Schmitz Contracts Fall 2010

8/3/2019 Schmitz Contracts Fall 2010

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Contracts Generally

Contract is a bargained for exchange

Offer + acceptance + consideration = K

Relative bargaining power of the parties in a K are important

Efficiency allow remedy for breach so that K are performed

Important to consider how the problems could be avoided from a drafting standpoint

Course of performance = these parties in this contract

Course of dealing = past contracts between these parties

Usage of trade = everyone knows the standard w/in an industry or trade

Topic 1: Consideration

Consideration bargained for exchange, inducement, material benefit or detriment

General

Elements of Consideration (Restatement 71)

Bargained for exchange: sought by promisor in exchange for promise AND given by promisee in exchange for thatpromise

Performance may be ( 71(2)) An act other than a promise A forbearance

The creation, modification, or destruction of a legal relation Cant be nominal consideration

Reasons for consideration

Enforce deliberate decisions; discourage rash promises Efficiency so social niceties, gratuitous promises, etc. arent in court Helps to determine remedies for breach

Ordinarily, courts dont look at adequacy of consideration (Restatement 79)

Inducemen t v. gratuitous promise

Not enough that the promise induces the conduct of the promisee or that the conduct of the promisee induces the making

the promise both elements must be present Hammer v. Sidway (uncle promises $5000 to stop drinking, smoking, etc.this promise induced change in behavior (i.e

forbearance (refraining from a legal act)) in reliance upon the promise = consideration)

Contrast Cash v. Benwardin which offer to forward life insurance application was not intended or reasonably expected t

induce Cash not sending it himself (because Benward had nothing to gain)

Consideration Substitutes (equitable remedies)

Moral Obligation

past consideration is usually not valid legal consideration (Ill give you X for having done Y) because there is no bargain

(Restatement 86): 1) a promise 2) benefit previously received 3) to prevent injustice

Webb v. McGowin enforceable promise (pay $15 every 2 weeks) b/c moral obligation is sufficient consideration whepromisor has received material benefit (life saved)

HIGH standardgenerally not applicable unless large injustice Exceptions: promise not binding

If promisee conferred benefit as a gift/promisor not unjustly enriched 86(2)(a) Value is disproportionate to the benefit 86(2)(b)

Promissory Estoppel when promisee has acted in reasonable reliance on promise

Difference between moral obligation and promissory estoppel is timing (promise comes 1st in estoppel vs. past benefit in

moral obligation)

Inserted in Restatement b/c consideration is a rigid standard that would result in injustice if always required

Schmitz for Contracts, Fall 2010,


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(Restatement 90): 1)a promise 2) promissor should reasonably expect to induce action or forbearance 3) which does ind

action or forbearance on reasonable reliance 4) to prevent injustice (remedy can be limited)

Ricketts v. Scothorn 1) $2000 (not written as contingent to giving up her job) 2) contemplated her quitting her job as a

reasonable and probable consequence of his gift 3) she quit her job 4) suffer loss if $$ not paid

Need actual inducement (importance of timing) Hayes v. Plantation SteelP was going to retire anywayso the promise did not induce the promisees retiremen

didnt change his position

Factors for reasonable reliance: Specificity of the promise (Ill take care of it in Cash not specific) If you knew the grandfather didnt have the $...wouldnt be reasonable to rely

Topic 2 Formation of K Implied in Law K (Quasi-K)

Generally

There is NO PROMISE = no K

Provides compensation when one party has been unjustly enriched by the actions of another party

obligations created by law for reasons of justice

Factors:

Is there an actual express contract that covers the situation? Distinction between reasonable expectation of compensation or acting gratuitously (officious intermeddler, who w

usually not be compensated in such situations i.e. violinist serenading who you never asked to perform). Given the opportunity, would the parties have bargained for compensation? Ex. doctor saves your life on the street Justice: what is the fair remedy? Remedy pursuant to justice Was there a benefit received? (did the person seeking compensation provide a benefit)? Is it unfair for the person to have the benefit without paying anything?

Schott v. Westinghouse Electric Corporation P provided suggestion to company in contest 1) reasonable expectation of

compensation 2) benefit received since company implemented suggestion 3) justice requires compensation

Unjust Enrichment (quantum meruit as much as he deserved)

K made by an unauthorized agent

Board of Public Works v. L. Cosby Bernard & Co. city engineer instructed architects to plan a more expensive facil

even though only common council had that authority; work performed and payment refusedb/c of apparent authorrecovery under unjust enrichment (benefit conferred, not under original K, expectation of $)

Does not allow recovery under an illegal K

S.T. Grand, Inc. v. NYCcleaning performed, but K illegal b/c of bribery; no recovery b/c against public policy donwant to encourage violation of public bidding

(Restatement 197) no claim in restitution for promise unenforceable on grounds of public policy

Offer

Generally (Restatement 24) the manifestation of willingness to enter into a bargain, so made as to justify another person

the understanding that his assent to that bargain is invited and will conclude it

Elements:

Expression of a promise, undertaking, or commitment to enter into a K Definite and certain in its terms Communicated to the offeree

Offeror is master of the offer

Offer v. preliminary negotiations/invitations to bargain

(Restatement 26) Preliminary negotiations/invitations to bargain are not offers if the person to whom its addressed has

reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation assent

26 cmt b advertisements are almost always NOT offersLeonard v. Pepsico, Inc. (pepsi points for harrier fighter je



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Factors to distinguish offer from invitation to bargain:

Clear, definite, explicit, nothing left to negotiate Degree of definiteness and certainty of terms (who, what is being offered, is quantity limited?, is it an exact time?) Course of performance; if there is an ongoing K, how has it been performed in the past by both parties? Course of dealing; the prior relationship of the parties Trade usage (custom in the industry).

Use objective, reasonable person standard to decide if offer or invitation to bargainLeonard

Revocation of an offer prior to acceptance

Offer is usually revocable unless it is turned into an irrevocable option through consideration (rationale dont want offeto speculate)

(Restatement 41)power of acceptance terminated at time specified in offer or at the end of a reasonable time (Restatement 42) offerees power of acceptance terminated when the offeree receives revocationAllen R. Krauss C

or 43 if offeror takes definite action inconsistent w/ intention to enter into proposed K and offeree finds out about i

Limitations on an offerors power to revoke

Consideration transforms offers into options (cant revoke before the stipulated time expires)

Option K: (Restatement 87) Offer is binding as option K if 1) in writing and signed by offeror, 2) recites consideration for making of the offe

proposes an exchange on fair terms within a reasonable time

Unlike most Ks do look at adequacy of consideration for option K i.e. disproportionate amount between the

consideration and the value of the option Ex.Allen R. Krauss Co. v. Foxthere was no consideration for the counteroffer, so it could be revoked at any time be

acceptance ($5000 earnest $ was for original agreement, not the optionso it was ok for Fox to take property off themarket)

Part performance creates an option KNewberger v. Rifkindcontinued employment constitutes consideration for stocoptions (inducement to workoffer invites offeree to accept by rendering performance) (Restatement 45)

Promissory estoppel : option K binding if offeror should have reasonably expected offer to induce action or forbearance o

offeree before acceptance

S.M. Wilson & Co. v. Prepakt Concrete Co. sub-contractor who revoked offer knew that offeree contractor dependeoffer to make bid and was bound to it (even though offer expired by terms, due date was waived by continuing toindicate willingness to perform)

Reasonable expectation based on custom & usage of trade

UCC 2-205 firm offer rule permits some offers to be irrevocable w/out consideration if signed offer by a merchant S.M

Wilson & Co

Termination of an offer by law

Revoked by death or incapacity of the offeror or offeree (Restatement 48), unless irrevocable by consideration

Acceptance

Generally (Restatement 50) manifestation of assent to the terms thereof made by the offeree in a manner invited or require

the offer

Acceptance by promise or by performance; if neither is specified the offeree can accept either way (Restatement 32) Bilateral K promise given in exchange for a promise Unilateral K promise in exchange for performance

Option K created when offeree tenders or begins the invited performance 45(1); offeror need not perform unlethe offeree completes performance 45(2)

the beginning of the invited performance is acceptance and operates as a promise to complete performance(Restatement 62)

acceptance good when sent (generally, see below)

rejection good when received by offeror

Mailbox Rule (Restatement 62)



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Acceptance in compliance w/ offer is operative at moment it leaves offerees possession with sufficient postage & proper

addressed (w/out regard as to whether it ever reaches the offeror)Henthorn v. Fraser(offer accepted when acceptancemailed, happened before he received revocation which is only effective once received)

Limitations on Mailbox rule

Acceptance for option K not operative until received by offeror 63(b) Acceptance by telephone, or instantaneous 2-way communication like email governed as if parties are in the presenc

each other 64

Offeror can expressly vary the mailbox rule and make acceptance conditional on receipt but intention needs to be c Worms v. Burgess intent to vary mailbox rule not clear enough

If offeree sends a rejection 1st then an acceptance, whichever arrives 1st is valid If an offeree sends an acceptance first and then sends a rejection, the acceptance is effective (mailed first) unless the

rejection arrives first and the offeror detrimentally relies upon it.

