Contracts II Outline- Spring 2010

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Contracts II—Spring 2010 The Compensation Principle A. Compensation vs. Punishment B. Expectation Remedies 1. Specific Performance 2. Compensatory Damages General, Incidental, and Consequential Damages Refresher: “Expectation” Remedies UCC: Ks for sale of goods CL: Non-Sale of Goods Ks RST § 347 Alternative “Loss in Value” Damage Measure (Construction Ks) Limitations on Damages RST § 347 Measure of Damages in General Subject to the limitations stated in §§ 350-353, the injured party has a right to damages based on his expectation interest as measured by: (a) The loss in the value to him of the other party’s performance caused by its failure or deficiency, plus (b) Any other loss, including incidental or consequential loss, caused by the breach, less (c) Any cost or other loss that he has avoided by not having to perform. CL (services K) formula: (loss in value) + incidentals/consequentials – expenses/costs saved Construction Service Ks: Calculate “loss in value” of incomplete construction? Options? o Option 1: GR = “cover-type” measure – “cost of repair” or “ cost of performance” o Option 2: Exception = “diminution in value” Peevyhouse v. Garland Coal & Mining Co. [pg. 315] Coal miners didn’t fix the land Garland wins proper compensatory damages = reduced value of property, not cost of restoration o GR re loss in value damages in construction services Ks: damages = “reasonable cost of performance of work” 1

Transcript of Contracts II Outline- Spring 2010

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Contracts II—Spring 2010

The Compensation Principle

A. Compensation vs. PunishmentB. Expectation Remedies

1. Specific Performance2. Compensatory Damages

General, Incidental, and Consequential DamagesRefresher: “Expectation” RemediesUCC: Ks for sale of goodsCL: Non-Sale of Goods Ks

RST § 347 Alternative “Loss in Value” Damage Measure (Construction Ks)

Limitations on Damages

RST § 347 Measure of Damages in GeneralSubject to the limitations stated in §§ 350-353, the injured party has a right to damages based on his expectation interest as measured by:(a) The loss in the value to him of the other party’s performance caused by its failure or

deficiency, plus(b) Any other loss, including incidental or consequential loss, caused by the breach, less(c) Any cost or other loss that he has avoided by not having to perform. CL (services K) formula: (loss in value) + incidentals/consequentials – expenses/costs saved Construction Service Ks: Calculate “loss in value” of incomplete construction? Options?

o Option 1: GR = “cover-type” measure – “cost of repair” or “ cost of performance”o Option 2: Exception = “diminution in value”

Peevyhouse v. Garland Coal & Mining Co. [pg. 315] Coal miners didn’t fix the land Garland wins proper compensatory damages = reduced value of property, not cost of

restorationo GR re loss in value damages in construction services Ks: damages = “reasonable cost

of performance of work” “Cost of performance” (“cost of repair”) rule cover-type measure

o Diminution in Value Exception to GR: If “economic benefit [from] full performance of work grossly disproportionate to cost of performance,” then damages are diminution in value resulting to premises b/c of non-perf

Similar to liquidated damages provisions (enforceable only if proportionate to value of breach)

RST § 348 Alternatives to Loss in Value of Performance(1) If a breach delays the use of property and the loss in value to the injured party isn’t proved

w/reasonable certainty, he may recover damages based on the rental value of the property or on interest on the value of the property.

(2) If a breach results in defective or unfinished construction and the loss in value to the injured party isn’t proved w/sufficient certainty, he may recover damages based on:

a. The diminution in the mkt price of the property caused by the breach, or [diminished-value rule]

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b. The reasonable cost of completing performance or of remedying the defects if that cost is not clearly disproportionate to the probable loss in value to him. [Cost-of-repair rule]

Peevyhouse $29K cost of perf/repair clearly disproportionate to $300 diminished value

Limitations on Damages [1] Avoidability of Loss and Mitigation

Parker v. Twentieth Century Fox Film Corp. [pg. 309] Big Country and Bloomer Girl not the same movie, unavoidable/recoverable loss; P wins despite refusal to accept other offer Rules re: duty to avoid/mitigate loss:

o As to “comparable, or substantially similar” opportunity to that lost via breach: (1) Duty to use “reasonable efforts” to seek it; AND (2) If find it, duty to accept it Translation: Loss avoidable & unrecoverable (i.e. duty to mitigate not met) if

EITHER: Not reasonably seek “comparable” or “substantially similar”

opportunity; OR Reject any such opportunity

o As to “different or inferior kind” opportunity to that lost via breach: (1) No duty to use “reasonable efforts” to seek it; AND (2) If find it, no duty to accept it Translation: Loss unavoidable and recoverable (i.e., duty to mitigate met) if

BOTH Reasonably seek “comparable” or “sub similar” ops; AND Merely reject “different or inferior kind” ops

RST § 350 Avoidability as a Limitation on Damages(1) Except as stated in Subsection (2), damages are not recoverable for loss that the injured party

could have avoided without undue risk, burden or humiliation.(2) The injured party is not precluded from recovery by the rule stated in Subsection (1) to the

extent that he has made reasonable but unsuccessful efforts to avoid loss. Parker lost $750K – unavoidable & recoverable, b/c met duty to use reasonable efforts to

find comparable role + no duty to accept “different or inferior in kind” role

Limitations on Damages [2] Reasonable Certainty of Loss (Non-Spec. Loss)

Locke v. United States [pg. 325] Typewriter repair requirements K; Recoverable –Locke’s lost profits reasonably “certain” + not “too speculative” Rules re reasonably certain loss:

o Certainty is sufficient if “make fair and reasonable approximation of damages” Reasonable basis of computation afforded + fairly measurable by calculable

odds and evidence bearing . . . on probabilitieso 100 % certainty not required: Uncertainty re exact amount not preclude recovery if

reasonable probability of damage clearly established Formula for reasonable basis of computation of lost profits

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1. Compute lost revenue = (i) take all San Diego repair jobs over 5 mos., (ii) give Locke proportionate share (25% presumption), + (iii) multiply share by per job price

2. Deduct projected expenses

Kenford Co., Inc. v. County of Erie [pg 328] Dome plans aborted; Unrecoverable – DSI’s lost profits not proven w/reasonable certainty Loss must be capable of proof w/reasonable certainty + not be merely speculative, possible

or imaginaryo New businesses easily show “reasonably certain” loss?

No reasonable basis of experience – tough to est. lost profits w/ . . . reasonable certainty

o Entertainment – easily show “reasonably certain” loss? Inherent uncertainties in predicting profits – involve whim of general public +

fickle nature of popular support – “fickle” factors

RST § 352 Uncertainty as a Limitation on Damages Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty. Compare Locke (lost profits for typewriter business proven w/reasonable certainty) with

Kenford Co. (lost profits for new stadium mgmt. business too speculative)

Limitations on Damages Forseeability of Loss

Hadley v. Baxendale [pg. 332] 1850’s late shaft FedEx; Unrecoverable – Hadley’s lost profits not foreseeable/contemplated by parties at time of K Rules re forseeability of loss:

o Recover loss if foreseeable at time of K – reasonably . . . in contemplation of both parties, at time they made K

o When “foreseeable” (or w/n “reasonable contemplation”):1. Damages that arise naturally (in “usual course of things”) from breach

No specific knowledge/communication needed2. Non-natural (unusual) special circumstances or damages . . . communicated

by Ps to Ds and thus known to both parties Specific knowledge/communication required

RST § 351 Unforeseeability and Related Limitations on Damages(1) Damages are not recoverable for loss that the party in breach did not have reason to foresee

as a probable result of the breach when the contract was made. [Hadley](2) Loss may be foreseeable as a probable result of a breach because it follows from the breach

(a) In the ordinary course of events, or(b) As a result of special circumstances, beyond the ordinary course of events, that the

party in breach had reason to know. Hadley—lost profits from shaft’s non-delivery not foreseeable under (a) or (b)

(Revisited) U.C.C. § 2-715(2) Buyer’s Incidental and Consequential Damages(1) Incidental damages . . .

