Statute of Frauds (Chpt. 6)

I. IntroductionA. Policies and Counter Policies

1. Three Rationalesa) Evidentiary - Ensure there is reliable and accurate evidence on which a fact-

finder may rely in reaching judgmentsb) Cautionary - Give pause to persons entering into contracts, so that they recog-

nize the importance and content of the contractual relationship they are about to establish

c) Channeling - Provide an effective and easily applied line to divide enforceable from unenforceable contracts so that courts can more easily and dependably make decisions

II. Manner and Effect of Invoking the Statute of FraudsA. The party against whom enforcement is sought must raise the statute of frauds

specifically (not using a general denial) to avoid waiving the defense, and will gener-ally then move to dismiss the contract claim. (p560)1. Affirmative defense

B. P must show that:1. The contract is not within the scope of S/F or the S/F requirements are satisfied

AND THEN2. K formation, breach, and resulting damages

III. Statue of Frauds AnalysisA. Is the contract within the class of contracts covered by the statute of frauds?

1. 2nd RSTMT § 110 (p562) (MYLEGS)a) Marriageb) One-Year Provision (Contracts that cannot possibly be performed in under a

year)c) Sale of an interest in landd) An executor’s promise to paye) K for sale of goodsf) Suretyship (promise to pay the debt of another)

2. U.C.C. § 2-201(1) (p562)a) Contract for the sale of goods priced $500 or more

(1) “Price” is specificB. Exception to Statute of Frauds?

1. Contracts for the sales of goodsa) U.C.C. § 2-201(2) (p581)b) U.C.C. § 2-201(3) (p581)

2. Part Performance Exceptiona) More likely to be enforced by buyers for land salesb) Evidentiary functionc) Must prove acts in the performance of the alleged contract:

(1) That demonstrate the injustice of failing to enforce the alleged contract(2) That are “unequivocally referable” to the agreement

d) CL - Partial performance exception applied even though the acts done in reliance on the verbal contract were “in preparation for, ancillary or collateral to, or in anticipation of” contract performance rather than the execution of the contract terms. (p582)(1) Very lenient(2) Court aimed to prevent injustice when a party changes his position in re-

liance on a verbal contract(3) Similar to 2nd RSTMT § 129

3. Equitable and Promissory Estoppela) 2nd RSTMT § 139 - Enforcement by Virtue of Action in Reliance

C. Is there a writing that satisfies the statute of frauds?1. General Requirements for the Writing

a) 2nd RSTMT §§ 131, 133, 134, 136, 137b) U.C.C. §§ 2-201; 1-201(37), (43)

2. Multiple Writingsa) Widely Accepted ROL: Express incorporation by reference in the

signed document to the unsigned existing document.(1) No outside evidence allowed

b) Owen v. Hendricks (p569)(1) Sale of land(2) ROL: Writing, when signed, can be shown by its contents to

adopt a then existing unsigned document.(a) Four-corners(b) No outside evidence allowed

c) Crabtree v. Elizabeth Arden Sales Corporation (p573)(1) Job contract(2) ROL: At least 1 writing, the one establishing a contractual rela-

tionship between the parties, must bear D’s signature. To be in-corporated, the unsigned document must, on its face, refer to the same transaction as that in the signed document.(a) Four-corners(b) Allow parol evidence regarding the circumstances of the writing can

connect the documents and can show D’s assent to the unsigned documents.

d) Corbin Rule (p572): If no fraud, use all documents expressly relating to the same transaction.(1) No signature unless required by S/F(2) Allow parol evidence to show the relationship between the documents

and D’s assent to the content of the unsigned documents.D. If the contract does not satisfy the S/F, it is not judicially enforceable, but it is not

void. (p560)E. Statute of Frauds in Electronic Commerce

1. Uniform Electronic Transactions Act (UETA) (p579)2. Electronic correspondence and electronic signatures MAY satisfy S/F depending

on intent

Content and Meaning of the Contract (Chpt. 7)

I. IntroductionII. Interpreting Express Contract Terms

A. Case Study in Interpretation1. Frigaliment Importing Co. v. B.N.S. International Sales Corp. (p593)

a) Different types of chickensb) Two Step Process

(1) Find facial ambiguity (if 4 corners)(2) Interpret ambiguous language

(a) Four bodies of evidencei) Language of Kii) Usage of tradeiii) USDA regulationsiv) Pricing of chickens

2. U.C.C. § 1-303 (p599) - Course of performance, Course of Dealing, and Usage of Tradea) Course of performance (c/p) - sequence of conduct between parties to a par-

ticular transaction…b) Course of dealing (c/d) - sequence of conduct concerning previous transac-

tions between the parties…c) Usage of trade (u/t) - any practice or method of dealing have such regularity

of observance in a place, vocation, or trade as to justify an expectation that it will be observed...

B. Interpretation Analysis1. Step 1: Is interpretation allowed?

a) In a 4-Corners Jurisdiction: Yes, If the language in the written agreement is fa-cially ambiguous (C&A)(1) “On its face”; patent ambiguity

(2) Latent ambiguity is not relevantb) In a context jurisdiction: Yes, if the language in the written agreement is rea-

sonably susceptible of more than one interpretation, as viewed in full context of K formation (Pacific Gas & Electric)

2. Step 2: If so, what kinds of evidence are allowed for interpretation? (Frigaliment)a) Express K languageb) Pre-K negotiationsc) Dictionary meanings d) U/T, C/D, C/P (U.C.C. § 1-303)e) Technical meaning (C&A)f) Statutes and regulationsg) Common sense arguments about most reasonable meaningh) Canons of construction (p600, First National Bank of Lawrence)

(1) Contra proferentum (Klapp)3. Eventual meaning is a question of fact, unless no reasonable persons could differ

(Klapp)4. Usage of trade (or course of dealing) can be reasonable construed as consistent

with an express term, when it qualifies (cuts down) the express term, but doesn’t negate it completely (Nanakuli)

C. Details of Analysis1. Canons of Construction

a) **List (p601)b) Klapp v. United Insurance Group Agency (p593)

(1) Dispute over “Agent’s Agreement”(2) Roles of Judge and Jury

(a) Judge - determine if an ambiguity exists(b) Jury - interpretation of ambiguous term

(3) ROL: Jury should also consider that ambiguities are to be con-strued against the drafter of the contract. “Contra proferentum”

(4) ROL: Primary goal should be to honor the intent of the parties.(a) Therefore, contra proferentum should be a last resort

i) Concurrence: when a contract is unilaterally drafted, contra pro-ferentum should be applied as the primary rule construction, not the last resort

c) C&A Construction Co. v. Benning Construction (p616)(1) Construction Contract(2) Patent ambiguity - on the face of the contract; something must be added

to clarify(3) Latent ambiguity - ambiguity comes from uncertainties/undisclosed facts

of written K (dissent leaves out “written”)(4) ROL: When, on its face, the document is ambiguous (question of

law) parol evidence is admissible, and the meaning of the term biomes a question for the fact finder (jury).

d) Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co. (p623)(1) K to replace cover of P’s steam turbine(2) ROL: If the court decides, after considering the evidence, that

the language of a contract, in the light of all the circumstances, is fairly susceptible to either one of the two interpretations con-tended for, extrinsic evidence relevant to prove either of such meanings is admissible.

