Contracts Michigan White Fall2003

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OUTLINE DETAILS:Author: AnonymousSchool:University of Michigan Law SchoolCourse: Contracts

Year: Fall, 2003Professor: James J. WhiteText: James J. White Coursepack (Fall 2003)Text Authors: James J. White

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CONTRACTS OUTLINE

I. A Roadmap for Contract Law .................................................................................................................. II. The Bargain Theory of Contract ..............................................................................................................

A. Consideration ....................................................................................................................................... B. Reliance ................................................................................................................................................ C. The Restitution Interest .......................................................................................................................

III. Negotiation and the Contract ................................................................................................................... A. The Role of the Courts ......................................................................................................................... B. Offer and Acceptance .......................................................................................................................... C. Negotiation and Closure ...................................................................................................................... D. Good Faith in Contract Formation ...................................................................................................... E. Problems with Standard Form Contracts ............................................................................................ F. The Statute of Frauds ...........................................................................................................................

IV. The Content of a Contract ........................................................................................................................

A. The Parol Evidence Rule and Reformation ......................................................................................... B. Interpreting the Terms of the Contract ................................................................................................ C. Implied Terms and the Implied Covenant of Good Faith ................................................................... D. Express and Implied Warranties .......................................................................................................... E. Modifications .......................................................................................................................................

V. Legal Regulation of Contracts ................................................................................................................. A. Mistake of Fact .................................................................................................................................... B. Public Policy and Illegality .................................................................................................................. C. Unconscionability ................................................................................................................................

VI. Remedies .................................................................................................................................................. A. Expectation Damages ..........................................................................................................................

B. Mitigation ............................................................................................................................................. C. Reliance Damages ................................................................................................................................ D. Restitution Damages ............................................................................................................................ E. Specific Performance ........................................................................................................................... F. Liquidated Damages and Agreed Remedies .......................................................................................

VII. Conditions ................................................................................................................................................ A. Express Conditions .............................................................................................................................. B. Implied or Constructive Conditions .................................................................................................... C. Impossibility, Impracticability, and Frustration ..................................................................................

VIII.Third Party Rights and Responsibilities .................................................................................................. A. The Assignment of Rights and Delegation of Responsibilities ..........................................................

B. Suretyship and Guaranty Contracts .....................................................................................................

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CasesA.Z. v. B.Z., 431 Mass. 150............................................................................................46Alabama Football v. Wright, 452 F.Supp 182.................................................................62Angel v. Murray, 322 A.2d 630.......................................................................................42

Ardente v. Horan, 117 R.I. 254.......................................................................................20Arnold Palmer Golf Co. v. Fuqua Industries, Inc., 541 F.2d 584....................................22Bailey v. West, 105 R.I. 61..............................................................................................17Baker v. Bailey, 240 Mont. 139.......................................................................................32Bank One v. Coates, 125 F.Supp.2d 819.........................................................................48Board of Control of Eastern Michigan University v. Burgess, 45 Mich. App. 183........14Brookside Farms v. Mama Rizzo’s, Inc, 873 F.Supp 1029.............................................43C & J Fertilizer, Inc. v. Allied Mutual Insurance Co., 227 N.W.2d 169.........................27C.R. Klewin, Inc. v Flagshp Properties, Inc., 220 Conn. 569.........................................29

Carnival Cruise Lines v. Shute, 499 U.S. 585.................................................................26Carpenter v. Chrysler Corp., 853 S.W.2d 346.................................................................40Centronics Corp. v. Genitron Corp., 132 N.H. 133.........................................................38City of Kenai v. Ferguson, 732 P.2d 184........................................................................23City Stores Co. v. Ammerman, 266 F.Supp. 766............................................................54Clouse v. Myers, 753 S.W.2d 316...................................................................................45Cohen v. Cowles Media Company, 479 N.W.2d 387.....................................................16ConAgra, Inc. v. Nierenberg, 301 Mont. 55....................................................................29Contemporary Mission v. Famous Music Corp., 557 F.2d 918......................................64Davis v. Satrom, 383 N.W.2d 831...................................................................................19Delchi Carrier SpA. v. Rotorex Corp., 71 F.3d 1024........................................................7Donahue v. Federal Express Corp., 753 A.2d 238..........................................................39Empire Gas Corp. v. American Bakeries Co., 840 F.2d 1333.........................................39ePlus Group, Inc. v. Panoramic Comm., 50 UCC 2d 213 (2003)...................................56Fertico Belgium v. Phosphate Chemicals Export Ass’n, 501 N.Y.S.2d 867...................51Fiege v. Boehm, 210 Md. 352.........................................................................................13Fisher v. Jackson, 142 Conn. 734....................................................................................14Ford Motor Credit Co. v. Russell, 519 N.W.2d 460........................................................18Freund v. Washington Square Press, 34 N.Y.2d 379......................................................49

Gardner Zemke Co. v. Dunham Bush, Inc., 115 N.M. 260.............................................25Hadley v. Baxendale, 9 Exch 341 (1845)........................................................................51Haines v. City of New York, 41 N.Y.2d 769..................................................................37Hamer v. Sidway, 124 N.Y. 538......................................................................................13Hamilton Bancshares, Inc. v. Leroy, 131 Ill. App. 3d 907..............................................21Harrington v. Taylor, 225 N.C. 690.................................................................................15Hill v. Gateway 2000, 105 F.3d 1147..............................................................................27

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StatutesMagnussen-Moss.............................................................................................................63Restatement §145.............................................................................................................63Restatement §261.............................................................................................................59

Restatement §346 (1)(a)(ii)..............................................................................................50Restatement §346(1)(a)(i)................................................................................................50Restatement §71(a)..........................................................................................................20Restatement §76...............................................................................................................12Restatement §76(b)..........................................................................................................13Restatement §79...............................................................................................................12Restatement 2d §1............................................................................................................12Restatement 2d §110........................................................................................................28Restatement 2d §131........................................................................................................29

Restatement 2d §139........................................................................................................30Restatement 2d §151........................................................................................................44Restatement 2d §152........................................................................................................44Restatement 2d §153........................................................................................................44Restatement 2d §154........................................................................................................44Restatement 2d §175........................................................................................................13Restatement 2d §20..........................................................................................................20Restatement 2d §202........................................................................................................34Restatement 2d §204........................................................................................................32Restatement 2d §205..................................................................................................23, 38Restatement 2d §211(3)...................................................................................................27Restatement 2d §217........................................................................................................32Restatement 2d §227(1)...................................................................................................59Restatement 2d §230........................................................................................................37Restatement 2d §237........................................................................................................60Restatement 2d §24..........................................................................................................18Restatement 2d §26 comment (c)....................................................................................19Restatement 2d §30(1).....................................................................................................20Restatement 2d §356........................................................................................................55

Restatement 2d §36..........................................................................................................19Restatement 2d §360........................................................................................................53Restatement 2d §42..........................................................................................................21Restatement 2d §45..........................................................................................................21Restatement 2d §45(1).....................................................................................................21Restatement 2d §45(2).....................................................................................................21Restatement 2d §59..........................................................................................................19

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I.A R OADMAP FOR CONTRACT LAW

1.Lucy v. Zehmer, 196 Va. 493 (1954)

a)Facts: allegedly enters a contract with for the sale of land.Π Δ Π says they were serious, but says he was clearly only jokingΔ around. wants specific performance.Π

b)Issue: Was there a contract, and is it enforceable?

c)Held: The contract was in good faith and specific performance wasawarded. The private intentions of are irrelevant, only theΔ manifested acts.

2.Delchi Carrier SpA. v. Rotorex Corp., 71 F.3d 1024 (1995)

a)Facts: , an Italian company contracted for goods from w/ a letterΠ Δ of credit. The goods upon arrival were not to spec and wasn’t ableΠ to use the goods. covered with extra expΠ ense.

b)Issue: Under the CISG is able to recover damages forΠ nonconforming goods?

c)Result: was entitled to lost profits, foreseeable consequentialΠ damages. was not entitled to damages for modificationsΠ necessary for cover.



Table 1 Topics, Rules, and Keywords

Issue Case Rule Key Terms

Bargain Hamer v. Sidway Forbearance from a legal rightUnconscionability Williams v. Walker-

Thomas2-302

Mutuality Wood v LucyLaclede Gas vAmoco

2-306 Illusory No free way outOutput K Requirement K Implied good faith effortAt will employment

ExpectationDamages

Goods: Freund v.Washington Sq.PressServices: Peevyhouse

Buyer: 2-712- 2-716Seller: §703; §704;§706; §708; §709Buyer:Cost to completeDiminution in valueSeller: ukp-costavoided

MitigationForeseeability (Hadley v.Baxendale)

SpecificPerformance

Lucy v. Zehmer City Stores v.Ammerman

Injunction (money insufficient)Unique good- can’t be pricedLDC §356; 2-718Penalty

Reliance Reasonable time periodPut in position before K

Restitution Break even rationale

K Interpretation Lucy v Zehmer Frigaliment

§20§201§219,220,221,222,232

Express termsCourse of PerformanceCourse of DealingTrade Usage

Offer §24

Acceptance Ardente v HoranPavel Enterprises

§41, 39, 59, 37,302-207

Mail box ruleAuctionsBid chopping/shoppingCounteroffer Notice

SilencePast dealingsBenefit conferred

Parol Evidence Baker v. BaileyMasterson v. Sine

§209, 210, 213, 215,2162-2022-209

IntegrationMerger Clause

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Issue Case Rule Key Terms

Mistake Sherwood v Walker (barren cow)Lenawee v Messerly(septic tank)

§152, 154,2-313, 2-314, 2-315

WarrantyMutual MistakeAllocation of Risk

Unilateral Mistake Lanci v. Met Ins. Co. §153SubstantialPerformance

Jacob &Young v.Kent (wrong pipes)

2-601 (perfect tender);2-508 (cure); 2-608(revocation of acceptance); 2-612(installment K)

Implied promise to meetcondition- good faithSubjective and objective standard

ExpressConditions

Howard v. Fed. CropIns. (tobacco crop)

§227 (condition v. promise);

Implied promise to meet condition

Breach andResponse

K & G Constructionco. v. Harris(workmanlike

manner);

§241; §242 Material breachSubstantial performance

AnticipatoryBreach

Taylor v. Johnston §253; §236; 2-610; 2-611

Mitigation, cover

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

0000fb021000070000000000bc02000000000102022253797374656d0009da0900003f4600008c38110004ee8339c86820000c020000040000002d01000004000000020101001c000000fb02c4ff0000000000009001000000000440001254696d6573204e657720526f6d616e0000000000000000000000000000000000040000002d010100050000000902000000020d000000320a360000000100040000000000d8097e0920d31b00040000002d010000030000000000



II.THE BARGAIN THEORY OF CONTRACT

A.Consideration

1.Definitions

a)A Contract is “a promise or a set of promises for the breach of which the law givesa remedy, or the performance of which the law in some way recognizes as a duty.”Restatement 2d §1.

b)Consideration is the inducement of a contract, something of value given in returnfor a performance or a promise of performance by another, for the purpose of forminga contract. This is a required element in the formation of a contract.

c)Illusory Promise is a promise so indefinite that it cannot be enforced or which, by

virtue of provisions or conditions contained in the promise itself, is one whosefulfillment is optional on the part of the promisor. Not adequate for consideration.

2.Restatement

a)Restatement 2d §71(1) – to find consideration there must be a performance or return promise which has been bargained for by the parties.

b)Restatement §76 - Any consideration that is not a promise is sufficient to satisfy therequirement of §19 (c), except the following:

(1)(a) An act or forbearance required by a legal duty that is neither doubtful

nor the subject of honest and reasonable dispute if the duty is owed either tothe promisor or to the public, or, if imposed by the law of torts or crimes, isowed to any person;

(2)(b) The surrender of, or forbearance to assert an invalid claim or defense byone who has not an honest and reasonable belief in its possible validity;

(3)(c) The transfer of money or fungible goods as consideration for a promiseto transfer at the same time and place a larger amount of money or goods of the same kind and quality.

c)Restatement §79 – A promise or apparent promise which reserves by its terms to the promisor the privilege of alternative courses of conduct is insufficient consideration if

any of these courses of conduct would be insufficient consideration if it alone were bargained for.

(1)See Petroleum Refractionating Corp. v. Kendrick Oil Co., infra.

d)Restatement 2d §77 Comment (a) – Words of promise which by their terms make performance entirely optional with the promisor do not constitute a promise.

e)Restatement 2d §79 - If the requirement of consideration is met, there is noadditional requirement of

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(1)(a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or

(2)(b) equivalence in the values exchanged; or

(3)(c) "mutuality of obligation."

f)Restatement 2d §175 – a contract is voidable by the victim if that party’s“manifestation of assent is induced by improper threat by the other party that leavesthe victim no reasonable alternative.”

g)UCC §2-306 – Output, Requirements, and Exclusive Dealings

(1)A term that measures the quantity by output or requirements means actualoutput or requirements as may occur in good faith, cannot be disproportionateto a stated or implied estimate.

3.Refraining from a right is adequate consideration.

a)Hamer v. Sidway , 124 N.Y. 538 (1891)

(1)Facts: Uncle tells Nephew that if he refrains from certain vices until he is21, he will give him $5000. is the executor of Uncle’s estate;Π Δ is the assignee of Nephew.

(2)Held: Nephew’s refraining from certain vices is a forbearance that amountsto consideration necessary for contract enforceability. The court “will not ask whether the thing which forms the consideration does in fact benefit the promisee or a third party.”

b)Fiege v. Boehm , 210 Md. 352 (1956)

(1)Facts: and entered an agreement for which will payΠ Δ Δ

support for her illegitimate child in return for not trying himΠ for bastardy. later proves the child is not his and stopsΔ paying.

(2)Held: ’s promise not to sue for bastardyΠ even though impossible

was adequate consideration for his promise to pay support. There was noevidence of fraud. Giving up the right to take legal action is adequateconsideration.

(3)Uses Restatement §76(b). A current defense could have used Restatement2d 175.

c)Petroleum Refractionating Corp. v. Kendrick Oil Co., 65 F.2d 997 (1933)

(1)Facts: contracted to buy 1.5M G of oil from unlessΔ Π Π should stop making that grade of oil. states that the gradeΔ of oil is not correct and will not accept further deliveries. (Thisis during the depression when the price of oil is falling fast.) Π then sells the remaining contract for much less than originally contracted

and is suing for the difference.

