contracts ii outline spring 2008

REMEDIES

BASIC PRINCIPLES

I. § 235. Effect Of Performance As Discharge And Of Non-Performance As Breach a. Full performance of a duty under a contract discharges the duty.b. When performance of a duty under a contract is due any non-performance is a breach.

II. Actionable Breaches. a. Failure to perform w/o justification at time agreed uponb. Repudiation of the promise or bargain

i. § 250. When A Statement Or An Act Is a Repudiation: (a) a statement indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach. (b) A voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach.

c. Bad faith in the form of preventing or hindering the other party's performance or failing to cooperateIII. Material and non-material breaches

a. Material breach : non-breaching party given option to suspend its performance or cancel contract and sue for damages. However, problem might be if this action is taken and court subsequently decides it was not a material breach. Then that suspension of performance or cancellation is a material breach.

i. § 241. Circumstances Significant In Determining Whether A Failure Is Material 1. Extent that injured will be deprived of the benefit which he reasonably expected;2. Extent that injured can be adequately compensated 3. Extent that failing party will suffer forfeiture4. likelihood that he can cure his failure, looking at all circumstances and any reasonable

assurances 5. extent that party is comporting with standards of good faith and fair dealing

b. Non-material breach , no option to cancel, but aggrieved party can recover. IV. Policies in getting breach remedies:

a. P must prove that breach was substantial cause of the loss complained of and the amount of the loss caused with reasonable certainty

b. Provable losses must have been reasonably foreseeable to D at time of contract formationc. Pl has “duty” to mitigate damages

V. Interest - In addition to compensatory damages, P can also recover interest of $ withheld and maybe costs of litigation. P cannot recover transaction costs (like attorney's fees or costs of delay) unless in agreement, or if a statute, etc.

VI.

REMEDIAL RESPONSES TO PROSPECTIVE BREACH OR INABILITY

I. Anticipatory Repudiation a. § 2-610. Anticipatory Repudiation . Repudiation of K when performance not yet due. Aggrieved party may

wait a reasonable time for performance or resort to a remedy even if they told the breaching party that they’re waiting for performance & have asked them to retract the repudiation.

b. § 2-611. Retraction of Anticipatory Repudiation . Can still retract until time of performance is due, unless other party has relied and changed their position (by cancelling, etc.). Retraction can be made in any way that clearly indicates to other party its intent, plus give assurances if justifiably demanded.

II. Right to cancel upon prospective breach

a. When promisor, by words or conduct, repudiates a performance not yet due under the agreed exchange. If both parties still have obligations under the K, remedies can be invoked before the time set or performance.

i. § 253. Effect Of A Repudiation As A Breach And On Other Party's Duties. Where there is repudiation before breach, this gives rise to a claim for damages for total breach. One party's repudiation of a duty to render performance discharges the other party's remaining duties to render performance.

b. Hochster v. De La Tour i. Facts: K for Pl to work for Df. Df repudiated (before Pl began). Pl sued before actual reach (time K

said that work would begin). Pl found another job.ii. Rule/Analysis : When a party clearly repudiates a material promise in advance, the other may treat

this as a breach immediately and can seek relief for breach without delay. Pl allowed to seek employment (w/o it being a breach itself) after Df repudiated b/c Pl is absolved from performance of the K. Pl mitigated damages by seeking other employment.

III. Right to Cancel upon prospective inability/Failure to give assurance a. If circumstances or the promisor's words or conduct create doubt that promisor will perform, but there is no

breach yet, the promisee may suspend performance and "demand adequate assurance" from the promisor i. § 2-609. Right to Adequate Assurance of Performance . If one party has reasonable insecurity that

other party will not be able to fulfill the K, they may in writing demand assurances of due performance, and until they receive it, they can suspend their own performance. If not rec’d within reasonable time (max 30 days), it’s a repudiation of the K.

ii. § 251. When A Failure To Give Assurance May Be Treated As a Repudiation . Same as UCC.iii. § 252. Effect Of Insolvency. Where the obligor's insolvency gives the obligee reasonable grounds to

believe that the obligor will commit a breach, the obligee may suspend any performance for which he has not already received the agreed exchange until he receives assurance in the form of performance itself, an offer of performance, or adequate security. (insolvency – not paying debts / bankruptcy)

iv. AMF, Inc. v. McDonald’s Corp. 1. Facts : Df has Ks with Pl to buy computers. Pl acting very irresponsible. Df doesn’t think they

can fulfill their needs, and cancels K. Pl sues.2. Rule/Analysis : Df allowed to cancel b/c they had reasonable insecurity that Pl couldn’t fulfill

K. Pl never gave assurances when they were demanded.

MEASURING & COMPENSATING LOSS RESULTING FROM BREACH

I. Expectation Damages –compensate the injured party for the benefit he would have received had the contract not been breached, minus any amount he would have spent in performance of the contract. Such damages must be proven with certainty, and may be measured by the contract price, loss in value, or lost profits.

II. Restitution Damages – compensates a party for the benefit conferred on the other party as a result of partial performance or reliance, and is aimed at preventing unjust enrichment.

a. Restitution damages may be measured by:i. the reasonable value of the benefit received in terms of what it would have cost to obtain such

benefit from another sourceii. the extent to which the value of the party's property has been increased or his other interests

advanced.III. Reliance Damages - compensate the injured party for expenses or loss incurred in reasonable reliance on the

contract that was breached. Reliance damages are only awarded when expectation damages cannot be proven, and may not exceed the anticipated benefit of the bargain.

IV. Sullivan v. O'Connor a. Facts: Plastic surgery gone bad. Dr. promised Pl she would look good (so able to bring breach of K

claim). Dr. found not liable for negligence.

b. Analysis : She is awarded reliance damages, including restitution and all other damages that flowed from the breach (including her psychological injuries). Goal is to put aggrieved party back into position as if no breach - and psychological damages are part of the equation.

i. Restitution - Giving the plaintiff back what she gave the defendant – costs of surgeryii. Reliance Damages - Putting the plaintiff in the position that she’d been in if she’d never entered

the contract. The whole difference in value between the promised and present conditions.1. the difference between what she has and what she’d have had if she’d not had the surgery,

and kept her average nose2. Pain/suffering/mental anguish – only awarded to the extent that it went beyond what was

expected per the K. Here, Pl entitled to recover for worsened condition, and pain, etc. of additional procedure to correct it.

PUNITIVE DAMAGES

I. Mental Anguish and Punitive Damages a. § 353. Loss Due To Emotional Disturbance. Recovery excluded unless breach also caused bodily harm, or if it

was very foreseeable that an emotional disturbance would likely result from a breach.b. § 355. Punitive Damages . Punitive damages are generally not recoverable for breach of contract, but if the

conduct that causes the breach also constitutes a tort, punitive damages may be awarded. i. To award punitive damages, breach must constitute an independent and willful tort accompanied by

fraud, malice, wantonness or oppression.c. Bohac v. Department of Agriculture

i. Facts : Pl got fired. Pl asks for $14k pecuniary damages, $150K non-pecuniary damages. For Mental anguish, damages to personal & professional reputation.

ii. Rule/Analysis : Consequential damages relates to foreseeability at the time the K is executed, not at the time of breach. Pecuniary damages are most likely to be foreseeable at the time of contracting. Non-pecuniary damages are more dependent on the circumstances of the individual at the time of breach (not at the time of K, which is required for consequential damages). Can’t get non-pecuniary damages.

d. Acquista v. New York Life Insurance i. Facts : Acquista has disability insurance. He gets sick, but insurance company denies the claims.

Acquista alleges bad faith conduct in the assessment of his claims. NY does not recognize this sort of conduct as a tort, but only a breach of K (some states say this is a tort).

ii. Rule : Where an insurer in bad faith denies a claim, damages are not limited to amount due under the policy. Damages could include consequential damages such as mental distress, or aggravation and inconvenience.

1. Otherwise insurance companies would have no motivation not to breach2. Goal of K damages is to put aggrieved in same position as if no breach. No money from

insurance can cause a lot to happen b/c insured doesn’t necessarily have the funds to take care of problems now, then sue later.

3. These non-economic losses would be compensable only in circumstances where they were a foreseeable result of a breach at time of contracting.

e. Boise Dodge, Inc. v. Clark i. Facts : Pl bought a car described as “new.” Actually, the car was used, and the odometer had been

set back to take off the mileage. Court awarded punitive damages.ii. Because there was intentional deceit and fraud involved (tortious conduct), punitive damages would

be allowed. Reasoning: Someone who engages in a calculated, fraudulent scheme would not be deterred if the only punishment is to pay the Pl for actual loss (compensatory damages only returns to Pl amount Df took); they would have no motivation not to engage in this type of behavior.

1. The award of punitive damages must not be grossly out of proportion to the severity of the offense.

BREACH OR REPUDIATION BY BUYER

I. Buyer’s Breach and Seller’s Remedies: (UCC 2-703) a. Breach - A buyer breaches a contract for the sale of goods by:

i. wrongfully rejecting the goodsii. wrongfully revoking acceptance of goods

iii. failing to make a payment when dueiv. repudiation

b. Remedies - In the case of a buyer's breach, the seller may:i. withhold or stop delivery of goods

ii. resell the goods and recover damages for the breachiii. recover damages for non-acceptance or repudiationiv. recover lost profitsv. recover the contract price

vi. obtain specific performancevii. recover liquidated damages

viii. reclaim the goodsII. Resale of Goods (UCC §2-706) - The seller may, in good faith and in a commercially reasonable manner, resell

goods that the buyer wrongfully does not accept. a. Damages are diff btwn resale & K price, plus incidental expenses, less expenses saved. b. Private sale – must give buyer reasonable notice. Public sale – governed by more rules (2-706(4)).

III. Damages for Buyer's Non-acceptance or Repudiation (UCC § 2-708)a. Where buyer wrongfully rejects goods, or unjustifiably revokes acceptance, damages are:

i. The diff btwn market price at time & place for tender & K price plus any incidental or consequential damages, less expenses saved.

b. Where buyer repudiates, damages are:i. Diff btwn market price at time & place for tender up to a reasonable time after seller learned of

the repudiation, plus any incidental or consequential damages, less expenses saved.IV. Contract Price (UCC § 2-709)

a. When buyer fails to pay when due, seller may recover (along with incidental damages), the price:i. of accepted or conforming goods lost or damaged within a reasonable time after risk of their

loss has passed to the buyer; andii. of goods identified to the K if seller is unable after reasonable effort to resell at a reasonable

price, or if circumstances reasonably indicate that such effort will be unavailingb. Where seller sues for the price, he must hold the goods that are in the K & that are still in his control,

except where it becomes possible to resell them at any time prior to collection of judgment. Damages awarded will be less this net sale, but seller still entitled for damages on goods not resold.

V. Seller’s Incidental Damages (UCC § 2-710(1)) - Includes any reasonable charges expenses or commissions incurred b/c of breach

VI. Seller’s Consequential Damages (UCC § 2-710(2)) – includes any loss resulting from general or particular requirements and needs of which buyer at time of contracting had reason to know and which could not be reasonably prevented by resale or otherwise.

a. (UCC § 2-710(3)) Seller may not recover consequential damages from a consumer. VII. American Mechanical Corp. v. Union Machine Co. of Lynn, Inc.

a. Facts : Pl in financial difficulty, Df knew. K to sell property to Df, but Df repudiated. Bank takes Pl’s property and sells for a lot less in order to pay off mortgage owed. Pl sues for breach.

b. Analysis : If we use UCC §2-708(b), the measure of damages is diff btwn market price & K price. Problem is that the diff would be nominal, but actual damages caused by breach were a lot more (since foreclosure caused sale of well below market). Court says that in this case, we can use actual price sold for to measure the damages. Reasoning behind this is that the point of awarding damages is to put

aggrieved party in position they would be in if there were no breach. Can only do this if we use actual damages.

