CONTRACTS II – Wilmarth – Spring 2010

I. GROUNDS FOR AVOIDING ENFORCEMENT (cont. from last semester)A. Misrepresentation- Syester v. Banta – dance studio scam

§164 – When misrepresentation makes contract voidable: (1) if party’s manifestation of assent is induced by either fraudulent or material misrepresentation

by the other party upon which the recipient is justified in relying, rescission(2) if party’s manifestation of assent is induced by either fraudulent or material misrepresentation

by one is not a party upon which the recipient is justified in relying, rescission unless other party in good faith and w/o reason to know of the misrepresentation gives value or relies

§162 – Either fraudulent or material misrepresentation will give rise to rescission-Misrepresentation is fraudulent if the person intends inducement of assent through it-Objective material misrepresentation is that which would be likely to induce assent in a reasonable person; Subjective material misrepresentation is that which it is known would be likely to induce assent in that particular person

§163 – If a misrepresentation as to character or essential terms of a proposed contract induces assent by one who neither knows nor has reasonable opportunity to know, the conduct is not assent

§376 – If you void a contract on grounds of misrepresentation, there is a requirement of mutual restitution (if you seek rescission, mutual restitution generally follows)

-Fraud: Misrepresentation + Materiality (Obj.) + Scienter (bad intent) + Reliance + Transactional Causation (But-for) + Loss Causation (proximate)-Rescission: Misrepresentation + Materiality (Obj./Subj.) OR Scienter + “Justified” Reliance

-You can only rescind the part of the contract that has not yet been performed (past performance and compensation for that performance can’t be returned in mutual restitution)

§166 – Misrepresenting the contents of the writing justifies reformation of contract if the recipient was justified in relying on the misrepresentation (except to the extent that rights of 3d parties not affected)

§167 – A misrepresentation induces a party’s manifestation of assent if it substantially contributes to the decision to assent

§168 – Assertions of opinion are misrepresentation if an individual asserts a reasonable opinion that he does not honestly believe or has no facts to back up (not simply “puffing”)

§169 – Reliance on an opinion is justified if there a relationship of trust and confidence

-Laidlaw v. Organ – nondisclosure of end of war; Supreme Court said that silence was ok

-The modern standard is that you have a duty to disclose information that has been casually acquired but no duty to disclose information that was required through substantial investigation

§161 – When nondisclosure is equivalent to an assertion(a) If you make a statement and later discover that the statement is a misrepresentation, you have

a duty to disclose(b) If you know that the disclosure would correct the other party’s mistake about a basic

assumption on which they entered the contract if non disclosure would amount to a failure to act in good faith (this provision is not universally accepted)

(c) If you know that the other party is mistaken about the contents or effect of the written agreement

(d) In the case of a fiduciary relationship

§173 – Abuse of a fiduciary relationship makes a contract voidable when(a) It is on fair terms, and(b) All parties beneficially interested manifest assent with full understanding of their legal rights

and of all relevant facts that the fiduciary knows or should know

-Hill v. Jones – Buyers of house bring suit after sellers failed to disclose past termite damage

§160 – actions intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist

-Other facts to consider in deciding when fairness requires disclosure of material info (p174):(1) Difference in degree of intelligence of the parties to the transaction(2) The relation the parties bear to each other(3) The manner in which the information is acquired (by chance/effort/illegal act)(4) The nature of the fact not disclosed(5) The general class to which the person who is concealing the information belongs(6) The nature of the contract itself(7) The importance of the fact not disclosed(8) Any conduct of the person not disclosing something to prevent discovery

-Park 100 v. Kartes – misrepresentation in “lease papers” on commercial building lease

B. Unconscionability-Codified in UCC §2-302 and R §208 (Wilmarth: the “not quite” doctrine)

Both UCC and Restatement focus on unconscionability at time the contract was made

-Unconscionability is a bargaining issue, not a performance issueProcedural unconscionability: circumstances of the sides / negotiations are grossly unfairSubstantive unconscionability: terms themselves are grossly unfair

-A balancing test: if you have a lot of bargaining misconduct, don’t need really bad termsIf you have really outrageous terms, don’t need that much bargaining misconduct

-The court can either strike certain provisions that are unconscionable, or void the entire contractIn a lot of cases, if entire contract is voided, unconsionability is grounds for restitution

-Williams v. Walker-Thomas Furniture Co.-Furniture store had sale contract that stipulated that any credit for buying goods would be “credited pro rata on all outstanding leases, bills, and accounts” (the store could repossess items still being paid for if an individual defaulted on a payment for a later bought item)-Court applies D.C. adaptation of UCC §2-302 and finds agreement unconscionable-Court defines unconscionability as “an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party”-“In determining reasonableness or fairness, the primary concern must be with the terms of the contract considered in light of the circumstances existing when the contract was made.”

