Contracts II OutlineKnapp, Crystal, and Prince – 5th Edition

Spring 2005 Professor Roy

Chapter 7 – Avoiding Enforcement

I. Minority and Mental Incapacity

A. Minority Rule – a.k.a. the Infancy Doctrine.

1. Classical Approach – minors are incapable of creating an enforceable K. If the seller never check age and minor tries to rescind the K, it’s tough shit for the seller.

2. Modern Approach – Minor should not be able to recover full purchase price once he has already paid for/used the merchandise, absent any showing of fraud or imposition by the seller.

3. Recision (Ex Ante Position)– a K with a minor is VOIDABLE. The minor can demand recision, (which means to put the parties back in the Ex Ante Position) -- to put the parties back into the situation they were in before the agreement. Problem – what if the value has decreases?

4. 2 Modern Rules:a. Benefit Rule – recovery of full purchase price is subject to a deduction for

minors USE of the merchandise.b. Use Rule – minors recovery of full purchase price is subject to a deduction for

the depreciation in value of merchandise.*Both pretty much same thing.

5. Exceptions to the Modern Approach:a. If the minor lies, or misrepresent his/her age – no minority defense.b. Necessaries – Items one needs to Live – child is liable for these.

**Classical approach would say the K is still voidable if the child misrepresents his age, but there would be a separate action in tort.

6. When will minor not be able to recover?a. Minor Misrepresents his/her age.b. Once he/she has reached majority, must disaffirm the K w/n reasonable time or

lose that option.

B. Mental Incapacity

1. Distinguished from Minority Doctrine:a. Minors can disaffirm even if restoration cannot be made.b. Mentally incapacitated person must still make restoration to other party,

UNLESS special circumstances are present (e.g., bad faith).

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2. Two Tests Under Rest. § 15a. Cognitive Test – § 15(1)(a) -- Can the person understand the nature and

consequences of the K.b. Volitional Test -- § 15(1)(b) – party is unable to act in a reasonable manner in

relation to the transaction and other party has reason to know.c. § 15(2) -- Where a K is made on fair terms and the other party is without

knowledge of mental illness or defect, if recision would be unjust, won’t allow

II. Duress and Undue Influence

A. Duress1. Physical Duress - party manifests assent as a result of threat to life & limb.

a. Contracts made under physical duress are void.2. Economic Duress (Rest. § 175)

a. Three Factors:i. Wrongful or improper threat

(1) Essential element of economic duress(2) “Wrongful” doesn’t have to be illegal(3) Threat must be made in bad faith.

ii. Lack of a Reasonable Alternative(1) Is the burden of existing alternatives even more burdensome than current

problem?(2) The dire economic situation at least needs to be contributed to by ∆; if it is

entirely P’s own making, the Court will likely hold there’s no duress.iii. Inducement into the K

(1) The threat actually caused the manifested assent.b. These K’s are voidable.c. Things to Ask:

i. Differentiate between actual threat and opinions of not wanting to pay.ii. If a release is being offered, consider the reasons behind it.iii. Always compare the total amount in debt v. the offered settlement . . . how

close are they?iv. Are there any reasonable alternatives? Remember, alternatives can be

combined w/ offered settlement and, if taken together, the person is close to being fully compensated, there is arguably no economic duress.

B. Undue Influence1. Elements:

a. Undue Susceptibility (works on a continuum)i. Total weakness (total weakness of mind/understanding).ii. Lesser Weakness (vulnerability in the moment).

b. Excessive Pressure (also exists on a continuum)i. 7 Factors: (Don’t need all 7 - just enough to show excessive pressure under the

circumstances).(1) Discussion of transaction at unusual or inappropriate time.

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(2) Consummation of transaction in unusual place.(3) Insistent demand that transaction be finished at once.(4) Extreme emphasis on consequences of delay.(5) Multiple persuaders on dominant side v. single servient party.(6) Absence of 3rd party advisors to servient party.(7) Statements that there’s no time to consult financial advisors or attorneys.

2. Restatement § 177 - Elements:a. Unfair persuasion;b. Of a party under domination of one persuading them;c. And who assumes (based on their relationship) that the person will act in a way that

is in his best interest.

3. Look for = a mismatch of force & capabilities between the dominant (stronger) and servient (weaker) parties.

III. Misrepresentation and Nondisclosure

A. Misrepresentation1. Overview: Victim of misrepresentation has choice between redress in tort for

damages or in contract to avoid enforceability of the contract through rescission.- Tort – intent to deceive; can get punitive damages.- K – use to receive rescission; can NOT recover punitive damages.- Rescission can be exercised either as an affirmative defense (shield) to an action to

enforce the K or in an affirmative action (sword) seeking restitution of benefits conferred on the other party.

- Rescission – judicial return of parties to the ex ante position.** Misrepresentation can be innocent or negligent – doesn’t have to be fraudulent if

we’re talking about misrepresentation in K, not in tort.

1. Rest. § 164 – Misrepresentation makes a K voidable when:(1) If assent is induced by either a fraudulent or material misrepresentation by the

other party(2) Upon which the recipient is justified in relying.

2. Assertion of Opinion (Rest. § 168)(1) An assertion is an opinion if it expresses only a belief.

3. Can NOT Rely on an opinion UNLESS (Rest. 169):(1) Relationship of Trust and Confidence.(2) Reasonably believes person to be an expert.(3) Is for some other special reason particularly susceptible to a misrepresentation of

the type involved.

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4. Syester v. Banta – P (old lady) sold a shit load of dance lessons for a bunch of money. She sued, and studio (∆) got her to drop by using her relationship w/ young instructor.

- This is tort action- ∆ argues that instructor’s comments are just opinion or “puffing.” Court rejects this

because there is a policy of giving these “opinions” all the time. It is a policy to sell more classes, not opinion.

- Tort Damages for misrepresentation:- Out of Pocket Rule – really just restitution. Give her back what she paid

minus value of what she received.- Benefit of the Bargain Rule (majority) – like expectation damages – trying to

get P in position she would have been in had the K been performed honestly.

B. Non Disclosure1. Misrepresentation v. Nondisclosure – Roy gave Billy and Annie romance hypo where

he hooked up with another chick the night before. When Annie asks him what he did the night before, he tells her everything except for the hooking up with another chick part. This is like Non-disclosure – not giving all of the material facts.

2. The whole idea of nondisclosure:= you shouldn’t have to absolutely box someone in the get the answers that you want.

Can’t expect people to be litigators; the standard is too high for ordinary people.

3. Rest. § 161 – there is an affirmative duty to disclose when:a. Disclosure is necessary to prevent a previous assertion from being a

misrepresentation or from being fraudulent or material;b. Disclosure would correct a mistake of the other party as to a basic assumption on

which that party is making the K and if a nondisclosure amount to a failure to act in good faith.

c. Disclosure would correct a mistake of the other party as to the contents of effects of a writing, evidencing or embodying an agreement in whole or in part.

d. The other person is entitled to know the fact because of a relationship of trust and confidence between them.

5. Intentional v. Unintentional -- If the sellers are unaware (unintentional non-disclosure) – NO duty to disclose. If

you don’t know about it, it is not non-disclosure. This is different than misrepresentation – CAN have an innocent misrepresentation, but not possible w/ non-disclosure.

6. Latent Defects -- Only have to disclose Latent Defects. If the defect is obvious, there is no duty to disclose.

7. Hill v. Jones – P asked about termite damage and the seller did not disclose certain information.

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-- Failure to disclose is the same thing as misrepresentation when there is a duty to disclose.

-- Facts supporting duty to disclose: (1) Boxes and Plant covering ripple; (2) disclosure may be necessary from making a previous assertion a misrepresentation; (3) possibly bad faith (denying fruits) by not disclosing.

-- Facts supporting no duty to disclose: Seller saying she didn’t want to find anything wrong with the place.

-- Court rejected merger clause because fraud is an exception to the parol evidence rule.

8. Factors to consider in determining whether fairness requires disclosure of material information:

a. Difference in degree of intelligence of parties.b. Relation the parties bear to each other.c. Manner in which the information is acquired.d. Nature of the fact not disclosed.e. General class to which the person who is concealing the information belongs;f. Nature of the K itself.g. Importance of the fact not disclosed;h. Conduct of the person not disclosing something to prevent discovery (active

concealment).

9. Materiality is a factual matter to be determined by the trier of fact.

II. Unconscionability

A. Doctrine of Unconscionability – deals with unfairness in the bargaining process. It originated in equity and became more widespread when adopted in the UCC. Judges decided unconscionability as a matter of law if the transaction displays:- Bargaining Unfairness (Procedural Unconscionability) AND- Unfair or Oppressive terms (Substantive Unconscionability)

B. Rest. § 208 – If court finds unconscionability, it can:1. Rescind the K (if it is permeated w/ unconscionability)2. Knock out the unconscionable term(s)3. Interpret it in a way that does not make the K unconscionable.

- Unconscionability is usually characterized by weakness in the bargaining process that is shown by gross inequality of bargaining power together with terms unreasonably favorable to the other party.

C. UCC § 2-302 (codifies doctrine) – Applies to the sale of goods.-- To determine if the transaction is unconscionable, court must determine whether in

light of the general commercial background the clause involved is so one-sided as to be unconscionable under the circumstances existing at the time of the making of the K.

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**There is no hard and fast way to determine if a transaction is unconscionable. It always involves a facts and circumstances test (ad hoc factual inquiry).

D. Procedural Unconscionability (Absence of meaningful choice) – Procedural Unconscionability leads to substantive unconscionability – Look for:

1. Gross inequality of bargaining power.2. Whether the terms were understood.3. Were the terms boilerplate or confusing.4. Education / financial means of the parties.5. Sales practices6. Lack of other sellers – if no reasonable alternative, more likely to enter into unfair K.

E. Substantive Unconscionability (Terms unreasonably favorable to other party) – harsh on one party and unreasonably generous on the other party.

- Here, you look at the terms themselves to determine if they are fair or if they are so extreme as to shock the conscience and are not in tune with business practices. To determine this, look to:

1. Usage of Trade -- Business practices of comparable businesses in the area as well as elsewhere. To find out if there is an economic/business justification for having the clause, look to other similar businesses.

2. Is the provision common? If so, then it is less likely to be so unfair that it is unreasonably favorable to one party.

**Rest. § 208 seems to follow the procedural/substantive approach more closely, and UCC § 2-302 seems to look more at the substantive side to see if the terms are unfair.

F. Criticisms and Advantages of Unconscionability:1. Criticisms

- Doesn’t respect the parties’ autonomy to contract.- Paternalistic – by allowing the judge to change or void the agreement, the court is

making decisions about who needs help. Many feel this is not the court’s role.2. Advantages

- Fairness – if we’re really concerned with fair bargains, then why not take this proactive approach.

- Real-Life argument – counters paternalism argument – says in reality, people do need help.

G. Williams v. Walker-Thomas Furniture Co. – ∆ had a clause saying all payment was credited pro rata to ALL outstanding losses = a balance due on every item until the balance of all items was paid = they could repossess everything, even stuff purchased previously, because all items become part of the same deal.

