Contracts with Vincent Rougeau in Spring 20081. Basic Theories

1.1. Classical Theory - Neutral principles can be instilled from cases1.1.1. Characteristics

1.1.1.1. Preference for clear rules over general standards

1.1.1.2. Indifferent to issues of morality or social policy

1.2. Modern Contract Theory1.2.1. Characteristics

1.2.1.1. More attentive to needs of commercial marketplace

1.2.1.2. Characterized less by rules than by standards

1.2.1.3. More responsive to issues of social justice and economic power

1.3. Mutual Assent - Section 17, Restatement1.3.1. Formation of a contract requires "a bargain in which there is a

manifestation of mutual assent to the exchange and a consideration"

1.3.1.1. Mutual assent = objective

1.3.1.2. "Meeting of the minds" = subjective

1.3.1.2.1. Works better to show that no agreement was reached; can defeat the creation of an agreement when minds do NOT meet

1.3.1.2.2. "Mistake" must be mutual in order to be an acceptable defense

1.3.1.2.3. Unilateral mistakes are typically not ok (exceptions discussed later)

1.3.2. Signatures - Anyone who has the capacity to understand a written document, who reads and signs it is bound by his signature in law

2. Bilateral Contracts: Parties exchange promises of performance to take place in the future2.1. General idea: A promise for a promise

2.2. Three Basic Components (Classical Approach)2.2.1. Preliminary negotiation

2.2.2. Offer by offeror

2.2.2.1. Offeror is master of the offer; he may revoke it at any time before acceptance

2.2.3. Power of Acceptance by offeree

2.2.3.1. Withdrawal of offer by offeror = revocation

2.3. Exceptions:2.3.1. Mailbox rule - acceptance of an offer is effective upon post (when

letter has been released to US Postal Service)

2.3.2. Advertisements - usually considered preliminary negotiations, unless they are attempting a "bait and switch"

2.3.3. Indirect notice is an adequate way to revoke an offer

2.3.3.1. Once offeree has knowledge that the deal has been revoked, he can no longer accept

2.4. Counteroffer - a modification of terms is a rejection of the original offer

2.5. Options - separate contracts which make the seller hold the offer open for a set period of time

3. Unilateral Contracts - A promise for a performance3.1. i.e., Conditionals

3.2. Remain revocable until offeree's full performance of act(s) called for in the offer3.2.1. Completed acts constitute acceptance

3.2.2. Legal Realist idea: An offeror may not revoke an offer where the offeree has made substantial performance of the requested act

3.2.3. Bonuses are unilateral contracts

4. Consideration4.1. Theories

4.1.1. Benefit/Detriment

4.1.1.1. Defined: some benefit accruing to the promisor, or some legal detriment suffered by the promisee

4.1.1.2. It means not so much that one party is profiting as that the other abandons some legal right as inducement for the promise of the first

4.1.2. Bargain Theory (Section 71 of Restatement)

4.1.2.1. Exchange - a quid pro quo

4.1.2.1.1. Tit for tat; a promise for a promise

4.1.2.2. This test works better than benefit/detriment

4.1.2.3. Is the behavior stimulated by the promise? If so, there is consideration

4.1.2.4. EXCHANGE aspect is necessary

4.2. Invalid forms of consideration4.2.1. Recited consideration; ex: "being a good boy"

4.2.2. Past consideration

4.2.3. Moral consideration

4.2.4. Nominal consideration (violates reasonableness; points to fraud, duress, or lack of capacity)

4.2.5. Also, gifts (gratuitous promises) are unenforceable b/c they lack consideration

4.2.5.1. If given within the home or to a charity, there is a presumption that it is a gift

4.2.6. Illusory promise - words in promissory form that promise nothing; they do not purport to put any limitation on the freedom of the alleged promisor

4.2.6.1. Thus, no consideration b/c there has been no exchange

4.2.6.2. Commonly applied to "at-will" agreements

4.3. Courts will not "weigh" the consideration, or insist on a "fair" or "even" exchange

5. Promissory Estoppel (Theory of Detrimental Reliance) Section 90 of Restatement5.1. Promissory Estoppel often used as a replacement for

consideration, or to compensate for loss

5.2. For PE, evidence must show:5.2.1. The promise was made under such circumstances that the promisor

reasonably expected the promisee to act in reliance on the promise

5.2.2. The promisee acted as could reasonably be expected in relying on promise

5.2.3. A refusal by the court to enforce the promise must be virtually tosanction the perpetration of fraud or must result in other injustice

5.2.3.1. Facts very important in determining whether or not there was reliance

5.3. Section 87 of Restatement on option contracts rejects the idea that there must be an ACTUAL exchange of consideration; rather, "purported consideration" must merely be put in writing to be legitimate

5.4. Express v. Implied5.4.1. A promise does NOT have to be expressed in order to apply

promissory estoppel

5.4.1.1. Implied promises can be inferred from behavior

5.4.1.2. Restatement Section 4: A promise may be stated in words either oral or written, or may be inferred wholly or partly from conduct

5.5. Enforcement of Contracts5.5.1. To be enforceable and valid, a contract to enter into a future

covenant must specify all material and essential terms and leave nothing to be agreed on in future negotiations

5.5.1.1. You can't make an agreement to agree later (Postponed bargaining)

5.5.1.1.1. Essential terms cannot be lacking in order for an agreement to be enforceable

5.5.2. Letters of intent

5.5.2.1. Are they contracts, preliminary negotiations, or agreements to

agree?