-Higgins v. Superior Court of Los Angeles County – “Extreme Home Makeover”

-American Software v. Ali – Ali sued company to recover commissions on contracts that came in after she resigned her position; a clause in the contract terminated that 30 days after resignation

§208 comments: the judge makes the decision on unconscionability

-The exclusion of consequential damages can be unconscionable-The fact that the contract is an adhesion contract permits an inference of unconscionability, but it does not definitively mean that the contract is unconscionable

C. Voiding on Grounds of Public Policy§178 – When a Term is Unenforceable on Grounds of Public Policy

(1) A promise or other term is unenforceable on public policy grounds if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed by a public policy against the enforcement of such terms

(2) In weighing interest in enforcement of a term, look to:a) The parties’ justified expectationsb) Any forfeiture that would result if enforcement were deniedc) Any special public interest in the enforcement

(3) In weighing interest against enforcement of a term, look to:a) The strength of that policy as manifested by legislation or judicial decisionsb) The likelihood that a refusal to enforce the term will further that policyc) The seriousness of any misconduct involved and the extent to which it was deliberated) The directness of the connection between that misconduct and the term

§179 – A public policy against the enforcement of promises or terms may be derived by:(a) Legislation relevant to such a policy(b) The need to promote some aspect of public welfare (i.e. restraint of trade, family relations)

§187 – If the contract does nothing more than restrain competition, it is no good

§188 – A promise to refrain from competition that imposes a restraint that is ancillary is unreasonable if:(a) The restraint is greater than is needed to protect the promisee’s legitimate interest, or(b) The promisee’s need is outweighed by the hardship to the promisor and injury to public

Promises imposing restraints that are ancillary to valid transaction include:(a) Promise by seller of a business not to compete with the buyer(b) Promise by an employee or other agent not to compete with his employer or principal(c) Promise by a partner not to compete with the partnership

- Valley Medical Specialists v. Farber – Restrictive covenant not to compete for doctor unenforceable- RR. v. M.H. & another – Surrogacy contract unenforceable

§197 – restitution generally unavailable for a promise unenforceable on grounds of public policy§198 – restitution is available for a promise unenforceable on grounds of public policy if:

(a) He was excusably ignorant of the facts or of legislation of a minor character(b) He was not equally in the wrong with the promisor (“in pari delicto”)

“in pari delicto” – equally in the wrong (both parties are left where the court finds them and no remedy is given to either party, even if one has received a benefit from the other)

-Unconscionability (procedural/substantive) is the lowest rung; the next step up is misrepresentation, abuse of relationship of trust and confidence, or undue influence

-The courts are not predisposed to rescission (somebody always gets hurt when you “unwind” the transaction) so it takes a significant showing to demonstrate cause for rescission-For mistake, the mistake has to relate to a fact or condition that is already in existence

- Lenawee County Board of Health v. Messerly – condemned property; equitable remedy of rescission not available when both parties innocent (did not know about present condition)

§152 – Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on performance, the contract is voidable by the adversely affected party unless he bears the risk of mistake

-The way you should approach the problem is start with §153 for basic assumptions, then go to §154 for when party bears risk, then back to §153 (a) & (b)

§153 – Where a mistake of one party at the time a contract was made as to a basic assumption on which the contract was made has a material effect on performance that is adverse to him, the contract is voidable by him if he does not bear the risk of mistake and

(a) The effect of the mistake is such that enforcement of the contract would be unconscionable(b) The other party had reason to know of the mistake or his fault caused the mistake

§154 – A party bears the risk of mistake if:(a) The risk is allocated to him by the agreement of the parties, or(b) He is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or(c) The risk is allocated to him by the court on the ground that is reasonable to do so

-If there’s some indication of bad faith, 154(c) may shift the bearing of risk to the bad faith party

§155 – When mutual mistake consists of failure of the written contract to accurately state agreement of the parties, reformation of contract to express parties’ mutual intent is the typical remedy

-Generally unilateral mistake doesn’t get you equitable remedy (exceedingly difficult)

-Wil-fred’s Inc. v. Metropolitan Sanitary District-Court lists conditions generally required for rescission in IL:

