Contracts II - Colombo - Spring 2008

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CONTRACTS II OUTLINE

PROF. COLUMBO - SPRING 2008

CONTENTS

Contents .......................................................................................................................................... 1

Avoidance of Contracts ......................................................................................................... 3

Fraud ........................................................................................................................................... 3

Duress or Undue Influence ........................................................................................................... 5

Unconscionability ........................................................................................................................ 6

Illegality/Public Policy ............................................................................................................. 7

Parol Evidence Rule .............................................................................................................. 9

Interpretation .................................................................................................................... 11

Duty of Good Faith ............................................................................................................. 12

Warranties ......................................................................................................................... 13

Express ...................................................................................................................................... 13

Implied ....................................................................................................................................... 14

Limitation on Warranties ........................................................................................................... 14

Conditions ......................................................................................................................... 14

Express ...................................................................................................................................... 14

Excuse of Express Conditions .................................................................................................... 15

Substantial Performance ............................................................................................................ 16

Constructive (IMPLIED) Conditions ............................................................................................. 17

Impracticability .................................................................................................................. 18

Frustration of Purpose ......................................................................................................... 20

Anticipatory Repudiation (aka Anticipatory Breach) .................................................................. 21

Remedies .......................................................................................................................... 22

Basics ........................................................................................................................................ 22

Compensatory Damages ........................................................................................................... 24

Equitable Relief .......................................................................................................................... 26

1 | C o n t r a c t s I I O u t l i n e



Liquidated Damages .................................................................................................................. 28

Limitations of Damages ............................................................................................................. 29

UCC Rules for Remedies ......................................................................................................... 30

Third Party Interests ............................................................................................................ 3

Assignments .............................................................................................................................. 32

Delegations ................................................................................................................................ 33

Third Party Beneficiaries ............................................................................................................ 34




AVOIDANCE OF CONTRACTS

• Avoidance protects the party that has a right to get out of the contract.

• Voidable: The contract will be valid until the party harmed objects to it.

• Policy: Courts don’t want to force people to remain bound to contracts that were

entered into under fraud or duress because it takes away the parties’ freedom.

FRAUD

• RULES:

If Π acceptance is induced by fraud then it is voidable.

Failure to disclose a material fact generally does not constitute fraud except when

(1) there’s a pre-existing duty to disclose and/or (2) circumstances make the non

disclosure affirmatively misleading. (Laidlaw v. Organ)

Generally you can only have a contract avoided for the misrepresentation of a

material fact. EXCEPTIONS:

• Expert Opinion;

• Equal Opportunity (when there’s more access to facts by one party);

• Fiduciary Relationship;

• Opinion is part of an artifice or trick. (Vokes v. Arthur Murray, Inc)

ELEMENTS of nondisclosure:

Party has to be aware and;

It has to be a material fact .

• It’s up to the jury to determine whether it was reasonable for the party not to

disclose. (Hill v. Jones)

Regarding writing: If you know the other party’s misinterpreting a term in the

contract you must correct them.

If you affirmatively lie about anything (even something trivial) then it will

constitute fraud.

A vendor has an affirmative duty to disclose material facts where:

Disclosure is necessary to prevent a previous assertion from being a

misrepresentation or from being fraudulent or material;

Disclosure would correct a mistake of the other party as to a basic assumption

on which that party is making the contract;

Disclosure 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;

or

The other person is entitled to know the fact because of a relationship of trust

and confidence between them.




(Hill v. Jones and R2d § 161)

• CASES:

Laidlaw v. Organ (p. 498): Facts: Buyer(Organ) agreed to buy hogsheads from

Seller(Laidlaw). Laidlaw asked Organ if there was any news that would change the

price or value of the tobacco. Organ withheld the information that caused the

value to increase from 30 to 50 per cent. Laidlaw delivered the tobacco and then a

few day s later took the tobacco back. Laidlaw argues that the contract is voidable

because of fraud. Holding: Δ did not have to communicate the information heknew about the price dropping to the Π, especially since the information was made

public in a handbill – therefore, Π had access to it.

UPSHOTS:

• Fraud allows the defrauded party to avoid a contract.

• Making a material misrepresentation of fact would constitute fraud.

• Failure to disclose a material fact generally does not constitute fraud. Two

Exceptions: (1) Pre existing duty to disclose and (2) Circumstances make the

non disclosure affirmatively misleading.

Vokes v. Arthur Murray, Inc (p. 500): Facts: Π widow taking dance lessons. Δkept telling her she was getting better (when she wasn’t) so that shed continue to

buy more dance lessons. She ended up spending $31g. Holding: Π wins. Rule: “A

statement of a party having superior knowledge may be regarded as a statement

of fact although it would be considered as opinion if the parties were dealing on

equal terms.”

UPSHOTS:

• Argument of fraud was expanded to cover opinions.

• Disingenuous can be the basis of avoidance actions in certain circumstances

(exceptions above).• Whole truth doctrine: Once you start saying things to people you create a

duty to tell the whole truth.

Hill v. Jones (p. 507): Facts: Hills bought house from Jones. Π asked if ripple in

wood floor was termite damage; Δ said it was from water damage. So the Π’s had

someone come in and do an inspection. The inspection report said that there was

no visible evidence of infestation. Jones never told them of previous termite

damage. Holding: Δ had a duty to disclose their knowledge of the previous

termite damage.

• R2d § 164 When a Misrepresentation Makes a Contract Voidable

(1) If you get someone to enter into a k by telling them something fraudulent or utell someone something that’s not true and its material (even if its accidental) then

the other party can avoid the k if they were justified in relying on that

representation.




(2) Even a 3rd party can get out of a k if that 3rd party relied on your statements-

UNLESS the party that the misrepresentation was made to has started to rely on

the k.

• R2d § 161 When Non-disclosure Is Equivalent to an Assertion

DURESS OR UNDUE INFLUENCE

• ELEMENTS of DURESS:

Objective – wrongful threat.

Subjective – take over someone’s will.

• RULES:

Test of whether there is duress: When the parties wrongful threat overcomesthe will of the other party of the contract the court is to look at whether or not in

fact the party complaining about the contract was subjectively overcome by the

threat. (Rubenstein v. Rubenstein)

Wrongful: the threat is so oppressive under given circumstances as to constrainone to do what his free will would refuse.

Moral compulsion or psychological pressure may constitute duress, if, thereby,

the subject of the pressure is overborne and he is deprived of the exercise of his

free will. (Rubenstein v. Rubenstein)

Economic distress may be proved when

One party threatens to breach a contract; and

That threat overcomes the will of the other party because

• The threatened party cannot recover from another source; and

• The ordinary contract remedies would be inadequate.

( Austin Instrument, Inc. v. Loral Corp.)

• CASES:

Rubenstein v. Rubenstein: Facts: Wife tells ex to transfer all his assets to

property or she would poison him with ARSENIC. Consideration- she will take care

of the kids.Holding:

Ex- husband wins.

UPSHOTS:

• Duress: any wrongful act or threat that overcomes the free will of a party.

• Duress makes a contract voidable.

• Psychological pressure can constitute duress.




• Objective prong: wrongfulness. Subjective prong: freewill was overcome.

Austin Instrument, Inc. v. Loral Corp: Facts: Loral has k with navy. Loral

subcontracted with Austin for parts. At opportunity for another k with Austin,

Austin said they would only continue to deliver under the 1st k if Loral accepted

their higher bid. Loral had to have the parts to navy by a certain time and wouldn’t

be able to do that if Austin didn’t finish delivering under the original k. Holding:Loral wins because they only agreed to the price increases in consequence of the

economic duress employed by Austin.

UPSHOTS:

• Case of economic distress.

UNCONSCIONABILITY

• There is a gross unequal bargaining power which leads to terms that are so

shockingly one sided and unfair that the court may be willing to strike the contract

down.

• RULES:

Heart of the test is whether the term or contract “shocks the conscience.”

Look for two elements to find something unconscionable:

Terms of the contract are substantially one sided and;

Procedural flaw.

