Detailed Contracts II Outline - Powers - Spring 2011

CONTRACTS II OUTLINEPOWERS

1) Highlighted Text = extra notes from class, Farnsworth (Hornbook), etc. of importance

2) Other additions are not marked – there for clarity

I. PAROL EVIDENCE RULE

Where an agreement has been reduced to a writing which 2 parties assented as the final and complete integration of their agreement, evidence of any EARLIER oral or written expressions or contemporaneous oral expressions will NOT be admitted for the purpose of varying or contradicting the writing.

A. Look at these two things initially to determine if parol evidence rule applies to the situation: (Modern-Subjective Test)

(1) Is there a writing (integration)? Must have intent for final expression of terms, even if not complete and

exclusive statement of all terms Threshold element if NO to this, then PER does not apply

(2) Is the writing a final writing of K (whether partial or fully integration)? Must have intention for complete & exclusive expression of all terms Integration DOES NOT EQUAL presumption of complete integration

MUST HAVE INTENT FOR FINAL WRITING, not enough to just have evidence there might have been to the outside observer

Conde Nast “Tests”(1) Determine if integrated (if YES) determine if ambiguous:

(if YES) interpret(if NO) apply clear language

B. If the above two answers are "YES" then look to these elements to determine the likelihood of the evidence being admitted:

(1) the evidence must be collateral in form; this means that it must not be so separate from the writing that it could stand as own, oral K (must be related to the writing).

(2) the evidence CANNOT contradict the express or implied provisions of the writing; if it contradicts = evidence is not admitted.

INCONSISTENT TERMS = A CONTRADICITON (Evidence OUT)CONSISTENT TERMS = NO CONTRADICITON (Evidence Possibly IN)

(3) is the contract complete? This means that if the evidence is so closely connected to the writing that a RPP would not have left it out, then it is not complete.(recall RPP – Reasonable Prudent Person standard from torts)

If it is complete = NO evidence is admittedIf not complete = YES evidence is admitted

of 82

parol = oral

Classic Example, Gianni v. R. Russel & Co.: Gianni sold tobacco and other small items at an office building; building sold; new owner said everything OK but tobacco – 3 yr K; new store came in and Gianni sued for breach of his exclusive K.

Gianni contents the exclusivity was in exchange for agreement not to sell tobaccoo Sought to add a term to the K

PER barred Gianni from using this evidence

General Notes: Basic premise behind PER is there are negotiations to a K, the intended final agreement,

in writing, shows what the parties wanted after negotiationso To give extrinsic, previous evidence to the contrary would destroy the

commercial and economic value of Ks and the purpose of the PER PER does not only apply to oral (as in Gianni’s case), but all extrinsic evidence to the K

itself is subject to the ruleo ONLY if K and final writing intended

“Substantive” rather than “evidentiary” rule, meaning Fed courts faced with Erie issue would use the state of seated court law on PER

PER does not exclude evidence:o of lack of K or intent to Ko showing that the agreement is unenforceable for lack of considerationo of fraud [ulent misrepresentation]

Concern here is turning “broken” promises into “false promises” – some courts refuse this factor of non-application

o Subsequent negotiations to show modification of K Even a completely integrated agreement can be modified or

rescinded orally, subject to the doctrine of consideration and statute of frauds

C. HOW TO DETERMINE IF THE WRITING IS FULLY INTEGRATED (complete)?

(1) MAJORITY APPROACH (Williston 4 Corners Approach / Traditional Rule) A writing will be treated as fully integrated if taken as a whole & on its face it

appears to be complete. The court will ask what would reasonably situated parties naturally do. Is it natural to leave out the disputed term? (Objective approach)

(2) R2D§213/CORBIN APPROACH (Modern Rule) A writing is deemed to be an integration if the parties actually intended it to be

fully integrated. (Subjective approach) Looks at any & all relevant evidence to determine whether the parties actually

intended the writing as a final & complete expression of their agreement & then will decide if the evidence should be heard. Also looks at what kind of writing it was (i.e. a long detailed writing is more likely to have included all the parties intended to agree on).

Restatement allows for evidence that writing was not intended as a final expression of the terms it containso Thus intention of parties toward integration is considered as “totality of

circumstances” (Antonellis v. Northgate Constr. Corp.) Idea is that if the writing could prove itself, parties would not be litigating A binding integrated agreement discharges prior agreements to the extent that

they are even within its scope

of 82

Use in CL non-sale of

goods cases.

(3) UCC APPROACH (2-202 ):No evidence is admissible to show prior written or oral agreements, or contemporaneous oral agreements contradicting the K, however a K can be explained or supplemented:

(a) by a course of dealing, course of performance, or usage of trade, and (b) by evidence of consistent additional terms unless the court finds that the

writing was to be intended as a complete and exclusive statement of the terms of the agreement

Parol Evidence under the UCC Terms in writing intended as final – may not contradict by prior agreement or

contemporaneous oral agreement , but may explain or supplemento By course of performance, course of dealing, or usage of trade; ando By evidence of consistent additional terms unless the court finds the writing

was intended to be completeo ***TEST*** would the parties certainly have included it in the writing?

Difference in C/L and UCC: if final writing in UCC, then can’t contradict it (like C/L) but the only things you can add are consistent terms under the UCC unless court determines the writing was intended to be complete

o UCC is more flexibleo UCC Deals with interpretation AND PE ruleo Can supplement by consistent additional term, OR by course of performance,

dealing, and tradeo UCC deals more with than just PER

Noteso Courts applying Article 2 may resort to contextual evidence of meaning, even

without a preliminary determination that the language of a written agreement is ambiguous

o UCC 2-202 takes a decidedly contextual approach to the admissibility of parol evidence to supplement the terms of a written agreement, much as it makes a contextual approach to contract interpretation

o At every step of the analysis, the decision-maker is invited to examine the words in light of the commercial context within which they were used.

D. MERGER CLAUSES: many Ks contain a clause that say “this writing is a complete & final expression of all the terms agreed upon by the parties”(1) The merger clause is generally sufficient to prove the parties intended the writing to be

a complete & final expression unless there’s evidence that the merger clause was included by fraud or mistake.

(2) However, warranties cannot be excluded just by claiming that the document is fully integrated. They must be expressly waived in the document, & if there is injury a waiver is prima facie unconscionable.

E. PARTIALLY INTEGRATED VS. FULLY INTEGRATED If a K is fully integrated no additional terms can supplement the document.

Full = no more [evidence of extrinsic nature]Intended to agree to everything in the document and nothing else

If a K is partially integrated, then additional terms can supplement the K, but they cannot contradict the written agreement.

Partial = some more [evidence of extrinsic nature]Agreed to everything in the document and perhaps other things too

of 82

Sale of Goods

Can be supplemented by consistent terms only An agreement is not completely integrated if the writing omits a consistent additional

agreed term which is (a) agreed to for separate consideration, or (b) such a term that as in the circumstances might naturally be omitted from the writing.

F. Procedure of the Parol Evidence: The judge will first hear all the evidence & determine as a matter of law if the evidence is admissible to the fact finder. If the judge determines the document is fully integrated, then the parol evidence is NOT allowed to be heard unless some exception exists. Intention for complete expression of agreement = “integrated” PER applies

o Full/Complete Integration: if intended writing to be complete expression of all terms and final expression of such

If so, then not even evidence “consistent in terms” is admissibleo Partial Integration: if intended to be a final writing but NOT complete

expression of all terms agreed to No such intention = “unintegrated” PER does NOT apply MAY be supplemented by: course of dealing, usage of trade, course of performance

o Course of Performance is pointless since subsequent to agreement, therefore not subject to PER anyways

G. CONTEMPORANEOUS WRITTEN AGREEMENTS ARE PART OF THE AGREEMENT!

H. EXECPTIONS: Even if K would otherwise be totally integrated, evidence admissible to prove:1. Defects in formation fraud, duress, lack of consideration, mistake2. That the agreement wasn’t final (i.e. that it was a memo reflecting a preliminary

negotiation position)3. Nonoccurrence of a condition precedent4. How ambiguities should be interpreted (but the evidence can’t contradict terms

(i.e. party can’t say he didn’t mean what the K says). Example: PE can be introduced to determine goods identified to the K in a lawsuit.

5. Omitted terms6. A Collateral Agreement as long as it does not contradict main agreement; not

necessary to have distinctly separate consideration from main agreement either; OK that it might have been reasonably omitted – BUT IT WASN’T, if proven, therefore, proof of separate agreement is admissible

The Parol Evidence Rule doesn’t deal w/ subsequent modifications to Ks!

REMEMBER: IF YOU NEVER HAD A CONTRACT OR DID NOT INTEND TO CONTRACT THEN THE PAROL EVIDENCE RULE DOES NOT APPLY.

of 82

II. INTERPRETATION what do the terms in the writing mean?

A. PLAIN MEANING (traditional/majority view on interpretation): A party has to show the K language was Patently or Latently ambiguous b/4 extrinsic

evidence can be used to aid interpretation. If clear on it’s face, that is the meaning; K is then interpreted as a matter of law and

no extrinsic evidence is needed If Ambiguous go to:(1) Patent Ambiguity the term is ambiguous on its face… no need to establish this by

looking outside the K.(2) Latent Ambiguity the term appears to be unambiguous on its face, but when

applied to the case it is ambiguous. The court must then look outside the K to determine meaning of the term.

Vagueness: not neatly bound to a class but a central norm Ambiguity: two or more connotations

o ie: using “light” to describe “dark feathers”o PER applies even if agreement integrated, as long as one of the

above two (vague / ambiguity) Issue is when contention of “clear” and “plain”

B. Modern Approach Is the K reasonably susceptible to the offered interpretation Always consider the writing under the parties’ circumstances and purpose(s)

C. Reasonably Susceptible Approach (minority view) Pacific Gas Case 2-step process by the court when applying this method:

(1) the court will hear all the extrinsic evidence first(2) then the court will determine if the term is "reasonably susceptible to the

interpretation" that is being offered by the parties.

D. General Notes on interpretation: If extrinsic evidence is admitted it cannot contradict, detract from or vary the terms in the

written K. Ks are interpreted against the draftsman if there is a dispute in interpretation and 2

reasonable interpretations are available. (R2D§206) Negotiated terms control over standard terms All terms interpreted to be reasonable, lawful and effective (do something) Public Policy

E. What to look for when interpreting the meaning of a K to determine what the parties intended (subjective intent):

In order of hierarchy of importance: (EPDT, Every Person Doesn’t Try) Not against Public Policy Against Draftsman

(1) EXPRESS TERMS: what the actual terms in the K say and mean; the literal meaning of the K & definitions of terms stated therein. (ex. If the K says delivery on the 15th, then under the K delivery needs to be on the 15th. However, if the K says delivery in the middle of the month, then you need to go to course of performance, course of dealing, & finally usage of trade to interpret the meaning of a term in the K.)

of 82

Some courts will simply say, this looks like an express term K; therefore, we are not going to look any further in interpreting the K.

(2) COURSE OF PERFORMANCE: this refers to what the parties have done so far in this K; there must be more than one prior performance to use course of performance in interpreting the meaning of the K. (ex. Accepting goods for a certain amount of time & then objecting to them for some reason.) Waiver if a term of the K is violated but the non-breaching party doesn’t object,

then they may have waived their right if it is a non-material part of the contractual exchange.

CoP not limited to UCC – aplicable to all Ks

(3) COURSE OF DEALINGS: this refers to the past dealings & Ks b/w the 2 parties involved. This can tell the court what the parties were likely to have meant or expected from the K. The prior course of dealings must be similar to the K in question.

(4) USAGE OF TRADE: this is used to determine the parties’ intent where the market has a well accepted custom or practice that explains language or supplements an omission in an agreement. (Frigaliment Importing Co.Chicken Case) Used in 3 situations to show the meaning of a contract:

(1) when both parties are in the trade;(2) if only one party is in the trade, the other party must show that the party

not in the trade actually knew of the trade practice or standard for it to apply; OR

(3) if the practice is something that is so generally known in the community so that it can be inferred that it is common knowledge. (Shoulda known)

R2d§ 201: WHOSE MEANING PREVAILS—Chickens, K Interpretation & R2d(1) Where the parties have attached the same meaning to a promise or agreement or a term thereof,

it is interpreted in accordance w/ that meaning.(2) Where the parties have attached different meanings to a promise or agreement or a term thereof,

it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made:

(a) that party did not know of any different meaning attached by the other, & the other knew the meaning attached by the first party; OR

(b) that party had reason to know of any different meaning attached by the other, & the other had reason to know the meaning attached by the first party.

(3) Except as stated in this section, neither party is bound by the meaning attached by the other even though the result may be failure of mutual assent. If no meaning attached: court looks solely to a standard of reasonableness (recall RPP test from Torts – reasonable prudent person)

GENERAL NOTES ON 201: If both parties meant the same thing when using the term, then that is what the term means. If one party knows both of the potential meanings attached to the term & the other party only knows

of one, then the meaning given to the term will be the one term that they both knew. (ex. If A knows meaning #2 but B knows meaning #1&2, the meaning attached is meaning #2 b/c they both knew it.) This is b/c of the meeting of the minds mutual assent.

The court may also objectively charge one of the parties with having reason to know the meaning of the term used based on trade usage. So, if one party only knows one meaning for the term & not the other, the court will decide if that party should have known of the other meaning based on trade.

of 82

Tools 2-4 are to be used for

explaining or supplementing

the writing ONLY; they

cannot contradict the terms of the

writing!

When the parties negate a

trade usage, look at

R2d§201.

If neither party actually knew or should have known of the other’s meaning of the term or they both knew of both meanings but never decided which one they were going to use, there is no K! There was never a meeting of the minds!

Plain meaning courts will apply all the rules of interpretation (R2d§ 202) before going outside the K to determine what the meaning of a term is.

R2d§ 202: RULES IN AID OF INTERPRETATION(1) Words & other conduct are interpreted in the light of all the circumstances, & if the principal

purpose of the parties is ascertainable it is given great weight.(2) A writing is interpreted as a whole, & all writings that are part of the same transaction are

interpreted together.(3) Unless a different intention is manifested,

(a) where language has a generally prevailing meaning, it is interpreted in accordance with that meaning;

(b) technical terms and words of art are given their technical meaning when used in a transaction within their technical field.

(4) Where an agreement involves repeated occasions for performance by either party w/ knowledge of the nature of the performance & opportunity for objection to it by the other, any course of performance accepted or acquiesced (agreed upon) in w/o objection is given great weight in the interpretation of the agreement.

(5) Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent w/ each other & w/ any relevant course of performance, course of dealing, or usage of trade.

GENERAL NOTES ON 202: Words mean what they generally, commonly mean. Specific terms rule over general terms. If you talked about a term very specifically, then that is what

it means. Writings are interpreted as a whole. Courts will interpret w/ public policy in mind. You use the interpretation that is NOT against public

policy. INTERPRETATION IS USUALLY AGAINST THE DRAFTER (R2d§ 206 above).

R2d§ 211: STANDARDIZED AGREEMENTS(1) Except as otherwise stated in subsection (3), where a party to an agreement signs or otherwise

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 writing as an integrated agreement with respect to the terms included in the writing.

(2) Such a writing is interpreted wherever reasonable as treating alike all those similarly situated, w/o regard to their knowledge or understanding of the standard terms of the writing

(3) Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement.

Gray v Zurich Insurance The insurance company tried to use an "exclusionary clause" to get out of providing a defense for

Gray b/c they said they did not defend intentional acts such as an assault. The court held that a reasonable person would have expected protection for an allegation of intentional acts & that it was unconscionable for the insurance agency to stick to this clause.

Similar provisions in insurance policies are often held unconscionable, but not always. The policy should have stated that “we will not cover for intentional acts, but we will defend against

intentional acts.”

of 82

With PER there is a writing & the question is whether we are going to let this “other term” in from another written/oral agreement. However, with interpretation, the writing is there, but you are trying to interpret the language or a clause in the K.

of 82

III. CONDITIONS

R2d§ 224: CONDITION DEFINED A condition is an event, not certain to occur, which must occur, unless its non-occurrence is

excused, b/4 performance under a K becomes due. EX: uncle/nephew and law school—Nephew must take a certain course & get a certain grade to get the $ the uncle promised. If...then. (Express Condition)

A passage of time is never a condition. The condition can be cumulative (i.e. course & grade). The condition can also be a non-event.

The non-fulfillment of conditions discharges the duty of the other party to perform. Need not be “material” or substantial to the obligor

A. CLASSIFICATIONS OF CONDITIONSConditions are either precedent, concurrent, or subsequent to the time when the other party's duty of performance becomes absolute. Any of these conditions can be created by agreement (express & implied conditions) or imposed by the court (constructive condition).

(1) condition precedent - an event (other than the lapse of time) which “triggers” a party’s performance; it must occur b/4 the other party is required to perform. A condition that must occur in order to create an absolute duty of performance. If it doesn’t

occur & is not excused, the promised performance needn’t be rendered. When you are talking about conditions, you are generally talking about conditions

precedent.

(2) concurrent condition - provides that the parties must exchange performance simultaneously; each party’s duty to perform is dependent on the other’s. ONLY applies when the performance is capable of being exchanged simultaneously.

(3) condition subsequent - an event that terminates the duty to perform that had become absolute. (e.g. Mutual Fire Insurance case where all claims had to be brought within 12 months of the damage or their duty to pay is discharged. This discharge clause is a condition subsequent.) These are very rare! Only really used in insurance Ks.

The has the burden of proving conditions precedent & concurrent (to show that the condition occurred so performance was due) & the has the burden of proving condition subsequent (to show that the duty of performance was discharged. It does not shift the burden of proof, only the burden of going forward w/ the evidence.

Promissory Condition – A statement that serves as a promise and a condition. IE after I deliver the goods, then you have to do X.

Conditional Promise – A promise to do something after the occurrence of a condition (this is not a condition in itself).

o Look at what happens first. If I have to fulfill my promise before the condition, it’s a promissory condition. If the condition has to occur before I fulfill my promise, it’s a conditional promise

Negative conditions – a condition that creates or destroys obligation on the non-occurrence of a set event.

o Negative conditions must have a time frame. IE I will do X if the Astros don’t win the world series by 2009 (must have time frame or invalid).

o This is not a category of condition, it’s a modifier I.E. it will be a negative condition precedent or negative condition subsequent

of 82

B. EXPRESS CONDITIONSA condition that is “expressly” included in the K that articulates the intent to make performance contingent on that event (i.e. that the parties spelled out in so many words). Express conditions are applied strictly, even if the results are harsh. An express condition must be complied w/ literally; mere substantial performance won’t suffice. Look for wording such as: “if,” “conditioned that,” “provided that,” “in the event that,” and

“subject to”

Dove v Rose Acre Farms: In this case the law student was working during the summer & he wanted to participate in the bonus program. His conditions: work 5 full days a week for 10 weeks, no absentees or tardies during this time period for any reason, finish project. These are all express conditions that must be met before his boss had a duty to give him the $5,000 bonus. He did not meet the express condition b/c he missed 2 days of work due to illness, so there was no duty for Rose Acre Farms to give him the bonus. The terms of the deal very clearly set out the conditions Dove had to meet to get the bonus.- Dove’s conditions to be met were conditions precedent.- Rose Acre Farms’ terminated duty to pay the bonus is a condition subsequent.

C. IMPLIED CONDITIONS

(1) Conditions implied-in-fact (for jury) This is a condition that we know the parties really intended to be a part of the K even though they did not expressly state so in the K (look at the contextual evidence to determine whether one exists). The notice that the parties intended to be given in the Wal-Noon case is an example. We

know this b/c no one would have written the K w/o the notice requirement b/c it would not make sense.

Implied-in-fact conditions are treated as express conditions; they must be complied w/ literally; mere substantial performance won’t suffice.

(2) Constructive Conditions - implied-in-law (for judge) This is a condition that the court will impose on the parties in the interest of justice. The court reaches the decision to include a constructive condition by saying that the addition of the implied condition is necessary for an appropriate, favorable & just outcome for the parties. See constructive conditions section below. Substantial performance is all that is required.

Effect of stare decisis: “fact” decision has no effect as stare decisis; however, if characterized as “law” then stare decisis has effect

Wal-Noon Corp. v. Hill : The K only made sense if notice of the damaged roof was an implied condition. How could the landlord inspect the roof to make sure no negligence existed on the part of tenant if he was not made aware of the damage before the roof was repaired? Therefore, he is not held to pay for the full value of the roof since the tenant did not meet the condition of giving the landlord notice. This was a condition precedent to the landlord’s duty to pay for the new roof.

In re Carter: The buyer presented a claim against the escrow fund for $69, 998.42 as a “liability” of the seller under the agreement. The agreement, under separate sections, distinguishes between warranties & express conditions. Buyer contends that the financial condition of the company was less favorable at the time of purchase than agreed upon & that he is therefore entitled to reimbursement for the deficiency under the warranty clause in the agreement. Seller says it was a breach of a condition, not a

of 82

Subjective

Objective

warranty; therefore, the Buyer could have refused the entire deal. The court held that it was a condition & that since the Buyer had already closed on the deal, he waived his right to contend the condition.

Exceptions to generally accepted conditions1. Events that must occur before a contract comes into existence (makes sense- can’t expect

something to be part of K when it was knowingly before K was formed)2. Events that are certain to occur (usually seen in fraud/misrepresentation and strange cases)

a. ie: Blinking your eyes (remember Page’s reference to selling his watch if you blinked)b. ie: Sun rising, etc.

3. Events that extinguish a duty after its performance has become duea. Again, makes sense because how can you excuse something after due, if known, when

forming K would mean that these conditions in Ks could be legally sufficient breach

D. DISTINGUISHING BETWEEN PROMISES & CONDITIONS

R2d§ 227: STANDARDS OF PREFERENCE WITH REGARD TO CONDITIONS (1) In resolving doubts as to whether an event is made a condition of an obligor's duty (promise), & as

to the nature of such an event, an interpretation is preferred that will reduce the obligee's risk of forfeiture, UNLESS the event is w/in the obligee's control or the circumstances indicate that he has assumed the risk.

(2) Unless the K is of a type under which only one party generally undertakes duties, it is doubtful whether:

(a) a duty is imposed on an obligee that an event occur, or(b) the event is made a condition of the obligor's duty, or(c) the event is made a condition of the obligor's duty, & a duty is imposed on the obligee

that the event can occur. The first interpretation is preferred if the event is w/in the obligee's control.

Condition v. Duty/Promise explained Condition is what has to happen before some other occurrence

o If X (then) Y Duty is what you are charged with doing by the terms of the K, if not explicitly or implicitly

otherwise Three ways for obligor to induce the other party to cause and event to occur

1. Obligor make event a condition of obligor’s own duty, so that the other party will have to see that the event occurs to have a right to obligor’s performance under the K

2. Obligor can have the other party undertake a duty to see that the event occurs, so that the other party will have to see that the event occurs in order to avoid liability damages

3. Obligor may combine (1) and (2), called “promissory condition”: event that is both a condition and the subject of a promise / duty

Effect of Condition: “premium paid on condition ship sails on next wind” – if cargo arrives but delayed past first, next wind, no pay premium and no right to an damages caused by delay

Effect of Duty: “ship owner promises to sail with next wind and premium paid on condition owner does so” – if cargo arrives late (as above) then right to any damages but NO relief from duty to pay premium

GENERAL NOTES ON 227: There is a preference that the K is a promise b/c the results aren’t as harsh. It avoids forfeiture &

harsh penalties. However, the fact that an act is a condition does not by itself make it also a promise. If the event is in the person's control, we can presume that it is a promise. If a condition is not met = NO K at all.

of 82

Promise or Condition?

