What is a Contract (K)?
1) Definition: R2d § 1K is a promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes a duty 2) Requirements a) The formation of a K requires a bargain in which there is consideration and a manifestation of mutual assent (R2d § 17) b) A K requires at least one promise; a commitment to do something in the future. i) R 2d § 2: (1) A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made. (2) Person manifesting the promise is the promisor; person to whom the manifestation is made is the promisee. Where performance will benefit a person other than the promisee, that person is a beneficiary. ii) R 2d § 4a promise may be stated in words (oral or written) or may be inferred wholly or partly from the conduct of the parties. Certain types of Ks must be in writing according to the Statute of Frauds. 3) Types of K a) Expressparties expressly agree to certain words and terms. b) Implied in Factno express agreement, but the conduct of the parties implies an agreement from which an obligation in K can be said to exist. Treated the same way as express Ks regarding enforcement. c) Implied in Law (quasi-contract)not a real K; no reference to intent or agreement; an obligation imposed by law for the purposes of bringing about justice and equity. d) Bilaterala promise exchanged for a promise; there must be mutuality of obligation (either both parties are bound or neither are bound). e) Unilaterala promise exchanged for performance or something else; only one promise exists. The person performing is not bound to perform the act, but once he performs, the promise becomes enforceable. f) ExecutoryK that remains wholly unperformed or for which there remains something still to be done on both sides. (e.g. sale for goods to occur at later date). Mostly used to allocate risk of market fluctuations. Most of the Ks we study are executory. 4) Elements of a K a) Bargain (R 2d § 17)K requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration. b) Manifestation of Mutual Assent (R 2d § 18)requires that each party either make a promise or begin to render a performance. Almost always takes place through an offer and acceptance. One party proposes a bargain (offer) and the other party agrees to the proposed bargain (acceptance). c) Consideration (R 2d § 71)---requires either a return promise or a performance that is bargained for. 5) Alternatives to K: a) Promissory Estoppelno K was created; promises reasonably induce action or forbearance (reliance) by the other party, and therefore promise is held to be binding when necessary to avoid injustice. Reliance is enough to require enforcement even though there is no bargain or consideration. b) Unjust Enrichment (Quantum Meruit)no K was created; no promise made; relief given in cases where it would be unjust to let a party receive a benefit without having to pay for it. c) Material Benefit Ruleno K was created because of past consideration; promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice.
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Consideration
1) Exchange Context: Receipt by promisor of “something of value” from promisee; distinguishes between unenforceable (gratuitous) promises and enforceable promises (exchange occurs). 2) Exchange Requirements (R 2d § 71) a) To constitute consideration, a performance or return promise must be bargained for. b) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise. c) The performance may consist of: i) an act other than a promise; or ii) a forbearance; or iii) the creation, modification, or destruction of a legal relationship. d) Third party can give or receive the performance or return promise e) Legal Detriment: Consideration is generally conceived of as a legal detriment because a party must give something up – in the form of a performance or promise – in order to manifest consideration. Forbearance can be a detriment. The detriment must induce the promise. 3) Formal v. Substantive Function a) Formal functions i) Evidentiary: Provides proof that promise existed; that exchange existed, if disputed. ii) Cautionary/Deterrent (1) Encourages recognition of serious legal implications (2) Serves as a check against rash, impulsive behavior & forces people to enter Ks with caution. (3) Ensures that promises made as a joke will not be enforced to the promisor’s detriment. iii) Channeling: Provides framework for legally effective expression of intent. Lets people know ex ante that K will be enforceable. Using non-formal standard makes K-making process less certain unless you can predict the factors judges look at. b) Substantive Functions i) K v. Gratuitous Promises: Distinguishes between Ks and gratuitous promises. Kirksey v. Kirksey. ii) Nature of K: Used as policing tool by courts to screen out Ks with illegitimate true motives and enforce the promises judges want to enforce. In Re Greene. c) Formal v. Substantive: Trade-off between judicial discretion in interpreting and enforcing Ks (substantive) and individual freedom and discretion in choosing when to be legally obligated and to what extent (formal). 4) Policy a) Consideration serves to distinguish between enforceable promises and unenforceable promises. b) Consideration is not merely a matter of the parties’ intention to be bound; it is a reflection of which promises judges want to enforce. c) Consideration distinguishes Bargain v. Gift Promises: Gratuitous promises always lack consideration b/c they fail for lack of bargain. One reason courts don’t want to enforce gratuitous promises may be that relatively little measurable damages are suffered by a disappointed donee in a broken gift promise. Another reason is that they are usually intrafamilial, which is off-market 5) Old Rule/New Rule a) Benefit/Detriment i) Older formulation of consideration: consideration found when the promisee suffers by performing an act or forbearance of some legal right in order to satisfy conditions of the promise from which promisor enjoys a benefit. ii) Eventually rejected b/c it’s a subjective question iii) Courts cannot assess subjective value b) Bargained for exchange i) Modern formulation of consideration; consideration is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.
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Hamer v. Sidway Forbearance of legal right is consideration even if beneficial to the Court of Appeals of NY, 1891 forbearer benefit/detriment rule modified to legal benefit/legal detriment Facts: Uncle promised nephew () $5,000 if refrains from drinking, smoking, playing cards, etc. until he is 21. refrained, but executor of uncle’s estate () refuses to pay claiming that there was no detriment to and no benefit to uncle, and therefore no consideration. Issue: Did ’s forbearance constituted consideration? Holding: Yes because it was a legal detriment. Rule: Promisee must suffer a legal detriment induced by promisor. Nephew gave up a legal right to vices. He refrained from activity he was legally privileged to do. This is consideration. Policy: Courts will not ask whether consideration actually benefits the promisor; the mere fact that it was sought by the promisor is sufficient to constitute a legal benefit. St. Peter v. Pioneer Not a gift if bargained for...(bargained-for exchange theory) Also, SC of Iowa, 1940 adequacy to be determined by the parties Facts: (theatre) held a bank night. won contest w/o attending the theatre or paying for ticket. Issue: Whether consideration can exist when receives nothing in return? Holding: Yes because s compliance with ’s terms was bargained for by . Rule: (1) Offeror is master of bargain and defines what constitutes consideration and acceptance (R 2d § 30). (2) Consideration is doing that which is bargained for, regardless of its apparent objective value. performed an act (signing the register and showing up) that he was not legally obligated to perform, and this is all that required in its terms, constituting consideration. (3) Adequacy: Each party determines the adequacy of a K; it doesn’t matter how insignificant the benefit may appear to be to the promisor, or how slight the damage appears to be to the promisee, provided it be susceptible of legal estimation. Not a lotto though b/c no monetary value. Policy: (1) Unilateral K, which does not exist until one party begins performance. Courts want to enforce agreements in which the promisee follows the terms of offer. (2) Distinction from gift promise got indirect economic benefit from having people come, even if they didn’t all buy tickets. So benefit theory still can apply to distinguish K from gift promise. Gift promise not binding when conditions are not bargained for Kirksey v. Kirksey SC of Alabama, 1845 Facts: wrote (brother’s widow) inviting her to live on his land. She did. Lived there for 2 years. Then kicked her out. Issue: Did ’s move constitute consideration? Holding: No, it was a mere gift. Rule: Gratuitous promises are not enforceable. No consideration because there was no bargained-for exchange. Moving was merely a condition for receiving gift. Note: One indication that an act is a condition for a gift rather than bargained for is whether it benefits offeror. Here it did not. Policy: (1) Courts do not want to enforce gratuitous promises. One reason may be that relatively little measurable damages are suffered by a disappointed donee in a broken gift promise. (2) This is particularly true w/ intra-familial promises. Family transactions are usually off-market. But see Wolford v. Powers and Ricketts v. Scothorn. Alternative: Nowadays could argue promissory estoppel here. 6) Adequacy of Consideration a) R 2d § 79. Adequacy of Consideration; mutuality of obligation: If the requirement of consideration is met there is no additional requirement of: i) A gain, advantage, or benefit to promisor or loss, disadvantage, or detriment to promisee ii) Equivalence in values exchanged
iii)Mutuality of obligationif bilateral K, both parties are bound or neither is bound. If for any reason the promise of one party is not binding, it is no longer sufficient consideration for the promise of the other, and the contract is void for want of consideration (e.g. illegal promise)
b) If the happening of the condition will be not only of no benefit to the promisor, but is obviously merely for the purpose of enabling the promisee to receive a gift, the happening of the condition, although brought about by the promisee in reliance on the promise, will not be consideration
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c) Adequacy Doctrine i) Courts do not normally inquire into adequacy of consideration, esp. when hard to measure; a seemingly insignificant act or forbearance for a larger sum of money will be enforced as adequate consideration – merely giving a peppercorn can be consideration, if bargained for. ii) Gross inequality in an exchange may indicate to courts the existence of incapacity, fraud, duress, unconscionability, or mistake. iii) Courts should respect subjective value people place on bargained for goods (see Wolford v. Powers), except where goods are fungible (exchanging $1 for $100 – if no bargain, no subjective value). iv) Policythe parties are thought to be better able than others to evaluate the circumstances of particular transactions. d) Nominal Consideration Doctrine (R 2d § 79 comment d): Disparity in value, with or without other circumstances, can indicate that the purported consideration was not bargained for but was a mere formality or pretense and does not satisfy the requirement of § 71. (In Re Greene) Nominal consideration is not sufficient In Re Greene USDC, SDNY (1930) Facts: and married had affair. At end of relationship, they signed an agreement in which agreed to give money, pay her rent, life insurance, etc. In return, gave $1 and “other good and valuable consideration,” and promised to release from any legal claims. Issue: Whether $1 and release from claims constitutes consideration? Holding: Not here, because the $1 was nominal and the legal claims didn’t exist. Rule: (1) Nominal consideration is not sufficient. $1 was nominal sham consideration, not actually bargained for. (2) Words/Intent alone is not consideration. “other good and valuable consid.” invalid unless such consid. was actually given. Also, legal claims did not actually exist; thus illusory. Policy: Courts do not want people to abuse doctrine. Motivation here was really payment for past cohabitation, which cannot serve as consideration b/c against public policy. That is probably what was bargained for, not the sham consideration. Consideration is not just a formality (like a seal) but a substantive goal. If it was simply a formal rule, it would have been enforced here. Mere inadequacy of consideration does not void a K Batsakis v. Demotsis Civil Appeals, TX, 1949 Facts: Desperate in war-torn Greece agreed to pay $2000 plus interest in exchange for $25 (in drachmas) from Issue: Whether $25 from can constitute consideration for $2,000 from ? Holding: Yes, amount of money doesn’t matter, as long as it was bargained for Rule: Mere inadequacy of consideration will not void a K as long as it was bargained for. $25 in war-torn Greece may have been worth $2,000 in post-war U.S. – that is for parties to determine. Policy: (1) Courts do not want to subjectively evaluate adequacy. The parties are best able to evaluate the value of that which is bargained for. Even if a bad deal, what matters is that it was bargained for. (2) Courts don’t want to discourage legit Ks. Maybe lent $25 to many people, knowing only a few would pay later, and thus it was a fair deal helping desperate people. Alternative: Duress b/c of wartime situation. Disparity in value of consideration is not grounds for invalidating a contract Wolford v. Powers SC of Indiana, 1882 Facts: ’s decedent promised to pay $10k for ’s child’s welfare if named the child after him. named the child after him, but he had died and estate refused to pay. Issue: Whether naming a child after a person is adequate consideration for $10k? Holding: Yes, since it was bargained for and there was no fraud. Rule: An apparent disparity in value of consideration is not grounds for invalidating a promise. When party contracts for performance of an act which will give him pleasure, his estimate of value for that act should not be questioned by the court, otherwise court would be substituting its own judgment and in so doing make a new K. Policy: (1) Courts do not want to inquire into value of exchange. (2) Freedom of contract. Parties should be able to contract based on their own subjective determinations of value.
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Agreement
The Objective Theory of Assent 1) Purpose a) Manifestation of mutual assent is required for K b/c it provides an objective standard to determine whether a promisor intends to be bound. The objective standard is what meaning a reasonable person would ascribe to the words and actions of the parties. Highly contextual, based on external expressions such as words and conduct. 2) Rules a) If a party says and does things which would ordinarily be taken by a reasonable person to indicate an intent to enter a legally enforceable agreement, then the agreement will be enforceable (notwithstanding any secret or subjective intent not to be bound) unless the party also expressly and clearly disclaims any intent to be bound. b) R 2d § 2: Promise is a manifestation of intention to act/refrain from acting, so as to justify performance of a promisee in understanding that a commitment has been made. c) R 2d § 18: Manifestation of mutual assent to an exchange requires that each party either make a promise or begin to render a performance. d) Reasonable Man Standard: The test for intent, borrowed from torts, is what a reasonable man in the position of the other party would conclude what the meaning was of the other party’s objective. (This is a reflective position where you have to put yourself in the shoes of the other party.) This standard does not give too much credence for the ignorant or incompetent unless they are truly in that state; although the standard does not protect a reasonable person from an incompetent in bargaining. e) R 2d § 20. Effect of misunderstanding: i) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and (1) neither party knows or has reason to know the meaning attached by the other; or (2) each party knows or has reason to know the meaning attached by the other. ii) The manifestations of the parties are operative in accordance with the meanings attached to them by one of the parties if (1) 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 (2) that party has no reason to know of any different meaning attached by the other, and the other has no reason to know the meaning attached by the first party 3) Subjective v. Objective: subjective and objective are used together, even though objective is dominant. a) Subjective View (Meeting of the minds; no longer the standard) (1) Evaluate what was intended. If each side intended to assent, it should be enforced. ii) Parties had a meeting of the minds iii) Only true intent of parties should be considered when deciding K enforcement iv) Outward manifestations do not matter b) Objective View (the enforced standard) (1) Evaluate what a reasonable person would think the parties intended in the agreement. ii) Terms and existence of a K should be determined by external expressions, words and conduct. iii) The expression is what is controlling. This places the liability on the party with the comparative advantage to prevent misinterpretation, so promisor is sure that their actions do not look like agreement if that is not their intent. 4) Policy a) Objective theory creates incentive for people not to invoke conventions of agreement that manifest an intent to be bound if they do not wish to enter into a contract – creates a strong incentive for people to be careful. b) Objective theory provides an easier standard to determine the existence of a contract, as it may be difficult to determine subjective intent. Creates certainty ex ante.
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c) Objective theory may hurt contractual intent because it does not determine enforcement based on what the parties actually intended. Thus may impede freedom of K because idiosyncratic bargainers may express intent differently. d) Subjective theory does not protect the party who intended to enter the agreement and who justifiably believed there was an agreement based on the other party’s actions. e) Subjective theory gives greater risk of fraud because people will try to get out of contracts by claiming they had no intent to enter into them. 5) Theories of Contract Law a) Autonomy Theory: Legal enforcement of K promotes individual freedom by giving people the power to bind themselves with others. Individuals have right to direct their own lives and not be interfered with. Right to rely on promises of others to plan your own life. Ks must be voluntary and informed (implicates duress, fraud, unconscionability, mistake). When an offer is accepted, a K comes into existence; contract is binding because parties intend to be bound; individual is morally bound to keep his promise b/c he invoked conventions whose function it is to give grounds for another to expect the promised performance. b) Reliance Theory: A communicated promise often induces the promisee to change course of future behavior (reliance). When promise is broken, reliance represents a harm to the promisee caused by the promise and its breach. c) Instrumental Theory: Places the liability on the party with the comparative advantage in preventing or minimizing the likelihood of misunderstanding. Parties enter into Ks b/c each believes the K makes him better off. Promise making benefits parties and society as a whole.
d) Economic Theory: Ks allow for efficient reliance for economic/business value to society.
Objective theory of assent – outward manifestations of intent are what matter, Lucy v. Zehmer SC of Appeals, VA, 1954 not hidden, inner intent of the parties Facts: promised to sell his farm to while at bar. claims his promise/offer was a joke. But had signed a note saying “We hereby agree to sell to [ the farm] for $50,000,” and his wife had signed it too. Although drinking, neither side was intoxicated. then refused to deliver farm. Issue: Is K enforceable even when one party does not mentally intend to be bound? Holding: Yes, as long as the outward manifestation is of assent. Rule: Outward manifestation of intent determines whether a K is made. If the words or acts of a party has only one reasonable meaning, his undisclosed intention is immaterial unless the unreasonable meaning which he attaches to his manifestations is known to the other party. Here, was reasonable to believe he had a real K after 40 minute negotiation, 2 drafts, written, signed K. Policy: (1) Objective theory of assent. Provides more certainty that the parties are bound (2) Protects the other party who did intend to enter K. That party believed it had a contract based on outward appearances, and cannot know what the other party is thinking. Objective theory – offer not binding if obviously a joke Leonard v. Pepsico USDC, SDNY, 1997 Facts: commercial indicated that a Harrier jet could be purchased for 7,000,000 Pepsi points along with other, more mundane merchandise. As Pepsi points could be purchased for 10 cents each, put the money together to give to , who refused delivery, saying it was a joke. The commercial made reference to a catalogue, and the Harrier jet was not in the catalogue. Issue: Is an offer made in jest binding? Holding: No, as long as a reasonable person would think it to be in jest. Rule: In evaluating an offer, the objective standard of a reasonable person should be used. An offer is not legally binding where it is obviously a joke. ’s offer was clearly a joke and a reasonable person would think so. Further, the offer could be construed as the commercial combined with the referred-to catalogue, and the jet was not in the catalogue. Policy: (1) Courts do not want to overly restrict advertising. Societal benefit exists for humorous advertisements and puffery, and when an ad is clearly a joke, it shouldn’t be held as an offer
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I.
Assent Through an Agent
A.
Overview 1. Contracts are often entered into by an agent acting on behalf of a principal. 2. Contract disputes involving agency often involve issue of whether agent had authority to assent to the K. Principal argues that she is not bound b/c her agent exceeded authority in assenting to K. Restatement 1. Agency is a contractual fiduciary relationship, authorizing the agent to act on behalf of the principle (manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act). 2. The one for whom action is to be taken is the principal. 3. The one who is to act is the agent. 4. Comment B: agency results if, but only if, there is an understanding between the parties which creates a fiduciary relation in which the fiduciary is subject to the directions of the one on whose account he acts. The element of continuous subjection to the will of the principal distinguishes the agent from other fiduciaries and the agency agreement from other agreements. Types of agency If no authority at all, you can still sue the agent. These questions are about suing the principal.
B.
C.
1.
Actual Authority a. Exists if P’s words or conduct would lead a reasonable person in A’s position to believe that P had authorized him to act. b. Example: CEO reaches a working agreement of a merger and leaves the room, telling the lawyers to fill in the details and close the transaction. The lawyers may have actual authority, depending on what a reasonable person in their position would think. c. Can be express; usually, though, it is implied from the words used, from customs, and from the relations of the parties. Apparent Authority a. Exists if the words or conduct of P would cause a reasonable person in T’s position to believe that P had authorized A to act on his behalf in relation to T. b. Example 1: P writes A directing him to act as his agent and sell Blackacre. P sends copy of this letter to T, a prospective buyer. A has actual and apparent authority. c. Example 2: Same as example 1, but in the letter to A, P adds a postscript, not included in the letter to T, telling A to make no sale until after communication with . A only has apparent authority. d. Apparent and actual authority usually coincide. When they don’t it is b/c A has not been given the typical degree of authority that an agent in his position has, and T deals with A only knowing A’s position and not knowing the limitations placed on that authority. e. Power of positionimportant, recurring type of apparent authority where apparent authority can be created by appointing a person to a position which carries with it generally recognized duties. A has apparent authority towards T if T knows of the appointment. Inherent Authority (General Authority) a. Exists when P puts A in a particular type of well known agency position, such as CEO, thus carrying with it authorization to do certain things which would normally accompany such a position. b. Not based on any particular communication between P and T, but rather based on a more general reasonable community understanding of the scope of authority of a position. Reasonableness standard ratchets up – reasonable person cannot be dumber than the actual actor in that position. c. Not recognized by all jurisdictions, but is by the Restatement and some jurisdictions.
2.
3.
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d. Example: a partner’s act that is for apparently carrying on in the usual way the business of the e. f. g. h. i.
partnership is presumptively binding on the partnership, even if no actual authority. Reasoning: commercial convenience requires that P should not escape liability where there have been deviations from the usually granted authority by persons who are essential parts of his business. Also gives P incentive to monitor agents. Ways of monitoring include contract design and ex ante screening. General agentan agent authorized to conduct a series of transactions involving a continuity of service without receiving instructions from P for each and every transaction. Makes modern corporations possible; most important type. Undisclosed PrincipleA, in dealing with T, purports to be acting on his own behalf, but he is really working for P. P is liable even for acts he has forbidden A to perform. Almost SL. ReasoningUndisclosed P is liable b/c it would be unfair for a business to get the benefit of the work of its agents without making it responsible to some extent for their excesses and failure to act carefully. Notetypically lawyers do not have authority to accept/ratify a deal. Lawyers advise and negotiate, but P usually must accept. Sales agents generally viewed as not having much authority.
D.
Ratification 1. Even if A has no particular authority, P will be bound to T if A purported to act on P’s behalf and P, with knowledge of the material facts, either: a. Affirmed A’s conduct by manifesting an intention to treat A’s conduct as authorized (express ratification); or b. Engaged in conduct that was justifiable only if he had such an intention (implied ratification). 2. Example: P knowingly receives benefit to which she would be entitled only by virtue of the purported A’s transaction, e.g. if A is authorized to sell only for cash, but A takes a check and P then takes and cashes that check. 3. Ratification need not be actually communicated to T, but must be objectively manifested and must occur before T has withdrawn, the agreement has been otherwise terminated, or the situation has so materially changed that it would be inequitable to hold T. Policy (why an objective theory) 1. If subjective, P would be able to negate authority if things didn’t work out the way he wanted 2. T would always have to contact P directly and make sure that A had authority, which would undermine the whole point of having agents in the first place.
E.
F.
Electronic Agents 1. UCITA § 102(27)a computer program or electronic or other automated means used to independently initiate an action, or to respond to electronic messages, on the person’s behalf, without review or action by an individual. 2. UCITA § 202a K may be made in any manner sufficient to show agreement, including by offer and acceptance, conduct of both parties, or the operations of an electronic agent which recognizes the existence of a K. 3. UCITA § 206a K may be formed by electronic agents. If the interaction results in the electronic agents’ engaging in operations that under the circumstances indicate acceptance of an offer, a K is formed, but a court may grant appropriate relief if the operations resulted from fraud, electronic mistake, or the like. 4. UCITA § 112(b)a term is assented to by electronic agent if after having an opportunity to review the term, the electronic agent authenticates it or engages in operations that in the circumstances so indicate. 5. UCITA § 112 Comment cfor electronic agents, assent cannot be based on knowledge or reason to know. Assent occurs if the agent’s operations were an authentication or so indicate. For an electronic agent, manifesting assent occurs only if the term was presented in such a way that a reasonably configured electronic agent could react to it.
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II.
Offer and Acceptance General Rule: There is no legally binding agreement until an offer is made and then accepted.
A.
Offer
1.
Definition R 2d § 24the 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 Characteristics a. An offer is almost always a promise, conditioned explicitly or by implication upon a specified return. b. An act by one party whereby he gives to another the power to enter into a K through acceptance. When one party makes an offer, he creates in the other party the power of acceptance, which would create a K if accepted (assuming consideration). c. Something is seen to be an offer if a reasonable person in the position of the offeree would understand that payment was expected of the services (that were not gratuitous). d. An offer is a specific kind of promise that is distinct from an expression of opinion, a statement of intention about future actions, and an invitation to negotiate; at some point in the bargaining process, an invitation to negotiate matures into an offer. Elements a. Intent to enter into a bargain i. Offer v. Invitation to dealan offer to make an offer (i.e. solicitation) is not an offer; nor is an offer to enter into preliminary negotiations. (A) Ex: A form letter will generally be seen as an invitation to deal rather than an offer; Advertisements are generally not offers, but rather invitations to offer (B) Ex: “Offer” that reserves for the offeror the final authority to close is not an offer On the other hand . . . Definite signIf the statement gives a definite sign that they are willing to do something, it will be construed as an offer. Certainty & Definiteness of terms to allow offeree to know what is being agreed to i. Essential termsIf essential terms (e.g. price, quantity, subject matter, dates) are present, the court will use these to determine if intent to offer was present. Otherwise, most likely is a negotiation.
ii.
2.
3.
b.
4.
Advertisements/Solicitations a. Solicitation i. Definition (R 2d §26)a manifestation of a 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 a further manifestation of assent. ii. Difference from offer (A) With offer, offeree is justified in believing his assent will conclude the K. (B) With solicitation, offeree knows or has reason to know that the offeror doesn’t intend assent by the offeree to conclude the K. b. Generally not offers Advertisements and solicitations are generally not offers, but rather invitations to make an offer. Newspaper ads are generally considered to be solicitations. c. Exceptions If the ad contains words expressing the advertiser’s commitment or promise to sell a particular number of units or sell them in a particular manner (e.g. first come first served), there may be an offer.
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d. Public Policy
i.
ii.
EfficiencyPublic policy does not like vague ads that waste customers’ time and don’t facilitate business, and if only clear Ks are enforced, customers will be able to rely on specific ads (but companies will only run vague ads). Market valueSolicitation that isn’t binding is good b/c if product is unique, like land, prospective buyers might be the only source of reliable market data, so seller would want to solicit offers to collect market information before setting price.
5.
Considerations a. Language Specificity and completeness matters when determining whether something, like an ad, is an offer. Must be clear, definite, explicit, and leaves nothing open for negotiation to be an offer. b. Context Whether a price is an offer depends on whether negotiation is expected. i. In mass commercial environment, prices could be seen as offers if no negotiation is expected (e.g. a price-tagged shirt at a store might be an offer). ii. In a smaller-scale environment, price negotiation might be expected, so a price may be considered an invitation to either offer or counteroffer (negotiate). (e.g. w/ car dealers, negotiation is expected, so price not an offer [but usually modified by statute to forbid bait-and-switch]. But Saturn dealers say they don’t negotiate, so maybe offer there) iii. If offer made to many parties, and it is known by all, it is likely not an offer but rather an invitation to offer, b/c the product could sell out. (e.g. an ad in classifieds offering item for sale; potential buyers know someone else might buy it before they can) Revocation of Offers a. Once offer has been made, it generally remains open for a reasonable time so the offeree has an opportunity to respond. But offeror may revoke the offer (manifest intent not to enter into a K) w/o incurring liability, provided the offeree has not already manifested acceptance. i. Exception: Where offeror specifies that the offer will remain open for a certain period of time (option Ks). b. Unilateral Ks i. Under early common law, unilateral offer was not considered accepted until full completion of performance. Thus offer could be revoked in the middle of performance. ii. More recent common law provides that once offeree has begun requested performance, offer may not be withdrawn until offeree has had reasonable opportunity to complete performance (option K gives option to complete performance). iii. Part performance makes the offer irrevocable subject to completion of the invited performance in accordance w/ offer’s terms. c. Bilateral Ks i. Under common law, if you leave an option to accept open, you can revoke offer if not paid for keeping the offer open, b/c no consideration. ii. Now, it cannot be revoked b/c in modern situations, binding option promises are necessary. iii. R 2d § 87Option K An offer is binding as an option K if it (A) is in writing, signed by offeror, recites a purported consideration, and proposes exchange on fair terms w/n reasonable time; or (B) is made irrevocable by statute. Offer that offeror should reasonably expect to induce substantial reliance by offeree before acceptance, and which does, is binding as an option K to avoid injustice. iv. UCC § 2-205Firm Offers: between merchants, option promises to sell/buy goods in signed writing are irrevocable for specified time, or if not specified, a reasonable time, not to exceed 3 months. Consideration is not necessary. d. Revocation governed by receipt rule of mailbox rule – revocation of an offer not effective until offeree receives communication.
6.
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7.
Irrevocable Offers a. Option KsR 2 d § 87 (above) b. Firm offersUCC § 2-205 (above) c. Drennan, Pavelpromissory estoppel (w/ construction bids) d. Theories based on traditional K theory i. James Bairdno irrevocable offers ii. Conditional bilateral K analysisif exchange of promises made before bid opening, that is a valid bilateral promise conditional upon the general getting the job iii. Unilateral K analysisif subcontractor intended its sub-bid as an offer to a unilateral K, use of the sub-bid by the general constitutes part performance, rendering the initial offer irrevocable iv. Unrevoked offer analysissince jury might disbelieve that a subcontractor withdrew, meaning acceptance came before withdrawal, a traditional bilateral K formed. e. Policy i. This issue arises b/c general contractors cannot formally accept the subcontractors offer until they themselves get the job; otherwise they’d be paying for subcontracting work that they don’t need were they not to get the general job. ii. The problem also arises b/c of mistakes by the sub-contractor in making its bid. Who should bear that cost? Under Drennan, the subcontractor – perhaps b/c they are the ones who made the mistake and thus are better able to take precautions to reduce the likelihood of such mistakes. But under Baird, the general contractor – perhaps b/c they are the ones who see everyone’s sub-bids, and thus can compare them all and are in the best position to notice an unusually low bid and check for mistake. iii. Extra-legal sanctionssubcontractors usually do not revoke except for the most egregious mistakes b/c they don’t want a loss of goodwill leading to refusal to award bids in the future. Cases
8.
