Contract Law Outline 1L


Contract Law Outline

 

  1. Elements of Contract (3)
  2. Mutual Assent (4)
    1. Offer and Acceptance (6)
      1. Offer (6)
        1. Preliminary Negotiations (7)
        2. Written Memorials (8)
        3. Revocation (8)
      2. Acceptance (9)
        1. Mirror Image Rule (9)
        2. Acceptance by Mail (10)
        3. Acceptance by Performance (10)
        4. Acceptance by Silence (11)
      3. E-Commerce (11)
    2. Interpreting the Agreement (11)
      1. Ambiguous Terms (11)
      2. Filling Gaps (13)
      3. Adhesion (14)
      4. Discerning Terms (15)
        1. Battle of the Forms (15)
        2. Terms that Accompany Product (16)
    3. Assent in Writing (16)
      1. Statute of Frauds (16)
      2. Parol Evidence Rule (18)
  3. Enforceability (20)
    1. Consideration (20)
      1. Bargains v. Gratuitous Promises (21)
      2. Moral Consideration (21)
      3. Modification and Preexisting Duty Rule (22)
      4. Adequacy (23)
    2. Intention to be Legally Bound (23)
    3. Promissory Estoppel (24)
      1. Substitute for Consideration (25)
        1. Family Promises (25)
        2. Charitable Acts (25)
        3. Construction (25)
      2. Alterative to Breach of Contract (26)
      3. Statute of Frauds (26)
      4. Current Application (27)
  4. Performance and Breach (27)
    1. Implied Duty of Good Faith (27)
    2. Conditions and Constructive Conditions (27)
    3. Substantial Performance and Material Breach (28)
  5. Defenses (29)
    1. Capacity (29)
    2. Improper Consent (30)
      1. Misrepresentation (30)
      2. Duress (32)
      3. Undue Influence (33)
      4. Unconscionability (33)
    3. Failure of Basic Assumption (34)
      1. Mistakes of Present Existing Facts (34)
        1. Mutual Mistake (35)
        2. Unilateral Mistake (36)
        3. Duty to Disclose (36)
      2. Changed Circumstances (37)
        1. Impossibility and Impracticability (37)
        2. Frustration of Purpose (39)
        3. Long Term Contracts (39)
  6. Remedies (40)
    1. Types of Damages (40)
      1. Expectation and Reliance (41)
      2. Restitution (44)
    2. Limitations on Damages (45)
      1. Unforseeability (45)
      2. Uncertainty (45)
      3. Avoidability (46)
    3. Liquidated Damages and Penalties (48)
    4. Specific Performance (49)
      1. Land and Goods (49)
      2. Personal Services (50)

 

  1. Elements of Contract

 

The Restatement (Second) of Contracts

1. Group of common law principles, with some innovations not in the common law, that are useful in clarifying the majority principle.

2. Very influential – while NOT a statute and binding on courts per se, some courts have adopted portions to be their state’s common law.

3. Originally published by Williston and Corbin.

 

Restatement (Second) § 1. Contract Defined

A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.

 

Restatement (Second) § 2. Promise; Promisor; Promisee; Beneficiary

(1) A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee of which the law in some way recognizes as a duty.

(2) The person manifesting the intention is the promisor.

(3) The person to whom the manifestation is manifested is the promisee.

(4) Where performance will benefit a person other than the promisee, that person is a beneficiary.

 

Restatement (Second) § 3. Agreement Defined; Bargain Defined

An agreement is a manifestation of mutual assent on the part of two or more persons. A bargain is an agreement to exchange promises or to exchange a promise for a performance or to exchange performances.

 

Restatement (Second) § 4. How a Promise May be Made

A promise may be stated in words either oral or written, or may be inferred wholly or partly from conduct.

 

The Uniform Commercial Code

1. Model statutes for states (adopted with minor variations in almost every one).

2. UCC itself is not law, although state laws reference it, and courts cite as law.

3. Article I – General Provisions; Article 2 – Sales – Transactions in Goods.

 

UCC § 1-103. Supplementary General Principles of Contract Law Applicable

Unless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating clause shall supplement its provisions.

 

UCC § 2-102. Scope; Certain Security and Other Transactions Excluded from this Article

Unless the context so requires, the Article applies to transactions in goods; it does NOT apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only a security transaction nor does this Article impair or repeal any statute regulating sales to consumers, farmers, or other specified classes of buyers.

 

UCC § 2-105. Definitions: Transferability; “Goods”….

(1) “Goods” means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (Article 9) and things in action. “Goods” also includes the unborn young of animals and growing crops and other identified things attached to realty as described in goods to be severed from realty (§ 2-107)….

 

UCC § 2-106. Definitions: Contract; Agreement; Contract for Sale; Sale; Present Sale…

(1) In this Article unless the context otherwise requires “contract” and “agreement” are limited to those relating to the present or future sale of goods. “Contract for sale” includes both a present sale of goods and a contract to sell goods at a future time. A “sale” consists in the passing of title from the seller to the buyer for a price (§ 2-401). A “present sale” means a sale which is accomplished by the making of a contract…

 

Default Rule – Rule parties can contract around by prior agreement (e.g. assets to spouse, then to kids on death).

Majoritarian Default – Rule majority of contracting parties would want.

Penalty Default – Rule at least one party would NOT want.

Immutable Rule – Rule parties cannot change (e.g. duty to act in good faith).

 

Special Contract – denotes an express or explicit contract, with all term laid out, as opposed to one where terms must be inferred from law or nature of circumstances surrounding transaction.

 

Shaheen v. Knight (Pa. 1957)

Facts: Shaheen contracted with Dr. Knight to sterilize him. Two years later, he got his wife pregnant and had another child.

Law: No warranty of cure implied in contract (not a medical malpractice tort action). In any case, it would be against public policy to award damages for the birth of a healthy child.

 

  1. Mutual Assent

 

Restatement (Second) § 17. Requirement of a Bargain

(1) Except as stated in Subsection (2), a formation of a contract requires a bargain in which there has been a manifestation of mutual assent to the exchange and a consideration.

(2) Whether or not there is a bargain a contract may be formed under special rules applicable to formal contracts under the rules stated in §§ 82-94.

 

Restatement (Second) § 18. Manifestation of Mutual Assent

Manifestation of mutual assent to an exchange requires that each party either make a promise or begin or render a performance.

 

Restatement (Second) § 19. Conduct as Manifestation of Assent

(1) The manifestation of assent may be made wholly or partly by written or written or spoken words OR by other acts OR by failure to act.

(2) The conduct of a party is not effective ad manifestation of his assent unless he intends to engage in the conduct and knows or has reason to know that the other party may infer from his conduct that he assents.

(3) The conduct of a party may manifest assent even though he does not in fact assent. In such cases a resulting contract may be voidable because of fraud, duress, mistake, or other invalidating clause.

 

Subjective Theory (old)

Consider what parties actually thought.

Must have Meeting of the Minds – both parties conform to same intent.

Subjective from both listener’s and speaker’s points of view.

 

Objective Theory (new)

Intention ascertains for outer manifestation, not inner thoughts.

Obligation attaches by mere force of law to certain acts (L. Hand)

Supported in late 19th and early 20th centuries by Williston and Holmes

Exemplified by Reasonable Person Standard

 

Embry v. Hargadine McKittrick (Mo. 1907)

Facts: Embry went to boss to demand renewal of contract or quit; boss said “Go ahead, get your men out.” Embry took this to mean that he retained job. Later fired.

Law: Meeting of the minds is determined by express intention. If what McKittrick said taken by reasonable mind as offer of employment, and Embry so understood it, then the contract is valid. (Objective Standard)

Note: There is a subject element to the objective standard in the Embry must have so understood McKittrick’s offer.

 

Lucy v. Zehmer (Va. 1954)

Facts: Parties signed contract over drinking for Lucy to buy Zehmer’s farm for 50K, a reasonable price. Zehmer later reneged.

Law: Lucy actually believed Zehmer was serious, AND was justified in believing so. No evidence that Zehmer was too drunk to make contract. (Objective Standard)

 

Reasonable Person Standard

  • Average Reasonable Person – would any reasonable person think party received offer?
  • Person Like Promisee – would someone with promisee’s actual characteristics think party received offer? (focus on major characteristics – danger of creeping into subjective)
  • Person from Promisor’s Perspective – What would someone with characteristics apparent to person do?

 

    1. Offer and Acceptance

 

|—————————-|————————————-|

I talk you talk I talk again

Offer Acceptance X

OR Solicitation Offer Acceptance

Contract formed upon acceptance, but what acceptance is depends on when offer made.

 

Restatement (Second) § 22. Mode of Assent: Offer and Acceptance.

(1) The manifestation of mutual assent to an exchange ordinarily takes the form of an offer or proposal by one party followed by an acceptance by the other party or parties.

(2) A manifestation of mutual assent may be made even though neither offer nor acceptance can be identified and even though the moment of formation cannot be determined.

 

UCC § 2-204. Formation in General

(1) A contract for the sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognize the existence of such a contract.

(2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.

(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a basis for an appropriate remedy. [Cf. § 33, below]

 

UCC § 2-206. Offer and Acceptance in Formation of Contract

(1) Unless otherwise unambiguously stated by the language or the circumstances

(a) an offer to make a contract shall be construed as inviting acceptance in any manner by any medium possible under the circumstances; [Cf. § 30, below]

(b) [shipment can equal acceptance].

(2) Where the beginning of a requested performance is a reasonable mode of acceptance, an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.

 

    1. Offer

 

Restatement (Second) § 24. Offer Defined

An offer is the manifestation of a willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.

[Offer effective when received by offeree]

 

Restatement (Second) § 29. To Whom an Offer is Addressed

(1) The manifested intention of the offeror determines the person or persons in whom is created a power of acceptance.

(2) [Power may be had by individual or group]

 

Restatement (Second) § 33. Certainty

(1) Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain.

(2) The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.

(3) The fact that one or more terms of a proposed bargain are left open or uncertain MAY show that a manifestation if intention is not intended to be understood as an offer or as an acceptance. [Cf. § 2-204(3), above]

 

    1. Preliminary Negotiations

 

Restatement (Second) § 26. Preliminary Negotiations

A manifestation of willingness to enter into a bargain is not an offer is the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.

Official Comment a: reason to know depends on words, conduct, and circumstances, including past communications and usage in line of business.

Official Comment c: in determining if offer is made, relevant factors include terms of previous inquiry, completeness of terms, number of parties to whom communication addressed.

 

Nebraska Seed v. Harsh (Neb. 1915)

Facts: Harsh sent letter to NSC naming price of millet. NSC accepted as offer.

Law: Mere statement of price cannot be understood as an offer to sell. Request for bids is not an offer, but really preliminary negotiations.

 

Leonard v. PepsiCo (N.Y. 1999)

Facts: Pepsi advertised junk for points, including Harrier Jet for 7M points as a joke.

Law: Advertisement is generally not offer, but solicitation of one. Objective person must construe an ad as an offer, which excludes acts in jest. No real offer made by Pepsi.

 

Donavan v. RRL (Cal. 2001)

Facts: RRL ran ad in paper offering car from $10,000 less than it sold for by mistake. Donovan came in with ad demanding car at lower price.

Law: Mistake unknown to Donovan – could reasonably construe as offer since price and VIN number were both on ad – thus, is an offer.

 

Farnsworth on Precontractual Liability

Generally courts take an “aleatory” view of negotiations, that the benefits of successful contract outweigh the risk of negotiations collapsing. They thus are generally unwilling to impose liability for precontractual negotiations. But, on occasion courts have departed from this rule in recent decades in the following ways:

1. Unjust Enrichment – Restitution for ideas disclosed or services rendered.

2. Misrepresentation – usually would be actionable in tort. Rare since difficult to both prove fraudulent intent and substantial loss.

3. Specific Promise – Negotiating party may not, without impunity, break promise that other party has relied upon. See promissory estoppel and Red Owl, below.

4. General Obligation – courts unwilling to impose general good faith duty for preliminary negotiations, unlike in Europe.