- There was confusing language, education disparity, lack of other sellers.

H. Adkins v. Labor Ready, Inc. – temp employment agency. Employees filed suit to get paid during waiting time. ∆ tried to enforce arbitration clause. Employees objected saying it was unconscionable.

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- Procedural:- Lack of education for employees- Arbitration term boilerplate.- Agency is a large, sophisticated company.

- Substantive:- Unfair bargaining process lead to unfair arbitration term – too costly for the poor

workers. (court rejects this b/c must show proof that it is more costly).

I. Contracts of AdhesionCooper v. MRM Investment -- ∆ owns a KFC. Women wants to sue them for sexual

harassment. ∆ tries to enforce arbitration per a term in the K. Court finds term unconscionable.

***It is important that this is a fast food chain and not a brokerage house b/c there is a much bigger discrepancy in bargaining power w/ fast food chain employee.

Procedural – adhesion K (take-it-or-leave-it) AND she has little bargaining power.Substantive – the term does not specifically require her to pay for arbitration, but the

rules of the AAA require cost sharing. She wins on substantive because she actually proves that it would cost her more than trial, and that her wages are below the poverty line.

**Here, policy favoring arbitration is tempered w/ P’s need to vindicate her rights.

* simply having an adhesion contract is not enough. You must fit these into the larger doctrinal concept.

III. Public Policy (not defect in bargaining process – it is defect in substance of agreement)- If a K violates public policy, it is void and unenforceable.- Even though a K might otherwise be enforceable, a court might declare it void against

Public Policy.

A. Ways to figure out if something violates Public Policy:1. Legislature in jurisdiction has said agreement X is unenforceable.2. Statutes that talk about a particular activity w/o coming out and saying that agreements

to that end are unenforceable.3. Court says so – usually based on precedent (not the best-case scenario). Courts are

loathed to do so. They would rather look to the legislature. Generally have to find it in a statute – action by the legislature.

B. Restrictive Covenants Not to Compete1. Valley Medical Specialists v. Farber – Dr. came to work for P as a partner and signed

K w/ covenant not to compete. ∆ left and began working in the area prohibited by the covenant.

- K held unenforceable b/c void against Public Policy- Court adopted reasonableness standard rather than per se rule (which would make

no-compete clauses automatically unenforceable.

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- Under reasonableness approach, Court looked to: (1) special dr.-patient relationship – don’t want to interfere w/ public’s right to see dr. they want (2) undue hardship on Dr. (although it didn’t deal with this much b/c no disadvantage in the bargaining process).

- Non-Compete clauses are reasonable when:a. They protect legitimate interests of the employer.b. They impose no undue hardship on the employee = not brought upon

themselves.c. They are not injurious to the public.

2. Blue Pencil / Severability Theory – Court may limit objectionable aspects and enforce the rest. Criticism of this theory is that employers will write overreaching clauses and just let the court fix them if they are challenged. This is a valid critique, but many courts still do this.

3. Rest § 187 – Non-Ancillary Restraints on Competition - Unenforceable – ex. agreement between competitors to fix prices.= Not ancillary to a valid transaction or relationship.

4. Rest. 188 – Ancillary Restraints on Competition - Enforceable unless restraint is greater than needed, injures the promisor, or injures

the public.- Examples of Ancillary Restraints (ancillary to a valid transaction)

- Promise by seller of business not to compete to injure the purchase.- Promise by employee not to compete with the employer.- Promise by partner not to compete with partnership.

**Pretty much balance all the factors for the legitimate business interest v. the factors that show the covenant is injurious to the promisor or public.

C. Marriage – Borelli v. Brusseau – plaintiff sought delivery of property promised by her then deceased husband made in consideration of her caring for him after a stroke.

Held – K for support by spouse is void against public policySource of Law – No direct source, but Court looks to civil statutes that give spouses duty

of care and support. This is where the courts get the public policy from.Balancing:

- For Enforcement: (1) Freedom of K – marriage shouldn’t diminish that right; (2) Outdated view of marriage to think she is required to care for him herself.

- Against Enforcement: (1) Consequence – what will happen if these Ks are enforceable; (2) These agreements are not in accord with society’s view of marriage.

D. Surrogacy – RR. V. M.H. & Another – surrogacy parenting agreement. Parties made agreemtn that surrogate mother would give up child after birth. She changed her mind during the pregnancy.

- Held unenforceable on P.P. grounds – mother must make decision to give up the child a reasonable time after it is born.

- Rest. § 191 – promise affecting right of custody of a minor child is unenforceable on P.P. grounds unless it is consistent with the best interests of the child.

- Balancing:

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- For Enforcement: (1) Freedom of K; (2) w/ Gestational surrogacy, no genetic bond; (3) Knowing Waiver – she voluntarily relinquished a known right; (4) Expectations of intended parents; (5) father’s rights (his genes too).

- Against Enforcement: (1) Commodifies women/babies; (2) mother’s rights – sweat equity in carrying child; (3) Child’s interest – don’t want to separate children an mothers; (4) taking focus away from adoption.

E. Cryo-Preserved Pre-Embryo Dispositional Agreements (from Article)- Both people contribute genetic material, then decide the don’t want to have the baby

anymore. But they disagree on what will happen to the embryos. Will one of them be able to use them?

- Source of Policy – Adoption and Marriage Statutes – used to analogize to a different set of facts.

- Balancing:- For Enforcing: (1) represents the will of the parties at the time of K; (2) will

decrease litigation; (3) Reliance interest in the woman; (4) Interest in mother seeing embryos become children; (5) destroying embryos could harm potential life in the child.

- Against Enforcing: (1) Forced Pro-creation; (2) Ambiguity in K – blank formed signed; (2) Don’t want to freeze people to the moment that K was signed w/ something like procreation.

F. Public Policy Overview:Analysis:

1. What public policy is implicated?2. What is the sources of that policy.3. What are the arguments:

- in favor of enforcement?- Against enforcement?

4. What does the Restatement provide (not necessarily dispositive) – Rest. § 178 - This particular Restatement is not really helpful.

Chapter 8: Justification for Nonperformance: Mistake, Changed Circumstances, and Contractual Modifications.

Mistake v. Changed Circumstances- Mistake -- doctrine based on the idea that the parties were just mistaken about

something at the time of the K – believed something to be true that wasn’t true.

- Changed Circumstances -- Things happening after the parties enter into the agreement under circumstances where it is unfair to hold them to it.

I. Mistake

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- Must exist either before or at the time of the K. If something happens after the agreement, then it is not mistake, but it could be changed circumnstances.

A. Mutual Mistake1. Rest. § 152 – Rescission for mutual mistake is available when:

a. Mistaken belief relates to a BASIC assumption upon which the K made, andb. Materially affects the agreed upon performance of the parties, and c. Party seeking relief does not bear the risk of mistake (Rest. § 154 determines)

2. Rest. § 154 – When party bears risk of mistake (for third element in § 152):a. When the risk is allocated to him by the agreement (ex. as-is-clause).b. When the party treats his limited knowledge with respect to the facts to which the

mistake relates but treats the limited knowledge as sufficient.c. When the Court allocates the risk to the party on the grounds that it is reasonable to

do so.3. Lenawee County Board of Health v. Messerly – Apartment building septic tank. Buyer

purchased land that ended up being valueless due to faulty septic tank. Buyer could not rescind b/c of the “as is” clause in the K. Buyer bore the risk.

- Courts are split on the validity of “as is” clause.- Rescission – is an equitable remedy, granted at sound discretion of the court.- Here, Mistake = that the property could produced rental income.- So, the Mistake Does (a) go to a basic assumption AND (b) materially affects the

agreed upon performance.- But Court says “as is” clause means that buyer bears risk of mistake, so no (c).**Lesson – as an attorney, put clause in K giving buyer right to inspect.

a. “As Is” Clauses – Courts are split on how much weight to give these. When you see these, ask if the clause really reflects the allocation of risk:

- Argument for: (1) Autonomy – people know what they’re getting into; (2) It is an efficient way to allocated risk.

- Argument Against: (1) Clause is boilerplate.

B. Unilateral Mistake 1. Rest. § 153 – Unilateral Mistake – the rescission available if:

a. Mistake of one party made as to a Basic Assumption upon which K made.b. Materially affects the agreed upon performances in adverse manner to him.c. Mistaken party does Not bear the Risk. (1st 3 same as mutual mistake).d. Effect of mistake is such that enforcement of the K would be unconscionable

(economic hardship), ORe. The other party had reason to know of the mistake or his fault caused the mistake.

2. Wil-Fred’s v. Metropolitaan Sanitary District – Renovation of sand drying beds. P made a unilateral mistake in submitting its bid to the district. Its subcontractor made a mistake that carried over to its bid. P was able to rescind b/c it was a material feature.

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a. Illinois Elements of Unilateral Mistake:1. Mistake relates to material feature of the K (here, it is worth a lot of $$)2. It occurred notwithstanding the exercise of reasonable care. (P had used

subcontractor a lot before, and it had never happened before).3. Hardship -- Such grave consequence that enforcement of the K is

unconscionable. (P would lose millions)4. Other party knew of the mistake.5. Other party at fault.

**Note that Restatement does NOT require “reasonable care.” Rest. § 157 only requires good faith in accordance w/ standards of fair dealing.

** classical Rule for mistake – Must be one of fact, not of judgment. ** Modern trend is to diminish this distinction – as in Wil-Fred’s.

- Mutual Mistake = easier to get b/c both parties expectations are off.- Unilateral Mistake is the exception b/c upsetting the expectation of one party, so that’s why

you need the additional requirement that the party that we are finding against either knew about it, was at fault for causing it, or there will be some extreme hardship.

II. Changed Circumstances-- Comes after formation of the K whereas mistake is before.**Most of what you will see will be impracticability.

A. Changed Circumstances:1. Impossibility –(Rest. §§ 262, 263) -- classical doctrine that is very narrow which says

that performance has been made impossible. Ex. Taylor case – music hall burned down and made performance impossible. Impossibility has been consolidated into the Restatement under impracticability.

Rest. §§ 262, 263 – When a person or thing “necessary for performance” of K dies or is incapacitated, is destroyed, damaged, or fails to com into existence, the duty of performance is accordingly excused.

2. Impracticability – (Rest. §§ 261, 264) – Performance is possible but extremely burdensome.

Elements – Rest. § 261:a. Performance made impracticableb. By the occurrence of an event that the non-occurrence of which was a basic

assumption of the K.c. w/o fault of party seeking discharge (raising the defense)d. No risk assumed/allocated by the K or the circumstances.

Rest. § 264 – If performance is made impracticable by having to comply with a governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the K was made.

3. Frustration of Purpose – (Rest. § 265) – Performance is possible but meaningless. Ex. Knell’s case: King’s coronation was cancelled and performance to rent hotel room was now meaningless.

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Elements – Rest. § 265:a. Principal Purpose Substantially Frustrated (= purpose now

worthless/meaningless) (rest is same as impracticability)b. By occurrence of an event that the non-occurrence of which was a basic

assumption of the K.c. w/o fault of party seeking discharge (raising the defense)d. No risk assumed/allocated by the K or the circumstances.

