Contracts Outline Spring 2011 Professor Anderson

FRAUDULENT MISREPRESENTATION:
1. Restatement 159 (misrepresentation) A misrepresentation is an assertion that is not in accord with the facts. .. 2. Restatement 164 (when misrepresentation makes voidable ) (1) If a partys manifestation of assent is
induced by (2) either a fraudulent or a material misrepresentation by the other party upon (3)which the recipient is justified in relying, the contract is voidable by the recipient.(must be a causal connection).

3. Restatement 162 (when a misrepresentation is fraudulent or material)

(1) A misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest his assent and the maker: (a) knows or believes that the assertion is not in accord with the facts, or (b) does not have the confidence that he states or implies in the truth of the assertion, or (c) knows that he does not have the basis that he states or implies for the assertion. (2) A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so. Note on Fraud: There must be a guilty state of mind with two components 1. Knowledge of falsity (scienter) 2. Intent to mislead

4. Restatement 160 (when concealment is a misrepresentation) - Action intended or known to be likely to prevent
another from learning a fact is equivalent to an assertion that the fact does not exist.

5. Restatement 161 (non-disclosure is equivalent to action) A persons non-disclosure of a fact known to him is
equivalent to an assertion that the fact does not exist in the following cases only: (a) where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material. Facts have changed and the original assertation is now false (b) Where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.

Basic assumption of other party is false and 1st party is not acting in good faith consistent with fair dealings

(c) where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part. (d) where the other person is entitled to know the fact because of a relation of trust and confidence between them.

I. Policing Contracts for Improper Bargaining There are doctrines in contract law designed to regulate/police improper bargaining. Among these are:

Fraudulent Misrepresentation Duress Unconscionability

These doctrines seek to strike a balance between the policy of protecting the reasonable reliance of the parties (manifest in the objective test) and the policy of freedom of contract that requires parties should not be bound by contracts to which they did not voluntarily assent. o o A rigid reliance on the objective test would force courts to enforce contracts even where the objective manifestation of assent was obtained by another partys deceit, coercion or other improper bargaining. The doctrines of Misrepresentation, Duress, and Unconscionability allow the court to look beyond objective manifestations of assent to find an agreement is unenforceable because the assent was not truly voluntary because it was obtained by improper means.

Remedies for Improper Bargaining General Rule: Where court finds that there was improper bargaining that induced assent to an agreement, the remedy is to allow the victim to avoid or rescind the contract. In other words, such a contract is generally voidable by the victim.

Voidable Distinguished from Void

Where a contract is void (e.g., fails for lack of consideration), it is not a contract at all. It is a legal nullity, so neither party can sue to enforce the agreement. Where a contract is voidable, it is valid and fully enforceable unless and until the aggrieved party under one of the policing doctrines elects to exercise the right to terminate (or avoid) it.

When a contract is avoided, the general rule is that both parties are entitled to restitution: Any benefit of the contract received by either party before the rescission must be returned. Otherwise there would be an unjust enrichment.

Note on Remedies for Improper Bargaining

Though avoidance/rescission is the most common remedy available where an agreement resulted from improper bargaining, the courts will sometimes order excision or modification of an offending term as a remedy.

This may occur where the aggrieved party would prefer to keep the contract in effect, but remove or modify the term that resulted from the other partys improper bargaining.

II. Introduction to Fraudulent Misrepresentation Affirmative Fraud

Restatement 159 Misrepresentation Defined: A misrepresentation is an assertion that is not in accord with the facts. Example: Assertion: There is a 3 carat diamond in this engagement ring. Fact: The stone is a Cubic Zerconia.

Restatement 164 When a Misrepresentation Makes a Contract Voidable: (1) If a partys manifestation of assent is induced by either a fraudulent or a material misrepresentation by

the other party upon which the recipient is justified in relying, the contract is voidable by the recipient

Note: Restatement 164 reflects the requirement that there be a causal link between the misrepresentation and the contractit must have actually motivated the other party.

1. Fraudulent OR material misrepresentation

2. Other party is justified in relying and actually and justifiably relies on THEN 3. The contract is voidable (only)
Restatement 162 When a Misrepresentation is Fraudulent or Material:

(1) A misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest his

assent and the maker

(a) knows or believes that the assertion is not in accord with the facts, or (b) does not have the confidence that he states or implies in the truth of the assertion, or (c) knows that he does not have the basis that he states or implies for the assertion. Note of Fraud: There must be a guilty state of mind with two components 1. Knowledge of falsity (scienter) 2. Intent to mislead

(2) A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent,

or if the maker knows that it would be likely to induce the recipient to do so.

Note on Materiality: The Restatement does not require the victim of fraud to prove materialityrequiring materiality of only negligent or innocent misrepresentations (where there is not the guilty state of mind required for fraud). Be aware that not all courts separate materiality from the definition of fraud as does the Restatement.

Restatement 160 When Action is Equivalent to an Assertion (Concealment): Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion

that the fact does not exist.

Example: Seller puts a heavy dresser over a hole in the floor of a house caused by termites. The issue is whether fraud or misrepresentation during the hiring process constitutes just cause for dismissal on an employment contract Yes. The court used the material element; there is a difference between fraud and material representation. The plaintiff made false statements on his resume when he applied for the school job. Additionally, the plaintiff told the college not to contact his past employers, this is a form of concealment and fraud on direct assertion. This is not a case by silence or non-disclosure.

Sarvis v. Vermont State Colleges

* Sarvis v. Vermont Colleges man misrepresented information to his employer that they should not contact his more like the hiding a termite hole affirmative misrepresentation action than a bald face lie An affirmative false statement or active concealment of the truth (as in Sarvis) is the most straightforward case of fraud in the inducement. It is also possible to show fraud due to non-disclosure or silence.

previous employer. This was seen as an affirmative, fraudulent action. Non-Disclosure or Silence as Fraud

This is a more difficult basis for claiming fraud because silence is only fraudulent where there is a duty to disclose information.

1. Rationale: The courts are reluctant to find fraud by silence because the assumption is that where
parties entering into a contract are each agents in the free market. Consequently, if one party through research, expense, or just plain business sense identifies value in a transaction the other party has not identified, then that party deserves to benefit from the advantage.

Example: A buyer who has thoroughly researched the real estate market does not have to tell the seller that the house is priced well under its market value.

More rationale: Would destroy market efficiency 1 person would do all the work while the others free-load and claim, you are required to give us your privy information even if you worked harder than us. 2. How do we know when there is a duty to disclose? Silence as Fraud

Restatement 161 When Non-Disclosure Is Equivalent to an Assertion(DUTIES): A persons non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist

in the following cases only:

(a) where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material. Facts have changed and the original assertation is now false

(b) Where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.

Basic assumption of other party is false and 1st party is not acting in good faith consistent with fair dealings

(c) where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part. (d) where the other person is entitled to know the fact because of a relation of trust and confidence between them.

Stambovsky v. Ackley Caveat Emptor buyer beware, or, the buyer has the responsibility to research before buying Was there a duty to disclose? Court reasons YES because it was NOT a physical defect that could reasonably be found by inspection. Rather, a spiritual defect that lowered the value of the house that the buyer could not have been aware of

Court leans on rationale that since the seller had advertised the haunting to the public, then they could not claim that the haunting was not real and therefore had a duty to disclose to the seller that there was a haunting because the buyer was under the assumption that the house was not haunted and to do otherwise would not be consistent with fair dealings nor in good faith (restatement 161 (b))

The plaintiff discovered the house he had recently contracted to purchase was widely reputed to be possessed by poltergeists. The plaintiff was not a local. This case was dismissed at the trial level because of the Doctrine of Caveat Emptor (imposes no duty upon the vendor to disclose any information concerning the premises unless there is a confidential or fiduciary relationship between the parties).

The issue is whether the defendant had to tell the plaintiff of the possession or whether the plaintiff should have reasonably known Yes. The other cases involving the Doctrine rule is for physical defects, however in this case there is no physical defect, the defect was created by the sellers assertions ct. disregards the physical impairment argument of the defendants.

The court uses Restatement 161 B failure to act in good faith. The court finds a duty for the seller to tell the buyer because there was no way for the buyer to find out the information on his own, as the buyer was not local. Doctrines Designed to Police for Improper Bargaining in Contract Formation

Policing for fraudulent misrepresentation, duress, and unconscionability allow the court to look beyond objective manifestations to find where assent was not truly voluntary because obtained by improper means. Remedies: Generally, the remedy for improper bargaining is that the contract becomes voidable for the victim though modification or excisions are also available under some circumstances. 1. Restitution is generally available to both parties.

Fraudulent Misrepresentation

Misrepresentation: an assertion that is not in accord with the facts. (Restatement 159) A false statement A misrepresentation makes a contract voidable If a partys manifestation of assent is induced [or caused] by either a fraudulent OR a material misrepresentation by the other party upon which the recipient is justified in relying (Restatement 164)

A misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest his assent and the maker (a) knows or believes that the assertion is not in accord with the facts, or (b) does not have the confidence that he states or implies is the truth of the assertion, or (c) knows that he does not have the basis that he states or implies for the assertion. (Restatement 162) 1. In short, there must be a guilty state of mind with two components to find a misrepresentation is fraudulent: Knowledge of Falsity (Scienter) Intent to Mislead

2. Some courts will also require materiality Concealment or Fraud by Silence

Fraud by Concealment: Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist. (Restatement 160) * Moving a desk to hide a termite hole

Fraud by Silence:

1. Must be a duty to disclose (See Restatement 161 for guidance on what might constitute a duty to
disclose.) * Series of occasions under restatement Section 161 caveat emptor normally precludes a duty to disclose and, this is an exception....most of the time there is no duty to disclosedoing otherwise would inhibit economic growth. Introduction to Duress:

1. Restatement 175(1) (When Duress by Threat Makes a Contract Voidable) (1) If a partys manifestation of
assent is induced by improper threat by the other party (2) that leaves the victim no reasonable alternative, the contract is voidable by the victim.

2. Restatement 175(2) When Duress by Threat OF 3RD PARTY Makes a Contract Voidable: If a partys
manifestation of assent is induced by one who is not a party to the transaction(3rd party), the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transaction.

3. Restatement 176 (When a Threat is Improper) - (1) A threat is improper if: (threat is so bad that the contract is
voidable regardless of whether the bargain is fair) (a) what is threatened is a (1) crime or a tort, or the threat itself (2) would be a crime or a tort if it resulted in retaining property [e.g., extortion], blackmail is the 2nd portion (Ill tell your wife youre cheating (not tort/crime) but when you say unless you give me $1,000) then it becomes a crime/tort. (b) what is threatened is a criminal prosecution, (c) what is threatened is the use of civil process and the threat is made in bad faith, or (d) the threat is a breach of duty of good faith and fair dealing under a contract with the recipient.

(2) A threat is improper if the resulting exchange is not on fair terms, and: (a) the threatened act would harm the recipient and would not significantly benefit the party making the threat, (b) the effectiveness of the threat in inducing the manifestation of assent is significantly increased by prior unfair dealing by the party making the threat, (c) what is threatened is otherwise a use of power for illegitimate ends.

4. Restatement 174 When Duress by Physical Compulsion Prevents Formation of a Contract: - If conduct
that appears to be a manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress, the conduct is not effective as a manifestation of assent. Restatement 175(1) When Duress by Threat Makes a Contract Voidable: (1) If a partys manifestation of assent is induced by improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim. 2 parts: 1. Must be an improper threat. 2. Threat must induce the victim by leaving no reasonable alternative but to enter into the contract.

Every offer to make a contract involves an implied threat to not enter into the contract unless the terms of the offer are accepted. Such threats are just part of the bargaining process.

Not improper in normal bargaining

1. A threat only becomes improper where it amounts to an abuse of the bargaining process.
Restatement 176 offers guidance on when that threshold into improper bargaining is crossed.

fair)

Restatement 176 When a Threat is ALWAYS Improper: (1) A threat is improper if (threat is so bad that the contract is voidable regardless of whether the bargain is

o (a) what is threatened is a (1) crime or a tort, or the threat itself (2) would be a crime or a tort if it
resulted in retaining property [e.g., extortion],

 blackmail is the 2nd portion (Ill tell your wife youre cheating (not tort/crime) but when you say unless you give me $1,000) then it becomes a crime/tort. o o (b) what is threatened is a criminal prosecution, (c) what is threatened is the use of civil process and the threat is made in bad faith, or (Alaska Packers example/pre-existing legal duty)

o (d) the threat is a breach of duty of good faith and fair dealing under a contract with the recipient.
(2) A threat is improper if the resulting exchange is not on fair terms, and (threat is not as serious so the

court will look to whether the bargain was fair so disproportionate that it amounts to a threat/improper bargaining).

This gives the court a great deal of discretion to find improper bargaining (a) the threatened act would harm the recipient and would not significantly benefit the party making the threat, (b) the effectiveness of the threat in inducing the manifestation of assent is significantly increased by prior unfair dealing by the party making the threat, (c) what is threatened is otherwise a use of power for illegitimate ends. 1. Note: Remember that there still must be inducement such that the victim had no reasonable alternative so a threat of a minor crime or tort may not itself warrant a finding of duress if there were reasonable alternatives to assent. 2. Note: Categories in subsection (1) involve threats so shocking that the court will not inquire into the fairness of the terms of the exchange [(a) and (b)] or that by definition involve some element of unfairness [(c) and (d)]. Threats in subsection (2) must be in combination with unfair terms of exchange.

Germantown Manufacturing Co. v. Rawlinson deal must be improper and no reasonable alternative Issue: Was there an impropriety in the bargaining process? Was a threat not to send her husband to jail a defect in the bargaining process? Court refers to Restatement 175 - there could be no reasonable alternative but to choose the choice made under threat (she could choose the alternative of her husband getting thrown in jail, her life getting ruined) * Ct. looks at her subjective situation as well as an objective look (anyone would act similarly in her situation). and 176 (1)(b) they threatened criminal prosecution Germantown argues that it was not improper b/c they had a right to prosecutionct. says on the contrary, the fact that it was a well-founded claim makes it more coercive the manner they went about it was dispositive Mr. Rawlinson embezzled $327, 011.22 from the company he worked for and admitted the crime when he was asked. Mr. Kulaski, a company reprehensive, had both the Rawlinsons sign court documents to repay the money Mr. Rawlinson had taken.

Mrs. Rawlinson was not aware until Mr. Kulaski showed up that she would have anything to do with signing the court documents based on her husbands actions. Mrs. Rawlinson was already in a distressed situation because she just suffered a miscarriage The court used Restatements for defining duress. The court noted that surprise and unfamiliarity of the documents and the threat of her husband going to jail, she basically that lost her ability to choose freely.

The court finds that the contract is voidable. The company argued that Mr. Rawlinson actually committed the crime so they were fully justified in prosecution. However the court points out the fact that the claim is actually true increases the threat of duress because if it had not a reasonable person would not sign the documents or put themselves in that position.

Economic Duress Distinguished from Mere Market Pressure

Economic Duress can be defined as an illegitimate threat to proprietary or economic interests, and is a well recognized basis for relief under the theory of duress. Nevertheless, this should not be confused with simple inequality in bargaining power, or even driving a hard bargain.

Quigley v. KPMG Peat Marwick, LLP Issue: When is economic duress impermisable? Rule: when one of the parties commits a wrongful or unlawful act or threat that deprives the other of his unfettered will.

Ct. says that economic duress is context dependent arbitration has traditionally not been held to be a cause of economic duress (THEY CAN BE IF THEY ARE TOTALLY DISPROPORTIONATE, or if one of the terms is inherently unfair).

Cts generally honor arbitration clauses arbitration clears the docket/clears judicial resources No economic duress in this situation more is required to find economic duress in these situationsall jobs now have an arbitration clauses, it makes good business sense to enforce them. Quigley was terminated from his position as a senior manager after 18 years of employment. He signed an employment arbitration agreement. Quigley claims he did not sign the document voluntarily but that he need the job to feed his family.

The wrongfulness of the pressure is decisive. To be wrongful, the threat need not be criminal or tortuous. It could be legal but still oppressive and wrongful in a moral or equitable since.

Coercion by Nonparty 3rd party coercion

Restatement 174 When Duress by Physical Compulsion Prevents Formation of a Contract: If conduct that appears to be a manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress, the conduct is not effective as a manifestation of assent.

1. Note: The kind of physical compulsion contemplated here is literalwhere the victim becomes a mere
mechanical instrument. The failure of assent means the contract is void.

Example: Perpetrator grabs victims hand and forces to sign in this situation, there is no manifestation of assent

Consequently, where there is physical compulsion by a non-party, the contract will be void( as opposed to voidable) as to even innocent parties.

No party can enforce this agreement because there was no contract in the first place

Restatement 175(2) When Duress by Threat Makes a Contract Voidable:

(2) If a partys manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction acted in good faith and without reason to know of the duress either gives value or relies materially on the transaction. if the victim manifested assent and the other party relied on it? Too bad for the victim, the law will enforce the contract against the victim

U.S. ex rel. Trane Co. v. Bond 3rd party threat contract void?

Mr. and Mrs. Bond signed a contract with the government to perform air conditioning systems. Both Bonds signed an surety bound be issued. Under the Restatement 175, she would not be able to avoid the contract (Govt probably relied on the contract so 175(2) kicks in AND she was not a mechanical instrument so 175(1) does not kick in. Mrs. Bond as a defense said her husband threatened her to sign the document. The U.S. said that the situation does not matter and that they wanted the money. The court does not follow the Restatement(persuasive), but when there is a situation like this, the party is bound by the contract unless the coercion is so bad that the contract itself is to be void. Restatement 174 treats contracts as void only where the victims manifestation of assent is physically compelled. The court found that a contract is void if there is physical force or if there is a threat that is extremely bad threats of dire force can be enough to void the contract The court found that Restatement 175 as too narrow (Restatement is persuasive authority)

nominal)

Duress Relating to Contract Modification No consideration? Usually no contract, but is a loophole (sham or

Pre-Existing Duty Rule: Recall when we discussed the pre-existing duty rule, we saw how the doctrine of consideration could be employed to protect parties against attempts to withhold services in exchange for more advantageous terms under an existing contractE.g., Alaska Packers Assn. v. Domenico.

1. Loophole - We also saw, however, that the consideration doctrine can be an imperfect shield in these
situations because all the other party has to do is compel better terms and list some new consideration that is of small value by comparison to the new gain they would receive.( I wont spit on the deck, court generally does not look into the adequacy of consideration).

2. Close the loophole (economic duress doctrine)- Although Alaska Packers was technically decided
based on the pre-existing duty rule under the doctrine of consideration, it could also have been decided on the theory of economic duresswhich would not suffer the same potential defect. Austin Instrument, Inc. v. Loral Corp. Economic duress? 2 elements must be met:

1. Restatement 176(d) - the threat is a breach of duty of good faith and fair dealing under a contract with
the recipient. (Alaska Packers example/pre-existing legal duty)

2. Restatement 175 there is no reasonable alternative

Austin won the bid for 23 out of 40 gear parts. However, Austin threatened to not give Loral anymore previous parts unless they promised to give them the remaining bids. Loral was under contract with the government and gave the remaining bids to Austin to receive the previous contracted parts. Elements that have to be met: (1) There has to be a threat to withhold goods from the party (2) has to be the case that the company could not get the goods from someone else. A breach of contract will not be enough. This claim falls under Restatement 176(1)(d), the threat is a breach of duty of good faith and fair dealings under a contract with a recipient.

Ct. found that both elements were met and that Loral had excercised due diligence in finding alternatives and that Austin was acting in good faith Dissent thinks that Loral could have called more than 10 companies to replace the needed parts.

Note on Contract Modifications Under UCC 2-209

It should be noted that under UCC 2-209, the pre-existing duty rule is eliminated altogether: (1) An agreement modifying a contract within this Article needs no consideration to be binding. (3) The requirements of Section 2-201 [SOF] must be satisfied if the contract as modified is within its provisions 1. Comment 2: Modifications made [under subsection (1)] must meet the test of good faith imposed by this Act. The effective use of bad faith to escape performance on the original contract terms is barred, and the extortion of a modification without legitimate commercial reason is ineffective as a violation of the duty of good faith.

Note: The UCC does not have separate provisions relating to either the doctrines of fraudulent misrepresentation or duress. Consequently, the common law version of these doctrines applies via UCC 1-103(b).

this is the reason that Loral did not try to strike the contract for lack of consideration. UCC does not require it

Note on Supervening Difficulties Exception to Pre-Existing Duty Rule

Doctrine of duress can fill a gap we identified earlier in the pre-existing duty rule (i.e., where a minor consideration is negotiated into an otherwise extorted modification). But there is still gap in coverage between the pre-existing duty rule and the doctrine of duress: 1. Where a modification is fairly negotiated and agreed to in light of changed circumstances, but no new consideration is exchanged.

Supervening Difficulties Under this doctrine, a promise modifying a duty under a contract not fully performed is binding (even without new consideration) where: 1. After the contract is made it becomes subject to substantial and burdensome difficulties not anticipated by the parties when the contract was made (cannot simply be result of error of judgment in setting price) 2. Party benefiting from modification must conform to standards of honesty and fair dealing (not attempting to take advantage or coerce) 3. The change in performance obligations must be reasonable and manifestly fair in view of the changed conditions.

See New England Rock Services, Inc. v. Empire Paving, Inc.; see also Restatement 89(a) Modification of Executory Contract.

Elements of the Policing Doctrine of Duress

Under Restatement 175(1), where one partys manifestation of assent is induced by another partys improper threat that leaves the victim no reasonable alternative, the contract is voidable by the victim.

We learned that market pressure or driving a hard bargain needs to be distinguished from duress. A threat only becomes improper when it amounts to an abuse of the bargaining process. Restatement 176 offers guidance on when that threshold into improper bargaining is crossed.

176(1) details*** 176(2) details*** Restatement 174: If conduct that appears to be a manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress (literal physical force), the conduct is not effective as a manifestation of assent, and is therefore void. 1. Consequently, such physical compulsion by a third party will void a contract even where the non-victim party(ies) are innocent. ** In this caseThere was no assent, therefore a legal nullity

Illegitimate Threat by Nonparty

Restatement 175(2): If a partys manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction, in good faith, and without reason to know of the duress either gives value or relies materially on the transaction. * No physical force? Other party imposed the threat? Then too bad for the victim if the OTHER party relied on the assent some courts do not apply this rule too rigidly (threat by words may suffice, Restatement is persuasive authority.)

1. We saw, however, that not all courts will follow this approach (See e.g., U.S. ex rel. Trane Co. v. Bond)
Duress Relating to Contract Modification

Policing Doctrine of duress can provide better protection against unfair bargaining vis--vis contract modification than can the preexisting duty rule. (savvy parties can get around pre-existing duties by adding sham or nominal consideration). Creates a loophole in contract formation

Under UCC 2-209, An agreement modifying a contract within this Article needs no consideration to be binding.

1. However, Modifications made [under subsection (1)] must meet the test of good faith imposed by this
Act. The effective use of bad faith to escape performance on the original contract terms is barred, and the extortion of a modification without legitimate commercial reason is ineffective as a violation of the duty of good faith.

Note: UCC does not have separate provisions relating to fraudulent misrepresentation and duress, so turn to common law via UCC 1-103(b).

Introduction to Unconscionablility

As we have seen, the doctrine of duress does not cover situations in which there is no physical force or threat, express or implied. And the doctrine of fraud requires a misrepresentation (whether by express assertion, concealment, or silence).

What about cases where there is no threat or misrepresentation, but there is nevertheless unfair bargaining that results in unfair contract terms?

Loophole: no threat, no misrepresentation, but still inequitablewhat to do?

Williams v. Walker-Thomas Furniture Co. Walker Thomas sold furniture and appliances on credit to low-income buyers. As security for payment of the balance of the price, Walker Thomas included a cross-collateralization clause (if you buy items, then we will loan you the money, but unless you pay everything, then all items are collateral, even if you have paid them off) in the contract.

1. This gave Walker Thomas a security interest in the goods bought under the new transaction, as well as
in all goods that the customer had ever bought from it in the past. ** this makes consumers fear non-payment/default (the more you buy, the more collateral they have against you). *** This clause is complex and the court is probably concerned that defendant could not understand it basically unfair b/c there is way more collateral than their investment warrants

2. The effect of this provision was that if the customer defaulted on her most recent purchase, Walker
Thomas could repossess not just the goods sold in that transaction, but all other goods bought in previous transactions (even if she had paid almost all of the other furniture off). At the time of the most recent transaction (bought multiple articles of furniture between 1957 and 1962), WalkerThomas was aware (via the credit application) that Williams was living on public assistance$218 a month. 1. On this income, she was supporting seven children. 2. Despite this, they sold her a $500 stereo. When she defaulted, Williams had paid off all but her most recent purchase (stereo). Court found that where there is unfairness in the bargaining process that results in unfair or oppressive contract terms, then the courts may provide relief based on the doctrine of unconscionability.

Before this case, doctrine of fraud and duress was basically the only redress a victim could have when there was a defect in the bargaining process . . . unconscionability doctrine gives court latitude Historical Context for Unconscionability

Historically, unconscionability was a doctrine that was only employed in the courts of equity (no remedy under the law but claim is still just, if you have unclean hands, then you cannot get a remedy) 1. For example, where the courts were asked to provide a remedy not available under law (e.g., specific performance) because justice/equity demanded it, then such remedy would not be granted if there were some dirty hands, such as unconscionability, that could be traced back to the party seeking the relief. 2. Consequently, courts were hesitant to apply this equitable doctrine to cases that did not involve requests for equitable relief. *Courts are hesitant to apply this doctrine b/c not applying it also has benefits to a lower class (the interest rates will rise in the place of collateral clauses) also, there will be loan discrimination **element of disrespectif you are poor, you are not able to contract *** just because one person is at an advantage, does not mean it is uncons. **** courts use the doctrine sparingly (it give wide discretion to courts) for above reasonspoor people should be able contract

This all changed when the doctrine of unconscionability was included as a provision of the UCC. (UCC 2-302) Unconscionability then became statutory law governing the sale of goods. Following the UCC, the Restatement (Second) included an unconscionability provision. (Restatement 208)

UCC 2-302 Unconscionable Contract or Clause

(1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract [i.e. remedy of avoidance], or it may enforce the remainder of the contract without the unconscionable clause [i.e., remedy of excising the unconscionable portion], or it may so limit the application of any unconscionable clause as to avoid any unconscionable result [i.e., remedy of modification of the terms] .

1. Note: UCC 2-302 offers guidance on what remedies will be available where unconscionability is found
(avoidance, excision, or modification). These are the familiar remedies typically available where improper bargaining is found.

2. Note also: UCC 2-302 identifies the court and not the jury as the arbiter of unconscionability.
In part a carryover from the fact that actions before courts in equity were tried before a judge, not a jury. But it is also because (as we will see) the doctrine itself is fluidif not slipperyand it is perhaps best if it is decided before a well-trained and presumably dispassionate judge. Juries can make bad law if led by emotion Restatement 208 Unconscionable Contract or Term

If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable term, or it may so limit the application of any unconscionable term as to avoid any unconscionable result. 1. Clearly modeled on the UCC. 2. Also relies on judge rather than jury to decide. 3. Same remedies as UCC.