 

      1. Written Memorials

Restmt. (Second) § 27. Existence of Contract Where Written Memorial Is Contemplated

Manifestations of assent that are in themselves sufficient to conclude a contract will not be prevented from so operating by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof; but the circumstances may show that the agreements are preliminary negotiations.

 

Empro v. Ball-Co. (7th Cir. 1989)

Facts: Empro sent letter of intent to Ball-Co. to buy assets but negotiations reached an impasse. Ball-Co. then started negotiations with a third party.

Law: There must be an express objective intent to be binding. Letter contains phrases like “subject to” indicating lack of finality – no intent shown, so not a binding contract.

Counter-argument: definitive contract will simply document agreement already reached.

 

Texaco v. Pennzoil (Tex. 1987)

Facts: Pennzoil made initial agreement to by Getty Oil. Texaco tortuously interfered with contract just 48 hours later.

Law: Court considers several factors to determine if agreement could be considered binding contract: 1) whether party reserved right to be bound, 2) any partial performance, 3) all essential terms agreed upon, and 4) whether complexity of transaction indicated formal contract expected. There was enough evidence in this case for the jury to find binding contract.

 

      1. Revocation

 

Restatement (Second) § 35. The Offeree’s Power of Acceptance

(1) An offer gives to the offeree a continuing power to complete the mutual manifestation of assent by completing the offer.

(2) A contract cannot be created by acceptance of an offer after the power of acceptance has been terminated in one of the ways listed in § 36.

 

Restatement (Second) § 36. Methods of Termination of the Power of Acceptance

(1) An offeree’s power of acceptance may be terminated by

(a) rejection of counter-offer by the offeree, or

(b) lapse of time, or

(c) revocation by the offeror, or

(d) death or incapacity of the offeror or the offeree.

(2) In addition, an offeree’s power of acceptance is terminated by the non-occurrence of any condition of acceptance under the terms of the offer.

 

Restatement (Second) § 25. Option Contracts

An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer.

 

Restmt. (Second) § 37. Termination of the Power of Acceptance under Option Contract

Notwithstanding §§ 38-49, the power of acceptance under an option contract is not terminated by rejection or counter-offer, by revocation, or by death or incapacity of the offeror, unless the requirements are met for discharge of a contractual duty.

 

Restatement (Second) § 42. Revocation by Communication [Offeror Offeree]

An offeree’s power of acceptance is terminated when the offeree receives from the offeror a manifestation of intention not to enter into the proposed contract.

 

Restatement (Second) § 43. Indirect Communication of Revocation

An offeree’s power of acceptance is terminated when the offeror takes definitive action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to that effect.

 

Dickinson v. Dodds (U.K. 1876)

Facts: Wed –Dodds offered to sell house to Dickinson. Thurs – Dodds sold to Allan (then Dodds found out). Fri – Dickinson tried to accept offer and was refused.

Law: Before acceptance, parties free to change – if offer revoked, then there is no meeting of minds at time of supposed acceptance. Dickinson knew offer was revoked because Dodds sold to Allen. No contract. See Restmt. § 43 (above).

 

UCC § 2-205. Firm Offers

[Not revocable for lack of consideration, but can lapse after a reasonable time (should never be LONGER than 3 months)]

 

      1. Acceptance

 

Restmt (2d) § 40. Time When Rejection or Counter-Offer Terminates Power of Acceptance

[When received by offeror]

 

    1. Mirror Image Rule

 

Mirror Image Rule – acceptance must contain no new terms.

 

Ardente v. Horan (R.I. 1976)

Facts: Horan offered to sell house for $250,000. Ardente agreed to buy and sent $20,000 deposit check and condition that some of the personalty remain in realty. Horan returned check and revoked offer.

Law: Conditional acceptance only valid if acceptance is independent of condition. Can only consider language actually used – request was not independent, so revocation valid.

 

Restatement (Second) § 61. Acceptance which Requires Change of Terms

[Acceptance with change of terms not invalid unless terms are conditional].

 

      1. Acceptance by Mail

 

Restatement (Second) § 63. Time when Acceptance Takes Effect

[Acceptance is valid when out of offeree’s possession].

Mailbox Rule – Acceptance effective on dispatch – avoids Two Generals problem.

 

Restatement (Second) § 64. Acceptance by Telephone or Teletype [same as in person].

Restatement (Second) § 65. Reasonableness of Medium of Acceptance

[It is reasonable if customarily used for similar transactions].

Restatement (Second) § 66. Acceptance Must be Properly Dispatched

[Must be properly addressed and reasonably ensure safe transmission].

 

      1. Acceptance by Performance (Unilateral Contracts)

 

Restatement (Second) § 54. Acceptance by Performance

(1) Where an offer invites an offeree to accept by rendering a performance, no notification is necessary to make such an acceptance effective unless the offer requests such a notification.

(2) If an offeree who accepts by rendering a performance has reason to know that the offeror has no adequate means of learning of the performance with reasonable promptness and certainty, the contractual duty of the offeror is discharged unless

(a) the offeree exercises reasonable diligence to notify the offeror, or

(b) the offeror learns of the performance within a reasonable time, or

(c) the offer indicates that notification of acceptance is not required.

 

Restatement (Second) § 45. Option Contracted Created by Part Performance

[option contract starts when performance begins – duty to complete is created, but conditional on completion of performance]

 

Restatement (Second) § 30. Form of Acceptance Invited

(1) An offer may invite acceptance to be made by an affirmative answer in words, or by performing or refraining from performing a specified act, or may empower the offeree to make a selection of terms in his acceptance.

(2) [any manner and any medium reasonable – Cf. § 2-206(1)(a), above]

 

Restatement (Second) § 32. Invitation of Promise or Performance

In case of doubt an offer in interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance, as the offeree chooses.

 

Carlill v. Carbolic Smoke Ball Co. (U.K. 1893)

Facts: CSB published ad saying it would pay £100 to anyone who used their smoke ball and got the flu. Carlill did, demanded her £100, and was refused.

Law: Notification of acceptance is required unless waived by offeror. Nature of the ad waives notification requirement – thus satisfaction of the condition alone is sufficient.

Note: Leonard v. PepsiCo distinguished this case by saying Pepsi’s ad was not an offer.

 

      1. Acceptance by Silence

 

Restatement (Second) § 69. Acceptance by Silence

(1) Silence acceptance is OK in following cases only: [a), offeree takes benefit of services (for which compensation expected) with reasonable time to reject, b) offeror indicates acceptance by silence is ok, c) previous dealings indicate so].

 

Hobbs v. Massasoit Whip Co. (Mass. 1893)

Facts: Hobbs had in past sent eel skins to MWC, and MWC had accepted and paid Hobbs. Hobbs sent MWC batch, MWC did nothing except to destroy them months later.

Law: MWC did accept Hobbs’ offer by doing nothing since conduct imported acceptance based on previous dealings, even if state of mind did not. Restmt. § 69(1)(c).

 

      1. E-Commerce

 

Specht v. Netscape (N.Y. 2001)

Facts: Specht downloaded SmartDownload by NS which had browse license. Claimed was violating privacy – NS required arbitration because of term in license.

Law: No affirmative manifestation of assent to license required to download, so act of downloading does not create binding contract.

 

    1. Interpreting the Agreement

 

    1. Ambiguous and Vague Terms

 

Restatement (Second) § 200. Interpretation of a Promise or Agreement

Interpretation of a promise/agreement/term thereof is the ascertainment of its meaning.

 

General Approach

1. Did parties (subjectively) attach same meaning to term at time of contract?

Yes – There is an agreement, use same meanings. § 201(1).

No – go to 2

2. Did party X know or have reason to know party Y’s meaning of term?

Yes if Y did not know X’s meaning – use Y’s meaning. § 201(2).

No – go to 3

3. Can objective meaning be determined?

Yes – use whichever party’s subjective meaning matches objective meaning.

No – no agreement, only seemed to be mutual assent.

 

Restatement (Second) § 201. Whose Meaning Prevails

(1) [When parties have same meaning, use that].

(2) [When different meanings, use A’s meaning if B a) knew, or b) had reason to know of A’s meaning].

(3) Except as stated in this Section, neither party is bound by the meaning attached to the other, even though the result may be a failure of mutual assent.

 

Restatement (Second) § 202. Rule in Aid of Interpretation

[Use whole weight of words, including context and in light of all circumstances. Generally prevailing meaning used, but use technical definitions and trade usage where appropriate. Use course of performance and course of dealing. Any term accepted without objection should be given greater weight].

 

Restatement (Second) § 206. Interpretation Against the Draftsman

 

UCC Evidence Hierarchy

1. Express Terms; 2. Course of Performance; 3. Course of Dealing; 4. Trade Usage

 

Raffles v. Wichelhaus (U.K. 1864)

Facts: Wichelhaus, a cotton speculator, contracted with Raffles to buy cotton arriving on Peerless. W meant one leaving in Oct., R shipped on one leaving in Dec. W refused to buy.

Law: Two ships Peerless – ambiguity means there is no meeting of the minds.

 

Oswald v. Allen (2d Cir. 1969)

Facts: Oswald wanted to buy all Swiss coins from Allen, including those in her Rare Coin Collection. Allen thought only coins in Swiss Coin Collection.

Law: No meeting on the minds, so no contract. No sensible way to choose between two different interpretations.

 

Weinberg v. Edelstein (N.Y. 1952)

Facts: Weinberg had restrictive covenant which meant only he could sell dresses in the building. Edelstein tried to sell two piece business suits.

Law: Should use trade usage of the word dress, which does not include business suits.

 

Frigaliment v. B.N.S. Int’l Sales Corp. (N.Y. 1960)

Facts: BNS shipped chickens to Frig including stewing chickens. Frig only wanted broilers and fryers and said that’s what the contract called for when said “chicken.”

Law: BNS’s view coincided with AN objectively reasonable meaning of the word in the trade. Frig has to show broilers and fryers is the ONLY objective meaning of the word.

Note: Frig had the burden – if B.N.S. was suing, then its claim would have failed too since Frig’s meaning was also reasonable in the trade and the burden would be on B.N.S.

 

      1. Filling Gaps

 

Restmt. (Second) § 34. Certainty and Choice of Terms; Effect of Performance or Reliance

(1) The terms of a contract may be reasonably certain even though it empowers one or both parties to make a selection of terms in the course of performance.

(2) Part performance under an agreement may remove uncertainty and establish that a contract enforceable as a bargain has been formed.

(3) Action in reliance on an agreement may make a contractual remedy appropriate even though uncertainty is removed.

 

Restatement (Second) § 204. Supplying an Omitted Essential Term

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

 

UCC § 2-204. Formation in General

(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a basis for an appropriate remedy. [Cf. § 33, below]

 

UCC Provisions for Open Terms

§ 2-305. Open Price Term

[Price can be left open – should be fixed reasonably]

§ 2-306. Output Requirements

[(1) Quantity measured by output can be in good faith, should reasonably to comport to estimates; (2) Each party should use best efforts to satisfy bargain in exclusive agreements].

§ 2-308. Absence of Specified Time for Delivery

[Generally, place should be home or business, titles through banks, and if seller knows where buyer is, then at that place]

§ 2-309. Absence of Specific Time Provisions; Notice of Termination.

[Should give reasonable notice of termination and ship goods in reasonable time]

§ 2-310. Open Time for Payment…Ship[ping] under Reservation

[Payment due at time and place of receipt, buyer may inspect goods]

 

Sun Printing v. Remington Paper (N.Y. 1923)

Facts: Sun agreed to buy paper from Remington over 16 month period with price term left open for last 12 months; agreed to negotiate price during that time.

Law: Essential terms must be agreed upon – an agreement to agree or negotiate does not supply term as it is too uncertain. Since price not agreed upon, Sun not bound. Judges must not be given the power to revise, only to interpret.

 

Martin v. Schumacher (N.Y. 1981)

Law: Mere agreement to agree unenforceable, especially when specific performance sought. There must be some inkling that parties would have agreed to price judicially imposed.

 

Texaco v. Pennzoil (Tex. 1987)

Facts: Texaco gives laundry of list of potential details to be worked out.

Law: Contract still binding because specific term omitted not alleged by Texaco.