•

Hidden term• Legalese or fine print that the other party wasn’t aware of

• Grossly unequal bargaining power

In order for something to be unconscionable it must be both procedural and

substantively unconscionable. *[Columbo says this is best law]

Procedural unconscionability looks to how the contract was negotiated and how

the offer and acceptance process played out. (Ferguson v. Countrywide Credit

Industries, Inc.)

Ct has to examine unconscionability at the time the contract is made!

• CASES:

Williams v. Walker-Thomas Furniture Co.: Facts: Δ filing complaint for Π

defaulting on payments. When she defaulted the furniture company tried to

repossess the items. Fine print in agreement said that payments are spread out to

all diff items (so essentially there’s always a balance on each item until total




balance is paid.) – Illustration of only requiring substantive element. Holding:Cases were remanded to see whether the contracts were unconscionable.

UPSHOTS:

• Unconscionability is a disfavored doctrine.

• Some courts will invoke unconscionability doctrine when (1) bargaining

power is grossly unequal and (2) the terms of the contract are unreasonablyfavorable to one party.

• “Unconscionability has generally been recognized to include an absence of

meaningful choice on one of the parties together with contract terms that

are unreasonably favorable to one of the parties.” (p. 539)

Jones v. Star Credit Corp.: Facts: Plaintiffs agreed to buy a home freezer unit

for $900 from a salesman representing Your Shop At Home Service, Inc. With the

addition of the time credit charges, credit life insurance, credit property insurance,

and sales tax, the total came to $1234.80. Plaintiffs have paid $619.88. The

defendant claims that with additional credit charges the plaintiffs owe another$819.81. The freezer unit was only worth $300 at time of purchase.

Ferguson v. Countrywide Credit Industries, Inc.: Facts: Ferguson signs an

employment contract that has an arbitration clause. She wants to file a sexual

harassment suit against her boss and the company but is told she has to do so in

arbitration. She argues the arbitration agreement is unconscionable. Holding: The

arbitration clause is unconscionable and therefore unenforceable.

UPSHOTS:

•

Good summary of what procedural and substantive unconscionability is.

• Need evidence of both in order to strike down a contract as unconscionable.

• UCC § 2-302

Added into the UCC so that the courts knew that they had the ability to strike down

a contract on the grounds of it being unconscionable.

ILLEGALITY/PUBLIC POLICY

• RULES:

A court can strike down the contract even if the parties don’t raise the issue – sua

sponte.

A court will not enforce an illegal contract. (Sinar v. LeRoy)




If a covenant not to compete can be reasonably altered to render it enforceable,

then the court shall do so unless it determines the covenant was not drafted in

good faith. (Data Mgt., Inc v. Greene)

• CASES:

Sinar v. Le Roy : Facts: Π wants to recover $450 he gave to Δ to get him an

illegal beer license. Holding: The contract is unenforceable because it was for an

illegal purpose.

UPSHOTS:

• A court will not enforce an illegal contract.

• If serious illegality is involved the court can raise the issue sua sponte.

Data Mgt., Inc. v. Greene: Facts: Δ was fired but there was a broad covenant

not to compete clause. General rule is that overbroad “covenant not to compete”

clauses are against public policy. Holding: Remanded to trial court to determine

whether there was good faith and whether the covenant can be reasonably

altered.

Different ways to approach an overly broad covenant to compete:

• To just hold it unconscionable and therefore, unenforceable.

• “Blue pencil rule”: If the words in an overbroad covenant not to compete can

be deleted in such a way as to render it enforceable then the court may do

so.

• “Rule of reasonableness”: If it can be reasonably altered to render it

enforceable, then the court shall do so unless it determines the covenantwas not drafted in good faith.

♦ This is the approach this court takes.

UPSHOTS:

• An overbroad covenant not to compete violates public policy.

• There are multiple factors a court will look at when determining whether a

covenant not to compete is overbroad. –Pg. 594

• The typical remedy is to reformulate the covenant so as to make itacceptable, UNLESS good faith is lacking.

• R2d § 178 When a Term is Unenforceable on Grounds of Public Policy

Something is unenforceable if it is something that legislature provides that

something is unenforceable or the interest in enforcing the contract is clearly

outweighed by a public policy against the enforcement of such terms.




PAROL EVIDENCE RULE

• The existence of a final, complete, written agreement will prevent the parties from

introducing any evidence of any prior or contemporaneous understandings that

would vary or contradict the terms of the written agreement.

• Policy: encourages good contract drafting.

• ELEMENTS:

1. Final: the document that the parties going to assert is the final contract you

have to proof to the ct that this is what the parties intended to be the final

contract.

2. Complete/ Integrated: The parties must have intended for it to completely

cover all the grounds of negotiation between the two parties. “It is fully

integrated”- this means that the written agreement integrates everything that

the parties talked about.

a. Partially integrated: if the ct determines that the parties decided to

just put a specific part down in writing, but that they were comfortable

leaving the rest for open discussion.

b. If the court determines it is complete then NO more EVIDENCE can

come in.

c. If the court determines that is only partially integrated - you can add

evidence as long as it doesn’t change the terms of the agreement.

Test: “Whether the provision is one that the parties would ordinarily be

expected to include in the writing” If yes, then the contract is complete. If no,

then the contract is partially integrated and evidence may be admissible.3. Written

** If 1-3 are fulfilled then you CANNOT introduce any more evidence** If any of the

three are not met then you CAN introduce more evidence**

THE EVIDENCE THAT CAN BE INTRODUCED IS:• Any prior or contemporaneous understandings: Bars evidence of any

agreements that were discussed before the contract was entered into – as long as

they don’t contradict what is in the written agreement.

Only need one element (1-3) to be missing in order to allow evidence to come

in!

• EXCEPTIONS (when the agreement is fully integrated ): You can introduce evidence that can invalidate the contract (evidence of fraud,

illegality, or duress).

You can introduce evidence to show that there was some condition in place that

needed to be fulfilled first before the contract can be effective.

Can introduce evidence that shows that a term needs to be clarify or interpret a

term.




Allowed to look at evidence b4 the date the contract was made to see determine

whether the K is partially or completely integrated.

• RULES: The parol evidence rule does not apply when there are two totally distinct

agreements. (Mitchill v. Lath pg. 615- orange highlight)

• CASES:

Mitchhill v. Lath: Facts: Ice house on farm. Conversation about how buyer of

farm will remove the ice house but then they didn’t. Π tried to show that there was

an additional promise to remove the ice house but that it just didn’t make it into

the contract. Holding: Π cannot introduce any evidence.

♦ Π is arguing that the issue about the house was partially integrated. 2 ways to

resolve this problem: (1) Minority position: Look at the contract itself – how

specific; look for integration clause (2) Majority position: At a minimum look at

written agreement and consider alleged side agreement that is being attempted

to be enforced- reasonable person standard.

♦ UPSHOTS:

This case supplies a test for ascertaining whether a contract is fully or

partially integrated. Test: “Whether the provision is one that the parties

would ordinarily be expected to include in the writing” If yes, then the

contract is complete. If no, then the contract is partially integrated and

evidence may be admissible.

Wholly independent contracts are not subject to parol evidence rule analysis.

Masterson v. Sine: Facts: Mastersons sold property and held on a provision to

repurchase the property. They have a right to buy it back at an option. The

Masterson’s went bankrupt and the bankruptcy agent wants to buy back the landto pay the creditors. The Masterson’s claimed that even though the contract said

that, they only did that so that the property was kept within the family. Holding: The trial court erred in not including the evidence to show that the parties agreed

to the option so that the property would be kept in the family, because the

contract was not integrated.

♦ UPSHOT:

Example of the most Corbinesqe approach- the most generous approach to

determining whether something is integrated or not. It allows a huge amount

of evidence to show if something should have been incorporated or not

Luther Williams Jr., Inc. v. Johnson: Facts: Contract for financing work on

purchase of a home. Contract didn’t say anything about financing but contained a

very broad integration clause. Holding: Ct said the evidence CAN come in

because financing was a condition. The ct looks at the integration clause as

merely evidence that it was intended to be integrated but it really wasn’t.




