Contracts Outline

I. Contract: Definitions & Basic Elements

1. Contract = a promise (of a future commitment) or set of promises that the law will enforce via assigning a remedy in the event of a breach or recognizing the performance it entails as a duty. Two contrasting theories of contract: 1) Objective – an obligation attached by the mere force of law to certain acts of the parties; nothing to do with personal intent; 2) Subjective – consideration of the actual intent of all parties is absolutely relevant.

Categories of Contracts:

a) Contracts for the sale of goodsb) Real estate transactionsc) Constitution contractsd) Employment agreements (i.e. ‘At-Will Employees’, which are those

employment agreements that are terminable by either party at any time and for any or no reason at all.)

e) Family contracts (unlike commercial agreements, are more often informal- usually oral, may not be preceded by significant bargaining, are often lacking in detail and may not have big $ involved)

Types of Contracts:

a) Unilateral – a promise in exchange for a performance; a K which only one party promises to do something and the other party is free to act or not as he/she wishes.

b) Bilateral – a promise in exchange for a return promise; both parties promise to do something; much more common; more $ involved

c) Implied in Law (quasi-contract) – A fiction of the law based on the maxim that one who is unjustly enriched at the expense of another is required to make restitution to the other (aka quasi-contracts or constructive contracts) (i.e. a physician gives emergency care to an injured/unconscious pedestrian, services were not requested by the victim or anyone else but the law may impose recovery on behalf of the pedestrian if care is negligent)

d) Implied in Fact : arises where the court finds from the surrounding facts and circumstances that the parties intended to make a contract but failed to articulate their promises in writing and the court merely implies what it

1

thinks both parties intended (i.e. patient visits doctor, where a reasonable fee is implied in fact although neither party mentions payment)

e) Option Contract : 1) valid contract even though it is an offer without an acceptance, instead it is a promise to keep an offer open for a certain period of time. 2) it is the offeror’s acceptance of consideration in exchange for his promise to keep the offer open for a designated period of time, thus rendering the offer irrevocable; 3) Elements are:

it must be supported by consideration (i.e. a deposit, the deal is in writing and signed by the offeror, etc.) AND

proposes an exchange on fair terms within a reasonable period of time AND

is reasonably expected to induce action/forbearance of substantial character in order to be a binding option contract

f) Illusory Contract : an agreement in which one party gives as consideration a promise that is so lacking as to impose no obligation (i.e. “I promise to think about giving you $5” or “If you come to every class, I will give you an A if I feel like it”); if a party’s promise is given the power to terminate at any time/at will without more, the party’s promise will be held as illusory unless termination requires written notice in advance. These may rarely be enforced under quantum meruit for the reasonable value of services or materials actually rendered or under the doctrine of promissory estoppel, where a party relies to his detriment on the promises. (See page >>> of this outline for more examples)

Strong v. Sheffield (p. 69): D gave a note to P for an antecedent debt which was past due, the only consideration was that P would forbear in his demand for payment, though no time period of the forbearance was set, 2 years later P demanded payment. Rule: A purported promise is illusory and not consideration if by its terms the performance of the promise is entirely optional for the promisor.

g) Adhesion Contract : a standard-form contract prepared by one party, to be signed by the party in a weaker position, usually a consumer, who has little choice about the terms. It is fully enforceable, unless:

1. K is unconscionable or unduly oppressive2. K does not fall within the reasonable expectations

of the consumer

(See page 22 - 23 for examples)

Promise = declaration of one’s intention to do or refrain from doing something; an expression of intention that the promisor will conduct himself in a specified way in the future with an invitation to the promisee to rely thereon.

2

Implied Promise = A promise inferred by law from a document as a whole and the circumstances surrounding its implementation.

2) Elements

A. Offer

1) an act whereby one person confers upon another the power to create contractual relations between them; 2) the manifestation of willingness to enter into a bargain, so made to justify another person in understanding that his assent to that bargain is invited and will conclude that bargain; 3) Elements are:

An expression of a promise or commitment to enter into a contract: (Note: the problem here is to distinguish between statements of future intent and preliminary negotiation on the one hand and statements of promise, undertaking, or commitment on the other.), which creates the power of acceptance. The criteria used to make this distinction include:

o Language –may show that an offer was or was not intendedo Offer made in jest – an offer which the offeree knows or

should know is made in jest is not a valid offer. Thus even if it is ‘accepted’, no contract is created

certainty and definiteness in the essential terms (i.e. to whom, for what, and when the offer is good as well as how the offer can be accepted) AND

communication of the above to the offeree

Lucy v. Zehmer (p.120): D claimed his offer to sell his farm to P was made in jest. Rule: if a person’s words or acts, judged by a reasonable standard, manifest a certain intent, it is immaterial what may be the real but unexpressed state of that person’s mind. If the acceptor has reasonable basis to perceive the offer is real and accepts, then the offer and therefore the K is real.

Fairmount Glass Works v. Crunden-Martin Warehouse Co. (p. 134): P requested by letter of D the lowest price it could give on his order for mason jars. D gave the prices to P but refused to full their order. Rule: Where prices are requested on an order and the vendor quotes those prices to the vendee, the vendor has offered to fill the order and is obligated to fill it upon receipt within a reasonable time of vendee’s acceptance.

Lefkowitz v. Great Minn. Surplus Store (p. 138): P answers ad for 1 lapin stole sold to first customer for $1.00; D refuses to perform saying the ad is only acceptable by women. Rule: While an advertiser has the right at any time before

3

acceptance to modify his offer, he does not have the right, after acceptance to impose new or arbitrary conditions not contained in the published offer. Because the ad was so specific (described who could accept, when, for what, and how), it constituted an offer.

(Note: the general rule is that an ad. Is not an offer but rather an invitation by the seller to the buyer to make an offer to purchase the item)

Ways to Keep an Offer Open:

1. Consideration (lower threshold for this exists for option K’s)2. Merchants are covered under the UCC, which requires offers to be

in writing where the time lapse can be up to 3 months (unless stipulated otherwise in the K)

3. Under a uni-lateral K, the offeree must begin to tender performance

B. Acceptance

1) The manifestation of assent by the offeree (and ONLY the offeree) to the terms of the offer in a manner prescribed or authorized by the offeror; 2) a voluntary act of the offeree whereby he exercises the power conferred upon him by the offer, and thereby creates the set of legal relations called a K. (Note: one of the most important consequences of this ‘set of legal relations’ is that the offeror is no longer free to change his mind and withdraw from the relationship without incurring liability.) Acceptance can be performed:

Usually silence is not a form of acceptance however, Restatement 69 states ‘where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only:

o Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation

o Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree should notify the offeror only if he does not intend to accept (i.e. past performance)

o Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror only that he does not intend to accept

o Terms are manifestly unreasonable

International Filter Co. v. Conroe Gin, Ice & Light Co. (p. 151): P offered a water purifier to D, stating that there would be a contract when D’s acceptance was approved by P’s executive officer, this was done but D revoked its order claiming

4

there was no K. Rule: As the offeror is in control of his offer, he may specify the type of acceptance which is require and can dispense with the requirement of its communication. Acceptance was done by obtaining the signature. D didn’t have to notify P that it had done so to create a K because K read “this becomes a K when signature obtained’.

White v. Corlies and Tift (p. 156): P attempted to accept an offer by D by beginning performance of ‘fitting up’ a suite of offices, without indicating to D of his intention to accept. Rule: Acceptance of an offer must be manifested in such a way as to be communicated to the offeror. P’s purchases could have been made for another job and do not constitute commencement of performance.

Ever-Tite Roofing Corp. v. Green (p.158): D hires P to re-roof their home with the understanding that the credit approval would take some time to obtain. D gets tired of waiting and hires another co. to do the job. P doesn’t find out until the arrive to do the work. Rule: K was accepted by the P when he commenced performance of the work contracted to be done. The commencement began ]with the loading of the trucks and transporting them to the house.

Allied Steel & Conveyors Inc. v. Ford Motor Co. (p. 162): D’s employee was injured during performance of D’s contract with P before D had formally accepted the K as per terms of P’s offer. Rule: Where the offeror merely suggests a permitted method of acceptance, other methods of acceptance are not precluded.

The Mirror Image Rule = An acceptance must be on the terms proposed by the offer without the slightest variation. Anything else is a rejection of the original offer and acts as a counter offer. The offeror ‘as master of the offer’ enjoys freedom from contract except on the offeror’s terms - - offeror does not have to accept counter offers.

Owen v. Tunison (p. 130): D replied by letter to P’s offer to buy his property and buildings thereon for $6K saying that he could not sell for less than $16K. P replied with ‘Sold! Here’s your money. D says ‘I never agreed to sell it to you’. Rule: There can be no contract, no meeting of the minds, between the parties unless there is an offer.

Under this rule, the party that sent the last form before performance began usually prevailed because each later form acted as a counter offer. When the recipient of the last counter offer performed, that was taken as an acceptance o f the counter offer. This made it advantageous to fire the ‘last shot’ (The ‘Last Shot’ Rule) before performance began. This is the common law doctrine, which applies to non-merchants.

Battle of the Forms = The conflict between the terms of standard forms exchanged between a buyer and a seller during contract negotiations. UCC 207 attempts to resolve battles by abandoning the common-law requirement of mirror-image acceptance and providing that an acceptance with additional terms is normally valid.