(2)Issue: argues there was no consideration.Δ



(3)Held: A benefit to the promisor ( ) or a detriment to theΔ promisee ( ) is a sufficient consideration for a contract. UnderΠ Restatement 79, both need to be sufficient when promisor hasalternative courses of conduct. got oil, and gave up theΔ Π right to discontinue producing that grade of oil. Giving up a

right is adequate consideration.

4.Options Contracts

a)Firm Offers under UCC §2-205

(1)An offer by a merchant which by its terms gives assurance that it will beheld open is not revocable, for lack of consideration, during the stated time (or reasonable time if not stated, no more than 3 months). Must be signed.

b)Restatement 2d §87(a)

(1)An offer is binding as an option contract if it

(a)is in writing and signed by the offeror, recites a purported considerationfor the making of the offer, and proposes an exchange on fair terms withina reasonable time; or

(b)is made irrevocable by statute.

(2)An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree beforeacceptance and which does induce such action or forbearance is binding as anoption contract to the extent necessary to avoid injustice.

c)Board of Control of Eastern Michigan University v. Burgess , 45 Mich. App. 183(1973)

(1)Facts: entered a contract with for a nominal fee for theΠ Δ option to purchase ’s land. never actually tendered theΔ Π Δ money. When tried to execute the option, refused.Π Δ

(2)Issue: Is there consideration for the option?

(3)Held: a dollar is valid consideration for options for thepurchase of land. However, no consideration was received, sothere was no option, but simply an offer by to sell, which isΔ revocable.

5.Employment at Will a)Permanent Employment is terminable at the will of either party without liability tothe other.

b)Fisher v. Jackson , 142 Conn. 734 (1955)

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(1)Facts: told to give up his job and work for (for lessΔ Π Δ money) under an oral contract for life or until he wasphysically unable to work. complied and then wasΠ discharged. acts to recover damages. says theΠ Δ employment was not “for life”, but a permanent position as

was advertised.(2)Result: giving up a job is not adequate consideration, but an incidentnecessary to accept the offer.

(3)JJ suggests that the plaintiff’s lawyer could have made more of the fact thathe was giving up some salary. That could be consideration.

6.Moral Consideration and Past Consideration

a)Although not bargained for, there are two circumstances where a promise mightseem worthy of enforcement

(1)Promisor acts from a strong sense of duty (moral consideration)

(2)Promisor is seeking to recompense the promisee for a previously conferred benefit (past consideration)

b)Harrington v. Taylor , 225 N.C. 690 (1945)

(1)Facts: assaults his wife who hid in ’s house. The wifeΔ Π then tried to kill , and saved him, injuring herself in theΔ Π process. promises to pay damages, but fails to.Δ

(2)Held: A voluntary humanitarian act is not consideration;implies that should pay up anyways.Δ

B.Reliance

1.Definitions

a)Equitable Estoppel is strictly, an estoppel which arises out of a person’s statementof fact, or out of his silence, acts, or omissions, rather than from a deed or record or written contract. Equitable estoppel is available when one party knowinglymisrepresents material facts that are then predictably relied upon by the other. Themisrepresenting party is “estopped” from asserting facts that contradict itsmisrepresentations.

b)Promissory Estoppel – an equitable doctrine declaring that “a promise which the promisor should reasonably expect [will] induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise .Restatement 2d §90.



2.Holmes on Reliance

a)“It would cut up the doctrine of consideration by the roots, if a promisee couldmake a gratuitous promise binding by subsequently acting in reliance on it.”

b)Some have argued that this prophecy has come true.

3.Equitable Estoppel and the emergence of Promissory Estoppel

a)Promissory Estoppel requires all of:

(1)A Promise

(2)Foreseeable reliance

(3)Actual reliance

(4)Injustice absent enforcement

b)Possible Applications

(1)Promise to make a gift: The P.E. doctrine is most often applied to enforce promises to make gifts, where the promisee relies on the gift to his detriment.

(a)Intra-family promises: The doctrine may be applied where the promise ismade by one member of a family to another. (Example: Mother promises to pay for Son's college education, and Son quits his job. Probably the courtwill award just the damages Son suffers from losing the job, not the fullcost of a college education.)

(2)Charitable subscriptions: A written promise to make a charitablecontribution will generally be binding without consideration, under the P.E.doctrine. Here, the doctrine is watered down: usually the charity does not needto show detrimental reliance. (But oral promises to make charitable

contributions usually will not be enforceable unless the charity relies on the promise to its detriment.)

(3)Gratuitous bailments and agencies: If a person promises to take care of another's property (a "gratuitous bailment") or promises to carry out an act asanother person's agent (gratuitous agency), the promisor may be held liableunder P.E. if he does not perform at all. (However, courts are hesitant to applyP.E. to promises to procure insurance for another.)

c)Quasi-contract - One party has something they were not entitled to in the first place, and in good conscience he should either return it or pay its value (doctor charging for reviving a person who passes out on the floor). The law implies a

contract where no contract existed previously and dispenses relief according to thatimplied contract. The contract implied-in-law is a legal fiction imposed by the courtto remedy injustice.

d)Ricketts v. Scothorn , 57 Neb. 51 (1898)

(1)Facts: is the executor. Testator promised to pay $2000Δ Π on demand so she wouldn’t have to work.

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(2)Issue: There was no consideration, but relied on theΠ money and quit her job.

(3)Result: Because it would be grossly inequitable to permit Δ to resist payment, shΠ ould receive the payment.

(4)JJ notes that while the court tries to fit this case to

Equitable Estoppel, they actually created Promissory Estoppelbecause had misrepresented no facts.Δ

(5)Restatement §90 was borne in part from this case.

e)Cohen v. Cowles Media Company , 479 N.W.2d 387 (1992)

(1)Facts: gave facts pertinent to a story to when assuredΠ Δ that would not share ’s identity. then printed ’s nameΔ Π Δ Π in the paper, and was fired from his office.Π

(2)Held: Although there was no contract, promissory estoppelbarred from using ’s name, so damages are due.Δ Π

4.Promissory Estoppel in Franchise Negotiations

a)A party to unsuccessful negotiations may recover for losses reasonably andforeseeably sustained by him as a result of the other party’s negligence or lack of good faith during the bargaining process.

b)Alternate: recovery may be based on the duty to bargain in good faith.

c)Typical context is an unsuccessful contract negotiation involving franchises or government contracts. Both have a great inequality in bargaining power.

d)Midwest Energy, Inc. v. Orion Food Systems, Inc., 14 S.W.3d 154 (2000)

(1)Facts: was building a gas station/convenience store withΠ hopes to provide ’s product. required that certain mods beΔ Δ done to the design before they could provide their product. Π redesigned and constructed as required. then neverΔ Δ agreed to the deal. Trial court granted summary judgment for .Δ

(2)Result: While the contract was not enforceable, there was a promise,foreseeable reliance, reliance in fact, and injustice absent enforcement, so the judgment was overturned.

C.The Restitution Interest

1.Definition

a)Restitution Interest – The interest in getting back to the point the parties wouldhave been at had there been no contract created. If a person A gave $5 to another B increation of the contract, the restitution interest is the $5 that would have to be returnedfrom B to A.



2.Bailey v. West , 105 R.I. 61 (1969)

a)Facts: purchased a horse then discovered it was lame. took theΔ Δ horse to ’s farm. fed and housed the horse and sent a billΠ Π Δ which was not paid. is suing for restitution.Π

b)Issue: Was there a contract, and what is the damage for breach?

c)Held: no contract, and since there was no request for payment priorto caring for the horse, no restitution can be paid. ( volunteered forΠ the job.)

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III.NEGOTIATION AND THE CONTRACT

A.The Role of the Courts

1.Cardozo and Crane duke it out in Sun Printing.

a)Should the courts hold strict the content of the contract? (Cardozo)

b)Should the courts hold strict that parties should be bound by their contracts when parts are missing? (Crane)

2.Sun Printing & Publishing Co. v. Remington Pulp & Paper Co. , 235 N.Y. 338 (1923)

a)Facts: agreed to buy paper from for a period of months with theΠ Δ price for some months and the term of that price to be determinedin the future. The price would not be higher than the current pricelisted by a particular third party.

b)Held: was not bound becΔ ause the fallback on the price term in the absenceof agreement did not make up for the absence of a time limit. The contract was tooindefinite. (Cardozo)

c)Dissent (Strongly worded): The price was indeed definable. If on the deadline todetermine a new price, could offer the 3Π rd party price, and is bound.Δ The term issue could be resolved month-to-month and be within thecontract’s specs. (Crane)

B.Offer and Acceptance

1.Definitions

a)An Offer is a “manifestation of willingness to enter into a bargain, so as to justifyanother person in understanding that his assent to that bargain is invited an willconclude it,” Restatement 2d §24.

b)An Acceptance is consent to the terms of an offer, creating a contract.

c)A Promise is a declaration of one’s intention to do or to refrain from doing

something. It can bind the person making the declaration to the thing declared.

2.Offers

a)An offer creates, in the offeree, a legal power of acceptance.

b)Advertisements



(1)An advertisement constitutes an offer when it is clear, definite, explicit, andleaves nothing open for negotiation.

(2)Ford Motor Credit Co. v. Russell , 519 N.W.2d 460 (1994)

(a)Facts: sold a car with a higher APR than was advertised.Π Δ defaulted on the payments and sued for breach whenΔ Π

gave them the higher APR. This is ’s countersuit.Π

(b)Issue: Is an advertisement an offer?

(c)Held: An advertisement is not an offer. Because not everyonequalifies for financing, and did not have an unlimitedΠ number of the car in question to sell, it was unreasonable for

to believe that the advertisement was an offer binding theΔ advertiser.

c)Quotes

(1)Restatement 2d §26 comment (c): A “quotation” of a price is usually a

statement of price per unit of quantity; it may omit the quantity to be sold,time and place of delivery, and other terms… The word quote is commonlyunderstood as inviting an offer rather than making one, even when directedto a particular customer… In determining whether an offer is made, relevantfactors include the terms of previous inquiries, completeness of the terms of the suggested bargain, and the number of people to whom the communicationis addressed.

3.Counteroffers and Mirror Image Rule

a)A counteroffer destroys the original offer and replaces it for the original offeror to

accept if he chooses.

b)Restatement 2d §36 lists five possibilities under which an offer is terminated

(1)The offeree rejects the offer or makes a counteroffer

(2)At the time specified in the contract, or, failing that, at the end of areasonable time

(3)If the offeror revokes the offer

(4)If the offeror dies or becomes incapacitated

(5)If the terms of the offer include a condition for acceptance that has not yetoccurred.

c)Mirror Image Rules

(1)Restatement 2d §59 states: “A reply to an offer which purports to accept it but is conditional on the offeror’s assent to terms additional to or differentfromthose offered is not an acceptance but is a counteroffer.”

(2)Restatement 2d §61 states an “acceptance request[ing] a change or additionto the terms of the offer” is not invalid “unless the acceptance is made todepend on an assent” to the new terms.

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(3)Both the UCC and the CISG are more liberal.

d)Davis v. Satrom , 383 N.W.2d 831 (1986)

(1)Facts: and were negotiating the sale of a mobile homeΠ Δ park. sent an offer to who made mods and returned it toΠ Δ

. and went back and forth again, and ’s final letterΠ Π Δ Δ

included a clause accepting the offer conditioned on hisattorney’s recommendation. sends a check to beginΠ performance, but returns the check. wants specificΔ Π performance.

(2)Result: ’s mods resulted in a counteroffer, not anΔ acceptance. ’s final response to ’s final responseΠ Δ constituted the only acceptance, and those became the termsof the contract, including the attorney provision which was enforceable.Specific performance denied.

4.Meeting of the Minds

a)When any of the terms used to express an agreement is ambivalent, and the partiesunderstand it in different ways, there cannot be a contract unless one of them should

have been aware of the other’s understanding. Restatement §71(a)

b)Restatement 2d §20 states

(1)there is no manifestation of mutual assent to an exchange if the partiesattach materially different meanings to their manifestations and

(a)neither party knows or has reason to know the meaning attached by theother

(b)each party knows or each party has reason to know the meaning attached by the other

c)Oswald v. Allen , 417 F.2d 43 (1969)

(1)Facts: tried to buy some of ’s coins. thought he wasΠ Δ Π buying all the Swiss coins in her collection. thought she wasΔ selling the collection she calls Swiss Coin Collection, but notthe Swiss coins that are parts of other collections. andΠ Δ entered a contract, but reneged when it was discoveredΔ that tried to collect more coins than she was selling.Π Π

wants specific performance.(2)Held: There was no meeting of the minds, and thus no contract.

5.Contracts Concluded by Exchange of letters

a)The Offeror is the Master of the Offer.



b)An offer may invite or require acceptance to be made by affirmative answer inwords, or by performing or refraining from performing a specified act, or mayempower the offeree to make a selection of terms in his acceptance. Restatement 2d§30(1).

c)Revisit counteroffers and the mirror image rule, supra.

d)Mailbox rule: the offer is effective upon proper dispatch.

(1)An acceptance made in a manner and by a medium invited by an offer isoperative and completes the manifestation of mutual assent as soon as put outof the offeree’s possession, without regard to wheter it ever reaches theofferor… Restatement 2d §63(a).

e)Ardente v. Horan , 117 R.I. 254 (1976)

(1)Facts: bid on ’s house for sale. After stated the offerΠ Δ Δ was acceptable, prepared a sale agreement and sent it toΠ Δ along with a check. also sent a letter asking if certainΠ

furnishings were included. then refused to sell, returning theΔ check. wants spΠ ecific performance

(2)Issue: was the letter a counteroffer, or an acceptance?

(3)Held: ’s “letter of acceptance” was conditional, andΠ therefore a counteroffer rejecting Δ’s offer. No contractual obligationwas created.