♦ UPSHOTS:

Parol evidence rule doesn’t bar evidence regarding conditions to written

contracts.

Some courts don’t consider integration clauses as conclusive of integration.

INTERPRETATION

• Plain Meaning Rule (Majority): A judge looks at the contract and if the language has

plain meaning then that’s what the contract means and the court will not look to any

other evidence to explain what the contract means.

Benefits: Encourages clear & more accurate contract drafting. Court wants to

promote freedom of contract. Encourages predictability. Beneficial for judicial

economy.

Cons: Might interfere with the intent of the parties. Each judge has different

meaning of things – “what one judge calls soda the other calls pop.”

• Minority Rule: Plain meaning is just a starting point but additional information can

come in to sway a judge one way or another.

Legal Rules

Legal gap Fillers

• Contra Proferentem- court will construe the contract against the drafter.

• RULES:

Allowed to bring in extrinsic evidence to demonstrate that something is

ambiguous. If you fail to show that there is ambiguity then the court will apply the

plain meaning approach. (Pacific Gas & Electric Co. v. G.W. Thomas Drayage &

Rigging Co.)

Π has the burden of proof to show that his argument is right. (Frigaliment

Importing Co. v. B.N.S. Int’l Sales Corp.)

• CASES:

PG&E Co. v. G.W. Thomas Drayage & Rigging Co.: Facts: Π hurt on the job

but there was an indemnity clause. Δ says the indemnification clause was only

meant to apply to 3rd parties injured. Dispute over whether the indemnification

clause applies to only third parties or the Π and third parties. Holding: Since the

clause was reasonably susceptible to the meaning condemned by the Δ, the

offered evidence was also admissible to prove that the clause had that meaning

and did not cover injuries to plaintiff’s property. Rule: Courts should place

themselves into the positions of the parties at the time the plaintiff was made.




Evidence to prove parties’ intentions includes testimony as to the circumstances

surrounding the making of the agreement, including the object, nature, and

subject matter of the writing.

UPSHOTS:

• Traynor’s Rule: Extrinsic evidence is admitted to disprove what appears to

be the existence of a plain meaning interpretation.

Frigaliment Importing Co. v. B.N.S. Int’l Sales Corp.: Facts: What does

“chicken” mean? The ct looked at pretty much all the evidence he could find to

determine what chicken meant. Holding: The ct sides with the Δ saying that

chicken wasn’t limited to the higher quality chicken.

• R2d § 202

• R2d § 203

• R2d § 204

DUTY OF GOOD FAITH

• Three Categories where good faith comes up:

(Most common) To help interpret the terms of the contract, especially regarding

those terms that have to do with discretion. The exercise of discretion has to be

reasonable.

Issue of performance – you do something that makes it impossible/difficult for

the other party to do their work.

(Controversial and rare) Reading good faith as an independent clause in a contract.

• RULES:

Good faith can’t be negotiated around but the parties can help define it in their

contract. (Centronics Corp. v. Genicom Corp.)

• CASES:

Centronics Corp v. Genicom Corp.: Facts: Contract between Π seller and Δ

buyer that had an arbitration clause. Dispute over funds and the money must be

put in an escrow until resolution of dispute. Π wants a portion of the money b4 the

end of the dispute and claims that that portion is not part of the money in dispute.

Issue: Is there an implied duty of good faith that requires Genicom to release the

money to Centronics? Holding: There is no duty here.




UPSHOTS:

• The duty of good faith does not oblige a party to do something that is not

required or contemplated by the contract.

• Good faith serves to limit the discretion of a party in exercising his or her

discretionary contract rights.

Hillesland v. Federal Land Bank Association of Grand Forks: Facts: Π wasCEO of the bank. A client of the bank is selling the land he hooks his son up with

the client to purchase the land. He was terminated for doing this. Π claims Δ had

no cause to fire him. Δ says he had an employment at will. Holding: Δ wins.

UPSHOTS:

• Some courts will interpret “at will” really at will for no cause.

• Other courts will apply the good faith duty to at will employment contracts to

exclude malicious firing or firing against public policy.

• UCC § 1-203

Every contract or duty within this Act imposes an obligation of good faith in its

performance or enforcement.

• R2d § 205 Duty of Good Faith and Fair Dealing

WARRANTIES

EXPRESS

UCC § 2-313

Affirmation of fact

Any description, sample, or model

“An affirmation merely to the value of the goods or a statement purporting to

be merely the seller’s opinion or commendation of the goods does not create a

warranty.”

• “Puffery” doesn’t create a warranty.

• The more general the more outrageous the promise the more likely it won’t

be considered a warranty.

• The more specific, more credible, then it will be justified in saying that it was

a warranty.




Not limited to merchants.

IMPLIED

UCC § 2-314 Merchantability

Can be modified

Has to be able to be used for an ordinary purpose.

Only applies to merchants**

UCC § 2-315 Fitness for Particular Purpose

The buyer and seller knows or should have known that the product is going

to be used for a particular purpose.

There is only liability if the seller has knowledge of how buyer intends to use the

product.

Not limited to merchants.

LIMITATION ON WARRANTIES

UCC § 2-316 Exclusion or Modification of Warranties

You cannot put a limitation on an express warranty.

Language must mention merchantability.

Language must be very clear.

Make sure you comply with section 2.

Terms such as “As is”, “with all faults”

Mostly applies to warranty of merchantability.

CONDITIONS

EXPRESS

If there’s a condition in a K that says party A must do something before B does

what they promised to do, and party A doesn’t satisfy that condition there’s no

breach of K but it lets B off the hook.




How to distinguish between condition and promise?

“If” usually means a condition.

A condition is when an event must occur before performance of a promise comes

due.

RULES:

Conditions will be strictly satisfied - you have to actually fulfill the condition

completely exactly as requested. (Dove v. Rose Acre Farms, Inc.)

An express condition need not actually be clearly articulated in a contract it will

be inferred if the terms of the contract demonstrate that the parties intended

for something to occur before a corresponding duty would attach. (Wal-Noon

Corp v. Hill)

CASES:

Dove v. Rose Acre Farms, Inc.: Facts: Π signed up for incentive program

that if he works for 10 weeks without coming late or missing work he will get a

bonus. Π gets sick during the last week and misses work- but he already

completed his work before getting sick. Δ says no bonus. Holding: Π did not

perform his part of the contract so he cannot sue Δ for not fulfilling its part.

• UPSHOT:

♦ Strict performance is necessary to satisfy an express condition.

Wal-Noon Corp. v. Hill : Facts: Π leased building from Δ and Π kept repairing

the roof then got it replaced. Π later read the lease and saw that the Δ agreed

to fix all repairs but that it will not fix repairs that need to be made because of

negligence or improper use by the Π. K did not explicitly say that Π had to give

notice. But it said that if notice is given it has to be given sufficiently- i.e. in

writing. Holding: The only way to interpret the clause is that this is a conditionprecedent. The court will read into the contract a requirement that Π notified Δ

of any damage to the roof and unless that notification occurs Δ’s obligation to

repair the roof doesn’t attach. The court concludes there’s no duty to

reimburse.

R2d § 224 Condition Defined

“A condition is an event, not certain to occur, which must occur, unless its non-

occurrence is excused, before performance under a contract becomes due.”

EXCUSE OF EXPRESS CONDITIONS

Ways to excuse express conditions:

If the condition is not a material part of the agreed exchange it can be excused

if failure to excuse it would result in disproportionate forfeiture.

• Look at intentionality.




• This is the substantial performance doctrine.

Waiver of the party that benefits from it.

• Definition of Waiver: The intentional relinquishment of a known right. It is

voluntary and implies an election to dispense with something of value, or

forego some advantage which the party waiving it might at its option have

demanded or insisted upon. (Clark v. West)

Unconscionable or against public policy.

