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Contracts II Outline

Defenses – Is it a contract the law will enforce?

Defense of fraud or misrepresentation:
Halpert v. Rosenthal
Facts: P sues for breach of contract in sale of real estate. D counterclaims for return of deposit on theory that P
        misrepresented the house as being free from termites.
Rule: Misrepresentation, even if innocent, allows the other party to rescind.
Reas: Speaker should be held responsible as a matter of fairness.

Swinton v. Whitinsville Savings Bank
Facts: P purchased house from D that was infested with termites. P alleges nondisclosure and concealment and that D
       knew about the infestation.
Rule: Nondisclosure does not create a defense, concealment must be coupled with evidence of fraud.
Reas: Facts must support the fraud allegation. Sellers should not be liable to disclose every non-apparent problem.

Weintraub v. Krobatsch
Facts: P purchased house infested with roaches. P only saw house illuminated, and alleges that D knew of the
       infestation and hid it by keeping the lights on.
Rule: There must be knowledge of the problem to constitute fraudulent concealment or nondisclosure.
Reas: D must know before there is anything to conceal, awareness should create a duty to speak.

Defense of duress and undue influence:
Improper pressure in bargaining.

Austin Instrument v. Loral Corporation
Facts: D sued for payment under subcontract. D alleges duress in subcontract – D wanted the entire second
        subcontract and threatened to stop delivery under the first subcontract.
Rule: Duress is established where party making the claim was forced to agree to it by wrongful threat precluding the
        exercise of free will.
Reas: Applicability of duress defense depends on free will analysis. Was there any meaningful choice? Not here.

R2K§175
Manifestation of assent induced by improper threat that leaves victim no reasonable alternative is voidable.

R2K§176 – Improper Threats
Threats are improper if they are crimes or torts.
Threat is criminal prosecution.
Threat breaches duty of good faith and fair dealing.
Is not on fair terms and would harm the recipient and not benefit the threatening party and a use of power for
illegitimate ends.

Odorizzi v. Bloomfield School District
Facts: P signed resignation letter at urging of D. Alleges undue influence in coercing him to sign. Signed at a time he
        was under emotional and mental stress.


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Rule:   “Overpersuasion”, taking an unfair advantage of another’s weakness of mind or distress is defense allowing
        rescission.
Reas:   Weakness of mind and application of excessive strength by one party over another.

Defense of illegality and public policy:
Tension between freedom of contract and important public policies.

Hanks v. Powder Ridge Restaurant Corporation
Facts: P contracted with D to use snow tubing facilities. P signed waiver agreement limiting D’s liability. P argues there
       was no meaningful choice – either leave or sign the agreement.
Rule: Analysis of the totality of the circumstances and societal expectations determines whether violation exists.
Reas: Societal expectations of reasonably safe snow tubing experience. If unusual harm occurs, violation of societal
       expectation and public policy violation.

Valley Medical Specialists v. Farber
Facts: Covenant not to compete at issue. Prohibits D from practicing in certain area for a period. Competing interests –
        commercial interests of P and medical interests of D and his patients.
Rule: Utility analysis between public policy interests and benefits to enforcement.
Reas: If the public policy interests exceed the interest in enforcement, the agreement should not be enforced.

Defense of Unconscionability:
Two prong test—
Procedural – absence of a meaningful choice, lack of bargaining power, manner deal was made.
Substantive – Oppressive contract terms, typical business practices, no reasonable person would agree. One sided,
overly harsh results.

UCC 2-302

Williams v. Walker-Thomas Furniture Company
Facts: K to buy furniture on payment plan. P made periodic payments. Failure to pay meant repossession of
       EVERYTHING she purchased. Title was retained by D until everything was paid off.
Rule: K is unconscionable if there is an absence of meaningful choice, or there is a gross inequality of bargaining
       power.
Reas: Concern is for equity – parties should understand and have an opportunity to know what they are getting into.

Discover Bank v. Superior Court of Los Angeles
Facts: K with arbitration provision prohibiting class actions. Arbitration clause was added subsequently in bill stuffer.
       Issue with late fees being assessed mid-day on due date. Small claims unless aggregated.
Rule: Unconscionability principle renders K unenforceable if there is oppression or surprise due to unequal bargaining
       power and there are overly harsh and one-sided results.
Reas: Contracts of adhesion limiting bargaining power. Cardholders had no meaningful choice – either agree or cancel
       account.

Interpretation – What are the terms of the deal?

