Contracts Outline I. Introduction to Contracts A. Contract – is a promise or set of promises for which the law gives a remedy, or the performance of which the law in some way recognizes a duty. (A.K.A. an enforceable promise) B. Principles of Contract Law 1. Autonomy: The ability of parties to act on their own. (This does tend to favor those with superior knowledge and skill.) General rule – the State steps back. 2. Social Justice: Occurs when both parties benefit. If one benefits from failing to keep a promise at the other party‟s detriment then the first is unjustly enriched. 3. Efficiency/Utilitarianism: Where the contract is beneficial to both parties. Through this theory people are able to rely on each other. An efficient breach occurs where it is more efficient for one party to breach that to fulfill the promise. If this occurs must compensate the other party so that they are in as good a position as they would have been had you performed your end of the deal. 4. Honesty/Integrity/Trust: Historically these qualities were important. 5. Fault/Responsibility: The party who is at fault must should the cost. There are two ways in which this may be accomplished (1) monetary compensation (2) specific performance. 6. Judicial Confidence 7. Paternalism: When is the right time for the state to come in and create a more balance playing field? The law recognizes that not all parties are capable of entering contracts and further recognizes that some parties have superior bargaining power so there are state driven attempt to make thing more equitable. C. Sources of Contract Law 1. Common Law 2. Uniform Commercial Code and other statutes 3. CISG and other treaties: These are especially important in the international arena. 4. Restatement D. Types of Remedies and Available Damages 1. Remedies (a) choice among available remedies (expectancy, reliance, restitution, specific performance, liquidated damages) (b) Remedial goals/measure of damages (c) type of contract (employment, construction, land and goods) 2. Expectation Damages: This is the difference between what you got with the breach and what you were promised. Giving the person that suffered the breach everything they would have received if the breach had not occurred. Principle: U.C.C. Section 1002 “…to put the injured party is as good a position as he would have been put in by the full performance of the contract…”
E.
Reliance Damages: This is the amount of money and energy you expended in reliance on the contract. (Look back as the injured party) Tries to put the party who suffered the breach back where they were prior to forming the contract. Loss actually caused by reliance. 4. Restitution Damages: How much did the breaching party receive as a result of breaking the contract? (Look back as the breaching party) Gives to the party who suffered the breach the amount of unjust enrichment of the other party. Prevent unjust enrichment of the breaching party. 5. Specific Performance: Perform what you said you were going to perform. Required Elements of a Contract 1. Manifestation of Intent 2. Offer 3. Acceptance 4. Validation (Consideration or Promissory Estoppel) i. Promissory Estoppel: The principle that a promise made without consideration may nonetheless be enforced to prevent injustice if the promisor should have reasonably expected the promisee to rely on the promise and the promisee did actually rely on the promise to his or her detriment. ii. Consideration: Is something of value, such as an act, forbearance, or a return promise, received by a promisor from a promisee.
3.
Introductory Cases 1. Baby M 2. Hawkins v. McGee (Hairy hand case) a. Doctor said, “I will guarantee to make the hand a hundred percent perfect hand.” b. McGee argued that he statements were mere statements of opinion or predictions rather than promises. The court rejected this argument because of McGee‟s repeated solicitation and had also gone beyond any statement of mere opinion when he guaranteed a hundred percent hand. II. The Agreement Process A. Intention to Be Legally Bound Section 18 of the Restatement (Second) of Contracts, Comment 1 “Where all the parties to what would otherwise be a bargain manifest an intention that the transaction is not to be taken seriously, there is not such manifestation of assent to the exchange as is required by this Section. In some cases the setting makes it clear that there is no contract, as where a business transaction is simulated on a stage during a dramatic performance. In other cases, there may be doubt as to whether there is a joke, or one of the parties may take the joke seriously. If one
F.
party is deceived and has no reason to know of the joke the law takes the joker at his word.” Section 20 of the Restatement (Second) of Contracts – Effect of Misunderstanding “(1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meaning to their manifestation and (a) neither party has reason to know the meaning attached by the other; or (b) each party knows or each party has reason to know the meaning attached to the other. (2) The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if (a) that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or (b) the party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.” Section 21 of the Restatement (Second) of Contracts – Intention to Be Legally Bound “Neither real nor apparent intention that a promise be legally binding is essential to the formation of a contract, but a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract.” Section 33 of the Restatement (Second) of Contracts “The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy. (3) The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance.” Convention on Contracts for the International Sale of Goods (C.I.S.G.) Sphere of Application and General Provisions Chapter I. Sphere of Application – Article 1 “(1) This Convention applies to contracts of sale of goods between parties whose places of business are in different States: (a) When the States are Contracting States; or (b) When the rules of private international law lead to the application of the law of a Contracting State. (2) The fact that the parties have their places of business in different States is to disregarded whenever this fact does not appear either from the contract or from any dealings between, or from information disclosed by, the parties at any time before or at the conclusion of the contract. (3) Neither the nationality of the parties not the civil or commercial character of the parties or of the contract is to be taken into consideration in determining the application of this Convention.”
Chapter II. General Provisions Article 8 “(1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was. (2) If the preceding paragraph is not applicable, statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances. (3) In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties. Article 10 “For the purposes of this Convention: (a) If a party has more than one place of business, the place of business is that which has the closest relationship to the contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of the contract; (b) If a party does not have a place of business, reference is to be made to his habitual residence.” Manifestation of Intent 1. Objective Theory of Assent (Applies to Offer and Acceptance): Basic Rule 2. Subjective Theory of Assent: Exception to the Rules Determining Reasonable Belief: Language, Context, Relationship, Custom, Prior Dealings, Type of Contract, Terms of Contract, etc. Applying the Rule: Complex Agreement (Letter of Intent – Examples Venture and Palmer) Applying the Rule: Simple Agreement (Missing Terms – Example Paloukos) 1. The Objective Theory a. Leonard v. Pepsico, Inc. 1. What an objective, reasonable person would have understood the commercial to convey. 2. If it is clear that an offer was not serious, then no offer has been made. (In this case a reasonable viewer would understand this advertisement was mere puffery, not as statements of fact.) Lucy v. Zehmer
b.
1.
2.
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Objective Manifestation of Assent: The mental assent of the parties is not requisite for the formation of a contract. If the words or other acts of one of the parties have but one reasonable meaning, his undisclosed intention is immaterial except when an unreasonable meaning which he attached to his manifestations is known to the other party. An agreement or mutual assent is essential to a valid contract but the law imputes to a person an intention corresponding to the reasonable meaning of his words and acts. If words and acts, judged by a reasonable standard, manifest an intention to agree, it is immaterial what may be the real but unexpressed state of mind. NO BELIEF PLAINTIFF DOES NOT BELIEVE AND THE BELIEF IS REASONSONABLE THERE IS NO CONTRACT PLAINTIFF DOES NOT BELIEVE AND THE BELIEF IS NOT REASONABLE THERE IS NO CONTRACT
REASONABLE
BELIEF PLAINTIFF BELIEVES AND THE BELIEF IS REASONABLE THERE IS A CONTRACT (ZEHMER)
NOT REASONABLE
PLAINTIFF BELIEVES BUT THE BELIEF IS NOT REASONABLE THERE IS NO CONTRACT (PEPSI) 4.
Notes after this section of cases i. Subjective Theory of Assent: look to actual assent. External acts were merely necessary evidence to prove or disprove the requisite state of mind. (Meeting of the Minds) Promotes autonomy. ii. Objective Theory of Assent: look to apparent assent. Promotes efficiency. This the standard by which the United States is governed. iii. CISG: (Subjective)
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Interpreting Statements to Determine Legal Consequences
Should a party who makes statements that appear to be serious always be understood as intending legal consequences? a. Gault v. Sideman (This is the Norm and Hawkins is the exception) 1. “…The doctor‟s therapeutic reassurance that his patient will be all right, not to worry, must not be converted into a binding promise by the disappointed or quarrelsome.”
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Patient-physician relationship is peculiar as there is not a contract to cure but rather to provide ordinary skill in the treatment of the patient.
b. Balfour v. Balfour 1. Even though the agreement between husband and wife may have included consideration “…they are not contracts, and they are not contracts because the parties did not intend that they should be attended by legal consequences.”*** 2. Exception: While social and domestic agreements are typically viewed as unenforceable because parties do not contemplate legal consequences arising from such agreements, if family members enter into a business relationship, their agreements are contracts. b. Cohabitation (Marvin v. Marvin) 1. Courts have begun to recognize the enforceability of agreements between unmarried persons who manifest intent to be bound to apportion property acquired during cohabitation. 3. Express Statements Concerns Legal Consequences (Letters of Intent) Letters of Intent: It is a written statement detailing the preliminary understanding of parties who plan to enter into a contract or other agreement. A typical letter of intent will merely express the intention of the parties in a continuing negotiation. Moreover, the fact that parties have signed a document captioned, “letter of intent,” will not preclude the finding of a contract between them if they manifest their intention to be bound to such a contract. a. Venture Associates v. Zenith Data Systems 1. The letter stated “merely a letter of intent.” Zenith Data Systems sent a return letter stating that they would begin negotiations. Venture accepted proposal to begin negotiations. With no contract Zenith broke off the negotiations. 2. If Zenith had negotiated in bad faith, Venture could recover only reliance damages – the expense he incurred by being misled, in violation of the parties‟ agreement to negotiate in good faith, into continuing to negotiate futilely. 3. Court found that Zenith did not exhibit bad faith. 4. Bad faith is deliberate misconduct.
4. Contemplation of Final Writing
Section 26 of The Restatement (Second) of Contracts – Preliminary Negotiations “A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made further manifestation of assent.” The courts generally agree that the issue of whether parties are bound prior to the execution of a formal document that would serve as evidence of a prior contract, or whether they are not bound until such a final document is executed, is a question of intention. a. Arnold Palmer Golf v. Fuqua 1. Memorandum of Intent drafted and signed. Excerpt of the Memo stated as a condition “ content satisfactory to both parties…” Fuqua pulled out of negotiations. 2. It is possible thus to make a contract to execute subsequently a final writing shall contain these provisions and no others, they have then fulfilled all the requisites for the formation of a contract. 3. On the other hand, if the preliminary agreement is incomplete, it being apparent that the determination of certain details is deferred until the writing is made out; or if an intention is manifested in any way that legal obligations between the parties shall be deferred until the writing is made, the preliminary negotiations and agreements do not constitute a contract. 4. To not be binding must create an out at the end of the document – “THIS IS NOT A BINDING AGREEMENT.”
5.“Agreements to Agree” – Missing Terms The Uniform Commercial Code Section 2204 – Formation in General “(1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract. (2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined. (3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.”
Comment: “The more terms the parties leave open, the less likely it is that they have intended to conclude a binding agreement, but their actions may frequently conclusive on the matter despite the omissions.” a. Paloukos v. Intermountain Chevrolet Co. 1. Completed a worksheet that detailed the features of the truck and the purchase price. Paloukos signed the worksheet and remitted a deposit. Five months later the dealership notified P that they would not be able to deliver the truck and returned the deposit. 2. (Rule: the agreement must be sufficiently definite.)
Curing the Omission If the court can legitimately insert the missing term, which the defendant relies upon as making the agreement fatally indefinite, the agreement will be enforceable. Such a missing term could be cured inferentially by the parties beginning to perform under the agreement. Uniform Commercial Code “Gap Fillers” Cannot gap fill on quantity. U.C.C. Section 2305 – Open Price Term “(1) The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if (a) nothing is said as to price; or (b) the price is left to be agreed by the parties and they fail to agree; or (c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded. (2) A price to be fixed by the seller or by the buyer means a price for him to fix in good faith. (3) When a price left to be fixed otherwise than by agreement of the parties fails to be fixed through fault of one party the other may at his option treat the contract as cancelled or himself fix a reasonable price. (4) Where, however, the parties intend not to be bound unless the price be fixed or agreed and it is not fixed or agreed there is no contract. In such a case the buyer must return any goods already received or if unable to do must pay their reasonable value at the time of delivery and the seller must return any portion of the price paid on account. U.C.C. Section 2307 – Delivery in Single Lot or Several Lots “Unless otherwise agreed all goods called for by a contract for sale must be tendered in a single delivery and payment is due only on such tender but where the circumstances give either party the right to make or demand delivery in lots the price if it can be apportioned may be demanded for each lot.” U.C.C. Section 2308 – Absence of Specified Place for Delivery
“Unless otherwise agreed (a) the place for delivery of goods is the seller‟s place of business or if he has none his residence; but (b) in a contract for sale of identified goods which to the knowledge of the parties at the time of contracting are in some other place, that place is the place for their delivery; and (c) documents of title may be delivered through customary banking channels. U.C.C. Section 2309 – Absence of Specific Time Provisions; Notice of Termination “(1) The time for shipment or delivery or any other action under a contract if not provided in this Article or agreed upon shall be reasonable time. (2) Where the contract provides for successive performance but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at anytime by either party. (3) Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.” U.C.C. Section 2310 – Requires Payment on Delivery U.C.C. Section 2311 – Options and Cooperation Respecting Performance “(1) An agreement for sale which is otherwise sufficiently definite (subsection (3) of Section 2204) to be a contract is not made invalid by the fact that it leaves particulars of performance to be specified by one of the parties. Any such specification must be made in good faith and within limits set by commercial reasonableness. (2) Unless otherwise agreed specifications relating to assortment of the goods are at the buyer‟s options and except as otherwise provided in subsections (1)(c) and (3) of Section 2319 specification or arrangements relating to shipment are the seller‟s option. (3) Where such specification would materially affect the other party‟s performance but it not seasonably made or where one party‟s cooperation is necessary to the agreed performance of the other but is not seasonably forthcoming, the other party in addition to all other remedies (a) is excused for any resulting delay in his own performance; and (b) may also wither proceed to perform in any reasonable manner or after the time for a material part of his own performance treat the failure to specify or to cooperate as a breach by failure to deliver or accept the goods.” B. The Anatomy of Agreements – Offer and Acceptance 1. Preliminary Negotiations Versus Offers a. Southworth v. Oliver 1. Case about whether the defendants are obligated to sell plaintiff 2,933 acres of land. There were a series of negotiations between the P and D regarding the land and finally an offer.
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Price quotation standing alone is not an offer. However, there are times when a price quotation along with the surrounding circumstances and facts may constitute an offer. 3. To determine if something can be regarded as an offer: (1) what a reasonable man in the position of the offeree has been led to believe; (2) language used – if there are no words of promise, undertaking or commitment, the tendency is to construe the expression to be an invitation for an offer or mere preliminary negotiations –; (3) determination of the party or parties to whom the purported offer has been addressed; and (4) the definiteness of the proposal. Section 24 – The Restatement (Second) of Contracts – Offer Defined “An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.” Effect of the Offer An offer creates a legal power of acceptance in the offeree. “An acceptance is a voluntary act of the offeree whereby he exercises the power conferred upon him by the offer, and thereby creates the set of legal relations called a contract.” What acts are sufficient to create a contract? The offeror is the creator of the power and at the time of its creation he has full control over both the fact of its existence and its terms. The offeror has, in the beginning, full power to determine the acts that are to constitute acceptance. Uniform Commercial Code Section 1103 – Supplementary General Principles of Law Applicable “Unless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions.” Uniform Commercial Code Section 2306 – Output, Requirements and Exclusive Dealings “(1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as
may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded. (2) A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.” b. Rhen Marshall, Inc. v. Purolator Filter 1. M received a circular from P setting forth premiums, which could be selected with an order of P merchandise. M ordered P and selected premium plan, however, additionally he included an additional 5% discount. P called M order not accepted. No filters delivered and no payment was made. 2. Advertisement was no an offer, rather it was a mere invitation to enter into a bargain. Lefkowitz v. Great Minneapolis Surplus Store 1. The second ad was an offer. Ad one fur, one purchaser. “We are of the view…that the offer by G of the sale of the Lapin fur was clear, definite, and explicit, and left nothing open for negotiation.” 2. Rule: Where the offer is clear definite, and explicit, and leaves nothing open for negotiation, it constitutes an offer, acceptance of which will complete the contract. 3. Why are ads not offers? Can‟t gap fill on quantity Maryland Supreme Corp. v. Blake Co. 1. S began to make concrete deliveries. S billed B at $21 per yard. S increase to $27. B could not accept the increase because we bid the job on firm prices. 2. Mutual assent is essential. 3. Letter to B from S = offer. Phone call from B to S = acceptance Interstate Industries v. Barclay Industries 1. Rule: Offer must be sufficiently certain to enable a court to understand what is asked for and what consideration is needed to mature the promise.
c.
d.
e.
f.
The Purchase Order 1. A purchase order is the standard printed form used by businesses to order goods.
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The submission of a purchase order by a prospective buyer is considered an offer.
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Identifying the Offeror and Offeree Section 41 of The Restatement (Second) of Contracts “An offeree‟s power of acceptance is terminated at the time specified in the offer.” a. Antonucci v. Stevens Dodge, Inc. 1. Boilerplate – fine print in a contract. 2. A signed the printed order form which stated that upon signing, A became the offeror and the terms in the form were subject to acceptance by S. No signature by S = no acceptance. S never signed the form. 3. No contract A gets his deposit back 4. Bilateral contract a promise for a promise. Unilateral contract a promise for an action.
3.
Duration of Offers
U.C.C. Section 2309 – Absence of Specific Time Provisions; Notice of Termination “(1) The time for shipment or delivery or any other action under a contract if not provided in this Article or agreed upon shall be reasonable time. (2) Where the contract provides for successive performance but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at anytime by either party. (3) Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.” When do offers end? (1) (2) An offer terminates when it says it terminates. If there is no established time then the standard is A REASONABLE PERIOD OF TIME.
a.
Vaskie v. West American Insurance Co. 1. 12-1-86 W offered settlement of $25,000 did not specify a date on which the offer would terminate. 2. According to Restatement 41 “The reasonableness of the time an offeree takes to accept an offer is measured from the perspective of the offeree. In general, the question is what time would be though satisfactory to the offeror by the reasonable man in the position of the offeree.
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As the “master of the offer,” the offeror may place any time restriction upon the power of acceptance he or she chooses.
The Uniform Commercial Code Section 1203 – Obligation of Good Faith “Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.” b. Caldwell v. Cline 1. Cline sent a letter dated 1-29-1929 to Caldwell offering to purchase a piece of land in exchange for cash and another parcel of land. In the letter Cline stated that he would give Caldwell eight days to accept or reject the offer. Letters, which perform the office of words, must come to the knowledge of the party to whom they are addressed before they are accorded legal existence. Before a mutual assent can occur, the words “must strike the ear.” (So if by mail – the letter containing the offer must come to the knowledge of the party to whom they were addressed before they legally exist.
