Contracts II - Wilmarth - Spring 2002_3

Contracts II Outline / Professor Wilmarth / Spring 2002 / Anna Thea Conrad 1

Contracts II Outline / Professor Wilmarth / Spring 2002 / Anna Thea Conrad I. AVOIDING ENFORCEMENT OF CONTRACTS

1. Misrepresentation p 3 a. Fraudulent or Material? Opinion?

2. Nondisclosure p 4 a. Assertion? Disclaimer? Fiduciary Relationship?

3. Unconscionability p 5 a. At time of formation? Procedural or substantive? Application and Remedies?

4. Public Policy p 7 a. Covenant not to compete? Adoption, custody, surrogacy?

II. JUSTIFICATION FOR NONPERFORMANCE OF CONTRACTS 1. Mistake p 9

a. Already existed at time K made? b. Mutual: Basic assumption? Material? Who bears the risk? Remedies? c. Unilateral: Basic assumption? Material? Unconscionable? Who bears the risk? Remedies?

2. Changed Circumstances, Impracticability and Frustration of Purpose p 11 a. Type? Delay in delivery? Remedies?

3. Modification p 14 a. Pre-existing duty? Duress? b. UCC modification, rescission, and waiver? Check for less than invoice price?

III. CONSEQUENCES OF NONPERFORMANCE 1. Breach p 16

a. Partial, material, or total? 2. Anticipatory Repudiation p 18

a. Effect? Retracted? 3. Express Contractual Conditions p 21

a. Condition or promise? Express condition or constructive condition? b. Effect? Preference? Satisfaction of a party as a condition? Excuse?

IV. EXPECTATION DAMAGES 1. General Theories of Damages p 23

a. Expectation, reliance, restitution, specific performance, actual? 2. Computing Expectation Damages p 23 3. Restrictions on Recovering Expectation Damages p 25

a. Foreseeability, certainty, and causation? Mitigation of damages? Lost Volume Seller? 4. Non-Recoverable Damages Under Breach of K p 28

a. Attorneys fees? Mental/Emotional disturbance? Punitive damages? 5. Efficient Breach Theory p 29

V. ALTERNATIVES TO EXPECTATION DAMAGES 1. Reliance Damages p 30

a. Pre-contract expenses? Promissory estoppel? 2. Restitutionary Damages p 31

a. When used? How computed? Can exceed K price. Not affected by loss. For breacher? 3. Specific Performance p 34

a. Inadequate damages? Public policy? Needs supervision? Personal-service K? 4. Agreed Remedies p 35

a. Liquidated damages rsbl? VI. UCC ARTICLE 2: WARRANTIES AND REMEDIES

1. Warranties p 37 a. Express? IWM? IWFPP? Defenses (disclaimed, lack of privity, SOL run, no notice given)?

2. Buyers Remedies p 40 a. Rejected (PTR) or accepted (and not revoked)? Cure? Installment K? b. Damages? Cover / market price? Damages for accepted goods? IDs + CDs? Specific perfomance?

3. Sellers Remedies p 44 a. Cancellation? Damages (resale, market, lost profits, action for price, IDs + CDs)?


Which Law Governs: UCC or Common Law (2nd Restatement)? 1. UCC Article 2: Applies only to the Sale of Goods (UCC 2-105).

a. Goods: i. Moveable, tangible items

ii. Growing crops iii. Unborn young of animals

b. NOT Goods: i. Money $$$$

ii. Securities iii. Real estate iv. Things in action

c. Merchant (UCC 2-104): i. Person who regularly deals w/ goods of that kind.

ii. Person who otherwise by occupation holds himself out to have knowledge of or skill concerning the goods in question.

iii. Person who employs an AGENT who has knowledge of or skill concerning the goods in question.

2. Common Law (2nd Restatement): Applies to everything else. 3. Common Law CAN Apply WITH the UCC:

a. Per UCC 1-103, you can use equitable concepts from common law (such as PE) w/ the sale of goods if they are not expressly forbidden by a provision of the UCC.


I. AVOIDING ENFORCEMENT OF CONTRACTS I. Misrepresentation: A misrepresentation of essential facts, which causes a party to give their assent, makes a K

voidable b/c the person did not really know what they were assenting to. A. When a Misrepresentation is Fraudulent per R2d 162(1): When it is intended to induce a partys

assent and the person making the misrepresentation either: 1. knows or believes it is false 2. is not confident it is true 3. statement has no basis

1. nb: does NOT have to be material to be fraudulent. B. When a Misrepresentation is Material per R2d 162(2): if it would be likely to induce a rsbl person

to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so (and knows false).

i. A subjective and objective test. C. Voidable Contract per R2d 164: If a persons assent is induced by either a fraudulent OR a material

misrepresentation by the other party (upon whose word the recipient is justified in relying), the contract is voidable by the recipient.

i. Misrepresentation undermines the meaning of assent required to form a K (even w/o specific intent to defraud). K can be rescinded even w/o fraudulent intent.

ii. Two avenues of redress: (1) tort action for misrepresentation damages and (2) right to avoid K enforcement by rescission (injured party must return any $/property recd).

1. Tort law needs more (reliance, causation) but get more (compensatory AND punitive damages); K law needs materiality OR intent but less aggressive remedies (only recission and restitution).

2. Rescission can be available even when tort remedy is not. Sometimes rescission unavailable (e.g., per Rest.Restitution 66: if the defrauded party cannot return property recd b/c transferred, recission is not allowed). Judicial return to the status quo before K formation: Representations of fact (if material and relied upon in good faith) that induce the receiving party and are the responsibility of the representing party (whether fraudulent or in good faith) require the latter to return or restore the offeree to the status quo.

D. Opinions per R2d 168: Reliance on an opinion cannot constitute a claim for fraud unless the reliance is rsbl. Opinion statement amounts to a misrepresentation of fact if the opinion-giver misrepresents her state of mind (e.g., says has certain opinion that doesnt) per R2d 168 (AND R2d 159 comment d).

1. When Reliance on an Opinion is Reasonable per R2d 169: to the extent that an assertion is only one of opinion, the recipient is not justified in relying on the opinion unless:

a. Relationship of Trust. b. Person Giving the Opinion has a Special Skill. c. P is Susceptible to This Type of Misrepresentation.

a. nb: (b) and (c) applied in Syester but (a) was a stretch. 2. What You Can Assume per R2d 168(2): If there is rsbl reliance on an opinion, one can assume that:

a. The facts known to that person are not incompatible w/ the opinion. b. Person knows facts sufficient to justify forming the opinion.

i. Opinion = an assertion if in line with facts and a misrepresentation if no rsbl factual basis or nondisclosure of contradictory facts.

Syester v. Banta: Old woman (P) signed up for 4057 hours of dancing lessons at a price of $29K b/c the teachers at the studio told her she could become a professional dancer. When she left the studio after her favorite teacher was fired and threatened to sue, they hired the teacher back and had him induce her to come back to the studio with more misrepresentations about her becoming a professional dancer and he got her to sign a release where she gave up all her claims against the studio. Held: Equity may relieve a party from the consequences of a release executed through a mistaken belief of fact (here Ds conduct so egregious and there was adequate evidence of fraud and misrepresentation for a jury to conclude that the release should be made void P should be relieved of the consequences of signing it such that she could proceed with her claims). Misrepresentation here was fraudulent AND material (so tort remedy available).


II. Nondisclosure A. General Rule: There is no general duty to disclose. If a subject is not discussed, then the facts surrounding

the subject need NOT be disclosed UNLESS there is a fiduciary relationship. B. Nondisclosure of a Known Fact is Equivalent to an Assertion per R2d 161 ONLY in the following

cases: 1. 161(a): When the person knows the disclosure of the fact is necessary to correct a previous statement

that they made which they now know to be false (i.e., to prevent some previous assertion from being a misrepresentation or from being fraudulent or material).

2. 161(b): When the person knows the disclosure would correct a mistake of the other party as to a basic assumption and the non-disclosure of the fact amounts to bad faith or unfair dealing (i.e., where good faith and fair dealing require disclosure).

i. This is more aggressive than good faith alone. Not all courts accept 161(b) b/c it departs from the classical notion that silence does not constitute a lie but Wilmarth seems to really love this section.

1. OLD: caveat emptor: Laidlaw v. Organ (1817): tobacco buyer knew value would increase b/c knew war over and could sell to Europe but didnt have to disclose.

2. NOW: 161(b) disapproves of this. ii. In a court that doesnt apply 161(b): cannot lie but neednt tell all known adverse facts either.

iii. Usually used with hidden or latent defects b/c buyer cannot discover even with due diligence (e.g., termites).

iv. Factors to consider when fairness requires disclosure of material misrepresentation (* = Wilmarth likes).

1. The difference in the degree of intelligence of the parties to the transaction (clearly this one is problematic).

2. The relation btw the parties. 3. The manner in which the information is acquired. Info that affects the value of the

subject matter in a K may have been acquired by chance, by effort, or by illegal act. It makes a difference on the ethical quality of disclosure.