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(2) Consequential Damages resulting from the seller’s breach includea. Any loss [1] resulting from general OR particular requirements and needs of which

the seller at the time of contracting had reason to know [foreseeable] and [2] which could not reasonably be prevented by cover or otherwise [unavoidable]; and

Most common example of consequentials = lost profits

RST § 353 Recovery for Loss Due to Emotional DisturbanceRecovery for emotional disturbance will be excluded unless [1] the breach also caused bodily harm or [2] the K or the breach is of such a kind that serious emotional disturbance was a particularly likely result. Ex. Of [1]: Sullivan v. O’Connor allowing recovery for pain, suffering, and mental distress

from doctor’s breach of rhinoplasty K that promised certain nose Ex. Of [2]: Ks transporting, burying, or disposing of dead people

Compensation PrincipleA. Compensation or punishment?B. Expectation RemediesC. Reliance Remedies D. Restitution

(Revisited) § 344 Purposes of RemediesJudicial remedies under the rules stated in this Restatement serve to protect one or more of the following interests of a promisee:(a) Expectation Interest: His interest in having the benefit of his bargain by being put in as good

a position as he would have been in had the contract been performed, Most popular form; aka “benefit of bargain” + includes lost profits

(b) Reliance Interest: His interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made, or

Examples include incurred expenses or foregone opportunities(c) Restitution Interest: His interest in having restored to him any benefit that he has conferred

on the other party. Examples include fees paid for performed work

(Revisited) § 345 Judicial Remedies AvailableThe judicial remedies available for the protection of the interests stated in § 344 include a judgment or order(a) Awarding a sum of money due under the contract or as damages, [Expectation/reliance] (b) Requiring specific performance of a contract or enjoining its non-performance, [Expectation](c) Requiring restoration of a specific thing to prevent unjust enrichment, [Restitution](d) Awarding a sum of money to prevent unjust enrichment [Restitution]

Reliance Remedies: Primer Purpose: Put a party in pre-K position as if K never made (i.e. by compensating for losses

sustained) Recoverable reliance damages

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(1) Expenses/expenditures made in preparation for performance or in performance Reliance on promise via action (RST § 349) Goodman (reimbursement for expenses “in preparation to do business” per franchise

promise)(2) Lost profits from lost opportunity(ies)

Reliance on promise via forbearance Court’s discretion to award (RST § 90):

o Compare Goodman (true measure of reliance damages = mere expenditures made in reliance upon assurance) w/Walters (also allowing loss of profits resulting from reliance on promise)

Reliance damaged ever better than expectation damages?(1) When no claim for lost profits (or no profits contemplated)

Security Stove (reimbursing travel/exhibit-related expenses incurred via reliance on promise to timely deliver furnace to exhibit – no profits contemplated)

(2) When claim for lost profits not “reasonably certain” Kenford/County of Erie dome case?

Restitution: Primer Purpose: Put party in pre-K position (i.e. by compensating for conferred benefit that led to

unjust enrichment) (RST §§ 345(c), 370, 373(1)) Recoverable restitution damages:

o Context: Sparks v. Gustafsono RST § 371:

o [1] Fair Mkt value of beneficial services (i.e. reasonable value to other party of what he received in terms of what it would have cost him to obtain it from person in claimant’s position; OR

o [2] Increase in property value (i.e. extent to which other party’s property has been increased in value or his other interests advanced)

Restitution damages ever better than expectation damages? If (a) would lose $ on K + make no profit (i.e. zero expectation loss) but (b) provided

services conferred benefit on other partyo Algernon Blair (subcontractor still recover value of services he gave [as

restitution/quantum meruit remedy] . . . irrespective of whether he would have lost $ on K)

Restitution damages ever greater than agreed, certain K price? No restitution if (1) fully perform services + (2) K specifies payment of definite sum

of money for services (RST § 373(2))o Oliver (refusing $5K restitution (quantum meruit) for attorney’s legal

services, where fully performed services + K set $750 sum

The Law of THE ContractA. K Terms

1. Identifying Express K Terms (Parol or Extrinsic Evidence)

Parol Agreement (PA) = Prior oral or written agreements (or tentative agreements) Admissibility of Pas SEE FLOWCHART (sums up the RSTs)

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RST § 209 Integrated Agreements(1) An integrated agreement is a [1] writing or writings constituting a [2] final expression of 1 or

more terms of an agreements(2) Whether there is an integrated agreement is to be determined by the ct as a question

preliminary to determination of a question of interpretation or to application of the parol evidence rule.

(3) Where the parties reduce an agreement to writing which in view of its completeness and specificity reasonably appears to be a complete agreement, it is taken [presumed] to be an integrated agreement unless it is established by other evidence that the writing didn’t constitute a final expression.

RST § 210 Completely and Partially Integrated Agreements(1) A completely integrated agreement is an [1] integrated agreement adopted by the parties as

[2] a complete and exclusive statement of the terms of the agreement.(2) A partially integrated agreement is an integrated agreement other than a completely

integrated agreement.(3) Whether an agreement is completely or partially integrated is to be determined by the ct as a

question of preliminary to determination of a question of interpretation or to application of the parol evidence rule.

Cmt. b. [Complete vs. partial integration] may be proved by any relevant evidence. . . . A writing cannot of itself prove its own completeness, and wide latitude must be allowed for inquiry into circumstances bearing on intention of the parties.

o Flowchart: Subjective intent of parties approach

RST § 213 Effect of Integrated Agreement on Prior Agreements – PER(1) A binding integrated agreement [either complete or partial] discharges prior agreements to

the extent that it is inconsistent w/them “Lenient” PER; ½ “Harsh” PER

(2) A binding completely integrated agreement discharges prior agreements to the extent that they are w/in its scope. Other ½ “Harsh” PER Cmt. a. [PER] “not rule of evidence but rule of substantive law. Nor is it rule of

interpretation; it defines subj matter of interpretation

RST § 214 Evidence of Prior and Contemporaneous AgreementsAgreements and negotiations prior to or contemporaneous w/the adoption of a writing [PAs] are admissible in evidence to establish:(a) That the writing is or isn’t an integrated agreement;(b) That the integrated agreement, if any, is completely or partially integrated;(c) The meaning of the writing, whether or not integrated;(d) Illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause; Flow Chart: PA allowed for purposes other than to est new K terms

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RST § 215 Contradiction of Integrated TermsExcept as stated in the preceding section, where there is a binding agreement, either completely or partially integrated, evidence of prior or contemporaneous agreements or negotiations is not admissible in evidence to contradict a term of the writing. Cmt. a: States evidentiary consequence of § 213 . . . Evidence of prior agreement is therefore

irrelevant to rights of parties when offered to contradict term of binding integrated agreement

RST § 216 Consistent Additional Terms(1) Evidence of a consistent additional term is admissible to supplement an integrated agreement

unless he ct finds that the agreement was completely integrated. Also states “evidentiary consequence” of RST § 213

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

U.C.C. § 2-202 Final Written Expression: Parol or Extrinsic EvidenceTerms w/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 w/respect to such terms [i.e. integrated agreement] as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement [i.e. PA], but may be explained or supplemented:(1) By course of dealing or UT (§ 1-205) or COP (§ 2-208); and(2) By evidence of consistent additional terms unless the ct finds the writing to have been

intended also as a complete and exclusive statement to the terms of the agreement [i.e. completely integrated agreement]

Gianni v. R. Russel & Co., Inc. [pg. 360] Objective 4 Corners Approach to Integration Sell Coke, not tobacco; PER discharged any PA re Coke exclusivity right; PA inoperative Rules re determining “completely integrated”

o Look @ “4 corners” of writing – “conclusively presumed” completely integrated if “appears to be K complete w/n itself” + “w/o any uncertainty as to object or extent of engagement”

o Objective “4 corners of K” approach = minority rule “Harsh” PER—PA w/n scope (field) of written lease?