VIII. Lost Volume Seller a. UCC 2-708(2) - If measure of damages (under 2-708(1)) is inadequate to put seller in as good a position

as performance would have done, then entitled to damages measured by the profit (incl. reasonable overhead) which seller would have made from the deal, plus incidental & costs reasonably incurred, less expenses saved.

i. When seller is able to resale goods for basically the same price - under this measure, seller can keep proceeds of resale and recover the profit that would have been made on the first sale.

ii. Reasoning: The breach cost the seller an additional profitable transaction, in addition to those he would have made anyway (he would have sold the 2nd unit even if no breach).

b. Locks v. Wade i. Facts : K for lease of jukebox. Df repudiated K. Pl subsequently rented jukebox to others.

ii. The court held that the proper measure of damages was the difference between the contract price and the cost of performing the contract because the supply in the market for jukeboxes was not limited. Therefore, if buyer didn’t breach, he could have made profit on that sale, and for any other customers. The breach cost the seller a deal (an additional profitable transaction).

IX. Breach of Construction Contract and the “Components” Approach a. When owner breaches while contractor in midst of performing - Unless the contract is divisible or

contractor has substantially performed, can’t get the agreed price as damages. b. What damages can a contractor recover? – A plaintiff could collect either in quantum meruit for what

had been finished, or in contract for what plaintiff had lost (k price, plus incidental and consequential, less paid, less expenses saved – UCC 2-708).

i. New Era Homes Corp. v. Forster 1. Facts : K for home improvements, where Df pays Pl for the work in installments. Pl did

work, and when time to get payment came, Pl didn’t pay. Pl stopped work and sued for entire balance.

2. Analysis : Majority interpreted the K to be a whole K (not severable), where the full payment was consideration for the work done, and the installments were only a device used for convenience. So the remedy should be the value of what Pl had lost (the K price, less payments rec’d, less expenses save – or cost of completion).

X. Reliance Damages or Restitution in Losing Contracts a. Reliance Alterative - If contractor can’t prove lost profits, still can get reliance damages, which includes

reliance expenses in preparation or part-performance.b. Losing Contracts – If Df can prove that there would have been a loss to contractor if K were performed,

contractor if foreclosed from recovering any profit and the reliance expenditures should be adjusted downward in proportion to the projected loss.

i. In a case w/ a losing K, can contractor get restitution damages for the benefit incurred on Df? 1. Issue with this: Restitution is getting back whatever benefit you incurred on Df, but

whole point in K damages is to put Pl in position they would have been in if no breach. But in losing Ks, Pl would have been a worse position if no breach.

XI. Collateral Source Rule – In contract law, any compensation a Pl may get from another source (like insurance) is deducted from damages, because the purpose of contract damages is to place the plaintiff in as good a position as if there were no breach.

a. Inchaustegui v. 666 5 th Avenue Limited Partnership i. Facts : Tenant failed to procure liability insurance w/ landlord as additional insured as specified

in lease. Landlord gets sued, and brings tenant in as 3rd party b/c of this breach. ii. Usual Rule: If the tenant fails to procure the necessary insurance, they are liable for

consequential damages to the landlord (b/c they should expect that this may result in economic injury to the landlord).

iii. Collateral Source Rule : However, if the landlord purchased insurance equivalent to that which the tenant was contractually obligated to do, the landlord's only damages are contract damages, equivalent to the costs of procuring the insurance policy.

XII. Employee’s Remedies for Breach of Employment Contract a. When employer repudiates K before work commences, or terminates employment while work is underway

i. When not a divisible K, the usual rule allows damages based upon the "loss in the value to him of the other party's performance … less … any cost or other loss that he has avoided by not having to perform."

b. The discharged employee is not required to prove what savings were realized by the breach in order to establish damages. The employer, on the other hand, has the burden of proving that the employee failed to mitigate damages

c. To show that employee failed to mitigate damages (by getting another job, etc.), employer must show that the substitution was comparable, or substantially similar. If different or inferior, employee's failure to accept or seek may not be used to mitigate damages.

d. If after discharge, employee gets another job, the employer can deduct the income from the damages if but for the breach, employee wouldn’t have taken that job. If employee already had another job, can’t deduct.

e. Collateral Source Rule - If employee cannot get a suitable job, and gets benefits (unemployment), probably can’t deduct from damages. Justified both by the need for deterrence, and by the feeling that mere indemnity for his net economic loss does not compensate the employee for all his injury, emotional as well as pecuniary.

BREACH OF CONTRACT BY SUPPLIER OF GOODS, SERVICES OR CONSTRUCTION

I. Seller’s Breach & Buyer’s Remedies (UCC § 2-711)a. Seller’s Breach

i. wrongfully failing to make deliveryii. wrongfully failing to perform a contractual obligation

iii. making a non-conforming tender of goodsiv. repudiation

b. Buyer’s Remedies i. recovery of price paid

ii. deduction of damages from outstanding payments dueiii. cancellation of the contractiv. "cover"v. specific performance and replevin

vi. liquidated damagesvii. expectation, incidental, and consequential damages

II. Cover (UCC § 2-712) – If seller breaches, buyer may “cover” by making in good faith * w/o reasonable delay, any reasonable purchase of substitute goods. Damages would be diff btwn cost of cover & K price, plus any incidental or consequential damages, less expenses saved. As long as cover made in good faith, the price doesn’t have to be the lowest, and goods don’t have to be exact. Failure by buyer to cover doesn’t bar him from another remedy.

III. Damages for Non-delivery or Repudiation (UCC § 2-713) a. When seller fails to deliver or buyer rightfully rejects or revokes, damages is diff btwn market price at

time of tender and K price, plus incidental/consequential, less expenses saved.b. When seller repudiates, damages is diss btwn market price at time buyer learned of repudiation (or

reasonable time after), and K price, plus incidental/consequential, less expenses saved.IV. Buyer’s Damages for breach in Regard to Accepted Goods (UCC § 2-714)

a. When buyer accepts goods & gives notification, he may recover damages for non-conformity where loss resulted from seller’s breach, and determined in any manner which is reasonable.

b. Measure of damages for breach of warranty is diff at the time and place of acceptance btwn the value of goods accepted & value they would have been as warranted, unless special circumstances show damages of a diff amount.

V. Resale and Offset (UCC § 2-711(3)) – on rightful rejection or revocation, buyer may resell goods in his possession, or control to offset any payments made on their price & any incidental expenses.

VI. Deduction of Damages from Payment Due (UCC § 2-717) – buyer can deduct damages resulting from any balance they owe to seller; must notify

VII. Buyer’s Incidental & Consequential Damages (UCC § 2-715)a. Incidental includes expenses reasonably incurred as a result in breach (like transportation, care, cover)b. Consequential includes any foreseeable loss (from general or particular reqs that seller had reason to

know), & which could not be prevented by cover or otherwise, -and- injury to person or property proximately caused by breach of warranty.

VIII. Cardozo’s Difference in Value Rule f. Jacob & Youngs v. Kent (Reading Pipe case) - *see more in avoidance of forfeiture

i. Rule: (Cardozo) Difference in value rule as here used, only applies when builder's failure to perform under a construction K is both trivial and innocent. Under this rule, damages are measured by the diminution in value of the building rather than the cost repairing or replacing the structure (of correcting it).

g. Rivers v. Deane i. Facts : Construction K for addition to Pl’s home. Structure built was unsafe & unusable. Court

awarded damages based on Cardozo’s difference in value rule.ii. Outcome : The difference in value rule only applies when builder's failure to perform under a

construction K is "both trivial and innocent". Here, however, the defect arising from the breach "is so substantial as to render the finished building partially unusable and unsafe." So the measure of damages is instead the market price of completing or correcting the performance.

II. Subjective Value Test and the Difference (Diminution) in Value Rule a. § 347 - adopts a partially subjective test for the measurement of damages based on the expectation interest.

i. Damages are loss in value to the Pl caused by the breach, plus incidental and consequential damages, less costs saved (Objective view of UCC looks at market/cover price to compare).

b. § 348 - where the breach results in defective or unfinished construction, but the value to Pl (347, subjective test), is not proved with sufficient certainty.

i. Damages may be recovered based on the diminution in value, or reasonable cost of correcting defects or completing it

ii. If it happens that the cost of correcting a defect is disproportionate to the probable loss in value to the Pl (where the cost of correcting is much more than the increase in value to the Pl - subjective), the award shouldn’t be made.

1. This is b/c if Pl would be awarded these damages, the Pl will not pay to correct the defects, b/c it will cost him more to do that than the resulting increase in value to Pl.

2. So instead, the damages would be the objective diminution in value of market price.c. Peevyhouse v. Garland Coal & Mining Company

i. Facts : Pl leased farm to Df for strip mining. K said Df had to fix the land after, but Df breached. Cost of completing the work is $25k, but value of property only increase by $300.

ii. Analysis : In k law, no one should be awarded more than he would have gained if there was no breach. The value Pl would have gained is only $300, so

1. § 348 - where the cost of correcting is much more than the increase in value to the Pl (subjective test), the award should not be made. This is b/c if Pl would be awarded these damages, the Pl will not pay to correct the defects b/c it will cost him more to do that than the resulting increase in value to Pl.

iii. Rule : Where the breach of a construction K causes a defect and the cost of correction is more than the increase in value of the structure, damages should be measured by the diminution in value, not the cost of performance.

iv. Dissent : talks about the importance of the negotiations to get the specific provision in K.

d. American Standard, Inc. v. Schectman i. Facts : K for Df to grade Pl’s land (make it look nice so they can sell). Grading cost $90k, diminution

in value of the property only $3k (they sold it for only $3k less than “market” price). ii. Rule: The owner has a right to make "improvements" on his value, even if doing so would diminish

its market value. 1. The Df can't say this his performance would not be beneficial to the Pl. The Pl specifically

contracted to have this done, so there is a value.iii. (from Jacobs and Young case) to use the diminution in value rule, the contract must not have been

breached intentionally and must show substantial performance made in good faith. 1. Here, breached in bad faith.2. Can’t be substantial performance if cost to complete grading $90k.

III. Buyer’s Remedies for Seller’s Breach of Warranty under the UCC (Default Rules; can be K’d otherwise)a. UCC provides 3 types of warranty that help to fill the gaps of the agreement

i. 2-313 an express warrantyii. 2-314 an implied warranty of merchantability

iii. 2-315 an implied warranty of fitness for a particular purposeb. If defect is discovered before acceptance:

i. Buyer has right to inspect to make sure goods conform to express warranty before accepting (2-513(1))

ii. If non-conforming, buyer may reject the goods (2-601, 2-602(2))iii. After a "rightful" rejection, seller has a limited "right" to cure the defects (2-508)iv. If not cured, buyer may pursue remedies which include cancellation, "cover" or damages (incl.

consequential) (2-711, 2-715(2))c. If defect is discovered after acceptance:

i. Acceptance UCC 2-606 - Acceptance of goods precludes the remedy of rejection, makes the buyer liable for the price and puts the burden of proving a breach of warranty on the buyer. (2-607)

ii. Remedy: (2-608) - Revocation of acceptance which gives the buyer the same remedial options as if the goods had been rejected

1. Will be denied if defect is insubstantial, or the buyer should have discovered it before acceptance or notice is given after an unreasonable time has elapsed since the defect was or should have been discovered.

d. If buyer can neither "rightfully" reject the goods, nor "justifiably" revoke acceptancei. UCC 2-607(3)(a) - if timely notice of breach is given, the buyer may recover damages for breach in

regard to accepted goods (2-714), and for incidental and consequential damages (2-715). 1. In this situation, buyer must keep the goods and pay the agreed price, but the price will be

adjusted downward to reflect the loss of bargain from the breach (2-717)IV. Restitution of Down Payment by Payor as Remedy for Breach by Performer

a. Sales of Goods – (UCC 2-711(1)) buyer who cancels after seller’s breach may recover so much of the price as buyer has paid. This is in addition to expectation damages. Also UCC 2-718(2) permits a breaching buyer to recover in restitution the amt in payments made that exceed seller’s damages.

b. Real Property – buyer must establish that (1) he is not in default, (2) the breach is material, and (3) legal remedies are inadequate.