4. * The nature of the fact not disclosed. In Ks for sale of real property, if the vendor conceals an intrinsic defect not discoverable by rsbl care, there is much greater likelihood of the existence of a duty to disclose the non-discoverable and intrinsic defect than there would be to disclose something extrinsic likely to affect the market value.

5. The general class to which the person who is concealing the information belongs (sellers more likely to be required to disclose than purchasers).

6. The nature of the K itself. In releases and insurance Ks, practically all material facts must be disclosed.

7. * The importance of the fact not disclosed. 8. * Any conduct of the person not disclosing something to prevent discovery. The active

concealment of any material fact (anything that might prevent the purchaser from buying at the price agreed on is, and should be, as a matter of law fraudulent).

a. Concealment: Attempts by D to conceal evidence of the fact/problem usually = evidence of bad faith.

Hill v. Jones: Before P bought a house from D, inquired about certain damage and D claimed it was due to water damage, not termites. P had a termite inspection done of the house and Ds concealed the evidence of termite damage w/ plants and boxes when the inspector came. Held: Ds disclosure of previous termite problems was necessary to correct Ps mistake that there had not been such damage. Termite damage was a basic assumption b/c would affect a rsbl persons decision to buy the house and concealment amounted to bad faith. Remanded to see if P took rsbl measures to discover the damage. Notes: Here K law alone deals w/ nondisclosure (no tort law like in Syester). Dispute is ALL pre-K here so good-faith rules for Ks themselves inapplicable. Duty to disclose here per 161(b)? Parol evidence allowed to show fraud and invalidate (equity) BUT difficult to get past PER in seeking $ damages?

3. R2d 161(c): When the person knows that the disclosure would correct a mistake of the other party as to

the contents of a writing evidencing the agreement.


4. R2d 161(d): Where the other person is entitled to know the fact b/c of a fiduciary or confidential trust relationship.

C. What Must the Plaintiff Show to Make the Contract Unenforceable? 1. Assertion: P must show that the nondisclosure = assertion/misrepresentation under R2d 161. 2. Reliance: P must show that they justifiably relied upon the sellers statements as being an assertion that

the fact did not exist. 3. Reasonable Inspection: P must show that she took rsbl measures to find out if the fact existed.

Laidlaw v. Organ: Seller asked buyer if there was anything that would affect the price of tobacco; buyer remained silent even though he knew the war was over and the price of tobacco had risen. Held: This was an arms-length transaction, and the buyer had no duty to disclose unless the seller pushed for an affirmative statement. Note: This was pre-161(b).

4. Material Facts: P must show that the facts not disclosed were material a. Subjective Test: P must show that he would have decided differently if he knew the fact, or that the

buyer knew that the fact would affect his decision. b. Objective Test: P must show that a rsbl person would have decided differently if they knew the fact

or that the buyer knew a rsbl persons decision would be affected by the fact. D. Disclaimers: Many courts say that you cannot put a clause in a K to disclaim your own fraud, but some

courts do allow specific disclaimers even though they still dont allow general disclaimers. 1. Hill v. Jones: Held that cannot disclaim your own fraud (i.e., a specific disclaimer does not bar action to

rescind, although does bar a tort action). 2. Dannan Realty: NY Court of Appeals upheld a specific statement in the K (saying that the seller made

no representations about expenses or profits) as a defense. E. Fiduciary Relationships per R2d 161(d) and R2d 173: Especially with attorney-client relationship.

Presumption of invalidity UNLESS: 1. Fair Terms: The K is made on fair terms. 2. Full Disclosure: All relevant facts are fully disclosed and explained. 3. Understanding of Legal Rights: The client is informed of (and understands) all of her legal rights. 4. Independent Counsel: Client is told that she can seek independent counsel.

Miller v. Sears: M was Ss attorney and he entered into a K to sell his property to S. S signed an indemnification proposal that was a personal guaranty in the K but did not know what he was signing. Held: The transaction was fair, but M did not adequately explain the legal consequences of the transaction.

III. Unconscionability per R2d 208 and UCC 2-302 (which are the SAME):

A. In General 1. Definition: Unconscionability is a rule of law whereby a court may excuse performance of a K (or of a

particular K term) if such term(s) are unduly oppressive or unfair to one party to the K. i. This usually boils down to a question of substantial fairness.

2. Legal Question: The determination of whether a K or K terms are unconscionable is a question of law to be decided by the judge after an evidentiary hearing.

3. Contract Must be Unconscionable at the Time of Formation: Determination of unconscionability is based on the terms of the K and the circumstances as they existed when the contract was made. A K will NOT be deemed unconscionable based on the results that it later produces.

i. Usually cannot be used to obtain affirmative relief (other than restitution and rescission). Usually nature is defensive (anything after K formation falls under good faith and fair dealing).

3. Test for Unconscionability per UCC 2-302, comment 1: Basic test for unconscionability is whether, in light of the commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the K.

4. Purpose of Unconscionability Doctrine per UCC 2-302, comment 1: To prevent oppression and unfair surprise.


B. Types of Unconscionability 1. Procedural Unconscionability: looks at the bargaining process and whether one party was induced to

enter into the contract w/o having any meaningful choice. a. Factors that may indicate procedural unconscionability (look at ALL circumstances and the

manner in which the K was made; determinations of unconscionability are very fact-intensive b/c dont want used as a universal solvent whenever anything seems at all one-sided). i. Was there a lack of knowledgeable assent?

ii. Was there a gross disparity/inequality of bargaining power? Boilerplate take-it-or-leave-it language?

iii. Was there an exploitation of a partys lack of knowledge or sophistication? iv. Was there unfair surprise? v. Was the contract difficult to understand or did it contain hidden terms?

vi. Was the contract rsbl and/or fair in light of the circumstances?

Williams v. Walker-Thomas Furniture Company: W entered into numerous installment contracts w/ WT. Ks had add-on and a pro-rata clauses that allowed WT to repossess all the stuff if W ever defaulted on any payment. Threshold issue = whether WT made the provision clear to W when she signed the form (if yes, no unconscionability here but if no, the bargaining process tainted by nondisclosure and incapacity). Held: W had inferior bargaining power and less sophistication than WT; K was confusing and W did not understand the pro-rata clause; W didnt have much of a choice b/c she was poor and had no credit. Court felt that WT took advantage of W b/c knew she was poor. Criticism: This decision was criticized b/c the dissent felt that the court shouldnt play big-brother, and if these types of clauses were not allowed, then it would discourage retailers from selling stuff to poor people and then they wont be able to get items that they need. 2. Substantive Unconscionability: Substantive unconscionability deals with whether the K or a K clause is

unrsbly/unduly unfair or one-sided (such that would lead to oppression). a. Situations Where Substantive Unconscionability Could Arise (look at actual terms):

1. Excessive price 2. Penalty clauses 3. Gross disparity btw cost and price 4. Denial of basic rights and remedies

b. Standards for Substantive Unconscionability a. Reasonableness Standard: looks at the terms of the K and determines whether they were rsbl

in light of the circumstances. b. Shock the Conscience Standard: in order for a K or K term to be substantively

unconscionable it must shock the conscience. Many courts adopt.

American Software v. Ali: A was an empee of AS and her K provided for a base salary + commissions, which were not awarded until customer paid. K said that if you quit then you didnt get any commission $ that came in more than 30 days after you left. A argued that AS had superior bargaining power and that the 30-day provision was unconscionable. Held: No procedural unconscionability b/c (1) A had an attorney look over the K and actually changed terms before she signed it (i.e., A had the capacity to understand the K provisions, unlike W in Williams) and (2) this did not shock the conscience b/c it provided an incentive for empees to keep servicing an account (AS was taking a risk that A might leave before reaching the draw such that they would lose $; this type of term common to this type of K). Used R2d 208 b/c service K. Distinguished A&M Produce, which applied unconscionability to clauses limiting liability for damages to those from breach of warranty. Per UCC 2-719(3), limits on consequential damages may not be unconscionable. Note: Unconscionability is more likely to be found in cases involving consumers (Williams) than in those involving parties in commercial settings as here.


c. Excessive Price: Gross excessiveness in price alone can make a consumer K unconscionable (e.g., price was agreed upon but consumer didnt realize it was excessive).

Ahern v. Knecht: A had an immediate need to fix her air conditioner, and she did not realize that the price she was charged was grossly excessive until the AC was not fixed and she had to go to another company. Held: There was a gross disparity in the values exchanged, A was ignorant as to how much the AC repair should cost, she had no bargaining power and she had no real choice but to accept the service t/f the K was unconscionable and restitutionary damages were awarded for the $ overcharged her.

C. Application of Unconscionability: Courts treat commercial Ks differently than they treat consumer Ks because

parties in commercial Ks are usually more sophisticated, they have more expertise, and there is more of an equality of bargaining power: compare Williams with American Software.

