CONTRACTS I. ENFORCEMENT OF PROMISES COMMON DEFINITIONS: o Consideration = bargained for exchange for something of value. (quid pro quo) o Performance = any act, forbearance, or changed legal relation o Gratuitous promise = promise without consideration HISTORY o Benefit-Detriment Approach *standard not useful anymore* Detriment: relinquishment of a legal right – act, forbearance, or promise. Benefit: party gets what they bargained for. A. CONSIDERATION PURPOSE OF CONSIDERATION o Evidentiary function = provides evidence of the terms of the K o Cautionary function = brings home the significance to the parties of their dealings. ELEMENTS OF CONSIDERATION – Requirement for Exchange §71(2) o Sought by the P’sor in exchange for the promise/performance Hamer v. Sidway: Uncle promised nephew $5K if he gave up smoking, drinking, etc. until he turned 21. N gave up activities and asked for money. Held: Binding K. Consideration = N abandoned present legal rights and promised to abandon rights as inducement for promise. o Given by the P’see in exchange for the promise/performance o Exceptions: A peppercorn (something of no value to either parties) cannot be exchanged Familial ties (usually has gifting motivations, and not bargaining motivations) INDUCEMENT DOES NOT NEED TO REST SOLELY ON THE TERMS OF CONSIDERATION. §81 o Shadwell v. Shadwell: Uncle promised nephew to pay him startup $$ if he were to get married to F. N married F and asked for $$. Held: Binding K. Consideration = N got married to F. It does not matter if N was already going to marry F, as long as one tiny reason he went through with it was to get $$. How do we know this was a reason? He got married. CONSIDERATION IS NOT USED TO POLICE FAIR DEALING §79 o Exception: Mere pretense of a bargain does not suffice (peppercorn) GRATUITOUS PROMISES ARE NOT BINDING o Not enforceable by a mere token payment arranged in order to satisfy the requirement of consideration. (peppercorn) Fischer v. Union Trust Co.: Dad wanted to convey land worth $5K to son. D sold land to S for $1. Held: No consideration. Grat promise bc he used a peppercorn in attempt to satisfy consideration. o Purpose of grat promises Assurances are good, even if not enforced in a court of law To weed out the promises that tend to be “small potatoes” B. PAST CONSIDERATION PAST CONSIDERATION IS NO CONSIDERATION. It is a gift. o Feinberg v. Pfeiffer: F worked for company for 39 years, and company made an unconditional promise to give a “surprise” pension to her. F retired, and company stopped paying pension. Held: No consideration bc there is no language predicating F‟s right to a pension upon her continued employment aka “no mutuality of obligation” (But, reliance.) Solution: “F will receive $X.XX in dependant on your future service.” o Hypo: Co. has to reduce money and announces “we will give $200 /mo to anyone over 40 who retires at the end of the month.” 2K E‟ees retire. Co. liable? Solution: Yes. This is a conditional promise. The co. is bargaining for retirement. At least one of the reasons the E‟ees retired was to get retirement pay. The co. needed to reduce payroll and get E‟ees off the books, and so the P‟sor received a benefit. o Exceptions: Necessary to prevent injustice.§86 See “PROMISSORY RESTITUTION” Moral obligations Webb v. McGowin: W saved M‟s life in an emergency and became disabled. M promised to pay W for rest of W‟s life and pays W until M dies. Held: binding promise – consideration arose from W‟s promise to pay for saved life based on moral obligation. (New rule for public policy – MORAL OBLIGATION.) This goes in promissory restitution EMPLOYMENT AGREEMENTS o (Maj.) Ks are not enforceable after job begins bc E‟ee lacks the ability to bargain for it before he renders his services. Pine River: Need consideration to change in E‟ee handbooks. o (Min) Ks enforceable after job begins if supplied by implied promise to continue work. CAB v. Ingram: CAB hired Ingram and made him sign non-compete after beginning work. I continued work, was promoted, and quit. Held: Non-compete is enforceable. Consideration = (implied) promise to continue to work for a “reasonable period of time” and got promoted. Dissent: No consideration because no bargain – employee lacks free will to bargain for non-compete after he begins work. Bankey v. Storer Broadcasting: P was fired after employer changed handbook deleting the „for cause‟ requirement. Held: Employer can change if he gives reasonable notice and fairly imposes (even if employee does not know of change). Consideration = employee‟s continued work after policy change. C. CONSIDERATION AS BARGAIN THE REQUIREMENT OF BARGAIN o Promises to give a gift are not consideration, bc they lack a quid-pro-quo Kirksey v. Kirksey: Brother promised widow (his sister) a home if she moved family 60 miles. S moved and was later kicked out by B. Held: No consideration bc B‟s promise was a just a “conditional gift prize” in that he just wanted to offer her a gift. Solution: If defending S, make it clear that B was bargaining towards the “if.” For example, “he is pro family union and wanted visitation.” Jennings v. Radio KSCS: Radio station promised its listeners 25K if they caught them not playing 3 songs in a row. J caught them, and demanded the $. Held: No consideration bc it was a “conditional gift prize” and no bargain for the “if” Solution: If defending J, make it clear that Radio was bargaining towards the “if.” For example, “to increase audience by inducing them with an award for their vigilance/duration of listening.” Hypo: You see a homeless man and offer to take him to McD‟s for lunch. Once there, he orders a bagillion of everything so you say “forget it” and walk away. Breach of promise? No, because this promise was a “conditional gift-prize” in that I just wanted to offer a gift. No bargained for exchange. o Exception: When the gift is made with a bargain towards the “if” Tiffany‟s: Estranged father promised to buy a ring for daughter if she met him for lunch. D met F, but F refused her a ring Held: F bargained towards the “if” bc D refused to see him otherwise, and he really wanted to see her. REWARDS o O‟ee who learns of offer after rendering part-performance may accept offer by completing the rest of the performance. § 51 Broadnax v. Ledbetter: Sheriff offered reward for capture of prisoner and refused to give P reward because P did not know about contest. Held: No consideration because P did not know about reward until he turned in prisoner. o Exceptions: If O‟or manifests contrary intention. Simmons v. U.S.: S caught prize fish in a tourney, but he was only fishing for personal pleasure and not a part of the tourney. Held: No money for S b/c evidence that the Tourney wanted more than just catching fish and returning; wanted acceptance of promise before began performance to increase competitors. D. BILATERAL CONTRACTS AND ILLUSORY PROMISES BILATERAL K = a promise for a promise o Ask… “What are the parties bargaining for?” If what parties are bargaining for is not clear, P‟sor‟s offer invites acceptance by a promise or by perf, whatever the P‟see chooses. §32 o An offer invites acceptance in any manner unless something specific indicated. §30(2) Usually, “something specific” = a return promise. o In Bilaterals, conditions can be… Expressed conditions Implied conditions implied in fact implied in law o constructive terms = they say “this is the rule applicable to all instances of this type” limit performance: Each performance is conditional on each other. Simultaneous performance condition satisfied by a tendered performance. You show up at the designated hour willing to perform. –OR- 2nd performance is conditional on the 1st. If the parties don‟t specify the performance order, the longer performance goes 1st, and the shorter performance is conditioned on the 1st performing. ILLUSORY PROMISES = A promise so lacking in substance that it indicates that no promise took place at all, and hence, there was no real bargain. Very narrowly construed. o If P‟sor reserves a choice to not perform, the promise is illusory (P‟sor appears to promise something but actually promises nothing) and there is no consideration. §77(a) Strong v. Sheffield: Sheffield‟s wife signs a promissory note for Strong‟s promise not to enforce debt until he wanted money. Held: Not binding because Strong‟s promise was illusory (“I promise not to ask for my $ until I want it” = “I promise to forbear or not to forbear”). Reserved right to change mind, so no consideration. Ex. Promise of continued “at will” employment o Requirement/output/exclusive agency Ks not illusory bc of implied good faith. UCC 2-306(2) Wood v. Lucy: L claimed exclusive license agreement w/ W to promote her fashion was illusory because W never promised to market. Held: Not illusory bc L‟s promise was given to induce W‟s efforts and success so that he‟s not undercut by other agents. Hypo: What if W promised “to sell whatever he can?” o If