Offer v. Solicitation; Price quotations are not offers, but Dyno Construction Co. v. rather solicitation of offer (unless they show intent to be an McWane, Inc. US Court of Appeals, 6th, offer) 1999 Facts: submitted bid to city for water/sewer project. was low-bidder among subcontractors, and faxed a quantity/price list with “estimate” printed above, and then a second fax with handwritten prices and cover sheet that said “please call.” called , told him to order the materials ( claims deal done at this point). sent fed-ex with purchase order that had legal terms limiting liability on the back. lost the fed-ex. faxed new forms, but the reverse side w/ clause never faxed. signed and returned. had prob w/ materials and wants damages, which clause would have waived. Issue: Whether the written price quotes from constituted an offer (that accepted by phone)? Holding: No, they were merely preliminary negotiations. Rule: (1) Price quotations do not generally constitute offers of sale, but rather invitations to engage in future negotiations. (2) To constitute an offer, a price quotation must show the express or implied intent of the offeror that its acceptance will make binding K. Here, it was not an offer because “estimate” was on the first quote and “please call” on the second, indicating further negotiations. Also, many terms weren’t specified, like time/place of performance or payment terms. Policy: Chilling EffectPrice quotations are useful in soliciting business. If they were regarded as formal offers, there would be a chilling effect and businesses would cease using them. Courts want parties to be able to freely negotiate. Lefkowitz v. Great Minneapolis Surplus SC of Minnesota, 1957 Offer v. Solicitation; Advertisement that is sufficiently specific can constitute an offer
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Facts: placed 2 newspaper ads in successive weeks, both stating “first come first served.” 1st ad was for 3 fur coats “worth to $100.00” for $1 ea., and 2nd ad was for 1 stole worth $139.50 for $1. arrived both weeks, but was turned away each time, the 1st when he was informed that a “house rule” limited the offer to women, and the 2nd b/c he knew the rule at that point. Ad didn’t mention it. Issue: (1) Whether ’s ads were offers; and if so (2) did have the right to modify the offer with the “house rule” Holding: (1) The 1st ad was not an offer b/c not definite w/ price, but 2nd ad was an offer. (2) can modify the offer with “house rule,” but must be modified before acceptance, not after. Rule: (1) Generally, newspaper ads are not offers, but where an ad offers sale of a certain article of definite value at a quoted price, which offer is clear, definite, and explicit and leaves nothing open for negotiation, it is an offer that would form a K if accepted. Here, the 1st ad was not an offer b/c gave no definite value. 2nd ad was an offer b/c met the above criteria. (2) While an advertiser has the right at any time before acceptance to modify his offer, he does not have the right, after acceptance, to impose new or arbitrary conditions not contained in the published offer. Here, the “house rule” was not made known until accepted the offer, at which point it could no longer be modified. Policy: (1) Incentive for careful ads. Court generally want to allow businesses the freedom to advertise to solicit business w/o being bound to Ks. But certain ads, those which are clear, definite, and leave nothing open for negotiation, will be enforced to provide incentive for advertisers to be careful, and validate consumer expectations. (2) Discourages inefficient offers. If one party leaves out something intentionally to induce inefficient reliance by other party, punitive enforcement encourages efficiency by discouraging inefficient offers. Squib: Barker v. Allied Supermarket: Dr. Pepper bottle exploded as put it into shopping cart. Court found there to be an implied warranty on the bottle, and the warranty period didn’t commence merely on payment. Instead, a merchant who invites the public to enter in and serve themselves makes an offer to the shopper to enter a contract to shop. Serving themselves is acceptance of that K. Note: Leonard v. PepsicoJohnston agreed w/ result, but said it should have been decided because ad wasn’t the complete offer. The offer was the combination of the ad and the catalog referred to in the ad, which didn’t contain the harrier jet. Subcontracting bids are revocable at any time before James Baird v. Gimbel formal acceptance of the offer Bros. Fed. Court of Appeals, 1933 Facts: sent sub-contracting bid to to supply linoleum. then realized his bid was incorrect and notified of its withdrawal. was awarded contracting job, and then formally accepted ’s bid. Issue: Whether ’s bid was binding once accepted it? Holding: No, b/c it was withdrawn before acceptance Rule: Subcontracting bids are revocable at any time before formal acceptance of the offer by general contractor. Here, withdrew its bid before accepted. Policy: Decision made on traditional K theory, but widely criticized as unfair b/c relied on ’s sub-contracting bid while making its contracting bid. Cost-minimizingone could say that the Drennan rule minimizes cost by placing the risk of mistaken bid on the party causing the mistake, where as Baird places it on the general contractor who made no mistake. But, general contractor is in the best position to compare bids to those entered by others and check on unusually low proposals – thus they might be in the best position to notice an error.
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Subcontracting bids are irrevocable Drennan v. Star Paving SC of California, 1958 Facts: sent sub-contracting bid to . then realized his bid was incorrect and withdrew offer. was awarded contracting job, and then formally accepted ’s bid. Issue: Whether ’s bid was binding once accepted it? Holding: Yes, b/c there was an implied subsidiary promise by not to revoke its bid Rule: Subcontracting bids are irrevocable due to implied promise not to revoke. Promissory estoppel serves as consideration for the implied promise not to revoke. submitted its bid to obtain the subcontract, and knew that could win its contracting bid. had reason not only to expect ’s reliance, but to want him to rely. Fairness dictates that should have the chance to accept ’s bid if is award the general contract. An implied promise by not to revoke exists. Policy: (1) Fairness should have chance to accept. (2) Chilling effectit is beneficial that general contractors rely on the bids of sub-contractors to obtain jobs. Allowing revocation would harm this. (3) Cost-minimizingPlaces risk of mistaken bid upon the subcontractor who would be bound, thus giving them an incentive to minimize the potential cost by ensuring their bids are correct Criticism of this is that the subcontractors are bound to the general, but not vice versa Note: R 2d § 87 was response to/based on this case. Detrimental reliance can make an offer irrevocable, but Pavel v. Johnson Court of Appeals of MD, here recovable because Π engaged in bid-shopping and 1996 bid-chopping Facts: submitted bid for NIH project and used ’s subcontracting bid as quote to base its price on. initially was the 2nd-lowest bid, but the winning bid was cancelled, and got it. discussed work with , but sent fax to all potential subcontractors, including , to ask for new bids based on revised calculations. informed NIH that they chose , and faxed a letter to formally accepting ’s bid. Upon receiving the fax, told that the bid was in error, and the only reason they didn’t notify was b/c they thought lost the bidding. withdrew its bid from ; refused. A month later, NIH officially awarded the bid. Issue: Whether ’s bid was binding under traditional K theory or promissory estoppel? Holding: No, b/c no acceptance. Rule: (1) Detrimental reliance can make an offer irrevocable. Here, didn’t rely on ’s sub-contracting bid b/c asked for new bids, thus no definite price. (2) Time lapse can vitiate claim of PE. Here, the time lapse b/n the bid opening and award of K was so great that ’s reasonable expectation of ’s reliance dissipated in the meantime. (3) Until a contractor is officially awarded a bid, the subcontracting bids can be revoked. ’s subbid was an offer for a K contingent of ’s winning its bid. wasn’t officially awarded its bid until after withdrew its offer. Policy: Reliance is necessary or there is no reason to force the subcontractor to keep his bid open indefinitely; Contractor could shop around for better bids, while the subcontractor is still on the hook
B.
Acceptance 1. Definition/Rules
a. b.
A voluntary act of the offeree whereby he exercises the power conferred on him by the offer, and thereby creates K (Corbin). Acceptance (R 2d § 50) i. Acceptance of an offer is a manifestation of assent to the terms of the offer, by the offeree, in the manner invited or required by the offer;
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c.
d. e. 2.
Acceptance by performance (Unilateral K) requires that at least part of what the offer requests be performed or tendered and includes the acceptance by a performance which operates as a return promise; (A) Under early common law, unilateral offer was not considered accepted until full completion of performance. Thus offer could be revoked in the middle of performance. (B) More recent common law provides that once offeree has begun requested performance, offer may not be withdrawn until offeree has had reasonable opportunity to complete performance (option to complete performance). (C) Part performance makes the offer irrevocable subject to completion of the invited performance in accordance w/ offer’s terms. iii. Acceptance by a promise (Bilateral K) requires that the offeree complete every act essential to the making of a promise. Termination of Acceptance (R 2d § 36)Offeree’s power of acceptance is terminated by: i. Rejection (§ 38) or counteroffer (§ 39) by the offeree ii. Lapse of time (§ 41)terminates at the end of the time specified in the offer, or if no specified time, at the end of a reasonable time, which is a question of fact depending on all circumstances existing when the offer and attempted acceptance are made. iii. Revocation by the offeror (§ 42) (A) Direct (R 2d § 42)when offeree receives from the offeror a manifestation of an intention not to enter into the proposed K. (B) Indirect (R 2d § 43)Offeree’s power of acceptance is also terminated when offeror takes definite action inconsistent with an intention to enter into the proposed K and the offeree acquires reliable information to that effect. iv. Death or incapacity of either party Also terminated by nonoccurrence of any condition of acceptance under terms of the offer. Acceptance in Preliminary Negotiationssame as solicitation, see § 26 above. Policy: These rules reflect the objective theory of assent – how would a reasonable person interpret what the offeree did?
ii.
Methods of Acceptance a. Form of Acceptance Invited (R 2d § 30) i. An offer may invite or require acceptance to be made by promise or performance ii. Unless otherwise indicated, an offer invites acceptance in any manner/by any medium reasonable in the circumstances (Look at the terms of the offer and if not explicit, do whatever is reasonable. b. Vague Invitation of Acceptance (R 2d § 32)If doubt exists as to how the acceptance should take place based on the offer, offeree can accept by either promise or performance (offeree chooses) c. Form of Acceptance Specified by Offer (R 2d § 60)If offer specifies place, time, or manner of acceptance, offeree must comply to effectively accept. If the offer merely suggests one of these, another method of acceptance can be made. d. Notice of Acceptance i. By Performance/Unilateral K (R 2d § 54)Notice of acceptance by performance is not generally required unless requested in the offer, but if the offeree accepting by performance has reason to know that offeror would not be aware of his performance/acceptance with reasonable promptness and certainty, no K unless: (A) Offeree exercises due diligence to notify offeror; (B) Offeror learns of the performance within a reasonable time; or (C) Offer indicates that notification of acceptance is not required. ii. By Promise/Bilateral K (R 2d § 56)Offeree must exercise reasonable diligence to notify offeror of acceptance except where acceptance is by silence or offer says otherwise. e. Acceptance by Silence or Dominion (R 2d § 69) Silence and inaction operate as acceptance only where: i. Offeree takes the benefit of offered services (e.g. negative option offers) with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation (having to send product back to marketer in order to avoid having to pay for it is not reasonable opportunity to reject).
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f. g. h.
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. iii. Because of prior dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept (when party knows that the first is so relying, and by a word could prevent mistake, he is held to acceptance for failure to speak). Exception to acceptance: Unjust enrichment – A can get restitution if he has conferred a benefit on B with the expectation that he would be paid for it, B knew or had reason to know of A’s expectation, and B would be unjustly enriched if allowed to retain benefit. R 2d § 41Unless otherwise indicated in K or circumstances, an offer sent by mail is seasonably accepted if an acceptance is mailed before midnight on the day the offer is received. Mailbox Rule (Common law)acceptance of an offer by mail takes effect as soon as the acceptance is mailed, regardless of whether it ever reaches the offeror. Revocation of offer takes effect when it is received.
ii.
When received Acceptance When mailed R 2d § 66Letters must be properly addressed and other precautions taken as normally observed. Reasoningan offeror who makes an offer by mail makes the post office his agent to receive the acceptance; also the offeree, sending the acceptance, loses control of the letter when deposited with postal service. However, this latter justification has eroded b/c today sender has more control over mail than before; can ask for letter back before delivery. iii. Emails are effective as acceptance upon receipt. iv. If offeror does not want the mailbox rule, he can specifically contract out of it by saying acceptance is upon receipt; merely a default rule. v. Revocation of Acceptancetakes effect on dispatch. A purported revocation of acceptance may still affect the rights of the parties by amounting to an offer to rescind the K or may be a repudiation or bar offeree by estoppel from enforcing it. vi. Minority viewacceptance is when the letter is received R 2d § 63Unless offer provides otherwise, acceptance made in manner and by medium invited by offer is effective when sent, without regard to whether it ever reaches the offeror. UCC § 2-206Unless otherwise indicated by language or circumstances, offer to buy goods is construed as inviting acceptance in any manner/by any medium reasonable. Order to buy goods for prompt shipment invites acceptance by either prompt promise to ship or by prompt performance of shipping (unless the seller notifies the buyer that it is just an accommodation) Where performance is reasonable mode to accept, an offeror who is not notified w/n a reasonable time may treat the offer as having lapsed before acceptance. AccommodationsAn arrangement or engagement made as a favor to another, with no consideration.
i. ii.
Revocation
i. j.
k. 3.
Counteroffers a. R 2d § 39 i. A counteroffer 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. ii. An offeree’s power of acceptance is terminated by his making of a counter-offer unless otherwise specified. b. Mirror Image Rule i. Common law rule that the terms in an acceptance must match the terms in the offer exactly or the offer is rejected and the “acceptance” becomes a counteroffer. ii. Strict rule, but provides certainty to bargaining parties. iii. Not followed in strictest form today, but underlying principles survive. c. Last Shot Doctrine i. Corollary of Mirror Image Rule
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d.
If performance of K terms occurred in absence of an exact agreement on all terms of the K (i.e., where one or both parties performed even though the mirror image rule had not been satisfied), both parties are bound to the terms of the last offer/counteroffer given by one party to the other before commencement of performance. Policy i. In situations where the value of a product depreciates quickly (e.g. computer equipment in Dataserv), advantage to holding that counteroffer is rejection. A rule that requires offerors to treat counteroffer as a step in continuing negotiation process rather than as rejection permits the offeree to play the market and await price adjustments. ii. In rapidly changing market, rule that makes counteroffer a rejection of the offer makes it costly/risky to make a counteroffer iii. Don’t want a hyper-technical rule like the Mirror Image Rule b/c if any tiny difference can invalidate acceptance, it encourages manipulative/strategic behavior.
ii.
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C.
UCC § 2-207 1. Original a. Background i. Intended to deal w/ 2 situations: (A) Written ConfirmationAgreement reached orally but later the parties sent formal memoranda w/ terms, and adding terms not discussed. (B) Offer and AcceptanceWritten acceptance adds further minor suggestions or proposals, or in which exchange of forms conflicting in terms takes place. ii. Designed to end the Last Shot Doctrine to better match commercial reality, but ended up being applied to a situation the drafters didn’t anticipate – Battle of the Forms. iii. Roto-Lith, which Ionics overrules, was widely criticized for bringing back the last-shot doctrine. iv. The question in § 2-207 cases is what are the terms, not whether there is a K. v. Possible arguments by person who form was sent to: (A) Didn’t read it (B) Read it but didn’t understand it (C) Understood it but no authority to agree to it. b. Statute Text i. (1) A definite & seasonable expression of acceptance or a written confirmation sent w/n a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. ii. (2) The additional terms are to be construed as proposals for addition to the K. Between merchants such terms become part of the K unless: (A) the offer expressly limits acceptance to the terms of the offer; (B) they materially alter it; or (C) notification of objection to them has already been given or is given w/n a reasonable time after notice is received. Note: It says “additional” terms, and leaves out “different” terms in this section. It may be drafting error, or could be intentional. If intention, 3 choices for “different” terms: (1) Knock out the different term in the acceptance, leaving only the one in offer. (2) Knock-Out Ruleknock out both conflicting terms, using UCC as gap-filler, even though this is not a § 2-207(3) case (3) Best Shot Ruledecide based on fairness. iii. (3) Conduct by both parties which recognizes the existence of a K is sufficient to establish a K for sale although the writings of the parties don’t otherwise establish a K. In such cases the terms of the K are those on which the writings of the parties agree, with any supplementary terms incorporated under any other provisions of this Act. iv. Comment 6 (A) If no answer is received w/n a reasonable time after additional terms are proposed, it is both fair and commercially sound to assume that their inclusion has been assented to. (B) Where clauses on confirming forms sent by both parties conflict, each party must be assumed to object to the clause of the other (satisfying the “notification of objection” part of §2207(2)), and the conflicting terms don’t become part of the K. § 2-207(3) applies, assuming the parties performed the K.
c.
Road Map i. First look to § 2-207(1). Two possibilities: (A) Clause 1Acceptance is not conditional on assent to new terms – look to § 2-207(2). (B) Clause 2Acceptance is conditional on assent to new terms. Becomes a counteroffer. Two possibilities: (1) Terms are accepted. They are controlling. (2) Terms are not accepted. But can still be a K – look to § 2-207(3), with gap-fillers provided by Article 2 of the UCC.
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§ 2-207(2)additional terms treated as proposals to be added to K, and become part of K unless barred by express provision in original offer, they materially alter K, or offeror objects. If any of these are the case, look to § 2-207(3). iii. § 2-207(3)If no K under (1) or (2), conduct of parties determines K and any conflicting additional terms are dropped. K only based on terms on which they agreed. iv. 3 tests for conditional acceptance (from Step-Saver): (A) Used in Step-SaverOfferee has to demonstrate an unwillingness to proceed w/ transaction unless additional/different terms are added in. (B) Offeree’s response states a term materially altering the K’s obligations solely to the disadvantage of offeror. This test conflicts w/ express provisions of § 2-207(2)(b), so not used in Step-Saver. (C) Certain key words or phrases can make an acceptance conditional, such as saying “these are the only terms on which we will deal.” Not used in Step-Saver.
ii.
2.
Proposed Update a. Background i. Now deals w/ terms for all Ks, not just Battle of the Forms deals ii. No longer purports to determine whether a K has been formed – that is left to new proposed amendment to §§ 2-204 and 2-206. iii. Focuses only on the content of the K forming by either conduct, offer and acceptance, or contract plus confirmation. iv. Allows the court to determine whether a party agrees to the other party’s terms – greater discretion. v. Gives no preference to the first or last form, applying the same test to each. vi. Fully changed bright-line rule of common-law mirror image rule to a broad standard. Old § 2-207 was an intermediate step. b. Text i. If (i) conduct by both parties recognizes the existence of a K, although their records do not otherwise establish a K, (ii) a K is formed by offer and acceptance, or (iii) a K is formed in any manner confirmed by the record which has terms additional to/different from those in the K being confirmed, the terms of the K, subject to § 2-202, are: (A) terms that appear in the records of both parties, (B) terms, whether in a record or not, to which both parties agree, and (C) terms supplied or incorporated under any provision of this Act Cases
3.
Ever-Tite Roofing v. Green Commencement of performance is acceptance; offer Court of Appeals of LA, 1955 becomes irrevocable upon acceptance Facts: hired to re-roof their house, signing document detailing work to be done & price. Doc. given by to , yet made it an offer by by reserving acceptance to themselves, with clause saying agreement would become binding only upon ’s signing or performance. obtained credit report and approval from lending agency, standard practice, and a week later loaded up the truck and went to ’s house, but found had other company working on the roof and turned away. Issue: Whether revoked the offer before ’s acceptance by performance? Holding: No, revoked when arrived, after had already accepted by loading up the truck. Rule: (1) Power to create a K lapses after specified time or if none specified, a reasonable time. Reasonable depends on nature of K, usage of trade, and other circumstances known (or could have been known) by offeree Here, the credit check and lender approval is standard due diligence. No unreasonable delay. (2) Offer cannot be revoked after commencement of performance. ’s loading of his truck was commencement of performance, thus K was accepted when got to ’s house, before tried to revoke.
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Policy: (1) Bright line/certaintyCourts want to set bright line when K is made – if revocation allowed after acceptance, no certainty. (2) Efficiencyavoids waste b/c loading of trucks or whatever the performance was would be wasted if could revoke after performance begun. Also, avoids waste of time (if had to notify that their trucks were on the way rather than just arriving). Notes: (1) Johnston pointed out that usually the offeror proposes the terms; here the terms are set up in such a way by that they created the terms and also are the offeree. They dictated the terms of their own acceptance. (2) Objective theory of assent being used in contradictory way from the way it is usually used b/c performance and preparation to perform, two separate things, are conflated. Squib: Corinthian Pharmaceutical v. Lederle Labs: supplied vaccines to , but prices went up. ordered from old price list, and sent 50 vials at old price the day before the new prices went into effect, but remainder at new price. sued for breach; court ruled the price list was an invitation to offer, and sending the 50 vials at old price was an “accommodation” and counter-offer. never accepted ’s original offer in response to the old price list order. Offeree’s rejection terminates power of acceptance; Dataserv Equipment v. Offeree’s proposal of changes in response to an offer is a Technology Finance Court of Appeals of MN, counteroffer terminating the original offer. 1985 Facts: made offer to sell equipment to . sent purchase order, replied w/ K form. replied that 3 clauses had to be removed. refused to remove one of the clauses. After weeks of negotiation, gave in and offered to remove the clause, but said it was too late. Issue: (1) Whether ’s requested changes were a counteroffer, and (2) whether that counteroffer was rejected. Holding: (1) Yes, it was a counteroffer; (2) It was rejected b/c terms not accepted Rule: (1) Offeree’s rejection terminates its power of acceptance, and once terminated, cannot be accepted w/o other party’s ratification. Here, rejected ’s counteroffer, terminating the offer, so couldn’t accept later. (2) Offeree’s proposal of changes in response to an offer is a counteroffer terminating the original offer. Here, ’s request to change the K was a counteroffer Policy: Allows parties to freely negotiate w/o being bound. But shows that with changing market conditions, one should act quickly to resolve issues and complete the K, b/c you can’t rely on past offers if you have made a counteroffer. Puts the risk on the counterofferor. Where clauses conflict, and K is performed, each party is Ionics v. Elmwood US Court of Appeals, 1st, assumed to object to the other’s clause 1997 Facts: bought thermostats from 3 times w/ conditions in purchase order allowing full remedies in case of problems with product or breach by . Before 1st deal, sent form letter to saying any exception to the conditions must be expressed in writing, otherwise acceptance of terms will be assumed. responded with form containing terms that limited ’s liability. The sales were executed and treated as if they were based on valid Ks. The discrepancies in the forms weren’t discussed. Issue: Whether the additional terms sent by were part of the K? Holding: No, b/c § 2-207(3) governs, not §2-207(1). Rule: Where clauses conflict, and K is performed, each party is assumed to object to the other’s clause. Here, § 2-207(1) is inapplicable b/c ’s form is conditional on assent to the additional terms. Even if (1) applied, §2-207(2) wouldn’t be satisfied b/c ’s original order gave notice of conflicting term (under comment 6), and the term materially alters the K. § 2-207(3) applies b/c conduct of parties show a K, so conflicting terms drop out and gap-fillers apply.
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Policy: Ends Last Shot DoctrineIf § 2-207 governed, any response w/ slightly different terms would be a counteroffer even if first offer had conflicting terms. Conflicts w/ intent of section in overturning Last Shot Doctrine. Acceptance is conditional when the offeree shows Step-Saver v. Wyse Tech. unwillingness to proceed w/ transaction unless (TSL was key ) additional/different terms added. US Court of Appeals, 3rd, 1991 Facts: requested info from about their OS, and assured that the OS would work w/ 90% of MS-DOS programs, and made other representations of its capability. purchased the OS from in this way: would call and order about 20 copies at a time. would accept order and promise to ship goods. After call, would send purchase order to detailing items, price, shipping, & payment terms. would ship order w/ invoice w/ identical terms. No reference was made anywhere to a disclaimer of warranty on invoices, purchase order, or phone. But when ’s OS arrived, on the box was a box-top license disclaiming warranty that also said consented by opening the box and had to return the package unopened w/n 15 days for a refund. had problems w/ software and sued. Issue: Whether the box-top license was part of the K and disclaimed a warranty by ? Holding: No, it was a proposal of additional terms that didn’t become part of the K. Rule: (1) § 2-207 governs agreement if the terms are in dispute rather than the K’s existence itself. When a disclaimer is not expressed until after the K is formed, § 2-207 governs. Here, dispute is whether the box-top license was added to the K, not whether there was a K. (2) An acceptance is conditional when the offeree demonstrates an unwillingness to proceed with the transaction unless additional/different terms are added. Here, the “consent by opening” language is not sufficient to make ’s acceptance conditional b/c no real indication would forgo transaction if additional terms are not accepted. Even though offers a refund, they are relying on ’s investment in time and effort to prevent them from returning the product (although the refund justification could be valid sometimes). But key factor here – one of the terms in the box-top license says that software cannot be transferred, but that is exactly what was doing w/ the deal, and knew. Thus, terms obviously not necessary. And the terms materially altered the K, thus under (2) the terms are proposals to be added to K that weren’t accepted. (3) K is definite if UCC can fill the gaps. Here, the box-top license wasn’t necessary to the K b/c UCC would fill warranty gaps. Summary of Analysis: § 2-207 governs. If ’s box-top license was a conditional acceptance (clause 2 of § 2-207(1)), the question would be whether the condition was assented to by . But, ’s box-top license was not a conditional acceptance, thus clause 1 and 2 apply, and under clause 2, the additional terms are a proposal to be added to K, but since they materially alter the K, the terms cannot be said to have been accepted by . Thus no K. Policy: (1) Ends Last Shot DoctrinePurpose of § 2-207 is to deal w/ situations where additional terms are sent late in the process. It isn’t an offer/acceptance issue, it is a Battle of the Forms issue, and § 2-207 should be used. (2) Reflects Commercial Realityusing this test for conditional acceptance best reflects commercial reality. Legal terms cannot reasonably be expected to be read at Hill v. Gateway 2000 US Court of Appeals, 7th, point of sale by cashier or phone salesman. 1997 Facts: ordered computer from . Box arrived w/ list of terms said to govern unless returned computer w/n 30 days. One of the terms was an arbitration clause. sued b/c computer was defective, and insisted on arbitration based on their clause. Prior case – ProCD – held that (1) terms inside a box of software bind consumers who use the software after an opportunity to read the terms and reject them by returning the product;
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and (2) when there is only one form, § 2-207(2) is irrelevant. Issue: Whether the terms included in the box were effective as part of the K even though not read over the phone by the order-taker and assented to by the consumer? Holding: Yes, the terms were effective. Rule: (1) Parties are bound by K even if they didn’t read the terms. took risk that terms were unwelcome by not reading them. (2) Legal terms cannot reasonably be expected to be read at point of sale by cashier or phone salesman. Here, commercial expectation exists that legal terms will be in the box and not negotiated at point of sale. Further, ’s tv ads said “limited warranty.” Policy: Commercial Reality and EfficiencyIn retail product sales, it would be a waste of time to have all the legal terms read at point of sale, and consumers will still claim they didn’t hear, understand, or pay attention. Waste of time on both sides.
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D.
Definiteness 1. Background a. Old Common Law Court must be able to determine K’s exact meaning. Thus, court would not enforce agreement if: i. it is not sufficiently definite to identify damages or performance; ii. open terms signal a lack of intent to be bound; or iii. there are substantial gaps, though the parties manifest an intent to be bound b. New Common Law The following elements (either express or implied) are necessary for the courts to rule that a K is sufficiently definite to qualify for enforcement: i. Parties names ii. Subject matter iii. Time for performance iv. Price c. Under the UCC, the key variable now is no longer completeness – it is intent of parties and reasonably certain basis for damages. d. Courts will sometimes fill in missing terms if they can give the missing terms a reasonable value. Reasonableness and good faith is implied in all Ks. e. Definiteness cannot be reduced to precise, universal measurement – it is a flexible standard. Every document can be said to have some degree of indefiniteness, and if doctrine is applied indiscriminately it may defeat the reasonable expectations of the parties. f. Before rejecting a K as indefinite, court must be satisfied that the agreement cannot be rendered reasonably certain by reference to an extrinsic standard that makes its meaning clear. g. Courts disfavor “agreements to agree” where there is agreement in principle, but details left for future negotiations. Usually ruled void for indefiniteness. h. Reasons not to enforce an indefinite agreements: i. Courts will have to create terms and damages w/o basis. ii. People will be held to terms not agreed upon iii. Cannot know what the expected benefit was or what damages should be iv. It is tough to tell if the parties actually agreed at all, or whether they even breached.
