Contracts II


I.                     Defective Formulation

a.        Misunderstanding

                                                               i.      Definition: a belief by one party as to the understanding of the other party, when both parties are in accord with some set of facts

                                                              ii.      Restatement § 20

1.        There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and

a.        Neither party knows or has reason to know the meaning attached by the other; or

b.       Each party knows or each party has reason to know the meaning attached by the other

2.        The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if

a.        That party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or

b.       That party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party

                                                            iii.      Material Difference

1.        Peerless: the name of the ship was material enough here to allow the def to avoid the contract bc it controlled the timing of deliver, and therefore, the price

a.        If two ships arrived only 15 minutes apart, not a material difference

b.       If only one ship named Peerless, but it arrived 2 months later than normal, contract would be valid unless dates were specified in the contract

2.        Subjectivity: Peerless looks into the state of mind of each of the parties, when intent to contract is actually an objective test

                                                            iv.      Level of Knowledge

1.        Equal: where both parties have different things in mind AND they have the same level of knowledge, no contract

2.        Reasonable: When one party’s understanding is less reasonable than the other’s, doctrine does not apply – binding contract

3.        Clueless Rule: whoever has the least amount of knowledge gets his way if the other knows or has more reason to know

                                                             v.      Alternatives

1.        Risk of unreimbursed reliance has led some courts to prefer avoiding the Peerless result if there is any reasonable means to giving effect to the contract at issue

2.        Factors to consider reasonableness

a.        Prior course in dealing

b.       Conversations

c.        Customs

d.       Information available to the other party

3.        Last Resort: if interpretation is inconclusive, courts prefer the understanding which operates against the party who wrote the contract

                                                            vi.      Application

1.        If A and B mean the same thing: valid contract

2.        If A and B mean different things and are clueless as to each other’s meaning: no contract

3.        If A and B each know the other means something different: no contract

4.        If A means something different from B and B knows or has reason to know: valid contract in favor of A’s meaning

b.       Mistake

                                                               i.      Definition: A belief not in accord with the facts as they existed at the time the contract was made

                                                              ii.      Rule: court will read in accordance with the mistake

                                                            iii.      Hypo: if said will sell cotton from ship called Fearless and new it should be Peerless, contract is binding – this is not a misunderstanding but a mistake of expression

c.        Misrepresentation

                                                               i.      Definition: an assertion that is not in accordance with the fact

                                                              ii.      Arthur Murray: told pl that she could dance so she would buy more lessons even though def knew she had no ability

II.                   Avoidance of Contract

a.        Infancy

                                                               i.      Rule: contract with a minor is voidable (unless for necessary)

1.        Minor must disaffirm the contract and return the item as is

2.        This protects minors from their own bad decisions

                                                              ii.      Restatement § 14: unless a statute provides otherwise, a natural person has the capacity to incur only voidable contracts until the beginning of the day before the person’s 18th birthday

                                                            iii.      Effect of rule:

1.        Contract is voidable (NOT void)

2.        Minor, parent, or guardian may disaffirm contract

3.        Disaffirmance may be made before or after age 18

a.        Must be within a reasonable time

b.       So if turn 18 one week later, can disaffirm; but if turn 18 6 months later, may not be allowed

4.        After age 18 is reached, surrender the power of avoidance – contract is ratified

a.        This is in accordance with any manifestation to be bound

b.       Silence does not mean ratification

c.        Silence rarely precludes avoidance unless demonstrated reliance by the other party

5.        Emancipation, marriage, or participation in business does not relieve infant of incapacity

                                                            iv.      Return of product

1.        Traditional rule

a.        No obligation to account for use or depreciation

b.       Minor does NOT have to restore other party to status quo

2.        Modern Rule

a.        Infacy may be raised as a defense

b.       Infant suing for rescission and recovery is allowed for value less the values of use and depreciation

                                                             v.      Exceptions

1.        Necessaries: something the minor actually needs – things indispensable such as food, clothing, shelter, or things proper and useful

a.        If the item bought was a necessary, a minor can be held responsible for the contract and he must pay a reasonable price for the item

b.       Things considered necessaries

                                                                                                                                       i.      It is a question of law

                                                                                                                                      ii.      Depends on what is suitable in view of the infant’s social position and situation in life, the customs of his social circle, and fortune possessed

                                                                                                                                    iii.      Useful article, although luxurious in character, may be included

c.        Policy: encourage people to contract with minors for the things they need

2.        Removal of Disability

a.        Minors can go to court and have the disability removed on a contract-by-contract basis or for all future contracts

b.       Minor petitions the court for the ability to contract in his own name for himself (cannot be done by others)

3.        Others: insurance, banking, education loans, military, etc.

                                                            vi.      Misrepresentation of Age

1.        Massachusetts Rule: (harshest for the seller) Minors are not liable in tort for deceit arising from false representations as to age

2.        Middle Rule: Infant can still disaffirm, but may be liable for damages in tort for misrepresentation or deceit

3.        Estoppel Rule: (harshest for minor) when a minor has reached a sufficient stage of maturity and enters into a contract falsely representing himself, he is estopped from denying that he is of age and cannot rescind or disaffirm the contract

                                                          vii.      Emancipated Minor

1.        Rule: whether the minor is emancipated or unemancipated does not make a difference – general rule still applies

b.       Mental Incompetence

                                                               i.      Restatement § 15

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

a.        He is unable to understand in a reasonable manner the nature and consequences of the transaction, or

b.       He is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition

2.        Where the contract is made on fair terms and the other party is wo knowledge of the mental illness, the power of avoidance under (1) terminates to the extent that the contract has been performed in whole/part or the circumstances have been so changed that avoidance would be unjust – Court may grant relief as justice requires

3.        NOTES:

a.        (1)(a) is a cognitive test – was there a lucid interval sufficient for understanding

b.       (1)(b) is a volitional test – even if party understands, are they able to act in a reasonable manner

c.        (2) takes into account considerations of fairness

                                                              ii.      Unlike infancy, knowledge matters with incompetency

1.        Easier to ascertain than age

2.        Society finds it difficult to understand mental illness, so we give more deference to seller

                                                            iii.      Burden of Proof

1.        The court presumes all people are competent

2.        Presumption of competence must be overcome by clear and convincing evidence

3.        If incompetence of a general permanent nature has been shown to exist for a period of time prior to the execution of a contract, it is presumed to continue

a.        Person relying on contract must rebut this presumption by showing the existence of a lucid interval

4.        Evidence

a.        Circumstances surrounding the transaction

b.       Adequacy of consideration

c.        Individual’s physical condition

d.       Acts wi a reasonable time before and after contract

e.        Relation of trust/confidence bt the parties

                                                            iv.      Intoxication

1.        Restatement § 16: A person incurs only voidable duties if one party has reason to know the other party has no ability to understand the nature and consequences of his actions

2.        Impairment must be proven to be extreme (incapable of exercising judgment)

3.        Requires knowledge

a.        Hard to void a contract for intoxication than mental illness

b.       Requirement places more culpability on the alcoholic (no sympathy)

c.        Incompetency is assumed voluntary

4.        May ratify contract upon sobering

                                                             v.      Restitution

1.        Most courts require mental incompetents who avoid contracts to restore the other party to the status quo ante

2.        Cannot tender broken, used, or depreciated things

3.        Restitution not required when the other party acted unfairly or with knowledge of incompetence

                                                            vi.      Guardians

1.        If a guardian has been appointed, any contracts with the ward are void

2.        Once a guardian is appointed, the ward has no contractual abilities

3.        This is true even if seller is unaware of the guardianship – however, there may be a quasi-contractual obligation of the ward for unjust enrichment or necessaries

III.                 Defects in the Bargaining Process

a.        Mistake

                                                               i.      Mutual Mistake (easier to void than unilateral mistake)

1.        Restatement § 152

a.        Where the 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 the mistake under the rule stated in § 154

b.       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

2.        Basic Assumption: fact must be central to the transaction

a.        But for the fact, the transaction would be of no interest to the party

b.       Applied to existing facts

3.        Material Effect: A change in the essence of the contract as opposed to a change in value

a.        Change in essence goes to the direct elements of the contract and is enough for rescission

b.       Change in value is a collateral element of the contract and may not be enough for rescission

4.        Party Bearing the Risk: Whoever gets the worst end of the deal gets to rescind

a.        Restatement § 154: A party bears the risk of mistake when:

                                                                                                                                       i.      The risk is allocated to him by agreement of the parties

                                                                                                                                      ii.      He is aware at the time of the contract that he has only limited knowledge wrt the facts to which the mistake relates but he treats his limited knowledge as sufficient (like buying a shirt wo trying on bc it looks like it will fit)

                                                                                                                                    iii.      The risk is allocated to him by the court on the ground that it is reasonable under the circumstances to do so

5.        Every mistake is not rescindable: court looks for something so important to the contract it would be unfair to enforce it

6.        Mistake v. Misunderstanding

a.        Misunderstanding is in accord with the facts

b.       Mistake is an incorrect belief

c.        Example: Register for Watson’s class

                                                                                                                                       i.      If two Watson then can be a misunderstanding if each believes a different Watson is being referred to

                                                                                                                                      ii.      If no Watson, meant Weaton then a mistake (not in accordance with the facts)

                                                              ii.      Lateral Mistake

1.        Restatement § 153:

a.        Where the mistake of one party at the time of 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 unless he bears the risk of the mistake under the rule stated in § 154, and

                                                                                                                                       i.      The effect of the mistake is such that enforcement of the contract would be unconscionable, or

                                                                                                                                      ii.      The other party had reason to know of the mistake or his fault caused the mistake

2.        Basic Assumption: Mistake to vital, existing facts

a.        Mistake is usually clerical, computational rather than a mistake in judgment

3.        Palpable Unilateral Mistake: known mistake under (ii)

a.        Too good to be true type knowledge – when one party is aware or should be aware of the mistake of the other party

b.       Courts do not allow offerees to take advantage of offers too good to be true

c.        When mistake is palpable, argue (i) and (ii)

4.        Analysis

a.        Under Restatement

                                                                                                                                       i.      Basic assumption of the agreement – if not then valid

                                                                                                                                      ii.      Is it material – if not then valid

                                                                                                                                    iii.      Does the mistaken party bear the risk – if so then valid

1.        Does agreement allocate risk to him

2.        is mistake party aware of limited knowledge but treating it as sufficient

3.        Would the court reasonably allocate the risk to the mistaken party

                                                                                                                                    iv.      Would enforcement be unconscionable – if so then voidable

                                                                                                                                     v.      Does the other party have reason to know of the mistake, or did his fault cause the mistake

b.       Under Boise

                                                                                                                                       i.      Is it material

                                                                                                                                      ii.      Would enforcement be unconscionable

1.        Usually hardship is a substantial pecuniary loss

2.        Not clear whether hardship for the deal or for the particular party

                                                                                                                                    iii.      Did mistake result from culpable negligence

1.        Was offer made in good faith

2.        Standard allowable mistake is a clerical mistake

3.        Is the error one that would be made by a reasonable/cautious person

                                                                                                                                    iv.      Would party be prejudices w the exception of their loss of bargain

                                                                                                                                     v.      Was prompt notice of the mistake given

                                                            iii.      Negligence of mistaken party

1.        Restatement § 157

a.        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 UNLESS his fault amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing

