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CONTRACTS II OUTLINE

I. Duty of Good Faith A. Implied into every contract.

B. Conduct + Motivation (Heart of the Issue: Intent)

C. How does the issue come up?

i. Look at the conduct of one party.

ii. The other party is not happy with that conduct.

iii. Party engaging in the conduct is going to say that there is no

express term prohibiting that conduct and “they are well within

their rights”; however, their conduct undermines the heart of the

bargain of the contract.

D. Cases: Minimum rent + % of Gross Receipts i. Goldberg v. Levy: Court implied because tenant deliberately

diverted customers to avoid paying “extra” rent.

1. Best Efforts (Lucy v. Lady-Duff Gordon): Court says that

lessee must use best efforts to generate gross receipts.

ii. Mutual Life v. Tailored Woman (Fur Coat Case): Moved fur sales

to another floor; No breach.

iii. Stop & Shop v. Ganem

E. Policy: Freedom of contract; Freedom not to contract

F. Goal of the Good Faith Doctrine: Expectancy

II. Implied Warranties A. Implied Warranty of Merchantability (UCC 2-314): Every goods

transaction comes with an IWM unless disclaimed.

i. Rule: A merchant seller warrants that goods are fit for their

ordinary purpose.

1. Must be a merchant seller

a. UCC 2-104: A merchant seller is anyone in the

business of selling goods of that kind.

2. What are you warranting?

a. Goods will pass in the trade without objection

b. Fit for their ordinary purpose

ii. Defense to the IWM: If you are using something outside of the

ordinary purpose and are injured in some way, there has not been a

breach of warranty.

iii. IWM almost works as a strict liability type of warranty.

B. Implied Warranty of Fitness for a Particular Purpose (UCC 2-315)

i. Requirements:

1. Seller knows or has reason to know the buyer’s particular

purpose.

2. Buyer relies on seller’s skill and judgment.

3. Seller knows or has reason to know reliance.

ii. Any seller of goods can make the IWFPP (does not have to be a

merchant).

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iii. Particular Purpose: 1. Something that is out of the ordinary.

2. Most people define as anything that is within your needs.

C. Damages for breach of warranty (UCC 2-714)

i. Value Received – Value Promised

ii. Can also recover for incidental and consequential damages.

D. Policy (behind warranties): Expectancy

III. Express Warranties (UCC 2-313)

A. Seller has to affirmatively create.

B. Elements:

i. Any affirmation of fact, description, sample or model

ii. Has to relate to the goods in question

iii. Must become part of the “basis of the bargain”

1. Basis of the Bargain: Part of the reason why I decided to

contract.

a. Fact that the seller made a statement of fact is

enough to prove “basis of the bargain.”

2. Reliance: The fact that you relied on the affirmations led

to creation of the warranty.

a. While not a technical rule requirement, reliance can

be used by the defendant as a defense to “basis of

the bargain”

C. Argument against “express warranties”: Seller was just stating his

opinion.

i. Example: “This car is brand new and is in great condition.”

1. Car being brand new may be an express warranty.

2. Car is in great condition would most likely be viewed as an

opinion (mere puffery).

ii. Policy argument against: Cuts against the expectancy policy.

D. Cases:

i. Royal Business Machines, Inc. v. Lorraine Corp.

ii. CBS, Inc. v. Ziff-Davis Publishing Co. (Focused on reliance;

plaintiff changed its financial position on representations made by

the defendant)

E. When addressing a warranty issue on the EXAM, address all three

elements:

i. Creation

ii. Breach

iii. Disclaimer

IV. Warranty Disclaimer A. Disclaimer of an IWM (UCC 2-316 (2))

i. Must use the buzz word “Merchantability”

ii. Can be oral or written

1. If in writing it must be conspicuous

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a. Set apart in some way

B. Disclaimer of an IWFPP (UCC 2-316 (2))

i. No required words; a general disclaimer will suffice.

1. Example: “I disclaim all warranties.”

ii. Must be in writing and conspicuous.

C. Disclaimer of an Express Warranty (UCC 2-316 (1))

i. Almost impossible to disclaim an express warranty.

ii. In order to do so, the disclaimer language has to be consistent with

the creation language.

1. Way to get around an express warranty is a creation

argument: Because of the parol evidence rule, I never

created the warranty in the first place.

D. “As Is” or “With All Faults” (UCC 2-316 (3))

i. Disclaims IWM (without using the word “merchantability”)

ii. Nothing says this has to be in writing (but courts have interpreted it

that way).

V. Creating Express Conditions

A. Condition (Restatement §224): An event not certain to occur, but that

must occur before a party has duties or obligations under the contract.

B. “Pure” Condition:

i. Effect if not met (Other party does not have to perform):

1. Condition Precedent: Other party’s duties do not arise.

a. Burden of proof is on the

b. Internatio-Rotterdam v. River Brand Rice Mills

2. Condition Subsequent: Other party’s duties are

discharged.

a. Did have a duty, but because condition was not met,

duty was discharged.

b. Burden of proof is on the

3. Not performing Breach

4. Obligee is not liable.

ii. Overall Effect: When the condition is not met, no one has

breached.

