Cornell Law - Contracts Outline (Summers, Fall 2003)

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Unformatted text preview: Contracts Outline - 2003 Fall Term, Professor Summers CHAPTER 1. INTRODUCTION I. White v. Benkowski (WI 1967), p.22 (Punitive damages are not available in actions for breach of K, if no tort was pleaded or proved. White should recover for loss of water and inconvenience.) II. In letter (pp. 41-42) from Lon Fuller to Karl Llewellyn, Fuller argues that contract-no contract Llewellyn, dichotomy is a fallacy. Llewellyn is preoccupied with business agreements, esp. sales. However, fallacy. there exists a hierarchy of contract interest and thus there is an ascending scale of enforceability from restitution to reliance to expectancy. E.g. Sullivan, since there was a contract, expectancy Sullivan, would have been awarded. However, in this doctor-patient case, expectancy is too harsh. Expectation Interest: In most breach of contract cases, P will seek and receive expectation interest. Interest: Courts attempt to put P in the position he would have been in had contract been performed. P performed. is given benefit of bargain, including any profits he would have made from contract. bargain, Grainseller and Grainbuyer, prob. 1-1, p. 35: K that grainseller would sell 1000 bushels for $3.55 35: per bushel on Sept. 1 and Grainbuyer is to send his delivery trucks. Grainbuyer sent his trucks ($500) but Grainseller sold out. On Sept. 2, Grainbuyer sent his trucks to another seller and purchased for $5.55 per bushel. Theory of oblig: Agreement w/consideration oblig: U.C.C. Article 2 entitled "Sales," and applies to "transactions in goods." U.C.C. sec. 2-102: 2-102: "Goods" includes "all things which are movable at the time of i.d. to K for sale ." U.C.C. sec. 1-106 Remedies to be Liberally Administered: "aggrieved party may be put in as Administered: good a position as if other party had fully performed . . . ." U.C.C. sec 2-712 "Cover"; Buyer's Procurement of Substitute Goods: " damages the difference Goods: between the cost of cover and the contract price together w/ any incidental or consequential damages " Expectation interest = $2 per bushel for 1000 bushels + $500 + other costs to obtain other seller (time, phone calls, research). III. A. B. C. D. E. IV. Reliance Interest: It may be impossible to measure expectation interest of P accurately. Thus, P Interest: may recover his reliance interest. Courts attempt to put P in as good a position as he was in before the K was made. P is given out-of-pocket costs incurred in perf he has already rendered, made. but no profits. profits. Sullivan v. O'Connor (MA 1973), pp. 35-41: 35-41: A. Facts: P, entertainer, paid $622.65 for one nose operation to enhance her appearance, but D, : Facts surgeon, made nose even worse in 3 operations and no further operations could help nose. B. Holding: P wanted expectation interest: Holding: (1) promised better nose - present worse nose; (2) pain and suffering from op. 3; (3) lost profits. However judge awarded partial reliance: (1) out-of-pocket expenses; (2) old nose - present worse nose; (3) pain and suffering from op. 3; (4) should have also awarded for ops. 1 and 2; (5) no proof of lost profits. C. Reasons for awarding Reliance and not Expectancy damages 1. U.C.C. doesn't apply b/c not transaction of goods. 2. The promise was unreasonable because the results were uncertain. 3. Promote health care, not defensive medicine. 4. Fee paid disproportionate to value of promised result. 5. 6. Difficult to value promised result. Expectancy of promised result in a medical or noncommercial context is weaker, than in a typical business context where goods are being allocated. CHAPTER 2. GENERAL THEORIES OF OBLIGATION I. A. SECTION TWO: OBLIGATION ARISING FROM AN AGREEMENT W/CONSIDERATION -- LEADING THEORY, pp. 46-78. Buyer cannot recover for objectively worthless rights if buyer "bargained" for it. Hardesty v. Smith (Ind. 1851), p.47 (D refused to pay promissory notes b/c invention re: improving a lamp had no utility. "Where one person examines an invention, and upon his own judgment, uninfluenced by fraud, or warranty or mistake of facts, agrees to give a certain sum for conveyance of that rt to him, conveyance forms valid consid for such agreement." Can have valid, enforceable K even if something you get is objectively a nothing b/c only the subjective value is needed for consid. 1. Private autonomy - People can make their own bargains. 2. Person is in best position to determine. 3. Ct. does not want to determine value. Once the "bargain" element is shown, cts will not inquire into "adequacy" of detriment. There are some situations in which the parties exchange things that do not have roughly equivalent value. This may be due to donative intent of parties, to the fact that one party is more ignorant than the other, to the fact that the parties are mistaken, etc. In such situations, as long as the promisee suffers some detriment, no matter how small, ct will not find consid lacking merely b/c what promisee gave up was of much less value than what he received. Haigh v. Brooks (Eng 1839), p.77 -- Like Hardesty v. Smith (A promises B that if B will return document to A, A will pay $10,000 to B. Neither realize that document is actually worthless. Return of doc was consid for A's promise to pay $10,000, even though doc was worthless). 1. Corbin (1963), p.77. "Parting w/doc, contents of which can in fact render no service, has been held to be a sufficient consideration for a promise to pay a lg sum of money. 2. Restatement (Second) of K, 79: Adequacy of Consid. p.78 "If the req of consid is met, Consid. there is no addtl req of equivalence in the values exchanged." 3. Restatement (Second) of K, 208: Unconscionable K or Term. p.78 "If K or term is unconscionable at time K is made, ct may refuse to enforce K, or may enforce remainder of K w/o unconscionable term, or may so limit applic of any unconscionable terms as to avoid any unconscionable result." A contract or term is unconscionable if for example, the bargain is so grossly unfair due to: the stronger bargaining powers of other party; procedural abuses relating to terms of contract. Or if no man in his senses would make. If it involves gross disparities in price. Absence of meaningful choice by one party. Unreasonably favorable to one party. 4. Hypo. Suppose owner of car worth $10,000 offers to trade it for a worthless wrist watch, . Hypo will law uphold deal? NO. 5. Fuller does not believe that only function of consid doctrine is to identify gift promises and isolate them for nonenforcement. See Fuller's functions. C. Where promisor promised money to promisee in return for nothing, she was conferring a bounty (gratuity) w/o conditions, which does not constitute an enforceable agreement w/consideration. Dougherty v. Salt (NY 1919), p.48 (Nephew can't recover $3,000 from aunt who conferred a bounty). "When one receives a naked promise and such promise is not kept, he is no worse off than he was before the promise was made. He gave nothing for it, loses nothing by it, and upon its breach he suffers no recoverable damage." Stonestreet v. Southern Oil (N.C. 1946), p.49. Lacks cautionary function b/c informal. B. 1. 2. 3. 4. Hypo: If you go to school and work hard, I'll sign this note. Hammer v. Sidway. Sidway. Hypo: If you go to store, my employee will give you a coat. Maughes v. Porter. Porter. (1) (2) E. D. Restatement (First) of K, sec. 75 (1932), p.50 (1932), Consid for a promise is (a) an act other than a promise, or (b) a forbearance, or (c) creation, modif or destruction of a legal relation, or (d) a return promise, bargained for and given in exchange for the promise. Consid may be given to promisor or to some other person. It may be given by the promisee or by some other person. Fuller, Consideration and Form (1941), p.51 1. Functions performed by legal formalities a. Evidentiary - provide "evidence of existence and purport of K, in case of controversy." Eg, writing, notary. b. Cautionary - act as a check against inconsiderate action. Eg, wax seal. c. Channeling - force parties to communicate and define goals and objectives. 2. Substantive Bases of K Liab a. Private Autonomy - Individs have power to effect change in his legal realtions w/others, like a legislature. b. Reliance - Breach may injure person who relied on expectation that promise would be fulfilled. c. Unjust Enrichment - One party is unjustly enriched if he breaches K and still gains benefit from other party. More urgent case for judicial intervention than reliance. d. Relation of Form to Substantive Bases of K Liab - Form is related to private autonomy. 3. Policies, "Formal" and "Subst," Underlying Common-Law Req of Consideration a. Reasons for Refusing to Enforce Gratuitous and Unrelied-on Promise 1. Lack of consid = promise => weak channeling. 2. Neither reliance, unjust enrichment nor autonomy. 3. Lack of evidentiary and cautionary safeguards. b. Contractual Archetype - Half Completed Exchange 1. Reliance and unjust enrichment. 2. No other provision for circ of goods and div of labor. 3. Delivery and acceptance of goods = natural formality. Williston Test: Whether the condition will be a benefit to the promisor (price of promise) or whether it is merely for purpose of enabling promisee to receive gift (condition of gift promise). Maughs v. Porter (VA 1931), p.55 (Promisee can recover for car b/c promisor lured promisee to auction to stir lively bidding = sufficient consid for chance to win car). 1. Tramp hypo: "If a benevolent man says to a tramp: `If you go around the corner to the hypo: clothing shop there, you may purchase an overcoat on my credit.'" It is a legal detriment to the tramp to make the walk, and the only reason why the walk is not consid is b/c on a reasonable construction, the walk was not requrested as the price of the promise, but merely a condition of a gratuitous promise. F. 1. 2. 3. G. Consid means not so much that one party is profiting as that the other abandons some legal right in present, or limits his legal freedom of action in future (even if he benefits from it). This is sufficient consid for a promise. Hamer v. Sidway (NY 1891), p.57 (Uncle promises nephew $5,000 if nephew will refrain from smoking, drinking and gambling until he reaches 21. Nephew so abstains). A bargain may be present even though promisor does not receive any economic benefit from the transaction. Uncle's promise was "bargained for" and thus supported by consideration. Uncle derived no economic benefit, but obtained something he regarded as desirable (nephew's health, morality). Look at language of offer to determine if mode of acceptance invites promise or performance. Circ and lang of offer indicate that uncle was not interested in having nephew's promise to refrain, but in having nephew actually refrain. See refrain, refrain. Unilateral K. Promise and consideration must purport to be the motive each for the other, in whole or at least in part. Allegheny College v. National Chautauqua (NY Cardozo 1927), p.59 (D promises to give $5,000 to P, a charitable org. Parties agree that $5,000 is for scholarship fund to be named after D. D gives $1,000, and then D repudiates her promise. She dies, and P sues her estate for remaining $4,000. P wins b/c consid for D's promise was P's promise to name fund after her). a. Restatement (Second) of K, 81: Consid as Motive or Inducing Cause. Cause. i. "Bargained for" means that promisor must "manifest an intention to induce the performance or return promise and to be induced by it, and that the promise must manifest an intention to induce the making of the promise and to be induced by it." ii. "Immateriality of motive or cause" means that "unless both parties know that the purported consid is mere pretense, it is immaterial that promisor's desire for consid is incidental to other objectives and even that the other party knows this to be so." b. Gilmore, Death of K (1974): Hamer illustrates that NY Ct of Appeals unlike most American cts rejected so-called bargain theory of consid. c. Hypo: Suppose nephew was planning to refrain from smoking anyway b/c Dr ordered him to refrain. Nephew is motivated by Dr's orders and $5,000. H. If promisee's forbearance to sue is unrelated to promisor's promise and vice versa, then there was insufficient bargaining => no a/c. Baehr v. Penn-O-Tex Corp (MN 1960), p.60 (Promisee can't recover b/c did not forbear rt to sue in consideration for D to pay rent. Ct ruled that promisee's statement, "or will I have have to give it to an attorney to sue" is nothing in the evid that P forbore rt to sue). If the promisee forbears legal rt, but promisee does not have colorable claim to legal rt, no consideration. Springstead v. Nees (NY 1908), p.63 (Promisor bargained for promise by the other children not to bother about Atlantic property, then promisor would give up share of Sackett property. Promisee agrees to forbear legal rt, but promisee does not have valid claim to legal rt, thus there is no consideration) consideration) 1. Corbin on K (1963), p.65: Forbearance to bring a suit not sufficient consideration if forbearance is w/knowledge that claim is ill founded & void. Exception: Good faith belief 2. Note: Promise for Promise as Consid, p.65: B/c a bargained-for promise may constitute Consid, consid, a party may become obligated to perform even though the other has not relied on the agreement. Eg. If Arnold promises to sell his car to Kate for $400, delivery Eg. next Sat, and Kate promises to pay $400, Arnold is legally bound to perform even if he attempts to recant five minutes after deal is made and bf any change of position by I. Kate. Compare to following rule: A party is always free, upon giving appropriate rule: advanced notice, to back out of wholly executory exchange except when other party has reasonably relied in some way. 5. 3. Fuller, Consideration and Form, pp. 66-67, Wholly Executory Form, Exchange. It is now generally assumed that so far as consideration is concerned, the Exchange. executory bilateral contract (where A and B enter into contract and B defaults on promise; even though A hasn't paid for anything, A sues B for damages) is on a complete parity with the half-completed exchange --situation where P has already paid the price of D's promised performance. However, Fuller argues that executory bilateral contract is weaker than half-completed exchange re: judicial intervention b/c: a. No unjust enrichment. b. Reliance may or may not exist; however at least reliance is weaker than P already paying the price of D's promised performance. c. No natural formality because no actual exchange of money, goods, property, etc. d. Can only rely on the fact that the transaction is an exchange and not a gift. i. Some cautionary and channeling functions ii. No evidentiary functions (statute of frauds) Thus, in the half-completed exchange, parties can rely on many factors for enforcement -- (1) exchange, (2) reliance, (3) unjust enrichment, and (4) natural formality in accepting and surrendering articles. In the executory bilateral contract, the element of exchange is the only basis for liability and definition of exchange becomes crucial. Possible definitions of exchange = transaction where: a. Each participant derives a benefit. b. Motives of parties are economic rather than sentimental. c. Conduces division of labor. d. Interests of parties are opposed. 4. Von Mehren -- If contracts are not enforceable, in nonsimultaneous exchanges one party runs the risk that the other will not render performance in due course. Fuller & Perdue, the Reliance Interest -- To encourage reliance, we must dispense with its proof because it is difficult to prove and measure reliance monetarily. Conflict w/ former Consideration and Form? 6. Note: Preexisting Duty Doctrine (Corbin (1973)), pp.76-77. Neither performance (1973)), of duty nor promise to render a performance already req by duty (pre-existing legal duty) is sufficient consideration for a return promise. i. Eg. Suppose Ajax agrees to clear site and provide fill for $60,000 for Brown. During performance, Ajax discovers that amt of fill needed will be greater than it contemplated and Brown promises to pay addtl $5,000. Under preexisting duty rule, Ajax gave no consid for Brown's promise to pay addtl $5,000 b/c Ajax had a preexisting duty to provide all fill necessary for $60,000. However, if Brown had believed it received too good of a deal and refuses to pay => cts decline to apply rule. If Brown could not find another rule. contractor and Ajax refuses to do w/o price increase but wouldn't suffer higher costs providing fill, cts apply rule. rule. J. Mutuality of obligation is an essential element in every enforceable agreement. Mutuality is absent when only one of the contracting parties is bound to perform, and the rights of the parties exist at the option of one only. De Los Santos v. Great Western Sugar Co. (Neb. 1984), p.68 (Trucker can't recover b/c no mutuality of obligation since Co. can dictate how many beets to transport. Co. employed other truckers, did not specify truckers, quantity of beets, and made no promise except to pay for transp of beets that trucker loaded.). Absence of mutuality is troubling b/c one party can leave agreement at any time. 1. 2. L. K. Even though promise to perform duties is not actually expressed, K is valid if whole writing is "instinct w/obligation"/ "implied promise" to perform duties. Wood v. Lucy, Lady Duff-Gordon: 1 of most famous cases in book (NY Cardozo 1917), p.70 (P Duff-Gordon: can recover b/c there was an implied promise to give "reasonable efforts" to gain profits for both of them, esp since P had exclusive privilege to market her designs. This implied promise is sufficient detriment to P to constitute consideration for Lucy's counterpromise not to place her endorsemenet upon anyone else's designs.). One of the terms most frequently supplied by cts is "duty of good faith." Ct supplied req that P make good faith, reasonable efforts to promote D's fashion creations. i. UCC sec. 1-203: Oblig of Good Faith -- "Every K or duty w/in this Act imposes an obligation of good faith in its performance or enforcement." ii. UCC sec. 2-306(2) -- "A lawful agreement by either seller or buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an oblig by seller to use best efforts to supply goods and by buyer to use best efforts to promote their sale." iii. Summers discussion of "good faith" pp. 728-729. In case law, "good faith" does not have a single general meaning. Rather, when the judge uses the term "good faith," ask yourself: "What in the actual or hypothetical situation, does the judge intend to rule out by his use of this phrase?" Determine what is the specific "bad faith" and formulate the opposite situation. In contract law, "good faith" is an "excluder." It lacks general meaning of its own, but takes on meaning in a particular context only by way of contrast to bad faith. faith. Distinguish De Los Santos: Trucker cannot imply a promise b/c he did not have exclusive Santos: rt. Mutuality is not always essential to a binding K, but presence of "What in the actual or hypothetical situation, does the judge consid is a fundamental requisite. Mutuality is not necessary when intend to rule out by his use of this phrase?" Determine what is promisor receives other valid consid. Weiner v. McGraw-Hill (NY 1982), p.72 (Employee can recover for wrongful discharge even though employee could leave at will, b/c (1) employer promised him employment except dismissal for just cause and (2) lured away from old job and turned down other offers) 1. Corbin, p.73: "If the employer made a promise, either express or implied, not only to pay Corbin, for service but also that employment should continue for a period of time that is either definite or capable of being determined, that employment is not terminable by him `at will' aft employee has begun or rendered some of the requested service or has given any other consid. This is true even though employee has made no return promise and has retained power and legal privilege of terminating employment `at will.' 2. Wood, A Treatise on Law of Master and Servant (1877), p.72: A general or indefinite hiring is a prima facie hiring at will. Employee must establish proof if he believes otherwise. 3. Suppose employee gave $100 at outset for employer's promise not to discharge w/o just cause. Stronger case b/c $100 is tangible detriment to P and cause. benefit to D. 4. Suppose employee had no other job or job offers. Cardozo might say implied promise. offers. Corbin would say beginning work = consideration. 