Acceptance by Silence (Restatement 69)

Acceptance typically must be communicated Curtis Co. v. Mason (party cant state a K to purchase crops on own terms a

unilaterally form a Kseller must agree to sell goods)

Exceptions

(a) Offeree takes benefit (b) there was understanding that silence would be acceptance Previous dealings so that it is reasonable for offeree should notify the offeror if he does not intend to accept

Discrepancy between Offer and Acceptance

Counter-offers (Restatement 39)

Common law Mirror Image Rule: If acceptance contains any terms that are different than the original offer, it is a rejec

and a new offerMinneapolis & St. L. Ry. Co. v. Columbus Rolling Mill Co. (varying the # of tons was a rejection)

Power of acceptance of original offer is terminated by a counteroffer, unless offeror has indicated that original offer is sti

open or the counter-offer reserves the right to accept the original offer 39(2)Minneapolis

Acceptance can also request a change or addition to the terms, as long as the acceptance doesnt depend on an assent to th

changed/added terms (Restatement 61)

Discrepancies between offer and acceptance in under UCC Article 2 Battle of the Forms

to determine if common law for services or UCC for sale of goods (UCC 2-102) applies to Kwhat is the predomin

purpose of the K? goods or services? Mirror Image Rule abandoned under UCC 2-207 a definite expression of acceptance or written confirmation w/in reasonable time operates as an acceptance even if th

are additional/different terms (unless acceptance made expressly conditional on assent to those terms)

between merchants the additional terms AUTOMATICALLY become part of the K unless: 2-207(2) the offer expressly limits acceptance to the terms of the offerBrown Machine they materially alter the KBrown Machine v. Hercules (cool whip case indemnification clause is material) objection has already been given or is given w/in reasonable time (merchant = a person who deals in goods of the kind or otherwise by his occupation holds himself out as having

knowledge in the area UCC 2-104(1)

K involving a non-merchant additional terms are regarded as a proposals

Shrink Wrap Licenses (1 form, not 2so no battle of the forms)

Cases dealing with software/electronics where contracts/licenses are contained within box and are not available for custo

review prior to purchaseProCD, Inc. v. Zeidenberg

Courts typically treat this as a sale of goods and not of a license to use information; thus, U.C.C. generally applies ProCD

Majority rule the offer is the license and the acceptance is using the product; user can return product for refund if after

reviewing the license he/she does not agree to its provisions

UCC 2-606(1)(b) a buyer accepts goods when, after an opportunity to inspect, fails to make an effective rejection unUCC 2-602

click through licenses are generally enforceable as well

Policy considerations for decision:

Commercial reality that its not feasible to put terms on the outside of the box



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Promote efficiency It is rare as a consumer to have a specifically negotiated (non-form) contract (in other words, this phenomenon happe

all the time elsewhere, why should it be disallowed for software and electronics manufacturers?)

Modifications

Generally

an agreement to amend a prior agreement

If U.C.C. applies to K (i.e., sale of goods), UCC 2-209 governs the modification and no consideration is necessary

Modifications must be in good faith to be binding Modifications must meet Statute of Frauds if K as modified is within the purview of the Statute of Frauds Between merchants , if an agreement excludes modification except by a signed writing, that form must be separately

signed by other party

If U.C.C. does not apply, the modification is governed by Restatement 89 and consideration is necessaryJole v.

Bredbenner(no consideration to forebear the previous rent)

Restatement 73 performance of a contractual duty is not consideration for a new promise Under 89 for modification to be binding

a) modification is fair & equitable (objectively demonstrable reason for seeking modification) in view ofcircumstances not anticipated at time of K

b) to the extent provided by statute c) to the extent that justice requires enforcement in view of material change of position in reliance on the proms

Unenforceable modifications

modification (or any K) is void if made under duress: 1) bad faith threat to breach 2) no reasonable alternative to acceptin

the modification exists for the injured partyAustin Instrument, Inc. v. Loral Corp. (modification for additionalcompensation, no reasonable alternative b/c needed to protect reputation)

Accord and Satisfaction agreements

Accord an offer to settle a good faith dispute (K between creditor/debtor for settlement of creditors claim by performa

other than amount of the claim)

Satisfaction acceptance by performance (taking the settlement)

Dispute must be in good faithJole v. Bredbenner(this was $$ she legally owed the landlordnot a good faith dispute)

In a good faith dispute, once a check is offered by one party as part of an accord and satisfaction agreement is cashed, the

other party has accepted the offer and waived other rights, even if that party attempts to reserve certain rights in theendorsement of the checkCounty Fire Door Corp. v. C.F. Wooding Co.

UCC 1-207 and UCC 3-311 says that you cant cash a check for accord and satisfaction under protest informalresolution by full satisfaction checks encouraged

Express Warranties v. Puffing

Distinguishing express warranties from puffing (words that do not constitute promises)

Key Factors when a promise is enforceable

Is it an objectively verifiable promise? Did the statement invite reasonable reliance? (look at course of dealing, course of performance)

Carpenter v. Chrysler Corporation (car dealer invites reasonable reliance) Was it an opinion, exaggeration, hope v. statement of factAbrams v. College (merely puffing b/c it is

desirable/everything would be done are not objectively verifiable and statements of hope)

Is it about price (puffing) or about the quality of the goods/conforming to a standard i.e. warranty? (more likely to bepromise thats enforceable if its about quality)

Reliance and course of dealing are important

Inconsistent representations /contradictory employment practices may negate a disclaimer (i.e. waive through conducPayne v. Sunnyside Community Hospital(reasonable expectation that employer would follow discipline proceduredespite disclaimer, b/c employer had a pattern of acting consistent w/ policies)



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UCC 2-208 express terms>course of performance>course of dealing and usage of trade (in K for sale, c/p is releto determining the meaning of the K; attempt to read conduct as consistent with terms)

UCC 2-313 Express Warranties (what became the basis of the bargain? Or what is fairly to be regarded as part of the K?)

seller are created by:

Affirmation of fact (objectively verifiable?) Carpenter v. Chrysler Corporation (new = express warranty)

Description of the goods quality, not price Sample or model (indicative of what you should expect) An affirmation merely of value of the goods does not create a warrantyScheirman v. Coulter(crazy cookware; wou

be sold at a reduced price and only available through distributors not express warranties)

Inchoate Agreements

General

agreements to agree even when the words used clearly are promissory in nature, they may be part of preliminary

negotiations only and not intended to be binding until further agreement is reached between the parties

Generally, parties cannot be forced to bargain; and courts will only enforce if agreement is sufficiently definite i.e. an

adequate meeting of the minds

(Restatement 27) manifestations may be preliminary negotiations; factors to determine whether a K has been conclud

(need to be sufficiently definite)

Extent to which express agreement has been reach on all the terms to be included

Cottonwood Mall Co. v Sine (extension or renewal of a lease must specify the time the lease is to extend and thrate of rent to be paid with such a degree of certainty and definiteness that nothing is left to future determination

Restatement 33 terms of a K must be reasonably certain i.e. breach and remedy could be determinedto beenforced

If it was a sale of goods under UCC 2-204: even though one or more terms are left open a K for sale does not ffor indefiniteness if the parties have intended to make a K and there is a reasonably certain basis for giving anappropriate remedy

Whether the K is of a type usually put in writing Whether it needs a formal writing for its full expression Whether it has few or many details Whether the amount involved is large or small, etc.