in inexclusive k = illusory promise o If exclusive K = enforce the K and read in implied promise. o Termination Clauses not illusory if there is a small promise to perform UCC 2-309(3) Only illusory if party has completely unfettered discretion. Any small promise to perform the K is upheld. Requirement of giving notice is usually enough to give substance to promise. And explicit provision dispensing something and trying to override this term will be thrown out. SATISFACTION CLAUSE = not illusory as long as standards (obj. or subj.) is met o In complex transactions, it would slow things down if you had to wait until you received an unbridled promise before moving on to securing the next promise. As a solution, we have a “satisfaction clause” in order to condition a promise on everything else moving forward. o In order to prevent its abuse, (“I promise to pay you if you paint house to my satisfaction” then lying “I am not satisfied”) we have two standards for the satisfaction clause.. Objective satisfaction commercial standard; reasonable person standard Subjective satisfaction honest state of fulfillment; personal taste judgment; good faith Mattei v. Hopper: M promised to sell land upon condition that developer H obtained satisfactory leases. Held: K binding w/consideration. Not illusory promise bc of subj. standards of good faith (H honestly attempted to find leases) If no time period = illusory promise If “subject to lawyer‟s agreement = illusory, bc L is extension of client ACTUAL RELIANCE RULE = establishment of sufficient reliance creates an actual K. o Discourages reliance through: (a) proof problem (b) uncertainty into the enforceability issue Ex. “I don‟t want to waste all my time planning the barn dance if there‟s a possibility that all that planning and investment might go to waste.” E. RELIANCE AND PROMISSORY ESTOPPEL PURPOSE of promissory estoppel o To compensate for harm; NOT to encourage reliance. ELEMENTS of Promissory Estoppel §90 ; §139(2) o P‟sor made a promise to P‟ee o P‟sor could reasonably (obj.) expect P‟see to take an action of a definite and something particular –AND- of a substantial character on the part of the P‟see o P‟see took an action induced by the promise (in reliance on the promise) o Enforcement is necessary to prevent injustice. 4 RELIANCE CATEGORIES o (1) Grat promise to convey land Established when the P‟see relied on that promise by moving on the land, taking possession, and making improvements. o (2) Grat promises by bailment An arrangement where the owner of personal prop gives to the Baillee temporary possession of that prop. Siegel v. Spear & Co.: Spear agreed to store‟s Siegel‟s furniture in warehouse, which later caught on fire. Held: Spear liable bc Spiegel relied on his promise to insure it, and Spear took actual possession of it. o (3) Grat promise to Charity. Are enforced bc these organizations rely on these promises. o (4) Familial promises made in the family context. Bargaining w/family members is uncomfortable. They‟re rarely going to condition their gifts on the promises of another family member. CASES of Promissory Estoppel o Ricketts v. Scothorn: S quits work in reliance on grandpa‟s promise to provide her w/money. Held: Binding promise because of reliance even though no consideration. o Feinberg v. Pfeiffer: P retired after company promised to pay pension. Held: Pension promise is binding because P relied upon promise and abandoned job opportunities. o White v. Corlies & Tift: Contractor bought lumber without notifying firm when firm faxed him note that he could redo office. Held: NO reliance because not reasonable for firm to know he would rely on fax promise. RELIANCE MUST BE DETRIMENTAL AND IN RELATION TO CONTRACT DAMAGES, not emo damages o Vatoler v. American Can: (min.) V sued employer AC for breach of promise of greater pension, which he relied upon for accepting his promotion. Held: Reliance established bc V stayed w/AC bc of pension; emo damages constitutes detrimental reliance. Purposes of Remedies § 344 o Expectation interest Give P‟see the benefit of the bargain. Put the P‟ee in the position he would have been had the promise been performed. o Reliance interest Give P‟see reimbursement for the detriments caused by his reliance on P‟sor‟s promise. Put P‟see in the position he would have been in had no K been made. o Restitution interest Make party whole again by restoring benefit conferred upon the other party. F. RESTITUTION RESTITUTION DEFINED: Recovery to prevent unjust enrichment; § 371 ELEMENTS OF RESTITUTION o A voluntarily confers a benefit upon B. o A expected to be paid. (A was not a „volunteer‟ OR an „officious intermeddler.‟) o B is unjustly enriched. IMPLIED CONTRACTS = Court may imply a K even if no actual K was created. (quasi-Ks) o Creation = created when performance/aid is… Excessively burdensome or expensive –OR- In business or professional capacity Cotnam v. Wisdom: C was thrown from car and rendered unconscious. Dr. W performed operation. W sued for medical services. Held: Implied K created because C was unconscious, and W should be reasonably compensated. o Categories of the implied K Implied in fact K made through intent, though not articulated. Ct. implies intention. Implied in law No K made. Ct gives restitution for unjust enrichment. o Schott v. Westinghouse: W promised E‟ees cash prize for good suggestions. S gave W a suggestion W later implemented. W refused to pay S. Held: K enforced. (S expected cash and idea was novel) o Damages for restitution. Choose the easier/smaller one. §371 Cost Avoided reasonable value of benefit received Net enrichment Extent to which property has increased in value. o Only allowed if no other reasonable alternatives. o Proving Unjust Enrichment If arguing UE to a 3rd party not K‟ed with, must prove a relationship b/w parties and the absence of another remedy. Callano v. Oakwood Homes: P K‟ed w/ 3rd party to plant shrubs. 3rd party did not pay, and D moved into house. P sued D for unjust enrichment – house increased in value w/out pay. Held: No unjust enrichment bc no relationship between P and D. Also, another remedy exists – P can sue 3rd party. Paschall‟s v. Dozier: (min.) P built bathroom in D‟s house at D‟s daughter‟s request. Daughter did not pay, and P sued D. Held: Restitution because of unjust enrichment (In D‟s house so there is a relationship b/w parties. Also, no other remedy exists since daughter filed for bankruptcy.) Spousal agreements: When there is extraordinary, unilateral effort by 1 spouse that benefits only the other, restitution may be appropriate. Pyeatte: Wife supported husband in law school based on promise that H would support her in grad school. Held: H was unjustly enriched by W‟s unilateral effort, so must pay restitution. (Dissent: W= „mere volunteer‟.) G. PROMISSORY RESTITUTION MIX BETWEEN PAST CONSIDERATION AND RESTITUTION o Past consideration is binding if necessary to prevent injustice §86 o Moral obligation does not serve as the basis for binding promise Exception: If the law would have enforced a promise based on a bargained for exchange and consideration o Decide that the bargained for exchange is no longer enforceable because some sort of technicality. o P‟sor makes a new promise to P‟see that is still based on the consideration made. We cannot enforce the new promise based on consideration bc past consideration is no consideration. We enforce the new promise based on the moral obligation. ELEMENTS of Promissory Restitution o Requires P’sor to be directly affected by P’see’s action Mills. v. Wyman: A gives emergency care to B‟s son while son is sick at sea. B promised to reimburse A. Held: Not a binding K. Though a moral obligation exixts, P‟sor and P‟see are not in a direct relationship, so no consideration for past services. o Requires evidentiary function: proof that P’sor intends the promise Harrington v. Taylor: While saving T‟s life, H‟s hand was maimed. T orally promised to pay for H‟s damages, but only paid small sum. Held: No K, bc evidentiary function not satisfied (T only paid H a little sum, then stopped). o Classic case Webb v. McGowin: W saved M‟s life and became disabled. M promised to pay W for rest of W‟s life, and did so up until M‟s death. Held: binding promise – consideration arose from W‟s promise to pay for his saved life which was a material benefit. M was directly affected by W’s act. While living, M paid large sums of money to W, evidencing intention. Moral obligation to enforce such a K. o Exceptions to §86: If P‟see conferred benefit as a gift, etc. The value of P‟see‟s action is disproportionate to its benefit II. THE BARGAINING PROCESS A. ASSENT AND THE OBJECTIVE THEORY OF CONTRACT Must manifest an intent to be bound to that P‟see knows a commitment has been made. §21(1) o Lucy v. Zehmer: Z promised to sell his farm to L; wrote promise on a napkin and signed by Z, L, and Z‟s wife. Z later said he was joking. Held: Promise was binding; court