4. Karl Wendt Farm Equipment v. International Harvester – IH went out of business and Wendt’s franchise was not continued by IH’s successor. Wendt sued for breach of dealership agreement. IH claimed impracticability and frustrations.

- Impracticability Rejected – Court rejects impracticability because market conditions insufficient.

- Frustration of Purpose rejected:- IH argues that purpose was mutual profitability. Court rejects this purpose b/c

says that would allow all contracts to fall under doctrine. Court says that purpose is to establish a dealership, which was not frustrated by the economic downturn.

a. Market Conditions – Generally won’t be sufficient to make performance impracticable. However, it may apply in some situations: Courts make foreseen v. foreseeable distinction.

- If an event was foreseen, the doctrine won’t apply b/c they will have allocated the risk.

- Courts will usually require that something be unforeseen (subjective) rather than unforeseeable (objective).

- Impracticability may apply to market conditions when:- Unexpected natural disasters.- Terrorist Activities

5. Mel Frank Tool & Supply, Inc. v. Di-Chem Co. -- ∆ leased storage facility. There was a provision in the K that ∆ was to make no unlawful use of property. It was found that the storage of the chemicals violated fire code. ∆ vacated and P sued. ∆ Claimed impracticability and frustration.

- Impract icability -- Court said no failure of basic assumption b/c Mel-Frank didn’t know that’s what they would be doing w/ the leased premises or that it wasn’t a major part of the negotiations, etc.

- Frustration – ∆ saying “we can’t use it for what we want to.” But Court says that they could still use the property, which means that it is not virtually worthless.

**Note – generally, there is a pretty strong case when the supervening event is a government order.

6. Relief for Impracticability or Frustration – Impracticability is a complete defense to a party’s failure rot perform, relieving him of the duty to perform and liability for damages. If any performance has been rendered by either party, then the benefit must be repaid through Restitution – Put parties back to the ex ante position. See. Rest. § 272.

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7. Force-Majeure Clause – a K provision allocating the risk if performance becomes impossible or impracticable as a result of an event or effect that the parties could not have anticipated or controlled. (Not important)

III. Modification= Change to an EXISTING agreement.

A. Common Law Modification1. There must be consideration.2. Pre-Existing Legal Duty Rule – where a party to a K already has a legal duty to

perform. A change in a K cannot be based on consideration (the duty to perform) already bargained for. Prevents coerced modifications. In other words, a modification for performance already required under an existing K is lacking consideration.- But a similar performance is consideration if it differs from what was required

by the duty in a way which reflects more than a pretense of bargain.3. Modification of an Executory K (= not fully performed). Rest. § 89 – Modification is

binding if:(a) Supervening / Changed Circumstances -- If the modification is fair and equitable

in view of circumstances not anticipated by the parties when the K was made.- This is like changed circumstances- Requires lesser showing than impracticability or frustration.

(b) To the extent provided by statute; or - Don’t really worry about this – if you’re this type of jurisdiction, don’t need

the Restatement’s blessing.(c) Promissory Estoppel -- To the extent that justice requires enforcement in view of

material change of position in reliance on the promise.- Problem – this exception seems to swallow the rule and allows for reliance

on coerced promises of modification. Seems like this exception could defeat the purpose of requiring consideration for CL modifications.

4. Alaska Packers’ Association v. Domenico – Workers forced a K modification when they arrived in Alaska adding wage of $100 in place of $60 term to which they had agreed and signed prior to modification, providing no consideration.- Modification was invalid.- No consideration, so see if any of the executory exceptions (§ 89) apply:

a. Changed Circumstances could have applied – fishermen said that the shitty nets changed the circumstances = new consideration (we’ll work with these shitty nets for more $$).- Court rejected this reason – possibly unjustly.

B. UCC Approach to Modifications

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- UCC § 2-209(1) -- To validate a modification, you DO NOT NEED CONSIDERATION. It only requires showing of Good Faith by both parties.

- Good Faith – tell the truth and an observance of reasonable commercial standards of fair dealing in the trade. Changes are presumptively valid. UCC substitutes good faith for consideration – requires that party seeking to avoid modification not act in bad faith.

1. Determining Good Faitha. Was there a threat made to breach K if modification was not agreed to?b. Was it really an unanticipated circumstance?c. If party agrees to modification and later refuses to pay, party can show good faith

by showing that he protested the modification.2. Duress – a subsequent K or modification is invalid, and therefore does not supersede

the earlier K, when the K was entered into under duress.- To claim duress – a buyer coerced into a K modification must at least display some

protest against the higher price in order to put the seller on notice that the modification is freely entered into.

3. When is Modification Valid -- Kelsey-Hayes Co. v. Galtaco Redlaw Castings – P bought brake castings from ∆; ∆ was having financial problems. P agreed to 2 separate 30% price increases so that they could continue production until P could find a new source.

- P sued claiming that it agreed to the modification under economic duress.- UCC § 1-103 – Can use economic duress as a defense for enforcement:

- Requires: (1) wrongful threat; (2) no reasonable alternatives.- Court finds economic duress.

4. Form Requirements for Modifications – Brookside Farms v. Mama Rizzo’s – Requirements K for purchase of basil leaves. This falls w/n Statute of Frauds under the UCC (purchase $500 between merchants).

- UCC § 2-201 – Modifications must be in writing under the S.O.F.- Ask same SOF questions from Last Semester:

a. Is it w/n the statute? – Yes – b/c for over $500b. Is there sufficient writing – No c. Is there an applicable exception?

- Part Performance – goods received and excepted.- Estoppel – parties promise to put the modification in writing. It is not

enough to promise to grant modification, they have to promise to put it in writing.

- But there is a NOM (No Oral Modifications) Clause – this acts as a private statute of frauds. UCC § 2-209(2) says these are generally enforceable. Then, reliance (P.E.) would not be justified.- Court finds WAIVER (voluntary relinquishment of a known right) –

Mamma Rizzos waives the NOM clause by not exercising its right to require written, signed modifications.

- But there is also a No Waiver Clause (good drafting!) – Court gets around this by looking at the same conduct that gave us the exception (wavier to the NOM

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clause) to the SOF. IF the regular SOF has exceptions, then the private SOF has exceptions.

- This pretty much eviscerates the no waiver clause = Controversial.

Chapter 9 – Rights and Duties of Third Parties

I. 3rd Party Beneficiaries – 2 parties can create certain rights and benefits to 3rd parties. You must determine if the 3rd party is intended or incidental. It must be intended to enforce or to have any action.

A. Rest. § 304 (Intended Beneficiary has a right to enforcement) -- a promise in a K creates a duty in the promisor to any intended beneficiary to perform the promise, and the intended beneficiary may enforce the duty.

**Right to Independent enforcement is the main idea of 3rd party beneficiaries.

B. To Qualify as a 3rd Party Beneficiary:1. Parties must manifest an intent to create a right in the 3rd party.2. There must be a benefit to the 3rd party

A - K - B C (Promisor) (Promisee) (Beneficiary)

C. Rest. § 302 – Intended v. Incidental Beneficiary1. Beneficiary is an intended beneficiary if recognition of a right to performance in the

beneficiary is appropriate to effectuate the intention of the parties and either.(a) Performance of the promise will satisfy the obligation of the promise to pay $$ to

the beneficiary (Creditor Situation)(b) The circumstances indicate that the promise intends to give the beneficiary the

benefit of the promised performance (Donee Beneficiary)2. Incidental Beneficiary is a beneficiary who is not intended to be benefited.

- Ex. Roommate w/ someone in class. You hire a K tutor, who asks questions out loud. Your roommate gets a lot out of these sessions. Your roommate is an INCIDENTAL beneficiary.

D. Vogan v. Hayes Appraisal Services, Inc. – Vogans get construction loan from bank. Bank Ks with Hayes to do appraisal work. Hayes performs work improperly. Vogans settle w/ bank but also go after Hayes under 3rd party beneficiary theory.

1. Court uses standard of whether the promisor has reason to know that the K is for the benefit of a 3rd party.

Alternative Standards:- Does promisor have reason to know.

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- Both promisor and promise must intend to give the third party rights.- Whether the promisee intends for the benefit to run to the third party.

2. How do we determine intent?- Could explicitly be stated in the K.- Some policy could determine**Objective Standard.

II. Assignment and Delegation of Contractual Rights and DutiesA. Types of Assignment and Delegation

1. Assignment of Rights: Ex. Business would sell its acct’s receivable to someone else – right to receive $$ from a creditor.

2. Delegation of Duties: Ex. General Contractor delegates duties to a subcontractor.3. Assignment of Right & Delegation of Duties: Ex. Sale of existing business where K’s

are transferred, selling rights to payment and to receive payment along w/ duties.

B. Assignment of Rights – See Examples and Explanations § 19.3.1 for diagram 1. Rest. § 317:

(1) Assignment is a manifestation of the assignor’s intention to transfer. The assignor’s right to performance is EXTINGUISHED.

(2) A Contractual right can be assigned UNLESS:(a) If would materially change the duty of the obligor.(b) Where public policy or statute would prohibit.(c) Or the assignment is validly precluded by contract (see § 322).

2. Preclusion by K – (Rest. § 322) Assignments are generally valid and prohibitions by K on assignments will be narrowly construed.-- Often times, courts will interpret these provisions as merely allowing the

obligor to get damages for breach, but it won’t preclude the assignment, and the assignee will still have the right to performance.

3. Rest. § 321 – Assignment of Future Rights(1) Assignment of a right to payment expected to arise out of an existing employment

or other continuing business relationship is effective in the same way as an assignment of an existing right.

(2) An assignment of a right expected to arise under a K not in existence operates only as a promise to assign.

4. Rest § 326 – Partial Assignment(1) Assignment of part of a right operates the same as if it was a separate right.

4. Herzog v. Irace – Jones, a former client of Irace, assigned personal injury settlement proceeds collected by Irace to Herzog, his doctor for medical operation. Then Jones gets the money and tells Irace not to give it to Herzog. Herzog couldn’t collect from Jones, so sues Irace.

- This is a partial assignment – b/c what was 1 obligation is now many.- No applicable exceptions under § 317(b)

- Attorneys argue that §317(b) apples – public policy b/ no b/c he didn’t assign his cause of action.

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- Then attorneys argue ethical reason = have to do what client wants. No b/c the client himself created the assignment.

C. Delegation of Duties – See Examples and Explanations § 19.3.7 for diagram

1. Rest. § 318 – duties are delegable UNLESS personal services are involved. Duties are not delegable, unless otherwise agreed to when the promise requires performance by a particular person.

- Delegation does NOT discharge any duty or liability of the delegating obligor.2. UCC § 2-210(1) – a party may perform his duty through a delegate UNLESS:

- otherwise agreed to, OR - Unless the other party has a substantial interest in having his original

promisor.NO delegation of performance relieves the party delegating any duty to perform or an

liability for breach.

3. When can the party delegating his duty be relieved from liability?-- A must agree to let B extinguish his liability = available under the UCC and in the

Rest.

