Contracts II Outline Spring 2012 Flashcards

8/2/2019 Contracts II Outline Spring 2012 Flashcards

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Conditions, Performance and Breach

I. Conditions

a. Condition an event which must occur before a partys performance is

due.b. Temporal Conditions

i. PrecedentMust occur before a partys duty to perform arises.1. Example: A written agreement between Painter and Owner states Owner

will pay Painter ten days after Painter finishes painting Owners house.Painters painting of the house is a condition precedent to Owners duty to

pay Painter.

ii. Concurrent Conditions are concurrent if they are to happen at the sametime.

iii. Subsequent Takes away a right that previously existed.c. Creation Conditions

i. Expressed stated by the parties, orally, or in writing1. Performance is completed once the work is totally performed

Full performance is required

ii. Implied An implied in fact condition is implied from the terms of thecontract or from the conduct of the parties.


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iii. Constructive Imposed by the court to do justice although the contractdoesnt say anything.

1. Only requires substantial performance on the part of the Sub2. Order of performance is not stipulated

Do work first and then get paidd. Performance

i. Constructive Conditions All that is requires issubstantial performance.1. However, a promisor may not rely on substantial performance if the failure

to perform is willful.

ii. Express & Implied Conditions Full performance is required.

e. Analysisi. Breach ?

ii. Material or Non-material ?1. Material Breach- The party is excused from performing the contract.2. Non-Material Breach- Does not excuse the parties.

iii. Was there notice of the breach ?

II. Constructive Conditions

a. Substantial performance fulfills the condition.


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b. Where concurrent conditions exist, NEITHER party could place the otherin breach for failure to perform without a tender of its own performance.

Non-breaching party has to substantially perform to provide tender inorder to hold other party in breach.

1. In concurrent conditions no one has to perform unless the other party stepsforward and claims breach of contract.

i. Tender of Performance a readiness andwillingness/present ability to perform in case of concurrent

performance by the other party, and notice to the otherparty of such readiness.

ii. There must also be substantial performance.c. Damage Measures

i. Contracts: Expectation1. The basis of contract law is an agreement made between 2 or more persons2. The basic measure of the contract damages is designed to put the non-

breaching party in the position he or she would have been in if the

agreement had been performedii. Torts: Compensation for Injury

d. Measure of Damages in Construction Contract Casesi. Cost of Completion


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1. In construction contract cases, when the breaching party has failed toperform a condition precedent, damages are traditionally measured by thecost of completion.

2. Cost of completion fulfills the letter of the agreement by giving the non-

breaching party the benefit of the bargain.ii. Difference in value

3. In construction contract cases, when the breaching party has failed toperform a condition precedent, damages are sometimes measured by thedifference in value as promised and the value as received, which is a tortmeasure of damages.

Restatement 241 Circumstances Significant in Determining Whether a Failure IsMaterial

In determining whether a failure to render or to offer performance is material, the followingcircumstances are significant:

(a) the extent to which the injured party will be deprived of the benefit which hereasonably expected;

(b) the extent to which the injured party can be adequately compensated for the partof that benefit of which he will be deprived;


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(c) the extent to which the party failing to perform or to offer to perform will sufferforfeiture;

(d) the likelihood that the party failing to perform or to offer to perform will cure hisfailure, taking account of all the circumstances including any reasonableassurances;

(e) the extent to which the behavior of the party failing to perform or to offer toperform comports with standards of good faith and fair dealing.

a. Independent v. Dependent Promises

i. Independent 2 separate causes of action.

ii. Dependent In the normal bilateral contract, the court will presume thatthe promises are in exchange for each other.

The courts will treat the promise as being mutually dependent, and will makeeach partys duty of performance constructively conditional upon the otherssubstantial performance of all previous duties.

If the breach is not material, then the parties must continue to perform. The contractcannot be cancelled.

b. Total Breach v. Partial Breach

i. Total Breach The non-breaching party may be excused from performance.ii. Partial Breach The non-breaching party may elect to continue the contract.


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1. If a material breach exists, the non-breaching party may still opt notto rescind or get out of the contract.

2. Contractor can refuse to pay if Subs breach was material non-breaching party has an election

Non-breaching party can still treat the breach as non-material even ifits material in such a situation, everything must keep going onand the non breaching party can still choose to recover damages

If theres substantial performance there isnt a material breach (vice

versa).

a. If theres a material breach, theres no substantial performance.III. Constructive Conditions under the U.C.C.

Common Law v. U.C.C.

Common LawMust provide substantial performance.

UCCMust provide perfect tender/full performance (ready, willing, and able).UCC 2-601 Buyers Right on Improper Delivery

Perfect Tender Rule Subject to the provisions of this Article on breach in installmentcontracts (2-612) and unless otherwise agreed under the sections on contractual limitationof remedy (2-718 and 2-719), if the goods or the tender of delivery fail in any respect toconform to the contract, the buyer may


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1. reject the whole; or

2. accept the whole; or Even if accept, acceptance doesnt waive breach3. accept any commercial unit or units and reject the rest

However, seller has a right to cure*

UCC 2-602 Manner and Effect of Rightful Rejection

i. Rejection of goods must be within a reasonable time after their delivery or tender. It isineffective unless the buyer seasonably notifies the seller.

ii. Subject to the provisions of the two following sections on rejected goods (Sections 2-

603 and 2-604),1. after rejection any exercise of ownership by the buyer with respect to anycommercial unit is wrongful as against the seller; and

2. if the buyer has before rejection taken physical possession of goods in which hedoes not have a security interest under the provisions of this Article (subsection(3) of Section 2-711), he is under a duty after rejection to hold them with

reasonable care at the sellers disposition for a time sufficient to permit the sellerto remove them; but3. the buyer has no further obligations with regard to goods rightfully rejected.

a. The sellers rights with respect to goods wrongfully rejected are governed bythe provisions of this Article on Sellers remedies in general (Section 2-703).


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a. UCC 2-508- Cure by Seller of Improper Tender or Delivery;Replacement

i. Where any tender or delivery by the seller is rejected because non-conforming and the time for performance has not yet expired, the seller mayseasonably notify the buyer of his intention to cure and may then within the

contract time make a conforming delivery .1. Seller must notify the buyer of his intention to s cure.

ii. Where the buyer reject a non-conforming tender which the seller hadreasonable grounds to believe would be acceptable with or without moneyallowance the seller may if he seasonably notifies the buyer have a furtherreasonable time to substitute a conforming tender.

1. Time for a conforming tender may extend beyond the contract time if theseller had a reasonable belief that the nonconforming tender would beaccepted.


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If the buyer accepts the imperfect tender

b. UCC 2-606 Effects of Acceptance1. Acceptance of goods occurs when the buyer

After a reasonable opportunity to inspect the goods signifies to the seller that thegoods are conforming or that he will take or retain them in spite of their non-conformity; or

Fails to make an effective rejection (subsection (1) of Section 2-602), but suchacceptance does not occur until the buyer has had a reasonable opportunity toinspect them; or

Does any act inconsistent with the sellers ownership; but if such act is wrongful asagainst the seller it is an acceptance only if ratified by him.

2. Acceptance of a part of any commercial unit is acceptance of that entireunit.

If the cure is not sufficient, then the buyer must give notice of the breach

c. Different Forms of Notice

i. UCC 2-605 - Notice of Curable Defects (may be oral) Rejection


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1. Buyer has to give notice to the seller of all non-conforming goods that canbe cured

Notice must be specific2. This is a condition precedent to the ability to sue

ii. UCC 2-607 -Notice of Breach (may be oral) buyers obligation of noticeof breach after the opportunity to cure

1. Purpose opens the way for settlement, lets the seller know that the sellerhas to preserve evidence

d. UCC 2-608- Revocation of Acceptance in Whole or in Parti. The buyer may revoke his acceptance of a lot or commercial unit whose non-

conformity substantially impairs its value to him if he has accepted it1. on the reasonable assumption that its non-conformity would be cured and it

has not been seasonably cured; or2. without discovery of such non-conformity of his acceptance was

reasonably induced either by the difficulty of discovery before acceptanceor by the sellers assurances

ii. Revocation of acceptance must occur within a reasonable time after the buyerdiscovers or should have discovered the ground for it and before any


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substantial change in condition of the goods which is not caused by their owndefects. It is not effective until the buyer notifies the seller of it.