Whether either party takes any action in preparation for performance during negotiations

Commercial leases

Courts in some jurisdictions will step in and mandate renewal/set the rent, especially if the landlord has acted in bad faith

(often trying to lease to a 3rd party for higher rent)Berrey v. Jeffcoat(also, in this case there was a written Keasier forcourt to work w/ than oral promise in Cottonwood Mall)

Courts more likely to view a good faith breakdown in negotiations as an unenforceable inchoate agreement Cottonwood M

Co. v Sine

Promissory estoppel/unjust enrichment in inchoate agreements

Damages may be awarded and a preliminary K treated as enforceable where a party has relied upon the promises made

during those negotiations to his detrimentHoffman v. Red Owl Stores, Inc.(franchisee allowed to recover b/c of failure o

to keep promises which 1) D should have expected to induce action which 2) induced P to act to their detriment and 3)injustice avoided through enforcement; P gets reliance damages)

Even if there was no enforceable K b/c it wasnt complete, definite, & certain in its material provisions, no promissory

estoppel if no detrimental reliance and everyone acted in good faithDursteler v. Dursteler(mink ranch; both get restitutifor unjust enrichment (benefit conferred which it would be unjust for the other party to retain) b/c neither acted in bad fai

Implied Terms

Warranties of quality in sale of goods

UCC 2-314 merchantability; unless excluded or modified, a warranty that the goods shall be merchantable is implied in

for their sale if seller is a merchant; fair average quality & fit for the ordinary purpose



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ONLY applies to MERCHANTS (someone who deals in goods of the kind or otherwise holds himself out to have spknowledge)

No fault system - Does not matter if the seller didnt know of the defect himself or if he could not have discovered itVlases v. Montgomery Ward & Co. (sick chick case; chicks not of fair average quality or fit for ordinary purposes ondelivery)

In medical cases, an adverse reaction to a drug will no give rise to a cause of action for breach of the implied warranmerchantability b/c the goods were merchantableBatiste v. American Home Products Corp. (P got stroke from birthcontrol)

UCC 2-315 fitness for a particular purpose; if seller at time of K has reason to know any particular purpose for which t

goods are required and the buyer is relying on the sellers skill/judgmentunless excluded or modified an implied warrathat the gods shall be fit for such particular purpose

Applies to merchants and non-merchants Has to be something greater than the ordinary purpose

Good faith

Generally

Every K imposes an obligation of good faith in performance or enforcement UCC 1-203 (good faith = honesty in facreasonable commercial standards of fair dealing UCC 1-201applies to all transactions); duty of good faith & fairdealing Restatement 205

Only applies once a K is established (good faith in performance); no duty to negotiate a K in good faith unless you ofiduciary relationship

Court can enforce the spirit of the K by finding that the partys performance is in breach of this obligation Good faith can create consideration (intent to be bound) Used to fill the gaps; cant be used to override express terms in a K

Requirements K UCC 2-306 = seller will fulfill all of the buyers requirements for a certain good

A buyer in a requirements K can go below a certain level or zero as long as it happens in good faithBrewster ofLynchburg, Inc. v. Dial Corp. (proof that dial corp. closed a lot of factories b/c of reasonable business decisions, notthey wanted to get out of the K)

With no special element of reliance or unequal bargaining power, generally if an absolute right to terminate exists inK, the motive of the terminating party is irrelevant (termination can be in good faith or bad faith) Triangle Mining CStauffer Chemical Co.

Output K seller agrees to sell all of the specified goods that he produces

Good Faith in Solicitations of Bids

In government K, duty to consider all bids in good faith; dont have to award K to lowest bidder, but have to considegood faith

With government K worried about bad faith because of taxpayer $$ Get reliance damages (cost of preparation of bid b/c relied on good faith in consideration) not expectation (benefit of

bargain what they would have received from Kbut too speculative that they would have received K)Heyer ProdCo. v. U.S. (u/t, c/d, c/p)winning bid was twice the lowest bidsuspicious since losing bid had testified in front oSenate

Good Faith in Employment K

At will K (terminable at any time by either party)employees sometimes protected by collective bargaining (need jucause, forbid discrimination, etc)

Breach of at will K (can fire for any reason or no reason at all) if termination is motivated by bad faith or based onretalitation

Where bargaining power between the two parties to an at-will employment K is unequal, courts in somejurisdictions will uphold breach of employment K suits where the Ps discharge was retaliatory/in bad faith (muhave cause to discharge)Monge v. Beebe Rubber Co.

Not every state recognizes implied duty of good faith in employment K Where the discharged party possesses substantially equal bargaining power (e.g., an executive at a corporation),

he/she can typically be fired for or without causeMurphy v. American Home Products Corp. (plus, encouragealternative way to protect employeei.e. statutes)



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Topic 3: Defenses to Formation and Enforcement of K Statute of Frauds (see handout also)

Generally Restatement 124-150

Some K must be in writing (memorandum) to be enforceable

1) Transfer of real property interest (and leases over 1 year) Restatement 125 2) UCC 2-201 K for sale over goods over $500 (revised will increase) 3) one year provision K that by their terms cant be performed in 1 year Restatement 130

Burton v. Atomic Workers Federal Credit Union (SOF applies to term K over a year; death, breach dont countperformance)

4) K made in consideration of marriage Restatement 124 5) suretyship provision promise to pay the debt/default of another, not for your own benefit (a cosigner isnt a su

cosigner is part of original K)

i.e. S.O.F. does not apply when one guarantees a debt of his own Wash. Belt & Drive Systems, Inc. v. ActiveErectors (pg 181)

Purpose

Evidentiary function efficient, easier to prove (getting past SOF doesnt mean that you winjust that you can usewriting as evidence of a Kstill have to prove that there was a K)

Cautionary function - induces deliberation in making promise

Channeling function easier for judges to determine if enforceable

Type of writing required

some memorandum or note thereof need not be full-fledged K or w/in a single document

Restatement 131

Indicate parties & signed by or on behalf of party to be charged If signed by fewer than all parties, the K is enforceable against signers but not others Restatement 135 Electronic K is enforceable Printed name/seal is sufficient

Reasonably identifies the subject matter of K States w/ reasonable certainty the essential terms of the unperformed promises

Price or consideration Hoffman v. Sun Valley Co., Inc. (didnt contain all the terms of the agreement i.e. deferred payments) May be several writings if one is signed and the writings clearly indicate that they relate to the same transaction Restatem

132

Unsigned writing may be considered part of a signed memorandum only where express reference to it is madeHoffmv. Sun Valley Co., Inc. (check didnt expressly reference letter)

UCC 2-201(1) less strict than common law

QUANTITY has to be in K (all courts agree not to enforce an alleged K past what was written as quantity) For K over specified $$ amount in jurisdiction must be signed by party to be charged (not both parties) Merchant Exception confirmatory memo/purchase orders rule UCC 2-201(2)

In a K between merchants, if 1 party, w/in a reasonable time after an oral understanding has been reached, sendswritten confirmation to the other party that binds the sender, it will satisfy the SOF requirements against therecipient who has reason to know of its contentsBazak Intl Corp. v. Mast Industries, Inc.

Unless written notice of the objection is given 10 days after received

UCC exceptionswhen a writing is not required UCC 2-201(3) Specifically manufactured goods admission by party against whom enforcement is sought that there was a K for saleDF Activities Corp. v. Brow

(but D did not admit in this case)

if payment & acceptance (entitles buyer to goods) or received & accepted (entitles seller to payment only for goreceived and accepted)

Exceptions to permit parties to prove oral K

Estoppel Restatement 139 (reasonable reliance)



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Allied Grape Growers v. Bronco Wine Co. (force purchase of corneilian grapes because relied on promise to detrimhad canceled K to provide grapes to other wineries, when D cancelledgrapes rot)

Remedy limited as justice requires Part Performance UCC 2-201(3)(c)

Jolley v. Clay (tendered of payment for land , taken possession, and made improvementsspecific performanceordered despite lack of evidence in writing)

Usually only get this exception for specific performance, not damages

Oral Modifications

If original K over $500modification must be in writing UCC 2-209(3)

Effect of no oral modification clause applies SOF to any K that contains them

some courts will strictly enforce other courts will not enforce if 1 party orally waived the requirement and the other acted in reliance Wagner v. Grazi

Construction Co. (change order construction case usage of trade course of dealing) Restatement 149-150

Parole Evidence Rule

General UCC 2-202 Evidence of prior or contemporaneous agreement (oral or written) is inadmissible if they contradict or

modify a writing intended by the parties to be a final expression of their agreement

Applies to any K which the parties have put in writing (whereas SOF limited to certain K)

Evidence outside the 4 corners of the document as to what was really intended but unstated or misstated is generallyinadmissible to add to or vary the writing

A K is not, on its face, a final integration could be preliminary (ex. standard form K, deed, etc. probably not finalintegration) PER does not apply to modifications

Merger clause (states that K completely expresses full agreement) strengthens presumption that K is final integration WW

