2008f.ahdieh.contracts Outline

ACOURSE OVERVIEW

1. Is there a Contract? [1]======================================================================a. Defining Intent [1]b. Enforcing Promises: The Basis of Obligation [1]

i. Consideration [1]ii. Promissory Estoppel [2]

iii. Restitution [2-3]c. Offer & Acceptance [4]

i. Bilateral Contracts [4]ii. Unilateral Contacts [5]

iii. Option Contracts [5]iv. Other: UCC contracts for goods, Battle of the Forms [6]

2. Is it enforceable? [8]=========================================================================a. Statute of Frauds [8-9]

3. What are the Contract’s terms? [10]=============================================================a. The Meaning of the Agreement [10]

i. Sources of Interpretation [10]ii. Parole Evidence [11]

b. Supplementing the Agreement [10]i. Gap Fillers [12]

ii. Good Faith [12]iii. Adhesion Contacts (Policy) [13]

4. Is there a defense against enforcement/ excuse for breach? [15]=========================================a. Avoiding enforcement [15]

i. Status [15]ii. Behavior [16-17]**

iii. Public Policy [17]b. Justifications for non performance [18]

i. Mistake [18]ii. Impossibility [18]

iii. Impracticability [18]iv. Frustration of Purpose [19]v. Modification [19]

5. Was the contract breached? [20]================================================================a. Consequences of non-performance [20]

i. Express Conditions [20]ii. Constructive Conditions: Material Full & Partial Breach [21]

iii. Anticipatory Repudiation [22]iv. Adequate Assurances [22]

6. What are the remedies? [23]===================================================================a. Expectation damages [23]

i. Computing [23]ii. Restrictions [24]

iii. Mitigation [24]iv. Why we enforce Expectation Damages [25]

b. Reliance Damages [26]c. Restitutionary Damages [26]d. Specific Performance/Agreed Remedies [26]e. Agreed Remedies [26]

7. Fundamental Values of Contract Law (Policy) [27]==================================================

Ahdieh’s Contracts, page A of 27

B

§ 344. Purposes of Remedies

(a) expectation interest: Restore potential earnings ( payment – cost); put Promisee in as good a position had the contract been fulfilled. [Encourage trade]

(b) reliance interest: Restore amount already spent; put Promisee back in original position had there been no contract. (c) restitution interest: Restore benefits conferred; put Promisor back in original position had the contract not been entered into.

Three corresponding ways to enforce promises/impose obligations: 1. Consideration -> Expectation damages2. Promissory estoppell/reliance -> Reliance damages3. Restitution or unjust enrichment -> Restitution damages

SupraInfraArguendoInter AliaSua sponte

(1)An agrement entered into by (2) two or more persons, (3) both of whom are legally competent (4) for consideration, (5) embodyng one or more promises to perform or forbear from specified acts (6) enforcible at law (7) offered and (8) accepted (9) in a manner that accords with the Statute of Frauds.

Ahdieh’s Contracts, page B of 27

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IS THERE A CONTRACT?A. INTENT

Mutual Assent: OBJECTIVE THEORY: What a reasonable person in the position of the other party would understand. Duty to Read the written terms. See Ray v. Eurice Bro’s [23] and Skrbina v. Fleming [32] Jokes that meet the Restatement definition of Promise are binding. See Lucy v. Zehmer [handout] and Leonard v. Pepsico

(Commerical not binding) [handout].

B. ENFORCING PROMISES

Promise: Restatement (2 nd ) 2(1): (1) a manifestation of intention to act or refrain from acting in a specified way(2) so made as to justify a promisee in understanding that a commitment has been made

1. Consideration

o Bargained for Exchange replaces Formalities [82] & Benefit/DetrimentRestatement (2d) 71:

(1) Must be bargained for Does not require actual bargaining – bargain for the "If." Removal of toxic AggRite, even

though it was free, is bargained-for benefit. Pennsy Supply, Inc. vs. American Ash Recycling Corp. of Pennsylvania [78].

(2) Detriment induced the promise AND promise induced the detriment (Def: bargained for) Legal Benefit/Detriment: encourages reliance on transactions

o Nephew giving up drinking etc is legal detriment/benefit for uncle Hammer v. Sidway [72].

Condition of a promise (something that enables one to take advantage of a promise) is NOT consideration

Adequacy of consideration does not matter as long as there is some consideration. Not the court’s job to determine values. Restatement (2d) 79. See Batsakis v. Demotsis. (Where $25 loan was consideration for $2000+interest) [93]

o Proportionality/adequacy provides insight into whether it was MEANT as consideration.

o Contrast with: Newman & Snells Bank v. Hunter. Where returning a promissory note is worthless and therefore not a benefit/detriment [85]

Mixed Motives OK. Restatement (2d) 81 Sham, Nominal & Past Consideration are NOT consideration. Dougherty v. Salt. (Aunt faking it, bare

recital and past deeds not consideration: promissory note not binding) [87]. Other options: Promise under seal, executed gift, testamentary gift (will), trust.

o Policy Enforcing Promises: Prof. Eisenberg [89]

Problem of proof: lacking formality and reciprocity Likeliness of Emotion (vs. deliberate) Obligation may be excused b/c ingratitude or improvidence Maintain sanctity of the “gift”

Functions of Formalism: Fuller [85] (how well does consideration fulfill these three criteria?) Evidentiary function: did it happen Cautionary: Were the parties aware Channeling: Objective external test – easy for courts to decide

Overinclusive: we worry about duress, drunk, too young, too dumb, Underinclusive: some contracts we want to enforce, even if they are not supported by consideration:

Family, Carity, Non-commercial interacitons

Ahdieh’s Contracts, page 1 of 27

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2. Promissory Estoppel Restatement § 90

(1) A promise(2) Reasonable expectation of reliance(3) Actual Reliance (court’s additional requirements:

Reasonable & Detrimental Reliance)(4) Injustice avoided only by enforcement: Limited as justice requires to check windfall damageso NO RELIANCE REQUIRED for marriage settlement or charity

o Family: maintain PE claims Condition of promise does not count. See Kirksey v. Kirksey. Sister-in-law’s move was a necessary

condition to take advantage of the gratuitous gift, not consideration [217]. Moving, improving, and living is reliance. Greiner v. Greiner. Promise of land to son enforceable

because he moved, made improvements, and lived there for a year, despite lack of consideration [218].

o Charity: very few courts maintain PE claims Cardozo’s trickery: Allegheny College v. National Chautauqua County Bank. Beginning to establish and

maintain foundation is consideration for a promised donation [handout]. Against:

o Pre-existing duty not considerationo Not specifically for foundation (could be donated to endowment)o When is a charity considered to have commenced acting?

o Commercial: maintain PE claims [237] Companies bound by relied upon promises for retirement payments. Katz v. Danny Dare, Inc. (Bound

even though they could have fired Katz instead) [238].o Injustice does not have to be ‘bad,’ change in position is sufficient

Plausible that P relied on the bank’s threat to purchase house insurance. Shoemaker v. Commonwealth Bank (would have tried harder?) [244].

o Policy Enforcing relied upon promises encourages transaction Promissory Estoppell no longer invoked just as a defense (Sheild) to the claim there is no consideration,

but instead has become an independent form of action (Sword), a theory of recovery, independent claim that a promise should be enforced.