D. Remedies For Unconscionability: Both UCC 2-302 and R2d 208 provide three different remedies that a court can provide when they find a K and/or a K term to be unconscionable. a. Refusal to Enforce: The court may refuse to enforce the entire K. b. Eliminate Terms: The court may choose to remove the unconscionable term(s) and enforce the

remainder of the K w/o these terms (blue-pencil the K). c. Limit Application: The court may choose to limit the application of the unconscionable term(s) so as to

avoid any unconscionable result (e.g, reduce the price). d. Restitution: The modern trend is moving toward allowing restitutionary damages when an

unconscionable K is rescinded (especially w/ excessive price) even though neither the Restatement nor the UCC specifically provide for this: see Ahern v.Knecht.

IV. Public Policy: Limitations on the enforcement of contractual obligations that violate some standard of public policy, even where the process of K formation is untainted (such Ks are unenforceable b/c of illegality even though not illegal).

A. In General per R2d 178 and R2d 181: a. Balancing Test per R2d 178(1): A promise or other term of an agreement is unenforceable

on grounds of public policy if the interest in its enforcement is clearly outweighed by a public policy against enforcement under the given circumstances.

b. Factors to Consider When Weighing the Interest in the Enforcement of a Term i. Parties justified expectations.

ii. Any forfeiture that would result if enforcement were denied. iii. Any special public interest in the enforcement of a particular term.

c. Factors to Consider When Weighing a Public Policy Against the Enforcement of a Term i. The strength of the policy as manifested by legislation or judicial decisions.

ii. The likelihood that a refusal to enforce the term will further the policy. iii. The seriousness of any misconduct involved and the extent to which it was deliberate. iv. The directness of the connection btw the misconduct and the term.

2. Failure to Comply With Licensing per R2d 181: A K made that is in violation of a licensing, registration or similar requirement is invalid if the requirement has a regulatory purpose OR if the public policy behind the requirement clearly outweighs the interest in the enforcement of the K.

B. Covenants Not To Compete per R2d 187 and R2d 188: 1. Must Be Ancillary per R2d 187: A promise to refrain from competition that is non-ancillary to an

otherwise valid transaction or relationship is an unrsbl restraint of trade. 2. A Covenant Not to Compete is Ancillary when, per R2d 188(2), it is a:

a. Promise by a Seller of a business not to compete w/ the Buyer. b. Promise by an Employee not to compete w/ his Employer. c. Promise by a Partner not to compete w/ the Partnership.

3. An Ancillary Restrictive Covenant is Reasonable when, per R2d 188(1), it: a. Protects the Interests of Employer per R2d 188(1)(a): The restraint must not be greater than is

necessary to protect the legitimate interests of the employer. b. There is No Undue Hardship to the Employee per R2d 188(1)(b): The employers need for the

restriction must outweigh the hardship to the employee that is imposed by the restriction. c. Is Not Injurious to the Public / Publics Interest per R2d 188(1)(b).


Karlin v. Weinberg: Ds empt K w/ P had restrictive covenant saying that if D left, he couldnt open a dermatology office w/in 10 miles of Ps office for 5 years. Protected Interests of Emper: restriction was necessary to protect Ps interests in keeping D from stealing patients that P had developed a relationship with. No Undue Hardship to Empee: b/c the covenant did not say that D could not treat certain patients, was merely inconvenient (D not barred from practicing dermatology just prevented from practicing in a certain area). Not Injurious to Public: Based on the circumstances of the case, the geographic or time restrictions were not excessive and t/f they did not seriously injure the public (covenant not so restrictive that it prevented D from treating patients or restricted the patients rights to see the doctor of their choice). Patients might have to drive a few extra miles but D was not prevented from treating them.

4. Doctors vs. Lawyers: Similar covenants not to compete cant be enforced against lawyers b/c they violate

the Rules of Professional Responsibility, which prevent restrictions that in any way prevent a person from being able to freely choose their attorney. The dissent in Karlin argued that doctors could not be distinguished from lawyers and that restrictive covenants should not be enforced against doctors either.

5. Remedies a. Modification of Restrictions: Many courts follow the approach of changing the restrictive covenant

in order to make it rsbl rather than to not enforce it at all (the blue-pencil approach; see Karlin). b. Restriction Unenforceable: Other courts disagree w/ the modification approach and say that the

covenant should not be enforced at all if it is unrsbl (b/c otherwise corporations would draft broad and potentially unfair covenants).

C. Adoption, Custody and Surrogacy Agreements 1. Adoption Laws

a. Consent After Birth: Adoption agreements made before a baby is born are invalid (mother must consent to the adoption 4 days after the child is born).

b. No Payment: Cannot pay for an adoption beyond what is necessary to reimburse the mother for any general medical expenses related to birth.

2. Custody Agreements per R2d 191: A promise affecting the custody of a minor child in unenforceable on grounds of public policy unless the custody agreement is determined to be consistent w/ the best interests of the child.

3. Biological Surrogates: Adoption laws often considered with surrogacy as well b/c similar Ks. a. Contracts Providing for Adoption: If a surrogacy agreement provides that the fathers wife will be

able to adopt a child, these provisions will be invalid b/c they violate the adoption statutes. The father may still get custody if it is in the best interests of the child, but the mother will not be forced to give up her parental rights (see Baby M). i. Termination of parental rights in exchange for $ runs counter to public policy (dont want poor

women to be surrogates b/c of economic pressure, t/f cannot pay directly for this service). b. Contracts Not Providing for Adoption: In RR v. MH, the court held a surrogacy agreement

invalid based on adoption laws even though it didnt provide for the adoption of the baby. The court was still uncomfortable w/ the agreement b/c it was made before the mother became pregnant and provided that she would receive $10K for her services as a surrogate.

c. Can There Ever be a Valid Surrogacy Agreement? RR v. MH seemed to say that it was possible under the following circumstances, subject to a judicial determination of custody based on the best interests of the child:

1. Mothers husband gives informed consent to the agreement in advance. 2. Mother is an adult that has had at least one successful pregnancy. 3. Mother, her husband, and the intended parents all have psychological evaluations. 4. Fathers wife infertile or incapable of carrying a child w/o endangering her health. 5. Intended parents are suitable to obtain custody of the child. 6. All parties have the advice of counsel. 7. No $ is paid beyond birthing and pregnancy expenses. 8. Mother does not have to give up parental rights.

4. Gestational Surrogates: These are looked at differently than biological surrogacy agreements b/c the gestational mother has no biological claim to the baby. In Johnson v. Calvert, the SC held that the gestational mother might have a claim for visitation rights to the baby but the biological mother had the mothers rights after the birth of the baby under the contract.


II. JUSTIFICATION FOR NONPERFORMANCE OF CONTRACTS

I. Mistake

A. General Rules 1. Existing Fact: The mistake must be about a fact that already existed when the K was made, a mistake

as to future predictions or assumptions will does not count 2. Courts Considerations: In determining if a mistake will justify the nonperformance of a K, the court

will generally look at the following factors: i. Whether there an assumption that was relied upon in making the K.

ii. Whether a mistake concerning a material fact lead to the assumption. iii. How due diligence and equity require the risk to be allocated.

B. Mutual Mistake per R2d 152: 1. When a Mutual Mistake Makes a Contract Voidable per R2d 152(1):

a. Mutual Mistake: Must have been made by both parties at the time the K was made. 1. Fact must have existed before K.

b. Basic Assumption: Mistake must relate to (run counter to) a basic assumption on which the K was made.

Lenawee County Board of Health v. Messerly (sewage case): Improperly installed septic tank caused the county health board to declare apartment property unfit for human dwelling. Held: This relates to the basic assumption that the property was an income-producing rental property. Notes: Courts need NOT grant recission in every mutual-mistake case. Where both parties are innocent (as here), a court exercises its equitable powers to determine which blameless party should assume the loss (here b/c as is clause should be the buyer but this is a very close call; many courts would have applied implied warranty of habitability theory and come out the other way AND b/c some courts regard boilerplate as is clauses as ineffective in that they lack adequate notice of what is being bargained for (see Shore Bldrs).

c. Material Effect: The mistake must have a material effect on the agreed exchange of performances. 1. Collateral v. Material Mistake: A K usually deemed voidable if the mistake is material but NOT

when it is collateral. a. Collateral Mistake: Affects only the quality or value of the material transferred through the K.

A&M Land Development v. Miller: P property and sought partial rescission of the K b/c it was unable to get permits from the county health board to install septic tanks on some of the lots. Held: No rescission allowed b/c the mistake was only related to the value of the property.

b. Material Mistake: Affect the essence of the consideration for the K.

Sherwood v. Walker: That the barren cow (offered for $80 steak value) was later found to be pregnant (and worth $1000 as a breeder) was a material mistake b/c the status of the cow being barren was not merely about the quality of the cow but it went to the very nature of the cow.

Lenawee (sewage case): Land being uninhabitable didnt just decrease the value, it rendered it valueless and completely eliminated the essential nature of the land that was considered when the K was made.

d. Adversely Affected Party Must not Bear the Risk of the Mistake (Risk Allocation): A mistake that

meets the above requirements will make the K voidable by the adversely affected party UNLESS that party bears the risk of the mistake under R2d 154 (see 154 below).


