Contracts Outline: The UCC and Restatement Second of Contracts
Essential Supplements for Success in 1L Contracts:
When analyzing contractual issues you must first examine whether the contract is covered under the Uniform Commercial Code (UCC) or the Restatement Second of Contracts. The UCC will cover any sale of moveable goods which includes commodities like rice, alcohol, cars, etc. but does not apply to the sale of land, services, stocks, etc. If covered by the UCC ask if the either party was a merchant, determine if it was a firm offer, if the goods meet the “perfect tender rule” etc. The Restatement will apply in most other jurisdictions and covers other types of sales when not dealing with goods or merchants. The Restatement will cover, for example, the sale of a business or securities, the sale of land, or services like rentals (car, boat, etc.). The UCC is meant to protect both consumers and merchants when making transactions. Under the UCC a merchant is defined as either: a party that specializes in the sale of a particular good, a party that claims expertise in a good by trade or expert knowledge, or a third party hired on behalf of the seller that specializes in the goods sold or has expert knowledge of the type of goods. The analysis begins with the essential question: is there a valid contract in the form of (1) Offer; (2) Acceptance; and (3) Consideration?
The essential items to conclude if a contract has been formed are offer, acceptance and considerations. When looking at the offer examine the objective and subjective aspects of the offer. Always look from the perspective of the party aiming to enforce the contract. When looking at the offer look first at the subjective belief of the offeree, did the offeree believe in his heart that an offer was being made [Embry v. McKittrick, “the Embry test”]. The after meeting the subjective test look at the objectivity of the offer, would an ordinary observer to the situation believe that an offer was being made, if so the objective test has been met [see Lucy v. Zehmer]. The Restatement § 24 defines an offer as “the manifestation of 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 [the contract].” However the offer must be in the form of exchanged bargains as the court will not usually enforce the offer of a gift, Restatement § 24(b), because a proposal of a gift is not an offer, it cannot be enforced as a contract because there is no element of exchange or bargaining. A gift does not require any performance on the part of the giftee and therefore does not satisfy the “bargain” requirement of an enforceable contract.Offers can come in the form of an options contract, which allows one party acting alone to consummate the contract without the possibility of the counter party revoking the contract. In order to determine if an options contract has been offered ask: first can party A acting alone create a contract if he so desires, and second can party B revoke A’s option to create that contract? If yes to the former and no to the latter then an options contract has been offered. If yes to both questions then the offer is revokable and is not an options contract, in which case the offer can be revoked at any time before acceptance has been manifested [see Dickenson v. Dodds]. The UCC 2-205 allots for “firm offers” which is a simple way for merchants to create an options contract. A firm offer requires an offer, by a merchant, to buy or sell goods, in a signed writing, that by its terms cannot be revoked for a period of time. This allows merchants to quickly make offers to one another with form contracts to speed the negotiations and streamline commerce.Offers can be destroyed in a number of ways. An offer can revoked by the offeror any time before acceptance has been made, and also is revoked if the offeree has acquired knowledge that the offer was revoked or the items are no longer available. According to the “mailbox rule” a revocation becomes valid upon receipt (as opposed to upon dispatch like an acceptance). Rejection, either express rejection or by way of a counter-offer. A counter-offer is essentially a rejection of the original offer and a brand new offer. Finally an offer is automatically revoked upon the death of the offeree. Offers need to be certain on the terms in order to be valid under the Restatement § 33. Even though manifestation of the offer is understood, it cannot be accepted unless the terms are reasonably certain. The terms of the offer must provide the basis for determining when a breach of the contract occurs and clues to possible appropriate remedies for a breach. The fact that one or more terms were left open in an offer chows that voluntary assumption of the contractual obligations cannot be reasonably satisfied. For this reason an acceptance to an uncertain offer cannot be completely valid without further analyzation. Whether an offer is certain on its terms varies by contract type but common factors include, the price, the quantity, the identity of the parties, the time allotted for those parties to perform, and the subject matter of the contract. However a contract can still be found valid as long as it can be shown that the parties intended to be bound by the agreement.
