Adhesion Contract

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					                                  CONTRACTS OUTLINE
                                      Professor Joo
                                       Spring 2002

1) Policing the Bargain:

   a) Unconscionability and Adhesion Contracts:

      i) Adhesion Contract: an adhesion is a form K that cannot be modified by the less
         powerful party. Some adhesion Ks, however, are unconscionable.

          (1) Form Contracts: adhesion contracts, contracts that give you no choice.
              (a) Arguments for:
                  (i) Mass production can serve the interests of both parties by utilizing
                       previous experience, reducing uncertainty, simplifying planning and
                       administration, and by making risk calculable.
                  (ii) They can be an important means of excluding or controlling the irrational
                       factor in litigation- unforeseeable contingencies such as strikes, fire, and
                       transportation difficulties can be taken care of.
              (b) Arguments against:
                  (i) It may be the means by which one party imposes its will upon another
                       unwilling or even unwitting party:
                       1. Bargaining over terms may not be between equals.
                       2. There may be no opportunity to bargain over terms at all.
                       3. One party may be completely, or at least relatively, unfamiliar with the

             (c) When society grants the freedom to contract it does not guarantee that all
                 members of the community will be able to make use of it to the same extent.
                 (i) In O’Callaghan v. Walker: the court upheld an exculpatory clause that
                      barred the tenant from recovery in a negligence action against the
                      1. This could be seen as a case of adhesion in that the tenant had to live
                          somewhere and if all landlords have the same form clause they have
                          effectively eliminated tort liability. The limited choice in the housing
                          market allows the landlord to put more conditions on the tenant.
                      2. The court however believes this to be a freedom to contract issue.
                          There are no legal rights to housing and the legislature had not ruled
                          that such clauses were illegal.
                 (ii) In Henningson v. Bloomfield Motors the court found a liability clause void
                      because unlike O’Callaghan, where the court did not find that all the
                      landlords had the same clause, the manufacturers explicitly got together
                      and agreed to the terms effectively denying consumers a chance at

          (2) Tickets, Passes and Stubs:

       (a) In Klar v. H & M Parcel Room Ellis did not read the ticket stub which limited
           the recovery amount to $25, but his package had been worth $1000.
                1. Ellis’s normal expectation was that if ∆s lost his package they would
                    pay for it.
                2. Terms unavailable: When the K was formed it is possible there were
                    no terms, he couldn’t read it, as they had not given him his stub until
                    after he had given them his package and paid his 10 cents.
           (ii) The stub contract should be blown up and obvious or it should be pointed
                out to patrons to avoid these types of suits.

   (3) The Duty to Read and the Right to Understand
       (a) A very general rule is that one who signs a contract document without reading
           it runs a risk.
       (b) This goes towards mutual assent- have they read it? Presenting a form
           contract for assent entails a certain obligation to make it intelligible. The
           UCC occasionally demands that a provision be conspicuous.
       (c) In Darner Motor Sales v. Universal Underwriters: Darner was able to recover
           when the insurance agent told him not to worry about his limit when in fact
           his policy did not provide full coverage.
       (d) Failure of a signer to appreciate the effect of a writing is not a mistake that is
           ordinarily excused. Someone who cannot read can express consent to a
           written K.
       (e) Where other evidence of unconscionability is present and the standard form is
           not intelligible the signer has a weakened duty to read.

ii) Unconscionability (oppression or unfair surprise): so unfair and bad that it won’t
    be tolerated, shocking to the conscious, something about the K is so awful that the
    law should not enforce it.

   (1) Unconscionable if (no one factor is determinative, they are distinct):
       (a) Deprived of a choice of terms;
       (b) Deprived of the ability to know and understand the terms (software, airline
       (c) K hides damaging terms in small print trickery, obscure language, deceptive
           sales practices (doesn’t rise to the dignity of a K);
       (d) Inequality of bargaining power is gross (may be monopoly or active
       (e) K is for a necessary purchase (apartments, cars)
       (f) Terms are extremely unfair in light of current business practices;
       (g) Injurious to public policy. Deprives consumer protection that legislature
           sought to protect (hospital exculpation clause).

   (2) Arguments Against Unconscionability:
       (a) Notice was clear and well-posted;
       (b) Not unfair, just economic leverage;
       (c) Weren’t forced to sign anything;

   (d) Form may have benefits (liability clause may reduce rent);
   (e) Public policy for legislature, not courts.

(3) Restatement § 211: Standardized Agreements
    (a) If other party has reason to believe that party manifesting assent would not do
        so if he knew the writing contained a particular term, the term is not part of
        the agreement.

(4) Unconscionable Contracts under the UCC:
    (a) UCC 2-302 authorizes a court to refuse enforcement or to limit the application
        of a K or clause that it determines to have been unconscionable.
        (i) The principle is one of the prevention of oppression and unfair surprise.
        (ii) The cannery lost to a grower in Campbell Soup Co v. Wentz because the
             court found it was too hard a bargain to entitle the ¶ to relief in a court of

(5) O’Callaghan v. Walker: Exculpatory clause relieves landlord of all liability for
    negligence. All LLs have same clause. Structural behavior and disparity of
    bargaining power. Housing as a basic need but the court sides with freedom of K.