 

New York Central Iron Works v. United States Radiator (N.Y. 1903)

Facts: CIW promised to buy entire radiator needs of 1899 from USR. Needs shot way up (100K+) previous years (48K). USR couldn’t deliver. CIW sued for breach.

Law: Parties must act in good faith and fair dealing when executing contract. There is no reason to believe CIW didn’t actually need the additional amount.

 

Requirements Contract

1. If market price > contract price (buyer has made good deal), then better for seller to sell to market than buyer.

2. If market price < contract price (seller has made good deal), buyer will limit quantity (seller still has less profit).

 

Wood v. Lucy, Lady Duff Gordon (N.Y. 1917)

Facts: Lucy promised to exclusively endorse products for Wood and split profits. Lucy endorsed for someone else and claimed Wood not doing enough to promote her products.

Law: A whole writing may be instinct with an obligation which creates a contract that requires Wood to make reasonable efforts to earn profit. Implied promise binds Wood.

 

      1. Adhesion

 

Adhesion Contract – Standardized contract (take it or leave it) – consumer has no realistic hope of negotiating or bargaining terms and cannot obtain product without acquiescing to terms.

 

Restatement (Second) § 211. Standardized Agreements

(1) Except as stated in Subsection (3), where a party to an agreement signs or otherwise manifests assent to a writing and has reason to believe that like writings are regularly used to embody terms of agreements of the same type, he adopts the writing has an integrated agreement with respect to the terms included in the writing.

(2) Such a writing is interpreted wherever reasonable as treating alike all those similarly situated, without regard to their knowledge or understanding of the standard terms in the writing.

(3) Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement.

Comment: Party does not expect the other to read all standardized terms, but generally are enforced but construed against draftsman (§ 206) and must be in good faith (§ 205). They also may be superseded (§ 203), or the court can refuse to enforce as unconscionable (§ 208).

 

Carnival Cruise Lines v. Shute (U.S. 1991)

Facts: Shute bought tickets through travel agent. Company sent tickets with standard form agreements, including a forum selection clause in Fla. Shute wanted to be in Wash.

Law (Blackmun): FSC can be enforced since it is fundamentally fair, even if there was unequal bargaining power, as in this case. No bad faith or fraud indicated.

Dissent (Stevens): Unequal bargaining power should make FSC unenforceable, especially since contracts of adhesion should be subject to heightened scrutiny.

Compagno Case: Still enforceable – not overruled by subsequent legislation.

Caspi Case: There is notice for terms on computer screens in adhesion contracts.

 

      1. Discerning Terms

 

    1. Battle of the Forms

 

UCC § 2-207. Additional Terms in Acceptance or Confirmation (Current)

(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

(a) the offer expressly limits acceptance to the terms of the offer;

(b) they materially alter it;

(c) notification of objection to them [given within reasonable time after received].

(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this act.

Comment: 2-207 applies when agreement reached orally and one or both parties send formal memoranda embodying additional terms.

 

UCC § 2-207. Terms of Contract; Effect of Confirmation (Proposed)

Subject to Section 2-202, if (i) conduct by both parties recognizes the existence of a contract although their records do not otherwise establish a contract, (ii) a contract is formed by an offer and acceptance, or (iii) a contract formed in any manner is confirmed by a record that contains terms additional to or different from those in the contract being confirmed, the terms of the contract, are:

(a) terms that appear in the records of both parties;

(b) terms, whether in a record or not, to which both parties agree; and

(c) terms supplied or incorporated under any provision of this Act.

 

Knockout Rule (§ 2-207 Official Comment 6)

What to do if terms are different, not additional – knocks out conflicting terms from contract in order to avoid the following adverse result:

Example 1: PO offer (“no back taxes”); Invoice acceptance (“back taxes”). Different term needs acceptance by offeror, so no back taxes.

Example 2: Price Book offer (“back taxes”); Order acceptance (“no back taxes”). Different term still needs acceptance, so back taxes.

 

Union Carbide v. Oscar Meyer (7th. Cir 1991)

Facts: OM (buyer) promised to pay UC’s taxes with respect to production, sale, and transport. UC accepted orders outside of Chicago to avoid municipal tax. Eight years later, Illinois tax authority said no and made them pay anyway.

Law (Posner): Material alteration of a term is not effective even if contract is. OM had no knowledge being charged taxes, so term is ineffectual.

Test: Term inserted by offeree is ineffectual if:

(1) offer expressly limits acceptance to terms of offer OR

(2) the new term a) makes a material alteration (UCC § 2-207(b) – consent cannot be presumed) AND b) there is no showing that offeror in fact consented to alteration expressly OR by silence against background of course of dealing.

 

      1. Terms that Accompany Product

 

ProCD v. Zeidenberg (7th Cir. 1996)

Facts: ProCD has license inside box. Zeidenberg bought product and violated license.

Law: Notice on outside, license on inside, right to return for refund is an acceptable way of doing business. Since only one form, § 2-207 not relevant, although contract still cannot be unconscionable (which it isn’t in this case).

 

Hill v. Gateway (7th Cir 1997), Klocek v. Gateway (Kan. 2000)

Facts: Plaintiff bought Gateway with contract inside the box, had problem, and did not want to submit to arbitration.

Hill: § 2-207 does NOT apply because there was only one form and refund allowed.

Klocek: § 2-207 DOES apply because terms in box are additional terms to which purchaser did NOT consent. No evidence Klocek given notice.

 

    1. Assent in Writing

 

    1. Statute of Frauds

 

Restatement (Second) § 110. Classes of Contracts Covered

(1) The following classes of contracts are subject to a statute, commonly called the Statute of Frauds, forbidding enforcement unless there is a written memorandum OR applicable exception:

a) executor-administrator provision b) suretyship provision

c) marriage provision d) land contract provision e) one-year provision

[NOTE: if contract not in these classes, does NOT need to be written to be enforced]

(2) The following classes of contracts, which were traditionally subject to the Statute of Frauds, are now governed by Statute of Frauds provisions of the UCC:

a) goods $500+ (§ 2-201) b) securities (§ 8-319) c) property $5000+ (§ 1-206)

(5) In many states other classes of contracts are subject to a requirement of writing.

 

Exceptions to the Statute of Frauds Requirements

1. Restmt. § 125 – payment after land transferred, short term leases

2. Restmt. § 129 – action in reliance; specific performance (must establish reasonable reliance, continuing assent from other party, and that injustice requires specific performance)

3. Restmt. § 130 – contract not be performed within one year

4. Restmt. § 139 – enforcement by virtue of an action in reliance (can exempt if there was detrimental reliance and injustice so requires; see promissory estoppel, below)

5. UCC § 2-201(3)

(a) specially made for buyer and part performance (b) admission in court

(c) goods for which payment has been made or accepted OR which have been received and accepted (§ 2-606)

 

Restatement (Second) § 131. General Requisites of a Memorandum

Unless additional requirements are prescribed by the particular statute, a contract within the Statute of Frauds is enforceable if it is evidenced by any writing, signed by or behalf of the party to be charged, which

(a) reasonably identifies the subject matter of the contract,

(b) is sufficient to indicate that a contract with respect thereto has been made between the parties or offered by the signer to the other party, and

(c) states with reasonable certainty the essential terms of the unperformed promises in the contract.

 

Restatement (Second) § 133. Memorandum NOT Made as Such

Except in the case of a writing evidencing a contract upon consideration of marriage, the Statute may be satisfied by a signed writing not made as a memorandum of contract.

 

Boone v. Coe (Ky. 1913)

Facts: Boone and J.T. Coe had verbal agreement with J.F. Coe to leave Ky. and go to Tex. to work farm there under a one year lease commencing at arrival time, at cost of $1400. When they got there, J.F. wouldn’t let them occupy.

Law: Contract is within statute of frauds since completion of contract (finishing the lease) will happen more than one year after it is made. Thus, is unenforceable.

Note: Could possibly have been an exception under § 139 since there was detrimental reliance, but then damages would be limited to reliance.

 

Schwedes v. Romain (Mont. 1978)

Facts: Romain sent offer to Schwedes to sell property. Schwedes called to accept. Romain later sells to Vornbrooks instead.

Law: No enforceable contract exists since there was no consideration – oral promise to pay is insufficient.

 

Leonard v. PepsiCo – ad not in writing, not signed.

 

Donovan v. RRL (Cal. 2001)

Facts: RRL ran ad in paper offering car from $10,000 less than it sold for by mistake. Donovan came in with ad demanding car at lower price.

Law: Must be signed by UCC § 2-201. But, since signature is any symbol to authenticate, UCC § 1-201(37), company’s name on ad suffices.

 

      1. Parol Evidence Rule

 

Parol Evidence – Oral evidence (Black’s), but generally applies to all extrinsic evidence

 

Restatement (Second) § 209. Integrated Agreements

[Writings constituting final agreement – subject to parol evidence rule

Off. Comm. c: Whether or not there is an integrated agreement is step 1 to determine whether or not to admit parol evidence]

Restatement (Second) § 210. Complete and Partial Integrated Agreements

[Complete – complete and exclusive statement of terms; Partial – all others

Off. Comm. b: Must give wide latitude to determine circumstances bearing on intent]

 

Integrated Agreements

1. Not integrated – not final

2. Partially integrated – final, but terms left open

3. Completely integrated – final, all terms final

 

Methodology of Admitting Parol Evidence

1. Is written agreement intended to be final expression of their agreement?

No – extrinsic evidence is admissible

Yes – go to Question 2.

2. Is agreement complete and exclusive statement of terms?

No – extrinsic evidence admissible and must be consistent. § 213(1).

Yes – extrinsic evidence within scope of agreement inadmissible. § 213(2).

 

Merger Clause – merges all previous agreements into current one (thus, cannot vary).

 

Restatement (Second) § 212. Interpretation of an Integrated Agreement

[use meaning of terms in light of circumstances, including relations of parties, subject matter of transaction, preliminary negotiations, usages of trade, course of fair dealing]

 

Restatement (Second) § 213. Parol Evidence Rule

(1) A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them.

(2) A binding completely integrated agreement discharges prior agreements to the extent they are within its scope.

(3) An integrated agreement that is not binding or that is voidable and avoided does not discharge a prior agreement. But an integrated agreement, even though not binding, may be effective to render inoperative a term which would have been part of the agreement had it not been integrated.

 

Restmt. (2d) § 214. Evidence of Prior or Contemporaneous Agreements and Negotiations

Agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish

(a) that the writing is or is not an integrated agreement;

(b) that the integrated agreement, if any, is completely or partially integrated;

(c) the meaning of the writing, whether or not integrated;

(d) illegality, fraud, duress, mistake, lack of consideration, or other invalidating clause;

(e) ground for granting or denying rescission, reformation, specific perf, or other remedy.

 

Restatement (Second) § 216. Consistent Additional Terms

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

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

 

UCC § 2-202. Final Written Expression: Parol or Extrinsic Evidence

Terms with respect to which the confirmatory memoranda of the parties agree or which otherwise set forth in a writing intended…as a final expression…may NOT be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained and supplemented

(a) by course of dealing or usage of traded (§ 1-205) or…performance (§ 2-208) and

(b) by evidence of consistent additional terms unless the court finds the writing [is complete and exclusive].

 

Thompson v. Libbey (Minn. 1885)

Facts: There was a written contract for the sale of logs and an oral promise of warranty.

Law: NO to Parol Evidence – contract was complete without oral promise – only evidence of completion is contract itself.

 

Brown v. Oliver (Kan. 1927)

Facts: Replevin for hotel furniture after removed – written contract was for the sale of real estate, question as to whether or not furniture should be included.

Law: YES to Parol Evidence – written instrument only complete as to sale of real estate – conduct and language important to determine assent – must look at surrounding circumstances.