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Convention on Contracts for the International Sale of Goods - Part II. Formation of the Contract – Article 20 “(1) A period of time for acceptance fixed by the offeror in a telegram or a letter begins to run from the moment the telegram is handed in for dispatch or from the date shown on the letter or, if no such date is shown on the letter or, if no such date is shown, from the date shown on the envelope. A period of time for acceptance fixed by the offeror by telephone, telex or other means of instantaneous communication, begins to run from the moment that the offer reached the offeree. (2) Official holidays or non-business days occurring during the period for acceptance are included in calculating the period. However, if a notice of acceptance cannot be delivered at the address of the offeror on the last day of the period because that day falls on an official holiday or a non-business day at the place of business of the offeror, the period is extended until the first business day which follows.” C. Termination of Power of Acceptance Section 36 of The Restatement (Second) of Contracts – Methods of Termination of the Power of Acceptance “(1) An offeree‟s power of acceptance may be terminated by (a) rejection or counter-offer by the offeree, or (b) lapse of time, or (c) revocation by the offeror, or (d) death or incapacity of the offeror or offeree. (2) In addition, an offeree‟s power of acceptance is terminated by the non-occurrence of any condition of acceptance under the terms of the offer.”
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Rejection a. Chaplin v. Consolidated Edison Co. of New York 1. ConEd sent a settlement proposition (offer) which stated that if the offer was not satisfactory the whole offer was withdrawn. Chaplin‟s atty stated the plaintiffs refused the terms. 2. The law changed the next day, as a result, the plaintiffs wanted to accept the offer. 3. An offer is extinguished upon rejection. 4. Court held that once an offer has been terminated, an acceptance cannot be tendered. 5. Policy is to protect the offeror so that they are free to carry on with business without fear that a prior rejection will become an acceptance. Revocations, Acceptances and the “Mailbox” Rule a. Farley v. Champs Fine Foods, Inc. 1. Champs orally revoked the terms of the agreement on 9-2883 2. Farley sent acceptance in the mail on 9-28-83. 3. Court found that Farley mailed the letter after Champs had already revoked the offer. 4. A proposal may be revoked at any time prior to when an acceptance is communicated. 5. Consent is deemed to be communicated fully between the parties as soon as the party accepting a proposal has put his acceptance in the course of transmission to the proposed. 6. Rule: When the acceptance was mailed, there was acceptance. THE MAILBOX RULE According to Common Law (Restatement (Second) of Contracts 40, 42 and 63. 1. Offer is valid when received, not dispatched. Period of time for acceptance begins to run when received, unless otherwise specified. 2. Acceptance is valid when dispatched, not received. 3. A revocation is valid when received, not dispatched. 4. A rejection is valid when received, not dispatched. According to the Convention on Contracts for the International Sale of Goods Articles 15, 16, 17, 18 and 20 1. Offer is valid when received, not dispatched. Period of time for acceptance begins to run when dispatched, unless otherwise specified. 2. Acceptance is valid when received, not dispatched.
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3. A revocation is valid when received, provided it is received before offeree dispatches acceptance. 3. Variations on the Mailbox (Dispatch) Rule a. Presence v. Distance 1. The rationale for the mailbox rule disappears when the parties are in the presence of each other. b. E-commerce 1. Where persons interact using electronic messages, a contract is formed either when the acceptance is received, or, it the offer is accepted by an electronic performance when the electronic performance is received. Indirect Revocation Section 43 of Restatement (Second) of Contracts – Indirect Communication of Revocation “An offeree‟s power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to the effect.” a. Dickinson v. Dodds 1. Dodds gave Dickinson until Friday at 9a.m. to decide if he would make the purchase. 2. Dickinson heard (prior to Friday) that Dodds was considering an offer from another party. 3. Rule: Offer revocable at any time prior to acceptance. There is no requirement that “there must be an express and actual withdrawal of the offer…” 4. “It must, to constitute a contract, appear that the two minds were at one at the same moment of time; that is, that there was an offer continuing up to the time of the acceptance.”
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Counter Offers What is the difference between an acceptance and a counter offer? A counter offer is an offeree‟s new offer that varies the terms of the original offer and therefore, constitutes a rejection of the original offer. a. Ardente v. Horan 1. Rule: The acceptance may not impose additional conditions on the offer, not may it add limitations. An acceptance, which is upon condition or with a limitation,
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is a counteroffer and requires acceptance by the original offeror before a contractual relationship can exist. Exception: An acceptance may be valid despite conditional language if the acceptance is clearly independent of the condition. Mirror Image Rule requires that the acceptance match the offer.
The effect of a counter offer is to reject the original offer. Section 39 of The Restatement (Second) of Contracts – Counter Offers “(1) A counter-offer is an offer made by an offeree to his offeror relating to the same matter as the original offer and proposing a substituted bargain differing from that proposed by the original offer. (2) An offeree‟s power of acceptance is terminated by his making of a counteroffer, unless the offeror has manifested a contrary intention or unless the counter-offer manifests a contrary intention of the offeree.” 6. Death or Incapacity a. Beall v. Beall 1. Plaintiff 2 died prior to Defendant‟s acceptance. 2. The general rule is that the death of an offeror revokes his offer or causes his offer to lapse. Death terminates the power of the deceased offeror to act. Therefore, after death, the formation of that “apparent stated of mind of the parties which is embodied in an expression of mutual consent” is rendered impossible. 3. There is no requirement that the fact of death be communicated to the offeree to constitute an effective revocation.
An offeree’s power of acceptance may be terminated by: 1. Rejection 2. Counter Offer 3. Lapse of Time 4. Revocation by the offeror 5. Death or Incapacity of the offeror or offeree D. Making Offers Irrevocable 1. Introduction a. Ways to make an offer irrevocable i. Option Contract ii. Firm offer/Promissory Estoppel /Detrimental Reliance iii. Partial performance of a unilateral contract
b.
An offer creates a power of acceptance making the offeror susceptible to the exercise of that power in the offeree. The offeree, however, is subject to the termination of that power at any time prior to acceptance through direct or indirect communication of revocation or even the uncommunicated death of the offeror.
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Option Contracts An option contract is a contract made to keep an offer open for a specified period, so that the offeror cannot revoke the offer during that period of time. An option contract has all of the steps of a contract: offer, acceptance and consideration. It is a contract to agree to try to contract. Section 25 of The Restatement (Second) of Contracts – Option Contract “An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor‟s power to revoke an offer.” Section 87 of The Restatement (Second) of Contracts – Option Contract “(1) An offer is binding as an option contract if it (a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within reasonable time; or (b) is made irrevocable by statute. a. Orlowski v. Moore 1. P leased property from D with the right of first refusal regarding the purchase of the property. 2. Where no time is specified for the performance of an act, the law implies that it must be done within a reasonable time, and what is a reasonable time depends entirely upon the circumstances of each case. 3. In an option contract, if one rejects the offer, the option remains open for the entire time of the option. In cases where no duration time is specified – the option will lapse after a reasonable amount of time. United States v. Hendricks 1. Court rule Rule 68 offers are irrevocable and therefore defendant‟s $2,900 offer of judgment remained open for the entire time period provided for by Rule 68 and that plaintiff made a timely acceptance.
b.
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Irrevocability Through Reliance – Firm Offers Section 2205 of The Uniform Commercial Code – Firm Offers
“An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if not time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.” (There is a 3-month ceiling on firm offers) Section 87 of The Restatement (Second) of Contracts – Option Contract (2) An offer which the offeror should reasonable expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.” Article 16 of the Convention on Contracts for the International Sale of Goods – Part II. Formation of the Contract “(1) Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance. (2) However, an offer cannot be revoked: (a) If it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or (b) If it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer.”(CISG contains no limitations on firm offers) a. Pavel Enterprises, Inc. v. A.S. Johnson Co., Inc. 1. Pavel notifies Johnson on 9-1-93 that bid is accepted. That same day Johnson notifies Pavel that there was an error in the bid and the price was too low. Johnson sought to withdraw the bid and on 9-2-93. 2. On 9-28-93 NIH formally awarded the contract to Pavel. Pavel found substitute contractor at an increase of $32,000. 3. Hand Theory – a bid was not an offer of a unilateral contract that can be accepted by performance, and promissory estoppel is limited to cases involving charitable pledges. Contract bound to its bid, but the subcontractor is not bound to the contractor to the detriment of the general contractor. 4. Traynor Theory – If the offeree knows that there will be reasonable reliance then the offer is irrevocable. Subcontractor bound to the general contractor, but the contractor is not bound to the sub contractor – bid shopping can occur. 5. Lovanger Theory(more modern) – there is a bilateral contract between general and subcontractors – the sub bid as a request for performance use of the sub bid in the general
6. 4.
bid constitutes part performance, which render the offer irrevocable. Court ruled that Pavel did not prove detrimental reliance.
Irrevocability Through Part Performance – Section 45 of the Restatements
Section 45 of The Restatement (Second) of Contract – Option Contract Created by Part Performance “(1) Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it. (2) The offeror‟s duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer.” Introduction – Unilateral v. Bilateral Contract Bilateral contracts (promissory acceptance) (1) two promisors (2) 2 promisees (3) 2 rights (4) 2 duties. Formed when promises are exchanged. Unilateral contracts (performance acceptance) (1) 1 promisor (2) 1 promisee. The contract is formed when the performance is completed. a. Dahl v. HEM Pharmaceuticals Corp 1. This was a unilateral contract –-> as performance was completed there was a contract. 2. Unilateral contract could have been revoked at any time prior to the completion of performance. 3. Court found that HEM sought actual performance of double blind test and once the participants completed that a binding contract was formed. BC Tire Corp. v. GTE Directories Corp. 1. When BC signed the application it became the offeror. Not publishing the ad was non-acceptance of the offer. 2. No performance No publication No acceptance No contract No damages 3. There was no contract as GTE never accepted the offer. 4. Conscionability: allows a court to refuse enforcement of a clause that attempts to shift a material risk to the party against whom the clause or contract terms are designed to operate.
b.
The Part Performance Problem Theories Designed to Make Offers Irrevocable Upon Part Performance 1. Traditional view – no contract until performance is completed.
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Modern view – an option contract is created when performance begins or when part of the performance is tendered
a. Petterson v. Patteberg 1. The court held there is no way you can partially complete performance. Defendant‟s offer was withdrawn before its acceptance had been tendered. 2. There was no acceptance because Patteberg could not and did not take the money; therefore, Petterson could not accept the offer. E. The Nautre of Acceptance 1. Knowledge and Motivation One cannot accept an offer that one doesn‟t know about. You must have knowledge of the offer to accept, even if the actions would have otherwise fulfilled the performance required by the offer. Section 53 of The Restatement (Second) of Contract – Motivation v. Knowledge “Where an offer…invites acceptance by performance…, the rendering of the invited performance does not constitute acceptance if before the offeror performs his promise, the offeree manifests an intention not to accept.” a. Simmons v. United States (Fish Case) 1. Unilateral contract – Plaintiff knew of the offer and took the steps necessary to perform acceptance contract. (For acceptance had to catch and turn in the fish.)
F.
The Requirement of Volition a. Carlill v. Carbolic Smoke Ball Co. 1. Cannot accept with non-volitional acts. 2. Ad was offer because there were no terms left to negotiate; all that was required was the performance of Carlill. 3. Performance was the using of the medicine and not getting sick because the performance required must be one that is done of one‟s own volition. 4. Court ruled the Carb must perform their promise. Manner of Acceptance Section 2206 of the Uniform Commercial Code – Offer and Acceptance in Formation of Contract “(1) Unless otherwise unambiguously indicated by the language or circumstances (a) an offer to make a contract shall be construed as inviting acceptance in any
2.
manner and by any medium reasonable in the circumstances; (b) an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods, but such a shipment of non-conforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer. (2) Where the beginning of a requested performance is a reasonable mode of acceptance an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.” Comment 2 to UCC Section 2206 “Any reasonable manner of acceptance is intended to be regarded as available unless the offeror has made quite clear that it will not be acceptable”. 1. Modern Analysis a. Empire Machinery Co. v. Litton Business Telephone Systems 1. Empire wanted to install Litton‟s system. 2. If the offer is not accepted in the stipulated manner, but performance is begun and both parties act like the offer was accepted, then the offer has been accepted. 3. If silent about the manner of acceptance - reciprocate the made in which the offer was made. b. Corinthian Pharmaceutical Systems, Inc. v. Lederle Laboratories 1. Cor had purchased product in lots not larger than 100 from Led in the past. Led were raising prices due to increased costs. 2. On day prior to the price increase – Cor attempted to place an order for 1,000 units by telephone. 3. Non-conforming goods with an accommodation letter = acceptance. Non-conforming goods with an accommodation letter – not an acceptance. Arduini v. Board of Education 1. Offer was the letter and that the acceptance was Ard performance of his duties after receiving the letter and cashing the paycheck, which the new policy was attached to. 2. After Ard began performance a bilateral contract was formed.
c.
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Silence as Acceptance Section 69 of The Restatement (Second) of Contracts – Acceptance by Silence or Exercise of Dominion “(1) Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only: (a) Where an offeree
takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation. (b) Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer. (c) Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept. (2) An offeree who does any act inconsistent with the offeror‟s ownership of offered property is bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if ratified by him.” a. Vogt v. Madden 1. Vogt and Madden had a sharecrop agreement for 1979 and 1980 – in 1981, Vogt states that Madden was told about his plan for 1981, and that he didn‟t say anything, but that Vogt had a belief that an agreement had been reached. 2. Silence can be acceptance but there must be intent for the silence to be acceptance.
3.
The Notice Requirement Section 1204 of the Uniform Commercial Code “What is a reasonable time for taking any action depends on the nature, purpose and circumstances of such action.” a. Petersen v. Thompson (Morton – Tractor Case) 1. Henderson‟s offer was not accepted until defendant picked up the tractor, and that defendant failed to give notice of his acceptance within a reasonable time, permitting Henderson to treat the offer as having lapsed under U.C.C. 2206. 2. Importance of Notice
Section 54 and 55 of The Restatement (Second) of Contracts No duty to notify on the part of the offeree unless the offeror requests. However, if the offeror has no way to know of the performance with promptness and certainty then the contractual duty of the offeror is discharged – unless the offeree exercises reasonable diligence to notify the offeror of the acceptance. 4. A Primer on the Concept of “Warranty” (UCC 2313, 2314, 2315 and 2316) a. Warranties are used in relation to contracts for the sale of goods and connote the seller‟s obligation as to the quality of the goods.
b.
Express warranty – (UCC 2313) created by a promise, affirmation of fact, description, sample or model. Buyer is entitled to receive goods as described – reasonable expectation. The buyer is entitled to receive goods complying with the quality expressed if the manifestations of quality become part basis of the bargain. Must distinguish for an express warranty between affirmations of fact and mere statements of opinion or puff by the seller. Facts v. Opinions – question is one of interpretation and will be measured by the objective under standing of the reasonable man under all of the surrounding circumstances. Implied warranty of merchantability (UCC 2314) – establishes basic, legally recognized quality of goods which the buyer is entitled to receive. Standard: The buyer is entitled to receive goods which may not reach the highest levels of perfection but which a reasonable buyer would normally expect to receive. Goods must be adequately labeled and packaged and the goods inside must conform to any affirmations on the label. The good must be at least such as “are fit for the ordinary purposes for which such goods are used.” For the warranty to be operative the seller must be a “merchant with respect to goods of that kind.” Implied warranty of fitness for a particular purpose (UCC 2315) occasions where buyer is relying on the seller‟s skill, expertise and judgment in selling the goods to the buyer for this particular purpose. To establish this warranty the buyer must prove the reliance factor. Exceptions – if the items have marginal imperfections or otherwise accepted as customary use.
c.
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f. Self-Service Contracts a. Barker v. Allied Supermarket Barker picked up a Dr. P from display in A‟s store – the bottle curst causing injuries. b. Barker claims that he accepted the offer to pick up the soda, therefore the store was liable. c. Court held that in self service areas that there are three ways to accept an offer i. The putting of the chosen goods in the cart w/implied promise to deliver goods at checkout. ii. Delivery of goods at the checkout iii. Promise to pay for goods as evidenced in (ii)
d. e. f.
Restate 62 – start of performance creates a bilateral contract. UCC 2204 – formation of contract If a customer in a self-service situation returns the goods to the shelf, they have terminated the contract. A buyer or a seller may have the power to cancel a contract for sale under some situations. Cancellation occurs when either party puts an end to the contract for breach – the effect is the same as a termination, but the canceling party may also retain any remedy for the breach of contract or for any unperformed portion of UCC 2106.