INCIDENTAL DAMAGES

I. Incidental Damages for Buyer’s breach (UCC § 2-710) - include any commercially reasonable charges, expenses or commissions incurred by:

a. the stoppage of deliveryb. the transportation, care and custody of goods after the buyer's breachc. the return or resale of the goods

d. actions otherwise resulting from the buyer's breach.II. Incidental Damages for Seller’s Breach (UCC § 2-715(1)) - include expenses reasonably incurred in:

a. inspection, receipt, transportation and care and custody of goods rightfully rejectedb. any commercially reasonably changes, expenses, or commissions in connection with effecting coverc. any other reasonable expense incident to the delay or other seller's breach.

CONSEQUENTIAL DAMAGES

I. Foreseeability - The loss had to be a foreseeable consequence of breach at time of contractinga. Hadley v. Baxendale

i. Facts : Pl is mill operator, and crankshaft broke. Can’t operate w/o it. Df to deliver for repair. Df didn’t delivery on time, and Pl lost profits.

ii. Rule/Analysis : Court said can only recover consequential damages for losses that are foreseeable (naturally arising), or is Pl’s special circumstances were communicated to Df (in contemplation of the parties at time of contracting).

b. UCC §2-715(2) - Consequential damages resulting from the seller's breach include (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting has reason to know and which could not reasonably be prevented by cover or otherwise

c. Rest §351 : Damages are not recoverable for loss that the party in breach did not have reason to foresee as the probable result of the breach when the contract was made. Loss may be foreseeable as a probable result of a breach because it follows from the breach (a) in the ordinary course of events, or (b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach has reason to know.

i. General damages - are the natural and probable consequences of a breach and are deemed to have been within the contemplation of the breaching party. A party seeking general damages need not offer further proof that the damages were foreseeable.

ii. “Special” or particular damages arise from the special facts and circumstances of the case and are not deemed to be within the contemplation of the breaching party unless he was made aware of such specific facts and circumstances. A party seeking consequential damages must demonstrate that the damages were foreseeable at the time the contract was formed.

d. When parties enter into a K which provides that the time of performance is to be fixed at a later date, the knowledge of the consequences of a failure to perform is to be imputed to the defaulting party as of the time the parties agreed upon the date of performance.

i. Spang Industries, Inc., Fort Pitt Bridge Division v. Aetna Casualty & Surety Co. 1. Facts : K for subcontractor to delivery steel to contractor. K said date of delivery to be

“mutually agreed upon.” Delivery date finally agreed on, but subcontractor delivered steel late, causing contractor to incur additional costs. Subcontractor argues that the consequences weren’t foreseeable at time of K

a. In contemplation of the parties when they entered into the K – The knowledge of the consequences of a failure to perform is to be imputed to the defaulting party as of the time the parties agreed upon the date of performance.

b. Reasonably foreseeable – Subcontractor experienced in this area. They knew or should have known the process, and therefore, the consequences of breach. These are damages that must necessarily follow, and also that are likely to follow.

c. Mitigation of damages - If contractor would have delayed the work, they would have incurred much higher costs. Therefore, they mitigated the damages as best they could, and in good faith.

II. Mitigation – could the Pl have reasonably mitigated damages by purchasing substitute goods on the open market or continuing to deal with the breaching party?

a. UCC §2-715(2) - Consequential damages resulting from the seller's breach include (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting has reason to know and which could not reasonably be prevented by cover or otherwise

III. Ascertainable – Can Pl prove what profits were lost with reasonable certainty?a. If profits are too speculative, can the Pl recover the reliance expenditures as an alternative?

i. Can the Pl recover both lost profits and reliance expenditures?IV. Enforceability of clauses "excluding" consequential damages caused by breach.

a. Hydraform Products Corp. v. American Steel & Aluminum Corp .i. Facts : Df to supply steel to Pl for manufacturing woodstoves. Df knew timing was very important to

Pl – Pl had to get woodstoves out by certain time in order to make their profits. Df delivered late and defective materials. Pl realized Df couldn’t perform as agreed, and tried to get materials from other suppliers, but was unable to get what they needed in time. There was a clause that if would not be liable for consequential damages.

1. Held: Clause was unenforceable, b/c it failed of its essential purpose, as it provided Hydraform with no effective remedy – it did not address the problem of late shipment. Hydraform allowed to recover consequential damages.

2. Consequential damages must be reasonably foreseeable, ascertainable (cannot be speculative), and unavoidable (could not be mitigated).

a. Lost profits for that season - reasonably foreseeable, Df knew of Pl’s needs. It was ascertainable b/c there is enough support to conclude that Hydraform would have sold the woodstoves they would have manufactured if Df had not been late in delivery. Tried to mitigate, but could find no alternative seller.

b. Any lost sales beyond that first season and the loss of the business were not foreseeable by Df. Cannot recover for the lost profits of subsequent seasons. Also, those profits were not ascertainable.

b. Calculating lost profits – using the “new business rule”i. New business – can’t really prove what profits would have been (merely anticipatory), but an

existing business can show profits from previous years

EQUITABLE REMEDIES

I. Equitable remedies are available only when there’s no adequate remedy at law a. Factors affecting the adequacy of damages (§360)

i. The difficulty of proving damages with reasonable certaintyii. The difficulty of procuring suitable substitute performance by means of money awarded as

damages, andiii. The likelihood that an award of damages could not be collected

b. Injunction : is an equitable where a party is required to do, or to refrain from doing, certain acts. i. If you don’t follow an injunction, you can be held in contempt. May be fined or go to jail if you

don’t perform. B/c we concluded long ago that we do not imprison ppl for failure to pay damages (if they have no assets), you can’t be held in contempt for failure to pay damages, b/c money damages are not an in personam remedy - remedy that effects a person (b/c we go after the assets, not the person).

c. Specific Performance - is a remedy in the form of a court order that the breaching party renders performance of the contract. Specific performance is not available if expectation damages are adequate to put the aggrieved party in as good a position as he would have been had the contract been fully performed.

d. § 364 Effect of Unfairness – even if no adequate remedy at law, court may deny equitable remedy if it would be unfair. Maybe b/c there was mistake or unfair practices. Or if it’s unconscionable/oppressive – exchange is grossly inadequate, or relief would cause unreasonable hardship

II. Sales of Goods : a. UCC § 2-716 : Expectation damages are deemed to be an inadequate remedy, (1) where the subject

matter is unique (Inability to cover or irreparable harm) (2) in real property transactions, or (3)in goods contracts, "where goods are unique or in other proper circumstances," e.g., where the goods are in short supply.

i. The buyer may have a right of replevin for goods identified in the contract if, after reasonable effort, the buyer is unable to effect cover or circumstances indicate that such an effort will be unavailing. UCC doesn’t mention what rights seller has

b. Sliding scale of impracticability to cover . If it’s pretty easy to cover - give money and they can buy any goods they want. But it doesn’t seem fair to say they would have to travel far to get it. Difficult to estimate this cost. Also not fair to the party to put them through the hassle of trying to cover. But if it isn't very hard to get another one, then we would prefer for the person to go out and get another one.

c. Curtice Brothers Co. v. Catts i. Facts : Pls can tomatoes, and give the Df cash for their entire crop of tomatoes. Dfs breach, and

the Pls seek specific performance of K.ii. Rule/Analysis : Specific performance can be ordered in Ks for the sales of personal property if no

adequate remedy at law exists. B/c Pls depends on the availability of tomatoes of certain quantity and quality for successful operation of their business, specific performance may be ordered.

d. Laclede Gas Co. v. Amoco Oil Co. i. Facts : Laclede (distributor) contracted with Amoco (supplier) to provide propane for its

commercial customer. Amoco terminated the agreement. Laclede sued for injunction against termination.

ii. Rule : A court may award specific performance where goods are unique and it is difficult to procure a suitable substitute.

III. Law & Economics: The Cost Benefit Analysis of Granting an Injunction a. Northern Indiana Public Service Co. v. Carbon County Coal Co.

i. Facts : K to purchase coal at set price and quantity (coal overpriced). Oil price collapses, and Df breaches – this is a classic example of an efficient breach. They would save more money b breaching (& paying damage) than performing the K. Pl awarded $181mm, but wants specific performance.

ii. Court denies specific performance (Posner uses a law & economics approach)1. This was not a profitable business, and so this was an efficient breach (costs more to take

coal out of the ground than what market price is). 2. This would be inefficient (highest and best use) – essentially make Df pay to keep the mine

open, when the free market wouldn’t.3. Posner forecasts that if he did grant the injunction, the 2 parties would just negotiate for Df

to buy out the injunction (Pl would want out b/c not profitable business). The compromise would be between the $181mm and cost of injunction.

b. Walgreen Co. v. Sara Creek Property Co.

i. Facts : Landlord sought to lease a space in mall to a pharmacy. Pl is a pharmacy, and is suing for breach of an exclusivity clause on their K w/ landlord (no other pharmacy – competition).

ii. Cost/Benefit Analysis of granting an Injunction - Posner uses an economic efficiency argument to imply that the injunction will lead to Phar-More trying to buy out Walgreens.

1. Benefits a. Shifts burden of calculating damages to the parties (instead of court)b. Private estimate better – generally, we think parties come to a better estimate of

the value that courts will; parties will reach a more accurate judgment.2. Costs

a. Supervisory Time i. Negative injunction – easier to supervise

ii. Positive injunctions – takes a lot of court’s time; also court can’t tell if person is doing it right or not (court is not the best judge of this – but parties would be).

b. Bilateral monopoly – they can only negotiate with each other; the bigger the bargaining range, the more parties spend on negotiations – waste of resources.

iii. Posner not worried about supervisory time. We’re dealing with 10 years of profits - very hard to determine the profits. In cases where damages would be difficult to calculate and an injunction would foster reasonable negotiations and require minimal judicial oversight, it may be the preferred remedy.

IV. Personal Services Contracts a. Courts are reluctant to grant equitable relief for personal services (§ 367):

i. It is undesirable to compel the continuation of a personal relationship after a dispute has undercut confidence and loyalty

ii. Very difficult to for court to supervise the performance (§366)iii. The difficulties inherent in passing judgment on the quality of what frequently is a subjective

performance are too greativ. Unconstitutional - An award requiring performance may impose a form of involuntary servitude

that is prohibited by the 13th amendment.b. Availability of injunctive relief

i. There can be negative enforcement if specific performance is unavailable (easier for courts to enforce b/c Pl will be enforcing by making sure Df isn’t doing something)

ii. An injunction, whose primary purpose is protect the Pl from unfair competition from a K breacher whose unique services cannot easily be replaced, is available whether or not an express negative covenant has been made

iii. An injunction against competition is proper of the competition "will do additional irreparable injury to the Pl, and if the injunction may induce proper performance of the entire K by economic pressure without at the same time creating harmful personal relations.

c. Employment Contracts i. Only when there's a non-compete, there's tortious behavior, or if employee still under the K, i.e.

still working there. However, courts may not enforce this if by doing so, the Df cannot reasonably earn a living (other than by working for Pl).

ii. Court will only enforce a covenant for non-compete if it’s reasonable (reasonableness depends on each situation):

1. time (20 years is unreasonable), 2. Space (can't be anywhere in the U.S., etc), 3. Scope - can't be too broad. Only enforce as to specific unique talents the employee has

iii. Public policy argument:1. We like competition - we want the most efficient allocation of resources. Public policy of

free competition2. We don’t want to deprive anyone of their livelihood (§ 367)

d. American Broadcasting Companies v. Wolf i. Facts : Breach of a renewal (non-compete) clause in employment K; employee is a unique TV

personality. ii. Court says although they breached, equitable remedies are inappropriate

1. Rule: During period of employment & is furnishing unique services - if they have expressly or by clear implication agreed not to compete for the duration of the K, and employer is exposed to irreparable injury, it may be appropriate to restrain employee from competing until K expires. What courts may do is order a "negative enforcement," in that; they can't offer those services to someone else during the duration of the K, when the services are very unique.

a. K is expired, so no negative enforcement warranted.