C. “Promissory” Condition:

i. Someone has taken on the respon. of making a condition happen.

ii. Implied in every single exchange.

iii. Effect if not met:

1. Party is not required to perform.

a. Not performing Breach

2. Obligor (person making promise) is liable for breach.

iv. Overall Effect: When the condition is not met, someone has

breached.

D. Promise (Restatement § 2): A manifestation of intention to act or refrain

from acting in a specified way so made as to justify a promisee in

understanding that commitment has been made.

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i. Effect of a breach: When there is a breach of a promise:

1. The promisor is still liable for the breach.

2. The promisee still has a duty to perform.

a. Example: One side promises to use a particular

brand, and does not do so, does that extinguish the

promisee’s duty to perform? Generally, the answer

is no.

E. “Promise” or “Condition”?

i. General Rule: When it is unclear whether a term is a promise or

condition, then the presumption is that it is a promise.

ii. How to distinguish:

1. Look at the express language of the contract:

a. Condition

i. “On condition that…”

ii. “Provided that…”

iii. “If…”

iv. “Subject to…”

v. “When…”

vi. “After…”

vii. “As soon as…”

b. Promise

i. “I will…”

ii. “I promise…”

iii. “I agree…”

iv. “I warrant…”

2. No express language

a. Look at what the contract is all about.

b. Court will look at the circumstances of the

transaction itself to determine whether it makes

sense for the parties to take on liability.

F. How a condition issue comes up: Someone is not performing and the

other party is saying that the non-performance amounts to a breach.

G. Policy: Assent Policy and Expectancy Policy

VI. Avoiding Express Conditions

A. Waiver: The voluntary giving up of some right.

i. Elements:

1. No reliance requirements

2. Unilateral Action

3. No consideration

4. No mutual assent or agreement

ii. Can occur expressly or impliedly (by your actions).

iii. Only the party for whose benefit the condition has been imposed

can waive it.

iv. Generally happens before the condition has failed.

1. Waiver can occur after failure.

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a. Election: Waiver of the condition post-failure.

v. Not available if the condition was a material part of the bargained

for exchange.

vi. Revocation of a waiver (Restatement § 84; UCC § 2-209)

1. Can revoke waiver as long as the other side has not

detrimentally relied on the waiver.

vii. How does a waiver issue come up?

1. Beneficiary of the condition decides that the condition is no

longer important and no longer wants their obligations

(duty of performance) to be a condition of performing the

contract.

B. Estoppel: Go to estoppel when waiver is not available.

i. Equitable Estoppel: Someone misstates a fact to you and you

rely on that misstatement to your detriment.

1. Used as a shield: Prevent the normally successful defense

from being successful.

ii. Elements:

1. Reliance

2. Bilateral (One person makes the misstatement of fact, the

other person relies on that misstatement of fact)

3. No consideration

4. No mutual assent or agreement

C. Forfeiture

i. When will forfeiture be an issue: Only if the enforcement of the

condition would result in disproportionate, unfair and harsh

(extraordinary) loss.

ii. Example of forfeiture: Often seen in the insurance policy context

1. Ins. company promises to give benefits if there is a fire.

2. Party receives that benefit (money) for the fire, but was

supposed to give notice prior to receiving the benefit.

3. Timing of premium payments is often at issue. Even

though the payments are late, but are paid, the insurance

company cannot exercise the forfeiture option in refusing to

provide benefits to the insured.

iii. Argument for Forfeiture: When the court allows one party to

essentially breach the express terms of the contract, not allowing

the non-breaching party to exercise the forfeiture option is

essentially re-writing the contract.

iv. Cases:

1. J.N.A. Realty Corp. v. Cross Bay Chelsea, Inc.

a. Tenant failed to give notice of desire to renew lease.

b. Tenant made improvements; if not permitted to

renew the landlord would get a windfall; landlord

would be unjustly enriched if condition were

enforced.

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c. Failure to meet condition should be excused to

prevent forfeiture.

VII. Constructive Conditions (Implied)

A. Kingston v. Preston

B. Morton v. Lamb (Corn Case): Payment was a condition of delivery.

i. Buyer argued that because seller did not deliver the corn, seller

was in breach.

ii. Seller argued that because buyer was not ready to pay for the corn,

he did not have a duty to deliver the corn.

iii. Seller wins because buyer had not paid for the corn.

C. Jacob & Youngs v. Kent (Reading Pipe Case)

i. Contract called for particular brand of pipe to be used.

ii. Seller used another brand of pipe – Buyer argues he does not have

to pay seller remainder of what is owed (because use of certain

brand of pipe was a condition of the contract).

iii. Court determines that this is only a promise and not a condition.

iv. Measure of damages in this case:

1. Cost of replacement

2. Difference in Value (Value received – Value promised)

VIII. Anticipatory Repudiation (UCC 2-610)

A. Has to be clear and unequivocal

i. Simple request to get out of the contract will not suffice.