 

Extrinsic Evidence

1. Traynor – words have no absolute and constant referents – courts need to use extrinsic evidence. PG&E v. Thomas (Cal. 1968)

2. Kozinski – how can courts enforce if there is no plain meaning? Preferable to rely on judges’ biases than parties’ biases. Trident v. Conn. Gen. Life Ins. (9th Cir. 1988)

 

  1. Enforceability

 

Six Core Principles of Enforceability

A. Party Based

1) will – enforce commitment by which promisor has chosen to be bound

2) reliance – protect promisee’s reliance on promises of others

3) restitution

B. Standards Based

4) efficiency – enforce when contract benefits exceed costs

5) fairness – enforce contracts that are “fair”

C. Process Based

6) bargain – enforce contracts that reflect bargain theory of consideration

 

Second Restatement’s Approach to Enforceability

1. Contract is enforceable promise (§§ 1-2).

2. With some exceptions (§ 17(2)), promise must be supplied by consideration to be enforceable (§ 17(1)).

3. Promise X is supported by consideration Y if Y was bargained for (§ 71(1)).

4. Promise OR Performance Y is bargained for if Y is

a) sought by promisor in exchange for his promise (X) AND

b) given by promisee in exchange for that promise (X).

Note: Bargain does NOT mean negotiation.

 

Adam Smith

1. Man needs help to survive – bargains with others to get it (Lectures on Jurisprudence).

2. People give goods and services because of their own self interest (Wealth of Nations).

 

    1. Consideration

 

Consideration – the inducement to a contract. The cause, motive, price, or impelling influence which induces a contracting party to enter into a contract. (Black’s)

 

Unilateral Contract – promise for performance

Bilateral Contract – promise for promise

 

Restatement (Second) § 71. Requirement for Exchange; Types of Exchange

(1) To constitute consideration, a performance or a return promise must be bargained for.

(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for this promise and is given by the promisee in exchange for that promise.

(3) The performance may consist of

(a) an act other than a promise, or (b) a forbearance, or

(c) the creation, modification, or destruction of a legal relation.

(4) The performance or return promise may be given to the promisor or some other person. It may be given by the promisee or by some other person.

 

Consideration Substitutes

Bankruptcy (§ 83), past consideration (§ 86), option contract (§ 87), modification of executory contract (§ 89), promissory estoppel (§ 90)

 

    1. Bargains v. Gratuitous Promises

 

Restatement (Second) § 81. Consideration as a Motive for Inducing Cause

(1) The fact that was bargained for does not of itself induce the making of a promise does not prevent it from being consideration for that promise.

(2) The fact that a promise does not of itself induce a performance or return promise does not prevent the performance or return promise from being consideration for the promise.

 

Hamer v. Sidway (N.Y. 1891)

Facts: Story Sr. promised to give Story Jr. $5000 on his 21st birthday when Junior was 15 if he didn’t drink, smoke, or gamble until his 21st. Junior didn’t, turned 21, Senior didn’t pay.

Law: Waiver of legal rights (to drink, smoke, and gamble) is sufficient consideration to make promise enforceable (as opposed to just profit to Story Sr.).

 

Dahl v. HEM (9th Cir. 1993)

Facts: 18 people enrolled in a program to test new medication in return for continued supply of drug if it proved effective. They finished test, HEM stopped giving.

Law: This was a unilateral contract – a promise (giving of drugs) was made in exchange for a performance rendered (testing the drugs). Contract in enforceable.

 

      1. Moral Consideration

 

Restatement (Second) § 86. Promise for Benefit Received

(1) A promise made in recognition of a benefit previously received by the promisor or promisee is binding to the extent necessary to prevent injustice.

(2) A promise is not binding under Subsection (1)

(a) if the promisee [gave as gift] or…the promisor has not been unjustly enriched.

(b) to the extent that its value is disproportionate to the benefit.

 

New York General Obligations Law § 5-1105

[Past consideration valid IF would have been valid consideration at time of signing]

 

California Code § 1606

[moral obligation sufficient to an extent corresponding to extent of obligation]

 

Mills v. Wyman (Mass. 1825)

Facts: Mills took care of Wyman’s adult son. Wyman wrote promising to pay expenses and then refused to do so.

Law: A mere promise, without any consideration, cannot be enforced. A moral obligation is sufficient consideration ONLY IF there is a preexisting obligation, which there was NOT in this case between father and Mills. See § 86.

 

Webb v. McGowin (Ala. 1936)

Facts: Webb saved McGowin’s life, who then offered to pay $7.50/wk for the rest of his life. McGowin died and his executor stopped payment.

Law: Benefit to the promisor or injury to the promisee is sufficient legal consideration to make the promise enforceable.

 

      1. Modification and Preexisting Duty Rule

 

Restatement (Second) § 89. Modification of Executory Contract

A promise modifying a duty under a contract not fully performed on either side is binding

(a) if the modification is fair and equitable in view of the circumstances not anticipated by the parties when the contract was made; or

(b) to the extent provided by statute; or

(c) to the extent that justice requires enforcement in view of material change of position in reliance on the promise.

[X works for Y making 125K; Z offers 140K; B offers A 5K raise to 130K; Enforceable]

 

UCC § 2-209. Modification, Rescission, and Waiver

(1) An agreement modifying a contract within this Article needs no consideration to be binding…

 

Stilk v. Myrick (U.K. 1809)

Facts: Two sailors deserted mid-voyage. Captain promised to pay increased wage to remaining crew for picking up the slack.

Law: Contract void for want of consideration – death and desertion (and thus picking up the slack) foreseeable on voyages.

 

Alaska Packers Ass’n v. Domenico (9th Cir. 1902)

Facts: Fishermen signed up with APA for $50 (some $60) + $0.02/fish. Nets were claimed to be faulty – threatened to quit unless paid $100 base, to which captain agreed.

Law: Consent given without consideration – fishermen already obliged to render same performance before new contract.

Note: Holdup problem in Economics.

 

Brian Construction v. Brighenti (Conn. 1978)

Facts: Contractor contracted with Subcontractor to excavate site. Subcontractor found unforeseen rubble and demanded extra to remove it, which was offered by Contractor. Subcontractor later breached.

Law: There was consideration since the promise to pay more is supported by different circumstances (more work to remove rubble).

 

United States v. Stump Home (7th Cir. 1990)

Posner: Consideration has distinct function in modification setting – to prevent coercion. But, slight consideration is consistent with coercion as well. Should abandon consideration in enforcing written modifications and just focus on duress defense.

 

      1. Adequacy

 

Restatement (Second) § 79. Adequacy of Consideration; Mutuality of Obligation

If the requirement of consideration is met, there is no additional requirement of

(a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or

(b) equivalence in the values exchanged; or

(c) “mutuality of obligation.”

 

Restatement (Second) § 364. Effect of Unfairness

(1) Specific performance or an injunction will be refused if such relief would be unfair because…(c) the exchange is grossly inadequate or the terms of the contract are otherwise unfair.

 

    1. Intention to be Legally Bound

 

Restatement (Second) § 21. Intention to Be Legally Bound

Neither real nor apparent intention that a promise be legally binding is essential to the formation of a contract, but manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract.

 

Seals under 1892 New York Statute

a) wafer, wax b) word “seal” c) “L.S.” opposite signature (“locus sigilli”)

 

Restmt. (2d) § 95. Requirements for Sealed Contract or Written Contract or Instrument

(1) In the absence of a statute a promise is binding without consideration if

(a) it is in writing and sealed; and

(b) the document containing the promise is delivered; and

(c) [the parties are or are able to be identified when document delivered]…

Note: Seals rarely used in United States law (consideration used).

 

UCC § 2-203. Seals Inoperative

The affixing of a seal to a writing evidencing a contract for sale or an offer to buy or sell goods does not constitute the writing a sealed instrument and the law with respect to sealed instruments does not apply to such a contract or offer.

 

Restatement (Second) § 87. Option Contract

(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 making the offer, and proposes an exchange on fair terms within a reasonable time….

 

Restatement (Second) § 71 comment b – mere pretense of bargain does not suffice.

 

Schnell v. Nell (Ind. 1861)

Facts: Schnell promised to pay $600 to dead wife’s friends in exchange for one cent. Other considerations include wife’s desire and her love and affection.

Law: One cent is nominal consideration which imposes no obligation on Schnell. Other considerations are moral only and not bases for enforceability.

 

    1. Promissory Estoppel

 

Promissory Estoppel – Exists to justify non-bargained for, informal circumstances where promises can induce reliance to the promisee’s detriment.

 

Promissory v. Equitable Estoppel

1. Promissory is offensive while equitable is defensive.

2. Promissory is when promisor knows promise was gratuitous.

3. Equitable is when there was a misrepresentation.

4. Williston – “when a lawyer or judge does not know what other name to give for his decision to decide a case a certain way, he says there is an estoppel.”

 

Restatement (First) § 90. [Promissory Estoppel]

A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee AND which does induce such action or forbearance IS binding injustice can be avoided ONLY by enforcement of the promise.

 

Restatement (Second) § 90. Promise Reasonably Inducing Action or Forbearance

(1) A promise WHICH the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person AND which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for the breach may be limited as justice requires.

(2) A charitable subscription or a marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance.

 

Differences in Restatements (Yorio and Thel)

“Definite and substantial character” removed – any reliance deserves protection and should be compensated accordingly.

 

Four Questions

1. Was there a promise?

2. Was there expected and foreseeable reliance?

3. Was there actual reliance?

4. Can injustice be avoided only by enforcement of the promise?

 

Richard Speidel’s “Reason to Know” Test

1. Did A understand in fact that B had made a promise? If not, no manifestation of assent

2. If so, did B know (actual knowledge) at the time of his conduct of A’s understanding? If so, a promise is made

3. If B did not know, of what facts in the “total situation” did B have actual knowledge?

4. Given this knowledge, and taking B’s level of intelligence into account, would B infer that if he acted or spoke in a certain way, A would understand that a commitment was made? If so, B has “reason to know” of that understanding.

5. If not, would B infer that there was a substantial chance that A would understand that a commitment was made? If so, B does have a duty to act with reasonable care to avoid misunderstanding; a failure to proceed with reasonable care is tantamount to “reason to know.”

 

Gilmore, Death of Contract – promissory estoppel derives from tort more than contract.

 

    1. Substitute for Consideration

 

    1. Family Promises

 

Ricketts v. Scothorn (Neb. 1898)

Facts: Ricketts promised to pay granddaughter Scothorn $2000 at 6%/yr if she quit her job as a bookkeeper. He died, estate refused to pay note.

Law: Equitable Estoppel – reliance on promise to her detriment was Scothorn’s consideration. Ricketts estopped from asserting want of consideration defense.

Note: Should this really be promissory estoppel?

 

      1. Charitable Acts

 

Allegheny College v. Bank of Jamestown (N.Y. 1927)

Facts: Johnson promised to give $5000 to College to create memorial fund in her name, payable after her death. She died, estate wouldn’t pay.

Law (Cardozo): There was consideration sufficient to make a bilateral agreement – Johnson wanted posthumous remembrance. Promise is implied in fact (court does not reach promissory estoppel).

 

Feinberg v. Pfeiffer Co. (Mo. 1959)

Facts: Pf. promised to pay Feinberg $200/month pension when she retired. Feinberg worked another 18 months, and then retired. Pf., under new management, stopped payment of pension seven years later.

Law: Feinberg left gainful employment and depended on pension as income. Court references Ricketts case, uses doctrine of promissory estoppel, and finds contract enforceable.

 

      1. Construction

 

General Way of Doing Construction

1. Subcontractor sends bid to General Contractor.

Is there a firm offer/option contract?

2. General Contractor submits bid to Client.

a. Is bilateral, conditional contract formed?

b. Does promissory estoppel apply?

3. Client accepts bid.

4. General Contractor “accepts” Subcontractor’s offer.

Is Acceptance required for sub’s promise to still be binding?

 

Baird v. Gimbel (2d Cir. 1933)

Facts: Sub sends in wrong bid to Gen, who then uses to send in bid to client. Sub withdraws, client accepts, Sub confirms withdrawal, Gen formally accepts client’s offer. Gen sues Sub for breach.

Law (Hand): Offer not promise until consideration received – refuses to apply doctrine of promissory estoppel and finds for subcontractor. (Above: 1, 2a, 2b NO; 4 YES)

Note: Gen could have insisted on contract before it used the figures.

 

Drennan v. Star Paving (Cal. 1958)

Facts: Sub submits bid to Gen, Gen submits to client, client accepts Gen’s bid, Sub withdraws bid. Gen sues Sub for breach.