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Auctions Section 2328 of the Uniform Commercial Code – Sale by Auction “(1) In a sale by auction if goods are put in lots each lot is the subject of a separate sale. (2) A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in other customary manner. Where a bid is made while the hammer is falling in acceptance of a prior bid the auctioneer may in his discretion reopen the bidding or declare the goods sold under the bid on which the hammer was falling. (3) Such a sale is with reserve unless the goods are in explicit terms put up without reserve. In an auction with reserve the auctioneer may withdraw the goods at any time until he announces completion of the sale. In an auction without reserve, after the auctioneer calls for bids on an article or lot, the article or lot cannot be withdrawn unless no bid is made within a reasonable time. In either case a bidder may retract his bid until the auctioneer‟s announcement of completion of the sale, but a bidder‟s retraction does not revive any previous bid. (4) If the auctioneer knowingly receives a bid on the seller‟s behalf or the seller makes or procures such a bid, and notice has not been given that liberty for such bidding is reserved, the buyer may at his option avoid the sale or take the goods at the price of the last good faith bid prior to the completion of the sale. This subsection shall not apply to any bid at a forced sale.” Contract for sale complete when the hammer falls. 2nd Semester:
Interpretation
1. Standards of Interpretation Mellon Bank v. Aetna Business Credit Corp. (A's obligation to purchase construction loan from M) The strongest external sign of agreement between contracting parties is the words they use in their written contract. When a written contract is clear and unequivocal, its meaning must be determined by its contents alone. Guides in interpretation :
(1) Meaning of a term of a contract should receive “a reasonable construction and one that will accord with the intention of the parties…” (2) Must consider the circumstances (3) The subject matter of their negotiations may affect the meaning of the words they employ. Reference point adopted by this court: The judge to hear the proffer of the parties and determine if there is objective indicia that, from the linguistic reference point of the parties, the terms of the contract are susceptible of different meanings. Trade terms, legal terms of art, numbers, common words of accepted usage and terms of a similar nature should be interpreted in accord with their specialized or accepted usage unless such an interpretation would produce irrational result or the contract documents are internally inconsistent. Where one of the two innocent persons must sustain a loss, the law will place that burden on the party that has agreed to sustain it. What is the difference between parol evidence and the rules of interpretation? Parol evidence when you want to bring in new information to show new term. Rules of interpretation – what do the words in the agreement mean? Restatement 200 “Interpretation of a promise or agreement or a term thereof is the ascertainment of its meaning.” Restatement 202: Rules in Aid of Interpretation (1) Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight. (2) A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together. (3) Unless a different intention is manifested, (a) Where language has a generally prevailing meaning, it is interpreted in accordance with that meaning; (b) Technical terms and words of art are given their technical meaning when used in a transaction within their technical field. (4) Where an agreement involves repeated occasion for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement. (5) Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage or trade. Standards of Performance (203) In the interpretation of a promise or agreement or a term thereof, the following standards of preference are generally applicable: (a) An interpretation which gives a reasonable, lawful, and effective meaning to all terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect;
(b) express terms are given greater weight than course of performance, course of dealing, and usage of trade, course of performance is given greater weight than course of dealing or usage of trade, and course of dealing is given greater weight than usage of trade; (c) Specific terms and exact terms are given greater weight than general language; (d) Separately negotiated or added terms are given greater weight than standardized terms or other terms not separately negotiated. Judge determines the interpretation rather than the jury. Restatement (Second) looks to the “common meaning of the parties…” Guides to Interpretation 1. Contextual Interpretation – Surrounding Circumstances 2. Purpose of the Parties 3. The Transaction must be viewed as a whole (Restatement 80) 4. Reasonable, Lawful or Effective Interpretation Preferred 5. Public Interest Favored 6. Contra Proferentem – The agreement will be interpreted against the party responsible for its drafting. 7. Expressio Unius Est Exclusio Alterius – The expression in the contract of one or more things of a class implies the exclusion of all not expressed. 8. Ejusdem Generis – Where the contact document contains general language followed by the enumeration of specific items, the meaning of the general language is said to be limited to matters similar in kind or classification to the enumerated specific terms. 9. Other Presumptions – (i) The ordinary or popular sense of words as used throughout the country will be preferred absent countervailing evidence as to the parties‟ intention; (ii) technical terms and words of art are to be given their technical meaning absent contrary circumstances; (iii) words with an established legal meaning will be given that interpretation absent evidence of a contrary understanding; (iv) the usage of a trade, locality, profession or the like will supercede the ordinary or popular sense of words where that assumption is justified; (v) specific terms will usually be held to qualify general terms because specific terms normally suggest a more precise identification of the parties‟ intentions; (vi) a word or phrase used more than once is interpreted in the same sense throughout the contract; (vii) obvious mistakes of grammar or punctuation will be corrected or disregarded to the extent that they conflict with a clear intention expressed in the contract; (viii) conflicts between printed and typewritten provisions favor the latter since more conscious attention is directed toward the latter -- similarly, handwritten provisions will be favored over typewritten provision, as separately negotiated terms will be preferred over prefabricated provisions; (ix) where inconsistent intentions are manifested in different clauses, the intention manifested in the principal or more important clause is favored.
2. Vague or Equivocal Meanings and Latent Ambiguity Ambiguity (Ambiguous terms) unclear as it has several meanings // could go either way. (Green eggs and ham) Vagueness term has one meaning but the limits are unclear expansive meaning. (Green eggs) Restatement 20 Effect of Misunderstanding (1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestation and (a) neither party knows or has reason to know the meaning attached by the other; or (b) each party knows or has reason to know the meaning attached by the other. (2) The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if (a) that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or (b) the party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.
Restatement 201 Whose Meaning Prevails (1) Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning. (2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made. (a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or (b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party. (3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be failure of mutual assent Frigalment Importing Co. v. B.N.S. International Sales Corp. (Chicken Case) Analysis: 1. Definition in the contract, 2. Negotiations, 3. Trade usage/definition that the industry utilizes, 4. Definition utilized by others incorporated by reference in the contract, 5. Market price (expect to make some profit – one would not deliberately incur a loss) 6. Course of dealing/ conduct between the parties Who has the burden of proof? (Very Important) The buyer had reason to know that the seller meant any chicken. Raffles v. Wichelhaus (Peerless Case) “Peerless” case not a common situation falls into Restatement 20 “(1) there is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and (a) neither party knows or has reason to know the meaning attached by the other…” The person with the inferior knowledge is not held responsible where the person with the superior knowledge resulted in him being held responsible. No mutual manifestation of assent – there is nothing on the face of the contract to show that any particular ship called the “Peerless” was meant; but the moment it appears that 2 ships called the “Peerless” were about to sail from Bombay, there is a latent ambiguity, and parol evidence may be given for the purpose of showing that the d meant one Why not the same analysis between the chicken case and this case? The buyer should have known what the seller was thinking (chicken case). The seller would not know that the buyer meant one “Peerless” rather than the other “Peerless.”(this case) MISTAKE 1. Mutual Mistake
Mistake is a Belief not in Accord with the Facts (151) When Mistake of Both Parties Makes a Contract Voidable (152) (Mutual Mistake) (1)Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in Section 154. (2) In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise. When Mistake of one Party Makes a Contract Voidable (153) (Unilateral Mistake) Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in Section 154, and (a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or (b) the other party had reason to know of the mistake or his fault caused the mistake. When a Party Bears the Risk of a Mistake (154) A party bears the risk of a mistake when (a) this risk is allocated to him by agreement of the parties, or (b) he is aware, at the time the contract is made, that he had only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or (c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so. Hoell v. Waters (Mistaken Land Sale Representative) In general, a unilateral mistake in the making of an agreement, of which the other party is ignorant and to which he in no way contributes, will not afford grounds for avoidance of the agreement. Exception (Rest. 153) The mistake of one party is sufficient to avoid a contract when the other party had reason to know of the mistake or cause the mistake. This case fits into 153(b) misrepresentation is the cause of the whole mistake. 2. Mistake in Offer Speckel v. Perkins (Typo $50,000 rather than $15,000) A duty to inquire may be imposed on the person receiving the offer when there are factors that reasonably raise a presumption of error. Not like the Hoell case as in this case the person who made mistake called the mistake. Restatement 153(b) applies as Speckel's attorney had reason to know of the mistake made by the other side. (Voidable) A unilateral mistake in entering a contract is not a basis for rescission unless there is ambiguity, fraud, misrepresentation, or where the contract may be rescinded without prejudice to the other party.
3. Mistake of Subject Matter Anderson Brothers Corp. v. O’Meara (Dredge Case) Mutual mistake is one common to both parties to the contract, each laboring under the same misconception. Rule: when a person does not avail himself of an opportunity to gain knowledge of the facts, he will not be relieved of the consequences of action upon supposition. Relief should be denied where the mistaken party exercised “no diligence whatever” in ascertaining the readily accessible facts before he entered into a contract. If there is a mutual mistake you can recover. Why is it not a mutual mistake? Both have to have the same misunderstanding but that was not the case only the buyer. Restatement 154(b) they assumed the risk. 4. Unilateral Mistake – Release Lanci v. Metropolitan Insurance Co. (Auto Accident - Insurance Misrepresented the Amount Available under the Policy) Release is binding unless it was executed under fraud, duress or mutual mistake. Relief granted to party adversely affected by mistake depends on: (1) Nature and effect of that mistake; (2) Mistake must relate to the basis of the bargain, must materially affect the parties‟ performance, (3) Must not be one as to which the injured party bears the risk before the party will be entitled to relief. Unilateral mistake exception: if the other party knows or has reason to know of the unilateral mistake, and the mistake, as well as the actual intent of the parties is clearly shown, relief will be granted to the same extent as mutual mistake. Similarities between Hoell and Lanci – both given representation which was incorrect and they relied on it. There may be an argument that Lanci failed with due diligence but this was not made in the case. 5. Releases –“Unknown Injury” LaFleur v. C.C. Pierce Co. (1st case about Mutual Mistake - Unknown Injury Becomes Known) Where there has been a mistake between the parties as to the subject matter of a contract, there has been no “meeting of the minds,” and the contract is voidable at the election of the party adversely affected. The mistake must involve a fact capable of ascertainment at the time the contract was entered into, and not a mere expectation or opinion about future events. A release of claims for p.i. may be avoided on the ground of mutual mistake if the parties at the time of signing the agreement were mistaken as to the existence of an injury. Inquiry: whether there has been a conscious and deliberate intention by the parties to release claims for injuries existing but not known to them at the time of the agreement.
Further inquiry: whether the plaintiff suffers from an unknown injury which is so serious as to indicate clearly that if it had been known, the release would not have been signed. Factors to consider: language of the agreement; the circumstances of it negotiation and execution, including the legal representation of the parties; the seriousness of the unknown injury; and the consideration paid to the plaintiff for the release of the defendant‟s liability. Restatement 152 6. Unilateral Mistake –Clerical Error First Baptist Church of Moultrie v. Barber Contracting Co. (Miscalculated Bid - Church refused to allow Withdrawal)(Unilateral Mistake Unconscionable) Issue: Was Barber able to rescind his bid upon discovering the miscalculation? (Yes, the court stated that Barber was entitled to rescind its bid. (Plaintiff lost only what it sought to gain by taking advantage of the contractor‟s mistake.) Restatement 153(a) the effect of the mistake is such that enforcement of the contract would be unconscionable Corbin: “…if the error was a substantial one and notice is given before the other party has made such a change of position that he cannot be but substantially in status quo, the bargain is voidable and rescission will be decreed.” Requirements for rescission of construction bid: the mistake is of such consequence that enforcement would be unconscionable the mistake must relate to the substance of the consideration the mistake must have occurred regardless of the exercise of ordinary care it must be possible to place the other party in status quo. it is also generally required that the bidder give prompt notification of the mistake and his intention to withdraw. Factors to consider when determining whether relief should be granted due to a clerical error: Was the mistake material? Would enforcement of the contract be unconscionable? (“An error in the computation of a bid may be material, representing a substantial percentage of the total bid submitted, and yet requiring compliance with that bid may not be unconscionable.) Did the mistake result from „any positive duty or culpable negligence? Would the plaintiff suffer severe hardship if the contractor were afforded relief? Was prompt notice of the mistake given? 7. Mistake of Value Wood v. Boynton (Diamond Sold for $1 – Both parties did not know what the rock was) Reasons for rescinding a sale: 1. Vendee was guilty of some fraud in procuring a sale to be made to him;
2. Mistake made by the vendor in delivering an article which was not the article sold, -- a mistake in fact as to the identity of the thing sold with the thing delivered upon the sale. Assumption of the Risk: If she chose to sell it without further investigation as to its intrinsic value to a person who was guilty of no fraud or unfairness which induced her to sell it for a small sum, she cannot repudiate the sale because it is afterwards ascertained that she made a bad bargain. In the absence of fraud or warranty, the value of the property sold, as compared with the price paid, is no ground for a rescission of a sale. 154(b) Sherwood v. Walker (Cow Case – Thought it was barren but really was not) A party who has given an apparent consent to a contract of sale may refuse to execute it, or he may avoid it after it has been completed, if the assent was founded on mistake of a material fact --(such as the subject matter of the sale, the price, or some collateral fact materially inducing the agreement) The controlling question: “Whether the mistake or misapprehension is as to the substance of the whole contract, going, as it were, to the root of the matter, or only to some point, even though a material point, an error as to which does not affect the substance of the whole consideration?” 154(c) UCC 2313(1)(a) “Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.” Abuse of the Bargaining Process 1. One party trying to be abusive to the other party 2. Both parties against public policy 1. Duty to Read General rule: You have a duty to read the contract. Common Law Rule: “It will not do for a man to enter into a contract, and, when called upon to respond to its obligation, to say that he did not read it when he signed it, or did not know what it contained. If this were permitted, contracts would not be worth the paper on which they are written.” Magliozzi v. P & T Container Service Co., Inc. (Injured While Walking Through Trash Compactor) Common law analysis: An inference of assent is not warranted where the subsequent writing: (1) Is used for other purposes (2) Does not purport to be a contract and is not contractual in form (3) Gives no notice whatsoever of proposed additional terms which are not visible on the face of the writing.
“Party without knowledge or reason to know that the … (pick up ticket) purports to be a contract is then not bound by terms printed on the (ticket).” (Restatement 211) One Stop Supply, Inc. v. Ransdell (CEO takes out Loan for Corporation but is Held Personally Accountable) General rule: a person cannot avoid a written contract into which he has entered on the ground that he did not attend to its terms that he did not read the document. A party need not specifically assent to each provision in a written contract in order to make that provision binding on him. Rule: The party who signs a printed form furnished by the other party will be bound by the provisions in the form over which the parties actually bargained and such other provisions that are not unreasonable in view of the circumstances surrounding the transaction. Restatement 211 2. Standardized Contracts – The “Reasonable Expectations” Solution (Adhesion Contracts: offered to consumers of goods and services on essentially a „take it or leave it‟ basis without affording the consumer a realistic opportunity to bargain and under such conditions that the consumer cannot obtain the desired product or services except by acquiescing in the form contract the weaker party has no realistic choice as to its terms.) REASONABLE EXPECTATIONS Restatement 211 Standardized Agreements (1) Except as stated in Subsection (3), where a party to an agreement signs or otherwise manifests assent to a writing and has reason to believe that like writing are regularly used to embody terms of agreements of the same type, he adopts the writing as an integrated agreement with respect to the terms included in the writing. (2) Such a writing is interpreted wherever reasonable as treating alike all those similarly situated, without regard to their knowledge or understanding of the standard terms of the writing. (3) Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement. Max True Plastering Co. v. United States Fidelity and Guaranty Co. (Sued Insurance Company as Employees "Jumped Ship") Doctrine of Reasonable Expectation: if the insurer or its agent creates a reasonable expectation of coverage in the insured which is not supported by policy language, the expectation will prevail over the language of the policy. (The language of the policy will provide the best indication of the parties‟ reasonable expectation. Controlling question: Whether an insured could reasonably have expected coverage.) The use of this doctrine is limited to situations in which the policy contains an ambiguity or to contracts containing unexpected exclusion arising from technical or obscure language or which are hidden in policy provisions. Under the reasonable expectations doctrine a policy term is ambiguous if it is reasonably susceptible to more than one meaning.
When defining a term the language is given the meaning understood by a person of ordinary intelligence. Question to be asked: Is this term so unreasonable that I would not have signed it? What is the test? Restatement 211 (2) and (3) Under the Restatement, reformation of an insurance contract is allowed if the insurer has reason to believe that the insured would not have signed the contract if the inclusion of certain limitation had been known. Broemmer v. Abortion Services of Phoenix, Ltd. (Abortion Arbitration Clause-Not Enforceable) 2 factors that determine whether an adhesion K is enforceable: (1) the reasonable expectations of the adhering party and (2) whether the contract is unconscionable. Restatement 211 … customers are not bound to unknown terms which are beyond the range of reasonable expectation. 3. From Fraud to Unconscionability (Fraud is a type of Misrepresentation) Restatement 205 Every contract imposes upon each party a duty of good faith and fair dealing in it performance and enforcement. Restatement 161 When Non-Disclosure Is Equivalent to an Assertion A person‟s non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only (a) where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material; (b) where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing; (c) where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part; (d) where the other person is entitled to know the fact because of a relation of trust and confidence between them. MISREPRESENTATION Restatement 162 When a Misrepresentation is Fraudulent or Material (1) A misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest his assent and the maker (a) knows or believes that the assertion is not in accord with the facts, or (b) does not have the confidence that he states or implies in the truth of the assertion, or (c) knows that he does not have the basis that he states or implies for the assertion. (2) A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so. Restatement 163 When a Misrepresentation Prevents Formation of a Contract If a misrepresentation as to the character or essential terms of a proposed contract induces conduct that appears to be a manifestation of assent by one who neither knows nor has reasonable opportunity to know of the character or essential terms of the proposed contract, his conduct is not effective as a manifestation of assent.
Restatement 164 When a Misrepresentation Makes a Contract Voidable (1) If a party's manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient. (2) If a party's manifestation of assent is induced by either a fraudulent or a material misrepresentation by one who is not a party to the transaction upon which the recipient is justified in relying, the contract is voidable by the recipient, unless the other party to the transaction in good faith and without reason to know of the misrepresentation either gives value or relies materially on the transaction.
DURESS Restatement 174 When Duress by Physical Compulsion Prevents Formation of a Contract If conduct that appears to be a manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress, the conduct is not effective as a manifestation of assent. Restatement 175 When Duress by Threat Makes a Contract Voidable (1) If a party‟s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim. Restatement 176 When a Threat is Improper (1) A threat is improper if: (a) What is threatened is a crime or a tort, or the threat itself would be a crime or a tort if it resulted in obtaining property. (b) What is threatened is a criminal prosecution. (c) What is threatened is the use of civil process and the threat is made in bad faith, or (d) The threat is a breach of the duty of good faith and fair dealing under a contract with the recipient. (2) A threat is improper if the resulting exchange is not on fair terms, and (a) the threatened act would harm the recipient and would not significantly benefit the party making the threat, (b) the effectiveness of the threat in inducing the manifestation of assent is significantly increased by prior unfair dealing by the party making the threat, or (c) what is threatened is otherwise a use of power for illegitimate ends.
Germantown Mfg. Co. v. Rawlingson (H embezzled $ and W signed judgment not to prevent H from going to jail) Duress Test of duress if a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.