4. Like the UCC, Restatement fails to define or offer elements of unconscionability.

Elements of Unconscionability

Though no guidance is given by the language of the UCC and Restatement provisions, we can learn something from the comments and from the case law.

1. Comment 1 to UCC 2-203: The basic test is whether, in light of the general commercial background
and commercial needs of the particular trade or case, the (1)clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.The principle is one of the prevention of (2)oppression and unfair surprise.

2. Restatement 208 Comment c: Inadequacy of consideration does not of itself invalidate a bargain, but
gross disparity in the values exchanged may be an important factor in a determination that a contract is unconscionable Substantive unfairness

3. Restatement 208 Comment d: gross inequality of bargaining power, together with terms unreasonably
favorable to the stronger party, may confirm indications that the transaction involved elements of deception or compulsion, or may show that the weaker party had no meaningful choice, no real alternative.

Procedural unfairness

4. Factors which may contribute to a finding of unconscionability in the bargaining process includebelief
by the stronger party that there is no reasonable probability that the weaker party will fully perform the contract; knowledge of the stronger party that the weaker party will be unable to receive substantial benefits from the contract; knowledge of the stronger party that the weaker party is unable to reasonably to protect his interest by reason of physical or mental infirmities, ignorance, illiteracy or inability to understand the language of the agreement, or similar factors. (Like Williams v. Walker Thomas furniture) So, when it is(1) substantively and (2)procedurally unfair, then the court will consider applying the doctrine they do on a case by case basis and do in very limited circumstances

A. Uncons in Case Law:

Germantown Manu. V. Rawlinson *Procedural uncons. present? Yes, didnt give her the chance make meaningful deliberation, she was already under distress, she didnt completely understand the terms. ** Substantive uncons present? Yes,she opens herself up to unlimited liability without getting anything in return they could still prosecute Elements of Unconscionability Case Law

As noted in Williams v. Walker-Thomas, Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.

This guidance allows us to distill the elements of unconscionability down to two elements: 1. Procedural Unconscionability

Procedural unconscionability focuses on the bargaining behavior of the parties and tries to identify whether there was an absence of meaningful choice. Were unfair bargaining tactics employed? Was there a disparity in power between the parties? Was there oppression or unfair surprise (or terms not reasonably expected)? (UCC) Was there awareness of physical or mental infirmities, ignorance, illiteracy or inability to understand the language of the agreement, or similar factors? (Restatement)

2. Substantive Unconscionability

Substantive unconscionability focuses on the outcome of the bargaining process. Is there a gross disparity in the values exchanged? (Restatement) Are the terms harsh, unfair, or unduly favorable to one of the parties?

Note: Courts take different approaches to the test. Some require the presence of both procedural and substantive unconscionabilityothers are more flexible.

Courts generally require both to be present, but not in equal amounts there is a definite relationship b/t the 2 . . . where one is present, then the other probably is too Contracts of Adhesion

Where one of the parties, having superior bargaining power, is able to dictate the terms of the contract to the other on a take-it-or-leave-it basis, and the weaker party has no choice but to adhere to the terms.

Contracts of adhesion are not necessarily bad or unconscionable.

1. We saw them last semester in our section on standard-form agreements. As we noted then, it often
results in greater efficiency, centralizes decision-making, lower transaction costs, and therefore lower prices for consumer. We need to allow for these standard form contracts.

There is, however a dangerous side-effect: big companies can impose their terms on weaker parties who may have little choice but to accept.

1. Consequently, where there is a contract of adhesion, the courts will generally be ready to find that it is
procedurally unconscionable. Courts will then scrutinize it for unfair terms. If there are none, the contract is enforced in its entirety. If there are unfair terms (SUBSTANTIVE UCONSCIONABILITY) or terms the weaker party could not reasonably expect, they are typically severed, modified, or the entire contract is made voidable. ** CONTRACTS OF ADHESION ARE INHERENTLY PROCEDURALLY UNFAIR (not all though) Zuver v. Airtouch Communications, Inc.

Airtouch offered Zuver employment as a sales support representative at the yearly salary of $21,000. One of the conditions was that Zuver sign an agreement to arbitrate her disputes. Issue is whether the arbitration agreement is procedurally and substantively unconscionable? The court found that some part of the agreement were unconscionable but other parts were not, however the court did not disregard the entire contract itself. PROCEDURAL:

Courts have not decided whether both be present to find unconsc., this court doesnt decide Contract of adhesion? 3 elements: (1) standard form contract (2) prepared by one party and places the other on a take it or leave it basis (3) whether there was inequality in the bargaining process ok, so contract of adhesion YES but was it unconsiable?

True question of whether the form lacked meaningful choice NO, so there was meaningful choice, therefore not procedurally uncons., even though it was a contract of adhesionholding otherwise would probably hold that all employment contracts are procedurally uncons. SUBSTANTIVE:

Some terms no, some terms yes ct. decides to sever the ones that are uncons. and leaves the ones that are not Ultimately, both elements were probably not present (the court decided that this particular contract of adhesion was not procedurally unfair) but did decide to strike elements of the contract b/c they were substanitively unfair. Thus, when cts find one of the two elements unconsc,, then they will often apply a lower standard for the second

Doctrine of Unconscionability Doctrine of Unconscionability as policing contracts where there is no physical compulsion, threat, or misrepresentation, but there is nevertheless unfair or improper contractual bargaining that results in injustice.

1. As the court held in Williams v. Walker Furniture: Where there is unfairness in the bargaining process
that results in unfair or oppressive contract terms, then courts may provide relief based on the doctrine of unconscionability. Drawing on Comments to the UCC and Restatement, as well as case law, we distilled two principle elements to a claim of unconscionability: 1. Procedural Unconscionability

Were unfair bargaining tactics employed that resulted in an absence of meaningful choice? Was there oppression or unfair surprise in reaching terms? Was there an awareness of physical or mental infirmities, ignorance, illiteracy or inability to understand the language of the agreement, or similar factors?

2. Substantive Unconscionability

Focuses on the outcome of the bargaining process. Is there a gross disparity in the values exchanged? Are the terms harsh, unfair, or unduly favorable to one of the parties?

Note: Courts differ on whether both procedural and substantive unconscionability must be present. Nevertheless, most courts agree that severe substantive unconscionability can be a sign of procedural defects, and vice versa.

Policing Contracts on Grounds other than Improper Bargaining: Illegality and Public Policy Today we continue our look at doctrines that police the contract formation process by looking at how the courts will treat contracts that involve an illegal term or subject matteror terms or subject matter that are contrary to public policy.
*

not concerened with the fairness of the bargain, rather another way to find a contract unenforceable (against

public policy)

Illegality and violation of public policy are defenses that rely on the courts reluctance to allow the judicial process to become involved with the enforcement of certain transactions. Fairness to the parties is not the focus. The defense of illegality traces to The Highwaymans Case, an unreported English decision from 1725.

The Highwaymans Case

Example of what courts will do when all the elements of a contract are met but the contract itself is illegal. Two men committed highway robbery and one man brought action for not getting a fair share of the stolen goods. The court arrested the individuals and the attorneys for bringing the case to court. Basically the court is not going to touch the issue. The general rule is that contracts involving an illegal subject matter are unenforceable by either pursuant to the doctrine of in party based on the principle of in pari delicto:

Doctrine of In Pari Delicto:

1. The law leaves parties who have participated in an illegal contract where they find them because they
are equally guilty. Results in: no enforcement (contract void) No restitution

Rationales: (1) Deter bad behavior. (2) Avoid undermining the integrity of the legal system.

In applying the doctrine of in pari delicto, the courts will not just look at the relative moral/legal guilt of the parties, but will also consider the goals of (public interest served by) the law that was violated. * otherwise, people may be encouraged to engage in illegal behavior, knowing that it is upheld by

the law slap in the face to the law.

1. For example, even if both parties are equally aware the contract is illegal, the courts may look to which
party (if either) the law is designed to protect. If one of the parties was intended to be protected by the law, the court may consider this in the balance of deciding whether to apply the doctrine of in pari delicto and may grant restitution. Again, the law uses this doctrine on a discretionary basis

Definitely NO restitution: hire a hit man and he botches the job the law does not protect the class, in
pari delicto applies leave the parties as you found them

Maybe restitution: Enter into a loan agreement for 20% interest where usury law limits interest to %15..
the law obviously protects the consumer, BUT, the parties are both guilty. Law can use discretion and void the contract, giving restitiution to the consumer b/c the loan shark is more guilty and the consumer is in the class that the law protects in pari delicto does not apply The Diversified Group v. Sahn Sahn sold the rights to Knicks season tickets to Haber. These rights however were explicitly nontransferable and any attempt to transfer them would result in their cancellation. The convention center canceled the rights. Sahn claims that he sold the tickets to Haber for one fee and the other fee was to hold the rights for next year. Sahn gave back the ticket price ($57,000) but not the additional charge ($140,000). Additionally, the contract violates New York law. They worded the contract to circumvent the law (contract said that the exorbitant charge was to hold the tickets, not for the face value of the tickets). Court does not buy that argument and says that both were attempting to circumvent the law Sahn argues that both the parties were aware that the contract was illegal, therefore the court should leave the parties where they found them (in pari delicto). The court acknowledges that most of the time in pari decilcto would be appropriate, but the court found that the state statute is to protect persons against ticket fraud. Thus leaving the parties the way they are would go against public policy. Haber was in the protected class.

Underlying policy was to protect people who bought scalped tickets, thus the ct. says that Sahn was more guilty than Haber and ruled in Habers favor for policy reasons (statute protects people like Haber)

Danzig v. Danzig (in pari delecto is applied on a discretionary basis) Jeffrey, an attorney, contracted with Steve for business. Steven was to get one-third of any fee that Jeffery made off Steves clients. Public policy: attorneys 1st represent the clientattorneys believe they have a need to represent their clientif you go out door to door seeking business, the sanctity of legal profession is transgressed The court holds that there is nothing in the evidence that shows Steven knew the contract was wrong, therefore in pari delecto does not apply..Steve was, relatively, not as guilty as Jeffrey The court also offers public policy reasons for enforcing the contract. ****No further illegal activity would take place by enforcing the contract. Non-enforcement serves BOTH the public good and protects the individual (Stevan) Dissent: The court should not get involved and by enforcing this agreement we are tarnishing the judicial system.

Violations of Public Policy

Where a contract is not illegal but nevertheless offends public policy, the decision on whether or not to enforce is more difficult.(Sometimes there is not a statute that makes a contract illegal, what do we do in that case, when the contract is against public policy?)

1. The courts must balance the interest of freedom of contract and individual autonomy with the
countervailing public policy. If the harm to the public interest outweighs the benefit of enforcing the otherwise valid contract, then the courts will not enforce.

Because violations of public policy in these cases are not violations of law, where do the courts look to determine what the public policy is?

1. Courts are generally wary of legislating from the bench, so they will commonly rely on settled authority: Expressed/clear legislative goals
Settled common law precedent

Nevertheless, it is inevitable the judges own moral, religious, or philosophical beliefs often impact their decisions in this area. Example of legal realismgood lawyers will be able to make a public policy argument and urge the judge to extrapolate a pre-existing policy/rule

Remedies for Violations of Public Policy

The courts generally apply the same remedy-related rules as where contracts are found to be illegalincluding the doctrine of in pari delicto.

1. However, because the contract is not illegal, the courts have greater flexibility in tailoring the result
either through voiding, avoidance, severing a term, modifying a term, enforcement or restitution.

Stevens v. Rooks, Pitts & Poust (professional ethics policy upheld even though contract was not technically Stevens became a partner at Rooks and signed a noncompetition clause. Steven joined another law firm and Rooks refused to pay Stevens the remaining departure compensation. Was not technically illegal (he could go work somewhere else, but it was merely a financial disincentive). Policy rationale for Rule 5.6 rule is designed to protect a (1)lawyers free choice to practice law in an area and to (2)give the public free choice to find the best representation Defendants argue that the rule of reason should apply they invested a lot of money in the attorney and should be compensated for him leaving Court strikes this argument, saying that rule of reason does not apply in this situation b/c it limits the public access to an attorney in that SPECIFIC town. If he had wanted to go to NY it wouldnt apply, basically runs him out of Chicago, depriving the public of his service, contrary to policy rationale The court uses the Bar Rules as a clear statement of public policy. Noncompetition clause deprives Stevens of the right to practice but also clients the right of service. The court finds that leaving both in pari delicto, or, where the parties were before the contract, would still harm the public the right of service.

illegal. Upheld on a PUBLIC POLICY rationale)

Surrogate Parenting Contracts

Surrogate parenting contracts usually involve facts along the following lines: 1. A childless couple enters into a contract with a third person to enable the couple to have a child that is the biological child of at least one of them. 2. Where the husband is sterile, the couple may contract with another man to provide the sperm.

3. If the wife cannot bear children, the couple can contract with a woman to be artificially inseminated by the father. 4. In either case, such contracts may provide for a money payment to be made to the surrogate for his or her services and/or for a waiver of parental rights. 5. Sometimes the surrogate reneges before or after child is born.

6. Courts are forced to choose between value of freedom of contract and the ethical considerations of
womans right to body, mans right as father, interests of the child, etc. In the Matter of Baby M The Sterns entered into a formal written contract with Ms. Whitehead for surrogacy arrangements. Ms. Whitehead would terminate her parental rights but she grew attached to the child. Moreover, baby-selling is illegalct. decides to compare it to adoption Sterns get custody but court says it was NOT an enforceable contractwas decided on a family law principle question at the end of the day was what is the best interest of the child(family law) The court found public policy issues. First, you cannot pay money for adoption, second, court looks at adoption law, and third, public policy allows time for the mother to change her mind. The contract issue is really dead and family law should be applied. Women agreed to be artificially inseminated with the husbands sperm. The payments described in the contract were payments for services and medical expenses, not payment for adoption. The court finds that the contract was structured to try to avoid public policy issues because the mother did not have to give up her parental rights(Baby M Rule) after having the baby, but the previous money received would have to be repaid. R.R. v. M.H.

The court notes on public policy that the mother would not be in a financial position to pay the money back and therefore the lower class could be targeted for adoptions. Ct. finds that it is unenforceable b/c it is against adoption policy, in effect they were contracting around the policy of not enforcing baby selling. The final payments were only due upon receipt of the baby = baby selling Contract, again, unenforceable on public policy grounds therefore is decided on family law principles what is best for the baby? Policing Contract Formation for Illegality and Violations of Public Policy IllegalitySubject matter, consideration, or terms of agreement are illegal. Public PolicyNot illegal but nevertheless offends settled public policy outlined in legislative goals or common law precedent.

1. Remedies: Courts generally apply the same remedy-related rules to contracts that are found to be
illegal or contrary to public policy, including the doctrine of in pari delicto.

Remedies: Doctrine of In Pari Delicto

The general rule is that contracts that are found to be illegal or contrary to public policy are unenforceable by either party pursuant to the doctrine of in pari delicto:

1. The law leaves parties where it finds them because they are equally guilty. Rationales: (1) Deter bad behavior. (2) Avoid undermining the integrity of the legal system.

2. However, in applying the doctrine of in pari delicto, the courts will not just look at the relative moral/legal
guilt of the parties, but will also consider the goals of (public interest served by) the law or public policy that was violated. Introduction to Policing Contracts on Grounds of Incapacity

The general presumption is that all persons have the capacity to enter into contracts. There are, however, two exceptions: (1)minors and (2)mentally incompetent adults.

1. These two classes of persons are considered to lack the mental capacity to contract. In order to protect
such incapacitated persons, the law generally permits them to avoid any contracts entered into while incapacitated.(voidable, not altogether void).so, they still have the power to contract Comparison to Doctrines that Police for Improper Bargaining

Insofar as these rules are designed to protect the incapacitated, they have much in common with the doctrines that police contracts for improper bargaining (misrepresentation, duress, and unconscionability).

1. However, contrary to the doctrines that police contracts for improper bargaining (but similar to policing
for illegality or public policy concerns), there is no requirement that any improper bargaining be proved for an incapacitated person to avoid a contract. Minority

Lack Capacity:(they are assumed, by the law, to lack the capacity to contract) 1. Prior to reaching the age of majority (usually 18), minors do not have the legal capacity to be contractually bound.

2. Rationale: To protect minors from exploitation due to lack of education and experience. Easier to apply bright-line, objective age test that case-by-case analysis of capacity (of course,
there are 17 year olds who have a better capacity than 65 year olds.it is easier to apply, cant evaluate every minor on a case by case basis.)

Remedies:

1. Nevertheless, contracts entered into by minors are not legal nullities. Instead, they are voidable at the
minors election. Consequently, a minor is free to disaffirm a contract at any time prior to reaching the age of majority, and up to a reasonable time after turning 18. Minority: Disaffirming a Contract

Where a contract is purely executory, a minors disaffirmance of a contract results in its termination (unenforceable by either party).

1. Majors Obligations: If, however, either or both parties have performed (or partially performed), the
major party will be required to offer complete restitution (full value of the minors performance) to the minor.

2. Minors Obligations: The general rule, however, is that the minor is only required to return what he or
she has left of the major partys performance (value still retained). Repayment of full value is not typically required.

Example: I sell a minor my F-150 for $15,000. He pays me $5,000 down and promised to make $300 a month payments. The minor totals the car by sinking it in quicksand. Afterwards, he disaffirms the contract. Under the general rule, I must return the $5,000 and any payments made. The minor is not required to pay me any restitution for the truck or its use.

3. Note: Courts may, however, differ in their leniency toward the minor. For example, courts have
sometimes shown less leniency where a minor either misrepresents his or her age or is negligent. The major may also have an opportunity for remedy in a tort action for fraud or negligence. *the lesser minority of courts will make the minority pay full restitution **Also, the out of luck majority may be able to bring the case in TORT, b/c capacity is treated differently in TORT than in CONTRACT Minority: Ratifying a Contract

As a minor does not have the legal capacity to be contractually bound until reaching majority, it follows that a minor also cannot affirm/ratify a contract (making it fully enforceable by both parties) until reaching majority.

1. After reaching majority, however, a contract entered into while a minor can be ratified. Such a contract
can be ratified expressly, by conduct (e.g., taking a benefit under the contract), or impliedly (by failing to disaffirm after a reasonable time).

Example: At the age of 17, Kobe Bryant entered into a contract with a company whereby he granted them rights to use his name and image on products.

Shortly after his 18th birthday, he cashed a $10,000 check from the company. A little over a year later, Bryant tried to avoid the contract by claiming it was entered into when he was a minor. The court held that they did not have to address the question of whether Bryant had impliedly ratified the contract by not disaffirming within a reasonable period of time because he had already ratified the contract by conduct when he cashed the $10,000 check. See, In re The Score Board, Inc. (ratification implied by conduct)

Minority: Necessaries Incapacity attributed to minors is a double edged swordthey are unable to contractwhat if they need to contract for a necessary? Necessaries are determined on a fact based/case by case basis NECESSARIES are more than NECESSITIES(food and shelter) If emancipated(no longer relies on their parents), then much more will qualify as necessary

Douglass v. Pflueger Hawaii, Inc. Plaintiff started working at a car lot as a minor. Plaintiff signed an arbitration agreement. Plaintiff filed suit against his employer for sexual harassment. Plaintiff alleges that the arbitration agreement is not binding because he signed the contract as a minor. The court first held that there was a state common law rule known as the infancy doctrine that stated contracts entered into by minors are voidable. An exception to the rule is that a minor may not avoid a contract for goods or services necessary to his/her health and sustenance.

However the court also held that a state stature for employment regulated minors working. The court found that the Legislature made a distinction between a licensed minor working and a non-licensed minor working by age. The court has to interpret both the state statute and the common law rule.

State legislature has explicitly stated that 16/17 yr. olds are able to contract, in the employment context

If he had won the argument that he was a minor, then he would not be able to seek damages b/c, as a minor, it was all or nothing/contract void, then no cause of action against, because not technically employed, by his employer ct is trying to help him out but saying that he is not a minor

Public policy reason for enforcement, the public in large will hesitate to enter into contracts with minors if every contract is voidable. The court did not enforce the arbitration agreement based on lack of consideration, not based on the plaintiff being a minor. .. it was an illusory promise, the clause was hidden deep inside the contract (procedural unconsabilty - hidden deep and contract of adhesion - and illusory for lack of real consideration)

Minority: Necessaries

The protection of incapacity is a double-edged sword. Though minors have the advantage being able to hold adults to contract while that they can avoid by disaffirmance, this very fact makes them undesirable contracting parties.

1. Recognizing this fact, the courts have recognized limited situations in which minors may be held legally
bound to the contracts they enter into. 2. The most common of these situations is where minors enter into contracts for necessaries.

What counts as a necessary is a fact-based determination, but it is generally regarded involving something more than the bare necessities of life (food and shelter) and certain something less than luxury items. It will also depend on the minors status. If living at home with parents, then very little might qualify as a necessary. But if emancipated (married or in military), much more will qualify as a necessary.

Mental Incapacity exception #2 to the general rule that everyone is assumed to have the ability to Restatement 15 Mental Illness or Defect:

contract

(1) A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect

1. (a) he is unable to understand in a reasonable manner the nature and consequences of the
transaction. *ex think you are selling your dog but are actually selling your car

2. (b) he is unable to act in a reasonable manner in relation to the transaction and the other party
has reason to know of his condition *ex. know what you are doing but cant connect the fact that this will have terrible consequences (tougher to prove b/c you have to prove the other party knew you were incapable) *have to (1)show incapacity (2) show that the other party knew of it (3) the contract was lopsided

(2) Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance under Subsection (1) terminates to the extent that the contract has been so performed in whole or in part or the circumstances have so changed that avoidance would be unjust. In such a case a court may grant relief as justice requires. *

Mental incapacity is usually established by expert testimony

Farnum v. Silvano

Farnum, a 90-year-old, sold her house for $64,900, to defendant. At the time the fair market value of the property was $115,000. Farnum had many episodes showing lack of capacity. The court found that Farnum did not possess the requisite contextual understanding to be bound to a contract. The court found that it is one thing to be aware but it is quite another thing to be able to understand the context of the situation. Additionally, defendant had been told about the unfair price and the plaintiffs state of mind. Restatement 15(1)(b) ct. found that she was incompetent(didnt know the ramifications of the sale, and found that the other party knew of her incompetence). Remedy was rescission - the parties are placed in the same position as they were in before the contracts she has to give back the $ and any taxes that he paid, he has to pay her rent for his use of the house

Two Exception Person has Capacity Enter into Binding Contract

Presumption is that all persons have capacity to enter into binding contracts. Two exceptions:

1. MinorsContracts entered into by minors are not legal nullities. Rather, they are voidable at the
minors election. Minor is free to disaffirm a contract at any time prior toand up to a reasonable time afterachieving the age of majority.

Exception: Courts will hold minors bound to contracts for necessaries. What is a necessary will be a fact-based inquiry. Ratifying a ContractMinor cannot ratify a contract until reaches the age of majority. Once of age, can be ratified explicitly, by conduct, or impliedly (by failing to disaffirm after a reasonable time.

2. Mentally IncapacitatedGuidance provided by Restatement 15. Contracts voidable by the mentally

incapacitated where shown that by reason of mental illness or defect, person unable to reasonably understand the nature and consequences of the transaction or is unable to act in a reasonable manner in relation to the transaction and the other party knows this.

3. Remedies: Where both parties have performed under such a voidable contract, the non-incapacitated
party will be required to provide full restitution of value received. The incapacitated party, however, is usually only required to return the value still in possession. Under certain facts (e.g., fraud or negligence), Non-incapacitated party may, however, be able to bring action under another theory (e.g., tort).

4. Note: The doctrines designed to protect the incapacitated (so similar to doctrines policing for improper
bargaining), but no improper bargaining is required for them to apply. Introduction to Contract Interpretation and Construction

We have now completed our focus on how to determine if the parties have an enforceable contract. We now turn our focus to discerning the content of parties contractual obligations after the contract has been formed. Parties may agree they have a contract but differ on what the contract requires of them. Where the parties cannot find consensus on what they agreed to, they may look to the courts to interpret or construct the terms for them. Glannon E & E Interpretation and Construction

An indefinite contract cannot come into being if there is a material term missing AND if the uncertainty cannot be resolved by interpretation and construction

Courts will generally try to enforce a contract, even if material terms are missing, if it appears that the parties intended to contract Interpretation evaluating the facts to see what the parties meant Construction applying appropriate legal rules that are used to determine presumed intent(interpretation by legal implication)

construction is appropriate only when the existing evidence supports the reasonable conclusion (objective
manifestations)that the parties intended to contract but there is little factual evidence that an supporting a particular aspect of the contract Another time construction is used is to further a public policy, or is so fundamental to fair dealing Indefiniteness occurs when terms are:

1. vague uncertain, stated obscurely

2. ambiguous capable of more than one meaning 3. omitted terms

4. there are agreements to agree sometimes courts will fill in terms, if they are certain that the parties
intended a contract

Generally, the jury deals with interpretation while a judge deals with construction (however, it has become blurred b/c of the subtle distinction b/t construction and interpretation) INTERPRETATION:

Can be either the plain meaning or the contextual approach. When interpreting the meaning of the contract, ct. looks to 5 things, in order;

1. Actual words of the agreement

explicit language trumps all. If is clear, then no need for interpretation

2. Context
conduct of the parties during negations can provide insight into their intent

3. course of performance (conduct after contract was made),

if one party accepts w/out objecting, it is strong evidence that a contract was formed and they agreed to the terms, reflecting clear intent by both parties to contract

ex. We agree no animals, I keep a duck and you do not object. Reasonable inference that a duck is not an animal

4. course of dealings (conduct before),

ex. You previously rented an apartment to me and told me that a duck was a prohibited animal. Later, we enter another contractI am expected to know that ducks are prohibited two transactions must be substantially similar

5. trade and usage

Probative value of evidence of usage is usually decided by the jury Old approach was that only ancient, universal, and notorious usage could be used as evidence. However, UCC is more flexible and recognizes that in todays dynamic economy, usage can change overnight UCC test iswhether the usage is currently observed by a great majority of decent dealers. Expert testimony is usually required to establish trade and usage

 Courts are hesitant to apply trade and usage if both parties are not active participants in the relevant market CONSTRUCTION:

Distinction Between Contract Interpretation and Construction

Contract interpretation is the process of discerning the meaning reasonably intended by the parties to a contract. I.e., this is the search for the actual intent manifested by the parties as demonstrated by the facts(words, conduct, and context)

Contract construction refers to the process of adding contract terms by legal implication. Construction goes beyond the search for what the parties actually intended and looks to what they would or should have meant in reaching their agreement. In short, where there is a gap in the facts or language that precludes interpretation, the court may look to the law to fill the gap.