1. Buyer must give notice of revocation of acceptance

Notice must be more specific than that for notice of breach but not as specific as thatfor curable defects

iii. No right to cure after revocation

1. Revised Article 2 There will be a right to cure after revocation and sonotice may sometimes be required to be more specific

** Revocation of acceptance cannot occur under common law.

e. INSTALLMENT CONTRACTSi. An installment contract is one which requires or authorizes the delivery of

goods in separate lots to be separately delivered1. Notice of a breach is required

A person receives a notice or notification when (a) it comes to his attention or (b) itis duly delivered to his place of business

Although 2-607 does not require notice of a breach, the parties may vary the termsas long as the variations do not disclaim the obligations of good faith, diligence,reasonableness, care and the standards are not manifestly unreasonable


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ii. Buyer may reject any installment if non-conforming if it substantially impairsthe value of the installment AND cannot be curedBUT if the non-conformity does not fall within the subsection (3) and the seller givesadequate assurance of its cure, the buyer must accept the installment.

iii. If non-conforming with respect to 1 or more installments substantiallyimpairs the value of the whole contract, then there is a breach of the wholecontract (Buyer must give notice of the cancellation).

f. DIVISIBLE CONTRACTS

i. General Rule one who has breached an entire contract to be performed

for an entire price cannot recover on the contract1. Exception If the contract consists of several and distinct items to be

furnished or performed by one party, the consideration to be apportioned toeach item according to its value and as a separate unit rather than as part ofthe whole, then the contract is severable or divisible, and a party in defaultmight recover

ii. Installment Contract v. Divisible Contracti. Installment ContractUCC 2-612

1. An installment contract is one which requires or authorizes the delivery ofgoods in separate lots to be separately delivered.


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ii. Divisible Contract can be broken down into separatepromises that do not affect each other parts can standor fall on their own.

2. Ex: If dont make a perfect tender with respect to one of the items

purchased along with other items at the same time material breach as toone lot/installment.

Payment is still required of the buyer just because seller didnt deliver the full

amount of the paper ordered, the buyer doesnt have to accept the paper that wasdelivered.

Rest of the contract stands or falls on its own.

IV. WRONGFUL PREVENTION AND NON-COOPERATIONa. Good Faith

i. Restatement 2d 2-205 every contract imposes upon each party a duty ofgood faith and fair dealing in its performance and its enforcement

1. UCC 1-201 (19) Good faith means honesty in factin the conduct ortransaction concerned

2. UCC 2-103 (1)(b) Good faith means honesty in factand observanceofreasonable commercial standards of fair dealing the in trade

3. Duty of good faith does not require complete candor


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2 kinds of behavior superior knowledge (good faith trying to be a goodbusiness person) and opportunistic behavior (bad faith)

A party to a contract may take advantage of another based on his superiorknowledge of the market.

Becomes bad/opportunistic behavior when youre trying to take advantage of aweakness in the other party.


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ii. Restatement 2d 225

1. The nonoccurrence of a condition may be excused by prevention orhindrance of its occurrence through a breach of the duty of good faith andfair dealing ( 2-205)

b. UCC 2-306 (2) - Exclusive dealings contracts

iii. Will use reasonable efforts in fulfilling the contract1. If dont use best efforts, then there is a breach of the contract

c. Implied Covenant v. Constructive Covenant (in this case, to stay

in business)iv. Implied Covenant from conduct of the parties and/or the terms of the

contract.

1. In certain situations, a covenant to continue in business will be implied inpercentage lease situations.

This is the case only when the fixed rent being paid is not substantial and bears noreasonable relationship to the fair rental of the property (no covenant if the rent isnominal or well below the fair market value) no covenant if above the fair marketvalue

The covenant may not be breached if the lessee goes out of business


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When determine a covenant to stay in business exists, it must be performed in goodfaith

It might be opportunistic when close business to keep out the competition, althoughmight still be paying rent

WAIVER, ESTOPPEL, ELECTIONb. U.C.C.

i. U.C.C. 2-309Absence of Specific Time Provisions; Notice ofTermination

1. The time for shipment or delivery or any other action under a contract ifnot provided in this Article or agreed upon shall be a reasonable time.

2. Where the contract provides for successive performances but is indefinitein duration it is valid for a reasonable time but unless otherwise agreedmay be terminated at any time by either party.

3. Termination of a contract by one party except on the happening of anagreed event requires that reasonable notification be received by the other

party and an agreement dispensing with notification is invalid if itsoperation would be unconscionable.

c. Time as of the Essencei. The parties to an agreement may make time of the essence.

ii Ei h k i f h h i d i


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ii. Either party may make or restore time as of the essence whenever it desires,simply by giving notice to that effect.

To restore time as of the essence, you need:(1) clear notice(2) give the other party a reasonable time to perform

(3) state the consequences of being late.iii. Rules Regarding Time (in General)

a. UCC: Where a contract for the sale of goods fails to provide a time forshipment or delivery, the law requires delivery within a reasonable time.

b. Time is never of the essence in an agreement which explicitly or impliedly

provides for performance within a reasonable time.c. Time is never of the essence in an agreement where the parties have waivedtime as an essential element of the contract.

d. Later, Shipview failed in trying to reinstate time as of the essence, becausethey caused the delays and then did not give enough time for performance.Court also considers the intent of the parties, thinking that Shipsview

wanted to reinstate so as to lead to a material breach by Beeche when theycouldnt meet the deadline.

V. RELIEF FROM FORFEITUREa. Restatement 2d 229- Excuse of a Condition to Avoid Forfeiture

i T th t t th t th f diti ld


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

Comment b: Disproportionate forfeiture Here, as in 227(1),

forfeiture is used to refer to the denial of the compensation that resultswhen the obligee loses his right to the agreed exchange after he has reliedsubstantially, as by preparation or performance on the expectation of thatexchange. See Comment b to 227.

b. Restatement 2d 302i. A condition may be excused without other reason if its requirement

(a) will involve extreme forfeiture or penalty, and(b) its existence or occurrence forms no essential part of the exchange for thefor the promises performance.

c. Relief from Forfeiture a. Buyer (defaulting party) must have clean hands to have

equitable relief ;

1. Clean Hands requires good faith and default/breach must beunintentional.

b. Non-defaulting party has to be made whole; AND

c. Buyer must also be ready, willing, and able to tenderperformance.

d P i C diti


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d. Promise v. Conditioni. Restatement 2d of Contracts 2: Promise v. Condition:

Promise = Manifestation of intent to act or not act in aspecified way.

Condition = An event, not certain to occur, which must

occur, unless its non-occurrence is excused, beforeperformance under a contract becomes due.

ii. Restatement 2d of Contracts 227: When to Call Something a Condition orPromise:(1) If unsure as to whether something is a promise/condition, the option

which will reduce forfeiture is preferred, unless the event is within thecontrol of the obligee or he assumed the risk.

(2) If the contract is the type where only 1 party undertakes duties (calledinsurance contract), and it is doubtful whether:

Promise (duty imposed),

Condition (event made condition),

Both promise and condition, then

e. Landlord / Tenant Relationship and the Risk of Forfeiture involved.i. Explanation and Application of same 229 as above and court finds:

(1) Whether failure to give notice was mere neglect or gross and willful


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(1) Whether failure to give notice was mere neglect or gross and willfulnegligence: Court finds it was only forgetful (Rule: Party seeking reliefmust come in with clean hands!!!!!)

(2) Whether the delay has been slight: Yes, slight.(3) Whether the loss to the lessor is small:

f. Insurance Contracts oral agreement first, payment, then receive thepolicy.