5. Suppose employer says not discharge w/o just cause, and day bf employee show up for work, employer says don't come. Cardozo may argue that implied promise by employee to give absolute loyalty in exchange for not discharging him. No Corbin cure. See Grouse v. Group Health p. 302. No K, but can sue for Promissory Estoppel. M. Inclusion of "satisfaction clause" does not indicate that agreement lacks mutuality b/c P could not withdraw at own unrestricted pleasure, but only in good faith. Mattei v. Hopper (CA 1958), p.74 (P can recover for breach of K b/c satisfaction clause did not mean P could withdraw at own unrestricted pleasure but only in good faith. Where satisfaction refers to commercial value, operative fitness, mechanical utility, dissatisfaction cannot be claimed unreasonably. Where satisfaction refers to fancy, taste or judgment, judgment cannot be arbitrary, or K will be illusory.). 1. Prob 2-4, p.76. On Jan. 10, S & B enter into an agreement whereby S is to sell 12 jet 2-4, 10, engines to B, delivery to B one each month beginning Feb. 1, with payment due on delivery. Agreement also provides that "S shall be free to terminate this agreement on 24 hrs notice." Valid K? YES b/c not unrestricted pleasure to withdraw, but makes S's performance dependent on whether he gave notice. Suppose on Jan. 11, S said: 11, "I won't perform" K? YES b/c gave notice. Suppose on Feb. 1, S failed to deliver 1, w/o having given notice. K? S breached K. II. SECTION THREE: OBLIGATION ARISING FROM JUSTIFIED RELIANCE -PROMISSORY ESTOPPEL, pp.79-107. The consideration doctrine is designed to enforce ESTOPPEL, promises which are "bargained for." There are some promises which, although the promisor makes them without bargaining for anything in return, nonetheless induce the promisee to rely to his detriment. Enforce promises not supported by consideration but induce detrimental reliance by promisee. promisee. Restatement (First) of K, 90, (1932), p.88: Promise Reasonably Inducing [Definite and p.88: Substantial] Action or Forbearance -- A promise which the promisor should reasonably expect to induce action or forbearance [of a definite and substantial character] on the part of the promisee or a third person [and] which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy promise. granted for breach may be limited as justice requires. Deletions are noted in and additions are noted by underlining to show changes in Restatement (Second) of K pp. 106-107. Necessary Pre-Conditions to Accepts Gifts is Not Valid Consid for Enforceable Agreement: Agreement: Promisee must meet certain conditions in order to receive the gift, but the meeting of these conditions is not really "bargained for" by the promisor, i.e., the meeting of the conditions is not the promisor's motive for making the promise. Kirksey v. Kirksey (AL 1845), p.79 (Sister-in-law can't recover for expenses incurred b/c visit (abandonment of her possession, expense of trip) is no benefit to brother-in-law. Brother-in-law made the condition of "if you will come down to see me" not as a bargain for a place to live. Visit is necessary precondition to accept gift). 1. If promisee suffers substantial detriment preparing to accept a promise which turns out to be unenforceable for lack of consideration, ct. may apply doctrine of PE. 2. Must analyze whether sister-in-law's visit to the promisor was something promisor actively desired (bargained-for) or was it just a favor (necessary pre-condition). 3. Had brother-in-law said, "I'll give you a place to live if you will come see me and be my housekeeper." (bargain) Test for Distinguishing Bargains from Pre-Conditions -- Williston Tramp case, p.56 (cited in Maughs v. Porter ): If a benevolent man says to a tramp: "If you go around the corner to the ): clothing shop there, you may purchase an overcoat on my credit." 1. It is a legal detriment to the tramp to make the walk and thus could be consideration. 2. Reasonable construction -- merely a condition to receive gratuitous gift and not a benefit to the promisor. promisor. Promisee can recover if justifiably relied on gratuitous promise to its detriment. Ryerrs v. Trustees of Presbyterian Church of Blossburg (PA 1859), p.80 (Relying party (congregration) won promised $100 because consideration, detriment to promisee, benefit to promisor. Gift promise on condition, not bargain. Relied on gratuitous promise to build church). Promises to Make Gifts 1. Oral Promises to Convey Land is enforceable if promisee acts in reasonable reliance on promise and incurs detriment w/respect to land: A promise to make a gift of land, land: like any other gratuitous promise, is unenforceable for lack of consideration. If the promisee acts in reasonable reliance on the promise and with the continuing assent of promisor, incurs detriment with respect to the land, promise may be enforced under doctrine of PE. Seavey v. Drake (NH 1882), p.81 (Father orally promises his son land. Son takes land, builds house on land and lives in it for 20 years until father A. B. C. D. E. a. b. dies. Son may obtain from father's estate decree ordering specific perf of father's promise to convey land). Statute of Frauds: Statute of Frauds requires that a contract to convey land must be Frauds: in writing to be enforceable. If one party to an oral contract to convey land relies to his detriment on the contract, he may be able to recover on his reliance interest. PE may be used as substitute for compliance with Statute. Since case in equity, part performance removes bar of statute. Statute. equity, Differences between Equity and Law, p.82: Cts in equity had no jury and awarded specific performance. Cts in law had jury and awarded money damages. 3. 4. 2. Commonwealth v. Scituate Savings Bank (Mass. 1884), p.82: "It would cut up the doctrine of consideration by the roots, if a promisee could make a gratuitous promise binding by subsequently acting in reliance on it." Pomeroy's Equity Jurisprudence (1886), p.84. Essential elements for equitable estoppel. a. Concealment of material facts. b. Facts must be known to party estopped. c. Facts must be unknown to other party. d. Conduct done w/intention that it will be acted upon by other party. e. Conduct must be relied upon by other party. f. Act upon it by changing his position for the worse. Intra-family promises -- Unbargained for yet justified reliance on a promise is a giftpromise condition that creates liability: PE may be used to enforce certain liability: promises made by one member of a family to another, if the latter reasonably and detrimentally relies on the promise. Ricketts v. Scothorn (Neb. 1898), p.84 (Grandfather, distressed b/c his granddaughter has to work in a store, gives her a promissory note ($2,000), telling her that he has done this so that she will not have to work anymore. She quits her job. He dies, and his estate refuses to pay note. Granddaughter justifiably and foreseeably relied on Grandfather's promise by giving up her job. This reliance made the note enforceable, and operated to "estop" executor from denying that the note was given for valid consideration (judges are lying again). Gift promise condition, not bargained-for exchange). exchange). F. If a person makes a gratuitous promise, and then enters upon performance of it, he is held to full execution of all he has undertaken. Siegel v. Spear (NY 1923), p.84 (P recovered for lost furniture b/c D entered upon performance of storing furniture, but did not fully execute promise (didn't get insurance). P relied on D's promise to his detriment). 1. Possible bargains a. check for insurance b. commission ("I handle lots of ins") 2. D is not liable for nonfeasance. a. Thorne v. Deas (cited in Siegel), p.86 (A and B were joint owners of vessel. Siegel), A voluntarily undertook to get vessel insured but neglected to do so. If vessel gets lost at sea, even though B relied upon promise to his loss, there was no consid for promise. B parted w/nothing to A. If he got wrong policy => liable. If he never gets ins => not liable. b. Suppose in Siegel, promisor is just a business acquaintance and says I'll get ins for Siegel, you as a favor, and he doesn't get it => D is not liable for nonfeasance. nonfeasance. 3. Seavey: Reliance Upon Gratuitous Promises or Other Conduct (1951), p.87 -- "Estoppel is basically a tort doctrine. The wrong is not primarily in depriving P of the promised reward, but in causing P to change position to his detriment." 4. Prob 2-6, p.87. Fred owned a farm and buildings that were insured by Prudential. 2-6, Farmhouse burned to ground. Fred asked Jones, Prudential agent, if he would file claim req under policy and he replied, "yes." Fred then said, "I leave it up to you." Jones failed to file claim. When Prudential refused to pay on policy, Fred sued Jones. Jones asserts that his promise was not supported by consid and that at most, he was a gratuitous agent, who is not liable for his failure to perform his promise (nonfeasance). nonfeasance). a. Jones would cite -- Fred can distinguish. i. Kirksey -- Brother-in-law received no benefit. Here, it is Jones' job to file claims. He benefits by doing his job well. ii. Thorne -- Just business partners. Here, Jones is prudential agent. b. 5. Fred would cite following cases which were all decided in favor of relying party. But a new theory of oblig was not explicitly recognized in these cases. Explicit recognition of new theory of oblig in law is rare development, and one of great potential significance. Theory tends to dominate practice. Siegel Seavey Ryerrs Ricketts Note, Ks, Promissory Estoppel (1933), p.90. PE doctrine definitely lies outside of K law. Fear that PE will abolish consid in K cases. Thus, some indulge in fictions and have jammed, stretched and distorted "rules" of consid where consid has no real applic. G. First Explicit Consideration of PE Doctrine. Wheeler v. White (TX 1965), p.90 (Although K may have been indefinite, Wheeler relied on White's promise to get loan/money so he destroyed building in prep for new building). 1. 90 is not confined to gratuitous promises. Suppose parties had not yet entered K. promises. Suppose on Mon. White made his offer to finance or get loan to do this project. And Wheeler on Tues bf accepting White's offer, started tearing down building. => Wheeler should have notified White. 2. Compensate for "foreseeable, definite and substantial reliance" (money to put him in position he would have been in had he not acted in reliance upon promise) not his expectation damages (profits he would have made had loan been given). Promisor may be bound by promise, even though unsupported by consid and would not have been enforceable, if promisee relies upon promise to his detriment, and promisor should have foreseen this reliance. Hoffman v. Red Owl Stores (Wis 1965), p.94 (Hoffman awarded reliance costs b/c relied on Red Owl's promise that $18,000 was enough to get Hoffman a franchise). 1. PE doctrine orig applied chiefly to gratuitous promises (promises to make gifts). Doctrine has been expanded to cover certain commercial situations, such as situations, where parties engage in prelim negotiations, one party gives assurance to other that they will be able to reach a binding agreement, other relies on this assurance to his detriment, and then K falls through. 2. Henderson: PE and Traditional K Doctrine -- PE is not always "substitute for consid", but sometimes a separate remedy. 3. Cts seem most likely to find an implied promise of good faith where negotiations relate to award of franchise. Typically a lg nat'l corp franchise. (franchisor) indictates to prospective franchisee (indiv) that franchisee's application for franchise will be accepted. Prospective franchisee incurs expenses in reliance on promise (eg, sells his existing business, leases retail space). Deal then falls through. Cts have freq been sympathetic to franchisee in this context, and have sometimes awarded damages based either on PE or breach of implied promise to negotiate in good faith. 4. Criticism in awarding Hoffman reliance costs. Hoffman is aware that agreement is not complete, and he must take risks too. Red Owl also incurred expenses. 5. A reason to deny Red Owl reliance costs is because it was in the driver's seat. Red Owl could have concluded negotiations at any time. Agent can recover for reliance costs since he justifiably relied on oral promise to his detriment, and promisor should have foreseen reliance. Elvin Associates v. Franklin (NY 1990), p.101 (Elvin recovers for its reliance costs b/c relied on Franklin's enthusiasm to perform in production). Historically, Elvins of the world would never recover. This is very new development. This case may chill negotiations b/c agent would want to recover for (1) negotiation expenses, (2) prep expenses, and (3) forgone opportunities. H. I. J. P was not awarded reliance cost b/c unreasonably expected D to use altered definition of profit. Local 1330 v. US Steel Corp (6th Cir. 1980), p.103. H: "We will stay open even if it bankrupts us." III. A. SECTION FOUR: OBLIGATION ARISING FROM UNJUST ENRICHMENT, pp.107ENRICHMENT, 134. Restat. of Restitution, 1 (1937): Unjust Enrichment, p.107. "A person who has been unjustly Enrichment, enriched at expense of another is required to make restitution to the other." 1. Dobbs' Exceptions (1973), p.113. a. Gift Principle -- One who has conferred a benefit upon another with an intention to make a gift, has no claim for relief against recipient of benefit in absence of fraud, mistake, duress or undue influence. b. Choice Principle -- One who confers a benefit upon another w/o affording that other oppty to reject benefit, has no claim. Eg. House painter cannot paint an owner's home in his absence and then recover for benefit conferred, even though house needed paint and is much increased in value. Intermeddler should not be encouraged to invade another's freedom of choice about his own affairs. 2. Elements a. Benefit to D. b. Detriment to P. c. P expects compensation for benefit d. D has reason to know P expects compensation (P is not intermeddler) e. P concurs to transaction Unjust not to make restitution of benefit or value of benefit. 3. Perillo, Restitution in a Contractual Context (1973), p.115. Use evid from failed K (trial will constantly refer to K). a. Prove request for services. b. Prove that P breached terms of K and should not recover. c. K's rate of compensation used to est reasonable value of services. Ct should not have ruled SJ against P since evid that P was not gratuitously providing services and not intermeddler. Bloomgarden v. Coyer (D.C. Cir. 1973), p.108 (Ds had "no cause to believe" (!!!) that P was expecting benefit for introduction). 1. Dobbs' Test a. Not gratuitous gift: P was expecting some benefit. gift: b. Not intermeddler: P didn't provide services w/o D's knowledge. intermeddler: Family member was unjustly enriched at P's expense so P can recover its reliance costs. Gay v. Mooney (NJ 1901), p.114 (P gave wife's uncle room and board in return for dwelling for children. Uncle died. K failed under statute of frauds, but P recovered for uncle's unjust enrichment). 1. Not A w/C b/c failed statute of frauds. Suppose promise was for $5,000 to P and wife. => frauds. A w/C theory may be used. 2. Not PE b/c giving family member room and board does not equal action of a "definite and substantial nature." Services rendered btwn siblings are usu gratuitous. These services are usu perfomred out of a sense of family responsibility, not pursuant to contractual agreement w/ legitimate expectation of payment. Brown v. Brown (D.C. 1987), p.114. 3. Dobbs' Test a. Not gratuitous gift: P and D attempted K. gift: b. Not intermeddler: P and D attempted K. intermeddler: Although K is unenforceable, Seller in good faith and believing that valid K existed, performed part of the services which he had promised in reliance upon K. Kearns v. Andree (Ct. 1928), B. C. D. p.116 (Buyer failed to buy house aft indefinite, unenforceable K w/seller and aft seller made alterations, finished house, and cut trees to please buyer. Seller recovered for these services). PE is probably a better cause of action because no benefit conferred, but `28 too early for this theory. E. Theories are available but parties failed to prove that they had shared understanding that P would guarantee to raise corner by 1 1/2 inches, w/in 10 days, for under $20,000. Anderco v. Buildex (D.C. 1982), p.119 (No K b/c no mutuality of assent. Quasi-contractual recovery for part perf of work that benefitted D = stabilize building). 1. 2. 3. F. ER breached. Even if EE sues in "quantum meruit" to recover for value of service if K had not existed, UE recovery is limited by K rate. Posner v. Seder (MA 1903), p.123 (ER breached K by discharging EE so EE wanted to recover market value of (ER extra hours worked regardless of $17/wk K. EE can only recover reasonable value of service in acc w/K). EE can elect to sue A/C or in "quantum meruit" (as much as deserved), which means to recover for value of services as if special K had not existed. existed. Why does it matter what the K rate was? UE assumes no K! EE could have been put in better position under UE than if K had been performed. performed. Bad to put in better position. However, ct limits UE recovery to K rate. G. P breached. P cannot recover for part performance and D gets to keep benefit if (1) P abandoned K w/o justification and (2) D did not accept partial performance of K bf breach. Kelley v. Hance (Ct. 1928), p.124 (P breached K by only excavating D's property (P and not constr any sidewalk or curb. P can't recover but D can recover nominal value of dirt removed by P (no mkt value for dirt)). 1. Can't use A w/C theory b/c P breached. Also, P substantially abandoned K (performed only $158/$420 of work) => Received $0 b/c cannot use A w/C "Theory of Subst Performance." p.125. 2. Can't use PE b/c unreasonable to expect to be paid b/c D conditionally promised to pay, and condition has not been met. met. Employee breached. If EE's performance is not substantial, but ER has nonetheless benefitted by EE's performance, EE may recover his restitution interest (in "quantum meruit") if his breach was not "wilful", less ER's damages for breach. Britton v. Turner (NH 1834), p.126 (P breached K by only working 9 1/2 mos out of req yr ($95/$120). P breached K w/no good cause but D necessarily accepted part performance in labor case (exception to "wilful"). "wilful"). 1. Can't use A w/C theory b/c P breached. 2. Can't use PE b/c unreasonable to expect to be paid b/c D conditionally promised to pay, and condition has not been met. 3. Distinguish w/Kelley (Summers say Britton case is unreal): w/Kelley a. P in Kelley substantially abandoned K. Emmanuels think not very subst. b. Kelley was land case => difficult to return part performance. Britton is labor case, case, and ER may be said to have accepted in advance. Breaching buyer has quasi-contractual rt to recover money payments for installment land-sale K. De Leon v. Aldrete (Tex 1965), p.130 (P defaulted on land-sale K aft having paid $1,070/$1500. D sold land to another for $1300. P sought return of $1,070. Ct awarded $1,070-$200 = $870). If we adhere to traditional rule that P recovers $0, it leads to absurd result that purchaser who pays subst portion of purchase price bf defaulting is in much worse position than purchaser who pays nothing. Absurd result that purchaser's loss increases as seriousness of his breach decreases, and punitive are alien to law of K. K. D had not been unjustly enriched if P also benefitted from relationship and P did not suffer any damages from termination of relationship. Marvin v. Marvin (Cal. 1981), p.131 (Reversed trial ct ruling that ordered Lee Marvin to pay Michelle Marvin $104,000 to be used for her "economic rehabilitation.") H. I. J. 1. 2. 3. K. Note: Variant Terms: Unjust Enrichment, Restitution, Quasi-K, Quantum Meruit, Common Counts "Unjust enrichment" is ordinarily used as name of a legally recognized general theory of obligation. A person who has been unjustly enriched at claimant's expense incurs a duty to satisfy claim asserted to extent of enrichment. Terms "restitution" and "quasi-contract" (Bloomgarden) and "contract implied in law" are sometimes (Bloomgarden) used. a. "Contract implied in fact" is agreement w/consid -- one in which the facts of agreement and consid are based on implication and inference rather than on explicit assent as in an express K. "Restitution" more frequently refers to remedy, whether in law or equity, that redresses unjust enrichment. "Quantum meruit" means "as much as he deserved" and orig designated a simplified form of pleading used to bring an action at law to obtain payment for services renederd. This form of pleading was called a "common count" in general assumpsit. L. Gilmore, Death of K (1974), p.133. "W/growth of UE, classical consid theory was breached on benefit side. W/growth of PE, it was breached on detriment side. We are fast approaching a pt where, to prevent UE, any benefit received by D must be paid for unless it was clearly meant as a gift; where any detriment, reasonably incurred by P in reliance upon D's assurances must be recompensed. When that pt is reached, there is really no longer any viable distinction btwn liab in K and liab in tort." 1. Summers says we have seen cases contrary to idea that "any benefit received by D must be paid for unless it was clearly meant as a gift." Eg, Bloomgarden and Kelley. Kelley. 