Ct. may construct contract terms where it is clear that a contract was intended and:

(1)

There were not enough facts to determine objective intent of the parties

*cannot interpret unambiguously (2) Public policy demands imposition of terms (regardless of the objective intent). So, when there are enough facts to determine the intent to contractin that case, the court will engage in interpretation. When there is not enough evidence, then the court may engage in construction, but courts are MORE hesitant to engage in construction, or, to impose terms by implication. We begin by looking at how the courts approach contract interpretation. (1) Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight. (2) A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together. (3) Unless a different intention is manifested, (a) where language has a general prevailing meaning, it is interpreted in accordance with that meaning; (b) technical terms and words of art are given their technical meaning when used in a transaction within their technical field. (4) Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement. (5) Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage of trade. Restatement 202 Rules In Aid of Interpretation Comments Restatement 202 Rules In Aid of Interpretation

Scope [Comment a]: Generally applicable to all manifestations of intention (not just writings) and all transactions. Purposes [Comment c] of a party are not always identical, but up to a point they commonly join a common purpose of attaining a specific factual or legal result which each regards as necessary to the attainment of his ultimate purpose.Determination that the parties have a principal purpose in common requires interpretation, but if such purpose is disclosed further interpretation is guided by it. Both parties do not always have the same purpose for contractingif we can ascertain their respective purposes, then we can give effect to the terms

Interpretation of the Whole [Comment d]: Meaning is inevitably dependent on context. A word changes meaning when it becomes part of a sentence, sentence when it becomes part of a paragraph. A longer writing similarly affects the paragraph, other related writings affect the particular writing, and the circumstances affect the whole.

Note on Technical Terms [Comment f]: technical terms are often misused, and it may be shown that a technical word or phrase was used in a non-technical sense. Moreover, the same word may have a variety of technical and other meanings.

Restatement 203 Standards of Preference in Interpretation(hierarchy)

In the interpretation of a promise or agreement or a term thereof, the following standards of preference are (a) an interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect; (b) express terms are given greater weight than course of performance, course of dealing, and usage of trade, course of performance is given greater weight than course of dealing or usage of trade, and course of dealing is given greater weight than usage of trade; (c) specific terms and exact terms are given greater weight than general language; (d) separately negotiated or added terms are given greater weight than standardized terms or other terms not separately negotiated.

generally applicable:

Restatement 203 Standards of Preference in Interpretation Comments

Scope [Comment a]: These rules do not override evidence of the meaning of the parties, but aid in determining meaning or prescribe legal effect when meaning is in doubt. Superseded Standard Forms [Comment f]: Rule in (d) has frequent application in cases of standardized documents.in cases of inconsistency a handwritten or typewritten term inserted in connection with the particular transaction ordinarily prevails. Similarly a typewritten term may be superseded by drawing a line through it.or controlled by an inconsistent handwritten insertion in another part of the agreement.

UCC 1-303 Course of Performance, Course of Dealing, and Usage of Trade

(a) A course of performance is a sequence of conduct between the parties to a particular transaction that

exists if:

(1) the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and (2) the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection.

(b) A course of dealing is a sequence of conduct concerning previous transactions between the parties to

a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.

(c) A usage of trade is any practice or method of dealing having such regularity of observance in a place,

vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law.

(d) A course of performance or course of dealing between the parties or usage of trade in the vocation or

trade in which they are engaged or of which they are or should be aware is relevant in ascertaining the meaning of the parties agreement, may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement. A usage of trade applicable in the place in which part of the performance under the agreement is to occur may be so utilized as to that part of the performance.

(e) Except as otherwise provided in subsection (f), the express terms of an agreement and any applicable

course of performance, course of dealing, or usage of trade must be construed whenever reasonable as consistent with each other. If such a construction is unreasonable: (1) express terms prevail over course of performance, course of dealing, and usage of trade; (2) course of performance prevails over course of dealing and usage of trade; and (3) course of dealing prevails over usage of trade.. UCC 1-303 Course of Performance, Course of Dealing, and Usage of Trade Comments

Interpreted in Commercial Context [Comment 1]: The UCC rejects the lay-dictionary reading of a commercial agreement. The measure and background for interpretation are set by the commercial context, which may explain and supplement even the language of a formal or final writing.

Course of dealing [Comment 2]: Restricted to a sequence of conduct between the parties prior to the agreementconduct after or under the agreement is course of performance. Usage of trade(trade and geographic specific) [Comment 3]: The language used is to be interpreted as meaning what it may fairly be expected to mean to parties involved in the particular commercial transaction in a given locality or in a given vocation or trade.

1. [Comment 4] (usage of trade changes quickly) it is not required that a usage of trade be ancient or
immemorial, universal, or the like. Under the requirement of subsection (c) full recognition is thus available for new usages and for usages currently observed by the great majority of decent dealers, even though dissidents ready to cut corners do not agree. Frigaliment Importing Co. v. B.N.S. International Sales Corp.

Frigaliment brought action for breach of warranty, there were two contracts entered into on the same day for frozen chickens. Frigaliment objected to the chickens received because they were not young chickens but B.N.S. claims that the word chicken means any kind of chicken not just young chickens.

The first thing the court did was look at the dictionary term chicken, but there was no clarity. Therefore the court held that the term chicken was ambiguous. Next the court looked at the terms of the contract as a whole. (The court does not use the UCC because it was not implemented yet.)

The contract states different weights of chickens normally found to be young chickens however the court does not give much weight to this argument because things can be different weights but the same kind of item.

U.S. Fresh Frozen Chicken, Grade A was found in the contract, Frigaliment argued that was just a trade term while B.N.S. used the definition give by the Department of Agriculture for any kind of chicken. The prices of the chickens were also at debate.

Finally, the court turned to extrinsic evidence. The terms of the contract were in German but for the word chicken. Fraigliment argues that is because the German word hunu means old chicken, while B.N.S. relies on the salesmans statement any kind of chicken.

The case was dismissed. The plaintiff did not meet the burden of proof necessary. Plain Meaning Approach: One approach courts have used to interpret contracts is called the plain meaning method. Plain meaning interpretation involves three steps: 1. (1) Court attempts to determine whether the language of the agreement on its face is ambiguous. (E.g., are there differing dictionary definitions, each of which might reasonably support one of the parties interpretations?) If the court finds the terms are on their face ambiguous, then they will move to the second step.

Plain Meaning v. Contextualist Approach

2. (2) Court attempts to interpret the disputed terms in light of the context of the entire written agreement.
Tries to determine whether a reasonable person coming across the terms in the context of the agreement as a whole would favor one interpretation over another.ONLY IF YOU CANNOT INTERPRET AT THIS POINT, YOU MOVE ONTO. 3. (3) The court will only turn to extrinsic evidence (oral or written communications between the parties, prior dealings, usage of trade, course of performance) if it cannot attach an unambiguous meaning to the terms after step two. Contextualist Approach Interpretation

Contextualist Approach to Interpretation: The modern trend (exemplified in the UCC), however, is to rely more on extrinsic evidence of meaning in contracts.

1. For example, many modern courts are willing to consider extrinsic evidence from the outseteven if
the language of the agreement seems clear at first glance. Often the context surrounding the contract formation will put the terms in a new lightone that better reflects the intent of the parties at the time the contract was formed. Guilford Transportation Industries v. Public Utilities Commission

The issue was whether the term wire included fiber optic cables. The court starts by addressing the word wire whether the dictionary meaning is ambiguous or unambiguous. (This is the plain meaning approach.) The court found that the term was ambiguous. Next the court looked at the term in the context of the entire agreement. CMP argues that the contract says electrical communication which includes fiber optic cables. However Guilford says that section only addressed communication internally. The court cannot make a final decision based on the four corners of the contract. Court takes the plain meaning approach, the 3-step analysisonly then do they allow EXTRENSIC evidence to control

3 steps are: (1) is it ambiguous? (2) if it is ambiguous, then try to interpret it and attach meaning, as determined by a reasonable person, under the circumstances (3) pull in extrinsic evidence to supplement and determine Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co. (extrinsic v. plain meaning approach) Defendant entered into a contract with plaintiff to furnish the labor and equipment necessary to remove and replace the upper metal cover of plaintiffs steam turbine. The lower court refused to look at extrinsic evidence, even though it might change the outcome of the decision. The lower court only looked at the plain meaning of the contract. The court found that even when only looking at the plain language of a contract, the judge is using external evidence based on personal experience and knowledge. The court found that words vary in meaning depending on their contexts. Therefore you must look at the circumstances surrounding the word to find out the true meaning. The court holds that the plain meaning doctrine is a old approach and that the contextualist approach must be applied. Contract Interpretation

Contract interpretation is the process of discerning the meaning reasonably intended by the parties to a contract that has already been formed. I.e., this is the search for the actual intent manifested by the parties. General Guidance for Interpreting Contract Terms: 1. Restatement 202 Rules In Aid of Interpretation 2. Restatement 203 Standards of Preference in Interpretation 3. UCC 1-303 Course of Performance, Course of Dealing, and Usage of Trade

Plain Meaning v. Contextualist Approaches

Distinguished Plain Meaning from Contextualist Approaches to Interpretation of Written Agreements: 1. Plain Meaning or Four Corners Approach (1) Court attempts to determine whether language is ambiguous on its face (e.g., differing dictionary definitions) (2) If ambiguous on its face, then court attempts to interpret meaning of terms in light of context of the entire writing, (3) Court will only turn to extrinsic evidence (look beyond the four corners of the written agreement itself) if it cannot attach an unambiguous meaning after step (2). Examples of extrinsic evidence: Course of performance Course of dealing Usage of trade Prior or subsequent oral or written communications

Contextualist Approach to Interpretation

Contextualist Approach to Interpretation: The modern trend (exemplified in the UCC), however, is to rely more on extrinsic evidence of meaning in contracts from the outset of the interpretive process.

1. Rationale: Often the context surrounding the contract formation (supplied by extrinsic evidence) will put
the written contract terms in a new lightone that better reflects the intent of the parties at the time the contract was formed.

Introduction to Contract Construction

Last time we discussed how the courts might approach a dispute over the parties actual intended meaning of contract terms by interpreting the agreement. But sometimes the problem is not that the terms are ambiguous or uncertain, but rather that they are missing altogether. Or perhaps methods of interpretation fail to yield a satisfactory result (the parties contradictory interpretation of the terms cannot be resolved by reading them in context and considering extrinsic evidence). In these circumstances, the court is left with the choice of either declaring the contract void for vagueness or indefiniteness, or fill the gap for the parties by supplying terms based on common law or statutory principles and rules.

In such cases, the court moves beyond interpreting the actual intentions manifested by the parties, and instead draws on the law to construct a resolution to the problem.

Intro to Specific Gap-Fillers or Default Rules

Why have default ruleswhy not just find any contract with missing terms to be void for indefiniteness? 1. One answer is that default rules are facilitative; they save a large number of bargainers the time, expense, and risk of error of bargaining each detail explicitly in an agreement in advance. This makes it easier for parties to make enforceable contracts and thus presumably advances important goals of contract law: autonomy and efficiency.

Where do default rules come from? 1. Obviously they come from the courts and legislaturesbut what about in terms of justification?

In the words of Oliver Wendell Holmes, they are typically thought of as the terms that it may fairly be presumed the parties would have assented to if they had been presented to their minds. Or, in other words, we imagine a hypothetical bargain among parties similarly situated to the litigants and ask: How would those parties have allocated this risk if required to do so explicitly in advance?

Opting Out

Remember that specific gap-filling provisions are only drawn upon to supplement an agreement where the parties are silent on the issue. This means that if parties do not want to be committed to the specific gap-filling provisions (either under the common law or the UCC), they can opt out of them by explicitly inserting a contrary term. commerce needs flexibility and filling in terms could transgress parties autonomy So, generally, you can contract out of default rules to escape unwanted consequences

Restatement: Opening Door to Construction

Restatement 204 Supplying an Omitted Essential Term:GREEN LIGHT TO ADD A TERM

When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.

UCC: Opening Door to Construction

UCC-2-204(3) Formation in General:

(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving and appropriate remedy.

Examples of Specific Gap-Fillers in UCC Last semester we saw how these gap-filling provisions could save a contract from being found void for indefiniteness. For example, where it is clear the parties intended to enter into a contract for the sale of goods, but they failed to include a price term, the UCC may fill that gap in the contract terms via UCC 2-305:

UCC 2-305 Open Price Term: 1. (1) The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if (a) nothing is said as to price; or (b) the price is left to be agreed by the parties and they fail to agree; or (c) the price is to be fixed in terms of some agreed market or other standard set or recorded by a third person or agency and it is not so set or recorded..

There are many other gap-filling provisions in the UCC (e.g., covering method of payment, method of delivery, etc.). UCC 2-311 Options and Cooperation Respecting Performance:

Consider, e.g., UCC 2-311:

1. (1) An Agreement for sale which is otherwise sufficiently definite (Section 2-204) to be a contract
is not made invalid by the fact that it leaves particulars of performance to be specified by one of the parties. Any such specification must be made in good faith and within limits set by commercial reasonableness.

2. (2) Unless otherwise agreed, specifications relating to assortment of the goods are at the
buyers option and [except as otherwise provided in 2-319] specifications or arrangements relating to shipment are at the sellers option. Family Snacks of North Carolina, Inc. v. Prepared Products Co., Inc.(contract dispute, can court add terms when parties cannot settle on them?) Prepco sold to Family Snacks a snack processing facility. The purchase price of the facility was based upon an agreement between Family Snacks and Prepco that Prepco would reduce the purchase prices of the facility and would recoup the difference through the implementation of a low-cost manufacturing agreement with Family Snacks. There are four elements the court looks at for a valid contract: (1) enforceable contract between the parties, (2) obligation, (3) breach, and (4) resulting damages. Prepco argues that there is not a valid contract because there was no fixed price. However the court finds that there is a fixed price based on the objective cost plus agreement form. Next Prepco argues that their performance relied on Family Snacks sending a price sheet. The contract does not address this issue and the court referenced a default rule, Restatement 204, opens the door to fill the gap. The court uses UCC 2-311 to fill the gap. The prevision says, the buyer is the person who has to act first. (default rule)the default rule is not invoked unless there is nothing in the contract defining the term Court cannot move on to gap filler unless the parties intended to contractct. determined that parties indeed intended to contract.

Prepco had the duty to move first, under UCC 2-311, and did not. Therefore, they were in breach Original contract was worded poorly Rules like UCC 2-311 provide specific gap-filling rules parties know will be construed as part of their agreement for the sale of goods if they do not explicitly opt out. Sometimes the courts will rely on general principles, rather than specific terms, to construct missing or ambiguous terms for the parties. The principle of good faith is one such example. As weve seen, both the Restatement and the UCC recognize a general duty faith attaching to every contract.

Good Faith as Construction Tool

Restatement 205 Duty of Good Faith and Fair Dealing Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.

1. Comment (a): The phrase good faith is used in a variety of contexts, and its meaning varies
somewhat with the context. Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving bad faith because they violate community standards of decency, fairness or reasonableness

UCC 1-304 Obligation of Good Faith Every contract or duty within [the Uniform Commercial Code] imposes an obligation of good faith in its performance and enforcement.

1. UCC 1-201(b)(20): Good faith,means (1)honesty in fact and the (2)observance of

reasonable commercial standards of fair dealing. Good Faith: Output and Requirements Contract

Youll recall from our discussion of the requirement of mutuality of obligation that UCC 2-306 imposes a duty of good faith on output and requirements contracts, thereby allowing it to meet the test for considerationand it also prevents one party from attempting to unfairly take advantage of favorable marked price fluctuations: 1. UCC 2-306(1) Output, Requirements and Exclusive Dealings

(1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output requirements may be tendered or demanded.

Indiana-American Water Co., v. Town of Seelyville

The town entered into a 25-year contract to obtain its water from the Indiana-American Water Company(REQIREMENTS CONTRACT). The town starts development on its own water towers and stopped the contract with the water company.

The court applies the UCC 2-306 good faith requirement. Was it an illusory promise? Ct. says that good faith makes the contract not illusory The court found that there was a requirement contract and the town was not taking advantage of the other parity.

The water company knew that the town wanted to develop its own water towers. The time came that the town could afford the construction. The town stopping the contract with the water company was not in bad faith but it was the best interest of the town.

The town had purchased the well site b4 the contract they would not be in competition with the water company The reasoning behind UCC 2-306 is to estopp people from taking advantage of price fluctuations in the market (demanding more than they need b/c of an advantageous market)this was not happening in this case

United Airlines, Inc. v. Good Taste, Inc. (Good Faith to Construe Other Terms) Untied entered a contract with Saucy Sisters to cater Uniteds flight to Anchorage. The contract said that there was a no cost termination agreement of 90 days. Untied gave a 90 day notice and stopped the contract. Costed Saucy Sisters $1 million to develop their business in order to meet Uniteds needs The trial court found that there was a contract termination at will but the court allowed the contract to move forward because there was an implied covenant of good faith. Simply, the court read the contract and it did say the contract can be terminated, however when a contract is so broad and has so many attachments in exercising discretion, there is an implied obligation to act in good faith. Illinios courts have never said that good faith is violated in at will employment contractsif the intent is to run someone else out of business, which would be bad faith Escaping the contract to get a better price is not, however, bad faithSisters argues it was in bad faith, but ct. says that seeking a better deal is consistent w/ good faith of the termination clause. When there is desertion in a contract you can breach a contract for growing your business or economic growth. There has to be a veiled business clause. However the court finds that a no clause termination clause doe not have to look at good faith. Good faith can only be read to supplement the contract. Here the trail court used good faith to change the contract not to fill in the gap. Saucy sisters wanted the contract bad, took the risk, and paid the price The dissent argues that there must be some kind of reason verses no reason at all to terminate a contract in good faith. Good faith is a richer concept and should be applied across the board, unless the contract specifically excludes good faith. Default rule should be that you have cause to terminate, not that you dont have to show cause Contract interpretation is the process of discerning the meaning reasonably intended by the parties to a contract that has already been formed. Contract construction applies where terms are missing altogether or methods of interpretation fail to identify the parties intended meaning. 1. In such cases, the court can either declare the contract void for vagueness or indefiniteness, or the court can supply the term. Courts will supply terms in one of two ways: Specific statutory or common law gap-fillers/default rules (e.g., UCC 2-305 Open Price Term)

Dissent (legal realism)

Contracts ConstructionGap Fillers and General Principles

Based on general principles of contract law (e.g., duty of good faith and fair dealing)

Rationale Behind Specific Gap-Filling Rules and General Principles in Contract Construction: 1. The are facilitative they save a large number of bargainers the time, expense, and risk of error of bargaining each detail explicitly in an agreement in advance. This makes it easier for parties to make enforceable contracts and thus presumably advances the goals of autonomy and efficiency.

Opting Out: Specific gap-filling rules are only drawn upon to supplement an agreement where the parties are silent on an issue. This means that if the parties do not want to be committed to the specific gap-filling provisions (either under common law or the UCC), they can opt out of them by explicitly inserting a contrary term.

Introduction to Parol Evidence

When Applies: The parol evidence rule comes into play where an agreement is recorded in writing and one of the parties attempts to introduce extrinsic evidence that the parties agreed to another term that is not contained in the writing.

Origins of Term: The term Parol derives from the French parole, meaning word. Thus, the term parol evidence was initially used to refer to oral evidence of agreement. Today, however, it refers to both oral and written terms agreed to prior to (or contemporaneous with) the execution of the final written contract, but not incorporated in it.

General Rule

We will see that the common law and UCC take different approaches, but generally speaking, the parol evidence rule provides that where the parties execute a writing that is intended to be a complete and final expression of their agreement (i.e., fully integrated), no parol evidence may be admitted to supplement or contradict it. If, however, the writing is not a final and complete expression of the agreement (i.e., partially integrated, then consistent (but not contradictory) parol evidence may be admitted to supplement or explain those parts of the agreement that have not been finally expressed *

Note: Evidence that contradicts the writing will NEVER be admitted

Distinguished from Interpretation

The parol evidence rule extends and reinforces the preference we saw the courts will generally give to a contracts written terms over extrinsic evidence of the parties intentions in contract interpretation.

1. Distinguishing from Interpretation: The focus of contract interpretation is on discerning the meaning of
the actual expressed terms in the agreement as they were reasonably intended by the parties (applies to both written and oral agreements). On the other hand, the parol evidence rule is limited to written agreements and concerns attempts to introduce extrinsic evidence that add to, detract from, vary, or contradict the written terms of the agreement.

Interpretation what does it say? Parole Evidence What will we let in as evidence?
Rationale Behind Parole Evidence Rule: (1)when parties take the time to put something down in paper, then it suggests that they were serious about it, (2)it is more reliable and; (3)protects against fraud.

The presumption is that when parties make the effort to reduce their agreement to a writing, they intend that writing to control the agreement as its final expression. As such, the final agreement should be understood as superseding any other agreements concerning the same subject matter that came before or contemporaneous with its execution. Consequently, evidence of terms agreed to prior to this written agreement that were not expressed in its terms should not be admissible for the purpose of determining the parties obligations.

1. Also presumes that written record is more reliable than recollections. 2. Also protects against fraud or self-serving testimony after the fact.
Effect of Rule

Important to remember that admitting parol evidence does not decide the question of the agreements enforceable termsthe fact finder must still evaluate the credibility of the evidence and otherwise determine whether it is enough to reflect a binding agreement by the parties to that term.

EVEN IF the parole evidence is admitted, then the jury still has to decide whether it should be part of the
agreementyou merely clear the first hurdle, then decide on the merits. Introduction to Common Law Integration

We have seen that the parol evidence rules application will depend on whether the court finds the agreement is fully or only partially integrated. The courts generally apply a twp-step process: (1) Judge decides the question of whether the written agreement is integratedand if so, whether it is fully integrated (in which case no parole evidence is allowed) or only partially integrated. (2) If it is only partially integrated, and the term at issue was missing or incomplete, then the court will admit parol evidence that is consistent with the express terms of the written agreement (cannot contradict).

Four Corners vs. Contextualist Approaches

We will see that at common law courts will take different approaches to the question of integrationranging from a strict four corners approach to more contextual approaches. As with interpretation, the current trend is toward greater contextualism.

Four Corners Approach

Looks only at the four corners of the written agreement to determine whether integratedno extrinsic evidence is considered. If the document interpreted as a whole (in accordance with the plain meaning of the text) appears to be a full and final expression of the agreement, it is fully integratedand no parol evidence is admitted to supplement its terms.

1. If the four corners reflects that only partially integrated, parol evidence allowable to add or supplement
with consistent terms.

2. Rationale(clarity and predictability) Logical application provides greater clarity for the parties and
greater predictability. If the parties want to include other terms, this strict application encourages them to make their intentions explicit in the agreement.

Problem: What about where parties made two separate agreementsone oral and one writtenand the consideration for both was manifest in the written agreement?

1. Four corners approach has a hard time dealing with this because cannot look beyond the written
agreement. Such courts typically apply the Collateral Agreement Rule. For this rule to apply, fourcorner courts typically require (1) distinct subject matter that does not conflict with terms of written agreement, and (2) that the consideration for the collateral agreement be distinct and capable of separate identification. (3)Would reasonable parties naturally and normally enter into the agreement If all ?s answered YES, the court will allow the parole evidence

Contextualist Approach (gives the court increased leeway to find that the document is not fully integrated)

This approach recognizes that even writings that appear to be full and final within their four corners can be exposed as incomplete when considered in light of the entire context of the transaction. Courts adopting the contextualist approach will therefore look beyond the four corners of the document and consider extrinsic evidence that may reveal that an apparently integrated writing was in fact not intended to be fully integrated.

1. In performing this analysis, the courts will often evaluate the credibility of the parol evidence. If
credible, then less likely parties intended the agreement to be fully integrated.

Restatement 216(2)(b) (reflects a more contextualist approach): (2) An agreement is not completely integrated if the writing omits a consistent additional agreed term which is (b) such a term as in the circumstances might naturally be omitted from the writing.

1. Comment (d): If it is claimed that a consistent additional term was omitted from an integrated
agreement and the omission seems natural under the circumstances, it is not necessary to consider further the questions whether the agreement is completely integrated.This situation is especially likely to arise when the writing is in a standardized form which does not lend itself to the insertion of additional terms.

Note: With the more liberal approach under the Restatement, there is no need for a separate Collateral Agreement Rule.

Merger / Integration Clauses (contract around the possibility of parole evidence being admitted in the future)

If parties want to protect themselves against the introduction of parol evidence in possible disputes over the terms of their written agreement, they can include an express provision within the written agreement that states the written contract is the entire agreement between the parties, and that no representations or promises have been made save for those explicitly set out in the writing.

1. Such contract provisions are referred to as merger or integration clauses. Four-corners courts
will usually defer to a merger clause in determining whether it is fully integrated. Even courts applying the contextualist approach will usually give merger clauses significant weight. Contextualist, and especially 4 corners, courts will give merit to these clauses, finding the existence of one concludes that the agreement is fully integrated Classic Case of Mitchell v. Lath

A buyer of real estate alleged that the seller had orally promised to remove an icehouse from an adjoining piece of property. The written agreement signed by the parties was silent on this issue.

Court ruled that insofar as the writing appeared to be complete (or fully integrated) on its face, extrinsic evidence of the icehouse agreement must be excluded per the parol evidence rule (4 corners approach) There is no indication the court doubted the icehouse agreement was madeits just that this parol evidence could not be considered once the courts inspection of the plain language of the agreement reflected that it was fully integrated.

The dissent challenged the ruling by pointing out that it makes little sense to claim the writing is fully integrated if a cursory review of the context surrounding the transaction reveals that it in fact left out an important aspect of the parties agreementnamely the icehouse term.

The majority decision represents a classic expression of the four-corners approach to the parole evidence rule, while the dissent points in the direction of the contextualist approach that has continued to gain momentum from that time forward.

Masterson v. Sine (MOVE TOWARDS A CONTEXTUALIST APPROACH)

Plaintiff owned a ranch, which they conveyed by grant deed to relatives. The plaintiffs went bankrupt. The relatives (and trustee of the bankruptcy) brought a declaratory judgment action to establish their right to exercise the option.

Up to this point, California had given lip service d the 4-corner approach, but the reality was that a more contextualist approach was used There was no integration clause. Ct. reasons that, under these circumstances, that an integration clause certainly WOULD be expected. 2 rationales for the P.E. Rule: (1) writing is better memory than words (2) Avoid fraud Memory rationale is taken care of under the original rule (IT DOES NOT DIRECTLY CONTRADICT SO ITS OK) Fraud rationale - Ct. says that collateral agreements should only be excluded only when the factfinder is likely to be misled The parol evidence at issue is the non-assign-ability of the option, to keep the farm in the familys name. The court held that under these facts, it appeared that the collateral agreement would /should have been made as a separate agreement; parol evidence in the issue of assignably must be allowed. Ct. rationale echoes Restatement 216(2)(b) Dissent says that this is totally inconsistent w/ the parole evidence rule of course Dallas Masterson would say this, obviously self-servingfurther, Cal. Is a 4 corner state and this is the exact ca that the 4 corner attempts to prevent (obvious fraud)

Yocca v. Pittsburgh Steelers Sports, Inc.(4 corners approach) Plaintiff received an SBL brochure to purchase season tickets, however the seats allegedly varied from the diagram that they had been given with the SBL brochure. There was an integration clause in the original offer; the contract stated it supersedes any previous representations or agreements. Where the parties, without any fraud or mistake, have deliberately put their engagements in writing, the law declares the writing to be not only the best but the only evidence of their agreement. The court found that by sending in their application with the initial non-refundable payment, plaintiffs simply secured their right to be considered for assigned seats and the opportunity to receive a subsequent offer to purchase SBLs for those seats.

Parol Evidence Rule Applied where an agreement is recorded in writing and one of the parties attempts to introduce extrinsic evidence of the parties prior or contemporaneous agreement of a term not reflected in the writing.