2. Rule : After K has expired - equitable relief may only be available from tortious behavior or to enforce a non-compete.

a. There is no express non-compete provision that employee is violating, nor is the employee committing tortious acts (like exploitation of trade secrets) that may cause special injury to ABC (other than competition).

3. Rule: Public policy favors healthy competition. So absent something unfair (like a tort or non-compete) courts wont grant equitable relief for personal services K.

LIQUIDATED DAMAGES & OTHER AGREED REMEDIES

I. Liquidated Damages - At the time the contract is formed, the parties may agree to a fixed sum of money or a set formula for setting damages in the event of a breach. Stipulated damages will be enforced if they reflect an honest effort to anticipate the harm caused by a breach. Stipulated damages will be deemed invalid if they represent an attempt to punish the breaching party, such as in the case of unreasonably large damages.

a. § 2-718. Liquidation or Limitation of Damages; Deposits. - Damages for breach may be liquidated in the agreement, but the amount must be reasonable in light of:

i. the anticipated or actual harm caused by breach, ii. where it is difficult to prove the loss, and

iii. the inconvenience or impossibility of otherwise obtaining an adequate remedy.b. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a

penalty."c. § 356 Liquidated Damages and Penalties – (common law) Damages may be liquidated in K, but only a

reasonable amount in light of anticipated or actual loss caused by breach & difficulties of proof of loss. Unreasonably large liq. damages are unenforceable on grounds of public policy as a penalty.

d. § 361 Effect of Provision for Liquidated Damages - Specific performance or an injunction may be granted to enforce a duty even though there is a provision for liquidated damages for breach of that duty.

e. Time of Contracting Test – look at reasonableness at the time of contracting. The actual losses don’t matter. The point of liquidated damages is to protect against very high or very low actual loss.

i. Ex: if the liquidated damages ends up being less than actual loss, breaching party is protected in only paying what liquidated damages are in the K, but non-breaching doesn’t get full compensation for their loss. This is the trade-off – limits/allocates the risk.

ii. However, sometimes a liquidated damages clause serves the interest of one party over the other, and is a result of unequal bargaining power. In this situation, it may be more appealing to look at the actual damages.

iii. Southwest Engineering Co. v. United States 1. Facts : Gov’t K, w/ liquidated damages provision which calculated such damage at a rate

per day. Pl was 97 days late, and gov’t subtracted the liquidated damages from payment to Pl. Pl suing to recover this amount, alleging that it’s an unenforceable penalty; govt suffered no harm.

2. Conclusion : The amount of the liquidated damages forecasted at K creation was reasonable, and the harm that may be caused was unmeasurable at time of K creation, so it is an enforceable liquidated damages clause. The absence of actual damages at the time of breach of K or thereafter does not bar recovery of liquidated damages.

f. United Air Lines, Inc. v. Austin Travel Corp. i. Facts : United leased its CRS program to Austin. Austin breaches K, which had liquidated

damages. Austin says unenforceable b/c it’s a penalty.ii. The amount is a reasonable proportion to probable loss – Didn’t matter if the actual loss is less,

all that’s required is that it’s a reasonable forecast. Also pointed out that the liquidated damages more generous than those of competitors – proves more than reasonable.

iii. Df argued that these were penalties b/c it provided for same amt of damages no matter how insignificant the breach (non-material), which would make damages punitive & unenforceable.

1. Court says no b/c K law says you can’t terminate for non-material. United would have only been able to collect liq damages for material breach (determined this was a material breach).

g. Leeber v. Deltona Corp i. Facts : Pl signed K for purchase of condo and put down as deposit 15% of total price. This

deposit would be liq damages in case of breach. When Pl failed to close (breach), Df terminated K, kept deposit & resold property for more to someone else.

ii. Florida law says that if the enforcement of a liq damages clause was unconscionable, then it won’t be enforced. The 15% was a reasonable amount forecasted as a loss at time of contracting. The issue here was that lower court looked at actual loss, & since Df was able to sell for more after, court only compensated Dfs for actual, incurred losses.

iii. The court here said this was wrong b/c the whole point of liq damages is for allocation of risk, and otherwise it would just be damages for breach of K, but parties had contracted otherwise. The point to have this type of provision is to predetermine a way to handle breach of K ahead of time, so as to avoid litigation and to equitably resolve conflicts, and this should be encouraged.

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I. Agreed Remedies - In addition to liquidated damages, there are other ways parties may attempt to settle in advance what the remedy will be in the event of breach.

a. UCC 2-719 provides that i. A K may have an agreed remedy established in addition or in substitution of any others. Those

agreed terms may limit or alter any damages that you would have anyway. ii. Using the remedy provided in the term is optional unless it is expressly agreed to be exclusive (then

would only be the sole remedy). iii. When circumstances cause an exclusive or limited remedy to fail of its essential purpose, any other

remedy may be had.iv. Consequential damages may be limited or excluded unless the limitation or exclusion is

unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

b. Lewis Refrigeration Co. v. Sawyer Fruit, Vegetable and Cold Storage Co. i. Facts : Sale of freezer, and warranty guaranteeing freezer would work to certain specs. K stipulated

an exclusive remedy for seller to repair or replace promptly, or rescission. Freezer didn’t perform as stated under warranty.

ii. The remedies in K failed of its essential purpose (UCC 2-719(2)), so remedy may be had otherwise. It was impractical to carry out agreed remedies. Jury decided that seller couldn’t repair/replace in time to meet buyer’s needs. Rescind failed too b/c buyer would have experienced severe financial loss if rescinded.

iii. UCC 2-719(3) says that limitation of consequential damages is valid unless it’s unconscionable. Lower court failed to make that determination. They need to b/c this is the supervening provision (over 2-719(2), which was only provision lower court discussed). Particular governs general, so must see if 2-719(3) permits consequential damages.

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THE BARGAIN RELATIONSHIP

I. Incomplete and Deferred Agreement a. Open Terms Other than Price

i. 2-204(3) gap filler: Even tough one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

ii. The parties are free to work out the terms of K, as long as it is fair and conscionable. Failure to agree on each and every term doesn’t make the K unenforceable. UCC has default rules as gap fillers.

b. How Should the Law Set “Default” Rules? i. Majoritarian approach - infer what most contractors in a particular situation would have agreed

upon. (Qty default is 0, from the statute of frauds)ii. Contra proferentem rule - penalizes sloppy K drafting by interpreting the contract against the

drafting party. Furthers equity and efficiency - provides incentive to create an express K1. Forces the more knowledgeable party to provide information b/c otherwise the default rule

makes the contract unappealing2. Make default unattractive so knowledgeable party comes forward.

c. Objective manifestation of intent needed. Must look at the whole letter to find intent to be bound.i. Empro Manufacturing Co., Inc. v. Ball-Co Manufacturing, Inc.

1. Facts : Empro sent Ball letter of intent, proposing an agreement, but left open terms to be decided later, and a provision that said any agreement to be approved by directors. Parties negotiating, can’t agree. Ball starts negotiating w/ someone else, Empro sues.

2. Empro made clear in letter of intent that it was free until a formal K written up & approved. No option that would commit Ball. Letter merely started negotiations - Agreement to agree only. Empro claiming reliance expenditures, but that’s normal with negotiations. Good faith not necessary in negotiations, only in performance of K.

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II. Remedies Where Agreement Incomplete or Indefinite a. Usually good faith duty not imposed for negotiations. In Hoffman, court held that a party can be found liable

w/o a K, if they induced reliance on part of the other party prior to making a K. Promissory estoppel can be sued to recover damages, but limited to “those necessary to avoid injustice.”

i. Hoffman v. Red Owl Stores, Inc. 1. Facts : Hoffman wants to open up Red Owl store. Red Owl assures him that he can do this

with $18k cash. Hoffman, in reliance, sold bakery, and later sold small grocery prematurely to get this money. Red Owl kept changing amt Hoffman needs. Hoffman backed out of negotiations and sues.

2. No actually K, damages based on reliance on promises. But since no K, damages limited to that necessary to avoid injustice. Awarded damages associated with selling store in reliance (sell quickly to get cash) & moving costs. No damages for lost profits, b/c no K (expectation damages).

AVOIDANCE OF CONTRACTS

Mistake, Fraud, misrepresentation, undue influence, constructive fraud, duress, bad faith & unconscionability. If any of these are present, court may grant relief from contractual duties.

INFANCY AND MENTAL INCOMPETENCE

I. Infancy a. §14. "Unless a statute provides otherwise, a natural person has the capacity to incur only voidable

contractual duties until the beginning of the day before the person's 18th birthday"b. Those who deal with minors do so at their own risk, and knowing of the fact that the minor can void the

contract at any time, but they (adult) cannot.II. Mental Incompetence

a. §15. Mental Illness of Defect - a person incurs only voidable K duties if mentally incompetent.i. Unable to understand nature and consequences of transaction

ii. Unable to act in reasonable manner in relation to transaction & other party knows

UNILATERAL AND MUTUAL MISTAKE

I. A mistake can provide the basis for rescinding a contract. Courts rarely void contracts due to mistake - b/c unlike intentional fraud, etc., the mistake may not be the defendant's fault.

§152. Mutual Mistake §153. Unilateral Mistake

Mistake by both parties Mistake by one party

Mistake made at time K is made Mistake made at time of K

Mistake as to the basic assumption on which the K was made Mistake as to the basic assumption on which he made the K

Has a material effect on the agreed exchange of performances Has a material effect on the agreed exchange of performances that is adverse to him

K voidable by adversely affected party K voidable by adversely affected party

Unless adversely affected party bears the risk Unless adversely affected party bears the risk

In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.

-AND (any of these) - Unconscionable to enforce-OR- Non-mistaken party knew or had reason to know of the mistake, -OR-Non-mistaken party's fault caused the mistake

II. Unilateral Mistake a. Boise Junior College District v. Mattefs Construction

i. Facts : Bids for construction K, costs estimated at $150k. Df places bid for $141k + promise to pay diff with next lowest bid if they refuse to perform. Df bid very low due to mistake. Next lowest bidder $149k. Pl sues to recover diff.

ii. Court uses a 5-part test to decide whether a mistake in bidding in public works K can be rescinded for mistake: don’t need to know this test.

1. Mistake is material? – omission of an item represents 14% of total cost – yes.2. Unconscionable to enforce? – Cost for Df is $151. – yes.3. Mistake due to violation of positive legal duty or culpable negligence? Clerical error. –No

4. Party to whom bid is submitted will not be prejudiced except by loss of bargain? Pl expected to pay $150k, next lowest $149k. –No hardship.

5. Prompt notice of error given? Notice before Pl could accept. –Yes.III. Mutual Mistake

a. Beachcomber Coins, Inc. v. Boskett i. Facts : Pl purchases rare dime from Df. Both parties believe it is genuine and worth $500 (price);

no fraud. 3rd party wants to buy dime from Pl for $700, provided it’s authentic. Then discovered it’s counterfeit. Pl sues to rescind K.

ii. No one assumed the risk ; both thought it was real. Court decides to use industry custom of a “return privilege” for altered coins. Pl can return & get money back.

b. Substance vs. quality as a basic assumption - Party excused from performance if there is a mistake about the very nature/character of the thing being bargained over. No relief if it is just a disagreement or mistaken belief over the quality or value.

i. Sherwood v. Walker 1. Facts : Pl wants to buy cow from Df, and chooses one that both parties believe is barren,

and only worth price of its beef $80. Df discovers cow is not barren and worth $750+, and refuses to sell.

2. Substance (nature/character) vs. quality a. Substance - (majority view). Mistake made on what was actually sold – the beef

or the breeding cow. b. Quality (dissent) – b/c it was the same cow, whether it was barren or breeding

c. “As is” Clauses – Buyer is assuming the riski. Lenawee County Board of Health v. Messerly

1. Facts : Pickles buys property from Messerly. Neither party knew that there was an illegal septic tank there. K said that buyer has inspected property & accepts in present condition. Board of health subsequently obtains an injunction & says it’s uninhabitable by humans until sewage fixed. Pickle seeks to rescind/avoid K based on the mutual mistake.