                                                            iv.      Mistake in Transmission

1.        Rule: Party who selects the mode of transmission bears the risk/loss

2.        Exceptions: Receiver must be innocent and not suspect error

a.        If any of the following would indicate probable error, receiver must perform a good faith investigation before acting

                                                                                                                                       i.      Message

                                                                                                                                      ii.      Attendant circumstances

                                                                                                                                    iii.      Prior dealings

                                                             v.      Remedies

1.        Rescission (voidable)

a.        Most common remedy for mistake of formulation

b.       Court will most likely allow either party a claim for restitution to restore the party to status quo ante after contract is invalidated

c.        Court may grant relief as justice requires in protecting reliance interest

d.       If non-mistaken party cannot be put back to status quo ante, court may not grant rescission

                                                                                                                                       i.      It is more difficult for pl to rescind if def changed position significantly

                                                                                                                                      ii.      Court does not have to grant if it feels the element of fairness has not been met

2.        Reformation

a.        Most common remedy for mistake of expression

b.       Court restores efficacy of writing that does not match oral/previous agreement

c.        Pl must show by clear and convincing evidence

                                                                                                                                       i.      Parties had reached agreement over term at issue

                                                                                                                                      ii.      Both intended the term to be included in the subsequent writing

                                                                                                                                    iii.      Bc of mutual mistake in expression the term was not included

3.        Traditionally

a.        Rescission was the only remedy for mistake in formulation

4.        Modern View

a.        Reformation can be used to remedy both mistake in expression and mistake in formulation

                                                                                                                                       i.      Especially when the non-mistaken party is fraudulent

                                                                                                                                      ii.      Where the contract is unconscionable or illegal

b.       Fraud and Misrepresentation

                                                               i.      Misrepresentation

1.        Must be an assertion not in accordance with the facts

2.        Rule: Courts leave the parties where they found them

3.        Exception: If the assertion is either fraudulent or material

4.        Assertion must be relied upon by the recipient in manifesting assent

a.        Reliance does NOT have to be reasonable

b.       Look at the status, inequities, vulnerabilities of the party to see if reliance is justified

5.        Contractual v. Tortious Misrepresentation

a.        Tortious: for money damages – criteria more difficult – must be fraudulent AND material fact

b.       Contract: must be fraudulent OR material fact

                                                              ii.      Fraud

1.        Restatement § 162

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

                                                                                                                                       i.      Kowes or believes that the assertion is not in accord with the facts, or

                                                                                                                                      ii.      Des not have the confidence that he states or implies in the truth of the assertion, or

                                                                                                                                    iii.      Knows that he does not have the basis that he states or implies for the assertion

2.        An intentional perversion of the truth

3.        Material

a.        Restatement § 162

                                                                                                                                       i.      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

b.       An innocent (non-fraudulent) misrepresentation can still be material

4.        Opinion

a.        Rule: Generally, a party is not justified in relying on an opinion

b.       Restatement § 168

                                                                                                                                       i.      An assertion is one of opinion if it expresses only

1.        A belief, wo certainty, as to the existence of a fact, or

2.        A judgment as to quality, value, authenticity, or similar matters

c.        Restatement § 169

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

1.        Stands in a relation of trust and confidence to the person whose opinion is asserted that the recipient is reasonable in relying on it, or

2.        Reasonably believes that, as compared with himself, the person whose opinion is asserted has special skill, judgment, or objectivity with respect to the subject matter, or

3.        Is for some other special reason particularly susceptible to a misrepresentation of the type involved

d.       Exceptions (Arthur Murray)

                                                                                                                                       i.      Fiduciary relationship

                                                                                                                                      ii.      Superior Knowledge

                                                                                                                                    iii.      Particularly susceptible – parties not dealing at arms length

                                                                                                                                    iv.      Person asserting has superior access to facts

1.        Relying party does not have the opportunity to be appraised of the truth or falsity of the fact represented

                                                                                                                                     v.      Person asserting is using trickery or artifice

1.        Intentionally varies from reality

2.        Close to fraud in a factual assertion

5.        Nondisclosure as Assertion

a.        Rule: There is no duty to disclose facts that would tend to discourage the other party from entering into a deal

b.       Alternate Rule: Where parties are dealing at arm’s length with no inequities or inherently unfair practices employed, the courts will leave the parties where they find them

c.        Exceptions

                                                                                                                                       i.      Restatement § 161

1.        A person’s nondisclosure of a fact known to him is equivalent to an assertion that the fact does not exist where he knows that disclosure

a.        Is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material (where changing circumstances have caused something to be untrue)

b.       Would correct a mistake of the other party as to a basic assumption on which that party is making the contract AND if nondisclosure amounts to a failure to act in good faith/fair dealing

c.        Would correct a mistake of the other party as to the contents or effect of a writing evidencing an agreement in whole or in part

d.       Where the other person is entitled to know the fact bc of a relation of trust and confidence bt them (families, physician/patient, lovers, etc.)

                                                                                                                                      ii.      Hill v. Jones

1.        Florida Rule: where the seller knows of facts materially affecting the value of the property that are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer

2.        Concealment: positive action to hide is equivalent of misrepresentation

3.        Partial Disclosure: A truthful statement that omits important qualifying facts is a misrepresentation

a.        If a party undertakes to disclose, he must disclose the whole truth

                                                                                                                                    iii.      UCC § 1-203

1.        Every contract or duty wi this article imposes an obligation of good faith in its performance or enforcement

a.        You can always make the argument that nondisclosure was a fraudulent misrepresentation (actual assertion)

6.        Analysis

a.        Was there an assertion not in accordance with the facts

b.       Is it a representation of fact or opinion

                                                                                                                                       i.      If fact

1.        Is it fraudulent (integration clauses do not insulate from fraud) – if not

2.        Is it material

a.        Was it the kind of thing that would induce a reasonable person to manifest assent

                                                                                                                                      ii.      If opinion

1.        Fiduciary relationship

2.        Superior knowledge

3.        Other person is particularly susceptible

4.        Superior access to facts

5.        Trickery

c.        Did the recipient rely

d.       Was it nonverbal, concealment

e.        Real test: materiality bc there a plenty of cases where a material, nonfraudulent misrepresentation has allowed avoidance but NOT many were a fraudulent, nonmaterial one has allowed avoidance

7.        Remedies

a.        Rescission

                                                                                                                                       i.      Dissolution of contract

                                                                                                                                      ii.      Parties put to status quo ante

                                                                                                                                    iii.      If misrepresenting party received a benefit, have to repay it

b.       Consequential damages

c.        Reformation

                                                                                                                                       i.      Option if misrepresentation goes to the effect of the writing

d.       Restatement § 164

                                                                                                                                       i.      If assent is induced by the misrepresentation of someone who is not a party to the transaction contract is voidable UNLESS the other party in good faith either gives value or relies materially on the transaction

c.        Duress

                                                               i.      Definition: a wrongful act or threat that coerces assent to a bargain and precludes the exercise of free will

                                                              ii.      Different from fraud

1.        Party is not relying on false information

2.        Party is accurately informed of the facts but is forced by duress to consent to the contract

                                                            iii.      Must show you tried to go elsewhere for a remedy

                                                            iv.      Restatement § 175

1.        Duress by threat makes a contract voidable

a.        If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative

b.       If a party’s manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable UNLESS the other party to the transaction in good faith and without reason to know of the duress either gives value or relied materially on the transaction

                                                             v.      Restatement § 176

1.        A threat is improper if

a.        A crime or a tort is threatened, or the threat itself would be a crime or a tort if it resulted in obtaining property,

b.       A criminal prosecution is threatened

c.        The use of civil process is threatened and the threat is made in bad faith, or

d.       The threat is a breach of the duty of good faith and fair dealing under a contract with the recipient

2.        A threat is improper if the resulting exchange is not on fair terms, and

a.        The threatened act would harm the recipient and would not significantly benefit the party making the threat, (done maliciously)

b.       The effectiveness of the threat in inducing the manifestation of assent is significantly increased by prior unfair dealing by the party making the threat, or

c.        What is threatened is otherwise a use of power for illegitimate ends

                                                            vi.      Reasonable Alternatives

1.        If the victim had any reasonable alternatives they may not claim duress

a.        Reasonable alternatives depend on the circumstances and relationship of the parties

b.       Austin Instruments v. Loral: could not find anyone else who could meet the deadline and delay was not an option

c.        Compromise bt the objective and subjective test

2.        Suit for contract damages can be seen as an alternative

a.        Sometimes that is not an alternative bc of time constraints of suit

b.       Go ahead and comply w terms to avoid threatened action and then sue for duress later

                                                          vii.      Remedies

1.        Rescission

a.        Victim cannot void after rescission

2.        On avoidance, victim is entitled to restitution and must also make restitution if he has obtained a benefit

d.       Undue Influence

                                                               i.      Different from duress

1.        High pressure as opposed to a threat that borders on coercion

2.        Not as in your face as duress, which makes it harder to prove

                                                              ii.      Restatement § 177

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

2.        Remedy: if a party’s manifestation of assent is induced by undue influence, the contract is voidable by the victim

3.        Third Parties: if assent is induced by one who is not a party to the transaction, the contract is voidable by the victim UNLESS the other party in good faith and wo reason to know of the undue influence either gives value or relies materially on the transaction

                                                            iii.      Factors

1.        Discussion of the transaction at unusual or inappropriate times

2.        Consummation of the transaction in an unusual place

3.        Insistent demand that the business be finished at once

4.        The use of multiple persuaders by the dominant side

5.        Statements that there is no time to consult with advisors or attorneys

e.        Unconscionability

                                                               i.      UCC § 2-302

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

a.        Refuse to enforce the contract, or

b.       It may enforce the remainder of the contract wo the unconscionable clause, or

c.        It may so limit the application of any unconscionable clause as to avoid any unconscionable result

2.        When the court claims the contract or any clause may be unconscionable, the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect to aid the court in making the determination

                                                              ii.      Restatement § 208: same as the UCC

                                                            iii.      UCC does not define unconscionability

1.        Others have said it is the prevention of oppression and unfair surprise

2.        This gives a great deal of discretion to the courts

                                                            iv.      Not a common defense

1.        Very hard theory to win on

2.        Depends on attitude of judge

                                                             v.      Competing issues

1.        Traditional notions that parties deal at arm’s length – absent this, courts will not police agreements

2.        Also have notions of fairness

                                                            vi.      Two Prongs

1.        Lack of meaningful choice (procedural)

2.        Unreasonable or unfair terms (substantive)

3.        Must have both (not mutually exclusive)

                                                          vii.      Consumer transactions

1.        Procedural: absence of meaningful choice

a.        Gross inequality of bargaining power – lack of voluntariness

                                                                                                                                       i.      Stronger party’s terms are non-negotiable (adhesion contract)

                                                                                                                                      ii.      Weaker party is deprived of choice (prevented by market factors, timing, or other pressures from being able to contract with another party on more favorable terms or to refrain from contracting at all)

b.       Manner in which contract was entered – lack of knowledge or understanding of contract terms bc of

                                                                                                                                       i.      Complex legalistic language

                                                                                                                                      ii.      Important terms were hidden or minimized

                                                                                                                                    iii.      Disparity in sophistication, economic and educational status of parties