What did the parties agree to – beyond the written word:
Threadgill v. Peabody Coal Company
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Facts: Equipment lost in coal mining operation. P alleges negligence caused loss of probe and D was obligated under K
       to pay for the value of the equipment. D counterclaims suing for expenses in recovery based on P’s negligence.
Rule: Trade usage and common practice is read into a contract even if not explicitly stated. There must be actual or
       constructive (universal and notorious – should have known) knowledge of the trade usage.
Reas: if it is common practice, it should be implied in the contract.

What does the written word mean?
Frigaliment Importing Company v. BNS International Sales Corporation
Facts: Chicken case. Interpretation of the meaning of “chicken” in the K. P meant fryers but D sent “stewing” chickens.
Rule: Plain meaning of term is used. If the term is ambiguous, then inquiry moves to the negotiations to determine
        intent. If there is a trade usage (assuming it be known or should be known), it will be used.
Reas: Intent is very important. If intent is not clear, trade usage may substitute as a reasonable alternative. If parties
        did not explicitly address issue, the trade usage is a reasonable default.

Is the written word ambiguous?
Random House v. Rosetta Books
Facts: Issue in the meaning of the phrase “book form.” Dispute as to whether the term means all publishing rights or
        certain ‘types’ of formats (eBook format is at the heart of the dispute).
Rule: Where there is no ambiguity in the contract, extrinsic evidence may NOT be used.
Reas: If the contract is not ambiguous, there is no reason to look further.

Trident Center v. Connecticut General Life Insurance
Facts: Contract to provide loan. Interest rate was favorable at the time. K provided there would be no prepayment for
        the first 12 years, then a fee would be charged. D retained option to accelerate repayment in case of default.
Rule: In California, extrinsic evidence may ALWAYS be admitted even if the contract is unambiguous. (Note well,
        traditional rule is that extrinsic evidence may not be used when the instrument is unambiguous).
Reas: That happens to be the rule in California. Trident Center is more of an exception. Two findings must be made –
        whether K is ambiguous (question of law), and only if ambiguous whether extrinsic evidence clarifies (question
        of fact).

Extrinsic Evidence to Construe Contract Language – Parol Evidence Rule (PER)

R2K§203
Interpretation of agreement, which supports the validity of the K, is preferred.
Express terms are given more weight than course of performance. Course of performance is given more weight than
course of dealing. Course of dealing is given more weight than usage of trade.

R2K§206
Interpretations operating against the party who wrote the agreement are preferred.

R2K§213 – PER Analysis
Whether agreement is integrated (intended to be final).
If integrated, whether it is complete or partial.
If partially or completely integrated it supersedes inconsistent terms of prior agreements.
If the agreement is NOT binding (lack of consideration), the agreement does not supersede prior agreements.
R2K§214


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Is there anything else to this deal? (PER):
Nelson v. Elway
Facts: Multiple form agreement. One to sell dealership to D, the other to make D give share of profits to P. Question of
         whether parties intended the service agreement to be part of the K. Merger clause exists in the buy-sell
         agreement explicitly stating that only what is in the buy-sell agreement is part of the K.
Rule: Explicit statement of superseding oral/prior agreements effectively bars the consideration of extrinsic evidence.
Reas: Intent was clearly manifested by an express term in the K – courts should not try to determine intent when they
         say what their intent was. Dissent takes issue – the dispute is over whether the extra agreement is part of the K,
         ruling is thus not appropriate at the summary judgment stage.

Rogers v. Jackson
Facts: Action to recover payment of promissory note. Note states repayment in two installments – half in one year and
        half in two years. Oral agreement to repay “when D was able.”
Rule: PER does not bar admission of evidence of an oral agreement if the oral agreement supplements, but does not
        contradict the writing (in a partially integrated K).
Reas: PER prevents evidence that contradicts the writing. A finding that the evidence does NOT contradict means it is
        admissible.

Contracts of Adhesion:
Meyer v. State Farm
Facts; Dispute over amount of recovery for fire damage. P claims K of adhesion (COH) is unconscionable to require
       appraisal – P wants to sue in court. D says clause is clear and unambiguous.
Rule: Courts must first determine the existence of a COH. If COH, a court MAY refuse to enforce unconscionable terms
       and construe ambiguities against the drafter. However, it WILL NOT ignore terms that are merely detrimental to
       the weaker party.
Reas: P’s claim they “did not know” is just not enough. That approach would destroy ADR clauses in many cases. COH
       are not necessarily unenforceable – it is only the first step in the analysis.

