Contracts Finals OutlineSpring 2011

GENERAL NOTES

WHAT’S A CONTRACT?

“A contract is a promise the law will enforce.” To prove a breach of contract, the plaintiff must prove: (1) contract formation, (2) breach, and (3) damages. Sometimes it’s a good idea to break a promise: efficient breach. This scheme influences the incentives of a contract breaker or someone considering breaking a promise. A unilateral contract is one where only one party has made a promise. That is, a promise has been exchanged for performance. A bilateral contract is one where a promise is exchanged for a promise. This is now the most common type of contract.

CHECKLIST / INDEX

1. UCC or COMMON LAW?2. CONTRACT= [OFFER + ACCEPTANCE + (CONSEDERATION/RELIANCE)]?

a. Was there an offer? b. If there was an offer, was it terminated? c. If not terminated, was it accepted? d. Bilateral or Unilateral? e. Option Contract/Firm offer formed? f. Output/Requirements contract formed? g. Is there consideration, reliance or ok past consideration?

3. Defenses to formation? a. Are there any defenses to formation?

4. Terms of the contract /What is in the contract?a. If written K, does the Extrinsic Evidence Rule apply? b. Interpretation issues? c. Are there any Omitted Terms? d. Are there any Warrantees? e. Has the seller disclaimed any warranty? f. Has the seller limited remedies for breach of contract? g. Have any terms been modified or waived?

5. Defenses to non-performance?a. Conditions regarding time and type of performance was due? b. Excuse by Wrongful Prevention? c. Excuse by Waiver? d. Excuse by Forfeiture? e. Was there anticipatory repudiation? f. Can the promisor retract? g. Have changed circumstances made performance impracticable or frustrated

contract’s purpose?

h. Impracticability? i. Frustration of purpose?

6. Breach of Contract?a. RST: Was there a Breach? b. UCC: Was there a Breach?

7. Remedies available?a. Remedies Available at Common Law? b. $$ Money Damages c. Quasi-Contract Restitution d. Specific Performance and Injunction e. UCC Remedies

Chapter 2 REMEDIES FOR BREACH OF CONTRACT

REMEDIES

We are compensating the plaintiff’s loss. There are no punitive damages.

Three interests: Expectation, Reliance, and Restitution

The expectation interest, the standard remedy in contracts, puts the plaintiff in the position he/she would have been in if the contract had been carried out. The expectation interest is the weakest…it has the least “tug on our heartstrings”. The reliance interest is a cost that came out of the plaintiff’s pocket but didn’t go into the defendant’s pocket; it might have gone to a third party. The restitution interest is the strongest because the plaintiff has a “minus” and the defendant has a “plus”. With restitution you’re merely taking the benefit away from the defendant that the plaintiff gave him, usually at market price. Sometimes putting someone in the position performance would have done means awarding restitution and expectation, or even all three.

Does the U.C.C. apply?

Initial considerations— often general contracts law and the U.C.C. will be the same, however sometimes, Article 2 of the U.C.C. applies and offers specific rules of protections.

Does NOT cover real property, services, or intangibles (i.e., stock). Hybrid Cases— these are the sales of goods and services.

a. Whether the predominant purpose is the sale of goods.b. Whether the services are merely incidental.

Relevant U.C.C. Provisions [for you to reference on your own!]. Be sure to always read the comments, as sometimes your questions are addressed in the comments.

a. U.C.C. §2-102: Applies to transaction in goods.b. U.C.C. §2-105: Definition of Goods

i. Goods are movablesii. Included: specially manufactured items, unborn young of animals and

growing crops, and items identified which are to be severed from realtyiii. Excluded: money, investment securities, things in action, real property,

servicesc. U.C.C. §2-107: Goods to be Severed from Realtyd. U.C.C. §2-501:

The Importance of Languagea. Ambiguity— we often look at what the parties intended. If that differs the

court looks at the most reasonable definition in light of all the circumstances.A. Expectation Remedies—seek to put non-breaching party in the position it would have

been in had the contract been performed. They focus on economic lost not punishment for breaching. Two typical, basic remedies granted:

a. Specific Performance b. Award of Damages

1. The Substitute Contract i. Policy: The court wants to encourage the aggrieved party to enter a

substitute contract with a new party. 2. Incidental Damages, Attorney’s Fees, and Interest — those damages that are expenses

reasonable incurred by the plaintiff after the breach in an attempt to deal with the breach.i. These are cost incurred in making arrangement to obtain substitute

performance and to mitigate damages.3. Limitations on Expectation Recovery

i. Reasonable certainty- the evidence must be such to persuade the fact finder that it is more probable than not that (1) an injury did actual occur as a result of the breach (2) and must also provide enough information to calculate a monetary award .

ii. Foreseeability- Damages are foreseeable at the time of contracting the party who ultimately breached the contract (1) should have reasonable realize that those damages would be a likely consequence of the breach or (2) was expressly informed of the potential damages.

iii. Mitigation – If the plaintiff has (1) through bad faith (2) unreasonable action aggravated her damages, the defendant is not held responsible for the increase in loss cause by the plaintiff. The plaintiff (3) must give notice that he intends to sell the item.

Resale— Seller is required to mitigate the damages by acting in good faith and in some cases this will include resale

a. There must be good faith; and

b. It must be commercially reasonable

i. Public auction or a reasonable market place where the good is usually sold; and

c. Notice to the original buyer

1. Test for Inclusion Bonerbake v. Cox (8th Cir. 1974) – The test for inclusion or exclusion [in Article 2 of the UCC] is not whether they [goods and services] are mixed, but granting that they are mixed, whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of service, with goods incidentally (e.g. contract with artist for painting) involved or is a transaction of sale with labor incidentally involved (installation of a water heater in a bathroom.)

2. Mitigation of Damagesa. Rule: can’t recover for damages which could have been avoided thru reasonable diligence and without incurring undue risk, expense or humiliation (e.g. accepting an inferior job).b. Buyer §2-175(2)(a) – must reasonably attempt to mitigate by cover or otherwisec. Seller §2-709 – must use reasonable effort to resell goods before he is entitled to recover contract priced. If an offer in mitigation is an inferior offer it cannot be used as defense to recovery of damages for failure to make good on a contract. Inferior substitutes cannot be used to satisfy or bridge the expectation interest.e. Subsequent jobs entered into or jobs that should have been entered into offset damages duef. If subsequent employment would or could not be performed in addition to contract employment, then it’s a “mitigating type” which reduces injured party’s claim against the defaulter

§2-703 Seller’s Remedies in General Where buyer fails to make payment or wrongfully rejects acceptance of goods(a) Withhold delivery of such goods(b) Stop delivery by any bailee as hereafter provided(c) Proceed under the next section respecting goods still unidentified to the contract(d) Resell and recover damages as hereafter provided(e) Recover damages for non-acceptance or in a proper case the price(f) Cancel

§2-706 Seller’s resale including contract for resaleThe only condition precedent to the seller’s right of resale under subsection (1) is a breach by the buyer within the section on the seller’s remedies in general or insolvency.

§2-708 Seller’s Damages for non-acceptance or repudiationThe provision is followed generally in setting the current market price at the time and place for tender as the standard by which damages for non-acceptance are to be determined.

§2-709 “if the seller is unable after reasonable effort to resell [the goods] at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing,” then the seller may recover the contract price from the buyer.

EXPECTATION INTEREST: OF INFERIOR SUBSTITUTES, OTHER ENDS, AND OTHER MEANS

Shirley Maclaine Parker v. Twentieth Century-Fox Film Corp.

Rule of Law. The measure of damages owed to a wrongfully discharged employee is the amount of salary agreed upon for the period of employment reduced by the amount the employer proves the employee has earned or with reasonable effort may have earned from other employment.

Facts. Plaintiff contracted with Defendant to play the female lead in the movie “Bloomer Girl” for a salary of $750,000. However, Defendant decided not to produce the film and offered instead for Plaintiff to play the lead in another film, “Big Country, Big Man.” Unlike “Bloomer Girl,” which was to be a musical filmed in California, “Big Country, Big Man” was to be a dramatic western filmed in Australia. Also, the contract for “Big Country, Big Man” did not grant Plaintiff the same control over the choice of directors and screenplay that her “Bloomer Girl” contract did. Plaintiff declined to act in “Big Country, Big Man” and sued to recover her guaranteed salary.

Issue. Should Plaintiff’s recovery be limited by her failure to accept substitute work in mitigation of damages?

Holding. No. A wrongfully discharged employee’s recovery of her full salary must be reduced by the amount the breaching employer can prove she earned or with reasonable effort might have earned. Importantly, the employer must show that the other employment was comparable or substantially similar to that employment of which the employee was deprived. The employee’s rejection of or failure to seek a different or inferior kind of employment may not be considered. For the factual differences stated above, acting in “Big Country, Big Man” constituted inferior employment. Thus, Plaintiff’s refusal to accept the female lead in “Big Country, Big Man” will not reduce her recovery.

Dissent. It has never been the law that the mere existence of differences between two jobs in the same field is sufficient to excuse an employee from accepting an alternative offer of employment in order to mitigate her damages. The inquiry in this case should be whether the present differences are substantial enough to constitute differences in kind of employment, or whether the substitute work is inferior.

Discussion. A wrongfully discharged employee is entitled to his lost salary, but he must mitigate damages by seeking alternative employment. However, he does not need to accept different or inferior employment. Why is the dissent relevant here? Because cases involving offers of employment found not to be appropriate are normally very vivid and extreme. Dissent here is like a majority in most cases.

de la Falaise v. Gaumont-British Picture CorpWhere trial court found that GBP breached its contract to Constance but reduced her damage award by amounts received for two radio broadcasts in NY. The court of appeals upheld the reduction quoting from another case “less the amount which the servant has earned or with reasonable effort might have earned from other employment.”

3. Weakness of the mitigation rule

California School Employees Assn. V. Personnel Com’n Court of appeals held that employee failed to mitigate damages after he didn’t accept another school bus driver position with only a few cents pay difference in the same locale but where employer did not have a merit based pay system.

Ballard v. El Dorado Tire Co. Court found it was insufficient that an employer expert witness testified there was an extremely low rate of unemployment for professional technical managers in the FL market. Citing Parker courts said employees damages are reduced only if the employer proves with reasonable certainty that employment was available in the specific line of work in which the employee was engaged.

The sanction for failure to follow through on duty to mitigate damage is loss of expectation damages

UCC §2-718. Liquidated or Limitation of Damages; DepositsDamages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as penalty.

(1) Where the seller justifiably withholds delivery of goods because of the buyer’s breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds.

a. The amount to which the seller is entitled by virtue of terms liquidating the seller’s damages in accordance with subsection (1), or

b. In the absence of such terms, twenty per cent of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller.

Neri v. Retail Marine Corp.

Rule of Law. A retail dealer may recover loss profits and incidental damages where a buyer repudiates.

Facts. Neri paid a $4,250 deposit on the purchase of a $12,600 boat from Retail Marine. Neri repudiated the sale one week later due to an upcoming operation. Neri requested a refund of his deposit and Retail refused because the boat had already been delivered from the factory. Neri sued to recover his deposit and Retail filed a counterclaim for $4,250 for lost profits and expenses. Retail sold the boat four months later to a different customer for the same price. Retail

proved that its expenses and expected profit was $3,250. Retail showed it would have earned $2,579 profit and that it incurred $674 in other fees, and sought to retrieve $1250 in attorneys’ fees.

Issue. Can Retail recover loss of profits and incidental damages?

Holding. Yes. A volume retail seller of standard priced goods may recover lost profits when a buyer defaults on a purchase if market damages are inadequate to put the seller in as good a position as he would have been had the contract been performed. Because Retail has multiple boast Retail can recover the profit because had Neri not breach the contact. Retail could have sold two boats. Give Retail a profit and incidental damages, $2,579 + $674. (no attorney fees here because NY law says no).Neri gets his $997 back total. U.C.C. §2-708 governs this case: The seller is essentially entitled to lost profits. Section 2-718 establishes that the buyer’s right to restitution is subject to offset to the extent that the seller establishes a right to recover damages under the provisions of this Article other than subsection (1). UCC 2-708(2) provides that if UCC 2-708(1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit, including reasonable overhead, which the seller would have made from full performance plus incidental expenses and damages. In this case the buyer’s right to restitution and the seller’s rights to offsets under UCC 2-718 were established on the motion for summary judgment. The measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as full performance. Under 2-708 (2) the seller is entitled to its profit including reasonable overhead along with incidental damages, due allowance for costs reasonably incurred and due credit for payments or proceeds of resale. Due credit for payments or proceeds of resale is inapplicable to this retail sales contract as this provision pertains to the privilege of the seller to realize the junk value of the items if it was manifestly useless to complete the operation of manufacture. Neri is therefore entitled to restitution in the sum of $4,250 less $3,250 for lost profits and incidental expenses. The court basically says that UCC § 2-708 (2) is novel enough that the trial court sort of overlooked it and applied the old rule (exemplified by § 2-708(1)) appropriately. The court says that UCC § 2-708 (2) is the right rule here. The court mentions that, of course, Neri get restitution, but these damages are reduced by the losses to the defendants. The court finds that the Retail proved sufficiently in trial court that they lost profits and also incurred expenses in storing and keeping up the boat while they were waiting to sell it to somebody else.

Discussion. Lost volume seller— the seller has made one less sale than he would have if the buyer performed. Usually the seller has an exhaustible supply of the good. “Due credit for payments or proceeds of resale”— the manufacturer who learns of a buyers breach before he has finished the product, the manufacturer then decides it is better to sell what has been complete so as scrap. The manufacturer is the entitled to lost profits he would have made less the amount of the sale of the scrap.

4. Lost Volume Sellera. The seller is a lost volume sell if he would have made two sales instead of just one. A

lost volume seller is defined as a dealer who has unlimited supply of standard-priced goods.

b. Generally must have unlimited supply or similarly priced goods (e.g. tires at a Goodyear dealership). As of 1994 courts have not required proof of unlimited supply of standard

priced goods. Some courts seem willing to presume that if one is a retailer, one is a lost volume seller.

c. §2-708(1) – allows difference between the market price at the time and place for tender and the unpaid contract price plus incidental damages less expenses saved in consequence of buyer breach

d. §2-708(2) entitles a “lost volume” seller to recover for Gross Profit or Lost Profit + Incidentals. This remedy is available if 2-708(1) is inadequate.

Gross Profit = Net Profit + Overhead Gross Profit = Revenue – Direct Costs Gross Profit – Net Profit = Overhead

e. A seller can recover gross profit but not gross profit + overhead which would “double recovery”.

Questions of OverheadGross profit is the difference revenue and direct costs. Another definition is the sum of net profit plus overhead. So net profit is gross profit minus overhead.When legal rules award profit is it gross or net? The UCC provides for profit (including reasonable overhead)The formula in §2-708(2) is to remember that normally “profits (including reasonable overhead)” – that is, gross profits – is the same as contract price less direct costs.

In Re Worldcom (Jordan v. Worldcom)

Rule of Law. The duty to mitigate damages bars recovery for losses suffered by the non-breaching party that could have been avoided with reasonable effort and without risk of substantial loss.

Facts. MCI and Jordan entered into an endorsement agreement. Jordan was to receive $2 million a year plus his $5 million signing bonus. The contract was from 1995-2005. Jordan could still do most other endorsements. MCI declared bankruptcy in 2002. Jordan sued for $8 million—the $2 million annual payments remaining in the contract. MCI argues Jordan failed to mitigate and the amount should be reduced to $4 million. Jordan argues he is a lost volume seller.

Issue. Whether Jordan had an obligation to mitigate damages and whether he was or was not a lost volume seller?

Holding. Yes. Jordan failed to look for other work and thus he failed to mitigate.Lost Volume Seller— No. Jordan argued because he could enter into other endorsements, and thus additional endorsements would not have haven substitutes and not mitigation.Courts do NOT focus solely on the seller’s capacity. Must also show you would have entered into a subsequent agreement. . Jordan does not qualify as a lost volume seller. Although he could have entered into unlimited agreements, there is no evidence that he would have entered into those agreements (Jordan must show he could and would have entered into subsequent agreements) if it were not for the breach, especially because he was trying to trim down his endorsements so as to not dilute his brand. Jordan lacked a nearly limitless supply. Thus, he does not qualify as a lost volume seller and had a duty to mitigate damages.

Mitigation Efforts— Jordan failed. MCI must show the absence of reasonable efforts by Jordan to minimize the damages.

Who is a lost volume seller?The test the court applies is sometimes called the “objective/subjective” test. Placing the burden of proof on the seller, it requires that the seller demonstrate first a “capacity” to be a lost volume seller by showing that it was possible to undertake additional business. This is considered the “objective” part of the test. But the seller is also required to show that it would have tried and would have been able to obtain additional business even if the defendant had not breached. This is the “subjective” branch of the test is often met by showing that the seller was seeking additional business prior to the breach, and that there is no reason to suspect that the ultimate purchaser would not have closed a sale with the plaintiff in the absence of breach.

Burden of Proof on Mitigation IssuesOn mitigation issues, the burden of proof is normally on the defendant. This means that the defendant must offer some credible evidence that the plaintiff could have mitigated damages before the plaintiff is required to offer evidence about other than breach and lost wages.

Reasonable Search Efforts and the “Substantially Similar” TestIf an issue about reasonable search opportunities had risen in the Parker case, the question arises whether the defendant would have carried the burden of showing both that the plaintiff had not made reasonable efforts and that such efforts would have uncovered mitigating opportunities that were “substantially similar.”

THE EXCEPTATION INTEREST: PERFORMANCE RATHER THAN DAMAGES

Specific Performance— When there is inadequate relief in the normal process awarding of monetary damages, then specific performance is appropriate. a. One cannot contract for specific performance but you could include in the contract why it would make sense.b. Examples

1. Contracts for sale or lease of propertyi. The seller typically wants specific performance.

2. Cases in which damages would be very difficult to prove with a reasonable certainty.

3. Cases in which the defendant is finically incapable of satisfying a money judgment.

4. Distinctly inferior substitute5. Difficulty in finding a permanent alternative substitute

Copylease Corporation of America v. Memorex Corporation

Rule of Law. State law controls in concerns about injunctive relief, but state law may require refined interpretation or application to the facts of the case. As a rule, specific performance in

long-term relationship situations is to be avoided. §2-716 allows for specific performance when product is unique. You must measure the unique ness or degree of covering against the difficulties of enforcement, which have caused courts to refrain from granting specific performance. (court is not a babysitter).

Facts. Defendant (Memorex) had a contract with plaintiff (Copylease). Plaintiff would sell defendant's toner, and would be the exclusive vendor in some regions. Defendant unilaterally altered the business relationship breaching the contract. Plaintiff sued both for damages for losses, and for specific performance of the exclusivity agreement.

Issue. Is specific performance a remedy available to diversity jurisdiction plaintiffs when the substantive law governing the case eschews it?

Holding. Maybe. Certainly there is a breach of contract here. Also, although it's not settled whether federal court can grant equitable relief in a diversity case in contravention of state substantive law, the state law should govern. In this case, however, there may be an exception that allows an injunction for specific performance, and more testimony (about the difficulty of covering) is needed to determine whether that would be appropriate. If specific performance is out of the question, there can still be recovery of damages. Specific performance will not be ordered for contract requiring a continuing series of acts in cooperation between the parties for the successful performance of those acts. However if copy lease has no adequate alternative source of toner, specific performance may be necessary UCC 2-716.

§2-716 Buyer’s right to Specific Performance or Replevin(1) Specific performance may be decreed where the goods are unique or in other proper

circumstances. In a contract other than a consumer contract, specific performance may be decreed if the parties have agreed to that remedy. However, even if the parties agree to specific performance, specific performance may not be decreed if the breaching party's sole remaining contractual obligation is the payment of money.

(2) The decree for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just.

(3) The buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered.

(4) The buyer's right under subsection (3) vests upon acquisition of a special property, even if the seller had not then repudiated or failed to deliver.

“Law” and “Equity”When will courts award specific performance? (1) A court will almost always order a defaulting party to carry out a contract to convey land. (2) A court will also almost always order specific performance when a contract calls for a seller to deliver a “unique good” such as a painting by a famous artist. (3) On the other hand, an employer will almost never be able to compel an employee to carry out a contract. An employer may sometimes be able to convince a court to order the employee not to compete with the employer by performing the same services for

another, or by opening a competing business. California Courts had decided two important cases before the UCC went into effect that showed a great reluctance to award specific performance of a continuing contract of any complexity.

Long Beach Drug Co. v. United Drug Co.The parties entered a contract in 1909. Plaintiff was to be the exclusive distributor of defendant’s product as long as it performed to terms, and one of the most important was that it sell only at prices established by defendant. Defendant started doing business with another company which had four stores in plaintiff’s exclusive territory. Plaintiff sued for injunctive relief that defendant stop supplying the other company. The California Supreme Court held that CA Civil Code provided that “an injunction cannot be granted to prevent breach of contract, the performance of which would not be specifically enforced.” Second, specific performance of this contract would not be proper. “Equity will not decree specific performance of contracts which by their terms stipulate for a succession of acts whose performance cannot be consummated by one transaction, but will continuous and require protracted supervision and direction.” The court left plaintiff to seek whatever damages it could prove.

Why damages rather than specific performance today?There are three major possibilities: (1) no one cares enough to bother to make any charges; (2) the practice has continued because it serves the interest of someone or some group that counts; or (3) the practice serves some larger social interest.

The Buyer’s Damage Remedies Under the UCC§2-711 Buyer’s Remedies in General; Buyer’s Security Interest in rejected Goods-Basically mirror image to seller’s remedies in §2-703. The law seeks to influence both aggrieved sellers and aggrieved buyers to find substitute contracts; this minimizes losses. Difference measures are used to compensate for having to sell at a loss or buy above the contract price. More particularly, a buyer may cover its needs (that is, buy them from someone else) and get the difference between the contract price and the cover price under §2-712. A buyer also may recover the difference between the market price and the contract price under §2-713. Section 2-714 deals with the buyer’s remedies where it has accepted the goods but something is wrong with the seller’s performance. Sections 2-712, 2-713, and 2-714, in turn, all say that a buyer can recover consequential damages in a proper case as defined by §2-715(2). The term ‘consequential damages” is not defined in the UCC, but it would include Copylease’s reduced profits on its resales because of Memorex’s breaches.

THE EXPECTATION INTEREST: BREACH DETERRENCE VERUS LIQUDATED DAMAGES

Liquidated DamagesA provision in the contract that in case of breach, the breacher would pay a certain sum of money to the non-breaching party. (Can be only on one of the parties if specified, does not have to be both).Must look at whether the provision amount of damages is reasonable in light of anticipated or actual harm caused by the breach. Court will refuse to enforce liquidated damages if they are

nothing more than a penalty for breach, because contracts law is based on compensation not punitive damages.

a. Restatement §356 – …Amounts must be reasonable in light of anticipated loss. The loss must be difficult to prove. Any term fixing unreasonably large damages is void as a penalty.

b. §2-718(1) – Same as above but includes provision which requires “inconvenience or non-feasibility of otherwise obtaining an adequate remedy.”[194]

c. Breaching party must still pay actual costs of breach. Only the high penalties are objectionable

i. Are more likely to be enforceable where damages are hard to estimateii. Stipulate damages are a good faith estimate of actual anticipated damages

d. Damage provision that is too small in comparison to actual damages is seen as a valid limitation of liability UNLESS found to unconscionable.

e. Efficient Breach: A breach where the non-breaching party is compensated for his loss and is no worse off than if the K had been performed, while the breaching party is actually better off because of the breach.

f. Policy against Penalty Clauses: discourage people from entering into Ks. Penalty clauses raise the cost of a breach, thus increasing the risk of the breaching partie’s other creditors. Discourages efficient breaches. Penalty clauses may award to the non-breaching party, damages in excess of their actual loss.

g. Windfall:h. Valid party chosen remedy = liquidation clause

i. Have to show at the time of contracting the reasonable estimation of the anticipated or actual loss caused by the breach, and (AMOUNT)

ii. That at the time of contracting we knew there would be difficulties in measuring the loss.(MEASURE OF DIFFICULTY)

i. Invalid party chosen remedy clause = penalty clausei. Term that fixes an unreasonably large liquidated damages in unenforceable on the

grounds of public policy as a penalty.

Pareto Optimality is still the base of refusal of law to enforce penalties. In a situation where you can pay the expectation damages to the breached party they should be indifferent. The breaching party pays less than they would have paid had they not breached [they effectively lose less than they would have otherwise].The effective policy is breaking a promise is o.k. where it is efficient and this is not immoral.

Lake River Corp. v. Carborundum Co.

Rule of Law. A liquidation of damages must be a reasonable estimate at the time of contracting of the likely damages from breach, and the need for estimation at that time must be shown by reference to the likely difficulty of measuring the actual damages from a breach of contract after

the breach occurs. When a contract specifies a single sum of money without the gravity of the breach the specification is not a reasonable effort to estimate damages.

Facts. Carborundum manufactures Ferro Carbo an abrasive powder used in making steel.  Carb entered into a contract with Lake River by which Lake River agreed to provide distribution services in its warehouses in Illinois.  Lake River would receive Ferro Carbo in bulk, bag it and ship it to Carborundum’s customers. Carborundum insisted that Lake River install a new bagging system to handle the contract.  It cost $89,000. To cover the cost and make a 20% profit Lake River insisted on a minimum guarantee clause. The clause stated: Lake River can charge Carborundum the difference between quantity bagged and the minimum guaranteed if not met If the full minimum quantity was shipped Lake River would make $533,000.  Carborundum only shipped 12,000 of the 22,500 tons of the Ferro Carbo when the contract expired.  Carborundum had paid for the amount billed and bagged.  The clause left Carborundum owing $241,000, $533,000 (ferro shipped) minus what Carborundum had paid.  Lake retained 500 tons of bagged Ferro ($31,000). Plaintiff argued the guarantee clause discourages willful breaches and “guarantees,” that the non-breaching party is able to make its profit, minus mitigating cost. This clause insures against non-credible parties entering into contracts. Defendant argued the provision is greatly disproportionate. The fixed sum greatly exceeds the actual damages inflicted by a breach.