Law (Traynor): Purpose of promissory estoppel (§ 90) is to make contract binding in lieu of consideration – finds reliance and enforceable contract. Gen wins. (1, 2a, NO; 2b, 4 YES)

Note: Sub could have expressly stated that offer revocable any time before acceptance.

 

      1. Alterative to Breach of Contract

 

Goodman v. Dicker (D.C. Cir. 1948)

Facts: Dicker incurred $150 in expenses in reliance on franchise contract from Goodman, which he didn’t deliver. Goodman could have terminated it any time once created.

Law: Goodman representations that contracted would be awarded, so reliance was justified. Damages should be in reliance only, not based on lost profit.

 

Hoffman v. Red Owl Stores (Wis. 1965)

Facts: Red Owl strung Hoffman along, promising to grant franchise as long as subsequent conditions continued to be met.

Law: Adopts promissory estoppel action based on § 90 and finds that it did exist in case. Court bases damages on reliance, and notes that this is NOT a breach of contract action.

 

      1. Statute of Frauds

 

Restatement (Second) § 139. Enforcement by Virtue of Action in Reliance

(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce the action or forbearance is enforceable notwithstanding the Statute of Frauds of injustice can be avoided only by enforcement of the promise. The remedy granted for breach is to be limited as justice requires.

(2) In determining whether injustice can be avoided only by enforcement of the promise, the following circumstances are significant:

(a) the availability and adequacy of other remedies, particularly cancellation and restitution;

(b) the definite and substantial character of the action or forbearance in relation to the remedy sought;

(c) the extent to which the action or forbearance corroborates evidence of the making and terms of that promise, or the making and terms are otherwise established by clear and convincing evidence;

(d) the reasonableness of the action or forbearance;

(e) the extent to which the action or forbearance was foreseeable by the promisor.

 

      1. Current Application

 

Hillman, Study of Promissory Estoppel (1998)

1. Promissory estoppel generally loses – less than 10% win on merits.

2. Very unlikely to win in employment cases.

3. Almost half of wins are reversed anyway (and almost no losses are reversed).

4. Main reason for both failure and success is quality of reliance.

 

  1. Performance and Breach

 

    1. Implied Duty of Good Faith

 

Restatement (Second) § 205. Duty of Good Faith and Fair Dealing

Every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement.

 

UCC § 1-203. Obligation of Good Faith

Every contract or duty within this act imposes an obligation of good faith in its performance or enforcement.

 

Goldberg 168-05 Corp. v. Levy (N.Y. 1938)

Facts: Levy leased commercial space from Goldberg for 10 years starting in October 1929. Rent was $13,800 + 0.1 x gross receipts. If gross fell below $101,000, tenant could terminate. Levy supposedly diverted business to another store.

Law: Promise implies reasonable efforts to bring in sales (cites Lady Duff-Gordon). Cannot avoid liability by diverting business – direct violation of covenant of good faith.

 

Stop and Shop v. Ganem (Mass. 1964)

Facts: SS leased land from Ganem for grocery store. Rent was $22,000 + 0.0125(gross receipts – 1.3M) if total sales from this building and another store exceeded $3M. SS opened two other stores nearby.

Law: No implication in lease that lessee was not free to open stores elsewhere. No allegations of unfair competition. $22,000 alone sufficient rent so no duty to bring in more.

 

    1. Conditions and Constructive Conditions

 

Condition – Future and uncertain event on which the existence or extent of obligation or liability depends (Black’s). See § 225(1) [performance of duty subject to condition cannot become due unless the condition occurs]

 

Constructive Conditions

1. Condition not expressly stated that is imposed by the court when filling gaps, the breach of which can relieve the other party of its duties. See § 226.

2. Is backward-looking inquiry into presumed intentions at time of formation, as distinguished from material breach, which is forward-looking inquiry into the likelihood of performance occurring in the future.

 

Restmt (Second) § 237. Effect on Other Party’s Duties of a Failure to Render Performance

[No uncured material defect in performance X is condition for other party’s remaining duties due after X; Cf. § 234 – default rule is for performances to be due simultaneously]

 

Substantial Performance (Farnsworth)

1. Substantial performance is performance without a material breach.

2. If X’s performance is constructive condition on Y’s duty, X need only substantially perform until he can recover under the contract.

 

Jacob & Youngs v. Kent (N.Y. 1921)

Facts: J&Y built house for Kent, who wanted “Reading Pipe” used. J&Y used equivalent pipe from different manufacturer. Kent refused to pay remaining $3500 and demanded that the entire pipe be replaced.

Law (Cardozo): Omission, both trivial AND innocent, not always breach of condition. Weighs purpose/desire of term, excuse for deviation, and cruelty of enforced adherence to determine if a term is an implied condition. Parties free to propose that every term is a condition. Since condition not breached, Kent still must pay, but less damages (difference in value of pipe).

Dissent: He wanted Reading Pipe, and should get it, dammit.

Note: Question as to whether Reading Pipe refers to brand name or quality.

 

    1. Substantial Performance and Material Breach

 

Material Breach

1. Only if breach is material does it relieve the non-breaching party of its duty to perform under the contract.

2. Is forward-looking inquiry into the likelihood of performance occurring in the future, as distinguished from constructive condition, which is a backward-looking inquiry into presumed intentions at time of formation.

 

Restatement (Second) § 348. Alternatives to Loss in Value of Performance

…(2) If a breach results in defective or unfinished construction and the loss in value to the injured party is not proved with sufficient certainty, he may recover damages based on

(a) the diminution in the market price of the property caused by the breach, or

(b) the reasonable cost of completing performance or of remedying the defects if that cost is not clearly disproportionate to the probable loss in value to him…

[Comment c: in construction cost of completion usually less than loss in value, which is hard to prove – even if greater, better to give a small windfall than undercompensate, but if much greater, should use difference in market price and property value]

 

Groves v. John Wunder Co. (Minn. 1939)

Facts: JW leased land from Groves to extract gravel and leave in uniform grade. JW extracted best gravel, left in non-uniform grade. Cost to fix is $60,000; where as the value of the land EVEN IF grade was uniform would be $12,000.

Law: JW was willful transgressor, should have to pay the $60,000 to fix.

Dissent (K-MAD: right!): Damages are for compensation, not punishment. If low cost of cure, pay cost of cure. If high cost of cure, pay the difference in value, which cannot be more than the entire value of the land. And if services wanted, use liquidated damages.

 

Peevyhouse v. Garland Coal Mining (Okla. 1962)

Facts: Peevy leased farm to GCM to mine coal. Did not clean up coal – would have cost $29,000. Diminution in value is $300; verdict at trial was for $5,000.

Law: Should be for diminution in value when it is much less than the cost of cleanup.

Dissent: GCM received benefit (coal), now Peevy should receive benefit of cleanup. Diminution damages undercompensate (do not take into account subjective value).

 

  1. Defenses

 

Defenses – pleas in avoidance EVEN IF prima facie case of contract proven. Aff. Def.

 

Restatement (Second) § 7. Voidable Contracts

A voidable contract is one where one or more parties have the power, by a manifestation of election to do so, to avoid the legal relations created by [or cancel] the contract, or by ratification of the contract to extinguish the power of avoidance.

 

Restatement (Second) § 376. Restitution When Contract is Voidable

A party who has avoided a contract on the ground of lack of capacity, mistake, misrepresentation, duress, undue influence, or abuse of a fiduciary relation is entitled to restitution for any benefit that he had conferred on the other party by way of part performance or reliance. [See restitution, below]

 

    1. Capacity

 

Restatement (Second) § 12. Capacity to Contract

(1) No one can be bound by contract who has not legal capacity to incur at least voidable contractual duties. Capacity to contract may be partial and its existence in respect to a particular transaction may depend upon the nature of the transaction or upon other circumstances.

(2) A natural person who manifests assent to a transaction has full legal capacity to incur contractual duties thereby unless he is

a) under guardianship, b) an infant, c) mentally ill or defective, or d) intoxicated.

Note: see §§ 13-16 for each of these, in turn (e.g. §14 – infant means under 18 years old).

 

Webster St. Partnership v. Sheridan (Neb. 1985)

Facts: Two teenage kids signed lease in Sept. Paid until Oct, and were sued for not paying Nov and Dec rent.

Law: Minors cannot enter into contract unless for necessity. Housing not necessity in this case since kids could (and did) move back into their parents’ houses.

 

Halbman (Wis. 1980) – minors may recover purchase price if NOT necessity.

Zelnick (Va. 2002) – legal services CAN be necessity.

 

    1. Improper Consent

 

General Form of Restatement Provisions (§§ 164, 175, 177)

1. Other Party

If a party’s manifestation of assent is induced by

{misrepresentation, duress, undue influence},

the contract is voidable by the recipient/victim.

2. Third Party

IF a party’s manifestation of assent is induced by

{misrepresentation, duress, undue influence},

by one who is NOT a party to the transaction

the contract is voidable by the recipient/victim,

UNLESS

the other party to the transaction in good faith and without reason to know of the

{misrepresentation, duress, undue influence}

either gives value or relies materially on the transaction.

 

California Civil Code § 1567

An apparent consent is not real or free when obtained through

1. Duress 2. Menace 3. Fraud 4. Undue Influence 5. Mistake

 

    1. Misrepresentation

 

Restatement (Second) § 159. Misrepresentation Defined

A misrepresentation is an assertion that is not in accord with the facts.

 

Restatement (Second) § 162. When a Misrepresentation is Fraudulent or Material

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

(a) knows or believes that the assertion is not in accord with the facts, or

(b) does not have the confidence that he states or implies in the truth of the assertion, or

(c) knows that he does know the basis that he states or implies for the assertion.

(2) A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so.

 

Restmt. (Second) of Torts § 526. Conditions under which Misrepresentation is Fraudulent

A misrepresentation is fraudulent if the maker

(a) knows or believes that the matter is not as he represents it to be,

(b) does not have the confidence in the accuracy of his representations that he states or implies, or

(c) knows that he does not have a basis for his representation that he states or implies.

 

Restatement (Second) of Torts § 530. Misrepresentation of Intention

(1) A representation of the maker’s own intention to do or not to do a particular thing is fraudulent if he does not have that intention.

(2) A representation of the intention of a third person is fraudulent under the conditions listed in § 526.

 

Restatement (Second) § 164. When a Misrepresentation Makes a Contract Voidable

(1) If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient.

(2) If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by one who is not a party to the transaction upon which the recipient is justified in relying, the contract is voidable by the recipient, unless the other party to the transaction in good faith and without reason to know of the misrepresentation either gives value or relies materially on the transaction.

 

Restatement (Second) § 167. When a Misrepresentation is an Inducing Cause

A misrepresentation induces a party’s manifestation of assent if it substantially contributes to his decision to manifest his assent.

 

Restatement (Second) § 168. Reliance on Assertions of Opinion

(1) An assertion is one of opinion if it expresses only a belief, without certainty, as to the existence of a fact or expresses only a judgment as to quality, value, authenticity, or similar matters.

(2) If it is reasonable to do so, the recipient of an assertion of a person’s opinion as to facts not disclosed and not otherwise known to the recipient may properly interpret it as an assertion

(a) that the facts known to that person are not incompatible with his opinion, or

(b) that he knows facts sufficient to justify him in forming it.

 

Restatement (Second) § 169. When Reliance on an Opinion is NOT Justified

To the extent that an assertion is one of opinion only, the recipient is NOT justified in relying on it UNLESS the recipient

(a) stands in such a relation of trust and confidence to the person whose opinion is asserted that the recipient is reasonable in relying on it, or

(b) reasonably believes that, as compared with himself, the person whose opinion is asserted as special skill, judgment, or objectivity with respect to the subject matter, or

(c) is for some other special reason particularly susceptible to a misrepresentation of the type involved.

 

Halpert v. Rosenthal (R.I. 1970)

Facts: Halpert sold house to Rosenthal for $54,000 with $2000 deposit. Rosenthal asked 3 times before closing if there were termites. Halpert said no (innocent, not intentional). Rosenthal found termites and skipped closing. House later sold for $35,000.

Law: Innocent misrepresentation can void contract. Speaker should bear loss of misrepresentation. Boiler Plate language in the contract cannot void the remedy of rescission.