If a promise is not met = the other party can sue for damages in breach. This usually does not relieve them from their duty to perform if the other party performs their duty (they performed, just not when the agreement said they would).

EXAMPLE: A painter agrees to start painting your house on Monday. He does not start until Tuesday. This is in his control so it is likely to be a promise. He still has a K to paint your house, but you can sue for the damages caused by his starting one day late, which are likely to be none.

SO, IF EVENT IS IN THE PERFORMER'S CONTROL = USUALLY A PROMISEBUT, IF EVENT IS NOT IN THEIR CONTROL = USUALLY A CONDITION

Two Questions to Ask:1. Was that party’s duty conditional or not?2. If duty was conditional, what is the event on which it was conditional?

a. Whether the condition was a promissory condition so that the other party was under a duty to cause the event to occur, is yet a third question if (2) is answered in the affirmative

The Case of the Insolvent OwnerSub $$ Prime $$ OwnerSub work OwnerThe K clearly stated that the sub would not get paid if the prime didn’t get paid from the owner for the work completed. The owner is insolvent & the prime didn’t get paid, therefore the sub didn’t get paid. The court has held in most cases like this one that the condition is actually a promise, so the sub would be able to sue for breach for the work completed.

If the K is clear & gives the weaker party notice of the possible forfeiture, you cannot interpret it any differently; however, if the K is not clear, the court may be able to interpret the K as a promise. The court does this by saying that the weaker bargaining party never assumed that there would be complete forfeiture. If the court interprets the K as a promise, the weaker party is allowed to sue for breach rather than the K being discharged all together.

E. Covenants Independent Covenants- promises to perform that are not dependant upon each other.

Failure to perform is always a breach.o Landlord's promise to maintain the premises is independent of a Tenant's promise

to pay rent Dependant Covenants- promise to perform that is conditional on the other party's

performanceo The other party's performance is a condition precedent

Mutually dependant Covenants- covenants of performance that are due at the same time. Each party's performance is conditional on the other's

o This is preferred interpretationo If the other party doesn't tender at the required time, your obligations are excused

Good faith: implied covenanto Can't cause the other party to fail to avoid obligationo Promises to:

Not prevent the other party from performing Cooperate in ensuring performance Act in good faith

F. EXCUSE OF CONDITIONS

of 82

A court may find that the fulfillment of an express condition is “excused” where extreme forfeiture would occur. This will only be done, however, if the damage to the other party’s expectations from non-occurrence of the condition is relatively minor. (See R2d§ 229 below)

Reasons for Excusing Conditions:(1) An agreement by both parties modifying the K to discharge the condition;(2) Conduct, by the party that is benefiting from the condition, that waives the condition

(Clark v West: he represented waiver of drinking condition);(3) Changed circumstances that make compliance by the promisee with the condition

impracticable;(4) Discharged by the court; AND(5) Foreiture (see R2d§ 84 & Aetna Casualty Insurance)

G. DOCTRINE OF WAIVERWaiver—The voluntary relinquishment of a known right or advantage.

Endless repetition of notice of possible invocation can waive it Waived clause can be reinstated with notice

o Reliance of other party on waiver can negate Can waive:

o Conditions for your benefito Minor(non-material) conditions

(1) EXPRESS WAIVERR2d§ 84 (1)( a): states that a waiver is enforceable if it is given in exchange for separate consideration; It is enforceable without consideration if:

(1) The waived condition was not a material part of the agreed exchange.(2) Uncertainty of the occurrence of the condition was not an element of the risk assumed by

the party who gave the waiver(3) Because there is no consideration for waivers they can be receded (withdrawn) until the

other party relies on the waiver to their detriment; then, the party making the waiver will be estopped from recession of the waiver.

(4) No waiver clauses can be waived.

Clark v West: In this case the publisher wanted the writer to abstain from drinking while he was writing the law books, and he would be paid an additional $4 for abstaining. The publisher said that the abstention was part of the consideration for the K. The court said that it is not a K to write books in order that the shall keep sober, but a K containing a stipulation that he shall keep sober so that he may write satisfactory books. Therefore, the drinking provision is not part of the consideration, but a condition and can be waived. The publisher knew the writer was drinking while writing the books but still avowed & represented that they would pay the additional $4. This created an “express waiver" of the condition. Express waiver by words; Implied waiver by conduct. Accepting the pages is not necessarily an automatic waiver though, but asserting that they

would pay him the additional $4 even though they were aware that he was drinking is. If there had been no extra money for not drinking but instead the provision was merely part of

the K, then the publisher’s act of accepting the books w/ the knowing that he had been drinking would create an implied waiver.

Conditions can be waived before or after the condition is met.

of 82

If a condition is waived by the promisor before the condition has been met & the promisor tries to raise the condition argument later, estoppel will step in & estop him from raising this issue since he had previously waived it. You can only reinstate a condition w/ reasonable notice.- In Clark if the publisher had stated you don't have to meet the drinking condition before the

writer ever took a drink he would be estopped from reinstating it w/o proper notice. If a condition is waived by the promisor after the condition has been met, it is an election.

- In Clark the publisher’s act of waiving the condition was an election. What if you put in an anti-waiver clause? You can still waive a condition, despite the anti-waiver

clause. A party may waive performance of a condition inserted for his benefit and thereby make

unconditional the other party’s duty under an agreement, but he cannot create obligation in himself where none previously existed by waiver of a condition precedent to his own liability. To create such an obligation would require a new K & new consideration.

R2d§ 229: Excuse of a Condition to Avoid (Disproportionate) ForfeitureTo the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was a "material part of the agreed exchange." In determining whether the forfeiture is “disproportionate,” a court must weigh the extent

of the forfeiture by the obligee against the importance to the obligor of the risk from which he sought to be protected... (See footnote 2, pg. 662)

In other words, weigh the forfeiture against the importance of the condition. This originally developed in the sale of land & w/ leaseholds. (What do you forfeit?

improvements, time & expense of moving, certain features of particular leased bldg.)

Aetna Casualty Insurance Case (Murphy & Chubb): This case gave us a situation in which Murphy did not give his insurance company adequate notice (this was the condition that he failed to meet). He would have suffered great loss by not being able to get his claim & this was considered disproportionate forfeiture. Issue: Whether or not the notice requirement was a "material part of the agreed exchange." It was found NOT to be a "material part," so Murphy had a chance to show that his failing to meet the condition did not prejudice the insurance company. If he could have proved this, he would have gotten his claim & not suffered the disproportionate forfeiture; however, he did not meet his burden of proof. Why doesn’t R§229 work for Murphy? B/c Murphy’s affidavit opposing summary judgment

contained no factual basis for a claim that Chubb had not been materially prejudiced.

General Notes Whether conduct amounted to a “modification” will determine assent based on standards

from K1: express & implied waivers; independent & dependent conditions Re-impose condition (rescind waiver) – UCC 2-209:

o If you want to retract waiver, its OK as long as notice received and not unjust in light of material changes of position;

o Condition event has not occurred; ando Give reasonable time to abide by re-imposed condition.

No consideration needed to modify, rescind, or waive conditions in K

H. IMPLIED (CONSTRUCTIVE) CONDITIONS (conditions implied-in-law)In implied-in-law conditions, the court can’t really tell what the parties’ agreed to but thinks the condition implied is reasonable & necessary to avoid injustice.

1. IS THIS A CONDITION OR MERELY A PROMISE?

of 82

(1) Look at the K to see if it explicitly stated in the K that this exact performance had to be done or it would breach the K. (i.e. non-compliance with this condition will result in non-payment or no return performance).

(2) The language in the K must expressly state the condition to be performed b/c courts will not supply the necessary language to make it a condition. So, if you really want certain performance, make it an express condition in the K.

INDEPENDENT & DEPENDENT PROMISES: See pg. 676-677.(1) Independent Promises the parties intend that performance by each of them is in no way

conditioned upon performance by the other. (ex. leaseholds) Parties exchange promises for promises, not the performance of promises for the

performance of promises. A failure to perform an independent promise does not excuse non-performance on the

part of the adversary party, but each is required to perform his promise, & if one does not perform, he is liable to the adversary party for such nonperformance.

(2) Dependent Promises the parties intend performance by one to be conditioned upon performance by the other, & if they mutually dependent, they may be:

a) Precedent Conditions a promise that is to be performed b/4 a corresponding promise on the part of the adversary party is to be performed. (Kingston)

b) Subsequent Conditions a corresponding promise that is NOT to be performed until the other party to the K has performed a precedent covenant.

c) Concurrent Conditions promises that are to be performed at the same time by each of the parties, who are respectively bound to perform each.

Modern Rule: There is a presumption that mutual promises in a K are dependent & are to be so regarded, whenever possible. (Courts will construe Ks to be concurrent when possible.)Because:(1) dependency offers both parties maximum security against disappointment of their expectations

of a subsequent exchange of performances by allowing each party to defer his own performance until he has been assured that the other will perform; AND

(2) dependency avoids placing on either party the burden of financing the other before the latter has performed.

R2d § 234: Modern View on the Order of Performance(1) Where all or part of the performances in a K can be rendered simultaneously, they are to that

extent due simultaneously, unless the language or circumstance indicate the contrary.(2) Except to the extent stated in Sub§(1), where the performance of only one party under such

an exchange requires a period of time, his performance is due at an earlier time than that of the other party, unless the language or the circumstances indicate the contrary. (i.e. K for construction work to be performed, the work must be performed before payment can be demanded)

Goodison v Nunn : This case is talking about concurrent conditions rather than conditions precedent. The parties contracted for to buy/sell land & there was a 21lb penalty for backing out. One party backed out and the court said that since the other party did not tender the performance to the non-tendering party he could not bring suit. Where there are concurrent conditions, the suing party MUST tender performance to bring a

suit for breach of K against other party.

Tender of performance: This refers to one of the parties being ready, willing, and able to perform their part of the agreement. The party desiring legal remedy must tender his agreed

of 82

upon performance in order to sue the non-tendering party for breach. If neither party tenders performance = no duty & the K will eventually go away.

Palmer v Fox: Seller was to make several improvements to land. Buyer was to make payments for 5 years. Buyer ceased payments b/c Seller didn’t perform all of the improvements.(1) The court says that clearly these conditions are dependent (concurrent conditions).

Are these really concurrent? No, b/c the parties can’t immediately exchange the $ for the improvements. Courts will construe covenants to be dependent, unless a contrary intention clearly appears. See R§234 above.

And, if we haven’t agreed otherwise, the performance that takes the longest time to tender is the performance that must be tendered before the other party is in breach. See R§234 above.

The presumption is that the work is done first & then you pay. This is just the way the law has developed.

Ex.—I promise to pay & Bob promises to mow lawn. Bob has to mow first b/4 I have to pay.(2) The court also said that Seller’s non-performance of all of the agreed improvements = material

breach. It was considered a material breach b/c the Buyer bargained for the land w/ the improvements, not just the land. See R§237 below.

2. MATERIAL BREACH A breach is material if the failure or deficiency in performance is so central to the K that it substantially impairs its value and deeply disappoints the reasonable expectations of the promisee. You look at the deviation from the K in relation to the whole K. Point where the other party has no duty for return performance Look to:

o Extent deprived of benefit reasonably expected.o Extent can be adequately compensated.o Extent breaching party will suffer forfeiture.o Likelihood of cure.o Extent of good faith and fair dealing.

R2d§ 237: Effect on other party's duties of a failure to render performances (material breach)Except as stated in § 240, it is a condition of each party's remaining duties to render performances to be exchanged under an exchange of promises that there be no uncured material failure by the other party to render any such performance due at an earlier time.

Notes on 237: A material breach by one party prevents performance of the other party’s remaining duties

from becoming due, at least temporarily. (This is why in Palmer, the Buyer was able to stop paying for the land when the Seller materially breached by not making the agreed upon improvements.)

If breaching party does not cure his performance during the time in which performance can occur, it discharges adverse party’s duties.

You can’t commit material breach & expect return performance.

R2d § 241: Circumstances significant in Determining whether a failure is MATERIAL(1) In determining whether a failure to render or to offer performance is material, the following

circumstances are significant: (court will weigh these factors)(a) the extent to which the injured party will be deprived of the benefit which he

reasonably expected;

of 82

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

(c) the extent to which the party failing to perform will suffer forfeiture;(d) the likelihood that the party failing to perform or offering to perform will cure his

failure, taking account of all the circumstances including any reasonable assurances;(e) the extent to which the behavior of the party failing to perform or to offer to perform

comports with standards of good faith and fair dealing.

Summary of above factors: (LAFCG)(1) (L): loss of benefit of bargain (2) (A): adequacy of compensation(3) (F): forfeiture(4) (C): cure (can worker fix problem)(5) (G): good faith

Extent Breaching Party Will Suffer Forefeiture How much have they committed?

o Did John spend thousands of dollars attempting to fulfill his contractual obligations?o Was it reasonably spent?

Did John spend $10,000 on paint that really should have only cost $1,000?o Balance this factor with other (Non-Contractual) remedies available to breaching party

Unjust enrichment, etc.

3. DOCTRINE OF SUBSTANTIAL PERFORMANCE You cannot have both substantial performance & material breach. One precludes the other.

o Are the defects trivial and innocent Party is still breaching the K, and other party can still recover damages

o Question is whether my return obligation is excused If a term of the K is a condition, not a promise, it cannot be substantially performed

o If the condition is not fulfilled, there is no promise to return perform Substantial Performance is an implied condition

o Express Condition > Implied conditiono So if I have an express condition precedent, the other party gets really really close to

fulfilling it, but fails, there is no K, and I have no duty to do anything

General Rule Where a K is made to perform work & no agreement is made as to payment, the work must be substantially performed b/4 payment can be demanded…

Substantial performance gives the performing party the right to demand performance by the other party!

Jacob &Young v KentThe architect w/held the certificate of completion b/c the builder didn’t use the correct pipe in the building of the home. Kent, the homeowner, was the . The mistaken pipe was not intentional, but merely accidental. Express promise & implied condition The type of pipe to use was an express promise in the K

not an express condition. Promises & conditions are 2 separate things. However, the architect not getting paid until the work was competed & the idea that using an incorrect pipe deems the work unfinished was an implied condition of the K.

of 82

Where we have a constructive (implied) condition, we have to determine whether performance was completed or at least substantially performed b/c performance comes b/4 payment.

Once we decide that there has been substantial performance, the other side has to pay. But why should the owner have to pay if the K was breached? The owner has to pay b/c there was a substantial performance of the K. The variation of the pipe was also not material to the K as a whole. The K was for the building of the house; had it been for the laying of the pipe, then the non-compliance would be material & the owner would be able to sue for breach of the K.

HOW DO WE DETERMINE IF A PARTY HAS SUBSTANTIALLY PERFORMED A K?(1) Look at the deviation from the K; how much different was actual performance from what the K

called for in performance?(2) Look at the excuse given for the deviation in performance. Was the deviation inadvertent &

unintentional OR was it in bad faith?(3) How cruel would it be to the performer to say he has not performed enough & should not be

compensated at all? If it would be very costly or harsh, it is likely that he has substantially performed.

REMEMBER: Substantial performance is due NOT perfect performance. The party must pay the performer for the substantial performance & then sue the performer for any damages caused by the breach of K. So, the worker gets $ for the substantial performance, minus any amount assessed for damages caused to the other party (ie wrong plumbing pipe in Jacob).

RULE: Damages are measured by the difference in what you were supposed to get and what you actually got (difference in value).

Example: Jacob &Young v Kent case : (wrong plumbing pipe)Good pipe worth = $5,000 (pipe you wanted)Bad pipe worth = $4,000 (pipe you got)Damages worth = $1,000 (you get bad pipe + $1,000)

O.W. Grun Roofing Case : The roofer failed to put a roof w/ “russet glow” shingles on ’s house. The roof it had yellow streaks on it that you could see. Issue: May a party that has materially breached the K claim that it has substantially been performed? No. The court will look at all factors of each case when deciding if it was a material breach. If this was a warehouse, then maybe it would not have been a material breach (streaks may not matter on a warehouse, but they do on a house). In a case like this the color of the roof was what the K was about! To construe substantial performance, the worker must have intended to comply with the K in good faith & must have performed w/o pervasive defects that go to the essence of the K. Here, we don’t only have a condition, we also have a promise. When promises are breached, we

have a right to damages. The restitution argument might have been made if only half the roof had to be replaced or if the

tar paper was good & only the shingles had to be replaced. Here, there was no benefit conferred!

The waiver argument also doesn’t work b/c she lives in the house already & would have had to move out to express her non-acceptance.

RULE: IF YOU HAVE A MATERIAL BREACH IN A K, THEN YOU CAN NEVER HAVE SUBSTANTIAL PERFORMANCE. Likewise, if substantial performance is found, a material breach is not present!

of 82

RULE: MUST LOOK AT THE WHOLE K TO DETERMINE IF THERE WAS SUBSTANTIAL PERFORMANCE.Examples:

(1) K for building an entire house & only the roof is defective = substantial performance is likely to be found if rest of house is performed correctly

(2) K for roof replacement and the roof is defective = no substantial performance

R2d § 242:When failure discharges duty of other partyIn determining when a party's uncured material failure to render or to offer performance discharges the other party's remaining duties to render performance under the rules stated in § 237 & § 238, the following circumstances are significant:

(1) whether the breach is material (look at the factors in § 241);(2) the extent to which it reasonably appears to the injured party that delay may

prevent or hinder him in making reasonable substitute arrangements;(3) the extent to which injured party stated in the actual K that time was important.

Factors to consider (Restatement)o Deprivation of reasonably expected benefitso Ability to adequately compensate ($)o Forfeiture avoidedo Ability to cure (fix it)o Behavior in good faith and fair dealing

Time is of the Essence Clause: This clause sometimes becomes a condition. Look to the circumstances to see if a violation of this is a material breach. In most cases it is not construed as a condition.

4. The UCC and SUBSTANTIAL PERFORMANCE Under the UCC there is no substantial performance in Ks for the sale of goods – buyer just pays

Problem: The Case of the Deficient Valve TesterB manufactured valves & entered into K w/ S for the design & manufacture of a valve testing machine w/ a 95% accuracy rate. The machine only had a 93-94% accuracy rate w/ occasional batches at 95%. B claimed that S had breached an express warranty that the machine would achieve a 95% accuracy rate & that B could reject the goods, cancel the K for breach, & sue for damages. S concedes that the warranty was breached, but claimed that there was substantial performance; therefore, B had to accept & pay for the goods. B said substantial performance rejected by UCC & B was entitled to a “perfect” tender. B can reject & is NOT required to accept & pay for the goods. S can also cure. This rule is harsh but it is b/c goods are tangible & can be resold to someone else if the

buyer doesn’t accept. The CL has the substantial performance rule b/c a service is intangible & once performed cannot be resold to someone else.

Damages for Substantial Performance Loss of value:

o How much less is the performance worth with the defect?o Usually only used with objectively quantifiable performanceo i.e. value of a good, quality of a common service like roofing

Cost to replace:o How much does it cost to put the non-breaching party in their contractually agreed to

positiono Default measure

The innocent party shouldn't be stuck with something they didn't want

of 82

o Can lead to significant waste i.e. replacing off-brand pipes with name brand

PERFECT TENDER RULE OF UCC:

UCC 2-601: Buyer's Rights on Improper DeliverySubject to the provisions of this Article on breach in installment Ks (§ 2-612) & unless otherwise agreed under the §§ on contractual limitations of remedy (§§ 2-718,719), if the goods or the tender of delivery fail in any respect to conform to the K, the buyer may

(a) reject the whole, or(b) accept the whole, or(c) accept any commercial unit or units and reject the rest.

NOTES ON 2-601: (1) A buyer that accepts a non-conforming tender is not penalized by the loss of any remedy

otherwise open to him. If accepting some & rejecting the rest it must be done in good faith.(2) You don’t have to accept the goods until you have had a reasonably opportunity to inspect

the goods.(3) In the perfect tender rule it is the tender that has to be perfect, not the goods. A perfect

tender would be described as, “just what I said it was.” Ex. if I am selling my used car to you & I express the quality of the car then my tender of the car to you would be a perfect tender if the quality meets what we agreed to.

(4) Seller also has an opportunity to cure under 2-508: if time for performance has not yet expired, he may seasonably notify the buyer of his intention to cure and may then w/in the K time, make a conforming delivery.

Buyer's Options:(1) Accept the entirety(2) Accept conforming portion(3) Reject the entire delivery

5. DOCTRINE OF DIVISIBILITY If a K is severable, the doctrine of substantial performance can be applied to a portion of it. A K is only divisible if it is expressly made so (ie stipulating a payment for each separate installment to be performed) or if a reasonable interpretation indicates that a failure to perform one installment would not constitute a failure of the basic consideration bargained for.

R2d§ 240: Part Performance as Agreed EquivalentsIf the performances to be exchanged under an exchange of promises can be apportioned into corresponding pairs of part performances so that the parts of each pair are properly regarded as agreed equivalents, a party's performance of his part of such a pair has the same effect on the other's duties to render performance of the agreed equivalent as it would have if only that pair of performances had been promised. Both parties performance need to "line up"

o You do A, I pay $500o You do B, I pay $500o You do C, I pay $500o NOT you do A, B, and C and I pay you $1500o Can be: you do A, A, and A and I pay you $1500

Cannot overcome express intent that contract be treated as a whole Will "save" the unbreached part of the K

of 82

If parts of the K were performed without breach, and can be separated, will be enforced ie. completed 9/10 houses the K called for

o That 1 missing house would be a material breacho However, still required to pay for first 9 if divisibleo Likely would be here

A. Look at 2 Main Factors when deciding if a contract is divisible:(1) Does the K easily break down into separate parts?(2) Did the parties intend the K to be separate parts or one entire K?

—THE ABOVE 2 ARE VERY DEPENDENT ON THE FACTS OF EACH CASE— Payment plans are per se divisible Construction Ks are almost always entire whereas Employment Ks are usually divisible The doctrine of divisibility is usually only applied to benefit the breaching party so that the doctrine

of substantial performance can be applied to avoid complete forfeiture.Lowy v United Pacific Insurance Co.: K for (1) excavation & grading and (2) street improvements. The contractor did not substantially perform the whole K but the grading work portion of the K was 98% completed. Since the K is divisible into 2 parts, the court says compensate the contractor for the substantial performance of the first grading portion & then you can sue for the damages from the breach of the second portion of the K. (This seems to be a way to compensate the breaching party for the work completed even if he does not substantially perform the entire K.) The K made it clear as to the compensation for each portion of the performance; therefore, the court

was able to break up the K…”this amount of work for this amount of payment” was expressly stated. You have to look not only at the tiers but you have to look at the intent of the parties.

Compare the following two examples:(1) contract to build 50 houses @ $100,000 for each house built; builder only builds 35 houses and then

stops work = this is divisible and he will likely be paid for the 35 houses(2) contract to build 50 houses for a total of $5,000,000. Worker builds 35 and then stops work.