                                                                                                                                    iv.      Lack of opportunity to study contract and inquire about terms

2.        Substantive: terms are unreasonably favorable to other party

a.        One party is deprived of all benefits or agreements

b.       One party is left wo a remedy for another party’s non-performance or breach

c.        Large disparity bt market value and price of the thing being sold

                                                        viii.      Commercial Transactions

1.        Generally, much harder for merchants to prove unconscionability bc businesses are expected to have sufficient knowledge and bargaining power to protect themselves

2.        Unfair Surprise – a burdensome clause that does not come to the attention of a party adhering to the contract

a.        Terms hidden in printed form

b.       Inability of adhering party to comprehend the contract

c.        Seller never suggests party read the entire contract

3.        Procedural: unequal bargaining power/lack of voluntariness

a.        Small company v. Big company

b.       Lack of negotiation (like an adhesion contract)

c.        One party has more market power

4.        Substantive: oppression

a.        Overly harsh, one sided results with no justification

b.       What is the potential loss

c.        Good faith: was there honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade

5.        Zapatha v. Dairy Mart

a.        Illusory promise – no b c required 90 days written notice to cancel contract

b.       Termination wo cause is not unconscionable per se if you have reasonable notice

c.        Substantively not unconscionable bc no huge financial losses or forfeitures

d.       Dairy Mart was honest in openly disclosing the reason for terminating the contract

e.        Some legislatures have limited the right of certain types of franchisers to terminate wo cause

                                                             ix.      Procedural Aspects

1.        Usually pleaded as an affirmative defense when other party sues for collection

2.        A question of law for the court

a.        UCC says court must allow evidence of commercial setting, purpose, and effect of contract

b.       This is valuable to the party asserting unconscionability

3.        Burden of Proof

a.        Party asserting unconscionability has initial burden of persuasion that the contract appears unconscionable

b.       After a prima facie case is established, burden shifts to the other party to persuade the contract was not unconscionable

                                                              x.      Remedies

1.        Rescission: court can refuse to enforce the contract

2.        Modification: court can enforce wo the unconscionable clause or may limit the application of the unconscionable term

3.        No right to recover damages

f.         Illegality/Public Policy

                                                               i.      Definition: agreements made unenforceable on grounds of public policy even though the have all the aspects of a contract

                                                              ii.      Rationale

1.        Deter undesirable conduct (assuming parties know the contract is illegal)

2.        Enforcing is an inappropriate use of judicial process

                                                            iii.      Conduct that renders contract unenforceable does not necessarily have to be a crime

1.        Most commonly, the promise under the agreement is not criminal but offends public policy

2.        A promise to engage in conduct might offend public policy even though the conduct itself does not

                                                            iv.      Procedure

1.        A court can consider illegality even if it has not been pleaded by the parties

2.        Court can examine witnesses and develop facts not brought out by the parties as well

                                                             v.      Maryland Rule: Hesitant to strike down voluntary bargains on public policy grounds

1.        Only allowed where the common sense of the entire community would pronounce the agreement invalid

2.        Favors freedom of contract

                                                            vi.      Restatement § 178

1.        If legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms (relevant question: what is the purpose to be served in denying enforcement and restitution when the contract is against public polity)

2.        In weighing the interest in the enforcement of a term, account is taken of

a.        The parties justified expectations

b.       Any forfeiture that would result if enforcement were denied, and

c.        Any special public interest in the enforcement of the particular term

3.        In weighing public policy against enforcement of a term, account is taken of

a.        The strength of that policy as manifested by legislation or judicial decisions

b.       The likelihood that a refusal to enforce the term will further that policy

c.        The seriousness of any misconduct involved and the extent to which it was deliberate, and

d.       The directness of the connection bt that misconduct and the term

                                                          vii.      Remedies

1.        Rule: contract is void and there is no restitution

a.        Courts prefer to leave the parties where they found them

b.       An illegal bargain is void so that neither party can enforce it

c.        Parties are in equal fault

2.        Exceptions: restitution may be allowed

a.        Disproportionate forfeiture

                                                                                                                                       i.      Where the gravity of the misconduct is not too high

                                                                                                                                      ii.      Or if it involves technical rules and regulations

b.       Excusable ignorance

c.        Claimant is not equally in the wrong

d.       Claimant has withdrawn from the transaction

                                                                                                                                       i.      Must withdraw before the improper purpose was achieved

                                                                                                                                      ii.      Not permitted when forces beyond claimant’s control prevented the improper purpose (police showed up)

e.        Claimant did not engage in serious misconduct and allowance of the claim would put an end the situation that is contrary to the public interest

                                                         viii.      Exculpatory Clauses

1.        Generally, a party can exempt himself from liability of harm caused by negligence

a.        No public policy against risk allocation devices

b.       However, they must be fairly bargained for, clearly worded, and known by both parties

                                                                                                                                       i.      Exculpatory clauses are not favorites of the courts

2.        Restatement § 195: Improper Exculpatory Clauses

a.        Terms exemption party from harm caused intentionally or recklessly

b.       Term that exempts one charges w a duty of public service from liability to the one to whom that duty is owed for compensation for breach of that duty

c.        Terms that exempt an employer from liability to employee for injury during the course of employment

d.       If one party is similarly a member of a class protected against the class to which the first party belongs

e.        Terms exempting a seller against products liability if unfairly bargained for

                                                             ix.      Covenants Not to Compete

1.        Generally okay but possibly against public policy by putting a restraint on trade

2.        Requirements

a.        Must be ancillary

                                                                                                                                       i.      Must be ancillary to an appropriate transaction like a sale of a business or an employment agreement

                                                                                                                                      ii.      A mere payoff not to compete in a certain area is not enforceable

b.       Must protect a legitimate interest of the promisee

                                                                                                                                       i.      Protect good will of customers

                                                                                                                                      ii.      Protect trade secrets, confidential information, etc.

                                                                                                                                    iii.      The employer is not entitled to prevent employee’s use of his knowledge, skill, or general information acquired or increased through employment

c.        Must be reasonable in scope

                                                                                                                                       i.      Time

                                                                                                                                      ii.      Duration

                                                                                                                                    iii.      Type of Activity

3.        Remedies

a.        Strict View: all overly broad clauses are unenforceable

                                                                                                                                       i.      Employees would be allowed to work anywhere, doing anything

                                                                                                                                      ii.      Problem: restricts parties freedom to bargain and has harsh results for employer

                                                                                                                                    iii.      Benefits: employers will draft very carefully, look at precedent for reasonable bounds, and will be very specific

b.       Blue Pencil Rule: strikes out words/phrases that make the contract unenforceable and lets the rest be enforced

                                                                                                                                       i.      Problem: Approach values wording over substance – employer will push the envelope and include backup plans in his phrasing

c.        Reasonableness Rule: Court will rewrite the agreement to make it enforceable, unless the employer wrote the agreement in bad faith with that result in mind

                                                                                                                                       i.      Burden of proof of good faith on employer

                                                                                                                                      ii.      Pro-employer: courts will rewrite as strict as boundaries of law allows

                                                                                                                                    iii.      Bad for autonomy of private agreements

                                                              x.      Non-Marital Cohabitation Agreements

1.        Consideration cannot include meretricious activities

a.        To enforce, the bargain must be independent of sexual activity

2.        If not enforceable as an express agreement, claim for damages is different

a.        Express agreements: parties split assets

b.       Unjust enrichment: would only give woman what she deserves

3.        When a contract is based on an illicit relationship, many courts see it as against public policy

a.        Enforcement would be a threat to the institution of marriage

b.       Illinois strongly values the institution of marriage, Wisconsin not as concerned

                                                                                                                                       i.      Difficulty with public policy is that different states reach different results

4.        How far courts go the use public policy as a guise to enforce morals of society

a.        Contracts for same sex marriages being unenforceable

b.       If basin public policy on religious beliefs, get into separation of church and state problem

IV.                 Statute of Frauds

a.        General Rules

                                                               i.      Do not need a writing in contract law

                                                              ii.      Exception: If it is within the statute of frauds then need a writing, otherwise unenforceable

                                                            iii.      Exception to the Exception: Judicial gloss of statute of frauds can take it back to the general rule of no writing required

                                                            iv.      Policy: prevent false claims

                                                             v.      Violation: it is an absolute defense to enforcement of the contract in violation of the statute of frauds, even if the parties admit to agree to its terms

b.       One Year Provision

                                                               i.      Rule: if the agreement is not to be performed within one year, then it must be in writing

1.        Points of reference are the time the contract was made and the time when performance is to be completed

2.        Rationale

a.        At common law, perjury was a problem – people would fraudulently assert there was a contract

b.       Memories fail, evidence is weakened

3.        If any promise of any party cannot be performed wi one year, the whole contract falls within the statute

                                                              ii.      Exception

1.        If the contract is performed wi a year you do not need a writing

2.        Restatement: Only contracts whose performance cannot possibly be completed wi a year are wi the statute

a.        Possibly: if the express terms of the contract say that it will not take place wi a year (no matter how improbably or unlikely it may be) OR there is absolutely no possibility, even if work day and night, that the contract could be performed wi one year

3.        Klewin v. Flagship

a.        Contract did not specifically state a length of time, but it would be virtually impossible to complete this major a construction project wi one year

b.       Rule: an oral contract that does not expressly say that performance is to have a specific duration beyond one year is, as a matter of law, the functional equivalent of a contract of indefinite duration, which is outside the statute of frauds and enforceable

                                                            iii.      Performance

1.        Option of Termination

a.        Termination = performance – majority will not apply the statute

b.       Restatement

                                                                                                                                       i.      As long as one contingency is performable wi the year, it is not wi the state of frauds and does not have to be in writing

                                                                                                                                      ii.      If contract created the power to terminate, that is an alternative performance that can be done wi one year and not wi the statute

c.        Schmidt

                                                                                                                                       i.      Pl contracted to be exclusive distributed as long as Schmidt sold beer in the NY metro area

                                                                                                                                      ii.      Bc Schmidt could stop selling beer wi a year through termination, there was a possibility for performance wi one year so enforceable

2.        Death

a.        If the promise is to do something, death is an excuse for non-performance

                                                                                                                                       i.      Example: oral agreement to work for 5 years – if promisor dies there has been no performance

                                                                                                                                      ii.      Contract is stuck within the statute of frauds (writing required)

                                                                                                                                    iii.      If contract is “for life” or “for 5 years if A lives that long” then contract is not wi the statutes – indefinite and contingency clauses respectively

b.       If the promise is not to do something like a contract not to compete then death is performance

                                                                                                                                       i.      Cannot do anything when dead

                                                                                                                                      ii.      Contract is not wi the statute if promisor dies wi one year

                                                                                                                                    iii.      However, courts will not go so far as to say bc party could die wi one year, the contract is outside the statute

3.        Complete Performance

a.        By one party takes the contract out of the statute of frauds and makes the promise of the other party enforceable

b.       Unfair for the def who has received a benefit to escape enforcement bc of the statute

c.        Some courts apply this rule and some hold that only full performance by both sides takes the contract out of the statute

d.       Mason v. Anderson

                                                                                                                                       i.      Contract for repayment of the loan by its repayment terms to take longer than one year

                                                                                                                                      ii.      Started repayment and then debtor died

                                                                                                                                    iii.      Takes out of the statute of frauds bc obvious a valid contract made by payments already rendered

4.        Unilateral Contracts

a.        Do not fall wi the statute bc a contract does not arise until there has been performance by the promisee

c.        Surety Clause

                                                               i.      Promise to pay the debt of another

                                                              ii.      Applies to all contracts of suretyship and promises to sign contract of suretyship