Substantial Performance CASES:

Clark v. West : Facts: Contract to write a book for Δ. A clause stating that Π

can’t drink. K was for $2 a page. If he doesn’t drink he’ll get $4 a page. Δ drinks.

Π says substantial performance. Holding: The stipulation as to the Π’s total

abstinence was a condition precedent. This is a condition because the purpose

of the contract was to make the book not to make Clark stop drinking.

• UPSHOTS:

♦ Express conditions can be waived.

♦ Consideration is unnecessary for the waiver to be effective.

Ferguson v. Phoenix Assurance Co. of NY : Facts: Contract covered lossesfrom safe burglaries committed by force and violence (for public policy reasons

to prevent recovery for inside jobs). Condition in the contract that stated that

you have to show evidence of force on all doors. Holding: The contract is

excused because it is against public policy - it is a public policy that insurance

companies pay when there is a burglary.

• UPSHOT:♦ Conditions, like contracts, generally are subject to public policy and

unconscionability analysis.

R2d § 229 Excuse of a Condition to Avoid Forfeiture

If the condition goes to the heart of the agreement the court will not excuse itso easily.

SUBSTANTIAL PERFORMANCE

• RULES: The variation to the contract has to be trivial (non material) and innocent (good

faith) and cannot be due to gross neglect. ( Jacob & Youngs v. Kent)

Failure of a party to abide by an express condition will be excused if (1) it is

necessary to avoid disproportion forfeiture and (2) the failure was unintentional or

innocent and (3) the overall impact of this failure is immaterial or trivial to thecontract as a whole. ( Jacob & Youngs v. Kent)

The substantial performance doctrine will not save a party who has not satisfied an

express condition if the deficiency in question is “so pervasive as to frustrate the

purpose of the contract in any real or substantial sense.” (O.W. Grun Roofing and

Const. Co. v. Cope)

• CASES:




Jacob & Youngs v. Kent : Facts: Contract to install pipes- contract for a specific

pipe. Only 40% was Reading pipe and 60% was a different manufacturer but same

quality. It would not be cost effective to rip out the pipes and replace them. Δ

didn’t pay because Π used the wrong pipes. Π suing for payment. Holding: Δ wins

because of substantial performance.

O.W. Grun Roofing and Const. Co. v. Cope: Facts: Π contracted with Δ to

install a new roof- supposed to be uniform in color for $648. Turns out some of the

tiles were yellow. Π complained so Δ went back and replaced the yellow shingles-but they weren’t “russet glow.” Π suing for damages of 1500 and to have a

mechanics lien set aside. Δ is suing for $648 and for foreclosure on the mechanics

lien. Holding: This isn’t substantial performance because there is disproportionate

forfeiture. It’s material- it was a contract for a roof and they got the roof wrong.

• R2d § 240 Doctrine of Divisible Contracts

• R2d § 241 Circumstances Significant in Determining Whether a Failure is Material

CONSTRUCTIVE (IMPLIED) CONDITIONS

• If you deem a condition to be constructive you can always argue substantial

performance.

• RULES:

Conditions are presumed to be dependant unless otherwise specified. (Kingston v.

Preston)

Failure of one party to perform discharges the duty of the counterparty to

perform.

Types of Dependent Conditions:

• Concurrent: two conditions that can occur at the same time. Conditions that

have no ordering of time attached to them.

• Precedent: Condition that must come first.• Subsequent: Condition that comes later.

• CASES:

Kingston v. Preston: Facts: Δ is a salesperson and agreed to sell his business

but wants Π to pay him a monthly income for security. Δ claims that Π failed to

produce the security- failed to convince him that he was able to make the

payments so the Δ said he’s not going to give him his business. Holding: the

promise to provide security is a condition- and since Π failed to satisfy his

condition, Δ doesn’t have to satisfy his. And as such he can’t claim that he has to

give you his business. UPSHOTS:

• Turning point in the law which gave rise to the modern rule that promises in

a contract are presumed to be conditions of one another – as conditions

failure of one party to perform discharges the duty of the counter party to

perform.




• The presumption may be overcome by facts and circumstances that

demonstrate that the promises are truly independent of one another.

Palmer v. Fox : Facts: Δ stopped paying because Π didn’t do the improvements

on the roads that he promised to do. Π sued for the remaining money plus interest.

Δ says the Π failed to cinderize and that was a dependent condition, so since Π

failed on his condition Δ doesn’t have to fulfill his condition. Δ says this is a

material breach – because it is a constructive condition and in order for Δ to get

out of performing Π’s breach must be material. Holding: Its material because it’s

obviously a big deal to a land owner whether their street is paved for not. The

court held that the conditions were concurrent.

UPSHOTS:

• Demonstration of presumption the promises in contracts are dependent

conditions of one another.

• It also demonstrates the importance of identifying whether a condition is

precedent, concurrent, or subsequent.

• Demonstration that substantial performance- and not strict performance- is

all that is necessary to satisfy a constructive condition. R2d § 226 How an Event May be Made a Condition: An event may be made a

condition either by the agreement of the parties or by a term supplied by the

court.

IMPRACTICABILITY

• RULES:

ELEMENTS:

Impracticability• Performance would be extremely and unreasonably difficult, expensive or

injurious.

Fault

• It can’t be the aggrieved parties fault that performance of the contract is

impracticable.

Assumption of Risk

• Unless the language or the circumstances indicate the contrary, there is no

explicit or implicit assumption of the risk in the contract.

Basic Assumption• Usually, if something is foreseeable, then its nonoccurrence is not a basic

assumption.

♦ EXCEPTIONS:

When the risk was foreseeable but at the time of contracting it seemed

trivial but turned out not to be.

Foreseeable but considered too remote.




Common law: The parties are responsible for performing under the contract even if

it is no longer possible for them to perform. They must pay damages for failure to

perform. Nonperformance is considered a breach.

Impossibility Rule: If something truly became impossible, the court would

excuse it.

Impossibility rule has become the impracticability rule because impossibility is a

very high standard.

Force majeure clause – a clause in a contract that says that in the event that the

parties cannot perform the promise, and addresses impracticability and assigns

one party or another the burden or dealing with that problem. [This goes to

assumption of risk]

• CASES:

Taylor v. Caldwell : Facts: Music hall burns down in Great Britain. One party

wants to license the hall. Holding: Court concludes here that this is without the

fault of either party, therefore one of the prongs of impracticability is satisfied.

Given that this event was not foreseeable, the court here concludes that it was

impossible for this contract to be performed so the D was able to walk away fromthe contract without having to pay damages

UPSHOTS:

• When a contract is based on the existence of a certain person or thing,

destruction of that person or thing renders the contract void on grounds of

impracticability.

• This is an early articulation of the doctrine of impracticability which has

broadened over time.

US v. Winstar : Facts: Winstar entered into an agreement with the Federal Home

and Loan Bank Board (FHLBB). The agreement promised to give Winstar favorable

regulatory treatment, presumably until the goodwill was amortized. The

agreement did not expressly promise that the United States would not

subsequently change the law or agree who would bear the risk if a law with

retrospective effects was enacted. Holding: Winstar wins – the government didn’t

meet its burden of showing impracticability.

Defendant’s Burden:

• Must show that the passage of the statute rendering its performance

impossible was an event contrary to the basic assumptions on which the

parties agreed, and

• Must ultimately show that the language or circumstances do not indicatethat the Government should be liable in any case.

UPSHOT:

• It is presumed that change in law is unforeseen and thus a change in law can

serve as the basis of an impracticability argument.




Canadian Industrial Alcohol Co. v. Dunbar Molasses Co.: Facts: Δ was the

middle man between the supplier and the buyer. Δ claims impracticability because

the Π failed to produce that same amount they were producing in the past years.

Holding: There was some implicit assumption of risk by being the middle man

because your whole reason for existing is to get the molasses.

UPSHOTS:

• A promisor is generally assumed to be responsible for foreseeable risks

pertaining to his/her promise.

