Contracts II OutlineCONTRACT INTERPRETATION AND CONSTRUCTION

A. INTERPRETATION1. Purpose: To determine the parties’ intent with respect to the contract

a. Ascertainment of a contract’s meaning(Frigaliment Importing Co. v. B.N.S. Int.: Chicken case)b. Ks are not formed in a vacuumc. Determine the meaning under the circumstances (Corbin—contextual)

2. Data Available:a. Intrinsic Evidence: Look at the contract itself

i. Courts prefer thisb. Extrinsic Evidence: Look outside of the contract (“parol evidence”)

3. Data Priority:a. Contract (“four corners”)b. Course of performancec. Course of dealingd. Trade usage (UCC 1-205): Any practice or method of dealing havingsuch regularity of observance in place, vocation or trade as to justify anexpectation that will be observed in respect to the transaction in question.

4. Interpretive Tools:a. Give words their general prevailing meaning unless the term istechnicalb. Interpret agreement in a reasonable, lawful, effective wayc. Custom-negotiated provisions given more weight than standardizedform provisions

5. External ways to view the contract:a. Ad/marketingb. Industry practicesc. Past dealingsd. Post-signing dealingse. Technical lexiconf. Common parlance (what would the average person look at this contractthink that the terms meant)g. Negotiations

6. Notes:a. Does the information itself add anything to the analysis?b. Why is certain information excluded in the analysis:

i. Relevanceii. Credibilityiii. Language in the contract that excludes any past dealings

c. Put the intent clearly in the document!d. With new technology, come new words, issues, and problems (Guilford v. Pub. Util. Comm.: Def. of “appurtenances”)e. Ambiguity resolved against the drafter (contra proferentum)f. The expression of one thing excludes another (exclusio alterius)

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7. Restatement Second 202: Rules in Aid of Interpretationa. Words and conduct are interpreted in light of all of the circumstances and, if the purpose is ascertainable, it should be given great weightb. A writing is interpreted as a wholec. Unless other intention is manifested:

i. Where language has a generally prevailing meaning, it is given such

ii. Technical terms and words of art are given such meaningsd. Relationship and prior dealings of the parties will be considerede. Intentions should be considered together

B. CONSTRUCTION1. Def: The methods and considerations that courts use to supplement orclarify contract terms as a matter of law for intent or for public policy2. Gap Fillers Approaches:

a. Autonomy of the parties: Try to find their intent and follow itb. Economic approach: Find the best way to promote efficiency of the lawc. Societal goals: Broad goals of societyd. Considerations of the relationships of the parties

3. Good Faith and Fair Dealing (R. 2nd 205) (UCC 1-203)a. Def: Every contract contains an implied obligation of good faith and fair dealing (Saucy Sisters: Termination for Convenience Clause did not have anybad faith and therefore stands)b. Alternative Interpretations:

i. Any rational action complies with the covenantii. Any action that is profitable per se compliesiii. Slimy behavior, even if profitable or consistent with literal terms of the contract is bad faith*These interpretations are somewhat contradictory to each other*However, the court may use any of these possibilities

c. Notes:i. These are very subjective issues (the court may do what it thinks

it right)ii. There are ethical and moral questions that come into this analysis iii. There is no one exact definition of good or bad faith iv. These can be thought of as gap fillers (this is because it is an implied term)v. Reflects a sense of public policy (courts want parties to act reasonably)vi. This issue usually arises when two parties enter into a K with an unexpressed expectation or intent and the other party does something that goes against this

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DEFENSES

Void: The K is a legal nullity; it is as though it never happened (void ab initio)Voidable: One party has the option to deem the K voidUnenforceable: Valid K but no remedy

MISUNDERSTANDING

1. Def: Parties use the same words but attach irreconcilably different meaningsto them (Peerless or Raffles) (Konic v. Spokane)(Frigailment)

a. Ambiguous terms: Suceptible to two different meaningsb. Vague: Wide spectrum of meanings

2. Elements:a. Parties have different meanings for the same word(s)b. Neither party knows the other’s meaningc. Words are material to the contractd. One party’s meaning is not more reasonable than the other’s

3. Notesa. This happens with both parties think that they are agreeing to the sameterms, although each has a different subjective belief about the dealb. Most commonly found when a term used in the K is ambiguous

i. In this sense, the objective theory of contracts does not strictly apply

c. If one party knew or should have known the meaning understood by theother party, a K will be formed on the term as understood by the unknowing partyd. UCC has no provisions dealing directly with the consequences of misunderstanding (it is left to case law)e. The difference between misunderstanding and mistake is that misunderstanding prevents a contract from ever existing at all (whereasmistake mean that a K exists but it may be avoided by the mistaken party)f. VOID

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MISTAKE

1. Def: An erroneous assumption of fact by one or both parties a. Mutual: Both parties have a mistaken belief about the fact (Wood v.Boyton: Diamond) (Sherwood v. Walker: Cow) (Mattson v. Rachetto: Agricultural)

i. Courts often hold that there was no K at all, rescission, or reformationii. This is usually the only grounds for avoidance!

