of Types Contracts
Types of Ks as to Formation 1. Express formed by language, oral or written 2. Implied formed by manifestations of assent, usually in the form of conduct other than oral or written 3. Quasi-Contract not actually Ks; constructed by courts to avoid unjust enrichment through remedy of restitution. Types of Ks as to Acceptance Classical 1. Bilateral promise for promise only; exchange of mutual promise 2. Unilateral promise for performance; acceptance by performance revocable by offeror at any time prior to completion of performance Modern most Ks are bilateral 1. Bilateral acceptance by Promise or Start of Performance (R2d 32) 2. Unilateral limited to two circumstances a. where offeror indicates acceptance only by completion of performance b. offers to the public (i.e., rewards) Test: Bilateral vs. Unilateral 1. Bilateral each party has a right and a duty 2. Unilateral one party only has a right and the other has only a duty Types of Ks as to Validity 1. Void without any legal effect from the beginning (K for illegal acts) 2. Voidable one or both parties may elect to avoid (K of minors) 3. Unenforceable valid, but not enforceable due to various defenses (like statute of limitations or frauds)
Step 1: What Law Applies? Common Law or UCC
COMMON LAW: governs everything but those covered by UCC. Common applies to everything, including goods, unless the UCC conflicts, then UCC prevails regarding goods. UCC: governs the exchange of goods (movable objects) between merchants (someone who deals in goods or by his occupation holds himself out as having knowledge or skills peculiar to goods involved). If conflict between UCC and common law, then UCC prevails!
Step 2: Was a contract validly formed?
ELEMENTS
1. Mutual Assent (offer and acceptance)? 2. Consideration, or some substitute? 3. Defenses to formation?
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MUTUAL ASSENT OFFER AND ACCEPTANCE
I) Generally: a meeting of the minds. No actual meeting is required; but an objective measure of intent to be bound. An OFFER and ACCEPTANCE are forms of assent. Offer and acceptance + intent to be bound Can be express or implied-in-fact (not expressed by is bargained for exchange) exmp ordering food off menu never say I will pay you but implied by circumstances A) Objective Measure of Intent 1) External manifestations of intent to be bound (a) Reasonable person std what would reas person in same position believe (b) Not necessarily expressed: can be by gesture, silence (c) Easier to determine than pure will theory (d) May make ppl conform to more reas behavior B) R2d 20
1) A & B have same meaning K w/ that meaning (subjective) 2) A& B have different meanings: (a) Neither party knows or has reason to know other`s meaning no k (b) Each party knows or has reason to know other`s meaning no k (c) A doesn`t know or have reason to know B`s meaning, but B does know or have
reason to know A`s meaning K on A`s terms C) Lucy v. Zehmer (p 120) claimed offer was made drunk, in jest, but actions suggest actual intent if Lucy had known that Zehmer was joking, would have been no K
D) Keller v Holderman (p 123) offered $300 watch for $15; not enforced b/c no reasonable buyer would think serious E) Pepsi commercial absurd to think could buy jet w/ pts F) Embry v Hagardine go ahead, you`re all right, get your men out inner intent unimportant; ask if words sufficient to = K (mixed question of law and fact) G) Raffles v. Wichelhaus famous ships Peerless- each means diff and neither has reason to
know no K because no mutual assent, no meeting of the minds (latent ambiguity)
H) Classical Law: Pure Will Theory of K not bound unless in heart of hearts both parties mean to be bound; meeting of minds.
II) OFFER defined: manifestation of willingness (assent) to enter into a bargain; conferring power to offeree to make a binding K through acceptance by promise or performance. R2d24 = offer: ad/price quote states limited quantity and limits or names recipients offer: invitation to deal, to bid in auction, act of prelim negotiation R2d30, public ad/price quote (generally) Offerer is master of the offer: can specify manner, time, place, acceptance by promise/performance As general rule, in commercial cases, the order itself constitutes the offer; purchaser plays role of offeror (contrary to Fairmount case, where for immediate acceptance made it a K) quotation of prices is not an offer (same w/public advertisements) A) Offer Requirements: 1) Communicated to (and reaches) offeree
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(a) Offeree must have knowledge of the offer. Valid offer on receipt. Even in the case of rewards. 2) Sufficiently complete to provide basis for enforcement (certainty and definiteness) (a) Certain and Definite Terms: capable of enforcement (R2d33) can see breach and figure remedy (i) P asked for price, D responded w/ $ & for immediate acceptance = definite offer (Fairmont Glass p 134) (b) Price; subject matter; identity; quantity (if for sale of goods); nature 3) Manifest an intent to be bound
(a) Language: I can`t sell for less than... is not offer but prelim negotiations. (Owen v. Tunison) (b) Surrounding Circumstances: wrote twice, haggled over wording (Lucy v. Zehmer) (c) Prior practice & Relationship (d) Method of Communication: (i) Advertisement = usually invitation for offer, unless terms certain and definite. (e) Industry Custom: would the proposal be considered an offer in the industry? B) Offer for Bilateral K (exchange promises) invites acceptance by promise; requires notice unless waived in offer C) Offer for Unilateral K invites acceptance by performance; no notice required unless specified in K 1) Until act completed, haven`t accepted (modern rule: terms must warn any ambiguity defaults to bilateral) 2) Rewards if find out moment before completion, still = R2d51
Broadnax v Ledbetter (p 64) returned prisoner, learned abt reward, then sued for reward; not induced by reward, no K
D) Termination of Offer R2d36
(a) Lapse of offer after reasonable time if offer doesn`t state (b) Revocation
(i) Common Law: Offeror may revoke anytime before acceptance if no consideration given (fee or premium paid to offeror for option K) generally, revocation has to be made known to offeree Dickinson v Dodd p 175 offer to sell land open to Friday, offeree hears from friend offered to someone else on Thursday, = revocation (knows not exclusive offer; matters who spks 1st) promise to hold offer open is not binding D free to revoke at any time R2d43 offeror takes definite action (manifested) to revoke and offeree gets reliable info
Gen'l K'r bid on construction K revocable before formal acceptance (see unilateral mistake Elsinore) Ct sympathetic b/c has so little time to collate info; Key: other party can be restored to status quo b/c hasn`t changed position
(ii) Modern exceptions limit revokation: = create option K (promise to hold offer open for reas time) 1. True option K (R2d87(1)) In writing, recites or gives (nominal) consideration
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2. UCC-205 no consideration needed if signed, written offer by merchant to hold open for stated time (if no time stated, for reas time) {max 3 mos}. 3. Offer for bilateral/unilateral K w/ reliance (R2d87(2)) if offeror should reas expect to induce perf on part of offeree before acceptance & does induce, = binding as option K to extent necess to avd injustice
Drennan (root of rule, case used R90) sub-K`r bid mistake irrevocable b/c induced K`r`s reliance (R90 waives requirement of consideration) Reliance didn`t = actual K, only binding K to keep offer open for reasonable time (subsidiary promise); K`r accepted in reasonable time
4. Offer for unilateral K w/ part performance (R2d45) (does apply to reward cases) -
Offeror could revoke at any point before complete performance... except Implied K for reasonable time: once part performance begins an option K is formed. Note: offeree is not bound to complete the performance (illustr e, but illustr d says implies promise to complete). Preparation to perform partial perf so option k (illustration f may = reliance under 87(2)) Ragosta - P offers to buy shop & starts arranging financing, D counteroffers to sell if show up at bank on set date if hasn`t sold to anyone else prior, then revokes. Ct said no option K b/c financing = only prep to perform, not starting performance and reliance b/c prior to offer & not reas to rely (c) Death or incapacity of parties (R2d48) (d) Offeree`s rejection or counteroffer (R2d36) (i) Mailbox rule R2d40 by mail or telegram doesn`t count until received. If send, then send acceptance after, acceptance = binding if received 1st, = counteroffer if received 2nd
III)
ACCEPTANCE
A) R2d 50 manifestation of assent to the terms made by the offerree in a manner invited or required by offer B) Who may accept: only a person in whom the offeror intended to create a power of acceptance. C) Offeree must know of the offer (remember for part perf if learn prior to completion = ok 51) D) Manner of Acceptance 1) Common Law (a) Reasonableness (i) R2d30 Generally, the offeror can prescribe method of acceptance prom, perf, choice. (2) Where the method is not specified: acceptance by any reasonable method. Tracking # (automated) not reas = acceptance Corinthian p 166 (ii) R2d53(1) can only accept by perf if invited by offer but, if in doubt, offer interpreted as choice (R2d32) (i) Choice = bilateral if bilateral accepted by perf, beginning perf = promise to complete 62
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(b) Silence (R2d 69), generally not valid, unless:
(i) offeree keeps benefits of services after reas opp to reject and knows/should know compensation expected, OR (ii) Offeror gave reason to believe that assent by silence is OK and silence was intended as acceptance, OR (iii) Previous dealing make it reasonable that offeree should notify if does not intend to accept
(c) Notice Requirements (i) R2d56: If acceptance invited by promise: Usually required unless 69 applies, or offer manifests contrary intention
Int`l Filter p 152 K specified upon acceptance by exec officer becomes K so waived notice White v Corlies p 156 K said upon agreement, start work then revoked. Carpenter bought lumber already said = implied promise. Ct said no part of normal duties, no way to show reliance
(ii) (R2d 54): If acceptance invited by performance 1. notice not required unless requested, OR
Carbolic Smoke Ball p 161 unilateral so performance dispensed w/ notice
2. If offeree knows offeror has no adequate means of learning of
performance w/ reas promptness & certainty, Exceptions Offeree exercises reas diligence to notify Offeror learns of perf in reasonable time
Ever-tite (invited offer by acceptance or performance) acceptance occurred when roofers loaded truck and left for house, arriving at house to begin roof = w/in reasonable time (credit ck takes time) offer that does not specify a time limit remains open for a reasonable amount of time
Offer indicates notification of acceptance is not required Carlill v Carbolic Smoke Ball (iii) Mailbox Rule R2d63 acceptance operative as soon as leaves possession
(revocation upon acceptance)
