Contracts Outline Fall 2007

BARBRI Contracts Outline Saturday, November 10, 2007 1:03 PM 7 Questions of Contracts: 1. Is there an agreement or promise? a. Consideration b. Promissory Estoppel 2. Is there any reason that this agreement or promise should not be enforced? 3. What are the terms of the contract? 4. Was the contract performed? 5. Excuses for Non-Performance - Is there any excuse for non-performance? 6. How do courts enforce agreements OR what are the consequences when someone first makes an agreement but then doesn't do what was agreed to do? 7. When do people who did not make the contract have either rights or duties under the contract? Three Places of Contract Law Article 2 of Uniform Commercial Code (UCC) – Legislatively Passed If sale of "goods" => Goods - tangible property that is NOT real estate, see/touch/move the object Moveable at the time of contract No Money Includes unborn young of animals and growing crops Things “severed from realty” Other Contacts = Common Law/Case Law (not statutory) Restatements and Cases - must examine these provisions Case law is always controlling - Restatement is secondary - "never 'controlled' by the Restatement," talk about Restatement being "relevant to" Vocabulary Correct use of vocabulary phrases is easiest way to create confidence in blue book and answer sheet Seven Groups of Terms (difference between…)Agreement - Contract Bilateral - Unilateral Condition - Duty Delegation - Novation Expectation Interest - Reliance Interest Impossibility - Frustration of Purpose Parole Evidence - Statute of Frauds Rule for Exam Taking o If you have to make up a fact – do not follow the issue o “IF” o “No reasonable person could think…” – “potentially” – don’t do it Special Assumpsit – Ds breach of an expressed contract

I) Contract Formation 1) Functions of Consideration a. b. c.

2)

Evidentiary - proof Cautionary – mental state Channeling – judicial enforcement

Formation of Contract through Consideration Doctrine a. b. c.

Consideration i. Statute of Frauds (if necessary) Mutual Objective Manifestation of Intent to be Bound (can be implied/expressed) Certainty/Definiteness - Essential Terms i. Subject (& Quantity) ii. Price iii. Time of Performance

A) Consideration 1) Define: Bargained for detriment/exchange - each party must give up a legal right and

must bargain for it a. Restatement 71 –Requirements of Exchange, Types of Exchange i. Defines consideration b. Issues with Consideration: i. Amount ii. Forbearance iii. Past Consideration iv. Bargained For v. Past Consideration c. Can be an act, requested promise, forbearance d. Restatement 81- Inducing Reliance i. Explain (a) Consideration must induce reliance ii. Earle v. Angel - payment after death is sufficient (aunt paid for nephew to attend funeral) iii. Hammer v. Sidway – giving up legal right (uncle – restrict lawful actions) iv. Diamond Jim – fishing, wasn’t “bargained for” but was accepted v. Klick Lewis – shooting golf

2) Amount of Consideration/Nominal a. b. c. d. e. f.

Adequacy is irrelevant UNLESS about two different sums of money Investment – can be consideration (selling the land) Ptaskis – inadequate but bargained for, contract acted upon by both parties Fisher v. Union Trust – love and affection is not enough, must bargain (deed for $1, but father did not pay the mortgage, dollar was not bargained for) Schnell v. Nell – Embola v. Tupula - Goldmine Plot of Land – investment in the land, even though inadequate, acceptable, probable loss of money was not a loan (50 for 10,000)

3) Consideration as Gift - Generous a. b. c.

Consideration must be bargained for cannot be gratuitous Congregation Kadimah - congregation gets money as a gift promise but two sides were not bargained for Hammer v. Sidway – uncle requesting to give money for not drinking or gambling, giving up a legal right

4) Forbearance as Consideration:

a. b.

Forbearance Rule [Duncan v. Black] i. Must be done in good faith - must uphold part of bargain, AND ii. Claim of forbearance must have some foundation Restatement 74 (pg. 222) - REMEMBER THE "OR" "GOOD FAITH" i. Forbearance is NOT consideration UNLESS (a) Uncertainty, OR (b) Good faith ii. Exception – Written Tool

5) Past Consideration a.

Restatement 86 - Past Consideration (previously conferred) - IMPLY A PROMISE i. A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice ii. A promise is not binding under subsection 1: (a) If the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; OR (b) To the extent that its value is disproportionate to the benefit.

6) Bargained For Offer and Acceptance: a. b.

Whitten – “don’t call me,” not bargained for even though both sides were giving up Kirksey v. Kirksey – widow moves based on promise but brother in law did not bargain

7) Express v. Implied Promises a. b.

Express: written or orally explicitly Implied : promise is implied by conduct of the parties i. Collins v. Lewis – cow situation, where cow was taken and silence… implied contract resulted through conduct ii. Seaview Assn of Fire Island – owner of 7 homes refuses to pay, but they used the facilities so created an implied contract iii. Martin v. Little Brown – law students wanted payment for offering tip (generous)

8) Contract Modifications a. b. c.

Pre-Existing Legal Duty – i. If modification is something that someone was already obligated to do, then this is not consideration UCC 2-209 - Modification of Contract for Sale of Goods – i. No consideration needed Accord in Satisfaction – getting around consid to modify contract i. Elements: (a) Bona fide dispute [good faith] (b) Tender [of lower amount] (c) Cash is checked or accepted [take payment] (d) Dispute is settled

9) Substitute for Consideration a.

Promissory Estoppel - Restatement i.

ii.

90

Elements: (a) Promise Made - sets up promisor and promisee (b) Foreseeable to the Promisor that promisee act or forbear based on the promise (c) (Reliance): Promise induces action or forbearance (d) Detriment - Injustice can only be avoided by enforcing the promise Getting around Consideration Doctrine – loss is not necessary (Fried v. Fisher – no detriment b/c got into better business, but still allowed by court b/c action occurred)

iii. Issues of Employment – at will typically will preclude a promissory estoppel claim (Hunter v. Hayes in comparison to Goldstick v. ICM Realty- also Forrer v. Sears Roebuck , permanent employment) iv. Damages = “As Justice Requires” (a) "As Justice Requires" - means that with PE damages can be either expectancy or reliance v. Future Promises = Must (a) Cannot be based on past or present, must be on future vi. Cases (a) Seavy v. Drake – father promises land to son, son starts building, after death estate doesn’t give deed and son says that he relied on promise (b) Goodman v. Dicker – radio distributor, promise caused retailer to start buying in preparation, court said that promise was made and P relied to detriment (damage was only the loss sustained in reliance, not lost profits) (c) Levine v. Blumenthal – rent case of reliance on a new contract, court says that no consideration existed for a new contract and had to pay regular rent + back pay (d) Hoffman v. Red Owl Grocery – P relied on getting franchise and purchased – had to sue on reliance because no expected profit and no value conferred on D b.

Restatement 89 i. Elements: (a) No consideration for modification if unforeseen (b) If fair and equitable under circumstances, AND (c) Have not have not fully performed

c.

Equitable Estoppel - BUT - this is not K formation, this is defense to preclude an argument, but must be a statement of past facts i. Elements (a) Statement of Fact (or conduct that amounts as fact) -can't be in future, AND (b) Action in reliance on the statement of fact, AND (c) Reliance has caused a detriment ii. Rickets - granddaughter quit job to live with grandfather but executor of will did not want to pay granddaughter because claimed that it was done gratuitously - court says it was not gratuitous because there was a detriment on the part of granddaughter in quitting her job iii. Allegheny College – donation after death for named scholarship – court allows name as acceptable iv. Geremia – loan company said that it would pay for the insurance on credit, fam relied

d.

Restitution Claim/Unjust Enrichment: i.

ii.

Elements: (a) Benefit was Conferred (b) Benefit cannot have been done gratuitously… was not a gift or given as a volunteer (c) Not the product of an Officious Intermeddler (d) CANNOT occur when there is a contract in place governing the parties' actions in the first place Martin v. Little, Brown - law students sends letter to publisher and wants compensation for publisher suing the copyrighter - court says that there is no evidence to prove that benefit wasn't just volunteered, no mention of compensation in original letter

10) Illusory Promises – a. b.