Issue. Whether the formulae in the minimum guarantee clause imposes a penalty for breach of contract or is merely an effort to liquidate damages?

Holding. This clause is a Penalty Clause. The court reasoned that the damages formula in this case is a penalty and not a liquidation of damages, because it is designed always to assure Lake River more than its actual damages. When a contract specifies a single sum in damages for any and all breaches even though it is apparent that all are not of the same gravity, the specification is not a reasonable effort to estimate damages; and when in addition the fixed sum greatly exceeds the actual damages likely to be inflicted by a minor breach, its character becomes a penalty.  From the face of the contract the damages provided for by liquidated damages are grossly disproportionate to any probable loss and penalizes some breaches more heavily than other regardless of cost. The unpaid contract price ($241,000) minus the costs saved by not having to complete the contract (the variable costs on the other 45 % of the Ferro that it never had to bag).

Notes and Questions

Compare UCC §2-718(1) with Restatement (second) of Contracts §356 on penalties and liquidated damages which provides: Damages for breach by either party may be liquated in thre agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages in unenforceable on grounds of public policy as a penalty.

The formula the Court in Lake River suggests for calculating expectation damages in contract price less costs saved by the breach. This formula is basically the same as lost profits plus overhead, for reasons discussed in Note 9 following Neri.

Questions about Efficient BreachWhat about persons interests of persons other than parties to the contract. Pareto Optimal- Given an initial allocation of goods among a set of individuals, a change to a different allocation that makes at least one individual better off without making any other individual worse off.

“Pay or Play” clauses and “golden parachutes”: penalties or something different.Contracts are sometimes interpreted as calling for “alternative performances,” one of which is the payment of money, rather than a single performance together with stipulated damages for breach. If the contract is interpreted as providing for the former, then the suit for the agreed amount is not subject to the penalty rule, and the prevailing freedom of contract principle prevails. If the contract is interpreted as providing for a single performance together with the stipulated damages for breach then the stipulated amount will be reviewed by the court for its reasonableness and will be labeled a penalty if excessive.

Termination Clauses / Employment penalty clauses. Business Practice has moved ahead of legal form related to Termination clauses in employee Ks. In Wisconsin these clauses have been upheld by the Supreme Court.

Wassenaar v. Panos 1.Whether the injury cause by the breach was difficult or incapable of accurate estimation when the parties made the K. 2. Whether the stipulated damages were a reasonable forecast of the harm caused by the breach. Provided that the damages provided for in the K are not grossly beyond original expectations the termination clause likely would apply.

Compensation is for: 1. Emotional Distress 2. Damage to Reputation. Both of these are hard to fix in terms of dollar recovery. The difficulties of proving damages are used as a rational for enforcing the clause. However, they are damages that would not have been recoverable.

Posner argues: we must allow penalty clauses to be valid; by refusing to enforce them, this prevents efficient breach (i.e. the breaching party will pay the penalty clause, get a better deal and nobody is worse off.

THE EXPECTATION INTEREST: LOST ANTICIPATED PROFITS AND CONSEQUENTIAL DAMAGES

Consequential Damages

Relevant UCC provisionsi. UCC §2-712

ii. UCC §2-713iii. UCC §2-714iv. UCC §2-715(2)

Recovery of “consequential damages” by a buyer is provided by UCC §2-715(2), and the same term is also often used in common law cases. One type of potential injury to a buyer upon breach that is always considered consequential damages is lost profits resulting from nonperformance by a seller of goods or services.

UCC Rejects the rule developed in Hadley v. Baxendale: It is now almost universally recognized that in the words of the UCC, if at the time of the making of the contract the seller has “reason to know” of possible consequential damages, that is enough to make him liable for recovery of those damages.

Hadley v. Baxendale

Rule of Law. The damages to which a nonbreaching party is entitled are those arising naturally from the breach itself or those that are in the reasonable contemplation of the parties at the time of contracting. A plaintiff can recover consequential damages only if they were reasonable foreseeable at the time of contracting.Two pronged rule: 1) aggrieved party may recover damages that are fairly and reasonably considered as naturally arising (general damages) OR 2) recovery is allowed for damages that may be reasonably contemplated by both parties at the time contract is made as the probable breach of it (special damages). Hadley, the “penalty default rule”— you do not get consequential damages based on plains and projections that you keep secret from the other party. Incentivizing disclosure.

Facts. Plaintiffs operated a mill, which they were forced to shut down when the crank shaft of their steam engine broke. They contacted the manufacturer of the engine, W. Joyce & Co. (Joyce), and Joyce agreed to make a new shaft from the pattern of the old one. Therefore, a servant of Plaintiffs went to the office of Defendants, common carriers, to have the crank shaft taken to Joyce. Plaintiffs’ servant told Defendants’ clerk that the mill was shut down and the shaft must be sent immediately. The clerk informed Plaintiffs’ servant that if the shaft were given to them by twelve o’clock any day, it would be delivered by the next day. Plaintiffs took the shaft to Defendants the next day before noon. Due to Defendants’ neglect, the delivery to Joyce was delayed, and Plaintiffs did not receive the new shaft for several days after they should have received it.

Issue. Are Defendants liable to Plaintiffs for damages suffered by Plaintiffs due to lost profits?

Holding. No. A nonbreaching party is entitled damages arising naturally from the breach itself or those that are in the reasonable contemplation of the parties at the time of contracting. Here, while the breach by Defendants was the actual cause of the lost profits of Plaintiffs, it cannot be said that under ordinary circumstances such loss arises naturally from this type of breach. There is a multitude of reasons for a miller to send a crank shaft to a third party. Defendants had no way of knowing that their breach would cause a longer shutdown of the mill, resulting in lost profits. Further, Plaintiffs never communicated the special circumstances to Defendants, nor did Defendants know of the special circumstances.

Discussion. Damages are limited to those that arise naturally from a breach and those that are reasonably contemplated by the parties at the time of contracting.

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Use Hadley Baxendale where the UCC doesn’t apply.

Where 2 parties have made a contract which one of them has broken, the damages which the party ought to receive in respect of such breach of contract should be such as

1. May fairly and reasonably be considered either arising naturally, from such breach of contract itself OR 2. Special circumstances 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 the breach of it. IF AND ONLY IF communicated by Plaintiff to Defendant.

Further though the right to limit liability by agreement was disputed at the time of the case, the entrepreneur now has the undoubted capacity to set a ceiling on his liability by a contract clause of disclaimer. §2-719 – says consequential damages may be limited unless limitation is unconscionable.

The buyer’s remedies under the UCC: Section 2-217, 2-713, and 2-714 all say that a buyer can recover consequential damages in a proper case as defined by §2-715(2). One requirement is that the consequential loss “could not reasonably be prevented by cover or otherwise.”The seller’s consequential damages under the UCC: There is no provision in the UCC giving sellers a right to consequential damages. Normally, when a buyer breaches a contract the seller loses the gains it would have made from receiving money. Had the drafters of the Code written a consequential damages section for sellers, sellers would seldom recover under any provision that incorporated the ideas of Hadley v. Baxendale.The typical common law approach was to award an aggrieved seller the difference between the contract price and resale or market price. Amended Article 2, in §2-710(2) and (3), provides for sellers to recover consequential damages from non-consumer buyers if “resulting from general or particular requirements and needs of which could not reasonably be prevented by resale or otherwise.”

The “tacit agreement” rule: “We know of no other test than the loose one that the loss must be such that, had the promisor been originally faced with its possibility, he would have assented to its inclusion in what he must make good.” Courts following the tacit agreement rule often balanced the benefits of the contract against the burdens of the damages sought.Official comment 2 to UCC §2-715 states “the tacit agreement test for the recovery of consequential damages is rejected.”

Proof of Damages with Reasonable Certainty: Of New Businesses and ExpertsConsequential damages must be reasonably certain in that 1) damage was caused by breach and 2) amount claimed is amount actually suffered; if not certain Hadley will not be enforced, even if foreseeable. Official Comment 4 to UCC §2-715 provides: The burden of proving the extent of loss incurred by way of consequential damage is on the buyer, but the section on liberal

administration of remedies rejects any doctrine of certainty which requires almost mathematical precision in the proof of loss. Loss may be determined in any manner which is reasonable under the circumstances. Official Comment 1 to UCC §1-305 says: “Compensatory damages often are at best approximate: they have to be proved with whatever definiteness and accuracy the facts permit, but no more.” On the other hand, most states once followed a “new business” rule. As one court put it: “Prospective profits are not recoverable for a newly established business or for a business which has operated at a loss.”

Incidental v. Consequential§ 2-715. Buyer's Incidental and Consequential Damages.

1) Incidental damages resulting from the seller's breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.

2) Consequential damages resulting from the seller's breach include

i. any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and

ii. injury to person or property proximately resulting from any breach of warranty.

Evergreen Amusement Corp. v. Milstead Contract breach delayed theater opening from June to mid-August. This is a new business. At trial appellant sought damages based on opinion expert testimony as to profits lost. Testimony was not allowed. Loss profit is a measure of damages for an established business. The damages in such an enterprise can be established with a reasonable degree of certainty. Restatement of Contracts, §331 states the law to be that damages are recoverable for profits prevented by breach of contract ‘only to the extent that the evidence affords a sufficient basis for estimating their amount in money with reasonable certainty,’ and that where the evidence does not afford a sufficient basis, ‘damages may be measured by the rental value of the property.’

Notes. Most recent cases reject the once generally accepted rule that lost profits damages for a new business are not recoverable.

Chung v. Kaonohi Center Co.Jury found breach of contract and awarded 50k in damages (ordinarily not recoverable from breach of contract) and 175k in loss of future profits. Court rejected the rule barring proof of lost profits of a new business. It said ‘it would be grossly unfair to deny Plaintiff meaningful recovery for lack of a sufficient ‘track record’ where the Plaintiff has been prevented from establishing such a record by Defendant’s actions.” The trier of fact “must be guided by some rational standard in making an award for loss of future profits.’ It allowed for expert testimony.Expert testimony has much more speculation. A single rest. Operator is operated for a few days then projects what Plaintiff would make. Focus should be on whether a plaintiff can prove lost profits with reasonable certainty.

Notes. Recovery for emotional loss: The Hawaii Supreme Court has explicitly overruled Chung with respect to the recovery for emotional injury arising from “wanton/ reckless” breach of contract.

Under the UCC there is no provision giving seller a right to consequential damages. Seller damages under common law were Market or Resale Price – Contract Price + Interest (Usually set by statute).

The Expectation interest: Some Concluding PerspectivesThe goal of expectation damages is said to be to put the non-breaching party in as good a position as performance would have done.

Discovering the Implicit Dimensions of ContractsThe duty to mitigate loss works because the mitigation rules give the claimant a great incentive to take reasonable steps to minimize his or her losses because failure to do so will result in the court refusing to award compensation for those avoidable but unavoided, and therefore excessive, losses.

Notes. A seller has an obligation to resell the product (UCC §2-706) and can rarely sue for the price (UCC §2-709), if the seller is a lost volume seller can sue for lost profits (UCC §2-708(2)).

THE RELIANCE INTEREST

Contract remedies could, and sometimes do, seek to protect the reliance interest. Rather than trying to put aggrieved parties where they would have been had their contracts been performed, judges applying contract law might seek to compensate victims of breach for out-of-pocket losses. That is, rather than trying to approximate the situation had there been no breach, a court could instead seek to compensate for losses caused by reliance on the contract. The Reliance Interest— If expectation damages are not available because they are uncertain or non-existent, the Plaintiff may be entitled to reliance damages. They compensate the Plaintiff for his detriment in changing position in response to the promise

Two types of reliance interests

1. Reliance interest2. Reliance of lost opportunities- cost of chance to find another supplier

Security Stove & Manufacturing Co. v. American Railways Express Co.

Rule of Law. “Where expectation damages do not exist or are not in the contemplation of the parties, damages can be awarded for expenditure made in contemplation of performance.” “in some instances, the injured party may recover expenses incurred in relying upon the contract, although such expenses would have been incurred had the contract not been breached.”

Facts. Plaintiff developed a new stove that it wanted to showcase at a convention. Plaintiff used American to ship the stove. The stove was broken down into 21 packages however one of the packages went to the wrong city. Because of this, Plaintiff was not able to show off the new stove at the convention and sued for reliance damages. Plaintiff sought shipping costs, cost of rental space at the convention, railway fares for himself and employee, hotel costs, presidents wages, employees’ wages (total of $800).

Issue. Whether the expenses are recoverable?

Holding. Yes, the general rule is that the party suffering the loss can recover only that which he would have been able to if the contract had not been broken. However, Stove was not seeking lost profits for American’s failure to deliver the furnace in time because he would end up with nothing. This is an injustice that is not supported. Plaintiff did not ask for any special price on the shipment. The price it paid was the normal price that anyone would. All the Plaintiff asked was that the stove be delivered within the ordinary delivery time. American knew about the Plaintiff’s circumstances regarding the convention. Plaintiff never would have had those expenses if the contract had never been formed. Plaintiff made those expenses in reliance on the contract with American.

Notes. This lawyer chose not to sue for expectation damages because new businesses may not sue for the profits that they would have made in their first year. The company would argue that they expected to impress people and have great marketing and free advertisements. However they can’t prove with reasonable certainty what they would have earned or if any sales would have been made. So they sue to recover their reliance damages. He got damages based on expenses performed before and after. The only reason they get the reliance interests is because they don’t try to prove the expectation interest. Basically, the company went to the trade show at a loss. Sue for reliance when you are in a losing contract. Back then it would have been difficult to prove the reasonableness of what they would have made. Now experts are involved.

L. Albert & Son v. Armstrong Rubber Co.

Rule of Law. When the value can be ascertained with "reasonable certainty as of a definite time," interest is appropriate. Also, a promisee may recover his outlay in preparation for performance, minus whatever amount the promisor can show that the promisee would have lost had the contract been performed.

Facts. L. Albert & Son (P) agreed to sell and deliver to Armstrong Rubber (D) four refiners that were designed to recondition old rubber. The contract of sale was dated December, 1942. Albert delivered two of the four machines in August, 1943 and delivered the remainder two years later. Because of the delay in delivery of the other two Armstrong refused to accept all four in October, 1945. The court gave judgment to Albert for the value of the equipment delivered. Buyer appealed for the expenses it incurred in reliance upon Albert’s promise.

Issue. Does a promissor’s default on performance make him a guarantor and insurer of the promisee’s venture?

Holding. No. A promissor’s default on performance does not make him a guarantor and insurer of the promisee’s venture. However, the promisee may recover his outlay in preparation for the performance subject to the privilege of the promissor to reduce it by as much as he can show that the promisee would have lost if the contract had been performed. We will also not put a plaintiff in a better position than he would have occupied had the contract been fully performed. The cost of the pad ($3,000) for the machines should be allowed as an offset as this was performed in anticipation of Albert’s delivery of the machines, and Albert may deduct from that sum any loss upon the contract had the machines been shipped before May 1, 1945. The counterclaim for reliance damages seems specious, except for the foundation. They never really did much with the department, and they quickly sold off the scrap. Making a contract doesn't make you an insurer of the other party's venture. The only difference with recovering the foundation costs is between recovering monies paid to the promisor (accepted) and paid to other people in expectation of promisor's performance (not normally done). But we're not mandated to decide otherwise, and this seems just. Seller owes for the foundation, buyer owes for the motor plus interest.

Notes.

The Restatement (Second) appears to embody the Learned Hand limitation on recovery of reliance as set out in the L. Albert case:

Restatement (Second) of Contracts §349. Damages based on reliance interest.As an alternative to the measure of damages stated in §347 [essentially, protection of the expectation interest], 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 would have suffered had the contract been performed.

Illustrations.A contracts to sell his retail store to B. After B has spent $100,000 for inventory, A repudiates the contract and B sells the inventory for $60,000. If neither party proves with reasonable certainty what profit or loss B would have made if the contract had been performed, B can recover as damages the $40,00 loss that he sustained on the sale of the inventory.

Reliance damages, the UCC, and the paucity of cases: If the Court decided L. Albert today, Article 2 of the Uniform Commercial Code would apply. What result would it reach? Perhaps the first question that should be asked is whether reliance expenditures that the buyer sought to recover could be considered “consequential damages” under §2-715(2)? There is no explicit definition of “consequential damages” in Article 2, but it is hard to image what else they could be. It would not be appropriate to consider reliance damages like those claimed in L. Albert to be incidental damages, as incidental damages are generally limited to post-breach expenditures for purposes of minimizing loss. Furthermore, UCC §2-715(1), allowing recovery of incidental damages, does not establish any Hadley v. Baxendale limitations on recovery, whereas UCC §2-715(2), allowing recovery of consequential damages, does contain such a limitation. It is clear there should be a foreseeability limitation on the recovery of reliance damages.

RESTITUTION AND EXIT AS ALTERNATIVE CONTRACT REMEDIES

Restitution damages are used when expectation damages aren’t available because they are uncertain or nonexistent. They give back or restore the Plaintiff to his previous position. It’s used to prevent unjust enrichment.

a. Common when there has been a misrepresentation or a mistake. b. Ask yourself: what is the unjust enrichment the other party is receiving? c. Restitution is often a component of reliance damages but the reverse is not the case. Can

make the breaching party pay for money you paid to a third party. That’s reliance.

Restitution means, roughly “to give back” or “restore to a previous position.” Illustration of the interplay between the expectation, reliance, and restitution interests with a simplified example. Suppose Seller contracts to deliver 3000 bushels of apples to Buyer for $8000. Buyer pays $1000 as a down payment. In anticipation of delivery Buyer hires two laborers to unload the apples, paying them $100 each in advance for their time. At the time for delivery, Buyer is ready and willing to pay the remaining $7000 to seller, but Seller breaches the contract by refusing to deliver. The market price when Buyer learned of the breach is $9000. Buyer has no other work for the laborers to do, and sends them home. Buyer then arranges for purchase of more apples (at $9000), to replace those she did not obtain from Seller, and makes new arrangements to have unloaded, but this time must pay two laborers $125 each. Buyer sues Seller.

a. What recovery would protect Buyer’s expectation interest? Her reliance interest? Her restitution interest? Are the interests mutually exclusive? Cumulative?

b. What would Buyer recover under the UCC? See §§2-711(1); 2-712

The common law of contracts has long embraced a substantial performance rule, limiting a non-breacher’s right to cancel a transaction and refuse a performance to situations in which the deficiency in the other party’s performance is “substantial” or “material.”

The provisions of the UCC as enacted are a compromise. In general, no distinctions here are made between merchant and consumer buyers. Under §2-601, A buyer may reject goods that “fail in any respect to conform to the contract.” However, after a rejection, §2-508 gives sellers a right to cure defective tenders of goods, subject to a number of qualifications. Once a buyer accepts goods, then §2-608 says that the buyer may revoke his acceptance only in certain limited situations. One important limitation is that the “non-conformity [of the goods] must substantially impair [their] value to him.” Different rules apply to installment contracts. Under §2-612, a buyer may reject an installment … “A buyer may call off the entire installment contract when a default “substantially impairs the value of the whole contract.”

Nuts and Bolts of RestitutionPlaintiff performed and handed over goods to Defendant. Defendant fails to pay. As a result of breach Plaintiff may rescind the contract. Once contract out of the way, then Defendant has Plaintiff’s property to

which he is not entitled. In order to prevent unjust enrichment law offers restitutionary remedies, commonly Plaintiff seeks fair market value of what he handed over to Defendant.

Once contract is rightfully rescinded, contract ceases to exist.

Acceptance §2-606

Rejection §2-601, 602, 513

Revocation of Acceptance §2-608

Buyer Remedies §2-711, §2-715

No Right to Revoke §2-608

Buyer Remedy§2-714 §2-715

Buyer Chooses to Keep Goods

Buyer Remedy§2-714 §2-715

Right to Cure Exercised (no breach)

§2-508

Seller has not Right to cure§2-508

Buyer Remedies §2-711, §2-715

Seller does not Exercise Right to cure

Buyer Remedies §2-711, §2-715

Colonial Dodge v. Miller

Rule of Law. The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it on the reasonable assumption that its nonconformity would be cured and it has not been seasonably cured. Revocation must occur within a reasonable time after discovery of the grounds for it and before alteration.

Facts. Miller ordered a Dodge station wagon from Dodge which included a heavy-duty package with extra tires. Miller picked up the wagon, met his wife, and exchanged cars. When she got home she noticed the spare tire was missing. The following morn Miller notified Dodge and insisted on having the spare tire. He was told there was no tire available; he informed the salesman that his check would be stopped for payment, and the wagon would be in the front of his houses for them to pick it up. He parked the car and ten days later it was towed. Dodge applied for license plates, registration, and title in defendant’s name, Miller refused the license plates. The tire was not included because of a nationwide shortage.

Plaintiff’s Argument: The missing spare tire did not constitute a substantial impairment in the value of the automobile and is only a trivial defect. Defendant’s Argument: The value of the car was substantially decreased to Defendant as a result of the nonconformity.

Issue. Whether failure to include spare tire with new automobile constituted a substantial impairment in value of automobile entitling buyer to revoke his acceptance of the vehicle?

Holding. (First Case) Yes. Failure to include spare tire with new automobile constituted a substantial impairment in value of that automobile entitling buyer to revoke his acceptance of the vehicle, where defendant had ordered special package which included special tires and defendant's occupation demanded that he travel extensively. Defendant’s concern with safety is evidenced by the fact that he ordered the special package which included the special tires.

Without a spare defendant would be helpless on the freeway until the morning hours. The dangers to attendant motorist are common knowledge and defendant’s fears are not unreasonable. Defendant notified plaintiff of his revocation the morning after the car was delivered to him. The Defendant did not discover the nonconformity before he accepted the vehicle, which does not preclude his revocation. The spare was under a fastened panel, concealed from view. Defendant had no duty to hold the goods other than with reasonable care for a time sufficient to permit the seller to remove them. (Second Case)Goes the other way.

Dissent. The requisite impairment of the value of the goods to the buyer must be substantial. It is not sufficient that the nonconformance be worrisome, aggravating, or even potentially dangerous. It must be a nonconformity which diminishes the value of the goods to the buyer to a substantial degree. Not the mere possibility of a flat in the early hours.

Acceptance, Rejection, Cure and Revocation Under Article II:

Revocation of Acceptance 2-608 Buyer’s remedy 2-711, 2-715

Acceptance 2-606 No Right to Revoke 2-608 Buyer’s Remedy 2-714, 2-715

Buyer Chooses to Keep Goods

Tender ofNon-Conforming Goods Right to Cure Exercised

[No Breach] 2-508

Seller has no Right to Cure 2-508Rejection 2-601, 2-602,2-513

Buyer’s Remedy 2-7112-715

Seller does not Exercise Right to Cure

Plante v. Jacobs

Facts. Jacobs were unhappy with construction work done by Plante. The most important defect is the installation of a wall a foot off from the plans.

Holding. Trial court found there was no damage to the Ds based on the testimony of two real-estate agents. The Supreme Court affirmed holding that moving the wall would involve an

unreasonable economic waste. The P is entitled to recover the difference in the value of the house as it stands with faulty and incomplete construction and the value of his house if it had been constructed in strict accordance with the plans and specifications.

Oliver v. Campbell

Rule of Law. ”That one who has been injured by a breach of contract has an election to pursue any of three remedies, to wit: (1) He may treat the contract as rescinded and may recover upon a quantum meruit so far as he has performed ; (2) or he may keep the contract alive, for the benefit of both parties, being at all times ready and able to perform; or, (3) he may treat the repudiation as putting an end to the contract for all purposes of performance, and sue for the profits he would have realized if he had not been prevented from performing.” A party who has been injured by the breach of an express contract, can pursue a variety of remedies including restitution when appropriate.

Facts. Plaintiff [attorney] and client [Campbell] entered into a written contract for the attorney to represent him in a divorce case. The contract stated that the plaintiff agrees to represent Campbell in the separate maintenance and divorce action which has been set for trial for a “total fee” of $750 plus court costs and other incidentals in the sum of $100 making a total of $850. After the trial [which lasted 29 days] ended the court indicated its intention to give Mrs. Campbell a divorce. But while her proposed findings were under consideration by plaintiff and the court, defendant Campbell substituted himself instead of plaintiff and thereby the representation by plaintiff of Campbell was “terminated”. The reasonable value of the services was 5,000 dollars. Campbell paid $450. Campbell died after the serves were rendered by plaintiff. Plaintiff sued his estate for the sum of 10,000 dollars, the reasonable value of services rendered as attorney. Campbell told him after defendant [wife] had offered proposed findings in the divorce action that he was dissatisfied with plaintiff as his counsel and would discharge him and asked him if he would sign a substitution of attorneys under which Campbell would represent himself. Plaintiff replied that he recognized Campbell had a right to discharge him but that the was prepared to carry the case to conclusion; that he expected to be paid the reasonable value of his services which would be as much as defendant’s counsel in the divorce action received, $9,000, to which Campbell replied he was not going to pay “a cent more”. There upon the substitution was signed and Campbell took plaintiff’s file in the divorce case with him.

Holding. The court said that plaintiff had performed practically all of the services he was employed to perform when he was discharged. The trial was at an end. The court had indicated its intention to give judgment against Campbell and all that remained was the signing of findings and judgment. The full sum called for in the contract was payable because the trial had ended. Here plaintiff alleged indebtedness on defendant’s part for services performed by plaintiff of a reasonable value of 10,000 of which only 450 had been paid. While it may have been more appropriate for him to have alleged that the price of such services was the contract figure, any deficiency of the pleading is eliminated by defendant’s answer setting forth that factor. Plaintiff’s action can thus be said to be common count indebitatus assumpsit, and there being no dispute as to the amount called for in the contract, the services having been in effect fully performed the court should have rendered judgment for the balance due on the contract which is conceded to be $300.

Dissent. The dissent argued that Oliver should be entitled to the 5,000 dollars. That is that no reasonable conclusion can be drawn from the evidence other than that the discharge amounts to a clear repudiation and abrogation of the contract in its entirety, in which case plaintiff is entitled to recover the reasonable value of the services performed.