B. Aggrieved Party is able to suspend performance Breach

i. Two Options for a Repudiated/Aggrieved Party

1. Sue immediately for breach

2. Wait until time of performance comes due to see if the

other party goes through with the deal, and if they don’t,

bring suit then.

C. Different interests at play when talking about a contract:

i. Present Interest: When the time for performance becomes due

you have an interest in getting what you bargained for (what was

promised).

ii. Future Interest: At the time you enter into the contract, you are

expecting that the other side will perform on the date that

performance comes due (At contract formation, there is an

expectation of performance).

1. Anticipatory Repudiation does away with the future

interest. When the future interest gets thwarted, you get

the right to suspend your own performance, without that

suspension amounting to a breach of contract.

D. How does an anticipatory repudiation issue come up?

i. Contract performance is supposed to take place at a certain time.

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ii. One party, prior to the date of performance, notifies the other party

that they do not intend to go forward with performance of the

contract.

E. Demand for Adequate Assurance (UCC 2-609)

i. Must be in writing

1. Once the demand is sent you have the right to suspend

performance while you are waiting for a reply.

ii. Can only ask for assurances that the contract terms are going to be

fulfilled.

iii. Must have reasonable grounds for the insecurity.

iv. Reply can be oral or in writing.

v. Reply must be made within 30 days of receipt.

1. NO ANSWER = REPUDIATION OF THE

CONTRACT

IX. Material Breach

A. Material Breach: Almost getting nothing that you contracted for.

i. Is it a material breach?

1. Essence of the contract is not being fulfilled.

2. Must shake your confidence in the contract as a whole.

3. Key question to ask to determine whether there was a

material breach: Was the breach so substantial as to

justify an injured party’s regarding the whole transaction as

at an end?

a. Factors:

i. To what extent has the contract been

performed.

ii. Was the breach willful?

iii. How much money will the breach cause in

relation to how much money is still owed

under the contract?

iv. Degree of hardship on the aggrieved party.

v. Adequacy with which the aggrieved party

will be compensated by damages.

ii. Aggrieved party has the right to:

1. Cancel performance/Walk away (extinguish the contract)

a. Suspension of performance Breach

B. Substantial Performance: Basically getting everything you contracted

for, minus some very small items. (Jacobs & Young v. Kent – Reading

Pipe Case)

i. Aggrieved party can:

1. Get damages

2. Cannot suspend their performance.

X. Perfect Tender Rule

A. UCC 2-601: Perfect Tender Rule

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i. Has to conform 100% to what was contracted for.

1. Burden is on the seller to show the goods conformed 100%

ii. Buyer has three options:

1. Reject the whole shipment.

a. Can be oral or written (UCC 2-602)

b. Cannot exercise ownership over the goods.

2. Accept the whole shipment.

a. Acceptance (UCC 2-606)

i. Notification (oral or written)

ii. Failing to make a proper rejection amounts

to a technical acceptance of the goods.

iii. Using the goods.

iv. Saying nothing.

b. Acceptance of part = Acceptance of all

c. Once you have accepted the goods, you can no

longer reject them. Your only recourse is to revoke

your acceptance.

3. Accept any commercial unit and reject the rest.

B. UCC 2-508: Right of rejection subject to seller’ right to cure. i. Seller has an absolute right to cure prior to the date of

performance.

ii. After the time for contract performance, if the seller reasonably

believes the goods would have been acceptable, and he notifies the

buyer, only then would he have the right to cure the breach.

1. Seller did not know of the breach.

2. Seller sends something better, but it is still considered to be

non-conformity.

C. UCC 2-608: Revocation

i. Can only revoke for substantial impairment.

ii. Occurs after acceptance.

iii. Uses both an objective and subjective test.

iv. Burden is on the buyer to show that the goods substantially

impaired the value.

D. Duty of the Buyer: Take reasonable care of the goods while they are in

your control.

i. Will have the ability to recover whatever the cost is for taking care

of the goods (Definition of Incidental Damages).

XI. DEFENSES (Voidable: will be enforced unless the holder of a valid defense

elects to exercise his or her right to terminate the contract; Have the right to

terminate, but the contract will go forward if that right is not exercised; Void

Contract: Not a contract at all)

A. Deficient Capacity to Contract

i. Incompetence (Rest. §15)

1. Two Tests:

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a. Traditional Cognitive Test: Did you understand

or comprehend the nature of the transaction?

i. Subjective Issue: Can be proved by

objective observations and through expert

testimony at trial.

b. Modern Conduct Test: Inability to control one’s

conduct because of the mental illness.

i. Restatement: Other party has reason to

know of the inability.

ii. Criticism: Allows the floodgates to open

up and allow for frivolous and false claims.

2. Ortelere v. Teachers’ Retirement Board of New York

3. Competing Policies: Expectancy vs. Protection of

Incompetent Individuals

ii. Infancy (Rest. §14)

1. Contracts entered into by “minors” are voidable such that

the “minor” has the right to exercise their right to

terminate the contract.

a. “Minor”: Anyone under the age of 18.

b. Have the right to avoid the contract within a

reasonable time after you reach the age of majority.

c. When the contract is avoided, the minor has the

right to get back everything he has turned over to

the adult and vice versa.