o Rules re determining if w/n scope or field Is PA “naturally + normally” included in completely integrated K (“relate

to same subject matter” mentioned, covered, or dealt with in completely integrated K)? [Yes, PA = inoperative and vice versa]

o Applied: “natural thing to have included [Pas] promise of exclusive rights” in exchange for lease’s tobacco prohibition = interrelated subjects (K consideration)

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Masterson v. Sine [pg. 363] Subj, Intention of Parties Approach, Collateral Agreement BR trustee wants to use repurchase option; PER not discharge PA re non-assignability – PA operative Rules re determining if completely integrated:

o Crucial issue = “whether parties intended writing to serve as exclusive embodiment of agreement”

o Subjective intent of parties approach = majority rule Court: Objective approach = determined solely from face of instrument + if

writing appears to be complete agreemento Relevant factors in this approach:

Clause in K stating it contains complete agreement (i.e. merger or integration clause)

Relationship b/n parties – close or arms length? Nature of transaction – “naturally” or typically involve agreements omitted

from written K? “Lenient “PER” – PA inconsistent w/(contradict) written deed

o Rules re inconsistent or contradict: Must directly contradict written K If K silent on issue/term, PA on that issue/term cannot contradict K

Interform Co. v. Mitchell [pg. 369] Recap comparison of approaches to integration Rent or buy concrete molding forms?; Recap: “Fundamental difference” re “manner in which integration . . . should be approached” 2 approaches to determining complete integration

o Objective “4 corners” approach: Writing = focus of attention – completely integrated if “appears complete”

o Subjective “intent of parties” approach: Completely integrated if parties intend writing as completely integrated

(exclusive + complete) If completely integrated writing, then . . .

o Writing supersedes all previous undertakings (Pas) that ordinarily + naturally fall w/n writing (i.e. scope or field)

Lee v. Joseph E. Seagram & Sons, Inc. [pg. 374] More subj approach to integration; iron-clad merger clause Failure to locate liquor distributor; PER not discharge PA re relocation PA operative Key issue = if parties intended written agreement to be complete + accurate integration of all

mutual promises of parties; Relevant factors: Same as in Masterson

Nelson v. Elway [pg. 379] More Objective Approach to Integration; Iron-Clad Merger Clause PER discharge PA re $50/car royalty PA inoperative If parties embodied terms of transaction in detailed written document, then it’s improper to

rewrite transaction by looking to evidence outside 4 corners of K to determine intent of parties

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The Law of THE KA. K Terms

1. Identifying Express K Terms2. Interpreting K Terms

Interpreting K Terms Term “Identification” vs. “Interpretation”

o Different focus: Id’ing Express K terms = ascertains express K terms (from PAs and related

evidence, if permitted) Interpreting K terms = pinpoints + resolves Meaning of identified, express K

terms Elway:

Problem w/K term ID: PA (re $50/each vehicle sold royalty) est. operative express term of K?

Problem w/K term interpretation: Meaning of “each new vehicle sold” term? (New? New & Used? Leased? Fleet?)

o Similar Themes: ID’ing Express K Terms

Objective 4 corners approach: Literal approach Subjective intent of parties approach: Contextual Approach

Interpreting K Terms Objective Plain meaning approach: Literal approach Subjective intent of parties approach: Contextual Approach

Typical Issues re K term interpretationo Clear vs. vague terms:

No distinct or defined boundaries (Ex: T-shirts of “average quality”)o Unambiguous vs. Ambiguous Terms:

2 + distinct or possible meanings (Ex: “blue” T-shirts “blue”?) Parol or Contextual Evidence?

o Examples – possibly relevant parol or contextual evidence to show meaning/interpretation

1. PA Why not subject to PER? Offered to est. K terms? See PER flowchart

2. Negotiations3. Conduct b/n parties on current K

“Course of Performance” (COP)4. Conduct b/n parties of on old Ks

“Course of Dealing” (COD)5. Conduct b/n others in industry on their Ks

“Trade Usage” or “Usage of Trade” (TU/UT)

Pacific Gas and Electric Co. v. G.W. Thomas Drayage & Rigging Co. [pg. 386] Indemnity Clause in Service K Rules re Subj Intent of Parties approach:

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o Even if K term “plain and unambiguous” (i.e., plain meaning), allow parol (extrinsic) evidence to prove intended meaning to which K language is reasonably susceptible (“fairly susceptible’)

Rational interpretation of K term consider all credible evidence . . . to prove intention of parties

Contextual: context + surrounding circumstances shows intention of parties

o PE create ambiguity even in words that don’t appear ambiguous

W.W.W. Associates, Inc. v. Giancontieri [pg. 389] cancellation provision in land K per obj. plain meaning rule, PE not allowed to show other meaning Rules re objective plain meaning approach:

o If K term clear + unambiguous upon its face, plainly manifest[ed] meaning governs Literal PM of clear unambiguous K terms binding not consider context +

surrounding circumstances to show alternate intended meaningo PE not admissible to create ambiguity in unambiguous term

Brinderson-Newberg Joint Venture v. Pacific Erectors, Inc. [pg. 393] Subcontractor duties to Erect Complete Despite subj approach, PE + additional K interpretations rules not show meaning to which “erect complete” susceptible NEW *** Rules of K Interpretation

1. Interpret K “to give meaning to each of its provisions” + not render any “part . . . superfluous”o Why? Favor interpretation that gives meaning to each parto Applied here: D’s meaning – render “useless” + “meaningless” (i) erect complete

term + (ii) detailed description of the work2. If conflicting K terms, specific K provisions “govern” + “qualify meaning of” more

general provisionso Applied: more specific descriptions requiring D to erect complete must control

3. If conflicting K terms, individually written provisions preferred over printed, boilerplate provisionso Applied: erect complete + detailed description lang = spec written additions to std

form

§ 200 Interpretation of Promise or AgreementInterpretation of a promise or agreement or a term thereof is the ascertainment of its meaning.

(Revisited) § 201 Whose Meaning Prevails(a) Where the parties have attached the same meaning to a promise or agreement or a term

thereof, it is interpreted in accordance with that meaning. [Subjective intents and meanings converge]

(b) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made

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(a) That party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or

(b) That party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party. [Lucy v. Zehmer; Embry v. McKittrick]

[Subjective intents and meanings “diverge”; objective intent and meaning converges] **When does party have “reason to know” another’s meaning?

(c) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent. [Oswald v. Allen] *[Subjective intents and meanings diverge; no converging objective intent and meanings]

§ 202 Rules in Aid of Interpretation(1) Words and other conduct are interpreted in the light of all the circumstances, and if the

principal purpose of the parties is ascertainable it is given great weight. [Subjective “intent of parties” approach = Majority]

(2) A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together. [Like Brinderson—Rule #1]

(3) Unless a different intention is manifested,(a) Where language has a generally prevailing meaning, it is interpreted in accordance

with that meaning;(b) Technical terms and words of art are given their technical meaning when used in a

transaction within their technical field.[Subjective “intent of parties”]

(4) Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance [COP] accepted or acquiesced in without objection is given great weight in the interpretation of the agreement.

(5) Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant course of performance, course of dealing [COD], or usage of trade [UT or TU]

§ 203 Standards of Preference in InterpretationIn the interpretation of a promise or agreement or a term thereof, the following standards of preference are generally applicable:(a) An interpretation which gives a reasonable, lawful, and effective meaning to all the terms is

preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect; [Brinderson—Rule #1]

(b) [#1] Express terms are given greater weight than course of performance, course of dealing, and usage of trade, [#2] course of performance is given greater weight than [#3] course of dealing or usage of trade, and course of dealing is given greater weight than [#4] usage of trade;

(c) Specific terms and exact terms are given greater weight than general language; [Brinderson—Rule #2]

(d) Separately negotiated or added terms are given greater weight than standardized terms or other terms not separately negotiated. [Brinderson—Rule #3]

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§ 206 Interpretation Against the DraftsmanIn choosing among the reasonable meanings of a promise or agreement or a term thereof, that meaning is generally preferred which operates against the party who supplies the words or from whom a writing otherwise proceeds.