2. Contracts and Commercial Context Under the U.C.C.a) Nanakuli Paving & Rock Co. v. Shell Oil (p631)

(1) Price protection conflict after change of ownership(2) ROL: Usage of trade (or course of dealing) can be reasonable

construed as consistent with an express term, when it qualifies

(cuts down) the express term, but doesn’t negate it completely. (p636)

III. Parol Evidence RuleA. Introduction and Effect of the Parol Evidence Rule

1. Policies and Counter Policies (p639)a) Written evidence is better than oral evidenceb) A subsequent written agreement is better evidence than a conflicting earlier

agreement on the same topicc) Written documents take precedence over previous oral negotiationsd) Certainty and stability of contracts is promoted if parties can depend on writ-

ten termse) If parties expressly say that their written agreement supersedes all their pre-

vious agreements and dealings, all evidence from those should be excluded, even to add additional terms consistent with those in the written document

f) Words must always be understood in their commercial context and courts may need additional evidence to explain ambiguous or incomplete terms

2. Procedural Issues (p639)a) Rule of substantive law (not procedural or evidentiary law)b) Questions of law for the court

B. Analysis of PER1. Is there a writing?

a) If no, then PER not applicable.2. If yes, is the writing an “integrated agreement” (a final expression of the parties’

agreement)? (p641)a) If yes, then PER bars evidence of previous agreements and contemporaneous

oral agreements that contradicts for changes the terms of the written agree-ment (unless it’s an exception to PER)(1) Test for integration

(a) Context Approach: When deciding whether a writing is final the most important issue is the intent of the parties. The intention of the par-ties is determined from all the circumstances, including their lan-guage and other conduct, just as intention is determined for any other purpose. (Middletown Concrete)

(b) 4-Corners - can be extrapolated to look for languagei) “integrated agreement”ii) “partially integrated agreement”iii) “final” etc.

3. Is the writing ALSO a “completely integrated agreement”?a) If yes, then PER bars evidence of consistent additional terms to supplement

the written agreement (unless it’s an exception to PER)(1) A valid merger clause indicates that the writing is completely integrated

(a) Integration requires a mutual intent by both of the contracting par-ties that the written agreements contain all of the agreements of the parties AND the further mutual intent that the written agreement is intended to be the sole agreement, barring reliance upon any other prior representations or contemporaneous agreements. (Sierra Diesel)

(2) No valid merger clause? Apply “naturally/certainty” test (p665)(a) If the additional terms are such that, if agreed upon, they would cer-

tainly have been included in the document in the view of the court, then evidence of their alleged making must be kept from the tier of fact. (Middletown Concrete)

b) If no, the agreement is merely “partially integrated”4. Nonetheless, is the evidence within an exception to the PER? (p642)

a) Meaning of an ambiguous term

b) Course of performancec) Course of dealing or usage of trade

(1) Unless carefully negatedd) Existence and contents of a collateral agreement

(1) Collateral Agreement : Mitchell Test (p649) (Seagrams)(a) An agreement is collateral if:

i) It would not be ordinarily expected to be embodied in the writing AND

ii) It is not so clearly connected with the principal transaction as to be “part and parcel” of it AND

iii) It is in form a collateral agreement ANDiv) It does not contradict express or implied conditions of the written

contract.e) Problems with contract formationf) Grounds for granting particular remediesg) Subsequent negotiations and modifications of contracth) Whether the writing is partially or completely integrated

5. Note: Terms that are expressly “incorporated by reference” are part of the writing that incorporates them, so no PER issues (p677, First Nat’l Bank)

C. Case Law Details for PER Analysis1. “Exceptions” to the Parol Evidence Rule: When the rule does not apply

a) Practice Pointer(1) Course of performance is ALWAYS admissible for a skilled attorney (p665)

b) Collateral Agreements(1) Lee v. Joseph E. Seagram & Sons Inc. (p646)

(a) Dispute over a collateral agreement(b) Mitchill Test: An agreement is collateral if:

i) It would not be ordinarily expected to be embodied in the writing AND

ii) It is not so clearly connected with the principal transac-tion as to be “part and parcel” of it AND

iii) It is in form a collateral agreement ANDiv) It does not contradict express or implied conditions of the

written contract.2. Is the written contract partially or completely integrated?

a) Middletown Concrete Products, Inc. v. Black Clawson Co. (p653)(1) Three competing merger clauses (can’t actually mean it)(2) Final ROL: When deciding whether a writing is final the most im-

portant issue is the intent of the parties. The intention of the parties is determined from all the circumstances, including their language and other conduct, just as intention is determined for any other purpose. (p658)

(3) Complete ROL: If the additional terms are such that, if agreed upon, they would certainly have been included in the document in the view of the court, then evidence of their alleged making must be kept from the tier of fact. (p660-1)

b) Sierra Diesel Injection Service, Inc. v. Burroughs Corp. Inc. (p662)(1) Agreement to purchase computer software that ended up being useless(2) ROL: Integration requires a mutual intent by both of the con-

tracting parties that the written agreements contain all of the agreements of the parties AND the further mutual intent that the written agreement is intended to be the sole agreement, barring reliance upon any other prior representations or contemporane-ous agreements. (p664)

IV. Implied Contract Terms and Provisions

A. Adding Implied Terms Using C/P, C/D, U/T1. U.C.C. § 1-303 (p599) - Course of performance, Course of Dealing, and Usage of

Trade2. Hierarchy of terms and provisions

a) Mandatory rules and provisions(1) Mandatory rules of law that specify fundamental expectations regarding

K formation and enforcement(2) Ex - S/L, regulations on unfair/deceptive practices

b) Express termsc) Implied terms

(1) C/P(2) C/D(3) U/T

d) Default provisions and rules(1) “Gap-fillers” (p671)

B. Terms Implied from the Circumstances1. Fischer v. Congregation B’nai Yitzhok (p672)

a) Orthodox Rabbi hired at a less orthodox churchb) ROL: When a custom or usage is once established, in absence of ex-

press provision to the contrary it is considered a part of a contract and binding on the parties though not mentioned therein, the pre-sumption being that they knew of and contracted with reference to it. (p675)

c) Look to parties intent at time of K formation(1) Usage of trade is assumed to be part of parties’ intent

2. First National Bank of Lawrence v. Methodist Home for the Aged (p676)a) Dispute over who gets estate after lady dies before probationary period endsb) ROL: Look to the view that a reasonable person in the position of the

claimant would have had at the time of contract formation. (p681)3. Wood v. Lacy, Lady Duff-Gordon (p682)

a) Dispute over breach of exclusivity. D claims there was no valid K.b) ROL: A promise may be lacking, and yet the whole writing may be

“instinct with an obligation,” imperfectly expressed. If that is so, there is a contract. (p683)(1) Should not suppose that one party is at the mercy of another.