(1) That the mistake relate to a material feature of the contract(2) That it occurred nonwithstanding the existence of reasonable care(3) That it is of such grave consequence that enforcement would be unconscionable(4) That the other party can be placed in the status quo (back to before contract)

-One context in which the courts are more likely to grant rescission for unilateral mistake is when the mistake is so obvious or “palpable” that the party should have known that it was too good to be true

(i.e. Wil-Fred’s bid being $235k lower than lowest bid)

D. Doctrines of Changed Circumstances-Impossibility:

§262 – death or incapacity of person necessary for performance§263 – destruction, deterioration, or nonexistence of thing necessary for performance§264 – prevention by gov’t regulation or order

-Impracticability: §261 – discharge by supervening impracticability§266(1) – existing impracticability (previously existing but unknown: like mistake)

-Frustration of purpose: §265 – discharge by supervening frustration§266(2) – existing frustration (previously existing but unknown: like mistake)

UCC: §2-613 and §2-615

-Impossibility requires literal objective impossibility (“no one could do it”)-Impracticability requires circumstances sufficiently different from what parties contemplated at the time of contracting as to be impractical (not literally impossible but really tough)

-The first big impracticability case was Mineral Park Land Co. v. HowardDefendant was able to claim impracticability when removing all the gravel it had contracted to do would require costs not contemplated b/c some gravel was underwater

-The difference between frustration and impracticability is a subtle oneIn impracticability, what happened changed a basic assumption of the agreementIn frustration, the principle purpose of the contract has also been frustrated

- Karl Wendt Farm Equip. Co. v. Int’l Harvester Co. – impracticability on grounds of market failure-In Karl Wendt, the court does not find frustration of purpose because the “mutual profitability” is not a sufficiently basic assumption as to allow the defense

-With unconscionability, you have the option of reformation; but with impossibility/impracticability/frustration it’s all or nothing (with exception of Alcoa)-Clearly unconscionability is not a jury question, but there is debate about whether or not impossibility/impracticability/frustration should be a jury question (in most places it is)-Forseeability can be a consideration in determining changed impos/imprac/frustration

-Courts have not historically granted rescission based on war or other international conflict that made the contract impracticable (i.e. closing of Suez Canal in ’56, ‘67)

- Harriscom Svenska v. Harris Corp. & RF Systems – impracticability b/c of Iran tech embargo -The court finds that RF established the affirmative defense of commercial impracticability because it complied in good faith with the government’s informal requirements

§264 – compliance with foreign or domestic government regulation or order as a basis for relief§272 – restitution is also available as relief for valid impossibility/impracticability claim

-a “force majeure” clause provides for excuse where performance is prevented or delayed by circumstances beyond the control of the party seeking excuse-Courts are skeptical of these clauses and test them against good faith / unconscionability

§89 – modification of existing contractA promise modifying a duty under a contract not fully performed on either side is binding(a) If the modification is fair and equitable in view of circumstances not anticipated(b) To the extent provided by statute(c) To the extent that justice requires enforcement in view of reliance on the promise

-A novation is a new contract to replace an old one (new contract, new consideration required)

-Under UCC §2-209, an agreement modifying a contract needs no consideration to be binding-A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, except by merchants

- Kelsey-Hayes Co. v. Galtaco Redlaw Castings Corp. – price increases to keep smelting plant open

- Alaska Packers’ Ass’n v. Domenico – workers on fishing boat forced reformation of contract in AK

UCC §1-308 deals with reservation of rights-Party performs but makes a formal reservation of the right to sue later on-Use of such words as “without prejudice” or “under protest” are sufficient

§2-209 – for modification, rescission, and waiver(1) An agreement modifying a contract within UCC needs no consideration(2) A signed agreement which excludes modification or rescission except by signed writing

cannot be otherwise modified or rescinded except if between merchants on separate form(3) Requirements of statute of frauds must be satisfied(4) An attempt at modification or rescission does not satisfy (2) or (3) but can be a waiver

-§2-209 gives the party the instrumentalities to oppose a one-sided modification by the other party-§2-209(4) provides that although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver

- Brookside Farms v. Mama Rizzo’s – unforeseen basil leaf costs created impracticability

- “no oral modification” clauses (NOM) prohibit oral modifications to the contractGenerally, the cases support the proposition that the NOM clause may be waived

-“no-waiver” clause: intended to insulate the parties from a claim that any provision in the contract had been orally waived

