i... · web viewcontract formation under article 2 of the uniform commercial code . ucc § 2-204....
TRANSCRIPT
Contracts II
GWU School of Law
Professor Swaine
Spring 2013
2
Table of ContentsThe Sale of Goods............................................................................7An Introduction to the Study of Contract Law................................7
Sources of Contract Law...............................................................7Article 2 (enacted in 48 states)..................................................7
The Basis of Contractual Obligation: Mutual Assent and Consideration................................................................................10
Contract Formation Under Article 2 of the Uniform Commercial Code............................................................................................10
Mutual Assent Under the Uniform Commercial Code.............10Jannusch v. Naffziger..........................................................10E.C. Styberg Engineering Co. v. Eaton Corp.......................11Harlow & Jones, Inc. v. Advance Steel Co...........................11
The Objective Theory of Contract............................................12Offer and Acceptance: Bilateral Contracts..............................13Irrevocability by Statute: The Firm Offer................................19Limiting the Power to Revoke..................................................19Qualified Acceptance: The “Battle of the Forms”....................22Classical Principles..................................................................22
Princess Cruises, Inc. v. General Electric Co......................22Battle of the Forms..................................................................22
Brown Machine, Inc. v. Hercules, Inc.................................25Paul Gottlieb & Co. v. Alps South Corp...............................25Filanto v. Chilewich............................................................28Chateau Des Charmes Wines Ltd. v. Sabate USA Inc.........28
Electronic and “Layered” Contracting.......................................29Hines v. Overstock.com, Inc...............................................30“Layered” Contracting........................................................31DeFontes v. Dell, Inc...........................................................31
3
Postponed Bargaining: “The Agreement to Agree”............31Statute of Frauds...........................................................................32
The Sale of Goods Statute of Frauds: UCC § 2-201....................32Buffaloe v. Hart...................................................................34
Interpreting the Agreement..........................................................35The Parol Evidence Rule.............................................................35
The UCC Rule and Trade Usages.............................................38Nanakuli Paving & Rock Co. v. Shell Oil Co.......................39
Parol Evidence under the CISG................................................40MCC-Marble Ceramic Center v. Ceramica Nuova D’Agostino40
Advanced Topics in Contract Law.................................................42Supplementing the Agreement.....................................................42
Reasons for Implied Terms.........................................................42Wood v. Lucy, Lady Duff-Gordon........................................43Leibel v. Raynor Manufacturing Co....................................43
Implied Obligation of Good Faith............................................45Seidenberg v. Summit Bank...............................................45Morin Building Products Co. v. Baystone Construction, Inc.47Locke v. Warner Bros., Inc.................................................47Donahue v. Federal Express Corp.......................................48
Warranties..................................................................................49Bayliner Marine Corp. v. Crow............................................50Caceci v. Di Canio Construction Corp.................................53
Defenses Relating to Capacity and Fairness.................................55Minority and Mental Incapacity.................................................55
Dodson v. Shrader...............................................................55Hauer v. Union State Bank of Wautoma.............................57
Duress.........................................................................................58Totem Marine Tug & Barge v. Alyeska Pipeline.................58
4
Undue Influence.........................................................................60Odorizzi v. Bloomfield School District................................60
Misrepresentation......................................................................62Syester v. Banta..................................................................63
Nondisclosure.............................................................................65Hill v. Jones.........................................................................65Park 100 Investors v. Kartes...............................................66
Unconscionability.......................................................................67Williams v. Walker-Thomas Furniture Co...........................68Higgins v. Superior Court...................................................68In re Checking Account Overdraft Litigation.....................69
Public Policy...............................................................................71Valley Medical Specialists v. Farber...................................72R.R. v. M.H..........................................................................73
Mistake and Changed Circumstances...........................................75Mistake.......................................................................................75
Lenawee County Board of Health v. Messerly....................76WilFred’s, Inc. v. Metropolitan Sanitary District...............77
Impossibility...............................................................................78Impracticability..........................................................................78Frustration of Purpose...............................................................79
Karl Wendt Farm Equipment Co. v. International Harvester79Mel Frank Tool & Supply, Inc. v. Di-Chem Co....................80
Modification................................................................................81Alaska Packers’ Assn v. Domenico......................................82Kelsey-Hayes Co. v. Galtaco Redlaw Castings Corp............83Problem 8-3........................................................................84
Third Parties.................................................................................85Third Party Beneficiaries............................................................85
Vogen v. Hayes Appraisal Assoc., Inc.................................86
5
Zigas v. Superior Court.......................................................87Assignment and Delegation........................................................89
Herzog v. Irace....................................................................90Sally Beauty Co. v. Nexxus Products Co.............................92
Breach, Repudiation, and Conditions...........................................93Express Conditions.....................................................................95
Oppenheimer & Co. v. Oppenheim, Appel Dixon & Co........96J.N.A. Realty v. Cross Bay Chelsea......................................96Problem 10-1......................................................................97
Substantial Performance and Material Breach..........................99Jacob & Youngs, Inc. v. Kent............................................100Sackett v. Spindler............................................................100Perfect Tender Rule under the UCC.................................101
Anticipatory Repudiation..........................................................103Truman L. Flatt & Sons v. Schupf.....................................103
Assurances................................................................................104Hornell Brewing Co. v. Spry..............................................104Problem 10-2....................................................................105
6
The Sale of Goodso An Introduction to the Study of Contract Law
Sources of Contract Law Universal Commercial Code
Purpose:o UCC § 1-102/ 1-103: Purpose
simplify, clarify, and modernize law governing commercial transactions;
permit the continued expansion of commercial practices through custom, usage, and agreement of the parties;
make uniform the law among the various Js, and is to be supplemented by other applicable laws
(e.g. If UCC applies to case, doesn’t have a section that applies to the particulars of the case, then we look to common law and the Restatement.)
Definitionso UCC § 1-201(3) : “Agreement”
“Agreement” means the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance as provided in this Act
o UCC § 1-201(11) : “Contract” “Contract” means the total legal obligation which
results from the parties’ agreement as affected by this Act and any other applicable rules of law
o Article 2 (enacted in 48 states) UCC § 2-102: Scope
This Article applies to transactions in goods Does NOT apply to:
o NOT services, real property (land, house, buildings..), Contracts to provide services, contracts to lease goods, contracts involving patents, trademarks or other intellectual property.
Employment contracts, investment securities, or “things in action” – copyrights, patents, etc.
UCC § 2-104 : Defining “Merchant” / “Between Merchants”
7
“Merchant” means a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge r skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill
“Between merchants” means in any transaction with respect to which both parties are chargeable with the knowledge or skill of merchants
UCC § 2-105(1) : “Goods” “Goods” mean all things (including manufactured
goods) which are movable at the time of identification to the contract for sale other than the money in which the price
is to be paid and things in action “Goods” also includes the unborn young of animals
and growing crops and other identified things attached to realty as described in the section on goods to be severed from realtyo Real-estate is not goods.
What about contracts that involve goods and services? Majority Rule: Determine what the more important
part of the contract is. Then follow the law the governs that part of the contracto Paying a painter for painting your house, labor
more important than goods, reviewed under common law
Minority Rule: Which part of the contract is being challenged, follow the law governing that parto Paying a painter to paint your house, dispute over
the quality of paint used, follow UCC
Common Law Law made by courts, case law Most commonly used (even over UCC and CISG) Applies when: the UCC and CISG fall short Also may supplement the UCC and CISG (i.e. definition of an
offer) *Restatements are persuasive but not binding
Restatement 2nd of Contracts Law NO state legislature has enacted the restatement of contracts NO judge has adopted the entire restatement
8
Restatement includes two different types of instruction Accurate restatements of the majority rule of the law Opinion of the writers of the restatement about how the law
should be
CISG Convention on contracts for the international sale of goods
A treaty between the U.S. and other states, covers transactions that UCC covers and parties and places of business in other countries that are contracting states to the treaty - limited to commercial transaction between businesso Civil law and common law on contract formation varies
widely among countries, the CISG was written to establish consistent standard
o Parties can opt out of the CISG, and many parties do CISG arts. 1
o This Convention applies to contracts of sale of goods between parties whose paces of business are in different States;
o When the States are Contracting State CISG arts. 14
o (1) A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price.
o (2) A proposal other than one addressed to one or more specific persons is to be considered merely as an invitation to make offers, unless the contrary is clearly indicated by the person making the proposal.
CISG arts. 15 o (1) An offer becomes effective when it reaches the
offeree.o (2) An offer, even if it is irrevocable, may be
withdrawn if the withdrawal reaches the offeree before or at the same time as the offer.
CISG arts. 18(1) o statement made by or other conduct of the offeree
indicating assent to an offer is an acceptance.
9
o The Basis of Contractual Obligation: Mutual Assent and Consideration
Contract Formation Under Article 2 of the Uniform Commercial Code o UCC § 2-204 Formation in General
A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.
An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.
Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy
o UCC § 2-206 Offer and Acceptance in Formation of Contract
(1) Unless otherwise unambiguously indicated by the language or circumstances
(a) an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances;
(b) an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods, but such a shipment of non-conforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.
(2) Where the beginning of a requested performance is a reasonable mode of acceptance, an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.
Mutual Assent Under the Uniform Commercial Code Jannusch v. Naffziger
o FACTS Plaintiff, business sellers. appealed a decision, which
found in favor of defendant, business buyers, on the sellers action for breach of an oral contract of sale.
10
The contract of sale was for the sellers' mobile concession business, which they operated at various festivals.
The buyers made a $10,000 payment on the sellers mobile food concession business, immediately taking possession of the assets of the business and operating the business for the remainder of a festival season.
o ISSUE Was the oral argument valid under the UCC?
o HELD The appellate court reversed.
The oral agreement was covered by the UCC. It was enforceable under exceptions to the UCC
statute of frauds. The essential terms were agreed upon. The purchase price was $ 150,000, and the
items to be transferred were specified. No essential terms remained to be agreed upon. The buyers took possession of the items to be
transferred and used them as their own. The fact that the buyers were disappointed in
the income from the festivals was not inconsistent with the existence of a contract.
Further, one buyer admitted in deposition that there was an agreement to purchase the business for $ 150,000.
The buyers breached the agreement when they failed to pay the additional purchase price and returned the business assets at the end of the festival season.
E.C. Styberg Engineering Co. v. Eaton Corpo FACTS
Plaintiff, a component manufacturer, sued defendant, auto parts producer, for breach of contract. After a bench trial, the district court entered judgment in favor of the producer. The manufacturer appealed.
o ISSUE Under the U.C.C., is a contract for the sake of goods
formed where the parties communications evidence ongoing negotiation, but no agreement as to key terms, such as price, quantity, and monthly production value?
o HELD No. In this case, the evidence was ambigous and the
court of appeals could find no evidence that the district
11
court's understanding of the facts was clearly erroneous
This case evidences the fact heavy nature of questions of ongoing negotiations
Evidence for contract: “thank you” theory, the early interactions suggest
price quotation which is an invitation to an offer Buyer had responded positively to another letter
that had price quotation The 240 unit trial run suggested existence of the
contract Weaknesses of Argument:
the price was an invitation to contract Seller’s account was ambiguous, the seller keeps
trying to build contract up to bigger than it is (suggesting ongoing negotiations)
Harlow & Jones, Inc. v. Advance Steel Co. FACTS
P sues D for alleged breach of contract to purchase 1000 tons of imported steel.
D claims the shipment was late and thus properly rejected under the contract.
Parties disagree as to what form constituted the contract.
Court found neither form constituted the contract, instead the contract was formed during their phone conversation before either party started sending or receiving written contract forms (UCC 2-204).
Testified that much of the steel importing business is conducted by phone and oral contracts are often made this way and then later confirmed in writing.
HELD A contract can be formed even if the parties are not
sure of when the formation happened and even if they disagree about some of the terms. (*Both UCC and Common Law- you can form an agreement notwithstanding clearly spelled out terms)
Court cites UCC § 2-207 allowing an integration of the parties confirmations into the contract.
Court found there was a substantial agreement between the confirmation forms of the parties (same price terms, weight and grade specifications)
NOTE
12
the UCC Statute of Frauds (SoF) does not necessarily require a formal signed contract in order to satisfy the SoF, so even though there was no such document in the case, the requirements of the statute may still have been met.
o The Objective Theory of Contract Rest. 2d § 20 Effect of Misunderstanding
o (1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and
(a) neither party knows or has reason to know the meaning attached by the other; or
(b) each party knows or each party has reason to know the meaning attached by the other.
o (2) The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if
(a) that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or
(b) that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.
Rest. 2d § 21 Intention To Be Legally Bound o Neither real nor apparent intention that a promise be legally
binding is essential to the formation of a contract, but a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract.
Rest. 2d § 201 Whose Meaning Prevails o (1) Where the parties have attached the same meaning to a
promise or agreement or a term thereof, it is interpreted in accordance with that meaning.
o (2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made
(a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or
(b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party.
13
o (3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent.
CISG art. 8 o (3) In determining the intent of a party or the understanding a
reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.
o Offer and Acceptance: Bilateral Contracts o An offer gives the other party a sense that they can conclude the
deal by saying “yes” to make the agreement enforceableo Essential Elements:
Intent to enter into a bargain- Offers must be distinguished from mere invitations to begin negotiations.
Definiteness of terms- A statement usually will not be considered an offer unless it make clear the subject matter of the proposed bargain, the quantity involved and the price.
o UCC Offers
Definition Offer not defined, use common law definition
Mode of Assent UCC 2-204: Formation in General:
(1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of a contract,
(2) An agreement sufficient to constitute a contract for sale may be found even if the moment of its making is undetermined
Certainty UCC- § 2-204
(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.
Terminations of Power of Acceptance § 2-206 Offer and Acceptance in Formation of
Contract (1) Unless stated otherwise…
14
(a) Offer can be made via any reasonable acceptance method.
o Example –offeree can accept by calling, coming into the office, whatever is reasonable.
o Abolished mirror-image rule (b) An order or offer to buy goods can be
interpreted as inviting acceptance via shipment.
o If offeror calls and leaves message saying “I’d like to buy 100 toys for $50”, offeree can accept offer by sending 100 toys promptly.
(2) If offeror does not have enough notice of acceptance that requested performance has begun, he may treat the offer as having been expired.
At the discretion of the offeror.
o CISG Offers
Definition Article 14(1) - A proposal for concluding a contract
addressed to one or more specific person constitutes an offer if it is sufficiently definite and indicated the intention of the offeror to be bound in case of acceptance…
Certainty Article 14(1 )- …A proposal is sufficiently definite if
it indicated the goods and expressly or implicitly fixes or makes provisions for determining the quantity and the price.
Preliminary Negotiations Article 14(2) - A proposal other than one
addressed to one or more specific persons is to be considered merely as an invitation to make offers, unless the contrary is clearly indicated by the person making the proposal.
Terminations of Power of Acceptance Article 16 - Until a contract is concluded an offer may
be revoked if the revocation reaches the offeree before he has dispatched an acceptance.
Acceptance Silence or Inactivity as Acceptance (Ninja Rule)
Article 18(1) A statement made by or other conduct of the offeree indicating assent to an offer is
15
acceptance. Silence or inactivity does not in itself amount to acceptance.
When Revocation is Permitted Article 16(2) - However, an offer CANNOT be revoked:
If it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable
If it was reasonable for the offeree to rely on the offer as being irrevocable and the offer has acted in reliance on the offer.
Article 15(2) - An offer, even if it is irrevocable, may be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer.
Time when Offer Becomes Effective- Article 15(1) - An offer becomes effective when it
reaches the offeree. o Common Law
Offers Rest. 2d § 24 Definition - An offer is the manifestation
of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.
Requires some specificity of terms and some certainty
Mode of Assent: Offer and Acceptance: Rest. 2d § 22
(1)- “The manifestation of mutual assent to an exchange ordinarily takes the form of an offer or proposal by one party followed by an acceptance by the other party or parties”
Normally, assent is through offer and acceptance, BUT
(2)- “A manifestation of mutual assent may be made even though neither offer nor acceptance can be identified and even though the moment of formation cannot be determined”
Manifestations of mutual assent can exists even if offer, acceptance, or moment of formation can’t be determined
Certainty Rest. 2d § 33- Certainty :
(1)- “Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain”
16
(2)- “The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.”
(3)- “The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance”
What is NOT an offer If it Lacks Certainty: an offer cannot be accepted so
as to form a contract unless the terms of the contract are reasonably certain.
Rationale: So offeree knows how to act upon it, so courts know how to enforce it (in subparts of R§33 UCC§2-204).
Lonergan v. Scolnick : One reason ad was not offer was that it was not specific enough; it did not say price. (see full case below)
Preliminary Negotiations Rest. 2d § 26 - A manifestation of willingness to
enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.
Advertisements are typically not offers because: Merely invitations for offers Addressed to public at large because possibility
that too many people will accept (not hard and fast rule.. just helps determine if the offeror was really and offeror)
Require additional steps to show expression of assent
Do no show willingness to be bound (often by a lack of reasonably certain terms)
When an “offer” is really an invitation to make offers:
When “offeree” has reason to know “offeror” does not intend “offer” to be binding
Exceptions: Advertisements can be offers if… A reasonably Prudent Person would understand its
terms to be an offer Specific information: price, quantity, description Offered to one person or limited number of people Language does not imply need to bargain further
17
Arrangement of language and arrangement of ad is deceiving
Bait and switch Fine print can be disregarded if there are reasons
for someone to read one section v. another (large v. small print)
RS § 26 Comment- to make an offer by an advertisement...there must ordinarily be some language of commitment or some invitation to take action without further communication
rationale for fair-dealing. Terminations of Power of Acceptance
Revocation: like an offer, revocation is effective only when communicated (meaning only when received)
Can be by someone else other than the offeror but has to be clearly communicated and reliable.
Rest. 2d § 42- Revocation by Communication from Offeror Received by Offeree
An offeree’s power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract.
Methods of Termination of Power of Acceptance- REST. 2D § 36:
1) An offeree’s power of acceptance may be terminated by:
a) rejection or counter-offer by the offeree, or b) lapse of time, or c) revocation by the offeror, or d) death or incapacity of the offeror or offeree
2) In addition, an offeree’s power of acceptance is terminated by the non-occurrence of any condition of acceptance under the terms of the offer.
Rejection- Rest. 2d § 38: 1) An offeree’s power of acceptance is terminated
by his rejection of the offer, unless the offeror has manifested a contrary intention
2) A manifestation of intention not to accept an offer is a rejection unless the offeree manifests an intention to take it under further advisement.
