MISREPRESENTATION

CONTRACTS OUTLINES II SPRING 2002.

AVOIDING ENFORCEMENT

MISREPRESENTATION

R2d 161. When Non-Disclosure is Equivalent to an Assertion [silence]

A persons non-disclosure of a fact know to him is equivalent to an assertion that the fact does not exist in the following cases only:

a) Where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material

b) Where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing. (161(b) is broad)

c) Where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effects of a writing, evidencing or embodying an agreement in whole or part

d) Where the other person is entitled to know the fact because of a relation of trust and confidence between them [fiduciary].

Note:

Good faith and fair dealing means, not taking more than the legitimate fruits of the exchange/contract. However, there is no contract here. What does the term mean? Perhaps to create a level playing field. Courts are supportive of 2 situations: where the parties had a pre-existing and related contract, and a hidden defect in the item of purchase (where buyer cannot find the defect through ordinary diligence.

Rest. 162: When misrepresentation is fraudulent or material.

1) Misrepresentation is fraudulent [subjective] if it induces another party agree and the maker,

a) knows or believes that the statement is not true.

b) does not have confidence that he states or implies the truth of the assertion,

c) knows there is no basis that he states or implies the assertion. Note: Fraudulent is when one party intended to misrepresent and/or had knowledge that the acts may not be adequately represented. There must be intent to mislead.

2) Misrepresentation is material if it would likely induce a reasonable person (objective) to manifest assent, or if maker knows that it would be likely to induce the other party to do so.

Note:

Materiality means that statement must be significant enough for other party to rely on. In 2), party may be liable even if party does not know statement is not true.

In both 162, a plaintiff can satisfy a misrepresentation allegation by proving either materiality or fraud (scienter). A contract may be subject to rescission even if there is an innocent but material misrepresentation.

Rest. 164: When a misrepresentation makes a contract voidable.

1) If the party manifest assent induced by justified reliance in either a fraudulent or material misrepresentation, the contract is voidable.

2) If party manifest assent induced by justified reliance in either a fraudulent or material misrepresentation made by one who is not a party to the transaction, the contract is voidable. Exception: not voidable if the other party transacted in good faith and has no reason to know of misrepresentation either gives value or relies materially on the transaction.

Rest. 168: Reliance on Assertions of opinion.

1) An assertion is an opinion if it expresses only a belief, without certainty, as to the existence of a fact, judgment of quality, value, authenticity or similar matters.

1) If it is reasonable to do so, the recipient of an assertion of a persons opinion as to facts not disclosed and otherwise known to the recipient may properly interpret it as an assertion

a) That the facts known to that person are not incompatible with his opinion, or

b) That he knows facts sufficient to justify him forming it (does he have the basis for making the statement?).

Note:

Opinions are generally not actionable. Opinions can be actionable if the factual basis is contradictory to the opinion. Statement of opinion amounts to an implied representation that the person giving the opinion does not know any facts that would make the opinion false and that the person making the opinion knows sufficient facts to render the opinion.

A statement of opinion also amounts to misrepresentation of fact if the person giving the misrepresented his state of mind, ie. stating the he holds a certain opinion when in fact he did not). 159 see p. 650 of text.

Rest. 169: When reliance on an assertion of opinion is not justified.

As recipient is not justified in relying on an opinion unless the recipient,

a) is in a relation of trust and confidence to the person whose opinion is asserted that the recipient is reasonable in relying on it, or

b) reasonably believes that, as compared with recipient, the person whose opinion is asserted has special skill, judgment or objectivity with respect to the subject matter, or

c) is for some special reason particularly susceptible to a misrepresentation of the type involved.

Syester v. Banta p. 641 - an affirmative misrepresentation case

Dft sold Plt thousands of hours of dance lesson while assuring Plt that she would become a pro. Dft used Plt's instructor to influence Plt into signing release from a prior suit. Current suit was brought for fraud and misrepresentation of sales and in the signing of release.

Court affirm jury verdict finding fraud.

Notes:

An 'out-of-pocket' rule allows plaintiff to recover the difference between what she parted with and what she received, plus consequential damages that she suffered prior to the discovery of the fraud.

A 'benefit of the bargain' rule; the plaintiff is put in the position she would have been in if the defendant had spoken truthfully. The court in Syester followed this rule. For examples see pg 651.

Hill v. Jones p.652 - Undisclosed information

Plt were sold house that was infested by termites. Dft did not say anything about termite infestation. Plt did not explicitly ask. However, Plt did ask whether a ripple in the wooden floor was a termite problem, Dft said no, it was water problem.

Court held that there is a duty to disclose material facts in accord to 161. There is a duty to disclose material facts affecting the value of property known to the seller but no reasonably capable of being known to the buyer. A matter is material if it is one to which a reasonable person would attach importance in determining the choice of action in the transaction in question.

Notes:

In an affirmative misrepresentation case, the asserter is liable even if the assert id not know of the falsity as long as the statement is material. However, in a non-disclosure, courts normally will not enforce against the defendant if defendant did not know. It is when the defendant should have known that becomes a problem. Courts are split on this issue. Some look to see whether it was reasonable for the defendant not to know.

Factors to help determine whether defendant acted in accordance to good faith and fair dealing:

1) The difference in degree of intelligence of the parties to the transaction,

2) The relation that the parties bear to each other,

3) The manner in which the information is acquired. Information that affects the value of the subject matter of the contract may be acquired by chance, by effort, or by illegal act. It makes a difference on the ethical quality of non-disclosure,

4) The nature of the fact no disclosed. If a vendor conceals an intrinsic defect not discoverable by reasonable care, there is a greater likelihood of the existence of a duty to disclose,

5) The general class to which the person who is concealing the information belongs. It is much more likely that a seller will be required to disclose information than a purchaser,

6) The nature of the contract itself. In releases, and contracts of insurance, practically all material facts must be disclosed;

7) The importance of fact no disclosed,

8) Any conduct of the person not disclosing something to prevent discovery. The active concealment of any material fact - anything that might prevent the purchaser from buying at the price agreed on is, and should be, as a matter of law fraudulent.

In Laidlaw, the buyer somehow knew that the peace treaty was signed and the blockade was lifted. This would increase the price of tobacco. In the course of the exchange, the seller questioned on whether there is any news on anything that would affect the price of tobacco. The buyer did not answer. The seller later sues buyer for failure to disclose. The Supreme Court argued that the seller waived the disclosure by not pressing the buyer to answer. Although this might not seem equitable, the parties in Laidlaw are in a commodity trading market where the market prices are expected to fluctuate. Also, there is no incentive to have the parties do research on the developments of these markets. This would hinter the research market development sector.

Prof. Kronman, on p. 661, argues that disclosure of deliberately acquired information should not be required because it is socially desirable to give parties an incentive to acquire information. Nondisclosure protects a partys investment in the acquisition of such information. Casually acquired information, however, does not reflect an investment of resources and disclosure should be required when the holder knows that the other party is without such information, because disclosure is the least costly method of reducing mistaken contracts.

Integration clauses: Hill court ruled that contract integration clause did not bar the purchasers action to rescind the contract on the basis of fraud because any provision in a contract making it possible for a party thereto to free himself from the consequences of his own fraud in procuring its execution is invalid and necessarily constitutes no defense.

But, some courts distinguish between General (vague merger clauses) and Specific Disclaimers. General disclaimers that say you cant rely on all verbal representations usually wont free X from fraud action. But in Danann Reality v. Harris, it had a specific disclaimer seller made no representations about expenses and profits, and the buyer couldnt win.