II. CONSEQUENCES OF NONPERFORMANCE§224 – a “condition” is an event, not certain to occur, which must occur before performance is due§225 – effects of non-occurrence of a condition

(1) Performance of a duty subject to a condition cannot become due unless the condition occurs or its nonoccurrence is excused

(2) Unless it has been excused, the nonoccurrence of a condition discharges the duty when the condition can no longer occur

(3) Nonoccurrence of a condition is not a breach by a party unless he is under a duty that the condition occur

§227 – three flavors of conditionsa) Pure promise (I promise to buy the car)b) Pure condition (I promise to buy the car if the car is inspected)c) Promissory condition (I promise to sell you the car and get it inspected)

-For §227, the order of preference in doubtful cases (hierarchy is used to avoid forfeiture):1) Promise2) Pure condition3) Promissory condition

-Forfeiture is when one party’s duty is discharged even after the other party has invested or relied upon the promise (that value/contribution has been forfeited)-When a condition only protects one party, it cannot be held to discharge the other party’s duty

(i.e. buyer doesn’t get mortgage but still wants to go forward w/ purchase in cash)-One can waive conditions, but a waiver can be retracted-If you rely to your detriment on the waiver, the court can enforce based on that reliance-Duty of good faith efforts to make a condition happen

The other party cannot block or prevent the condition from happening-Duty may be discharged based on bad faith obstruction or frustration by one party-There can be oral conditions (subject to statute of frauds)

-Oppenheimer v. Oppenheim – “unless and until” text in contract meant no substantial performance

§229 – to 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 material

Three basic areas where the courts have created conditions:§234 has the first two:

1) When simultaneous performance required, performance of one requires the other2) When one performance is short/instant and the other takes time, longer one goes first

§240 has the third (partial performances)3) When a contract’s performances are divisible, remedies can be reasonably divided

§235 – any failure to perform when that performance is due is a breach

Δ π1) Partial (“technical”) breach -must keep performing, but may sue for direct damages2) Material breach -may suspend performance (“suspended animation”)3) Total breach -is completely discharged from further performance,

may seek all remedies

§237 – except as stated in §240, parties must 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

Jacob & Youngs, Inc. v. Kent – construction of house with wrong brand of pipe-Cardozo says it’s not a material breach, but only partial breach b/c contractor has substantially performed-Cardozo makes a distinction between the unintentional transgressor and a deliberate mistake

- Sackett v. Spindler – Spindler agreed to sell newspaper to Sackett; Sackett never paid up-Sackett’s disregard of Spindler’s anticipatory repudiation meant that he still had to pay

- Flatt v. Schupf –

-Look at §241 to determine when a failure is material

§241: Circumstances significant in determining whether a failure is materiala) Extent to which injured party will be deprived of the benefit he reasonably expectedb) Extent to which injured party can be adequately compensated for what was deprivedc) Extent to which party failing to perform or to offer to perform will suffer forfeitured) Likelihood that party failing to perform or offer to perform will cure his failuree) Extent to which behavior of the party failing to perform or offer to perform comports with

standards of good faith and fair dealing§242: Circumstances significant in determining when remaining duties are discharged

a) Those stated in §241b) Extent to which it reasonably appears to injured party that delay may prevent or hinder him in

making reasonable substitute arrangementsc) Extent to which agreement provides for performance without delay, but a material failure to

perform or offer to perform on a stated day does not itself discharge the other parties remaining duties unless circumstances indicate that date is important

§250 – Anticipatory repudiation requires that the verbal/written repudiation be clear or unequivocal, or a clear and unequivocal act that indicates repudiation by conduct

-whether an anticipatory repudiation occurred is a question of fact

§251 – bases for 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 under §243, the obligee may demand adequate assurance of due performance and may suspend performance

(2) The obligee must treat as a repudiation the obligor’s failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances

§253 – anticipatory repudiation that is unequivocal creates total breach

-Anticipatory repudiation is justified if a party has reasonably grounds for insecurity about the other party’s ability to perform and the party cannot give adequate assurances-After you ask for a first assurance, you must show that circumstances have changed to be able to ask for a second assurance (in Hornell, the nature of the sham operation was revealed)

- Hornell Brewing Co. v. Spry – Arizona Iced Tea scam man w/ sham distributorship company

III. DAMAGES -Damages may be assessed as a remedy once total breach is established

Three types (§344):1) Expectation damages (forward looking remedy: fulfill the contract)2) Reliance damages (backward looking remedy: unwind the contract)3) Restitution damages (equitable remedy: Δ must reimburse value of given benefit)

A. Expectation Damages§347 – Measure of estimated damages = lost value of perf. + other loss – cost avoided – loss avoided

ED = LVP + OL – CA – LA

- Roesch v. Bray – Mom & Dad didn’t pay up to kids in real estate sale, so kids had to sell elsewhere-Where sale of real estate is made within reasonable time after breach, sale price is evidence of market value at the time of breach

- Handicapped Children’s Ed. Board v. Lukaszewski – duty to replace teacher w/ one of equal value

-Should LVP be measured by cost-to-completion or diminution of market value?