2. Remedies: The remedies for a mutual mistake that makes a K voidable are reformation and rescission (and sometimes restitution), and the remedy will depend on the type of mistake. a. Reformation: Reformation is generally the remedy when the mutual mistake consists of a failure of

the written K to accurately state the actual agreement of the parties. The K will be reformed to express the parties mutual intent.

b. Rescission: Rescission will be awarded for ALL other types of mutual mistakes EXCEPT those that involve the failure of the written K to accurately state the actual agreement of the parties.

c. Restitution per R2d 158: Restitution may be awarded where it is appropriate (e.g., when one party has made a down payment and then the K is rescinded).

C. Unilateral Mistake per R2d 153: [nb: can be a close call btw unilateral mistake and misrepresentation] 1. When a Unilateral Mistake Makes a Contract Voidable per R2d 153:

a. Unilateral Mistake: Mistake made ONLY by one party at the time the K was made. b. Basic Assumption: The mistake must relate to a basic assumption on which the K was made.

Wil-Freds v. Metropolitan Sanitary District: WF placed a bid (on a job to be done for the SD) that was incorrect (too low) by $150K b/c of a mistaken interpretation of the specifications for the project. Held: Related to the basic assumption that WF made that std (large) trucks could be used on the project (which involved plastic pipes) t/f contractor may rescind the K.

2. Material Effect Adverse to Mistaken Party: The mistake must have a material effect on the agreed

exchange of performances that adversely affects the mistaken party.

Wil-Freds: Mistake material b/c they could not perform and t/f would forfeit a $100K bid deposit.

a. Mistaken Party Must NOT Bear the Risk: A mistake that meets the above requirements will make the K voidable by the mistaken party IF that party does NOT bear the risk of the mistake (per 154).

1. Rsbl Care: Usually, the mistaken party must show that the mistake was made in good faith and with the use of rsbl care (failure to do so would probably allocate the risk to the mistaken party under R2d 154(b)).

a. Although the text of 153 doesnt require rsbl care, courts usually require it b/c it underlies the unconscionability element (and b/c 153 points to 154, for which rsblness is important).

Wil-Freds: WF used rsbl care b/c they had worked w/ the SC that messed up the bid in the past and the SC had never revoked a bid t/f WF was justified in relying upon the SCs bid in formulating their own bid.

2. No Prejudice: If the rescission of the contract will prejudice the non-mistaken party,

the K is not voidable (b/c this would probably allocate risk to the mistaken party under 154(c)).

Wil-Freds: SD would suffer little or no prejudice b/c they could just accept the next lowest bid (they were not responsible in making a bid to anyone).

AND

b. Mistake Has An Unconscionable Effect: If the mistake results in grave consequences that make enforcement extremely unfair or imposes severe hardship on the mistaken party, then it will be determined to have an unconscionable effect. i. Meaning here (that severe enough to cause substantial loss) is less than meaning in R2d 208

or UCC 2-302)???

Wil-Freds: Loss of the $100K would have caused WFs bonding capacity to be reduced by $2M to $3M (sufficiently grave).

OR ii. Other Party Had Reason to Know of the Mistake: If the non-mistaken party should have

known of the mistake then the K can be rescinded.


Wil-Freds: SD should have realized that there was a mistake b/c WFs bid was so much lower.

OR iii. Other Party Caused the Mistake: If the mistake was caused by or was the fault of the non-

mistaken party, the K can be rescinded.

Wil-Freds: SDs confusing specifications partially responsible for WFs price mistake.

3. Remedy: The remedy for unilateral mistakes is rescission and sometimes restitution. 4. Inadvertent clerical errors are typically voidable (e.g., where Kr inadvertently omits major cost item

from total and bid wins); courts almost always allows contractor to rescind/reform bid ) as long as acts before substantial reliance on the bid) on the ground that enforcement would be unconscionable (this does NOT hold true if the mistake was a business misjudgment (e.g., an underestimation of cost).

a. Wil-Freds is different from Drennan (where the mistaken party lost) b/c in Drennan detrimental reliance was shown (but not by SD here). Would be more like Drennan if Wil-Freds was suing Cigalo (the excavation subKr who erred in the sub-bid and on whose sub-bid Wil-Freds relied in bidding)?

D. Allocation of the Risk of a Mistake per R2d 154: 1. Contract Terms per R2d 154(a): A party bears the risk of a mistake if it is allocated to him by the

agreement of the parties. a. As Is Clauses: Courts are split as to whether as is clauses allocate the risk to the buyer, some

courts hold that as is clauses are boilerplate and unenforceable, while others (see Wil-Freds) say that as is clauses allocate the risk of a mistake to the buyer.

2. Limited Knowledge per R2d 154(b): A party bears the risk of a mistake if she is aware, at the time the K is made, that she has only limited knowledge of the facts to which the mistake relates but treats this limited knowledge as sufficient.

i. Usually, the mistaken party must show that the mistake was made in good faith and with the use of rsbl care (failure to do so would probably allocate the risk to the mistaken party under R2d 154(b)).

3. Equity per R2d 154(c): A party bears the risk of a mistake when it is allocated to him by the court on the ground that it is rsbl under the circumstances to do so (equity).

Suez Canal cases (e.g., American Trading v. Shell): No relief b/c foreseeable that Suez would be seized and t/f inoperable and risk should be borne by the shippers b/c better risk allocators.

If the rescission of the K will prejudice the non-mistaken party, the K is not voidable (b/c this would probably allocate risk to the mistaken party under 154(c)).

II. Changed Circumstances, Impracticability and Frustration of Purpose

A. Types of Impracticability (Not impossibility, but K less feasible and more costly/burdensome/difficult; how much? Fuzzy b/c defines with impracticable so courts retain some discretion). 1. Existing Impracticability: Impracticability exists when K is made but the parties dont know about it.

Mineral Park: K required D to purchase all the gravel required for the construction of a bridge from P, but there was not enough gravel above the water level on Ps land so D got some gravel from elsewhere. Held: The significant increase in price that would result from recovering gravel from below the water line made performance impracticable. NOTE: Here, relief granted due to excessive cost of performance but this case is rarely followed. The existing impracticability in MP seems like mutual mistake under a different label; in Wilmarth land, we would label this mutual mistake UNLESS this was an unusually rainy season and the water table rose after the K was made (which would be superseding/intervening impracticability).

2. Supervening Impracticability per R2d 261: The supervening occurrence or non-occurrence of an

event that was a basic assumption of the K excuses performance unless the K provides otherwise. Ask: 1. Supervening event? 2. Contradicts basic assumption? 3. Impracticable? 4. Allocation of risk?

a. Fault: Intervening event must not be the fault of the party claiming impracticability.


a. Foreseeability: Many courts read the UCC requirement into common law Ks that the intervening event must be unforeseeable and not w/in the contemplation of the parties when the K was made (b/c otherwise could have put provisions in the K to deal w/ the intervening event). Wars, natural disasters, and market changes are usually held to be foreseeable events.

c. Increased Cost/Market Shifts: Increased costs and market shifts are not usually considered to be basic assumptions of the K b/c courts assume that the parties assumed the risk of market changes and possible increased costs (261 comments b and d: discontinuance of market conditions not basic assumptions). Courts hesitate to rewrite agreements to redistribute loss/risk (b/c then losing parties to unprofitable Ks could get out and Ks would be more risky; especially long-term Ks).

1. See Karl Wendt. d. Method of Performance Prevented: When the method of performance is rendered impracticable, it

will excuse performance ONLY if the parties agreed upon a specific method of performance.

Chugach Elec. v. Northern Corp.: D agreed to haul rocks across a lake in Alaska once it froze b/c there were no roads around to use. Alaska had a warm summer and the ice never got thick enough to allow the transportation of the rocks across it and the court excused the performance b/c the parties had agreed on a specific method of performance that had become impracticable.

Suez Canal Cases: Two different cases said that the closing of the Suez canal due to war did NOT excuse performance under the impracticability doctrine b/c they could have gone around the canal, so performance was not impossible, and the specific means of travel were not expressed in the K, they were merely assumed, and t/f NOT deemed to be basic assumptions of the K.

3. Physical Impracticability: Changed circumstances (e.g., that result the destruction or death of something or someone that is a basic assumption of the K) will excuse performance where performance has become impracticable, if not impossible.

a. Death or Incapacity of a Person per R2d 262 and UCC 2-613: When a person necessary for performance of a duty dies or is incapacitated, this is a change in a basic assumption of the K and performance is excused.

b. Destruction of Thing per R2d 263 and UCC 2-613: If a thing necessary to the performance of a duty is destroyed, deteriorates, or fails to come into existence, this is considered to be a change in a basic assumption of the K and the duty of performance is accordingly excused.

i. Taylor v. Caldwell: D agreed to rent music hall, which burned down before performance; D didnt have to pay b/c fire rendered the K impossible.

c. Governmental Interference per R2d 264 and UCC 2-615: If performance is made impracticable b/c of a need to comply w/ a governmental order, this IS a change in a basic assumption of the K and performance will be excused. UCC 2-615 specifically mentions compliance in good faith withgovt regulation as a form of relief.