Once an offer has been made it is upon the offeree to accept. The acceptance is analyzed through the same subjective and objective view as the offer using the Embry test. Always analyze from the perspective of the party pursuing enforcement. For example if a seller wishes to enforce a contract as did the seller “subjectively” believe that the counter-party had accepted. Secondly determine if an ordinary observer would “objectively” believe that an acceptance was made. When accepting by mail (delivery, email, etc.) the “mailbox rule” states that the acceptance is valid upon dispatch (as opposed to revocation of an offer which is valid upon receipt). An acceptance is also required to be an agreement to the exact terms of the offer, effectively a mirror image acceptance. Any deviation from the original offer will be considered a rejection of the offer and a new offer. However, a party is permitted to unequivocally accept an offer and merely suggest changes to be made, such an acceptance is valid and the changes are at the discretion of the counter party as to their inclusion in the contract. An exception is made by the UCC 2-207(2) when an acceptance is made between merchants that deviates from the original offer. UCC 2-207(2) allows the new terms to be automatically incorporated into the contract unless the offer expressly forbids modifications, the new terms materially alter the agreement, or the new terms are objected to within a reasonable period of time.Acceptance to an offer can be validated by either promise or performance. The default rule under the Restatement § 30 allows an offer to be accepted by both promise and performance. If the offer is acceptable under the default rule of acceptance or performance then once the performance has begun or a promise has been made the contract is binding [Restatement § 62] on both involved parties and deviation from the contract by either party will now constitute a breach. Parties have the option to specify a method of acceptance and override the default rule. If the offer is accepted by performance only, Restatement § 54, it is clear that no promise is necessary [Carlill v. Carbolic Smoke Co.]. Restatement § 45 states acceptance by performance only does not bind the performing party and once performance has begun an options contract is created, the performer is not as its discretion to complete performance or abandon the contract. An acceptance that is valid only by performance is sometimes referred to as a unilateral contract. This is in contrast to a bilateral contract that requires acceptance in the form of a promise, in addition to the offer and consideration [White v. Corlies]. Occasionally the offeree is expected to expressly notify the offeror of a rejection of the offer due to the course of past dealings between the parties [Hobbs v. Massasoi Whip Co., Restatement § 69(1)(a)].
Consideration is the essence of a bargain between contracting parties it is an exchange of promises for performance, money, or other desired items. In order for a contract to be enforceable there must be, according to the Restatement § 71, an exchange of promise or performance in the form of, an act other than a promise, a forbearance by giving up a legal right that you entitled to, or the creation, modification, or destruction of a legal relationship. A gift is not a valid consideration to create a contract. Gifts are not adequate consideration because, according to Restatement § 24(b), there is no intent by the parties to be bound in an agreement, gifts are often proffered in a cavalier manner, and there is usually a lack of substantial evidence surrounding a gift because there a really no negotiations to look at [see Kerksy v. Kerksy]. Occasionally parties attempt to structure a gift to appear as consideration, this type of arrangement is called “sham consideration” [see Restatement § 79(d). For example the sale of a car to a friend for $1 is a prime example of sham consideration. Most jurisdictions do not recognize sham consideration. However a few jurisdictions will because the effort to create the sham consideration is usually an obvious reflection of the parties intent to be bound by the contract. A conditioned gift is a gift that will be transferred only when a condition is met, for example “I will give you a sandwich as long as you wait until noon to eat it,” yes you are giving up the right to eat the sandwich before noon but you would not have a sandwich to eat had one not been given to you. Conditioned gifts do not satisfy the consideration requirement either because, even though the gift is conditioned on an event, the party receiving the gift is not actually giving up or doing anything they would not have already done. Consideration can be met even if the right you are giving up did not actually exist. If you negotiate with an employer over a workplace injury and agree not to sue in tort, this consideration is valid in light of the fact that there is no valid claim because workplace injuries are covered under Federal Worker’s Compensation [Dryer v. National By-Products]. If one or both parties subjectively believe they are giving up a legal right this is valid consideration because if it were not recognized parties could too easily trick others into unenforceable contracts for their own benefit.Under most circumstances modifications will not be viewed as a new consideration because of pre-existing duties. A pre-existing duty will not be viewed as consideration after renegotiation if one parties obligations do not change under the contract. This is usually to prevent extortion because parties can be more vulnerable during the performance of a contract. For example a roofer cannot demand more money midway through a roofing project when a heavy rain is expected the following week [Alaska Packers Association v. Canfield]. Unanticipated circumstances, however, can give rise to new consideration. If an unexpected event occurs during performance that will substantial increase the obligations of one party the new obligations will be viewed as consideration as long as there is a fair increase in price and the event was unexpected and not induced by the party [Brian Construction v. Brighenti, Restatement § 89(a)]. The UCC has somewhat relaxed requirements for new consideration in UCC 2-209 whereby modification does not require new consideration as long as it is done in accordance with good faith and fair dealing.