Divisible? Probably not due to the fact that the building of each house may not be worth the same amount, and therefore, the contract is not as easily divisible. (look at the intent of the parties)

Problems: Divisible or Entire K?(1) The Case of the Unpaid Contractor. $30,000 to be paid as follows: (1) $1,500 on signing, (2) $10,000

upon delivery of the materials & starting of work, (3) $15,000 on completion of rough carpentry & plumbing, & (4) $3,500 on completion. Upon completion of the of the rough work the contractor request payment of the 3rd installment & the owner refused. This arrangement benefits both parties in that it keeps the cash flow going for the contractor 7 it

always the owner to keep tract w/ the contractor’s progress. However, the intent of the parties is that this is one deal; there is no way that this K can be divisible b/c the parts are not even remotely equal as they were in Lowy.

Additionally, the doctrine of divisibility usually only applies to the breaching party who none the less did something.

Hypo 2 parts to the K $100,000 for 1st part & $100,000 for the 2nd part. The contractor completes the 1st part & then quits. The expense of the owner to have the 2nd part finished by someone else is $120,000. He will get the value of his performance less the owner’s actual damages (what he would have paid less what he actual paid) $100,000 less (120,000-100,000) = $80,000.

(2) The Case of the Defaulting Thresher. ’s agreed to thresh ‘s grain at $1/bushel for whet, $.60/bushel in oats, & $1.50/bushel in flax. After threshing only 50% of ’s crop, moved his

of 82

equipment to another location b/c they were losing $ on the job w/ . This K is not divisible, but the will most likely be able to recover in restitution for the benefit conferred.

B. RESTITUTION: recovering the amount due to you for a benefit given to another party; so, to prevent unjust enrichment, the person that performed the benefit should be compensated.

Britton v Turner: (pg. 691) A man contracted to work for another man for one year for $120; he worked for 9 1/2 months & then quit for no reason. The court found that even though he breached the K, he should be compensated under a restitution (quantum meruit) theory. But, from this compensation, one must subtract out any damages suffered by the injured party. So, $95 for the work done for 9 1/2 months (pro-rate the 120/12 months). But, if employer suffered damage worth $20 b/c worker left early, then employer only owes the worker (Breacher) $75. The man did not substantially perform the K so he cannot recover the 9 ½ months under the

substantial performance theory. This K is also not divisible. Additionally, the man did materially breach the K, but we still have to find a way to pay the man for the work he has completed. Therefore, we use unjust enrichment—the value of the benefit conferred!

The idea is that once you’ve done the work it is gone & you can’t recover your time. If this wasn’t the rule, the closer you would come to performance, the more you would loose if you breached.

The court will never let the breaching party recover more than the ceiling on the K. To figure the damage amount of $20: It cost the $100 to hire someone else less the 2 ½

months he didn’t work (120-95=25) gives 75 in damages. The worked 9 ½ months $120 prorated for 9 ½ months means he should have earned $95. $95 earnings - $75 damages = $20 to the .

If the damage amount was more than the amount due, the breaching party would actually owe the non-breaching party. You always offset the substantially performance amount w/ the damages!

Restitution is a good option to keep the breaching party from not being able to get anything for the substantial performance. However, it is not likely that the there will end up being a positive net benefit conferred to the non-breaching party once you subtract out all of the expenses & damages.

C. How do we determine how to compensate a person for partial performance?

R2d§ 371: Measure of Restitution InterestIf a sum of money is awarded to protect a party's restitution interest, it may, as justice requires, be measured by either:

(a) The reasonable value to the other party of what he received in terms of what it would have cost him to obtain it from a person in the claimant's position, or ("cost of replication")

(b) The extent to which the other party's property has been increased in value or his other interests advanced. (increase in property due to the benefit received")

Practice Problem #1 (pg 700)A was to build a pool for B for 15,000 that was guaranteed for 20 years. A intentionally used an inferior system in the construction of the pool to make more money; the inferior system only had a 10 year guarantee. The pool he built was only worth 10,000. It was going to cost the homeowner 20,000 to replace the inferior system. This was considered a material breach, so no substantial performance doctrine applies here. Even though this is a material breach, the court decided not to give the homeowner 20,000 to replace the system to avoid “economic waste.”

of 82

Let’s assume the property W/O the pool was worth $150,000; had the pool been constructed properly as contracted, the value of the property would be $160,000; as the pool was actually constructed w/ the inferior system, the value of the property is only $155,000.

How do we compensate the builder under a restitution theory?(1) Some courts say no compensation at all due to a material breach in bad faith.(2) Other courts would compensate in ONE of 2:

(a) The reasonable value to obtain the pool from another builder (cost to replicate the pool) The pool from another pool contractor would cost = $12,000; OR

(b) The extent to which the other party’s property has been increased in value There was an increase in the value of the property from the addition of the pool = $5,000.

The court will award the breaching party the lower amount. After you determine the restitution amount to the breaching party, you then subtract out any

damages that the non-breaching party incurred. Generally at CL you are going to choose a contract recovery or a restitution recovery. Just b/c we

subtract out the damages in a restitution recovery doesn’t mean that this a K recovery.

Practice Problem #2 (pg. 700)Attorney / Client K for $100,000. The amount was recovered after trial so the attorney gets 25% but he materially breached b/c he didn’t want to handle the appeal. The client had to pay another attorney to handle the appeal for $7,500. He is suing in restitution to get the value of the benefit conferred. Why wouldn’t you give the attorney 17,500 (100000 * .25 less 7500)? This is a K recovery & we can’t have a K recovery in restitution. The client was not guaranteed the $100,000 claim. The most likely recovery in this case is $0 b/c this is such an egregious breach of fiduciary duty.

RULE: ALWAYS GIVE THE BREACHING PARTY THE LESSER VALUE OF THE ABOVE 2 WHEN DETERMINING RESTITUTION VALUE AND THE AGRIEVED PARTY THE HIGHER VALUE.

of 82

VI. IMPRACTICABILITY & FRUSTRATION OF PURPOSEC &S contract to deliver goods; circumstances change causing C to have to take a different, longer route to deliver the goods; C offers this to S; S refuses so C breaks off discussions; S sues. Is this a breach or not? Is there an excuse for someone in this situation? Yes, b/c the circumstances changed w/o anyone having any knowledge of the change b/4 hand. This doctrine is not used as much b/c of the harsh effects to the other party, S in this case. The key is always going to be knowledge! Did either party have knowledge of the circumstances at

the time of contracting? Impractical = impossible (objective standard for purposes of business and efficiency)

After K formed Without fault of breaching party Outside even Non-occurrence was basic assumption (expressly, implicitly, by act, commonality, or otherwise)

Not reasonably foreseeable

A. EXISTING IMPRACTICABILITY Impossibility is included under the impracticability doctrine.

R2d§ 266: Existing Impracticability or Frustration(1) Where, at the time a K is made, a party's performance under it is impracticable w/o his fault

b/c due to an existing fact that there was no reason to know & the non-existence of which is a basic assumption on which the K is made, no duty to render that performance arises, unless the language or circumstances indicate the contrary.- Most cases will use the term foreseeability instead of basic assumption. Also, “unless the

language…contrary” is basically an assumption of the risk argument.(2) Where, at the time a contract is made, a party's principal purpose is substantially frustrated

without his fault by a fact of which he has no reason to know and the non-existence of which is a basic assumption on which the contract is made, no duty of that party to render performance arises, unless the language or circumstances indicate the contrary.

Generally: Excuse due to changed circumstances: Impracticability, Frustration of Purpose Common theme in impracticability and frustration of purpose issues is the actual performance of

the K is significantly different from what at least one party originally expected (or so claims they expected)

o Powers says: that Frustration of Purpose is used too much when not proper Also note that the courts like to hold people bound to their Ks

Look to events subsequent to contract formation developments have so changed the environment in which performance is to take place and are so contrary to the assumptions made at the time of contracting that the very premises of the contract have been overturned

One party is asking the court to excuse their performance as originally promised Materiality and Risk Allocation are the crucial issues to be evaluated Relief is only available if the supervening change in circumstances imposes a severe and

unwarranted burden on the party seeking relief Court must determine if the K expressly or impliedly allocates the risk in some way

This doctrine is much like the mutual mistake doctrine (R2d§ 152). Under the mistake doctrine, you are wanting the whole K to be rescinded; whereas, w/ the existing impracticability doctrine is to about breach. Under this doctrine there are no damages b/c the performance is excused.

Mineral Park Land Co. v. Howard: The K was to take a certain amount of gravel off the 's land under a requirements K. The took as much as possible above the water level & then did not take anymore;

of 82

brought suit saying owed for the amount of dirt specified in the K; said it was impracticable to take gravel under water level b/c it was too costly; court held that even though it was not impossible, it was impracticable b/c of the extra costs it would entail. Basic assumption was to take gravel by "ordinary means." The majority looks at this K as if it was so impossible that it is like a total absence of the earth &

gravel below the water level.

U.S. v. Wegematic Corp.: proposed & won a K to develop & deliver a computing system to the . Delivery was to be made on June 30 w/ damages of $100/day plus the cost of alternative services for delays in delivery. Development of the system was taking longer than expected & finally cancelled the K in October. sued for damages for paying $179,450 more for another computer & contends that delivery was impossible b/c of basic engineering difficulties under UCC 2-615 (see below). Holding: Basic engineering difficulties do NOT constitute impracticability to be able to excuse the K where has shown that it might be able to develop the system w/ more time & money. assumed the risk when he guaranteed that he could develop this computer. Buyer didn’t know

that he couldn’t develop this computer. Acceptance of ’s argument would mean the manufacture would “enjoy a wide degree of latitude w/ respect to performance while holding an option to compel the buyer to pay if the gamble should pan out.”

It is important to note here that the (govt) did not have any specifications for the computer; they merely requested an intermediate-type, general-purpose electronic digital computing system(s) w/ the only requirement being the delivery date.

Had the govt furnished detailed specifications (performance specifications) which the contractor was to follow or specifications which require a particular result (design specifications) & the contractor is unable to perform on time, the risk is placed upon the govt if the specifications were defective or an implied warranty of suitability was made.

The “Superior Risk Bearer” Test—The party who is the most efficient bearer of the particular risk in the particular circumstances is likely to be the party w/ (1) knowledge of the magnitude of the loss, (2) knowledge of the probability that it will occur, and (3) (other) costs of self-insurance or market-insurance.

B. SUPERVENING IMPRACTICABILITY Supervening Impracticability is the more common use of the impracticability doctrine.

Elements of Supervening Impracticability: (if ALL of these are met, the party seeking relief is discharged of their contractual duty). See R2d§ 261.

(1) Event or condition occurs AFTER the K was made that makes performance as agreed impracticable

(2) Occurrence of an event, the non-occurrence of which was a basic assumption on which the K was made(a) The event is unforeseen by the parties if they themselves did not contemplate it as

a real likelihood.(b) Unforeseen events external to a K:

1. War2. Natural Disaster3. Strike4. Change in law or govt. regulation

(c) Change in Market conditions:1. Generally not regarded as an event beyond the contemplation of the

parties b/c the very purpose of setting a price or committing to a future delivery of goods or services is based on the possibility that prices or demand may change.

of 82

2. It is possible that a constant market was assumed in a K, or even if not, the market variation results from a disruption which causes changes way beyond reasonable expectations. This is particularly so if some unexpected calamity, such as a sudden war, embargo, or natural disaster is the cause of market changes.

(3) Event makes performance impracticable (unduly burdensome).(a) Relief is only appropriate if the change is extreme or very burdensome. The

event must have such a severe impact on the performance that it cannot be rendered without great loss, risk, or other hardship.

(b) Focuses on increased burden on party to perform unlike mutual mistake where court considers both parties to the exchange

K for specific individual that becomes unavailable through no fault of his own = impracticable, discharged from duty to perform

(4) The party seeking relief must not be at fault in causing the event to occur.(a) A party should not be able to take advantage of his own wrongful or negligent

act, and a party who disables himself from performing, or makes performance more difficult, cannot expect to be excused from liability.

(5) The party seeking the relief must not have born the risk of the event occurring.(a) If the party adversely affected by the event had expressly or impliedly assumed

the risk of its occurrence, the non-performance cannot be excused even though all the other elements are satisfied.1. Express Assumption: look at the contract itself to see if one of the parties

assumed the risk force majeure: a general provision allocating the risk of disruptions and

calamities. See example in Note 2, pg. 731. Provide excuse for some events

2. Implied Assumption: the K may impliedly place the risk on a party by means of a provision such as a warranty, an undertaking to obtain insurance, or some other commitment from which the assumption of the risk may be inferred. A term expressly allocating the risk of certain events to one party may give rise to the inference that the other assumed the risk of event not enumerated.

3. Contextual Assumption: if the K terms do not settle the issue, its context, including normal commercial practices & expectations, must be examined by the court to decide where the risk should lie.

Taylor v Caldwell : rented music hall to for the purpose of a concert. The Hall burned down & sued the b/c they could not have the concert; this is an example of a supervening impracticability that will discharge the duty of party. In Ks in which the performance depends on the continued existence of a given person or thing, a

condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance. Therefore, the court implied the presumption of the Hall existence at law.

The parties in this case Ked based on the continued existence of the Hall; that being essential to the ’s performance, that performance is excused.

Somewhat foreseeable, but highly unlikely now the courts would ask “why no insurance?” Calls for attention to detail of K and circumstances surrounding it ie: if foreseeable and likely, then protect against it, if not, then mutual mistake-ish

1. Assumption is basic premise2. Materially affects K3. Must not bear risk

of 82

R2d§ 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 performance impracticable is an event the non-occurrence of which the K was made. (AKA “supervening destruction”, like Taylor v. Caldwell under modern law of impossibility)

Example: Assume Fred Farmer has a contract to sell 10,000 bushels of wheat to Betty Buyer.

o A severe drought totally destroys his crop.o Wheat is available on the open market, but at a drastically inflated price.

Is Fred excused based on impracticability?o Would have to look to K and see what is expected in the K

Does the K require the sale of Fred’s wheat, or any wheat?o What if the K doesn’t specify the source of the wheat? – look to course of

performance/dealing and trade usageo Does that make a difference? – if needs to be his wheat, then impracticable, if any

wheat, then less strict and most likely not impracticable What if Fred had the option to irrigate the fields, but chose not to do so?

o This is under Fred’s control and he chose not to What if droughts are common in the area? What if they almost never happen?

o The more common, the more likely the court will say it should have been in the Ko Court will look to industry, trade, and location

Focus is on what was assumed at the time the K was formed (the non-occurrence of whatever did end up happening)

o Control of the activity is a factor Assume Fred normally produces 40k bushels, and has contracts with B, C and D for 10k each.

Due to the drought he only produces 10k total.o What are his options?

Distribute on pro-rata according to UCC o What are B, C and D’s options?

Have an option to take less than their K is for, not required to take less than K amount

o What if Fred sells to E, but did not have a contract with E? Is allowed to apportion some of the 10K to E Would be allowed to apportion to himself if he usually keeps a portion for

himself. Assume Dan Dealer has a K to sell an original oil painting to Collen.

o Before the sale is consummated, the painting is stoleno Is D excused from performance?

Yes, K is voidedo What if Dan left the painting in his unlocked car after he made the K with Colleen?

Still voided though perhaps contributorily negligent?o What if the painting is recovered, but was slightly damaged when it was stolen?

Collen has the option

R2d§ 262: Death/Incapacity of Person Necessary to Performance:

of 82

This addresses the death or incapacity of a person that is necessary for the performance of the K. The K must be one that is personal & cannot be delegated to a third party. The test for this is if it requires the personal experience, ability, & skill of that particular

person.

Canadian Industrial Alcohol Co. v. Dunbar Molasses Co.: This is a requirements K for the to provide 1,500,000 gallons of molasses to the . Unknown to the , the was a middle man & could only provide 344,083 gallons to the . sues for breach. contends that he could only get this much from the refinery & that full performance of the K was out of his control & therefore impracticable. The key here is that did not even get a K w/ the refinery to guarantee the level of production. The

could also have dealt directly w/ the refinery had they known he was dealing w/ a middleman. A party may not, by its own conduct, create the event causing the impracticability of performance.

This is assumption of the risk by the since they had a K w/ & guaranteed the production. Had the contracted this a potential excuse or had a requirements K w/ the refinery to guarantee

production, he would have been excused from performance. The K would also have been excused if the refinery had been destroyed, if there would have been a sugar crop failure, war, etc.

Problem: A Builder in the Quagmire of Impracticability (pg. 732): Builder (B) Ked w/ homeowner (H) to construct home on homeowner’s land. The home was to be constructed according to detailed plans & specifications prepared by Harry’s architect for $300,000 on the only feasible spot on the lot. In the following problems, access the probability that B will be discharged or obtain relief in performing the K:(1) B started bulldozing & discovered a massive & unforeseen rock formation 4 feet under the surface. B

had performed no tests b/4 commencing performance, & estimates that it will now cost an extra $100,000 to remove the rock.- The circumstances indicate that the risk was on B. H assumes B is going to make sure that

everything is up to par w/ the sub-surface. Therefore, B must still perform & eat the extra $100,000. What if H first hired an engineer to come to the site, inspect the soil, & determine the only feasible spot & then told B to build the house in this location. The risk is now on H (to take up w/ the engineer) & not the builder.

- Note 3, pg. 721 When a contractor encounters unexpected subsurface conditions upon the land of another which delay or increase the cost of performance, the usual rule is that the contractor assumes the risk unless the owner, whether a private party or the government, has agreed to assume the risk, misrepresented the conditions or failed to disclose known difficulties.

(2) After construction began, a new county zoning ordinance was adopted. The county attorney claimed the was lot too small & obtained an injunction against continued construction. B stopped work; 6 months later the injunction was dissolved by a ruling that the ordinance did not have a retroactive effect, but B had construction crew on other projects & refused to continue performance.- The key is whether this event was foreseeable. If it was foreseeable & not a basic assumption on

which the K was made, B would be liable. If it is totally unforeseeable, as it was here then B’s performance is excused. (Note that government orders are always an excuse under R2d § 264.)

- The completion of the house would merely be temporarily impracticable. See R2d § 269.(3) After the home was 60% completed & w/o fault or negligence on either party, a fire burned the

structure to the ground. B had been paid $50,000 as progress payments & was not insured even though it was customary for the builder to obtain insurance on the structure until closing. Is B excused or must he rebuild under the K w/o a price adjustment? What about the progress pmts?- If B did not have insurance, the court is not going to help him out. B can also still build the

house, even though it is going to be more expensive, b/c it is not outrageously expensive.- If the house burns down, the subcontractors (i.e. roofer, plumber, etc.) can claim restitution for

the amount of work completed if there has been some performance.(4) When the house was 60% completed, B died of a heart attack, but had already been paid $50,000. H

Ked w/ C to complete the work for $300,000 & then sued B’s executor for $50,000—damages for

of 82

breach. Assume that B’s executor, upon H’s request, refused to complete performance after B’s death.- The builder, by his death, is not excused & the estate is responsible for fulfilling the K in this

situation. There is also a distinction between subjective & objective impracticability.- Is this a personal service or is this something that someone else can do? Subjective

impracticability is impossible to be performed by someone else b/c of the uniqueness; whereas, objective impracticability is not impossible to be performed by someone else.

C. TEMPORARY IMPRACTICABILITY

R2d§ 269: TEMPORARY IMPRACTICABILITY This test applies a lesser standard to determining if the performance is impracticable. The

party only has to show that it is not "materially more burdensome" to perform the contract. The event in this situation only temporarily suspends the duty of a party to perform while

the impracticability exists, it does not discharge their duty totally; so, after the impracticability or frustration ceases, the duty reattaches.

To permanently discharge his performance, the performing party has to show that it is now materially more burdensome than it was b/4 the impracticability or frustration.

D. CASUALTY TO IDENTIFIED GOODS: Destroyed Goods – If identified goods are destroyed prior to delivery (without fault), the

contract is avoided. Damaged Goods – If identified goods are damaged prior to delivery (without fault), the

buyer may accept the goods (with due allowance for damage) or refuse to accept. Dead Seller – If a seller dies prior to delivery, the contract is valid with the estate. Diminished Capacity – If a seller has multiple contracts for a good but full production

becomes validly impracticable, he must distribute the right to purchase proportionally among his contracts and regular customers (including himself) and allow them to purchase or refuse.

Increase in costs – Increased cost alone won’t create excuse by impracticability, but unforeseen acts such as war, famine, etc causing extreme shortage may excuse if create a dramatic price increase.

Problems: Casualty to Identified Goods (pp. 732-33:(1) F Ked to sell 20,000 bushels of #1 yellow corn to B, for $2.40/bushel. A severe drought began &

intensified until after the usual harvest date. The crop was so bad that F ground it up for fodder. B demanded delivery & F refused claiming excuse under UCC 2-613 through 2-616. At that time, #1 yellow corn was selling at $5/bushel. B claims damages of $2.60. Should he collect them?- UCC 2-615 reads a whole lot like R2d§ 266 (impracticability). However, UCC 2-613 is more

specific & is used where the goods are identified to the K at the time of the K. Is corn something that is identified to the K in the case here? Normally, crops have to be identified at the time they are planted to be considered “identified at the time of the K.” However, comment 9 under 2-615:

The case of a farmer who has Ked to sell crops to be grown on designated land may be regarded as falling either w/in UCC 2-613 or UCC 2-615, & he may be excused, when there is a failure of the specific crop, either on the basis of the destruction of identified goods or b/c of the failure of a basic assumption of the K.

- Under 2-615, you can also have a general excuse to the K when the manufacturer’s building burns down or when the crop fails b/c of a drought, etc.

- What if you had 2 buyers that each wanted 20,000 bushels but the farmer’s crops only yielded 12,000 b/c of the drought? Here you allocate equally among the buyers, but the buyers may

of 82

of course refuse under the perfect tender rule. If one refuses, then the other gets the entire amount.

- If the farmer wanted some of the corn for himself & it was Ked at the knowledge of the other interested parties, the UCC provides that the farmer can allocate with himself, as well.

(2) Boots were being shipped to New York for sale but the seller shipped them through San Francisco where they were ruined in a fire. What result?- The seller shipped the boots FOB (free on board) to NY, so he assumes the risk of damage until

the boots arrive in NY. (see UCC 2-319) So, the seller has assumed the risk of shipping the boots & he will be liable to the buyer for any damages caused by the late shipping or non-delivery.

- This situation is not an excuse situation at all. The seller is responsible. We have mentioned the idea of price going up in the previous cases…Is the buyer excused for an

increase in price? NO. You assume the risk of a price increase when you enter into a K. However, the UCC leaves the door open just a little bit by saying that if there is something unexpected that happens that causes an EXTREME price increase, the buyer may be excused for a price increase.

UCC 2-613: Where the K requires for its performance goods identified when the K is made, & the goods suffer casualty w/o the fault of either party before the risk of loss passes to the buyer, or in a proper case under a "no arrival, no sale" term then:

(a) if the loss is total the K is avoided; AND(b) if the loss is partial or the goods have so deteriorated as no longer to conform to the K, the

buyer may nevertheless demand inspection & at his option either treat the K as avoided or accept the goods w/ due allowance from the K price for the deterioration or the deficiency in quantity but w/o further right against the seller. The difference between UCC 2-613 & UCC 2-615 is that the goods in 2-613 are identified &

particular at the time of the K. In 2-615 they are generic goods such as widgets or K books. The buyer says "I want some books like those, but not that particular set of 20. In 2-613, they might be a certain crop out of a field (see example on page 732; but crops can be classified as either).