4. Sally Beauty Co. v. Nexxus – ∆ refused to accept P’s performance b/c P was a direct competitor w/ ∆. Court found that ∆ had a substantial interest in having Best perform rather than P.

- Concerns w/ the QUALITY OF PERFORMANCE, so there is a SUBSTANTIAL INTEREST (2-210) in having Best perform the K.

5. K Clauses that preclude delegation of duties – generally you can effectively prevent the delegation of duties in your K. Courts will generally enforce these provisions.

E. Metaphor for Assignment v. DelegationAssignment – throwing a football – from one party to another party.Delegation – catching a cold – can be communicated from one person to another,

but the original person still had it.

Chapter 10 – Consequences of Nonperformance: Material Breach, Anticipatory Repudiation, and Express Conditions

If the breach is total the promisee may *withhold performance And material *Terminate

*Claim full damages for Breach

If the breach is material the promisee may *suspend performancebut not total *await cure

*Claim compensation for Any loss suffered.

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If the breach is not material the promisee may *Claim Compensation for (Substantial Performance) any loss suffered.

I. Framework for performance and Breach:A. Ask these questions to figure out how to resolve a question of breach?

1. Was a promise made, and if so what was promised?2. When was the promised performance due?3. Was the performance in compliance with the promise?

(Substantial Performance?)4. If not, what was the proper response?

Total Breach? Material Breach? Substantial Performance?

II. Types of BreachA. Minor Breach:

= Substantial Performance= Non-Breaching party must perform; May claim compensation for loss suffered.

- IN this case, damages were very small.- Doctrine of Substantial Performance is about Questions #3 & 4 above.

B. Material Breach= No substantial Performance= Non-Breaching party may suspend performance and must wait for cure; May claim

compensation for loss suffered.- How long to wait – for a reasonable time.

C. TOTAL BREACH (Material breach that has moved to point of being total)= Fatal to any recovery – breaching party won’t get anything.= Non breaching party may withhold performance and terminate immediately; May claim

damages for breach:- Not just compensation for the loss to that point.- Can say game over – you breached, and NBP has no obligation perform.

*** If you are the non-breaching party – it is safest to suspend performance and await the cure.

II. Substantial Performance= one party has done enough for us to say they are not in material breach; must be very minor

acts which aren’t performed.A. Rest. § 241 – No substantial performance if breach is material. Look to the following

factors to determine if breach is material or immaterial (SP):1. Extent to which injured party would be deprived of the benefit reasonably expected.2. Extent to which the injured party can be compensated for the PART of the benefit of

which he was deprived.3. The extent to which the breaching party will suffer forfeiture (The Law Abhors

Forfeiture!) If forfeiture likely for the breaching party, more likely SP.

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4. The likelihood that the party failing to perform will cure his failure, taking into account all circumstances including Reasonable Assurances.

5. Whether the breaching party was acting in good faith.

B. Jacob & Youngs, Inc. v. Kent – P installed pipe which was different brand than contractually agreed to.

1. Court found substantial performance because minor breach.2. Court said:

- good faith trivial departure- Won’t imply a condition that will result in forfeiture for MINOR deviations.

(Conditions must be complied w/, so if it were a condition then the NBP could refuse to tender their performance). So court says it is a promise rather than a condition.

3. If there had been an express condition (“performance on the part of the buyer is conditioned on the use of Reading pipes”), then substantial performance would not be available. Since no express condition, court refused to create a constructive condition because of the harshness that would result.

4. Damages:Court awarded diminution in value, which was $0 rather than the cost of completion

which would resort in forfeiture.*Note – damages for substantial performance are typically compensation for any loss

suffered. (if there had been a $5000 difference in the value of the house w/ or w/o Reading pipes, then the damages would be $5000).

III. Material Breach** Main Question: When does one party’s failure to perform justify the other party in

refusing to render performance of his own?A. When is Breach Material?

- If the failure or deficiency of performance is so central to the K that is substantially impairs its value and deeply disappoints the reasonable expectations of the promisee.

- Ask – Does the defective or absent performance form a significant part of the consideration bargained for by the promisee?

- Also look to Effect on breaching party – forfeiture means not likely to be material unless there is an express condition.

- Also look at conduct of the breaching party – good faith means that courts will be more hesitant to impose a constructive condition.

- See Jacob & Youngs.

B. Relationship between materiality of breach and the non-fulfillment of a condition.1. Promissory conditions (where term of a K is both a promise and a condition), then the

non-fulfillment of a condition is a Material and Total Breach. - This means that the NBP can sue for damages AND withhold her performance.

2. If breach is material, but not total because it can be cured, the NBP cannot immediately sue or terminate the K. She suspends her performance until such time as the condition is fulfilled by cure.

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3. If not material breach (= substantial performance) = NBP must perform and seek damages for the shortfall in performance.

C. Another way to say the same thing:1. Material Breach (Rest. § 241) – if there has been a material breach, the NBP must give

a reasonable opportunity to cure. NBP cannot terminate their performance but can suspend it. Can claim compensation for any loss suffered. Can collect interest on late payments.

2. Total Breach (Rest. § 237) – material nonperformance that has not been cured w/n a reasonable amount of time. When there is total breach, NBP no longer has an obligation to perform and can terminate the K, keep money or sue for damages. You can claim full K damages for breach of K (= expectation and foreseeable consequential damages).

3. Material to a total breach (Rest. § 241 PLUS § 242)a. Injured party may miss out on substitute arrangements.b. Specific language in K that suggest timing is important.

- “time is of the essence clause” – although can be seen as boilerplate. Better to say, “your timely performance is a condition on my obligation to perform.”= “time is of the essence” is not enough; also put why in the K.

D. Sackett (buyer) v. Spindler (seller) – K for sale of newspaper that never went through, despite numerous attempts. Buyer sued seller for breach. But seller claimed that buyer had breached by not paying and that he had the right to terminate the K.

Court found the buyer to be in total breach:- Said it was not likely the buyer was going to pay.- Buyer was grossly negligent – looks like bad faith.

- Notice that the seller was faced with a dilemma. If he was wrong, and there was no total breach, then he would be in breach for failing to perform b/c unlawful repudiation.

IV. Anticipatory Repudiation – when one of the parties clearly repudiates a material promise in advance, the other may treat this as a breach immediately and may seek relief for breach w/o delay.

A. Basic Approach – a clear, unequivocal, and voluntary repudiation by one of the parties is recognized as the equivalent of a material and total breach, provided that the threatened action or failure to act would be a material and total breach if it happened at the time due for performance. = advanced failure of a condition.

B. Conduct sufficient for a repudiation (Rest. § 250):1. Statement by obligor indicating that he will commit a breach that would itself be a total

breach under § 243.2. A voluntary affirmative act, which renders the obligor unable or apparently unable to

perform w/o such breach.3. Financial difficulties that make one party unable to perform does not constitute a

repudiation giving rise to damages for total breach (§ 243(3)).

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C. Repudiation must be CLEAR and UNEQUIVACAL,, make it impossible for the party to perform before time required by the K.

D. Retraction (Rest. § 256(1) & UCC § 2-611) -- Repudiation is nullified by a retraction if it comes to the attention of the injured party before he materially changes his position or indicates to the other party that he considers the repudiation to be final.

E. Truman L. Flatt & Sons v. Schupf – K for sale to build an asphalt plant, subject to rezoning. Buyer sent letter saying rezoning probably wouldn’t happen, so offered to buy at lower price. Seller rejected. Then Buyers said ok, we’ll buy it at the agreed upon price, and sellers said, “hey buyer, you repudiated.”

- Court said standard for anticipatory repudiation NOT met b/c has to be clear and unequivocal. Buyers didn’t ever say they were canceling completely.

- What if seller had sold to someone else?- Would be an repudiation by him – b/c would make the sale a practical impossibility.- What if buyer had extreme financial hardship, and seller knew performance was

unlikely?- Would NOT be repudiation b/c it doesn’t make the sale a practical impossibility.

The buyer could get other financing. In this case the seller should seek assurances.

F. Adequate Assurances – a way to respond when you anticipate that the other party is going to breach. Rather than waiting for breach, can seek assurances that they will perform. (Rest. §251 & UCC § 2-609).

1. UCC § 2-609 – a party can seek adequate assurance when he has reasonable grounds for insecurity. Reasonable grounds for insecurity are a question of fact based on standards of commercial reasonableness.

What are reasonable grounds for insecurity?- Question of fact – Factors including:

Words, there are financial difficulties, failure to perform K obligations, failure to form under related Ks, Course of Dealing, Course of performance, Information from a reliable source (not mere gossip).

- If the party doesn’t receive adequate assurances – can treat as a repudiation. Says that reasonable time not exceeding 30 days is allowed.

* Requesting assurances is generally a good idea b/c shows you are in good faith.* Code says that request must be in writing, but courts have not strictly adhered to

this formality as long as an unequivocal demand has been made.

2. Common Law Assurances -- § 251 – can request assurance when reasonable grounds for thinking other party won’t perform. Obligee may treat the failure to provide assurances as a repudiation if assurances not received w/n reasonable time.

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3. Hornell Brewing Co. v. Spry – K for sale of Arizona Tea from P to ∆ for distribution in Canada.

- § 2-609- Received information that ∆ was a scam-artist = additional grounds for insecurity.

G. Constructive Conditions – generally implied in law. Ex. Substantial Performance.

H. Express Conditions – provision in K that relieves a party’s obligation to peform.- Thaumaturgic Language: If and only if, unless and until, on condition that, provided

that.

1. Pure Condition – A promises to do X if Y happens; if y does not occur, A’s promise to do X is relieved. B cannot sue (Give you a car if and only if the Dow hits $5,000)

2. Promissory Condition – When a party’s promise is conditional on the execution of the other party’s promise. Acts as both a promise and a condition. See diagram in Examples and Explanations § 16.5. Can withhold performance and seek remedy for breach.

3. Pure Promise – A promises B to do X.

4. Oppenheimer & Co. v. Oppenheimer, Appel, Dixon & Co. – P contracted to lease office space from ∆. There was a condition that P get Landlord’s consent in writing by a particular date. P argued substantial performance.

General Rule: SP does not excuse an express condition

5. Ways to get around Express Conditions:a. Interpretation (Rest. § 227) – If a court will rule that it is a promise rather than an

express condition, then you can use the doctrine of Substantial Performance.- § 227 – Standards of Preference (Restatement prefers interpretation as promises)

(1) Interpretation preferred that will reduce the obligee’s risk of forfeiture.(2) Interpretation as promise preferred over interpretation as express condition

or promissory condition.b. Estoppel – prevents unfair assertion of rights by a party who has acted

inconsistently w/ those rights. If one party’s conduct makes the other party believe there is no right, then that party cannot assert those rights.