2.
Rules a. R 2d § 33 i. terms must be reasonably certain; ii. terms are only reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy. iii. open or uncertain terms may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance.
b. UCC § 2-204(3)
Even if terms are left open, K does not fail for indefiniteness if the parties intended to make a K and there is a reasonably certain basis for giving a remedy. i. Note: Parties do not have to agree on a price. See § 2-305. ii. Note: Commercial standards are to be used as gap-fillers where K is indefinite. Look to express terms, course of performance in the transaction, course of dealing in the past, and usage of trade in industry typically.
c.
UCC § 2-305 – Open Price Terms Ex. – used often when there is an emergency rush order and no time for parties to set price. i. Parties can make K w/o settling price, if they intend. Price will be a reasonable price if: (A) nothing is said about price; (B) price is left to be agreed by the parties and they never do; or (C) price is to be fixed in terms of external standard by 3rd party and never is ii. Price to be fixed by one of the parties must be in good faith
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iii. iv.
If fault of price never being fixed is due to one party, the other can treat K as cancelled or set his own price If parties intend not to be bound unless price is fixed or agreed to, and it never is, no K.
3.
Cases
Corthell v. Summit Thread If parties manifest intent to pay fair price, even if the price is not specified, K does not fail for indefiniteness. Company SC of Maine, 1933 Facts: , employee of , made and patented 2 inventions which he sold to . In K, gave higher wage plus $ for the patents, and said that would give all future inventions to in exchange for “reasonable recognition” by the “basis and amount of recognition to rest entirely” with . Final line said all of K should be interpreted in good faith on the basis of what is reasonable and intended, and not technically. turned over 4 more inventions to but was never paid for them. Issue: Whether the terms of K regarding payment were too indefinite to be binding? Holding: No, b/c the intent was to pay a “reasonable” price in good faith, and is thus binding. Rule: (1) If K makes no statement as to price, law invokes standard of reasonableness, and the fair value of the services or property is recoverable, unless the terms exclude the supposition that reasonable price was intended. Here, the terms do not exclude the supposition that reasonable price was intended – in fact the K shows that it was intended. But even if it didn’t mention good faith, b/c one party has excessive discretion, it would have been interpreted in good faith anyway. (2) If parties manifest an intent to pay a fair price, that fair price is not too vague for enforcement. Here, the parties indicated that a reasonable price be paid. (3) A reservation to either party of an unlimited right to determine the nature and extent of his performance is indefinite. Here, it was qualified with “reasonable.” Policy: Good Faith Doctrine abused discretionary power to deprive of value of K. Parties negotiated in good faith and intended to be bound. Agreement to agree, leaving material term open for future Joseph Martin Deli v. negotiations, is unenforceable for indefiniteness. Schumacher Court of Appeals of NY, 1981 Facts: leased retail store to for 5-year term. Renewal clause provided that may renew lease for an additional 5-year period at annual rate “to be agreed upon.” After 5 years, asked for a much higher rate than the appraised value. Issue: Whether the terms of the K were unenforceable due to indefiniteness? Holding: Yes, unenforceable, b/c they leave no room for legal construction. Rule: (1) A mere agreement to agree, in which a material term is left open for future negotiations, is unenforceable for indefiniteness. Here, there is no methodology specified in the K for determining the rent – not tied to an external standard. Should have specified “reasonable rent” or “rent at fair market value.” (2) In K’s involving land, court unwilling to infer price b/c of subjectivity in determining the price. Land is not fungible like goods are. Policy: Not enforcing terms parties did not agree toCourts don’t want to construct terms that parties didn’t agree to. Parties should set up their own methodology in the K for determining price. Particularly w/ real estate, where land is unique and market value hard to determine. Note: Case here distinguished from May v. May (mentioned in case), where won, b/c May dealt w/ goods and fell under UCC, and is not applicable to real estate; and also b/c in May there was a contractual history of renewals from which a reasonable extrapolation could be made. § 2-204(3).
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Agreement leaving material terms open for future Koufman v. IBM Corp. USDC SDNY, 1969 negotiations is not enforceable Facts: solicited bids to buy land, build building, and lease it to . requested bids for 4 alternative methods, leaving responsibility for taxes and insurance to be decided later. submitted bid and was told by that he won and to secure the land. asked for changes and negotiating problems developed; revoked saying wasn’t complying; had not bought land. Issue: Whether the terms of the agreement were definite enough to be binding? Holding: No, they left several material facts unclear. Rule: An agreement which leaves several material terms open for future negotiations is not enforceable. Here, the “acceptance” wasn’t sufficient b/c didn’t specify which of 4 methods chose, and several material issues were undecided – taxes & insurance responsibility, commencement date of lease, and when building would be completed. Policy: Not enforcing terms parties did not agree toCourts don’t want to construct terms that parties didn’t agree to. Not enough for court to interpret. Note: Good lawyering by IBM to get out of a clear agreement. Agreement containing some open terms may still be Paloukos v. Intermountain enforceable; UCC 2-204(3) doesn’t require itemization of Chevrolet SC of Idaho, 1978 all terms. Facts: bought truck from , and wrote general terms on form – type of truck, color as green or yellow, and purchase price. Engine size, exact color, and other things not specified. signed and paid deposit. didn’t have truck in stock and ordered it. After 5 months, told that due to shortage, truck couldn’t be delivered. Issue: Whether the agreement was definite enough to be binding? Holding: Yes, b/c both parties intended a K and there is reasonable basis for a remedy Rule: An agreement containing some open terms may still be enforceable (§ 2-204(3)). paid deposit, accepted it and retained it for several months, so a trier of fact could determine that the parties intended to enter into a binding K. There is a reasonable basis for remedy. Policy: Parties’ IntentCourts want to enforce agreements sufficiently definite to show intent, if remedy is determinable. The court here could interpret the K w/o writing new terms to enforce. Gaining problemsif too indefinite for appropriate remedy to be determined, remedy could be more than what was bargained for if enforced. Note: One reason this came out differently than Koufman is that this case used the UCC rule. Price term can be sufficiently definite if amount can be Cobble Hill Nursing Home determined objectively w/o need for new expression by v. Henry&Warren SC of Idaho, 1978 parties.. Facts: , about to go to jail, gave option to buy nursing home at price determined by Dept. of Health in accordance w/ applicable rules. Deal enabled to represent to his sentencing court that he was complying w/ their demand that he not own nursing home. exercised option and Dept. of Health set price based on Medicaid rules. refused, claiming indefiniteness, b/c price was low. Issue: Whether option to sell based on price determined by 3rd party is definite enough to be enforced? Holding: Yes, definite b/c a method was specified for determining the price. Rule: Price term may be sufficiently definite if the amount can be determined objectively w/o need for new expression by the parties. Delegation of determination of price to 3rd party valid if there is an objective method for determining price. Here, Dept. of Health rules were specifically mentioned, and the price was determined by those rules. Policy: Parties’ IntentParties intent is shown by the language of the K here. Also, got
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what he bargained for b/c he used the K to get out of criminal problems. Courts do not want to write termseither K is definite enough to be interpreted or it is so indefinite that courts would have to create terms to enforce. Court do not want to do the latter. Squib: United Press v. NY Press Co.: Court found indefinite a clause providing for weekly payments not exceeding $300. Goldstick& Smith v. ICM: Difference in value and price is too high a fraction of the value of the K to allow court to enforce. Boyce v. McMahan: Preliminary agreement specifying that a more detailed agreement at later date will be agreed upon is not enforceable, even if containing many terms, b/c it is indefinite. Note: Contrast w/ Joseph Martin Deli: Here there is a definite means of fixing price, and court did not have to fill in any terms. In Deli, no formula, so no basis for court to make price. Could not even use market value b/c real estate is subjective.
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E.
Complex Business Negotiations 1. Background a. When sophisticated businesses negotiate large, one-shot transactions, like merger or acquisition, it is difficult to determine what is an offer and what is acceptance in the negotiations. b. K is not final until all the details are worked out, regardless of earlier assent. There must be clear and convincing evidence to hold an agreement binding before that point. c. Offer and Acceptance paradigm doesn’t fit. Rather, a long series of negotiations culminate in an “agreement in principle” which is given to the parties’ lawyers who keep refining details, sending “draft agreements” back and forth to eventually have a final agreement signed and executed at a formal closing. Draft agreements are actual agreements, not offers or acceptances. d. Objective theory of assentlook to the context of the negotiations to determine the intent of the parties. Sometimes writing is a memorialization of terms that were orally accepted and finalized. e. Even if not binding, written terms serve as a reminder later, and other people can see, whereas if it was never written, only one person may know the terms he agreed to. If that guy leaves the company, nobody else may know. f. When deciding K issues, always look micro and then macro. g. PolicyChilling effect – imposing liability too early in the bargaining process will chill future deals. 2. Rules a. R 2d § 22(2) A manifestation of mutual assent may be made even though neither offer nor acceptance can be identified & even though the moment of formation cannot be determined. b. Four-factor test (from RG Group - this is a standard, not a hard rule) If parties intend not to be bound until agreement is set forth in writing and signed, they won’t be bound until then. Factors to guide inquiry into intent of the parties: i. Whether there is express statement that agreement is not binding unless signed writing. (A Texaco clause) ii. Whether there has been a partial performance of the alleged K. iii. Whether all terms of the alleged K have been agreed upon. iv. Whether the agreement is the type of K that is usually committed to writing. No single factor is decisive.
3.
Binding Preliminary Ks At least 2 main types: a. Parties reach complete agreement on all issues, and only signing remains. Binds both sides to ultimate contractual objective b/c K basically reached. b. Binding Preliminary AgreementParties express mutual commitment to a K agreed to on major terms, while recognizing the existence of open terms that remain to be negotiated, and there is a commitment to negotiated further in good faith. Note: Gives an alternative argument to 4-part test – prior to this (TIAA), parties not bound until final agreement, or bound possibly before final execution. With this, the parties reach a binding agreement to negotiate further in good faith to reach a final agreement.
4.
Cases
Parties to an agreement not bound until closing of signed K unless there is clear and convincing proof of intent to be bound. Such proof is by partial performance or if signing is mere memorialization. Facts: Settlement deal negotiated between and , w/ 3rd party Hamlin involved. sent draft license agreement proposal as basis for settlement. turned it down, and another ITC v. Teleprompter US Court of Appeals, 2nd, 1979
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meeting was inconclusive. Parties met again, and basic terms were agreed upon (terms were never altered later). Revisions took place, and sent clean drafts of agreement to be signed, and told to advise the judge that the case was settled. did advise the judge that settlement was almost complete. Just then, and Hamlin have dispute and Hamlin pulled out. told but wanted to secure the deal on the same terms w/o Hamlin. then wrote that they wanted to settle on same terms and would revise the agreement to remove the name “Hamlin” throughout. did revise drafts and forwarded to , w/ separate letter saying to call if there were any final changes ( never called) and w/ stipulation and order of dismissal for court signed by . ’s pres. signed documents subject to proviso that it would not be delivered to until the officer’s reviewed the documents. Then, new management decided to pull out. called to say that he was mistaken that deal was done. wanted to enforce agreement. Facts Summary: drafted licensing agreement with and finalized everything, and then 3rd party pulled out. wanted to keep same terms but just remove 3rd party’s name. No other changes requested, and acted like they had a deal, and ’s pres. even signed it pending board approval. All that was needed was signatures on final document. Issue: Whether there was a binding settlement agreement between and ? Holding: Yes b/c there were no undecided terms and all that remained was formality of signing. Rule: Parties to an agreement are not bound until closing of a signed K unless there is clear and convincing proof to show that they meant to be bound before final signing. This proof can be shown by one party allowing the other to begin performance, or unequivocal statements by the parties that a complete agreement had been reached and signing is merely evidentiary. Here, the terms were all complete after “Hamlin” was removed and all that was left was signing. But there was no indication that either side felt that signing was necessary to close deal. Further, ’s pres did sign the documents. He could have held them in escrow pending signing, but never did. And the communications/actions of show that they felt the deal was done. Intent here was to be bound. Policy: Intent of PartiesCourts do not want parties to take advantage of the required execution of documents to get out of otherwise binding agreements. Where offer and acceptance have been reached and all that remains is the signature, K can be enforced. Commercial Reality/Efficiency It is beneficial to allow full negotiations by parties w/o them having to worry that they must hurry to complete deal before the other side pulls out...parties should be able to close deals w/o working all the minute legal details out. Agreement in principle not enforced where K requires Ciaramella v. Reader’s execution Digest Association US Court of Appeals, 2nd, 1997 Facts: sued for employment discrimination. They engaged in settlement negotiations with several drafts of agreement, each draft explicitly saying that the settlement would not be effective until executed by all parties and attorneys. wanted a recommendation letter from and was dissatisfied by the example letter. After several revisions were made, ’s lawyer told “we have a deal,” but later backed out of the deal. No agreement was ever signed. Issue: Whether the oral agreement between the parties created a binding K? Holding: No, execution by signing was necessary to make a binding K, due to express provision. Rule: When parties do not intend to be bound until agreement is put into writing, they shall not be bound orally. R.G. Group 4-factor test applies. Here, there was an express clause saying signing was necessary, no partial performance, some material terms that were not yet decided, such as content of a recommendation letter, and settlement agreements are usually put in writing b/c of complexity of terms. Policy: (1) Requires conduct appropriate to setting (2) Freedom to Contractparties
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who expressly reserve agreement until writings are signed should be allowed to do so. Four factor test for determining intent to be bound only R.G. Group v. Horn & upon signed writing. Hardart US Court of Appeals, 2nd, 1984 Facts: met with to establish Bojangles franchise. gave its standard franchise form K which explicitly said entire agreement must be in writing and signed to be effective. Territory for franchise remained in dispute throughout several negotiations, but told they had a “handshake deal.” Agreement was never signed, and pulled out. Issue: Whether the agreement was binding due to the oral “handshake deal?” Holding: No, b/c a written signing/execution was necessary due to terms of forms. Rule: When parties do not intend to be bound until agreement is put into writing, they shall not be bound orally. R.G. Group 4-factor test applies to determine intent: (1) whether express statement that signed writing is necessary; (2) whether there has been partial performance; (3) whether all terms of K have been agreed upon; and (4) whether the agreement is the type of K that is usually in writing. No single factor is decisive. Here, there was explicit wording indicating signed writing was necessary. No performance, terms were not finalized (territorial boundaries), and writing is usual in business transactions like this, as they were complex, lasted well into the future, and dealt w/ a great deal of money. Policy: Parties Intent/Freedom of ContractCourts want to give the parties the power to K as they please, and if they want the K to only be effective upon signing, they should be allowed to. Note: Express statement requiring signed writing will be given much weight by the court. Preliminary binding agreements can be made to negotiate TIAA v. Tribune Co. USDC SDNY, 1987 further in good faith based on existing terms. Facts: needed loan and only would negotiate w/ them. told that their objectives were to get funds and avoid showing it on the balance sheets. Negotiations continued, and both sides agreed to basic terms. approved, and mailed terms to , contingent on final execution and said it would be binding when got signed return letter from accepting the terms. didn’t want to sign with “binding” language, but didn’t want to lose as a lender, so sent response back saying acceptance is subject to approval of offer. then told that general approval had been gotten, but later pulled out of deal. Issue: Whether the parties had a binding agreement? Holding: Yes, as it was an agreement to further agree in good faith. Rule: (1) Binding preliminary agreement exists when the parties express mutual commitment to a K agreed to on major terms, while recognizing the existence of open terms that remain to be negotiated. A commitment then exists to negotiate further in good faith. R.G. Group Test: Here, the language of the writings indicate an intent to be bound by preliminary agreement. needed firm commitment b/c their needs were time sensitive, never objected to ’s “binding agreement” language, and signed and returned agreement to . Presence of some open terms doesn’t indicate lack of intent to be bound – both parties are bound to negotiated further in good faith. also partially performed by allocating money to give to . And it is customary in such transactions to have preliminary agreements in writing. (2) Once binding preliminary agreement is made, the terms on which the parties must negotiate can only be those existing in the agreement. Here, asked to condition the loan on offset accounting, but that was never part of the preliminary agreement. Policy: Good faith found a better deal after getting to commit to them b/c of ’s time-pressured situation. Note: Gives an alternative argument to 4-part test – prior to this, parties not bound until final agreement, or bound possibly before final execution. With this, the parties reach a
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binding agreement to negotiate further in good faith to reach a final agreement.
5.
Synthesis When does liability begin in NY law? a. ITC: Part performance and clear statement of intent are dispositive i. One party allows other to begin performance ii. Prior unequivocal statements made by the party contesting the K that agreement had been reached. b. R.G. Group/Ciaramella: when there’s a Texaco clause, the court is not likely to give effect to an oral agreement that purportedly reveals an intent to be bound prior to signing. i. Did the parties expressly reserve assent until signing? ii. Were the terms decided? iii. Did performance commence? iv. What are the transactional norms in the industry? c. TIAA: If there is an agreement in principle and one party fails to negotiate w/n its parameters, the party will be in breach of a binding preliminary agreement. i. Was there intent? ii. Open terms do not matter as much iii. Was there partial performance? iv. What are the transactional norms? d. Settlements must be signed in front of a judge or in writing. Pennzoil v. Getty CONTRACT (Pennzoil) Offer/acceptance – the BOD of Getty make a counter-offer for the price of $112.5/share and Getty accepted. Once an offer is accepted it’s binding. No one signed the K at the BOD mtg. Intent to be bound – at the time both parties intended to be bound. Getty issued press release stating an “agreement in principle” had been reached. After BOD meeting, hands were shook. Argument: signing mere memorialization. Agreement with Gordon – “dear Hugh” letter bound Gordon to Getty plan. If Board members did not agree, Gordon promised to replace them with members who would agree. Partial performance – lawyers began working on draft agreement. Museum’s lawyer corrected a draft made by Pennzoil. Press release, impact on public opinion/stocks. Open terms – although the terms were open, that’s not a big deal for “agreement in principle.” Parties have agreed to negotiate in good faith w/in certain parameters set forth in the agreement (Teachers) No “Texaco clause”: nothing that said parties were not bound until final agreement signed. Unequivocal statements – in litigation brought by Claire Getty in CA, counsel representing Gordon in court stated that agreement w/Pennzoil nearly complete, everything else being mere formality. Lawyer later signed an affadavit saying K reached between parties,
6.
NO CONTRACT (Getty) Agreement had not been signed – draft not signed by any BOD. Intent to be bound – every party from Getty made statements to other people that they were not yet bound to Pennzoil. At one point counsel for museum screamed to everyone that there was no deal. Agreement with Gordon: Dear Hugh letter only said that board must approve plan today. Fact that board approved the plan did not mean there was a K. Open terms – substantial amount left open. Deal could have fallen through for any reason Getty chose since parameters around which they had to negotiate were not set. No partial performance – lawyers negotiating drafts does not equal performance b/c of reliance on deal. Would have to draft anyway to lay out what remained to be negotiated. Transactional norms – This is the type of complex transaction that necessitates signed and written agreements. (R.G. Group & Teachers) No agreement in principle – no one from Getty signed!!. Dear Hugh letter did not say both parties were bound.
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which he later amended.
III. Alternatives to Traditional K Theory
A.
Promissory Estoppel Even if cannot establish that there was a legally enforceable K, may be able to convince the court to enforce ’s promise. Most important alternatives: Promissory Estoppel and Unjust Enrichment, neither of which require the court to find consideration or agreement. In practice, chance of recovering on these theories is much higher when ’s promise was made in a context that typically involves a bargained-for exchange agreement.
1.
Background a. Basic Doctrine alleges that failed to keep a promise that he should have reasonably expected to rely upon; did indeed rely on it to his detriment, and should recover lost reliance expenditures (at least) from . b. Equitable Estoppeloccurs when you misrepresent a fact to someone and they rely to their detriment. Court will estop you from denying the fact. PE different b/c no misrepresentation. c. Purposeto expand enforcement of promises and compensate a promisee where he has reasonably relied on a promise by incurring costs in the expectation that the promise would be fulfilled. d. Characteristics i. There is reliance on a promise, but not necessarily an exchange ii. It is not intent based; uses objective, reasonable person standard iii. Argument to make: “even if” no consideration, there is promissory estoppel b/c . . . iv. Procedural benefit: PE cases almost always get past summary judgment and go to jury b/c they are fact sensitive. Also may increase incentive to settle for this reason. v. Promise must induce a reasonable reliance & must be definite and substantial in character in relation to the remedy sought. vi. Formality matters – the more formal the promise, the more reasonable to expect reliance, and the more reasonable the relying party is. vii. Promise must be clear, definite, and complete to enforce. viii. Original § 90 required “definite and substantial” reliance. Now, only what justice requires matters. More discretion to judge. e. Areas of Enforcement i. Family promisesseldom enforced ii. Charitable subscriptionsoften enforced iii. Promises to insureoften enforced iv. Retirement benefitsoften enforced v. Preliminary negotiationsseldom enforced. Rule a. R 2d § 90(1) i. A promise ii. which the promisor should reasonably expect to induce action or forbearance (reliance) on the part of the promisee or 3rd party iii. and does induce such action or forbearance iv. is binding if injustice can be avoided only by enforcement of the promise. Factors to consider for injustice: (from comment b) (Question of law for judge) (A) Reasonableness of reliance (B) Definite and substantial character of the reliance (C) Formality and completeness w/ which promise was made (Feinberg = formal, Hayes = informal) (D) Extent to which evidentiary, cautionary, and deterrent functions of formality are met. (is there risk that enforcing on PE enforces a promise not intended to be K?)
2.
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v.
Note: (A) and (B) deal w/ character of reliance; (C) and (D) deal w/ character of promise. Remedy may be limited as justice requires. (Question of law for judge)
3.
Remedy Remedy almost always either specific performance or expectation damages. In rare instances where courts award reliance damages there is either a problem w/ the promise or a difficulty in assessing expectation damages. Irrevocable Offers In construction bid context, PE can serve as consideration for an implied promise to keep the bid open for a reasonable time. See Drennan and Pavel above. Intra-familial Cases
4.
5.
No detrimental reliance = no promissory estoppel, Haase v. Cardoza DC, 3rd, CA, 1958 particularly in family setting Facts: and husband entered a trust where survivor received the full estate. ’s husband, w/o ’s knowledge, left $10,000 in will and $3,000 to ’s sister, combined for suit. told that her husband had only left her $2,500, and gave it to her even though she was under no obligation to. Later, felt guilty and told how much her husband had really left. said she would voluntarily give $50/month. After a few months demanded a note for payment of the rest, and stopped paying. Issue: Whether ’s promise to pay $50/month is enforceable? Holding: No, b/c no consideration or detrimental reliance by . Rule: An informal promise w/o consideration creates no duty and is not enforceable unless there is reliance. There was no consideration for ’s promise, and didn’t rely on that promise to her detriment, so no binding promise. Promise was very informal, and reliance wasn’t definite and substantial, so doesn’t satisfy injustice element of PE. Also no evidence that element 3 was satisfied. Policy: Intra-familial ContextCourts are less likely to enforce in intra-familial contexts b/c of the extra-legal sanctions available (moral pressure), and b/c they are off-market anyway. detrimental reliance can = promissory estoppel in family Ricketts v. Scothorn () setting if case is strong enough. SC of Nebraska, 1898 Facts: ’s decedent gave granddaughter a promissory note promising $2,000 on demand at 6% interest. said he was doing it so that would no longer have to work and would be independent, but did not require her to quit work in exchange for the promise to pay. quit her job in response, but had to get another job 1.5 years later w/ his permission b/c he couldn’t pay the interest anymore. He died w/o repudiating promise & said he regretted not selling his house to pay her. sued estate. Issue: Whether PE makes the promise binding? Holding: Yes, b/c the 4 elements of PE are met. Rule: Formal promise intended to induce reliance, which does, can be binding under 4-element Test. ’s decedent not only should have foreseen reliance, he actually hoped would rely. did rely by quitting her job, thus it was substantial and definite. 4 factors are met. Policy: Intra-familial ContextCourts will sometimes enforce in intra-familial context when the case is strong enough. Note: Here, never repudiated the promise, it was his estate that refused to pay. That might have factored in.
6.
Employment Cases
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Reliance in employment setting upheld Feinberg v. Pfeiffer Court of Appeals, MO, 1959 Facts: worked for for 37 years at the point that ’s board of directors, in official vote, promised to give her retirement pay of $200/month for life whenever she decided to retire. retired 2 years later and was paid the benefit for 7 years, when company pres. died and successor refused to pay . Issue: Whether ’s promise to pay the pension is binding? Holding: Yes, under the 4 elements. Rule: 4-element Test. Promise made directly from company pres., board should have foreseen reliance, did rely. Unjust b/c reliance was substantial ( gave up job, hard to get a new one at that age) and reasonable (formal promise, prior relationship b/n and that engendered trust). Court rejected argument that since she got cancer, she would have had to retire anyway – she didn’t know she had cancer at the time of promise. No consideration here b/c continued to work after promise made and didn’t want her to retire (gave her a raise) – thus her retirement wasn’t bargained for. Policy: Employment Casescourts often enforce when employee is induced to rely based on promise of pension. Note: Key factors here are formal promise, prior relationship b/n the parties, and reasonability of the reliance. Reliance in employment setting not upheld Hayes v. Plantations Steel SC of RI, 1982 Facts: announced he was retiring and then was told by an officer of that the company “would take care” of him. No mention of a sum of money, nor was there formal authorization. retired and was paid 5K/year for 4 years by , at which point the payments stopped. Each time check was sent, asked whether he was going to get the next one. Issue: Whether ’s promise to pay the pension is binding? Holding: No, as there was no detrimental reliance induced. Rule: For PE, the promise must induce the promisee’s action or forbearance. made decision to retire on his own, not in reliance on promise of pension. Plus asked each year whether he would be paid, showing uncertainty. The promise was also not formal or complete. No consideration here b/c intended to retire before any promise was made, so it was not bargained for. Policy: Purpose of PEcourts will not enforce promises that didn’t induce any reliance. Note: Key factors here are informal promise and no actual inducement of the reliance. US Auto Problem When promise is conditional on certain situations (e.g. favorable market conditions), it may impact reasonableness of reliance. Unconditional promise, like in Feinberg, may be more reasonable to rely upon. Opportunity costs are a form of reliance – shifting money in budget in reliance on promise. Towns in general are better off if companies not held to promises conditioned on favorable market b/c if enforced, companies wouldn’t go to the town in the first place.
7.
Preliminary and Incomplete Negotiations Cases a. If court finds no agreement, but finds a promise on which other parties relied, the case survives summary judgment and party could recover damages. b. Deal making process, series of promises and assurances, but deal doesn’t go through. Where do you draw the line between expenditure in trying to strike a deal and reliance in PE? A party is driven to reliance w/o necessarily having prospect of K. c. Sophistication of the parties is a factor in determining reasonableness. d. Claims in this context are now quite commonplace and get to the jury often.
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No PE where reliance not of definite or substantial nature. Coley () v. Lang Also – sophisticated parties. AL Court of Civil Appeals, 1976 Facts: entered discussions w/ to buy the stock of ’s corporation to use their name to bid on gov. projects. Preliminary agreement reached w/ signed letter, but no K. 18 days later, when agreement was supposed to be finalized, pulled out of deal. claims he didn’t bid during that time as the detrimental reliance. Issue: Did detrimentally rely on the agreement? Holding: No, it was not definite or substantial Rule: No PE where reliance is not of a definite or substantial nature. only had 18 days of inactivity, and only missed 2 bidding opportunities in that time, and there is no evidence that he would have gotten the bid.. And, nothing in the agreement even said that couldn’t bid during that period. Policy: Purpose of PEcourts will not enforce based on PE when no injustice. Note: Key factors here are informal promise and no actual inducement of the reliance. Offer is not necessary for PE to be applied. Hoffman v. Red Owl AL Court of Civil Appeals, 1976 Facts: relied on numerous promises by , making expenditures to further the deal during negotiations: bought grocery store, sold the store at a loss, put $1K down for site. kept changing the deal w/o formalizing the K, asking to put up more and more money, bringing his father-in-law in as silent partner. Deal ended up falling through. Issue: Whether PE can be applied even when there is no offer? Holding: Yes, as long as detrimental reliance was induced. Rule: Offer is not necessary for PE to be applied. Here, even though never made an actual offer and terms weren’t substantially definite, promised a future offer if did certain things. PE applies b/c detrimentally relied on that promise. expended significant sums of personal money, moved his family, sold his business. reasonably could have foreseen that reliance, and injustice would result w/o compensation - was unsophisticated party dealing w/ sophisticated company. Policy: Justice/Fairnesscourts apt to invoke PE when unsophisticated parties are taken advantage of.