1.        Must be an actual debt owed by the debtor (not owed by the surety)

a.        Surety agreement is collateral to the original debt

2.        Must be three parties involved

a.        Surety: obligated to creditor, but may seek reimbursement from debtor

b.       Principal Debtor

c.        Creditor

                                                            iii.      Rationale

1.        Creditors used to go after the money of a debtor’s friends, saying they promised to pay for their friend’s debt

                                                            iv.      Functions

1.        Evidentiary: promisor has received no benefit from transaction, so promise is the only evidence

2.        Cautionary: brings home to the prospective surety the significance of the promise, guards against ill-considered promises

                                                             v.      Exceptions (do not require writing)

1.        Indemnity: when the third party promises the debtor he will pay

a.        Not a promise to the creditor but to the debtor

b.       Not a collateral but a primary promise

2.        Ovation: payment in turn for release of debtor from obligation

a.        Not a surety bc the principal debtor is no longer involved (two parties instead of 3)

b.       Not wi the statute – no writing required

3.        Main Purpose Doctrine: promisor has a pecuniary interest in transaction

a.        If the surety’s actual or main purpose is for economic advantage rather than the benefit of the principal, then no writing required

b.       Policy worries reduced when promisor receives something substantial bc:

                                                                                                                                       i.      There is no disparity of exchange

                                                                                                                                      ii.      Commercial context provides the evidence

4.        When the creditor neither knows nor has reason to know the promisor is a surety

                                                            vi.      Questions to ask

1.        Is the promise original or collateral

2.        Is promise from promisor to debtor or from promisor to creditor

3.        Does the promisor have an actual obligation to the creditor

4.        If the promisor trying to further some business or pecuniary interest of his own

5.        NOTE: If the answer to any of these takes it out of the statute, still analyze the agreement as if were in the statute as well

d.       Marriage Clause

                                                               i.      Any agreement in consideration of marriage must be in writing

1.        Does not apply to mutual promises to marry

2.        Applies to marriage settlements, pre-nuptial agreements, promises of prospective groom to pay bride money, convey property, execute a will in consideration of marriage

                                                              ii.      Purpose: prevent unguarded expressions of gallantry being perverted into solemn, enforceable engagements

1.        Also do not want contracts like: I married him bc he promised me money

e.        Executor of a will

                                                               i.      Same thing as a surety – promise to pay damages for claims on the deceased’s estate out of the executor’s estate requires a writing

f.         Contract for the Sale of Goods worth $500+

                                                               i.      UCC § 2-201

1.        A contract for the sale of good for $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract has been made and signed by the party against whom enforcement is sought

a.        A writing is sufficient if it omits or incorrectly states a term agreed upon

b.       Quantity of goods must be specifically stated

2.        Between merchants, if wi a reasonable time a writing in confirmation of the contract is received, it satisfies the requirements of subsection (1) unless written notice of objection to its contents is given wi 10 days after receipt of confirmation

3.        Exceptions

a.        Specially manufactured goods are not wi the statute of frauds if

                                                                                                                                       i.      They are not suitable for sale to others in the ordinary course of the seller’s business and cannot be easily altered to sell to others

                                                                                                                                      ii.      The seller, before notice of repudiation is received and under circumstances which indicate the goods are for the buyer, has made either a substantial beginning of their manufacture, or commitments for their procurement

1.        Substantial beginning: look to see what precedent is, customs in the industry, etc.

2.        Evidentiary worries are eased bc unlikely that the manufacturer will begin to make goods especially for the buyer wo a contract

                                                                                                                                    iii.      NOTE: not suitable for sale to others means they are not marketable – a downturn in the market does not count a reason for non-marketability

b.       Admission of one party in pleading, testimony, or otherwise in court that a contract for sale was made

                                                                                                                                       i.      Contract not enforceable beyond the quantity of goods admitted

c.        Goods already paid for and accepted or received and accepted

                                                              ii.      How to tell if something qualifies as goods under the UCC

1.        Goods are moveable

2.        When goods and services are mixed together, look to see what is the predominant factor or main purpose of the item being purchased

a.        Installation of linoleum: a good bc you care more about the floor than the service

b.       Contract w artist for painting: service bc you want the talent of the particular artist

g.       Land Clause

                                                               i.      Any agreement that contains a promise to create or transfer an interest in land falls wi the statute of frauds and requires a writing

h.       Compliance

                                                               i.      General Requirements

1.        A note or memorandum is sufficient writing

2.        Writing can be made before or after the contract

3.        It need not be delivered to anybody

4.        Writing must amount to an acknowledgment by the party charged that he has assented to the contract that is asserted by the other party

                                                              ii.      UCC § 2-201

1.        Must evidence a contract for the sale of goods

2.        Signed by party against whom enforcement is sought

a.        Signature: any symbol executed or adopted by a party with present intention to authenticate a writing

b.       Test to see whether a mark is a signature: whether the other party reasonably believes that the asserted signer’s intention is to authenticate the writing by mark

3.        Must specify quantity

                                                            iii.      Restatement § 131

1.        Any writing, signed by or on 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 bt 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

                                                            iv.      More than one writing

1.        When terms to satisfy the statute of frauds are in 2 or more documents and only one of them is signed by the party to be charged, there are two different approaches

a.        Signed papers must have explicit reference to the unsigned papers

b.       If the papers are in reference to the same transaction or subject matter, then they can be taken together and considered as one writing to satisfy the statute of frauds

                                                                                                                                       i.      This is the Restatement view

                                                                                                                                      ii.      Probably the view allowed by the UCC considering its purpose

i.         Effect of Noncompliance

                                                               i.      In general

1.        Failure to comply makes a contract voidable

a.        The noncompliance defense can be waived

b.       Defense must be raised as an affirmative defense in the pleadings – if it is not, it is waived

2.        Complete performance on both sides eliminates any statute of frauds problem

                                                              ii.      Admission Exception

1.        If the party against whom enforcement is sought admits in pleading, testimony, or otherwise in court that a contract for sale was made, the statute of frauds defense is gone

                                                            iii.      Restatement § 139

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 if injustice can be avoided only by enforcement of the promise – remedy granted 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 the 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

3.        Split of authority regarding estaoppel – three views

a.        Some courts refuse to use promissory estoppel to circumvent the statute

b.       Some apply whenever fraud or unconscionability is present

c.        Others apply it whenever the ordinary elements of promissory estoppel are present

                                                            iv.      Equitable Estoppel exception

1.        When a representation produces detrimental reliance

a.        Example: when one party said he did or would sign and did not

b.       Example: when a trusted person like an attorney says that no writing is required

2.        Also can be waived if not brought up bc it is an affirmative defense

                                                             v.      Quasi-Contract Exception

1.        IF there is performance and the statute prevents enforcement, a quasi-contract remedy may be allowed

2.        UCC provides for this is § 2-201(3)(c)

j.         Analysis

                                                               i.      Is it a written agreement – if not

                                                              ii.      Is wi the statute

1.        Suretyship

2.        Marriage

3.        One Year

4.        Land

5.        Goods greater than $500

                                                            iii.      Do any exceptions take it out of the statute

1.        Admission

2.        Specially manufactured

3.        Goods accepted and received

                                                            iv.      Does it satisfy the statute

1.        Memorandum

2.        Confirmatory writing

3.        Second documents

4.        Quantity Term

5.        Signature

                                                             v.      If not, can party assert

1.        Equitable or promissory estoppel

2.        Unjust enrichment

V.                   Parol Evidence Rule

a.        In General

                                                               i.      Parol evidence rule is used to determine whether a party can bring in evidence as to the meaning of a contract

1.        Extrinsic Evidence: conversations/e-mails/writings BEFORE the contract as to the meaning or addition of terms

a.        If a conversation comes AFTER the written contract, it is a modification

2.        Even if a party does make it past the parol evidence rule and the evidence is admitted, the trier of fact may still choose to ignore the evidence

                                                              ii.      Distinguished from the statute of frauds

1.        Statute of frauds tells you when you need a writing and what kind of writing you need

2.        Parol evidence rule tells you, once an agreement is reduced to a writing, whether you can bring in evidence to explain, modify for change what is in the writing

a.        You can deal with both the statute of frauds and the parol evidence rule at the same time

                                                            iii.      Policies

1.        Written evidence is more accurate than human memory

2.        Witnesses may use fraud or unintentional invention

a.        Prevent juries from feeling sorry for the economic underdog when they should not be

                                                            iv.      Limitations

1.        Parol evidence rule does not exclude evidence of negotiations that took place after the written agreement was made

2.        Does not exclude evidence to show that there was not agreement or that the agreement was valid

a.        May allow parol evidence in to show fraud, duress, or mistake

3.        Does not exclude evidence offered to interpret the language of the writing

b.       Restatement

                                                               i.      § 209

1.        An integrated agreement is a writing or writings constituting a final expression of one or more terms of an agreement

a.        NOTE: this is NOT the strongest degree of integration

                                                              ii.      § 210

1.        A completely integrated agreement is an integrated agreement adopted by the parties as a complete and exclusive statement of the terms of the agreement

a.        NOTE: this IS the strongest degree of integration

                                                            iii.      § 213

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 that they are not wi its scope

3.        An integrated agreement that is not binding or that is voidable and avoided does not discharge a prior agreement

a.        Prior agreements may be admitted to show fraud, mistake, etc.

                                                            iv.      § 215

1.        Evidence of prior or contemporaneous agreements or negotiations is not admissible if it contradicts a term of the writing

                                                             v.      § 216

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 addition term which is

a.        Agreed to for separate considerations, or

b.       Such a term as in the circumstances might naturally be omitted from the writing

c.        UCC § 2-202

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

1.        Course of dealing or usage of trade or by course of performance; and

2.        Evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement

                                                              ii.      Explained:

1.        Final is analogous to restatement’s partially integrated or integrated

2.        Even if the agreement is complete and exclusive, you can let in evidence of course of dealing/performance or usage of the trade

3.        UCC is a little more liberal in allowing things in

4.        How to tell if consistent

a.        Would the agreed upon terms certainly (as opposed to naturally) have been included in the document – if so, writing is complete and exclusive

d.       Integrated Writing

                                                               i.      Four Corners Test

1.        The terms of the agreement are determined solely from the face of the document

2.        Contract must appear on its face to be incomplete in order to be deemed partially or not completely integrated

3.        Criticized bc it is hard to know what a contract was intended to cover wo looking to see what was left out

4.        Sometimes deed have a particular format which would dictate whether something might naturally be included or excluded

                                                              ii.      Restatement § 216 Test

1.        Only allows evidence of items that would naturally be made in a separate agreement

a.        Those things are called collateral matter

b.       Mitchell v. Lath: Icehouse was not collateral bc it was what made her decide to buy the property

2.        Objective Test: if a reasonable person would have put the item in a separate agreement, then the contract in question is not integrated as to that item

a.        Also, if reasonable parties would not have put the item in a separate agreement, then the contract is integrated as to that item

                                                                                                                                       i.      Must have been purposefully excluded

b.       Look at surrounding circumstances, parties, collateral agreements

                                                            iii.      UCC Test

1.        If evidence would certainly have been included in the document then it is not allowed in

a.        Policy: it should have been in the contract to begin with so you do not get to put it in now