UNCONSCIONABLILITY

UCC 2-302: Unconscionable contracts or clauses

1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may [a] refuse to enforce the contract, or [b] may enforce the remainder of the contract without the unconscionable clause, or [c] may so limit the application of any unconscionable clause as to avoid any unconscionable result.

2) When it is claimed or appears to the court the contract or any clause maybe unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.

Commentary to 2-302

The basic test is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.

The principle is one of prevention of oppression and unfair surprise and not the disturbance of allocation of risks because of superior bargaining power.

Section 2 is for the court's consideration, not the jury's.

Notes: Restatement 208 express the same ideas as UCC 2-302 1).

Williams v. Walker p.669

The Plt bought household goods from Dft under installment payment plan. The installment contract had an add-on clause, whereby installments are made on pro-rata basis; failure to pay for one item results in repossession of all items not fully paid off. Each new item became security for all items not fully paid off. Plt failed to pay installment, Dft sought to replevy all items purchased by Plt.

Court reasoned that unconscionability is recognized to include an absence of meaningful choice on part of one of the parties and with terms that are unreasonably favorable to the other party.

Meaningful choice can be determined by examining the circumstances surrounding the transaction, such as a gross inequality of bargaining power, manner in which the contract was entered into (did each party to the contract, considering his education, have a reasonable opportunity to understand the terms of the contract). Court noted that normally one who signs a contract would be held to assume the risk of entering a one-sided contract. However, when a party has little bargaining power, hence little real choice, signs an unreasonable contract with little or no knowledge of the terms, an exception may apply.

Reasonableness or fairness is considered in the light of the circumstances existing when the contract was made. The terms are then considered in light of the general commercial background and the commercial needs of the particular trade or case. Corbin suggest the test as being whether the terms are 'so extreme' as to appear unconscionable according to the more and business practices of time and place.'

Notes:

Look at contract as of signing: the contract must be judged as of the facts existing at the time of signing it. The fact that one of the parties (usually the seller) acted in bad faith after the contract was signed has no effect on whether the contract itself was unconscionable (but the post-contract actions may constitute a violation of the partys duty to perform in good faith, imposed by 1-203.

Procedural unconscionability may refer to either lack of choice by one party or some defect in the bargaining process (such as quasi-fraud or quasi-duress). Substantive unconscionability relates to the fairness of the terms of the resulting bargain.

Unconscionability is normally used as a defense (a shield not a sword). In other words, unconscionability can be use to rescind contracts or strike out unconscionable clauses, but is not normally use to provide restitution

(Should the doctrine also apply price term in addition to provisional terms?) Ahern v. Knecht p. 677. The air-conditioner case. Plt called Dft to repair air-conditioner. Dft required $154 for the service call and told Plt that the charge was $762. Plt paid because she had an appointment. But, repairer did not repair the air-conditioner. Plt brought suit. Court allowed Plt to recover the remainder of her money minus the price of the service actually performed by Dft.

Courts have divided in cases alleging unconscionable price terms because of the different views about how to determine when a price is excessive. Recently, courts have allowed for restitution and rescission of unconscionable contracts. However, compensatory damages are still normally avoided.

America Software v. Ali p. 683

Alis salary was composed of salary and commissions. The company allowed her to take a regular draw against commissions. If it exceeded the draw, she would get the commissions. If she didnt meet the draw, then she was still allowed to take the draw, but the balance would carry over. If ultimately, she didnt meet the draw, they wouldnt make her return the payment. Commissions were only payable if the customer she recruited made actual payment with American Software. With voluntary resignation, her entitlement to commissions would cut 30 days thereafter. Her big clients didnt pay within 30 days and American Software refused to pay. She sues under a theory of unconscionability.

Court discussed 2 elements in analyzing unconscionability: procedural and substantive.

Substantive unconscionability focus on the actual terms of the agreement while procedural unconscionability focuses on the manner in which the contract was negotiated and the circumstances of the parties.

Indications of procedural unconscionability include 'oppression, arising out of inequality of bargaining power and the absence of real negotiation or a meaningful choice and surprise, resulting from the hiding the disputed term in a prolix document. Indication of substantial unconscionability include by contract terms so one-sided as to shock the conscience. Trade usage, whether the terms are commonplace. Ali court rejected the lower std. that the terms were unreasonable. Must shock the conscience. Procedural: Ali was an sophisticated businesswoman who had successfully negotiated several big contracts. Contract was not hard to understand, she acknowledged that she knew of the clause and what it meant. It was not a standard adhesion contract. She changed some provisions and had some bargaining power. She also had an attorney to review the contract.

Substantive: Must be looked at at the time the contract was entered into. It is irrelevant what happened in hindsight. It is irrelevant that she was entitled to a large commission, but for the fact that client didnt pay. Substantively, the ct. looks at allocation of risks. For , risk was that she would be extremely successful and wouldnt get all of the commissions. The risk to American was that if she was lousy and didnt meet the draw, they would have to take a loss. It was not one-sided. Plus, the term was commonplace.

Notes:

Courts will generally emphasize that contracts should not be judged in hindsight. Subsequent performance may constitute breach of duty of good faith but has no bearing on unconscionability at time contract was made.

PUBLIC POLICY

Contracts that are unenforceable because of 'illegality' in that they violate or runs directly contrary to public policy.

Karlin v. Weibberg p 716 - post-employment restrictive covenant

Plt, a doctor, entered into an employment contract with Dft, a new doctor, which contain terms restricting the Dft's ability to practice in a 10 mile radius of Plt's practice after the employment was terminated. After employment agreement ran, Dft stayed as a partner with Plt. However, partnership later ended and Dft opened up a new practice near to the Plt.

The Court held that restrictive covenants are not per se violations of unconscionability.

A restrictive covenant will be found to be reasonable when [1] it protects the legitimate interest of the employer, [2] imposes no undue hardship on the employee, [3] is not injurious to the public.

The Court distinguishes Dwyer, a case holding attorney restrictive covenant as per se unreasonable. Court argued that in Dwyer the covenant denies clients the right to seek an attorney of her choosing, where as in this case the patients could travel to see the Dft. Also, the ABA specifically disallows such practices and the courts have been given the power to regulate lawyers. In this case, the American medical association does not disallow restrictive covenants.

Considerations & Limitations:

After it is determined that employer has a legitimate interest to protect, the covenant will be unenforceable beyond the period of time which the employer needs to protect his practice.

Nor will the covenant be enforceable beyond the geographical area needed to protect the employers practice. Whether the geographical dimensions of the covenant make it impossible, as a practical matter, for existing patients to continue treatment.

The covenant will be unenforceable if it restricts the employee from engaging in activities not in competition with those of his former employee.

Also, must consider undue hardship. A showing of personal hardship, without more, will not amount to an undue hardship. But, if youre denying him the right to earn a livelihood within the relevant community then it seems suspect.

Must examine the effect that enforcement of the covenant would have on public interest. The public interest being taken into account is patient choice to choose which physician they want to see. If the covenant completely excludes patient choice, it will favor striking the covenant.

Notes:

Examples of covenants that could be enforced. 1) Buyer purchases business, doesnt want seller to compete with buyer in the business he just sold. 2) partners being prevented from competing with the partnership after he leaves 3) prevents an employee from disclosing or using trade secrets gained from employer

California Ct. in Howard v. Babcock acknowledges that its law firms are not stable and partners leaving are a problem and the interest is legitimate so they decide although going against weight of authority, the preventing partners from competing with the firm is enforceable.

Traditionally courts have been willing to adopt a blue-pencil approach. If they felt that a covenant was overbroad, the approach was to redraft it so it was reasonable. Most will enforce overly-broad non-compete up to reasonable limits. There is a backlash against this recently. In Kolani v. Gluska: will reform contracts on the grounds of mistake, but wont blue-pencil to save an illegal contract.