Threat of civil suit not considered duress. Threat of imprisonment is duress. A contract document signed by a reluctant party under gunpoint or other physical compulsion is an example of physical duress. Duress, other than by physical compulsion, involves an improper threat that may take various forms. (Restatement 175 and 176)
Material/Fraudulent Misrepresentation Recipient of a misrepresentation may avoid the contract by showing that the misrepresentation was either fraudulent or material. How to est. materiality? Showing that the misrepresentation would have been likely to have induced a reasonable person to make the contract. Four types of fraudulent misrepresentation according to Restatement 162: (1) Maker of the misrepresentation knows or believes that the assertion is not in accord with the facts; (2) The maker expressly or impliedly suggests that the statement is based on knowledge (though) he knows it is mere opinion; (3) Maker honestly believes his assertion but lies about its basis; (4) Fraud in the factum or execution. (This type of fraud would render the contract void, not just voidable. A typical example involves a surreptitious substitution of one document for another and the innocent party signing it without knowledge or a reasonable opportunity to know the character or essential terms of the substituted document) Fraud test: The essential elements of fraud are: (1) That defendant made a representation relating to some material past or existing fact; (2) that the representation was false; (3) that when he made it, defendant knew that the representation was false, or made it recklessly, without any knowledge of its truth and as a positive assertion; (4) that defendant made the representation with intention that it should be acted upon by plaintiff; (5) that plaintiff reasonably relied upon the representation and acted upon it; and (6) that plaintiff thereby suffered injury. (Taken from Hoell Case) 4. Duty to Disclose Misrepresentation is an assertion that is not in accord with the facts (Restatement 159) Concealment is an affirmative act designed to prevent another from learning the facts. Nondisclosure involves no affirmative act. A failure to act in good faith to correct the mistake of the other party that is basic to the transaction equates to an assertion not in accord with the facts. (Restatement 161)
5. The Unconscionability Analysis “Analysis to be done when determining unconscionability if such terms allocate the risks of the bargain in a manner which the parties should have reasonably expected, they are enforceable (decent terms). If the terms of the contract suggest a reallocation of material risks, an attempted reallocation may be so extreme that regardless of apparent and genuine assent, a court will not enforce it. Different categories of unconscionability (1) unfair surprise (2) apparent but not genuine assent (3) procedural unfairness
You could have a situation where you have a necessity but no choice but to accept even though you know is bad absence of meaningful choice. Unfair surprise - type of unconscionability involves contractual terms which are not typically expected by the party who is being asked to “assent” to them. Unconscionability permits a court to refuse enforcement of a contract or the unconscionable portion because one of the parties, typically a party of inferior bargaining power, was reasonably unaware of a material, risk-shifting term which that party would not have normally assented, and/or such a party had no reasonable choice in acquiescing in such a term dictated by the other party with superior bargaining power. Undue influence involves improper or unfair persuasion that may result from the domination of one party over another. UCC 2303 provides that the court may refuse to enforce a contract which it finds to be unconscionable at the time it was made. Williams v. Walker-Thomas Furniture (On Welfare - Stereo System on Installments) Where elements of unconscionability are present at the time a contract is made, the contract should not be enforced. Unconscionability absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. (Consideration given to all surrounding circumstances.) Terms problematic cross collateral security agreement owe a little for everything not paid off until everything is paid Maxwell v. Fidelity Financial Services (Solar Water Heater Lien on Home) The determination of unconscionability is to be made by the court as a matter of law. Procedural v. Substantive Unconscionability PROCEDURAL UNCONSCIONABILITY: is concerned with “unfair surprise,” fine print clauses, mistakes or ignorance of important facts or other things that mean bargaining did not proceed as it should. Bargaining Naughtiness lack of meaningful choice. Deals with the manner in which the contract was negotiated under the circumstances. Examples of procedural unconscionability: the use of printed form or boilerplate contract drawn skillfully by the party in the strongest economic position generally offered on a takeit-or-leave-it basis, … phrasing contractual terms in language that is incomprehensible to a layman or that diverts his attention from the problems raised by them or the rights given up through them, …hiding key contractual provisions in a maze of fine print,…or in an inconspicuous part of the document, …minimizing key contractual provisions by deceptive sales practices,… lack of opportunity for meaningful negotiation,… whether the aggrieved party was compelled to accept the terms,… and exploitation of the underprivileged, unsophisticated and illiterate. Factors to considered under procedural unconscionability: age, education, intelligence, business acumen and experience, relative bargaining power, who drafted the contract, whether the terms were explained to the weaker party, whether alterations in the printed
terms were possible, whether there were alternative sources of supply for the good in question SUBSTANTIVE UNCONSCIONABILITY: is an unjust or “one-sided” contract. (sufficient to avoid term of contract and can sometimes be used to confirm or provided support for procedural uncon). “…concerns the actual terms of the contract and examines the relative fairness of the obligations assumed. Use of overly harsh terms. Concerned with whether the obligations assumed are unreasonable to one of the parties, i.e., whether a term of the contract is particularly one-sided or manifests an outrageous degree of unfairness If substantive unconscionability is so extreme can assume procedural unconscionability. Generally need both procedural and substantive unconscionability Unconscionability v. reasonable expectations (adhesion) Even if you know the term but can pass test for pro and sub unconscionability tests then unconscionability. If you know the terms then no reasonable expectations. Brower v. Gateway (Arbitration Clause) Unconscionability requires some showing of an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonable favorable to the other party. Remedies for unconscionable terms – throw out term or contract. Unconscionability Applied to “Merchants” Johnson v. Mobil Oil Corp. (Illiterate Owner - Gas Station Caught on Fire - Damages Clause in K Unconscionable) Substantive unconscionability focus on the contractual terms and requires a determination if they are reasonable. A substantial number of cases have refused to apply unconscionability to agreement between merchants on the ground that businessmen are deemed to possess commercial sophistication and will not be viewed as unsuspecting customers. 6. The Pervasive “Good Faith” Requirement Tests for Good Faith Restatement 205 implies a standard of good faith and fair dealing in all contracts. (Performance and enforcement not negotiations.) UCC Section 1203 states that “Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement. Remember, however, UCC does not support an independent cause of action for failure to perform or enforce in good faith. (Generally) UCC 2103(b) in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in trade. (Between merchants)
Market Street Associates v. Frey (If Negotiation Fail - Repurchase at Original Purchase Price) Good faith attaches to the performance of a contract. Good faith is a compact reference to an implied undertaking not to take opportunistic advantage in a way that could not have been contemplated at the time of drafting, and which therefore was not resolved explicitly by the parties. When determining good faith focus on post contractual conduct. The formation or negotiation stage is precontractual, and here the duty is minimized. Importance of good faith is greater not only at the performance but also at the enforcement stage, which is post contractual. Key: The purpose of the doctrine of good faith is to forbid the kinds of opportunistic behavior that a mutually dependant, cooperative relationship might enable in the absence of rule. Good faith is an implied term. 7. Agreement Against Public Policy – “Illegal Bargains” Restatement 178 When a Term Is Unenforceable on Ground of Public Policy (1) A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms. (2) In weighing the interest in the enforcement of a term, account is taken of (a) the parties' justified expectations, (b) any forfeiture that would result if enforcement were denied, and (c) any special public interest in the enforcement of the particular term. (3) In weighing a public policy against enforcement of a term, account is taken of (a) the strength of that policy as manifested by legislation or judicial decisions, (b) the likelihood that a refusal to enforce the term will further that policy. (c) the seriousness of any misconduct involved and the extent to which it was deliberate, and (d) the directness of the connection between the misconduct and the term. Restatement 184: When Rest of Agreement Is Enforceable (1) If less than all of an agreement is unenforceable under the rule stated in @ 178, a court may nevertheless enforce the rest of the agreement in favor of a party who did not engage in serious misconduct if the performance as to which the agreement is unenforceable is not an essential part of the agreed exchange. (2) A court may treat only part of a term as unenforceable under the rule stated in Subsection (1) if the party who seeks to enforce the term obtained it in good faith and in accordance with reasonable standards of fair dealing. Failure to Comply with Licensing Requirement Restatement 181: Effect of Failure to Comply with Licensing or Similar Requirement If a party is prohibited from doing an act because of his failure to comply with a licensing, registration or similar requirement, a promise in consideration of his doing that act or of his promise to do so it is unenforceable on grounds of public policy if (a) the requirement has a regulatory purpose, and
(b) the interest in the enforcement of the promise is clearly outweighed by the public policy behind the requirement. (Balancing of Interests - regulatory v. fiscal) RESTRAINT OF TRADE Restatement 186: Promise in Restraint of Trade (1) A promise is unenforceable on grounds of public policy if it is unreasonably in restraint of trade. (2) A promise is in restraint of trade if its performance would limit competition in any business or restrict the promisor in the exercise of a gainful occupation Restatement 187: Non-Ancillary Restraints on Competition A promise to refrain from competition that imposes a restraint that is not ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade Restatement 188: Ancillary Restraints on Competition (1) A promise to refrain from competition that imposes a restraint that is ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade if (a) the restraint is greater than is needed to protect the promisee's legitimate interest, or (b) the promisee's need is outweighed by the hardship to the promisor and he likely injury to the public. (2) Promises imposing restraints that are ancillary to a valid transaction or relationship include the following: a) a promise by the seller of a business not to compete with the buyer in such a way as to injure the value of the business sold; (b) a promise by an employee or other agent not to compete with his employer or other principal; (c) a promise by a partner not to compete with the partnership.
IMPAIRMENT OF FAMILY RELATIONS Restatement 189: Promise in Restraint of Marriage A promise is unenforceable on grounds of public policy if it is unreasonably in restraint of marriage. Restatement 190: Promise Detrimental to Marital Relationship (1) A promise by a person contemplating marriage or by a married person, other than as part of an enforceable separation agreement, is unenforceable on grounds of public policy if it would change some essential incident of the marital relationship in a way detrimental to the public interest in the marriage relationship. A separation agreement is unenforceable on grounds of public policy unless it is made after separation or in contemplation of an immediate separation and is fair in the circumstances.
(2) A promise that tends unreasonably to encourage divorce or separation is unenforceable on grounds of public policy. Restatement 191: Promise Affecting Custody A promise affecting the right of custody of a minor child is unenforceable on grounds of public policy unless the disposition as to custody is consistent with the best interest of the child. Restatement 192: Promise Involving Commission of a Tort A promise to commit a tort or to induce the commission of a tort is unenforceable on grounds of public policy. Restatement 193: Promise Inducing Violation of Fiduciary Duty A promise by a fiduciary to violate his fiduciary duty or a promise that tends to induce such a violation is unenforceable on grounds of public policy. Restatement 194: Promise Interfering with Contract with Another A promise that tortiously interferes with performance of a contract with a third person or a tortiously induced promise to commit a breach of contract is unenforceable on grounds of public policy Restatement 195: Term Exempting From Liability for Harm Caused Intentionally, Recklessly or Negligently (1) A term exempting a party from tort liability for harm caused intentionally or recklessly is unenforceable on grounds of public policy. (2) A term exempting a party from tort liability for harm caused negligently is unenforceable on grounds of public policy if (a) the term exempts an employer from liability to an employee for injury in the course of his employment; (b) the term exempts one charged with a duty of public service from liability to one to whom that duty is owed for compensation for breach of that duty, or (c) the other party is similarly a member of a class protected against the class to which the first party belongs. (3) A term exempting a seller of a product from his special tort liability for physical harm to a user or consumer is unenforceable on grounds of public policy unless the term is fairly bargained for and is consistent with the policy underlying that liability. Restatement 196: Term Exempting From Consequences of Misrepresentation A term unreasonably exempting a party from the legal consequences of a misrepresentation is unenforceable on grounds of public policy. RESTITUTION Restatement 197: Restitution Generally Unavailable Except as stated in @@ 198 and 199, a party has no claim in restitution for performance that he has rendered under or in return for a promise that is
unenforceable on grounds of public policy unless denial of restitution would cause disproportionate forfeiture. Restatement 198: Restitution in Favor of Party Who Is Excusably Ignorant or Is Not Equally in the Wrong A party has a claim in restitution for performance that he has rendered under or in return for a promise that is unenforceable on grounds of public policy if (a) he was excusably ignorant of the facts or of legislation of a minor character, in the absence of which the promise would be enforceable, or (b) he was not equally in the wrong with the promisor. Restatement 199: Restitution Where Party Withdraws or Situation Is Contrary to Public Interest A party has a claim in restitution for performance that he has rendered under or in return for a promise that is unenforceable on grounds of public policy if he did not engage in serious misconduct and (a) he withdraws from the transaction before the improper purpose has been achieved, or (b) allowance of the claim would put an end to a continuing situation that is contrary to the public interest. If a statute or other governmental regulation expressly prohibits the enforcement of an agreement, courts will not enforce it, notwithstanding the presence of all requirements for an otherwise enforceable agreement A bargain may be “illegal” where parties enter into an agreement in clear violation of a criminal standard. Typical situation is one in which the agreement is not “illegal”; rather, because it violates a standard of public policy, a court will refuse to enforce it. Both parties mutually agree to do something that the state does not want you to do. A. Public Policy in Legislation – Regulatory v. Nonregulatory Restatement 181: Effect of Failure to Comply with Licensing or Similar Requirement If a party is prohibited from doing an act because of his failure to comply with a licensing, registration or similar requirement, a promise in consideration of his doing that act or of his promise to do so it is unenforceable on grounds of public policy if (a) the requirement has a regulatory purpose, and (b) the interest in the enforcement of the promise is clearly outweighed by the public policy behind the requirement. (Balancing of Interests - regulatory v. fiscal) U.S. NursingCorp. v. Saint Joseph Medical Center (Nurse Supply Company without License)
B. Contracts in Restraint of Trade Fine Foods, Inc. v. Dahlin (Non-competition Covenant) Analysis: What‟s the business that they are engaged in? What is the time limitation? What it the geographic limitation?
We want competition that is why public policy does not like contracts in the restraint of trade. Restrictive agreements will be enforced by the courts, unless the agreement is found to be contrary to public policy, unnecessary for protection of the employers, or unnecessarily restrictive of the rights of the employee, with due regard being given to the subject matter of the contract and the circumstances and conditions under which it is to be performed. Boisen v. Petersen Flying Service (Restrictive covenant) An employer has a legitimate business interest in protection against competition by improper and unfair methods but an employer is not entitled to enforcement of restrictive covenant which merely protects the employer from ordinary competition. Where an employee has substantial personal contact with the employer‟s customers, develops goodwill with such customers, and siphons away the goodwill under circumstances where the goodwill properly belongs to the employer, the employee‟s resultant competition is unfair, and the employer has a legitimate need for protection against the employee‟s competition. C. Contract in Restraint of Marriage Wilcox v. Trautz Basic Rule: Sliding scale how long are you asking someone not to marry? An express agreement between adult unmarried persons living together is unenforceable only to the extent that it explicitly and inseparably is founded on sexual relations (meretrious relationships) When is cohabitation a meretrious relationship? Where sexual consideration is the main factor the contract will not be enforced. Sexual services cannot constitute the only, or dominant, consideration for the agreement. D. Wagering Rahmani v. Resorts International Hotel, Inc. (Lost 3.8 Million) Rule on gambling: If you are gambling - law simply leaves the litigants in the plight in which they have seen fit to place themselves without undertaking to balance benefits or burdens. The remedy is that you don’t enjoyment enforcement of the agreement. E. Facilitating an Illegal Purpose Carroll v. Beardon (Hooker Ranch) Participating v. Knowledge look to the intent Test: the determination between participation and knowledge. Mere knowledge of a grave offense may lead to participation.
CONDITIONS, BREACH AND REPUDIATION
Offer acceptance formation of contract upon acceptance condition precedent performance condition subsequent discharge full performance obligation either breach or full performance Restatement 224: Condition Defined “Condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.” Condition is a promise modifier. Can be an act or non-act. Restatement 225: Effects of the Non-Occurrence of a Condition (1) Performance of a duty subject to a condition cannot become due unless the condition occurs or it non-occurrence is excused. (2) Unless it has been excused, the non-occurrence of a condition discharges the duty when the condition can no longer occur. (3) Non-occurrence of a condition is not a breach by a party unless he is under a duty that the condition occur. Restatement 230: Condition Subsequent – Event that Terminates a Duty (1) Except as stated in Subsection (2), if under the terms of the contract the occurrence of an event is to terminate an obligor‟s duty to immediate performance or one to pay damages for breach, that duty is discharged if the event occurs. (2) The obligor‟s duty is not discharged if occurrence of the event (a) is the result of a breach by the obligor of his duty of good faith and fair dealing, or (b) could not have been prevented because of impracticability and continuance of the duty does not subject the obligor to a materially increased burden. (3) The obligor‟s duty is not discharged if, before the event occurs, the obligor promises to perform the duty even if the event occurs and does not revoke his promise before the obligee materially changes his position in reliance on it. (Waiver) Restatement 231: Interpretation of Doubtful Words as Promise or Condition Where it is doubtful whether words create a promise or an express condition, they are interpreted as creating a promise; but the same words may sometimes mean that one party promises a performance and that the other party‟s promise is conditional on that performance. 1. Nature and Effect of Condition A condition is an element of a contract that trigger an obligation to begin performance Condition precedent –> if condition not meet then no obligation. I don‟t have to perform unless condition occurs. Condition subsequent have to perform (absolute obligation to perform) unless something occurs which eliminates your duty to perform. Conditional obligations and absolute obligations. If condition occurs then an absolute obligation. Look for words like -> if, provided that… Condition v. Promise Promises: (a) always made by one party; (b) creates a duty in promisor; (c) performance of promise discharges duty; (d) failure to perform promise is a breach of duty.
Conditions: (a) parties must agree; (b) postpones a duty in promisor; (c) occurrence of a condition activates a duty; (d) nonoccurrence of condition leaves duty dormant and duty is discharged. Factors to determine whether something is a promise or condition: (1) language (2) legal effect - consequences (3) to be done (condition) v. not to be done (promise) Highland Inns Corp. v. American Landmark Corp. (Selling Inn Property) Promissory Conditions Promissory condition where something is both a condition and promise. Test of a promissory condition: Restatement 225(3) the non-occurrence of a condition is not a breach by a party unless he is under a duty that the condition occur. A. Interpretation – Promise Condition Howard v. Federal Crop Insurance Corp. (Lost Tobacco Crop - Sought Insurance to Recover Losses - Violated Clause_ General legal policy is opposed to forfeitures. When it is doubtful whether words create a promise or a condition precedent, they will be construed as creating a promise. Main Electric, Ltd. (sub) v. Printz Services Corp. (general) (Pay When Paid Clause) General must pay the sub even though the owner has not paid the general. B. Precedent Versus Subsequent Condition – Original Formula Gray v. Gardner (Condition Precedent on Sperm Oil) Condition precedent: until it should happen, the promise did not take effect (duty does not arise). To entitle himself to enforce the promise, the plaintiff must show that the contingent event has actually occurred. Who has the burden of proof to establish that a condition has occurred? Condition precedent – plaintiff has burden of proof. Condition subsequent – defendant has burden of proof. C. Precedent Versus Subsequent Condition – Restatement of Contract Analysis Cambria Savings & Loan Association v. Estate of Gross (For Construction K to be valid has to get Disability Insurance) Court prefers condition precedent. Condition occurred that terminated the duty – not a breach of contract Oral waiver – waivers of conditions happen all the time. D. Condition of Personal Satisfaction Elec-trol, Inc. v. C.J. Kern Contractors, Inc. (Need Architect's Approval for Electrical Work) Tests of Satisfaction:
(1)The objective reasonable satisfaction is applied when the contract involves commercial quality, operative fitness, or mechanical utility which knowledgeable persons are capable of judging; (2) The subjective personal satisfaction standard is applied when the contract involves person aesthetics, taste or fancy. The law prefers the objective standard. Sale on approval – UCC 2326(1)(a) a buyer of good may return them even though they conform to the contract where the transaction was a “sale on approval” Summary: Howard and Main Electric case – rarely easy to determine difference between promise v. condition. (1) Language is very important. What type of language if you want condition? (2) Ambiguous construe as a promise. Is there a way to articulate as a promise? Main Electric – looks like a condition but is not because not reasonable for sub to know that owner would not pay contractor – policy reasons. In this case can make it look like a promise E. Express, Implied, and Constructive Condition Distinguished A condition is created by either (1) the parties have manifested an intention (by words or conduct) that the duty to render a promised performance shall be subject to the occurrence of some fact or event other than a mere lapse of time; (2) a court, in the interests of equity and justice, determines that a contractual duty should be subject to a condition even though the parties have manifested no such intention. (Constructive) Condition created by the manifested intentions of the parties = EXPRESS CONDITION. “Implied in fact” conditions: created by the conduct of the parties. Restatement Section 231: Criterion for determining when performances are to be exchanged under an exchange of promises: Performances are to be exchanged under an exchange of promises if each promise is at least part of the consideration for the other and the performance of each promise is to be exchanged at least in part for the performance of the other. Restatement 234: Order of Performances (1) Where all or part of the performances to be exchanged under an exchange of promises can be rendered simultaneously, they are to that extent due simultaneously, unless the language or the circumstances indicate the contrary. (2) Except to the extent stated in Subsection (1), where the performance of only one party under such an exchange requires a period of time, his performance is due at an earlier time than that of the other party, unless the language or the circumstances indicate the contrary. Bell v. Elder (Land for Ag. Wanted for Res. No Permit) Rule: Where there is no express indication of the intended order for performance, the law implies a covenant and condition that the related obligation be performed concurrently. During the executory period of a contract whose time of performance is uncertain but which contemplates simultaneous performance by both parties, neither party can be said to be in default until the other party has tendered his own performance. If not expressly indicated the performance is to occur concurrently.