Exception: option K acceptance not operative until received
If Offeree sends both Rejection and Acceptance Rejection sent first: whichever is received first Acceptance sent first: then mailbox rule applies and K is formed, unless rejection is received first AND offeror detrimentally relies on the rejection. 2) UCC
(a) UCC 2-206(1)(a) unless otherwise unambiguously indicated by language or circumstances, invites acceptance by any medium reasonable in circumstances, including commencement of performance (i) If ambiguous language look at context of prior dealings to see if defines specific acceptance, if still ambiguous = choice (b) UCC 2-206(1)(b) - Shipment of nonconforming goods acceptance if seller seasonably notifies buyer offered only as accommodation (a favor) Corinthian p166
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(c) UCC 2-206(2): If beginning of requested performance = reasonable acceptance,
if offeror not notified in reasonable time, may treat offer as having lapsed before acceptance B) Acceptances w/ different terms 1) Common law (a) mirror image rule (R2d58): statement of acceptance is effective only if it is mirror image of offer and expresses unconditional assent to all of ther terms and conditions imposed by offeror (i) If offeree responds w/diff. terms, it`s considered a rejection and counteroffer (b) Battle of the FORMS std forms containing boilerplate language, parties agree to essential terms on front but have conflicting fine print terms on back that no one looks at mirror image rule supplanted by 2-207 (see below) (i) Problems 1. One wants to enforce/other doesn`t executory K (no change in position) technicality lets out of K 2. Part perf creates K so ct must determine actual terms when have dispute Often used last shot rule last sent governs: ea = counteroffer so last accepted by conduct 2) UCC Rejects Mirror Image Rule for Sale of Goods (a) When there are Additional or Different terms (2-207) (i) (1) If acceptance expressly conditional on offeror`s assent to changes no K, counteroffer Exceptions K through conduct : Terms = those upon which agreed plus appropriate gap-fillers Itoh p 210 arbitration clause. (UCC 2-207(3)) offeror assents ProCD p 217 add`l terms in box = proposal but clicks on I
accept to use program = acceptance
(ii) If acceptance NOT expressly conditional on offeror`s assent to changes yes, K boilerplate discrepancies are largely irrelevant in this scenario (b) (2) If K & additional terms (i) If one party is not a merchant (ii) If Both Merchants = 1. Additional terms become part of the K, unless
1. K is formed, but additional terms only = proposals to modify, until offeror agrees to them.
They materially alter original terms Offer expressly limits acceptance to original terms Offeror has already objected, or objects within a reasonable time. 2. If performance commences, K consists of terms on which parties do agree, plus gap-fillers providedby UCC
(c) If K & Conflicting (Different) Terms UCC doesn't explicitly say (Northrop v. Litronic)
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(i)
Majority view: Knock out conflicting clauses and replace with relevant UCC gap-fillers; otherwise apply common law. (2-207(3) & comment 6 which
says gap-fillers + apply 2-201 enforce prior oral agreement )
(ii) Minority view: FirstShot Rule = Offeror`s terms retained offeror = master of offer (Step-Saver) (iii) Leading Minority: (Posner prefers but doesn`t apply, use 2-207b) Equates different and additional terms
1. If new terms are materially different, then offeror`s terms prevail 2. If new terms are not materially different, they become proposals. (iv) Revised UCC will fix terms in both forms, agreed terms, and UCC Gap-fillers everything else drops out (v) NOTE: SEE SPECIFIC GAP FILLERS IN INTERPRETATION SECTION
CONSIDERATION
I) Definition: Consideration for performance or return promise must be bargained for (must act as inducement) (R2d 71). 1) What`s a Performance?:
(a) Act other than a promise, or (b) Forbearance of something legally entitled to do (Hamer v. Sidway1 uncle offers nephew $ to stop smoking) courts don`t inquire into adequacy (i) Forbearance to assert or the surrender of a claim/defense that proves invalid consideration UNLESS Claim/defense in fact doubtful b/c of uncertainty of facts or law OR Forbearing/surrendering party believes claim/defense may be fairly determined to be valid Fiege v Boehm p34; R2d74(1) (c) Creation modification or destruction of a legal relation.
2) Consideration may be given to the offeror or some other person. 3) Usually don`t inquire into adequacy of consideration (only if peppercorn or unconscionable) II) BARGAINED FOR A) Defined: A mutual conventional inducement: intended to induce assent R2d71(2) 1) Objective - External manifestation of intent III) NOT CONSIDERATION A) Nominal Consideration the peppercorn if consideration paid is so small relative to returned consideration that is not valid. (Modern rule) 1) Classical enforce since don`t look at adequacy 2) Exceptions: Option Ks [R2d 87] (requires only writing and a recitation); and UCC [2205] Firm offers not revocable for lack of consid. 3) Rationale: reason for not enforcing is that donor should be able to change their mind if they go broke, lose affection for donee, etc. (and usually no harm to donees) B) Gifts gifts are not consideration, (they are redistributions of wealth, rather than economic exchange) 7
1) Act or forbearance by promisee must benefit the promissor (R2d 81)
(a) Example: Come over and I`ll let you stay. This is a gift. Promise of the place to stay is not to induce giving up land. (Kirksey) D`s promise was gratuity, lacked consideration (despite inducement, reliance)
C) Illusory Promises [R2d 77] promise consideration if doesn`t really bind promisor
(Strong v. Sheffield) I`ll forbear collection of debt, until I want my money.)
1) Exceptions (seem illusory but are not: Ks are binding): (a) If satisfied Ks require exercise of judgment in GOOD FAITH! (i) Satisfaction based on quality or utility (non-unique good under UCC) must meet objective reasonable person std (ii) Satisfaction based on fancy, taste or judgment must meet subjective std of good faith (Mattei p 72 satisfactory leases for shopping center) enforceable! (b) Output/requirement Ks (Eastern Airlines v. Gulf Oil p 76) UCC 2-306 buy in good faith, reasonably proportionate to estimate (c) Exclusive agency (Wood v Lucy p 83) assume both intended workable business, so read to give efficacy, requires best efforts 2-306(2), supplies mutuality (d) Alternative promises (assuming all alternatives are valid consideration) R2d77(a & b) (i) (a) if you say consideration is a or b and each meet criteria to be consideration by themselves (ii) (b) refers to insurance: there is consideration b/c substantial possibility that events elim 1st alt of not paying anything (which would normally be no consideration) I promise to pay premiums and ins promises 2 alt: either nothing happens so pays nothing or have accident and they pay face value they can`t control whether pay or not though and can`t back out if accident occurs D) Past Benefit or moral obligation: generally not consideration, not binding. (R2d 86)
[Feinberg v. Pfeiffer Co. p 39 company wants to reward employee for past loyalty; add`l svc afterward not consideration b/c not bargained for gratuitous, but enforced due to reliance]
1) Exceptions: (a) to prevent injustice (R2d 86 general exception) (i) Not if benefit = gift (or for other reason promisor not unjustly enriched) (ii) Not if value is disproportionate to benefit (protects ppl on whom benefits pushed) (b) Reaffirm past legal obligation (does not refer to moral oblig) (i) Ex: promise to pay debt after statute of limitations ran out (c) Promise to pay for services rendered where no prior negotiations possible requires: not gift; no unjust enrichment Need material benefit to promisor (someone/thing s/he oblg to care for) Look at seriousness of promise formality of promise or partial performance (i) Emergency
Webb v. McGowin p 45 Webb crippled saving boss; boss received material benefit (life); McGowin had moral obligation to compensate Webb for saving life material benefit + moral obligation = valid consideration Mills v Wyman p 44 adult son ill, P cares for, dad promises to pay = moral oblig = no consideration, not binding P volunteered services (Good Samaritan) **Moral obligation may support a promise (w/out consid.) only if promisor has benefited
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Harrington v Taylor p 48 - P saves D beating wife but not binding promise not formal
but spontaneous
(ii) Mistake (maybe) example of painters painting the wrong house, and owner offers payment E) Preexisting Legal Duty performance of legal duty owed which is not doubtful or in honest dispute consideration (Alaska Packer`s Ass`n v. Domenico) [R2d 73] sailors demanded higher pay to complete job, not enforceable due to duress, no consideration 1) Exceptions: similar perf = consideration if differs from what was required in way that reflects more than pretense of bargain (c) modifications to a preexisting legal obligation under R2d89 (i) k not fully performed yet (ii) modification fair/equitable in view of unanticipated consequences, to extent of statute, or extent justice requires in view of material change of position in reliance on promise Watkins v Carrig p 334 excavate cellar and find unanticipated rock; parties agree will pay more, = oral agreement modifying old K; circumstances made reasonable; no duress b/c owner didn`t object
2) Extra Cases: CAB & Bankey (p 53) if change K after start work, still has consideration? CAB yes because allowed to continue empl = consideration for signing no-compete clause Pine River handbook yes = consideration because employer induced by employee continuing to work and employee induced by employer adhering to rules Bankey (handbook) no ; promise for a performance; if no promise then no performance so okay (employers enforcement provides benefit, if no enforcement doesn`t derive benefit, but parties not obligated to either): employer not induced by anything because employee will still work. (i) policy reason is that employers would have diff handbooks based on when empl started and too hard to keep track Employee handbooks Two different approaches: (i) Employee handbook is offer for unilateral contract (Minnesota Rule) (ii) Employee handbook is statement of policies (Michigan Rule)
IV) RELIANCE as means of enforcement (no consideration, or no mutual assent, so no K) A) Classical R90 - Reliance was substitute for consideration so enforced K by giving expectation damages; required substantial & definite action or forbearance 1) Feinberg not K b/c no consideration, but retired in reliance on promise so justice = enforce K B) Promissory Estoppel (Modern) R2d90 not substitution for consideration, only give reliance
damages, substantial not required TREATS PROMISSEE`S RELIANCE AS INDEPENDENT BASIS FOR ENFORCEMENT
1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce is binding if injustice can only be avoided by enforcement. (i) Charitable subscription and marriage settlements are binding without proof of inducement or
forbearance.