3 Basic theories that can help liberal approach (bend the rules to reach a just result

Benefit results in a more just result because it provides more protection

i. Reasonable Expectations1. Court looks to this idea of reasonable expectations in Restatement 211

1. Restatement 2d 211- Standardized Agreements(1) Except as stated in Subsection (3), where a party to an agreement signs orotherwise manifests assent to a writing and has reason to believe that like writings are

regularly used to embody terms of agreements of the same type, he adopts the writingas an integrated agreement with respect to the terms included in the writing.(2) Such a writing is interpreted wherever reasonable as treating alike all thosesimilarly situated, without regard to their knowledge or understanding of the standardterms of the writing.

(3) Where the other party has reason to believe that the party manifesting such assent


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(3) Where the other party has reason to believe that the party manifesting such assentwould not do so if he knew that the writing contained a particular term, the term is not

part of the agreement.

Consider expectations of parties as a function of what the words mean/interpretation

Unconscionability

Substantive and Procedural Unconscionability

Take it or leave it Adhesion contract are one-sided, but not automaticallyunconscionable need something more

UCC 2-302 (Old 234)- Unconscionability

Judge determines unconscionability by asking whether the agreement is so one-sided thatshould not be enforced.

So one-sided = unequal bargaining power (mere existence doesnt mean its

unconscionable unless it is extreme)

Unconscionability rests on the principles of preventing oppression and unfair surprise

Unfair surprise generally equates with procedural unconscionability

No opportunity to control in the absence of meaningful choice on the part of one


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No opportunity to control in the absence of meaningful choice on the part of oneof the parties

Oppression generally equates with substantive unconscionability

Some courts will allow relief if have substantial substantiveunconscionability without procedural unconscionability

Includes terms that are unreasonably favorable to the other party

Restatement 208- Unconscionable Contract or Term

If a contract or term thereof is unconscionable at the time the contract ismade a court may refuse to enforce the contract, or may enforce the

remainder of the contract without the unconscionable term, or may so limitthe application of any unconscionable term as to avoid any unconscionableresult.

CONDITIONS OF SATISFACTIONRestatement 228: Satisfaction of the Obligor as a Condition

When it is a condition of an obligors duty that he be satisfied with respect to theobligees performance or with respect to something else and it is practicable todetermine whether a reasonable person in the position of the obligor would besatisfied, an interpretation is preferred under which conditions occurs if such areasonable person in the position of the obligor be satisfied.

Personal satisfaction is judged subjectively


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Personal satisfaction is judged subjectively.

Satisfaction based upon utility/value is judged objectively.

General Rule: In satisfaction contracts, the dissatisfaction must be clear andspecific. It can not be general satisfaction with the deal. Must be specific

dissatisfaction with a materialterm.

In order to rejecta contract, the contract must:

Be rejected ingood faith, and

Be a complaint about a material term.

2 Different kinds of Satisfaction Contracts

Personal Satisfaction (subjective) Promisor is the sole judge of the quality of thework, and in good faith, has the right to reject and may not be reviewed by a court or

jury.

Look at own persons satisfaction based on good faith.Note good faith is still a requirement.Difference between express personal satisfaction and implied warranty of fitness is that animplied warranty of fitness comes from the outside.

Utility Satisfaction Contract (objective) Involves utility fitness value and can


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Utility Satisfaction Contract (objective) Involves utility, fitness, value, and canbe measured more against a reasonably satisfactory standard.

Third Party Satisfaction

Viewed subjectively

Where parties expressly allow for the approval of an outside party before a contractgoes into effect (i.e. an attorney approval on a purchase of a home), the court willconstrue the clause to allow the third partys disapproval to terminate the contract.

If the parties put it into the contract, they should be allowed to use it.

PROSPECTIVE FAILURE OF CONDITION AND BREACH BYREPUDIATION

Restatement 250- When a Statement or an Act is Repudiation

A repudiation is

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

A voluntary affirmative act, which renders the obligor unable or apparently unableto perform without such a breach.

Restatement 251- When Failure to Give Assurance May be Treated as a


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Restatement 251 When Failure to Give Assurance May be Treated as a

Repudiation

Where reasonable grounds arise to believe that the obligor will commit a breach ofnon-performance that would of itself give the obligee a claim for damage for total

breach under 243, the obligee may demand adequate assurance of due performanceand may, if reasonable, suspend performance for which he has not already received theagreed exchange until he receives such assurance

The obligee may treat as a repudiation the obligors failure to provide within areasonable time such assurance of due performance as is adequate in the circumstancesof the particular case

Restatement 253- Effect of a Repudiation as a Breach on Other Partys Duties

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, hisrepudiation alone gives rise to a claim for damages for total breach.

Where performances are to be exchanged under an exchange of promises, onepartys repudiation of a duty to render performance discharges the other partysremaining duties to render performance.

Traditional Rule: Prospective Inability to Perform (U.C.C. 2-609)


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Same for Common Law and Article 2


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Adequate Assurances business plan or something showing you can pay.

Can now change position in reliance (e.g., get another job or sell to someone else)

If fail to provide assurances, can then treat it as an anticipatory repudiation.

If the assurances are not received within 30 days (under Restatement it is a

reasonable time), the non-breaching party may

Be excused from his or her own performance, and

Treat the failure to give assurances as a repudiation

Anticipatory Repudiation ( 2-610)-

Contract must be executory on both sides

Anticipatory repudiation must be unequivocal No

If no unequivocal no, jump to 2-609 (iii) above

The non-breaching party may:

Treat the repudiation as a total breach and sue immediately

Suspend performance and wait to sue until the performance date


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p p p

Treat the repudiation as an offer to rescind and the treat the agreement as discharged

Different than #2, because here you walk away and dont sue

If you sue, the other party may find against you

Ignore the repudiation and urge the promisor to perform

Happens when really, really need the performance/itemFailure to Give Assurances

If theres a failure to give assurances, then you can treat the failure as ananticipatory repudiation.

Converts from Prospective Inability to Anticipatory Breach

Impossibility or Impracticability, and Frustration

IMPOSSIBILITY OR IMPRACTICABILITY AND FRUSTRATION

Restatement 261- Discharge by Supervening Impracticability

Where, after a contract is made, a partys performance is made impracticablewithout his fault by 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


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p y pis discharged, unless the language or the circumstances indicate the contrary.

Restatement 262 Death or Incapacity of Person Necessary for Performance

If the existence of a particular person is necessary for the performance of a duty, his

death or such incapacity as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the contract was made

Restatement 263- Destruction, Deterioration or Failure to Come Into Existence

of Thing Necessary for Performance

If the existence of a specific thing is necessary for the performance of a duty, its

failure to come into existence, destruction, or such deterioration as makes performanceimpracticable is an event the non-occurrence of which was a basic assumption onwhich the contract was made.

Restatement 264 Prevention by Governmental Regulation or Order

If the performance of a duty is made impracticable by having to comply with adomestic or foreign governmental regulation or order, that regulation or order is anevent the non-occurrence of which was a basic assumption on which the contract wasmade.


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IMPOSSIBILITY

U.C.C. 2-613

Where a specified thing is destroyed, the contract is voided.

If the thing is goods that have so deteriorated as to no longer conform to therequirements set forth in the contract, either

The contract can be voided orThe goods may be accepted with an allowance for their lesser value.

Death/incompetence of promisor also voids the contract.

UCC 2-615 -- Impossibility, Impracticability and Frustration of Purpose

Did the parties contract otherwise as to the risk (force majeure clause)?

(UNLESS its unconscionable) If so, who bore the risk?

If they did not, go to 2

Was there an unforeseeable event? (Was there a nonoccurrence of a basic

assumption of the contract?) must be unforeseeable at the time the contract was

made.

If the event is foreseeable, there is no excuse.

What you characterize the basic assumption as makes a difference in the outcome


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of the case.

Did the event

Make performance impossible? (Sellers/Performers Defense)

Impossibility usually consists of death of the promisor or destruction of the subject matter,judged objectively.To make performance objectively impossible, a party may have some kind of exclusivityagreement or specify something in the contract

Temporary Impossibility suspends performance (does not discharge it) for whatever

reasonable time it would be.Impossibility is a seller/performers excuse

Make performance impracticable (was it reasonable based on the costs)?