8.
Statute of Frauds and PE a. Background i. Courts will not enforce certain agreements that are not in writing: for sale of land, goods over $500, suretyship (promises to pay someone else’s debt), and obligations that take more than one year from time K is made to complete. ii. Purposes:
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(A) Evidentiaryprevents fraud and perjury by requiring proof (B) Cautionarywarns parties of the serious nature of the transaction (C) Channelingchannels certain agreements into the form of a K
b.
Some states allow PE w/ statute of frauds, but some (like TX) do not. SOF is an affirmative defense to prevent enforcement of non-written agreement. Difference from PERSOF deals w/ question of whether a K exists, PER deals w/ terms of the K, refusing to look beyond what is written. vi. Both SOF and PE are intended to prevent injustice. SOF to prevent fraud; PE to enforce promises that caused reliance. Rules i. UCC § 2-201 (A) (1) Goods sale over $500 requires writing; (B) (2) Between merchants, if w/n a reasonable time a writing in confirmation of K and sufficient against seller is received and party receiving it has reason to know of the contents, it satisfies requirements of subsection (1) unless written notice of objection given w/n 10 days. (C) (3) K that doesn’t satisfy (1) but which is otherwise valid is enforceable: (1) (a) if the goods are specially manufactured for the buyer and not suitable for sales to others and seller has begun performance; or (2) (b) party against whom enforcement is sought admits that K was made (liable only for the amount he admits); or (3) (c) for goods for which payment has been made and accepted or which have been received or accepted. ii. R 2d § 139PE circumvention of SOF (A) (1) PE allowed notwithstanding the Statute of Frauds. Same elements. (B) (2) In determining when injustice can be avoided, look at: (1) (a) the availability and adequacy of other remedies; (2) (b) the definite and substantial character of the action or forbearance in relation to the remedy sought; (3) (c) the extent to which the action or forbearance corroborates evidence of the making and terms of the promise, or the making and terms are otherwise established by clear & convincing evidence; (4) (d) the reasonableness of the action or forbearance; (5) (e) the extent to which the action or forbearance was foreseeable to promisor. iii. General rulepart performance of an oral K not to be performed w/n 1 year will not take the K out of the statute unless, in some jurisdictions, the part performance is reliable evidence of the agreement. But even when part performance won’t take K out of the “one year” category, full performance will. So part performance can enforce K that otherwise violates SOF as separate doctrine other that PE? Schwedes iv. 1-year restriction runs from the making of the K to the completion of performance v. Restitutionwhen a party to an oral K, unenforceable under the SOF, bestows a benefit on an alleged trading partner, an action in restitution lies for the recovery of the benefit.
iii. iv. v.
c.
Cases
PE can get around SOF; Part performance on both sides McIntosh v. Murphy SC of HI, 1970 shows no fraud Facts: interviewed and offered 1-year employment if he came to HI. sold possessions, moved his belongings to HI, and leased apt. there. After 2.5 months, fired . If a 1-year employment K, it would be barred by SOF, so TC said that the K started the first day of work, rather than acceptance, to make it under 1 year so he could rule for . Issue: Whether the oral employment K is enforceable even though the SOF prohibits Ks
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not to be performed w/n 1 year? Holding: Yes, PE allows enforcement despite SOF. Rule: (1) PE applicable under R 2d §139 (case calls it 217(A)?). PE case is clear under 4 elements test, as uprooted his life in reliance on promise by moving, and injustice can only be avoided by enforcement of K. (2) Part performance on both sides will usually take the agreement out of the SOF, b/c clearly not fraud if both sides perform. It is clear that a K of some type existed, b/c did work for for 2.5 months, satisfying subsection (2)(c), the length of which is for the jury to decide. No fraud, though. Policy: Justice/FairnessCourts use discretion w/ SOF. Purpose of SOF is to prevent fraud so restatement allows for flexibility. Courts will not allow parties to use SOF to commit fraud, as arguably did here. Oral employment agreements that can’t be performed w/n Mercer v. Roberts Co. US Court of Appeals, 5th, 1 year are not enforced except in extreme circumstances 1978 Facts: hired and established him in Dallas sales office. Employment agreement was oral and w/o definite duration, but it was understood that would develop the office to maturity, a process which would take 3-5 years. given incentive compensation, w/o written agreement, payable quarterly. 4 years later, in August, notified that a retroactive change was removing his incentive pay for that year. resigned and filed claim for those 8 months. Issue: Whether the K was unenforceable under SOF? Holding: Yes, b/c the K couldn’t be performed w/n 1 year. Rule: (1) Oral employment agreements that cannot be performed w/n 1 year are not enforced except in extreme circumstances. No extreme circumstances here. (2) When no time for performance is specified, a reasonable time will be implied and determined. Policy: Bright Line/ChannelingEncourages parties to put complex business arrangements in writing. Dissent: Should be construed as a renewable 1-year employment agreement, falling out of the SOF. Also trying to fraudulently get out of deal when got benefit out of agreement. PE can get around SOF; Part performance on both sides Schwedes v. Romain US Court of Appeals, 5th, shows no fraud 1978 Facts: sent letter to offering to sell them land for $60K. accepted by phone, and had attorney handle arrangements w/ . Closing date set, and offered to send whole purchase price at any time, but ’s attorney told no need to send now, to wait for closing. sold land to 3rd party for $64K. claims partial performance b/c then secured financing and offered to pay the price, and that partially performed by withholding their property from the market during negotiations and hiring attorney. Issue: Whether PE can supercede violation of SOF? Holding: No, b/c no part performance and no fraud. Rule: (1) Acts taken in contemplation of eventual performance do not qualify as part performance of K for SOF purposes. Claimed acts of partial performance sufficient to take an otherwise unenforceable K out of the statute of frauds must be unequivocally referable to that K. Such acts as obtaining financing and making studies of the real property have been held insufficient part performance to preclude defense of SOF. Here, no enforceable K b/c not in writing and its a land sale. No part performance b/c no terms of K were fulfilled - only contemplated performance. (2) Where a case is clearly w/n SOF, PE is inapplicable, for the net effect would be to repeal the SOF entirely. No PE b/c no fraud, and case clearly falls under SOF. Policy: Bright Line/ChannelingEncourages parties to put complex business arrangements in writing. Purpose of SOFcourts will not invoke PE to counter SOF unless the SOF itself is being used to perpetrate a fraud.
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9.
Charitable Subscriptions a. R 2d § 90(2) A charitable subscription or marriage settlement is binding under (1) w/o proof that the promise induced action or forbearance. b. Only a few state supreme courts have accepted § 90(2). c. Question of charitable subscriptions rarely comes up b/c it doesn’t breed good will to sue donors. d. Possible effects of blanket enforcement of charitable subscriptions: i. None ii. Enhances charitable treasuries b/c donees can now enforce promises iii. Reduces charitable promising (although not necessarily giving) iv. Reduces charitable treasuries b/c donees who would have felt morally bound to keep promises just won’t promise in the first place.
e.
Cases
Charitable subscription is binding w/o reliance. Salsbury v. NW Bell Telephone Co. SC of Iowa, 1974 Facts: wrote out a pledge to for charitable subscription, but later reneged. Issue: Whether the letter is binding? Holding: Yes, b/c of § 90(2) Rule: (1) § 90(2) – charitable subscription binding w/o reliance. Here, made a charitable subscription. Policy: Public policy supports enforcing charitable subscriptions, as they serve the public interest. PE can get around SOF; Part performance on both sides Congregation Kadimah shows no fraud Toras-Moshe v. DeLeo SJC of MA, 1989 Facts: Dying promised $25K to temple orally. Temple planned to use money for library named after , although didn’t request the library. died intestate; estate refused to pay. Issue: Whether ’s promise is binding? Holding: No, b/c no consideration or reliance, and court has discretion under § 90(2) Rule: (1) Courts have discretion whether to apply § 90(2) based on injustice. Here, there is no injustice in not enforcing the promise. No reliance b/c changes were only budgeted, not carried out. No consideration b/c room-naming not bargained for by . Policy: Public policy supports enforcing charitable subscriptions only when not doing so would be unjust. Squib: Allegheny College v. National Chautauqua County Bank: promised money to after her death if they used money for memorial fund in her name and for specific purpose. paid $1,000 of it before dying, but executors refused to pay. Cardozo held that it was binding b/c there was consideration - ’s promise to name fund after her and use for specific purposes, which was bargained for by .
B.
Past Consideration/Material Benefit Rule 1. Background a. Promise is made, but it is made after rather than before services are rendered: benefit is conferred, and then the promisor promises to pay for them. b. Not enforceable under traditional K theory b/c exchange not bargained for – it is past consideration. Not enforceable under Promissory Estoppel b/c “reliance” is before the promise. But under Material Benefit Rule, subsequent promise to pay for non-requested services is enforceable if recipient has incurred a substantial benefit from those services and there is a moral obligation to pay.
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c.
d. e. f. g. 2.
Two alternative reasons for finding consideration in the receipt of a past benefit: i. in the promise, made after the benefit has been received, which is made in a context in which it is pretty clear that there was an exchange of some sort ii. in the expectations of the parties at the time the benefit was received Purpose is to prevent injustice and unjust enrichment where K has structural defect that promise was made after performance. Performer must expect payment at time of act § 86 does not distinguish b/n benefit requested by the promisor and those that are not. On one level, conflicts with consideration theory b/c benefit/detriment theory went out the window w/ Hamer v. Sidway.
Rule a. R 2d § 86 – promise for benefit received i. A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice. ii. A promise is not binding under the above section: (A) if the promisee conferred the benefit as a gift (promisee was a volunteer) or for other reasons the promisor has not been unjustly enriched; or (B) to the extent that its value is disproportionate to the benefit. iii. Comment a: Need future promise PLUS past consideration PLUS moral obligation for promise to be enforced. iv. Comment e: denies enforcement to gratuitous promises. b. Material Benefit Rule (Webb v. McGowan)where the promisee cares for, improves, and preserves the property of the promisor, though done w/o his request, it is sufficient consideration for the promisor’s subsequent agreement to pay for the service, b/c of the material benefit received. Promise to pay Indebtedness a. R 2d § 82Promise to pay all or part of prior contractual or quasi-contractual debt owed by promisor is binding if the indebtedness is still enforceable or would be except for the statute of limitations. b. R 2d § 83Express promise to pay all or part of indebtedness of promisor, discharged or dischargeable in bankruptcy proceedings begun before the promise is made, is binding.
3.
4.
Cases
Past consideration not consideration; only preexisting obligation supports subsequent promise, not moral obligation Facts: ’s 25-year-old son got sick on voyage and gratuitously took care of him for 2 weeks. After all expenses were incurred, (father) wrote letter to promising to pay for the expenses, but later reneged after his son died. Issue: Whether ’s promise is binding? Holding: No, consideration was past and there was no preexisting obligation. Rule: (1) Past consideration is not consideration; only when there are preexisting obligations will a subsequent promise be enforced. Here, the consideration was past, and there was no preexisting obligation (2) Moral obligation not sufficient to support subsequent promise to pay. Policy: Just b/c something is immoral doesn’t make it illegal. Must have consideration for K. Note: Perhaps the fact that was the father of an adult who was benefited distinguishes Mills v. Wyman SJC of MA, 1825
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this case; b/c got no benefit, and his son was no longer in his care. Also, had given something in exchange for ’s promise to pay or had son been a minor for whom was still responsible, court may have decided to enforce promise. never deliberated about making this promise. Promisee must expect compensation at time of benefitManwill v. Oyler SC of Utah, 1961 giving to qualify for material benefit rule Facts: made several payments on ’s behalf. alleges that a few years later, after benefit received, promised to pay him for the payments. reneged. Issue: Whether ’s promise is binding? Holding: No, consideration was past and there was no expectation of compensation by at the time he made his payments. Rule: (1) Mere moral obligation not enough to bind a K. (2) For material benefit rule, promisee must expect compensation at time of benefit-giving. Here, didn’t expect payment for his actions at the time; they were done gratuitously. Policy: If moral obligation was enough to enforce promises, all promises would be enforced. Must have expectation of getting paid at the time benefit is conferred. Material Benefit Rule; Moral obligation is sufficient where Webb v. McGowin Court of Appeals of AL there is material benefit received. Facts: diverted falling block from hitting his boss, , saving ’s life but crippling himself. A month later promised to pay ’s expenses for the rest of ’s life. When died, his estate refused to continue the payments. Issue: Whether ’s promise is binding? Holding: Yes, as there was a material benefit given and moral obligation to pay. Rule: (1) Material Benefit Rulewhere the promisee cares for, improves, and preserves the property of the promisor, though done w/o his request, it is sufficient consideration for the promisor’s subsequent agreement to pay for the service, b/c of the material benefit received. (2) Moral obligation is sufficient where there is material benefit received. Here, there was a material benefit given, and expressly agreed to pay for it. Policy: If the parties had time to bargain over this, would certainly have asked to do what he did, saving his life, in exchange for paying ’s expenses for life. No reason why such a promise should not be enforced just b/c it was made after a benefit was given that would have promised beforehand, if there was time. Also, would have expected compensation for his act had he known of the detriment he would suffer.
Reconciling Wyman and Webb Mills v. Wyman Webb v. McGowin the promisor felt a transient feeling of promisor reflected on the promise for about gratitude that prompted him to make a month before making promise through a a promise just 4 days after the formal contract incident promisor substantially performed promise promisor did not receive a benefit during his life because his son died promisor never reneged on promise; he died promisor didn’t get the direct benefit; still upholding the K, it was estate who his son did reneged. promisor wasn’t responsible for his promisor received a sizable benefit (being son saved from death) the parties were strangers w/ no prior parties worked together for years and had a course of dealing relationship – employee expects boss to take care of him.
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C.
Unjust Enrichment/Quantum Meruit/Quasi-Contract 1. Background a. Quasi-contract/Implied-in-Law Contract/Restitution Not a real K, but rather an obligation imposed by law for the purpose of bringing about justice and equity. No reference to intent of parties – often goes against agreement of parties. has received a benefit from which it would be inequitable for him to keep w/o compensating . b. Quantum Meruit/Unjust enrichmentA type of quasi-K. A party receives a material benefit and it would be unjust for that party not to pay for it. Quantum Meruit“as much as is deserved” – same as unjust enrichment. c. W/ Quantum Meruit, there is no explicit promise. d. Difference from PE: Under PE, key is ’s detrimental reliance. Under Quantum Meruit, key is ’s unjust gain. Under PE, damages based on ’s reliance. Under QM, damages based on the market value of benefit conferred upon . e. Restitution damages based on benefit conferred upon , measured by market value, cost, or value to the beneficiary, . f. Officious intermeddler – person waiting to do services and forces them upon someone, then demands payment (A paints B’s house, but B didn’t request services.). Fear is that w/ QM, it will allow officious intermeddlers to benefit unjustly. If is a volunteer, w/o reason to believe he will be paid, no claim. g. But, in cases of mistake, emergency, or wrongful conduct by , restitution by is allowed. If mistakenly starts painting ’s house, thinking it is a different house, and knows what is doing but doesn’t tell him, can get restitution. h. ’s argue breach of K first, then PE, then quasi-K as fallback. i. Implied-in-fact K is a real K, under traditional theory, except the promise is implied.
2.
Rules a. Elements of recovery under Quasi-K for QM: i. Benefit conferred upon by with reasonable expectation of reimbursement; ii. Benefit was appreciated and accepted by ; iii. Acceptance must be such that its retention would result in an unjust enrichment of (it would be inequitable for to retain the benefit w/o paying for value) b. cannot be volunteer under Quasi-KA person who officiously confers a benefit upon another is not entitled to restitution for it. A person who has conferred a benefit should not be permitted to require the other to pay for it unless the one conferring the benefit had a valid reason for doing so. c. Implied-in-Fact K (R 2d § 4)a promise may be inferred wholly or partly from conduct. i. Mutual agreement ii. Intent to promise iii. Agreement and promise have not been made in words, but are implied from the facts (manifestation of assent arising from the parties’ actions). Past course of dealing/history between the parties or industry practices, are very important in showing an implied-in-fact K can be implied in the facts of the situation. E.g., if the parties had a history of dealing in a certain way, future acts may be implied or expected w/o express new agreement. Case
3.
Person who officiously confers benefit upon another is not entitled to restitution for it. Must have valid reason to expect $ Facts: purchased horse which turned out to be lame, and sent it back to the racetrack/seller. The racetrack/seller refused to accept it, and the deliveryman brought it to ’s farm. sent bills for horse’s care to , and responded back that he wasn’t paying for it as it wasn’t his horse anymore. also sent bills to seller, who didn’t claim the horse or Bailey v. West SC of RI, 1969
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pay. sold horse to 3rd party and sued for cost of care. Issue: Whether has a duty to pay the cost of the horse’s care? Holding: No, b/c was a mere volunteer Rule: (1) Where conduct of parties does not imply intent to enter K, there is no K implied-in-fact. No implied-in-fact K – no mutual agreement b/c didn’t have prior course of dealing with - nothing to base assumption of agreement on. (2) A person who officiously confers a benefit upon another is not entitled to restitution for it. A person who has conferred a benefit should not be permitted to require the other to pay for it unless the one conferring the benefit had a valid reason for doing so. No Quasi-K - acted as volunteer b/c he had no valid reason to believe he would be paid. He knew the ownership was in controversy. Policy: Volunteer rule necessary to prevent officious intermeddlers. House painting example- painter paints person’s house without consent Painter Person Low cost of person’s telling No benefit them of mistake Look at incentives you’re creating for future Burden should be on person who made the mistake put risk on person most able to appreciate risk Employment example- P negotiating executive employment contract to move to new city and moves to new city while still negotiating contract. Never reach agreement on final terms and she is terminated. Contract Promissory Estoppel Quasi Contract too many no promise made benefit conferred open terms no reasonable Company accepted apply R.G. expectation of reliance benefit Group reliance wasn’t would there be unjust nothing reasonable without a enrichment if D didn’t signed and signed contract- she pay? (there IS a executed shouldn’t have moved reasonable expectation of etc without a contractcompensation) she should not have SHE COULD WIN ON realized this was risky QUASI CONTRACT and not reasonable to rely
IV.
Defenses to K
A.
Overview Given that has established an agreement exists, can say that there is something wrong w/ K: 1. Procedural Defensessomething wrong w/ procedure 2. Substantive Defensesthis is not the kind of K we want to enforce Immorality and Illegality (Against Public Policy) 1. Public Policy a. Ks to perform illegal or immoral activities are not enforceable b. Ks based on meretricious consideration are not enforceable c. R 2d § 178: Promise is unenforceable on grounds of public policy if legislation provides it is unenforceable or the interest in its enforcement is clearly outweighed in circumstances by public policy.
B.
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Homosexual Sodomy laws are unconstitutional violations Lawrence v. Texas SCOTUS, 2003 of Equal Protection and Due Process clauses. Facts: was arrested for engaging in homosexual sodomy in violation of TX law. Issue: Whether the TX law violates the Equal Protection and/or Due Process clauses? Holding: Yes, b/c discriminatory and violate fundamental right Rule: (1) There is a fundamental right to privacy in the home. Sexual matters with consenting adults fall under the right to privacy. (2) Laws that single out homosexuals are discriminatory. If bans on sodomy were allowed, they would at least have to apply to both homosexuals and heterosexuals. But even still, b/c the nature of the activity is so connected w/ homosexuals, it is discriminatory b/c it focuses on them. Policy: Right to privacy, freedom from discrimination.
2.
Cohabitation Agreements
No pseudo-marriage Ks allowed Hewitt v. Hewitt SC of IL, 1979 Facts: lived in manner of a wife w/ for 15 years w/ 3 kids and thought that they were married, but they were not. promised to share his life, future earnings, and property w/ her. No common law marriage allowed in IL. left her, and she sued for property acquired together. Issue: Whether the oral K to share assets allows to recover an equal share of marriage profits? Holding: No, b/c that would circumvent law against common law marriage & violates public policy. Rule: (1) No mutually enforceable property K can exist w/ knowingly unmarried cohabitants. Psuedo-marriage K to share assets is illegal b/c resurrects common law marriage, and violates public policy by undermining the institution of marriage. Policy: Courts will not enforce illegal Ks or Ks that violate PP. Here, K may have used sex as consideration which is also illegal. Courts also want to protect the institution of marriage by not allowing common law substitutes. Legislature banned common law marriage – courts do not want to overrule legislature in public policy areas. Pseudo-marriage Ks allowed as long as not for sex Marvin v. Marvin SC of CA, 1976 Facts: lived w/ for 7 years and had oral agreement to share all property and earnings gained during marriage. claimed in reliance she gave up her career. left. Issue: Whether there is an enforceable K to share assets? Holding: Yes, b/c it is a real K. Rule: (1) Mutually enforceable property K can exist w/ knowingly unmarried cohabitants. Courts should enforce Ks unless it is for sex, which it was not here. W/o express K, courts should inquire into conduct of the parties to determine whether that conduct shows an implied K. Court may also employ QM or equitable remedies when warranted by facts. Policy: CA court wants to uphold freedom to K here and changing social norms. Pseudo-marriage Ks allowed as long as not for sex Glasgo v. Glasgo IN Appellate Court, 1980 Facts: lived w/ but they weren’t married (were married earlier in life but had divorced) Issue: Whether has a claim for half of the value of assets of marriage? Holding: Yes b/c of facts of case in interest of justice Rule: (1) Mutually enforceable property K can exist in the interest of justice. In this case, where relied on ’s promises, it would be unjust not to allow her what she was promised. This doesn’t resurrect common law marriages. Policy: Justicecourt must provide relief in interest of justice, and to prevent fraud.
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Denying recovery here would unjustly enrich at expense of .
3.
Ks for Reproduction
Surrogacy Ks are invalid b/c illegal and violate public In Re Baby M SC of NJ, 1987 policy Facts: Stern K’ed for surrogacy agreement w/ Whitehead. W was to receive $10K, and S were to receive baby. W was to give up all parental rights. ICNY, the infertility center that set up the deal, was paid $7.5K. When child was born, W refused to give up the baby and ran off with the baby. Issue: Whether surrogacy Ks are valid? Holding: No, they are illegal and violate public policy Rule: (1) Surrogacy Ks conflict w/ adoption laws. Laws prohibit use of money w/ adoptions and require proof of parental unfitness or abandonment before termination of parental rights. Here, money was involved and mother wasn’t proven unfit. (2) Public Policy supports keeping the child w/ both parents. Best interest of child is violated by not considering the mother’s situation. (3) Natural mother has a right to a voluntary, informed decision. Mother cannot give up that right before she even sees her child. Mother here was not even given counseling. Policy: K was basically exchange of $ for baby, and didn’t take into account best interests of the child or the mother. Surrogacy Ks are valid if the host is not the genetic Johnson v. Calvert SC of CA, 1993 mother; Intent of parties goes to best interest of child Facts: entered surrogacy K w/ where they donated zygote, and she carried it to term for $10K and an insurance policy. Relations b/n the parties deteriorated during the pregnancy Issue: Whether surrogacy Ks are valid if the host is not the biological mother? Holding: Yes, b/c not an adoption, and although in the state there is a no distinction b/n mother based on gestation or biology, in case of such a tie, the one who sought to bring the baby into the world has the rights. Rule: (1) Surrogacy Ks are valid if both donor parents are the biological parents. Here, the biological parents donated the zygote, so the host is not genetically related to the baby. This is a public policy question that should be determined by legislature, but the gov. vetoed it, so not against public policy. Difference from regular surrogacy: payment is for service of hosting, not for the baby, the child was placed w/ the people who wanted it, and the host was not the genetic mother, so she wasn’t giving up her biological child. (2) Best interest of child is for the child to go to the parents who intended to bring the child into the world. Here, did. Policy: Courts look to intent of parties to determine best interest of the child. Also, valuable to parents who cannot conceive to have another person host their baby.
C.
Covenants Not to Compete 1. Background a. In exchange for a term K (an employment K for a definite period of time) employee is required by employer to promise not to compete against the employer if they leave the employment. b. Common law courts have generally held covenants not to compete unenforceable on grounds of public policy, w/ 4 exceptions: i. Those made by a seller of property or a business not to compete w/ the buyer in a way that lowered the value of the business or property ii. Those by a retiring partner not to compete w/ his firm iii. Those by the buyer of property not to use that property in competition w/ a business retained by the seller iv. Those by an employee not to compete w/ his employer after the expiration of employment.
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c. Common law required that restraint be reasonably necessary to protect the business of the promisee. d. Courts imply protection of employer rights to secret formulas and customer lists w/o, but won’t imply
covenant not to compete – must be explicit. With doctors, covenants not to compete are generally enforceable, following balancing test. Law firms cannot prevent lawyers from taking clients. They try to say that leaving equity partner cannot take uncollected revenues or some other incentive if he takes clients. Some courts have upheld this. g. Attorneys: AHA Model Rules of Professional conduct A lawyer shall not participate in offering or making: i. a partnership or employment agreement that restricts the rights of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement; or ii. an agreement in which a restriction on the lawyer’s right to practice is part of the settlement of a controversy b/n private parties Cohen v. Lord, Day, & Lord: NY court held that partnership agreement that condition payment of a departing partner’s share of earned but uncollected revenues on noncompetition was unenforceable b/c it violated ethical prohibition on restricting lawyer’s practice. h. Covenant generally seeks injunction, possibly damages. Rules a. R 2d § 188Johnston: enforceability is based on a balancing test b/n needs of employer, impact on public (competition), and hardship on employee. b. Valid restrictive covenant test: (from Gagliardi) i. the covenant must be part of or ancillary to employment K ii. must be supported by consideration iii. must be reasonably limited in time and geography (Johnston: look at what it is that the employer is trying to protect to determine reasonableness) iv. must be necessary to protect the employer – look at the nature of employment and training/knowledge of employee, if low, covenants less likely to be upheld. c. Ways to judge reasonableness: i. At time of K ii. At time employee left
e. f.
2.
4-part test for covenants not to compete Gagliardi Bros. v. Caputo USDC, EDPA, 1982 Facts: worked for and knew proprietary secrets. No covenant restricting his use of that info when hired. 2 years after hiring, made sign non-compete clause w/n 1 yr of leaving and w/n the market area of 100 miles in case left company, and got pay increase. ’s pay was increased in a similar manner ever 6 months though anyway. turned down 3 other offers for employment while working for , but was let go 7 years later and found job w/ competitor w/n 1 yr, 25 miles away. Issue: Whether the covenant is enforceable? Holding: No, as it had no consideration and was not reasonable Rule: (1) Four-element test. No consideration b/c wage increase was just regular increase, not tied to the clause. Not reasonably limited in geographic territory b/c 100 mile restriction no longer makes sense – company’s radius has increased. Also not necessary to protect employer – lack of such clause has never hurt employer before, and no evidence it would do so here. Policy: Courts want to enforce covenants to protect business, but also want to protect employee’s abilities to find work elsewhere. Note: Johnston disagrees w/ opinion b/c could be valid reason for company to need agreement – they had just designed new slicing machine, could bring competitor up to speed quickly in competition. Squibs: Marine Contractors v. Hurley: restrictive covenant upheld b/c they accelerated retirement pay. Brewer v. Tracy: court invalidated 15 mile restrictive covenant on garbage
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man as being unreasonable – must limit only to area where service performed. Maltby v. Harlow: court rule stockbrokers have unique relationships w/ customers and covenant allowed.
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D.