What do we mean by identified goods?- These are goods that we can actually define at the time the K is made. (Ex. Sale of a

used Pontiac Sunbird it is a good & we can define the exact item to be Ked for)- Identified source v. identified goods

- Identified Source If the farmer is a dealer in corn & the buyer requests corn from a specific plot of the farmer’s land & there is a drought—the farmer would be excused for the drought.

- Identified Goods However, if the farmer is a dealer in corn & the buyer requests #1 corn & there is a drought—the farmer is not excused for the drought.

- Don't forget that the buyer can always accept a partial shipment of the goods (for lesser price than the full K) or he can reject b/c of not full shipment under the K.

UCC 2-615: Excuse by Failure of Presupposed ConditionsExcept so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:(a) delay in delivery/non-delivery of goods by a seller who complies with paragraphs (b) and (c)

below is not in breach of his duty under a contract if:(1) Performance as agreed has been made impracticable by the occurrence of a contingency

when the non-occurrence of this event was a basic assumption on which the contract was made, or

(2) Performance was made impracticable by a good faith compliance with a governmental regulation or order whether or not it later proves to be invalid.

(b) Diminished number of goods due to some event or condition

of 82

(1) Allocation of goods: if (a) only affects part of the seller's capacity to perform (by reducing the number of goods to ship), the seller must allocate production and delivery of the goods among all his customers.

(2) Guidelines for allocation of goods: (i) the seller does not have to allocate the goods only to customers with outstanding orders(ii) seller can allocate goods to "regular customers" that do not have orders(iii) he may also allocate some for his own requirements for further production (iv) any method of allocation used must be fair and reasonable

(c) Notice to the buyer: (1) Seller must seasonably notify the buyer of the delay or non-delivery.(2) If the seller will be allocating goods, he must seasonably notify the buyer of the estimated

quantity he will be shipping.E. FRUSTRATION OF PURPOSE

Frustration of purpose was designed to provide relief when an unexpected supervening event so destroyed the value of a transaction that the K’s underlying purpose is frustrated. There is no doctrine for impracticability or frustration of purpose for the buyer under the UCC for the sale of goods b/c all a buyer has to do is pay, not perform. Also, there is a strong presumption that the buyer assumes the risk. And if the buyer doesn’t want to buy more than they need, it is presumed that the buyer will enter into a requirements K.

R2d§ 265 Use the same elements as impracticability, except substitute frustration of purpose for impracticability:1. After K was made,2. The purpose of the K must be SUBSTANTIALLY FRUSTRATED (purpose, no economic

value), The purpose that is frustrated must have been a principal purpose in making the K that

w/o it the K wouldn’t make sense.3. Frustrated by occurrence of an event w/o the fault of the party seeking relief,4. The nonoccurrence of the frustrating event must have been a basic assumption on which

the K was made, AND Parties knew this was the purpose, or “an” important purpose of the K (ie: coronation

parade) Foreseeability is merely a relevant factor in determining whether nonoccurrence of the

frustrating event was a basic assumption of the K.5. The performance of the K is excused UNLESS the language or circumstances indicate

otherwise. It is not enough that the transaction has become less profitable for the affected party or

even that he will sustain a loss. Many times, the affected party will be able to get through 4, but can’t overcome the

assumption of the risk argument in 5. Performance of conditions will never be excused under FOP.

Paradine v. Jane: This is not a impracticability of performance case b/c the could have performed by simply paying the rent money. The uses the argument of frustration of purpose by saying, why do I have to pay when the purpose of the K is no longer valid. However, the court said that the assumed the risk of adverse possession of his estate when he entered into the K.

Classic Example: Krell v Henry : is suing for the balance of 50₤ on a 75₤ street-side flat that paid a 50₤ deposit on for the purpose of viewing the coronation procession. The King got sick & the coronation was cancelled & the contends that the purpose of the K was frustrated b/c the procession didn’t take place & therefore he should be discharged of his duty to perform. The court agrees saying that the

of 82

coronation procession was an implied condition on which the K was formed. They used the precedent of Taylor v. Caldwell to assume the implied condition. Most courts look to see if there is any commercial value left to the K for the party seeking the relief;

no more value, then it is more likely to be held frustration of purpose. The court gives 3 questions to ask: (1) What was the foundation of the K w/ regard to all the

circumstances?, (2) Was the performance of the K prevented? (this is misstated b/c the performance doesn’t have to be completely prevented merely substantially frustrated), AND (3) Was the event which prevented the performance of the K of such a character that it cannot reasonably be said to have been in the contemplation of the parties at the date of the K? If all 3 of the questions are answered in the affirmative, both parties are discharged from further performance of the K.

The Doctrine of Frustration of Purpose doesn’t work in a lot of situations; it is a very narrowly construed, limited doctrine that is not very widely used. It has to be a very clear case where the purpose of the K is SUBSTANTIALLY FRUSTRATED by an unforeseen event.

UCC Frustration of Purpose Betty Byers orders a new car from Sam Seller After she orders it, she loses her job and gets another job in NY Betty cancels due to frustration of purpose saying she doesn’t need a car in NY Sam insists she breached Betty breached and is not excused.

Washington Hop Producers: Prior to 1985, the USDA required hop growers to buy hop base in order to have access into the mkt. to sell hop. Ked w/ to buy hop base mid year 1985 w/ the basic assumption to both parties that this requirement would persist. The USDA is abolishing the rqmt as of first of 1986 & the is trying to be excused from the K. sues & contends that the purpose of the K was frustrated & that if he had known the rqmt would change, he would have just rented it for the remainder of 1985 rather than Ked to buy it. Holding: The irrelevance of the need of hop base after 1986 is the frustration; wins; should have drafted a force majeure clause but didn’t (the could not bargain for the clause). The argues that it was foreseeable, but the court says that whether the change was foreseeable

only goes to figuring out whether the change was a basic assumption on which the K was made. And in this case, it was not foreseeable that the USDA would make this change even though it had been mentioned.

Hypo What if a bride is having a dress designed for her wedding, the designer makes the dress, but then the wedding is cancelled? Should the bride be able to claim FOP? NO, b/c the bride assumes the risk & the seller actually performed the K. R§265 doesn’t work b/c this is a sale of goods K. The UCC doesn’t have a § for FOP for the buyer b/c it is generally assumed that the buyer assumes this risk since all they have to do is pay. Sellers, on the other hand, have to perform.

Impracticability v. Frustration of Purpose: Make a distinction between impracticability, where you are able to perform but it becomes extremely difficult & frustration of purpose, where you are still able to perform but there is no reason to perform & it no longer makes sense to perform the K.

of 82

VI. RESPONSE TO BREACH : REPUDIATION (ANTICIPATORY BREACH)

A. Repudiation

R2d§ 250: When a statement or an act is a RepudiationA repudiation is:(1) a clear statement by the obligor to the obligee indicating that the obligor will

commit a breach that would of itself give the obligee a claim for damages for total breach under §243, OR Vague doubts about willingness or ability to perform is not enough

(2) a voluntary affirmative act that makes performance impossible, or apparently impossible w/o breach. Failure to give adequate assurances is a voluntary, affirmative act that makes

obligor appear unable to perform

B. After a clear Repudiation is given by statement or voluntary action (anticipatory repudiation), a has 3 options:

(1) wait till the time when the act was to be done & then sue for breach (remember: the breaching party can retract his repudiation during this time). The Breacher can only retract if the non-breaching party has not performed

yet. RETRACTION POSSIBLE

(2) cancel the K & bring suit for breach against the party that gave the repudiation; once cancelled, the breaching party cannot retract the repudiation. NO RETRACTION

(3) accept & act in reliance on the repudiation, which makes it impossible for the Breacher to retract the repudiation. (Breacher cannot retract) Hochster v. De La Tour : The repudiated an employment K w/ . When

sued, contended that lost his right of action against when he obtained another job since he was not ready, willing & able to perform the employment K in the case of retracting his repudiation. The court held that they were not going to do this b/c this goes against the policy of the aggrieved party mitigating it’s damages.

NO RETRACTION

Taylor v Johnson : was a breeder & Ked w/ to provide ’s horse for stud services. B/4 the services were rendered, sold the horse & informed that K could no longer be performed. then retracted his repudiation & said he would breed the mares but gave the runaround; considered this a repudiation, bred mares to another stud, & then sued for breach. Holding: ’s performance was not impossible; the runaround was not a repudiation b/c performance was still possible. When sold the horse, gave the run-around & then sent a letter saying the is relieved of

their duties is this a repudiation? No, b/c the letter didn’t have a clear statement of repudiation & the selling of the horse & run-around did not make performance impossible. There is still time for the to perform w/ another stud.

The can demand an assurance though R2d§ 251 if you have reasonable grounds for insecurity. The has to be given reasonable time to respond w/ the assurance & the assurance must be reasonable. If the fails to give assurance, it is a repudiation.

R2d§ 256: Nullification of Repudiation or Basis for Repudiation(1) the effect of a statement as constituting a repudiation under § 250 or the basis

for a repudiation is nullified by a retraction of the statement if notification of retraction comes to the attention of the injured party b/4 he materially changes

of 82

Anticipatory Repudiation

(repudiation by a clear statement)

Retraction of a

Repudiation

his position in reliance of the repudiation or indicates to the other party that he considers the repudiation to be final.

(2) The effect of events other than a statement (ie. Voluntary, affirmative act) that constitutes a repudiation under § 250 or the basis for a repudiation under §251 is nullified if, to the knowledge of the injured party, those events ceased to exist b/4 he materially changed his position in reliance on the repudiation or indicates to the other party that he considers the repudiation to be final.

C. REPUDIATION WHEN DEALING WITH SALE OF GOODS

UCC 2-610: ANTICIPATORY REPUDIATIONWhen either party repudiates the K w/ respect to performance not yet due the loss of which will substantially impair the value of the K to the other, the aggrieved party may

(1) for a commercially reasonable time await performance by the repudiating party; (difference in Restatement and UCC is “commercially reasonable time” rather than WAIT

(2) resort to any remedy for the breach, even if he said he would await the latter's performance & has urged retraction; ANDREMEDY

(3) in either case suspend his own performance or proceed in accordance w/ the provisions about seller's right to identify goods to the K notwithstanding breach or to salvage unfinished goods.STOP OWN PERFORMANCE

UCC 2-611: RETRACTION OF ANTICIPATORY REPUDIATION 1. Time for Retraction : repudiating party can retract if,

(a) his next performance is not yet due, AND Can only retract until next performance is due

(b) the aggrieved party has not:i. cancelled the K, or ii. materially changed its position, oriii. otherwise indicated that it considers the repudiation final.

2. Request for Retraction: a valid retraction of a repudiation must,(a) clearly indicate to the aggrieved party that the repudiating party intends to

perform, AND(b) include any adequate assurance justifiably demanded (2-609)

3. Effect of Retraction: (a) the repudiating party's rights under the K are reinstated, and (b) the aggrieved party is excused for any delay due to the repudiation.

D. DEMANDS FOR ADEQUATE ASSURANCE OF PERFORMANCE If there is not yet repudiation by a party, but you have reasonable grounds for insecurity

you can ask for assurances & suspend your performance. If assurances are not given to you in a reasonable amount of time or the assurance is not adequate, it is considered a repudiation (adequacy depends on the circumstances of each case).

Reasonable insecurity request assurance time to respond reasonable assurance? YES NO repudiation NO YES, can be interpreted as repudiation, though adversely affected party may

continue in course of K, but waives right to complain/take legal action

of 82

R2d§ 251: When a Failure to Give Assurance May Be Treated as a Repudiation(1) Where reasonable grounds arise to believe that the obligor will commit a breach

by non-performance that would of itself give the obligee a claim for damages for total breach under § 243, the obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance.

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

AMF v McDonald's Corp.: AMF Ked to make computerized cash registers for McD. AMF had a model in McD Elk Grove restaurant but it didn’t perform properly. McD demanded assurance; AMF did not give adequate assurance of performance so McD cancelled the K. Holding: Court held that McD’s suspension of performance due to AMF’s lack of assurance was OK & AMF cannot recover for McD’s cancellation. The UCC governed this case b/c it was the sale of goods. The use of this demand for assurance is good but most parties do not know that it has to be

in writing & they are doing it more informally. This is why the court held that McD’s demand for assurance was OK even though it was not in writing & was more informal. If the parties would have gone to an attorney, they would no about the requirement, but most parties do not go to an attorney until they are actually sued, which is too late.

REPUDIATION SHOULD NOT GIVE THE A BETTER RIGHT TO SUE. THE HAS TO SHOW THAT IT WOULD HAVE BEEN READY, WILLING, & ABLE TO PERFORM, BUT FOR THE REPUDIATION. Therefore, AMF should not even be able to sue McD b/c they were not ready, willing, & able to perform, but for McD repudiating.

UCC 2-609: RIGHT TO ADEQUATE ASSURANCE OF PERFORMANCE(1) A K for sale creates an obligation of each party to maintain the other party's expectations

of due performance.(2) A party will be excused from performing any contractual obligation if:

(a) the party had reasonable grounds for insecurity as to whether the other party will perform according to the K, AND

(b) the party sends a written notice to the other party demanding adequate assurance of due performance, AND

(c) the other party did not yet respond to the demand, AND(d) it is commercially reasonable to suspend such performance, AND(e) the party did not receive payment (or other return) for the obligations it plans to

suspend.(3) Standards: reasonable grounds for insecurity & the adequacy of assurance will both be

determined by commercial standards.(4) Installments: An aggrieved party is not precluded from demanding adequate assurance

of future performance even if he has already accepted an improper delivery or payment of earlier obligations. Can still demand assurance.

(5) Time before Repudiation is assumed: A party who fails to provide adequate assurance under the circumstances of the K (demand must be justified) w/in a reasonable time (NEVER MORE THAN 30 DAYS) will have repudiated the K.

E. FINANCIAL INABILITY TO PERFORM (See Problems on pg. 833)Repudiation is either an express statement or a voluntary act; financial inability to perform is not a repudiation (although it may become a repudiation).

of 82

Voluntary Disablement (repudiation by conduct)

R2d§ 252: EFFECT OF INSOLVENCY(1) Where the obligor's insolvency gives the obligee reasonable grounds to believe

the obligor will commit a breach under rule in §251, the obligee may suspend any performance for which he has not yet received the agreed exchange until he:

(a) receives assurance in the form of the performance itself(b) receives an offer of performance(c) or adequate security.

(2) A person is insolvent is he ceases to pay his debts in business, cannot pay his debts as they come due, or is insolvent w/in the meaning of federal bankruptcy law.

(a) No cash (or other ability) to cover debts, new or old

UCC 2-702: Buyer's Insolvency; Reclamation Rights(1) Where the seller discovers the buyer to be insolvent before delivery he may:

(a) refuse to continue delivery except when the buyer promises to:i. pay C.O.D. , ANDii. pay for any shipments previously delivered under the K

(b) or the seller can stop delivery(2) Where the seller discovers that the buyer has received goods on credit while

insolvent, the seller may reclaim the goods:Reclamation Requirements:

(a) 10-day time limit: in order to reclaim goods seller must:i. demand payment or reclamation of the goodsii. make demand within 10 days after the buyer receives the goods

(b) Exception: the 10-day time limit does not apply if the buyer made a written misrepresentation within 3 months before delivery.

(c) The seller may not base a right to reclaim goods on the buyer's fraudulent or innocent misrepresentation of solvency or of intent to pay.

(3) Limitations on Seller's rights to reclaim goods(a) the seller's rights to reclaim goods are subject to the rights of:

(i) a buyer in the ordinary course of business(ii) any other good faith purchaser

(b) Successful reclamation of goods excludes all other remedies (w/ respect to reclaimed goods).

R2d§ 254: Effect of Subsequent Events on Duty to Pay Damages(1) A party's duty to pay damages for total breach by repudiation is discharged if it

appears after the breach that there would have been a total failure by the injured party to perform his promise (tender perf.) So if a party repudiates a K & the injured party was not ready, willing, and able to

perform, the Breacher will not have to pay damages when the injured party sues for breach of K. Can’t sue if you were going to breach anyways yourself

(2) A party's duty to pay damages for total breach by repudiation is discharged if it appears after the breach that the duty that he repudiated would have been discharged by impracticability or frustration before any breach by non-performance. So if a party repudiates and the Breacher says that it was impracticable to perform,

he will not have to pay damages if the court finds that it was a case for impracticability (even if he repudiated).

of 82

F. INSTALLMENT CONTRACTSo Not subject to perfect tender rule b/c K for installments over time (by definition,

NOT all at once)

Plotnick v Pennsylvania Smelting: is suing for non payment of delivered goods & is suing for non-delivery of goods. This case focused on the 2nd suit by saying that if the ’s non-payment was a material breach of the K then the was excused of delivering the remaining battery lead. However, since this is a sale of goods, the UCC says we don’t look at material breach but at perfect tender. What is going on? This is an installment K, so we don’t use the perfect tender rule. The court held that the Buyer’s non-payment did NOT substantially impair the whole

value of the K in the Seller’s viewpoint. The court comes to this determination b/c the Buyer had agreed to place the overdue payment in escrow.

Note 3, pg. 842 If at any time you have the right to cancel based on material breach, you can cancel. However, you may waive that right if you delay b/c the Breacher may cure the defect.

UCC 2-612: Installment Contracts; Breach this can apply to both Buyers & Sellers(1) An installment K is one which requires or authorizes the delivery of goods in separate

lots to be separately accepted, even though the K contains a clause "each delivery is a separate K" or its equivalent.

(2) A buyer may reject a non-conforming installment only if the non-conformity substantially impairs the value of that particular installment or it cannot be cured (or if the non-conformity is a defect in the required documents). If one of these do not apply & the seller gives adequate assurance of its cure of

the non-conformity, then the buyer must accept the installment.(3) The buyer may cancel the whole K & sue for breach if one or more installments

substantially impairs the value of the whole K.(4) WAIVER: But, the aggrieved party may re-instate the K if he:

(a) accepts the non-conforming & does not seasonably notify the seller of cancellation

(b) brings an action with respect only to past installments(c) demands performance as to future installments

Notes on UCC 2-612: You can't cancel for anything; it must be a substantial impairment to the whole K (must be

found to be a material breach, not a minor breach as in the Plotnick case.) A party cannot just decide to cancel the whole K for insecurities; you need to go through the

process of demanding adequate assurance; if no response, then that is a repudiation & you can cancel & sue for breach legally. Insecurity? If so, request assurance: if none given repudiation

If given no breach If a party has made 2 breaches, one minor and one material & the injured party does not

raise the issue of the major breach, thereby waiving his right to cancel; he cannot come back & try to cancel using this material breach as reason if he never made the reason known to the breaching party. Can’t implicitly excuse material breach and then bring it up when small/minor breach

occurs; letting performance go on without commercially reasonable in time objections in writing

of 82

VII. DAMAGES

A. Purpose of damages: to "protect the benefit of the bargain"; thereby giving the injured party what he would have gotten out of the K had there not been a breach. The enforcement of Ks gives people the assurance to K w/ others.

o Basis of Expectation Damages Economics and the bargained-for-exchange play a vital role in the voluntary reallocation

of goods, labor, and other resources in a socially desireable manner.

B. Why not specific performance? Why do we sometimes encourage breach?(1) Sometimes it is more efficient to breach a K. The policy of "efficient breach" makes sure

that resources are used for their most efficient purpose & encourages an efficient society. Be careful w/ this idea!

(2) The remedy of choice to a breach of K is damages. If a person has an adequate remedy at law, then they should get it, & not the equitable remedy of specific performance. (English CL courts said that if damages would work, then damages should be given.)

C. 3 TYPES OF CONTRACT DAMAGES :

(1) EXPECTATION : place the in as good a position as he would have been in had the K been performed. – hold the parties to public policy standard of economic efficiency Expectation interest gives the injured party the benefit of the [expected by K]

bargain b/c it gives him what he would have gotten from the K. K terms are the maximum recoverable (less any failure to avoid/mitigate costs)

Expectation interest is based not on the injured party’s hopes at the time he made the K, but on the actual value that the k would have had to him had it been performed.

Must have causation: the breach must be the cause in fact of the loss Similar to torts Also must show that without breach, would have been able to perform

Breach not precluded by presence of other contributing causes like intervening, supervening, etc. as you have in torts

Failure to mitigate losses is thought of as a limiting factor to damages, rather than being linked to (in an effort to destroy) causation

The over-optimistic landowner who contacted to have an oil well dug that turned out dry would get the value at performance – dry well If circumstances at time of performance are less favorable (market) than it

seemed at time of K, diminished the promissee’s expectation interest

(2) RELIANCE : reimbursement for loss caused by reliance on the K by being put in as good a position as he would have been in had the K not been made. Next best alternative, or the opportunity cost of entering into the K Two options:

1. “Essential:” as a result of preparation for performance of Ka. ie: builder who buys materials and plans for building a house, is

entitled to recover those lost expenses for repudiation2. “Incidental:” preparations for collateral transactions that are planed to

carry out when K is performed Courts have put the opportunity cost under this category because

of the lost ability to K with another party

of 82

Most common type of damage

award.

(3) RESTITUTION : restore the w/ any benefit that he has conferred on the . Unjust enrichment Focus on party in breach being returned to where they were Market value determined at time of performance Ordinarily smaller than either expectation or reliance

R2d§ 347: MEASURE OF DAMAGES IN GENERAL The expectation interests is measured by:

(1) the loss in value to the injured party of the other party's performance caused by its failure or deficiency, plus

(2) any other loss, including incidental or consequential loss, caused by the breach, less(3) any cost or other loss that the injured party has avoided by not having to perform.

R2d§ 349: DAMAGES BASED ON RELIANCE INTERESTAs an alternative to the measure of damages stated in § 347, the injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance, less any loss the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed.

Sullivan v O'connor : "nose job gone bad case"Doctor guaranteed a certain result for a nose job; the nose is worse than before & sues for K damages. Normally doctors cannot be sued under K theory, but in T law for negligence. The lost in T b/c the

doctor was not negligent. However, we don't want doctors making promises to get patients in the office, so they hold doctor in this case accountable under breach of K. This is an implied (in fact) K that the doctor is going to provide the nose he promised & that is going to pay.

The court is reluctant to allow this action b/c there is no way that a doctor can guarantee that a will be satisfied w/ the procedure. However, this action is allowed b/c the doctor made a guarantee. Note breach of express warranty

The court said that restitution is plainly too meager & expectancy may be too excessive. The court awarded the reliance damages.

(1) EXPECTATION DAMAGES Repair Theory recover the cost to put things the way they would have been Loss in value would be the difference b/w the value of the nose she had before operation, and

the value of the nose she expected to get from the surgery. Consequential or incidental loss She is worse off now than when she began, so add in the

consequential or incidental damage caused by the new nose. (difference in the value of the nose she had from the one she ended up with due to the breach)

Cost avoided you subtract any cost that the injured party avoided by the Breacher's breach of K. If the had not paid the doctor’s bills yet, then the bills would be subtracted from the damage award.

of 82

Nose expected - nose she had+ nose she had - nose she now has that is worse than the original nose+ pain & suffering from the 3rd operation- any unpaid doctor's bills from the 3rd surgery= DAMAGES under expectation theory

Lost value+ other loss- cost/loss avoided

(2) RELIANCE DAMAGESPuts the back in the position she occupied just b/4 the parties entered upon the agreement, to compensate her for the detriments she suffered in reliance upon the agreement.