Define: No Consideration or No Objective Standard Section 77 - Illusory & Alternative Promises i. Future promise is not binding as consideration if both parties DO NOT bargain for it if it were individual without prior agreement ii. Conditional Clauses feared Illusory

iii.

iv.

(a) Omni Case - objective standard for measuring good faith in fulfilling condition, subsequent condition (b) If based on "reasonable standard" or objective [Omni] (c) Performance can be conditioned, FORMATION of contract cannot be - good faith will limit discretion Output Contract v. Requirement Contract – for output, both parties are expected to act in good faith, cannot stop for economic downturn (Feld v. Levy – breadcrumbs) (a) Output – Buyer buys all that seller can produce (b) Requirement – buyer will buy all it needs from seller Cancellation Clauses – illusory if unconditional (a) Cannot do with 2 different parties for Requirements Contracts

c. Cases i. ii. iii. iv.

Nat National Service Station – multi-year deal says wholesaler but court says each buy was new contract so no Statute of Frauds Obering v. Swain-Roach Lumber – not illusory because implied contract developed once P acted on the agreement, illusory to enter into agreement, but once relied it became a contract Paul v. Rosen – conditional agreement, no promise on which to rely, bargained is conditioned Wood v. Lady Duff Gordon – implied conditions in the contract, measure because the contract gave exclusive rights to P was conditionally obligated to perform

B) Statute of Frauds 1) What is it? a. b. c.

Statute, each state has its own laws Purpose - preventing people from coming to court and claiming that there was a contract when there wasn't If not satisfied - courts will not enforce a contract

2) Covered Under: a. b.

c. d. e. f.

Marriages Year i. Services contract and transfer of land; "Theoretically Possible with Unlimited Resources" filled within a year; Task v. Time Period Term; Multi-year contracts are very difficult could pay in advance and problems arise; ii. Must be theoretically IMPOSSIBLE to be completed in the year to be a part of statute of frauds - must be MEASURED in time; 1 Year Lease - not within Statute of Frauds => for real estate deals it is more than one year test; iii. Hypo - agree to do a lecture 13 months later and date given for 3 hour lecture; because the date was specified it is impossible for it to occur one-year later, do not have to work straight through it's can it be completed within a year of contracting Land i. Transfer of an interest in land - to use or own; Easement to use the land that will be for 2 years (over a year) Executor (doesn't really apply) Goods - SALE OVER $500 i. Goods over the value of $500 - Uniform Commercial Code Surety : i. Transfer of a debt - standing for a debt; example: co-signing for a loan (promising to pay debt if you can't)

3) What must be shown? a.

Elements: to Satisfy the Statute of Frauds i. Must be in Tangible Form

ii. iii. iv.

v.

Need Authentication (Signed): parties + writing = physical connection (can be done electronically now – E-Sign Statute) Party to be Charged Must Sign (a) Whoever says "I want out" - whoever wants Out of the Deal, that’s whose signature we care about; whoever would say - I Want Out - get their signature Must Have Essential Terms (can reference another document - composite) (a) Parties (b) Price (c) Subject CAN BE MULTIPLE FORMS

4) Exception to Statute of Frauds a.

Restatement, Section 139: Part-Performance Doctrine (Reliance Claim) i. Used to get around Statute of Frauds ii. Depends on the state - some jurisdictions say NO 139 for employment, some say no to use of 139 for ALL subjects iii. CANNOT use for employment Ks iv. CAN use for land sales

b.

Section 90 v. Section 139 i. Section 90 applies the Statute of Frauds, which comes from the legislature ii. Section 139 - trumps the statute of frauds iii. Some states are uncomfortable with Section 139 iv. Part 2 of Section 139 (a) Sets out the standards for when the statute of frauds can be trumped (pg. 270) (b) 5 factors: other remedies?, action of forbearance?, evidence?, foreseeability Cases: i. Seavey v. Drake - father and son transfer of land, exception created to getting around St of Frauds Part-Performance Exceptions through Section 90 i. Real Estate - 3 qualifications, 2 needed: (a) Part-Payment (b) Possession of Land (c) Improvements to Land ii. Service Contracts - if service, part-performance is NEVER satisfaction of statute of frauds UCC 2-206

c. d.

e. C)

Mutual Objective Manifestation of Intent to be Bound - Is there an Agreement? 1) "Meeting of the Minds" - Consideration, Offer, Acceptance, Certainty a. b. c.

Objective Reasonable Actions Standard – Reasonably Objective Test i. Implied – actions or silence, ii. Express – oral or written Misunderstanding in Material Clauses Cases i. New York Trust – both parties know that agreement is fraudulent so there is not possible MOMIB, they know it’s a joke ii. Embry v. HM Dry Goods – using reasonable standard to say that employer’s conduct would be reasonably understood as assent to employment extension iii. Kabil Development v. Mignot – court allowed “intent testimony” but instructed jury that intent was not the measure – reasonable objective standard iv. Empro MFG. v. Ball – signed letter of intent was not sufficient because there was not definiteness to show assent to what was at issue

2) Offer - Steps for Objective Manifestation of Intent (express/implied)

a.

Offer – Objective manifestation of intent to be bound (oral or written) i. CONTENT of the 1st communication - what was said? What was written? Content? ii. Offer Must have: (a) Consideration (b) Intent to be bound (c) Certainty iii. Watch for phrases that are UNCLEAR : (a) Fair, Appropriate, Reasonable iv. Four words that show communication IS an offer (I will buy…): (a) Requirements, All, Only, Solely v.

b.

c.

Restatement 24 - Offer (a) Defining the offer

"Master of the Offer" i. Master of substance/terms as well as how acceptance should occur (a) Offer for Acceptance (1) WHAT: substance of acceptance (2) WHEN: procedural side of acceptance (3) HOW: medium by which acceptance is expressed, who can accept (4) TIME: how long offeree has to accept (b) The Law allows for and looks for REASONABLE signs of acceptance if there's no exclusive means of acceptance expressed, both are bound at acceptance (c) Allied Steel – (d) Davis & Jacobe – accepted and then died (e) Advertisements - generally not offers ii. Offer for Real Estate – (a) Must have 1) Price AND 2) Description of Property iii. Requirement Contract: iv. Bilateral Offer & Unilateral Offer (a) Bilateral - promise for a promsie (b) Unilateral - promise for performance and performance only (1) Klick-Lewis - Performance contract with golf shot, duty to perform only arose by completing the golf shot After the Offer is Made - 3 Possibilities: i. Death - Someone dies - offer dies when people die ii. Lapse of Time - delay, offer will expire after a "reasonable amount of time" iii. Revocation - Offeror changes mind - Revocation of an Offer (a) Only person that can revoke an offer is the person that MAKES the offer (b) Requires Offeree AWARENESS - Revocation is a 2-player game (c) WORDS or CONDUCT that show Offeror has changed mind, conduct inconsistent with the offer and the offeree reasonably understands that revocation has occurred iv. Restatement Section 36 - Termination of an Offer (a) Termination: (1) Rejection OR counter-offer by offeree OR (2) Lapse of (reasonable amount of ) time OR (3) Revocation by Offeror OR (4) Death or Incapacity of the Offeror or Offeree (5) Offeree's power of acceptance is terminated by nonoccurrence of any condition of acceptance under terms of offer v. Restatement Section 35 – Power of Acceptor (a) Power shifts to acceptor once the offer is complete (b) UCC 2-206 (1) Inviting acceptance in any reasonable manner

vi. 4 situation when revocation CANNOT occur: (a) Option Contract - not only an offer, but 2 more facts (1) Option if: o (1) additional promise not to cancel the offer/hold offer open and o (2) some payment for that promise (2) Promissory Estoppel CAN form an option contract (3) Hypo: offer to sell car for 10,000, but buyer isn't sure. Seller says, I'll let you think about it for a week if you pay me $100 today. (b) Restatement Section 87 - Option Contract (1) Offer is binding as an option contract if… i. Is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; OR ii. Is made irrevocable by statute iii. An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance AND which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice (2) Cases i. Offer – Gimble Was not justifiable reliance, party should not have relied ii. Promise – Drennan (3) Hoffman – with no certainty of terms, when reliance – (c) Firm Offer Rule: with "sale of goods" (1) UCC 2-205 - "Firm Offer" i. Offer must expressly not revoke - good for some period of time ii. Must be in writing iii. Must be by a merchant (d) Reliance (1) Offer has been Relied on in a way that is REASONABLE and FORESEEABLE (e) Unilateral Contract - contract when intended... (1) To enter into a unilateral contract and (2) Performance has begun (3) Unilateral Contract: promise for performance and a performance only o contract that results from an offer that requires performance as the only possible method of acceptance

3) Acceptance - response to the offer a.