2.        If it would certainly have been included, it is not a consistent additional term

                                                            iv.      Corbin Test

1.        All relevant evidence should be taken into account to search out the actual intention of the parties

2.        Subjective Test: allows evidence of prior negotiations

e.        Inconsistent Terms

                                                               i.      Consistency Analysis

1.        Until we know what the terms mean, we cannot decide if parol evidence contradicts

2.        Prior oral statements come in quickly to allow the judge to interpret the contract

3.        Then the parol evidence is compared to the interpreted contract independently and its consistency is judged

4.        Paradox: court must use the evidence in question to determine whether or not that evidence should be admitted

                                                              ii.      Test for inconsistency

1.        Hunt’s Food Test

a.        If the parol evidence contradicts or negates a specific term in the writing then it is not admissible

b.       Terms which has a lesser affect is admissible

c.        Narrow view of contradiction

d.       More parol evidence is allowed in

2.        Snyder Test

a.        A term is inconsistent if there is an absence of reasonable harmony bt the established agreement and the parol evidence asserted

b.       Broader view of contradiction

c.        Less parol evidence is allowed in

f.         Analysis

                                                               i.      Is a written expression intended by the parties to be a complete and exclusive final expression of their agreement

1.        If so: no extrinsic evidence will be admitted, even if consistent

a.        Restatement calls this a completely integrated agreement

b.       UCC calls this a complete and exclusive agreement

2.        How to tell – ask if the extrinsic evidence would naturally be included in the agreement

a.        If yes – it should have been included and cannot be included now

                                                                                                                                       i.      Exception: UCC allows course of dealing/trade to explain agreement even if complete and exclusive

b.       If the kind of thing that would naturally be talked about orally and have a collateral agreement on, go to step ii

c.        Look at the four corners of the document to see if it looks like something else needs to be included

d.       Look at the extrinsic evidence together with the evidence in the writing to see if that is the kink of thing you would normally but in a contract

                                                                                                                                       i.      After deciding, throw evidence back out

                                                                                                                                      ii.      If you progress to step ii by deciding the agreement is not complete/final/exclusive the evidence may be readmitted to determine consistency

                                                              ii.      Is a written agreement intended by the parties to be a final expression of their agreement

1.        If so – extrinsic evidence that is consistent with this expression may be introduced

a.        Restatement calls this a partially integrated or integrated agreement

b.       UCC calls this a final agreement

2.        How to tell if consistent

a.        Hunts Food: inconsistent or negates a specific term

b.       Snyder: absence of reasonable harmony bt the contract and the extrinsic evidence

3.        If not even a final or partially integrated agreement, the extrinsic evidence is admissible even if inconsistent

g.       Merger/Integration Clauses

                                                               i.      Commercial Sales

1.        Integration clause is NOT an automatic ban on parol evidence – it merely strengthens the presumption of integration

a.        Evidence for the beyond the four corners test

b.       Parties intent may rebut this presumption

2.        Still must examine the circumstances surrounding the making of the contract to determine whether the intent of both parties was to include everything in the integration clause – look at:

a.        Length and detail of contract

b.       Length and nature of negotiations preceding execution

c.        Absence/presence of evidence that parties intended non-written terms to be part of the overall agreement

                                                              ii.      Consumer Sales

1.        Purpose: protect truly integrated writings

2.        Best evidence of integration: a merger clause contained in a writing which has objectively been assented to by both parties

a.        In many cases, boilerplate clauses are ineffective bc not objectively assented to by the consumer

b.       If the merger clause is viewed as an attempt to disclaim the express warranty, the warranty prevails to protect the buyer

c.        If the merger clause is viewed as an attempt to totally integrate the writing, UCC 2-202 applies and would appear to protect the seller

3.        Restatement § 211 (3) Comment

a.        A party who adheres to the other party’s standardized term does not assent to a term if the other party has reason to believe that the adhering party would not have accepted the agreement if he had known that the agreement contained a particular term

                                                                                                                                       i.      Closely related to the policy against unconscionable terms and the rule of interpretation against draftsmen

                                                            iii.      Merger Clauses and the Parol Evidence Rule

1.        A merger clause is not always enough to defeat the parol evidence rule

a.        Courts will usually hold the merger clause (disclaimer) to a high standard of the code

b.       Especially where there is some surprise to the buyer

c.        Especially when the clause is buried in boilerplate language

h.       Warranties and Disclaimers

                                                               i.      UCC § 2-313

1.        Express warranties by the seller are created as follows

a.        Any affirmation of fact or promise made by the seller to the buyer which relates to goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise

b.       Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description

c.        Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model

2.        It is not necessary to the creation of an express warranty that the seller use formal words such as warrant or guarantee or that he have a specific intention to make a warranty, BUT, an affirmation of the value of the goods or a statement purporting to be merely the seller’s opinion of the goods does not create a warranty

3.        NOTE: distinguish express warranty from sales puffing

a.        Test: is it the basis of the bargain

b.       Williston: would the statement induce you to buy the goods

4.        Disclaimer – UCC § 2-316 (1)

a.        Words or conduct relevant to the creation of an express warranty and those tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other; but subject to the provisions of § 2-202 on parol evidence, negation or limitation is inoperative to the extent that such construction is unreasonable

                                                                                                                                       i.      If the warranty and disclaimer terms just contradict each other, buyer wins most of the time

                                                                                                                                      ii.      Generally, express warranty will not be affected by a disclaimer

1.        They are very difficult to disclaim

2.        Policy: protect consumer from boilerplate language in contract

                                                              ii.      UCC § 2-314

1.        Unless excluded or modified, a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant wrt goods of that kind (the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale)

2.        To be merchantable, goods must be at least such as

a.        Pass wo objection in the trade under the contract description; and

b.       In the case of fungible goods, are of fair average quality wi the description; and

c.        Run, wi the variations permitted by the agreement, of even kind, quality, and quantity wi each unit and among all units involved; and

d.       Are fit for the ordinary purposes for which such goods are used; and

e.        Are adequately contained, packaged, and labeled as the agreement may require; and

f.         Conform to the promises or affirmations of fact made on the container or label if any

3.        Disclaimer – UCC § 2-316 (2)

a.        Language must mention merchantability

b.       In case of a writing, language must be conspicuous

4.        NOTE: seller must be a merchant wrt to goods of that kind

a.        An item sold at a yard sale not protected bc not a merchant

b.       Merchant: someone who deals in goods of a kind and holds himself out as such

c.        Merchantability is not a synonym for perfect – must conform to other products in the trade

                                                            iii.      UCC § 2-315 (Fitness)

1.        Elements

a.        Buyer must have a particular purpose in mind and seller must have reason to know that purpose

b.       Buyer relies on seller’s skill or judgment to select or furnish suitable goods

c.        Unless excluded, there is an implied warranty that the goods will be fit for that purpose

2.        NOTE: goods can be merchantable, yet still not fit for a particular purpose

3.        Disclaimer – UCC § 2-316 (2)

a.        Must be in writing and conspicuous

b.       Sufficient if writing states there are no warranties which extend beyond the description of the face hereof

                                                                                                                                       i.      Thus, harder to create an implied warranty of fitness, but also harder to disclaim it than merchantability

                                                            iv.      UCC 2-316 (3)

1.        Applies to all implied warranties

a.        Notwithstanding subsection (2)

                                                                                                                                       i.      Unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like as is, with all faults, or other language which in common understanding calls the buyer’s attention to the exclusion of warranties and makes plain that there is no implied warranty; and

                                                                                                                                      ii.      When buyer has examined the goods, sample, or model or has refused to examine the goods, there is no warranty with regard to defects which such an examination ought to have revealed to him; and

                                                                                                                                    iii.      An implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade

                                                             v.      Failure of a warranty

1.        If a warranty fails its essential purpose, then other UCC remedies are available

a.        Consequential damages: loss caused by general or particular needs of the buyer which seller had a reason to know at the time of contract which could not be reasonably prevented by cover

b.       Cover: right of the buyer, after breach by seller, to purchase goods on open market to substitute the goods, then to recover from the seller the difference in cost bt cover and contract price

VI.                 Conditions and Performance

a.        In general

                                                               i.      Risk of performance

1.        When determining the scope of what a party has to perform, parties to a contract can adjust risk of liability for non-performance by

a.        Using a condition on the duty to perform, or

b.       Enforcing a warranty if someone does not perform

                                                              ii.      Condition

1.        Definition: an event, not certain to occur, which must occur (unless its non-performance is excused) before performance under a contract becomes due

2.        Condition Precedent: must be satisfied BEFORE a contractual duty comes into existence

a.        Makes the duty dormant until the condition is satisfied

b.       If condition is half satisfied, the performer may be entitled to quantum meruit

3.        Condition Subsequent: an event that extinguishes an existing duty

                                                            iii.      Distinguished from promise

1.        Promises are often the actual consideration for the bargain and their breach is grounds for an offensive suit

2.        Conditions are not part of the consideration, they just determine when a dormant duty becomes active

a.        Usually used in a defensive posture – condition was not satisfied and therefore def is not liable

b.       Express Conditions

                                                               i.      Express conditions have been expressly agreed upon in words and placed in the contract by the parties

1.        Also called true conditions

                                                              ii.      Implied in fact conditions are created by the parties through their words, actions, etc.

                                                            iii.      Characterized by language such as:

1.        provided that

2.        if and only if

3.        unless

4.        on the condition that

                                                            iv.      Performance

1.        Express conditions must be fully performed and have the strongest effect wrt forfeiture of any type of condition

a.        Have literal compliance requirements

b.       Substantial performance is not enough

2.        Possible excuses for non-performance

a.        If the condition was not an essential theme of the contract

b.       If condition conflicts with public policy

                                                             v.      Categories

1.        Rule: performance of a condition depens on what type of promise you have

a.        Independent

                                                                                                                                       i.      Promises are not connected at all

                                                                                                                                      ii.      Still have to perform promise even if other promise is not performed

                                                                                                                                    iii.      Remedy: sue for damages

b.       Dependent

                                                                                                                                       i.      Promises are always conditional upon each other

c.        Dependent but collateral when departure is insignificant

                                                                                                                                       i.      A condition that may not impose a duty if promise is not met

                                                                                                                                      ii.      Arises when departure from promise is insignificant

2.        How to tell what type of promise

a.        Look at considerations of justice and presumable intention of the parties

b.       Justice: can the parties get back to status quo by enforcing the condition

                                                                                                                                       i.      If not: promise may fall into third category

                                                                                                                                      ii.      Otherwise, harsh and unfair to the party who must rip out structure and start over

c.        Jacob & Youngs v. Kent: homeowner wanted reading pipes – installed different pipes – is man’s promise to pay dependent on promise to install Reading pipes

                                                                                                                                       i.      If expressly conditioned, non-performance would excuse payment

                                                                                                                                      ii.      Here, just part of the contract and not expressly conditioned – probably insignificant departure