(6) Williams v. Walker-Thomas: the court found a K unenforceable where the credit
    scheme made it so that the lender could repossess all items bought, even when the
    customer defaulted on only one item.
    (a) There was a lack of bargaining power.
    (b) When a party of little bargaining power, and hence little real choice, signs a
        commercially unreasonable K with little or no knowledge of its terms, it is
        hardly likely that his consent was ever given.

(7) Warranties and the UCC 2-719:
    (a) It is okay to limit your warranty, however limitation of consequential damages
        for injury to the person in case of consumer goods is prima facie (at first
        glance) unconscionable but limitation of damages where the loss is
        commercial is not. You/the Court assume it is unconscionable; the seller has
        to prove that it is not.
        (i) Henningsen: all dealers disclaim all implied warranties of merchantiblity.
             Industry wide form. Gross disparity and active collusion to undermine
             warranty law- must take purchase K as it is or for go the car.
             1. The law is saying that there are some things that you just can’t do.
                 The government protects individuals from big business. Big business
                 is the only institution that has power that can rival the state (banks,
                 auto manufacturers, etc).

(8) Two Views of Unconscionability:
    (a) Eisenberg: Reconciliation with the bargain principle: the element of unfair
        surprise (negating assent)
        (i) Substance/Procedural:

                   1. Procedural: fault or unfairness in the bargaining process
                   2. Substantive: fault or unfairness in the bargaining outcome- unfairness
                       of terms.
                       a. Doesn’t believe these are different. Saying that the law should
                           only regulate procedure is easier said than done- they over lap and
                           hence substance must be regulated at some times.
              (ii) Freedom of K is not an end in and of it self, it is a tool by which we
                   achieve good deals. Freedom of K is instrumental.
              (iii)Unequal bargaining power. Some people have more freedom of K than
                   others. If every manufacturer has the same exculpatory clause then those
                   private parties are in a sense making the law
                   1. Imperfect competition: As in the case of cars where there are few
                       manufacturers that could get together in one room and agree.
          (b) Epstein: In the substantive context the doctrine of unconscionabilty serves
              only to undercut the private right of K in a manner that is apt to do more
              social harm than good.
              (i) (1) Freedom to K is the important thing- the result is not.
              (ii) (2) The courts can police by looking to a defect in the process of
                   formation, or to incompetence.

b) Contracts that Violate Law or Public Policy:

   i) With hot public policy issues the court will step back and leave the parties as they
      were rather than interfere.

   ii) Illegality: K involving activities that are illegal or that violate public policy are void,
       even if they seem perfectly valid in terms of K formation. Don’t enforce even though
       outcome may be unfair, both parties must have clean hands.
       (1) The courts will look to their own formulations or case precedent or statutory laws
           in determining what public policy is.
           (a) Criminal sanctions are far more likely to be effective than are threats of the
               unenforceability of private agreements.

   iii) Public Policy as a reason for enforcing:
        (1) Laclede v. Amco: if the K was broken the people would freeze- public policy
            reason to order the injunction (public policy as a reason to enforce- this is not
            policing the bargain)

   iv) Public Policy reasons for not enforcing:
       (1) Marvin v. Marvin: ordered palimony payments for people who were not married.
           (a) The courts had previously looked at these types of cases as meretricious
               relationships that should not be enforced. Based on a presumption that a
               sexual relationship outside of marriage was immoral.
               (i) The court here felt that to equate this type of relationship with prostitution
                   was to do violence to those relationships. There was no basis for the old
                   thinking anymore- society’s mores were changing.

                     1. Movement for freedom of K for anything (even a K for a relationship
                         that doesn’t conform to the ideas of marriage).
          (2) Thomas v. LaRosa (1990): the court ruled that since the parties’ relationship was
              adulterous support agreements that had been entered into were unenforceable.
              (a) The court did not like that recovery for Thomas would be injurious to
                  LaRosa’s wife. The court also did not like that Thomas had presented herself
                  as Mrs. LaRosa- common law marriage was not part of the law of West
                     1. When two people enter into a bad K, and both are behaving badly, the
                         court will not bring the law into it.
                     2. The 3rd party: if you are living in sin in an adulterous relationship the
                         3rd party is causing harm to the wife’s marital property rights
                     3. The other problem is that they are creating something not allowed by
                         law- the subject matter is illegal- common law marriage, adultery, or

      v) Surrogate Parentage Contracts: Reproduction
         (1) Johnson v. Calvert, 1993; gestational surrogacy; enforced the K
             (a) The majority felt that to say that a woman cannot knowingly and intelligently
                 enter into this type of K to carry a baby is demeaning to women.
             (b) The dissenting justice wanted the decision to be based upon the best interest
                 of the child. This brings up questions as to what criteria would be used.
             (c) Moschetta: the CA struck this case down (it was more like the Baby M case)
                 b/c the surrogate was the genetic mother.
                 (i) The genetic connection is very important to the court in this case, contrary
                     to the Johnson cases where they cared who intended to be the mother. The
                     court however said they struck the K down based on a CA adoption rule.
         (2) In re Baby M, 1988; traditional surrogacy
             (a) In this case the surrogate mother was a genetic parent. Promised to pay her
                 $10K to carry the child.
             (b) The court invalidated the surrogacy K b/c they felt it was illegal and contrary
                 to public policy: In disregard of the agreement, the court concluded that
                 custody should be assigned according to the best interest of the child.