2. Exception to the General Rule:

a. If contracting for a “necessary” then contract cannot

be avoided by a minor.

i. “Necessary”: If you do not have the ability

to contract for this particular good or

service, then you are going to have to go

without this good or service.

b. Webster Street Partnership, Ltd. v. Sheridan

(Minors contracting for an apartment; Was not a

“necessary” because minors could still go back

home.)

c. Policy (behind “necessary” exception): Encourage adults to enter into this type of contract.

3. Ratification: Minor can “reach back” and ratify the

contract, thus making it a stand-alone contract that cannot

be voidable.

a. Can happen in writing or by conduct. 4. Policy (behind Infancy defense): Discourage adults from

entering into contracts with infants because there is a

greater chance the adult is going to take advantage of the

minor.

B. Improper Obtainment of Assent

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i. Misrepresentation (Rest. §162)

1. Two types:

a. Material Misrepresentation

i. Misrepresentation of a Material Fact

ii. Cannot be a mere opinion

iii. Must be material: Would it induce a

reasonable person to enter into the contract?

iv. Falsity of statement does not matter

v. Justifiable Reliance

b. Fraudulent Misrepresentation

i. Intent to mislead.

ii. Know or should have known of the falsity of

the statement.

iii. Justifiable Reliance.

2. When does an opinion rise to the level of fraudulent

misrepresentation?

a. Trickery: When you know your opinion is a lie.

b. Close Relationship between the parties

c. Parties not dealing at arms length: One party has

superior knowledge of the issue at hand (other party

is in some way lacking or at a disadvantage).

3. Cases:

a. Halpert v. Rosenthal (Termite case): Innocent

representation rises to the level of fraudulent

misrepresentation (termites were a material fact)

b. Byers v. Federal Land Value Co. (Land Value

Case): Court said value of land was a mere opinion.

c. Vokes v. Arthur Murray, Inc. (Widow Dance Case):

Opinion rises to the level of fraudulent

misrepresentation.

ii. Duress (Rest. § 175)

1. Requirements:

a. Improper Threat (Rest. § 176)

i. Person making the threat is not going to

benefit in any way from the threat.

ii. Look at the surrounding circumstances.

iii. Even if a party is susceptible to criminal

prosecution, raising that is generally deemed

to be an improper threat.

iv. When a party threatens something that it has

every legal right to do, then that does not

amount to a threat.

b. Inducing the apparent assent of the other party

c. Victim left with no reasonable alternative but to

give assent.

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2. How to spot a duress issue: We had a contract, now all of

a sudden someone is wanting to change the contract, I

assent to the change, but I am looking for a way out of that

assent that I gave (because of economic duress).

a. Hard bargaining vs. economic duress

i. Hard bargaining does not amount to

economic duress.

ii. Being in a difficult financial spot does not

mean you are going to be able to avoid the

contract due to economic duress.

3. Was there economic duress?

a. Did the purported victim assent to pay for

something to which it was already entitled? If

yes, then move on to question 2.

b. Was the request for this assent motivated by a

legitimate business reason that would have been

within the reasonable contemplation of the

parties at contract formation? If no, then

generally that amounts to economic duress. If yes,

then one can argue no economic duress.

4. Cases:

a. Hackley v. Headley (Log weighing Case): Buyer

withholds payment for goods

i. Duress of person vs. Duress of Goods

1. Person: Force or threats (actually

holding a gun to your head).

2. Goods: Holding goods hostage

ii. Simply threatening to withhold payment is

not an improper threat in and of itself (Still

may be a breach).

b. Austin Instrument v. Loral Corp. (Navy radar case):

Two contracts; one party threatens the other party

that they will not fulfill their duties under one

contract unless they are given the business on the

second contract; Classic economic duress case.

5. Doctrine of Good Faith (related to defense of duress):

Did you have a legitimate reason for requesting the contract

modification?

6. Policy: Assent Policy – If we allow these contracts to go

forward then you are not exercising your free will.

iii. Undue Influence (Rest. § 177)

1. Elements:

a. No improper threat (instead an exertion of undue

influence takes place such that you are trying to

obtain what you want versus what the other party

wants)

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b. Dominant/Serviant Relationship (sets stage for

undue influence to take place)

2. Odorizzi v. Bloomfield School District (Teacher’s sexual

orientation led to undue influence being applied by school

district; forces resignation)

3. How to spot an undue influence issue: Must be some

relationship of dependency or trust such that one party has

domination ability over another party and the other party is

justified in believing that they would not act contrary to

their interest. The other person abuses that position of trust

by unfairly persuading the victim to enter into the contract.