U.C.C. § 1-205 Course of Dealing and Usage of Trade(1) A COD is a sequence of previous conduct b/n the parties to a particular transaction which is

fairly to be regarded as est a common basis of understanding for interpreting their expressions & other conduct

(2) A UT is any [1] practice or method of dealing [2] having such regularity of observance [3] in a place, vocation, or trade as to justify an expectation that it will be observed WRT the transaction in question. The existence and scope of such a usage are to be proved as facts. If it is est that such a usage is embodied in a written trade code or similar writing, the interpretation of the writing is for the ct

(3) A COD b/n parties and any UT in the vocation or trade in which they are engaged or of which they are or should be aware give particular meaning to and supplement or qualify terms of an agreement

(4) The express terms of an agreement and an applicable COD or UT shall be construed wherever reasonable as consistent w/each other; but when such construction is unreasonable [1] express terms control both COD and UT and [2] COD controls UT

Same as RST § 202(5), 203(b), & UCC § 2-208(2)

U.C.C. § 2-208 Course of Performance or Practical Construction(1) Where the K for sale involves repeated occasions for performance by either party

w/knowledge of the nature of the perf and opportunity for objection to it by the other, any COP accepted or acquiesced in w/o objection shall be relevant to determine the meaning of the agreement.

Same as RST § 202(4); Cmt. 2: COP always relevant to determine meaning of the agreement; Cmt. 4: Single occasion of conduct not fall w/n COP

(2) The express terms of the agreement and any such COP, as well as nay COD and UT, shall be construed whenever reasonable as consistent w/each other; but when such construction is unreasonable, [1] express terms shall control COP and [2] COP shall control both COD and UT (§ 1-205)

Same as RST § 202(5), 203(b), & UCC § 1-205(4)

Hierarchy:1. Parties’ Meaning2. Express Terms3. COP4. COD5. TU

Frigaliment Importing Co. v. B.N.S. International Sales Corp. [pg. 399] Chicken problem Broad meaning prevails

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Nanakuli Paving and Rock Co. v. Shell Oil Co., Inc. [pg. 404] HI asphalt mafia Per UCC’s subj intent approach, PE shows alternate meaning w/which posted price term reasonably consistent + reasonably reconciled

The Law of THE KA. K terms

1. Id’ing express K terms2. Interpreting K terms3. IMPLICATION OF K TERMS

a. IMPLIED, REASONABLE TERMS OMITTED FROM K b. IMPLIED DUTIES OF GF & FD—PERFORMING

DISCRETIONARY Ks

Spaulding v. Morse [pg. 418] Divorce agreement to pay for education Omitted term supplied though implication due to main purpose + main object of agreement Term interpretation vs. implication not always a clear line

o Implication = establish implied terms when omittedo Interpretation = interpret terms, express or implied

2 signs of IMPLICATION case:o No existing K term to interpret omitted term (i.e., “what if son maintained by TP”)o No interpretation evidence (i.e., “meager” extrinsic/contextual resources

Rules re Implication:o Omitted term cannot be supplied by conjectureo Defect of omission may be supplied by implication if Main purpose + main object

of K shows particular result fixedly desired (albeit not expressed by formal words)

Wood v. Lucy, Lady Duff-Gordon Exclusivity K for clothes sale Omitted promise (term) to use reasonable efforts = fairly to be implied; valid consideration exists Rules re Implication: Promise (term) fairly to be implied if:

o K instinct w/obligation, imperfectly expressed despite missing actual termo Necessary to give K business efficacy, as both parties must have intended

Judge Supplied Terms Implication (Morse & Lady Lucy) Reasonable efforts GF + FD Best efforts Substantive/others

RST 204 Supplying an Omitted Essential TermWhen the parties to a bargain sufficiently defined to be a K have not agreed w/respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court. Morse – reasonable + fair to imply non-payment term b/c “main purpose” of Trust

Agreement

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Lady Lucy – reasonable + fair to imply reasonable efforts promise to give “business efficacy” to exclusivity K

Cmt c – Interpretation & Omission. “The supplying of omitted term is not w/n definition of interpretation”

Cmt d – “Factors in determining what term is reasonable in circumstances may include: (i) Purposive reading of K language + (ii) the term parties would have agreed to if question had been brought to attention

o Morse – “main purpose” + “fixedly desired”o Lady Lucy – “business efficacy, as both parties must have intended”

“The court should supply term which comports w/community standards of fairness and policy rather than analyze hypothetical model of bargaining process.”

(IMPLIED DUTIES OF GF & FD—PERFORMING DISCRETIONARY Ks)

Implied Duties of GF and FD Sources: CL and U.C.C. Typical Scenario: “Discretionary” K term or obligation

o Allow flexibility or discretion in performing per Ko Examples?

“Best efforts” to promote beer sales (Bloor) Cancel K if “conclude, in my business judgment, cost of XYZ is economically

impracticable or prohibitive’ (Greer Prop.) “Order as many ABCs as my business requires” (Requirements K) (Eastern

Airlines; Orange & Rockland) “Order as many ABCs as your business produces” (Output K) “Refuse shipment of ABCs if quality not to my satisfaction” (Satisfaction K)

Typical issue in “Discretionary” K lawsuit?o Exercise flexibility or discretion for “proper” vs. “improper” reason

“Proper” = “K-permitted” reasons per GF & FD “Improper” = reason “outside K” per GF & FD KEY: GF & FD act as “restraints” on flexibility or discretion

Example in requirements K situation? **Assume no “discretionary” term – GF and FD apply?**

o YES – implied duties apply to every K obligation, even if no discretionary aspect

RST § 205 Duty of GF & FDEvery K imposes upon each party a duty of GF & FD in its performance and its enforcement. **Includes, but not limited to, perf of discretionary terms**

U.C.C. § 1-203 Obligation of GFEvery K or duty w/n this Act imposes an obligation of GF in its perf or enforcement. Cmt:

o Required = “In commercial transactions GF is required in performance and enforcement of all agreements or duties

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o No separate Cause of Action = Section not support independent cause of action for failure to perform or enforce in GF Means failure to perform/enforce, in GF, specific duty or obligation under K, constitutes breach of the that K

Translation: In order to claim a breach of GF & FD, it must be linked to a specific duty/obligation under the K; there’s no independent cause of action for acting unfairly. (*Concrete obligation may be implied)

Other U.C.C. Sections of GF § 1-201(19): “GF” means honesty in fact in the conduct or transaction concerned.

o Cmt 19. Minimum definition = GF means, “at least what is here stated. In certain Articles additional reqs are made applicable”

o § 2-103(1)(b): “GF” in case of merchant means [1] honesty in fact and [2] observance of reasonable commercial standards of FD in trade

Bloor v. Falstaff Brewing Corp [pg. 421] GF in maintaining beer sales D not perform promotion & sales K obligations in GF & FD Rules re: GF & FD duties:

o Even w/o best efforts clause, Falstaff “bound to make GF effort to see substantial sales of Ball products made”

Greer Properties, Inc. v. LaSalle National Bank [pg. 429] Contamination land K Remanded re if motive behind termination w/n limits placed on discretionary cancellation term via GF & FD Rules re implied GF & FD duties:

o Every K implies GF & FD b/n parties to ito If discretion exercised in bad faith, breach of K occurs

Re effect of implied duties on discretionary term: o These implied obligations . . . act as limit on discretion possessed by parties [so that

party] must exercise discretion reasonably + may not do so arbitrarily Court writes in a limit that the seller may not terminate to accept a better offer

(Revisited) U.C.C. § 2-306 Output, Requirements, and Exclusive Dealings(1) A term which measures [1] the quantity by the output of the seller [output K] or [2] the reqs

of the buyer [reqs K] means such actual output or reqs as may occur in GF, except that no quantity unreasonably disproportionate to [i] any stated estimate or [ii] in the absence of a stated estimate to any normal or otherwise comparable prior output or reqs may be tendered or demanded.