                                                            vi.      Four factors of substantial performance

1.        Purpose to be served

2.        Desire to be gratified

3.        Excuse for deviation

a.        If a willful transgression the non-performance is not easily excused

b.       Mere negligence is probably okay

4.        Cruelty of enforced adherence

                                                          vii.      Damages

1.        If substantial performance – other party gets an offset for breach – two options

a.        Replacement cost

b.       Difference in value

2.        If express condition – other side excused from performance – no duty to pay

c.        Excuse of Conditions

                                                               i.      Arguments

1.        Condition precedent was never intended

2.        Agreement was modified by the parties to exclude the condition

a.        UCC: no new consideration needed

b.       Restatement: requirements for modification

                                                                                                                                       i.      Voluntary

                                                                                                                                      ii.      Unanticipated circumstances

                                                                                                                                    iii.      Made before full performance by either side

                                                                                                                                    iv.      Fair and equitable

3.        Condition was waived by the parties

4.        Court should discharge the condition

                                                              ii.      Waiver

1.        Failure of a promise can subject the promisor to contract damages – failure of a condition means the duty to the promisor never arises

a.        Cannot waive a promise wo rescission or additional consideration

b.       Can waive a condition

2.        Express Waiver

a.        Party which the condition benefits expressly tells the other party that the condition will not be required to activate the duty

b.       The party’s duty is no longer dormant

3.        Election Waiver

a.        Waiver after failure of express or constructive condition – may take place through:

                                                                                                                                       i.      Waiver by Conduct

                                                                                                                                      ii.      Waiver by Promise

4.        Estoppel Waiver: party relies on other’s representation that condition will not be necessary

5.        Anti-Waiver Clause

a.        Agreement says there can be no waiver of any condition in this agreement

b.       Relevant but not conclusive

c.        Sometimes courts will ignore the clause if the promisor’s acts constitute a waiver

d.       To be sure that you are not abandoning the condition, then write specifically, this is not a waiver

6.        Retraction

a.        UCC § 2-209 (5)

                                                                                                                                       i.      A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver

7.        Analysis

a.        Was the provision not complied with a condition or a promise

                                                                                                                                       i.      Does the provision go to the substance of the contract

                                                                                                                                      ii.      If so – promise; if not – condition

1.        If a promise, promisee could sue for breach but still must perform duty

b.       If a condition, was it waived

                                                                                                                                       i.      Expressly

1.        A representation that the promise will not enforce the condition

                                                                                                                                      ii.      Implied – go to (c)

c.        Was the condition central to the bargain

                                                                                                                                       i.      If not – condition waivable by election

1.        Condition has failed and promisee acts as if the condition has not failed

                                                                                                                                      ii.      If central – condition not waivable unless by estoppel

1.        Promisee tells promisor not to worry about the condition and the promisor relies on that statement

2.        Wo estoppel, you would need new consideration

                                                            iii.      Discharge by court

1.        Restatement § 229

a.        To the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was a material part of the agreed exchange

2.        Disproportionate Forfeiture

a.        Weigh what one is giving up compared to what the other wants to protect against

b.       Within the discretion of the court – three factors to consider

                                                                                                                                       i.      Was it an adhesion contract

                                                                                                                                      ii.      Would enforcement operate as a forfeiture

                                                                                                                                    iii.      Does the enforcer have a legitimate purpose in wanting condition enforced

                                                                                                                                    iv.      Excuse for deviation form the letter

                                                                                                                                     v.      Prejudice of the party enforcing the condition if it is waived

3.        Changed circumstances may make compliance with condition impracticable

a.        Might also go to disproportionate forfeiture as well

d.       Constructive conditions

                                                               i.      Independent Promises

1.        The parties intend that performance by each of them is in no way conditioned by performance of the other

2.        Parties exchange promises for promises – not performance for performance

3.        Failure to perform and independent promise does not excuse non-performance on the party of the adversary party

4.        If one does not perform, he is liable to the adversary party for breach

                                                              ii.      Dependent promises

1.        Parties intended performance by on to be conditioned upon performance by the other

2.        If mutually dependent, a promise may be:

a.        Precedent

b.       Subsequent

c.        Concurrent

                                                            iii.      Rule

1.        When there is no express condition, the court may construct the condition if it is not fair for one party to perform wo reciprocal performance by the other party

2.        Three questions to be answered

a.        Who will perform first

b.       How much performance is needed

c.        If there is a breach, should the other party get restitution

                                                            iv.      Order of Performance

1.        Historical View: courts did not construct conditions if none were in the agreement

a.        Promises were prima facie independent of each other

b.       If seller refused to tender goods, buyer still had to pay and then sue for breach

2.        Modern View: court constructs a condition of dependency for mutual promises

a.        Rationale

                                                                                                                                       i.      Provides both parties maximum security against disappointment

                                                                                                                                      ii.      Prevents one party from having the burden of financing the other before the latter has performed

b.       Effect: dependent promises require reciprocal acts performed concurrently

c.        Presumption of dependency is a default position and can be contracted around

                                                                                                                                       i.      Must be a deliberate manifestation of intent for the agreements to be independent

3.        How to tell if dependent

a.        Intent of parties

b.       Order required by transactions

c.        Justice

4.        Restatement § 234

a.        Where all or part of the performance to be exchanged under a promise can be rendered simultaneously, they are due simultaneously, unless the language or the circumstances indicate to the contrary

b.       Where the performance of only one party under such an exchange requires a period of time, his performance is due at an earlier time that that of the other party, unless the language or the circumstances indicate the contrary

5.        Where the acts of the parties are concurrent, the covenants are dependent – neither party can maintain an action against the other wo averring and proving performance on his part

a.        If the breach was not material, could claim partial performance or a substitute that was just as good

b.       If partial performance – the court would only require and offset for the different in value

                                                             v.      Substantial Performance

1.        Rule: no duty for A to perform if B commits a material breach or if B does not substantially perform

2.        Definition (use the factors)

a.        Purpose to be served

b.       Desire to be gratified

c.        Excuse for deviation (should be inadvertent and unintentional)

d.       Cruelty of enforced adherence v. forcing promisee to receive less than he bargained for

3.        Restatement § 241

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

                                                                                                                                       i.      The extent to which the injured party will be deprived of the benefit which he reasonably anticipated;

                                                                                                                                      ii.      The extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;

                                                                                                                                    iii.      The extent to which the party failing to perform or to offer to perform will suffer forfeiture;

                                                                                                                                    iv.      The likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances;

                                                                                                                                     v.      The extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing

                                                            vi.      Recovery/Damages

1.        Even if there has been a material breach or lack of substantial performance, some recovery may be awarded to the party who has partially performed

2.        Restatement § 234: where performance requires a period of time, performance is due before payment is made

a.        This is a default rule and can be expressly contracted around

b.       Other ways to under the rule are below

3.        Divisibility

a.        If contract is divisible, and one portion is substantially performed, breaching party may recover for the portion performed – look to see if the consideration is able to be apportioned

b.       UCC § 2-307

                                                                                                                                       i.      Default rule: deliver goods in a single delivery and payment is due only when all goods are received

                                                                                                                                      ii.      BUT: where circumstances give either party the right to make or demand delivery in lots the price (if it can be apportioned) may be demanded for each lot

4.        Quantum Meruit

a.        Generally, unless the def has expressly stated that payment will be given only on completion, this will operate when there has been substantial performance (breaching party recovers for benefit conferred on non-breaching party)

5.        Modern Trend

a.        Breaching party can recover net benefit conferred in excess of the actual damages caused

b.       Burden of proof is on breaching party to show that there is a net benefit conferred over the actual damages caused by the breach

c.        Rationale: otherwise, the more the breaching party performs, the greater the loss he suffers if he can only recover for full performance

6.        Restatement § 374

a.        The breaching party is not entitled to restitution if the value of the performance as liquidated damages is reasonable in light of the anticipated or actual loss caused by the breach

7.        UCC § 2-718

a.        Damages for breach may be liquidated in the 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 of otherwise obtaining an adequate remedy

b.       Where seller justifiably withholds delivery of goods bc of buyer’s breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds:

                                                                                                                                       i.      The amount to which the seller is entitled by virtue of terms liquidating the sellers’ damages per subsection (a), or

                                                                                                                                      ii.      In the absence of such terms, 20% of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller

VII.               Changed Circumstances

a.        Existing Impracticability

                                                               i.      The impracticability exists at the time the contract is made, but the promisor is unaware of the conditions making his performance impracticable

                                                              ii.      Generally, the promisor is thought to have assumed the risk

                                                            iii.      Restatement § 266

1.        Where, at the time the contract is made, a party’s performance under it is impracticable wo his fault bc of a fact of which he has no reason to know and the non-existence of which is a basic assumption on which the contract is made, no duty to render that performance arises, unless the language or circumstances indicate to the contrary

2.        Distinguished from mutual mistake

a.        Mistake is a material effect on performances

b.       Impracticability is that performance is impracticable

                                                                                                                                       i.      Mistake is easier to win

                                                                                                                                      ii.      Increased expense is generally not sufficient on its own for impracticability, but may be enough for material effect

c.        Always raith both issues on the exam and analyze both

                                                            iv.      Analysis

1.        Basic Assumption Test

a.        In determining whether one party naturally assumed the risk of the event’s non-performance, court looks at terms of the contract and circumstances – 2 factors

                                                                                                                                       i.      If the event is unforeseeable that suggests the non-occurrence was a basic assumption

1.        However, the parties may not have though the risk was important enough to have made it a subject of their bargaining

                                                                                                                                      ii.      Relative bargaining positions of the parties and the relative ease with which either could have inserted a clause

2.        Superior Risk Bearer Test

a.        The party who is the most efficient bearer of the particular risk in the particular circumstances should bear the loss

b.       Conditions

                                                                                                                                       i.      Contract does not assign the risk

                                                                                                                                      ii.      The event giving rise to the discharge was not avoidable by any cost justified precautions

c.        In making this determination – 3 factors

                                                                                                                                       i.      Knowledge of the magnitude of the loss

                                                                                                                                      ii.      Knowledge of the probability that it would occur

                                                                                                                                    iii.      Other costs of self or market insurance

b.       Supervening Impracticability

                                                               i.      In General

1.        Something happens after the contract is made to render performance impracticable

2.        Essence of the analysis: who assumes the risk of the surprise

                                                              ii.      Restatement § 261

1.        Where, after the contract is made, a party’s performance is made impracticable wo his fault by the occurrence of an event the nonoccurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary

2.        Four elements

a.        Occurrence/surprise/contingency

b.       Nonoccurrence of surprise was a basic assumption on which the contract was made

                                                                                                                                       i.      Destruction of the subject matter of the contract

                                                                                                                                      ii.      Death or illness of person essential for performance

                                                                                                                                    iii.      Supervening illegality or prevention by the law

c.        Did either party assume the risk of the surprise occurring

d.       Performance was impracticable

                                                                                                                                       i.      Impossible, excessively costly, or very difficult

                                                            iii.      UCC § 2-615

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

a.        Delay in delivery or non-delivery by a seller is NOT a breach of his duty under a contract for sale if:

                                                                                                                                       i.      Performance has been made impracticable by the occurrence of a contingency

                                                                                                                                      ii.      The nonoccurrence of which was a basic assumption on which the contract was made, or

                                                                                                                                    iii.      By compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid

2.        Two prongs:

a.        Basic assumption test

                                                                                                                                       i.      Does the contract center around the fact that the surprise will not occur