C. Duty of Good Faith1. Introduction

a) Common Law pronouncement on good and bad faith (p685):(1) Evasion of the spirit of the bargain(2) Lack of diligence and slacking off(3) Willful rendering of imperfect performance(4) Abuse of a power to specify terms(5) Interference with or failure to cooperate in the other party’s performance

b) 2nd RSTMT § 205 - “ Every contract imposes upon each party a duty of good faith and fair dealing.”

c) U.C.C. § 1-304 - “Every contract or duty within the UCC imposes an obligation of good faith in its performance and enforcement.”(1) Definition of good faith varies by jurisdiction

(a) Half of jurisdictions:i) “honesty in fact and the observance of reasonable commercial

standards of fair dealing”(b) Other half:

i) Merchants: “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade”

ii) Non-Merchants: “honesty in fact”

2. Application of the Requirement of Good Faith in Performance or Enforcementa) Market Street Associates Limite Partnership v. Frey (p687)

(1) “Sale and Leaseback” contract(2) ROL: Good faith is a compact reference to an implied undertaking

not to take opportunistic advantage in a way that could not have been contemplated at the time of drafting, and which therefore was not resolved explicitly by the parties. (p694)(a) Applied to performance and enforcement, not K formation(b) What the parties would have done if they had thought of it

3. Implied Duty of Good Faith in Requirement and Output Contractsa) Feld v. Henry S. Levy & Sons, Inc. (p699)

(1) Bread crumb sales - output K(2) U.C.C. § 2-306(1)

(a) A term which measures the quantity by the output of the seller or the requirements of the buyer means actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or re-quirements may be tendered or demanded. (p700)

(3) ROL: An output K is not lacking in mutuality or unenforceable be-cause of indefiniteness in that a quantity for the term is not specified. (p700)

b) Eastern Air Lines v. Gulf Oil Corporation (p702)(1) Aviation fuel K - output K

(a) Fuel freighting not a violation because is an accepted practice(2) U.C.C. § 2-306(1)(3) UCC RULE: Good faith means honesty in fact in the conduct or

transaction concerned. Between merchants good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. The relevant commercial practices are “courses of performance,” “courses of dealing,” and “usages of trade.” (p706)

4. Implied Duty of Good Faith in Exercising Termination Rightsa) Corenswet, Inc. v. Amana Refrigeration, Inc. (p710)

(1) Termination of distributorship agreement(2) Termination vs Cancellation

(a) Termination - parties’ agreed means of ending performance obliga-tions pursuant to the contract

(b) Cancellation - the legal right of an aggrieved party to put an end to the parties’ performance because of material breach of the contract performance obligations

(3) Course of performance is conduct, NOT lack of conduct(a) There is no c/p by not exercising a K’l right(b) Not terminating was not a c/p

(4) Good faith and unconscionability have different roles (p716)(5) Course of performance cannot override express terms (p715)(6) When a contract contains a provision expressly sanctioning ter-

mination without cause, there is no room for implying a term that bars such a termination. There is, at best, an expectation that a party will decline to exercise it’s rights. (p716)

b) Bak-a-lum Corporation of America v. Alcoa Building Products, Inc. (p718)(1) Alleged breach of exclusive dealings K(2) Contracts of indefinite duration are terminable by either party

(for convenience) after a reasonable period of time, and with a reasonable notice period (p720)

(3) A breach of the hood faith duty in termination is relevant to as-certaining reasonable notice period.(a) Breach of good faith did not result in damages, rather the termina-

tion date was extended to the time P should have had with proper notice.

c) Baker v. Ratzlaff (p721)(1) Dispute over termination of a contract for popcorn distribution (2) ROL: A party terminating a contract must do so in good faith. If

done in bad faith, there is no right to K enforcement.5. Duty of Best Efforts

a) Common law - Persons to whom exclusive rights were conveyed must use rea-sonable efforts to make profits come into being (Wood)

b) U.C.C. § 2-306(2) - A lawful agreement by either the seller of the buyer for ex-clusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use its best efforts to supply the goods and by the buyer to use best efforts to promote their sale

c) Bloor v. Falstaff Brewing Corporation (p727)(1) Alleged breach of best efforts clause in a beer contract(2) Distinction between good faith efforts and best efforts

V. Express ConditionsA. Introduction

1. Difference between condition and promise (Morrison)a) Condition: fact or event and is not an expression of intention or assurance

(1) If not met(a) can excuse condition(b) go ahead with with K performance(c) avoid K, thus terminating any obligations of either party - “discharge

of duty”b) Promise: creates a legal duty in the promisor and a right in the promisee

(1) If not met - breach2. Conditions precedent and subsequent (p734)

a) Condition Precedent: triggers a duty (duty does not exist unless the condition occurs)

b) Condition Subsequent: terminates a duty (duty exists but is extinguished if the condition does not occur)(1) RSTMT - “event that terminates a duty”

3. Condition precedent to K formation vs. K performance (preferred canon of con-struction)

4. Promise with attached condition5. Excuse of condition or discharge of condition (Morrison)

B. Strict compliance with the condition is required:1. If the condition is the essence of the contract (Morrison, 744)2. Unless waived by the party who is benefitted by the condition

a) Waiver can be retracted, but only after notice and a reasonable period of time (Burger King 772)

3. Or unless excused because enforcement will result in extreme forfeiture or penalty, and condition is not an essential part of the exchange (Burger King, 773)

C. Conditions of Satisfaction1. Objective standard (Hutton, 753, 755)

a) Usually applies to(1) Commercial value or quality(2) Commercial or financial matters(3) Operative fitness(4) Mechanical utility

b) Judged by whether the performance would satisfy a reasonable person; dissat-isfaction cannot be claimed unreasonably

2. Subjective standard (Hutton, 753, 755)a) Usually applies to

(1) Fancy shit(2) Personal or aesthetic taste(3) Judgment(4) Feasibility of operation(5) Management(6) When objective test is impracticable

b) Judged by recipient of performance, acting in good faith; OK to be unreason-able, as long as done in good faith (Hutton 753, Morin 760)