The contract is generally adverse to the other person’s

interest.

iv. Unconscionability (General catch-all defense when duress or

undue influence will not work; Basically a cause-and-effect

situation)

1. Types (once one is found, the other also exists):

a. Procedural Unconscionability: Bargaining

Process

i. Focuses on the bargaining behavior of the

parties.

ii. Purpose is to prevent undue surprise.

iii. Gross inequality of behavior

iv. Good to show that there has been some

pressure, deception and unfair persuasion.

b. Substantive Unconscionability: Resulting terms

of the contract

i. Because of the unfair bargaining, we end up

with unfair, grossly one-sided terms in the

resulting contract itself.

2. Sliding Scale (Balancing Test)

a. High procedural, low substantive

b. Low procedural, high substantive

3. Cases:

a. Williams v. Walker-Thomas Furniture: Contract

terms allowed the furniture company to re-possess

all items purchased under previous contracts should

Ms. Williams default.

b. Gatton v. T-Mobile USA, Inc.:

i. Court separates procedural uncon into two

different aspects:

1. Oppression: Unequal bargaining

power leads to no meaningful choice

2. Surprise: Were you aware of the

terms or were they hidden?

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c. Discover Bank case: One-sided waiver clause

easily amounts to substantive unconscionability.

4. How to spot an unconscionabilty issue: Based on the

resulting term, it appears that someone has taken advantage

of another party to a grossly disproportionate level, such

that you end up with these disproportionate terms.

a. 3 things to look at when determining uncon:

i. Examining the terms (substantive)

ii. Manner of its execution (procedural)

iii. Knowledge and status of the parties

b. Unconscionability does have elements of the other

defenses: Lack of capacity, undue pressure

(influence)

C. Failure of a Basic Assumption

i. Mistake

1. Mutual Mistake of Present Existing Facts

a. Rest. §152:

i. Mistake by both parties.

1. Rest. §151: Definition of Mistake

– a belief that is not in accordance

with the facts.

2. Simply having a mistake with

regards to judgment does not qualify

as a mistake.

ii. Present existing fact.

iii. Basic assumption.

iv. Has a material effect on the agreed

exchange.

b. Rest. §154: Risk of Loss - Person asserting the

defense cannot bear the risk of loss

i. Lays out very broad circumstances for when

a party is going to bear the loss for mistake.

1. Risk allocated by agreement between

the parties.

2. Conscious ignorance.

3. Risk allocated by the court.

c. Cases:

i. Sherwood v. Walker (Barren cow case)

1. Difference in substance v.

Difference in quality

a. If the mistake goes to the

heart of the contract, then the

contract can be avoided.

b. If you are only talking about

a difference in quality, then

the contract remains binding.

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2. Largely not followed.

ii. Messerly (land contract with “as-is” clause):

Cannot avoid due to mistake; buyer bears

the risk of loss.

iii. Wood (Diamond case): Stands for the

“Conscious ignorance risk of loss” rule.

2. Unilateral Mistake (Rest. §153): What I was contracting

for is significantly impaired by the mistake.

a. Elements

i. One party.

ii. Mistake as to a basic assumption, as held by

the person asserting the defense.

iii. Material adverse effect with regards to the

exchange (on the party asserting the

defense)

iv. Person asserting the defense cannot bear the

risk of loss.

b. Additional Requirements of Unilateral Mistake (Differences with Mutual Mistake)

i. Enforcement of the Contract =

Unconscionable Result

ii. Other party had reason to know of the

mistake, or

iii. The other party caused the mistake in some

way.

c. Cases:

i. Tyra v. Cheney: Sub did not include part of

the cost in the written contract (was

previously communicated orally); Court

allows for unilateral mistake because if the

contractor received the benefit without

paying for it, then the result would be

unconscionable.

ii. Drennan Case (First Semester): If the

contractor does not have reason to know of

the mistake, then we are not going to allow

the defense of unilateral mistake to come in

and void the contract.

d. Duty to Disclose (and Unilateral Mistake) i. Laidlaw v. Organ (Tobacco Case): Buyer

contracted for tobacco; treaty was signed

that had an effect on the price; Seller was

not aware treaty was signed; Seller asked

buyer whether he knew of anything that

would cause price to rise; Buyer was silent;

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Buyer does not have a duty to disclose, but

does have a duty not to defraud.

ii. Rest. §161: Limited and exhaustive list of

when a non-disclosure amounts to an

assertion that could be fraudulent or a

material misrepresentation.

1. To correct a prior statement.

2. Knows that the disclosure will

correct a unilateral mistake being

relied upon by the other party, and

not disclosing would mean acting in

bad faith or against fair standards of

dealing.

3. Idea of Mistake: Very similar to the defenses of fraud

(bad faith): You know that there is a mistake, but you take

advantage of that mistake. No real meeting of the minds.

ii. Impossibility/Impracticability

1. Elements:

a. Contingency – unexpected occurrence

b. Risk not on the person asserting the defense.

c. Occurrence makes performance of the contract

commercially impracticable.

2. General Rule (Duty): You have the liability to protect

yourself against changed circumstances. If you do not see

fit to protect yourself, then the court is not going to provide

that protection for you.