§348 – Alternatives to loss in value of performance(1) if breach delaying use of property and the loss in value to the injured party is not proved with reasonable certainty, he may recover damages based on then rental value of the property or on interest on the value of the property(2) if breach results in defective or unfinished construction and the loss in value to the injured party is not proved with reasonable certainty, he may recover damages based on

a) diminution of market value, orb) cost of completion (if the cost is not clearly disproportionate to loss in value)

-Other Loss (OL) comes in two flavors: incidental damages and consequential damages-the plaintiff can only argue for fair compensation; he cannot argue for punitive damages

-Hadley v. Baxendale – English case establishing foreseeability as a restriction on expectation damages-Wilmarth: “the only case where they sued because they didn’t get the shaft!”-Court sets out two general categories: those arising naturally and special damages

For special or “consequential” damages, the special circumstances must have been communicated by the plaintiffs to the defendants when the contract was made

§351 – the modern test for damages(1) Damages not recoverable for loss that party in breach did not have reason to foresee as a

probable result of the breach when the contract was made(2) Loss may be foreseeable as a result of breach if it follows from breach

(a) In the ordinary course of events(b) As a result of special circumstances that party in breach had reason to know

(3) Court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires it

- Florafax Int’l v. GTE – GTE breached contract w/ Florafax to provide telecommunications services-evidence of lost profits was adequately shown to a reasonable certainty so damages were appropriate

-“new business rule” – if the business is new, and there is little to no record of profits, most courts deny recovery as a matter of law (difficult to establish future lost profits)

Mitigation of damages (predominantly “LA”) – if you fail to use reasonable efforts to mitigate, your recovery can be reduced by the amount of the loss you should have avoided

-Rockingham County v. Luten Bridge Co. – Co. kept building bridge after County voted to stop funding it

§350 – Avoidability as a Limitation on Damages(1) Except in subsection 2, damages are not recoverable for loss that the injured party could have

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

extent that he has made reasonable but unsuccessful efforts to avoid loss

- Boehm v. ABC – executive replaced and offered a lesser status, made-up job-the employment cases say that you don’t have to accept a job with less status than the one from which you were terminated (but what if you can’t afford to sit out and you take the lower job?)- the lower status job salary counts against your damages

Jetz Service Co. v. Salina Properties – new landlord breaches contract and makes Jetz remove machines-Court holds that Jetz sending the machines elsewhere was not mitigating of damages, but constitutes “lost volume” b/c it had numerous machines and could have gotten profits from both initial lease and later lease (not a replacement/substitute, but an supplemental)-R §350 (comment d) discusses lost volume:

“If he would have entered into both transactions but for the breach, he has “lost volume” as a result of the breach…the second transaction is not a substitute for the first one”

-So does R §347 (comment f):“If the injured party could and would have entered into the subsequent contract, even if the contract had not been broken, and could have had the benefit of both, he can be said to have “lost volume” and subsequent transaction not a substitute for the broken contract”

Zapata Hermanos Sucesores v. Hearthside Baking Co. – cookie tin dispute between baker and tinmaker-Are attorneys fees recoverable under CISG, either as compensatory fee damages or punitive damages?-No doubt that there was a breach, but court finds that (1) CISG does not authorize attorneys fees under article 74 “loss” and (2) attorneys fees are not recoverable as punitive damages

There is no relevant treaty, so court uses choice of law rules and uses IL law-Outside of insurance, plaintiff must show that the breach involved tortious misconduct, such as duress or fraud, to recover punitive damages (can’t call bad faith damages “attorneys fees”)-Posner says that when you enter into a contract, you obtain an option to break the contract (and pay compensatory damages); unlike a tort, there is no wrongdoing that requires punishment

-American rule is no fee-shifting (as opposed to civil law countries in which loser pays) -Some statutes authorize recovery of attorneys fees (civil rights, consumer protection, etc.)-Parties can also provide by contract for recovery of attorneys fees