2. Dawson, Gifts and Promises (1980), p.133 -- Response to Gilmore. "Bargain consid has been and will remain for a long time to come a central feature of our law of K, central in the sense that it provides a strong aff reason for enforcing promises, reason that is by a wide margin most often used, though it is not the only one." IV. A. SECTION FIVE: OBLIGATION ARISING FROM PROMISES FOR BENEFIT RECEIVED, RECEIVED, pp.134-146. Promise => benefit is usual sequence. In these cases, Benefit => promise. Promise to pay for services received in the past is usu held not to be supported by consid and thus not enforceable. Possbibly binding w/o consid if son was a minor. Mills v. Wyman (MA 1825), p.134 (P voluntarily nursed Levi (25-yr old). Afterwards, father of Levi promised to pay for P's expenses in caring for his son). 1. P can't recover under A w/C b/c no bargained-for exchange. Fuller Rationale = Cautionary function, p.52 -- "Acting as a check against inconsiderate action." function, "Inducing frame of mind appropriate in one pledging his future." 2. P can't recover under PE b/c seq is reversed. 3. P can't recover under UE b/c fails Dobbs' Test a. Gratuitous gift => YES. b. Intermeddler => Maybe. 4. Promise to pay for services received in past is enforceable if there is only a moral oblig based on a pre-existing consid. Restat. (Second) of K, 82(1): "A promise to pay for all or part of an antecedent contractual or quasi-contractual indebtedness owed by promisor is binding if indebtedness is still enforceable or would be except for effect of st of lims. Eg, suppose debt owed by debtor to creditor has been discharged due to Eg, (1) bankruptcy of debtor or (2) statute of limitations has run on creditor's claim. If debtor makes gratuitous promise to pay the now-barred debt, most courts agree promise is enforceable, even though there is no consideration. They are not promises to pay something for nothing b/c there was a pre-existing obligation/consideration. It is a voluntary revival of pre-existing obligation that had been disposed of for public convenience. If P renders a service to D w/o having been requested to do so, and D then promises to pay for it, most cts hold the D's promise is unenforceable. However, a few cts have held that a subsequent promise to pay unreq service is enforceable, if recipient has incurred a substantial benefit from those services. Webb v. McGowin (AL 1935), p.136 (P saves D's life in an emergency, and is totally disabled in so doing. D then promises to pay P $15/wk for rest of P's life, and makes these payments regularly over 8 yrs until he dies. D's estate refuses to continue payments, but ct held that D's promise is enforceable). 1. P can't sue on A/C (though ct fictionally uses term, "consideration") D didn't shout up at P and say, "If you don't drop block on my head, I will pay for your injuries." 2. P can't sue on UE b/c fails Dobbs' Test a. Intermeddler => YES b/c P foisted service on to D. 3. Boothe v. Fitzpatrick (Vt), p.138 (Promise by D to pay for past keeping of bull which had escaped from D's premises and had been cared for by P was valid, although no previous request, b/c subseq promise obviated that objection; promise is equiv to a previous request. request. C. A past humanitarian act is not lawful consideration and D's promise to pay for benefits previously received but not requested is unenforceable, even though D began part payment. Harrington v. Taylor (NC 1945), p.140 (P saved D from decapitation and had her own hand mutilated. D orally promised to pay P, and began paying small sum but stopped). B. D. D is liable for past benefit received even though did not request if (1) P's conduct was not gratuitous, (2) D received direct benefit, and (3) D expressly promised to pay for reasonable value. Edson v. Poppe (SD 1910), p.142 (P put valuable well on D's property. 1. Aft D examined well, D promised to pay P for reasonable value of his service, but D then refused to pay). Ct uses term "consideration" fictionally again. However, it does explicitly state alt theory. 1. 2. 3. F. E. Henderson, Promises Grounded in the Past: The Idea of UE and Law of K (1971), p.143. Analyze Fuller's functions of formality. Time lag btwn perf and promise afford oppty for deliberation and exercise of caution, as caution, well as an evaluation of "price" not present in most conventional bargains. Weak evid security: Usu supported only by oral assurances, and must depend on notions of security: moral oblig and past consid. Part performance strengthens Fuller's evidentiary function. Note: Concept of Moral Obligation, p.144. The concept of moral obligation (consid) is involved Obligation, in most cases in this section. One ct held that one ought, in morals, to make return for things of value not intended as a gift that he has accepted. Fuller argued that when we say that D was morally obligated to do the thing he promised, we in effect assert existence of substantive ground for enforcing promise. Ct's conviction that promisor ought to do the thing plus promisor's own admission of his oblig, may tilt scales in favor of enforcement where neither standing alone would be sufficient. Restat. (Second) of K, 86: Promise for Benefit Received, p.145. Restitution is denied in many Received, cases in order to protect person who have had benefits thrust upon them. (1) A promise made in recognition of a benefit previously received by promisor from promisee is binding to extent necessary to prevent injustice. (2) A promise is not binding under subsec. 1 (a) if promisee conferred benefit as a gift or for other reasons the promisor has not been unjustly enriched; or enriched; (b) to the extent that its value is disproportionate to the benefit. Such promise may be enforced if following facts are shown: 1. Definite and subst character of benefit received. 2. Formality in making of promise. 3. Part performance of promise. 4. Reliance on promise or probability of such reliance. G. V. A. B. SECTION SIX: OBLIGATION ARISING FROM TORT, pp.146-168. TORT, Prosser and Keeton on Torts (1984), p.146. Tort liab is based upon conduct which is socially unreasonable. Busch v. Interborough Rapid Transit (NY 1907), p.146. "Tort is distinguished from breach of K in that latter arises under an agreement of the parties; whereas, tort ordinarily is violation of duty fixed by law, indep of K or will of parties. law, Spiedel, Borderland of K (1983), p.147. 1. Nature of conduct causing loss. loss. a. K: Failure w/o justification to perform an enforceable promise. (s.l.) b. Tort: Aff conduct, intentional or negl, that causes loss. 2. Duty and Interest Protected a. K: Parties can shape or reallocate existing entitlements through bargain/exchange. b. Tort: Protects praties' existing state of affairs, his person, property, relationship, from others' wrongful conduct. 3. Scope of available remedy a. K: Put in position he would have been in had D performed. b. Tort: Restore party to position occupied bf tort, and where appropriate enjoin future tortious conduct (punitive damages). If one party to K through misfeasance or negl performance of K injures other contracting party and violates duties which exist as a matter of law and not only through the particular terms of K, the injured party may recover "ex delicto" instead of "ex contractu." Mauldin v. Sheffer (Ga 1966), p.148 (Architect fell below professional standards in attempting to perform K.) 1. P is motivated to seek tort recovery b/c Better damages. P lost potential future Ks, and Contract law would only award lost expectancy damages. 2. What if K too indefinite? No K => no tort? Prosser and Keeton on Torts (1984), p.152. 1. Advantages for suing on contract a. K may lead to s.l. for failure to perform, where tort would req proof of negl. b. Shorter st of lims may bar tort action. c. Damages may be greater (give benefit of bargain made rather than compensation for loss). d. P may have accepted K, and thus must be bound by it. 2. Advantages for suing in tort. a. Usu. permit greater recovery of damages. b. May be open when K fails. J'Aire Corp v. Gregory (CA 1979), p.154 1. If P sued D, D would want to recover from county => Insert indemnification agreement. 2. Civil Code 1714 states that D is liable for harm to "injury" which indicates damage to person as opposed to: a. Property b. Economic interests 3. Key component = foreseeability. You don't want to dissuade people from entering Ks. C. D. E. F. VI. A. SECTION NINE: THE STATUTE OF FRAUDS, pp.182-191 FRAUDS, Background, pp.182-184 Background, 1. Encountered in Gay, p.114 and Kearns, p.116. Gay, Kearns, 2. Almost all states copied or adopted some version of general Engl Statute of Frauds and also special statutes. UCC has several special writing req. 3. Compliance w/statute of frauds does not itself prove existence of K. P must still show requirements of a/c. Conversely, if D has fraud defense, P cannot recover even w/ proof of K. 4. Fuller's formality functions a. Evidentiary b. Channeling c. Cautionary -- If K is in writing, K won't be casual, consequential or insignificant. 5. Basic probs that arise under statute of frauds: a. Does statute apply? b. If case is w/in statute, does a memorandum, note, or other writing satisfy statute? c. If case is w/in statute and there is no complying writing, does statute or case law recognize an exception? d. If case is w/in statute, there is no complying writing, and there is no applicable exception, does any other doct. mitigate what would otherwise be noncompliance? 6. Cts tend to treat statute as a "common law" statute subject to judicial revision. 2. 3. 4. C. B. Statue of Frauds: No action shall b brought and maintained in the following cases unless the agreement is written and signed: 1. To charge a representative out of his own estate To charge a person for a promise to pay the debt of another Sale of land or interests concerninf them One-year rule. . . If promisor made promise to pay the debt of another mainly for his own pecuniary or business advantage, rather than in order to benefit third person, promise is not w/in statute of frauds. Howard M. Schoor Assoc v. Holmdel Heights Constr Co. (NJ 1975), p.184 (18% stock owner and lawyer for corp orally agreed to personally pay outstanding bills and future bills if Ps continued their work. He gave them (1) $2,000 check, (2) $1,000 check + ltr ("This is my money being submitted to you in good faith b/c I promised it to you last week. I certainly hope you don't let us down." Ltr also contained detailed specs of further engineering work)) If alleged K to sell land does not contain all essential provisions of K in writing, incl terms and conditions of sale and time of payment, K is barred by statute of frauds. Jonesboro Investment Corp v. Cherry (Ark 1965), p.189 (Ds offered to sell and convey land to Corp. for $900,000. Corp accepted offer, but Ds refused to convey land, so Corp. brought suit for specific performance). Note: What Kind of Writing? p.191. Restatement (Second) of K, 131 states that K within Statute of Frauds is enforceable if it is evidenced by any writing, signed by or on behalf of party to be charged, which: 1. reasonably identifies subject matter of K, 2. sufficient indication of K, 3. states w/reasonable certainty essential terms, terms, Restatement further says: 1. Memorandum may take form of several writings, provided one of them is signed and evid that relate to same transaction. 2. Memorandum need not have been specifically created for purpose of serving as memo of K. 3. Signature need not be handwritten. 4. Memorandum may be made or signed at any time bf or aft formation of K. 5. If orig memorandum has been lost or destroyed, its contents may be shown by "an unsigned copy or by oral evid." 6. If memorandum omits or inaccurately states a term, some case law permits introd of oral or written evid to show term. D. E. CHAPTER 3. REMEDIES I. A. SECTION ONE: REMEDIES AND ROLE OF LAWYERS Topics include 1. General availability of damages for breach or repudiation. 2. Different measure of damages. 3. Unforeseeability and other limits on recoverable damages. 4. Restitutionary relief in promissory contexts. 5. Validity of private remedial clauses in agreements. 6. Specific performance and other forms of specific relief. 7. Punitive damages. II. A. B. SECTION TWO: REMEDIAL THEORY -- SOME FUNDAMENTALS Pound, Limits of Effective Legal Action (1917), p.200. Substantial redress by way of money damages has been staple remedy of law at all times. Fuller & Perdue, Reliance Interest in Contract Damages (1936), p.200. Purposes Pursued in Awarding Contract Damages. Damages. 1. Restitution Interest: Prevent unjust enrichment. Ct may force D to disgorge value received Interest: from P. a. Unites (1) reliance by promisee (unjust impoverishment) and (2) resultant gain to (unjust impoverishment) promisor (unjust gain). Usu gain by promisor is identical to loss to promisee (unjust gain). => restitution interest is merely a special case of reliance. Reliance interest cases will be broader if incl cases where P has relied on D's promise w/o enriching D. b. Restitution is the strongest case for judicial intervention => corrective justice. 2. Reliance Interest: Put P in as good a position as he was in before promise was made. Ct Interest: may award damages to P to undo harm which his reliance on D's promise has caused him. 3. Expectation Interest: Put P in as good a position as if had D fully performed his promise. Interest: e.g. specific performance. a. Move from corrective justice to distributive justice. Charney, Nonlegal Sanctions in Commercial Relationships (1990), p.202. Nonlegal sanctions work side by side w/legal sanctions. Sacrifices of "bonds", something valuable to breaching party. 1. Sacrifice of relationship-specific prospective advantage a. Asset posted is future dealings - Termination relationship and refusal to deal w/breacher again; destruction of the repaet deal. b. Keeping collateral. c. Rendering franchisee's investment worthless. 2. Loss of reputation 3. Psychic and social goods. Breaching promisor may suffer loss of self-esteem, feelings of guilt, snubbed at local club, pangs of guilt at Sunday sermon. C. III. SECTION THREE: EXPECTANCY DAMAGES FOR BREACH OF AN AGREEMENT WITH CONSIDERATION -- THE RULE, ITS RATIONALE, AND ITS APPLICATION IN VARIOUS CONTEXTS Cost-of-Completion v. Diminished Market Value 1. Monument (Cost-of-Completion) v. Oil Well Case (Diminished Mkt Value): Groves v. Value): John Wunder Co. (MN 1939), pp. 204-213. Whether purpose of contract was to improve land for general sale (Oil well -- Diminished Market Value) or personal and unique addition to land that owner can rightfully decrease value of land (Monument -- Cost-of-Completion). a. Majority thought removal of overburden made this case like monument case (e.g., if P likes to look at monument on his property). Thus, awarded cost-ofcompletion. b. Summers and Dissent thought K's purpose was improvement for general sale (e.g., if K expressly stated purpose to be "put property in shape for general resale"). Thus, would have awarded diminished market value. c. Majority and Dissent agree on legal issues: i. Expectancy formula ii. Don't want to put P in better position iii. Monument case -- cost-of-completion iv. Oil well case -- diminished market value But disagree on "What P was promised?" Monument or oil well? 2. Oil Well Case (Diminished Market Value): Peevyhouse v. Garland Coal & Mining Co. (Ok 1962), pp. 213-214: After D mined for coal deposits, did not do required restorative work (removing lots of dirt). Restorative cost $29,000 but diminished market value of land w/unremoved dirt is $300. Jury awards $5,000 but court reduced sum to $300 b/c: a. Restorative work is incidental to main object of K. b. Damages seem to be unconscionable amount. (Cost-of-completion damages is 9x greater than total value of P's farm.) Economic benefit of full performance grossly disprop. to cost of performance. performance. c. Summers and dissent think this is a monument case b/c Ps insisted restorative provisions be included in K and that they would not agree to coal mining lease unless such provs were included. Also, strip mining is very ugly and very destructive to land. Eisenberg, Responsive Model of K Law (1984) pp. 214-215: Disparity btwn cost-ofcompletion and diminished market value can be due to: 1. Unanticipated circumstances; costs not factored in 2. P has no intent to complete. Monument Case -- P can recover cost of completion damages, even if D's breach did not diminish market value of P's property, if there is evid that P intends to use damages for completion. Radford v. De Froberville (Eng 1977), p.215 (P sold land to D for (1) 6500 and (2) D's promise to build a wall to divide plot sold from P's land. D failed to build wall, which did not diminish market value of P's property). a. Man w/garden by sea which is subject to flooding on rare occasions. He sells part of his garden to purchaser and stipulates that purchaser must erect a flood wall on the property purchased to protect both properties. However, the purchaser fails to build the wall. If the court is satisfied that the plaintiff intends to build on his own land what the defendant has failed to build on his, A. 3. 4. b. why should plaintiff be limited to the diminished value of land? Plaintiff is interested in cultivating his garden, not selling his property. Restat. (Second) of Contract 346, comment (b) (p. 216): To determine lost expectancy damages from breach of contract, must determine the value of that performance to the injured party himself and not the value to some hypothetical reasonable person or on some market. market. 1. B. P can't recover damages, when D breaches K, for diff btwn D's contract and 3d party's cost of completion of K, if P received more from 3d party than he was to receive from D. Thorne v. White (DC 1954), p.217 (P can't recover b/c 3d party put better roof than bargained for in orig K w/D. If 2 Ks had been same, or if in small town and 3d party contractor was only other contractor => P may have recovered cost-of-completion). Morello v. Hogan (Conn 1984), p.218 (P did $10,000 out of $44,000 work, and D had to hire 2d contractor for $55,000 to finish work. P sued for $10,000, and D countersued for $11,000. Trial ct erroneously awarded P $1,000. App ct reversed and awarded D $11,000 b/c 2d contractor price of $55,000 already took into account P's work). C. When D breaches K, P can recover profit if K had been fully performed = (K price - work and materials necessary to complete K) + (expenditures already spent for work and labor supplied towards completion of K - salvage). Warner v. McLay (Conn 1918), p.218 (D unjustly breached written building K w/P. P wants damages for expenditures and loss of profits.) 1. Fixed cost K 2. Cost Plus K = 10% (materials - salvage + all work) 3. Greg's hypo. Owner tells contractor to stop building. hypo. K = $1500; Work and materials nec to complete K = $1000 Profit = $500 Contractor already expended $800 Thus, damages = $500 + $800 = $1300. Fuller and Perdue, Reliance Interest in K Damages (1936), p.219. Why measure damages by value of promised performance? 1. Principle of private autonomy: K parties exercise legislative power. 2. Reimburse P for reliance and losses involved in foregoing opportunities to enter other Ks. 3. Req of P to mitigate damages helps to compensate P for lost oppty to enter other Ks. 4. Policy in favor of preventing and undoing harms resulting from reliance, and policy in favor of promoting and facilitating reliance on business agreements. 5. Difficulty in proving and measuring reliance = obstacle to businessman to rely on promise. To encourage reliance, we must dispense w/its proof. E. 1. 2. 