Unformatted text preview: OUTLINE – CONTRACTS Key issues in Contracts Issue 1: Context Who are the parties? What is their sophistication? Is there a moral or legal obligation? The three formal requirements of a contract are offer, acceptance and consideration 1. Offers a. The offer has to be intended to be an offer (an objective standard) b. Three ways to tell if there’s an offer (tone, specificity, remaining open) Tone -Leonard v. PepsiCo (the Pepsi Points Case). Pepsi made commercial to show what points get and had jet at end. P tried to get the jet, Pepsi said no. Court said no binding contract because a reasonable objective person would not take the ad as a serious offer (humorous one) Specificity -Terms of contract must be reasonably certain in order for there to be a contract Ex) “Shoes for sale” vs. “Buy One Pair of Nike Basketball Shoes, Get $50 Off Any Pair of Nike Air Jordan’s” The UCC will apply “gap fillers” if some of the terms are left open (UCC §2-204(3)) Remaining Open -Has to be an actual offer -The offer remains open for the amount of time specified by the Offeror -If there is no specified time, the offer remains open for a reasonable amount of time (depends on the circumstances) -Offeror can revoke his offer, even if he or she has promised otherwise, unless there is reliance (which also depends on the circumstances) 2. Acceptance ● Agreeing to the terms of an offer made in a manner invited or required by the offeror o The offeror can state the method by which it must/can be accepted (ie. letter, signature, performance, etc.) o If the terms of acceptance are not specified, “an offer invites acceptance in any manner and by any medium reasonable in the circumstances” ● A contract is formed when acceptance occurs (the light-bulb is turned “on”, creating obligation) ● An offer can ONLY be accepted by the person in whom the offeror intended to create a power of acceptance ● An acceptance is usually valid only if the offeree knew of the offer at the time of his acceptance o Meaning where a reward is offered for a particular act, a person who does the act without knowing about the reward cannot claim the reward 3. Consideration ● A “bargained-for-exchange” for something of legal value 1 of 35 ● A performance or return promise is “bargained-for” if it is sought by the promisor in exchange for his promise and it is given by the promisee in exchange for that promise ● The performance may consist of: o an act other than a promise o a forbearance (of something that the person is legally allowed to do) Issue 2: Transaction v. Litigation ● How does the contract help the parties avoid litigation? Issue 3: Text ● Is the agreement written or oral? o Written: See Statute of Frauds ● Is the text ambiguous in its meaning? Ex: What is a “day”? Subjective v. Objective Approaches 1. Subjective – refers to a person’s actual state of mind a. Personal perspectives, feelings, beliefs, desires 2. Objective – external acts of a party to the agreement a. What would a reasonable person in the situation think? Exam approach: ● 1) What law governs the agreement? Is there a contract? o If goods, UCC. If not, common law. ● 2) Analysis ● 3) Damages: what remedies may be available to the parties CHAPTER 1 – REMEDIES FOR BREACHES OF CONTRACT A. PROTECTING THE EXPECTATION INTEREST a. Reading Statutes & Application of Article 2 of the UCC ● Sources of Contract Law o The Uniform Commercial Code (UCC): primary source of law for transactions involving the sale of goods (Article 2) o Restatement: comprehensive statement of general common law contracts principles written by the American Law Institute; authority not binding ▪ 1st restatement (1932) ▪ 2nd restatement (1979) o Common Law: contract law is created through case law o State Statutes: a lot of contract law is governed by state law ● Goods: anything that is tangible, moveable, such as products, livestock. ● What laws govern the contract? o If the contract is for a moveable good, the UCC applies o If the contract is for services/experiences, look to common law and the Restatement o If the contract is for a mix of goods and services, apply the Bonebrake test. 2 of 35 Bonebrake v. Cox: look at whether the predominant factor is goods or the service, and then decide. ● Remedies: there are two different types of remedies o 1) Monetary damages ▪ Expectation damages – puts the non-breaching party in a position they would be in had the contract been fulfilled ▪ Reliance damages – attempt to put the non-breaching party in as good as a position as they were in prior to making the contract ▪ Liquidated damages – provision set forth in a contract specifying the amount of damages in case one of the parties breaches the contract ▪ Restitution – attempt to prevent “unjust enrichment” of the breaching party by returning to the other party who has partially performed the value of the performance he has rendered to the defendant. o 2) Specific performance – the other party has to do what the contract required them to deliver. ● Statute of Frauds: The following contracts