Course of Negotiations
Without a specific manifestation of a contract you can then look to the preliminary negotiations of the parties subject to the following questions: was there partial performance excepted by one party that the other party disclaiming the contract accepted? Were there any loose ends in the contractual agreement, or were all the essential terms agreed upon? Did either party agree to be bound only upon a final written contract? Was the complexity of the contract so great that it required confinement to writing in order to satisfy the statute of frauds?
Statute of Frauds
Certain contracts require a confinement to writing signed preferably by both parties, at minimum by the party charged. The Restatement § 110 requires five (5) types of contracts to be put in writing: a contract for an executor of an estate to answer for the decedent, a contract to answer for the duty of another, a contract made upon the consideration of marriage, a contract for the sale/lease of a land interest [Schwedes v. Romain], and a contract not to be completed within one (1) year. Under the UCC 2-201 any goods sold with a value of five hundred dollars ($500) or more must also be in writing (if the sale is between merchants, any rejection must be received within ten (10) days of receiving the product). Exceptions to the UCC statute of frauds requirement will be had in the case of specially manufactured goods, wherefore any counter-party agrees to an extent of the contract, the goods have been accepted or paid for [see Riley v. Capital Airlines]. Exceptions under the Restatement; A signed offer will be found to satisfy the statute of frauds under the Restatement § 131 only if: signed by the party charged, it identifies the subject matter of the contract, it indicates a contract or valid offer was made by the signatory, and states all the essential terms of the contract with reasonable certainty. Occasionally a contract for the sale of land will invoke specific performance even in the absence of a written contract when there were actions of reliance on the contract and justice can be served only through specific performance [Restatement § 129]. Reliance on other types of contracts will also except the statute of frauds if justice requires under Restatement § 139. If one party completes its obligations within one year of contracting Restatement § 130 will allow the contract to be enforced without a signed writing. A rather lenient exception in the Restatement § 133 also does not require the writing to be an actual draft or memo of the contract as long as it meets the requirements of Restatement § 131.