3. Restitution: Liability for benefits received, Unjust Enrichment

o Ordinary Restitution: Expectation Damages (payment owed – cost) to offset Quantum meruit (unjust enrichment)

Implied-in-fact contract (a request for services: parties’ actions imply contract, imply promise to pay etc.) Law will create a legal-fiction (contract) in order to give relief

Elements of Unjust Enrichment: (for subcontractors) [269] Exhausted all remedies against the general contractor Owner has not given consideration to ANYONE. See Commerce Partnership 8098 Limited

Partnership v. Equity Contracting Co. Court R&R for further litigation on the factual question of whether someone got paid for the sub’s work [266].

Intra-family Gratuitousness [285]: (absent clear and convincing evidence) no unjust enrichment. (enforcing this would commercialize human existence)


3o Promissory Restitution: promise, not unjust enrichment, is cause of action

Implied-in-law contract: no promise, no intent, no consideration, no negotiation, parties may not even know each other: imposition of liability/duty

Elements for a quasi-contract: Benefit D must have knowledge of the benefit D must have accepted or retained the benefit Inequitable

Officious intermeddler [299]: unbargained-for benefit only in circumstances where the costs of a voluntary bargain are high enough (ie doctor helping someone dying)

Promise to pay for benefits already conferred is not binding (Past consideration is no consideration) Mills v. Wyman Father’s promise to pay for the past care of his son is not binding [286]. Do not want to enforce moral obligations (causes uncertainty, dehumanizes morality).

EXCEPTIONSo Moral Obligation combined with Material Benefit makes a promise a mere affirmance of

the services rendered. Actions prove intent of promisor. See Webb v. McGowin (Promise to compensate P who voluntarily harmed himself in order to protect D is binding) [291].

Restatement § 86 : cut down Webb in cases of gift (or when there is not unjust enrichment) or when value is disproportionate to the benifit– courts have not gone along, except in exceptional circumstances.

o Where there was once a valid debt Promises to pay debt excused in bankruptcy Excused if you are a minor Statute of limitations bars a suit to collect debt Seal Between Merchants

Distinctions between Webb and Mills: Relative injustice: severe personal injury vs. money Recipient: promisor vs. other party Action on the promise: action proves intent vs. promise Commercial context: employee vs. strangers

Fuller [297] Morality is a value just like commerce (but this would overstep Promissory Restitution). Posner [298] Enforcing promises facilitates transactions.


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C. OFFER AND ACCEPTANCE

Types of Contracts:

1. Bilateral Contracts: an exchange of promiseso Restatement (2d) § 32 : preference for bilateral contract in case of doubt. Intent of parties

o OFFER: Restatement (2 nd ) §24 : [1] Manifestation of willingness to enter into a bargain, [2] so made as to justify another person in understanding [3] that his assent to that bargain is invited and will conclude it.

Factors to consider when determining intent of parties: Exclusivity Language/actions Terms

Communications that do not constitute offers Opinions about future results, including professional opinions Invitations to submit a bid Price Estimates: Response to an inquiry with an initial price quote is not an offer but a request to make

an offer. Lonergan v. Scolnick [34] Advertisements, catalogs and mass mailings

o EXCEPTION: when the language is deceptive and unfair. Izadi v. Machado (Gus) Ford, Inc. (Reasonable person does not read fine print, so advertisement intended to deceive is an offer) [38]

When is the Offer Effective? Upon receipt by the offeree or his agent Duration of offer: within stated time or for a reasonable period of time based on nature of contract,

trade usage, prior dealings and other circumstances

Termination of the Power to Accept Restatement (2 nd ) § 36(1) (a) rejection by offeree

A counter-offer is a rejection of the offer. Restatement § 39 and Normile v. Miller [44](b) reasonable lapse of time (when not specifically determined by offeror)(c) revocation by offeror (before acceptance occurs, determined by time of receipt) – words or actions

inconsistent with the intent to be bound. Notice by a 3rd party of sale to someone else counts as revocation (see Restatement § 43 and Normile v. Miller above.)

(d) death or incapacitation of either

Offers that may not be revoked Option Contract where offeree gave consideration for an offer Reliance on an implied or express promise not to revoke Reliance on the offer itself (see Reliance, Restatement § 87(2)) Unilateral Contract where the offeree began performance (See Unilateral Contract, Restatement § 45) Firm Offers of goods between merchants (See Firm Offers, UCC § 2-205)

o ACCEPTANCE: appropriate and timely fashion

Mailbox Rule: Restatement §63 (a) : Protects the offeree, because the offeror has the power to specify the terms of acceptance. offer/revocation is made upon receipt, acceptance is made upon transmission/dispatch (regardless if it ever gets there).

See page 6: OTHER METHODS OF REACHING MUTUAL ASSENT


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2. Unilateral Contracts: Promise for future action in exchange for act (now). Formed upon completion – the offeree is never bound to complete the act. (Brooklyn Bridge)

o Option Contract: When oferee tenders, begins, or tenders to begin act, offeror must give offeree the chance to finish the act Restatment (2d) §45. Bind the offeror but not the offeree.

Dissent in Petterson v. Pattberg is now the rule in order to prevent snare and delusion. (Unilateral contract is only formed upon completion of the act, not with a promise or intent) [53]

Llewellyn [61]: unilateral contacts are rare. (Rewards, Commissions, first come first served, “try it”) Speculative cases where offeree’s ability to perform is unknown or there are multiple offerees.

3. Option Contracts: Consideration, Promissory Estoppel, and Firm Offers (fake consideration)

o Option Ks based on Consideration Restatement § 25 R(2nd)K §25: the thing bargained for is the offer remaining open. Separate contract, pay new consideration in exchange for maintaining the option

o Option Ks based on Reliance Restatement § 87(2): Promissory Estoppel supporting an Option Contract General contractors and subcontractors:

Not a promise until received consideration – sub may revoke because is contracting for the acceptance, not the bid. See James Baird Co. v. Gimbel Bros., Inc. (J. Hand finds the offer was revoked by sub before it as accepted)

Sub is bound by promise, but gen is not bound UNLESS gen shops around or tries to get lower price from sub. See Drennan v. Star Paving Co. (J. Traynor: option K supported by reliance.)

Drennan prevailed over Baird.

Partial performance, Restatement § 45: once you begin performance, you have an option complete it

o Firm Offers, a.k.a. Option Ks based on Fake Consideration Restatement §87(1) : an offer is binding as an option contract if it…

(a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time, or

(b) irrevocable under statute UCC § 2-205 Firm Offers.o Recognizes that, in the real world of buying and selling, it makes sense to create an easy

mechanism by which someone can bind himself to keep an offer openo Courts have been mixed on their willingness to accept this.

Firm Offer rule, UCC §2-205 Only applies where the offer is made by a merchant. Buy or sell goods Signed Record How long does the option remain open?

o During the stated timeo If no time is stated, for a reasonable time, but not more than 3 months (courts are split

about what to do if stated time is longer than 3 months).


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4. Other Methods of Reaching Mutual Assent: UCC § 2-204 & Battle of the Forms Restatement § 59

[1] UCC § 2-204: Goods(1): Conduct sufficient: “any manner sufficient to show agreement, including conduct by both parties”

Oral agreement followed by later forms. See Harlow & Jones, Inc. v. Advance Steel Co. (Where shipping contract formed upon oral agreement, later forms just worked out the particulars: custom, evidence, no material delay) [64].

(2): Time of contract irrelevant: “even though the moment of its making is undetermined.” In Harlow, at some point during that exchange of phone calls, an agreement was formed.