3. Interpretation issue, so depends on express language and parties’ intent at K for-mation (Morin, 753)

4. Courts loose on this, no rules just guidelinesD. Case Law Details

1. Express conditionsa) Morrison v. Bare (p735)

(1) Man buys, refurbishes, and rents houses(2) A condition if a fact or an event event and is not an expression of

intention or an assurance. (p739)(3) A promise in a contract creates a legal duty in the promisor and a

right in the promisee (p739)(4) 2nd RSTMT § 225 - consequences of nonoccurrence (p741)

b) Internatio-Rotterdam Inc., v. River Brand Rice Mills, Inc. (p742)(1) Contract to deliver rice. Delivery required upon two weeks notice by

plaintiff. Plaintiff did not give notice before K ended so no delivery.(2) The nonoccurrence of a condition precedent to be performed by a

party to a contract acts to permit the other party to rescind the agreement or to treat its contractual obligations as discharged.

c) Peacock Construction Co. v. Modern Air Conditioning (p745)(1) When owners of a condominium did not pay P, it did not pay the subcon-

tractors.(2) Interpretation of a contract is a question of law, not fact.(3) Payment by the owner to the general contract is not a condition

precedent to the general contractor’s duty to pay the subcon-tractors.

(4) Policy considerations - General K’ors usually have more money(5) Jurisdictional split regarding interpretation of expressly conditional pay-

ment clause from contractor to sub contractor (p746)2. Conditions of Satisfaction

a) Hutton v. Monograms Plus, Inc. (p749)(1) Franchise agreement for a non-exclusive 10 year license. Subject to find-

ing financing, otherwise a refund of the 25k franchise fee(2) Objective vs reasonable tests (above)

b) Morin Building Products Company, Inc. v. Baystone Construction, Inc. (p759)(1) Contractor’s work rejected due to a construction contract stating that all

matters relating to artistic effect were subject to the final approval of the owner.

(2) An objective standard of reasonableness is the proper standard to employ in a construction contract for commercial building

(3) Extremely difficult to contract into the subjective test3. Waiver and Excuse of Conditions

a) Burger King Corp. v. Family Dining, Inc. (p764)(1) Franchise was given lots and lots of waivers

(2) 2nd RSTMT § 302(a) A condition may be excused without other reason if its requirement

i) Will involve extreme forfeiture or penalty, ANDii) Its existence or occurrence forms no essential part of the ex-

change for the promisor’s promise(3) Must give notice and a grace period to retract a waiver.(4) A right to terminate is not for an indefinite amount of time.

E. Rules to recall1. U.C.C. § 2-207 (p306)

a) Additional terms (Sec. 2)b) Common law rules on additional termsc) Contracts recognized by conduct (Sec. 3)

2. Court’s discretionary powers under unconscionability (Chpt. 5)a) To omit the unconscionability clause form the contract ORb) To limit the effect of the clause to eliminate the unconscionability

Performance, Breach, and Excuse (Chpt. 8)

I. IntroductionA. “Breach” - performance that does not match the terms and provisions of the contractB. Types of breaches

1. Repudiation2. Nonperformance3. Late performance4. Incomplete to faulty performance5. Wrongfully rejecting other party’s performance6. Failure to act in good faith in performance

II. Categories of Implied ConditionsA. Kingston v. Preston (p781)

1. Contract to work for and eventually buy a silk business2. Categories of covenants (p783)

a) Mutual and independent promises(1) Either party may recover damages from the other, for the injury that he

may have received by the breach of the covenants in his favor, and where it is no excuse for the defendant to allege a breach of the covenants by plaintiff

b) Dependent conditions(1) Performance of one depends on the performance of another, and, there-

fore, until this prior condition is performed, the other party is not liable to an action on his covenant

c) Mutual and simultaneous conditions(1) If one party was ready, and offered, to perform his, and the other ne-

glected or refused to perform his, he who was ready and offered had ful-filled his engagement and may maintain an action for the default of the other, though it is no certain that either is obliged to do the first act

d) Choose by looking at the sense and meaning of the parties3. Interpretation of covenants - Peacock, 745 - question of law

III. Performance and Breach Under the Common LawA. Implied Conditions and Performance Responsibilities

1. Jacob & Youngs v. Kent (p785)a) Reading pipe issueb) The measure of damages for a trivial and innocent omission is not

the cost of replacement, but the difference in value.c) No change will be tolerated if it is so dominant or pervasive as in any

real or substantial measure to frustrate the purpose of the contract.

No general license to install whatever, in the builder’s judgment, may be regarded as just as good.

B. Substantial Performance or Material Breach1. Roberts Contracting Co. v. Valentine-Wooten Road Public Facility Bd. (p794)

a) Contract for a sewer system that wasn’t completedb) No substantial performance for material breachc) 2nd RSTMT § 241 (p797) - Factors for determining whether perfor-

mance is substantial2. Khiterer v. Bell (p801)

a) Dental crowns made of porcelain instead of goldb) Substitution was substantial performance; “suited for intended purpose”c) Uses Jacob & Youngs Rules

C. Partial or Total Breach?1. 2nd RSTMT § 242 (p808) - Circumstances significant in determining when

remaining duties are discharged2. Sackett v. Spindler (p809)

a) Contract to buy stock where the buyer repeatedly did not render payment by the due date, causing seller to repudiate the contract.

b) Total or partial breach depends on the materiality of the breach(1) 2nd RSTMT § 317 (p471)

c) Repudiation of a contract is justified only where the breaching party’s breach constituted a total or material breach, not merely a partial breach.

D. The Complexities of Adjusting Performance after Breach1. Flowchart p8152. K&G Construction Co. v. Harris (p816)

a) K&G sued Harris, a subcontractor, for damages done to a construction site and for breach of the subcontract. Harris counter-sued for the work P had not paid for, and for lost profits.

b) Failure of one party to render substantial performance on an agree-ment may allow the other pray to refuse to perform some or all of his obligations under the contract.

c) Make sure there’s a total breach before you walk out, or else you are the breacher.

E. Divisible and Severable Contracts (p823) - multiple parted contract that can be di-vided into separate free-standing contracts1. Divisible - tactic to make substantial performance OK2. Severable - if part of a contract is invalid, other parts of K are still valid3. Clauses (p825)

IV. RepudiationA. Defining Repudiation (Renunciation)

1. Party indicates that they will not perform the contract any further sometime be-fore or during performance

2. Note: if it’s done in response to the other party’s breach, it is really just a cancel-lation.

3. McClosky & Co. v. Minweld Steel Co. (p827)a) Steel company cannot get any steal for the contractor. Termination for cause

clause in the contract.b) No right to terminate, no right to cancel because no total breachc) In order to give rise to a renunciation amounting to breach of a con-

tract, there must be absolute and unequivocal refusal to perform or a distinct and positive statement of inability to do so.

d) Where affirmative action is promised mere failure to act, at the time when action has been promised, is a breach, failure to take prepara-

tory action before the time when any performance is promised is not an anticipatory breach…(p831)

B. Anticipatory Repudiation1. When does breach occur?

a) Upon renunciationb) Hochster v. De la Tour (p833)

(1) English courier case(2) If two parties enter into a contract to be performed at a desig-

nated time in the future, and one party refuses to perform the contract before the designated time the parties agreed to per-form, the other party may sure before the contract was per-formed. That party need not wait until the time for performance has passed.