Indirect Communication of Revocation- Rest. 2d § 43 (learning the offer was revoked by a 3 rd party)
An offeree’s power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into the proposed
18
contract and the offeree acquires reliable information to that effect.
Mirror Image Rule- Rest. 2d §§ 39 & 59- Acceptance has to mirror the offer- Any
modification is actually a rejection and constitutes a counter-offer, terminating the offeree’s power of acceptance. Acceptance must be identical to the offer.
Counter-Offers- Rest. 2d § 39: (Mirror Image Rule)
1) A counter-offer is an offer made by an offeree to his offeror relating to the same matter as the original offer and proposing a substituted bargain differing from that proposed by the original offer
2) An offeree’s power of acceptance is terminated by his making of a counter offer, unless the offeror has manifested a contrary intention or unless the counter-offer manifests a contrary intention of the offeree
i.e. if the response proposes tentative counter terms but hedges so as not to kill the offer “I am not proposing a counter offer, I merely propose X…but I am still entertaining your offer” – then it may not be seen as a counter off.
Rest. 2d § 59- Purported Acceptance Which Adds Qualifications (Mirror Image Rule)
A reply to an offer which purports to accept it but is conditional on the offeror’s assent to terms additional to or different from those offered is not an acceptance but is a counter-offer.
Acceptance Defined
Rest. 2d § 50 (1)- Acceptance of an offer is a manifestation of
assent to the terms thereof made by the offeree in a manner invited or required by the offer
(2)- Acceptance by performance requires that at least part of what the offer requests be performed or tendered and includes
19
acceptance by a performance which operates as a return promise
(3)- Acceptance by a promise requires that the offeree complete every act essential to the making of the promise
Acceptance must be made in: Manner invited by offer Medium invited by offer
Rest. 2d § 58 - Necessity of Acceptance Complying with Terms of Offer
An acceptance must comply with the requirements of the offer as to the promise to be made or the performance to be rendered.
Rest. 2d § 60 - Acceptance of Offer Which States Place, Time, or Manner of Acceptance
If an offer prescribes the place, time or manner of acceptance its terms in this respect must be complied with in order to create a contract. If an offer merely suggests a permitted place, time or manner of acceptance, another method of acceptance is not precluded (and does not need to be complied with for the creation of K).
Silence or Inactivity as Acceptance (Ninja Rule) Generally you cannot impose a contractual
obligation on silence. Rest. 2d § 69- (1) Where an offeree fails to reply
to an offer, his silence and inaction operate as an acceptance in the following cases only:
Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation (ex. brick layer)
Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer
Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept.
Generally only exceptional circumstances in which we allow a contract to be imposed by silence
Ex.if offeree imposes the silence obligation and says if you don’t hear from me then I accept,
20
that is okay because it is not the offeror imposing on the offeree.
Time when Acceptance Takes Effect- Rest. 2d § 63- Time when Acceptance takes
Effect- (when it is sent) Unless the offer provides otherwise:
a) an acceptance made in a manner and by a medium invited by an offer is operative and completes the manifestation of mutual assent as soon as put out of the offeree’s possession, without regard to whether it ever reaches the offeror; but
b) An acceptance under an option contract is not operative until received by the offeror.
21
Irrevocability by Statute: The Firm Offero Limiting the Power to Revoke
o Common Law Traditional Option Contract (Promise +
Consideration) Two Requirements: 1) There needs to be a promise
to hold the offer open and 2) that the promise was held open by consideration
Time When Acceptance Takes Effect- Rest. 2d § 63(b)
Unless the offer provides otherwise, an acceptance under and option contract is not operative until received by the offeror.
Traditional contract theory requires consideration to keep the option open
“an option contract which is not supported by consideration is a mere offer to sell which may be withdrawn at any time prior to acceptance.”
Consideration must be in writing or bargained for
You can’t just give someone money and say its consideration, it needs to be bargained for
Consideration cannot be vague, it must be definite
\ #1- Option Contracts without Consideration
Traditional notion is that you need Promise + Consideration to make a contract.
Other ways to make an offer “binding as an option contract” without consideration
Rest. 2d § 87- Option Contract (most jurisdictions apply to Drenna based cases) 1) an offer is binding as an option contract
if it a) is in writing and signed by the
offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or
b) is made irrevocable by statute
22
2) an offer which the offeror should reasonably expect to induct action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.
Special Circumstances of Subcontracting/ Contracting
Three Options: Classical Rules- sub can withdraw
anytime before the bid has been accepted (Baird)
Promissory Estoppel- if the GC relies on the sub’s bid by using it in it’s own bid, then the sub can’t revoke until such time as the GC has had a reasonable time/ opportunity to accept (Drennan)
Bilateral Contract- we could say when the GC uses the subs bid in preparing their own bid the GC accepts the subs bid and creates a bilateral contract (road not taken)
Majority Rule: if there is reasonable reliance, the promise will be enforced
Minority Rule: Promise is not enforceable if no consideration and acceptance Based on classical rule requiring
consideration Offer is not effective unless accepted This tends to leave the general contractors
out on a limb and leaves them at the mercy of sub-contractors
General Promissory Estoppel- Rest. 2d § 90- predicated on a series of assurances
1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only be enforcement of the promise. The remedy granted for breach may be limited as justice requires.
2) A charitable subscription or a marriage settlement is binding under subsection (1)
23
without proof that the promise induced action or forbearance.
Difference between Rest. 2d § 90 & 87(2) Courts are reluctant to apply 87 (2) beyond a
Drennan context Section 90- predicated on a promise
Promises are more definite in character and not contingent on the formation of a contract
Promise: I will give you a clown car… Offer: I will give you a clown car if…
Section 87- predicated on an offer and requires substantial reliance (courts are not willing to say that all offers are promises) Offers are just a stage in the formation of a
contract o #2 Irrevocability by Statute- The Firm Offero UCC
Provides that some offers will be irrevocable despite the absence of any consideration.
Offers must be firm- i.e. giving assurance they will be held open
UCC §2-205- Firm Offers (applied to offers without consideration)
An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.
Requires offeror to be a “merchant”o Does not require them both to be
merchants “signed” here also includes authentication
but the reasonableness of the authentication herein allowed must be determined in the light of the purpose of the section.
o Typically the kind of authentication allowed would consist of a minimum of initialing but the circumstances surrounding the signing may justify
24
something less (i.e. a handwritten memorandum on the writer’s letterhead purporting in its terms to “confirm” a firm offer already made, or an authorized telegram, even with a typed signature, would be enough to satisfy).
“signed separately”o Any assurances of “firmness” must be
signed separately by offeroro to protect against the inadvertent
signing of a firm offer within a form prepared by the offeree.
Length of period of irrevocability-o If an offer states it is guaranteed until
the happening of a contingency which will occur within the three month period, it will remain irrevocable until that event.
o A promise made for a longer period will operate under this section to bind the offeror only for the first three months of the period but may of course be renewed.
Unlike § 87(2) and §90, UCC §2-205 appears to impose no requirement that the offeree demonstrate reliance on the offer in order to claim the right to accept despite an attempted revocation.
UCC §2-104 (1) Merchant
UCC §1-201 (39)- “signed” includes any symbol executed or
adopted by a party with present intention to authenticate a writing.
(46)- “written” or “writing” includes printing, typewriting or any other intentional reduction to tangible form.
o CISG CISG takes an even more expansive attitude toward the
possibility of “firm offers,” giving legal effect to the apparent intention to make an offer binding, without the restrictions imposed by UCC §2-205
Yet, CISG does not apply to purchase of goods by consumers
Article 16(2)(a)
25
However, an offer cannot be revoked: if it indicated, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable.
Note there is not time limitation like that in UCC
Qualified Acceptance: The “Battle of the Forms”o Classical Principles
Princess Cruises, Inc. v. General Electric Co. FACTS
P contracted with D for inspection and repairs of ship. Both services and goods were included in the contract.
HELD GE changed terms, so its response was a counter offer
(mirror image rule from Normile v. Miller). Last Shot Rule- Princess did not object to the letter by GE, they gave GE permission to proceed and they paid the final amount…therefore accepted by conduct, so they accepted the last contract sent by GE. (Trial court applies UCC) Appellate court applies Common Law.
At common law, an offeror who proceeds under a contract after receiving the counteroffer can accept the terms of the counteroffer by performance.
Factors court took into consideration to decide if UCC or Common Law applies (to see if it is predominately for services or goods):
The language in the contract The language talks a lot about service
The nature of the business of the supplier GE is manufacturer…but it was the service
engineering department… The intrinsic worth of the materials
o Battle of the Forms o Imposing agreements on parties despite the fact that the
writings don’t agree.o Where businesses use forms with “boiler-plate” termso Which Law to Apply?
If there is a mix of goods/ services in the contract it is up to the court’s discretion whether to use the UCC, Common Law or apply both.
If majority of agreement based on goods, courts tend to use UCC
26
If majority of agreement based on services, courts tend to use common law.
If there is a 50/50 split, the courts may chose to appy the UCC to part and common law to the other part.
Factors to Consider: Language of the Contract Nature of the Business of the Supplier Intrinsic Worth of the Materials Other Relevant Factors
If it is international, apply CISG
UCC § 2-207 Purpose: to alter the mirror image rule! Terms where there is agreement are not in question What was the first offer? (use common law to determine)
Price Quotations- generally NOT an offer Purchase Order- generally IS an offer
UCC 2-207- OLD 1) A definite and seasonable expression of acceptance or a
written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
2) the additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
a) the offer expressly limits acceptance to the terms of the offer;
b) they materially alter it; or c) notification of objection to them has already been
given or is given within a reasonable time after notice of them is received.
3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provision of this Act.
Under 2-207(1) - only about determining if the parties had an agreement (is there an offer and is there acceptance?)
27
You still need acceptance to the fundamental terms, but if a party responds to an offer with different or additional terms it may still be acceptance.
To be acceptance you need: Definite and timely expression of acceptance -OR- Written confirmation
If parties don’t accept terms à look to part (3) It is a counter-offer if:
Not genuinely an acceptance and replies with drastically different terms by proposing completely different transaction
Acceptance is expressly conditional on the offeror’s assent to new terms (Hercules)
Conduct alone is not enough to be acceptance Assent to one part of the contract is not assent to
all *clown examples in notes
2-207(2)- parties trying to figure out the terms Are the parties both merchants? Are they additional terms or different terms?
If additional, do one of the three exceptions apply? What happens with Additional Terms? (brand new term)
Between consumers “additional” terms are ONLY proposals for addition to the contract and ONLY become part of the contract if expressly agreed to (still have a contract but discrepant terms are not included unless both parties accept)
Between merchants the “additional” terms come in UNLESS one of the 3 exceptions listed applies.
Offer expressly limits acceptance to the terms in the offer
Courts look to the language of acceptance to see if it is expressly conditional, the language must be clearly indicate that it is expressly conditional.
Some courts go beyond this and examine all the facts and circumstances, including trade usage and course of dealings between the parties
New terms materially alter the contract What is a material alteration? Surprise/
Hardship test Surprise- objective inquiry… is the term
uncommon in the commercial context? Hardship- significant shift in liability
Examples of material alterations under this test: Disclaimer of warranty
28
Limitations of Liability (Princess Cruises) Indemnifications (Brown Machine) Choice of law, choice of forum and
arbitration clauses Not regarded as material alterations:
Reasonable period of delivery Not responsible for acts beyond our
control The offeree has already expressly objected to the
terms or he objects within a reasonable period of time after he learns of them.
What happens with Different Terms?? (changing a term that has already been discussed).
Courts have sketched 3 approaches: Minority Rule: First Shot Rule
1) Inclusive Approach: we should treat the different terms the same way we treat additional terms
but under the 3 part test the term gets bounced because it is a material alteration
2) Categorical Exclusion: different terms are not included at all (like #1 but don’t even look at material alteration)
Majority Rule: Knock Out Rule 3) Knock Out Approach: if you have different
and conflicting terms, those two collide and knock each other out and neither becomes part of the agreement.
The court then supplements with the default principles of the UCC to fill in the gaps.
Preserves fairness to both parties so that the offeror’s terms aren’t always used.
2-207(3) if the parties behave like they have a contract, then
they do and the court will sort the terms out later. Terms on which the parties agree and there are no inconsistencies about will become part of the contract.
2-207(1)- acceptance not undone; 2-207(2) new terms can accrue; 2-207(3)- and/even conduct can agree
Brown Machine, Inc. v. Hercules, Inc. FACTS
P sues D for indemnification clause to get damages for an employee injured while using P’s trim press.
HELD
29
Price quote is NOT an offer but rather an invitation to enter into negotiations, unless it is detailed enough and can amount to an offer creating the power of acceptance.
Orders are considered offers to purchase. Seller’s acknowledgement is acceptance because not expressly limited.
But the purchase order expressly limited to the terms of its offer so the indemnification provision would not have come in under 2-207(2)
Question is whether Brown Machine’s acknowledgment containing the indemnity provision constitutes a counter offer or an acceptance with additional or different terms?
General notion is that under UCC 2-207(1) to convert an acceptance to a counter offer, the conditional nature of acceptance must be clearly expressed in a manner sufficient to notify the offeror that the offferee is unwilling to proceed with the transaction unless the additional/ different terms come in.
Court found it was acceptance with additional terms. So then if the term doesn’t come in, it is just hanging out there as a proposed addition. Court says nonetheless the parties did not accept based on their conduct because it was a material alteration
“if they are such as materially to alter the original bargain, they will not be included unless expressly agreed to by the other party” pg.158
Court found that the buyer’s response of “all other specifications are correct” did not satisfy the requirement that they expressly assented to the new terms
Finding express assent under 2-207(2) cannot be presumed by silence or mere failure to object
Paul Gottlieb & Co. v. Alps South Corp.o FACTS
Paul Gottlieb & Co., Inc. Contended that a limitation of liability clause on the back of its standardized finished foods contract did not materially alter the contract is had with Alps South Corp.,, so that the clause should not, as a matter of law, have been excluded from the contract, and, therefore the clause served to limit Gottlieb's liability to Alps for consequential damages
o ISSUE
30
Under the UCC 2-207, does a limitation of liability clause found on the back of a standardized contract for the sale of goods between merchants materially alter the contract where it does not, as a matter of law, cause unreasonable surprise or hardship?
o HELD The trial court erred in its finding that the limitation of
liability clause, upon which the seller relied in defense to the buyer's counterclaim, materially altered the contract. The fact that the seller altered a yarn type in filling the buyer's order that resulted in a breach of contract was separate and distinct from the legal analysis of how the language of the contract was construed.
The central issue was whether the limitation of damages clause, as an additional term, materially altered the contract under the Fla. Stat. If so, it was excluded.
The evidence did not allow a conclusion that the seller's limitation of liability clause was either an unreasonable surprise to the buyer or a hardship as a result of surprise.
Rather, the evidence showed that the buyer neglected to inform the seller of the larger consequences of providing nonconforming goods;
thus, the seller did not meet its burden of proving that incorporating the limitation of liability clause would have resulted in an economic hardship. The trial court erred by not enforcing the limitation of consequential damages clause. The buyer also failed to prove lost profits with reasonable certainty.
Burden of proof is on the party on the party claiming that there was a material alteration - ALPS in this case
An issue of law is reviewable de novo UCC §2-207 Comment 4 describes material that would
alter the contract in surprise or hardship Clause negating standard warranties, standard of
cancellation - think of this like advice Criticism of this is by Judge Posner: “hardship
is a consequence not a criterion” pg. 182 (Union Carbide opinion)
Hardship that results from some surprising term There exists a duty to read, mere ignorance is
no excuse
31
This is the 6th contract between these parties that contains this limitation
Looking for substantial economic hardship or shift in liability that imposes some unreasonable cost
Would something be surprising to reasonable merchant behaving in a reasonable manner?
Similar to a reasonably foreseeability issue in regards to damages arising under common law
Court will look to reasonable expectations of parties
Comment 5 - lists things that are not material alterations, what the court was trying to determine was if there was a material alteration
Clauses of choice of law or choice of forum (per se material alteration - not a general rule)
o CISG CISG arts. 8(3)
In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.
To determine the intent of a party or how a reasonable person would have understood it, including if silence can be construed as acceptance consider:
Negotiations (Chateau) Established practices between the parties Usages Subsequent conduct of the parties.
CISG arts. 18(1) A statement made by or other conduct of the offeree
indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance. (Filanto)
CISG arts. 19 1) A reply to an offer which purports to be an
acceptance but contains additional, limitations or
32
other modification is a rejection of the offer and constitutes a counter-offer
2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.
3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially.
*need to read 19(1) and 19(2) together. 19(1)- adopts the mirror image rule 19(2) if the new terms do not materially alter and
the offeror does not rejected them, then there is acceptance. (under UCC 2-207(2) materially alteration determines if a term comes in or not; but here the material alteration would derail acceptance). This question determines if there is acceptance or not.
19(3)- details the terms that are considered material alterations
Material alterations are defined so broadly that it is hard to imagine a change that would not be material. So this means that in almost every case an acceptance that varies the terms of the offer will be a counter-offer which will be accepted by the other party’s conduct.
Filanto v. Chilewich FACTS
A New York enterprise agreed to sell shoes to a Russian enterprise pursuant to a master agreement that required disputes to be arbitrated in Moscow.
To fulfill the agreement, the New York enterprise entered into multiple contracts with an Italian [seller].
33
Pursuant to one purported contract the Italian manufacturer supplied shoes but the New York buyer made only partial payment.
The Italian [seller] sued in a New York court to recover the price.
Alleging that the contract incorporated the Russian master agreement by reference, the New York buyer sought a stay of proceedings to permit arbitration.
HELD 1) CISG governs because parties of different countries
that are both signatories of the treaty (Italy v. US) 2) F did not reject new terms in a timely manner,
therefore they are included in K, 3) if they had replied in a timely manner, it would have
been a rejection/ counter offer, and 4) b/c they later tried to invoke one of the rules they
claim to have rejected, all rules they claim to have rejected apply.
Chateau Des Charmes Wines Ltd. v. Sabate USA Inc. FACTS
D shipped corks bought by P to him with invoices and clause about dispute resolution in French. P noticed corks tainted wine with cork flavor, sued D.
ISSUES (1) whether the parties orally concluded a contract;
and (2) whether the forum selection clause contained in
seller’s invoice modified the original terms of the contract or rather constituted a separate agreement between the parties.