3. Von Mehren, Contracts in General (1982), p.221. Economic considerations in choosing between expectancy and reliance damages Parties bargin for less risk at a higher cost to ensure performance In market transactions, K deterred promisee from obtaining performance elsewhere. Thus, reliance or expectation damages are effective. In nonmarket transactions, nonaction by party does not give rise to reliance loss. If there is no prompt reliance involved, no need to have K. Party may feel compelled to rely on K for proof and do so prematurely or excessively. D. F. P suffered damages in replacing non-performing party, even though replacement is more valuable than non-performing party, b/c P had no alternative but to obtain replacement that req higher salary, and thus P lost "benefit of orig bargain." Handicapped Children's Education Bd of Sheboygan County v. Lukaszewski (Wis. 1983), p.222 (Therapist breached K w/Bd for higher paying and closer job. Bd acted in good faith to mitigate damages but still had to hire replacement w/higher salary). Note: Concept of "Efficient Breach" -- An Introduction and Caveat, p.225. Posner (1977). If profit from breach - compensation to victim of breach would exceed expected profit from G. 1. completion of K, then breach should be encouraged. Victim of breach is made whole for his loss, so he is indifferent. Fuller's Caveat to Efficient Breaches: W/o fidelity to K, no one would occupy a Breaches: sufficiently stable position. H. Prob. 3-1, p.226 (Reverse from Sheboygan b/c EE is suing ER here). Jan 2, 1984 - 1 3-1, yr K at $1500/mo salary. Mkt value = $1200/mo. On Jan. 31, 1984, he was wrongfully terminated. After diligent search, he couldn't find job until Dec. 1, 1984 at $1500/mo. Thus, he should recover 10 mos x $1500 = $15,000 + search costs. Put P in as good a position as if K performed. I. J. Prob. 3-2, p.226. Llewellyn sees free retraction as uncomfortable and disturbing. 3-2, If Seller fails to deliver goods to buyer pursuant to K, buyer is entitled to receive damages = (mkt price at time and place of breach - K price); K/market differential. Cooper v. differential. Clute (NC 1917), p.227 (Under K, seller was to sell buyer cotton at 10 7/8 cents per pound. Seller failed to deliver cotton, and at time and place of delivery, mkt value of cotton was 10 7/8 cents per pound. Seller subseq sold cotton to Sprunt for 11.03 cents. P recovers $0 = 10 7/8 cents - 10 7/8 cents.). 1. If Seller had K to sell particular cotton, ct may have awarded diff btwn 11.03 and 10 7/8. cotton, 2. Efficient breach: Seller made profit selling at higher price and owes original buyer $0. breach: K. Prob 3-3, p.228. 3-3, UCC 1-106. Remedies to Be Liberally Administered. The remedies in this act shall be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed. #1 -- UCC 2-713. Buyers Damages for Non-Delivery or Repudiation. Measure of damages for non-delivery or repudiation by seller is diff btwn mkt price at time when buyer learned of breach and K price w/ any incidental and consequential damages provided less any expenses saved in consequence . a. Diff from Cooper which says mkt price at time and place of breach. This could breach. make BIG diff in mkt w/rapidly fluctuating prices. #2 -- UCC 2-712. "Cover"; "Buyer's Procurement of Substitute Goods. (1) Aft breach, Goods. buyer may "cover" by making in good faith and w/o unreasonable delay any reasonable purchase substitution. (2) Buyer may recover from seller as damages diff btwn cost of cover and K price, less expenses saved in conseq. a. If buyer bought at 11 1/8 cents per pound and mkt price was 11 3/8 cents, buyer can recover 11 1/8 - 10 7/8 = 2/8. #3 -- UCC 2-708. Seller's Damages for Non-Acceptance or Repudiation. (1) Diff btwn mkt price at time and place for tender and unpaid K price, less expenses saved in conseq of buyer's breach; or (2) Profit + incidental damages. breach; a. Assume buyer breached in Cooper. K price = 10 7/8 and mkt price = 9. Cooper. Seller would recover 10 7/8 - 9 = 1 7/8. #4 -- UCC 2-706. Seller's Resale Incl K for Resale. Diff btwn resale price and K price and incidental damages, less expenses saved. a. Assume buyer breached in Cooper. K price = 10 7/8 and mkt price = 10. Cooper. Next day, seller resold at 9 7/8. Seller can recover 10 7/8 - 9 7/8 = 1 cent. #5 -- UCC 2-714. Buyer's Damages for Breach in Regard to Accepted Goods. Diff btwn value of goods accepted and value they would have had if they had been as warranted. a. Assume in Cooper that S agreed to sell to B first quality seed grain and K price = 15/lb. S delivered grain worth 5. On date of delivery, mkt price of first quality grain was 17. Buyer accepted and paid for grain, and sued seller for breach of warranty. B can recover 17 - 5 = 12. 1. L. UCC 2-708(2) provides that (mkt price - unpaid K price) is inadequate measure if seller has an unlimited supply of same goods; Lost volume seller. Even if seller sold seller. good at same price next month, seller would have made two sales instead of one. Neri v. Retail Marine Corp (NY 1972), p.230 (Buyer repudiated from K to buy boat from boat dealer. Boat dealer ready to delivere boat. Even though boat dealer sold boat 4 mos later, this would have been its second sale. Thus, buyer must pay profit + incidental damages in upkeep of boat to seller of unlimited supply of goods). Hypo. Suppose seller makes only 10 boats/yr and this is its 10th boat. Aft buyer repudiates, Hypo. seller sells its 10th boat to X. Lost profit? => NO b/c he has no further boats to sell thus no further profit. M. Prob 3-4 (good prob acc to Summers!), p.234. Eisenberg's justifications for expectancy damages. 1. Surrogate cost theory: Cost incurred in reasonably relying on a bargain promise. theory: Expectation damages are approx = to cost, but much easier to measure. 2. Planning theory: K's purpose is to enable parties to plan future conduct reliably. Award of theory: expectancy damages makes breach unprofitable. 3. Risk theory: K's purpose to allocate risk of price changes. Prices are constantly fluctuating. theory: None of these three justifications are applicable to Dance Lessons Hypo => huge prob area. D signs up for dance lessons for $500, but later repudiates. a. Does seller incur any costs in reliance? i. Opportunities foregone - NO b/c class wasn't full. ii. Expenses incurred - maybe $50 to add extra customer. b. Dancer pulling out only marginally affects future planning, thus $500 seems too much to award. c. Third theory seems inappropriate for merchant-consumer transaction. None of these three justifications are applicable to Buick Buyer Hypo. P contracts for car at Hypo. $10,000 but repudiates bf factory has begun to fill order. N. Note: Lost Expectancy, General Damages, and Consequential Damages, p.235. While Damages, distinction btwn gen. and consequential damages may be blurred, it is still important. Typically, consequential damages are subject to greater qualifications and limits than general damages. See next section. 1. General Damages are losses from breach that arise naturally or ordinarily. Eg, defective stove => diff btwn value of good stove v. value of defective stove. Neri suffered general damages in the sense that it substitutes for seller's rt to contract-mkt differential. 2. Consequential Damages are special damages. Eg, if P needed stove to make pizzas at his restaurant, he suffers lost profits. Not everyone will suffer this injury. IV. A. SECTION FOUR: AVAILABILITY QUALIFICATIONS AND LIMITS OF LOST EXPECTANCY DAMAGES -- Two Foreseeability Rules of Hadley -- P suing for breach of K may recover only damages which (1) arise naturally, according to usual course of things, from breach of K itself, or (2) arise from the special circumstances under which K was actually made if and only if these special circumstances were communicated by Ps to Ds; reasonability. Hadley v. Baxendale (Engl 1854), (most famous case) p.236 (Mill told carrier that mill was stopped and shaft must be sent immediately. Carrier negl delayed delivery so that mill did not receive shaft for several days and mill lost profits. Since Ps did not communicate that this shaft was only shaft to run mill, Ds could not have foreseen these special circumstances of lost profits.). 1. Plausible that mill might not have been stopped b/c mill might have extra shaft on hand or close down mill for week for general repairs. 2. P must tell D of special circumstances so that parties would have specially provided for breach of K (higher price to deliver). If 3d party informs carrier of special circumstances, this is inadeq b/c if P chooses not to inform carrier, then P decided to bear burden. 3. Posner, p. 239: Court tries to imagine how the parties would have provided for the contingency if it had occurred to them to do so. Conflict w/ next note. 4. Ayres and Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, pp. 239-240: a. Miller should tell carrier of potential consequential damages and contracted for full damage insurance, due to the high consequential damages. b. If the carrier foresees the loss, he will be able to prevent it more efficiently. c. Revealing info to carrier will undoubtedly increase price of shipping. d. However, if increase in transaction costs is not prohibitive, a miller with high consequential damages will gain by telling carrier and contracting for greater insurance b/c carrier is least-cost avoider. Summers argue that mill might be least-cost avoider b/c carrier deals w/ lots of diff people. Some have big losses and some have small losses. 5. Spang Industries, Inc. v. Aetna Casualty & Surety Co. (1975) The headnote in Hadley is misleading in stating that the clerk of the defendant carrier knew that the mill was stopped and that the broken shaft had to be delivered immediately. Ct. of Exchequer must have rejected this statement and denied loss of profits b/c only knowledge possessed by the defendant was that the mill shaft was broken and plaintiffs were millers. However, the misleading headnote, was considered to reflect the actual facts. 6. Tacit Agreement Test (instead of Hadley). Some cts have permitted recovery of conseq Hadley) damages only when D tacitly agreed to assume risk. Thus though farmer in Lamkins told D that he needed ($20) lamp to plant crops at night, D is not liable for loss of profits ($450) b/c seller did not tacitly consent to be bound for more than ordinary ds. Most cts reject test. test. 7. UCC 2-715(2)(a). Consequential damages from seller's breach include loss resulting from general or particular requirements and needs which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise The "tacit agreement" test is rejected. 8. Armstrong v. Bangor Mill Supply Corp (Me 1929), p.240 (P sent broken crankshaft to D's machine shop. D negl made repairs so that P had to return crankshaft, shut down mill for 6 days and lose profits. P recovered lost profits). Distinguish from Hadley b/c machine shop should have known, professional duty, even though it was not told duty, about special circumstance. B. D is not liable for costs due to P's failure to mitigate damages. P is not entitled to complete performance of K and recover costs for full performance if D requested P to stop during performance. D would be liable for costs due to breach. Clark v. Marsiglia (NY 1845), p.242 (D told P not to continue work but P continued and wanted to recover for whole job. P had no rt to make penalty upon D greater. D violated K and would have to pay (1) labor done, (2) materials used, and (3) other costs due to breach (expectancy/profit). Subseq events may make work useless to D. P did not act in good faith, and brought the loss on himself by continuing to work.). Prob. 3-7, p.243. D completes work b/c thought he could at orig K price ($40,000) or above. 3-7, However, due to drop in mkt, D only gets $15,000. Seller can recover 40 (k price) - 25 (labor and component) + 7 (reallocation and resale) = 22. Seller is not entitled to recover lost profits, interest, and incidental ds if seller failed to take "reasonable" steps to mitigate damages due to buyer's breach. Schiavi Mobile Homes v. Gironda (Me 1983), p.244 (Father offered to pay for son's mobile home, but D declined offer, sold it to 3d party and sued son for lost profit). Employee is entitled to recover amt of salary agreed upon if ER breaches K by wrongfully discharging EE. Though ER offers EE alternative employment for identical compensation, EE does not have to mitigate damages by accepting the offer b/c employment is of a "diff and inferior kind." Parker v. 20th Century Fox Film Corp (CA 1970), p.246 (Shirley MacLaine entered into K to star in musical production in CA w/ director approval rts. Film fell through so D offered role in dramatic western to be filmed in Australia w/no director approval rts. Actress rejected alt. Ct ruled that movie was inferior as matter of law!). law!). 1. Dissent a. Jury question: do diffs really make movie inferior? b. Diffs don't seem highly signif. Maj doesn't weigh diffs. c. Suppose actress liked Australia. d. Suppose actress never exercised rt to approve director, and this was just boilerplate provision. e. p.251: "Resolving issues req critical appraisal of similarities and diffs btwn two jobs in lt of importance of these diffs to the employee." employee." 2. Hillman, pp. 253-254. Many courts, perhaps unwilling to allow the breaching party to "escape" full liability, are reluctant to apply the avoidable consequences rule when the only or least-damaging alternative, is to accept a new offer from breaching party. Courts seem to have concluded as a matter of law that it is never reasonable to deal further with breacher. Courts seem to focus on "bad actions of contract breaker rather than on breacher. making injured party whole. P should receive all his profits from subseq K if subseq K is an indep arrangement from breached K, and is not direct result of breached K. Olds v. Mapes-Reeves Constr Co. (Mass. 1900), p.254. 1. Distinguish w/Parker. Suppose ER wrongfully dismisses EE and EE is hired by landowner w/Parker. for same salary. Parker would say $0 recover. Here, subc does not have to deduct b/c subc can have may Ks at one time. EE can only have one job at a time. 2. Volume seller - Neri 3. Assumed risks of new contracts C. D. E. F. G. Co. who hired contractor that negl delayed constr of new business is not entitled to lost profits during period of delay b/c calculation of profits of new businesses is uncertain and speculative compared to calculation of profits of established businesses. Rental value of property during period of delay is more sufficient bases of calculating loss resulting from delay. Evergreen Amusement Corp v. Milstead (Md 1955), p.256. 1. Note: "New Business Rule" today, p.258. The "new business rule" of Evergreen today, Amusement Corp. is in decline b/c: a. Grossly unfair to deny recovery of lost profits where P had been prevented from establishing amount of lost profits due to D's actions. b. Rule encourages parties contracting with new businesses to breach. c. New Rule -- calculation of profits must be based on reasonably certain factual basis or rational basis. H. 1. 3. Note: Punitive Damages in Contract Cases, pp. 265-266 Cases, Restatement (Second) of Contracts 355 (1979): Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable. This rule applies although breach is intentional or done with malicious intent. 2. Reasons for NO punitive damage recovery in contract law: law: a. Holmes' theory -- contract = set of alternative promises either to perform or to pay damages for nonperformance. nonperformance. b. Law of contracts govern primarily commercial relationships were amount required to compensate for loss is easily fixed, in contrast to law of torts, which fixed, compensate for injury to personal interests that are more difficult to value, thus justifying noncompensatory recovery. c. Breaches of contract do not cause kind of "resentment or other mental and physical discomfort as do the wrongs called torts and crimes," and no retributive purpose would be served by punitive damages in contract cases. d. Economists argue that efficient breaches of contract that are wealth-enhancing should be encouraged b/c breaching party would still profit after compensating other party for expectation interest. Punitive damages would deter efficient breaches. Exceptions in K Law where can recover punitive damages: damages: a. Where breach constitutes an independent, wilful tort. b. Contract breach to marry. c. Failure of a public service company enjoying monopoly or quasi-monopoly power to discharge its obligs. to public. d. Breach of fiduciary duty. e. Contract breach accompanied by fraudulent conduct (where D conveys to a 3rd party property given as security for P's debt when D has promised to reconvey the property to P upon repayment of debt). f. Bad faith refusal by an insurer to settle an insurance claim for which it is liable. I. Note: Other Qualifications and Limits on Lost Expectancy Recovery, pp. 266-267 Recovery, 1. Denial of lost expectancy recovery in medical contexts. See Sullivan v. O'Connor contexts. ("considering the uncertainties of medical science and the variations in the physical and psychological conditions of individual patients, doctors can seldom in good faith promise specific results"). 2. Denial of recovery for loss of reputation or goodwill. 3. Denial of lost expectancy to attorneys. Some courts allow wrongfully discharged lawyers attorneys. only reasonable value of their services up to the date of discharge. 4. Denial of attorneys' fees and interest. General rule = victorious party cannot recover interest. attorneys' fees from losing party. One reason is it would discourage the poor from litigating possibly meritorious claims. a. Will award reasonable attorneys' fees if in specific contract clause. clause. b. Will award attorneys' fees as reliance damages if not litigation expense and were wasted because of D's breach. E.g., attorneys' fees to pay for a title search if vendor of land later repudiates. c. Some laws award to induce private enforcement of pubilc policies 5. Ps generally cannot recover pre-judgment interest unless amt of damages is ascertained or liquidated prior to entry of judgment. judgment. V. SECTION FIVE: REIMBURSEMENT OF RELIANCE COSTS AS AN ALTERNATIVE REMEDY WHERE THERE IS A BREACH OF AN AGREEMENT W/CONSIDERATION A. Some cts distinguish btwn "essential" reliance expenditures (those made in preparing to perform K) and "incidental" reliance damages (those made by P b/c anticipated K would be performed), and have denied recovery for incidental reliance damages. However, performed), most modern cts award recovery for both, so long as incidental reliance was reasonable and foreseeable. Nurse v. Barns (Kings Bench 1664), (great case) p. 268 (P contracts to foreseeable. rent D's premises for 6 mos at cost of 10. P plans to use premises to run store. Relying on K, P purchases stock of goods for 500. D breaches K, and P's goods are spoiled for lack of storage space. P may recover for value of goods.). 1. Fuller, p.276, states that there is no valid reason to limit P's recovery of incidental Fuller, reliance damages by the expectation interest measured objectively. Incidental reliance is not regarded as price of performance. Note that essential reliance are acts necessary to perfection of P's rights on the contract (performance of agreed exchange, preparations to perform, foregoing opportunity to enter other profitable contracts). Essential reliance should be limited b/c it would permit P to shift to D his own contractual losses. P might be motivated to pursue only reliance costs b/c obstacles to recover lost net profits. See SEC FOUR. a. Hadley foreseeability. b. P must try to mitigate damages. c. New business rule. Suppose P proved that he would have grossed 600L. Thus, P should recover 10L (rent) + 600L. 500L (goods) + 90L (profit). If incidental reliance, use foreseeability test: Suppose P told D nothing about intent for test: use. Award 500? NO if they were remote expenses. Coppola v. Kraushaar (1905), p. (1905), 275. (Issue = Whether P is entitled to all expenses from breach of K if expenses were too remote from the actual cost of the breach? NO. See Hadley. Thus, P could only Hadley. recover $10 for wedding gowns that were delayed in being delivered, even though delay of delivery caused wedding to be canceled by fiance and D lost investment of $500 (presents, wine and clothes)). Suppose D had notice that P would run business but didn't know that P would buy 500. Award 500? YES if expenses could be reasonably contemplated. Anglia Television Ltd. v Reed (Eng. 1971), p.274 (Issue = whether P is entitled to recover expenses incurred before the signing of the contract if such expenses were reasonably contemplated by the parties as likely to be wasted if contract was broken? YES. broken? Thus, P can recover cost of hiring director and other key persons for film after D breached contract.) a. Distinguish from Dempsey: Return to status quo ante - Dempsey was the cost of Dempsey: doing business, speculative; here status quo includes all preparations. 2. 3. 4. 5. 1. B. Limitations on Amount of Reliance Recovery; Fuller and Perdue, The Reliance Interest in Contract Damages, pp. 275-277. & Emanuel's: Expectancy ordinarily exceeds Damages, Emanuel's: reliance interest. It is possible for reliance to exceed expectancy. Should this be allowed when P is seeking reliance damages? We will not in a suit for reimbursement for losses incurred in reliance on a K knowingly put P in a better position than he would have occupied had the K been fully performed. a. Ususally means max. damages will be limited to what D has to pay under the K. b. P has entered losing contract. Suppose mfr has undertaken to construct a contract. machine for $1,000 failing to foresee that it will cost $1,500 to tear down wall to remove machine when completed. Reliance damages = $1500. Expectancy = $1,000. 