(ii) Ricketts v. Scothorn1 Granddaughter spends $, incurs debt after relying on grandpa`s 2) Elements: 9
promise to pay principal value of $2k donor is estopped from asserting want of consid.
(a) Promise doesn`t have to be so definite that could be offer whose acceptance = K but enough for: (b) Reasonably expected to induce reliance/forbearance (c) Actual reliance or forbearance must suffer loss (exception is charity) (d) Only way to avoid injustice can be limited as justice requires 3) Recovery is limited to extent to avoid injustice; usually reliance damages. 4) Hoffman v. Red Owl: Promissory representations by franchisor induced Hoffman to rely in costly and irreversible fashion no offer, no consideration, but promissory estoppel creates claim as distinct basis of liability 5) Examples of application of promissory estoppel
(a) Promise to make a gift (intra-family) (b) Promise of a job (c) Offers by sub-contractors
C) UCC Promises in Writing some do not require consideration
2) Modification of a Contract 3) Firm Offers 1 Both cases probably adjudicated more on basis of donor being dead
V) RESTITUTION as means of alternative recovery (Quasi K, Implied in law K, Quantum Meruit) A) Recovering off the K no K b/c not two parties intending to be bound, but provides recovery 1) Implied in law law imposes obligation (a) MUST HAVE: (i) Expectation of payment If mistake: would have expected if all facts known (ii) Direct relationship b/n parties 2) Implied in fact (Not Restitution) ppl agreed to terms but is not expressed = agreement (both intend to be bound, just didn`t express)
B) No K (no promise at all) but unjust enrichment (P confers benefit, D retains, assume D would have bargained for, unjust not to pay)
1) 2) 3) 4)
Not gift Not officious intermeddler or volunteer (imposed on someone) May be used for K that is unenforceable due to technicality May be used for mistake or emergency precluding assent (Cotnam) (a) If professional providing svc can expect compensation (i) Takes risk of being actionable if something goes wrong; layperson doesn`t have this risk (ii) Usually not considered, but Dr takes oath so has to assist, should be paid (iii)Central argument: this is person`s job so always expects payment (layperson wouldn`t) (b) Someone goes beyond simple act to point of excessive burden Cotnam p 103 emergency surgery in street on unconscious victim who dies; paying for benefit of svcs so don`t need net benefit (paying for life = millions) Damages fair mkt value: dr skill/ability/experience, difficulty of procedure (not ability to pay) Encourages to provide care even if can`t pay
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Paschall`s p 110 - 3d party knew & consented to work on house even though K w/
daughter; k`r exhausted remedies w/ daughter 1st (no relief) then sued 3d party. KEY: knew/consented/owned prop at time of K
Pyeatte p 112 wife puts hubby through law school; agreement he would put her through school after; instd divorcs. Usually consider marital matters gratuitous but here different xtreme unilateral benefit Problem: not lack of consideration, but lack of definiteness, so no mutual assent & no Implied in Fact so have to go with Implied in Law. C) 2 Types where can have restitution even w/ K 1) Restitution > expectation builder would have lost money on job so expectation damages < costs (a) Algernon p 488 Coastal terminated b/c Algernon-Blair wouldn`t pay crane rental. Coastal sued for costs spent so far and received restitution even though if had completed would have lost $ 2) Breacher seeks relief set off from other damages (exmp: deposit or part of payments made already)
DEFENSES
Classical v realist add later
I) Defenses to Formation
A) Statute of Frauds certain categories of K unenforceable if not in writing 1) Categories (a) K to guarantee someone`s debt (b) Sales of land (c) A K to be performed more than a year after made (d) Sales of goods > than $500 UCC 2-201 (e) Wills 2) Loopholes (a) Can be written on any piece of paper: eg one party wrote down but other didn`t = ok; written confirmation after oral agreement ok (b) Some cts allow audio/video (c) Can be multiple, detached documents (d) Ok if once had documents but were lost, destroyed, stolen (e) If admit oral K = enforceable (UCC 2-201(3)(b)) (f) Can use restitution and promissory estoppel to enforce if unenforceable under SOF B) Void against Public Policy 1) Classical defense was Illegality won`t enforce k to do illegal things (a) Exmp worker sues for having to work 12 hrs w/ no overtime both punished jointly, no recovery 2) Modern: Cts today willing to say K invalid even if no explicit statute making K a violation of law (a) Surrogacy entire category might be allowed or disallowed (i) State`s options Criminalize Enforce
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Make voidable at election of one party (ii) Policy arguments Pro Freedom of K Pro-family enforce for families ppl really want to have; just another way for couples to have kids Feminist argument ct being paternal assuming women can`t make K or protect own interests Difference b/n buying babies and paying for svcs Con Not really free Diff bargaining pwr (econ coercion) Not really informed Class exploitation Pro-family terminating parental rights is perm and violates trad`l notions of family Will there be diff outcomes based on genetic ties? Commodification of child/women Don`t allow to sell baby b/c some values more imp than mkt value Shouldn`t turn ppl into commodities Family law vs adoption statutes Most states discourage pvt adoption b/c worry abt money issues and want to regulate I. Don`t want to easy b/c fewer ppl will adopt Family law focuses on interest of child & focusing on K moves away from this std Genetic tie may be line of distinction surrogate w/ no genetic tie seems less wrong so may enforce K and give child to couple TODAY: most won`t enforce if mother changes mind b/c consent is revocable. New Uniform Parentage Act incorporates allowing ct to approve pre-K. California follows Calvert intent determines parentage (iii)Baby M (handout) surrogate artificially insem so is genetically linked; changes mind and runs off w/ baby, S. Ct said agreement goes against adoption statutes and is baby selling so not enforceable K. However, gives custody to birth father b/c nat`l mother (surrogate) unstable (iv) Johnson v Calvert (handout) embryo from couple implanted in surrogate. Uniform Parentage Act determine parentage by genetics or giving birth (here = diff outcome) Ct used K to determine intent of parties o Calvert intended to be parent o Surrogate did not Ct says not inconsistent w/ public policy or statutes o No clear message from legislature/not worried about indentured servitude
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Dissent: test should be best interests of child; prefers model legislation where ct supervises formation of K (b) Covenants not to compete (c) Pre-nuptial agreements C) Mistake of Fact belief not in accord w/ facts = basic assumption of K (existing problem that is unknown) Material effect Adversely affected party bears risk? R2d154 (yes not voidable; no = voidable) (i) allocated by K (ii) Or by ct b/c reas in circmstnce ct can allocate risk to party most capable of controlling Ct will look at custom, trade usage, expense to investigate (iii)Conscious ignorance aware at time had lmtd knowledge of related fact but treated as sufficient (iv) Note: Mistake easier than impracticability b/c latter has high std of no real alt 1) Mutual Mistake k voidable by adversely affected (unusual for K to be voided for mistake though) R2d152 both parties make mistake abt basic assumption on which K based that has material effect on performance = voidable by adversely affected party unless bears risk under 154. 2) Unilateral Mistake same as undisclosed fact; not enough to void unless: R2d153 K voidable when party makes mistake abt basic assumption on which bases decision to make K and has adverse material effect on performance; as long as party doesn`t bear risk of mistake according to R2d154 & (i) Enforcing K would be unconscionable (ii) OR the other party had reason to know of mistake or his fault caused the mistake
Elsinore (p 147) k`r bid`g clerical error, bid accepted, notified school bd of mistake, both intended plumbing charges be incl`d; ct said since knew & could be put back to status quo (could have awarded to next lowest) Stees k to build even though find quicksand classical analysis = k obligates no matter what Renner p 789 jojoba farm both thought enough water = mutual mistake so can rescind
D) Misrepresentation There is generally no duty to disclose (Swinton, no duty to disclose termites), unless there's a misrepresentation: (a) R2d 159: Defined as an assertion that is not in accord with the facts (b) R2d 164 (ELEMENTS): When a Misrepresentation Makes a Contract Voidable:
(i) Assertion not in accord with facts (ii) Fraudulent OR material (iii) Party`s manifestation is induced by fraud or misrepresentation, and justified in reliance
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(c) Party may be induced by a third party`s fraud or misrepresentation, K still voidable
unless the other party to K acting in good faith and has no reason to know of the misrepresentation
(d) R2d 161: treats non-disclosure as equivalent to misrepresentation where the undisclosed fact concerns a basic assumption made by other party to K and where non-disclosure amounts to failure to act in good faith (i) Non-disclosure = assertion when ...