6.Revocability of Offers

a)Restatement 2d §42 says an offeree’s power of acceptance is terminated when theofferee receives form the offeror a manifestation of an intention not to enter into the proposed contract.

b)Look out for Firm Offer issues in UCC §2-205 however.

c)Hamilton Bancshares, Inc. v. Leroy , 131 Ill. App. 3d 907 (1985)

(1)Facts: and entered into two option contracts for stock forΠ Δ $1. While the $1 was never received, paid “earnest money”Π as a deposit towards purchasing the shares. claimed toΔ withdraw the options, but moved to exercise them. wantsΠ Π specific performance for two stock options.

(2)Issue: since $1 wasn’t received, was this an offer (revocable) or a contract?

(3)Held: The earnest money put as a deposit was considerationsupporting the contract because it was detrimental to to doΠ so. gave up the right to use thatΠ money elsewhere.

7.Contracts Accepted by the Offeree’s Performance

a)Restatement 2d §45 and Restatement 2d §62 handle this situation.

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(1)Where an offer invites an offeree to accept by rendering a performance anddoes not invite a promissory acceptance, an option contract is created whenthe offeree tenders or begins the invited performance or tenders a beginning of it. Restatement 2d §45(1).

(2)The offeror’s duty of performance under any option contract so created is

conditional on completion or tender of the invited performance in accordancewith the terms of the offer. Restatement 2d §45(2).

(3)The consequence of this is that the offeror is bound to the offer while theofferee is not.

b)Offers Ambiguous as to Manner of Acceptance

(1)An offer to make a contract shall be construed to invite acceptance in anyreasonable manner. UCC §2-206(1)(a).

(2)An offer to buy goods if ambiguous can be accepted “either by a prompt promise to ship or by the prompt or current shipment of goods. UCC §2-206(1)(b).

(3)Where the beginning of a requested performance is a reasonable mode of acceptance, an offeror who is not notified of acceptance within a reasonabletime may treat the offer as having lapsed before acceptance. UCC §2-206(2).

(4)When an offer is ambiguous as to whether a promise or a performanceconstitutes acceptance, not only does the beginning or tender of performance

c)Pavel Enterprises, Inc. v. A.S. Johnson Co., Inc., 342 Md. 143 (1996)

(1)Facts: C solicited subcontractor bids to enter its own bid for a contract. Sgave them a bid which C relied on in the creation of its bid. C initially lost the bid, but was awarded it when the winner couldn’t perform. S then notified Cthat its bid was erroneous and too low and did not feel compelled to correctthe error because C had not won the contract when the error was discovered. Csued to cover damages between the contract price and the price of a substitutesubcontractor.

(2)Issue: Is S’s bid revocable?

(3)Result: Neither traditional K theory nor detrimental reliance theory upheldC’s request for damages.

(4)Many states adopted Traynor’s view that a sub’s bid is irrevocable under R2d §90 (Promissory Estoppel) although the rule was criticized for its lack of symmetry, allowing the general contractor to bid shop.

(5)CISG Art. 16(2)(b) holds an offer irrevocable if “it was reasonable for the

offeree to rely on the offer as being irrevocable and the offeree has acted inreliance on the offer.” (No time limit!)



C.Negotiation and Closure

1.Situation Management Systems, Inc. v. Malouf, Inc. , 430 Mass. 875 (2000)

a)Facts: Π and had longstanding business agreements for toΔ Δ

purchase services from . ’s business became less profitable andΠ Π agreed with that should purchase a ’s competitor for sale. InΠ Δ Δ Π order for to make the purchase, they requested a longer term forΔ the renewal on and ’s longstanding contract. assured of theΠ Δ Π Δ commitment and bought the competitor. then added terms toΔ Π the renewal contract that had not been present in previous dealings.When did not abide by the new terms, sued for breach.Δ Π

b)Held: and ’s minds had met because of the longstandingΔ Π contract. The contract was enforceable when offered assurancesΠ (without the new terms).

2.Agreements to Agree

a)Arnold Palmer Golf Co. v. Fuqua Industries, Inc., 541 F.2d 584 (1976)

(1)Facts: solicited to merge. and negotiated andΠ Δ Π Δ drafted a memorandum to be distributed by the press statingin part that counsel for and will proceed to make aΠ Δ definitive agreement containing details, and conditionsobligation on completing such a definitive agreement. thenΔ declined to go forward with the deal. complains of breach of Π contract.

(2)Issue: Is it a breach when there is simply an “agreement to agree?”(3)Result: The agreement to agree is upheld, obligating the two parties tomake the detailed agreement. (Remanded for trial to see if the intentions wereto be bound.)

3.Open Terms

a)Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonablycertain basis for giving an appropriate remedy. UCC §2-204(3)

b)A contract can be valid even though the price term is left open, or is sbject todetermination by one party or by a third party. UCC §2-305.

c)City of Kenai v. Ferguson , 732 P.2d 184 (1987)

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(1)Facts: leased a plot of land from the city, for a term of Δ Π 55 years where the rent was set by an escalation clause. Theclause allowed for renegotiation every 5 years. For 10 years,the rent remained constant, and then the city demanded a500+% increase (the highest use value) without negotiation.

When didn’t pay, sued for breach.Δ Π(2)Held: Good faith is implied in every contract with openterms, and did not act in good faith. had the duty toΠ Π negotiate, and the highest use value was inappropriate.

D.Good Faith in Contract Formation

1.Definition

a)Good Faith is a total absence of any intention to seek an unfair advantage or todefraud another party; an honest and sincere intention to fulfill one’s obligations.

b)Good faith in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. (UCC §2-103(b))

c)Also called BFP: Bona Fide Purchaser

d)Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement. UCC §1-203, Restatement 2d §205.

2.Negotiating a new contract

a)There is no requirement in America that parties negotiating must come to a contract.

As seen below in Racine & Laramie , this is true too of contractextensions/expansions.

b)The implied covenant of good faith and fair dealing rests upon the existence of some specific contractual obligation.

c)Some Civil Law jurisdictions take a different approach in that damages may beawarded to an injured party from negotiations in bad faith. This is the doctrine of culpa in contrahendo.

d)Racine & Laramie, Ltd., Inc. v. Dep. Of Parks & Recreation , 11 Cal. App. 4th 1026(1992)

(1)Facts: entered a long term K with for leasing an area of aΠ Δ park for concessions. Midway through the lease, wanted toΠ negotiate an addition to the contract to allow them to expandthe operation.

(2)Held: There can be no breach of the covenant of good faith by a refusal toenter into a new contract.



3.New England Insulation Co. v. General Dynamics Corp. , 26 Mass. App. Ct. 28 (1988)

a)Facts: was invited by to bid on a contract. designed aΠ Δ Π solution to fit the needs that included confidential engineeringideas. then made ’s bid available to a 3Δ Π rd company that gotΔ kickbacks from.

b)Result: remanded for trial reversing the dismissal. The court held that theimplied contract to perform in good faith meant that did not haveΔ the right to give the contents of the bid to third parties, and thatthey had the obligation to judge the bids fairly.

E.Problems with Standard Form Contracts

1.UCC §2-207 – Battle of the Forms

a)§2-207 takes a much different position than the common law precedents do. Incommon law, any response that didn’t look exactly like the offer was not anacceptance, but a counter offer. This doesn’t work well with the nature of current businesses using standardized forms. §2-207 comes in to help this.

b)This section’s goal is to deal with written confirmations of either oral or informalcorrespondence or the exchange of a purchase order andacceptance/acknowledgement form where the second form may offer slightdifferences.

c)Additional Terms in Acceptance or Confirmation

(1)A definite and seasonable expression of acceptance or a written

confirmation which is sent within a reasonable time operates as an acceptanceeven though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to theadditional or different terms.

(2)The additional terms are to be construed as proposals for addition to thecontract. Between merchants such terms become part of the contract unless:

(a)the offer expressly limits acceptance to the terms of the offer;

(b)they materially alter it; or

(c)notification of objection to them has already been given or is given

within a reasonable time after notice of them is received.

(3)Conduct by both parties which recognizes the existence of a contract issufficient to establish a contract for sale although the writings of the parties donot otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree,together with any supplementary terms incorporated under any other provisions of this Act.

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d)There seems to be general agreement that §2-207 has not been a success.

e)Important pieces:

(1)Definite acceptance, or written confirmation

(2)Does not expressly limit acceptance to the terms proposed (no conditional

acceptance)(3)Does not materially alter the offer

(4)Objection not received in a reasonable time

(5)Conduct by both parties suggests a contract was intended

(6)No unwillingness to proceed absent the terms

f)Prototypical case: Gardner Zemke Co. v. Dunham Bush, Inc., 115 N.M. 260 (1993)

(1)Facts: entered a K with to provide chillers for ’sΠ Δ Π DOEnergy contract. provided an offer on standard form, andΠ

responded with another standard form. ’s chillers were notΔ Δ

to spec, sues for damages, but claims that their version of Π Δ the K is controlling.

(2)Issue: in using two different forms, was ’sΔ acknowledgement of the K a counteroffer or an acceptance?

(3)Result: Remanded to address questions that

(a) could reasonably believe that a K had been formedΠ

(b)When the offeree’s acceptance lists a term in conflict with the offer,neither is part of the contract, and general rules of fairness prevail.

2.Seven scenarios for UCC §2-207 a)The Acceptance is expressly made conditional on the offeror’s assent to the termsadditional or different

(1)Any expression of acceptance or written confirmation acts as anacceptance. (General Rule)

(2)The acceptance does not form a contract if it is “expressly madeconditional on assent to the additional or different terms.”

(3)Courts will general only accept the exception if it is shown that theAcceptor is unwilling to proceed absent the changes.

b)Acceptance discusses an issue on which the offer is silent (additional term)

(1)The additional term does not prevent the offeree’s response from givingrise to a contract.

(2)If both parties are merchants, the change automatically becomes part of theK unless the offeror rejects in a reasonable time.

(3)If one party is not a merchant, the offeror has to explicitly assent to thechange for the term to be part of the K.



c)Offer discusses an issue on which the acceptance is silent

d)Acceptance and Offer deal with a particular issue in conflicting (different) ways

(1)Majority view: KNOCKOUT RULE – conflicting clauses knock eachother out. Neither gets into the K. A UCC gap-filler is used in its place if

available. Criticism: the knockout theory strips the offeror of writing the termsto which he will do business.

(2)Minority view – second form’s term fails to have any effect.

e)Acceptance recites terms that diverge so much from those contained in the offer

(1)No contract is formed

(2)In the usual purchase order-acknowledgement context the forms do not failto give rise to a contract if they do not diverge as to price, quality, quantity, or delivery terms, but only as to the usually unbargained terms on the reverseside concerning remedies, arbitration and the like.

f)Oral agreement, then one or both sends a confirmation which adds to or conflictswith the oral agreement

(1)Additional terms in confirmation are treated just the same as if the offer was written.

(2)Different terms – the court will almost certainly say that the different termin the confirmation does not enter the contract. The Knockout rule will not beapplied.

g)The parties don’t use forms, but exchange custom-drafted documents that differ.

(1)No contract is formed

3.Confirmation of Oral Contracts via Forms

a)Step-Saver Data Systems v. Wyse Technology , 939 F.2d 91 (1991)

(1)Facts: entered a K with by calling on the phone toΠ Δ Δ order goods. would then ship them the goods with aΔ warrantee disclaimer applied on the packaging, containing anintegration clause. When ’s product failed, sued forΔ Π breach.

(2)Issue: Do the additional terms on the received goods override the terms of the oral agreement on the phone? Do they materially alter the parties’contract?

(3)Result: Because K was sufficiently definite without the addedΔ terms, and never assented to the terms, and there was noΠ conditional acceptance because the terms did not specify ’sΔ unwillingness to proceed, K without the added terms iscontrolling. Warranty terms materially altered the contract, sowere not controlling.

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4.Carnival Cruise Lines v. Shute , 499 U.S. 585 (1991)

a)Facts: bought a ticket on ’s cruise line. When the ticket arrived,Δ Π it contained many terms and conditions on the reverse side,including the forum clause. was injured on board, and is trying toΔ sue in the court near their residence. wants to enforce its forumΠ selection clause to get the case to be tried in ’s home district.Π

b)Issue: Is the forum clause controlling?

c)Result: Because had notice of the clause, and because had noΔ Π bad faith motive for including the clause, and because the court feltthe clause did not limit in any way (JJW disagrees), the clause isΔ controlling.

d)I think JJW put this case in the book to show a bad decision. He quotes thelower court ruling that even if had notice of the clause, clearlyΔ Δ had not bargained for the term.

5.Rolling Contracts

a)A Rolling Contract is one where a consumer orders and pays for goods beforeseeing most of the terms, which are contained on or in the packaging of goods.

b)Hill v. Gateway 2000 , 105 F.3d 1147 (1997)

(1)Facts: orders and purchases a computer from by phone.Π Δ Upon its arrival, the computer has a list of terms limitingliability that the customer must assent to or return thecomputer. When the computer doesn’t work, complains of Π breach of warranty, and notes the arbitration clause. (Δ Π does not want to arbitrate.)

(2)Issue: Since the terms were not read prior to purchase, are the termscontrolling?

(3)Result: By keeping the computer for more than 30 days, Π accepted the additional terms, and must go througharbitration.

(4)This is a policy ruling and is very flawed. It uses ProCD as precedent(written by the same judge) and will not distinguish its facts from the instantcase. Murray observes: “The [7th Circuit] has provided particularly valuable

insights in the interpretation of various provisions of UCC Article 2, many of which are cited elsewhere in this volume. The most charitable statement thatcan be made concerning the ProCD/Hill analysis, however, is that, evenHomer nods.” (Ouch.)

6. Reasonable Expectations

a)Largely confined to insurance cases.



b)Where the other party has reason to believe that the party manifesting such assentwould not do so if he knew that the writing contained a particular term, the term is not part of the agreement. Restatement 2d §211(3).

c)C & J Fertilizer, Inc. v. Allied Mutual Insurance Co., 227 N.W.2d 169 (1975)

(1)Facts: ’s business was burglarized and tries to recoverΠ Π their loss from , their insurer. and intended to excludeΔ Π Δ liability for inside jobs. The door was found to not be lockedafter the burglary. In small type, burglary was defined such thatthis loss was not covered.