(Sellers/Performers Defense)

Impracticability requires an extreme increase in the cost (the 1st Restatement of Contractssuggests a tenfold increase), coupled with risk to person or propertyImpracticability is a seller/performers excuse

Frustrate the parties purpose? (Buyer/Recipients Excuse)

Frustration of purpose means that the parties can perform but there is no longer any point toperformance.

Frustration is a buyer/recipients excuse


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Mutuality of Remedy If buyer is excused, the seller is then excused as well.Did the event occur without the fault of the party seeking excuse?

One can never take advantage of an event you caused yourself

In other words, if there is an excuse, it will not be an excuse if the party who caused theproblem is the one seeking the excuse

Mere Increase in Cost

Impossibility vs. Impracticability Rules:

Rule: Impossibility requires that no one else be able to do the performance.

Rule: Commercial Impracticability is an easier standard to meet (it is met in thiscase):

A party is discharged from contractual obligations, even if it is technically possible toperform them, if the costs of performance would be so disproportionate to that reasonablycontemplated by the parties as to make the contract totally impractical in the commercialsense.Restatement: Serious risk to life or health will excuse nonperformance.

Force Majeure Clause

Two kinds of force Majeure Clauses:

One that protects the buyer;


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The other that protects the seller.

Under force majeure clause, when a promisor has anticipated a particular event andprovided for it in the contract, he should be relieved of liability regardless of whether it

was reasonably foreseeable.

and,

Under 2-615, any contract can be excused if the events leading toimpossibility/impracticability were unforeseeable.

Rules of Construction:Expression of one thing is exclusion of another

The causes that you list, you get excused forThe causes you do not list, you do not get excused for you meant to exclude the others

Of the same kindIf you have a list of things, and then say similar occurrences You include the thingslisted and others like them

Article II talks about events that areforeseeable

If you have a clause then you dont use Article II 2-615.


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The court says that you could pick and choose by listing various events and thatthe events do not have to be unforeseeable.

The seller has slightly greater protecting in the listing of the events.

For any event that is not listed in the clause, you go back to the rule embodied

in 2-615.

FRUSTRATION

Seller is excused only because the buyer is first excused because of frustration of

purpose.Test for Excuse from Contractual Obligation forFrustration due to

impossibility.

Must first determine what the substance of the contract is then ask whetherthat substantial contract needs for its foundation the assumption of the

existence of a particular state of things(1) Foundation of the contract?

(2) Was the performance of the contract prevented?

(3) Was the event which prevented the performance of the contract of such characterth t it t bl b id t h b i th t l ti f th ti t th


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that it cannot reasonably be said to have been in the contemplation of the parties at thedate of the contract.

If all questions are answeredyes, both parties are discharged

from further performance of the contract.No Impossibility financial difficulty is not impossibility.

No frustration Because the defendant itself made the decision to close the hotel,the circumstances were foreseeable.

IMPRACTICABILITY Rule: An express covenant in a lease agreement to surrender the premises in

good order and repair obligated the lessee to keep the premises in repairagainst ordinary accidents and not against acts of God or enemies.

Tenant is excused in this case for 3 reasons:

(1) A covenant which will include guarding against an act of God or enemy must bespecial and express, and so clear that there is only one meaning of it.

(2) It must be in the contemplation of the parties (foreseeable) to hold tenant liable(WAR not foreseeable at this point).

(3) Equality is equity, so the losses should be divided.


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Court Rules:

The tenant has to pay, and lost his opportunity to use the land during its capture, and

The landlord had to pay the damage to the buildings.

Enforcement of Remedies

DAMAGES

Analysis

Choose between money damages or injunctive relief,

Choose the type of damages, and

3 Types:

Expectation Puts the nonbreaching party where he or she would have been if the

agreement to had been performed.Puts you forward.

Reliance Puts the nonbreaching party back where he or she was before the agreementwas made, compensating him or her for detriments suffered in reliance on the agreement.

Puts you back to where you were.Can never exceed expectation damages


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Can never exceed expectation damages.

Restitution Designed to give the nonbreaching party the amount corresponding to anybenefit conferred by the nonbreaching party on the breaching party.Puts you back to where you were.

Recovery in restitution might be more than expectation damages.Choose formula

Seller ( 2-706, 2-708, 2-709)

Remedy = resell

Buyer ( 2-712, 2-713, 2-714)Remedy = Cover/substitute goods ( 2-712)

has burden of proving improper cover.General Principles

Expectation Damages

Measure of damages when the loss of business is alleged to be caused bywrongful acts of another, damages are measured by the going concern value OR lostfuture profits. The value of business is measured by tangible plus intangibles (Thisnecessarily includes lost profits).

Expectation Damages: 2 Tests can be applied:


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Going Concern Value Price a willing buyer

would pay and a willing seller would accept in afree marketplace for the business in question.

(a) Sale price includes the ability to generate future profits because the company was soldintact.(b) If it is not sold intact, then maybe lost profits can be sought.

Lost future profits(a) You can not have both, since Going Concern Value includes future profits.(b) Nonbreaching party should get the benefit of the bargain in expectation damages, but

no more/no less.Contracts Measure of Damages

Expectation (Compensatory) Damages (traditional contract measure) Gives thenon-breaching party the benefit of the bargain.

Put the non-breaching party where he or she would have been if the agreement had

been performed

Avoid a windfall (no more, no less)

Direct benefits of the bargain = Special/Consequential Damages

Formula for Contract Expectation Damages (Article 2)


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General Damages + Contract Price Cover/Resale or Market PriceSpecial Damages + Incidental Damages + (Consequential Damages buyer, notseller, usually gets consequential damages)

Expenses Saved= TOTAL Recovery

Reliance Damages put the non-breaching party back to where he or she wasbefore the contract was made, compensating him or her fordetriments suffered inreliance on the agreement (would sue for actions taken in reliance on the contract anything spent in reliance of the contract) put back as if the contract had neverhappened (recovering off the contract

Includes out-of-pocket expenses

Normally, capped (maximum) at the contract price (never get more than theexpectation damages)

Restitution Damages designed to give the non-breaching party the amount

corresponding to any benefit conferred by the non-breaching party on the breachingparty (put back as if the contract had never happened recovering off the contract)

Quantum meruit (see Section 2)

Differs from reliance damages because reliance damages are given for detrimentssuffered while restitution damages are given for benefits conferred


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suffered, while restitution damages are given for benefits conferred

Consequential Damages This can be considered a form of expectation damages(see formula under expectation damages)

To recover, consequential damages must be

Reasonably foreseeable [notice] (the other party had reason to know that the damageswould result) HadleyLook to see if lost profits were foreseeableLook at public policy behind the need for carriers.

Unavoidable damages

this avoids a windfallBreaching party has the burden to prove that the damages could have been avoided.Ascertainable [unable to mitigate] (be able to figure out what those profits/damageswould be) must be sufficiently certain to warrant expectation damages.Look to see if full performance could be proved in order to show that the damages arecertain/ascertainable

Look at the measure of damages available (this doesnt mean there cannot be a measure ofdamages in a new business).Damages have to be caused by the breach

Rule: Consequential (Collateral) Damages are only recoverable if they areforeseeable.

Consequential v. Incidental Damages

C ti l i di t d


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Consequential indirect damages

Incidental direct and flow naturally from the breach

3 types of Consequential Damages

Loss of primary profits

Primary item upon which the aggrieved party relies for a substantial amount of itsrevenue.Loss of secondary profitsSecondary profits can only be recovered if there is a breach of primary profits.

Loss of good willGood will future loss after the good is cured. If dealing with a new business, look atcomparable sales of other similar businesses.

Installment Contract SJ Groves v. Warner

Concrete = good, so Article 2 applies

This is treated as an installment contract (delivery in lots)

U.C.C. 2-612(3) a breach of an INSTALLMENT contract occurs where there is anonconformity with respect to one or more installments thatsubstantially impairs the valueof the whole contract.