3 Questions to judge response to offer: i. Who (a) Rule - Only the person to whom the offer was made can accept the offer ii. How (a) Terms of Offer MAY control the acceptance - was there language in 1st communication that controls the method of acceptance? (b) Default Rule - if not expressed, anything reasonable can act as acceptance (c) Performance as Acceptance: (1) 2 Rules: o Bilateral - If an offer to enter into bilateral contract the start of performance is an implied promise, acceptance, creates bilateral contract o Unilateral - if offer was unilateral then start of performance is NOT enough, not acceptance, do not have a contract

(2) Restatement 32 – Promise Assumption o Court will infer a promise for acceptance (d) Restatement 63 – Mailbox Rule (1) Mailbox Rule: other than acceptance, all communications except acceptance are effective when THEY ARE RECEIVED - acceptance only is effective when IT IS SENT o Adams v. Lindsdell - only an acceptance is effective when it is sent o Morrison v. Thoelke – application of mailbox rule in FL case for land, sellers tried to revoke after acceptance was mailed o Hints for knowing when to use mailbox rule - 2 parties making the deal are not making the deal face to face, not in the same place; some delay in receipt of communications & inconsistent communications iii. When (a) When is response NOT effective as an acceptance? (1) Reasonable Time has passed (2) Offeror - time/death/revoke (3) Rejection: when Offeree indicates intent NOT to be bound, Kills the offer, offer is off the table (4) Indirect Rejection (3 forms): o Counter-Offers Response by offering new terms = rejection of original offer and replacement of a new offer DOES apply to sale of goods o Conditional Acceptances Material changes reject the offer ALWAYS an indirect rejection Leading words - "if... provided… but… so long as…" DOES apply to sale of goods o Additional Terms Adding terms to the offer - no agreement, no acceptance of the offer When a response adds a term it is an INDIRECT rejection (5) Mirror Image Rule – (not to sale of goods) o Any change in the response, not an acceptance (6) Deviant Acceptance Rule – o Offer is terminated with the inclusion of new material terms

b.

iv.

UCC Firm Offer Rule - 2-207 (revised version out) (a) Whether there is a contract? (b) What are the terms of the contract? (c) 3 months is longest

v.

Cases (a) Allied Steel v. Ford Motors – performance was reasonable acceptance of terms in the contract regardless of the indemnification clause and failure to return – objective

Battle of the Forms & Boiler Plate – UCC Acceptance (depends on context of each case – must look one by one) i.

UCC 2-204 - "Formation in General" (a) (1) formation occurs at any point where agreement - express or implied by conduct (b) (2) beginning point is not necessary (c) (3) indefiniteness is not preclusive

(1) Definiteness - can be supplied if intent to make a contract "no set price, etc…" ii.

UCC 2-206 - Offer and Acceptance (a) (a) offer invites any reasonable acceptance (b) (b) promise to ship or shipment is acceptance (conforming goods) (1) (2) if reasonable time passes, offeror can believe offer as rejected (2) (3) definite and seasonable acceptance of offer is acceptance even if it contains terms additional to or different from the offer

iii.

UCC 2-207 - Terms of Contract (a) Contract through (i) conduct recognizing contract even without records (ii) contract formed by offer and acceptance (iii) contract formed by a record (even if different) - terms are established by : (1) (a) terms that appear in records of BOTH parties (2) (b) terms, whether in record or not, to which both parties agree; (if conflict then KNOCK OUT RULE – UCC substitutes) AND (3) (c) terms supplied by UCC

iv. Restatement 32 – Invitation of Promise or Performance (a) In case of doubt an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance, as the offeree chooses v. Restatement 36 – Methods of Termination of the Power of Acceptance vi. Restatement 58 – Necessity of Acceptance Complying with Terms of Offer (a) An acceptance must comply with the requirements of the offer as to the promise to be made or the performance to be rendered (b) Acceptance may be limited even with part performance If vii. Restatement 59 – Counter-Offer

(a) A reply to an offer which purports to accept it but is conditional on the offeror’s assent to terms additional to or different from those offered is not an acceptance but a counter-offer (b) Counter-offers kill the original offer (c) Exceptions – option contract viii. Allied Steel v. Ford Motors – performance was reasonable acceptance of terms in the contract regardless of the indemnification clause and failure to return – objective ix. Petterson v. Pattberg – unilateral contract where revocation occurred with the refusal to allow through the door x. Idaho Power v. Westinghouse – inquiry – offer – purchase order (acceptance) => purchase order acted as acceptance and use the offer from Westinghouse (price quote) for the terms of the deal

c. Electronic Acceptance i.

ii. iii.

Shrink Wrap Rule (a) Accept the terms at usage (b) Enforceable once terms clicked and accepted (c) Unless terms or conditions are unjust, AND (d) Can reject through return of product Pro CD - acceptance for electronic goods occurs at clicking to use software (2-207 does not apply because terms are not being added), 2-204, acceptance is expressed by offeror Hill v. Gateway 2000 – contract was not formed until the terms were read, option to return was sufficient to hold open ability to return

d. Acceptance through Silence i.

ii.

iii.

Restatement Section 69 - Acceptance by Silence or Exercise of Dominion (a) Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases ONLY: (1) Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation o 3 parts: (1) take benefit (2) opportunity to reject (3) reason to know offered w/ expectation of compensation (2) Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer o Show 2 parts (1) offeree does nothing (2) prove intent [getting him on stand and admitting it] (3) Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept (b) An offeree who does any act inconsistent with the offeror's ownership of offered property is bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if ratified by him Cases (a) Hobbs Case - P sent pelts to buyer as had done in the past; expected that sending and no return was acceptance - court affirmed silence as acceptance because of past conduct (b) Maroney v. Maroney – 1) cohabitating cannot have implied contract 2) not a K (c) Austin v. Burge – father had paid for newspaper, stopped paying – son continued to read and company sued for bill and won because silent acceptance UCC 1-202(3)

D) Certainty 1) Restatement 33

2) UCC 1-201

II) Defenses A) Pre-Formation Defenses 1) Objective Manifestation Altering (Broemmer) a.

b.

Adhesion Contract i. 2 Step Analysis - Elements: (a) Adhesion Contract [Broemmer] (1) Take it or leave it – little choice (2) Standardized Contract (3) Ability to negotiate – bargaining power (b) Enforceability – Factor (1) Beyond reasonable expectations of weaker/adhering party, should they have reasonable expected it to be in there, OR (2) Unconscionably (manifestly unjust or unreasonable) ii. Restatement Section 211 (a) Can block out terms Cases i. Broemmer v. Abortion Services of PH – arbitration agreement in a form signed before abortion, girls says she didn’t read and court allows contract of adhesion

2) Statute of Frauds a.

Failure to satisfy the statute of frauds

3) Minor Competency/Infancy – disaffirm K, sue for restitution a.

b.

c.

Notes: i. Right to DISAFFIRM - court not enforcing the contract - restitution ii. Minor has a right to disaffirm a contract within a reasonable amount of time - minor = under 18 iii. Only a defense, cannot be used for the person that is not the minor iv. Right of disaffirmance for a reasonable time 3 EXCEPTIONS: i. If minor misrepresents his/her age ii. If parents sign iii. Doctrine of Necessities (a) Necessaries - Food, housing, clothing, medical care; If the good is a necessity, then disaffirmance is not possible Defense to Minor Defense i. Equitable Estoppel - statement, reliance, not a product of intermeddler

4) Mental Incompetence a.

b.