2) Remedies for Breach:

   a) Measuring Expectation: where I would have been if you would not have broken the
      contract. Calculated from perspective of the breached against party.
      i) Might expect to have some out of pocket expenses and get paid- the expectation
         damages were not the total of what the party was to get paid- the expectation is the
         difference between what you expected to get paid and what you expected to
         spend on the contract out of your own pocket.

          (1) Loss in value: What I should have received from you – what I received from you
              (a) Value of performance; pay expected (not profit) (offset by any performance
                  received before breach)

(2) Other loss: physical harm to that party’s person or property or expenses incurred
    in an attempt to salvage the transaction after breach. (physical harm,
    inconvenience, cover costs, transportaion)
    (a) Not always other damages.

(3) Cost avoided: the saving of further expense that would have been incurred had
    performance been continued. How much was I going to spend but did not. i.e.
    would cost $400K to finish the project.
    (a) In Formula B: Cost of complete performance minus cost already incurred in
    (b) i.e. Cost of building the entire building minus costs so far

(4) Loss avoided: the saving of expense by the avoidance of some loss by salvaging
    and reallocating some or all of the resources that otherwise it would have had to
    devote to performance of the K.

(5) Expected Profit: K price minus all costs.

(6) Reliance: cost expended to carry out so far (total cost minus the cost to complete)

(7) Formula A: expectation damages = loss in value + other loss – cost
   avoided – loss avoided

   (a) Example: $1 million (loss in value)- $400K (cost avoided) = $600K
       expectation damages
   (b) Sullivan v. O’Connor: $20K (loss in value) + $10K + $100 + $3K (other
       losses) = $33,100 expectation damages
       (i) Promised improvement in appearance - $20K
       (ii) Loss in appearance/disfigurement - $10K
       (iii)Fee for 3 operations - $100 each
       (iv) Pain for 3 operations - $3000 each

(8) Formula B: expectation damages = cost incurred in reliance +
   expected profit + other loss – loss avoided

   (a) Joo’s version: Expected Profit + other loss + cost incurred in reliance – losses
       avoided = expectation damages
       (i) This is just a different way to get at the same answer from Formula A; use
            when given different numbers/info that doesn’t fit into categories for
            formula A.
       (ii) Loss in value + other loss – (cost of complete performance + cost already
            incurred in reliance) – loss avoided
            1. Loss in value – cost of complete performance = expected profit
   (b) Example: $500K (cost of reliance) + $100K (expected profit) = $600K

ii) Contracts for the sale of goods: substitute transactions the UCC and market price

   (1) Buyer’s Remedies:
       (a) UCC § 2-712: Cover; Buyer’s Procurement of Substitute Goods
           (i) A buyer may “cover” (purchase) goods that should have been delivered.
           (ii) The buyer may recover from the seller as damages the difference between
                the cost of cover and the contract price together with any consequential
                damages, but less expenses saved in consequence of breach.
           (iii)Buyer’s damages should be based on the difference between a presumably
                greater price that the buyer will have to pay on the market and the lesser K
           (iv) Failure to cover does not bar buyer from remedy; but there is a good faith
                requirement to try.
                1. Laredo Hides v. H & H Meat Products: Laredo was allowed to recover
                    the cost of additional cow hides it was forced to purchase when H&H
                    failed to deliver hides under their K.
       (b) UCC § 2-713: Buyer’s Damages for non-delivery or repudiation
           (i) The measure of damages for non-delivery or repudiation by the seller is
                the difference between the market price at the time when the buyer learned
                of the breach and the contract price together with any consequential
                damages, but less expenses saved in consequence of the seller’s breach.
           (ii) The seller fails to deliver goods and the buyer fails to cover its damages
                are based on the difference between market price and the K price.

   (2) Seller’s Remedies:
       (a) UCC § 2-706: Seller’s Resale (analogous to cover)
           (i) Seller’s damages should be based on the difference between the
               presumably greater K price and a lesser price it will receive on the market.
       (b) UCC § 2-708: Lost Profits
           (i) When the buyer fails to take a pay for goods and the seller fails to resell its
               damages are based on the difference between market price and the unpaid
               K price.
               1. Davis v. Diasonics: the court allowed recovery under 2-708 if
                   Diasonics could establish that the breach did cause a lost volume sale.
                   Diasonics would have to prove that it had the capacity to make the sale
                   to Davis as well as the sale to the resale buyer and that it would have
                   been profitable to make both sales.

iii) Losing Contracts:

   (1) If you were going to be $100K in the hole then you should only be able to recover
       up to the point where you are still $100K in the hole. This would be expectation
       damages for a losing K.

      (2) If preventing you from getting any money violates another doctrine then you may
          get more than expectation. The court may use reliance or unjust enrichment as
          the measure of damages.
          (a) A builder is not likely to say they were going to be in the hole. If it is really
              hard to say what is going on then you may want a different measure of
          (b) US v. Algernon Blair: the general contractor breached its contract with the
              subcontractor. The subcontractor wants to recover for the breach although it
              would have lost money on the job ultimately. If the general contractor pays
              them $37K the subcontractor will be better off than expected.
              (i) The subcontractor will argue for reliance damages.
              (ii) Expectation damages was not applied in this case b/c it would violate
                   another principle of Ks- unjust enrichment.
              (iii)The court chose to measure damages based on market value of the
                   materials and labor.
          (c) Security Stove: lost an opportunity to show off their stove at a trade show
              when ∆ did not deliver all the parts as the K specified. They expected to lose
              money on the show but expected it to be an opportunity to showcase their new
              (i) The problem is how to calculate what a lost opportunity is worth. The
                   court elects a reliance measure of damages- ¶s relied on ∆s delivering the
                   parts. They recover for incidental and consequential damages- damages
                   that flow from the breach.