 

Vokes v. Arthur Murray Dance Studio (Fla. 1968)

Facts: AM induced Vokes to buy more and more hours of dancing lessons, even though it knew Vokes had no rhythm, at total cost of $31,000.

Law: Vokes has a claim for misrepresentation as promotions went beyond mere sales puffing. Misrepresentation must be fact, not opinion, except opinion give by one with superior knowledge may be treated as fact.

Note: Sales puffing intruded into undue influence as well (below).

 

      1. Duress

 

Restatement (Second) § 175. When Duress by Threat Makes a Contract Voidable

(1) If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.

(2) If a party’s manifestation of assent is induced by an improper threat by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the duress either gives value of relies materially on the transaction.

 

Restatement (Second) § 176. When a Threat is Improper

(1) A threat is improper if what is threatened is [a) crime or tort, b) criminal prosecution, c) bad faith use of civil process] or d) the threat is a breach of the duty of [good faith].

(2) A threat is improper if the resulting exchange is not on fair terms AND [a) threatened act would harm recipient without benefit to maker, b) effectiveness of threat increased by prior unfair dealing, or c) threat is use of power for illegitimate ends].

 

No Reasonable Alternative

If there truly are reasonable alternatives, then promisor cannot have been coerced by threat – finding of duress depends on finding no reasonable alternative.

1. Never enforce where there is no RA – parties refuse to perform

2. Always enforce when there is no RA – initial promise meaningless

3. Happy medium – only enforce when no RA and threat not wrongful

 

Hackley v. Headley (Mich. 1881)

Facts: Hackley owed Headley $6200, but Headley in financial straits, so Hackley offered him only $4000 as a settlement for the whole thing.

Law: Hackley did not cause Headley to be in financial straits, and the same transaction would be legal if Headley were not in trouble. Headley still could have sued for the full amount, so he was not deprived of free will and there was no duress.

 

Austin Instrument v. Loral (N.Y. 1971)

Facts: Loral had contract with Austin for delivery of precision gears. Working under deadline, Loral needed parts for a second contract. Austin was only approved vendor who could deliver them on time, so they retroactively raised the prices for the first contract.

Law: Mere threat to breach is not economic duress, but because Loral was in need, changing the prices for the first batch was duress – Loral did not have free will to negotiate.

 

      1. Undue Influence

 

Restatement (Second) § 177. When Undue Influence Makes a Contract Voidable

(1) Undue influence is the unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that that person will not act in a manner inconsistent with his welfare.

(2) If a party’s manifestation of assent is induced by undue influence, the contract is voidable by the victim.

(3) If a party’s manifestation of assent is induced by undue influence by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the undue influence either gives value of relies materially on the transaction.

 

Odorizzi v. Bloomfield School District (Cal. 1966)

Facts: Odorizzi, a teacher, arrested for homosexual activity. Right after interrogation and arrest, BSD induced him to resign or they would publicize incident.

Law: Odorizzi has a cause of action for undue influence because he was in a weakened state and being taken advantage of by the dominant BSD.

 

      1. Unconscionability

 

Unconscionability (Leff)

1. Procedural – Bargaining naughtiness

2. Substantive – Evils in resulting contract

 

Absence of Meaningful Choice

Gross inequality of bargaining power – no reasonable opportunity to understand terms

 

Unreasonably Favorable Terms

When terms are so extreme as to appear unconscionable according to the mores and business practices of the time and place

 

Restatement (Second) § 208. Unconscionable Contract or Term

If a contract or term thereof in unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the conscionable term as to avoid any unconscionable result.

 

UCC § 2-302. Unconscionable Contract or Clause

(1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

(2) [When unconscionability claimed, parties may introduce evidence as to its commercial setting, purpose, and effect].

 

Williams v. Walker-Thomas Furniture Co. (D.C. 1965)

Facts: Williams, poor mother of 7, bought stereo on credit from WTF, where she already had a balance. All future payments pro-rated to outstanding items, so all items can be repossessed until everything is paid off. She missed, they repossessed.

Law: May be unconscionable (q of fact), which includes the absence of meaningful choice, often by gross inequality of bargaining power since true assent not given. Contract must be BOTH procedurally and substantively unconscionable to be unenforceable.

 

In Re Realnetworks (Ill. 2000)

Law: Arbitration and Forum Selection Clauses are not procedurally unconscionable because in a long contract – still need to read the whole thing. Clauses not substantively unconscionable for requiring plaintiffs to travel or for not facilitating class arbitration.

 

Epstein, Unconscionability

Serves same general end as Statute of Frauds and parol evidence rules, as well as preventing fraud, duress, and incompetence without requiring specific proof of any of them. Looks to subject matter of agreements instead of to writing requirements.

 

    1. Failure of Basic Assumption

 

    1. Mistakes of Present Existing Facts

 

Restatement (Second) § 151. Mistake defined

A mistake is a belief not in accord with the facts.

 

Restatement (Second) § 154. When a Party Bears the Risk of a Mistake

A party bears the risk of mistake when

(a) the risk is allocated to him by agreement of the parties, or

(b) [conscious ignorance] he is aware, at the time the contract was made that he has only limited knowledge with respect to the facts to which the mistake relates but treats his knowledge as sufficient, or

(c) the risk is allocated to him by the court on the ground that is reasonable in the circumstances to do so.

 

Restatement (Second) § 157. Effect of Fault of Party Seeking Relief

A mistaken party’s fault in failing to know or discover the facts before making the contract does NOT bar him from avoidance or reformation under the rules stated in this Chapter, unless his fault amounts to a failure of good faith and in accordance with reasonable standards of fair dealings.

 

Restatement (Second) § 158. Relief Including Restitution

(1) In any case governed by the rules in this Chapter, either party may have a claim for relief including restitution stated in the rules § 240 [part performance] and § 376 [restitution].

(2) In any case governed by the rules stated in this Chapter, if those rules together with the rules stated in Chapter 16 will not avoid injustice, the court may grant relief on such terms as justice requires including protection of the parties’ reliance interests.

 

    1. Mutual Mistake

 

Restatement (Second) § 152. When Mistake of Both Parties Makes a Contract Voidable

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

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

 

Wood v. Boynton (Wis. 1885)

Facts: Wood had stone she thought was a topaz. She took it to Boynton, a jeweler, who also did not know what it was. She sold it to him for $1 ($20 today). It turned out to be an uncut diamond worth $700 ($14000 today). She wanted it back.

Law: Neither party knew of value, so there was no fraud. There was also no warranty.

 

Sherwood v. Walker (Mich. 1887)

Facts: Sherwood contracted to buy a barren cow (Rose 2d) from Walker for $80. Walker found out Rose was with calf (now worth $750) before delivery and rescinded.

Law: If parties make mistake as to substance of object to be traded as opposed to its quality, the contract can be rescinded. Majority says difference is substance, Dissent quality.

 

Lewanee v. Messerly (Mich. 1982)

Facts: Pickles bought land using quitclaim deed from Messerly for investment purposes. Land was later condemned for being uninhabitable because of an improper septic system.

Law: Overturns Sherwood test of substance/quality and instead tests whether or not the mistake materially affects the bargain. Once mistake exists, court should use equity to allocate loss. If parties expressly contract risk allocation, court will defer (as in this case).

 

      1. Unilateral Mistake

 

Restatement (Second) § 153. When Mistake of One Party Makes a Contract Voidable

Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him IF he does NOT bear the risk of the mistake stated in § 154 AND

(a) the effect of the mistake is such that enforcement of the contract would be unconscionable, OR

(b) the other party had reason to know of the mistake or his fault caused the mistake.

 

Tyra v. Cheney (Minn. 1915)

Facts: Tyra supposedly orally bid for work at $4025, but mistakenly left out $963 for new part of building in written bid, which was accepted.

Law: If Cheney knew about first bid, and knew that the written bid was a mistake, he cannot accept (no meeting of the minds). BUT, if Cheney did NOT know of the mistake, then Tyra cannot profit be his own mistake.

 

Drennan (see Promissory Estoppel, Construction above)

Gen had no knowledge of Sub’s mistake based on price, which can vary widely.

 

Donovan v. RRL (Cal. 2001)

Facts: RRL ran ad in paper offering car from $10,000 less than it sold for by mistake. Donovan came in with ad demanding car at lower price. No bad faith on part of RRL.

Law: Court applies Restatement §§ 153-154:

1. Basic assumption? Yes, price.

2. Mistake material? Yes, 32% of value.

3. RRL must bear risk? No (note the AND in § 153, so inquiry continues)

Applies § 154(c) – must have bad faith to award risk to dealership.

4. Unconscionable? Yes, unfair and unjust to permit mistake.

Thus, RRL can void contract.

 

      1. Duty to Disclose

 

Restatement (Second) § 160. When Action is Equivalent to an Assertion (Concealment)

Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist.

 

Restatement (Second) § 161. When Non-Disclosure is Equivalent to an Assertion

A person’s non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only:

(a) where he knows that the disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material.

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

(c) where he knows that the disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part.

(d) where the other person is entitled to know the fact because of a relation of trust and confidence between them.

 

Laidlaw v. Organ (U.S. 1817)

Facts: Organ bought tobacco from Laidlaw right after the War of 1812 ended but before news leaked. Laidlaw did not know, so he asked Organ, who said nothing in response, so he sold for cheap. He then found out the War ended, and seized back the tobacco.

Law (Marshall): Organ under no obligation to say anything at all, but if he does, then it cannot be false.

 

      1. Changed Circumstances

 

Frustration Type Defenses

Courts generally reluctant to permit frustration defenses since they want to protect certainty. Generally, total destruction of purpose important.

 

Forseeability and Risk Allocation – if an event is foreseeable, and there is no provision for it in the contract, then the risk was assumed and the contract thus allocates the risk.

 

Posner and Rosenfield on Risk

There are two ways in which a party can be a superior risk bearer:

1. Party could be in better position to prevent risk from materializing. Discharge inefficient if party can prevent risk at lower cost than expected cost of risky event.

2. Party could be in better position to insure against risk. Thus, even though the party cannot prevent risk from materializing (e.g. no-fault fire), that party might be able to insure against the risk at the lowest cost, since risk is itself a cost.

 

    1. Impossibility and Impracticability

 

Restatement (Second) § 261. Discharge by Supervening Impracticability

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

 

Restatement (Second) § 262. Death or Incapacity of Person Necessary for Performance

If the existence of a particular person is necessary for the performance of a duty, his death or such incapacity as makes performance impracticable is an event, the non-occurrence of which was a basic assumption on which the contract was made.

 

Restatement (Second) § 263. Destruction, Deterioration or Failure to Come Into Existence of Thing Necessary for Performance

If the existence of a specific thing is necessary for the performance of a duty, its failure to come into existence, destruction, or such deterioration as makes performance impracticable is an event, the non-occurrence of which was a basic assumption on which the contract was made.

 

UCC § 2-613. Casualty to Identified Goods

Where the contract requires for its performance goods identified when either party when the contract is made, and the goods suffer casualty without fault of either party before the risk of loss passes to the buyer, or in a proper case under a “no arrival, no sale” term (§ 2-324) then

(a) if the loss is total the contract is voided; and

(b) if the loss is partial or the goods have so deteriorated as no longer to conform to the contract the buyer may nevertheless demand inspection and at his option either treat the contract as avoided or accept the goods with due allowance from the contract price for the deterioration or the deficiency in quantity but without further right against the seller.

 

UCC § 2-615. Excuse by Failure of Presupposed Conditions

Except so far as a seller may have assumed a greater obligation and subject to the preceding action on substituted performance:

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

(b) Where the causes mentioned in paragraph (a) affect only part of the seller’s capacity to perform, he must allocate production and delivery among his customers by may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.

(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.

 

Taylor v. Caldwell (U.K. 1863)

Facts: Defendant sold use of music hall in Surrey to Plaintiff for concerts in the summer. Before the first one, the music hall burned down and plaintiff sued for breach.

Law: Impossibility of performance voids contract and excuses both parties from performing, provided that one party is not at fault, or that the risk is not assumed by one party.