Contracts can come with either express or implied warranties. An express warranty is one the is stated explicitly either verbally by the seller or written into the contract itself. Express warranties define the expectation of the parties, however not everything a seller asserts is an express warranty, some may be pure puffery which is not a warranty. An express warranty must be an affirmation of a fact that the seller is aware of and the buyer may not be that becomes part of the bargain, however reliance is not necessary for an express warranty to be valid. Generally a statement is a warranty when it is a fact asserted by the seller which the buyer would most likely otherwise be ignorant. Puffery is a mere expression of opinion or a general statement that includes no special knowledge, “our products are the hottest,” and the buyer should exercise his judgement when puffery is used [Royal Bus Machines v. Lorraine Corp.]. Implied warranties are only available for the sale of goods under the UCC. Express warranties can be asserted for any type of contract. A buyer showing doubt in an express warranty does not release the seller from his obligations under the warranty [CBS v. Ziff Davis Publishing].Sale of goods under the UCC offer two (2) types of disclaimable implied warranties. No implied warranties are available under the Restatement Second of Contracts. The first type of implied warranty warranty under the UCC is the “Implied Warranty of Merchantability.” The implied warranty of merchantability only applies in transactions where the seller is a merchant as defined by UCC 2-104. This warranty requires that the goods sold live up to the standard that a buyer would normally expect for the goods, whatever they may be. The second implied warranty under the UCC is the “Implied Warranty of Fitness for a Particular Purpose.” The implied warranty of fitness for a particular purpose does not require any party to be considered a merchant under UCC 2-104. This warranty requires that the goods sold are suitable for use in a particular manner. In order to confer a warranty of fitness for a particular purpose the seller must be aware of the buyers “particular purpose,” and the buyer must be relying on using the goods in this particular manner.In order to disclaim a warranty several criteria must be met. Under the Restatement § 2-316(1) disclaimers are only valid if reasonable. Restatement § 2-316(2) requires the disclaimer be clear and conspicuous on the face of the contract, and under § 2-316(3)(a) “as is, no warranty” clauses be enforced as long as they too are clear and conspicuous. An implied warranty is also invalidated if the buyer had, rejected, or refused, the opportunity to inspect the product (or have a third party inspect) where an inspection could have reasonably exposed the defect [Schneider v. Miller, Restatement § 2-316(3)(b)]. The court may also look the the course of past dealings between the parties, or current performance of the contract in question when determining what if any implied warranties should be applied [Restatement § 2-316(3)(c)].
Are Form Contracts Enforceable?
Form contracts a generally viewed as valid contractual obligations because where a party to an agreement manifests assent, the terms of the form contract are enforceable [Carnival Cruise v. Shute, Restatement § 211(1)]. Form contracts, according to the Restatement § 211(3), are enforceable generally unless the drafter has reason to know that the counter party would not have assented to the contract had it been fully aware of a clause in the form contract, if that is the case then the clause is invalid and may invalidate the entire contract. When a conflict arises clauses in a form contract are construed against the drafter per the Restatement § 206. Form contracts are also subject to the non-disclaimable good faith and fair dealing requirements of the Restatement § 205. Unconscionability or unfairness can also invalidate a contract under the Restatement § 208. When conflicts with public policy arise certain types of contracts will be unenforceable, for example contracts to commit crimes, torts, sell votes, collusive trade restrictions, etc. [Restatement §§ 207, 178-96].An online computer form is also a valid method for contracting subject to the same limitations of traditional form contracts. When analyzing computer forms one must subject the contract to the Embry test based on the objective and subjective nature of the party aiming to enforce the contract. In Specht v. Netscape, Netscapes assertion of the contract failed the Embry test because while subjectively Netscape believed the contract was a valid agreement, objectively an observer (ie the average computer user) would not be assenting to a hidden contract at the bottom of the Netscape website. In Register.com v. Verio the Embry test was passed because subjectively Register.com believed they were forming a contract by offering the information with the contract attached, and objectively after the first time the information was viewed an ordinary observer would have seen the contract and been aware of its obligations.Traditionally merchants were subject to the “last chance” rule which basically allowed the party who sent the last form contract to determine the terms of the agreement, however tis rule is no longer followed in any jurisdiction. The UCC now determines which forms are valid and according to UCC 2-207 when an acceptance includes different terms than the offer it is not treated as a counter offer unless it is explicitly stated that acceptance is conditional upon acceptance of the new terms. However, UCC 2-207(2), states that new terms are automatically incorporated into the terms of the agreement unless the offer expressly forbids modifications, the new terms materially alter the agreement, or the terms are rejected within a reasonable amount of time. In situations where the parties writings do not create a contract but the actions of the parties imply a contract was formed then the terms, under UCC 2-207(3) are: any terms the parties have written with any missing portions filled by the UCC gap filling provisions which generally base every other term on reasonability. In situations where a form contract materially alters the agreement the contract will be nullified as to those offending terms [Step-Saver v. Wyse].
How Does a Breach of Contract Occur?