5

UCC 207: current law everywhere except D.C.; three treatments:1. For merchants and non-merchants alike – if new, conditional terms are

not accepted, there is no contract but each party goes on to act as if a K exists, then UCC states that a K does exist based on the terms in common

2. For 2 merchants – a definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless the acceptance is expressly made conditional upon the assent to the additional/new terms. The additional terms are to be construed as proposals for addition to the contract and the offeror’s form/terms will prevail unless

The offer expressly limits acceptance to the terms of the offer The new terms materially alter the K The offeree has already objected to the particular terms, or

objects within a reasonable time after notice of them is received

3) For merchant to non-merchant – additional terms of the offeree are treated as proposals to be added to the K and do not get added to the K

Step-Saver Data Systems, Inc. v. Wyse Technology (p. 204): P purchased software programs from D for resale, which failed to operate properly; P sued for breach of the warranty in the K but court held that the box-top warranty disclaimer was incorporated into the K. Rule: An additional term will not be incorporated into a K if the term’s addition to the K would materially alter the agreement.

ProCD, Inc. v. Zeidenberg (p. 217): D purchased software as a private consumer and then formed a company around it in spite of restrictions on the box and at the start of the program stating that use of the software was limited to non-commercial purposes. Rule: A buyer accepts goods/terms when, after an opportunity to inspect, he/she fails to make an effective rejection.

(Note: The UCC is more favorable to K formations than is common law because it was spawned by commercial trade.)

The Knock Out Rule = when there are difference between the seller’s and the buyer’s terms and they are material, they cancel each other out and the contested term gets filled in by a code/UCC gap filler (i.e. warranty of merchantability)

The Mailbox Rule = The dispatch of acceptance is the crucial point at which the K in made – after which the offeror’s power to revoke is terminated. The offeree’s power to withdraw his/her acceptance is also then terminated. In short, acceptance of an offer takes effect as soon as it is mailed, whether or not it ever reaches the offeror as long as it is properly addresses and safe transmission is generally assured. (Common Law)

6

4 Ways to Revoke the Power of Acceptance

1. Lapse of an offer2. Revocation (prior to acceptance only)3. Death or incapacity of an offeror4. Rejection or counter offer by offeree

Ragosta v. Wilder (p. 181): D offered to sell a piece of real estate to P contingent on P meeting D at his bank with the $ before 11/1; on 10/8 D informed P that he had changed his mind and wasn’t going to sell. Rule: Where an offer invites an offeree to accept by rendering a performance, an option contract is created when the offeree tenders or begins the invited performance. D returned the consideration and the P never began performance therefore, the option contract was no longer binding. (Example of revocation)

Dickinson v. Dodds (p. 176): D attempted to revoke an offer to sell land to P but P agreed to purchase the land prior to communication of the revocation got to him. Rule: An offeree may not bind an offeror by accepting a revoked offer, even if the revocation had not been communicated to him prior to acceptance. (Example of revocation)

C. Consideration

1) Something of value (such as an act, a forbearance, or a return promise) received by a promisor from a promisee; it is necessary for an agreement to be enforceable; 2) it must be fair and reasonable under the circumstances of the agreement and be tendered after the promise. 3) aka Bargained for Exchange = mutually induced exchange; promise or return promise must be sought by promisor in exchange for his promise or performance. Requirements:

1. Performance or return promise must be bargained for aka mutually induced2. Promise or return promise sought and given by promisor in exchange for his promise 3. Performance may consist of:

Affirmative act other than the promise that the promisee is not legally obligated to do

Forbearance from an act if you have a legal right to do it Creation, modification, or destruction of a legal relationship

4. Promise or return promise may be given to promisor or some other person but this must also be bargained for

7

As Long as Consideration Has Been Met, There is No Requirement of:

1. Benefit to the promisor, or detriment to the promisee2. Equivalence in the values exchanged3. Mutuality of obligation(Note: Court is not out to discover or undo bad deals!)

Gratuitous Promise = consideration that, not being founded on any detriment to the party who gives it, will not support a K; a performance for which a party was already obligated

Gift = voluntary transfer of property without consideration; unenforceable because there is no consideration or detriment to the promisor

Peppercorn = A small or insignificant thing or amount; nominal consideration; pejorative term for consideration that is for nominal value; an attempt to make a gratuitous promise enforceable by a mere token payment, arranged by the parties for the sole purpose of satisfying the requirement of consideration. If discovered, it is neutralized.

Hamer v. Sidway (p. 27): D promised to pay $5K to P if he would forebear booze, tobacco, swearing, and playing cards and pool for $ until he turned 21. D later refused to pay. Rule: Forbearance of legal freedoms is valuable consideration therefore a K did exist.

Fiege v. Boehm (p. 34): D promised to pay $ if P would refrain from suing for child support; D did not pay and P sued, during suit it was determined that the child did not belong to D anyway. Rule: Forbearance to assert an invalid claim may serve as consideration for a return promise if the parties at the time of the settlement reasonably believed in good faith that the claim was valid.

Feinberg v. Pfeiffer Co. (p. 39): P was given a pension for life by D based upon her past service to the company, D subsequently refused to pay for lack of consideration. Rule: Past services are not a valid consideration for a promise.

Webb v. McGowin (p. 45): P saved the now deceased D from serious bodily injury/death by placing himself in grave danger on the job, in return D promised to pay $15 every 2 weeks for the rest of his life, D then refused to pay. Rule: A moral obligation plus a material and substantial benefit to the promisor is sufficient consideration to support a subsequent promise to pay (moral obligation alone does not account for consideration).

Kirksey v. Kirksey (p. 50): D promised P a place to raise her family ‘if you come down and see me’ and later tossed her out. Rule: In order to be legally enforceable, an executory promise must be supported by sufficient, bargained for consideration.

8

Central Adjustment Bureau, Inc. v. Ingram (p. 53): P brought suit against Ds seeking enforcement of a non-competition clause in the former employees’ K. Rule: A court will enforce covenants not to compete to the extent that they are reasonably necessary to protect the employer’s interest without imposing undue hardship on the employee when the public interest is not adversely affected.

Illusory Ks:

Strong v. Sheffield (p. 69): D gave a note to P for an antecedent debt which was past due, the only consideration was that P would forbear in his demand for payment, though no time period of the forbearance was set, 2 years later P demanded payment. Rule: A purported promise is illusory and not consideration if by its terms the performance of the promise is entirely optional for the promisor.

Mattei v. Hopper (p. 72): P purchased property from D, the sale was to be completed in 120 days ‘if satisfactory leases could be obtained’, D later refused to perform. Rule: ‘Satisfaction’ clauses do not render a contract illusory or raise problems of mutuality of performance since good faith as per a reasonable person is required towards fulfillment of them.Eastern Airlines v. Gulf Oil Corp. (p. 76): D contracted with P to supply P’s fuel requirements (spec. ‘as much fuel as they need’) at current $ rate, later D raised the price significantly and withheld supply until new condition was met. Rule: A promise conditional upon the parties’ requirements is not illusory since they must act consistent with good faith and standard commercial practices.

Wood v. Lucy, Lady Duff-Gordon (p. 83): P received the exclusive right for one year, renewable on a year-to-year basis if not terminated by 90 day notice, to endorse designs with D’s name and to market all of her fashion designs for which she would receive ½ of the profits derived. D broke the K by placing her endorsement on designs without P’s knowledge. Rule: K is not illusory, because while an express promise may be lacking, an implied promise imperfectly expressed pervades the document so as to form a valid K.

Exceptions to Consideration Requirement:

A. Reliance = Dependence or trust by a person, especially when combined with action based on that dependence or trust. It is used to stop D from claiming that there is no consideration, therefore no K. Forbearance in reliance is binding if injustice can be avoided only by enforcement of the promise. However, it does not serve in lieu of consideration. Charitable subscriptions/donations and marriage settlements can also be enforced under this theory. Elements:

9

Promisor should reasonably expect that the promise will induce action or forbearance

Promise does induce such action or forbearance to P’s detriment Injustice can only be avoided by enforcing the K

Detrimental Reliance = Reliance by one party on the acts or representations of another, causing a worsening of the first party’s position. May serve as a substitute for consideration and thus make a promise enforceable as a K.

Ricketts v. Scothorn (p. 86): In reliance on D’s promise to pay her $2K, P quit her job. Rule: A promise may be legally binding without consideration if it reasonably induced action or forbearance and if injustice can be avoided by its enforcement.

When Reliance is Proven, Court Can Employ:

1. Promissory Estoppel = The principle that a promise made without consideration may nonetheless be enforced to prevent injustice if the promisor should have reasonably expected the promisee to rely on the promise and if the promisee did actually rely on the promise to his/her detriment.

Promisor must have reasonably foreseen that something promisee would rely on the promise

Promisee must believe in and rely on the promise The only way to avoid injustice is to enforce the promise

Feinberg v. Pfeiffer Co. (p. 39): P was given a pension for life by D based upon her past service to the D. D subsequently refused to pay the pension claiming lack of consideration for its promise to do so. Rule: Where one acts in reliance on a promise, there is an enforceable K under the doctrine of promissory estoppel.