Policy. If a party could always file suit for the fair value of services, without regard to the K, a party who’s performance turned out to be more expensive than was thought at the time of contract could make up for his disappointment by filing suit for restitution.

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Getting your restitution interest is the disgorgement of unjust enrichment, not the enforcement of a promise. Restitution interest is the benefit that the injured party gave to the breaching party. This will not be reduced by any losses the injured party would have incurred upon performance.

What is the measure of restitution interest? It’s the replacement value for the other party for the stuff they got, that is, the market price. You can get back your restitution interest even if that would put you in a better position than performance would have done. Expectation interest does not limit restitution interest when the contract breaker has gained value from the injured party’s part performance. Notice that when you get your restitution interest, there may not be any real promise being enforced. Instead, it is the disgorgement of unjust enrichment. Making restitution is not the same as enforcement.

Quantum meruit is more or less means a recovery that doesn’t aim at enforcing a promise, but rather recovering the value of performance rendered as restitution. Usually, this term indicates a restitution claim, but not always, so be careful.

Notes and QuestionsWhat’s a benefit? Traditionally, one recovers “benefits conferred” in a restitution action. We could say that you benefit me when you do what I want you to do. We then could value my benefit by what it would cost to get someone else to do what I asked you to do. On the other hand, we could insist on finding an actual increase in my assets before concluding there is a benefit. Do we focus on what it cost you or what I got from your efforts? Put another way, how far are we interested in compensating your reliance loss and how far are we interested in making sure that I am not unjustly enriched?

§371. Measure of Restitution InterestIf a sum of money is awarded to protect a party’s restitution interest, it may as justice requires be measured by either:

The reasonable value to the other party of what he received in terms of what it would have cost him to obtain it from a person in the claimant’s position, or

The extent to which the other party’s property has been increased in value or his other interests advanced.

Difficulties with Restitution as a Remedy for Breach of Contract in Building ContractsThe law offers restitution as an alternative remedy for breach of contract. Restitution can put an aggrieved party in a better position than had the contract been performed. It is not available if the defaulting party has substantially performed. Also the aggrieved party cannot have performed fully, as Oliver holds. Where those limitations do not apply, in the name of restitution the aggrieved party is entitled to receive “the reasonable value to the other party of what he received in terms of what it would have cost him to obtain it from a person in the claimant’s position,” what is commonly called the quantum meruit value of the work performed.

Example 1 is a good expectation between expectation recovery and restitution damages.

Does rescission mean the contract really vanishes? Rescission is a valuable remedy for any aggrieved party to a contract. It means that the aggrieved party is no longer bound to perform her side of the contract, and is free to look for others to perform defaulting party’s obligations. In both Boomer and Oliver cases, the CA courts wrote as if the logic compelled the conclusion that once a plaintiff exercises his right to rescind the contract, it “ceases to exist.” Then nothing exists to limit recovery to the contract price or contract rate for work performed. The situation is exactly as if the Owner had asked the Builder to build, but the parties said nothing about the price. In that case, Builder could recover the fair market value of his work. A contract is not a tangible thing but an idea. If we say that plaintiff has a right to rescind, this does not mean the contract never existed. Rather, the courts are saying that they will treat the contract as if its limitations were not controlling.

Does restitution fully protect reliance? At this point, some might be tempted to downgrade the importance of the L. Albert & Son case. Judge Hand said that a defendant could reduce the recovery by showing plaintiff had made a losing bargain. However, a plaintiff can sometimes avoid being held to the contract’s allocation of gains and losses by taking the restitution route. Oliver v. Campbell, shows one important limitation on restitution: plaintiff has no such right if he has completed his performance and is entitled to the contract sum.

Restitution for the Plaintiff in DefaultUCC §2-718 and 2-708 [194]

When the Promisor defaults, he can recover restitution only based on equity (the amount recoverable is the amount by which the non-breaching party would be unjustly enriched.)

A party in default must pay damages to the other party. Obviously when a party to a contract risks forfeiting what he has done trying to perform; this is an incentive to complete performance.

Breaches of contract are not always the result of morally bad contract. In long-term contracts one may encounter unexpected trouble only remotely related to one’s own actions.

De Leon v. Aldrete

Rule of Law. Whether the vendor who rescinds an executor contract for the sale of land shall return the purchase money paid depends upon the equities of each case. If it would be inequitable for such rescission to occur without restoration of money paid, then it must be restored.

Facts. Aldrete agreed to buy property from the De Leons for $1,500. He made payments but they were always late. The final payment was supposed to come July 6, 1961 but at that time Aldrete had only paid $1,070. De Leon agreed to sell his house to someone else for $1,300. Aldrete sued for his money plus $250 that he had spent on an architect.

Issue. Was the trial court correct in granting plaintiff damages.

Holding. No. Because the plaintiff’s failure to make the payments called for in the contract, the defendants had the right, and they did, “rescind” the contract of sale. However, plaintiff had paid in excess of 70 percent of the purchase price. The damages which defendants suffered as a result of plaintiff’s breach are definite and ascertainable from the evidence. Would have made 1500 but had to sell for 1300. Plaintiff gets his money minus 200 in damages for defendants for losing 200 on the sale of the property. Additionally plaintiff is allowed to collect interest on his money.

Peevyhouse v. Garland Coal & Mining Company

Rule of Law. Damages for breach of contract cannot be so excessive that they cause economic waste. Where the provision breached is incidental to the main purpose of the contract and where the cost of performance greatly exceeds the resulting economic benefit to the plaintiff, the plaintiff may recover damages equal only to the economic loss and is not entitled to the cost of performance.

Facts. Plaintiffs leased their farm to Defendant, a mining company for five years. Defendant performed strip mining. The contract included a provision where Defendant would do remedial work to fill in the holes caused by Defendant’s mining after the mining was complete. This work involved moving substantial amounts of dirt. Defendants did not do the remedial work. The trial court established that the remedial work would cost more than $29,000.00 and that the value of the farm would increase by $300.00. The court awarded Plaintiffs $5,000.00.

Issue. Is Defendant liable for the costs of the remedial work?

Holding. No. Case law, statute and Restatement of Contracts limit damages to those that do not cause economic waste or to those damages where the costs involved are not disproportional to the end obtained. Plaintiffs may not gain more in damages for a breach of contract that actual performance is worth. It is unlikely that a reasonable landowner would spend $29,000.00 to increase the value of a piece of land by $300.00. If breach pertains to a matter only incidental to the main purpose of the contract, and performance would be disproportionately costly, the proper measure of damages is the diminution in value measure. Garland Coal argued that the work would add only a few hundred dollars to the value of Peevyhouse’s land and that damages should be limited to that amount because that was all Peevyhouse had lost. The court noted that the majority followed the diminution in value rule when the cost of performance greatly exceeded the diminution in value. The court looked to the purpose of the contract and concluded that it was

for the mining of coal and the restoration was incidental. Even in building and construction contracts there is consideration of unreasonable economic waste when determining damages. The Restatement and other authorities consider waste and relative economic benefit when assessing damages. The measure of damages in a contract involving land is: the cost of performance limited to the total difference in the market value of the land before and after the work was performed, if that contract provision is merely incidental to the main purpose of the contract, and the cost of full performance is grossly disproportionate to the increase in value. Where such a result is in fact contemplated by the parties and is a main or principal purpose of the contract, however, the measure of the breach would be the cost of performance.

Dissent. Garland Coal has received all of the benefits of the contract. The element of remedial work was an essential part of this agreement and it was a condition to the right for Garland to use Peevyhouse’s land. If the value of the performance should be considered in determining damages, the value of the benefits received should also be considered. The law cannot make a better contract for the parties than they have made for themselves and should not alter it for the benefit of one party and to the detriment of the others. The judicial function of a court of law is to enforce a contract as it is written.

Both of the damages formulas reflect the expectation principle: they constitute different methods of estimating the position of the plaintiff if the contract had not been breached.

Hawkins v. McGee

Rule of Law. The plaintiff was entitled to expectancy damages plus incidental losses resulting from the breach. Expectancy damages are damages sufficient to put the plaintiff in the position he would have been if the contract had been performed. The correct measure of damages for a failure to perform a contract as promised is the difference between the result that was promised and what was actually provided. Plaintiff should be as good of a position as if defendant would have kept his contract. Without a promise you don’t get to contract and without contract you don’t get to contractual liability. Good for Offer and Acceptance analysis.

Facts. Hawkins (P) underwent surgery to repair scar tissue on his hand resulting from burns he sustained from contact with an electrical wire. Dr. McGee (D) gave Hawkins a 100% guarantee that he would be able to repair the scar tissue by grafting skin from his chest to his hand. The surgery was unsuccessful and Hawkins was left with a hairy hand. At trial, Hawkins sought damages for breach of contract due to McGee’s failure to perform including pain and suffering. The jury entered judgment for Hawkins but the judge ordered remittitur. Hawkins refused and brought this appeal. Hawkins' hand was scarred from contact with an electrical wire. He was approached by McGee, a doctor, about having the scars removed. McGee guaranteed to make the injured hand a "one hundred percent good hand". McGee used a technique of "skin grafting" that he was unfamiliar with and failed to remove the scars. Because McGee used skin from Hawkins's chest area, the graft caused the palm of Hawkins' hand to grow thick hair.

Issue. The true measure of damages as applied to this case would be the difference “between the value to [Hawkins] of a perfect hand such as the jury found the defendant promised him, and the value of his hand in its present condition…” Did the lower court follow this rule correctly?

Holding. The court held that the amount of damages awarded should be equal to the difference between the value of what Hawkins was promised to receive—a "one hundred percent good hand"—and what he in fact received—a hairy palm—as well as any incidental losses he incurred as a result of the breach. This is known as expectation interest (or expectation damages), which attempts to put the plaintiff into a position where they would have been had the contract not breached. The court made a point of dismissing the argument towards damages for the pain and suffering because pain and suffering were an implicit part of the contract for surgery. The case does not stand for the principle that expectation damages are the only proper measure of damages — there are many other measures. Another, for example, would be the cost to fix the hand, and another would be what it would be the difference between what Hawkins got and what he had before. The court found only that this was the proper measure of damages in a case of this kind in New Hampshire.

Discussion. The Supreme Court in NH restated the rule for damages in a contract breach. More specifically, the measure of damages is the difference between the value of the contract as carried out and the value of the contract as broken.

Sullivan v. Connor

Rule of Law. Expectation interests, restitution interests and reliance interests are used in measuring damages to put the promisee in the position in which she would have been had the promise been performed. Clear proof of a doctor’s promise of specific medical results may give rise to an enforceable contract.

Facts. Sullivan (P) entered into a contract with O’Connor (D), wherein D promised to perform two surgeries on P’s nose to enhance P’s appearance. After three surgeries on P’s nose, D failed to achieve the promised results. The surgeries performed by D actually worsened P’s appearance and further surgery would not improve P’s condition. The judge instructed the jury that: (1) P was entitled to recover her out-of-pocket expenses; (2) P could recover damages flowing directly, naturally, proximately, and foreseeably from the D’s breach; and, (3) P could be awarded pain and suffering on the third operation, but not the first two operations. The jury verdict awarded P $13,500. D appealed, claiming that the judge erred in allowing the jury to take into account anything but P’s out-of-pocket expenses.

Issue. Is P entitled to recover for the worsening of her condition and for the pain and suffering and mental distress involved in the third operation?

Holding. Yes. Judgment affirmed. Some courts view the promise by a physician like an ordinary commercial promise and permit a successful plaintiff to recover expectancy damages. Expectancy damages are measured by an amount of money intended to put the plaintiff in the position he would have been in had the contract been performed. Instead of expectancy damages, a successful plaintiff may elect restitution damages. Restitution damages are measured by an amount of money corresponding to any benefit conferred by the plaintiff upon the defendant in the performance of the contract disrupted by the defendant’s breach. Here, the court found restitution damages to be too meager. Other cases have indicated that reliance damages are to be applied in patient-physician actions on breach of alleged special agreements. Reliance damages

are measured by an amount of money to put the plaintiff back in the position he occupied just before the parties entered upon the agreement. Reliance damages compensate the plaintiff for the detriments she suffered in reliance upon the agreement. There is no general rule of law that recovery for pain and suffering or mental distress under reliance damages is barred, particularly when under the circumstance those damages were foreseeable. The mere fact that P agreed to go through some pain and suffering because of the initial operation does not change the fact that she went through additional pain and suffering in attempts to fix the problems created by D’s breach of contract. P was not confined to the recovery of her out-of-pocket expenses. P was entitled to recover for the worsening of her condition and the pain and suffering and mental distress involved in the third operation. These items were compensable on either an expectancy or a reliance view.

Discussion. The promisee is often said to receive “the benefit of the bargain” and the interest that is protected is called the expectation interest. The promisee has a reliance interest if she has changed her position to her detriment in reliance on the promise. The promisee has a restitution interest if she has not only relied on the promise but has conferred a benefit on the promisor.

Ordinary principles are that it is hardly a defense to a breach of K that the promisor acted innocently and without negligence. Measure of damages allows P to recover any expenditure made and for any detriment following proximately and foreseeably upon the D’s failure to carry out his promise. Tendency of formulation is to put the P back in the position he occupied just before the parties entered upon the agreement, to compensate him for determents he suffered in reliance upon the agreement.

There is not rule barring recovery from breach of K for psychological as well as physical injury. Suffering or distress resulting from breach going beyond that which is envisaged by treatment as agreed, should be compensable on the same ground as the worsening of the patient’s condition because of the breach.

Reliance Compensation = P’s Payments + Value before Operation – Value after Operation + (Expectation Mixed in Additional Pain Endured) + Psychological and Physical Injury

Question: How does court predict which category a statement falls in: Promise = CONTRACTUAL Liability for Breach or Prediction = No Breach

Purpose of expectation damages is to encourage reliance on Ks. The test is therefore what the one who relies believed.

The rule is [the basic test] that in this dichotomy classification of future sounding statements between predictions and promises, the general test is what a reasonable person in the position of the listener would have understood which side of the line it was on. It is therefore not dependent on what the speaker really intended.

The first major policy point:

What is the Rationale for Expectation Damages – You may safely rely on the promise of promise or damages will put you in the same position. The conventional rationale, the purpose for expectation damages it to encourage parties to Ks to rely on Ks to rely on Ks and plan their affairs consistent with the promise. Fuller and Perdue are cited as the developers of

Why aren’t Reliance Damages the primary principal?

We so much want to encourage reliance that we don’t require people to prove their reliance damages. Clearly expectation damages protect reliance in any instance of a profitable K.

Some reliance is hard to prove – Reliance of missed opportunities. If no K the other party would be looking for other deals. Would they have found?

Efficient Breach: It is related to efficiency related. We want to encourage reliance but breach in circumstances where benefits exceed cost of benefit.

Mitigation rules require mitigation of damages to lessen cost of breach, only to the extent that mitigation does not interfere with expectation.

Realists realize you don’t know where a non-breaching party would have been. Ascertaining precisely is a guesstimate. The law frequently has to choose between expectation and efficient breach. You must balance between over and under compensation.

Tilt toward efficient breach at perhaps cost of expectation interest:

New Business Breach

Peevy House v. Garland Coal

Plante v. Jacobs

Tilts in favor of expectation away from efficient breach:

Neri v. Retail Marine -- Loss Volume Seller

Reliance Recover with Hand Principle limitation

Restitution

A whole new set of policy objectives [efficiency won’t justify] e.g. Recovery of down payment of buyer, not necessary to protect expectation interests.

Policy is moral philosophy based. It’s just morally wrong to have seller keep the down payment and breach. Unjust enrichment.

Chapter 3Contract and Continuing Relations

There are three clusters of parties to contracts and each cluster exhibit distinct features: Deals can be (1) person to person; (2) person to organization; and (3) organization to organization.

“discrete” contacts are one time deal where the parties have never done business before and don’t plan on doing business again.

“relational” contracts are long term deals that involve people who know each other have plan on doing business for an extended amount of time.

In relational contracts “Parties treat their contracts more like marriages than like one night stands. Obligations grow out of the commitment that they have made to one another, and the conventions that the trading community establishes for such commitments; they are not frozen at the initial moment of commitment, but change as circumstances change; the object of contracting is not primarily to allocate risks, but to signify a commitment to cooperate… and the sanction for egregiously bad behavior, is always, of course, refusal to deal again.”

An Introduction to the Rules of Offer and AcceptanceClassical lawyers say that a contract requires (1) an offer; (2) an acceptance of the terms of that offer; and (3) consideration. Lawyers and Judges wanted to develop rules that would fix the exact moment that parties created a contract. Before this instant, the parties were still completely free to alter their negotiating positions or back out entirely. After formation, they list this power and were bound to a contract.

Contracts scholars said that offer- and-acceptance law served to (1) enable the court to mark off a dividing line between “preliminary negotiations” toward a deal and closing of a bargain; (2) ensure that the parties had agreed on some minimum quantity of sufficiently defined terms so that a court could find that they actually had made a deal; and (3) give the court a reliable method to determine the content of their deal.

UCC §2-204 repeals rules that require courts to find a precise instant when parties made a contract it says: (1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract. (2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined. (3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

The standard of interpretation – a meeting of the minds versus objective signs of agreement. Judges said contract rested on the “intention of the parties,” and there had to be a “meeting of the minds.” The requirement that there be a subjective union of the wills of the parties became not just a metaphor representing an idealized vision of agreement but a legal standard.

Objective theory of ContractThat actual intention and real choice are irrelevant; liability rests on outward objective manifestations. Courts interpret contracts in context in terms of what a reasonable person should understand from the communication. Secret reservations and private meanings of words do not control.

Silence in the face of an offer.

Silence in response to an offer is not an acceptance, except when it is. Suppose S writes to B, “Unless I hear from you in two days, you will be deemed to have accepted my offer.” Doing nothing does not create contractual liability. This rule protects free choice and avoids what could be a burdensome commercial practice – responding to ward off liability. However, in a continuing relationship, the parties can agree that renewals of their arrangement will take place automatically unless one party gives notice of desire to cancel it. This agreement can be implied from custom and past practice. This means that if S and B had often done business in the past, and B had accepted that it was reasonable for S to treat B’s silence as an acceptance, then B could be bound to a contract.

The Duration of OffersPeople must accept offers to create conventional contracts, but they cannot accept them after they have expired. An offer lasts only to any limit specified in its terms. Offer that specific no expiration time, but are on their face unlimited, are, nevertheless, open only for a reasonable time. How long is reasonable depends on the circumstances. In a rapidly fluctuating market this might be as short as the time to place a phone call or send an email. On the other hand, an offer to sell a business or a vacant lot might remain open for weeks.

Generally, an offeror can revoke an offer until it has been accepted. An offeror can revoke even if he promises to keep the offer open until a certain time because a promise not to revoke lacks consideration (and so is not binding) since the buyer gave nothing for it, and so that promise was not enforceable. There is a way for the offeree to secure an irrevocable offer under classical doctrine. The offeree could buy an option giving the offeror consideration for the promise not to revoke, and then the promise would be enforceable.

Some courts have applied Restatement of Contracts §90 to irrevocable, or “firm” offers. Once there is reliance on the promise not to revoke, the offeror loses his power not to revoke. UCC §2-205 explicitly repudiates the common law rule requiring consideration to create irrevocable offers and says that a merchant can make an irrevocable offer in writing, which will stay open despite the absence of consideration or any proof of actual reliance. The statute limits the duration of such an offer.

The Manner of Acceptance

One must use a reasonable means to communicate his or her acceptance. For example, it usually is safer to accept by fax when an offer was made by fax, since the use of a fax suggests the need for quick action.

Under classical doctrine, one must accept the precise offer made to create a contract. “The offeror is master of the offer.” For example one cannot accept to sell a five year old Ford for $10,000 by saying “I accept your offer to sell a four year old Chevy for $5000.”

Distinguish between recovaction of an offer, which is what an offeror does to terminate one that she has made, and a rejection, which is what an offeree does when she refuses to go along with a deal that the offeror has proposed. The offeree rejects an offer by expressly or impliedly commutating a lack of interest. And, importantly, a counteroffer is treated as a rejection. Once a counteroffer is proposed the offeree has terminated his power to accept offer even on the original terms.

Under UCC §2-207, if there is a “definite and seasonable expression of acceptance,” there is a contract.

The Acceptance When Mailed RuleThe general rule binds the offeror once the offeree deposits the letter of acceptance in the mailbox, since the offeree is likely to rely from that point. Acceptance occurs once the acceptance is mailed.Policy: When the offer is accepted, the offeree may act in reliance of that acceptanceMain Rule: Would a person who is the offeree be reasonable in assuming that their acceptance is invited and that their acceptance will conclude the deal.

The Requirement of CertaintyContracts must be reasonably certain to be enforceable. UCC §2-204(3) expresses the standard as “a contract does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.” Section 2-305 governs “open price terms” and provides that “ the parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if (a) nothing is said as to price; or (b) the price is left to be agreed by the parties and they fail to agree; or (c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person and it is not so set or recorded ….” Subsection (4), however provides; “Where, however, the parties intend not to be bound unless the price be fixed or agreed and it is not fixed or agreed there is no contract….”

A Policy Approach to Judicial Intervention

Four Policies that should govern the decision to intervene by the Courts.

(1) The Strangle Hold Policy. Sometimes a relationship is so important to the parties that changing it or leaving it would have unusually serious consequences for their lives. It is not easy for them to “exit” if the relationship goes wrong. They can’t pack up and go elsewhere. Examples include worker expelled from unions, doctors from medical societies, or brokers from stock exchanges. In such cases, only outside intervention may prevent or compensate what we see as serious harm. The fact that ne party holds the other in a stranglehold is a reason for intervention.

(2) The Dismal Swamp Policy. The agency may be getting in over its head, It may not be able to sort out conflicting claims of right and wrong in a complex relationship. The relationship has its own unique history, specialized vocabulary, power hierarchies, personal animosities , and implicit understandings. ( The obvious example is the difficulty faced by courts asked to decide contending claims to church property among schismatic factions. Each asserts that it, and it alone represents the true religion of the church. It is easy to see why courts are reluctant to intervene.

(3) The Hot Potato Policy. If most of the parties think that the outside intervention is undesirable and would be an uncalled for interference in their affairs, the agency’s attempt to intervene may simply cause resentment and resistance. This is particularly true if the legal agency operates as a court and uses adversarial procedure. Such procedures invite parties to show their opponents in the worst possible light. When a plaintiff charges

a defendant with wrongful conduct, it may aggravate an already difficult relationship. As a result, parties may not cooperate in fact-finding, settlement, or enforcement process.

(4) The Living Tree Policy. The autonomy of the relationship itself may be independently valuable. Chafee says that the “health of society will usually be promoted if the groups within it which serve the industrial, mental, and spiritual needs of citizens are genuinely alive … Legal supervision must often be withheld for fear that it may do more harm than good. If parties “legalize” their relationship, and structure it with a view toward invoking outside legal regulation to enforce their demands, they may sacrifice cooperation.

Contracts In The Family Setting

Which Promises Should the Law Enforce?

Courts and Contracts between Husband and Wife

Husbands and wives can make contracts with each other. The wealthy often agree to keep their property separate. One spouse may wish to buy the land, or artwork, or automobile of the other spouse. One agrees to buy the other agrees to sell.

Balfour v. Balfour

Rule of Law. There is a rebuttable presumption against an intention to create a legally enforceable agreement when the agreement is domestic in nature.Facts. Husband and wife lived together in Ceylon. They went to England during the Husband’s leave from work. Once the Husband had to return the wife stayed due to her illness (rheumatoid arthritis), and husband agreed to send her 30lbs per month. Their marriage deteriorated and she sued for the 30lbs per month to be enforced. Issue. Whether there are some types of agreements were the parties do not intend legal consequences.

Holding. The court reasoned that arrangements between husband and wife do not constitute a contract. This is because, according to the court, it is quite common and it is the natural and inevitable result of the relationship of husband and wife, that the two spouses should make arrangements for allowances. Moreover, they are not contracts because the parties did not intent that they should be attended by legal consequences. At the inception of the arrangement, the parties never intended that they should be sued upon. Agreements such as these are outside the realm of contracts altogether.

Mehren v. Dargan

Rule of Law. Post marital agreements are unenforceable if they violate statutory policy favoring no-fault divorce.

Facts. Husband appeals an order upholding the validity of a post marital agreement. In the agreement he promised to grant the wife all of his interest in certain of the parties’ community property should he use illicit drugs. Unfortunately, the husband did not keep his promise. Thereafter his wife filed for divorce.

Issue. Whether statutory regulations pertaining to marriage would be frustrated if the agreement was to be enforced?

Holding. Yes. Therefore the agreement between the parties is unenforceable. Marriage itself is a highly regulated institution of undisputed social value, and there are many limitations on the ability of persons to contract with respect to it, or to vary its statutory terms, that have nothing to do with maximizing the satisfaction of the parties or carrying out their intent. The conduct of one spouse would affect the divison of community property, the agreement frustrates the statutory policy favoring no fault divorce … as such, its objective is illegal under Civil Code section 1667, which renders a contract unlawful if it is “Contrary to an express provision of law. Contrary to the policy of express law… or otherwise contrary to good morals. Additional the contract fails for lack of consideration.

Notes

In Miller v. Miller, the husband and wife signed a contract stating the husband will give the wife money every month for her to perform the duties of a wife. Additionally they agreed to live together and maintain a faithful marriage. Mrs. Miller’s petition alleged and for purposes of the demurrer it was taken as true, that Mr. Miller was spending money on other women and refused to furnish Mrs. Miller with necessary clothing. The Supreme Court of Iowa found that enforcing this contract was against public policy. It explained that in order to enforce the husband’s promise, a court would have to decide whether the wife had carried out her part of the bargain. “Judicial inquiry into matters of that character, between husband and wife, would be fraught with irreparable mischief, and forbidden by sound considerations of public policy.

Did the Millers actually intend their agreement to be legally enforceable?

