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CONTRACTS II SPRING 1995 COURSE OUTLINEMark Anderson/ Farnsworth & Young 4th Ed.

Table of Contents

General Contract Principles......................................................................................

Parol Evidence Rule.................................................................................................Page 1Determining the Subject Matter to be Interpreted...........................................Page 1

Contract Interpretation.............................................................................................. Page 53 approaches to interpreting language of contracts:........................................Page 5Ambiguities.................................................................................................. Page 5Objective & Subjective Theories of Contract Interpretation...........................Page 6Function of Judge & Jury..............................................................................Page 6Trade Usage.................................................................................................. Page 7Implied Terms..............................................................................................Page 7

Concealment, Misrepresentation & Mistake............................................................Page 10Mistake: As to the nature of the transaction.................................................Page 10Mutual Mistake...........................................................................................Page 10Unilateral Mistake.......................................................................................Page 10Mistake as to the Subject Matter of the Contract..........................................Page 10

Conditions.............................................................................................................. Page 12Restatement §224 (Condition defined).........................................................Page 12Express Conditions.....................................................................................Page 12Conditions precedent...................................................................................Page 12Satisfaction Clauses....................................................................................Page 12Conditions and Forfeiture............................................................................Page 14Dependent Promises (Constructive Conditions) & Independent Promises.....Page 15Excuse of Condition....................................................................................Page 16Assurance of due performance ...................................................................Page 16Substantial Performance before Payment is Due..........................................Page 17Mutual Conditions Precedent/ Concurrent Conditions..................................Page 17Tender Page 18Materiality of Breach..................................................................................Page 18Divisible & Separate Contracts....................................................................Page 21Conduct that Alters Expectations.................................................................Page 22Restitution for Defaulting Plaintiff..............................................................Page 25

Impossibility, Impracticality, and Frustration of Purpose.........................................Page 27Impracticability ..........................................................................................Page 27Frustration of Purpose.................................................................................Page 28Cases Page 28

Remedies................................................................................................................ Page 33General rule................................................................................................Page 33Damage Formulas.......................................................................................Page 33Calculating Damages (Cases)......................................................................Page 34Measuring Expectation................................................................................Page 35

Doctrine of Specific Performance....................................................Page 35Lost Volume Sellers....................................................................................Page 36Duty to Mitigate Damages...........................................................................Page 37

Avoidability....................................................................................Page 37Costs to complete and diminution of value...........................Page 39

Foreseeability..................................................................................Page 41Consequential Damages.......................................................Page 41

Certainty.........................................................................................Page 43"Liquidated Damages" and "Penalties"........................................................Page 43

Policing the Bargain of the Unfair and Unconscionable...........................................Page 46

General Contract Principles

I. 2 Paradigms (goals to contract system)A. enforcing the contract as written (cannot go outside of the contract for any reason)

1. Supports values of:a. self-relianceb. predictabilityc. reduces litigationd. protects individuals' rights to contract

B. achieving justice/ fairness/ equity between parties1. concede that most contracts should be enforced2. however, in exceptional cases, they say that it's important to make whatever modifications are necessary to ensure fairness3. sure, there will be more litigation

Parol Evidence Rule

II. Determining the Subject Matter to be InterpretedA. In interpreting and enforcing a K, questions often arise as to whether the written instrument is the complete embodiment of the parties' intention.

1. General Rule: Where the parties to a contract express their agreement in a writing, with the intent that it embody the full and final expression of their bargain, any other expression—written or oral—made prior to the writing, as well as any oral expressions contemporaneous with the writing, are inadmissible to vary the terms of the writing.

a. see UCC §2-202 (Final Written Expression: Parol or Extrinsic Evidence)

2. It is a rule of substantive contract law, which precludes any showing of the ultimate matter of fact itself (that is, that the terms of the K are other than as expressed in the writing)3. DOES NOT apply to oral modification after K is signed.

B. PER's importance:1. prevents fraud/ "bogosity"

a. creating of bogus reasons for backing out of contract2. self-reliance

a. no sympathy for someone who doesn't read the terms of a Kb. also no sympathy for someone who doesn't get their desired terms in writing

3. reliabilitya. the virtue of getting it in writing

4. certaintya. clarifies what the end result of the negotiations is

Contract Law Outline (Part II) Page 1

C. Is the Writing an Integration?1. final expression2. complete or partial integration

a. if the document contains a merger clause reciting that it is complete on its face, this clause then strengthens the presumption that all negotiations were merge in the written document

D. Exceptions to PER 1. Collateral agreement exception

a. when there is a complete integrationb. OK to have some things not in writing if it is sufficiently distinct from the main part of the contract, then you wouldn't expect to see it in writing

(1) what is "normal" or "natural" to be included in the contract must be present

2. Mutual Mistake exceptiona. we can modify the contractb. must have evidence to show that the performing party would not have performed unless they believed it was required

3. Frauda. must improve intent to defraud

E. To prevent problems with PER (for your client)1. merger clause: says that no oral agreements are outstanding

a. "this document constitutes the complete integration of the agreement between the undersigned parties."

2. makes it tough to go beyond the 4 corners of the document F. After the K is signed:

1. At common law:a. modifications are not automatically prohibited if oral b. will not uphold clauses that say that oral modification is not allowed

2. UCC tried to change common law rule:a. UCC §2-209 (Modification, Rescission, and Waiver)

(1) no consideration necessary to modify(a) reason: it's not unusual for parties to change terms

(2) enforces any "no-oral modification" clauses(4) may be a waiver(5) can revoke waiver as long as there hasn't been reliance (by non-waiving party)

G. Presumption of a completed K if there is a writing1. Giani v. R. Russell & Co. (1924) 545

a. P (Giani) wants money damages for his lost earnings. Terms of K said he could not sell tobacco. P insists that as consideration for giving up his right to sell tobacco, he was given the exclusive right to soft drink sales in the building. A competitor shortly opened to sell soft drinks. P argued that this was a collateral agreementb. Held: Integrity of written contracts is important. Since P's promise to refrain from tobacco sales was included in the writing, it would be the natural thing to have included the promise of exclusive rights


c. Rule: Where the c/a rests entirely on an alleged oral understanding concerning a subject which is deal with in a written K, it is assumed that the writing was intended to set forth the entire agreement as to that particular subject

H. Best example of a collateral agreement1. Icehouse Case

a. Buyers of a house thought ice house was ugly (but it was on another property). Got agreement from seller to tear it down. Seller changed mind and didn't do it. This agreement was not part of the written sales contract.b. Held: this deal was so different from the sale of a house, that you would not automatically expect to see it in the sales contract. BUT, since the consideration was the same, it is related to the original agreement, and the PER does not apply

I. New way of looking at PER: Collateral Agreements Exception: to determine if the K is a "complete integration," court considers very evidence it's supposed to be deciding to admit

1. Masterson v. Sine (1968) 548a. Brother grants a deed to his sister, reserving right to repurchase land for original price until 2-1/2 years from date of K. Brother goes bankrupt. Extrinsic evidence that showed that they wanted the property to remain in the family. Therefore, reverter option was personal to the grantors and could not be assigned to creditors.b. Held: if a contract is merely a partial integration, OK to add consistent terms c. Rule: Evidence of oral collateral agreements should be excluded only when the fact finder is likely to be misled.d. rejects 4 corners test

2. Dissent's Concernsa. this decision made PER more confusing than it was with only the four corners testb. easier to defraud creditors

(1) could be a conspiracy between the partiesc. normal rule: if you gave someone a repurchase agreement, it is assignable

(1) THUS, the majority allows an addition of terms that actually contradict the written contract

J. Mutual Mistake: When parties intend to honor PER by trying to include all terms in writing, but in drafting, a mistake was made, then K can be reformed

1. Bollinger v. Central PA Quarry (1967) 556a. P. filed equity action asking that a K entered into by them (regarding depositing construction waste from PA turnpike constr. on P's property) be reformed to include a paragraph alleged to have been omitted by mutual mistake: that D was to put the waste under the topsoil and restore topsoil to cover the waste.b. Held: D did remove and set aside the topsoil on part of the area before depositing the waste and did replace it over the waste. It follows that it


would not have done so unless it had not so agreed. THUS, P proved mutual mistake in not having included it in the Kc. Rule: The fact that one of the parties denies that a mutual mistake was made does not prevent a finding of mutual mistake

K. No Oral Modification Clauses1. Court is trying to give some protection against bogus claims2. Wisconsin Knife Works v. National Metal Crafters (1986) 559

a. terms of K: orders placed/ acknowledged — Aug 81; delivery due date — Oct/Nov 81. D did not deliver. P sent more purchase orders in June 92 (subsequently rescinded). P sued for breach in Jan 93. There was a "no oral modification" clause in the K.b. National (performing party) is asking for modification and claim that paying party said okc. Held: Court requires reliance: P does not waive its right to demand prompt delivery when D modifies the K orally, even though there is a "no oral modification" clause in the K, UNLESS D has relied on the oral modification to D's potential detriment.

3. Dissenta. can only have a waiver by the course of performance

(1) it is reading this into the code, but it demonstrates that this is really a badly-drafted clause

b. basic premise: don't want to be taken advantage of by fraudulent behaviorc. Here, because paying party sent new p.o.s out 6 months later, they were considered to be acting as if they still had a continuing relationship with the performing party

Contract Interpretation

III. 3 approaches to interpreting language of contracts:A. 4 corners testB. circumstances surrounding the contract formation

1. falls somewhere in between 1 & 32. depends on type of evidence being admitted (this may not be parol evidence, in other words)

C. anything goes — any extrinsic evidence can be allowed1. (eg. "reasonably susceptible)

IV. Ambiguities: General rule: can use parol evidence to resolve ambiguities about the meanings of particular words

A. Frigaliment Importing Co. v. B.N.S. Int'l Sales Corp. (1960) 5721. 2 contracts: totaling 150,000 lbs of chickens; Π complained of the type of chicken sent (suing for damages). Breach of warranty claim: what was sent was not what the contract required. Π claimed that "chicken" meant broiling chicken.