The blue-pencil approach gives employers the incentive to create an overbroad covenant and wait for employee to bring a lawsuit and rely on the courts to reform it.

R2d 187 Non-Ancillary Restraints on Competition [clearest example is an agreement between competitors to fix prices]

A promise to refrain from competition that imposes a restraint that is not ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade.

R2d 188 Ancillary Restraints on competition

1) A promise to refrain from competition that imposes a restraint that is ancillary to an otherwise valid transaction or relationship is unreasonably in restraint if

a) the restraint is greater than is needed to protect the promisees legitimate interest, or

b) the promisees need is outweighed by the hardship to the promisor and the likely injury to the public.

2) Promises imposing restraints that are ancillary to a valid transaction or relationship include the following:

a) a promise by the seller of a business not to compete with the buyer in such a way as to injure the value of the business sold;

b) a promise by an employee or other agent not to compete with his employer or other principal

c) a promise by a partner not to compete with the partnership.

R.R. v. M.H. p 730

Agreement provided that surrogate will be inseminated with semen from Natural Father. Natural Father will have full legal parental rights. Mothers rights, however would not terminate automatically by letting Father take the child, but if she sought to enforce her parental right, by way of custody or visitation rights, she would forfeit her rights under the agreement and would be obligated to reimburse father for all expenses and fees. The mother ended up wanting to keep the baby and did not give the money paid to her back.

Court cited to a NJ case Matter of Baby M, where the court held that surrogacy is not illegal when the surrogate mother volunteers, without any payment, to act as surrogate and is given right to change her mind. The Court here noted that the MA law also states that payments towards expense of birth may be made but no direct payment for the custody rights. As a practical matter, court noted that although the money was paid for expenses, mother had virtually surrendered her parental rights because she has to pay back the money and reimburse the natural father for all expenses should she revoke the contract. Court also noted that by statute, the mother cannot be make the decision to give up the baby until 4 days after giving birth to the baby. Here the mother had decided before becoming pregnant.

Notes:

The court held that if there is no money involved and that the mother has at least 4 days after delivery to make the decision, the surrogate would be enforceable. But, for all practical purpose this will not induce people to enter into such a contract. In contrast to this case, Johnson v. Calvert: Calverts supplied both egg and sperm to Johnson. The court reasoned that gestational surrogacy does not involve surrender of parental rights for money because the surrogate is being paid for gestating service and not for surrender of parental rights. It was not involuntary servitude b/c woman could abort. They felt that prior decisions were too paternalistic. They felt that women could enter into these contracts know what they are doing. The court puts alot of weight on who is the biological parent (R.R. court recognize this in footnotes). Presents the purest of form of public interest. None of the principles of avoiding enforcement would apply (no unconscionability, no fraud, no duress etc) there is no question on the voluntary and fully informed nature of the case.R2d 178: When a Term is Unenforceable on Grounds of Public Policy

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

2) In weighing the interest in the enforcement of a term, account is taken of

a) the parties justified expectations,

b) any forfeiture that would result if enforcement were denied,

c) any special public interest in the enforcement of the particular term

3) In weighing a public policy against enforcement of a term, account is taken of

a) The strength of that policy as manifested by legislation or judicial decisions,

b) The likelihood that a refusal to enforce the term will further that policy

c) The seriousness of any misconduct involved and the extent to which it was deliberate, and

d) The directness of the connection between the misconduct and the term.

JUSTIFICATION FOR NONPERFORMANCEI. MISTAKE

Mistakes may constitute an excuse from performance if, when the contract was made, facts not known makes the desirability of the contract unfavorable to one party. In order for the mistake doctrine to apply, the facts must be in existence at the time the contract was made, but was unknown to at least one of the parties. These are normally not easy cases to win. Parties normally enter into a contract with some degree of incompleteness of information and foreseeability. Any thing could occur to make a contract unfavorable to one party. People take risks and if the law is liberal in letting people out of a contract b/c some risks manifested, a lot of contracts would be void. The courts are quite skeptical about allowing rescission of such contracts.

Mutual mistakes

In a mutual mistake case, there is a problem of whether there was mutual assent necessary to the formation of valid contracts.

Rest. 152: When mistake of both parties makes a contract voidable

1) Where a mistake of both parties at the time a contract was made as to the basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under 154.

2) In determining whether the mistake has material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.

Rest. 154: When a party bears the risk of a mistake

A party bears the risk of a mistake when

a) the risk is allocated to him agreement of the parties, or

b) he is aware, at the time the contract is made, the 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 it is reasonable in the circumstances to do so.

Leenawee County Board of Health v. Messerly p. 747

A small apartment was sold to the Plts. At one time, the plot was an acre and if it was still that big, the parties could fix the problem by installing a new septic tank. The Plts bought the apt and days after they found out that the septic tank did not satisfy legal criteria and the city condemned the property. There was no way to make the property habitable. The Plts wanted the court to rescind the contract because of mistake.

Court rejected the categorization of mistakes as those that affect the essence of the consideration from those which go to its quality or value (essence/collateral distinction). The court adopted the approach of Rest. 152 and 154.

The elements of 152(1) are:

1) Requirement that the mistake be mutual,

2) Fact is in existence at the time the contract was made,

3) The mistake goes to the basic assumption of the contract.

Here, the basic assumption was that the property would generate revenue.

Court applied 154 and pointed out that the first section applies to this case because there was a clause in the contract that the purchaser accepts the property 'as is.'

Notes:

Looking at Rest 154, the drafters addressed the allocation of risk as a factor that should be considered, 'did the agreement state an allocation of risk.' if there were no allocation of risk in the agreement, the rest. look to whether one party was lacking in diligence in finding out. Finally, if these fail, the rest. looks to who is the better bearer of the cost of mistake or risk.

In the Gartner case (p754), the court argued that the wet land regulations is difficult to determine. It was not very fair for the buyer to bear the risk in this case. The court argued that the clause that buyer take the land and all regulations subjected to, is not fair. The court emphasized that the seller's agent had told the buyer that property zone was ok for what the buyer would want to do. (the agent was not aware of the zoning regulations). In this case the buyer could have used a misrepresentation to recide the contract see Rest 164. (you don't need intentional misrepresentation to succeed.) The Garnter case probably fit better under the misrepresentation argument.

Derouin v. Granite p.757. The buyer had allowed too much time to run and made changes to the property and the court refused to rescind the contract. (buyer bought a house with a defective chimney). Court would have granted rescission, but b/c of the extensive improvements, wouldnt give rescission. Cant put the parties back to status quo.

In a residential case, the result would be quite different. Implied warranty of habitability. Landlord has superior control, and its only fair that he cant lease out property that is not habitable. But in the Lenawee case, it is a commercial setting and the Pickles arent considered to need that kind of protection.Unilateral mistakes

Rest. 153: When mistake of one party makes a contract voidable

Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in 154, and

a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or

b) the other party had reason to know of the mistake or his fault caused the mistake.

Wil-Fred v. Metropolitan Sanitary District p.758

Wil-freds subcontractor, Ciaglo, was mistaken and thought that large gravel trucks could drive across plastic pipes, and so submitted a low bid. 2 days after submitting its bid, Wilfreds realized Ciaglos error and tried to withdraw. Sanitary Dept. forced the bid on them. Wil-Fred wanted rescission alleging that the company would be irreparably injured if forced to perform the contract at such an unconscionably low price or if forced to forfeit its $100,000 bid deposit. Sub, Cialgo claimed that it would go bankrupt if forced to perform.

The court cited four factors for determining whether a unilateral mistake may offer grounds for rescission.