will not look to parties‟ intent in their head, but their manifestation of intent (good faith offer & acceptance, completeness of neg., reliance). Harm in deliberately misleading others A court will not enforce P‟sor‟s promise if P‟see actually knew or a reasonable person would have known that D was not assenting to be bound. o If words have 1 reasonable meaning, courts use „objective bargain‟ test (reasonable person test) rather than „subjective bargain‟ test (meeting of minds, intent of parties) without secret thoughts or reservations o What is NOT an intent to be bound .Optimistic statements made by doctors to patients = not binding Ks. Sullivan v. O‟Connor: Dr. promised D “I‟ll make your nose look better” and then made nose look worse. Held: No K bc Dr. was not assenting to be bound. (Given uncertainties of medical science and variations on what is “beautiful” or “better”) Patients may transform such statements into firm promise in their own minds. o Exception: If specific result is promised. Hawkins v. McGee: Dr. promised boy would recover in 4 days after elective hairy hand operation. Boy did not recover for 1 month. Held: Binding contract – dr promised a specific result. NOTE: Expectation damages. Statements made b/w intimates or for social purposes = not binding Ks. Casualness of agreement doesn‟t suggest binding legal K Presumption of gratuitousness Promise so insufficiently serious = not binding Ks Leonard v. Pepsico: L sent in check and Pepsi points for a Harrier jet worth $23 mil. Held: Not binding – zany humor, no reasonable person believes as offer. Gentleman‟s Agreements o Parties in an agreement, by express provision, can prevent enforcement of promise. Exception: Employment agreements, bc courts change rules to promote the K. Mabley v. Borden: E‟or gave M a certificate promising specified death benefits would be paid to beneficiary if M was still employed at the time of death. It also mentioned that “it carries no legal obligation whatsoever or assurance and may be withdrawn or discontinued at any time.” Held: E‟or liable to beneficiary. Formal K Contemplated o Look to see if there are any words or conduct suggesting that P‟see was not to be bound until the written papers were drafted and sound. What is customary for this type of K? Does the complexity of the transaction require a written K? Was there an oral discussion about all the significant terms of the deal? If so, P‟sor less likely to know that P‟see needed to sign K to close deal. Was there substantial performance or prep to perform by one of the parties? What‟s at stake? The more at stake, the more the P‟sor knew that the P‟see didn‟t intend to be bound until the signing of papers. B. OFFER Offer = always takes the form of a promise §24 o O‟or‟s manifestation of willingness for bargain o O‟ee‟s subjective understanding/belief that he has the last word §26 understanding/belief must be justified. Requirements for a valid offer §24 o Manifestation of present contractual intent. o Certainty & definiteness of terms. o Offer must be communicated to the O’ee. Manifestation of present contractual intent o Must be words/conduct of offer rather than words/conduct of prelim nego §26 Words used, surrounding circumstances, to who the proposal is made, written K contemplated Hopper v. All Pet: In a letter, AP said “I am willing to” release H from a non-comptete. AP told H to let them know if she was “willing to approach the prob” and AP would draft paperwork. Held: No offer, bc of prelim neg, looks like AP wanted last word, and evidence of written K contemplated. Certainty and definiteness of terms o When unclear/ambiguous = No Offer o Price Quotations are not offers…bc quantity is left out Owen v. Tunison: Held: Stating the min price (not < $16K) is not a binding offer bc evidence of prelim nego and that Seller wanted last word. Harvey v. Facey: Held: Stating lowest price not binding offer, merely a statement of possible sale price, because terms not complete. Also, H knew of other potential buyers = evidence of bidding contest. Moutlon v. Kershaw: Buyer inquired for salt; Seller quoted prices; Buyer ordered 2K barrels; Seller revoked. Held: No offer bc qty not listed. o Quotations for Immediate Acceptance are offers Fairmount Glass v. Crunden Martin Woodenware: Seller and buyer exchanged letters for the purchase of Mason jars. Buyer inquired; seller quoted prices w/qty for immediate acceptance; buyer entered order; seller revoked. Held: Binding offer existed when buyer wrote “for immediate acceptance.” Also, quantity was listed so terms were specified. Exception: When qty not given and last word goes to Seller o Mesaros v. U.S.: M wanted to buy mint collection from U.S. Order form said “limited qty of 5K” and “please accept my offer” and sent in $. Held: No offer bc qty risk, and “please accept” signified that US to have last word. Communication to the O‟ee o Power of acceptance created only in designated O‟ee §52 o Advertisements are not offers, but invitations to deal. Exception: Ad can be an offer if clear, definite, explicit, and numbered Lefkowitz v. Great Minneapolis Store: Store ad “One stole to sell for $1. first come, first serve.” Held: Ad was an offer bc listed qty, terms of buyer “first come”, and left nothing open for negotiation. o Exclusivity of Offer / Bidding Contests If O‟ee knows O‟or is submitting one thing out for the potential purchase of many buyers = no offer bc evidence of a bidding contest Southworth v. Oliver: O sent letter to 4 neighbors RE: prelim nego on terms of house sale. S accepted. Held: No offer b/c S knew letter was addressed to 4 neighbors. Plus, the move-in date nego. Mistakes in offers o If both parties make mistake, K is voidable. §152 o If 1 party makes mistake, contract is voidable only if…§153 Enforcement would be unconscionable or Other party has reason to know about mistake. Heifetz Metal Crafts, Inc. v. Kiewit: HMC made a mistake in giving a bid and revoked offer. K sued for breach. Held: K won, bc K did not have a reason to believe that HMC‟s bid was a mistake. Low bids happen. o Party bears the risk of his mistake when risk is allocated to him or he is aware of limited knowledge but ignores limited nature. §154 C. ACCEPTANCE The O‟or is Master of the Offer, giving O‟ee ability to make/terminate assent by saying yes/no.§35 Requirements for a Valid Acceptance o Only the O‟ee can accept offer made by O‟or §52 o Acceptance must be unqualified. §59 If qualified = counteroffer = rejection of offer §39(1) o Notice of acceptance Bilateral Ks: §56 O‟ee must exercise reasonable diligence to notify O‟or of acceptance –OR- O‟or must receive acceptance seasonably Unilateral Ks: §54 No notice of acceptance required unless O‟or requests it If O‟ee has reason to know that O‟or won‟t realize performance soon, then K is discharged unless o O‟ee exercises reasonable diligence to notify O‟or of acceptance o O‟or learns of perf. w/in reasonable time o Offer indicates that no notification of acceptance is required. Methods for Acceptance o In cases of doubt, offer invites acceptance by promise or performance. §32 If O’ee chooses performance, the beginning of performance = acceptance. §62 Becomes governed by notice rules of §56, NOT §54 Ever-Tite Roofing v. Green: G wanted ETR to roof house. Unclear whether G invited acceptance promise/performance. ETR choose performance, and accepted upon loading of trucks. Went to G‟s house, where work already began Held: Acceptance binding bc done w/in reasonable time with no unreasonable delay. o Unilateral Ks Can only be rendered if O‟or invites acceptance by performance. §53 White v. Corlies & Tift: CT wrote note saying that builder could begin work. W didn‟t respond, but bought lumber. CT canceled offer; W sued for breach. Held: No acceptance because CT didn‟t invite acceptance by performance- invited acceptance by written promise. Also, W buys lumber often; does not signal to firm that he has accepted. If ambiguous, no acceptance. Accepting by performance Carlill v. Carbolic Smoke Ball: CSB offered $ for anyone who contracted flu after purchase and use of product. C used ball, contacted flu, and sued for reward. Held: P‟s performance was acceptance. Its clear CSB invited acceptance by perf. Bishop v. Eaton: E (in Nova Scotia) wrote to B that if B got $, E would protect B got $ but did not inform E. Held: No binding K, notification was implied to be necessary due to distance – D had no way of knowing if P accepted. §54 Steinberg v. Chicago Med School: S read CMS bulletin “we evaluate you based on X criteria. S paid app fee and sent app. S later finds out that they evaluate based on other criteria and sues. Held: CMS wanted performance ($ and app) and was on notice that S acceptance bc received $ and app. o No notice requested An implied acceptance is binding = INVALID – illustrates development of acceptance Int‟l Filter v. Conroe Gin: D offered to buy water filters from P, and P