Contracts

CONTRACTSI. ENFORCING PROMISES: BASES OF LEGAL OBLIGATIONA. Intention to be Bound: The Objective Theory of Contract Objective Test-Manifestations of intent are interpreted, not in light of what

the utterer actually meant or the other party actually understood, but from

the standpoint of a reasonable person in the position of the party to whom

the manifestation was made.

(+) certainty (-) people may intend to be bound, but legally they are not, contracts imposed,

favors party with stronger bargaining powerB. Consideration

1. Is there a contract?

a. Promise

i) Promise: 2 A manifestation of intention to act or refrain from acting a

specified way, so made as to justify a promisee in understanding that a

commitment has been made. [e.g. stating that you plan or intent to do something is

not a promise b/c no indication of assurance]

ii) Illusory and Alternative Promises 77- A promise or apparent promise is not

consideration if promisor reserves a choice of alternatives

iii) Example: An actress promises to pay an agent a fee for his work for three years and that she can

terminate at any time without any notice. Not consideration since actress has not bound herself to

anything.

b. Consideration

i) Classic Definition [see Hamer]

A) Benefit to the Promisor or

B) Detriment to Promisee- Give up a legal right. One doesnt suffer

a detriment by doing something that one is already obligated to do or by forbearing something that is already forbidden (e.g. giving up an illegal act is not consideration)

C) Some courts look for an exchange when applying the benefit/detriment test see

Plowman)

ii) Restatements Definition 71 Bargain- Action is sought by

promisor in exchange for his promise and action is given by

promisee in exchange for that promise.

--Promisee must be aware of promise. If promisee is unaware,

then there couldnt have been a bargain

--Action may be given to promisor or some other person and

performance may be given by the promisee or by some other

person

2. Aspects of Consideration

a. Gifts Dougherty i) Executed Gifts- too late to challenge on lack of consideration

ii) Consideration v. Conditional Gift Ask whether occurrence of the condition is of benefit to promisor. If promisee must meet certain conditions, but if conditions are not bargained for, then no consideration. If value of act is 0 to promisor, then conditional gift.b. Adequacy of Consideration Batsakisc. Past Consideration Plowman d. Conditional Gift-picking up checks because company didnt seek act of picking

up checks

Ray v. William Eurice & Bros., Inc. (, signed a contract with P, Ray, to build a house. 1/9 Plans & Specs (7 pages). 2/14 D submits a proposed contract (3 pages). 2/22 Contract written by P signed (5 pages of plans and specs). D claimed that they never intended to enter contract w/ those specs shouldnt be held to it. Court found that manifested intent (objectively) to enter contract w/ 5 pages specs and should be liable for breach.

Park 100 v. Kartes Kartes, , were mislead by into signing a personal guaranty of a lease. Court found that if a contract was induced by fraud, then it is not enforceable. Elements of Fraud (1) a material misrepresentation of past or existing fact by the party to be charged, which (2) was false, (3) was made with knowledge or in reckless ignorance of the falsity, (4) [reasonable] reliance, (5) proximately caused injury.Batsakis v. Demotsis: During WWII, Batsamis/P, a Greek resident lends Demotsis/D, also a Greek resident 500,000 drachmae, at the time worth $25. In return for loan, P requires D to sign a promissory note for $2000 payable at end of war. After war, P sues D to collect $. D claims that there was no consideration. P, knowing Ds financial distress and desire to return to US, extracted of her the written instrument P sues upon, which was a promise to pay him $2000. Court looks at actual bargain, the fact that recited consideration is not the actual consideration is not relevant. Courts also dont concern themselves with the relative values of things being exchanged.

Doughety v. Salt: P, Dougherty age 8, received from his aunt, Salt a promissory note for $3000 payable at her death or before. Note was on a printed form, which contained the words value received. D handed P note with these words You have always done for me, and I have signed this note for you. P sued Ds estate for payment. A formal document stating consideration received doesnt, in absence of consideration, turn a gift into a contract.Plowman v. Indian Refining Co.: Indian Refining Co, D, promised to pay 18 employees a monthly sum equal to of their working wages for life + health insurance. P, Plowman et. al., were retained on pay roll, but their didnt render any further services and their only obligation was calling for checks. Held, no consideration since D didnt seek act of picking up checks from D, there was no bargain and act had 0 value for D.

Hamer v. Sidway Uncle promised his nephew $5000 in exchange for his giving up alcohol, smoking, and gambling. Nephew refrained from these activities as agreed. Later, P=assignee of Nephew sued D = Uncles estate for $. Court used older definition of consideration: its a benefit to the promisor or a detriment to promisee. Doesnt matter if benefit to promisor is of value to anyone.

Baher v. Penn-O-Tex Oil Corp: P, Baehr, leased gas filling stations to Kemp. Kemp was buying Webb Oil and other things from D, Penn-O-Tex Oil. Kemp became indebted to D and gave D assignment of accounts receivable. D collected rents paid by operators of filling stations. P called D asking for rent and threatening to sue. D promised to pay rent, but didnt so P sued. There was no bargain, D didnt promise to pay in exchange for Ps promise to forebear from suing. No consideration and no contract.

C. Promissory Estoppel 90

1. Elements of Promissory Estoppel

a. Promise see 2

b. Promissor should reasonably expect reliance

i) Is the reliance reasonable?

ii) Does promissor benefit from reliance? Did she want reliance?

c. Reliance

i) Show a change in position b/c of promise

d. Injusticei) Try to find an injustice not based on reliance

ii) Find injustice to promisor to argue other side

2. Promises Within the Family Kirksey, Griener

2 Promise Defined

90(1) Promissory Estoppel

3. Charitable Subscriptions Allegheny, King

2 Promise Defined

90(1) Promissory Estoppel

90(2) Charitable Subscriptions-not widely followed, weak argument

4. Promises in a Commercial Context Katz, Vastoler, Shoemaker 2 Promise Defined

90 Promissory Estoppel

Kirksey v. Kirksey D wrote P a letter that said If you will come down and see me, I will let you have a place to raise your family, and I have more open land than I can tend. P moved, giving up her belongings that she could have secured if she had remained. D gave P a place for 2 years, then required her to leave. Held, no bargain and no consideration.Greiner v. Greiner P/mother sued to kick D/son off 80 acres that he was living on. D responded that she had promised him the land. P told D that she would give him land if he moved to Mitchell country. D gave up his home in Logan country, moved to Mitchell country, made improvements on land, lived there for nearly a year, relying on Ps promise. P, at another sons insistence, backed out of agreement. Court gave D the land based on Promissory Estoppel. Case used old definition of promissory estoppel, which required the reliance to be definite and substantial.

Wright v. Newman D, knowing that he was not the father of the child, put his name on the birth certificate and gave the child his last name. D raised son for three years. 7 years later, P/mother sued for child support. Court ruled in favor of P. Ds act of putting his name on the birth certificate induced Ps reliance-P didnt seek out birth father for support. Court seemly misapplied the injustice requirement, applying it to the son, not P. DISSENT-questions reliance/detriment because ties had been severed and several years passed by without any support.

Allegheny v. Chautauqua Bank: = Allegheny College = promisee and = National Chautauqua Country Bank = estate of promisor. Mary Johnston pledged $5,000 to college on condition that the fund be named after her and used to educate students preparing for the ministry. Promissory note stated that payment was due after her death, but she paid $1000 while alive. The college set $ aside for a scholarship fund, but did nothing else in reliance of promise. Johnston repudiated (took back) promise. After she died, college sued her estate. Held, Johnston sought to have fund named after her and gave $1000 + promised $4000 in exchange for schools promise to name fund after her. DISSENT-gift stated that consideration was her interest in Christian education. Even if her gift had the condition that the fund be named after her, not acceptance b/c these acts were not performed.

King v. BU: P = King = Promisor. D = BU = promisee. In a letter to BU, Dr. King wrote I name the BU Library the Repository of my correspondence, manuscripts, and other papers. He also wrote In the event of my death, all such material deposited with the University shall become from that date the absolute property of BU. Court ruled for BU using promissory estoppel. BU hired staff, cataloged papers, etc. in reliance of promise.Katz v. Danny Dare, Inc. P/Katz = Promisee worked for D/Dare = Promisor for 25 yrs. P was injured on the job and could no longer work effectively, so D wanted P to retire. After 13 months, he talked him into retiring w/ a $13,000/yr pension & included it in a letter. After three years, pension was cut off and P sued. Court applied promissory estoppel since evidence suggested that P would not have been fired, so he did rely on promise by retiring. Professor suggested that a contract was made. Katz sought reliance.