(3) Hochster free to seek alternative employment(4) Based on reciprocal implied promises, mitigation, estoppel

2. Aggrieved parties optionsa) Free to seek alternative contract (Hochster)b) U.C.C. §§ 2-610, 2-611 (p837)

(1) Anticipatory repudiation(2) Retraction of anticipatory repudiation

C. Reasonable Insecurity about Future Performance1. U.C.C. § 2-609 (p839) - right to adequate assurance2. 2nd RSTMT § 251 (p840) - when a failure to give assurance may be

treated as a repudiation3. CISG Arts. 71, 72 (p840-1) - anticipatory breach and installment con-

tracts4. “Hedge to Arrive” Contracts (p841)

V. Performance and Breach under UCC Article 2A. U.C.C. § 2-601 (p852) - Buyer’s rights on improper delivery

1. Perfect tender rule2. Buyer’s choice between rejection and acceptance

B. U.C.C. § 2-608 (p854) - Revocation of acceptance in whole or in partC. U.C.C. § 2-508 (p855) - Cure by Seller of Improper Tender or Deliver

1. Two instances for cureD. U.C.C. §§ 2-606, 2-607 (p856) - AcceptanceE. U.C.C. § 2-711 (p862) - Right to cancelF. Ramirez v. Autosport (p858)

1. Contract to buy a messed up van2. Plaintiff’s entitled to rescind the contract after seller fails to cure.

VI. Excuse Defenses: Impossibility, Impracticability, and Frustration of PurposeA. Historical Background of the Excuse Defense

1. Factual categoriesa) Personal service ksb) Continued existence of a thing

2. Not the same as mistake (Unke, 872)a) Being mistaken as to an essential fact means there is no binding contract

B. Impossibility 1. Taylor v. Caldwell (p866)

a) Agreement to use a music hall, but it burns down before performanceb) Where from the nature of a contract it appears that the parties must

from the beginning have known that is could not be fulfilled unless...some particular thing continued to exist…the contract is not to be construed as a positive contract, but as subject to an implied condition that the parties shall be excused in case, before breach,

performance becomes impossible from the perishing of the thing without default of the contractor.

2. Unke v. Thorpe (p869)a) Not enough alfalfa seed delivered.b) Ignore RSTMT § 460 (p873)c) Parties should not be subject to damages for failure to do that which,

through no fault of his own, was impossible.C. Frustration of purpose

1. Krell v. Henry (p874)a) Hired a flat or a parade, parade was moved.b) If a contract is formed with an assumption of the continued existence

of an express condition or state of things that(1) Was the foundation of the contract AND(2) And the the performance of the contract was prevented AND(3) The event that prevented the performance was of such a nature

that it cannot be reasonably said to have been in the contempla-tion of the parties.

c) Expands on Taylor2. Adbar, L.C. v. New Beginnings C-Star (p880)

a) People trying to get a permit for a halfway houseb) Doctrine of Commercial Frustration

(1) If the occurrence of an event, not foreseen by the parties and not caused by or under the control of either party, destroys or nearly destroys the value of the performance or the object or purpose of the contract, then the parties are excused from further perfor-mance.

(2) If the even was reasonably foreseeable, then the parties should have provided for its occurrence in the contract. The absence of a provision indicates an assumption of risk by the promisor… (p882)

D. Impossibility Broadens into Impracticability1. Unsuccessful cases

a) Transatlantic Financing Corp v. United States (p884)(1) Agreement to ship wheat from Texas to Iran, but war blocked the normal,

convenient route.(2) Three part test to determine impracticability

(a) An unexpected contingency occurred(b) The risk of the unexpected occurrence was not allocated to

either party by either agreement or custom(c) Occurrence of the contingency rendered performance com-

mercially impracticable(3) No excuse because custom dictated an alternate route, and insurance

should have been boughtb) Northern Ind. Public Service Co. v. Carbon County Coal Co. (p889)

(1) Contract to own and operate a coal mine, alternative fuel prices fell and they were screwed.

(2) Force majeure clauses are not intended to buffer a party against the normal risks of a contract.

(3) Frustration is a defense if something had happened to make the performance for which he would be paying worthless to him, an excuse for not paying, that is analogous to impracticability or im-possibility.(a) Rare for it to be impossible for a payor to pay

(4) Court’s do not reassign contracted risks!2. Successful cases

a) City of Vernon v. City of Los Angeles (p896)(1) Contract for a shared sewer system(2) Uses ROL from Krell

E. Force Majeure Clauses (p906)1. Specify how particular risks are allocated between parties and may help define

how the excuse defenses will be applied.2. Functions:

a) Specifying and clarifying aspects of the excuse doctrine(1) Which events the parties assume will not occur and why those nonoccur-

rence are basic assumption on which the contract is made,(2) Payor’s principle purpose (relevant for frustration of purpose)(3) Which risks are allocated to one of the parties(4) How much difficulty of performance is necessary to find impracticability

b) Adding events that can serve as excuses (ex - strikes, economic downturns, technology failures, etc.)

c) “Contracting out” of the default rules on excuse3. Be careful that the clause is not boilerplate

F. When do courts grant excuse?1. Examples pp 906-7

G. Codifications of the Excuse Defense1. U.C.C. §§ 2-615, 2-616 (p893, 909) - Excuse by failure of presupposed

conditions2. 2nd RSTMT §§ 261, 265, 266 (p910 - 11) - Discharge by supervening im-

practicability/frustration and existing impracticability/frustration3. UNIDROIT Art. 7.1.7 - Force Majeure

Remedies (Chpt. 9)

I. Overview A. Categories of remedies

1. “At Law” or “In Equity”2. Flowchart p918

II. Remedies at Law (Damages)A. Policies and counter policies (p918)

1. Four competing policies 2. Foreseeability applies only to consequential damages3. Not all polices apply to restitution, reliance, liquidated, or punitive damages

B. Three types of damages1. Expectation 2. Reliance 3. Restitution

C. Expectation Damages1. Overview

a) Categories of expectation damages(1) Direct - awarded for loss of the value of the performance promised in the

contract(2) Indirect

(a) Incidental - extra costs incurred by the aggrieved party in dealing with the breach

(b) Consequential - other losses arising as a consequence of the breach, often where “real money” is in the disputei) Ex - lost profits, lost customers, lost business volume

b) Thinking sensibly about expectation damages(1) Traditional damages formula (p922)