accepted offer („okay‟ w/ shipment directions, water sample). D cancelled order; P sued because P already accepted. Held: Binding K bc of prompt acceptance – notification to D not required. Reasonable person would think P accepted. o Suggested method of acceptance §60 If offer prescribes specific terms to be met must fully meet terms to create K If offer suggests specific terms of acceptance partial meeting of terms create K Allied Steel v. Ford: F sought to enforce indemnification agreement when AS‟s E‟ee was injured. AS did not sign agreement but began performance. Held: Binding K, bc AS impliedly accepted agreement when it began work. Signing paper was a suggested method o Sales of goods context When buyer orders goods,(offer) he is indifferent as to promise or performance Shipment is acceptance Buyer cannot revoke if seller promptly shipped. o Mirror Image Rule Acceptance has to mirror offer, it cannot change/add/delete terms of acceptance If it does, it is a counteroffer o Silence as acceptance Silence does not operate as an acceptance unless §69 Parties agree that silence = acceptance Past dealings and tradition of silence = acceptance D. TERMINATION OF POWER OF ACCEPTANCE Termination by operation of law o Lapse of an offer = set by O’or or reasonable time §41 O‟ee knows or has reason to know offer no longer effective Subject matter of offer o If the subject matter undergoes rapid market swings short period of time = reasonable o If the subject matter is stable long period time = reasonable Means of transmission o If the MoT indicate urgency, the reasonable time is shortened. Newman v. Schiff: Offer of 100 K made on nightwatch to anyone who called in and cited certain section of the Tax Code. N saw a re-airing of program the next morning on news and called in to cite and claim reward. Held: No reward bc 1) lapse after Nightwatch program ended; 2) O’ees were the few ppl watching Nighwatch so late, not millions of ppl watching morning news the next day. o Offers to the public are usually offered for a longer period of time. o Tardy acceptances (see “Rejection of offer by O‟ee”) o By death or destruction of the subject matter of the offer o By death/incapacity of O’or or O’ee If either party dies/incapacitated, PoA ends §48 Exception: death does not terminate option Ks o Intervening illegality of proposed K Revocation of the offer by the O‟or o An offer is freely revocable by the O‟or until it is accepted §42 o Requirements of effective revocation Words/Conduct obj. standard Communicated to the O‟ee reasonable effort standard If O‟or says/ “I revoke offer” to O‟ee before O‟ee accepts, PoA ends §42 o Cases Hoover v. Clements: H offers C prop in Nov., deadline to accept Dec. C calls H in Jan. to discuss offer, but Hoover says “I don‟t know if we‟re ready. We might not want to go through with it.” C accepts Nov. offer. Held: ToA ended bc 1) C‟s phone call was to modify the deal = counter offer; 2) offer was revoked. How? Equivocation by O‟or put C on notice that H wanted the last word and that a clear offer was not being made. Dickenson v. Dodds: Do gave Di until Fri to accept offer to sell prop, but sold to someone on Thurs. Di heard through 3rd party of Do‟s possible sale and tried to accept by Friday. Held: Offer revoked bc 1) O‟or can revoke at any time, since this wasn‟t an option K (no consideration for promise to leave offer open); 2) O‟ee lost PoA bc 3rd party told him of O‟or‟s plan to sell to someone else. Equivocation by O‟or put O‟ee on notice that a clear offer was not being made. o Offer to the public If O‟or made a general offer, he must terminate offer w/same amount of publicity he used to make the offer §46. If O‟ee misses the notice of revocation, O‟or is NOT bound Offers to the public are usually offered for a longer period of time. o Option Ks Offer binding on an option K if it writing/signed by O‟or w/consideration, exchange of fair terms, w/in reasonable time. §87(1)(a) Courts tolerant of peppercorns, bc… Not consideration for deal. Consideration for ext. of time to consider offer O‟or is getting an O‟ee who is willing to seriously evaluate the offer. Rejection of the offer by the O‟ee o A rejection terminates PoA §38 o Counter offers terminate PoA §39(2) Tardy Acceptance = when O‟ee accepts after time has lapsed Tardy acceptances are treated as a counter offer, and O‟or has PoA. o If O‟or says/does nothing about counteroffer, his silence = acceptance if past dealings indicate that if O‟or objected to counter- offer, he would have notified O‟ee. § 69.1(c) o Mirror Image Rule Acceptance must be on the terms proposed by offer, w/o any variation If not, a counter offer is created by any varying terms. Exceptions: o Implied terms = varying term was implied in offer, so that the language that appeared to be a variance of terms was not. o Precatory terms = language requesting or recommending in a non- binding way. Last Shot Rule: Last agreement before performance began is binding. Exception: option K (holder of option can still accept) Ardente v. Horan: Acceptance was not acceptance because it put conditions of having certain extra pieces of furniture upon the original offer o Counter offers for sale of goods Process Request for quote, answered by a quote Buyer‟s purchase order “offer” Seller‟s sales acknowledgement “counter-offer” Buyer‟s acceptance of goods “acceptance” Minneapolis RR V. Columbus: M&S asked for a quote, CRM made an offer, MS rejected, counter-offered, thus bringing an end to negotiations. o Mailbox Rule: Dispatch of O‟ee‟s acceptance makes K enforceable, and O‟or loses power to revoke after O‟ee mails unless O‟or sets other terms of acceptance §63 Offer sent by mail is accepted if response mailed the same day offer received §41(3) Exception: Acceptance by option K. must reach the O‟or Firm Offers o Applies to an offer made by a merchant UCC § 2-104(1) any business person will be considered a merchant – Comment 2 o Offer to buy or sell goods in a signed writing Offer supplied by O‟ee Firm offer clause separately signed by O‟or o Offer will be irrevocable for stated time or reasonable period of time, but not > 3 months E. BATTLE OF THE FORMS F. PRE-CONTRACTUAL LIABILITY If O‟or is bargaining for perf. only, an option K is created when O‟ee begins the perf. §45 o Pre-K liability for Exp. Damages Hypo: Bru tells Anna, “I will give you 10K if you walk across the Brooklyn bridge.” The only way for Anna to accept is by performance, aka walking across the bridge. Halfway across the bridge, Bru pulls out the bullhorn and says “I revoke!” Held: Bru cannot rescind pursuant to §45. Brackenbury v. Hodgekin: Widow wrote to daughter offering farm if D cared for W during life. D moved to farm and began performance. Held: Widow cannot rescind. Exception: If widow‟s letter said, “please let me hear from you as soon as possible,” that is evidence of a bilateral K and that W is seeking a promise. o Pre-K liability for Reliance. Damages *Recall* Requirements of Reliance (Promissory Estoppel) §90 ; §139(2) P‟sor made a promise to P‟ee P‟sor could reasonably (obj.) expect P‟see to take an action o of a definite and something particular –AND- o of a substantial character on the part of the P‟see P‟see took an action induced by the promise (in reliance on the promise) Enforcement is necessary to prevent injustice. Hypo: Same conditions as Brooklyn Bridge hypo, but before Anna begins performance, Bru notifies her of his revocation while in a cab near the bridge. She nevertheless completes performance and notifies Bru. Held: No K, since Bru revoked before the performance, but Bru is responsible for costs incurred up until his revocation in promissory estoppel. (ex, flight) Hoffman v. Red Owl: H wanted to buy franchise, and RO assured H that 18K would be sufficient. RO made H spend a lot of $ in pre-franchise prepping, and later told H and 18K wouldn‟t be enough $. Held: Franchise offer never made, but there was a promise that 18K would be enough to buy franchise. Reliance damages. Markov v. ABC Storage: L‟or told L‟ee, “I‟m willing to negotiate w/you about renewal of lease.” L‟or secretly had L‟ee#2 in mind and used L‟ee as a backup. Upon L‟ee#2‟s signing of a lease, L‟or notified L‟ee to evacuate in a month when his lease expired. Held: No offer to renew lease, but promise to negotiate in good faith for lease renewal. Reliance damages + punitive D for fraud. G. DEFINITENESS Even if we have an offer and acceptance, that exchange is not going to be enforced unless the promise sought is definite. §33 o Test for definiteness: §33 Can court determine what the parties intended? Can court fix damages in case of breach? o Varney v. Ditmers: E‟or promised to pay E‟ee a “fair share of the profits” in addition to salary, and reneged on the bonus. Held: No K. “Fair”= pure conjecture. Can‟t tell whether party breached or not. (But it‟s E‟or gave E‟ee nothing; surely that‟s a breach) Still can‟t give E‟ee damages bc we don’t