Katz vs. Plowman. In Plowman, employees were fired before pension was offered.

Vastoler (note case): Vastoler accepted a promotion to a supervisory position b/c of promise of pension. Employer then revoked promise. Held, although Vastoler benefited from reliance (by getting a promotion) court should consider possible detrimental reliance (e.g. worse work conditions). Professor suggested that an argument for a contract could be made since employer was seeking Vastolers acceptance of job. Promissory estoppel harder argument since not much injustice. [Best injustice arguments dont involve reliance].

Shoemaker v. Commonwealth Bank: P/Shoemaker = promisee obtained a $25,000 mortgage from Commonwealth Bank/ D. The mortgage agreement provided that P was required to carry insurance on the property. In 1/1994, the insurance was allowed to expire, and in 1995 the house was destroyed by fire. P claims that D told them that they might be forced to purchase insurance and add the premium to the loan balance. P asserts, that based on a letter and phone conversion, they assumed that D obtained insurance on the home. D claims that it obtained insurance for a year and then notified P that they allowed it to expire. P claims that they never saw the letter. Court ruled in favor of P.

D. Restitution

1. Restitution in absence of promise a. 116 Preservation of anothers life or health (Credit Bureau)

Necessary Elements of Claim: (see Restatements of Restitution)

i) Party acted unofficiously with the intent to charge

ii) Things or services were necessary to prevent the other from

suffering serious bodily harm or pain

iii) No reason to know that the other would not consent to

receiving them, if mentally competent;

iv) Impossible to obtain consent

b. 117 Preservation of anothers things or credit (see Restatements of Restitution)

c. Contracts implied in Law (Quasi Contracts)- Mainly Applies to

Subcontractor/Contractor cases? (Commerce Partnership) Not an actual contract, a legal fiction.

Elements of Claim i) conferred a benefit on

ii) has knowledge of benefit iii) accepted or retained benefit iv) inequitable for to retain benefit without paying fair value for itd. Contract implied in fact: is based on a tacit promise, one that is inferred in whole or in

part from the parties conduct [actual contract w/ implied bargain] e. Contract implied in law: one party was unjustly enriched, that party received a

benefit under circumstances that made it unjust to retain it without compensation.

[quasi-contract] 2. Promissory Restitution a. Restatement 86 Promise for Benefit Received

A promise is made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice unless: (a) the promisee conferred the benefit as a gift or (b) the promisor has not been unjustly enriched (c) to the extent its value is disproportionate to the benefit.

b. Moral Obligation/Material Benefit Theory Mills, Webb Courts will enforce promises based on prior consideration if:

i) At one point there was consideration

A) Debts discharged in bankruptcy ( 83)

B) Debts barred by statues of limitations ( 82)

C) Promise to pay debt incurred as a minor

ii) Material Benefit: if a person receives at material benefit from

another, other than gratuitously, a subsequent promise to

compensate the person for rendering such a benefit is enforceable.

(Webb)

Credit Bureau Enterprises, Inc. v. Pelo: Pelo/ telephoned his wife making threats of self-harm and purchased a shot gun and was taken to a mental hospital by the police who had been advised of his threats. While hospitalized, was pressured to sign a release form, agreeing to pay for his hospitalization. Hospital sought payment from , but he refused. Hospital turned account over to Credit Bureau Enterprises/, who sues. Court held liable for medical bills based on Restitution 116.Commerce Partnership v. Equity Contracting Co.: Commerce/ owns a building and contracted w/ World Properties for improvements. World Properties contracted w/ Equity/ for stucco and surfacing work. claims that it did $17,100 and was not paid by World Properties since never paid them. Court remanded case and held that if paid sub-contractor it was not liable. Mills v. Wyman: /Mills nursed /Wymans sick 25 year-old son, but son died.

promised to pay for care, but later refused to pay. didnt have to pay because promise was based on prior consideration and was never legally bound to pay.

Webb v. McGowin: /Webb saved McGowins (Wyman = estate =) life, but sustained bodily injury, crippling himself for life. In consideration of the services, promised to pay him $15 every two weeks for life. paid for 8 years and then died. Court enforced promised based on past consideration since a material (life-saving) benefit was received.

II. REACHING AGREEMENT: THE PROCESS OF CONTRCT FORMATION

A. Offer and Acceptance: General Considerations

1. When to apply offer/acceptance

a. Contract formation is in dispute

b. When terms included in contract are in dispute

2. Offers Lonergan a. Offer Defined 24

i) Must be communicated

ii) Indicate a desire to enter into contract

iii) Must be directed at some person or group

iv) Invite acceptance

v) Offer must create the reasonable understanding that a contract will arise on acceptance without any further approval

vi) Newspaper ads are generally NOT considered offers

Because parties understand its first-come, first served, seller doesnt have enough goods to sell to everyone. Exeception: deceptive (reasonable person interpretation used) Izadi b. Termination of an Offer i) Rejection or counter-offer

ii) Lapse of time- offer must be accepted within a reasonable time

A) Nature of transaction

B) Relationship of parties

C) Course of dealing, custom, or trade usage

D) Means of communication

E) Stability of the market

iii) Revocation by offeror (even if offer states that it will be open

longer)

iv) Death or incapacity of offeror or offeree

v) Occurrence of any condition set forth in offer 3. Counter-Offer 39 a substituted bargain differing from that proposed

original offer

4. Timing Issues-The mailbox rule

a. Revocation becomes effective when communicated

i) Direct-notice becomes available so offeree if acting reasonably,

would be aware of its contents (or offerees agent)

ii) Indirect-valid as long as offeree obtains reliable information

b. Acceptance-in effect as soon as its out of offerees position,

provided that acceptance is made in a manner ok w/ offerer

Normile v. Miller. s home was listed with a realtor. filled out a document offering to purchase home. signed it making numerous changes, rejecting the offer and making a counter-offer. sold the house to someone else. heard about this via the realtor, but still tried to accept offer. Court ruled in favor of .

Lonergan v. Scolnick. placed an ad in the newspaper, selling land. In response to s inquiry, he mailed him a form letter. wrote back w/ questions about property. wrote back, answered questions, and told him to act fast. Held, s final letter was not an offer, so no contract arose.

Izadi v. Machado (Gus) Ford, Inc. placed a newspaper ad selling Fords, intending the ad to be deceptive. was mislead by ad and sued for a car under conditions of ad. Court interpreted ad as an offer b/c it was misleading and b/c reasonable person would share s interpretation.

B. Offer and Acceptance: Unilateral Contracts

1. Bilateral vs. Unilateral

Almost all contracts are bilateral. Assume that a contract is bilateral

unless there is a reason to believe otherwise (i.e. offeree doesnt want to

be bound to perform)

a. Bilateral Contract-promisor is seeking a promise, if promise is not

fulfilled, she can sue for damage), contract arises from mutual

promises

b. Unilateral Contract-acceptance arises from performance

c. Hamer v. Sidway revisited-Unilateral

i) Exchange of promises (Yes)

ii) Would uncle sue nephew for breach? (doesnt make sense,

therefore contract is unilateral) 2. Unilateral Contractsa. Acceptance 50(2)-acceptance by performance requires at least part of what the

offer requests to be performed or tendered. Performance has to be acts offeror

sought.

b. Option Contract Created by Part Performance 45-once a beginning of

requested performance performed offeror is bound (but not offeree)

c. In Cook, the court required substantial performance-this differs from

45 which requires only the beginning of performance

Petterson v. Pattberg has a $5450 mortgage. made an offer-pay mortgage by May 31and save $780. showed up at s house and knocked on door. said that he was there to pay off mortgage. Without opening door, said that he had sold it to someone else. then opened door. tried to hand over money but refused to accept it. Court found for , holding that contract was unilateral and could only be accepted by performance. Gathering up $ is only a preparation, not performance. DISSENT: if ( made performance impossible by interfering with it, he cannot take advantage of the failure (should count as an acceptance). ( did everything necessary to accept, ( was only interfering with performance.Cook v. Coldwell Banker. announced a bonus program running from Jan 1991-Dec. 1991. made enough sales to qualify for bonuses. In Sept, told that she wouldnt be paid until Mar. 1992. stayed with company until Dec. wouldnt pay bonus stating that had to stay with company until Mar to receive it. Court found for holding that offeror was found when offeree rendered substantial performance.