Lauvetz v. Alaska Sales and Service
Facts: D rented car from P. P seeks recovery for damage to van. D purchased CDW that he thought “covered
        everything.” P says CDW did not cover certain acts including DUI or recklessness.
Rule: Finding of COH requires analysis of reasonable expectations. If a reasonable consumer expects an understanding
        contrary to the written clause, it is normally not enforced.
Reas: D was given choice of CDW or not. Liability or no liability. Reasonable consumer would interpret agreement as
        such.

Implied Terms
To effectuate assumed intent:
Wood v. Lucy, Lady Duff-Gordon
Facts: Alleged K granting exclusive right to market dresses. K is signed but D says does not have all elements of K. P is
        apparently not bound to do anything.
Rule: Implied covenant can save an agreement that is incomplete in writing.
Reas: Parties’ intent is key. If they intended to be bound, a court will assume it goes without saying.

To effectuate public policy:
Locke v. Warner Brothers

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Facts: Development deal between P and D. D was given first-look opportunities and a pay or play provision to all work
       presented by P. D retained discretion to decide. P alleges D never intended to accept any of P’s projects (i.e., D
       never intended to exercise its discretion).
Rule: A K granting discretionary power affecting the rights of the other must be exercised in good faith and in
       accordance with fair dealing.
Reas: A party should not be allowed to deprive the other of its benefits under the K. The covenant is implied in every K
       unless otherwise specified.

Hobin v. Coldwell Banker
Facts: Franchise K between P and D. P claims exclusive territory. D reserved right to operate other franchises in the
area.
Rule: The implied covenant may be disclaimed expressly (K around).
Reas: Parties should be allowed to do what they contracted to. If they reserved the right to operate franchises in
        another franchisee’s area, the implied covenant of good faith should not prevent them from doing so.

Excuse/breach – Is one side excused from the deal?
Death or incapacity:
R2K§262
Death or incapacity of a person necessary for performance excuses the nonperformance.
Analysis requires determination of whether decedent was “necessary” for performance.

Other unforeseen occurrences:
Impracticability/Impossibility –
R2K§261
Where performance is made impracticable without his fault by the occurrence of an event which was assumed not to
happen, duty to render performance is discharged unless stated otherwise. “Hell or high water” clause.

Taylor v. Caldwell
Facts: K to give P’s use of concert hall. The building burns down before the concert at the fault of neither party.
Rule: There is an implied condition of the continued existence of a thing in this sort of K (parallel to the implied
        condition that K parties remain alive) and when the existence is no longer, both parties are excused.
Reas: The rule applies to K’s that are absolute – parties knew from beginning that it could not be fulfilled unless when
        the time came certain implied conditions were satisfied (here, the continued existence of the hall).

Opera Company V. Wolf Trap
Facts: Similar K to furnish concert hall. Power went out – neither party’s fault (lightning strike).
Rule: Implied condition excuses both parties – foreseeability does NOT excuse parties IF the foreseeability is so great
       that it should have been guarded against.
Reas: Electricity was an implied condition of the performance. Dissent takes issue with foreseeability – lightning struck
       multiple times prior, and it should have been guarded against.

Unforeseen occurrences that affect the purpose of performance:
Frustration of purpose –
Related to the REASON the party entered the contract. If something occurs that makes continued performance
meaningless, frustration of purpose exists.

Krell v. Henry

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Facts: D was given use of P’s apartment for viewing the coronation. Coronation did not occur as scheduled. Claimed
       implied covenant that coronation would occur.
Rule: Where functional performance is not possible, an implied covenant excuses the parties if intent is sufficiently
       clear even if not explicitly stated.
Reas: Focus is again on intent of the parties. If their intent is not stated but clear, it should be enforced that way.

Mel Frank v. Di-Chem
Facts: Lease agreement for D to store chemicals. D wanted to store hazardous chemicals, but changes to the fire code
       made the cost of compliance too high. D wanted out because it could not store its hazardous chemicals.
Rule: Frustration of purpose is a change of circumstances that makes the value of performance virtually worthless. To
       sustain this defense, the purpose must have been principal in making the K, the frustration must be substantial,
       and the non-occurrence of the event must have been a basic assumption on which the K was made.
Reas: Parties K for value. If the value does not exist the K’s purpose is frustrated. However, K’s are interpreted as being
       enforceable unless it can be clearly shown otherwise.

Breach – Material Breach:

R2K§235
Full performance discharges the duty.
Any non-performance constitutes breach – question is matter of degree.