b) Limitations on Damages:

   i) Avoidability:

      (1) There is a duty to reasonably mitigate damages. If you don’t mitigate then you
          don’t recover for your loss. You can recover the amount up to where you should
          have mitigated.
          (a) Rockingham County v. Luten Bridge: L was notified that R no longer wanted
              the bridge, a breach of K. L built the bridge anyway and brought suit to
              recover. The court did not allow recovery b/c L failed to mitigate its damages,
              there is a duty to avoid losses if possible.
              (i) L would have been better off to stop building and then could have
                   recovered using Formula B: the cost of reliance + expected profit.
          (b) Parker v. Twentith Centruy Fox: the court allowed P to recover damage from
              breach of an employment contract. They found she could recover when she
              did not mitigate her damages by accepting substitute employment that was not
              equivalent or substantially similar.
              (i) The substitute employment must be reasonable/comparable and
                   substantially similar- this is a very fact specific inquiry.
              (ii) Generally a wrongfully discharged employee cannot deliberately rack up
                   damages by not finding other employment; they can only recover damages
                   that cannot be avoided. If you can get another job you should.

(2) Contracts for the sale of goods: if the breached against party reasonably believes
    that damages can be mitigated by completing production of the good, then the
    party may complete the good, and full damages are recoverable even if the
    attempt to resell fails.
    (a) Can choose to cover and make a substitute purchase and then damages are
        based on the cover price minus the K price.
        (i) People will most likely cover to avoid being sued by another party they’ve
             contracted with.
    (b) Or Can choose not to cover and then seek damages based on the market price
        minus the K price.
    (c) Tongish v. Thomas: Farmer breached K with the Coop when the price of
        sunflower seeds went up. The court awards the Coop the market price ($9K)
        of the sunflower seeds instead of the lost profit ($455) caused by the breach.
        In this case the UCC 2-713 (market price) is used as a way to modify the CL
        rule of expectation damages in order to deter breaches.
        (i) If cover is possible and you choose not to cover then you shouldn’t get
             damages based on lost profit which could have been avoided, but you can
             still get the market price. You should get incidental and consequential
             damages that came from your decision not to cover.
        (ii) If cover is not possible then you may get to recover market price damages
             with incidental and consequential damages. The loss or gain of profit on
             the resale could be consequential damages.

(3) Avoidability and Cost to Remedy Defect:

   (a) When Cost of Repair is Greater than the Value of Repair: cost of
       remedying a defect or full completion may be far greater than the decline in
       market value caused by the defect. Court may say that the breached-against
       party has substantially performed, which means that the breached-against
       party will only get the loss in market value, not the cost of replacement.

       (i) Jacobs & Young v. Kent: ¶ did not install the specific pipes ∆ requested,
           but the installed pipes were of the same grade and quality. The court
           would not award the cost to repair in such a case.
           1. The purpose of the K was to build a country house which is what the ∆
               got. The purpose was not to install Reading pipes; there was no
               purpose to wanting that brand of pipe.
           2. The measure of ∆s damages would be the difference in market value-
               in this case the difference would be nothing or nominal.
           3. It would be economic waste to tear down the walls and replace pipe
               that is essentially the same. Expectation would not be an appropriate
               remedy. Of course if could be argued he got what he expected

           (ii) Peevyhouse v. Garland Coal: P leased their farm land to G to strip mine
                with the condition that G return the land to its previous state. G did not do
                so- it would have cost $29K to fix the land and the market value of the
                land would have increased $300. The court did not allow P to recover the
                cost to repair.
                1. The purpose of the K: The court found that the special provision
                    pertaining to the remedial work was incidental to the main object
                    a. The dissent points out that P had said explicitly that G could not
                        mine without returning the land to its previous condition.
                2. The court sets up a rule for coal mining leases that precludes recovery
                    where the cost of performance would greatly exceed the value. This is
                    a very lenient rule for coal companies.

           (iii)Bob Villa and the New England Cottage:
                1. The owners put in a pool for their daughter. The pool itself decreases
                   the value of the cottage property. If the pool company had tried to
                   breach their contract, they might argue that finishing the pool would
                   actually decrease the market value of the property. However, since the
                   purpose of the K is a pool for their daughter, an interest society
                   recognizes, the purpose is valid. The market value is not equal to the
                   loss of a pool for their daughter.
                   a. Unlike the pipes where the purpose of the pipes was found invalid.
                   b. The Peevyhouses may have felt that the market value was not
                       equal to the loss- the land where they lived and ranched was torn

           (iv) Groves v. John Wunder: W contracted with G for G’s property and
                promised to level the ground when done. It would have cost $60K to level
                and the property would have been worth $12K. The court allows recovery
                of the cost of repair.
                1. The purpose the K was to put the land back as it had been.
                2. The court found the W breached in bad faith- this probably colored
                    their judgment.
                3. The court reasoned that the land might increase in value in the future if
                    the land was leveled.

ii) Forseeability:
    (1) Consequential damages are limited to what is reasonably foreseeable (in
        contemplation) at the time the K was formed (flowing from the K).
    (2) Possible spectrum of everything possible that flows from the breach to only what
        the parties were told. Can be better than direct K damages.
    (3) Foreseeability is related to mutual assent. If you knew you’d be liable for a large
        sum of damages then you may not have gotten into the K.
    (4) Unfair to hold a party liable for damages they could not have foreseen.