C. Pre-acceptance Reliance

1. Contractor/Subcontractor Context

a. 90 Promissory Estoppel

i) Promise

A) Offer is a promise, subcontractor guaranteed bid (Drennan)

B) An offer is not a promise until its accepted (Baird)

ii) Promisor expected reliance

A) Subcontractor expected party to use its bid when maker an

offer. Subcontractor wanted Reliance.

B) Subcontract doesnt care if this particular contractor relies. It

wants any contractor to win. If an error in subcontractors

bid was obvious, then an argument can be made that

reliance was not expected (or no injustice).

iii) Reliance

A) Contractor used bid when bidding on the contract

B)

iv) Injustice

A) Yes, contractor has a contract to do work and will lose

money as a result of the subcontractors error.

Subcontractor was in better position to prevent mistake.

B) No, should have entered into an conditional/options

contract with subcontractor. Contractor itself didnt want to be bound in case

it found cheaper work later (is there evidence of contractor shopping

around?) May be unreasonable for contractor to rely. Money contractor is

losing is small compared to total bid. Subcontractors mistake allowed

contractor to win contract b/c of low bid

b. 87(2) Reliance Creates an Option Contract

i) Offer

ii) Offeror reasonably expects reliance

iii) Reliance before acceptance

iv) Reliance is substantial

v) Injustice

b. Even if involves sale of goods 2-205 isnt used by courts

BairdDrennan

Offer is not a promiseOffer is a promise because no language saying that it is revocable at any time or implied promise to keep offer open

Contractor knew of mistake before contract (however it would lose deposit and chance to win project if it withdrew)Contractor did not know of mistake until after contract was formed

2. Non-construction Situations

a. Promissory Estoppel 90 Pops Cones b. Option Contract-promise to keep offer open in exchange for

consideration (use contract analysis)

James Baird Co. v. Gimbel Bros. Inc sent a letter to 20-30 contractors offering its subcontracting services at a listed price to the party that won a bid. used s quote in its bid and submitted the bid. withdrew its offer. won the contract and accepted offer. Court held that offer was not a promise, so 90 does not apply (not followed today).

Drennan v. Star Paving Co. , a contractor, was preparing a bid. , a subcontractor placed a bid for the paving. placed a bid with s name and figure. told that he couldnt do job at quoted price before could accept offer, but after was awarded contract. Court allowed to recover under 90.Pops Cones v. Resorts International Hotel, Inc. Court allowed to recover under 90. Resort intended to be bound because they said that just the signature was needed to finish the deal. Resort expected reliance because it told Pops Cones not to renew its lease and to pack up. Pops didnt renew the lease and put its stuff in storage in reliance. In this jurisdiction a definite and seasonal promise was needed, but court relaxed this requirement.Berryman v. Kmoch-analyzed under 90 and as an option contract. Real estate agent and seller signed an agreement stating for $10 and other valuable consideration, I grant an option. Court found that it was not an option contract because of lack of consideration. Agent didnt pay $10 and seller didnt seek his act of rounding up funds to purchase land. No recovery under promissory estoppel either. Agent knew that there was no consideration and that offer could be revoked and his reliance is not what promisor expected.

D. The Firm Offer UCC 2-205

1. When does this Section Apply?

a. Offer ( 24)

b. By a merchant ( 2-104, pg. 17)

c. Sale of goods ( 2-105, pg. 19)

Test used to determine if contract involves sale of goods (Princess)

A) Did dispute arise over goods or services?

B) What is the predominate factor, thrust, or purpose?

C) Fourth Circuits factors (1) language of contract (2) nature of

business of supplier (3) intrinsic worth of materials

d. Signed writing ( 1-201, pg. 11, 12)

e. gives assurance that it will be held open

f. stated time or reasonable time but in event > 3 months, time = 3

months ( 2-205) 2. If 2-205 doesnt apply then try to find an option contract

E. Battle of the Forms UCC 2-207

1. When does this Section Apply?

a. Transaction involves one or more printed forms

b. Transaction involves sale of goods

2. Battle of the Forms

a. Common Law Principles Princess Cruisesi) Mirror Image Rule-if forms arent identical, then second form is a

counter-offer not an acceptance

ii) Last Shot Rule-contract is on terms of party that send last document-usually the

seller

b. UCC involving Merchants

i) Additional Terms

A) Express Assent

B) Not Material (e.g. no surprise or hardship Falconer)

1) Surprise

a) Custom in industry/ trade usage

b) Previous dealing between parties

c) Subjective knowledge (e.g. did party read contract?)

2) Hardship

3) Examples

a) Indemnification Clauses (Material Brown Machine)

b) Sellers attempt to limit warranty (Material Falconer Glass

and Comment 4)

c) Consequential Damages (Not material Comment 5, but

see Falconer Glass-Material)

d) Arbitration Clauses (not material, as a manner of policy)

e) Forum-selection clauses

ii) Different Terms: Three Possible Outcomes

A) Never become part of agreement

B) Knockout Rule, terms cancel and default UCC term is used

C) Same analysis as Additional Terms

c. UCC in consumer transactions-additional terms cannot be added unless buyer

expressly assents to them

Princess Cruises v. General Electric-Court found that contract involved services not sale of goods and applied common law. Princess gave GE a purchase order for work to be done. GEs sent a quotation, which was considered a counter-offer because some of the terms were different. Princess accepted the counter-offer by authorizing the work to be done. Because GE had the last-shot, the contract was on its terms.

Brown Machine v. Hercules- Hercules sent a purchase order. Brown sent back an order acknowledgment with different terms. Hercules responded by correcting the reverse trim and stated that all of specifications are correct. Court didnt interpret this as assent to all of Browns different terms. Sellers Indemnification was not part of the contract.

Dale Horning v. Falconer Glass- (/buyer ordered glass from ( over phone, the issue of remedies/warranties was not discussed. (/buyer sent ( a confirmation order form (no remedy/warranty information). (/seller sent ( a form instead of responding to (s form. On the back, the form stated that buyers sale remedy would be limited to replacement and no liability for other damages. Glass was shipped, received, and defective. ( lost money b/c it had to meet its subcontract. Testimony indicated that seller/( adhered to industry custom. Under UCC 2-207, the different term could not be added if it would result in surprise or hardship. Court found that ( should not have been surprised by the term b/c its custom in the glass industry. Court found hardship, however because of the loss ( incurred because of the defective glass. Therefore, court held that terms were not added to contract and seller had to pay.

Hill v. Gateway- purchased a computer from over the phone. sent computer to , along with documents listing terms of agreement. Court held that 2-207 didnt apply in transactions with only one form (doesnt make sense because under this analysis 2-207 wouldnt apply to consumer transactions). Court decided that Gateway made an offer by mailing the computer and consumer accepted it by keeping the computer.

Klocek v. Gateway-same facts as Hill. The court held that 2-207 applied and that the consumer was the offeror. The court found that the contract was formed over the phone when the computer was purchased.

Caspi v. Microsoft-court held consumer to a forum-selection clause because he clicked on I agree at the end of an electronic document.

D. Postponed Bargaining-The Agreement to Agree

1. Open Price Term

a. Formalist View Walker b. 2-305 (sale of goods)

2. Did parties intend agreement to be binding or were they intending to

reduce their agreement to writing later?

a. Restatement 27-agreement if parties manifest an intent to be bound,

but no agreement if preliminary negotiations. Quake factors may be

helpful.

b. Factors to consider [Quake]

i) Type of agreement usually in writing?

ii) Number of Details

iii) Amount of $ involved

iv) Formal writing needed to fully express covenants?

v) Negotiations indicate that a formal writing was contemplated?

vi) Where in negotiation process agreement was abandoned

vii) Reasons for abandonment

viii) Extent of assurances given by party that now disclaims contract

ix) Reliance

c. UCC 2-204

Walker v. Keith- ( was leased a lot for $100/month for a 10-year term with an option to extend for an additional 10-year term with same terms and conditions except rental will be fixed in such amount as shall actually be agreed upon by the lessors and lessee with the monthly rental fixed on the comparative basis of rental values as of the date of the renewal with rental values at this time reflected by the comparative business conditions of the two periods. Court found that option was ambiguous and didnt give a definite, objective standard for setting the price and, therefore, it wouldnt enforce the agreement. (formalist view)

Quake v. American Airlines-( bid on a project for (, AA. ( was told verbally that it won the contract and received a letter stating we have decided to award you the contracta contract agreementis being prepared and containing a disclaimer reserving the right to cancel this letter of intent if the parties cannot agree on a fully executed subcontract agreement. Court found that letter was ambiguous. Quake argued that it was binding b/c (1) work was to start soon, (2) letter stated that contract had been awarded, (3) letter contained a cancellation statement which suggested that letter was intended to be binding. AA argued that letter was not binding b/c (1) cancellation clause, (2) mention of a formal contract that needed to be written, (3) lack of sufficient detail. Court held that letter was ambiguous and remanded the case.