-Types of contracts where breach may lead to emotional recovery: agreements to transport bodies, common carrier/innkeeper, heirloom protection, misdiagnosis of VD (see §353)

-punitive damages are reserved for outrageous tortious behavior (not negligent breach)-since contracting parties need to predict their exposure, no punitive damages unless there is an independent tort available; the exception is insurance companies

Erlich v. Menezes – homebuilder from hell-Issue is whether emotional distress damages are recoverable for the negligent breach of a contract to construct a house -Court says that you cannot recover emotional tort damages for negligent breach without a physical injury (but yes for intentional or reckless)-Court also says that foreseeability alone is not enough to recover for emotional distress negligent breach damages (because it would significantly drive up housing costs)-Outside the insurance context, a tortious breach may be found when

(1) the breach is accompanied by a traditional tort (i.e. fraud or conversion),(2) the means used to breach the contract are tortious (i.e. deceit, coercion), or(3) one party will cause severe unmitigatible harm in the form of mental anguish, personal hardship, or substantial consequential damages

§353 – for breach of implied warranty of good workmanship in building a house, recovery for emotional distress will be excluded unless the breach also caused bodily harm or the contract/breach was of such a kind that serious emotional distress was a likely result

-Expectation damages are generally the “most favored” types of damages for breach of contract-“Engorgement” – instead of focusing on plaintiff’s losses, focus on defendant’s unjust gains

-What the expectation theory says is that you had a goal in mind, and that goal was sufficient to create expectations of value that motivated the plaintiff (creation of reliance)-Where expectation damages can be calculated, the courts should grant them

-Holmes says let’s not focus the law on the good people, but focus the law on the bad peopleSo in contracting theory, he sees contracts as involving an option to breach, and that the breach does not entail punitive consequences

-Posner takes it further, by arguing not only that Holmes is right but that individuals should exercise the option to breach when it would be efficient and practical to do so (The “Posnerian producer”)

Roth v. Speck – hairdresser leaves salon and works for cross-town competitor-The sole question: what damages is plaintiff entitled to under these circumstances?-the measure of damages for breach of an employment contract by an employee is the cost of obtaining other service equivalent to that promised and not performed; but in this case there’s no comparative value because the salon was unable to find a new hairdresser that was as good-The best evidence in terms of market value was what the local competitor was going to pay the hairdresser ($25 more); the court uses this to assess loss value of performance in damages

B. Reliance Damages §349 – as an alternative to expectation damages under §347, injured party has a right to reliance damages

Claims: Defenses (lack of):-Prep for performance (essential Reliance) -Foreseeability-Part performance (essential Reliance) -Certainty-Forgone opportunity (essential Reliance) -Causation-Collateral investments (incidental reliance) -Mitigation

-Essential reliance is limited by contract price-Incidental reliance not limited by contract price

-The Hightower argument is that money was raised based on firm’s advice (collateral investments)

-Courts may not allow a party to recover for reliance costs incurred before the contract was made(see Chicago Coliseum Club v. Dempsey; but see Security Stove & Manufacturing Co.)

Walser v. Toyota Motor Sales – Walser & McLaughlin spend in reliance, then don’t get Toyota dealership-Reflects the notion that there is a choice for the judge/jury regarding type of damages (expect/reliance) for a promissory estoppel claim-Serious doubt that Walser & McLaughlin could have satisfied the requirements of the letter of intent; to prove it they obtained land and capital investment (quantified reliance)-When it’s unclear (or unwritten) what the expectation of the contract would be and so you cannot prove them, look to what you were induced to rely upon-“Relief may be limited to damages measured by the promisee’s reliance”

C. Restitution Damages§371 – If money is awarded to protect a party’s restitution interest, it may 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(b) the extent to which the other party’s property has been increased in value

-Relief may be measured as justice requires

Coastal Steel Erectors v. Algernon Blair-No question that the defendant breached; issue is whether quantum meruit damages are correct-Coastal wants restitutionary damages for the fair value of services provided (§371)-The measure of recovery for quantum meruit (restitution) is reasonable value of perform. (§347)-Plaintiff has a choice: he can sue on the contract for expectation/reliance damages, or he can sue for fair value of benefits given restitution damages (off the contract b/c it was breached)

In this case this option provides Coastal with a better recovery

§374 – Party in breach is entitled to restitution for any benefit that he has conferred by way of part perf.In case of breach, restitutionary recovery is limited to non-liquidated damages or unreasonable liquidated damages (in light of the anticipated or actual loss caused by the breach and difficulties of proof of loss)