- Can’t assert a right when:(1) Deliberate words or conduct;(2) With knowledge or reason to know that the words or conduct will be

relied upon.(3) The actor causes the other party detriment by inducing the justifiable belief

that the right does not exist or will not be asserted.- Example:

K for the sale of land conditioned on rezoning being obtained w/n 60 days. 55 days after K executed, zoning authority tells seller that it can’t decide on zoning for at least two more weeks. Seller tells buyer about this,

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but buyer says that he will wait the extra time. On the strength of this, Seller foregoes the opportunity to sell to someone else (reliance). So, if on the 61st day, the buyer tries to escape the K by asserting the non-fulfillment of a condition, then he will likely be estopped from doing so.

c. Waiver – voluntary relinquishment of a known right.*Party can only waive a condition that is solely for his own benefit.

Rest. § 84:(1) Only the party who is benefited by a condition may waive it. If both

parties benefit, then both may waive.(2) Material v. Non Material

- Non material conditions – can be waived w/o consideration or reliance.- Material Conditions - A material condition can ONLY be waived with

consideration (making it a modification).- Material Conditions are generally technical.

Retraction of Waiver: Rest. § 84(2)(1) If waiver is of a material condition, it has to be supported by consideration,

and cannot be retracted.(2) If waiver is of a non-material condition, waiver does not have to be

supported by consideration to be effective, but whether it is retractible of not may depend on timing.

- If time for fulfillment of the condition has already passed, then it should be non-retractable.

- If it is made beforehand, the obligor can retract while there is still time for the condition to occur, unless the obligee’s change of position in reliance of the waiver has made retraction unjust.

- Cannot be unjust

- Waiver is more useful when there is no reliance but the condition is ancillary. Estoppel more useful when the condition is material but there was justified reliance.

**Timing is usually non-material.

d. Forfeiture -- the denial of compensation that results when the obligee loses its right to the agreed exchange after it has relied substantially, as by preparation or performance, on the expectation of that exchange. Generally substantial performance does not apply, but Courts will look to materiality of the condition if forfeiture is involved. If express condition is not a material one and enforcement will result in forfeiture, then Court will look to substantial performance to see if condition should be enforced.

e. Breach – doctrine of prevention (§ 245). If one party has an obligation to make an event occur, they are in breach if they don’t make it happen. When a party prevents the condition from occurring, that will excuse the non-occurrence of a condition. A party can either take steps to prevent the condition from being met

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or a party can fail to act in order to prevent condition. EX. Party required to obtain 90% financing on purchase of home as part of an express condition. If this party does not attempt to get the financing, then the seller can still enforce the K, even though the condition did not occur.

(1) Retraction of waiver: Must be done in enough time for performance to still occur. AND; there can be no retraction if there has been reliance.

(2) You can waive before or after time of performance, but can not retract if waived after performance was due.

(3) Materiality is important b/c if a party waives a material condition, then consideration is needed and the waiver would be considered a modification.

(4) Under UCC, consideration is not needed for a modification, just good faith. Therefore, if waiver is material, then do not need consideration.

J.N.A. Realty Corp.(landlord) v. Cross Bay Chelsea, Inc (tenant): Defendant failed to send in a timely written notice for a lease renewal due its own negligence. Plaintiff’s are trying to evict the Defendants. Defendants will suffer a forfeiture if the condition is enforced. The court balances the hardships of both parties. Express Condition was not enforced.

• Rest. § 229 – Excuse of a condition to avoid forfeiture. • General rule – a notice exercising an option is ineffective if it is not given within the time

specified. • Here, the court does not follow the general rule. Instead, they say a tenant should not be

denied equitable relief from the consequences of his own neglect or inadvertence if a forfeiture would result.

• Negligence does not bar equitable relief. “Gravity of the fault must be compared to the gravity of the hardship.”

• Always look at “reliance” or reasons the buyer should not lose the option. (e.g. improvements they have made to the property)

(1) Other Real Estate Situations:(a) In cases for the purchase of real estate, unlike above which is renewal,

courts generally deny equitable relief if the option holder fails to comply with the time set forth in the option. Court treats differently because interests are different and courts generally expect timely written notice.

(b) There is already a K to purchase and buyer goes beyond time to close. More like JNA Realty because courts are generally more flexible in parties going beyond deadlines when a K already exists.

• Condition of Satisfaction: one party does not want to take risk of performing until other party assures that he will be satisfied.

a. To Determine which standard applies:(1) Objective Standard: Rest 2d § 228, would a reasonable person be

satisfied. It is applied when practical to use. Usually applied to work of technical nature.

(2) Subjective Standard: honest satisfaction, usually applied with respect to aesthetic matters Ex. Personal Portrait

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b. To get subjective standard applied by court: K needs to say a subjective std will be applied, show that it was negotiated for, and why it is needed.

Chapter 11 – Expectation Damages: Principles and Limitations

*Goal of Expectation Damages – To put the NBP party in the position he would have been in had the K been performed.

I. Computing Expectation Damages:A. General Formula:

ED = Loss in value (LV) + Other Loss(OL) – Cost Avoided (CA) – Loss Avoided (LA)

1. Loss in Value (LV): difference between what party expected and what party received.- These are direct damages. Measured different ways in different types of Ks.

2. Other Loss (OL): Incidental and Consequential Damages:Incidental Damages: Additional costs incurred after the breach in a reasonable attempt to

avoid loss. These are also direct damages (although sometimes called special)Consequential Damages: Further loss in other transactions or endeavors that were

dependent upon the K. These are special damages.

3. Cost Avoided (CA): Loss in value avoided. (Money you expected to spend, but didn’t have to.

4. Loss avoided: other losses avoided. (Mitigation).

B. Real Estate 1. Buyer’s Damages: LV = Fair Market Value – K Price.2. Seller’s Damages: LV = K Price – Fair Market Value

3. Determining Fair Market Value: - Many jurisdictions use testimony of appraisers.- Some jurisdictions use owner’s testimony.**Always determine Fair Market Value at the time of the breach.

4. Turner v. Benson – Turners selling their house for $75K. Bensons back out at the last minute. A year later, they sold house for $1K more.

- No damage since they sold it for more.- Here, seller can collect Consequential and Incidental damages.- Other Losses Claimed:

a. Day Care Center – Court said no b/c lack of causation since P’s planned to quit the business anyway.

b. Interest on the deposit – do they recover this interest – YES

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- Why – b/c had the K been performed, they wouldn’t have had to pay that interest.

c. Loss on car sale – No - Why - The proof that it was a result of the breach was too vague

d. Advertisement at auction – YES – incidental damage.e. Also got plumbing and insurance expenses.

5. Interesta. Pre-Judgment Interest – Ps loss of use of a particular sum prior to the judgment.

Normally awarded when it is a liquidated sum.b. Post Judgment Interest – The cost of a loan, expense incurred because of breach

OR where there is a money judgment, plaintiff can get interest on money owed from time of judgment to be paid.

C. EmploymentEmployer and Employee = LV + OL – CA – LA1. Employee – focus on salary remaining in the K for LV

2. Employer – Handicapped Children’s Ed. Board v. Lukaszewski – teacher breached employment K and school hired another teacher but had to pay a higher salary. Court finds for school b/c bargained for ∆ and the benefit imposed was not asked for.

Employer = Cost of obtaining other services equivalent to that promised but not performed, plus any foreseeable consequential damages.

*Note that specific performance would not be an option b/c it was a personal services K.

* If the employer can only find replacement that is more expensive, then the breaching employee has to pay the difference because she is the reason for the increased cost.- Ex. I order Ribeye steak but am brought a Filet Mignon.

*Consequential Damages would be costs in looking for a replacement – ex. running ads, etc.

D. Construction1. Builder = expected net profit on the entire K + unreimbursed expenses at the time of

the breach.2. Buyer = LV + OL – CA – LA

3. American Standard’s v. Schectman – builder did not complete the project. The correct grade level was not right. Buyer went ahead and sold the property for a $3,000 loss. The cost of completion was $90,000.

- Big difference depending upon whether P is awarded Cost of Completion ($90,000) or diminution in value ($3,000).

- General Rule – when a contractor’s performance has been defective or incomplete, the reasonable cost of replacement or completion is the measure.*Note this case is different from Jacob Young where was good faith.

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- Exceptions: (= when to use diminution in value instead).(1) When there has been substantial performance made in good faith, but defects

exist, the correction of which would result in economic waste (Jacob Young)

(2) when a breach is only incidental to the main purpose of the K and completion would be disproportionately costly to cause economic waste.

- The restatement breaks with the general rule and shows a preference for diminution in value. Rest. § 348(2). This rule is not followed by most courts.

II. Restrictions on the Recovery of Expectation Damages: Foreseeability, Certainty, and Causation.

A. Foreseeability 1. Two instances when one can recover damages:

a. Direct Damages – Loss in value and incidental – flow directly from the breach.- Foreseeability not really an issue w/ direct damages b/c it is almost always

reasonable to assume that the damages will flow directly from a breach.b. Special/Consequential – other loss that was dependent on the K. These can be

recovered when they should have been reasonably contemplated by the breaching party at the time the K was formed (foreseeability).

2. Objective Standard – Not concerned with the a particular person did foresee, but what she would have foreseen had she reasonably contemplated the course of likely future events.

3. Determine at the time the K was formed

4. Hadley v. Baxendale – plaintiff attempted to recover lost profits (consequential damages) b/c a carrier failed to deliver a crank shaft. The court did not allow plaintiffs to recover b/c the lost profits were not foreseeable at the time the K was formed.

- P never really gave ∆ information that the broken shaft was their only one.

5. Floraflax International v. GTE – P hired GTE (collateral K)to do call centers for its new K w/ Bellerose. ∆ got a bad deal, and did a shitty job, and Bellerose withdrew from the K.

*Note that P is still responsible to Bellerose b/c the K w/ GTE was a delegation.- The lost profits were reasonably foreseeable b/c GTE made the K w/ P b/c of the K

w/ Bellerose.- Also issues w/ Certainty & Causation (see below)

B. Certainty 1. The plaintiff bears the burden of proving loss. The P must give the persuade the fact

finder that:a. The loss is more likely than not to have occurred, andb. Must give the fact finder enough basis for calculating monetary award.

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2. As a general rule, the more clearly that a plaintiff shows the first element, the greater the court or jury will make to come up w/ some kind of compensation figure.

3. Rest. § 352, Comment a – comment a – policy that breacher should be accountable for breach means that doubts should be resolved against her once it is established that a significant injury has occurred.

4. Common problem New Businesses – it is typically troublesome to establish damages to a degree of certainty when the breach prevents a plaintiff from opening a new business.

a. In these situations the P will have to show projections for profit, etc.b. Also, if the P has opened and is making profit by the time the case goes to court, he

can use the figures from the time opened to aid the court (although the new figures won’t necessarily reflect what would have happened but for the breach).

5. Floroflax Revisited – certainty was not a problem in this case just because the experts disagreed on the damages figure. The parties don’t have to agree to the penny.

C. Causation – A breaching party cannot be accountable for a loss not caused by his breach. There must be a link between the breach and the loss.

1. Example: Sarah contracted to receive voice lessons from Harmony to prepare her for a music contest. Harmony reneged on the K just before the lessons were to begin, and Sarah could not find a replacement teacher. So, she had to sing in the contest w/ no lessons. Sarah loses and sues Harmony for losses to compensate her for her loss of career as a music star.