(3): Quantity is the only necessary term: “Even though one or more terms are left open” Whatever terms the parties agreed to, and the rest will be implied/supplemented by the UCC

[2] Battle of the Forms Mirror Image Rule: Restatement § 59: SERVICES (non merchants), The acceptance must be the mirror

image of the offer, or else it is a rejection and counter-offer. When the contract is primarily for services it is covered by the Restatement (if it is for goods it is UCC 2-207 First Shot rule) Final price quote is a counter-offer and performance is acceptance under Restatment § 54. See Princess

Cruises, Inc. v. General Electric Co. [144]. Look at:o Language of contracto Intrinsic worth of materialso Nature of business of supplier

Last Shot rule: Consequence of the Mirror Image rule. Whichever side gets the last form in before performance begins, wins—that form’s terms control the K.

o Accepted by performance under Restatement § 54 .

First Shot Rule: UCC §2-207. GOODS (merchants) Additional terms in acceptance do not prevent the creation of a contract by acceptance.

(1) Is there a contract? o If answer is definite (cannot change basic terms) and seasonable statement of acceptance

OR written confirmation within reasonable timeo Despite additional or different terms. Courts deal with different terms by…

Treating them like additional terms Ignoring them “Knocking-out” conflicting ones

o Unless acceptance is expressly conditional on assent to additional/different terms. See Brown Machine, Inc. v. Hercules, Inc. (Price quote is like an advertisement, the purchase order was the offer to purchase) [153]

Order Acknowledgement was not expressly conditional so under UCC § 2-207(1) it is an acceptance

(2) What are the terms of the Contract?o Additional terms are proposals that must be expressly accepted by offeror.o For merchants, additional terms automatically become a part of the contract unless…

(a) the offer expressly limits acceptance to terms (b) they would materially alter it (surprise or hardship if incorporated without

express awareness, normal conduct informs – Comment 4) or, notice of objection w/in reasonable time

(3) Conduct is sufficient to establish contract based on agreed-upon terms plus any other terms allowed under this rule. Restatement § 54.

Always make acceptance expressly conditional upon your terms.


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IS THE CONTRACT ENFORCEABLE?

UCC § 2-201 Statute of Frauds

o Just because the statute applies, does not mean there is no contract – just means it can’t be enforcedo Liberalizing analysis of sufficient memorandum & exceptions forces information.o Why This Is Bad:

Adds transaction costs but not value Up to discretion of judge, reducing legitimacy and predictability Formality bars legitimate contracts

(1) Is it within the statute? (Restatement § 110: list of contracts subject to UCC § 2-201) A contrac(a) of executor/administrator in answering for duty of decedent(b) answering for the duty of another(c) upon consideration of marriage(d) for the sale of an interest in land(e) is not to be performed within one year

o only termination by full performance within a yearo including when it could possibly be completed within a year

including lifetime contracts for employment UCC § 2-201 : sale of goods over $500

(2) Is there sufficient memorandum? [Consider: cautionary, channeling, and evidentiary. See page 1, Consideration: Policy] Written: any writing that recognizes/references the contract

o Combine multiple documents under Restatement § 132. See Crabtree v. Elizabeth Arden Sales Corp. (unsigned memo in combination with signed pay-roll cards sufficient to establish employment contract) [306].

One writing must be signed Restatement § 132, signature is any symbol made or adopted with intent, actual or apparent, under Restatment § 134. See Winternitz v. Summit Hills (Oral agreement to renew lease insufficient) [314]

o Writing must itself establish a contractual relationshipo Need not be made as a memorandum of a contract. Restement § 133: minutes of a

meeting, communication, informal letter to a 3rd person. Clearly relate to the same transaction

Essential terms: Statement of quantity sufficient (suggested: ID parties, nature of exchange, and material terms) Signed by the party against whom contract is being enforced (under Restatement §131 : General requisites)

o Restatement §131 (b) assent OR offer of contract is sufficiento UCC § 2-201 (2) Merchants: both parties bound if

Within reasonable time of oral contract one party sends a signed written confirmation which would satisfy the statute against the sender

The recipient has reason to know contents And does not give written notice of objection within 10 days.


9(3) Is there an exception that will allow us to enforce it?

The Part-Performance exception UCC § 2-201 (3)o (a) goods are to be specifically manufactured for buyer. Substantial beginning or commitments.o (c) payment has been made & accepted or goods have been received and accepted.

o Restatement § 129 : reasonable reliance on a contract for the transfer of an interest in land (despite failure to comply with the Statute of Frauds): specific performance NOT damages. See Winternitz v. Summit Hills Joint Venture (Pharmacy: oral agreement insufficient, but part performance allows him to seek specific performance, not damages.) [314]

Judicial Admissiono (b) party admits that contract was made

Reliance Restatement § 139o (1) reasonably expect to induce action…which does induce…is enforceable notwithstanding the Statute of

Frauds if injustice can be avoided only by enforcement of the promiseo (2) consider:

(a) other remedies (cancellation/restitution) (b) action in relation to remedy (c) reliance as corroborating existence of a contract (PE as supplementary basis for enforcement) (d) reasonableness (e) foreseeable by promisor


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WHAT ARE THE TERMS?

A. INTERPRETING THE CONTRACT

1. Principles and Sources of Interpretation

o Constructive (construct law when justice requires)o Implied in Fact ( when conduct reasonably indicates a promise)o Subjective: Not helpfulo Objective: We want to understand the meaning of the contract, not the real world meaning (ie § 201(1))

Restatement §201 : Modified Objective:

[1] Whose meaning controls the interpretation of the contract?

(1) If parties agree on meaning, that meaning holds (2) If parties disagree, must choose the meaning of the party who

o (a) did not know of any different meanings (and the other knew the meaning of the first party) or

o (b) had no reason to know (and the other had reason to know the meaning of the first party)

o Joyner v. Adams (disputed term, must determine whose meaning: remanded to find who knew or had reason to know the other party’s meaning) [356].

Trial court finds D neither knew nor had reason to know P’s meaning, P not entitled to relief under Rst (2 nd ) § 201(3).

(3) If not, it is a failure of mutual assent and neither party is bound by other’s meaning.o This includes when both parties know (or have reason to know) the meaning of the other.o See Rst (2 nd ) § 20 : Material Misunderstandingo Raffles v. Wichelhaus (Peerless, no contract if there is no objective criterion for deciding

btwn 2 boats, so failure of mutual assent and no contract) [350].

[2] What was that party’s meaning?

Rst (2 nd ) § 202 : Rules in Aid of Interpretationo (1) Words and conduct interpreted in light of circumstances. Overall purpose so

discovered is given great weight.o (2) A writing, along with all other writings, are interpreted togethero (3) Unless otherwise stipulated:

(a) general definition of a term is accepted (b) technical/terms of art is accepted when in that field

o (4) Acceptance or acquiescence without objection during the course of performance is given great weight.

o (5) Trade usage. Rst (2 nd ) § 203 : Standards of preference in interpretation

o (a) Prefer interpretations that create reasonable, lawful and effective contractso (b) Order of weight:

Express terms Course of performance (ie acceptance by actions) Course of dealing (past dealings between parties) see Rst. (2 nd ) § 223 Trade usage see Rst. (2 nd ) § 222

Frigaliment Importing Co. v. B.N.S. International Sales Corp. (P failed to prove trade usage of “chicken”) [361].

o (c) Specific terms outweigh generalo (d) Negotiated or added terms outweigh standardized


11 Prof. Patterson:

o Consider other words in a listo General term in a list informed by the specific oneso If a list is only specific terms, it is exhaustiveo Interpretation that makes the contract valid is preferred to one that invalidates ito Prefer the interpretation less favorable to drafter (burden on drafter)o A writing or all writings as a whole see Rst. (2 nd ) § 202 (2) o Principle apparent purpose see Rst. (2 nd ) § 202 (1) o Specifics considered exceptions when in conflict with general provisionso Handwritten/typed (in blanks) outweigh pre-printedo Public interest interpretation given weight.