           (a) Hadley v. Baxendale: damages for extended mill shutdown not awarded b/c
               shipper did not know (didn’t communicate) reopening depended on timely
               (i) Held to know things contemplated: sort of narrow, only responsible for
                    things that you actually though about or discussed.
           (b) Spang v. Aetna: Damages to bridge builder who had to rush from supplier’s
               delay where foreseeable b/c supplier should have known delays would cause
               complication with the weather.
               (i) Based on the particular parties – a steel contractor should foresee what
                    they delay would do.
               (ii) Builder tried to keep a lid on possible damages by rushing – fair to hold
                    supplier liable.

   iii) Certainty (for lost profits):
        (1) Lost profits or predicted gains may be included as “other losses” after a breach
            only if it is proven with reasonable certainty that the prospective profits/gains
            would have materialized had the breach not occurred.
            (a) Fera v. Village Plaza: ¶s were refused the space they had contracted to lease
                from ∆ for their new business.
                (i) New business may recover lost profit damages for breach of the mall lease
                     if the profits are not excessively speculative.
                (ii) In this case there was a good deal of testimony on both sides as to future
                     profits. There must be some evidence/testimony to support a damage
                     estimate – the jury is not allowed to guess.

c) Liquidated Damages and Penalties:
   i) Stipulated Damages Clause: a K provision which pre-estimates damages to be paid
       in the event of a breach. Must constitute a reasonable forecast of provable injury
       resulting from breach, otherwise, the clause will be unenforceable as a penalty and
       the non-breaching party will be limited to conventional damage measures.
       (1) Liquidated Damages Clause: Enforceable if it is a reasonable estimate of harm,
           and actual damages are difficult to prove/calculate.
           (a) The sum a party agrees to pay if she breaks some promise that was reached at
               in good faith.
       (2) Penalty Clause: unreasonably high estimate of harm, used to deter or punish a
           breach (unenforceable).
           (a) A the sum the party agrees to pay in the event of a breach which is meant as a
               punishment, the threat of which is designed to prevent breach.
   ii) Courts don’t want to penalize as a result of differences in bargaining power. Must be
       fair and constitute a legitimate attempt to predict actual damages.
       (1) Wasserman’s v. Middletown: the court held that a damage clause stating that if
           M breaches it has to pay part of the cost of renovation plus 25% of W’s annual
           receipts was a penalty. 25% of gross is not a reasonable estimate of what W
           actually makes.

             (a) Two questions asked by the court to determine enforceability of the
                 (i) If the actual damages are hard to calculate;
                 (ii) If the stipulated amount is reasonably related to actual damages.

3) Finding the Law of the Contract:

   a) The Parol Evidence Rule:
      i) Rule: No extrinsic evidence (prior oral agreements, memos, faxes, letters,
         negotiations) may be introduced to vary the terms of a final and complete
         (integrated) written agreement.
         (1) Is extrinsic evidence being used to clarify or to vary the substance?
             (a) Prior communications may be mere bargaining that do not reflect the final

          (2) In determining whether extrinsic evidence may be allowed, it is necessary to first
              determine whether the written agreement is fully integrated (final and complete)
              or only partially integrated (final but not complete).
              (a) A K is fully integrated if it is final and exhaustive with regard to all terms
                  related to the K. No outside evidence may be admitted to add any missing
                  contract term to a fully integrated K.
              (b) A K is merely partially integrated if it is final with regard to terms included in
                  the K. Evidence of prior agreements may be admitted to add missing terms in
                  a partially integrated K.
                  (i) Gianni v. R. Russell: (strict older view) oral promise for exclusive right to
                       sell soda in exchange for not selling tobacco was not allowed into
                       evidence b/c it was natural for such terms to be included in the written
                       lease. There was no reason to believe anything was missing – that type of
                       promise should have been included in the lease.
                       1. Integrated unless obviously incomplete on its face, presumption that it
                           is final and complete. (Williston)
                       2. What is natural is really intent. Look to see if the parties intended the
                           document to be a final integration. Hard under strict older rule.
                  (ii) Masterson v. Sine: (looser, modern view) allow parol evidence to evaluate
                       whether document is complete. Allow when the fact finder is likely to be
                       misled. A writing cannot prove its own completeness – some evidence
                       must be admitted to establish its completeness.
                       1. A wide latitude must be allowed for inquiry into circumstances bearing
                           on the intention of the parties. (Corbin)
                       2. The court had to admit certain evidence to figure out what the terms in
                           the K meant – clarify the meaning. Can use outside evidence to clarify
                           the substance of the K.

          (3) If the K is partially integrated, to determine whether the extrinsic evidence is
              allowed we must next determine whether the parties would have naturally
              included such information as part of the written agreement.