2. Equitable Estoppel = A defensive doctrine preventing one party from taking unfair advantage of another when, through false language or conduct, the person to be estopped has induced another person to act in a certain way, with the result that the other person has been injured in some way. Elements:

The party to be estopped must be aware of all the facts The party being estopped must intent of his/her actions must make the

other party believe that the property will be transferred The other party must be ignorant of the facts The other party must rely on the conduct of the estopped to his/her

detriment (reliance plus damages) The only way to avoid injustice is to enforce the promise

10

B. Restitution = Return or restoration of some specific thing to its rightful owner or status; compensation for benefits derived from a wrong done to another; compensation or reparation for the loss caused to another. Courts may also enforce the K if the benefit received by the promisor was material and no opportunity to bargain existed. Applications:

1. Unjust Enrichment = the retention of a benefit conferred by another, without offering compensation, in circumstances where compensation is reasonably expected; a benefit obtained from another, not intended as a gift and not legally justifiable, for which the beneficiary must make restitution or recompense.

Callano v. Oakwood Park Homes Corp. (p. 108): P, under K to a 3rd party (who died mid-K), planted shrubbery on, and enhanced the value of, D’s property. Rule: Where one party receives benefit from a 2nd party, the 1st party is not unjustly enriched if there was no direct relationship between the parties and the 2nd party did not expect recompense from the 1st party (who received the benefit) in the first place. In short, go sue the guy you contracted with.

Webb v. McGowin (p. 45): P saved the now deceased D from serious bodily injury/death by placing himself in grave danger on the job, in return D promised to pay $15 every 2 weeks for the rest of his life, D then refused to pay. Rule: A moral obligation is a sufficient consideration to support a subsequent promise to pay where the promisor has received a material benefit.

2. Quantum Meruit = ‘as much as he deserved’; equitable remedy to provide restitution for unjust enrichment; the reasonable value of services; damages awarded in an amount considered reasonable to compensate a person who has rendered services in a quasi-contractual relationship.

Cotnam v. Wisdom (p. 103): P rendered emergency professional medical services to D after a car accident. D later said that they didn’t ask for his help and refused to pay. Rule: A physician may recover for emergency services rendered on the spot to an unconscious accident victim.

Restatement 86:1. A promise made in recognition of a benefit previously received by

a promisor is binding to the extent necessary to prevent injustice2. A promise is not binding under #1 if:

i. If the promise conferred a benefit as a gift or for other reasons the promisor has not been unjustly enriched or

ii. To the extent that its value is disproportionate to the benefit

11

C. Precontractual Liability = some circumstances in which a party may nevertheless incur liability before that contract has been formed; crossing the Brooklyn Bridge example; ‘an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree begins the invited performance.

Hoffman v. Red Owl Stores (p. 235): P jumped through all of D’s hoops to open up a franchise and, upon the statements of D’s employee, took certain steps such as selling his bakery, etc. In the end, D misrepresented the amount of $ that the franchise would cost and negotiations collapsed. Rule: The promise need not embrace all essential details of a proposed transaction between the parties so as to be the equivalent of an offer that would result in a binding K if the P accepts it.

Cyberchron Corp v. Calldata (p. 239): D procured computer equip. from P in order to fill a gov’t K, but later purchased the equipment at a lower cost elsewhere. Rule: Promissory estoppel has 3 elements: 1) a clear and unambiguous promise; 2) a reasonable and foreseeable reliance by the party to whom the promise is made; and 3) an injury sustained by the party asserting the estoppel by reason of reliance.

Channel Home Centers v. Grossman (p. 244): D promised that none of P’s competitors would be rented a store in the mall and used a letter of intent to rent to P to obtain financing, but then rented a spot to P’s competitor. Rule: A letter of intent to rent providing that the lessor will take the unit off the market is enforceable if the lessor uses the letter to help obtain financing = consideration/unjust enrichment.

II. Breach

An exchange of promises will lead to an exchange of performances in the ordinary course of affairs. One who has committed oneself in exchange for a return promise is entitled to a continuing sense of reliance and security that the promised performance will be forthcoming when due. One way of protecting this right is to permit the party to defer or withhold its own performance in the face of a threat that it will not receive what was promised.

Swift Canadian Co. v. Banet (p. 834): D contracted to purchase/import lamb pelts from P, the gov’t raised the price on imports after P had accomplished only partial shipment, shortly thereafter D refused to accept further deliveries. Rule: Assuming a party is ready to perform, he is not obligated to perform in vain when the other party has given notice of refusal to accept performance.

12

Condition Precedent = an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a K becomes due (2nd Restatement 224); the happening of an uncertain occurrence, which is necessary before a particular right or interest may be obtained or an action performed.

1. Express Conditions = if the parties explicitly agree that a duty is conditional upon the happening of some event

Example: A is to ship shoes to B, and B agrees to either return them if they don’t satisfy her, or pay for them. The K states “B’s duty to pay for the shoes shall be conditional upon her being satisfied with them”. Strict compliance is usually required to satisfy this.

Luttinger v. Rosen (p. 665): P signed a contract to purchase D’s premises and put down a deposit ‘subject to and conditional upon’ their obtaining a specified mortgage financing. Rule: A condition precedent is a fact or even which the parties intend must exist or take place before there is a right to performance, and if the condition precedent is not fulfilled the K is not enforceable.

2. Constructive Conditions = the happening of an event is made a condition of the duty because a court so determines aka conditions implied-in-law (used to ask: isn’t that an implied condition?)

Example: A contract to ship shoes to B, and B agree to either return the shoes as unsatisfactory, or pay for them. No language of condition is used in the agreement. As a matter of common law (or the UCC), the court will impose a constructive condition upon her receiving them and being satisfied with them. Substantial compliance is usually required to satisfy this.

Kingston v. Preston (p. 693): P agreed to sell his business to P, and P agreed to but did not give security for the payments. Rule: Breach of a K by one party relieves the other party’s obligation to perform their promise, which is dependent thereon, the performance of the first promise being an implied condition precedent to the duty to perform the second promise.

Stewart v. Newbury (p. 695): P, who was contracted to do excavating for D, alleged that he was to be paid in the ‘usual manner’, which was a set of fixed installments. D failed to pay according to the schedule. Rule: Where a contract is made to perform work and no agreement is made as to payment the work must be substantially performed before payment can be demanded.

Substantial Performance = if one party fails to substantially perform, the other party’s remaining duties do not fall due; where the performance meets the essential purpose of the K

Jacob & Youngs v. Kent (p. 507): P was hired to build a $77K country home for D. When it was completed, it was discovered that through an oversight, the wrong

13

brand of pipes (a specific brand was contracted for) were used, D refused to make final payment until it was fixed. D refused to fix it because the cost to do so would be enormous. Rule: An omission, both trivial and innocent, will not amount to breach in the event that the K has been substantially performed – all of the essential obligations pursuant to the agreement have been met.

Plante v. Jacobs (p. 702): D believed that P, whom they had contracted with to build a home upon their lot for $26K, used faulty workmanship and incomplete construction, they stopped further payments to D after having paid $20K. P then refused to complete and sued. Rule: There can be no recovery on a K as distinguished from quantum meruit unless there is substantial performance, which is defined as where the performance meets the essential purpose of the K.

Warranties (UCC) = a seller may make several warranties that are of importance; if the seller breaches any of these warranties, the buyer may bring a damage action for breach of warranty, which can be viewed as a special type of beach of K action.

1. Express Warranty : an explicit (not just implied) promise or guarantee by the seller that the goods will have certain qualities; seller is free to disclaim this warranty as long as he/she does so in a clear and reasonable way; this can be expressed via

Description of the goods Sample or model of the goods If the seller is clearly expressing an opinion, he will not be held to

have made a warranty2. Implied Warranty of Merchantability: unless excluded or modified, a warranty that goods shall be fit for the ordinary purposes for which such goods are used is implied in a K for their sale if the seller is a merchant with respect to goods of that kind; seller may disclaim this warranty but must follow UCC protocol to do so3. Warranty of Fitness for a Particular Purpose: 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 judgment to select or furnish suitable goods, there is an implied warranty that the goods shall be fit for that purpose; seller may disclaim this warranty but must follow UCC protocol to do so; Elements that the P must prove:

The seller had reason to know the buyer’s purpose The seller had reason to know that the buyer was relying on the

seller’s skill or judgment to furnish suitable goods That the buyer did in fact rely on the seller’s skill or judgment to

furnish suitable goods

(Note: If the buyer insists on a particular brand of goods, he/she is not relying on the seller’s skill or judgment to furnish suitable goods, so no implied warranty of fitness for a

particular purpose arises.)

14

Privity = the relationship between the parties to a K, allowing them to sue each other but preventing a 3rd party from doing so; this doctrine has been relaxed.

Divisibility = A K where both parties have divided up their performance into units or installments, in such a way that each part performance is roughly the compensation for a corresponding part performance by the other party; if a K is found to be divisible, and one party partly performs, then the other will have to make only partial payment; if a K is not found to be divisible, and one party partly performs, the other party won’t have to pay anything as the K has been breached.

Gill v. Johnstown Lumber Co. (p. 707): P contracted to drive and deliver 4 million feet of logs but had delivered only a part of the amount when a flood swept away the rest. P was to be paid $1/thousand feet for the oak logs, .75 for all other logs, and .03 for each cross tie. Rule: When consideration for work done is apportioned in the K, that K will be interpreted as divisible in the event of partial performance.