1) Unilateral mistake relates the material feature of the contract?

2) Mistake occurred notwithstanding the exercise of reasonable care,

3) Mistake is of such grave consequence that enforcement of the contract would be unconscionable,

4) Other party can be placed at status quo.

The court noted that for 1), the Plt stands to lose $100,000 or 10% of the contract price. As for 2), the court noted that Ciaglo had a good track record and their mistake was partially the result of the District's misleading specifications. (Under 153(a), if the mistaken party is negligent, the party might not be able to get rescission. However, Ciaglo might satisfy 153(b) where it is possible that District is responsible for the mistake. The court thought that Dft had exercised reasonable care by reviewing the price quotations twice and relying on Ciaglo which had honored its past price bids. The court believed that the Plt and Ciaglo would suffer grave consequences (loss of bonding capacity and bankruptcy). Finally, court noted that the District was notified by Plt that there was an error before the opening of the bids.

Notes:

If one party were in fact aware of the other's material mistake (or should have known because of the contract being 'too good to be true'), this would be a factor militating in favor of a duty to disclose (161). 153 permits avoidance of a contract for 'mistake of one party' by either 1) a mistake such that enforcement would be unconscionable or 2) that other party either has reason to know of or be responsible for causing the mistake.

Unconscionability in context of 208 or UCC 2-303 is complex. However 'unconscionable' in the context of 153 seems to mean merely severe enough to cause substantial loss (Wil-Fred "substantial hardship.")

Many courts have held that a unilateral mistake must be 'non-negligent,' but there is a clear tendency to relax this requirement where the proof of mistake is strong and the effect of enforcement will be devastating or at least severely injurious to the mistaken party. See 157, expressly negates any requirement that the mistaken party be non-negligent, requiring only that its conduct not fall below the level of good faith and fair dealing.

II. CHANGED CIRCUMSTANCES: IMPOSSIBILITY, IMPRACTICABILITY AND FRUSTRATION

[Rules on Impracticability]

Rest 261. Discharge by Supervening Impracticability

Where, after a contract is made, a partys performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

Rest 261, Comment d.: makes clear that mere lack of profit under the contract is insufficient: Impracticability means more than impracticality. A mere change in the degree of difficulty or expense due to such causes as increased wages, prices of raw materials or costs of construction, unless well beyond the normal range, does not amount to impracticability since it is by this sort of risk that a fixed price contract is intended to cover.

Comment d also provides: a severe shortage of raw materials or of supplies due to war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in cost or prevents performance altogether may bring the case within the rule stated in this Section. Comment b, basic assumption: is also simple enough in the cases of market shifts or the financial inability of one of the parties. The continuation of existing market conditions and of the financial situation of one of the parties are ordinarily not such assumptions, so that mere market shifts or financial inability do not usually effect discharge under the rule stated in this Section. [i.e. unexcused from performance and liable for breach]UCC 2-615. Excuse by Failure of Presupposed Conditions

Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance [UCC 2-614]:

(a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

(b) Where the causes mentioned in paragraph (a) affect only a part of the seller's capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may allocate in any manner which is fair and reasonable.

(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.

[Rules on Impossibility]

Rest. 262. Death or Incapacity of Person Necessary for Performance

If the existence of a particular person is necessary for the performance of a duty, his death or such incapacity as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the contract was made.

Rest. 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 deterioration as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the contract was made.

Rest. 264. Prevention by Government Regulation or OrderIf the performance of a duty is made impracticable by having to comply with a domestic or foreign government regulation or order, that regulation or orders is an event the non-occurrence of which was a basic assumption on which the contract was made.

UCC 2-613. Casualty to Identity Goods

Where the contract requires for its performance goods identified when the contract is made, and the goods suffer casualty without 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 (Section 2-3240 then

(a) if the loss is total the contract is avoided; and

(b) if the loss is partial or the goods have so deteriorated as no longer to conform to the contract the buyer may nevertheless demand inspection and at his option either treat the contract as avoided or accept the goods with due allowance from the contract price for the deterioration or the deficiency in quantity but without further right against the seller.

[Rules on Frustration]

Rest. 265 Discharge by Supervening Frustration

Where, after a contract is made, a partys principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.

See also UCC 2-615

Impossibility: Some intervening event that was unforeseen (not = unforeseeable) that renders the performance impossible. [Usually applies to destruction of unique goods, such as a racehorse]

Impracticability: performance is not literally impossible, just extremely burdensome and difficult to the we point we call it impracticable.

Mineral Park Land v. Howard: agreed to extract all the gravel from s land to build a bridge. They began digging, then hit water. It was demonstrated to the court that it would cost 10x-12x as much to continue extracting wet gravel. Court said that neither party contemplating extracting gravel under water, and that the burden on was too high. Not a risk he assumed. [Wilmarth note: this seems like a mutual mistake case. But were focusing on intervening impracticability. For the exam, if it is a condition that exists before the contract forms, and one or both of the parties dont know about it, assume it is a mistake case.

Frustration of purpose: sort of a subset of impracticability.

Krell v. Henry (p. 772): wanted to view Edward VIIIs coronation parade. Was called off. Court let off, said that both parties understood that the entire purpose of renting the hotel suite was to view the coronation parade. Contract had lost all its value to because of a supervening change in extrinsic circumstance.

R2d incorporates the doctrine of impossibility (262, 263, 264), impracticability (261, 266) and frustration (265, 266).

Unless it was a likely occurrence, the courts havent required perfect foresight because hindsight is always 20/20.

UCC 2-617 addresses impracticability.

If it is a scriveners mistake, the court can reform the contract, but cant re-allocate risks

Karl Wendt Farm Equipment Co. v. International Harvester Co.

F: IH sold their farming machinery business to Case. Case picked which dealerships they wanted in areas of conflict where they already had dealerships set up. Did not pick Wendt. IH acknowledges that the contract had a standard clause that if either party wanted to voluntarily terminate, have to give 6 months notice.

To make out a claim for the defense of frustration, according to a South Dakota Ct. followed by this ct.:

1) The purpose frustrated by the supervening event must have been the principal purpose (the object must be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense. (265 Comment a).

2) The frustration must be substantial (it is not enough that the contract has become less profitable for the affected party or even that it will sustain a loss. The frustration must be so severe that it is not fairly to be regarded as within the risks that he assumed in the contract. (265, Comment a)

3) The frustrating event must have been a basic assumption of the contract

H:

Appellate court felt that impracticability did not applyneed more than a market downturn. neither market shifts nor the financial inability of one of the parties changes the basic assumptions of the contract such that it may be excused under the doctrine of impracticability. R2d 261, Comment b. To hold otherwise would not fulfill the likely understanding of the parties as to the apportionment of risk under the contract. IH had alternatives. In accordance with good faith and fair dealing, the court felt that there should have been some negotiation, and only in an emergency situation could termination be appropriate.

Frustration of Purpose wasnt allowed to go to jury. IH appealed, but court said that mutual profitability was the primary purpose. This Ct. rejected this argument b/c the primary purpose analysis would be meaningless b/c mutual profitability would be implied as the primary purpose of every contract.

Section II of the opinion. IH argued that under the contract they could either add or subtract different lines of equipment at its discretion. This meant that they could delete all of them. Court said that if it were read that way, the 6 mos. Termination clause would be meaningless. In contract interpretation: interpret it to make all the clauses mean something.

Dissent: takes a different view on how severe the market shift was and felt that the jury should have been able to decide.

Northern Corp. Chugach Electric Co. (Alaska 1974): Two parties agreed that a rock needed to be dug up from the land and that the rock would then be dragged on the ice. The winter was particularly warm, and the ice would not support the weight of the rock. Alternative transportation would be expensive. Contract was rescinded by arguing that the parties did not assume this unforeseen intervening cause.