MUST be in writing 1) contracts for the sale of an interest in land, 2) UCC § 2-201(1): goods with value of $500 or more ▪ Exception: Specially manufactured goods 3) contracts in consideration of marriage, 4) contracts that cannot be performed within one year of the contract being made and, 5) contracts of suretyship. B. THE EXPECTATION INTEREST: OF INFERIOR SUBSTITUTES, OTHER ENDS, AND OTHER MEANS Parker v. Twentieth Century-Fox Film Corporation (California Supreme Court, 1970) Facts: Parker was offered a contract by Twentieth Century Fox to star in the movie musical “Bloomer Girl”, but Fox never made the movie. Fox offered Parker another role in a western. Parker sued for $750,000 (the amount she was to be paid under “Bloomer Girl” contract) Issue: Whether an actress must accept a role in a different film to mitigate damages from the film producer’s failure to produce the original film? Holding: No. There was no failure to mitigate damages because Parker’s second offer was not substantially similar. Rule: The measure of recovery by a wrongfully discharged employee is the amount of salary agreed upon. However, projected earnings from employment opportunities not sought or accepted can be applied in mitigation, if the employer can show that the employment was substantially similar to that of which the employee has been deprived. Takeaway/Significance: The court found an implied duty to reasonably mitigate. Parker is a great example of transaction vs. litigation because Fox could have avoided litigation if they had just included an express duty to reasonably mitigate in the contract - including what would constitute sufficient mitigation ▪ 3 of 35 Pay-or-play clause: there was a clause in Parker’s contract that said that Fox was either going to pay her $750,000 or make the movie. Why didn’t this ever come up in the case? This case could also be seen through the lens of freedom of contract as a theme because of this Are we talking about Parker’s objective or subjective expectations relative to the two movies in this case? a. Subjective - She probably liked Bloomer Girl better as a movie b. Objective - Her reputation might have been damaged accepting Big Country, Big Man Fairness and Efficiency - Fairness: is the court really allowing one party to push the other around? The Parker decision was based on fairness because it protected both parties by giving them a little bit of what each wanted: Protecting Parker’s expectation interest and it said Parker had an implied duty to mitigate. Efficiency: i. Goal of Mitigation = maximize the efficient use of resources ii. Parker is an actress who we want acting. Don’t want to incentivize her to do nothing because her acting is better for everyone. iii. This favors upper-class jobs (not “commodity based” or “doable by anyone”) Parker’s position allows an easier argument that other employment is not equal than a bus driver/fry cook etc. People in Parker’s position aren’t going to be able to say that their employment isn’t comparable because everyone can be a bus driver, but not everyone can be Parker. Neri v. Retail Marine Corporation Facts: Neri was going to buy a boat from Retail Marine (RMC). Neri breached because of an illness and wanted to recover his deposit. Issues: 1) How much of the $4,250 deposit can Neri recover? 2) Is Retail Marine a lost volume seller? Holdings: 1) Neri is entitled to recover $997 o Method the court used: $4250 (initial) - $2579 (lost profit) - $674 (incidental fees) = $997 back to Neri o Bradley believes Neri should’ve received $497. o $4250 - $500 (UCC §2-718(2) - $500 or 20% rule, whichever is less) - $2579 (lost profit) - $674 (incidental damages) = $497 (what Neri should recover) 2) Retail Marine is a lost volume seller o Lost volume seller: a person who would’ve had the benefit of additional sales had the first buyer had not breached o If Neri had not breached, RMC could have sold another boat to another customer, thus RMC could have sold two boats, and they lost the sale of the second due to Neri’s breach. o RMC also wouldn’t have incurred incidental fees. 4 of 35 Rules: 1) UCC §2-708 o If it is inadequate to put the seller in as good a position as if the contract wasn’t breached by the buyer, then the measure of damages is: profit (including reasonable overhead) made from full performance + incidental damages & expenses. 