1. Distinguished from interpretation: Focus of interpretation is on discerning the meaning of the terms
actually reflected in a written or oral agreement. Parol evidence rule limited to written agreements and applies to parties attempts to introduce extrinsic evidence of the parties agreements that would add to, detract from, vary or contradict the written agreements express terms.

2. Distinguished from construction: Contract construction occurs where the courts draw on statutory gapfillers or general legal principles to fill in gaps in the parties terms. The parol evidence rule applies only to the parties attempts to introduce evidence of prior or contemporaneous agreements by the parties to supplement or contradict the parties express terms. Myskina v. Conde Nast Publications

Myskina takes a photo shoot with GQ; she takes her boyfriend, and a secretary for the agency. They tell her that they will only use one risqu picture; She signs a standard release form and her agents dont raise issue; The photographer asks if he can use the additional pictures for personal use claimed oral exchange was that the only pictures would NOT be published anywhere; photographer has a clause in his contract that he can use the photos externally; he does and sells them to a Russian outlet

Myskina makes 2 arguments that the photographer breached contract: 1. Oral breach of contract (2 oral agreements on the day of the contract) 2. She didnt know or intelligently agree to sign (her English was so poor)

Ct. found that the duty to read applied, she had representation and they did not protect her interests; outward manifestations of assent should legally allow the other party to rely on them, so long as there was no impropriety in the bargaining process; the court found none.

Ct. probably would have been more sympathetic if she had not been represented; ct. may have considered an unconsablilty argument if that were the case Ct. looks into the oral agreements and applies the contextualist approach, or the Restatement 216 approach, allowing extrinsic evidence They found that the agreement was fully integrated; they do not see anything about an oral agreement in the contract; the contract said that they can use the photos for anything, which directly contradicts (rather than supplements) the written terms;

This is a fundamental issue and she had representation; looks like the court tried to help her but there was no remedy under law.

General Rule (though Common Law and UCC may differ in application)

Where the parties execute a writing that is intended to be a complete and final expression of their agreement (i.e., fully integrated), no parol evidence may be admitted to supplement or contradict it. If, however, the writing is not a final and complete expression of the agreement (i.e., partially integrated), then consistent (but not contradictory) parol evidence may be admitted to supplement those parts of the agreement that have not been finally expressed.

Effect of Rule:

1. Evidence admitted under the parol evidence rule may be considered by the fact finder in determining the parties obligations under the contract. Admitting extrinsic evidence of another term does not decide the question of whether it should be found to be part of the agreement. Common Law Application

Application of Parol Evidence Rule turns on the question of integrationwhether the written agreement is fully or partially integrated. Common law courts take differing approaches:

1. Four Corners: Looks to only the four corners of the written agreement in determining whether
integratedno extrinsic evidence is considered. If the document interpreted as a whole (in accordance with the plain meaning of the text) appears to be a full and final expression of the agreement, it is fully integratedand no parol evidence is admitted to supplement its terms.

ExceptionCollateral Agreement Rule

2. Contextualist: Recognizes that even writings that appear full and final within their four corners can be
exposed as incomplete when considered in light of the entire context of the transaction. Courts adopting the contextualist approach will therefore look beyond the court corners of the document and consider extrinsic evidence that may reveal that an apparently integrated writing was in fact not intended to by fully integrated. Adopts the approach reflected in Restatement 216(2)(b) Merger and Integration Clauses Parties can protect themselves against the introduction of parol evidence to supplement the terms of their written agreement by including a merger or integration clause. 1. States the written contract is the entire agreement between the parties, and that no representations or promises have been made save for those explicitly set out in the writing.

Four corners courts will usually defer to a merger or integration clause. Even contextualist courts will give a merger or integration clause great weight in determining whether the agreement is integrated.

Pre-Revision UCC 2-202 Final Written Expression: Parol or Extrinsic Evidence (usage of trade, course of

dealing, course of performance are admissible as evidence, even if the document is fully integrated)

Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented 1. (a) by course of performance, course of dealing, or usage or trade (Section 1-303); and

2. (b) by evidence of consistent additional terms unless the court finds the writing to have been
intended also as a complete and exclusive statement of the terms of the agreement. UCC 2-202 Comments

Comment 1: This section definitely rejects: (a) Any assumption that because a writing has been worked out which is final in some matters, it is to be taken as including all the matters agreed upon.

UCC 2-202 Comments

Comment 2: Paragraph (a) makes admissible evidence of course of dealing, usage of trade and course of performance to explain or supplement the terms of any writing stating the agreement of the parties in order that the true understanding of the parties as to the agreement may be reached. Such writings are to be read on the assumption that the course of prior dealings between the parties and the usages of trade were taken for granted when the document was phrased. Unless carefully negated they have become an element of the meaning of the words used. Similarly, the course of actual performance by the parties is considered the best indication of what they intended the writing to mean.

UCC 2-202 Comments

Comment 3: Under paragraph (b) consistent additional terms, not reduced to writing, may be proved unless the court finds that the writing was intended by both parties as a complete and exclusive statement of all the terms. If the additional terms are such that, if agreed upon, they would certainly have been included in the document in the view of the court, then evidence of their alleged making must be kept from the trier of fact.

little more forgiving than Restatement, which allows only if it would certainly have been included to be considered NOTE: course of dealing will usually always make it in, even if there is an integration clause (1) The oral agreement did not contradict the contract. The contact does not address the issue, therefore the evidence can be used. (2) This would be permitted. The evidence does not contradict. The contract does not contain a merger clause and the contract is not fully integrated. (3) This is a prior dealing. The information does not contradict the contract. Prior dealings are allowed to hear the evidence. A reasonable person could conclude that this would be a part of the agreement. (4) This evidence would be used. It does not contradict and is consistent with usage of trade. (b) This evidence would be permitted because it is a course of performance. It does not contradict. (c) The form would change the agreement to A(1) but (2) does not preclude any of the rest. There are not qualifications on the rule. The court might not give it a lot of weight, but it can still be used.

Problem 16.2 Eldon v. Devine (p. 601 Questions will be on the test)

Exceptions for Evidence of Violability or Invalidity of the Contract

As weve seen, the parol evidence rule only applies once it is understood the parties have entered into a valid, enforceable contract. Consequently, as a general rule, extrinsic evidence that an alleged contract is either void or voidable is admissible as an exception to the parol evidence rule. For example, in cases of clear fraud or egregious misrepresentation that otherwise make an agreement enenforceable, courts agree the parol evidence rule cannot be relied upon to exclude extrinsic evidence of the fraud or misrepresentation.

Sound Techniques Inc. v. Hoffman McGloin employee of Hoffmans leasing, showed Anderson Sounds president vacant space on the second floor of a building.

The first floor of the building was occupied by Boston Ramrod, a bar. McGloin told Anderson that he need not worry that Ramrod was only expanding its dining area in which background music would be heard. However the expansion was a dance floor.

There is a claim for breach of contract and negligent misrepresentation. Parol evidence is a contract tool that does not apply to tort claims. If the negligent misrepresentation evidence is used it could create an exception to the merger condition found in the contract.

In this situation there is no fraud or defect. Although there is case law that allows getting around the parol evidence rule when fraud or defect are present, there is no case law about exceptions without fraud; the court found that it was a negligent misrepresentation, not a fraudulent misrepresentation, which makes all the difference.

Ct. reasons that a negligent misrepresentation should not be punished b/c it is only a slight deviation from the acceptable standard and would not deter future mispresentations. Also, P. arguably bore the blame b/c he did not inspect the bar adequately before buying This contract was fully intergraded. The court finds that the parol evidence rule does not apply. There is no exception to the rule. The court reasons that the negligent misrepresentation does not rise to the level that would preclude an exception. An exception runs the risk of making the rule obsolete. The court will not allow an exception to overcome a merger clause found in a contract. An exception has to reasonable induce the party. Who can be induced by a statement and sign a document and reasonable rely on that statement, when the contract completely contradicts.

Concluded our introduction to the Parol evidence rule by considering its application under Pre-Revision UCC 2-202:

Contextualist approach: Presumption is that written terms may always be explained or supplemented by course of performance, course of dealing, or usage of traderegardless of whether writing is fully integrated

1. Only way to avoid such evidence is to carefully and expressly negate its application in the language of
the writing through an integration clause. 4 corners approach: Presumption is that written terms may be supplemented by consistent (though not contradictory) additional extrinsic evidence of terms unless court finds the writing was fully integrated.

1. Extrinsic evidence of terms only excluded if would certainly have been included in the written
agreement by the parties.(justice Traynors reasoning) Exception to the Parol Evidence Rule

Also considered exceptions to the parol evidence rule where the extrinsic evidence shows the contract was void or voidablee.g., due to Fraud, Duress, Unconscionability, etc. 1. Courts typically allow parol evidence to show such defects in the bargaining process. 2. In such cases, the evidence is not generally introduced to supplement or contradict the terms of the agreement (concern of the parol evidence rule), but rather to show the agreement itself was void or voidable.

Introduction to Doctrines of Misunderstanding, Mistake and Excuse

Over the next few classes we are going to look at three doctrines that may render a contract or certain of its terms void or unenforceable where the exchange contemplated by the contract turns out to be very different from what the parties expected at the time they entered into the contract.

Misunderstanding: Parties attached different meanings to the terms of the agreement and the law is unable to resolve the question of which was correct. Mistake: One or both parties enter into the contract with a misapprehension concerning the factual circumstances of the exchange at the time of contracting (probably would not have contracted if they would have known the actual facts)

Excuse: Turns on changes in circumstances that arise after the parties enter into a contract. Changes in circumstances may make one partys performance impossible or highly impractical (impossibility or impracticability). Or circumstances may arise that eliminate a partys reason for entering into the contract to begin with (frustration of purpose).

Limited Application: These doctrines are used in very limited circumstances not turn out they way they wanted/expected. Misunderstanding

This is b/c contracting is about allocating risks. Courts will not relieve parties from their duties just b/c things did

The doctrine is applied by the courts where interpretation issues are insoluble.

1. The parties said or wrote the same words, but meant entirely different things. Usually a court can apply
the rules of contract interpretation to resolve this conflict by finding what would be the most reasonable interpretation of the term(s) under the circumstances. Sometimes, however, this is just not possible because both interpretations (through no fault by either party) are equally reasonable and the law cannot decide the issue. Where this occurs, the court may find that there was simply no mutual assent, and the parties did not form a contract. I took this term to mean X, you took this term to mean Y; the court will look to the most reasonable interpretation; if the ct. cannot find a reasonable interpretation, then they may find that there was a misunderstanding Notes Misunderstanding

Note: This is not an exception to the objective test, but rather an occasion where the objective test cannot offer a single, most reasonable interpretation of the parties objective manifestations. Note also: It is important that neither party knew of (or was responsible for) the other partys misapprehension at the time of contracting. In such cases, it would be the responsibility of the party with knowledge (or who was responsible) to clear up the misunderstanding.

Consistent with the analysis of the objective test: if you know someone is attaching a different meaning to
the term that what is actual, then you have a duty to inform; the court will not enforce to your benefit.

Raffles v. Wichelhaus (the Peerless case)

The Defendant agreed to buy cotton to be shipped by Plaintiff to England from India aboard the ship, Peerless.

Turns out that, unbeknownst to either party, there were two ships named Peerlessone leaving Bombay in October and one in December. Cotton market plunged in prices. Defendant refused to accept shipment from the later-departing shipclaiming that he agreed to shipment from the Peerless that departed in October.

1. Issue: When a contract is subject to two equally reasonable interpretations and the parties contracted
with different interpretations in mind (neither knowing of the others inconsistent interpretation), is there mutual assent?

2. Holding: No mutual assent, and therefore no contract; there was no meeting of the minds. both parties were equally reasonable to believe their side, therefore no meeting of the minds, therefore no
contract because of valid misunderstanding. Konic International Corp. v. Spokane Computer Services, Inc.

Yong, employee of Spokane Computer, was instructed to investigate the possibility of purchasing a surge protector. Youngs investigation turned up several units priced from $50-$200, none which were appropriate for his employers needs.

Young was referred to Konic. Later deciding on a certain unit, Young inquired as to the price. The salesman responded fifty six twenty meaning $5,620 and Young thought $56.20. The lower court affirmed that Spokane wins based on the fact that Young did not have the authority to buy the surge protector. However the appellate court finds for Spokane but for other reasons. The court finds that there was no meeting of the minds therefore there cannot be a valid contract. The court looks at the general rule of misunderstanding but lays out three principles for the doctrine of mistake. 1. (1) Applies to parties who have different understandings of their expression of agreement 2. (2) Not apply one partys understanding because of that partys fault is less reasonable than the other partys understanding 3. (3) Parol evidence is admissible to establishes the facts necessary to apply the rule

The first principle corresponds with the present case. The language fifty-six-twenty has two meanings. Neither party knew about the others interpretation. The second principle also applies to this case because both parties understanding of the language is reasonable. They were both equally stupid or equally reasonable therefore there was no meeting of the minds and there was a misunderstanding; Argument can be made that the buyer should have known that it was not $56.20 but rather $5,620; could reasonably have shifted the risk to him

Mistake

The doctrine of mistake applies where both parties attach the same meaning to the terms of their agreement, but one or both parties are operating under a misapprehension of fact when they enter the contract. 1. Enlisting the doctrine of mistake, the complaining party alleges she would never have entered into the contract had she not been mistaken as to this fact. Under certain circumstances the court may grant relief.

Courts typically divide mistake analysis into two categories: mutual mistake and unilateral mistake. We will look at each in turn.

Mutual Mistake The Restatements guidance concerning mistake generally can be found at ( 151-158). The authors of

the casebook provide a good summary of the Restatements guidance concerning when mutual mistake (152) will be grounds for voiding a contract:

(1) The mistake relates to facts in existence at the time of the contract (2) The mistake is shared by both parties (3) The mistake relates to a basic assumption on which the contract was made has to do with a motivational issue, parties would not have contracted if they had known the actual facts (4) The mistake has a material effect on the agreed exchange of performances Looks at the impacts on the parties; looks at the benefits or burdens to the parties (5) The complaining party did not bear the risk of the mistake Look to Restatement 154 (did you make a contract bet and lose?) this is usually the element that strikes a suit for mistake Wood v. Boynton

Wood sold a stone to Boynton for $1. Both parties guessed the stone was a topaz but neither knew for sure. It later became clear that the stone was in fact a diamond worth $1,000. Wood sued to rescind the sale. The court refused rescission, holding that there was no mistake as to the identity of the thing soldjust a mistake as to its probable value. 1. Why was there no mistake concerning identity of thing sold? comes down to the fact that it was a mistake in judgment, she did not bother to have it checked out; she bore the risk not disputed that it was a rock he bought the risk that it was merely a rock, which was not worth 1 dollar. Partys engaged in selling their risks

Would have been different if she had come in and said this is a topaz, will you buy it? he says yes, it is
a topaz, Ill buy it In that case, it would have been a mistake in fact and neither party would have bore the risk. Sherwood v. Walker

Sherwood contracted to buy a cow from Walker for $80. Both parties agreed that the cow was unable to breed. When it came time to perform, Walker discovered the cow was with calf. As a breeder, the cow was worth at least $750. The court found rescission could be available here because the mistake of the parties went to the whole substance of the agreement.

1. Were all the Restatement factors for mutual mistake we outlined present here? Yes, but an argument
can be made that the 5th element was not; can argue that the seller bore the risk b/c he was in a better position to find out.

Difference is that both parties believed that a specific fact was true and they relied on it; they did not
engage in buying and selling risk; there was a mutual mistake

Could make the opposite argument that the seller bore the risk b/c he was in the exclusive possession of
the cow and had duty of due diligence to investigate whether the cow was barren; there is a transaction cost involved; if buyers have to investigate before buying something that is not in their possession, costs go up for us all. Land Grantors in Henderson, Union, and Webster Counties, Kentucky v. US

Facts:After WW II the U.S. acquired approximately 35,849.28 acres of land. Almost all of the property was owned by famers. Department of Defense became aware that substantial gas and oil reserves may be located under the condemned properties and transferred to the Department of the Interior. The document certificate of inspection found in the agreement state that there was no oil, coal, or other minerals. The court uses Restatement 152 (Not in slides). There has to be a mistake, it has to relate to the basic assumption of the contract, has to have a material effect, and the party suffering cannot bear the risk of the mistake.

The court finds that no oil, gas, or minerals on the land was a basic assumption of the contract. This information would have had a material effect on the price of the land. Next the court finds that the plaintiffs did not bear the risk. The government took the land. The owners did not have time to inspect the land. Additionally, the contract documents stated that the land did not have oil, gas, or other minerals. Issue: Was there a mistake in fact b/t the govt and the previous landowners? If so, who assumed the risk of that mistake? Holding: Yes. Even though they signed the document, the landowners and the govt did not know there was oil on the land. The landowners did not bear the risk b/c they had to get off so quick b/c of the war; they had no reasonable time to inspect whether or not there was oil on it.

Rule: If a mistake in fact has a material impact on the transaction, then it MAY void the contract if neither party BORE THE RISK OF THE TRANSACTION Rationale: court looks to Restatement 154 to see when to allocate risk to a party. This was not a normal situation, they had no choice to sell, it was on the spur of the moment, so we cannot, therefore, allocate the burden to the landowners

Problem 17.2 Jethro

Mistake relates to facts in existence at the time of the contract. Oil on the land was not stated in the contract. The seller bears the risk of selling the land. The seller could have done an inspection. There was no mistake in the situation. There could have been oil on the land or there could not have been oil on the land. Parties engaged in buying and selling risk. Not an extraordinary situation like the case above where there was no time to investigate

Landowner had the opportunity to check before he sold, therefore burden shifted to him.

More efficient to allocate the risk to the seller b/c it makes it cheaper and more efficient for all parties Began our look at doctrines that may render a contract (or certain of its terms) unenforceable where the exchange contemplated by the contract turns out to be very different from what the parties expected at the time they entered into the contract.

Misunderstanding, Mistake, and Excuse

1. MisunderstandingParties attached different meanings to the terms(Peerless) 2. MistakeParties enter into contract with misapprehension concerning facts at time of contract (Cow
example)

3. Excuse (Impossibility, Impracticability, or Frustration of purpose)Changes in facts or circumstances

arising after entering into contract When Misunderstanding Renders Contract Unenforceable

Applied where interpretation is insoluble (interpretation issue); court applies interpretation and cannot find a reasonable meaning of the term; there is 2 meanings and they are equally reasonable 1. Parties said or wrote the same words 2. Neither partys meaning is more reasonable than the other under the circumstances 3. Neither party is at fault for the misunderstanding

Where these conditions are met, the court may find that there simply was no mutual assent, and the parties did not form a valid contract. Note: Insofar as the doctrine of misunderstanding (and mistake) is employed as a means of defeating a contract as void or voidable, the parol evidence rule will generally not apply. (This is for the same reasons we saw it does not apply to defenses of fraud or duress IMPROPRIETY IN THE BARGAINING PROCESS)

Introduced Test for When Contract Unenforceable Due to Mutual Mistake

The mistake relates to (1)facts in existence at the time of contract

Not a mistake of judgment or opinion; differentiate these 2 between mistakes of FACT

The mistake is (2)shared by both parties The mistake relates to a (3)basic assumption by the parties on which the contract was made [examines parties motivations and presuppositions] The mistake has a (4)material effect on the agreed exchange of performances [examines impact of mistake in the balance of the exchange] The adversely affected party did not (5)bear the risk of mistake Focus: Is Mistake of Law grounds for relief? Must be a mistake of fact does mistake of law count? In the Common Law, general rule was that ignorance of the law is no excuse and therefore parties to a contract are presumed to be aware of relevant laws However, with the proliferation of ever more complex laws, some courts have become more open to treating mistakes of law as a mistake of fact

See Mattson v. Rachetto (ct. found that obscure statute invalidating long-term agricultural leases was
grounds for rescinding a contract for the sale of land on the grounds of mutual mistake (had a lot to do with the specific facts of the case, judge was probably looking to hang his hat on something). Focus: Must Be Mistake of Fact, Not Judgment or Opinion

Restatement 151 Mistake Defined A mistake is a belief that is not in accord with the facts. Not bad judgment or opinion:

1. Example 1: Two parties enter into a contract for the sale of a champion race horse with understanding
that the horse is fit and can win races. It turns out, however, that the horse had a fractured leg at the time of contracting. This is a mistake of fact.

2. Example 2: Same as one above, but though the horse is fit at the time of contract it never wins another
race. This is not a mistake of fact, but of judgment or opinion as to the horses ability to win. Focus: Is Mistake of Law Be Grounds for Relief?

Early common law cases followed the general rule that ignorance of the law is no excuseand therefore parties to a contract are presumed to be aware of the relevant laws. However, with the proliferation of ever more complex laws, courts have become more open to treating mistakes of law as mistakes of fact. 1. Mattson v. Rachetto Court found that mistake (by two attorneys) concerning an obscure statute invalidating longterm agricultural leases was grounds for rescinding a contract for the sale of land on grounds of mutual mistake.

Focus: Who Bears the Risk? Restatement 154 When a Party Bears the Risk of a Mistake A party bears the risk of a mistake when (a) the risk is allocated to him by agreement of the parties, or [Sometimes risk allocation expressly stated in contract. E.g., contract for sale of property provides: Purchaser has examined the property and agrees to accept same in its present condition.] (b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or

[Sometimes referred to as conscious ignorance. Party bears the risk because knew there was a possibility of mistake, but contracted anyway.]

(c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so. [Court will consider the purposes of the parties and will have recourse to its own general knowledge of human behavior in bargain transactions, as well as usage of trade.]

Estate of Nelson v. Rice (mutual mistake) Newman and Franz the representatives of the estate, employed Larson to appraise the Estates personal properly for an estate sale. Larson told them that she did not appraise fine art and that if she saw any, they would need to hire an additional appraiser. Larson did not report finding any art.

They told the representatives of the estate that they did not appraise fine art; representatives overlooked that and did not hire a fine art appraiser

Rice attended the public estate sale and paid $60 for two oil paintings. He was not educated in art and did not think they were originals. As he had done in the past, Rice sent pictures of the paintings to New York hoping they might be real. Christies authenticated the paintings and offered to see them on consignment. The Rices received $911,780 from the sale.

Rice assumes that b/c this estate is being run by professionals, the painting could not be an original b/c it was so cheap. Mutual mistake requires 3 elements to be met:

1. Basic assumption; Yes 2. Material effect; Yes 3. Party seeking relief must not assume the risk; NO there was conscious ignorance(restatement 154(b)
Mutual mistake as to be a basic assumption on which both parties made the contract. However the mistake must not be one on which the parity seeking relief bears the risk under the rules state in 154(b) of the Restatements.

The court finds that there was conscious ignorance. Even though the mistaken party did not agree to bear the risk, he may have been aware when he made the contract that his knowledge with respect to the facts to which the mistake relates was limited. If he was not only so aware that his knowledge was limited but undertook to perform in the face of that awareness, he bears the risk of the mistake.

The estate knew that Larson, the appraiser, did not appraise fine art. She told them they would have to find someone different. The court finds that the estate bears the risk because they knew that Larson had limited knowledge but relied about it to inform them if there was any fine art.

The court finds that the estate had plenty of opportunity to appraise the paintings. The Rices did what the estate should have done. If the court did not use conscious ignorance under Restatement (c) the court could still use who reasonable bears the risk reasonable in the circumstances.

Cherry v. McCall The Cherrys bought a home from the McCalls. After the Cherrys brought the home, they discovered a walledin room in the basement. The trash found in the room was damp and contaminate with mold. There were two claims that the Cherrys use to try and get out of the contract. (1) breach of contract (2) contract should be reseeded for mutual mistake

The court finds that the contract says as is and the Cherrys bore the risk. To overcome an as is clause there has to be fraud or the totality of the circumstance. Breach of Contract: Cherrys assert that as is implies that the sellers impliedly said they would provide a house w/out mold; they rely on Prudential which looks to the totality of the circumstances. That case was all about fraud and misrepresentation In this case, the court finds the opposite to be true; there was no fraud, impropriety, etc.; So,as is means exactly what it says as is with mold in a hidden room Here the Cherrys could have had the house inspected. Additionally, they didnt allege fraud. Although the Cherrys might have been in a slightly lower barging position, however the Cherrys stated they knew what they were doing and took the house as as is.

Cherrys then argue that there was a mutual mistake to prove mutual mistake, they must prove 1. Basic assumption 2. Materiality 3. Party seeking relief does not bear the risk. Here there was a mistake of fact by both parties, whether it was material we are not sure. The court focuses on element of who bears the risk. The court finds that the buy took the risk because of the as is clause found in the contract restatement 154(a) Look at Restatement 154 to see who allocates the risk and when

Elements of Unilateral Mistake:

Restatement 153 provides guidance. The test for unilateral mistake parallels the elements required for

mutual mistake, but imposes an additional requirement (as laid out in BB):

The mistake relates to facts in existence at the time of the contract Mistake may be by one party only The mistake related to a basic assumption on which the mistaken party made the contract The mistake has a material effect on the agreed exchange of performances that is adverse to the mistaken party The mistaken party did not bear the risk of mistake ADDITIONAL ELEMENT: IT MUST BE THAT Either (a) the effect of the mistake is such that enforcement of the contract would be unconscionable or (b) the other party had reason to know of the mistake or his fault caused the mistake.

Reason for additional element is that courts are sensitive when the other party relies on the mistake, they
dont want to disappoint his expectations (b/c it is a unilateral mistake) Distinguished from Mutual Mistake

To win relief on a claim of unilateral mistake, the adversely affected party must meet all the elements of mutual mistake (as applied to that party) and must show; (a) Enforcement would be unconscionable

Courts will look to the disparity in the exchange resulting from the mistake and balance the equities.

If the disadvantaged party will end up with a significant loss (where profit was expected), then probably unconscionable. If only results in smaller profit, then probably not unconscionable.

OR (b) Other party knew or had reason to know of the mistake

If knew, then there may be grounds for establishing fraudulent non-disclosure (See Restatement 161(b)-162).

Ex. - Other party sees disadvantaged party make or state the error as to basic assumptionrecognizes it as an errorand then rushes to close the deal before disadvantaged party finds out.

If other party had reason to know it was a mistake, then court may grant relief.

E.g., where the other party is familiar with services being offered by the mistaken party and knows the quote is 10% of what the market commands, then probably had reason to know of mistake.

Bert Allen Toyota, Inc. v. Grasz

Grasz reached an agreement with Toyota to buy a specially ordered truck and he made a $500 down payment. When he went to pick up the truck the dealership argued that its computer had made a computational error and Grasz owed an additional $2,000 beyond the balance.

The lower court found that the contract was valid. This is a court of equity for specific performance. Grasz brings the action in a court of equity (chancery) b/c he wants specific performance (which demands that the product be unique) The lower court is looking at the situation and deciding whether or not unconsonability occured. The court finds that mutual mistake did not happen; customers rely on the bottom line; was not customers basic assumption that the bottom line was wrong. The court finds that there was a unilateral mistake; the computer made a miscalculation dealers mistake The court finds that the customer just looks at the button line, what price does he have to pay. A reasonable person under these circumstances would do that. For Mississippi, there is a four part test that the court uses, different standard then the restatements. (1) no meet of the minds (2) gross negligence (3) no intervening rights have accrued (4) parties will still be in status quo

The court found that the dealership was grossly negligent. The court looked at the amount of time the salesman had worked at the dealership, the salesman knows the price margins, and finally the price was calculated in writing.