Rule: Once breach occurs there is a duty to mitigate that begins. Mitigation, though, canbe met even through inaction, if that is a reasonable course of action under the


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be met even through inaction, if that is a reasonable course of action under thecircumstances.U.C.C 2-712(1): Cover After a breach, a buyer may cover by making in good faithand without reasonable delay any reasonable purchase of or contract to purchase goods in

substitution for those due from the seller.Comment 2: Test of proper cover is whether at the time and place the buyer acted in goodfaith and in a reasonable manner, and it is immaterial that hindsight may later prove thatthe method of cover used was not the cheapest and most effective. Burden of proving thelosses should have been avoided is on the party who has broken the contract.

Remedies

Cover = buyers remedy when buyer is faced with a breach and goes to getsubstitute goods

Resale = sellers remedy

To recover damages, those damages have to be caused by breach.

In addition, there is a duty to mitigate damages

Damages must be unavoidable (see consequential damages above)

However, did satisfy the burden of proof to show that the damages could have beenavoided.


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avoided.

Exclusive Dealings Contract was to be the only one to distribute/promote thesale of the U.N. Christmas cards. Defendant failed to promote the sale and the

plaintiff was forced to sell the cards for less than 10% of the expected price.

Manufacturer is seekingtheirexpected profits/benefit of the bargain (ExpectationDamages)

Lost profits consequential damages analysis from above

Reasonably foreseeable because did not promote them so the damages were

foreseeable

could not show could have avoided those damages by contracting someone else

because then would have breached the exclusive dealings contract

Lost profits sought here were not ascertainable because the full performancecould not be proved.

No measure of damages existedThere was no measure to determine how many UN X-mas cards would have been sold bythe defendant.

NO EXPECTATION DAMAGES

Out-of-pocket expenses = Reliance damages


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Out-of-pocket expenses Reliance damages

Includes manufacture, labor, and the plates

However, the plates were made prior to the contract with the so could not recover forthis (cannot rely on the contract because there was no contract).

Expenses Before Formation

General Rule expenses before the formation of the contract are not recoverable,

BUT if the cannot claim for lost profits, then he can claim for reasonably

contemplated acts that can be considered wasted if the contract was broken.

Employment Contracts

Basic Formula for Employees Damages Based on Employers Breach of

Employment Contract

Salary for Unexpired Term of Contract Expenses Incurred in Seeking Other Employment

Income Earned, to Be Earned, or Could Be Earned

During Unexpired Term____________________

= Total Recovery


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Total Recovery

Recovery is based on the contract price

Therefore, the employee has to prove the breach and the contract price

There is a duty to mitigate.

Similar Employment Rule: An employees damages will be mitigated by what hecould have earned in similar employment only if the employer proves that similar

employment opportunity was available. Not just any employment, must be similar.

Burden is on the breaching party to show similar employment was available,UNLESS:

Employment where the employee will know more than the employer (IndependentContractor).

Sale of Goods and Realty

Article 2 Remedies

Remedies under Article 2 are cumulative meaning that you get to pick and choose.

There is no requirement to mitigate damages under Article 2.


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Preferred Remedies

Resale is the preferred remedy for the seller (UCC 2-706)Cover is the preferred remedy for the buyer. (UCC 2-712)

Consequential Damages (In direct Damages)

Buyer gets consequential damagesSeller does not get consequential damages because the seller sets the contract pricefactoring in profits and overhead costs.

Contract Expectation Damages

Basic Formula for Contract Expectation Damages

Contract Price

Cover (buyer)/ Resale (seller) or market price

Incidental Damages

Consequential Damages

Expenses Saved

= Total Recovery

Sellers Remedies

Preferred Formula for Damages for Sellers Resale Damages ( 2-706)

Contract Price


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Contract Price

Resale Price

Incidental Damages

Expenses Saved

= Total Recovery

Formula for Sellers Damages for Buyers Non-Acceptance or Repudiation ( 2-

708(1))

Contract Price Market Price at Time and Place for Tender

Incidental Damages

Expenses Saved

= Total Recovery

Formula for Sellers Damages for Buyers Non-Acceptance or Repudiation ( 2-

708(2))

Lost ProfitsIncidental Damages and Costs reasonably incurred


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(Payments or Proceeds of Resale)- only if you are selling for scrap= Total Recovery

Use when the measure of damages provided in subsection (1) is inadequate to put

the seller in as good a position as performance would have done)The lost volume seller would be entitled to lost profits.

Lost Volume Seller Use 2-708(2) One who proves that even though he resold thecontract goods, that sale to the third party would have been made regardless of the buyers

breach.

Has an unlimited supply of standard-priced goods,

Has the capacity to make an additional sale,

Would have made two sales rather than one, but-for the buyers breach,

(Would have made a profit on the second sale.)

Holding: Plaintiff is entitled to the lost volume seller damages.

Recovers under2-708(2). NCI did not have unlimited supplies but they had the capacity to

make two sales.

Buyers Remedies


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Buyers Damages for Non-Delivery or Repudiation-Hypothetical Cover ( 2-

713)

Market Price at Time Buyer Learns of Breach Contract Price

+Incidental Damages+Consequential Damages

Expenses Saved= Total Recovery

Formula for Buyers Cover Damages ( 2-712)

+Cover Price

Contract Price

+Incidental Damages

+Consequential Damages (Special Damages)

Expenses Saved

= Total Recovery

The test of proper cover is whether at the time and place the buyer acted in goodfaith and in a reasonable manner and it is immaterial that hindsight may later proveh h h d f d h h ff i


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that the method of cover used was not the cheapest or most effective.

Role of Consequential Damages and How Interest Plays a Role

Modern Rule get expectation damages only if the seller breachesBuyer only gets the difference in the interest rates for consequential damages by

determining if the financing was a material part (if so, buyer does not get thedifference) of the contract or it was just about selling the house.

If loan/financing was essential, then you do not get the difference.

Construction Contracts

Traditional Measure (contract measure) Cost of Completion

In construction contract cases, when the breaching party has failed to perform acondition precedent, damages are traditionally measured by the cost of completion

Cost of completion fulfills the letter of the agreement by giving the non-breachingparty the benefit of the bargain

Cost of completion is the proper measure of damages when

The breach is willful, or

There is a complete failure to performDifference in Value (torts measure)


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In construction contract cases, when the breaching party has failed to perform acondition precedent, damages are sometimes measured by the difference in value as

promised and the value as received, which is a tort measure of damages

Use of the difference in value measure avoids causing a breaching party to pay aninordinate amount to remedy a trivial breach

Difference in value may be the proper measure when

The breach is not willful,

The breach is trivial,The condition breached is constructive,The cost of remedying the defect would be imprudent and unreasonable, resulting ineconomic waste, orThe cost of performance exceeds the value of the land when the work is completed(economic waste).

o Economic Waste The cost to remedy the defects will be clearlydisproportionate to the probable loss in value to the injured party.

(Ex. It will cost $60,000 to clean up the property and once it is allcleaned up, the property will be worth $12,500.)

If the owner breaches before any work is done, the contractor may recover thedifference between the contract price and the prospective cost of performance (profit).


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Punitive Damages, Penalties, Efficient Breach, Agreed Damages, and Limitations

of Liability

Punitive Damages: Punitive Damages are recoverable for breach of contract onlywhere the breach included elements of fraud, malice, oppression, or gross negligence.

Liquidated Damages Clause a settled amount of damages and parties have theright to contract for them

BUT, an unreasonably large liquidated are void as a penalty.

A liquidated damage clause is enforceable if

The injury caused by the breach is one that is difficult or incapable ofaccurate estimation at the time of the contract, and

The stipulated damages are a reasonable forecast of the harm caused by thebreach, also judged at the time of the contract (or the loss actually caused).

Restatement (2d) of Contracts 356 Liquidated Damages and Penalties

(1) Damages for breach by either party may be liquidated in the agreement but only at an


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( ) g y p y y q g yamount that is reasonable in the light of the anticipated or actual loss caused by the breachand the difficulties of proof of loss. A term fixing unreasonably large liquidated damagesis unenforceable on grounds of public policy as a penalty.

If damages are easily ascertainable at the time the K was made, a liquidateddamages clause is not proper and unenforceable as a penalty.

Liquidated Damages Clause under the U.C.C.