(2) UNIDROIT Art. 7.4.2 - Full Compensation2. Direct Damages

a) Measuring Typical Direct Damages (p925)(1) CISG Art. 75(2) UNIDROIT Art. 7.4.5 - Proof of Harm(3) Special problems in measuring direct damages

b) Damages when there is no market(1) Sackett v. Spindler (p928)

(a) Same facts as above(b) In the absence of an available market

i) the measure of damages may be (1) the difference between the contract price and the

value of the goods as best as can be ascertained, OR (2) the difference between the contract price and the

best offer that can be obtained for the goods, OR (3) the difference between the contract price and the

price obtained on resale, OR (4) the actual damages naturally and directly resulting

from the buyer’s breach.(c) Generally where the title to goods has not passed to the

buyer and the seller has the property in his possession or un-der his control, the measure of damages upon the buyer’s re-fusal to accept and pay for goods, under normal conditions, is the difference between the contract price and the market or current value at the time and place where the goods ought to have been delivered and accepted, or, if no time is fixed for acceptance, then at the time of the refusal to ac-cept.

c) Damages Resulting from Anticipatory Repudiation (by seller)(1) Cosden Oil & Chemical Co. v. Karl O. Helm Aktiengesellschaft (p933)

(a) Contract for polystyrene, but a plant has problems.(b) Three potential choices for measuring damages:

i) When he learns of the repudiationii) When he learns of the repudiation plus a commercially reason-

able timeiii) When performance is due under the contract

(c) If an aggrieved party awaits performance beyond a commer-cially reasonable time he cannot recover resulting damages which he should have avoided

(d) When a buyer chooses not to cover, but to seek damages, the market is measured at the time he could have covered - a reasonable time after repudiation.

3. Owner’s Cost to Complete versus Diminution in Valuea) Jacob & Youngs v. Kent (p940)

(1) Facts above(2) Measure of damages should not be the cost of replacement,

which would be great, but the difference in value, which would be either nominal or nothing.

b) Khiterer v. Bell (p942)(1) Facts above(2) Where substantial performance has been rendered, the remedy

is the cost of completion or correction, unless that cost is grossly and unfairly out of proportion to the good to be attained, in which case the measure is the difference in value.

(3) Where the defect in performance is substantial, the cost of com-pletion or correction will be awarded “notwithstanding the rela-tively small fee charged for services rendered”

c) Lyon v. Belosky Construction, Inc. (p943)(1) Contract to build a house, arches centered over the wrong rooms.(2) The proper measure of damages in cases involving the breach of

a construction contract is the difference between the amount due on the contract and the amount necessary to properly compete the job or to replace the defective construction, whichever is ap-propriate. Where the contractor’s breach was unintentional and constituted specific performance in good faith, and remedying the situation would result in unreasonable economic waste, dam-ages should be based upon the difference between the value of the property as constructed and the value if performance had been properly completed.

d) Peevyhouse v. Garland Coal & Mining Co. (p947)(1) P leased their farmland to D for strip mining on the condition that D fill in

the holes after completion of the mining. D didn’t fill in the holes.(2) ROL: Damages cannot be so excessive that they cause economic

waste.(3) Case of bad lawyering - always argue in the alternative

4. Damages for “Lost Profits” and “Lost Volume”a) Lost Volume

(1) Neri v. Retail Marine Corp. (p957)(a) Man buys a boat, but repudiates before delivery because of an oper-

ation. (b) A volume retail seller of standard priced goods may recover

lost profits when a buyer defaults on a purchase if market damages are inadequate to put the seller in as good a posi-tion as he would have been had the contract been per-formed.

(2) U.C.C. § 2-708 (p958)(a) (1) Seller’s market damages(b) (2) If damages under (1) are inadequate, then damages are

i) Profit (including reasonable overhead)ii) (+) incidental damagesiii) (-) due allowanceiv) (-) due credit

b) Restitution or breaching buyer(1) U.C.C. §§ 2-718(2,3) (p958)

(a) Seems to violate a lot of damages rules(b) Once the breaching party has paid a particular amount, the other

party keeps some of thatc) Lost profits

(1) Vitex Mfg. Corp. v. Caribtex Corp. (p961)(a) Breach of contract for chemically showerproofing imported cloth.

Breach, & claim for lost profits.(b) Overhead should be treated as part of gross profits and re-

coverable as damages rather than considered part of the seller’s costs.

(2) Fixed profits (overhead) vs. Variable (labor and materials) (p963)D. Indirect Expectation Damages

1. Incidental Damages (p921, 967)a) Usually administrative and mitigative costs after breachb) U.C.C. §§ 2-710, 2-715(1) (p967)

(1) Seller’s incidental damages include any commercially reasonable charges...in stopping delivery…

(2) Buyer’s incidental damages include expenses incurred in the inspection...of goods rightfully rejected…

2. Consequential Damages (p921, 968)a) Almost always awarded to only buyer/recipient, not seller/supplierb) Must be foreseeable at time of contract formation (general or specific)

(1) Hadley v. Baxendale (p969)(a) Crank shaft breaks, delay in delivery, lost profits.(b) Consequential damages must flow naturally form the breach

under ordinary circumstances.(c) If there are special circumstances, the breaching party must

be made aware of those special circumstances at the time of contract formation.

(2) Kenford Co. v. County of Eerie (p985)(a) Alleged lost profits from failure to build a proposed stadium.(b) Requirements for loss of future profits:

i) Demonstrated with certainty that damages were caused by breach

ii) Alleged loss must be capable of proofiii) Showing that damages were fairly within the contemplation of

the parties at the time of contract formationc) Causation

(1) Consequential damages appropriate if the plaintiff proves with sufficient evidence that a breach of contract proximately caused the loss of identifi-able professional opportunities (p977, Redgrave)

d) Certain (non speculative) damages(1) Redgrave v. Boston Symphony Orchestra, Inc. (p973)

(a) Famous lady wants to recover for lost movie roles after her movie was cancelled.

(b) Damages must be capable of ascertainment by reference to some definite standard, either market value, established ex-perience or direct inference from known circumstances.

e) Consequential damages for new businesses(1) Stricter standard (p988)

f) Codifications(1) U.C.C. §§ 2-715(2) (p990) - Buyer’s Incidental and Supplemental

Damages(2) CISG Art. 74 (p991)(3) UNIDROIT Art. 7.4.4 (p991)

3. Mitigation of Damages( (Avoidable Damages)a) Policies

(1) Avoiding award of damages aggrieved party could have reasonably pre-vented or avoided

b) Codifications(1) CISG Art. 77 (p992)(2) UNIDROIT Art. 7.4.8 (p992)

c) Sackett v Spindler (p993)(1) Facts above (newspaper stocks)(2) A person who has been injured by a breach of contract cannot re-

cover damages for detriment which he could have avoided by reasonable effort and without undue expense.