What a party spent in preparation or performance of the contract, less any losses the breaching party can prove with reasonable certainty that the non-breaching party would have suffered

i.e. If I can prove you were going to lose money on the deal, you're still going to lose money if I breach

Damageso Usually only include damages incurred after formation of Ko Can be held liable for prior losses if the breach causes the loss of the entire amount,

and the damages were within the contemplation of the parties when the contract was signed

o Must prove causation and amounto How much would a new business have made, and therefore how much did it lose?

Can be proven, just difficult

What the Sullivan court used

(3) RESTITUTION DAMAGESFocuses on the The has to disgorge any benefit conferred by the upon the in the performance of the K disrupted by the ’s breach. This would only give her any doctor expenses that she has incurred.

NOTE: In this case it seems that reliance may be better b/c it gives her pain & suffering for all 3 operations & the cost of all 3 surgeries. The other distinction between expectancy & reliance recovery is that the gives up the cost of the expected nose under reliance recovery. Expectancy is usually the best result though & is the standard measure of recovery for breach—an amount intended to put the in the position he would be in if the K had been performed.

UCC Damages; non-breaching party may recover: Cover: purchase substitute goods and recover difference in price Market Value: difference in the market value less the contract price Accepted goods: difference in value of goods delivered and goods warranted Specific Performance: goods identified in contract if cannot find reasonable cover

Seller’s Damages Resale: sell goods in commercially reasonable means

o If its to the public, sold according to industry standardo If its sold in private, buyer must be notified

Damages: difference in contract value and market value of the goods Profit: expected profit under the contract, less costs saved

o Lost volume sellers

of 82

Nose she had - nose she has now (this puts her back where she was)+ pain & suffering for all 3 operations (b/c if you put her back where she was b/4 the

operation, you would have to give her the value as if she had not gone thru any surgery.)+ Any doctor bills she has actually paid up to this point (costs of all 3 surgeries)= DAMAGES under reliance theory

D. BUYER'S REMEDIES FOR A BREACH BY SELLER

Problem: The Case of the Recalcitrant Manufacturer (pg. 40): needed a new oven & ordered one from for $30,000 w/ 90 days credit. The oven was late & the said that unless the paid up front, would not deliver. The bought his oven from someone else. In this case there is a statutory remedy for the buyer since the seller breached. See UCC 2-711 through 713 below for Buyer’s recovery options.

UCC 2-711: Buyer's remedies in general; buyer's security interestWhere the seller breaches by wrongfully failing to deliver or perform a K, making a nonconforming tender of delivery or performance, or repudiating, the buyer may:(1) Cover & have damages under UCC 2-712 as to all the goods affected whether or not they have

been identified to the K; Formula: (cover price - K price + incidental/consequential damages) - (any

incidental/consequential damages avoided) Cover purchase of or K to purchase good in substitution for those due from seller. Must be a good faith purchase w/o unreasonable delay. Failure of buyer to cover does not bar him from other remedies.

(2) Recover damages for non-delivery or repudiation as provided in UCC 2-713 which is the determination of the market price;

Formula for non-delivery: (Market price at the time for tender - K price + incidental/consequential damages) - (incidental/consequential damages avoided)

Formula for repudiation: (Market price at the expiration of a commercially reasonable time after the buyer learned of the repudiation - K price + incidental/consequential damages) - (incidental/consequential damages avoided)

Market price is determined at place of tender, but in cases of rejection after arrival, it is determined at place of arrival.

(3) Obtain "specific performance" under UCC 2-716: buyer may be able to recover via replevin if cover is not available after a reasonable effort & the goods are unique.

Available where goods are unique or in other proper circumstances. Only available in commercial Ks if both parties have agreed to that remedy & the breaching

party’s remaining obligation is NOT merely the payment of money. Buyer has a right of replevin to goods identified in a K if after reasonable effort he is unable

to effect cover for such goods or the circumstances reasonably indicate that such effort will not be favorable.

UCC 2-714: Buyer's damages for breach in regard to accepted goods"breach of warranty on the goods"

(1) The goods delivered are not as they were warranted to be. So the buyer keeps the goods & can recover the difference in the value of the goods as they were delivered, & the value of the goods as they were supposed to be under the warranty, unless circumstances show proximate damages of a different amount (different amount example = Bisko problem 912).

(2) The buyer may also recover any incidental or consequential damages in a proper case. Supposed to be value – actual value of received + consequential

UCC 2-715: Buyer's incidental and consequential damages(1) Incidental damages include expenses reasonably incurred in inspection, receipt, transportation &

care & custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover & any other reasonable expense incident to the delay or other breach.

Incident of breach is key anything done that has lost its value due to breach in covering or to deal with delay

of 82

(2) Consequential damages include: a) any loss resulting from general or particular requirements & needs of which the seller at

the time of contracting had reason to know & which could not reasonably be prevented by cover or otherwise.

o Seller knows probable loss from breach and cannot be covered or prevented otherwise

b) Injury to person or property proximately resulting from any breach of warranty.o Easier to prove than the (a) above because foreseeability harder than proximately

E. EMOTIONAL LOSS:Usually applied to cases dealing w/ mishandling of corpses, insurance Ks (sold for peace of mind), medical Ks (Sullivan), & some jds will even allow it in wedding Ks (distressed newlyweds case).

R2d§ 353: Loss Due to Emotional DisturbanceRecovery for emotional disturbance will be excluded UNLESS the breach also caused (1) bodily harm or (2) the K or the breach is of such a kind that serious emotional disturbance was a particularly likely result. Most Ks are commercial Ks between businesses & emotional loss or damages are not

expected & generally do not occur. Generally not applied to commercial Ks.

Allen v. Jones: Ked w/ funeral home to cremate the remains of ’s brother & ship the cremated remains home. alleged that as a result of funeral home’s negligence in packaging, the urn arrived empty & the ashes were lost. Holding: A may recover for mental distress w/o accompanying physical injury b/c it is foreseeable that the breach will cause emotional distress. This was an emotional K, therefore the possibility of emotional loss was foreseeable at

the time the K was made. Typically, you are trying to put the where they would have been had the K not been

made (expectation) & damages for emotional loss help to do this.

Problem: The Case of the Distressed Newlyweds: A couple Ked w/ band to play at their wedding reception. The couple paid $300 down & agreed to pay $700 more after the reception. The engagement was confirmed but the band did not show up b/c they got another job for $2000 but didn’t notify couple. Couple got brother to D.J. the reception & paid him $75. How much should the couple be able to recover? Band offered $375 recovery.- Expectation damages = loss expectancy ($1000 Ked price) + other losses ($75 D.J.) +

emotional distress ( ) – cost saved ($700 they hadn’t paid yet) – loss avoided ($75 if you consider their brother’s performance to be worth something) = $300

- The $375 settlement actually looks good above, unless you factor in emotional distress. Also, you could value the band’s performance at $2000 instead of $1000 which would give the couple a recovery of $1300. Remember, w/ compensatory damages, you can recover more than the original K amount.

- You generally cannot recover for punitive damages in a case like this b/c the breach by the band was an economic breach & court’s generally don’t want to deter economic behavior. Also, most breaches are willful & intentional & in bad faith. Here, there was not an independent tort involved.

- At CL recovery for attorney’s fees are not allowed, however, Texas allows them in a breach suit.

of 82

F. PUNITIVE DAMAGES FOR BREACH OF CONTRACT

R2d§ 355: PUNITIVE DAMAGESPunitive damages are not recoverable for a breach of K UNLESS the conduct constituting the breach is also a tort for which punitive damages are recoverable.

Fraud, malice, oppression, misrepresentation, etc.o ”First Blush Rule:” if at “first blush” the punitive damages seem outrageous, then

they probably areo Some areas where punitive damages are awarded in K cases:

(a) Breach of fiduciary duty(b) Bad faith failure to pay by an insurance company(c) K cases involving an independent tort (see above)

o Bifurcated trial: some jurisdictions will separate out the punitive award phase from the rest of the trial as to get a fair judgment on the rest There are 2 ways to bifurcate a trial:

(1) Allow the worth of in at beginning stage of the punitive damages question.

(2) Only allow the worth of in after the jury has decided if punitive damages are proper in the case.

NOTES on § 355 (See also Borkholder v. Sandock, pg. 850) : Generally punitive damages are NOT given in K cases, b/c they place a person in a better

position than they would have been if K had been performed (overcompensation). Look for an independent tort in the K breach to determine if punitive damages will be

awarded. The courts have resisted imposing punitive damages in commercial transactions, even

though the breach was “knowing & willful” b/c most breaches are knowing & willful but for economic reasons. See Comment on pg. 857 for an exception.

Courts also determine whether the imposition of punitive damages would further the public interest—consumer protection. The purpose of punitive damages generally is to punish the wrongdoer & to deter him & others from engaging in similar conduct in the future. See Borkholder. (This case pushes the concept a little bit b/c of the consumer protection issue.)

Boise Dodge v. Clark : In this case the dealership sold a demonstrator car to Clark as “new” that had the odometer rolled back from 6,968 to 165 miles. Clark stopped payment on the check when he discovered it was used & dealership sued. Holding: The trial court held punitive damage for Clark for $12,500 & the actual damage for $350. The SC held that the punitive amount was justified & reasonably related to the actual damages suffered. The sale was in bad faith w/ the intent to defraud the consumer. The independent T is

fraud. Punitive damages may be assessed in K actions where there is an independent T (i.e.

fraud, malice, oppression, misrepresentation, etc). However, the punitive damages must be "reasonably related" to the actual damages suffered.

of 82

4 FACTORS TO LOOK AT TO DETERMINE IF THE AMOUNT OF PUNITIVE DAMAGES IS OK:(1) Is the amount will be enough to deter the from doing the act again (takes more $ to

deter big corp. like McDonald's)?- The court wants to make sure that the Breacher/tortfeasor pay a significant more than

the cost of doing business to make them pause & consider the consequences & enough money to give the the incentive to sue.

(2) Was ’s conduct calculated (did he plan or have a scheme to do the act as in Dodge)?(3) Look at the motives behind the 's conduct(4) Extent of 's disregard of the rights of others

Comment, pg. 857: When will a breach of implied covenant of good faith & fair dealing constitute a tort?Seaman’s (supplier) Ked w/ Standard (producer) for oil & then Standard intentionally tortured w/ Seaman’s advantageous business deal w/ the city; this was a pure T cause of action. The trial court awarded Seaman’s $400,000 in actual (compensatory) damages & $1 mil in punitive damages for tortuous breach of the implied covenant of good faith & fair dealing. This is a commercial transaction & courts hardly ever award punitive damages in commercial Ks. However, Standard’s conduct offended accepted notions of business ethics; Standard denied the existence of the K in bad faith seeking to avoid the K in order to get a higher price for the sale of oil.- The reason why the court imputed punitive damage in this commercial case is b/c Standard

knew Seaman’s had a K w/ the city that relied on the K w/ Standard. W/ this knowledge Standard adopted a “stonewall” position & “laughed” & said “see you in court.” As a result, Seaman’s went out of business & lost the lease w/ the city.- Punitive because of knowledge there was a probable loss and no way for Seaman’s to

mitigate (malice)

Comment, pg. 861: What must a do to secure a “satisfied” judgment? A judgment does not order the to pay any particular sum, it orders that shall recover the stated sum from the & have “execution.” If pays, the matter is settled, but if does not pay, must proceed by the process of execution to obtain satisfaction from ’s real & personal property. You can garnish wages, secure a lien on non-exempt property (i.e. in Texas if a debtor has filed a homestead exemption, the debtor’s house cannot be taken to satisfy a judgment).

John Hancock Insurance v. Cohen : The is the beneficiary under this policy & the insurance co. is the . The thinks the policy was for 20 yrs., but the says it is a 15 yr. policy. The insurance co. only pays for 15 years & refuses to pay the last five years of the installment. sues the for repudiation of the K & to collect the 5 years that were not paid. Normally, the rule for anticipatory repudiation is that you can sue for damages right now.

This is an exception to the rule, called the unilateral exception. But this is a bilateral K, so what is this unilateral stuff about. The unilateral exception is that where the performing party has already performed & all that is left in the K is collect payments, you are going to have to wait until the payments are actually due & cannot get full recovery right now. You have to wait for the payments.

The courts are reluctant to order specific performance in Ks b/c if the breacher continues to not perform, they are held in contempt of court & can possible by jailed. This looks like debtor’s imprisonment, which is something we don’t do.

If the court made the insurance company pay the full value now, there would be a time value of money problem. You would have to discount the money to the PV.

of 82

Pg. 869, Note 5 : Inflation is not a factor in discounting future payments b/c inflation would not have been a factor in installment Ks (i.e. annuities). However, inflation would be a factor in T settlements where future wages are being discounted.

Pg. 870, Note 7 : If a lender is sued for breach of K to lend money or to finance a particular venture, courts award the the difference between the interest rate s Ked to pay & the actual rate s were compelled to pay to secure substitute financing. So, if the difference is 1%, the defaulting lender will pay the 1% as damages. If it is foreseeable to the King lender that the venture will not be able to obtain substitute financing & the venture fails, then the lender will be liable for the compensatory damages from the failed venture.

Powers’s damage questions: 3 ways Powers will ask:

o Damages person A wantso Damages person B wantso Most appropriate/likely damages

Complete answer should include every possible type of damages the facts supporto ie. under restitution I would get $2000, under expectation repair theory I would get

$5000, under diminution in Value I would get $3000, etc. Obviously the person wants the measure that gives the most money, but be sure to state

which one If you are asked likely result, you are arguing court policy

o ie. courts generally favor expectation/repair theory, but don't want waste Restitution- look for situations where the breaching party was getting a really good deal

in the first placeo Non-breaching party better off getting FMV than Ko Note- if you aren't given facts about FMV, this can't be the answer. Mention it if

appropriate Reliance- person spending more than they are making

o Rather than getting FMV, they are just getting their spent money back Comparing restitution and reliance:

o Restitution I am getting the fair market value of the benefit breaching party received

If I spent $10,000 and 500 hours, and the FMV of what you got was $500,000 then I get $500,000

o Reliance I am only getting the actual cash I spent performing the K back If I spent $10,000 and 500 hours, I just get the $10,000

Diminution in value theory- look for facts!! If you have a value of the property before and after the events, she wants to see this number. Doesn't mean it’s the correct answer (It rarely is).o Remember, she wants to see the policy of why the damage measure is likely

i.e. you have the right to devalue my property by putting on neon green siding if I want to

R2d§ 243(3): Damages based on anticipatory breach of installment payments:Where at the time of the breach the only remaining duties of performance are those of the party in breach & are for the payment of money in installments not related to one another, his breach by non-performance as to less than the whole, whether or not accompanied or followed by a repudiation, does not give rise to a claim for damages for total breach.NOTE: This rule only works where there are only money payments still due on the K.

of 82

“Unilateral” K exception to

the doctrine of anticipatory

breach

This rule is not adopted in Texas; if damages are immediately due, they are discounted to present value by subtracting the expected interest rate the breaching party would have earned off the money. In other words, in Texas you can sue for the full value today. C/L – discounted; Texas – full value today

Question: Why do we make an exception to the anticipatory repudiation when someone fully performs his part & then the other party to the K says they will not perform (can't bring suit right away like normal)?Answer: If you have already fully performed, then you are not waiting around trying to decide if you should perform; you are not missing out on other opportunities.

Economic efficiency concerns

Acceleration Clause : this is a clause placed in a K that says that if a person quits payment on an installment plan, the injured party can sue for the entire amount today w/o having to wait until the installment is due to receive it. This fixes the result from the Cohen case.

When used, makes Ks in other states like in Texas – entitlement to full value now

G. REMEDIES FOR THE SELLER IF BUYER BREACHES

Problem: Seller’s Resale Remedy Under the UCC (pg. 870-71): Slick Shoe Co. entered into K w/ store for sale of 200 pairs of shoes for $12,000. Slick was to ship shoes fob destination 100 in 3 mos. & the remaining 100 on Sept. 1. The K price of $60/pair & the market price has gone down to $30/pair.

UCC : SELLER'S REMEDIES IN GENERALWhere the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due on or before delivery or repudiates with respect to a part or whole, then with respect to any goods directly affected &, if the breach is of the whole K (2-612), then also w/ respect to the whole undelivered balance, the aggrieved seller may:

(a) withhold delivery of such goods;(b) stop delivery by any bailee as hereafter provided (2-705)(c) proceed under the next § respecting goods still unidentified to the K;(d) resell & recover damages as hereafter provided (2-706)(e) recover damages for non-acceptance (2-708) or in a proper case recover damages for the price

(2-709)(f) cancel the K.

FURTHER EXPLANATION OF ABOVE REMEDIES:

(1) UCC 2-709: ACTION FOR THE PRICE seller’s recovery1. When the buyer fails to pay the price as it becomes due the seller may recover, together with

any incidental damages under the next §, the price:(a) of goods accepted or of conforming goods lost or damaged within a commercially

reasonable time after risk of their loss has passed to the buyer; and(b) of goods identified to the K if the seller is unable after reasonable effort to resell

them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing.

2. Where the seller sues for the price he must hold for the buyer any goods which have been identified to the K & are still in his control except that if resale becomes possible he may resell them at any time prior to the collection of the judgment. The net proceeds of any such resale must be credited to the buyer and payment of the judgment entitles him to any goods not resold.

of 82

Price Measure

Finished goods,

delivered and

accepted

3. After the buyer has wrongfully rejected or revoked acceptance of the goods or has failed to make a payment due or has repudiated under 2-610, a seller who is held not entitled to the price under this § shall nevertheless be awarded damages for non-acceptance under the preceding section.NOTE: If the goods have been delivered & accepted, just sue for the price. If the goods have been lost or damaged after they have been sent to the buyer, the seller can recover the price of the goods. If you have goods that have not been delivered but they are completely manufactured, you can sue for the price if they have been identified for the buyer & the seller can’t reasonably resale the goods.

(2) UCC 2-706: RESALE OF GOODS BY SELLER The seller may resell the goods concerned or the undelivered balance. Where the resale is in good faith & in a commercially reasonable manner, the seller may recover the difference b/w the resale price & the K price together with any incidental damages allowed under the provisions of 2-710, but less any expenses saved (such as transportation to buyer) due to the buyer's breach.

Sell can be public or private Can be in parcels of the goods or in one unit All aspects must be commercially reasonable (time, place, manner) Goods do not necessarily have to be identified before breach In private sale, the seller must give the breaching buyer reasonable notice of his intention to

sell. In public sale

i. only identified goods can be sold, unless recognized market for public sale of futures in goods of the kind

ii. must be made at usual place or market or public sale if one is reasonably available; seller must give buyer reasonable notice of the sale unless he is selling goods that are perishable or decline in value speedily.

iii. If the goods are not in view of new buyers, the notification of the sale must state the place where the goods are located and provide for their reasonable inspection by bidders.

A person buying the goods at resale takes them free of any rights of the original buyer even though the seller fails to comply with any of the above requirements.

The seller is not accountable to the buyer for any profit made on any resale. Under the problem the seller would be able to recover ($60 K price - $28 resale price - $4 saved

in transportation = $28; $28 * 100 shoes not delivered = $2800 + $100 in incidental damages incurred in selling the shoes to someone else)

Note that you can’t sue for damages if the market price is higher than the K price! Do you have to resale the goods to sue for damages? No, you would just use the market

measure. In other words, you would have the (K price less the resale price) or the (K price less the market price). Need good faith at commercially reasonable efforts

The seller can choose to use either the market measure or a resale (w/in a reasonable time). What happens if the seller sues for the market measure & then holds on to the goods a long time

b/4 reselling them in the market. Is the buyer responsible if the market price decreases? NO, the seller holds onto the goods at his own risk. If the market price increases, the seller can keep the extra price. Need commercially reasonable time

How do you go about reselling the goods? You can either have a private sale (calling someone up that might be interested in the goods) or a public sale (auction, advertise in the newspaper). The (Breaching Buyer) has to have notice of the private resale under the code (UCC).

(3) UCC 2-708: Seller's damages for non-acceptance or repudiation

of 82

Resale Measure

2-708(1) Market

Measure

Finished goods,

undelivered (like

recovery for repudiation)

(1) The measure of damages for non-acceptance or repudiation by the buyer is the difference between the MARKET PRICE at the time & place for the tender and the UNPAID K PRICE together w/ ANY INCIDENTAL DAMAGES provided by 2-710, but less any EXPENSES SAVED in consequence of buyer's breach.

Price – K price + Incidental damages – savings (avoided costs) Suppliers Damages: K price – price on redisposition market + other loss Buyers Damages: Price on replacement market – K price + other loss

Example: $60 contract price - $25 market value of goods = $35 difference - $4 cost avoided for not having to transport the goods = $31 actual damage recovery

Note: If the market value is actually higher than what is stated at court, the buyer should bring in evidence to show this so the damage award will not be as much (the difference in prices won't be as much).

IF THE MEASURE OF DAMAGES PROVIDED IN (1) IS INADEQUATE TO PUT THE SELLER IN AS GOOD A POSITION AS PERFORMANCE WOULD HAVE DONE THEN:

(2) The measure of damages is the PROFIT (including reasonable overhead) which the seller would have made from full performance by the buyer, together w/ ANY INCIDENTAL DAMAGES provided by 2-710, due allowance for COSTS REASONABLY INCURRED and due credit for PAYMENTS OR PROCEEDS OF RESALE. – expectation damages

(4) UCC 2-710: SELLER'S INCIDENTAL DAMAGES Incidental damages to an aggrieved seller include any commercially reasonable charges,

expenses or commissions incurred in stopping delivery, in the transportation, care or custody of goods after the buyer's breach, in connection with return or resale of the goods or otherwise resulting from the breach.

NOTE CASES:

American Mech. Corp. v. Union: This case showed us that the K price for real estate is evidence of the fair market value when trying to figure what damages the injured seller can recover. Here, the bank foreclosed on the seller after the buyer breached & the court held that a forced sale does NOT give the court an accurate value of the FMV of real estate. So here take the K price & subtract the forced sale price & add any actual damages suffered by the seller. The damage formula for real estate is K – FMV, but here the did not plead the right to recover

damages beyond nominal damages. However, the high court said that the actual damages suffered by the are recoverable as well. Therefore:

Formula: Value Lost (K Price) $135,000Less FMV ($135,000)Plus: Other Losses $45,000 [loss from (135,00 K price less 90,000 foreclosure)]Damage Recovery $45,000

In a forced sale, a creditor is entitled to satisfy its claim against its defaulting customer, including expenses incurred in enforcement.

- If there is a surplus, it must be paid to the defaulting customer.- If there is a deficit, the defaulting customer still owes that amount to the creditor, who

becomes an unsecured creditor.