Every contract is subject to non-disclaimable good faith and fair dealing requirements. Good faith requires that neither party do anything that would deprive the counter party of the benefits the contracted for. When examining good faith breaches look not only at the parties actions but also the intent behind those actions [see Goldberg v. Levy “bad faith,” Mutual Life v. Tailored Woman “good faith”].Material breach occurs when a the breach goes to the heart of a contract. Several items must be considered in order to find a material breach. First look at performance factors: did the breach go to the heart of the contract and frustrate the purpose, did the non-breacher get most of the expected benefit of the contract, or is the breacher likely to remedy the breach in a reasonable passage of time? Justice and equity factors play a equally important role: would finding (or not finding) a material breach create an unfair forfeiture, were there actual damages incurred by the non-breacher and are damages sufficient to compensate these damages, was the breacher acting innocently or was the breach intentional or reckless? A material breach allows the non-breacher to pursue on or off contract remedies. On contract remedies will account for expectation or reliance damages whereby off contract remedies will allow reliance o rescission restitution. Keep in mind rescission restitution is only available for a material breach, not simply a minor breach.Anticipatory repudiation is a material breach that occurs at anytime before performance is due. In this situation the breacher unequivocally refuses to perform their obligations under the contract. At which point the non-breacher may immediately cease performance and pursue a cause of action for breach of contract. Situations occasionally arise where there is some hesitation or doubt manifested by one of the parties, this is not an anticipatory repudiation. In these situations a mere request for modification or hesitation by one party in not a breach. There must be undisputed intent that the repudiator absolutely will not perform [Harrel v. Sea Colony]. Under the UCC 2-206 when reasonable insecurities arise either party may request, in writing, adequate assurances that performance will be realized. If, after a written request no assurance is given then you may cease performance and pursue a breach. Alternately under the Restatement § 251 adequate assurances need not be requested in writing in oder to be valid, and as long as an assurance is requested in an acceptable form and no assurance is given, a breach may be pursued.
Conditions to Performance May Avoid Breach Liability
Contracts performance can be subjected to two (2) types of conditions: condition precedent, and condition subsequent. Conditions can be either implied by the wording in the contract or the parties actions or expressly stated in the contract or verbally. Condition precedent is a condition that must be met before performance is due, and if the condition is not met there will be no performance due [Internacio-Rotterdam v. River Brand Rice]. Condition subsequent is a type of condition that must be met after the condition precedent has been satisfied. For example if you purchase auto insurance the condition precedent is a collision which will trigger the insurance companies duty to payout, and the condition precedent will be the requirement that you file a timely claim before the insurance company is required to pay [Howard v. Federal Crop Insurance]. Generally however courts will look to interpret contract clauses to be mere promises as oppesed to conditions because conditions can be very harsh and detrimental to the parties interests at stake. The Restatement § 227(1) provides that the interpretation of a condition is preferred that will reduce the obligee’s risk of forfeiture, unless the event is under the obligee’s control or the obligee has born the risk of the condition.Three (3) doctrines can alleviate the burden of conditions on the parties: waiver, estoppel, and excuse. A waiver occurs when a party receiving the benefit of a condition voluntarily gives up that known right or moves forward with the contract in disregard of the condition [Clark v. West]. Estoppel, similar to waiver, occurs when the party receiving the benefit of a condition leads the counter party to believe by reassurance that they will continue despite the condition not being met. An estoppel will lead to reliance by the other party on the “new” contract that doesnt require a condition. The court will “excuse” the contract at its discretion, usually for policy reasons or illegality. A promise to perform without the condition being met is binding to the parties under the Restatement § 84, however § 84(2)(a) allows you to renege on a waiver or estoppel as long as the counter party still has sufficient time to meet the required condition.