Notes: pp. 783 - 786

Elements of the doctrine of impracticability of performance and frustration of purpose are essentially the same. They require the disadvantaged party to show:

1) substantial reduction of the value of the contract (performance is made impracticable or a partys principal purpose is frustrated

2) because of the occurrence of an event, the nonoccurrence of which was a basic assumption of the contract;

3) without the partys fault; and

4) the party seeking relief does not bear the risk of that occurrence of the event either under the language of the contract or the surrounding circumstances. [Compare R2d 261 and 265; UCC 2-615 is also very similar b/c it predated Rest.]

Harriscom v. Harris (p. 789) [impracticability due to government interference]

F: contracted with to sell radios. is a foreign firm that distributes radios to Iran. US Gov. refused to let export model 2301 to Iran. After negotiations, was allowed to fulfill 3 out of remaining 8 outstanding orders to Iran. sustained a loss in performance bond to Iran, and to . alleged that made a voluntary settlement with the government. sues for breach of k for the five remaining unfilled orders..

H: The court argued that did not have a meaningful choice but to submit to the governments demands. Also, the contract specifically contained force majeure clauses to excuse from performance under present circumstances, namely governmental interference.

Notes:

As the case suggests, when the event on which the claim of impracticability rests is some form of governmental action, the courts have been much more willing to grant relief than cases in which the event is war, natural disaster, or market change.

UCC 2-615 makes specific mention of compliance in good faith with any applicable foreign or domestic governmental regulation or order as the basis for relief

R2d 264: recognizing compliance with foreign or domestic governmental order as a basis for excuse under the doctrine of impracticability.

Examples: contract to convey easement discharged when govt. condemned land; performance of strip mining lease frustrated by public outcry and flood of environmental legislations and litigation that followed

It is important to note that under the analysis in Harriscom, it is not necessary that the law require or prohibit conduct, so long as the party seeking relief is acting in good faith compliance with the law (International Minerals & Chemical Corp v. Llano, Inc.: buyer of natural gas under long-term supply contract excused by compliance with governmental environmental regulation, even though buyer took action earlier than law required it to.)

Despite this strong policy in favor of excuse where performance is prevented by supervening governmental action, UCC in Comment 11 to 2-615 also states generally that the excused seller must fulfill his contract to the extent that the supervening contingency permits. Do you think ct. in Harriscom gave too little consideration to s contention that might have been able to conduct some of its Iranian business through its Indian licensee?

If relief for impossibility b/c of governmental regulation should be available to buyers as well as sellers, it seems that the court might at least have granted Harriscoms claim for refund of the deposit it paid on the sale contracts. R2d 272 comment b, suggesting the appropriateness of restitution in cases where one party has rendered some performance under a contract which is later discharged for reasons of impracticability or frustration.

Ct. in Harriscom relies on the force majeure clauses in the k. Besides governmental regulation, force majeure clauses also cover other excusing events such as windstorm, fire, flood strikes, and labor disputes. Force majeure clauses for the most party track ground now covered by UCC 2-615 and Rest. But may attempt to go further and permit excuse where the law would not do so. Cases have shown that this is permitted. But of course, sweeping exculpatory clauses can be struck down and tested against good faith.

Impossibility, impracticability, and frustration of purpose are excuses from performance, but courts will not go further and reform the contract to acct. for changes in circumstance.

Modification

Problem 9-3

Alaska Packers Association v. Domenico (p. 800)

H: Pre-existing duty rule: Where a party merely does what he is already obligated himself to do, he cannot demand an additional compensation there. Rest. 73: No consideration, no binding modification.

Notes:

R2d 89. Modification of Executory Contract

A 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 by the parties when the contract was made; or

b) to the extent provided by statute; or

c) to the extent that justices requires enforcement in view of material change of position in reliance on the promise.

R2d 89(a): relief from unanticipated difficulties can be sufficient consideration for a modification benefiting the affected party. 89 Illustration 1: when solid rock unexpectedly encountered making removal 9 times more expensive, owners promise to pay increased amount for excavation is binding).

Basically, R2d 89doesnt go as far as UCC, but simply says that there are some circumstances where a modification may be binding w/o consideration. 89(c): modification will induce a material change in position such that injustice will result if enforcement is not forthcoming

Schwartzreich v. Bauman-Basch (p. 808): Employee reported to employer that he had a better salary offer. The parties tore up old contract and wrote a new one. So, there was mutual rescission followed by a new and valid contract (fresh consideration).

Kelsey-Hayes Co. v. Galtaco Redlaw Castings Corp. (p. 809)

F: Galtaco supplied castings to KH a supplier of brake assemblies. KH agreed to 2 price modifications. They had a req. k on a fixed price basisGaltaco had agreed to fulfill KHs needs.

H: Galtaco made an improper threat and KH had no other reasonable alternatives except to assent. This is sufficient for a claim of duress.

R:

Although Galtaco was losing money, but they had no legitimate defense to nonperformance. They didnt argue impracticability or change circumstance that would justify recission.

For duress, a buyer coerced into executing a modification to an existing agreement must at least display some protest against the higher price in order to put the seller on notice that the modification is not freely entered into. The court felt KH by protesting informally had given Galtaco enough notice that the matter was unsettled.

UCC 2-209(1): The drafters of the UCC express the view that one-sided modifying agreements, do not support consideration, are commonplace occurrences and should be routinely enforced except in the present of special circumstances. Of course any modification must meet the test of good faith. Any modification exhorted without good faith would be invalid.

UCC 2-209. Modification, Rescission and Waiver

1) An agreement modifying a contract within this Article needs no consideration to be binding.

2) A signed agreement that has a no oral modification clause, the NOM clause is ineffective (i.e. not binding) if it is contained on a form supplied by a merchant unless either 1) the other party is also a merchant or 2) the other party (usu. customer) has separately signed the NOM clause. This permits parties to make their own statute of frauds.

3) If falls under statute of frauds, must be in writing

4) Although attempt of modification does not satisfy the requirements of subsection 2 or 3 (a valid no-oral-modification clause), it can operate as a waiver

5) Party who has made a waiver can retract the waiver by reasonable notification that strict performance will be required of any term waived, unless other party has materially changed their position in reliance on waiver.

Comments to UCC:

Comment 2:

No consideration, but modifications must meet the test of good faith. Use of bad faith to escape performance is barred and the extortion of a modification without legitimate commercial reason is a violation of duty of good faith.

The test of good faith btwn merchants or as against merchants includes observance of reasonable commercial stds. of fair dealing in the trade ( 2-103), and in some situations may require an objectively demonstrable reason for seeking a modification.

The reason need not rise to the level to be excused from performance under 2-615, 616

Comment 3:

Subsections (2) and (3) are intended to protect against false allegations of oral modifications.

The Statute of Frauds provisions of the UCC are expressly applied to modifications under subsection 3. The delivery and acceptance test is limited to goods that have been already accepted (in the past). Modification cannot be proven with oral testimony if the price is more than $500 since the modification must be shown by an authenticated memo.

Subsection 2 permits parties to make their own Statute of Frauds in regards to any future modification. If a consumer is held to it, must be separately signed.

Comment 4:

Subsection 4: gives legal effect to the parties actual later conduct such that can waive no oral modification (subsections 2 & 3). Subsection 5 regulates how the waiver works. Example: Buyer and seller have k that has NOM clause and also sets firm delivery date. Buyer tells Seller orally, I wont insist on adherence to firm delivery dateyou can take an extra 3 wks. Buyer will probably be held to have waived the benefit of the no-oral-modification clause, and will thus be held to have effectively modified the contract to provide for a later delivery date.