Cultural norms: We suggest that “living tree” and “dismal swamp” polices are not value-neutral in their impact. Consideration and public policy doctrines are not simply technical exercises in applying general rules. They reflect assumptions. Scholar point out the indirect discriminatory effect. It may confirm social practices that appear neutral and nondiscriminatory, but In fact perpetuate the exclusion of a particular group that has been subject to discrimination in the past. Women in contracts with husbands. A legal tradition evolved which recognized a world split into public and private spheres and segregated women into the private sphere where such legal ideals did not apply.

Premarital agreements: Until the 1960s, courts found premarital contracts that encouraged divorce to be against public policy. Court believed divorce would be encouraged by enforcement of agreements purporting to protect income and property of one spouse from the other spouse’s claims upon divorce. This view refused to allow the parties to use a contract to undercut legislation that protected the woman’s economic position.

In Posner v. Posner, decided in 1970 the court decided that premarital agreements that dealt with property division upon divorce were no longer necessarily against public policy. The Court pointed to no-fault divorce and the changing roles of women.

Court now enforce premarital agreements as long as they are not unconscionable. Substantive review of premarital contracts typically is justified on ideas of cognitive limitations and bounded rationality. These ideas often are criticized as paternalistic. It can be argued instead that substantive review of these contracts is more effectively defended on the grounds of the public interest in marriage.

Post marital agreements: Ultimately, postnuptial bargaining is likely to result in one of three outcomes. First, if both parties spouses have high outside options, they will divorce and seek happier lives outside of the marriage. Second, if the value of the husband’s outside option is low, the wife will not sign a postnuptial agreement and the spouses will continue to split the marital surplus equally. Third, if the value of the husband’s outside option is high, and the value of the wife’s option is low, he will receive his reservation price but nothing more.

Marriage and Cohabitation Contracts

Marvin v. Marvin

Rule of Law. The California court found that partners in nonmarital relationships may bring claims for property division based on both express and implied contracts.

Facts. Plaintiff and defendant lived together for seven years without marrying, with all property acquired during this time taken in defendant’s name. Plaintiff avers that she and defendant entered into an oral agreement where the parties would combine their efforts and earnings and share equally all property accumulated as a result of their efforts. Plaintiff agreed to give up a lucrative career as a singer and entertainer and assume the role of homemaker, with defendant agreeing to provide for all of plaintiff’s financial support. Defendant compelled plaintiff to leave his household in May of 1970, and continued to provide support to her until November of 1971. Thereafter, he refused to provide further support. Plaintiff brought suit to enforce the oral agreement, claiming that she was entitled to half the property and to support payments. The trial court granted judgment on the pleadings for the defendant.

Issue. Did the trial court err in granting defendant judgment on the pleadings?

Holding. Yes. The court held that (1)The provisions of the Family Law Act do not govern the distribution of property acquired during nonmarital relationship; such a relationship remains subject solely to judicial decision. The courts should enforce express contracts between nonmarital partners except to the extent that the contract is explicitly founded on the consideration of meretricious sexual services. (3) In the absence of an express contract, the courts should inquire into the conduct of the parties to determine whether that conduct demonstrates an implied contract, agreement of partnership or joint venture, or some other tacit understanding between the parties. The courts may also employ the doctrine of quantum meruit, or equitable remedies such as constructive or resulting trusts, when warranted by the facts of the case. The trial court erred in granting defendant judgment on the pleadings because the plaintiff’s complaint states a cause of action for breach of an express contract, and can be amended to state a cause of action independent of allegations of express contract. Defendant first and foremost

claims that the alleged contract should not be enforced because it violates public policy due to its close relationship to the immoral character of the relationship between plaintiff and defendant. However, a contract between nonmarital partners is unenforceable only to the extent that it explicitly rests on the consideration of meretricious sexual services. Courts should look to the consideration underlying such agreements to determine their enforcement. Defendant secondly claims that the contract violated public policy because it impaired the community property rights of Betty Marvin, his lawful wife. However, there is no reason that enforcement of the contract between plaintiff and defendant against property awarded to defendant by the divorce decree will impair any right of the lawful wife; therefore it is not against public policy. Defendant next contends that enforcement is banned by civil code requiring all contracts for marriage settlements to be in writing. However, a marriage settlement is an agreement in contemplation of marriage, and the present contract does not fall within this definition. Previous precedent has held that the Family Law Act suggests that property accumulated by nonmarital partners in an actual family relationship should be divided equally. Although courts have generally not recognized the fact, common law principles hold that implied contacts can arise from the conduct of the parties. Courts have allowed partners to retain a proportionate share of funds or property contributed to a relationship, but have disallowed such an interest based on contribution of services. Because the Family Law Act is intended to eliminate fault as a basis for dividing marital property, implied contractual claims should be allowed in nonmarital relationships.

Dissent. The judicial overreach, the majority perform a nunc pro tunc marriage, dissolve it, and distribute its property on terms never contemplated by the parties, case law, or the legislature.

Discussion. The Court examined how the distribution of property acquired in a non-marital relationship should be governed. The court allowed not only plaintiff’s claim that an express contract existed and should be enforced, but also found that implied contracts may be found in such situations

Notes and Questions

Implied contracts between those who cohabitate: the Marvin case held that the parties who cohabited could make express or implied contracts dealing with property or other matters involved in their relationship. However, Michelle Marvin was unable to prove that there was an implied contract to share income based on how the parties lived together.

Not all states follow Marvin: The Supreme Court of Illinois held in Hewitt v. Hewitt, The issue of unmarried cohabitants’ mutual property rights … cannot appropriately be characterized solely in terms of contract law, nor is it limited to considerations of equity or fairness as between the parties to such relationships. There are major public policy questions involved in determining whether, under what circumstances and to what extent it is desirable to accord some type of legal statutes to claims arising from such relationships. The issue is whether it is appropriate for this court to grant legal status to a private arrangement substituting for the institution of marriage sanctioned by the State. The court holds that plaintiff’s claims are unenforceable for the reason they contravene the public policy implicit in the statutory scheme of the Illinois Marriage and Dissolution of Marriage Act, disfavoring the grant of mutually enforceable property rights to knowingly unmarried cohabitants.

Contrast Marvin and Hewitt.

In re Baby M.

The Court was asked to determine the validity of a surrogacy contract. The court invalidated the surrogacy contract because it conflicts with the law and public policy of this State. Essentially, the court said that the surrogacy agreement was an attempt to evade the adoption and child custody laws of the state.

Which Promises Should the Law Enforce? – The Response of Contract Doctrine and the Role of Form

“Bait”: Promises by a Family Member with Money to Influence the Lives of Those Without It

This section is a look at promises made to family members to induce them to do things desired by the one with money. These are not commercial situations, but courts often use contract law as a tool to resolve problems that do not fit into family or property law. A disproportionate number of well-known contract cases follow this pattern, and so it is a useful paradigm for the study of contract doctrine, the limits of judicial capability, and the advantages and disadvantages of thinking of agreements as creating relationships rather than transactions.

To make a gift the law insists on donative intent plus delivery of property. The Restatement of Trusts, §2 defines a trust as “a fiduciary relationship with respect to property, subjecting the person whom the title to the property is held to equitable duties to deal with the property for the benefit of another person.”

Is transaction between father and son for law school a contract/ This raise the question of whether there was “consideration” for the father’s promise. Was this “a bargained-for exchange between the parties,” or rather, was it no more than “a statement of intention or a promise to make a gift to the son on a certain condition?” A completed gift requires no consideration to be enforced. However, a promise to make a gift in the future – or, for that matter, a promise to make a will or create a trust – typically will be unenforceable without it. There are some exceptions. Often it is difficult to distinguish a conditional gift from a bargain.

Legal formality: We can view the requirements for making a legally enforceable will, gift, trust, or contract as forms. That is, there is a necessary pattern of conduct or ceremony which people must follow to trigger a particular legal relationship. For example, wills require a writing witnessed by two people. Gifts require intent plus delivery. Trusts require a declaration to hold specific assets for another, and contracts require an exchange (and often, but not always, a writing as well). We can ask about the costs and benefits of formal requirements.

The costs of legal form are obvious. One person may clearly intend to transfer property, and the other may expect to get it and even rely on the transaction. However, if they have not met a formal requisite, the attempted transfer of rights fails.

The functions of benefits of form may not be obvious to everyone. The persistence of formal requirements in many legal systems suggests, but does not prove, that there may be some, or a great deal of utility in them. Professor Fuller says that legal formalities have three functions – cautionary, evidentiary and channeling.

Cautionary: If people must go through a formal ceremony to create legal relationships, it may warn them that they are doing something serious and important. Such a warning should serve to prompt thought about the commitment being made. Insofar as people view exchange-based bargains as serious and as slightly dangerous, a contract also serves as a form. Bargaining warns people not to be carless in the promises they make.

Evidentiary: some forms give us evidence that a transaction took place while others also tell us what the terms of the transaction are. Written contracts serve the evidentiary function nicely, provided the parties understand what they have signed. Oral contracts are less useful.

Channeling: A legal form is important to people who want to do something with legal consequences. The law says that you have no gift if there is no intent or delivery. It also says that you have no gift if there is no intent or delivery. It also says that you can make a gift successfully if you do intend to make one and hand over property or a token representing it. If you want to be sure that you have a legally enforceable contract, it is useful to find a blueprint telling you how to build one.

Courts need channels too. The more objective the formal requirements, the easier it is for judges. Consideration, Fuller says may serve some of this channeling function. In planning a contract, a lawyer knows that she is taking far fewer risks if she cats the arrangement as an exchange. The courts can quickly sort clear cut exchanges from all other promissory transactions, and they may refuse to act or demand strong reasons for enforcement of non-exchanges.

Hamer v. Sidway

Rule of Law. In general, a waiver of any legal right at the request of another party is sufficient consideration for a promise. Bargain-for legal detriment. Changing your legal status. The nephew was forbearing his legal rights.

Facts. William E. Story and his nephew, William E. Story II, agreed that the uncle would pay his nephew $5000 if the nephew would refrain from drinking, using tobacco, swearing, and playing cards and billiards for money until he turned 21. When the nephew turned 21 his uncle sent him a letter that indicated that the nephew had earned the $5000 and that he would hold the money with interest until the nephew became capable of taking care of it responsibly. The nephew accepted the terms. The uncle died twelve years later without having transferred the funds to his nephew.

Issue. Is forbearance from permissible legal conduct sufficient consideration to create a valid and enforceable contract?

Holding. Yes. The mere abstention from a permissible legal conduct is sufficient consideration to make a promise based on that forbearance a valid contract. Consideration is not measured as a benefit to the promisor. When an offer is ambiguous regarding whether acceptance shall be in the form of performance or an exchange of promises, determining if the offeror was indifferent to whether acceptance be by performance or promise is accomplished by interpreting the language of the offer under the circumstances in which it was made. The court held that in this case, the language of the offer made it clear that the uncle sought acceptance by performance and not by a promise to perform. Defendant contended that the contract was invalid because it lacked consideration and that there is no consideration unless the promisor is benefited. The court stated that consideration may consist in either some right, interest, profit, or benefit to one party, or some forbearance, detriment, loss, or responsibility given, suffered, or undertaken by the other. It is immaterial whether the consideration does in fact benefit the promisee or a third party or is of substantial value to anyone. Refraining from something that one is entitled to do is a sufficient detriment to create an enforceable contract. Disposition: Reversed in favor of Hamer (P).

Discussion. Under Restatement 2nd 32 if an offer is ambiguous it can be accepted by a promise or actual performance. If acceptance is through performance the contract is unilateral, if through promise the contract is bilateral.

Consideration is defined as a valuable consideration, in the sense of the law, may consist ethier in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility given, suffered, or undertaken by the other.

Courts will not ask whether the thing which forms the consideration does in fact benefit the promise or a third party, or is of any substantial value to anyone. It is enough that something is promised, done, forborne, or suffered by the party to whom the promise is made as consideration for the promise made to him.

Notes and Questions

What is “consideration” and how is it different from a contingent gift?

Restatement of Contracts §71. Requirement of Exchange; Types of Exchange

(1) To constitute consideration, a performance or a return promise must be bargained for.(2) A performance or return promise is bargained for if it is sought by the promisor in

exchange for his promise and is given by the promisee in exchange for that promise(3) The performance may consist of

(a) An act other than a promise, or(b) A forbearance, or(c) The creation, modification, or destruction of a legal relation.

(4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promise or by some other person

Williston’s tramp case. If a benevolent man says to a tramp: 'If you go around the corner to the clothing shop there, you may purchase an overcoat on my credit,' no reasonable person would understand that the short walk was requested as the consideration for the promise, but that in the

event of the tramp going to the shop the promisor would make him a gift. Yet the walk to the shop is in its nature capable of being consideration. It is legal detriment to the tramp to make the walk, and the only reason why the walk is not consideration is because on a reasonable construction it must be held that the walk was not requested as the price of the promise, but was merely a condition of a gratuitous promise. It is often difficult to determine whether words of condition in a promise indicate a request for consideration or state a mere condition in a gratuitous promise. An aid, though not a conclusive test, in determining which construction of the promise is more reasonable is an inquiry whether the happening of the condition will be a benefit to the promisor. If so, it is a fair inference that the happening was requested as a consideration. On the other hand, if, as in the case of the tramp stated above, the happening of the condition will be of no benefit to the promisor but is obviously merely for the purpose of enabling the promisee to receive a gift, the happening of the event on which the promise is conditional, though brought about by the promisee in reliance on the promise, will not properly be constructed as consideration. In case of doubt where the promisee has incurred a detriment on the faith of the promise, courts will naturally be loath to regard the promise as a mere gratuity and the detriment incurred as merely a condition. But in some cases it is so clear that a conditional gift was intended that even though the promisee has incurred detriment, the promise has been held unenforceable. An Introduction to the Doctrine of Consideration

Consideration – a promise for an act: Seller promises to deliver a car if buyer will pay $1,000. If the seller refused to deliver the car although the buyer had paid the seller money. One way to validate the promise is to show that buyer gave consideration for the promise. The $1,000 buyer paid seller would be consideration to support enforcement of the seller’s promise to deliver the car. This is the easiest case. Buyer paid the money, and this was the price for the promise. Contact’s scholars call this a “half-completed exchange.”

Consideration – a promise for a promise: Suppose the buyer had never paid the $1,000 as promised. However, buyer was ready, willing, and able to do so when seller refused to deliver the car. There would still be consideration for seller’s promise. Buyer’s promise to pay would serve as consideration for seller’s promise to deliver. Consideration can be either an action or a promise to act. However, instead of promising to act, I can also promise not to act when I had a legal right to do so. That, too, works as consideration. My promise not to do something is consideration for your promise to pay. A promise is consideration, however, only if performing it would be consideration. Suppose, in exchange for your promise to pay me $1,000, I promise not to smash the windows of your store. Since I had no legal right to smash your windows, my promise is not consideration for yours. Of course, this does not mean that my promise might not be valuable if I had the power to smash your windows and the police were unlikely to protect you. Consideration is not just something you want or value. It must be something I have a legal right to withhold from you if you do not pay.

Consideration – bargained for and given in exchange: Not just any act or promise will serve as consideration. This is ture even if the action or the promise was or would be very valuable to the one getting it. Consideration must be bargained for and given in exchange. Example. Bill gives his sister $5,000 for school. The sister now has a good job and has a sports car. The sister out of gratitude promises to give Bill the car once she gets a new one. However before the sister gets a

new she gets into a big fight with Bill and refuses to carry out her promise. If Bill wishes to pursue the matter, is the sister’s promise to transfer title to the car supported by consideration? No. The $5,000 given by Bill to sister is not consideration for her promise to give him the car. It was not “bargained for and given in exchange.” “Bargained for” does not mean “haggled over” but rather means that paying $5,000 would have to be the inducement for her promise to transfer title to the car. Bill’s kind act in the past prompted her promise, but he gave her the money as a gift with no strings attached.

Consideration – transforming gifts into bargains to make them legally enforceable: Suppose June wants to promise to give her car to bill. However, her lawyer said that promises to make gifts are not legally enforceable. She asks Bill to promise to give her a book in exchange for her promise to deliver the car. Now is June’s promise enforceable as supported by consideration? Some courts have said things such as “We look for only the presence and not the adequacy of consideration.” Some courts have refused to look behind the form of the transaction to the real transaction. The Restatement of Contracts follows the bargin theory of consideration. Since the promise to deliver the book in no way induced June’s promise, it says there is no consideration. However, it says that there would be consideration if June’s motives were mixed. If she acted both to get the book because she really wanted it, and to express her gratitude, then there would be consideration.

Consideration – policing bargains for equality? A promise and the consideration for it need not be of equal value. A prominent exception to this rule concerns an exchange of unequal sums of money. A promise to pay $100 in exchange for $5 is unenforceable for want of consideration. Courts often explain by reciting that while they will not investigate the adequacy of consideration, they will not enforce a bargain which on its face can be nothing but an unequal exchange. Despite the form of bargain, the transaction would be a gift of $95. We have few tests of a court’s willingness to follow past declarations about disinterest in the adequacy of consideration. So long as the consideration is sufficient to make credible the idea that it was bargained for and given in exchange, courts do not ask whether one party made a good deal and the other a very bad one. However courts will refuse to enforce grossly disproportionate exchanges on the ground that they were procured by fraud, are unconscionable, or were the product of duress.

Consideration – benefit or detriment? There is a contract if Ann promises to transfer title to car if Bob agrees to serve as the county chairperson for Red Cross. Although there is no financial benefit for Ann, serving as chairperson is a legal detriment to Bob.

Consideration – modifications of bargains and pre-existing legal obligations: One of the standard consideration problems involves the modification of ongoing bargains. Suppose Dan Architect agrees to superintend a construction project for Bruce Builder for $10,000 fee. During the project, Dan unjustifiably takes the plans and refuses to continue unless Bruce pays Dan an additional $2,000. Bruce promises to do so because it is cheaper to buy off Dan than to do anything else. Is there consideration for Bruce’s promise to pay Dan an additional $2,000. No, because Dan demanded an additional amount to do no more than he originally promised. Consideration serves to protect reliance on bargains and blunt the leverage people in Dan’s position get when their trading partners cannot replace them easily.

Example. Suppose Angela borrowed $500 from Julia and agreed to repay the money on December 1st. On December 1st, Angela had only $400. Julia needed money then, and so she promised to discharge the debt if Angela paid her $400. Payment of $400 would not be consideration for Julia’s promise. Angela had a pre-existing duty to pay the debt in full. She promised nothing she was not already bound to give. However, there must be a pre-existing legal obligation to trigger the rule. Suppose Angela owes Julia $500, payable on December 1st. However, Julia needs money because of unexpected obligations. She asks Angela if she could repay her on November 25th. Angela says she only has $400, but is willing to pay that then in full satisfaction of the debt. Since Angela’s payment was early, she was under no pre-existing legal obligation to pay then.

Builder promises to build a house, but he finds that there is an underground stream on the property, which he will have to divert for more money. Owner promises to pay the additional cost. This would seem to be an example of pre-existing duty. Some courts say if a unforeseen event causes a great additional expense, that this is an exception to the consideration doctrine and will enforce the promise.

UCC §2-209 states: “An agreement modifying a contract within this Article needs no consideration to be binding.” The comments say that the parties must modify their contract in “good faith.” Leaves it to courts to work out which modifications are good and which ones are bad.

The Restatement of Contracts §89 says that a promise modifying a contract is binding without consideration: (a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or (b) to the extent provided by statute; or (c) to the extent that justices requires enforcement in view of material change of position in reliance on the promise.

Consideration – illusory and alternative promises: whether a promise is illusory often turns on how we translate it. But it basically is a promise that is translated to “I’ll perform, if I feel like it.” Not this easy to spot illusory promises because they are seldom as blatant. Example, A may hire B to act as agent for three years. However buried in the mass of clauses on their printed form contract is one that provides that either A or B can end the agreement at any time. As you can see, this gives either party the legal right to perform or not to perform the agency agreement. Without more, this would be an illusory promise. If the contract requires notice, then both parties are bound at least until the period expires. This would be enough to make the promises real and not illusory.

Promises to repay despite defenses to the debt: Suppose Bob owes Jane $1,000, and he did not repay the money when payment was due. Then Bob discovers he has one of several defenses to the debt: (1) He was a minor when he contracted the debt, it was not for the “necessaries,” and he disaffirms the debt within a reasonable time after he reaches the age of majority; (2) The statute of limitations runs before Jane files an action to collect the debt. Despite having one of these defenses, Bob promises Jane that she will be repaid. Jane gives no new consideration for the promise. Nonetheless, common law courts would enforce it.

Wavier: Wavier is one of the wild cards in the common law. The term means that a person may lose a right when she voluntarily gives it up. Of course she might be estopped if she misled the other party into relying on her statements such that allowing her to assert the right would be unjust. However, a waiver does not require proof of reliance.

Consideration and anti-consideration – Restatement §90: The major exception to the consideration doctrine offered by the Restatement is §90. Courts can enforce promises without consideration on the basis of reliance on a promise that the promisor should have expected to induce reliance, to the extent required to prevent injustice. A court could use it to cancel a great deal of the impact of consideration doctrine. The alternative reliance-on-a-promise doctrine is meant to give courts a great deal of discretion, and thus its application in a particular case is usually uncertain. Courts often talk about §90 before applying standard consideration and offer-and-acceptance doctrine. While parties who assert reliance on a promise often lose, many states have accepted the doctrine, and courts always could develop it much more.

The Conditional Gift

Kirksey v. Kirksey

Rule of Law. A mere gratuitous promise is without the consideration necessary for enforcement as a contract.

Facts. Plaintiff was the wife of Defendant’s brother, but was now a widow with several children. Plaintiff lived on leased public land and would have attempted to secure the land had she continued to reside there. Defendant lived approximately sixty to seventy miles from Plaintiff. After hearing of his brother’s death, Defendant wrote Plaintiff and offered to provide her with land to live on if she came to see him. Plaintiff left the public land she was leasing and moved to Defendant’s land. For the first two years, Defendant put Plaintiff and her family up in a comfortable home and gave her land to cultivate. After the first two years, Defendant removed Plaintiff and placed her in an uncomfortable house in the woods. Defendant then required that Plaintiff leave the house in the woods.

Issue. Is there consideration to enforce Defendant’s promise?

Holding. No. Defendant’s promise was gratuitous, and as such cannot be enforced due to lack of consideration. Although the Justice writing the opinion would consider Plaintiff’s inconvenience of moving a distance of sixty miles, a sufficient consideration to enforce Defendant’s promise, the Court finds that the promise is merely gratuitous and lacks consideration.

Discussion. The Court finds Defendant’s promise to be gratuitous and will not enforce it due to lack of consideration. It may be that the court was reluctant to interfere in a family dispute. Today, the facts presented in this case would likely be analyzed under promissory estoppel.

Ricketts v. Scothorn

Rule of Law. Equitable estoppel bars a party from asserting lack of consideration where reliance was induced by the party asserting there was no requisite consideration.

Facts. Plaintiff, the maker of the note was Defendant’s grandfather. A witness recalled he came in and gave her the note stating that he had fixed it so she did not have to work anymore. Plaintiff died two years later having only paid one year of interest and never paid the full balance of the note and has expressed regret regarding his failure to pay the note upon his death. There was no promise on the Plaintiff’s part to do or refrain to from doing anything, although she did abandoned the job in reliance on the note. One year after quitting her job as bookkeeper, Defendant secured another position as a bookkeeper.

Issue. Does equitable estoppel preclude the defendant from alleging that the note is lacking consideration?

Holding. Since the grandfather, as maker of the note, intentionally influenced the granddaughter into changing her position on the belief that note would be paid when due it would be inequitable to permit him to escape payment of that note on the ground that there was no consideration. The evidence conclusively established equitable estoppel.

Discussion. Recognition of reliance may help solve injustice in cases where an agreement is unsupported by consideration.

Restitution of benefits conferred under contracts made unenforceable by the Statute of Frauds.

Restatement §375 provides that one is not barred from restitution “because the Statute of Frauds unless the Statute provides otherwise or its purpose would be frustrated by allowing restitution.”

Davis v. Jacoby

Rule of Law. An offer invites the formation of a bilateral K by an acceptance amounting in effect to a promise by the offeree to perform what the offer requests, rather than the formation of one or more unilateral K by actual performance on the part of the offeree.

Facts. Blanche Whitehead and her husband Rupert enjoyed a close relationship with their niece Caro Davis (P). The Whitehead’s suffered health and financial difficulties and Rupert asked Davis to come to California to help take care of Blanche and assist Rupert with his business affairs. She was promised an inheritance in return for her assistance. One week after Davis agreed Rupert committed suicide. Davis moved to California to care for Blanche. Upon Blanche’s death Davis learned that Rupert had left his entire estate to two nephews. Davis sued Rupert’s estate (Jacoby, D), asserting that her agreement with Rupert had created a contractual obligation for him to make a will and bequest his estate to her and that she was entitled to quasi-specific performance. Davis appealed the trial court’s ruling in favor of the estate that no contract had been formed because Rupert had made a unilateral offer that could only have been accepted via performance.

Issue. What type of offer is presumed to have been made where the offer is ambiguous as to whether it is unilateral or bilateral?

Holding. The court pointed to Rupert’s statement “Will you let me hear from you as soon as possible…” as a request for an immediate reply so that he could make arrangements and rely on Davis’s promise to come to California. Furthermore, since Rupert asked her to take care of them until both of them had died, it was apparent that he had to rely on Davis’s promise to continue to care for Blanche if she survived him. The offer was an offer for a bilateral contract.  Mr. Whitehead knew form his past relationship with Davis that if they promised to perform (taking care of Mrs Whitehead) they would perform.  Whitehead expressly indicated the nature of the acceptance desired by him, Davis’ promise that they would come to California and do the things requested by him.  The Davis’ immediately sent their promise back, and Mr. Whitehead received the same.  The Davis’ moved to California, and despite Mr. Whitehead’s suicide, they continued to perform by administering assistance to Mrs. Whitehead.

PL A: The letter was an offer to enter a bilateral K, dependent upon PL promise to perform as acceptance.