2. Held: Π had burden to prove that its definition of chicken was correct. (b/c that's the only way they'd collect damages) Π did not meet the burden, and case is dismissed3. Ways to determine the definition of chicken:

a. look at the contract to see if it's definedb. extrinsic evidence (outside the writing)

(1) trade usage of the term(a) HERE, trade usage is not conclusive b/c there is conflicting testimony by the experts in the field(b) Look to: what did the parties do once they entered into the contract (could shed some light on what they thought the terms meant)(c) if it was really obvious that trade usage of word was "broiler chicken" Π has a right to rely on the trade usage and Δ would lose

(2) performance of the parties (subjective analysis)(3) price

(a) Δ argued that it was impossible to get Πs order for the low price that they agreed to pay

(4) dictionary (objective)(a) both definitions were included

(5) Department of Agriculture(a) it was not clear to the judge that these definitions were automatically incorporated into the contract

V. Objective & Subjective Theories of Contract InterpretationA. Where terms are ambivalent and the parties understand them in different ways, there is no contract1

1. Raffles v. Wichelhaus ("Peerless") (Eng. 1864) 580a. Π thought cotton was supposed to be on the Dec. Peerless ship, Δ thought it was to be Oct. boat.b. Held: By specifying the ship, the parties were attempting to specify the time. THUS, there was no meeting of the minds, and no contract to enforcec. Rule: where there is latent ambiguity, parol evidence may be introduced to show that D. meant one Peerless and P. meant the otherd. see Restatement §20 (Effect of Misunderstanding)

(1) no manifestation of mutual assent

VI. Function of Judge & Jury 582A. The meaning of K language is a question of fact

1 ? This is also the rule of Oswald v. Allen


B. YET, the interpretation of written agreements, as to which there is no dispute over the word used by the parties, is a question of "law" for the judge

1. distrust of unsophisticated, uneducated and (at one time) illiterate jurors2. desire for consistency in interpretation of some kinds of Ks

C. No requirement that K language must be ambiguous on its face1. Pacific Gas & Electric v. GW Thomas Drayage (1968) 584

a. D was to furnish labor and equipment necessary to repair P's steam turbine. D was to obtain insurance, which was to have a cross-liability clause extending the coverage to P's property. Lower court held that the plain language of the agreement required D to indemnify2 P for injuries to P's property, and refused to hear extrinsic evidence to contradict this interpretationb. Held: REVERSED. Lower court should have admitted the extrinsic evidence. As long as language is reasonably susceptible to ambiguity, it doesn't have to be ambiguous on its facec. Test of admissibility of extrinsic evidence: whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.

D. Where the language is clear, no ambiguity will be read in to alter the parties' intent in the K

1. Stewart v. McChesney (1982) 588a. S. gave Mcs right of first refusal for the S's farm if S received a bona fide offer to buy, and the Mcs may exercise their right to purchase at a value equivalent to the market value accd'ing to the assessment rolls maintained by the County. Farm was appraised at $50,000; S's received 2 offers of $30K and $35K. Mcs tried to exercise right by offering $7,820 (the value on the County rolls). Super.Ct. said Ss must sell to Mcs at that price.b. Held: Affirmed. There is no ambiguity, and none should be read in. The plain meaning of the words indicates S's intent to give Mcs a good deal

2. Dissenta. it is the height of unfairness to grant appellee's requested decree for specific performance at a price based on a valuation which took place in 1972.

VII. Trade UsageA. Even when the language is clear and unambiguous, the courts are often quite willing to ignore it if trade usage indicates something else.

1. Hurst v. W.J. Lake (1932) 594a. H contracted to sell Lake 350 tons of horse meat scraps. The specs stated minimum 50% protein, allowing a $5 discount for any pieces at less than 50%. Actual delivery had protein of 49.53 to 49.96%.b. Held: None of the reasons to exclude extrinsic evidence appeals to us as sufficient to exclude evidence of custom and assign to the words their

2 ? Indemnify: to restore the victim of a loss, in whole or in part, by payment, repair or replacement.


common meaning only, even though the instrument is nonambiguous upon its face.c. Reasons to exclude extrinsic evidence:

(1) unambiguous language(2) protects the writing from attack by some occasional individual who will seek to employ perjured testimony in proof of alleged custom

VIII. Implied TermsA. Why would you read in an implied term?

1. b/c it's necessary to effectuate intent of the parties2. b/c necessary to achieve a fair and reasonable result

B. Court prefers allowing business deals to happen, and will read in a good faith duty to perform on the K in order to preserve Ks that seem to make sense

1. Wood v. Lucy, Lady Duff-Gordon (1917) 601a. D gave P exclusive right to promote her name and clothes. D would get half the money. Then, P sold to others without going through D.b. Held: P's promise to pay D one-half of the profits and revenues from the exclusive agency and to render accounts monthly was an implied promise to use reasonable efforts to bring profits and revenues into existence.

C. Percentage Leases1. Implied covenant only extends to covenant against non-compliant use. Does not require D to use property in only one way

a. Dickey v. Philadelphia Minit-Man Corp. (1954) 603(1) P leased to D land for a term of 10 years with an option to renew for an additional 10 years. Minimum rent was stipulated. D washed cars until 1952, and started to simonize as his principle business. P sued on the ground that D had defaulted by discontinuing the business specified in the lease.(2) Held: this use was not forbidden by any implied obligation in the lease. Only implied obligation is good faith use of legitimate business judgment, not to move any part of business, nor to deliberately seek to decrease percentage of rent. (3) Rule: A provision in a lease that the premises are to be used only for a certain prescribed purpose imports no obligation on the part of the lessee to use or continue to use the premises for that purpose

(a) such a provision is a covenant against a noncomplying use, not a covenant to use

2. Implied covenant for good faith and fair dealings, where a breach would result in punitive damages, is limited to egregious cases

a. Nicholson v. United Pacific Insurance Co. (1985) 606(1) N had lease K with UPI, and N was responsible to renovate, following UPI's approval of the architectural plans. N had increasing difficulty getting in touch with UPI. UPI then rescinded


the lease, b/c they had decided to move to a different city. N then sued seeking punitive damages for breach.(2) Held: In order for punitive damages to be awarded in a tort action for a breach of this covenant, the breach must amount to oppression, fraud or malice. The jury had adequate evidence on which to find the culpable conduct necessary for an award of punitive damages.(3) General Rule: cannot get punitive damages in K(4) CA Supreme Court invented a new tort, and held that a defendant would be subject to tort remedies (thus, pun. dmgs) when, in addition to breaching a K, it sought to shield itself from liability by denying in bad faith and w/o probable cause that a K exists or ever existed.

(a) limited to egregious situations3. UCC §1-203 (Obligation of Good Faith)

a. good faith = honesty in fact (based on UCC §1-201(19) (Statute of Frauds))

4. Court will not second-guess a company's business judgment if it was made in good faith

a. Zilg v. Prentice-Hall (1983) 616(1) publishers reserved the right to decide how many to print and how much to spend; author got an advance for finishing the manuscript and doesn't have to pay for the publishing out of pocket. Author also gets percentage of sales (royalties)(2) Held: The publisher only has the obligation of exercising good faith business judgment(3) implied term = "best efforts"

5. Trade usage isn't allowed to be a total negation of the K's terms; this is an exceptional case b/c the price jump was so unprecedented and so unexpected

a. Nanakuli Paving & Rock Co. v. Shell Oil Co. (1981) 634(1) N. K w/ Shell for them to provide asphalt (requirements contract3). 1969 entered; renewed; complained of Shell's behavior in 1974. N. made a K with government at $44 price for asphalt. When Shell raised the price at delivery did not allow N. to pass on the cost in their bid to the government(2) Held: Under the facts of this case, a jury could reasonably have found that Shell's acts on two occasions to price protect N. were not ambiguous and therefore indicated Shell's understanding of the terms of the agreement w/ N. rather than being a waiver by Shell of those terms(3) implied term = price protection

(4) UCC §1-208(2) (Course of Performance or Practical Construction)

3 ? Requirement contract: one in which party promises to supply all specific goods or services which other party may need during a certain period at an agreed price, and in which the other party expressly or implicitly promises to obtain his goods or services from the first party exclusively


6. Course of dealing and trade usage are not synonymous with verbal understandings, terms and conditions

a. Columbia Nitrogen Corp. v. Royster (1971) 644(1) Columbia agreed to buy 31,000 tons phosphate. Price adjustment clause allows price to go up if Royster's price of production goes up (that's all). Col. wants to introduce evidence of trade usage in their defin's(2) Held: There's a gap in the contract (it's silent abt certain things); Court says it should be filled in with trade usage.(3) applied Parol Evidence Rule as test of admissibility(4) merger clause: court held that this did not preclude the admissibility of trade usage(5) UCC §2-202 (Final Written Expression: Parol or Extrinsic Evidence) (see 1)

Concealment, Misrepresentation & Mistake

IX. Mistake: As to the nature of the transactionA. Conditions to demand before relief would be authorized:

1. mistake must be mutual betw the parties2. must be material to the agreement

a. eg., it changes the basic agreement3. must be basic

a. it would be unfair to require performanceb. the mistake goes to the root of the Kc. risk-bearer is not the person suing

B. See Restatement §152 (When Mistake of Both Parties Makes a K Voidable)C. See Restatement §154 (When a Party Bears the Risk of a Mistake)

X. Mutual MistakeA. relief granted unless:

1. K specifically says who does bear the risk for the mistake (rare)2. parties contract knowing that their knowledge is limited

a. knowledge of her ignorance (in the Diamond case) will sufficeb. conscious ignorance and proceeding to contract

3. assumption of the riska. how much risk do you assume?

(1) her knowledge was more limited than it could have been(2) she may not have realized that it might be a diamond

b. reasonableness of the risk assumed(1) passage of time — parties should rely on stability of transaction over a period of time

c. fault of aggrieved party(1) ease of getting to the truth

d. except with real property(1) cannot rescind after a done deal


XI. Unilateral MistakeA. relief may be granted for a unilateral mistake

1. by one party as to a basic ... unless you assume the riska. eg. rare Charles Dickens manuscript for $1

storekeeper assumed the risk because he put a price on there knowing his limited knowledge about rare books

b. eg. Baseball card store — rare card priced at $100clerk makes a mistake and charges $1

(1) can it be rescinded? YES(2) Buyer knows it was the seller's mistake, cannot thus keep it

XII. Mistake as to the Subject Matter of the Contract 356A. Mutual mistake of fact will allow a rescission of the K

1. Beachcomber Coins Inc. v. Boskett (1979) 358a. P retail dealer in coins, D part-time coin dealer. D sold P a dime, supposedly minted in Denver 1916, for $500. P rec'd an offer for coin for $700, subject to certification. Cert. resulted in a finding that the coin was counterfeit.b. Held: This is a classic case of rescission for mutual mistake of factc. Rule: negligent failure of a party to know or discover the facts as to which both parties are under a mistake does not preclude rescission or reformation on account thereof.