b. Unilateral: Mistake made only by one party i. Courts often hold that there is no relief

2. Elements:a. Fact exists at the time of the contractb. Parties are mistakenc. Fact relates to basic assumption underlying the contractd. Mistake has material effect on contract’s valuee. Complaining party does not bear the risk. Risk allocations:

i. By contractii. Reckless about lack of knowledgeiii. Reasonable for party to bear risk

3. Notesa. It it not enough to say that a mistake has been made—there must be something in addition to the mistakeb. Principle of Conscious Ignorance: A party who bases his assent on apresent fact (that is important and material) but who is consciously awarethat his knowledge of the truth is limited

i. This person should bear the risk (risk allocation)ii. However, consider the reasonability—should he have to bearthe risk?iii. This is a situation where the court would say it is probablyfair for him to bear the risk

c. Court may focus on three factors:i. Nature of the mistakeii. Seriousnessiii. If it is unfair

d. Remember: This is not about what may happen in the future (those Ksdeal with impossibility, impracticability, and frustration of purpose)!e. Traditional rule is that ignorance of the law is no excuse –however, themodern view is that mistake of law may serve to avoid the K (Mattson)f. VOIDABLE

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EXCUSE DUE TO CHANGED CIRCUMSTANCES

1. Def: Facts occurring after contract formation that affect the basic contractassumption

a. The actual performance of the K is significantly different than what the party originally expectedb. There are three types: Impracticability, Frustration of Purpose, ForceMajeure

2. Elements:a. Materialityb. Risk allocation

i. Expressii. Implied

3. Must be:a. Unexpected occurrenceb. It was the basic assumption of the agreementc. The occurrence made the performance impracticable/mootd. Party seeking relief must not have been at faulte. Party seeking relief must not have assumed the risk

4. IMPRACTICABILITY: Supervening fact that makes performance impractical (Paradine v. Jayne: German prince) (Taylor v. Caldwell: Music hallthat burned down) (Opera Co. v. Wolf Trap: Opera perf. in park after elec. storm)

a.. It is not that the K is impossible, it is just that it is SO impractical that the party should not have to go through with itb. These cases often apply when:

i. Death or incapacity necessary for performanceii. Destruction of a specific thing necessary for performanceiii. Prohibition or prevention by law

c. Courts struggle with this because of freedom of contract5. FRUSTRATION OF PURPOSE: Supervening fact makes performance moot(something happened that rendered the K not meaningful for either party)(Krell v. Henry: Coronation of King)

a. The value of performance is diminishedb. Frustration of a hidden, secret, or otherwise undisclosed purpose is notenough (Scottsdale Rd. v. Kuhn Farm Machinery)c. Consider foreseeability (although this cannot be analyzed alone)d. Imprac. and Frust. of Pur. are similar and only differ in purpose and what the supervening fact does to performance—this is because Imprac.came from Imposs. and Frus. of Pur. came from Imprac.

6. FORCE MAJEURE: An act of God or an event outside of the parties’ reasonable control

a. Note: If force majeure affects basic contract assumption and makesperformance impracticable or moot, performance is excused UNLESSthe contract specifies otherwise (freedom of K always important!)b. Remember: Freedom of contract is always important!

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MISREPRESENTATION & FRAUD

1. Def: A contract is voidable if assent is justifiably induced by fraudulent ormaterial misrepresentation

a. Misrepresentation: An assertion not in accord with the factsb. Fraud: When the assertion is made with knowledge that it is not in accord with the facts

2. Situations include:a. Express situations—a lie or embellishmentb. Deliberate concealment of a factc. Failure to disclose a fact

3. Often used for:a. Liesb. Overconfident factual statementsc. Actions taken to hide factsd. Innocent but material misstatementse. Failure to volunteer facts (in limited situations)

4. Notes:a. Material Fact: Something that affects the conduct of a reasonable person in reference to another person (subjective analysis)b. Types of Fraud

i. Affirmative Fraud (Sarvis v. Vermont State College: Man who lied on resume for employment)ii. Silence as Fraud (Stambovsky v. Ackley: Poltergeists case)

c. When Non-Disclosure is Equivalent to an Assertion (R. 161): Thisoccurs when the party knows that disclosure of the fact would correct theother party as to a basic assumption upon which the party is makingd. The essential difference between misrep. and fraud is state of minde. Fraud in the Inducement: Relates to the fact that forms the basis of the K and gives the other party incentive to enter the Kf. Fraud in the Factum: Relates not to an underlying fact but to the document being executed (creates a void, not voidable K)g. Common remedies for fraud:

i. Rescission (restitution)ii. Damages

5. VOIDABLE

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DURESS

1. Def: Assent procured by improper means2. Notes:

a. Examine if the party had any options leftb. What was the motivation for entering into the Kc. The mere threat of a breach is not, in itself, duress d. Economic Duress: The agreement was induced by an improper threat,

leaving the party with no other alternative but to assent (Austin Instr. v. Loral: Navy radar) (Alaska Packers Assn.: Although decided on consid.)