Reqs K and Output K = “discretionary K” Cmt. 2: GF req – sets Q to “approx. reasonably foreseeable figure” & not “too

indefinite”(2) A lawful agreement by either the seller or the buyer for exclusive dealing [*exclusivity K] in

the kind of goods concerned imposes unless otherwise agreed an obligation [1] by the seller to use best efforts to supply the goods and [2] by the buyer to use best efforts to promote their sale

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Cmt 2: parties to exclusive dealing K impliedly, even when not expressly, bound to use reasonable effort + due diligence in expansion of mkt & promotion of product

Eastern Air Lines, Inc. v. Gulf Oil Corp. [pg. 434] Fuel Freighting consistent w/GF & est commercial practices Rules re requirements K:

o Per § 2-306, binding + enforceable reqs K only if: Discretion re reqs exercised consistent w/GF + est. commercial practices (implied duty of GF)

o Per § 2-103(1)(b), GF for merchants = 1. Honesty in fact2. Observance of reasonable commercial standards of FD in trade

Orange and Rockland Utilities, Inc. v. Amerada Hess Corp. [pg. 439] bad req of oil estimate P’s oil increases per discretionary reqs term not incurred in GF Rules re reqs K: Well-settled” that “buyer in rising market cannot use a fixed price in reqs K

for speculation” (Speculation = improper outside K reason per GF & FD) Applied: reason for upping fuel reqs (+ 63%)?

o O&R – suddenly + dramatically propel itself into position of large seller of power to other utilities + take advantage of mkt conditions @ seller’s expense

The Law of THE KA. K terms

1. Id’ing express K terms2. Interpreting K terms3. Implication of K terms4. PROMISES AND CONDITIONS PRECEDENT

Promises and Conditions Precedent Intro: K terms may be “promises” or “conditions” (or “promissory conditions”)

1. Promise term: Creates K obligation – breach promise = breach K Ex: “I’ll mow your lawn on Sat. in exchange for $20” If not mow on Sat,

breach? Yes unconditional K obligation; mow obligation due Indicative lang: promise, covenant, agree, undertake, will

2. Condn or condn precedent term Not create K obligation – specifies event to determine if + when party’s

obligation to perform promise becomes due Ex: “If I am in town, I will mow your lawn on Sat. for payment of $20”

o If out of town + not mow, breach? No conditional K obligation + condn not satisfied; mow obligation not due

o If in town + not mow, breach? Yes: conditional K obligation + condn not satisfied; mow obligation due

Indicative lang: if, on condn that, contingent upon, provided that, subject to

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GR re: Conditions

Jungmann & Co., Inc. v. Atterbury Brothers, Inc. [pg. 448] Shipping casein w/out notice Failure to satisfy express notification via cable condn GR re Conditions:

o Party not recover “w/o proof it has performed all condns precedent req of it” Translation: express condn must be performed fully + exactly before party

can recover under K

RST § 224 Condition DefinedA condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a K is due.

Jungmann notice via cable = condition to Atterbury’s promise

RST § 225 Effects of the Non-Occurrence of a Condition(1) Performance of a duty subject to a condn cannot become due unless the condn occurs or its

non-occurrence is excused Jungmann GR condn of notice via cable not occur; Atterbury obligation to pay not

“due”(2) Unless it has been excused, the non-occurrence of a condn discharges the duty when the

condn can no longer occur. Example? Promise to mow lawn if “in town this weekend”

(3) Non-occurrence of a condn is not a breach by a party unless he is under a duty that the condn occur Jungmann did Jungmann (seller) breach?

RST § 226 How an Event May be made a ConditionAn event may be made a condn either [1] by the agreement of the parties [express term] or [2] by a term supplied by the court [Implied term].

Spaulding Change wording to “provided that, kid not being taken care of by the Army” Cmt. a “Words as ‘on condn that,’ ‘provided that’ + ‘if’ often used . . .”

Exceptions to GR re Conditions Precedent

Peacock Construction Co., Inc. v. Modern Air Conditioning, Inc. [pg. 450] AC installation Absolute Promise, lang not to be interpreted as a condn Exception to GR re condns: If (1) ambiguity re condn vs. promise, then (2) favor

interpretation as non-condn to avoid forfeiture by party, unless (3) that party bears risk of forfeiture (w/n its control to avoid forfeiture)

RST § 227 Standards of Preference W/Regard to Conditions(1) In resolving [1] doubts as to whether an event is made a condn of an obligor’s duty, and as to

the nature of such an event, [2] an interpretation is preferred that will reduce the obligee’s risk of forfeiture, unless [3] the event is w/n the obligee’s control or the circumstances indicate that he has assumed the risk.

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Cmt b: If event w/n his control, he will often assumes risk of forfeiture. If not w/n his control, sufficiently unusual for him to assume risk that, in case of doubt, interpretation is preferred under which event is not condn

Peacock interpret pay lang as “non-condn” to avoid risk of payment failure by owner sub not assume risk

Burger King Corp. v. Family Dining, Inc. [pg. 453] Exclusive territory agreement Development rate = condn & BK’s exclusivity promise due Rule: Condition = words in K that raise no duty . . . but modify or limit promisee’s right to

enforce promiseo Translation: promise = K duty vs. condn doesn’t = K duty

GR re conditions: If promisor protects himself by making promise conditional – ordinarily party entitled to have agreement [+ condn] strictly enforced [like Jungmann]

Rules re waiver exception: o Not in opinion: “intentional relinquishment of known right”o Court: waiver = party’s acts + conduct indicate “literal performance will not be

required” – can’t demand exact performance w/o notice + reasonable time Rules re excuse of condition exception:

o Unsatisfied condn “excused” if [1] extreme, [2] forfeiture or penalty if req condn; AND [3] condn not essential part of exchange

“Extreme” forfeiture or penalty – how measure? Disproportionally: compare (1) loss by party A (via forfeiture) if req condn vs. (2) loss by party B if excuse condn

RST § 229 Excuse of a Condition to Avoid ForfeitureTo the extent that [1]-[2] the non-occurrence of a condn would cause disproportionate forfeiture, a ct may excuse the non-occurrence of that condn unless [3] its occurrence was a material part of the agreed exchange. Cmt. b. Forfeiture used to refer to denial of compensation that results when obligee loses

right to agreed exchange after he has relied substantially, as by preparation or performance on expectation of exchange

BK (rest. rate condn excused – extreme forfeiture + not critical or material part of agreement)

Conditions w/n Party’s Control or Discretion—Implied Duties of GF & FD

Conditions w/n Party’s Control or Discretion Examples:

o Tom promises to buy ___ “conditioned upon” or “subject to”: Tom obtaining mortgage loan @ 5% (Fry) Tom’s approval of termite + radon test results (Pannone) Shipped fruit being “satisfactory quality to Tom”

Typical issues in “Discretionary Condn” K lawsuit:o Properly exercise flexibility or discretion per GF & FD to meet condn w/n party’s

control GF & FD = act for “K-permitted” reasons vs. reasons “outside K”

o GF standards:

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Objective – act reasonably (as a reasonable person would) Prefd, except in pure personal satisfaction/judgment Ks

Subjective – act for K-permitted reasons, even if not reasonable

RST § 228 Satisfaction of the Obligor as a ConditionWhen [1] it is a condn of an obligor’s duty that he be satisfied w/respect to the obligee’s performance or w/respect to something else, and [2] it is practicable to determine whether a reasonable person in the position of the obligor would be satisfied, [3] an interpretation is preferred under which the condn occurs if such a reasonable person in the position of the obligor would be satisfied.