Offer to tender the service – just show that you are wiling and able to do it at that time. Concurrent and Precedent Constructive Conditions Concurrent constructive conditions: where the performance can be exchanged simultaneously, neither party is required to perform before the other. Constructive condition precedent: If the contract had specified that one party must perform before the duty of the other is activated, the first performance would be a constructive condition precedent. R.G. Pope Construction v. Guard Rail of Roanoke (Guardrails for Nov. not ready until July) Constructive condition of cooperation … obligates each party to do what is necessary to enable the other to perform. Even in the absence of an express duty to cooperate, the law implies an agreement between the parties of any contract to do and perform those things that according to reason and justice the should do in order to carry out the purpose for which the contract was made, and to refrain from doing anything which will destroy or injure the other party‟s right to receive the fruits of the contract. Excused Condition -- Prevention, Hindrance and Waiver Rohde v. Massachusetts Mutual Life Insurance Co. (Widow wants $ from husband's life insurance policy) Because of bad faith the if-then condition went to an absolute obligation. Bad faith excuses conditions. Rule: The nonoccurrence or nonperformance of a condition is excused where that failure of the condition is caused by the party against whom the condition operates to impose a duty. (Defendant‟s failure to honor its obligation of good faith in exercising its right to examine the application deprives defendant of any benefit it might obtain from that condition. Restatement 245 Effect of a Breach by Non-Performance as Excusing the Non-Occurrence of a Condition: Where a party's breach by non-performance contributes materially to the nonoccurrence of a condition of one of his duties, the non-occurrence is excused. Where a duty of one party is subject to the occurrence of a condition, the additional duty of good faith and fair dealing imposed on him under Section 205 may require some cooperation on his part, either by refraining from conduct that will prevent or hinder the occurrence of that condition or by taking affirmative steps to cause it occurrence. Standard Supply Co. v. Reliance Insurance Co. (Waiver) Waiver Rule: Conditions in an insurance policy working forfeiture are matters of contract and not limitation and may be waived by the insurer. Thus when the insurer, knowing the facts, does that which is inconsistent with it intention to insist on a strict compliance with the conditions precedent of the contract, it is treated as having waived their performance. Rose v. Mitsubishi International Corporation. (Variation of Waiver) You can’t waive material parts of the exchange; however, you may waive non-material parts of the exchange.
Restatement 297 Requirements for the Excuse of a Condition by Waiver: A promisor whose duty is dependent upon performance by the other party of a condition or return promise that is not a material part of the agreed exchange can make that duty independent of such performance, in advance of the time fixed for it, by manifestation of willingness that the duty shall be thus independent. Such a waiver unless it is a binding promise within the rules for the formation of contracts, can be retracted at any time before the other party has materially changed his position in reliance thereon, but not afterwards. Comment c: If performance of the condition is a material part of the agreed exchange, an agreement to be liable in spite of the nonperformance of the condition involves to so great a degree a new undertaking that the requisites for the creation of a new contract must exist. Restatement 84 Promise to Perform a Duty in Spite of Non-occurrence of a Condition (1) Except as stated in Subsection (2), a promise to perform all or part of a conditional duty under an antecedent contract in spite of the non-occurrence of the condition is binding, whether the promise is made before or after the time for the condition to occur, unless (a) occurrence of the condition was a material part of the agreed exchange for the performance of the duty and the promise was under no duty that it occur (Rose case); or (b) uncertainty of the occurrence of the condition was an element of the risk assumed by the promisor. (Reinstating the condition) (2) If such a promise is made before the time for the occurrence of the condition has expired and the condition is within the control of the promise or a beneficiary, the promisor can make his duty again subject to the condition by notifying the promise or beneficiary of his intention to do so if (a) the notification is received while there is still a reasonable time to cause the condition to occur under the antecedent terms or an extension given by the promisor; (b) reinstatement of the requirement of the condition is not unjust because of a material change of position by the promise or beneficiary; and (c) the promise is not binding apart from the rule stated in subsection (1)
Different types of excuses of the condition. 1. Was there bad faith? Can excuse condition. 2. Whether there was a waiver? Was the waiver so material that it modified the contract lacking consideration? Divisible (Severable) Versus Entire Contracts Questions to be asked and answered: Is there a breach? If there is a breach of the part is it a breach of the whole? John v. United Advertising, Inc. (7 Motel Signs - 2 of which were not provided) When determining if a contract is divisible look at the intent of the parties. The primary objective is to ascertain the intent of the contracting parties; as such intent is manifested by not only the several terms and provisions of the contract itself, but also as such are viewed in the light of all the surrounding circumstances, including the conduct of the parties before any dispute has arisen.
Whether the parties assented to all the promises as a single whole, so that there would have been no bargain whatever, if any promise or set of promises were struck out. Restatement Section 183: When Agreement Is Enforceable as to Agreed Equivalents If the parties‟ performance can be apportioned into corresponding pairs of part performances so that the parties of each pair are properly regarded as agreed equivalents and one pair is not offensive to public policy, that portion of the agreement is enforceable by a party who did not engage in serious misconduct. Restatement Section 240: Part Performance as Agreed Equivalents If the performances to be exchanged under an exchange of promises can be apportioned into corresponding pairs of part performances so that the parts of each pair are properly regarded as agreed equivalents, a party‟s performance of his part of such a pair has the same effect on the other‟s duties to render performance of the agreed equivalent as it would have if only that pair of performances had been promised. UCC – Installment Contracts Section 2612(3) Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a non-conforming installment without seasonably notifying of cancellation or if he brings an action with respect only to past installment or demands performance as to future installments. Cherwell-Ralli, Inc. v. Rytman Grain Co. Rule: Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a non-conforming installment without seasonably notifying of cancellation or if he brings an action with respect only to past installment or demands performance as to future installments. UCC Section 2612(3) Installment Contracts. If you fail to perform your side of the deal because you think the person has not performed – it is a gamble as the court may determine that you were the own that really materially breached. What constitutes impairment of the value of the whole contract is a question of fact. If there is reasonable doubt about whether the buyer‟s default is substantial, the seller may be well advised to temporize by suspending further performance until it can ascertain whether the buyer is able to offer adequate assurance of future payments. But if the buyer‟s conduct is sufficiently egregious, such conduct will, in and of itself, constitute substantial impairment of the value of the whole contract and a present breach of the contract as a whole. Breach Materiality of Breach Restatement (Second) Section 241: Materiality (Current Rule) In determining whether a failure to render or offer performance is material, the following circumstances are significant:
(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) the extent to which the injured party can be adequately compensated for the part of the benefit of which he will be deprived; (c) the extent to which the party failing to perform...will suffer forfeiture; (d) the likelihood that the party failing to perform… will cure his failure…; (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing
Overview 1. When is a breach of the part so significant that it is a breach of the whole? 2. Materiality: If you fail to perform is response to the breach of the other party‟s obligations then the other party‟s breach must be material. Restatement (Second) of Contracts Associated Builders, Inc. v. Coggins (A.B. to build Chocolate Emporium but C. 3 days late on payment) Issue: Can late payment constitute a material breach? No. each? If breach and owe money then may establish an accord and satisfaction. If breach accord and satisfaction (1) an sue under the original obligation; or (2) sue under the new obligation. Accord: is a contract under which an oblige promises to accept a substituted performance in future satisfaction of the obligors duty. Satisfaction: is the execution or performance of the accord. The obligor‟s breach of the accord, however, must be material. A material breach is a nonperformance of a duty that is so material and important as to justify the injured party in regarding the whole transaction as at an end. Time of performance is merely one element in determining whether a defective or incomplete or belated performance is substantial performance. A slight delay of payment that causes no detriment or prejudice to the obligee is not a material breach. Waiver: a waiver is a voluntary or intentional relinquishment of a known right. If a party in knowing possession of a right does something inconsistent with the right or that party‟s intention to rely on it, the party is deemed to have waived that right. A party waives a contractual right arising from a breach because of a late payment when that party accepts tender of the late payment. Substantial Performance and Material Breach If the failure to perform or delay in performing is so material that it will or may result in the other party not getting substantially what he bargained for, the latter is excused from his promised duty. If the failure or delay is not of that character, the other party continues under a duty and he must recoup his loss because of the breach, though one of the procedural devices for that purpose.
Jacob & Youngs, Inc. v. Kent (Reading Pipe) An omission, both trivial and innocent, will sometimes be atoned for by allowance of the resulting damage, and will not always be the breach of a condition to be followed by forfeiture. Perfect Tender Rule: My obligation to pay you is conditioned on you performing perfectly. An unconditional promise to pay regardless if whether you performed or not. (Opposites) Substantial Performance: if there is substantial performance it is enough to satisfy constructive condition then pay the difference. The owner has obligation to pay but the owner has right to sue for the difference between perfect tender and substantial performance. Objective Stance Express condition can override substantial performance – This is not to say that the parties are not free by apt and certain words to effectuate a purpose that performance of every term shall be a condition of recovery. Nowhere will change be tolerated, however, if it is so dominant or pervasive as in any real or substantial measure to frustrate the purpose of the contract. Factors to be weighed: the purpose to be served, the desire to be gratified, the excuse for deviation from the letter, the cruelty of enforced adherence. Deliberate v. Accidental: The willful transgressor must accept the penalty of his transgression. For him there is no occasion to mitigate the rigor of implied conditions. The transgressor whose default is unintentional and trivial may hope for mercy if he will offer atonement for his wrong. Constructive condition condition is satisfied with substantial performance – requirement to pay becomes absolute the owner may sue for the difference between substantial performance and perfect tender.
Substantial Performance and Express Conditions Jackson v. Richard’s 5 & 10 (Modification of Jacobs and Young) (Discount Stores for Sales - Deed Down) Limitation to the Express Condition Carve Out: the court may excuse even this express condition if it determines that the nonoccurrence of the condition was so relatively unimportant to the owner that the resulting forfeiture to the builder would be extreme. Certain immaterial non-occurrence may be excused. Restatement 229 Excuse of a Condition to Avoid Forfeiture To the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was a material part of the agreed exchange. Restatement 237: Effect on Other Party's Duties of a Failure to Render Performance Except as stated in Section 240, it is a condition of each party‟s remaining duties to render performances to be exchanged under an exchange of promises that there be no
uncured material failure by the other party to render any such performance due at an earlier time. The Willful Preclusion Vincenzi v. Cerro P to construct house for D. D to pay P $91,000 in installments as various stages of work was completed. D refused to pay as P was not finished and some of the work was defective. P alleges doctrine of substantial performance is not applicable because of willful breach. Inquiry: Whether the behavior of the party in default comports with standards of good faith and fair dealing. Factors to be weighed in deciding whether there has been substantial performance: Good faith and fair dealing, extent to which the owner will be deprived of a reasonably expected benefit and the extent to which the builder may suffer forfeiture A breach of contract cannot be “material” if substantial performance has been rendered. The Perfect Tender Rule – Rejection – Revocation of Acceptance UCC 2504: Tender Where the seller is required or authorized to send the goods to the buyer and the contract does not require him to deliver them at a particular destination, then unless otherwise agreed he must: (a) put the goods in the possession of such a carrier and make such a contract for their transportation as may be reasonable having regard to the nature of the goods and other circumstances of the case; and (b) obtain and promptly deliver or tender in due form any document necessary to enable the buyer to obtain possession of the goods or otherwise required by the agreement or by the usage of trade; and (c) promptly notify the buyer of the shipment. Failure to notify the buyer under paragraph (c) or to make a proper contract under paragraph (a) is a ground for rejection only if material delay or loss ensues. Where the goods are conforming but their tender is nonconforming because the seller has not met one or more of its shipment duties under 2504, the last paragraph of Section 2504 condition the buyer‟s right to reject on a material breach of either (a) or (c). UCC 2508(2) Cure by Seller of Improper Tender or Delivery; Replacement (2) Where the buyer reject non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender. If there is any non-conformity after tender but prior to acceptance the buyer can reject for any reason. If the seller tries to tender after the delivery date then you ask: would the seller expect that the buyer would accept this good with or without a discount but does not accept then seller has the right to conform the good (cure). UCC 2106(2) Goods or conduct including any part of a performance are "conforming" or conform to the contract when they are in accordance with the obligations under the contract.
UCC 2601 Buyer's Rights on Improper Delivery …If the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may (a) Reject the whole; or (b) Accept the whole; or (c) Accept any commercial unit or units and reject the rest. UCC 2608 Revocation of Acceptance in Whole or in Part (1) The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it (a) on the reasonable assumption that its non-conformity would be cured and it has not been seasonably cured; or (b) without discovery of such non-conformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller's assurances. (2) Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it. (3) A buyer who so revokes has the same rights and duties with regard to the goods involved as if he had rejected them.
Ramirez v. Autosport (Defective Camper) Perfect Tender Rule: sellers required to deliver goods that comply exactly with the sales agreement. Substantial Performance does not apply prior to acceptance under UCC. A buyer can reject for any reason, seller can cure. Cure: fix the nonconformity. What are the rights of the buyer and seller: BEFORE ACCEPTANCE: the buyer may reject goods for any nonconformity. Because of the seller‟s right to cure, however, the buyer‟s rejection does not necessarily discharge the contract. Within the time set for performance in the contract the seller‟s right to cure is unconditional. UCC 2601 AFTER TIME SET FOR PERFORMANCE: the seller has a further reasonable time to cure if believed reasonably that the goods would be acceptable with or without a money allowance. The determination of what constitutes a further reasonable time depends on the surrounding circumstances, which include the change of position by and the amount of inconvenience to the buyer. UCC 2508 AFTER ACCEPTANCE: the buyer may revoke acceptance only if the nonconformity substantially impairs the value of the goods to him. Once acceptance has occurred, the buyer must pay for the goods unless he has a right to revoke acceptance. Revocation of acceptance, however, requires the buyer to show a substantial impairment of the value of the goods – revocation may not be based on just any nonconformity. The substantial impairment must be to the buyer, suggesting a subjective standard, albeit objectively measured to the
particular buyer. Beyond a showing of substantial impairment of the value of the goods to the buyer, revocation of acceptance also requires either (a) the buyer accepted the goods on the reasonable assumption that the nonconformity would be cured and it has not been cured, or (b) the buyer‟s reasonable inspection of the goods did not disclose the nonconformity because it was difficult to discover or because of the seller‟s assurances. UCC 2608 When the buyer rightfully rejects, then with respect to the goods involved, the buyer may cancel. Cancellation occurs when either party puts an end to the contract for breach by the other. Rejection includes both the buyer‟s refusal to accept or keep delivered goods and his notification to the seller that he will not keep them. Cancellation by rejection for minor defects. Revocation occurs after the buyer has accepted the goods. Revocation of acceptance only for substantial impairments. Rescission only for material breaches. Materiality = substantial impairment Once a buyer accepts goods, he has the burden to prove any defect. Where goods are rejected for not conforming to the contract, the burden is on the seller to prove that the nonconformity was corrected. A buyer who rightfully rejects goods and cancels the contract may, among other possible remedies, recover so much of the purchase price as has been paid. Fair market value as the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable Repudiation Repudiation is a manifestation by a party to a contract that he will not perform his contractual duty. The manifestation can occur through words or conduct and typically amounts to a clear, material breach of contract Anticipatory Repudiation If you know that they are not going to perform and you are required to perform first – you don’t have to go through with your obligation and can considered a breach. You have to be confident that they are not going to perform. Restatement 250: When a Statement or an Act is a Repudiation A repudiation is: (a) a statement by the obligor to the oblige indicating that the obligor will commit a breach that would of itself give the oblige a claim for damages for total breach under Section 243, or (b) a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach. Flatt & Sons Co., Inc. v. Schupf (Real Estate) Anticipatory repudiation requires a clear manifestation of intent not to perform the contract on the date of performance. That intention must be definite and unequivocal
manifestation that he will not render the promised performance when the time fixed for it in the contract arrives.(question of fact) Repudiation Tests Common Law: the manifestation of intention not to perform must be definite and unequivocal. Restatement 250: “sufficiently positive to be reasonably interpreted to mean that the party will not or cannot perform” (use the Restatement standard)*** UCC 2610: only requires action which reasonably indicates a rejection of the continuing obligation. Retraction Restatement 256: Retraction the effect of a statement as constituting a repudiation under Section 250 or the basis for a repudiation under Section 251 is nullified by a retraction of the statement if notification of the retraction comes to the attention of the injured party before he materially changes his position in reliance on the repudiation or indicates to the other party that he considers the repudiation to be final. UCC 2611: Retraction of Anticipatory Repudiation: (1) Until the repudiating party‟s next performance is due he can retract his repudiation unless the aggrieved party has since the repudiation cancelled or materially changed his position or otherwise indicated that he considered the repudiation final. (2) Retraction may be by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform, but must include any assurance justifiably demanded under the provisions of this Article (Section 2609) (3) Retraction reinstates the repudiating party's rights under the contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation. After an anticipatory repudiation, the aggrieved party is entitled to choose to treat the contract as rescinded or terminated, to treat the anticipatory repudiation as a breach by bringing suit or otherwise changing its position, to await the time for performance No notice is required to be given to the repudiating party if the aggrieved party materially changes its position as a result of the repudiation. Where the aggrieved party has not otherwise undergone a material change in position, the aggrieved party must indicate to the other party it is electing to treat the contract as rescinded. Conduct repudiations: Where an obligor sells or leases goods or land necessary to perform a contract or makes a contract for their sale to another prior to the time for performance, such conduct will constitute a repudiation.