i. Balance with competitive markete. Does not constitute duress if substitutes are available f. Supervening difficulties may allow for the K to be upheld without new consideration (New England Rock Ser. v. Empire Pav.) UCC 2-209:

i. An agreement modifying a K needs no new considerationii. A signed agreement which excludes modification or rescissionexcept by a signed writing

g. A threat is improper when (R. 176):i. It is a crime or a tort (or could become one)ii. It is a criminal prosecutioniii. Threat of use of civil process or in bad faithiv. The threat is breach of duty of good faith and fair dealing undera K with the recipient

h. A threat is improper if the resulting is not on fair terms and (R. 176):i. The act would harm the recipient and would not significantly benefit the party making the threatii. The effectiveness of the threat in inducing the manifestation of

assent is significantly increased by prior unfair dealing by the party

making the threatiii. What is threatened is otherwise a use of power for illegitimate ends

3. VOIDABLE

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UNCONSCIONABILITY

1. Def: The absence of choice and reasonable terms (NEC Tech. v. Nelson: TV case) (Williams v. Walker-Thomas Furniture)

a. Something that offends the conscience because it is unreasonablyexcessive, unscrupulous, or egregiousb. Remember, there can still be “bad bargains”c. Prevent oppression and unfair surprised. Based on the concept of Equitable Relief

2. Elements:a. Procedural: Defects in the bargaining process (the way it was formed)

i. Contracts of Adhesion: Non-negotiable form or standardizedcontracts

*Any K where one of the parties, having superiorbargaining power, is able to dictate the terms of the K on atake-it-or-leave-it basis, and the weaker party has no choicebut to adhere to the terms*This signifies that there was oppression in its formation

ii. Examples: Age, education, intelligence, business knowledge,experience

b. Substantive: Unfair terms (the terms in the K)i. Examples: Reasonableness, purpose of the K, allocation of therisks, language that is incomprehensible, boilerplate terms, cost-price disparity (selling something for much more), denial orbasic rights or remedies, circumstances surrounding the K,commercial settings

3. Notes:a. If one is present and much stronger than the other (P or S), the court willprobably find unconscionability b. Think about both elements together (the distinction is not as important)c. These cases are very fact-specific and limitedd. If unconscionability is found, the court may:

i. Reject the K entirely ii. Excise the offending term(s) and go forward with the rest of K

4. UCC 2-302a. Un-C clauses may be severed from the rest of the Kb. Meant to prevent oppression and unfair surprise

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ILLEGALITY1. Def: A contract that is in violation of a law (Diversified Group v. Sahn)2. Clause is usually severed

PUBLIC POLICY1. Def: A contract that is in violation of a public policy2. Notes:

a. Tension between enforcing the K and upholding the countervailingpublic policyb. Court does not want to overstep judicial lawmakingc. Rule of Reason: The court tries to find a balance btwn. the K and the clause that goes against public policy (Stevens v. Rooks Pitts & Poust)d. Damages: Courts usually look at the least extreme remedy in order toget the right result

3. Usually VOIDABLE

INCAPACITY1. Def: Contracts entered into during incapacity are voidable by the incapacitatedparty2. MINOR: A minor does not have the capacity to bind himself to a K, thusmaking the K voidable (usually 18 years old) (Webster St. v. Sheridan: K for apt.lease) (Haldman v. Lemke: Teen who buys car)

a. A minor may disaffirm expressly or by conduct at the time of reachingmajority, or a reasonable time thereafter b. Exceptions: (must have both)

i. Emancipated Minor: When his parents’ duty of support is terminated as a result of certain voluntary acts of the minor(Ex: Getting married, army)

*Just leaving home in not enoughii. K is for Necessaries: Goods and services essential to theminor’s existence, but can extend to items which are appropriateto the minor’s standard of living, as set by his parents’ socialposition in life

c. Most courts have held that minor not responsible for loss in value ofproperty d. If disaffirmed, minor must return goods (quantum meruit available onlyif minor emancipated and contract was for necessaries)d. VOIDABLE

3. MENTAL ILLNESS4. INTOXICATED

a. Normally limited to situations where the person is incapable of understanding and the other person has reason to know he is impaired

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PAROL EVIDENCE

A. Def: If the parties have a writing that is supposed to be a complete and final expression of their agreement, then extrinsic evidence of prior contemporaneous agreements they might have made, which would vary or contradict the terms contained in the writing, is inadmissible.(Masterson v. Sine Judge Traynor)(Pacific Gas & Electric v. Drayage Judge Traynor: Parol evidence is admissible if it is relevant to prove the meaning to which a word is susceptible—otherwise may undermine intent of the parties)

1. Notes:a. Think of this as the extrinsic evidence rule (this is because it appliesto oral and written evidence that is outside of the contract itself)b. How much credence do we give to a written agreement?c. Does the information contradict the analysis or is it within the scope?d. Meant to preserve the integrity of written contractse. Remember: Parties may subsequently modify their Ksf. Integrated=Final

B. Types:1. FULLY INTEGRATED: Parties intend writing to be complete and exclusive as a final agreement

a. The parol evidence rule may only interpret ambiguous termsb. Cannot add or contradict terms