= No Causation – too many variables that are involved.

2. Floroflax Again!! – GTE says that since Bellerose had a 60 day termination clause in its K w/ Florflax, that causation can’t be proved as to damages beyond the 60 days.

- Court rejects this – this is mere speculation about what Bellerose may or may not have done. They would have to be the party with the right to termination.

D. Rest. § 351(3) – Gives Court the option to limit consequential damages notwithstanding a party’s ability to overcome limitations (foreseeability, causation, certainty).

**Another situation where Restatement breaks w/ common practice – NO TYPICAL.

III. Mitigation of DamagesA. Duty to mitigate Damages – a NBP has a general duty to take reasonable steps to reduce

his loss following a breach of contract.

B. Rockingham County v. Luten Bridge Co. – The County authorized bridge by slim vote. ∆ started work on bridge. One member of the commission resigned, and the new board ordered that work be stopped. ∆ gambled and continued to build the bridge.

- Rule – Can’t collect entire K amount when notice of repudiation was received.- So, Court awarded Net Profit + unreimbursed expenses prior to breach, so Luten lost

out big.

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- While a K is executory, a party has the power to stop performance on the other side by an explicit direction to that effect, subjecting himself to such damages as will compensate the other party for being stopped in the performance.

- The party whose performance was stopped can’t go on, and thereby increase the damages, and then recover such damages from the other party.

C. Rest. § 350(1) – asking the NBP to do what is reasonable. Damages are not recoverable where NBP could have avoided injures w/o undue risk, burden or humiliation. (Not required to bend over backwards).

D. Boehm v. ABC – P was released from one position, but offered another similar position in the company. P felt that the job was a farce (made-up). ∆ argued that P did not mitigate his damages b/c he refused to take the job and that he took himself off the job market.

- The employer, as the breaching party, has the burden of proving that the NBP employee didn’t use reasonable efforts and that he didn’t accept comparable alternative employment.

- Court ruled for P b/c they said that the position was fake – it doesn’t exist now (pretext). They also said that his moving didn’t matter b/c national job market.

- Money spent looking for a new job (head hunter, etc) falls under incidental damages which goes under Other Loss.

1. Comparable employment – NBP must use: A) Reasonable Efforts to find; B) Comparable Employment.

a. Reasonable Efforts – Question of fact for the juryb. Comparable Employment – Look to:

- Salary- Title, Responsibility w/n company, etc.- Location- Type of Work/Industry- Fringe Benefits- Comparable opportunity for advancement- # of hours worked.

c. Under principles of mitigation, you are only required to take comparable employment. However, if for whatever reason you take a job at McDonalds, this salary would be subtracted.

- But, if a lesser position (like McD) is taken but there is a comparable position available, then they can mitigate using the comparable position.

2. Must accept your old job back – Fair v. Red Lion – a woman fired and the employer offered her the same job back. She asked for certain conditions and assurances. The employer refused to give her either and she sued for breach. Court found that she did not mitigate her damages, and she could have done so if she had taken her old job back. Employee cannot demand conditions when the employer offers re-employment.

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IV. Lost Volume Sellers: When a party’s damages will not be reduced by substitute Ks.

A. Lost Volume Seller: When a seller could have performed both Ks at the same time. The new K cannot be seen as a substitute that would reduce his damages. He lost profit on the K breached. Those damages cannot be mitigated. Factors to determine if NBP is a lost volume seller:

1. Whether party has capacity to make additional sale2. Whether substitute K would be profitable3. Whether seller probably would have made an additional sale absent the buyer’s breach.

B. Profits from a new K are not subtracted as mitigation. The new K is an additional K, not a mitigating one. Lost volume sellers do NOT have a duty to get a mitigating K.

C. Jetz Services Co. v. Salinas Properties – Salinas breached K w/ Jetz. K provided that Jetz would get 50% profit off Laundromat. Jetz put its machines in another property and Salinas argued that Jetz had mitigated its damages.

- Court found Jetz as a Lost Volume Seller because he could have performed both Ks at the same time, so Jetz entitled to the lost profits that he would have made if the K had not been breached.

- The burden is on the breaching party to show that the NBP could not have undertaken both Ks.

D. UCC § 2-708(2) – Under Certain circumstances, a seller can recover lost profit:1. Lost volume seller2. Seller of component parts – seller does not have another buyer for the components.

The parts have value, but they cannot be easily resold. Under UCC, the seller can recover his lost profits.

D. Personal Services Ks – remember that one person cannot do 2 jobs. If they cannot, then the substitute K would be mitigating. But if it can be shown that the nBP could have performed both Ks, then the second K will Not be mitigating. (Ex. if original job was day shift, and new job was night shift.

D. Costs:1. Fixed – (overhead) – stay the same no matter what you produce. Must be paid

regardless of the breach (mortgage, salaries). Fixed expenses are NOT deducted when computing lost profits.

2. Variable – Dependent on the K. Costs that are incurred b/c of the K. These cost are deducted from lost profits b/c these are costs that should be avoided because K does not have to be performed.

V. Non-Recoverable Damages

A. Attorney Fees – Under the American Rule, attorney fees are not recoverable in a breach of K action. So this is a situation where we are really not giving true expectation damages b/c the NBP would not have to pay attorney fees but for the breach.

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1. Exceptions:a. Provision in the K providing for attorney fees.

- Courts generally imply mutuality to these terms, so if the term awards only one party attorney fees in the event of breach, then courts will apply the term to both parties.

b. Statute awarding attorney fees – Civil Rights Statues (§ 1983) or Copyright.

B. Emotional Distress Damages – Generally not recoverable.1. Exceptions:

a. If the K is of the type that involves emotional distress damages if there is a breach. Ex. Ks dealing with the dead, Plastic surgery, K related to a wedding.

b. Bad Faith breach of Insurance K – b/c a fiduciary relationship.c. Wrongful Discharge in violation of public policy.

2. Rest. § 353 -- recover for emotional disturbance will be excluded unless also bodily harm or it is of such a kind that b/c of breach that emotional disturbance will be likely to result.

- Bodily harm would have to flow directly from the breach. Can’t be an attenuated harm.

C. Punitive Damages -- Courts won’t allow them for breach of K. There must be an independent tort claim that allows for punitive damages. (Rest. § 355)

VI. UCC Article 2

A. Buyer’s Damages1. Ways a Seller can breach:

a. Non-Conforming Goodsb. Failure to Deliver or Late Deliveryc. Anticipatory Repudiation

2. There will be different courses of action depending on whether the buyer accepts goods or not. The following material assumes that the seller has failed to deliver or the buyer has rightfully rejected.

3. Loss in Value (LV) can be measured by either:a. Cover Damages (UCC § 2-712)b. Market Damages (UCC § 2-713)

4. Cover Damages (2-712) – When buyer buys the goods from someone else to substitute (type of mitigation).

*Note – in order for the buyer to get damages, the cost of cover must be larger than the breached K. Otherwise, he wouldn’t be seeking damages.

a. When can Cover damages be recovered?

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- Buyer has to act in a way that is commercially reasonable. Has to do so in good faith = reasonable substitute. Buyer can’t upgrade to goods of much higher quality. Must do so without Unreasonable Delay.

b. What happens if the buyer doesn’t cover?- The buyer is not limited to cover damages. The buyer can elect market

damages. Doesn’t really matter if market damages give the buyer greater recovery.

- The failure to cover does come into play in Other Loss (incidentals and consequentials)

- UCC § 2-715 – Incidental and consequential damages. Subsection (2) –Buyer’s consequential damages will be limited for the buyer’s failure to cover (foreseeability, etc.)

c. If the buyer covers, is he limited to cover damages?- Probably – the answer is not clear in the code.- Code express preference for cover. If market damages would give the buyer

more than cover, and the buyer did, in fact cover, then it sounds like overcompensation.

- However, we don’t know for sure. Many courts would consider arguments to the contrary.

5. Market Damages (2-713) – Can be used if the buyer elects not to cover.E.D. = LV(Market Price – K price) + OL – LA – CA

a. Time for Calculation – When buyer learns of the breach.- Buyer is likely going to learn of the breach:

(1) Whenever he gets around to looking at the goods or (2) If the seller repudiates the K

Three Interpretations on what (2) means. Could mean:*When buyer learns of repudiation (= plain meaning)*When the buyer learns of the repudiation plus a commercially

reasonable time thereafter. (supported by § 2-610).*When actual performance by the seller is due under the K. (argued

by Professors White and Summers based on legislative history and comparison of code provisions).

b. Relevant Market- “Place of Tender” OR- In cases of rejection after arrival or revocation of acceptance, then the place of

arrival (place where the goods arrive or leave w/n a K).

6. Incidental & Consequential Damages (UCC § 2-715):(1) Incidental = expenses reasonably incurred in inspection, receipt, transportation

and care and custody of goods rightly rejected, and commercially reasonable

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charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or orhter breach.

(2) Consequential – include:a. Any losses seller had reason to know about at the time of K (Foreseeability)

and could Not be reasonably prevented by cover (Mitigation).

B. Seller’s Damages

1. Ways a buyer can breach:a. Failure to payb. Wrongful rejection of goodsc. Wrongful revocation of acceptance of goods.d. Repudiation w/ respect to the K in whole or in part.

2. Side Note - If the buyer has already accepted the goods, the code provides that the seller can bring an action for the price. This is a type of specific performance. All you are doing is telling the buyer to go ahead and complete the transaction. We are not talking about this situation now.

3. Types of Damages seller can get:a. Resale – UCC § 2-706b. Market – UCC § 2-708(1)c. Lost Profit – UCC § 2-708(2)

4. Resale (UCC § 2-706) – allow the seller to resell on market and recover the difference between the resale and the K price. (**Notice again that there is an assumption that the resale price will be less than the K price; otherwise, there would be no loss).

LV(K Price – Resale Price) + Incidental Loss – Cost Avoided.

a. 3 requirements a seller must meet to recover Resale (2-706):(1) Identify the resale K – must show the resale K is connected to the breached K.(2) Seller has to give proper notice to the buyer unless the goods are perishable

no matter whether they are private or public.(3) Seller has to resell in good faith / commercially reasonably – not a sham

(selling to your buddy at a really low price).

5. Market Damages (UCC § 2-708(1)) = the difference between the market place at the time and place for TENDER and the unpaid K price together w/ incidental damages. Seller has the burden to prove what the market price would be.

LV (K Price – Market value) + Incidental – Cost Avoideda. The revision changes market damages for the seller to mirror market damages for

the buyer.

6. Lost Profits (UCC § 2-708(2)) -- *Remember these are direct damages w/ sellers.

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- Available when the other damages are inadequate to put the seller in the situation he would have been in had the K been performed.. Seller is entitled to the profit which he would have made form full performance by the buyer plus any incidental damages.

- There are typically 3 situations where market & resale will be inadequate, so have to use lost profits:

a. Lost Volume Sellers – seller would have made another sale (made 2 sales rather than 1). Seller has unlimited supply and he can perform both Ks. Seller has the burden of proving he is a lost volume seller.

b. Manufacturer of Component Parts – If goods are specialty items w/o an established market.

c. Jobber – an intermediary who purchases for resale. When a buyer from a jobber breaches before the jobber has acquired the goods, neither resale nor market value can be used.