Roth Steel Products v. Sharon (cited by Kelsey-Hayes) applies a two-part test.

1. A party may in good faith seek modification when unforeseen economic exigencies existed which would prompt an ordinary merchant to seek modification in order to avoid a loss on the contract

2. Even where circumstances do justify asking for a modification it is nevertheless bad faith conduct to attempt to coerce one, by threatening breach.

On this point, the court conceded that the inference of bad faith arising when bad faith is threatened may be rebutted if the party has a good faith, legitimate defense/excuse for not performing. Under the UCC, honesty in fact is required.

Most courts are more relaxed than the Roth Ct. and only require that there be a good faith reason for asking for the modification.

secret intention to never pay the higher prices may amount to bad faith on the buyers part. In KH, informal protest, not formal reservation of rights, was enough, but in United States ex rel. Crane Co. v Progressive Enterprises, Inc., buyers secret intention never to pay higher price not in keeping with good faiths requirement of honesty in fact. This decision was limited later by 4th Cir. by recognizing that asking for modification was asking in good faith, and there was no duress. The problem of not being honest was not the focal point of the decision. Some cts. seem to suggest that if there ia good faith reason for requesting modification, there is a duty on both sides to make some concessions.

Brookside Farms v. Mama Rizzos, Inc. [interaction of modifications & Statue of Frauds]

F: Fixed price k for delivery of basil. The supply conditions changed and the basil supplier requested various increases in prices. sues Mama to recover $ on the basil that Mama accepted but did not pay for.

H:

As to first price increase, Mama promised to put it in writing and a valid writing under Statute of Frauds only requires some writing signed by the party against whom it is to be enforced (here, Mama). Since they made one promise, they made an implied promise to change the other two and Brookside relied on this promise. On estoppel grounds, they made a valid written modification of the contract (not too convincing). Based on these actions, MRI cannot now invoke the NOM clause to bar s claim that no valid modification occurred.

Also, regular statute of frauds 2-201 should apply to 2-209 (Wilmarth not wholly convinced, but court rests decision on this). An exception to the Statute of Frauds is that Mama ordered, paid and accepted the goods. Actual performance can override statue of frauds b/c that is proof that a contract exists. Thus, the payment due on the 3,041 lbs. shipped is enforceable. is entitled to payment. The no waiver clause could not save here. Their argument that the NW protected them from waiver of the NOM clause fails although they could still argue that they didnt waive NOM clause because this falls outside of statute of frauds the transaction need not be in writing.Notes:

Waivers are one-sided concessions: ok, you can be 5 days late on this shipment. Waivers, by their nature dont require consideration. If something was given for the waiver, however, it is binding just like a little contract on its own. Absent consideration, waivers are generally retracted up until the time a particular performance is to occur. Of course, if the other party has detrimentally relied, then you can no longer retract under PE.

2-209(4) and (5) can be implied by conduct or communications. It is not clear that a NOW clause has any real standing under 2-209, it is not clear that parties can contract to make the a no waiver clause such that it cannot be binding unless it is in writing and signed.

UCC 2-209 imposes no formal requirement on modifying an agreement, except that 2-205 does impose a writing requirement for a firm offer. Most courts have held that a modification must be in writing not when the modification brings an oral contract within the statute. Commentators have disagreed: under 2-201 memorandum only need specify quantity and price can be expressed orally. Thus, oral modification would be enforceable unless it would change the quantity term or increase the price above $500 UCC threshold. 2-209(4): although an attempt at modification or rescission does not satisfy the requirements of 2-209(2) and (3), it can operate as a waiver. Most courts have generally held that the NOM clause may be waived, by oral agrmt to that effect, or by some combination of words and conduct that in the circumstances evidences the parties willingness to dispense with its protection. Merger clauses prevent parol evidence of earlier or contemporaneous agrmts. But, parol evidence does not bar subsequent agmts. Thats where NOM comes in. Thus, when both merger clause and NOM are employed by the drafter, this is an attempt to ensure that any dispute btwn the parties will be resolved in writing only. Accord and Satisfaction: two parties dispute how much is owned on a particular obligation. A offers B less than full amount but this amt. represents how much A acknowledges is owing and probably includes a bit more to induce B to agree to settle the dispute. In 1990, UCC 1-207 was amended and says that you cannot reserve your rights on an accord and satisfaction. Today, 1-207(2) makes clear that cashing a full payment check even with reservation of rights still constitutes an accord and satisfaction, barring the creditor from collecting the unpaid balance, unless creditor can establish a ground for avoiding the accord and satisfaction such as duress. Accord and Satisfaction will generally not work unless there is a good faith legal excuse for not paying the full amt.CONSEQUENCES OF NONPERFORMANCE

When performance of a duty under a contract is due any non-performance is a breach. See Rest. 235(2). However, performance is not considered to be 'due' if nonperformance is justified. There are three important situations in which a party's nonperformance may be justified and therefore not a breach.

I. MATERIAL BREACH

Most contracts are bilateral in nature, with both parties obligated to perform at a specified time. Ins such cases, when the time for performance arrive, one party may fail to render all or some of its promised performance. The issue raised in this instance is: when does one party's failure to perform justifies the other party in refusing to render a performance of his own?

Most breach fails into three categories: partial breach (technical breach), material breach and total breach.

Partial breach: these are normally trivial breaches. The general rule is that in a partial breach, the non-breaching party may not stop performing. However, they may sue for past and present damages.

Material breach: Rest. 241 lists factors that are used in determining whether a breach is material. If a breach is material, the non-breaching party may suspend performance until the breach is cured. See Rest 237.

Total breach: Rest. 242 requires a total breach to first be material (241) along with an analysis of a low likelihood of cure and 2) the prejudice to the non-breaching party. When a total breach occurs, the non-breaching party does not need to perform and may sue for future damages in addition to any past and present damages.

Rest. 234: Order of Performances

(1) Where all or part of the performances to be exchanged under an exchange of promises can be rendered simultaneously, they are to that extend due simultaneously, unless the language or the circumstances indicate the contrary.

(2) Except to the extent stated in Subsection (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 circumstances indicate the contrary.

Note:

234 set forth the constructive conditions that performances that can be rendered at the same time are due simultaneously. However, if performances cannot be rendered at the same time, the performances requiring the longer period of time must be rendered before the performance requiring a shorter period of time will be due.

Rest. 237: Effect on Other Party's Duties of a Failure to Render Performance

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 performances due at an earlier time.

Note:

Here the restatements place a constructive condition that there is no previously uncured breach in a contract.

Rest. 240: Part Performances 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.

Note:

If a contract is divisible, this allows the court to provide another form of recovery. The doctrine of divisibility applies when the overall contract can be divided into a number of part performances and a portion of the contract price allocated to each of the part performances. To be divisible, it must first be possible to apportion the performances of the parties into corresponding pairs of part performances. Secondly, it must be proper to treat the pairs as 'agreed equivalents.'

Rest. 241: Circumstances Significant in Determining Whether a Failure is MaterialIn determining whether a failure to render or to offer performance is material the following circumstances are significant:

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

(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 or to offer to perform will suffer forfeiture;

(d) the likelihood that the party failing to perform or to offer 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.

Rest. 242: Circumstances Significant in Determining When Remaining Duties are Discharged

In determining the time after which 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 and 238, the following circumstances are significant:

(a) those stated in 241;

(b) the extent to which it reasonably appears to the injured party that delay many prevent or hinder him in making reasonable substitute arrangements;

(c) the extent to which the agreement provides for performance without delay, but a material failure to perform or to offer to perform on a stated day does not of itself discharge the other party's remaining duties unless the circumstances, including the language of the agreement, indicate that performance or an offer to perform by that day is important.