2. PARTIALLY INTEGRATED: Parties intend the writing to be the final agreement but not comprehensive

a. May add terms but not contradict them (this is because we are concluding that, although the document is not comprehensive, we givepriority to the final agreement)b. Terms that contradict are not allowed because otherwise it would notbe final—parties go through negotiations to get the K they have(Masterson v. Sine: PI because was silent on assignability)

3. Parol Evidence may also show if agreement is fully/partially/not integrated(How does a party prove that a contract is anywhere on the continuum?)Focus on the intent (did they intend for the contract to be integrated?) Two ways:

a. Four Corners: Prohibits extrinsic evidence i. Look at the writing itself to determine if extrinsic evidence ispermitted (Thompson v. Libbey: Quality of logsii. Williston (you can think of this approach as an implied mergeclause)iii. Mitchell v. Lath (icehouse on the property did not have to beremoved even though orally agreed because not in K)

b. Modern Approach: Accept extrinsic evidence to determine whether integration exists

i. Extrinsic evidence may be used by the court to determinewhether parol evidence rule appliesii. If the court finds that the parties intended to integrate, then no

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other evidence will be admittediii. Corbin and Winmore (you can think of this approach that theywould not imply a merger clause but the parties can include it)

C. Reasons for parol evidence1. To keep bad information from juries2. Reduces litigation costs (not as many discovery issues)3. To give reason for parties to enter into written agreements

D. Steps to Determine Parol Evidence1. Is the agreement intended to be a final agreement? (INTEGRATION)

a. If it is the final but not comprehensive agreement, it is partiali. Evidence inconsistent cannot be introducedii. Terms that are missing may be supplemented

2. Is the agreement that is intended to be final, also complete and exclusive?a. If it is the complete and exclusive writing, it is fully

i. Evidence inconsistent cannot be introducedii. Terms cannot be addediii. Only ambiguous terms may be interpreted

E. Exceptions to the Parol Evidence Rule *This only applies if the parties are not trying to enforce the contract separately*

1. Contracts that attack the validity of the contract (Examples include fraud, duress, mistake, illegality, and possibly unconscion.)

a. Example: If a party is trying to claim fraud or duress, extrinsic evidenceis going to be admitted (and there will be no parol evidence rule) becauseotherwise a party would never be able to bring these claimsb. There are certain acts that are so egregious that courts do no want toexclude claims because of a strict evidentiary rule

2. To the extent that an agreement is meant to interpret an earlier contract doesnot violate the parol evidence rule

a. Example: Parties have a contract to deliver something in Winter of2008, which they both understand to be January 2008. A second contractmay interpret this agreement without violating the parol evidence rule.

3. Restatement Section 214(d) deals with these exceptionsF. Notes

1. PE is on the decline2. Liberal application (Traynor) v. Strict application3. PUT YOUR INTENT INTO THE K4. Just because a party gets his evidence in does not mean that it will be believed5. To avoid parol evidence problems:

a. Put your intent in the Kb. Define terms in the Kc. Use merger clauses

G. Parol Evidence Rule under the UCC1. Takes a similar approach that fully may not be contradicted or supplemented2. However, UCC does not permit a final and complete written K to be explainedor supplemented by course of dealings, trade usage, or course of performance

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H. MERGER and INTEGRATION CLAUSES1. “All prior oral or written representations, understandings and agreements had between the Parties with respect to the subject matter of this Contract…are merged in this Contract, which alone fully and completely expressed their agreement”(Bristow v. Drake Street, Inc. Judge Posner)

a. Goes to the intent of the parties (that they do not want the court to look at evidence since their intent is already included)b. Terms that are capitalized mean they are defined in the contractc. Make sure to indicate in the merger clause that this contract standsalone (this is because parties often have multiple contracts)d. Remember: This deals with prior oral and written representations(this means that subsequent agreements could come in)

2. Notesa. This is a way to contract around the parol evidence ruleb. Remember: You still cannot use a merger clause to get around issuesof validity c. Courts give a good amount of deference to merger clausesd. These are particularly valuable in situations when the negotiations take a long time (to make sure that prior drafts are not resurrected) e. Evidence of fraud, bad faith, uncon. will always be able to get in

CONDITIONS AND PROMISES

A. CONDITION PRECEDENT1. Def: Condition must be satisfied before an instant duty of performancearises2. Notes:

a. The idea is that the condition arises and at that point precedent arisesb. Example: Assume Binco is buying Targetco by purchasing all of its stock. The acquisition requires Targetco’s stockholder approval. The parties have to document the agreement before the approval (so they can have something to vote on). However, Targetco does not want any obligations if the stockholders veto the deal. The condition precedent is that the acquisition will go through only after the stockholder’s approvalc. Policy: Courts generally disfavor condition precedents (“courts refuse to shift the risk and burden…unless the language clearly indicates that theparties intended to do so”) (Koch v. Construction Tech., Inc.)

i. This idea is rooted in fairnessB. CONDITION SUBSEQUENT

1. Def: Condition’s failure to occur discharges already-existing contractualduty (condition that, when it happens, cancels or modifies the duty of thecontract)2. Notes:

a. Do not get caught up on why it is called subsequent b. These are rather rare

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c. Example: Insurance company promises to insure a homeowner for flood and flood damage. The condition precedent would be that a flood has to happen. Assume that the insurance company adds another provision that it will not provide coverage unless it is submitted within 60 days of the flood (this would be a condition subsequent).