Restatement Section 15 - Elements of Mental Incompetence... i. By reason of [cause] (a) Cannot understand the consequences of the contract, OR (b) Cannot understand the consequences of the Act, AND (1) Other party has a reason to KNOW [other party] Contesting Mental Incompetence i. Elements of contesting defense: (a) No Knowledge of the condition, AND (b) Contract done in fair terms, OR (c) Because of performance or other factors, avoidance is unjust [basically one cannot restore the status quo – probably get reliance]

5) Duress (physical & economic)

a. b.

c.

Physical Duress Elements: i. There has to be a threat in inducement, AND ii. Something has to be wrongful - [knowledge of falsity OR not a mistake], AND (a) Unlawful OR (b) Wrongful iii. Deprives the other of free will Economic Duress - add 2 elements i. Goods or services are being withheld; AND ii. Goods cannot be obtained anywhere else iii. Detrimental duress from threat (not iv. Austin Instruments v. Loral - Loral was relying on Austin to provide critical components, Austin says that unless make new contract then won't deliver from old contract v. Smithwick v. Whitley – original seller did not transfer deed and 3 years later seller comes back and demands that buyer, buy again b/c doesn’t have deed – D claims economic duress but court says that D had other options so not available

6) Drugs or Alcohol (not in casebook) 7) Constructive 'Fraud' [effect - no contract] – Relationship Based a.

b. c.

Law is constructing fraud to rescind a contract if... i. Confidential or Fiduciary Relationship, AND ii. Induces actual & justifiable reliance by weaker party (actual reliance), AND iii. Disadvantageous Contract - gross inadequacy in consideration Defense that ONLY the weaker party has [Jackson v. Seymour] – absent-sister relies on brother, occupier, brother sells trees

8) Undue Influence – advantage-taking a.

b. c.

Factor Test - Things to consider… weigh in the analysis i. (1) Undue susceptibility, and/or ii. (2) Excessive pressure iii. Factors for determining both: (a) Unusual time (b) Unusual place (c) Insistence on doing at once (d) Emphasis on consequences of delay (e) Multiple persuaders (f) No 3rd party advisors (g) No time to talk to accountants Intentional advantage-taking; need 100%, not an even split because it's a factor test Odorisi Case - agreement by school teacher to resign, agreed to resign, but later wants agreement to resign not to be enforced, says he's under undue influence, threatening to go public with sex crime charges

9) Mutual "Mistake" a.

b.

Elements: i. Mutual belief in a mistake, AND ii. Basic assumption on which the contract was made, AND iii. Both parties know that the K is based on an assumption of the set of facts, AND iv. “Whole Substance" of the Transaction [material effect on the transaction] v. UNLESS parties did not "Assumed the Risk" (a) If the parties know of the risk but do nothing about it they have assumed it Conscious Ignorance - as long as the parties are aware of a risk, and don’t do anything to protect, one assumes the risk

c. d. e.

Sherwood v. Walker - case about the thought about a barren cow; turns out that cow was fertile; both parties thought the cow was barren - question of what the parties believed about the facts of the case when the deal was made Raffles v. Wichellhaus – mistake about the ship and timing, material mistake about definiteness and court says that contract will not be enforced Klick-Lewis – golf shot (consideration = publicity for right of shooting shot), granted because P did not mistake and did not have reason to know that offer was not valid (work off his knowledge)

10) Unilateral Mistake a. b. c.

d. e.

Very rare - most often they are limited to miscalculations by subcontractors when putting in bids State law forbids revoking a bid from a government agency Elements i. One party mistakes, AND ii. About a basic assumption, AND iii. The assumption has a material effect, AND iv. Condition about risk (a) Unconscionable to enforce contract; OR (b) Reason to know of the mistake v. UNLESS risk was assumed Makes courts feel very uncomfortable; Limited to miscalculations, not misjudgments Often driven by the "knowing of" by the other party

11) Misrepresentation/Fraud from Non-Disclosure - rescind and restitution EXCEPT Builder-Vendor] a.

In the Execution = fraudulent making of the contact, getting into contract i. Documents are flawed… ii. No contract in the first place - EXTREMELY rare iii. "What contract?"

b.

In the inducement (real/actual fraud) = Statements about facts that are fraudulent that lead you into a contract i. Elements (a) Misrepresentation (statement of fact that is not true - no mention of intent) (b) Fraudulent OR About a Material Fact (c) Justifiable Reliance ii. Builder-Vendor Exception (a) Any statement of fact will become a foundation for the contract and will be a warranty (b) Remedy - Expectations, put parties where they would have been if the contract had been fulfilled

c.

Actual Fraud Remedy i. Defense (if no intent to deceive), OR ii. "Affirmative Liability" because intent = breach (will become a binding promise) Non-Fraudulent Material Misrepresentationi. Only rescission and restitution

d.

12) Fraudulent Non-Disclosure or Partial Non-Disclosure a.

Elements i. Lead other party to believe that you have full information on a subject, AND ii. Disclose none or only part of the information, AND iii. Lead non-fraudulent party to believe that you've given full information, AND

b.

c.

iv. Information is about a material fact, AND v. There is justifiable reliance Duties to Disclose: i. One party knows that the other party is operating under mistake on basic assumption duty, OR ii. Necessary to do so to correct a fraudulent misrepresentation - even if misrepresentation was done by a third party, OR iii. If in a confidential or fiduciary relationship Liability = breach of contract - using fraud claim as way to get to breach of contract i. If there is no duty to disclose - there cannot be a misrepresentation

B) Post-Formation Defenses 1) Unforeseen Occurrences a.

Impracticability Doctrine Excuse: i.

ii.

iii.

Elements: (a) Occurrence of an event after formation that makes performance impossible OR impracticable (commercially), AND (b) Contrary to a basic assumption, AND (c) No fault on the part of a party (negligence could be fault, does not have to be intentional act), AND (d) No assumption of excuse [by party asserting the claim] Notes (a) Commercially Impracticable when - extreme and unreasonable expense or loss (b) Restatement Section 64 - Government Regulations Changing Assumptions (1) A change in government regulation satisfies number (2) (c) UCC 2-615 (1) Fa (d) Restatement 255 (1) Supervening event causes frustration of purpose (e) Implied Condition (1) If the case and condition doesn't exist, both parties are relieved (f) Assumption of Risk Issue (1) Force Majeure Clause, i.e. "other acts of God" – narrow allowed o All other possible scenarios (normally waived) - used as conditions for performance (capturing unforeseen events) o Trying to get around waiver of the clause o The Force Majeure clause are NARROWLY construed (g) Remedy: (1) "Do Justice" - restitution but possible reliance, possible to break into pieces Cases (a) Taylor v. Caldwell - leasing a concert hall, owner contracted to lease out BUT the concert hall burned down, performance became impossible (b) Closing of Suez Canal - contracts to ship goods, implicit (what was understood) belief that canal would be used; shipping became much more expensive, shipper wanted out - court says that all that happened was unforeseen performance that made something more expensive then that's part of the risks you take for being a business person - if just makes more expensive then not an excuse (c) American Trading Case - court recognizes that it doesn't have to be COMPLETELY impossible but has to have EXTREME financial downfall (d) Thompkins v. Dudley - school building burns down before completion, but builder was still in control so still liable

b.

Frustration of Purpose: i.

ii.

c.

Elements: (a) One party's principle purpose is substantially frustrated, AND (b) Purpose was contrary to a basic assumption for entering deal, AND (c) Frustration was no fault on the part of a party (negligence could be fault, does not have to be intentional act), AND (d) No assumption of excuse [by party asserting the claim] Krell v. Henry - willing to pay inflated rental rate because there was a coronation parade that buyer wanted to see parade; afterwards parade was cancelled - court allowed because the purpose for renting was eliminated (new doctrine created)

Unconscionability i.

ii. iii.

Factor Test (do not have to be equal but must meet 100%): (a) Procedural Unconscionability (1) One side had greater bargaining power (b) Substantive Unconscionability (1) The contract/terms of contract are UNFAIR (c) Issues to Decide Unconscionability (1) Oppressiveness of K (2) Unfair surprise (3) Allocation of risks is unsubstantially distributed (4) Gross disparity in consideration (5) Evidence that stronger party knowingly took advantage of weaker party (6) Presence of high pressure sales tactics or misrepresentation UCC 2-302 - Unconscionable Contract or Term (a) Applies in ALL contracts, sale of goods and all others Always tested as of the TIME OF THE CONTRACT - where conditions are "oppressive"

iv. Unconscionability (Defense - sort of...) - has to do with formation (a) Contract of Adhesion - "take it or leave it" AND terms are extremely unfair (b) Unilateral Mistake\ d.