Note:

It is not sufficient to simply state in the contract that time is of the essence. See Foundation Development, p902 (time of the essence clause does not permit landlord to terminate lease since a two day delay in paying common area charge is trivial.).

Jabob Young v. Kent p.881 - partial breach caseOwner of property had contracted to build a mansion. Specified that he wanted Reading pipe installed. The house is completed and the owner's architect is supposed to issue a certificate of completion before the last payment is made. It was found that some pipes were not made of Reading manufactures. The evidence suggest that 60% of the pipe were not Reading. The owner wanted the builder to replace the non-Reading pipes. The builder refuses and sues for payment.

The question was whether there was material breach by the builder. (This case was decided before the 2nd Rest.) The court argues that the breach was not material. First, the court noted that the mistake was innocent (quality and intent of the motivation of non-performance). Also, the court argued that there was no functional or utilitarian difference between the pipes since they are of similar quality. Court reasoned that the plaintiff had substantially performed and the defendant's injuries as a result of the defect are almost nonexistent; this does not justify having the plaintiff replace the pipes.

Notes:

This case, the court adopted the doctrine of 'substantial performance,' which provides that each party's duty of performance is implicitly conditioned on there being no uncured material failure performance by the other party. Minor or immaterial deviations from the contractual provisions do not amount to failure of a condition to the other party's duty to perform.

What is substantial? " There is substantial performance where the variance from the specifications of the contracts does not impair the building or structure as a whole or where the defects can be remedied without great expenditure but defect must not run through the whole work." The magnitude of defects in performance will be important.

The modern view is that of reasonableness of what affects the breach had. If the pipe was worth less than the specified model, there would be a consequential clause to the case. In this case, it is reasonable that the contractor assume the owner is concerned with the quality of the product (since most of the pipes will not be visible). If the owner is concerned about other reasons (such as environmental-friendliness) for the product, the owner should inform the contractor.

The restatement recognizes three categories of conditions: express conditions, implied-in-fact conditions (inferred from the conducts of the parties), and constructive conditions (created by the court for reasons of justice).

Sackett v. Spindler p895 - determining material and total breach

Spinder owns a newspaper co. and wanted to sell it to Sackett. Sackett was to pay installments. Sackett pays the first two installments and did not pay future installment. Spindler kept extending and finally revokes the contract. Sackett later sued for restitution. He argued that purchase price was $85000, Sackett paid around $30,000. He wanted to get back the money. Spindler counterclaimed for breach of contract.The issue here for the court to determine was whether Sackett's conduct constituted total breach. If so, Spinder would be justified in repudiating the contract. If not, Spindler was not entitled to consider himself discharged under the contract; this means that Spindler's repudiation would mean a total breach on his part. The court ran through the factors for determining materiality in the 1st Rest. Court determined that the breach was material and total. However, the court also noted that even if the breach was not total, Spindler was justified in not perform (until cure occurs). His repudiation did not constitute a total breach on his part because he retracted it before Sackett relied on it.

Notes:

The current factors to consider for materiality are under 241:

(a) To what extent does the breach of the contract deprive Spindler of benefits?

This seem to be quite significant. Spindler was forced to reduce his newspaper to a weekly publication because of cash flow problems. As a result the value of his business deteriorated.

(b) To what extent could Spindler be compensated without giving him damages for total breach?

Here we have to go to (d) and figure out to what extent is the likelihood that the breaching party would cure the breach. If the breaching party was not going to cure, than (b) would not be likely to be applicable. However, it is not likely that Spindler will get a cure because Sackett kept failing the deadlines.

(c) To what extent will Sackett suffer from forfeiture?

He loses the $30,000.

(e) To what extent of Sackett's behavior purports with good faith and fair dealing?

Here Sackett appears to be making promises that he cannot meet and did not inform Spindler of his financial siutation.

Having determined that Sackett's breach was material, we must still look to see if the breach was total. Only then, may Spindler be justified in repudiating the contract. Rest. 242 adds two more factors to consider in addition to 241. 1) Does the delay appear to hinder the injured party's ability to make substitute arrangements? In this case, there is a likelihood that Spindler's business is likely to lose value if he kept waiting. The longer he waits, perhaps the less alternative he might have. 2) Does the agreement provide for performance without delay (i.e. was time of the essence)? In this case, it is hard to argue that time is of the essence in this contract. Such provisions are normally applicable to fast moving markets such as the equities market.

Note that it is not sufficient to simply state in the contract that time is of the essence. See Foundation Development, p902 (time of the essence clause does not permit landlord to terminate lease since a two day delay in paying common area charge is trivial.).

Note that this is a balancing test. In part (d) of 241, forfeiture by the non-performing party is taken into consideration. There is a risk that the non-breaching party will make a premature declaration of repudiation which in turn would constitute a breach.

ANTICIPATORY REPUDIATION

Before the date specified for performance, if one party declares or makes clear by conduct that it cannot or will not perform, this is in itself repudiation. The repudiating party can change its mind. If the repudiator retracts its repudiation, the contract is still value except that the other party had relied on the repudiation or had brought an action against it.

Rest. 250: When a Statement or an Act is a Repudiation

A repudiation is

(a) a 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

(b) a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach.

Rest. 251: When a Failure of 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 within a reasonable time such assurance of due performance as is adequate in the circumstances of the particular case.

Rest. 256: Nullification of Repudiation or Basis for Repudiation

(1) The effect of a statement as constituting a repudiation under 250 or the basis for a repudiation under 251 is nullified by a retraction of the statement if notification of the retraction comes to the attention of the injured party before he materially changes his position in reliance on the repudiation or indicates to the other party that he considers the repudiation to be final.

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

UCC 2-609: Right to Adequate Assurance of Performance

(1) A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.

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

(3) Acceptance of any improper delivery or payment does not prejudice the aggrieved party's right to demand adequate assurance of future performance.

(4) After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.

UCC 2-610: Anticipatory Repudiation

When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may

(a) for a commercially reasonable time await performance by the repudiating party; or

(b) resort to any remedy for breach (Section 2-703 or Section 2-711), even though he has notified the repudiating party that he would await the latter's performance and has urged retraction; and

(c) in either case suspend his own performance or proceed in accordance with the provisions of this Article on the seller's right to identify goods to the contract nonwithstanding breach or to salvage unfinished goods (Section 2-704).

UCC 2-611: Retraction of Anticipatory Repudiation

(1) Until the repudiating party's next performance is due he can retract his repudiation unless the aggrieved party has since the repudiation cancelled or materially changed his position or otherwise indicated that he considers the repudiation final.

(2) Retraction may be by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform, but must include any assurance justifiably demanded under the provisions of this Article (Section 2-609).

(3) Retraction reinstates the repudiating party's rights under the contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation.

Truman Flatt v. Schupf - p903

Flatt contracted to purchase a land from Schupf. The purchase was conditioned on obtaining appropriate zoning approval of the land. The contract contained an express condition that if the buyer did not get the zoning approval the buyer could have the option of voiding the contract. (Here the court did not appear to focus on the fact that the buyer just gave up on making the zoning change). Flatt, failing to get the zoning change, proposed a new price (modification) of the land. Schupf answered that it will not sell. Later Flatt agreed to buy the land at the original price. Schupf responded by saying that the contract was already repudiated.