Def A: (Jacoby) The letter of April 12, was an offer to contract, but that offer could only be accepted by performance and not by a promise to perform.  The offer was revoked by the death of Mr. Whitehead before performance.

Restatement §86. Promise for Benefit Received

(1) A promise made in recognition of a benefit previously received by the promisor from the promise is binding to the extent necessary to prevent injustice

(2) A promise is not binding under Subsection (1)(a) If the promise conferred the benefit as a gift or for other reasons

the promissor has not been unjustly enriched; or(b) To the extent that its value is disproportionate to the benefit

If Law is to Intervene, What Remedies are Appropriate?

Reliance and the Expectation interest in the Family Context

Brackenbury v. Hodgkin

Facts: Widow Sarah Hodgkin (D) wrote to her daughter and son-in-law (“Brackenbury”, (P)) and asked them to move from Missouri to Maine to care for her for the rest of her life. In exchange Mr. and Mrs. Brackenbury were given the use of the farm and household goods and were to receive the property upon Hodgkin’s death. Ps moved to Maine and lived on the farm and cared for D until an argument ensued several weeks later. D asked P to depart and executed and delivered the deed to the property to her son Walter. P sued for a reconveyance of the property. D appealed the trial court’s judgment for P.

Issue: What are the legal consequences of an offeree beginning performance of a unilateral contract?

Holding and Rule: Beginning performance of a unilateral contract creates an option contract that renders the offer irrevocable until the offeree has had a reasonable time to complete performance.

i. Facts: ∆wrote to the πs and asked them to move from Missouri to Maine to care for her for the rest of her life. In exchange πs were given the use of the farm and household goods and were to receive the property upon Hodgkin’s death. πs moved to Maine and lived on the farm and cared for the ∆until an argument ensued several weeks later. ∆ asked π to depart and executed and delivered the deed to the property to her son. π sued for a reconveyance of the property (equitable remedy).

ii. Rule: Beginning performance of a unilateral contract creates an option contract that renders the offer irrevocable until the offeree has had a reasonable time to complete performance.

iii. Analysis: The π’s were there and they were trying to perform. ∆ was preventing the πs from performing so ∆ is actually the one breaching.

Rosen says: This was a unilateral K. The K was never completed but the court says it was so they rule in favor of the π, treating it like a bilateral K. Rosen says that even though a unilateral K was created, performance had begun so the offer should be irrevocable and that should be the reasoning. Hodgkin was preventing the performance of the other party. The result would be the same under UCC sec 45.

An option contract is created when the offeree begins the invited performance under a unilateral offer. In this case D’s offer was in writing and there was no dispute regarding its terms. D’s offer was unilateral and P’s act of moving and beginning to care for D was substantial part performance.

Effectiveness of Mediation

Mediation is a process in which parties to a dispute use a third party who, unlike an arbitrator, does not have power to dictate the outcome. Mediators act in a number of ways: they can suggest new solutions to parties; they can help parties recharacterize events; they can separate parties and act as go-betweens, translating their concerns into less emotional langue.

Franchise and Employment Relations

The Franchise

A. Creating the Relationship

Promissory Estoppel — Promises that induce a foreseeable detrimental change of position by the promise. The party can enforce the promise even

if other essential elements of a contract are not present. Promissory estoppel is equitable relief. Damages here would be equitable relief. Differs by jurisdiction.

a. If the contract lacks consideration is a fort or at will employment you might be able to enforce under promissory estoppel. Go through contract analysis then to promissory estoppel analysis.

Equitable remedy — You might persuade the court to award damages where damages aren’t necessarily appropriate. In some cases expectation damages can be achieved. Might not call it expectation damages.

Look for the injustice — If injustice can only be avoid by awarding damages. Just one of the things they look at. If this is the only way then appropriate.

Subsequent actions seen as independent choices and not motivated by reliance on the promise do not give rise to promissory estoppel. If you are notified by other party that there is no contract you cannot keep acting in reliance to contract and try to collect damages.

RSC §90 Promise Reasonably Inducing Action or Forbearance a. Foucs on this. (1) A promise which the promisor should

reasonably expect to induce action or forbearance on the part of the promise or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.

b. (2) A charitable subscription or a marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance.

Hoffman v. Red Owl Stores, Wis. 1965 a. Facts: Lucowitz a agent of red owl agreed with Hoffman that red

owl would build a store and stock it for Hoffman to operate. Hoffman agreed to invest 18 k. Hoffman sold his bakery and grocery store business. Hoffman then purchased the building site then rent home for family. Hoffman sued for all these expense and the families lost income.

b. Issue: Does promissory estoppel apply here?c. Holding: Yes. Lucowitz knowingly led the Hoffmans to sell their

business to move etc. and should have reasonable known that his promises would induce Hoffman’s reliance. No lost profits. Although the agreement was to indefinite to enforce the Hoffman’s reliance on the agreement entitled them to reliance damages. Because of all the conditions for promissory estoppel were satisfied.

1. The agreement was one that red owl should have realized the Hoffmans would rely on.

2. The agreement induced such reliance.3. The Hoffmans suffered a loss and injustice could only be

avoided by compensating the Hoffmans for their lost.

d. RULE: Promissory estoppel is appropriate where red owl should have realized their action would induce Hoffman to rely on these actions to Hoffmans detriment and injustice can be avoided only by compensating Hoffman.

e. Thoughts to ponder:1. Was the reliance really reasonable?2. Should they have gotten independent advice?3. Was good faith a factor?4. How important was timing?

The measure of recovery in promissory estoppel.

Hoffman v. Red Owl is often cited as limiting recovery in promissory estoppel to reliance damages.

Ending the Relationship

Collins Drugs, Inc. v. Walgreen Co.

Facts. Walgreen decides to get out of the franchise business in Wisconsin. A bunch of franchisees are uptight about this.

Issue. Does the WI Fair Dealership Law permit a granter to cancel all dealership arrangements for bona fide economic reasons?

Holding: No: you have to have good cause. No injunctive relief, only damages.

Rule of Law. Several different resolutions, depending on when the dealership

Reasoning. The legislature wasn't trying to create a perpetual care responsibility for dealerships, but dealers should be reimbursed for losses resulting from termination. The law covers all such circumstances, including non-discriminatory withdrawals from an entire geographic range. The court suspects that this law may not be a good idea, but acknowledges that it's not for them to say.

Notes. The Court explained its Walgreens decision in Remus.

Walgreen does not stand for the proposition that the Fair Dealership Law forbids a franchisor to make system-wide changes without the consent of every franchisee. Walgreen we found was trying to eliminate the dealers who had built its reputation in Wisconsin, so that it could open its own stores and appropriate the goodwill that the dealers had created … This was just the sort of conduct that the Wisconsin legislature had wanted to prevent.

1. Alternative Dispute Resolution a. Mediation is a process in which parties to a dispute use a third party who does

not have power to dictate the outcome—as does an arbitrator. They can suggest

new solutions to parties, they can help parties recharacterize events, they can separate parties and act as go-betweens, translating their concerns into less emotional language. However, mediation does not always prove to be an effective tactic. Many times, parties are not looking to settle. Sometimes the parties are fighting for a cause. Other times, mediation fails do to outside influences on the parties. Mediation is simply a tool that parties use to avoid litigation and ultimately find whatever it is they are looking for. Problems arise when parties’ goals differ. This is one of the weaknesses in the mediation process. Mediation just requires that the parties get together in a room with a third party mediator. Nothing more. The parties are not obligated to reach an agreement. ROSEN says that mediation works against the socially weak party.

b. Arbitration unlike mediation, creates a binding result in which parties forfeit their rights to any judicial review. Many lawyers dislike arbitration because its lack of discovery process may deny claimants the opportunity to prevail on valid claims. On top of that, some judges even allow arbitrators to impose punitive damages. Furthermore, a private arbitration process may fall short of the parties’ reasonable expectations of fairness and have a dramatic impact on consumers’ substantive rights and remedies.

Grievance Process Under Collective Bargaining

Three characteristics of unions are worth noting. First, the idea of unions is an expression of confidence in democracy. Whether employees have a union and which union represents them turns on a vote of the bargaining unit. Furthermore the membership elects union officials to office. Second, we characterize union management relations as the product of a contract. Organized workers gained bargaining power because of the right to strike, and that bargaining power served to produce a collective bargain. Third, norms of industrial due process govern the system. If union members wish to challenge management action, there are procedures to resolve disputes while at the same time the rights of management and the convenience of the public will not be interfered with unnecessarily. Instead of strikes we substitute orderly process.

The grievance arbitration process serves both the interests of the union and of management. Grievance systems enable unions to challenge the way management is carrying out the collective bargain. Union officials can gain the support of members by handling grievances in a satisfactory way. Management avoids disputes that provoke strikes, and it gains information about problems

In re TWA, (1965) (Labor arbitration case)a. Facts: Stewardess was employed by TWA for a number of years

but TWA had a policy to have short hair and have regulations. This policy was clearly laid out in the manual. Stewarts failed to comply with inspection and failed to report to a meeting to discuss her non-compliance. Then, she did not report to supervisors superior. She was terminated for willful insubordination

b. Decision: Management must be given the right to verify the right of compliance with their regulations to ask the stewardess to admit to inspection is neither improper nor unreasonable. We do not

know why the stewardess refused to comply with inspection, but there is no evidence that she was evading the hair length rule. Thus we accept her argument that she refused because she was offended by the request. Perhaps future inspections could involve holding the wig in her hand.

1. Reinstatement without back pay.c. Thoughts to ponder:

1. Was the arbitrator substituting his view for the employer’s?2. What would TWA state as the cause of the stewardess’

firing? Does this affect the decision?3. Did the view of women in the 1960s play a factor in the

arbitrator’s decision? Note on arbitration— Arbitrations are more privacy, flexible, expedient

and cheap than litigation.a. Criticism— Arbitration law is ill suit to protect against

questionable practices when making arbitration agreements. They might put travel and financial burdens on the individuals.

Employment Relations

1. An Overview

Unless person has a K for a definite term he can be discharged at any time.

Workers exempt from ‘employment at will’ rule:

Unionized workers almost uniformly have in their collective bargaining agreement dismissal only for cause clause. Often dismissal is an elaborate process.

Public employees almost uniformly can only be dismissed for cause.

Note: Economic redundancy is considered cause. If there is not a need for worker then under union and public employment they can be dismissed. Note unemployment benefits are the safety net.

1. Fixed term Ks are afforded sports, entertainment, executive and school teachers. Under fixed term Ks dismissal for cause allowed but redundancy is not cause.

2. Anti-discrimination rules – protects against dismissal for membership in a protected class (e.g. Women, minorities etc...) It is argued by corporations that this only provides for cause or redundancy dismissal of minorities. Employee groups argue in the contrary – that it is not a for cause standard. Some protection against arbitrary groups is afforded.

3. Largest unprotected class is white male professionals.

4. No specific performance of personal relationship Ks. The irony is reinstatement would be automatic for a protected class employee (see above). Some academic studies have indicated that the employee might be bought out in lieu of being returned.

5. Statutory limits do exist that limit employer’s right to fire employees at will. Examples include those based on discrimination, jury duty and union activity.

McIntosh v. Murphy (1970)

Facts: McIntosh moved to HI from CA to take an assistant sales manager job. The position was offered under oral agreement for a year.

Reasoning: Court finds that the statute of fraud applies. It bases its decision on promissory estoppel allowing the statute of frauds to be usurped and affirms the lower court ruling.

Rule: §139 of Restatement of Ks adopted. 1. A promise which promisor should expect to induce action on part of promisee when it does is enforceable if injustice can be avoided only by enforcing promise.

McIntosh v. Murphy , Haw. 1970a. Facts: McIntosh was an employee of Murphy’s. Mac moved to

Hawaii to work for Murphy after Murphy interviewed him twice in CA. They exchange telephone calls and Mac worked for two months. This contract was not in writing despite the fact it could not be performed within the year in violation of the statute of frauds. Mac sued to recover damages for breach of a one year oral employment contract. Murphy defended that it was an at will employment.

b. Issue: contract exists even in violation of statute of frauds? (Or, is promissory estoppel allowed?)

c. Holding: Yes. Although the statute of frauds applies. The statute has been limited by judicial construction in order to reduce the harshness of mechanical application. We must also keep in mind the policy behind the statute of frauds which is to prevent fraud or unconscionable injury.

1. Should look to RSC § [139]. 2. It was foreseeable to the defendant that plaintiff would

move to Hawaii which is 2200 miles away.3. Injustice can only be avoided if the contract is enforced

and damages are awarded. 4. It is clear that a contract existed because McIntosh worked

for two and a half months and the jury found this. d. RULE: The court has discretion to implement the true policy

behind the statute of frauds (to prevent fraud or

unconscionable injury) and this may be done through promissory estoppel.

e. Dissent: If the statute of frauds is too harsh then the legislature should repel or amend but it is not the role of the court to legislate.

Attempts to Provide Meaningful Protections to Employees at Will

Tameny v. Atlantic Richfield Co. (1980) Facts: Arco asks the π to engage in some illegal price fixing activities in regard to its gas station franchisees. When π refused to participate, Arco fired him and said it was because of incompetence. Π filed suit under tort law but Arco alleges that π’s remedy for the alleged conduct is only in contract and not in tort. Trial court agreed with Arco. Issue: Can an employer terminate an employee at will for refusing to partake in illegal activities?Rules: Employers traditionally have a broad power to fire their at-will employees, however that power may be limited by statute or by considerations of public policy. An employer may not discharge an employee if the motivation for the discharge contravenes some substantial public policy.Analysis: There is a huge public policy argument here. If we allow employers to fire their employees for not contributing to and participating in criminal acts, we are basically encouraging criminal conduct. The discharge offends public policy by allowing employers to get away with promoting criminal behavior. The court says that the cause of action is ex delicto, meaning that the action arises out from a breach of duty growing out of the contract. An employer has the duty to refrain from firing an employee who refuses to commit a criminal act. An employer’s authority over its employee does not include the right to demand that the employee commit a criminal act to further its interests, and an employer may not coerce compliance with such unlawful directions by discharging an employee who refuses to follow such an order.Conclusion: The π is allowed to sue under a tort action for a wrongful discharge.Policy: Dissent: The legislature should be the one to decide on this issue and not the courts. The legislature has already spoken and given some exceptions so we must assume that they did not intend for any other exceptions for the time being.

Application of Tameny

Cleary v. American Airlines (broad interpretation)Cleary was fired under the guise of theft, poor performance, and threatening a fellow employee, but it was really for his union activities. He had worked there for 18 years under an oral K for an unspecified time (employment at will). The court said that firing him after 18 years of good performance would offend the implied in law covenant of good faith and fair dealing.

Pugh v See’s Inc. (narrow inyterpretation)

See’s employee at will for 32 years. Court found an implied contract limitation on termination at will. Court said that π needs to show fairly clear evidence that an employer had fired an employee for refusing to do something illegal in order for the Tameny rule to apply.Gordon Tameny v. Atlantic Richfield Company (CA 1980)Facts: P worked for Arco as a retail sales representative. In this capacity it alleges he was pressured to threaten and cajole independent service station dealers to cut their gasoline prices to a point at or below the Arco designated level in violation of the Sherman Antitrust Act.

Reasoning: Tobriner: rights to dismiss limited by statute or public policy. The court cites Petterman where the court barred an employer from discharging an employee who had complied with a legal duty in refusing to commit an illegal act (not lying under oath). The court concludes that an employee’s action for wrongful discharge is ex delicto and subjects an employer to tort liability. The duty recognized in Petterman that an employer must refrain from discharging an employee who refuses to commit a criminal act is breached when wrongful dismissal occurs giving rise to a tort cause of action. In Petermann v. International Brotherhood of Teamsters (CA) – P fired for failing to commit perjury. Court rules that right to discharge employee at will is limited by statute or public policy.

Employee ‘at will’ remedy in K is for loss wages, the issues becomes for how long would you compensate an employee for loss wages. Under tort, recovery for emotional distress, punitive damages and lost reputation.

Cleary v. American Airlines (CA 1980)Facts: Employee discharged allegedly for stealing but rebuts stating it was for union organizing activities. D did not use its established process for adjudicating dismissals.

Reasoning / Rules: Court recognized discharge after years of satisfactory performance as offending the implied in law covenant of good faith and fair dealing. The D had obligation by its established procedures for adjudicating situations as the one involved in the case. The court held that the preceding factors operated as a form of estoppel, precluding any discharge of an employee without good cause. The court found that if P sustains burden of proof he would have established a cause of action in both K and tort.

Pugh v. See’s Candies Inc. (Ct. of Appeals 1981)Facts: P refused to serve on union negotiating management team because of rumored sweetheart deal and was subsequently dismissed. He had been employed for 32 yrs. and was in good standing. See’s had announced policies of job security for those who did their work.

Reasoning: Court found an implied K limitation and allowed compensatory and punitive damage recovery for breach of implied K limitation, premised on announced policies and the P good standing with company.

Foley v. Interactive Data Corp. (CA 1988) – Leading case of CA.

Facts: P had worked for D for 7 yrs. P told R. Earnest an IDC official that Kuhne Foley’s new supervisor was under FBI investigation for embezzlement. Kuhne transferred P from CA to MA. Earnest told Foley that he was not doing a good job and one week later fired him.

Reasoning: Court affirms Tameny a tort cause of action for the termination of an employee in a situation where the termination would violate public policy which is substantial, fundamental and basic. However, cause of action not present when only private interest of employer is served by employee duty to disclose

information.

Court upholds Pugh allowing cause of action for breach of implied-in-fact K (parties by there behavior acknowledge commitment) which limited D right to dismiss P arbitrarily. Compensatory and punitive damages for breach of the implied K limitation are allowed. Suggests that allegation of breach of written K can be premised on any content found within an employee manual.

Court rejected Cleary, refusing to recognize a wrongful termination action based on tortuous breach of implied covenant of good faith and fair dealing (different from implied in fact obligation. It is an implied in law obligation set by law). It held such covenant give rise only to a K action, necessary because there is a need for predictability to promote commercial stability. Count dismissed because pled in tort.

Foley Rules:

1. An employee may recover emotional distress and punitive damages if his or her dismissal was in violation of substantial public policy. Emotional distress and punitive damages.

a) An employee may recover for bad-faith breach of the covenant of good faith and fair dealing. K damages recovery only

b) An employment K may be implied from the totality of the circumstances protecting employees from discharge where there is no evidence of ‘good cause’. Compensatory and punitive damages allowed

i. There is no special relationship between employers and employees. Effectively this bars using wrongful discharge as springboard to establish a tort action.

Common law tort theories not specifically barred by decision including fraud, defamation, Invasion of privacy… may be substituted for bad faith breach to recovery emotional distress and punitive damages

Newman v. Emerson Radio Corp (CA 1989) – Court decided that Foley decision was to be applied to all claims filed both before and after Foley.

Hunter v. Upright Inc. (CA 1993) – Employee alleged that employer represented job would be eliminated. Employer said he could resign or be fired. He resigned and then brought action when it was determined no decision to eliminate job was made. Court ruled employee can recover for misrepresentation only if it is separate from termination of the employment K so that P’s damages cannot be said to result from the termination itself.

Wagenseller v. Scottsdale Memorial Hospital

Facts: Plaintiff was an “at-will” employee at Scottsdale Memorial Hospital. For more than four years, Plaintiff and her supervisor maintained a friendly, professional, working relationship. They joined a group consisting of personnel from other hospitals for an eight-day camping and rafting trip down the Colorado River. Plaintiff said that an “uncomfortable feeling” developed between her and her supervisor. This was the result of the behavior that her supervisor was displaying, such as public urination, defecation, and bathing, heavy drinking, and “grouping up” with other rafters. Plaintiff did not participate in any of these activities. She also refused to join in the group’s staging of a parody of the song “Moon River”, which allegedly concluded with

members of the group “mooning” the audience. Furthermore, Smith and others allegedly performed the “Moon River” skit twice at the hospital following the group’s return from the river, but plaintiff declined to participate there as well. Her refusal to engage in these activities caused her relationship with her supervisor to deteriorate and as a result, plaintiff suffered harassment and abusive language from her supervisor. Furthermore, up until the time of the river trip, plaintiff had received consistently favorable job performance evaluations. After the trip, however, her performance evaluations were poor. She was fired when she refused to resign.

Procedural Posture: Trial court erred in granting judgment against the plaintiff on the “public policy” theory. Trial court erred in granting summary judgment against plaintiff on the count alleging breach of implied-in-fact provisions of the contract, because this should be a jury question. Supreme Court affirmed the grant of summary judgment on the count seeking recovery for breach of the implied covenant of good faith and fair dealings.

Judgment/Disposition: reversed in part and remanded

Issue: Whether the plaintiff could be terminated, even though she was an “at-will” employee, based upon bad cause?

Holding: In the absence of contractual provision such an employee may be fired for good cause or no cause, but not for “bad” cause.

Rational: The court looked into the history of the at-will employee and found that there was a public policy exception that had been developed over time, since courts have allowed a cause of action for violating of public policy, even in the absence of a specific statutory prohibition. The key to an employee’s claim in all of these cases is the proper definition of a public policy that has been violated by the employer’s actions. Here, plaintiff refused to participate in activities which arguably would have violated the indecent exposure statute. The court held that rumination for refusal to commit an act which might violate a statute may provide the basis of a claim for wrongful discharge. In regard to the issue of the implied contract, the court reasoned that the employee manual could be regarded as a contract. They cited a previous case they decided Leikvold. The court reasoned that the hospital established a four-step disciplinary procedure, subject to 32 listed exceptions, prior to being terminated. These include (1) verbal warning, (2) written performance warning, (3) a letter of formal reprimand, and (4) notice of dismissal. The court reasoned that it should be up to a jury to determine whether or not that manual is an implied contract. Lastly, the court rejected the argument about an implied covenant of good faith and fair dealings, because it does not protect an employee from a no cause termination. The Good Faith exception is not applied here but the good faith and fair dealings protects the right of the party to an agreement to receive the benefits of the agreement they entered into.

Another Approach to public policy

Brockmeyer v. Dun & Bradstreet WI – court held that cause of action for wrongful discharge was one in K and damages were limited to concepts of forseeability and mitigation, the P alleging the discharged has the burden of proving dismissal violates a clear mandate of public

policy. Unless the employee can identify a specific declaration of public policy, no cause of can be stated. Court found against P stating that the case was devoid of facts that proved the D asked Brockmeyer to lie.

Implied contract based on an employment handbook trumps employment-at-will.

Toussaint v. Blue Cross + Blue Shield MI - Court required that employer adhere to the provisions for dismissal in its employment K. The court held that a policy to dismiss for cause only, published to personnel cannot be departed from on a whim simply because the employer was under no obligation in the first place. P was fired by employer for suspected dishonesty but they did not adhere to stated procedures which required warnings, notice, hearings and procedures.

Pine River State Bank v. Mettille MN – Court found an offer to K in distribution of an employee manual. The court held that the firms had to follow procedures announced to employees.

The Covenant of Good Faith Exception

Fortune v. National Cash Register MA – Found for employee who was fired after a big sale so employer could avoid alleged large payout. The court found that action was in bad faith and finding of breach of K was warranted . Note: court qualified decision not implying a good faith requirement in every K and avoided adopting full theory of Monge case.

Restatement §90 to the Rescue

Hunter v. Hayes (CO 1975): P claim for 2 months loss pay upheld based on promissory estoppel because D’s agent told P to quit her job which she did in reliance on a job offer made.

Most Americans at employees at will. The doctrine assumes that employment is a private relationship subject to its own internal sanction system plus the discipline of the market. Undesirable consequences are possible:

Employment At Will and the free Market

Kumpf v. Steinhaus (US Ct. of Appeals 1985)

Facts: Kumpf alleged that Steinhaus had wrongfully in interfered with his prospects for receiving certain fees. Kumpf was an executive who was an at-will employee.

Holding: The privilege to manage corporate affairs is reinforced by the rationale of employment of will. The lack of job security motivated him to do well; security of the position would diminish the incentive. A K at will may be terminated for any reason or no reason without judicial review.

Disposition: Lower court ruling upheld on finding that Kumpf did not bargain for legal rights against Lincoln Life and judge proper declination in allowing the jury to convert moral and ethical claims into legal duties.

Effectively the private sector will correct itself, thus no need for judicial intervention into employment Ks.

Ellen Vale Hypo Facts: she is an employee at will. She left old company to come to this one. They loved her. She was given an employee handbook that said what procedures the company would have to take in order to fire her. She told her employer that she was unhappy with a few things and complained that her commission was given away. She gets fired without the company following the handbook procedures. Issues:

[Employee at will, reliance interest, duty to mitigate, was her firing against public policy or just in bad faith, they didn’t follow their own handbook procedures]

Although Vale had a written contract, the terms were for an indefinite period of time, making her employment with the multinational corporation an employment at will. Under traditional common law, employment at will was subject to termination by either party and at any time. However there has been a shifting trend that serves to protect the rights of the employee to a greater extent. This new modern common law implies that an employer does not enjoy an absolute or totally unfettered right to discharge even an at-will-employee. Looking at the rule in Tameny, an employer may not discharge an employee if the purpose or reasoning behind that discharge offends some substantial public policy. The facts of this case seem to point towards an act of bad faith, rather than a violation of some substantial public policy. Ellen expressed concerns about the companies actions during a convention and its treatment of women in the office. The company never asked her to do something that goes against any public policy, rather they fostered an uncomfortable environment for some of the female employees. Women entering the corporate world should realize that they are at quite a disadvantage and will have to deal with things such as office jokes that may offend them. In terms of violating a substantial public policy, I do not believe that MC has done anything to that extent. However, there are more issues regarding Ellen’s case.

2 months ago Ellen was approached by 2 competing companies who praised her ability and skill. Both companies offered her jobs and large raises in base salary and commission. However, Ellen relied on her supervisor who assured her a bright future with the company. This has created some reliance interest in Ellen. Ellen may have a cause of action for reliance damages. Ellen relied on the words and praises of her company and turned down multiple job offers that offered lucrative futures. Ellen relied on her current employer to her detriment and because of that, she missed out on guaranteed money. Ellen has an action for the money that she missed out on by relying on her contract with MC.