2. Contract can’t be rescinded due to a mutual mistake as to the nature of the property when the K included an “as is” clause b/c buyer had assumed the risk.

IV. Who bears the risk? a. When a Party bears the risk of mistake (§ 154)

i. When by agreement risk is allocated to himii. He is aware, at time K made, that he has only limited knowledge with respect to facts to which

the mistake relates but treats his limited knowledge as sufficientiii. Court allocates risk b/c it’s reasonable to do so.

b. Ayer v. Western Union Telegraph Co. i. Facts : Pl sends offer for sale to buyer via telegraph (Df). Df makes a mistake in transmission, and

offer sent to buyer for less than Pl wanted. Pl still sold to buyer, then sues Df for diff in value.ii. The person who chose the means of communication bears the risk.

FRAUD AND THE DUTY TO DISCLOSE

I. When Misrepresentation makes a K Voidable – not necessary that misrepresentation was intentional; a negligent or even innocent misrepresentation may be sufficient to make a K voidable if it is material.

a. § 164. When A Misrepresentation Makes A Contract Voidable - when it induces a party to assent and:i. When one party makes a fraudulent or material misrep, on which other party justifiably relies

ii. When a 3rd party makes a fraudulent or material misrep, on which a party justifiably relies, unless the other party to the transaction in good faith & w/o reason to know of misrep gives value or relies materially on the transaction.

b. § 162. When A Misrepresentation Is Fraudulent Or Material – when it induces a party to assent, and: i. He knows or believes that the assertion is no in accord with the facts, or

ii. He does not have the confidence that he states or implies in the truth of the assertion, oriii. He knows that he does not have the basis that he states or implies for the assertion.

II. When Reliance is Justified - Must show that you in fact relied, and that it was justifiable. However, if misrep is intentional, may not need to show reliance is justifiable.

a. Not justified when it’s an assertion of Intention only, as long as intention is consistent with reasonable standards of fair dealing. (§ 171(1))

b. If reasonable, promisee may interpret a promise as an assertion that promisor intends to perform (§ 171(2))c. A recipient's fault in not knowing or discovering the facts before making the contract does not make his

reliance unjustified unless it amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing. (§ 172)

III. Non-Disclosure as a Misrepresentation and the Duty to Disclose a. Non-disclosure does not necessarily amount to fraud, but one cannot falsely impose information on the

other party (or if there is silence in bad faith). If the information is in the public domain where one party could have obtained it with due diligence, then there is no duty to disclose.

i. Laidlaw v. Organ 1. Facts : Pl to sell tobacco to Df. News spread that War of 1812 is over, and price of tobacco

expected to go up once war was over. Buyer calls seller next day and wants to buy the tobacco. Seller didn’t know war is over, but asked buyer if there was any news. Buyer silent; purchase made.

2. News was in public domain & both parties had access to info. Df had no duty to disclose. However, you cannot by implying or acting in a certain way to impose on the other party so that they would interpret it in a certain way. Jury would need to decide if silence made in bad faith.

b. Even in contractual situations where a party to a transaction owes no duty to disclose facts within his knowledge or to answer inquiries respecting such facts, the law is if he undertakes to do so he must disclose the whole truth.

c. § 161. When Non-Disclosure Is Equivalent To An Assertion i. Where he knows that it is necessary to correct a previous statement or false impression

ii. Where he knows that disclosure would correct a mistake made by other party as to a basic assumption on which K made, & if non-disclosure made in bad faith.

iii. Where he knows the disclosure would correct a mistake made by other party as to a writingiv. If there is a special relationship of trust& confidence btwn the parties.

d. Failure to Correct a Mistake (§161(b)) – If one party knows that the other is making a mistake as to a basic assumption, failure to correct that misunderstanding will constitute a misrepresentation if the non-disclosure amounts to a “failure to act in good faith” or to act “in accordance with reasonable standards of fair dealing.”

i. Hill v. Jones 1. Facts : Pl wants to buy house from Df. Looking at house, Pl sees something that looks like

termite damages & asks Df if it is, Df answered that its water damage. House passes a termite inspection, and Pl buys the house. Then Pl finds out there had been termite infestation in the past, causing $5k in damages, and sellers knew and never told anyone.

2. If Hill hadn't asked about the ripple, then probably no duty to disclose. But they asked. Saying it is water damage may be factual, but he probably knows that he is misleading them into believing that there are no termite problems by that statement. He knew they were making a mistake (§161(b)), and didn’t correct that mistake. But court still has to decide if the misrepresentation was material or not.

e. Positive Concealment § 160.– when you act in a way that is intended or you know it’s likely to prevent the other from learning a fact, even though it’s not verbal. (Ex: Maybe in Hill they put boxes on termite holes specifically so that inspector wouldn’t have seen it).

f. Half-Truths (§ 159 comment b) – Of part of the truth is told, but another portion is not, so as to create an overall misleading impression, this may constitute misrepresentation.

IV. Misrepresentation of Fact vs. Opinion a. Misrepresentation must be of fact, rather than opinion (which is usually merely “puffing”). However, there

are special circumstances that make an assertion of opinion actionable.i. § 169 . – Reliance on an opinion is not justified unless:

1. When there is a special relationship of trust & confidence, that recipient reasonably relies2. Recipient reasonably believes that, as compared with himself, the person whose giving the

opinion has a special skill, judgment or objectivity with respect to the subject matter3. Recipient is for some other reason particularly susceptible to a misrep of the type involved.

ii. A statement of a party having superior knowledge may be regarded as a statement of fact although it would be considered as opinion if the parties were dealing on equal terms.

1. Vokes v. Arthur Murray, Inc . a. Facts : Pl bought a whole bunch of dance lessons and is alleging that Df induced her

into buying them by telling her she was a wonderful dancer, and encouraging her that she should keep progressing, when in fact this was not true.

b. Dfs were experts in the field (they had superior knowledge), so their opinion mattered, and Pl takes it at face value (& they’re not dealing on equal terms). Df believed the opposite of what they actually told her (he lied). Although Df had no duty to disclose, once he decides to disclose, he must tell the truth.

iii. § 168. Reliance On Assertions Of Opinion – An opinion is one of belief, w/o certainty as to the existence of a fact or expresses a judgment on something. A recipient may interpret that the assertion is not incompatible with his actual opinion, and that he knows enough facts to justify in him forming the opinion.

DURESS AND UNDUE INFLUENCE

I. Duress Generally – Defense of duress is available if Df can show that he was unfairly coerced into entering into the contract, or into modifying it. The essential rule is that duress consists of “any wrongful act or threat with overcomes the free will of a party.

a. § 175 When Duress by Threat Makes a Contract Voidable - Where assent is induced by an improper threat by other party that leaves victim with no reasonable alternative.

i. Also if it’s a 3rd party who threatens, unless the other party enters in good faith, doesn’t know of duress, and gives value or relies materially on the transaction.

b. Subjective standard : Look at the subjective to determine if someone’s free will has been overcome. Moral compulsion or psychological pressure may constitute duress if the subject of the pressure is overborne and he is deprived of the exercise of his free will. Also you would take into account if a person of ordinary firmness would have also been coerced in the situation.

i. Rubenstein v. Rubenstein 1. Facts : Under duress by his wife, Pl conveyed to her property. She threatened to poison him

w/ arsenic etc., plus her dad in jail for murdering ppl w/arsenic, so this shows he really believed she would do it.

2. This court used a subjective standard: the party’s state of mind is relevant in determining whether there is an interference of free will in contracting (eggshell plaintiff).

II. When a threat is improper (§ 176) a. Threat is improper if what is threatened or the threat itself is a crime or tort, if criminal prosecution is

threatened, if you threaten to sue, but no basis so in bad faith, or the threat is a breach of the duty of good faith and fair dealing under a K with the recipient.

III. Economic Duress – there will be duress if the threatened breach would, if carried out, result in irreparable injury that could not be avoided by a lawsuit or other means, and the threat is made in “breach of the duty of good faith and fair dealing.”

a. Austin Instrument, Inc. v. Loral Corp . i. Facts : Loral got a govt K, and contracted with Austin for some goods it needed for the govt K. Then

Austin threatened to breach unless Loral agrees to some new K’s and a raise in the price of the existing K.

ii. To find economic duress in a business K:1. There is a wrongful threat to breach2. It overcomes free will3. There are no alternative sources of goods, 4. Ordinary remedies doesn’t cover the loss

b. Machinery Hauling, Inc. v. Steel of West Virginia i. Facts : Pl contracted to buy steel from Df, and have it delivered to a 3rd party. 3rd party rejected the

steel b/c it was defective, and told Pl to return remaining undelivered loads. Df told Pl that if it did not pay $31k, price of undelivered loads, it would cease doing business with Pl (this potential loss was over $1mm/year).

ii. Df has not obligation to Pl - no legal duty to do business w/Pl, and no K exists for future business. No duty of good faith in negotiations. The threat to not do business in the future is not economic duress.

UNCONSCIONABILITY

I. § 2-302. Unconscionable contract or Term. a. Provides that if the court as a matter if law finds the contract or any clause to have been unconscionable at

the time of was made, the court may refuse to enforce the K, or may only enforce part of it w/o unconscionable terms, or may limit the application of it to avoid an unconscionable result.

b. No definition of unconscionability – this gives courts discretioni. Policy: to prevent oppression and unfair surprise

II. Consumer Transactions - The defense of unconscionability is mainly used by consumersa. Williams v. Walker-Thomas Furniture Co.

i. Facts : Buyer enters into installment Ks for sale of furniture. K had a provision where debt incurred at time of purchase would be added onto outstanding debts, so until everything paid off, it extended a security interest to everything she bought (even though she might have paid that balance already). She defaults, and store wants to get all her stuff.

ii. Ordinarily one who signs a K w/o full knowledge of its terms might be held to assume that risk. But when a party of little bargaining power (no real choice) signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that consent was really given to those terms. In such a case, the court should consider whether the terms of the contract are so unfair that enforcement should be withheld (is it unconscionable?).

iii. “Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.”

III. Contracts of Adhesion - contracts that have a standardized form and are presented on a take it or leave it basisa. At common law these Ks have been "presumptively enforceable" - excuse only when P able to show that the

drafter actively caused the misrepresentation. b. §211 - if a party has reason to know that the other party wouldn't assent to a particular term, that term

won’t be part of the K.c. Basically, they are enforceable, unless unconscionable

IV. Procedural and Substantive Unconscionability - For K to be unconscionable there must be procedural and substantive unconscionability (although a greater degree of one can make up for less of the other).

a. K can be procedurally (manner in which K was enacted) unconscionable if there is oppression or surprise (unequal bargaining power; lacks meaningful choice).

b. K can be substantively unconscionable where the actual terms of the agreement are so one-sided they shock the conscious (party benefits from unreasonably favorable terms).

c. Ferguson v. Countrywide Credit Industries, Inc. i. Facts : Pl brings tort claims against employer. Df says K has an arbitration clause.

ii. Standardized K is enforceable unless it’s unconscionable – pattern of one-sided terms1. There was procedural unconscionability – oppression; wouldn’t have a choice if you want

the job; no negotiations2. There was substantive unconscionability – terms so one-sided it shocks the conscious

a. One-sided coverage of claim (those that employee would bring covered, those that employer would bring not covered)

b. Arbitration fees may be unconscionable if costs more than normal litigationc. One-sided discovery provision – Df had certain advantages

ILLEGALITY

I. Illegality: Agreements Unenforceable on Grounds of Public Policy - Although all the conditions of a K are satisfied, a K can be held unenforceable if there's something in the bargain, performance or objectives that are "illegal" or against "public policy."