5.6. Promises in a Commercial Context5.6.1. The principal application of promissory estoppel

5.6.2. When is reliance detrimental?

5.6.2.1. In many cases, the plaintiff will have made actual expenditures in reliance on the promise

5.6.2.2. A change in position is also sufficient

6. Restitution6.1. Unjust enrichment - when someone has gotten a benefit, for

which they should have paid, unjustly

6.2. Two basic types of contracts6.2.1. Quasi-contract, quantum meruit, or contract implied-in-law

(Restitution only applies here)

6.2.1.1. The court, sua sponte, says "this benefit needs to be paid for"

6.2.1.2. The law thus implies an obligation to pay for the benefit

6.2.1.2.1. Obligation is imposed by law without regard to the party's expressions of assent either by words or acts

6.2.2. Express contracts, or contracts implied-in-fact (Restitution does not apply here; this is classic "tit for tat" bargain theory)

6.2.2.1. There typically would have been a bargain made that would produce compensation for the party providing the benefit, but for whatever reason, that contract was not actually entered into

6.3. Limitation: Officious intermeddler limitation6.3.1. You can't just dump benefits on people; there has to be some sense

that if the person could have contracted for the service he/she would have, OR that the circumstances are such that the service was something we would normally expect people to want to pay for

6.3.2. You also cannot use restitution to get out of a contract that you've agreed to in order to pay less, when you realize that you are overpaying

6.4. Action for Recovery based on Unjust Enrichment has Three elements6.4.1. Benefits conferred on defendant by plaintiff

6.4.2. Appreciation/knowledge by defendant of benefit

6.4.3. Acceptance or retention of the benefit by the defendant under circumstances making it inequitable for defendant to retain the benefit

7. Promissory Restitution - The promise follows the benefit conferred7.1. Traditional View

7.1.1. Past consideration/moral consideration not legally binding

7.1.2. Express promises founded on pre-existing equitable obligations may be enforced

7.2. Modern View7.2.1. Moral obligation IS sufficient consideration to support a subsequent

promise to pay where the promisor has received a material benefit

7.2.1.1. "Material benefit" rule - If a person receives a material benefit from another, other than gratuitously, a subsequent promise to compensate the person for rendering such benefit is enforceable

7.2.1.1.1. This is a subsequent promise based on the receipt of a material benefit

7.2.1.1.2. Not all courts agree with this rule, but it is in Section 86 of Restatement

7.2.2. Benefit to the promisor or injury to the promisee is a sufficient legal consideration for the promisor's agreement to pay

8. Statute of Frauds - Restatement Section 1108.1. Requires certain types of contracts to be in writing to be

legally effective (s.m.a.l.l.):8.1.1. A contract of an executor or administrator to answer for a duty of

his decedent

8.1.2. A contract to answer for the duty of another (the suretyship provision)

8.1.3. A contract made upon consideration of marriage (the marriage provision)

8.1.4. A contract for the sale of an interest in land (the land contract provision)

8.1.5. A contract that is not to be performed within one year from the making thereof (one-year provision)

8.1.5.1. "One year" starts the moment the agreement is reached

8.2. Failure to comply with the Statute of Frauds makes the promise, even if supported by consideration, unenforceable8.2.1. This does not mean that the contract doesn't exist; it just means

that the court will not enforce it

8.2.2. Any statute that requires a transaction to be memorialized in writing for legal efficacy is a statute of frauds

8.3. Contracts that are not to be performed within one year8.3.1. Signed and unsigned writings may be read together, provided they

clearly refer to the same subject matter or transaction

8.3.2. Standard view: Contract is not subject to the statutory provision if it is possible to be performed within a year, even though the prospect of such performance is remote

8.3.2.1. Termination: The fact that the contract may be terminated within a year is not sufficient to remove the contract from the requirements of the statute; only performance will do

8.3.2.2. Lifetime contracts: Contracts measured by lifetime are

inherently capable of termination by full performance in less than a year; there is always a possibility that the person dies within a year

8.4. Exceptions: Part performance8.4.1. Transfer of possession of the property coupled with the making of

valuable improvements is sufficient part performance (to overcome the Statute of Frauds)

8.4.1.1. Part performance can only be invoked when specific performance is wanted

8.4.1.2. You cannot use part performance in order to attempt to get money/damages

8.4.2. Performance must be "unequivocally referable" to the alleged oral agreement

8.5. Statute of Frauds v. Promissory Estoppel8.5.1. SOME courts hold that Promissory Estoppel can be used to

overcome the Statute of Frauds

8.5.2. Other courts do not. Therefore, on an exam, discuss both possibilities

8.6. Approach for Dealing with the Statute of Frauds (Know this for exam)8.6.1. Q1: Is the contract within the Statute of Frauds?

8.6.1.1. No --> Then it doesn't need to be in writing, and the contract may be proved by any relevant evidence

8.6.1.2. Yes --> Q2: Is there some sort of written memorandum signed by the parties that meets Statute of Frauds Requirements?

8.6.1.2.1. Yes --> Then the case may proceed as any other

8.6.1.2.2. No --> Q3: Does an exception apply?

8.6.1.2.2.1. No --> Then the contract is not enforceable

8.6.1.2.2.2. Yes --> Evaluate exception

9. Principles of Interpretation9.1. The process by which a court gives meaning to contractual

language when the parties attach materially different meanings to that language

9.2. Three views9.2.1. Subjective View (Classical approach)

9.2.1.1. What did each party mean by the language? - A "meeting of the minds"

9.2.1.2. Problem: How can we know what was in people's minds when they formed the contract?

9.2.2. Objective View

9.2.2.1. Court attaches the meaning that a reasonable person would give under the circumstances

9.2.2.2. Problem: Court substitutes its judgment for the judgment for

one or both of the parties

9.2.2.2.1. The parties might then be bound by something that neither one of them intended

9.2.3. Modified Objective View - Section 200, 201 of Restatement

9.2.3.1. Reasonable meaning of one of the parties will prevail

9.2.3.2. The party who knew or should have known of the other party's meaning will be held to that meaning

9.3. Principles of Interpretation (Never used all at once)9.3.1. Noscitur a sociis - the meaning of a word in a series is affected by

others in the same series (context)