HELD CISG governs because parties of different countries
that are both signatories of the treaty (Canada v. USA/France);
Oral agreement formed the contract (had this been the UCC it would have needed to be in writing)
The forum selection clause printed on every invoice does not govern agreements because it wasn’t part of the telephone agreement.
Distinguishing between Filanto and Chatreau- Acceptance in Chateau case came before the new terms surface.
34
Electronic and “Layered” Contracting Shrinkwrap
Elements: Consume places an order and there hasn’t been very much
widdling down of the details yet When the purchaser receives the product, the more
detailed terms are inside After removing the “wrapping,” the purchaser has the
opportunity to inspect and review the contract terms These terms typically include a term that says if you hang
onto this for a certain period of time you have accepted. By keeping and using there is acceptance
Two Approaches to “Offer and Acceptance” Rolling approach
The placement of an order (by phone or online) is not an offer. The shipment of the goods by the vendor constitutes the offer, and keeping the product is the acceptance.
Opening a package to read the terms does not constitute an acceptance, but after perusal of the terms, if the consumer keeps the product for the specified period of time (specified in the terms) then he/she has assented to the terms
Practical advantage: the consumer retains the ability to escape the contract
Problem: finding acceptance after delivery Klocek approach
The contract is formed when the consumer orders the product
Shrink-wrap terms found in the box contain the vendor's proposals for additions to the contract governed by UCC, the terms are not included in the contract unless readily assented to by the consumer
Clickwrap Here we are talking about circumstances where you have to
scroll through the seller’s terms of sale, before completing the purchase, and click a button that says “I agree” that signals the purchaser’s agreement.
It makes it harder for the purchaser to say they did not see the terms.
Courts generally accept that you assent through the click because:
1) user gets notice of provisions before shelling out $ 2) arguably the quality of notice is better (better than
bundled in the back of a booklet)
35
3) clickwrap is easier to determine discrete user conduct (in shrinkwrap you have to unwrap paper and retain…clicking to indicate acceptance is easier to distinguish and isolate and unwind because you can refrain from clicking instead of having to send back)
Browsewrap May not even be purchasing. Just the user of a site. There are
no “I agree” buttons. The owners of the site just provide terms and conditions.
Typically involve information made available by Internet providers on their websites often, but not necessarily, free of charge, and often, although not necessarily, including information that the user accesses but doesn’t always download.
Fall into several categories: Repeatedly getting information (register) Terms and conditions on the site browsed are enforced
against the website owner themselves, not the smaller fry customers that are repeat customers.
Going to turn on: Identity of parties Court’s interpretation of property The actual terms imposed
Enforceable if 4 Requirements Met: User is provided w/ adequate notice of the existence of the
proposed terms Use has a meaningful opportunity to review terms User provided w/ adequate notice that taking a specific
action manifests assent to the terms User takes action specific in the latter notice.
o Hines v. Overstock.com, Inco FACTS
Plaintiff initiated a class action against overstock.com claiming that their restocking fee was a breach of contract, fraud and a violation of NY business law.
Plaintiff purchased a vacuum and when she returned it she was charged a 30 dollar restocking fee despite the fact that the website said returns could be done free of charge
Overstock moved to have the case moved to Utah for binding arbitration in accordance with their terms and conditions
Plaintiff claimed to have never seen the terms and conditions due to their location on the website, and that the arbitration clause is not part of the contract
She was never required to actively assent to the terms and conditions by clicking "I agree"
36
o ISSUE Are the terms and conditions of a seller binding on a
consumer when the print is in a location that is not apparent to the consumer
o HELDI. Request to Stay or Dismiss for Arbitration
The Federal Arbitration Act allows for binding arbitration is specified in the contract and both parties agree.
To determine whether arbitration should be stayed/dismissed the court must ask 2 questions
(1) Did the parties agree to arbitrate? Traditionally, agreements require "meeting of the
minds" and a "manifestation of mutual assent" Internet contracts challenge this traditional
understanding. The new standard is "whether a website user
has actual or constructive knowledge of a site's terms and conditions prior to using the site"
Defendant has failed to prove that Plaintiffs had actual or constructive notice because the website did not prompt the visitors to review the terms and conditions.
No adequate notice of existence of the terms
A small hyperlink to the terms and conditions at the bottom of the page is not sufficient
(2) Does the scope of the agreement encompass the asserted claims?
II. Request to transfer to Utah Pursuant to the Forum Selection Clause
A forum selection clause also requires that both parties assent. There was no meeting of the minds on these terms therefore they are invalid.
“Layered” Contracting
o DeFontes v. Dell, Inc. o FACTS
Computer purchasers brought action against manufacturer, alleging that manufacturer's collection of taxes from them on the purchase of optional service contracts violated the Deceptive Trade Practices Act because services contracts were not taxable in Rhode Island. The Superior Court denied manufacturer's
37
motion to stay the proceedings and compel arbitration, and manufacturer appealed.
o HELD “Shrinkwrap” terms and conditions agreements did
not adequately inform buyers of their right and method of rejection of the goods, and thus buyers' retention of the goods did not indicate assent to the terms and conditions agreements, including arbitration provision.
Postponed Bargaining: “The Agreement to Agree” o Restatement § 27. Existence of Contract Where Written
Memorial is Contemplated Manifestations of assent that are sufficient to constitute an
agreement will be treated as binding even if the parties have agreed to write a formal contract later with all of the specific terms. However some circumstances can show that a manifestation of assent is just preliminary negotiations.
o UCC § 2-204(3) Even though 1 or more of the terms are left open, the contract
does not fail for indefiniteness if the parties intended to make a contract and "there is a reasonably certain bases for giving an appropriate remedy"
o UCC § 305. Open Price Terms If the parties leave the price blank, a court will fix a reasonable
price. BUT leaving the quantity blank is a problem
38
o Statute of Frauds The Sale of Goods Statute of Frauds: UCC § 2-201
UCC § 2-201- Formal Requirements; Statute of Frauds 1) Except as otherwise provided in this section a
contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing.
2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfied the requirement of subsection (1) against such party unless written notice of objection to its contents is given within 10 days after it is received.
3) A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable
a) if the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement; or
b) if the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or
c) with respect to goods for which payment has been made and accepted or which have been received and accepted (Sec. 2-606)
Question #1: Does this fall under the UCC SoF? Contract for sale of goods for $500 or more not
enforceable unless there is a writing sufficient to
39
indicate that a contract has been made between the parties.
Question #2: Does meet requirements of the UCC SoF? Three requirements for a memorandum:
Evidence a contract for the sale of goods An offer is NOT enough (under RS 131 an written
offer can satisfy for the common law but the UCC is looking for a contract)
Does not need to say “this is a contract” Enough evidence that there was an oral contract
and a real transaction occurred It must be singed
Must be a signed writing Writing includes printing, typewriting, or
any other intentional reduction to tangible form UCC 1-201(46)
Must be signed by the party to be charged Signed includes any symbol executed or
adopted by a party with intention to authenticate a writing UCC 1-201(39)
It must specify a quantity Quantity can be incorrectly stated (but that puts a
cap on the damages that can be enforced) (while Common Law requires that ALL the
essential terms be there, UCC does NOT… UCC ONLY requires that a quantity be stated)
Question #3: is there an exception? Four exceptions under the UCC:
1) Specially manufactured goods- if you are making goods for just one buyer court should enforce those contracts even if there isn’t a writing because that is sufficient proof (but still need to show that there was an underlying agreement)
2) Admission- no contract is required to the extent of the admission. If a party admits that there is a contract then this is sufficient evidence that a contract exists. (not majority rule under the CL)
3) Part performance- Buffalo goods have been received and accepted Acceptance must be voluntary and unconditional Part payment-
Acceptance must be voluntary and unconditional
May be made by cash or check May be inferred by the buyer’s conduct in
taking physical possession
40
Behavior may indicate that the goods have been received
Doing repairs, getting insurance But must be genuine, not just opportunistic
4) Merchant confirmation- 2-201(2) If BOTH parties are merchants, one of them sends
a written confirmation, to which the other does not object within 10 days, that written confirmation may be used to satisfy the SoF even if it is not signed by the person who receives it. But it has to be sufficient against the sender.
As long as it is sufficient/ can be enforced against the person who is sending it, then it is not unfair to make it enforceable against the person receiving it.
Sufficient against the sender: Show the existence of the contract It has to be signed by the sender It has to show the quantity of goods Some courts add a 4th element that it
must say that it is a written confirmation of the prior oral agreement (intended to drive out objection)
Other courts reject this and say that it is too much (Bazak pg. 345)
Buffaloe v. Hart FACTS
o Plaintiff Buffaloe, rented barns from Defendant Hart. Plaintiff attempted to purchase the barns from Defendant by making an installment payment. Defendant returned the payment and sold the barns to others.
ISSUEo Did the jury err in enforcing the contract?
HELD o No. The Court did not err in enforcing the contract.
Because the sale of the barns involves the sale of goods for at least $500, the agreement falls under the statute of frauds provision in the UCC.
o A check may satisfy the requirements of the statute of frauds if it contains sufficient writing to indicate the contract of sale, is signed by the party against whom enforcement is sought, and indicates quantity.
41
o Because Defendant did not sign the check, it does not satisfy the requirements of the statute of frauds.
o Plaintiff argues that even though it does not satisfy the statute of frauds, the agreement should be enforced under the doctrine of part performance. The Court determines there is evidence whereby a jury could determine that the agreement is enforceable under part performance. Therefore, the Court upholds the jury verdict.
42
o Interpreting the Agreement The Parol Evidence Rule
The Common Law Rule o Definition
A doctrine precluding parties to an agreement form introducing evidence of PRIOR or CONTEMPORANEOUS agreements in order to repudiate or alter the terms of the written contract
An exclusionary rule / meaning to keep certain evidence out
o Purpose Provides certainty for contracting parties Prevents the introduction of unreliable evidence Deters attempts to rewrite agreements with
hindsighto Integrated Agreements
R § 209(1): An integrated agreement is a writing or writings constituting a final expression of one or more terms of the agreement
UCC provision is similaro Complete v. Partial Integration
R § 210(1) : A COMPLETELY integrated agreement is an integrated agreement adopted by the parties as a complete and exclusive statement of the terms of the agreement
R § 210(2) : A PARTIALLY integrated agreement is an integrated agreement other than a completely integrated agreement
Could be a final agreement, but was not intended to fully encompass the deal
Restatementso § 209: Integrated Agreements
(1) An integrated agreement is a writing or writings constituting a final expression of one or more terms of an agreement
(2) Whether there is an integrated agreement is to be determined by the court as a question preliminary to determination of a question of interpretation or to application of the parol evidence rule
(3) Where the parties reduce an agreement to a writing which in view of its completeness and specificity reasonably appears to be a complete agreement, it is taken to be an integrated
43
agreement unless it is established by other evidence that the writing did not constitute a final expression
o § 210: Completely and Partially Integrated Agreements
(1) A completely integrated agreement is an integrated agreement adopted by the parties as a complete and exclusive statement of the terms of the agreement
(2) A partially integrated agreement is an integrated agreement other than a completely integrated agreement
(3) Whether an agreement is completely or partially integrated is to be determined by the court as a question preliminary to determination of a question of interpretation or to application of the parol evidence rule
o § 211: Standardized Agreements (1) Excepted as stated in subsection (3), where a
party to an agreement signs or otherwise manifests assent to a writing and has reason to believe that like writings are regularly used to embody terms of agreements of the same type, he adopts the writing as an integrated agreement with respect to the terms included in the writing
(2) Such a writing is interpreted wherever reasonable as treating alike all those similarly situated, without regard to their knowledge or understanding of the standard terms of the writing
(3) Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement
o § 213: Effect of Integrated Agreement on Prior Agreements (Parol Evidence Rule)
(1) A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them
(2) A binding completely integrated agreement discharges prior agreements to the extent that they are within its scope
(3) An integrated agreement that is not binding or that is voidable and avoided does not discharge a prior agreement. But an integrated agreement, even though not binding, may be effective to render inoperative a term which would have been part of the agreement if it had not integrated
44
o § 214: Evidence of Prior or Contemporaneous Agreements and Negotiations
Agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish
(a) that the writing is or is not an integrated agreement;
(b) that the integrated agreement, if any, is completely or partially integrated;
(c) the meaning of the writing, whether or not integrated
(d) illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause;
(e) ground for granting or denying rescission, reformation, specific performance, or other remedy
o § 215: Contradiction of Integrated Agreements Except as stated in the preceding Section, where
there is a binding agreement, either completely or partially integrated, evidence of prior or contemporaneous agreements or negotiations is not admissible in evidence to contradict a term of the writing
o § 216: Consistent Additional Terms (1) Evidence of a consistent additional term is
admissible to supplement an integrated agreement unless the court finds that the agreement was completely integrated
(2) An agreement is not completely integrated if the writing omits a consistent additional agreed term which is
(a) agreed to for separate consideration, or (b) Such a term as in the circumstances might
naturally be omitted from the writingo § 217: Integrated Agreement Subject to Oral
Requirement of a Condition Where the parties to a written agreement agree
orally that performance of the agreement is subject to the occurrence of a stated condition, the agreement is not integrated with respect to the oral condition
Merger Clause o If parties put a merger clause in their contracts,
they are communicating to each other that the written agreement is MEANT to be a complete and final integrated agreement
45
Provides that, “this document constitutes the entire agreement of the parties and there are NO representations. warranties, or agreements other than those contained in this document”
o BUT, under the Restatements, a merger clause does NOT necessarily mean that the agreement is completely integrated
3 Step Rule
o 1st STEP - Determine the Level of Integration A completely integrated agreement is an expression
of ALL of the terms of the agreement A partially integrated agreement is a final statement
of SOME of the termso 2nd STEP - What Purpose is the Parol Evidence
Going to be Used For? To Contradict, Supplement, or Explain?
If the agreement is NOT integrated at ALL / not meant to be a final expression of the terms in any way, the parol evidence rule does NOT apply
If the agreement is PARTIALLY integrated, evidence of a prior or contemporaneous agreement can be used to supplement or explain the written agreement
BUT, evidence of a prior or contemporaneous agreement can NOT be used to contradict the written agreement
If the agreement is COMPETELY integrated, evidence of prior or contemporaneous agreements can be used ONLY to explain the written agreement
Evidence of a prior and contemporaneous agreement can NOT be used to supplement or contradict the agreement
Rationale - Since a completely integrated agreement is intended to be a comprehensive statement of all the terms, you should NOT be supplementing or contradicting this at all
o 3rd STEP: Exceptions to the Rule Evidence of the following are NOT excluded / can
be presented to show that there was never an agreement / agreement is invalid:
Incapacity Fraud Duress
46
Undue Influence Mistake Lack of Consideration No Mutual Assent Existence of a Collateral Agreement Existence of an Oral Condition
Evidence to show that the agreement would not take effect unless some specified event occurred
Showing of Entitlement to an Equitable Remedy (i.e. Promissory Estoppel)
Evidence to Explain Ambiguity in the Contract
The UCC Rule and Trade Usages o Similar to Restatement, bus has special deference to
trade usage, course of performance, and course of dealing to EXPLAIN the meaning of the agreement / qualify the terms of a written contract
o UCC § 2-202 Final Written Expression: Parol or Extrinsic Evidence
Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may NOT be CONTRADICTED by evidence of any prior agreement or of a contemporaneous oral agreement but MAY be EXPLAINED or SUPPLEMENTED
(a) By course of dealing (i.e. past conduct between parties not relating to contract at issue) or usage of trade (i.e. place or location or trade usage) or by course of performance (i.e. past conduct between the parties relating to the contract at issue) and
(b) By evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement
o UCC § 1-205: Course of Dealing and Trade Usage (1) A course of dealing is a sequence of pervious
conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct
(2) A usage of trade is any practice or method of dealing having such regularity of observance in a PLACE (used in Nanakuli), vocation or trade as to
47
justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage are to be proved as facts. If it is established that such a usage is embodied in a written trade code or similar writing the interpretation of the writing is for the court
(3) A course of dealing between parties and any usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware give particular meaning to and supplement or qualify terms of the agreement
(4) The express terms of an agreement and an applicable course of dealing or usage of trade shall be construed wherever reasonable as consistent with each other; but when such construction is unreasonable express terms control both course of dealing and usage of trade and course of dealing controls usage of trade
(5) An applicable usage of trade in the place where any part of performance is to occur shall be used in interpreting the agreement as to that part of the performance
(6) Evidence of a relevant usage of trade offered by one party is not admissible unless and until he has given the other party such notice as the court finds sufficient to prevent unfair surprise to the latter.
o UCC § 2-208 (1) Where the contract for sale involves repeated
occasions for performance by either party with knowledge of the nature of performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection shall be relevant to determine the meaning of the agreement
(2) The express terms of the agreement and any such course of performance, as well as any course of dealing and usage of trade, shall be construed whenever reasonable as consistent with each other; but when such construction is unreasonable, express terms shall control course of performance and course of performance shall control both course of dealing and usage of trade
(3) Subject to the provisions of the next section on modification and waiver, such course of performance shall be relevant to show a waiver or modification of any term inconsistent with such course of
48
performance
o Nanakuli Paving & Rock Co. v. Shell Oil Co.(UCC 2-202’s Parol Evidence Rule → Trade Usage & Course of Dealing)
FACTSo P sued over a one-year contract, contending
that D failed to protect it from price increases
o P argued that although such protection was not enumerated in the contract (just said “price is to be D’s posted price at time of delivery”), it was part of the trade usage in concrete and thus implied in the contract, plus D had previously performed this service for P in the past (i.e. course of dealing)
ISSUEo May trade custom and usage and past course of
dealings establish contract terms? HELD
o Under UCC 2-202, trade usage and past course of dealings between contracting parties may establish terms not specifically enumerated in the contract, so long as no conflict is created with the written terms (not used to contradict)
Express terms do control and cannot be overridden, but trade usage and course of performance can QUALIFY express terms, specifically price protection within the contract here
Parol Evidence under the CISG ALTOGETHER, the CISG allows for the admission
of all relevant evidence of the parties’ intent, but it does NOT make it mandatory nor does it require the court to give relevant evidence a lot of weight
Article 8(1) : For the purposes of this Convention, statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was
Article 8(2): If the preceding paragraph is not applicable, statements made by and other conduct of a party are to be interpreted according to the
49
understanding that a reasonable person of the same kind as the other party would have had in the same circumstances
Article 8(3) : In determining the intent of a party OR the understanding a reasonable person would have had, due consideration is to be given to ALL relevant circumstances of the case, including the negotiations, any practices which the parties have established between themselves, usages, and any subsequent conduct of the parties
Article 11 : A contract of sale need NOT be concluded in or evidenced by writing and is NOT subject to any other requirement as to form. It may be proved by ANY means, including WITNESSES
o MCC-Marble Ceramic Center v. Ceramica Nuova D’Agostino
(CISG → NO Parol Evidence Rule) FACTS
P signed an Italian contract, containing terms and conditions on both the front and reverse
P signed but was unaware of the provisions on the reverse side
D was aware that P had no subjective intent to be bound by those terms
later, P brought suit against D, claiming breach of requirements contract when D failed to satisfy orders
ISSUE Must a court consider parol evidence in a
contract dispute governed by the CISG? HELD
The CISG precludes the application of the parol evidence rule, which would otherwise bar the consideration of evidence concerning a prior or contemporaneously negotiated oral agreement
Since the CISG allows for the admission of all relevant evidence of the parties’ intent, evidence indicating that D was aware of P’s subjective intent not to be bound by the terms on the reverse of the pre-printed contract can be considered
50
Advanced Topics in Contract Law o Supplementing the Agreement
Reasons for Implied Terms UCC § 2-306(2) : Output, Requirements and Exclusive
Dealings o Codifies Wood v. Lucy, Lady Duff-Gordon and requires
“best efforts” under a requirements contracto (2) A lawful agreement by either the seller or buyer for
exclusive dealing in the kinds of goods concerned IMPOSES unless otherwise agreed an obligation by the seller to use BEST EFFORTS to supply the goods AND by the buyer to use BEST EFFORTS to promote their sale
UCC § 2-308: Absence of Specified Place for Delivery o Unless otherwise agreedo (a) the place for delivery of goods is the seller's place of
business or if he has none his residence; buto (b) in a contract for sale of identified goods which to the
knowledge of the parties at the time of contracting are in some other place, that place is the place for their delivery; and
o (c) documents of title may be delivered through customary banking channels.