Duress 1. Background a. No mutual assent b/c one side forced the other to assent – renders K voidable. b. Violates autonomy justification of K enforcement – not voluntary. c. Threats of negative consequences are not enough by themselves to constitute duress, nor are situations of substantial imbalance in market/bargaining power. d. Threat to breach a K is not duress if reasons exist why you need to breach – only bad faith threats to breach to force other party to act against their will is duress e. For economic duress, party has a superior bargaining position if he is the sole effect or source of something needed by the other party to avoid a serious economic loss, and the relationship is not reciprocal. If he used that superior bargaining position unreasonably, unlawfully, or unjustifiably, = duress. 2. Rules a. Elements of Duress: i. Improper threat or force ii. Threat/force induced assent iii. Inducement was reasonable (no reasonable alternative to assent) b. Types: i. PhysicalR 2d § 174: duress by physical compulsion ii. ThreatR 2d § 175 (Can be economic – any improper threat that leaves no reasonable alternative) (A) Threat by other party (B) Threat by 3rd party, unless other party in good faith and w/o reason to know of the duress relied materially on the transaction. (C) Comment a: threat may be in words or inferred (D) Comment b: not duress if victim doesn’t take advantage of a reasonable alternative c. Improper threatsR 2d § 176: crime, tort, criminal prosecution, use of civil process in bad faith, breach of duty of good faith and fair dealing under K d. Subjective test: used to determine whether party’s free will has been overcome. If party is unusually timid, still can use the defense. e. There must always be causation - ’s threat must have lead to ’s actions. If ’s threats not taken seriously by , cannot use defense. If made threats that did not act in reaction to, cannot use defense. f. Remedy is usually restitution for unjust enrichment. Threat to do a legal act can be duress, if malicious Wolf v. Marlton Corp SC of NJ, Appellate Div., 1959 Facts: agreed to buy house from w/ payments at specified times. had right to keep paid money if failed to keep up payments. didn’t make second payment, and told that if didn’t release them from K, they would resell house to undesirable people. agreed, but wanted to keep some of deposit – said that if he didn’t reduce to $450, it would be sorriest move he made in business career. Issue: Whether ’s threats constitute duress, breaching K? Holding: Yes, if the threats were made. Rule: A threat to do a legal act can constitute duress if immoral. Action threatened by was purely malicious. Policy: Courts do not want to encourage threats to void Ks against one party’s will.
Economic duress if needful goods withheld and no other Austin Instrument v. Loral Court of Appeals, NY, 1971 source available in time Facts: awarded K for Navy, and gave subcontract. awarded 2nd Navy K, and
45
threatened to cease delivery on 1st sub-K unless awards 2nd sub-K and gives retroactive price increase for 1st sub-K. tried to find other companies to perform in time based on navy-approved list, but failing to do so, acceded to ’s demands. After final payment, sued. Issue: Whether was forced to increase payments and award 2nd K under economic duress? Holding: Yes, as ’s threat deprived of its free will. Rule: Economic duress exists if immediate possession of needful goods is threatened, or by proof that one party threatened to breach agreement by withholding goods unless demands are met. Also must show that could not obtain goods from another source. did much business w/ gov and had to worry about losing future business. would have been 2 months late unless they acceded to , and tried to find alternatives. Not acceptable to require to accept breach and then sue for damages; would still lose gov. business and had reputation hurt. Policy: Courts do not want to encourage threats taking advantage of a contractual position to extort benefits. Economic duress due to lack of bargaining power Post v. Jones SCOTUS, 1856 Facts: Ship, after completing whaling oil cargo, crashed on rocks. Nearest port 5K miles away, nearby shore was unsafe, and ocean wouldn’t be navigable for 10 months in winter, starting in 2 weeks. 3 ships came along and held auction to sell oil. All 3 loaded up at low price. Issue: Whether Ks to purchase oil/cargo were invalid due to duress? Holding: Yes, b/c of ’s lack of bargaining power Rule: Where one party exploits superior bargain power to take advantage of the duress-like situation of another party, K not enforced. Ship entitled to salvage compensation but not profit from unfair bargaining. had no choice to submit to sale. Policy: Courts do not want to encourage taking advantage of someone else’s bad situation
46
E.
Fraud 1. Background a. Assent wasn’t really assent b/c it was induced by misrepresentation. b. Fraud is willful or negligent misrepresentation. Types of fraud: i. Fraud in the inducementfalse assertion to inducing party to enter K ii. Fraud in the executionfalse assertion regarding substance of K – e.g., telling someone K is for one thing so they sign it, but it is really about something else iii. Fraud in the instrumentfalse assertion that goes to the character of the K itself and the terms of the K c. Fraud makes K voidable (not necessarily void) d. Standard of proof is by clear and convincing evidence, rather than by a preponderance of the evidence. e. In arm’s length market transactions, law allows you to expect honesty, but not candor, except in certain situations. f. Courts and statutes generally prohibit parties from both making and disclaiming warranty in the same agreement. g. Often party can bring fraud claim based in tort or K. Tort elements generally more strict, requiring BOTH fraudulent and material misrepresentation. But in tort, punitive damages are possible, while they aren’t generally in K. h. Once party is on notice that a fraud has been perpetrated, he must decide whether to ratify or rescind the K. If party fails to seek rescission in timely manner, or otherwise affirms K, he loses option to void K. 2. Rules a. Basic Elements i. False assertion as to a present or past fact (A) includes nondisclosure when duty to speak (but not nondisclosure generally) and active concealment (B) opinions as to quality & projections of the future are not false assertions unless knowingly false ii. That is fraudulent OR material (See R 2d § 162 below) (A) fraudulentknowingly false, intended to mislead, or recklessly made (B) materialthe sort upon which a reasonable person would typically rely even if just negligent iii. Upon which the recipient justifiably relies to his detriment (A) Court very sensitive who recipient is. Sophisticated recipient may not have relied. (B) Needs a substantial factor inducement (goes w/ material inducement) as causation iv. Damages (A) Depends on state of mind of . (B) Must show detriment: (1) Restitution: benefit conferred through fraud. Most courts will allow if necessary to restore party to status quo ante. (2) Consequential damages: lost profits (3) Punitive damages: if behavior was malicious/reckless – usually only for tort (4) Reliance or expectation: typically inconsistent w/ fraud (C) Rescission: get out of the deal. Typical K fraud remedy. No detriment needed b. R 2d § 162(1): Misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest his assent and the maker: (one of the following) i. knows or believes that the assertion is not in accord w/ the facts; or ii. does not have the confidence that he states or implies in the truth of the assertion; or iii. knows that he does not have the basis that he states or implies for the assertion c. R 2d § 162(2): Misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or if maker knows that it would be likely to induce the recipient to do so. d. Mixes subjective and objective standard: Speaker judged by subjective standard – intent to mislead, etc. Receiver judged by objective standard – reasonableness of reliance.
3.
Cases
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False representation of past or present income and profits Spiess v. Brandt SC of MN, 1950 is fraud if other elements met Facts: bought resort from . was young, was experience in resort business, and knew from when was a child visiting resort. did run an inn once, though, so had some experience. told that they were making “good money” out of the resort, and that could make good money too. requested to see the books, but refused. took over and started making payments, but low income from business forced them to stop paying. finally saw books and they showed financial losses for prior years cancelled K and kept paid funds as liquidated damages. Issue: Whether made false representations to amounting to fraud? Holding: Yes, by falsely representing that they had made “good money” Rule: False representation of past or present income and profits is fraud if other elements satisfied. misrepresented past income by saying they made “good money,” and books were withheld. ’s reliance was reasonable b/c of youth and inexperience and special relationship from when was a kid. Policy: Fraud bad (duh). Relative youth an inexperience of s – should be protected. But, could be said to incentivize recklessness/carelessness, parties rewarded for blindly entering K w/o getting the books first. Dissent: didn’t misrepresent – past losses were due to investment back into the business; purely paper losses, as business was profiting. Parties can K out of fraud if specific enough Danann Realty v. Harris Court of Appeals, NY, 1959 Facts: entered K w/ and is now alleging misrepresentations. Language of K said that the seller has made no representations as to expenses, operation, and other aspects of the property and that the purchaser so acknowledges, and takes premises as is. Also, there was a merger clause. Issue: Whether can void K based on fraudulent misrepresentations by despite fraud waiver? Holding: No, the clause is dispositive; only if the clause itself was induced by fraud is it void Rule: Parties can K out of fraud if specific enough. Clause specifically denies representations of facts that now says were misrepresented. If clause was a general disclaimer, it would not be valid, but since specific to the representation in dispute, it is valid. Only if the clause itself was induced by fraud would it be void. Policy: Freedom to K Dissent: Parties shouldn’t be able to K out of fraud for public policy and morality reasons. Fraud vitiates every transaction. The only reason the clause was specific enough is b/c it included everything, amounting to a general waiver. Encourages all-encompassing boilerplate in future. Squib: CBS v. Ziff-Davis: investigated ’s representations before closing, found they were false, but proceeded anyway. Court held did not waive warranty claim b/c critical question is not whether the buyer believe truth of warranted info, but whether it believed it was purchasing the seller’s promise as to its truth.
48
F.
Duty to Disclose 1. Background a. Goes to first element of fraud, false assertion. b. Default ruleno duty to disclose. Courts are moving away from this though. c. Duty to disclose in fiduciary relationships, when you have already spoken and you find out that the facts were wrong or have changed, and when speaker knows disclosure is necessary to correct mistake by other party as to basic assumption and where non-disclosure would be a violation of good faith and fair dealing. d. Concealmentparty takes affirmative steps to prevent the other side from discovering a material fact. e. If both parties have equal access to knowledge or info, no duty to disclose. Converse of this is insider information – must disclose if the other party cannot get the information. f. Policy – economic rationale for default rule of no duty to disclose – we want to reward speculators who turn out to be right, and if parties had to disclose, there would be no incentive to acquire info. g. Misappropriation theory – insider trading violates duty to society. h. Landlord/tenant relationship almost like fiduciary relationship b/c of asymmetry of power i. Vendees v. Tenantsgenerally duty to disclose stronger w/ tenants b/c tenants do not have right to inspect, etc., which vendees do; and vendees are buying house, as opposed to renting.
2.
Rules a. R 2d § 161Person’s nondisclosure of a fact known to him is considered a false assertion only when one of the following exist: i. where disclosure of fact is necessary to prevent a previous assertion from being a misrepresentation, fraudulent, or material. ii. where disclosure would correct a mistake of other party as to a basic assumption on which party is making K and if disclosure is required by good faith and fair dealing iii. where disclosure would correct a mistake of the other party as to contents or effect of writing iv. where the other person is entitled to know due to relation of trust and confidence b/n parties (e.g. a fiduciary duty) Cases
3.
Seller of real property has duty to disclose dangerous Obde v. Schlemeyer SC of WA, 1960 latent defects Facts: purchased home from 3rd party and discovered termite infestation. hired S to eradicate, and S fixed surface signs of infestation but told he would have to go further to eliminate problem, w/ regular inspections for 1 year. declined, and sold house to w/o informing of termite condition. asked no questions about it – but surface signs had been eradicated. Issue: Whether had duty to disclose the termite condition? Holding: Yes, as it was a latent condition for which surface signs were eliminated by . Rule: Seller of real property has duty to disclose latent defects dangerous to property, health, or life of tenant, known to seller when lease is made, but unknown to purchaser, and which a careful examination by buyer would not disclose. Termite infestation serious danger to property. Condition was latent at time of sale, so had duty to disclose. Further, helped in concealment. Policy: Unequal positions of knowledge – protection of buyer.
Seller of real property has duty to disclose latent facts Reed v. King Court of Appeals, CA, 1983 materially affecting value or desirability of property Facts: purchased home from , but didn’t tell that a multiple murder took place at the house 10 years earlier. had told neighbor not to tell . B/c of stigma, house has low market value.
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Issue: Whether has duty to disclose that house was site of multiple murder? Holding: Yes, b/c value of house is materially affected and condition is latent. Rule: Seller of real property has duty to disclose facts materially affecting value or desirability of property known only to him and not w/n reach of buyer. 3 factors for materiality: gravity of harm, fairness of imposing duty of discovery on buyer, and impact on stability of Ks. Murder is not common enough occurrence to expect buyer to have to inquire about it. If quantifiable effect on market value of premises, it is sufficiently material to require disclosure. Policy: Unequal positions of knowledge – protection of buyer. Duty to disclose when seller creates condition impairing Stambovsky v. Ackley NYSC, Appellate Div., 1991 value that purchaser couldn’t have discovered Facts: bought house from , only to discover that it was haunted by ghosts. seller had publicized the haunting locally, but being from NYC, didn’t know, and did not disclose. Issue: Whether has duty to disclose ghost? Holding: Yes, b/c latent, affecting market value, and himself created the reputation. Rule: Duty to disclose when seller creates condition impairing market value that purchaser exercising due care is unlikely to discover. created the reputation, market value was hurt, and could not have discovered on reasonable inspection. Policy: Overrules caveat emptor when seller has unique knowledge of negative condition that buyer could not discover. No duty to disclose when equal access to info; expert L&N Grove v. Chapman DC of Appeal, FL, 1974 cannot rely on representations Facts: sold land to in Orlando in 1966 for 1.5 times market value. Both parties were real estate agents in area. Disney World project had been announced in 1965, but location was unknown. In 1970, construction of Disney World began, and ’s land was right by entrance. claims knew. Issue: Whether has duty to disclose his knowledge of the impact Disney World would have on property value? Holding: No, the info about DW coming was publicly available, was speculating, and was knowledgeable broker himself. Rule: (1) No duty to disclose when there is equal access to info. DW had been announced; just did a better job of guessing where the entrance would be. (2) Party w/ expert knowledge and equipped to evaluate falsity of representation does not have the right to rely on it. is a real estate broker in the community; he knew the market and could appreciate the representation. Policy: Parties should be rewarded for good speculation. When both parties have equal access to info, parties should have freedom to get the benefit of their good deals. Squib: Laidlaw v. Organ: negotiated to buy tobacco from , and day before sale news arrived that war of 1812 had ended and tobacco prices would skyrocket. didn’t know of news but did, and even asked if news had arrived, but didn’t answer. Court found no duty by to tell b/c he didn’t affirmatively misrepresent. Reconciling Obde and L&N: Access to info = crucial (Obde/imposs v. L&N/poss) Equality of parties (Obde/disparate v. L&N equal) Nature of info (Obde/substantial v. L&N/speculative)
G.
Mistake 1. Background
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a.
2.
Mistake is a belief not in accord w/ the facts at the time of K; not an erroneous belief about what will happen in the future or an assumption. b. Two types of mistaken belief: i. Meaning of termnever really had an agreement b/c not talking about same thing (e.g. “Peerless” case – both parties talking about different Peerless ship. ii. Factsbasic assumption upon which the K was made (motivating assumption) c. Types of mistake i. Mutual mistake ii. Unilateral mistake iii. Better chance of non-enforcement of K if a mutual mistake. d. Remedy: Rescission or reformation (where oral agreement is different from expression) e. Economic analysis: place liability on party that can best assume the initial risk, to decrease total cost to society in the long run. f. Alternate theory: trades on private knowledge of productive facts should not be set aside. g. Crucial legal pointassumptions about future behavior under K should be expressly made into a promise. Otherwise you are left asserting mistake. h. Subjective K theoryIrmen v. Wrzesinski: kid bought Nolan Ryan card worth $1200 for $12 due to mistake of clerk. Parties settled, but CB indicates that if kid knew it was a mistake, sale would have been void. If the kid realized the card was actually being offered for low price, he was free to take advantage of seller’s stupidity. i. “As is” clause ordinarily waives any implied warranty associated w/ sale. j. Courts generally grant relief for clerical/math errors b/c they are difficult to prevent, serve no useful social purpose by enforcing mistaken term, and no incentives exist to make such mistakes; in fact incentives work in opposite direction. Rules a. R 2d § 151: Mistake DefinedA mistake is a belief that is not in accord w/ the facts b. R 2d § 152: Mutual MistakeWhen mistake of both parties at time of K formation about basic assumption on which K was made has a material effect on the agreed exchange, K is voidable by the adversely affected party unless he bears risk of mistake under § 154. To determine material effect, take account of any relief by way of reformation, restitution, or otherwise. c. R 2d § 153: Unilateral MistakeWhen mistake of one party at time of K formation about basic assumption on which he made K has a material effect on the agreed exchange that is adverse to him, K is voidable by him if he does not bear risk of mistake under § 154, AND: i. effect of mistake would make enforcement unconscionable; OR ii. other party had reason to know of mistake or his fault caused the mistake (Note: but not a broader obligation than duty to disclose). d. R 2d § 154: When a Party Bears Risk of MistakeWhen: i. the risk is allocated to him by agreement of parties; OR ii. he is aware, at time of K formation, that he has only limited knowledge of facts to which the mistake relates but treats that limited knowledge as sufficient; OR iii. risk is allocated to him by the court on ground that it is reasonable w/ circumstances e. Common Law ruleparty who selects and uses the method of communication bears the cost of mistake due to that method. However, liability shifts when party receiving message knows or should know that it was a communication mistake.
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R§152
R§154
Does affected party bear risk of the mistake because of clause in K, because of limited knowledge, or because the court says so?
Is mistake unilateral or mutual?
Does mistake have material effect on exchange?
Not voidable
R§153 Is the effect of such enforcement a unconscionable ( ) or did the other party have reason to know of mistake (b)?
Not voidable
voidable
voidable
Not voidable
Limited knowledge implies that person is aware the he or : she does not have all of the facts to which the mistake relates but treats limited knowledge as sufficient (R§154)
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3.
Cases
If mistake goes to substance of deal, no K, but if difference Sherwood v. Walker SC of MI, 1887 only in some quality or accident, K is binding. Facts: , banker, wanted to buy cow from , and took him to see cows that probably couldn’t breed. contracted to buy specific cow from at price of beef cow, $80, but before delivery found out cow was with calf, and refused to deliver. Price as breeding cow would be $1K Issue: Whether mutual mistake voids K? Holding: Yes, b/c mutual mistake over the very nature of the cow sold. Rule: If mistake goes to the substance of the thing bargained for, no K. But if difference is only in some quality or accident, K is binding. Here, both parties were bargaining for a beef cow. Although there wasn’t a mistake as to the specific cow, the very nature of the cow was mistaken by both parties, not just for the short term but for all time. Policy: Ensuring that parties make informed decisions. Dissent: thought that cow could breed, and was speculating on it. And , as a rancher, was in the best position to know – should be rewarded for his good deal. Note: Johnston: Avoid abstract terms like “substance of the thing” or “quality of the thing” w/o specific examples to distinguish. Squib: Lenawee v. Messerly: court overruled Sherwood that there is a difference b/n substance & quality. They are the same thing basically when mistaken quality is of substantial value. “As is” clause allocated the risk of the mutual mistake. Anderson Bros. v. O’Meara Party claiming MM has duty to reasonably investigate; for US Court of Appeals, 5th, MM, both parties must be mistaken about same fact 1962 Facts: bought oil well dredge from . sent non-expert to inspect it, but he didn’t have expertise to tell that dredge was wrong kind for ’s purposes. Dredge was only usable for straight trench, and unusable w/o major, costly rebuilding for ’s purposes of digging sweep dredge. didn’t know of ’s intended use and assumed was going to use for its designed capabilities. Issue: Whether K is void for mistake of fact? Holding: No b/c neither party mistaken about same fact, and liable for his own lack of due care Rule: (1) For mutual mistake, both parties must be mistaken about the same fact. Here, was mistaken about what the dredge would do, and was mistaken about ’s intentions. But neither party shared the same mistake. (2) Party claiming mutual mistake has duty to reasonably investigate. Here, sent an unqualified inspector, so no due diligence. Policy: Buyer has duty to investigate b/c he is the one who knows what his purposes are. Asymmetry of info is on his side. Courts allocate risk to party best able to bear it. Squibs: Gartner v. Eikill: seller misrepresented zoning requirement but buyer should have known by researching title. But court found mutual mistake b/c buyer reasonably relied on statements by seller’s agent. Elsinore Union v. Kastorff: rescinded K based on mistake where winning bidder on construction K bid thousands less than the next closest bidder due to math error.
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H.
Unconscionability (must argue assent as well) 1. Background a. Defects do not rise to level of fraud or duress, yet enforcement would “shock the conscience” b/c it would create oppression and undue surprise. b. Unconscionability v. Fraud: unconscionability does not require a false assertion. Also, unconscionability may entail a lesser duty to disclose. Generally, fraud is much more difficult to establish b/c it requires clearly elements, while unconscionability is more vague. c. Types: i. Proceduralrefers to a defect in the bargaining process itself. There is an absence of meaningful choice on the side of one of the parties (e.g. through fine print, adhesion K, form K, disparity in knowledge). Understanding of K terms, unequal bargaining power, poor education, literacy, wealth all taken into account ii. Substantiverefers to the terms of agreement itself; an unreasonable term that deprives a party of the essence of the bargain (commercially unreasonable). It is unreasonably favorable to one party. d. Usually substantive cannot exist w/o procedural. e. Johnston: it could be argued that unconscionability doesn’t add anything to mistake or fraud or any of these defense theories – just an application of the objective theory of assent. f. adhesion KK where there are no market alternatives to the terms. Procedurally unconscionable (substantive also needed). g. Many Ks are regulated and not in common law b/c legislatures have gotten involved – housing, auto sales, etc. h. Unconscionability is a fallback when duress, fraud, or incapacity is less direct or clear – the procedural aspect of unconscionability. Substantive unconscionability also needed though. Substantive can be thought to extend the public policy exception. i. Bargain is not unconscionable merely due to inequality of bargaining position – must be gross inequality combined with terms unreasonably favorable to the stronger party. j. Courts generally will enforce waivers of tort liability unless the bargaining process was procedurally unconscionable or terms violated public policy. Most courts do not let disclaimers release from liability for gross neglignece.
2.
Rules a. R 2d § 208Court may refuse to enforce an unconscionable K entirely, or enforce the whole K except for any unconscionable terms, or may limit the application of the unconscionable terms so as to avoid any unconscionable result. i. Comment dbargain is not unconscionable merely b/c parties to it are in unequal bargaining position, but gross inequality of bargaining power, w/ terms unreasonably favorable to the stronger party, may confirm indications that the transaction involved elements of deception or compulsion, or may show that the weaker party had no meaningful choice. Courts find unconscionability where a stronger party: (A) believes a weaker party will not be able to perform K; (B) knows that weaker party will not receive a substantial benefit from K; or (C) knows that weaker party cannot protect his interest due to a physical/mental sickness, ignorance, etc. b. UCC § 2-302If unconscionability is claimed, evidence may be presented as to the K’s commercial setting, purpose, and effect to aid the court in determining, based on rule in R 2d § 208. c. Test is whether seller makes terms clear to buyer at time of K formation. If not, seller does not meet test of “substantive fairness.” Duty to read a. Under common law, the one who signs a document is bound by it. If he cannot read, he has a duty to have it read to him. b. Exception based on objective theory is that an apparent acceptance will not bind if the offeror knows or has reason to know that the apparent acceptor does not intend what his words ostensibly indicate.
3.
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c. 4.
Terms must be clear, conspicuous, and on a document that the signer would presume is a K or affects his existing K. Cases
Williams v. Walker-Thomas Unconscionability when absence of meaningful choice/gross inequality of bargaining power, and terms in Furniture DC Court of Appeals, 1964 favor of other party, based on circumstances. Facts: , single mother w/ 7 kids on welfare, entered 14 Ks w/ to buy various items of furniture on installment plan. Plan was such that her minimum payments only paid off a proportion of the cost of each item, so that each would only be paid off once the final one was paid off. K was very long and technical, and didn’t read. Before her final purchase of an expensive radio, had paid down her debt to $164, but after the radio, she defaulted, and repossessed all items. Issue: Whether the K was unconscionable? Holding: Yes, b/c of gross inequality of bargaining power and ’s lack of understanding of K. Rule: Where there is absence of meaningful choice, which can be shown by gross inequality of bargaining position, on the part of one party and K terms unreasonably favorable to the other party, K may be unconscionable based on commercial circumstances of case. Procedurally knew didn’t understand implications of K and that there was gross inequality of bargaining power. shouldn’t have sold her the radio in the first place, knowing her position. Substantivelythe clause requiring payment for all items before owning any is unreasonable. Policy: Preventing one party from using law to take advantage of another unsuspecting party. Courts want to discourage predatory behavior. Note: Responses to this would be duty to read, and the idea that wanted that clause so she could have the opportunity to buy such goods in the first place. Landlord held to higher standard of expertise re: Seabrook v. Commuter bargaining power; Complex legal terms are procedural Housing Co. Civil Court of NY, 1972 unconscionable when party cannot understand them. Facts: leased apt. from subject to legal condition that if building not complete by move in date, K will start whenever the building was completed. Legal term was hidden in huge, complicated lease agreement. After waiting 2 months, notified that she had to cancel lease b/c she needed place to live and was forced out of prior residence. refused to cancel lease or return rent or security deposit, and claims didn’t explain clause and she had no lawyer. Issue: Whether the K was unconscionable? Holding: Yes, b/c of asymmetry of bargaining power, ’s lack of understanding of K, and complexity of lease/terms Rule: Landlord should be held to higher standard of expertise than regular person due to expertise. Procedurallylegal term hidden w/n complicated agreement; lease agreements rarely negotiable, and lessor was in much superior bargaining position, and did not have attorney. Substantivelyclause didn’t set out reasonable time period for extension of time and failed to give tenant option of canceling. Landlord had duty to do so and relieve lessee of burden of figuring out what was reasonable on her own. Also, ’s previous lease expired, so needed the place to live. Policy: Preventing one party from using law to take advantage of another unsuspecting party. Courts want to discourage predatory behavior. Note: Court could say there is a gap in terms that doesn’t specify a reasonable term for time of K, and not enforce for that reason. Henninsen v. Bloomfield Motors Adhesion Ks are procedurally unconscionable
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SC of NJ, 1960 Facts: bought car from and signed order form w/ fine print limiting the warranties of the dealer and Chrysler to 90-day on parts or workmanship, expressly disclaiming all other warranties. Almost every other car company had the same disclaimer provisions, so it was an adhesion K. 10 days after getting the car the steering mechanism failed and was injured. Issue: Whether the express warranty disclaimer is effective? Holding: No, b/c it is unconscionable. Rule: Modern standardized mass K is unconscionable if used inequitably against weaker party who has no other alternatives. ProceduralK was adhesion K b/c all others in industry used. Inequality of bargaining power. Substantivepoint of warranty is to protect consumer, not limit liability of seller. It is unjust to avoid warranty obligations and give little in return. Policy: Letting car companies disclaim warranties harms consumers and takes away incentive to build cars that work well. Adhesion Ks prevent free choice.
Forums selection clauses are OK if notice given and Carnival Cruise Lines v. benefits accrue to class of people, e.g. lower prices Shute SCOTUS, 1991 Facts: , of WA, bought cruise tickets from an agent in one state. Actual tickets came later and had a forum selection clause saying that all litigation would be brought in FL. Language also said tickets were non-refundable. On ticket in big letters it said to look at the legal terms on the back and that acceptance of the tickets was acceptance of terms. was injured on boat and tried to sue in WA. objected on grounds of forum-selection clause. claimed unconscionability. Issue: Whether the clause is void for unconscionability? Holding: No. Rule: Forum selection clauses are valid as long as there is notice and a class of people benefit from the lower prices thereby provided. Proceduralgave notice of terms on the front of the ticket. Substantiveconsumers get benefit of lower prices provided by not having to defend lawsuits all over the world and not having to negotiate w/ consumers. Also, cruise is not a necessity. Policy: Social benefit. Dissent: Notice only given after the tickets had arrived, not before. Also, clause not bargained for so no assent. couldn’t get refund according to terms, so had not choice but to accept.
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V.
Parol Evidence Rule
A.
Background 1. PER excludes and declares inadmissible extrinsic evidence (oral/written evidence outside of the writing designated as the K) 2. PER only applies to prior and contemporaneous extrinsic evidence at time of K – not later evidence 3. Purposes a. Allows parties to negotiate w/o fear that statements made during negotiations will be used later to expand or contradict the parties’ written obligations. b. Decreases chances of fraud, duress, mistake, etc. 4. Integration: the full expression of the parties’ agreement, so that all earlier agreements are superseded. a. Non-integrated Kterms of K not committed in a final writing b. Partially integrated Kintegrated agreement other than a completely integrated agreement. Some of the terms, but not all, of K are committed in a final writing, and parties can introduce parol evidence to supplement if they don’t contradict integrated terms. c. Completely integrated Kintegrated agreement adopted by the parties as a complete and exclusive statement of the terms of the agreement. All of the terms of the agreement are committed in a final writing, no parol evidence allowed. 5. Extrinsic evidence permissible despite PER for: a. To show illegality, fraud, duress, mistake, lack of consideration, or other defenses b. To show grounds for granting or denying remedies c. To show the meaning of the terms of the K d. To show whether it is integrated in the first place 6. Judge is the gatekeeper for PERdecides first whether a total or partial integration exists and then factfinder will consider any parol evidence allowed. 7. Problem w/ Four Corners Testif there is asymmetrical bargaining power & knowledge, a person can be taken advantage of & all unfavorable terms to the other party will be only oral 8. Implied warranties are not parol evidence – they must be expressly disclaimed, b/c they are implied in law, not fact. Rules/Steps 1. Does PER apply at all? a. R 2d §214parol evidence admissible to establish: (and thus PER does not apply) i. whether writing is or is not integrated in the first place ii. whether, if integrated, it is complete or partial iii. the meaning of the writing (parol evidence admissible to give meaning to vague or ambiguous terms) iv. illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause. 2. Is the Writing Integrated? a. R 2d § 209Agreement is integrated if, in view of its completeness and specificity, it reasonably appears to be a complete agreement, unless other evidence establishes that its not b. R 2d § 211If party manifests assent to a writing and he has reason to believe that such writings are regularly used to embody the terms of such agreements, it is integrated, unless the other party knows that the first party would not have agreed if he knew about a particular term.