Cases i. Walker v. Furniture- terms in the sale of furniture was unfair because all goods were taken with failure to pay for one good ii. Waters Case - drug abusing woman who sold annuity - unconscionable because boyfriend was part of the deal and had greater knowledge and induced the sale iii. Gateway - sale and service was not unconscionable BUT the requirement that disputes in Int'l Arbitration Commission were unconscionable

e.

Doctrine of Good Faith - has to do with performance i. Omni Case - "feasibility study case" - subjective v. objective standard ii. With regard to your side of the contract - you must perform with good faith; this discretion is enough to make the promise a real promise and not illusory iii. What is good faith? (a) Objective (independent) & Subjective - has to do with intent (harder to prove) (b) Subjective v. Objective Test (1) Depends on the agreement = (2) (1) Fancy, taste, sensibility, or judgment = SUBJECTIVE o Why is this not illusory - because it is limited by good faith (3) (2) All else = OBJECTIVE iv. Not independent - it attaches to things already in the contract - has to do with discretionary actions v. Standard – Split of Opinion

(a) Easterbrook: (only applies if not written in the contract) if it's in the discretion of the party… no good faith; If any other discretionary act, good faith applies (1) If a contract covers an area, no good faith needed imposed (b) Other camp - easier (1) Good faith to every aspect of the contract (2) Good faith to everything including the expressly C)

Excuses for Non-Performance: 1) Conditions - left unsatisfied a.

Define: An event not certain to occur but MUST occur before performance becomes due i. Promise - if promise is not fulfilled there is a breach of duty (obligation to perform) ii. Condition - event, not certain to occur which must occur before performance can become due

b.

Identifying a statement as a condition: i. Failure of Condition - excuses other party's duty to perform ii. Different from Duty - does not create a "new liability," it limits a duty iii. Language of Express Condition must be STRICTLY complied with iv. Condition + Promise = “Condition and promise to…” (a) Court will imply a condition for impracticability (b) "Material Adverse Event" - added to the end to encompass all other v. Cases: (a) Jacob & Young v. Kent - court allowed a different pipe, but if it had said "payment is conditioned on use of Redding Pipe" (provided…) => would have been a different outcome (b) Gary v. Gardner - condition of ship being in the port to sell at a different price (futures contract), "arriving" - in sight or in port (c) Baird v. Gimbel Bros – linoleum producer relies on bid for contract to make bid on linoleum but general revokes – no promise, no option contract (d) Drennan v. Star Paving – sub tried to back out after bidding, and general sues for detrimental reliance and wins vi. Condition Precedent and Condition Subsequent (a) Issues of Burdens of Proof & Burden of Pleading (b) Who had to prove the sailing into court question? (c) Condition Precedent v. Condition Subsequent (1) Precedent - must occur before possible breach o “If…” - Performed before o Must be proved by party establishing a contract (2) Subsequent - something that happens "later" that gets one out of impending deal o Unless… [something happens] o Must be proved by party trying to get out of the contract or trying to say should not perform (3) Now follow FRCP 9(c) – reasonableness, burden to prove unsatisfaction, assume all conditions fulfilled (d) Restatements 227

(1) Assuming that promises, not conditions precedent – reduce the risk of forfeiture (2) UNCLEAR = assume promise c.

Time Conditions i. “Time is of the Essence” – if expressive, makes time in contract extremely important strictly construed ii. Implied – court will assume reasonableness iii. Boiler plate – allowable unless dropped through Adhesion or Battle of Forms iv. Real Estate – generally court will be more reasonable to remedy reasonable defects for performance

d.

Illusory Conditions i. Unfettered discretion - makes a condition illusory ii. "Satisfaction" we fall into Omni case and we fall into good faith and whether possible to objectively measure (a) Objective Standard – all else (b) Subjective Standard – fancy/taste

e.

Possible Results of Condition: i. Satisfied - duty to perform follows ii. Waived - before or after condition is not satisfied iii. Estopped from relying (a) Getting Around Estoppel - NOTICE - notice requirement for action before reliance, but must be included in the condition (b) Parsons Case - architect wanted to get money for work done when construction company thought it had a loan secured - loan was condition - court says NO because no NOTICE require and should not have relied iv. Precluded from relying because of bad faith conduct (a) Example - horse for 10,000; "it is a condition for obligation to perform that Van Alstine wants to perform " or "Van Alstine wants to do it" - cannot be subjective measure v. Impossibility & Impracticability can prevent performance vi. Waiving a Condition (a) If someone is entirely in favor of one party, it can be waived at any time (b) Depends on the crafting of the obligation under condition (c) How can be waived: (1) Implied Waiver - through conduct (2) Estoppel - "relying on condition" (d) Notes about Waiving (1) Consideration is not needed for waiving a condition (2) Can be done through implied conduct (Potter v. Harrington – paying the landlord late consistently but the landlord implied a waiver by conduct of accepting late payments)

f.

Payment Disputes i. ii.

In payment disputes, if a check is cashed for an amount (no matter if condition of “not satisfied” is written) – the dispute is settled over the sum owed Marton Remodeling – cashes check with reservation written, not acceptable

2) Order of Performance as Condition a.

Restatement Section 234 - Order of Performances (if they can be performed same time, then they should be)

i. ii.

Where all or part of the performances to be exchanged under an exchange of promises can be rendered simultaneously, they are to that extent due simultaneously, unless the language or the circumstances indicate the contrary 5 categories (a) Time is fixed for performance for each party (b) Where fixed for one and no fix to other (c) No time fixed for either party (d) Same period is fixed within which each party is to perform (e) Where different periods are fixed within which each party is to perform

iii. Three Kinds of Performances: (a) Mutual - Independent [minor promises] (1) Either party can recover damages, no excuse from failure of one (b) Conditional: Condition Precedent = 1 goes first [major promise] (1) One party must start performance (c) Mutual Dependent - simultaneously [major promise] – 234/238 (1) If the performances cannot be done at the same time then they are conditional on one another (2) The party that is ready, if the other is not then first puts other in breach (d) Parties can agree to perform however they want if they EXPLICITLY express it b.

c.

d.

e. f.

Restatement Section 238 - Effect on Other Party's Duties of Failure to Offer Performance i. When performances are due simultaneously, condition of each party's duties to render performance either render or, with manifested present ability to do so, offer performance of his part of the simultaneous exchange Interaction of 234 & 238 i. If can be done at same time, they should be done at same time ii. If can be done at same time, conditions to perform are mutually conditional, if one party doesn't show then there is a non-satisfaction of condition Cases i. Ziehen v. Smith - Both parties don’t show up, and buyer sues for breach; duty to perform only arises if one party shows up; conditionality - b/c performances are conditioned; breach will only occur if one party shows up (a) Buyer argues that she was ready but seller was not - COURT SAYS seller's inability is not an impossibility (she could have just paid off the mortgage), had to show up to see if she actually satisfied the condition, but since buyer did not show up, no possible breach Performance in Lots i. If can be delivered in lots or group, can split Constructive Condition i. This is an IMPLIED CONDITION - Court PRESUMES REASONABLENESS - court assumes performance is complete performance ii. For implied relationship, need only reasonably substantial completion for performance, but must "satisfy the central purpose of a contract" iii. Cutting performances into pieces -court may imply separate performances when ... (a) Different Prices - Parties chopped it in 2 pieces with price (b) Parties Knew the Difference - Factually parties knew there would be different kinds of performance (c) Performanes were Actually Different (d) Tipton v. Feitner - sale of pigs, some dead now, live were supposed to come later didn't and court split so payment was necessary on first performance

g.

Other Party's Breach

i.

Anticipatory Repudiation/Breach (a) Indication to party that don’t intend to perform (b) Test for Anticipatory Breach (1) Definite and unequivocal manifestation of intent not to perform when performance is due (2) Expressible by: o Statement, OR o Action, OR o Inability to perform

ii.