B. When both parties know that they are dealing in one item, and it turns out to be another, there can be no rescission.

1. Wood v. Boynton (1885) (diamond note case) 361a. Girl brought in unidentifiable stone to a jeweler, who also didn't know what it was. Jeweler bought it for $1. It turned out to be an uncut diamond worth an estimated $700. Judgment for D (jeweler) was affirmed on appeal:b. Held: When this sale was made, the value of the thing sold was open to the investigation of both parties, neither knew its intrinsic value, and, so far as the evidence in this case shows, both supposed that the price paid was adequate

Conditions

XIII. Restatement §224 (Condition defined)A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a K becomes due.

XIV. Express Conditions


A. condition can be something outside of your control (and beyond the other party's control)

1. eg. if Atlanta is awarded the Olympic games in 1996, your promise to rent rooms will stand2. sometimes may be ignored by the court

B. precedent = one that must happen or be performed before some right dependent thereon accrues, or some act dependent thereon must be performedC. subsequent = condition referring to some future event, upon the happening of which the obligation becomes no longer binding upon the other party, if he chooses to avail himself of the condition

1. eg. if party fails to perform a separate act, he will cancel the contract between the parties

D. If condition is not followed:1. will excuse Π from his obligation under the contract

a. and Π can get damages2. if the provision is NOT a condition,

a. parties are not excusedb. only remedy is a suit for damages

E. Effect of a Condition—Equitable Remedy1. if a contract is not enforceable due to the failure or occurrence of a condition, the party who provided benefits to the other party can usually recover under unjust enrichment theories (although the measure of damages may be lower than the K price)

XV. Conditions precedent must be first satisfied, or the parties are excused from performance

A. Luttinger v. Rosen (1972) 6491. Πs duty: to buy the house. condition: to get a mortgage at this rate. If not, then excused from performance under the contract and can back out of the deal. Must make a diligent effort to fulfill the condition2. Held: In this case, the language of the K is unambiguous and clearly indicates that the parties intended that the purchase of the defendants' premises be conditioned on the obtaining by the Ps of a mortgage as specified in the K.

a. any additional offer by the Ds to fund the difference in interest payments could be rejected by the Ps.

XVI. Satisfaction ClausesA. Good faith requirement read into the K, since there are too many variables to be considered by the reasonable person standard.

1. Mattei v. Hopper (1958) 652a. P agreed to buy D's shopping center. In their K is a satisfaction clause: pendant upon P's satisfaction with the leases that he can obtain. P then tries to purchase the land, and D refuses saying that the satisfaction clause changed the mutuality of the agreement.b. Held: The contract here was neither illusory nor lacking in mutuality b/c of the satisfaction clause.


c. as long as a satisfaction clause deals with an objective reason to refuse contract, it is not illusory.d. See Restatement §228 (Satisfaction of the Obligor as a Condition)

(1) an interpretation is preferred under which the condition occurs if a reasonable person in the position of the obligor would be satisfied

B. Subjective Satisfaction Clauses: Does not require that the satisfaction be reasonable

1. Gibson v. Cranage (1878) 654a. D = man whose daughter had died; P = managed an artist. P offered to D to paint a portrait from a photo to Ds complete satisfaction

(1) if D not satisfied, doesn't have to payb. Held: Where parties thus deliberately enter into an agreement which violates no rule of public policy, and which is free from all taint of fraud or mistake, there is no hardship whatever in holding them bound by itc. Ct determines that "to Δs satisfaction" is not an objective element

(1) thus, not required to be reasonable(2) subjective good faith requirement

(a) The only thing Δ has to do is look at the picture(b) this is what Gibson bargained for(c) good faith = Δ looking at it

C. Satisfaction of Independent 3d Party: Building Contracts 6551. Some of the problems inherent in making a party's duty to perform conditional on its own satisfaction can be eliminated by making its duty to perform conditional instead on satisfaction of an independent third party (eg. an expert)

D. Majority Rule: general contractor, not the subcontractor, assumes the risk of nonpayment by the owner, and thus, the subcontractor must be paid regardless

1. Peacock Construction Co. v. Modern Air Conditioning (1977) 659a. Peacock (D) builder of condo project. P. was subcontractor. D was to make final payment to P "within 30 days after completion, written acceptance by the Architect and full payment therefor by the Owner." Owner failed to pay, and D, then, also did not.b. Held: Provisions of the kind disputed here do not set conditions precedent, but rather constitute absolute promises to pay, fixing payment by the owner as a reasonable time for when payment is to be madec. Rule: small subcontractors will not ordinarily assume the risk of the owner's failure to pay the general contractor.d. Parties to these contracts may shift the risk of payment failure by the owner to the subcontractor, BUT the contract must unambiguously express that intention (burden of clear expression is on the general contractor)

E. Minority Rule: Promise to pay on condition of Owner payment shifts risk on non-payment to subcontractor

1. Mascioni v. I.B. Miller (1933) 662


a. Subcontractor (Mascioni/P) made K with general contractor (Miller/D). Terms = "payments to be made as received from Owner".b. Held: D would not profit by P's performance unless the Owner paid the stipulated price. This was the D's risk, but the D's promise to pay on condition that payment was received by D shifted that risk to the P's.

F. Failure to meet a condition precedent will cancel the contract between the parties1. Hicks v. Bush (1962) 663

a. Parties engaged in a merger of their two companies. Each party would subscribe to stock in the new company, the consideration for which was the transfer to the new company the stock in the old companies. Certain funds were procured outside the K (condition precedent) before the K was to take effect. D did not transfer the stock of their company to the new company, and as a result, P did not receive stock in the new company.b. Held: The parties did not contemplate performance of the written agreement until such funds were first received.

(1) THUS, the merger was to be a proposal only and that, even though the formal preliminary steps were taken, the writing was not to become operative until the funds were raised.

c. Rule: Parol evidence is admissible to prove a condition precedent to the legal effectiveness of the written agreement if the condition does not contradict the express terms of the written agreement

XVII. Conditions and Forfeiture 667A. Restatement §227 (Standards of Preference With Regard to Conditions)

(1) in resolving doubts as to whether an event is a condition ... an interpretation is preferred that will reduce the obligee's risk of forfeiture (the denial of compensation)

B. Distinguish between Conditions or Duty (Promise) 668 (see p. 22 in notes)1. Parties:

a. A = ship owner (promise to sail and pick up cargo)b. B = cargo owner (will pay for it)

2. B wants to add "sail with the next wind" into the Ka. if promise,

(1) A says, "I will sail with the next wind"(2) if violated, B will be entitled to ONLY DAMAGES, but cannot cancel his obligations

b. if condition,(1) B says, "I will pay only if you do sail with the next wind"

(a) if violated, B doesn't have to pay(b) CAN'T sue for damages b/c Δ did not promise to sail with the next wind

i) ONLY RELEASE B (and A) from K requirements(c) A did not undertake a duty

c. if BOTH,(1) A says, "I will sail with the next wind" AND B says, "I will pay only if you do sail with the next wind"


(2) if violated, B can sue for damages AND doesn't have to pay3. Restatement §225 (Effects of Non-Occurrence of a Condition)

a. "Performance of a duty subject to a condition cannot become due unless the condition occurs or its non-occurrence is excused"b. "Unless it has been excused, the non-occurrence of a condition discharges the duty when the condition can no longer occur"c. "Non-occurrence of a condition is not a breach by a party unless he is under a duty that the condition occur"

XVIII. Dependent Promises (Constructive Conditions) & Independent Promises 670A. When there are no express conditions in the KB. Court reads them in, even though the parties only made promises

1. the analysis is different when conditions were actually included in the writing2. A promise becomes a condition if it's so important to the K that you wouldn't expect the other party to perform without it

a. Everything you undertake to do in a K is a promiseb. the only question, then, is if that promise is also a condition

C. Independent 1. you must perform that promise regardless of other party's performance

D. Dependent 1. must only be done if something else has happened (conditioned on another promise)

E. Mutual (from Kingston)1. if party A was ready and offered to perform2. AND party B neglected or refused to perform

a. THEN, party A has fulfilled his obligation, and may maintain an action for default of party B

F. Constructive Condition: If promise is sufficiently important to the contract, then it's considered a condition precedent, THUS dependent

1. Kingston v. Preston (Eng. 1773) 672a. D was a silk mercer, and P had entered his business as an apprentice. The articles of indenture provided that after a year and 3 mos, D would retire. Thereafter, the business was to be carried on by P and a partner (nominated by D). P was to pay for his share of the business in monthly installments. P agreed to give D "good and sufficient security," approved by D, at and before the sealing and delivery of the deeds for the business. D then refused to surrender the business at the appointed time.b. Held: judgment given for D, because the part to be performed by the P was clearly a condition precedent

(1) the essence of the agreement was that D should not trust to the personal security of the P, but should have good security for the payment of the money(2) the giving of such security was a condition precedent

c. regarded as the chief inspiration for constructive conditions

XIX. Excuse of Condition


A. A duty of immediate performance does not become absolute until the conditions1. have been performed OR2. have been legally excused

B. Methods of legal excuse1. actual breach (will excuse the duty of counter-performance)2. anticipatory repudiation

a. which can be retracted before acceptance (see below)3. substantial performance4. divisibility of K

C. D cannot repudiate contract when there is no material breach1. Walker v. Harrison (1957) 679

a. D is in the dry cleaning business. Rents from P a billboard for 36 months. D agreed to maintain and service the billboard (which would include cleaning ... as often as deemed necessary by lessor). D made only one payment. Shortly after, someone hit it with a tomato, and rust was visible. D called P for maintenance, which was not forthcoming.b. Held: There was no valid ground for D's repudiation and their failure thereafter to comply with the terms of the K was itself a material breach, entitling Walker, upon this record, to judgment.c. This not material because P eventually did comply

(1) possibly, would be different if Δ had gotten someone else to clean it, and given Π the bill(2) if a delay only, then they may have come close enough to have fulfilled the condition

d. OBJECTIVE ELEMENT: good faith obligation to perform as a reasonable person would in maintaining the sign

D. Restatement §241 (Circumstances Significant in Determining Whether a Failure is Material)

XX. Assurance of due performance A. UCC §2-609 (Right to Adequate Assurance of Performance)

1. "A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired."2. suggests that a lawyer's best service might be to direct a carefully expressed demand on behalf of client for "adequate assurance of due performance."