           (a) If the outside evidence would have naturally been included (related to the
               subject matter), it is considered excluded evidence and not allowed.
           (b) However, if the evidence is of the type that wouldn’t have been included in
               the written agreement by the parties, it is considered a prior independent
               agreement and permitted under the parol evidence rule.
   ii) Exception for Mistake, Accident, Fraud: even in a fully integrated K, a prior
       agreement / term that is mistakenly, accidentally, or fraudulently omitted from the
       written K may be admitted later if mistake, accident, or fraud is proven.
       (1) Bollinger v. Central Pennsylvania Quarry: Oral condition that company cover
           waste with topsoil was omitted from K by mistake. Company started restoration
           and then stopped, and followed same procedure on neighbor’s property. This is
           good evidence that the mistake was mutual and both wanted it to be part of the K.

   iii) No-Oral Modification Clauses: K cannot be varied by an oral agreement after a
        written K is made.
        (1) CL: these clauses are not effective b/c even a no-modification clause may later be
        (2) UCC 2-209: A signed agreement which excludes modification or rescission
            except by a signed writing cannot be otherwise modified or rescinded.

   iv) UCC and the Parol Evidence Rule: relaxes the parol evidence rule; under the UCC
       an agreement goes beyond the words on a piece of paper.

b) Interpreting Contract Language (find the ambiguous terms)
   i) Problem: First locate what the problem is. Words in a K may be unclear, and may
        cause confusion as to what the parties intended the agreement to be.
   ii) Plain and Clear: if K language is plain and clear, then no extrinsic/outside evidence
        is allowed.
   iii) Reasonably Susceptible to Alternative Meaning: If K language is reasonably
        susceptible to alternative meaning, then extrinsic evidence should be considered to
        determine what the parties intended. Objectively reasonable meaning of language
        will usually prevail (information that the court would find relevant to finding out the
        (1) Trade usage/ custom
        (2) Prior dealings of the parties
        (3) Parties actions and communications (PER, can use extrinsic evidence to clarify
             but not to change terms)

       (4) Frigaliment Importing v. International Sales: party who seeks to interpret terms
           of K in a sense narrower than everyday use (subjective) bears the burden to prove
           this use. K would have been loser if chicken only meant broilers.
           (a) The court will start with the common sense meaning and then look to see if it
               means something else.
           (b) In this case the trade usage of the word chicken was used to figure out the
               objectively reasonable meaning.

       (5) Raffles v. Wichelhaus: Two ships with same name, no objectively reasonable
           meaning of Peerless.
           (a) Exception to general rule: if ambiguous, if both parties give same meaning
               then K, but if parties give different meaning, then no K b/c it was a material
           (b) There was no objectively reasonable interpretation of the K they had made.
       (6) Oswald v. Allen: two coin collections, no objectively reasonable interpretation of
           the K they had made. The court ruled there was no K.

c) Filling Gaps:
   i) Three Step Approach to Filling Gaps:
       (1) Identify Gap: Parties disagree, yet the K says nothing about the matter and no
           parol evidence to figure out what parties intended.

       (2) Fill Gap: Explain that gaps are usually filled by some interpretation of “good
           faith” (always a duty) or sometimes “best efforts.”

       (3) Define Gap Filler Term: by examining objective information such as:
           (a) Industry Practice
           (b) Prior dealings and course of performance
           (c) Custom

           (d) What is normal between parties and what is normal in the industry without
               imposing an obligation that would be unreasonable.

   ii) Eastern Airlines v. Gulf: Fuel freighting. Good faith means following reasonable
        industry practices. Fuel freighting was a reasonable industry practice and they had
        been doing it for some time.
   iii) Dickey v. Philadelphia Minit-Man: Minimum rent clause makes best efforts to max
        car washing efforts irrelevant. It is unreasonable and wholly undesirable to imply an
        obligation that would necessarily be vague, uncertain, and impracticable (no need to
        operate business at a loss).
        (1) The business was in a down turn and the LL was protected by the minimum rent
            clause so there is no reason to declare they breached the K when they stopped
            washing in an effort to increase revenue.
   iv) Market Street Associates v. Frey: Party may not intentionally exploit other party’s
        oversight of a crucial fact. Did not bring up the buy back clause that would become
        operational when negotiations broke down. This departs from good faith. (but can
        use superior knowledge to drive an advantageous bargain)
        (1) Good faith in performance of the duty, not it making the K.
        (2) Need to fill in a gap b/c we need to know if M’s behavior is acceptable. We fill
            the gap with a duty of good faith.
   v) Bloor v. Flastaff Brewing Company: K clause obligating “best efforts” to maintain
        high volume of sales of certain product is breached when company emphasizes profit
        w/o fair consideration of the effect on sales volume of brand. (No need to go
        bankrupt, but…)

          (1) Best efforts curtail a party’s ability to go after their own best interest. Parties to a
              K are like partners. Have to try to maximize both sides.
      vi) Nankuli Paving v. Shell: Gap – does the K require S to give price protection to N?
          Price protection was part of trade usage and course of performance (past practice),
          and will be read into Ks where such are so prevalent that the parties have meant to
          incorporate them.
4) Performance and Breach:

   a) Conditions: an event that is not certain to occur that must occur before performance
      becomes due (if not met, performance is excused).
      i) Cannot act to foil a condition that is under your control.

       ii) Approach to conditions:
           (1) What is the performance that is due?
           (2) What is the condition?

       iii) Implying conditions:
            (1) Who bears the risk of the condition not occurring? Look at the whole context.
            (2) What are the policy reasons to imply a condition?