C. Difference between a CONDITION and a PROMISE1. Condition: An event, not certain to occur, which must occur before performance under a contract becomes due

a. Something that is a condition and not a promise: No X, then no Yb. This can result in no duty to perform and no damages for liability

2. Promise: A commitment to act or refrain from acting in a specific way in the future

a. Something that is a promise and not a condition: If X, then Yb. This means liability for damages but if it is not a condition, the otherparty still has to perform

3. Promissory Condition: D. TYPES OF CONTRACT PROVISIONS

1. Covenant: A promise to do or not do somethinga. Breach of contract is the focus

2. Representation: Statement of fact made to induce a party to enter into a contract

a. Misrepresentation: This is a defense to contract formation and it mayalso include tort-type damages

3. Warranty: Other statements of facta. Breach of contract and special warranty remedies are the focus

4. Condition: An event that must occur before performance is requireda. A failure of a condition excuses performance

*Most contract provisions are covenants and not contract provisions*-This is because people do not draft contracts thinking about how theycan get out of them

E. How Conditions Are Expressed1. Express Condition: Expressed in the contract

a. On condition that, if, unless, until (condition is the best)b. Rule: Express conditions must be literally complied with (and strictly enforced)c. Although constructive conditions, which are imposed as a matter of law and drawn from the promises constrained in the contract, may be substantially performed, express conditions must be literally complied with. Failure of the condition to occur excuses the promisor from its duties. (Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co.)d. Courts will not apply substantial performance to express conditions

2. Implied Condition: Implied in facta. These are constructive conditions (see below)b. “We must weigh the purpose to be served, the desire to be gratified, theexcuse for deviation from the letter, the cruelty of enforced adherence”(Judge Cardozo in Jacobs & Young)

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3. Construed Condition: Implied in law4. Substantial Performance: (Constructive Conditions): Substantial performance of a contractual duty satisfies any “constructive condition” derived from that duty to the other party’s obligation to perform

a. Is the breach material?b. Would it be out of proportion to say that the breach means that theparty does not have to go through with the contract?

i. Would it be fair?ii. What was the intent of the parties?

c. Jacobs & Young, Inc. v. Kent: The owner’s duty to make the final payment was subject to the constructive condition of the builder’sperformance of his duty to complete the house according to theagreed specifications. Substantial performance of the builder’s dutysatisfied this constructive condition.d. This is rooted in justice and equitye. The breach cannot be materialf. Judge Cardozo broke down the promises into three categories:

i. Promises that are so plainly independent of each other that they can never be conditionsii. Promises that are so plainly dependent that they must always beconditionsiii. Promises that are dependent in matters of substance but independent with regard to insignificant departures

g. Trivial, innocent, and inconsequential departures from the contracth. Cannot frustrate the purpose and cannot be intentionali. Unless it is clear, contract language is generally viewed as covenantsand not conditionsj. The law does not deal well with “hard to quantify” ideas (such as certainbrands)

MATERIAL BREACH, SUBSTANTIAL PERFORMANCE,AND ANTICIPATORY REPUDIATION

*Concept: Distinguishes between those breaches that would excuse performance from those breaches that would not*A. Def: Failure to perform a covenant or inaccuracy of warranted fact

1. Material breaches create termination right as a gap filler2. Breacher is entitled to restitution

B. Determine if the breach is material:1. Material: Where a breach is so serious that it allows the other party to declinehis performance, terminate the contract, and sue for full expectation damages

a. A material failure by one party gives the other party the right to

withhold further performance as a means of securing his expectation of an

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exchange of performance and suspends the injured party’s duties until the

breaching party cures the default (Seydel v. Ige: Employer got employee to

move to U.S. to take a job by telling him he would get stock, apt., etc. and

employee received damages after not transferred)b. Cure: The breaching party may reasonably fix the

problem before itbecomes serious

2. Not Material: If the breach is not material, need substantial performance (cannot cancel the contract but can sue for damages)3. If there is a breach, the other party may:

a. Suspend performanceb. ?c. Seek to rescind the contractd. Continue the contract and then sue because of the breach

4. Restatement 2nd 241: Five Factors to Consider in Determining Whether a Breach is Material: *Know* (Seydel v. Ige) (Worchester Heritage Society v.Trussell: Seller could not rescind the contract for a home that buyer bought witha clause that he would restore it, even though it was not restored within time per.)

a. Whether the breach deprives the injured party of a benefit which he reasonably expectedb. Whether the injured party can adequately compensated for the part of the benefit that he was deprivedc. Whether the breaching party will suffer a forfeiture by the injured party’s withholding or performance

i. What will the “suffering” be?d. Whether the breaching party is likely to cure his breache. Whether the breach comports with good faith and fair dealing*Courts balance these factors to determine if there is a breach*