UCC § 2-309: Absence of Specific Time Provisions; Notice of Termination o Used in Leibel v. Raynor Manufacturing / frequently
applied to distributorship agreementso (2) Where the contract provides for successive
performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party
o (3) Termination of a contract by one party except on the happening of an agreed event requires that REASONABLE notification be received by the other party and an agreement dispensing with notification is INVALID if its operation would be unconscionable
“Reasonable notification” may still be required, even if written agreement dispensed w/ need for notification of termination, if it would lead to an unconscionable state of affairs
CISG arts. 31 o If the seller is not bound to deliver the goods at any other
particular place, his obligation to deliver consists: (a) if the contract of sale involves carriage of the
goods - in handing the goods over to the first carrier for transmission to the buyer;
51
(b) if, in cases not within the preceding subparagraph, the contract relates to specific goods, or unidentified goods to be drawn from a specific stock or to be manufactured or produced, and at the time of the conclusion of the contract the parties knew that the goods were at, or were to be manufactured or produced at, a particular place - in placing the goods at the buyer's disposal at that place;
(c) in other cases - in placing the goods at the buyer's disposal at the place where the seller had his place of business at the time of the conclusion of the contract.
CISG arts. 33 o The seller must deliver the goods:
(a) if a date is fixed by or determinable from the contract, on that date;
(b) if a period of time is fixed by or determinable from the contract, at any time within that period unless circumstances indicate that the buyer is to choose a date; or
(c) in any other case, within a reasonable time after the conclusion of the contract.
Wood v. Lucy, Lady Duff-Gordon(Implied Term of “Best Efforts” under UCC 2-306(2)) FACTS
Lucy, a famous-name fashion designer, contracted w/ Wood that for her granting him an exclusive right to endorse designs with her name & market and license all of her designs, Wood would split all profits w/ her
later, Lucy placed her endorsement on Sears clothing, in violation of contract
Lucy alleged there was no contract in first place, b/c Wood not bound to do anything
ISSUE Is the exclusivity provision supported by an implied
promise / term, making it a binding contract? HELD
While an express promise may be lacking, the whole writing may be “instinct with an obligation”- an implied promise- imperfectly expressed so as to form a valid contract
The promise to pay Lucy half the profits and make monthly accounting was a implied promise to use Wood’s BEST EFFORTS to bring profits and revenues into existence
52
Wood assumed an implied obligation to use reasonable efforts in return for the exclusive privilege to promote Lady’s designs, therefore creating a binding contract
Leibel v. Raynor Manufacturing Co.(Implied Term of “Reasonable” Notice of Termination → UCC
2-309(3)) FACTS
P orally contracted w/ D to become an area-exclusive distributor of D’s garage doors and operators
P borrowed substantial sums of money to purchase an inventory of D’s products
after 2 yrs. of decreasing sales, D sent P a notice of termination saying that as of THAT date, the relationship was terminated & P would have to go through another manufacturer-buyer for a higher price to acquire D’s products
ISSUE P argues reasonable notice was NOT given / D claims
they were able to terminate at any time HELD
Reasonable notification is required under the UCC in order to terminate an ongoing oral agreement creating a manufacturer-distributor relationship
UCC applies where the dealer-distributor was to sell the “goods” of the manufacturer-supplier
The requirement of REASONABLE notification does not relate to the method of giving notice (i.e. written), but to the circumstances under which notice is given / extent of advance warning
When sales are the primary essence of the distributorship agreement, the dealer is compelled to keep a large inventory on hand- if distributorship is terminated w/out sufficient time to sell remaining inventory, a cause of action for damages may exist
Factors that Determine Whether Notice of Termination is “Reasonable”
The distributor’s need to sell his remaining inventory Whether distributor has substantial un-recouped
investment made in reliance on the agreement
53
Whether there has been sufficient or “reasonable time” to find a “substitute” arrangement”
Terms contained in the parties’ present or prior agreement and by industry standards
54
Implied Obligation of Good Faith Rest. 2d § 205: Duty of Good Faith and Fair Dealing
(used in Locke)o Every contract imposes upon each party a duty of good
faith and fair dealing in its performance and its enforcement
UCC § 1-102 : Purposes; Rules of Construction; Variation by Agreemento (3) The effect of the provisions of this Act may be varied by
agreement, except as otherwise provided in this Act and expect that the obligations of good faith, diligence, reasonableness and care prescribed by this Act may NOT be disclaimed by agreement but the parties may by agreement determine the standards by which the performance of such obligations is to be measured if such standards are not manifestly unreasonable
UCC § 1-203 : Obligation of Good Faith o Every contract or duty within this Act imposes an obligation of
good faith in its performance or enforcement UCC § 1-201 : General Definitions
o (19) “Good faith” means honesty in fact in the conduct or transaction concerned
o (20) "Good faith," except as otherwise provided in Article 5, means honesty in fact and the observance of reasonable commercial standards of fair dealing.
UCC § 1-304: Obligation of Good Faith o Every contract or duty within [the Uniform Commercial Code]
imposes an obligation of good faith in its performance and enforcement.
UCC § 2-103: Definitions and Index of Definitions o (1)(b) “Good faith” in the case of a merchant means
honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade
UCC § 2-306: Output, Requirements and Exclusive Dealings o (1) A term which measures the quantity by the output of the
seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.
CISG art. 7 o (1) In the interpretation of this Convention, regard is to
be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade
Seidenberg v. Summit Bank FACTS
55
o Seidenberg and another plaintiff (Ps) sold their insurance brokerage business to Summit Bank (D). In exchange they received 445,000 shares of stock in Summit Bank’s parent corporation and were to continue as executives of the brokerage firms. The employment agreements acknowledged the joint obligation to work together, and provided that Ps and D would formulate a joint marketing program to provide the brokerage firm with access to D’s marketing resources.
o D later terminated Ps and Ps brought suit for breach of contract, contending that D had failed to honor its obligations regarding joint marketing, thereby impacting negatively Ps’ expected compensation and future involvement.
Ps claimed that their allegations gave rise to an inference of bad faith and that D had never been committed to developing the business with Ps, and that D had merely sought to acquire Ps’ business to operate it themselves.
o All claims except Ps‘ claim of a breach of the implied covenant of good faith and fair dealing were settled. The lower court dismissed the remaining claim, holding that the sellers sought to use parol evidence to prove an oral agreement made beyond the four corners of the written contract. Ps appealed.
ISSUESo 1) Must a court allow parol evidence in
determining whether a breach of the covenant of good faith has occurred?
o 2) Is a claim under the implied warranty of good faith and fair dealing negated merely because the claimant had equal bargaining power, had engaged counsel, or was not financially vulnerable when negotiating the agreement?
HELDo 1) Yes. A court must allow parol evidence in
determining whether a breach of the covenant of good faith has occurred.
The parol evidence rule does not come into play until the true intentions of the parties is determined. The rule cannot inhibit the application of the implied covenant of good faith and fair dealing because that covenant is contained in all contracts made by operation of law.
56
In this case Ps do not seek to contradict or alter any express term in their written contract, but rather question D‘s good faith in both its performance and termination of the contract.
To determine what is considered a good faith performance, the court must consider the expectations of the parties and the purposes for which the contract was made.
It would be difficult, if not impossible, to make that determination without considering evidence outside the written contract.
Therefore, in determining whether a breach of the covenant has occurred, a court must allow for parol evidence.
o 2) No. A claim under the implied warranty of good faith and fair dealing is not negated merely because the claimant had equal bargaining power, had engaged counsel, or was not financially vulnerable when negotiating the agreement. These are factors which the trier of fact may consider in weighing the sufficiency of plaintiffs’ claim but they are not the only factors.
The covenant of good faith and fair dealing is contained in all contracts and mandates that neither party do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.
While the bargaining power and sophistication of the parties must be viewed as significant, it is not the sole criterion by which this claim must be resolved.
Morin Building Products Co. v. Baystone Construction, Inc.(Contracts whose purpose is primarily functional should be judged by the objective standard) FACTS
o General Motors hired Baystone Construction (D) to build an addition for a Chevrolet plant.
Baystone hired Morin Building Products (P) to supply and erect the aluminum walls.
o The contract required that “aluminum type 3003, not less than 18 B & S gauge” be used for the exterior siding.
57
o The contract also provided that all work was to be done subject to approval of the architect and that his decision would be final, and that decisions regarding acceptability would rest strictly with General Motors. Whatever was customary or usual in erecting other buildings shall not enter into any consideration or decision.
o P did the work but General Motors rejected it and D hired another subcontractor to replace it.
o When P refused to pay D for their work, they sued and the jury held that D's work was objectively adequate
ISSUESo Will acceptance of performance in a contract whose
purpose is primarily functional (as opposed to aesthetic) be based on an objective standard?
HELDo Yes, the majority rule is that where the contract
in question involves performance of commercial quality, an objective, reasonable person standard will be used in determining whether performance was adequate.
Locke v. Warner Bros., Inc.(“Pay or Play” Deal / Implied Covenant of Good Faith & Fair Dealing R § 205)
FACTS P entered into agreement w/ D in exchange for
dropping her case against Eastwood P would receive $250,000 from D for 3 yrs for a
non-exclusive first look deal for any picture she was thinking of developing & a $750,000 “pay or play” directing deal
unbeknownst to P, Eastwood agreed to reimburse D for contract / D paid P guaranteed compensation under contract but never developed any of P’s proposed projects or hired her to direct any films
P contends that the development deal was a sham
ISSUE By categorically rejecting P’s work irrespective of the
merits of her proposals, did D violate the implied terms of the contract?
HELD Where a contract confers on one party a
discretionary power affecting the rights of the
58
other, a duty is imposed to exercise that discretion in good faith and in accordance w/ fair dealing
The contract provides that D can elected to do nothing with P, but did NOT give D the express right to refrain from considering P’s ideas / working with P
The implied covenant of good faith and fair dealing obligated D to exercise that discretion honesty and in good faith and neither party can frustrate the other party’s right to receive the benefit of the contract under this implied covenant
Donahue v. Federal Express Corp.(No Good-Faith Cause Needed to Terminate At-Will Employment Contract) FACTS
P, an employee of D, was fired after he questioned numerous company practices which he claimed to be improper / P brought suit against D for wrongful termination
ISSUE Is there an implied term of good faith in the
termination of at-will employment contracts? HELD
An employee cannot, as a matter of law, maintain an action for the breach of an implied duty of good faith and fair dealing insofar as the underlying claim is for the termination of an at-will employment relationship
In an at-will employment contract, either party is free to terminate the contract at any time w/out requirement of good or just cause / implied covenant of good faith will NOT transform an at-will employment relationship into one that requires good cause for discharge
Limitations on Ability of Employer to Terminate an At- Will Employee
Contracts w/ a specified duration Public policy (restricted to clear mandates) Additional consideration provided (i.e. employee’s
hardship and expense in relocating for job) Employee handbook or manual states that D refrains
from terminating employees except for good cause
59
Promissory estoppel (i.e. detrimental reliance by a discharged employee)
60
Warranties UCC § 2-313: Express Warranty
o An affirmation, promise, description, sample or model will amount to an express warranty if it is part of the “basis of the bargain”
Does NOT require that the seller have the intent to create an express warranty
o (1) Express warranties by the seller are created as follows: (a) Any affirmation of fact or promise made by the seller to
the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise
(b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description
(c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model
o (2) It is NOT necessary to the creation of an express warranty that the seller use formal words such as “warranty” or “guarantee” or that he have a specific intention to make a warranty, BUT an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does NOT create a warranty
UCC § 2-314: Implied Warranty of Merchantability o Under this warranty, a “MERCHANT” who regularly sells
goods of a particular kind impliedly warrants to the buyer that the goods are of good quality and are fit for the ordinary purposes for which they are used
Applies only if the seller is a merchant Two most frequently applied tests are whether the
goods would: Pass without objection in the trade AND Are fit for the ordinary purposes for which such
goods are usedo (1) Unless excluded or modified (Section 2-316), a warranty
that the goods shall be merchantable is implied in a contract for their sale IF the seller is a merchant with respect to goods of that kind. Under this section the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale
o (2) Goods to be merchantable must be at least such as: (a) pass without objection in the trade under the contract
description; and (b) in the case of fungible goods, are-of fair average quality
within the description; and (c) are fit for the ordinary purposes for which such goods
are used; and
61
(d) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and
(e) are adequately contained, packaged, and labeled as the agreement may require; and
(f) conform to the promises or affirmations of fact made on the container or label if any
o (3) Unless excluded or modified (Section 2-316) other implied warranties may arise from course of dealing or usage of trade
UCC § 2-315: Implied Warranty of Fitness for a Particular Purposeo Warranty is created only when (1) the buyer relies on the
seller’s skill or judgment to select suitable goods for the buyer’s particular purpose and (2) the seller has reason to know of this reliance
Breach of the warranty does NOT require a showing that the goods are defective in any way- merely that the goods are not fit for the buyer’s particular purpose
NOT limited to merchant sellers (like the implied warranty of merchantability)
o Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose
Bayliner Marine Corp. v. Crow(UCC Express / Implied Merchantability / Implied Fitness Warranties)o FACTS
Crow purchased a sport fishing boat from Bayliner, but sued when boat couldn’t reach max speed / Crow argued that Bayliner breached express warranties and implied warranties of merchantability and fitness for a particular purpose
o ANALYSIS Express Warranties (UCC 2-313)
Bayliner’s statement in its sales brochure that this model boat “delivers the kind of performance you need to get to the prime offshore fishing ground” did NOT create an express warranty that the boat was capable of a 30 mph speed / just opinion or “puffery”
62
UCC 2-313(2) directs that a statement purporting to be merely the seller’s opinion or commendation of the goods does NOT create an express warranty
The “prop matrixes” Crow received did NOT create an express warranty that the boat he purchased was capable of max speed of 30 mph
By their plain terms, the figures stated in the “prop matrixes referred to a boat w/ diff. size propellers that carried substantially less weight
Implied Warranty of Merchantability (UCC 2-314) Bayliner did NOT breach an implied
warranty of merchantability because the boat WAS fit for its ordinary purpose as an offshore sport fishing boat
Passes w/out objection in the trade, i.e. a significant segment of the buying public would NOT object to buying a offshore fishing boat w/ the speed capability of Crow’s boat
Fit for the ordinary purpose for which the good is used, i.e. the good is reasonably capable of performing its ordinary functions (Crow used the boat for a few years / ran engine for 850 hours)
Implied Warranty of Fitness for a Particular Purpose (UCC 2-315)
Bayliner did NOT breach an implied warranty of fitness for a particular purpose because even though Crow was in fact buying the boat for its max speed, there is NO evidence that Bayliner’s rep knew on the date of sale that a boat incapable of traveling at 30 mph was unacceptable to Crow
UCC § 2-316 : Exclusion or Modification of Warranties o Express Warranties under UCC 2-316(1)
A disclaimer of an express warranty is inoperative / not effective if the disclaimer cannot be construed to be “consistent” with the express warranty
Can NOT try to sucker someone into an express warranty and then render that warranty ineffective through a disclaimer
63
Evidence of express warranties (oral or written) are subject to the parol evidence rule and may be excluded as evidence
2-316(1) Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as CONSISTENT with each other; but subject to the provisions of this Article on parol or extrinsic evidence (Section 2-202) negation or limitation is INOPERATIVE to the extent that such construction is unreasonable
o Implied Warranties of Merchantability under UCC 2- 316(2)
To disclaim an implied warranty of merchantability, the disclaimer must be CONSPICUOUS if in writing and include the word “merchantability”
Use of capital letters, contrasting color, location of the clause, and sophistication of the parties are all factors in the determination of conspicuousness
Some courts require the word “merchantability” to be in the disclaimer
2-316(2) Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing, must be conspicuous….
o Implied Warranty of Fitness for a Particular Purpose under UCC 2-316(2)
The disclaimer has to be in WRITING and it has to be CONSPICUOUS
“Conspicuous” is not just about the size and placement of the font, but also a question of whether a reasonable buyer would be surprised to find it in there
Language is sufficient to disclaim the implied warranty of fitness for a particular purpose if it states that “there are no warranties which extend beyond the description on the face hereof”
2-316(2)… and to exclude or modify any implied warranty of fitness the exclusion must be a writing and conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for example, that “There are no warranties which extend beyond the description on the face hereof”
o 3 Additional Alternatives Under UCC 2-316(3)(a)
all IMPLIED warranties (i.e. merchantability / fitness) are excluded by expressions like “as is,” “with all faults” or other language which in
64
common understanding calls the buyer’s attention to the exclusion of warranties and makes plain that there is NO implied warranty
o This language in the disclaimer thus shows that no implied warranties were made on the product when sold / basically taking it “as is”
Under UCC 2-316(3)(b) when the buyer before entering into the contract
has examined the goods or the sample or model as fully as he desired or has refused to examine the goods, there is NO implied warranty with regard to defects which an examination ought in the circumstances to have revealed to him
Under UCC 2-316(3)(c) an implied warranty can also be excluded or
modified by course of dealing or course of performance or usage of trade
o If it can be shown that people in the trade always buy products “as is” / take it as it stands without warranties, a party can show that there is no implied warranty of merchantability that came with the product
o Limitations on Warranties Statute of Limitations (typically 4 years) A Notice Requirement
Buyer, within a reasonable time after finding the defect, must alert the seller to the defect in the product
A Privity Relationship
CISG art. 35 o (1) The seller must deliver goods which are of the
quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract.
o (2) Except where the parties have agreed otherwise, the goods do not conform with the contract unless they:
(a) are fit for the purposes for which goods of the same description would ordinarily be used;
(b) are fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller's skill and judgment;
65
(c) possess the qualities of goods which the seller has held out to the buyer as a sample or model;
(d) are contained or packaged in the manner usual for such goods or, where there is no such manner, in a manner adequate to preserve and protect the goods.
o (3) The seller is not liable under subparagraphs (a) to (d) of the preceding paragraph for any lack of conformity of the goods if at the time of the conclusion of the contract the buyer knew or could not have been unaware of such lack of conformity.