Contract Ambiguity or Vagueness
Contractual ambiguity is found when a term in the contract is interpreted by the contracting parties to have two (2) entirely different definitions. In situations with ambiguous material terms the contract must be voided because it would be impossible and unfair to enforce the two (2) “separate” contracts created by the conflicting terms [Raffles v. Wichelhaus aka The Peerless]. If one party knew or had reason to know of the counter parties ignorance on a term then the court will most likely enforce the ignorant party’s interpretation. A vague term in a contract gives rise to a situation where the parties disagree on the scope of a term in the contract so famously the “what is a chicken” argument seen in Fragiliment v. B.N.S. In which case a vague term will be interpreted at the discretion of the court based on: any definition in the contract itself (the most heavily weighted argument), definitions discussed through the process of negotiating the contract, course of current performance on the contract, course of past dealings between the parties, and lastly trade usage of the term. The Restatement § 201 outlines whose meaning will prevail when interpreting the term and will allow the parties to make ridiculous definitions if the so desire, for example agreeing for contractual purposes that “bananas” actual mean “polka dot underwear.” There is an exception to the general rule that allows the course of performance to define the term wherefore one party understands the meaning that the other party places on the term essentially failing the Embry test. The Embry test fails because subjectively that party is well aware of the definition of the term, and objectively an outsider would view the contract as a valid offer, acceptance and consideration.
When is Parol Evidence Permitted to Clear Up Ambiguity or Vagueness?
The parol evidence rule traditionally only allowed evidence into court when a contract was vague or ambiguous on its face. The modern view of parol evidence allows new evidence to show vagueness or ambiguity even when the contract itself appears to be concise. The integration of the contract also differs from the traditional to the modern version of the parol evidence rule. The traditional version assumes that a contract is fully integrated, meaning that everything the contract intended to mention was in fact mentioned, therefore anything not mentioned in the contract is excluded from the eyes of the court for enforcement. The modern version does not automatically assume a contract is fully integrated, however a “merger clause” can be added to the contract to indicate the parties intent on creating a fully integrated contract. A partially integrated contract is considered integrated only so far as the terms mentioned in the contract. Under both views of the parol evidence rule evidence is only allowed to interpret terms in a fully integrated contract, and is never allowed to contradict terms of a contract. In a partially integrated agreement parol evidence is also allowed to supplement unmentioned aspects of a contract. When the traditional view is used no evidence is permitted unless to interpret a vague or ambiguous term on the face of the contract [Thompson v. Libby]. The more modern liberal view allows parol evidence to show ambiguity or vagueness in an otherwise clear contract. In a very liberal interpretation by the California court, Justice Kosinski asserted that is is impossible to draft a contract in California that is immune to the admission of parol evidence [Trident Center v. Connecticut General Life Insurance]. It is important to note that parol evidence, either verbal or written, must predate the actual written agreement because any subsequent evidence will be considered a modification to the contract. I a few instances a scrivener’s error will be the source of the misinterpretation, in this situation the party seeking reform must show evidence beyond a reasonable doubt that they are entitled to a reformation of the term in the contract due to the parties actual intent at the time of contracting.
The Doctrine of Promissory Estoppel
The doctrine of promissory estoppel allows a promise to be enforced even without a traditionally formed contract. When a promise has been made a promisee may be able to enforce a contract without offer, acceptance, and consideration if it can be show that there was reliance on that promise. The Restatement § 90(1) allows recovery as if there was a contract when: a promise is made, the promisee acts on that promise, those acts are reasonable, definite and substantial, and the acts are done in reliance on the promise [Goodman v. Dicker]. In situations as discussed in the Restatement § 90(1) the promisee is entitled to recover a full range of contractual damages, however the court is at its own discretion to limit those damages to serve justice. The breaching party will be essentially estopped from asserting that there was not a contract in defense of the claim [Cohen v. Cowles Media Group]. Modern views of promissory estoppel allow the action to proceed independently however a breach of contract claim generally coincides with a promissory estoppel claim. An exception to promissory estoppel is allowed for “illusory promises” that are at the discretion of the promisor to fulfill [Spooner v. Reserve Life Insurance].