(1) Change in Governmental Policy Florida Power & Light v. Westinghouse: W had K to deal with old fuel (nuclear rods); govt policy changed to prohibit commercial reprocessing of fuel. Performance thus rendered impracticable (W couldnt fulfill K). (2) Governmental Order: A straight governmental order will almost always excuse performance. Harriscom Svenska v. Harris Corp.: HC produced radios that HS sent to Iran. US customs said that the radios were military items and t/f couldnt be shipped to Iran. HC entered into an agreement w/ the govt to only sell four more radios to Iran so that they would still be able to sell them elsewhere. Held: That HC would have been prohibited from selling their radios at all unless they entered into this agreement made it compliance w/ a governmental order and not a voluntary choice. Performance had become impracticable and was accordingly excused (nb: Ks contained force majeure clauses).


4. Frustration-of-Purpose Impracticability per R2d 265: If the principal purpose of a K is substantially frustrated by the occurrence of an event whose non-occurrence was a basic assumption on which the K was made, performance will be excused unless the K indicates otherwise. a. Considerations: Consider Foreseeability (if the intervening event was foreseeable, the purpose is

not frustrated); totality of frustration; and allocation of risk. b. What is a Principal Purpose?

(1) Mutual Profitability: Mutual profitability cannot be a principal purpose b/c it is generally a purpose of all Ks.

(2) Examples of a Principle Purpose: In Krell v. Henry, P rented a room to watch the coronation parade, which was cancelled due to King Henrys illness. The principle purpose of the K was determined to have been frustrated and the K was rescinded. In Molnar v. Molnar, parent permitted to discontinue child-support payments after the child died.

Karl Wendt Farm Equipment Co. v. International Harvester Co: IH lost a lot of $ for many reasons (e.g., embargo on wheat) so decided to go out of the farm-equipment business. IH sold their business to Case, and in areas where both IH and Case had dealers, only one could get the franchise under Case. Wendt was one of the old IH dealers that got screwed and he sued for breach of K b/c he didnt get 6 months notice. Held re: Impracticability: (1) market changes were a foreseeable occurrence and t/f performance was not excused (although some govt actions were involved in the problem so maybe it should have been a jury Q) and (2) good faith required IH to try and give notice and to try and help the dealers in some way instead of just helping themselves. Held re: Frustration of Purpose: Mutual profitability was not the primary purpose of the K b/c the reality that mutual profitability is a purpose of all Ks would eliminate the doctrine of frustration of purpose; the court considered the frustrating event to the IHs decision to go out of business and t/f frustration of purpose NOT be a defense. Dissent: This should have been a jury Q and that the jury verdict for IH should have been upheld b/c the govt actions allowed a rsbl jury to find for IH.

C. Delay in Delivery or Non-Delivery of Goods

1. Impracticability per UCC 2-615(a): A delay in delivery or non-delivery is NOT a breach of duty if delivery has been made impracticable, either by (1) the occurrence or non-occurrence of an event that was a basic assumption of the K or (2) by government interference, as long as the following conditions are met: a. Rsbl Allocation per UCC 2-615(b): When only part of a sellers capacity to perform is affected, he

must allocate production and deliveries among his customers in any manner that is fair and rsbl. b. Notice per UCC 2-615(c): The seller must notify the buyer that there will be a delay or non-

delivery and of the quota made available to the buyer (if any) under 216(b). 2. Foreseeability per UCC 2-615, comment 1: The supervening cause must be unforeseeable and NOT

within the contemplation of the parties when making the K. 3. Increased Cost per UCC 2-615, comment 4: Increased cost alone does not excuse performance

UNLESS it is due to an unforeseeable contingency that alters the essential nature of the performance. 4. Market Changes per UCC 2-615, comment 4: Changes in market condition are not enough to excuse

performance b/c this is a risk you take when you enter into a K. 5. Shortage of Raw Materials per UCC 2-615, comment 4: An unforeseeable shortage of raw materials

may be enough to excuse performance b/c of impracticability. 6. Method of Delivery: If the method of delivery becomes impracticable, courts will excuse performance if

the method of delivery was agreed upon in the contract (Alaska Case) but they will not excuse performance if the method of delivery was simply assumed by one of the parties (Suez Canal Cases).

D. Remedies: The remedies are rescission and restitution where appropriate. Also, in UCC cases of delayed delivery, the remedy is not rescinding the K for a late delivery.


III. Modification A. Pre-existing Duty Rule per R2d 73: A promise to perform a pre-existing legal duty is NOT consideration

(but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than the pretense of a bargain). If someone agrees to do something already required of him, it is insufficient to be consideration for a unilateral modification of a K.

Alaska Packers Association v. Domenico (1902): Fishermen were hired to work for the season for AP. When the fisherman got to Alaska, they refused to continue working unless they were paid more. AP could not get new workers so they agreed to the modification. AP later refused to pay the higher amount. Held: Since the fishermen didnt agree to do anything that they werent already legally required to do, there was no new consideration to make the modification enforceable.

B. Exceptions to the Pre-existing Duty Rule per R2d 89: A promise modifying a contractual duty that has

not yet been fully performed by either party IS binding in the following situations: 1. Unanticipated Difficulties per R2d 89(a): If the unilateral modification is fair and equitable in view of

unanticipated circumstances (unforeseen at time K made) that make performance of the duty more difficult.

2. Statute per R2d 89(b): If the modification is provided for by statute, then it is enforceable. 3. Detrimental Reliance per R2d 89(c): If one partys reliance on the modification induces a material

change of position that will result in injustice if the modification is not enforced. 4. New Contract: A number of courts have followed the exception created in Schwartzreich v. Bauman-

Basch that said that a modification will be enforceable, even if no new duties are imposed, if the old K is torn up b/c that would constitute mutual rescission and the modification would result in a new and valid K; when tore up old K, rescinded, t/f moment when neither party was bound t/f when signed new K, new consideration. a. Restatement View per R2d 89 comment b: This rationale is fictitious when the rescission

and the new K are simultaneous. b. When is This View Likely to be Justified? Even though fictitious, the Schwartzreich rule may be

justified when the following circumstances exist: (1) No coercion. (2) Unexpected change of circumstances (like if an employee later found out he was worth more $). (3) Justifiable reliance (employee stayed instead of breaching the K b/c of promise of a raise).

C. Modifications Agreed to Under Duress: Modifications that are agreed to as a result of duress (including economic duress) are unenforceable. 1. When is There Duress per R2d 175?

(a) Improper Threat: Threatening to breach a contract in order to gain assent to a modification b/c one knows that a breach will cause severe hardship to the other party is considered an improper threat.

(b) No Rsbl Alternative: Duress will not be found unless the injured party had no other choice but to agree to the modifications.

2. Protesting the Modifications: Most courts require that the party claiming duress is required to protest the modifications to fulfill their good-faith duty of putting the other party on notice so that the other party will not later be shocked by the injured partys intention to resist enforcement or seek redress BUT other courts hold that the buyer is not required to act in good faith b/c the seller is acting in bad faith by using duress.

Kelsey-Hayes v. Galtaco: G experienced financial losses and threatened to shut down operations unless customers agreed to a 30% price increase. KH could not find another supplier, and so they agreed to Gs price increases to avoid substantial losses from a failure to produce the required brake parts for their clients. Held: A subsequent K modification is invalid if entered into under duress and t/f does not supersede an earlier K. Threat does not have to be illegal, only improper, and Gs threat was improper b/c it knew KH needed the parts. Also, faced w/ the imminent shut down of its major customers plants, KH had no other alternative than to accept Gs price increases. Finally, KH protested the price increases even though they didnt specifically reserve the right to sue and the increases are t/f unenforceable b/c of duress.


D. UCC Modification, Rescission, and Waiver per UCC 2-209 1. No Consideration Required per UCC 2-209(1): An agreement modifying a K w/in Article 2 of the

UCC does not need consideration to be binding, BUT a. Good-Faith Test: Even though no consideration is required, comment 2 says that modifications

made under 2-209(1) must meet the good faith test. (1) Bad Faith: Comment 2 says that a bad faith attempt to escape performance or to extort a

modification w/o a legitimate commercial reason violate the good-faith test and will render the modification unenforceable.

2. No Oral Modification Clauses per UCC 2-209(2): A contract that contains a NOM clause cannot be modified w/o a signed writing when the K is between merchants. a. Non-Merchant: If one of the parties is a non-merchant and the NOM clause is contained in a document

provided by the merchant, the non-merchant must separately sign the NOM clause or else it is not binding.

b. Personal SOF: Basically, this provision allows parties to create their own private SOF in order to protect themselves from false allegations of oral modifications.

3. SOF per UCC 2-209(3): If the K, as modified, falls under the SOF, the requirements of the SOF under 2-201 must be met.