Caceci v. Di Canio Construction Corp (Real Estate → Implied Warranty of Skillful Construction) FACTS
o P contracted w/ D builder for a parcel of land on which a one-family home was to be constructed by D
o Kitchen floor started dipping 4 years later & D couldn’t repair it
o Found that the cause of the sinking foundation was its placement on top of deteriorating tree trunk soil and wood
ISSUEo Should the responsibility and liability in such case, as a
matter of sound contract principles, policy, and fairness, be placed on the builder-seller, the party best able to prevent and bear the loss of major defects in construction, instead of the purchaser, who is unable to inspect the premises for defects?
HELDo The “implied warranty of skillful construction” by
legal implication (implied term in the express contract) is a contractual liability on a homebuilder for skillful performance and quality of a newly constructed home
The implication that the builder must construct a house free from material defects in a skillful manner is wholly consistent with the express terms of the contract and with the reasonable expectation of the purchasers
Builder Disclaimers of Implied Warranty of Skillful Constructiono Builder can disclaim the implied warranty, but only
through negotiations / NOT boilerplate
66
New, subsequent owners can sue the construction company, but most courts limit the ability to sue the original buyers b/c they did not have the ability to inspect the home prior to its being built
67
68
o Defenses Relating to Capacity and Fairness The UCC & CISG’s Adoption of Common Law Rules Regarding
Defenses UCC § 1-103 : Supplementary General Principles of Law
Applicableo Unless displaced by the particular provisions of this Act, the
principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy or other validating or invalidating cause shall supplement its provisions
CISG art. 4 o This Convention governs only the formation of the contract of sale and
the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is NOT concerned with:
(a) The validity of the contract or of any of its provisions or of any usage;
(b) The effect which the contract may have on the property in the goods sold
Minority and Mental Incapacity Rest. 2d § 14. Infants
o Unless a statute provides otherwise, a natural person has the capacity to incur only voidable contractual duties until the beginning of the day before the person's eighteenth birthday.
Dodson v. Shrader(Voidable Minor Contracts / “Use Rule” Exception to the R § 16 Infancy Doctrine)o FACTS
P, aged 16, bought a used pick-up truck from the D’s Auto Sales Shop for $4,900
Ds did not inquire as to P’s age Truck developed a burnt valve 9 months later P drove the truck until it “blew up,” then
demanded the contract be rescinded and his money returned
o ISSUE Should a merchant who deals with a minor in good
faith receive some protection?o HELD
Even if a minor’s contract is rescinded, the merchant MAY keep an amount equal to the decrease in value of the items returned rather than refund the full purchase price (“Use Rule” Exception to Infancy Doctrine)
69
The GENERAL RULE is that a minor’s contracts are considered VOIDABLE, not void, i.e. the minor has the option in invoking the contract selectively, but the merchant can NOT claim the contract is void (to protect minors from their lack of judgment / crafty adults)
BUT, old rule teaches children “bad tricks” (use infancy doctrine as shield to avoid enforcement before performance / as a sword to rescind a contract after performance)
Court-created EXCEPTIONS: The “Benefit” Rule→ (Purchase Price) -
(Use of Truck for 9 Months) Minor’s recovery of full purchase price
MINUS the minor’s use of the merchandise
The “Use” Rule (USED HERE) → (Purchase Price) - (Deterioration of Truck)
Minor’s recovery of full purchase price MINUS depreciation in value while in minor’s possession
o Minors Exceptions Necessities Exception
A minor’s contracts for necessities, such as food, clothing, and shelter are NOT voidable b/c we want adults to make these types of contracts w/ minors
Minor only liable for reasonable value of necessities though
Resuscitation at Age 18 Minors presumptively affirm contracts when they
reach the age of 18 unless they expressly disaffirm them
o Rest. 2d § 15. Mental Illness or Defect (used in Hauer)
Requires a case-by-case inquiry / not a bright line rule
(1) A person incurs only VOIDABLE contractual duties by entering into a transaction if by reason of mental illness or defect
70
COGNITIVE Test → (a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, OR
Whether the person involved had sufficient mental ability to know what he or she was doing and the nature and consequences of the action
VOLITIONAL Test → (b) he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition
Person may understand at some level the contract, but lacks the ability to effectively control themselves
(2) Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance under Subsection (1) terminates to the extent that the contract has been so performed in whole or in part of the circumstances have so changed that avoidance would be unjust. In such a case a court may grant relief as justice requires
Hauer v. Union State Bank of Wautoma(Wrong Interpretation of R § 15’s Mental Incapacity)
o FACTS P suffered from a brain injury from motorcycle
accident and had previously been adjudicated as incompetent, but treating physician now says okay
D Bank allowed P to use her $80,000 mutual fund to be used as collateral for friend’s loan from D Bank
When loan matured, P filed suit against D Bank, alleging that D knew or should have know she lacked the mental capacity to understand the loan
o ISSUE Does a contracting party expose itself to a avoidable
contract where it is put on notice or given a reason to suspect the other party’s incompetence such as would indicate to a reasonably prudent person that
71
inquiry should be made of the party’s mental condition?
o HELD Hauer court got it wrong / NOT how R § 15
should be interpreted GENERAL RULE: The unadjudicated
mental incompetence of one of the parties is NOT a sufficient reason to set aside an executive contract if the parties cannot be restored to their original positions, if the contract was made in good faith for a fair consideration, and without knowledge of incompetence
Since bank did NOT have actual knowledge of Hauer’s mental incompetence, R § 15(2) says that contract may NOT be voided if unjust
BUT, the court interprets R 15 § (1)(b) to mean that if the bank had “reason to know”, then they don’t have the ability to escape the consequences of this transaction / should be held responsible
o Rest. 2d § 16. Intoxicated Persons A person incurs only voidable contractual duties
by entering into a transaction if the other party has reason to know that by reason of intoxication
(a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or
(b) he is unable to act in a reasonable manner in relation to the transaction
72
Duress o 3 Duress Requirements:
(1) An improper threat Crime or tort Breach of good faith (used in Totem)
(2) An inducement(3) No reasonable alternative
o Restatement § 174: When Duress by Physical Compulsion Prevents Formation of a Contract
If conduct that appears to be a manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress, the conduct is NOT effective as a manifestation of assent
o Restatement § 175: When Duress by Threat Makes a Contract Voidable
(1) If a party’s manifestation of assent is INDUCED by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim
(2) If a party’s manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim UNLESS the other party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transaction
o Restatement § 176: When a Threat is Improper (1) A threat is improper if
(a) what is threatened is a crime or a tort, or the threat itself would be a crime or a tort if it resulted in obtaining property,
(b) what is threatened is a criminal prosecution, (c) what is threatened is the use of civil process and the threat is
made in bad faith, or (d) the threat is a breach of the duty of good faith and
fair dealing under a contract with the recipient (used in Totem)
(2) A threat is improper if the resulting exchange is not in fair terms, AND (a) the threatened act would harm the recipient and would not
significantly benefit the party making the threat, (b) the effectiveness of the threat in inducing the manifestations of
assent is significantly increased by prior unfair dealing by the party making the threat, or
(c) what is threatened is otherwise a use of power for illegitimate ends
Totem Marine Tug & Barge v. Alyeska Pipeline (Economic Duress / Breach of Good Faith / R § 175)o FACTS
P had contracted to transport pipeline construction materials from Texas to Alaska for D
73
D’s failure to proceed in accordance w/ terms and specifications in contract caused considerable delays and occasioned P’s hiring of a second tug to handle extra tonnage
After D terminated w/out reason, P submitted invoices worth $300,000 and advised D of financial constraints, since P was faced w/ possibility of bankruptcy
D only offered $97,500 in cash for settlement of all P’s claims
o ISSUE Is economic duress a ground for voiding a contract?
o HELD A party’s manifestation of assent induced by an
improper threat by the other party, such as a breach of the duty of good faith and fair dealing under a contract with the recipient, that leaves the victim with no reasonable alternative, will render the contract VOIDABLE by the victim
Since D deliberately withheld payment of an acknowledged debt, knowing that P had no choice but to accept an inadequate sum in settlement of that debt, the contract was made under economic duress and is deemed voidable by P
Dissent, J. Posner Concerned that parties may claim economic
duress later on to avoid settlement agreements / Doesn’t want to undermine settlement agreements b/c there is a societal interest in having people settle claims
74
Undue Influence o 2 Requirements
(1) Excessive Pressure (a) Discussion of the transaction at an unusual or
inappropriate time (b) Consummation of the transaction in an usual place (c) Insistent demand that the business be finished at
once (d) Extreme emphasis on untoward consequences of
delay (e) Use of multiple persuaders by the dominant side
against a single servient part (f) Absence of 3rd party advisers to the servient party (g) Statements that there is no time to consult financial
advisers or attorneys (2) Undue Susceptibility (lack of full vigor / extreme
youth, age or sickness) OR
(2) A Confidential Relationshipo Restatement § 177: When Undue Influence Makes a
Contract Voidable (Used in Odiorizzi) (1) Undue influence is unfair persuasion of a party who is
under the domination of the person exercising the persuasion OR who by virtue of the relation between them is justified in assuming that that person will not act in a manner inconsistent with his welfare
(2) If a party’s manifestation of assent is induced by undue influence by the other party, the contract is voidable by the victim
(3) If a party’s manifestation of assent is induced by one who is NOT a party to the transaction, the contract is voidable by the victim UNLESS the other party to the transaction in good faith and without reason to know of the undue influence wither gives value or relies materially on the transaction
Odorizzi v. Bloomfield School District (Voidable Contract under Undue Influence / R § 177)o FACTS
P, a teacher in D’s School District, was arrested for criminal homosexual activities
D came to his home after P hasn’t slept in 40 stressful hours and convinced P to resign by threatening to dismiss P if didn’t, occasioning
75
embarrassing publicity and impairing his chance for future jobs
P subsequently acquitted but D refused reemploymento HELD
Where a party’s physical and emotional condition is such that excessive persuasion leads to his own will being overborne, so that in effect his actions are not his own, a charge of undue influence so as to rescind a resignation or contract may be sustained
Excessive Pressure P approached at his apt. immediately after
release P threatened with such publicity if he did not
immediately resign Approached by both superintendent and the
principal of his school P not given an opportunity to think the
matter over or consult outside advice Undue Susceptibility (no confidential
relationship) P hadn’t slept in 40 hours / just released
from jail / tired and weak of mind
76
Misrepresentationo Requirements
A Material or Fraudulent Misrepresentation Material→ Representation that is pivotal / makes up
the party’s mind Ex: A intentional and knowingly induces B to buy a
cave by saying there were 100 running elk in the cave, and A thinks there is 100 elk in the cave, but there are really only 90
Fraudulent→ Representation that is consciously false and intended to mislead
Ex: A intentionally and knowingly induces B to buy a cave by telling him that there were 100 running elk in the cave, even though there are only 90
Justifiable Reliance Not just at the margins
o Restatement § 162: When a Misrepresentation is
Fraudulent or Material(1) A misrepresentation is FRAUDULENT if the maker
intends his assertion to induce a party to manifest his assent and the maker
(a) knows or believes that the assertion is not in accord with the facts, or
(b) does not have the confidence that he states or implies in the truth of the assertion, OR
(c) knows that he does not have the basis that he states or implies for the assertion
(2) A misrepresentation is MATERIAL if it would be likely to induce a reasonable person to manifest his assent (objective), or if the maker KNOWS that it would be likely to induce the recipient to do so (subjective)
A material misrepresentation is significant to the contract at hand / critical to the other party’s assent
A contract may be subject to rescission because of an innocent, but material, representation (i.e. statements made recklessly or negligently)
o Restatement § 164: When a Misrepresentation Makes a Contract Voidable
(1) If a party’s manifestation of assent is INDUCED by either a FRADULENT or a MATERIAL misrepresentation by the other party upon which the recipient is JUSTIFIED in relying, the contract is voidable by the recipient
(2) If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by one who is
77
not a party to the transaction upon which the recipient is justified in relying, the contract is voidable by the recipient, unless the other party to the transaction in good faith and without reason to know of the misrepresentation either gives value or relies materially on the transaction
o Restatement § 168(1): Reliance on Assertions of Opinion (1) An assertion is one of OPINION if it expresses only a
belief, without certainty, as to the existence of a fact or expresses only a judgment as to quality, value, authenticity, or similar matters
A statement of opinion can NOT be fraudulent
o When Is An Opinion a Misrepresentation?When the person giving the opinion does NOT honestly
believe it (R § 159)When the opinion falsely implied that the person does
not know of facts that would make the opinion false, or that the person does know facts sufficient to support the opinion (R § 168(2))
(R 168(2)) If it is reasonable to do so, the recipient of an assertion of a person’s opinion as to facts not disclosed and not 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 in forming it
When there is a confidential relationship (R 169(a)) (R § 169) To the extent that an assertion is one of
opinion only, the recipient is NOT justified in relying on it UNLESS the recipient
(a) stands in such a relation of trust and confidence to the person whose opinion is asserted that the recipient is reasonable in relying on it, or
When the person giving the opinion has special skill or judgment (R § 169(b)
(R § 169) To the extent that an assertion is one of opinion only, the recipient is NOT justified in relying on it UNLESS the recipient
(b) reasonably believes that, as compared with himself, the person whose opinion is asserted has special skill, judgment or objectivity with respect to the subject matter, or
78
When the person receiving the opinion is particularly susceptible to a misrepresetantion of that type (R § 169(c))
(R § 169) To the extent that an assertion is one of opinion only, the recipient is NOT justified in relying on it UNLESS the recipient
(c) is for some other special reason particularly susceptible to a misrepresentation of the type involved (i.e. age or other factors)
Syester v. Banta(Fraudulent and Material Misrepresentations) (R §§
162 / 164) FACTS
P, a 68 year-old widower, purchased 4,057 hours of dancing lessons from D’s dance-studio for $29,174
P was continually flattered and cajoled into signing up for more lessons through planned campaign of D’s staff
When P learned truth, brought suit, but P’s former instructor Mr. Carey was compensated for convincing P to drop legal action by wooing her w/ compliments and false statements
P then executed a full release for a refund of $6,090 payment, w/out consulting her attorney and now sues for fraud / misrepresentation in sale of lessons / obtaining of 2 releases
D argues that its statements were just mere expressions of opinion, not fact
HELD Equity may, if fair to do so, relieve a party from
the consequences of a release executed through fraudulent or material misrepresentation
Misrepresentations→ Carey telling P she could become a professional dancer / didn’t need a lawyer / implication that Carey had a romantic interest in her
Fraudulent→ Carey made these statements even though weren’t true / just to induce P to sign the release
Material→ Carey knew these misrepresentations would be likely to induce P to assent to the release
Justifiable Reliance→ Reliance was procured under fraudulent misrepresentation
79
80
Nondisclosure Restatement § 161: When Non-Disclosure Is Equivalent to
an Assertion (Used in Hill ) A person’s non-disclosure of a fact known to him is
EQUIVALENT to an assertion that the fact does not exist in the following cases ONLY:
When necessary to correct a previous assertion R § 161(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
Where good faith seems to require disclosure R § 161(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
When you know the other party is mistaken about the effect of a writing
R § 161(c) where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part
Where there is any confidential relationship (i.e. attorney-client relationship)
R § 161(d) where the other person is entitled to know the fact because of a relation of trust and confidence between them
Restatement § 173: When Abuse of a Fiduciary Relation Makes a Contract Voidable
A greater duty is imposed b/w these 2 contracting parties, such that the terms of the transaction must be fair and must be fully explained to the other party
If a fiduciary makes a contract with his beneficiary relating to matters within the scope of the fiduciary relation, the contract is voidable by the beneficiary, UNLESS
(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
81
Hill v. Jones(Vendor’s Affirmative Duty to Disclosure Material Facts in Good Faith under R § 161) FACTS
P purchased D’s home During escrow, D assured P that the ripple in floor
was from water damage, not termite damage D never said anything about termites to either P,
P’s hired exterminator, or P’s realtor despite previous infestations treated during D’s ownership
After moving in, P noticed wood crumbling & exterminator confirmed the existence of termite damage to floor, steps, and wood columns to house
P sued to rescind purchase contract on ground of intentional nondisclosure of terminate damage
ISSUE Is the existence of termite damage in a residential
dwelling the type of material fact which gives rise to the duty to disclose because it is a matter to which a reasonable person would attach importance in deciding whether or not to purchase such a dwelling?
HELD Where the seller of a home knows of facts
materially affecting value of property which are not readily observable / are not known to buyer, the seller is under a duty to disclose them
Disclosure of the fact that there was prior termite damage would correct the mistake of P as to the basic assumption on which P purchased the home
A vendor MUST disclose material facts that would make a reasonable person think twice about the transaction
Park 100 Investors v. Kartes o FACTS
Park 100 sought to collect unpaid rent from the Karteses under a provision of the lease which was induced through fraudulent means
The Karteses were told that they were signing a lease agreement but actually they signed a personal guaranty of the lease
o ISSUE
82
Can a contract of guaranty be enforced by the guarantee, where the guarantor has been induced to enter into the contract by fraudulent misrepresentations or concealment on the part of the guarantee?
o HELD No, where one employs misrepresentation to induce a
party's obligation under a contract, one cannot bind the party to the terms of the agreement.