5. Consequences of Substantial Performancea. Rule: Measure of damages for substantial performance is the cost to the victim of rectifying the defective performance (Jacob & Youngs recognizes an exception to this general rule)b. Exception: This award is not appropriate where the breach is neither material nor willful and the cost of remedying the defect would be grossly out of proportion to the harm—the property award will be to award no more than the amount that the defective work has reduced the market

value (Jacob & Youngs) (Lyon v. Belosky Contruction: Woman could

recover for a custom home that was built with improper roof—the proper measure of damages in cases involving the breach of a construction K is

the difference between the amount due on the K and the amount necessary to properly complete the job or to replace the defective construction, which ever is appropriate)

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c. Parties may put forward defense of affirmative economic waste thatdamages should be calculated on diminution of value (this is the defensethat Belosky unsuccessfully tried to use)

C. UCC Perfect Tender Rule 2-601: Buyer may reject non-conforming tendersa. 2601: If the goods or tender of delivery fail in any respect to conform to the contract, the buyer may:

i. Reject the whole, orii. Accept the whole, oriii. Accept any commercial unit(s) and reject the rest

b. Exception: Buyer’s right to reject is subject to good faith underUCC 1-203

i. This means that, if a seller can show that the buyer used the nonconformity as a pretext to avoid a contract that had becomeunfavorable as a result to market changes, the buyer’s rejectionwould not be rightful

c. Exception: UCC-2-508: The Seller’s Opportunity to Curei. Before the time of performance has expired, the seller mayseasonably notify the buyer of his intention to cure and may thenwithin the contract time make a conforming deliveryii. Where the buyer rejects a non-c good, the seller may haveadditional time to cure (or substitute the good) if he seasonablynotifies the buyer (Ramirez v. Autosport: Buyer was able to rescind a contract for a van since reasonable time for cure wasgiven, although the seller did not cure the problem)

d. Under UCC 2-313: If the seller provides a sample to the buyer, theusual understanding is that the seller warrants that the goods will conform to the sample (Printing Center of TX v. Supermind Publishing:Buyer of books could rescind contract because pages were not printedthe same as the sample they were shown)e. The ability to cure was incorporated into the UCC to reflect what reallyoccurs in the business world (sellers reasonably expect to have a “secondchance” to cure the problem)f. Parties may write the Perfect Tender Rule out of their contract

i. In addition, spell out the terms of what constitutes acceptanceii. Party should also define what is a material breach

e. UCC 2-612: Installment contracts: does not follow the perfect tender rule but instead adopts the substantial performance doctrine. Installment contract is defined under 2-612 as “one that requires or authorizes the delivery of goods in separate lots to be separately accepted…” If a contract is an installment contract, UCC 2-612(2) allows the buyer to reject any non-conforming installment only if:1: the non-conformity substantially impairs the value of that installment to the buyer; and 2: if it cannot be cured D. ANALYSIS:

1. Was it a material term?2. Was there a material breach?

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REMEDIES

A. PRINCIPLE REMEDIES1. Money2. Termination of obligation3. Specific performance

B. METHODS TO COMPUTE DAMAGES1. Expectation Damages: Put the non-breaching party in the position as if thebreaching party had performed

a. Also called “benefit of the bargain”b. Restatement Second § 347

i. The loss in value to him of the other party’s performance causedby its failure or deficiency, plusii. Any other loss, including incidental or consequential, caused bythe breachiii. Any cost of other loss that he has avoided by not having to perform

c. Carpel v. Saget Studios, Inc.: s could not recover in fed. court from negligent photographer after they did not receive wedding photos becausecould not meet jur. amt.—damages they claimed included sentimental value, restaging the wedding, etc.

i. Mental suffering and punitive damages are typically not allowedin contractsii. Some losses cannot be avoided and the law does not always have a good remedy for it

d. Peevyhouse v. Garland Coal & Mining Co.: P. leased land to G., with aclause that G. will restore the land at the end of the term. G. did not restore the land, although the court only awarded the diminution of theland after coal had been extracted and land was used.

2. Reliance Damages: Put the non-breaching party in position as if the promiseshad never been made in the first place

a. Reimbursing the expenses incurred in reliance of non-breaching party’sexpected performance

3. Restitution Damages: Put the breaching party in position as if the promiseshad never been made

a. What benefits have been made that should be returned?b. These usually the lowest

4. These methods are alternative—this means that the non-breaching party canpick the method he wants

a. Typically, amount of damages from most to least is:expectation—reliance—restitution

5. Examplea. Facts: A sells B a textbook for $10, to be delivered tomorrow. B pays A $10 and gives him a copy of your notes

i. Text market value: $15ii. Notes market value: $1

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iii. Cost for photocopying: $3b. Ex: B gives $10 and his notes and A does not give B the textbook.

i. Restitution damages: $11 (The $10 cash and $1 notes)*Do not add the $4 of the photocopying!ii. Reliance damages: $13 (The $10 cash and $3 that it cost youto photocopy the notes)*Do not add the $1!iii. Expectation damages: $15