2. Parole Evidence Rule: UCC § 2-202 and Rst (2 nd ) §209-218

o (Remember you have to establish a contract first: offer & acceptance, consideration etc)o Any evidence outside the four corners of a contract (ie my testimony, witnesses, letters, earlier drafts)

o UCC § 2-202 & Rst (2 nd ) § 213 : Final expression of their agreement may not be contradicted by evidence of prior or contemporaneous agreements. May be explained/supplemented with:

(a) course of dealing, trade usage, or course of performance (§2-208)o Rst (2 nd ) § 210 & UCC § 2-202: Applies to written agreements that are “integrated,” partially or completely

Total Integration = no Parole Evidence admitted Partial Integration = PE admissible to supplement or explain incomplete terms, but cannot contradict them.

PE not admissible for final terms. Ambiguous language of term = PE admissible to explain uncertainty or establish meaning Unintegrated = PE is admissible to supplement or explain, but still cannot contradict.

o Classical: 4 Corners test (look for Patent Ambiguity) Merger clause: this document merges together the entire agreement as a complete integration. See

Thomspon v. Libby (No warranty within the 4 corners of the contract, which is a complete/full integration (§210) ) [385].

Ambiguity/uncertainty decided on plain meaning of language in writing

o Modern: Contextual (look for Latent Ambiguity) First look at evidence, determine if it is integrated or not, then allow (or disallow) evidence, and allow jury

to examine. See Taylor v. State Farm Mutual Automobile Insurance Co. (Judge must first look at evidence that suggests the intended meaning of terms (in order to clarify ambiguity), then decide whether to admit parole evidence) [394].

o Why not bring in Parole Evidence? Encourage parties to be responsible in their contract writing/put things in writing Finality/predictability Easy to litigate

o 3 Reasons to bring in Parole Evidence Contradict the terms of the contract Supplement terms of the contract Interpret the terms of the contract

o Parole Evidence does not apply: Subsequent agreements (ie separate and later contracts) No agreement or invalidated agreement (fraud) Mistake in agreement (reformation: clear and convincing evidence) Collateral Agreement (extension of agreement: logically a part, warrantee) supported by same

consideration


12B. SUPPLEMENTING THE AGREEMENT

1. Gap Fillers: Implied Terms [See p. 445] (can contract around)

o Construct terms the parties must have intended had they been acting fairly and reasonably based on: Common expectations (predictability) Commercial practice (trade usage) Public policy & economic efficiency

o UCC makes it easier to contract: Intent, instead of Bargained for Exchange, can formalize implied terms Want to enforce/encourage contracts Efficiency: Assumes commercial world

o UCC § 2-306 (2) Both parties must exercise Best (reasonable) Efforts in Exclusive Dealings Wood v. Lucy, Lady Duff-Gordon (There is a contract because there is an implied duty to use reasonable

efforts in return for her granting a sufficiently exclusive right) [438]. Illusory promise: Lady Duff-Gordon argued that Wood’s promise was illusory because he was not bound to

do anything Eisenberg: the party making the real promise (Lady Duff-Gordon) has bargained for a chance to prove

that her performance is attractive (Ex: money-back guarantee) [440].

o UCC § 2-309 : Must give reasonable Notice of Termination absent specific provision for time (2) If contract is indefinite in duration, it is valid for:

a reasonable time and may be terminated at any time by either party

(3) Termination requires reasonable notification Note 8. Reasonable notice = reasonable time to seek a substitute arrangement Parties can negotiate around the requirement, but an agreement dispensing with notification is invalid

if it is unconscionable

Leibel v. Raynor Manufacturing Co. (Must give reasonable notice of termination of an exclusive at-will contract with an indefinite duration) [442].

o Assessing reasonable notice Remaining inventory Substantial unrecouped investment made in reliance on contract Reasonable time to find substitute arrangement

2. Implied Obligation of Good Faith: UCC § 1-203 (Mandatory: matter of regulation, not intent, in the

interest of public policy)o Breach of Good Faith = breach of contract.

Good Faith Definition UCC §1-201 (19): Subjective Honesty Good Faith for Merchants UCC § 2-103 (1)(b): Observance of reasonable commercial standards of fair

dealing (higher standard) Bad Faith standard [458]

State of mind Context:

o Nature of understandingo Industry Standards

o Parole Evidence is admissible because it informs the reasonable expectations (good faith) of the parties. Seidenberg v. Summit Bank (Good faith is implied in contract, therefore parole evidence of bad faith is

admissible.) [451].

o 3 Situations when we use Good Faith, in Seidenberg. Contract does not provide a term necessary to fulfill the parties obligations, see Lucy, Lady Duff-Gordon.


13 Bad faith served as a pretext for the exercise of a contractual rights

Sons of Thunder v. Borden, Inc. (Termination was within contract, but was exercised with bad faith considering economic dependency of P: “reasonable expectations and right to receive the fruits of the contract”) [460].

Contract expressly provides a party with discretion regarding performance Mathis v. Exxon Corp. (Improper motive despite contractual discretion, malice o/w objective test of

reasonableness of gas prices) [461].

o UCC § 2-306 (1): Output (I will sell all I produce to you) & Requirements (I will buy all I need from you) Subject to Good Faith except when:

Comment 3: Any stated estimate serves as a “clear limit on the intended elasticity” “normal or otherwise comparable prior requirements,” reasonably foreseeable from the time of

contracting inform the amount

o Satisfaction Clauses: Prefer the objective method Subjective (will I like it?)

Taste, personal judgment, etc. (Ex: commissioning a bust) Good faith, actual dissatisfaction

Objective (would a reasonable person or specified expert be satisfied?) Utility, fitness, value (Ex: GM builds a factory, hires company to do the side) Only ignore the manifest intention of party (whether to be subjective or to specify the expert) in order

to prevent unjust enrichment or forfeiture.

3. Adhesion Contracts: Rakoff & Barnett [handout] Barnett

o Against Gap Fillers: Government does not know better than the parties

o Consensual basis for enforcing form contracts:

Assent to perform vs. Assent to be legally bound (click licence)

o Limits: bound to tersm that are not radically unexpected (dog)

Rakoffo Shopping is an adequate substitute for bargaining, but only if lots of people (some critical mass) are shopping, enough that the suppliers will

respond to shoppers’ demands

o There will be terms that are shopped for, like extreme terms (“I agree to give away my dog.E”)

[1] Expediate Transactions, facilitate internal processing:

coordination and predicatability: uniformity

professional ethos of the legal draftsman

lower costs

[2] Efficiency within the company:

Coordination of efforts

Delegation of responsibility without worry of liablity

Check salesmen

Enforce hierarchy

[3] Interaction with consumer: take-it-or-leave-it

Shopping some terms (price, extras, payment)

Buisness reputation

No one reads them

o Power of the form

Organizational – grants the freedom from legal restraint key to our society

o EVALUATION:

Freedom to contract: Adhesion contracts are products of the hierarchy, not of the members, created to affort the greatest amount

of protection to the company

However, should be allowed to buy products – Government cannot always protect us from ourselves.