9.3.2. Ejusdem generis - a general term joined with a specific one will be deemed to include only things that are like the specific one

9.3.3. Expressio unius exclusio alterius - if one or more specific items are listed, other items, although similar in kind, are excluded

9.3.4. Ut magis valeat quam pereat - interpretation that makes the contract valid is preferred to one that makes it invalid

9.3.5. Omnia praesumuntur contra proferentem - preferred interpretation is the one that is less favorable to the one who drafted the document

9.3.6. Interpret the contract as a whole

9.3.7. Purpose of the parties - what did they intend? Was it the same thing?

9.3.8. Specific provision is exception to a general one

9.3.9. Handwritten or typed provisions control printed provisions

9.3.10. Public interest is preferred

9.3.11. Court should prefer an interpretation that makes an agreement reasonable, lawful, and effective to one that produces an unreasonable or unlawful result or that makes the agreement ineffective

10. Parol Evidence Rule (Cannot be superseded by Promissory Estoppel)10.1. General Idea: When parties to a contract have mutually

agreed to incorporate a final version of their entire agreement inwriting, neither party will be permitted to contradict or supplement that written agreement with "extrinsic" evidence (written or oral) of prior agreements or negotiations between them10.1.1. Basic function: the rule does not define what evidence is

affirmatively admissible, but rather operates to EXCLUDE evidence

10.1.1.1. Used to prevent CONTRADICTION or SUPPLEMENTATION of a written agreement, when that written agreement is the final expression of the parties' intent

10.2. Views

10.2.1. Classical: An attempt to try to get people to mean what they say (4 corners approach)

10.2.1.1. Presumes that the entire agreement was reduced to writing

10.2.1.1.1. If writing contains such language as imports a complete legal obligation, it is presumed that the parties have introduced every material item and term

10.2.1.1.2. No new term may be added by parol

10.2.2. Modern: Willing to entertain varying interpretations/discussions

10.2.2.1. Modern courts want to hear ALL evidence to determine what evidence to exclude (circular logic)

10.2.2.2. Special language rule: If the parties use language that is mutually intended to have a special meaning, a court is obligated to enforce the agreement according to the parties' intent, even if the language ordinarily might mean something different

10.3. Exceptions (What evidence CAN you introduce?)10.3.1. EXPLAIN the meaning - interpretation

10.3.2. COLLATERAL AGREEMENT exception - agreements made AFTER the writing may be submitted, because they could not have been integrated into the original writing

10.3.3. ORAL CONDITIONS PRECEDENT - this agreement would only go into effect if certain things happened prior, such as one party obtaining a loan

10.3.4. INVALIDITY exception - contract is not enforceable b/c of fraud, duress, mistake, etc.

10.3.4.1. NB: Fraud exception only applies when the alleged fraud does not relate directly to the subject of the contract

10.3.4.1.1. Where an alleged oral promise directly contradicts the terms of an express written contract, the parol evidence rule applies

10.3.4.1.2. The written agreement supersedes all previous oral agreements

10.3.5. Evidence designed to establish an EQUITABLE REMEDY

10.3.6. COLLATERAL AGREEMENTS between the parties - completely separate contracts

10.4. Full v. Partial integration10.4.1. A completely integrated agreement is the kind of agreement that

the rule is designed to protect, and prevents contradiction or supplementation to that agreement

10.4.1.1. Merger clause - a clause w/in a document that states that the agreement is completely integrated

10.4.2. If it is partially integrated, then the parties only intended the writing to be representative of a certain portion of the agreement

10.4.2.1. Evidence would thus be allowed on the portions of the agreement that were not included

10.5. Basic approach10.5.1. Determine whether the agreement is completely integrated or

partially integrated

10.5.2. Determine whether the evidence presented is intended to contradict/supplement, or merely explain/show collateral agreement

10.6. Latent v. Patent Ambiguities10.6.1. Patent ambiguity

10.6.1.1. Plain meaning; intrinsic ambiguity

10.6.2. Latent ambiguity

10.6.2.1. One not apparent from the words alone; extrinsic ambiguity

10.6.2.2. Poses problems b/c someone has to determine if it is worth the effort to do the additional work to uncover the ambiguity

10.7. Parol Evidence Rule v. Promissory Estoppel10.7.1. Most courts reject the use of promissory estoppel to supersede the

Parol Evidence Rule

10.8. Ways of Undermining Clear Language and the Express terms of the contract10.8.1. First, you MUST look at the express language, but then...

10.8.2. UCC allows for introduction of:

10.8.2.1. Course of dealing (Defendant has contracted this way in the past)

10.8.2.2. Course of performance (Defendant has contracted this way during this contract)

10.8.2.3. Usage of the trade (What is the common practice for the entire trade?

11. Implied Terms11.1. Two types

11.1.1. Any term that the court finds to be "implicit" in the parties' words or conduct ("implied-in-fact")

11.1.2. Any term that the court holds should be "implied-in-law" - made a part of the agreement by operation of the rules of law rather than by the agreement of the parties themselves

11.1.2.1. Example 1: An implied obligation to use reasonable efforts ("best efforts obligation") will prevent a somewhat indefinite promise from being illusory in a commercial contract

11.1.2.2. Example 2: Reasonable notification is required to terminate an ongoing at-will business agreement, based on terms implied-in-law

11.2. Implied Obligation of Good Faith (Parole Evidence Rule does NOT bar)11.2.1. In every contract there is an implied obligation to act in good faith

11.2.1.1. NB: Implied covenant cannot override an express term

11.2.2. "Fruits of the Contract" approach

11.2.2.1. In every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of thecontract

11.2.2.2. Parol Evidence rule cannot inhibit the application of the implied covenant of good faith and fair dealing because that covenant is contained in all contracts made, by operation of law