B.
3.
Is the Writing Completely or Partially Integrated? a. Common Law “Four Corners Test”Court looks only at writing to determine whether or not it is a complete integration. The test: i. The parol agreement is collateral (capable of being expressed in a separate agreement) ii. Does not contradict terms of written agreement (express or implied); and iii. Evidence must be such that the parties would ordinarily not be expected to embody in the writing, or the written K fails to fully contain & define the parties’ understanding. (Reasonable person standard is used)
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b. R 2d Modern Approachrejects Four Corners Test, and instead focuses on evidence that the parties
introduce. If something that would “naturally” be omitted from the writing is, based on circumstances, it is partially integrated w/ regard to those terms and is admissible. Look at intent of the parties i. R 2d § 210Court determines based on any relevant evidence. “writing cannot of itself prove its own completeness, & wide latitude must be allowed for inquiry” (comment b) ii. Complete Integration if: (A) Merger clause (not 100% effective); or (B) Any proffered terms would not have naturally been omitted (R 2d § 216) from the K based on circumstances, and thus their omission means that they are not part of the K; or (C) Any proffered terms are inconsistent w/ the agreement. iii. Partial Integration if: (A) No merger clause (though sometimes can get around); and (B) Any proffered terms would have naturally been omitted (R 2d § 216) from the K based on circumstances, and thus their omission does not mean that they are not part of the K; OR proffered terms are supported by separate consideration; and (C) Proffered terms are consistent w/ the agreement. iv. Rules (A) R 2d § 216(2)Not complete integration (and thus a partial) if the writing omits a consistent additional agreed term which is: (1) agreed to for separate consideration, or (2) such a term as in the circumstances might naturally be omitted from the writing
c.
d.
UCC Statutory Approachmore liberal approach than the modern restatement approach. If a term would certainly be in the document, parol evidence of such a term is inadmissible, but if not, it is admissible. Term doesn’t have to naturally be expected to be omitted – just not certainly included. i. Complete Integration if: (A) Merger clause (not 100% effective); or (B) Any proffered terms would have certainly been included (if UCC §2-202) in the K, and thus their omission means that they are not part of the K; or (C) Any proffered terms are inconsistent w/ the agreement. ii. Partial Integration if: (A) No merger clause (though sometimes can get around); and (B) Any proffered terms would not have certainly been included (if UCC §2-202) in the K, and thus their omission does not mean that they are not part of the K; and (C) Proffered terms are consistent w/ the agreement. iii. Rule: UCC § 2-202 (comment 3)Complete integration w/ regard to terms if the terms “would certainly have been included” in the document. If not, it is partial w/ regard to those terms iv. With UCC, approach is to use default terms to fill in the blanks; UCC terms will be assumed unless the parties K out of them. Oral Conditions Precedentnot barred by PER even if it contradicts the writing or has merger clause. i. R 2d § 217if an oral agreement exists that performance of the integrated agreement is subject to a stated condition, the agreement is not integrated w/ respect to the oral condition (A) Comment bsome courts consider oral conditions to be “naturally omitted” and thus hold it to requirement of consistency w/ agreement. But conditions are always a bit inconsistent w/ the agreement, so still allowed if contradicts written K. Even a merger clause does not bar admission of oral conditions.
4.
Can Parol Evidence Be Used? a. If Complete Integration i. R 2d § 215Parol evidence not admissible to contradict term of writing ii. R 2d § 216(1)Parol evidence not admissible even if consistent w/ the writing iii. UCC § 2-202(a)Course of dealing, usage of trade, or course of performance may be used to explain/supplement iv. R 2d § 213(1),(2)Prior agreements are discharged if inconsistent or w/n scope of agreement
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b. If Partial Integration (terms that would ordinarily, naturally, or certainly be left out of K)
R 2d § 215Parol evidence not admissible to contradict term of writing R 2d § 216(1)Parol evidence IS admissible to supplement if consistent w/ the writing – admissible only w/ regard to terms not already finalized. (A) (Same) UCC § 2-202(b)Parol evidence of consistent additional terms IS admissible to explain/supplement iii. UCC § 2-202(a)Course of dealing, usage of trade, or course of performance may be used to explain/supplement iv. R 2d § 217Oral agreement that performance of the integrated agreement is subject to a stated condition IS part of the K v. R 2d § 213(1)Prior agreements are discharged if inconsistent w/ terms If Not an Integration i. Parol Evidence is admissible w/o restriction.
i. ii.
c.
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C.
Chart Is the agreement integrated (a final expression of the terms)? NO PER doesn’t apply YES Is it complete or partial integration?
merger clause? naturally/ordinarily/certainly would have been included?
Complete
Partial
PER applies (can’t allow PER doesn’t apply parol evidence even if (parol evidence admissible consistent w/ writing if consistent w/ writing
D.
Implications of the Rule 1. In its strict forms, rule results in barring consideration by fact-finder of all evidence of certain preliminary agreements that are not contained in the final writing, even though that evidence might persuasively establish that a preliminary agreement did take place. 2. Writing may be a more reliable form of evidence. People have poor/selective memories 3. Cuts down on possibility of fraud (One could say that it helps fraud b/c people could make influential oral promises in a fraudulent way, knowing they will be barred by PER – except, parol evidence is still admissible to prove fraud, so that possibility is eliminated – except in case of Danann clause) 4. Channeling functionencourages people to put agreements in writing so that later agreements do not supercede them. Cases 4 Corners Test Mitchill v. Lath Court of Appeals, NY, 1923 Facts: owned farm w/ view of icehouse across the road. wanted to buy farm but didn’t like view of icehouse. promised orally to remove the icehouse, and bought farm w/ written K. never removed icehouse, and sued for specific performance. Issue: Whether the oral agreement is enforceable? Holding: No, b/c the term would ordinarily be included in the writing. Rule: 4 corners test. K was full and complete, detailing all duties. One would ordinarily expect the icehouse to be mentioned in the K, if really a term. Policy: Certainty of K by looking at written agreement only. Dissent: The only way to determine if the icehouse should have been included in the written K is to look at the parol evidence first, and the parol evidence here supports Π. Natural Omission/UCC tests; courts look to context for Masterson v. Sine SC of CA, 1968 intent and sophistication of parties, not just the writing Facts: Dallas Masterson owned ranch as tenants in common w/ wife. Dallas conveyed land to (Dallas’ sister) by grant deed reserving unto Dallas the option to buy back the property w/n 10 years. Deed did not contain term saying Dallas’ option was non-assignable. Dallas went bankrupt and his bankruptcy trustee (and Dallas’s wife) sued to enforce the option, saying option was assignable to . Both Dallas and his wife said that oral agreement/intent existed that option was non-assignable. (Dallas conveyed to his sister to avoid creditors from taking it). Issue: Whether the parol evidence showing that the option was non-assignable is admissible? Holding: Yes b/c not a complete integration under Natural Omission Test or UCC
E.
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Rule: (1) Natural omission test or UCC. Traynor: Here, no merger clause, and deed is silent on assignability. No evidence shows that past experience would tell the parties that they needed to include such a term – they were unsophisticated. Term would thus might naturally have been omitted, and thus not true that it would certainly have been included. (2) Parol evidence should only be excluded when it is likely to mislead the fact-finder. Policy: Intent of parties. Dissent: Creates potential for fraud – b/c the bankrupt optionee himself is testifying as to the intent, and he is supposed to be on ’s side. Also, CA statute has default rule that it is assignable, thus the parties would have had to say something to get around it. Parol evidence that only lessens or weakens the writing is admissible; not considered inconsistent; Oral conditions precedent are admissible Facts: negotiated to buy ’s stock, and agreed on price but not all details. Negotiations had to be recessed for several weeks, and was worried would use bid as leverage for other buyers, so paid $1K giving right to buy stock at that price w/n 3 months. When negotiations resumed, they failed for other reasons, but exercised option. claims that promised orally that the option would only be used if solicited other offers, which they didn’t. says no such condition. Issue: Whether the parol evidence should be admitted to invalidate the option? Holding: Yes, b/c it is not inconsistent w/ the writing. Rule: (1) Parol evidence doesn’t contradict the writing if it only lessens or weakens the writing. Even though the oral condition may weaken the writing, it is not inconsistent b/c doesn’t contradict or negate the writing. (2) Oral conditions precedent are admissible unless impossible. Here, soliciting not offers was an oral condition that cannot be excluded. Policy: Intent of parties. Squib: Snyder v. Herbert Greenbaum: court rejected Hunt reasoning, holding that “inconsistency” under UCC means absence of reasonable harmony w/ language/obligations of parties. Thus, lessening force of a term can be inconsistency. Hunt Foods v. Doliner SCNY, Appellate Div., 1966
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F.
Merger Clauses 1. Background a. Clause indicating that the writing constitutes the final expression of the agreement b/n the parties. b. Conclusively establishes that the document is a total integration unless it is obviously incomplete, or the merger clause was included as a result of fraud or mistake. c. Tries to overcome PER as a default rule. Should be factor, but not determinative. Allowing them to be 100% effective would return us to the Four Corners Rule. d. Evidence of oral conditions precedent are admissible despite merger clause (see R 2d § 217 above) e. Example: “This K embodies the entire understanding of the agreement b/n the parties and there are no verbal agreements or representations in connection therewith.” f. Merger clause can be unconscionable: Seibel v. Layne & Bowler: small font, no spacing, etc. Can be forced under duress. Can be due to mechanical mistake – scrivener’s error. Can be induced by fraud. g. If seller makes oral representations constituting an express warranty, but merger clause in the agreement: If court finds that the seller was trying to disclaim or limit the express warranty, the warranty will prevail over merger clause (UCC § 2-316(1)). But if merger clause is seen as an attempt by the parties to totally integrate the agreement, UCC § 2-202 should protect seller.
2.
Case
Merger clause bars Parole Evidence UAW-GM v. KSL Recreation Corp. MI Court of Appeals, 1998 Facts: entered written K w/ CMC to use their resort for a convention. CMC sold resort a month later to , who fired all unionized workers. and CMC both contend they had an oral agreement that the resort would use unionized workers, but written K had no such condition, but had a merger clause. refuses to refund ’s down payment Issue: (1) Whether the merger clause bars parol evidence that K wasn’t complete integration; and (2) whether the merger clause negates a claim of fraud. Holding: (1) Yes, merger clause invokes PER; and (2) Yes, negates fraud claim, unless fraud goes specifically to the merger clause. Rule: (1) Merger clause bars all parol evidence. Intent of parties governs, and merger clause shows their intent was to make a complete integration. K is conclusive except for obvious gap-fillers. (2) Merger clause bars evidence of fraud, unless fraud goes directly to the merger clause. Here, presence of merger clause made it unreasonable for to rely on oral representation w/o insisting on their inclusion in the K. Only fraud in the execution/instrument can negate MC. Policy: Intent of parties; also b/c company was sold, they should be able to rely on written agreements that they can read rather than oral agreements they have no knowledge of. Dissent: CMC never told that they were about to sell business. Despite merger clause, there must be assent, and parol evidence can go to assent. Since ’s agreement was predicated on the oral agreement, did not assent to the exclusion of the oral agreement.
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G.
Resolving Ambiguity – K Interpretation 1. Background a. Methods of K Interpretation: i. Plain MeaningLook at the words in context of contract itself, w/ reference to ordinary dictionary meanings. The meaning of any writing which appears to be clear, complete, unambiguous on its face will be interpreted w/o any extrinsic evidence at all. Textualist perspective (Kozinski)Words have plain meaning discernable in writing. Otherwise PER is effectively eviscerated. ii. Ambiguity Rule (In Re Soper): If in light of circumstances, K is “fairly susceptible” to more than one interpretation, extrinsic evidence relevant to proving an interpretation is admissible. Once the ambiguity is established, extrinsic evidence must always be allowed. iii. Contextualist Rule (Pacific Gas - Traynor) Writing only one thing to look at, extrinsic evidence should be used. Words have many meanings, and the writing never contains all meanings of parties; it is inherently useless w/o context. iv. Terms can be vague or ambiguous. Ambiguity: Peerless case – not specific enough. Vagueness: saying a “hard dark red apple” - a matter of quality. v. 4 types of extrinsic evidence: (A) parol evidence between parties (B) course of performance (how parties have acted) (C) course of dealing (how parties have acted in dealing in the past) (D) usage of trade (how do parties in the industry act)
2.
Rules a. R 2d § 201: When parties have attached the same meaning to a term, that meaning is applied. If the parties have attached different meanings to a term, it is it is interpreted according to the meaning attached by one of the parties if at the time of K formation: i. that party did not know of the different meaning attached by the other, and the other party knew of the meaning attached by the first party; or ii. that party had no reason to know of any different meaning attached by the other, and the other party had reason to know of the meaning attached by the first party. Otherwise, neither party is bound by the meaning of the other, even if K fails for lack of mutual assent. b. R 2d § 202: Contextualist approach should be used. Unless a different intention is manifested, where language has a generally prevailing meaning, that should be used, and technical terms and words of art should be given that meaning w/n their field. Course of performance should be given great weight as to interpretation. c. R 2d § 203: Look at writing first w/ hierarchy of 1) express terms; 2) course of performance; 3) course of dealing; 4) usage of trade d. UCC § 1-205: Course of dealing and usage of trade give particular meaning to and supplement or qualify terms of a K. Express terms should be construed reasonably as conforming w/ both. Heirarchy if they conflict: 1) express terms; 2) course of performance; 3) usage of trade.
3.
Common Law Cases
In Re Soper’s Estate SC of MN, 1935
Ambiguity Rule; Extrinsic evidence admissible to interpret K term even when it conflicts w/ plain meaning, if ambiguous Facts: Sopher married Westphal. Soper faked suicide and fled state, illegally marrying Whitby. When Soper died, his money was left to his “wife.” Both Soper (neė Westphal)
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and Whitby are claiming “wife” means them. Issue: Whether extrinsic evidence is admissible to interpret the term “wife” Holding: Yes, b/c intent matters. Rule: (1) Extrinsic evidence of intent is admissible to interpret K term, even where it conflicts with a plain meaning. Here, plain meaning of “wife” is his lawful wife, Westphal. But Soper intended to leave his money to his present pseudo-wife, Whitby. Extrinsic evidence is admissible b/c intended meaning by Soper is what matters. Policy: Intent of party; Language isn’t absolute, and context matters. Ambiguity rule. Dissent: Only one construction of the term “wife” is possible – his legal wife. Pacific Gas v. G.W. Thomas Contextualist approach, Traynor; All credible evidence should be considered to interpret K. Drayage SC of CA, 1968 Facts: entered K w/ to remove and replace steam turbine cover. Indemnity clause said indemnified against all liability to property. During work, cover fell and damaged ’s property. claims that this is covered by clause; claims with parol evidence that the clause only meant to apply to damage to 3rd party property loss, not himself. Issue: Whether extrinsic evidence is admissible to provide context to interpret K? Holding: Yes, b/c words are not absolute or constant. Rule: (1) All credible evidence should be considered to determine the subjective meaning of the terms of the K. Here, such evidence should be allowed. Intent is what matters. Policy: Intent of party; Language isn’t absolute, and context matters. Contextualist approach.
Even if writing is unambiguous, extrinsic evidence is Trident Center v. Conn. admissible in CA to determine intent. Kozinksi: Textualist, General Life Ins. US Court of Appeals, 9th, but bound by Traynor Decision from Pacific Gas 1988 Facts: sought financing from and K’ed for loan. Note expressly provided that did not have the right to prepay at all for first 12 years – but had a clause that in case of default, the prepayment fee would be 10%. But in several places said that default determination was ’s decision, not ’s. After a few years, interest rates fell and wanted out of deal to refinance loan at better rates, but wouldn’t let them. suing for declaration that they can prepay loan for 10% default fee. Both parties are highly sophisticated, dealing at arms length, w/ equal bargaining strength. Issue: Whether parties in CA can ever draft a K to which parol evidence cannot be considered? Holding: No, parol evidence must always be considered in CA, even when terms unambiguous Rule: (1) Even if writing is unambiguous, extrinsic evidence is admissible in CA to determine intent. Kozinski: no ambiguity in this K; clearly has no right to prepay and can’t get around defaulting. Default process is at discretion of , and if enforced default provision it would harm ’s credit, hurt other deals, etc. – thus can’t get around the painful default process b/c it would remove a powerful incentive for borrowers to pay their lenders. HOWEVER, under Traynor’s Pacific Gas decision, extrinsic evidence must be considered in CA. Bad rule, but must be followed. Policy: Fed. court bound by State SC when interpreting state law. But policy against rule is that if K unambiguous, allowing extrinsic evidence creates uncertainty over all transactions and casts doubt on any solidity in language w/ any law – such as criminal law, where statutes have meaning. Frigaliment Importing Co. Trade usage must be universally known in the trade to
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imply knowledge of it to a party new to the trade. v. B.N.S. Int’l Sales USDC, 1960 Facts: K’ed to buy “US Fresh Frozen Chicken, Grade A, Government Inspected, Eviscerated” from , new to the trade, in 2 separate Ks. thought meant any chick, and sent stewing chicken (fowl). claims it meant broiler chicken, and claims that is standard industry usage of the term. agreed to 2nd shipment even though had problem w/ the first shipment. German words were used in order except for the “chicken” term, claims this was b/c the German word was more general. But claims that he was told by , after asking what type of chicken, that it was “huhn,” which is the German general word. Gov’t USDA definition includes both stewing chicken and broilers. ’s witnesses said chicken=broiler, but admitted that even they are more specific when ordering. ’s witnesses said that chicken often means either stewing or broiler. Issue: Whether “chicken” has the standard meaning of broiler as claims. Holding: No, it is ambiguous enough to allow the meaning ascribed to it. Rule: Trade usage must be universally known in the trade to imply knowledge of it to a party new to the trade. Here, evidence is that ’s meaning is equally valid. USDA definition brought into K by mention of USDA inspection, and witness helped more than . Policy: Objectivist – what was a reasonable meaning. Traynor- constructionist (Pacific Gas) words can never have a plain meaning and you always have to look to intent to see what parties meant by particular words nothing means anything outside of its context When a judge is assigning a plain meaning basis the court is actually assigning his own linguistic interpretation (education/experience) and imposing that on the party. To determine the party’s meaning, go beyond the writing to look at: o Negotiating history o Course of performance o Course of dealing (previous contracts) o trade usage of terminology Kozinski- textualitst (Trident Center) put great emphasis on the writing in the agreement; attach mandatory meanings to certain words & provides a “fixed” intent word in written context of the contract with reference to its ordinary dictionary meaning and in the light of the meaning of the contract as a whole meaning as revealed by the writing itself, not looking outside of it
4.
UCC Cases
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Columbia Nitrogen Corp. v. Trade usage/course of dealing should only be excluded if inconsistent, but is otherwise admissible. Considered Royster () default interpretation unless K’ed out of. US Court of Appeals, 4th, 1971 Facts: makes fertilizer, and has usually been a customer of , buying nitrogen. now producing extra phosphate though, so entered K to sell phosphate so could make fertilizer. K had escalation clause allowing to raise prices if market price for phosphate went up, but instead they plunged, and only ordered part of the phosphate it had K’ed to buy. demanded fulfillment of K, and when refused, sold to 3rd parties for lower price, and wants the difference. ’s witnesses say trade customs allow price adjustment based on volatile fertilizer ingredient prices. also has evidence that in its past business dealings w/ when was their customer, always changed price terms to help , and even once let out of the deal altogether b/c of market changes, so it was course of dealing. Issue: Whether ’s extrinsic evidence is admissible to show custom and trade usage modified K? Holding: Yes, b/c course of dealing b/n parties admissible unless inconsistent. Rule: (1) Evidence of trade and course of dealing should be excluded whenever it cannot be reasonably construed as consistent w/ K, but is otherwise admissible to explain or supplement terms. Here, the K does not explicitly bar course of dealing and usage of trade. K is silent about adjusting terms in declining market. The prior relationship shows a course of dealing where prices were changed based on market volatility, and trade custom shows the same. (2) Course of dealing and trade usage are assumed as taken for granted as K was written. Policy: UCC sets default rule that must be K’ed out of. Note: Decision indicates you can put in K that course of dealing and trade custom interpretations are excluded. Southern Concrete Services Trade custom not admissible if contradicts terms of K; provisions waiving trade usage not valid. v. Marbleton USDC, ND GA, 1975 Facts: K’ed to supply w/ 70K cubic yards of concrete. K had clause saying that “No conditions which are not incorporated in this K will be recognized.” only ordered 12K cubic yards. alleges that under trade custom and additional terms intended by parties, the quantity in K was not mandatory and was subject to negotiation. Issue: Whether ’s evidence is admissible? Holding: No, is inadmissible b/c K is specific and trade custom contradicts. Rule: (1) Trade custom is not admissible if it contradicts terms of K. Here, the K was specific as to quantity and price, and does not say that buyer has repricing rights. Also key is that no prior dealings b/n the parties. Specs such as price and quantity are so clear, any intent to depart must be included in written K. Trade custom thus contradicts the explicit agreement, and is inadmissible. (2) Provisions waiving application of trade usage are not valid. Would become standard boilerplate and would thus eliminate useful commercial custom which has value. (3) Extrinsic evidence that lessens the effect of a term is inconsistent. Policy: If court didn’t enforce specific terms, the terms would lose their meaning and Ks would lose their utility as a means of assigning market risk. Distinguished: Royster b/c in that case, there was no specific term on point (b/c price term was qualified by escalation clause on one side, and not by similar clause on other; price term wasn’t absolute), and had prior dealings w/ . Here, contradicts specific price term and no prior course of dealing.
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VI.
Gap-Fillers
A.
Good Faith and K Modification 1. Background a. Any changes after K formation is a modification b/c PER no longer applies. b. Ks often fail to specify how and under what circumstances K can be renegotiated or modified when unforeseen circumstances develop. c. Parties sometimes make illegitimate and opportunistic attempts to modify the case based on market changes by threatening to breach unless other party renegotiates. d. Primary challenge is the distinguish legitimate/good faith modifications from the illegitimate/opportunistic ones, to prevent a hold-up of one party by the other. e. Common law courts have not enforced “no modification” clauses which try to prevent modifications altogether. f. Ks have implied obligation of good faith in performance of K (but not in K formation – can bargain in bad faith, unless like Teachers there is a binding preliminary agreement) See 2 part good faith test below. g. Very importantif you can foresee something changing in the future at time of K, it is then built into the price and no longer justifiable to use as an excuse to modify K when it happens h. Judges do not like to excuse performance on grounds of changed circumstances. Should modify K.
2.
Approaches/Rules a. Common Law Pre-Existing Duty RuleContract modification is only enforceable if new consideration is present. Attempts to use consideration to set up a bright-line test to distinguish legitimate modifications from extortionate hold-ups. i. R 2d § 73a similar performance is consideration if it differs from prior duty in a way which reflects more than just a pretense of bargain. (Renegotiating w/ new consideration valid even if the consideration on one side is still pretty much the same) ii. Advantage is that it guards against the hold-up game. iii. Underinclusive b/c clever lawyers could still manufacture consideration to make extortion look valid. Overinclusive b/c denies valid and reasonable modification due to market changes that lack new consideration. iv. 2 ways to avoid this rule: 1) Promisee does or promise something in addition to existing obligation. 2) Rescind 1st K before entering into 2nd revised K. b. R 2d § 89A promise modifying a duty under a K not fully performed on either side is binding: i. if the modification is fair and equitable in view of circumstances not anticipated by the parties when K was made; or ii. to the extent provided by statute; or iii. to the extent that justice requires enforcement in view of material change of position in reliance on the promise. c. UCC § 2-209: i. An agreement modifying a K needs no consideration to be binding, but must have legitimate commercial reason and be in good faith based on 2 part test for obligation of good faith applicable to performance all Ks: (comment 2 & UCC § 2-103) (A) Merchant must be “honest in fact” (B) Merchant must observe reasonable commercial standards of fair dealing in the trade (1) The extortion of a “modification” without legitimate commercial reason is ineffective as a violation of the duty of good faith. Nor can a mere technical consideration support a modification made in good faith. (comment 2) ii. Signed writing excluding oral modification or rescission is valid. iii. Requirements of SOF must be satisfied if K is modified orally iv. Although modification attempt doesn’t satisfy prior 2 requirements, it can operate as a waiver (Wisconsin Knife: if waiver was relied upon)
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v.
Waiver of executory portion of K may be retracted unless unjust due to reliance of other party on waiver
3.
Case
Pre-existing duty rule; new consideration necessary for Alaska Packers’ Ass’n v. modification of K Domenico US Court of Appeals, 9th, 1902 Facts: K’ed to labor for for $60. Once arriving in the remote location, said they wouldn’t work unless paid them $100. Supervisor at that location, w/ no other choice, agreed, but told him he had no power to change a K. When arrived back at mainland he was paid only $60 Issue: Whether modification negotiated in the remote location was supported by valid consideration? Holding: No, b/c they K’ed to provide labor that they were already obligated to perform. Rule: Pre-existing duty rule – can’t modify K w/o new consideration. Here, was already obligated to perform labor, thus modification not supported by valid consideration. Policy: Bright-line rule – consideration; prevents hold-ups Note: Modification would also fail under UCC § 2-209 and R 2d § 89 b/c modification was the result of coercion/hold-up. Squibs: Angel v. Murray: Court upheld modification paying trash company extra $10,000 per year b/c of city’s increased population. New consideration b/c circumstances had changed and company was doing extra work in serving the new homes. Brian Construction v. Brighenti: Court upheld modification of K when subcontractor encountered unexpected debris below surface of old building. Roth Steel v. Sharon Steel: Modification not enforced b/c acted in bad faith to coerce low price modification due to superior bargaining position.
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B.
Warranties An express or implied promise that something in furtherance of the K is guaranteed by one of the contracting parties, especially representations made by a seller concerning the thing being sold. Warranties can pertain to goods or services.
1.
Express Warranty a. UCC § 2-313 i. Express warranties by seller are created as follows: (basis of the bargain = buyer must have bargained for it; buyer must have wanted it) (A) Any affirmation of fact or promise by seller to buyer relating to the goods which becomes part of the basis for the bargain creates an express warranty that the goods shall conform to those representations. (B) Any description of the goods made part of the basis of the bargain creates an express warranty that the goods shall conform to the description. (C) Any sample or model which is made part of the basis of the bargain creates an express warranty that all of the goods shall conform to the model. ii. It’s not necessary to use formal words like “warrant” or “guarantee” or that have specific intention to make warranty; but an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty. iii. Johnston: Certain language triggers court to find express warranty – “guarantee” is crucial, otherwise courts find it to be mere puffery. b. Summary of Steps i. First look at whether seller’s statement was “an affirmation of fact or promise” or “description of the goods”, or whether it is rather “merely the seller’s opinion or commendation of the goods” ii. Then, if the language qualifies as the former, it must be determined whether the statement was “part of the basis of the bargain.” If it was, an express warranty exists. iii. If express warranty exists under first two steps, court must determine if it was breached and if the breach was the proximate cause of the damage to the buyer. c. Case
Circumstances determine express warranty; Trade custom affects; When buyer relies on seller and seller knows, its an express warranty. Facts: sent agent to buy specific horse from based on what he had heard of the horse from his agent. Agent had unrestricted evaluation of horse by . Maloney called , said he liked horse. got on phone and told that would like the horse, that he was a good one, and that he was sound. Agent paid for horse, which remained in ’s care for 2 weeks until shipped horse w/ approved carrier to . When horse arrived, horse had tendinitis in both legs, cause undetermined. called to get his money back and return horse; wanted to inspect, and when he arrived horse had already recovered from tendinitis and ran fine. But 3 days later horse went lame, cause unknown. refused to refund money. sent horse to a farm to recover, and when he did he won several races, but wants money for expenses at farm. Horse still has breeding value. Issue: Whether breached an express warranty? Holding: No warranty. Π relied on his agent, not seller’s statement. Not “basis of the bargain”. Rule: (1) Circumstances determine whether use of language is an express warranty. Saying “the horse is sound” is merely opinion/commendation b/c nothing talismanic about “sound.” And other bland statements like “the horse is good” temper this statement. Also, the statements were made in a collateral way to the sale rather than an essential part of it.(2) Trade custom affects determination of warranty. In horse industry, it is not common to guarantee horses. (3) Only when seller knows that buyer is ignorant, relying totally on Sessa v. Riegle USDC, EDPA, 1977
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knowledge of seller not to scam him are statements of soundness to be taken as more than seller’s opinion. Here, was knowledgeable horseman buyer and sent a knowledgeable agent. (3) “Basis of the bargain” requires reliance by buyer on the statements of the seller. Here, primarily relied on his agent’s independent assessment, not seller’s statement. Policy: Takes away burden on the seller to warranty that which he did not want to warranty; creates an incentive on the buyer to investigate, or to require an explicit “guarantee” in the K.