4. Waiver per UCC 2-209(4): Even if a modification would be invalid under 2-209(2) or (3) b/c it is oral, it can operate as a waiver. Waivers operate on a one-time basis, they do not change the K for good as modifications do.

5. Retraction of Waivers per UCC 2-209(5): A party who has made a waiver may retract the waiver by giving the other party rsbl notification that strict performance of any term(s) waived is required. a. Received Before Performance Has Begun: The other party must receive this waiver before they have

begun performance b/c after they start performing they will have a detrimental reliance claim. b. Preventing Injustice: 2-209(5) provides that a retraction will not be allowed if it would be unjust in

view of a material change in position that the other party made in (detrimental) reliance on the waiver. c. No Waiver Clauses: Some Ks will have no waiver clauses in addition to NOM clauses BUT courts dont

look favorably on these and are very unlikely to enforce them.

Brookside Farms v. Mama Rizzos: MR was under K to buy basil leaves from BF. MR and BF agreed that BF would remove the stems of the leaves for an increased price. MR said they would include this increase in the K but never did. BF subsequently asked for more price increases and MR orally agreed. MR sent a check to BF that bounced and BF sued. Held: A K that doesnt satisfy the SOF, but is valid in other respects, is enforceable re: goods for which payment has been made and accepted or which have been recd and accepted. The first price increase was valid under the SOF b/c BF relied on MRs promise to put it in writing AND b/c the goods were accepted and paid for, showing that there was a K. BF could have assumed that MR would record the other price increases as it promised to do w/ the first, and t/f the other increases are valid for the same reasons the first increase is valid. Note: This involved a NOM clause under 2-209(2), not the general SOF under 2-201 (2-209(3)) and the court just assumed that 2-201 rules applied to personal SOFs; Wilmarth thinks they needed more evidence of this (and perhaps should have used 2-201 directly b/c already using by analogy). Some courts say that per 2-201 can change price w/o memo but not quantity; Wilmarth questions need for new memo if not changing quantity but change material where 2-201 says only need quantity. Wilmarth prefers merchant-confirmation approach of 2-201(2) (price confirmed when paid) here b/c didnt object (better defense than implied promise to make a memo; Wilmarth thought it was a stretch to make repeated promises an implied writing). What the hell is the point of having a personal SOF if it is just like the regular SOF??? E. Checks for Less Than Invoice Price per UCC 3-311: If a check is given for a price less than the invoice

price (with something like tendered in full and final settlement, accord and satisfaction, of account #123), then it is said that the check represents full payment and an acceptance of the check constitutes accord and satisfaction, which discharges any remaining obligations under common law. a. No Reservation of Rights: UCC 1-207 used to say that you could reserve the right to sue under accord

and satisfaction, however, it now says that you cannot. b. Does not Apply to Liquidated Damages: Accord and satisfaction does not apply to damages that are

liquidated (e.g., promissory notes) when there is no dispute as to the amount owed. It only applies when there is a good-faith dispute as to the money owed (un-liquidated damages).


III. CONSEQUENCES OF NONPERFORMANCE

I. Breach: First need to determine nature of the breach (partial/material/total) so can determine consequences

A. Performance

1. Order of Performance per R2d 234 a. Simultaneous Performance per R2d 234(1): When the performances to be exchanged under a K

can be rendered simultaneously, there is a presumption that the parties intended them to be performed simultaneously and they are t/f due at the same time unless the K provides otherwise. (1) Concurrent Condition: Simultaneous performances are considered to be concurrent conditions

to the other partys duty of performance. b. Subsequent Performance per R2d 234(2): When one of the performances requires more time

than the other performance, the longer performance is due before the shorter one. (1) Condition Precedent: The performance requiring the longer period of time (rendering services) is

a condition precedent to the performance requiring the shorter period of time (payment of $). 2. Full Performance per R2d 235(1): Full performance of a duty under a K discharges the duty. 3. When Nonperformance is a Breach per R2d 235(2): When performance of a duty under a K is due,

any nonperformance is a breach. 4. Effect of Nonperformance per R2d 237: Each partys duty to render remaining performances is

contingent upon the other party completing his prior duties w/o an uncured material breach. (a) Exception: Divisible Contracts per R2d 240: When different promised performances can be

divided into a number of part performances, the other party is required to perform their respective duties as if there were a number of different Ks. (1) Carrig v. Gilbert-Varker: GV agreed to construct 35 houses for C in groups not less than 10

at a time. GV only built 20 houses and the court said C owed GV the $ for the 20 houses b/c the K was divisible.

B. Partial Breach 1. Requirements of a Partial Breach

a. Trivial: The breach must be trivial or technical. b. Not Material: The breach must not be related to a material part of the K.

(1) Aesthetic Ks: If a K involves aesthetics, breaches that may otherwise be trivial may be deemed material (e.g., improper painting on home may not decrease value greatly but decreases aesthetic appeal to individual consumer).

1. City School District v. McLane Construction: Appearance of wooden beams central to aesthetics of swimming pool buildings design; defects in cleaning and staining beams neither trivial nor inadvertent.

c. Substantial Performance: The breach must be made after the breaching party has substantially performed the K. Basically, the breach must not significantly impair the value of the K. (1) Factors to Consider: When trying to determine if performance is substantial, look at:

a. The relative fault of the breaching party (good faith). In J&Y, they did not realize the mistake until after the house was built.

b. The nature of the defects (whether inconsiderable or very noticeable). In J&Y, the pipes were of equal quality and so their difference was negligible.

c. Details of the K (whether aesthetics or time important). 2. Remedies Available: Partial breaches will not suspend or discharge the duty of the injured party to

complete their performance of the contract, however the injured party can sue for damages.

BREACH SPECTRUM

PARTIAL BREACH MATERIAL BREACH TOTAL BREACH 1. Neither Party May Stop 1. Injured Party May Suspend Performance 1. Injured Partys Duties Performing 2. Must Notify Other Party of Suspension Are Excused 2. Injured Party Can Only 3. Must Give Rsbl Time for Cure (242) 2. Material Breach Becomes Total

Sue for Actual Damages When Not Cured w/in Rsbl Time 3. Can Sue for ALL (Past and Future) Damages


a. Cost of Completion: Cost of completion damages will usually be awarded unless they are so extreme that they would unduly compensate the injured party.

b. Market Damages: If cost-of-completion damages are too high, the injured party will be awarded the difference in the market value of the performance as completed and the contract price. (This may be negligible in partial breach cases).

Jacob & Youngs v. Kent: JY agreed to build a house for K in East Hampton, NY (down near Hook Pond and Georgica). The specs provided that all pipes had to be of Reading manufacture, and after the house was built it was discovered that some of the pipes were made by a different company (but were of equal quality). K said JY had to replace the pipes or else he would not pay them and JY sued. Held: Where the significance of the omission or default is generously out of proportion to the oppression of the forfeiture, a breach is considered innocent and trivial. Cardozo focuses on pragmatics and equity and says that this was a trivial breach b/c the pipes were basically the same as what was asked for, they were just made somewhere else and t/f the difference in what they received was nominal. Replacing the pipes would cost too much b/c the walls would have to be torn down and so K could only get the difference in market value btw the Reading pipes and the pipes used. This was NOT a material breach (only a partial breach) t/f can only sue for actual damages. Dissent: This destroys the idea of a written K b/c parties should be able to specify what they want in writing, whether or not they have a good reason or any reason at all.

C. Material Breach 1. When is a Breach Material per R2d 241? The following circumstances are significant in determining

if a breach is material (dont need all of them, but consider all of them): a. Deprival of Benefit: Look at the extent to which the injured party will be deprived of a benefit that

he reasonably expected. (In Sackett, D was deprived of a significant benefit $34K) b. Adequate Compensation: Look at the extent to which the injured party can be adequately compensated

for the part of the benefit that will be deprived. (In Sackett, D could obviously be adequately compensated by a payment of $34K)

c. Forfeiture: Look at the extent to which the breaching party will suffer forfeiture. (In Sackett, P suffered forfeiture when D sold the stock to someone else)

d. Cure Failure: Look at the likelihood that the breaching party will cure the breach (by performing or offering to perform), taking into account all the circumstances, including any rsbl assurances. (In Sackett, P did not seem able to cure his breach since the $ had been due for 2 months, his last check bounced, and he did not seem to have the $ to pay)

e. Good Faith and Fair Dealing: Look at the extent to which breaching partys behavior done w/ GFFD. (In Sackett, arguable whether P was acting in good faith; no sign that he was willfully trying not to pay, but he did keep saying that he would be able to pay when he couldnt)

2. Suspension of Performance per R2d 237: When one party is in material breach, the injured partys duties are suspended while the breaching party is given a rsbl amount of time to attempt to cure the breach. This rsbl time period is determined by 242, and duties are discharged after it expires. a. Notice Required: The injured party must inform the breaching party that they are suspending

performance b/c that party is in material breach, t/f giving them an option to cure. 3. When Material Breach Discharges Duties per R2d 242: In determining how long an injured party

must wait before their duties are discharged, the following factors should be considered. a. Material Breach: Look at the factors in 241. b. Result of Delay: Look at the extent to which it rsbly appears that the delay may prevent the injured

party from finding substitute arrangements. (In Sackett, D needed the $, his business was going under, and if he did not declare total breach and look for other buyers he was facing serious loss)

c. TIME IS OF THE ESSENCE: Look at the extent to which the agreement provides that performance w/o delay is important and look at the length of the delay. (1) Due Date Not Enough: The mere fact that the K provided for a party to perform on a certain

stated day does not in itself discharge the duties of the injured party (BUT if the K provides that the due date is an express condition of the K, this is enough per 242, comment d).