11.2.3. Implied covenant of good faith and fair dealing applies in three ways:

11.2.3.1. The covenant permits the inclusion of terms and conditions which have not been expressly set forth in the written contract

11.2.3.2. The covenant has been utilized to allow redress for the bad faith performance of an agreement even when the defendant has not breached any express term

11.2.3.3. The covenant permits inquiry into a party's exercise of discretion expressly granted by a contract's terms

11.2.4. Easiest application is to measure conduct against "bad faith;" wasthe defendant acting in "bad faith"?

12. Avoiding Enforcement12.1. Duress (Economic)

12.1.1. Any wrongful threat of one person by words or other conduct that induces another to enter into a transaction under the influence of such fear as precludes him from exercising free will and judgment, if the threat was intended or should reasonably have been expected to operate as an inducement

12.1.1.1. Elements. Restatement Section 175 says Duress exists where there is:

12.1.1.1.1. A wrongful or improper threat that causes one party to unreasonably accept the terms of another

12.1.1.1.2. Lack of a reasonable alternative

12.1.1.1.2.1. Victim must have no choice but to agree to the other party's terms or face serious financial hardship

12.1.1.1.2.2. Possible reasonable alternatives:

12.1.1.1.2.2.1. Availability of legal action, if that course presents a viable option

12.1.1.1.2.2.2. Alternative sources of goods, services, or funds when there is a threat to withhold such things

12.1.1.1.2.2.3. Toleration if the threat involves only a minor vexation

12.1.1.1.3. Actual inducement of the contract by the threat

12.1.1.2. Contracts made under duress are voidable, rather than void

12.1.1.2.1. These Ks are binding unless disaffirmed and may be expressly or implicitly ratified by the victim

12.1.1.3. NB: The defendant typically has to be the one causing the financial hardship

12.2. Undue Influence: The use of excessive pressure to persuade one vulnerable to such pressure; pressure is applied by a dominant object to a servient object12.2.1. Includes taking advantage of another's weakness of mind, or

taking a grossly oppressive and unfair advantage of another's necessities or distress

12.2.1.1. "Overcoming the will without overcoming the mind"

12.2.1.2. Restatement Section 177: Unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that that person will not act in a manner inconsistent with his welfare

12.2.2. Undue Influence cannot be used simply as a pretext to avoid bad bargains

12.2.3. Conditions of overpersuasion:

12.2.3.1. Unusual or inappropriate TIME

12.2.3.2. Unusual or inappropriate PLACE

12.2.3.3. Inistent demand that the deal be finished AT ONCE

12.2.3.4. Extreme emphasis on untoward consequences of DELAY

12.2.3.5. Use of multiple persuaders by the dominant side

12.2.3.6. Absence of advisers to the 3rd party/recommendation against legal counsel

12.3. Misrepresentation/fraud12.3.1. Elements: A contract is voidable if a party's manifestation of

assent is induced by either a fraudulent OR material misrepresentation by the other party upon which the recipient is justified in relying (Restatement 164)

12.3.1.1. Victim of misrepresentation has 2 choices of redress:

12.3.1.1.1. A tort action for damages, OR

12.3.1.1.2. Rescission

12.3.1.1.2.1. Remedy of rescission requires the injured party to return any money or property that he has received

12.3.1.1.2.2. Rescission amounts to a judicial return of the parties to the status quo that existed before the contract was formed

12.3.2. Statements of opinion can be misrepresentations if they do not accurately reflect the state of mind of the speaker

12.4. Nondisclosure (what you must reveal, but don't)12.4.1. Restatement Section 161: A seller has a duty to disclose material

facts where:

12.4.1.1. Disclosure is necessary to prevent a previous assertion from being a misrepresentation or from being fraudulent or material

12.4.1.2. Disclosure would correct a mistake of the other party as to a

basic assumption on which that party is making the K if nondisclosure amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing

12.4.1.3. Disclosure would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part

12.4.1.4. The other person is entitled to know the fact because of a relationship of trust and confidence between them

12.4.1.4.1. Failure to disclose can result in rescission

12.4.2. Sellers must disclose known latent defects

12.5. Unconscionability12.5.1. General idea: A grossly unfair bargain should be unenforceable

12.5.2. Test: An "absence of a meaningful choice" on the part of one of the parties together with contract terms which are unreasonably favorable to the other party (procedural)

12.5.2.1. Whether a meaningful choice is present can only be determined by the circumstances surrounding the transaction

12.5.2.1.1. Procedural unconscionability: Either lack of choice by one party or some defect in the bargaining process

12.5.2.1.2. Substantive unconscionability: Relates to the fairness of the terms of the resulting bargain (unfair bargain)

12.5.2.1.2.1. NB: Unconscionability is only to be judged as of the time that the contract was made, not based on developments after K was formed

12.5.3. Contracts of adhesion: Standardized contracts that are imposed and drafted by the party of superior bargaining strength and relegate to the other party "only the opportunity to adhere to the contract or reject it"

12.5.3.1. These types of contracts MAY (but definitely not always) signal unconscionability

13. Justification for Nonperformance13.1. Mistake

13.1.1. A contract MAY be rescinded because of a MUTUAL misapprehension of the parties

13.1.1.1. The best approach is a case-by-case analysis whereby rescission is indicated when the mistaken belief relates to a basic assumption of the parties upon which the contract is made, and which materially affects the agreed performances of the parties

13.1.1.1.1. Rescission is NOT available to relieve a party who has assumed the risk of loss in connection with the mistake

13.1.1.1.1.1. i.e., when party agrees to accept the property "as is"

13.1.1.2. When mutual mistake consists of the failure of the written contract to state accurately the actual agreement of the parties, reformation of the contract to express the parties' mutual intent is

the normal remedy

13.1.2. A unilateral mistake may afford ground for rescission where there is a material mistake and such mistake is so palpable that the party not in error will be put on notice of its existence