2.
Implied Warranty a. UCC § 2-313 (comment 1)Implied warranties rest so clearly on a common factual situation or set of conditions that no particular language or action is necessary and they will arise unless “unmistakably negated.” b. Two types of implied warranties: i. Implied Warranty of Merchantability (UCC § 2-314) (A) warranty that the goods shall be merchantable is implied in K if seller is merchant w/ respect to goods of that kind. Serving of food is considered to fall under this. (B) Goods to be merchantable must at least be of fair average quality, meeting the description, fit for the ordinary purposes for which such goods are used, and properly packaged and labeled. (C) Applies only to merchantsperson who deals in goods of the kind or holds himself out as having knowledge or skill particular to such goods, or an agent thereof (UCC § 2-104) ii. Implied Warranty of Fitness for a Particular Purpose (UCC § 2-315)arises where seller at time of K’ing has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods. iii. Implied Warranty of Workmanlike Performanceapplies to construction and service Ks. Not a default rule or gap-filler, but an independent duty of K. Ends up often using tort negligence analysis. While in theory this could be K’ed out of, nobody would hire someone to do a bad job. iv. Implied Warranty of Habitabilityapplies to construction Ks only. Another difference from workmanlike warranty is that negligence question does not arise here. v. After determining that there was an implied warranty, court must also find that the warranty was breached and the breach was the proximate cause of the damage to the buyer. c. In Ks, implied warranties under UCC are default rules that can be disclaimed. Tort liability cannot be disclaimed the same way.
d. Case
Only parts of the manufactured article fall under implied Flippo v. Mode O’Day SC of AR, 1970 warranty of merchantability Facts: tried on pants at ’s store and got bitten by spider hidden in pants. Issue: Whether the spider being in the pants violated an implied warranty of merchantability? Holding: No, b/c the spider wasn’t part of the pants. Rule: Only parts of the manufactured article fall under an implied warranty of merchantability. The spider wasn’t part of the pants, and the spider caused the injury, not the product. The pants were fit for the ordinary purposes of pants, and in fact bought the pants and has used them since the spider bite. Policy: Limitation of liability for warranty to things w/n merchant’s control. Squibs: Coffer v. Standard Brands: court held natural impurities in mixed nuts (one was unshelled) do not render the batch unfit for ordinary use (state statute allowed up to 2.5% unshelled. Webster v. Blue Ship Tea Room: encountering a fish bone in chowder is foreseeable, and does not breach implied warranty of merchantability.
3.
Warranty Disclaimers
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a.
b.
c.
Argument for them is that they lower the cost of product. Market alternativesyou can’t get warranty of merchantability at store like Wal-Mart, but you can pay more for the warranty at another store. Some courts leery of warranty disclaimer b/c inconsistent w/ K theory b/c of bargaining power of customers, general lack of alternatives for the non-wealthy, etc. UCC § 2-316: Exclusion or Modification of Warranties i. Words relevant to or negating express warranty shall be construed consistently w/ warranty if reasonable; but subject to PER, negation or limitation is inoperative if it is unreasonable. ii. To exclude/modify implied warranty of merchantability, the language must mention merchantability and in case of writing must be conspicuous. iii. To exclude/modify implied warranty of fitness, exclusion must be in writing and conspicuous. To exclude all implied warranties of fitness, language is sufficient if it states “There are no warranties which extend beyond the description on the face hereof” iv. All implied warranties are excluded by expressions such as “as is,” “with all faults,” or other language which in common understanding makes clear warranties are excluded. v. When buyer has fully examined goods w/o restriction or has sampled them, or has refused to examine them, there is no implied warranty w/ regard to defects an examination should have revealed. vi. Implied warranty can be excluded or modified by course of dealing, course of performance, or usage of trade. One criticism is that many buyers don’t know what “merchantability” means and won’t know it is disclaimed if that word is used.
d. Case
“As is” or “with all faults” disclaims warranties unless Pelc v. Simmons AC of IL, 1993 circumstances imply otherwise. Facts: bought used car from . claims said the car was in good condition and that the engine was rebuilt, implying a warranty. let drive around lot, but not test drive in street b/c of no insurance. The car said “as is” on a sign. Issue: Whether the words and actions of created an implied warranty of merchantability? Holding: No, b/c the “as is” sign disclaims any such warranty Rule: “As is” or “with all faults” statements disclaim warranties unless circumstance imply otherwise. Here, ’s statement that he had rebuilt the engine does not imply he is warranting it. And the “as is” sign disclaims any potential warranty, unless circumstances indicated otherwise. Policy: Intent of parties; Freedom to K out of warranty. Squibs: Weisz v. Parke-Bernet: tiny disclaimer in art catalog, but rest of catalog encouraged reliance on gallery’s experience. Art turned out to be fake. Court said that b/c of disparity in knowledge, disclaimer invalid, and on objective theory of assent, no reasonable person would think they assented. Note: If dealer didn’t let her test drive off the lot b/c then the defects would show up, that could be active concealment.
VII.
Frustration/Impossibility/Impracticability Excuses
A.
Background 1. Executory Ks are used to allocate risks and nail down price to prepare for market fluctuations. 2. It is not possible for parties to foresee all possible events that might happen that affect performance.
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3. 4. 5. 6.
Difference b/n unforeseen event that occurs after the K was made and a mistake at time of K formation is not so clear – unforeseen future even is really a mistaken ex ante assumption about the future. But, mistake cases generally deal w/ false assumptions about the present, while unforeseen event deals w/ future. Only apply when neither party has control over the event. These excuses rarely work. Force Majeure clauseseffect is to shift the risks that would ordinarily fall on the party whose performance is adversely affected in extrinsic circumstances. Parties K to excuse performance in case of Act of God, death, war, riots, fire, flood, etc.
B.
Impossibility
1.
Background/Test a. The means of performing are no longer available. (e.g. subject matter of K is destroyed, a key party dies or is incapacitated, etc.) b. Three factor test: i. Unexpected contingency ii. Failure of K to allocate the risk of that contingency iii. Contingency causes the existence of thing necessary for performance to fail to come into existence or be destroyed; or performance is made impracticable iv. Contingency was not caused by the parties c. If performance found impossible, court will generally discharge both parties. d. Performance of K only impossible if a specific thing is necessary, and that thing cannot be substituted for. e. Contractors sometimes have clauses K’ing out of impossibility defense to shift risk to party who can best control contingencies, such as preventing fires. Cases
2.
If performance of K depends on person/thing’s existence, Taylor v. Caldwell King’s Bench, 1863 their continued existence is an implied condition of the K. Facts: K’ed w/ to use ’s music hall for series of concerts. Before the concerts, the music hall burned down. Issue: Whether ’s nonperformance of K is excusable due to impossibility? Holding: Yes, b/c existence of music hall was an implied condition of K Rule: If performance of K depends on the continued existence of a given person or thing, an implied condition exists that K will be excused if the person/thing perishes. Here, K was based on implied condition that the Music Hall would exist. Since it no longer exists, condition is not met, and nonperformance by is excused. Destruction was not ’s fault. Policy: Intent of parties. Note: Court says if party promises to paint a painting for other party, but dies, executors are not liable for the breach b/c the staying alive of the first party was an implied condition of the K. If performance of K depends on person/thing’s existence, Howell v. Coupland Queen’s Bench, 1876 their continued existence is an implied condition of the K. Facts: potato merchant K’ed to buy 200 tons of potatoes from . sowed enough land to produce the crops, but a disease which could not have prevent attacked the crop, and could only deliver 79 tons. Issue: Whether ’s nonperformance of K is excusable due to impossibility? Holding: Yes, b/c existence of potatoes was implied condition, and their destruction wasn’t ’s fault Rule: Same as Taylor. Continued existence of the potatoes was an implied condition of K. They were destroyed by forces outside of ’s control, so excused.
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Policy: Intent of parties. Note: Johnston: you could say that this case should have been decided differently from Taylor b/c there the music hall was unique, while here potatoes are fungible and could have gotten from different source. If performance rendered impossible, parties are liable for Carroll v. Bowersock SC of KS, 1917 benefits received up to the point of impossibility Facts: K’ed w/ to construct a reinforced concrete floor in warehouse. When part of the work was done (tearing out old floor and adding new concrete footings), ’s warehouse burned down through no fault of either party. collected on insurance but refused to build again, rendering performance by (in letting build and paying him) impossible. Issue: Whether ’s nonperformance of K is excusable due to impossibility? Holding: Not completely - must pay for the benefit of work received. Rule: If performance becomes impossible, parties are liable for benefits received during performance before it became impossible. W/ contractors, liability of owner should be measure by the amount of K work done by time of impossibility which had become identified w/ the structure such that it was a benefit to the structure if performance had not become impossible. Here, can recover for tearing out the old floor and putting in concrete footings, b/c had there been no fire, received a benefit from those actions. But cannot recover for loose materials destroyed, like the loose rods, that had not yet given benefit to owner. Policy: Prevents unjust enrichment of owner. Even though property destroyed, he did get a benefit for a small period of time; encourages contractors to either use installment payment plans to get paid as the work is done, or to build fast. Note: If contractor works on house and it burns before completion, loss falls on him. If contractor engages to build 2 rooms, and finishes 1 before the house burns, he can recover for that 1 room. If event is foreseeable, its occurrence does not excuse performance for impossibility; necessary person must have been incapacitated; and just b/c loses $, not excuse performance Facts: K’ed w/ to get sign work done by . K had force majeur clause that would not be liable except for acts of God or conditions outside their control. ’s expert sheet metal worker, a diabetic, got sick, rendering unable to perform. had to get another sign company to do the work, and is suing for price difference. Issue: Whether ’s nonperformance of K is excusable due to impossibility? Holding: No, b/c force majeur clause doesn’t include foreseeable sickness of a worker, and also b/c ’s expert metal worker wasn’t the only one who could have done the job. Rule: (1) When event is foreseeable, its occurrence does not render performance excusable for impossibility. Here, ’s expert worker’s diabetes was progressive and it was foreseeable, not a sudden act of God that would fall under force majeur clause. (2) To excuse for impossibility, a necessary person must become incapacitated (or thing destroyed). Here, the work was not specific to ’s metal worker – another expert metal worker could have done the work, albeit at a cost to . (3) When one agrees to do something for a fixed sum, it must be performed w/ no extra compensation even if unforeseen difficulties are encountered, as long as not impossible. Just b/c will lose money doesn’t mean K shouldn’t be enforced. Policy: Intent of parties in allocating risk. Note: Llewellyn: for every canon there is an opposite canon. Here, the canon is that specific risks are allowed to be barred by force majeur clause. Opposite canon is that the inclusion of the general language at the end of the force majeur allocates the risk so generally that intent of the parties should be used. Seitz v. Mark-O-Lite Sign Sup. C. of NJ, 1986
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No excuse unless seller has employed all due measures to Canadian Industrial v. assure himself that his source will not fail. Dunbar Molasses Court of Appeals, NY, 1932 Facts: K’ed to buy molasses from who was to get the molasses from National Sugar Refinery. only delivered some of the molasses b/c National Sugar Refinery didn’t allot as much to as he had expected. had made no K w/ National Sugar Refinery to ensure a supply Issue: Whether ’s breach of K is excusable due to impossibility? Holding: No, b/c should have had a K w/ National Sugar. Rule: No excuse unless seller has employed all due measures to assure himself that his source will not fail.. Here, never told that he had no assured supply of molasses, and put his faith in the mere chance that National Sugar would produce the same output, and should have K’ed to assure the supply. If refinery had been destroyed, or sugar crop had failed, would have been excused though. Policy: Excuse of breach for impossibility should only be allowed when the breaching party took all reasonable measures to prevent breach. Here, took on the risk of loss of supply by not K’ing for it.
C.
Frustration of Purpose
1.
Background a. Something changes after signing K that significantly changes the value of performing b/c the very purpose of the K no longer exists b. R 2d § 265Where, after K is made, a party’s principal purpose is substantially frustrated w/o his fault by the occurrence of an event, the non-occurrence of which was a basic assumption on which the K was made, his remaining duties to render performance are discharged, unless the language or circumstances indicate to the contrary. c. Three factor test: i. What was the foundation of the K? ii. Was the performance of the K substantially frustrated? (was that foundation removed) iii. Was the event which prevented the performance of the K unforeseeable at the time the K was made. d. Under frustration, there is no further benefit from performing the K. Performance is not too expensive (e.g. impracticability), but rather the value of performance is low. Must be careful, though, that this isn’t used just b/c one party’s expectations fail. e. Frustration cases = big declines in value. Impracticability = big increases in cost. f. Parol evidence admissible to show purpose despite PER. g. Response to frustration in case of football players signed by World Football League that failed – K has been fulfilled b/c by merely signing, the league benefited in attempts to get other players and TV deal. Even if ultimately failed, they got a benefit merely from the signing.
2.
Cases
when event is the foundation/purpose of the K, its existence Krell v. Henry King’s Bench, 1903 is an implied condition Facts: agreed to rent ’s apt. for 2 days to watch the King’s coronation, paying 25 £, w/ 50 more due later. King got sick, and coronation was cancelled. had advertised the apt. for the purpose of watching the coronation, and that is the sole reason rented it. Issue: Whether can be excused from performance due to frustration b/c the coronation was cancelled? Holding: Yes, b/c that was the fundamental purpose of the K.
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Rule: When an event is the foundation/purpose of the K, its existence is an implied condition on the K. Also 3-part Test. Here, watching the coronation was the purpose of the K, the canceling prevents such performance, and it was unforeseeable. Thus, excused. Policy: Intent of parties; Efficiency b/c parties don’t need to waste time K’ing for every possible event which could vitiate K. If event foreseeable, no excuse; Severe frustration necessary; Must have no alternative to breach to recover value Facts: leased location in 1941 in Beverly Hills to for 5-year term for sole purpose of selling autos (w/ gas sales too). In 1942, Fed. gov. ordered that sale of new autos be decreased and regulated, sold on rating system. orally waived the auto-only restrictions it had put on ’s K, and said they would reduce rent to help ’s profits; but vacated and repudiated the lease. maintained 2 other auto selling locations, and rented the property to another tenant. Issue: Whether can be excused from K b/c of gov. regulation frustrating his car-selling purpose? Holding: No, b/c the gov. regulations were foreseeable, and didn’t even prevent from selling cars there, and waived the restrictions anyway and could have subleased. Rule: (1) If the event frustrating purpose was foreseeable at time of K, no excuse – it should have been in the K. Here, the gov. restrictions were foreseeable due to the Nat’l Defense Act of 1940. (2) For frustration, total purpose most be almost valueless. Here, was still allowed by gov. to sell cars from location, just not a full amount. Still value there. Plus maintained 2 other car lots, so cars were selling. (3) For frustration, must have no alternative to breach. Here, let out of auto-only restriction, so could have subleased the land and gotten out of the deal. Policy: Sets up difficult test to meet frustration – almost has to be unconscionable loss of value, severe frustration purpose. Prevents confusion about threshold. Lloyd v. Murphy SC of CA, 1944
D.
Impracticability
1.
Background a. Cost of performance has gone up so much as to make performance commercially infeasible. b. Courts generally equate “extreme impracticability” w/ “impossibility” c. Unlike impossibility, in impracticability there is no allegation that you cannot perform – just that performance should be excused b/c extremely costly. d. Always better to make these seem like impossibility cases, b/c that is the old common law original rule. Frustration or impracticability have build-in defaults that the parties have the risks of their own expectations failing, which must be overcome. e. Courts hardly ever grant impracticability claims. Rules a. R 2d § 261Where, after K is made, a party’s performance is made impracticable w/o his fault by the occurrence of an event, the non-occurrence of which was a basic assumption on which the K was made, his duty to render that performance is discharged, unless the language or circumstances indicate to the contrary. b. Three Factor Test i. Unexpected contingency: something unexpected to all parties must have occurred ii. Risk of contingency not allocated to defaulting party by K or custom; and iii. Occurrence of contingency must have rendered performance commercially impracticable. c. UCC § 2-615commercial impracticability: delay in delivery or non-delivery by seller is not a breach under K 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 K was made, unless seller assumed the risk for such occurrence.
2.
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d.
Contingency must not have been foreseen by the parties Risk must not have been allocated by express language of K or custom. Performance must have been commercially impracticable – unjust to bind the parties in light of the contingency. iv. Factors excusing performance – severe shortage of raw materials/supplies due to war, embargo, local crop failure, unforeseen shutdown of major sources of supply. Performance not excused merely by increased costs, rise and fall of markets, or death. v. No excuse unless seller has employed all due measures to assure himself that his source will not fail (like Canadian Molasses) vi. UCC § 2-614if K performance is impracticable, but a commercially reasonable substitute is available, such substitute performance must be tendered and accepted. Summary of UCC § 2-614 from Eastern Airlines: UCC § 2-615 – For impracticability, there must be a failure of a presupposed condition, which was an underlying assumption of the K, which failure was unforeseeable, and the risk of which was not specifically allocated to the complaining party. Burden is on the party claiming excuse.
i. ii. iii.
3.
Cases
Mere reduced profitability does not constitute Transatlantic Financing v. impracticability; 3-part test United States US Court of Appeals, DC, 1966 Facts: Egypt nationalized Suez Canal in 1956. then chartered to deliver wheat from Texas to Iran. No mention in K of route of voyage; typical route, though, was through Suez canal. As was sailing, Israel attacked Sinai and Egypt blocked the canal. was forced to go around the Cape of Good Hope rather than through the Suez to deliver the wheat. Issue: Whether can recover the cost of diverting its route due to forced impracticable nature of changed route? Holding: No, b/c there was no commercially impracticable result from the occurrence. Rule: Mere reduced profitability does not constitute impracticability. Also 3-part test. Here, it is reasonable that the customary route was expected, although not mentioned in the K, and the closure was unforeseeable. Also, no allocation of risk in the K. However, performance was not rendered commercially impracticable b/c was able to make it to Iran w/o other costs besides extra time. was able to perform, and received K price. No burden on to preserve ’s profit. Policy: Reliability of K – if risks aren’t allocated, the burden should not be shifted just b/c contingencies hurt one parties’ profit. The other has the right to rely on the K terms.
Eastern Airlines v. Gulf Oil If events were foreseeable at time of K, no excuse when they occur Corp. USDC SD FL, 1975 Facts: supplies jet fuel to . Gov. price controls, though, rendered meaningless the escalator clause in the K, and crude oil prices have risen substantially, increasing ’s cost w/o increasing their pay b/c no escalator anymore. threatened to cut off supply of jet fuel if didn’t raise the price it was paying. Issue: Whether is excused from performing the K due to events increasing their cost? Holding: No, b/c the events were foreseeable. Rule: If events were foreseeable, no excuse when they occur. Here, volatility in the Middle East was well known at the time, and knew the gov. might control prices. Thus, no excuse. Policy: Parties should allocate risk of foreseeable harms in the K themselves, b/c courts
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won’t write such terms for them. Only unforeseeable occurrences are protected by courts when ommitted from K Performance excused due to severe price and cost increase ALCOA v. Essex Group USDC, W.D. PA, 1980 not contemplated at K formation. Facts: entered into K w/ to convert alumina into aluminum for . Price was set by a complex formula. sought a profit of 4 cents/lb. Range of foreseeable deviation was roughly 3 cents/lb. sought a long term supply of aluminum. Starting in 1973, OPEC increased oil prices, thus increasing ’s costs. At same time, market price for aluminum doubled, but was stuck selling aluminum to for half price, while just resold the aluminum for the pure profit rather than using it. Issue: Whether ’s performance can be excused due to impracticability or frustration. Holding: Yes, b/c severe costs accrued to , and is getting the benefit. Rule: Performance excused when exogenous event not contemplated by the parties at K formation results in significant destruction of value of K. Frustration must be substantial to allow excuse – here the severe standard of disappointment is met, as is losing significant money due to market for aluminum. Impracticability must be a severe increase of costs, difficulty, or risk of performance – met here b/c cost increased severely due to OPEC. Policy: Impracticability/frustration only invoked when extreme frustration of purpose/value of K Note: Case distinguished b/c of gravity of harm to , and risk not allocated in K. This is pretty much the only case that has granted judgment on impracticability. Mistake might have been applied – risk was kind of foreseeable b/c there was an escalation clause w/n predicted deviation. But the extreme nature wasn’t foreseeable.
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VIII. Breach
A.
Anticipatory Repudiation 1. Background a. A party indicates that he will not perform the K, but the time for performance has not yet arrived. Such anticipatory repudiation allows the other party to suspend/cancel his own performance, and can generally either sue right away (while mitigating damages) or wait until time of performance for other party to actually breach, in which case he can sue for breach of K. But, if waits, and other party revokes, K is back on. b. There can be no actual breach until the time specified for performance has arrived. c. Express repudiationclear, positive, unequivocal refusal to perform K. i. In general, the statement “I will not perform” means that there is a great probability that party will not perform, but doesn’t mean that necessarily won’t perform. Would be an express repudiation – but party could revoke unless other party sues first. ii. A suggestion for modification of K does not amount to a repudiation. d. Implied repudiationresults from conduct where the promisor puts it out of his power to perform so as to make substantial performance of the K impossible (e.g. takes another job) e. Policy: it would be economically wasteful for one party to continue w/ performance if the other already said he would not performed. f. Response to a repudiationOther party: i. Can treat repudiation as breach and immediately seek damages. To treat repudiation as a breach, must give notice to the repudiator, or materially change position based on the repudiation (demonstrable reliance). Duty to mitigate damages, though. (A) Allowing early lawsuit allows injured party to make other arrangements, and lessen overall damages; actually is a benefit to the repudiating party that injured party is able to mitigate). ii. Can treat the repudiation as an empty threat and wait until time of performance for repudiating party to actually breach, and sue for breach of K. But if this option is taken, and repudiating party retracts the repudiation before time of actual performance, the repudiation is nullified, and K is back on. g. Most common law jurisdictions require anticipatory repudiations to be unambiguous to be effective to discourage strategic behavior. h. You can K out of repudiation by specifying how repudiation could be done or not done, thus default rule is strict b/c people can K out of it. i. Problems w/ this doctrine: i. Discourages parties from renegotiating, especially if courts interpret anticipatory breach and repudiation liberally. ii. Encourages strategic behavior, b/c if one party wants to get out of the K, can provoke breach by faking anticipatory repudiation (making vague statements to induce the other party to treat as a repudiation).
2.
Cases
If party repudiates, other party can treat as breach and Hochster v. De La Tour Queen’s Bench, 1853 sue/mitigate right away. Facts: was a courier engaged by to accompany him on a 3-month tour of Europe to start June 1. May 11 - wrote to saying he had changed mind. sued on May 22, but before June 1 got a job w/ another guy to start July 4. Issue: Whether is liable for anticipatory breach even though didn’t wait for actual breach? Holding: Yes, is liable, doesn’t have to wait. Rule: If party expressly repudiates K, the other party may treat the repudiation as a breach and sue/mitigate right away. Here, clearly repudiated, and was right to sue and mitigate.
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Policy: shouldn’t have to wait around until actually breaches and waste his services until then. Better for all parties if can sue and mitigate. No implied anticipatory repudiation until “repudiator” Taylor v. Johnston SC of CA, 1975 puts it out of his power to perform. Facts: K’ed w/ that stud its stallion to ’s 2 mares. K provided for breeding during 1966, and if unsuccessful, during 1967. sold stallion to 3rd party, and told it released them from the K. insisted on performance, and 3rd party agreed, but gave the runaround, continually delaying breeding. However, season was not yet over and they still could have performed. But told the 3rd party to breed w/ another horse, which resulted in aborted twins. claims anticipatorily breached w/runaround. Issue: Whether ’s and the 3rd party’s actions constituted breach of K? Holding: No, b/c they still could have performed, and didn’t expressly repudiate. Rule: No implied anticipatory repudiation until “repudiator” puts it out of his power to perform (performance becomes impossible). Here there are 2 alleged repudiations of K by /3rd party. First was when they tried to release from K, but retracted when insisted on performance. Second alleged repudiation was the runaround. It was not express. And for implied, would have to put it out of his power to perform – but merely postponed the time of performance, w/n the allowed time limit. Still could have been performed. Policy: The probability of performance goes down during the runaround period. When probability goes down to 0, that is implied anticipatory repudiation. This reduces litigation b/c creates clear threshold. Note: Probability that the other party will perform is built into the initial price. As that probability erodes, the value of the K to you erodes (imagine if you were going to try to sell the obligation) Truman L. Flatt v. Sara Lee Repudiation must be unambiguous; Retraction of repudiation valid unless other party relies or notifies the Schupf AC of Illinois, 1995 other party that they consider them to have repudiated. Facts: promised to sell land to . Clause said that if zoning not granted by city council, could void K and receive refund of earnest money. After trying to get zoning, sent letter to saying zoning couldn’t be gotten, and asking if would change price based on different zoning. responded turning down that offer. replied that they would proceed w/ original K terms. said that they weren’t going to perform b/c ’s letter asking for price change was an anticipatory repudiation. didn’t resell the property during the time period (didn’t rely) Issue: Whether ’s conduct or words repudiated the K? Holding: No, it was too ambiguous to constitute a repudiation, and if it was, retracted anyway b/c never relied. Rule: (1) Doubtful and indefinite statements that performance may or may not take place is not enough to constitute anticipatory repudiation. never said they were going to void K – too indefinite to construe as anticipatory repudiation. (2) Retraction of an anticipatory repudiation is allowed as long as the other party has not materially changed their position in reliance, or as long as the other party has not notified them that they are treating it as a repudiation. Here, didn’t rely or notify that they were treating their statements as an anticipatory repudiation anyway, so retracted and nullified any supposed repudiation. Policy: Intent of parties; if party doesn’t intend to repudiate, but merely to renegotiate, courts want to encourage renegotiation for economic efficiency, not force a breach.
Squibs:
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Wholesale Sand & Gravel: K’ed w/ to install gravel driveway. No time of completion provision in the K. began work, but stopped due to wet ground. removed equipment from site, presumably to wait for ground to dry out. repeatedly called asking when they would come back, and said they would “get right on it,” but weeks went by. Finally, 45 days after K formation, terminated and hired alternate company. Court granted judgment for , finding that it was reasonable for to conclude that would never complete its performance under K. Bonebrake v. Cox: was in time crunch and found out , who was to deliver goods, had died. frantically called everyone associated w/ , including his sister, to locate the equipment, but when that failed, they ordered from someone else. Court found that did not breach b/c reasonable indication that would not perform. Shows liberalizing of UCC rule. Chamberlin v. Puckett: proposals for modification do not constitute repudiations unless they are demanded. Record Club of America v. United Artists: anticipatorily repudiated K b/c it erroneously believed had breached. claimed their belief that had breached was in good faith and excusable; Court said no good faith exception to anticipatory breach. Test is objective. Gibbs v. Int’l Multifoods Corp.: Retraction of an anticipatory repudiation can arise from conduct indicating that the repudiating party is still willing to be bound by the K. Keppelon v. W.M. Ritter Flooring: contracted w/ to build house, but refused to commence construction b/c was insolvent. Court held mere insolvency was not enough to justify anticipatory repudiation, b/c it was still w/n ’s power to perform.
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B.