Associates v. Giancontieri(very clear K between sophisticated business parties wont admit evidence contradicting anunambiguous reciprocal cancellation provision)

Final integration

Completely integrated K a complete & exclusive statement of the terms of the K Restatement 210

Determined by the court

if the additional terms are such that, if agreed upon, they would certainly have been included in the document in the view

the court then inadmissible

Exceptions

Oral Conditions : parole evidence is admissible to show that a written instrument is not to become a binding obligation ex

upon the happening of a certain event (doesnt vary or contradict terms, but shows what must occur before agreement takeffect)Scott v. Wall(oral promise to return down-payment if wall couldnt get lease) Restatement 217

Consistent Additional Terms & Ambiguity Restatement 216: parole evidence is admissible to prove the existence of a

separate oral agreement as to any matter on which the document is silent & which is not inconsistent with its termsMasterson v. Sine (especially because family K, no merger clause, real estate deeds generally are not complete integratioparties not expect they would need to expressly cover assignment in the K) UCC 2-202(b)

Proof of a claimed collateral agreement is admissible if it is such an agreement as might naturally have been made aseparate agreement by the parties

trade usage & course of dealing can supplement K terms Columbia Nitrogen Corp. v. Royster(price & quantity in K for

materials in fertilizer are projections to be adjusted by market forces) UCC 2-202(a)

Topic 4: Unfair Contracts Doctrines which allow courts to refuse to enforce some K no matter how clear the terms

2 approaches: were the parties unequal in bargaining power/sophistication? Fairness of the terms of the K

If you get out of a K for incapacity must give back money/benefit conferred unless they already spent it before they knew th

could get out of the K

IncapacityRestatement 12-16



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Intoxicated Persons lack capacity to K if the other party has reason to know that he is unable to understand/act in a reasonable

manner because of intoxication Restatement 16

Mental Illness or Defect Restatement 15

Only matters if mental illness existed at time of K

Voidable if 1) he is unable to reasonably understand the consequences 2) he is unable to act in a reasonable manner &other party has reason to knowKrasner v. Berk(transaction is not one a reasonably competent person might have mto sign a lease if doctor was going to give up practice)

If the K is made on fair terms & other party does not have knowledge of the mental illness, the K can be enforced if the K

been so performed in whole or in part or avoidance would be unjust

Infants (minors)

Age varies by jurisdiction, but no capacity to contract until 18 Restatement 14

A K between an adult and an infant is binding on the adult, but not on the infantParrent v. Midway Toyota K with a minor requires signature of legal guardian to be enforceableParrent v. Midway Toyota

Fiduciary Relationship

Limited enforcement of K between persons in a fiduciary relationship; more easily voidable

Fiduciaries generally have duty of good faith & fair dealing in pre-contractual negotiations (not true in absence of fiduciary)

When a fiduciary relationship arisesdefined by statute, but common ex:

Guardian/minor

Trustee/beneficiary

Real estate agent/client Turner v. Guy (violation of fiduciary by fairing to disclose all facts material to the transaction)

Client/attorney

Doctor/patient

Fiduciary relationship NOT established b/c someone claims to be an expert Thomas v. Caldwell(antique vase appraiser

reliance on an assertion of opinion i.e. value of the vase not justified; although under Restatement 169(b) if he was anexpert reliance would be justified)

Mistake of Fact

Restatement 157 mistaken parties fault in failing to know or discover facts before K doesnt bar him from relief unless he fto act in good faith

Mutual Mistake Restatement 152

Definition: when both parties entering into a K are mistaken about the facts relating to the agreement, the K may be void

by the adversely affected party

Mistake must occur at the time of contracting

Elements:

Mistake concerns a basic assumption on which K was made (does not include mistake of market conditions, generalldoes not include value)

Woyma v. Ciolek(basic assumption that she was not injured in the car accidentcourt lets woman out of releasnot sue for personal injury)

The mistake has a material effect on the agreed upon exchange Reilley v. Richards (lack of knowledge that the land was on a floodway so that house couldnt be built constitut

mutual mistake)

Has the risk been allocated? Restatement 154 Risk is allocated by agreement (i.e. escape clause) He is aware, at the time of K, that he has only limited knowledge w/ respect to the facts to which mistake relates

treats ignorance as sufficient

Unilateral Mistake Restatement 153

Definition: where only 1 of the parties at the time of K was mistaken about facts relating to the agreement, will not preve

enforcement of the K UNLESS

Schmitz for Contracts, Fall 2010, p


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The non-mistaken party had reason to know of the mistake or his fault created the mistake (i.e. 1 party is trying to takadvantage of the other party)

Donovan v. RRL Corp. (unilateral mistake of fact regarding price in good faith & enforcement with erroneous pwould be unconscionable + buyer seemed to know that ad was a mistake)

Elements

Mistake about basic assumption (often price) Material effect on agreed upon exchange Adversely affected party does not bear the risk Effect of the mistake is such that enforcement of K would be unconscionable

Unconscionability & Adhesion K

Generally

Restatement 208 and UCC 2-302

Usually involve parties with unequal bargaining power Flexibility in remedy: a court can refuse to enforce a provision or an entire K (or modify the K) to avoid unconscion

terms

a matter of law; highly subjective

Unconscionability

(1) Substantive : terms of the deal (are the unduly oppressive or beyond the reasonable expectations of the weaker party)

(2) Procedural : focus on the bargaining process at the time of K (unequal bargaining power/sophistication v. true, freeconsent)

Although its a 2 prong test, some courts may use sliding scale analysis (if 1 is very unconscionable might need less in th

other prong)

Ex. Weaver v. American Oil Co. (1) substantivehold-harmless clause beyond Weavers expectationliable even when

negligent oil co. employee poured gas on him (2) procedural b/c of lack of bargaining power

Adhesion K take it or leave it (generally enforceable unless other factors present to render it unconscionable)

Graham v. Scissor-Tail, Inc. (1) procedural b/c adhesion (music industry requires this K written by union) (2)substantive b/c the arbitrator was biased (unduly oppressive & beyond reasonable expectations)REMEDY stillenforce arbitration but find neutral arbitrator

Price unconscionability (2.5 times market price) usually applicable in financing K when youre unaware of how much y

eventually oweJones v. Star Credit Corp. (procedural b/c unequal bargaining power (on welfare) and substantive b/c owmore than 3 times retail price of freezer in door-to-door sale)

today there are home solicitation statutes & cooling off periods for diamonds, etc. creditors must disclose finance charge

Can look at unconscionability in light of course of dealingRemco Enterprises v. Houston (she understood and agreed to

K terms in the past b/c she had rented stereo & used option to purchasecant claim unconscionability now that shedefaulted on tv)

Topic 5: Rules to prevent unfair K for the Sale of Goods (warranty disclaimers & remedy limitations)

Disclaimer of Warranties UCC 2-316

Express Warranties Definition any affirmation of fact or promise, description of goods, model or sample that became a basis of the bargain

(does not include statements of opinion)

Difficult to disclaim! words or conduct that create an express warranty & words or conduct negating or limiting that

warranty shall be constructed whenever reasonable as consistent w/ each otherbut negation or limitation is inoperativesuch construction is unreasonable

Almost every sale includes a description of the goods & the basic obligation from that express warranty cant be readof the KA & M Produce Co. v. FMC Corp. (disclaimer commercially unreasonable b/c went to the basic characterisof the product)

Implied Warranties

All implied warranties are excluded by expressions like as is



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Disclaimer forimplied warranty of fitness for particular purpose must be in writing

Writing must be CONSPICUOUS

A reasonable person against whom the clause will operate ought to have noticed it UCC 1-201(10), i.e. bold, differenfont, all caps

When disclaimers do not have to be in writing

Disclaimer forimplied warranty of merchantability does not to be in writing When a buyer before entering into K has examined goods/sample/model or has refused to examine the goods, there

implied warranty w/ regard to latent defects (that could have been discovered on examination)Lumber MutualInsurance Co. v. Clarklift of Detroit(sophisticated buyer who had previously leased the forklift for 3 months)

Implied warranty can be excluded or modified by course of dealing, course of performance, usage of trade

Even if a disclaimer is conspicuous, it might be unconscionable UCC 2-302

(1) procedural b/c adhesion K (2) substantive b/c FMC in essence guaranteed nothing about the productdifficult toexclude express warranty b/c its a basis for formation of KA & M Produce Co. v. FMC Corp. (salesman saidhydrocooler was unnecessary; then disclaimed all warranties)

Limitations of Remedy for breach of warranty UCC 2-719(different than disclaimer b/c they give the buyersome remedy)