 

CNA v. Phoenix (Fla. 1996)

Facts: River Phoenix was under contract to appear in two movies when he ODed and died, and thus could not appear.

Law: OD is not reason to depart from usual rule that death renders a personal services contract impossible to perform.

 

      1. Frustration of Purpose

 

Restatement (Second) § 265. Discharge by Supervening Frustration

Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault or by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made [§§ 262-263], his remaining duties to render a performance are discharged, unless the language or the circumstances indicate to the contrary.

 

Krell v. Henry (U.K. 1903)

Facts: Krell, the lessor, sued Henry, the lessee, for £50, the balance due on rental contract for the two scheduled days of Bertie’s coronation. When Bertie fell ill, coronation was postponed, and Henry rescinded.

Law: Discharged from further performance if 1) basic assumption is foundational, 2) performance was prevented by the failure of that assumption, and 3) failure was not in reasonable contemplation of the parties when contract made. All three true – duties discharged.

 

Chandler v. Webster (U.K. 1904) – let loss lie where it falls (rev’d by H.L. and later statute).

 

Lloyd v. Murphy (Cal. 1944)

Facts: Lloyd leased premises to Murphy to sell cars and pump gas in late 1941. War started soon after, and U.S. Government severely restricted the sale of cars. Murphy said the business was unworkable and tried to get out of the lease.

Law (Traynor): Murphy cannot get out of lease – landlord not responsible if tenant cannot perform functions motivating lease. Land still has value for other commercial purposes.

 

 

      1. Long Term Contracts

 

Macneil’s Theory of Contract

1. Discrete Contracts – Those of short duration that require a minimum of future cooperation. Parties are closely and precisely bound. Everything is presentiated.

2. Intertwined Contracts – Those of long duration where future cooperation is anticipated. Object of exchange includes quantities not easily measured, future unforeseeable.

3. Discreteness – Each transaction is identifiable event at particular moment.

4. Presentiation – Every future contingency can be reduced to present expectation.

5. Classical Contract Theory – Assent at time of formation.

6. Relational Contract Theory – Contract colors and influences meaning of complex relations between parties as time goes by.

7. Neoclassical Contract Theory – Classical qualified with Relational concerns.

8. Can either interpret contracts to approximate original intention (Classical), or intervene given changing circumstances, expectations, and interests (Relational).

 

Weintraub, Survey of Contract Practice and Policy, 1992

1. Answered by General Counsels of companies of varying sizes.

2. Most companies use long term contracts, are flexible about modifications if the market shifts, request modification of their own long term contracts, and think legal sanctions are necessary to enforce contracts.

3. Hypothetical – B buys from A at fixed price but market price causes A’s cost to rise and breach. Wide variation in responses – some say expectation damages to B, others would excuse A from performance, and nearly half would allow for price change.

 

NIPSCO v. Carbon County Coal Co. (7th Cir. 1986)

Facts: CCC entered into long term contract with NIPSCO (utility) to provide coal at fixed price with escalation options only. NIPSCO ordered by state agency to get cheaper sources, so tried to get out of contract with CCC under force majeure clause. NIPSCO wanted damages, CCC specific performance.

Law (Posner): Price floor is way of allocating risk to NIPSCO – court will only allocate risk using frustration and impracticability defenses when parties do not do so. However, specific performance should be denied since damages are an adequate, and more efficient, remedy.

 

  1. Remedies

 

    1. Types of Damages

 

Definitions

1. Expectation – benefit of the bargain; attempts to put promisee in position he would have been in had the bargain been fulfilled.

= Loss in value + other loss caused by breach – cost avoided

2. Reliance – promisee incurred cost relying on gain from contract; attempts to put promisee back in the position he was before the promise was made.

= All costs incurred

3. Restitution – deprives promisor of benefit received; attempts to put promisor back in position he would be in had promise not been made.

= Benefit promisor received

4. Remittitur – action by court to reduce excessive damages.

5. Incidental – losses associated with actual damages (e.g. expense in stopping delivery). Farnsworth: “Costs after breach in a reasonable attempt to avoid loss.” See §§ 2-710, -715.

6. Consequential – losses that flow indirectly from the injurious act.

 

Example of Three Kinds of Damages

A agrees to sell land to B for 5000. B gives 4000 down. A fails to deliver. Market price of land drops to 2000. What damages does A owe to B?

1. Expectation (profits + expenses): -3000 + 4000 = +1000

2. Expectation (§ 347: loss in value – cost avoided): 2000 – 1000 = +1000

(loss in value is the value of the land B should have if A delivers = 2000)

3. Reliance (§ 349: expenditures – loss if contract performed): 4000 – 3000 = +1000.

4. Restitution (§ 347: just refund): +4000.

 

Restatement (Second) § 346. Availability of Damages

(1) The injured party has a right to damages for any breach by a party against whom the contract is enforceable unless the claim for damages has been suspended or discharged.

(2) If the breach caused no loss or if the amount of the loss is not proved under the rules stated in this Chapter, a small sum fixed without regard to the amount of loss will be awarded as nominal damages.

 

UCC § 1-106. Remedies to be Liberally Administered

(1) The remedies provided by this Act shall be liberally administered to the end that the aggrieved party may be put in as good of a position as if the other party had fully performed but neither consequential not special nor penal damages may be had except as specifically provided in this Act or other rule of law….

 

    1. Expectation and Reliance

 

Restatement (Second) § 347. Measure of Damages in General [Expectation]

Subject to the limitations stated in §§ 350-353, the injured party has a right to damages based on his expectation interest as measured by

(a) the loss in value to him of the other party’s performance caused by its failure or deficiency, plus

(b) any other loss, including incidental or consequential loss, caused by the breach, less

(c) any cost or other loss that he has avoided by not having to perform.

[ § 350 – Avoidability § 351 – Unforseeability

§ 352 – Uncertainty § 353 – Emotional Disturbance ]

 

Restatement (Second) § 349. Damages Based on Reliance Interest

As an alternative to the measure of damages stated in § 347, the injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance, less any loss that the party in breach can prove with reasonable certainty the injured person would have suffered had the contract been performed.

 

UCC § 2-711. Buyer’s Remedies

[buyer can recover price that has been paid – can cover or not and get damages as per § 2-712 and 2-713, below].

 

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

(1) After a breach within the preceding section the buyer may “cover” by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from seller.

(2) The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with and incidental or consequential damages as hereinafter defined (§ 2-715), but less expenses saved in consequence of the seller’s breach.

(3) Failure of the buyer to effect cover within this Section does not bar him from any remedy.

[Cf. § 2-706 – Seller’s Resale, below]

 

UCC § 2-713. Buyer’s Damages for Non-Delivery or Repudiation

(1) Subject to the provisions of this Article with respect to proof of market price (§ 2-723), the measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this Article (§ 2-715), but less expenses saved in consequence of the seller’s breach.

(2) Market price is to be determined as the place of tender, or in cases of rejection after arrival or revocation of acceptance, as the place of arrival.

[Cf. § 2-708 – Seller’s Damages, below, and Restatement § 347, above]

 

UCC § 2-715. Incidental and Consequential Damages

(1) Incidental damages resulting from the seller’s breach include expenses reasonably incurred in the inspection, receipt, transportation, and care of and custody of goods rightfully rejected, any commercially reasonable charges, expenses, or commissions, in connection with effecting cover and any other reasonable expense incident to the delay or other breach.

(2) Consequential damages resulting from the seller’s breach include

(a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and

(b) injury to person or property proximately resulting from any breach of warranty.

 

UCC § 2-717. Deduction of Damages from the Price

The buyer on notifying the seller of his intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract.

 

Hawkins v. McGee (N.H. 1929)

Facts: Hawkins contracted with Dr. McGee for a skin graft operation to cure his hand. Was horribly botched and his hand became very hairy.

Law: Trial Court’s award of damages (pain and suffering plus positive ill effects of the operation) was wrong as it was based on reliance. Would have had P&S anyway, and ill effects go to the current value of the hand. Should be expectation (value of cured hand less value of current hand).

 

Efficient Breach Example

Seller cost = 40; Buyer valuation = 120; Price = 100 (negotiated).

Social benefit = 80; Seller surplus (profit) = 60; Buyer surplus (expectation) = 20.

 

1. Assume costs may change as follows and expectation damages are used:

  cost produce breach decision soc. Surplus
A 110 -10 -20 produce +10
B 120 -20 -20 indifferent 0
C 130 -30 -20 breach -10

If production cost < buyer’s value, produce (positive social surplus) – A

If production cost = buyer’s value, indifferent (no social surplus) – B

If production cost > buyer’s value, breach (negative social surplus) – C

 

2. Assume costs may change as follows and expectation damages are NOT used:

  cost produce breach decision soc. Surplus
D 115 -15 -10 breach +5
E 125 -25 -30 produce -5

If |damages| < |expectation| then the seller will breach even when producing would generate positive social surplus – D

If |damages| > |expectation| then the seller will produce even when breaching would generate positive social surplus – E

 

Hooker v. Roberts (Miss. 1996)

Facts: Roberts entered into a contract to sell and install cabinets for Hooker. Problems arose in relationship, and Hooker terminated contract. Roberts claimed $9850 in manufacturing losses, $1760 in administrative time, $1440 in storage of cabinets, and $30,000 in lost profit (150k – 120k), for total of $43,050. Jury awarded $42,870 total.

Law: Roberts leased no extra space to store cabinets, or to store anything else displaced by them. So, is invalid, which means the max damages possible claimed by him is $43,050 less $1440 equals $41,610. Remittitur is thus $1260 ($42,870 – $41,610).

UCC: Even though installation service, primary sale is for goods, so UCC applies.

Note: This assumes that administrative time WAS included in the 120K expenses, otherwise, if it was not, then the profit estimate was to high.

 

Sullivan v. O’Connor (Mass. 1973)

Facts: O’Connor botched two nose jobs for Sullivan, who then had to get a third, which still left her nose worse off than before the first surgery.

Reliance: A) expenses + B) worsening of condition + C) P&S for op 3

+ D) P&S for ops 1 and 2

Expectation: A) expenses + B) worsening of condition + C) P&S for op 3

+ E) expected betterment of condition

(note: expenses technically should only be for op 3 here)

Law: Elements A, B, and C were awarded at trial, but neither D nor E was. So the court does not have to choose between expectation and reliance, so it lets the award stand.

 

      1. Restitution

 

Restitution – for victim of contract [§§ 371-373]; restoration of benefit conferred [§ 374].

 

Restatement (Second) § 371. Measure of Restitution Interest

If a sum of money is awarded to protect a party’s restitution interest, it may as just requires be measured by either

(a) the reasonable value to the other party of what he received in terms of what it would have cost him to obtain it from a person in the claimant’s position, or

(b) the extent to which the other party’s property has been increased in value or his other interests advanced.

 

Restatement (Second) § 373. Restitution When Other Party is in Breach

(1) Subject to the rule stated in Subsection (2), on a breach by nonperformance that gives rise to a claim for damages for total breach or on a repudiation, the injured party is entitled to restitution for any benefit that he has conferred on the other party by way or part performance or reliance.

(2) The injured party has no right to restitution if he has performed all of his duties under the contract and no performance by the other party remains due other than payment of a definite sum of money for that performance.

 

Restatement (Second) § 374. Restitution in Favor the Party in Breach

(1) Subject to the rule stated in Subsection (2), if a party justifiably refuses to perform on the ground that his remaining duties have been discharged by the other party’s breach, the party in breach is entitled to restitution for any benefit that he has conferred by way of part performance or reliance in excess of the loss that he caused by his own breach.

(2) To the extent that, under the manifested assent of the parties, a party’s performance is to be retained in case of breach, that party is not entitled to restitution if the value of the performance as liquidated damages is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.

 

Restatement (Second) § 376. Restitution When Contract is Voidable

[for certain defenses – see Defenses, above]

 

Vines v. Orchard Hills (Conn. 1980)

Facts: Vines agreed to buy Condo from Orchard Hills for $78,800 and put $7880 down which was supposed to be liquidated damages in case of breach.

Law: Vines not entitled to restitution as liquidated damages is presumptive of actual damages – Vines must prove that there would be unjust enrichment (he didn’t). § 374(2).