UCC 2-718: Liquidation or Limitation of Damages

(1) Damages for breach by either party may be liquidated in the agreement buy only at anamount which is reasonable in the light of the anticipated or actual harm caused by the

breach, the difficulties of proof of loss, and the inconvenience or nonfeasability ofotherwise obtaining an adequate remedy. A term fixing unreasonably large liquidateddamages is void as a penalty.Criteria by which to Measure Reasonableness

Anticipated or actual harm caused by breach;Difficulty of proving loss; andDifficulty of obtaining an adequate remedy

UCC 2-719: Contractual Modification or Limitation of Remedy

(2) Where circumstances cause an exclusive or limited remedy to fail of its essential


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( ) ypurpose, remedy may be had as provided in this Act.(3) Consequential damages may be limited or excluded unless the limitation or exclusion isunconscionable. Limitation of consequential damages for injury to the person in the case of

consumer goods is prima facie unconscionable but limitation of damages where the loss iscommercial is

Attorney Client Relationship

Attorney-client relationship lasts as long as the client wants (client can terminate atany time)

If client has terminated the contract, the attorney only gets compensation for theservices actually provided on a quasi-contractual basis

If client terminates, that act is not a breach of contract so attorney cannot get moneydamages under the traditional measures for future loss.

Limitation on Remedy

The test is different when the clause limits damages. Instead of using a reasonabletest we use an unconscionability test.

Liquidated Damages Clause sets an amount of money to be paid in case of a breach

Limitation on Remedy/Liability sets an upper cap/max of damages to be collected incase of a breachQuestion becomes whether limitation is enforceable:


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Question becomes whether limitation is enforceable:Analyze procedural (unfair surprise) and substantive (oppression/undue hardship)unconscionability

Ex: dry cleaners, parking garages, luggage at airportMajor Difference:

With limitation of liability, you get up to but less than a certain amount.With liquidation clauses, you get a settled amount.

Holding: Unless public policy is offended, private parties may

contractually limit their liability for breach or negligence. The clause was a valid limitation of liability, since both parties were

competent businessmen.

Restitution

Designed to give the nonbreaching party the amount corresponding to any benefitconferred by the nonbreaching party on the breaching party.

Puts you back to where you were.

If fully perform contract, expectation damages should be sued for and restitution isnot available.


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Quasi Contract (implied-in-law contract)

The plaintiff conferred a benefit on the defendant.

The defendant appreciated the conferral of the benefit.

The defendant accepted the services.

It would be inequitable for the defendant to retain the benefit without paying for it.

Restitution

Cases in which restitution is available:

Implied in Law Contract (quasi contract)

Quantum meruit for services (including rendering of emergency aid)Quantum valebant for goods

Contract Formed at Law

Quantum meruit if full performance has not been rendered by the party claiming restitution(however, restitution is not available if the clam is for work done on a new structure)

If its a new structure, one has to atleast provide substantial performanceQuantum meruit if full performance has been rendered by the party claiming restitution andthe consideration sue for the work is not fully liquidated


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the consideration sue for the work is not fully liquidatedReturn of deposit

Cases in which restitution is NOT available:

Quantum meruit for work done in building a new structure that is destroyed by anact of God (as opposed to work done on an existing structure that is destroyed by anact of God)

No excuse for impossibility because you assumed the riskQuantum meruit if full performance has been rendered by the party seeking

restitution and the consideration due for the work is a liquidated sumIf completed the contract, then must recover ON the contractIf the contract is done, one cannot recover OFF the contract

Quasi Contract in Construction Cases

Quasi-Contract is available if the plaintiff promises to make repairs on existing

structure and the structure is destroyed without the plaintiffs fault.

However, quasi-contract generally is not available if the agreement is forconstruction of a new structure that is destroyed before completion; the plaintiff must

rebuild, and the completion date is deemed to be suspended due to temporaryimpossibility.


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Specific Performance

Traditional Requirements for Specific Performance

Inadequacy of Remedy of Law This is essential because the law wants to makesure not to award specific performance unless there is no other form of compensation.

Mutuality of Remedy whether the obligations of each party to the contract aremutual.

No longer considered an important factorCases regarding the purchase and sale of a condo allow specific performance to be

available to both parties.

Ease of Judicial Administration whether possible for the courts to administer

Ease or difficulty of court supervising specific performance of the K.Issue of discretion and might be ignored when public interest is involved.Laclede

Gas Co. v. Amoco Oil Co.

Definiteness and Certainty of Terms

The more uncertain the terms of the K are the more involved the court will have tobe in specific performance of the K.

Th d fi i h h lik l h ld b d ifi


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The more definite the terms are, the more likely the court would be to order specificperformance.

Specific performance should NOT be awarded if the breach is efficient.If it would cost more to the breaching party to specifically enforce the contract than

it would to pay off the non-breaching party for the breach, no specific performance,ignoring whether the remedy at law would be adequate.

Specific Performance and the Sale of Land

If the seller breaches the sale of a land the buyer can always get specificperformance.

The common law views each piece of land unique.

Specific Performance under Article II

UCC 2-716 Buyers Right to Specific Performance or Replevin

Specific performance may be decreed where the goods are unique or in other properi t


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circumstances.

If goods are unique or in other proper circumstances, specific performance should be

grantedComment 2: Output and requirements contracts involving a particular or peculiarlyavailable source or market present today the typical commercial specific performancesituation.

U.C.C. 2-609- Action for the Price (Seller)

When the buyer fails to pay the price as it becomes due the seller may recover,together with any incidental damages . . .,

the price of goods accepted or of conforming goods lost or damages within a commerciallyreasonable time after risk of their loss has passed to the buyer, andof goods identified to the contract if the seller is unable after reasonable effort to resellthem at a reasonable price or the circumstances reasonably indicate that such effort will beunavailing.

Preliminary Injunctions (as opposed to specific performance) It reserved thestatute quo

Requirements for Preliminary Injunctive Relief

A party seeking preliminary injunctive relief must clearly demonstrate


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Substantial likelihood of success on the merits andIrreparable harm.

OR

Serious questions going to the merits andBalance of the hardships decidedly tipped in her favor.

Covenants Not to Compete

Factors Considered in Determining Effect of Covenant Not to Compete

Geographic area

A court will accept as prima facie valid a covenant related to the territory where theemployee was employed as a legitimate protection of the employers investment incustomer relations and good will.

The territorial restriction must be related to where the employee was employed

Time Limit

A covenant will not be stricken merely because it contains no time limit or is expressly


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A covenant will not be stricken merely because it contains no time limit or is expresslymade unlimited as to time.

Type of Activity (scope)

A covenant not to compete is also unreasonable where the nature of the business activitiesin which the employee is forbidden to engage is not specified with particularity.The type of activity should be restricted to the activity the employee was employed to do.

If it appears that the performance of the covenant was intended, and not merely thepayment of damages, the covenant will be enforced.

Approaches to the Enforceability of Non-Competition Clauses in EmploymentAgreements

Georgia: Unreasonable non-competition clauses are unenforceable restraints ontrade.

Blue Pencil Theory can sever parts that are unreasonable and if unreasonable

portion is not severable, then clause is unenforceable

A non-competition clause may be enforced if the offending portion can be severed.A non-competition clause may not be enforced if the offending portion cannot be severed.


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Holding: A former employer of a breaching employee cannot enjoin aprospective employer from accepting the services of the breachingemployee.


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p yEquitable Defenses

Defenses to contracts formed at law may be used as defenses in equity. Although a

defense may not have worked to deny a contract at law, these same defenses may beadequate to block specific performance.

Some forms of Equitable Relief

AccountingReformationInjunctionSpecific Performance

The court can look into the adequacy of consideration because it is a court of equity(court at law cannot inquire into the adequacy of consideration)

You cannot ask for equitable relief if you havent done equity already. (clean

hands).

Holding: A decree of specific performance is not a matter of right but isbased on the sound discretion of the court. Specific performance may bedenied where the plaintiff has been guilty of inequitable conduct.


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p g y q

Unclean Hands is an equitable concept. You need to act with fairnessand justice.

o In money damages, the courts do not consider uncleanhands.