B. Restatement §251 (When a Failure to Give Assurance May be Treated as a Repudiation)(1) "where reasonable grounds arise to believe that the obligor will commit a breach ... the obligee may demand adequate assurance ... and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance."1. this rule not strongly founded on precedent

XXI. Substantial Performance before Payment is DueA. Stewart v. Newbury (1917) 684


1. P (builder) who offered to do excavation work for D's new building. D accepted the offer. P said, "I will expect my payments in the usual manner." P began billing once a month. D refused to pay, and work was discontinued.2. Held: For D. Where a K is made to perform work and no agreement is made as to payment, the work must be substantially performed before payment can be demanded. 3. no customary practice of periodic payments4. courts are not generally looking for easy outs for the parties

a. missing a few payments is not enough for an out, when they eventually will pay

B. Restatement §234 (Order of Performances)1. where work is to be done by one party and payment is to be made by the other, the performance of the work must precede payment, in the absence of a showing of contrary intention

XXII. Mutual Conditions Precedent/ Concurrent Conditions 686A. Concurrent conditions/ obligations are supposed to be satisfied at the same time by each party

1. Kanavos v. Hancock Bank & Trust Co. (1985) 687a. D gave P the right to acquire all stock of a company before the bank sold the stock to anyone else on the same terms. D then gave P $40,000 to sell his option to purchase. Then sold the stock to another for $760,000 w/o giving P notice or opportunity to purchase.b. Held: Kanavos' financial ability to pay was material b/c he should not recover K damages, even from a repudiating promisor, under an agreement to sell stock unless he could have complied with his concurrent obligation to pay for the stock c. Rule: When performance under a K is concurrent, one party cannot put the other in default unless he is ready, able and willing to perform, and has manifested this by some offer of performance

(1) although a tender of performance is not necessary if the other party has shown that he cannot or will not perform

d. P has burden to prove that he was able to perform his obligations under a K of the type involved here

XXIII. Tender 692A. UCC §2-507 (seller's tender of delivery)B. UCC §2-511 (buyer's tender of payment)C. Defined:

1. contemplates an offer coupled with the present ability to fulfill all conditions resting on the tendering party

2. must be followed by actual performance if the other party shows himself ready to proceed


a. Comment to UCC indicates that something less will suffice to put the other party in default if he fails to proceed in some manner

D. Perfect Tender Rule UCC §2-6011. every promise in a K for sale of goods viewed from perspective of the buyer as a constructive condition2. So, if goods deviate in any way from the terms of the K,

a. seller owes damagesb. buyer can reject the goods

3. BUT, if buyer accepts the shipment, he must pay the K price4. Currently, more restrictions on the perfect tender rule:

a. seller has the right to cure the defect — UCC §2-508(1) if reason to believe that goods were okay even though there were problems, allowed time to fix (would look to prior dealings)

b. if buyer accepts, and then tries to reject (and return) the goods, buyer must show substantial impairment — UCC §2-608

(1) once goods are accepted, you may revoke acceptance if you find defects subsequently ONLY if value is substantially impaired.(2) see Hays Merchandise Company v. Dewey at p. 19

XXIV. Materiality of BreachA. Breach Occurs when

1. the promisor is under an absolute duty to perform, AND2. this absolute duty to perform has not been discharged

B. Minor Breach1. if the obligee gains a substantial benefit of the bargain, despite obligor's defective performance

a. eg. insignificant delays in completing performanceb. eg. small deficiencies in the quality or quantity of performance where precision is not critical

2. Result of minor breach:a. Aggrieved party can get damagesb. BUT, Aggrieved party is not excused from performance

C. Material Breach1. if the obligee does not receive a substantial benefit of the bargain as a result of obligor's breach2. Result: non-breaching party may

a. treat the K at an end ANDb. will have the immediate right to sue for damages for the entire K

D. Willful breach1. Even a conscious and intentional departure from the K specifications will not necessarily defeat recovery

a. INSTEAD, it may be considered as one of the several factors involved in deciding whether there has been full performance

2. If willful transgression, then doctrine of substantial performance is unavailable (says Cardozo)

E. Substandard Performance: Building Contracts


1. Where P did not use the exact same pipe, but pipe similar to it, and the function is essentially the same, then the defect is insignificant, and the P will have substantially performed

a. Jacob & Youngs v. Kent (1921) 501; 694(1) Π used similar pipe to one required in contract. $77,000 house -- done -- Δ is living in it. Plumbing was done with the wrong pipes (thus, Δ argues, did not fulfill the terms of the contract). Underlying conflict: about $3500 Π wants to be paid (Δ did not pay it because of the wrong pipes). Δ demanded Π to rip out the pipes; Π didn't do it. Δ did not sue to get the pipes ripped out, Π did -- to get payment.(2) Held: There are more important matters besides strict performance. Strictness depends on the nature of the transaction. Courts find fairness more important than performance. (3) Rule: An omission, both trivial and innocent, will sometimes be atoned for by allowance of the resulting damage, and will not always be a breach of the condition to be followed by a forfeiture

b. Dissent (1) P did not perform the K b/c he failed to include the pipe that D specifically bargained for

2. Substantial Performance in Context 695a. If the performance meets the essential purpose of the K, then substantial performance will be met.

(1) Plante v. Jacobs (1960) 697(a) P (Plante) contracted with D to build D's house for $26,765. Π built house, Δ wouldn't pay (alleged that Π misplaced a wall by a foot). Π didn't finish building, instead, sued to establish a lien on property to recover his cost.(b) Held: Although the Ds received a house with which they are dissatisfied in many respects, the contract was substantially performed. Ds were not damaged by the misplacement of the wall.

i) trial court was correct in allowing damages for the costs to repairii) To tear down the wall now would cause unjustifiable economic waste.

(c) TEST: What amounts to substantial performance is whether the performance meets the essential purpose of the K

F. Delayed Performance: Sales of Goods 1. The non-occurrence of a condition precedent entitles the other party to rescind or treat its contractual obligations as discharged.


a. Internatio-Rotterdam v. River Brand Rice Mills (1958) 710(1) D=Rice Mills; P=Internatio. July 1952: 95,600 pockets of rice @ $8.25/ pocket. Delivery to Houston or Lake Charles: (seller's choice). Delivery by December 1952, with two week's notice (buyer's choice). Once buyer tells seller where to ship, seller has two weeks to deliver. Buyer chooses: 50,000 --> Lake Charles, and 46,000 --> Houston.

(a) Dec 17, 1952: * last day for seller to receive instructions and still be able to deliver by December 31, 1952.(b) no directions arrive(c) Dec 18 (am) Δ rescinds the contract (for lack of 2-week notice)

(2) Held: The parties' duties as to shipment to each port were paired and reciprocal, and that performance by the parties as to Lake Charles did not preclude the D's right of cancellation as to Houston.

(a) The giving of notice was a condition precedent to D's duty to ship. The provision for the December delivery went to the essence of the K. The contract was dependent upon this condition precedent.

2. "Mercantile Performance" 715a. Buyer's Remedies: Fairness & Efficiency

(1) UCC § 2-608 (Revocation of Acceptance in Whole or In Part)(a) once goods are accepted, you may revoke acceptance if you find defects subsequently ONLY if value is substantially impaired . (b) purpose = lemon laws

3. Revocation must be communicated to the other party for it to be effective.a. Hays Merchandise Company v. Dewey (1970) 720

(1) Δ (Dewey--hardware retailer) ordered stuffed animals and other toys from Π to sell in his store. order totaled $2500-3500. Δ received $500 of stuffed animals -- about 1/2 of what he had ordered. Received bill for $3500. Δ claimed that Π failed to deliver $250 of stuffed animals and did not pay(2) Held: For P. There was no material breach because the value of the installment was not substantially impaired by the absence of some of the stuffed animals. In view of the seasonal nature of the toy business, and the somewhat faddish demand for certain toys, this delay by D in giving notice was unreasonable.(3) Rule: When delivery in separate lots is authorized, to be separately accepted, a nonconforming lot may be rejected only "if the non-conformity substantially impairs the value of that installment.

XXV. Divisible & Separate ContractsA. Separate Ks; Divisibility

1. separate: when promises are outstanding between two parties under multiple Ks


a. Rule: Neither the UCC nor general contract law gives either party to a contract the right to refuse performance b/c the other has breached a separate K between them

2. divisible: when parties have provided for paired exchanges under a single K3. Restatement §240 (Part Performance as Agreed Equivalents)

a. "if performance . . . can be apportioned into corresponding pairs of part performances . . . , a party's performance of his part of such a pair has the same effect on the other's duties to render performance of agreed equivalent as if only that pair of performances had been promised"

4. UCC §2-612 ("Installment K"; Breach)B. Contract is divisible (and thus payable) when separate consideration is paid for distinct parts of the K

1. Gill v. Johnstown Lumber (1892) 725a. P agreed to drive 4 million feet of lumber down river, but flood prevented him from finishing. K specified that payment would happen for every 1000 feetb. Held: While the contract is severable, and the P entitled to compensation at the stipulated rate for all logs and ties delivered at the specified points, there is no reason or authority for the claim for compensation in respect to logs that were swept by the flood to the delivery site.c. Rule: If the delivery of the cargo is in its nature, divisible, it is not a condition precedent. The P is then entitled to recover freight in proportion to the extent of such delivery, leaving the D to his remedy in damages for the short delivery.d. Divisible K = installment K: major advantage if you want to avoid forfeituree. value of divisibility doctrine

(1) is it reasonable to assume that this can be subdivided b/c parties intended payment/ value for each item?

C. When a contract is not divisible, partial performance will not constitute a completion of the K

1. PA Exchange Bank v. U.S. (1959) 727a. Government contract. Lerner was to equip itself for the production in volume of an item called a microwave magic tee. 4 steps to be completed: 1st 2 were preparing; 3 was acquisition of certain equipment; 4 was to produce at gov'ts request. Lerner was to remain ready for a six-year period in anticipation of a national emergency. Lerner went bankrupt after completing steps 1-3.b. Held: Since the government did not ultimately get what it bargained for (a readiness for 6 years) which was essential to the K, the K cannot be divisible and assigned to creditors.

D. The Uses of Divisibility 7281. A failure to perform an individual promise does not excuse non-performance on the part of the adversary party.

a. K&G Construction Co. v. Harris (1960) 729


(1) D contracted to do excavation work on P's property (P was general contractor). In the course of employment, one of D's employees drove the bulldozer too close to P's newly constructed wall, causing it to immediately collapse. Subc submitted bill for work done, P did not pay b/c wall was not compensated for. D discontinued work.(2) Held: When the subcontractor's employee negligently damaged the contractor's wall, this constituted a breach of the subcontractor's promise to perform his work in a "workmanlike manner and in accordance with his best practices."(3) Rule: There is a presumption that mutual promises in a K are dependent and are to be so regarded whenever possible (4) So, whoever materially breaches a K pays the damages and other party is excused from performance

b. this case appears in "divisibility" b/c P's attorney argued that the K should be considered divisible b/c each house constituted a complete part of the K

(1) THUS, when D finished working on each house, had conferred value to each house, and would be paid for that work

XXVI. Conduct that Alters Expectations 735A. Anticipatory Repudiation 735

1. Anticipatory Breacha. A party's expectation of receiving a promised performance is profoundly affected, naturally, by the promisor's considered declaration that it will not be forthcoming

2. Repudiation4 a. by either party to a K may have these effects:

(1) to expose that party to an immediate action for breach(2) to excuse the other party from compliance with constructive conditions, founded on that party's commitments under the K

3. Restatement §250 (When a Statement or an Act is a Repudiation)a. statement indicating obligor will breach that would of itself give the obligee a claim for damages ORb. a voluntary affirmative act which renders the obligor unable or apparently unable to perform without any such breach

4. Restatement §253 (Effect of a Repudiation as a Breach and on Other Party's Duties)

a. repudiation alone gives rise to a claim for damagesb. duties to render counter-performance are discharged

5. non-repudiating party can:

4 ? Repudiation: a rejection of a K before performance is due.


a. ignoreb. make other arrangementsc. sue for damages

6. Can calculate damages for anticipatory repudiation:a. when they learned of repudiationb. when they learned of repudiation plus a commercially reasonable timec. when performance is due under the K