III. THE MEANING OF THE AGREEMENT

A. Principles of Interpretation

1. Look at Language of the Contract

a. Whose Meaning Prevails? 201 Joyneri) Neither party knew or had reason to know of the others meaning:

No contract b/c no mutual assent

ii) If both parties either knew or both had reason to know of the

others meaning: No contract

iii) If one party knew or had reason to know of others meaning and

other did not know, then agreement uses others meaning

b. Clarifying the Language

i) 202, 203

ii) Maxims given in text [pg. 358]

A) Construction against the drafter 206 (especially applicable

if one party was responsible for writing the document and has greater bargaining power)

B) Words in a series are affected by each other (e.g. a general

terms joined with a specific one only include things like the specific term or if one or more specific items are listed without general or inclusive terms, others are excluded)

C) Purpose of the parties D) Specific provision exception to a more general one E) Handwritten or typed provisions control printed provisions

F) A reasonable interpretation is preferred to unreasonable one

2. Standardized Agreements C&J Fertilizer a. 211 (applies all standard form contracts, not just adhesion ones)

b. Is it an adhesion contract?

i) Adhesion Contract-imbalance of bargaining power, pre-printed

form, take it or leave it, most terms not negotiable (pg. 381)

A) Printed form

B) Drafted by one party

C) Drafting party routinely enters into similar transactions

D) Form presented on take it or leave it basis

E) Adhering party enters in few transactions of this type

F) Principal obligation of adhering party is to pay $

ii) If an adhesion contract, apply Reasonable Expectations Doctrine- customer is not bound to unknown terms which are beyond the

range of reasonable expectations. Factors to consider:

A) Other party has reason to believe that ( would not except

contract if she knew term

B) Terms eliminates dominant purposes of transaction

C) Term bizarre or oppressive

D) It eviscerates standard (or more prominent) terms

E) Party never had an opportunity to read them, or if term is illegible or otherwise hidden from view.

F) Look at circumstances

Joyner v. Adams owned Waters Edge Office Park. agreed to prepare land for the execution of lot leases. In order for these lot leases to be executed, the land had to be developed. argued developed meant buildings, and gave evidence showing she communicated this belief to . argued that developed meant installation of water and sewer lines. presented evidence of local custom. The trial court held that the ambiguity should be resolved against the party that drafted the agreement. The court of appeals reversed arguing that this doctrine shouldnt apply b/c there was no disparity of bargaining power and there was evidence that both parties were responsible for language. Instead, this court held that 201 should be followed and if the court finds that the knew or had reason to know of s meaning and she didnt know or have reason to know of s, she should recover.

Frigaliment Importing Co v. International Sales Corp.Buyer and seller disagreed over the meaning of chicken. In analyzing the agreement, the court (1) rejected argument that a size that includes a size that refers to only young chicken means all of contract referred young chicken, (2) German usage of word, (3) trade usage, (4) legal and Dept. of Agriculture meanings, (5) preferred reasonable over unreasonable (cost would be unreasonable if K referred to young chickens), (6) course of performance. Court rule for ( because ( couldnt meet its burden of proof.

C&J Fertilizer v. Allied Mutual Insurance Co.( purchased theft insurance, expecting it to cover burglary and knew that it excluded inside jobs. Chemicals were stolen from (, but there were no marks outside the building (just tire treads), inside, the door to the room where the chemicals were located there were signs of forced entry. Court held that because it was a contract of adhesion, the reasonable expectations rule would apply. This rule enforces the objectively reasonable expectations of the party.

DISSENT: Court should have started out with a determination if language was ambiguous, no evidence of deception or fraud, text was not fine print, courts should not meddle with contracts which clearly and plainly state their meaning even it dislikes the meaning.

B. The Parol Evidence Rule- evidence of an oral or written agreement that took place before a written contract was formed is parol evidence1. Degree of Finality of the Writing

a. Complete Integration-a writing that is intended to be a final and

exclusive expression of the agreement 210

b. Partial Integration-writing that is intended to be final but not complete

because it deals with some but not all aspects of a transaction

2. Exceptions

a. Fraud, Duress, Incapacity, Mistake, Undue Influence

b. Agreement was subject to a verbally expressed condition

c. Oral or written agreements made after the execution of the writing

d. Agreement was invalid or no agreement

e. No mutual assent

f. No consideration

g. Collateral Agreement

h. Equitable remedy (seeking something other than damages)

i. Evidence to explain ambiguity

Thompson v. LibbyThompson sold logs to Libby and they signed an agreement that didnt mention a warranty. Using a classical approach, the court held that the warranty could not be added to the agreement because it was complete and the warranty wasnt a separate agreement [therefore collateral exception N/A here]

Taylor v. State Farm was involved in a car accident with two other motorists, Ring and Wistrom. Ring sued and recovered $2.5 million in excess of s policy limit. Wistrom was an uninsured motorist, so had to rely on his State Farm uninsured motorist coverage to recover from him. After his suit w/ Ring, and signed a waiver. received $15,000 in uninsured motorist coverage and agreed in return to release all contractual rights, claims, and causes of action he had or may have against State Farm. sued for bad faith, which might be considered a tort claim rather than a contractual claim. Court held that this clause was ambiguous so the Parol evidence rule doesnt exclude evidence.

Nanakuli Paving v. Shell

IV. SUPPLEMENTING THE AGREEMENT: GOOD FAITH & OTHER IMPLIED TERMS

A. Implied Terms Wood, Leibel, Locke 1. Rationale

a. Meets expectation of parties

b. Penalize parties

2. Types of Implied Terms

a. Tailored Default: term that parties would have agreed to if term had been

discussed

b. Untailored Default: UCC gap fillers (terms that most parties would expect to be

in K)

3. Implied promise to use Reasonable Efforts Wood a. Courts often apply an obligation to use reasonable efforts (e.g. to make a sale)

to prevent an indefinite promise from being illusory

b. Rationale: parties expected to be bound by contract and for each party to be

obligated to do something

c. Counter-argument: parties may sometimes bargain for a chance that the other

will do something

d. What constitutes reasonable efforts? not clear

e. Sale of Goods: UCC 2-306 requires best efforts

4. Implied promise to give Reasonable Notice of Termination Leibel, 2-309 a. UCC 2-309 states that reasonable notice must be given, this relates not to

how notice is given, but when its given Leibel b. Assessing what is reasonable notice

i) Needs of parties (e.g. Leibel had to sell off inventory, and it invested in K)

ii) Sufficient time to find a substitute arrangement

iii) Custom, course of dealings

5. Implied Obligation of Good Faith Locke, 205, UCC 1-304 a. Every contract has a duty of good faith and fair dealing

b. No obligation of good faith implied in K formation

c. What constitutes good faith and fair dealing? see pg. 442

d. Doctrine prohibits a party from violating the essence of a transaction, while

technically complying with terms, motive can show bad faith even if prices

reasonable

e. Subjective Satisfaction Locke i) Honesty in fact (e.g. if Warner Bros rejected projects saying it didnt like them,

then they actually have to been dissatisfied with projects). Bad faith can be

shown if it never gave projects a chance or it liked them but rejected them

anyway.

ii) Objective: showing other people liked products is not required, may be helpful

to make other parties credibility questioned

B. Warranties

1. Express Warranties UCC 2-313a. Basis for warranty may be: words, description, sample, or model

b. Sales talk or puffery is not the basis for a binding commitment-affirmation of fact must be objective and capable of being proven true or false (e.g. statement that product is best in its class not an express warranty)

c. Not clear of buyer must rely on express warranty or not

2. Implied Warranty: Merchantability UCC 2-314a. Test 1: Whether goods would pass without objection in the

trade. A product would fail this test if a significant segment of the buying public would object to the product

b. Test 2: Whether goods are fit for the ordinary purpose for

which the goods are used. A product would fail this test if the

goods are [not] reasonably capable of performing their ordinary

functions.