know how to quantify “fair” or know what the performance would have been. Damages/Recovery o If indefinite = can‟t enforce the K. Doesn‟t mean disappointed P‟see won‟t get anything. Promissory Estoppel Restitution Hypo: Same facts as Varney, absent salary. Sole reliance on “fair share of profits” for earnings. Held: No K, but we can enforce the E‟or‟s cost avoided damages and give E‟ee restitution. Pyeatte v. Pyeatte: Wife supported husband in law school based on promise that H would support her in grad school. Terms of her schooling were indefinite so the K failed. Held: The fact that there was a bargained for exchange overcame the assumption of gratuitousness. Restitution damages in costs avoided (tuition, housing, food, etc) Terms that need defining (express or implied) o Parties o Subject matter o Time o Price Court may imply reasonable terms if they are missing to avoid forfeiture. UCC Gap fillers o The UCC supplies a gap filler price term as a fallback rule for sales of good transaction. For example, §2-305. Usually, we don‟t use a gap filled for price, and if that term is absent, we say there was no K. o Even under the UCC, you still have the issue of assent: Did they intend to make a K w/an open term? Ex. Two parties foresee an issue, talk about it, and decide to postpone negotiations. “We‟ll talk about price later.” If they don‟t agree later, you have two issues: Did they intend to still have a K, and for the law to supply a gap filler if they didn‟t agree? If they didn‟t agree on term later, did they intend not to have a K? H. STATUTE OF FRAUDS For certain types of K, the K is only enforceable if you have written evidence. The writing is NOT the K, it is just an additional requirement… the bargain/offer/acceptance makes the K. 6 elements necessary to a writing o Identity of contracting parties o Description o the subject matter of the K o Terms and conditions of the agreement o Recital of the consideration o Indication of assent o Signature of the party sought to be charged (or initials, email sig, stationary heading, seal) What kind of writing will satisfy the statute? o Actions of parties Courts have been liberal in term of how they must act. o Type of writing Any sort of writing can be used to satisfy the SoF. Ex. electronic games, facebook, email, tape/video recordings. o Timeliness of writing Doesn‟t matter when it was made- before or after. o Delivery of writing The writing doesn‟t have to be delivered or prepared to/by the parties. o Integration of writing Piecemeal docs can be combined to create one K. Ex. email threads, letters. Signature dilemma: Can use an unsigned doc if D signed at least one of the writings, and there‟s a link b/w unsigned/signed writings to prove assent. o Liberalness of courts: Courts are v. liberal in determining SoF claims, mainly bc the writing is not the K, the bargain/offer/acceptance/assent is the K. They enforce the SoF more as an evidentiary function. Types of Ks that must be in writing o Suretyship K Promise to answer for the debt of another. “Guaranteed K” Ex. I go to bank for a loan and they want someone to guarantee the loan. The guarantee promise from my dad to the bank is a surety promise. Consideration = his promise to be liable in exchange for bank to give a loan to me. o K is unable to be performed w/in one year Ks that cannot be fully performed by both parties w/in 1 yr from their making Express terms of K require some performance over a year by one of the parties. Ex. Builder going to build hospital w/in 23 years. Owner will pay $$ for hospital, but only when hospital is complete. That K is not considered w/one year clause, bc it is possible for it to be full performed w/in one year of the making Ex. Employment agreement for E‟ee to work for the rest of the E‟ee‟s life. K is not considered a one year clause bc E‟ee might die in a year. o K for sale of land or any interest in real property “Interest in land” includes fixtures, liens, growing timber, etc Includes leases (exception, leases for one year or less) o K for the sale of goods<$500 Applies to any sale of goods K for the price of $500 or more. UCC §2-201. Goods defined All tangible movable prop. Does not include intangibles, securities, labor, or services. o Executor‟s K o Marriage K o Broker‟s K o K not to be performed w/in lifetime of P‟or Alternative basis for enforcement: o In cases of unenforcement, seeking reliance damages are preferable. o Ex: Serg agrees to mow Bru‟s lawn for 3 years for $500. Fails 1 year clause of SoF, so K is unenforceable. Bru pays Serg upfront. Serg breaches. Reliance damages: Remedies are more generous, aka put the P‟or in the position before the promise. So if no one in the world will mow Bru‟s lawn for a year for less than 1K, then Bru gets more $$ to procure a substitute performance. Restitution damages: FMV of cost avoided. Not always a good alternative. Mitigating Doctrines o Reliance Takes K out of SoF. Like §45 option, bc triggered by the performance of the K Exception to the 1 year clause o Party full perf to take it out of SoF Exception to the land sale clause o Partial performance to take it out of the SoF. o If a purchase order an oral K to buy land does two things w‟re going to enforce the K Take possession of the real prop Make improvements to the real prop o Promissory Estoppel If P‟sor‟s promise is enforceable notwithstanding the SoF if… §139 P‟sor expected his promise to induce P‟see‟s action/forbearance P‟sor‟s promise did induce P‟see‟s action/ forbearance Injustice is avoided no other way. III. POLICING THE BARGAIN A. CONTRACTUAL CAPACITY Purposes of limiting K Capacity o Protect party w/o capacity and inherent limitation Does not understand the breadth and responsibilities of the K. Open invitation for the merchant to take advantage of the person. o Protect the legitimate expectations of the other party. Minors §14 o Rules of Minority-ship The K is voidable at minor‟s option. Hypo: Zach Hanson (age 12) pays for a Beemer at a dealership. He later returns to dealership, and says “I no longer want it. I want my money back.” Held: Z is a minor, and can void the K at his option. Minor may enforce the K against the adult party If Minor voids K minor is liable to return necessaries furnished to him Hypo: Same as above, but Z have to give back whatever he got out of the deal. So Z returns the Beemer and the dealership returns the money. If minor unable to return necessaries furnished minor liable for its FMV. Hypo: Sam as above, but this time Hanson allows little Z to drive. Z gets into a car accident and destroys the car. Z goes to the dealership and says, “Take the destroyed car back, I want my money.” Held: Dealership does not have to take back the destroyed car. Z is liable for the FMV of the car Added Purpose: Merchant will not overcharge minor, since if minor can‟t return the good, the minor is only responsible for the FMV. Rationale: It is a Quasi-K, so minority is no defense Upon reaching the age of majority, the former minor can ratify the K (manifest his intention to be bound) w/in a reasonable period of time If minor lies about age to induce K minor is liable for fraud under tort law. Hypo: If Ike lies about age to dealership. I voids the K. Held: I is a minor, yet he is still liable for his tort of fraud to induce K. Mental Illness/Defect §15 o Rules of Infirmery-ship K is void by reason of mental illness/defect if the person… Lacks the ability to understand nature of K. (cognitive test) –OR- Lacks the ability to control actions in a reasonable way. (volitional test) o Cognitive Test Knowledge of defect by other party is irrelevant Hypo: Bru has a mental disorder that makes him delusional. At his employment, there is a pension plan. B believes a pension plan is when big ugly monsters pench him when he sleeps. B enrolls in the highest amount of the pension plan bc he thinks that doing this will keep the monsters away. Held: Bru can void the K o Volitional test Other party must have a reason to know of mental defect for K to be voidable Damages = Restitution on both sides of K Hypo. Bru has extreme paranoia, and believes he must sign all papers given to him by his E‟or or else the CIA will kill him. His E‟or knows this, and puts a K in front of him that forfeits his 401K. Held: Bru can void the K. Hypo: Bru is delusional. B buys a yellow Bug. Dealership doesn‟t know of his mental defect. B believes the bug is a yellow sub (cognitive) and he drives it into the lake (volitional). Held: K is not void bc 1) car dealership didn‟t know of defect, and 2) B liable for restitution of the car = FMV. Intoxicated Persons §16 o K is voidable at the option of the intoxee if… Other party has reason to know that, bc of intoxication I‟ee lacks the ability to understand nature of K. –OR- I‟ee lacks ability to control actions in a reasonable way. o Harder to satisfy, since you have to prove that the other party knew you were impaired to the level that you didn‟t know what