3. Cases:

a. Paradine v. Jane: Prince invades land; tenant trying

to get out of rent due to changed circumstances;

Court does not allow.

b. Taylor v. Caldwell: Music hall burns down prior to

concert; No express term allowing for party’s duties

to be set aside; Court implies a condition in the

contract.

c. Transatlantic Financing Corporation v. US:

Closing of the Suez Canal during voyage caused

to have to take a different route; Cost increased; Not

impossible to perform the contract.

i. Just because something is more expensive

does not mean that it is commercially

impracticable such that the contract can

be set aside.

d. CNA & American Casualty v. Arlyn Phoenix (River

Phoenix dies of drug overdose)

4. How to spot the impossibility/impracticability issue:

Event has caused the costs to increase dramatically and is

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against public policy for me to go forward with this

contract.

iii. Frustration of Purpose

1. Elements:

a. Post-contract occurrence.

b. Non-occurrence of the event is a basic assumption

of the contract.

c. Unforeseen event (not in the contemplation of the

parties at the time of contract formation).

d. Adversely impacts the benefit/value of the contract

(benefit you expected to receive under the contract)

e. Frustrating/affecting the central purpose of the

contract.

2. Steps to go through to determine if you have frustration

of purpose:

a. What was the foundation of the contract?

b. Was the performance of the contract prevented?

c. Was the event that prevented the performance of the

contract of such a character that it cannot

reasonably be said to have been in the

contemplation of the parties at the contract date?

3. Cases:

a. Krell v. Henry (Coronation Case): King gets sick;

coronation delayed; Lessor argues frustration of

purpose; Central purpose for leasing the apartment

has been frustrated.

b. Lloyd v. Murphy (Landlord/Tenant Car Dealer

Case): Lease has a restriction of use; Government

changes law and limits tenant’s use of the property;

landlord changed the lease to accommodate

4. In order to prevail under Frustration of Purpose

defense, the person asserting the defense must show:

a. That the expected value of performance to the party

has been destroyed.

b. Event cannot have been foreseen such that the

parties could not have protected themselves.

5. How to spot Frustration of Purpose: Because of this

event, I am not going to receive any value, or very little

value from this contract.

XII. DAMAGES

A. Expectancy: Put the aggrieved party in the position they would have

been in had the contract been fully performed.

i. Rest. § 347: Formula for Expectancy (General Measure)

1. Loss in Value + Other Losses – Costs Avoided – Losses

Avoided

ii. UCC § 714 (2): Breach of Warranty

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1. Value Received – Value Promised – Incidentals –

Consequentials

iii. Cost of Completion v. Diminution in Value

1. Cost of Completion

a. Normally correct measure of damages, unless the

value that is going to be added by the completion is

grossly disproportionate to the cost of completion.

b. Furthers the Expectancy Policy: Had the contract

been fulfilled, you would have gotten what you

originally bargained for.

c. Groves v. John Wunder Co. (Court awarded Cost of

Completion because of a bad faith breach by the )

i. How to spot a good faith issue: Someone

is doing something, or not doing something,

that is not specifically identified in the

contract, but it is still “jabbing a stake

through the heart of the contract.”

2. Diminution in Value

a. Formula: Value Received – Value Promised

b. Furthers the Expectancy Policy: Gets the party

financially to the position they would have been in

had there been completion of the contract.

c. Hawkins v. McGee (Hairy Hand Case)

d. Jacob & Young v. Kent (Reading Pipe Case)

3. EXAM NOTE: Argue both Cost of Completion and

Diminution in Value.

iv. Seller’s Remedies under the UCC (UCC 2-703: does not require

resale; seller can elect which remedy they want to come under.)

1. UCC 2-706: Resale

a. Formula: Resale – Contract – Incidentals +

Expenses Saved

b. In order to recover, you have to have effectuated a

reasonable resale.

2. UCC 2-708 (1): Hypothetical Resale

a. Go to 2-708 (1) when you do not go out and resell

the goods.

b. Formula: Market Price – Contract Price –

Incidentals + Expenses Save

3. UCC 2-708 (2): Loss Volume Seller Remedy

a. Able to recover lost profits on sale #2.

b. Must be a loss volume seller

i. Unlimited supply of goods that you could

have sold.

ii. Had it not been for the buyer’s breach, you

would have made two sells instead of one

(and made a profit on both sells).

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iii. When 2-706 or 2-708 (1) results in 0 or a

positive number, then you can come under

2-708 (2).

iv. Neri v. Retail Marine Corp. (Special order

boat; buyer breaches; seller able to recover

under 2-708 (2).

4. UCC 2-709: Action for Price (Seller’s Specific

Performance)

a. Goods turned over to the buyer refuses to pay.

b. Court can then force buyer to actually pay.

c. Cannot resell the goods (because goods are unique).

v. Buyer’s Remedies under the UCC

1. UCC 2-712: Cover

a. Formula: Contract Price – Cover Price –

Incidentals – Consequentials + Expenses

b. Actually go out on the market and buy substitute

goods.