Obj. standard preferred but not always “practicable” in pure satisfaction K

Fry v. George Elkins Co. [pg. 463] Bad faith in obtaining home loan? Fry not in GF to refinance loan in question Rules re conditions w/n party’s control

o Implicit in refinancing of loan . . . was obligation . . . to put forth GF effort to obtain such refinancing (translation = implied GF duty for discretionary conditions)

o Not in opinion personal satisfaction/judgment aspect of K apply objective standard of GF

Pannone v. Grandmaison [pg. 465] Radon gas chicken Pannone in GF in rejecting test Rules re condition w/n party’s control:

o Every K imposes duty of GF & FD, if condn w/n control obligated to exercise discretion in reviewing radon gas inspection results in GF & FD

o Translation implied GF duty for discretionary condns Subjective GF standard act for K-permitted reasons even if not reasonable

The Law of THE KA. K termsB. K PERFORMANCE AND BREACH

Intro:The Security Principle The law requires each party to K formation or performance to do its part to respect other

party’s reasonable expectations and relianceo Translation: obligation to not impair other party’s expectation interest in receiving

future performanceo How “impair” expectation interest?

Anticipatory repudiation/breach Pre Performance: Say will breach + not perform (or engage in conduct

rendering unable to perform) Material Breach

Wholly or substantially not perform K when due & required “Constructive Conditions of Exchange” Doctrine

o Hypo: A & B enter into bilateral K:

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B promises to mow lawn + A promises to baby-sit on Fri. If A later tells B “cannot do it” B still have to mow? Express

Conditions?o Doctrine – Bilateral K: Promises = “dependent” upon (i.e., constructive conditions”

for) each other If A anticipatorily repudiates or materially breaches generally, B’s K duties

discharged b/c “constructive condn” not fulfilled Effects of Material Breach of bilateral K

o If breach = “non-material”: Party B can recover $ damages for Party A’s breach of promise

o If breach = “material” (includes anticipatory repudiation): Non-occurrence of constructive condn B also discharged from duty to

perform Act Y

Kingston v. Preston [pg. 473] Silk apprentice collateral Promises dependent Kingston breach discharged Preston from promise to sell business interest Rules re kinds of promises:

o GR = “conditional + dependent” “Performance of one depends on prior performance of another (translation:

promise = constructive condn no duty to perform until “prior condn is performed”)

o Exception = “mutual + independent” No excuse for [party] to allege breach of covenants by other party (translation:

Promise no equal to constructive condn duty to perform even if other party not perform

How determine “dependent” or “independent”o GR esp. for “essence” K promiseso “Sense + meaning of parties” + “order of time” parties intended promises performed

RST § 238 Effect on Other Party’s Duties of a Failure to Offer PerformanceWhere all or part of the performances to be exchanged under an exchange of promises [bilateral K] are due simultaneously, it is a condn of each party’s duties to render such performance that the other party either render or, wit manifested present ability to do so, offer performance of his part of the simultaneous exchange.

Constructive Conditions Doctrine?

Interests of Parties Impaired by Breach-Anticipatory Breach/Repudiation

Hochster v. De La Tour [pg. 475] Trip escort Anticipatory Rep = material breach that discharged Hochster’s promise Rules Re Anticipatory Repudiation

1. Renunciation (anticipatory repudiation) defined: “utterly renouncing K or doing some act which rendered it impossible for party to perform More than passing intention

2. Anticipatory repudiation = (material) breach: After renunciation right to sue for damage suffered from breach

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No universal rule precluding K breach claim until day for doing act has arrive3. Effect of anticipatory rep: After renunciation P absolved from any future perf

Ct: renunciation dispenses w/condn to be perf by other party

RST § 250 When a Statement or an Act is a RepudiationA repudiation is:(a) A [1] statement by the obligor [2] to the obligee [3] 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

(b) A [1] voluntary affirmative act which [2] renders the obligor unable or apparently unable to perform w/out such a breach

Cmt. b. “language must be sufficiently positive to be reasonably interpreted to mean party will not or cannot perform. Mere expression of doubt as to willingness or ability to perform is not enough.

RST § 253 Repudiation as a Breach and Effect on Other’s Duties(1) Where an obligor repudiates a duty before he has committed a breach by non-

performance and before he has received all of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach

(2) Where performances are to be exchanged under an exchange of promises [bilateral K], one party's repudiation of a duty to render performance discharges the other party's remaining duties to render performance.

Cmt. a. “such repudiation . . . called “anticipatory breach” meaning breach by anticipatory repudiation . . .

“Constructive Conditions doctrine? Hochster (De La Tour’s anticipatory repudiation = breach of K claim for $ damages +

discharge Hochster’s duties)

U.C.C. § 2-610 Anticipatory RepudiationWhen either party repudiates the K WRT a perf not yet due, the loss of which will substantially impair the value of the K to the other, the aggrieved party may(a) For commercially reasonable time await perf by the repudiating party, or (b) Resort to any remedy for breach, even though he has notified the repudiating party that he

would await the latter’s perf and has urged retraction; AND(c) In either case suspend his own perf or proceed IAW the provisions of this article on the

seller’s right to ID goods to the K notwithstanding breach or to salvage unfinished goods Translation: anticipatory rep = breach of K claim for $ damages + discharge other party’s

duties (suspend perf)

United States v. Seacoast Gas Co. [pg. 478] Oil K rep D’s retraction of rep ineffective and untimely Rules re timely retraction:

o All that is required to close door to repentance [render retraction untimely] is definite action indicating that anticipatory breach has been accepted as final

o Examples of definite action: Actual change in position in reliance

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Filing of suit Firm declaration that repudiation will be accepted

RST § 256 Nullification of Repudiation or Basis for Repudiation(1) The effect of a statement as constituting a repudiation under § 250 or the basis for a

repudiation under § 251 is nullified by a retraction of the statement if notification of the retraction comes to the attention of the injured party before he [a] materially changes his position in reliance on the repudiation or [b] indicates to the other party that he considers the repudiation to be final. Seacoast Gas?

(2) The effect of events other than a statement as constituting a repudiation under § 250 or the basis for a repudiation under § 251 is nullified if, to the knowledge of the injured party, those events have ceased to exist before he [a] materially changes his position in reliance on the repudiation or [b] indicates to the other party that he considers the repudiation to be final.

U.C.C. § 2-611 Retraction of Anticipatory Repudiation(1) Until the repudiating party’s next performance is due he can retract his repudiation unless the

aggrieved party has since the repudiation [a] cancelled or [b] materially changed his position or [c] otherwise indicated that he considers the repudiation final.

Similar to RST § 256(2) Ignore(3) Retraction reinstates the repudiating party’s rights under the K w/due excuse and allowance

to the aggrieved party for any delay occasioned by the repudiation.

§ 251 When a Failure to Give Assurance May Be Treated as a Repudiation(1) Where [1] reasonable grounds arise to believe that the obligor will commit a breach by non-

performance that would of itself give the obligee a claim for damages for total breach under § 243, the obligee [2a] may demand adequate assurance of due performance [2b] and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance. Revisited: p. 478 probs. 3b + d

(2) The obligee may treat as a repudiation the obligor's failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances of the particular case.

U.C.C. § 2-609 Right to Adequate Assurance(1) A K for sale imposes an obligation on each party that the other’s expectation of receiving due

performance will not be impaired. When [1] reasonable grounds for insecurity arise WRT the performance of either party, the other [#2(a)] may in writing demand adequate assurance of due perf and [2(b)] until he receives such assurance may if commercially reasonable suspend any perf for which he has not already received the agreed sum

(2) B/n merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards.