Generally

K may limit the buyers remedies to return of the goods & repayment of the price or to repair & replacement of non-

conforming goods or parts

Resort to remedy as provided is optional unless expressly agreed to be exclusive

BUT not enforceable if circumstances cause an exclusive/limited remedy to fail of its essential purpose

Consequential damages (see UCC 2-715(2))

May be limited or excluded UNLESS it is unconscionable

Limitation of consequential damages for injury to he person in the case of consumer goods isprima facie unconscionable

Collins v. Uniroyal(when a person is killed by blowout of a defective tire, giving widow a new tire is not adequatecompensation)

Limitation of damages for commercial loss is NOTprima facie unconscionable

Topic 6: Specific Performance & Damages (remedies based on affirmance of K)

Specific Performance (at common lawsee Topic 7 in UCC)

Generally Restatement 357

Equitable remedy, usually only awarded if legal remedy is inadequate 359

Ex. Goldblatt Bros. Inc. v. Addison Green Meadows, Inc. (ordered paving of access road b/c need for s.p. cantquantify lost client base, would take time to find substituteand burdens are not large+ beneficial to 3rd parties)

Does specific performance prevent efficient breach?...or would it foster inefficiency if people couldnt rely on their K

Balancing act between the need v. burden

Factors in need for specific performance Restatement 360 Difficult to prove $$$ damages, with reasonable certainty

D has no money $$$ damages inadequate because its UNIQUE (cant have substitute performance) Real estate, especially in the context of business is considered uniqueSeverson v. Elberon Elevator Inc. (g

elevator business)

Factors in burden Burden on court for supervision/enforcement Restatement 366 But wont shirk from specific performance f need is great or there is substantial public interest involved

Burden on 3rd parties and the public Perry v. Tanglwood Lakes, Inc. (developer & homeowners association agreed to make recreational areac

doesnt order lake to be built; plus would require constant supervision)

Burden on the breacher (most clearly in employment K)



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Rogers v. Runfola & Associates

Reasons to deny specific performance

if the buyersperformance is not secured to the satisfaction of the court Restatement 363 (i.e. paying for land in

installment K)

if the K is not sufficiently definite Restatement 362

if such relief would be unfair because Restatement 364

the K was induced by mistake or unfair practices the relief would cause unreasonable hardship or loss to breaching party of 3rd parties the exchange is grossly inadequate or the terms are unfair

Employment K

Employees will not be ordered to work for someone Restatement 367Nassau Sports v. Peters

Undesirable to compel a performance involving personal relations (i.e. involuntary servitude) Employees will be enjoined from working for others (non-compete clausemust be ancillary to anther valid K otherwi

against anti-trust)

Nassau Sports v. Peters (UNIQUE and exceptional talent) Exception : will not be enforced if: (factors to consider pg 343!!!)

1) unreasonably broad for the protection of the employer (geography) 2) injurious to the public (i.e. covenants not to compete for doctors) 3) imposes undue hardship on employee i.e. leaves employee without reasonable means of making a living Rogers v. Runfola & Associates (court reportersthis was their only means of employment)

Damages (Expectation v. Reliance)

See handout

Goal: to make the injured party whole, not to compel performance or punish the breaching party

Must be able to prove damages with reasonable certainty

Ex. [the value of a perfect nose]-[the nose she got]+[pain & suffering]-[doctor fee] (expectation) v. out-of-pocket expense

doctor (reliance)Sullivan v. OConnor

Expectation (preferred measure of damages)

Definition: those which attempt to place him in the position he would have occupied had the K been fully performed

BENEFIT OF THE BARGAIN; similar to specific performance but in $$$ damages, deters breach of K (promote relianc

K) Restatement 347 General formula = [loss in value]+[other loss]-[cost/loss avoided]

The loss in value to him of the other partys performance caused by its failure or deficiency PLUS Any other loss (including incidental or consequentialreasonable test)

Incidental - $$ spent dealing w/ the breach i.e. mitigate (ex. if rat problem in apt. $$ spent on rat poison or ifreleasing money spent remodeling the space to rerent)

Consequential arent part of direct breach, but happen as a consequence (ex. moving expenses if you had to mour of apt. b/c of rat problem or rats ate your clothes)

court will award consequential damages that were reasonably foreseeable from breach

P must prove that both parties were aware of circumstances to cause these consequential damages

Usually pain and suffering not recoverable under K unless special situation (i.e. in transportation of a dead body

MINUS any cost avoided by not having to perform (to avoid putting P in better position than full performance would

have achieved)

Ex. for breach of a construction K: the builder recovers the K price MINUS (1) any payments made by the owners on the

and (2) what it would have cost the builder to complete the project

Reliance (2nd choice for damages)changed his position (i.e. lost opportunity to enter other K)

Definition: those which attempt to place the injured party in the position that he would have been in had there been no K

Restatement 349

Expenditures made in preparation for performance or in performance MINUS any loss that the party in breach can prove with reasonable certainty the injured party would have suffered h

the K been performed

Generally awarded if



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Expectation damages are too speculative; cant be calculated with reasonable certainty (ex. speculation on lost profit Gruber v. SM News Co. (get out-of-pocket expenses because too difficult to calculate how many xmas cards D

would have soldand clear liability for D for failing to exercise reasonable diligence to sell the cards (only sold4/700 wholesalers); D has burden to prove that it would have been a losing K)

Booker v. Midpac Lumber Co.(wont award expectation damages to wrongfully discharged attorney b/c speculthat this attorney would have gotten same result (i.e. cant use what case was ultimately worth)instead based obillable hours)

Quantum meruit as much as he/she deserved

losing Ki.e. little or no expectation damages (need clear liability for the breaching party)

Restitution (last choice for damages) Definition: those that prevent unjust enrichment (get back benefit conferred breaching party)

Time of Measuring Value

Usually applicable to real estate K

Usual measure is the difference between the fair market value at the time of breach and the K price (if no difference then

get nominal damages)

Rationale: encourage avoidance of loss & have party seek substitute performance; burden on P to prove fair market von the date of the breach

Time of breach in sale of real estate is the date that the conveyance was to be madeBachewicz v. American Natl. Baand Trust Co. (P couldnt use resale price when D resold to 3rd party b/c real estate appreciates)

Exception : when the court grants an equitable remedy i.e. specific performance for unique propertymeasure of damages c

be assessed as the difference between the fair market value at the time of trial and the K price Cameron v. Bens(b/c equitable remedy get benefit of appreciation)

Crediting the defendants performance

Defaulting party will be given credit for partial performance in computation of damages Wolfberg v. Hunter(damages =

[rental value of apt as warranted i.e. agreed rent] [value of defective unit i.e. with rats] + [reasonable expenses incurredrat poison] [rent withheldto prevent excess recovery]) Restatement 347

Right to sue for payments not yet due

If K is not yet fully performed & a party breaches or repudiates (i.e. loan K, employment K)

Generally, courts sill only award damages that can be measured accurately

a breach by non-performance followed by repudiation gives rise to a claim for damages for total breach Restatement 24

unless the repudiation occurs after the repudiating party has received everything to which it was entitled under the Kthdoes not give rise to claim damages for TOTAL breach & party must await time of performance to sue (gives benefit of dto breaching party that they will pay)

acceleration clause if debtor is in breach as to 1 installment, all remaining installments become due (usually limitedgood faith)

Multiple-cause-of-action

Majority view P can sue for past due damages, but must bring new claims as damages accrue Greguhn v. Mutual of Omaha Insurance Co. (P could not recover a $$ judgment for the present value of futur

payments based on insureds life expectancy; insurance co. should pay monthly payments as long as P istotally/permanently disabledotherwise speculative)

Anticipatory breach

Minority view: award money due + present value of future payments (speculative) Immediate resolution of damages limiting damages to the difference between rents due & the fair market rental val

of the premise (takes into account the amount the landlord will be able to realize by reasonable efforts to relet/mitiga

Retained jurisdiction

Allows injured party to obtain a judgment soon after breach, but rather than requiring a new suit to collect futurepayments, court retains jurisdiction over the parties and enters new damage awards as payments accrue

Administrative burdennot efficient



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Reid v. Mutual of Omaha Insurance Co. (preferred because damages based on past events, and ensures that landlorwill continue ongoing duty to mitigate)

Limitations on Damages

Limitations include: reasonably foreseeable at the time of K, proved with reasonable certainty, mitigation