Implied Excuses and Defenses
Contracts are essentially about voluntarily assumed obligations. Implied excuses and defenses allow evidence to show that those obligations should be excused or were never fully realized by the parties. Implied excuses fall under three (3) main categories: mistake, impracticability, and frustration of purpose. Mistake is an erroneous belief that is present at or before the time of contracting and is either unilateral or bilateral. Bilateral mistake, as the name implies, occurs when both parties are mistaken as to a material element of the contract. A bilateral mistake must go to a basic assumption underlying the contract, the party bearing the brunt of the mistake must not have bore the risk. A party bears the risk of an element when: the contract assigns the risk, conscious ignorance of a risk but proceeds anyways, or the court determines it was fair to place risk on the party. Bilateral mistake allows both parties to renege on the contract. A unilateral mistake is when one of the parties is mistaken on a material part of the contract. Unilateral mistake is required to be a mistake at or before contracting, of a basic assumption of the contract, and the party did not bear the risk of the mistake [Tyra v. Cheney]. Impracticability is an extension of impossibility. A contract becomes impracticable when an unexpected event occurs after contracting that makes the performance very difficult to complete. In order to rescind under the doctrine of impracticability the party seeking rescission must show that it is impracticable for anyone to perform their duties under the contract, the performance must violate a basic assumption of the contract, and the party must not be responsible for the event that gave rise to impracticability. Death of the performer is an obvious example of an impracticable contract in which case the performer is excused [C.N.A. v. Phoenix]. Frustration of purpose is similar to impracticability but the unexpected event merely makes completing the contractual duties pointless. Imagine a bridge being built into a forrest where a chemical processing factory was to be built, in the event the factory construction is cancelled the purpose of the bridge building contract would be frustrated [Luten Bridge Co. v. Rockingham County].Procedural defenses are issues with the methods used to form the contract at issue. In contrast to implied excuses, procedural defenses are generally due to a misrepresentation, a non-disclosure, duress, or incompetence. Misrepresentation is a false representation of a material fact that induces the assent of the counter party. Misrepresentation does not require any party to be at fault however, in contrast to a bilateral mistake, the party charged is not released from its contractual obligations and only the party bearing the brunt of the misrepresentation is allowed to rescind the contract [Halpert v. Rosenthal]. A non-disclosure, similar to a unilateral mistake, is when one party is unaware of a material aspect, however a non-disclosure is an intentional withholding of information as opposed to a mistake that is simply unilateral. Under the Restatement § 161 a non-disclosure creates a misrepresentation, of a basic inaccurate assumption, that one party is aware of and the other is not. Non-disclosure violates the doctrine of good faith and fair dealing and is also imposed on contracts created through reliance based on trust or relationship. However a buyer is not required to disclose information of which the seller should already be aware, Baseball Card Dealer v. Smart Kid, because remember courts will enforce bad bargains between parties. Duress will nullify a contract because contracts are about voluntarily assumed obligations. Duress imposes a contract by way of threats for example of violence, a tort against the offeree or a friend, threats to violate an existing contract, or general bad faith. The threat under duress is almost always illegal and contracts formed through duress are not enforced. Certain individuals do not have the mental ability to voluntarily assume obligations due to incompetence. Incompetence is a viable excuse for infancy under the age of 18 according to the [Restatement § 14], mental illness [Restatement §§ 13, 15], intoxication [Restatement § 16], or undue influence. Undue influence arises in situations where there are multiple persuaders contracting with a single vulnerable party. Other signs of undue influence are lack of third party advisors (accountant, lawyer), urgency of immediate contraction, or contracting at an unusual time or place (hospital, funeral, back ally, etc.).Substantive defenses address issues of illegality or public policy interest. The doctrine has its roots in the illegality of certain types of contracts like contracts to commit a crime or a tort. The doctrine has evolved to include contracts that contradict public policy like monopolization of markets, selling votes, restraint of trade, or bribery. Contracts are unenforceable under substantive defenses when legislation provides a defense or the interest is clearly and heavily outweighed by a countervailing public policy.Finally unconscionability which has bot procedural and substantive aspects. Unconscionability is found through interpretation on a case by case basis. With no clear cut rule the distinction is fuzzy and difficult to determine. The doctrine is important conceptually but rarely seen in practice. When a contract is found unconscionable the court will either void the entire contract or simply strike the unconscionable clause.