Non-Material Breach (substantial performance) (a) Example – paint 1 coat when supposed to paint 2 (b) Remedy – sue for damages, no rescission

iii. Material Breach Standard/Rule (non-substantial performance) (a) 3 Options for Material Breach: (1) Rescind contract - sue for restitution (2) Waive Materiality and Partial Breach - retain claim for damages (3) Treat as Anticipatory Repudiation - tell company to stop and treat material breach as intent to commit a material breach when performance is due; sue for expectation (b) What if you are not sure if something is a material breach? (1) Right to Request Adequate Assurance of Performance: if reasonable ground to believe other party will commit material breach - may ask for an assurance that they are not going to commit reasonable breach - pending the answer, have a right to withhold "performance" o If no adequate assurance from "breaching" party - non-breaching may treat as anticipatory repudiation (2) Decker - took a big risk (3) K & G - weren't sure, held money thinking that material breach would occur (c) Consequence? (1) Party getting breached says material breach and rescission then restitution (2) Partial Breach - waiving a material breach, treat material breach as a partial breach o Consequence? Sub still had to continue to perform AND Breachee is still entitled to damages and withholding payment is the damage payment (second payment was paying for the first breach) o When former breaching party later stops performance, ANOTHER breach o Jacobs & Young v. Kent - example of pipes being requested BUT because the pipes were comparable the court said that there was no material breach iv.

Whether house is "habitable" - can someone live in a house, then substantial enough (a) If it's close enough - there is STILL A BREACH, get expectation interest; put at place where would have been if promise had been fulfilled v. If not substantial performance => becomes condition where not satisfied (a) If homeowner says (b) Restitution Claim - because party can seek RECISSION (voiding a contract) vi. Non-Substantial Performance = Material Breach (a) Breach is material and party has a right to rescind vii. Material Breach (non-substantial performance) – (a) So undermined the relationship that takes away the purpose

III) What is in the Contract? A) Implied Warranty 1) UCC 2-314 - Implied Warranty of Merchantability a.

b.

Element: i. If seller is in business of selling goods of this kind then UCC will tell us that goods are fit for ordinary use The person must be in the business of selling what is being sold of goods of that kind

B) Misunderstanding in Definiteness 1) Restatement Section 20 - Effect of Misunderstanding a.

b.

No mutual assent if parties attach materially different meanings to their manifestations and i. Neither party knows or has reason to know the meaning attached of others (equally ignorant) ii. Each party knows or each party has reason to know the meaning attached by others (equally knowledgeable) Manifestation is operative the meaning if ONE i. Party does not know of any different meaning attached by the other, AND the other knows the meaning attached by the first party; OR ii. That party has 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 2 - 2 = no K 2 - 1(0) = K but follow knowledge of 1(0) 1 - 1 = no K 1 - 0 = K but follow knowledge of 0 0 - 0 = no K

C)

Parol Evidence Rule 1) Basics a. b. c.

Define: must have a final writing, has to have a written document Purpose: the final document is the best representation of the meaning of the deal; superior reliability of deal If Accepted: Outside evidence of earlier statements (oral or written) will not be accepted

2) Integrated Agreement or Integration a. b.

c.

Define: Written agreement that the court concludes was meant to be the final version of the deal – “final writing” – must have a final writing for PER to be involved Elements: i. Around Parol Evidence Rule Elements: (a) Have a final Writing? (b) Is parol evidence contradictory to the final writing? (c) Is the final writing fully integrated ? ii. Factors to Consider: (a) Sophistication of those involved? (b) Attorney’s Present? (c) Reading of the writing in the context would lead to absurd result? (d) Form of Writing? Detailed? (e) Relative Bargained Strength? Mitchill v. Lath - 3 Factor Test for oral agreement to vary written promise: (1) agreement must in form be a collateral one (2) oral promise must not contradict express or implied provisions of written contract (3) must be that one party would not ordinarily be expected to embody in writing - cannot be so closely related to the principal transaction to be part and parcel of it

3) P.E.R.s & Naturalness a.

Evidence will not be allowed under PER if: i. K is integrated, AND (a) Contradicts the material of the writing, OR (b) Would NATURALLY be a part of the writing but is not ii. To get around - lawyers use the "MERGER CLAUSE" - this is everything, there is nothing else

b.

Restatement 212 (2) – Judge Determines Integration i. Judge makes determination of integration of the contract

c.

Restatement Section 214 - Evidence of Prior or Contemporaneous Agreements and Negotiations i. Agreements/negotiations are admissible when to establish that… (a) Writing is or is not integrated (b) That integrated agreement, if any, is completely or partially integrated (c) Meaning of writing, whether or not integrated (d) Invalidating causes (fraud, illegality, etc…) (e) Ground for granted/denying rescission, reformation, specific performance, or other remedy (damages/remedy) ii. When talking about a remedy – Parol Evidence does not apply

d. e.

Restatement Section 212 Restatement Section 213 i. Prior agreements – still obligated with subsequent voided contract ii. If renegotiation, voided contract with renegotiation

f.

Cannon of Construction (3) i. ii. iii.

g. h.

UCC 2-202 - Does essentially the same thing as PER UCC 2-205 - Hierarchy of evidence - Express > Course of Performance > Course of Dealing > Usage

i.

Plain Meaning Rule - similar to 4 Corners Rule i. ii.

4)

Hand written over type written Exclusion of lists – with lists, anything that is not in the list is excluded Bargained for is greater than boiler plate terms

End result is the document - what's in the writing is what stays Bethlehem Steel case v. Pacific Gas & Electric (a) Justice Trainor - Plain Meaning Rule should not be used, judge is relying on his/her own education to make major decisions; judges should put themselves in the place of the party at the time of forming the contract (b) New method - whether evidence is CREDIBLE and whether evidence is REASONABLE enough to provide doubt to the interpretation of language in the contract (1) QUESTION: "Is the language ambiguous?" o If no - judge decides the meaning o If yes - to go to the trier of fact

Restatement 214 - 3 Exceptions to the Parol Evidence Rule: a. Ambiguous Term Exception: i. Parol evidence is always admissible to explain an ambiguous term in a written b. Additional Term Exception: i. If the contract is only a partial integration - then parol evidence IS admissible to add terms to the contract

c.

d. 5)

Establishing a Defense Exception (i.e. fraud, mistake - but will no longer be able to receive expectation interest; restitution): i. CAN - introduce parol evidence of a statement as a defense (to get out of contract) ii. CANNOT use to change the terms of the writing Determine Damages

Cases a. Mundy v. Lumberman’s Mutual Insurance – silver 1000 stolen and not covered under change in claim – court says that the print was readable and so it was integrated and PER in effect b. Weisz v. Parke-Bernet Galleries – warranty disclaimer on front of handout, accepted because displayed prominently

XIV) Breach & Remedy A) Basics - K formed, one party did not perform, question becomes - how did a court respond? B) Breach 1)

Expressed Conditions (strictly construed - "time is of essence")

2) Constructive Conditions a. b.

Order of Performance i. Who must perform first? Breach Options: i. Material Breach (a) Define: Non-substantial performance (b) Breach is SO great that non-breaching party can sue for TOTAL breach ii. Partial Breach – (a) Define: Non-Material Breach (b) If close, still breach, but other party must perform, but will have damages claim against

3) Anticipatory Breach & Anticipatory Repudiation 4)

Right to Request Adequate Assurance of Performance: a.

Three Options for Non-Breaching Party: i.

ii.

iii.