Therefore the party cannot avoid the contract. Under evaluation from the Restatement, the contract probably would not have been avoided either b/c the additional, uni-lateral element was not fulfilled (it would not have been unconsiasable and Grasz didnt have reason to know of the mistake b/c he was looking at the bottom line); also, the dealership probably bore the risk b/c it was there computer.

It is the dealerships computer and if there is going to be a risk assigned its going to be on the side of the dealership. Specific performance will only be given if the object is unique. The court will only grant specific performance in cases where there is not another option. Here there can be another truck that can be bought from another dealership. Is the item unique? Sent to the trial court for further findings on this issue.

Continued our discussion of the doctrine of mistake (both mutual and unilateral)

Emphasized that the doctrine is concerned with mistakes of fact, not judgment or opinion. 1. Noted that many courts will consider a mistake of law as fact for purposes of applying the doctrine of mistake.

Focused on question of when a party bears the risk of a mistake (Restatement 154) 1. When explicitly allocated in the agreement

2. When party is consciously ignorant 3. When reasonable under circumstances to allocate risk to that party

Introduced Doctrine of Unilateral Mistake (See Restatement 153) Parallels the elements of mutual mistake, but imposes additional requirements:

1. 2. 3. 4.

Mistake must relate to facts in existence at time of contract Mistake may be by one party only Mistake related to a basic assumption on which the mistaken party made the contract Mistake has a material effect on the agreed exchange of performances that is adverse to the mistaken party

5. The mistaken party did not bear the risk of mistake 6. Either (a) the effect of the mistake is such that enforcement of the contract would be unconscionable or
(b) the other party had reason to know of the mistake or his fault caused the mistake.

Note: If other party actually knew of the mistake, then may be fraudulent non-disclosure under Restatement 161(b).

Introduction to Excuse

The doctrine of mistake may allow a party to avoid a contract where that party was mistaken as to a material fact at the time of contracting. By contrast, the doctrine of excuse (impracticability and frustration of purpose) may be applied by a party where events subsequent to contract formation change dramatically in unexpected ways so as to defeat the legitimate expectations of that party under the contract.

1. Consequently, the party will ask the court to excuse her performance obligations under the contract
(either by allowing her to avoid the contract altogether, or by adjusting its terms).

2. Like mistake, we will see the excuse doctrines turn on questions of materiality and risk allocation.
Impracticability: Historical Context Early common law did not recognize the doctrine of impracticability. If you wanted to account for changes in circumstances, you were required to make this clear in the language of the contract itself. 1. Paradine v. Jayne Conquering forces occupied a territory and ejected a tenant from his land. Landlord sued for rent. Tenant sought relief from the court. Court refused to excuse tenant from his obligations (despite the fact that it was impossible for him to occupy the leased property). Court found he should have accounted for the contingency of military obligation in his lease. By the mid-nineteenth century, however, the courts had softened their stance: 1. Taylor v. Caldwell Taylor contracted with Caldwell for a music hall to give concerts. Before the concerts were to be given, the hall was destroyed by fire. Neither party was responsible for the fire. Taylor sued for breach of contract.

Court found that both parties were excused from their obligations under the contract because where performance depends on the continued existence of a person or thing, a condition is implied that the objective impossibility of performance arising from the perishing of the person or thing will excuse performance.

Impractiablity Today

Under Taylor, excuse of performance was limited to cases of objective impossibility. The modern standard under the Restatement and UCC is more forgiving, and requires only impracticability.

1. Change recognizes there are situations in which events do not make performance absolutely
impossible, yet they place so great a burden on the adversely affected party that fairness demands relief. Impracticability: Restatement Restatement 261 Discharge by Supervening Impracticability Where, after a contract is made, a partys performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which is a basic assumption on which the contract was made, his duty to render that performance is discharged, unless language or the circumstances indicate the contrary. Impracticability

Examples of subsequent events that may make a performance impracticable 1. Death or incapacity of person necessary for performance (See Restatement 262) 2. Destruction, deterioration or failure to come into existence of thing necessary for performance (See Restatement 263) 3. Prevention by Governmental Regulation or Order (See Restatement 264)

Basic Assumption 1. Similar to the element of mistake

2. At the time of contracting, the parties expressly or impliedly made assumptions about the future course
of events, and those assumptions were a central motivation of the parties in entering into the contract.

Unless the Language or Circumstances Indicate Contrary

1. This refers to whether the contract language or circumstances make it clear that the risk of the
subsequent event (making performance impracticable) was allocated to the adversely affected party.

Foreseeability is central to this analysis. If the parties could have foreseen, the courts will typically presume the risk was assumed by one of the parties. Be careful when assigning risk if you say he is responsible for xyz risk, the court may read this as saying that you are responsible for all remaining risk, a-w risk.

Restatement in focus: examples of subsequent events that may make performance impossible:

Death or incapacity of person necessary for performance (restatement 262) Destruction or failure to come into existence the thing necessary for performance
(restatement 263)

Prevention by governmental regulation (restatement 264)

Examples of subsequent changes that usually do no make performance impracticable

Change in market conditions (no party should expect a market to remain static); doing so
would place too much of a burden on one party and would practically eliminate futures markets

 However, dramatic shifts in the market due to calamity may warrant voiding or rescinding the contract

Ling v. Board of Trustees of Doane College (objective extrinsic factor rendering performance impossible) Ling was a citizen of England and employed by the defendant Doane College as an assistant professor of sociology. Ling held a student visa during his first year while teaching and completing his Ph.D. During Lings second year teaching both parties filed a petition seeking to grant a non-immigrant visa with an H1B classification as an alien working as a college teacher. One of the requirements to renew the visa was that the school had to perform a job search and Ling has to be the most qualified. The federal regulation stated that the alien must be more qualified than any of the U.S. workers who apply for the position. The hiring committee concluded that Ling was not the most qualified. Lings employment was pursuant to a handbook. The handbook stated that faculty members with more than 2 years of service are entitled to 12 months notice of pending non-appointment. Argument 1 The school admits that they are in breach of the contractual obligation but claim they are excused because of the doctrine of impossibility or performance. Ling asserts inter alia although I advised the college to take further action regarding renewal of my bias it refused to do so. The court found that the school could not foresee a year in advance that Ling was not going to be more qualified then the other applicant. The court found that it place the college in an impossible position. Under the law in good faith the school is required to hire the best applicant. Argument 2 Ling says the board was wrong in hiring the new teacher because he only had a masters while Ling had a PHD. The court finds that they are not going to rule on a job finding. Focusing on Restatement 263, it is implied that the parties relied on the basic assumption that Ling would be able to teach w/in the next year

Note: In this case it can be argued that it is not clear that it is completely foreseeable. Impracticablity: Pre-Revision UCC 2-615 Excuse by Failure of Presupposed Conditions Except so far as a seller may have assumed a greater obligation

1. (a) Delay in delivery or non-delivery in whole or in part by a selleris not a breach of his duty under a
contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

Comment 4: futures markets, no excuse unless war or other catastrophes

Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance. Neither is a rise or collapse in the market in itself a justification, for that is exactly the type of business risk which business contracts made at fixed prices are intended to cover. But a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a market increase in cost or altogether prevents the seller from securing supplies necessary to his performance, is within the contemplation of this section.

Clark v. Wallace County Cooperative Equity Exchange (difference between objective and subjective impracticability)

Clark and Co-op entered into a written agreement for the sell of 4,000 bushels of corn. There was a freeze in the area, which severely damaged the corn crop. Clark maintained he was excused from delivering the remaining bushels because of the freeze. The action was brought by Clark to recover the money Co-op withheld from the grain sale. UCC Impracticability, the elements the court used, applying Kansas law: (1) Non-occurrence of the contingency was the sellers fault not his fault b/c it was an act of nature (2) Seller had reason to know of the impracticality (or) Yes. Freezes happen often, farmers should know about them (3) Seller assumed the risk of the contingency Yes. Futures contracts cannot be avoided, unless there are catastrophic circumstances. Had there been a bumper crop, he would have been the one on top would be unfair to the buyer

Difference between subjective and objective impracticality. This difference can be illustrated by an individual who says I cannot do it versus a statement to the effect that the thing cannot be done. 1. Example: The crops were frozen so I did not give you enough corn verses there is no grain in the state to buy because of the freeze it cannot be done. 2. Example: If it was a specific farm that the company wanted its grain from then it would impossible for them to produce it.

The court finds that the grain could have been bought from another farmer. However, Clark doesnt want to do that because he might loss money because the price of grain has gone up do to the freeze. The court finds that if they held this is as impracticable then contracts for grain would not be useful anymore. 1. Example: Clark is betting that grain will not go up while Coop. is betting that is will not go down. The court will not let someone out of contract just because someone assumed the risk and then something bad happened. If they had a premium product (say high quality grapes), then the contract may have been avoided b/c it then would may have been objectively impossible If he had written the contract to say that only corn from my land then it would arguably be objectively impossible.

Frustration of Purpose

This doctrine applies to cases where performance has not necessarily become impracticable, but rather the principal purpose for entering into the contract has (without fault by either party) been defeated by an unexpected event.

Frustration of Purpose: Historical Context

Krell v. Henry (1903): Henry contracted to lease Krells apartment for two days. The parties understood that the principal purpose for the lease was for Henry to see the Kings coronation parade, which would have been visible from the window. The parade was, however, postponed when the king became sick.

1. Court could not rely on the precedent in Taylor v. Caldwell because it was not impossible to perform:
Henry could still occupy the apartment on the agreed upon date (hadnt been destroyed). Where the purpose of the contract is frustrated by an unforeseeable supervening event, and the purpose was within the contemplation of both parties when the contract was made, performance is excused. Here, Henry only rented because he wanted to view the parade, and Krell commanded higher rent because of the parade. Restatement 265 Discharge by Supervening Frustration Where, after a contract is made, a partys(1) principal purpose is (2)substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was (3)a basic assumption on which the contract was made, his remaining duties to render performance are discharged,(4) unless the language or circumstances indicate the contrary (one party bore the risk.) Discharge by Supervening Frustration 2. Court had to issue a new rule:

Must be a principal purpose (not just a purpose without which the party would not have contracted)and both parties must be aware of this. Frustration must be substantialnot just that it makes the contract uneconomical Non-occurrence must have been a basic assumption of the parties. No relief if can be inferred from either the language of the contract or the circumstances that the adversely affected party assumed the risk.

7200 Scottsdale Rd. General Partners v. Kuhn Farm Machinery, Inc (supervening frustration must be the principle purpose, must be extreme, must be basic assumption, and rescinder must not bear the risk) Scottsdale Plaza Resort contracted with Kuhn for a convention to present new products to Kuhns dealers and employees. The agreement required the resort to reserve 190 guest rooms. Kuhn, in turn, guaranteed revenue of at least $8,000. The agreement also provided for liquidated damages in the event of cancellation. Due to the Gulf War, Kuhn cancelled the convention. Kuhn did not feel that air travel was safe. Some of Kuhns top members had decided not to come. The court looks at the difference between Impracticality and Frustration. Impracticability utilized when certain events occurring after a contract is made constitute an impediment to performance by either party. Traditionally the doctrine has been applied in three categories: death or incapacity, destruction of a specific thing necessary for performance and prohibition.

Frustration of purpose deals with the problem that arises when a change in circumstance makes one partys performance virtually worthless to the other. Performance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event. In short, one is impossible and the other is possible but is not done. Courts do not like the rule of Frustration. The court finds that impracticability does not fit here because it is possible for the convention to be held. Elements of Frustration (1) The purpose that is frustrated must have been a principal purpose of that party and must have been so to the understanding of both parties The hotel did not know that Kuhns principal purpose was to hae Europeans present the new productsthats fine but the hotel did not know that They then argue that there principal purpose was to have all or most of Kuhns employees would come to the conference the agreement has terms that govern attrition the hotel contracted to say that if all the rooms are not filled then you will be adversely affected they then argue that principal purpose was for people to come ct. shoots that down b/c many people were planning to come. they then argue that pp was to make money ct says that is not enough, you assume that risk every time you contract. (2) the frustration must be substantial it must be so severe that it is not to be regarded as within the risks assumed under the contract. (3) the non-occurrence of the frustrating event must have been a basic assumption Kuhn argues that the basic assumption was that there would NOT be a war (4) relief will not be granted if it may be inferred from either the language of the contract of the circumstances that the risk of the frustrating occurrence, or the loss caused thereby should properly be placed on the party seeking relief. Argument 1

The first element, both parties must know of the principal purposes. The resort does not dispute that it was Kuhns principal purposes was to introduce new products but the convention center did not know that. The court looks at the contract nothing mentions the purpose in the contract. Both parties were not aware. Argument 2 The resort new that some of the employees were coming from another country. The court looks at the agreement and the contract says that there might be a less then optimal turn out and Kuhn has the risk. Argument 3

The resort understood that at least some people would show up. The court finds that both parties new that some people would come but the purpose was not frustrated. Kuhn still had some people that had confirmed. A lot of people where flying. You cannot make an argument for frustration when the convention would be less profitable then expected. Argument 4

It would have been uneconomical. The court looks back to the last argument. If the court did not hold the contract based on non-economical then all contract could be breached and the court will not do that.

Excuse Impracticability and Frustration

Saw that the doctrines of excuse (impracticability and frustration of purpose) may be applied where events subsequent to contract formation change dramatically in unexpected ways so as to defeat the legitimate expectations of a party under the contract.

1. Distinct from doctrines of mistake, which focus on mistakes of fact by one or both parties at the time of
contracting. Impracticability

When, after the contract is formed, a partys performances is made impracticable (without that partys fault) by the occurrence of an event the non-occurrence of which is a basic assumption on which the contract was made, party may be freed from obligation to perform. (See generally Restatement 261; Pre-Revision UCC 2-615 for sale of goods)

Examples of subsequent events that may make performance impracticable include 1. Death or incapacity of person necessary for performance (Restatement 262) 2. Destruction, deterioration or failure to come into existence of thing necessary for performance (Restatement 263) 3. Prevention by Government Regulation or Order (Restatement 264)

4. Note: Generally, increased cost (or rise or collapse of the market price) alone does not excuse
performance unless the rise in cost is due to some unforeseen contingency (e.g., war, embargo, unforeseen shutdown of sources of supply, etc.) which alters the essential nature of the performance. (See UCC 2-615 comment 4)

As we saw in Clark, finding an unfavorable change in market price enough to excuse performance would undermine the very purpose of a forward contract (i.e., to allocate risk of market fluctuation).

Basic Assumption 1. At the time of contracting, the parties made assumptions about the future course of events, and those assumptions were a central motivation of the parties for entering into contract.

Frustration of Purpose Restatement 265

Where, a contract is made, a partys 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.

1. Distinguished from Impracticability: Both parties may still be perfectly capable of performing. Its just
that one partys performance becomes virtually worthless to the other party. See Krell.

2. Contemplation of Both Parties: Purpose that was frustrated must have been a principal purpose of the
adversely affected party and must have been so understood by both parties.

3. Substantial Frustration: Must be so severe that was not contemplated by parties. Usually means that
the value of the other partys performance must be totally or nearly destroyednot enough that exchange becomes less profitable or results in a loss. See 7200 Scottsdale Rd. Introduction to Conditions and Promises

Restatement 2 defines promise: A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that commitment has been made.

1. We learned early on that an agreement cannot qualify as a contract unless it contains at least one
promisethe element of futurity.

2. We learned that the distinction between a bilateral and unilateral contract turns on what promises are
still to be performed by the parties at the time of contracting:

If each party has a promise remaining to be performed at the time the contract is formed, then there is a bilateral contract. If only one party has a promise left to be performed at the time the contract is formed, then it is a unilateral contract.

Introduction to Condition

Although we have seen and made reference to contractual conditions throughout the course, we have yet to focus on them in any detail. Restatement 224 defines condition as follows:

1. A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused,
before performance under a contract becomes due.

Examples of Promises and Conditions (p. 661)

Person about to leave in two weeks on an overseas vacation enters into a travel insurance contract that includes the following terms: 1. The insured promises to pay a premium of $200 within a week of signing. 2. The insurer promises to reimburse the insured for any medical expenses incurred during the course of the trip as a result of illness or injury while traveling. 3. The insurers obligation to reimburse is subject to the following conditions: (a) The insured must not abuse alcohol or drugs during the trip. (b) To make a claim under the policy, the insured must, within ten days of returning from the trip, deliver to the insurer a written claim accompanied by a medical report and a statement of account from the medical provider showing the charges for the treatment with specificity.

Examples of Promises and Conditions

Two Promises:

1. Promise to pay the premium in consideration for

2. Promise to reimburse

Note: Only one of the promises is a conditional promise. The promise to pay the premium within a week of signing is an unconditional promisethere is no contingent future event that must take place (or not take place) to make it due. The promise to reimburse is, however, a conditional promise. It only comes due if certain conditions are mettwo are express and two are implied (they can be easily inferred by the language, nature, and structure of the agreement through basic methods of interpretation):

Four Conditions:

1. Express Condition #1: Insured must not abuse alcohol or drugs 2. Express Condition #2: Insured must submit the claim in the manner specified in the contract

3. Implied Condition #1: Insured must in fact incur a medical illness or injury during the trip 4. Implied Condition #2: Insured must pay premium within a week of signing Note: All four of these events meet the definition of a condition in that they are uncertain at
the time of contractingand the non-occurrence of one of these events will free the insurer from performance. Contractual Conditions in Focus Events

An event can be an affirmative happening (e.g., submission of an insurance claim), but it might also be nonhappening (e.g., the non-abuse of alcohol and drugs). To serve as a contractual condition, the event must be uncertain to the parties (otherwise what would be the point of making it a condition?).

1. Future Event: Usually something that may or may not occur in the future (e.g., submission of an
insurance claim).

2. Past Event But Parties Uncertain: But may also be something that has already occurred (existing fact)
and the parties have yet to acquire the relevant information (e.g., dont know whether already covered by existing insurance, so contract to make performance under new policy conditioned on not being already covered). Introduction to Purposes for Contractual Conditions

Parties may include conditions in their contract for a variety of purposes:

1. To establish the sequence of performances (one party is assigned the risk of nonperformance) E.g., requirement that premium be paid within a week of signing establishes that the insured
must perform first.

Create an escape for one or both parties

1. E.g., condition that insureds existing insurance not already cover for medical expenses during travel
allows the insured to escape from performance if already covered.

To limit the scope of obligations

1. E.g., condition that insured incur medical expenses resulting from illness or injury during the trip limits
the scope of the insurers payment obligations.

To allocate the risks of parties 1. E.g., condition that insured not abuse alcohol or drugs allocates the risk of illness or injury resulting from use of these substances to the insured.

Sequencing Conditions Precedent and Concurrent

Conditions Precedent

1. Condition must be satisfied (i.e., event or non-event must occur) before the performance subject to that
condition is due.

Example: Conditions of (1) payment of the premium, (2) non-consumption of alcohol or drugs, (3) incurring medical expenses for illness or injury, and (4) submission of proper claim each must occur before the insurer will be obligated to pay.

Concurrent Conditions

1. Where the performance of one promise depends on the performance of another. Here, the promises
must be performed simultaneously.

Example: Where contract provides that title for property is due upon payment of sale amount (and vice versa).

Note: Conditions Subsequent

Condition subsequent refers to a condition the occurrence of which will discharge an existing duty to perform.

1. Distinguished from Condition Precedent: While occurrence of condition precedent makes a contractual
duty come due, a condition subsequent discharges a pre-existing duty.

Examples:

Condition Precedent: Buyers duty to pay the purchase price is conditional upon a building permit being issued by the county Condition Subsequent: Buyers duty to pay the purchase price is excused if a building permit is not issued by the county

2. Little turns on this distinctionoccurrence of either condition means the contingent promise need not be performed.

Burden of Proof: The only practical consequence of the distinction is that the occurrence of condition precedent must be proved by party suing for breach, and the condition subsequent must be proved by party denying a breach occurred. Burden of Proof in litiagation

Condition precedent? Must be proved by suing party Condition subsequent? Must be proved by party denying a breach occurred

Note: Conditions subsequent are rare and getting rarer. Conditions Subsequent are Disfavored by the Restatement 227 (instructing courts to interpret conditions as precedent where intent of parties is unclear b/c of the obvious difficulties that arise).

Express, Implied, and Construed Conditions

In determining whether performances under a contract are subject to conditions, we employ the familiar principles of contract interpretation and construction.

1. Express Conditions (Interpretation): Sometimes the parties will expressly articulate a condition in the
contract. This is usually done by using phrases such as conditional upon, on condition that, contingent upon, provided that, or subject to.

Note: Just because a term is express, does not make it an express condition. To qualify as an express condition, the conditional nature of the term must be expressly stated (usually by using one of the terms above).

2. Implied Conditions (Interpretation): Conditional nature of the term is not expressly articulated, but
applying the tools of contract interpretation to the facts (parties language in context) the court determines that the parties intended to make the term conditional.

3. Construed Conditions (Construction): The parties intent to make a term a condition cannot be
determined based on the facts (language and context), but the court determines a condition exits because a rule of law recognizes a condition under the circumstances, or the court concludes as a matter of law that it is reasonable and fair given the nature of the relationship, etc.

Effect of Express vs. Implied or Construed Conditions

Effect of Express Conditions: Generally, the courts will give literal effect to an unambiguous express condition. Must be satisfied exactly as it is articulated by the wording of the agreement. Effect of Implied or Construed Conditions: Because the condition is the result of the courts own interpretation or construal of the agreement, the court has flexibility in determining whether the condition has been met. Court can limit enforcement.

Pure and Promissory Conditions

Pure Condition: Does not involve a promisemerely describes an event that must occur before a performance under the contract is due. If the event does not occur, no performance is dueand there is therefore no breach for non-performance.

1. Example: Consider the condition of medical expenses incurred due to illness or injury on trip. If there
are no such medical expenses, the condition is not satisfied. Insured is certainly not in breach for not satisfying the condition (I.e., getting sick), and the insurer is not in breach for failing to pay out. Obviously, the insurer will not sue the insured for not getting injured.

Pure Promise: Where performance of a promise under the contract is due, and it is not the condition of any further performance, it is a pure promise.

1. Example: Where all four of the conditions for reimbursement under the travel insurance policy are met,
the insurers promise to pay the insured is not the condition of any further promise. It is the last performance in the chain, and is therefore a pure promise.

Promissory Condition: Sometimes a term in a contract is both a promise and a condition. In such a case, failure to perform will not only result in condition not being satisfied, but the party responsible for satisfying the condition will be in breach.

1. Example: The insureds promise to pay the premium within one week of signing. If the insured fails to
pay the premium, the insurer will not be required to reimburse for any medical expenses incurred and the insured will be in breach.

Note: Do not confuse Promissory Condition (promise that is a condition as well) with Conditional Promise (promise subject to a condition). Koch v. Construction Technology, Inc.(pay when paid clause not generally a valid condition precedent)

Construction Technology(contractor) hired Koch(subcontractor) to paint a portion of their project They added a payment, condition clause into the contract that stated partial payments subject to all applicable provisions of the contract shall be made when and as payments are received by the contractor. the subcontractor may be required as a condition precedent to any payment to furnish evidence to the contractor that all payrolls, material bills, etc to the work have been paid. Koch completed the work, but CTI paid $39k less than he was supposed to, reasoning that they had not been paid in full by their employer, which was a condition precedent of their contract The court said that the condition was not valid reasoning that conditions precedent are disfavored and will not be withheld unless the is clear language to support them. pay when paid clauses do not generally release the contractor from his duty

court reasoned that the parties would have been more explicit if the condition precedent was their actual intent not normally happens in these situations. Therefore, ruled in favor of the plaintiff more of a timing provision and court is hesitant to shift the risk from the contractor to the subcontractor. Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co.

The plaintiff was the lessee of the 33rd floor of a building in Manhattan. The defendant occupied premises on the 29th floor and wished to expand. The parties entered a letter agreement. The parties extended the letter agreements deadline in writing and plaintiff timely satisfied the first condition set fourth in paragraph 1 (a), however plaintiff never deliver the prime landlords written consent to the proposed tenant work on or before the modified final deadline.

Rather plaintiffs attorney telephoned defendants attorney and informed him that the prime landlords consent had been secured. Express conditions are those agreed to and imposed by the parties themselves. Implied or constructive conditions are those imposed by law to do justice. Expressed conditions must be literally performed, whereas constructive conditions which ordinarily arise from language of promise are subject to the precept that substantial compliance is sufficient. In this case the court finds that it is clear based on the language of the letter agreement it establishes an expressed condition precedent rather than a promise, as the parties employed the unmistakable language of condition (if unless and until).

Additionally, there is no basis for applying the doctrine of substantial performance to the facts of this case. The flexible concept of substantial compliance stands in sharp contrast to the requirement of strict compliance that protects a party that has taken a precaution of making its duty expressly conditional.

Introduced to contractual conditions:

An event the parties are not certain will occur, but which must occur for a performance under the contract to become due.

1. Event can be either an affirmative happening (e.g., submitting a claim) or a non-happening (e.g., nonuse of drugs or alcohol)

2. Event must be uncertain to the parties. Usually a future event, but could also be an event that has
already taken place, but the parties dont know the result. Precedent and Concurrent Conditions Saw one of the uses of conditions in a contract is to sequence the parties performances. 1. Conditions Precedent

Condition that must be satisfied before the performance subject to that condition is due. Performance of one promise depends on the performance of another (and vice versa). Thus, the promises must be performed simultaneously.

2. Concurrent Conditions

Introduced the concepts of Pure Conditions, Pure Promises and Promissory Conditions

Pure Condition: Does not involve a promisemerely describes the event that must occur (or not occur) in order for a performance under the contract to come due. If event does not occur, then there is no performance due but there is also no breach by either party as a result.

Pure Promises: A promise the performance of which is not the condition of any further performances under the contract. It is a pure promise because it is the last performance in the chain and nothing further is conditioned on it.

Promissory Condition: Term that is both a promise and a condition (e.g., payment of insurance premium within a week of signing). The condition not being met will result in two consequences: (1) The performance conditioned on it will not be due. (2) The party responsible for the condition having been satisfied is in breach.

Conditions

Express Conditions: Where parties expressly articulate that a term is a condition in the contract. No formula, but language such as conditional upon, contingent upon, provided that, subject to, etc., are indicators. Implied Conditions: Conditional nature of the term is not expressly articulated, but, by applying the tools of contract interpretation to the facts, the court determines the parties intended to make the term conditional. Construed Conditions: The parties intent to make a term a condition cannot be determined based on the facts (language and context), but the court determines that a condition exists as a matter of law.

1. Effect of Express Conditions: Courts will generally give literal effectmust be satisfied exactly as
articulated.

2. Effect of Implied or Construed Conditions: Because the condition is the result of the courts own
interpretation or construal, the court has flexibility in determining whether the condition has been met may require either strict or only part/substantial performance. Express, Implied, and Construed Conditions

Saw an illustration of how the courts will enforce express conditions literally in Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co. We now look at an example of how the courts will enforce an implied or construed condition. Plaintiff built a residence and defendant sues for the remaining balance. One of the specifications for the plumbing work provides that all pipe must be manufactured by Reading. Some of the pipe installed was from other factories.