7. Seller cannot collect Consequential Damages – b/c it would be the loss of use of money. The Code does not mention these for sellers. (**The revision changes this to allow consequential damages for the seller.

8. Seller’s Incidental (UCC § 2-710) – include any commercially reasonable charges, expenses, or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer’s breach in connection with return or resale of the goods.

VII. Efficient Breach

A. Efficient Breach – a breach of K is said to be efficient if the ∆’s cost to perform would exceed the benefit that performance would give to both parties. Thus, the breaching party pays damages and still comes out ahead.

B. Doctrine of Efficient Breach assumes there are:1. Rational Actors – the party contemplating breach must be capable of acting voluntarily

and rationally, and must have sufficiently full and reliable information to enable her to make a prediction of likely losses and gains.

2. Low Transaction Costs – the transaction costs involved in terminating the K and making substitutes must be small enough so as not to eliminate any advantage achieved by the breach.

- These ideal conditions are really not likely to exist, which means that it is really not that easy to tell if the breach will be efficient or not.

C. Roth v. Speck – an employment K was breached by the hairdresser who worked for a salon. Hairdresser took a new job making more money. The court determined fair market value by using the hairdresser’s new K rather than the Ps substitute K. (Like the court in Lukazweski case). The difference between this case and Lukazewski is that the school had gotten a substitute teacher where the salon had not hired a

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substitute hairdresser. Also, the Ks (one between the hairdresser and the P and the hairdresser’s new K) in the Roth case are more similar. Under this method, there is less risk of under compensation because the P is capturing some of ∆’s gain from his breach rather than the court trying to estimate fair market value.

3 reasons to protect expectation damages:1. assure protection of the full reliance interest2. Facilitation of planning3. Protection of risk allocation

B. corp contracts with s corp to prepare accounting program for B. K price is 2 million. S expects to make 200,000 dollars. After half the contract is done, B repudiates.

Chapter 12 – Alternatives to Expectation Damages: Reliance and Restitutionary Damages, Specific Performance, and Agreed Remedies.

For Example:- Owner enters into K for construction of a building for $500,000. The total cost of construction

is $450,000 (labor and materials). There is a breach in the form of repudiation after the building is 10% complete. In addition to having completed 10%, the builder has purchased another $30,000 of materials. The builder is able to sell those materials for $20,000.

- What would be the expectation interest?- Net Profit + Unreimbursed Expenses = E.D.- $50,000 + $10,000 (which is 30K – 20K) + $45,000 (which is 10% of $450,000

in labor and materials). = $105,000.00 in Builder’s Expectation.- What would the reliance interest be?

- Generally measured by out-of-pocket expenses.Only what the builder is actually spending.= $55,000

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- What would restitution be?-Look at benefit conferred unjustly. Focus shifts from what the builder is out to

what the owner got unjustly.- 10% of $500,000 - $50,000.- Look at worth of building, not cost to builder.

= These examples show the circles.Although expectation damages are the primary remedy for breach of K, they can only be

recovered to the extent that the P can prove that the breach deprived her of an economic gain that would have resulted from the performance promised by the ∆ in the K. She must be able to show that she received less than her entitlement under the K or was otherwise precluded from realizing an expected gain.

However, the Ps inability to prove expectation damages does not always end the matter of relief because she may be able to show that she has suffered losses other than her defeated expectation.

II. Reliance Damages

A. Goal – To put the NBP in the position he was before the K was formed. Put them where party would be if they never had entered the K.

- Reliance damages aim to refund expenses wasted or equivalent losses by the P in reliance on the K, thereby restoring her to the status quo ante.

B. Measured by out-of-pocket expenses. 1. Rest. § 349 – Injured party has right to reliance damages, including expenditures made

in preparation for performance or in performance, less any loss that the party in breach can prove with reasonable certain the injured party would have suffered had the K been performed.

C. Limitations on Reliance Damages: (Same as Expectation Damages)1. Certainty2. Forseeability3. Causation 4. Mitigation

D. Wartzman (∆) v. Hightower Productions (P) – The P went to ∆ to form a corporation and the ∆ was negligent in its formation, and there was a breach of K. P is suing for reliance damages because he can not recover in expectation damages.

Certainty- Expectation damages for lost profits would be too speculative (Limitation of certainty).

Ps were unable to capitalize on their flagpole sitting venture b/c of the faulty work.

- Firm tries to say that the company would have lost even more money if the venture had gone through, but this argument is also limited by lack of certainty.

Mitigation- ∆s say all P had to do was hire a specialist, but

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- Equal Opportunity Doctrine – if the ∆ is also in a position to pay a specialist, then they are obligated to do so. It was ∆’s responsibility to take steps to limit its own losses.

E. Walser v. Toyota Motor Sales – P relied on ∆’s promise of getting a Lexis dealership and purchased land anticipating the K.

- P brought promissory estoppel claim since K was never actually formed.- Trial Court limited damages in Ps promissory estoppel claim to “out-of-pocket”

expenses.- Damages decision under § 90 is within the discretion of the court. Comment d to § 90

says relief “may be limited to the extent of Ps reliance. Courts can award reliance, expectation, or something in between.

- Appellate Court said court did not abuse its discretion in limiting Ps damages to out of pocket.

- Toyota presented evidence that the deal was far from certain.- P only relied for a short period of time since they were informed a couple of days

later that they had previously been misinformed.* it is far more likely that you will have taken more steps in reliance the further

away you are from the promise.

There are 2 schools of thought (relating to whether or not to limit to reliance damages)1. Limit to reliance damages – only way to make it fair to promisor.2. Full expectation damages – treat P.E. like breach action.

F. Examples of when different types of damages can be recovered under § 90:1. Hoffman v. Red Owl – bakery hypo, suggests that only reliance damages are allowed

under § 90.2. Illustration to Rest. – suggest expectation damages are allowed if breaching party acts

in bad faith or some kind of intentional breach.3. Drennan v. Star Paving – suggests when there is some lost opportunity, full

expectation damages are available.4. Reliance on Insurance Ks – can get full expectation damages. (N.9) Reliance and

expectation are the same in this context.

III. Restitution Damages - restore any benefit that has been conferred to the breaching party by the NBP. Alternative to expectation damages – available where expectation is zero, not where the K is fully performed.

A. When Restitution Damages can be recovered:1. Where service was performed and one expected payment, but no promise was made.2. Another party promised to pay for service and service was rendered.3. When a party disaffirms a K and NBP sues for the benefit conferred.4. When a breaching party has conferred a benefit on the NBP.

B. Rest § 370 – Restitution (generally) – party is entitled to restitution only to the extent that he has conferred a benefit on the other party.

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C. Rest. § 371 – Measure of Restitution Interest – As justice required, can be measured by either:1. The sum may be measured by what it would have cost him on the market.2. Extent to which the other party’s property has been increased in value.

D. U.S. ex rel Coastal v. Algernon Blair – NBP suing for restitution – coastal spent $37,000 for work performed and Blair committed a total breach. It can be shown that if Coastal had completed the project, he would be at a loss. Thus, expectation and reliance damages would be zero.

The NBP can still collect restitution damages. Why?1. The breaching party is getting something that they get to keep without paying for it. If

the substantive focus is on the breaching ∆, why should it matter that the plaintiff wouldn’t have got anything by suing on the K?

2. Generally, when a party sues in restitution, we call that suit off the K. The idea is that where there is or has been a K, the party can choose whether to sue on or off the K. If sue off, then the K is not part of our calculus.

*This only makes sense where there is a K in the first place. Last semester we talked about restitution where there was no K at all. This is different. This is getting the reasonable value of services conferred where there was a K.

Limits on this rule:1. If there has been full performance, then no restitution. Where the party who is suing

has completely performed, then they can’t sue in restitution. In this case, if Coastal had completed everything, there must be suit on the K (Benefit Theory)

2. The K price – does the K price itself set a limit on restitution damages. Sometimes the K price can be used as evidence of market value. Some courts say no way can the plaintiff get more in restitution than they would have had they fully performed. (Enrichment Theory)

E. Lancellotti v. Thomas – Breaching Party suing for Restitution. – P breached the K and is suing for restitution damages.

1. Can a breaching party recover in restitution?a. CL view – a breaching party cannot recover in restitution the value of the benefit

conferred.b. Modern – breaching parties are allowed to recover if he has conferred a benefit

onto the NBP. (always subtract the NBP’s expectation damages).- Works on the assumption that K rules are not rules of punishment – shows

influence of the UCC on common law.

2. Rest. § 374 (1) The party in breach is entitled to restitution.(2) If a liquidated damages clause allows the NBP to retain the breaching party’s

performance as liquidated damages, then the breaching party cannot sue in

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restitution for the benefit conferred if the value of performance is reasonable in light of the anticipated or actual loss caused by the breach.

= Under liquidated damages, parties agree there will be a certain amount of money set as damages for breach of the K. (ex. if breach, seller keeps $25K). The standard for evaluating liquidated damages is reasonableness in light of the anticipated actual loss. SO, subsection 2 says in some cases that the breaching party will not be able to recover if the court says that the money they are keeping is reasonable as liquidated damages.

- Don’t necessarily have to have a liquidated damages clause.- Subsection 2 just means that the Court can look at the circumstances and say it

looks like this is liquidated damages.- Court would look to the intent of the parties.- Generally, the Court is really trying to determine of the parties were acting with

their own loss in mind. Question is: Is the party that is trying to get the huge amount of damages trying to get what they really think their loss would be?

3. Limitations on Restitution Damages for the Breaching party?a. Must be damages left over from the NBP’s damages -- Breaching party has to

compensate the NBP for their loss, and whatever is left over, the breaching party gets to recover in restitution. = Have to know what the NBP’s damages are first **Exam Tip

b. Contract Price – for the breaching party, the K price is definitely a limitation when talking about restitution. Breaching party will likely not get any more recovery than a ratable portion of the K price.

F. Ventura v. Titan Sports, Inc. – Issue: Can a party sue in restitution where there is already a K in place that seems to cover what he is suing for?- Jesse “the body” Ventura (Governor of Minnesota who got capped in Predator) sues

under quantum meruit arguing that he created an intellectual property benefit for Titan Sports. In the Pre-Bloom period, the agreement was silent on royalties. In the Post-Bloom Period, the royalties were actively negotiated by his manager Bloom.

1. Pre- Bloom Period:- The agreement was silent on royalties, so there are 2 ways to look at it.

a. No right to royalties b/c not in the K = no restitution.b. Right to Publicity – gets around the logical argument from a.

- The Court recognizes a right to publicity – even though there is a K on point, he is suing for a tort that is not part of the K.

2. Post-Bloom Period:- Royalties were actually negotiated, which means they were covered by the K.

Normally, this means he would not be entitled to compensation in restitution since there would be no unjust enrichment.

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- He gets around this argument under a FRAUD theory (consistent w/ unjust enrichment damages). The fraud has to do with what they actually told him, not b/c wrestling is fake.