Evaluate in terms of case law prinicples, statutory and administrative sources, and custom and practice to determine

meaning of «hidden» terms.


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15

IS THERE A DEFENSE AGAINST ENFORCEMENT/EXCUSE FOR BREACH?

A. AVOIDING ENFORCEMENT (despite bargained for exchange – policing the bargain) 3 Concerns:

1. Status of one of the bargaining parties: one party may not be sufficiently responsible to freely engage in

bargaining/contracting. o Two conflicting concerns:

Protect the party that lacks capacity from their own inherent limitations vs. Protect the legitimate expectations of the other party

[1] Minority Rst. (2 nd ) 14: Until a person reaches the age of majority, any contract they enter into is voidable at the option of the minor: optional one-way street (non-minor party bound).

Can ratify or affirm contract upon reaching majority: even a failure to disaffirm can function as an affirmation

If minor voids contract: She gets whatever she gave She returns whatever she has left of what she got (to protect the poor) Exceptions:

o Necessaries: minor is liable in restitution for any benefit received in a contract for necessaries. (Fair market value, not sticker price) Food, shelter, clothing, basic and fundamental for survival (context specific).

Need Usefulness Unobtainable otherwise

o Fraud: Can void the contract, but liable for tort of fraud for full amount of contract.o Emancipationo Benefit purchased for cash: some courts allow recovery of value of its use offset against

minor’s restitution. Bright Line (18 yrs):

o Freedom of Contract: Prevents people from wanting to contract even with competent minors.

o Protecting minors are not competent outweighs.

[2] Mentally ill Rst. (2 nd ) 15: Avoid a contract they enter into while they lacked capacity (1) Mental illness or defect only incurs voidable contractual duties if:

(a) Cognitive: unable to understand in a reasonable manner nature or consequences of contract OR (b) Volitional: unable to control actions in a reasonable way, AND the other party is aware of his

condition. (2) If contract is fair AND other party does not know of his condition, and they have performed OR

circumstances have changed that avoidance would be unjust, then the court may enforce contract. If it is voided, restitution is owed like in the case of a minor.

[3] Intoxicated Persons Rst. (2 nd ) 16 : Other person mush have reason to know that, due to intoxication,

(a) party is unable to understand or, (b) unable to act

Courts tend not to use this except in cases of prescription drugs


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2. Behavior of one of the bargaining parties: reprehensible or problematic bargaining behavior (contracts based on

informed, freely given consent)

[1] Duress: assent is not freely given, 4 factors:(1) Improper or wrongful threat (refusal to make payment on an acknowledged debt)

Rst (2 nd ) 176 (1) : A threat is Improper if the threat is (a) crime or tort or threat is a crime or tort if resulted in obtaining property (b) criminal prosecution (c) abuse/bad faith use of civil process (d) breach of duty of good faith and fair dealing

(2) Threat leaves no reasonable alternative but to make the contract (deprived of free will – i.e. delay in payment)(3) Threat induces the making of the contract(4) D caused the relevant hardship (may be sufficient that they are taking advantage of the situation). Totem Marine

Tug & Barge, Inc. v. Alyeska Pipeline Service Co. (Totem may be able to establish economic duress because Alyeska’s threat left them no reasonable alternative (impending bankruptcy) and was caused by D) [538].

Economic duress natural to commerce & contracts. Physical threats Rst. (2 nd ) § 174: No assent, contract is void. Threats to property

[2] Undue Influence Rst. (2 nd ) §177: (1) Undue influence is when one is under the domination of the person exercising persuasion OR justified in

assuming that person will not act in a manner inconsistent with his welfare(2) Assent is induced by undue influence(3) 3rd party undue influence also makes K voidable UNLESS other party acted in good faith and without reason to

know of 3rd party undue influence, relies on K.

Odorizzi v. Bloomfield School District (Teacher’s resignation obtained through undue influence) [548]. Elements of Undue Influence:

(1) Undue susceptibility of one party(2) Excessive pressure that borders on coercion – domination of the will of another & unequal bargaining

power, including: [552] Unusual/inappropriate timing or Location Pressure to decide at once Extreeme emphasis on untoward consequences of delay Use of multiple persuaders Absence of third-party advisers Statements that there is no time to consult financial or legal advisors. Trust in dominating party Bad Faith, wrongful or improper threats (an indicator, but not requirement)

[3] Misrepresentation [556] No affirmative duty to disclose(1) Fraudulent or material misrepresentation

Fraudulent: deliberate dishonest intent (know it is false and intend to use it to induce the other party) Material: relates to a fact central to the transaction

(2) Reliance on it(3) Reliance was reasonable

Negligent misrepresentation, when the speaker does not know his statement to be untrue, the fact must be material and he must have known or had reason to its importance. (Justifiable reliance on the speaker)

Affirmative duty to disclose Restatement (2 nd ) § 161 : When(a) the party knows disclosure is necessary to prevent some previous assertion from being a

misrepresentation or fraudulent or material(b) the party 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 witheld in bad faith.


17(c) the party knows it would correct a misunderstanding of the party(d) the other party is entitled to know

Fraudulent Non-disclosure: If, in the context of the interaction, the response is misleading, and the party knows it, it is fraudulent non-disclosure

Hill v. Jones (Non-disclosure when the fact is material (termite infestation) constitutes fraudulent non-disclosure) [567]

Addressing caveat emptor (buyer beware): Syester v. Banta (Dance lessons: Fraudulent over-reaching in formation of release allows rescending of contractual release and therefore allows tort claim) [557].

Opinion can be fraudulent if it is:o From an experto Expressed as a facto Known to be wrong

Buyer has not duty to disclose (Enhanced value vs. defect, homeowner should know his land, socially useful to encourage investment)

Buyer has duty not to impede (Cannot conceal public information or obtain information in an illegal way)

[4] Unconscionability Rst (2 nd ) § 2-302: 2 Factors: See Williams v. Walker-Thomas Furniture (Prorata)[586](1) Bargaining unfairness (procedural unconscionability)

Contracts of adhesion: such a disparity that there is a lack of meaningful choice Cmt 1 : prevent “oppression and unfair surprise” while not disturbing “allocation of risks because of

superior bargaining power.”(2) Resulting in unfair or oppressive terms (substantive unconscionability): general commercial background & commercial needs

Is the problem is with the add-on clause (but everyone does it) or with selling the stereo (what about freedom to contract). Or intersection of the two.

Poor people lack of capacity to make the decision? “Shock the conscience”

Procedural and Substantive unconscionability evalueated on a sliding scale. Higgins v. Superior Court of Los Angeles County (Extreme Home Makeover) [599].