7. Non-breaching party does not have to wait until performance is due before suing for that breach.

a. Hochster v. De La Tour (Eng. 1853) 736(1) Π to be employed by Δ, (April 1852) to begin work in June. May 11 -- Δ cancels. Π gets a new job. May 22 -- Π sues for breach. June 1, 1852 -- when Π was to begin work with Δ(2) Held: Upon a K to do an act in the future, a renunciation of the K by one party dispenses with a condition to be performed in the meantime by the other

(a) there is no reason for requiring the other to wait until the day arrives before seeking his remedy by action

(3) Other party should be able to rely on repudiation (a) and find other employment(b) THUS, recognizing that those who repudiate want the other party to take their repudiation seriously (c) It's in the best interests of those who repudiate to have other party act on that

8. Once one party's performance has been completed, and all that remains is for the other to pay, the doctrine of anticipatory breach no longer applies

a. Phelps v. Herro p. 741-742 (1957) (1) H contracted to sell stocks for $37,500. Ph agreed to pay $5000 by Jan 1, '56 and give a promissory note for remainder. $5000 was paid, but note never given. Sept '56 Herro transferred stocks to Ph.(2) Held: for Ph. Herro might have sued Ph for failure to give the note w/in a reasonable time, and recovered at least nominal damages, but H was not entitled to installments after judgment was granted for Ph.(3) Doctrine of anticipatory breach has no application to money contracts, where one party has fully performed and all that remains for the opposite party to do is pay

9. Repudiation must be an absolute and unequivocal refusal to perform or a distinct statement of an inability to do so.

a. McClosky v. Minweld Steel Co. (1955) 745(1) P (McClosky) sued on 3 Ks, alleging anticipatory breach on each one. D agreed to furnish & erect all steel for 2 buildings. Times for delivery -- to be determined by the general contractor.


Minweld suggests: Sept 1 to begin delivery; Nov 15, finish delivery. Then, McClosky says new delivery date = August 20. Korean War broke out, and hard to get steel. July 24, Minweld wrote to ask help of gen. contractor and State authority to help them get the steel. July 26, McClosky took Minweld's letter as repudiation and cancelled the K(2) Held: Minweld's letter was not a breach of the agreement.(3) Rule: Where affirmative action is promised mere failure to take preparatory action before the time when any performance is promised is not an anticipatory breach(4) See UCC §2-609 (Right to Adequate Assurance of Performance)

(a) does not apply here b/c it's not a sale of goods contract(b) BUT, the court may borrow, as persuasive, language from the UCC

10. Buyer is not required to cover when seller breaches by cancelling the remaining portion of the K.

a. Cosden Oil & Chemical Company v. Karl O Helm (1984) 752(1) Δ -- sees tightening of our oil market. buys 1500 tons of polystyrene b/c it will rise in value and D will be able to sell high. Π begins to perform (shipped 500 tons), different orders to be filled. Π lets Δ know they may not be able to complete order. cancels orders 5-7 (repudiation) (2) Held: The proper time to measure damages was a commercially reasonable time after P informed D that it was cancelling the three orders.(3) Rule: If an aggrieved party awaits performance beyond a commercially reasonable time he cannot recover resulting damages which he should have avoided(4) The jury found that P had cancelled orders 5-7 before D's failure to pay constituted repudiation

11. Once the non-breaching party changes their position as a result of the repudiation, acceptance of the anticipatory breach is final

a. U.S. v. Seacoast Gas Co. (1953) 759(1) Δ (Seacoast) contracted with Π to supply gas. 1/2 way through, Δ repudiates for a future date (Δ had believed that Π had breached) to allow Π to accept bids in time for no substantial loss to occur. Π seeks new K --> Trion submitted lowest bid (Trion and Seacoast both owned by Zell) -- actually Zell was going to be making a profit, and then have to pay damages(2) Held: Seacoast's retraction of its repudiation came too late to heal the breach, and judgment is reversed in favor of P.(3) Rule: All that is required to close the door to repentance is definite action indicating that the anticipatory breach has been accepted as final, and this requisite can be supplied either by the filing of a suit or a firm declaration, as here, that unless within a fixed time the breach is repudiated, it will be accepted.


(4) Rule: The repudiator has the power of retraction prior to any change of position by the other party

XXVII. Forfeiture Problem/ Restitution for Defaulting Plaintiff 795A. Rule: A plaintiff who has failed to complete the performance of a contract may recover in quasi-contract or quantum meruit for the reasonable value of the work performed or the material furnished, provided that his breach was not willful B. in almost all of the cases before, parties who have been denied recovery had not been denied completely

1. no parties were required to reimburse the Δ for any payments already made to Π a. (where there was value conferred on other party --> MUST show this!)b. eg. excavation case, they had been paid up to June

(1) were not required to return those payments received2. THUS, focus is on what value has been given to the other party

C. ** BY NO MEANS is it universally accepted that restitution to breaching parties is available

1. This is actually taken care of by statute2. numerous jurisdictions do not allow restitution w/o substantial performance

D. Where the party receives value—takes and uses the materials, or has advantage from the labor—he is liable to pay the reasonable worth of what he has received

1. Britton v. Turner (1834) 796a. K betw the parties was for P to work for one year, and that D was to pay him at the end of the year. P left D's service without D's consent.b. Can the P, under these circumstances, recover a reasonable sum for the service he has actually performed, under the count in quantum meruitc. Held: Where a party undertakes to pay upon a special contract for the performance of labor, or the furnishing of materials, he is not to be charged upon such special agreement until the money is earned according to the terms of it.d. Rule: In a contract for daily labor, the party is continually receiving the benefit of the contract under an expectation that it will be fulfilled. That party cannot decide at the breach to refuse to receive what benefit has been done, and thus discharge himself from payment.

E. Where there has been value conferred, breaching party will be able to recover the value of the work that he has done

1. Kirkland v. Archbold (1953) 804a. K worth $6000 (included alterations w/ periodic payments for turning in "satisfactory" work). Π did $2985 of work, and was only paid $800. (THUS, owed $2185). P stopped working.b. Held: In natural justice, the defaulting contractor who has by his labor materially enriched the estate of the other party should be afforded relief to the reasonable value of the work done, less whatever damage the other party has sufferedc. Rule: Where a builder has supplied work and labor for the erection or repair of a house under a lump sum contract, but has departed from the


terms of the K, he is entitled to recover for his services and materials, UNLESS

(1) the work he has done has been of no benefit to the owner(2) the work he has done is entirely different from the work which he has contracted to do(3) he has abandoned the work and left it unfinished

Impossibility, Impracticality, and Frustration of Purpose

XXVIII. Impracticability A. A defense made by the performing partyB. Restatement §261 (Discharge by Supervening Impracticability)

Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the K was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

C. Impossibility under the UCC can only be claimed by sellers1. See UCC §2-614 (Substituted Performance)2. See UCC §2-615 (Excuse by Failure of Presupposed Conditions)

D. Doctrine of Impossibility1. has evolved from true concept of impossibility (when it simply can't be done) to one of impracticability2. evolution from being based on implied conditions (true intent of parties) to analysis of what parties negotiated over (took on risk of particular event happening)

E. Elements of Impracticability 1. unexpected event2. risk cannot have been allocated to complaining party

a. compared with mistake (Π not responsible for assuming risk)b. §2-615: idea is if non-occurrence of risk is basic assumption of K, and no one could have assumed the risk

3. resulting impracticability4. no fault -- b/c this is an equitable remedy

F. Objective standard1. have to show that anyone in this circumstance would have same problem

G. In normal impractic. cases, something changes after K has been signed1. courts more willing to grant relief with impracticability that when the parties could have known the correct state of affairs but were mistaken

H. Force majeure clause: same kind of events that might lead to relief under the doctrine of impossibility

1. purpose: a. might cite events that are beyond those relied on traditionallyb. takes care of the possibility that the court might find that the danger was foreseeable


c. these clauses specifically negate the presumption that the risk of this danger was allocated

I. If impossible, parties are excused from further performance of K1. Court can treat the parties as co-responsible and each party would bear 1/2 the loss

a. (this doesn't happen in court, just in settlement agreements -- court has to find winner and loser)

2. Court can treat losses as whatever has happened at that time

XXIX. Frustration of PurposeA. A defense made by the paying partyB. Restatement §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.

C. Elements of Frustration of Purpose 1. unexpected event2. that was a basic assumption of the K (thus, risk was allocated)3. frustrated purpose

a. it must be seriously erodedb. other party must share & rely on same purposec. if other party does not rely, then doctrine not necessarily available

(1) example: If A has an interview in Chicago and purchases an airline ticket for Chicago. If interview is cancelled and ticket is not refundable, then there is no frustration of purpose -- b/c airline did not share the purpose

XXX. CasesA. Impossibility, not the result of fault, to perform on the K shall excuse the parties from performing.

1. Taylor v. Caldwell (Eng. 1863) 811a. P contracted to rent a Music Hall for four days. Music Hall burned down before K dates. D obviously couldn't do what they had promised. P suing for expenses they incurred (reliance recovery rather than expectation recovery). D claims impossibility.b. Held: The parties contracted on the basis of the continued existence of the Music Hall at the time when the concerts were to be given; that being essential to their performance. Thus, both parties are excused.c. General Rule: Where there is a positive contract to do a thing, the contractor must perform it or pay damages for not doing it, although in consequence of unforeseen accidents, the performance of his K has become unexpectedly burdensome or even impossible.


d. Rule: A contract of this type is subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor

B. A thing is impracticable in legal contemplation when it can only be done at an excessive and unreasonable cost.

1. Transatlantic Financing Corp. v. U.S. (1966) 816a. K signed --> Oct 2, 1956. ship left harbor --> Oct 27. War --> Oct 29. canal blocked by Egypt --> Nov 2. Transatlantic decides on another route (to go around the Cape of Good Hope) --> Nov 7. b. Held: The performance of this K was not rendered legally impossible.

(1) to justify relief there must be more of a variation between expected cost and the cost of performing by an available alternative than is present in this case, where the promisor can legitimately be presumed to have accepted some degree of abnormal risk, and where impracticability is urged on the basis of added expense alone.

c. Rule: Doctrine of Deviation: Parties normally expect performance by the usual and customary routed. Foreseeability, or even recognition, of risk does not necessarily prove its allocation.

C. Canadian Industrial Alcohol v. Dunbar Molasses Co. (1932) 824 1. Δ (Dunbar) sells to Π (Canadian) 1.5 mil. gallons of molasses.

no K KNat'l Sugar ---------> Dunbar Δ -------------> Canadian Π

$350,000 $1.5 mil

Simple reference to the name of your supplier doesn't limit your liability. Δ never got K from National Sugar. 2. Held: The duty will be discharged if the mill is destroyed before delivery is due. The duty will subsist if the output is reduced because times turn out to be hard and labor charges high.