Whether fraud is present in a case is rooted in the surrounding facts and circumstances and is for the trial court to determine.
o The evidence supports the trial court's conclusion here; the findings support the judgment and are not clearly erroneous.
83
Unconscionability In order to find unconscionability, a court must find
BOTH:o Procedural Unconscionability
Either a lack of choice by one party or some defect in the bargaining process / the way the contract was negotiated or devised, such as quasi-fraud or quasi-duress
o Substantive Unconscionability Relates to the fairness of the terms of the resulting
bargain Approaches to Unconscionability
o UCC Approach Procedural Unconscionability-> Unfair Surprise
Inequality in bargaining power NOT sufficient in itself because its too common
Substantive Unconscionability-> Terms of Oppression
Basically the same as Williams’ “unreasonably favorite terms”
o Williams v. Walker-Thomas Approach Procedural Unconscionability-> The absence of
meaningful choice Look for inequality in bargaining power (can be
enough by itself) and some term that is unintelligible / difficult to parse
Substantive Unconscionability-> Unreasonably favorable terms
Terms seem to be tilted toward other side / similar to UCC “terms of oppression”
What Can Courts Do Once They Find A Term in the Contract Unconscionable?o Under both UCC 2-302 & Restatement § 208, courts
can: Try and strike the clause Refuse to enforce the contract as a whole if they find
that unconscionability permeates the whole contract Limit the clause so as to contain the unconscionability
UCC § 2-302 Unconscionable Contract or Clause o 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 refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the
84
application of any unconscionable clause as to avoid any unconscionable result.
o When it is claimed or appears to the court that the contract or any clause thereof may be 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.
Rest. 2d § 208 Unconscionable Contract or Term o If a contract or term thereof is unconscionable at the time
the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.
Williams v. Walker-Thomas Furniture Co.(Unconscionable=Lack of Mean. Choice / Unreason
Fav. Terms) FACTS
D, a retail furniture store, sold furniture to P under a printed form contract containing an “add-on” clause, the effect of which was to keep balance due on EVERY item purchased until balance due on ALL items, whenever purchased, was liquidated
P purchased a stereo while had balance of $164 still owed on prior purchases
P defaulted on payment and D sought to replevy all goods previously sold to D
ISSUE Are the bargaining process and resulting terms of the
contract so unfair that enforcement should be withheld?
HELD The defense of unconscionability to action on a
contract is judicially recognizable when the contracting party lacks meaningful choice in the bargaining process, resulting in unreasonable favorable terms in the contract
Procedural Unconscionability→ D knows P has meager income / sale took place at her home / terms were hidden in a printed form contract
Substantive Unconscionability→ D can take everything away for one default
85
Higgins v. Superior Court(Unconscionability in a clause, not whole contract)o FACTS
The Higgins children who orphaned and the show Extreme Make-Over Home Edition built a new home for the family that was housing the Higgins children. The family whom the house was built kicked the Higgins children out.
When the television network failed to help the Higgins children with their situation with the family in the home, the Higgins brought suit against the family and the network.
The network petitioned to compel arbitration in accordance with the arbitration clause of the contract that the oldest Higgins child signed.
The Higgins argued that the arbitration clause was unconscionable.
The trial court granted the petition and the Higgins moved for a writ of mandate challenging the court's ruling
o ISSUE May an arbitration clause in a written agreement be
enforced, if only the clause as opposed to the entire agreement, is being challenged and the clause is unconscionable?
o HELD No, an arbitration clause in a written agreement may
not be enforced if only the clause, as opposed to the entire agreement, is being challenged and the clause is unconscionable.
The arbitration clause in unconscionable because It was a contract of adhesion - the Higgins
only had the opportunity to adhere to the contract or reject it
The Higgins's were not present during the talks between the television network and the family for whom the house was built
Procedural There was oppression and surprise due
to unequal bargaining power The arbitration clause was not
separated from other clauses in the contract and was instead placed in a
86
chuck of text marked miscellaneous = surprise
The network knew that the people signing the document were young, unsophisticated and had recently lost their parents, but they did nothing to make the contract digestible for the Higgins
Substantive There were overly-harsh and one-sided
results The arbitration clause only required
that the Higgins's submit to arbitration but the television network could deny it if they wanted
In re Checking Account Overdraft Litigation(Affirmative assertion of unconscionability)o FACTS
Checking account customers contended that federally chartered banks charged excessive overdraft fees for charges to their accounts on debit card transactions, primarily by entering charges debiting the customers' accounts from the "largest to the smallest," thus maximizing the overdraft fee revenue for the Banks.
The Banks moves to dismiss on the grounds that the customers assertion of unconscionability was invalid because unconscionability may be asserted only as a defense, not as an affirmative claim
o ISSUE May a court in the exercise of its equitable powers
entertain and affirmative claim of unconscionability of contract and fashion a remedy for such a claim?
Will an affirmative claim of unconscionability be dismissed where plaintiffs have sufficiently pled that a contract is both procedurally and substantively unconscionable?
o HELD Yes, unconscionability can be asserted as an affirmative
claim and the court may fashion a remedy for it No, the claim can not be dismissed if the plaintiffs have
shown procedural and substantive unconscionability Procedural
The contracts with the banks were boilerplate contracts of adhesion, the
87
customers had no bargaining power and were much less sophisticated than the banks
The customers were not notified that they could refuse the overdraft protection service
Substantive No reasonable person would agree to allow
the Banks to post debits in a manner designed solely to maximize the number of overdraft fees, and the fees were excessive because the fees were no reasonably related to the costs or risks associated with providing overdraft protection
The banks motion to dismiss was denied
88
Public Policy Reasons for Public Policy Defense to Contract
Enforcemento (1) Courts want to discourage certain types of illegal
conduct and bargaining (i.e. murder for hire) A way to deter is to NOT enforce these contracts in a
court of lawo (2) Want to prevent courts in general from enforcing /
getting involved with certain types of contracts (i.e. surrogacy contracts)
o (3) One party is victimized / the contract is unfair to somebody
Standards Used To Determine Whether a Restraint on Competition Violates Public Policyo (1) Is the restrictive covenant on competition
ancillary to a contract that is otherwise valid? A restrictive covenant is NOT valid unless it is related
to another legitimate provision / ends R § 188(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
o (2) Does the restraint on competition meet the standards of Restatement § 188?
R § 188(1)(a) Is the restraint is greater than is needed to protect the promisee’s legitimate interest?
R § 188(1)(b) Is the promisee’s need is outweighed by the hardship to the promisor and the likely injury to the public?
o (3) What is the appropriate remedy? 4 Blue Pencil Approaches
(1) Blue Pencil Approach (used in Valley Medical)
The court will use the blue pencil power to edit the document and make the agreement as reasonable as possible
Ex: Cross out “3 years” and put in “6 months”
89
(2) Blue Pencil, But Restrictively The court will cross out words that are
grammatically severable, but will NOT write in something of their own devise
Ex: Cross out activities from list, but not write in a new activity
(3) Blue Pencil, Unless… (Restatement § 184 approach / Default rule)
The court will rewrite the covenant UNLESS one party has engaged in:
Overreaching (i.e. trying to unreasonably restrict the other party)
OR Exercising Bad-faith
The approach does not want to reward parties for making these types of contracts in the first place / deters parties from trying to accomplish bad ends
(4) Non-Enforcement The court will not enforce the contract in
its entirety or not enforce the unreasonable clause at all
This is not a preferred approach
Valley Medical Specialists v. Farber(Restraints on Competition) (Use Restatement § 188(1)
(a )& (b))o FACTS
VMS sued Farber, a former employee, when he violated a restrictive covenant in VMS’ shareholder / employer agreement, which prohibited Farber from providing any and all forms of “medical care” for 3 years after date of termination w/in a 5 mile radius of any VMS office
o ISSUE Under Restatement 188, is the covenant broader than
necessary to protect VMS’ legitimate interest (beyond desire to protect itself from competition) or is VMS’ need outweighed by the interest of the public or Farber?
o HELD The burden is on the party wishing to enforce the
covenant to demonstrate that the restraint is not greater than necessary to protect the employer’s legitimate interest, and that such interest is not
90
outweighed by the hardship to the employee and the likely injury to the public
Here, VMS has not met that burden because of strong public interest in free choice in selecting medical care, which makes the restrictive covenant on competition unreasonable because of the time period covered, the geographical reach, and the scope of activities prohibited
The restrictive covenant is unreasonable and unenforceable since VMS’ protectable interests were minimal compared to patient’s right to see the doctor of their choice, which was entitled to substantial protection
Restatement § 178: When a Term is Unenforceable on Grounds of Public Policyo (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 interests in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms
o (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, and (c) any special public interest in the enforcement
of the particular termo (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 that
misconduct and the term Restatement § 181: Effect of Failure to Comply with
Licensing or Similar Requiremento If a party is prohibited from doing an act because of his
failure to comply with a licensing, registration or similar requirement, a promise in consideration of his
91
doing that act or of his promise to do it is unenforceable on grounds of public policy if
(a) the requirement has a regulatory purpose, AND (b) the interest in the enforcement of the promise
is clearly outweighed by the public policy behind the requirement..
R.R. v. M.H.(Surrogacy Agreements / Restatement § 178) FACTS
P and D entered into a surrogacy agreement, providing P with full parental rights and obligating D to reimburse P for all fees and expenses paid to her if D attempted to obtain custody or visitation rights
After accepting initial fee of $500, D changed her mind but never returned money
ISSUE Is the surrogacy agreement enforceable under
contract law or do these types of contracts violate public policy / should be invalid?
HELD The payment of money to influence the mother’s
custody decision makes the agreement to custody void
Under R § 178, a promise or other term of an agreement is unenforceable on grounds of public policy if the interests in its enforcement is clearly outweighed in the circumstances by a public policy against enforcement of such terms, taking into account the parties’ justified expectations, any forfeiture that would result if enforcement were denied, and any special public interest in the enforcement of the particular term
92
93
o Mistake and Changed Circumstances Mistake
Important Termso “Basic assumption”
Something that would unsettle the agreement completely if untrue / fundamental in character
o “Materially affecting the agreed performance” One party is much worse off and one party is much
better off
Mutual Mistake (R § 152)o (1) BOTH parties are mistakeno (2) Under R § 152, the mutual mistake has to
relate to a basic assumption of the contract AND it must have a material effect on the performances
§ 152(1) 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 the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in Restatement § 154
o (3) Under R § 154, the party seeking to avoid the obligation can NOT be a party who has assumed the risk, such as…
(1) Where the risk is allocated by the agreement itself
(2) When a person is aware that he has limited knowledge and acts regardless
(3) The risk gets allocated by the court by deciding who was in the best position to avoid a mistake or ensure against it
Unilateral Mistake (R § 153)o (1) ONE party is mistakeno (2) Under R § 153, the unilateral mistake is about
something that is a basic assumption of the contract AND must have a material effect on the performances
R § 153 (1) 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
94
performance 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 Section § 154
o (3) Under R §§ 153(1)(a) & (b), a party who wants to show a unilateral mistake has to show:
The result was unconscionable OR (a) the effect of the mistake is such that
enforcement of the contract would be unconscionable
(b) That the other party had reason to know of the mistake or his fault caused the mistake
o (4) Under R § 154, the party seeking to avoid the obligation can NOT be the party bearing the risk, such as…
(1) Where the risk is allocated by the agreement itself
(2) When a person is aware that they have limited knowledge and act regardless
(3) The risk gets allocated by the court by deciding who was in the best position to avoid a mistake or ensure against it
The DISTINCTION Between Unilateral and Mutual Mistakeso Under unilateral mistake, a party seeking to avoid the
obligation must show that enforcement would be UNCONSCIONABLE or that the other party KNEW OF or CAUSED the mistake
Lenawee County Board of Health v. Messerly(Mutual Mistake & Risk Allocation- R §§ 152 & 154)o FACTS
D unknowingly sold the Pickleses a 3-unit apartment building w/ a septic tank, installed w/out permit in violation of applicable health codes
Contract contained clause that “purchaser has examined this property and agrees to accept same in its present condition”
6 days after purchase, Pickleses discovered raw sewage seeping from ground / P condemned the property and sought an injunction against human habitation until brought into compliance w/ sanitation code
o ISSUE
95
Is rescission always granted when there is a mutual mistake?
o HELD A court need not grant rescission in every case in
which there is a mutual mistake that relates to a basic assumption of the parties upon which the contract was made and which materially affects the agreed performance of the parties, especially when there is some agreed allocation of the risk
Mutual mistake? → Both parties believed that the property transferred was suitable for residential use / didn’t know about septic tank
Mistake involves basic assumption? → Yes, a structural problem that cannot be remedied
Basic assumption materially affect the agreed performance→ Pickleses are much worse off / Messerlys are much better off
Was the risk allocated? →YES, risk allocation to the Pickleses b/c of the “as is” clause in the contract, which they agreed to
WilFred’s, Inc. v. Metropolitan Sanitary District(Unilateral Mistake in subcontractor bid, appeal of recission of contract)o FACTS
Sanitary district sent out an advertisement Nov. 26 announcing it was taking bids for rehab work on a reclamation plant
Specified work that needed to be done and the estimate determined by the engineering department was 1.25 million
Taking bids until Jan. 6, received Wilfred’s on Jan. 6. Their bid was 882K, they sent in the 100K deposit
required, and the next lowest bid was 1.11 million. January 8 Wilfred tried to withdraw its bid. Requested
the return of the deposit Sent a letter explaining that Ciaglo, their excavator
made an error, and could not perform for that price. Rejected the withdrawal request and Wilfred sought an
injunction.o ISSUE
Whether Wilfred can obtain rescission because of its unilateral mistake?
96
o RULE Unilateral mistake may afford rescission where
there is a material mistake The mistake is so palpable that the party not in
error was/should have been put on notice of its existence, and
The party in error must have exercised reasonable care, and
The mistake is so grave that enforcement would be unconscionable
The party not in error would not be too severely prejudiced rescission
o HELD Offer can be rescinded
This is a material mistake The difference between the second lowest bid
and lowest bid was vast, the MSD should have known there was an error
Wilfred used reasonable care because Ciaglo had been dependable in the past
Trial court found that a 120 K error would severely hurt Wilfred's, and there was no evidence of clear error in that finding
Wilfred declared promptly its intention to withdraw, before MSD could rely on the price
97
Impossibility (VERY hard to establish this defense)
o Must show: (1) Supervening legislation prohibiting the
activity in the contract R § 264: If the performance of a duty is made
impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the contract was made
(2) Supervening death or disability of a person necessary for performance
BUT, if someone else could easily step in, then impossibility would not be a good defense
R § 262: 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
(3) The destruction, deterioration or failure to come into existence of a thing necessary for performance
Ex: A music hall burns downo Therefore, a contract for performance at that
music hall is impossible because the venue no longer exists
R § 263: If the existence of a specific thing is necessary for the performance of a duty, its failure to come into existence, destruction, or such deterioration as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the contract was made
Impracticability Applies to a situation in which performance is NOT
impossible, but it no longer makes sense to enforce performance
Like a qualified impossibility defenseThe impracticability defense has to relate to a basic
assumption of the contract Party asserting impracticability defense needs to show:
An unexpected or important event
98
The event is NOT his faultThe risk was NOT allocated to himThe event makes performance substantially more
expensive or difficult R § 261: Where, after a contract is made, a party’s
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
Frustration of Purpose Applies to a situation in which circumstances arise that
destroy the value of the other person’s performance Ex: Renting a room to overlook a coronation ceremony
Defendant was able to get out of the contract when the ceremony was cancelled because the purpose of the contract had been frustrated / had no reason to be there anymore
Party asserting frustration of purpose defense needs to show:
An unexpected or important event The event is NOT his fault The risk has NOT been allocated to him The event has to almost completely devalue or
destroy the performance R § 265: Where, after a contract is made, a party’s
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 a performance are discharged, unless the language or the circumstances indicate the contrary
o Contract liability is STRICT liabilityThe obligor is therefore liable in damages for the breach of a
contract, even if he or she is without fault and even if circumstances have made the contract more burdensome or less desirable than anticipated
A court may grant relief where extraordinary circumstances may make performance so vitally different from what was reasonably to be expected as to alter the essential nature of the performance
99
Karl Wendt Farm Equipment Co. v. International Harvester
(Impracticability / Frustration of Purpose) FACTS
P and D entered into contract, making P a dealer of D’s goods in Michigan city
During economic downturn, D sold its farm equipment division to competitor Case
Case did not offer P a renewed franchise agreement, leaving P w/out a supplier
P sued D for breach D claimed its performance was excused due to
impracticability b/c of rescission & frustration of purpose cause D could make no profit from it
ISSUE Will a party’s performance be excused where the
occurrence of a foreseeable event such as a market downturn renders the contract unprofitable?
HELD Since market changes are the normal risks of a
contract to which the parties are assumed to have considered beforehand, a contract will not be canceled for impracticability or frustration or purpose because market conditions have changed
Basic assumption of the contract→ Robust market / mutual profitability was NOT the basic assumption-> to make a dealer relationship was
The basic purpose of every contract is to make a profit!
Neither market shifts nor financial inability of one of the parties change the basic assumption to the contract such that it may be excused
Risk allocated→ Contract ascribed risk to D by specifying how to terminate the contract, and IH did not take that route / instead unilaterally terminated the contract
Mel Frank Tool & Supply, Inc. v. Di-Chem Co.(NO Frust. of Purpose, Even if Less Valuable /
Profitable) FACTS
D, a chemical distributor, negotiated w/ P to lease a storage and distribution facility for 3 yrs
100
D later told by city that recently enacted ordinance prohibited D’s storage of hazardous chemicals there
D vacated w/out paying rent b/c structure was useless to them as chemical warehouse
P sued for breach ISSUE
Did the City’s acts substantially frustrate D’s principal purpose of storing and distributing hazardous chemicals, thus completely devaluing performance?