Repudiation by Good Faith Mistake Chamberlin v. Puckett Construction Co. “I am not going to perform unless the president confirms the modifications.”
What are your options if the other side repudiates? UCC 2610 Anticipatory Repudiation: When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may: (a) for a commercially reasonable time await performance by the repudiating party; or (b) resort to any remedy for breach (Section 2703 or 2711), even though he has notified the repudiating party that he would await the latter's performance and has urged retraction; and (c) in either case suspend his own performance or proceed in accordance with the provisions of this Article on the seller's right to identify goods to the contract notwithstanding breach or to salvage unfinished goods. Anticipatory Repudiation: I know you are not going to perform so I can do: (1) Wait for a commercially reasonable time to see if performance will take place (if you wait too long you might be mitigating your damages); (2) Resort to remedies for breach; (3) Suspend your performance. Prospective Failure of Performance – Demanding Adequate Assurances Scott v. Crown (Wheat K - Truck driver said the Buyer could not pay) Restatement 251 When a Failure to Give Assurance May Be Treated as a Repudiation (1) Where reasonable grounds arise to believe that the obligor will commit a breach by nonperformance that would of itself give the obligee a claim for damages for total breach under Section 243, the obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance. (2) The obligee may treat as a repudiation the obligor's failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances of the particular case. Restatement 253 Effect of a Repudiation as a Breach and on Other Party's Duties (1) Where an obligor repudiates a duty before he has committed a breach by non-performance and before he has received all of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach. (2) Where performances are to be exchanged under an exchange of promises, one party's repudiation of a duty to render performance discharges the other party's remaining duties to render performance. UCC 2609 Right to Adequate Assurance of Performance: (1) A contract for sale imposes an obligation on each party that the other‟s expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party, the other may in writing demand adequate assurance of due performance and, until he receives such assurance, may if commercially reasonable suspend any performance for which he has not already received the agreed return.
(2) Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards. (3) Acceptance of any improper delivery or payment does not prejudice the aggrieved party's right to demand adequate assurance of future performance. (4) After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract. Reasonable grounds for insecurity about the performance of either party must exist in order for the other party to exercise further rights Whether Seller had reasonable grounds for insecurity is a question of fact. Demand for assurances of performance must be in writing in order to be effective. Time for Adequate Assurances UCC 2609(4): indicates that a failure to provide adequate assurances within a reasonable time not exceeding 30 days after receipt of a justified demand for such assurances constitutes a repudiation of the contract. Restatement 251(2): same as above except no 30 day time limit. RISK ALLOCATION: IMPOSSIBILITY, IMPRACTICABILITY AND FRUSTRATION OF PURPOSE Origins Taylor v. Caldwell (Concert Hall Burns Down - The Show will not go on) In contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance. The loss will lie where it will. Can get reliance damages, etc. However may be unjust enrichment. If there is an assumption of risk then the impossibility doctrine will not apply. If you wanted to avoid this situation what should you do? Expressly contract out of it – Act of God clause. You are allocating the risk. Commercial Impracticability UCC 2615 Excuse by Failure of Presupposed Conditions Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance: (a) Delay in delivery or non-delivery in whole or arty by seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid. (b) Where the causes mentioned in paragraph (a) affect only a part of the seller's capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.
(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer. Comment 4: Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance. Neither is a rise or a collapse in the market in itself a justification, for that is exactly the type of business risk which business contracts made at fixed prices are intended to cover. Restatement 261 Discharge by Supervening Impracticability: Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption, on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary. Transatlantic Financing Corp. v. United States (Suez Canal) A thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost. Test for impracticability -- Excessive and unreasonable costs: 1. Occurrence of a contingency – something unexpected must have occurred; 2. The nonoccurrence of which was a basic assumption upon which the contract was made; 3. By which occurrence further performance has become commercially impracticable. If you are the cause of contingency then can‟t use impracticability doctrine as a defense. 1. Is the event really unforeseeable (objective test)? 2. How impracticable must it be for it can be commercially impracticable (within the test)? Long Term Supply Contract Missouri Public Service Co. v. Peabody Coal Co. (Coal K - Inflation) Issue: Forseeability Distinguishing Mutual Mistake – Equitable Adjustment Mutual mistake, impracticability and frustration of purpose all discharge an obligor from his duty to perform a contract where a failure of a basic assumption of the parties produces a grave failure of the equivalence of value of the exchange to the parties. All three are qualified by the same notion of risk assumption and allocation. Differences: Mutual mistake requires only that a party show a material effect on the agreed exchange, while impracticability requires a supervening risk that goes well beyond materiality and, even then, will constitute an excuse only if it was unforeseeable and not a risk that should have been assumed by the party seeking to be excused. Force Majeure Clauses Northern Indiana Public Service Co. v. Carbon County Coal Co. (Coal K with Fixed Price) Force Majeure clauses: seek to excuse a party for various events beyond his control. Acts of God are typically included. They also typically include such events as war, civil strife, strikes, and shortages of raw materials. A force majeure clause is not intended to
buffer a party against the normal risks of a contract. Purpose of a force majeure clause is to allocate the risk. Question to be asked: Whether his nonperformance should be excused because the parties, if they had thought about the matter, would have wanted to assign the risk of the contingency that made performance impossible or uneconomical to the promisor or to the promise; if to the latter, the promisor is excused Delay in delivery by a seller is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made. Performance on schedule need not be impossible, or infeasible – provided that the event which made it infeasible was not a risk that the promisor had assumed. Fixed price contract: an explicit assignment of the risk of market price increases to the seller and the risk of market price decreases to the buyer, and the assignment of the latter risk to the buyer is even clearer where, as in this case, the contract places a floor under price but allows for escalation. Impracticability Evaluate: 1. Determine whether something is unforeseeable? Forseeability is based on a reasonable objective standard. 2. How much hardship must you suffer to invoke impracticability? (Vague b/c they want the court to have discretion) 3. Assumption of Risk Frustration of Purpose – Performance is still possible. (Companion Rule to Impracticability) Restatement 265 Discharge by Supervening Frustration Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary. Chase Precast Corp. v. John J. Paonessa Co. (Concrete Median - Angry Neighbors Protest) Issue: Whether they could foresee people protesting to the concrete medians? Frustration: when an event neither anticipated nor caused by either party, the risk of which was not allocated by the contract, destroys the object or purpose of the contract, thus destroying the value of performance, the parties are excused from further performance. Under frustration, performance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by the fortuitous event. Question: Whether an unanticipated circumstance, the risk of which should not fairly be thrown on the promisor, has made performance vitally different from what was reasonably to be expected. Test of Frustration: The question is, given the commercial circumstances in which the parties dealt: Was the contingency which developed one which the parties could reasonably be thought to have foreseen as a real possibility which could affect
performance? Was it one of the variety of risks which the parties were tacitly assigning to the promisor by their failure to provide for it explicitly? If it was, performance will be required. If it could not be so considered, performance is excused. This is a question for the trier of fact. Mel Frank Tool & Supply Co. v. Di-Chem Co. (Chem. Storage - Fails Fir Inspection) Restatement 309 and 310: The obligor is therefore liable in damages for breach of contract even if he is without fault and even if circumstances have made the contract more burdensome or less desirable that he had anticipates… he may reserve a right to cancel the contract… Even though the obligor has not restricted his or her obligation by agreement, a court may still grant relief: “An extraordinary circumstance may make performance so vitally different from what was reasonably to be expected as to alter the essential nature of that performance. In these circumstances, the court must determine whether justice requires a departure from the general rule that the obligor bear the risk that the contract may become more burdensome or less desirable. Whether extraordinary circumstances exist justifying discharge is a question of law for the court. 3 grounds for the discharge of the obligor’s contractual duty: o First, the obligor may claim that some circumstance has made his own performance impracticable… o Second, the obligor may claim that some circumstance has so destroyed the value to him of the other party‟s performance as to frustrate his own purpose in making the contract… o Third, the obligor may claim that he will not receive the agreed exchange for the obligee‟s duty to render the agreed exchange, on the ground of either impracticability or frustration. Obligor’s contractual obligation is discharged only if three conditions are met: (1) The purpose that is frustrated must have been a principal purpose of that party in making the contract; (2) The frustration must be substantial; (3) The non-occurrence of the frustrating event must have been a basic assumption on which the contract was made…The forseeability of the event is a factor in that determination. "The tenant is not relieved from the obligation to pay rent if there is a serviceable use still available consistent with the use provision in the lease. The fact that the use is less valuable or less profitable or even unprofitable does not mean the tenant's use has been substantially frustrated." Frustration doctrine is very, very narrow. Remedies Ending of the Contract Timeline 1. Duty is Discharged 2. Fully Perform 3. Breach Goal of Contracts
What‟s the most efficient allocation of scarce commodities? Maximize the cost of scarce resources. Analysis: 1. What was the Breach? 2. What are the damages that are being claimed? Types of Damages 1. Restitution Damages: looks at the breach from the perspective of the breaching party and says “what did you get out of this breach?” Remedy the unjust enrichment. Bad guy in position that they were in before contract. (The plaintiff has in reliance on the promise of the the defendant conferred some value on the defendant. The defendant fails to perform his promise. The Court may force the defendant to disgorge the value he received from the plaintiff. Goal: Prevent the gain by the defaulting promisor at the expense of the promise) 2. Reliance Damages: looks backward from perspective of the injured party and puts them in position in before contract. (The plaintiff has in reliance on the promise of the defendant changed his position. WE may award damages to the plaintiff for the purpose of undoing the harm which his reliance on the defendant's promise has caused him. Goal: to put plaintiff in as good a position as he was in before the promise was made.) 3. Expectation Damages: imagine in the contract had been fully performed “what would the injured party have gotten from the bargain?” What would‟ve gotten from the contract? (Favored) (Put the plaintiff in as good a position as he would have occupied had the defendant performed his promise) 4. Specific Performance Hierarchy of Remedial Choices 1. Specific Performance 2. Expectation Damages 3. Reliance Damages 4. Restitution Damages Efficient breach: occurs when the breaching party will still profit after compensating the other party for its expectation interest. The Expectation Interest and Its Limitations The Foreseeability Limitation Hadley v. Baxendale (Broken Shaft at Mill) Foreseeability is a limitation on damages. Rule: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as (1) may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself or (2) such as may reasonably be suppose to have been the contemplation of both parties, at the time they made the contracts, as the probable result of the breach of it. (Notice of special circumstance that party had reason to know – special knowledge)
Restatement 351: Unforeseeability and Related Limitations on Damages (1) Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made. (2) Loss may be foreseeable as a probable result of a breach because it flows from the breach (a) in the ordinary course of event, or (b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach has reason to know. (3) A court may limit damages from foreseeable loss by excluding the recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation. Comment f: It is not always in the interest of justice to require the party in breach to pay damages for all the foreseeable loss that he has caused. There are unusual instances in which it appears from the circumstances either that the parties assumed that one of them would not bear the risk of a particular loss or that, although there was no such assumption, it would be unjust to put the risk on that party. One such circumstance is an extreme disproportion between the loss and the price charged by the party whose liability for that loss is in question. The fact that the price is relatively small suggests that it was not intended to cover the risk of such liability. Another such circumstance is an informality of dealing, including the absence of a detailed written contract, which indicates that there was no careful attempt to allocate all of the risks. The fact that the parties did not attempt to delineate with precision all of the risks justifies a court in attempting to allocate them fairly. The limitations dealt with in this Section are more likely to be imposed in connection with contracts that do not arise in a commercial setting.
General v. Special/Consequential Damages General damages arise naturally from the breach and are implied or presumed by law. Special damages do not arise naturally; they are not within the common experience of mankind as arising in the particular situation and, therefore, they are not implied or presumed by law. Spang Industries, Fort Pitt Bridge Division v. Aetna Casualty (Steel for Bridge Late) Analysis: What was the breach? What are the damages that they are claiming? Question to be asked: Are the expenditures naturally flowing from the delay/special circumstances? Rules: 1. When the parties enter into a contract which, by its terms, provides that the time of performance is to be fixed at a later date, the knowledge of the consequences of a failure to perform is to be imputed to the defaulting party as of the time the parties agreed upon the date of performance 2. A party is liable for all direct damages which both parties to the contract would have contemplated as following from its breach, if at the time they entered into it they had bestowed proper attention upon the subject, and had been fully informed of the facts.
CONSEQUENTIAL DAMAGES -- HADLEY V. BAXENDALE AND THE UCC UCC 2714 Buyer's Damages for Breach in Regard to Accepted Goods (Basic Rule) (1) Where the buyer has accepted goods and given notification (subsection (3) section 2607) he may recover as damages for any nonconformity of tender the loss resulting in the ordinary course of events from the seller's breach as determined in any manner which is reasonable. (2) The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount. (3) In a proper case any incidental and consequential damages under the next section may also be recovered. UCC 2715 Buyer's Incidental and Consequential Damages (1) Incidental damages resulting from the seller's breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach. (2) Consequential damages resulting from the seller's breach include (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting (b) injury to person or property proximately resulting from any breach of warranty. UCC Comment Note 3: Particular needs of the buyer must generally be made known to the seller while general needs must rarely be made known to charge the seller with knowledge. Why do we have a foreseeability limitation? We want people to make efficient choices when they contract. Cricket Alley Corp. v. Data Terminal Systems Breach of Express Warranty/IWPP Breach? Was the non-compatibility of the Wang with DTS. The Certainty Limitations Must have a level of certainty when assessing damages. Obligation of non-breaching party to show that he actually suffered this particular amount of damages. Drews Co. v. Ledwith-Wolfe Associates, Inc. Rule: The crucial requirement in lost profits determinations is that they be established with reasonable certainty, for recovery cannot be had for profits that are conjectural or speculative. The proof must pass the realm of conjecture, speculation, or opinion not founded on facts, and must consist of actual facts from which a reasonably accurate conclusion regarding the cause and the amount of the loss can logically and rationally drawn. What do you look at to determine amount of lost profits? Economic and financial data, market surveys and analyses, business records of similar enterprises, profit performance of
business similar in size, nature and location, profit history, comparison of similar businesses, and expert testimony. If not certain in amount of damages then may not be able to recover. If you can't get lost profits (expectancy damages)? Then try to get reliance damages. Certainty and foreseeability limitation on expectancy damages. UCC 2708 comment 2 states, It is not necessary to a recovery of "profit" to show a history of earning, especially if a new venture is involved." The Emotional Distress Limitation Restatement 353 Loss Due to Emotional Disturbance Recovery for emotional disturbance will be excluded unless the breach also caused bodily harm or the contract or the breach is of such a kind that serious emotional disturbance was a particularly likely result. Deli v. University of Minnesota (Gymnastics Coaches videotape sexual encounter) Rule: In the absence of specific statutory provisions, extra-contractual damages, such as emotional distress, are not recoverable for breach of contract except in exceptional cases where the breach is accompanied by an independent tort. Two exceptions to the recovery of emotional distress where the nature of the contract or the breach is such that serious emotional disturbance is clearly foreseeable, such damages will be recoverable. The Mitigation Limitation -- Avoidable Consequences Soules v. Independent School District No. 518 (Teacher Wrongfully Terminated) Reduction in award amount if no reasonable effort to mitigate damages. Calculating amount to be mitigated: 1. Calculate total damages and then 2. Subtract the amount of avoidable loss Restatement 336(1): Damages are not recoverable for harm that the plaintiff should have avoided by reasonable effort without undue risk, expense, or humiliation. Only earning from employment which are incompatible with the employee's contractual obligations may be offset as mitigated damages. Limitations on the ability to get expectation damages: Damages must be foreseeable Damages must be certain (certainty) Damages must been avoidable (Mitigation) Liquidated Damages Restatement 356: Liquidated Damages and Penalties (1) Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the
difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty. (2) A term in a bond providing for an amount of money as a penalty for non-occurrence of the condition of the bond is unenforceable on grounds of public policy to the extent that the amount exceeds the loss caused by such non-occurrence. UCC 2718: Liquidation or Limitation of Damages; Deposits (1) Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty. (2) Where the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds. (a) the amount which the seller is entitled by virtue of terms liquidating the seller's damages in accordance with subsection (1), or (b) in the absence of such terms, twenty percent of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller. (3) The buyer's right to restitution under subsection (2) is subject to offset to the extent that the seller establishes (a) a right to recover damages under the provision of this Article other than subsection (1), and (b) the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract. (4) Where a seller has received payment in goods their reasonable value or the proceeds of their resale shall be treated as payments for the purposes of subsection (2); but if the seller has notice of the buyer's breach before reselling goods received in part performance, his resale is subject to the condition laid down in this Article on resale by an aggrieved seller (Section 2706). Liquidated damages help b/c you know what are likely the damages that you will have to pay if you breach. Can put a limitation on damages in the contract, can exclude remedies or make certain remedies the only ones available. Then add a clause about deference to state statutes, and a severability clause and they protect themselves as much as possible. Some contracts can expand the remedies available: such as legal fees. Tries to forecast the damages at the forming of the contract what the damages would be due to any breach. Often clauses are one-sided, main reason is to anticipate breach when the damages would be difficult if not impossible to prove. Lind Building Corp. v. Pacific Bellevue Development (Sale of Real Estate with Liquidated Damages Clause) The damages must be reasonably anticipated. Certain liquidated damages may be unconscionable, in that the damages may be too small. 3 steps for liquidation damages: a) First thing you look at the point of the formation of the contract and ask is this amount. a reasonable forecast if I breach and