 

Cotnam v. Wisdom (Ark. 1907)

Facts: Wisdom was surgeon who performed emergency operation on Cotnam after he was hit by a streetcar. The operation failed and Cotnam died.

Law: Performing services for unconscious people creates a legal fiction called a quasi-contract (or quantum meruit or constructive contract) which in enforceable. Wisdom entitled to reasonable compensation for services rendered. Price of operation does not depend on result of operation since Cotnam would have paid anyway.

 

    1. Limitations on Damages

 

    1. Unforseeability

 

Restatement (Second) § 351. Unforseeability and Related Limitations on Damages

(1) Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made.

(2) Loss may be foreseeable as a probable result of a breach because it follows from the breach

(a) in the ordinary course of events, or

(b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know.

(3) A court may limit damages for foreseeable loss by excluding recovery for loss or profits, by allowing recovery only for loss incurred in reliance or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation.

 

Hadley v. Baxendale (U.K. 1854)

Facts: Hadley, a miller, contracted with Baxendale, a common carrier, to deliver a new crankshaft by noon the next day. Baxendale several days late. Mill could not operate in interim.

Law: Baxendale only liable for expectation damages if they are foreseeable. No reason to foresee that delay would cause mill to be inoperable.

Note: Damages that do not occur normally are consequential damages.

 

      1. Uncertainty

 

Restatement (Second) § 352. Uncertainty as a Limitation on Damages

Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty.

 

Pre-contractual Reliance – in absence of expectation, can bring breached party back to zero by awarding them damages they incurred in preparing to enter into a contract.

Posner: Zero profits assumed when reliance awarded because of uncertainty of profit – but underestimates profit since party would have probably earned some profit. Awarding pre-contractual reliance can offset that.

 

Farnsworth on Forseeability and Cover

Forseeability problems typically arise when the buyer cannot cover – issue is over damages stemming from collateral to the original transaction – this is consequential damage.

 

Chicago Coliseum Club v. Dempsey (Ill. 1932)

Facts: CCC made contracts with Wills and Weisberg in anticipation of fight with Dempsey. Then, made contract with Dempsey, who later breached.

Disallowed Damages: Expenses before contract made and after breach (since no contract then) and lost profits (since completely speculative).

Allowed Damages: Expenses between when contract signed and breach (reliance).

 

Anglia Television v. Reed (U.K. 1971)

Facts: Reed breached contract to appear in TV show (liability undisputed). Anglia spent £850 after contract and £2750 total.

Law: Because choosing reliance instead of expectation, can also include damages made in anticipation of contract as well. NEVER applied in Unites States.

 

      1. Avoidability and Mitigation

 

Restatement (Second) § 350. Avoidability as a Limitation on Damages

(1) Except as stated in Subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden, or humiliation.

(2) The injured party is not precluded from recovery by the rule stated in Subsection (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss.

 

UCC § 2-706. Seller’s Resale Including Contract for Resale

[Seller may resell goods and recover difference between resell price and contract price plus any incidental damages. Cf. § 2-712 – Buyer’s Cover, above.]

 

UCC § 2-708. Seller’s Damages for Non-Acceptance or Repudiation

(1) Subject to subsection (2) and to the provisions of this article with regard to the proof of market price (§ 2-723), the measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place of tender and the unpaid contract price together with any incidental damages provided in this Article (§ 2-710), but less expenses saved in consequence of the buyer’s breach. [Cf. § 2-713 – Buyer’s Damages, above.]

(2) [Lost volume sellers can recover lost profit].

 

UCC § 2-710. Seller’s Incidental Damages

Incidental Damages to an aggrieved seller include any commercially reasonable charges, expenses, or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer’s breach, in connection with the return or resale of the goods otherwise resulting from the breach.

[Note: ALI suggested amendment includes consequential as well for seller]

 

UCC § 2-718. Liquidation or Limitation of Damages; Deposits

(1) Damages for breach by either party may be liquidated by agreement but only at an amount which is reasonable in light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.

(2) Where the seller justifiably withholds delivery of goods because of the buyer’s breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds

(a) the amount to which the seller is entitled by virtue of terms liquidating the seller’s damages in accordance with subsection (1), or

(b) in the absence of such terms, 20% of the value of the total performance for which the buyer is obligated or $500, whichever is smaller.

(3) The buyer’s right to restitution under subsection (2) is subject to offset to the extent that the seller establishes

(a) a right to recover damages under the provisions of this article other than subsection(1), and

(b) the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.

(4) [how resell treated depends on when seller receives notice of buyer’s breach].

 

Rockingham County v. Luten Bridge (4th Cir. 1929)

Facts: RC awarded contract to LB in January, cancelled in February, and told LB to stop working in March, April, and September. LB finally stopped in November and sued for breach.

Law: LB is entitled to loss profits plus costs incurred before the breach. Party has a right to renounce contract, but then it must pay damages. There is no reason to rack up costs when LB entitled to lost profits.

 

Kearsage v. Acme (1976)

Law: Gains by the injured party for OTHER transactions AFTER the breach are never recoverable unless those transactions were made possible BECAUSE of the breach.

 

Lost Volume Seller

1. Seller who even though resells goods to buyer 2 after buyer 1’s breach, would have sold the identical goods to buyer 2, so can claim lost profit from buyer 1.

2. Provider of services CAN be lost volume seller, if he can show that he would have expanded business to take on both contracts (Farnsworth).

 

Shirley MacLaine v. 20th c. Fox (Cal. 1970)

Facts: MacLaine offered $750,000 to appear in Bloomer Girl. Project cancelled, and Fox offered her a western for the same salary, which she refused. She then sued for breach.

Law: Western was not sufficiently comparable employment to require MacLaine to mitigate damages – female lead in musical different than part in a western.

 

Neri v. Retail Marine Corp. (N.Y. 1972)

Facts: Neri contracted with RMC to buy boat. Neri reneges after boat complete after which RMC sells to someone else at contract price with Neri.

Law: Neri entitled to a refund of his deposit. § 2-718(2). Seller entitled to offset that by damages, § 2-718(3)(a), he is entitled to under § 2-708(2), which allows lost volume sellers (since other buyer would have bought different boat anyway, but because other buyer bought it at the same price, RMC cannot recover the difference between the market and contract price under § 2-708(1)) to recover lost profit plus incidental damages for the resell. Thus, Neri gets:

his deposit – RMC’s lost proft – RMC’s incidental damages.

 

    1. Liquidated Damages and Penalties

 

Size of Liquidated Damages – generally if they are too big, they are considered a penalty. But, if they are too small, they might be stricken as unconscionable. UCC § 2-718, Official Comm. 1.

 

Restatement (Second) § 355. Punitive Damages

Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable.

[Cf. UCC §§ 1-106, -305 also prohibiting penal damages]

 

Restatement (Second) § 356. Liquidated Damages and Penalties

(1) Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages in unenforceable on grounds of public policy as a penalty.

(2) A term in a bond providing for an amount of money as a penalty or non-occurrence of the condition of the bond is unenforceable on grounds of public policy to the extent that the amount exceeds the loss caused by such non-occurrence.

 

UCC § 2-719. Contractual Modification or Limitation of Remedy

(1) Subject to the provisions of subsections (2) and (3) of this Section and of the preceding section on liquidation and limitation of damages,

(a) the agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer’s remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts; and

(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.

(2) When circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act.

(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

 

Difficulty of Ascertainment Test – Difficulty of ascertaining damages, proof of damages, proof of contemplation, forecasting types of damages – liquidated damages clause more desirable.

Reasonable Forecast of Harm – are stipulated damages reasonable forecast of harm – consider perspectives both at time of contract and time of breach.

 

Kemble v. Farren (U.K. 1829)

Facts: Director and Actor had 4 year contract with liquidated damages set at £1000. Actor breached in second year.

Law: If £1000 is for four years, then £750 is for three years since Actor already partly performed, so additional £250 is an unenforceable penalty clause.

 

Wassenaar v. Towne Hotel (Wis. 1983)

Facts: Wassenaar entered into 36 month employment contract with Hotel, with stipulated damages to be remainder of salary over term. After 15 months, Hotel fired Wassenaar, who found a similar job 3 months later.

Law: Rule for stipulated damages must be for damages difficult to estimate and a reasonable forecast of the harm caused. Since potential earnings at new job not offered at trial, clause is reasonable under totality of the circumstances.

 

Lake River v. Carborundum (7th Cir. 1985)

Posner: Penalty clause can create inefficient breach. But, they can make promise more credible and encourage maximizing contracts – paternal for courts not to enforce.

 

    1. Specific Performance

 

Injunction – Court order prohibiting some act or commanding someone to undo harm.

Specific Performance – Remedy of requiring exact performance of a contract in specific form in which it is made.

 

Coase Bargaining Example

Value(A) = 100; Value(B) = 500; Value(C) = 600. Contract: A B for 350.

Breach (expectation): A B exp. damages of 150; A sells to C for 600 (gains 500 surplus). Total surplus to A is 350, total to B is 150, for total surplus of 500.

Breach (specific performance): A forced to sell to B for 350. B then sells to C for 550. So, A gains 250, B gains 200, and C gains 50, for total surplus of 500. BUT, B could sell back to A for 550 (equivalent of A paying B 200 damages), who could sell to C for 550 and achieve the SAME result as above.

So, parties have an incentive to work around inefficient breach – the only thing the type of damages allocates is the benefits, but efficiency still attained (assuming no transaction costs).

 

    1. Land and Goods

 

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

(1) Specific performance may be ordered where the goods are unique or in other proper circumstances. [Official Comment 2: inability to cover is strong evidence of “other proper circumstances”]

[Revised (1) adds the following: …specific performance may be decreed if the parties have agreed to that remedy]

(2) The judgment (decree) for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just.

(3) The buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered.

 

Loveless v. Diehl (Ark. 1962, 1963)

Facts: Diehl rented farm from Loveless with option to buy for $21,000 and put $5000 of improvements into it. Diehl offered to sell to Hart for $22,000 – then Loveless interfered.

Law: Specific performance ordered – Loveless should be forced to sell to Diehl because Diehl put in $5000 to improve land.

Dissent (was 1st majority): $5000 irrelevant since already part of $22,000 at which Diehl and Hart valued land. Should be awarded expectation damages of $1000.

 

Scholl v. Hartzell (Pa. 1981)

Facts: Scholl put down a $100 to buy Hartzell’s ’62 Corvette. Hartzell reneged and refunded Scholl’s deposit. Scholl sued for replevin.

Law: According to § 2-716(1), the goods must be unique to warrant replevin, which they are not in this case.

 

Sedmak v. Charlie’s Chevrolet (Mo. 1981)

Facts: Sedmak contracted with CC to buy specialized Chevrolet for $15,000. CC received offers to buy for $24,000 and $28,000, so CC reneged. Sedmak wants replevin.

Law: The Corvette was very rare, § 2-716(1), and Sedmak made effort to replace, which he could not, § 2-716(3). So, replevin is appropriate.

 

      1. Personal Services

 

MLB Standard Contract – In case of player’s breach, clubs have right injunctive relief to prevent player from playing baseball during term of contract.

 

The Case of Mary Clark (Ind. 1821)

Facts: Clark entered into indentured servitude contract for 20 years with Johnston.

Law: Indentured servitude contracts not enforceable with specific performance because would then be involuntary servitude, which is slavery.

 

Lumley v. Wagner (U.K. 1852)

Facts: Wagner contracted with Lumley to sing at his opera house. She breaches for a better deal at another opera house.

Law: Court cannot compel her to sing for Lumley, but can enjoin her from doing so for other opera houses in the U.K.

 

Ford v. Jermon (Pa. 1865)

Facts: Ford contracted with Jermon for Jermon to perform on stage. Jermon breached.

Law: Injunction to not work elsewhere beyond court’s jurisdiction and would be a mitigated form of slavery.

 

Duff v. Russell (N.Y. 1891)

Facts: Russell contracted with Duff to perform and then breached to go to another place for more money. Parties had liquidated damages clause of $2000.

Law: Liquidated damages clauses enforceable even where alternate remedy would be an injunction, which is unenforceable.

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