Jacob & Youngs v. Kent

There are express terms in the contract agreement that the piping throughout the house should be by Reading. The court will use there discretion when dealing with implied or expressed conditions and the court finds that this is a construed condition. If the parties wanted to strictly enforce that condition in the contract, then different language should have been used. Intention not otherwise revealed may be presumed to hold in contemplation the reasonable and probable. If something else is in view, it must not be left to implication. There will be no assumption of a purpose to visit venial faults with oppressive retribution.

In this circumstances, we think the measure of the allowance is not the cost of replacement, which would be great but the difference in value, which would be either nominal or nothing. The pipe that was used id not result in any harm to the defendant. Here there was not a difference in the value between the two different kinds of pipe.

Focus on Uses of Conditions

Last time we talked about a few of the many uses of contractual condition. We will now focus on a few uses already discussed, as well as some new ones:

1. Allowing a party to escape the contract 2. Allowing a party to make performance contingent on satisfaction with a specified outcome or state of
affairs

3. Allowing for alternative performances based on the occurrence or non-occurrence of an event 4. Allowing parties to sequence their performances under the contract.
Conditions Allowing for Escape

At the time of contract, parties may recognize that if circumstances turn out in a particular way, then one or both of the parties will not want to perform. 1. Example: Only want to buy the land if the zoning board approves commercial use. Making the zoning approval a condition of the buyers performance affords the buyer an escape if commercial use is not approved. This is an example an escape clause that is a pure conditionwithout any promissory intent. If condition is not satisfied, then no performance is due, and neither party is in breach.

Not all conditions designed to allow for the escape of one or both of the parties will be free of promissory content. Sometimes the condition will be partly in the control of one of the parties. 1. Example: Parties make sale of home contingent on buyer being approved for a loan at interest rate of 4.75% or less. However, buyer promises to use best efforts to attain the loan. Here, the condition is not entirely free of promissory content. The buyer does promise to try to attain the loan (so will be in breach if does not use best efforts), but she does not promise to get the loan (so may escape performance without breach if her loan application is turned down).

Conditions of Satisfaction

A conditions of satisfaction is just another form of escape clause. 1. Here the party is only willing to enter into a contract if she is satisfied with the outcome of some uncertain event.

Example: Buyer may make her promise to pay for a painting she commissioned on satisfaction with the finished product.

Could make it conditioned on her own satisfaction Or could make it conditioned on the satisfaction of her friend who is an art critic

As we saw when looked at the doctrine of mutuality and illusory promises, satisfaction cannot be a function of pure whim or unlimited discretion (otherwise there would be no legal detriment and the contract would fail for lack of consideration). 1. Satisfaction must be based on some objective, measurable standard.

2. If the measurable standard is not expressly articulated in the terms of the contract, it may be implied or
construed by the court. Objective measures of satisfaction typically fit into one of two categories: Subjective good faith (honest judgment) 1. Where satisfaction relates to matters of taste or artistic judgment

Example: Satisfaction as to the quality of a painting

Objective reasonableness (based on commercial or trade standards) 1. Where satisfaction relates to matters of a technical or commercial nature

Example: Satisfaction as to the structural soundness of a building

Recall our discussion of Mattei v. Hopper last semester (in lecture on mutuality), in which these tests were laid out and the subjective good faith test was applied.

Incomm. Inc., v. Thermo-Spa, Inc.

Incomm was engaged by Thermo-Spa to put together an advertising brochure. After working together on the brochure, Thermo-Spa became dissatisfied with Incomm and turned to another agency to complete the brochure.

1. No express condition: Contract said nothing about Thermo-Spas payment being conditioned upon
Thermo-Spas satisfaction.

Thermo-Spa argued that the condition of satisfaction based on subjective good faith should be implied.

2. Court concluded that the language and context of the agreement were such that it made no sense to
imply a condition of satisfaction based on subjective good faithIncomm would not have agreed to take on such risk under the circumstances.

3. Court conceded that the commercial context of the transaction may have warranted an implied
condition of satisfaction based on objective reasonableness, but Incomm would prevail under that standard.

Court awarded judgment to Incomm. Parties may use conditions to perform a channeling function. The contract could be structured so that if the condition occurs, then one performance will become due, but if it does not occur, another performance will become due.

Conditions that Provide for Alternative Performances

1. Example: I want to buy your land, but we dont know how the zoning commission is going to rule on
whether it can be zoned commercial. We structure the contract so that if the board zones it commercial, then I will pay you $1 million, but if the board refuses to zone it commercial, I will pay you $500,000. In either case, I have a performance due. But the nature of the performance depends on the occurrence or non-occurrence of the condition. Use of Conditions to Sequence Performances

As we have seen, the parties to a contract can use conditions to sequence performances, allowing them to allocate the risks of who is to perform first.

1. May structure a sale so as to make delivery a condition precedent of payment. Example: Payment of $15,000 on Friday is conditioned upon delivery of the F-150 on Monday.
Here, seller becomes creditor to the buyer and assumes the risk of non-performance between delivery and payment.

2. If neither party is willing to assume the risk of non-performance by the other party, they can structure
the contract so as to make each partys performance a concurrent condition.

Example: Payment of $15,000 is due upon delivery of the F-150. Neither party assumes any risk of non-performance

3. Could also mix it up by using both conditions precedent and concurrent conditions.

Example: $7,500 due on Monday is a condition of delivery of the F-150 on Tuesday. Then parties must meet on Friday when the remaining $7,500 will be exchanged for the title to the F150.

Where Contract is Silent as to Sequencing

If the parties are silent as to the sequencing of performances under the contract, courts will generally imply or construe that the performances are concurrent conditionssimultaneous performance is required. (See e.g., Restatement 234(1); Pre-Revision UCC 2-511)

1. If one of the performances is capable of instantaneous completion (e.g., payment of $), but the other is
not (painting a house), then the general rule is that the longer performance is the condition precedent of the instantaneous performance. (See e.g., Restatement 234(1)) Excusing Conditions

We have already seen that where a court finds a condition by interpretation or construction, the court has flexibility in how/whether it will enforce it. The general rule, however, is that where the parties take the trouble to articulate an express condition in a contract, the courts will strictly enforce the condition. 1. There are, however, certain circumstances in which the courts may excuse performance due after even an express condition has occurred

Waiver of Rights

Waiver is a knowing and voluntary abandoning of a contractual right. Waiver can be either express or by conduct. 1. Waiver occurs when, after the contract has been formed, the beneficiary of a condition agrees to perform even if the condition is not satisfied.

Note: A party can only waive a condition that is in place solely for her benefit.

Example: My promise to buy land was contingent upon the board zoning it for commercial development. Board does not zone it commercial, but I decide I want to buy it anyway and waive my right to escape the contract.

2. Problem: Because waiver is one-sided, there is no consideration exchanged. If the non-waiving party seeks to enforce the waiver against the waiving party (say, because
the waiving party changes her mind), then it must be treated as a contract modification.

General rule is that if the waiver is of a non-material right under the contract, then no consideration is required.

If, however, the right is material, then the waiver will not be enforced against the waiving party absent consideration.

There is no problem of consideration if it is the waiving party who wishes to proceed. This is because the waiving party has already bought and paid for the non-waiving partys performance.

Estoppel

Generally: If the beneficiary of the condition indicates by words or conduct that he will perform despite nonfulfillment of the promise, and 1. knew or had reason to know that the other party would be rely on this representation 2. and the other party relied on this representation to her detriment, 3. Then courts may estop the beneficiary of the condition from seeking to enforce it.

Distinguished from waiver: There is a great deal of overlap between the doctrines of waiver and estoppel, but here are two important differences:

1. Waiver does not require justifiable reliance and detriment 2. Unlike waiver, estoppel is not confined to non-material aspects of the contract (because estoppel
operates as an alternative to consideration) Obstructive or Uncooperative Conduct

Even if in the case of a pure condition (where neither party promises the condition will be satisfied), most contracts will contain a commitment by the parties not to do anything to obstruct or hinder its occurrence. 1. If not made explicit or implied in the agreement, the duty not to obstruct or hinder the occurrence of a condition will usually be construed as part of the general obligation of good faith and fair dealing found in every contract. 2. Nevertheless, there may be circumstances under which the parties contemplate one partys interference with the occurrence of the condition:

Example: Business owner agrees to sell his business to competitor, but only if he cannot convince his daughter to take over. In this case, the business owner is free to try to convince his daughter to take over the business.

Sullivan v. Bullock Sullivan hired Bullock, to remodel her kitchen, hallway, utility room, bathroom and sewing room. The written contract set out the major aspects of the project but lacked detail. Sullivan told Bullock that she would not be at home on a certain day and she did not want the workman there while she was gone. The workmen entered. Sullivan told Bullock that neither he nor his workmen were to ever set foot in her house again. Whether Sullivan prevented or hindered Bullocks performance? Yes Implied in every contract is a condition to cooperate. In any cases where the plaintiffs performance requires the cooperation of the defendant the defendant by necessary implication promises to get this corporation and if he fails to do so he is immediately liable although his only express promise is to pay money at a future day There is evidence that the jury could conclude that Bullocks failure was to be to be excused by Sullivans act of denying access to her home. The jury had awarded Bullock the full unpaid balance of the contract price.. However, this overcompensated him because it did not take into account the cost that he saved by not having to complete performance. Unfair Forfeiture

Theres a sense in which any time a condition of performance does not occur, the result is a forfeiture of money or expected benefit by the party who was to receive the performance that never came due. 1. Excusing a condition on the basis of unfair forfeiture must, therefore, require more than disappointed expectations of the party who would have benefited from the conditional performance.

Generally, unfair forfeiture is only available to excuse the non-occurrence of a condition if its enforcement would result in an unfair, disproportionate, and harsh deprivation of the rights of property of the party who expects performance, and a windfall to the party whose performance was subject to the condition. 1. This is an equitable remedy, so the courts will balance the equities between the parties is reaching a result. Will consider any wrongful conduct by either party Will weigh the burden on the party who is harmed by enforcement of the condition against the harm (if any) that would be placed on the other party by excusing the condition.

J.N.A. Realty Corp v. Cross Bay Chelsea, Inc. The rule of unfair forfeiture. For the court to excuse the tenants failure to comply exactly with the condition precedent to renewal, the tenant must show that it had made: (1) valuable improvements to the property (2) its failure to exercise the option in time was honest and inadvertent and (3) that the other party had not been harmed by the delay in notice The court finds that the first requirements are satisfied. The court remained the case to the trial court to take evidence on the question of whether J.N.A. had been prejudiced by the delay (by re-letting the premises in good faith and reliance on the apparent intent not to renew). The court found that cross Bay would suffer a significant economic forfeiture of its investment if it lost the lease. Its failure to renew in time while negligent was not purposeful. Contractual Conditions

We completed our introduction to contractual conditions by looking at some of the different ways parties will use conditions to shape their obligations under the terms of a contract:

1. Allowing a party to escape the contract if a certain event occurs. Example: Only want to buy land if the zoning board approves use, so make approval a
condition of performance.

Allowing a party to make performance contingent on satisfaction with a specified outcome or state of affairs.

1. Example: Making promise to pay for painting contingent upon satisfaction with finished product. Note: Cannot be based on pure whim or unlimited discretionmust be based on some
objective measurable standard (subjective good faith or objective reasonableness).

Allowing for alternative performances based on the occurrence or non-occurrence of an event.

1. Example: I will buy your land for $500,000 if zoning board approves commercial use, but for only
$250,000 if board does not approve.

Allowing parties to sequence their performances under the contract.

1. Example: Payment of $15,000 on Friday is conditioned upon delivery of the F-150 on Monday. Note: Condition precedent is used to structure the contract so that seller is creditor between
Monday and Friday.

2. Example: Payment of $15,000 is due upon delivery of the F-150. Note: Here the contract is structured so each partys performance is a concurrent condition and
neither party assumes the risk of being creditor.

Different ways in which the occurrence of a condition may be excused:

WaiverKnowing and voluntary abandoning of a contractual right (either by words or conduct).

1. Note: A party can only waive a condition that is in place solely for her benefit. Example: My promise to buy land was contingent upon zoning board approving commercial
use. Board does not approve use, but I decide to buy land anyway.

Problem: If the non-waiving party later seeks to enforce the waiver (e.g., because waiving party changes mind), then the waiver must be treated as a contract modification. But, because waiver is one-sided, there is often no consideration exchanged.

1. General Rule: If the waiver is of a non-material right, then no consideration is required to enforce. If the
waived right is material, courts will only enforce if supported by consideration. Estoppel

EstoppelIf the beneficiary of the condition indicates by words or conduct that she will perform despite nonfulfillment of the promise, and (1) knew or had reason to know that the other party would rely on this representation, and (2) the other party relied on this representation to her detriment, then courts may estop the beneficiary of the condition from seeking to enforce it. 1. Distinguished from waiver: Waiver does not require justifiable reliance and detriment Estoppel is not confined to non-material aspects of the contract (estoppel is an alternative to consideration).

Obstructive or Uncooperative Conduct

Obstructive or Uncooperative ConductMost contracts will contain an commitment (express or implied) that the parties will not do anything to obstruct or hinder its occurrence. If such obstruction occurs, the courts ill usually excuse the condition. See, e.g., Sullivan.

Unfair Forfeiture

Unfair ForfeitureAn equitable remedy that is only available to excuse the non-occurrence of a condition if its enforcement would result in an unfair, disproportionate, and harsh deprivation of the rights or property of the party who awaits performance, and a windfall to the party whose performance is subject to the condition. See e.g., J.N.A. Realty Corp.

1. Note: As this is an equitable remedy, the courts will not apply if the party seeking relief has unclean
hands, and courts will balance burden of enforcement on party seeking relief against harm (if any) to other party. Introduction to Issues Relating to Breach of Contract

Breach of contract occurs any time a partys performance falls short of that promised by the terms of the contract. Nevertheless, there are different degrees of breach that carry different consequences:

1. Breach that is total and material 2. Breach that is material, but not total 3. Breach that is not material (Substantial Performance)
We will look at each of these in turn. Where a partys breach of contract is total and material, the promisee may: Material and Total Breach (3 options)

1. Withhold performance (because typically failure of condition) 2. Terminate the contract (end the transaction and enter into a new agreement with a third party) 3. Make a claim on the breacher for full compensation for the loss of her bargain
Determining Materiality

In determining whether a breach is material, one must begin by interpreting the terms of the contract in context to identify reasonable expectations of the parties. Must then evaluate the facts surrounding the shortfall in performance:

1. A breach is material if the failure in performance is so central to the contract that it substantially impairs
its value and deeply disappoints the reasonable expectations of the promisee (i.e., promisee will not receive a significant part of the exchange she bargained for).

This standard of materiality is imprecise and flexible. It is fact-intensive and should be applied on a case-bycase basis. The purpose is to further the parties reasonable expectations under the contract. The Restatement offers some guidance:

Restatement 241 Circumstances Significant in Determining Whether a Failure Is Material:

In determining whether a failure to render or to offer performance is material, the following circumstances are significant:

1. (a) the extent to which the injured party will be deprived of the benefit which he reasonably
expected [if not, then more likely material];

2. (b) the extent to which the injured party can be adequately compensated for the part of that
benefit of which he will be deprived [if not, then more likely material];

3. (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture [if
so, then less likely materialso less likely material if breach occurs late in process];

4. (d) the likelihood that the party failing to perform or to offer to perform will cure his failure,
taking account of all the circumstances including any reasonable assurances [if so, then less likely to be material (or at least total)];

5. (e) the extent to which the behavior of the party failing to perform or to offer to perform
comports with standards of good faith and fair dealing [if not good faith or fair dealing, more likely to be material]. Total and Partial Breach, and the Concept of Cure

Sometimes a breach would be material if it was left alone, but it is not yet total breach because there remains the possibility of cure. In other words, the deficiency in performance may still be rectified so as to prevent it from reaching the level of total breach.

Where there is still time or opportunity to cure a material breach, it may be referred to as a not-yet-total (sometimes partial) breach.

1. Example: Enter contract to have car painted red for $500. The paint job is to be completed Friday.
$500 is due on completion of the job. Shop calls on Wednesday and says car is ready. You go to pick it up and discover it is blue. Shop still has until Friday to cure.

Where the material breach is not-yet-total and there is opportunity to cure, the disappointed party may suspend performance, but must await imminent cure (may not terminate). If the material breach is cured in time, then the breach is over.

1. The disappointed party cannot terminate the contract and must now perform. 2. The disappointed party may, however, claim compensation for any loss suffered by the delay, etc.
If the material breach is not cured, then it becomes a material and total breach. Substantial performance is a partial performance resulting in a non-material breach. Substantial Performance

1. Occurs where the performance is substantially in compliance with what was promised, and
consequently the breach is not so severe as to undermine the promisees reasonable expectations. Here, there is still a breach, but it would be unfairly harsh to allow the disappointed party to withhold performance, terminate the contract, and claim full damages (the consequences of material and total breach). 1. Instead, where there is a breach resulting in substantial performance, the disappointed party

may not terminate the contract, must perform, but may claim compensation for any loss suffered. (Well return to question of measurement of loss for substantial performance.)

The same test is applied to determine whether a breach is material or whether there was substantial performance. Generally, where it falls short of being material, then there is substantial performance.

Worcester Heritage Society, Inc. v. Trussell The plaintiff the society, dedicated to the preservation of historically significant building. Trussell bought the house and agreed to abide by historic preservation restrictions and to do a complete historic restoration. The exterior portion was to be completed in one year falling which the society could at it option engage workers to complete the exterior restoration at Trussells expense. Whether there has been only a breach of contract rather than an utter failure of consideration or a repudiation by the party in breach? He obviously breached the contract (1 year to do the work and it took 5); was it a material breach or substantial performance? In order to get rescission, you have to prove material breach, or, total lack of consideration. Court decided that it was substantial performance because Trussell had began his performance, therefore there was consideration. The determination of materiality is a fact intensive undertaking; in these circumstances, the facts point to substantial performance rather than material breach The society was concerned with what the outside of the house looks like and Trussell had began and renovated the outside; therefore no material breach Court also notes that Trussell had put in a lot of time and hard work on the house; therefore, it would be inequitable to allow rescission (as a result of material breach) The Society could go in and fix it itself. In the absence of fraud, nothing less than conduct that amounts to an abrogation of the contract or that goes to the essence of it, or takes away its foundation can be made a ground for rescission of it by the other party. There has not been a total failure of consideration, Trussel having paid the purchase price and invested some additional sums and much labor in the restoration work.

The court applies the Restatement. The society purpose for this contract was the outside of the house and the outside is updated. The society could have brought the action sooner.

Measurement of Relief for Substantial Performance

We have seen that where there is a material and total breach, the disappointed party may:

1. terminate the contract (and, e.g., hire another to do the job), 2. refuse to render her own performance (e.g., pay for services already rendered and due under the
contract), and

3. claim damages from the breacher (usually expectation damages or rescission)

We have also seen that where there is a breach resulting in substantial performance, the disappointed party

1. may not terminate the contract, 2. must perform, 3. but may claim compensation for any loss suffered.
There are two different measures of relief for loss suffered due to substantial performance.

Usual Measurement of Relief for Substantial Performance

The usual measure of damages for substantial performance is the cost to place the promisee in the position he would have been in had the performance been in full compliance with the contract. In most cases, this will be the amount of money necessary to correct the shortfall in performance.

1. 2. 3. 4.

If work was done improperly, then compensation is cost to promisee of rectifying the work. If property supplied was defective, then compensation is cost of repairing or replacing the property. If breach lies in failure to complete the performance, then completion cost is measure. If breach involves delay in performance, then compensation is measured by loss caused by delay.

Measurement of Relief for Substantial Performance: Where Cost of Rectify is Disproportionately High

In some cases, however, the cost of rectifying the performance may be disproportionate to any realistic loss actually suffered by the promisee.

1. Thus, where the breach is neither material nor willful, and the cost of remedying the defect in
performance is grossly out of proportion to the harm caused by the breach, the court may limit the damages to the amount by which the defective work had reduced the market value of the product of the performance.

Example: This was the measure of damages applied by the court in Jacob & Youngs. There the court found that the was no difference in market value between a house constructed using Reading pipe and a house constructed using pipe of equivalent or better quality. Consequently, the damage award was $0.

Note: Determining which measure of damages should be awarded where there is breach by substantial performance is fact-intensive, and the court will sometimes award the cost of rectifying the defect even where this will not improve the market value.

Lyon v. Belosky Construction, Inc.

Plaintiff Lyon and her sister entered into a contract with defendant Belosky for the construction of a custom home at the cost of $247,000. Plaintiffs retained defendant Kirk Bieselmeyer a professional engineer to inter alia prepare construction document and conduct periodic inspection to insure that the home was constructed in conformity with the drawings.

Where, however, the contractors breach was unintentional and constituted substantial performance was in good faith and remedying the defective performance would result in unreasonable economic waste, damages should be based upon the difference b/t the value of the property as constructed and the value if performance had been properly completed.

After moving into the home, plaintiff learned that the roof had been centered over the library rather than the living room as represented in the drawings resulting in a change in the roof proportions and enlarging of the overhang over the main entrance. In addition the entrance pillars could not be used in the manner depicted in the drawings.

The defendant argues an affirmative defense, that giving the plaintiffs the cost to replace the roof would be economic waste. The act by the parties was not willful but negligent. The court finds that the plaintiff paid more than the market value for the house and the construction of the house did not equal that chose. The court finds a breach of contract.

General rule, the proper measure of damages in cases involving the breach of a construction contract is the difference between the amount due on the contract and the amount necessary to properly complete the job or to replace the defective construction, whichever is appropriate.

However, the contractors breach was unintentional and constituted substantial performance in good faith and remedying the defective performance would result in unreasonable economic waste, damages should be based upon the difference between the value of the property as constructed and the value if performance had been property completed.

Belosky hired a framer to frame the roof but testified that he did not personally inspect the roof to insure that it and the dormer complied with the drawings. Our review of the photographs of the home as constructed compared with the design drawings convinces us that plaintiffs did not get the benefit of their bargain and that requiring defendants to remedy the problem could not under the circumstance result in unreasonable economic waste.

Recover for Breach Party Unjust Enrichment

As weve seen, if a partys breach is material and total, then the breacher has no right to enforce the contract he has violated. 1. Most courts (but not all) will, however, allow a party who has partially performed (but who is still in material and total breach) to make a claim for unjust enrichment (restitution).

However, because a party in material and total breach is at fault, the courts that allow recovery for unjust enrichment will typically recognize the following restrictions:

1. Not entitled to the market value of performance or good (as is the usual remedy for unjust enrichment),
only the actual economic enrichment of the other party (so recovery will be offset against any loss or extra costs undertaken by the non-breaching party as a result of the breach).

2. In addition, if the actual contract price for the performance is less than the market value, then recovery
will be limited to the lesser amount. Divisible Contracts

Even where the breach is material and total, the breaching party may seek to limit damages by arguing that the contract is divisible into self-contained units, and the breach must be limited to those units.

1. Most contracts are not divisible because, even where the parties contemplate the exchange of more
than one performance, they are typically bargained for together as part of a single exchange.

Whether a contract can be divided into self-contained mini-contracts is a question of contract interpretation. Factors to be considered will include:

1. 2. 3. 4. 5.

Purpose of the parties Whether contract breaks performances into distinct parts Separate payments or prices identified with specified performances Separate performance schedules Whether completed performances have separate and identifiable economic worth

Example: Contract for the construction of 35 houses in a planned community. All 35 homes are assigned specific lots with distinct architectural plans. Itemized prices are assigned to each home, and there are different completion schedules assigned to each. Builder only completes 20 homes and then refuses to build the remaining 15. See Carrig v. Gilberty-Varker Corp.

Menorah Chapels at Millburn v. Needle Plaintiffs father died and defendant arranged a Jewish Funeral Chapel to provide funeral and related services. Because of the Sabbath commencing at sundown on Friday, the funeral could not be conducted until Sunday. The statement of goods and services selected disclosed that Needle requested that the chapel agree to provide shomeim to conduct the shmerrah. The Chapel subcontracted to provocation of shomerim to a burial society. However, because of the Sabbath the society did not provide the required services and in fact only three of the six shifts were performed. Although the services at issue may be required under the tents of the orthodox Jewish faith, the dispute does not concern the manner in which they were performed, but solely whether they were performed at all a non doctrinal matter. Whether the contract was divisible in nature? No. A party may not repudiate one part of a non-divisible contract and claim the benefit of the residue, because to do so would amount to unjust enrichment and would bind the parties to a contract which they did not contemplate.

In order for a contract to be divisible, you must show that: 1. You have be able to divide into 2 or more parts 2. You have to be able to break it into separate and total considerations of each party The D. argues that it was divisible b/c they had a separate price list. However, court rejected that argument because, by law, they had to provide that list. Rather, the court decided that it was a contract for the entire service THE SUM WAS GREATER THAN THE PARTS!!!

Only where a contract is severable into different transactions may one of those separate transactions be avoided. A contract is said to be entire when the consideration moving from the promisor is conditioned upon the complete performance by the promissee of his promise. On the other hand a contract is said to be divisible when performance is divided in two or more parts with a definite apportionment of the total consideration of each party.

The mere fact that there is a contract rate of payment per unit of performance to be rendered by the plaintiff is not sufficient to make the contract divisible.

Concerning Breach

We began our focus on issues concerning breachwhere a partys performance falls short of that promised by the terms of the contract. We saw that there are different degrees of breach: 1. Material and Total 2. Material and Not Total 3. Not Material (Substantial Performance)

Breach

Material Breach

1. Material if the failure in performance is so central to the contract that it substantially impairs its value
and deeply disappoints the reasonable expectations of the promisee (i.e., promisee will not receive a significant part of the exchange she bargained for). Look to Restatement 241 for further guidance on what counts as material

2. Total if there is nothing done to cure a material breach. 3. Consequences of Material and Total Breach:
Promisee may withhold performance Promisee may terminate the contract Promisee may make claim for full compensation for the loss of her bargain (e.g., expectation damages or rescission)

Material but Not Total Breach

Material if left alone, but not yet total because there remains possibility of cure. Consequences:

1. If cured in time, then breach is over

Promisee cannot terminate contract Promisee must perform May claim compensation for any loss suffered due to delay.

2. If not cured in time, then there is material and total breach.

Substantial Performance

Substantial Performance is a partial performance that results in a non-material breach: 1. Performance is substantially in compliance, so breach not so severe as to undermine the promisees reasonable expectations. Consequences:

Promisee must perform

Promisee cannot terminate contract Promisee may claim compensation for any loss suffered

Usual: Cost to required to correct the defect in performance. Alternative/ Exception (Young v. Kent): o o o Where not willful Where remedying defect grossly out of proportion to the harm caused Court may limit damages to amount by which the defective work reduced the market value of the product or performance.