                                                                                                                                      ii.      Did one party assume the risk or was one party in a better position to discover the risk

b.       Commercial impracticability

                                                                                                                                       i.      Loss must be particularly severe, not just an increase in costs

                                                            iv.      Assumption of the risk

1.        Rule: if a party assumes the risk of the surprise, then that party is not excused

2.        Factors:

a.        Posner: superior risk bearer

                                                                                                                                       i.      Who has knowledge of the magnitude of the potential loss

                                                                                                                                      ii.      Who has knowledge of the probability that the loss will occur

                                                                                                                                    iii.      Who can bear the risk most efficiently by self/market insurance

b.       Farnworth: foreseeability

                                                                                                                                       i.      Foreseeability is emphasized

                                                                                                                                      ii.      Examine relative bargaining power: who could have included a clause protecting itself in light of foreseeable risk

3.        Contractual terms allocation risk

a.        Take or pay clause

                                                                                                                                       i.      Requires the seller either take a certain amount or pay for that amount now and take it later

                                                                                                                                      ii.      Producer assumes risk of rising production costs

                                                                                                                                    iii.      Seller assumes risk that there will be market demand for his refined good

b.       Fixed price contract

                                                                                                                                       i.      Buyer assumes risk of decreased costs

                                                                                                                                      ii.      Seller assumes the risk of increased costs

c.        Force Majeure Clause

                                                                                                                                       i.      Designed to insulate a party from extraordinary risks like acts of God or strikes

d.       Reopener Clause

                                                                                                                                       i.      Provides a chance to reopen the contract for negotiation if gross inequities arise

                                                                                                                                      ii.      There is a lot of good faith involved here

4.        Restatement § 262

a.        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 nonoccurrence of which was a basic assumption on which the contract was made

b.       Necessary for performance: person is necessary to agreement if the performance is a personal matter requiring personal skill, ability, or judgment

                                                                                                                                       i.      Test: could the duty of the dead/incapacitated person have been assigned to another wo the other party’s consent

5.        Destruction of an essential thing

a.        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 nonoccurrence of which was a basic assumption on which the contract was made

6.        Exclusive source of supply

a.        When a particular source of supply is exclusive, the seller must employ all due measures to ensure the source will not fail or he will be considered to assume the risk when it does

c.        Frustration of Purpose

                                                               i.      Restatement § 265

1.        Where, after a contract is made, a party’s principle purpose is substantially frustrated wo his fault by the occurrence of an event the nonoccurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary

2.        Comment A: this defense is used when one party’s performance becomes virtually worthless to the other

a.        The purpose that is frustrated must have been the principal purpose

                                                                                                                                       i.      The object must be so completely the basis of the contract that wo it the transaction would make little sense

                                                                                                                                      ii.      Both parties must understand this to be the case

b.       The frustration must be substantial

                                                                                                                                       i.      It is not enough that the transaction has become less profitable for the affected party or even that he will sustain a loss

                                                                                                                                      ii.      Must be so severe that it is not regarded as wi the risks assumed under the contract

c.        Nonoccurrence of the frustrating event = basic assumption

                                                                                                                                       i.      The foreseeability of the event is a factor in that determination

                                                                                                                                      ii.      But, the mere fact that the event was foreseeable is not dispositive that its nonoccurrence was not a basic assumption

                                                                                                                                    iii.      Also consider the relative bargaining positions of the parties and the relative case with which either party could have inserted a clause

                                                              ii.      Compare to Impracticability

1.        With impracticability, the performance of one party is extremely burdensome or impossible for that party to perform

2.        With frustration, performance of both parties is practicable, but the purpose of one of the parties is frustrated to the extent that the performance of the other party is valueless to him

3.        Courts very rarely use frustration of purpose – they use it sparingly, and have to prove each element

                                                            iii.      Change in price alone does not constitute substantial frustration

1.        The change can be evidence of frustration, but there must be something else

2.        What would do it – a change in the trading rule, switch from freemarket to communist economy, etc.

VIII.             Good Faith

a.        Types of contracts

                                                               i.      Contract Formulation

1.        Bad faith in contract formulation is

a.        Misrepresentation

b.       Failure to correct a discovered error

                                                              ii.      Employment at will contracts

1.        Bad faith in these agreements is

a.        Malicious termination of employment contract in retaliation for something employee did or refused to do in consonance with public policy

b.       Now, state and federal statutes help govern this area

                                                            iii.      Discretion in Contract Performance

1.        Bad faith in performance is

a.        Party using discretion in an abusive manner

b.       Behavior inconsistent with common standards of decency, fairness, and reasonableness

c.        Behavior inconsistent with the parties agreed upon common purpose and justified expectations

b.       Different Approaches

                                                               i.      Common Law Rule (New Hampshire Test)

1.        When an agreement appears to invest one party with a degree of discretion in performance sufficient to deprive another party of a substantial proportion of the agreement’s value, the parties intent to be bound by the contract raises an implied obligation of good faith to observe reasonable limits in exercising that discretion, consistent with the parties purpose in contracting

2.        Ask 4 questions

a.        Does the agreement allow or confer upon one party a degree of discretion tantamount to a power to deprive the other of a substantial portion of the agreement’s value

b.       If so – did the parties intend to make and enforceable contract

c.        Has the def exercise of discretion exceeded the limits of reasonableness

d.       Is the cause of the pl damage the def abuse of discretion, or does it result from circumstances beyond the control of either party, against which the def has no obligation to protect the pl

                                                              ii.      Burton’s Theory

1.        When unstated economic opportunities are bargained away, it is bad faith for one side to use the contract terms to recapture such an opportunity

                                                            iii.      Restatement § 205

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

2.        Comment a: the meaning of good faith should vary somewhat within the context

a.        Good faith emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party

3.        Comment d: the following types of bad faith have been recognized in judicial decisions

a.        Evasion of the spirit of the bargain

b.       Lack of diligence and slacking off

c.        Willful rendering of imperfect performance

d.       Abuse of power to specify terms

e.        Interference with or failure to cooperate in the other party’s performance

                                                            iv.      UCC

1.        § 1-203: every contract or duty wi this act imposes an obligation of good faith in its performance and enforcement

2.        § 1-203 (b): in the case of merchant buyers and sellers, good faith means both honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade

a.        Bad faith conduct violates community standards of decency, fairness, or reasonableness

3.        § 1-201 (19): Good faith, at a minimum, means honesty in fact in the conduct or transaction involved

                                                             v.      Excluder Theory

1.        The meaning of good faith is best determined by the conduct excluded rather than through an a priori, structured definition

a.        The general duty of good faith and fair dealing is no more than a minimal requirement, rather than a high ideal

                                                            vi.      Analysis

1.        A contract is breached and the defense claimed is this

a.        A change resulted in a surprise, and bc of this change, I should not have to perform

2.        Will the defense stand – factors to consider

a.        What was the nature of the risk event and what was its impact on the contract

b.       Was the party claiming the defense at fault

c.        Did the contract allocate the risks to the party claiming the defense

                                                                                                                                       i.      Condition on the contract

                                                                                                                                      ii.      Force Majeure clause

                                                                                                                                    iii.      Insurance

d.       How is the court to fill the gap in risk allocation

                                                                                                                                       i.      Restatement § 266 – existing impracticability

                                                                                                                                      ii.      Restatement § 261 – Supervening impracticability

                                                                                                                                    iii.      Restatement § 265 – Frustrated purpose

e.        What is the nature and scope of relief

                                                                                                                                       i.      Discharge of contract with appropriate restitution

                                                                                                                                      ii.      Continued performance under adjusted terms

                                                                                                                                    iii.      Remedial middle ground

f.         Is refusal to negotiate a proposed modification in good faith

                                                                                                                                       i.      Good faith is very contextual – an I know it when I see it kind of argument

IX.                Prospective Breach

a.        Rules

                                                               i.      In general

1.        When the circumstances or the promisor’s words or conduct create doubt whether the performance will be forthcoming as agreed but do not amount to a breach, the promisee has a more limited remedy

2.        In the proper circumstances, the promisee may suspend performance and demand adequate assurance from the promisor

3.        If assurance of due performance is not forthcoming, the promisee may treat it as a repudiation and resort to the unusual affirmative and defensive remedies

a.        This promotes mitigation of damages

4.        the promisee may also decide to suspend performance, reserving any claims for damages, and seek to resolve the dispute by agreement

                                                              ii.      Restatement § 250

1.        A repudiation is a statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach under § 243, or

2.        A voluntary affirmative act which renders the obligor unable or apparently unable to perform wo such breach

3.        Comment a: even if it occurs before any breach by nonperformance, it may

a.        Give rise to a claim for damages for total breach

b.       Discharge the other party’s duties

c.        Excuse the nonoccurrence of a condition

                                                            iii.      UCC § 2-609

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

2.        Bt merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards

3.        After receipt of a justified demand, failure to provide wi a reasonable time not exceeding 30 days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract

                                                            iv.      UCC § 2-610 (b)

1.        When either party repudiates the contract wrt a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may

a.        Resort to any remedy for breach even though he has notified the repudiating party that he would await the latter’s performance and has urged retraction

                                                             v.      UCC § 2-711

1.        Where the seller repudiates, the buyer may cancel and whether or not he has done so may in addition to recovering so much of the price has been paid

a.        Cover and have damages as to all the goods affected whether or not they have been identified to the contract

b.       Recover damages for non-delivery as provided in this article

c.        Recover the goods that have been identified

d.       Obtain specific performance or replevy the goods

b.       Steps to take

                                                               i.      In writing, tell obligee I am secure, please give me adequate assurance of your due performance

                                                              ii.      Until such assurance is received, performance that has not yet been paid for may be suspended

                                                            iii.      If assurance is not received wi 30 days, the contract may be repudiated and the order may be cancelled

X.                  Compensatory Damages

a.        Basic Policies

                                                               i.      Expectancy, reliance, and restitution damages

1.        Primary purpose of the contract remedy: to compensate the pl for loss of expectation

2.        Primary purpose of tort remedy: to restore (restitution)

                                                             ii.      Emotional Disturbance

1.        Border bt contract and tort – when the breach of contract is the cause and the injury is a tort, in addition to losing the value of the bargain, the pl is worse off physically than he was before the contract

2.        Restatement § 353

a.        Recovery for emotional disturbance will be excluded unless the breach also caused bodily harm or the contract or the breach is of such a kind that serious emotional disturbance was a particularly likely result

3.        Application

a.        ED is not available for breach of an employment contract

b.       ED is generally available for mishandling of corpses

                                                                                                                                       i.      These types of claims are most likely genuine

                                                           iii.      Punitive Damages

1.        Traditional Rule: punitive damages are not awarded for breach of contract

2.        Restatement § 355: 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

3.        Common Rule: The breach must constitute an independent and willful tort accompanied by fraud, malice, wantonness, or oppression to be eligible for punitive damages

4.        Purpose

a.        Punishment

b.       Deterrence – there must be a public interest to be served

5.        Application

b.       Breach or Repudiation by Performer

                                                               i.      Normal Breach

1.        Natural and usual value of the contract under ordinary circumstances

a.        Difference in either the contract price and the cost which was or would have been incurred in purchasing substitutions on the open market at the time of breach

b.       Difference bt the value of what was promised and what was received

2.        When the pl lost bargain is measured in this way, no consequential damages are involved

                                                              ii.      Incidental Reliance

1.        Definition: damages other than those necessary to perfect the non-breaching party’s rights under the contract

a.        Include loss profits, reliance expenditures, etc.