       iv) Effects of conditions:
           (1) Luttinger v. Rosen: If we find an 8.5% loan we will buy house. Don’t meet
               condition even though attorney is willing to provide functional equivalent.
               (a) Performance: buying the house
               (b) Condition: Getting a mortgage at 8.5% by using due diligence
           (2) Internatio-Rotterdam v. River: We will deliver rice to your docks if you give us
               two weeks notice.
               (a) Performance: R’s delivery of the rice
               (b) Condition: two week’s notice (shipping instructions by 12/17)

       v) Problems of Interpretation (duty v. condition): It is not always clear whether a
          performance is conditional, or whether there is a duty to perform. Courts, however,
          often interpret language in a way that avoids forfeiture:
          (1) Peacock v. Modern Air Conditioner: A contractor agrees to pay a subcontractor
              within 30 days of owner’s final payment. P argues condition; M argues duty and
              wins: 30 days merely sets the timeframe.
              (a) Who bears the risk: the K does not say how the risk is allocated so the court
                  interprets the 30 day language as a way to prevent P from ripping off M. It
                  makes sense to have P bear the risk b/c as the general contractor P has more
                  control over the owner. Looking at the whole situation.

       vi) Good Faith Duty to Perform Condition: If promise is conditional, then a “good
           faith” attempt must be made to make the condition occur. A party is not allowed to
           sabatoge the condition. Good faith is defined by industry custom and practices,
           objective reasonable person standard, marketability, utility.

      (1) Mattei v. Hopper: Businessman must make a good faith effort to find satisfactory
          leases. Buyer’s duty is conditional on getting satisfactory leases. Objective good
      (2) Gibson v. Cranage: Father of deceased girl promises to buy a painting from an
          artist who “forced it upon him” if it is “satisfactory in every way.” The painting
          is good, yet the highly subjective nature of the conditions gives the father wide
          latitude to be dissatisfied. Personal, maybe not even a K, illusory, no
          (a) Objective (implied) good faith > Subjective (more latitude to say condition is
               not satisfied)

   vii) Parol Evidence is Admissible to Prove Oral Condition Precedent: Parol evidence
        is admissible to prove oral condition precedent to a written K’s legal effectiveness as
        long as evidence does not “in a real sense” contradict with the terms of the written
        agreement. (not discussed in class)

b) Constructive Conditions: dependency of covenants/promises

   i) Defined: exists when the parties intended a promise to be conditional, yet they didn’t
      use explicit language in the agreement.

   ii) Condition, Duty or Both:
       (1) Presumption Favors Independent Condition Unless Implied Otherwise: A
           promise is presumed to be independent (not conditional) unless language or
           circumstances imply that the parties intended the promise to be dependent
           (conditional). Dependence or independence of covenants is to be determined
           from the intention of the parties.

          (a) Kingston v. Preston: A merchant agrees to convey his business to an
              apprentice “upon good and sufficient security.” Merchant’s promise must be
              conditional upon the apprentice’s security deposit b/c merchant would never
              give up business w/o some protection. The performance of the 1st covenant
              was an implied condition precedent to the duty to perform the second
              (i) To make this duty only: state that ¶’s attainment of security it not a
                   condition of ∆ giving over his business. If merely a duty ∆ must sell and
                   ∆ can then sue ¶ for damages for failing to give security.
              (ii) To make this a condition: if ¶ fails to give security then ∆ doesn’t have to
                   sell the business. ∆ cannot sue for damages. ¶ has not broken the K.
              (iii)Condition and Duty: the agreement is to give security and the
                   performance is conditioned on that. If ¶ doesn’t give security then ∆
                   doesn’t have to sell and ∆ can sue for damages.

      (2) On an exam talk about:
          (a) Whether it’s a condition.
          (b) Which one is a condition?
          (c) Is it merely conditional or a condition and a duty?

          (d) Should assume a conditional relationship. Look to the purpose of the K in the
              broader picture to determine which one is the condition.

   iii) Performance Presumed Before Pay: Payment is presumed to be conditional upon
        completed / tendered performance. Parties can K around this rule unless otherwise
        stated (e.g. progressive payments or installments)
        (1) Stewart v. Newbury: K to do excavation work, but silent on payment process and
            ¶ bills first installment after completion of the first floor. ∆ refuses to pay. The
            court decides that work should come before pay.
            (a) The order of performance is an allocation of the risk.

   iv) Concurrent Conditions and Tender: sales of goods or land
       (1) The conditions are mutually dependent: duty to supply the good is conditional
           upon payment and duty to pay is conditional on supply of the good – happen at
           the same time.
       (2) When the K doesn’t say who goes first the assumption is that it happens at the
           same time.

c) Mitigating Doctrines Regarding Partial Performance:

   i) Substantial Performance: If the purpose of the K is substantially achieved then there
      is a duty to substantially pay. Duty to pay is not based on perfect performance, but
      substantial performance. If you perform substantially or did everything but not
      perfectly then it is not always treated as a breach.

   ii) The ∆ should recover the K price minus the damages caused by ∆’s incomplete

   iii) Look for the purpose of the K and see if it has been achieved to find substantial

   iv) A Trivial Breach:
       (1) Intent of the parties is mostly satisfied and the purpose of the K is not frustrated.
       (2) Economically wasteful to correct a small defect w/o substantial increase in value.
       (3) Beaching party acted in “good faith”
       (4) Expectation damages would be harsh.
           (a) Jacob & Young v. Kent: builder finished the house but not with Redding
               pipes. This was trivial b/c the purpose of the K (to build a house) was not
               frustrated. Specific piping was not held to be a condition or essential to the K.
               (i) To not enforce the K would create a forfeiture problem. Instead the owner
                   can subtract from the K price if the trivial breach affects the market value.