(5) Mitigation and Leases:

of 82

2-708(2) Profit

Measure

Does a landlord have any duty to mitigate his damages by leasing to someone else after a breach? At CL the answer was no, b/c lease agreement were not considered Ks, but rather interests in land (you actually own the right to be on the land you are leasing; ownership for the lease term).

But, recently they have been treated lease agreements like Ks, so we may see a shift in the law going towards a rule that landlords do have a duty to mitigate damages. The effect is that the lessee’s liability for breaching will be reduced by the amount of rent that the lessor reasonably could have obtained. This only works where landlords reserve the right to reenter the property or accelerate the lease payments left in the K; landlords ALWAYS reserve these rights!

In Ks for the sale of goods, however, the seller does have to mitigate his damages by trying to resale the goods in his possession & identified to the K. Commercially reasonable efforts and collect difference especially important when

diminishing value of goods or they are perishable (rather, expected and especially known probable decrease in value)

New Era Homes (page 875): This is a case about a K to make improvements to a person's home to be paid in scheduled part payments that were convenient to the builder & the owner (i.e. $150 on signing of K, $1000 on starting of work, $1500 on completion of carpentry, $425 on completion of job). The builder completed through the carpentry but the homeowner refused to pay last 2 payments. The court said that this K was not divisible (similar to earlier case where the court held that the 2 parts of the K were not equivalent) b/c the total price of $3,075 was the single consideration for the whole of the work. Unless the K is divisible or Contractor has “substantially” performed, an action for the agreed price

for the job will NOT lie. What damages can the Contractor recover? The builder can recover in restitution (quantum meruit

for what had been finished) or in contract (expectancy or reliance). We are normally going to go w/ expectancy under R2d § 347 to figure damages. (see pp. 878-79).

Formula:K price $3,075Less: Cost Avoided ($425)Less: Progress Payments ($2000) Damage Recovery $650

NOTE: This figure will be enhanced if Contractor can prove other losses, including incidental or foreseeable consequential damages. Of course, Owner can always attack Contractor’s attempt to prove the savings realized by the breach, here $425 by saying that this number should be lower b/c the Contractor didn’t mitigate his damages.

EXPECTATION DAMAGES: (see above outline under damages heading for R2d § 349)*Think K value/profit to non breaching party (less failure to take avoidance measures)

(1) Let’s say that Builder is building a house for Owner for $100,000 & owner repudiates b/c is moving to another city. The building cost is $80,000. How do we figure damages:

Contract Price $100,000Less: Cost Avoided $80,000 (Contractor saved the 80,000 building costs)Expectation Damages $20,000

(2) Let’s say Builder has already partially completed the house at the time of breach. The building cost is still $80,000.2 WAYS TO FIGURE:a) You can start w/ the K price…

Contract Price $100,000

of 82

This figure covers both the gain prevented by the breach & the performance expenditures incurred up to the breach.

Less: Cost Avoided $40,000 (Contractor saved $40,000 building costs b/c the house is ½ completed)

Expectation Damages $60,000

b) Or you can start w/ the profit you were going to make…

Profit $20,000Plus: Total Costs Incurred $40,000 (Contractor incurred $40,000 building costs b/c the

house is ½ completed)Expectation Damages $60,000

NOTE: Remember to subtract out any payments already made to the Contractor from the damage recovery. These are treated the same as the cost avoided. In the examples above, the damages protect both the expectation & the reliance interests. In

other words, the above formula accounts for the recovery of both net gains prevented & unreimbursed expenses in part performance.

RELIANCE DAMAGES: (see above outline under damages heading for R2d § 349)– think expenses incurred

Reliance may sometimes be a better measure for recovering damages when b/c of difficulties of proof or otherwise, a Contractor can’t prove lost profits, but can prove the expenses incurred.

Reliance is the measures damages based on what expenses you’ve incurred, whereas expectancy measures damages based on the loss in value caused by the other party’s failure or deficiency (i.e. what you would have gotten out of the bargain).

What if the contractor would have suffered a loss had the K been completely performed (i.e. a losing K)? If the Breacher can prove that the ’s losses upon full performance would have equaled or

exceeded its reliance expenditures, the will recover nothing under a reliance theory. The burden is shifted to the breaching party to prove losses! It is at this point that the “quantum meruit” or restitution alternative becomes relevant. Example:

Contract Price $100,000Less: Projected Costs ($120,000) $60,000 for ½ performance b/c the

actual cost were higher than the estimated + $60,000 projected expenses to complete the K

Profit (Loss) ($20,000)Total Cost Incurred $60,000 Reliance Damages $40,000

RESTITUTION DAMAGES: (See R2d § 373) – think unjust enrichment

Problem: Restitution as a Remedy for Breach (3-sided wall) pg. 885:

(1) EXPECTANCY DAMAGES:K Price $30,000Less: Cost Avoided ($25,000) Expectancy Damages $5,000

(3) RELIANCE DAMAGES:

of 82

DAMAGES COME

OUT THE SAME!

K price $30,000Less: Projected Costs ($50,000) $25,000 cost incurred + $25,000 projected expensesProfit (Loss) ($20,000)Total Cost Incurred $25,000 Reliance Damages $5,000

(4) RESTITUTION DAMAGES: In restitution we are not worried about the K itself, we are concerned about the value of

the benefit conferred. So you can only get damages that benefit the other party. If the breaching party sues for restitution, he cannot get more than the K price. If the injured party sues for restitution, he may get more than the K price, if his work

was worth more than the K price. In other words, the can recover the full amount of the benefit conferred even though it would have been a losing K had there been no breach.

Limitation The injured party has no right to restitution if he has performed all of his duties under the K & no performance by the other party remains due other than payment of a definite sum of money for that performance. case of goods/unilateral K

2 possible measurements of damages under the restitution theory (R2d§371):i. Cost to replicate the work in the market = $20,000ii. Increase in the value to the property = $5,000 Breaching party <= K priceInured party >= K price (less avoided costs)

NOTE: Always determine which of the above 2 figures to use by figuring against the Breacher. Since here, the is the non-breaching party, we use the higher number, which is $20,000. Since restitution is the best measure for the Contractor, the Contractor will sue in

restitution.

H. OPTIONS SELLER HAS WHEN BUYER REPUDIATES B/4 THE GOODS ARE FINISHED BEING PRODUCED

UCC 2-704: Seller’s right to identify goods to the K notwithstanding breach OR to salvage unfinished goods(1) an aggrieved seller may:

(a) complete manufacture of goods identifying the goods to the K & then sue for damages. (use Resale Measure from UCC 2-706)

(b) cease production at that moment & resell the materials for scrap/salvage value & then sue for profit you would have made from the K along w/ any costs & incidental damages.(use Profit Measure from 2-708(2))

(c) NOTE: THE SELLER MUST DO WHICH EVER WOULD MINIMIZE HIS DAMAGES. In other words, you avoid loss & when you are told to stop, you stop! (i.e. If it would lessen the damages to finish the shoes & resale v. having a pile of leather, then you would finish the shoes!)

o Economic efficiency concerns

Problem, pg. 885 Slick Shoe Co. & Bobo’s Sports Revisited:Price The Seller cannot sue under UCC 2-709 b/c the goods have not been delivered & accepted.Resale Measure The Seller cannot sue under UCC 2-706 b/c the Seller has not made the shoes yet.Market Measure The Seller cannot sue under UCC 2-708(1) b/c the shoes have not been made yet.But the Seller can sue under UCC 2-704 above (which includes 2-706 & 2.708(2)).

of 82

Unfinished goods

UNDER SUBSET (b), IF HE STOPS NOW AND SELLS THE MATERIALS AS SCRAP, HERE IS THE DAMAGE MEASURE:

Profit to be expected from contract $1200Plus: Reasonable Overhead $2000

$3200Must also add/subtract the following from above amount:

Add any incidental damages (UCC 2-710) none hereAdd any costs incurred + 6000 Total materials purchasedSubtract proceeds from resale - 3500 Seller can resale the shoes for $35/pairAdd labor incurred (total labor saved) + 400 TOTAL DAMAGES under 2-708(2) $6100

UNDER SUBSET (a), IF THE SELLER FINISHES THE GOODS & THEN RESELLS THEM, HERE IS THE DAMAGE MEASURE:

K Price $12,000Less: Resale Price ($7,000)

$5,000Less: Any Expenses Saved by the Breach ($800) transportation cost savedTOTAL DAMAGES under 2-706 $4,200

Therefore, the seller must do this second option b/c it minimizes his damages. Under UCC 2-704 the Seller must only make a REASONABLE JUDGMENT to minimize his

damages. If the Seller ends up make the wrong decision, he will not be penalized. Both measures will make the seller whole, but the first is at a greater expense to the

breaching party. There is no difference in the compensation that the actually gets! Both of these UCC measures are basically expectation measures.

I. LOST VOLUME SELLER

Locks v. Wade: A loss of profit caused by a buyer’s breach is recoverable b/c the seller would have been able to make the profit from the good he was selling to the Breacher, plus another good he can sell to the subsequent purchaser. But, it must be a good that is easily attainable on the market (i.e. a jukebox). In this setting, the buyer’s breach “costs the dealer a sale” even though the same goods are

resold to a 3rd party w/o any apparent loss. Had the buyer performed the K, the seller would have made 2 sales instead of one.

Since the breach depletes the dealer’s sales to the extent of one, he should recover the lost profit from the buyer under UCC 2-708(2).

Market measure is insufficient here b/c it would result in zero b/c the seller sold the product to another purchaser.

Resale results in loss of volume only if 3 conditions are met:(a) The person who bought the resold entity would have been solicited by Seller had

there been no breach & resale;(b) The solicitation would have been successful; and(c) The Seller could have made the additional sell had there been no breach.

- In other words, the Seller has more than the one good & therefore it cannot be a one-of-a-kind good (i.e. real estate) – no uniqueness

of 82

The avoidability

standard is the same under

both the Restatement & the UCC.

Profit Measure

Resale Measure

Both of these UCC measures basically

expectation damages

- If Seller is not is not a commercial seller, he probably would not have solicited anyone & should not get a lost volume adjustment (i.e. If I try to sell my car).

- But even if Seller is a commercial seller, if he had decided to go out of business b/4 receiving notice of ’s breach or if he reached the limits of the volume he planned to sell, he would not have solicited anyone to buy other wares

RULE: If you are dealing w/ the loss of volume principle, and trying to figure damages, do not add costs incurred & proceeds of resale into the equation. Only use profit lost + reasonable overhead.

J. MEASURING MARKET VALUE WHEN DEALING W/ INSTALLMENT Ks

Problem, pg. 893: 9000 units @ $100/unit in 6 installments over 3 yearsDelivery Date # of Units Market Price Seller’s Actions Buyer’s Actions

July 1, 1991 1500 $95 Seller delivered Buyer accepted & pd

BUYER REPUDIATED K ON DECEMBER 1, 1991 MARKET PRICE = $45January 2, 1992 1500 $40 Seller tendered Buyer rejected

goodsSELLER SUES BUYER FOR DAMAGES IN MARCH, 1992

July 1, 1992 1500 $50CASE GOES TO TRIAL IN SEPTEMBER, 1992

December 1, 1992 1500 Exp. to increaseJuly 1, 1993 1500 Exp. to increaseDecember 1, 1993 1500 Exp. to increase

The Seller will be able to recover damages under the market measure (2-708(2)).JUST A NOTE: Aside from the code telling us to always use the market measure over the profit measure unless the market measure undercompensates the Seller, Scholars argue that the market measure overcompensates the Seller & the profit measure should be used. Although, the Seller will end up exactly the same either way. See notes.

RULE: When dealing w/ installment contracts, the time & place for each separate tender is used to determine the market value of a good. So, theoretically it could be a different value when each installment comes due. Therefore, the Seller will be able to recover $60 for the 1500 units he delivered on January

2, 1992. That is K price less market price ($100-$40=$60).

K. MEASURING MARKET VALUE OF A GOOD WHEN A REPUDIATION HAS BEEN GIVEN & THE TRIAL OCCURS B/4 THE TIME FOR DELIVERY IS DUE

RULE: Under UCC 2-723(1), the market price of the goods at the time of repudiation is used if the trial occurs before the due date for delivery. In the above example, the market price used in recovery damages would be $45.

L. EMPLOYEE’S REMEDIES FOR BREACH OF EMPLOYMENT CONTRACTS

Most of these contracts are “at will” so we usually don’t have to deal w/ the damages resulting from a breach due to firing an employee.

But, if there is a breach of a term employment K, damages are figured as follows:Contracted salary $100,000Less: any new job salary $50,000Plus: any incidentals (ie. relocation expenses)

of 82

Damages Suffered $50,000

RULE: AN EMPLOYEE MUST MITIGATE HIS DAMAGES BY GETTING ANOTHER JOB, IF POSSIBLE. IF HE DOES NOT REASONABLY TRY TO MITIGATE HIS DAMAGES, THEN THE AMOUNT THE EMPLOYER AFFIRMATIVELY PROVES THE EMPLOYEE COULD HAVE EARNED FROM OTHER EMPLOYMENT WILL BE SUBTRACTED FROM THE DAMAGES (i.e. savings realized by the breach).

A law professor does not have to take a job at McDonald’s, or relocate to another city or town. The new job must be comparable, or substantially similar, to old job.

The employee cannot be sued for failure to mitigate, but if employer meets his burden of showing the employee could have mitigated, then the employee will not get the amount of damages that he could have mitigated.

If the employee takes another job, an important question is whether the employee could have had the time, capacity or energy to take the new job as a second job. If the employer can prove this in the affirmative, then the employee did not mitigate his damages. However, if the employee had already been moonlighting, it is taken into consideration & the employee gets full damages.

Also, if the breaching employer offers the new employment to the employee to mitigate their damage payment, this probably won’t work (i.e. Parker musical v. Big Country ex.)

RULE: THE EMPLOYER HAS THE BURDEN OF SHOWING THAT THE EMPLOYEE HAS NOT MITIGATED HIS DAMAGES.

M. BREACHES BY THE PERFORMER (SELLER) Remember, the Buyer does not have to “cover” (i.e. mitigate damages).

QUESTION: When a Seller repudiates the K before the delivery is due, how do we determine when to measure the market value of the goods for purposes of the market measure of damages? (see Reliance v Treat, p. 896)ANSWER: ( Under UCC 2-713, it comes in 3 parts)(1) If the Buyer accepts the repudiation immediately, then we use the market value of the good at

the time of repudiation. (You would then take difference in market & K value.)(2) If the Buyer does not accept the repudiation, then he can await Seller’s performance for a

commercially reasonable time. If the Seller performs, thereby retracting his repudiation, during this commercially reasonable time, the Buyer must accept the goods & pay. However, if the Seller does not retract his repudiation & does not perform before the time of performance, then the market value of the good is taken at this commercially reasonable time (whatever it may be is decided by the court). See UCC 2-610—Anticipatory Repudiation.

(3) If the Seller just outright breaches at the time of delivery/performance, then we use the time of delivery/performance to measure the market value of the good.

Problem, pg. 901: Remember, under the UCC we have the perfect tender rule. Therefore, under UCC 2-601 the Buyer can either reject the whole, accept the whole, or accept any commercial unit or units & reject the rest. However, in this case, the Buyer needs to accept b/c there are no other Sellers on the market that can provide the goods. However, if there was another Seller on the market that could provide the same good to Buyer, Buyer is maybe better off rejecting the goods in whole.

HOW DO WE KNOW IF THE BUYER HAS ACCEPTED GOODS DELIVERED BY SELLER?

of 82

Courts normally use #2.

UCC 2-606: What Constitutes Acceptance(1) Acceptance of goods occurs when a buyer:

(a) after a reasonable time to inspect goods signifies to the seller that they are conforming or that he will accept them as non-conforming, OR

(b) fails to make an effective rejection, but this does not occur until the buyer has had a reasonable time to inspect the goods, OR

(c) does any act inconsistent with the seller’s ownership; but if the buyer does anything wrongful against the seller, it only constitutes an acceptance if the seller ratifies it.

(2) Acceptance of part of a commercial unit is acceptance of that entire unit. (installment Ks)

DOES A SELLER HAVE A RIGHT TO CORRECT A NON-CONFORMING SHIPMENT OF GOODS?

UCC 2-508: Seller’s Right to Cure(1) When buyer rejects the goods b/4 the time for delivery is due (such as an early shipment),

then the seller has until the due date of performance to cure the non-conformity. However, the seller must seasonably NOTIFY the buyer that he intends to cure the non-conformity.

(2) When the buyer rejects the goods & the time for delivery is due, there are 2 instances when the seller will still have a reasonable time to cure defect:

i. if the seller had reasonable grounds to believe the goods would be accepted by the buyer, OR- Example You order a car from a dealership & it comes in on the day of

delivery but is not conforming to your K. Since the dealer thought the car would be okay, the dealer has a right to cure.

- Example You order 100 widgets but the Seller only sends 99 thinking that you asked for 100 b/c it was just a nice round # & that 99 would be okay. Seller has right to cure.

ii. the seller, in good faith, thought he had delivered conforming goods- If Seller is a middle man that doesn’t inspect the goods but thought they were

conforming, he has a right to cure.

ONCE THE BUYER ACCEPTS THE GOODS, DOES HE HAVE A REMEDY IF HE DISCOVERS A DEFECT?

Once the buyer has had a reasonable time to inspect the goods & he accepts he can no longer reject the goods, but he can revoke acceptance. See UCC 2-608.

UCC 2-608: Revocation of Acceptance in Whole or in Part(1) The buyer may revoke his acceptance of a non-conforming shipment if the non-conformity

substantially impairs the value of the goods, AND(a) the goods were accepted on the reasonable assumption that the non-conformity

would be cured, & it has not been, OR(b) the buyer did not discover the non-conformity due to difficulty of discovery or b/c of

the seller’s assurances.(2) Revocation must occur within a reasonable time after buyer discovers the defect. Not valid

until the buyer notifies the seller.(3) Buyer revoking acceptance has the same rights as a buyer that has rejected goods (i.e. you still

have a remedy for breach).NOTE(s):

All about “commercially reasonable” time Recall: Acceptance on Dispatch, Rejection on Receipt

of 82

IS THERE ANY RESTITUTION REMEDY FOR THE BUYER TO GET BACK A DOWN-PAYMENT ALREADY PAID ON GOODS AFTER THE BUYER REPUDIATES THE K (i.e. Can a breaching buyer get restitution for a down-payment)? The breaching Buyer can get the down-payment back LESS any liquidated damages in restitution.

UCC 2-718: Liquidation or limitation of damages; deposits(1) Parties in a K can put a clause in their K that fixes the amount of damages that a Breacher will

owe in the K (this is liquidated damages). But, this must be a reasonable amount considering the circumstances (like actual harm caused by breach, difficulties of proof of loss, and inadequacy of another remedy). Unreasonably large liquidated damages are void b/c they are a penalty.

(2) Where the seller justifiably withholds goods from a buyer b/c of the buyer's breach, the buyer is entitled to any amount by which the amount he has paid exceeds,

(a) the amount to which the seller is entitled by the terms of liquidated damages- So, if down payment = 15,000 & the liquidated damages in K are 10,000, the Buyer

gets 5,000 back.- However, if the liquidated damages in the K were 20,000, the Buyer would have to

pay the Seller an additional $5,000.(b) in the absence of liquidated terms, the Seller gets whichever of the following 2 is the

smaller amount & the Buyer gets the remainder:i. 20% of the value of the total performance for which the buyer is obligated

under the K, OR- K price $30,000 * 20% = $6,000

ii. $500- Here, $500 is less than $6,000, so the Seller gets $500. If the down

payment was $15,000, the Buyer will get $14,500 of his down payment back.

- If the K was $600 & the down payment was $200, the value under (i) $120 & (ii) $500. Here, the Seller would get $120 & the Buyer would get $80 of the $200 down payment back.

(3) The buyer's right to recover restitution may be lessened in any amount that the seller can show he was damaged as a result of the breach, & any benefits the buyer may have received from the K. (latter is unjust enrichment

N. 2 TYPES OF DAMAGE RECOVERY THEORIES IN CONSTRUCTION Ks (See Rivers v. Deane, pg. 902 AND American Standard v. Schechtman, pg. 905.)

(1) Cost to Repair: This is the general rule for “defective or unfinished construction.” The measure of damages is the market value of the cost to repair the faulty construction. This formula works when you don't have to tear down the structure to fix it (like in Jacob & Young).

(2) Diminution in value: This formula is used when the cost of completion will result in "economic waste." The measure of damages is the difference between the value of the property as constructed (w/ defects) & the value the property would have had w/o the defects.

of 82

The determination of which recovery

to award the property owner

will never be based on

whether the defect will

actually benefit

The general rule is that a contractor who would ask the court to apply the diminution of value measure as an instrument of justice must not have breached the K intentionally & must show substantial performance made in good faith.

The key factor is whether the breach was willful or non-willful.

of 82

Recovering damages for breach of warranty by showing special circumstances:Bisko Problem, page 912: This problem discusses the opportunity for the buyer to recover under UCC 2-714 warranty theory when the buyer accepts the goods & they are not as warranted. If the buyer can show special circumstances, then he may be able to recover the "cost of repair,"

which was $8,000 in this example, instead. If you have to repair the good to make it safe, aesthetically pleasing, etc. this value is recoverable.

Value of the goods as warranted $29,500Less: value of the goods as accepted $25,000 Damage Award $4,500

This problem completely ignores the K price. Sometimes the value as accepted turns out to be nothing. Example: buy a car that is supposed to be worth $16,000, but there is something wrong w/ the

paint that makes it only worth $12,000. However, the problem w/ the paint can only be fixed by repainting for $5,000. Therefore, the buyer would get the car plus $5,000 (i.e. proximate damages of a different amount).

Value of the car as warranted $16,000Less: value of the goods as accepted $12,000 Damage Award $4,000 v. cost to repair $5,000

In this case, the car buyer will get the cost to repair of $5,000 However, if the cost to repair is only $3,000, then the buyer will only get $3,000 b/c that is

the value that makes him whole.

O. CONSEQUENTIAL DAMAGES & FORESEEABILITY – considerations

Foreseeability D is only liable for damages that could be fairly and reasonably contemplated by both parties at

formation of Ko If I don’t know that my breach will harm you, I’m not responsible for the damage (to

some extent, unless you should have known or another duty is imposed) General damages- damages that arise naturally from a breach that any reasonable person would

have foreseen Consequential (special) damages- remote or unusual. Liability is only present if defendant

actually knew.o Note: they have to know it, not agree to it

Consequential Damages Lost primary profits- lost profits I would have made on resale Lost secondary profits- lost profits of goods associated and sold alongside

o Car is faulty, now I can't sell my tires Loss of prospective profits- lost goodwill, general business value

There are 4 basic problems involved in compensating for consequential damages:(1) Were the losses a foreseeable consequence of the breach at the time of contracting?(2) Could Buyer have reasonably “mitigated” damages by purchasing substitute goods on the

open market or continuing to deal w/ Seller?(3) Could Buyer prove what profits were lost w/ reasonable certainty?(4) If profits are too speculative, could Buyer recover the reliance expenditures as an

alternative? Could Buyer recover both lost profits & reliance expenditures?

of 82

The key to 2-714 is the

value it takes to make you

whole!

UCC 2-715: Buyer's incidental and consequential damages(1) Incidental damages include expenses reasonably incurred in inspection, receipt, transportation and

care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.