Procedural: Had time to read, told to read, not really complicated (worked out with family before hand, weren’t told anything about it, signed within 15 min)

Substantive: (lack of bilaterality: arbitration not binding on abc)

3. Public Policy: Deals with the substance of bargain -> tension with freedom to contract: Technically permissible

contacts that a judge decides not to enforce.o Illegal contractso Non-compete contracts for Medical Practitioners may not be enforceable. Valley Medical Specialists v. Farber

(Unreasonable: (1) restraint is greater than necessary to protect the employer’s legitimate interest (Freedom of K, investment in employees, value of the business re: patients and referral sources), and (2) hardship to employee and competing public interest o/w (patients right to choose doctor, doctor’s ability to treat emergencies)) Consider: Scope of activities restricted, Geographical reach, Duration

o Non compete contracts not enforced on Lawyerso Cannot contract away parental rights before pregnancy. See R.R. v. M.H. & another (Cannot compel a mother,

regardless of contract, to give away her parental rights any time before three days after birth) [647].o Evaluate:

public interest hardship on promisor reasonableness of the contract


18B. JUSTIFICATIONS FOR NON-PERFORMANCE

1. Mistake[1] Mutual mistake Restatement (2 nd ) §152:

(1) Where a (1) mistake of both parties at the time a contact was made as to a (2) basic assumption on which the K was made has a (3) material effect on the agreed exchange of performances, the K is voidable by the adversely affected party (4)unless he bears the risk of the mistake under the rule stated in §154.

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

Parties may rescind contract

[2] Unilateral mistake: higher standard than mutual Restatement (2 nd ) §153 (a.k.a. §152 PLUS):

Where (1) a mistake of one party at the time a K was made as to a (2) basic assumption on which he made the K has a (3) material effect on the agreed exchange of performances that is adverse to him, the K is voidable by him if he (4) does not bear the risk of the mistake under §154, AND

(a) the effect of the mistake is such that enforcement of the K would be unconscionable, OR(b) the other party had reason to know of the mistake OR his fault caused the mistake.

Mathematical Errors can be rescinded: Wil-Fred’s, Inc. v. Metropolitan Sanitary District [674] Substantial loss due to enforcement would be unconscionable Project has not begun (no reliance) Due care was exercised (inefficient to check all math 20 times)

Generally, Judgment Errors may not be rescinded (would allow people to change their mind)

[3] A party bears the risk of a mistake when: Restatement (2nd) §154(a) the risk is allocated to him by agreement of the parties. See Lenawee County Board of Health v. Messerly

(No longer income producing property b/c sewage, but “as-is” clause made buyer assume risk), or(b) he is aware at the time the K 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(c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.

2. Impossibility: Restatement § 262 (death or incapacity), 263 (Destruction or deterioration) 264 (Governmental

regulation or order); UCC § 2-613: Objectively impossible: person or thing necessary for performance dies or is destroyedo Protects the promissor from liability. Taylor v. Caldwell (Music hall owner not liable to tenant when hall it burns

down) [685].

3. Impracticability: Restatement § 261o Performance impracticable (but goal is possible)

(1) Substantial reduction of value of the contracto Comment d: mere loss of profit insufficiento Natural disaster or war does not (b/c public policy)

(2) because of the occurrence of an event, the nonoccurrence of which was a basic assumption of the contracto Comment b: Continuation of existing market conditions and financial situation of parties is not ordinarily basic

assumptions, does not discharge duty. See Karl Wendt Farm Equipment Co. v. International Harvester (Rst 261 and Groseth Intl. v. Tenneco 3 Factor test for frustration of purpose) [687]

Consider alternatives that preclude unilateral termination, windfall profits resulting from unenforcement b/c impracticability

Question of Law v. Fact: Law gives predictability & consistency with judicial decisions -> encourage commerce

o Sufficiently different from what both parties had contemplated. Mineral Park Land Co. v. Howard (all the gravel required does not include that which is extremely expensive and sufficiently different, underwater)

(3) without the party’s fault(4) and the party seeking relief does not bear the risk under language of contract or circumstances


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4. Frustration of Purpose: Restatement § 265 (Higher Standard: about risk allocation)o Goal impossible (so performance is irrelevant)o Protects the promisee from liability. Krell v. Henry (the exchange called for had lost all anticipated value –

coronation postponed) [686].

o Three Factor Test from Groseth Intl. v. Tenneco [692] Principle Purpose: Comment a “completely the basis of the contract…without it the transaction would

make little service” “Virtually worthless” Mutual profit is (always so) never principle purpose

Substantial Frustration: Comment a “not enough that the transaction has become less profitable…must be so sever that it is not fairly to be regarded as within the risks…assumed under the contract”

Basic Assumption: Comment a echoes § 261 Comment b: Continuation of existing market conditions and financial situation of parties is not ordinarily basic assumptions, do not discharge duty

o Equitable doctrine: fairly apportion risks by implying the terms the parties would have agreed to. Lichnovsky v. Ziebart Intl. Corp. (will not imply termination clause when it is explicit) [694]

5. Modification & its Contractual Limitso Intersection of Consideration, Duress, and Statute of Frauds

o Pre-Existing Duty Rule: In order to check coercion, PED is not consideration for a contract modification No consideration if they had a pre-existing duty to perform. Alaska Packers’ Association v. Domenico

(Coercive dimension makes avoiding court as consideration inadequate.) [715] Must protest

o Exceptions: Restatement § 89(a) If the modification is fair and equitable in light of new circumstances(b) To the extent provided by statute. See UCC 2-209 (No pre-existing duty rule: consideration not necessary)

(1) Agreement modifying a contract within the UCC needs no considerationo Cmt 2: Subject to Good Faith

(2) Explicit agreement to sign written modifications cannot be modified except by signed writing. (EXCEPT: If between a merchant and non-merchant, the form supplied by the merchant must be specifically signed next to this exception)

(3) Statute of Frauds UCC 2-201o Honest in Facto Commercial reasonableness

(c) If there is reliance on a promised modification (despite no new consideration) Mutual Release: tear up old contract, write new one

o Employment Contracts Good Faith belief that employees are not bound by “no-strike” clause. See the DISSENT in Contempo

Dseign v. Chicago & Northeast Illinois Dist. Council of Carpenters (Modified agreement, under duress of strike, lacked consideration) [721]

Revisions of personnel manuals are ineffective because they are unsupported by consideration. [721]o Economic Duress: Wrongful threat, not just illegal threat, is suffiecient. See Kelseay-Hayes Co. v. Galtaco Redlaw

castings Corp. [723].


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WAS THE CONTRACT BREACHED?CONSEQUENCES OF NON-PERFORMANCE : A has breached, what are B’s rights and responsibilities?

OVERVIEW:

(1) Express or Constructive Condition?

Express:o Must be explicit in the language of the contract o Must be literally performed, breach relieves non-breaching party’s responsibilitieso Beach of express condition is a release from duty to perform

Constructive:

(2) Substantial Performance or Material Breach

o Substantial Performance: Essential purpose of contract (inferred) Must continue performance and sue for breach

o Material Breach: Rst. 241

(3) Partial or Total breach? Rst. 242

Partial: May suspend performance (time does not matter, likely breaching party will cure) demand adequate assurances

Total: Relieved of contractual duty (time matters, unlikely breaching party will cure)

1. Breach of Express Conditions:

Must be clearly expressed in language of contact Must be literally performed (UCC: perfect tender)

Oppenheimer & Co.v. Oppenheim, Appel, Dixon & Co. (Conditional contract to sublease: Clear language of condition means no contract unless explicit terms of condition (delivery of letter by date) are met) [786]

Not subject to substantial performance test: parties communicated this and expected this explicitly UNLESS: there is forfeiture (unjust enrichment, one party suffering or benefiting unfairly) Waived by beneficiary (can only be applied to a non-material condition, and condition must clearly for the

benefit of the waiving party) Estopped because of past behavior (must show prejudicial reliance on past behavior) Prevention: promisor wrongfully hinders or prevents the condition from occurring Adverse interpretation: court will interpret a condition in a way that avoids an undesirable outcome Jacob &