(3) Ignore

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(4) After receipt of a justified demand, failure to provide w/n a reasonable time (not exceeding 30 days) such assurance of due perf as is adequate under the circumstances of the particular case, is a repudiation of the K

Similar to RST 251(2)

Pittsburgh-Des Moines Steel Co. v. Brookhaven Manor Water Co. [pg. 481] Steel water tank PDM not have reasonable grounds for insecurity and demanded more than adequate assurance Rules re § 2-609’s elements

o #1 If reasonable grounds for insecurity arise w/respect to performance of either party

Majority: “necessary predicate” + “trigger” for demands of adequate assurance

o #2 Other party may “demand adequate assurance of due performance” Majority and Concurrence: § 2-609 gives “right to request assurance that

performance will be forthcoming not give “alarmed party right to re-draft K”

“Market Price” When Anticipatory Repudiation

(Revisited) U.C.C. § 2-713 Buyer’s Damages for Non-Delivery or Repudiation(1) Subject to the provisions of this Article w/respect to proof of mkt price (§ 2-723), the

measure of damages for non-delivery or repudiation by the seller is [1] the diff b/n the mkt price at the time when the buyer learned of the breach and the K price [2] together w/any incidental or consequential damages provided in this Article (§ 2-715), but [3] less expenses saved in consequence of the seller’s breach. Default mkt formula no valid or attempted “cover” Possible meanings for when B learned of breach

o When B learned of repudiationo When actual, subsequent performance due under Ko @ Commercially reasonable time after B learn of repudiation

(Revisited) RST § 344 Purposes of RemediesJudicial remedies . . . serve to protect 1 or more of the following interests of a promisee:(c) Restitution Interest: His interest in having restored to him any benefit that he has conferred on the other party ** Examples include fees paid or performed work

Restitution damages – for breaching/repudiating party too?

Britton v. Turner [pg. 493] 1 yr work agreement despite breach, P can recover restitution damages for beneficial, performed services per quantum meruit (UE) theory Rules re restitution damages for breaching party:

o Formula = (a) reasonable worth or value of conferred benefits minus (b) amt of damage caused by breach (cover, incidentals, consequentials)

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RST § 374 Restitution in Favor of Party in Breach(1) If a party justifiably refuses to perform on the ground that his remaining duties of

performance have been discharged by the other party’s breach [i.e. constructive conditions doctrine], the party in breach is entitled to restitution for any benefit that he has conferred by way of part performance or reliance in excess of the loss that he has caused by his own breach. Britton (interest of breaching employee protected recover restitution damages under

quantum meruit/UE theory Other K damage concepts that “protect” breaching/repudiating party? Duty to mitigate,

Peevyhouse, forseeability, certainty (speculative losses not recoverable)

Cancellation in Re to Breach—Material Breach

Material Breach and Substantial PerformanceRelationship: “Degree” of Breach & “Extent” of Performance Extent = substantial performance Degree = non-material Extent = non-substantial performance Degree = materialWorld of K BreachesA. “Material” vs. “Non-Material”

o Material = no substantial performance occuro Non-Material = substantial performance occur

B. Determination: breach = “material” or “non-material” why crucialo Merely recover $ damages vs. also discharge K duty of other party (per constructive

conditions doctrine)

Essential purpose of K Test Minority RulePlante v. Jacobs [pg. 502] Wrong wall Plante’s breach non-material per essential purpose of K test Rules re:

1. Effect of material breach determination: “no recovery on K (as distinguished from quantum meruit) unless substantial performance translationo Substantial performance (non-material breach) = not discharge or cancel K

promiseo Non-substantial Performance (material breach) = discharge/cancel K promise

2. Test to determine material breacho No mathematical rule to determine substantial perfo Test of what amts to substantial perf = whether perf meets essential purpose of K

o Not mean every detail done in strict compliance w/K less than perfect suffices unless all details made essence of K

Multi-factor Test Majority RuleWalker & Co. v. Harrison [pg. 506] Neon signs P’s breach non-material per multi-factor test Rules Re:

o Effect of material breach determination:

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Court: if Party “commit material breach,” K cancellation is one of weapons available to injured party

Non-Substantial performance (material breach) = discharge or cancel K promise

Substantial Performance (non-material breach) = not discharge or cancel K promise

Opt to cancel b/c supposed “material breach”= fraught w/peril b/c . . .o Test to determine material breach:

No single touchstone + many factors involved RST § 241 multi-factor test (Plante illustration):

1. Extent non-breaching party will obtain anticipated, substantial benefit (like “essential purpose”)

2. Extent NBP can be adequately compensated in damages (vs. allowing cancellation)

3. Extent of hardship or forfeiture on BP (via perf or prep) if K cancelled4. Certainty BP will perform rest of K5. Neg./Willful vs. innocent conduct of BP

RST § 235 Effect of Performance on Discharge and of Non-Performance as Breach(1) Full perf of a duty under a K discharges the duty.(2) When perf of a duty under a K is due any non-perf is a breach Still must determine breach

RST § 241 Factors in Determining Materiality of BreachIn determining whether a failure to render or offer perf is material, the following circumstance are significant:

(a) Extent to which inured party will be deprived of benefit which he reasonably expected

(b) Extent to which injured party can be adequately compensated for part of that benefit of which he will be deprived;

(c) Extent to which party failing to perform or to offer to perform will suffer forfeiture;(d) Likelihood that party failing to perform or to offer to perform will cure his failure,

taking account of all circumstance including any reasonable assurances;(e) Extent to which behavior of party failing to perform comports w/standards of GF Test weights interests of breacher vs. non-breacher

RST § 237 Effect of Other Party’s Duties of a Failure to Render PerformanceExcept as stated in § 240, it is a condn of each party’s remaining duties to render performances to be exchanged under an exchange of promises [bilateral K] that there be no uncured material failure [substantial performance/no material breach] by the other party to render any such perf due at an earlier time. Constructive Conditions Doctrine?

o Cmt. a “material failure of perf” = “prevents perf of [other party’s] duties from becoming due” & “discharges those duties if . . . not cured”

o Assume Material breach timely “cured”?

Closer Look: Multi-Factor Test’s Element (d)

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Element (d) “Likelihood that party failing to perform or to offer to perform will cure his failure, taking

account of all circumstances including any reasonable assurances” Translation?

o Eric Anderson: Did breach “impair (or harm) party’s expectation interest in future performance” (i.e., create “reasonable apprehension” re inadequate or non-perf of future acts)?

Treatment as Partial vs. Total Breach

RST § 236 Damages for Total and for Partial Breach(1) A claim for damages for total breach is 1 for damages based on all of the injured party’s

remaining rights to performance.(2) A Claim for damages for partial breach is 1 for damages based on only part of the injured

party’s remaining rights to performance.

RST § 243 Effect of a Breach by Non-Performance As Giving Rise to a Claim for Damages for Total Breach(1) With respect to performances to be exchanged under an exchange of promises [bilateral K],

a breach by non-performance gives rise to a claim for damages for total breach only if it discharges the injured party's remaining duties to render such performance, other than a duty to render an agreed equivalent under § 240.

(2) Except as stated in Subsection (3), a breach by non-performance accompanied or followed by a repudiation gives rise to a claim for damages for total breach.

Divisible or Severable Ks—Partial Perf

Gill v. Johnstown Lumber Co Log driving Severable/divisible b/c Gill’s non-perf of certain parts don’t discharge payment duties as to performed parts Rules re “severable/divisible” vs. “entire” K:

o Severable/divisible K if: Performance consists of several + distinct items AND Price to be paid apportioned to each item to be performed

o Entire K if: (a) consideration to be paid is single + entire, even if perf consists of several distinct + wholly independent items

o Effect of non-performance: If Entire K if material breach, discharge/cancel K promise If severable/divisible if material breach of “part,” discharge/cancel K only

as to that part still K duty re performed parts

§ 240 Part Performances as Agreed EquivalentsIf the performances to be exchanged under an exchange of promises [bilateral K] can be apportioned into corresponding pairs of part performances so that the parts of each pair are properly regarded as agreed equivalents, a party's performance of his part of such a pair has the same effect on the other's duties to render performance of the agreed equivalent as it would have if only that pair of performances had been promised.