Need to correct Half-truth Need to correct other party`s mistake regarding a basic presumption... ONLY When = a violation of DGFFD (ok to use superior knowledge) Fiduciary duty gives other party rt to know Will correct a mistake of other party as to the writing
(e) R2d 162: Misrepresentation is Fraudulent or Material fraud when intends to induce; misrepresentation when it is likely to induce, a reasonable person to manifest his assent. (f) Kannavos: ad said = invest prop = truth so duty to fully disclose; once start tell all, even though extra diligence by buyer could prevent (g) Vokes: dance lessons; told was excellent dancer = misrep of material fact (h) Developer of market data also doesn`t have to disclose data upon purchase 2) Defenses to Misrepresentation (a) Fact vs. Opinion draw line b/c not reasonable to rely on opinion of other ppl (i) Exceptions:
Fiduciary relationship Superior knowledge/expert Deceit
(b) Duty to read E) Duress R2d175 manifestation of assent induced by improper threat that leaves victim w/ no reas alt = voidable 1) Elements of Improper threat R2d176 (i) Threat is Improper if...
What is threatened is a criminal act, or a tort Threat of criminal prosecution or Threat to sue in bad faith (abuse legal system) Breach of DGFFD (hard to tell when cross line from hard bargaining)
(ii) Threat improper if resulting exchange is not on fair terms AND...
Harm recipient of threat and not significantly benefit party making threat Threat is more effective b/c of previous unfair dealings by threatening party What is threatened = use of pwr for illegitimate ends
2) Classical gun to head, hand moving pen (tort or crime) (a) not voluntary, so never really did it 3) Realist expanded so just threat of crime/tort, now incl improper threat of something not illegal (econ duress) Have broader duress rule, but weaker rules against modifying K
Austin v Loral p 343 Austin sub-k w/ Loral who has navy K for radar sets. Austin threatened to stop delivery on 1st K if not given K for all components on 2nd bid and agree to higher price. Loral tried to find replacement sub-k`r but none could deliver on time. After all parts received refused to pay extra amt demanded K modifications voidable b/c of duress (Austin deprives Loral of its free will)
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Loral must show really has burden penalties from navy plus threat of losing future k`s = substantial pressure to give in to Austin`s threat Not pre-existing duty here b/c ct trying to look at actual problem econ duress Normally doctrine of duress wouldn`t be applied here because modification of K in light of market changes is usually good faith
F) Undue Influence voidable if assent is obtained through exploitation of dominant position of one party over another [R2d 177] (Odorizzi v. Bloomfield the gay teacher persuaded to resign) 1) Not duress but party is weak in some way 2) Elements: (a) Lessened capacity of one party to make free K (elderly, mentally impaired, status makes
susceptible to pressure that wouldn`t = duress but is still unfair for this person)
(i) Subnormal subjected to ordinary force OR (ii) Normal subjected to extraordinary force (b) Factors (i) See p. 351 G) Lack of Capacity 1) Legal Incapacity: Certain individual are legally incapable of incurring binding contractual obligations. Timely assertion of this defense by a promisor makes the K voidable at his election. (a) Infants and Minors: Bright Line Rule K voidable upon child`s election once reaches majority (i) Doesn`t matter whether age known (ii) Puts seller on guard against selling to minors (b) Mental Incapacity: not as clear b/c harder to know (i) Trad'l test lacks capacity to understand and looks at if other party knows Problem: Some disorders = understand but can`t control self (ii) R2d15 expands & adds (b) unable to act in reasonable manner & other party has reason to know of incapacity H) Reasonable Expectation of consumer (New Realist Doctrine) R2d211(3) 1. adhesion K = term in std-form K (adhesion) that reas consumer would not agree to if knew abt it (b/c doesn`t fit into reas expectations) part of K (see primarily in Insurance) Henningsen p 380 steering failure on new car; reas person wouldn`t know warranty disclaimer waived rt to personal injury claim NOT enforced overriding consideration of public policy, protection of ordinary man O`Callaghan p 370 fell crossing apt ctyd, lease had exculpatory clause If use 1, do other enforced (usually disfavored) Carnival p 389 would reas person forego buying if knew abt forum-selection? o Ct said no bad faith, advantages to both parties, so ok I) Unconscionability (also adhesion k)
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1) UCC 2-302 didn`t define b/c couldn`t agree but allows to strike whole K, clause only, or limit to get rid of unconscionability (allows judicial flexibility) 2) Substantive oppression (one-sided terms) 3) Procedural unfair surprise and absence of meaningful choice (latter = on its face unconscionable) (a) Usually unconscionable: waivers of liability, remedies limitations, warranty disclaimers (i) UCC 2-719: 1st two unconscionable on face (b) Williams p 403 (bought furniture w/ cross-collateralization clause) unconscionable b/c lack of bargaining power; irresponsible dealing/sharp practice when knows on public assistance K not enforceable when one party could not or did not comprehend meaning of K; otherwise enforceable no matter how unfair (c) Jones v Star Credit freezer pd $1200 should pay $300 = on its face unconscionable (lack of choice) (d) Armendariz - Employment Arbitration Clauses required employee to use but not employer (i) One-sided (substantive) (ii) No opp to negotiate so no choice (e) Brower v Gateway (handout) arbitration clause unconscionable under UCC 2302 (i) Requires use ICC = cost prohibitive and too onerous (can`t contact, in France) 4) Policy arguments (a) For being applied (i) Paternalism protect from bad terms (ii) Not really free when have such disparity 1) pwr 2) lack of understanding (iii)Distributive ? (iv) Legislation can`t be specific enough to cover every poss (b) Against (i) Anti-paternalism (ii) Gen`l Freedom of K (iii)Anti-redistribution Empirical if put cost on merchant, prices go up for all = won`t sell on credit Normative shouldn`t use K law (iv) Legislature should handle Ppl will know in advance Evenhandedness of application so not case-by-case J) Preexisting Duty performance of an act which promisee is already bound by K to perform is not valid consideration for change that promisor has apparently agreed to 1) Exception: Promise modifying contractual duty will be enforced if fair and equitable in light of circumstances (UCC 2-209 says must be made in good faith)
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Step 3: Interpretation: What are the terms of the contract?
I) EXPRESS TERMS A) How do we Interpret the Meaning of Contract Terms P has burden to show narrower meaning should prevails (Frigaliment p 574) Chicken, not otherwise specified, could be stewing chicken or fowl D`s subjective intent agreed with one of several objective definitions of chicken, thus no breach of warranty (P has burden to show that it wanted another type) 1) R2d 203 hierarchy: express terms, course of performance, course of dealing, then trade usage (a) Specific language better than general (b) Separately negotiated/added = greater weight than std or non-negotiated terms 2) Start with term itself. If ambiguous (susceptible to more than one meaning), then look at it in the context of the whole K; interpret it consistent with other terms; apply maxims (a) Maxims courts often use
(i) Construe the K against the drafter (ii) Interpret K as a whole, as internally consistent, and the most reasonable light, lawful and effective (iii) Give greater weight to specific terms and to separately negotiated or added terms (iv) Interpret the K in the way most favorable to the public.
3) Course of Performance how has the term been used by parties in the course of this, or similar, K? 4) Course of Dealing how has the term been used by parties in negotiation? 5) Trade Usage how is term used in industry? Is there widespread consensus? B) Whose meaning prevails? 1) R2d 201(1): If parties have the same meaning subjective meaning prevails 2) R2d 201(2): If different, but B knows or has reason to know A`s meaning and A doesn`t know or have reason to know B`s (modified objective test) A`s meaning 3) R2d201(3) not bound unless one of above even if = lack of mutual assent (no K) (a) Raffles famous ships Peerless- each means diff and neither has reason to know no K because no mutual assent, no meeting of the minds (latent ambiguity) (b) Oswald Swiss coin collection honestly meant diff things, no K C) UCC 1-205, 2-208 course of performance, course of dealing and trade usage are always relevant and admissible to determine the meaning of K terms. II) IMPLIED TERMS 1) Duty of Good Faith -- R2d 205 and UCC 1-203 (a) Is implied in every K but doesn't attach until K is formed (doesn`t apply to negotiations) (i) Saves Ks that would have been illusory under Classical Regime (output & requirement Ks, exclusive agency Ks) (b) Definitions: (i) UCC 2-103 definition of Good Faith for Merchants honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.