(2)Held: That had reasonable expectation to believe this wasΠ covered when he purchased the policy. Also, it wasunconscionable that the fine print would overrule thereasonable meaning of the dickered terms.

(3)Dissent: didn’t read the contract, and thus shouldn’t beΠ Δ liable for ’s lack of understanding.Π

F.The Statute of Frauds

1.Definition:

a)This statute requires that certain contracts must be in writing to be enforceable.Restatement 2d §110. These include in common law:

(1)Contracts to answer to a creditor for the debt of another

(2)Contracts made in consideration of marriage

(3)Contracts for the sale of land or affecting any interest in land (except short

term leases)

(4)Contracts not to be performed within one year from their making

b)The UCC handles the Statute slightly differently.

c)The CISG has no statute of frauds. Article 11: A contract of sale need not beconcluded in or evidenced by writing and is not subject to any other requirement as toform. It may be proved by any means, including witnesses.

2.UCC §2-201

a)Codifies the common law Statute, but adds that a contract for the sale of goods for the price of over $500 is not enforceable unless in writing and signed by the partyagainst whom the enforcement is sought. (The new version set the limit at $5000.)

b)§2-201(1) adds that a writing is not insufficient because it omits or incorrectly statesa term agreed upon but the quantity of goods transferred cannot be enforced beyondwhat is actually written in the contract.

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c)§2-201(2) adds that between merchants, a confirmation in writing received in areasonable amount of time when the party receiving it has reason to know its contentswill satisfy the statute unless notice of objection is remitted within 10 days.

(1)Illustration: Two parties, S and B, agree over the telephone the purchaseof goods. S sends B a memo confirming the order. That memo is good against

S for breach. That memo is also good against B if he is a merchant . Thereason is that it would be unfair to S that he be bound to his word, but not B. Bwould be able to play the market otherwise with impunity.

d)§2-201(3) adds exceptions where the contract is enforceable even if it violates §2-201(1)

(1)if the goods are specially manufactured for the buyer that aren’t suitable for another buyer

(2)if the party against whom enforcement is sought admits that a contract for sale was made (limited to the actual quantity in the writing)

(3)if the payment has been made and accepted or received and accepted.(UCC §2-606)

3.The One Year Limit Rule

a)The Restatement and UCC both declare that a contract must be in writing if it is notto be performed within one year from its making. The case below adds that the performance must be COMPLETED in a year, and that if there’s any chance that itwon’t be completed in a year, it is bound by the Statute.

b)C.R. Klewin, Inc. v Flagship Properties, Inc., 220 Conn. 569 (1991)

(1)Facts: subcontracted for to build at a site. TheΠ Δ

agreement was over dinner and unwritten. The agreementwas publicized and videotaped. Also, and ceremoniouslyΠ Δ signed a standard form without filling in any blanks.Construction began a year later. became dissatisfied withΔ

’s work and replaced , breaking the contract.Π Π

(2)Held: that “an oral contract that does not say, in express terms that performance is to have a specific duration beyond one year is, as a matter of law, the functional equivalent of a contract of indefinite duration for the purposes of the statute of frauds.”

4.Multiple Writings to Comply with the Statutea)A writing must be sufficient to indicate that a contract for sale has been made between the parties.

b)The writing must be signed by the party against whom enforcement is sought

c)The writing must specify a quantity.



d)The writing must “state with reasonable certainty the essential terms of theunperformed promises in the contract.” Restatement 2d §131.

e)Migerobe, Inc. v. Certina USA, Inc., 924 F.2d 1330 (1991)

(1)Facts: contracted to buy watches from for an after-Π Δ

Thanksgiving sale. later backed out, and sued for breachΔ Π of the oral contract and won. On appeal, argues that theΔ Statute was violated.

(2)Result: Court found that the integration of three documents, includingtwo signed by were adequate to prove a contract had beenΔ formed and the Statute was not violated.

5.Exceptions to the Written Requirement

a)If a party admits that an oral contract for sale was made by way of his pleadings,testimony, or otherwise in court, then he can no longer assert a Statute of Frauds

defense.

b)If both parties are “merchants,” one party may send written confirmation of an oralcontract to the other which, if received within a “reasonable time,” provides that thereceiving party has 10 days to object in writing. Should the receiving partysubsequently fail to object as required, he too can no longer assert a Statute of Fraudsdefense.

c)ConAgra, Inc. v. Nierenberg , 301 Mont. 55 (2000)

(1)Facts: agreed by phone to sell grain at a certain price toΔ Π be delivered at a certain time. drafted a K to whichΠ Δ promised to sign, but never signed the contract. Oral K’sΔ make up the vast majority of ’s K’s. When sold the grain toΠ Δ another buyer (at a much higher price), had to cover, andΠ sued for damages.

(2)Result: Because ’s confirmation was received in aΠ reasonable time, and did not object, the Statute defense isΔ not available.

6.Promissory Estoppel does not Trump the Statute of Frauds.

a)A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce theaction or forbearance is enforceable notwithstanding the Statute of Frauds if injusticecan be avoided only by enforcement of the promise. The remedy granted for breach isto be limited as justice requires. Restatement 2d §139. This means that the Statute of Frauds is a higher authority than Promissory Estoppel. Courts are generally reluctantto add ways to circumvent the Statute of Frauds.

b)Lige Dickson Co. v. Union Oil Co. of California , 96 Wash.2d 291 (1981)

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(1)Facts: had a longstanding relationship with to provide oilΠ Δ based products. encouraged and assisted ’s entering theΔ Π asphalt business and purchased all its asphalt from . WhenΠ Δ prices for asphalt went up during the oil crisis, promisedΔ that they would only raise prices on new K’s with . thenΠ Δ

raised prices anyway for existing K’s.(2)Result: Since the promise was not in writing, and the courtwill not allow promissory estoppel to trump the Statute, thecourt ruled for .Δ



IV.THE CONTENT OF A CONTRACT

A.The Parol Evidence Rule and Reformation

1.Definitions

a)The Parol Evidence Rule renders any evidence of a prior or contemporaneousunderstanding of the parties inadmissible if offered to contradict or modif the terms of a written agreement. It is best understood as a rule of substantive law concerning thelegal effect of the expression of an agreement in a final, fully integrated contract; itdeclares that when the terms of a contract have been embodied in a writing [called theintegration of the agreement] to which both parties have assented as the finalexpression of their agreement, parol evidence of contemporaneous or prior oralagreement is not admissible for the purpose of varying or contradicting the written

contract.

b)Reformation is an equitable remedy consisting of a “rewriting” of a contract or other document in cases where the written terms of the contract do not express whatwas actually agreed upon.

c)Integration is the process by which the parties to an agreement adopt a writing or writings as the full and final expression of their agreement. Also called merger.

2.UCC §2-202

a)Final Written Expression: Parol or Extrinsic Evidence

(1)Terms with respect to which the confirmatory memoranda of the partiesagree or which are otherwise set forth in a writing intended by the parties as afinal expression of their agreement with respect to such terms as are includedtherein may not be contradicted by evidence of any prior agreement or of acontemporaneous oral agreement but may be explained or supplemented

(a)By course of dealing or usage of trade or by course of performance (seeUCC §2-208) and

(b)By evidence of consistent additional terms unless the court finds thewriting to have been intended also as a complete and exclusive statement of the terms of the agreement.

b)Don’t be fooled! The Parol Evidence Rule does not keep out terms that are addedafter the agreement is written.

3.Integration

a)Restatement 2d §210 says

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(1)A Completely Integrated Agreement is adopted by the parties as a completeand exclusive statement of the terms of the agreement.

(2)A Partially Integrated Agreement is an integrated agreement other than acompletely integrated agreement

(3)Whether an agreement is completely or partially integrated is to be

determined by the court as a question preliminary to determination of questionof interpretation or to application of the parol evidence rule.

b)Williston’s view

(1)Merger clause – will conclusively establish that the document is a totalintegration, unless the doc is obviously incomplete.

(2)Rest of Writing – without a merger clause, if the doc is obviouslyincomplete, it is a partial integration, allowing consistent terms to besubmitted from oral evidence.

(3)Four Corners – reasonable person standard looking just at the document.Would a reasonable person have put the terms of the alleged oral agreement inthe document?

c)Corbin’s view

(1)The actual intention of the parties should be looked to in answering if it isa partial or total integration.

(2)Corbin places less importance on the actual writing and more on the intent.The Corbin view comes close to eviscerating the parol evidence rule.

4.Prototypical case: Baker v. Bailey, 240 Mont. 139 (1989)

a)Facts: The value of ’s land plummeted when enforced a rule inΠ Δ

their contract stating that if sold their land, had the right toΠ Δ disallow the subsequent buyer the use of ’s well. argues that theΔ Π original purpose of the clause was to keep undesirables from usingthe well, not to prevent ’s buyer from using the well.Π

b)Result: Parol evidence rule prevents extrinsic evidence of the ’sΠ reason for including the clause allowing them to deny the well usageto subsequent landowners. Ruled for .Δ

5.Parol Evidence is allowed in interpreting terms that are not clear

a)The fact that an essential term is omitted may indicate that the agreement is notintegrated or that there is partial rather than complete integration. Restatement 2d§204.

b)Where the parties to a written agreement agree orally that performance of theagreement is subject to the occurrence of a stated condition, the agreement is notintegrated with respect to the oral condition. Restatement 2d §217.



c)The term must not be contradictory to a term in the written document. A test in the§2-201 official comment is “if the additional terms are such that, if agreed upon, theywould certainly have been included in the document tin the view of the court, thenevidence of their alleged making must be kept from the trier of fact.”

d)Masterson v. Sine , 68 Cal. 2d 222 (1968)

(1)Facts: sells his interest in a TIC to a relative with the optionΠ to repurchase it later for the same price as given. then goesΠ into bankruptcy. ’s trustee sues his relative to enforce theΠ option.

(2)Result: Parol evidence was allowed to determine what was meant by theunclear terms in the written contract.

(3)IN CALIFORNIA, the parol evidence rule was greatly limited by thisruling.

e)Hunt Foods & Industries, Inc. v. Doliner , 26 A.D.2d 41 (1966)

(1)Facts: entered negotiations to purchase and agreed onΠ Δ all but a few points. When negotiations were recessed, andΠ

agreed to grant the option to purchase all of ’s stock toΔ Π Δ prevent from shopping for a higher bid. While not part of theΔ contract, assured that the option was only to be used inΠ Δ the event solicited another bid, but then executed theΔ Π option anyways.

(2)Held: Additional terms, while oral, were not contradictory,but explanatory. Therefore, the parol evidence was allowedand ’s summary jΠ udgment denied.

6.Reformation

a)In an action for reformation of a contract, “parol evidence is admissible to show the parties’ intent and a mutual mistake.” … The parol evidence rule is not applicable insuits for rescission or reformation of contracts. (Williston)

b)“Reformation of a written instrument will be decreed when the words that itcontains do not correctly express the meaning that the parties agreed upon, as thecourt finds to be convincingly proved.” (Corbin)

c)Thompson v. Estate of Coffield , 894 P.2d 1065 (1995)

(1)Facts: sold his land to retaining royalties for coal foundΔ Π under current “valid, recorded leases.” However, none of thecurrent leases had been recorded. urges that reformation of Δ the deed is required because the deed did not conform to thenegotiations, intent, and knowledge of the parties.

(2)Result: the case was remanded to determine what the true intent of the parties was. Parol evidence will be allowed.

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d)See also Mistake, 48

7.In sum

Is there an integrated agreement?

NO Then Jury can hear the evidenceYES

Does the oral term directly contradict the written agreement?

YES Then Jury can NOT hear the evidence NO

Would the oral term naturally be omitted from (or is it in reasonableharmony with) the written agreement?

YES Then Jury can hear the evidence

NO Then Jury can NOT hear the evidence

B.Interpreting the Terms of the Contract

1.Definitions

a)Four Corners – the doctrine that requires that the meaning of a document bederived from its entire contents as they relate to one another, and not from itsindividual parts.

2.Restatements

a)The restatements offer a lot of insight in interpretation.

b)Restatement 2d §202 – Rules in Aid of Interpretation

(1)Words and other conduct are interpreted in the light of all thecircumstances, and if the principal purpose of the parties is ascertainable it isgiven great weight.

(2)A writing is interpreted as a whole, and all writings that are part of thesame transaction are interpreted together.

(3)Unless a different intention is manifested,

(a)Where language has a generally prevailing meaning, it is interpreted inaccordance with that meaning

(b)Technical terms and words of art are given their technical meaning whenused in a transaction within their technical field



(4)Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted to acquiescedin without objection is given great weight in the interpretation of theagreement.

(5)Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and withany relevant course of performance, course of dealing, or usage of trade.

c)Restatement 2d §203(a) – an interpretation which gives a reasonable, lawful, andeffective meaning to all the terms is preferred to an interpretation which leaves a partunreasonable, unlawful, or of no effect.

3.Principles of Construction – 5 principles

a)The entire contract should be read as a whole and every part is a piece of the whole

b)The contract itself must be read in light of the circumstances under which it wasmade.

c)Where a public interest is affected, an interpretation that favors the public is preferred

d)Specific provisions ordinarily will be regarded as qualifying the meaning of broadgeneral words in relation to a particular subject

e)Unless contrary to the plain meaning of the contract, an interpretation given by the parties themselves will be favored.

f)W.W.W. Associates, Inc. v. Giancontieri , 77 N.Y.2d 157 (1990)

(1)Facts: entered a contract to purchase land from . K calledΠ Δ for $25k up front, $225k upon closing, and $500k to bemortgaged. K contained a clause allowing either party tocancel if the litigation on was not settled by a certain date.Δ Standard merger clause present. dallied on the litigationΔ waiting for the cancellation date. sues for specificΠ performance.

(2)Issue: wants the court to interpret the cancellation clauseΠ as one way, in that it was intended to protect him from thebuyer’s continued litigation.