The court held that Schupf could not make anticipatory repudiation. The doctrine of anticipatory repudiation must be clear and unequivocal. Although there might be an implied inference that Flatt repudiated, an implied is not enough for clear and unequivocal. The court also argued that even if Flatt had repudiated, the contract was still valid because Flatt's subsequent letter to purchase at the original price was a retraction of the repudiation. Schupf did not make any formal acceptance of repudiation; Schupf simply said it would not sell at the new price. There was no apparent change in the party's situation. According to the restatement and the UCC, if there is no material change in position, the only other option for the aggrieved party to indicate to the other party that it is electing to treat the contract as rescinded.

Note:

Financial difficulty, even to the level of insolvency, does not constitute an anticipatory repudiation. Rest. 252, Comment a. However, insolvency does constitute a ground for demand of adequate assurance of performance. Rest. 252.

Hornell Brewing v. Spry p913

Dft, Spry entered into an oral agreement with Plt for distributorship in Canada. Spry was constantly late in his payments and Plt finally refused to sell Spry more goods until Spry pays the remaining balance. Spry told Plt that he had obtained financing but did not disclose that the financing company, Metro was actually a factoring company. Plt agreed to give Spry $300,000 credit for 14 days. After getting Metro to pay the balance, Spry ordered a shipment of over $300,000. Plt refused to sell unless Spry obtained a letter of credit and provides a personal guarantee. Spry failed to do so, Plt brought action to terminate agreement of distributorship.

The issues here are: whether Plt had reasonable grounds for insecurity and whether Plt made reasonable request for assurance. The court here applies UCC-609 and notes that the standard of reasonableness is determined according to commercial standards.

"Reasonable grounds for insecurity can arise from the sole fact that a buyer has fallen behind in his account with the seller, even where the items involved have to do with separate and legally distinct contracts, because this impairs the seller's expectation of due performance." (p917) The court pointed to Dft's poor payment history and that Plt only guaranteed credit of up to $300,000. Thus, by placing a single order of over this limit, the Dft has given the Plt the reasonable ground for insecurity. Dft's failure to respond to the demand for assurance constitute a repudiation and Plt is entitled to suspend performance and terminate agreement.

With regards to the reasonableness of the request for assurance, Plt here is asking for something that this not originally dictated in the contract. While this might strain the limits of reasonableness, the court held that Plt is commercially justified in demanding personal guarantee and letter of credit because there are indications that the Dft is engaging in illegitimate dealings.

Notes:

Pittsburgh-Des Moines Steel case (cited in Hornell and on p.921), Plt had contracted to extend credit to the buyer. The contract required a bank loan to guarantee payment, but after some time the buyer still could not obtain a loan. At this point, Plt demanded a personal guarantee or credit advance. The court that Plt had no reasonable ground for requiring assurance. The court introduced the two prong analysis: whether there was reasonable grounds for insecurity and whether the demand for assurance was reasonable. The court was in dispute over the first prong. The majority argued that there is no reasonable ground for insecurity because there is no material change in Dft's credit worthiness. However, the court unanimously agreed that Plt's demand for personal guarantee or advance payments were not reasonable. (Wilmarth - Plt should have asked Dft to show alternative source of financing.)

Determining what constitute reasonable assurance depends on facts and circumstances'; Rest and UCC both utilizes this approach. However, demand for assurance must be made in good faith.

Breaches of related contracts to the current contract may be adequate grounds for insecurity. However, mere rumors are not enough. This is also a fact intensive approach to determining when there are grounds for reasonable insecurity.

UCC 2-609 indicates that the demand should be in writing, this requirement has not been strictly enforced. The Restatement however adopts a flexible approach: "the demand need not be in writing. Although a written demand is usually preferable to an oral one" Rest. 251 comment d.

Under the UCC, after a justified demand for adequate assurances, the demanding party must wait a reasonable time not to exceed 30 days. The Restatement requires a party to respond to a demand for assurances within a "reasonable time" but does not set maximum time period.

III. EXPRESS CONDITIONS

When an express condition is spelled out in a contract, it will often be a condition to the duty of only one of the parties, because that term has been included in the agreement to protect that party from having to perform in a situation where performance is for some reason less advantageous to her. An express condition may not have to be in the control of the parties.

A condition is different from a promise. A duty is discharged when a condition is not met, but under a promise there is still a duty for the promisee to perform although the promisee can bring suit for damages. For example, "if you go to the superbowl and file a report, we will pay you X amount." Here there is a condition for payment. The person is not under a duty to make those things happen.

However, it may sometimes be difficult to distinguish between a promise and a condition. If the contract, states "we want you to go to the superbowl and file a report, and if you do that we will pay you $20,000." Here there is a promise and a condition. Not only can the promisor withhold the payment if promisee failed to perform, promisor can also sue for damages. Another example: "Buyer shall give the instruction by X date, if not, the seller's duty to sell the rice is discharged.' Here the buyer is subject to damages for breaking the promise ("buyer shall give") while discharging seller from shipping the rice. Internatio-Rotterdam, v. River Brand Rice Mills [p.932].

The party whose performance is so conditioned is referred to as the 'obligor,' the one whose performance obligation is at issue. The other party, the one to whom the performance obligation is owed, usually also the party who is attempting to enforce obligation, is the 'obligee.'

Rest. 224: Condition DefinedA condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.

Rest. 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, and 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 within the obligee's control or the circumstances indicate that he has assumed the risk.

(2) Unless the contract is of a type under which only one party generally undertakes duties, when 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 and a duty is imposed on the obligee that the event occur,

the first interpretation is preferred if the event is within the obligee's control.

(3) In case of doubt, an interpretation under which an event is a condition of an obligor's duty is preferred over an interpretation under which the non-occurrence of the event is a ground for discharge of that duty after it has become a duty to perform.

Rest. 228: Satisfaction of the Obligor as a Condition

When it is a condition of an obligor's duty that he be satisfied with respect tot the obligee's performance or with respect to something else, and it is practicable to determine whether a reasonable person in the position of the obligor would be satisfied, an interpretation is preferred under which the condition occurs if such a reasonable person in the position of the obligor would be satisfied.

Rest. 229: Excuse of a Condition to Avoid Forfeiture

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 a material part of the agreed exchange.

Note:

There are three possibilities stated in Rest. 227(2):

1. Pure promise

2. Pure condition

3. Promisory condition

Preference in language construction is given to promise and not condition (reducing risk of forfeiture for the obligee). This is done to allow the contract to go forward.

In a case of a pure condition there is a risk of forfeiture on the obligee if the obligee had relied on the contract (making investments in anticipation of performance). The third possibility, promissory condition, is the worst. Courts prefer pure condition to promissory condition contract because in a pure condition the contract is discharged and that's the end of it. In promissory condition, the obligee is both discharged of duty while still suing for damages (getting best of both worlds).

Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co. p. 924

Plt moved into a new building but still has 3 years left to its lease in the old location. Owners of new building agreed to pay for Plt's remaining lease. Plt subleased it to the Dft. There were two conditions: Plt must get the landlord's written consent to the sublease and the landlord must consent to Dft performing 'tenant work' on the premise. The first written consent was obtained although only after an agreed deadline extension between Plt and Dft. The second consent letter did not come on time (but Plt did give oral notice that consent was obtained). The Dft cancelled the sublease.

Plt argued that they have substantially performed and the Dft should not be allowed to cancel on a technical basis. The court held that under an express condition, there is no room for the doctrine of substantial performance. This is very formal and Willistonian view of contract and appears to conflict with the equitable principles of modern contract. One reason is that the forfeiture on Plt is low. Plt did not have to bear the loss of the sublease because the owner of the Plt's new building agreed to bear the cost of the lease.

The court's analysis up to bottom of p928 seems to be very Willistonian but (p929) the court suggested that it might be willing to decide differently if there h