A K is divisible if it can be “apportioned into corresponding pairs of part performances so that the parts of each pair are properly regarded as agreed equivalents”; however the court will not find a K divisible if it is unfair to the non-breaching party to do so

Restitution = a method of recovering outside of a K; P can get his/her out of pocket expenses; can be invoke when: 1) the parties may not have dealt with one another, or 2) they may have engaged in negotiations that fell short of a K, or 3) they may have made an agreement that proved to be unenforceable for some reason such as the Statute of Frauds, a contravention of public policy, or the nonoccurrence of a condition; this can also be used when an agreement is unenforceable by reason of mistake, impracticability of performance, or frustration of purpose; often preferred by grieved party as it is readily available.

Britton v. Turner (p. 710): P contracted to work for D for an entire year but left without cause after only 9.5 months (substantial performance) and sought the reasonable value of the labor he did perform. Rule: A defaulting party, although unable to recover on his contract, may recover under a quasi-contractual theory the reasonable value of his services less any damages to the other party arising out of the default.

Kirkland v. Archbold (p. 716): P contracted to repair and improve D’s property and be paid, in scheduled progress payments, $6K but defaulted after only partial performance. P sought to recover the value of the work he had done up to that point. Rule: A defaulting party may recover for partial performance, on a quasi-contractual theory the benefit received by the other party diminished by the damages to that other party arising from the default.

15

Breach During Performance:Often a dispute arises at a much earlier stage of performance and the question is whether a breach justifies the injured party in exercising a right to self-help by suspending performance or by refusing to render performance and repudiating the K; Elements:

1. Is there an uncured breach by one party?2. Is it a breach of a duty of performance that was to be exchanged under an

exchange of promises as opposed to a duty under a promise on which the injured party’s promise does not depend?

3. Did the breach go to a performance that was to be rendered at an earlier time than that of the aggrieved party?4. Is the breach a material breach?

a) if no, aggrieved party must continue performance and seek recovery based on a partial breachb) if yes, aggrieved party has two options: 1) continue performance and treat the breach as partial or 2) stop performing, treat the breach as total, repudiate the K, and sue for damages

However, the aggrieved party must give the non-performer a chance to cure the breach and follow a specific protocol when repudiating a K.

Walker & Co. v. Harrison (p. 722): D rented a neon sign from P with expectations based on a clause that read “repair service as deemed necessary by P to keep sign in 1st class advertising condition”. The sign was allegedly rusty, covered in spider webs, and covered in a rotting tomato that someone had thrown at it. D and sought to repudiate the K when P delayed in repairing the sign. Rule: A party attempting to repudiate a K must convince the court that the other party has materially breached the K.

K&G Construction Co. v. Harris (p. 727): D breached his covenant to perform in a workmanlike manner when they crashed into one of P’s buildings, P thereafter declined to make good on its return covenant to pay (as D and D’s insurance co. refused to pay for the damage). P withheld the amount due from D’s pay towards the aforementioned damage. D refused to perform further until he got all of his $, which caused further damage to P. Rule: D was in breach, P chose to treat is as a partial performance and continue on with the K, which required only partial payment, but the D breached again. P’s payment was conditioned on the D’s adherence to the original K, since it did not, P did not have to pay.

1. Mutual Mistake = sometimes (and only sometimes) a K obligation is excused, or is suspended, when a contracting party faces and obstacle to its performance that the parties did not take into account (or had no way to know of) when the K was made; NEVER applies to mistakes in judgment (i.e. purchase gold thinking its price will go up) – it must be a mistake in fact; permits one of them to escape a commitment under a K; Elements:

16

1. Mistake must be make at the time of the K2. Mistake must be on an essential& material term3. P must not have assumed the risk of the mistake or been consciously ignorant

Stees v. Leonard (p. 786): P alleged that D had breached a K to build a house in their lot when it collapsed upon reaching 3 stories in height (twice); D claimed that the subsoil conditions were aggravated by quicksand, making it impossible for the land to support a house. D sought rescission based on the mutual mistake that the soil could hold it. Rule: If one binds himself by a positive, express K to do an act in itself possible, he must perform unless prevented by act of god, the law, or the other party to the K and will not be excused by hardship (i.e. having to drain the property), unforeseen hindrance, or difficulty short of absolute impossibility.

Renner v. Kehl (p. 789): P sought to rescind a K entered into with the D for the purchase of land when several test wells failed to produce sufficient water to cultivate jojoba. Both parties believed at the time of the K that sufficient water could be had on the property. Rule: Mutual mistake of fact is a basis for rescission.

(Note: These decisions hinge upon the absence of an “in case we can’t do it” clause.)

Varieties of Mutual Mistake:

a. Mutual : both parties have the same mistaken belief; parties must show that the mistake concerned a basic assumption on which the K was made, that the mistake has a material effect on the agreed exchange, and that the aggrieved party is not the one who was allocated the risk

b. Unilateral : the mistaken party must show basic assumption, material effect, risk on the other party, AND unconscionability or that the other party had reason to know that a mistake was being made (harder to prove than mutual mistake)

c. Mistake in Fact : mistaken belief about an existing fact, not an erroneous belief about what will happen in the future

d. Mistake of Law : a mistake about a legal principle, according to most courts today, can be a grounds for avoiding the K

2. Impracticability = a fact or circumstance that excuses a party from performing because (though possible) it would cause extreme and unreasonable difficulty through no fault of their own; the duty must become much more difficult or much more expensive to perform and this difficulty or expense must have been unanticipated: Elements:

1. Event/occurrence must be surprising/unexpected2. Performance must become EXTREMELY difficult/ totally impossible3. One side must not have assumed the risk / the risk must not have been

allocated

17

Taylor v. Caldwell (p. 801): P contracted to rent D’s place and hold some events there for 4 days at 100lbs. per day. Through no fault of either party, the place burned to the ground. P seeks recovery of the $ it spent on advertising/set up. Rule: In K in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance.

Transatlantic Financing Corp. v. United States (p. 805): P contracted during an international crisis to ship a full cargo of wheat from TX to Iran and was to travel through the Suez Canal however war broke out and caused the closing of the Canal. The wheat was shipped using an alternate route and incurred a cost increase of $44K, for which P seeks recovery. Rule: Just because the means of performance was impossible, the court must find whether the risk of the contingency was allocated and, if not, whether performance by alternate routes was rendered impracticable. In this case, it was not allocated and it was not impracticable.

Selland Pontiac-GMC, Inc. v. King (p. 815): P sued D for failure to deliver four school bus bodies (D went into receivership just after the K was formed and was later dissolved). P seeks recovery for increased cost to cover. Rule: A partial failure of a seller’s source of supply generally has been treated as a foreseeable contingency, the risk of which is allocated to the seller absent a specific provision to the contrary in the K.

Eastern Airlines, Inc. v. Gulf Oil Corp. (p. 823): D contended that its performance under the K to supply petroleum products to the P was rendered commercially impracticable due to the severe (400%) escalation in the price of the products. Rule: Price increases will render performance of a K commercially impracticable only where it would be fundamentally unjust to hold the parties bound.

3. Frustration of Purpose = some turn of events has thwarted that party’s object/goal in making the K; where, after a K is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of the event or the non-occurrence of which was a basic assumption on which the contract was made, he remaining duties to render performance are discharged, unless the language or circumstances indicate otherwise.

Krell v. Henry (p. 831): D paid a deposit to P for the use of his apartment for the purpose of watching the king’s coronation. The king fell ill and there was no ceremony. D refused to pay the remainder of the rent. Rule: Where the object of one of the parties is the basis upon which both parties contract, the duties of performance are constructively conditioned upon the attainment/occurrence of the object/event.

18

Young v. City of Chicopee (p.850): P contracted with D to repair a bridge for which P was required to store half of the necessary materials on site before he could start the job; after part of the work was done, the bridge burned down through no fault of either party; P seeks recovery for the value of the work he did and the materials stored and lost at the site. Rule: There is an implied condition that a thing upon which work is to be done shall continue to exist, and if it is destroyed without fault, the owner is liable for the value of the work done (but not the materials destroyed in this case).

4. The Perfect Tender Rule = UCC 2-601; buyer is entitled to reject goods unless the seller makes a ‘perfect tender’ in terms of quantity, quality, and details of shipment. However, the defect must be a substantial one and there is a set protocol for rejection.

III. Policing the Bargain/Enforcement

3 Facets of Policing the Bargain:1. Status: disqualifies certain person (i.e. minors, mentally ill) from contracting2. Behavior: to deal with Ks made under duress, lack of info, etc.3. Substance: to bar a K where no one in their right mind would accept it

Illegality = court will not enforce K’s for illegal activities (i.e. gambling, illegal lending, unlicensed services in exchange, and non-compete covenants when too broad) nor will it enforce honor among thieves.

Capacity to Contract = Certain classes of people have only a limited power to contract; most important are:

1) Infants: defined now as all those under that age of 18; when an infant lies about their age, the courts usually let the other party escape the K2) Mentally infirm: person must be a) unable to understand in a reasonable manner the nature of the consequences of the transaction and b) unable to act in a reasonable manner in relation to the transaction and c) the other party must have a reason to know of his/her condition

Cognitive Test = (used by all states) in order to void a K the mind must be so affected as to render him/her wholly & absolutely incompetent to comprehend and understand the nature of the transaction.