HELD A tenant is not relieved from the obligation to
pay rent due to a subsequent governmental regulation which prohibits the tenant from legally using the premises for its originally intended purpose if:
There is a serviceable use still available consistent with the use provision in the lease and
Not ALL of D’s inventory was hazardous / can still store other chemicals it produces
No term in the lease that limited storage to just hazardous chemicals
The fact that the use of the premises is less valuable or even unprofitable does not necessarily mean the tenant’s use has been substantially frustrated
D did not establish that its principal purpose for leasing the facility, storing and distributing chemicals, was substantially frustrated by the city’s actions
101
Modification Common Law Modification Rules: The “Preexisting
Duty” Ruleo Under the common law, a contract modification
requires additional consideration UNLESS it falls into an exception listed in R § 89
If you are already obligated to do something under the law (positive or negative), that is NOT sufficient consideration for a modification of the contract
o The Restatements focus on whether there is a prior legal existing duty to the PROMISOR
R § 73: Performance of a legal duty OWED to a PROMISOR which is neither doubtful nor the subject of honest dispute is NOT consideration; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense of bargain
o How do judges try to enforce this modified contract if there is this no additional consideration to make it enforceable?
(1) Say that the contract gives one person a legal benefit / something that is distinct
The other party is therefore obligated (2) Exception for “mutual release”
Say that one party had given up a mutual right to rescission
o Under R § 89, a promise modifying a duty under a contract not fully performed on either side is binding if
(1)(a) It is fair and equitable under circumstances NOT anticipated by the parties
The court is trying to pursue fairness and equity in this provisiono Allows the parties to react to surprising
changes or circumstances by changing the contract to arrive at a solution between them
o The circumstances have to be SUPRISING / UNEXPECTED and the result has to be FAIR / EQUITABLE
(1)(b) to the extent provided by the statute; or (1)(c) to the extent that justice requires
enforcement in view of material change of position in reliance on the promise
Just like Restatement § 90 (providing a reliance exception)
102
o BUT, the other party can restore the original circumstances by providing notice
o A party is only protected to the extent that they relied on the other party
Alaska Packers’ Assn v. Domenico(Common Law “Preexisting Duty” Rule / R §§ 73 & 89) FACTS
A group of seamen (P) entered into contract w/ D to go from San Fran to Alaska on D’s ship to work as sailors and fishermen
In Alaska, P refused to continue work unless compensation increased to $100
D reluctantly agreed b/c unable to hire new crew in remote place
P finished work but D refused to honor the new contract
ISSUE Is a promise to pay a man for performing a duty he is
already under contract to perform, without consideration?
HELD The performance of a preexisting legal duty
guaranteed by contract is not sufficient consideration to support a promise
Consent to such a demand was based solely upon P’s agreement to render the exact same services, and none other, that they were already under contract to render
The new contract is unenforceable even though P completed their performance in reliance on it because a party cannot lay the foundation of an estoppel by his own wrong
Modification under the UCC and CISG Under the UCC, a contract modification does NOT
need additional consideration in order for the modification to be enforceable
One-sided modifications are okay Divergence from the common law
103
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 which excludes modification or rescission except by a signed writing can NOT be otherwise modified or rescinded, but EXCEPT as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party
(3) The requirements of the statute of frauds section of this Article must be satisfied if the contract as modified is within its provisions
(4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver
(5) A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver
“No Oral Modification” (N.O.M.) Clauses under the UCC
“No oral modification (NOM)” clauses = “this contract may NOT be modified, except in writing”
Often found in a contract together with a merger clause
Under UCC 2-209, If you try to orally modify a contract that has NOM clause in it, that modification will NOT be effective
BUT, a party can be assumed to have waived the NOM clause by orally agreeing to modify the contract
BUT, just because you waived this clause right, does NOT mean that you waive it forever
You may retract the waiver by reasonable notification unless the other party has materially changed his position in reliance on the waiver and allowing retraction would be unjust
104
CISG Article 29 (1) A contract may be modified or terminated
by the mere agreement of the parties (2) A contract in writing which contains a
provision requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated by agreement. However, a party may be precluded by his conduct from asserting such a provision to the extent that the other party has relied on that conduct
Kelsey-Hayes Co. v. Galtaco Redlaw Castings Corp.(No Additional Consideration Requirement under UCC 2-209 / Duress & Bad-Faith Defenses Still Available to Invalidate Modification ) FACTS
D supplied P w/ castings pursuant to a 3 yr. requirements contract, which were incorporated into brake assemblies sold to car manufacturers like Ford and Chrysler
Facing financial losses, D stopped producing castings but offered to keep operation for 30% price increase
P agreed for next 2 years, 30% extra each year, b/c could not find an alternative source
D sued when P didn’t pay P claimed modifications made under duress b/c
D threatened to breach its contract, stopping production and delivery of castings, unless P agreed to significant price increases
ISSUE Is a subsequent contract or modification invalid when
the subsequent contract was entered into under duress?
HELD Economic duress and bad faith are available as
defenses to contract modification enforcement, but lack of additional consideration will not invalidate a modification under the UCC
P did NOT argue that modifications were invalid under the preexisting duty rule b/c this case is governed by the UCC, which says that NO consideration is need for contract modification
105
Therefore, must invalidate it based on bad faith or duress defenses
Improper Threat→ Threat to breach its contract / go out of business was in bad faith
Reasonable Alternative→ Faced w/ imminent shutdown of its major customers, P may have had no alternative other than agreeing to D’s price hikes
Inducement→ P vigorously objected, a sign of protest that courts require to put seller on notice that modification is not freely entered into
Problem 8-3 (1) Is this a UCC or common law transaction? (2) Can D rely on changes in circumstances occurring
since the agreement was made to justify nonperformance on its part / excuse itself?
Impossibility? Impracticability? Frustration of Purpose? Mistake?
(3) If P should agree to pay D a higher price for the tile work, could it later refuse to pay the amount of the increase, on the ground that its agreement to that increase either was void for lack of consideration or was entered into as a product of bad faith or duress on D’s part?
Honest dispute or bad-faith? Modification enforceable?
Pre-existing Duty Rule Exceptions-> R 89(a) & (c)
UCC 2-209 Duress?
(4) Even if an agreement to pay the increased price would otherwise be enforceable, if you can avoid putting it in writing, can P later refuse to pay?
NOM clause (UCC 2-209)? Waived? Retraction? Reliance by other party? Statute of Frauds problem? Ethical implications?
106
o Third Parties Third Party Beneficiaries
o A third party beneficiary is NOT a party to the contract, but he is within the expectations of at least one party to the contract
o Promisor, Promisee, & Third Party Beneficiary A loans money to B who makes a similar loan to CC promises B that he would make repayment to AC did not keep his promise and A sues C for the amount of
the promised payment Promisor -> C Promisee -> B Third Party Beneficiary -> A
Modern contract law permits A to sue C directly and cut out the middle person
o Incidental vs. Intended Beneficiaries (R § 302) Incidental→ A party that incidentally benefits from a
contract in which he is not a party Ex: Party benefits from his neighbor’s landscaping
contract to grow a garden on his front lawn / may increase the value of neighbor’s property, but only incidentally
Intended→ A third party who is the recipient of the benefit of the transaction undertaken by another
Three Approaches -> A third party is an intended beneficiary if:
#1 BOTH the promisor (C) and the promisee (B) intended to benefit the third party under the contract
#2 Only the promisee (B) intended to benefit third party under the contract
#3 (Vogan) The promisee (B) intended to benefit the third party under the contract and the promisor (C) must have known or had reason to know of the promisee’s intent to benefit the third party
R § 302: Intended and Incidental Beneficiaries (1) Unless otherwise agreed between promisor and
promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the INTENTION of the parties and either
107
(a) the performance of the promisee will satisfy an obligation of the PROMISEE to pay money to the beneficiary; OR
(b) the circumstances indicate that the PROMISEE intends to give the beneficiary the benefit of the promised performance
(2) An incidental beneficiary is a beneficiary who is NOT an intended beneficiary
o Defenses to Enforcement
Just being a third party beneficiary does NOT necessarily mean that A can sue and win
Defenses to enforceability are still available for the original contract b/w B and C
B and C can also modify and terminate the contract up until the point when A’s right VESTS
Under R § 311, vesting occurs when A: Relies on the contract or Turns down other opportunities or He decides to sue
Vogen v. Hayes Appraisal Assoc., Inc.(3rd Approach to Intended Benef- Promisor w/ Reason
to Know). FACTS
D was hired by MidAmerica Bank to do appraisal Monitor the progress of new home construction for P,
who had obtained a construction loan from MidAmerica
MidAmerica was to use D’s progress reports to make payments to contractor / D’s progress reports were erroneous, causing P’s to take out a second mortgage loan plus more
P sued D on a third party beneficiary theory based on its failure to properly monitor the progress of the construction, thus allowing funds to be improperly released by the lender to the defaulting contractor
ANALYSIS Promisor→ D / Promisee→ MidAmerica / Third
Party Beneficiary→ P
108
Takes #3 Approach, taking into account both the intent of the promisor and the promisee to benefit the third party beneficiary
The promisee has to intend to benefit the third party AND the promisor has to at least had reason to know this
Did MidAmerica intend its contract w/ D to benefit P?
YES, for a pecuniary benefit Did D know or have reason to know that
MidAmerica intended to benefit P? YES, inspection reports issued by D naming P as
home purchasers gave D reason to know that MidAmerica’s purpose in contracting for periodic inspection reports was to provide protection for the money which the Ps had invested in the project
Zigas v. Superior Court (Third Party Beneficiaries Under Government Contracts – Stricter Standard)
FACTS HUD helped finance certain apartments /
regulations thereunder pursuant to National Housing Act
In exchange, landlords contracted that they would adhere to certain rent schedules
Landlords disobeyed and charged rents in excess of schedule, collected in excess of $2 million
Several tenants (P) brought a class action suit seeking enforcement and damages
ISSUE When the federal government has contracted with
landlords to provide apartment financing in return for rent ceilings, do tenants have standing to seek enforcement or damages?
HELD Under the Zigas approach, since the agreement
itself b/w HUD and the landlords manifested an intention that the tenants be compensated in the event of the landlords’ nonperformance, the
109
tenants are incidental beneficiaries and have standing to seek enforcement or damages
Approaches: Zigas Approach
Zigas constitutes the California approach to more demanding restraints on third party suits against the government, concerning government contracts
(1) A stricter standard for determining who is an intended vs. incidental beneficiary
(2) An intent to benefit a third party is NOT enough by itself, but also need an intent that the third party will be refunded in the event of a breach
Restatement § 313 Approach Because there is such a huge potential
liability in these cases, it would upset government contracts and prices in general if third party beneficiaries could sue under these government contracts
(1) Same standard for determining who is an intended vs. incidental beneficiary
(2) Limit the amount of consequential damages that can be recovered by third party beneficiaries
R § 313(2) In particular, a promisor who contracts with a government or governmental agency to do an act for or render a service to the public is NOT subject to contractual liability to a member of the public for consequential damages resulting from performance or failure to perform UNLESS
(a) the terms of the promise provide for such liability; or
(b) the promisee is subject to liability to the member of the public for the damages and a direct action against the promisor is consistent with the terms of the contract and with the policy of the law
110
authorizing the contract and prescribing remedies for its breach
111
Assignment and Delegation Rest. 2d § 317. Assignment of a Right
o (1) An assignment of a right is a manifestation of the assignor's intention to transfer it by virtue of which the assignor's right to performance by the obligor is extinguished in whole or in part and the assignee acquires a right to such performance.
o (2) A contractual right can be assigned unless (a) the substitution of a right of the assignee for the right of
the assignor would materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reduce its value to him, or
(b) the assignment is forbidden by statute or is otherwise inoperative on grounds of public policy, or
(c) assignment is validly precluded by contract. Rest. 2d § 318. Delegation of Performance of Duty
o (1) An obligor can properly delegate the performance of his duty to another unless the delegation is contrary to public policy or the terms of his promise.
o (2) Unless otherwise agreed, a promise requires performance by a particular person only to the extent that the obligee has a substantial interest in having that person perform or control the acts promised.
o (3) Unless the obligee agrees otherwise, neither delegation of performance nor a contract to assume the duty made with the obligor by the person delegated discharges any duty or liability of the delegating obligor.
Rest. 2d § 321. Assignment of Future Rights o (1) Except as otherwise provided by statute, an assignment of a
right to payment expected to arise out of an existing employment or other continuing business relationship is effective in the same way as an assignment of an existing right.
o (2) Except as otherwise provided by statute and as stated in Subsection (1), a purported assignment of a right expected to arise under a contract not in existence operates only as a promise to assign the right when it arises and as a power to enforce it.
Rest. 2d § 322. Contractual Prohibition of Assignment o (1) Unless the circumstances indicate the contrary, a contract
term prohibiting assignment of "the contract" bars only the delegation to an assignee of the performance by the assignor of a duty or condition.
o (2) A contract term prohibiting assignment of rights under the contract, unless a different intention is manifested,
(a) does not forbid assignment of a right to damages for breach of the whole contract or a right arising out of the assignor's due performance of his entire obligation;
112
(b) gives the obligor a right to damages for breach of the terms forbidding assignment but does not render the assignment ineffective;
(c) is for the benefit of the obligor, and does not prevent the assignee from acquiring rights against the assignor or the obligor from discharging his duty as if there were no such prohibition.
Rest. 2d § 326. Partial Assignment o (1) Except as stated in Subsection (2), an assignment of a part of
a right, whether the part is specified as a fraction, as an amount, or otherwise, is operative as to that part to the same extent and in the same manner as if the part had been a separate right.
o (2) If the obligor has not contracted to perform separately the assigned part of a right, no legal proceeding can be maintained by the assignor or assignee against the obligor over his objection, unless all the persons entitled to the promised performance are joined in the proceeding, or unless joinder is not feasible and it is equitable to proceed without joinder.
Rest. 2d § 328. Interpretation of Words of Assignment; Effect of Acceptance of Assignmento (1) Unless the language or the circumstances indicate the
contrary, as in an assignment for security, an assignment of "the contract" or of "all my rights under the contract" or an assignment in similar general terms is an assignment of the assignor's rights and a delegation of his unperformed duties under the contract.
o (2) Unless the language or the circumstances indicate the contrary, the acceptance by an assignee of such an assignment operates as a promise to the assignor to perform the assignor's unperformed duties, and the obligor of the assigned rights is an intended beneficiary of the promise. Caveat: The Institute expresses no opinion as to whether the rule stated in Subsection (2) applies to an assignment by a purchaser of his rights under a contract for the sale of land.
Rest. 2d § 336. Defenses Against an Assignee o (1) By an assignment the assignee acquires a right against the
obligor only to the extent that the obligor is under a duty to the assignor; and if the right of the assignor would be voidable by the obligor or unenforceable against him if no assignment had been made, the right of the assignee is subject to the infirmity.
o (2) The right of an assignee is subject to any defense or claim of the obligor which accrues before the obligor receives notification of the assignment, but not to defenses or claims which accrue thereafter except as stated in this Section or as provided by statute.
o (3) Where the right of an assignor is subject to discharge or modification in whole or in part by impracticability, public policy, non-occurrence of a condition, or present or prospective failure of performance by an obligee, the right of the assignee is
113
to that extent subject to discharge or modification even after the obligor receives notification of the assignment.
o (4) An assignee's right against the obligor is subject to any defense or claim arising from his conduct or to which he was subject as a party or a prior assignee because he had notice.
Herzog v. Irace(Assignment of Rights under R § 317 / Binding Upon
Obligee)o FACTS
When Jones was unable to pay for medical treatment he signed a letter requesting payment be made directly to P of money received in settlement for his claim
P notified Jones’ lawyers D about the “assignment of benefits” form
P performed surgery and Jones received $20,000 settlement, but Jones told lawyers D to pay the money to him instead of P
Jones never paid P P sued D for breach of assignment, seeking to enforce
the “assignment of benefits”o ISSUE
Is assignment binding upon the obligor where the assignor has intended to relinquish the right and the obligor has been notified?
o HELD An assignment is binding upon the obligor where
there is an intent to relinquish the right to the assignee and the obligor is notified
Assignor→ Jones Asignee-> P
Obligee-> D The letter directing payment to be made
directly to P gives no indication that Jones attempted to retain any control over the funds he assigned to P / letter permanently relinquished Jones’ rights
Ds were duly notified of this assignment, had adequate funds to satisfy all of Jones’s credits, and therefore the settlement money should’ve been paid directly to P
UCC 2-210: Delegation of Performance; Assignment of Rights
114
(1) A party performs his duty through a delegate unless otherwise agreed or unless the other party has a substantial interest in having his original promisor perform or control the acts required by the contract. No delegation of performance relieves the party delegating of any duty to perform or any liability for breach
(2) Except as otherwise provided in Section 9-406, unless otherwise agreed, all rights of either seller or buyer can be assigned except where the assignment would materially change the duty of the other party, or increase materially the burden or risk imposed on him by his contract, or impair materially his chance of obtaining return performance. A right to damages for breach of the whole contract or a right arising out of the assignor’s due performance of his entire obligation can be assigned despite agreement otherwise
This provision does limit this power to assign to cases in which the seller has earned payment by full performance or the contract has been discharged by breach of the whole contract
(4) Unless the circumstances indicate the contrary, a prohibition of assignment of “the contract’ is to be construed as barring only the delegation to the assignee of the assignor’s performance
(5) An assignment of “the contract” or of “all my rights under the contract” or an assignment in similar general terms is an assignment of rights and unless the language or the circumstances (as in an assignment for security) indicate the contrary, it is delegation of performance of the duties of the assignor and its acceptance by the assignee constitutes a promise by him to perform those duties. The promise is enforceable by either the assignor or the other party to the original contract
Sally Beauty Co. v. Nexxus Products Co.(Assignment AND Delegation under UCC 2-210)
115
FACTS D, a manufacturer of hair products, contract w/
Best to be their exclusive distribution agent in Texas
Later, Best purchased by P, owned by a competitor of D / D subsequently cancelled the contract
P sued for breach of contract D defended that the contract was not assignable to P
ISSUE May a distribution agreement be abrogated by the
manufacturer if the distributor is purchased by a direct competitor of the manufacturer?