• When the promisor is a broker it seems to be industry custom that the broker

is insurable.

• A promisor cannot invoke impracticability to discharge his/her contractual

duties if he/she was at fault in creating or contributing to the

impracticability/impossibility.

• R2d § 261 Discharge by Supervening Impracticability

FRUSTRATION OF PURPOSE

• ELEMENTS:

What’s frustrating has to go to the heart of the contract.

And the frustration has to be a really high level of frustration.

Cannot be aggrieved party’s fault that the purpose was frustrated.

• CASES:

Pradaline v. Jane: Facts: Paradine owns property that the Prince occupies. Jane

had a 3 yr lease on the property. Jane stops make the lease payments since he

can’t use the property bc of the army. Holding: Δ still has to pay because its not

Π’s fault that the army took over the land. UPSHOT:

• Illustration of the old rule in common law.

Krell v. Henry : Facts: Δ rented an apartment to watch the coronation of Henry

VII. The coronation didn’t happen so now he wants to get out of the contract. Δ

wants his money back; the landlord wants the contract enforced. Holding: Not

impracticable because he can still rent the room.

UPSHOT:

• Classic case articulating the doctrine of frustration of purpose.

Washington State Hop Producers, Inc. v. Goschie Farms, Inc.: Facts: If youwanted to sell hops you needed to have a hops license. After taking bids for these

licenses. The hops base dramatically decreased in value because the rules

changed and now licenses weren’t needed anymore. Π wants the contracts

enforced. Δ wants out of the contracts because licenses were no longer needed.

Holding: The price drop alone is not the frustration just that it is evidence of the

frustration. The real frustration is that the licenses are no longer needed.




UPSHOTS:

• Foreseeability is an important but non – dispositive factor in assessing

frustration as well as impracticability.

• Frustration of purpose is less likely to be successful than an argument for

impracticability.

• R2d § 265 Discharge by Supervening Frustration

ANTICIPATORY REPUDIATION (AKA ANTICIPATORY BREACH)

• RULES:

If someone announces their intention to bring a breach of contract regardless or

not of whether they’ve done anything to make it impossible for them to perform

(a) we treat it as a breach and (b) it gives you the right to suspend your

performance. (Hochster)

• CASES:

Hochster v. De La Tour : Facts: Δ was going to be the tour guide for the Π. Then

on May 11th Δ calls and tells Π that he changes his mind and is not going to be his

tour guide. Π sues from breach of contracts. Then Π goes on to get another job.

Holding: Breach has to be material.

UPSHOTS:

• When a party repudiates a material aspect of his/her contractual obligations,

then the aggrieved party may immediately sue for breach (or may wait until

the date of performance before suing) and the aggrieved party may hold off

on performing his/her own obligations.• Repudiation- when a party makes clear by words or deeds that he or she is

not going to honor his/her contractual obligations.

• Repudiation may be retracted.

♦ You can retract your repudiation anytime before the counterparty accepts

your repudiation.

♦ If the other party has not yet relied on the repudiation you can retract it,

even if the party has accepted the repudiation.

• If you guess wrong and it turns out that the ct doesn’t think the repudiation

was that clear then you have breached. AMF, Inc. v. McDonald’s Corp (pg. 876): Facts: AMF was supplying computer

systems for McDonalds but the computers weren’t performing up to standard.

McDonalds wasn’t happy so they backed out of the contract and sued for its $20g

back. AMF sues back to get the money for the computers. McDonald’s demand for

assurance wasn’t enforced because it wasn’t in writing.

UPSHOT:




• Illustration of adequate assurances.

• UCC § 2-609 Right to Adequate Assurance of Performance

• UCC § 2-610 Anticipatory Repudiation

Reasonable time standard because you have an obligation on the UCC to “cover” –

mitigate harm done to you.

• UCC § 2-611 Retraction of Anticipatory Repudiation

REMEDIES

BASICS

• Explicit policies that permeate the process of translating losses into dollars:

The PLAINTIFF must prove that

The breach was the substantial cause of the loss complained of, and

The amount of the loss caused with reasonable certainty. The provable losses caused by the breach must have been reasonably

foreseeable to the Δ at the time of contracting; otherwise consequential damages

are not recoverable. (Hadley)

The Π has a “duty” after the breach to make all reasonable efforts to avoid the

consequences of the breach (duty to cover)

• In contract law we want to encourage an efficient breach – we want to allow parties

to get out of a contract if it’s better for them to do so.

• Reliance Damages- brings the parties back to the position they were in before the

contract was made. A lot easier to prove.

• Nominal Damages- situation where a party wins the case but there are no real

damages to award. Think $1 in damages.

• Expectation Damages- the whole point it to put the non-breaching party in the

position he/she would have been in had the contract been performed. Imagine the

world as if the contract had not been breached. What amount of money would it take

to get the Π there. (Hawkins)

• Incidental: Think of these as expenses- money that someone has to pay to mop up

because of the breach. Not the harm caused by the breach- but any money you have

to spend to deal with the breach.

• Consequential: Damages that are consequences that flow from the direct harm.Additional damages that result from the breach beyond what is readily apparent. I.e.

Lost profits. (Hadley)

Consequential damages have to be foreseeable by both parties at the

time of contracting in order to be recoverable.

• CASES:




Hawkins v. McGee: Facts: Π had burnt hand and Δ promised to make it 100%

fixed. Promised a perfect hand. Instead he has a burned and hairy hand.

How to calculate expectation damages: Whatever dollar amount represents

the difference perfectly healed hand and the hand he was left with.

Curtice Brothers Co. v. Catts: Facts: Contract for canning tomatoes. Holding:

Specific performance is appropriate in this case because there was no adequate

compensation at law.

UPSHOTS:

• Specific performance may be decreed when there is no adequate remedy at

law.

• Specific performance will rarely include a demand that personal services be

performed.

Hadley v. Baxendale: Facts: Π was a miller. The crank shaft in the mill broke. Π

hired a carrier from Δ to bring the shaft to get fixed. Something happens and the

shaft isn’t delivered right away. Δ told Π that he’d probably get the shaft back to

him in a day. As a result of the Δ’s neglect the Π didn’t receive the shaft for a

couple days. Π sue for lost profits. Holding: The losses suffered by Π were notforeseeable by Δ so consequential damages are not recoverable.

UPSHOTS:

• Consequential damages are generally of a special character and are usually

indirect (involving a third party).

• Consequential damages are only recoverable to the extent that they are

reasonably foreseeable to both parties at the time of contract.

MENTAL ANGUISH/PUNITIVE DAMAGES-

• Done to punish the other party. Almost NEVER awarded under contract law.

•

CASES: Bohac v. Department of Agriculture: Facts: Π fired by Δ and is claiming non

pecuniary damages as a result of her life changing because of her firing. Ct is

interpreting a provision in the statute that is supposed to be interpreted by

contract law. Holding: Π does not get compensatory damages because the

statute did not intend for these kinds of damages.

UPSHOT:

• Damage from mental anguish and emotional distress generally won’t be

recoverable under contract law. If the damages are foreseeable then they

can be awarded as legitimate consequential damages.

Boise Dodge, Inc. v. Clark : Facts: Δ bought a car from Π that was described as

a new car. Turns out it’s not a new car- fraudulent contract. Δ wants punitive

damages. Holding: The jury’s award of $12,500 in punitive damages against Boise

Dodge, Inc. was justified. Reasoning: In Idaho the law says that punitive

damages may be assessed in contract actions where there is fraud, malice,




oppression or other sufficient reason for doing so. Rule: the amount of punitive

damages must bear a “reasonable relation” to the amount of actual damages.