(2) Consequential damages include (a) Any loss resulting from general or particular requirements & needs of which the seller at the

time of contracting had reason to know & which could not reasonably be prevented by cover or otherwise.

(b) Injury to person or property PROXIMATELY resulting from any breach of warranty. (proximately resulting is easier to prove than foreseeable, so it is easier to recover for these types of damages in a breach of K)

Hadley v Baxendale: This is the landmark case on foreseeability of consequential damages. Here, the mill’s crank shaft broke & the mill had to shut down while the carrier shipped the crank shaft to get fixed. The carrier negligently took too long & the mill sued for lost profits. The court held that at the time of contracting the Breacher must have reasonably foreseen that the losses would result from his breach for the injured party to recover. No recovery was allowed here. The mill should have informed the carrier that the mill was stopped & that the shaft must be

returned immediately. Spare part? Knowledge and foreseeability go hand-in hand; look for information about

knowledge of breaching party of the injured party’s circumstances given in fact pattern It doesn’t matter how real the consequential damages are; if they were not foreseeable, they are not

recoverable. Where, like here, you can’t get consequential damages, you could get general damages. Here

general damages would be: the difference in cost of the delivery that you got from the delivery that you expected (i.e. UPS delivery – USPS delivery).

RULE: Consequential damages may be awarded where (1) the informs the of special circumstances ( has a reason to know somehow), or (2) the damages are reasonably foreseeable to at K formation (unaffected by events subsequent to formation) Some courts have begun adopting stricter standards that mere foreseeability isn’t enough, must

be a “tacit agreement” to assume the risk of that liability Seller has it easy in showing foreseeability if could have arranged substitute, cause of loss will

be a decline in the market, together with any expenses incurred as a result of the “extra” arrangement(s)

R2d§ 351: Unforeseeability and related limitations on damages(1) Damages are not recoverable for loss that a Breacher did not have reason to foresee as a probable

result of his breach when he made the K.(2) Loss may be foreseeable as a probable result of a breach b/c it follows from the breach

(a) in the ordinary course of events, OR(b) as a result of special circumstances, beyond the ordinary course of events, that the

Breacher had reason to know about.(3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by

allowing recovery only for the loss incurred in reliance, OR otherwise if it concludes that justice requires this type of recovery to avoid disproportionate compensation.

Spang Case: This case gave us the basic 3 things to look at when deciding if court will award consequential damages:

of 82

General damages (naturally occurring damages)

Special damages (damages

NOT naturally

occurring)

3 LIMITATIONS ON RECOVERY OF CONSEQUENTIAL DAMAGES:(1) Foreseeability Did the Breacher have reason to know these damages would be caused by his

breach at the time he contracted (i.e. at the time of final agreement)?(2) Certainty Is it certain that the breach caused the damages?(3) Avoidability Did the injured party “reasonably mitigate” his damages by cover or other

methods available? If they made a reasonable attempt to mitigate & they failed they will still recover the cost

incurred. Need notice of intent to breach and look after to see if losses that could be mitigated Duty only applies to a reasonable extent

Buyer for resale: can often prove with reasonable certainty the loss on resale contracts that have been disrupted or prevented by the breach

Buyer as manufacturer: Manufacturer or other that buys either capital goods or raw materials, seller’s breach may cause a loss of profit in collateral transactions that is much more difficult to prove.

Problem: Judge Posner’s Hypo: A takes his watch to a retail store, B, for repair. B sends it out to a watchmaker, C. Through negligence, C damages the watch, & when it is returned to A via B it does not tell time accurately. As a result, A misses an important meeting w/ his creditors. They petition him into bankruptcy & he looses everything. Can A obtain damages from C, the watchmaker, for the consequences of C’s negligence? Here, you have all 3 problems: (1) it is not foreseeable that & broken watch will cause you to go

bankrupt, (2) The broken watch is not the proximate cause of the bankruptcy; in other words, we have a certainty problem, (3) A could have avoided this problem by looking at the clock in the car, clocks in the house, etc. It is not reasonable that this watch is his only form of telling time.

Problem: Recovery of Lost Resale Profits: What if a injured party could have covered, but they do not? Facts: Buyer has a K w/ Seller to purchase goods for $100/unit

Buyer then resells goods to Carl 1000 miles away for $125/unit.Seller is aware that Buyer resells goods of this kind in the course of business but knew nothing about the K w/ Carl.Seller failed to deliver goods & Buyer couldn’t cover after reasonable effort.Buyer sues Seller for lost profits.

Buyer can recover $25/unit for lost profits (a consequential damage) + any other consequential damages he could prove as a result of Seller being aware that Buyer resold these type of goods in the course of business.

However, if Buyer could have covered at $110/unit & didn’t, Buyers recovery would be limited to the difference between the K price & the cover price (market price). Therefore, if he could have covered for $110 & the K price is $100, he will recover $10/unit from the Seller.

Note that since Buyer could have covered but didn’t, he is barred from recovering any consequential damages.

Hydraform v. American: The Buyer is seeking consequential damages from the Seller for lost profits in the year of the K (1978) & for the 2 years thereafter, as well as the loss of good will. The K was for enough steel to make 400 stoves, which the Buyer would have sold. B/c of the Sellers breach the Buyer was only able to sale 250 for the year. The Buyer tried to cover but couldn’t & now sues b/c several customers cancelled their orderslost profits. Lost profits in 1978 Since it is not foreseeable that Buyer would sale more than 400 stoves, lost

profits from sales beyond 400 are not recoverable. Therefore, Buyers recovery is lost profits from the 400 stoves they could have sold less the 250 stoves they actually sold = lost profits from 150 stoves.

of 82

Future profits What you would have sold in future years is not foreseeable. If you can’t prove certainty as to the fact of loss you are pretty much out of luck.- It was not totally unforeseeable that the breach could have effects on sales in subsequent years,

but it cannot be calculated w/ a reasonable degree of certainty. Loss of good will As a general rule, loss in the value of a business as a going concern, or loss in the

value of its good will, may be recovered as an element of consequential damages. However, here recovery for good will should not be allowed b/c: (1) cannot be calculated w/ reasonable certainty, (2) would result in double recovery b/c already got recovery for lost profits, (3) no evidence on which it could be calculated.

Good will is measured based on future sales. Therefore, if we are not going to allow you to recover for future profits, we are also not going to allow you to recover for loss of good will.

CERTAINTYA. Two Types:

(1) Certainty as to the fact of the damage —Are we certain that the loss in profits was caused by the breach? - Must prove this with reasonable certainty. – standard, like RPP and foreseeability

(2) Certainty as to amount of the damage —Courts allow a little more leeway here. The certainty as to fact of loss has been proven.- Problems sometimes arise when trying to prove this for new businesses b/c they have

no track record.

B. New Business Rule —new businesses cannot prove that they would have had future profits b/c they have no prior financial history; thus they cannot recover for future losses.- Most courts use the fact that it was a new business as a per se rule (i.e. new business…that’s

the end of it).- Other courts use the fact that it was a new business as an evidentiary rule (i.e. new

business…prove the profits you would have made). This is used primarily when it is a franchise restaurant; the court lets experts testify to prove the profits..

C. At common law, attorney’s fees were not awarded for breach of K, so you must either (1) place a clause in your K that allows recovery for attorney’s fees in a breach or (2) if there is a statute that allows recovery of attorney’s fees, use it.- Texas has a statute that gives a claim for attorney’s fees.

D. Primary Profit —the main business affected (i.e. Exxon station)E. Secondary Profits —profits from a side business (i.e. tiger mart inside the Exxon station)

- You can get both primary & secondary profits if you can prove w/ reasonable certainty that they were both affected.

of 82

NOT ON FINAL – testable material starts again with Roman Numeral IX.VIII. DTPA Deceptive Trade Practices Consumer Protection Act

A. Background Info. The Texas DTPA is notorious for its tremendous protection of consumers. However, it has changed in recent years & is a little less protective than b/4. This Act is to be liberally construed & applied to promote its underlying purposes. Purpose of the Act : to protect consumers against false, misleading, & deceptive business

practices, unconscionable actions, & breaches of warranty & to provide efficient & economical procedures to secure such protection.

B. Waiving the DTPA §17.42 This Act cannot be waived b/c it is against public policy. A consumer can waive their DTPA rights IF:

(1) Represented by legal counsel (that was not suggested or identified by ), AND(2) Waiver in writing signed by consumer, AND(3) Consumer is not be in a bad bargaining position.(4) Waiver must be conspicuous & in bold-face type of at least 10 pt font.

C. Definitions § 17.45(1) Goods: tangible chattels or real property purchased or leased for use (this Act also covers

goods bought for resale).(2) Services: work, labor, or service purchased or leased for use. Something in connection w/ a

sale.(3) Person: an individual, partnership, corporation, association, or other group however

organized.(4) Consumer: an individual, partnership, corporation, this state, or a subdivision or agency of

this state who seeks or acquires any goods or services & has assets under $25 million. A person who hires an attorney is a consumer. Patients are not consumers with respect to doctors & health care providers,

UNLESS unconscionable activity such as false or misleading advertising. Pharmacists are NOT exempt from DTPA

D. What gives you a COA under the DTPA § 17.50 Relief for Consumers: Must show actual damages under the DTPA. A consumer has a COA where any of the following constitute a “producing cause” of

economic damages or damages for mental anguish:

(1) Anything that fits into the laundry list under § 17.46 that was relied on by a consumer to the consumer’s detriment: misrepresentation is "producing cause" (odometer change, advertising going out of business sale when actually not, pyramid schemes, price increase during disaster period)

(2) Breach of Warranty—we look outside the DTPA to see if there is a warranty; if a warranty has been disclaimed than there has been no warranty.

(3) Any Unconscionable Act as defined in § 17.45(5):- any act or practice which to a person's detriment:

(a) takes advantage of lack of knowledge, ability, experience, or capacity of a person to a grossly unfair degree, OR

(b) results in a gross disparity b/w the value received & consideration paid, in a transaction involving the transfer of consideration (i.e. $100 bag of ice during hurricane in Corpus Christi).

(4) Violation of Texas Insurance Code

of 82

E. Different Causation Standard Producing Cause : To bring a suit under the DTPA you only need to show that the damages

were the producing cause of the misrepresentation. This is an easier causation standard to meet than foreseeable & proximate cause.

FORESEEABILITY PROXIMATE CAUSE PRODUCING CAUSE HARDEREASIER

F. Damages under the DTPA § 17.506(1) Innocent Act: Meaning that the seller innocently violated this Act.

The consumer may recover economic damages ONLY, which are the amount of $ the consumer is out of or lost from the injury caused by the retailer (i.e. economic damages = actual $ lost).

Can never get mental anguish damages for innocent act. Can never treble (triple) these damages.

(2) Knowing Act (aware of falsity): Consumer can recover trebled economic damages & mental anguish damages (only the economic damages can be potentially trebled).

(3) Intentional Act: Meaning that the seller had the specific intent for the consumer to rely on misrepresentation.Consumer can recover trebled damages for BOTH the economic damages & the mental anguish damages. So, the whole amount is potentially trebled in this case!

EXAMPLE: If your economic damages = $10,000 & your mental anguish = $20,000(1) innocent act: $10,000 max. (nothing is trebled)(2) knowing act: $50,000 max. (economic damages are potentially trebled)(3) intentional act: $90,000 max. (BOTH economic damages & mental anguish are potentially

trebled)

G. Attorney's Fees If consumer wins the DTPA action, the consumer also gets court costs & reasonable &

necessary attorney's fees as part of damage award. However, if the retailer wins (i.e. consumer loses), the retailer does NOT get an award of

court costs & attorney's fees UNLESS the consumer brought the claim in bad faith, for the purpose of harassment, or the action was groundless in fact or law.

H. Notice: A consumer must give the seller 60 days written notice & specifically state the amount sought including all attorney's fees expended to date. This is to give seller an opportunity to settle. If seller offers to settle for the amount the consumer brings the claim for, the consumer must accept.

I. Settlement Offers: If the seller makes a settlement offer & the case still goes to trial & damages are not found to be much more than the offer, the consumer can recover either the amount of the settlement or the amount decided by the jury.

J. EXEMPTIONS The DTPA does not apply to the following cases:(1) Written contract claim for more than $100,000 where the person had an attorney & the K

was non-residential.(2) Contract claim for more than $500,000 where the K was non-residential.(3) If the settlement offer was the amount of the claim, you must accept.(4) If the settlement amount was fair & you did not take it then you will not be able to recover

attorney’s fees in excess of the amount of fees tendered in the settlement offer.

of 82

Gormely v Stover Rule: You cannot bring a negligence claim for personal injury damages or death against

doctors or health care providers under the DTPA. This rule is only limited to negligence; it still leaves warranty. Stover tried to claim misrepresentation (breach of warranty) since she can’t get her

negligence claim under the above rule. The court recognizes this & didn’t let her do this. In general, the DTPA does not apply to the tendering of professional services—the essence

of which is the providing of advice, judgment, or opinion—UNLESS there is a misrepresentation or failure to disclose (i.e. unconscionability, breach of express warranty).

Lawyers can be sued under the DTPA for failure to disclose information or an express misrepresentation (must be a misrepresentation, not just something that requires judgment by the attorney).

of 82

THIS IS ON FINALIX. PREVENTION, COOPERATION, & DUTY OF GOOD FAITH

R2d§ 205 Every K imposes upon each party a duty of good faith and fair dealing in its performance & its enforcement (subjective test).

UCC 1-203 Every K or duty w/in this Act imposes an obligation of good faith in its performance or enforcement (objective test). Use “reasonable commercial standards.”

A. Prevention & Cooperation: all courts read all Ks as containing an implied condition that the parties will act in good faith & will not hinder or prevent the other party from performing.

B. Must act in good faith when rejecting goods & satisfying conditionsNeumiller Farms (p. 775) : Buyer was rejecting potatoes in bad faith b/c he found them at a better price from another dealer. Buyer tried to claim that the potatoes didn’t conform to the K. However, an expert examined the potatoes & said that they did conform. The court held that Buyer’s claim of dissatisfaction didn’t matter since it was an objective test & the expert said they were fine; therefore, Buyer’s claim was held to be in bad faith. The evidence here indicates that Buyer’s claim of dissatisfaction was not made in good

faith. As a merchant, Buyer has a duty to act in good faith. B/c Buyer’s claim of dissatisfaction was not made in good faith, the rejection was ineffectual & constituted a breach of K for which Seller could recover damages.

OBJECTIVE TEST Courts use an objective test to decide whether a reasonable person would have been satisfied with the goods. The objective test is used in utilitarian (products of utility) approaches. Goods will almost always fall under the utilitarian approach.

RULE Where the condition requires satisfaction as to commercial value or quality, operative fitness, or mechanical utility, an objective standard is to be used in determining whether the clause has been satisfied. Mere price increase, or savings on price, acceptance/rejection of goods is base

on strict application of objective test The parties can also explicitly make it a subjective test if both parties agree to it or

where the clarity of the K evidences that the parties intended for a subject test to be applied when they K.

C. Some instances require subjective test: Matters of personal taste or fancy (i.e. self-portraits, design of a dress). The other party must know it is a subjective decision based on personal taste. These kind of Ks have what seems to be a condition of satisfaction. The concern w/ this

is that it makes it seem like an illusory promise; however, the party has to perform the K in good faith.

PREFERENCE IS GIVEN TO APPLICATION OF AN OBJECTIVE TEST.

D. What about satisfaction by 3rd parties? This happens often in construction Ks (engineers or architects). The purpose of having a 3rd party decide is to get their subjective view on the decision.

So, it is a subjective test, but if there is evidence of bad faith, we will bring in others (i.e. the court) to see if it meets an objective standard.

E. Employment at will: in at-will employment K a person could get fired for no reason at all, but the legislature has limited at-will discharges by protecting employees from

of 82

discrimination firings. Many states say that the presumption of at-will Ks can be altered by a statement in employee handbooks or manuals, or by other K theories such as promissory estoppel, or implied covenants of good faith or policies established by the employer. The breach of good faith argument doesn’t work in at-will employment Ks. About the only situation where an employee has been allowed to sue for breach of

good faith in an at-will employment K was a whistle blowing situation.

Seubert Although the employee did not meet the quotas, it was the employer who prevented

him from performing, thus his non-performance is excused. The breach of duty of good faith was by the employer who didn’t provide a system free

of defects; the employee was supposed to sell a product that was not what was promised.

He still could have a cause of action, not for the termination, but for the performance b/c seller misrepresented that the items were good.

Foley case This case said that you can only fire an employee for good faith reasons, but this goes against the idea of at-will employment. – in general, use the above rule unless obvious bad faith in fact pattern

F. Implicit agreement not to interfere with other party In all Ks there is an implicit agreement by each party to not interfere w/ the other

party's ability to perform the K. A party cannot intentionally & purposefully do anything to prevent the other party from

performing & if he does, he cannot recover damages for the breach he caused. Situation in Seubert because the company misrepresented the product so the

employee breached due to the prevention of performance by company

Patterson v. Meyerhoff (p.940) : sued for damages resulting from ’s interference w/ ’s performance of a K under which agreed to purchase parcels of land from . A party that causes or sanctions a breach of K is not entitled to recover damages for the

breach & may not use the breach as a defense in an action in K. This case was different b/c he did not know that when he bought from the other party

he was diminishing the supply of the market that is why he could still recover. Therefore, they were not acting in good faith.

The biggest problem in this case is that there is nothing in the K to recognize the 5th lot; the ’s knowledge that wanted to buy the 5th lot doesn’t make a K. However, if the 5th lot had been part of the K, could sue for bad faith. The bad faith argument does work for the other 4 lots though.

Iron Trade v. Wilkoff (pg. 942) : was to sell rails to for $40/ton. wins b/c did not deliver the rails. said made it impossible for him to perform. went & bought rails form the market, drove prices up, & thus made it impossible for to perform. Something more must be alleged than that began buying rails in the market, thus

making performance more difficult. did not show that had knowledge that the supply was limited & that intended to prevent, interfere w/, or cause to default.

There was no express understanding that would not buy elsewhere as well as from . It makes no difference what intended to do w/ the rails. Buyer covering/mitigating loss when delivery did not occur does not prevent

recovery unless shown to be within the time allowed for Seller to cure The difference between this case & the previous case is that there are still rails in the

market & in the previous case, the parties were bidding on a specific, unique item that could not be bought from any other source.

of 82

From the interference standpoint—maybe the just needed a whole lot of rails & the had no intent to interfere. The should have secured his source.

The Case of the Opportunistic Tenant: Lease that tenant pays 5 cents a gallon for every gallon of gas that is sold on premises. The tenant decides that he should open up another gas station across the street to reduce the amount that is sold at the previous location so that he will pay less rent & be able to keep more profits. The tenant is acting in bad faith & is liable for breach of bad faith. If this lease had a flat

rate of rent, then it would not be considered bad faith b/c the 2nd station would not have affected the lease amount of the original station.

The Case of the Interfering Homeowner: Homeowner made daily visits & each time contacted the foreman to inquire about the house. The foreman reported to the Builder that Homeowner’s visits were interfering w/ his work. This is not bad faith. A party's action that only makes the other party's performance more difficult will not

release the party that must perform from doing so, when the party causing the difficulty is in good faith & does not intend to interfere.

If in bad faith, then this would amount to a breach due to interference. Look at facts to show intent to interfere/bad faith

Billman v Hensel (pg. 946) : K for sale of house w/ a condition precedent that the Buyer secure financing. Buyer cancelled K b/c said he couldn’t get financing so Seller wants to keep the earnest money. Court holds that Seller can keep earnest money. Buyers went to one bank and then to parents for difference needed to secure mortgage

– court count not enough for good faith effort to secure financing (think about it: seems childish to go to a bank, they say you need more cash to

make up the difference and then you go to your parents, they say no, and you cry about it?)

A party must make a good faith effort to secure a loan when this is a condition precedent to a party's performance. This applies to all conditions precedent; the party must make a reasonable & good faith effort to satisfy the condition.

of 82

X. EQUITABLE REMEDIESSometimes the court will award “equitable remedies” instead of the usual remedy of money damages. Legal remedies “at law” are remedies against the property. Equitable remedies are remedies against the person.

A. WHEN CAN A PARTY GET SPECIFIC PERFORMANCE OF A CONTRACT? When the legal remedy for the breach is inadequate. If money damages would be adequate to protect the injured party, that party CANNOT

get specific performance. The has the burden of proving that equitable damages are necessary.

B. WHEN ARE THE LEGAL REMEDIES INADEQUATE (i.e. damages)?(1) When damages cannot be calculated w/ sufficient certainty.(2) When the subject of the K is unique & money cannot purchase a substitute for the Ked

for performance.(a) Real Property (i.e. that special house w/ the stream behind it)(b) Hope diamond, Mona Lisa(c) Personal Property artwork, jewelry, antiques

C. INJUNCTIVE RELIEF Ordering Specific Performance(1) Advantages:

(a) The burden of determining cost falls on the parties.(b) The outcome will protect the parties’ reliance interests b/c they will receive the

benefit of the bargain.- Example If we award damages, will the take the $ & run. If we award SP &

make them repair the property, it will make the parties negotiate what this is actually worth b/c it shifts the burden.

(2) Disadvantages: Supervision by the court (the court will have to make sure the parties perform).

(3) Factors used in determining if specific performance should be granted:(a) Adequacy of damages: To get SP, the aggrieved party must plead and prove that

legal remedies are inadequate (i.e. money damages are insufficient to restore the benefit of the bargain to the non-breaching party).

(b) Mutuality: There is NO REQUIREMENT THAT BOTH PARTIES BE ENTITLED TO THE SAME REMEDY of SP under the K. The only mutuality requirement is as to the consideration of the K. (See Laclede v. Amoco)- Exception In real estate Ks both parties should be entitled to the same

remedies.(c) Supervision: SP may require judicial monitoring to ensure that the does not

provide a grudging performance that falls short of the reasonable standards required under the K.- Therefore, in construction Ks SP is almost never granted b/c it is too difficult for

the court to supervise.(d) Certainty: To get SP, the court must know exactly what each party was supposed to

do under the K. The K terms have to be definite enough to enable the court to frame an adequate order.

i. R2d§ 364: The terms must be known & specific for the court to grant an order for SP. The only time SP will be granted in spite of such

of 82

Threshold Question

terms is where denial of SP would be unfair b/c it would cause unreasonable hardship on the aggrieved party.

ii. Court will not order SP against the seller if the buyer's performance is not secured to the satisfaction of the court.

iii. Rationale: The court doesn’t want punish a party w/ SP b/c the punishment for not performing once the court has ordered SP is jail.

iv. Although a K may be too uncertain for SP, it may be sufficiently certain to award the legal remedy of damages. Be careful not to run in circles: calculating to a certainty for SP is

held to a higher standard than for legal (money) damages because of the strain it puts on parties and the court. Lack of certainty might be an indicator that legal remedies are preferred, though such still need to be calculated with some reasonableness.

What SP turns on more is the definiteness of the terms in the K, such that if SP was ordered, the performance that becomes required is known

(4) UCC—GoodsBuyer—2-716—SP may be decreed where the goods are unique or in other proper circumstances Rule: SP may also be granted in Ks involving goods that are NOT UNIQUE but

where the goods are necessary for buyer's business & cannot be obtained elsewhere.