Compulsion Test = (used in some states) in order to void a K he/she can be able to understand what they are doing but unable to deal rationally with it

In short, these groups are not capable of giving legal acceptance. Any K these people enter into is voidable at their option – they can enforce or escape the K as they wish.

19

Kiefer v. Fred Howe Motors, Inc. (p. 301): P sought to rescind a truck purchase he had made while still a minor as it turned out to be a lemon. Rule: One may rescind or disaffirm contracts made while a minor.

Ortelere v. Teacher’s Retirement Board (p. 305): P had $70K in the retirement system and borrowed the maximum amount allowed while on leave for mental illness. She did not tell her husband and her election made it so that he got nothing after she died. Husband seeks revocation of her election. Rule: A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect if he/she is a)unable to understand in a reasonable manner the nature of the consequences of the transaction and b) unable to act in a reasonable manner in relation to the transaction and c) the other party must have a reason to know of his/her condition.

Cundick v. Broadbent (p. 310): P claimed that her husband did not have the mental capacity to enter into a K to sell his land. Rule: Mental capacity to contract depends on whether the allegedly disabled person possessed sufficient reason to enable him to understand the nature and effect of the act in issue. In this case, he haggled for a better price and his wife worked with him during the entirety of the deal therefore it is not voidable.

Misrepresentation = A grounds for rescinding a K or for tort action; can be accomplished via concealment and/or non-disclosure; Elements:

1. P must establish that D made misrepresentation either: a) knowing it was false or b) know that they don’t know whether it is true or false

2. The misrepresentation must be material3. P must exercise due diligence and justifiably rely on it/be persuaded by it

nonetheless4. The misrepresentation must be one of fact not opinion

Swinton v. Whitinsville Savings Bank (p.354): D knowingly sold a termite infested house to P but did not tell P of its condition. Rule: Where both parties to a K of sale are dealing at arm’s length, mere non-disclosure of latent defects in the goods will not render one party liable to the other party.

Kannavos v. Annino (p.357): D sold her multi-family dwelling to P, with the express knowledge that it was his intent to rent it out as such, without telling him that so doing was illegal. D went as far as to show P proof of profits to be had. Rule: Where one party to a K of sale goes beyond “bare non-disclosure” and knowingly misrepresents material facts by telling “half-truths”, the other party may rescind the K even though he could have ascertained the whole truth by checking public records. If D touches upon a subject, he/she must touch upon all aspects of the subject.

20

Vokes v. Arthur Murray, Inc. (p.363): P was continually cajoled into purchasing thousands of hours of dancing lessons by D when D knew she was terrible and could never be an ‘accomplished dancer’. Rule: Where one party has superior knowledge, statements made within the area of such knowledge may be treated as statements of fact. Here, they misrepresented the fact that she was a terrible dancer.

Varieties of Misrepresentation:

a) Half truth: If part of the truth is told but not the other part, so as to create an overall misleading impression, this may constitute misrepresentation

b) Positive concealment: If a party takes positive action to conceal the truth, this will be actionable even though it is not verbalc) Failure to correct past statements: If the party knows that disclosure of a fact is needed to prevent some previous assertion from being misleading, and doesn’t disclose it, this will be actionabled) Fiduciary relationship: If the parties have some kind of fiduciary relationship, so that one believes that the other is looking out for his/her interests, there will be a duty to disclose material factse) Failure to correct mistake: If one party knows that the other is making a mistake as to a basic assumption, the former’s failure to correct that misunderstanding will be actionable if the non-disclosure amounts to a ‘failure to act in good faith’.

Duress = grieving party must exhibit some level of resistance; he/she cannot just yield to pressure too readily/easily. A threat of lawful action cannot be wrongful/grounds for duress; it is a subjective standard; Elements:

1. Wrongful threat (i.e. blackmail; deprivation of life, liberty, etc.)2. Threat reasonably forces victim to act accordingly

Alaska Packers Assoc. v. Domenico (p. 327): P, who had agreed to ship from S.F. to Alaska at a fixed pay, refused to continue working once they reached Alaska, and demanded that the D provide a new contract with a higher rate of pay. D agreed at the time but refused to pay once they returned to S.F. Rule: A promise to pay a man for doing that which he is already under K to do is without consideration and therefore an unenforceable K.

Modification = A change to the terms of a K without altering its general purpose.

Watkins & Son v. Carrig (p.333): P encountered solid rock in the course of an excavation, which was written in the K as “to excavate all material from D’s cellar”; D agreed to raise the price in the K but refused to pay the new price once the work was done. Rule: A modification made to meet the reasonable needs of standard and ethical practices of men in their business dealings with each

21

other operates as a partial rescission of a prior K and is thus enforceable since supported by consideration.

Austin Instruments v. Loral Corp. (p. 343): P threatened to withhold delivery of precision parts unless D would raise the K price and sign off on a K renewal. Rule: A K modification is voidable on the grounds of duress when the party claiming duress established that its agreement to the modification was obtained by means of a wrongful threat from the other party, which precluded the first party’s exercise of free will.

(Note: The usual remedy for these is to allow the victim to rescind/avoid consequences)

Unconscionability = The principle that a court may refuse to enforce a K that is unfair or oppressive because of procedural abuses during the K formation (i.e. lack of a bargained for exchange) or because of overreaching contractual terms, esp. terms that are unreasonably favorable to one party while precluding meaningful choice for the other party; K is viewed within the context of the circumstances at the time that the K was formed (therefore things like a rise in price are irrelevant); often arises when dealing with standard form Ks aka Adhesion Contracts; Varieties:

1. Procedural: unintelligible/hidden writings/misleading salesman; denies the signors of making a meaningful choice; the process itself is unduly unfair and one-sided

2. Substantive: unfairness in terms/outcomes; overly oppressive/harsh; the K itself is unduly unfair and one-sided

(Note: Courts almost never strike down a K just based on substantive without procedural unconscionability.)

Adhesion Contract = a standard-form contract prepared by one party, to be signed by the party in a weaker position, usually a consumer, who has little choice about the terms. It is fully enforceable, unless:

1. K is unconscionable or unduly oppressive2. K does not fall within the reasonable expectations of the consumer (it must be an unfair surprise)

O’Callaghan v. Waller & Beckwith Realty Co. (p.370): P was injured by her landlord’s (D) negligence under a lease, which exculpated the D from liability for negligence. Rule: A lease clause exculpating a landlord, which potential leasees cannot avoid, for liability for his own negligence should be upheld and is not void as against public policy. Later abandoned.

Henningson v. Bloomfield Motors, Inc. (p. 380): P’s wife is injured when steering failed in the new car she just purchased from D. Rule: An attempt by a car

22

dealer to disclaim an otherwise implied warranty of merchantability will be declared void as against public policy. This was an adhesion contract because of the gross disparity of bargaining power between the consumer and the giant and essential car industry. P had to take the car with all of the terms or leave it.

Williams v. Walker (p. 403): P sold D furniture burdened by a cross-collateral clause and, subsequent to D’s default, sought to replevy all goods previously purchased by D. Rule: The defense of unconscionability to action on a contract is judicially recognized.

Public Policy = courts may find some Ks to be unenforceable as per unconscionability in the even that they fly in the face of public sentiments/morality (i.e. preservation of life, liberty, and the pursuit of happiness, sanctity of marriage, abortion, keeping litigation rates as low as possible, etc.)

Central Adjustment Bureau, Inc. v. Ingram (p. 53): P brought suit against D seeking enforcement of a non-compete clause in the former employee’s Ks. Rule: Unless circumstances indicate bad faith on the part of an employer, a court will enforce covenants not to compete to the extent that they are reasonably necessary to protect the employer’s interest without imposing undue hardship on the employee when the public interest is not adversely affected.

(Note: Exculpatory clauses for intentional torts or recklessness are unenforceable.)

Statute of Frauds = Most Ks are enforceable despite the fact that they are only oral. A few types of Ks though are unenforceable unless that are in writing; Categories:

1. Suretyship : a K to answer for the debt or duty of another2. Marriage : a promise for which the consideration is marriage; “if you’ll

promise to marry me, I’ll transfer shares of XYZ to you”; does not apply if K consists of mutual promises of marriage (ordinary oral engagements are enforceable if oral)

3. Land Contracts : a promise to transfer or buy any interests in land (i.e. leases, mortgages, etc.); does not apply to the actual conveyance of land just the contract providing for subsequent conveyance

4. One Year Clause : a K where complete performance is absolutely impossible within one year from its making must be in writing; clock starts at the time the K is formed; designed to avoid dealing with evidence that has ‘gone stale’; (i.e. an agreement to work for 5 years is covered; an agreement to pay $250K over 10 years is not covered) and renders them unenforceable; a K can be taken out of this clause if the offeree has completed performance; it does not apply to oral agreements for lifetime employment because death can collapse agreement within one year; it does however apply to oral agreements for employment for a period longer than one year even though death could collapse it within one year too

23

5. UCC : a K for the sale of goods for a price of $500 or more; exceptions to this are:

Specially manufacturer goods – no writing is required if the goods are to be manufactured specifically for the buyer and are not suitable for sale to others and manufacturing is substantially underway

Estoppel – a writing is not required if the party against whom the enforcement is sought admits in court that a K was made but the K is not enforceable under this provision beyond the quantity of goods admitted

Monarco v. Lo Greco (p. 291): D had been promised the family farm by his stepfather, if he would abandon his life and work on the farm with his family, D did so for 20 years, increasing its value 25 times. However the stepfather changed his will cutting D, out without telling him or his wife who also knew of and testified to the existence of the oral agreement, and left the farm to P. Rule: The doctrine of estoppel may be used to assert the Statute of Frauds to prevent fraud that would result from refusal to enforce oral contracts in certain circumstances.