COMPENSATORY DAMAGES

• RULES:

Usually you measure damages at the time of the contract breach. Once the

breach happened, you should look to the market price at that time. ( American)

Lost business volume damages (profits) are available generally if the market

supply of the plaintiff’s goods or services exceeds the market demand (i.e. if you

have more goods to sell than people want). (Locks v. Wade)

When a breach of contract is substantial or intentional (when the defense of

substantial performance is lacking), the plaintiff is entitled to expectation

damages, namely the cost to repair or rebuild and not merely the diminution in

value measure of damages. (Rivers v. Deane)

• CASES: American Mechanical Corp. v. Union Machine Co. of Lynn: Facts: Π was in

financial trouble and they entered into a contract with Δ where Π agreed to sell

some real estate and property for $135,000 and then Δ reneged on its deal to buy

this property. Seven months later the property was sold at a foreclosure sale and

the property was then sold for $90K. Here the rule does not apply because it is

seven months later and it is sold at foreclosure so they don’t know what the

market price would have been. Holding: The court awards the $45K. The court

awards damages EQUAL to actual loss. They recognize that the $90K does not

reflect the actual value of the property, but they are in a bind so they have nothing

else they can do.

UPSHOTS:

• Plaintiff bears the burden of proof in proving damages generally, both to the

fact of the damage’s existence, and to their actual amount.

• If a Plaintiff cannot prove the exact amount of damages, but is able to

convince the court that they were somehow damaged, then courts may

sometimes enter a damages award within its discretion.

• Breaching party in a contract bears the burden of proving lack of

cover/mitigation on the part of the non-breaching party (usually the plaintiff)

New Era Homes Corp. v. Forster : Facts: Defendant hired Plaintiff to makeadjustments to his home where there would be four payments. Plaintiff completed

the rough carpentry and plumbing but did not do any work beyond that. Holding:

The court says that this is not a divisible contract. It is one big contract for the

whole amount.

UPSHOTS:




• Illustration of the importance of divisibility in regards to the damages

assessed

• The importance of subtracting out the plaintiff’s damages – money saved or

not spent because of the breach

Bernstein v. Nemeyer : Facts: Defendants got the Π to invest over $1 million

into a partnership by promising a negative cash flow guarantee. Basically, it is a

promise that the partnership will put in whatever money it takes every year to

keep the partnership afloat. Despite good faith efforts and loans to the partnership

of $3 million, the Δ defaults on their obligations. Π sues for rescission and

restitution. The defendants failed to continually lend money which led to the

breach of contract. Holding: Plaintiff sues for restitution but there is no restitution

here because there is no ‘unjust enrichment’ because the defendant lost money.

The plaintiff might have said that they expected to make money here but this is

impossible to prove. Expectation damages here are not ‘expected’ here because

there is no proof that this investment would have ever made money for him.

UPSHOTS:

• Rescission is an action to have a contract set aside because of an uncuredmaterial breach

• Restitution damages are damages equal to the benefit that the breaching

party received

• Restitution damages are available in situations of UNJUST ENRICHMENT

♦ In a case of rescission

♦ In a quasi-contract

Locks v. Wade: Facts: Π runs a jukebox leasing business. Π was going to lease to

Δ a jukebox for 2 years and the terms were that they would split the profits on the

jukebox and there was a minimum guarantee that you would get at least $20 perweek. Δ repudiates and changes his mind. Π sues b/c he expected the K to go

through and the Π sues for damages. Holding: Plaintiff gets $836 in expectation

damages.

UPSHOTS:

• Lost business volume damages (profits) are available generally if the market

supply of the plaintiff’s goods or services exceeds the market demand.

Rivers v. Deane: Facts: Homeowners contracted with Δ to do construction on the

house and they did a terrible job so homeowner sued. At trial, difference in market

value is $10K. The cost of fixing this problem with the deck was much > $10K.

Holding: Deane loses here because the breach was material so expectation

damages are necessary. Here it was the amount of money that it would cost the

Rivers’s to build a new deck as they had originally contracted for.

American Standard, Inc. v. Schectman: Facts: Δ failed to grade the property

like they were supposed to as part of a construction contract. Grading would have

cost $90K. Property value without the grading was reduced by a mere $3K. Δ




argued that the diminution in value should be the measure of damages and argues

that they substantially performed. Holding: Court says damages award should be

$90K because they did not attempt to finish the construction contract (which

means that the breach is intentional and therefore does not constitute substantial

performance).

UPSHOTS:

• Sets a very high standard for what constitutes disproportionate forfeiture by

linking it to economic waste as a predicate to awarding merely diminution in

value damages.

EQUITABLE RELIEF

• Positive injunction: The court orders someone to do something – harder to police.

• Negative injunction: The court restricts someone from doing something. –Granted

more easily.

• RULES:

General Rule: It is axiomatic that specific performance will not be ordered whenthe party claiming breach of contract has an adequate remedy at law. (Laclede)

An adequate remedy at law exists when:

The subject matter of the contract is unique;

Where money damages cannot fully compensate the injured party;

Money damages cannot be adequately assessed.

(Laclede Gas Co. v. Amoco)

EMPLOYMENT CONTEXT : Injunctive relief in the form of an order not to work for

someone (a negative injunction) is sometimes awarded under certain

circumstances:

Where the employee is a threat to your trade secrets or intellectual property.

Where the employee is still under contract with the employer.

Where the contract already contains a reasonable covenant not to compete.

( Abc v. Wolf)

• CASES:

Laclede Gas Co. v. Amoco: Facts: Amoco agreed to supply propane to any new

house set up in Laclede developments. Δ wants out of the contract and the Π is

arguing that he should get specific performance. The way the contract was set up

was that Laclede could walk away from the contract whenever but Amoco couldn’t.

Holding: there was no adequate remedy at law because this was a long termcontract and Π wouldn’t have been able to find anyone else to enter into a long

term contract with them at that time.

UPSHOTS:

• SP is available where there is an inadequate remedy at law.




• This case shows the trend toward a more liberal application of specific

performance.

Northern Indiana Public Service Co. v. Carbon County Coal Co.: Facts: Π

has a k with Δ to supply coal for 20 years. 7 years into the contract the price for

coal increased greatly. At this point it was cheaper for Π to have its energy needs

provided by other means. Π tries to get a declaratory judgment to excuse it from

the k. The Δ counterclaims and wants specific performance. Holding: No SP bc

there was an adequate remedy at law - the court was able to come up with a $amount that would make Δ whole.

UPSHOTS:

• Example of strict approach to specific performance.

• Articulates that third party concerns shouldn’t play a role in SP analysis

unless such 3rd parties have a legally recognized interest in the law suit.

Walgreen v. Sara Creek : [Judge Posner] Facts: In agreement Δ agreed not to

lease space in the mall to any other pharmacy. Δ decides to lease space to

Pharmore. Holding: The court is unable to assess adequate damages, therefore

an injunction is granted. Factors that Judge Posner points to as informing the decision:

• Fact driven analysis.

• Π has to show that the case is unique so that damages would be inadequate.

The parties (as opposed to the court) are better people to figure out the

damages in a situation like this.

UPSHOTS:

• When a party is asking for an injunction they have the burden of proving that

an injunction is necessary.

• Judge Posner applies a cost benefit analysis to decision making. Looks atthe most efficient way of accurately assessing the damaged amount. With

just two parties an efficient way is to issue an injunction. Court also looks a

judicial economics.

ABC v. Wolf : Facts: Δ worked for Π and his contract was going to terminate on

3/4/80. In his contract there was a clause that said there was a 90 day period prior

to his k termination in which he was obliged to partake in good faith negotiated.

There was also a 3 mth period in which Π had right of first refusal. During the first

45 days of the 90-day period there is an additional covenant- negotiations with

other parties prohibited. In 10/79 theres a negotiation with CBS and Δ- they talk

but don’t reach any conclusion. On 2/80 CBS and Δ agreement. Π is seeking an

injunction that prohibits Δ from working at CBS. Holding: Negative injunction is

not granted.

UPSHOTS:




• Because of both philosophical and practical concerns specific performance is

almost never used to order an employee to continue working for his or her

employer.

• The key to whether or not they’ll be granted is going got be the

reasonableness of their scope and duration.

LIQUIDATED DAMAGES

• Parties provide in the contract what the damages will be if the contract is breached.