c. In order to prove that a product is not merchantable, first ( must establish the standard of merchantable in the trade

d. Seller must be a MERCHANT in order for this warranty to apply

3. Implied Warranty: Fitness for Particular Purpose UCC 2-315a. Warranty only created when the buyer relies on the sellers skill or judgment to

select suitable goods for the buyers purpose and the seller has reason to know

of this reliance

b. Breach of warranty doesnt require showing that the goods are defective,

merely that they arent fit for the buyers particular purpose

c. Most courts require that the buyers particular purpose must be one other than

the ordinary use of the goods (not addressed in Bayliner)

4. Exclusion or Modification of Warranties UCC 2-316 a. Disclaimer must be conspicuous. Test is whether a reasonable person ought to

have noticed it. (as is and such sufficient is noticeable)

Wood v. Lucy, Lady Duff-Gordon: Lucy (a fashion-designer) entered into an exclusive contract with Wood. Wood promised to market Lucys products and would get a share of the profits in return. Lucy wanted to get out of agreement. She argued that there wasnt a K to begin with Because Woods promise is illusory b/c he didnt promise to do anything. He wasnt bound to market her clothes. The court implies a term into agreement that makes promise not illusory. Court decided that Wood promised to make a reasonable effort to market product. Court used a tailored default b/c these parties intended to have an enforceable K. Rational to imply term b/c of exclusive nature of agreement. Lucy wouldnt agree if Wood not bound.

Leibel v. Raynor Manufacturing Co: (/manufacturer agreed to sell garage doors exclusively to (. ( would sell, install, and service garage doors. After two years of decreasing sales, ( terminated the relationship. ( argued that K was for an indefinite duration and that it could be terminated at will by either party. ( argued that he was entitled to a reasonable notice. Court held that UCC 2-309 applied to case, and 2-309(3) provides that reasonable notice must be given. Reasonable notice doesnt apply to the method of noticed, but rather extent of advanced notification of the termination it gives.Locke v. Warner Bros: Locke entered into a contract in which she would submit scripts to Warner Bros and WB would review them. If WB liked any scripts it would hire her to direct project, if it rejected them it would pay her a sum. Court implied an obligation of good faith into contract. This means that WB must have actually reviewed scripts, given them and chance, and rejected them because they didnt like the materialnot because they didnt want to work with Locke. Just because WB could exercise its discretion and didnt have to accept any projects doesnt mean that it didnt have to consider the projects before rejecting them. The court distinguished a case in which party had the right to at our election refrain from here WB didnt have that right. Bayliner Marine Corp. v. Crow: ( buys a boat for off-shore fishing, desiring that it be capable of traveling 30 mph. ( sees a prop matrix that lists boats will less weight and larger propellers that can reach 30 mph. ( discusses his desire to use the boat in off-shore fishing with (/seller but doesnt mention the 30 mph figure. ( buys a boat and it cannot reach 30 mph. ( sues for breach of (A) express warranty (UCC 2-313), (B) implied warranty of merchantability (UCC 2-314), and (C) implied warranty of fitness for a particular purpose (UCC 2-315). ( loses on all three claims on appeal.

(A) Prop matrixes not a warranty because they referred to boats with different sized propellers and carried equipment weighing substantially less than (s boat. (s sales brochure statement that boat delivers the kind of performance you need to get to the prime offshore fishing grounds is merely the sellers opinion and did not create an express warranty that boat was capable of traveling 30 mph. (B) ( could not prove a violation of warranty because he could not show the standard for the trade, nor that a significant portion of the boat-buying public would object to the boats speed. Although the ( testifies that he believes that the boat is unacceptable as an offshore fishing boat, he fails to show that the boat was not fit of the ordinary purpose for which it was intended. In order to prove that a product is not merchantable, first ( must establish the standard of merchantable in the trade. (C) Court rejects (s argument because there is no evidence that he informed ( of his particular purpose and that the seller knew that selling a boat incapable of traveling 30 mph would be unacceptable to buyer.Caeci v. Di Canio Construction Corp: ( entered into a contract with ( for the construction of a home. Four years after the home was completed, ( noticed a dip in the floor. ( found out that floor was sinking because the foundation of the home was placed on top of soil containing tree trunks, wood, and other biodegradable materials. Court recognized a Housing Merchant warrantythat is an implied term in the contract that the home would be built in a skillful manner and be free of defects. Whether the buyer/seller is aware of the defect or not is irrelevant in the analysis. The builder must construct a home free from material defects and in a skillful manner and the home must be a habitable place

There is an implied warranty of (1) skillful or sound construction and (2) habitability. [only applies when builder = merchant or professional builder-vendor]

(1) skillful or sound construction: focuses on the manner in which the work is performed, may include defects that do not render the house uninhabitable

(2) habitability: the end result expectation that the home will not have any major defects which render it unsuitable for habitation

V. AVOIDING ENFORCEMENT: INCAPACITY, BARGAINING MISCONDUCT &

UNCONSCIONABLITY A. Incapacity 1. Minor Dodson, 14

a. Traditional Rule: minor can void K and is not required to pay adult

restitution absent a showing of a misrepresentation of age

i) Exceptions

A) Necessities: in contracts involving food, clothing, & shelter, minor is liable for

the reasonable value based on quasi-contractual relief rather than

enforcement of K

B) Ratification upon reaching majority: if minor doesnt disaffirm contract within a

reasonable period of reaching majority, they are bound

C) Fraud or misrepresentation on behalf of minor

D) Benefit Rule: money can be returned but refund is deducted by the value of

minors use

E) Use Rule: refund lowered by depreciation

b. Dodson adopts the Use Rule

i) If contract is fair and minor has not been overreached in any way, minors

recovery is deducted for use and depreciation of good

ii) Exceptions

A) Fraud or imposition

B) Adult took unfair advantage of minor

iii) Court distinguished between minor using age as a sword and shield. If adult is

trying to enforce contract requiring a minor to perform, courts more likely to take

a traditional approach

2. Mental Hauer, 15

a. Common Law (Hauer): Test is whether person had sufficient mental ability to know

what he/she was doing and consequences of the transaction

b. Restatement 15

i) Cognitive 15(1)(a) (followed by Hauer and most courts)

A) Defect if person is unable to understand in a reasonable manner the nature

and consequences of transaction

ii) Volitional 15(1)(b) (more controversial section

A) Defect if person is unable to act in a reasonable manner in relation to the

transaction (person could understand transaction, but not able to act

reasonably) andB) Other party has reason to know of defect c. Relief

i) General rule is to put parties back to their initial position

ii) If other party knows/has reason to know of defect, then contract can be voided

even though parties cannot be restored to their initial positions. Hauer

iii) If terms are unfair, 15(2) implies restoration to initial positions not needed B. Duress and Undue Influence

1. Duress 175/Totem Marine a. Wrongful or improper

i) See 176 for a list

ii) Threat to breach K (usually requires bad faith)

iii) To withhold payment of an admitted debt (Totem)

iv) Threatening consequences is not duress (even if they are dire) if

they can be lawfully and properly pursued in absence of

agreement

b. Threat

i) explicit

ii) implicit

A) subtle, unspoken threats

B) awareness that the other party will suffer undesirable

consequences if the contract is not made and use of this to

take unfair advantage of others need

c. Lack of a reasonable alternative such as:

i) Availability of legal action

ii) Alternative source of goods, services, or funds when threat is to

withhold such things

iii) Toleration if threat is minor

d. Threat must cause person to enter into contract

i) Threat must substantially contribute

ii) Was person induced by threat? (subjective standard)