you were doing B. BARGAINING PRESSURE Pre-Existing Duty Rule o Requirements of PED §73 Performance of a legal duty owed to the P‟sor which is neither doubtful nor subject to honest dispute > is not consideration. When part demands extra compensation for same duty, agreement to pay more is unenforceable because lacks consideration. o Alaska Packers v. Domenico: Packers hired workers to sail to AK and pack fish. In AK, workers demanded higher pay for same work, and Packers promised raise. Held: Promised raise is unenforceable because no consideration under Pre-Existing Duty. Workers demanded more pay for same duties and took advantage. o Exceptions to PED: §89 If modification is fair in view of circumstances not anticipated by parties when K was made Statute requires it Justice requires it. o PED ends upon Changing conditions Rescission. Disputed obligation New K Schwartzreich v. Bauman: S gets a better job offer. S tells B, B says will pay more S more if he rejects other offer. B tore up old K in front of S. New K w/same terms except increased pay. Held: No PED, new K. Rescission followed by new K creates new duties as long as rescission was more than a pretense (aka, tearing up old K) Watkins v. Carrig: Cellar excavator began work and discovered solid rock. Excavator and D made new contract for more money. Held: New contract is enforceable because old contract mutually rescinded due to new conditions. Borrelli v. Braussau: Husband told Wife “I‟ll give you all my prop if you don‟t put me in a nursing home to have strangers care for me.” W agreed, W performed, and H‟s exec doesn‟t give W the prop. Held: W doesn‟t get prop bc there is a PED duty to care for husband. (Dissent: PED does requires her to provide care, albeit not personally. Could hire someone) PED does not apply if duty differs from what is required in a way which reflects more than a pretense of a bargain. Foakes v. Beer: Creditor can enforce debt even if part paid w/ agreement to forgive rest unless debtor agreed to pay by different terms (gift of a horse, hawk or robe.) Duress o Requirements of Duress: party uses compulsion (economic or physical) to obtain benefit o Damages: victim may be able to compel restoration and promise may not be enforceable. o Economic Duress: Contract is voidable when party is forced to agree to promise by means of wrongful threat precluding his free will. Requirement of resistance/temerity – victim must not yield to threat too easily. Not duress: Threatening (valid) lawsuit (Fiege v. Boehm) Hard bargaining (offer to sell house in 1 hour). Being in a bad business situation Duress proof required: 1 party threatens breach by withholding needed goods unless other party agrees to further demand; no alternate suppliers; ordinary remedy for breach is inadequate (strict deadline). Austin Instrument v. Loral: Austin began delivery of radar sets for 1 contract and then stopped delivery until Loral paid more and accepted 2nd contract. Held: Economic duress voids 2nd contract because of Austin‟s threat, no alternative suppliers, and no other options before strict deadline. C. MISREPRESENTATION Requirements of misrepresentation o Must be a fact (not a legal conclusion) o That fact must be affirmatively stated –OR- actively concealed o The misrepresentation induces assent (obj. or subj) Seller‟s misrepresentation is material when it is…. o Likely to induce a reasonable person (obj) to manifest assent. –OR- o Likely to induce the specific recipient (subj) to manifest assent §162(2) When to disclose? o Seller is not liable for failing to disclose information when no duty to disclose Swinton v. Whitensville Bank: D sold P a house, knowing that it was infested with termites. Held: K enforceable because D did not have special duty to disclose – sold house caveat emptor (as is). (Note: Old rule – modern courts/laws require house seller to disclose dangerous defects.) o Seller has duty to disclose all info to buyer if seller brings up the topic. Kannavos v. Annino: D advertised house as multi-family dwelling and sold house to P, knowing zoning laws. P did not ask about laws and assumed D was honest. Held: K is void because seller revealed some info in ads and statements and is required to be honest and disclose all info. Misrepresentation can be implied. o Seller has a duty to disclose a fact to buyer if seller knows buyer has made a mistaken assumption on something material to the K §161(b) o Seller has an obligation to disclose if in a relationship of trust or confidence w/buyer. o Seller cannot actively conceal information Soniat v. Johnson: Seller received termite report that indicated “No termites now, but there used to be termites.” S gives the buyer termite report, but removes sheet that says “there used to be termites.” Held: K is void. Affirmative concealment. Jewish Center v. Whale: Rabbi didn‟t tell his new E‟or (church) of history of insurance fraud and disbarment as an atty. Held: K void bc R had reason to believe that his E‟or would need to know that info for hiring decision. Fuller v. De Paul Univ. Prof failed to disclose history of being an ordained priest who later married and had children to E‟or (catholic univ.). Held: K void bc P had reason to believe that his E‟or would need to know that info for hiring decision. Expert Knowledge Exception o Expert does not have to disclose all information. (Ex. jeweler, rare coin seller) o Rationale: If experts weren‟t excepted, no incentive to craft an expertise, bc they would be required to “share it” by giving away their leverage power. Exception: An expert who makes false statements of opinion. If buyer relies on it, expert liable. D. UNFAIRNESS Limits o In most cases, unfairness does not get you out of the K. o You cannot get specific performance of service Ks Rationale: against servitude; breaching is sometimes good business sense o The stronger party has to show that the bargain was fair, conscientious, and beyond the reach of suspicion. Remedies o Ct of law = $$ damages (most common) o Ct of Equity = order breaching party to perform the specific promise *only used when remedy of law was inadequate* positive injunction Ex. convey land negative injunction Ex. Cov not to compete Grounds to withhold o K unfair and o shocks the conscious Undue Influence o Requirements of UI: Reliance of trust or confidence Unfair persuasion Excessive over-persuasion (coercive & overcomes the will) –OR- Pressure that abuses party’s mental, moral, or emotional weakness. Unfair exchange o Damages K is voidable at victim‟s option, even if threat was legal o K may be void if… Relative trust/influence/status of party renders unequal bargaining McKinnon v. Benedict: UI bc P was a businessman and took advantage of poor jeweler. Ordorizzi v. Bloomfield School: Principal went to teacher‟s home and asked him to resign. Teacher tried to rescind resignation. Held: For P. Resignation void because done at home w/out attorney, school threats to publicize charges. Unfairly persuaded Discussion of transaction at inappropriate time or place; Demand that transaction be finished immediately Extreme emphasis on consequences of delay Use of multiple persuaders by dominant side Statements of “no time to consult financial advisors or attorneys” Unfair exchange between parties Hodge v. Shea: S contracts to sell 20 acres and an old Caddillac for H‟s 4K and a brand new Cadillac. H is S‟s doctor, and S has chronic illnesses. Looks like a bad deal. Held: Bargaining unequal due to relative status of parties. Dr. knows Shea needs cash very badly, and he knew Shea had a Caddy-fetish. When you have a relationship of trust or confidence that puts one party in the position to take advantage of trusting party, if the other party used “unfair persuasion” to obtain an unfair exchange. Obviously an unfair deal even upfront. Ex. If I manage to convince Mr. Simpleton that he should sell me piece of land for ½ FMV, that might be a case of extreme unfairness. The court might give an order of specific performance o Standardized One-sided Ks = you are bound The fact that you don‟t read all the terms of a K doesn‟t matter if you sign. Ex. You buy a car, but all the terms and warranty are boilerplate and one-sided. You sign the K for your car. You are bound. o Through offer/acceptance = may not be bound if terms came after acceptance Ex. Coat check. You pay person money, they hang up your coat, and then give you ticket w/disclaimer on the back. o Unconscionable Ks. Defined: If the K a clause in the K is unconscionable at the time it was made §2-302 Damages: Strike out objectionable clause and leave the rest of the K. Exceptions: Void for price Note: Difficult for cts to rule consistently IV. REMEDIES FOR BREACH A. MEASURING EXPECTATION, RELIANCE, AND RESTITUTION REMEDIES FOR BREACH §344 Substitutional Relief= Give $$ as substitute for actual performance that‟s not forthcoming Expectation Interest Giving the party the benefit of the bargain; put the party