2) UCC §2-718: buyer’s right to restitution o Offsets the extent that the seller establishes a right to recover damages ● The UCC isn’t clear about how 2-708 and 2-718 interact with one another. In Re Worldcom (NY Bankruptcy Court, 2007) Facts: In 1995, MCI/Worldcom entered into an endorsement agreement with Jordan. Jordan gave MCI a 10-year license to use his services to advertise MCI products. Under the agreement, Jordan was free to advertise other products as long as they were different from MCI’s. In July 2002, MCI filed for bankruptcy and rejected the agreement. Jordan filed a claim for $8 million for breach of contract. Issue: Is Jordan a lost volume seller with a duty to mitigate, or is he an exception? Holding: Jordan is not a lost volume seller and had a duty to mitigate damages. Rule: To claim lost volume seller, the non-breaching party must show that they could have and would have entered into subsequent agreements. ● Two-part test for lost volume seller exception: 1) Objective capacity to enter other agreements (could he) 2) Subjective intent to enter other agreements (will he) How is Worldcom different from Parker? The same? ● Different - Parker did have both the capacity and subjective intent to enter into more work contracts, whereas Jordan did not. o Parker was an employee; Jordan was a subcontractor o If Jordan isn’t an employee, then the “substantially similar” requirement might not apply to him o Jordan could have been in multiple contracts at once, but Parker really could not o Jordan has more money than Parker. ● Same - Both Parker and Jordan had a duty to mitigate damages o Jordan - because he was not a LVS, even though he tried hard to argue that he didn’t have this duty o Duty to mitigate damages means that the non-breaching party can’t do nothing and expect the breaching party to compensate them fully just because of the breach How is Worldcom different from Neri? The same? ● Different - RMC did have subjective intent to resell but Jordan did not. Jordan has the dilution issue here, however, that Neri does not have ● Same - both claiming lost volume seller and unlimited supply C. THE EXPECTATION INTEREST: PERFORMANCE RATHER THAN DAMAGES. To ensure specific performance, Court would have to continue supervising ongoing relationships. ● Difficulty to calculate damages is not a bar to specific performance. 5 of 35 ● Convention on the international sale of goods (CISG): prefers specific performance ● When specific performance is appropriate o Land: Usually yes. o Personal Service/Employment: Usually no. o Unique products: Usually yes. ● Arguments for specific performance: o Cannot otherwise “cover” goods/goods are unique or appropriate under UCC §2-716 ▪ Cover: substitute goods o Persuade court to exercise power of specific performance. Compare to lack of interest in continued supervising. Copylease Corporation of America v. Memorex Corporation Facts: Memorex (D) manufactures photocopier supplies. Copylease (P) contracted to buy toner. Copylease promised to buy specified minimum quantities. Memorex gave Copylease a favorable price and exclusive dealership for Memorex’s toners in the Midwest. However, the contract did not incentivize Copylease to push Memorex products, so Copylease instead pushed cheaper off-brand. Memorex considered the terms of the contract unduly favorable to Copylease and wanted to modify the contract to receive more control. Copylease was willing to consider contract changes if Memorex gave an attractive incentive. Memorex notified Copylease it was unilaterally changing contract terms, and Copylease would no longer be the exclusive dealer. Copylease sued for breach and sought specific performance. Issue: Is specific performance an appropriate remedy? Holding: If Copylease has no adequate alternative source of toner, Memorex’s product may be considered unique for the purposes of UCC §2-716(1) or the situation may be an example of other proper circumstances where specific performance is appropriate. Rule: UCC §2-716 (1) Specific performance may be decreed where the goods are unique or in other proper circumstances (2) The decree for specific performance may include such terms and conditions as to payment of the price, damages, or other relief the court may deem just (3) The buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered. Rationale: The exclusivity aspect alone is not enough to warrant specific performance. Copylease argues that other brands of toner are distinctly inferior to Memorex’s product, and the fact that the UCC specifically contemplates requirements/output contracts make the claim for specific performance liable. Efficient breach - the price you pay to walk away. If we think a contract is no longer efficient, we want to give one of the parties the ability to pay damages and get out. - Holmes: “Breaching contracts constitutes a morally neutral act. You must pay damages and nothing else.” - We don’t require people to keep their promises for the sake of keeping their promises. We care more about them keeping their promises or not based on the principles of fairness and efficiency. 6 of 35 Takeaway: Although courts are hesitant to award specific performance, they would if the goods are unique/no cover could be obtained. D. THE EXPECTATION INTEREST: BREACH DETERRENCE VERSUS LIQUIDATED DAMAGES ● UCC §2-718: Liquidation or Limitation of Damages ● There must be a fixed damages amount or formulation in the contract. ● The amount must be reasonable in the light of: o The anticipated or actual harm caused by the breach AND o The difficulties of proof of loss AND o The inconvenience or non-feasability of otherwise obtaining an adequate remedy ● If conditions are met, ...
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