ELLEN ARGUMENT: There is a hostile work environment under federal law. There was an implied in fact K. They gave her good performance reviews and they committed themselves to follow certain procedures. MC ARGUMENT: She was given handbook after she started working there and they can be changed whenever the company wants to. There are 2 diff K’s involved. One for her employment and one to follow certain procedures. A breach of one should not affect the other K.

The employee did not expect these procedures because they did not know they were coming, thus they are not in the K. She received the handbook after she started working.They are daring you to sign it and keep working. The K was not performed until after you sign it. The consideration is your continuing to work.

Damages:Expectation: she expected to be paid bonus because she did the work. Question of fact? She wasn’t supposed to make that sale because it was out of her district.Restitution: other employee got paid for not doing anything.Reliance: She relied on the statements by her supervisor and gave up the offers. She is going to argue that it is reasonable for them to know that she would rely on those statements and stay with the current company. MC is going to argue that we didn’t expect her to turn the jobs down, we just hoped that she would turn them down.

Chapter 4SOCIAL CONTROL OF FREE CONTRACT

1. Introduction

Policy Statement: Each of the following policing doctrines is intended to limit the abusive nature of parties in forming Ks yet balance the autonomy of individuals to make their own decision and the market’s reliance on K.

Freedom of K

1. Free to K and the making is not a crime. A great deal of freedom including between married couples. Not complete though.

2. It will be argued by the Ds that it is the obligation of the state to enforce the expectation interest (like protecting property interests and is the proper role of state). Anytime they don’t it is infringement of K. Limiting to restitution of interest is considered infringement.

Section I: Regulation of Ks in interest of externalities.

Individualistic Position Distributional Position

Any K you wishBad deal price of freedomHonor choices regardlessRelieving of bad deals is an attack on competence

Make or applies rules for equal distribution of wealthRules should ensure bargains are fairRegulate terms of K

2. General RulesCOURTS HAVE LONG REFUSED TO ENFORCE MOST ILLEGAL KS OR THOSE AGAINST PUBLIC POLICY.

A PARTY TO AN ILLEGAL K OFTEN CANNOT RECOVER RESTITUTION TO GET BACK WHAT

HE HAS PAID TO HAVE ANOTHER BREAK THE LAW, UNLESS DENIAL OF RESTITUITON WOULD CAUSE DISPROPORTIONATE FORFEITURE.

Promise unenforceable if the interest in its enforcement is clearly outweighed in the circumstances by a public policy against enforcement of such terms

Everett v. Williams – “Highwayman’s Case” (Court of Exchequer 1725)Case involved agreement to share expenses and proceeds highway robbery. There was a breach of said agreement. The court dismissed the claim with costs to be paid by P counsel. COURT LEAVES PARTIES WHERE THEY WERE FOUND.

A. Illegal Contracts—.Courts will not enforce illegal contracts, but a court will not always deny relief to both parties if a court finds a contract illegal.

Illegal Object — A contract to laundry money, contract to run illegal gambling, contract to murder

Assists Illegal Activity — If you rented a house to a known drug dealer with the payment agreement that was 20 % of renters monthly income.

A court can do the following: a. Deny relief to both partiesb. Enforcement one parties promise and not the otherc. Enforce part of the contractd. Allow restitution to the party who

1. Is excusable ignorant of the facts or of legislation that makes the promises enforceable

2. Was not equally in the wrong with promisor Examples through Cases

a. Carroll v. Beardon, Mont. 19631. Facts: Carroll and Beardon entered a contract to sell

property with a monthly mortgage payment. Bearden defaulted on the mortgage and foreclosure proceedings were instituted. Beardon argued that the mortgage was absolutely void as contrary to express law and public policy. Beardon said the house was to be used for sole prostitution. Both parties aware of prostitution.

2. Issue: can this contract be upheld? 3. Holding: Yes. In the absence of activity participation, the

defense of illegality is ordinarily not available to the party who has breach the contract where the fault in legality are unilateral on her side of the transaction.

4. RULE: The bear knowledge of the purpose of which the property is sold is not enough to raise the valid defense of illegality.

5. Thoughts to ponder:i. Is this a contract to sell a house or to sell an illegal

business? Good will? This house has a good will attached to it because it was a successful whorehouse or was it because it was a nice house.

ii. Is this merely a technical illegality?

Carroll v. Beardon (MT 1963)

Facts: Both P and D were ‘Madames’. The mortgage was for $42K for the Hillside Ranch.

Reasoning: Court held that where the sale of property which may or may not be used for illegal purpose, no defense that the seller knew purpose of the buyer exists in the absence of active participation. The illegality is unilateral on the D’s part, more active participation would be necessary than what is shown here.

Disposition: Judgment in favor of P affirmed.

COURT FINDS CONTRAC IS EXTRINSICALLY ILLEGAL. THIS MEANS K WAS VALID ON ITS FACE.

3. “Not in pari delicto Rules”

Court invented ways to make adjustments for parties not in equal bargaining position.

Illegal Contract’s and Capacity

i. Mental Incapacity to contract:1. Sec. 15 of the Restatement. A person incurs only voidable duties

"if by reason of mental illness or defect…he is unable to understand in a reasonable manner the nature and consequences of the transaction."

ii. K made under the influence of drugs:1. Restatement Contracts Sec. 16.

iii. K's made with minors:1. A K made with a minor is voidable at the minor's election. It is

VOIDABLE and NOT void2. The minor can assert "Infancy" as a defense3. Restitution if the minor breaches?4. The minor usually will not have to pay and is actually entitled to

get his money back as long as he returns as much of the goods as possible

5. Minors are usually liable if they misrepresent their age6. Necessaries: Minors cannot avoid liability on K's they make for

necessariesb. Policy Reasons to not enforce illegal K’s:

i. Don’t want people to enter in to these illegal K’s.ii. Hitman example: don’t want them to have a market and don’t want to not

pay your hitman.

5. Policy

Factors Involved in Enforcement of Illegal K s1. Deterrents - Rules to deter illegal behavior 2. Legitimate – would remedy enforcement condone activity. 3. Seriousness of Crime 4. Extent of unjust enrichment.

Prof. Leon Trakman: In New Zealand K the court will do whatever in its discretion it thinks just.

1 You can enforce a deal between thieves. It does not promote thievery or deter it. The public opinion will not deteriorate by enforcing these deals.

2 There are real issues if the court does not jump into illegal K there is present unjust enrichment. 3 Should courts get involved in enforcing honor among thieves?

The law waffles. Tobriner in Marvin v. Marvin – The money can be severed from the sex. Severable was the promise for the household services which was not illegal. There essentially illegality around or

There is only one exception ‘Not in Pari Delicto’ and the court can grant a restitution type remedy:

1) Exceptions One party knew of illegality the other did not Statute settles it in favor of recovery Statute does not settle it but only one result is consistent with statutory purpose Repentance principle

Coma Corporation v. Kansas Department of Labor

Rule of Law. The KWPA applies to earned, but unpaid, wages of an undocumented worker. The employee can collect.

Facts. An illegal immigrant sued a company for unpaid wages. The company argued that the since the employee was an illegal the contract was illegal and goes against law and public policy are therefore is unenforceable.

Issue. Whether an employee can collect unpaid wages on an illegal contract.

Holding. First must look at the meaning of the legislatures intent behind the statute. The think anout equity and fairness. The employer who knowingly participated in an illegal transaction, should be permitted to profit thereby at the expense of the employee is a harsh and undesirable consequence of the doctrine that illegal contracts are not to be enforced. This result so contrary to general considerations of equity and fairness, should be countenanced only when clearly demonstrated to have been intended by the legislature. Third, since the purpose of this section would appear to be the safeguarding of American labor from unwanted competition, the employee’s contract should be enforced, because such an objective would not be furthered by permitting employers knowingly to employ excludable aliens and then, with impunity to refuse to pay them for their services. Indeed, to so hold could well have the opposite effect from the one intended, by encouraging employers to enter into the very type of contracts sought to be

prevented. Additional “an undocumented alien performing construction work is not an outlaw engaged in illegal activity, such as bookmaking or burglary. Rather the work itself is legitimate; it simply happens to be work for which the alien is ineligible or disqualified.”

Discussion.

Court in Coma uses John G. Gates v. Rivers Construction Co. (Alaska 1973)

Facts: Gates Ked with Rivers to do public relations work without a work permit. His payments were to be banked in trust and payable if we were able to secure a visa as a landed permanent resident or alien. He was dismissed 7 days prior to his becoming a landed resident.

Reasoning: Court finds that K should be enforced because:

1. The statute does not specifically declare labor or service Ks of aliens seeking entry in U.S. for purposes of performing labor or services void. (Rather this new statute replaced one that specifically did so and only provides a deterrent of ineligibility for the illegal act.)

2. The party who knowingly participated in an illegal transaction should not profit at the expense of another

Repudiation ExceptionThe court will not grant a remedy to parties for an illegal K. Exception: The exception is to someone who is repentant before illegality is accomplished is allowed restitution.

Greenberg v. Evening Post Ass’n. Court held that it was consistent with sound public policy to encourage prompt repudiation of illegal and immoral Ks by permitting, under such circumstances, the recovery of money paid upon an illegal or immoral consideration. The plaintiff must back out before the other party acts to put into effect any part of the illegal or immoral design. In this case court awarded money paid by Greendberg to Evening Post agent for rigging of a contest in which a car was the prize returned

NOTE THIS IS A RESTITUTION REMEDY ONLY

Note that in none of the preceding cases no one sued for a pure expectation remedy, rather its something like a restitution damage amount.

i. Gates v. Rivers Construction1. Facts: The worker was unauthorized to work in the U.S but the

company made a K with him to work here. Then they don’t pay him and say to force them to do so would be against public policy. Should we encourage the enforcement of these K’s?

2. Analysis: Rivers knew it was illegal to hire these people but they did it anyways. Gates is suing to get his earned wages.

ii. Greenberg v. Evening Post

3. Facts: Fitch tells Greenberg that if he pays $300 that he will make sure that Greenberg wins the prize of a $2500 automobile at a local contest. A week later, Fitch demands another $100 and Greenberg refuses. Greenberg sues Fitch wants his money back. Court rules for Greenberg.

4. Analysis: Why are we giving Greenberg his money back? He wanted to continue the deal and only backed out once Fitch raised the stakes.

5. Rule: A plaintiff may recover money being paid to carry out an illegal or immoral design if the arrangement was repudiated with reasonable promptness. The π must back out before the other party acts to put into effect any part of the illegal or immoral design.

Reasoning: Greenberg is seeking equitable/restitution damages. They have repudiated the K and now say that he has “clean hands.” The court may be saying that either Greenberg now has clean hands or his hands are “cleaner” than Fitch’s hands

a. Karpinski v. Collins, 1st DCA Cal. 19671. Facts: Karpinski sued Collins to recover rebates which

Karpinski had to give Collins to secure a grade A contract for Karpinski’s milk. Karpinski agreed to pay Collins a kick back of 4 and ½ cents a gallon during the life of the contract. Karpinski said he accepted the offer because there was no other offer for grade A milk and he said had to, to stay in the business. Collins told Karpinski a year later that he was going to cancel the contract unless Karpinski loaned him money. So Collins agreed to lower his kickbacks to 1 and ½ cents a gallon until the loan was repaid. Karpinski fell behind in his loan payments and Collins terminated their contract. He was not meeting the 1 and ½ percent.

2. Issue: can this contract be upheld?3. Holding: Yes. Collins asserted an illegal contract cannot be

enforced in law or in equity. Here though it is not a case of two parties equally in fault entering an illegal contract. Karpinski was a small dairy man who had to enter this agreement in order to survive.

4. RULE: An illegal contract will be enforced against a party who was more at fault than the other.

5. Thoughts to ponder: If a contract violates a law intended to protect a group of persons the contract cannot be enforced against a party who is a member of the protected group. But such member may never the less enforce the contract against the other party.

iii. Why couldn’t Karpinski do something else instead of entering an illegal contract?

In Pari Delicto (not equally at fault)— knowing that a contract is illegal but still engaging in the performance.

Karpinski v. Collins (CA 1967)

Fact: Kapinski entered into a K for Grade A milk with the Santa Clara Creamery. To gain the K Kapinski had to kickback an apportionment of the creamery payment to Collins.

Rule: Where the parties are not in equal bargaining position there is an allowed exception to ‘in pari delicto’ allowing the P to recover what he has rendered as performance of the executed illegal transaction.

Reasoning: The court found that because of his position P was not in pari delicto with Ds. The P depended on D for his economic survival; he was peculiarly vulnerable to the exertion of economic coercion by a person such as the D.

NOTE COURTS – WILL NOT ENFORCE EXPECTATION DAMAGE RECOVER, INSTEAD THEY ARE LIMITING DAMAGES TO MILK DELIVERED. THE ILLEGALITY PRECLUDES EXPECTATION RECOVERY.

CONTRACTS AGAINST PUBLIC POLICYRestatment §§178-199

CONTRACTS BY EMPLOYEES NOT TO COMPETE

In General Courts carefully police covenants and they must be Necessary to protect: Trade secrets Manufacturing processes Business Strategy Characteristics of Potential Customers Customer Relationships

AND

Reasonable in Length (Time), Geography (Space) & Activities Restricted (Scope)If covenant fails either requirement, the contract is VOID as against public policy.

i. Fullerton Lumber Co. v. Albert Torborg6. Facts: The plaintiff hired the defendant to work as a manager at

one of their lumber yards.  Their contract said that if the defendant stopped working for the plaintiff for any reason, he couldn’t work for any other lumber companies within a 15 mile radius for 10 years.  The defendant quit and opened his own lumber yard in the same town.  The plaintiff sued for an injunction against the defendant to make him stop working in that town.  The trial court dismissed the complaint and the plaintiff appealed.

7. General Rule: Contracts in restraint of trade are void as against public policy if they deprive the public of the restricted party’s industry or injure the party himself by precluding him from

pursuing his occupation and thus prevent him from supporting himself and his family.

a. A covenant not to compete must be reasonable in reference to place and time.

b. When their purpose is contrary to public policy and there is evidence to say that they are deliberately unreasonable and oppressive, then they are invalid.

8. Blue-penciling Test: When a K’s terms are divisible and that such portions as were void by reason of being in restraint of trade could be separated and the K enforced as to the proper territory.

9. Reasoning: Torborg agreed to it but it was unreasonable and thus should not be enforceable. Also, it is a negative covenant and thus restricts competition. However, π suffered irreparable loss when D quit. The court says that the 10 year time limit is excessive but suggests that a 3 year time limit would be adequate because it took the defendant three years to build up the plaintiff’s lumber yard. The covenant not to compete is reasonable and necessary for the π’s protection.

ii. Notes: 10. One may not agree to sell one’s self in to slavery.11. One can agree to something that is unreasonable but it is NOT

enforceable. 12. But what about Intellectual Property?

a. Courts cannot rewrite K’s for parties. They only decide whether to enforce or not.

13. Why will Fullerton not alter their general K?a. Some of the other employees may actually follow it and if

they challenge it, at the worst, Fullerton will get a reasonable decision on what they can do.

Fullerton Lumber Co. v. Torborg Facts: Torborg was the lumberyard manager working in Clintonville WI. He voluntarily terminated his employment with Fullerton Lumber to open his own lumber yard. He was party to an employment K which contained a 10yr. non-compete clause.

Rule: Restrictive covenants are lawful and enforceable if they meet the test of necessity and reasonableness. The court adopts a new rule: Partial enforcement of an indivisible promise will be allowed restraining the party insofar as it is reasonable and not oppressive.

Reasoning: While the facts do not support a 10 yr restraint for the P’s protection, 3years appears reasonable.

Common Law – Allows for covenant to be enforced whether employee voluntarily departs or is asked to leave. However, it remains unexplored whether an employee at will who claims to be

wrongfully discharged can avoid a restrictive covenant. Discharge however might change the reasonableness consideration.

§516 Restrictive covenants in employment KsA covenant by an assistant, servant or agent not to compete with his employer or principal during the term of the employment or agency, or thereafter, within a specified territory and during a specified time is lawful and enforceable only if the restriction imposed are reasonably necessary for the protection of the employer or principal, Any such restrictive covenant imposing an unreasonable restraint is illegal, void and unenforceable even as to so much of the covenant or performance as would be a reasonable restraint. Balancing the equities: The Court in Johnson v. Salmen, listed factors to balance in judging whether or not to enforce the covenant not to compete. A Court should consider: (1) the degree of inequality of bargaining power, (2) the risk of the employer actually losing customers as a result of the competition; (3) the extent of respective participation by the parties in securing and retaining customers; (4) the good faith of the employer; (5) the existence of general knowledge about the identity of the customers; (6) the nature and extent of the business position held by the employee promising not to compete; (7) the employee’s training, health, and education, and the needs of his or her family; (8) the current conditions of employment; (9) the necessity of the employee changing his or her residence if the covenant is enforced; and (10) the correspondence of the restraint found in the contract with the need for protecting interest of the employer.

‘Bad boy’ provisions

The employer creates a deferred compensation plan so key employees have future contingent claims to benefits. An employee who quits and competes loses all claims to accrued benefits. The employer does not have to seek an injunction to enforce the covenant.

1. Pension rights that are vested are excepted from these provisions they cannot be denied under Federal Law.

2. WI courts still apply rule of reasonableness to the bad-boy provisions. If unreasonable they are cut off.

Vendor Restrictive Covenants Not to CompeteRestrictive covenants also appear in the vendee / vendor K. In business purchases the purchaser wants from the seller is a covenant that would prevent opening a business down the street. One of the things purchases is the value of the on-going business. This is subject to the same rule of reasonableness but the interpretation in the courts is broader with more leeway. There is sympathy for an employee that is not had for seller of a business. Note that Business Sales still likely apply under the Fullerton Rule.

In a vendor vendee K, signing on a covenant it much more immediate since it kicks in immediately vs. the employee in beginning a relationship does not focus on the restriction for an end.

Doctrine of Severability

Allows a restrictive covenant to be unenforceable but the unreasonable clause is severed from the balance of the employment or seller K remains which remains valid.

Historic Rule: Blue Pencil Test - The courts say its o.k. to divide a covenant and invalidate only the excessive part, provided that a pencil could be used to cross words in the language of the covenant and leave a grammatically coherent sentence that makes sense in the context afterwards. You can’t add words though, a striking phenomenon. Court overruled and substituted

Free Divisibility Rule: No restrictions on ability of court to rewrite the covenant provide that the covenant as rewritten is lesser. If intentionally oppressive then covenant has no divisibility.

Social Control K and Choice

1. IntroductionIdeally K coordinates choices so that both parties are better off. The values of free choice and free K demand some social control of the process. Some argue that the fruits of bargaining belong to them regardless of whether someone gets an inordinately good deal someone gets an inordinately bad one.

Concern is K is exploitative as between the parties. Freedom of K also encompasses that no one shall be bound unless they have agreed. Once there is agreement court should enforce expectation interest. Has there been a proper agreement to the K. Recurring theme, the idea that many of these cases from a legal realist perspective, court may have been more concern about fairness of K. The court avoids enforcement by claiming not K at the beginning.

1 Consent is from the viewpoint of the listener. The question is what a reasonable listener would have interpreted. 2 Capacity deals with speaker’s state of mind. If speaker is mentally ill, they have not properly consented if there agreement is influenced by mental defect. 3 A system championing free choice must face those people who cannot choose in their own best interest:

Sutliff Inc. v. Donovan Companies Inc. - Where Ms. Sutliff was found to be mentally incapable having sold gasoline cheap while buying it high. The court held ‘if you K with someone who lacks the mental capacity; it is voidable on grounds of fraud, provided that the other party took advantage of the mental incapacity when they made the K.

2. Mental Incapacity to K §15 Restatement Second:

(1) A person incurs only voidable Contractual duties by entering into a transaction if by reason of mental illness or defect:

a. He is unable to understand in a reasonable manner the nature and consequences of the transaction or

b. He is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition.

(2) Where the K is made on fair terms and the other party is without knowledge of the mental defect, the power of avoidance under Sub-Section (1) terminates to the extent that the K has been so performed in whole or in part or the circumstances have so changed that avoidance would be inequitable. In such a case the court may grant relief as justice requires.

Traditionally if a person knew what he was doing at the time of signing the contract and later becomes mentally ill his choices are binding:

a. Restatement Contracts § 15. Mental Illness or Defect: A person incurs only voidable duties "if by reason of mental illness or defect…he is unable to understand in a reasonable manner the nature and consequences of the transaction."

iii. Easier to void under mental illness than under intoxication.iv. People choose to become intoxicated. People don’t choose mental

illnesses.

3. K Made Under the Influence of DrugsAlcohol and other drugs can affect our capacity to make the choices involved in free K.

§16 – Intoxicated PersonsA person incurs only voidable Contractual duties by entering into a transaction if the other party has reason to know that by reason of intoxication

(a) He is unable to understand in a reasonable manner the nature and consequences of the transaction, or(b) He is unable to act in a reasonable manner in relation to the transaction

Harlow v. Kingston (WI 1919) – Where P was intoxicated for 10 days and had run out of money and exhausted his credit. The trial court held that by ‘reason of his debauch that P did not act normally and he did not appreciate what he was doing. Grossly inadequate consideration between value of property conveyed and consideration support the determination that at the time the D fully realized the circumstance that he was obtaining a bargain.

1. Restatement Contracts § 16. Intoxicated Persons: 2. Party has to know or must have reason to know that they are

intoxicated.

b. CAPACITY TO CONTRACT

v. Infancy Doctrine: K's made with minors: infant until your 18th birthday.1. Restatement Contracts § 14. Infants:2. From the day a person is born until their 18th birthday.3. A K made with a minor is voidable at the minor's election. It is

VOIDABLE and NOT void4. The minor can assert "Infancy" as a defense

vi. Halbman v. Lemke1. Facts: Halbman, a minor, buys a car from Lemke. The car breaks

and Halbman takes the car to a garage. He does not pay the bill and the garage takes a lien on the vehicle. The garage takes out the engine and tows it back to Halbman’s father. Halbman’s father then told Lemke to come get the car. The car was a total loss. Halbman was entitled to the money that he paid. Halbman returned only as much as he could.

2. Notes: But what about Halbman’s unjust enrichment? The infant got the money back but did not return the car.

Halbman v. Lemke (WI 1980) – P – Halbman purchased automobile from D - Lemke. Had it repaired and disaffirmed K leaving the auto at the repair station. Engine and transmission were removed in satisfaction of repair bill and car towed to P’s home. P requested D retrieve the automobile. The auto was vandalized and unsalvageable. The court held that the P a minor was entitled to the return of the money; a disaffirming minor need only return so much of the goods as is possible. Minor need not make restitution for quantum meruit use of the car or depreciation in its values.

1. Duress and Undue Influence a. Physical duress : did something because someone has threatened your physical

being.

b. Economic duress : i. EX.] In desert and dying of thirst. Vendor charges you $50 for water. Buy

it then sue vendor.ii. Price gouging is only illegal when a statute is passed. Immoral but not

illegal.iii. EX.] K with a company where the company is to drop you off in the

middle of the desert.c. EX.] Snorkeling trip in which boat sells you water at exorbitant prices.d. Duress: The boundary between proper and improper advantage-taking

i. A threat to do what you are legally entitled to do is not duress.e. Undue Influence : involves an application of excessive strength by a dominant

subject against a servant object.i. If will has been overcome against judgment, consent may be rescinded

ii. But when does the art of persuasion become oppressive?f. Overpersuasion characteristics:

i. Discussion of the transaction at an unusual or inappropriate timeii. Consummation of the transaction in an unusual place

iii. Insistent demand that business be finished at onceiv. Extreme emphasis on untoward consequences of delayv. The use of multiple persuaders by the dominant side against a single

servient party

vi. Absence of third party advisers to the servient partyvii. Statements that there is no time to consult financial advisers or attorneys

g. The difference between legitimate persuasion and excessive pressure rests to a considerable extent in the manner in which the parties go about their business

§175 – When Duress by Threat Makes a K Voidable:If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the K is voidable by the victim.

Duress is more than the constraining of choice. Method of constraint and act that constrained is important. It has something to do with the conduct of the other party.1 Generally accepted that threat must be improper or wrongful and the person threatened must have no reasonable alternative. However, this is not bright-lined and predictable.

2 The exercise of superior bargaining power in an irresponsible or unreasonable or inappropriate way. To make an improper threat that leaves the other party with no reasonable alternative than acquiescence. Traditionally: A threat to do what you are legally entitled to do cannot be duress.

Modern View: Acts or threats cannot constitute duress unless they are wrongful; but a threat may be wrongful even though the act threatened is lawful. This is dealt with in terms of business compulsion doctrine, with acts and threats that are wrongful, not necessarily in a legal, but moral or equitable sense. Wolf v. Marlton Corp (NJ 1959)

R.L. Mitchell v. C.C. Sanitation Company, Inc. (TX 1968)Facts: Mitchell brought action for damages caused by the negligence of Crane while in the employ of CC Sanitation Company. At the time of the incident Mitchell was on the job for Herrin Transportation Company. Mitchell signed two releases one for medical bills + damage to company vehicle, the other for a medical bill he paid. Mitchell avers that he was informed by agent of Herrin that either he signed the release or he would lose his job.

Rule: Any coercion of another, either mental, physical, or otherwise causing him to act contrary to his own free will or to submit to a situation or conditions against his own volition or interest, constitutes duress.