b) Now looking backwards, and the breach has been committed, is this liquidated damages clause a reasonable clause in light of the damages, c) and at the time of formation was it difficult to assess liquidated damages If at the time of formation you don‟t think there is going to be a reasonable certainty that you could calculate the actual damages then there is no liquidated damages clause. The Test of liquidated damages is: 1) The damage which was to be expected as a result of a breach of the contract was uncertain in amt. or difficult to prove 2) There was an intent on the part of the parties to liquidate damages in advance and 3) the amount stipulated was reasonable in the sense that it was not greatly disproportionate the toe amt. of the damage which, as the parties looked forward, seemed to be the presumable loss which would be sustained by the contractee in the even of a breach of the contract. If the limitation is very small, then it raises issues of unconscionability. Look at the point of formation of the contract and decide if this amount that they specified a reasonable forecast of a likely breach. Then you look at the time of the breach and analyze whether this clause is reasonable in light of the breach. If there are no actual damages then liquidated damages clauses are unenforceable. 3 reasons why this clause was unenforceable: 1) could easily determine what the damages would be if there was a breach; 2) the damages were not a reasonable forecast of a breach; 3) the damages were not reasonable in light of the actual breach. If it is too high as a penalty then can strike under Restatement 356. If it is too low then may strike under unconscionability. Liquidated Damages: contractual limitation of remedies available. Rodriguez v. Learjet, Inc. (Lear Jet Reject) Lost Volume Seller: The lost volume seller measure of damages refers to the lost volume of business the non-breaching seller incurs on the buyer's breach. When the seller resells the entity he expected to sell to the original buyer, he usually deprives himself of something of value -- the sale to a new buyer of another similar entity. If liquidated clause is invalid then non-breaching party can recover actual damages. 3 requirements to qualify as a "lost volume seller" (1) capacity (2) buyers (3) profitable Lost volume seller can recover lost profits. Concept premised on the principle that the seller was deprived of an additional sale and the corresponding profit by the buyer's breach. Liquidated damages: advantage to the person who already has the money as the other party has to sue. The burden of proving that a liquidated damages clause is unenforceable rests with the party challenging its enforcement. EXPECTANCY DAMAGES (CONSTRUCTION CONTRACTS) Computation of expectancy damages: Amount you have expended plus the lost profits
American Standard, Inc. v. Schectman (Grading/Removal of Structures) Expectation Damages: try to fulfill the contract through monetary damages. What do you get diminution of value or cost of completion? Diminution of value: the difference between what you got and what you wanted Cost of completion: do what you agreed to do. Cost of completion as work to be done was not incidental - it was the actual core of the contract and willfulness of the breach, not substantial performance and not additional absorbent cost. o Intentional breach can't get diminution of value o The loss in property value, rather than the cost of completion, is the proper measure of damages where the correction of the defects would necessitate unreasonable destruction of work, or where the strict completion of performance would involve expense greatly disproportionate to the importance of results obtainable. Restatement 348 Comment C If an award based on the cost to remedy the defects would clearly be excessive and the injured party does not prove the actual loss in value to him, damages will be based instead on the difference between the market price that the property would have had without the defects and the market price of the property with the defects. Remedies Under the Uniform Commercial Code Buyer's Remedies UCC 2711 Buyer's Remedies in General; Buyer's Security Interest in Rejected Goods (1) Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract (2612), the buyer may cancel and whether or not he has done so may in addition to recovering so must of the price as has been paid (a) "cover" and have damages under the next section as to all the goods affects whether or not they have been identified to the contract; or (b) recover damages for non-delivery as provided in this Article (2713) (2) Where the seller fails to deliver or repudiates the buyer may also (a) if the goods have been identified recover them as provided in this Article (2502); or (b) in a proper case obtain specific performance or replevy the goods as provided in this Article (2716) (3) On rightful rejection or justifiable revocation of acceptance a buyer has a security interest in goods in his possession or control for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, transportation, care and custody and may hold such goods and resell them in like manner as an aggrieved seller (2706) When the buyer may reject: Where the seller delivers goods that are nonconforming, the buyer may thrust the goods back in the seller by rejecting them (2601) if rejection occurs within a reasonable time so as to permit the buyer to inspect the goods (2513) and decide to reject them. The buyer must notify the seller of such a rejection within a reasonable time (2602). When the buyer may not reject:
Where the buyer has accepted the goods wither by signaling such acceptance, or by not rejecting within a reasonable time or by exercising dominion or control over the goods (2606). When the buyer may revoke: The buyer may still revoke acceptance of the goods if there is a substantial impairment of the value of the goods to the buyer and the buyer has either accepted the goods with the seller's assurance that the nonconformity will be cured, or if the defect was not discoverable upon a reasonable inspection (2608(1)). Where revocation of the acceptance is effective: If the goods have been returned to the seller because they have been rejected or if revocation of acceptance has occurred, the buyer may proceed to "cover" (2712), or the buyer may choose not to make a substitute purchase and proceed to recover damages based on the difference between the contract price and the market price at the time the buyer learned of the breach, which is, typically, the time the goods should have been delivered (2713). Recovery if buyer accepts even with nonconformity: If the buyer chooses to accept the goods notwithstanding their nonconformity, the buyer may do so (2601(b) or(c)) and still recover the difference between the value of the goods that should have been delivered and the value of the goods actually delivered (2714(2)) What if the buyer claims breach? If the buyer decides to claim a breach with respect to accepted goods, the buyer must notify the seller of such a breach within a reasonable time after the buyer discovered or should have discovered the defect (2607(3)(a)). Seller's Remedies UCC 2703 Seller's Remedies in General Where the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due on or before delivery or repudiates with respect to a part or the whole, then with respect to any goods directly affected and, if the breach is of the whole contract (2612), then also with respect to the whole undelivered balance, the aggrieved seller may (a) withhold delivery of such goods; (b) stop delivery by any bailee as hereafter provided (2705); (c) proceed under the next section respecting goods still unidentified to the contract; (d) resell and recover damages as hereafter provided (2706); (e) recover damages for non-acceptance (2708) or in a proper case the price (2709); (f) cancel How can the buyer breach: wrongfully rejecting or revoking acceptance of the goods, failing to make a payment for the goods when due, or repudiating the contract by informing the seller that he will not accept the goods. UCC 2706 Seller's Resale Including Contract for Resales (1) Under the conditions stated in Section 2703 on seller's remedies, the seller may resell the goods concerned or the undelivered balance thereof. Where the resale is made in good faith and
in a commercially reasonable manner the seller may recover the difference between the resale price and the contract price together with any incidental damages allowed under the provision of this article (2710), but less expenses saved in consequence of the buyer's breach. Failure to properly notify the breaching buyer that the seller intends to resell will preclude the availability of that remedy. UCC 2718 (Liquidated Damages) : Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility… (812)
Restitution and Reliance Damages Expectation Damages: forward as if the contact had been fully performed. “what would the injured party have gotten from the bargain?” What would‟ve gotten from the contract? (Favored) Restitution Damages: based on equitable principle that a person who has been unjustly enriched at the expense of another is required to make restitution to the other. Breaching party Reliance Damages: A plaintiff may recover his expenses of preparation and of part performance, as well as other foreseeable expenses incurred in reliance upon the contract. Nonbreaching party CBS, Inc. v. Merrick (T.V. Movie Rights Not Seen) Restitution Damages: looks at the breach from the perspective of the breaching party and says “what did you get out of this breach?” Remedy the unjust enrichment. Put bad guy in position that they were in before contract. Reliance Damages: looks backward from perspective of the injured party and puts them in position in before contract. Reliance damages: put back in the position that it was in before the contract. Amounts paid to breaching party and third parties. What was expended in reliance on the contract? Bausch & Lomb v. Bressler (Not so exclusive Rights) Contract: exclusive rights to sales of certain instruments Breach: exclusivity and delivery Expectation damages: put them in the position had fully performed would have lost money - if would no profits then can't collect expectation damages. (Non-breaching party) Reliance damages: his expenses of preparation and of part performance, as well as other foreseeable expenses incurred in reliance upon the contract. If reliance damages are just to be a substitute for uncertain profits then you can not get reliance damages. (Non-breaching party) Losing contract doctrine applies to expectation and reliance damages Restitution Damages: remedy the unjust enrichment - look at the person who breached. Focus on the breaching party. The reasonable value of the benefit unjustly received.
Alternative Relief for Breach of Contract Restatement 374: Restitution in Favor of Party in Breach (1) Subject to the rule stated in Subsection (2), if a party justifiably refuses to perform on the ground that his remaining duties of performance have been discharged by the other party's breach, the party in breach is entitled to restitution for any benefit that he has conferred by way of part performance or reliance in excess of the loss that he has caused by his own breach. (2) To the extent that, under the manifested assent of the parties, a party's performance is to be retained in the case of breach, that party is not entitled to restitution if the value of the performance as liquidated damages is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A breaching party may recover restitution if that party confers a benefit on the non-breaching party in excess of the loss caused by the breach, regardless of willfulness. Wanted to unwind the contract - the injury that the seller incurred was less than the original benefit conferred to her. United States v. Algernon Blair, Inc. Expectation damages: were going to be negative profits so they fall back on reliance damages. Reliance: the cost amount Restitution: might be cost and built in profit (market value of the services) Considerations First look at the contract? How about specific performance? Expectancy damages? Reliance damages (out of pocket expense - opportunity loss [maybe])? Restitution (look to the contract - breaching party - unjust enrichment) Gardner (Seller) v. Olsen (Buyer) (O breaching party able to receive restitutionary damages) Cost of the breach: $35,600 Benefit to G (Seller- non-breaching party): $70,297 Issue: Can restitutionary damages be used even in the absence of a breach? Yes. They are setting off the benefits conferred upon her. Generally, no specific performance with personal service contracts. Inquiry: Whether in the end the non-breaching party is receiving a windfall? Breaching party can recover restitution damages. Quasi Contract Anderson v. Schwegel ("Restore" Vehicle - no meeting of the minds) End cost: $9,800 Agreement price: $6,000 Mistake as to what "restore" means. (No meeting of the minds) (Like - Peerless Situation - no contract)
Quasi contract: An obligation imposed by law for the purposes of brining about justice and equity without reference to the intent or the agreement of the parties and, in some cases, in spite of an agreement between the parties. Calculations: Value of the Services In the absence of an agreement restitutionary damages are available to unwind the effect of the agreement they thought they entered into. Unjust enrichment: What is the fair market value of the services (what the invoice would be)? (Not the actual cost) In restitutionary damages you might get lost profits as it is calculated within the fair market value of the services. Estate of Frances Cleveland v. Gorden (Niece took care of aunt and wanted reimbursement) General rule: a person who voluntarily and officiously pays another's debts is not entitled to reimbursement. Exception: When the payment is made under the compulsion of a moral obligation, in ignorance of the real state of facts, or under an erroneous impression of one's legal duty Rebuttable Presumption is that you don't mean to enter into contracts with your family. Evidence to show that there was a commercial agreement. The presumption that family members' services are gratuitous is not conclusive. It can be rebutted by proof of an express agreement to pay for the services or by proof of circumstances showing that the relative accepting the benefit of the services knew or should have known that the relative performing them expected compensation or reimbursed. Notes: If you did not ask for the benefit in fact or implied then don't have to pay for it. Limitations to Monetary Damages: (1) foreseeability (2) certainty and (3) mitigation Specific Performance Specific performance or an injunction will not be granted where there is an adequate remedy at law - (where the normal remedy of substitutional damages is adequate to protect the expectation interest of the aggrieved party.) Inquiry: Is the performance required unique or unusual? Fiction: all land is unique UCC 2716 Buyer's Right to Specific Performance or Replevin (1) Specific performance may be decreed where the goods are unique or in other proper circumstances. (2) The decree for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just. (3) The buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of
the security interest in them has been made or tendered. In the case of goods bought for personal, family, or household purposes, the buyer's right of replevin vests upon acquisition of a special property, even if the seller had not then repudiated or failed to deliver. Unique or Scarce Goods Sedmark v. Charlie's Chevrolet (K to purchase special pace corvette) Specific performance? Yes as this new car could not be obtained elsewhere except at considerable expense, trouble or loss, which cannot be estimated in advance and under such circumstances did not have an adequate remedy at law. (Expense, Delay and Inconvenience) Burden: on the person seeking specific performance to prove scarce and unique. Notice that in these situations - there is not a mutuality of remedies - the buyer may seek specific performance - seller may not seek specific performance. Personal Service Contracts Beverly Glen Music, Inc. v. Warner Communications, Inc. (Music K and Baker backed Out) Rule: very rare/never to force a person to work for you (involuntary servitude). Cannot guarantee "best efforts" A contract to render personal services cannot be specifically enforced. An unwilling employee cannot be compelled to continue to provide services to his employer either by ordering specific performance of his contract, or by injunction. Negative injunction: you cannot apply your trade with competition. (Must pass the uniqueness test) - May raise restraint of trade issues. Uniqueness Test: CISG REMEMDIES Article 25: Fundamental Breach A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee, and a reasonable person of the same kind in the same circumstances would not have foreseen, such a result. Article 35: Conformity of the Goods and Third Party Claims (1) The Seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract. (2) Except where the parties have agreed otherwise, the goods do not conform with the contract unless they: (a) Are fit for any particular purposes for which goods of the same description would ordinarily be used; (b) Are fit for any particular purpose expressly or impliedly made known to seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller's skill and judgment;
(c) Possess the qualities of goods which the seller has held out to the buyer as a sample or model; (d) Are contained or packaged in the manner usual for such goods or where there is no such manner, in a manner adequate to preserve and protect the goods. (3) The seller is not liable under subparagraphs (a) to (d) of the preceding paragraph for any lack of conformity of the goods if at the time of the conclusion of the contract the buyer knew or could not have been unaware of such lack of conformity. Article 46 Remedies for Breach of Contract by the Seller (Specific Performance) (Foreseeability Test) (1) The buyer may require performance by the seller of his obligations unless the buyer has resorted to a remedy which is inconsistent with this requirement. (2) If the goods do not conform with the contract, the buyer may require delivery of substitute goods only if the lack of conformity constitutes a fundamental breach of contract and a request for substitute goods is made either in conjunction with notice given under article 39 or within a reasonable time thereafter. (3) If the goods do not conform with the contract, the buyer may require the seller to remedy the lack of conformity by repair, unless this is unreasonable having regard to all the circumstances. A request for repair must be made either in conjunction with notice given under article 39 or within a reasonable time. Article 49 Remedies for Breach of Contract by the Seller (Damages) (Foreseeability Test) (1) The buyer may declare the contract avoided: (a) If the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; or (b) In case of non-delivery, if the seller does not deliver the goods within the additional period of time fixed by the buyer in accordance with paragraph (1) of article 47 or declares that he will not deliver within the period so fixed. (2) However, in cases where the seller has delivered the goods, the buyer loses the right to declare the contract avoided unless he does so: (a) In respect of late delivery, within a reasonable time after he has become aware that the delivery has been made: (b) In respect of any breach other than late delivery, within a reasonable time: (i) After he knew or ought to have known of the breach; (ii) After the expiration of any additional period of time fixed by the buyer in accordance with paragraph (1) of article 47, or after the seller has declared that he will not perform his obligations within such an additional period; or (iii) After the expiration of any additional period of time indicated by the seller in accordance with paragraph (2) of article 48, or after the buyer has declared that he will not accept performance. Article 74 Damages (Foreseeability Test) Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion
of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract. Delchi v. Rotorex (Know all the articles of CISG for purposes of the exam) Rotorex (U.S.) agreed to sell compressors to Delchi (Italy) based on model. Delichi sued for lost profits and damages. CISG 35: Under the CISG the seller must deliver goods which are of the quantity Third Party Beneficiaries Classic Example of Third Party Beneficiaries 1. Insurance Policy Question to Ask: Does the non-contracting party (beneficiary) have rights to enforce the contract/ sue under the contract? Lawrence v. Fox 1. Who is contracting with whom? Fox and Holly (debtor) Lawerence: creditor Fox promises Holly that he will pay Lawerence. Person outside the contract is a beneficiary. Rule: Where on person makes a promise to another for the benefit of a third person, that third person may maintain an action upon it. A promise made to one for the benefit of another, he for whose benefit it is made may brings an action for its breach. Test of "Intent to Benefit" Colonial Discount Co. v. Avon Motors, Inc. Focus on the agreement that Colonial Finance Company was to be the only finance company. Contracting parties: Banet (Lessor) and Levin (Lessee) Beneficiary: Colonial Rule: Whether the intent of the parties to the contract was that the promisor should assume a direct obligation to the third party and that that intent is to be determined from the terms of the contract read in light of the circumstances attending its making, including motives and purposes of the parties. Must have intent to benefit the third party. Look to the language to determine intent. Restatement (Second) of Contracts Raritan River Steel Co. v. Cherry, Bekaert & Holland IMC hired Cherry as its accounting firm. Raritan is a creditor of IMC. Raritan lost 1.5 million Cherry was negligent in auditing IMC. Failed to disclose that the bottom line worth. Breach? Cherry did audit pursuant to the books. Issue: Can Raritan sue Cherry for the breach? NO, Raritan was an incidental beneficiary. Test: the determining factor as to the rights of a third-party beneficiary is the intention of the parties who actually made the contract. The real test is said to be whether the contracting parties intended that a third party should receive a benefit which might be enforced in the court.
Restatement 302: Intended and Incidental Beneficiaries (1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either (a) the performance of the promise will satisfy an obligation of the promise to pay money to the beneficiary (Creditor Beneficiary); or (b) the circumstances indicate that the promise intends to give the beneficiary the benefit of the promised performance (Donee Beneficiary). (2) An incidental beneficiary is a beneficiary who is not an intended beneficiary. If one party (promisee) wants to obligate the other party (promisor) to do something for a third party. Both third party and the promise can sue. Public Beneficiaries Zigas v. Superior Court of the City and County of San Francisco Financing Agreement - Contract with government and landlords - stipulation on amount that could be charged. Breach: Charging more than was allowed under agreement. Tenants suing the Landlord. Rule under Shell: A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it. Once it is established that the relationship between the contractor the government is contractual, that is the class intended to be protected by the contract, are third party beneficiaries of that contract. Under the agreement where to you draw the line between who should be considered third party beneficiaries and who should not be? How direct does it have to be? Factors to Focus On with Government Contracts: 1. Whether or not the government suffered a loss as a consequence of the breach? (In Shell and this case the government lost nothing and the tenant suffered the direct pecuniary loss) 2. Whether governmental administrative 3. Whether or not there is limited liability? 4. Whether or not the contract was designed to benefit individuals? (Purpose of the contract narrow and specific) 5. Whether or not there was a manifest intent to make this group direct beneficiaries or incidental beneficiaries? Suretyship -- Payment and Performance Bonds Board of Education v. Hartford Accident & Indemnity K contracted to build high school pool facilities. A performance bond (builder for benefit of school) and labor and material bond (builder for benefit of subcontractors). Statute of limitations ran for the performance bond. School is trying to recover under the labor and material bond. Had there been no statute of limitations the school could recover under the performance bond as intended third party beneficiaries.