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(ii) UCC 2-306 definition of Output, Requirements and Exclusive Dealings no quantity unreasonably disproportionate to any state estimates or in the absence of [estimates], to any normal or otherwise comparable prior output & requirements Ks. (c) R2d uses excluder definition comments talk about faithfulness to agreed common purpose and consistency with justified expectations of other party and lists some kinds of bad faith. (i) Examples of Bad Faith Opportunism using discretion under K to recapture foregone opportunities w/ Interference other party`s performance Exercising discretion arbitrarily or irrationally Destroying or injuring the right of the other party to receive the fruits of the K (Dalton v. ETS the case where ETS accused student of cheating). Dickey p 617 car wash business changed to simonizing for more net profit; rent based
on gross profit, owner said K implied had to stay car wash; ct said change was in good faith & won`t interpret b/c slippery slope; still paying min $
(d) Termination in at-will Ks when is DGFFD violated? (when employees acting against interests of the agreement) (i) Bak-a-Lum v. Alcoa (Franchise p 634) A supplies, BAL distributes. Can terminate but need to give reasonable notice. Instd encouraged to bld facilities so would still sell hard. Note: cannot contract out of DGFFD; so had to have some type of reas notice. (ii) Sheets v. Teddy's Frosted Foods (Employment) whistleblower wrongfully terminated; at-will employee may sue, as here, for wrongful discharge if he can prove that the termination violates public policy. (An exception to the Wood`s Rule where uphold at-will K) b/c require firing in GF (iii)Balla v. Gambro, Inc. (Attorneys) No protection for attorneywhistleblowers. Attorneys have an ethical obligation to report; public interest would be served without extending a claim to attys. (iv) Nanakuli p 651 implying term into K w/ express term saying use posted price by applying trade usage Two arguments price protection = term of K OR GF requires (ct agrees w/ latter but focuses on 1st) UCC 2-202 & 1-205 implied term can`t negate express term; so is implied term consistent - said doesn`t totally negate (would be if said buyer sets price) so is consistent b/c could be unstated exception or special circumstance (v) Eastern fuel freighting not bad faith b/c course of perf, trade usage, custom, all show is normal 2) Trade Usage or Custom (a) Who should be bound? Some say newcomers shouldn`t be bound; others say only outsiders not bound, as soon as you join trade you should be held to usage. (b) Modern courts often hold that customs are actually part of the K, rather than just something you consider if the K is ambiguous.
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(i) Critique: doesn`t fit with idea that Ks are freely created by individuals, not imposed on individuals by society. (ii) Cardozo's reply: people reasonably expect to comply with social norms; the K is their reasonable expectation of what it is, therefore social norms are part of the K. (c) Classical Ct includes some conservative judges today only use trade usage if ambiguous terms (d) UCC says you may always admit evidence of trade usage to interpret K terms or to supplement them, even if K is completely integrated, unless trade usage is inconsistent with the writing (contradicts/negates writing). (i) Note: Complete integration means can`t use parole evidence to supplement or contradict. (ii) Nanakuli trade usage and course of performance will be read into Ks where they are so prevalent that the parties would have meant to incorporate them into the terms of the K. 3) UCC Gap-Fillers try to make whole K internally consistent; two poss meanings, give most reas, greater weight to handwritten additions (a) 2-305 If open price term reasonable price at time for delivery; (b) 2-308 If no place of delivery seller`s place of business or if he has none, his residence. (c) 2-309 If no time for shipment or delivery a reasonable time (d) 2-314 Implied Warranty of Merchantability the good would pass w/o objection in the trade; meet the fair average quality within the description; fit for ordinary purposes; etc.) (e) 2-315 Implied Warranty of Fitness for Particular Purpose if the sellers knows that the buyer is relying on the seller`s skill or judgment in selecting or furnishing suitable goods for a particular purpose, there is an implied warranty that the goods shall be fit for that purpose. III) THE PAROLE EVIDENCE RULE A) Effect: If it applies, prevents one party from giving evidence of prior contemporaneous agreements or negotiations. (oral or written) 1) No application to oral agreements made after execution of written K 2) Also does not apply to exclude evidence of trade usage or course of dealing B) Arguments For & Against 1) For the PER: (a) Written word is more accurate/reliable, less chance of fraud (b) Makes K law more predictable, can rely on facts that Ks say what they say (c) Can`t trust jury to weigh evidence correctly (sympathy awards) 2) Against: (a) Too inflexible could lead to fraud other way (Bollinger, leaves something out at last min) (b) Words don`t have plain meaning, not absolute and stable referents. (inherent ambiguities in language)
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(c) We should give effect to intents of parties, allow all evidence that helps us determine (d) Jury should get all evidence, can still weigh written word more heavily; we can trust jury (e) Not more predictable, leads to more disputes. C) Steps to Determine Whether the PER applies: 1) Is the K an integration?: (a) Intended by parties to be a final expression of one or more terms of K? Gianni v. R. Russell lease w/ no selling tobacco, P says in exchange gives exclusive rt to sell soda but then someone else allowed to. Not collateral (side) agreement b/c w/in field embraced by subject of K (would expect it to be in K if intended to have term) (b) Compare oral/written to see if expect parties in same situation to normally or naturally include in written K 2) Is it (a) complete? = final expression of all terms (i) can`t be contradicted or supplemented (ii) can always make later agreements to modify though (b) Or partial? = final expression of only the terms it contains (can`t be contradicted, but can be supplemented). (i) How to decided whether integration, complete or partial? Corbin View: Modern courts and R2d 214(a) writing itself can`t prove its completeness, must use all other circumstances, including prior negotiations, to determine whether integration, complete or partial. (judges look at all and then decide what goes to jury) Classical View: Four Corners only if it appears on its face incomplete is it partial. (ii) Merger Clause: states K is complete integration (best evidence is integrated) may not be conclusively determinative in standardized K & may be unconscionable or not binding if buried (iii)Are Extrinsic Terms Consistent or Contradictory? E.g. Masterson v. Sine: Traynor majority says deed not the kind of document likely to be complete integration; because partial, can admit consistent evidence to supplement; dissent says extrinsic evidence is contradictory, not consistent. D) Reformation & PER: when error in reducing negotiations to writing produces writing that doesn`t accurately express parties` agreement, may admit parol evidence & reform K, 1) Bollinger oral agreement to make waste sandwich. Defendant complied initially, but then stopped. Parties made a mistake and forgot to write this term in the contract. K may be reformed. E) No Oral Modification (NOM) Clauses--all future modifications must be in writing; not oral
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1) Common Law: ineffective at CL b/c can`t bind self not to make future K 2) UCC: Statutes allowing NOM clauses UCC 2-209(2) and some states outside sale of goods (a) BUT UCC 2-209(4) allows attempt to modify orally to act as waiver of NOM clause, especially if there`s detrimental reliance on oral modification. F) Exceptions to PER 1) Doesn't preclude "Collateral Agreements" that is, an oral agreement that is supported by separate consideration may be demonstrated, even though it occurred prior to a total integration. (a) TEST: A prior agreement is NOT a collateral agreement if... (i) It involves the same subject matter as the written agreement and (ii) It is so related to the written K that both would be executed at the same time. 2) Doesn't exclude: (a) Evidence of negotiations after written agreement made. (b) Evidence to show no agreement or agreement invalid (defenses like fraud, mistake, etc.) (c) Evidence of integration (or not), complete or partial (d) Evidence to help interpret writing (classical view would say only if term is ambiguous) 3) UCC 2-202: Can`t contradict terms of integration, but can always explain or supplement by course of dealing or performance & trade usage. 4) Even merger clauses may not conclusively determine complete integration for standardized K. (See R2d 211) G) When does PER bar admission of extrinsic evidence for purpose of interpreting meaning of K? 1) Again, 2-stage process: (a) Preliminary determination: is language ambiguous? (b) If yes, admit evidence of prior negotiations for interpretation of express terms. 2) How to decide at First Stage? (a) Classical view: plain meaning rule. Either ambiguous or not. When parties set down a writing in a clear complete document, their writing should be enforced according to their terms, and extrinsic evidence is generally inadmissible. (i) W.W.W. Associates v. Giancontieri p 586 K for sale of land w/ a cancellation and a merger clause. want to cancel, but claims that cancellation intended to protect , not . wants to include oral evidence supporting this. Held that K was clear on its face--either party may cancel. (b) Modern Rule: admit ext. evidence at 1st stage (before judge) to determine whether express terms are reasonably susceptible to meaning contended for by parties; if not, then exclude at stage 2. (i) Pacific Gas & Electric Co. v. GW Thomas p 592 K says must insure from property damage resulting from `s work. `s property is damaged. won`t indemnify claiming only 3rd parties covered. has evidence to support their narrow meaning. Judge Traynor says you can`t tell whether a K has a
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plain meaning without looking at all evidence--must consider extrinsic evidence, at least as preliminary consideration - to decide intention of parties IV) THE BATTLE OF THE FORMS how to interpret competing form agreements--See Acceptance, Acceptances Varying from the Offer.