Youngs, Inc. v. Kent

May excuse a «technical» condition: Material (strictly enforced) vs. Non-Material (Substantial Performance) [Childres: 794]

Condition (Binding on Promissee) vs. Promise (binding on promisor): can be both


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2. Breach of Constructive Conditions: created by court

[1] Substantial performance: Essential purpose of contract – other party is still obliged to fulfill its’ duties under the contract and then sue for any damages

Standard: Thomas Haverty Co. V. Jones [812]o Where variance from specifications does not impair the building or structure as a wholeo The building is actually used for its intended purposeo OR where defects can be remedied without great expenditure AND without material damage to

the other parts of the structureo BUT defects do not run thoroughout the whole work, nor be substantial that owner does not get

essentially what he bargains for

o Favor conractor in cases of incompleteness only when details are inconsiderable and not the fault of the contractor

Brand, when there is no difference in quality, is constructive condition, therefore court can decide whether there was substantial performance. See Jacob & Youngs, Inc. v. Kent (Adverse interpretation: constructive condition – substantial performance OK in this instance, despite express condition in contract for Reading Pipes) [806].

o Standard for damages: Cost of Completion: cost they would pay to fix it – Cardozo argues that this would be ridiculous

because of the costs associated in relation to the actual damage caused, uses diminunation because C of C would moot the result of substantial performance which is forcing D to perform.

Diminunation in value: Difference in value between the house they wanted and the house they got – basically nothing.

[2] Material Breach (vs. substantial performance)

Not paying on time was grounds to discharge duties (242 circumstances of delay). See Sackett v. Spindler (Not illegal repudiation because P discharged D’s duty by not paying on time) [817]

o Oct 5th was notification of dicharge of duties due to Sackett’s material breach. Even if it was repudiation, it was nullified

o Partial: suspend performance vs. Total breach: abandon performance

Restatement § 241 : Circumstances Significant in Determining Whether a Failure Is Materialo (a) injured party deprived of reasonably expected benefit;o (b) can the injured party be adequately compensated for the deprived benefit (could money fix it?)o (c) extent to which the breaching party experiences forfeitureo (d) likelihood that it will be curedo (e) good faith and fair dealing

Restatment § 242 : Determining when remaining Duties are Discharged (Partial v. Total breach)o (a) those in § 241o (b) extent to which it reasonably appears to the injured party that delay may prevent or hinder him

from making reasonable substitute arrangementso (c) the extent to which the agreement provides for performance without delay

circumstances must indicate that performance by that day is important


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3. Anticipatory Repudiation Restatement § 250 cmt (b) & UCC § 2-610 cmt. (2): “language that under a fair reading amounts to a statement of

intention not to perform except on conditions which go beyond the contract’ constitutes a repudiation.”

Test in Truman L. Flatt & Sons Co. v. Schupf () [825] “A clear manifestation of an intent not to perform the contact on the date of performance. That intention must be a definite and unequivocal manifestation that he will not…Doubtful and indefinite

statements… are not enough.” [827].

Doubts about willingness or ability count: Expressions sufficient to constitute anticipatory repudiation

o Millis Construction Co. V. Fairfield Sapphire Valley (Expression of inability to pay because he’s “belly up” and “busted” may be sufficient to constitute a refusal to perform) [832].

Conduct: Restatment § 250(b)o Conduct that “renders the obligor unable or apparently unable to perform may amount to repudiation”

practical impossibility Effect:

Gives injured party immediate right to damages and discharges his duty to perform

Retraction of repudiation: Restatement § 256 (1) & UCC § 2-611 if done before the party changes his position (reliance) or indicates that he considers the repudiation final (notice).

o Filing suit counts

Why: We want people to be able to rely on contracts: anticipatory repudiation undermines expectations, must resolve

these expectations Forces information sharing

But, hard to judge when there has been anticipatory repudiation: If there wasn’t, then you breached (adverse impact of the high bar set in Restatement 250

4. Adequate assurances of performance: UCC § 2-609, Rst § 251 Hornell Brewing Co. v. Spry (Bad checks/late payment on Arizona Tea distribution contract reasonable grounds for

insecurity. Failure to provide adequate assurance as repudiation, and P could suspend performance) [833]o Are there reasonable grounds for insecurity (case by case) ? UCC § 2-609(1)

Factual conditions: Buyer’s exact words or actions Course of dealing

Commercial reasonableness: Nature of contract & industry Good faith

o If so, I must notify you in writing (UCC §2-609, not always followed) and I can suspend my actions until I receive an assurance

o Adequate assurances: Subject to same test of commercial reasonableness and factual conditions Why:

o Avoid litigation, facilitate commerce/transactions


23

WHAT ARE THE REMEDIES

A. EXPECTATION DAMAGES

1. Computing Expectation Damages [850] Putting the plaintiff in the position they would have been if the

contract had been fulfilled. Forward looking.

o Loss in value (value of contract: put them in the position they would be in had the contract not been breached) + other loss (incidental vs. consequential losses from failure of contract//lost wages) – cost avoided (work not done) – loss avoided (materials not used & resold)= general measure of expectation damages

o Sale of property: based on difference between contract price and sale price. Roesch v. Bray (Breach of K to sell a house: No such thing as consequential damages) [851]

o Employment: Put party in position they would have been in had the contract not been breached. Handicaped Children’s Education Board v. Lukaszewski (Resigned from job b/c of health issues, employer sued for wage difference between her and new employee: Self-inflicted health does not excuse breach, nor does a condition that was foreseeable at the time of contract. ALSO Damages for breach are measured by expectation of the parties) [857]

Expectation Damages vs. Specific Performance (hard because she’s a teacher) Difference between wages (discourage breach by taking away her incentive)

o Construction: Cost of completion v. Diminunation of value. American Standard, Inc. v. Schectman (Contract to grade property, D does not remove all sub structures: Expectation damages in construction is cost of completion minus the unpaid contract price. Grading was main purpose of contract) [861]

EXCEPTIONS: [864] Diminunation of value, revisiting Jacob & Youngs

o Substantial performanceo Good faith efforto Economic waste

If breach is incidental to the main purpose of contract AND repairing it would be disproportionately costly see Jacob & Youngs.

Specific Performance? -> contract around judgment, reallocation of payment Better to overshoot than undershoot: if someone gets punished, it should be the breacher because we want

to encourage contracts.


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2. Restrictions on the Recovery of Expectation Damages (restrictions on “other losses”): Forseeability,

Certainty, Causation

[1] General Damages: obviously follow from breach, breaching party responsible for damages.

[2] Other Damages: Foreseeable losses: Was the damage in the contemplation of the parties “at the time they made contract” as a

probable result of breach. Type of loss, not manner, must be foreseeable Objective: Breaching party is liable for losses about which it had reason to know Duty of the injured party to inform other party of special circumstances: Information forcing. Hadley v.

Baxendale (Crankshaft late, shut mill down, repair company didn’t know so are not liable) [869]

Vs. Tacit Agreement: contract damages are a question of contract interpretation. o Explicitly stated in contract: follow parties desireso Not explicitly stated: damages the parties most likely would have agreed upon

Causation: Breach caused the damages Certainty: Amount of damages always inherently uncertain, sufficient to know that there would be damages

and then base them on statistics. See Florfax International below. When it is likely that it would have lost money, no expectation damages. See Wartzman v. Hightower

Productions (Pole sitting “Woody Hightower,” ) [965]

o Collateral Contracts: Florfax International, Inc. v. GTE Market Resources, Inc. (GTE performs inadequately and Bellerose pulls out of contact w/ Florax because of GTEs poor performance and Florfax sues GTE for damages) [874].