Reasoning: The parties stood on no equal footing. The appellant undoubtedly was the weaker party and the threat to discharge him was real. Even where the right of an employer to discharge an employee is unquestioned, duress and coercion may be exercised by the employer by threats to discharge the employee, where circumstances such are here present appear.

h. R. L. Mitchell v. C. C. Sanitation Company, Inc. DURESS

i. Facts: Mitchell was a truck driver for Herrin Transportation. While on the job, his truck was hit by a crane that worked for C.C. Sanitation. Herrin wanted to secure a claim of damages for its truck but C.C.’s insurance would not pay until Herrin got a release from Mitchell for any claim that might arise from the accident. Mitchell says that Herrin said he had to sign the release and accept $62.12 in damages or he would be fired. Mitchell signed and then subsequently brought an action for damages and to set aside the release based on DURESS.

ii. Rule: K obtained through duress or coercion is voidable and this rule applies to releases.

iii. Duress: “Any coercion of another, either mental, physical, or otherwise, causing him to act contrary to his own free will or to submit to a situation or conditions against his own volition or interests.”

iv. Holding: Where there is such an inequality in the terms, sacrifice of benefits, and rights on that part of the employer, inadequacy of consideration, and advantage taken of the weaker party, we cannot conclude that no fact situation of duress or coercion exists.

v. Analysis: The appellant was undoubtedly the weaker party, the threat to discharge him was very real and he was fully justified in expecting that he would be immediately discharged. Furthermore, Herrin had a direct economic interest in their employee signing the releases and this was the sole reasoning behind the companies actions. Duress and coercion existed and are sufficient for the avoidance of the releases signed by Mitchell.

vi. Notes:1. Consideration is him giving up his right to sue.2. K for indefinite duration is a K at will and can be extinguished at

any time.3. This CASE must be wrong because the holding makes everything

fall under DURESS.

Wolf v. Marlton Corp – Give back down payment or else we will sell house to someone from a racial minority group. Undoubted P had right to resell house to anyone. Marlton attempted not to return down payment return because of threat to sell house to minority, they Wolf’s won because there threat was for something they had a right to do.

§175. WHEN DURESS BY THREAT MAKES A CONTRACT VOIDABLEvii. (1) If a party's manifestation of assent is induced by an improper threat by

the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.

viii. (2) If a party's manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other

party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transaction.

i. §176. WHEN A THREAT IS IMPROPER i. (1) A threat is improper if

1. (a) what is threatened is a crime or a tort, or the threat itself would be a crime or a tort if it resulted in obtaining property,

2. (b) what is threatened is a criminal prosecution,3. (c) what is threatened is the use of civil process and the threat is

made in bad faith, or4. (d) the threat is a breach of the duty of good faith and fair dealing

under a contract with the recipient. (IMPORTANT ONE)ii. (2) A threat is improper if the resulting exchange is not on fair terms, and

1. (a) the threatened act would harm the recipient and would not significantly benefit the party making the threat, or

2. (c) what is threatened is otherwise a use of power for illegitimate ends.

j. Selmer v. Blakesleei. Facts: Selmer is a subcontractor on a project for which Blakeslee is the

Gen. Contractor. Selmer had a K with Blakeslee to erect materials that Blakeslee supplies for $210k. Blakeslee was late in delivering the materials and agreed to pay an extra fee in order for Selmer to complete the work. Selmer completed and demanded payment. Blakeslee offered to pay only $67k and would not budge. Selmer was under financial stress and accepted the deal. 2 ½ years later Selmer brings suit.

ii. ISSUE: Whether the settlement agreement is invalid because it was procured by “economic duress.”

iii. Alaska Packers’ Ass’n v. Demenico: Fishermen agreed to set wages but once they got out onto the ocean they refused to work unless they were paid more. They lost. The decision did not have fresh consideration for the modified agreement. The modified agreement had been procured by duress in the form of threat to break the original K.

1. Fisherman argument : There was new consideration. Work longer hours, colder weather, anything. But have to show that the parties treated it as consideration. Modification classically requires consideration.

iv. Holding: The mere stress of business conditions will not constitute duress where the defendant was not responsible for the conditions.

v. Analysis: Selmer had the option of walking away from the original K but decided to enter into the extended K. Thus, Selmer was never forced to

remain on the job and it is not certain why Selmer could not overcome the non-payment by Blakeslee.

vi. Notes:1. Practical argument against treating such a statement as a threat: it

will make an inference of duress inescapable in any negotiation where one party makes an offer which it refuses to budge, for the other party will always be able to argue that he settles only because there was a figurative gun at his head.

2. The issue in a duress case is not the victim’s state of mind but whether the statement that induced the promise is the kind of offer to deal that we want to discourage.

3. *Have to make a promise sound like a threat in order to win this case. “Every promise can be read as a threat and every threat can be read as a promise.”*

4. § 74. Settlement of claims:

5. The 2 types of fiduciary relationships that aren’t a professional – client are… parent - child and husband – wife

WI Economic Duress Rule – An Unsettled Area The Selmer Company v. Blakeslee-Midwest Company (7th Cir. 1983)Facts: Selmer subCONTRACTed with Blakeslee to erect prestressed concrete materials supplied by Blakeslee-Midwest. Blakeslee failed to fulfill its Contractual obligations resulting in an alleged additional 120k of costs to Selmer. Selmer had verbally agreed early on to compensate for the additional costs and on the demand from Selmer offered 67k in settlement.

Rule: Fundamental issue whether the statement that induced the promise is the kind of offer to deal that should be discouraged, hence it was a threat. A threat not to honor a K cannot be considered duress. Financial difficulty cannot by itself justify setting aside a settlement on grounds of duress.

Reasoning: The court reasons that it would not be sound policy to preclude settlement between parties without court action. As such a threat not to make payment alone to force settlement cannot by itself be duress. Selmer validates the practice that is common among Insurance Practice, especially when it has 3rd party liability – not their policy holder, no payments until settlement and release is signed. This is a fairly routine opinion

Capps v. Georgia Pac. Corp (1969) – Duress is present in this case where the D advised P that though he was entitled to the sums demanded unless he signed a release P would receive no part thereof. The confluence of P necessitous financial condition, the D acknowledged indebtness of full 157k and the settlement of the indebtness for less than 3 cents on the $ with no suggestion

that D did not have the money to pay debt in full.

Wurtz v. Fleischman (WI Ct. App. 1979) Facts: P. Wurtz was owner of Hotel Luzeren which he agreed to sell to W. Fleischmann. An agreement was struck where by the transaction would be by the exchange of property between Wurtz and Fleischman’s Lakeside Habitat Inc. a limited partnership. The properties to be exchanged were agreed upon and pursued by Flieschman. There was some delay in the closing which the parties agreed would be compensated for at the rental value of the properties Wurtz would acquire for the delay period. It appears that Wurtz at some point made a demand for an additional 50k which was to be satisfied by Wurtz’s interest in the Lakeside Habitat Inc.

Rule: Duress may be implied when payment is made or an act performed to prevent great property loss or heavy penalties when there seems no adequate remedy except to submit to an unjust or illegal demand and then seek redress in the courts.

When one party wrongfully threatens another with severe economic loss if he does not enter a proposed K, and the threatened party acquiesces solely because of the wrongful threat, the injury to the threatened party may be redressed under the doctrine of economic duress.

The burden of proof applicable is a reasonable degree of certainty by evidence that is clear, satisfactory and convincing. Damages only need be proven by the greater weight of the credible evidence.

Duty Breach Causation Damages

To exercise superior economic power reasonably in a bargain situation

Superior bargaining position = sole effect or source of something needed by the other party to avoid severeeconomic loss where relationship not reciprocal

One must be found to have used superior bargaining position unreasonably

Actions must be in good faith and fair dealing in trade

Whether the victim would have acquiesced in the absence of the wrongful threat.

The test is primarily objective

The primary criteria is whether the victim had an adequate legal remedy available at the time of the threat

Restitutionary remedies.

Economic duress is available as a defense to a suit on K

or

A separate cause of action or counterclaim. In appropriate cases punitive damages may also be awarded.

Wurtz v. Fleischman (WI 1980) Issue: Whether the court of appeals exceeded its authority by making factual determinations,

based on conflicting evidence, in lieu of, and in addition to, the findings made by the trial court.

Court concluded that it clearly did.

Basic Elements of Economic Duress

1. The party alleging economic duress must show that the has been the victim of a wrongful or unlawful act or threat and 2. Such act or threat must be one which deprives the victim of his unfettered will

Duress is: Wrongful acts that compel a person to manifest apparent assent without his volition or cause such fear as to preclude him from exercising free will and judgment in entering into a transaction. Duress isn’t: Threats to do what the threatening person has a legal right to do.

a. Undue Influence vii. Test for undue influence

1. Involves an application of excessive strength by a dominant subject against a servient object…. If will has been overcome against judgment, consent may be rescinded.

viii. Need to show that there was unfair persuasion of a party who is under the domination of the person exercising the persuasion.

ix. And need to show that there was a fiduciary relationship

x. UCC § 177. When Undue Influence makes a K voidable

xi. Odorizzi1. Facts: Odorizzi agreed to resign from his post at school one day

after he was arrested for gay activity. The principle and superintendent came to his house after he had just been released from jail. Charges against him were dismissed a month later. Trial court dismissed the claim but the court of appeals reversed this.

2. Analysis: The lawyers should have claimed this to be duress. The court is basically saying that he was under undue influence because he could not resist the other men that asked him to resign. ROSEN says that we need to argue for duress. Expand the fiduciary obligations of employer/employee relationship.

2. Active Misrepresentation and Failure to Disclose a. Active Misrepresentation

i. § 159 Misrepresentation defined: a misrepresentation is an assertion that is not in accord with the facts. (A LIE!)

ii. § 160. When action is equivalent to an assertioniii. § 162. When misrepresentation is fraudulent or material

iv. Fraud means an intentional lie.v. Misrepresentation means that intent does not matter.

vi. § 164. vii. Misrepresentation – statement not in accordance with the facts

1. Misrepresentation is material (§ 162 sub. 2)viii. Next show that the recipient is justified in relying on the misrepresentation

b. Passive Misrepresentation

i. Statement facts – one is not justified in relying on a statement of opinion.ii. § 168. Reliance on assertions of opinion

iii. § 169. When reliance on the assertion of opinion is not justifiediv. Mere puffery! Just some opinion about something.

c. Caveat Emptor: Buyer Beware i. Intentionally false

ii. False statement must be materialiii. Must be statement of factiv. Person must take reasonable steps toward self-protectionv. Reliance must cause injury

7. Misrepresentation – Unsettled Common Law Classic Tort of Fraud: Relief where the D with scienter

o Fraudulently has made o A material misrepresentation of o Fact on which o The P has a right to rely o Then P must prove o Reliance on the misrepresentation which o caused injury

Courts have questioned softened or even abandoned almost all the elements of the classic tort.

Damages1 Most jurisdictions will protect the victim’s expectation interest in fashioning remedies. 2 A few limit recovery in tort actions to “out of pocket’ damages, roughly a measure of the P’s reliance losses. 3 It has become not uncommon for courts to award punitive damages for intentional misrepresentation.

Until mid 20th century rule was caveat emptor.

Exception 1: Sellers are responsible in some states for innocent misrepresentations. Some states have imposed liability with limited recovery for innocent misrepresentation, allow rescission but deny damages (upon rescission, can sue in quasi-K for restitution).

Halpert v. Rosenthal – The court stated that simple justice demands that when both the vendor and vendee are innocent, the one making the false statement should bear the loss of the benefits of the transaction.

Exception 2: In some circumstances the seller will be liable today for failure to honestly state her opinion. Vokes v. Arthur Murray.

RICO – allows for those injured by reason of racketeering activity can bring civil action for treble damages costs and attorney’s fees.

Sedima v. Imrex – Civil RICO actions do not require a criminal conviction nor an organized crime nexus.

d. **Obde v. Schlemeyer**i. Facts: Schlemeyer’s purchased an apartment house in April 1954. Shortly

after, they discovered that there was a substantial termite infestation. ∆’s hired Senske to eradicate the termites and make some repairs. Senske told ∆’s that the job required extensive measures. ∆’s did not want to pay for the entire treatment and so Senske gave them no assurance of success. ∆’s sold to π (Obde) in November 1954. ∆’s claim that at the time of the sale they had no reason to believe that they had not completely fixed the problem.

ii. Holding: Defendants had a duty to inform π of the termite condition.iii. Rule: Concealed, dangerous, known to seller, not known to buyer, buyer

wouldn’t have discovered it through inspection.

iv. Analysis: The purchaser had no knowledge of the alleged defect and that it was a defect a reasonable inspection would not disclose. Schlemeyer knew about the termites and knew that there was a chance that they weren’t entirely extinguished. We want to disclose things that are dangerous to the people because we don’t want them to get hurt.

v. Notes:1. Assummption of risk: you assume the risk once you know about it. 2. An owner selling an older house does not impliedly promise it to

be free from defects. A builder selling a new house, however, is liable for structural defects even without proof of knowledge.

3. Even if you disclose, it does not matter if you have an implied duty of warranty (builder). Builder is liable for damages

4. Many times, the seller of the property has moved to another state or is hard to sue or no longer has the sufficient assets to satisfy a judgment, so buyers sue the real estate agents for alleged misrepresentations or failures to disclose what they knew or ought to have known.

Obde v. Schlemeyer (WA 1960)Facts: Action is to recovery damages for alleged fraudulent concealment of termite infestation in an apartment home purchased from Ds. P asserts D’s were aware of termite condition but fraudulently concealed it from the Ps.

Rule: Where there are concealed defects in demised premises, dangerous to the property, health or life of the purchaser, which defects are known to the seller when the lease is made, but unknown to the purchaser, and which a careful examination on his part would not disclose, it is the seller’s duty to disclose them to the tenant before leasing, and his failure to do so amounts to a fraud. If either party to a K or sale conceals or suppresses a material fact which he is in good faith bound to discloser then his silence is fraudulent. The object of the law in these cases is to impose a duty to speak whenever justice, equity and fair dealing demand it.

Damages = Difference between the actual value of the property and what the property would have been worth had the misrepresentations been true…

Subsequent Supreme Court of WA Obde Clarifications:Hughes v. Stusser – No duty to disclose to purchasers conditions that sellers had no knowledge of.

Mitchell v. Straith – The undisclosed fact was a material fact to the extent that is substantially affected adversely the value of the property or operated to materially impair or defeat the purpose of the transaction

House v. Thornton – Court found that builder had an implied warranty guaranteeing that a new house’s foundation are firm and secure so the house is structurally safe for occupation.

Klos v. Gockel – Court limited House doctrine limiting it to commercial transactions contemporaneous with completion of the building of the house.

Texas Gulf Sulphur – buyers in such cases would be less likely to invest in costly searches for information if they were required to disclose that information to the seller. Non disclosure is upheld as consistent with efficient discovery and utilization of resources.

8. Good FaithFiduciary Doctrine of Good faith is a compact reference to an implied undertaking not to take opportunistic advantage in a way that could not have been contemplated at the time of drafting, and which therefore was not resolved explicitly by the parties.

In fiduciary relations one party may be required to confer upon the other party’s interests a weight greater than upon his own. In ordinary commercial Ks however the other party’s interests can be treated as of not account as long as the right holder remains within his zone of discretionary action

Market Street Associates v. Frey (7th Cir. 1991)Facts: Market Street Associates has a JC Penney assigned leaseback agreement purchased wherein it sells its property to Frey and by agreement it gets a lease term of 25 years. The parties will negotiate in good

faith on the construction and financing. If negotiations fail lessee shall be entitled to repurchase the property. Market Street attempted to enforce the lease clause to repurchase property in Milwaukee that GE Pension Trust declined to finance improvement for, after the property was offered to sale for it at 3mil. It would under the lease be allowed to purchase for 1mil.

Holding: Doctrine of good faith forbids opportunistic behavior that mutually dependent cooperative relations might enable in absence of rule. Tricking a party to an on-going Contractual relationship is a violate of the duty of good faith performance. In a good faith case one party is deemed to have breached the K .

Posner finds: There is a duty to disclose found. Had to warn about the clause.

e. ****Market Street Associates v. Frey****i. Facts: JC Penney entered into an agreement with GE Pension Trust to sell

GE its properties for capital and lease them back from GE for 25 years. Paragraph 34 of the lease agreement entitles the lessee to request GE to finance the costs of construction and improvements as long as they are over $250k. If the negotiations fail, the lessee can repurchase the property at a price roughly equal to what Penney sold it for plus 6% a year, as stated in paragraph 34. Penney doled out one of the properties to Market Street Associates. MSA needed additional funds to build a drug store in the shopping center. After trying to get financing from other sources, they turned to GE for financing. The letter made no reference to paragraph 34. GE refused to help MSA with financing. Later, MSA told GE that they were exercising the option of buying the property under paragraph 34. GE refused, so MSA sued for specific performance.

ii. Rule: If information is readily available to both parties the failure of one to disclose it to the other, even if done with the knowledge that the other party is acting on mistaken premises, is not actionable.

iii. Good Faith : a compact reference to an implied undertaking not to take opportunistic advantage in a way that could not have been contemplated at the time of drafting, and which therefore was not resolved explicitly by the parties.

iv. Analysis: The lease stated that the Trust must give “reasonable consideration to providing the financing.” So, the lessor who fails to give reasonable consideration and thereby prevents the negotiations from taking place is breaking the contract. There is a difference between capitalizing on knowledge that you have invested in and the deliberate taking advantage of your contract partner’s oversight (sharp dealing). The latter is more like a theft because it is not the exploitation of superior knowledge, nor for the avoidance of an unbargained for expense. Thus it serves no social product. In the end, it comes down to the fact that a sophisticated enterprise simply failed to read the K. MSA did not act in bad faith. It acted honestly, reasonably, without ulterior motive, in the face of circumstances as they actually and reasonably appeared. MSA may have believed that the Trust already knew of paragraph 34 or that they

would surely find out about it. So, it was not dishonest or opportunistic to fail to mention 34.

v. NOTES:1. Generally you may freely assign your rights but you may not freely

delegate your duties.2. Can let someone live in your place but you can’t just give up your

duties to maintain your place.3. ROSEN, calls paragraph 34 an option!4. The parties didn’t think about it but if they had, they would have

put something in the K to deal with it.5. WHAT WOULD THE PARTIES HAVE AGREED TO?

f. ****§ 205. Duty of good faith and fair dealing**** i. Every contract imposes upon each party a duty of good faith and fair

dealing in its performance and its enforcement.ii. Not in contract formation , but in performance and enforcement.

iii. ****Opposite side is caveat emptor! ****

g. § 161. When non-disclosure is equivalent to an assertion

h. Duty to disclose only in the following cases :i. Where you know that disclosure in necessary to prevent misrepresentation

ii. Where disclosure would prevent mistake and non-disclosure amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing

Vokes v. Arthur Murray, Inc. (FL 1968)Facts: P signed some 14 dance lesson Ks totaling some $31k all were procured by Davenport franchisee of Arthur Murray Inc. P’s complaint seeks a decree the dance Ks to be null and void and to be cancelled, and judgment entered for that portion of the payments made not charged against specific hours of instruction given to the P.

Holding: Generally a misrepresentation to be actionable must be one of fact rather than opinion. Where there is a fiduciary relationship between the parties, or where there has been some trickery employed by the representor or where the parties do not in general deal at arm’s length or where the representee does not have equal opportunity to become apprised of the truth or falsity of the fact represented. A statement of a party having superior knowledge may be regarded as a statement of fact although it would be considered an opinion if the parties were dealing on equal terms. Even in Contractual situation where a party to a transaction owes no duty to disclose facts within his knowledge or to answer inquiries respecting such facts, the law is if he undertakes to do so he must disclose the whole truth.

Obde and Vokes – Law falls through the cracks between Ks and torts. Extremely practical and important part of the law. Fraud is a common defense or ground for trying to invalidate K. It’s more attractive than duress because it’s factually easier to prove; people lie a lot and there is the potential for very good remedies.

Obde v. Schleymer – Fraudulent concealment. The buyer one party is under certain types of assumptions the other party knows it’s wrong but does not tell them. In common with fraud parties have differing knowledge about true facts one of which is wrong, anytime this occurs one party is at a bargaining advantage. The information like economic power gives an advantage getting you a better deal. This law is more controversial because behavior is in the formation stage, why shouldn’t a person get to explore an information advantage.

Duress and Misrepresentation have grown to attempts to regulate the misuse of bargaining advantage. Economic Power – Mitchell, Selmer, Woods v. Fleischmann. Might arise from psychological pressure undue and induced. Any bargaining advantage must be used in a reasonable way.

Concern about Mushy Law.

A lot of lack of clarity exists about fraud and fraudulent concealment. Bright line rules are one solution. They require tough choices.

Ks of AdhesionA standardized contract, which, imposed and drafted by the party of superior bargaining power strength relegates to the subscribing party only the opportunity to adhere to the contract or reject it. (Graham v. Scissor Tail. Inc.)Introduction

1. Policy Statement

In general a court will refuse to honor a standard form K when non-negotiable standard forms bear terms inherently unfair. In McCutcheon Lord Devlin approaches terms of adhesion, must be “clear, fair and reasonable”

a. ProCD v. Zeidenbergiv. Facts: ProCD sold telephone directories on CD-ROM.  Their product had

a shrinkwrap license on the non-commercial version of their software that made the buyer agree not to resell the information. Zeidenberg (D) bought one of those non-commercial versions, created his own company and tried to resell the same info to consumers via internet.

v. Analysis: ProCD is daring Zeidenberg to buy it and not return it. The K was formed when he failed to return the product, not when he paid for it. He had an opportunity to reject the terms once he had read them but he failed to do so.  That effectively means he accepted the terms

b. Hill v. Gateway 2000vi. Facts: The Hills ordered a computer over the phone. The order-taker did

not read the terms of the K over the phone to them. The terms included an arbitration clause that said all the terms apply unless the computer is returned within 30 days. Hills kept the computer passed the 30 days.

vii. Analysis: By keeping the product beyond 30 days, the Hills accepted Gateway’s offer, including the arbitration clause. The buyer of the product

has a chance to accept or return the product once they read the terms of the K. It would be unreasonable to ask a salesperson to read contract terms over the phone and it would be unreasonable to ask the customer to sit there and listen to them. It is cheaper and more beneficial to have it on paper. The K is formed when the terms are read and agreed to, not when the product is sold. Furthermore, it doesn’t matter that the box didn’t notify the customer that additional terms were on the inside of the box because the Hills knew when ordering the computer that the terms would be inside. Customers can do 3 things to discover these terms:

1. Have the vendor send a copy of the terms in advance2. Consult public sources3. Inspect the documents after the product arrives

Contracts of Adhesion – K’s of the take-it-or-leave-it basis

4. Terms in the Box Additional terms (in a box) at the time of the transaction bind customer.

1 Where customer have an opportunity after they have read terms to return product2 Keeping product after a reasonable period indicates assent to terms3 UCC does not require full disclosure at time of purchase 4 It is in consumers best interest to avoid costly disclosure steps 5 UCC does not require prominence of any arbitration terms

§2-209: Strong precedent, offer to modify which is not assented too means terms are not accepted by the purchaser.

ProCD, Inc. v. Zeindenberg (WI 1996)

Facts: Zeindenberg utilized ProCD’s software to create a website for his formed company Silken Mountain Web Services, Inc., that allowed customer’s free access to the telephone number database. ProCD sold its software to the consumer and commercial customer base and dependent on its use the pricing varied.

Holding: That terms inside a box of software bind consumers who use the software after an opportunity to read the terms and to reject them by returning the product.

Reasoning: The Appeals Court finds that it did have effect under the UCC. Its analysis is that the K isn’t made until the time the agreement shows up after the software is loaded. Its analysis follows:

1) §2-204 – A K may be made in any manner sufficient to show agreement, including conduct by parties which recognizes the existence of such a K

2) §2-606 – A buyer accepts goods if he fails to make an effective rejection under §2-602(1). 3) §2-205 & 2-209(2) – Under the UCC the ordinary terms found in shrink-wrap licenses require any

special prominence, or otherwise are to be undercut rather than enforced.

Effectively then ProCd proposes a K a portion of which is not disclosed at the time of purchase. However, it allows a return after an opportunity for review of the terms. Finally, under the UCC there is

no prohibition under this type of K.

Hill v. Gateway 2000 Inc. (7th Cir. 1997)Facts: Hill ordered a computer from Gateway. They were unsatisfied with purchase. At issue is the Hill’s filing of a suit contrary to an arbitration clause contained in Gateway’s materials. Hills say the arbitration clause did not stand out and as a result they should be allowed to proceed to court with there claims.

Holding: Citing ProCD the court holds that terms inside a box can bind customers. Customers are better off when costly steps are skipped, so no requirement exists that the terms should have been read when the computer was purchased by phone. Further, the U.S.C. does not support that arbitration terms must be prominent. The Hills like Zeinberg in ProCD opted to inspect the documents after the product’s delivery. By keeping the computer beyond 30 days, the Hills accepted Gateway’s offer, including the arbitration clause

Note: Court upheld Gateway’s arbitration under ICI rules which required 4k and sending papers to France to begin process.

Arbitration will stop a class action suit from proceeding. Federal Arbitration Act. – Seeks to promote arbitration and prevents States from imposing special

conditions on process.

Carnival Cruise Lines v. Shute – The court upheld a forum selection clause requiring any litigation be done in FL. The court held that federal law requires terms of Ks be fundamentally fair, and the U.S. Supreme Court held there was no fundamental unfairness in requiring Ps to litigate in FL.

Summarization of Standard Form Contracts:McCutcheon til C&J

Liability is based on consent of the contract. If they haven’t consented they should not be bound. The idea has difficulties in standard form contract implementation, given existing social practice, wherein people don’t read contracts.

McCutcheon – People sign and don’t read. Its no mystery. The vendors know the contracts aren’t read.

So what does consent mean?

1 Traditionally (Lord Blackburn), by signing or taking the document means consumer is manifesting a willingness and hence there is consent, even thought is might be an unknowing consent. 2 Llewellyn would present an alternative vision, there is no assent to the specific. Rather the dickered terms and broad type of transaction. A blanket assent to unreasonable or indecent terms that do not alter the dickered terms. Written standard form contract becomes much less important under Llewellyn’s version. Rather it is the understanding between the parties that is of import. The contract can be used to maneuver and to specify ambiguities but not to obviate or negate what was agreed too. A standard form contract can specify the rules but only with the reasonable expectations of the parties.

The law has sided with the Blackburn view. By accepting the document the consumer effectively consents and is bound. The Parol evidence rule gives extra force, by not allowing evidence that there were dickered terms to be considered. The content of the standard from contract under Parol evidence is Supreme. ProcCD and Gateway – The Traditional Rule is extended so that the standard form can come later of be enclosed in the box.