C. EFFICIENT BREACH1. Def: A party should breach if alternative arrangement improve social welfare*Very controversial2. Consequences:

a. Non-breaching party should be made wholeb. Breaching party should not be deterred from breaching

i. No “penalties”ii. No punitive damagesiii. No specific performance

3. Problems with efficient breach theory: a. Contract damages may not make the breaching party wholeb. No attorney’s feesc. Much time and hassle for enforcementd. There are limits to the damages a party can get*Default remedies may be incomplete*(Freund v. Washington Square Press: Author got $.06 after publisher backed out of contract to publish manuscript because damages couldnot really be quantified)

4. Notesa. Some countries follow pacta sunt servanda (commitments must be honored)

D. TYPES OF DAMAGES1. Direct: Damages that ordinarily result from the breach regardless of the non-breaching party’s identity2. Indirect:

a. Incidental: Administrative costs of remediating a breach (substituteperformance)

i. Ex: Costs of inspecting the defective performance or the costs ofarranging substitute performance

b. Consequential: Idiosyncratic damages suffered by the non-breaching party due to breach

i. Ex: Lost profits, injury to property, and personal injuries3. In determining damages, must account for any cost avoided by the non-breaching party4. Example:

a. Painted contracts to paint house for $1,000b. Customer plans to sell home for fair market value of $100,000c. Painted fails to do job

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d. Homeowner hires a new painted for $1,200 (direct damages of $200)e. Homeowner incurs $50 in finding the new painted (incidental of $50)f. Homeowner’s house sell is delayed and sells for $95,000 (consequential damages of $5,000)

5. Liquidated Damage Provisions: These are provisions in contracts that spellout exactly what the party is to get if the other is to breach

a. Ex: A will get $X if the other is to breach the contract6. Sole Remedy: Parties may put a clause in the contract that spells out exactlywhat the damages will be

E. EXPECTATION DAMAGES UNDER THE UCCAdd Class/Book Notes

1. BUYER’S REMEDIESa. Buyer’s alternative remedies for failure to deliver conforming goods

i. Cover: Buy goods in the open market (the seller pays the increase in price plus any incidental or consequential damages)(UCC 2-712)ii. Damages: Equals the market price of the goods minus thecontract price plus incidental/consequential damages minusthe expenses avoidediii. Specific Performance (rare)

b. Remedy for breach discovered after acceptancei. All reasonable losses plus incidental/consequential damagesii. If there is a breach of warranty, person may receive value of goods promised minus value of goods delivered

2. SELLER’S REMEDIESa. If seller has fully performed and buyer fails to pay, seller gets contractpriceb. if buyer breaches before complete deliver, the seller can stop delivering,resell undelivered goods or cancel the contractc. If the seller resells, the buyer owes the contract price minus the resaleprice plus incidental/consequential damages minus seller’s costs avoided

i. But in cases of “lost volume seller” (in business of resellinggoods), seller gets lost profits plus incidental damages

F. LIMITS ON EXPECTATION DAMAGES1. Damages are recoverable only if they can be established with REASONABLE CERTAINTY (cannot be unduly speculative)

a. Mears v. Nationwide Insurance Co.: Insurance company sent out an announcement to employees that two Mercedes will be given to person who creates company theme

i. When there is an ambiguity, the complaining party will get the least favorable option ii. This case carries with it the idea that we do not have certainty, and since we do not, it would be unduly speculative to just “make up” different damages

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iii. Trend in courts: Courts allow more leeway to a non-breaching party as far as establishing reasonable

certainty of damages if the breaching party knowingly or willingly offends the court

b. Locke v. United States: US terminated a requirements contract to repair typewriters with Locke without cause

i. If a reasonable probability of damage can be clearly established, uncertainty as to the amount will not preclude recovery

c. Justice Oliver Wendell Holmes: “The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it—and nothing else”

i. This may not be the trend in most courts todayii. This seems to be in line with efficient breach

d. ESPN v. Baseball: ESPN contracted with Baseball to play games for one year. ESPN preempted B. to play football games (Efficient Breach). Baseball brought suit for “millions” but could only recover nominal damages because to speculative

i. To recover soft damages, the needs to provide some formula for estimating them

2. Damages are not recoverable if breaching party did not have reason to FORESEE them as a consequence of breach

a. General damages: Damages arising in the natural course due to contract breach (direct and incidental damages)

i. Every buyer would have received these damagesb. Special Damages: Damages reasonably contemplated at contract time as the probably consequence of the breach (consequential damages)

i. Only that particular buyer would have received those damagesii. Wullschleger v. Jenny: Whether is was reasonably contemplated that Jenny would use certain fabric for circle skirts