For intent look at the document and the surrounding circumstances. Mortgage Assumption A mortgage is a security interest in real property to secure a loan by the lender to the owner. If the mortgage is not paid, the lender will foreclose, i.e., sell the property through a judicial sale so that the loan will be repaid from the proceeds of the sale. (Lender may retain only the portion of the proceeds necessary to cover the outstanding indebtedness. Assuming the mortgage: Where the owner conveys to X and X has assumed the indebtedness, the owner is a promise who has induced the promisor (X) to agree that he will pay the mortgage debt. The assuming grantee is primarily liable and the original debtor is liable as a surety. Subject to the mortgage: If X had then conveyed the land to Y who did not assume the mortgage but took the land subject to that mortgage, the lender would have no third party beneficiary rights against Y because Y did not promise to become liable on the mortgage debt. The lender would still have the original owner as a debtor. Third-Party Beneficiary Status in Warranties 1. There are situations - were contracts law is not sufficient (a) no mutual intent (b) disclaimer contract law has not been sufficient therefore the legislature was encourage to pick a level of privity - extended it through various alternatives - extended warranties for third party beneficiaries. Contract (Warranty) or Tort Choices Privity No real limitation on privity in torts. Section 402A does not require a contractual relationship between the injured party and defendant. UCC 2318 - horizontal privity in contracts (California has rejected 2318 want to have a much broader notion of horizontal privity ) UCC 2318: Third Party Beneficiaries of Warranties Express or Implied Alternative A A seller's warranty whether express or implied extends to any natural person who is in the family or household of his buyer or who is a guest in his home if it is reasonable to expect that such person may sue, consume or be affected by the goods and who is injured in person by breach of warranty. A seller may not exclude or limit the operation of this section. Alternative B A seller's warranty whether express or implied extends to any natural person who may reasonably be expected to use, consume or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the operation of this section. Alternative C A seller's warranty whether express or implied extends to any person who may reasonably be expected to use, consume or be affected by the goods and who is injured by breach of the
warranty. A seller may not exclude or limit the operation of this section with respect to injury to the person of an individual to whom the warranty extends. Warranty Disclaimers UCC validates warranty disclaimer pursuant to the agreement of the parties. (Contract) Section 402A is not limited by disclaimers. (Tort) Notice Requirement Under warranty theory, after a buyer accepts goods (Section 2606), he must notify the seller of a breach within a reasonable time after he discovers or should have discovered the breach. Failure to do so will bar him from any remedy (2607(3) (a)). A party suing under warranty theory must be concerned with the notice requirement which does not attend a Section 402A. (Contracts there is a notice requirement; Torts there is not a notice requirement) Statute of Limitations The UCC statute of limitations (2725) deems a cause of action as having accrued when the breach occurs, "regardless of the aggrieved party's lack of knowledge of the breach." A typical torts statute of limitations runs from the time of the injury -- a "discovery" statute of limitations. Injury to Person or property vs. "Economic Loss" Defects of suitability and quality are redressed through contract actions and safety hazards through tort actions. Torts: The gist of products liability tort case is that the plaintiff has suffered personal injury or property damages caused by a defective product that posed an unreasonable risk of injury to person or property. Contracts: Recovery for economic loss is intended to protect purchasers from losses suffered because a product failed in its intended use. Recovery for economic loss focuses upon the bargain. Economic loss is defined as damages for inadequate value, because the product is inferior and does not work for the general purpose for which it was manufactured or sold. Liability for economic loss is based on express or implied representations manifesting the manufacture's or seller's intent to guarantee the products. Vesting of Third Party Rights Olson v. Etheridge If rights depend on the intent of the parties - what if they change their mind. What happens if you modify the contract to the detriment of the beneficiary? Does the beneficiary have rights if the parties have modified the agreement? Agreement 1: Etheridge and Olson (Walnut) for $350,000 Agreement 2: Etheridge and Engelhaupt - 1/2 price of the shares to go to Olson (Walnut) - was modified - Engelhaupt was to then pay Princeton. Olson (Walnut) was not getting paid. Can modify the vesting rights of the beneficiary in the original contract. At what point are the beneficiary's rights irrevocable?
Restatement 311: Variation of a Duty to a Beneficiary (1) Discharge or modification of a duty to an intended beneficiary by conduct of the promise or by a subsequent agreement between promisor and promise is ineffective if a term of the promise creating the duty so provides. (2) In the absence of such a term, the promisor and promise retain power to discharge or modify the duty by subsequent agreement. (3) Such a power terminates when the beneficiary, before he receives notification of the discharge or modification, materially changes his position in justifiable reliance on the promise or brings suit on it or manifests assent to be at the request of the promisor or promise. (4) If the promisee receives consideration for an attempted discharge or modification of the promisor's duty which is ineffective against the beneficiary, the beneficiary can assert a right to the consideration so received. The promisor's duty is discharged to the extent of the amount received by the beneficiary.
Promisee's Right to Enforce the Promise Drewen v. Bank of Manhattan Co. Nixon's divorced - agreement (between Doris and Stan) that give each child 30% of estate. Executor of ex-wife sued on the contract. Agreement - Never to reduce the quantity or quality of the interest. Could not change or modify the agreement because the wife is dead. If the children not the age of maturity - there is a presumption of a manifestation of assent. Both the mom and the kids can sue. Rules: A promisee of a contract for the benefit of a third party donee has a sufficient interest in the enforcement of the promise to entitle him to sue for damages. The general rule is that a right of action founded upon a contract survives the person entitled in his lifetime to sue, so that the right passes upon his death to his personal representative. Stan (Promisor) ________________Doris (Promisee) Kids (Third Party Beneficiary) Recovery/Damages There is a duty from the promisor to the promise as well as the third-party beneficiary. Donee Beneficiary: Specific performance is appropriate, however, if the promisor's performance would have operated to discharge a duty owed by the promisee to the third party, the promisee may recover any damages suffered thereby. Creditor Beneficiary: If the promisor breaches his agreement to pay the debt of the promisee to a third party (creditor) beneficiary, the promisee may recover the amount of the debt from the promisor. Defenses Available Against Beneficiary Liberty Mutual Insurance Co. v. Travelers Indemnity Co.
Smithy (S k with Travelers (inferior and secondary) and 3rd Party Beneficiary is Church) ______(Contract)______ Church (C k with Liberty (primary) and 3rd Party Beneficiary is Smithy) Breach was between Smithy and the Church - can this give defense to Promisor against the 3rd party beneficiary. Restatement 309: Defenses against the Beneficiary (1) A promise creates no duty to a beneficiary unless a contract is formed between the promisor and the promisee; and if a contract is voidable or unenforceable at the time of is formation the right of any beneficiary is subject to infirmity. (2) If a contract ceases to be binding in whole or in part because of impracticability, public policy, non-occurrence of a condition, or present or prospective failure of performance, the right of any beneficiary is to that extent discharged or modified. (3) Except as stated in Subsection (1) and (2) and in Section 311 or as provided by the contract, the right of any beneficiary against the promisor is not subject to the promisor's claims or defenses against the promisee or to the promisee's claims or defenses against the beneficiary. (4) A beneficiary's right against the promisor is subject to any claim or defense arising from his own conduct or agreement. (Don‟t worry about this) Comment C of Restatement 309 The beneficiary's right is direct, not merely derivative, and claims and defenses of the promisor against the promisee arising out of separate transactions do not affect the right of the beneficiary except in accordance with the terms of the contract. Similarly, the beneficiary's right against the promisor is not subject to the claims and defenses of the promise against the beneficiary unless the contract so provides. The right of any beneficiary against promissory claim is not subject to the promisee's claim or defense against the beneficiary Rights of beneficiary are not going to be greater than the right of the promise. The Cumulative Nature of the Beneficiary's Right Erickson v. Grande Ronde Lumber Co. E is accountant for Grand Ronde. Grande Ronde and Stoddard contract to pay some of fees of E. Stoddard does not pay their part. Eriskson is the third party beneficiary. Erickson sues both S and G. Is that permissible? Yes but can not recover twice. Novation is the substitution of a new right for an existing obligation. Courts which hold that the original contract is in effect an offer of novation to the creditor naturally hold that if the creditor accepts the promisor as his debtor he releases the original debtor, and on the other hand, if he elects to sue the original debtor he thereby rejects the proffered novation and cannot afterwards sue the new promisor. The creditor has rights against both the promisor and the promise. Restatement 141 (1) A creditor beneficiary who has an enforceable claim against the promise can get judgment against with the promisee or the promisor or against each of them on their respective duties to
him. Satisfaction is whole or in part of with of these duties, or of judgments thereon, satisfies to that extent the other duty or judgment. Restatement 310 (1) Where an intended beneficiary has an enforceable claim against the promise, he can obtain a judgment or judgments against either the promise or the promisor of both based on their respective duties to him. Satisfaction in whole or in part of either of these duties, or of a judgment thereon, satisfies to that extent the other duty or judgment, subject to the promisee's right of subrogation. (2) To the extent that the claim of an intended beneficiary is satisfied from assets of the promise, the promise has a right of reimbursement from the promisor, which may be enforced directly and also, if the beneficiary's claim is fully satisfied, by subrogation to the claim of the beneficiary against the promisor, and to any judgment thereon and to any security therefore. The Assignment of Rights and Delegation of Duties Restatement 317: Assignment of a Right (1) An assignment of a right is a manifestation of the assignor's intention to transfer it by virtue of which the assignor's right to performance by the obligor is extinguished in whole or in part and the assignee acquires a right to such performance. (2) A contractual right can be assigned unless (a) the substitution of a right of the assignee for the right of the assignor would materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reduce it value to him, or (b) the assignment is forbidden by statute or is otherwise inoperative on grounds of public policy, or (c) assignment is validly precluded by contract. Restatement 318: Delegation of Performance of Duty (1) An obligor can properly delegate the performance of his duty to another unless the delegation is contrary to public policy or the terms of his promise. (2) Unless otherwise agreed, a promise requires performance by a particular person only to the extent that the obligee has a substantial interest in having that person perform or control the acts promised. (3) Unless the obligee agrees otherwise, neither delegation of performance nor a contract to assume the duty made with the obligor by the person delegated discharges any duty or liability of the delegating obligor. UCC 2210(2) counterpart to Restatement 317(2)(a) Unless otherwise agreed, all rights of wither seller or buyer can be assigned except where the assignment would materially change the duty of the other party, or increase materially the burden or risk imposed on him by his contract, or impair materially his chance of obtaining return performance. A right to damages for breach of the whole contract or a right arising out of the assignor's due performance of his entire obligation can be assigned despite agreement otherwise.
The Nature of an Assignment Kelly Health Care, Inc. v. Prudential Ins. Co. There is a line between assignment and agency. Assignee: surrenders all rights and benefits (irrevocable) v. Agency: remain the principal person acts as a representative (revocable) Assignment to constitute an assignment the obligee must have intended, at the time of the transfer, to dispossess himself of an identified interest, or some part thereof, and to vest indefeasible title in the transferee. The intention of the assignor is the controlling consideration. The intent to transfer a present ownership of the subject matter of the assignment to the assignee must be manifested by some word, written or oral, or by some act inconsistent with the assignor's remaining as owner (present appropriation). The assignor must not retain any control over the fund or property assigned, any authority to collect, or any form of revocation. No clear intent to benefit - not a third party beneficiary Partial Assignment - How does that differ from an Assignment. Third Party Beneficiary v. Assignment Third part beneficiary contract where the promise induced a promise for the benefit of a third party, intending that third party to have an enforceable right against the promisor. The third party beneficiary contract is the product of the intention of the promise and promisor who, at the moment of formation, created rights in the third party. Assignment is the unilateral act of a party who has rights under an existing contract and chooses to make a present transfer of those rights to an assignee without the consent and usually without the knowledge of the other party to the contract, the obligor.
The Nature of Assignable Rights and Delegable Duties Evening News Association v. Peterson Post New sold license to Evening News - Peterson wanted to quit his employment contract. Issue: Whether or not valid assignment? Personal Services Contract: Provider of services can not assign - Receiver of services can assign Generally can assign contract rights and duties. Exceptions: 1. Where the assignment would vary materially the duty of the obligor 2. Increase materially the burden of risk imposed by the contract 3. Impair materially the obligor's chance of obtaining return performance Personal Services:
The general rule of assignability is also subject to exception where the contract calls for the rendition of personal services based on a relationship of confidence between the parties. Where a contract is said to be non-assignable because it is "personal," what is meant is not that the contractor's right is not assignable, but that the performance required by his duty is a personal performance and that an attempt to perform by a substituted person would not discharge the contractor's duty. Peterson has a special skill - he cannot assign Test: Restatement 317 Will assignment result in a material change? o Instances under Restatement 317(2)(a)) The substitution of a right of the assignee for the right of the assignor would: 1. Materially change the duty of the obligor, or 2. Materially increase the burden or risk imposed on him by his contract, or 3. Materially impair his chance of obtaining return performance, or 4. Materially reduce it value to him, Crane Ice Cream Co. v. Terminal Freezing & Heating Requirements Contract - ceiling of 250 tons - Court found that rights were of so personal a character that they could not be assigned. Issue: Whether there was a material change in the agreed performances due to the assignment? Valid Assignment? No, there was a material change. The Macke Co. v. Gaithersburg, Inc. Rare genius and extraordinary skill are not transferable, and contracts for their employment are therefore personal, and cannot be assigned. Absent provision to the contrary, a duty may be delegated, as distinguished from a right which can be assigned, and that the promise cannot rescind, if the quality of the performance remains materially the same. This contract was assignable. If you do not want the contract to be assigned the input a No Assignment Clause. Test: Material Alteration Test of whether personal service is assignable: Look to skills, character, reputation or discretion (contract). Normally when you assign a contract assign rights and duties. 1. If you assign a right right to receive the benefit of the service (rights). 2. Delegate a duty giving somebody else the duty. Four sides of a contract. Restrictions on assignment either (a) contractual or (b) prejudicial (material). Partial Assignments
Space Coast Credit Union v. Walt Disney World Co. No duty on employer to honor voluntary wage assignment. When partial assignment need consent of the other original contracting party. Why? Transactional costs - maybe subject to multiple lawsuits (employee and Space Coast). If the assignment is partial only it cannot be enforced against the debtor, or the employer, without his consent, or the joinder in an equitable proceeding of all persons entitled to the various parts of the total debt.
Restatement Section 326: Partial Assignment (1) Except as stated in Subsection (2), an assignment of a part of a right, whether the part is specified as a fraction, as an amount, or otherwise, is operative as to that part to the same extent and in the same manner as of the part had been a separate right. (2) If the obligor has not contracted to perform separately the assigned part of a right, no legal proceeding can be maintained by the assignor or assignee against the obligor over his objection, unless all the person entitled to the promised performance are joined in the proceeding, or unless joinder is not feasible and it is equitable to proceed without joinder. Comment Section 326 Under the rule stated in Subsection (1), a partial assignment and a total assignment are equally effective, subject to the protection of the obligor under the rule stated in Subsection (2). Why is partial assignment problematic? Because we allow free assignments of duties and rights but need consent for partial assignment. Effects of Delegation Rosenberger v. Son, Inc. Rosenberger sold (sales contract) Dairy Queen to Pratt (written consent) assigned to Son, Inc. then assigned to Merit (conduct sufficient to suggest consent) then Merit pledged the inventory and equipment of the Dairy Queen as collateral for a loan from Valley Bank and Trust of Grand Forks. Rule: A contracting party cannot escape its liability on the contract by merely assigning its duties and rights under the contract to a third party. Novation v. Assignment v. Agency v. Third Party Beneficiary Novation: a means by which a contracting party can rid himself of an obligation under the contract as it seeks approval of the other contracting party for release - substituting a new party in its place. An agreement between the obligor, oblige and a third party by which the third party agrees to be substituted for the obligor and the oblige assents thereto, the obligor is released from liability. It must be clear from the terms of the agreement that a novation is intended by all the parties involved. Look for release language as well as both the contracting parties and the assignee's signatures on the release. An obligor is discharged by the substitution of a new obligor only if the contract so provides or if the obligee makes a binding manifestation of assent, forming a
novation. Therefore both original parties to the contract must mutually assent to discharge of the obligor from any further liability on the original contract. Another means by which the assignor may be released: Alteration that prejudices the position of the assignor. (Implied Novation) The assignor is responsible only for the obligation which he oringally contracted to assume, and the assignee cannot, without the assignor's knowledge, increase the burden. If the changes in the obligation prejudicially affect the assignor, a new agreement has been formed between the assignee and the other original contracting party. More concisely, a novation has occurred and the assignor's original obligation has be discharged. Intent to create a novation may be shown not only by the terms of the agreement itself, but also by the character of the transaction and by the facts and circumstances surrounding the transaction. Future Right Speelman v. Pascal When can you assign future rights? Restatement 321 Assignment of a Future Rights (1) Except as otherwise provided by statute, an assignment of a right to payment expected to arise out of an existing employment or other continuing business relationship is effective in the same way as an assignment of an existing right. (2) Except as otherwise provided by statute and as stated in Subsection (1), a purported assignment of a right expected to arise under a contract not in existence operates only a promise to assign the right when it arises and as a power to enforce it. Hope of expectation would not be a present existing transfer of an existing right . Defenses Against the Assignee Restatement 336: Defenses Against an Assignee (1) By an assignment the assignee acquires a right against the obligor only to the extent that the obligor is under a duty to the assignor; and if the right of the assignor would be voidable by the obligor or unenforceable against him if no assignment had been made, the right of the assignee is subject to the infirmity. (2) The right of an assignee is subject to any defense or claim of the obligor which accrues before the obligor receives notification of the assignment, but not to defenses or claims which accrue thereafter except as stated in this Section or as provided by statute. (3) Where the right of an assignor is subject to discharge or modification in whole or in part by impracticability, public policy, non-occurrence of a condition, or present or prospective failure of performance by an oblige, the right of the assignee is to that extent subject to discharge or modification even after the obligor receives notification of the assignment. (4) As assignee's right against the obligor is subject to any defense or claim arising from his conduct or to which he was subject as a party or a prior assignee because he had notice.
The same defenses have available against assignor have against assignee. Priority Among Successive Assignees Restatment 342 Successive Assignees From the Same Assignor Except as otherwise provided by statute, the right of an assignee is superior to that of a subsequent assignee of the same right from the same assignor, unless (a) the first assignment is ineffective or revocable or is voidable by the assignor or by the subsequent assignee; or (b) the subsequent assignee in good faith and without knowledge or reason to know of the prior assignment gives value and obtains (i) payment or satisfaction of the obligation, (ii) judgment against the obligor, (iii) a new contract with the obligor by novation, or (iv) possession of a writing of a type customarily accepted as a symbol or as evidence of the right assigned. First assignment is the one that controls (effective) not a subsequent assignment on unless second assignee has done one of the following: 1. Securing payment or satisfaction 2. Securing a judgment 3. Entering into a novation 4. Securing a symbolic writing or other document that is normally surrendered when the right is transferred.