D. The party undertaking the burden of establishing commercial impracticability must show extent to which he has suffered or will suffer losses in performing his K.

1. Eastern Air Lines v. Gulf (1975) 836a. Eastern to buy refined oil from Gulf (price to be determined by published price). (West Texas Sour Crude was the benchmark). signed 1972 -- 5 year contract. Refiner wanted to pass on rise in prices of crude oil to its customers. 1973-4 OPEC embargo & OPEC price rise (quadrupled prices). 1971 domestic oil was regulated AND (wage and price controls -- inflation was high). Gulf chose domestic oil price (at the time of the K -- domestic oil was more expensive). BUT, Gulf got stuck with the prices lower than market valueb. Held: Even if Gulf had established great hardship under UCC §2-615, which it has not, Gulf would not prevail b/c the events associated with the so-called energy crisis were reasonably foreseeable at the time the K was entered into.


c. The burden is upon Gulf to show what its real costs are, not its "costs" inflated by its internal profits at various levels of the manufacturing process, and located in various foreign countries.

E. Court recognizes that increased expense to one of the parties justifies relief on the basis of impracticability

1. Mineral Park Land Co. v. Howard (1916) 842a. Parties contracted for the right to take earth and gravel from P's land to be used in the construction of a bridge. 1/2 of it was below the water table, and the cost to remove it was 12 times the cost anticipated.b. Held: Where the difference in cost is so great as here, and has the effect, as found, of making performance impracticable, the situation is not different from that of a total absence of earth and gravel.c. here, there's existing impracticability

F. Where individuals are not named in the K, their inability to perform does not excuse the company they work for from performance of the K

1. Mark-O-Lite (1986) 847, note 4a. Mark-O-Lite (Δ) contracts to make the neon sign for Seitz. K -- has a force majeure clause, which excuses them from performance if something listed happens. Seitz sues for non-performance. D learned that its expert sheet metal worker, a diabetic, had to enter the hospital for an unknown period of time. He was the only employee who could do the work.b. D should not be excused from performance b/c

(1) their worker has diabetes (not a sudden illness)(a) likely that Δ may have known that he had this condition(b) risk, therefore, may have been allocated to Δ

(2) the worker is not the one who contracted to do the work-- Mark-O-Lite was

(a) this worker was not specifically mentioned in the K(b) thus Π can say, "I don't care how you do it, or who does it, just get it done."

(3) subjective v. objective impossibility(a) Π ended up being able to hire someone to do the job, thus it was not impossible for anyone to do it

G. Frustration of Purpose: if a fundamental part of the K is missing, the K will be deemed to be impossible b/c of this absence (and thus, no breach of the K -- parties are excused from performance)

1. Krell v. Henry (Eng. 1903) 847a. D rented a room to watch the King's coronation (which didn't happen). D did not pay the rent on the room. Claimed that the purpose of the K had disappearedb. Held: The coronation was viewed as the foundation of the K, thus its absence excused the performance of the K

H. Frustration cannot be used when the buyer can still deliver his goods anywhere and still receive a value

1. Swift Canadian Co. v. Banet (1955) 850


a. K to send pelts from Toronto to Phila. partially performed. US government then prohibited this kind of import. Canadian company sold pelts to other party for lower cost. Banet no longer wanted pelts. K was to be performed in Toronto. FOB5 — allocated to buyer in Toronto (this is where risk and title pass to buyer)b. Held: Even if the goods could not imported into the US under the then existing regulations, the rest of the world was free to the buyer, so far as we know, as the destination for the shipment. THUS, purpose of K not frustrated.

I. If the K terms explicitly assign the risk to one party, frustration is no defense1. Northern Indiana Public Service Co. (NIPSCO) v. Carbon County Coal Co. (1986) 853

a. NIPSCO and Carbon signed a K where Carbon agreed to sell about 1.5 million tons of coal every year for 20 years, at a price of $24 a ton subject to various provisions for escalation. Force majeure clause included. Coal prices go up. Commission which regulated NIPSCO required that it find and use electricity at prices lower than its K price with Carbon. NIPSCO decided to stop receiving coal from Carbon. NIPSCO seeks a declaratory judgment excusing them from the Kb. Held: If the buyer forecasts the market incorrectly and therefore finds himself locked into a disadvantageous contract, he has only himself to blame and so cannot shift the risk back to seller by invoking impossibility or related doctrines.c. Rule: If something has happened to make the performance for which he would be paying worthless to him, an excuse for not paying, analogous to impracticability or impossibility may be proper

J. Creative Remedies/ Half Measures 8591. Liability of the owner should be measured by the amount of the K work done which at the time of the destruction of the structure had been the property of the owner, even though completion of the K is impossible

a. Young v. City of Chicopee (1904) 861(1) K regarding repair of a wooden bridge. While the work was in progress, the bridge was totally destroyed by fire, w/o either party's fault. The amount of the P's compensation was to be measured by the number of feet of new material wrought into the bridge(2) Held: D should be liable for the labor and materials actually wrought into the bridge.

2. Changed circumstances: The court can interpret the terms of the K to allow for equitable relief, even when the K makes no provision for future technological improvements

a. J.J. Brooksbank Co. v. Budget Rent-A-Car Corp (1983) 865(1) K signed in 1962. franchise agreement -- Budget doesn't own this company, instead, individuals do. Budget owned NYC, LA and

5 ? FOB (free on board). Usually used as "free on board (some location)" eg., FOB shipping point, or FOB destination point. A delivery term which requires seller to ship goods and bear the expense and risk of loss to the FOB point designated. At that point, the goods become the buyer's property and problem.


Chicago offices. Franchisees in local areas were to forward the reservations for other cities (recipient franchisee would only pay phone charges). Any calls forwarded from NYC, LA and Chicago were free. Technology changed: Budget brought in a centralized computer reservation system and charged Brooksbank a higher rate.(2) Held: Since Brooksbank historically received one-third of its reservations from the NYC, LA, and Chicago offices, it was entitled to have the cost of reservations reduced by one-third.(3) New technology may have altered the mode in which reservations were placed within the franchise system, but it did not alter the parties' essential bargain in apportioning reservation obligations based upon geographic markets.

3. K reformation case: court can reform price figure to allow for profit (equitable relief)

a. Alum. Co. of Amer. v. Essex Grp (The Alcoa Case) (1980) 872(1) Π aluminum company. Δ has raw material, will receive final product. long-term K --> 16 years with possibility of 5-year extension. added price escalation clause (includes labor and non-labor costs). Oil embargo drove up the cost of electricity (the major non-labor cost for Alcoa). Wholesale Price Index can't keep up. Alcoa has to buy electricity at market value.(2) Held: K is impossible, court granted relief by reforming K to include a profit for Π(3) have:

(a) unexpected event: oil embargo(b) impracticability: $70 million loss to complete the K(c) allocation of risk to party seeking relief

i) traditional analysis? risk allocated b/c Π did not include this in his list of protectionsii) new analysis? if no one could possibly have known, shouldn't there be relief

(4) This is an EXTREMELY controversial decision, and is not the ultimate rule


Remedies

XXXI. General ruleA. Court trying to protect parties' expectationsB. Court trying to reach the situation that would happen if the K was performed

1. see UCC §1-106 (Remedies to Be Liberally Administered) (common law principle)

C. Can only be collected by the non-breaching partyD. Specific performance: court requires that the parties complete the K

1. not the normal remedyE. Hierarchy of recovery for damages

1. restitution -- simply reimburses P for expenditures related to K2. reliance -- somewhere in the middle 3. expectancy -- protects what P expected to get out of the K4. Example to show scale

promised nose ---------- \|

original nose ---------- \ | expectancy | reliance recovery | recovery

current nose ----------- / /

F. Promise in a K is seen as either a promise to perform v. a promise to pay damages for non-performance (not seen as a promise to perform v. a promise to perform)

XXXII. Damage FormulasA. General

1. damages = loss in value - cost avoided + other lossa. cost avoided ->> cost saved by other party's breachb. other loss ->> includes "incidental" and "consequential" damages

(1) incidental = transportation, shipping(2) consequential = lost profits, etc.

2. eg. Building K casesa. View A

(1) loss in value = K price ($1 million)(2) cost avoided = work left to do (cost to complete K) ($400,000)(3) THUS, damages = K price - cost to complete K

(a) damages, then, equals $600,000b. View B

(1) costs incurred = $400,000 (was halfway finished at time of breach)(2) profit = $200,000(3) THUS, damages = costs incurred + profit

c. RESULT SHOULD BE THE SAME NO MATTER WHICH WAY CALCULATED!


3. Buyer's damages a. cover UCC § 2-712

(1) loss in value = cover price(2) cost avoided = K price(3) cover price - K price = damages

b. market price UCC §2-713(1) loss in value = market price when K was to be performed(2) cost avoided = K price(3) market price - K price = damages

4. Seller's damages (when product has been completed)a. UCC §2-706

(1) loss in value = K price(2) cost avoided = resale price(3) K price - resale price = damages

b. UCC §2-708(1)(1) loss in value = K price(2) cost avoided = market price(3) K price - market price = damages

XXXIII. Calculating Damages (Cases)

A. If cover, can collect damages equalling difference between cover price and K price, plus any incidental damages (like shipping and handling)

1. Laredo Hides Co. v. H&H Meat Products Inc. (1974) 2a. Laredo = middle person (will re-sell hides to a tannery in Mexico; separate contract). K price = about $10 per hide (over a 9 or 10 month period. price goes up after the K is signed. Laredo periodically covered due to D's failure to deliver (b/c they were still obligated under the separate K w/ tannery to provide the hides periodically)b. Held: Laredo Hides, in purchasing the hides in substitution of the hides which should have been delivered under the K, acted promptly and in a reasonable manner.c. Total damages amount was only the money necessary to put Π in the position it would have been in had the K been performedd. Buyer is not obligated to cover; instead, they can choose between that and the market price remedy

B. In patient-physician agreements, reliance recovery is appropriate1. Sullivan v. O'Conner (1973) 6

a. medical malpractice and breach of contract. jury found no negligence (thus, no malpractice). jury did find breach of K (b/c the doctor promised her that her nose would be better-looking)b. Held: The P was not confined to the recovery of her out-of-pocket expenditures; she was entitled to recover also for the worsening of her condition, and for pain and suffering and mental distress involved in the third operation. These items were compensable on either an expectancy or reliance view.


c. Rule: Pain and suffering not usually compensable in breach of K (special circumstances here)

(1) but there is no rule barring itC. Punitive damages not recoverable in breaches of K, even where there has been a willful breach

1. White v. Benkowski (1967) 12a. K = to share B's water supply for $3 per month plus maintenance fees. There was consideration for the deal. jury awarded $10 compensatory damages; $2,000 punitive damagesb. Held: Damages recoverable are limited to compensation for pecuniary loss6 sustained by the breach. Thus, recovery reduced to $10.c. no tort was pleaded or proven.