Constructive Conditions of Exchange 1. Background a. Constructive conditions of exchangeParties’ obligations under K are dependent, reciprocal conditions. Each party’s condition to perform is that the other hasn’t breached. Substantial performance doctrine applies – each party’s substantial performance is a condition of the other party’s duty to substantially perform themselves. Perfect performance is not required. b. Some breaches are so insubstantial that they do not trigger the rule of constructive conditions of exchange. c. Performer’s risk principlethe risks associated w/ the performance of an executory promise are allocated to the promisor – the person whose performance is thereby affected. This is a central default rule of K law, based on idea that the performing party has more control over his performance and precautions, so has advantage in reducing risk. Can be K’ed out of, but promisor will bargain for higher price in response. d. Default implied rules/conditions of Ks: i. Risks are allocated to the promisor ii. If not specified, payment due at time of delivery iii. If payment expected for a long performance, unless otherwise specified, it is due at the end of payment or when substantially complete. iv. Implied obligation of cooperationin every K is implied that each party will not take action that he knows will substantially hinder performance by the other party. (R 2d § 205 comment d; UCC § 2-311). v. Implied obligation of good faith (UCC § 2-103(1)(b)). vi. If performance due in exchange for performance, unless otherwise specified they must be done concurrently. e. R 2d § 234 i. Where the performances can be exchanged simultaneously, they are due simultaneously unless language or circumstances indicate otherwise. ii. Where the performance of one party requires a period of time, his performance is due before the other party’s performance, unless language or circumstances indicate otherwise. (i.e. long performance of building a house is due before short performance of paying) 2. Condition v. Promise a. ConditionA future and uncertain event on which the existence or extent of an obligation or liability depends; an uncertain act or event that triggers or negates a duty to render a promised performance. b. PromiseThe manifestation of an intention to act or refrain from acting in a specified manner, conveyed in such a way that another is justified in understanding that a commitment has been made. c. Courts interpret conditions differently than promises. Conditions are construed strictly and narrowly, and if not met, no duty on other side to perform. Default is that a term is a promise. d. If a condition precedent is not met, K is void. Thus, someone trying to walk away from a deal would want to claim that a term not met was a condition precedent, thus K is void. e. If promise is not met: i. If substantial performance of K, K still valid, other party still has to perform (e.g. pay for the work), but other party can also sue for the breach of the immaterial promise. ii. If no substantial performance, K is breached by not meeting promise, and other party doesn’t have to perform, and can sue for breach. f. Two interpretive doctrines: i. Courts like to see promises (duties) and not conditions; and ii. Courts will interpret K to reduce risk of disproportionate forfeiture (too big relative to potential gain from K...similar to unconscionability. g. Forfeitureone party has relied on K, and will lose reliance interest if the clause is interpreted as a condition. h. Main Electric v. Printz Services: pay-if-paid clauses (clauses that sub-contractor won’t get paid by the general until the general is paid by the principal) interpreted as “paid-when-paid” clauses when no
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i. j. k. l. 3.
mention of what to do if principal defaults b/c the purpose is so that the general has the cash flow to pay the sub-contractor – not to allocate the risk of principal’s default to the sub-contractor. Homeowner who renovates and renovator is paid based on homeowner’s satisfaction is determined objectively – would a reasonable person be satisfied. Obligor contractual conditionbuyer’s duty conditional on obtaining satisfactory financing. Obligee contractual conditioninsurer’s duty to pay conditional on receiving prompt notice of loss from insured. Exogenous contractual conditioninsurer’s duty to pay conditioned on loss due to fire.
Waiver v. Modification a. Waiver i. Obligor says at some point, before or after condition is satisfied, that the condition is waived. ii. Only conditions that are not material can be waived. It’s an interpretive exercise to determine if waived. iii. Waiving a condition is easier than modifying a promise – unilateral, no new consideration, no worry of reliance (except under Wisconsin, § 2-209, waiver only effective w/ reliance when oral modifications are barred). b. Modification i. See p. 65 section on modification. Substantial Performance a. When a party breaches a K by deviating from its terms, but still performs well enough that the breach is not material. But, other party has a claim of damages for the deviation. Permits the other party to withhold own performance only when the defect materially impairs the essence of what was K’ed for. b. Under common law, substantial performance wouldn’t matter b/c any breach would simply relieve the other party of his obligation to perform. c. Usually applies to service and construction Ks d. Test for substantial performance: (OW Grun Roofing) i. Good faith breach (unintentional) ii. Defect was trivial or immaterial in light of promisee’s purpose or objective. (not a material breach) If you are idiosyncratic and your purpose is weird, you must put it in the K so that courts will know your intent. iii. Repair or replacement would involve destruction/economic waste – but should not be overemphasized, b/c they will still allow repair or replacement if the term is important/material enough. e. Substantial performance is meant to prevent strategic behavior. f. To determine whether the breach was material: R 2d § 241 i. Extent to which injured party will be deprived of benefit of expected ii. Extent to which injured party can be adequately compensated for the benefit of which he is deprived iii. Extent to which party failing to perform will suffer forfeiture iv. Likelihood that party failing to perform will cure his failure v. Extent to which the party failing to perform comports with standards of good faith g. Perfect Tender Rule (UCC § 2-601)relates to delivery of goods. If goods fail in any respect to conform to the K, buyer may reject them, within a reasonable time period. This means no substantial performance for goods. Cases
4.
5.
Party must perform K unless absolutely impossible. If it Stees v. Leonard SC of MN, 1874 didn’t allocate risk otherwise, risk falls where it lies. Facts: K’ed w/ to erect building on ’s lot. Building collapsed twice due to soft soil. had promised to keep soil drained after the first collapse but didn’t. refused to build again, claiming it is not their fault, but the soils; that selected the spot, and failed to
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drain, so it is also their fault. Issue: Whether must carry out the terms of the K despite the difficulty? Holding: Yes, must uphold promise unless impossible. Rule: Party must perform K unless absolutely impossible. Here, K not impossible to perform. Even though selected spot, knew what spot at time of K. ’s oral promise not raised in answer, so inadmissible. Policy: Parties must allocate risk – but the default is that if not allocated, the risk falls w/ promisor. “Performer’s risk” principle. Where no express order of performance, implied condition Bell v. Elder Court of Appeals, UT, 1989 that they be performed concurrently Facts: K’ed to buy land from . K provided that provide water and power to the land, and that apply for building permit and construct home. didn’t provide water but was ready, willing, and able. didn’t apply for building permit or build a home. claiming that should have performed first and breached by not performing, and want their money back. Issue: Whether one party was obligated to perform before the other? Holding: No, they were to perform concurrently. Rule: Where there is no express indication of intended order of performance, there is an implied condition that they be performed concurrently. B/c never performed, didn’t breach. If had applied for permit and starting building house, and no water was available, then would be in breach. Policy: Economic efficiency – why should supply water and power to a nonexistent house? If ambiguous, term should be construed as a promise Howard v. FCIC US Court of Appeals, 4th rather than a condition precedent. Facts: issued insurance policies to guarding against damage to ’s tobacco crops. Heavy rains destroyed ’s crops, and filed timely notice to . Clause 5(a) in K said it was “condition precedent” that the loss was caused by a hazard. Clause 5(f) said that the tobacco stalks shall not be destroyed until makes inspection. When came to inspect, had already plowed field. refused to pay. Issue: Whether clause 5(f) is a condition precedent to payment, or merely a promise by in K? Holding: It is a promise, not a condition precedent. Rule: (1) If ambiguous as to whether it is a condition precedent, term should be construed as a promise. Here, 5(f) wasn’t labeled w/ “condition precedent” even though 5(a) was. Since not labeled, it is ambiguous and must be construed as a promise. (2) Insurance policies are generally construed most strongly against the insurer. Distinguished: from Fidelity Phenix: there, the other clauses were labeled w/ “warranty,” and the court held that under the context they were meant interchangeably. Here, no such interchangeable label. Policy: Conditions either turn K on or off – thus default should avoid this harsh possibility. Regarding insurers, they write the policies and know how to specify conditions – they could have made the term a condition precedent had they wanted to. Squib: Fidelity-Phenix: Insurer required safety measures such as alarm system. Some clauses labeled “condition precedent” to recovery, some labeled “warranty”. Court found that the terms were used interchangeably and were all conditions precedent. Johnston: very precise conditions in the K to specifically allocate risk, so purpose of terms factor in. Inman v. Clyde Hall Drilling SC of AK, 1962 Conditions precedent are void for public policy for same reasons as the whole K; Breach by one side doesn’t excuse performance of condition precedent to recovery on the other side.
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Facts: fired by . Employment K had a “condition precedent to any recovery” that give notice of any claim w/n 30 days of it happening, and that not file a lawsuit for 6 months after such notice. 12 days after being fired, filed suit for breach of employment K. admits he knew of the clause, but claims he thought that the filing of the lawsuit itself was notice. Issue: Whether the notice provision is contrary to public policy? Holding: No, it was fair and reasonable. Rule: (1) Conditions precedent are void for public policy for same reasons as the whole K could be void. Provision here was neither unfair nor unreasonable, and had full knowledge, capacity, and opportunity to read and understand the agreement, and admits he did. (2) Breach of K by one side doesn’t excuse the other side from performing their condition precedent. Even if breached the K by firing him, still has to follow condition precedent to recovery by filing proper notice. Policy: Courts want to let parties K out of litigation issues. If term is not part of the consideration, it is a condition; Clark v. West Court of Appeals, NY, 1908 Waiver of conditions may be implied by circumstances. Facts: promised to pay $2 per page to write a new law book, $6 per page if abstained from liquor. did drink, but claims knew he had drank, did not object to it, continued to require ’s performance, and never said he would require strict compliance w/ clause. finished the book, and only gave $2 per page. Issue: Whether waived the drinking clause in the K? Holding: Yes, it could be so established. Rule: If a term is part of the consideration, it is a promise, and if not, a condition. The purpose of the K – what was bargained for – was the book. The drinking clause was only to increase the chances of a better book. Thus it was only a condition to enable the consideration. (2) Waiver of conditions can be implied by the circumstances. Here, the circumstances are such that a jury might find that a waiver of the condition was implied. Policy: Intent of parties; equity Wisconsin Knife v. National If term is not part of the consideration, it is a condition; Waiver of conditions may be implied by circumstances. Merit Crafters US Court of Appeals, 7th, 1986 Facts: K’ed to buy spade bit blanks from . Condition on order is that no modification shall be binding upon unless made in writing and signed by . missed 2 deadlines, but eventually, over a year later, produced the blanks for the first set of purchase orders. , after accepting half the blanks, notified that the K was terminated and sued. Issue: Whether modified the K to allow extended deadline, despite clause barring oral mod.? Holding: No, but may have waived the deadline, depending on whether relied. Rule: UCC § 2-209(4) allows oral waiver, but only if relied upon by other party. Posner: The clause barring oral modification is effective. But (4) allows an attempt at oral mod. to act as a waiver. This clause only makes sense if reliance is added in. Here, it is a question for the fact-finder. Policy: Equity Dissent: Easterbrook: Reliance is not a part of (4). Reliance is specifically mentioned in (5) but was left out of (4). Waiver means the same thing in both sections, but reliance left out of (4) for a reason. Note: Reliance here can be unjust enrichment or unjust detriment. Here there is arguably both. DAMAGES 1. Remedy R 2d 348
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a. If a breach results in defective or unfinished construction and the loss n value to the injured party is not proved with sufficient certainty, he may recover damages based on: i. Cost of Completion: normally, the reasonable measure of damages for failure to perform is the cost, according to the market value, of repairing the defect ii. Diminution in value: However, if the repair would involve substantial economic waste, the measure of damages will be the amount by which the defect diminishes the value of performance (Jacobs and Young) 2. Perfect Tender Rule: UCC 2-601: relates to delivery of goods. If good are not in perfect condition when received by purchaser, the purchaser can reuse to accept them, within a reasonable time period, so long as the purchaser says why he is rejecting them and gives seller the opportunity to remedy the problem. a. Perfect tender v. Substantial performance: justification for using perfect tender for goods and substantial performance for services is that if perfect tender applied to services, homeowners, for example, could hold up contractors. Cases: Jacobs and Young v. Kent substantial performance; economic waste Facts: P built house for D under a K which clearly specified a particular brand of pipes. P used a different brand of pipes for 2/3 of the piping. Different pipes were equal in value to the pipes specified in K. When D learned of the diff. in pipes 9 months after the house was completed, he refused o pay P the balance of the K. Issue: Whether P substantially performed. Whether damages should be measured by diminution in value or cost of replacement. Rule: Where a breach is peripheral to the main purpose of the K, resulting in an insignificant loss in value to the nonbreaching party, the breaching party has substantially performed. Policy: Cts do not want to encourage economic waste. In this case, the difference in value of the house was insignificant but the cost of replacement was very high b/c it would have required tearing down the whole house to replace the pipes. Also, cts wish to prevent opportunistic behavior (i.e the house was fine other than a minor detail).
I.
Contract Remedies:
Rules: 1. Breaching party can only be held responsible for consequential damages reasonably foreseeable at the time of K formation. 2. There is an affirmative duty to take reasonable steps to mitigate the effects of a breach, even an anticipatory breach. 3. R 2d §344: Remedies protect expectation, reliance and restitution interests. Rationale: 1. Goal is not to penalize for breach, but t create incentives for when it is appropriate (i.e. cost efficient) to breach. 2. Breaching party should know the full measure of damages at the outset so that he can bargain accordingly and later apply the correct cost-benefit analysis to determine whether to breach. 3. Not supposed to allow either economic waste or P’s windfall. Rules exist to resolve the competing interests of preventing opportunistic behavior and not stifling behavior that has a net economic benefit. 4. Damage mitigation benefits both parties through increased economic efficiency.
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Types of Damages: A. Expectation Principle: Expectation is used to compensate the victims of breach of bargain. Puts the injured party in the position he would have occupied if the K had been performed. Limited to reasonably foreseeable damages. Victim has a duty to mitigate. This is the general rule, especially in commercial Ks. Expectation model encourages efficient breach, when the seller finds a buyer with a higher price than the current K and the damages assessed to P are less than the profit that can be gained by a K with the higher buyer. When the value of the damages cannot be measured it is hard to calculate the award and thus expectation remedies will be inefficient. a. R 2d §347: states that the injured party has a right to damages based on the expectation interest as measured by (a) the loss in value to him of the other party’s performance caused by its failure or deficiency; and (b) any other loss, including incidental or consequential loss, caused by the breach; less (c) any cost or other loss that he has avoided by not having to perform.
Cases: American Standard v. Schectman meeting grading specifications of K central to K; cost of completion appropriate measure of damages; not diminution in value Facts: P owned manufacturing plant and industrial property. P and D make K to sell land to D and required D to remove equipment, demolish structures, etc. as per specific requirements in K. D failed to meet proper grading specifications – failed to grade 1 foot deep. D argues that breach did not affect property value and that diminution in value is appropriate measure of damages. P argues that cost of completion is appropriate measure of damages. Issue: Whether cost of completion or diminution of value is appropriate measure of damages. Rule: Cost of completion is default measure of damages. Where breach is not incidental to main purpose of K, cost of completion will be measure of damages. Policy: Courts want to avoid economic waste by using the diminution in value measure of damages where cost of completion damages would result in tearing down a structure at great cost. But where the breach is central to the purpose of the K, cost of completion will be the measure of damages. Peevyhouse v. Garland Coal and Mining diminution in value appropriate damages where breach is incidental to main purpose of K Facts: P leased land to D for the purpose of coal mining. D agreed to perform remedial and restorative work at the end of lease. At the end of the lease, D left land and did not perform the restoration, intentionally breaching the K. P sued for the cost of performance. The cost of performing restoration work would be greater than the value of the land. Issue: Whether cost of completion or diminution in value is appropriate measure of damages. Rule: Where breach is incidental to main purpose of K, diminution in value is the appropriate measure of damages. Where the economic benefit of full performance is grossly disproportionate to the cost of performance, the measure of damages is the diminution in value resulting from breach. Policy: Avoid economic waste. Freund v. Washington Square Press damages not certain enough Facts: Professor entered K with publisher to publish his book. K included 2K advance and % of royalties. Publisher sold and new owner refuses to publish the book. TC awarded P damages measured by the cost of publishing. Issue: Are expectancy damages appropriate? Rule: Only damages that can be calculated with certainty will be measured by expectation damages.
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B. Reliance Damages: (Status Quo Ante) – used where a promise is enforceable only because of reliance; gives victim his costs, putting him back in the position he occupied before the promise was made. This is the default for promissory estoppel cases. a. R 2d §349: states that as an alternative to damages in 347, the injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance, less any loss that the party in breach can prove with reasonable certainty the inured party would have suffered had the K been performed. Cases: Sullivan v. O’Connor P granted reliance damages for botched nose job Facts: P contracted with D for a nose job that D said would improve P’s appearance and enhance her beauty after 2 operations. P not satisfied with poor results. P had to undergo a 3rd operation and was left with no further surgical option to improve her nose. Issue: Whether reliance damages are appropriate or expectancy damages are appropriate. Rule: Where damages are difficult to calculate, no expectancy damages will be granted. Kizas v. Webster Ps awarded reliance damages for the loss of preferential treatment Facts: (D) FBI canceled clerk-to-agent program which granted preferential treatment to clerks in agent applications. P clerks sue for reliance damages, claiming that reliance damages are measured by the difference bet. what they earned as FBI clerks and what the avg. person of their age, education, etc. earned in the US, ccording to the census. Issue: Whether Ps can be awarded reliance damages for losing opportunity of preferential treatment. Rule: Where a party relies on a contractual promise, he will be awarded damages equal to the losses incurred by that reliance.
C. Specific Performance: an equitable remedy where the court orders the breaching party to perform a. UCC 2-716: Court may award specific performance where goods are unique, or in other proper circumstances. b. In the service context, a party cannot sue for SP to force someone to perform. To do so would require indentured servitude. Cases: Klein v. Pepsico Facts: (P) Klein sought to buy a Gulfstream II Jet from (D) Pepsico through jet broker Universal Jet Sales. Ct. determines that K was formed between the parties. Klein agreed to $100k deposit and purchase pending an inspection and that certain
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repairs were made to the jet. Chairman of Pepsi stranded in airport, needs jet, and orders that the jet be withdrawn from sale. Pepsi withdraws offer and Klein sues for specific performance, claiming that the jet was unique. Issue: Whether a significant increase in cost of replacement constitutes “unique or other proper circumstances” as per appropriateness of specific performance. Rule: An increase in the cost of replacement of a good for sale does not warrant specific performance. Policy: Courts are very reluctant to order specific performance and will only do so as an extreme measure where goods are unique or nearly irreplaceable. Sedmak v. Charlie’s Chevrolet limited edition car warranted specific performance Facts: P contracted to buy a limited edition corvette from (D) dealership. Car was ordered as per P’s specs and delivered to dealer. D subsequently received higher bids as there was great demand and limited supply of the car. When car arrived, D refused to sell to P and wanted to sell to a higher bidder. Rule: Where replication of the good in question would require considerable delay, inconvenience and expense, specific performance is appropriate remedy. Where there is no adequate remedy at law, a court may order specific performance. Policy: Courts will order specific performance where goods are either unique or close to unique. The good does not have to be absolutely irreplaceable to warrant specific performance. The court ordered specific performance because the car was functionally unique, even though it was not actually unique. Courts are moving towards a more liberal standard of what constitutes “other proper circumstances.”
D. Limitations on Expectation Principle: a. Foreseeability: one can only get damages for consequences that were reasonably foreseeable at the time of K formation. i. R 2d §351: damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of breach when the K was made. A court may limit damages for foreseeable damages in order to avoid disproportionate compensation. b. Certainty: a party may not recover damages that are too speculative or uncertain. c. Avoidability/Duty to Mitigate: a party cannot intentionally pile up damages after the other party has breached. Parties have a duty to seek a reasonable substitute and avoid economic waste. However, parties are not required to accept any substitute; must be reasonably comparable. Cases: Drews Company, Inc, v. Ledwith-Wolfe lost profits on new restaurant deemed too speculative to award damages; but not automatic bar to recovery Facts: (P) restaurant owner hired (D) contractor to renovate a building to be used as a new restaurant. Disagreement results in contractor walking off the job. P sues D for lost profits on new restaurant. TC awards damages. Issue: Whether lost profits on a new restaurant are too speculative to award damages. Rule: Determination of recovery of lost profits must be reasonably certain; not speculative or conjecture. Policy: Courts want damages to be calculable and will consider other businesses owned by same owner in different locations, other comparable competitors, etc. but will not award damages that are not relatively certain. Hadley v. Baxendale losses must be foreseeable to be recovered
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Facts: (P) mill owner shipped sole mill shaft through (D) mover for repair. P told D that it was urgent but P did not understand that mill could not run without shaft. Mill was shut down while shaft was being repaired but P claimed that it thought there was a spare shaft. P claims that D had special knowledge of P’s urgent need for speedy delivery. P sues for lost profits resulting from D’s delay in returning shaft. Issue: Whether the losses incurred by P were foreseeable by P at the time of K formation. Rule: Losses must be foreseeable by breaching party for non-breaching party to recover damages. Policy: Cts do not want parties to pay for damages that were not foreseeable at the time of K formation b/c they were not able to factor liability for those damages into their prices. If parties were liable for all damages that, whether or not foreseeable, service providers would become insurers and prices would increase, making services available to fewer people. As a result, parties can elect to pay for extra insurance (i.e. FedEx or moving insurance). Spang Industries v. Aetna Casualty forseeability; damages normally flowing from breach can be recoverable even if not actually anticipated Facts: Torrington (Construction Company) wins NYS bid to build bridge and subcontracts with P to provide steel for bridge. P and Torrington form K which specifies prices and estimated date of delivery. Steel must be laid so that concrete can be poured before freezing temps set in. P supposed to deliver in July, don’t deliver until end of August/beginning of Sept. Torrington mitigates damages by rushing job and unloading steel itself. Torrington claims that P reasonably knew that these damages were foreseeable b/c P is a construction co. that knows concrete must be poured before freezing temps. Issue: Whether the damages resulting from P’s breach were foreseeable at the time of K formation. Rule: For non-breaching party to recover damages, losses resulting from breach must either be actually anticipated at the time of K formation or must be of the type that would normally flow from such breach (i.e. as per business practice). Policy: Cts do not want parties getting out of paying for reasonable damages b/c they did not actually anticipate them if they would have been anticipated if properly attention was paid at the time of K formation – incentive to be careful when forming Ks.
Crickett Alley Corp. v. Data Terminal Systems forseeability of consequential damages Facts: (P) retail store owner looking to buy computerized cash registers that can communicate with the Wang computer it already owned. P buys cash registers from D who repeatedly assured P that cash registers were compatible. Cash registers are not compatible and P must replace cash registers. P sues D for cost of replacement and cost of extra manual labor that he would not have had to pay had cash registers functioned properly. Issue: Whether damages were foreseeable to seller at the time of K formation. Rule: A seller is liable for consequential damages resulting from breach where he knew of either the general or specific purpose of the goods in question. Policy: Cts do not want to hold buyers to a very strict standard of informing the sellers of their purposes in using the goods. In this case, where the general purpose of the goods is obvious, buyers should not have to inform seller of his purpose. Seller is in the business of selling computerized cash registers and therefore reasonably understands their purpose.
Duty to Mitigate Cases: Rockingham County v. Luten Bridge Company after absolute repudiation of K, non-breaching party under duty to mitigate damages
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Facts: (D) County contracts with (P) bridge builder to build bridge for new highway. New highway was controversial and new county board votes against after P had already started work. D expressly informs P that K is canceled when P had incurred $1900 of damages. P continues with work; completes bridge at a cost of $18k. P sues D for damages. Issue: Whether P has a duty to mitigate damages after D expressly repudiates K. Rule: Where breaching party expressly repudiates K, non-breaching party has a duty to mitigate damages. Policy: Avoid economic waste. After county decided not to build road, bridge had no value. P could stop work and find a job with economic value. Bridge in the middle of nowhere with no road attached.
Parker v. Twentieth Century Fox Facts: (P) Shirley MacLaine contracts with (D) movie studio to star in musical for $750,000. P is granted director and screenplay approval. Under original K, D has to pay P whether or not movie is made. D decides not to make movie. D offers P a new role in a western for the same money and no director and screenplay approval in Australia. P refuses new role and D claims that P has a duty to mitigate. Issue: Whether the non-breaching party is under a duty to mitigate by taking a job that is different and inferior. Rule: The duty to mitigate only extends to finding a comparable substitute. A non-breaching party does not have to mitigate damages by taking a substitute that is different and inferior. Policy: Courts want to encourage non-breaching parties to mitigate damages to avoid economic waste. But they will not force non-breaching parties to find anything to substitute for performance. Must be substantially similar (dissent thinks the 2 roles were substantially similar).
Restitution Damages: 1. Restitution: (quasi contract damages): usually awarded when (1) a party has conferred a benefit on another party under an enforceable K (2) a losing K was breached (3) benefit was conferred at pre-K stage and no K was ever formed. Designed to give the promisee reasonable market value of the benefit conferred on the promisor. Prevents unjust enrichment. a. R 2d §373: (Restitution when the other party is in breach): states that (1) on a breach by non-performance that gives rise to a claim of damages for total breach or repudiation, the injured party is entitled to restitution for any benefit that he has conferred on the other party by way of part performance or reliance. (2) The injured party has no right to restitution if he has performed all of his duties under the K and no performance by the other party remains due other than payment of a definite sum of money for that performance. b. R 2d §374: Restitution in favor of the breaching party: states that (1) 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 on the other party by way of part performance or reliance in excess of the los that he has caused by his own breach. Restitution Cases:
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United States v. Zara Contracting Co. unjust enrichment; restitution damages – value of benefit conferred on D not anticipated in K Facts: (P) subcontractor hired by (D) contractor to build airport for US. P started work and found that conditions of the soil were much more difficult than anticipated in K. P incurred expenses not anticipated in K due to wear and tear on equipment and extra labor costs. Due to disagreement, P stops the job and D continues using P’s equipment. P sues D for the cost of renting the equipment and the cost incurred from the additional work. P claims that D was unjustly enriched by extra work and use of equipment. Issue: Whether D is liable for damages resulting from benefits conferred by P that were not anticipated in K. Rule: Where P confers a benefit on D that was not anticipated in the K, measure of damages should be how much D would have to pay for services rendered in an open market. Policy: Parties should pay for benefits conferred upon them. Britton v. Turner non breaching party must pay for partial performance to avoid unjust enrichment Facts: (P) laborer formed K with (D) employer to work for one full year in exchange for one payment of $120. P worked for 9 months and then left the job. D paid P nothing and P sues D for the value of partial performance. Issue: Whether a non-breaching party must pay for benefit conferred upon him from partial performance. Rule: Breaching party is entitled to restitution for any benefit that he has conferred upon other party by way of partial performance. Policy: If this were not the case, an employer could make conditions unbearable in the final weeks/months of a K and force employees to quit, thereby receiving nearly the full benefit of the work without having to pay anything.
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Liquidated Damages: 1. Definition: liquidated damages are damages pre-determined by the parties when entering the K as the damages that will apply in the case of breach. 2. R 2d §356: Damages for breach by either party may be liquidated in the agreement but only at the amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulty of proof of loss. A term fixing unreasonably large liquidated damages in unenforceable on grounds of public policy and will be deemed a “penalty.” Liquidated Damages Cases: C & H Sugar Co. v. Sun Ship, Inc. liquidated damages will only be enforced if they are not a penalty in light of actual damages. Facts: (P) Sugar Company grows cane in HI and refines it in CA. Hires (D) ship builder to build barge and attach the barge to a tug produced by another company. K includes liquidated damages clause that provided that D would pay P $17,000/day for each day delivery of the barge was delayed. D delivered the barge 8 months late and paid liquidated damages as specified in the K for first 5 months. D then discontinued payments of liquidated damages claiming that because the other company had also failed to deliver the tug, the actual damages were 0. D claimed that only failure to deliver the integrated vessel would trigger the liquidated damages clause and b/c this was impossible, there was no duty to pay. D also claims that actual damages were 0 b/c P found a new shipper and the crop of sugar was not wasted (as anticipated in K). Issue: Whether liquidated damages were a penalty in light of actual damages, which were nearly 0. Rule: Liquidated damages must be enforced here they are reasonable in light of both actual damages and the reasonableness of anticipated damages at the time of K. Policy: Courts don’t want to set the precedent of allowing parties to breach liquidated damages clauses on the grounds that a third party breached as well. This would reduce the incentive to perform Ks in general. Courts will not enforce liquidated damages where they are viewed as a penalty in light of actual damages. This would lead to a windfall for P. The ct enforced the liquidated damages in this case b/c the parties were highly sophisticated/freedom of K. Lake River Corp. v. Carborundum Co. Facts: Carborundum manufactures Ferro Carbo, an abrasive powder used in making steel. Lake River is a distributor which bags the powder and ships it to Ferro’s customers. Carbo insisted that Lake River have a new bagging system which cost $89k in exchange for a K that guaranteed a minimum amount of business. The K contained a liquidated damages clause that stated that if Carbo did not provide the minimum amount, it would pay the difference (the fee for the stated minimum). Carbo did not ship the minimum and owed LR $243k. LR had already bagged $269 worth of carbo and was holding it hostage until Carbo paid the liquidated damages. Carbo claimed that the minimum imposed a penalty. Issue: whether the liquidated damages clause imposed a penalty in light of actual damage. Holding: Clause is a penalty b/c it is designed to pay LR more than its actual damages in all cases. The cost of the new equipment was not a sunken cost b/c LR could and did use it for performance of other Ks. Rule: Where a liquidated damages clause is a penalty in light of actual damages to the non-breaching party, it will not be enforced.
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