McNeil’s view of relationships where they are volitional, once you enter though someone else dictates the terms. (i.e. Joining the military or coming to school. You decide to enter but then you follow the rules handed to you). McNeil argues that the standard form contracts are of the same nature. There is no consent you join, while there are a control including the market, there still is lacking specific consent.

The law has tried to have legal remedies.

1. The disclosure rules – requiring various terms to be conspicuously disclosed. UCC – Disclaimer of implied warranties. Statutory Regulations – Truth in lending.

2. Some standards that explicitly allow courts to interpose a substantive fairness review. Rather than make consent true, the courts impose a fairness standard. Reasonable Expectations Standard, 2-719(2) and 2-313 – Non disclaimable implied express warranties, while handicapped by 2-202 it is not emasculated.

3. Creative misinterpretation cases. e.g. Vokes v. Arthur Murray: Fraud, Mitchell v. CC Sanitation: Duress.

a. C & J Fertilizer, Inc. v. Allied Mut. Ins. Co. (1975)i. Facts: π’s warehouse was robbed. Π’s had purchased an insurance policy

from the D that protected him from burglary. However, the policy had its own definition of burglary that was different from the statutory definition. The policies definition required a “felonious entry therein by actual force and violence.” There was no visible forced entry so D said it was not covered.

ii. Analysis: The burglary definition used in the policy comports neither the concept a layman might have of that crime, nor with a legal interpretation. Must take into account these 2 things when interpreting contract language.

1. Revolution in formation of contractual relationships2. Reasonable expectations - § 211

iii. Rule: customers are not bound to unknown terms which are beyond the range of reasonable expectation.

iv. Notes: Do you REASONABLY EXPECT to have it covered? IMPORTANT RULE OF LAW!!!!

1. This is true for insurance. Insurance is special. Major question is what is a reasonable expectation.

2. However, if they put writing in the K stating otherwise and you are supposed to read it, then you are bound to it. BLACK LETTER LAW.

b. CLASS NOTES: The UCC gives a hierarchy of language (§ 203. b: standards of preference in interpretation). HOWEVER, Rosen believes that trade usage or

language, which is the last in the hierarchy, is actually the MOST important language.

i. Logic – parties write contracts for themselves, so if they meant something they would have written it in the K. It is the courts job to enforce, not rewrite the K’s that people enter into.

ii. Express terms – strict construction of rulesiii. Course of performance: this Kiv. Course of dealing: any prior K’sv. Trade language

1. Sometimes #’s in a K are ambiguous. Somebody might ask for 300 of something, but in the trade, 300 may actually mean 290 to 310 of that thing. EX.] Bagels. Asking for 12 or asking for a dozen does not matter.

2. § 201. Whose meaning prevails.a. Does one party have reason to know that the other party has

attached a different meaning to some term in the K?

C&J Fertilizer Inc. v. Allied Mutual Insurance Co. (IA 1975)Facts: P purchased two insurance policies to cover facility from burglary. Dickered terms included that coverage did not include any ‘insider jobs’. Policy included terms that visible marks of physical damage of the exterior of the premises must be present to recover.

Holding: Courts in construing and applying a standardized contract seek to effectuate the reasonable expectations of the average member of the public who accepts it. In contracts of adhesion where P has little choice in the offer judicial regulation is appropriate. The objectively reasonable expectations of applicants and intended beneficiaries regarding terms of insurance contracts will be honored and customers will not be bound by unknown standardized terms which are beyond the range of reasonable expectations.

Effectively the provision can be said to border on unconscionability

5. Ambiguous or Conflicting ProvisionsIn cases of ambiguous / conflicting provisions, they are construed against the drafter.

Elliott Leases Cars, Inc. v. Quigley (RI 1977)Facts: P leased car which was in an accident due to negligence of one of his officers’ wives. Two forms were provided, 1, single page summary of transaction 2, formal lease. The formal lease required payment for loss or damage caused by negligence. Single page summary $100 deductible for accident.

Holding: Common knowledge that detailed provisions are seldom read. Plaintiff should have known that single page summary would be relied upon. Ambiguity could have been avoided by noting exclusion of negligence on leasing order from.

6. Reasonable Expectations Doctrine / Rule of Construction ½ states have adopted, rarely applied outside of AZ to anything other than insurance claims. §211 EXCEPTION to enforcement of adhesion contracts: “reasonable expectations doctrine – Ps are not bound to unknown terms which are beyond the range of reasonable expectations.

Courts determine meaning of contract provisions (‘ doing a lot right by doing a little wrong’ – Shakespeare). Where contract terms are ambiguous the court tends to interpret to achieve what it views as a fair result. Llewellyn observed this and wrote critically about it 1. It creates an awkward precedent when a legitimate contract containing a clause came along. He hoped with the UCC to remedy this situation by providing reliable tools.

27.Warrantiesa. Warranties as a tool to guard expectations (§ 2-313, 2-314, 2-315, 2-316, 2-317,

2-714(2), 2-719)b. Warranties, express and implied

i. § 2-313. Express Warranties by Affirmation, Promise, Description, Sample.

1. (1) In this section, "immediate buyer" means a buyer that enters into a contract with the seller.

2. (2) Express warranties by the seller to the immediate buyer are created as follows:

a. (a) Any affirmation of fact or promise made by the seller which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.

b. (b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

c. (c) Any sample or model that is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.

3. (3) It is not necessary to the creation of an express warranty that the seller use formal words such as "warrant" or "guarantee" or that the seller have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller's opinion or commendation of the goods does not create a warranty (Mere Puffery!).

4. (4) Any remedial promise made by the seller to the immediate buyer creates an obligation that the promise will be performed upon the happening of the specified event.

ii. Absent effective disclaimers, sellers are bound by affirmations of fact, promises and descriptions of the goods. They are not bound by opinions and statements commending the goods.

iii. § 2-314. Implied Warranty:  Merchantability; Usage of Trade.

1. (1) Unless excluded or modified (Section 2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant (someone who deals in goods of that kind) with respect to goods of that kind.  Under this section the serving for value of food

or drink to be consumed either on the premises or elsewhere is a sale.

2. (2) Goods to be merchantable must be at least such as:a. (a) pass without objection in the trade under

the contract description; b. (b) in the case of fungible goods, are of fair average

quality within the description; c. (c) are fit for the ordinary purposes for

which goods of that description are used; d. (d) run, within the variations permitted by

the agreement, of even kind, quality and quantity within each unit and among all units involved; 

e. (e) are adequately contained, packaged, and labeled as the agreement may require;  and

f. (f) conform to the promise or affirmations of fact made on the container or label if any.

3. (3) Unless excluded or modified (Section 2-316) other implied warranties may arise from course of dealing or usage of trade.

iv. § 2-315. Implied Warranty:  Fitness for Particular Purpose. (RARE IN REAL WORLD)

1. Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.

v. Disclaimer v. Remedy Limitation1. Disclaimer: § 2-3162. Limitation of remedy: § 2-719

a. Test: Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act.

i. This means that other remedies are availableii. A limited remedy fails of its essential purpose when

there is not a fair quantum of remedy for breach of obligations or duties.

b. People often try to phrase remedy limitations as warranties. vi. Necessary steps:

1. Must decide whether, absent disclaimers, the seller gave any warranties.

a. Express or Implied?i. If implied then:

1. Merchantability or;2. Fitness for a particular purpose

2. Must consider whether the type of warranty given has been disclaimed successfully. Test with § 2-316 (1)(2)(3)

a. Express: 2-316(1)b. Implied: 2-316(2) - (3)

3. Has seller successfully limited remedies for the breach of any warranties not successfully disclaimed under § 2-719

c. NOTES: Warranties are simply promises. That is it.i. Express warranty: they promised you something and you didn’t get it

ii. Implied in law: iii. Implied in fact: iv. Implied warranty of merchantability:v. Implied warranty of fitness:

vi. As –is: these do not exclude express warranties only implied warranties.vii. Steps:

1. Decide whether it is express or implieda. Merchant: someone who deals in goods of that kind

viii. Merchantability: if you want to exclude merchantability, you must use the word “merchantability.”

d. PG 495 HYPO:i.

e. Conspicuous disclaimers and conscionable remedy limitationsi. Hunt v. Perkins Machinery Co., Inc. (1967)

ii. Facts: Hunt, through Rideout (D’s agent), purchased a new boat engine from Perkins. Hunt asked for specific modifications to be made to the engine, which Rideout agreed to. The K that Hunt signed had a back page that described that there were no warranties of merchantability or fitness regarding the engine. Hunt did not see or read these. After the engine was installed a series of mechanical problems arose (coughed smoke). 3 months after installation, Hunt removed the engine, told Perkins to come get it, and bought a new one.

iii. Issue: Was the disclaimer of the warranties on the back of the purchase order conspicuous?

1. Can attention reasonably expect to be called to it?iv. Rule: § 1-201(10)v. Analysis: The language of the official comment on the front did not call

sufficient attention to the language on the back of the form. Hunt’s only reasonable opportunity to view the back of the form was when the executed copy was sent back to him.

1. The smoking was caused by a breach of the warranty of merchantability and warranty of fitness. Perkin’s was aware of Hunt’s requirements and purpose for buying the engine. Hunt relied on Perkins to guide him in his selection

2. Conspicuousness: § 1-201(10) – the person ought to have noticed it.

vi. Conclusion: The provisions on the front of the purchase order did not make adequate reference to the provisions on the back of the form as to draw attention to them. Hence the provisions on the back cannot be said to be conspicuous. The disclaimer is not effective.

vii. Notes: Rosen says this K is unconscionable because seller of the clause that said “shall not be liable for any property damage or for any injuries in connection with the engine.” 2-719(3)

7. Warranties §2-314, §2-315, §2-316 & §2-719

Any good where the seller is a merchant, code implies a warranty of merchantability and in certain cases warranty of fitness for particular purpose

Courts regulate the quality of goods or services supplied by sellers through the legal device called warranty. Ks frequently fail to articulate express provisions about quality and usually say nothing of buyer’s rights and the seller’s duties if there are problems with goods. Usually warranties are for the sale of goods.

Rule: Courts have long held sellers of goods to some duty to provide products of at least minimal quality.

A. Warranties Express and Implied -- The Necessary Steps

1 Did the seller give a warranty?

§2-313 – Express Warranties

(1) Sellers create express warranties in a number of ways including;

a) A fact or promise that becomes part of the basis of the bargainb) A description of the goods that (ditto)c) Any sample or model that (ditto)

Opinion, commendation or puffery does not create a warranty.

1 Seller need not intend to make a warranty; an objective standard applies as to buyer’s interpretation of ‘warranty’.

§2-314 – Implied Warranties Merchantability

a) Merchantable goods are such as “pass without objection in the trade under the K description.”b) Fit for ordinary purposes which such goods are intended

§2-315 – Implied Warranty Fitness for Particular Purpose

a) Sellers who know “any particular purpose for which the goods are required b) Buyer is relying on the seller’s skill or judgment to select or furnish suitable goods.”c) Particular purpose is distinguished from ordinary purpose

§2-317 – Warranties shall be construed as consistent with each other UNLESS such construction is

UNREASONABLE, then the INTENTION of the parties shall control: In determining INTENTION:

a) Exact / technical specs, displace inconsistent general model, language and descriptionb) Express warranties displace inconsistent implied warranties OTHER THAN IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE

1 Has the type of warranty given been disclaimed?

Warranty Disclaimers and Remedy Limitations

Sellers must honor their buyer’s reasonable expectations but are allowed to limit their obligations to control costs allowing buyers to accept risks for lower prices.

Rule: Sellers can tailor their liability but must do so conspicuously.

§2-316(1) Exclusion or modification of Express warranties

a) Express warranties and negation / limitation of warranties shall be construed wherever reasonable as consistent with each other.b) But subject to Parol Evidence negation or limitation is inoperative to extent construction is unreasonable

§2-316(2) Exclusion or modification of Implied warranties

a) To exclude must mention MERCHANTABILITY and in case of writing must be conspicuous. Note merchantability can be excluded verballyb) To exclude FITNESS exclusion must be in writing and conspicuous.

§2-316(3) – As Is Disclaimersa) Circumstances indicate otherwise, all implied warranties are excluded by expression like ‘AS IS’

c) Disclaimers – must satisfy the same criteria as §2-316(2) requirements that the modification be conspicuous. ‘As is’ or ‘with all flaws and faults’ – Verbiage that disclaims all warranties, no express guarantee about the quality of the item

1 Implied warranty can be excluded by course of dealing, course of performance, or usage of trade

§1-201(10)

a) When reasonable person against who it is to operate ought to have noticedb) Contains a ‘brightline’ or a safe harbor. Disclaimers of Implied warranties must be in Capital Letters. Larger and contrasting print. c) Whether term or condition is conspicuous is ultimately a decision for the court.

2 Did the Seller limit Remedies for Breach of Warranty

§2-719 – Limitation of Remedy agreements. They are authorized. There are substantive limitations. The key ones are:

a) The limited remedy must be stated as the exclusive remedy

e.g. repair or replacement at the sellers options excluding consequential damages

b) If a remedy fails of its essential purpose remedy must be had according to the act.

1 There is no definition of ‘essential purpose of remedy.’ Cases have interpreted as limited remedy provides the buyer a remedy that preserves a core of value to the buyer. 2 Limited remedies that fail of there essential purpose entitles to rescission and restitution at buyer’s discretion. However, on consequential damages courts are split

e.g. product does not work. Then buyer has ability to rescind and get restitution

c) Consequential damages may be limited UNLESS UNCONSCIONALBE

1 Limitation on consequential damages is prima facie unconscionable where injury is to person of buyer.

Standards are qualitative v. Brightline.

Hunt v. Perkins Machinery Co., Inc. (MA 1967)

Facts: Mr. Hunt purchased, by Purchase Order which contained a modification of express and implied warranties, an outboard motor for his boat from Perkins Machinery. The motor was ‘defective’ and attempts to repair its excessive belching of smoke had failed on several occasions leading Mr. Hunt to have it uninstalled whereupon who ordered another from a different manufacturer.

Rule: Under§2-316 to exclude or modify the implied warranty of merchantability where in writing such writing must be conspicuous. The applicable test for conspicuous §1-201(10) ‘whether a reasonable person against whom… [The disclaimer] it’s to operate ought to have noticed it. It is a question of law for the court whether a provision is conspicuous.

The court determines that the provisions on the front of the PO did not make adequate reference to the back of the PO to draw attention to the latter. Hence the provisions were not conspicuous and the consequently the disclaimer was not effective.

Armco Inc. v. New Horizon Development Co. of VA Inc. - Court held because excluding language in K is in larger type, as a matter of law that it is conspicuous.

‘AS IS’ clause required to be conspicuousGindy Mfg. Corp. v. Cardinale Trucking Corp. – Court held that an ‘As Is’ disclaimer must be conspicuous and that this was consistent with the purpose of the Code. The court held as reasonable to avoid the implied warranties the requirement of subsection (2) must be met.

Consequential Damages AllowedMurray v. Holiday Rambler Inc. – Where Ps purchased a motor home. The trial could found that when a buyer gives a seller reasonable opportunity to repair the vehicle and it fails to operate as a new vehicle free of defects , the limited remedy of replacement or repair fails of its essential purpose under §2-719. This meant that the buyers could revoke their acceptance under §2-608 and recover what they had paid. They also recovered in consequential damages 2.5k for loss of use of the vehicle.

Consequential damages are recoverable under §2-715 when §2-719(2) fails to provide a fair quantum of remedy for breach of obligations or duties outlined in the K.

No Consequential Damages AllowedChatlos Systems Inc. v. National Cash Register Corp – Where NCR sold a computer system to a manufacturer. The court of appeals disallowed consequential damages while agreeing that the limited remedy had failed its essential purpose. It found that the consequential damages exclusion was valid because it was not unconscionable. Chatlos was allowed to recovery a buyer remedy under §2-714(2) the difference between value of goods at time accepted and the value they would have had if it was as warranted.

Fiorito Bros Inc v. Freuhauf Corp. – Where court found limited remedy of replacement or repair failed of its essential purpose. The failure invalidated the disclaimer of consequential damages. The court found that the parties in King for the dump truck bodies could not be found to also include that the D be enable to avoid all consequential liability for breach.

B. Regulation Warranties in Consumer TransactionsLargely symbolic regulation. The Magnuson-Moss Act – Applies only where seller gives a “written warranty” covering a “consumer product.”

1 A supplier of a consumer product need not give any written warranty

2 Where a written warranty is provided it must clearly and conspicuously designate that warranty as either a full or limited warranty.

Full warrantyo Must remedy any defect within a reasonable time without charge to customer. o If cannot do this after reasonable number of attempt, then the customer can elect a refund of

what she paid or a replacement of the product.o Cannot disclaim implied warranties nor limit their duration unreasonably

3 Court may award attorney’s fees to a consumer who prevails since all warranties are under the act a suit in state courts can also have attorney fees awarded.

Most suppliers have offered only Limited warranties wherein they have wide freedom to write almost any kind of warranty they desire if they call it a limited warranty. Limitation of warranties must be conspicuous.

1 A supplier cannot disclaim any implied warranty imposed by statutes such as the UCC.

2 A supplier may limit the duration of implied warranties to that of a written warranty of reasonable duration, if such limitation is conscionable and is set forth in clear and unmistakable language and prominently displayed on the face of the warranty

Limited warranty is on entire product. You can’t express warranty a portion and have implied warranties apply to another portion.

The FTC interprets the act to require exclusions or limitations of consequential damages to be conspicuous.

1975 FTC Rules –

Warrantor

1 Must state what it will do in the event of a failure to conform with the written warranty and what the consumer must do.

2 Supplier must disclose “any exclusions of or limitation on relief such as incidental or consequential damages”

To act on either the FTC or Magnusson rules a consumer must sue for breach of warranty in state courts.

Lemon Laws – Passed by all 50 states

Generally deal in Rescission and Restitution like §2-719(2). Additionally, you need to evince that repairs not satisfactory. Further, some prescribe a certain quantity of times a thing must be returned. Sometimes award attorney fees.

1 Provide consumer with remedies including right to return the car if dealer’s repeated efforts to solve recurring problems prove to be ineffective. 2 Rights are in addition to rights granted under the UCC or pursuant to the terms of the K of sale. 3 Consumer must exhaust all remedies under private consumer dispute resolution

Studies have shown that consumers win much more in states where there are government-run lemon law arbitration programs than in states where the auto makers run the arbitration programs.

Hughes v. Chrysler – WI Sup. Ct. upheld a judgment of 74k+ when Chrysler failed to replace a defective mini-van within 30 days after a consumer’s demand.

8. Parol Evidence Rule and Warranties§2-202 The key to the parol evidence rule is finding that the parties intended a writing to be “a final expression of their agreement with respect to such terms.” Where this is found evidence of prior agreement or contemporaneous oral agreement MAY NOT CONTRADICT the writing. However, a writing intended by the parties to be the final expression of their agreement can be explained or supplemented (to resolve ambiguities) by

(a) By a course of dealing, usage of trade or course of performance. (Primarily for interpretation)

(b) Allows explanation or supplementation by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of terms of the agreement.

Merger clauses seeks to assert that it is the final agreement and complete and exclusive expression of the agreement, no other warranties exist. This to eliminate parol evidence considerations.

Wilson v. Marquette Electronic (8th Cir. 1980)Facts: Buyer ordered the MUSE system. It suffered after installation considerable and repeated down-time. The central computer of the system was eventually replaced and some 8k was charged for a larger disc that cam. Problems continued prompting buyer to bring this action.

Importance of case according to Whitford:

If K was signed the Implied Warranties would be displaced. This would leave the buyer to rely on the Express Warranty §2-313 statements of capacity and environment operation.

Express warranties cannot be disclaimed by virtue of §2-316(1). ‘negation is inoperative.’

§2-202: The disclaimer section of express warranties. Sometimes buyer cannot turn to oral discussion or papers exchanged prior to final signing of K, would be viewed as language tending to contradict.

§ 2-202. Final Expression in a Record:  Parol or Extrinsic Evidence.

(1) Terms with respect to which the confirmatory records of the parties agree or which are otherwise set forth in a record intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be supplemented by evidence of:

(a) course of performance, course of dealing, or usage of trade (Section 1-303);  and

(b) consistent additional terms unless the court finds the record to have been intended also as a complete and exclusive statement of the terms of the agreement .

(2) Terms in a record may be explained by evidence of course of performance, course of dealing, or usage of trade without a preliminary determination by the court that the language used is ambiguous.

27.Extrinsic Evidence Rule (AKA Parol Evidence Rule)a. “When two parties have made a contract and have expressed it in writing to which

they have both assented as the complete and accurate integration of that contract, evidence, whether parol or otherwise, of antecedent understandings and negotiations will not be admitted for the purpose of varying or contradicting the writing.”

b. Does not apply to subsequent K’s or separate K’s!c. Class Notes:

i. SOF:1. Does the K fall under the statute?2. Is the writing sufficient to satisfy the SOF?

a. The only party that has to sign is the party against who enforcement is sought! The Defendant has to sign it!

ii. Extrinsic Evidence Rule:

1. Is the K final and complete (integrated) with respect to the term regarding which the evidence is sought to be introduced?

2. For what purpose is evidence to be admitted? [Not to contradict or supplement]

d. This is a substantive rule, not procedurale. Extrinsic Evidence: Evidence that is outside the 4 corners of the Kf. 2 Questions regarding Parol Evidence:

i. (1) Is the K integrated (final and complete) with respect to the term to which the extrinsic evidence applies?

1. Is it the final expression?a. Is it a writing? (If not, ERR not apply)b. Is it intended to replace prior agreements?

2. Is it a complete expression?a. Is it intended to replace contemporaneous agreements that

are within the“scope” of this agreementi. If not integrated, no ERR

ii. If integrated:ii. (2) For what purpose is the evidence to be admitted? [Not to

contradict or supplement]1. inadmissible if it is evidence of a prior agreement or a

contemporaneous agreement within the scope of this agreement2. inadmissible to “alter” or “contradict” the writing3. Does it survive the “laugh test?”

g. Whether something is an integration is a question of law.  What may the judge consider?

i. “4 corners” approach -  only the document itselfii. Modified classical – evidence of surrounding circumstances admissible

iii. UCC – Trade Usage, course of Performance, Course of Dealing always admissible

h. For what purposes is extrinsic evidence admissible?i. To show a defect in formation (Finger 2)

ii. To interpret an “ambiguous:” provision.  In most states, whether a term is ambiguous is a question of law.  That question is usually decided using the same three approaches used to determine if a contract is integrated.  Some courts allow the evidence to be admitted solely for the purpose of determining whether the contract is ambiguous.

i. How do you get court to admit parol evidence?i. The test is whether the offered evidence is relevant to prove a meaning to

which language of the instrument is reasonably susceptible.ii. You could argue that there was fraud on the part of one party

j. What purposes may you offer parol evidence?i. If the writing was not intended to be final.

ii. Where parties make a tentative written agreement but do not intend a K to exist until a final writing is executed.

iii. If some language in the K is subject to interpretation

iv. To show a defect in formation (Finger 2)k. When may you NOT offer parol evidence?l. Merger Rule/Clause -

Unconscionability

1. Introduction and Definition

§2-302: Unconscionable Contract or Clause

Remedies for unconscionability: Here are some of the things a court might do to remedy a clause or contract which it finds to be unconscionable: [488]

a. Refusal to enforce clause: Most likely, the court will simply strike the offending clause, but enforce the rest of the contract;

b. Reformation: Alternatively, the court may "reform" the offending clause (e.g., by modifying an excessive price to make it a reasonable price);

c. Refusal to enforce whole contract: Very occasionally, the court may simply refuse to enforce the entire contract, denying P any recovery at all.

Varieties: Clauses can be divided into two categories for unconscionability analysis: (1) "procedural" a.k.a. Unfair surprise - prolix printed form; and (2) "substantive" unconscionability ‘prevention of oppression’

a. Procedural: One party is induced to enter the contract without having any meaningful choice. Two factors: Oppression which arise from an inequality of bargaining power and Surprise which arises when terms of the bargain are hidden” Here are some possible types: (1) burdensome clauses tucked away in the fine-print boilerplate; (2) high-pressure salespeople who mislead the uneducated consumer (3) absence of meaningful choice due to gross inequality in bargaining power (see Walker)

b. Substantive: the clause or contract itself (rather than the process used to arrive at the contract) is unduly unfair and one-sided to one party.

i. Excessive price.

ii. Remedy-meddling: a term may be substantively unfair because it unfairly limits the buyer’s remedies for breach by the seller. Types of remedy-meddling that might be found to be unconscionable in a particular case include: (1) disclaimer or limitation of warranty, especially prohibiting consequential damages for personal injury; (2) limiting the remedy to repair or replacement, where this would be a valueless remedy; (3) unfairly broad rights of repossession by the seller on credit; (4) waiver of defenses by the buyer as against the seller’s assignee; and (5) a cross-collateralization clause by which a secured seller who has sold multiple items to a buyer on credit has the right to

repossess all items until the last penny of total debt is paid. (6) Terms may be unreasonably favorable to other party (see Walker)

Williams v. Walker-Thomas (DC 1965)

Started through Replevin Procedures – ex parte procedure very quick way to get a court order

Facts: Low income customers purchased a number of household items from Walker-Thomas on installment agreements. At issue is the ‘add on’ contract clause that provides that all previous goods purchased by the buyer from the seller will secure the debts incurred with the current purchase.

Holding: Where the element of unconscionability is present at the time a contract is made, the contract should not be enforced. In determining reasonableness or fairness the primary concern must be with the terms of the contract considered in light of the circumstances existing when the contract was made. When the terms are so extreme as to appear unconscionable according to the mores and business practices of the time and place. Unconscionability is present at the time the contract if there is 1. Absence of meaningful choice and 2. Unreasonably favorable to one party.

If the clause is a fine print boilerplate clause that is hard to understand and if the consumer is poor an has limited shopping options – This is the strongest case.