Step 4: Have the terms of the contract been performed?
I) DEFENSES TO PERFORMANCE does the party even have to perform? A) Classical doctrine - nothing short of impossibility would excuse performance. 1) Impossibility if act of God, illegality, or death duty to perform is discharged. 2) Taylor v. Caldwell concert hall, which is the subject of a K, is burned down (not the fault of any of the parties) making it impossible to execute K. Parties excused from performance since no fault critical issue of intent Modern Doctrines excusing from performance 1) Complied w/ gov't K specs or 2) Impracticability [R2d 261, UCC 2-615] seller's claim (a) Occurrence of event/contingency, (not pre-existing go to mistake) (i) Traditional Scope: (ii) death or incapacity of necessary thing 262 (iii)Destruction of specific thing 263 (iv) Supervening prevention or prohibition by law 264 (b) Non-occurrence = basic assumption of K not fairly regarded as w/in risks assumed under K (foreseeability: risk not allocated by K or custom) (c) Makes performance impracticable no real alternative? (i) Not that alt more expensive; while doesn`t have to be totally imposs, must be well beyond normal range of alternatives/expense . (ii) Think about who is superior risk bearer (ct did in transatlantic diversifying costs, insurance, but said wanted principle across the bd, not for a specific instance) (d) Claim of impossibility is an all-or-nothing doctrine 3) UCC 2-615 (test is same) (a) (b) If the causes mentioned in section (a) affect only a part of seller`s capacity to perform, he must allocate production and deliveries among his customers... [in any manner which is fair and reasonable] (b) (c) Seller must notify the buyer seasonably that there will be delay or nondelivery. 4) Transatlantic Financing Corp. v. United States p 805 closure of Suez Canal forced ship to take detour around Africa. There was a contingency, the non-occurrence of which was a basic assumption and was not fairly regarded as w/in the risks assumed under the contract. However, it did not make performance impracticable because
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there was an alternative (the detour). If you can still perform, even if it requires more money, your duty is not discharged (i.e., not commercially impracticable) 5) Eastern Airlines v. Gulf Oil Corp. p 823 Gulf tries to assert defenses based on UCC 2-615, but is not successful b/c K clearly and unambiguously states that a certain price indicator would be used--cannot now claim that it is impracticable to use it. Further, the contingency was reasonably foreseeable so should have accounted for it in negotiations. B) Frustration of Purpose [R2d 265] (buyer's claim) if a party`s principal purpose is substantially frustrated by the occurrence of an event, presumed not to occur, his remaining duties are discharged. 1) Test: (a) Occurrence of contingency, (b) Non-occurrence = basic assumption of K risk not allocated by K or custom (foreseeability, superior risk bearer) (c) Substantially frustrates the principal purpose of the K (can still perform but value is 0) (d) Krell v. Henry p 831 K to use property for the procession of the King, but King falls ill. Seeing King was the foundation of the K, discharges both parties from performance. (e) Chase v. Paonessa supply concrete median barriers for construction company & protests from residents = cancel order. Chase paid for all barriers produced; knew how government contracts work. Held for Paonessa, frustration of purpose discharges remaining duty. (no reliance damages b/c stopped production) II) THE PERFECT TENDER RULE [UCC 2-601] as long as a K doesn`t involve installments (multiple deliveries), and unless otherwise agreed... if the goods or tender of delivery fail in any respect to conform to the contract, the buyer may (a) reject the whole; or (b) accept the whole; or (c) accept any commercial unit or units and reject the rest. A) But: UCC relaxes the strictness of the perfect tender rule, or makes it more difficult for the buyer to reject... 1) Reasonable time [2-602(1)] rejection must occur within a reasonable time. Buyer must also give prompt notice of the rejection to the seller. 2) No acceptance [2-606(1)] buyer can only reject if he hasn`t previously accepted the goods. (Acceptance = buyer`s indication of acceptance after inspection; failure to timely reject; or act inconsistent with seller`s ownership). 3) Revocation of Acceptance [2-608] even if a buyer has accepted the goods, if he discovers a defect he may be able to revoke his acceptance. To revoke, buyer must make a stronger showing of non-conformity--must show that the defect substantially impairs the value of the goods, rather than just fairs to conform in any respect. (a) Revocation must occur within a reasonable time [2-608(2)] (b) Buyer can still recover damages as difference in value if no revocation [2-714] 4) Cure [2-508(1)] Seller can fix the problem if notifies buyer w/in time or time of K hasn`t expired 5) Installment Contract [2-612] more lenient to sellers. The buyer may reject any installments that are non-conforming only if it substantially impairs the value of the
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installment and cannot be cured. III) DIVISIBILITY mitigating doctrines to protect breaching parties A) Defined: a K in which both parties have divided up their performance into units or installments so even if a part is breached, compensation may be given for the part performed. In other words if performance consists of several distinct items, and the price to be paid is apportioned to each item to be performed, or is left to be implied by law, then such a K is generally severable. 1) Gill v. Johnstown Lumber Co. K to drive logs down river to lumber company, but flood carried logs past delivery point. Logs are several and distinct items. Judgment for lumber co--K is severable and not whole. Defendant is only paid for logs delivered. (a) Several and distinct items diff things w/ diff prices IV) SUBSTANTIAL PERFORMANCE A) Generally: Assume K formed and no defenses: question of perf breach 1) If one party fails to substantially perform (material breach), the other party`s remaining duties are not due. 2) There has been breach only ask if material or not B) Factors to Consider in Determining Important or Trivial Breach (Jacob) 1) Purpose to be served by k (very realist b/c justice equated w/ intent) 2) Desire to be gratified 3) Excuse/reason for deviation 4) Cruelty of enforcement C) Jacob & Youngs v. Kent p 507 P sues b/c D refuses to make last payment on house that was built with wrong piping. Judgment for P b/c mistake was inadvertent and trivial K not forfeited, but damages for minor breach of condition will be allowed where omission is trivial and not willful D entitled to difference in property value D) Plante v. Jacobs p 702 K to build house. Dispute arose and contractor stopped work and sued Jacobs for payment. Jacobs claim faulty workmanship and incomplete construction. Jacobs says no recovery unless contractors substantially performed... (wall in wrong place plus left other things out) held for P on question of substantial performance misplacing of living room wall fell under diminished value rule, would have been economic waste to tear down wall and rebuild (a) Test: whether the performance meets the essential purpose of the K. (i) Does not require strict compliance of every detail (ii) Something less than perfection is the test, unless all details are made the essence of the K. Defendants did not show that the contractors failed to substantially perform. Plaintiffs recover K price less damages caused by incomplete performance.
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Step 5: Has there been a breach? (if breach not material, it is b/c other party
substantially perf)
I) BREACH & SUSPENDING PERFORMANCE if it is found there is a duty to perform, and the duty has not been discharged, then failure to perform in accordance with K`s terms breach. A) Effect of Breach 1) Minor Breach if the non-breaching party receives the benefit of substantial performance and the breach is immaterial, then a remedy may be given for the immaterial breach. 2) Material Breach if non-breaching party does not receive the benefit of substantial performance and the breach is material, then the non-breaching party may seek remedy for the entire K; or, may treat as a partial breach. B) Effect on Other Party's Duties [R2d 237] each party`s remaining duties is conditioned upon whether there are any uncured material breach by the other party from earlier time C) Factors in Determining Whether a Breach is Material [R2d 241] 1) Amount of benefit received extent injured party will be deprived of reasonably expected benefits 2) Adequacy of Damages extent injured party can be adequately compensated for benefits deprived 3) Hardship to Breaching Party extent to which breaching party will suffer as result of termination (consider extent of performance, cost of termination). 4) Likelihood of Cure will breaching party cure or offer assurances of cure? 5) Good/Bad Faith did the breaching party`s breach comport with standards of DGFFD D) Is Breach Material? 1) NO (subs perf) then must continue performance = partial breach (a) Partial Breach gives rights to damages but not a right to terminate 2) YES then... (a) Continue performing and treat as a partial breach, OR (b) Stop performing and treat as a total breach E) Walker & Co. v. Harrison Harrison`s store leases a sign from Walker, who is to maintain it. Some minor blemishes on it so Harrison stops payment, alleging material breach. Not a material breach--Walker responded in a week and the maintenance was minor no foreseeable duty to clean the sign on a daily basis II) ANTICIPATORY REPUDIATION announcement of intention not to perform A) Common Law 1) Issues (a) Other party has duty to mitigate damages (b) Can go to ct immediately even before date of perform arrives (c) If ignore repudiation and wait for performance at your peril b/c of duty to mitigate
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(d) Whether or not can withdraw repudiation depends on reliance of other party (have they changed position) (e) If try to get other to retract, only allow reas time then make other arrangements 2) Advantages and Disadvantages: (a) Advantages: allow injured party to move on without being bound to a K that is anticipated to be breached by the other party. (b) Disadvantages: injured party should not just stop performance b/c breaching party may not have actually breached--alleged breaching party might have substantially performed or may cure it. UCC treats a little different from common law 3) UCC 2-609 Right to assurance (a) K for sale imposes expectation of due performance. (i) When a party reasonably questions whether the other will perform, they may in writing demand assurance of performance, and may suspend performance until assurance is received. (b) Between merchants reasonable grounds for insecurity = according to commercial standards (c) Acceptance of improper delivery or payment does not prejudice future right to demand assurance (d) Failure to provide assurance within a reasonable time (no more than 30 days) repudiation. (e) R2d 251 a promise who has reasonably grounds for believing that the K will be breached may demand adequate assurance of due performance 4) UCC 2-610 Anticipatory Repudiation If a party repudiates a performance not yet due, and if the loss substantially impairs the value of the contract to the other, the aggrieved party may: (a) Await performance for a commercially reasonable time; or (b) Resort to remedy for breach [even if he promised to wait until performance is due]; (c) AND suspend (if will substantially impair value of K) or proceed his own performance. (d) Must cover as soon as party learns of repudiation (i.e., if price of commodity changes, damages are calculated from day of repudiation) 5) UCC 611 Rule for retraction can retract prior to when next perform due unless aggrieved party canx or materially changed position or otherwise indicated repudiation is final (a) Must clearly notify of intent to now perform (b) Must include justifiable assurance per 2-609 (c) Reinstates all rts w/ allowance to aggrieved party for delay Hochster v. De La Tour (not UCC b/c svc agreement) repudiation allows plaintiff to sue before actual performance is breached, or wait until actual breach. In this case, waiting until actual breach would mean waiting 3 months for D to return have duty to mitigate Kanavos v. Hancock Bank & Trust Co. the financial ability of a prospective buyer of property is a material issue in his action for damages against a repudiating seller.