Goods accepted or paid for – no writing is required with respect to goods for which payment has been made and accepted or which have been received and accepted.

What Must be in the Writing:

Common Law- a) All essential terms and conditions of the deal b) Identities of all parties

c) Signature of the person trying to get out of the K d) The writing does not have to be contained in one document (MORE STRICT)

UCC - a) Quantity b) Signature of the person trying to get out of the K

c) The minimum amount of writing necessary to indicate that a K was formed(LESS STRICT)

Silent Merchant = acceptance; based on the principle that a regular player in the commercial world would not stand silent upon the receipt of a message referencing an agreement he/she did not make

Sometimes, when the court sees no contract in writing, it will imply and enforce one. If there is a discrepancy of quantity, but both sides acknowledge a deal, a K is enforced based on the lower number.

24

Johnson Farms v. McEnroe (p. 285): P entered into an oral option K to purchase D’s property in exchange for like property. D jerked him around for a while trying to wait out the new capital gains tax rate (hoping it would decrease) then reneged and used the Statute of Frauds as a defense. Rule: Any court may compel the specific performance of any agreement for the sale of real property in case of part performance thereof.

Ks can be orally rescinded even though the original was required in writing under the Statute of Frauds even if there is a ‘no oral modifications clause’ (generally) to Ks that fall under the Statute do not have to be in writing. Modifications act as new/original Ks and must conform to Statute requirements. However, if one party materially changes his/her position in reliance on the oral modification, courts may enforce it.

In Re Arbitration Between Acadia Co. & Irving Edlitz (p. 279): A dispute arose between P and D as to whether an employment contract providing for arbitration was breached. Rule: When a written agreement providing for arbitration is orally renewed, the parties in effect adopt it as an integral part of the new agreement.

Cases Where Reliance is Recognized as a Basis for Enforcement:

1. Family promises2. Promises to convey land3. Promises coupled with gratuitous bailments4. Charitable Subscriptions

4 Reasons Donations are Not Enforced:1. Degree of uncertainty/ promisee doesn’t expect anything in return2. Uncertainty in terms of what the promisor really intended3. Society has no stake/no reason to get involved4. Promisees are not normally getting hurt

2 Key Components of an Enforceable Contract:1. Assent/ an agreement between the parties2. That the assent is definite

The Suretyship Clause = An agreement to ‘answer for’ another’s debt or obligation as guarantor; guarantor becomes a party to the principal obligation; the purpose is to guard against loss if the principal debtor were to default; interest in this clause is most intense when the debtor is insolvent; one who performs surety can be reimbursed by the primary obligor in the end.

Novation = The act of substituting a new obligation for an old one or replacing an original party with a new party; may substitute: 1) a new obligation between the same parties; 2) a new debtor; 3) a new creditor; interest in this clause is most intense when company A buys company B and assumes its debts/obligations

25

Sale of Personal Property is unenforceable past $5K in value or remedy

IV. Finding the Law of the Contract

Parole Evidence Rule (PER) = limits the extent to which a party may establish that discussions or writings PRIOR to the signed written K should be taken as a part of the agreement. In some circumstances, the rule bars the fact-finder from considering any evidence of certain preliminary agreements that are not contained in the final writing, even though this evidence might show that the preliminary agreement did in fact take place and that the parties intended it to remain a part of their deal despite its absence from the writing. PER doesn’t come into the equation if: 1) there is nothing in writing and 2) there is no addition of information/term which PRE-DATE the K. PER never bars consideration of subsequent oral agreements – a written K may always be modified after its execution, by an oral agreement.

Integration = A document is said to be an ‘integration’ of the parties’ agreement if it is intended as the final expression of the agreement. PER only applies to documents that are integrations.

Partial Integration = A document that is intended to be final, but that is not intended to include all details of the parties’ agreement; here no evidence of prior or contemporaneous agreements/negotiations (oral or written) may be admitted if this evidence would contradict what is in the writing.

Total Integration = A document that is intended, not only as a final expression of the agreement, but that is also intended to include all details of the parties’ agreement; here no prior or contemporaneous evidence may be admitted at all. Most Ks contain a Merger Clause – a clause stating that the writing constitutes the sole agreement between the parties. The presence of such a clause makes it more likely that the court will find the writing to have been intended as a total integration therefore baring any further evidence.

Role of the Judge: Courts disagree about how the judge should make these decisions. Two extreme positions are:

1. The Four Corners Rule: the judge decides whether there is an integration, and whether it is total or partial, by looking solely at the document

2. The Corbin Rule: these questions are to be answered by looking at all available evidence, including testimony, to determine that actual intention of the parties.

26

Situations Where PER Does Not Apply:

1. Fraud, mistake, or other voidability: a party may always introduce evident to show illegality, fraud, duress, mistake, lack of consideration, etc.; PER never bars the introduction of evidence to show that no K exists

2. If the parties orally agree on a condition to the enforceability of the K, or to the duty of one of them, but this condition is then not included in the writing, courts generally allow such proof

3. Collateral agreements: an oral agreement that is supported by separate consideration may be demonstrated, even though it occurred prior to what seems to be a total integration

4. Subsequent/ additional transactions

Gianni v. R. Russell & Co., Inc. (p. 556): D negotiated a new lease for a 3 year period with P on the condition that he not sell tobacco. P alleged that he only accepted this because D orally gave him the exclusive right to sell soft drinks, which was violated when another tenant sold soft drinks, cutting into P’s profits. However, this oral agreement was nowhere to be found in the K. Rule: All preliminary negotiations, conversations, and verbal agreements are merged in and superseded by the subsequent written K, and unless fraud, accident, or mistake is alleged, the writing constitutes the agreement between the parties, and its terms cannot be added to or subtracted from by parole evidence.

Masterson v. Sine (p. 560): D (husband and wife) owned a ranch as tenants in common and conveyed it to P by grant deed reserving an option to purchase the ranch back within 10 years for the same consideration as was paid for it plus the depreciation value of any improvements the P might have added. When D1 went bankrupt, D2 sought to establish her right to enforce the option. Rule: Evidence of oral collateral agreements should be excluded only when the fact finder is likely to be misled.

Bollinger v. Central Penn. Quarry (p. 567): P contracted to permit D to dump construction waste on their property and had an additional oral agreement that the waste was to be covered with a layer of topsoil. D did it for a while then quit saying they didn’t have to since it wasn’t in the K. Rule: A court of equity has the power to reform a writing and make it correspond to the understanding of the parties on the ground of mistake as long as that mistake is mutual.

Definiteness = courts try to avoid finding the no K exists because of a lack of definiteness; if fuzzy terms are found in a K, courts look to outside sources (i.e. industry standards) or good faith of the individual to assess them; the UCC is more lenient on definiteness than is common law; indefiniteness often results because of:

27

1. Parties prefer to rely on the terms enforced by the court2. Parties are reluctant to raise difficult issues for fear of jeopardizing the deal3. Parties do not foresee the problems that arise later4. Parties prefer not to divulge info that could work for the other party’s

advantage

Interpreting Contract Language: Ks involves the expression of two parties who may attach very different meanings to the language therein, when a dispute arises, it is up to the court to interpret the terms under contention; most courts allow parties to introduce extrinsic evidence to aid in the interpretation of a K, even if the writing is integrated.

Vagueness- when a terms applicability in marginal situations is uncertain (i.e. green)

Ambiguity – a word that has 2 entirely different connotations so that it may be appropriate and inappropriate at the same time (i.e. the word light when used in a K dealing with dark feathers);

a) of syntax – ambiguity of grammatical structure (most common)b) of term – same term can be read by 2 parties who walk away with 2 different understandingsc) Two Stages – if term is ambiguous, then extrinsic evidence can be introduced; if it is not ambiguous, then extrinsic evidence may not be introduced

Sources Consulted to Interpret Terms:

1. K as a whole and the definitions in it2. Dictionary3. Governmental Classification (i.e. F.D.A., D.O.A. etc.)4. Trade Usage : Any practice or method of dealing having such regularity of

observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question; the meaning attached to a term in a certain region, industry, etc. would be admissible.

5. Realities of the Marketplace – you can’t get X at that price anywhere6. Course of dealing – how have parties worked together before and with what

expectations/outcomes7. Course of performance – how have parties worked together in performing the

K at hand

Frigaliment Importing Co. v. B.N.S. Int’l Sales Corp (p. 574): Parties had a K for ‘chicken’. Later a dispute arose as to what ‘chicken’ meant – fryers, broilers, young, or old. Rule: The party who seeks to interpret the terms of the K in a sense narrower than their everyday use bears the burden of persuasion to so show, and if that party fails to support its burden, it faces dismissal of its complaint.