XXXIV. Measuring Expectation 471A. Doctrine of Specific Performance

1. UCC §2-716 (Buyer's Right to Specific Performance or Replevin)2. General Rule:in order to get specific performance, you will have to show why damages aren't good enough.3. Arguments that might be successful:

a. uniquenessb. real propertyc. inability to get a replacement

4. even so, you may not get specific performance ... a. problems of supervision by courtb. problems of uncertaintyc. problems with personal performance

5. Specific Performance is not always granteda. McCallister v. Patton (1948) p. 19

(1) P (McCallister) placed an order to buy a car from D. D promised that he was numbering the Ks in the order received, and would deliver the cars in order. Cars were in short supply at the time. D had the cars to fulfill the order, but refused to sell the car to P.(2) Held: The allegations of the complaint are insufficient to entitle the P to equitable relief. Remedy at law is adequate.(3) Rule: Courts of equity will not enforce specific performance of K for the sale of chattels

(a) exceptionsi) when damages at law may not afford a plain, adequate and complete remedyii) where the chattel has a peculiar, unique or sentimental value to the buyer not measurable in money damages

6. Specific performance granted when chattels are unique6 ? Loss of money. Inconvenience is not a pecuniary loss, there must be instead a cost involved w/ this inconvenience.


a. Morris v. Sparrow (1956) 23(1) Sparrow agreed to work on D's ranch for 16 weeks. In return, D would give him $400 and a horse called Keno. P trained Keno such that with a little additional training, he could be a first-class roping horse. At the end of the 16 wks, D refused to give P the horse.(2) Held: Although it has been held that equity will not ordinarily enforce, by specific performance, a contract for the sale of chattels, it will do so where special and peculiar reasons exist which render it impossible for the injured party to obtain relief by way of damages in an action at law.

7. When Specific Performance is Appropriatea. Laclede Gas Co. v. Amoco Oil Co. (1975) 24

(1) K for propane gas. Amoco experienced a shortage of propane, and placed all customers (including L) on 80% allocation basis. Amoco wants out of the K, claiming lack of mutuality. Laclede wants specific performance of the 100%.(2) Held: Where there was evidence that Laclede probably could not find another supplier of propane willing to enter into a long-term K such as the Amoco agreement, specific performance is the proper remedy

8. Performance of a contract for personal service, even of a unique nature, will not be affirmatively and directly enforced.

a. Northern Delaware Industrial Development v. E.W. Bliss (1968) 30(1) B, general contractor, agreed to modernize steel plant. When work did not progress as rapidly as contemplated in the K, NDID (Phoenix) sought a court order of specific performance to compel B to put 300 more workmen on the job to complete the K(2) Held: Court of equity should not order specific performance of any building K in a situation in which it would be impractical to carry out such an order, unless there are special circumstance or the public interest is directly involved.

XXXV. Lost Volume Sellers7

A. If a lost volume seller can prove that it would have been able to make the additional sale without buyer's breach, then it may be entitled to lost profit resulting from buyer's breach.

1. R.E. Davis Chemical Corp. v. Diasonics Inc. (1987) 479a. Davis (middleman) sued for restitution for his downpayment for Diasonics medical diagnosing equipment. Diasonics claims it was a "lost volume seller" and that it was entitled to its expected profit from Davis.b. Held: Lost volume sellers are entitled to a remedy for profit, if it can demonstrate that it had the capacity to make the sale to this buyer as well as the sale to the resale buyer, and also that it would have been profitable to make both sales.

7 ? Lost volume seller: one who has a predictable and finite number of customers and that has the capacity to sell to all new buyers or to make the one additional sale represented by the resale after the breach.


(1) ALSO, that a reselling seller, such as Diasonics, is free to reject the damage formula in §2-706 and choose to proceed under §2-708.

c. Rule: Under some conditions, awarding a lost volume seller its presumed lost profit will result in overcompensating the seller, and §2-708(2) would not take effect because the damage formula provided in §2-708(1) does place the seller in as good a position as if the buyer had performed.d. UCC §2-718(2) (Liquidation or Limitation of Damages; Deposits)

(1) restitution can be lesser of 20% of the K price, or $500e. burden of proof on seller

(1) must show that you would have produced enough items to cover all of the buyers(2) if would have been profitable to do so

(a) if you sell out anyway, then you've suffered no lossB. Losing Contracts 485

1. Restitution recovery: The standard for measuring the reasonable value of services rendered is the amount for which such services could have been purchased from one in P's position at the time and place services were rendered.

a. U.S. v. Algernon Blair, Inc. (1973) 486(1) owner breaches. K price = $1,000,000. Builder's costs incurred = $400,000 (when owner breaches). costs to complete = $800,000. (THUS, would have been a loss of $200,000)(2) Held: As long as you have not exceeded the K price, AND the other party breaches, you will be allowed a restitution recovery(3) Rule: The impact of quantum meruit is to allow a promisee to recover the value of services he gave to the D irrespective of whether he would have lost money on the K, and been unable to recover in a suit on the K(4) Rule: Measure of recovery for quantum meruit is the reasonable value of the performance and recovery is undiminished by any loss which would have been incurred by complete performance

XXXVI. Duty to Mitigate Damages/ Limitations on Damages 490A. Avoidability 490

1. Restatement §350 (Avoidability as a Limitation on Damages)(1) Except as stated in Subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation.(2) The injured party is not precluded from recovery by the rule stated in Subsection (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss.

2. Mitigating damages: Once builder is notified of owner's breach of K — B cannot continue to build and sue for K price. Builder has a duty to mitigate damages

a. Rockingham County v. Luten Bridge Co. (1929) 490


(1) Bridge K -- entered Jan 7, 1924. Feb 21, 1924 -- County breaches K. Π continues to build. claimed damages of $18,301.07.(2) Held: P should not have continued work after being notified of D's breach. Instead, he will be allowed to recover the costs up to the breach plus their profit(3) Rule: After P received notice of the breach, it was its duty to do nothing to increase the damages flowing therefrom. (4) It is inflicting damages on the defendant without benefit to the plaintiff to allow the latter to insist on proceeding with the contract after the former has breached.

(a) the work may be useless to the defendant, yet he would be forced to pay the full contract price(b) AND P is only interested in the profit he will make out of the K

3. "Constructive Service" 492a. It is one thing to say that the injured party cannot recover for cost that could have been avoided by simply stopping performanceb. It is another to say that the injured party cannot recover for loss that could have been avoided by taking affirmative steps to arrange a substitute transactionc. General Rule: a person discharged from service must not remain idle, but must accept employment elsewhere if offeredd. Doctrine of Constructive Service

(1) encourages idleness and gives compensation to men who fold their arms and decline service, equal to those who perform with willing hands their stipulated amount of labor(2) not accepted as a rule of law

4. Employment Ks: A wrongfully dismissed employee is not required to accept different or inferior work to mitigate damages. Failure to accept such work does NOT equal failure to mitigate damages.

a. Parker v. Twentieth Century Fox Film Corp (1970) 493(1) P's employment K was cancelled by D. D instead offered a second K with a few changes. P refused to accept second K, because she claimed it was inferior to the K offered before.(2) Held: The deprivation or infringement of an employee's rights held under an original employment K converts the available "other employment" relied upon by the employer to mitigate damages, into inferior employment which the employee need not seek or accept(3) General Rule: the measure of recovery by a wrongfully discharged employee is the amount of salary agreed upon for the period of service, less the amount which the employer affirmatively proves the employee has earned or with reasonable effort might have earned from other employment.(4) Rule: the employer must first show, however, that the other employment was comparable, or substantially similar, to that of which the employee has been deprived


(5) Rule: Reasonableness is NOT an element of a wrongfully discharged employee's option to reject, or fail to seek, different or inferior employment(6) The court may have been swayed by the fact that the "substitute employment" was offered by the original employer, and constituted a limiting of the original bargain

5. Contracts for Sale of Goods 498a. UCC §2-712 (Cover; Buyer's Procurement of Substitute Goods)

(1) may cover b. UCC §2-706 (Seller's Resale Including K for Resale)

(1) seller's primary remedy(2) K price - resale price

6. Avoidability and Cost to Remedy Defect 500a. If the breach consists merely of incomplete performance, the injured party can usually arrange to have someone else complete the work at less than the loss in value to the injured partyb. Limitation of avoidability then has the effect of restricting the injured party to damages based on that lesser cost to complete the work rather than loss in valuec. Trouble will arise, however, if the performance is defective rather than merely incomplete

(1) THEN, part of the cost to remedy the defect and complete performance as agreed will probably be the cost of undoing some of the work already done

7. Choosing between Costs to complete and diminution of valuea. Damages = Cost to complete unless grossly and unfairly out of proportion with the good to be attained (then, go to diminution in value)

(1) Jacob & Youngs v. Kent (1921) 501(a) Facts the same as above, at page 18 (b) Held: the measure of damages is not the cost of replacement, which would be great, but the difference in value, which would be nominal or nothing

(c) General Rule: An owner is entitled to cost to complete i) UNLESS out of proportion with the good to be attained

------------ cost to compl. |

|---------- new value |

|current value __________ ____________| current expenses


b. For wilful breach of building K, value of land is improper calculation of damages. Instead, cost to remedy defect.

(1) Groves v. John Wunder Co. (1939) 506(a) P leases his land for 7 years to D. Property eventually returning to Π. D -- paying $105,000 (to compensate Π for taking out the sand and gravel for 7 years). Δ intentionally breached (AND, didn't restore the land to a uniform grade). Π wants damages in cost to restore grade (ie. cost to complete = $60,000). Δ restoring grade would only be $12,160 (current value may not be anything)(b) Held: It is for reconsideration below whether the result should be that the uniform grade should be supplied at the level where the road currently is. BUT, P is granted the cost to complete(c) Rule: There can be no unconscionable enrichment, no advantage upon which the law frowns, when the result is but to give one party to a K only what the other has promised.

c. Cost to complete is normal rule(1) exception (ie. diminution in value) is ONLY used when it's hard to believe that value to this particular owner is any different from that to any other owner(2) when value to person (owner) is different than market price, Court will for the most part grant the value to the individual (rather than market price)

d. Without willful breach, and where provision is only incidental to the terms of the K, diminution in value is the appropriate remedy

(1) Peevyhouse v. Garland Coal & Mining (1963) 512 (a) Oklahoma, Ps K that Garland can strip-mine their property for 5 years, but that he must restore the property to its original condition. Cost to complete = $29,000; Π sued for $25,000. diminution of value = $300. whole property less than $5000. Jury awarded $5000. (b) Held: Where the K provision breached was merely incidental to the main purpose in view, and where the economic benefit which would result to lessor by full performance of the work is grossly disproportionate to the cost of performance, the damages which lessor may recover are limited to the diminution in value resulting to the premises because of non-performance (c) Court reduced jury's finding to $300.

i) Court was concerned that Π would just pocket the extra $25,000

B. Foreseeability1. Consequential Damages

a. Direct Damages: arising naturally or "general damages"