              (b) Plante v. Jacobs: a wall was misplaced by one foot and other small omission
                  made by the builder. The court found substantial performance that met the
                  main purpose of the K. Cost of repair applies to small defects, but
                  misplacement of wall has no economic value and ∆ cannot recover the cost of
                  replacement for it (would be economically wasteful to move the wall).
                  (i) Diminished Value Rule: the difference between the value of the house as it
                      stands with faulty and incomplete construction and the value of the house
                      if it had been constructed in strict accordance with plans and

      v) Exception to Substantial Performance: Perfect Tender Rule (UCC, goods):
         (1) UCC § 2-601: a K for the sale of goods must be performed exactly/perfectly. No
             substantial performance mitigation is available for goods. But the UCC does give
             some time for the seller to correct performance if there is time to do so.
             (a) Forfeiture Issue: the seller can at least keep the good, as opposed to
                 services/employment Ks
             (b) Moulton v. Lyn-Flex: ∆ refused to accept certain innersole molds made by ¶
                 on the grounds that they differed from what ∆ had agreed to buy. Under the
                 perfect tender rule ∆ did not have to accept the molds.

5) Failure of Basic Assumptions: Mistake, Impracticality and Frustration: create an excuse
   (defense) not to perform

   a) If a basic assumption of the K has failed then you might be able to get out of the K. This
      is about when you can not perform and still get off the hook.

   b) Mutual Mistake:
      i) A party can get out of the K if (Restatement § 152):
         (1) The mistake was to a basic assumption regarding a condition that existed at the
             time the K was made;
         (2) The changed condition had a material effect on agreed performance;
         (3) The risk of that mistake is not assigned/borne by the party seeking excuse
             based on Restatement § 154:
             (a) Assigned by the K;
             (b) Knowingly acts on insufficient information;
             (c) The court thinks it’s reasonable.

      ii) Stees v. Leonard: building falls down twice b/c of poor soil and the K was silent.
          Someone had to bear the risk and this court rules for the owner. The builder knew
          that they had limited information about the soil, reasonable that the builder would
          have inspected. (Counter: owner had access to the lot and could have found out about
          the soil – least cost avoider)
          (1) Could look to trade practice in 1874 to find out who would have been responsible
              for testing the soil.

   iii) Dover v. Brooking: Buyer of land was allowed to void the K b/c both parties
        mistakenly assumed that the zoning laws allowed the buyer to use the property as the
        buyer had planned. The parties did not know about the pending law. Would be
        economically wasteful for the buyer to have to hold onto the land – the seller can find
        another buyer who could use the land appropriately under the new zoning law.

   iv) Mutual mistake is a failure of assent such that the K doesn’t make sense.

c) Impracticability of Performance:

   i) A party can get out of the K if:
      (1) There has been a change in circumstances of a basic part of the K;
      (2) Performance has become commercially impractical;
      (3) The risk is not borne by the party seeking excuse.
          (a) Allocation of the risk: foreseeability is a key element
              (i) Foreseeability does not tell us who the risk was allocated to but does give
                  a good indicator.

   ii) Taylor v. Caldwell: There was a change in circumstances due to the basic assumption
       that the music hall would not burn down. Would be commercially impractical to
       require ∆s to construct a new hall by the K date or find another venue.

   iii) Transatlantic v. US: Shipper was not allowed to use the defense of impracticability
        b/c the longer route (the shorter route was foreclose by closure of the Suez Canal) did
        not cause the shipper commercial impracticability. The shipper should have had
        insurance and known of the risks.
        (1) Commercially impractical does not mean just more expensive.

   iv) Wedding Cake Hypo: it is foreseeable that if the caterer waits too long to order the
       cake he might not be able to get the cake. Not only was the risk foreseeable but there
       is nothing that the bride could have done to protect herself b/c the baker would only
       deal with the caterer.

   v) Eastern v. Gulf: price controls are negatively affecting Gulf. The court says that not
      only were the price controls foreseeable but Gulf could have protected itself by
      putting in a clause that dealt with it.

d) Frustration of Purpose: minor doctrine

   i) A party can get out of the K if:
      (1) The value or purpose of a K is frustrated by
      (2) An unexpected occurrence or circumstance, and
      (3) The risk of such unexpected occurrence or circumstance was not allocated
          (explicitly or implicitly).

       ii) Unexpected change the risk of which was not allocated with destroys the value of
            performance. A hybrid of mistake and impracticability.
       iii) Krell v. Henry: The letting of the rooms has not value b/c the procession was
            postponed. The renter still has value b/c they can always rent to someone else. The
            renter did not have to pay for the rooms.

6) Assignment and Delegation: transferability of K rights and duties
   a) Assignment: assignment of rights to another party
   b) Delegation: personal property and leases
      i) Robson v. Drummond: where the essence of the K is a personal performance the right
          can not be delegated/assigned to someone else.
          (1) Sally Beauty v. Nexxus: when a business is being bought and sold we are talking
              about the assignment and delegation of K rights. S was owned by a direct
              contributor of N. N had contracted for Best’s best efforts. Couldn’t trust S to
              give best efforts.
      ii) British Waggon Co. v. Lea & Co: in a wagon repair K the court ruled that the right
          could be delegated. This was a K for rail cars rather than a K to take care of a
          handmade article in Robson.


Description: Adhesion Contract document sample