• Some ways to tell if the provision is enforceable:

The damages bear some reasonable proportion to the harms incurred by the

breach.

Evaluate the reasonableness of the reward at the time of contracting.

• RULES:

A liquidated damages provision will not be enforceable if it is deemed punitive.

In order for a liquidated damages provision to be enforceable it must:

Be a reasonable forecast of just compensation for the harm that is caused bythe breach; and

The harm that is caused by the breach must be one that is incapable or very

difficult of accurate estimation. (this is MINORITY view)

(Southwest Engineering v. United States)

• CASES:

Southwest Engineering Co. v. United States: Facts: Δ hired Π for 4

construction jobs. There was a liquidated damages provision for every day that the

project was completed late. Π argues that since Δ didn’t sustain any damages that

bars recovery. Holding: Liquidated damages are allowed. UPSHOTS:

• Liquidated damages provision must be reasonable estimates of the expected

harm caused by the breach.

• Reasonableness is measured at the time of contracting.

• Minority rule is that reasonableness will be measured at time of breach. Adds

a second element that liquidated damages provision must address harm that

is incapable or very difficult of accurate estimation.

United Air Lines, Inc. v. Austin Travel Corp.: Δ argument is that liquidated

damages clause is unenforceable. Court says that the clause is enforceable. Δ

makes argument that the damages estimate isn’t a good one- there could have

been a more accurate assessment of damages at the time of contracting.

Holding: The question is whether the estimation is reasonable or not – not

whether a more accurate one could have been made. The question becomes:

would liquidated damages be triggered by a trivial breach? RULE: Liquidated




damages will only be available in the case of a trivial breach if it is

explicitly stated in the agreement of the parties.

UPSHOTS:

• Indicative of the modern trend in which a liquidated damages clause will

generally be upheld by the court unless the liquidated damages amount is a

penalty because it is plainly or grossly disproportionate to the probable loss

anticipated when the contract is executed.

• The amount of damages specified need not be the best estimate of

damages; merely it must be a reasonable estimate.

• It will be presumed that liquidated damages clauses are not applicable to

trivial breaches.

Leeber v. Deltona Corp: Facts: sales contract that says the Δ was to retain

deposit of %15 if the closing isn’t settled by July 20. Π ultimately fails to pay

balance Δ wishes to keep the deposit – Π sue to get the money back. Π says the

liquidated damages clause is unenforceable. Unconscionability- you’d have to say

that this amount somehow shocks the conscience. Holding: It doesn’t shock the

conscience. UPSHOTS:

• Liq damages clause may be held unenforceable if they would shock the

conscience. – look at the day of contracting.

• If its reasonable at the time of contracting but then is unconscionable on the

day of enforcement then most courts will deem it unenforceable.

• UCC § 2-718(1) Liquidation or Limitations of Damages

LIMITATIONS OF DAMAGES

• GENERAL RULE: As long as it’s not unconscionable it will be enforceable.

• Lewis v. Sawyer : Facts: Lewis sold malfunctioning refrigerator to Sawyer. Since it

kept malfunctioning Δ didn’t pay. Δ brought a counterclaim and sued for loss profits

and costs. Three Issues: (1)Did the trial court err in allowing the jury to consider

whether the exclusive remedy clauses had failed their essential purposes? Exclusive

remedy clause was that they’d repair or replace. Δ didn’t want this bc they were

having a dreadfully difficult time repairing the fridge. The trial court made no mistake

by letting the jury answer these questions. (2)Given the fact that the damages

provision failed at its essential purposes is it fair for the jury to consider consequential

damages generally speaking? This contention is incorrect.(3)The k also had a

provision that said that there should be no consequential damages to the contract

ever. SO, do we throw out the clause that says there shall not be any consequential

damages? Ct says whether or not that section remains enforceable is to be looked at

separately and independently. Holding: A consequential damages provision is

only enforceable if it is not unconscionable.




UPSHOTS:

Illustration of UCC § 2-719

A remedy will fail of its essential purpose if it no longer provides meaningful

relief.

• UCC § 2-719

1(a) In addition to the remedies you can provide your own in addition to them or in

substitution.

1(b) Unless the contract makes clear that the contracts list of remedies are

exclusive anything you write in your k with regard to contracts will just be

interpreted as additional options.

(2) Where circumstances cause an exclusive or limited remedy to fail of its

essential purpose, remedy may be had as provided in this Act.

Specifically to consequential damages – damages can be limited unless they are

for injury to the person in the case of consumer goods.

UCC RULES FOR REMEDIES

• UCC § 1-106 Remedies to Be Liberally Administered

Expectancy damages. No consequential or punitive damages unless otherwise

specified in the Act.

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

(1) If buyer rejects because of non conforming goods the seller can cure the defect

before the end of the contract time.

(2) If buyer rejects non conforming goods that the seller had reasonable grounds to

believe would be acceptable the seller may have more time to make the goods

conforming.• UCC § 2-703 Seller’s Remedies in General

If buyer wrongfully rejects the goods or doesn’t pay the seller may:

Withhold delivery

Stop delivery

Proceed under § 2-704

Resell and recover damages

Recover damages for non acceptance or in certain cases the price

Cancel

• UCC § 2-706(1) Seller’s Resale Including Contract for Resale Seller must act in good faith and act in a commercially reasonable manner when

reselling.

If he does so then he may recover difference in price and any incidental damages

less expenses saved in consequence of buyer’s breach.

• UCC § 2-708 Seller’s Damages for Non-acceptance or Repudiation




(1) Subject to subsection 2- the damages for non-acceptance is [(unpaid contract

price + incidental damages) – market price - expenses saved in consequences of

buyer’s breach].

(2) If the damages of section 1 do not put the seller back into the same position as

he would have been had buyer not breached he may recover additional damages

to put him in that place.

• UCC § 2-709(1)(b) Action for the Price

Seller can recover incidental damages and the price of the goods only after making

a reasonable effort to resell the goods.

• UCC § 2-710 Seller’s Incidental Damages

Includes commercially reasonable charges, expenses or commissions incurred in

stopping delivery, in the transportation, care and custody of goods after the

buyer’s breach and in connection with the return or resale of the goods.

• UCC § 2-711 Buyer’s Remedies in General; Buyer’s Security Interest in

Rejected Goods

(1) If the seller refuses to deliver or the buyer rightfully rejects and it is a material

breach the buyer may recover the amount already paid or cancel the order. Hemay also (a) cover or (b) recover damages for non-delivery.

(2) If the seller refuses to deliver the buyer may also (a) if the goods have been

identified recover as specified in § 2-502; or (b) in certain circumstances obtain

specific performance or replevy the goods as specified under § 2-716.

(3) If buyer has received and paid for some of the goods already he may resell

them in a like manner as an aggrieved seller.

• UCC § 2-712 “Cover”; Buyer’s Procurement of Substitute Goods

(1) Cover means to make a good faith effort without unreasonable delay to

purchase goods in substitution of the ones due from the seller. (2) Buyer may recover [(cost of cover – contract price) + (incidental or

consequential damages) – expenses saved in consequence of seller’s breach].

(3) If the buyer doesn’t cover that doesn’t bar him from recovery.

• UCC § 2-713 Buyer’s Damages for Non-delivery or Repudiation

(1) Need proof of market price but damages are [(contract price – market price at

time buyer learns of breach) + (incidental and consequential damages) – expenses

saved].

(2) Market price is to be determined based on place of tender. In cases of rejection

the place of arrival.

• UCC § 2-715 Buyer’s Incidental and Consequential Damages

(1) Incidental damages include: expenses reasonably incurred in inspection,

receipt, transportation and care and custody of goods rejected and 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 include: (a) loss resulting from requirements and

needs that the seller had reason to know of and which could not be prevented by

cover; and (b) injury to person or property proximately resulting from any breach

of warranty.

• UCC § 2-716 Buyer’s Right to Specific Performance or Replevin

(1) Specific performance is proper where the goods are unique.