Partial breach entitles party to recover some damages, but does not provide excuse to obligations.
Total or material breach gives the non-breaching party two options:
Cancel or terminate the entire contract.
Argue that their obligation is discharged by other party’s breach.

Gibson v. City of Cranston
Facts: Employment K to work as superintendent for D. P quits mid-K due to various factors including administrative
       disputes and a claim of impairment of responsibility.
Rule: Contracting party may cease performance if the other party commits breach that is material. A non-material
       breach does not give contracting parties such rights.
Reas: Thrust of claim is based on failure to provide timely evaluations. Cannot say that without evaluations, P would
       not have been able to carry out responsibilities. If evaluations were essential, P could have contracted for them
       explicitly to make failure a material breach – “if evaluation is not provided in timely fashion, it will be deemed a
       material breach excusing me from performance.”

Jacob & Youngs v. Kent
Facts: K to build house and use specific types of piping. Different manufacturer was used for some of the pipe. D
       refuses to make final payment and P sues.
Rule: There must be a baseline determination of whether issue is promise or condition. If condition, performance
       must be absolute. If promise, substantial performance doctrine applies (close enough, substantially similar).
Reas: If condition, it is essential to the K. Courts should not allow a substitute. If promise, substantial performance
       doctrine tells us that if it is close to what was contracted to, parties got what they bargained for. Dissent takes
       issue because the manufacturer was explicitly stated. He thinks they clearly meant only that type was
       acceptable, making it a condition.

Expectation Interests:

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What could be done in the situation?
Feasibility of options – repair, replace, redo.
If not feasible, difference in fair market value is damages.
If the FMV difference is nominal, there is nothing to recover.

Grun Roofing v. Cope
Facts: K to install roof. D did not install a roof that was uniform in color. P sues for breach. D argues substantial
       performance.
Rule: A deficient performance that can only be remedied by a complete replacement cannot be considered substantial
       performance.
Reas: Substantial performance doctrine protects an otherwise breaching party where the performance is “close
       enough.” Here, replacement is necessary and thus NOT “close enough.”

Remedies – how does a law enforce a deal?
Money damages:
Paying instead of performing.
Liquidated damages – money damages determined beforehand in case of breach.
Determined by court:
Expectation – as if contract had been performed (R2K§§347, 248)
Reliance – as if contract had not been made (R2K§349)
Restitution – restoration of benefits conferred (breaching party should return what it received)

Expectation Damages:
Hawkins v. McGee
Facts: P sues surgeon D for breach of warranty. D performed surgery that did not provide the results P expected. P
       alleges D “guaranteed” a “good hand.” Note well, this guarantee brings the case within K law, not tort.
Rule: In such a case of a breach, the damages awarded may be the difference in what was expected and what was
       received.
Reas: Award allows damaged party to be made whole. Giving them the difference lets them fix the problem through
       someone else.

R2K§347 – Basic Damages Calculation
Loss of Value + Incidental or consequential losses – costs avoided.
Leingang v. Mandan Weed Board
Facts: K to cut weeds on “big lots.” Lots given to someone else. P sues for recovery of lost work. Calculation is disputed
        – whether inclusion of overhead is proper.
Rule: Only variable expenses are deducted from the award; constant expenses are not included in the calculation.
Reas: Variable expenses (like labor, materials) are required for the work. They are considered losses avoided that
        should be deducted. Constant expenses would be incurred regardless of performance, thus they should not be
        considered.

Panorama Village v. Golden Rule Roofing
Facts: K to install roofs and provide warranties. Roofs defective and no warranty was actually provided. Dispute is over
what should be awarded.
Rule: P bears the burden to provide a damages figure. The burden then shifts to D to refute the computation. If a
       computation cannot be made, then damages would be difference in FMV or cost of replacement if it were not
       clearly disproportionate.

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Reas:   Parties should get what they bargained for. It makes sense that both parties have an opportunity to present
        evidence about what the value of performance would be.

Groves v. John Wunder
Facts: K to allow gravel removal on condition that it is left “at uniform grade.” Cost to fix was over $60k. FMV of
       property was around $12k. Issue is which figure should be used as damages.
Rule: Cost of performance rule - The value of land is irrelevant in cases of willful breach of K, the proper award would
       be the cost of performance.
Reas: This is a case of willful breach. The breaching party should not benefit from purposely not performing. The
       problem is economic waste where a lot is spent for a marginal increase in value. The court says no economic
       waste because it does not require destroying a building or something like that to fix the problem.