(2) Totality of Circumstances: You must look at the totality of the circumstances, including the language of the agreement, to determine if performance on the stated day was important (in Sackett, D seemed to need the $ on time b/c he needed to save the business. The court felt that the 2 months he gave P before declaring total breach were rsbl under 242).


D. Total Breach per R2d 243

i. Material breach becomes total when (1) not rsbl to make injured party wait any longer (need to let go so that can make other arrangements) or (2) not cured.

1. Notice Required: The injured party must notify the breaching party that they are declaring total breach (such that they have the chance to cure).

2. When are Damages for Total Breach Appropriate? a. General Rule per R2d 243(1): When one party is in material breach and they are given a rsbl time

to cure under 242 but the breach is not cured (t/f discharging duties), then the injured party may declare total breach and get damages accordingly.

b. Repudiation per R2d 243(2): When one party is in material breach and subsequently repudiates the K, then the injured party may declare total breach and get damages accordingly.

c. Exception per R2d 243(3): When the injured party has fully performed his duties under the K and the breaching partys only obligation is to pay $ in installments, the injured party cannot declare total breach, they may just bring suit to recover the installments as they become due, even if the breaching party has repudiated the contract. (1) Way to Get Around the Exception: Some Ks will contain clauses that say if any installment

is late then the entire amount is due in order to circumvent this exception. d. Other Agreements per R2d 243(4): In any other agreement (that is not for mutual exchanges of

promises of performance), nonperformance will give rise to a claim of total breach only if it SO substantially impairs the value of the K to the injured party that justice will allow him to recover total breach damages.

E. Courts will try to Prevent Forfeiture by: 1. Finding Partial Breach: The courts will try to avoid finding that the breach was material or total and

will instead find the breach to be partial in order to prevent forfeiture 2. Finding That the K is Divisible: Courts will try and find the K to be divisible so that part performance

and possession of part of the property is not forfeited. II. Anticipatory Repudiation

A. In General 1. Courts Interpret Anticipatory Repudiation Very Narrowly b/c they want to avoid forfeiture. 2. Requirements of an Anticipatory Repudiation: If one party claims that their duties are discharged

based on an anticipatory repudiation, they must do one of the following: a. Give Notice: The party claiming that their duties are discharged must notify the other party that they

are not going to perform the K. OR b. Detrimental Reliance: The party claiming that their duties are discharged must materially change

their position in some way based on the repudiation. B. Is There a Repudiation per R2d 250, 251 and UCC 2-609?

1. Common Law a. When a Statement or Act is Repudiation per R2d 250

(1) Statement per R2d 250(a): A statement by the obligor indicating that he will commit a breach that would give the obligee a claim for total breach under 243 will constitute a repudiation. (a) Requirements: Must be a clear, unequivocal, unambiguous statement of intent not to

perform. 1. Doubtful and indefinite statements that performance may or may not occur are NOT

enough. 2. Can say If you dont cure performance, Im going to resort to a legal remedy BUT

beware the threat of nonperformance where it isnt absolutely clear that there has been a material breach already (b/c YOU may then be breaching).

(2) Affirmative Act per R2d 250(b): A voluntary affirmative act that renders the obligor unable or apparently unable to perform w/o such a breach will constitute a repudiation. (a) Requirements: Conduct must indicate that performance is impossible or apparently

impossible (e.g., selling to another would disable future sale in case where item unique, such as land).


b. When Failure to Give Assurances May Constitute Repudiation per R2d 251 (1) Demand of Assurances per R2d 251(1): If there are rsbl grounds to believe that the obligor will

commit a breach that would give a claim for total breach then the obligee may demand adequate assurances of performance (e.g., bond/credit letter). (2) Suspension of Performance Allowed per R2d 251(1): The obligor may suspend any

performance for which he has not received exchange until he receives assurance if it is rsbl to do so.

(3) Repudiation per R2d 251(2): If the obligor does not provide assurance w/in a rsbl time that is adequate under the circumstances, the obligee can treat this as a repudiation.

2. UCC 2-609: When rsbl grounds for insecurity arise w/ respect to the performance of either party, the other party may in writing demand adequate assurance of performance. a. These are Considered Rsbl Grounds for Insecurity (Rumors, Speculation, and Insignificant Risks

are NOT ENOUGH): (1) Significant financial difficulties. (2) Failure to perform important obligations under related Ks. (2) Failure to perform important obligations under this K.

b. Reasonableness w/ Merchants per UCC 2-609(2): When the K is between merchants, the rsblness of the grounds for insecurity and the adequacy of any assurance offered will be determined according to commercial standards.

c. Demand of Assurances per UCC 2-609(1): The demand of assurances must be in writing. d. Suspension of Performance is Allowed: The obligor may suspend performance for which he has

not received the agreed return until he gets adequate assurance as long as it is commercially rsbl. e. Effect of Acceptance per UCC 2-609(3): The acceptance of any improper delivery or payment

does not prejudice the obligees right to demand adequate assurance of future performance. f. Repudiation per UCC 2-609(4): Once the obligor receives a justified demand for assurances, the

failure to provide assurances w/in a rsbl time, not exceeding 30 days that are adequate under the circumstances will constitute a repudiation of the K.

C. Effects of the Repudiation per R2d 253 and UCC 2-610 1. Common Law (R2d 253): Repudiation discharges the injured party from any remaining duties to

render performance and allows her to sue for damages for total breach. i. R2d 253(1): Where an obliger repudiates a duty BEFORE he has committed a breach by non-

performance and BEFORE he has recd all the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach.

2. UCC (2-610): If a party repudiates the K w/ respect to a performance not yet due, the loss of which will substantially impair the value of the K to the injured party, the injured party may: a. Await Performance by the repudiating party for a commercially rsbl period of time. b. Await Performance and Seek Damages: The injured party may resort to any remedy for breach

(2-703 or 2-711), even though he has notified the party he will await the performance. c. Suspend Performance: In either case the injured party may suspend his own performance.

D. Retraction of the Repudiation per R2d 256 and UCC 2-611 1. Common Law

a. Retraction of a Statement per R2d 256(1): A statement constituting a repudiation under 250 or the basis for a repudiation under 251 may be retracted if the injured party is notified of the retraction before: (1) The injured party materially changes his position in reliance on the repudiation; or (2) The injured party indicates that he considers the repudiation to be final.

b. Retraction of a Repudiation Other Than a Statement per R2d 256(2): Other events that amount to a repudiation under 250 or 251 will be retracted if the injured party knows that those events have ceased to exist before: (1) The injured party materially changes his position in reliance on the repudiation; or (2) The injured party indicates that he considers the repudiation to be final

2. UCC a. When a Repudiation can be Retracted per UCC 2-611(1): The repudiating party may retract his

repudiation before his next performance is due UNLESS the injured party has: (1) Cancelled or materially changed his position; or (2) Otherwise indicated that he considers the repudiation to be final.


b. Method of Retraction per UCC 2-611(2): The retraction may be made by any method that clearly indicates to the injured party that the repudiating party intends to perform. (1) Repudiation Must Include Assurances: Any assurance justifiably demanded under 2-609.

c. Rights Reinstated per UCC 2-611(3): A retraction will reinstate the repudiating partys rights under the K w/ due excuse and allowance to the injured party for any delay caused by the repudiation.

Truman L Flatt & Sons Co. v. Schupf (COMMON LAW): S was to buy land from F contingent upon getting new zoning on the land. S didnt get the zoning and offered F less $, which F rejected. S later offered to pay the full amount, but F refused to sell b/c he said S had repudiated the K, even though F had not sold the land to anyone else (anticipatory repudiation). Held: Ss offer of less $ was not a clear and unequivocal repudiation b/c there was no threat that he wouldnt buy the land unless S agreed to the new price. Also, even if S had repudiated the K, he retracted it by offering to buy the land before F said it was final or tried to sell the land to anyone else. Hornell Brewing Co. v. Spry (UCC): H&S entered into a K making S the exclusive dealer of Arizona Iced Tea in Canada. S fell back on his payments and was falling short of his sales projections. H asked to see evidence of a line of credit, and H gets credit from a secured creditor. S gives H a $300K credit and S ordered over $400K worth of goods. H then demanded an irrevocable line of credit, good evidence of a line of credit, or a personal guarantee (adequate assurance). S didnt produce any of these and H tried to terminate the K. Held: The consistent failure to make payments and to meet sales projections were rsbl grounds for insecurity, and although the payment by the creditor could be seen as adequate assurance, when S violated its $300K credit, this was a new basis for insecurity. Also, giving S three options to provide adequate assurance the 2nd time (three of which options did not require immediate payment) was rsbl. H was justified in terminating the K.