2. Corollary = There should be deducted from P's recovery any losses he would have suffered had the contract been performed. D has the burden of proof on loss. P limited to expectation damages. a. L. Albert & Son v. Armstrong Rubber Co. (2d Cir. Hand 1974), p.274 3. Essential v. Incidental Reliance: Nurse a. Essential reliance are acts necessary to perfection of P's rights on the contract (performance of agreed exchange, preparations to perform, foregoing opportunity to enter other profitable contracts). Essential reliance should be limited to "contract price" b/c it would permit P to shift to D his own contractual losses. b. Incidental reliance are acts that followed naturally (reasonably) and foreseeably from the contract (those made by P in anticipation of K but do not relate directly to the performance of K). It cannot be regarded as price of D's performance. Incidental reliance should be limited to reasonable and foreseeable expectancy of each particular venture. venture. C. P cannot recover lost profits b/c profits from public events lack element of stability. But P can recover reliance costs for this A/C case incurred after P signed K w/ Dempsey. Chicago Coliseum Club v. Dempsey (Ill. 1932), p.268 (Boxing promoter sues Dempsey who breaches an agreement to participate in a fight to be promoted by P one month bf fight). 1. P cannot recover lost profits b/c profits to be made from boxing match depend on public whim, which cannot be reasonably ascertainable b/c lacks element of stability. Cite Evergreen, TX cases, and new business rule. Evergreen, 2. P cannot recover reliance expenditures made bf contract was signed w/Dempsey. 3. P cannot recover for expenses on getting decree enjoining Dempsey from fighting w/Tunney. Cite Clark (P has no rt on making penalty upon D greater). 4. P can recover for its reliance costs aft signed w/Dempsey. P can recover overhead expenses = variable costs (% of salary and benefits of its employees that worked on project of breached K) given that these employees could have devoted its time to another project sufficiently profitable to cover salary and benefits of employees had K w/ D had not been signed. Autotrol Corp. v. Continental Water Systems Corp (7th Cir Posner 1990), p.277 1. Fixed costs are the same whether or not the firm does anything. Thus, fixed costs would be an improper item of damage for breach of K because the K did not cause these expenses. 2. Variable costs are those that vary with the firm's activity. Thus, had it not been for the K, those expenses would not have been incurred and so they are recoverable. D. 3. P was growing firm that was "consistently overbooked" and had "consistent record of profitability." Declining firm may not recover overhead expenses. VI. SECTION SIX: VALIDITY OF CLAUSES PROVIDING FOR A SPECIFIC MONETARY REMEDY IN EVENT OF BREACH OR REPUDIATION OF AN AGREEMENT W/CONSIDERATION Dunbar, Drafting Liquidation Damage Clause. Clause. a. Damages stipulated should fall within range btwn upper and lower limits of potential actual damages foreseeable. b. Parties should negotiate on amt. and provide evidence of negotiation c. Provide suitable machinery for reasonable extension to adjust for delays d. Amt of damages should vary w/breach. e. Use words, "liquidated damages." f. Recite facts which caused parties to incorporate clause, eg, amt of damages upon breach will be very difficult to ascertain w/precision. UCC 2-718(1), p. 283 & 232. 2-718(1), Damages for breach by either party may be liquidated in the agreement but only if: a. Amt is reasonable in the light of the anticipated or actual harm caused by breach. b. Proof of loss is difficult. c. Inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. d. Unreasonably large liquidated damages are void as a penalty. Liquidation clause of valid K is a penalty and not enforceable if specified damages are (1) not proportionate to possible extent of prospective breach (reasonable forecast) and (2) prospective damages from breach are easy to accurately estimate through ready mkt. HJ McGrath Co. v. Wisner (Md 1947), p.281 (Farmer agreed to sell all his tomatoes to Co., but only sold 11 tons to Co. and 45 tons on mkt for higher price. Liquidation clause said if farmer breached, had to pay $300). 1. To determine damages, ct used (K price - mkt value) x amt of undelivered tomatoes. 2. Compare to Massman (1945), p.289 (Ct refused to award liquidated ds b/c breach caused no ds. Massman did not complete bridge w/in specified time. Since there was no road on other side anyway, bridge was useless. Also no ready mkt here). Liquidation Clause passed two-prong test of (1) reasonably foreseeable ds and (2) difficult to ascertain ds, though dissent thinks value was unreasonable and Summers thinks lawyer should have orig called it a limitations clause. Better Food Markets v. Amer Dist Telegraph Co (Ca 1953), p.289 (Ct found that Ps can only recover $50 damages specified in "liquidation" clause agreed to by both parties b/c potential damages were not foreseeable, and was reasonably related to potential losses) 1. Dissent said that $50 was unreasonable. Dissent would have calculated by avg amt of cash in store or inventory of avg merchandise. 2. Stupid that lawyer called clause "liquidation" instead of limitation b/c invited two-prong test of damages that are (1) reasonably foreseeable and (2) difficult to ascertain. Lawyer got away w/it. Distinguish w/ Limitations Clause which req test of unconscionability. unconscionability. 1. Rinaldi and Sons v. Wells Fargo Alamr Service (NY 1976), p.293. 2. UCC 2-719(3). Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. A. B. C. D. E. VII. A. SECTION SEVEN: MONETARY REMEDIES WHERE THEORY OF OBLIGATION IS PROMISSORY ESTOPPEL, pp.294-304. ESTOPPEL, Restat. (Second) of K, 90: Promise Reasonably Inducing Action or Forbearance. A promise which the promisor should reasonably expect to induce action or forbearance on part of promisee or third person and which does induce such action or forbearance is binding if injustice can be avoided only be enforcement of the promise. The remedy granted for breach may be limited as justice requires. 1. Comment (b) Character of Reliance Protected. Promisor is affected only by reliance which he does or should foresee. This depends on reasonableness of promisee's foresee. reliance, on its definite and subst character, on formality which promise was made, and on extent of evidentiary, cautionary, deterrent and channeling functions of form are met. 2. Comment (d) Partial Enforcement. Relief may sometimes be limited to restitution or to damages or specific relief measured by extent of promisee's reliance rather than by the terms of the promise. (Principal change from former 90 is recogn of (Principal possibility of partial enforcement). enforcement). 3. Restatement (First), 90. Suppose Uncle says to Johnny that he will give him $1,000 to 90. buy a buick. Johnny buys a car for $500. a. Williston: Uncle is liable for $1000 b/c promise is binding. Williston: b. Coudert: Why should Johnny get car + $500, and thus penalize uncle. Coudert: Reliance damages - restoration of stauts quo ante (limited by expectation damages) damages) P can recover only reliance damages under PE theory b/c he did not forego other opportunities (no proof of lost profits). Goodman v. Dicker (DC Cir 1948), p.295 (In reliance on radio franchisor's promise, P spends $1150 preparing to open up shop. He also promise, gives D an initial order of 30 radios. D then turns down P's applic, and P sues for $1150 + $350 (profit from 30 radios. P can recover on PE theory the $1150 he spent in reliance on D's promise). 1. Restat. (Sec), 90 re: comment (d) "relief may sometimes be limited to . . . extent of promisee's reliance rather than by the terms of the promise." Contrast to Seavey v. Drake p. 81 where P received full expectancy. 2. Hypo: Suppose another radio franchisor would have made franchise w/P and $350 was Hypo: likely. => P can recover $350. 3. Distinguish w/Siegel,p.84. In Siegel, P did not get other ins b/c he relied on D to get ins. w/Siegel,p.84. Siegel, Thus, P got what he was promised. In Goodman, P had no other offers of franchisee, Goodman, so he didn't forego anything. 4. Cts seem most likely to find an implied promise of good faith where negotiations relate to award of franchise. Ct awards lost profits even though no proof of similar lost oppty. Walters v. Marathon Oil Co. (7th Cir. 1981), p.297 (Co. promised couple gas station, but they refused to sign agreement in end). 1. No proof of lost oppty found in Goodman => reliance costs. Proof of lost oppty found in Grouse => expectancy costs. Ct in Walters thinks issue is whether Ps can prove profits w/ certainty. But true test is proof of foregone oppty. oppty. 2. How about Ds = (investment) + (% return) - (profit from resale) + (wages) 3. Ct say non-breaching party can recover lost proifts on theory of PE considering that non-breaching party suffered a loss of profit, or foregone opportunity to invest elsewhere, as a direct result of its upon promise made by breaching party, amt of lost B. C. 4. profits can be ascertained w/reasonable certainty, and dist ct has broad powers in certainty, ct of equity. equity. Non-breaching party took reasonable steps to mitigate ds when they conducted a search for a new supplier to the best of their ability considering they lacked relevant mkt experience, rather than conducting a sophisticated, experienced search. 1. D. Hoffman v. Red Owl Stores (Wis 1965), p.299 No shred of evid that Hoffman should receive fair mkt value. Should have awarded amt value. of expenditures in reliance (diff btwn sales price of fixtures and inventory received and fair mkt value of assets sold). (1)Money invested + (2)interest + (3)value of Ps' personal services - (4)sum received when equipment was sold - (5)net earnings on investment - (6)salary received during period. E. Grouse v. Group Health Plan (Minn. 1981), p.302 (Pharmacist was induced to leave his old job (41 hrs at $7/hr = $287/wk) and forego Va job. D then revokes promise of job bf employee shows up for work. P can recover damages he sustained in reliance of promise, including work. foregone opportunities. opportunities. 1. Hypo: Suppose old job = $287; Va job = $300; new job = $350. Should we award $287 or Hypo: $300? a. D can argue that Va job was unforeseeable, thus they are not liable for foregone unforeseeable, oppty ($300). Hadley & Nurse b. Trial ct award foregone oppty. oppty. c. Note: Court did not say employer could not fire at will even after start. Only that P was justified in relying on being given a good faith opportunity to perform. VIII. SECTION EIGHT: RESTITUTIONARY RELIEF AND THEORIES OF OBLIGATION, pp. 304-321. "Restitutionary relief" can refer to (1) monetary remedies and (2) certain forms of specific relief such as an order req D to return a specific item. Here we concentrate on monetary remedies. A is req to pay B value remedies. of any benefit B conferred on A. This suggest measure of relief is increase in value of A's property or other interests, but sometimes ct awards B's full outlay in preparing to perform, or in performing, even if interests, this exceeds A's gain. Sometimes theory of oblig is (1) UE, (2) A w/C, or (3) obscure. Restatement (Second) of K, 371: Measure of Restitution Interest. If sum of money is awarded to Interest. protect a party's restitution interest, it may as justice requires by measured by either (a) the reasonable value to the other party of what he received in terms of what it would have cost him to obtain it from a person in the claimant's position (mkt value), or (mkt value), (b) extent to which the other party's property has been increased in value or his other interests advanced. Comment (a) Under either choice, the court may properly consider the purpose of the recipient of the benefit when he made the K. Comment (b) Choice of measure. Party seeking restitution for part perf is commonly allowed measure. more generous measure of reasonable value, unless unduly difficult to apply or P is in breach. A. WHERE A NON-BREACHING P CONFERRED A BENEFIT AND ELECTS RESTITUTIONARY RECOVERY. In Posner, p.123, party injured by breach of an A/C RECOVERY. Posner, may elect to recover benefit conferred on breacher under theory of UE, instead of expectancy ds for breach of K. Here we focus on prob of measurement of benefit conferred when an injured party seeks restitution in this context. 1. US for Use of Susi K Co. v. Zara Contracting Co (2d Cir. 1944), p.305 (Subcontractor found unexpected soil conditions and had to do extra work and demanded extra money but D did not pay. D finally completed project using P's tools). a. Three theories of recovery i. Extra work not covered by K ii. Under main K - trial ct. iii. May waive K entirely and sui in quantum meruit/UE for reasonable value of work performed - app ct. b. D cannot limit liab based on K b/c D breached K and P is not suing on K. c. " it is to be valued, not ot the extent to which D's total wealth has been increased but by the amount for performance could have been purchased " Henderson, Promises Grounded in Past: Idea of UE and Law of K (1971), p.308. Restitution restores status quo by awarding claimant reasonable mkt value of his performance, not by forcing D merely to disgorge benefit unjustly retained. retained. Quantum meruit is an allegation of indebtedness for labor and services of P, done at D's req. A claim of quantum meruit auth ct to alter parties' basic risk allocation. Necessity for fashioning relief outside of bargain is b/c D's conduct has resulted in enjoyment of gain which is product of P's loss. loss. P cannot elect to sue upon quantum meruit and recover reasonable value of services rendered if P fully performed K and the only remaining perf is D's payment. Oliver v. Campbell (Ca 1954), p.309 (P Oliver (lawyer) and D Campbell agreed to $850 to conduct divorce proceeding. After the completion of the trial, Campbell discharged Oliver after paying him only $550. Oliver then sued upon quantum 2. 3. b. meruit for the reasonable value of his services and court below awarded $5,000. Held, reversed. a. General rule -- One who is wrongfully discharged and prevented from further performance of his contract may elect to treat the contract as rescinded and may sue upon quantum meruit and recover the reasonable value of the services performed even though such reasonable value exceeds the contract price. Exception -- In this case, lawyer had completed the performance of his service and thus the following rule would apply -- Remedy of restitution in money is not available to one who has fully performed his part of a K, if the only part of the agreed exchange for such performance that has not been rendered by the defendant is a sum of money constituting a liquidated debt. Risk allocation complete. 1. B. WHERE A NON-BREACHING P CONFERRED A BENEFIT BUT HAD A NEGATIVE EXPECTANCY (A "LOSING" K) Restat. (Second) of K, 373, comment (d). An injured party who has performed in part will usu prefer to seek ds based on his expectation interest ( 347) instead of sum of money based on his restitution interest b/c such ds incl his net profit and will give him larger recovery. Even if he cannot prove net profit, he will seek reliance interest, regardless of whether they resulted in benefit to D. In case of K on which interest, he would have sustained a loss, restitution interest may give him larger recovery than would damages on expectation or reliance. The rules stated in this Section give him that right. Much controversy If builder expends in excess of K price and has not yet completed performance, and owner voluntarily puts end to his K rts by breaking K, then builder is entitled to full reimbursement. If builder expends in excess of K price in completion of performance, he is limited to K price. City of Philadelphia v. Tripple (Pa 1911), p.310 (Builder was to construct fire engine house in 125 days for $34,500. D acquiesed that P continue working after 125 days, but subseq asked him to discontinue. P can recover for actual cost and labor). Builder can recover reasonable value of his services, but he K price constituted a ceiling on his recovery of restitution. Johnson v. Bovee (Colo 1978), p.311 (P agreed to build house for D acc to specified plans. P and D orally agreed to many deviations in plan. D became dissatisfied w/quality of work and asked P to stop aft he completed 90% of work). a. Childres & Garamella (1969), p. 312. Attacked Restatement b/c P gets more than if K had been performed. Puts P in better position if K is breached. There is no justification for the position that the terms of the promise do not regulate recovery of reliance damages in some cases which may be twisted into an "action in quantum meruit." Asking for reasonable value which is 5x amount of contract price upsets the parties' original business arrangement. arrangement. 2. 3. C. WHERE A NON-BREACHING P CONFERRED A BENEFIT BUT CANNOT PROVE LOST EXPECTANCY 1. Osteen v. Johnson (Colo 1970), p.313 (D agreed to promote singer for $2500. D subst performed agreement but did not mail out second record, which goes to essence of K. P can recover restitution = $2500 - reasonable value of D's services). a. P can recover because of material/vital/substantial breach b. P only recovers pro rata share c. Difficult to measure lost profits ("to promote Linda"), thus Ps don't seek lost profits. They seek $2500 back (restitution). Analogous to Dempsey where lost profits were difficult to prove for boxing match. Thus, Ps recovered reliance costs as an alternative for A/C. d. Ct is undoing K so looks like UE, but is K theory of oblig. D. WHERE PLAINTIFF HAS CONFERRED A BENEFIT BUT K IS INVALID, FRUSTRATED, OR OTHERWISE UNEFORCEABLE Restitutionary relief may be granted to a party on unjust enrichment grounds even though: 1. Agreement is unenforceable a. Lack of consideration b. Lack of writing 2. Promissory estoppel is unavailable (e.g., B should not have reasonably have expected A to rely on B's promise to convey). 3. Generally, see Chapter 2, Section 4 (especially Kearns v. Andree p. 116) E. WHERE P HAS MATERIALLY BROKEN K AFTER CONFERRING A BENEFIT. P has BENEFIT. committed breach of K, cannot recover on K theory (agreement w/consideration). Nevertheless, P may have conferred a benefit on D and it may be unjust for D to retain benefit, in whole or in part. Law permits P to have restitutionary relief premised on prevention of unjust enrichment. Eg, Britton, p.126 and De Leon, p.130. enrichment. Britton, Leon, 1. Prob. 3-15, p.321. K = $10,000; A expends $8,000, breaches K and increases value of B's 3-15, building by $4,000. B hires another contractor who completes A's work for $9,000. a. Since B had to pay another contractor $9,000 for $10,000 job, A only completed 1/10 of job, and thus should get 1/10 of K price = $1,000. IX. A. SECTION NINE: SPECIFIC PERFORMANCE, pp. 321-336. PERFORMANCE, Kitchen v. Herring (NC 1851), p.321 1. Land is assumed to have peculiar value, so cts always give equity of specific perf, w/o ref to quality or quantity. Land has value immeasurable; mkts can't handle. a. Idaho Rule (Watkins v. Paul (1973)), p.323: Ct will grant specific performance only (Watkins to vendee who can show some "particular, unique purpose" for which he wanted the land. 2. Hypo: Suppose 2 plots of land and X agrees to sell to P and then X repudiates. Y has plot Hypo: on mkt too. In Idaho, would P automatically get spec perf? NO, unless particular, unique purpose. Y=substitute in mkt. Posner would like Idaho rule b/c sometimes more efficient to take money than land. 3. Hypo: Suppose second purchaser is bona fide purchaser. Kitchen = 1st purchaser. Who gets Hypo: land? Second purchaser b/c cts generally "hold that first vendee is only entitled to damages and that subseq bona fide purchaser has the rt to land (specific perf)." First purchaser can get constructive trust in favor of first vendee on vendor's proceeds from second sale. Eg, 1st sale = $20,000 and 2d sale =$23,000, vendor owes 1st vendee $3,000. Ct can order specific performance against breaching D if K for sale of goods was so unique that "no adequate remedy at law" exists to remedy breach. Curtice Brothers Co v. Catts (NJ 1907), p.323 (P cans tomatoes as his business and seeks specific perf of K in which D agreed to sell P all tomatoes from D's certain land). 1. Hypo: Suppose D contracts to sell 20 bushels to P who plans to can at home. If D Hypo: repudiates, can P get s.p? NO b/c he can buy in mkt. No s.p b/c remedy at law is adequate. 