*Case focused on the differences between general andspecial damages

iii. Damages must be within the reasonable contemplation of theparties (Kenford Co. v. County of Erie: Man could not recover for lost appreciation of land that he purchased around a proposed stadium site when the stadium did not get built because it was not within the reasonable contemplation of the parties)

c. Hadley v. Baxendale Rule: Special or consequential damages awardable only if non-beaching party’s special circumstances werecommunicated to or known by breaching party

i. As rearticulated by Restatement 351, consequential damages awardable only when reasonably foreseeable by breaching partyii. Forces parties to disclose their priorities upfront

d. Lost profits are typically the damages sought by the other party—however, the lost profits still must be foreseeable to be recoverable

i. Make the contract clearly specify the purpose and the

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profits lost from possible breach (liquidated damages clause)

3. Damages are not recoverable to the extent that the non-breaching party COULD HAVE AVOIDED THEM WITH UNDUE EFFORT (MITIGATION)

a. Def: Non-breaching party cannot recover damages that could havebeen avoided without undue effort (“duty” to mitigate)

i. This is an affirmative defense (it would be on the breachingparty to prove that the non-breaching party did not mitigate)ii. Rockingham County v. Luten: Construction company was hiredto complete a bridge. He was told to stop from one party and thenprivately told to continue (so he did continue). Allowed to recoverfor damages up until told to stop and profits if K not breached.iii. Parker v. 20th Century Fox Films: Actress brought suit afterfilm company cancelled her film and offered her work on anotherfilm that was somewhat different. Actress able to recover and notbarred by mitigation of damages.

b. Purposes:i. Do not want to encourage wasteful behavior (efficient breachconcept)—efficiency

c. Employment Context Damages: Non-breaching employee damagesequal the contracted salary minus the amount the employer proves thatthe employee:

i. Earned, orii. With reasonable effort, might have earned from other employment that was not “different or inferior” (Parker v. 20th Century Fox Films: Films held to be different)

d. UCC (Principle for UCC also requires mitigation as long as “commercially reasonable”)

i. UCC 2-715ii. UCC 2-710

G. RELIANCE DAMAGES1. Def: Instead of expectation damages, the non-breaching party can get theamount incurred in reasonable reliance of the breaching party’s promises

a. Limited by certainty, foreseeability, and mitigation principlesb. In contracts where the would have lost money, reliance damagesmay be limited to the amount of expectation damages (so they maybe lowered)

2. Notesa. Hawkins v. McGee: Doctor promised that this patient’s hand wouldbe fixed and “100% perfect.” The doctor used skin from the patient’shand (so its now hairy). Court held that the patient should get damagesof the hand as warranted (100% perfect) versus what the hand is now(hair).

i. Contract does not deal well with “soft” damages

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b. Sullivan v. O’Connor: Doctor gave patient a nose job that did notturn out as it was supposed to. Patient was allowed to recover out ofpocket expenses and pain and suffering

i. Very rare to get p&sii. Court was skeptical to award damages as in Hawkins

H. CONTRACTUAL LIMITS TO REMEDIES1. Liquidated Damages: What the parties agree upon for damage amount

a. They are enforceable is the amount is a reasonable estimate of lossand difficulty of proof

i. This can be a way of increasing or decreasing liabilityii. These must all be tailorediii. Make sure that this is also the sole and exclusive remedy!iv. Never call the liquidated damages clause a penalty!v. Mitigation damages should now be irrelevant (if it is well-written)

b. They are not enforceable if there is a penaltyc. Restatement Second 356: Damages for breach by either party may beliquidated in the agreement but only at an amount that is reasonable in thelight of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidateddamages is unenforceable on grounds of public policy as a penaltyd. UCC 2-718 (Same as Restatement)

i. Wedner v. Fidelity Security Systems: W. brought suit againstsecurity system for improperly maintaining the system. W. wasonly allowed to recover the amount specified in K.

*It does not matter that the K called the clause a liquidateddamages clause, it was held to be a dollar cap!

e. Lake River Corp. v. Carborundum Co.: Distrib. and manu. entered intoa K in which manu. promised to sell distrib. enough goods to cover costsand make a promise. Manu. breaches and distrib. may recover under theparties’ liquidated damage clause but only to the extent that it is notconsidered a penalty.

2. Consequential Damages Waiver (or other damages)a. Generally enforceable except as applied to consumer-based personal injury

3. Dollar Capa. Generally enforceable except as applied to scienter-based tort claimsor if cap leaves not effective remedyb. Wedner v. Fidelity Security Systems: Could be read as a liquidateddamages clause or as a dollar cap

4. Ancillary Limitsa. Shorten the SOLb. Performance as the “sole and exclusive” remedyc. Warranty Disclaimersd. Release/Waiver of Liabilitye. Limited Jurisdiction/Venue or Arbitration

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I. SPECIFIC PERFORMANCE1. Def: This is equitable relief that is available only when money damages areinadequate

a. Sometimes characterized as an extraordinary remedyb. Parties cannot contractually require court to award itc. Subject to equitable limitations (e.g., unclean hands, laches)

2. Real estate buyers typically can get specific performance3. UCC buyers typically can get specific performance when damage calculations undercompensate

a. Van Wagner Advertising v. S&M Enterprises: Tenant brought suit against new owner/landlord for specific performance to require it to letthem remain on the premises. SP was denied and may only recover lostrevenue.

4. No specific performance for personal services, but negative injunction may be available

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