II. Illegality: Where both Parties are guilty of Illegality – the court will do nothing; no one can recover. This may be unfair because one party will benefit at the loss of another. However, the denial of K's enforceability would help public policy by deterring parties from entering into these types of agreements b/c of the lack of judicial protection. However, sometimes a guilty party ends up being rewarded for engaging in the illegal transaction. In this type of situation, the courts may allow restitution.

a. Sinnar v. Le Roy i. Facts : Store owner denied beer license. He agrees with his friend that, through a 3rd party, to get

him a beer license for $450. Couldn’t get license, Pl (owner) wants money back (3rd party has it).ii. Clearly illegal b/c only state can give you this type of license. Pl cannot recover; we want to

discourage people from entering into illegal agreements.III. Unenforceable on Grounds of Public Policy

a. Hard to define public policy; also would be an argument of last resorti. "Public policy … is but a shifting and variable notion appealed to only when no other argument is

available, and which, if relied upon today, may be utterly repudiated tomorrow."b. Court may decide that there is a public policy strong enough to deny enforcement of the K, but not deny

restitution. Court will look at a legislative mandate to direct. When none available, the promise or term is unenforceable if the "interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms."

i. Factors in weighing this interest:1. The parties' justified expectations2. Any forfeiture that would result if enforcement were denied, and 3. Any special public interest in the enforcement of a particular term.

ii. Watts v. Watts 1. Facts : Parties lived together for 13 years, but never married. When relationship ends,

she’s left with nothing. She files suit to get a portion of property accumulated during their relationship.

2. Df argues that relationship was immoral & illegal, so recognition would be against public policy. Court points out that where the sole consideration was the illicit relationship,

then yes, it would not be enforceable. However, the illicitness was not what was bargained for. The claim here would be unjust enrichment where Pl did a lot of work to help build the couple’s wealth.

c. Non-Compete Agreements Unenforceable on grounds of public policy because overbroad i. In general, courts focus upon 2 aspects of the covenant:

1. Whether it protects some legitimate interest of the promisee, 2. Whether it is reasonable in scope

ii. Data Management, Inc. v. Greene 1. Facts : Suit for breach of non-compete. Clause says that for 5 years after termination,

employee will not perform any other similar services for any person or firm in the state of Alaska.

2. Court proposes three methods with approaching overbroad covenants:a. Strict Method – if overbroad, then it’s unconscionable & won’t be enforcedb. Blue Pencil method – Just strike out certain words that make it unconscionablec. Rule of Reasonableness – If found to have been written in good faith,

reasonably alter the covenants to make I enforceable. Court uses this method.IV. Validity of a Contract Limiting Liability for Negligence - Limiting liability for negligence may be okay. When

bargaining power is not unequal, contracting against liability for negligence is just a way to allocate risks. (Can’t K against liability for intentional stuff – against public policy).

a. Exceptions to contractually limiting liability for negligence (§ 195 (2):i. it exempts an employer from liability to an employee for injury in the course of his employment;

ii. exempts one charged with a duty of public service from liability to one to whom that duty is owed for compensation for breach of that duty, or

iii. the other party is similarly a member of a class protected against the class to which the first party belongs.

b. Where the agreement is of an adhesion type between parties with disproportionate bargaining power, there may be a conceptual overlap of "illegality" and "unconscionability."

c. Parties can make K's exculpating one from negligence and providing for indemnification, but it must be done knowingly and willingly as in insurance Ks made for that very purpose.

d. § 195(3) – Can’t exempt a seller from a tort liability or physical harm to user of his product, unless it’s fairly bargained for. Where a seller's breach causes economic loss rather than damage to person or property, "disclaimers" of warranty and limitations upon remedy are enforceable if not unconscionable.

PERFORMANCE

DETERMINING SCOPE AND CONTENT OF OBLIGATION

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I. Integrated Writings and the Parol Evidence Rule a. Parole evidence Rule : provides that when the parties to a contract reduce their agreement to a writing, that

writing is presumed to be the final repository of all prior negotiations. So all evidence of any prior agreements that are not contained in the writing are barred.

i. However this depends if the parties intended the writing to be integrated (final) or not

b. UCC §2-202 i. If a writing is a final expression of the parties’ agreement (an integration), it may not be contradicted

by evidence of any prior agreement, whether written or oral, nor any oral agreement that is contemporaneous with the writing.

ii. Even a final expression may, however, be “explained or supplemented” by:1. Evidence of a course of dealing, trade usage, and course of performance, and by,2. Evidence of “consistent additional terms,” unless the court concludes that the writing was

intended not only as a final statement, but also as a “complete and exclusive statement.”II. Integrated Writing (§209) – a writing(s) constituting a final expression of all terms of the agreement

a. Complete Integration – document is intended by the parties to include all the details of their agreement. The effect of completely integrated K on prior agreements is that it (§ 213):

i. Discharges prior agreements to extent that they are inconsistent to integrated writingii. Discharges prior agreements to the extent that they are within the scope of the writing

1. Mitchell v. Lath a. Facts : Lath selling house to Mitchell. Before the sale, Mitchell promises to remove

an icehouse. K did not specify this would be done. Mitchell buys house, but Lath doesn’t remove it.

b. Since K was completely integrated, would the removal of the icehouse be something that would be you would ordinarily expect to be included in the K? To be within the scope it must not be too closely connected to the principle transaction. Here, court decides that if parties had intended the removal to have been part of the K, they would have put it in.

b. Partial Integration – not intended by the parties to include all details of the agreement i. evidence extrinsic to the writing of other agreed terms will be admitted

ii. Prior evidence may be admitted only if it doesn’t contradict a term of the writing. (§213)III. Complete vs Partial (§210) – Whether an agreement is completely or partially integrated is to be determined by the

court in determining a question of interpretation or to apply the parole evidence rule.a. §214 – You can submit evidence of prior or contemporaneous agreements or negotiations to establish

whether or not it is integrated or not, whether it’s complete or partial integration, the meaning of the writing (whether or not integrated), anything that might make K voidable, or whether there’s a ground for denying a remedy.

b. Luther Williams, Jr., Inc. v. Johnson i. Facts : Parties enter into K with an integration clause for improvements on Df’s house. Df told Pl that

their getting improvements depended on getting financing. Df ended up hiring someone else. Df is trying to enter the oral agreement about financing as extrinsic evidence.

ii. Rule - Judge says to determine if it is in fact integrated, we must first look outside the 4 corners of the document. So Judge will then decide if the extrinsic evidence should be permitted in. “what is intended to cover will not be known until we know what there was to cover.”

iii. Outcome : It’s an integrated K, but there is no provision in the K that mentions financing. Therefore, it doesn’t contradict anything in the K.

IV. Contemporaneous and subsequent expressions a. § 216. Consistent Additional Terms

i. Evidence of a consistent additional term is admissible to supplement an integrated agreement unless the court finds that the agreement was completely integrated.

ii. An agreement is not completely integrated if the writing omits a consistent additional agreed term which is agreed to for separate consideration, -or- such a term as in the circumstances might naturally be omitted from the writing (not in the scope of K).

1. Masterson v. Sine a. Facts : Pl conveys property to Sine, with a 10-year buy back option. Masterson files

for bankruptcy, and bankruptcy trustee tries to enforce the option. Sine attempts to bring extrinsic evidence that showed option was personal to Masterson, and cannot be assigned to trustee.

b. Precedent is to use the parole evidence rule, where that extrinsic evidence would not be allowed. Judge here says you can’t just always do that – you need to look at other evidence to see if it would be relevant, and to decide if it is, in fact, an integrated writing. The collateral agreement about the assignability of the option is one that might naturally be made as a separate agreement (not within the scope of the primary transaction), so it can be used.

b. § 217. Integrated Agreement Subject To Oral Requirement Of A Condition - Where the parties to a written agreement agree orally that performance of the agreement is subject to the occurrence of a stated condition, the agreement is not integrated with respect to the oral condition.

V. Warranties, Disclaimers and the Parole Evidence Rule a. A warranty made may be very difficult to take away by a disclaimer

i. Express warranties - impossible; words or conduct creating an express warranty cannot be negated by words or conduct limiting the warranty

b. Parole evidence rule does not apply at all if representations were fraudulenti. Maybe - if a total integration was intended, the oral representations may not be excluded if the

buyer was surprised by an "unexpected and unbargained-for" exclusion.

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I. Interpretation of the Meaning of a writing – (if unambiguous, then Judge will interpret)a. Ambiguous terms in writing – extrinsic evidence must be allowed, and would be evaluated by a jury

i. § 212. Interpretation Of Integrated Agreement – question of interpretation is determined by trier of fact, if it depends on extrinsic evidence. Otherwise, determined as a question of law.

b. How a Judge determines existence of ambiguity:i. The “four corners” rule – only look at writing to determine if the term is ambiguous. No extrinsic

evidence permitted. Very strict rule – very few courts use it.ii. The “plain meaning” rule – court will not hear evidence about the parties’ preliminary negotiations,

however, the court will hear evidence about the circumstances, or “context” surrounding the making of the K.

1. A. Kemp Fisheries, Inc. v. Castle & Cooke, Inc. a. Facts : Parties negotiated where Pl was to charter a vessel for fishing from Df, and Pl

gave $50k deposit. Df then sent final K for Pl to sign, and Pl noticed that it didn’t include some provisions they had negotiated on (all warranties were disclaimed, they negotiated otherwise), but still signed it. Problem with vessel; Pl lost a lot of money & suing Df.

b. Judge uses reasoning similar to plain meaning rule to figure if it’s integrated. Found that it was integrated. The collateral agreements on warranty would be those that would naturally come up in the K, and also K contradicted the oral negotiations (disclaimer on warranty).

iii. The “Liberal” rule – evidence of prior negotiations is admissible for the limited purposes of enabling the trial judge to determine whether the language in dispute lacks the required degree of clarity.

1. Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co .a. Facts : Parties entered into K, where Df to do work for Pl. During the work, there was

damage resulting in a cost of repair for $25k. There was a clause that Df performed work at its own risk, and indemnified Pl against any liability that resulted. The issue was the interpretation of the clause, whether or covered Pl’s losses or only 3rd party losses.

b. Basically, Judge is saying, let's bring in outside evidence, and see if the language in the K, in light of the outside evidence, means something else than what is apparent.

c. So even though jury may not hear the extrinsic evidence, the judge HAS to hear it to see if it is relevant, b/c you can never know the actual meaning just from the words.

II. §202. Rules in Aid of Interpretation

a. Primary purpose rule – if the primary purpose of the parties in making the K can be ascertained, that purpose is given “great weight.”

b. A writing interpreted as a whole, and all writings that are part of same transaction interpreted together.c. Unless diff intention, where language has a certain prevailing meaning, that’s what’s usedd. Use prior dealings and course of performance to interpret.

III. § 203. Standards Of Preference In Interpretation a. Reasonable lawful and effective meanings preferred over the opposites. b. Preference in order of hierarchy: Express terms in K, then course of performance, then course of dealing,

then usage of trade.c. Specific over the generald. Negotiated terms preferred over standardized terms

IV. The Hierarchy of Interpretation Rules a. What to look at to help in interpretation, in order of most important.

i. Start with Contract termsii. Surrounding circumstances

iii. Course of performance – refers to how parties’ have conducted themselves w/ dealing with the K at hand

iv. Course of dealing – refers to parties’ history and their conduct; the pattern of dealings (past Ks)v. Trade usage – the practice in this type of dealing that would justify that a certain expectation would

be observed in the K at hand.vi. Specific rules of construction

vii. General Rulesviii. General duties of good faith & fair dealing

b. Frigaliment Importing Co. v. B.N.S. International Sales Corp. i. Facts : K for sale of “chicken.” K didn’t specify whether chickens are old or young. Seller sent older

chickens rather than young. Question on interpretation of the word “chicken” to mean boiler or fryer (young chickens), rather than older ones that are termed “fowl.”

ii. Court looks at different things to help in interpretation (see hierarchy of the rules). Since not clear from K, they look outside, to decide the meaning of “chicken.”