2. UCC 2-713: Hypothetical Cover

a. Formula: Contract Price – Market Price –

Incidentals – Consequentials + Expenses

3. Breach of Warranty (UCC § 714-2):

a. Formula: Value Received – Value Promised –

Consequentials - Incidentals

4. UCC 2-716: Buyer’s Specific Performance

a. If buyer is going to recover then he:

i. Must show goods are unique, or

1. One of a kind thing that is in and of

itself unique.

ii. In other proper circumstances.

1. Example: Tried to go out on the

market and find substitute goods, but

I could not find it or found it only

with incredible extra expense.

vi. Foreseeability

1. Rest. § 351: What makes a damage “foreseeable”?

a. In the ordinary course of event; Naturally flowing

b. Special circumstance: One party has put the other

party on notice (actual or constructive – known or

should have known) as to what can happen because

of the breach of contract.

2. Hadley v. Baxendale (Mechanical shift delay causes plant

shut down) – Special Circumstance case; did not have

notice; no recovery for lost profits.

3. Competing interests at play in foreseeabilty:

a. Plaintiff’s expectancy

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b. Defendant’s expectancy: What did the expect to

be liable for if it breached the contract?

4. Express provisions regarding liability for breach:

Parties often state what liability they are willing to take on

in the event of a breach. When there is the absence of that

term, the court steps in and tries to figure out what the

expectations of the parties were at the time of contract

formation.

5. Tacit Agreement Rule: Not only did you have to be on

notice, but you also have to have agreement to take on the

liability.

a. Going through with the agreement might be

enough.

b. Actual agreement might be enough

c. Morrow v. First National Bank of Hot Springs.

d. Not widely followed because it extends Hadley too

far such that it results in the underenforcement of

contracts.

vii. Certainty (Rest. § 352)

1. Damages that are not deemed to be certain are not

recoverable.

a. Certain: Almost impossible to come up with a

hard and fast number of what the damages are going

to be.

b. Chicago Coliseum Club v. Dempsey (Boxing

Contract): Lost profits not recoverable because of

certainty rule.

2. Rest. § 349: When you cannot recover expectancy

damages because of certainty (too speculative or too

uncertain to be recovered) that is when you try to come

under reliance.

a. Two situations when you would come under

reliance (instead of expectancy):

i. When you cannot recover expectancy

damages because of certainty (too

speculative or too uncertain to be recovered)

that is when you try to come under reliance.

ii. When you have contracted for, and when

you end up in a losing contract, the

aggrieved party would want to come under

reliance instead of expectancy (Mistletoe

Express Service v. Locke – Court allows

reliance expenses even when the aggrieved

party would not have made any money

because they did not have the full year to

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actually perform, as stipulated by contract,

due to the breach).

3. Liquidated Damages Clause (UCC 2-718): In the event

there is a breach, this clause sets an actual monetary

amount that the aggrieved party will receive. Must be

reasonable in relation to anticipated or actual harm.

a. Will not be enforced if it is deemed to be penalty:

So out of line with what damages would be that

those damages would be deemed to be punishing for

the breach.

b. To determine whether a liquidated damages clause

is enforceable, courts have the discretion as to

whether they want to look at the harm as anticipated

or actual. They usually will look at both.

c. Wassenar v. Towne Hotel: Sliding Scale Test

i. Intent of the Parties

ii. Difficulty in determining what damages

should be.

iii. Reasonable forecast of the harm caused by

the breach.

4. Limitation of Remedy Clause (UCC 2-719)

a. (1) (a): Parties have a right to contract for what

their damages may be.

b. (1) (b): If you want your remedy that you set forth

in 1 to be the exclusive and only remedy, then you

have to explicitly state that in the contract.

i. If not included, then (1) (a) says that you

have the right to all of your UCC damages

(including consequential damages) as well

as to repair and/or replace.

ii. “Exclusive” cuts out consequential,

incidental and all monetary damages.

c. (3): If you are talking about a personal injury with

regards to a consumer good, the UCC and society

has determined that that kind of a waiver of liability

is per se unconscionable.

5. Policy:

a. Rules vs. Justice

i. Rules: We need hard and fast rules in

contract law; our rules do not always equate

to justice (specifically with regards to the

undercompensation issue).

ii. Justice: Adherence to the rules works an

injustice on behalf of the aggrieved party.

b. Plaintiff’s Expectations vs. Defendant’s Protection

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viii. Avoidability (Mitigation)

1. General Mitigation Rule: Once there has been a breach

of contract, the non-breaching party should endeavor to

avoid any losses.

2. General goal: Do not want the running up expenses and

running up damages that could have been avoided.

3. Real issue is, “Who is responsible for the damages?”

a. Generally, the is only responsible for the damages

that are caused by their breach.

4. Cases:

a. Rockingham County v. Luten Bridge Co. (Bridge to

Nowhere Case): Seller not able to recover for

damages incurred after notification of intent to

breach (through their own fault)

b. Shirley Maclaine Parker v. Twentieth Century-Fox

Film Corp. (Liberal Actress Case)

i. Actress not required to mitigate by accepting

an inferior job.