A) Age

B) Background of parties

C) Relationship between parties

D) Other attendant circumstances

e. In economic duress cases, most courts require that inducing party

must have been the source of the economic hardship

2. Undue Influence (177/Odorizzi)

a. Undue susceptibility

i) Weakness need not be long-lasting nor wholly incapacitating but

may be lack of a full vigor due to age, physical condition, emotional

anguish or a combination of such factors

b. Excessive Pressure by dominant subject (party abused his position

by unfairly persuading ( to enter in a contract adverse to his interests) Factors suggestive of this abuse:

i) discussion of transaction at an unusual/inappropriate time

ii) consummation of transaction in an unusual place

iii) insistent demand that business be finished at once

iv) extreme emphasis on untoward consequences of delay

v) use of multiple persuaders against a single ( vi) absence of third-party advisors to ( vii) statements that there is no time to consult financial advisors or

attorneys

c. Special Relationship (not required)

i) Dominant Subject (e.g. Employer/employee in Odorizzi) OR

ii) Confidential Relationship: ( had relationship of dependence& trust

that gave party dominance over him and justified him in believing

that the dominant party would not act contrary to the victims

interest. Special relationship not required, but helpful in establishing

case C. Misrepresentation and Nondisclosure

1. Affirmative Misrepresentations 164 Syester a. Misrepresentation of fact 168(1) (see C is opinion)

b. Fraudulent 162(1) or Material 162(2)

c. Reasonably relied on

d. Induced assent (e.g. did buyer have notice)

2. Opinions 168, 169

a. Misrepresentation

i) Opinion is not actual belief 159 or

ii) Person is aware of facts that would make it false or doesnt know

sufficient facts to form opinion 168(2)

b. Fraudulent 162(1) or Material 162(2)

c. Reasonably relied on 168, 169

d. Induced assent

2. Nondisclosure 161, 162, 164 Hill

a. Failure to disclosure a known fact when a condition under 161 is met. Factors to

consider include (not from a case):

i)Knowledge of parties

ii)Relationship between parties

iii)Manner in which information is required

iv)Nature of fact not disclosed. How easy is it to discovery fact

v)General class to which person belongs to (more likely that seller would have to disclose than buyer)

vi)Nature of K and importance of fact

vii)Conduct taken to conceal

b. Fraudulent 162(1) or Material 162(2)

c. Reasonably relied on

d. Induced assent

D. Unconscionability

1. Procedural: Absence of a meaningful choice (Williams)

a. Gross inequality of bargaining power/ use of form documents

b. Unfairness in bargaining process/ manner in which K was entered into

(Odorizzi factors apply)

c. Did party have a reasonable opportunity to understand the terms of

the contract, considering his obvious education or lack of it; were

terms unreasonably difficult to understand

d. Were important terms hidden in a maze of fine print and minimized by

deceptive sales practices

e. Did party knowingly take advantage of bargaining impairment due to

mental impairment, lack of education, or similar factors 2. Substantive: terms unreasonable favorable to one party

a. Terms in light of the circumstances existing when K was made

b. Gross disparity between the contract and market price (e.g. if price is

twice what is should, may be unconscionable)

c. Limitations of available remedies for breach

Dodson v. Shrader: ( at age 16 purchased a truck from ( for $4,900. 9 months after the purchase, the truck developed mechanical problems. ( didnt repair the truck and drove it until the engine blew up. ( then filed suit seeking to get out of K. Before the suit was complete, the truck was hit by a hit-and-run driver and is now worth only $500. The lower courts found for ( because the rule at the time was that a minor could void a K. The state supreme court reversed and developed a new rule for minors. This rule states when the minor has actually paid money on the purchase price, has not been taken advantage of, and the K is fair, when voiding a contract, the minor is not permitted to recover the amount actually paid. The amount that the minor recovers is reduced for the use of, depreciation, and willful or negligent damage to the article purchased. This rule does not apply if there has been any fraud or imposition by the seller or the contract is unfair, or an unfair advantage has been taken by the seller in inducing the minor into the contract.Hauer v. Union State Bank of Wautoma: (/Hauer suffered a brain injury in a motorcycle accident. She was adjudicated to be incompetent and a guardian was appointed by the court. Later the guardianship was terminated based on a letter from her physician. Elibes, who was in debt, convinced Hauer to take out a loan and give the money to him. RS 15 states that if a party knows or has reason to know of the other partys incompetency and enters into a contract anyway, the contract is voidable by the incompetent party. A party exposes itself to a voidable contract if a reasonably prudent person would suspect the others parties incompetence and decide that an inquiry should be made. Here, the court found that Bank had knowledge of facts that created a suspicion that it should not have entered into the loan because: the Bank knew that Eilbes was in default on his loan and arranged for someone that the Bank didnt know to get a loan, Eilbes told the bank that he would pay off his loan with Hauers loan, the Bank was told by Hauers stockbroker not use Hauers fund as collateral b/c she needed the money to live on, the Bank stated that it was possible that the stockbroker told them of Hauers brain injury, and Hauers banking expert stated that the bank should have not made the loan.

Incompetent Rule/RS 15: If the party knew or had reason to know of the incompetency or took unfair advantage of the incompetent, consideration dissipated without benefit to the incompetent need not be restored. If the party did not know or have reason to know of the incompetency, however, the contract ceases to be voidable when the situation is such that the parties cannot be restored to their previous positions. (finish by reading RS 15 and NOTES)

Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline Service Co.: Totem/( entered into a contract with (/Alyeska to deliver pipes to Alaska. ( gave ( more pipe to carry than expected causing delays, boats traveled slower b/c of load, hurricane cause Totem not to deliver goods on time. When ( reached CA, ( canceled the contract. ( then submitted invoices and began pressing for paymentthis was ( first contract and without the money it would go bankrupt. ( said that it wasnt sure how long it would be before it paid. ( received a settlement offer for $97,500 (the amount owed was between $260,000 and $300,000).Court reversed a summary judgment and remanded the case for a trial. Duress could be shown. (a) ( withheld payment its payment of debts, knowing that ( was facing bankruptcy (b) ( was facing impending bankruptcy and had to accept the cash offered (c) Totem had to agree or go bankrupt (d) ( caused duress because it hadnt yet paid the money it owed to (.

Odorizzi v. Bloomfield School District: ( was employed as a school teacher. He was arrested for homosexual activity. After completing the process of arrest, being questioned by the police, booking, release on bail, and not having slept for 40 hours he was approached by his principal/superintendent at his apartment. ( said that he was trying to help, that there was not time to consult an attorney, that he should immediately resign and if he did not school would suspend and dismiss him and cause him to suffer public embarrassment. Court held that the evidence supported a claim of undue influence but not duress, menace, fraud, or mistake. (1) Duress: no unlawful confinement or threat to people, property. Under RS, this could come out differently b/c suspension and publication of proceedings could be improper if in bad faith (2) Fraud: no misrepresentation. Constructive Fraud: no confidential or fiduciary relationship. (3) Mistake: neither party had a mistake of fact or law (4) Undue Influence could be shown: (a) Undue susceptibility: ( had just been released on bail hadnt slept for 40 hours (b) Excessive strength: apply seven factors e.g. transaction occurred at apartment not office, insistent that time was limited, absence of advisors, and no time to consult an attorney etc.

Syester v. Banta: (, an elderly woman, signed up for classes at (s dance studio. Studio made misrepresentations such as telling her that she could be a professional dancer, that they were her friends, and that she didnt need an attorney. The dance instructors statements of opinion were misrepresentations because he didnt believe what he was saying (168). The statements induced ( to enter into several lifetime membership contracts. It is questionable whether she was reasonable in being induced by statements but 169(c) states that recipient is justified in relying if she is particularly susceptible. Court found for ( and allowed her to rescind.

Hill v. Jones: Seller knew has had termites but failed to tell buyers of this. Court found that sellers failure to disclose was equivalent to an assertion under RS 161(b) buyer was assuming that house didnt have terminates and seller acted in bad faith in not revealing it. The court also applied 162 and found that terminates could be material. The court also stated that there could be inducement because buyers would not have purchased home had they known.