in position he would have been in had the promise been performed. Purpose: To encourage reliance in a commercial setting. o Reliance Restore the party to the position he would have been in had the promise never been made o Restitution Compensating the party for any benefits conferred on the other party; restore breaching party by taking away any benefit. Specific Relief = Forcing the breaching party to perform on the K. o Usually don‟t do this bc we‟re against servitude and don‟t want to discourage breaching if that is the best business move MEASURING EXPECTATION DAMAGES Formula: Loss in Value (Value Promised – Value Received) - Cost Avoided (Cost Full Performance – Cost Reliance) + Other Loss - Loss Avoided Loss is from the victim‟s standpoint §347 o NOT the FMV, or a reasonable person. Emo disturbance excluded §353 o Exceptions Coupled w/physical harm caused by the breach. Serious emo disturbance a likely result of breach K Ex. K w/cemetery. Mishandles a dead body during funeral. Victim cannot recover for any unusual sentimental value. MEASURING RELIANCE DAMAGES Formula: Cost of Reliance - Value Received + Other Loss - Loss Avoided Non-Commercial settings reliance damages o Rationale: The purpose of exp damages is to encourage reliance. Here, it‟s obvious that party relied on the K. On a year-by-year contract, reliance damages permitted to avoid overcompensation o Hypo. A makes a 5 year road-side-assistance contract w/B for 500k. 2yrs into performance, B breaches. Damages: Exp Damages (the full 500k) = No, bc it would lead to overcompensation since for 2 years A received the benefit of the K. Exception: Exp damages given if the victim can show w/certainty that breaching party would have lost money Reliance Damages (100k per yr X 3 yrs remaining) of 300k to A = Yes. Restitution Damages (100k per yr X 2yrs of conferring benefit) to B =Yes, if the victim opts to do so. Exception: No restitution damages given if party fully performed and the only thing left if the definite sum of money owing Note: 1) cap is contract price COMPARING TYPES OF DAMAGES Sullivan v. O‟Connor: S promised a cute nose. 3 botched nose-jobs later, she has an even uglier nose. Held: Reliance damages. o Exp Damages: Damages include: value of better nose; damages for worse nose. S waived exp damages bc the value of a better nose was too difficult to prove. Would still have gone w/reliance damages if exp damages were super high bc value of nose is great but dr. only gets a small fee Damages do NOT include: doctor‟s fees; pain (would have to endure even if surgery went correctly). o Reliance Damages: Damages include: doctor‟s fees; pain; damages for worse nose. Damages do NOT include: value of better nose (putting you in the same position you were in pre-nosejob) o Restiution Damages: Damages include: doctor‟s fees. (benefit conferred) Damages do NOT include: value of better nose, damage for worse nose, pain LOSING CONTRACTS When the cost of fully performing the K exceeds the amount afforded as payment of the K. Deciding between Expectation and Reliance Damages in Losing Contracts o Hypo. X contracted w/Y to build bldg. X spent 500k, then breached at a point where it would have cost him 600k more to fully perform. What does Y owe X? Exp. Damages Loss in Value (Value Promised – Value Received) 1 mil (1 mil - 0 ) - Cost Avoided (Cost Full Performance – Cost Reliance) -600k (1.1 mil - 500k ) + 0 (Other Loss - Loss Avoided) = Reliance Damages Cost of Reliance – Value Received + Other Loss – Loss Avoided 500k -0 - 0 = 500k to X breeching party If the victim can, w/reasonable certainty, show that the breaching party would have lost money, the victim gets exp damages. §349 Ex. X gets exp damages of 400k. If victim cannot show w/reasonable certainty that breaching party would have lost money, then victim party gets reliance damages or exp damages. §349 Ex. X gets reliance damages of 500k. Restitution in Losing Contracts o Formula: $ builder spend - $ buyer paid o Quantum Meriut – can recover for damages suffered even if overall loss was imminent. Victim is awarded restitution for value of performance (or contract price), and recovery is undiminished by any loss which may have incurred from complete performance. §373. U.S v. Algernon Blair: AG breached K for crane use, and then C terminated performance. Amount remaining for C‟s value of performance= 37k , but C would have lost more than 37k if AG had not breached and it had completed performance. Is C entitled to restitution? Held: Yes. Prospective loss irrelevant. o If restitution damages > expectation damages Recover restitution damages o If restitution damages > contracted price Recover contract price. It is the cap for rest damages Ex. A Ks w/B to build home for 1 mil. Will end up costing 2 mil to fully perform work. A breaches after spending 1.25 mil. Held: B pays restitution for 1 mil. o Exception Party cannot recover in restitution for its fully completed performance. §373 Must recover the payment of the definite a sum of money due under K. Hypo. AG refused to pay C after C was 100% done. AG contracted work for 1 mil, and it cost C 1.1 mil to fully perform. Held: C wins 1 mil for contracted price. V. GENERAL LIMITATIONS TO DAMAGE RECOVERY B. AVOIDABILITY DUTY TO MITIGATE When victim becomes aware of other party‟s breech, victim has the duty to mitigate damages. o “Mitigating damages”= taking reasonable steps to recover for losses incurred by breach. o Virtue v. Bird: P contracted to meet D at a city to deliver goods. D never arrived. P, waiting long hours for D to arrive, owned horses who died from standing in the sun for so long. Held: P cannot sue for the value of the horses, bc P had duty to mitigate damages, i.e. put the horses in the shade. Exceptions o Victim does not have to mitigate damages if the mitigation will causes undue risk burden humiliation o Comparing the Exceptions to Mitigate Parker v. 20th Century Fox: F offered P a role in “Bloomer Girl” but then breached. As a “means to mitigate damages” F offered P another role in “Big Country, Big Man” and P never responded to offer. P sues for breach of original K, but F says P had a chance to mitigate, but didn‟t. Held: P wins. 2nd offer was o too different (undue risk) fans used to seeing P in funny lighthearted musicals, not serious dramas loss of director and screenplay approvals only gave her a week to approve contract less time for weighing pros/cons o too inferior (undue humiliation) only required acting talent instead of combination of singing, acting, and dancing o too taxing (undue burden) film site in Australia, far away from family Hypo: Same scenario as above, but 2nd movie was vastly similar in all respects to 1st movie. Only difference was that 2nd movie would pay smaller salary. Held: If a 2nd salary was a little smaller than 1st salary, P has duty to mitigate. But if 2nd salary is moderately or vastly smaller than 1st salary, P has no duty to mitigate bc actors salary‟s get published (undue humiliation of compensation too small) and it might affect P‟s future salary offers (undue risk bc other firms think that the 2nd salary is what she‟s worth so that‟s what they offer her) Hypo: Sam scenario as above, but 2nd contract says “offer condition on waiving right to claim breach.” Held: P has no duty to mitigate bc you don‟t have to give up breach claims to mitigate losses, and it would make mitigation unduly risky. Hypo: Same scenario as above, but Fox gives 1st movie role to nemesis, LM. Does P have duty to mitigate losses in the 2nd movie? Held: P has not duty to mitigate bc filming for a company who stole her role and gave it to her nemesis is unduly humiliating. Anticipatory repudiation o Statement evidencing party‟s breach If a material breach completely excuses P from any further performance o Once received, victim is put on notice of breach Victim can only recover damages up until this point. o Rockingham Co. v Luten Bridge: Contract b/w city ® and LB to build bridge for 18k. It would cost LB 14k to perform the K, and would make 4k in profit. City breached via letter to LB at a time when LB had performed 2k worth of work. LB ignored notice and fully built bridge. Held: 6k in damages. Exp. Damages Loss in Value (Value Promised – Value Received) 18k (18k - 0 ) - Cost Avoided (Cost Full Performance – Cost Reliance) 12k (14k - 2k ) + 0 (Other Loss - Loss Avoided) = 6K to be paid to LB Solution: Argue there was no repudiation. Notice was not certain b/c letter stated that reason for repudiation was bd K is invalid.. but K was not invalid. Fear LB would be found as the “breaching party” if stopped performance when K was valid. o Hypo: Same situation as above, but the LB contracts with 2 separate counties (Rockingham and Wake counties) to build a bridge linking the two, ½ in one county and ½ in other. Rockingham repudiates. Held: No duty to mitigate bc mitigation (ceasing performance) would be an undue risk for LB bc Wake county might