Adequacy of ConsiderationIn determining Adequacy of Consideration for purposes of granting specific

performance the test is whether the price isfairand reasonable under thecircumstances.

Holding: Consideration need not be the highest price of full value.Defendants desire for a quick sale justified the low price.

Accounting

Specific performance is equitable relief, and courts should consider all

circumstances in order to avoid harsh or oppressive results.An unconscionable advantage to the plaintiff should be avoided.

Third Party Beneficiaries

Intended, Incidental, Creditor and Donee Beneficiary


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There are 4generaltypes of third party beneficiary contracts

Close Family Relationships

TrustPublic Contract

Creditor

Third Party Beneficiary Chart (see notes)

Privity of contract exists between promisee and promisor.

No privity of contract exists between beneficiary and promisor.

Third Party Beneficiary is at law.

Relationships between Promisee and Beneficiary

Creditor-beneficiary relationship: There is an enforceable K between the beneficiary(creditor) and the promisee (debtor).

Promisee can sue and seek money damages or injunctive relief because thepromisee has liability to the creditor.

Donee-beneficiary relationship: The promisee (donor) intends to make a gift to the


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Donee beneficiary relationship: The promisee (donor) intends to make a gift to thebeneficiary (donee). There is no consideration flowing from the beneficiary to thepromisee.

Promisee can sue and seek injunctive relief only because he does not have liabilityto the donee.

Requirements for a Third Party Beneficiary

Intent

Valid Contract between the Promisor and Promisee

Mortgagee and Mortgagor

Mortgagee/lender can foreclose and sue the mortgagor in case of deficiency.

If grantee assumes the mortgage, the mortgagee can sue for both personal

liability and foreclosure.

Subject to the mortgage = no personal liability.

A grantee of property who has assumed the mortgage thereon is not liable for anydeficiency in the event of foreclosure unless the party from whom he acquired the propertyhad also agreed to assume the mortgage.

J i di ti lit t h th th t h ld


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Jurisdictions are split as to whether the mortgagee should recover.

This court says is not held personally liable for the deficiency in the event of

foreclosure.

Problem occurred where subsequent grantees of the original mortgagor/borrower, butprevious to the last grantee, had been subject to the mortgage.Promisee (Person who extracted the promise but was not the mortgagor) did not have

personal liability, so he cannot intend to benefit the 3rd party ().

Look to see whether promisee intended to benefit the mortgagee.Donee Beneficiary

Traditionally, third party beneficiary theory is used in

(1) creditor-debtor relationship

(2) close family relationship (fiduciary relationship)

(3) public contracts AND

(4) when the promise runs directly to the beneficiary although he

does not furnish consideration.

Courts have moved away from separating cases into these categories. Aslong as there is intent on the part of the promisee, the beneficiary can sue


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long as there is intent on the part of the promisee, the beneficiary can suethe promisor.

Construction Contract

There are a number of remedies available to the Subcontractor:

Mechanics Lien can be put on property to make sure the Sub gets paid

No such lien is allowed against the government (like in this case)

Promissory Estoppel court can allow promissory estoppel to the Sub if the Subrelied on any promise to pay made by the owner.

Quasi-Contract Doesnt apply when owner paid.

3rdParty Beneficiary of Payment Bond Contract between general contractor(promisee) and owner (promisor) includes a surety bond.

Performance Bond guarantees that work will get done (wouldnt help Sub

get paid)

Payment Bond General contractor promises to pay the Sub

This acts to create a 3rd party beneficiary situation because showsintent for 3rd party to get paid.

Tools to reach conclusion that a payment bond exists:


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o If language is ambiguous, it is construed against the party who drafted the

contract.

o Incorporation by Reference Applicable statutory provisions becomepart of the contract.

Donee Beneficiary / Attorney Promisor

Traditional Rule No cause of action between attorney and beneficiary because


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y yplaintiffs were incidental beneficiaries (attorney is only liable to his client).

Modern Rule

When there is sufficient evidence of intent and the presence of acontrolled group, the courts will allow a 3rd party beneficiary claim to exist.

EXCEPTION An attorney is not liable for every mistake he may make in hispractice and, in the absence of an express agreement, is not an insurer of the soundnessof his opinions or of the validity of an instrument he is engaged to draft.

Ex: Just look to see if lawyer used such skill, prudence, and diligence as lawyers ofordinary skill and capacity commonly exercise.

Defenses, Vesting, and Relative Rights

DefensesBeneficiarys Standing to Sue

Both Promisor and Promisee Can Be Sued: Creditor Beneficiary can sue both thepromisor and the promisee to recover the amount due.

Creditor beneficiary can sue the promisee on the basis of a breach of contract theorybecause there is direct privity of contract/

Creditor beneficiary can sue the promisor because there was a transfer of business


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(transfer of both assets and liabilities) from the promisee to the promisor this is on a3rd party beneficiary basis.

Promisor assumed the duties.If the creditor beneficiary does not receive the benefit of the promise then the

beneficiary may sue the promisee or promisor or both unless:

Theres a novation or

The beneficiary is a donee beneficiary.If the beneficiary is a donee beneficiary then the beneficiary cannot sue the

promisee. (Theres no privity of contract).

Vesting and Relative Rights

The parties (promisor-promisee) to a third party beneficiary K may rescind, vary orabrogate the K as they see fit, without the approval of the third party, at any time

before the K is accepted, adopted, or acted upon by a third party beneficiary (vestingof the rights).

Three ways a Right if a Beneficiary Might Vest

AcceptanceBring Suit


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Change Position in Reliance

Enforcement of Donee beneficiary Contract by PromiseeDistinction between Donee Beneficiary and Creditor Beneficiary

If the 3rd party beneficiary is a creditorbeneficiary, the promisee could sue thepromisor because the creditor can sue the promisee if the promisor fails to pay thecreditor promisee has contractual liability

Promisee can sue for injunctive relief and damages because the promisee has liability.Creditor beneficiary can sue both the promisor and promisee.

A donee beneficiary CANNOT automatically sue the promisee because there is noenforceable promise/contract between the promisee and beneficiary, although therewas intent promisee could NOT sue the promisor.

This has changed Promisee can now sue ONLY for specific performanceNo money damages can be awarded to the promisee because she has no liability from theoriginal promise (remember promisee cannot be sued by donee beneficiary) can onlysue for equitable relief (such as specific performance).

If money damages are awarded, the promisee would end up getting awindfall.

Beneficiary takes Subject to Defenses Assertable against Promisee


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Beneficiary takes Subject to Defenses Assertable against Promisee

Any defense from the base of the triangle (between promisor and promisee) can

sometimes be asserted from the promisor against the beneficiary.

On the side of the triangle

Donee Beneficiary promisor cannot assert any defenses against beneficiary becausepromisee had no original liability (meaning there were no original defenses the promisor

can raise against the promisee).Creditor Beneficiary Defense promisor has against the promisee may be asserted by

promisor against beneficiaryIf promisor promises/assumes to pay a specified sum of money, defense may NOT beasserted.If the promisor assumed the duty (promise to pay whatever is owed), defenses may be

asserted.

Assignments and Delegations


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Assign rights; Delegate duties

Obligee (receive benefit) Obligor (duty)o Obligee = person or entity to whom an obligation is owed under a

contract (assigning a right)

o Obligor = a person or entity who owes an obligation under a contract

(delegating a duty)

Obligee

Assignee Assignor Delegator Delegatee

Plaintiff Defendant

Delegation of DutyAssignment of Right

Labels are given depending on whether a right or duty is in question because bothparties are potentially both obligor and obligee (it just depends on what duty isbeing looked at) focus in on what is being delegated

Assignment An assignment is a present transfer of a partys already-existing rights


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Assignment An assignment is a present transfer of a party s already existing rightsunder a contract. Present transfer of a present right.

Assignor (original obligee) Assignee (usually the )o Obligee becomes the assignor once the obligee manifests his intent to

presently transfer a right to a 3rd party

Assets= RightsDelegation Occurs when an obligor appoints another person to render a performance

that the obligor owes to a 3rd

party.