(3)Result: had exclusive rights in certain clauses immediatelyΠ surrounding the offending clause, implying that the twoparties knew what they were doing. They had done it before,so their omission here suggests they intended this clause tobe different. No specific performance. Restatement 2d §§202(5), 203(d),203(a)

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4.Parol Evidence

a)Parol Evidence is admissible to ascertain the true intent of the contractual partieseven where the writing seems clear and unambiguous.

b)Pacific Gas & Elec. v. G.W. Thomas Drayage & Rigging , 69 Cal. 2d 33 (1968)

(1)Facts: promised to purchase insurance “to indemnify [ ]Δ Π against all loss, damage, expense, and liability resulting from… injury to property, arising out of or in any way connectedwith the performance of this contract.” damages theΔ equipment, and sues for the insured damages. TC ruled forΠ

.Π

(2)Issue: How should the court interpret the indemnity clause? Specific to 3rd

parties’ damages, or inclusive of ’s?Π

(3)Held: Traynor: The exclusion of ’s equipment could beΠ justified only if it were feasible to determine the meaning the

parties gave to the words from the instrument alone. Looking only at the plainmeaning of contractual language ignored the possibility that the parties hadcontrary intentions.

(4)Criticism: Kozinski of the 9th C complained that even when thetransaction is sizeable and the parties are sophisticated, and the result isunambiguous, costly litigation cannot be avoided if one party has a strongenough motive to challenge the K.

5.Insurance Policies

a)Insurance companies will be held to higher standards in this case as well. Any

ambiguity in the policy will be construed to favor the insured. Contra Proferentem

b)Z.R.L. Corp. v. Great Cent. Ins. Co., 156 Ill. App. 3d 856 (1987)

(1)Facts: operates a club that is insured by . A racialΠ Δ discrimination suit is brought against by a 3Π rd party for“wrongful eviction” and seeks to force to pay for the suit.Π Δ

(2)Held: Where language in an insurance policy is subject to differentinterpretations, such ambiguity is to be construed to favor theinsured ( ) not the insurance company, which drafted theΠ policy.

6.Customs and Practices

a)Hierarchy of practices

(1)Express terms of the agreement

(2)Course of Performance – how a company had performed the contract so far can imply the meaning of how the contract was meant to be performed.



(3)Course of dealing – how a party has performed on similar contracts in the past can imply the meaning of how the contract was meant to be performed.

(4)Trade practice – local customs can imply terms in a contract.

b)The risks of waiving your performance on express terms of the contract are great. If you do it systematically, it becomes your course of dealing.

c)Nanakuli Paving & Rock Co. v. Shell Oil Co., Inc., 664 F.2d 772 (1981)

(1)Facts: had a longstanding K with for the sale of asphaltΠ Δ supplies. (1963-1974). twice raised prices, but gaveΔ aΠ warning and held the price constant for a few months.

(2)Issue: Can local customs imply terms in a contract?

(3)Held: Yes. There was overwhelming evidence that it was customary to practice price protection in the asphalt industry in Hawaii (Trade Practices).In past dealings, had price protected and given warningΔ when the price was to go up. (Course of Performance). Ruled

for .Π UCC §2-202(4)Note: now the question becomes how prevalent must a practice be before it becomes a trade practice?

7.CISG cases CAN include parol evidence

a)MCC_Marble Ceramic Ctr, Inc. v. Cermaic Nuova D’Agostino , 144 F.3d 1384(1998)

(1)Facts: entered oral negotiations and agreed with onΠ Δ price, quality, quantity, delivery, and payment in 10/90. K memorialized by ’s standard form. When did not satisfyΔ Δ

orders in 4/, 5/, and 8/91, sued for breach. responded thatΠ Δ it was under no obligation to satisfy the order because Π hadn’t paid for some previous shipments. responded thatΠ the shipments they had received were of lower quality thanrequested, and the CISG allows them to pay less for them. Δ responds that terms for dealing with lower quality receipts areon the back of the form, in Italian. responds that they hadΠ never intended those terms, just the oral terms.

(2)Result: CISG Article 8(1): courts must interpret the “statements … andother conduct of a party … according to his intent” as long as the other party

“knew or could not have been unaware” of that intent. Thus, CISG cases caninclude parol evidence.

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C.Implied Terms and the Implied Covenant of Good Faith

1.Definitions

a)Good Faith is a total absence of any intention to seek an unfair advantage or to

defraud another party; an honest and sincere intention to fulfill one’s obligations(1)In the case of a merchant, good faith refers to honesty in fact and theobservance of reasonable commercial standards of fair dealing in the trade.UCC §2-103(1)(b).

(2)More generally, the term means “honesty in fact in the conduct or transaction concerned.” UCC §1-201(19).

2.Missing Terms

a)When a term is missing, a reasonable term may be inserted by the court, i.e.reasonable time is implied when a temporal term is missing.

b)It is generally agreed that where a duration may be fairly and reasonably supplied by implication, a contract is not terminable at will. Restatement 2d §230.

c)A contract is not voided by conditions that arise outside the contemplation of the parties after execution.

d)Haines v. City of New York , 41 N.Y.2d 769 (1977)

(1)Facts: was a developer that wanted to add a sewer systemΠ outside NYC in a town that had contracted with NYC in 1923 that “allcosts of construction and subsequent operation maintenance and repair” shall be at the expense of NYC. The K also stated that it required NYC to extendthe sewer lines when necessitated by future growth and building up of thecommunities. The sewer system is now at capacity, and further additionswould be impossible without building a new plant.

(2)Issue: K did not say for how long the K would be in effect, or what to dowhen it becomes impossible to add sewer lines. NYC argues it can terminatethe K at will.

(3)Held: The contract’s missing time term should be added to be thereasonable time required to perform the contract. NYC is obligated tomaintain the existing plant, but not to expand it.

3.Open Price Term UCC §2-305

a)Parties can write a contract without the price term settled.

b)At the time of delivery the price is a reasonable price if

(1)nothing is said of price,

(2)the price is left to be determined but the parties fail to agree



(3)the price term is to be fixed to some 3rd party price index or marketstandard.

c)Good faith rules apply.

d)If the parties agree not to be bound without a price, there is no contract. Buyer must

return all goods received or pay the reasonable value if unreasonable to return them.Seller must return prepaid money.

4.Good Faith

a)Summers: the obligation of good faith performance is better understood simply asexcluding behavior inconsistent with common standards of decency, fairness, andreasonableness, and with the parties’ agreed-upon common purposes and justifiedexpectations.

b)Burton: Bad faith is the exercise of discretion for the purpose of recapturing

opportunities forgone or bargained away at the time of contracting, with the

identification of such forgone opportunities depending on objective analysis of the parties’ expectations as they may be inferred from the express contract terms in lightof the ordinary course of business.

c)Centronics Corp. v. Genitron Corp., 132 N.H. 133 (1989)

(1)Facts: agreed toΠ sell biz assets to . The purchase price wasΔ pegged at a value that arbitration was to determine. Anescrow account held money from DD pending the results of thearbitration.

(2)Issue: charged that was breaching the implied covenantΠ Δ

of good f aith when would not allow any money to beΔ

removed from the escrow before arbitration ended eventhough that money was going to be ’s after arbitration andΠ that was belaboring the arbitration.Δ

(3)Held: had not asked for any clause in the K to allow themΠ to pull any money out in the event of a long arbitration. had good faithΔ reasons to want to keep the money in escrow until the end of arbitration.

d)Four question test

(1)Does the agreement ostensibly allow to or confer upon aΔ

degree of discretion in performance tantamount to a power to deprivethe plaintiff of a substantial proportion of the agreement’s value?

(2)If the ostensible discretion is of that requisite scope, does competentevidence indicate that the parties intended by their agreement to make alegally enforceable contract?

(3)Assuming an intent to be bound, has ’s exercise of discretionΔ exceeded the limits of reasonableness?

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(4)Is the cause of the damage complained of ’s abuse of Δ discretion, or does it result from events beyond the control of either party, against which has no obligation to protect ?Δ Π

e)CISG contains no clause requiring good faith in the international sale of goods bymerchants but most European codes have clauses closely following Restatement 2d

§205 which implies the duty of good faith and fair dealing in every contract.

5.Output, Requirements, and Exclusive Dealings UCC §2-305

a)A term that measures the quantity by the output of the seller or the requirements of the buyer is still bound by a quantity of good faith, and no quantity unreasonablydisproportionate to any stated estimate or comparable prior output may be tendered or demanded.

b)A lawful agreement for exclusive dealings imposes an obligation on the seller to use best efforts to supply and on the buyer to use best efforts to promote the sale.

c)A shutdown by a requirements buyer for lack of orders might be permissible wherea shutdown merely to curtail losses would not. Comment 2.

d)Empire Gas Corp. v. American Bakeries Co., 840 F.2d 1333 (1988) RequirementsK

(1)Facts: entered K with to convert 3000 trucks from gasΔ Π powered to propane “as required by [ ]” and then buy all theΔ propane from for 8 years. , giving no reason decided not toΠ Δ convert its fleet. sues for lost profits on 2,242Π Δ conversions.

(2)Issue: What is unnecessarily disproportionate under UCC §2-305(1)?(3)Held: With proper jury instruction, no reasonable jury would have foundfor . If no reason at all need be given to reduce a buyer’sΔ requirements to zero, then a requirements contract is reducedto an option contract. There must be a good reason to changethe requirements to zero, and did not supply one.Δ

6.Employment and Good Faith

a)An at-will employee can still be terminated at any time without a good faith duty for the employer to give a reason.

b)Most jurisdictions recognize a narrow “public policy” exception that must involve a public duty.

c)Donahue v. Federal Express Corp., 753 A.2d 238 (2000)

(1)Facts: Π, a permanent employee, was a “whistleblower” atcompany which then terminated him. appealed hisΔ Π termination with the Guaranteed Fair Treatment Procedureprovided for in his K, which upheld the termination.



(2)Issue: argues that did not act in good faith in ’Π Δ Π s

termination and that P supplied sufficient additional consideration to beclassed differently than an at-will employee.

(3)Held: As a matter of law, an employee cannot maintain action for breachof implied duty of good faith and fair dealing insofar as underlying claim is

for termination of an at-will employment. Superior performance is not goodenough to be classed differently than an at-will employee because that is whatis expected.

D.Express and Implied Warranties

1.Definitions

a)Warranty – an assurance by one party to a contract of the existence of a fact uponwhich the other party may rely, intended precisely to relieve the promisee of any dutyto ascertain the fact for himself, and which amounts to a promise to indemnify the

promisee for any loss if the fact warranted proves untrue.

2.UCC §2-313 on the Creation of Express Warranties

a)Any affirmation of fact or promise made by S to B that becomes part of the basis of the bargain creates a warranty that the goods will conform to the affirmation or promise

b)Any description of the goods which is made part of the basis of the bargain createsa warranty that the goods will conform to the description.

c)Any sample or model which is made part of the basis of the bargain creates a

warranty that the goods will conform to the sample.

d)The use of the words “warrant” or “guarantee” are not necessary.

e)Opinions do not make a warranty, expressions of fact do.

f)Express warranties must be part of the basis of the bargain to take effect.

g)Carpenter v. Chrysler Corp., 853 S.W.2d 346 (1993)

(1)Facts: purchased two cars from dealer. requests aΠ Δ Π “reliable car” and dealer tells that the LeBaron is what heΠ wants. The car then has a series of failures and defects. Π

stops making payments on the car when cannot repair theΔ car’s defects. then reposΔ sessed the car.

(2)Held: Under UCC §2-313, a warranty was created because the dealer gavea (mis)representation of fact. When the car did not live up to therepresentations, the warranty was breached.

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(3)Note: look out for statute of frauds or parol evidence problems. This casehad no SoF problems because it was a written contract with an oralsupplement. No Parol Evidence problem because the written instrument wasnot a full integration.

(4)The dealer could have protected himself from salesmen’s slips by putting

an integration clause into the contract.

3.Implied warranties

a)UCC §2-314 on Implied Warranty of Merchantability and Usage of Trade

(1)Unless excluded or modified, a warranty that the goods shall bemerchantable is implied in a contract for their sale if the seller is a merchantwith respect to goods of that kind. See the statute for a description of whatmakes goods merchantable.

b)UCC §2-315 on Implied warranty on Fitness for purpose

(1)Where the seller at the time of contracting has reason to know any particular purpose for which the buyer is purchasing the goods and that the buyer is relying on the seller’s judgment, there is, unless modified, an impliedwarranty that the goods will fit that purpose.

c)Vlases v. Montgomery Ward & Co., 377 F.2d 846 (1967)

(1)Facts: purchased 2000 chicks from . The chicks wereΠ Δ then found to carry a disease that left them unsuitable foruse.

(2)Held: UCC §314 and UCC §315 hold. It doesn’t matter that Δ could not have known that the chicks were sick nor that Δ

took care in ensuring that the goods were quality. All that isimportant is that the goods were not. is in breach.Δ

4.UCC §2-316 Exclusion or Modification of Warranties

a)Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit the warranty shall be construed as consistentwhenever reasonable. §2-316(1)

b)To exclude or modify the implied warranty of merchantability or fitness mustmention merchantability or fitness and be conspicuous. §2-316(2)

c)See exclusions in text.

d)Singer Co. v. E.I. Du Pont De Nemours & Co., 579 F.2d 433 (1978)



(1)Facts: approached about purchasing theirΠ Δ electrodepositing system. then contracted to build theΠ Δ system. then experienced problems with the system thatΠ Δ was unable to fix, including altering the original consumables.

then removed ’s consumables and replaced them withΠ Δ

another company’s. then sues .Π Δ(2)Result: is awarded $$. Reliance interest was formed whenΠ

accepted the offer to provide a system.Δ Π §2-316(2) applies as

the implied warranty of fitness was cumulative to and not excluded by theexpress warranty. relied on ’s expertise in the area.Π Δ §2-315.The question of the parties’ intent was a proper issue to reach the jury.

e)Massey-Ferguson, Inc. v. Utley , 439 S.W.2d 57 (1969)

(1)Facts: ’s dealer sold a combine. put $675 down, andΠ Δ Δ financed the rest for $534.52 a year for the next 3 years. Δ defaulted on the first payment and brings suit to recoverΠ

the deferred payments. defends on breach of impliedΔ warranties of fitness in UCC §2-316.

(2)Result: Affirmed the ruling for because the language thatΔ limited the implied warranties was not conspicuous enough.

(3)Note: why is the manufacturer/financier losing? The court states that itsconduct put it in the status of a seller and that its status as a seller outweighedits status as an assignee, and therefore did not entitle them to the protection of an assignee against defenses that derived from its actions as a seller.