2. Distinguish Curtice from Hypo. Money ds is not adeq. Hypo. a. Factory went through lot of prep to can tomatoes. b. Loss of reputation and ability to compete forever. (We have name of col on cans and if customers can't find it in stores, they'll buy another brand). c. Suppose spec perf is denied and mkt price is up. Growers will bail out and hope they won't get sued. Unsettles whole planning process. "The breach of K by one planter differs but in degree from breach by all." 3. Ct won't force D to work against his own will => Appoint receiver to pick tomatoes. Doesn't work in case of opera singer that refuses to sing. P is entitled to specific performance of D's agreement to replace defective good even though open mkt; P financially unable to purchase good on mkt and avoid his business losses. Remedy at law can still be inadeq even if open mkt. Stephan's Machine & Tool v. D&H Machinery Consultants (Ohio 1979), p.326 (P bought machine from D for $96,000. Machine failed to work, and D failed to replace machine. P was unable to buy replacement elsewhere, although such machines were available). P is entitled to s.p. of D's long-term agreement because alternate supply could not be obtained at same quantity and price in uncertain mkt except w/ expense, trouble or loss which cannot be estimated in advance. Adequacy of remedy at law compared to s.p. in certainty, promptness, completeness, and efficiency. Laclede Gas Co v. Amoco Oil (8th Cir. 1975), p.326 (D was to provide propane gas until natural gas became available. D terminated agreement and P wanted s.p.) Note: Defenses to and Limitations on Availability of Specific Performance, p.328 Performance, 1. Unfairness, mistake, duress, undue influence. B. C. D. E. 2. 3. 4. 5. Lack of mutuality of perf. Ct will not grant s.p to P unless D can be reasonably assured of receiving return perf. Indefiniteness of agreement. Impracticability of perf. Diff to enforce and supervise. Ct will not grant s.p. to provide personal services. Eg, unique singer and employees; reinstate faculty member even if discharged in breach of K. Ct don't want to compel assocaiton aft disputes have arisen and loyalty and confidence are gone. 4. F. Buyer only entitled to recover diff btwn K price and mkt price on date he learned of breach when goods not unique and Buyer can cover in mkt, rather than recovering for s.p. or punitive damages even though Seller deliberately breached K to make another K at higher profit. Pratt Furniture Co. v. McBee = systematic review of all remedy material, p.330 (McBee breached K w/ P (90,000 chairs) to make tables for X at material, a higher profit. Lawyer told him law encourages efficient breach and he would owe P diff btwn K price and mkt price on date P learned of breach.) 1. Majority: The UCC allows s.p. where goods are unique or are uncoverable. uncoverable. Parties have no business tying up the courts with demands for specific relief when they have ready market alternatives as here. There is no authority in this jurisdiction for requiring wilful breacher to disgorge his ill-gotten gains. Nor has this court ever awarded punitive damages merely for deliberate breach. 2. Judge Posner Concurring: a. Result serves social goal of increased allocative efficiency of scarce resources; P moved his resources to an even more highly valued use = net social gain; goods end up where they are most valuable. b. Contract law encourages efficient breach: breach: i. Rationale in adopting lost expectation rule. ii. Refuses other remedies i.e. s.p. restitution, and punitives. c. Cts. often use it, but don't explicitly recognize it. d. Holmes essay: K is utterly amoral; perform or pay lost expectancy. See pp. 265-266, Note why no punitive damages for K. 3. Judge Rawls Dissenting No s.p., but would allow P to recover the amount of profit McBee makes on the table deal. 1. K law generally favors and encourages performance. 2. Rules do not encourage efficient breach but can be explained: a. Rules confining recovery to lost expectancy and barring punitive damages, and barring enforcement of penalty clauses make contracting less hazardous, and thus encourage parties to enter Ks in first place. b. History shows that s.p. awarded only if no remedy at law in order to minimize conflicts btwn ct of equity and law. 3. Efficient Breach can be more costly. a. Lost expectancy includes consequential damages. b. More litigation re: precise amt to pay aggrieved party. c. K-market differential might be calculated at a reasonable timeafter Pratt timeafter learned of breach. 4. Cts rarely rely on efficient breach doctrine. 5. K damage rules do not account for all costs to aggrieved party. a. Limits lost profits to those that are foreseeable and certain. b. Some aggrieved parties don't sue b/c amt. not worth it; they swallow costs. 6. Efficient breach is costly to breaching party. a. Reputation suffers as being untrustworthy. b. Lost business due to lost reputation. 7. Definition of "highest valued use" is not complete. a. B/c of other costs, Pratt might not have bid as high. b. Pratt might even make so much profit, enough to pay McBee his potential profit and have something left over. c. If Table Co. resells tables at a loss -- no net social gain. Not UE case. No benefit conferred. It is important socially and morally for people to keep their word and for the legal system to foster trust and cooperation, not merely individualistic self-advancement. Fuller, p. 226. "if all existing arrangement are subject to being reordered in the interest of increased economic return," our system of exchange "would lose its anchorage and no one would occupy a sufficiently stable position to know what he had to offer or what he could count on receiving from another. CHAPTER FOUR. AGREEMENTS AND PROMISES I. SECTION ONE: THE AGREEMENT PROCESS AND ROLE OF LAWYERS, p.342. LAWYERS, -advise on general law applicable to agreement -find fact that bear on prospective terms -ascertain and particularize goals of parties -plan and draft overall agreement -negotiate with other side SECTION TWO: PLANNING AND DRAFTING, pp.342-358. DRAFTING, Two Main Types of Planning [MacNeil] 1. Performance Planning: Will what is planned almost certainly have to be carried out if this Planning: contract is to go through to a successful conclusion as planned? E.g., insurance. 2. Risk Planning: Is K likely to go through to a successful conclusion w/o what is being Planning: planned having to be carried out? Drafting Techniques 1. Pure boilerplate loses sight of essential and peculiar ingredients of this transaction. 2. Identify particular ingredients and express in language so anyone can read and enforce. 3. Entire document is draftsman's concern. 4. Model Documents and Standard Provisions a. Meet needs of party having greater bargaining power. b. Even though successful for previous client, may not be successful in diff. transaction. 5. Punctuation, Paragraphs, and Headings - Helping the Reader a. Punctuation promotes meaning and buttresses intent. b. New paragraph means diff. obligation. c. Headings are intended as visual aids. Usu. do not imply more or less than provision itself and thus, may insert caveat. 6. Miscellaneous a. Reach more than named parties? b. Can party assign its position to someone else? c. Duration of agreement? Extention or renewal? Terminated prior to end of term? d. Time of performance = essence of K? Insert force majeure clause in case superior force outside control of parties happens? e. Collect signatures? 7. Style and Draftsmanship a. Don't use elegant, stylistic writing. b. Repeat same exact terms if same intent. c. Use established terms (old over new). d. The legal document is designed to fit the wearer, not flatter the tailor. C. Planning and Drafting for Performance 1. Lawyers usu. have little expertise. 2. Nonlawyers perform many of the same functions II. A. B. 3. D. Lawyers must engage in fact finding -- determine general objective of client and how client proposes to realize objectives. Rely on client and his notes, memos, letters, financial position of client and other party, general mkt conditions, and experts. 4. Prob. 4-1. Draft defining Harold's duties of perf as to quantity, price 4-1. and K duration. a. Cost of machines and how to allocate costs to plates or up front payment b. Maintenance costs of machines. c. Storage costs for completed plates. d. Diff of costs from 5,000 plates to 11,000 plates. e. Ask if Harold is solvent. f. Ask about other oppties. g. Likely demand for Harold's product. h. Risk planning = insurance for fire, workers comp, liqudated damages i. Termination of agreement; duration 5. Weistart, Requirements and Output Ks: Quantity Variations Under UCC. Select design, e.g., Requirements Contract --Seller agrees to supply buyer's requirements for design, goods and buyer agrees to take all of its requirements from seller. a. Incentives for Buyer i. Allows buyer to adjust his intake to fluctuations in mkts. ii. Shift risk to seller; market contraction or expansion iii. Ensure constant supply. -greater control over production schedule. -enhance predictability of cost iv. Save time b/c less search for new supplier. b. Incentives for Seller i. Can bargain selling price greater than mkt price. ii. Save time b/c less search for new business. iii. Can be predictable demand. 6. Prob 4-2, p.351. Best req clause is req buyer to buy stated minimum plus any other req above minimum. Must also have cap if incapable of producing greater than certain amt. 7. Seller is entitled to recover under Req K if K imposed upon Buyer duty to (1) buy his gas exclusively from seller and (2) conduct his business in good faith and fair dealing so that his req would approximate reasonably foreseeable figure as stated in K. Stacks v. F&S Petroleum Co. (Ark 1982), p.351 a. D's args: Indefiniteness; Lack of mutuality; Lack of termination clause Planning and Drafting Against Risks: Identify possible risks and prevent them from causing Risks: breakdown of agreement. 1. Ensure that K satisfies all requirements of legal validity, both substantive and formal. 2. Include clause allocating risk that arises from violation of law (local, state, federal). 3. Include clause to take advantage of tax benefits, and to allocate tax burden to other party. 4. Include indemnity clause if loss to third parties. 5. Include force majeure clause to allocate risk of occurrence to one party or provide insurance. 6. Include clause re: providing for some mode of dispute resolution, e.g., arbitration. 7. Liquidated damages provision or self-help remedies. 8. Include termination clause, e.g., death during lease term. Agreement locks parties. 9. Responsibility of Negotiator a. Find opponent's settling point. (Negotiators frequently assume opponent's settling point is higher). b. Don't reveal own settling point. c. III. 1. 2. a. b. c. d. e. f. g. 3. Change opponent's position and convince him that his case has lower value than he has put on it. d. 4. 5. 6. 7. SECTION THREE: THE LIMITS OF PLANNING, pp. 358-360. PLANNING, Time constraints Costs of investigation may be too high client's willingness or ability to pay cost of conducting an investigation probability that investigation will yield any relevant info that lawyer does not already know importance of info being sought frequency with which instrument being drafted will be used extent to which lawyer can reasonably rely on his client to know and inform him of fact that an indep. investigation would uncover extent of lawyer's experience w/ the particular subject matter involved and w/ particular client Sources for investigation a. Client b. Notes, memos, or other writing possessed by client c. Textbooks dealing with subject matter in q Persons who are specialists in field e. Treatises and law review articles Language limits: words may be unavailable to express with precision. Human mind is unable to foresee future, esp. with rapidly changing technological society. Parties are sometimes simply unable to agree on issue. Some parties prefer the ambiguous document to be later resolved. E.g., define "two years." IV. A. SECTION FOUR: THE NATURE OF ASSENT, pp.361-385. ASSENT, Objective Theory of K Formation -- B/c neither contracting parties nor cts are mind-readers, the existence and terms of Ks are determined from manifestations made by each of the parties, rather than by each party's subjective intention. Thus a party's intention are to be gauged objectively, rather than subjectively. Test of Intent -- Party intended what a reasonable objectively, person in position of other party would conclude that his objective manifestations of intent meant. Corollary -- Parties' secret intentions (that is, hidden from other party) are irrelevant in determining whether K exists, and what its terms are. Ct. judges intention by outward expression. Embry v. Hargadine, McKittrick Dry Goods Co. (Miss 1907), expression. p.361 (EE tells ER that unless his K is renewed he will quit. ER says not to worry and go back to work. EE thinking that his K has been renewed goes back to work and makes no effort to find another job. Two months later, co. fires him and he sues ER. ER says he did not intend to create K w/his words.) 1. Note that judge decided here b/c reasonable jurors could not differ. 2. Hotchkiss v. National City Bank of NY (1911), p.364. L. Hand A K has, strictly speaking, nothing to do with the personal, or individual, intent. 3. Whittier, p.373 Whittier, Instead of A/C, should theory have been tort, for careless use of language? Liability for carelessly misleading other party into reasonable belief of assent might well have held to be in tort. To hold one for the merely careless use of language which causes no damage whatever to the party to whom the language is addressed is certainly inconsistent with principles generally applied. (No reliance or damage => nominal recovery) Business Agreement -- Where transaction is one which would normally be considered a "business" transaction, it will be presumed that parties intended the agreement to be legally enforceable. Contract made in jest -- Thus in a business context, even if one party makes an offer in jest, and the other party reasonably believes that he is serious, and seriously accepts that offer, K will be binding. Lucy v. Zehmer (Va 1954), p.365 (P offers Ds $50,000 for farm. Ds write one-line statement and sign it. Ds fail to go through w/agreement arg that they were drunk and only joking. "A person cannot set up that he was merely jesting when his conduct and words would warrant a reasonable person in believing that he intended a real agreement.") 1. Note that app ct makes review findings of fact "de novo" here b/c ct of equity => no jury. 2. Summers criticize b/c trial ct found conflict in testimony. Since trial ct saw witnesses and app ct just sees paper, trial ct's opinion should prevail. Eg, Evid supports trial ct's findings -- Agreement takes place in restaurant, both drunk, written on back of receipt. C. Domestic and Social Situations -- Where an agreement arises in a social or domestic situation, presumption is that legal relations are not intended. Balfour v. Balfour (Eng. 1919), p.375 (Husband promises while living amicably w/wife to pay certain monthly allowance to Wife. Couple later separates and wife sues for payments. Agreement is unenforceable b/c parties never intended to have legal consequences). If H and W were explicit that agreement was to be legally binding => legally binding. Summers' Rule: No K if customarily no K unless parties explicitly agree to valid K. Rule: B. 1. 2. D. Even if there is objective understanding of an option to w/ draw from K, does not mean there is no K w/ obligations. Tilbert v. Eagle Lock Co. (Conn 1933), p.376 1. D made 5 args -- Ct rejected. a. b. c. d. No consideration -- Benefit plan used to secure good will, loyalty and efficiency of D's employees. No manifestation of acceptance of arrangement -- P manifested acceptance by staying w/D for 7 yrs. No intention of K (customarily situation for K, but D explicitly said no K) -- To construe the promise (offer) acted on (accepted) by the employees as never having effect would constitute fraud which the record does not confirm. Notice was not necessary. 2. e. If notice was necessary, it was timely -- Entire day upon which K expires is open for compliance w/it. Corbin (1963), p.379: It should be noted that when the subject matter of an agreement is of a kind that is customarily dealt with in enforceable contracts, and the parties have contracts, in fact acted under the agreement, ct is likely to look with some distate at provisions that seem to exclude all sanction and remedy. Apply to D's arg #3. Rationale is based on reliance, PE. reliance, PE. E. ER's Statements of Policy is instinct w/ obligation and gives rise to contractual rts in employees w/o evidence that parties negotiated that the policy statements would create such contractual rts. ER was not obligated to issue such a policy, but when it did, there was consideration on the part of EE to support it. Toussaint v. Blue Cross & Blue Shield of Mich (Mich 1980), p.379 (ER discharged EE, and EE sues b/c relied on policy that said discharged only for "just cause.") 1. Restat. (Sec) of K, 211, Standardized Agreements. (Gap filler section) Agreements. (1) where a party to an agreement manifest assent to a writing and has reason to believe that like writings are regularly used to embody terms of agreements of the same type, he adopts the writing as an integrated agreement w/ respect to the terms type, included (2) Such a writing is interpreted whenever reasonable as treating alike all those similarly situated, w/o regard to their knowledge or understanding of the standardized terms Seller is liable to Buyer under written K in which S mistakenly indicates he was selling larger quanitity than intended. The deal is accentuated by the fact that B reasonably acted in reliance upon the mistake. Cargill Commission v. Mowery (Kan. 1916), p.381 (Seller sent wrong message that he was selling 35,000 when he intended to sell only 3,500. Seller sent ltr correcting its error, but Buyer had already resold 35,000 bushels on mkt). 1. Objective Theory of K formulation holds even though there is a mistake! 2. Market shift reliance; the deal is done and B has the benfit of the bargain. Restatement (Sec) of K, 20: Effect of Misunderstanding. (1) There is no manifestation of mutual assent to an exchange if parties attach materially different meanings to their manifestations and (a) neither party knows or has reason to know the meaning attached by the other; or other; (b) each party knows or each party has reason to know the meaning attached by the other. (2) The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if (a) that party does not know of any diff meaning attached by the other, and the other knows the meaning attached by the first party; or party; (b) that party has no reason to know of any diff meaning attached by the other, and the other has reason to know the meaning attached by the first party. No mutual assent when parties attach materially different meanings to their manifestations and neither party has reason to know the meaning attached by the other (no meeting of (no the minds). Raffles v. Wichelhaus (Eng 1864) (great case), p.382 (Seller agrees to ship minds). cotton to Buyer on "Peerless" ship. Neither knew there were two "Peerless" ships. Seller intended goods to arrive on Oct ship and Buyer intended goods to arrive on Dec ship). 1. Distinguish from Embry - "Go ahead, you'er all right." has objective meaning 2. Distinguish from Cargill. 35,000 has one objective meaning. Cargill. F. G. H. 3. I. Hypo: Suppose Buyer did not know about Dec. Peerless, but Seller knew. K? => K on Oct Peerless under 20(2)(a). 20(2)(a). K requires only notice of acceptance if the buyer clearly discloses to seller that he understood K to req only notice of acceptance and seller did not indicate otherwise. Dickey v. Hurd (1st Cir. 1929), p.384 (Seller offered to sell land and gave Buyer until July 18 "to accept this offer." Buyer clearly disclosed his understanding to Seller that "accept" meant to give "answer", and not pay purchase price. It was Seller's duty to inform Buyer if interpretation was wrong). 1. 20(2)(b) -- Buyer does not know of any diff meaning except notice of acceptance, and seller has reason to know that buyer attaches this meaning to offer => Buyer's meaning controls. 2. Ct looks to objectively construe Seller's ltr first. V. SECTION FIVE: THE OFFER, pp.385-395. OFFER, Corbin on K (1963): An offer is an expression by one party of his assent to certain definite terms, terms, provided that the other party involved in the bargaining transaction will likewise express his assent to the identically same terms. terms. Restatement (Sec) of K, 24. the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude [the bargain]. A. Reluctance to find K -- If the existence of an offer presents a close question, ct will generally find that there was not an offer. Whereas once a K has been found to exist, cts will be quite offer. willing to supplement the actual terms with provisions on which the parties have not explicitly agreed, they are much less willing to take liberties w/language of what is asserted to be an offer. A person should not be found to have taken the significant step of creating a power of acceptance unless he quite clearly made a commitment. Courteen Seed v. Abraham (Or 1929), p.385 (D wires P, " asking 23/lb for a car of clover seed from which your sample was taken. practically no plantain Have an offer of 22 3/4/lb, f.o.b. Amity" P replies, "We accept your offer. Ship promptly ") 1. Summers says judge was wrong in deciding "no offer" b/c judge only looked at particular language of offer and not offer w/in context. P requested, "Wire firm offer." 