(3) Question of fact.

(4) Where trial court has made findings of fact showing the mitigat-ing party has acted reasonably, this finding must be upheld on appeal.

d) Parker v. Twentieth Century Fox Film Corp. (p995)(1) “Bloomer Girl” or cowboy film(2) In measuring damages for the wrongfully discharged employee,

the employer must show that the other employment was compa-rable, or substantially similar to that of which the employee has been deprived.

(3) The employee’s rejection of or failure to seek other available em-ployment of a different or inferior kind may not be resorted to in order to mitigate damages.

(4) Dissent(a) If the jobs were substantially similar, must mitigate.(b) Here, employment was not different enough in kind.

e) Failure to mitigate breaks the causal link of the aggrieved party’s damages (p991 n.1)

4. Reliance Damages (p1003)a) Promissory estoppel cases in Chpt. 3 under 2nd RSTMT sliding scaleb) “Fallback position” is no provable expectation damages

(1) Security Stove & Mfg. Co. v. American Ry. Express Co. (p1005)(a) Defendant didn’t get an important piece of the stove to the confer-

ence in time(b) Ordinarily the measure of damages when a carrier fails to

delivera shipment at a destination within a reasonable time is the difference between the market value of the goods at the time of deliver and the time when delivery should have happened.

(c) Where the carrier has notice of peculiar circumstances under which a shipment is made, which will result in an unusual loss by the shipper in case of delay in delivery, the carrier is responsible for the real damage sustained from such delay, if the notice given is of such character and goes to such ex-tent, informing the carrier of the shipper’s situation that the carrier will be presumed to have contracted with reference thereto.

(2) Goodman v. Dicker (p1010)(a) Contract for a dealer franchise, but products were never delivered.(b) Distinguishing equitable and promissory estoppel

i) Equitable estoppel(1) Misrepresentation(2) Recipient reasonable relies on it(3) Reliance causes detriment(4) Can be used only defensively (not a cause of action)

ii) Promissory estoppel(1) Promise(2) Recipient reasonably relies on it(3) Reliance causes a detriment(4) Can be used at either a cause of action, or a response to a

defense(c) Other Rules (p1011)

5. Restitution Damages (p1012)a) Review

(1) Promissory and non-promissory restitution cases in chapter 3(2) Ch. 5 cases in which K is violated

(3) Ch. 8 cases refunding price to be paid to aggrieved buyer (Ramirez)(4) Ch. 9 cases allowing breaching buyer to resitution (Neri)

b) Damages for the party who materially breaches(1) Connect with Ch.8 cases on material or total breach (not substantial per-

formance)(2) Britton v. Turner (p1013)

(a) Court uses quasi-contract and quantum meruit to compensate the la-borer

(3) Lancellotti v. Thomas (p1014)(a) Contract to operate a luncheonette business and build an addition.

Addition never built.(4) 2nd RSMT § 356 - Restitution in favor of party in breach(5) The party in breach should be entitled to recover “any

benefit...in excess of the loss that he has caused by his own breach”

c) Measuring Restitution Damages (p1021)(1) Think about it box(2) Net enrichment, cost of services provided, pro rata portion of the contract

priced) Damages for the aggrieved party in a losing contract

(1) United States v. Algernon Blair (p1022)(a) Construction contract (losing) with the US(b) The standard for measuring the reasonable value of services

rendered is the amount for which services could have been purchased from one in the plaintiff’s position at the time and place services were rendered.

(c) Split rule?6. Agreed and Liquidated Damages

a) U.C.C. §§ 2-718(1) (p1026) - Liquidation or Limitation of Damagesb) 2nd RSMT § 356 (p1026) - Liquidated Damages and Penaltiesc) Wassenaar v. Panos (p1027)

(1) Breach of employment contract - employee wrongfully terminated(2) Once a stipulated damages clause is found reasonable, the liqui-

dated damages should not be reduced at trial by the amount the employee did earn, or could have earned.

(3) Reasonableness test(a) Did the parties intend to provide damages for a penalty?(b) Is the injury caused by the breach one that is difficult or inca-

pable of accurate estimation at the time of the contract?(c) Are the stipulated damages a reasonable forecast of the

harm caused by the breach?d) Question of law because challenge is based on defense of “void for public pol-

icy”e) Burden of proof on party challenging validity of the clausef) Balancing of policies and counter policiesg) No mitigation requiredh) The Theory of Efficient Breach (p1037)

7. Punitive Damagesa) Romero v. Mervyn's (p1040)

(1) Lady “pushed” down an escalator(2) Punitive damages are appropriate when the defendant’s conduct

was malicious, fraudulent, oppressive, or committed recklessly with a wanton disregard for the plaintiff’s rights.

(3) The amount must not be so plainly unrelated to the injury or ac-tual damages such as to raise a question of sympathy, passion and prejudice as a matter of law.

b) Boise Dodge, Inc. v. Clark (1045)(1) Odometers in trucks set back before sale.(2) Punitive damages are appropriate where there is fraud, malice,

oppression, or other sufficient reason to do so.(a) Must bear reasonable relation to compensatory damages, and not be

the result of passion or prejudice.III. Equitable Remedies

A. Specific Performance1. Real estate, because each piece is unique2. Goods, if unique, rare, irreplaceable, and “other proper circumstances” (e.g.

Cover not possible) (p1051)3. Court has discretion to award, weighing

a) Unavailability of damages (Ammerman)b) Difficulty of any court supervision needed (Laclede)c) (Un)certainty of performance terms (p1054,1058)d) Public interest in performance of K (p1058)

4. Ammerman v. City Stores Co (p1051)a) Contract to be a major tenant in a strip mallb) When the contractual obligation being enforced involves more than

the mere construction and the building is to be built on land con-trolled by its owner, specific performance becomes entirely appropri-ate.

c) The mere fact that a contract, definite in material respects, contains some terms which are subject to further negotiation between P and D will not bar a decree for specific performance, if in the court’s discre-tion specific performance should be granted.

5. Laclede Gad Co. V. Amoco Oil Co. (p1055)a) Contract for supply of propane to residential developmentsb) A remedy at law adequate to defeat the grant of specific perfor-

mance must be “as certain, prompt, complete, and efficient to attain the end of justice as a decree of specific performance.

6. CISG on Specific Performancea) CISG Arts. 42 & 62

B. Prohibitory Injunction1. American Broadcasting Companies v. Wolf (p1062)

a) Wolf trying get out of a contract and move to a new networkb) Once the employment contract has terminated equitable relief is po-

tentially available only to prevent injury from unfair competition or similar tortious behavior or to enforce an express and valid anticom-petitive covenant.

c) In the absence of such circumstances, the general policy of unfet-tered competition should prevail.