28

Raffles v. Wichelhaus (p. 582): P contracted to sell cotton to D, which was to be delivered from Bombay at Liverpool on a ship named the ‘Peerless’. Unknown to the parties was the existence of two different ships carrying cotton, each names ‘Peerless’ making the same trip, but at different times. P contends that K was for the ship which arrived first. Rule: Where neither party knows or has reason to know of the ambiguity, or where both know or have reason to know, the ambiguity is given the meaning that each party intended it to have. In other words, no meeting of the minds = no K.

W.W.W. Assoc. v. Giancontieri (p. 586): P sought to compel specific performance of a K to sell certain property. The K included a clause stating that if litigation, already in progress, did not conclude within a certain period of time either party had a right to cancel the K outright. Rule: When parties set down a writing in a clear, complete document, their writing should be enforced according to their terms, and extrinsic evidence is generally inadmissible to add to or vary the writing.

Pacific Gas & Elec. v. G.W. Thomas Drayage & Rigging Co. (p. 592): D contracted to repair P’s turbine and to perform the work at his own risk and expense and to indemnify P against all loss and damage. D also agreed not to procure less than $50K worth of insurance to cover liability for injury to property. When the turbine was damaged, P claimed it was covered under that policy while D said it was only to cover injury to third persons. Rule: The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.

Interpretation of Statutes:

1. Examination of the law before enactment of the statute2. Ascertainment of the ‘mischief or defect’ for which the law did not provide3. Analysis of the remedy provided by the legislature to ‘advance the remedy’4. Determination of the ‘true reason of the remedy’5. Application of the statute so as to ‘suppress the mischief’ and ‘advance the

remedy’

Interpretation of Contract:

1. Primary Purpose – if the primary purpose of the parties in making the K can be ascertained, that purpose is given great weight

2. All terms made reasonable, lawful, and effective so that they will have such a meaning

3. An ambiguous term will be construed against the person who drafted the K

29

4. Negotiated terms control standard terms – handwritten/typewritten clauses added to the K override boilerplate clauses

5. Public Interest/Policy – to protect life, liberty, and the pursuit of happiness; policy administered by the state with respect to the health, safety, and morals of its people in accordance with common notions of fairness and decency

Plain Meaning Rule = Only applicable to integrated agreements (therefore it is often considered a corollary of the PER)

Gap-Filling = the court will fill-in what appears to be a gap in a K if and when the language therein, when interpreted, does not cover the case at hand.

Gap-Filling Terms/Measures:

1. Good faith – the court will find an implied requirement of a ‘duty of good faith’; sometimes used to create mutuality of obligation

2. Duty to continue business – in requirement and output Ks, generally there will not be a duty to continue the business (assuming the owner acted in good faith when he/she closed down)

3. Termination of dealership or franchise – some but not all courts will supply a term to prevent one party from arbitrarily terminating a franchise or dealership arrangement. More commonly, courts will find an implied requirement of a reasonable notice prior to termination

4. Termination of employment contract – a strong minority of courts now find that an at-will employment K contains an implied term prohibiting the employer from terminating the arrangement in bad faith. Here, an employer may not terminate an at-will arrangement in order to deprive the employee of a pension, to retaliate for the employee’s refusal to commit wrongdoing at the employer’s urging, or for other bad faith reasons.

Dalton v. ETS (p. 605): P sued D after D informed him that they were canceling his 2nd SAT score on the basis that they suspected him of cheating. The agreement gave P the option to provide additional information, take a retest, authorized D to cancel score and refund $, 3rd party review, or arbitration. D did not allow him to choose any of these. Rule: Implicit in all Ks is a covenant of good faith and fair dealing. In this case, ETS acting in bad faith by refusing to consider the additional information P supplied them with.

Dickey v. Philadelphia Minit-Man Corp. (p. 617): P leased land to D for the sole purpose of conducting a car washing business based on a percentage lease, which fixes the rent as a stated percentage of the lessee’s receipts or profits. D discontinued washing cars except as incidental to his new business of polishing and waxing, which P claims is breach. Rule: D was using good faith efforts to maximize profits and therefore rent $. When the minimum rent is set and substantial (thus lessening the risk to the lessor), there is no implied obligation by the lessee to continue the prescribed business.

30

Bloor v. Falstaff Brewing Corp. (p. 619):P brought suit alleging that D had breached its contractual obligation to use its ‘best efforts to promote and maintain a high volume of sales’ of Ballantine Beer. Rule: A party breaches the K, which obligates him to use best efforts to maintain a high volume of sales if he makes policy based primarily on considerations of profit instead of the effect these policies will have on sales volumes.

Wood’s Rule = Court’s longstanding preference for termination at will in employment agreements

Hobson’s Choice = A choice without an alternative; the thing offered or nothing/commit an illicit act (i.e. do the right thing and get fired or lie)

Sheets v. Teddy’s Frosted Foods (p. 642): P contended that he had been terminated in violation of public policy. P argues that he was merely a potential whistleblower urging the Co., as Quality Control Director, to get into compliance with statutes. Rule: An employee hired at-will may maintain an action for wrongful discharge if he can prove that the discharge violates public policy.

Nanakuli Paving and Rock Co. v. Shell Oil Co. (p. 651): D contended it was not obligated to price protect P, and its conduct in the past did not constitute a course of conduct governing the K. Rule: Trade Usage and course of performance will be read into Ks where such are so prevalent the parties would have to have meant to incorporate them in the terms of the K.

V. Remedies

The overall purpose of remedies is compensatory and not punitive (to make the parties whole). Deterrence is generally not the goal, in fact courts sometimes encourage economically efficient breaches. Finally, contract law provides for damages that are the least costly to the breaching party.

Replevin = an action for the repossession of personal property wrongfully taken or detained by the D,

2 Types of Equitable Remedies:

1. Specific Performance - orders the promisor to render the promised performance

2. Injunction - directs a party to refrain from doing a particular act

31

3 Limitations on Equitable Remedies:

1. Inadequacy of damages – equitable remedies will not be granted unless damages are not adequate to protect the injured party (due to lack of certain damage estimate/money cannot substitute for the contracted for performance

2. Definiteness – equitable remedies will not be granted unless the Ks terms are definite enough to enable the court to frame an adequate order

3. Difficulty of enforcement - equitable remedies will not be granted if there will likely be great difficulty in enforcing and supervising the order

Substitutional Relief = form of a judgment awarding $ rather than requiring performance of the promise

Klein v. PepsiCo, Inc. (p. 453): When an agreement between P and D for the purchase of a corporate jet fell through, P sued for breach of contract in an effort to obtain specific performance. Rule: A specific performance is inappropriate where damages are recoverable and adequate.

Walgreen v. Sara Creek (p. 465): Parties has a lease relationship for decades based on the agreement that the D would not lease any space in the mall to another store operating a pharmacy. D later did lease to such a firm and put it right next door to the P’s store. Rule: All of the costs incurred by an injunction, and the costs of establishing the proper amount of damages are both very costly and would very likely be insufficient/fraught with uncertainty therefore, the injunction is granted.

Assumpsit = to recover damages for physical injury to person or property on the basis of a consensual undertaking (i.e. carpenter hired to build a house but does a crappy job)

4 Damage ($) Measures:

1. Expectation Interest –attempts to put the promisee in the position he/she would have been in had the promise been fulfilled

a. Formula = value of D’s promise minus the benefits P has received from not having to complete his performance (does not include overhead costs)

b. Breach can affect the P in 4 ways: Loss in value = What the P should have received minus what

the P did receive Other Loss = physical harm to the P’s person or property or

expenses incurred in an attempt to salvage the transaction after breach or both #1 and #2

Cost Avoided = breach saves the P further expenses that would have occurred had the promise been performed

32

Loss Avoided = P is able to avoid some loss by salvaging and reallocation some of all resources that it would have spent on/devoted to the D

The General Measure of Damages (Formula A):

(Loss in value) + (Other loss) – (Cost avoided) – (Loss avoided) = Damages

The General Measure of Cost Avoided:

(Cost of Complete Performance) – (Cost of Reliance) = Cost Avoided

The General Measure of Damages (Formula B):

(Cost of reliance) + (Profit) – (Loss avoided) + (Other loss)

Vitex Manufacturing Corp. v. Caribtex Corp. (p. 472): D contracted with P for the latter process a large quantity of wool in its factory. P reopened a factory in order to fulfill its side of the K but D never sent the wool to be processed. P sought lost profits and got them. D appeals citing that overhead expenses should have factored into the determination of damages. Rule: In a claim for lost profits, overhead should be treated as a part of the gross profits and recoverable as damages, and should not be considered as part of the seller’s costs. (D lost)

Laredo Hides Co., Inc. v. H&H Meat Prod. Co., Inc. (p. 476): When D refused to continue to deliver hides under its K with P, P purchased them elsewhere and sued to recover the price difference. Rule: When a seller wrongfully repudiates a K or fails to make delivery of the goods, the buyer may ‘cover’ by obtaining such goods elsewhere and sue the seller for the difference between the cost of cover and the K price plus any incidental or consequential damages.

U.S. v. Algernon (p. 488): P brought suit against D, the prime contractor of a gov’t project, to recover in quantum meruit the value of the labor and materials it had furnished up to the point at which it justifiably ceased work. Rule: A promisee is allowed to cover under quantum meruit the value of services he gave to a D who breached the K irrespective of whether he would have lost $ had the K been fully performed and would thus be precluded from recovering in a suit on the K.