2. Court's rationale in not finding an "offer" a. Seller used general advertising language in his telegram. b. S mailed out samples to many potential buyers, not just P. c. "I am asking" is not an express offer to sell but merely an invitation to negotiate. 3. Feldman v. Green (1984), p.387 -- "Contractual intent cannot be based exclusively on formalisms." Objective Theory of K Formulation -- Manifestation of intent is controlling, rather than a person's actual intent. D's letter was an offer to sell if the circumstances surrounding the ltr would have led a reasonable person to believe that D was making an offer to sell to P. Southworth v. Oliver (Or 1978), p.387 (Offeror asked offeree if interested in buying ranch and subseq sent him ltr re: sale of ranch). 1. Ct's rationale for "offer" a. Ltr is not out of blue since P and D have previously talked. b. Offeror sought offeree. c. Definiteness of proposal (price, terms, addressee). 2. App ct is fact-finding "de novo" b/c suit in equity. 3. Evid showing ltr is not an offer. a. "I am selling . . ." b. Ltr describes lots of things he's selling, not just particular ranch. c. P accepts only one of many things described. d. Merely a quote, providing information. quote, e. Made to more than one party and P knew this. Mere advertisement. f. Only one can accept D's offer. g. Presence of open terms. terms. h. D uses term "negotiating" as if still doing it. 4. Summers thinks this is close case. However, it seems that ct should be more sure w/such a drastic remedy (specific performance). B. 1. 2. 3. 4. 5. 6. C. Use of term "quote" may mean that it is less likely an offer will be found, whereas use of term "offer" may mean it is more likely that a formal offer will be found. However, this is not dispositive if other factors indicate that the person receiving the quotation is empowered to close the deal. Fairmount Glass Works v. Grunden-Martin Woodenware Co (Ky 1899), p.392 (B writes to S, asking for "lowest price you can make on our order for ten car loads" of Mason jars. S writes back, "We loads" quote you . . . for immediate acceptance." B writes back, "Enter order 10 carloads as per your quotation." S declines order, and B sues. S's use of phrase "for immed acceptance" must have meant that B was empowered to book order immed, w/o further approval by S. Thus quotation was an offer). Offeree asks offeror to state an offer. Hypo: Suppose B said, "Enter 20 carloads" => No K b/c initial request for "lowest price" is Hypo: for 10 carloads. S arg that B changed terms of agreement by requesting for "strictly first-quality goods." Ct rejects and says goods are implied to be first-quality in commercial transactions. transactions. Hypo: Suppose B specified 10 carloads of pints and never bf ordered all of one kind from S Hypo: before => K b/c B can designate types he wants. Hypo: Suppose B ordered only 5 carloads => No K b/c requested 10 carloads initially. Hypo: Prices may be higher since fewer quantity. S quoted prices for 10 carloads. UCC 2-204(3) - Even though one or more terms are left open a K for sale does not fail for indefiniteness if the parties have intended to make a K and there is a reasonably certain basis for giving an appropriate remedy. VI. SECTION SIX: THE ACCEPTANCE, pp.395-407. ACCEPTANCE, Corbin, Offer and Acceptance, and Some of the Resulting Legal Relations, p.395. Relations, An acceptance is a voluntary act of the offeree whereby he exercises the power conferred upon him by the offer, and thereby creates a K. Offeror is creator of power and at time of its creation has has full control over both fact of its existence and its terms. Offeror, in the beginning, has full power to determine acts terms. that are to constitute an acceptance. [Offeror] may be disabled to change or revoke it; [the] power, is the characteristic that distinguishes contractual relations from non-contractual ones. Aft offeror has created the power, the legal consequences thereof are out of his hands, and he may be brought into many unforeseen conseq relations. *Mirror-Image Rule. Acceptance must be mirror-image of offer; a meeting of the minds. Rule. A. An "acceptance" is invalid if it is qualified by conditions indicating that Buyer will not accept offer w/o these conditions. An acceptance w/conditions may be valid if B is explicit that he would accept offer anyway w/o them. Ardente v. Horan (RI 1976), p.396 (B accepted offer of house w/ltr and also seeking "confirmation" that house would include certain items as part of transaction indicating difficulty in finding replacements.) 1. How far do we carry mirror-image rule? Suppose we had $250,000 land and offeree said rule? must include old lawn chair. K? NO b/c even though chair is only little tiny crack in mirror, it must be all or nothing. Rule is carried to extreme b/c slippery slope. Certainty is imp in K. People need to know if their in or out. K. 2. Hypo: Suppose S refuses B's counteroffer, then B says, "OK, I accept your original offer." Hypo: K? NO b/c counteroffer kills orig offer. Uncertainty is present if you allow B to subseq accept offer. S may want to go elsewhere to sell. 3. No mirror-image: Offer = land Acceptance = land + furniture Mirror-Image Rule even extends to procedure of K formation (mode of acceptance itself). An offer imposes no obligation on offeror until accepted by offeree, according to terms in which offer was made. Any departure from those terms invalidates offer, unless offeror agreed to departure. Eliason v. Henshaw (S.C. 1819), p.398 (B says it wants to buy flour and needs response by return of wagon to Harper's Ferry. S sent by mail to Georgetown.) 1. Place -- Offeree did not send acceptance ltr to place designated by offeror. Buyers may offeror. want to receive acceptances at location of purchasing operations for convenience. 2. Time -- Wanted response by "return of wagon", probably wanted it next day. 3. Mode of Acceptance -- Offeree sent by post and not by wagon. 4. Hypo: Suppose offeror says "You can send your acceptance by return of wagon to Hypo: Georgetown or Harper's Ferry" => No K b/c req of "return of wagon" still there. 5. UCC 2-206(1)(a). (1) Unless otherwise unambiguously indicated by language or 2-206(1)(a). circumstances, an offer to make a K shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances. Restat. (Sec) of K, 32: Invitation of Promise or Performance. In case of doubt an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance, as the offeree chooses. B. C. 1. 2. 3. D. If an offer is not clear whether acceptance is by promise or performance, an offeree, at his option, may accept either by promising to perform or by performing. An acceptance occurs when offeree begins to perform. Allied Steel v. Ford (6th Cir. 1960), p.401 (Ct held that the signing and returning of acknowledgment copy for acceptance was merely a suggested method of acceptance and that offeree's acceptance by commencing performance was valid form of acceptance). Summers criticizes opinion. Restat. 32 & 62. offeree accepts when he starts to perform, and becomes bound to 62. perform. i. Do not confuse this w/ 45, which requires a unilateral K, and thus only the offeror becomes temporarily bound until complete performance. If Ford was the D, it would also be bound a second way if there was complete performance. i. Prior dealing may make acceptance by silence reasonable. ii. Acceptance of services where an offeree has an opportunity to reject. iii. Reason to know or implied acceptance E. Builder's purchase of materials and commencement of work was not a valid acceptance though his actions were in line w/ industry customs if he gave no other indication, as requested, to offeror of acceptance. White v. Corlies (NY 1871), p.404 (Offeror wrote "Upon an agreement to finish . . . in two weeks, you can begin at once. Writer will call again, prob btwn 5 and 6 p.m.") Ducommun v. Johnson (Iwoa 1961), p.406: "It is a general rule of law that silence and inaction do not amt to an acceptance of an offer." offer." Prob 4-11, p.406. Record co. sends unordered c.d. and requests payment of $21. A listens to c.d. 4-11, and puts it aside not liking it. 1. Restat. (Second) of K, 69: Acceptance by Silence or Exercise of Dominion. (1) Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only: (a) Where an offeree takes the benefit of the offered services w/reasonable oppty to reject them and reason to know that they were offered w/expectation of compensation. (b) Where offeror has stated or given offeree reason to understand that assent may be manifested by silence or inaction, and offeree in remaining silent and inactive intends to accept the offer. (c) Where b/c of previous dealings or otherwise, it is reasonable that offeree should notify offeror if he does not intend to accept. 2. 39 USC 3009 (1982): Mailing of Unordered Merchandise. F. G. VII. SECTION SEVEN: DURATION OF OFFERS, pp.407-458. Restatement (Sec) of K, 36: Methods of Termination of the Power of Acceptance. (1) An offeree's power of acceptance may be terminated by: (a) rejection or counter-offer by offeree, or (b) lapse of time, or (c) revocation by the offeror, or (d) death or incapacity of the offeror or offeree. (2) In addition, an offeree's power of acceptance is terminated by the non-occurrence of any condition of acceptance under the terms of the offer. A. Lapse of Time -- B/c offeror is "master of the offer" he can set a time limit for acceptance. At end of this time limit, offeree's power of acceptance automatically terminates. Direct Negotiations -- When parties are bargaining face-to-face or over the telephone, the power of acceptance continues only during the conversation, unless the parties' words or actions conversation, indicate that they intend the power of acceptance to continue. Akers v. Sedberry (TN 1955), p.408 (During face-to-face meeting, P offer to resign on 90-days' notice. D makes no response to this offer, and continues discussing business. Several days aft meeting, D sends telegrams to P stating that resignation is accepted.) 1. Rejection -- D rejected offer by not responding to P's offer and continuing w/rest of discussion. 2. Lapse of Time - Offer made during face-to-face conversation last until close of conversation, and cannot be accepted thereafter unless evid that offeror intended offer to last. 3. Hypo: Suppose D said, "I'll take these under consideration." and P said "Offer is good until : Hypo close of conversation," and D sends acceptance few days later. Offer? NO b/c offeree does not have unilateral power to extend offer. offer. 4. Hypo: Suppose she said, "I'll pay you to keep offer open." => A/C. Hypo: 5. Part performance could be manifestation of acceptance by some appropriate act, even if parties are not together. See White. Hypo: Suppose offeror says, "I would like White. Hypo: you to plow my 40 acres, and if you do it all, you can start rt now." Offeree begins perf. K? YES. Hypo distinguished from White, b/c in White, ltr said "writer will White, White, call btwn 5 and 6 p.m." infers that offeror wants acceptance by phone. 6. Distinction btwn Ford and White: Ford knew Allied started perf. and implicitly asseted. White: 7. Offeror has a right to rely on answer, though reliance is not required. P did not go out and look for another job. Duration of an offer sent by mail is measured from time offer is received by offeree, and not offeree, time offer is dated/sent, unless offeror has otherwise specified. Caldwell v. Cline (WV 1930), p.417 (Offeror made offer on Jan. 29 and said you have 8 days to accept. Offeree receives ltr on Feb. 2 and accepts by telegram on Feb. 8 (thinking he has until Feb. 10). Offeror receives acceptance on Feb. 9, but declines to perform b/c was expecting acceptance on Feb. 6. Offeree wins b/c dated from time offeree received offer). 1. Delay in Transmission: Where written offer is delayed in transmission and offer lists a time Transmission: period, start of period is determined as follows: a. Obvious delay: If the delay in transmission is apparent to the offeree (as by date of delay: ltr, postmark, or a statement by the messenger), period starts to run when offer would have been received had there been no delay. b. Non-obvious delay: If the delay is not evid to offeree, period starts to run on his delay: actual receipt. Hypo: Suppose offer was mishandled by post and it arrives at offeree on Feb. 7. Offeree knows ltr Hypo: dated Jan. 29, thus offeree has only 3 days based on if post was normal. B. C. Counter-Offers do not kill offers if offeree simultaneously manifests an intention to accept original offer. Collins v. Thompson (9th Cir. 1982), p.418 (Inmates move for either Mar. 1 approval or Aprl 1 decree manifests an intention to a reas person that inmates would settle even if date were Apr 1). Where offeree learns of offer made to third party -- Indirect revocation when offeree learns that offeror has taken a definite step inconsistent w/proposed K, as by selling land in question to another. But mere fact that offeror has entered into negotiations with third person, or even that he has made an offer to a third person, is not sufficient to constitute a revocation when the orig offeree learns of it. Exception -- Dickinson v. Dodds (Eng 1876), p.420 (Offeree heard that offeror "had been offering or agreeing to sell property to third party". Offeree immed sent his acceptance, but offeror told him offer was revoked.) 1. Note: The Offeror's Power to Revoke, pp. 420-421. Revoke, a. Dickinson approach still followed today. today. i. Representation that offer will remain open is bare promise, unsupp. by consid and thus unenforceable. ii. Old theory = wills of parties must concur when making K. b. K law moved to direction of cts. barring revocation of offers. c. Restatement -- revocation must be received bf offeree's power of acceptance is terminated. terminated. i. Exception -- Shuey v. US (1875): Offer of reward and revocation were published. P performed but not entitled to recover b/c revoc. was effective. (1) Revoc. same notoriety as offer; (2) Offer was not made directly to P; (3) P should have known revoked by same method as offer. ii. Distinction btwn Shuey and Dickinson: In Shuey, public offer made Dickinson: Shuey, through newspapers. Restat. (Sec) of K, 87(1): Option K. An offer is binding as an option K if it K. (a) is in writing and signed by offeror, recites a purported consid for making of the offer, and proposes an exchange on fair terms within reasonable time; or [Look for these 4 reqs time; [Look on exam!] exam!] D. E. (b) is made irrevocable by statute. Comment (b) Nominal consideration. Cts do not ordinarily inquire into consideration. adequacy of consid. A comparatively small payment may furnish consid for consid. irrevocability of an offer proposing transaction involving much larger sums. But gross disproportion btwn payment and value of option commonly indicates that payment was not in fact bargained for but was a mere formality or pretense. In such a case there is no consideration Nonetheless, a nominal consid is sufficient to support a short-time option proposing an exchange on fair terms. UCC 2-205: Firm Offers. An offer by merchant to buy or sell goods in a signed writing which Offers. by its terms gives assurance that it will be held open is not revocable, for lack of consid, during time stated or if not time is stated for a reasonable time, but in no event may period exceed 3 months. F. Any money consid, however small, paid and received for an option to purchase property at its adequate value is binding upon seller thereof for time specified, and is irrevocable for want of its adequacy. Marsh v. Lott (Ca 1908), p.421 (Offeror gave option to offeree for 25 cents to consider purchasing property by June 1 w/ privilege of 30 days extension. June 1, offeree elected to extend option and on June 2, offeror revokes option. Option is irrevocable b/c fulfills 4 reqs: (1) in writing, (2) signed by offeror, (3) recites purported consid for option, and (4) proposes an exchange on fair terms within reasonable time). Rejection of an option purchased for a valuable consideration does not terminate rts of option holder unless optionor has materially changed his position (suffer a legal detriment) prior to timely acceptance. Ryder v. Wescoat (Missouri 1976), p.424 (Offeror, for a valuable consid, gave option to offeree to purchase farm by Sep. 1. On Aug 20, offeree said it was going to "pass" on the option. Offeror talked w/ bank and bulldozer operator and arranged for liming. On Aug 30, offeree agreed to purchase farm). 1. Remedy = specific performance. Offer for a unilateral K can only be accepted by performance. Offer for bilateral K can be accepted by a promise. If case is too vague to determine which K, must look to intent of offer and surrounding facts and circumstances. There is presumption that offer is to enter into a bilateral K. Davis v. Jacoby (Ca 1934) (great case), p.426 (Uncle asked niece and husband to come and help w/ business and dying wife for consid of inheriting everything. Couple promised they would come, did come (aft uncle's suicide) and fully performed uncle's request). 1. Ct is finding fact de novo b/c specific performance. 2. Evid of bilateral K. Uncle wanted piece of mind, assurance. K. 3. Wormser (1916), pp. 431-432 -- A unilateral K is created when the act is done. Thus, , (1916) done. offeror can revoke its offer at any time b/c neither party is bound until act is done. Eg, Brooklyn Bridge. Summers eg., "I will pay you $500 if you give me infor on stealer of my pet chipmunk." P has to give info to make K. 4. Hypo: Suppose couple closed business in Canada and had taken all kinds of irrevocable steps. Would this have any bearing at all? Look at next three cases. In a unilateral K, is part performance enough to bind offeror? YES, if offeree began performance explicitly requested by offeror and not merely preparations to actual perf. Restat. 45, 62, 87 Restat. (Sec) of K, 45: Option K Created by Part Performance or Tender. (1) Where an offer invites an offeree to accept by rendering a performnace and does not invite a promissory acceptance, an option K is created when offeree tenders or begins the invited performance or tenders a beginning of it. G. H. I. (2) The offeror's duty of performance under any option K so created is conditional on competion or tender of the invited performance in accordance w/terms of the offer. Comment (a) Offer limited to acceptance by performance only. Limited to cases where offer does not invite promissory acceptance. Such an offer has often been referred to as an "offer for a unilateral K." J. Offeror's duty conditional upon complete performance by offeree -- Although in this unilateral K situation, beginning of performance by offeree makes offer irrevocable, offeror's duty under K is conditional on offeree's completing performance as specified in offer. Brackenbury v. Hodgkin (Me 1917), p.433 (Mrs. Hodgkin asked daughter and husband to leave their home, come live w/her, and take care of her until she dies in consid for inheriting place when she dies. When couple moved in, they fought w/mother and mother tried to evict them. No K exists until couple completes peformance asked for in Mrs. H's offer. However, b/c couple has begun perf, H is bound by option K, and her offer is irrevocable as long as perf, couple continues to perform. Couple is not bound by K, and may cease performance whenever they wish (thus declining to exercise their option)). PE theory. 1. Wormser (1916), pp. 431-432 (1916), A unilateral K is created when the act is done. Thus, offeror can revoke its offer at any time done. b/c neither party is bound until act is done. Eg, Brooklyn Bridge. 2. Restatement (First), 45 (1932), pp. 434-435. (First), If an offer for a unilateral K is made, and part of the consid. req. in the offer is given or tendered by the offeree in response thereto, the offeror is bound by K, duty of K, immed. performance of which is condition on the full consideration being given or tendered within the time stated in the offer, or, if no time is stated therein, within a reasonable time. 3. Questions, p.435. #1 1916 Wormser -- Mrs. Hodgkin can revoke offer b/c Ps have not fully performed yet (she has not died, and offer was care "for life"). 1932 Restat.