2.        Two Types

a.        Those that arise naturally from the breach

b.       Those that are reasonably contemplated by the parties at the time the contract was made

                                                            iii.      Test of Foreseeability

1.        Hadley v. Baxendale: damages which the non-breaching party ought to receive in should be such as may fairly and reasonably be considered either arising naturally, or such as may be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it

2.        Special Circumstances: if the special circumstances under which the contract was made were communicated by the pl to the def, and thus known to both parties, the damages resulting from the breach of such a contract which they would reasonably contemplate would be the amount of injury which would arise generally

a.        The special circumstances must be communicated so the parties can have the chance to provide for them in the terms of the contract

                                                            iv.      UCC § 2-715 (2)

1.        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

                                                                                                                                       i.      Cover: buyer’s duty to mitigate damages

b.       Injury to person or property proximately resulting form any breach of warranty

                                                             v.      Restatement § 351

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 bc it follows from the breach

a.        In the ordinary course of events

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 of 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

XI.                Third Party Interests

a.        Assignment of Rights

                                                               i.      Terminology

1.        Obligor: party who has not yet performed his duty

2.        Obligee: Party wo whom obligor owes a duty and has a contract right to get performance

3.        Assignor: If the obligee transfers his right against the obligor, he becomes an assignor

4.        Assignee: The 3rd party to whom the obligee/assignor transfers his contract right to

5.        Account Receivable: promise to pay for services/goods that has already been performed or delivered

6.        Contract Right: promise for future performance

                                                              ii.      Assignment

1.        In general parties convert a right to future payment into present cash by transferring the right to another

a.        Assignment was not recognized at common law bc there was a lack of privity bt the 3rd party and the obligor

b.       In equity, this was never a problem

2.        Rights: the rights of an assignee are subject to all the terms of the contract bt the assignor/obligee and the obligor and any claim or defense arising therefrom

3.        US Government: claims against the US cannot be assigned

a.        Purpose: protect the government from harassment

b.       Prevent collusive bidding, and other bad things

                                                            iii.      Restatement § 317

1.        A contractual right can be assigned unless

a.        The substitution of a right of the assignee for the right of the assignor would materially change the duty of the obligor, or materially increase the burden of the risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reduce its value to him, or

b.       The assignment is forbidden by statute or is otherwise inoperative on grounds of public policy, or

c.        Assignment is validly precluded by contract

2.        Material change of duty

a.        If all of a sudden your credit card company makes you send your payment to Siberia, and postage costs substantially more, it might be non-assignable

3.        Public Policy

a.        A divorced woman could not assign her right to collect child support Atlantic City Casino bc we have a concern for the well being of the child

4.        Validly precluded by contract

a.        Allhusen v. Caristo: must include a phrase like contract is non-assignable, else contract will be void – otherwise, assignment is just a breach of a promise not to assign and the resulting damages would be minimal

                                                                                                                                       i.      Rationale: must balance the freedom of assignability with the freedom to contract

                                                                                                                                      ii.      Contract wins out as long as it is specific

                                                            iv.      UCC § 2-210 (2)

1.        Unless otherwise agreed, all rights of either seller or buyer may be assigned except where the assignment would materially change the duty, or materially increase the burden or risk imposed on the other party, or materially impair his chance of obtaining return performance

a.        A right to damages for breach of the entire contract or a right arising out of the assignor’s due performance of his entire obligation can be assigned despite agreement otherwise

                                                                                                                                       i.      Thus, the UCC adopted a rule that an anti-assignment clause is ineffective

2.        Fitzroy v. Cove: could argue that his duty was materially changed bc all five debts were consolidated – Cove may have purposefully spread the debt out for easier payment schedule, etc. – now, all payments were due at once

                                                             v.      Gratuitous Assignment

1.        Restatement § 332 (1)

a.        Unless a contrary intention is manifested, a gratuitous assignment is irrevocable if

                                                                                                                                       i.      The assignment is in writing either signed or under seal that is delivered by the assignor, or

                                                                                                                                      ii.      The assignment is accompanied by delivery of a writing of a type customarily accepted as a symbol or as evidence of the right assigned

2.        The pattern adopted is consistent with the requirement respecting gifts of chattels that a symbolic or constructive delivery is required

a.        Do not necessarily have to have consideration

                                                            vi.      Obligor’s defenses against assignee

1.        Assignee stands in the shoes of the assignor

a.        Assignee’s claim against the obligor is subject to the same defenses the obligor would have against the original obligee (fraud, impracticability, statute of frauds, etc.)

2.        Notice: an obligor is not affected by the assignment until he has notice thereof

a.        If debtor pays his obligation to the assignor in ignorance of the assignment, he is relieved of all liability to the assignee

b.       Sufficient Notice: such information given to the obligor as will fully inform him that the alleged assignee is the owner of the contract right

                                                                                                                                       i.      Assignee does not have to provide a copy of the assignment unless requested by the obligor

3.        Modification: after notice of assignment is given, the original parties cannot then modify the contract wo the assent of the assignee

a.        UCC permits modification to an extent

4.        Implied Warranty from Assignor: in the absence of an express agreement to the contrary, and assignor impliedly warrants that:

a.        The assignor will do nothing to defeat or impair the value of the assignment

b.       The right exists and is subject to no defenses or limitations not stated or apparent

c.        Any document evidencing the right is genuine

d.       NOTE: the assignor does not impliedly warrant that the obligor is solvent or will perform

5.        Priority of Successive Assignees of the Same Right: priority goes to the assignee whose enforceable assignment is first in time unless the second assignee, in good faith and wo reason to know of the prior assignment, gives value and obtains:

a.        Payment or satisfaction of the obligation

b.       Judgment against the obligor

c.        A new contract with the obligor by novation

d.       Possession of a writing of a type customarily accepted as a symbol or as evidence of the right assigned

b.       Delegation of Duties

                                                               i.      Issues

1.        In general, when the obligor (delegator) appoints another person (delagatee) to perform his duty to the obligee

2.        To what extent can one party delegate the duty of performance created by a contract to a 3rd party wo the consent of the obligee

3.        If the delegatee fails to perform, what is the liability of the delegator

                                                              ii.      Restatement § 318

1.        An obligor can properly delegate the performance of his duty to another unless the delegation is contrary to public policy or the terms of his promise

2.        Unless otherwise agreed, a promise requires performance by a particular person only to the extent that the obligee has a substantial interest in having that person perform or control the acts promised

3.        Unless the obligee agrees otherwise, neither delegation of performance nor a contract to assume the duty made with the obligor by the person delegated discharges any duty or liability of the delegating obligor

                                                            iii.      UCC § 2-210 (1)

1.        A party may perform his duty through a delegatee unless otherwise agreed or unless the other party has a substantial interest in having his original promisor perform or control the acts required by the contract

2.        No delegation of performance relieves delegator of any duty to perform or any liability for breach

3.        UCC § 2-201 (5): the other party (obligee) may treat any assignment which delegates performance as creating reasonable grounds for insecurity and may wo prejudice to his rights against the assignor/delegator demand assurances from the assignee

a.        Insecurity allows a party to suspend performance until he receives reasonable assurance

                                                            iv.      Substantial Interest

1.        Contracts usually pass the substantial interest test when:

a.        The contract is predicated on the unique skills of the obligor, and

b.       Where the contract is predicated on the trust and confidence that the obligee has placed on the obligor

2.        Application

a.        Sally Beauty v. Nexxus: court held that having an exclusive dealings contract delegated to a wholly owned subsidiary of a direct competitor violated a substantial interest

                                                                                                                                       i.      Court did not rule on the effect that would have if Sally were only a partially owned subsidiary, not under the direct control of Alberto Culvert

                                                             v.      Liability of Parties

1.        Delegator cannot free himself of liability to the obligee

2.        Delegee:

a.        Restatement: delegatee who accepts delegation promises the delegator to perform delegator’s duties

c.        Third Party Beneficiaries

                                                               i.      Creation of rights

1.        Intended Beneficiaries: a person for whom a promisee extracted the benefits of a promisor’s promise

a.        Promisor is the party to give the performance that ultimately goes to the 3rd party beneficiary

b.       Promisee is the party bargaining for the other promisor’s promise to benefit the 3rd party

                                                                                                                                       i.      Analysis: always ask first who is the original promisor and promisee

2.        Tests (intention)

a.        To whom the benefit runs

                                                                                                                                       i.      If the benefit runs directly to the 3rd party, that party is intended

                                                                                                                                      ii.      If the benefit runs directly to the promisee, the 3rd party is usually an unprotected incidental beneficiary

b.       Intent to benefit

                                                                                                                                       i.      Whether the 3rd party was an ultimate intended beneficiary of the promisor’s performance

1.        Did the promisor reasonably understand that the promisee intended to benefit the 3rd party

                                                                                                                                      ii.      A party who receives benefit but was not intended to be a beneficiary is incidental

1.        Criteria:

a.        Language and terms of the contract

b.       Actual reliance and needs of the commercial setting

3.        Restatement § 302

a.        Unless otherwise agreed bt promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either

                                                                                                                                       i.      The performance of the promise will satisfy and obligation of the promisee to pay money to the beneficiary, or

                                                                                                                                      ii.      The circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance

b.       An incidental beneficiary is a beneficiary who is not an intended beneficiary

                                                                                                                                       i.      NOTE: the restatement still makes a distinction and requires a donee/creditor scenario

4.        Competing Policy Considerations: factors to balance when determining whether to allow 3rd party beneficiary to recover

a.        The extent to which the transaction was intended to affect the pl

b.       The foreseeability of harm to the pl

c.        The degree of certainty that pl suffered injury

d.       The closeness of connection bt the def conduct and the injury suffered

e.        The moral blame attached to the def conduct

f.         The policy of preventing future harm

                                                              ii.      Government Contracts

1.        Can a 3rd party enforce a contract where the government is promisor or promisee

a.        Difficulty: potentially every citizen has a claim

                                                                                                                                       i.      Everything the government does is with the intent of benefiting the public

2.        Shell: as long as the 3rd party is the intended beneficiary, they can sue

a.        Policy considerations: encourage the party dealing with the government not to breach its contract

3.        Martinez: the contract must specifically state an intent to benefit that class of people

a.        There the contract did not specifically benefit the 3rd party, but it was an employment scheme designed to benefit all of East L.A.

4.        Factors

a.        Possibility of excessive financial burden

b.       Risk of multitude of claims

c.        Likelihood of impairing government services

d.       Difficulty of determining the intent of Congress

e.        Availability of alternatives such as insurance

                                                            iii.      Nature of Rights

1.        Old Rule: donee’s rights vest at the moment the agreement is made (Tweeddale)

a.        No modifications can be made wo the 3rd party’s consent, whether they have notice of their status as a beneficiary or not

2.        Restatement § 311

a.        Discharge or modification of a duty to an intended beneficiary by conduct of the promisee is ineffective if a term of the promise creating the duty so provides

b.       In the absence of such a term, the promisor and promisee retain power to discharge or modify the duty by subsequent agreement

c.        Such a power terminates when the beneficiary, materially changes his position in justifiable reliance on the promise or brings suit on it or manifests assent to it at the request of the promisor or promisee

3.        Majority View: the right to rescind or modify a 3rd party beneficiary contract, wo the consent of the 3rd party, ceases once the contract is accepted, adopted, or acted upon by the 3rd party

a.        Acceptance: knowledge of the contract coupled with a failure to object is not enough in some states

b.       Minority view: there is a presumption of acceptance when the beneficiary is an infant