13.1.2.1. Four conditions generally required for rescission based on mistake:

13.1.2.1.1. The mistake must relate to a material feature of the contract

13.1.2.1.2. The mistake occurred notwithstanding the exercise of reasonable care

13.1.2.1.3. The mistake is of such grave consequence that enforcement of the contract would be unconscionable

13.1.2.1.4. The other party can be placed in the status quo

13.1.2.1.4.1. Evidence of these conditions must be clear and positive

13.1.2.2. Restatement 153 view of unilateral mistake. K may be avoided when:

13.1.2.2.1. The mistake is such that enforcement would be unconscionable, OR

13.1.2.2.2. The other party either had reason to know of, or was responsible for causing, the mistake

13.1.2.2.2.1. NB: The "duty to read" anything signed can be overcome by lack of capacity, fraud, or unconscionability

13.2. Changed Circumstances. All three derive from the original notion of impossibility13.2.1. Impossibility

13.2.1.1. Requires a showing of LITERAL impossibility; the thing promised simply could not be performed

13.2.1.1.1. OBJECTIVE impossibility - "no one could have done it" rather than "I could not do it"

13.2.1.1.1.1. This rule therefore does not excuse a party merely because performance had come to be more difficult or expensive or because the contract itself had lost value to that party

13.2.1.1.1.2. Death or incapacity allow for this defense

13.2.2. Impracticability (see 13.2.3.3)

13.2.2.1. Even when performance is clearly not literally impossible, it is sufficiently different from what the parties had both contemplated at the time of contracting as to be impracticable

13.2.2.1.1. In order for a supervening event to discharge a duty under this section, the non-occurrence of that event must have been a "basic assumption" on which both parties made the contract

13.2.2.1.2. Only an EXTREME increase in cost may justify nonperformance; normal economic loss or hardship is insufficient

13.2.3. Frustration of Purpose

13.2.3.1. When the exchange called for by the contract loses all value to the defendant, because of a supervening change in extrinsic circumstances

13.2.3.2. Requires the establishment of 3 factors:

13.2.3.2.1. The purpose frustrated by the supervening event must have been the "principal purpose" of the party making the contract

13.2.3.2.2. The frustration must be substantial

13.2.3.2.3. The nonoccurrence of the frustrating event must have been a "basic assumption" of the contract

13.2.3.3. For EITHER Frustration OR Impracticability, the disadvantaged party must show:

13.2.3.3.1. Substantial reduction of the value of the contract

13.2.3.3.2. The occurrence of an event, the nonoccurrence of which was a basic assumption of the contract

13.2.3.3.3. Without the party's fault, AND

13.2.3.3.4. The party seeking relief does not bear the risk of that occurrence of the event either under the language of the contract or the surrounding circumstances

13.2.3.4. NB: If a contract has simply become more expensive or less profitable due to a change in market conditions, courts typically deny relief on claims of Frustration or Impracticability

13.2.3.4.1. Exception: Restatement 264 recognizes compliance with foreign or domestic governmental orders as a basis for excuse under the doctrine of impracticability

13.2.4. These defenses may be used to excuse nonperformance; they may NOT be used for reformation of a contract, or for compensation

13.2.4.1. The distinction between impracticability and frustration is that impracticability concerns the duties specified in the contract whereas frustration of purpose concerns the reason that the party entered into the contract; some jurisdictions have merged the two together

14. Consequences of Nonperformance14.1. Breach: Any nonperformance of a contractual duty at a time

when performance of that duty is due14.1.1. Performance is not due if for any reason nonperformance is

"justified"

14.2. Express conditions14.2.1. When the terms of an agreement state that performance is not due

unless and until some specified event has taken place

14.2.1.1. The happening of the event is an "express condition" to the duty of performance

14.2.1.1.1. When an express condition has simply failed to occur, the conditional duty never arises and the promisor is therefore justified in not performing

14.2.1.1.2. When the nonoccurrence of the condition is excused, the conditional duty becomes an unconditional one, and the promisor's failure to perform amounts to breach

14.2.1.2. A party whose performance is conditioned is the "obligor," and the other party is the "obligee" (the one to whom performance is owed)

14.2.2. These conditions must be literally performed

14.2.2.1. If the parties have made an event a condition of their agreement, there is no mitigating standard of materiality or substantiality applicable to the non-occurrence of the event

14.2.2.2. Until the conditioning event does occur, the duty does not arise; at the point it cannot occur, the defendant is discharged

14.2.3. Often uses the language "if...unless...and until"

14.2.3.1. General rule of courts is strict enforcement of express conditions

14.2.4. Exceptions: Section 229 - A court may excuse the nonoccurrence of a condition where forfeiture would otherwise result, unless theconditioning event was a material part of the parties' exchange

14.3. Implied, or Constructive, Conditions14.3.1. Those conditions imposed by law to do justice

14.3.1.1. These conditions arise from the language of the promise and are subject to the precept that substantial performance is sufficient

14.3.1.2. When interpreting doubtful language, Courts will interpret the condition as constructive, rather than express

14.3.2. One party's failure to perform should constitute a sufficient justification for the other party's withholding of its performance in return

14.3.3. Performance

14.3.3.1. Performances that can be rendered at the same time are due simultaneously

14.3.3.1.1. If performances cannot be rendered at the same time, the performance requiring the longer period of time must be rendered before the performance requiring the shorter period of time will be due

14.3.4. Prevention of a condition: A condition is excused from the entire agreement if the promisor wrongfully hinders or prevents that condition from occurring