Lancellotti v. Thomas-Thomas’s agreed to sell their business to Lancellotti for $25k and the building of an addition to the property (if he didn’t build the addition, he would owe them rent)-He doesn’t build the addition, and disappears. He sues to recover the $25k, minus the owed rent-Traditional CL rule was that you don’t get the money back if you breach (but see §374)

-Restitution for the breaching party is only fair value of partial performance

§360 – factors affecting adequacy of damages1) Difficulty of proving damages with reasonable certainty2) Difficulty of procuring a suitable substitute performance by means of money awarded as dmgs3) Likelihood that an award of damages could not be collected

-Specific performance is one type of equitable remedy (also injunctions)-you can only get equitable remedy like specific performance when other remedies unavailable

City Stores Co. v. Ammerman – Tyson’s Corner lease breach dispute-Was an offer made to City Stores by Lerner-Gudelsky? Yes – assurance created option contract

Two conditions had to happen: Tyson’s had to get zoning permit, and get other leases-L-G gives the lease to Sears instead; City Stores seeks an immediate preliminary injunction and seeks specific performance of the lease-Court grants City Stores specific performance because there was no way to calculate expectation damages with any certainty (§360a)-Court does not find that uncertainty of terms precludes remedy by specific performance-Specific performance will not be awarded if it would be too heavy a financial hardship, but simple economic disadvantage is insufficient (§364 – effect of unfairness)

§361 – Specific performance or an injunction may be granted to enforce a duty even though there is a provision for liquidated damages for breach of that duty

§362 – Specific performance or an injunction will not be granted unless the terms of the contract are sufficiently certain to provide a basis for an appropriate order

§363 – Specific performance or an injunction may be refused if a substantial part of the agreed exchange for performance to be compelled is unperformed and its performance not secured to satisfaction of court

§364 – Specific performance or an injunction will be refused if such relief would be unfair because:(a) the contract was induced by mistake or by unfair practices, or(b) the relief would cause unreasonable hardship or loss to the party in breach or third persons, or(c) the exchange is grossly inadequate or the terms of the contract are otherwise unfair

-Specific performance or an injunction will be granted in spite of a term of the agreement if denial of such relief would be unfair b/c it would cause unreasonable hardship or loss to the party seeking relief

ABC v. Wolf – breach of contract dispute regarding Wolf’s negotiations with CBS-ABC sues for equitable relief alleging breach of contract (good faith negotiation)-Specific performance not available b/c it’s a service contract (issues of involuntary servitude)-What about injunction: negative injunction prohibiting him from working for another company-Contract had Good faith negotiation period (exclusive/non-exclusive) and First refusal period

Wolf met with CBS during non-exclusive GFN period, signs contracts during that periodContract had covenant not to compete; this breached his obligation to GFN

IV. WARRANTIES (the §2-300 series)§2-313: Express warranties can be made by: (see p504-05)

a) Affirmation or promiseb) Description of the goods made part of basis of the bargainc) Sample or model made part of basis of the bargain

-not necessary to use words “warrant” or “guarantee”

§2-314: Implied warranty of merchantability

§2-315: Implied warranty of fitness for particular purpose

-difference between “puffery” and verifiable statements that are misleading

Bayliner Marine Corp. v. Crow – boat didn’t go as fast as man wanted for deep sea fishing-Issue is whether there was sufficient evidence to support that manufacturer of sport fishing boat breached express warranty and implied warranties of merchantability and fitness for purpose-“a statement purported to be merely the seller’s opinion or commendation of the goods does not create a warranty” (so statement about performance for offshore fishing was not express warranty)-π needs to prove that seller made an express warranty

Reliance is presumed but existence of warranty is not presumed-however, for implied warranty, every sale by a merchant contains an implied warranty of merchantability unless seller successfully disclaims it-for merchantability claim, need to establish merchantability in the trade-for fitness for particular purpose claim, seller must have reason to know of the particular purpose and that the buyer is relying upon the seller’s skill and judgment in selecting the goods

§2-316 sets forth a series of possibilities for disclaiming warranties-words will be construed to be consistent with each other whenever possible-to exclude/modify implied warranty of merchantability the disclaimer must mention merchantability and the writing must be conspicuous-“knock out” rule removes disclaimer if there is a clearly integrated express warranty-For implied warranty of merchantability, disclaimer can be written or oral, but must use the word “merchantability” to be effective-For implied warranty of fitness for particular purpose, disclaimer must be in writing and conspicuous, but does not need to specifically mention fitness-The catch-all is if you use the words “as is / all faults” in written disclaimer