Foreseeability; Certainty of Consequentials

Consequential damages those losses other than the loss in value of the promised performance itself Damages that injured party ought to receive should be those fairly and reasonably considered to (1) arise naturally fr

breach of K itself or (2) as may reasonably have been in the contemplation of both parties at the time of K as a proba

result of the breach (special circumstance) Hadley v. Baxendale (delivery company did not know that delay in delivering shaft would result in shutting dow

millshould not be liable for lost profits; direct loss in value from failure to deliver should be delivery charge)

The test is objective: what the breaching party had reason to foresee as a probably result o the breach at time of Restatement 351 tacit or presumed agreement test

Promotes efficiency b/c if damage is a probable result, the K should allocate the risk; if its not allocated, yet faiforeseeable, defaulting promiser will be liable for damages b/c they assumed the risk

Court more likely to impose higher, more speculative damages if the breach is intentional/willful Native Alaskan Reclamation & Pest Control Inc. v. United Bank Alaska (UBA had reason to know that repudi

of loan would make other lenders more cautious about lending moneythey breached anyway; standard measurwould have been difference between interest on this K and increased interest on replacement loanbut in this ccouldnt get replacement loan)

Proved with reasonable certainty

Restatement 352 damages cant be speculative In the case of a new business, generally cant get lost profits from new business that was never established b/c of

breachbut depending on willfulness of the breach, could use profits of similar businesses in the area to estimate

Mitigation/avoidable consequences

Injured party is required to use reasonable efforts to avoid damages to the extent that they can do so without undue burden, or humiliation Restatement 350

Injured party must stop its own performance once its clear that return performance will not be forthcoming(avoidable consequences)

Injured party must make reasonable substitute arrangements; costs associated with mitigation are recoverable Standard for duty to mitigate: objective reasonable person in that circumstance

lost volume: if injured party could have & would have entered into subsequent K even if the K had not beenbroken & could have had benefit of both, the subsequent K is not a substitute for the broken K (damages are thebased on net profit lost b/c of broken K)

Employment K wrongfully discharged party can recover lost salary less what they could have earned by

making diligent effort to obtain similar employment

Exception where discharged employee is seeking reinstatement, no duty to take another job because

would have been an unreasonable risk and jeopardize claim at reinstatement George v. School District 8R

Standard: reasonable person under YOUR circumstances

Leases

Standard is objective commercial reasonablenessordinarily must seek to relet the premise

Passivity rule show that passively receptive to opportunities to relet Active rule must advertise, take positive steps to relet (can recover costs reasonably incurred in

attempting to relet)Reid . Mutual of Omaha Insurance Co

Economic Waste (common in construction law - efficiency)

Restatement 348 allows damages as (1) diminution in market price of the property caused by breach or (2) thereasonable cost of completing the performance or of remedying defects if the cost is not clearly disproportionate to tprobable loss in value

Factors for court to refuse to award higher figure:



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How much is the difference in actual cost between the diminution in value and the cost to actually repair to brincompliance with the K as written?

Difference in 2 possible ways to fix it How important it is for public policy, environmental concerns, 3rd parties to actually repair and bring in perfect

compliance with K provisions

Is the loss for this P functional or aesthetic? ex. where value of house diminished by $15,000 when window in basement room barred that rooms use as a bedroo

the court ordered $858 repair so that it could be a bedroom (instead of $15,000 damages) Thomas v. Green

ex. where cost of repair greatly exceeds difference in value between property as promised and property as it existsnot award damages for complete demolition County of Maricopa v. Walsh & Oberg Architects, Inc. (fixing parking

garage would have required removing all landscaping whereas could fix the leak for significantly less)

Tort v. K: Emotional Disturbance & Punitive Damages

Generally, can not recover emotional disturbance damages in K b/c not reasonably foreseeable at time of K unless it invo

1) bodily harm 2) serious emotional disturbance was a particularly likely result of the breachSullivan (botched nosesurgery case)

Injuries to reputation in breach of employment K not recoverable b/c unduly speculative & not reasonably within thecontemplation of the parties at time of KFogleman v. Peruvian Associates (even though employee was fired w/outcause & had moved to Peru0

Generally, punitive damages do not lie for breach of K, unless its an independent tort Restatement 355

Ex.Z.D. Howard Co. v. Cartwright(falsely representing car to be a new one was an independent, willful tort)

Liquidated Damages Parties stipulate the amount of damages payable in the event of a breach Restatement 356

Can also use unconscionability analysis

Will be held enforceable if:

it is a reasonable estimate of the likely damages (reasonable alternative performance)

Delay damages provisions typical in construction K (breaching party must pay X amount per day late in completion)often enforced as long as they are for a reasonable amount City of Boston v. New England Sales & Mfg. Co

it is difficult to prove actual loss

it is not a penalty (unreasonably large liquidated damages)

rationale: penalty clauses/overcompensating for breach may deter efficient breach ex.Ridgley v. Topa Thrift & Loan Association (prepayment provision was a penalty for late paymentand bore no

relationship to actual damages the parties could anticipate from late payment; plus could have proved actual loss) ex. of enforceable liquidated damages provision:Blank v. Borden (withdrawal from sale clause in real estate in an exclus

right-to-sell K does not constitute a void penalty provisionthis is alternative performancepublic policy reason toprevent homeowners from pulling off market to avoid paying commission to agent)

Topic 7: UCC Damages & Remedies (based on affirmance of K) Generally, UCC remedies resemble common-law Part 7 of UCC Article 2 is Remedies

i.e. expectancy damages: UCC 1-106 to put aggrieved party in as good a position as if the other party had fully performed

cover and cancel are peculiar to the UCC

Generally buyers & sellers remedies are reciprocal: sellers right to fix damages by resale & buyers right to establish damages by

cover/substitute purchase; but buyers right to specific performance differs from sellers action for the price

Buyers Remedies

UCC 2-711

Sellers breaches are generally either 1) failure to deliver the goods or 2) delivery of defective goods (breach of an express or

implied warranty)

Buyers rights on improper delivery UCC 2-601 (perfect tender rule)

Unless otherwise agreed in limitations of remedy, if the goods or th ender of delivery fail in any respect to conform to the

the buyer may 1) reject the whole 2) accept the whole 3) accept any commercial unit(s) and reject the rest

Buyers damages for non-delivery UCC 2-713 (difference between market price at time buyer learned of breach and the K price +

incidentals & consequentials expenses saved)

Computing the value of the goods may be difficult and justify specific performance



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Specific Performance UCC 2-716

Applies to non-delivery of goods

Specific performance may be ordered where the goods are unique Copylease Corp. of America v. Memorex Corp.

(requirements Kcould not have covered b/c other brands of toner were inferior)

1) Uniqueness is not sole basis of the remedy; also other proper circumstances i.e. inability to cover (especially maappropriate for output & requirementsbut those also require ongoing relationship which is a burden)

Balance need for specific performance v. burden

Specific performance may include such terms as payment of price, damages, or other relief

Cover UCC 2-712

After a breach, the buyer may cover by making any reasonable purchase of or K to purchase goods in substitution for t

due from seller

Must be made

1) in good faith 2) without unreasonable delay Oloffson v. Coomer(grain dealer bared from recovering for cover made after an

unreasonable amount of timeshould have obtained cover on the day on cancellation when he knew farmer wasntplanting corn)

Buyer may recover as damages the difference between the cost of cover and the K price + incidentals/consequentials

expenses saved

Use UCC 2-723 damages based on market price shall be determined according to price of goods prevailing at the timwhen the aggrieved party learned of repudiation

Failure to cover does not bar buyer from other remedy (be reasonable to get damages)

Buyers damages once goods have been accepted after a certain time you cant reject/revoke the goods UCC 2-607 UCC 2-608

Damages for breach of implied warranty of merchantability

Buyer may recover under UCC 2-714 for breach of implied warranty by seller

Measure of damages = difference at the time and place of acceptance between the value of the goods accepted and the va

they would have ad if they had been as warranted

Court will generally not find the value of defective goods to be 0 that would be windfall to buyer There will generally be a duty on the part of the buyer to mitigate (re-sell defective goods or put them to some use) unles

buyer has been negotiating with the seller to resolve the situation (as in Vista St. Clairwhere buyer used defective carpet3.5 years while getting the run around from sellerdamages = carpet as warranted-carpet you gotuseful measure is

of repair/replacement)

Consequential and Incidental Damages

UCC 2-715 damages resulting from sellers breach

Incidental damages expenses reasonably incurred in custody of goods rightfully rejected, in connection with covering, e