THE DUTY OF GOOD FAITH

I. Scope and Content of Good Faith Duty a. § 205. Duty Of Good Faith And Fair Dealing - Every contract imposes upon each party a duty of good faith

and fair dealing in its performance and its enforcement.i. Only in performance, not in negotiation. Always implied in a K, can’t disclaim it.

b. What is good faith?i. Good faith means honesty in fact and the observance of reasonable commercial standards of fair

dealing in the trade.c. Centronics Corporation v. Genicom Corporation

i. Facts : Centronics selling assets to Genicom, but can’t agree on value of the assets. Per K, they agree to have arbitration, and meanwhile, money held in escrow until value determined by arbitrator. Both parties agree it’s worth at least $5mm, so Centronics asking from money that’s undisputed, b/c they’ll get this amount anyway, and Centronics really needs this money. Genicom refuses, and Centronics alleging bad faith (that Genicom knows they are in dire need of the money, and they’re practicing opportunism in taking advantage that they will agree for less just to end the dispute).

ii. Outcome - Judge says K is clear – there’s no duty to release money from escrow until arbitration settles their dispute. He looks at the business purpose – parties want arbitration to go quicker. So an incentive to speed up arbitration is that no one gets money until dispute is settled, so no one is dragging their feet.

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II. Prevention, Hindrance, and the Duty of Cooperation – In every K, there is an implicit understanding that neither party will intentionally do anything to prevent the other party from carrying out his part of the agreement. It is likewise implied in every K that there is a duty of cooperation on the part of both parties. Thus, whenever, the cooperation of the promisee is necessary for the performance of the promise, there is a condition implied that the cooperation will be given.

a. Market Street Associates Limited Partnership v. Frey i. Facts : JC Penney sells their property, and leases it back. K has a clause that if they want to build a

store for at least $250k, pension trust will act in good faith to lend them the money, and if not, JC Penney has the option to buy back the property for a stipulated price. 20 years later, JC Penney requests a loan, but they deny it saying they only give loans for at least $7mm. JC Penney never mentioned the clause, and so demanded it can buy back property as per K, which was a lot less than what it was worth. Trust saying they were being tricked, but we don’t know, maybe they really just wanted the loan, and anyway trust should have read the K.

ii. The court pointed out that the essential issue was Orenstein’s state of mind (guy requesting the loan)

iii. Judge Posner suggests that even corp’s make mistake and the contracting partner should not be allowed to exploit these mistakes if they could correct the mistake at a very little cost. This imposes a duty of good faith dealing in performance (not necessarily negotiation). Remanded for jury.

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III. Exercise of Reserved Discretion a. Lender Liability and scope of the Duty to Act in Good Faith - Lenders may be found liable where there is a

bad faith refusal to honor commitment to finance. i. Three standards:

1. Limited – a prohibition of intentional dishonesty2. Expansive – community standards of decency and fairness

a. One of the purposes/values of a contract is to fix things, to make them certain and predictable. To use the expansive definition would be to make things uncertain, open the door for virtually unrestricted interpretation by each judge hearing a case.

3. Intermediate – prohibition on opportunistic behavior

ii. Provisions giving the lender sole discretion whether to continue funding and to call any amounts outstanding are best understood as bonding mechanisms used by the borrower to obtain more favorable credit terms. Trade-off:

1. Interest rates are set to reflect the risks banks are taking. 2. If banks have more discretion to cut off loan, then rates would be lower (less risk)

b. Feld v. Henry S. Levy & Sons, Inc. i. 1yr K for Df to sell all bread crumbs it produces to Pl; K says must have a 6mo cancellation notice. Df

stops producing b/c not economically feasible to continue. ii. Implied promise to try in good faith to keep producing. So, must determine whether Df stopped

production in good faith. Court says bad faith b/c if you stop producing just b/c profits aren’t as high as you expected. It would only be good faith if they would have incurred losses that were more than “trivial.” Factfinder has to determine which happened here.

c. Effect of “Best Efforts” Agreement on Contracts for Indefinite Quantity i. Just b/c parties entered an output or requirements K, doesn’t mean best efforts is implied. To

impose this obligation, parties must agree to use best efforts in addition to satisfying their obligation to perform their K in good faith.

ii. However, exclusive dealings imply best efforts. UCC 2-306(2): a "lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise

agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale."

iii. What are best efforts? - In most cases, courts use an objective standard, and ask whether the D has made reasonable efforts in the circumstances

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IV. Termination of Contractual Relations for Other than Breach: Employment Contracts a. Hillesland v. Federal Land Bank Association of Grand Forks

i. Facts : Pl, CEO of bank, discovered customers in financial difficulty & needed to sell farm, and he proposed that his sons buy it. Then told, conflict of interest, can’t be involved in transaction, per bank policies. Farm sold to his sons. Then bank investigated and discharged him b/c he violated standards of conduct, among other things.

ii. Breach of K – unless by K it says otherwise, default is that it’s an at-will employment.iii. Implied covenant of good faith & fair dealing – not unless says so in K. Again, default is at-will, and

court will not look into what the cause of termination was, unless it violates a statute (like based on discrimination).

b. Erosion of “Employment at Will” Doctrine i. Historically, the at-will doctrine was firmly adhered to.

1. An employee not subject to a collective bargaining agreement could be fired for a good reason, a bad reason, or no reason at all.

ii. Recently, employer's power to discharge has been limited by statute & judicial opinion. 1. Example - based on sexual o racial discrimination

ALLOCATION OF RISK

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I. Representations and Warranties of Quality – a warranty is a promise that a representation is true.a. Express Warranties (UCC §2-313) – an explicit representation of existing fact by the seller that the goods will

have certain qualities.i. §2-313(1) Where on the basis of the bargain (buyer relies on warranty) seller makes a statement:

1. Any affirmation of fact or promise made by the seller to the buyer which relates to the goods; express warranty that they shall conform to the affirmation or promise

2. Any description of the goods; express warranty that they’ll conform to the description3. A sample or model; express warranty that all goods conform to the sample/model

ii. “Puffing”: §2-313(2) says not necessary that formal words like warrant or guarantee are used, but merely that they are an affirmation of fact. Statement of opinion or commendation doesn’t create a warranty, it is merely “puffing.”

iii. §2-313(4) – This section also includes remedial promises, where there’s a promise by seller to repair, replace goods, or refund price if some event occurs. This kind of promise creates an obligation.

iv. §2-313A & §2-313B – clarifies that a manufacturer who makes an express warranty to the public (either through dealer or through ads), is liable if goods don’t conform.

b. Implied Warranties i. Implied warranty of merchantability (§2-314) – Unless excluded or modified, a warranty that goods

are merchantable is implied, if seller is a merchant with respect to those goods. Goods are 'merchantable' if they meet the following conditions:

1. Must conform to the standards of the trade as applicable to the contract for sale.2. Must be fit for the purposes such goods are ordinarily used, even if the buyer ordered them

for use otherwise.3. Must be uniform as to quality and quantity, within tolerances of the contract for sale.4. Must be packed and labeled per the contract for sale.5. Must meet the specifications on the package labels, even if not so specified by the contract

for sale.ii. Fitness for a particular purpose (§2-315) - is a warranty implied by law that if a seller knows or has

reason to know of a particular purpose for which some item is being purchased by the buyer, the seller is guaranteeing that the item is fit for that particular purpose.

c. Limitations of Warranties and Remedies - §§2-314 & 2-315 are default rules. Parties free to K around themi. Disclaiming an express warranty (§ 2-316(1)) – if the scope of the disclaimer is clear, and the scope

of warranty not as clear, the court should construe the disclaimer warranty, so that it doesn’t conflict with the disclaimer. But if there’s no reasonable way to construe the two as consistent with each other, the disclaimer is ineffective.

ii. Disclaimer of implied warranty (§2-316(2)) – must be conspicuous in the k (can’t be fine print). 1. If disclaiming warranty of merchantability, you must mention the word “merchantability,”

doesn’t have to be I writing, but if it is, writing must be conspicuous.2. If disclaiming warranty for fitness of a particular purpose, must be in writing, and must be

conspicuous. (Ex: No warranties which extend beyond the description here.)iii. Implied Limitations (§2-316(3))

1. Language of Sale – all implied warranties are excluded by expressions such as "as is" or "with all faults," or other language that makes it plain that there’s no implied warranty.

2. Examination – when buyer has examined, or refused to examine (only when seller demand that he does, but refuses, not simply when it’s made available for inspection) the goods, there is no implied warranty on defects he should have seen on inspection.

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

iv. Henningsen v. Bloomfield Motors 1. Facts : Pl buys a car for his wife. Wife gets into accident, and discovers it’s due to mechanical

defect or failure. They sue car manufacturer based on a breach of an implied warranty of merchantability (by the Uniform Sales Act). Express warranty disclaimed this implied one.

2. The attempted express warranty, which disclaimed the manufacturer of an implied warranty of merchantability is void, as against public policy; court doesn’t even look into the validity of the K.

3. Also, manufacturer also liable to buyer’s wife.

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II. Express Conditions a. Nature and Effect – If there’s a K, but Df breach, and an event occurs that impairs the value of the bargain to

the Pl, what protection is available? If K doesn’t specify, then court will enter “gap-fillers.” i. §84 – a promise to perform all or part of a conditional duty under an antecedent K is binding in spite

of the non-occurrence of the condition binding, whether the promise is made before or after the time for the condition to occur, unless

1. occurrence of the condition was a material part of the agreed exchange, and promisee doesn’t have a duty to make sure it occurs, or

2. uncertainty of the occurrence was a risk assumed by the promisor.ii. Dove v. Rose Acre Farms, Inc.

1. Facts : Pl works for Df; bonus program where if Pl works certain amount of time, can never be absent, never late. In the last week Pl got sick, still went to work, where Df told him he could just stay on the couch, and they would still count it. But Pl left for the hospital instead.

2. Pl says he substantially performed so he should get the bonus. But the condition was not met, so he didn’t fulfill the K. The point of the bonus program was not met. If you don’t meet the condition you cannot recover.

iii. Wal-Noon Corp. v. Hill 1. Facts : D leases property to Pl. Lease says Df responsible for any problem unless Pl’s

negligence. Problem with roof; Pl fixes it. Later Pl realizes Df is responsible, so wants the money he spent on the roof.

2. Implied condition that Df had to be notified (b/c how else would he know he’s responsible, and he also needs to know if Pl is negligent). Notice is an indispensable condition precedent to D's duty to perform under the covenant to repair.

b. Excuse of Express Conditions – If an express condition has failed, the promisor has a defense and may be discharged from the K w/o obligation to pay for part-performance, and whether or not promisor is in fact prejudiced doesn’t matter. But this can be harsh on the promisee.

i. So some possible grounds for excuse are: 1. an agreement by both parties modifying the K to discharge the condition

a. Modification/Rescission (§2-209) – You can modify the K w/o consideration. Buyer must agree & sign a disclaimer is K involves more than $500.

b. § 89 Modification of Executory Contract – promise modifying a duty under a K not full performed on either side is binding, if (a) modification is fair & equitable in view of circumstances not anticipated when K made, or (b) to extent provided by statute, or (c) to the extent that justice requires enforcement in view of material change in position in reliance on the promise.

2. Conduct by the party for whose benefit the condition was made that “waives” the conditiona. Clark v. West

i. Facts : Pl to write law books for Df to publish. K says Pl must abstain from alcohol to get higher rate. Df knew Pl was drinking.

ii. Df knew & said ok the Pl drinks. So he implicitly waived that condition.3. Changes circumstances that make compliance by promisee with the condition impracticable4. Discharge by the court.5. Ferguson v. Phoenix Assurance Company of New York

a. Facts : Pl insured for loss by burglary, but insurance provision says there has to be evidence of actual force on both inner & outer door. Outer door manipulated (no evidence of force), but inner door was visibly forced open.

b. Despite the provision, still found for Pl. The purpose of the provision was merely evidentiary – in avoidance of fraudulent claims. But there is still evidence of force, just not meeting the technicality. Court says against public policy.

c. Limitations on the Waiver Doctrine i. Conditions precedent (may be expressed or implied) – are terms of the contract. Most of the time

failure of a condition is not a breach but may provide the promisor with a defense.ii. If a promisor waives a condition, it is a unilateral modification to the contract.