III. Express Contractual Conditions A. In General

1. Conditions vs. Promises a. Meanings

(1) Promise per R2d 2: A manifestation of intention to act or refrain from acting in a specified way that is made to justify that a commitment has been and provide a basis for what has been exchanged in the K.

(2) Condition per R2d 224: An event, not certain to occur, which must occur before the performance under a K is due unless its occurrence has been excused.

b. Distinguishing Promises from Conditions: The most important thing to look at is the intent of the parties. Using words like if, provided that, or unless indicate an intent to create a condition.

c. Remedies (1) Pure Promise: Breaking a promise will result in a breach of K action for damages, but the K

will still be enforceable. (2) Pure Condition: The non-occurrence of a condition will make the K unenforceable, but there

is no liability for damages. (3) Promissory Condition: The non-occurrence of a promissory condition will make the K

unenforceable AND create a cause of action for damages. a. Most extreme/worst b/c K totally discharged. b. An event can be BOTH a promise and an express condition, either by agreement of the

parties or as follows: i. Internatio-Rotterdam v. River Brand Rice Mills: Buyers promise to give

shipping instructions to seller at least two weeks prior to shipment was a promissory condition.

2. Express Conditions v. Constructive Conditions a. Creation of Conditions per R2d 226

(1) Express Conditions: Express conditions are created through the Ks themselves where the parties expressly agree that a certain condition precedent must be met in order for a party to be required to perform the K, or that upon the happening of a condition subsequent, performance will be excused (e.g., the zoning issue in Truman Flatt was a condition precedent).


(2) Constructive Conditions: Implied by law; conditions upon which performance is implicitly conditioned in order to promote fairness and equity (J&Y).

b. Necessary Compliance (1) Express Conditions: Usually require strict performance to prevent forfeiture (237 comment d:

substantial performance is NOT a defense to the non-occurrence of an express condition). (2) Constructive Conditions: Constructive conditions usually only require substantial performance

to prevent forfeiture (J&Y). Oppenheimer v. Oppenheim, Appel, Dixon & Co.: P entered into a conditional agreement w/ D to sublease their former office to D if P got the written consent of the prime landlord to certain improvements. P got oral consent, but written consent was not delivered to D until after the stated deadline and so D declared the agreement to be void. Held: Trial court held for P saying that P had substantially performed the K, but the court of appeals said that substantial performance did NOT apply to excuse the non-occurrence of an express condition precedent and t/f the agreement was void.

B. Effects of the Non-Occurrence of a Condition per R2d 226 1. Performance Not Due: Performance of a duty subject to a condition cannot become due unless the

condition occurs or its non-occurrence is excused. 2. Performance is Discharged: Unless it has been excused, the non-occurrence of a condition discharges

the duty when the condition can no longer occur (e.g., time period expired). 3. When Non-Occurrence is a Breach: The non-occurrence of a condition is not a breach by a party

UNLESS the condition is a promissory condition and that party is under a duty to ensure that the condition occurs.

C. Standards of Preference per R2d 227(1): In interpreting ambiguous Ks, an interpretation is preferred that will reduce the obligees risk of forfeiture UNLESS the event is within the obligees control or the circumstances indicate that he has assumed the risk. 1. General Order of Priority per R2d 227(2)

a. Unconditional Promise: A duty is imposed on an obligee that an event will occur. b. Pure Condition: The event is made a condition of the obligors duty. c. Promissory Condition: The event is made a condition of the obligors duty and a duty is imposed

on the obligee that the event will occur. 2. Conditions Precedent Preferred per R2d 227(3): In case of doubt, an interpretation where an event

is a condition of an obligors duty (condition precedent) is preferred over an interpretation under which the non-occurrence of the event will be a ground for discharge of a duty after it has already become a duty to perform (condition subsequent).

D. Satisfaction of a Party as a Condition per R2d 228: This involves a condition that one party be satisfied w/ another partys performance. 1. Objective Standard: Occurrence of the condition that a party be satisfied w/ the performance should be

based on whether a rsbl person in the partys position would be satisfied. 2. Subjective Standard: Occurrence of the condition is determined solely by whether the party is satisfied

with the performance in their subjective (and maybe eccentric) opinion. a. Good Faith Required: Even when the subjective test is used, the party still has an obligation to act

in good faith when determining if the performance is satisfactory. i. Did they make and honest decision or were they motivated to reject the performance by

malice? 3. When Objective Standard Should be Used per R2d 228: When it is practicable to determine whether

a rsbl person in the position of the obligor would be satisfied, the objective test should be used. a. When is it Practicable? Usually, in cases of commercial utility, it is practicable to use the objective

standard b/c the interests of the parties are usually practical or technical. b. When is it NOT Practicable? When the essence of the performance is aesthetic, like painting a portrait,

then the subjective standard should be used b/c the partys interests are more personal and aesthetic.


Morin Building Products v. Baystone: M entered into a K w/ B to put uniform finish aluminum siding on the sides of GMs building. K said that the work would have the final approval of GM. When M finished the siding, GM rejected it b/c they said it didnt have a uniform finish. So, B didnt pay M the rest of his $ and hired someone else. Held: The objective standard should be used b/c this is a commercial utility K. There is a presumption of objective standards w/ commercial Ks, and even though this K provided for GMs final approval, Posner felt that nobody would enter into these types of Ks if they thought their performance would be subject to the whims of someone like GM. If it was really that important to have uniform siding, they could have chosen something else b/c aluminum siding is almost never uniform no matter how it is installed. E. Excuse of Conditions

1. To Avoid Forfeiture per R2d 229: If the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition UNLESS its occurrence was a material part of the exchange. a. Failure to Renew Leases or Exercise Options: Most courts will use equity to protect tenants who

negligently fail to exercise renewal options or other parties who fail to comply w/ other types of options w/in the required time period when a failure to do so will result in forfeiture (JNA Realty).

2. By Hindrance or Wrongful Prevention per R2d 245: When a partys duty is condition on an event, and that same partys wrongful conduct (breach/non-performance) prevents the occurrence of the condition, the non-occurrence of the condition will be excused and the party still has to perform.

3. By Acceptance per R2d 246(1): If a party retains benefits under a K after learning (or having reason to know) that a condition of the K had not been met, he will be held to have waived the condition.


IV. EXPECTATION DAMAGES I. General Theories on Damages

Formation of K Breach of K Completion of K

A. Expectation Damages: Benefit-of-the-bargain damages. Where there is a bargain and one side doesnt keep up the bargain, the other side should not be deprived of the benefit that they would have gotten from the bargain (i.e., they should get what they expected to get) per R2d 344(a). 1. Forward-Looking Relief: Expectation P wants to be put in the position he would have been in had the

K been performed (b/c this is what induces K formation t/f makes Ks reliable to enforce the end-point if the K is breached; rewards unquantifiables, e.g., sweat equity).

2. Narrowest Theory: This is the narrowest interest b/c P needs to show mutuality of consideration (valid K); is hardest to prove (but most aggressive if you can get it).

3. Favored Remedy: This is the favored remedy (especially in the total-breach-of-K situation) b/c it encourages people to enter into Ks and provides full compensation BUT sometimes the P cannot prove exactly what was expected (unforeseeable) or the expectation interest may be ambiguous.

B. Reliance Damages (PE): Damages to reimburse the injured party for the loss caused by their reliance on the K; based upon what the injured party has already invested in the K. CANNOT get if K fully performed. 1. Backwards-Looking Relief: Reliance P wants to be put back into the position he would have been in

had there never been a K per R2d 344(b). 2. Narrower Than Restitution: Because requires a promise and t/f it is harder to prove than the restitution

interest. 3. When Reliance Damages are Used: Chosen when you cant prove what the expectation interest would

have been (e.g., where uncertainty or unforeseeability of lost profits). C. Restitution Interest (UE): Damages for unjust enrichment that compensate the giving party for the fair

value of the benefit that he has conferred on the other party per R2d 344(c). 1. Broadest Theory: This is the broadest theory of damages b/c it does not even require a promise and t/f

is the easiest to prove. D. Specific Performance E. Actual damages (e.g., for partial breach): difference btw what promised and what recd (actual loss; like

LVP). II. Standard for Computing Expectation Damages per R2d 347

ED = LVP + OL [CDs + IDs] CA LA

A. Loss of Value of Performance (LVP)

1. LVP: The loss in value to the P b/c of the other partys failure to perform. Difference btw value to the injured party of the performance that should have been recd and the value to that party of what (of an

Contracts II - Wilmarth - Spring 2002_3

Documents

Transcript of Contracts II - Wilmarth - Spring 2002_3