Total and Material Breach

Where there is total and material breach, breaching party has no rights under the contract. But most courts will allow a breaching party to make a claim for restitution (unjust enrichment). However, where a party is in breach, recovery for restitution will be limited;

1. Not entitled to market value, only to the actual economic enrichment of the other party. 2. If the actual contract price for the performance is less than the market value, will be limited to the lesser
amount. Divisible Contracts

Divisible Contracts:

1. Party in breach may seek to limit damages by arguing that the contract is divisible into self-contained
unitsand breach must be limited to the units that were not performed.

2. Most contracts are not divisible (each performance being related to the others in a single exchange).
To determine whether a contract is divisible, look to: Parties purpose Whether contract breaks performances into distinct parts Separate payments identified with specified performances Separate performance schedules

Menorah Chapels at Millburn v. Needle The argument is that the contract is divisible. The court follows the Restatement, which requires that a court look to the parties intent to determine whether the value to the injured party of what he received is equivalent to its stated price or whether that value is materially diminished by the part performance. The whole is greater then the sum of the parts. Must look at the entire contract to decision if it is divisible. Mini contract, therefore the only thing we are going to give you are the parts of the contract that we did not do. The Chapel argues that the prices sheet is itemizes, a dollar amount for each of those. First, the court says that a statute requires that the parties allows itemizes the price list. By dividing the contract the part that is not being done has to not mean a lot to the other party. Here we are talking about a funeral that requires certain things for religion purposes. The court says that they will leave it up to the jury to decide if it is a material breach.

The court notes that the Chapel might be able to recover for some of the cost but it will be less then the market value. Unjust enrichment is proved not market value but the actual value of the funeral. Here it could be negative because we are talking about funerals.

Breach and Substantial Performance Under UCC: Perfect Tender

Sellers obligation under a contract for the sale of goods is to tender delivery of the goods contracted for at the time and place provided for in the contract. If tender conforms to the contracts terms, the buyer must accept and pay for them at time and in manner required by the contract. If the sellers tender does not conform to the terms of the contract in some way, then under common lawi.e., there is a breachthen under common law we would look to the significance of the breach to determine whether material or substantial.

1. But the UCC does not follow the common law and adopts a more bright-line approachthe perfect
tender rule. UCC 2-206 Buyers Rights on Improper Delivery

Subject to the provisions of this Article on the breach in installment contracts (Section 2-612) and unless otherwise agreed under the sections on contractual limitations of remedy, if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may

(a) reject the whole; or (b) accept the whole; of (c) accept any commercial unit or units and reject the rest. Printing Center of Texas, Inc. v. Supermind The paper did not conform to the sample. The poor production of the book was not up to the standards of retail. Was a sale of goods so the court applied the UCC and the perfect tender rule; goods must conform in every respect. Is a matter of contract interpretation Supermind did not conform, in every respect and had therefore breached the contract. Under common law, the breach probably would have been material and the same conclusion probably would have been found. However, the breaching party, under common law, would possibly have been able to cure the defect. The court expressed a qualification to the perfect tender rule. It said that the buyers right to reject nonconforming goods in subject to the general obligation of good faith imposed by the UCC on both parties in the performance and enforcement of the contract. Therefore to decide whether tendered goods are conforming, the court must determine the terms of the contract by examining the language of the contract in the entire context of the transaction, including any course of dealing, trade usage, and course of performance. Once the contract terms have been established it must be decided if the right goods were tendered at the right line and place. UCC 1-304 is also applied to get out of the contract, you have to act in good faith; even if nonconforming you still may be bound if you are acting out of bad faith. If the evidence reveals any nonconformity in the goods or their manner of deliver, the buyer is entitled to reject.

Limitations on Perfect Tender Rule

UCC 2-508 Cure by Seller of Improper Tender or Delivery; Replacement

(1) Where any tender or delivery by the seller is rejected because non-conforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery.

(2) Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender.

1. Note: Distinguishes sellers cure rights before and after the time for performance has expired.
Broader right to cure if before due date

So long as notice is seasonably provided, the defect is corrected in time, and seller compensates for any loss incurredbuyer must accept.

If after due date Seller must have had reasonable grounds to believe would accept Must meet all the requirements under (1) Must be corrected within a reasonable time so as not to disappoint buyers reasonable expectations under the contract.

Ramirez v. Autosport Ramirez bought a camper van from Autosport. The camper was to be delivered to them on August 3. When they came to collect it on the day, they found that it had several small defect such as scratches, missing electric and sewer hookups and missing hubcaps. Autosport had numerous attempts to fix the camper but never did. Ramirez sued in order to get the their money back. In appropriate circumstances, the seller may cure even after the time of delivery has passed, provided that the cure is accomplished within a reasonable time and in accordance with the buyers reasonable contractual expectations. The UCC applies because this if for the sale of goods. The court points out that cure is a good thing for the mass-produced goods in the modern economy. Here the Ramirez certainly did give Autosport time to cure and beyond. When the Ramirez came back the second time, if beyond the due date, Autosport could presume that the Ramirez would not take a wet camper. This is one of the rules.

UCC 2-612 Installment Contract Breach

(1) An installment contract is one which requires or authorizes the delivery of goods in separate lots to be separately accepted, even though the contract contains a clause each delivery is a separate contract or its equivalent.

(2) The buyer may reject any installment which is non-conforming if the non-conformity substantially impairs the value of that installment and cannot be cured or if the non-conformity is a defect in the required documents; but if the non-conformity does not fall within subsection (3) and the seller gives adequate assurance of its cure the buyer must accept that installment.

(3) Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a non-conforming installment without seasonably notifying of cancellation or if he brings an action with respect only to past installments or demands performance as to future installments.

1. Note: Rule adopts the substantial performance doctrine (and not perfect tender) with respect to
installment contracts

Example: If Nissan is to deliver 100 trucks in one lot and 5 are defective, then buyer can reject all of them under the perfect tender rule. However, if they are delivered in lots of 10, and the first 10 have 5 defective trucks, buyer can only reject if substantially impairs, and cannot be cured.

Anticipatory Repudiation

A party cannot typically breach a contract before performance is due. But sometimes the promisor will make it clear by words or conduct that she will not perform when the time for performance falls due. In effect, she has breached the contract in advance. When this occurs, there is anticipatory repudiation

1. Rationale: In the absence of anticipatory repudiation, the non-breaching party, despite knowledge that
the breaching party will breach when the time comes to perform, would have to continue preparations for and remain available to perform. Anticipatory Repudiation: Restatement Guidance Restatement 250 When a Statement or an Act Is a Repudiation (anticipatory repudiation) A repudiation is

(a) a statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach, or (b) a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach.

Restatement 253 Effect of a Repudiation as a Breach and on Other Partys Duties

(1) Where an obligor repudiates a duty before he has committed a breach by non-performance and before he has received all the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach.

(2) Where performances are to be exchanged under an exchange of promises, one partys repudiation of a duty to render performance discharges the other partys remaining duties to render performance.

Anticipatory Repudiations: UCC 2-610

When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may 1. (a) for a commercially reasonable time await performance by the repudiating party; or

2. (b) resort to any remedy for breach, even though he has notified the repudiating party that he
would await the latters performance and has urged retraction; and

3. (c) in either case suspend his own performance or proceed in accordance with the provisions of
this Article on the sellers right to identify goods to the contract notwithstanding breach or to salvage unfinished goods. Risks Concerning Anticipatory Repudiation

Once one learns of promisors intention to repudiate, the question becomes whether that repudiation is material.

1. If it is not, and the promisee treats it as material and withholds performance or states intention to cancel
the contract, then that promisee now assumes the risk that court will find the repudiation not material.

If repudiation found to be not material, then promisee is now the party in breach. This risk is particularly acute where the statement of repudiation is vague or uncertain.

Wholesale Sand & Gravel, Inc. v. Decker The performance is not yet due so the court is dealing with anticipatory repudiation. James Decker and Wholesale agreed to perform earth work including the installation of a gravel driveway on Deckers property. The contract contained no provision specifying a completion date for the work. Indeed the only time reference made in the contract was that payment was to be made within 90 days. Wholesale began work on the drive way on the weekend after the contract was executed and immediately experienced difficulty because of the wetness of the ground. Goodenow decided to wait for the ground to dry out before proceeding further. Decker called many times about the driveway. Finally Decker called Goodenow for the purpose of terminating the contract. At that point Goodenow said that they would be on the property the next day but did not show. We conclude that Wholesale, through its conduct manifested and unequivocal and definite inability or unwillingness to perform with a reasonable time. A definite and unequivocal manifestation of intention on the part of the repudiator that he will not render the promised performance when the time fixed for it in the contract arrives. The manifestation of an intention to repudiate a contract may be made and communicated by either words or conduct After its second weekend of work at the site, Wholesale removed its equipment and did not return. Moreover, on two occasions Goodenow, responding to Deckers inquires about the progress of the job promised to get right to work but did not do so.

Retraction of Repudiation: Restatement Restatement 256 Nullification of Repudiation or Basis for Repudiation

(1) The effect of a statement as constituting a repudiation under 250 or the basis for a repudiation under 251 is nullified by a retraction of the statement if notification of the retraction comes to the attention of the injured party before he materially changes his position in reliance on the repudiation or indicates to the other party that he considers the repudiation to be final.

(2) The effect of events other than a statement as constituting a repudiation under 250 or the basis for a repudiation under 251 is nullified if, to the knowledge of the injured party, those events have ceased to exist before he materially changes his position in reliance on the repudiation or indicates to the other party that he considers the repudiation to be final.

Retraction of Repudiation: UCC UCC 2-611 Retraction of Anticipatory Repudiation

(1) Until the repudiating partys next performance is due he can retract his repudiation unless the aggrieved party has since the repudiation cancelled or materially changed his position or otherwise indicated that he considers the repudiation final.

(2) Retraction may be by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform, but must include any assurance justifiably demanded under the provisions of this Article.

(3) Retraction reinstates the repudiating partys rights under the contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation.

Prospective Inability to Perform: Restatement 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 by non-performance that would of itself give the obligee a claim for damages for total breach under 243, the obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance.

(2) The obligee may treat as a repudiation the obligors failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances of the particular case.

Prospective Inability to Perform: UCC UCC 2-609 Right to Adequate Assurance of Performance

(1) A contract for sale imposes an obligation on each party that the others expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.

(4) After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.

Problem 19.4 Home Sale (a) Seller has an interest if finding a good buyer because its more money and time off the market. Here there has been no voluntary act or statement that the buyer will not perform. So the seller could request assurance of performance but cannot void the contract on ground of anticipatory repudiation. (b) / (c) Here there is a fine line between asking to little versus to much. In this situation a good request might be asking the buyer for (a) reasons for why your loan has not be cleared (b) how the problem is going to be corrected.

Breach and Substantial Performance

Looked at breach and substantial performance under the UCC. 1. Saw that the UCC offers a bright-line rule where there is not perfect tender. Under UCC 2-601, if the tender or delivery of goods by the seller fails in any respect to conform to the contract, the buyer may: Reject the whole Accept the whole, or Accept any commercial unit or units and reject the rest.

This treatment departs from common law, which would first determine whether there was substantial performance.

Perfect Tender Rule

Saw that the perfect tender rule has limitations: (1) The buyer must allow the seller to cure if there is still time left before the due date and the buyer is seasonably notified of intention to cure. (2) Buyer must (upon seasonable notice) allow seller reasonable time to cure (even if due date has arrived) if the seller had reason to believe buyer would have accepted.

Under UCC 2-508 Cure by Seller

Under UCC 2-612 Installment Contract Adopts substantial performance doctrine (and not perfect tender) for purpose of installment contracts. Statement (or voluntary act) by the obligor that indicates the obligor will commit a total and material breach. (See Restatement 250) Anticipatory Repudiation gives rise to a claim for total breach. (See Restatement 253. UCC gives similar treatment (See UCC 2-610) Generally, anticipatory repudiation may be retracted if there is no detrimental reliance on repudiation. 1. See Restatement 256 and UCC 2-611 Anticipatory Repudiation

Prospective Inability to Perform Where there are reasonable grounds for thinking a party will not perform (but there has been no repudiation by words or conduct), then the other party may demand adequate assurance of due performance. 1. If the assurance is not received, obligee may suspend performance until such assurance is received. See Restatement 251 and UCC 2-609.

Introduction to Contract Remedies

In general, Anglo-American contract remedies operate on a compensation principle: In the usual case, the goal is to make the aggrieved party whole. It does not aim to deter or punish. In the typical case, the injured party is supposed to be placed in as good a position as she would have been in if the contract had actually been performed but not better off. 1. This purposed can be achieved in a number of ways: Forcing the breaching party to perform (specific performance) Enjoining one party from taking action that may negatively impact the contractual rights of the other party Money damages

Distinguishing Expectation, Reliance, and Restitution Interests

Restatement 344 Purposes of Remedies Judicial remedies under the rule states in this Restatement serve to protect one or more of the following interests of a promisee:

1. (a) his expectation interest, which is his interest in having the benefit of his bargain by being put in as
good a position as he would have been in had the contract been performed,

2. (b) his reliance interest, which is his interest in being reimbursed for loss caused by reliance on the
contract by being put in as good a position as he would have been in had the contract not been made, or puts you in the position you would have been in if the contract had never been formed 3. (c) his restitution interest, which is his interest in having restored to him any benefit that he has conferred on the other party. Generally, the remedy for unjust enrichment Expectation Damages Generally

Attempts to put a promisee in as good a position as he would have been in had the contract been performed gives non-breaching party the benefit of the bargain. Generally (though not always) the most generous remedy

1. Examples of measures:
Any additional cost for replacement Comparing contract price for service versus market price Lost profits

Reliance Damages Generally

Attempts to put the promisee in same position as if the contract had never been made at all. Applies where party has changed position (incurred expenses in preparing to perform, performed, foregone opportunities to make other contracts) in reliance on the other partys performance. Here the court measures damages based on this reliance. Generally less generous than expectation damages because it will not include an injured partys lost profits. Attempts to restore any benefit already conferred to the other party so as to avoid unjust enrichment. May occur where a party has conferred a benefit on the other party by, for example, making a part payment or furnishing services under the contract. Here the court may require the other party to disgorge the benefit received by returning it to the party who conferred it. Generally the least generous contract remedy (less than expectation and reliance) because it neither includes the injured partys lost profits nor the injured partys reliance expenditures that did not benefit the other party.

Restitution Damages Generally

Amour v. LeChef

The Amours are about to celebrate their 50th wedding anniversary. They are planning a huge celebration and contract with LeChef to cater the affair for $10,000. When the Amours sign the contract, they give LeChef a 10% deposit ($1,000). Shortly after signing the contract, the Amours have invitations printed that note the affair will be catered by LeChef. LeChef, however, receives a subsequent offer for a celebrity wedding on the same day and decides this would offer him more exposure, so he repudiates his contract with the Amours. Amours hurry to find a replacement and find Gourmande, another chef of LeChefs stature, but she will only do it for $13,000. Amours reprint the invitations at a cost of another $1,000.

Celebration is a huge success Plaintiff entered into a contract with defendants to publish a book. Plaintiff delivered the manuscript and defendants agreed to pay him $2,000. The contract provided that defendant would pay royalties to plaintiff, based upon specified percentages of sales. Defendants merged with another publishing company and did not publish plaintiffs book.

Freund v. Washington Square Press, Inc.

The error by the court below was in measuring damages not by the vale to plaintiff of the promised performance but by the cost of the performance to defendant. Damages are not measured however by what the defaulting party saved by the breach but by the nature and probable consequences of the breach to the plaintiff.

General rule, is to put the injured party in as good a position as he would have been put by full performance of the contract, at the least cost to the defendant and without charging him with harms that he had no sufficient reason to foresee when he made the contract.

The trial court granted plaintiff $10,000 the cost that it would cost him to have the book published. However the court finds that $10,000 was far beyond compensation plaintiff for the interest he had in the defendants performance of the contract. An award of that cost publication would enrich plaintiff at defendants expense.

His expectancy interest in the royalties the profit he stood to gain from sale of the published book while theoretically compensable was speculative.

Concept of Efficient Breach

As we noted earlier, the Anglo-American law of contracts turns on the compensation principlewhereby the goal of contract remedies is not to deter or punish for breach, but rather to provide the injured party with monetary compensation that will put him in as good a position financially as he would have been had the other party performed.

One of the consequences of compensation principle is that if (as in Freund) there is no quantifiable financial loss on the part of the non-breaching party, then the breaching party will not have to pay for the breach. This is supposed to be one of the benefits of the compensation principlenot a defect: I.e., that it allows for efficient breach. If one party breaches the contract to take up a more lucrative opportunity (presumably with someone who values his services more), then he is only required to compensate the non-breaching party for the benefit they were to receive under the terms of the contract.

1. When this occurs, two parties are made better off (the breaching party, and the other party to the new
contract), and the non-breaching party is not made any worse off because he has been fully compensated. Resources are thereby transferred from less to more valuable uses.

2. Problem: The breaching party is allowed to profit by breaking a promise. Also, as was presumably the case in Freundnot all parties value their bargains in purely
monetary termsmay, e.g., seek prestige and notoriety from publication. Components of Expectation Damages

Expectation interest is the default measure of damages for breach of contract. As we have seen, the injured partys lost value from the contract is the main component of expectation damages. This is sometimes referred to as direct damages.

Direct damages are those that compensate the injured party for the loss of the value that would have come directly from the contract itself. Where neither party has performed under the contract, direct damages will be the value of the entire contract from the injured partys point of view (minus any savings resulting from the injured partys not having to perform).

If the breaching party has partially performed, direct damages will be the difference in value between what the plaintiff hoped to get from the contract and what the plaintiff actually received. It is often the case, however, that when one party is in breach, the other party incurs other losses in addition to the loss of the value of the contract. These are often referred to as indirect losses, which can then be separated into consequential and incidental losses.

Sometimes a chain of injuries will be set in motion as a consequence of the breach.

1. For example, without the promised good or service, a business may have to close until a replacement
can be found. This may result in lost profits.

Perhaps the good was an emergency bearing that was crucial to prevent the breakdown of machinery at an industrial complex. A consequence of the breach will be costly injury to property. Even personal injury may result from a breachsay where the promised good or service is health-related. A consequence of the breach may be personal injury.

Expectation Damages: Incidental

Sometimes the non-breaching party will incur costs simply coping with the other partys breach. For example, incidental damages may include

1. The costs of assessing damage resulting from the other parties breach, or 2. The cost of finding and arranging for a substitute performance
Expectation Damages Measurement

Whether damages are characterized as direct, consequential, or incidental may not always matterbut sometimes common law and statutory limitations placed on recovery will turn on the distinction. In addition, sometimes the parties themselves will explicitly limit recovery under the terms of the contract to only a certain class of damages (direct, consequential, or incidental). Is such cases, the distinction may prove to be all important.

So from what has been said so far, we have a good sense of how the courts will measure expectation damages. In essence, it will be the injured partys losses (lost value of contract, consequential damages) set off against any savings resulting from the other partys breach.

Restatement offers the following guidance. Subject to the limitations stated in 350-53, the injured party has a right to damages based on his expectation interest as measured by

Restatement 347 Measure of Damages in General

1. (a) the loss in the value to him of the other partys performance caused by its failure or
deficiency, plus

2. (b) any other loss, including incidental or consequential loss, caused by the breach, less 3. (c) any cost or other loss that he has avoided by not having to perform.
Ed v. Anna, CPA

There are not any expectation damages. The plaintiff court have given it to someone else but he decide to do it himself. It would be the plaintiffs burden to prove that this time spent finding someone else was more valuable then whatever else he had going on at the time.

Interests

Last time we began our introduction to contract remedies by distinguishing three interests these remedies will protect:

1. Expectation interestBeing placed in as good a position as would have been had the contract been
fully performed. Typically most generous remedy

2. Reliance interestBeing reimbursed for loss caused by reliance on the contract by being put in as
good a position as he would have been in had the contract not been made Typically less generous than expectation damages because cannot award lost profit Typically least generous because cannot award lost profit or relianceonly return of benefit conferred on other party.

3. Restitution interestInterest in having restored any benefit conferred on the other party

Components of Expectation Damages

Direct DamagesCompensate the injured party for the loss of the value that would have come directly from the contract itself. 1. Where neither party has performed, this will be the value of the entire contract from the injured partys point of view (minus any savings resulting from the injured partys not having to perform).

Indirect DamagesLosses in addition to the value of the contract. 1. ConsequentialBeyond lost value in the contract, a chain of further losses may be set in motion by the breach, for example; Lost profits due to business shut-down Injury to property Personal injury Costs of assessing damage (getting estimates for repair) Costs of finding or arranging for substitute performance

2. IncidentalCosts associated with coping with the other partys breach:

Expectation Damages

Began our look at how expectation damages will be measured generally: 1. Loss in value of other partys performance caused by breach + 2. Any other loss, including incidental or consequential loss -

3. Any cost or other loss avoided.

= 4. Expectation damages Measurement of Expectation Damages Generally

Begin by measuring expectation interest where the other party has not performed at all. In determining expectation damages, the first step will be to determine what (if any) direct losses were suffered by the non-breaching party. To do this, a court will have to determine what if any economic value the breaching partys performance would have had for the non-breaching party.

There are basically three measures:

1. By reference to substitute transaction price 2. By reference to market value 3. By reference to lost profits
Measurement of Expectation Damages: Substitute Transaction

Where the non-breaching party obtains a replacement performance, if the replacement price is less advantageous than the contract price, the direct loss may be measured as the difference between the contract price and the replacement performance price.

An important factor to consider in determining if a substitute transaction is a proper measure of direct damages will be whether the substitute really equivalent?

1. May be higher price because getting more (which would be a windfall) 2. May be lower price because getting less (so unfair measure to plaintiff)
Handicapped Childrens Education Bd. V. Lukaszewski Handicapped Childrens Ed. Board hired defendant to serve as a speech and language therapist for the spring term. Prior to the benign of the school year defendant was offered a position by another school located not far from her home. Additionally, the job paid more money. Defendant tried to breach the contract with Handicapped Childrens Ed. but the board refused to release her from the contract. Defendant was very upset and went to her Dr. who found that her blood pressure was high and she was suffering from stress. Defendant quit her job based on medical needs. Plaintiff is suing defendant for the additional money it took to replace her, which was $1,026.64. Damages in breach of contract cases are ordinarily measured by the expectation of the parties. The non breaching party is entitled to full compensation for the loss of his or her bargain that is losses necessarily flowing from the breach which are proven to a reasonable certainty and were within contemplation of the parties when the contract was made. The court disagrees with defendant that the teacher value that the board got was worth the addition money need to pay her. The board neither expected nor wanted a more experienced therapist who had to be paid an addition money per year. Defendant breach forced the Board to hire the replacement and in turn to pay a higher salary. Therefore the Board lost the benefit of its bargain. However a injured party must take all reasonable steps to mitigate damages. Therefore the employer must attempt to obtain equivalent services at the lowest possible cost. The benefits imposed upon the plaintiff is not something they wanted. This is an example of affective breach by the defendant. Measurement of Expectation Interest: Market Value

Sometimes a replacement performance is not obtained and cannot therefore serve as a measure for direct losses under the contract. In such circumstances the courts may determine direct losses by comparing the contract price to the market value of the performance promised under the contract.

The market value of a performance is not always easy to determine because there may not always be an active market for that service. 1. Where there is not an active market or an identifiable going rate, some other reliable evidence of market value must be provided. This may require the fact-finder to rely on hypotheticals.

New Valley Corp. v. U.S.

Western Union formalized a launch service agreement with NASA which committed that agency to use its best efforts to launch two communication satellites. However the space shuttle challenger exploded during launch, the president of NASA suspended planning for the June 24th launch. NASSA restricted launch services to only the military.

Western Union began to investigate alternative launch options. How much more Hughes Communications would have paid for the Westar Division assets had they included a NASA launch contract? There is the question of absent the breach the parties would have been notified of the launch date. Without the certainty of a known launch at the time of the sale, market data regarding launch costs presumably would not be a major factor in determining the final selling price.

Cost of comparable launch services as ranging from $20.9 million to $31.6 million that market data however cannot be taken as the exclusive determinant of plaintiffs loss. Financially stressed organization would suggest that the price Western Union would have to pay to obtain a substitute launch contract would not correspond to the price it could expect to receive from the sale of a launch contract.

Measurement of Expectation Interest: Lost Profits

There may be situations in which neither the substitute performance nor the market value measure of damages can compensate the non-breaching party. In such cases, the court may award the non-breaching partys lost profits under the agreement.

Example #1:

Anna contracts to prepare Eds tax returns for $1,000. This amount represents pure profit for Anna because she will have no costs other than her time. Ed reneges and Anna was not able to find any business to replace Ed. She is left watching TV during the time she had set aside to prepare Eds return. Court will likely award Anna $1,000 in lost profitsshe lost the entire value of the contract due to Eds breach. But what if Anna had a full schedule and Eds breach left one 4 hour gap. She immediately received a request to Joes taxes in that 4-hour gap for $1,000. Here, the court would probably not award Anna any damages because she did not end up suffering any loss as a result of Eds breach. She made the exact same amount of money that tax season as she would have made had Ed not breached.

Example #2:

Here the lost profits measure is not available to Anna because her substitute transaction paid precisely the same amount.

Example #3 (Lost Volume):

But what if Anna did not have a full schedule when she received Joes taxes after Eds breach? She could have (and desired to) take on more business.

Here Anna can argue that, had Ed not breached, she could have made $2,000 (Ed and Joes taxes) rather than the $1000 she made (just Joes taxes). Here Anna will claim that Eds breach resulted in lost volume and that the correct measure of damages for Eds breach should be lost profits of $1,000.

In Re Worldcom, Inc. Jordan and MCI entered into an agreement that Jordan would promote MCI products. However MCI went bankrupt and did not complete the contract. Whether Jordan was a lost volume seller? No. Courts do not focus solely on the sellers capacity. The seller claiming lost volume status must also demonstrate that it would have entered into subsequent transactions. Jordan has not shown he could and would have entered into a subsequent agreement. A lost volume seller is one who has the capacity to perform the contract hat was breached in addition to other potential contracts due to unlimited resources or production capacity. The lost volume seller theory applies to contracts for services as well as goods. Non-breaching party must show that it could and would have entered into a subsequent agreement. The testimony of Jordans representatives establishes that although Jordans popularity enabled him to obtain additional product endorsements Jordan desire to scale back his level of endorsements.

Measurement of Expectation Interest: Breaching Party Performs in Part

In the last few examples, we have assumed that the breaching party did not perform at all. We now look at what happens how expectation interest will be measured when the breaching party performs in part.

1. Recall (Restatement 347) expectation interest will be measured by the loss in the valueof the other
partys performance caused by its failure or deficiency. Thus, if the other party has partially performed, the expectation interest must be discounted by the value of that performance to the non-breaching party.

As we have already seen, determining the discount or valuing the deficient performance is not always straightforward. Where the breach is material and total, then the measure will be the cost to complete the job per the terms of the agreement. Where the breach results in substantial performance, there are two measures:

1. Cost to complete the job (Lyon) 2. Diminution in market value resulting from the breach (Jacob & Youngs)
Problem 20.2 Mary Time v. Bungle (page 760) General the measure of damages is going to be the cost of competition or repair. Material breach in this situation. Bungle has to pay Mary $150,000. The difference between the contracts and the actual agreement. Substantial performance. She would have $900,000 to all the parties. Bungle should pay Mary $450,000. Continued our introduction to expectation damages by Looking at three measures of direct damages (i.e., damages that compensate the injured party for the loss of the value that would have come directly from the contract itself) where the breaching party has not performed at all: 1. By Reference to Substitute Transaction Price

Expectation Damages Three Measures of Direct Damages

2. By Reference to Market Value 3. By Reference to Lost Profits Substitute Transaction and Market Value

Substitute Transaction: Where the non-breaching party obtains a replacement performance, if the replacement price is less advantageous than the contract price, the direct loss may be measured as the difference between the contract price and the replacement performance.