Material Breach at Utterance: (a) If intent to commit material breach on day of performance but uttered early - can be treated as a material breach at time of utterance rather than at time of performance Option not to Perform: (a) Doesn't have to perform & can sue for breach "right now" - if turns out that after utterance that breaching party can now perform on day of performance - doesn't matter Assurance of Performance: (a) If have uttered or given signal of reasonable ground that other party will not perform, then non-breaching party can request an assurance of performance (1) In time, non-breach party may withhold until adequate assurance (2) If suspected breacher does not provide adequate assurance, non-breach party can treat as a material breach

C) Specific Performance (In Rem remedy) – Equitable Remedy 1) 2)

Define: A court order that requires a person to do what she has agreed to do a. General Performance: not here, this is paying for the breach b. Specific Performance: actually saying to do something Elements: a. Where remedy at law is not an adequate remedy (money not adequate) b. There is not enough information to appropriately measure damages

3) Restatement Section 360 - Factors Affecting Adequacy of Damages a. Adequate damages assessed through following circumstances: i. Difficulty of proving damages with reasonable certainty ii. Difficulty of procuring a suitable substitute performance by means of money iii. Likelihood that an award of damages could not be collected

4)

Notes a. When breaching party does not follow: i. Contempt – can be jailed b. Court may grant specific performance even with liquidated damages clause c. Unique: i. Not the matter of uniqueness – the test is: “Is the damage measurable?” ii. Question is do we have enough information to assess a monetary value iii. When we can’t figure out the value then specific performance makes sense iv. Can be talking about the SPECIFIC PARTIES IN THE LAWSUIT – subjective value may be important d. Historical Reasons - courts are reluctant to issue specific performance (different court systems law & equity) – enforceability problems i. When specific performance must be done precisely as requested by judge ii. Equity - money damages were only used when specific performance was adequate iii. Law - money damages iv. Modern Trend - specific performance is an available alternative unless there will be problems of judicial administration in monitoring the performance v. Maryland – specific performance is not abnormal, courts in Maryland consider specific to be normal form of recovery e.

General Situations for Specific Performance: i.

Real Estate - always get specific performance because it's the land or real estate that is desired (societal connection – not able to be “valued” – must have the piece)

ii.

Services Contracts (never) - in a contract to perform services, specific performance is NEVER acceptable (a) Affirmative (b) Negative (exceptions) (1) Highly Expert/Specialized Knowledge o Damage beyond the personal services when o Example: employee has developed specialized knowledge/ability, including trade secrets (c) Injunctive Relief - preventing future action (d) Fitzpatrick v. Michael – elderly has caretaker, caretaker gets switch in the will/estate and siblings want estate back; life estate => using “for your life” – old man promises that caretaker would have life estate – statute of frauds issue (transfer of any interest in real estate – including least) – real estate is within – (1) Part Performance Doctrine – 139 of Restatement (pull together) – using promissory estoppel-like arguments to get back statute o Court – b/c remedy is equitable; using 139 to get to damages is normal way around but this is a different case o Issue – parties don’t like each other, and courts don’t want to get (2) Negative Specific Performance: o Exceptions to negative sp. performance – precluded from hiring anyone else Highly Specialized Knowledge (e) Pingsley – piano player, court says that measurement is possible in damages

iii.

Covenant Not to Compete – addition to contract that precludes a party from competing; contract to be treated on own (a) Judges have started to put regulations on these covenants: (1) Could not be excessive (invalidation) (2) Blue-Pencil (3) Limited Enforcement (4) Enforce Covenant but Only to Reasonableness

Reasonableness for Covenant (harm): Geography Length (2 yrs) Extent of Market of Employer Administerability Scope (5) Basis: must have consideration – new contract when employee-at-will (continued employment with us is MOMIB) (6) Defenses: o Good Faith (employment at will, no good faith needed) o Consideration o Adhesion o

iv.

Sale of Goods - only used if the goods are "unique" (works of art, antiques, custom made)

v.

Not Possible (too much harm/stress) – court will not order specific performance when something is so severe that court feels uncomfortable about it

f.

5)

Restatement 360 i. Adds whether party will be able to collect to determine Cases: a. Van Wagner v. S&M Enterprises – will that damages be adequate, reluctant to require specific performance

D) Money Damages - Breach Remedies 1)

Punitive Damages - not recoverable for breach of contract, damages designed to punish

2)

Compensatory Damages - giving money to compensate for breach

3)

Liquidated Damages - contract provision that sets the amount of damages (listed in contract) a.

b.

c.

Pacheco Test for Liquidated Damages – Element Based: i. Damages must be difficult to predict at time contracting in estimating, AND ii. Amount must be reasonable in light of what parties expected to happen Restatement Section 356 – Factor Based (foreseeability & reasonableness): i. Damages for breach of either party may be liquidated in agreement but only at an amount (a) That is reasonable in the light of the anticipated damages OR (b) Actual loss caused by the breach ii. And difficulties of proof of loss. iii. A term fixing unreasonably high damages is unenforceable on grounds of public policy of penalty Test v. Restatement 356: i. Test = element test ii. Rest. 356 = factor test (a) Focuses more on foreseeability and reasonableness (b) Reasonableness WITHOUT reference to time in factor test iii. Example: (a) Adoption contract w/ clause – “in the event that the adoption does not go forward, there will be damages of $700,000” (1) Pacheco – is difficult to determine BUT damages are way too much at best guess so not enforceable

d.

(2) Restatement – factor test and reasonableness, so hard to determine the damages is enough to enforce iv. When damages end up being close to an unreasonable liquidated damages clause’s amount – Restatement may allow where Pecheco is unable to recover Notes i. Floor & Ceiling of Liquidation Clauses– (a) Liquidated damages if accepted then the amount is set regardless of the amount of the damages ii. A clause in an unenforceable contract may still be enforceable iii. Forfeiture Clause (a) Typically not allowed because not supposed to punish

iv. In Damages – parol evidence rule does not apply v. Suppose writing includes clause to exclude any outside vi.

e.

4)

Question will be whether liquidated damage clause is valid - cannot be punitive; is the contract provision designed to be a reasonable estimate to compensate non-breaching party or is it designed to punish the breaching party vii. If set at specific sum… one size doesn't fit all (i.e. 10,000 for breach); BUT if sets out formula or flexible approach (such as 1000 for each day that delivery is late) viii. Compensatory v. Punitive Cases: i. Pacheco – 2 part damages test ii. City of Rye v. Public Service Mut – City and developer, bond held for delay; using 2 part damages test; REFUSES TO ENFORCE because damages were completely speculative

Damage Measurement (if no clause sets out) a.

Expectation Interest - general approach to K law damages, designed to protect expectation interest i. Define: Putting non-breaching party in the same economic position as if the contract has been fulfilled without breach ii. If special value, must determine what the "real expectation" is [John Wonder] and court will grant the expectation if special value iii. Net Expectation - difference of performance - costs of performance; if special iv. Hawkins v. McGee - "hairy hand," victim agreed to have surgery because doctor promised 100% perfect hand, but it came out as a hairy hand - so court says put P at same economic position if the contract had been performed v. Peaveyhouse v. Garland Coal - coal company leases land and agrees to fill hole after leaving. Property was worth 12,000. Coal company would have cost 60,000 to refill so hole was left empty. Majority - bad faith breach, doesn't matter, but says P deserves the 60,000. Minority says that parties will use 60,000 to put in pocket. Dissent points out - Is there a special reason or special value to P?

b.

Reliance Interest (value spent)- putting P in the same position as if there never had been a contract, compensating P (non-breaching party) i. Restatement Section 349 (a) Alternative to expectation, injured party may recover reliance interest, including expenditures made in preparation of performance, less any loss that party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed (b) Possible to maintain "incidental reliance" - costs incurred by relying on contract ii. Notes about Rest. Sec. 349 (a) Proving losses avoided by breaching the contract may show that reliance recovery is completely diminished by avoidance (b) Typically the “expenses incurred in the performance of the contract” (c) Expenses must be REASONABLY FORESEEABLE for recovery

iii. Example of Reliance Interest (a) i.e. franchise with McDonalds for $100,000 to build a restaurant. P then builds an arch over building in preparation - reliance interest is for 7000 because wouldn't have built arches, expectation would be $0.00 because no economic loss because of breach iv. Cases (a) Chicago Coliseum Club v. Dempsey – Court does not allow Coliseum to recover $ spent in procurement of contract, does allow reliance money spent in changing the (b) Security Stove & MFG v. American Ry Express c.