This is especially likely in the case of output & requirements Ks, where the item is not in ready supply.

Curtice Brothers : K for the sale of tomatoes. It is the peculiar nature of the tomato canning industry that preparation must be made year round for a canning season which lasts about 6 weeks. Therefore, SP will be granted where there is an inability to cover w/ the sale of goods under UCC 2-716. – has a uniqueness undertone with a different name: otherwise unattainable goods (which inherently makes the goods under the K unique)

Real Estate—Damages are presumed to be an inadequate remedy for breach of an agreement to convey real property b/c of the peculiar locality, soil, advantages, & other conveniences which cannot be replaced by other land of equal value. Therefore, SP is available for a seller’s breach.

(5) SP & Third PartiesRule: 3rd parties to a K may NOT seek SP b/c they are NOT in privity of the K. Northern v. Carbon Co. : seeks SP to protect the miners who lost their jobs from

the mine closure & the related businesses that consequently shut down.

(6) DEFENSES to Specific Performance:(a) Hardship: The can argue that SP will create undue hardship, but it must be

especially burdensome.(b) Clean hands: If a party seeks equitable relief then they must have clean hands (be

in good faith). Courts look to the least culpable party if both have unclean hands.- In other words, SP is denied if the K resulted from misrepresentation, mistake,

sharp practice, or other unfair acts.(c) Latches: A defense where the court says that equitable relief cannot be granted b/c

the waited too long to assert a SP claim. This occurs where length of time is

of 82

unreasonable & unexpected under the circumstances & SP would be prejudicial to the breaching party. This is independent of the statute of limitations.- Example You breached on selling your house a year ago. Since then you

have added a pool & deck. The Buyer cannot claim SP now b/c the value of the house has increased. The Buyer would only be entitled to money damages.

(7) Personal Services & Employment Ks: You cannot get SP in service Ks. The court will not order SP for personal services for 3 main reasons:

(1) Relationships It is undesirable to compel continuation of an employment relationship after a dispute;

ie: force a coach to stay where he tried to leave and took settlement for his breach? Doesn’t make sense.

(2) It amounts to involuntary servitude under the 13th Amendment; AND(3) Supervision It is hard to supervise the performance of the K (how do

you enforce the quality of their performance).- This is why SP is almost never granted in construction Ks.

Injunction However, an injunction may be granted to the employer against the employee furnishing the services to another person for the duration of the K b/c this is what the employee agreed to, expressly or by implication. Like a non-compete clause which is enforceable as long as the K express or

impliedly had such terms In the case of performer, SP & injunction are effectively the same thing b/c if you

injunct them from providing the Ked service to someone else, they will probably end up performing the K.

Injunctive relief usually comes up in the entertainment & sports industry (i.e. singer dancer, comedian, actors & actresses, football players, etc.).

An injunction may be granted if:(a) Terms of the K have NOT expired —the court can enjoin the performer from

performing elsewhere during the time of the K if (1) he was an employee providing unique services, (2) he has some other reasonable means to make a living, (3) the employer is exposed to irreparable injury this boils down to economic pressure.

(b) Terms of the K have expired —if the employment K has terminated, equitable relief is potentially available ONLY to prevent injury from unfair competition or similar tortuous behavior of to enforce an express & valid non-competition agreement.

(8) COVENANTS NOT TO COMPETE:Courts will enforce these as long as they are not over broad in terms of time, geographic location, & scope of the K. If it is over broad the court will either:

i. strike the clause completely;ii. strike the unreasonable terms; ORiii. modify the unreasonable terms to make it enforceable & then enforce

the covenant. If enforced, the equitable remedy will almost always be injunctive relief.

of 82

XI. LIQUIDATED DAMAGES & LIMITATION OF REMEDIES A liquidated damages provision is a fixed, definite sum to be paid in the event of a breach,

agreed to before or at the formation of K They will NOT be enforced if the court feels that the clause is a “penalty.”

Do not to punitive unless breach is also an actionable tort This is an alternative to, not in addition to, normal damages Breach must have caused actual damages Benefits: (1) lowers the cost of litigation, (2) easy to assess where damages are not

ascertainable.

A. Liquidated damages clause requirements for enforcement:(1) must be a good faith reasonable forecast of the harm made as of the time the K was

entered into(2) the damages must have been difficult to determine at the time the K was entered into(3) cannot be intended as a penalty for breach (i.e. Texas wife case where the amount in

the clause was grossly disproportionate to the loss was held to be a penalty)

B. Under the UCC: Liquidated damages are allowed under the same conditions of the CL, but any limitation

of damages when personal injury is involved is prima facie unconscionable. The UCC allows you to limit the damages recoverable to return the goods or to replace or repair, etc.

The UCC also looks at either the reasonable forecast OR the actual loss.

NOTES Reasonable Forecast: The reasonable forecast is measured at the time the K was made. The

amount fixed must be reasonable relative to the anticipated or actual loss for breach. The party invoking the clause has the burden of proof that it is reasonable.

Effect of no harm:(1) Claiming that there was no harm done by the breach will not excuse a party from a

liquidated damages clause. (as long as it was reasonably calculated at formation of K or in comparison to actual damages)

(2) R2d§ 356: The restatement does NOT enforce the clause if it turns out that NO actual damage has been sustained. To enforce a liquidated damages clause even when there has been no actual harm/damage would defeat the purpose of the clause.

Alternative to Performance: Liquidated damages may serve as an alternative to performance. The breaching party can perform in 2 different ways, (1) by choosing to perform as promised, or (2) by paying the liquidated damages.

Where actual damages are much lower than liquidated damages: the clause will be enforceable as long as the damages are a reasonable forecast made at the time the K was made.

Liquidated Damages as a cap: Liquidated damages may serve as a cap to liability but if they are too low they may be determined unconscionable to the aggrieved party. In this case the clause is not liquidating damages, it is limiting damages! Same idea when assessing too high – in both circumstances, the liquidated damages

must be reasonable to both parties at time of K or in relation to actual damages unless either is unconscionable and the court will then set the amount to be recovered

RULE: A limitation clause can be agreed upon & is enforceable as long as not unconscionable.

of 82

XII. Third Party Beneficiary

A. Ask who are the intended beneficiaries? An easy way to determine intent if when the parties bargain for the performance to go directly to the 3rd party.

B. Johnson v. Holmes Tuttles1. Calderas were involved in an accident 3 weeks after they purchased their car

from HT. The Calderas said they contracted for insurance when they purchased the car.

2. HT claims that 3rd party is not applicable because the P (other party injured in accident) were not specifically named.

3. Court said that even though they were not specifically named, there was a way to identify who the benefits are intended to protect.

4. Intent creates the relationship between the Calderas and the P

C. In Texas, there is no cause of action for 3rd party beneficiaries regarding wills, but this could change if the right case came through.

D. When dealing with government contracts, the courts look for a direct intent to benefits a specific group or person as opposed to a general intent to benefit all citizens.

E. UCC 2-318 – Who do warranties extend to? (Strict Liability in Torts)1. Alt. A – any natural person in family, household, and guest who are injured.

Horizontal Privity. 2. Alt. B – natural persons who may be expected to use, consume or be affected

(employees are included here). Vertical Privity.3. Alt. C – any person who may be expected to use, consume or be affected

(includes corporations and businesses). Takes out the personal injury requirement and allows legal entity.

There is no connection between the buyer and the end users and the only way that the hurt party would get compensated is products liabilities and 3PB. Seller of the beans, buyer of the beans, family members of the buyer. The buyer and family members die from bean poisoning. There is a horizontal privity between the buyer and family members.

There is vertical privity manufacturer, wholesaler, retailer, and end user.

Texas leaves it to the courts to determine it.

of 82

F. Defenses:1. Must have an underlying K. Therefore, if there was no consideration there is

no enforcement of the K and the 3PB cannot sue.2. All of the defenses available in K are available to 3PB3. However, the party can agree that the defenses will not apply to the 3PB

G. Vesting – when do 3PB rights vest? 3 different views:1. Rights vest immediately when the original K is made (if mentioned that 3PB

exist).2. Reliance on the rights – R2K 3113. Acceptance of rights by 3PB (notice that incorporates 3PB into K).

H. Novation – K or agreement where all of the parties have agreed that one party will step out and a new party takes his place.

I. Agreeing to be a 3PB is not agreeing to release one party from his duties. Must specifically agree to release from liability.

Example – There was a K between son and father that stated that after the father die and the son inherit the property that he would give his sister 1,000. After the father dies, the son refuses to give his sister the 1,000. The court stated that there was consideration in the contract and the only one that had claim to sue was the estate of the father, which the son inherited, so it made no sense. The court went on to say that the daughter had claim against the son. We enforce it b/c of the love and affection counts as consideration in the K to give the daughter/sister 1,000.

Laurence v. Fox – Holly owe money to Lawrence. Holly loan money to Fox and told Fox to give the money to Lawrence. Fox did not give the money to Lawrence. Lawrence is not a party to the K, then how can there be a cause of action. Creditor – beneficiary. Is there an intended beneficiary? Lawrence is the 3 rd party beneficiary. Promissor is the one that made the promise by which the 3rd party will benefit. The issue is whether the 3PB has standing to sue? Because they are 3PB they have standing to sue. There are incidental beneficiaries. How do we determine whether a party is an intended beneficiary? Intent of the parties. In most cases it is the intent of the promisee. The agreement is that the 3PB is going to benefit and the performance runs directly to the beneficiary.

Some cases where the 3PB has standing even though the performance does not run directly to beneficiary.

Johnson v. Holmes – Calderas bought a car plus insurance from Homes. Homes forgot to buy the insurance the Calderas had an accident with Johnson. Homes claims that the Johnson’s were not named in the insurance and therefore could not get any money. The court said no. There is no way of knowing the names of the intended beneficiaries. Homes had an obligation to buy insurance for the Calderas to protect them. It clearly specifies a method of getting payment to 3PB such as the Johnsons.

Hale v. Groce – Attorney has contract with client to write a will. Attorney will write a will and client will pay. When the client dies, if the attorney has done something wrong so that the will cannot be probated, can the intented beneficiaries sue? If the will is written correctly, then the beneficiaries will get a benefit. Traditionally, Attorneys have very strong fiduciaries connections to their clients and to no one else. So there were not that many lawsuits against lawyers for malpractice for negligence. The problem with this is that the client who is the only one that can sue is already dead, so the courts have declared that the 3PB has standing to sue. The intent is obvious. Another problem is going to be that the estate is the one

of 82

that has the cause of action to sue. There is a fiduciary is appointed either under the will or intestate. When you have standing to sue, you are suing on the contract and you have no greater claim. If you are suing for malpractice, then you have to prove it. The courts have gradually been allowing 3PB to sue in wills not in other areas though.

Courts look at it as a court causet of action: Is there a duty in tort (Negligence) to these beneficiaries. Other courts look at it under the 3PB that are intended to benefit.

Zigas v. Superior Court – Public K.1. What kind of K do they have? The K was entered to protect the renters (receive

benefits).2. If the entity had an obligation to the public and the entity hire someone else to do it.3. Look at it more specifically.4. UCC 2-318 (Has alternatives).

of 82

XIII. ASSIGNMENTS AND DELEGATIONS

A. DEFINITIONS Rights are assigned by an assignor (received by assignee). Duties are delegated by a delegator (given to a delegatee). One that is owed a duty or has a right is an obligee. One that owes a duty to someone is an obligor.

B. Explanation of how these operate:(1) Sam's Produce sells bananas to Betty's Grocery.

So, Betty’s has a right to receive the bananas (obligee) & a duty to pay for them (obligor).

Sam's has a right to receive money (obligee) & a duty to deliver the bananas (obligor).

(2) What happens when Betty’s sells her store to Bob’s Corner Store?(a) Assignments in this case: Betty’s assigns her rights to receive bananas to Bob.

So, Sam's is the obligor and Betty is the obligee and assignor. Bob is the assignee.

(b) Duties delegated in this case: Betty delegates her duty to pay Sam's for the bananas to Bob. Bob is a delegatee, and Betty is a delegator.

Sam (seller to store)o At first: Obligor to deliver bananas and Obligee to receive money from Bettyo Then: stays Obligor to continue delivering bananas to Bob and Obligee to receive

payment from Bobo Sam is the common denominator in the Assignment/Delegation, so his roles stay

the same Betty (first store owner)

o At first: Obligee to receive bananas and Obligor to payo Then: Assignor to Bob to receive the bananas and Delegator in giving duty to Bob

to pay Sam Bob (new store owner)

o Becomes: Assignee for receiving right to receive bananas from Sam and Delegatee in receiving duty to pay Sam for the bananas received

Note that the goods and the payment are matched with Obligor/Obligee and change only for Betty and Bob, b/c the duty to pay (when Betty was Obligor) becomes delegated and Betty is Delegator and Sam Delgatee because this is no longer a “right” it becomes a duty once Sam delivers the bananas.

o After the assignment/delegation, Bob is obligor/obligee with regards to SAM (just as Betty was), but we are describing the terms and rights/duties at the time of the transfer of the store from Betty to Bob, not what the relationships will be down the road. Be careful here: make sure to (1) list the titles for each before the “transaction”, then (2) use the proper terminology in the changes. If space and will fit into your answer, then (3) list what the rights/duties are after the transaction, using the same terminology as before the transaction. Most Important thing is the first two steps

Typically: Obligee is Assignor or rights and Obligor is Delegator of duties

ASSIGNMENT OF RIGHTS An assignment is a complete transaction.

of 82

The assignor gives up all duties & rights of the K to the assignee. The assignee is said to “stand in the shoes of the assignor.” That is, w/ a few exceptions, he takes subject to all defenses, set-offs and counterclaims which the obligor could have asserted against the assignor.

ASSIGNMENT AGAINST THE UNITED STATES IS PROHIBITED.

Fitzroy v Cave: , the assignee of debts owed by to 5 creditors in Ireland, sued to recover the debts (i.e. the Ireland creditors assigned the right to collect the ’s debt). ’s motive in taking the assignment was to force into bankruptcy & thereby remove from directorship of a company in which was largely interested. argues that the assignment was invalid b/c it was merely maintenance, which is taking

on someone else’s litigation that is not yours (professional litigators that take on other peoples suits) & that only motive was to drive him into bankruptcy.

The court, however, said that a K right is essentially a property right & that ’s intent had no bearing on the validity of the assignment.

Held : As a matter of law, rights can be assigned. There are only 2 limitations that will make an assignment invalid:i. the assignment cannot materially change the duties or rights or increase the

risks or burdens on the other partyii. the assignment cannot violate a statute or public policy

R2d§ 317: Assignment of a Right(1) An assignment of a right is a manifestation of the assignor's intention to transfer it by virtue of

which the assignor's right to performance by the obligor is extinguished in whole or in part and the assignee acquires a right to such performance.

(2) A contractual right can be assigned UNLESS:(a) the substitution of a right of the assignee for the right of the assignor would materially change

the duty of the obligor, or materially increase the burden or risk imposed on him by his K, or materially impair his chance of obtaining return performance, or materially reduce its value to him, OR

(b) the assignment is forbidden by statute OR is against public policy, OR(c) the assignment is validly precluded by the terms of the K (i.e. anti-assignment clause).

C. GRATUITOUS ASSIGNMENTSThese can be made as long as the assignment is in writing or is accompanied by delivery of a writing of a type customarily accepted as a symbol or as evidence of the right assigned (any instrument that shows the assignee has the right to collect). However, gratuitous assignments are revocable if not in writing or the assignor dies.

D. FUTURE ASSIGNMENTS (future rights)(1) Can be assigned if: you have a job or a K for services but have not yet earned the money

on the job or performed the K.(2) Can NOT be assigned if: you don’t have a job or a K b/c you have nothing to assign.

Think about: if you don’t have the K for yourself, you can’t assign/delegate because you don’t have it yet!

(3) But, you could K with the bank to give you money (i.e. loan) & then the first job you get you will pay them the money. This is not an assignment b/c you have nothing to assign; here you are making a K. Assignment gives ownership, K does not. For example, in a bankruptcy suit an assignor has a right to the $ whereas, w/ a K the contractor only has an equitable right to the $.

(4) The UCC allows you to assign although there is no K of any type as long as you have people who owe you money (i.e. accounts receivable, inventories, etc.)

of 82

E. Can parties place anti-assignment clauses in the contract? Yes, see Allhusen.(1) General Rule: Any property right is assignable; it can be overcome ONLY by agreement

of the contracting parties or a principal of law or public policy.(2) The anti-assignment language in the K must be clear, definite & appropriate for the

court to enforce it.(3) Anti-Assignment Clause & Breach —Some courts hold the assignment valid & only make

the assigning party pay for the breach of the K (usually nominal damages). This is based on the policy of free alienability of K.

F. Notice Requirement The obligor/debtor must be given notice by the assignor or the assignee that the rights

of the obligee/assignor have been assigned to the assignee. Once the obligor/debtor has knowledge of the assignment, he is only protected by

paying (or performing to) the assignee. If he pays the original obligee (the assignor) or any third party, he is liable.

The rights vest in the assignee at the time notice is given.

UCC 2-210: Delegation of performance; Assignment of Rights A party may perform his duty through a delegate unless otherwise agreed or unless the other

party has a substantial interest in having his original promisor perform/control the acts required by K. ***NO delegation of performance relieves delegator of any duty to perform/any liability for breach

If you are merely assigning a right to payment, then the K cannot prohibit this. If an assignment that delegates duties creates reasonable grounds for insecurity, the obligee has

an automatic right to demand assurances under §2-609. Under the UCC, an anti-assignment clause is to be construed as barring ONLY THE DELEGATION to

the delegatee rather than barring the assignment.

UCC 9-318: Same as 2-210 but it says that an "accounts general" is always assignable even if stated otherwise. Also allows good faith modification of Ks once assignments have been made as long as they keep the corresponding rights of the assignees. You also have a right to ask for verification by documentation when notified about an assignment.

DELEGATION OF DUTIESA. Definitions :

Obligor is the person who owes the duty to someone; they delegate this duty to someone making them a delegator, & the person assuming the duty becomes the delegatee.

Rule: Generally, duties can be delegated. There must be a reason to make an exception to this general rule, & not allow a duty to be delegated.

Rule: A party cannot delegate a personal service Ks, such as Bagwell trying to get Professor Powers to take over his duties and K for Bagwell w/ the Astros.

B. Question: If a contract is assigned, does this mean that both the rights under the K are assigned, & the duties under the K are delegated? Yes, the presumption is that when a K is assigned, both the rights and duties are transferred to new party. In other words, any liability from the original K remains unless the original party

releases liability.

of 82

The only way the delegator can be relieved is through a novation. This is when the parties get together & decide that a new K is formed w/ the new person now liable for performance & breach (i.e. a substitution of parties to the K).

Standby Liability when the assignor retains liability after delegating his duties to someone else. He can only get rid of this liability by a novation. If no novation, then the delegator retains liability for breach.

of 82

Exams:4 multiple choice questions.100 point exams.A lot your time by the point next to each question. If it is a 20 point question, pay more attention to this then to the 4 point question. Identify what the issue is and the rule should be there and the analysis. Open book. Tell her what the rule is but don’t spend the time writing everything on the rule. Facts are very important. Don’t ramble or restate the facts but use them appropriately. Organize what you are going to write before you write it.

Get out of Class: ExamParol evidence rule question. Is this really a contract? Sofie case: She might want to argue that there was no K, or that there was some misrepresentation made (credit charge was not going to be charge for some time). Lets assume that this does not work. Then argue the whole test, give both sides. Is this supposed agreement a contradiction. What does it mean a no refund? Does it mean that her account was not going to be charge at all? Look at interpretation level. The court might say no, that the meaning is very plain but on the other hand another court might say that it is not a contradiction after all.Look at the common law agreement. Look at the reasonable party, what they would have done. If a reasonable person would have thought the information is important enough that it should have been in the agreement, then the parol evidence will not be allow. If the evidence comes in then the fact finder has to determine the facts.

Tell me about the breach of K and TDPA? Make sure you discuss both. Look at 2-714

You do not get mental anguish for breach of contract unless it is a k where you might expect mental anguish. Look at the TDPA, How did you get in: breach of warranty gets you in. Did the seller know about this problem and if he did know what was the intent. Makes a difference because of damages the person will get.If we had knowledge, then go down the list ( we could get trebble).

The preston dinner theater to paint the mural. Does she have a claim for breach of K. He does not have a duty unless the condition was met (is it subjective or objective). Painting a mural is subjective but you can argue objective in that the work will not necessarily be something that he likes but something that will promote his business. Did he made the decision in good faith? Maybe he has something else in mind when he says that maybe things can happen, this can demonstrate bad faith. Also the criticism thru the entire time could be seen as bad faith. However, the criticism can also go the other way, in that the entire time that he was criticism shows that he did not like it. The problem with this is that he keeps it and this tends to deminished this argument. You can argue the objective condition. Any reasonable person would find the mural tasteful and beneficial to the business. The fact that he kept the mural at the end will require some damages in restitution. Under expectation you would get 800. In reliance you have 1300 in reliance but you have 500 in expenses and you end with 800. Restitution you might look at the value of the benefit confer. What is the value confer to have someone else finish it. She claims 10,000. Can she get 10,000 in restitution when the K price is 1,000. Most jurisdictions will limit you to the K. Is this performance substantially complete? If it is not substantially performed, then most jurisdictions will not limit you to the full amount of the K. If there was not quite substantial performance then she might have an argument for more than 1,000.

Favio was fire and there was no reason why he was fire and he is suing for 10,000. The court said that no he does not get it. This is not the question. The question was, was there a K? Whether he has done any worked or not is not the questions but he should get the amount for the loss of the bargain (loss profits). Mitigation offer by the breaching party is always suspect.

of 82

SSI (Parking lot) Liquidated damages clause. Is the late completion a breach of K at all? Impracticability (excuse) argument (temporarily) – bad weather. Bad weather is usually a good argument. Was this a basic assumption in the K about bad weather. Aren’t weather problems foreseeable. Assumption of the risk: if the contractor did not put anything at all in the K knowing that sometimes it rains. Assuming that we determine that there was no excuse, then we have to establish liquidated damages. Projected opening date. This project is late but it is not that late. What kind of damages are we anticipated? 1,000 might be too much. What kind of damages did they predict per day? Is this a correct accurate prediction. If a reasonable person would figure damages per day that the party might have been losing each day that the parking lot lost per day. How would you know. If it is to punish then liquidated damages will not be allow and then we will move to damages.

If it is a bad shipment that impairs the K materially you can reject the shipment. If the seller can remedy the problem then you can’t reject it. Is there going to be a problem if you have to get a replacement shipment. If the first shipment is that bad, will the others be just as bad? The only thing that you can do is get an assurance from the seller that the shipment will be of better quality than the last one. If assurance is not given then you can cancel the K.

If she asks to provide her with each parties damages give them to her, it does not matter that they will not be successful.

Delegation of performance:Is the cure acceptable? Is it okay to have sully do the performance? It is okay for the delegate to perform the portion of the K, however, 2-210, you can get assurances. You can sue for damages. The specific question on specific performance of the seller, only buyers get specific performance, seller just get the money.

of 82

Detailed Contracts II Outline - Powers - Spring 2011

Documents

Transcript of Detailed Contracts II Outline - Powers - Spring 2011