3. Measuring “the Body’s” Damages:- 2 options under § 371:

a. Value of Benefit received.b. Increase in ∆’s wealth./

- Roy says b probably works better.- For the test – look at these two sections of § 371 – should recognize that certain

claims lend themselves to one or the other, and others could be either.s

- Example – Maglica case – wife sued in restitution for services provided from ex-husband. Court awarded her $84M, which was ∆’s increase in wealth. Appellate Court reversed and applied the standard which awarded her the reasonable value of her services rendered for those years.

IV. Specific Performance - Court-ordered remedy that requires precise fulfillment of a contractual obligation where

a breaching party is required to carry out their promise. This is giving the NBP their pure expectation. Comes even closer than expectation damages. It doesn’t put them in the exact same position b/c they had to go to court to get it done.

- Available when $$ damages are insufficient.

General Rule – Expectation damages are the favored measure of damages over specific performance.

A. Advantages of SP:1. Puts the NBP in the position he would be in if K had been performed (NBP gets their

expectation).2. We don’t have to go through the ugly formula to figure out how much $$ it takes –

Saves Court and parties time (putting on damages experts, etc).

B. Disadvantages:1. Cost – really hard and expensive.2. Restricts Liberty (in the case of personal services) – this is theoretical b/c courts

generally don’t order SP for Ks for personal services.3. Efficiency concerns – SP undercuts efficient breach, b/c now the breaching party can’t

capture the other opportunity and they are forced to comply.

C. Rest. § 359 – Effect of Adequacy of Damages:1. No SP if damages adequate to protect the injured parties expectation interest.2. Adequacy of damage remedy for failure to render one part of performance due does

not preclude SP or injunction for K as a whole.3. SP of injunction will not be refused merely b/c there is a remedy for breach other than

damages, but such a remedy may be considered.

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D. Rest. § 360 – Factors to determine whether $$ damages would be adequate:1. Difficulty of proving damages with reasonable certainty2. The likelihood that an award of damages could not be collected.3. The difficulty of procuring a suitable performance by means of money awarded as

damages.

E. Rest. § 362 – SP will not be granted unless the terms of the K are sufficiently certain to provide a basis for an appropriate order.

F. Rest. § 364 – SP is precluded if relief would be unfair. E.g. K induced by mistake, unreasonable hardship, exchange is grossly inadequate (look at equivalency of exchange.

G. UCC § 2-716 – If buyer has wrongly refused goods/revokes, the seller’ action is for the price. For buyer, he can get SP when goods are unique. So, if goods are readily available on the market, no SP for the buyer. **We won’t deal w/ this, but know rules.

H. City Stores Co. v. Ammerman -- ∆ was trying to get a building permit and aksed P wto write a letter of interest in the center to the planning board to help ∆ get approval. In exchange for the letter, ∆ promised to give P an option to lease at the center.

Point of Case – Courts are a little more willing to award specific performance where burden on court and on the ∆ will not be heavy.

1. Specific performance was awarded even though the terms of the agreement were left to future negotiations. Court found the option K mentioned other leases with other department stores, and those leases could be used to determine the missing terms, therefore, it wasn’t too vague.

2. Under Rest. § 366 – when the burden on the court is too much but the harm to P is great if SP is not enforced, then the court can appoint a special master.= Someone who the judge can appoint to handle technical expertise of K

3. Hardship - ∆ argued that SP would create hardship.- Hardship Standard – performance of their obligation to P would be impossible or

would or would ruin them financially. Court found no hardship, the ∆ had put himself in the position and there would only be a monetary loss.

I. Seller of Land -- K’s for the sale of real estate (in notes):- Courts are less ready to let seller’s of real estate get specific performance b/c the seller

is just getting money. If we’re just talking about money changing hands, it is less likely you will see SP?

J. Personal Service Ks – do not get specific performance because it would be similar to involuntary servitude and the performer would probably provide shitty performance.

1. ABC v. Wolfe – ABC contracted w/ Wolfe as a radio talk show host and the K contained a right of first refusal provision and a good faith negotiation provision.

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Wolf breached the K by entering into an option K w/ CBS. ABC is seeking a negative injunction to keep Wolfe from working for CBS.

a. Negative Injunction v. Specific Performance- Negative Injunction – Prohibits performance for another party.- As opposed to SP – which compels performance for you.

b. Negative Injunction = a way to get around the involuntary servitude problem. Since you are not requiring them to perform the work but preventing them from doing the work for the other company, there is no involuntary servitude.

c. Negative Injunction, Factors to be considered:(1) Services have to be unique(2) Personal Services K not terminated.(3) Agreement not to compete (or work for someone else)

d. In the present case, (1) Are services unique (if not, the other things don’t matter b/c it would not be a

situation where it is equitable to grant SP)- Here, it is – entertainment industry should be a red flag for uniqueness –

since there is name recognition, etc.= Look to where services are unique first.

(2) Duration – not terminated? - Same principal we use w/ damages. If the time has already expired for

performance, then there is nothing to measure. How can you get a negative injunction when you no longer have a legal claim on that person’s time? It would be nothing further than pure punishment.

= no

(3) Is there an agreement not to compete?- A covenant not to compete would extend the time where we would say it is

reasonable to apply a negative injunction at least under the terms of a covenant not to compete.

2. Rest. § 367(2) – Negative Injunction – 2 policy concerns:(1) Working condition on employee – if you grant the negative injunction, then there

is no option but to go back – there will be bad working conditions if forced to go back and perform.

(2) Hinders Competition

3. Justification for prohibiting negative injunctions:a. No involuntary servitudeb. Can’t make people do stuff and expect them to do it well.

- NBP won’t get the performance they want anyway. There will be a really negative work environment.

- It can also be b/c it was intolerable to begin with.

4. This relief is very limited

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- A lot of policy concerns going against granting Negative Injunctions. They are very similar to SP.

- Think about this w/ entertainers, athletes, etc. – Ask: Is there anything colorful that they offer.

Handout: Drafting

I. Building Blocks of a KA. Title / Description – Most common title is “agreement,” and sometimes it will be a little

more descriptive, “lease agreement.”B. Caption – first paragraph right after the Title/Description – introductory – identifies the

parties, date of the agreement (sometimes there will be an effective date), also identifies detail about the parties.

C. Recitals – Background information that you think the reader would need (i.e. your client, the other party, the Court). Will the Court understand? Want to give factual information.

- Think about what has happened that has created the need for the agreement. This is the type of information that you want to summarize in the recitals.

“Whereas…….”“Whereas…….”“Now, therefore……..”

- This is a place where using legalese is not a bad thing.D. “Parties agree as follows,” “It is agreed” – Then go to the heart of the agreement.

Warming up before you get to the Heart of the Agreement:E. Definitions – (this part would have been really important in Fragaliment). You don’t have

to have a separate definition section. It depends on the size of your agreement. Ex. if you only have 3 definitions, you probably don’t need a separate section. Just define as you go – define the first time. If you have a big agreement, have a separate section.- Define words that have lay meaning – Never leave anything to common sense.

Heart of the Agreement:F. Covenants (**Most important part of the agreement) – a covenant is a promise. This is

where your actual agreement will be. This is what the agreement is all about. Talk about who has a duty to do what, who agrees to do what, etc. - This part will ALWAYS be drafted from Scratch – even if the deal looks exactly

like the deal that has been done before.- One of the worst things that can happen is if you copy something from a different

form, and end up in litigation, where it is wrong. The client will usually trust you when you draft.

G. Notices – (**this part not in reading) – generally the parties will have need to notify each other of various things. Ex. Provision dealing with notice of termination. Identify how the parties will get in touch with each other (what is the proper address, what is

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the proper means, do the parties talk to each other directly or through lawyers, is fax or email ok, does it have to be certified mail). This is important – there could be litigation regarding improper notice.

H. Representations and Warranties – really the parties aren’t promising anything in this section, and should be different from recitals. With recitals, you are only describing what has already happened. You don’t want to create liability in the recitals. - This is the place where parties insert representations that they think are

important as a basis. Background understanding.- Ex. Real Estate – important representation by seller would be that “seller

represents and warrants that seller has marketable title.” It is not a promise, it is a background understanding.

- Want this in Reps and Warranty section. Then, easier to have a claim for misrepresentation if reps and warranties not true.

- Ex. Representation by the buyer – “the buyer is in a position to make the purchase.”

- Ex. Seller – “the seller doesn’t have an obligation to anyone else.= These are not promises; they are statements of things that are true that have

serious consequences – Basic Assumptions.- What happens if a representation is false – you may want to build this into this

section. May want to say that if it is not true, the obligation is completely relieved – Express Conditions. Or you could make it breach, although conditions more likely.

I. Declarations – (sometimes thought of as Miscellaneous provisions) – Here is where we see a lot of the provisions we have talked about this year. Ex. Merger clause, force majeure, “as is” clause, mechanics of construction, governing law (ex. choice of law), best efforts clause, attorneys fees, could say “all parties are represented by counsel” to get around bargaining party stuff, and “headings have no meaning.”

J. Closing – Where you find signatures of the parties. The parties have been identified in the caption. If the parties are corporations, need the information of the signer (you ought to be satisfied that that person has the authority – often you only need the persons title), and you want your signature to match what you described.- Sometimes, the closing has this language, “Approved by: ___________, where

your signature as the attorney goes there. The advantage would be that the party can’t come back and say that he/she was represented by counsel.

- If you sign it, then your name is on the line, so be doubly careful.

II. Form Based v. Zero BasedA. Form: Drafting using a form as the base.B. Zero: drafting from scratch.

III. Language of Drafting

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A. The Three P’s:1. PREDICT what may happen2. PROVIDE for that contingency; and3. PROTECT your client with a remedy.

B. List for drafting on p. 247:1. Draft in the present tense.2. Draft in the active voice. Ask who is obligated to do something or to refrain from

doing something.**Especially if talking about covenants.

3. Use gender neutral language. – don’t sacrifice clarity to achieve this (ex. using plural pronouns = sometimes bad). A better way is to use the party’s name or “buyer” and “seller.” There is no need to say “he,” “she,” “they.”

4. Delete unnecessary language of agreement -- there are some things that are just descriptive.

5. State obligations with the word SHALL. WHhen you have used shall, ask if ou can substitute “has the duty to.”

6. Statute authorization with the word “may.” Whne you have used may, ask if you can substitute it with “is authorized to.”

7. State conditions precedent with the word “must.” When you have used, ask if you can substitute “has to do X before Y will happen”

8. Consider whether you have used a term that requires greater specificity. PREDICT whether the term may cause problems in the future.

9. Constantly ask “What if…?” Provide for the significant contingencies.10. When you have stated an obligation, ask, “What happens if the obligor doesn’t do it?”

Protect the obligee by stating a remedy in the K.11. **IMPORTANT** -- Cross-check the agreement for internal references. Make

sure the references are consistent. ***This is VERY IMPORTANT – the simplest way to do it is to look for cross-references and make sure they match. Make sure they are all consistent. Think about all possible scenarios, and figure out if your treatment is consistent. Some of them can actually be put together.

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