Damages: lost profit and cost of setting up their own call center. Foreseeability: Lost profits due to 3rd party breach foreseeable because GTE knew of contract w/

Bellerose. Causation: Expected a long term relationship, and the only reason it was terminated was because of

this breach. Certainty: Amount of damages is inherently uncertain, sufficient to know that there would be

damages, base them on statistics Not for new business because there is no track record, but in this case Bellerose’s track record

3. Mitigationo After an absolute refusal to perform by one party, the other party cannot continue to perform and claim full

damages. If you don’t mitigate, you cannot be compensated for damages you could have avoided. Rockingham County v. Luten Bridge Co. (Bridge to nowhere: Cannot recoup damages from performance continued after breach) [887].

Could have sought adequate assurance and suspended performance Or a declaratory judgment Rationale:

Avoid infliction of costs without benefits, we object to waste Want to de-incentivise non-breaching parties from accentuating damages

O Good faith effort to find suitable alternative employment. Havill v. Woodstock Soapstone Company () [890] Burden on employer to show:

suitable work existed (substantially equivalent to the position lost and suitable to a person’s background and experience) and

that the employee did not make reasonable efforts to obtain it Damages: Floor and ceiling, should not receive more or less than under the contract


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4. Why we enforce Expectation Damages (expected profit)

[1] Floor: Eisenberg’s three reasons for full-bargain allocation [949][1] Surrogate-cost theory: assured protection of the full cost of reliance (hard to prove) Fuller [947][2] Facilitation of planning: by deterring breach parties can start working Fuller [947] promoting and facilitating reliance on business agreements[3] Protection of a risk-allocation that the contract was created to effectuate (futures contracts)

[1] 250 Price, 225 Cost. Spent 25, Breach = 50 damages[2] b contracts w/ s: s will create software for 2mil. S expects to make 200grand. S invests 100grand, b

repudiates = 300 damages[3] 2/bushel 6mo futures contract. Price of corn rises to 2.25/b, breach = .25 damages

[2] Ceiling: Do not want to give damages beyond expectation damages Prevailing party not compensated for attorney’s fees (American Rule)

Access: deters people from filing suit because of risk of additional fees Judicial Administration: Too complicated for judge to determine reasonable attorney’s fees Against:

o Fails to fully compensate (I still have to pay my attorney’s fees after I win my awards, so I’m not in the same place)

o Prevent meritorious small claims (know will win, but cannot afford attorney) EXCEPTIONS:

o Contract provisiono By statute (Civil Rights)o Court Rules (Rule 11 Sanctions) o 28 U.S.C. 1927: If a party sits on a settlement offer from the government, that party’s

attorney is stuck with the gov’t attorney’s feeso Collateral Litigation against other parties caused by breacho Insurance companies responsible for other party’s attorney’s fees: “special relationship”

No damages for Mental Distress or other Non-Economic Damages (suck it up) EXCEPTIONS: consequential damages subject to foreseeability, causation, certainty

o Bodily harm resulting from breacho Contracts associated with dead bodies: morgue etco Contracts to deliver notice of death: wrongful service etc

No punitive damages: not concerned with fault or punishment, strict liability. Holmes (Distinction between law and morality) [952]

Puntitive damages would prevent parties from engaging in Efficient Breach for greater social utility

o A contracts to teach B for 50. C wants to be taught for 120. A should breach, bay B 50, keep the 20, and give 120 worth of teaching to C.

o Against Efficient breach: Expectation damages may not completely compensate parties for harm, so

failure to allow punitive damages (allowing efficient breach) then parties do not fully recover

Ignores transaction costs (if there were no transaction costs, there would not be a need for contract law because everyone would bargain around their contracts instead of breaching and going to court) (ignores bargaining around judgement)


26B. RELIANCE DAMAGES

1. Essential Loss: Put the plaintiff in the position they would have been had the contract not been entered into. Backwards looking at amount paid to D or expenditures of non-breaching party in furtherance of contractual obligations

2. Incidental Loss: Other expenses, subject to forseeeability, causation and certainty3. Losing contracts: Burden on D to prove any loss to non-breaching party arising from contract to offset recovery. See

Wartzman v. Hightower Productions, Ltd (Could not satisfy certainty, awarded reliance damages) [965]. Equal Opportunity to Mitigate: Sometimes, if both parties could have mitigated and both failed, mitigation cannot be

held against either.4. Promissory Estoppel as a Sword: Court determines which is the approprate standard, when using Promissory Estoppel cour

may award reliance damages, which may be mitigated by any value (ie in land purchased). See Walser v. Toyota (No contract, but relied on promise. Will not pay for entire investment because land is still worth money, but some reliance damages.

C. RESTITUTIONARY DAMAGES

1. Unjust Enrichment: Put the defendant in the position they would have been had the contract not been entered into.2. Calculating Restitutionary Damages: Court wants the lower one, and the easiest to calculate

[1] Cost avoided: Reasonable value of the services – how much it would cost to have gotten the service from someone else: Market Value[2] Net enrichment: How much was the party enriched (hard to prove)

3. Breaching party can claim damages too: Unjust enrichment works both way

D. SPECIFIC PERFORMANCE/AGREED REMEDIES

1. Theory: Generally not available (because it is an equitable remedy vs. contract claims which are in law) except when damages are not adequate (real estate, something unique that is hard to substitute)

2. Problems: Indefiniteness: Sometimes hard to ascertain Supervision: Don’t want to watch parties Hardship: Don’t want to impose on their liberty?

3. Benefits: Perfect Compensation Eliminates transaction costs Allows parties to contract around decision

E. AGREED REMEDIES

1. Liquidated Damages clause: Compensatory damages (allow) vs. punitive damages (not allowed)


27

FUNDAMENTAL VALUES OF CONTRACT LAW

I. Freedom of Contract: a. Individual autonomy – integral part of personal liberty -> assent essentialb. Right to hold and deal with property: Economically efficientc. Limits:

i. Corresponding rights held by others1. Protect weaker parties from stronger parties (assent)

ii. State’s legitimate interest in regulation1. Criminal enterprise2. Protecting the environment3. Preventing monopoly

II. The Morality of Promise: Agreements must be kepta. Ethical obligation to keep promises: Bad Faithb. Business relationshipsc. Limits:

i. Do not want to incorporate morality into law – promises without consideration are not enforceable

III. Accountability for Conduct and Reliance: Voluntariness (volition is not measured by actual state of mind, but of apparent state of mind)

a. Objective test: manifested intent and reasonable reliancei. Specific reliance on manifest contract

ii. General trust in legal redress for reliance: “Security of contracts” (reliance essential to transaction)b. Limits

i. Duress, coercion, fraud

IV. Social Justice and Protection of the Underdog: lack of meaningful assent (duress etc)

V. Fairness: Where mechanical application of rules achieves a result that seems to be unjust, there is likely to be some adjustment or manipulation of the rule to avoid it.

a. Unconscionabilityb. Good Faith

VI. Economics: Encourage transactionsa. Efficiency (mainly in remedy)


Documents

2008f.ahdieh.contracts Outline