Laidlaw v. Organ (note case): seller asked buyer if there was any news calculated to raise or lower price of tobacco. Even though seller knew that a war just ended, he was silent. Court found that seller had no duty to disclose. Note that here information was equally accessible to both parties unlike in Hill.Williams v. Walker-Thomas Furniture Co.: ( bought furniture from (. The loan contract had a clause that divided up payments among all purchases, leaving the prior purchases unpaid until the balance was paid in full. ( defaulted on a payment and ( tried to take back all furniture. Court held that it was possible the contract was unconscionable and remanded case. Procedural ((): contract of adhesion, inequality of bargaining power, door-to-door salesperson, ( less sophisticated, clause difficult to understand. ((): ( an adult and knew what she was getting into, terms were not hidden in fine print, ( assumed risk by signing K. Substantive ((): clause difficult to understand, cross-colaterization allows company to keep lien longer, clause used to threaten consumer. ((): wouldnt be able to make loan to high-risk customers w/o clause, not illegal, collateral not disproportionate to loan (used furniture not worth much).Adkins v. Labor Ready: ( was a day-laborer working for (. ( wanted to sue ( for violations of fair labor laws, but was unable to do so because of an arbitration clause in his employment application. ( tried to argue that the arbitration clause was unconscionable, but court rejected his argument b/c of the policy of enforcing arbitration clauses. Procedural ((): form document, ( paid minimum wage, ( didnt complete high school, large difference in bargaining power, ( didnt know what arbitration was ((): ( adult and freely signed K, contracts of adhesion are entered into all the time and upheld, no improper bargaining or deception on party of ( Substantive ((): arbitration is too expense effectively denying him of his day in court, arbitration doesnt allow class actions ((): federal policy of enforcing arbitration clauses, no evidence of cost to ( or a cost/benefit analysis, arbitration is not an inferior or less reliable means of resolving disputes according to federal statute, no allegation of specific bias to ( b/c of arbitration

NOTE CASE Ahern v. Knecht: During a heat wave, (s AC broke so she looked in phone book and called (. ( came over and asked for $762 to fix AC. ( paid him and left for doctor appointment. When she returned AC was broken and ( gone. ( sued to get out of K b/c unconscionability. Procedural ((): heat wave, $150 service fee, no knowledge about AC, pressure by (. ((): ( initiated transaction, plenty of listing in phone book, should have gotten other estimates, not unusual for transaction to take place at home. Substantive: other person fixed AC for $72 rather than $762.

VI. JUSTIFICATION FOR NONPERFORMANCE

A. Mistake

1. Mutual Mistake 152, 154, Messerly a. Mistake of a fact in existence at time by both parties

i) Conscious ignorance of facts before entering into transaction is not

an excuse (e.g. seller of $60 painting that was worth $1 million)

b. Fact is a basic assumption

c. Mistake has a material effect on K

d. K voidable unless party assumed a risk under 154

2. Unilateral Mistake 153

a. Restatement Version 153

i) Mistake of a fact in existence at time by 1 party

ii) Fact is a basic assumption

A) Messerly-building was suitable for human habitation

iii) Mistake has a material effect on K

iv) Party didnt assume risk under 154

v) Enforcement is unconscionable (means severe enough to cause

substantial loss) or

Other party had reason to know of mistake or it was his fault

b. Wil-Freds Version (pg. 646)

i) Material Mistake (courts more likely to enforce clerical mistakes

than mistakes of judgment)

ii) Reasonable Care

iii) Unconscionable to enforce K (means severe enough to cause

substantial loss)

iv) Other party can be placed at status quo B. Changed Circumstances

1. Impossibility 262, 263, 264

Performance must be objectively impossible b/c

a. Death or Incapacity 262 or

b. Destruction of thing necessary for performance 263

c. Government order 264

2. Impracticability 261 (What is partys performance? Is it harder to perform?)

a. Performance is impracticable [substantial reduction in value of K]

i) Requires extreme & unreasonable difficulty, expense, injury &

loss. War, embargo, local crop failure, unforeseen shutdown of

major sources of supply may be enough.

ii) Mere lack of profit under K is insufficient. A change in degree of

difficulty or expense due to changes such as increased wages,

prices of raw material, etc. is not sufficient.

b. Because of the occurrence of an event, which

i) Market Change = insufficient Wendt ii) War, Embargo, Terrorism, Crop Failure, Natural Disaster = courts

not that willing to accept

iii) Government Action = sufficient in Di-Chem c. Non-occurrence of was a basic assumption

i) Continuation of existing market conditions and the financial

situation of one of the parties are not such assumptions

ii) Foreseeability is a factor, but foreseeability doesnt compel the

conclusion that non-occurrence was a basic assumption. However, if an event is

foreseeable then non-occurrence of it cannot be a basic assumption

iii) Parties need not have been conscious of alternatives for them to

have had a basic assumption (eg artist dies is a basic assumption

even though parties never contemplated his death) Di-Chem d. With-out parties fault

e. Party seeking relief didnt bear risk under K3. Frustration of Purpose 265 (Is contract now pointless?)

a. Principal purpose-not enough that a party had in mind a specific

object without which he would not have entered contract. The object

must be so completely the basis of the K that, as both parties

understand, without it the transaction would matter little sense.

b. Substantially Frustrated

i) Not enough that transaction becomes less profitable or that party

will sustain a loss, frustration must be so severe that it is not fairly

regarded as within the risks that he assumed under K Wendt

ii) Lease not substantially frustrated if one use is gone as long as

tenant has other uses (some of initial uses are still OK) Di-Chem c. Because of the occurrence of an event, which see impracticability

d. Non-occurrence of was a basic assumption see impracticability

e. With-out parties fault: see impracticability

f. Party seeking relief didnt bear risk under K: see impracticability

C. Modification Alaska Packers, Kelsey-Hayes 1. Modification & Consideration

a. Traditional Rule: consideration required Alaska Packers b. RS 89: modification without consideration allowed: (not influential) i) Unforeseen Circumstances or ii) Statute (e.g. sale of goods) or iii) Reliance on the agreement to modify K

c. UCC 2-209: no consideration required, but request for modification must be made

in good faith

d. Requirement for new consideration: slight change in performance or nominal

consideration usually accepted (see 73)

e. Mutual Release/Forming a New Contract is another way to avoid consideration

requirement

2. Modification & Duress Kelsey-Hayes a. Improper Threat (Kelsey-Hayes stated that threat not to deliver goods is improper)

b. Threat induced party to agree to modification

c. No reasonable alternative

d. Coerced party must display protest, informing the other party that modification was

not freely agreed to (requirement for modification cases)

Lenawee County Board of Health v. Messerly: Pickles bought apartment building from Messerlys as a rental investment. Unknown to both parties at time of contracting, the septic system had been installed in violation of health code. When Pickles went to inspect land (after purchase), the noticed sewage seeping from ground. Health department condemned building and it was impossible to fix sewage problem at reasonable cost because lot was too small. Court made the Pickles accept responsibility for mistake because of an as is clause in the contract. (a) Mistake of a fact in existence at time by both parties: septic system; (b) Fact is a basic assumption: parties were mistaken about whether people could live in apartment; (c) Mistake has a material effect on K: yes b/c land can generate no income; (d) K voidable unless party assumed a risk under 154what case turned on.Wil-Freds Inc. v. Metropolitan Sanitary District: Wil-Freds placed a bid on Governments project. Before its bid was accepted, Wil-Fred tried to withdraw bid, but wasnt allowed. Wil-Freds realized that its subcontractor had made a mistake in its estimate b/c it thought that it could drive its equipment over pipes. This mistake was based on language in governments ad that stated that the pipes were to be able to withstand construction machinery. Wil-Freds hadnt realized that its bid was off initially b/c the estimate for gravel changed when government amended its specifications. Could allowed rescission based on unilateral mistake. (i) material mistake because value was 17% of total bid, (iii) unconscionable/grave harm would result from enforcement--subcontractor would go out of business if forced to perform and Wil-Freds would lose $2-3 million in bonding capacity. (ii) Wil-Freds exercised reasonable care because it had worked with contractor several times in the past without problems, contractor experienced, and Wil-Freds checked bid. Govt argued that it didnt b/c it should have double-checked with subcontractor before submitting bid once it realized its estimate was so low. Wil-Freds thought estimate was low because of change in specifications. Government would get a wind-fall based on mistake (iv) government can be placed at status quo b/c it can accept the next bid which is close to its estimate of cost.

Karl Wendt Farm Equipment Co. v. International Harvester Co: Wendt was a dealer of I.H.s farm equipment. The farming market underwent a recession, so I.H. sold its division to Case. As a result of this sale, I.H. breached its contract with Wendt. Wendt sued. Court held that changes in profitability and in the market cannot be used to establish impractibility or frustration of purpose.

(A) Impractibility: (a/b) IH argued impractibility b/c of market shift, daily losses, and that it might declare bankruptcy. Court rejected this b/c change in profits and market insufficient (c) court holds that as a matter of law, the state of the market is not a basic assumption under K. IH tried to argue that it was because parties entered K to make profit and assumed K would end when they no longer could (d) although market turn was not parties fault, court noted that IH had a way to exit contract and didnt have to sell itself to Case.