Consequential damages

(a) any loss resulting from requirements the seller at the time of K had reason to know, and which could not have beeprevented by cover (need to cover)

i.e. if D knew that the tubing provided couldnt have high liquid absorption rate beer keg caseDraft Systems Iv. Rimar Manufacturing(seller had reason to know of buyer requirementsconsequent disruption ofmanufacturing)

buyer must properly inspect...Draft Systems did conduct tests which was commercially reasonably

(b) injury to person or property proximately resulting from breach of warranty (tort-like standard)

Modification or limitation of the remedy in K

Buyers remedies may be limited in the initial K to return of goods and repayment of price OR repair or replace defective

goods UCC 2-719(1)(a)

2 ways to attack limitations on damages unconscionable or fail of its essential purpose resort to remedy as provided is optional unless remedy is expressly agreed to be exclusive

However, if remedy fails of its essential purpose, it is basically void and buyer can get damages for breach of warranty un

UCC 2-714

i.e. agreement to repair and replace fails if tractor is completely defective to begin with. (i.e. if product is replaced orrepaired continually and is always defective, being strung along)Johnson v. John Deere (lemon tractor)



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Sellers Remedies

UCC 2-703 seller may withhold delivery, stop delivery by any bailee, proceed under next section respecting goods still

unidentified to the K, resell & recover damages, recover damages for non-acceptance or in a proper case the price, cancel

Resale v. Market Price

UCC 2-706 (dont have to prove market price) sellers right to fix damages by resale but must be made

1) in good faith AND 2) in a commercially reasonable matter

Seller recovers difference between resale price and K price + incidentials what they saved by buyers breach

Where the resale is at a private sale, the seller must give the buyer reasonable notification of intention to resellB & R Tex

Corp. v. Raul Rothman Industries (cant get damages for resale of fabric if seller doesnt give notice to buyer)

Difference with cover of buyer who does NOT need to give notice

Sellers damages under UCC 2-708

Comes into play when buyer refuses to accept or repudiates If seller doesnt give notice of resale (i.e. DONT follow recipe in UCC 2-706, fallback is UCC 2-708)B & R Textil

Corp

difference between market price at time & place for tender (seller has to prove) and unpaid K price (i.e. market valuelower than K price)

resale value is not determinative but could be used as evidence of market valueB & R Textile Corp

if seller is a volume seller If K price minus market price measure of damages provided by UCC 2-708(1) is inadequate (if lost volume se

or no substitute buyers b/c goods were unique for the breaching buyer)

2 requirements to be a lost volume sellerLake Erie Boat Sales, Inc. v. Johnson (didnt sufficiently prove th

were a volume seller & told buyer this was the only boat)

Unlimited supply of goods

Substitute buyers ready, willing, and able to buy good

Measure of damages is lost profit

Resale value is not subtracted for volume seller

Sellers damages under UCC 2-704

Seller, acting in a commercially reasonable manner, may either finish the unique good or cease manufacture and resefor scrap or salvage valuecommercially reasonable

Seller could then argue that once the good is fully manufactured it is an action for the price (UCC 2-709). Problem for finishing is that it may difficult to prove the market, that good is sufficiently unique, etc

Action for the Price UCC 2-709

Similar to specific performance but for the seller; usually if resale is impracticable b/c goods are specially made Good(s) must be accepted by buyer w/o payment from the buyer When goods have been lost or damaged within a commercially reasonable time, the seller can recover the price if the

goods cannot be resold

Upon payment of judgment, buyer is entitled to the goods (seller cant resell then) Resale of goods must be credited to buyer

Once goods are accepted, the SELLER does not have to accept return of the goods in order to mitigate: UCC 709(1) supplants common law duty to mitigate F&P Builders

Topic 8: Termination, Rescission, Setoff, Suspension

Termination (like divorce)

Termination: 1) affirms the existence of the K, but 2) stops future performance and 3) reserves right to expectancy damages

There must be mutual consent to rescind, if not, termination Woodruff.

Rescission (like annulment)



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Rescission: 1) disaffirms the K, 2) discharges all performance go back to day one 3) instead of expectation, you want restitu

(=do over! Pretend like none of this happened)

When is recission proper?

1) mutually agree to rescind expressly or by K 2) if injured party has made bad bargain

Ex. pg 252 specific restitution (equitable relief): return of the property which she had sold; but court may refuse if it would un

interfere w/ the certainty of title to land or otherwise cause injustice

If K is rescinded, it is as if no provisions of it ever existed (i.e., cannot recover liquidated damages, atty.s fees, etc. if K rescin

as in Woodruff,p. 446).

Minority of jurisdictions follow common law rule of election of remedies.

InAigner, p. 447, rescission (retaking premise) precludes recovery of damages based on expectancy (rent not yet due)

landlord elected rescission

Majority rule : no election of remedies, can plead in alternative (invoke remedy based on affirmance & disaffirmance)

Seeking adequate assurances (UCC 2-609).

If reasonable grounds for insecurity arise, can seek assurance in writing of performance.

If assurance is not made within 30 days of demand, it can be considered a repudiation of the K.

Buyers letter seeking adequate assurances when they have no right to do so could constitute an anticipatory repudiation UCC

610 (Romigp. 453).

Also cannot seek assurances that are not reasonable (question of fact for jury,Ronig).

Between merchants: reasonableness of grounds for insecurity & adequacy of assurance determined according to commercial

standards

Setoff

Whether a breach by one party justifies a refusal to perform by the other but you breached too!

Depends if promises are dependent or independent (independent no, dependent, yes).

Refers to damages owed to D setoff against damages D owes to P (in other words Ds damaged subtracted from amount ow

ex.Haymore ($3000 in escrow - $261 deficiencies)

Topic 9: Implied & Express Conditions

When can a party terminate or rescind?

Factors: 1) importance the parties themselves attribute to the breach 2) unfairness to the injured party in making him continue

perform in light of the breach Express conditions ( 224-229, see handout also).

Promise v. Condition.

A promise is a commitment to do or refrain from doing something. The promise in the K may be unconditional or conditiona

Failure to perform according to terms of promise is a breach of K. Termination if there is a material breach.

A condition is an event other than the passage of time, which must occur before performance under a K becomes due

Breaking a condition is not a breach of K , no damages.

Must rescind and seek restitution unless the condition is also a promise.

If non-occurrence of a condition would cause disproportionate forfeituremay be excused by court 229

ex.Burger King(how important it is for BK to demand timely building v. how much family dining would lose w/ouexclusivity agreement76 years left in K)

If condition is also a promise, two remedies (restitution and expectancy damages) available (Ard v. Dr. Pepper(p. 457)

(condition b/c of if and also a promise if within control to perform)

When in doubt, courts prefer to interpret as promise.

Express conditions: those made expressly in K ( 226, p. 27 generally on conditions).

Objective condition : when the K/condition has to do with something that is functional (operative fitness, mechanical utility or

structural completion)Haymore v. Levinson (cant withhold approval unless there is an apparent reasonable justification)

In construction contracts, the standard is reasonable person (within range of generally accepted workmanship in the area)



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Subjective condition: when the K/condition has to do with a matter/item of personal taste.

If subjective standard: cant say arent satisfied for any reason or no reason at alllimited by GOOD FAITH

Satisfaction of conditions is usually judged on reasonable person standard ( 228).

Interpretation of express conditions that will avoid forfeiture by oblige is preferred 227

Obligor can insert provision into K allowing it to determine if condition satisfied and to terminate if it is not, but the clause m

usually specify that the obligor must do this in good faithotherwise, it could be construed as an illusory agreement (essentiafailure of consideration) (Dr. Pepperthis was a requirements K & there was evidence of breach)

Impliedwaiver of right to terminate for breach of express condition (see chart).

Conditions can be waived by course of dealing, reliance upon past waiver (overlooking) of conditions by oblige (Burger King

Family Diningp. 461, where Burger Kings previous laxity in allowing restaurants to open behind schedule estopped them frterminating years later after demanding that they open on schedule)

Implied waiver of one condition in a K does not automatically waive all of them (American Continental Life Ins. Co. v. Ran

Construction, Co.p. 467).

Conditions may be excused when substantial performance has been rendered (see discussion below on material v. non-mat

breach) (Jacobs & Young v. Kent, p. 475).

Implied conditions and material breach

Determining the materiality of the breach ( 241, p. 30)(once a promise has been breached (not a condition) look to whethe

was material or not).

Material breach.

Material breach is a breach that has gone uncured for a period of time.

If breach is sufficient, it becomes total immediately.

No substantial performance by breaching party.