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Gill (log K apportioned in severable/divisible pairs + items perf re some parts = payment obligation re those pairs or parts

U.C.C. Approach to K Cancellation See flowchart---------------------------------------------------------------------------------------------------------------------

CHAPTER 7 – THE BOUNDARIES OF AUTONOMY

The Law of THE KA. K termsB. K Perf and BreachC. CHANGED CIRCUMSTANCES SURROUNDING K

Concept: Changed Circumstances Breach defined (whether material or non-material): Failure to perf as promised, unless non-

perf (1) justified or (2) excused1. Justified – Justification for non-perf…2. Excused – Excuse for non-perf? = changed circumstances after K formation + beyond

parties’ control:1. Supervening impossibility/impracticability of perf doctrine when likely apply?

K subj destroyed, perished, not exist2. Supervening frustration-of-purpose doctrine K subj exists, but changed state of

affairs to defeat K purpose

Taylor v. Caldwell [pg. 551] Disco Inferno D’s non-perf excused, per impossibility/impracticability of performance doctrine

Notes: This is an example of objective impossibility; it is impossible for either party to perform. If the parties in such an arrangement do not allocate the risk at the time of contract the court will let the loss lie where it falls. In this example Taylor suffered the loss of resources invested in preparing for the concerts, and Caldwell suffered the loss of the destroyed hall. This rule only applies if neither party is at fault in the destruction of the person or thing.

Rules re doctrine:o (a) Elements: excuse non-performance b/c post-K event/circumstance, IF . . .

1. Event makes performing “impracticable” or “impossible” Subject of K destroyed/perishes

2. Event not “fault” of non-performing party Degree of “fault”?

3. Parties made K on “basic assumption” (basis or foundation) that event not occur (Continued existence of thing) - “force majeure” = Act of God.

4. K language + circumstances not allocate/shift “risk of loss” from event to non-performing party

o (b) Rationale: “implied condition” to excuse non-performing for such post-K events

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§ 261 Discharge by Supervening ImpracticabilityWhere, after a contract is made, [1] a party's performance is made impracticable [2] without his fault by [3] the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, [4] unless the language or the circumstances indicate the contrary.

Same elements as Taylor

§ 262 Death or Incapacity of Person Necessary for PerformanceIf the existence of a particular person is necessary for the performance of a duty, his death or such incapacity [1] as makes performance impracticable is an event [3] the non-occurrence of which was a basic assumption on which the contract was made.

Such death/incapacity meets elements 1 & 3 others must still be met Not “fault” + “risk of loss” not allocated or shifted to non-performing party

§ 263 Destruction, Deterioration or Failure to Come Into Existence of Thing Necessary for PerformanceIf the existence of a specific thing is necessary for the performance of a duty, its failure to come into existence, destruction, or such deterioration [1] as makes performance impracticable is an event [3] the non-occurrence of which was a basic assumption on which the contract was made.

Such failure/destruction/deterioration meets elements 1 & 3 others must still be met Not “fault” + “risk of loss” not allocated or shifted to non-performing party

Supervening Frustration of PurposeKrell v. Henry [pg. 555] Kings crowning D’s non-perf excused, per frustration of purpose doctrine Rules re Frustration of Purpose Doctrine:

o (a) Compared-impossibility/impracticability doctrine Where “event” = “destruction or non-existence of some thing” as “subject

matter of K”o (b) Elements: excuse non-perf b/c post-K event/circumstance, IF . . .

Event substantially frustrates party’s principal purpose for K Event not fault of non-perf party Parties make K on basic assumption (basis or foundation) that event not occur

(continued existence of particular state of things) K language + circumstances not allocate/shift risk of loss from event to non-

perf party

RST § 265 Discharge by Supervening FrustrationWhere, after a K is made, [1] a party's principal purpose is substantially frustrated [2] without his fault by the occurrence of an event [3] the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, [4] unless the language or the circumstances indicate the contrary.

Same elements as Krell

RST § 267 Effect on Other Party's Duties of a Failure Justified by Impracticability or Frustration

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(1) A party's failure to render or to offer performance may, except as stated in Subsection (2), affect the other party's duties under the rules stated in §§ 237 and 238 even though the failure is justified under the rules stated in this Chapter.

(2) The rule stated in Subsection (1) does not apply if the other party assumed the risk that he would have to perform despite such a failure.

U.C.C. § 2-615 Excuse by Failure of Presupposed Conditions[4] Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substantial performance:(a) Delay in delivery or non-delivery in whole or in part by a seller who complies w/paragraphs

b and c is not a breach of his duty under a K for sale if [1] performance as agreed has been made impracticable by the occurrence of a contingency [3] the non-occurrence of which was a basic assumption on which the K was made or by compliance in GF w/any applicable foreign or domestic governmental regulation or order . . . Cmt. 3: “Commercial impracticability” used in lieu of “impossibility”, “frustration of

purpose”, or “frustration of venture” Cmt. 4: “Increased cost alone not excuse performance unless rise in cost due to some

unforeseen contingency which alters essential nature of perf. Neither is rise or collapse in mkt in itself justification, for that is exactly type of business risk which business Ks made at fixed prices are intended to cover

Market Changes & Increased Costs—Excuses?Northern Indiana Public Service Co. v. Carbon County Coal Co. [pg. 557] Coal K P’s non-perf not excused, per impossibility/impracticability or perf doctrine or force majeure clause Rules re doctrine:

o Excuse doctrine no place when K explicitly assigns particular risk to 1 party (element 4)

o Fixed price Ks: Explicit assignment of [a] risk of mkt price increases to seller + [b] risk of mkt price decreases to buyer

The Law of THE KA. K termsB. K perf and breachC. Changed circumstances surrounding KD. RIGHTS OF THIRD PARTIES UNDER K LAW

Work through both options: 1. Intent of parities – direct benefit test2. Statos/ creditor/ donee

§ 302 Intended and Incidental Beneficiaries(1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an

intended beneficiary if [1] recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and [2] either Determine “intention of Parties”?

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o Direct Benefit Test : K perf by party necessarily requires party to confer benefit that directly benefits TP

(a) The performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; [Creditor TPB] or

(b) The circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. [Donee TPB]

(2) An incidental beneficiary is a beneficiary who is not an intended beneficiary.

§ 304 Creation of Duty to BeneficiaryA promise in a contract creates a duty in the promisor to any intended beneficiary to perform the promise, and the intended beneficiary may enforce the duty.

§ 315 Effect of a Promise of Incidental BenefitAn incidental beneficiary acquires by virtue of the promise no right against the promisor or the promisee.

Lawrence v. Fox [pg. 605] P has TPB rights Rules re K privity & TPB rights:

o GR: want of privity can = valid objection to K action Policy re CL privity barrier: Prevent flood of K claims by TP who may

“benefit” from K o RST § 302 Exception: TPB survives privity barrier when:

1. Recognition of TPB right appropriate to effectuate the intention of the parties and

2. Creditor TPB or Donee TPB

Seaver v. Ransom [pg. 609] House donee GR re K privity and TPB rights = privity b/n P and D necessary to K action Exception: TPB rights just + practical when:

1. K intended to provide direct benefit to TPB (i.e. K made expressly for his benefit) AND

2. Debt or duty owing promisee to TPB or sustain gift for donee beneficiary per K

Bain v. Gillispie [pg. 614] Big 10 Referee Rules re K privity and TPB rights

o GR: party must be privy to K to maintain cause of actiono Exception: TPB rights when:

Parties intended TP should receive benefit and TP = direct beneficiary as donee beneficiary or creditor beneficiary merely

incidental beneficiaries insufficientTP (third party)TPB (third party beneficiary)

K Duty = delegate to TP?K Right = assign to TP

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