Restitution Interest - the interest of a party in recovering values conferred on the other party through efforts to perform a contracts i. Restitution Claim/Unjust Enrichment: (a) Elements: (1) Benefit was Conferred (2) Benefit cannot have been done gratuitously [was not a gift or given as a volunteer] (3) Not the product of an Officious Intermeddler (4) CANNOT occur when there is a contract in place governing the parties' actions in the first place (5) BREACHER – cannot recover in contract, but can recover in restitution for part performance (special example of employment doctrine) (6) Return value of object at time of transaction ii. Who can sue in Restitution? (a) Generally: (1) Beaching party may sue in restitution (2) UNLESS bad faith breach (3) Less any damages (b) Britton v. Turner: allows breaching party to recover in restitution for partial performance (employee quit and wanted money for 9 months of performance); exception is that if someone is breaching in bad faith then may not be able to recover) (c) Contract Claim Recovery by breaching? NO iii. Restitution After Performance – (a) May not sue for greater level of expenditure after full performance (b) Oliver v. Campbell – once one party has completed performance, if made bad deal, party cannot back out of contract and sue in restitution iv. Restitution for Unsatisfactory Performance: (a) Not is not available for unsatisfactory performance (b) Pinches v. Swedish Evangelical Church – builder suing church in restitution because church wouldn’t pay builder – builder wants value of the building to the church; church says value is diminished, want the cost of remedying the problems (1) Church is being FORCED to bring a K claim v. Restitution for Contracts blocked by Statute of Frauds (a) Generally, can use restitution

d.

Calculation i. +Net Expectation (profit) (a) Profit = Income - costs (b) What goes into costs? Fixed Costs NO - Variable Costs relating to specific K YES ii. +Wasted Reliance (a) money spent in performing under the contract (before and up to the breach) - cut by mitigation doctrine iii. +Other Losses (Consequential Damages) (a) other damages that were not part of the specific contract language

iv. -Less Benefits (a) any benefits that occurred as a result of the breach (must be reasonably foreseeable under circumstances) e.

5)

Diminution in Value v. Cost of Performance a. b.

c. d. e. f.

6)

Calculation Notes i. All damages must be: caused, unavoidable, foreseeable, and reasonably calculated - issues arise with new businesses (a) New Businesses - issues of good faith/bad faith will be considered, may use expert analysis to determine damages ii. Damage Recovery – (a) Expenses incurred BEFORE the contract – depends… (1) If the expenses are REASONABLY foreseeable – recoverable

Diminution in Value Cost of Performance – using the actual contract i. Restatement S. 336 (a) Get Cost of Performance Measure as long as "measure is not clearly disproportionate" (b) When clearly disproportionate - skeptical that injured party will actually fix damage and court is less likely to allow cost of performance – get diminution in value Value of Performance i. IF far GREATER than Performance under Contract - not acceptable, get diminution in value Special Value i. Whether party has a reason to ask for special conditions as bargained for under the contract or if general interest is sufficient Timing i. Pick the time of the breach and measure the damages Market Value v. Subjective Value i. Market Value = distilled to “reasonable value” (a) Fair Market Value – figure out value for reasonable seller and reasonable buyer (b) “Arms Length Transaction” – not involved in case, not related parties ii. Subjective Value = value to parties in the deal iii.

Limitations on Money Damages: each damage must be caused, unavoidable, foreseeable, and reasonably calculated - not collateral a.

Caused – i. ii. iii. iv.

b.

Define: Must show with reasonable certainty the damages were caused by the breach Damages must be proved with REASONABLE CERTAINTY - question of fact Must prove that damages occurred Hawkins - very difficult to prove the value of a perfect hand

Unavoidable - Mitigation - Avoidable Damages: i. ii. iii. iv.

Define: non-breaching party cannot recover for damages that he/she could have avoided When are damages avoidable??? - Reasonable efforts to find comparable or substantially similar results (work/employment/product) Mitigation - Avoidable Damages Rule – (a) must make reasonable effort to find comparable or substantially similar [thing] Parker v. 20th Century Fox; Shirley McClain Case - contract to play lead in musical called Bloomer Girl, studio breaches contract, but offer her another musical called Big Country Big Man - she sues for full amount she was supposed to get in Bloomer Girl; studio says she could have avoided damages by doing other. Court says that second

v.

c.

d.

movie is inferior and does not meet the test of avoidance. Requires that in employment P must make reasonable effort to find "comparable or similar work." Law Professor - contract to teach in NY for $100,000. School breaches. If another school in NY to pay $80,000 then prof can take for 80,000 and only have 20,000 damages. But if no other professor jobs she isn't forced to take another non-similar job

Unforeseeable - Foreseeable Limitation on Damages - Consequential/Special Damages i.

Consequential Damages = Special Damages - unique to that specific plaintiff (a) Elements: Can only recover for special damages if elements: (1) Loss that is special to P - consequential/special, and EITHER o Damage was reasonably foreseeable, OR o P told D of the special circumstances AND D knew of the damages at time of making contract - objective to parties involved

ii.

To recover for consequential damages, the damages must have been foreseeable at the time the contract was entered into - foreseeable BY THE DEFENDANT

iii.

Restatement Section 315 (a) Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probably result of the breach when the contract was made (b) Loss may be foreseeable as a probable result of a breach because it follows from the breach (1) In the ordinary course of events (2) As a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know (c) 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

iv.

Emotional Distress – (a) Will not grant emotional distress damages UNLESS the contract is extremely personal

v.

Cases: (a) Hadley v. Baxendale - mill in small village in England and no one could fix the machine so had to transfer shaft to another village. Issue was damages in shipping shaft to other area, should lost profits be included? Hadley, the mill worker, wants to recover loss profits, court says that the lost profits of mill were not foreseeable (1) Net Expectation = cost of 1 say shipment (where would have been) - 7 day shipping (where party is) (2) Remoteness of Damages (b) Victoria Laundry - company told engineer manufacturers they were responsible even though they didn't have experience. Court says objective standard of the parties involved.

Reasonably Certain Calculation - Must be Proven to a Reasonable Degree of Certainty i. (No) Collateral Source Rule: if A causes damage to B, B cannot consider collateral (a) Majority - include the collateral source UNLESS the breacher acted willfully (i.e. bad faith breach will) (b) Minority - never include collateral income ii. Must be able to prove the damages to a REASONABLE DEGREE OF CERTAINTY (a) Seibel Case - example of court saying that collateral income is never included

iii.

(b) Freund v. Washington Square Press - must be able to reasonably calculate damages, not collateral damage - no damages for the "loss in reputation" - cannot sue for royalties b/c no proof was offered to say that royalties would have come from; P wants the cost of publishing the book => cost v. value argument (1) Court says that P has no SPECIAL VALUE here New Businesses – (a) Can use experts, but will good faith and bad faith will be incorporated in decision

XV) Contract Formation A) Two Forms 1) Consideration 2) Promissory Estoppel B) Elements (specifically in consideration) 1) MOMIB 2) Required terms C) Control over Process 1) Master of Offer 2) Pre-Formation "Liability" - Section 87 & Option Contract D) Process 1) Non-matching acceptances 2) Timeliness - Timing of acceptances E) Standardized Forms F) Writing 1) Parol Evidence Rule XVI) Defenses A) Pre-Formation Defenses B) Post-Formation Excuses 1) Impracticability 2) Frustration of Purpose XVII) Performance & Breach A) Expressed Conditions (strictly construed - "time is of essence") B) Constructive Conditions 1) Order of Performance a. Who must perform first? 2) Breach a. Material Breach (non-substantial performance) i. Breach is SO great that non-breaching party can sue for TOTAL breach b. Partial Breach - Non-Material Breach (if close, still breach, but other party must perform but will have damages claim against) C) Anticipatory Breach & Anticipatory Repudiation D) Right to Request Adequate Assurance of Performance? 1) If intent to commit material breach on day of performance but uttered early - can be treated as a material breach at time of utterance rather than at time of performance 2) Doesn't have to perform & can sue for breach "right now" - if turns out that after utterance that breaching party can now perform on day of performance - doesn't matter 3) If have uttered or given signal of reasonable ground that other party will not perform, then nonbreaching party can request an assurance of performance a. In time, non-breach party may withhold until adequate assurance

b.

If do not provide assurance, non-breach party can treat as a material breach

IS there a contract Is there a defense Are they obligated to perfrom Is there a breach? Whats the remedy.