2. Reliance Interest – if the promisee has changed its position in reliance on the promise, this methods attempts to put the promisee in the position it would have been had the promise not been made (so $ = amount spent in performing/preparing to perform)

33

a. Used mainly when it is impossible to measure the P’s expectation interest accurately and when the P recovers on a promissory estoppel theory (as it is then a quasi-contract, this is a half-measure)

b. Limitations: Contract price as limit – where D’s only obligation under the K

is to pay a sum of $ Recovery limited to profits – cannot exceed expectation

damages (most courts), burden of proof on D Expenditures prior to signing – cannot get $ for expenditures

that pre-date the formation of the K

3. Restitution Interest – if the promisee has relied on the promise AND conferred a benefit on the promisor, this method attempts to put the promisee in the position he/she would have been in had the promise not been made (limited to gain at the P’s expense); designed to prevent unjust enrichment

a. Most commonly used where the non-breaching P has partly performed, and the restitution measure is greater than the K price, and where a breaching P has not substantially performed, but is allowed to recover the benefit of what he/she has conferred on the D thus far

b. Based on the fair market value of the services rendered to the D, regardless of how much it actually cost the P to provide it and how much P was injured by D’s breach (not limited to the K price)

c. Limitation: not available when the P has fully performedd. Partial Restitution (UCC) – breaching buyer has a right to partial

restitution with respect to any deposit made to the seller before he/she breached. The seller can only keep 20% of the total K price or $500, whichever amount is smaller – the balance must be returned to the breaching buyer.

Efficient Breach = after paying P restitution interests, D still has a profit

Efficient Reallocation = a reallocation of resources in a society which will make some economic unit better off without making some other unit worse off

4. Half Measures = serves to compensate the party for losses incurred in reliance on the K before the parties were excused due to frustration of purpose.

Young v. City of Chicopee (p. 850): P contracted with D to repair a bridge. After part of the work was dong, the bridge was destroyed by fire without the fault of either party. P sued for the value of the work done and for his lumber destroyed in the fire. Rule: There is an implied condition that a thing upon which work is to be done shall continue to exist, and if it is destroyed without fault, the owner is liable for the value of the work done.

34

Substantial Performance = (approx. 85% and up) where one party substantially performs, the other is not relieved of his/her duties. It the latter refuses to perform, the substantially performing party has an action for breach of contract. In this case, P can seek:

1. Expectation Damages = Value of D’s promise minus the benefits P has received from not having to complete his own performance (does not include overhead costs minus the cost of damages suffered by D due to P’s failure to completely perform

2. Divisible Contracts = if the K is divisible into separate pairs of ‘agreed equivalents’, a party who has substantially performed one of the parts may recover on the K for that part. That’s true even though he/she has materially breached with respect to other portions of the K

Quantum Meruit = a P who has materially breached may normally bring a quasi-contract suit, and recover his restitution interests, less the damages that the D suffers due to the breach; based on fair market value of services (UNLESS HIS BREACH IS WILLFUL)

3 Major Limitations on Damages:1. Avoidability – the aggrieved is not allowed to recover loss that it could have

reasonably avoided; must use reasonable not all possible measures to fulfill:a. Duty to cover = must arrange a substitute transaction/take affirmative

steps to decrease lossb. Duty to mitigate the loss = duty not to increase the loss

Rockingham County v . Luten Bridge Co. (p. 492): D had contracted to have P build a bridge upon which the latter began construction. Due to public opposition to the bridge, D notified P to stop work under the K but P continued having already expended $1,900. Upon completion, P sued for full payment. Rule: After an absolute repudiation or refusal to perform by one party to a D, the other party cannot continue to perform and recover damages based on full performance.

Parker v. Twentieth Century Fox (p. 500): P, an actress, was to have the lead role in a dance film, have approval over the director, dance director, and the screenplay and film close to home. But D later decided not to make it. In its place, D offered her the lead role in a western without any of the aforementioned authority, which filmed in Australia. D refused to take the second film and sought recovery. Rule: The general measure of recovery by a wrongfully discharged employee is the amount of salary agreed upon for the period of service, less the amount which the employer affirmatively proves the employee has earned or with reasonable effort might have earned from other employment. Here the two jobs were viewed as virtually the same and she should have taken the 2nd movie.

35

Jacob & Youngs v. Kent (p. 507): P was hired to build a $77K country home for D. When it was completed, it was discovered that through an oversight, the wrong brand of pipes (a specific brand was contracted for) were used, D refused to make final payment until it was fixed. D refused to fix it because the cost to do so would be enormous. Rule: An omission, both trivial and innocent, will not amount to breach in the event that the K has been substantially performed – all of the essential obligations pursuant to the agreement have been met.

Peevyhouse v. Garland Coal & Mining Co. (p.518): Rule: The measure of damages in an action by lessor against lessee for damages for breach of K is ordinarily the reasonable cost of performance of the work; however, where the K provision breached was merely incidental to the main purpose in view, and where the economic benefit which would result to lessor by full performance of the work is grossly disproportionate to the cost of performance, the damages which lessor may recover are limited to the dimunition in value resulting to the premises because of the non-performance.

2. Foreseeability – courts will not award consequential damages for breach unless the damages fall into one of two classes:

Arise Naturally: the damages were foreseeable by any reasonable person, regardless of whether the D actually foresaw them; or

Remote or Unusual: the damages were remote or unusual, but only if the D had actual notice of the possibility of them

Parties can also allocated the risks among themselves

3. Certainty – courts will not award damages for breach unless they can be shown by clear and satisfactory evidence to have been actually sustained and the amount of which can be shown with certainty and not left to speculation or conjecture

Hadley v. Baxendale (p.521): P arranged to have D, a common carrier, ship his broken mill shaft to the engineer. P suffered a 300lb loss when D unreasonably delayed shipping it, causing the mill to be shut down longer than anticipated. D argued that they were never informed of the time sensitive nature of the delivery. Rule: The injured party may recover those damages as may reasonably be considered arising naturally from the breach itself and, second, may recover those damages as may reasonably be supposed to have been in contemplation of the parties, at the time they made the K, as the probable result of a breach of it.

36

Measuring Damages (UCC):

Consequential Damages = include the profits which the buyer could have made by reselling the contracted for goods had they been delivered.

Incidental Damages = include such items as transportation expenses, storage expenses, and other small but direct expenses associate with the breach and buyer’s attempt to cover for it.

A. Seller Breaches: buyer’s options are1. Cover aka buy elsewhere -

(Cost of item) – (K cost) + (Cost & conseq.) – (expenses saved) = Damagesdamages

2. P doesn’t cover – market price is measured at the time the P received notice of the breach

(Market Price*) – (K price) = Damages

B. Buyer Breaches: seller’s options are1. Cover aka find a substitute vendor

(K price) – (Price of cover) + (Costs) = Damages

2. Failure to cover

(K price) – (Market price) = Damages

3. If no resale market, meaning that no one can or will buy it, seller can get the full K price in damages/sue for performance

(Note: The seller can have a windfall but the buyer cannot. Inappropriate cover is the same as no cover/doing nothing.)

Liquidated Damages = a provision/clause that assigns penalties ($) assessed in the event of a breach, used to encourage timely performance/ discourage default; if interpreted to be punitive are not enforceable; it must be an attempt to estimate actual damages, rather than to penalize a party for breach by awarding damages that are far in excess of the ones actually suffered. In order to be enforceable, clause must meet one, sometimes both of:

1. Reasonable forecast – the amount fixed must be reasonable relative to the anticipated or actual loss for breach at the time of contracting or in light of the actual damages; and

37

2. Difficult calculation – the harm caused by the breach must be uncertain or very difficult to calculate accurately, even after the fact

Punitive Damages = rarely awarded in breach of k cases (tort/bad faith only)

Wasserman’s Inc. v. Township of Middletown (p. 543): A lease between P & D contained a stipulated damages provision based on a pro-rata reimbursement of an improvement costs and P’s gross receipts for one year. Rule: Provisions for liquidated damages are enforceable only if they are a reasonable forecast of just compensation for the harm caused by the breach. Here the court found that gross receipts do not reflect actual losses incurred when a lease in cancelled.

Injured Party May Have Trouble Recovering For:

1. Sentimental value2. Value of a chance3. Emotional distress4. Lost volume5. Loss of reputation6. Loss of good will7. Many others

38

Broad Outline for Answers

1. Was a K made?a. Offer – Acceptance – Consideration

2. Are there any reasons to enforce the K even though one of the above is missing:a. Consideration exceptions, Reliance, etc.

3. Are there any reasons not to enforce the Ka. Fraud, Mistake, Duress, Impracticability, Frustration of Purpose, Statute

of Frauds, etc. 4. Who has enforceable rights?

a. Minors, Mentally Incompetence, etc.5. Are there issues of interpretation

a. 4-Corners, Corbin, trade usage, parole evidence, public policy6. If a K has been broken, what remedies are available?

a. Reliance, Restitution, Retribution, Quantum Meruit, Half Measuresb. Liquidated Damages, Punitive Damagesc. Efficient Breach, Mitigation, Cover

7. Pick a side

39