5. Policy:

a. Avoid Waste

b. Encourage Commercial Transactions: Encourages

transactions by parties who might breach in

knowing that their damages will be limited should a

breach be necessary.

ix. Specific Performance (Ultimate Expectancy Remedy)

1. Land

a. Why do we award specific performance for

land? Because land is unique. Buyer cannot go out

and purchase that same piece of land.

b. Loveless v. Diehl: Two contracts One for

purchase of the farm; One between buyers and

doctor (money man) Lower court denied specific

performance Higher court reinstates because

specific performance is the default rule in land

contracts.

c. Policy: Encourages contract formation

2. Goods (Default Rule: Monetary Damages)

a. UCC 2-716: Buyer’s Specific Performance i. If buyer is going to recover then he:

1. Must show goods are unique, or

a. One of a kind thing that is in

and of itself unique.

2. In other proper circumstances.

a. Example: Tried to go out on

the market and find substitute

goods, but I could not find it

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or found it only with

incredible extra expense.

b. Cases:

i. Cumbest v. Harris: Hi-Fi Stereo was unique

(spent 15 years creating it one-of-a-kind)

ii. Scholl v. Hartzell: Car was not unique

because it was not difficult to go out and

buy substitute goods on the marketplace.

c. Replevin (UCC 2-716 (3)) vs. Specific

Performance:

i. Replevin: Have already paid for the goods,

but the seller is refusing to turn the goods

over to you.

1. Because the default rule in goods

contracts is monetary damages, you

try to come under replevin first.

ii. Specific Performance: Contracted for the

goods and have not paid, but seller refuses

to turn the goods over to you.

iii. Sedmak v. Charlie’s Chevrolet, Inc.: Pace

Car Case – Example of other proper

circumstances in which court will award

specific performance.

3. Personal Services

a. General Rule: Courts are not going to award

specific performance in personal services contracts.

i. The Case of Mary Clark, A Woman of Color

b. Negative Injunctions:

i. Lumley v. Wagner: Negative Stipulation

Clause included in the contract and court

enforces by not allowing comedian to

perform at theater number 2 after breaching

contract at theater number 1.

ii. Duff v. Russell: Court implies a negative

stipulation clause from the surrounding

circumstances.

iii. Dallas Cowboys v. Harris: If a performer

has exceptional or unique knowledge,

skill and ability, it is appropriate to

enforce this type of injunction.

4. Policy for awarding Specific Performance in Lands and

Goods Contracts: Unable to go out and make yourself

whole.

B. Reliance: Put the promissee in the position they were in prior to the

formation of the contract.

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i. Just because you have expended money does not mean that you

have conferred a benefit on the other party.

ii. Two situations when you would come under reliance (instead

of expectancy):

1. Certainty Limitation

2. Contract for and end up in a losing contract.

a. Mistletoe Express Service v. Locke – Court allows

reliance expenses even when the aggrieved party

would not have made any money because they did

not have the full year to actually perform, as

stipulated by contract, due to the breach.

iii. UCC technically does not allow for reliance expenses.

Restatement can come in to supplement.

iv. Cases:

1. Sullivan v. O’Connor (Nose Job – It did not work - still

ugly case) Court awards reliance and consequential

damages (other money you had to spend because of the ’s

breach).

C. Restitution: Put the breaching party in the position they would have been

in prior to contract formation. Take away the benefit that has been

conferred.

i. Non-breaching Party (Rest. § 373): If the promisor/breaching

party has been unjustly benefited (given a benefit that they have

not paid for) then you are going to take that benefit away.

ii. Breaching Party (Rest. § 374): Non-breaching party has been

unjustly enriched then the breaching party should receive

restitution.

1. Formula: Value of Benefit Conferred – Damages they

owe

2. Two ways an aggrieved party can get out of paying

money to the breaching party.

a. Express Agreement

b. If the aggrieved party does not accept the benefit.

iii. Quasi-Contract: Asking the court to imply a contract even though

I know that there was no actual contract, so that I can get paid.

1. Distinction between types of contracts:

a. Actual Contract: Both parties expressly giving

their mutual assent to express terms of the

contract.

2. Contract Implied in Fact:

a. Stems from an actual contract.

b. Court is inferring this contract from the surrounding

circumstances of the contract.

3. Contract Implied in Law:

a. Does not stem from an actual contract.

b. Created by law to promote justice

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4. Cases:

a. Cotnam v. Wisdom: Doctor sues man’s estate to

recover for services rendered after being summoned

to the scene of an accident

i. Rule: When a doctor has been summoned,

they are using their professional skills and

knowledge to provide a service. When that

happens the law says that there is an

expectation of payment and the law will step

in and create this contract implied in law and

allow for the doctor’s to get paid.

b. Martin v. Little, Brown and Co.: Court refuses to

imply a contract because plaintiff volunteered his

services.

i. General Rule for implying a contract: When you have one party volunteering their

services to help another person, the court is

not likely to imply a contract between the

parties.

iv. Policy: Fairness and Justice