(B) Frustration of Purpose: (a) court rejected the argument that mutual profitability was principal purpose, saying that this would defeat the purpose of this part of the frustration of purpose test. Court relied on language of K which stated that the purpose was to sell farm goods; (b) primary purpose was not substantially frustrated b/c IH could sell goods at reduced profits, still a market for goods, still reasons to sell them (c) the event was the dramatic downturn in the market for farm goods; (d) court rejects that the state of the market can be a basic assumption; (e) although IH didnt cause the downturn, the court found fault b/c IH could have included the dealers in the sell-out. IH will argue that it had to do this to prevent bankruptcy; (f) not mentioned by court

(C) Clause in Contract: IH argues that there was a clause that allowed it to withdraw from K b/c the clause allowed it to discontinue product lines. Court rejected argument that IH could use this clause to discontinue all of its products b/c there was already a means to terminate agreement and this wasnt intended to be an alternative and court read this clause to allow IH to change products but not to eliminate sales altogether.

(D) Implied term that allows manufacturer to go out of business: court held that it might imply this term if there was no termination clause, not here.

Mel Frank Tool & Supply v. Di-Chem Co.: Di-Chem leased a building from Frank to store chemicals. The local government changed the fire code, and Di-Chem was found to be in violation of it. Di-Chem moved out, stating that the structure was useless to it as a chemical warehouse. Court didnt find a frustration of purpose because Di-Chem had some non-hazardous chemicals that it could still store in the building.

(A) Mutual Mistake: not applicable because new code was not yet in existence

(B) Fraud: landlord didnt know or have reason to know that Di-Chem was storing harzardous. (C) Frustration of Purpose: (a) Principal purpose is: storing and distributing chemicals; (b) Substantially frustrated: Di-Chem argued that it could no longer store many of its chemicals b/c of fire code violations. Court didnt find substantial frustration b/c not all of Di-Chems chemicals were hazardous (e.g. its food additives), so it still could do some storing in building. Di-Chem however, will have to find another building to store hazardous chemicals, so inefficient; (c) Because of the occurrence of an event: change in law; (d) Non-occurrence of was a basic assumption: court seemed to accept the government law as sufficient, using artist death illustration; (e) With out parties fault: neither party had control over the passing of the ordinance; (f) Party seeking relief didnt bear risk under K: no language of this in contract, Di-Chem tries to use destruction clause to get out. (D) Impracticability: doesnt apply really because it is not harder for Di-Chem to perform (e.g. pay rent), just pointless for them to do so.

Alaska Packers Association v. Domenico: Fisherman agreed to work on boat for $50/season. Once boat reached Alaskan fishing waters, workers refused to fish citing bad nets. Employer agreed to pay $100/season, but once boat returned home, employer refused to pay higher wage. Court held that wage increase was not enforceable due to lack of consideration. Today, the employer could have made a duress argument because employees waited until boat was far from home, then threatened not to perform. Employer lacked reasonable alternative because season was short and it had expended large amount of money on processing plant.

Kelsey-Hayes Co. v. Galtaco Redlaw Castings Corp.: ( and ( signed a contract in which ( agreed to purchase castings from (. ( used the castings to make breaks that it sold to Ford and Chrysler. ( requested a 30% price increase, because it was losing money. Most of (s customers found supplies of castings from others. ( was only customer left when ( demanded second 30% increase. ( had to agreed to increases because it had no other suppliers and Ford would have to shut down its production lines if ( delayed in producing castings. Court found that K could be voidable under duress (it remanded case for trial) because (s threat to breach was improper, there was no reasonable alternative because Ford needed the parts and ( couldnt find an alternative supplier, threat induced agreement to 30% increases. The court had an additional requirement: that party coerced into modification at least display some protest against the higher price in order to put the seller on notice that modification is not freely entered into.

VII. RIGHTS AND DUTIES OF THIRD PARTIES

A. Third-Party Beneficiaries Vogan, Zigas 302, 3041. Third Parties that have traditionally had standing

a. Creditor Beneficiary (e.g. A loans $ to B. B loans $ to C. C promises B to pay A. A

is the creditor beneficiary)

b. Donee Beneficiary (based on close relationship between third party and promisee

(e.g. husband promises wife to leave money to niece, niece is donee beneficiary)

2. Third-Party Standing in RS 302

a. Intent requirement 302(1): Both promisor and promisee must intend to give third

party rights [supported by the fact that section starts of unless otherwise agreed

between promisor and promisee , and refers to intention of the parties]

i)The intent requirement may be different for each party. For example in a contract for a will that omits an intended beneficiary:

ii)Client = Promisee, intended to benefit beneficiary (clear)

iii)Lawyer = Promisor, hard to argue that lawyer cared about clients friend but lawyer intended to draw up will as client intended to benefit friend. Make arguments about which intent of lawyer is needed.

iv)How is intent determined? Look at contract language and provisions, the background of K, and considerations of fairness and practicality. Some courts have a presumption against third party standing and require clear evidence in K to hold otherwise

b. Benefit to third party 302

i) 302(1)(a): Performance will satisfy an obligation of the promisee to pay money

to beneficiary or A) Vogan require performance to be of pecuniary benefit to third party

B) Comment: Third party is intended if it would be reasonable for her to rely on

the promise as manifesting an intention to confer a right

ii) 302(1)(b): circumstances indicate that promisee intends to give the beneficiary

the benefit of the performance (this section implies that the intent requirement is

not very strict)3. Other Approaches to Third Party Standing a. Both promisor and promisee must intent to give the third party rights under K

b. Intention of the promisee controls

c. Promisor must know or have reason to know of the promisees intent to benefit the

third party, even if the promisor has no particular desire to confer a benefit on or

create an obligation to the third person (See Vogan)

4. Third Party Standing in Government Contracts 313

a. Contract must have been made for the benefit of a third party. The court in Zigas

considered 5 factors: i)Who lost $ as a result of the breach: govt or third party?

ii)Is there a government procedure to resolve the issue?

iii)Is liability limited? (a few tenants v. general public)

iv)Broad purpose in contract or a narrow goal

v)Does agreement manifest an intent to make third party a direct beneficiary?

B. Can Third Party Sue Parties For Mutually Agreeing to Change the Contract? 311

1. General Rule is No

2. Exceptions to General Rule given in 311(3)

a. 311(3): Beneficiary materially changes his position in justifiable reliance on the

original duty

b. 311(3): Beneficiary brings suit to enforce original duty

c. 311(3): Beneficiary assents to original K at request of promisor or promiseeC. Assignment and Delegation 1. Assignment 317

a. General Rule is that rights can be assigned.

b. A right cannot be assigned if:

i)Substitution materially changes the duty of the obligor

ii)

iii)Assignment materially increases the burden or risk imposed on obligor by K

It materially impairs obligors chances of obtaining return performance

iv)Substitution materially reduces value of contract 317(2)(a)

v)It violates statute or public policy 317(2)(b)

vi)Right cannot be assigned if contract precludes it 317(2)(c)

c. Requirements of Assignment

i)Assignor must make intent to relinquish right clear

ii)Assignor cannot retain any control over right or power of revocation

iii)Obligor need not accept the assignment

d. Liability of Obligor Herzogi)Once obligor has notice of assignment, he must pay assignee not assignor

ii)Assignor can assert claim against obligor directly

e. Sale of Goods: see 2-210

2. Delegation 2-210, 322

a. Duty can be delegated unless other party has a substantial interest in having her

original promisor perform.

b. Party has a substantial interest in having original party perform when:

i) Personal Services

ii) Personal Services exception applies to business contracts when party has an

interest in performance by a specific individual iii) K cannot be delegated if there is some reason why the non-assigning party would

find performance by delegate substantially different from what it bargained for.

See Sally Beauty

Vogan v. Hayes Appraisal Associates, Inc.: Bank entered into contract with an inspection company. Company was to inspect Banks customers home and Bank would disperse funds to contractor based on appraisals. Appraisal company was negligent and caused all of Banks money to be dispersed before home was complete so homeowner sues. Court allows third party to have standing. Court found that Bank intended to benefit third party (bank wanted to protect Vogans so they would be able to repay loan). Court also required that promisor have reason to know that such benefit is contemplated by the promisee as one of the motivating causes in making contract. Court found that appraisal company had reason to know because it was inspecting a home site and the Vogans name were on the paperwork.

Zigas v. Superior Court: Tenants sued their landlords for violating a contract with HUD requiring the landlords to charge rents below a certain amount in exchange for getting low interest loans. Court held that tenants had third-party standing. The court app