14.4. Breach: Remedies for Nonbreaching party14.4.1. Total and Material

14.4.1.1. Withhold performance

14.4.1.2. Terminate K

14.4.1.3. Claim full damages for the breach

14.4.2. Material, but not total

14.4.2.1. Suspend performance

14.4.2.2. Await a cure

14.4.2.3. Claim compensation for any loss suffered because of the breach

14.4.3. Breach that is not material (substantial performance given)

14.4.3.1. Limited to a claim of compensation for any loss suffered

14.5. Material Breach - A breach so central to the K that it substantially impairs its value14.5.1. Occurs when one party's failure to perform justifies the other party

in refusing to render a performance of his own

14.5.1.1. Jacob and Youngs: The court's option for damages are either the cost of replacement or the difference in value

14.5.1.1.1. Diminution in value is only used where the breach relates to an element of the K that was not central, AND when cost-to-complete would lead to waste

14.5.1.1.1.1. Condition: When applying diminution in value, the complained-of defect could not have been done in bad faith

14.5.1.1.1.2. Typically, courts use the cost-to-complete option instead of diminution in value

14.5.2. Whether a breach is total or partial depends upon its materiality. In determining the materiality of a failure to fully perform a promise, the following factors are to be considered: (CHECK RESTATEMENT 241)

14.5.2.1. The extent to which the injured party will be deprived of the benefit which he reasonably expected

14.5.2.2. The extent to which the injured party can be adequately compensated for the part of that benefit for which he will be deprived

14.5.2.3. The extent to which the party failing to perform or to offer to perform will suffer forfeiture

14.5.2.4. The likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurance

14.5.2.5. The extent to which the behavior of the party failing to perform, or to offer to perform, conforms with the standards of good faith and fair dealing

14.5.2.5.1. Totality of a breach also depends on 2 other factors:

14.5.2.5.1.1. The extent to which further delay appears likely to prevent or hinder the making of substitute arrangements by the nonbreaching party, AND

14.5.2.5.1.2. The degree of importance that the terms of the agreement attach to performance without delay

14.5.2.5.1.2.1. Only the Restatement draws a distinction b/w material and total breach (241)

14.5.3. Total Breach

14.5.3.1. Relieves or discharges the nonbreaching party from his duties under the contract

14.5.3.1.1. The injured party may collect not only actual damages, but also any future damages that will reasonably flow from the breach

14.5.4. Partial Breach

14.5.4.1. Does not discharge the nonbreaching party, who must continue to perform his obligations under the contract

14.5.4.1.1. Produces a right to damages only for the actual harm, and NOT for future harm (NO right to expectancy damages)

14.6. Anticipatory Repudiation14.6.1. Advance refusal to perform by one party; it may be expressed

orally, in writing, or by conduct showing an unwillingness to perform

14.6.2. The doctrine of anticipatory repudiation requires a clear manifestation of an intent not to perform the contract on the date of performance

14.6.2.1. That intention must be DEFINITE and UNEQUIVOCAL

14.6.2.1.1. Doubtful and indefinite statements that performance may or may not occur are not enough to constitute anticipatory repudiation

14.6.2.1.2. A suggestion for modification of a contract does not amount to repudiation

14.6.2.2. Language that under a fair reading amounts to a statement of intention not to perform except on conditions which go beyond the contract constitutes a repudiation

14.6.2.2.1. Conduct can also be sufficient (14.6.2.4)

14.6.2.3. The effect of a statement as constituting a repudiation is nullified by a retraction of the statement if notification of the retraction comes to the attention of the injured party before he:

14.6.2.3.1. Materially changes his position in reliance on the repudiation, OR

14.6.2.3.2. Indicates to the other party that he considers his repudiation to be final

14.6.2.3.2.1. This can be accomplished by:

14.6.2.3.2.1.1. Bringing suit

14.6.2.3.2.1.2. By notifying the repudiating party, OR

14.6.2.3.2.1.3. By some other way manifesting an election to treat the contract as rescinded

14.6.2.3.2.2. Prior to such indication, the repudiating party is free to retract its repudiation

14.6.2.4. For mere conduct to constitute anticipatory repudiation, it must indicate that performance is a practical impossibility

14.6.2.4.1. Financial difficulty, even to the level of insolvency, does not constitute an anticipatory repudiation

14.6.3. UCC authorizes a party who has "reasonable grounds" for insecurity to demand "adequate assurance" of due performance from the other party (Restatement also adopts this view)

14.6.3.1. The failure to give such assurances constitutes anticipatory repudiation of the contract

15. Expectation Damages: Principles & Limitations15.1. Three basic interests that the law may seek to protect in

fashioning remedies for breach of contract:15.1.1. Restitution interest - the court may force the defendant to disgorge

the value he received from the plaintiff

15.1.1.1. Object: The prevention of gain by the defaulting promisor at the expense of the promisee

15.1.2. Reliance interest - Damages are awarded to the plaintiff for the purpose of undoing the harm which his reliance on the defendant's promise has caused him

15.1.2.1. Object: To put plaintiff in as good a position as he was in before the promise was made

15.1.3. Expectation interest - Court seeks to give the promisee the value of the expectancy which the promise created

15.1.3.1. Object: To put plaintiff in as good a position as he would have occupied had the defendant performed his promise

15.1.3.2. Restatement, and most courts, adopt this approach when possible

15.2. Computing Damages15.2.1. Section 347 of Restatement

15.2.1.1. LV = Loss in value

15.2.1.2. OL = Other losses (incidental and consequential)

15.2.1.3. CA = Costs avoided

15.2.1.4. LA = Loss avoided

15.2.1.4.1. Damage amount = (LV + OL) - CA - LA

15.2.1.4.1.1. See Notes from K 410 for examples; p. 850

15.2.1.4.1.2. The one bringing suit must find some way to prove market value

15.2.2. In a personal services contract, the death or incapacity of a person necessary for performance may excuse nonperformance