E.Modifications

1.Generally

a)Usually, modifications of contracts are contracts themselves requiringconsideration.

(1)Preexisting duty rule: an agreement modifying a contract is not supported by consideration if one of the parties to the agreement does or promises to dosomething that he is legally obligated to do.

(2)Courts are hesitant to apply this rule when unanticipated difficulties ariseand the other party, not influenced by coercion or duress, voluntarily agrees tothe amendments.

b)UCC §2-209(1).

(1)An agreement modifying a contract [for the sale of goods] needs noconsideration to be binding.

(2)A signed agreement which excludes modification or rescission except by asigned writing cannot otherwise be modified or rescinded, but except as between merchants, such a requirement on a form supplied by the merchantmust be separately signed by the other party.

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(3)The requirements of the statute of frauds must be satisfied if the contract asmodified is within its provisions

(4)Although an attempt at modification or rescission does not satisfy therequirements of (2) or (3) it can operate as a waiver.

(5)A party who has made a waiver affecting an an executory portion of the

contract may retract the waiver by reasonable notification received by theother party that strict performance will be required of any term waived, unlessthe retraction would be unjust in view of a material change of position inreliance on the waiver.

c)Angel v. Murray , 322 A.2d 630 (1974)

(1)Facts: entered a K with the city to collect garbage for aΔ fee. later asked the city to increase the fee paid to him toΔ cover an unexpected increase in garbage to be collected. Thecity obliged. , a citizen of the city, sues , a garbageΠ Δ collector company for repayment of fees paid to the latter by the city

claiming a lack of consideration.(2)Issue: is consideration necessary for modification?

(3)Result: The volume of garbage had risen unexpectedly and substantially.The modification to the contract was made during a time when the contracthad not been fully performed. Therefore, the decision to pay the additionalfees was fair and equitable.

2.Oral Modifications

a)Oral modifications of contracts within the Statute of Frauds are not enforceable.

b)Oral modifications that do not materially alter the underlying obligations may not be barred. Where one party relies on the other to reduce an oral agreement to writing,failure to do so will not prevent the relying party from taking the modification out of the statute of frauds.

c)An oral modification may be valid on estoppel or statutory grounds.

d)Brookside Farms v. Mama Rizzo’s, Inc , 873 F.Supp. 1029 (1995)

(1)Facts: entered K with to sell basil as required.Π Δ Δ Δ agreed to buy a minimum over a year. and agreed to aΠ Δ series of modifications over the months as ’s needs andΔ financial situation changed. then bounced a payment check.Δ

brings suit because did not purchase the minimumΠ Δ amount over the year. counters that raised the prices inΔ Π violation of the K’s express language that no modificationswould be made unless in written form.

(2)Held: While the K’s no waiver clause prevents oral modification, otherlegal theories (noted in (b) and (c)) allow for themodifications. breached, so is awarded damages.Δ Π



V.LEGAL R EGULATION OF CONTRACTS

A.Mistake of Fact

1.Generally

a)A mistake is a belief that is not in accord with the facts. Restatement 2d §151.

b)Mutual Mistake – Where a mistake of both parties at the time a contract was madeas to a basic assumption on which the contract was made has a material effect onthe agreed exchange of performances, the contract is voidable by the adverselyaffected party unless he bears the risk of the mistake under the rule stated in §154.Restatement 2d §152.

(1)Look out for limited information! If the parties recognize their limited

information and proceed anyway, K will be enforced.c)Unilateral Mistake – Where a mistake of one party at the time a contract was madeas to a basic assumption on which he made the contract has a material effect on theagreed exchange of performances that is adverse to him, the contract is voidable byhim if he does not bear the risk of the mistake under the rule stated in §154 and

(1)The effect of the mistake is such that enforcement of the K would beunconscionable, or

(2)The other party had reason to know of the mistake or his fault caused the

mistake.

Restatement 2d §153.

d)A party bears the risk of a mistake when

(1)The risk is allocated to him by agreement of the parties, or

(2)He is aware, at the time the contract is made, that he has only limitedknowledge with respect to the facts to which the mistake relates but treats hislimited knowledge as sufficient, or

(3)The risk is allocated to him by the court on the ground that it is reasonablein the circumstances to do so.

Restatement 2d §154.

2.Reformation – a)A court may reform the contract if parties orally agree to a deal and then mistakenlydraft a document that incorrectly reflects the terms of the deal.

b)A party’s negligence does not prevent him from obtaining relief, even if he didn’tread the contract.

c)Parol Evidence may be allowed.

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d)For more, refer back to the remedy of Reformation, 36

3.Lenawee Ct. Bd. Of Health v. Messerly , 331 N.W.2d 203 (1982)

a)Facts: sold land to on which a 3 unit apartment stood. After theΔ Π

sale, the county condemned the property as it had a defectivesewer system. sued to rescind the sale on the basis of mutualΔ mistake. Both parties were blameless as neither new of the sewerdefect. The sales K contained an “as is” provision allocating risk to the buyer.

b)Held: The parties had a mutual mistake of fact, but this case does not warrantrescission. Rescission is not available to relieve a party who has assumed the risk of loss in connection with the mistake.

c)In the cited Barren Cow case, Sherwood v. Walker, 66 Mich. 568 (1887), the partiesagreed to the sale and purchase of a cow which was thought to be barren, but which

was, in reality, with calf, showing it to have a much greater value. The court permittedthe rescission as the state of the cow was the substance of the agreement. “The thingsold and bought had in fact no existence.” Sherwood is distinguished from Messerly because the very thing being sold was different in Sherwood, as opposed to the value

of the thing being sold being different in Messerly.

4.Lanci v. Metropolitan Ins. Co., 388 Pa. Super. 1 (1989)

a)Facts: agreed to settle an accident claim with , his insurer, forΠ Δ $15k. After which, he finds that his policy allowed him $250k. Π argued that he had settled under a mistaken belief that $15k was all

he was entitled.

b)Held: This was a unilateral mistake under §153. The performance wasadverse to him, the mistake was such that enforcement would beunconscionable, and had reason to know of the mistake.Δ

B.Public Policy and Illegality

1.Illegality

a)Neither law nor equity can be invoked to redress a wrong that has resulted from the

injured party’s own wrongful and illegal conduct.

b)Clouse v. Myers , 753 S.W.2d 316 (1988)

(1)Facts: and entered an agreement to jointly run a tavern.Π Δ paid money to as an investment in the venture, with moreΠ Δ

to pay at a later date. However, it was not legal for toΠ operate a tavern in the manner propsed, and the authorities halted the

operation. then sued for return of the payment made.Π Δ



(2)Held: Because and were violating the law when theyΠ Δ entered the K, the action is denied. (see (a) above.)

2.Covenant Enforceability

a)A noncompetition covenant is okay if the enforcing agent can prove it is necessaryfor business interests.

b)A covenant cannot deprive a community of a unique skill.

c)A covenant cannot impose undue hardship on the terminating worker

d)Geography constraints are upheld when the business serves a limited geographicalarea

e)Time constraints should be reasonable related to the legitimate interest which theemployer is seeking to protect.

f)Hopper v. All Pet Animal Clinic , 861 P.2d 531 (1993)(1)Facts: worked for for a time under a K that disallowedΠ Δ her working as a small animal veterinarian within the 5 milessurrounding the city for 3 years. left and then worked atΠ another animal hospital and depleted some of ’s business.Δ

(2)Issue: Are covenants such as these enforceable?

(3)Result: The Court held that the 3 year duration was unreasonable, andreduced it to 1 year. The Court affirmed the remaining terms of the covenant.

3.A.Z. v. B.Z., 431 Mass. 150 (2000)

a)Facts: and divorced after going through artificial inseminationΠ Δ and storing pre-embryos. wants to have the pre-embryosΔ implanted; does not.Π

b)Issue: Can an individual be compelled to procreate? Does a consent form constitutea contract between the couple?

c)Held: A person cannot be compelled by court to procreate. Also, the purpose of theconsent form was not to bind the couple to an agreement, but was only meant to directthe clinic.

d)Note: public policy will also not force an abortion of the child, even if a couple

agrees that the woman would go on birth control and does not.

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C.Unconscionability

1.Definition

a)Something is unconscionable if it is so unreasonably detrimental to the interest of a

contracting party as to render the contract unenforceable.

b)Procedural Unconscionability is concerned with “unfair surprise,” fine printclauses, mistakes, or ignorance of important facts or other things that mean bargainingdid not proceed as it should.

c)Substantive Unconscionability is an unjust or “one-sided” contract.

d)An Adhesion Contract is one so heavily restrictive of one party, while so non-restrictive of another, that doubts arise as to its representation as a voluntary anduncoerced agreement. Often a standard form printed contract prepared by one partyand submitted to the other on a “take it or leave it” basis.

2.UCC

a)UCC §2-302 official comment – The basic test is whether, in the light of the generalcommercial background and the commercial needs of the particular trade or case, theclauses are so involved are so one-sided as to be unconscionable under thecircumstances existing at the time of the making of the contract.

b)Unconscionability is generally recognized to include an absence of meaningfulchoice on the part of one of the parties together with contract terms which areunreasonably favorable to the other party.

c)Williams v. Walker-Thomas Furniture Co., 121 U.S. App. D.C. 315 (1965)(1)Facts: entered a contract with stating that payments onΠ Δ rent-to-own merchandise are to be applied equally to theoutstanding balance of all debts owed pro rata. defaulted onΠ a payment, and used this clause to repossess all theΔ belongings with any outstanding debt, some having owed less than a

dollar remaining.

(2)Held: This is classic unconscionability.

d)Many courts hold that there must be both procedural and substantiveunconscionability present to establish a claim.

e)Maxwell v. Fidelity Fin. Servs., Inc., 184 Ariz. 82 (1995)



(1)Facts: financed ’s purchase of a water heater for theirΔ Π $40k home. The heater cost $6500, and with 19% financingfor 10 years, cost $15k. The heater didn’t work. Whenfinancing was renewed, the balance was down to $5733. TheK called for securing the payments with the home. arguesΠ

unconscionability. argues novation and passing the statuteΔ of limitations.

(2)Held: No one should be able to repossess a $40k house for nonpayment ona $6500 heater. This is substantively unconscionable. This court does notrequire both procedural and substantive unconscionability though.

3.Bargaining power

a)Courts are reluctant to accept pleas of unconscionability between merchants.(similar bargaining power)

b)When gross inequality of bargaining power and a misunderstanding or unawarenessof a provision is present, a court may invoke unconscionability.

c)Langemeier v. National Oats Co., Inc , 775 F.2d 975 (1985)

(1)Facts: entered a K to grow popcorn for . The K providedΠ Δ that could reject popcorn with defects including damageΔ due to freezing weather. got ’s permission to proceed andΠ Δ plant. After a freeze damaged the corn, refused it, andΔ Π sold it to another firm. had not told that the crop requiredΔ Π an extra 20 days in the field, exposing it to the frost damage.

(2)Held: the clause stating could reject the popcorn wasΔ

unconscionable.(3)JJ: isn’t this odd? Shouldn’t you avoid using this case on the final? J HintHint…

4.Bank One v. Coates , 125 F.Supp.2d 819 (2001)

a)Facts: entered a K with for credit. then sends an addendumΔ Π Π to including a forced arbitration clause. Not responding within 30Δ days is regarded as acceptance of the addendum. After the 30 dayperiod, finds he does not want the arbitration clause.Δ

b)Held: This case is not unconscionable. Arbitration is not inherentlyunfair, and had the right to deny but dΔ idn’t. He was given options, and

failed to take them.

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VI.R EMEDIES

A.Expectation Damages

1.Definitions:

a)This is a measure of the money damages available to plaintiff in an action for breach of contract based on the value of the benefit he would have received from thecontract if Δ had not breached, but had completed the performance as agreed.

b)The amount is generally the monetary value of full performance minus the costs plaintiff avoided by not performing his own part of the contract.

D = VFullPerformance

– Cavoided

c)When the buyer breaches, the seller’s expectation damages will ordinarily be thecontract price less the cost saved.

D = K - Cavoided

d)When the seller breaches, the buyer’s expectation damages will be measured by thefair market value of the performance at the time and place of promised performance.

D = VFairMarket

2.UCC Provisions

a)UCC §2-712 – “cover” damages, damages for replacement goods

b)UCC §2-713 – damages for goods not delivered

c)UCC §2-714 – damages for goods delivered not to spec

d)UCC §2-715 – damages incidental to main

e)UCC §2-715(2) – damages consequential to main (as a result of bad goods, extradamages occurred) (Hadley v. Baxendale rule)

f)UCC §2-717 - the buyer on notifying the seller of his intention to do so may deductall or any part of the damages resulting from any breach of the contract from any part

of the price still due under the same contract.

3.General rules

a)No speculative damages. has to prove his damages withΠ reasonable certainty.



b)The injured party should not recover more from the breach than he would havegained had the contract been fully performed.

c)‼ Common law alert: the common law did not recognize cover as a remedy.

d)Specific performance is only awarded when damages are not adequate.

e)Freund v. Washington Square Press , 34 N.Y.2d 379 (1974)

(1)Facts: contracted with to publish his manuscript with aΠ Δ $2k advance upon receipt of the work and royalties on thecopies. then decides not to produce his book. finds aΔ Π different publisher and pays then to publish. sues forΠ Δ specific performance (denied at TC) and damages.

(2)Issue: argues his promotion was delayed, he lost royalties,Π and he make other arrangements.

(3)Result: Nominal damages only. was promoted anyways,Π

royalties were speculative at best, and on the cost of publication, the injured party should not recover more from the breach than he would have gained hadthe contract been fully performed.