sue if LB doesn‟t finish the bridge. o Seller‟s Right to Salvage Unfinished Goods notwithstanding Breach. UCC §2-704 Victim doesn‟t have to stop performance after receiving repudiation if continuing performance in a means to mitigating damages. Hypo: A contracts w/B, a dollmaker, to create 20 dolls for 10k. B makes dolls in batches of 50. A repudiates right after dolls come out of the oven. If B stops ceases performance now, B will get profits and cost of reliance up until this point, but if B continues performance (making the dolls) A might be able to resell goods (+30 extra) in order to exceed the costs of ceasing manufacturing. By increasing “reliance costs” by a little, B increases “loss avoided” costs by a lot. Note: If seller can‟t resell goods, it‟s ok as long as the extension of performance was for a reasonable time, towards a reasonable goal, an with genuine effort. Breaching party cannot force party to mitigate damages if it cannot be easily done (undue burden) o Simeone v. First Bank: FB contracted w/S to sell rare car for 400K. FB sold car to 3rd party for 1 mil. Car worth 3 million. Damages 2,600,000. FB says S could have mitigated losses by buying car from SMB. Held: S wins. Undue burden to have to spend ½ mil up front just to mitigate damages. Exp. Damages Loss in Value (Value Promised – Value Received) 3 mil (3 mil -0 ) - Cost Avoided (Cost Full Performance – Cost Reliance) 400k (400k - 0 ) + 0 (Other Loss - Loss Avoided) = 2,600,000 to S [S‟s claim for damages] Loss in Value (Value Promised – Value Received) 3 mil (3 mil -0 ) - Cost Avoided (Cost Full Performance – Cost Reliance) 400k (400k - 0 ) Losses (+ Other Loss - Loss Avoided) -2 mil (+ 0 – 2 mil ) = 600k S [FB‟s claim for S‟s damages] Volume of Sale o Victim can recover from lost profits if breach makes volume of business smaller. Hypo. Bru is a builder. J contracts with Bru to build a home for 75k. It would cost Bru 50K in materials and labor to build J‟s house. J breaches early, and Bru hasn‟t spent any money yet. What‟s Bru‟s only damages? Loss in profit aka 25K Exp. Damages Loss in Value (Value Promised – Value Received) 75k (75k -0 ) - Cost Avoided (Cost Full Performance – Cost Reliance) 50k (50k - 0 ) + 0 (Other Loss - Loss Avoided) = 25k to Bru o Victim cannot recover from lost profits if a substitute contract maintains business volume Hypo. Same hypo as above. Immediately after J breaches, Bru contracts to build the same house at the same price for R. Held: Bru forfeits loss in profits from J‟s K bc Bru‟s K w/R will eliminate Bru‟s damages with J. R is a substitute K that maintains Bru‟s business volume. o Victim can recover lost profit if a substitute contract is made, but the new K does not maintain business volume Hypo. Same hypo as above, but Bru could have built both J‟s and R‟s home at the same time. Held: Bru keeps loss of profit damages from J‟s K bc Bru‟s K w/R does not eliminate Bru‟s damages w/J. R is not a substitute K that maintains Bru‟s business volume. DETERMINING MATERIALITY AND DAMAGES Materiality v. Immateriality o Test for materiality Extent of breach in light of the entire undertaking of the party. Was breach so significant that the other party was deprived what they were bargaining for? Sufficiency of damages Are damages from breaching party good enough? Deliberateness of breach Was breach innocent or a willful? Potential to remedy breach What is the likelihood victim party will remedy the breach? from performance. Conditions of Materiality o Expressed Conditions Expressed conditions required strict compliance. Requires clear and unambiguous language; repeated throughout K. Ex. “Owner has no obligation to pay unless strict adherence to X” o Implied Conditions Require substantial performance for constructive condition. Damages o If breach is material… Victim can recover breach damages and not have to pay cost of future performance Breacher can recover restitution *minus* breach damages. o Capped at the contract price o If breach immaterial… Victim is NOT excused for having to pay cost of future perf. Victim has the right to recover damages as compensation for the breach\ Diminution of FMV of breach –OR- Cost of remedying *unless it is grossly unfair to P.* o Cost to remedy> dim FMV = pay dim FMV See Jacobs & Young v. Kent o Cost to remedy< dim FMV = pay cost to remedy. Hypo: Builder fails to put a roof on house. FMV of house is 50k less bc house has no roof on it. Would cost 5K to put roof on house. Held: Damages = cost to remedy, bc less it‟s less than dim. FMV. Note: Materiality of the breach has NOTHING TO DO w/measuring the loss caused by the breach. The ONLY thing it tells us is whether other party is excused Application o Jacobs & Youngs v. Kent: Contractor installed Reading pipe instead of Cohoes pipe, but performed the rest of the contract to a T. R pipe same quality/price as C pipe. Held: Immaterial breach; Damages measured by dim of value to the victim. Test/Rationale Breach Immaterial o No differences in quality or value of pipes o Damages from breaching party to injured party are good enough. o If we call it a material breach, we excuse him from paying anything, AND he gets to keep the house. The owner owns the land house becomes part of the land owner owns the house. o Owner not likely to use damages money to replace pipes. o Breach not willful. Damages= Dim of value to victim o If cost to remedy> FMV diminution = pay the FMV diminution o Owner not likely to use damages money to replace pipes. DETERMINING WHETHER TO AWARD THE COST TO REMEDY Doctrine of Economic Waste o It‟s stupid to go out and spend a lot of money on something that does not increase the FMV. But spending money is economically beneficial, so what‟s the problem? o It‟s the mater of not giving the P a windfall recovery Ex. If we awarded the owner damages to replace the C pipe w/the R pipe, owner would not replace the pipe, and just pocket the money. If, due the party‟s relation/preoccupation, it is likely that victim will use damage money to remedy the breach award cost to remedy damages o Hypo.: Same breach as above, but what if the owner was the President of Reading Pipe? Held: Give him damages for replacing the pipe bc we have a reason to believe having the particular Reading Pipe is very important to him, and that he would use the money to remedy the breach. When an element of personal taste is involved the cost of remedying is a better determination of damages. o Hypo: What if builder painted the living room off-white although the K called for the color light beige? Also, the costs of remedying are high bc of sponge painting. That breach has no affect whatsoever on the FMV. Held: Award damages for costs to remedy, bc we have a reason to believe that the owners would use the money to remedy the breach. If a K is expressly conditioned on the performance on fane express term, and the other party fails to perform that express term material breach, and you don‟t have to fully perform, aka, you‟re “cost avoided” decreases. Sometimes this means no damages at all, so cts rarely use this. o Hypo: Bru contracts w/me to build a house on his land for 300k. Express terms: “Bru doesn‟t have to pay a dime for house unless it‟s painted barn red.” If I paint his house navy blue = failure of strict compliance mean Bru doesn‟t have to pay me. I am in breach, so I have to award Bru damages for my breach (cost to repaint house = 10K) BUT my breach damages are offset by cost avoided (since Bru doesn‟t have to pay me the K‟ed price = 300K) Exp. Damages Loss in Value (Value Promised – Value Received) 10k (cost to repaint house) - Cost Avoided (Cost Full Performance – Cost Reliance) 300k (300k - 0 ) + 0 (Other Loss - Loss Avoided) = -290k to Bru cts usually don‟t refer to things as express conditions bc of this o Hypo: Same situation as above, w/o express terms. Could argue no material breach, bc damages are enough. Could counter that the term was an implied term, making breach was material = breach of material K Bru‟s obligation to pay is constructively conditioned on my SUBSTANTIAL perf. Damages to Bru same as above. o Hypo: Same as above, but I paint the house blue for spite. Deliberateness = material breach. Damages to Bru same as above. . C. FORSEEABILITY RULE: The plaintiff may not recover damages for losses that were not forseeable at the time the contract. TEST FOR FORSEEABILITY If the loss arised in the ordinary course of events –or- if the D has notice of the special circumstance giving rise to them. D. CERTAINTY RULE: P cannot recover damages that the P cannot prove w/reasonable certainty. Fera . Villaage Plaz E. LIQUIDATED DAMAGES AND PENALTIES LD DEFINED: Damages that the parties stipulated in the K RULE: Courts may award the P liquidated damages as long as they are not… o Penalties If remedy is unreasonable large in comparison to actual loss. o Unconscionable If unconscionably small remedy.
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