15.2.2.1. Performance may be impracticable because it will involve undue risk of injury to a person (Section 261)

15.2.3. General Rule of damages for breach of a construction contract is that the injured party may recover those damages which are the direct, natural and immediate consequence of the breach and which can reasonably be said to have been in the contemplation of the parties when the contract was made

15.2.3.1. Restatement Section 348(2)

15.2.3.1.1. If the loss in value to the injured party is not proved with sufficient certainty, damages may be measured by either

15.2.3.1.1.1. (a) the diminution in market value, OR

15.2.3.1.1.2. (b) the reasonable cost of completing performance or of remedying the defects if that cost "is not clearly disproportionate to the probable loss in value to him"

15.2.3.1.1.2.1. In ordinary cases of defective or unfinished construction work, courts appear to be generally inclined to award cost-to-complete

damages

15.3. Restrictions on the Recovery of Expectation Damages: Foreseeability, Certainty, & Causation15.3.1. "Other loss" - recovery for this type of loss is subject to certain

controls not applied to ordinary damages

15.3.2. Rule: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be:

15.3.2.1. (A) Such as may fairly and reasonably be considered either arising naturally from such breach of contract itself, OR

15.3.2.2. (B) Such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of breach of it

15.3.2.2.1. Modern formulation of this rule is understood to depend on defendant's knowledge at the time the contract is made

15.3.2.2.2. It is only necessary that the loss be foreseeable

15.3.3. Direct v. Consequential Damages

15.3.3.1. General, or direct, damages: Damages that arise naturally

15.3.3.1.1. The plaintiff need not make any special showing to recover general damages

15.3.3.2. Consequential, or special, damages: Damages flowing from special circumstances

15.3.3.2.1. Most important type in commercial cases is lost profits arising from collateral contracts

15.3.3.2.2. Also includes injury to person or property caused by goods that fail to comply with contractual warranties

15.3.4. Rule: Before lost profit damages are recoverable, it must be adequately shown such profits were reasonably certain to have beenmade by the non-breaching party absent breach

15.3.4.1. Loss of future profit is recoverable in a breach of contract action:

15.3.4.1.1. If the loss is within the contemplation of the parties at the timethe contract was made

15.3.4.1.2. If the loss flows directly or proximately from the breach, AND

15.3.4.1.3. If the loss is capable of reasonably accurate measurement or estimate

15.3.4.1.3.1. Mere uncertainty as to the EXACT amount of damages will not preclude the right to recovery

15.3.4.1.3.2. But an injured party may not recover damages that are speculative

15.3.4.1.3.2.1. Plaintiffs must prove their damages with "reasonable certainty"

15.3.4.1.3.2.2. Courts often draw a distinction b/w uncertainty about the FACT of damage and uncertainty regarding the AMOUNT of damage

15.3.4.1.3.2.2.1. When plaintiff establishes FACT of damage, the jury is

given wide leeway in awarding compensation

15.3.4.1.3.3. "New business" rule: Plaintiffs have traditionally encountered great difficulty in recovering lost profits in a new business venture that has no history of prior profitability

15.3.5. Mitigation damages

15.3.5.1. These are off-setting factors that may have the effect of reducing the plaintiff's recovery, or even eliminating it altogether

15.3.5.1.1. They are referred to in the Restatement as "cost avoided" and "loss avoided"

15.3.5.1.2. Also called the doctrine of avoidable consequences

15.3.5.2. General idea: The plaintiff may not recover for those injurious consequences of the defendant's breach that the plaintiff herself could, by reasonable action, have avoided

15.3.5.2.1. After an absolute repudiation or refusal to perform by one party to a contract, the other party cannot continue to perform and recover damages based on full performance

15.3.5.2.1.1. Plaintiff must, so far as he can without loss to himself, mitigate the damages caused by defendant's wrongful act

15.3.5.2.1.2. The measure of plaintiff's damage is an amount sufficient to compensate plaintiff for labor and materials expended and expense incurred in the part performance of the K, prior to its repudiation, PLUS the profit which would have been realized if it had been carried out in accordance with its terms

15.3.5.2.2. Mitigation, in the context of an employment dispute, requires that the employee make a good faith effort to find suitable alternative employment

15.3.5.2.2.1. "Suitable employment" is that which is substantially equivalent to the position lost and suitable to a person's background and experience

15.3.5.2.2.2. The measure of damages is the amount the plaintiff would have earned absent the breach, less what the plaintiff actually earned, or could have earned by the exercise of reasonable diligence, during the K period after plaintiff's termination

15.3.5.2.2.2.1. In seeking substitute employment, a wrongfully discharged employee may have to spend money in various ways to gain new employment

15.3.5.2.2.2.2. These "incidental expenses" may be recoverable from the previous employer

15.3.5.3. "Lost Volume Seller" measure of damages

15.3.5.3.1. Refers to the lost volume of business a non-breaching seller incurs on a buyer's breach

15.3.5.3.1.1. When the seller resells the entity he expected to sell to the original buyer, he usually deprives himself of something of value - the sale to a new buyer of another similar entity

15.3.5.3.1.2. The duty to mitigate damages cannot be imposed to deprive a plaintiff of the benefit of subsequent contracts which would have been available to him irrespective of the original breach

15.3.5.3.2. Mitigating vs. additional contracts

15.3.5.3.2.1. Mitigating contract - a contract that the plaintiff was able to perform only because the defendant's breach freed the plaintifffrom the obligation to perform the original contract (Loss avoided)

15.3.5.3.2.2. Additional contract - the plaintiff would be entitled to the profit from both contracts, and the defendant will not have the benefit of any deduction from its damage liability

15.4. Efficient Breach: Encouraging Breach of Contract15.4.1. Theory: When nonperformance would be economically efficient,

the law should not only permit breach but indeed regard it as appropriate behavior to be encouraged rather than condemned