4.Efficient Breach and Economic Waste

a)If the seller finds a better buyer, he should breach and present the original buyer with damages.

b)The cost of performance is the proper measure of damages ‘if this is possible anddoes not involve unreasonable economic waste’. Restatement §346(1)(a)(i)

c)The diminution in value caused by the breach is the proper measure ‘if constructionand completion in accordance with the contract would involve unreasonable

economic waste’. Restatement §346 (1)(a)(ii)

d)Peevyhouse v. Garland Coal Mining Co., 382 P.2d 109 (1962)

(1)Facts: entered a K with to allow to strip mine coal onΠ Δ Δ ’s land for a period of years if they return the land to theΠ

way it was at the end of the lease. refuses to fill in the holesΔ they left saying it would cost them $29k, while only adding$300 in value. sues for $25k.Π

(2)Held: The measure of damages in Restatement §346(1)(a)(ii) is used

because unreasonable economic waste would occur if the K was completed aswritten.

e)Doran: there is a risk that a seller with the prospect of zero damages will breachwhen someone else will have to bear the cost. It’s not that we don’t want parties breaching, but we want breaching parties to do so efficiently. An inefficient breachwould be that society as a whole would have to pay more than required while societywould gain less than it could.

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5.Lost Volume Sellers

a)To be a lost volume seller, these criteria must be met

(1)Capacity to make an additional sale

(2) Profitable to make an additional sale

(3) Probably would have made an additional sale absent the buyer’s breach

b)Lost Volume sellers do not have to mitigate their loss on a license sale because thenew sale would have been one they could have made absent the breach.

c)In re El Paso Refinery , 196 B.R. 58 (1996)

(1)Facts: Refinery (R) went bankrupt and RHC took over their processes andassets. UOP alerts RHC that they are operating without a license, and RHCand UOP negotiated a new license.

(2)Issue: did UOP mitigate R’s damages in the sale of licenses to RHC? UOPargues that R’s damages were not mitigated because RHC was a new potential

customer, and UOP is a lost volume seller.(3)Held: UOP is not a lost volume seller, because absent R’s breach, UOPwould not have been able to sell to RHC which used the same refinery. Thus,R’s damages were mitigated.

6.Cost Plus

a)KGM Harvesting Co. v. Fresh Network , 42 Cal. Rptr. 2d 286 (1995)

(1)Facts: S contracted to sell lettuce to B which would pass the lettuce toanother buyer at cost plus. During a period of skyrocketing lettuce prices, Srefuses to supply B with lettuce, forcing B to find another, more expensive

supplier.

(2)Issue: Why should B recover damages when they suffer no consequencesof the breach?

(3)Held: B should get the benefit of the bargain in all situations.

(4)See Doran’s note above.

7.Incidental Damages

a)Fertico Belgium v. Phosphate Chemicals Export Ass’n , 501 N.Y.S.2d 867

(1)Facts: B contracts with S to deliver fertilizer to Belgium which will then

go to Iraq in two shipments paid by letter of credit. The first shipment willarrive late, so the second shipment is canceled. The first shipment is coveredfor $700k more. B then sells the first shipment when it arrives for $450k profit.

(2)Result: B has to subtract the profit on the resale because he never wouldhave had that profit were it not for the breach.



8.Consequential Damages

a)A plaintiff can only recover consequential damages when

(1)They arise naturally from the breach itself

(2)They arise from the special circumstances under which the contract was

actually made if the special circumstances were communicated by Π to .Δ

Hadley v. Baxendale , infra.

b)Hadley v. Baxendale , 9 Exch 341 (1845)

(1)Facts: operated a mill that suffered a broken shaft.Π Manufacturer asked to send them the shaft. delayed inΠ Δ sending the shaft and as a result the mill was inoperable forlonger than it had to be.

(2)Issue: is liable for the lost profits suffered from theirΔ Π delay in shipment?

(3)Result: Δ owed no damages by the famous rule noted above that is nowrepresented in UCC §2-715(2)

B.Mitigation

1.Definition

a)Mitigation of Damages is a requirement that one injured by reason of another’s breach of an agreement exercise reasonable diligence and ordinary care to avoidaggravating the injury or increasing the damages.

2.When Applicable

a)In general, the party that did not breach has the duty to mitigate in lessening thedamages incurred by the other party, and not increasing their damages.

b)UCC §2-709(1) Action for the Price – when the buyer fails to pay, the seller mayrecover the price of goods accepted or of conforming goods lost or damaged within areasonable time after risk of loss has passed to the buyer or goods identified to thecontract if the seller can’t reasonably resell them.

c)A seller only has the duty to mitigate when loss could be avoided with reasonable

effort and without undue risk, expense, or humiliation.

3.Siemens Energy & Automation v. Coleman Elec. Supply Co , 46 F.Supp.2d 217 (1999)

a)Facts: was a distributor of ’s products. was late on itsΔ Π Δ payments to . tried to return some goods to , but refusedΠ Δ Π Π them in favor of money. sues for such money. argues that theirΠ Δ duty to mitigate suggests they should have to recover the goods.

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b)Issue: does have the duty to mitigate?Π

c)Result: No. UCC §2-709(1) holds.

C.Reliance Damages

1.Definitions

a)Incidental damages include losses reasonably incident to a claim for actualdamages. These would include things like “expenses incurred in inspection, receipt,transportation, and care and custody of goods rightfully rejected…(UCC §2-715 - buyers) or “any commercially reasonable charges, expenses, or commissions incurredin stopping delivery, in the transportation, care and custody of goods after the buyers breach in connection with return or resale of the goods…” (UCC §2-710 – sellers)

b)Consequential damages are those which are caused by an injury but which are not anecessary result of the injury. Because they do not necessarily flow from the injury,

they must be specially pleaded and proven.

2.Availability

a)Reliance Damages may be limited to the expectation of complete performance.

3.UCC

a)UCC §2-715 – Buyer’s Incidental and Consequential Damages.

(1)Incidental damages resulting from Seller’s breach include expensesreasonably incurred in inspection, receipt, transportation and care and custodyof goods rightfully rejected.

(2)Consequential damages resulting from the seller’s breach include

(a)Any loss resulting from general or particular requirements and needs thatthe seller was told or would have reason to know

(b)Injury to person or property proximately resulting from any breach of warranty.

b)UCC §2-710 - Seller’s Incidental Damages

(1)Incidental damages to an aggrieved seller may include any commercially

reasonable charges, expenses or commissions incurred in stopping delivery, inthe transportation, care, and custody of goods after the buyer’s breach, inconnection with return or resale of gods or otherwise resulting from the breach.



D.Restitution Damages

1.

E.Specific Performance

1.Definition

a)This is an equitable remedy available to an aggrieved party when the party’s remedyat law is inadequate forcing the party in breach to undertake to perform or complete performance as prescribed by the contract.

2.Availability

a)Specific Performance is only available in common law jurisdictions when other

remedies are inadequate or where damages are impractical. In civil law

jurisdictions however, it is usually available before other remedies are used.

b)Contract has to describe a performance so specific that other remedies would beinadequate. Having indefinite terms however does not bar a court’s use of specific performance. (See City Stores, infra.)

c)Common law usually decrees specific performance for land contracts because each plot of land is considered unique unless the difficulties of supervision outweigh theimportance of specific performance to the P. (Especially true for construction on Dcontrolled land because P cannot employ another contractor at D’s expense.)

3.Restatement a)Restatement 2d §360 says: In determining whether the remedy in damages would beadequate, the following circumstances are significant:

(1)the difficulty of proving damages with reasonable certainty,

(2)the difficulty of procuring a suitable substitute performance by means of money awarded as damages, and

(3)the likelihood that an award of damages could not be collected.

4.UCC

a)UCC §2-716 says that (1) Specific Performance may be decreed when goods areunique. Additionally, (3) the buyer has the right of replevin “goods identified to thecontract” if cover is attainable with reasonable effort, or if circumstances reasonablyindicate that such effort will be of no avail.

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5.City Stores Co. v. Ammerman , 266 F.Supp. 766

a)Facts: P entered an agreement with D such that if P helped D gain zoning approvalto build their mall, D would give P the opportunity to be a tenant at a favorable rate.The terms of the lease to P would be similar to what was offered to other tenantswhen they were acquired. D did secure zoning privileges and then entered leases with

Woodward & Lothrop and Hecht’s, but not with P.

b)Issue: Is the K definite enough to warrant specific performance?

c)Result: The precise measure of damages was too difficult to ascertain. Even if itwas ascertainable, money would not be adequate compensation for the right to participate in the shopping center. Specific Performance awarded.

F.Liquidated Damages and Agreed Remedies

1.Definition

a)An amount stipulated in a contract which the parties agree to as a reasonableestimation of damages owing to one in the event of breach by the other.

2.Enforceability

a)In order for such a provision to be enforceable, the liquidated damages must bereasonable in light of

(1)A forecast of the damages likely to actually result from the breach

(2)Difficulties in proof of loss

(3)Inconvenience or infeasibility of otherwise obtaining an adequate remedy b)If these conditions are met, liquidated damages clauses establish a maximalliability.

c)If these conditions are not met or if it otherwise appears that the clause was includedto deter a breach rather than by a good faith effort to estimate probable damages, the provision will be considered punitive and unenforceable. (This does not excludenormal damage calculations.)



3.Restatement

a)Restatement 2d §356

(1)Damages for breach by either party may be liquidated in the agreement butonly at an amount that is reasonable in the light of the anticipated or actual

loss caused by the breach and the difficulties of proof of loss. A term fixingunreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.

(2)A term in a bond providing for an amount of money as a penalty for non-occurrence of the condition of the bond is unenforceable on grounds of public policy to the extent that the amount exceeds the loss caused by such non-occurrence.

b)

4.UCC

a)UCC §2-718

(1)Damages for breach by either party may be liquidated in the agreement butonly at an amount which is reasonable in the light of the anticipated or actualharm, the difficulties in proof of loss, and the inconvenience or nonfeasibilityof otherwise obtaining an adequate remedy. Unreasonably large liquidateddamages are void as a penalty.

b)UCC §2A-504 – Liquidation of Damages (leases)

(1)Damages payable by either party for default, or any other act or omission,including indemnity for loss or diminution of anticipated tax benefits or lossor damage to lessor's residual interest, may be liquidated in the leaseagreement but only at an amount or by a formula that is reasonable in light of the then anticipated harm caused by the default or other act or omission.

(2)If the lease agreement provides for liquidation of damages, and such provision does not comply with subsection (1), or such provision is anexclusive or limited remedy that circumstances cause to fail of its essential purpose, remedy may be had as provided in this Article.

(3)If the lessor justifiably withholds or stops delivery of goods because of thelessee's default or insolvency (Section 2A-525 or 2A-526), the lessee isentitled to restitution of any amount by which the sum of his [or her] payments exceeds:

(a) the amount to which the lessor is entitled by virtue of terms liquidatingthe lessor's damages in accordance with subsection (1); or

(b) in the absence of those terms, 20 percent of the then present value of thetotal rent the lessee was obligated to pay for the balance of the lease term,or, in the case of a consumer lease, the lesser of such amount or $500.

(4)A lessee's right to restitution under subsection (3) is subject to offset to theextent the lessor establishes:

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(a)a right to recover damages under the provisions of this Article other thansubsection (1); and

(b)the amount or value of any benefits received by the lessee directly or indirectly by reason of the lease contract.

c)UCC §2A-528 - Lessor's Damages for Non-acceptance, Failure to Pay, Repudiation,or Other Default.

(1)Except as otherwise provided with respect to damages liquidated in thelease agreement (§2A-504) or otherwise determined pursuant to agreement of the parties (§§1-102(3) and 2A-503), if a lessor elects to retain the goods or alessor elects to dispose of the goods and the disposition is by lease agreementthat for any reason does not qualify for treatment under §2A-527(2), or is bysale or otherwise, the lessor may recover from the lessee as damages for adefault of the type described in Section 2A-523(1) or 2A-523(3)(a), or, if agreed, for other default of the lessee, (i) accrued and unpaid rent as of the

date of default if the lessee has never taken possession of the goods, or, if thelessee has taken possession of the goods, as of the date the lessor repossessesthe goods or an earlier date on which the lessee makes a tender of the goods tothe lessor, (ii) the present value as of the date determined under clause (i) of the total rent for the then remaining lease term of the original lease agreementminus the present value as of the same date of the market rent at the placewhere the goods are located computed for the same lease term, and (iii) anyincidental damages allowed under Section 2A-530, less expenses saved inconsequence of the lessee's default.

(2)If the measure of damages provided in subsection (1) is inadequate to put alessor in as good a position as performance would have, the measure of

damages is the present value of the profit, including reasonable overhead, thelessor would have made from full performance by the lessee, together withany incidental damages allowed under Section 2A-530, due allowance for costs reasonably incurred and due credit for payments or proceeds of disposition.

d)Liquidated damages should not put the lessor in a better position than it would have been in had the lease been fully performed. UCC §2A-504

e)A contract aloowing the lessor to collect the present value of all future rent and the present value of the equipment’s fair market value at the end of the lease while permitting the lessor to sell the repossessed equipment immediately without providing

the lessee with any credit for the proceeds of the sale violates UCC 2A-504.

f)ePlus Group, Inc. v. Panoramic Comm., 50 UCC 2d 213 (2003)

(1)Facts: entered a master lease agreement with with a K Π Δ that included a liquidated damages clause. The lease wasthen modified to include a co-lessee. eventually breached.Δ Π sues for $1.1M, reduced from $1.2M by a credit for thereleases and sale of returned equipment.



(2)Issue: the liquidated damages clause stated that will credit theΠ Net Proceeds to damages owed by . Damages were theΔ amount of money left on the lease, while net proceeds werethe value or re-leasing or selling the equipment. The value lefton the lease was much greater than the value in re-leasing or selling the

equipment.(3)Result: The court ruled that the liquidated damages clause may beunreasonable (so refused to grant summary judgment on its enforceability).

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VII.CONDITIONS

A.Express Conditions

1.Definitions

a)A condition is something attached to an agreement, the occurrence of which willtrigger the performance of a legal obligation. A condition is not a promise. Failure tomeet a condition is not a breach.

b)A condition precedent is a fact which must exist or occur before a duty of immediate performance of a promise arises. The party to whom a duty is owed must prove the occurrence in order to compel the other party to perform.

c)A condition subsequent is a fact which will extinguish a duty to make

compensation for a breach of contract after the breach has occurred.

d)A concurrent condition is a condition precedent which exists only when parties toa contact are found to render performance at the same time. The party owing the duty

must prove the condition has occurred to discharge the duty.

2.Condition vs. Promise

Condition Promise

Upon not meeting the condition,the duty is discharged

Upon not performing the promise, then

• total breach: the duty is discharged.