Market Value: Sometimes no replacement performance is obtained and the courts will determine direct losses as the difference between the contract price and the market value of the performance under the contract. Where there is not an active market for the performance, this may be a difficult analysis, requiring the fact-finder to rely on hypotheticals.

Lost Profit

Lost Profits: In situations where neither the substitute transaction nor the market value methods are the proper measure of the non-breaching partys lost value, the lost profit measure may be employed. Here the measure is the profit the non-breaching party would have earned under the contract at issue.

1. Lost Volume: Lost profits measure is typically only available where non-breaching party has lost
volume.

Lost Volume seller is one who can demonstrate she could and would have entered into subsequent agreements in addition to the instant contract. As a consequence, the breach results in lost volume, regardless of whether subsequent similar sales or service agreements were entered into.

Breaching Party Performs in Part

We also looked at how expectation damages will be measured where the breaching party performs in part.

1. Expectation interest only covers loss in value resulting from the failure or deficiency in performance.
So, if the breaching party has performed in part, the expectation interest will be discounted by the value (if any) of the part performance.

Where the part performance is a material and total breach, then the expectation interest will be the cost to complete or repair performance to bring it in conformity with the contract terms. Where there is substantial performance, the measure of expectation damages will be either: Cost to complete or repair Diminution in market value resulting from the breach (if court finds cost to complete or repair would result in unfair forfeiture or economic waste).

Expectation Damages Under UCC

As with the common law, the central theme of UCC remedies is that the non-breaching party receive compensation for lost expectations under the agreement

UCC 1-305(a) Remedies to Be Liberally Administered

The remedies provided by [the Uniform Commercial Code] must be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed but neither consequential or special damages nor penal damages may be had except as specifically provided in [the Uniform Commercial Code] or by other rule of law.

1. Comment 1: reject[s] any doctrine that damages must be calculable with mathematical
accuracy. Compensatory damages are often at best approximate: they have to be proved with whatever definiteness and accuracy the facts permit, but no more. Emphasis is on direct damagesconsequential and penal damages only permitted where specifically provided for Buyers Remedies Under UCC

We begin by looking at the buyers remedial options when the seller breaches by, e.g., 1. Failing to deliver goods 2. Delivering non-conforming goods (which buyer rejects) 3. Delivering defective goods (which buyer rejects)

In each of these cases, the buyer has lost the entire value of the contract. The following options may be available to make the buyer whole (depending on the circumstances): 1. Demand Specific Performance Exceptional remedy, available only where the good is unique or under other proper circumstances 2. Money Damages Measured by replacement transaction (cover) Measured by market value

Buyers Remedies Measured By Substitute Transaction (Cover)

UCC 2-712 Cover; Buyers Procurement of Substitute Goods:

(1) After a breachthe buyer may cover by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller. (2) The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damagesbut less expenses saved in consequence of the sellers breach.

(3) Failure of the buyer to effect cover within this section does not bar him from any other remedy. The test of proper cover is whether at the time and place the buyer acted in good faith and in a reasonable manner, and it is immaterial that hindsight may later prove that the method of cover used was not the cheapest or most effective.

Comment 2

without unreasonable delay is not intended to limit the time necessary for him to look around and decide as to how he may best effect cover.

Comment 3 [C]over is not a mandatory remedy for the buyer. The buyer is always free to choose between cover and damages for non-delivery under the next section [UCC 2-713].

Buyers Remedies Measured by Market Value

UCC 2-713 Buyers Damages for Nondelivery or Repudiation

(1) Subject to the provisions of this Article with respect to proof of market price (Section 2-723), the measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this Article (Section 2-715), but less expenses saved in consequence of the sellers breach.

(2) Market price is to be determined as of the place for tender or, in cases of rejection after arrival or revocation of acceptance, as of the place of arrival.

Comment 1: [U]ses as a yardstick the market in which the buyer would have obtained cover had he sought that reliefplace of tender crucial time is the time at which the buyer learns of the breach Must be compared with market price for goods of the same kind and in the same branch of trade. The present section provides a remedy which is completely alternative to cover under the preceding section and applies only when and to the extent that the buyer has not covered. 1. So cannot make a beneficial cover and then also claim difference between cover and market price.

Comment 2: Comment 5:

Chronister Oil Co. v. Unocal Refining and Marketing Chronister was an oil trader. It contracted to provide 25,000 barrels of gasoline to a fro shipment to Unocal. The contract price was 60.4 cents a gallon. The owners of the pipeline refused to take the gasoline because it contained too much water. Unocal had promised to pay Chronister 60.4 cents a gallon but the price of gasoline had fallen. Had Unocal gone out in the market and covered by buying 25,000 barrels it would have paid someone where in the neighborhood of 55 cents a gallon and thus would have saved 5 cents a gallon as a result of Chronisters breach. What is the opportunity cost, the opportunity one gives up by engaging in some activity is the cost of that activity? Unocal gave up the opportunity either to sell the gasoline on the market which we know would have yielded it substantially less than the average cost of its inventory because the market price was much lower than the cost or to have a larger an unnecessarily and it would soon prove unusable larger inventory. UCC 2-712 defines cover as purchasing or making a contract to purchase a substitute good. Unocal did not purchase any gasoline to take the place of the lost barrels. It decided not to purchase a substitute good but instead to use a good that it already owned. The next section allows the buyer to obtain damages measured by the difference between market price and contract price. If a reasonable response for the buyer to the breach would be to make the product itself then the difference between the market price of that product and the contract price would be an appropriate measure of the harm from the breach. Sellers usually break their contracts in a rising market where they can get more for the product by selling to someone other than the buyer with whom they signed the contract. Here a seller in a declining market broke a contract that he desperately wanted to perform, conferring a windfall gain on the buyer.

Question page 767 1. Unocal would able been able to sell their inventor for $2.40. By not performing Unocal is losing a hug benefit therefore there will be damages awarded. The market price remedy is $2.40 per a gallon.

Buyers Remedies Upon Acceptance of Deficient Performance

So far we have focused on circumstances where either the seller does not deliver the goods at all, or the buyer has rightfully rejected the goods. But what about where the buyer accepts non-conforming goods? 1. Buyer does not waive rights to remedy for non-conformity by accepting non-conforming goods. 2. So long as the buyer gives notice to the seller, the buyer may claim damages to compensate for sellers deficient performance.

UCC 2-714 Buyers Damages for Breach in Regard to Accepted Goods

(1)Where the buyer has accepted goods and given notification (subsection (3) of Section 2-607) he may recover as damages for any non-conformity of tender the loss resulting in the ordinary course of events from the sellers breach as determined in any manner which is reasonable.

(2) The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.

(3) In a proper case any incidental and consequential damages under the next section may also be recovered.

Sellers Remedies Under the UCC

The remedies available to the seller when the buyer is in breach parallel those available to the buyer. 1. Sellers measure of direct damages will vary depending on circumstances. For example: Buyer accepts goods but refuses to pay Buyer repudiates the contract before the seller performsor wrongfully rejects goods when tendered.

Sellers Action for Price

Where the seller has delivered all the goods and the buyer has accepted, but refuses to pay, then the measure of the sellers damages will be the full price of the contract. (In essence, a sellers action for price is just a special kind of action for specific performanceseller just wants the buyer to complete performance.)

Sellers Remedies Where Buyer Repudiates or Wrongfully Rejects

If the buyer repudiates the contract prior to tender, or wrongfully rejects the goods after tender, then 1. Seller is not obligated to provide the goods to the buyer

2. Seller may recover contract price less the value of the goods. One of the following measures is usually
employed to arrive at this number:

Difference between contract price and subsequent sale price Difference between contract price and market price Lost profit the seller would have made on the contract

Sellers Remedy Measured By Resale or Contract for Resale UCC 2-706 Sellers Resale Including Contract for Resale

(1) Under the conditions stated in Section 2-703 on sellers remedies, the seller may resell the goods concerned or the undelivered balance thereof. Where the resale is made in good faith and in a commercially reasonable manner the seller may recover the difference between the resale price and the contract price together with any incidental damages allowed under the provisions of this Article (Section-2-710), but less expenses saved in consequence of the buyers breach.

Sellers Remedy Measured by Resale or Contract for Resale Resale must be made in good faith Must give appropriate notice of the sale Resale must be made in a commercially reasonable manner. 1. Generally, whether a professional (and competent) dealer in goods of the sort involved would sell them in this manner.

Sellers Remedy Measured by Market Value or Lost Profit

UCC 2-708 Sellers Damages for Nonacceptance or Repudiation

(1) Subject to subsection (2) and to the provisions of this Article with respect to proof of market price (Section 2-723), the measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this Article (Section 2-710), but less expenses saved in consequence of the buyers breach.

(2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this Article (Section 2-710), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.

Comment 1: [C]urrent market price at the time and place for tender [is] the standard by which damages for non-acceptance are to be determined. Comment 2: Recovery of lost profit and reasonable overhead is only available where the standard measure of damages [i.e., market value] is inadequate. And only where resale is impracticable.

1. Note: As with common law, lost profit measure is typically only available where seller is deemed a lost
volume seller.

2. To determine lost profit, must deduct the costs directly associated with the production of the contractedfor good (i.e., direct costs) from the contract price. Overhead (e.g., management salaries, rent, heat, lighting, etc.) need not be deducted because they are not saved as a result of the breach. Problem 20.3 Willie v. Bessie (page 722) (a) Lost profits are not available because he only had one guitar. Willie gives her notice so there is no reason to think he didnt act in good faith. 1. Is selling on e-bay commercially reasonable manner? In this day and age it could be argued that it is commercially reasonable to sell the guitar in this manner. 2. To find something commercially reasonable look to the evidence. Look at the number of bids or do people buy these items on e-bay.

3. The fact that the guitar brought less money might be because of the item description or because he got a really good with Bessie. 4. If you do not sell the time commercially reasonable you can always get market price. (b) In choosing to keep the guitar the seller is in as good position as before. Nominal damages would be appropriate. The sell does not need any money from the court to get in the same position because the guitar is worth more. Part 2 There would be $4,000. That is if the court thinks that this appraiser is a fair way to find the value If Merry Music has an unlimited supply of violins and a loss volume seller the measure of the remedy would be a lost profit measure. 1. Example Merry buys the violins for $150 a peace, a $100 would be the lost profit cost. You would have to take out any other cost that would be directly attributed to this sell. Example: Box UCC Expectation Damages Problem 20.4 Merry Music v. Deff (page 722)

Looked at expectation damages under the UCC.

1. To be liberally administeredrejects the doctrine that damages must be calculated with mathematical
precision. 2. Emphasizes direct damagesconsequential and incidental damages are only permitted where specifically provided for. (See 1-305)

Buyers Remedies

Looked at buyers remedial options when the seller breaches and buyer loses entire value of the contract: 1. May seek specific performance (only in special circumstancese.g., where good is unique) or money damages (most common remedy). Money damages will be measured either by replacement transaction (cover) Market value

Buyers Remedies Where Seller Repudiates Fails to Deliver Goods or Buyer Rightfully Rejects:

Buyer may cover by making in good faith and without unreasonable delay any reasonable purchase of a substitute. (See UCC 2-712) 1. May recover any difference between cost of cover and contract price (plus incidental and consequential, minus savings). 2. But cover is not a dutybuyer may elect to do nothing and seek another remedy.

If buyer does not cover under 2-712, then may receive the difference between market price and contract price under 2-713. 1. Market price is measured at the time buyer learned of breach and in the place of tender. 2. Incidental and consequential damages available. Award will be discounted by any savings.

Buyers Remedies Upon Acceptance of Non-Conforming Goods. Buyer does not waive rights to remedy by accepting non-conforming goods. So long as the buyer gives notice to seller, she may claim reasonable damages to compensate for sellers deficient performance. 1. Incidental and consequential damages are available.

Sellers Remedies

If the buyer accepts the goods, but refuses to pay, seller may claim the full price of the contract. If the buyer repudiates the contract prior to tender, or wrongfully rejects the goods after tender, then 1. Seller is not obligated to provide the goods to the buyer

2. Seller may recover contract price less the value of the goods. One of the following measures is usually
employed to arrive at this number:

Difference between contract price and subsequent sale price (UCC 2-706) Difference between contract price and market price at time and place of tender (UCC 2708(1)) Lost profit the seller would have made on the contract (UCC 2-708(2))

Only available where resale is impracticable and market value is inadequate

Introduction to Limitations on Expectation Damages As we have seen, the purpose of the expectation measure of damages is to put the non-breaching party in the position she would have been in had the contract been fully performed. There are, however, important limitations the courts will place on the recovery of expectation damages. These limitations are reflected in the following three principles: 1. The Reasonable Certainty Principle 2. The Foreseeability Principle 3. The Mitigation Principle

These limits on expectation damages are designed to prevent the award of expectation damages from imposing excessive liability on the breaching party.

Reasonable Certainty of Damages

It is the non-breaching partys (or plaintiffs) burden to prove the fact and amount of damages that were suffered. Courts differ in the level of certainty they will require with respect to the non-breaching partys damage claim. Generally, the courts will require proof of damages with reasonable (as opposed to absolute) certainty.

1. All courts agree, however, that if the damage claim is entirely speculative and uncertain, there will be no
award. Depending on the facts, establishing damages with reasonable certainty can be difficult with respect to all forms of expectation damages (direct, incidental, and consequential). However, it can often be particularly challenging to satisfy the standard when alleging consequential damages for lost profits. Rancho Pescado, Inc. v. Northwestern Mutual Life Insurance Co. Jones contemplated using the existing water in the canals in which to raise the catfish, using an intricate system of screens to separate the fish and control algae problems. The Gila Bend Canal was owned by Northwestern Mutual Life Insurance Company and used to deliver underground water to a large ranch operated by a wholly owned subsidiary of Northwestern, Painted Rock Development Company. That proposal as well as subsequent ones, as rejected but in 1973 a license agreement granting Rancho Pescado the exclusive right to raise fish in a five mile portion of the canal for a period of five years was entered into between the parties.

Holidays the canal did not run. As such Northwestern notified Rancho by letter that it was terminating the license agreement for cause because the demand for continuous follow of water interfered with the ranching operations in violation of paragraph tow of the license agreement.

Whether the evidence introduced established a reasonably certain factual basis for computation of lost profit? No. Old Majority Rule: Jury verdict of damages for lost profits of a new business were prohibited. Such reasoning is supported by the generally accepted rule of contract law that damages are not recoverable unless they are reasonably certain. New Majority Rule: Allow recovery for such lost profits if they can be proven with reasonable certainty. Rancho also had the burden of proving with reasonable certainty that it could market the fish it raised. United States Department of Agriculture estimates that 95% is the failure rate and the 5% who succeed are experienced aquaculture farmers. Also the record shows that the pond method used is the most successful not the raceway system.

Evidence on this point was based upon oral conversations and a letter from the president of Frosty Fish which indicated it was willing to purchase the entire production of catfish.

Foreseeability of Damages

In order for expectation damages to be recoverable, such damages must be reasonably foreseeable at the time of contracting.

Hadley v. Baxendale Mill was stopped by a breakage of the crank shaft by which the mill was working. The plaintiffs servant told the clerk that the mill was stopped and that the shaft must be sent immediately and in answer to the inquiry when the shaft would be taken the answer was that if it was sent up by twelve oclock any day it would be delivered at Greenwich on the following day. The delivery of the shaft was delayed by some negates and the consequence was that the plaintiffs did not receive the new shaft for several days after they would otherwise have done and the working of the miss was thereby delayed. But how do these circumstances shew reasonably that the profits of the mill must be stopped by an unreasonable delay in the delivery of the broken shaft by the carrier to the third party? The loss of profits here cannot reasonably be considered such as consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract. When two other parties have made a contract which one of them has broken the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally according to the usual course of things from such breach of contract itself or such as may reasonably be supposed to have been the contemplation of both parties at the time they made the contract as the probable result of the breach of it. If these special circumstances were wholly unknown to the party breaking the contract, he at the most could not be supposed to have had in his contemplation the amount of injury with outside arise generally and in the great multitude of cases not affected by any special circumstances for such a breach of contract.

But it is obvious that in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances such consequences would not in all probability have occurred and these special circumstances were here never communicated by the plaintiffs to the defendants.

Mitigation Principle

In general, contract imposes requires the nonbreaching party to do what she can to reduce the costs resulting from a breach after it has occurred. This is often referred to as the duty to mitigate damages. It is a bit misleading to refer to this as a duty because a failure to mitigate will not, of course, give rise to claim on the part of the breaching party. It may, however, reduce the nonbreaching partys damage award by refusing to compensate for losses that could have been avoided with the exercise of reasonable efforts (extraordinary efforts not required).

Rationale: In the spirit of efficient breach, the mitigation principle is designed to promote efficiency by minimizing wasteful behavior on the part of the non-breaching party.

1. Example: County contracts with construction company to build a bridge for a proposed highway. The
highway project is cancelled and the contract repudiated, but the construction company obstinately continues to perform and build the bridge, racking up damages against the county. Court finds the proper damages were limited to the costs incurred up until time of the Countys breach plus lost profits. The construction company was forced to eat all labor and material costs after the breach. See Rockingham County v. Luten Bridge Co. In Re Worldcom, Inc. MCI became bankrupt and breach an endorsement contract it had with Jordan. Doctrine of avoidable consequences, which has also been referred to as the duty to mitigate damages bars recovery of losses suffered by a non-breaching party that could have been avoided by reasonable effort and without risk of substantial loss or injury. The philosophical heart of the lost volume theory is that the seller would have generated a second sale irrespective of the buyers breach and that it follows that the lost volume seller cannot possibly mitigate damages. Several of the justifications for the substantially similar or equivalent standard of employment law, aside from the general remedial policy of making the non-breaching party whole for losses caused by the breaching party show why there is less concern here regarding a substantially equivalent opportunity as Jordan was not an employee of MCI. Since reasonable efforts in the form of affirmative steps are required to mitigate damages. Polk explained that Jordan did not which to expand his pitchman efforts with new relationship because of his primary goal of becoming the owner of an NBA team. MCI convincingly responds that adding an agreement to replace a lost one is merely maintaining the status quo not a dilution of Jordans impact by addition. Under the risk of reputation theory Jordan cites, an injured party is not allowed to recover from a wrongdoer those damages that the injured party could have avoided without undue risk, burden or humiliation.

Case show plaintiff faced with choice of (1) selling a substandard product to the public to mitigate damages caused by the breach of another and (2) doing nothing can choose to do nothing but Jordan was not confronted with those circumstances. While Jordans reputation is considerable and obviously the result of careful development there are not factual assertions that support he proposition that Jordans choosing another endorsement opportunity is akin to be forced to sell damaged goods.

Any harm to Jordans reputation arising from MCIs bankruptcy is not comparable to the reputation damage a construction contractor faces from building a defective roof. Jordan cites cased that hold if a non-breaching plaintiff chooses a reasonable course of action despite the existence of another course of action that in hindsight would have been better at lessening harm, the plaintiffs damages are not reduced.

MCIs motion for summary judgment is granted in party and denied in part. To the extent MCI sought to disallow the Claim in full, MCIs motion is denied. To the extent MCI claimed that Jordan failed to mitigate damages, MICs motion is granted in part. Further evidentiary hearing is necessary to determine that Jordan could have received had he made reasonable efforts to mitigate.

Mitigation Under UCC

UCC does not set out an express mitigation rule, but its commitment to the mitigation principle can be seen as reflected in (1) its refusal to compensate seller for consequential damages or for unreasonable actions or inactions, and (2) its limits on buyers ability to recover where there is no attempt to cover. Like seller, buyer is also limited to only reasonable incidental charges.

UCC 2-710 Sellers Incidental Damages

Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses, or commissions incurred in stopping delivery, in the transportation, care, and custody of goods after the buyers breach, in connection with return or resale of the goods or otherwise resulting from the breach.

1. Note: The UCC does not allow the seller to claim consequential damages upon buyers breach. 2. Comment 2 to the revised UCC 2-710 offers some insight into why the pre-revision Article 2
does not allow the seller to recover consequential damages: 3. Sellers rarely suffer compensable consequential damages. A buyers usual default is failure to pay. In normal circumstances, the disappointed seller will be able to sell to another buyer, borrow to replace the breaching buyers promised payment, or otherwise adjust the sellers affairs to avoid consequential loss. UCC 2-715 Buyers Incidental and consequential Damages

(1) Incidental damages resulting from the sellers breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.

(2) Consequential damages resulting from the sellers breach include

1. (a) any loss resulting from general or particular requirements and needs of which the seller at
the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and

2. (b) injury to person or property proximately resulting from any breach of warranty.

3. Comment 1: The incidental damages listed are not intended to be exhaustive but are merely
illustrative of the typical kinds of incidental damage.

4. Comment 2: Although the older rule at common law which made the seller liable for all
consequential damages of which he had reason to know in advance is followed, the liberality of that rule is modified by refusing to permit recovery unless the buyer could not reasonably have prevented the loss by cover or otherwise.

5. Comment 4: The burden of proving the extent of loss incurred by way of consequential
damage is on the buyer, but the section on liberal administration of remedies rejects any doctrine of certainty which requires almost mathematical precision in the proof of loss. Loss may be determined in any manner which is reasonable under the circumstances. Introduced three principles that may impose limitations on the non-breaching partys recovery of expectation damages:

Reasonable Certainty Principle: Damages not available where speculative, or where they cannot be established with reasonable certainty

1. Can be particularly difficult to prove consequential damages for lost profits. (Rancho Pescado)
Foreseeability Principle

The Foreseeability Principle: Where there are special circumstances such that breach will result in damages that one would not expect to flow naturally from a contract of that kind, then there will be no award for the damages resulting from the special circumstances unless there is notice at the time of contracting (Hadley v. Baxendale)

Mitigation Principle

The Mitigation Principle: Non-breaching party must make reasonable efforts (in the form of affirmative steps) to mitigate damages after learning of the breach or preventable losses will not be recoverable (In Re Worldcom)

Mitigation Under the UCC

UCC does not set out an express mitigation rule, but its commitment to the mitigation principle can be seen as reflected in (1) its refusal to compensate seller for consequential damages or for unreasonable actions or inactions, and (2) its limits on buyers ability to recover where there is no attempt to cover. Like seller, buyer is also limited to only reasonable incidental charges.

UCC 2-710 Sellers Incidental Damages

Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses, or commissions incurred in stopping delivery, in the transportation, care, and custody of goods after the buyers breach, in connection with return or resale of the goods or otherwise resulting from the breach.

1. Note: The UCC does not allow the seller to claim consequential damages upon buyers breach.
Comment 2 to the revised UCC 2-710 offers some insight into why the pre-revision Article 2 does not allow the seller to recover consequential damages:

Sellers rarely suffer compensable consequential damages. A buyers usual default is failure to pay. In normal circumstances, the disappointed seller will be able to sell to another buyer, borrow to replace the breaching buyers promised payment, or otherwise adjust the sellers affairs to avoid consequential loss.

UCC 2-715 Buyers Incidental and Consequential Damages

(1) Incidental damages resulting from the sellers breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.

(2) Consequential damages resulting from the sellers breach include

1. (a) any loss resulting from general or particular requirements and needs of which the seller at
the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and 2. (b) injury to person or property proximately resulting from any breach of warranty.

Comment 2: Although the older rule at common law which made the seller liable for all consequential damages of which he had reason to know in advance is followed, the liberality of that rule is modified by refusing to permit recovery unless the buyer could not reasonably have prevented the loss by cover or otherwise.

Comment 4: The burden of proving the extent of loss incurred by way of consequential damage is on the buyer, but the section on liberal administration of remedies rejects any doctrine of certainty which requires almost mathematical precision in the proof of loss. Loss may be determined in any manner which is reasonable under the circumstances.

Reliance Damages as an Alternative to Expectation Damages When expectation damages are diminished (or perhaps even eliminated altogether) by the limiting principles weve looked at, the non-breaching party may still have recourse to other damage measuressuch as reliance damages.

Recall that the expectation interest of the non-breaching party is to be put in as good a position as he would have been in had the contract been performed. The reliance interest of the non-breaching party, by contrast, is to be put in as good a position as he would have been in had the contract not been made.

Reliance Damages in Other Contexts We have already been introduced to the concept of reliance damages in a variety of contexts:

1. Damages awarded where theory of recovery is based on promissory estoppel 2. Reliance damages may also be available where there is consideration, but the contract is
unenforceable for some reason (E.g., statute of frauds) Reliance Damages in Standard Contract But reliance damages may also be available in standard breach of contract action (standard bargained-for exchange and no reason to find contract unenforceable), wherefor whatever reasonexpectation damages are either unavailable or inappropriate. 1. In such cases, the non-breaching party may still seek reimbursement for costs incurred in reasonable reliance on the contract.

Reliance damages are subject to the same limitations as expectation damages:

Hawkins v. McGee Sullivan v. OConnor

Reasonable certainty Reasonably foreseeable Reasonable efforts to mitigate

Reliance Damages Where Expectation Damages Are Inappropriate

Reliance Damages Where Expectation Damages Cannot be Established

In Sullivan, it appears the court was relying on public policy grounds for fixing the measure of damages in breach of surgery contract cases at the plaintiffs reliance interest. 1. But a court may also find that reliance interest will be the proper measure where expectation damages cannot be fixed with reasonable certainty, but reliance damages can be determined.

Hollywood Fantasy Corp. v. Gabor Hollywood Fantasy Corporation was briefly in the business of providing fantasy vacation packages that would allow participants to make a movie with a Hollywood personality and imagine themselves movie starts for one week for a fee. Hollywood Fantasy arranged to have Gabor as one of two celebrates at the event. Gabor backed out.

Reliance. Although Hollywood Fantasy did not present evidence to base an award of compensatory damages on either lost profit or lost investment, it did present sufficient evidence as to certain out of pocket expenses to justify their recovery.

General Rule: The victim of a breach of contract should be restored to the position he would have been in had the contract been performed. However an injured party may if he so chooses ignore the element of profits and recover as damages his expenditures in reliance.

Lost profit must be proved with reasonable certainty. Two weeks before the San Antonio event only two people had bought tickets for the event. Hollywood Fantasy had no commitments to or agreements for specific future events. Profits which are largely speculative as from an activity dependent on uncertain or changing market condition or on chancy business opportunities or on the success of a new and unproven enterprises

Sullivan v. Oregon Landmark, Ltd. Reliance Damages in a Losing Contract Restatement 349 Damages Based On Reliance Interest

As an alternative to the measure of damages stated in 347 [the expectation measure], the injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed.

1. Note: Proof of losses will have to be proved by the party in breach with the same certainty as
where the non-breaching party is proving damages. It is a two-edged sword. Wartzman v. Hightower Productions, Ltd.