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Burden on the plaintiff (buyer) to show would have been able to perform w/in terms of agreement. If shown recover against repudiating seller. C.L. Maddox, Inc. v. Coalfield Services, Inc. stop work is allowed if done to obtain assurance of payment. This prevents running up of costs of work without being assured of payment. Posner applying something like UCC 2-609 but it doesn`t apply here.
Step 6: What are the remedies?
When P proves breach and P does not materially breach. REMEDIES IN LAW Damages, types of 1. Compensatory (see generally R2d 344) a. Expectation (the Standard Measure) gives the value of the performance i. Put in position as if K performed as promised ii. Formula = [Loss in value] [loss avoided] + [other loss] - [cost avoided by not having to perform] (R2d 347) 1. Loss in value = diff b/n what received & what promised 2. Other loss = incidental & consequential (unbargained for pain & suffering) 3. Loss avoided = money saved by mitigation iii. Supplier's Formula: reliance costs + lost profits = total out of pocket + lost profits 1. remember to factor other loss & avoided costs/losses
iv. Hawkins v McGee (Handout #1 p 5) 1. suit on two counts: tort claim of negligence (dismissed for lack of evidence; needed expert witness) and K claim of breach of warranty a. promised 100% good hand i. jury has to find guarantee actually uttered ii. meant to be taken at face value (to reasonable person, not P specifically) as inducement to grant consent b. promised recovery time of 5 days or so i. no one would understand to be k because dr is giving opinion or prediction 2. 1st trial had hung jury, 2nd for Hawkins but judge set aside verdict for excessive damages (tried first to pressure P to accept $500) 3. Damages should be diff between good hand and hand as it is now Court gives expectation damages!! a. not issue of what P spent or lost b. Could receive damages even if hand not worsened c. Neither D`s fee nor P`s cost in pain and suffering could be recovered b/c they would have been incurred regardless of success of surgery v. Executory contracts (late 19th cent.) no one has changed position or acted on K so no loss other than expected gain; vi. recover for sense of injury and protects from lost opportunity vii. uphold intent of parties viii. No payment for pain & suffering because = cost paid even had K been performed
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ix. Acting w/ innocence or w/o negligence is not a defense
b. Reliance restores plaintiff to position as if K never formed; recover any loss caused by reliance i. Used if expectation damages are too speculative (lack of certainty) ii. [Pre K] [Current position] = Reliance (R2d 349)
iii. More lenient than restitution because not limited to amount paid to D and can include damages for worsened condition iv. Not expectancy because doesn`t give whole difference between what received and expected v. Sullivan v. O'Conner (p 8) 1. P , an entertainer, sued D because nose surgeries (had 3) resulted in worse nose 2. Judge said P could recover expenses + damages directly from breach (psychological etc due to disfigurement & pain and suffering from 3rd op). No loss of earnings though because she did not show any. a. Allowed pain & suffering since it did not include for the first two surgeries: = pain beyond what would be expected from agreed upon surgery; also theory that pain is wasted` if surgery fails 3. P wanted expectation damages (ct said = too much since no negligence); D wanted restitution (ct said this not enough) a. Damages should not be based on if court thinks weak case as was done here b. Public policy also affected because court doesn`t want doctor to practice defensive medicine 4. Reliance would normally include all pain & suffering, expectancy would not; here have mix of the two a. Logic of expectation but gave for some pain & suffering and didn`t give for difference between where started and what received. Only got back to where started. b. P waived right to pain & suffering from 1st two surgeries c. Reliance allowed P to recover her detriments to be put back in position she occupied before parties made the contract
c. Restitution alternate theory of recovery; based on unjust enrichment (R2d 371) (See restitution section) i. Fair market value (reasonable value) of performance ii. Some courts say should be capped at K amount when is higher rare for breach that late though
iii. put back to position as if promise never made 1. return only amount P benefited D due to K; prevents unjust enrichment (payment or services) 2. P has relied on promise AND conferred benefit on D iv. Usually only when P requests such as Mobil Oil & Producing Southeast v United States (p 15 #3) v. Restitution can be claimed by party in breach
2. Punitive generally not awarded, unless breach is also tortious (R2d 355)
a. (bad faith breach) (i.e. breach + fraud or outrageous act justifies punishment) i. Mostly in insurance cases where co refuses to pay claim ii. 1984 CasSCt tried to extend beyond insurance in Seaman's v Standard Oil (p 18) when D refused to honor K with P. Ct opinion said it is a tort when company
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tries to shield from breach claim by denying K existed. (elements are bad faith and special relationship similar to insurer/insured iii. 1988 same court reined back in saying couldn`t extend policy for ins type relationships uncritically; Seaman`s has not impacted other cases and wasn`t applied here either iv. Will give punitive in cases with moral culpability Werner v Lewis (handout 1 p 24) 1. D hired to write program, included instructions for computer crash after certain # of claims (to get more business from P). 2. Punitive allowed here for policy reasons: a. to deter other hackers b. special trust relationship (P doesn`t have knowledge D has, so must trust D to do what should) c. Encourage people to bring suit by making worthwhile (punitive allows to recover ct costs) d. May have been hard to measure reliance or expectation here i. $7000 was reliance but not full reliance because didn`t show lost business, etc 3. Argument against punitive damages: expectation is just enough to deter breach when it should but punitive will over-deter
3. Nominal may be awarded if breach, but no actual loss proven 4. Liquidated enforceable if agreed upon in K, and if reasonable (not punitive) (R2d 356) REMEDIES IN EQUITY
A) Specific performance historical bias against because in old system only equity courts could give 1) Exception for cases where award by law (money) not adequate 2) Arguments against: (a) Is forced labor or indentured servitude so don`t see in employment K (b) Personal service contracts may not perform well (can make sing but not well) (c) Creates bilateral monopoly which is good because burden of figuring value is on them, but negotiations can fail due to hard heads and thus value is restricted to range of their values (what one is willing to pay and other willing to accept) (d) 3d party costs can`t accurately reflect externalities 3) Elements: (a) UCC 2-716: (i) where goods are unique or other proper circumstances (ii) Buyer unable to cover Klein v Pepsico (p 451) no specific performance because there were substitute goods that could`ve been purchased (jet) to satisfy original K and money damages were adequate (b) R2d359: SP not ordered where damages adequate to protect expectation interest (c) R2d360: To determine Adequacy (i) Damages difficult to prove with reasonable certainty (ii) Can`t replace using money damages (UCC = cover) Laclede v Amoco (p 458) specific performance is appropriate remedy for breach of K involving personal property (no other way to get central propane gas distribution systems) (iii) Won`t be able to collect damages
I) ISSUES IN EXPECTATION
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A) R2d 347 A breach can affect an injured party in 4 ways: 1) Loss in value: deprivation of the expected return performance 2) Other loss: the expense incurred in attempting to salvage transaction after breach 3) Costs avoided: breach can benefit the injured party by saving them the cost of continued performance. 4) Loss avoided: beneficial effect on injured party by allowing them to avoid some loss by freeing up their resources that would have been devoted to the K. 5) NOTE: Overhead is not chargeable as a cost saved in computing an expectations award for breach (Vitex) overhead remains constant whether K is performed or not B) Therefore... Expectation Damages = Loss in Value + other loss cost avoided loss avoided
a. Definition: Injured party may recover from breaching party a $ sum sufficient to put him in as good a position as he would have been had the contract been performed in full i. Entitlements and obligations of parties are cut off an determined at date set by K b. Why expectation damages i. Fuller & Purdue Will theory promise has present value because you know law will enforce; law helped create credit economy and credit economy is used to justify law (circular argument) ii. Central argument: want to protect reliance measure but reliance damages don`t account for lost opportunity costs. Expectation is just reliance in broadest view because does give lost opp costs iii. Efficient Breach Theory ensure resources go to where valued most 1. measure by how much willing to pay 2. enourage Pareto-superior transactions (total consumer surplus) where breach is efficient: re-allocates goods to 3d party who values more 3. A will only breach where can still benefit after paying B 4. Problem: a. assumes pay what you actually value at; what if can`t afford b. allows to hedge mkt and breach whenever mkt price increases c. assumes everything can be monetized d. doesn`t consider B`s right to resell to D himself e. doesn`t consider bribe: A bribes B to let out of contract so benefit is split between both f. ignores externalities: buyin for crim activity or to donate (positive & negative social interests)