•

material breach: the duty is performed, but there are damagesrecoverable.

3.Restatement view

a)See Howard v. Federal Crop Insurance Corp., 520 F.2d 695, on p.99

(1)Facts: Due to heavy rains, ’s tobacco crop was damagedΠ and unusable. plowed and disked the land so he could plantΠ a cover crop. When tried to get an insurance claim, , hisΠ Δ

insurer denied the claim because they had not inspected thedamage. The K said in one paragraph “it shall be a condition precedent tothe payment of any loss [that the insured provide info regarding the loss]” andin the next “[the crops] shall not be destroyed until the Corporation makes aninspection.”



(2)Issue: Is the latter paragraph a promise or a condition? If it is acondition, its violation results in ’s forfeiture of coverage. If itΠ is a promise, may recover damages from f Δ Π or the eliminationof the crop but does not cause a forfeiture of the policy.

(3)Held: If the policy was intended for the latter paragraph to be a

condition, it would have been labeled as such like the otherparagraphs were. Therefore, this paragraph is a promise, and

has not forfeited the policy.Π

b)Restatement §261: Promises and Conditions: Where it is doubtful whether wordscreate a promise or an express condition, they are interpreted as creating a

promise; but the same words may sometimes mean that one party promises a performance and that the other party's promise is conditional on that performance. Illustration: An insurance company A issues B a policy containing the clause “In theevent of disagreement as to the amount of loss it shall be ascertained by twoappraisers and an umpire. The loss shall not be payable until 60 days after the awardof the appraisers when such an appraisal is required.” This provision is a promise toarbitrate AND makes the award conditioned on A’s duty to pay upon disagreement.

4.Strict compliance is the rule

a)Courts frequently avoid applying the strict compliance rule when a forfeiture

would result. A forfeiture occurs when one party has relied on the bargain (either by preparing to perform or by actually making part performance), and insistence on strictcompliance with the condition would cause him to fail to receive the expected benefits from the deal. See Restatement 2d §227(1)

B.Implied or Constructive Conditions

1.Definitions

a)An implied condition is one that can be implied from the parties’ conduct.

b)A constructive condition is one that is not agreed on by the parties, but which issupplied by the court for fairness.

2.Substantial Compliance is the rule

3.Restatement viewa)When parties have structured a contract to require periodic payments or alternating performances, a party’s duty to perform a portion of the contract is constructivelyconditioned upon the other party’s having substantially performed any correspondingduties. Look at who is first to fail to substantially perform.

b)See K & G Construction Co. v. Harris & Brooks, 223 Md. 305, p.104

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(1)Issue: Did the contractor have the right to refuse progress payments when acondition of the contract was not met? Did the subcontractor have the right torefuse to perform when the contractor stopped paying them?

(2)Held: Mutually dependent promises. Contractor’s refusal to pay did notrelieve Sub’s duty because it was the Sub that breached in the first place.

c)Restatement 2d §237: Except as stated in §240, it is a condition of each party’sremaining duties to render performances to be exchanged under an exchange of promises that there be no uncured material failure by the other party to render anysuch performance due at an earlier time. Illustration: A contracts to build a house for B for some amount, with progress payments while A is building. For no reason, B fails to remit a progress payment, andA opts to suspend building. B’s failure is an uncured material failure. A is not in breach, and B has no claim against A. A has a claim against B if it is damaged by thedelay. However, if B makes a delayed payment and it is not too late to cure thematerial breach, A’s duties are not discharged.

4.Taylor v. Johnston ,15 Cal. 3d 130 (1975)

a)Facts: had two mares to be bred with ’s horse. sold his horseΠ Δ Δ out of state before bred the horse making it very difficult for .Π Π Π attempted to find a way to breed the horses, but ’s horΔ se was not available because it was often breeding with other horses owned by its shareholders. gaveΠ up and bred the horses with a different horse.

b)Issue: When was in breach? When they sold the horse, or whenΠ the contract period ended? The court noted that no conditionappeared that was required to take a subordinate positionΠ to the

shareholders.

c)Held: could have still bred his horses with during theΠ Δ contracted term but for his own actions (like bringing a pregnanthorse to the stud, and finding another stud). The conditionconstructed by the actions of at most amounted to a partialΔ breach, insufficiently material to terminate the contracts.

5.Anticipatory Breach and the Right to Adequate Assurance of Performance

a)Anticipatory Repudiation is a breach committed before the arrival of the actual time

of required performance. It occurs when one party by declaration repudiates hiscontractual obligation before it is due. See Taylor v. Johnston,15 Cal. 3d 130 (1975),supra.



b)This is covered under UCC §2-609: (1) a contract for sale imposes an obligation oneach party that the other’s expectation of receiving due performance will not beimpaired. So, when a party has reason to believe that the contract’s performance is in jeopardy, he may demand in writing assurance, and may if commercially

reasonable, suspend performance for which he has not already received the agreed

return. Merchants must use commercial standards as grounds for reasonableness. §2-609(2). Acceptance of improper delivery or payment does not preclude the use of thisin the future. (No waiver.) §2-609(3). A party receiving such a demand has repudiatedthe contract if he does not respond with assurances in a reasonable time not exceeding30 days. §2-609(4).

This clause was an attempt to battle problems with anticipatory repudiation. A lawyer may erroneously signal to his client that the other party has breached, and instruct him tocover his losses. At that point, his client may have breached if the other party actuallyhadn’t.

(1)Pros: instead of immediately putting the client in a situation where he may

cause a breach, a lawyer can force the other party to give assurances that hewill continue to perform as contracted, and then wait the month.

(2)Cons: introduces problematic concepts that may extend the weaseling acouple more moves.

(a)What are “reasonable grounds for insecurity?”

(b)When has a party given an “adequate assurance” of due performance?

(c)When is it commercially reasonable to suspend performance whileawaiting assurance? (Remember the repudiatee is only authorized thesuspension of performance “for which he has not already received theagreed return.”

c)See Koch Materials Co. v. Shore Slurry Seal, Inc., 205 F.Supp.2d 324.

(1)Facts: D, a construction company has entered a contract with P to provideasphalt as required. Then, D writes P saying that he is selling the company to athird party. P demands assurances that D will continue the contract, and Ddoes not respond with assurances.

(2)Result: P had good reason to ask for assurances under §2-609, and Dviolated it when he did not respond. Summary judgment is granted.

C.Impossibility, Impracticability, and Frustration

1.Impossibility occurs where

a)An unexpected contingency occurs

b)The risk of which was not allocated either by agreement or custom and

c)The occurrence of the contingency has made performance impossible.

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2.UCC §2-614

a)Substituted Performance – when the agreed performance is unavailable due tounforeseeable contingency, but another alternative is available, the substitute must betendered and accepted.

(1)Where without fault of either party the agreed berthing, loading, or unloading facilities fail or an agreed type of carrier becomes unavailable or the agreed manner of delivery otherwise becomes commercially impracticable but a commercially reasonable substitute is available, such substitute performance must be tendered and accepted.

(2)If the agreed means or manner of payment fails because of domestic or foreign governmental regulation, the seller may withhold or stop deliveryunless the buyer provides a means or manner of payment which iscommercially a substantial equivalent. If delivery has already been taken, payment by the means or in the manner provided by the regulation dischargesthe buyer's obligation unless the regulation is discriminatory, oppressive or

predatory. b)But, take note that the buyer of services can say that fixed fees inherently areallocation of risks and as such, the buyer should not have to pay more for theservices substituted for the services.

3.UCC §2-615

a)Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of acontingency the non-occurrence of which was a basic assumption on which the

contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

b) Where the causes mentioned in paragraph (a) affect only a part of the seller'scapacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as hisown requirements for further manufacture. He may so allocate in any manner whichis fair and reasonable.

c)The seller must notify the buyer seasonably that there will be delay or non-deliveryand, when allocation is required under paragraph (b), of the estimated quota thusmade available for the buyer.

d)What is “impracticable?”

(1)

e)But, again, take note that the buyer of services can say that fixed fees inherently areallocation of risks and as such, the buyer should not have to pay more for theservices substituted for the services.



4.Long term contracts are the ones that will cause this affect the most.

5.Alabama Football v. Wright , 452 F.Supp. 182 (1975)

a)Facts: hired to play football for them, and gave a $75k signingΠ Δ bonus. When and the league folded, requested remit theΠ Π Δ $75k. countersued that failed to provide him with a forum toΔ Π perform the contract.

b)Result: was allowed to keep the $75k as it was consideration forΔ a performance actually did: sign the contract. was not grantedΔ Π any damages in the countersuit because it was impossible.

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VIII.THIRD PARTY R IGHTS AND R ESPONSIBILITIES

In general, third parties can only sue for damages if they are intended beneficiaries, not

incidental beneficiaries.

The law is receptive to payees who wish to assign their rights to payment.The law is generally unreceptive when the suit is over the delegation to perform a duty.

• For instance, if you contract a brain surgeon to operate on you, and he has his lessqualified friend do it, your cause of action is against the surgeon.

• C, A member of the public cannot recover for injury from B’s failure to perform acontract with the United States to carry mail over a certain route. Restatement §145 (illus1)

Magnussen-Moss

Fill in Later

UCC §2-318

A natural person is a human. A person as compared to a natural person may include acorporation.Three options to the states in implementation: A seller’s warranty (express or implied)extends…

• Alternative A: to the immediate family or household or guest of the buyer if it isreasonable that such person would be injured by breach. (Seller cannot exclude.)

• Alternative B: to any natural person who would reasonably be expected to use

the goods and could be injured by breach. (Seller cannot exclude.)• Alternative C: to anyone who would reasonably be expected to use the goods and

could be injured by breach. (A seller may not exclude or limit the operation of thissection with respect to injury to the person of an individual to whom the warrantyextends.)

Martinez v. Socoma Companies, 11 Cal.3d 394 (1974)

1. Facts: contracted with the government to build and provide jobsΔ for . When failed to do so, sued.Π Δ Π

2. Issue: can sue for damages when the contract was betweenΠ Δ and the government?

3. No: Although would certainly benefit from the performance of Π the K as intended, was not a direct party to the contract. ’sΠ Π beneficiary status was only incidental.



A.The Assignment of Rights and Delegation of Responsibilities

1.Definitions

a)Assignment is the transfer of an interest in a right or property from one party to

another.

b)Delegation is the transfer of authority by one person to another which may infer ageneral power to act for another’s benefit or which may assign a debt to another.

c)Subrogation is one’s payment or assumption of an obligation for which another is primarily liable.

2.Assignment of payment

a)Usually no one will mind if the rights to payment are assigned. (This is the usualcase.)

b)An exception may be an assignment of payments from a manufacturer to a bank.

(1)If the recipient of goods has a problem with the goods, they may lose their ability to sway the manufacturer to fix the problem if the payment had beenassigned. Holding back payment as a threat won’t work against a bank; theywill just repossess the goods.

3.Delegation of Duties

a)A party delegating is contractual duties is still liable to the original party itcontracted with if the delegated party does not perform correctly.

b)Contemporary Mission v. Famous Music Corp., 557 F.2d 918 (1977)

(1)Facts: , a group producing music sold its rights in return forΠ royalties to , a distributor. then assigned its record divisionΔ Δ (and ’s music) to a 3Π rd party. When the 3rd party refused to participatein part of the contract, sued .Π Δ

(2)Issue: Who is liable for the breach?

(3)Held: is liable for any obligation that was not fulfilled,Δ even after assigning responsibilities or performance to the 3rd

party.

c)A party may assign but the new party must grant adequate assurance that it will perform under the agreement.

d)UCC §2-210 deals with assignment of duties.

(1)Also look at UCC §9-404 (p 806) in short is that the assignee takes subjectto the defenses that the assignor had. So, the assignee needs to make sure theassignor performs in some cases.

e)UCC §3-305 Defenses and Claims in Recoupment (under Negotiable Instruments)

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(1)Except where otherwise provided in this section, the right to enforce theobligation of a party and pay an instrument is subject to the following:

(a)Infancy of the obliger, duress, lack of legal capacity, or illegality of thetransaction, fraud, insolvency…

f)In re Nedwick Steel Co., 289 B.R. 95 (2003)(1)Facts: before bankruptcy, B was the exclusive distributor for N. Now bankrupt N wants to assign its duties of performance to a third party Wwhence the original creditor B does not want the assignment to occur becauseit feels W is a competitor to B.

(2)Held: W was a direct competitor to B thus clearly increasing the risk imposed on B. B had the right to refuse the assignment, and did so.

(3)Borrowed: Sally Beauty, 801 F.2d 1001, 1006, held that the duty of performance under an exclusive distributorship cannot be delegated to a directcompetitor without the obligor’s consent because such an agreement does not

bargain for best efforts of his competitor when the contract was entered into.

B.Suretyship and Guaranty Contracts

1.Definitions

a)A surety is one who undertakes to pay the money or perform other acts in the eventthat his principal fails to do so; the surety is directly and immediately liable for thedebt.

b)A payment bond pays the subcontractors should the general contractor default on payments to them.

c)A performance bond promises the other party of the contract that the contract will be performed in the event that the contractor fails.



2.Beware of statute of frauds issues with surety contracts. UCC §2-201

3.If the underlying obligation is secured by a security interest in collateral and the oblige

impairs the value of that interest, the secondary obligation is discharged to the extent that

such impairment would otherwise increase the difference between the maximum amount

recoverable by the secondary obligor pursuant to its subrogation rights and the value of the secondary obligor’s interest in the collateral. Restatement 3d §42 (Suretyship)

4.National Surety Corp. v. United States , 118 F.3d 1542 (1997)

a)Facts: backed the performance of D for the government. When DΠ failed to perform, completed the work as contracted. As part of Π D’s contract, D was required to have 10% retainage kept from hispayment until satisfactory performance was completed.Government did not actually keep the retainage, but since therewas no completion, is suing the government for the retainageΠ

which it was entitled to.

b)Result: Gov’t was liable for improper release of retainage; release did notimplicitly modify the contract; failure to notify gov’t of D’s default did notaffect ’s right of subrogation; damages were not to be based onΠ full retainage amount but on ’s actual damages.Π

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Contracts Michigan White Fall2003

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