Peevyhouse v. Garland Coal
Facts: K to allow coal mining upon stipulation that land is returned to condition prior. It was not and P sues. Marginal
       increase in market value and high cost of performance to fix problem.
Rule: Value rule – The difference in value of the land is the proper award here. Cost of performance should only be
       awarded where the cost is not disproportionate to the end to be attained.
Reas: Focus here is on the reasonableness of property owners. The typical owner would not spend $29k to increase
       the property value by $300. Groves is the exception – most courts will award cost of performance only if it does
       not exceed the value.

Limitations on money damages:
Foreseeability
Hadley v. Baxendale
Facts: P needed new part for their mill. P sent to D and stated the urgentness of delivery. Delivery was delayed and P
        sues for lost profits from its milling operation.
Rule: Damages may only be recovered for losses incurred within the contemplation of the parties. Special
        circumstances must exist to add damages that may not necessary stem from the breach.
Reas: Liability should only extend to foreseeable occurrences. Lost profits are consequential damages that are not
        normally foreseeable to the breaching party without special circumstances (i.e., if D knew P was not operating
        without the part, P could probably recover for the lost profits).

Manouchehri v. Heim
Facts: K to purchase x-ray machine of certain specification. Machine was wrong specification and P sues for value and
       lost profits. Trial court awarded P full value of machine and lost profits.
Rule: Sufficient foreseeability, certainty and mitigation allow recovery for consequential damages stemming from
       breach.
Reas: If it should be reasonably known to the breaching party the consequences of his breach, he should have to pay.

Certainty:
ESPN v. Baseball
Facts: Breached K resulting from P preempting baseball games. Baseball seeks recovery for consequential damages
        based on lost exposure, prestige, and ratings. Baseball estimated damages to be “millions of dollars” but could
        not quantify anything.
Rule: Consequential damages must be shown with certainty to be allowed. No certainty means no recovery.
Reas: Damages of this sort should be quantified. If the party cannot quantify them, the D should not have to pay.

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Mitigation:
Parties should not be allowed to accrue damages. They must mitigate whenever possible.

Fair v. Red Lion
Facts: P was terminated after returning from medical leave. D offered reinstatement to same position at same salary
         with same benefits. P ignored offer and sued. She claimed fear of retaliation – being fired later.
Rule: An unconditional offer for substantially similar work must be accepted to mitigate damages unless special
         circumstances exist (i.e., knowledge the offer is illusory).
Reas: Damages should not be allowed to accrue. Unless P had reason to know the offer was not really good she must
         accept it. There was no evidence of the sort here. If D’s offer really was no good, P should have accepted and
         sued again if she was fired.

Parker v. 20th Century Fox
Facts: P sues for breach of K for failure to produce film. D offered a position for a different film but without certain
        terms of the prior K (right to choose director among other rights).
Rule: Acceptance of an inferior or different offer is not required to mitigate damages.
Reas: Mitigation is required only where the offer is essentially the same. No one should be forced to accept lesser or
        different employment just because it is offered. Dissent notes that the test in California is not whether the offer
        is “different” but whether it is “substantially similar.” The analysis would require a deeper comparison beyond
        the mere differences in the two movies.

Restitution:
Quantum meruit recovery is the reasonable value of the performance.

United States (Coastal) v. Algernon Blair
Facts: General contractor fails to pay for subcontractor’s equipment and maintenance. Claim is quantum meruit (not
        breach of K). Trial court finds P would have lost more than it would have been paid under the K and awards
        nothing.
Rule: Recovery in quantum meruit is the reasonable value of the performance NOT reduced by loss which would have
        been incurred by complete performance.
Reas: Though P could not have recovered anything in a breach of K claim, quantum meruit (unjust enrichment/gain)
        seeks to take away any benefit that D received. “Distributive” vs. “corrective” justice.

Specific Performance:
    Generally, only allowed if money damages are inadequate or result is irreparable injury without performance.

Walgreen v. Sara Creek
Facts: Provision of K stipulated no other pharmacies in the mall. P seeks permanent injunction to prevent D from
       allowing another pharmacy. D seems prepared to pay damages to breach – “efficient breach.”
Rule: Specific performance enforced through an injunction requires a cost-benefit analysis. If the cost of requiring
       performance exceeds the benefits of allowing the breach, damages should be awarded as a matter of efficiency.
       However, if the burden to compute damages is too great, specific performance may be better. It is a balancing
       test.
Reas: Efficient breaches are beneficial to all, in most situations. There is a presumption towards damages unless
       specific performance can be shown to be a better option.



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