15.4.1.1. Few courts have explicitly relied on this doctrine

15.4.1.2. Example of hairdresser case

15.4.1.2.1. The measure of damages for breach of contract by employee was the cost of obtaining other service equivalent to that promised and not performed

15.4.1.2.1.1. Defendant would have made $75 a week, and replacement cost $100 a week, so defendant had to pay plaintiff the $25/week difference

16. Alternatives to Expectation Damages16.1. Reliance Damages

16.1.1. Where anticipated profits are too speculative to be determined, monies spent in part performance, in preparation for, or in reliance on the contract are recoverable

16.1.2. The very nature of reliance damages is that future gain cannot be measured with any reasonable degree of reliability

16.1.2.1. The injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance, or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party wouldhave suffered had the contract been performed

16.1.3. Often, but not always, pairs with promissory estoppel claims

16.1.3.1. Relief MAY be limited to restitution or to damages or specific relief measured by the extent of promisee's reliance rather than by terms of the promise

16.1.3.1.1. Language is permissive; Court MAY limit relief

16.1.3.1.2. Relief MAY be limited to a party's out-of-pocket expenses made in reliance on the promise

16.1.3.1.2.1. Out-of-pocket expenses are the only difference between the market value and the amount paid for the property

16.1.3.1.3. Many modern courts believe that recovery for promissory estoppel should always be limited to the amount of actual reliance

16.1.4. Precontract reliance - courts will not allow a party to recover for reliance costs incurred before the contract was made

16.1.5. Another crazy twist: Some contracts, that were formed on the basis of promissory estoppel, might even allow more than reliance damages

16.1.5.1. They might allow expectation damages. How crazy!

16.2. Restitutionary Damages16.2.1. General:

16.2.1.1. Modern contract law allows a nonbreaching party to elect recovery of restitutionary rather than expectation damages for breach of contract (373)

16.2.1.2. Even a breaching party may in some cases be entitled to restitution by virtue of the benefit conferred on the other party by part performance (374)

16.2.1.3. If the performance obligations imposed by the contract have been "discharged" for some reason, such as incapacity or impracticability, either or both of the parties may be entitled torestitutionary relief (375-377)

16.2.2. The measure of recovery for quantum meruit is the reasonable value of the performance, and recovery is undiminished by any losswhich would have been incurred by complete performance

16.2.2.1. The standard for measuring the reasonable value of the services rendered is the amount for which such services could havebeen purchased from one in the plaintiff's position at the time and place the services were rendered

16.2.2.1.1. This is the rule of "market value restitution"

16.2.2.1.2. If a plaintiff elects to rescind the contract and recover in restitution, the contract no longer legally "exists"; therefore any loss that would have resulted from performance of the contract should not act as a limitation on the amount of recovery

16.2.2.1.3. Full performance exception to market value restitution:

16.2.2.1.3.1. If the nonbreaching party has fully performed his obligations under the contract and the breaching party's only remaining duty of performance is the payment of a liquidated or specified sum of money, the nonbreaching party may not elect a restitutionary recovery but is limited to expectation damages

16.2.2.2. Compensating a defaulting party via quantum meruit

16.2.2.2.1. Recovery by a defaulting party is limited to the LESS of either:

16.2.2.2.1.1. (a) the value of the benefits conferred OR

16.2.2.2.1.2. (b) the defendant's increase in wealth

16.2.2.2.1.2.1. Applies only if it would be unjust for nonbreaching party to be enriched by breaching party's part performance (374)

16.2.2.3. Section 371 of the Restatement recognizes both means of measuring Restitution (reasonable value of the performer's services and value of increase to the recipient's property) and indicates that relief may be measured as justice requires

16.3. Specific Performance

16.3.1. General

16.3.1.1. Specific performance is not a remedy to which the plaintiff is automatically entitled, even when an unexcused breach has been clearly established

16.3.1.1.1. Courts often will not undertake to coerce a performance that is personal in nature

16.3.1.1.2. Courts also reluctant to order specific performance where difficulties of supervision or enforcement are foreseen

16.3.1.1.3. Courts will often require that contract terms be express with someone greater certainty if specific performance is to be granted than if damages are to be awarded

16.3.1.1.3.1. Ordinarily, a promisee must be content with money damages

16.3.2. Specifics

16.3.2.1. When specific performance is to be granted, the essential criterion has been the inadequacy or impracticability of legal remedies

16.3.2.1.1. Contracts involving interests in land or unique chattels generally are specifically enforced because of the clear inadequacy of damages at law for breach of contract

16.3.2.2. The mere fact that a contract, definite in material respects, contains some terms which are subject to further negotiation between plaintiff and defendant will not bar a decree for specificperformance, if in the court's discretion specific performance should be granted

16.3.2.2.1. But, failure to agree on MATERIAL terms may result in denial of specific relief

16.3.2.3. Section 360: Circumstances which support a claim that damages are inadequate:

16.3.2.3.1. Difficulty of proving damages with certainty

16.3.2.3.2. Difficulty of procuring a suitably equivalent substitute performance

16.3.2.3.3. Likelihood that a damage award would not be collectible

16.3.2.4. Section 364: Other factors in determining whether specific relief should be available

16.3.2.4.1. The possibility that the contract was the product of mistake or unfair practices

16.3.2.4.2. The exchange it calls for is grossly inadequate

16.3.2.4.3. The terms of the contract are otherwise unfair

16.3.2.5. Section 367: A promise to render personal services will not be specifically enforced

16.3.2.5.1. But some courts have been willing to grant "negative enforcement" by way of injunction that prohibits a breaching party for performing for anyone other than the nonbreaching party

16.3.2.5.1.1. Requirement that services be unique

16.3.2.5.1.1.1. Injunctive relief may be available against employees whose services are not easily replaceable, such as athletes, artists, or media personalities, particularly when the employee plans to work for a competing enterprise