HELD Under UCC 2-210, delegation can be prohibited
because the delegator has a substantial interest in having that delegatee perform under the contract, or assignment will materially affect the delegator
The UCC applies because most of the contract dealt with the distribution of hair care products
The duty of performance under an exclusive distributorship may NOT be delegated to a competitor in the marketplace- or the wholly owned subsidiary of a competitor- without the obligee’s consent
Since the contract is being delegated to competitor P, D has a substantial interest in NOT seeing this contract performed by P, which prohibits the delegation of duties under UCC 2-210
NOTE In theory, D could sue Best if P failed to perform
adequately b/c Best has NOT escaped its original obligations under the contract by delegating its duties to P
Also, contracts for services are usually per se nonassignable w/out consent
116
o Breach, Repudiation, and Conditions Consequences of Nonperformance Outline
Is a breach MATERIAL? (R § 241 / Jacob & Youngs) Consider
(1) How much is non-breaching party harmed by breach
(2) How much would breaching party be harmed if required to perform fully and
(3) Whether breaching party’s failure to perform was in bad-faith
Note→ A partial breach may be substantial performance, meaning that the constructive condition to the other party’s performance is satisfied, but at the same time create liability for other damages
Is it a TOTAL breach? (R § 241 & 242) Consider
(1) Likelihood that breaching party will cure breach
(2) Harm that delay will cause non-breaching party
(3) Extent to which contract provides for performance without delay
Also, whether there has been a definite and unequivocal repudiation, or an unsuccessful attempt, based on reasonable grounds for insecurity, to obtain adequate assurances of performance (R 250-253, 256 / UCC 2-609-611 / Truman Flatt)
Consequences Spectrum Full performance→ Must perform Partial Breach→ Must perform / Damages Material Breach→ Right to suspend Total Breach→ Right to terminate
Chapter 10 Outline: Effect on Obligations of Performance /
Suits for Damages Failure of an Express Condition
If an express condition fails to occur, the other party can suspend performance and be released from their obligations under the contract
Exceptions: Waiver / Prevention by Obligor / Forfeiture
If an express condition fails to occur, no party can sue for damages
Reasonable Grounds for Insecurity
117
If you have reasonable grounds for insecurity, the other party can wait for performance or request adequate assurances
Failure to provide adequate assurances amounts to a repudiation, which is a total breach, discharges the other party’s duty to perform under the contract, and also allows the other party to sue for damages
Actual Nonperformance (i.e. you put the wrong pipe in my house)
Have to figure out what kind of breach this use of the wrong pipe was:
NOT a material breach→ Still have to perform (i.e. pay)
Material breach→ Can suspend performance Total (i.e. gut the house)→ Treat your duties as
completely discharged (i.e. not pay) Other party can always sue for damages, but might not
be much in value if the difference in value of the materials used is slight
Anticipatory Repudiation If there is anticipatory repudiation, it is a total breach,
the other party is released from its obligation to perform, and the other party can sue for damages
118
Express Conditions Under R § 224, a condition is an event that has to occur before
performance becomes dueR § 225 says that until the condition occurs, the party is NOT
required to performo Constructive Conditions
Created by the courts for 2 reasons: (1) To implement the parties’ intent (2) To reach a just result
Also used to avoid costs that might be imposed on society, like waste
o Breach of a PromiseGives rise to a claim for damages Substantial performance is applicable to require performance
under the contract Only if the promise is material can the breach of that
promise (i.e. material breach) allow the other party to suspend performance
o Nonoccurrence of a ConditionDoes NOT give rise to a claim for damagesSubstantial performance is NOT applicable to excuse the
nonoccurrence of an express condition Express conditions are strictly enforced Any failure of a condition to occur permits the other party no
to perform
o How Do We Tell Whether a Contract Provision is an Express Condition or a Promise?
Look to the language of the contract An express condition will usually include terms such as:
Unless, Until, On the condition that, “If such and such occurs, then the contract is null and void…”
If the language of the contract is ambiguous, the preference or default-rule is to classify the contract provision as a promise
o Waiver, Prevention and ForfeitureNOTE: Only the party who the condition is supposed to
benefit can waive or prevent the conditionWaiver
An express condition can be waived by words or conduct BUT, if the condition being waived is material,
then the waiver of that material condition will only be binding if the other party has relied upon the waiver or it is supported by consideration
Prevention (R § 245) (Oppenheimer) A condition is excused if the party that would benefit from
the condition interferes with its occurrence If the conditioning event is somewhat within the
obligor’s control, then he has some duty to act for
119
the purpose of helping that conditioning event to occur
Forfeiture (JNA Realty) A non-material condition may be excused to prevent a
forfeiture 3 Questions:
(1) Would the tenant experience a forfeiture? (2) Would the landlord be prejudiced? (3) Was the reason for non-compliance with the
condition of minimal fault Oppenheimer & Co. v. Oppenheim, Appel Dixon &
Co.(Non-Occurrence of an Express Condition) FACTS
P entered into an conditional letter agreement with D to sublease D’s office space / proposed sublease said it would be executed only if P submitted its plans and obtained the primes landlord’s written consent to the proposed “tenant work”
If the written consent was not received by the agreed date, both the agreement and sublease were to be deemed null and void
P timely submitted plans but never delivered the written consent on or before the modified deadline
D declared the agreement and sublease invalid P sued for breach of contract, arguing that it had
substantially performed the conditions set forth in the letter agreement
ISSUE Is substantial performance applicable to excuse the
nonoccurrence of an express condition precedent? HELD
Substantial performance is NOT applicable to excuse the nonoccurrence of an express condition precedent
The language of the contract unambiguously established an express condition rather than a promise because it employed the unmistakable language of a condition (provision stated that the sublease would be invalid “unless an until” all conditions had been satisfied” and that failure of the conditioning event would cause the agreement to be of “no further force and effect”)
120
Condition should be strictly enforced because it effectuates the will of the parties and it is likely that more coin was exchanged in order for that express term to be put in the contract
J.N.A. Realty v. Cross Bay Chelsea(Excuse of Non-Material Condition Based on Forfeiture
/ R § 229) FACTS
P executed a commercial lease w/ D’s predecessor, who assigned the lease to D
Lease terms provided for 24-year renewal option on 6-month notice by D
When 6 mo. Mark approached, P did not remind D, who did not send notice, although it had knowledge of its duty to do so
P demanded D to vacate, even though D had spent some $15,000 in improvements
D argues there should be an excuse based on forfeiture
ISSUE Will equity protect a tenant who negligently fails to
exercise a renewal option if failure to do so will result in a forfeiture?
HELD Under R § 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 a material part of the agreed exchange
We must look to.. (1) Whether the tenant is going to suffer
a forfeiture D purchased the lease for $40,000, put
in $15,000 worth of improvements, and if the location is lost, D’s restaurant may lose a considerable amount of its customers good will
(2) Whether the landlord will be prejudiced
Has to be resolved on remand whether P will be harmed by excuse of 6-month condition
Since P was negotiating w/ a prospective tenant, may be harmed by intervention
121
(3) Whether this is mere negligence, or something more deliberate
No evidence that D’s actions were deliberate / course of performance suggests that P should have reminded D of this 6-month renewal provision
A tenant who has intentionally delayed should NOT be relieved of a forfeiture
R § 228: Satisfaction of the Obligor as a Condition When it is a condition of an obligor’s duty that he be
satisfied with respect to 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
Problem 10-1o Issues Involving Conditions
Is the quoted condition a condition or a promise? Look to language of the contract, intent of the
parties, and the maxims of contract interpretation Is there a claim for damages here based on the
language of the contract? Nonoccurrence of a condition→ NO
o BUT, if the condition was intended to benefit the obligor, then the obligee can NOT use the nonoccurrence of that condition to get out of the contract if the buyer wants to waive that condition
Only the party to which the condition is supposed to benefit can waive or prevent the condition
Breach of a promise→ YESo If it is a material breach, the party can sue for
damages (look to R §§ 241 & 242) Is there a claim for damages based on other
events? Waiver by Obligor → MAYBE
o If obligor waives the condition, then contrary acts by the obligee may be a repudiation and therefore a total breach of the contract
Prevention by Obligor → MAYBE
122
o If party’s failure to use his best efforts in progressing the condition significantly contributed to the failure of the condition, then condition can be excused on grounds of prevention / looked at as a breach of good faith
Anticipatory Repudiation→ YESo This would be a total breach and release the
party from all of his obligations under the contract / can sue for damages
o BUT, was there a revocation of anticipatory repudiation?
Irrevocable if other party materially changed his position or indicating he was considering it a final repudiation, thus still giving rise to a total breach / suspension of performance / suit for damages
Breach of Good Faith by Obligee → YESo If obligee prevents the condition from
occurring, it is contrary to an obligation of good-faith
o The obligee cannot use the condition to get out of the contract if the obligor wants to waive the condition
123
Substantial Performance and Material Breach Restatement § 235: Effect of Performance as Discharge
and of Non-Performance as Breacho (1) Full performance of a duty under a contract discharges
the dutyo (2) When the performance of a duty under a contract
is due any non-performance is a breach A breach is an unjustified and unexcused failure
Different Levels of Breach o Full Performance
Must performo Partial Breach (R § 235)
Must perform, damages only It’s a constructive condition of the one party’s
performance that there has been no material breach by the other party
o Material Breach (R § 241) Right to suspend (§ 237) Breach of a contract’s terms by one party that is so
substantial as to relieve the other party from its obligations pursuant thereto
o Total Breach (R § 242) Right to terminate
o But how do you know where you are in this landscape? How can you move from one state to another?
R § 241 gives us a set of criteria to consider as to whether there has been a MATERIAL breach:
How much is the non-breaching party being harmed / deprived of the benefit of which he reasonably expected?
Is the non-breaching party required to perform fully?
Can the injured party be adequately compensated for the part of that benefit of which he will be deprived?
Was the breaching party’s failure to perform in good-faith?
Did the breaching party fail to comport with standards of good-faith and fair dealing?
R § 242 lists more factors, in addition to R § 241, to consider whether or not there has been a total breach, thus discharging all remaining duties:
Likelihood that the breaching party is going to cure the breach
124
The harm that delay would cause The extent to which the contract provides for
delay
Jacob & Youngs, Inc. v. Kent(Substantial Performance / Partial Breach / Constructive Conditions) FACTS
P built a country home for D 1 yr. later, D discovered that not all pipe in home
was of Reading manufacture as specified in the contract
D ordered pluming replaced but P refused b/c pipe was of comparable price and quality
Substitution of other pipe meant demolition at great expense of completed structure
Omission was not fraudulent or willful D refused to pay balance of contract
ISSUE Was the omission by P so trivial and innocent so as
not to be a breach of the condition? HELD
An omission, both trivial and innocent, will sometimes be atoned for by allowance of the resulting damage, and will not always be the breach of a condition to be followed by forfeiture
If a party has substantially performed its side of the bargain, the other party is still obligated to perform its side of the contract
The other party can sue for damages, but it can NOT stop from performing (i.e. paying the contract price) since the breach was not material
For damages in construction contracts, the owner is entitled merely to the difference between the value between the value of the structure if built to specifications and the value it has as constructed though
125
If Reading pipe were so important to D, he could have protected himself by imposing an express condition of recovery if the provision in the contract is breached
But here, its not clear that the Reading pipe provision was material
Sackett v. Spindler(Total Breach / Discharge of Performance / R §§ 241 &
242)o FACTS
P contracted to purchase all of the 6,316 outstanding shares of S&S Newspapers (for $85,000), in which D owned a majority of the shares
P made initial payments, but after a $59,200 check bounced for insufficient funds P repeatedly failed to pay
During this time, D had to take out mortgages, sell his own stocks, and change newspaper to a weekly to create working capital
P filed suit to recover money paid, alleging D unlawfully repudiated the contract after only a partial breach
o ISSUE Can a party repudiate a contract because the other
party thereto has committed a material breach thereof in continually failing to make requirement payment thereunder?
o HELD A material breach of a contract constitutes a
total breach thereof and is sufficient to permit the non-breaching party to lawfully repudiate
Under R 241 & 242, P’s behavior was a total breach, therefore justifying D’s repudiation and non-performance under the contract, because:
There was a high degree of uncertainty as to whether P intended to complete the contract
P’s failure to perform was brought about by gross negligence or willful conduct (not in good faith) and
P repeatedly failed to perform under his own assurances, undermining the value that P could attach to these assurances
126
Perfect Tender Rule under the UCC Instead of the principle of substantial performance, the
UCC has the “perfect tender” rule, which says that goods HAVE to conform to the contract and, if they deviate in any respect, then the buyer can refuse the goods upon delivery
UCC 2-601: Buyer’s Rights on Improper Delivery If the goods or the tender of delivery fail in any
respect to conform to the contract, the buyer may (a) reject the whole; or (b) accept the whole; or (c) accept any commercial unit or units and
reject the rest However, the seller isn’t always out of luck
The cruelty of this rule is not so severe as it would be in other contracts because the seller can always re-sell the product to another without much of a loss
(1) There is an opportunity for the seller to cure defects within a reasonable time if they have reasonable grounds to believe that tender will be accepted
UCC 2-508: Cure by Seller of Improper Tender or Delivery: Replacement (1) Where any tender or delivery by the
seller is rejected because non-conforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention 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 with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender
(2) If the buyer accepts delivery of the goods (doesn’t automatically turn it away), then more principles of substantial performance comes into play
UCC 2-608: Revocation of Acceptance in Whole or in Part
127
(1) The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it
(a) on the reasonable assumption that its non-conformity would be cured and it has not been seasonably cured; or
(b) without discovery of such non-conformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller’s assurances
(2) Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it
(3) A buyer who so revokes has the same rights and duties with regard to goods involved as if he had rejected them
Substantial Performance under the CISG
The CISG has a rule of substantial performance like the common law, i.e. a buyer can reject goods ONLY IF nonconformity is a fundamental breach of the contract
CISG Article 51(2) (2) The buyer may declare the contract avoided in
its entirety ONLY IF the failure to make delivery completely or in conformity with the contract amounts to a fundamental breach of the contract
CISG Article 25 A breach of contract committed by one of the
parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee, and a reasonable person of the same kind in the same circumstances would not have foreseen, such a result
CISG Article 49(1)(a) (1) The buyer may declare the contract avoided:
128
(a) If the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract
129
Anticipatory Repudiation Under R § 250 (and UCC 2-610), 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 or
(b) a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach
Under R § 250, repudiation can be by words OR conduct, but must be definite and unequivocal
One party attempting to sell to another person would constitute a repudiation by conduct
Requires a clear manifestation of an intent not to perform
Rationale→ high standard b/c anticipatory repudiation is a total breach, which is a major consequence entitling the other party to terminate and seek damages
Under R § 253, if one party repudiates, the other party can treat the repudiation as a total breach
The other party can then sue for damages and view its own duty as completely discharged
Under R § 256 and UCC 2-611, repudiation can be retracted entirely only IF the other party has not materially changed its position or said explicitly that it was treating what the party did as a final repudiation
Rationale→ Courts are reluctant to give this nuclear power of anticipatory repudiation and thus allow the repudiating party to take it back, as long as it doesn’t harm the other party
Truman L. Flatt & Sons v. Schupf(Retracting Anticipatory Repudiation / R § 256 & UCC -
611) FACTS
P contracted w/ D to purchase some land for $160,00, contingent upon rezoning of property
When request for rezoning was denied, P wrote D offering a lower price for the land
D rejected the lower offer and P later wrote a letter, saying he wanted to go ahead w/ the purchase at $160,000
D replied that P’s new offer to buy the property at lower price effectively voided the contract by indicating that P wasn’t going to perform under the deal
P sued for specific performance
130
ISSUE May an anticipatory repudiation be retracted by the
repudiating party? HELD
Under R § 256, an anticipatory repudiation may be retracted by the repudiating party UNLESS the other party has, before the withdrawal, manifested an election to rescind the contract, or changed his position in reliance on the repudiation
Assuming P’s request for a lower price constituted an anticipatory repudiation of the contract, P successfully retracted that repudiation in his later letter, because D had not yet materially changed his position or indicated to P any intent to treat the contract as rescinded
Assurances Under the R § 251, UCC 2-609 (requires a writing, but courts
don’t enforce it) and CISG Art. 71, a party can demand adequate assurances of performance if in doubt about the other party’s ability to perform under the contract
This is a way of ameliorating the hardship caused by the high standard for construing anticipatory repudiation
In order to make a claim for total breach under this doctrine, the plaintiff must show:
(1) There was reasonable grounds for insecurity(2) Adequate assurances were reasonably related to party’s
doubts or the contract (i.e. a letter of credit or a bond) Courts are reluctant to allow parties to demand a lot
more of the other party under the guise of getting adequate assurances b/c its like re-writing the contract
If its reasonable, a party can suspend its performance until the other party provides them with adequate assurance
If the other party FAILS to provide, within a reasonable time, such assurance of due performance as is adequate under the circumstances of the case, the party can treat this as a repudiation
Repudiation is a total breach, so the party can stop all performance AND sue for breach
o Hornell Brewing Co. v. Spry(Failure to Provide Adequate Assurances → Total Breach /
UCC 2-609)
131
FACTS D was granted the exclusive right to purchase P’s
beverages for distribution in Canada When D failed to remit timely payment for shipments
of beverages received from P and P learned that D’s operation was a sham, P requested adequate assurances
D failed to adequately reply and P requested a declaratory judgment
ISSUE Does one party’s failure to respond to a request for
adequate assurance of due performance constitute a breach of the agreement?
HELD One party’s failure to respond to a request for
adequate assurance of due performance constitutes a breach of the agreement, entitling the other party to suspend performance and terminate the agreement
P had reasonable grounds for insecurity after several missed payments and bad checks, and properly requested assurances from D that he would be able to make the payment on time
Since D failed to adequately reply, P was entitled to suspend his performance and terminate the agreement
Problem 10-2o Was There a Condition at All?
Was this an express condition or a promise? Look to…
o The intent of the partieso The language of the contracto Maxims of contract interpretation
Course of performance / dealingo The Anti-Forfeiture Defense→ Use the
interpretation that reduces the risk of forfeiture unless the risk is within the control of the obligee
What will the parties argue? Plaintiff will argue that the contract provision is
an express condition, and since events did not occur, he is released from his duties under the contract
132
Defendant will argue that the contract provision is a promise, in which substantial performance was rendered and plaintiff therefore is still bound / can’t suspend performance
Assuming there is an express condition, did the plaintiff waive or prevent it from occurring?
Only the plaintiff can waive or prevent the condition
Assuming there is an express condition, should it be excused because of forfeiture?
Under R § 229, look to:o Harm to Po Prejudice to Do Obligation of Good Faith
Assuming there is a promise, is there a material breach of the contract, entitled plaintiff to terminate the contract?
Look to R §§ 241 & 241 & the Sackett case