-Conspicuousness, like unconscionability, is a legal question (not a factual one)-Keep in mind the possible application of parol evidence rule (for express warranties)-If there is a direct conflict, the disclaimer will be knocked out in favor of express warranty-Limitation of remedies is different than limitation of warranties

§2-317 is another interpretive/instructive provision: whenever possible, warranties are interpreted as being harmonious and cumulative (but if there’s a conflict, use hierarchy)

-Implied warranties can be inferred/created by course of performance & course of dealing

V. BUYERS REMEDIES (NO SELLERS REMEDIES)§2-711: Buyers’ remedies in general-when buyer rightfully rejects goods (§2-601, §2-602) or revokes acceptance (§2-608)-if you reject or revoke you can cancel contract

§2-601: when you can reject (single delivery, single installment)

§2-602: requirements for rejection (within a “reasonable time”)

§2-606: what constitutes acceptance of goods (“reasonable opportunity” to inspect and have somehow indicated to seller that they’re ok or even if they’re not ok you’re taking them anyway)

Once you start acting like the owner of the goods, you’ve accepted

§2-608: revocation of acceptance must occur within a “reasonable time” after discover defecta) must be a “substantial nonconformity or impairment”

ANDb) you accepted on reasonable assumption that nonconformity would be cured and seller did not

cure it, ORc) you accepted without discovering nonconformity (latent defect)

§2-508: Limited right to cure by seller(1) Where any tender or delivery by seller is rejected b/c non-conforming and the time for

performance has not yet expired, seller may seasonably notify buyer of intent to cure and may then within the contract time make a conforming delivery

(2) Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable w/ or w/o money allowance the seller may (if he seasonably notifies buyer) have reasonable time to substitute a conforming tender

-If buyer rejects or revokes acceptance, contract is canceled (terminated for total breach)-After cancellation, buyer recovers any purchase price paid plus can get cover (§2-712) or market damages (§2-713), and incidental and consequential damages (§2-715)-If seller doesn’t deliver, buyer may have claim for specific performance under §2-716

Only a possibility if goods are unique or special (or reasonable substitutes not available)

§2-712: Cover – buyer’s procurement of substitute goods (preferred remedy)-After breach, buyer may “cover” by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase substitute goods-Buyer may recover difference between cost of cover and contract price together with incidental or consequential damages-Failure to cover does not preclude buyer from another remedy (but reduces consq dmgs)

§2-713: Market damages for non-delivery or repudiation-Measure for dmgs is difference between the market price at the time when buyer learned of the breach and contract price together with incidental and consequential damages-Market price to be determined as of the place for tender or in cases of rejection after arrival or revocation of acceptance, place of arrival

-Buyer has right for a reasonable time after repudiation to convince seller to perform

-Cover damages = Cover price – Contract price-Market damages = Market price – Contract price

§2-715: Incidental and consequential damages1) Incidental damages include expenses reasonable incurred in inspection, receipt,

transportation, and care and custody of goods rightfully rejected2) Consequential damages include

-Any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and could not be prevented-Injury to person or property proximately resulting from any breach of warranty

-Failing to cover will reduce your consequential damages

-If buyer has accepted, he can get ordinary & direct damages arising under breach under §2-714Measure of damages is difference at time and place of acceptance between value of good accepted and value they would have had if they had been as warranted

-Acceptance/Breach damages = Value as warranted – Value as accepted(Incidental and consequential damages may also be recovered)

§2-719: Seller’s attempt to modify or limit remedy-parties can agree to additional or substitute remedies and may alter the measure of damages-any stated remedies need to be optional unless expressly agreed to be exclusive (“sole remedy”)-(2) when circumstances cause an exclusive or limited remedy to fail of its essential purpose, it should not be used and should award remedy based on another article-(3) consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable; limitation of consequential damages for injury to person for consumer goods is prima facie unconscionable but limitation of damages when loss is commercial is not

“Consumer goods” means for household purposes, not business

Reject Specific performance OR

BUYER Cancel + Recover purch. price + Cover dmgs + Incid./Cons. dmgsOR Market dmgs

Revoke acceptance

If Final Acceptance occurs Dmgs under §2-714Breach of warranty: Value as warranted / Value as accepted+ Incid./Cons. dmgs

-Revocation of acceptance parallels rejection-Cancel is not rescission, it is termination for total breach