(2) Specific performance may include payment of the price, damages or other

relief the court feels just.

(3) Buyer has right of replevin if after reasonable effort he is unable to cover for

the goods. In the case of goods bought for personal, family, or household

purposes, the buyer’s right of replevin vests upon acquisition of a special property.

THIRD PARTY INTERESTS

ASSIGNMENTS

• Assign your rights.

• Promisees assigning the benefits they get out of a contract to somebody else.

A agrees to cut the lawn for B, B agrees to pay on a monthly basis to A. A assigns

his right to be paid to X. A keeps cutting the lawn for B but B pays X.

A is Assignor

X is Assignee

B is Obligor

• Generally you can assign something if it doesn’t substantially effect the burden on the

obligor.

• If the contract is silent to assignability then it is allowed to be assigned.

• CASES:

Fitzroy : Facts: Δ owed 5 creditors money. The creditors decide to assign their

rights to this money to the Π. Turns out Π didn’t really want to collect the money

he just wanted to force Δ into bankruptcy so he could remove him from

directorship. Issue: Does Π’s motivation matter? Δ says assignment was not valid

because it the assignee wanted the assignment for bad faith reasons. Court says

the motives don’t matter for assignment. Why they assigned it or took it on is

irrelevant.

UPSHOT:

• Although there are limits to what can be assigned the motivation of the

parties involved in the assignment are irrelevant to the calculus.

Allhusen v. Caristo Construction Corp.: Facts: subcontract with language that

said the contract couldn’t be assigned unless there was written consent. Consent

wasn’t received in writing. Issue: Is this prohibitory clause enforceable? Ct holds




that where clear language is used this will be honored. If the language isn’t

clear enough you still have the right to assign – it will be considered a

mere promise not to assign and this does not take away your right to

assign – you still have the right but if you breach your promise you can be

sued for damages.

UPSHOTS:

• Clauses prohibiting assignment are disfavored and will be narrowly

construed, thus clauses prohibiting assignment shall generally be read as

limiting a parties’ contractual right to assign but not its power to assign.

• If sufficiently clear however such terms will be held to eliminate the power to

assign.

Owen v. CNA: Facts: Contract with a nonassignment clause. Owen assigned her

rights regardless of the nonassignment clause. CNA refused to make payments to

the assignee. Π brought action for say that this is ok. CNA probably cares because

of tax reasons. Holding: Clause didn’t take away the right to assign but it was a

covenant in the contract. The assignment is valid but Owen is on the hook for

damages. Can’t make an assignment if it’s going to make it harder on the obligorto fulfill its responsibilities.

UPSHOT:

• Recognize the legal limits of assignability. Summarized nicely on pg. 1089

and R2d § 317.

Continental Purchasing Co. v. Van Raalte Co.: Facts: Ethel Potter assigned al

her future wages to Π. Δ is her employer. Δ received written notice of the

assignment. Δ keeps paying Potter. Π sues Δ for the payments. Issue: Is Δ

(obligor) liable to Π (assignee) for the payments? Holding: The Δ is liable because

they had notice.

UPSHOT:

• Obligor is obliged to honor an assignment once he/she receives notice of it.

• R2d § 317 Assignment of a Right

• R2d § 322 Contractual Prohibition of Assignment

DELEGATIONS

• Delegate your duties.

I.e. A agrees to cut the lawn for B, B agrees to pay on a monthly basis to A. A

doesn’t want to cut lawns anymore, but doesn’t want to be sued for breach. A gets

X to cut the lawns. A still gets paid but X cuts lawn.

A is Delegator

X is Delegatee

B is Obligee/Obligatee




• Even if there is a completely valid delegation then the original person is normally still

responsible.

• Sally Beauty Co. v. Nexxus Products Co., Inc.: Facts: Δ had an agreement with

Best for an exclusive distributor agreement. So Best had to give “best effort” to sell

Δ’s product. Π acquires Best. Π is a competitor of Δ. Issue: Was Δ entitled to cancel

the contract? The duty to do the distribution was assigned exclusively to best so now

a diff company was going to be doing this work. Holding: This delegation is void

because of the substantial interest of the obligee.

UPSHOTS:

Application of § 318- Duties cannot be delegated to a third party if such

delegation would impair a substantial interest of the obligee.

• R2d § 318 Delegation of Performance of Duty

THIRD PARTY BENEFICIARIES

• TPB’s are bound by the whole contract – I.e KMART bound by the arbitration clause.

• Any defenses that the Δ would have had against the original counterparty they canraise against you as well.

• Intended Beneficiary: The parties to the contract intended you to have rights under

that contract.

• Three standards of when a 3d parties rights vest:

Upon formation of the contract – knowledge is irrelevant.

Knowledge – vest when the 3d party finds out they have these rights.

Reliance – when the 3d party acts in reliance on the contract.

• CASES:

KMART v. Balfour Beatty, Inc.: Facts: Contract btwn BBI and TPL (owner of theshopping center). KMART sues BBI for breach of contract because the roof wasn’t

up to specification. Π argument: They were intended to benefit from the contract.

They are a tenant of the shopping center. The contract specifically mentioned

KMART in it. Rule: You’re an intended beneficiary if the parties to the

contract intended you to have rights under that contract. What the third

party thinks doesn’t matter – just what the parties to the contract thinks. Holding:

KMART is an intended beneficiary.

UPSHOTS:

• Only intended beneficiaries have rights that can be asserted under contracts.

• Intended beneficiaries are those parties whom the parties to the contract

intended to grant the legally enforceable rights to.

♦ Look at circumstances and contract language.

• A Δ may assert against a TPB any defenses that it could have asserted

against its original counterparty.




Johnson v. Holmes Tuttle Lincoln – Mercury, Inc.: Facts: Caldera bought a

car from Δ. They get into an accident with Π. Whne the car was purchased Caldera

was told by the dealership that they’d get full insurance coverage and they didn’t.

Π is suing to recover the money they were awarded when they sued the Calderas.

Π was not named in the contract. Holding: Even though Π wasn’t named or even

thought of – there was a class of people that the parties intended to be protected.

i.e. Anyone damaged by their car. RULE: Even though you as an individual

were not the intended beneficiary, so long as there is a class of intendedTPB your protected if you’re in that class.

UPSHOTS:

• A party need not be named in a contract to be a TPB or even individually

intended to be a TPB, all that is necessary is that the TPB be a member of a

class for whose benefit the contract was made.

Hale v. Groce: Facts: Δ was an attorney. He was instructed by his client to make

a will and include Π as a beneficiary but Δ never does this. Δ’s client dies and the

will gets discharged. Π brings a lawsuit against Δ for breach of contract. Holding:

Π was an intended beneficiary. UPSHOTS:

• Illustration of the third party beneficiary rule.

Zigas v. Superior Court : Facts: US gov’t – housing and urban development

(HUD) – is financing apartment building in return for the housing only being for rent

control price. Landlord raises rent above the amount permitted under the contract

with HUD. Tenants sue claiming the landlords are violating the contract with HUD.

Different rule when the government is involved – much higher standard. The test

is “whether there was manifested an intention that petitioners be

compensated in the event of real parties’ nonperformance.”

UPSHOTS:

• There is a heightened standard for asserting third party beneficiary claims in

the context of gov’t contracts.

• An intention to compensate the third party for injuries resulting from breach

must be manifested in the contract itself.

Tweeddale v. Tweeddale: Facts: Mom gives son property. But if he ever sells it

he has to get 100 to his brother and 50 to his sister. The brother is not a party to

the contract. The son sells the land but doesn’t give the brother any money. The

brother sues to get his $100. Rule: The right of a 3d party to sue vests once

the contract is made, regardless of knowledge of the right. Another rule:

A third parties right to sue only kicks in when the 3rd party relies on their

status as a third party beneficiary.

UPSHOT:

• A 3d party beneficiary’s rights must vest before they can be asserted.

Documents

Contracts II - Colombo - Spring 2008