C. Specific Restitution1. Return a specific item2. Usually unique and irreplaceable

Third Party Rights and Duties

I. IntroductionII. Assignment of Rights and Delegation of Duties

A. Common Law Approach

1. British Wagon Co. v. Lea & Co. (p1077)2. Crane Ice Cream v. Terminal Freezing & Heating Co. (p1082)

B. UCC and RSTMT Provisions1. U.C.C. § 2-2102. 2nd RSTMT §§ 317, 318, 322

C. A Contemporary Case1. Sally Beauty Co. v. Nexxus Products Co. (p1092)

III. Third Party BeneficiariesA. Common Law Roots of the Doctrine

1. Lawrence v. Fox (p1107)2. Seaver v. Ransom (p1113)

B. 3rd Party Beneficiaries in the Restatements1. 1st RSTMT § 1332. 2nd RSTMT §§ 302, 304, 3153. UNIDROIT Arts. 5.2.1, 5.2.2

C. Contemporary Cases1. Cretex Companies v. Constuction Leaders, Inc. (p1120)2. Martinez v. Socoma Companies, Inc. (p1128)3. 2nd RSTMT § 313

§ 3 – Third-Party Beneficiaries

Diagram! (p. 1105-6)

§ 3.1 – Common Law Roots of the Doctrine

Lawrence v. Fox·Holly owed Lawrence $300, but gave Fox a loan for $300, and he was to pay it back

to Lawrence to satisfy debt·Farley v. Cleaveland Case Law·ROL

o3PB RulesoThat where one person makes a promise to another for the benefit of a third

person, that third person may maintain an action upon it·Lawrence

oCreditor beneficiary = 1st RoIntended beneficiary = 2nd R

Seaver v. Ransom·Lady on deathbed wants to give her house to P niece after her husband dies. He

doesn’t will her the difference of value in her will and she brings suit·Moral obligation conversation

oInterest in enforcement of obligation for 3PB (Policy)

·Donee beneficiary = 1st R·Intended beneficiary = 2nd R·ROL

oAny third person, for whose direct benefit a contract was intended, can sue on it.

·Reasoning

oHusband owes as testatrix promising P money; not close relationship

§ 3.2 – Third-Party Beneficiaries in the Restatements

Restatement § 133 – Definition of Donee Beneficiary, Creditor Beneficiary, Incidental Benefi-ciary

·(1) Where performance of a promise in a contract will benefit a person other than the promisee, that person is, except as stated in subsection (3):

o(a) a donee beneficiary if it appears from the terms of the promise in view of the accompanying circumstances that the purpose of the promisee in ob-taining the promise of all or party of the performance thereof is to make a gift to the beneficiary or to confer upon him a right against the promisor to some performance neither due nor supposed or asserted to be due from the promisee to the beneficiary;

o(b) a creditor beneficiary if no purpose to make a gift appears from the terms of the promise in view of the accompanying circumstances and per-formance of the promise will satisfy an actual or supposed or asserted duty of the promisee to the beneficiary, or a right of the beneficiary against the promisee which has been barred by the statute of limitations or by a discharge in bankruptcy, or which is unenforceable because of the Statute of Frauds

o(c) an incidental beneficiary if neither the facts stated in Clause (a) nor those stated in Clause (b) exist

·(2) Such a promise as is described in Subsection (1a) is a gift promise. Such a prom-ise as is described in Subsection (1b) is a promise to discharge the promisee’s duty

Restatement (Second) § 302 – Intended and Incidental Beneficiaries

·(1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either

o(a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or

o(b) the circumstances indicate that the promisee intends to give the benefi-ciary the benefit of the promised performance

·(2) An incidental beneficiary is a beneficiary who is not an intended beneficiary

Restatement (Second) § 304 – Creation of Duty to Beneficiary·A promise in a contract creates a duty in the promisor to any intended beneficiary to

perform the promise, and the intended beneficiary may enforce the duty

Restatement (Second) § 315 – Effect of a Promise of Incidental Benefit·An incidental beneficiary acquires by virtue of the promise no right against the

promisor or the promisee

§ 3.3 – Contemporary Cases

Cretex Companies v. Construction Leaders·Facts

oPlaintiffs sought to recover the costs of materials for a construction project from defendant, their contractor's surety, arguing that they were intended third-party beneficiaries of the performance bond.

oThey argued that the terms of the original construction contracts were incor-porated by reference into the bond, and that one of those terms stated that the contractor would provide all materials, which meant that defen-dant was liable for their claims.

oDefendant argued that plaintiffs could not recover, because they were not parties to the bond and it was not created to benefit them.

oThe court found that plaintiffs were not intended third-party beneficiaries, because the bond's language did not evidence an intent to benefit them, and its performance did not discharge any duty owed them.

·IssueoIntentional or incidental beneficiaries

·HoldingoIncidental = no recoveryoThe court reversed the judgment, holding that plaintiffs were not intended

third-party beneficiaries under the performance bond, because the lan-guage of the bond did not indicate such intent.

·RuleoTests

1. Intent2. Duty owed

Martinez v. Socoma Companies·Facts

oPlaintiffs, a class of unemployed persons, sued defendant companies alleg-ing that they breached contracts made with the United States pursuant to the 1967 amendments to the Economic Opportunity Act, which obligated them to provide training and one year of employment to disadvantaged unemployed individuals.

oThe appellate court affirmed and held that the benefits to be derived from defendants' performance were clearly intended not as gifts from the gov-ernment to unemployed persons but as a means of executing the public purposes stated in the contracts and in the underlying legislation.

oIt said plaintiffs were only incidental beneficiaries and as such had no right of recovery and no standing to sue.

·HoldingoThe court affirmed dismissal of demurring defendants and held that plaintiff

unemployed persons were only incidental beneficiaries to contracts made between defendant companies and the government, and as such had no right of recovery and no standing to sue.

·Ruleo§ 145oA promisor bound to the US or to a State or municipality by contract to do an

act or render a service to some or all of the members of the public, is sub-ject to no duty under the contract to such members to give compensation for the injurious consequences of performing or attempting to perform it, or of failing to do so, unless an intention is manifested in the contract, as interpreted in light of the circumstances surrounding its formation, that the promisor shall compensate members of the public for such injurious consequences

·Here, no intent!·Dissent

oExpress intent

Restatement (Second) § 313 – Government Contracts·(1)…·(2) In particular, a promisor who contracts with a government or governmental

agency to do an act for or render a service to the public is not subject to contrac-tual liability to a member of the public for consequential damages resulting from performance or failure to perform unless

o(a) the terms of the promise provide for such liability; oro(b) the promisee is subject to liability to the member of the public for the

damages and a direct action against the promisor is consistent with the terms of the contract and with the policy of the law authorizing the con-tract and prescribing remedies for its breach