(First) -- Brackenburys' part performance binds Mrs. H to K. But Bs can leave at any time. Restat. (Sec) -- Valid option K has been created between parties. Thus, Mrs. H is bound by the option K, and her offer is irrevocable as long as the Brackenburys continue to perform. Brackenburys are not bound by any K, and may cease performance whenever they wish (thus declining to exercise their option). The two Restatements seem the same. Offeror can revoke offer of unilateral K bf offeree has begun performance. Performance does not include preliminary preparations that are not explicitly called for by the offer. Petterson v. Pattberg (NY 1928), p.435 (Offeree goes to offeror and says, "I have come to pay off mortgage" = only preliminary preparation. Offeror then says, "I revoke." Offeror can revoke b/c offeree has not begun performance actually requested by offer = payment/tender of money.) 1. Summer's criticizes ct's rationale. 2. Court's rationale [Kellogg]: a. Williston: If offeror can say, "I revoke," before the offeree accepts, offer is terminated. Williston: b. No formal notice is needed to revoke an offer. It is sufficient that offeree had offer. knowledge that the offeror has done some act inconsistent with the continuance of the offer. See Dickinson v. Dodds. Dodds. c. Dicta: If offeree actually accepted bf revocation, offeror can still revoke offer b/c the act Dicta: requested to be performed was the completed act of payment, a thing incapable payment, of performance, unless assented to by the person to be paid. paid. 3. Dissent [Lehman]: K. 4. 5. 6. L. a. Williston: P could not perform b/c D refused to accept payment. Since D caused P's Williston: failure to perform, he cannot take advantage of the failure. failure. b. D expressly said: "I agree to accept payment." Thus, D could not have intended to reserve the rt to refuse payment. c. Offer to pay is as good as formal tender here, b/c P has done the act which D requested as consid = P offered to pay, with present intention and ability to make that payment. Did the court cut D a break because of other facts? p.439 "Tender" payment only means to show he has money in hand and is ready to transfer it. PE theory, 87(2), b/c P relied on D keeping promise. Same damages under PE and A/C. Issuance of credit card is not a valid K since offeror extends line of credit unilaterally and it's offer is not supported by consideration. Garber v. Harris Trust & Sav. Bank (Ill 1982), p.440 (P arg that cardholder agreements are binding Ks to continue to extend credit on same terms. D arg that each use of credit card constitutes separate K, and D can terminate and modify terms of offer anytime). 1. Summers' criticizes ct rationale. Gives own subst reasons. a. What's really being bargained for is future business. b. If you lock credit card cos. to same terms, then they may start at artificially high fee. Cos. need flexibility to modify terms acc to fluctuations of prime rate. James Baird Co. v. Gimbel Bros (2d Cir. Hand opinion 1933) (great opinion), p.443 (Subcontractor offer: "If successful in being awarded this K, it will be absolutely guaranteed, and we are offering these prices for reasonable, prompt acceptance aft general K has been awarded. Contractor stuck in these prices in its bid. Subc revocation was received bf award. award. Contractor won and expected subc to provide linoleum at stated price). 1. Hand's rationale a. P wanted acceptance, and acceptance does not mean D putting in prices into its bid. b. Rejects PE theory b/c confined to charitable promises. No binding promise of an irrevocable offer. c. Offer is not meant to become a promise until consid has been received. Thus, it's premature to rely on offer. if you do rely on offer, you do it at your own risk. d. Not an option K b/c no evid that subc meant to subject itself to such one-sided oblig. Drennan v. Star Paving Co. (Ca 1958), p.445 (Sub submits written offer of paving to Contractor. Since its bid is lowest, contr uses it and wins K. Sub then notifies contractor that bid was too low b/c of an error. Contr justifiably and substantially relied upon sub's offer, sub's offer was irrevocable until Contr had reasonable chance to notify sub of award and of Contr's acceptance of subc's bid.) 1. Restat. PE 90 -- D had reason to expect if its bid proved the lowest it would by used by P. a. Classical theory that D can revoke any time bf P completes performance is obsolete. b. Purpose of restat 90 is to make a promise binding even though there was no consid c. Subcontractor was motivated by its own business interest. interest. d. Contr. had no reason to know that subc. price = mistake; was a reasonable mistake; price. i. Subc.'s mistake misled Contr.'s as to cost of paving. e. Contractor is not free to dely acceptance after award of K 2. Restatement (Second) of K, 87(2), p.451. 87(2), An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree bf acceptance and which does M. N. 3. induce such action/forbearance is binding as an option contract to the extent necessary to avoid injustice. Contractor was not accepting sub's price bf using in bid b/c a. Lose last-minute low bids. b. After being awarded K, may even get lower bids. c. Need to verify bid and quality after award VIII. SECTION EIGHT: BARGAINING AT A DISTANCE, pp. 458-464. DISTANCE, A. Mailbox Rule -- Acceptance is effective upon proper dispatch. Eg, deposit of ltr of acceptance in mailbox will cause acceptance to become effective. Adams v. Lindsell (Eng. 1818) (great case), p.458 (A sends B letter offering to sell him wool. Ltr of offer is delayed in the mails. Upon receipt of offer, B mails an acceptance. Aft B has mailed acceptance, but bf A receives it, A sells wool to someone else. There is binding K btwn A and B. Offer lasted for "reasonable time" and B's acceptance became effective when he mailed it => K was formed). *1. Authorized format -- If offer arrives by mail, infer that one can send acceptance by mail. Offeror bears the risk since he can choose the method of response. 2. Easier to prove time of accept -- Postmark v. evid of when offeror received acceptance. 3. Good just to have rule -- People will know where they stand. Offeree cannot repudiate acceptance if he already mailed acceptance. Morrison v. Thoelke (Fl 1963), p.460 (An offeree cannot repudiate an acceptance he already mailed, b/c it would be unfair that the offeror is bound when acceptance is sent, but offeree is not bound. This is not an option K). 1. Hypo: Suppose Mon -- S makes offer to sell widgets to B. Hypo: Tues -- S sends revocation of offer by mail to B. Wed -- B receives offer puts acceptance in mail on Wed aft. Thur -- B receives revocation, phones S and says my acceptance is on way, thus I've got a K. S says no, I've revoked. Issue = Whether revocation of offer is valid at time it's mailed or time it's received or some other time. Most cts say revocation is not effective until time. receipt. General Rule = Acceptance effective on dispatch. Revocation effective on receipt. C. Offeror can define mode of acceptance, diff from mailbox rule, eg, acceptance is not available until receipt. Lewis v. Browning (Ma 1881), p.460 (Offeror has power to define terms of K. Thus, if offeror in his offer specifically wanted an actual communication of acceptance, and not just acceptance by post, then acceptance must be by communic. to be valid. Eg, "Telegraph me yes or no. If I do not hear from you by the 18th or 20th, I shall conclude no.") Mailing of req notice to exercise an option is a valid acceptance by optionee and thus binding on optionor, if optionor did not specificy otherwise. This is true even if optioner never received notice. Worms v. Burgess (Ok 1980), p.461 (Optionor made offer to optionee which req "notice [of acceptance] by registered mail on or bf Aug. 21, 1977." On Aug. 20, optionee dispatched req notice, but optionor never received it. 1. Mailbox Rule = Acceptance is effective when deposited in the mail. In negotiations mail. by mail, one party must be in the dark about its contractual relations during the period of transmission. It imposes this uncertainty on the offeror. This risk allocation is reasonable b/c offeror can shift this risk by requiring receipt of acceptance when he makes an offer. 2. Criticisms of mailbox rule, esp for option ks. a. Restatement 64 = Unless the offer provides otherwise, an acceptance under an option K is not operative until received by the offeror. Rationale is b/c since an offer in an option K is irrevocable, no need for protection for offeree against revocation while his acceptance is in transit. b. Corbin B. D. 3. Apply mailbox rule to acceptance of option K. a. Statute = Consent is deemed to be fully communicated btwn parties as soon as the party accepting the proposal has put his acceptance in the course of . b. Dispatch rule is so widely recognized that most parties understand that timely dispatch is enough for acceptance. c. Risk that someone will not know when new K for a while, but this is the risk of parties' willingness to deal by mail. d. Risk of nondelivery should be borne by optionor b/c best comports w/ intent of parties and dispatch rule. IX. SECTION NINE: AGREEMENTS TO AGREE AND RELATED MATTERS Background Principles: Principles: 1. These are basically preliminary agreements to facilitate future negotiation of the ultimate agreement. Parties may or may not intend to bind themselves to these agreements. 2. Cts may supply missing terms only if there is evid that parties intend to bind themselves in a K. 3. Rule is to look at the objective intent of the parties. Did parties have: a. Intent to have no legal obligation or effect. b. Intent to contract w/written memorial following. c. Intent to have enforceable preliminary agreement w/duty of good faith to consummate ultimate agreement. Theories: Theories: 1. Whitford (1985), p.470. a. There are two extreme types of K in the spectrum: relational and discrete. b. Relational Ks are agreed upon throughout ongoing relations w/no discrete moment where parties confirm meeting of minds. c. Discrete Ks are agreed upon at a moment in time. d. Treatment of relational Ks by classical K law is sometimes harsh. Needs some basis outside of classical K law to serve as reference in deciding on enforcement. 2. Restatement (Second) of K, 27: Existence of K Where written memorial is contemplated ., p.473. "Manifestations of assent that are in themselves sufficient to conclude K will not be prevented from so operating by the fact that parties also manifest an intention to prepare and adopt a written memorial thereof; but the circumstances may show that agreements are preliminary negotiations. Comment: K = if parties definitely agreed that they will do so, and that the final writing shall contain these provisions and no others, they have then concluded K. No K = if either party knows or has reason to know that the other party regards the agreement as incomplete until it has be reduced to final written form. How to determine K: K: 1. Extent of agreement on all terms. 2. Whether K is of type usually put in writing. 3. Whether it needs formal writing for full expression. 4. Whether it has few or many details. 5. Whether amt involved is lg or small. 6. Whether it is common or unusual K. 7. Whether a standard form of K is widely used in similar transactions. 8. Whether either party takes any action in prep. for performance during negotiations. 9. Are there express binding terms in the language UCC 2-204(3), p.489. "Even though one or more terms are left open a K for sale does not fail for 2-204(3), indefiniteness if the parties have intended to make a K and there is a reasonably certain basis for giving an appropriate remedy. Finding of an objective intent to K btwn parties is a factual issue for the trier of fact and not for the courts to decide in summary judgment. Arnold Palmer Golf Co. v. Fuqua Indus (6th Cir. 1975), p.465 (Ct said cannot grant s.j. re: intent to K b/c factual issue for jury. In dicta, ct said there was evid that parties intended to K in Memo Of Intent). 1. Three ways to state issue substantively a. As a matter of law, had parties entered in only an agreement to agree rather than a K? a. b. c. 3. A. b. c. As a matter of law, was contemplated final formal agreement required as condition there be a binding K or was it only to be a mere memorial? As a matter of law, had parties merely engaged in preliminary negotiations and not entered into binding K? 3. 4. 5. 2. Evid of K in MOI a. MOI contains all essential terms b. Unqualified language. c. Can interpret to mean intention only to "memorialize" agreement. d. D issued a press release. NB. MOI lawsuits are very rare b/c lawyers are pretty good. Does MOI satisfy factors. 1. Extent of agreement on terms. 2. Whether K is of type usu. in writing -- YES 3. Whether it needs formal writing for full expression. 4. Whether it has few or many details -- MANY 5. Whether amt is lg or small. 6. Whether it is common or unusual K -- COMMON 7. Whether a standard form of K is widely used in similar transactions -- NO 8. Party takes any action in prep. for performance during negotiations -- YES D bought stocks Did D break oblig to negotiate in good faith? Look at paragraph 10. D just calls up and just terminates. For an attempt to prove bad faith, an atty may resort to Bd of Director's minutes to show dishonest reason for getting out of agreement; past history of dealings, etc. Very little law in this are b/c just starting to evolve good faith remedies. a. Reliance damages b. Foregone opportunities B. Parties are bound to an agreement in which all the essential terms and conditions have been agreed upon, and the only remaining matter is an intention to prepare a written memorial of the agreement. Dohrman v. Sullivan (Ky 1949), p.471 (Seller sent formal sales K for purchasers to sign. K stated that S has "bargained and sold" described property to B for $10,250, and would sign them after B signed them). 1. Restatement 27 a. Even though no formal doc signed by both parties, K will not be prevented from an intention to adopt written memorial of K. Ct doesn't think offeror was clear that no K existed unless both signed. b. Analyze open terms to see if substantial. Seems that all key items were agreed upon. C. 1. Texaco v. Pennzoil (Tx 1987) (most infamous case in last 30 yrs of K law), p.474 "Tortious intereference w/ K" btwn Pennzoil and Getty. Tort used like in Mauldin and J'Aire. Restatement Def: "One who intentionally and improperly interferes J'Aire. w/performance of K (except K to marriage) btwn another and 3d person by inducing or otherwise causing 3d person not to perform K is subject to liab to the other for pecuniary loss resulting to the other from the failure of 3d person to perform K. Intentional means that D must have knowledge of K with which he's interfering. Not necessary that D appreciates legal significance of facts giving rise to K duty. If D knows those facts => liab, even though D believes K is not legally binding. Even if Texaco was advised by counsel (as it was) that P and G have not reached a binding K (only at agreement to agree, preliminary negotiations, MOI to bargain further), and even if T acted on advice, and advice was based on reasonable foundation => T is liable for billions of dollars if advice was wrong. Getty did not act as if it was bound. It contacted Texaco. It solicited further bids while preliminary negotiations continued. What kind of effect does this case have on bidding for assets where prel. agreements btwn S and prospective B? Other potential Bs will back off. 2. 3. 4. 5. Seems to be something wrong w/tort like this. T behaved like a shark. But G was eager to this. sell for more. Shouldn't G pay 1/2 of this judgment? a. Hood thinks G should pay for whole thing b/c best party to know whether there's K or not. b. Abolished tortious interference for marriage, maybe we should abolish here. Or at least have req that co. must consult attorney first and act on his advice. Rationale of finding K btwn P and G a. Indicative terms "will" (Summers says one of the weakest reasons he's ever heard of. Don't ever put on exam!) b. Paragraph of routine details. c. "Chiefly" used by ct suggests hedging. d. "Agreement in principle" e. Judge only looks at one factor, press release, even though very complex agreement. D. Parties did not intend to be bound when MOI has express language to possibility that negotiations might fail, and to a binding sales agreement to be completed at some future date. Arcadian Phosphates v. Arcadian Corp (2d Cir. 1989), p.482. 1. Is this a clearer case than Penzoil? Same test; different facts? Lease Renewal Provision in Tenant-Landlord Renewal Clauses is not enforceable if the clause contains no evid to bind parties to definite or calculabe rent (necessarily indefinite). Joseph Martin Deli v. Schumacher (NY 1981), p.486 (P sues for specific perf = renew at fair mkt value. Ct struck down renewal clause as being too indefinite.) 1. Rationale a. Clause contains no reference to formula or mkt value (flat rate w/ no reference to value may be considered a penalty) b. No evid that rent was to be fixed judicially or by 3d party. 2. Suppose landlord tells tenant to sue for money damages, instead of specific perf. Difficult for P b/c has to move, relocate, lose local customers, reputation. No remedy at law. 3. Cts have been reluctant to follow UCC 2-204(3) lead in supplying missing terms in cases of tenant-landlord renewal clauses and have done so only if there is evid that parties intend to K. Nevertheless, definiteness is not the "essence of K law." Weak K. rationale. 4. Requirement of definiteness poses a serious problem if highly relational exchanges are to be forced into mold of traditional K analysis. Farnsworth 5. Majority view of Not Enforcing Clauses a. Cts cannot make a K for party and cannot compel them to agree upon one since K depends on mutual agreement. b. Renewal clauses that are too indefinite necessarily fail b/c ct cannot supply missing terms which would be tantamount to judicial pressure to subvert liberty of K. 6. Dissent a. Renewal clasue is an inducement for tentant to rent place in 1st instance. Tenant bargained and paid consid for renewal clause. By not enforcing bargain, cts are unjustly allowing landlord to avoid allocation of risk. b. This clause does not fail for indefiniteness b/c it implies a reasonable rate of renewal fixable based on: i. Previous agreements: "may renew" "5 years" "annual rentals" Not a "mere agreement to agree" ii. Arbitrator iii. Fair Mkt value. c. Tenant has to forfeit a lot -- fixed place (deli) to suit its needs; good will built into business; improvements to property; LL has advantage. E. 7. If LL refused to renew at any rate => breach of good faith. X. SECTION TEN: LIMITS ON SCOPE OF TRADITIONAL OFFER-ACCEPTANCE ANALYSIS -- A SUMMARY, pp.489-492. K can be formed w/o identifiable sequence of offer and acceptance. SECTION ELEVEN: NON-JUDICIAL ADMINISTRATION OF K LAW, pp.492-497. Tenant says that offer = tenant signing and returning lease. LL sends counteroffer. Tenant withdrew offer (but didn't need to b/c counteroffer kills offer). SECTION TWELVE: INTRODUCTION TO K FORMATION IN FORM CONTRACT SETTING XI. XII. UCC 2-204(2). An agreement sufficient to constitute a K for sale may be found even though moment 2-204(2). of its making is undetermined. UCC 2-207: Addtl Terms in Acceptance or Confirmation. Confirmation. (1) |A| A definite and seasonable expression of acceptance or |A1| a written confirmation which is sent w/in a reasonable time operates as an acceptance even though it states terms addtional to or different from those offered or agreed upon, |B| unless acceptance is expressly made conditional on assent to the addtl or diff terms. (2) Addtional terms are to be construed as proposals for addition to K. Btwn merchants such terms become pt of K unless: unless: (a) offer expressly limits acceptance to terms of offer; (b) they materially alter it; or (c) notification of objection to them has already been given or is given within reasonable time aft notice of them is received. (3) |C| Conduct by both parties which recognize existence of K is suff to estab K for sale although writings of parties do not otherwise establish K. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together w/ any supplementary terms incorporated under any other provisions of this Act. A O + A in agreement + A that survive 2 + gap fillers B A counteroffer + gap fillers CTerms that agree + UCC gap fillers White and Summers, UCC (1988), p.499. White believes that if terms are diff => fall out. Summers disagrees and says if terms are diff => offeror's terms. Daitom, Inc. v. Pennwalt Corp. (Tenth Cir., 1984) p. 503. (1) Legal right (2) improper threat (3) inducing something would not choose (4) no legal remedy ...
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This note was uploaded on 02/12/2008 for the course LAW 5041 taught by Professor Summers during the Fall '07 term at Cornell.

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