II) Remedies and Avoidability: A) SELLER'S REMEDIES UCC 2-703 (only relevant ones listed, check UCC numbers!) 1) Options covered in class (a) Option 1 (2-706) where resale is possible and done (good faith and in a commercially reasonable manner) (i) Damages = K price resale price + incidental damages costs avoided OR specific performance (b) Option 2 (2-708) resale possible, but not resold (i) Damages = K price market price + incidentals costs avoided (ii) Note: Encourages covering b/c otherwise you bear burden of proving fair mkt value
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(iii)You bear loss if don`t cover and mkt fails (c) Option 3 (2-709) where resale not possible (i) Full K price for "goods identified to K" (ii) Same as specific performance for seller Have choice to finish and ID to K OR (iii)Sell scrap materials as salvage 2) Lost Volume Seller UCC 2-708(2) If the damages under 2-708(1) are inadequate to put the seller in as good a position as performance would have done (e.g., 2nd K not a substitute for the first, seller would have had two sales instead of one had D not breached), then the measure of damages is the profit which seller would have made from full performance by the buyer covers incidental damages equal to added cost of selling the same merchandise twice (a) Requirements (i) would have solicited customer w/ or w/o breach (ii) would have sold to anyway, AND (iii)could have sold to & profited from both had breach not occurred (b) R.E. Davis Chemical Corp. v. Diasonics, Inc. p 484 3) Note: remember to deal w/ remainder of K if output K??? B) BUYER'S REMEDIES (a) UCC 2-711 & 712 - Buy substitute: (i) Cost of cover [replacement K price] + incidentals + consequentials costs/losses avoided (ii) Laredo Hides Co p 476. H&H said delayed payment justified term K, but ct says no = breaches; Laredo covers on spot mkt. = lot more $. Seller has to prove cover is improper (got something better than should have) (b) Option 2 (2-713) don't cover (i) Damages = Market price K price + incidentals & consequentials costs avoided (c) Option 3 (2-716) no cover available; get specific performance (i) Only if goods are unique or in other proper circumstances C) Common law requirement to cover 1) R2d 350 (a) Except as state below, damages are not recoverable for losses that could have been avoided without undue risk, burden or humiliation (b) Injured party is not precluded from recovery stated by (1) above, if reasonable but unsuccessful, efforts to avoid loss. Rockingham Cty v. Luten Bridge Co. K to build bridge. Ordered to stop. Notice was given to builders, but they continued anyway. Rule: Once notice is given to stop performance, performing party shall not continue to build and increase damages. (They can, but they can`t recover for costs) duty to mitigate
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Parker v. Twentieth Century-Fox Film Corp. Shirley MacLaine case. K to play role in movie, with clause that actress would be paid whether or not movie was made. Movie not made. Fox offers MacLaine alternate, but diffrent role. No duty for MacLaine to take alternate job b/c it was inferior and materially different award of $750,000 in damages other employment must be comparable & not of a different or inferior kind III) AVOIDABILITY AND COST TO REMEDY DEFECT A) R2d 348 (dividing line diff in price too great and look at economic waste of tearing down structures;
some cts expand to not wanting to compel performance no one values )
1) If breach delays use of property and the loss in value is not certain, he may recover rental value or interest on value of property. 2) If breach results in defective or unfinished construction and loss of value is uncertain, he can recover: (a) The diminution in market price of property, (might unjustly enrich P) or (b) Reasonable cost of completing performance or of remedying the defects if that cost is not clearly disproportionate to the probably loss in value to him. (might unjustly enrich D) B) Jacobs & Young v. Kent the stupid pipe case again. We don`t give homeowner the piping because of the huge disparity in costs of replacing the piping and the value of the pipe + econ waste. R2d 348(2). C) Groves v. John Wunder Co. defendant breach by not leaving property at uniform grade. Cost to complete performance is $60K. Value of land after performance is only $12K. Proper measure of damages is cost of performance (remedying defect, $60k) b/c 1) Breach was willful, so he should benefit from equitable doctrine of substantial performance 2) Objective of the K included restoration of land central feature of K!! 3) Subjective value might really be more. D) Peevyhouse v. Garland Coal defendant failed to do restorative work on farm at cost of $29K. Work would have increased market by only $300. Proper measure is difference in value b/c the breached K provision was only incidental to the main purpose and economic benefit was grossly disproportionate to cost of performance. IV) FORESEEABILITY A) R2d 351 (remember: knowledge of possible consequences is NOT the same as assuming responsibility for risk) 1) Damages are not recoverable for loss that the breaching party did not have reason to foresee as a probable result of the breach when the K was made. 2) Loss may be foreseeable as a probable result if it follows from breach (a) In the ordinary course of events, (P always gets) OR (b) As a result of special circumstances beyond the ordinary course of events, AND the breaching party had reason to know. (only gets if was foreseeable) 3) Court may limit damage for foreseeable loss as justice requires. B) Hadley v. Baxendale Mill breaks down, and plaintiff sends part to make replacement. Delay by carrier costs the mill profits. No recovery for lost profits b/c not foreseeable by carrier that profits would be lost as result of delay.
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C) Kenford v. County of Erie stadium to be built, but cancelled. Plaintiff suing for anticipated appreciation of value. No recovery b/c such extraordinary damages were not brought within the contemplation of the parties as the probable result of breach at time of contracting. V) CERTAINTY A) R2d 352 Damages are not recoverable for loss beyond an amount that evidence permits to be established with reasonable certainty. B) Fera v. Village Plaza, Inc. new store to open in mall, but mall misplaced the lease and leased the space to someone else. Store sues for lost profit. Held: a new business may recover lost profit damages if the profits are not excessively speculative. Here, there was a good deal of testimony as to the likely profits. VI) LIQUIDATED DAMAGES (can use to K around Hadley rule) 1) Damages for breach may be liquidated (i.e., pre-determined) by the contract 2) Damages cannot exceed a figure that is reasonable in light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss can't be a penalty! 3) Good b/c more predictability anticipates what loss will really be 4) Penalty damages are other type of stipulated damages bad b/c would push breaching party to perform in all circumstances (purpose of law is not to punish and want to encourage efficient breach) B) UCC 2-718. Liquidation or Limitation of Damages (helped popularize b/c good faith circum = predict & no ct) 1) Damages for breach may be liquidated in the K, but only at an amount which is reasonable in light of the anticipated or actual harm caused by breach, difficulties of proof of loss, and inconvenience of obtaining adequate remedy. Unreasonably large liquidated damages void as a penalty. C) UCC 2-719. Contractual Modification or Limitation of Remedy 1) Wasserman's Inc. v. Township of Middletown p 543 lease between Wasserman and Township contained liquidated damages provision based on Wasserman`s gross receipts. Liquidated Damages provisions are enforceable only if the are a reasonable forecast of just compensation for harm cause by breach. Gross profits are NOT a good measure. Net profits better account for costs of business. 2) Gustafson p 552 more uncertain actual damages would be (hard to figure out) better to have liq dam D) Better to put in promissory conditions (bonuses for completing by certain date) than penalty Brief history recognized K 17th century w/ writs of death 1. The Restatement influential because restates the law; not authoritative but persuasive law a) 1st Restatement expressed classic view b) 2nd Restatement expressed Realist view a. substance justice more than formative b. started with remedies c. A right is meaningless w/o remedy 2. UCC law, product of realists, K uses Article 2 covering transactions and goods a) law of goods should reflect standards of comm. b) flexible standards instead of specific rules 33
3. Three assumptions a) concerned with relief of promisees to redress breach; not punishment to compel performance b) Relief should protect promisee`s expectation c) Relief is substitutional in form of money, not specific performance, if adequate to protect expectation interest Bases for enforcement Enforce because bad to break promises: moral argument; bad for business; UCC includes obligation of good faith in every K because social good
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