(1) are they necessary to protect expectancyb. Indirect damages, special damages — called "consequential damages"

(1) arise from failed expectancies in other transactions(2) included:

(a) personal injury from breach of warranty or product liability(b) resulting from K betw you and outside world

(3) if you go for this type of damages, must show that the other party knows about these(4) reluctance to award consequential damages b/c they can be very large, especially in comparison to direct damages

c. UCC --> consequential damages only available to buyers(1) ordinary sellers do not experience consequential damages(2) UCC §2-715(2)(a) --> defines consequential damages

(a) can't get them if they could have been avoided by cover

d. Difference betw consequential and incidental damages (1) §2-715(1) --> incidental damages (buyer)(2) §2-710 --> incidental damages (seller)(3) Both consequential and incidental damages qualify as "Other loss"(4) Incidental damages = damages that related to protecting expectancy under the original K, but are not originally included in damages

(a) You are seller, and buyer backs out. Have to find new buyer. If sell at a loss to new buyer, deals with normal measure of damages

i) BUT, if you incurred additional costs while trying to find a new buyer, these are incidental damages

a) extra costs for storing product longerb) extra costs for additional advertisingc) extra insurance

(b) ** Costs to remedy original breach(c) ** these are direct damages (arising naturally)

e. Limitation of risk: loss to non-breaching party must be contemplated by both when negotiating the K

(1) Hadley v. Baxendale (Eng. 1854) 515(a) Ps operated a mill. One of their parts was broken, and it had to be sent to manufacturers to be fixed. D guaranteed next day delivery. Ps had to shut down their mill in the meantime. Ds failed to deliver in a reasonable time, and Ps had to keep the plant closed 5 days longer than expected. (b) Held: The loss of profits here cannot reasonably be considered such a consequence of the breach of contract as


could have been fairly and reasonably contemplated by both parties when they made this contract (c) Rule: If these special circumstances were wholly unknown the party breaking the K, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise naturally(d) remanded to ensure that jury was instructed properly about how to determine damages (this is a question of law)(e) Court lays down what damages are for breach of K:

i) arising naturally in the ordinary course of things from a breach of Kii) arise only in special circumstances

a) want to include potential liabilityb) want parties to be aware of special circumstances before being liable for damages

2. Where the parties are aware (at the time they contracted) that the damages which did result were likely to result, the breaching party will be liable for consequential damages

a. Spang Industries v. Aetna Cas. & Surety Co. (1975) 520(1) Torrington -- general contractor. Spang (through subsidiary, Fort Pitt) -- subcontractor. Spang was to supply steel for bridge, also to erect the steel (subcontracted w/ someone else to do that). Nov 69 agreed to June 70 as performance date. Jan 70 Fort Pitt notified T. that it couldn't meet the date (could be anticipatory repudiation; Torrington threatened to get someone else). May 70 Fort Pitt said they'd perform in Aug 70. mid Sept 70 delivered most of the steel. End Oct 70 Torrington finally able to pour concrete(2) Held: Serious or catastrophic injury was avoided by prompt, effective and reasonable mitigate at modest cost.(3) Rule: When the parties enter into a contract which, by its terms, 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 performance. (4) Hadley Rule: Have to know that these extra costs were the probable result of the breach

(a) Court here only requires that they be "likely"3. Emotional Disturbance 524

a. Courts have been reluctant to grant damages for emotional disturbance resulting from the breach of Kb. See Restatement §353 (Loss Due to Emotional Disturbance)

Recovery for emotional disturbance will be excluded unless the breach also caused bodily harm or the K or the breach is of such a kind that serious emotional disturbance was a particularly likely result


C. Certainty 5261. Damages for breach of K must be shown by clear and satisfactory evidence, to have been actually sustained 2. AND be shown with certainty, and not left to speculation or conjecture.3. Where Ps can prove lost profits, even in a new business, to a degree of certainty, a jury award for damages based on that proof will not be overturned.

a. Fera v. Village Plaza Inc. (1976) p. 527(1) Ps leased space for a book and bottle shop in D's proposed shopping center (10 year lease). $1000 deposit paid by Ps. Ps gave up space so that D could lease to another tenant. Bank foreclosed on D's center. When the center was ready for moving into, Ps were refused the space b/c their lease had been lost, and the space was rented to other tenants. Ps sued for anticipated lost profits(2) Held: There was no abuse of discretion by the jury in finding that Ps proved to a degree of certainty that they would have suffered the damages awarded. Trial court decision is reinstated.(3) Rule: Prospective profits are so speculative and uncertain that they cannot be recognized in the measure of damages.

(a) concern, however, is for sufficiency of proof, not the award of damages for lost profits per se.

(4) Standard of review: could a reasonable person/ juror have made the same decision

(a) looking for abuse of discretion(5) General Rule: If a business is one that has already been established, a reasonable prediction can often be made as to its future profits.

(a) BUT, if a business is new, such prediction cannot be made, and future profits cannot be recovered

XXXVII. "Liquidated Damages" and "Penalties" 532A. Allows recovery for damages that would not normally be availableB. Must be in your K

1. these are damages that the court would not necessarily give you unless there's a terms in the K that have been agreed to

a. eg. emotional distressC. This is price of breach (Amount in K -- payable upon breach by one party)D. Rule: If liquidated damages are too high, they will be void

1. don't want it to be a penaltya. shouldn't be punitive damages for breach of K

2. if too high, non-compensatory


3. sometimes people breach NOT out of choice, but b/c of unexpected events4. want to allow parties to breach when the K is inefficient

a. these clauses, then, will guarantee specific performance5. parties might actually raise the prices of the products throughout the economy6. Consequential damages

a. good example of where appropriate to include a liquidated damages clause

E. Historically, these clauses are honored1. to encourage reasonable behavior at the time of K2. AND to have liq. dmgs. mean something3. BUT, probably can't answer what damages are suffered

F. Courts do not like to have to calculate damages.1. THUS, when the parties do it for them, they are likely to be somewhat deferential

G. UCC added a wrinkle to this (that the Restatements also contain)1. §2-718(1) enforcing liq dmgs if damages amount is reasonable in light of anticipated or actual damages

a. increases the number of places where liq damages clauses will be enforcedb. looks to actual damages as wellc. (does not deal with the possibility of limiting consequential damages, or limiting possible liability -- see unconscionability for that)

H. If liquidated damages clause is too far from damages to be reasonably anticipated as a result of the breach, then clause will be void

1. Dave Gustafson & Co. v. State (1968) 534a. P surfaced new highway that paralleled an older road that remained open during and after the construction. Delay of 67 days in completion. K provided graduated scale of "liquidated damages per day". D (state) withheld $14.070 from Ps bill to as liquidated damages.b. Held: The amount stipulated in the K bears a reasonable relation to probable damages and is not, as a matter of law, disproportionate to any and all damage reasonably to be anticipated from the unexcused delay in performance.

c. Tests for allowing/ upholding liq. dmgs. clause(1) damages at breach are very difficult (or impossible) to determine (at the time the K was made)

(a) regular damages don't make sense b/c they can't be calculated(b) THUS, we will let the parties determine what is an appropriate amount of damages through a liq. dmgs. clause

(2) a reasonable endeavor/ attempt to set a fair value(a) good faith effort

(3) liq. dmgs. have to bear a reasonable relationship to the probable damages


(a) determine after breachd. Court considers:

(1) overall value of the K(2) how late Δ was(3) what Δ's being asked to pay (%age of the total K price)

I. When the damage formula does not take into account the gravity of the breach, and one party is ensured to receive more than its actual damages, then the clause will be void.

1. Lake River Corp. & Carborundum Co. (1985) 536a. LR = Π, in bagging and distribution business. under K, agrees to accept delivery of Ferro Carbo powder, package it and ship it to Carborundum's customers. THUS, Δ is just hiring a service. Δ agrees to ship minimum amount of product over a 3-year period. Π wanted this clause b/c Π is pd $24/ton, and wanted to ensure some profit over his expenses (would make up for the investment price)b. Held: The damage formula in this case is a penalty and not a liquidation of damages, because it is designed always to ensure LR more than its actual damages.c. Illinois Test: need for estimation at that time must be shown by reference to the likely difficulty of measuring the actual damages from breach after it occurs

Policing the Bargain of the Unfair and Unconscionable

XXXVIII. Exculpatory clause is void where a reasonable person would not believe it applied to personal injury.

A. Henningsen v. Bloomfield Motors Inc. (1960) 3791. In a standard form sales K, car company limited its liability for breach of warranty of merchantability to replacement of defective parts for the period of 90 days after delivery. P was injured when steering mechanism failed, and tried to sue for personal injuries.2. Held: Courts keep in mind the principle that the best interests of society demand that persons should not be unnecessarily restricted in their freedom to contract. But they do not hesitate to declare void as against public policy contractual provisions which clearly tend to injure the public in some way.3. Court considers:

a. unequal bargaining powerb. standard form K --> adhesion K (no ability to negotiate terms)c. lack of notice -- small print, back of Kd. only form of K in the industrye. no comprehension of meaning of this clause

(1) didn't realize that they were signing away their right to sue for personal injury

f. importance of K (you really need a car; can't just walk away)4. Court says eliminating consequential damages is doing away with a cause of action


a. THUS, will look at elements of K under high scrutiny5. if term were reasonable (and here it's not), then wld enforce it

a. reasonable --> terms that reasonable person would not be surprised to see in this type of K

6. procedural elements a-f7. substantive --> eliminating consequential damages

a. term not unreasonable on its faceb. BUT, if procedural elements are bad enough, less flexible in what you can do substantively

XXXIX. Where a clause operates as a partial restriction on ability to sue, but does not eliminate the entire cause of action, and where P knows about the clause, it will be upheld.

A. Carnival Cruise Lines, Inc. v. Shute (1991) (handout)1. Admiralty case. Ps bought tickets for D's ship. There was a forum selection clause on the tickets themselves indicating that for any injuries, etc, all suits had to be brought in FL. Ps were injured and sued in Seattle. D moved for summary judgment b/c improper forum. 2. Held: Sustained. Because the clause allows for judicial resolution of claims against Carnival, and does not purport to limit Carnival's liability for negligence, it shall not be void for unconscionability3. Rule: a freely negotiated private international agreement, unaffected by fraud, undue influence, or overweening bargaining power, such as that involved here, should be given full effect4. Ps conceded notice to the clause (that they knew about it)5. It is reasonable here for the following reasons:

a. Cruise Line able to save money(1) in this business, many passengers from many different jurisdictions

(a) any accident could conceivably be tried in any jurisdiction(b) good to consolidate

(2) significant cost to determine whether there was jurisdiction in a given case

(a) by having a clause where it stipulates the applicable jurisdiction, this problem is solved

b. passengers benefit as well(1) b/c if cruise line saves money in litigation, then the savings get passed on to the passengers in ticket prices


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