Dependent promise

Justifies other party not performing. Remedy: rescind (restitution (benefit conferred) or terminate (expectancy damages)).

Non-material breach (minor breach).

Ex.Jacobs & Young v. Kentdifferent type of pipe used

Ex. Walker & Co. v. Harrison delay in cleaning sign not material

Substantial performance by breaching party.

Independent promises (Jacobs & Young v. Kent, p. 475).

Remedy: sue for damages for actual harm suffered (diff. between what was contracted for and what was received); no

termination.

Anticipatory Repudiation ( 250, p. 31).

Anticipatory repudiation is either an express notification or a statement from words or conduct that promisor either cannot or

not perform (high burden of proof for P).

Once a party has relied upon the repudiation or treated it as final, the repudiation can no longer be retracted ( 256, p. 32, and

Stonecipher v. Pillatsch, p. 480).

Reason not to trust a party does not give rise to anticipatory repudiation; should demand adequate assurances in such a

circumstance (Neves v. Wright, p. 482).

Four options once there is a repudiation:

Treat the anticipatory repudiation as a total repudiation and sue immediately.

Suspend performance and wait to sue until the date due.

Treat the repudiation as an offer to rescind.

Ignore the repudiation and urge promisor to perform.

If a party ignores anticipatory repudiation and treats the K as still in force, he is limited to damages available for breach of tha

cannot later choose anticipatory repudiation remedies (Taylor v. Johnston insisted on performance of breeding with mare).

Topic 10: Rescission, Restitution (Buyers & Sellers)

Effect of Rescission and restitution.



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Rescission generally ( 373, p. 49).

When is there a right to rescission under 373?

Material and total breach.Ennis v. Interstate Distributors, Inc.

Equities.

-Injured party can get restitution for any benefit conferred on the other party by way of part performance. -no adequate remedy at law; too difficult to calculate damages -is it a losing K? -Analysis for restitution: can parties actually be returned to the status quo ante without inequity?

No restitution if: party has fully performed and is only awaiting payment of some fixed sum ( 373(2)).

Rescission will generally not be granted for real property; deeds are not contracts and failure of consideration or other K issuecannot hinder conveyancing (Easterling v. Ferris, p. 489 cant undo the deal).

Divisible and indivisible Ks. (look at intent)

When is K divisible? (seeSiemans v. Thompson,p. 493, for example of indivisible K; seeEnnis for example of divisible K b

covenant not to compete is separate from stock sale).

Separate damages are calculable.

Look for 2 contracts, with separate assents (divisible).

If parts of K are intertwined functionally, K will not be divisible.

Can the deal easily be unwound to return parties to status quo? (Rudman v. Cowles Communication, Inc. (p. 495).where K

were separate and independent transactions; couldnt rescind the stock deal/merger though

Sales of companies/purchases of companies in conjunction with employment agreements usually indivisible.Siemans

Delay as a bar to rescission (Restatement 381, p. 53-54).

If you sit on your rights (continue performance of K) and other party detrimentally relies, you no longer have the ability to res

the K (estoppel).

Did injured party waive rights (does waiver apply)?

How much did other party rely on the performance by non-breaching party?

Did non-breaching party act reasonably to mitigate when he/she kept performing K?

Even if waiver did not apply, is rescission a proper remedy given the facts (i.e. are legal remedies available)?

Damages can still be claimed under usual remedies (Snyder v. Rhoades, p. 497, where no rescission but damages still availab

for fraud to D who knew of Ps misrepresentations throughout K but performed it anywayP sued for breach in the case whefinally stopped performing)cant speculate and try to make a profit on dry cleaning stores

Breaching partys right to restitution (Restatement 374, p. 51).

Restitution to prevent unjust enrichment (think: return of earnest money for buyers who breached sales K for house).

Expectation damages (when there is a non-material breachand you substantially performed) (Jacobs & Young v. Kent,p. 4

Courts seek to avoid rewarding breach.

Measure of damages: breaching part entitled to restitution for benefit conferred in excess of loss (Kutzin v. Pirnie, p. 501

injured parties damages-benefit conferred/deposit)

If deal enforced by specific performance (buyer must purchase, most common in property cases) no restitution for breaching

buyer.

Restitution for innocent parties ( 373, p. 49).

Restitution for benefit conferred.

Ex. US v. Western Casualty & Surety Co.

Ps will seek these for losing Ks partially completed (comment b to 373) because restitution interest will be greater on losin

than expectancy damages under 347.

If K has been completed, however no right to restitution, can only get damages for payment remaining due.

Buyers rejection, revocation and cancellation.

General.

Termination and rescission eliminated under UCC.

Buyer does not have to elect remedies.

Acceptance of goods occurs when (UCC 2-606, p. 85).:



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After reasonable opportunity to inspect, buyer indicates to seller goods conform or she will keep in spite of nonconformit

(reasonable opportunity to inspect may include post-delivery, as inZabriskie Chevrolet, Inc. v. Smith (ex. of CURE), p. where buyer was deemed never to have accepted after finding massive defects in vehicle during 7-mile drive home andreturning car to dealership).

Buyer fails to reject or fails to seasonably notify seller of rejection.

Buyer does anything inconsistent with sellers ownership.

Buyers rejection of goods (UCC 2-602).

Rejection prior to acceptance -Perfect tender rule: buyer can cancel (reject) for any breach, whether or not it is material.

Different from common law standard articulated inJacobs & Youngrequiring material breach to rescind (rescission being

equivalent there of cancellation). Rejection must be made within a reasonable time after tender or delivery and before acceptance.

Buyer must seasonably notify the seller.

In a K between merchants, buyer cannot prove sellers breach without notifying seller of defect expressly if:

-Seller could have cured defect. -Seller made a request in writing for complete list of defects.

Installment K exception to perfect tender rule ( U.C.C. 2-612): an installment can be rejected when value to buyer is

substantially impaired (Jacobs and Youngrule applies to installment contracts) (Hays Merchandise Inc. v. Dewey, p. 525).

Revocation of acceptance (UCC 2-608, p. 86, also seeMcCullough v. Bill Swad Chrysler Plymouth, Inc .).

To revoke acceptance, there must be a substantial impairment of value of the good to the buyer.

Revocation must be given within a reasonable time of buyer discovering (or when he should have discovered) defect. Must be made within such a time as no substantial change to goods not resulting from their own defects could have occurred.

Seller will usually be compensated for value of use of the good with defects during time buyer possesses (McCullough whe

continued use of car after revocation of acceptance was reasonable pg 524).

Limitations on buyers right to cancel.

Seller has right to cure (UCC 2-508).

Within time originally provided for performance, seller may cure by:

-Giving reasonable notice of intention to cure. -Making a new tender of conforming goods.

Defective installments of installment Ks cannot be rejected if they can be cured.Hays Merchandise Inc. v. Dewey UCC

612 (toys in installment K would be cured)

Zabriskie Chevrolet, Inc. v. Smith (ex. of CUREnot limitless.new transmission is not adequate)

Sellers cancellation, rescission and recovery (Article 9/Secured transactions not on test).

General.

Sellers remedies listed generally under UCC 2-703.

All cancellation and can sue for expectation damages (difference if breach happens before or after delivery can only ge

price)

When seller learns of breach, can terminate (refuse to deliver goods, UCC 2- 703(a)).

When both parties breach, it is the first breach that counts (as in Goldstein v. Stainless Processing Co, p. 527, where stop

payment order on a security check from buyer was breach, even though P wrongfully attempted to cash check).

Secured parties.

UCC article 9 mandates that when a buyer surrenders possession to a secured party (after default), seller has several optio

Party may lease or sell the goods; however, any surplus for lease or resale over the amount of indebtedness of thbuyer will be refunded to the buyer minus sellers expenses for resale.

Alternatively, the seller may keep the collateral as repayment of the debt (i.e. can sell it without obligation later)however, seller must give written notice to buyer that he is exercising this option. Buyer may object in writingwithin 30 days (Brown v. Baker, p. 534, failure to give notice made seller liable for surplus of resale).

When does a lender have a right to deem itself insecure (what factors) (ConsiderSheppard Federal Credit Union, Proble

P)?

Impairment of the collateral. General insecurity.



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P can bring in objective evidence that this was unreasonable. Standard for determining whether clause can be exercised is objective. P has burden of proof to demonstrate no good faith (good faith assumed). Lender can put grounds for insecurity in the K. Acceleration clauses generally not unconscionable b/c of economic reasons.

Schmitz Contracts Fall 2010

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