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III. Constructive Conditions of Exchange : Dependent vs. Independenta. Historical Development – Previously covenants were defaulted as being independent, unless K clearly said

they were dependent. In Kingston v. Preston, Lord Mansfield changed default to dependent.i. Kingston v. Preston

1. Facts : D promises to give his silk business and some stock to Pl. As a condition precedent, had to pay some money towards the stocks.

2. The Judge looks at the subjective intent, and the objective “sense and meaning” of the parties to determine whether it’s dependent or independent. The rule now is that covenants are dependent unless explicitly indicated otherwise.

ii. Goodison v. Nunn

1. Facts : Pl to sell estate to Df for 210. Df refused to pay, and Pl never gave property. Pl sues for liquidated damages in K (21).

2. The court held that a Pl must tender his own performance before the Df’s failure to perform his reciprocal duties will be considered a breach. The Df’s duty to pay did not arise until the Pl had tendered the property and counter-performance was not yet due.

iii. Palmer v. Fox 1. Facts : K for sale of property; Df to pay in monthly installments for 5 yrs, and Pl has to

perform some covenants. Df stopped paying, & Pl sued for balance. Df claims Pl failed to perform covenants of K.

2. Rule : If covenant is dependent, then if one party breaches, the adversary party gets excused for non-performance.

3. Rule : If covenants are concurrent, then they are dependent.4. Rule : Even if it is a dependent covenant, there still must be a material breach in order to for

non-breaching party to be excused from performance. IV. Independent v. Dependent promises

a. Independent i. If parties intended that performance by each of them is in no way conditional upon performance by

the otherii. Parties exchanged promises for promises (not promise of performance for the performance of a

promise)iii. Failure to perform an independent promise does not excuse non-performance on the party of the

adversary, but each is required to perform his promise, and if he does not perform, he is liable to the adversary party for such nonperformance

b. Dependent i. If parties intend performance by one to be conditioned upon performance by the other

ii. If they are mutually dependent, they may be1. Precedent - a promise that is performed before a corresponding promise on the part of the

adversary party is to be performed2. Subsequent - a corresponding promise that is not to be performed until the other party to

the contract has performed a precedent covenant3. Concurrent - promises that are to be performed at the same time by each of the parties,

who are respectively bound to perform each.c. Default is dependant. Unless it is clear from the K that the covenants were intended to be independent.

i. Dependency offers both parties maximum security against disappointment of their expectations of a subsequent exchange of performances by allowing each party to defer his own performance until he has been assured the other will perform.

ii. Dependency avoids placing on either party the burden of financing the other before the latter has performed.

iii. If covenants are concurrent (to be done at the same time), then they are dependent.1. § 234 (1): Where all or part of the performances to be exchanged under an exchange of

promises can be rendered simultaneously, they are to that extent due simultaneously, unless the language or the circumstances indicate the contrary.

V. The Avoidance of Forfeiturea. § 234 (2): Except to the extent stated in (1), where the performance of only one party under such an

exchange requires a period of time, his performance is due at an earlier time than that of the other party, unless the language or circumstances indicate the contrary.

i. Where the contract is made to perform work and no agreement is made as to payment, the work must be substantially performed before payment can be demanded.

b. Substantial Performance – is a constructive condition to a party’s duty of performance that the other party have made a “substantial performance” of the latter’s previous obligations under the K. If one party fails to substantially perform, the other party’s remaining duties do not fall due.

i. Jacob & Youngs v. Kent

1. Facts : Pl builds Df’s home. K specifies Reading Pipe to be used. Due to an oversight unintentional) Pl uses anther brand, but of same quality. Df says condition of K not met, so doesn’t have to pay Pl. Cost a whole lot to replace with correct reading pipe, but no change in value.

2. Substantial performance occurs when the contract was not performed exactly, but was performed to the extent that the difference in the end result is insubstantial. Where there is substantial performance the harmed party may not recover the cost of completion, but rather the difference in market value.

ii. Excuse by Substantial Performance : The breach of the contract must be trivial and not material. You must look at whether the purpose of the contract has been served and look at the breach compared to what the person was supposed to do.

iii. Measure of Damages Under Substantial Performance : If the builder has substantially performed but there are defects in the building there is still a breach. If you have a breach, then you can sue for damages. Under substantial performance damages are measured (1) by the cost of completion or replacement where this can be done without economic waste OR (2) the amount by which the deficiency lessens the value (a diminution in value). We then decide which of these is appropriate to the situation.

iv. §241: Circumstances Significant in Determining Whether a Failure is Material : 1. The extent to which the injured party will be deprived of the benefit, which he reasonably

expected. 2. The extent to which the injured party can be adequately compensated for the part of that

benefit of which he will be deprived. 3. The extent to which the party failing to perform or to offer to perform will suffer forfeiture. 4. The likelihood that the party failing to perform or to offer to perform will cure his failure,

taking account of all the circumstances including any reasonable assurances. 5. The extent to which the behavior of the party failing to perform or to offer to perform

comports with standards of good faith and fair dealing.c. O.W. Grun Roofing and Construction Co. v. Cope

i. Facts : Df installs new roof for Pl. Dispute that roof not a uniform color and streaky. Pl refused to pay.ii. Df says substantial performance. Substantial performance only if breach is not material. A

contractor who tenders a performance so deficient that it can only be remedied by completely redoing the work for which the contract specified does not substantially perform his contractual obligation.

d. Doctrine of Divisibility – a K is divisible only when it explicitly states it; i.e. stipulating compensation for each separate installment as performed. A K under which the whole performance is divided into 2 parts of the whole performance and the performance of each part is agreed upon.

i. Lowy v. United Pacific Insurance Co .1. Facts : Df, contractor to perform excavation and grading work, and also street improvement

work. Df performs 98% of grading, but breaches & doesn’t do street improvements. 2. Court says this is a divisible K, b/c separate consideration, separate payments (progressive).

So since it’s divisible, first look at 1st part, yes substantial performance, they should be paid for that w/o looking at 2nd part where no work was done.

e. Employment Contracts – A hired laborer is entitled to compensation for work actually performed unless there is an express stipulation to the contrary in the K. Britton v Turner established this.

i. Britton v. Turner 1. Facts : K for employment; Pl to work for 1 yr and Df to pay him $120. Pl stopped working

after 9.5 months. Df saying he didn’t fulfill K, so can’t pay him.2. Under the old rule, a person who only partially completes the K would be under a worse

condition than someone who never performs at all. Because they would have put time and energy into performing partially.

3. Court feels precedent is bad, and changes this. Entitled to value of work performed (quantum meruit).

CHANGED CIRCUMSTANCES

I. The Test For Duty Under Impracticability : (1) At the time of the contract (2) performance is impracticable (3) without fault (4) existing fault, no reason to know or foreseeability (5) basic assumption.

a. If this test is met then there is no duty to perform and you will not have to pay damages for the contract UNLESS the facts or circumstances indicate otherwise because an allocation of risk was obviously on one party.

b. NOTE: that the impracticability has to be extreme and almost impossible to perform, but if you made this happen or knew/had reason to know of this then you will not have an excuse.

c. Restatement 456: Existing Impossibility : Unless a contrary intention is shown then a promise imposes no duty if the performance is impossible because of facts existing when the promise is made of which the promisor neither knows or has reason to know. Impossible is defined as strict impossibility and impracticability because of extreme or unreasonable difficulty.

d. Restatement 460: Where the existence of a specific thing is, either by terms of a bargain or in contemplation of parties necessary for performance, a duty to perform the promise never arises if at the time of the bargain is made the existence of the thing within the time for seasonable performance is impossible.

e. § 2-615. Excuse by Failure of Presupposed Conditions. Delay or non-delivery not a breach if made impractical by the occurrence or non-occurrence of which was a basic assumption on which the K was made, or if complying in good faith with a law. Seller must seasonably notify buyer of delay or non-delivery.

f. § 262 – death or incapacity of party makes performance impracticable g. §263 – if existence of something necessary for performance of a duty, it’s not existing (either by destruction

or never coming into being), makes performance impracticable.h. §264 – govt regulation or order can makes something impracticablei. §269 – temporary impracticability or frustration – suspends duty, doesn’t discharge it. Unless impracticable

to suspend it.

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II. Existing Impracticability a. § 266. Existing Impracticability Or Frustration – At time K made, performance made impracticable, or

principle purpose is frustrated, w/o fault b/c of a fact he had no reason to know, and it’s a basic assumption on which K made, no duty to perform arises.

b. A thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive or unreasonable cost

i. Mineral Park Land Co. v. Howard 1. Facts : Requirements K for Df to get all gravel they need from Pl. Took gravel that was above

ground level, then got the rest they needed from somewhere else. Pl suing says breach of K. But to get the gravel from below water level (they didn’t know this would have happened), would cost 10x more.

2. Availability of the gravel, doesn’t mean that’s its practical or reasonable for Df to extract it. Just b/c not impossible, doesn’t mean it’s not impracticable.

c. United States v. Wegematic Corp. i. Facts : Df said they’ll deliver a computer system to Pl, although it wasn’t designed yet. Deadlines w/

penalties for each day late. Df couldn’t deliver. They said existing impracticability, where at time K made, it could not be produced, but they were not aware of this.

ii. The defendant assumed the risk when they guaranteed that they could perform the contract. He assumed the risk of an underdeveloped product, but he marketed it as though it was already developed.

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III. Supervening Impracticability a. § 261 Discharge by Supervening Impracticability – Where after K made, performance made impractical w/o

his fault, by occurrence or non-occurrence of an event of which was a basic assumption on which K made, duty to perform discharged, unless otherwise said in K.

b. Taylor v. Caldwell i. Facts : Pl contracts to use Df’s music hall. Music hall burns down. Pl wants expected profits. No

express language in K that says music hall burning down excuses performance.ii. Very impractical to put in K expressly for everything that may occur. We need to imply this.

iii. After K made, performance made impractical b/c hall is burned down, no longer exists. The music hall being there was a basic assumption.

c. Canadian Industrial Alcohol Co. v. Dunbar Molasses Co. i. Facts : P contract to buy molasses, but Df delivers only small portion. Df says impracticable b/c their

supplier could not get more. ii. RULE: Doctrine of Impracticability does not include a normal failure of supply, unless it is explicitly

written in the contract. d. Dills v. Town of Enfield

i. Facts : Df agrees to sell land on 2 conditions. Impracticable for Pl to meet one condition, so Pl doesn’t meet the other either.

ii. §270 – partial impracticability – duty to render remaining part is unaffectediii. One condition independent of the other. Just b/c one is impracticable doesn’t excuse non-

performance of the other.

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IV. Frustration of Purpose a. § 265. Discharge By Supervening Frustration - Where, after a contract is made, a party's principal purpose is

substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.

b. Paradine v. Jane i. Facts : Paradine sues for 3 years back rent; Jane’s defense is that land was under control of Prince

Rupert (invasion).ii. Risk shifting K - if land wasn’t invaded, he would gain profit from use of the land. Also a risk that he

wouldn’t get a profit out of the land, and this is just a risk tenant took when he entered K. iii. He could have contracted with a force majour clause

c. Krell v. Henry i. Facts : Pl rents out rooms to Df overlooking a street where there was to be a coronation procession.

Never mentioned that coronation was reason for rental. Coronation canceled.ii. RULE: The doctrine of frustration may excuse performance when the underlying value or purpose

of the contract has been destroyed.iii. Although not explicitly mentioned, it was pretty obvious why the rooms were being rented out.iv. Also, the non-performance was in contemplation of the parties; they knew it might happen.

d. Washington State Hop Producers, Inc. v. Goschie Farms, Inc.

contracts ii outline spring 2008

Documents

health subsequently obtains

lenawee county board

illegal septic tank

western union telegraph

lowest bidder 149k

adversely affected party

pickles buys property

141k promise