Delegator (original obligor) Delegatee (usually the )o Obligor becomes the delegator once he appoints another person to render

performance.

Liabilities = Duties

The Nature and Effect of an Assignment

Present Right


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The rights assigned to the assignee must be a present right.

Assignor must have the rights when he assigns them.

Rule: To be valid, there must be a perfected transaction between the partiesintended to vest in the assignee a present right in thing assigned.

You need language that shows intent to assign a present right.

Deviants From the NormNo contract is necessary between assignee and assignor (assignment may be

gratuitous).

If had a present transfer but not of present rights.

In such a case, assignment may be enforced as an equitable assignment (equity willenforce these transfers).

In order to be enforced, there must be some kind of

(1) on-going contractual relationship (business/employment relationship) and

(2) a real expectation that the profits are going to arise between the assignor andassignee.

Concept of an Equitable Assignment


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If there is an assignment of a right to be vest in the future an equitable assignment isappropriate instead of a legal one.

Are the Rights Assignable and Performances Delegable?

General Principles

Delegation of Duties Unless otherwise agreed, contractual duties can bedelegated UNLESS they require such unique personal services that this would

materially change the nature of the performance.

Personal service duties that cannot be assigned are those requiring genius andextraordinary skill

Must look to see if there would be a material change if duty is delegated if so,no delegation.

Delegation of Duties under Article 2 (Same as Common Law)

U.C.C. 2-210: Delegation of Performance; Assignment of Rights(1) A party may perform his duty through a delegate UNLESS (1) otherwise agreed

OR (2) the other party has a substantial interest in having his original promisorperform or control the acts required by the K.


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No delegation of performance relieves the party delegating of any duty to perform or any

liability for breach.The delegating party would only be released from liability when the other party consents torelease them (novation).The delegatee is still primarily liable. The delegator is held secondarily liable. If thedelegator is forced to pay, he can seek indemnification against the delegatee.

U.C.C. 2-609 Right to Adequate Assurance of Performance- Safety Net The other

party may treat any assignment which delegates performance as creating reasonablegrounds for insecurity and may without prejudice to his rights against the assignordemand assurances from the assignee.

Contractual Prohibition Against Assignment

When the obligor pays the obligee/assignor instead of the assignee.

Possible Suits

Assignee sues the Obligor

Assignee could have also sued the assignee because there is privity of contract(assuming the contract between them is enforceable).

Non-Assignment Clause


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First look at language.

If the clause is vague then the court will interpret it as being a delegation of duties.

If there is a clause in the contract thatprohibits the delegation of duties the clause will beenforced and the delegation will be void.

If the clauseprohibits the assignment of rights the assignment will be enforced butit will be considered a breach (if there are damages.

If the obligee assigns right to someone else, the assignee does have standing to sue theobligor despite the clause.

If there is a power but not the right to assign, the assignment is then abreach of the contract

Assignment is enforceable (allows for a transfer of the benefit) but may still be considereda breach.

If clause specifically says the duty is not to be delegated, any delegation is animproper delegation and would, therefore, fail in addition to constituting a breach ofcontract harder to transfer the duty than to transfer the benefit.

Vesting The rights of the assignee vest on notice to the obligor.

Once those rights vest the obligor must pay the assignee.

If the obligor pays the obligee he might have to also pay the assignee. The obligor


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will end up paying TWICE.

Vesting is important in respect to whom the obligor is required to render performance.Option Contracts

Improper Assignment or Delegation- Effect of Waiver

Obligee suing the Delegatee (The party who got the rights)

When the obligee is dissatisfied with the delegatees performance, the obligee canonly sue the delegatee ONLY if there is a 3rd Party Beneficiary Relationship.

Assumption of Duty Obligee can sue the delegate directly when the delgateeASSUMES the duty owed to the obligee

To determine this, you have to go through a 3rd party beneficiary analysis.

Did the delegator transfer all its rights and liabilities to the delegate?Implied Assumption of DutyWhen contract does not have express

assumption language, a transfer of business (which includes transfer of assets and

liabilities) from the obligor to the delegate will be sufficient to allow the obligee to suethe delgatee.

Defenses


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Follow 3rd Party Beneficiary Rules

Once youve determined that the obligee can sue the delegate because youvedetermined that the obligee is a third party beneficiary then you go the 3rd party

beneficiary laws to determine what defenses you can use.

The delegate can assert any defenses against the beneficiaries (obligee) that it hasagainst the promisee (obligor / delegator).

May the promisor assert against the promisee any defenses the promisor has againstthe beneficiary?

Maybe.

If its a donee beneficiary relationship

NOIf its a creditor beneficiary relationship

Maybe

It depends on what the promisor promises to do.

Other Problems Relating to Assignment and Delegation

Obligors Liability After Delegation of Duties


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g y g

Although an obligor under a contract may delegate his duties to another, he

nevertheless remains liable for the performance obligation unless the obligee consentsto his release.

When a contract is assignable, a party may,

Assign the benefits of his contract to another and

Delegate to his assignee the performance of his obligations under the contract,BUT he remains liable for the proper performance of those obligations UNLESS the

other party to the contract consents for the assignment to have the effect of releasinghim.

Defenses, Counterclaims, Vesting, and Latent Equities

Assignee suing the Obligor

An assignee can sue an obligor as soon as his rights vests.

The assignees rights vest upon notice to the obligor.

Defenses

Obligor can assert against the assignee any defense out of the original relationshipb h bli d bli


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between the obligor and oblige

Assignee steps into the Obligees shoes.When the obligor paid the obligee/assignor instead of the assignee

Assignee can sue

Assignor and

Assignee can sue the obligee because privity of contract exists between the two.

Obligor

Assignee can sue the obligor because the obligor if he given NOTICENotice to the obligor VESTS the right of the assignee (further supports notion that it iseasier to assign rights than to delegate duties)

As soon as rights of the assignee vest, performance is dueto the ASSIGNEE

If the obligor still performs/pays to the obligee instead of the assignee, the assignee can stillsue the obligor.

This means the obligor might have to pay twice (in its defense, the obligor cannot claim healready paid the obligee/assignor).Differs from 3rd party beneficiary because notice is not sufficient to vest the rights of a 3rd

party beneficiary.

Thi h ill h i h f 3rd b fi i A h i i


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Things that will cause the rights of a 3rd party beneficiary to sueAccept, change position,or sue.

Modification of the Contract

If there is truly a modification of the contract then the assignee will gaincorresponding rights to the modification.

If new agreement is a completely separate agreement, assignee would have no rightsfrom that agreement .

In deciding whether new agreement is a separate agreement, must look at theconduct of the parties and whether they are acting in good faith .

Bad faith Same contractGood faith New contract

Counterclaim: Where Assignee sued ObligorObligor can assert a compulsory counterclaim against both the obligee and assignee

because the counterclaim .

Problem arises when there are permissive counterclaim arising from anothertransaction.

Obligor MAY assert those against the obligee, but with regards to those being raisedagainst the assignee:


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g g

Traditional Rule Permissive counterclaim can be asserted against assignee if it arose

BEFORE the obligor received notice of the assignment (before the assignees rights vest).

Statute of Frauds

Statute of Frauds is an issue of enforcement of an otherwise enforceable contract it isnot an issue of formation.

Contract formation is valid, but the question is whether it can be enforced. If contract falls within the statute of frauds, contract must be in writing.

Traditional Rule one year from the making of the contract.

MYLEGS

Marriage Contract made upon consideration of marriage.

Year (a year from its making) A contract cannot be performed within one year

of its making.

Land A contract for the sale of an interest in land

Executor Only when an executor says he will take care of the decedents debtfrom his (the executors) own money/pocket is a writing required.

Goods Contract for the sale of goods for a price of $500 or more.

Suretyship Contract to answer for the debt or duty of another


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Suretyship Contract to answer for the debt or duty of another.

Effects of Part of Full Performance, Rescission and ModificationExceptions to the Statute of Frauds (Common Law)

Primary EstoppelPart Performance

Restatement of Contracts 139- Enfo

Contracts II Outline Spring 2012 Flashcards

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