Types of Damages for Contractual Breach
Expectation damages are pursued by the non-breacher “on-contract” they will generally be the highest and plaintiffs are incline to pursue expectation damages first. Expectation damages aim to place the non-breacher in the place he would be if the contract was fully performed. To determine expectation damages examine the world as it is compared to the world that would have been had the contract been realized [Hawkins v. McGee, Sullivan v. O’Connor]. In situations where expectation damages may be unreasonably high the court may offer a variation on expectation damages in the form of cost of completion versus diminution in value. When the cost of completion of the contract is less the the diminution of value then the court will award cost of completion. However in cases where the cost of completion is greatly disproportionate to the diminution in value the court will likely opt to award diminution in value [Jacobs & Young v. Kent]. When making the decision between cost of completion and diminution in value the court will examine the objective and subjective intent of the parties, whether the breach was willful or unintentional, minor or material breach, gross disproportion in value, and whether the breacher stands to benefit from his breach.Reliance damages are available as an on-or-off-contract remedy. Reliance damages place the non-breacher in the position as if no contract had been made to prevent detrimental loss in reliance on the contract. The court does not wish to see any party harmed by a breach of contract and will therefore make awards to assure this. Sometimes reliance is preferred as it is a known fact where the world stood before the contract was made, as opposed to a somewhat uncertain world in the case of expectation damages.Rescission restitution is available only as an off-contract remedy and aims to place the breaching party back in the world before the contract was made. The focus of rescission restitution is to prevent the unjust enrichment of the breaching party. This award is generally the smallest and leans in favor of defendants. The Restatement § 373 allows damages incase of a total material breach or a repudiation by the breaching party. A non-breacher has no right to rescission restitution if he has already performed all of his obligations under the contract and is only owed a cash payment, in which case a cash transfer as a legal remedy is easily enforced by the court [Restatement § 373(2)].Specific performance is an equitable remedy only available on-contract. Specific performance is the default remedy for the sale or lease of a land interest and goods that are unique or irreplaceable [Cumbset v. Harris (goods), Loveless v. Diehl (land)]. Specific performance is absolutely never granted for contracts of personal services which would in essence impose slavery. However a negative injunction is sometimes available when personal services are unique like those of an actress or athlete. The negative injunction is usually only granted in instances when the non-breacher would be subject to further damages if the breacher were to continue elsewhere, the focus is on preventing any further loss by the non-breacher, not to penalize the breacher.
Limitations on the Flow of Damages from Breach of Contract
Damages generally must flow naturally from the breach. In order to be awarded damages must be foreseeable or expressly stated as possible at the time of contracting [Hadley v. Baxendale]. When a plaintiff is seeking lost profits the must show with substantial certainty that the profits would have been made. Certainty of profits can be shown through balance sheets, past similar transactions, etc. Profits for uncertain events like movie openings or sporting events a generally not substantially certain [Chicago Colosseum Club v. Dempsy]. Mitigation of damages varies by contract type but requires that a non-breaching party limit post-breach damages as best it can [Luten Bridge Co. v. Rockingham County]. In case of employment the employee has a duty to find similar or comparable work [Shirley Maclaine v. Twentieth Century Fox]. A substantial volume seller has a duty to mitigate damages in a slightly different way because a lost volume seller has substantial inventory available to be in several concurrent contracts [Jetz v. Salinas Properties]. Damages that can be reasonably calculated at the time of contracting may be included in a liquidated damages clause. A liquidated damages clause is enforceable if the court finds it reasonable. Generally liquidated damages based on factual calculations or a sliding scale are always found to be reasonable [Wassenar v. Towne Hotel]. If a liquidated damages clause is not reasonable the court may find it to be a penalty clause which is not enforceable. A penalty clause is usually an unusually high lump sum or other remedy that is unfair to one of the parties [Kemball v. Farren]. A liquidated damages clause is slightly different than a cap on damages which states that a party will only be held liable for damages up to a particular agreed upon sum. Liquidated damages are beneficial to the parties because they are in the best position oftentimes to determine their own damages, also helps to show the parties intent at the time of contracting, and incase of breach eases the litigation process and allows damages to be recovered as agreed upon.