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I. Is There A Contract?

1. Is the contract governed by UCC or common law?

The UCC covers transactions in “goods”

Definition of Goods: Goods means all things, including specially manufactured goods which are movable at the time of identification to the contract for sale other than the money in which the price is to paid, investment securities and all things in action.

Real Estate, Shipping, and Services are NOT goods.

2. Is it within the Statute of Frauds?

General Rule: If the contract falls within the Statue of Frauds, it must be in writing. The writing must identify the contract parties and show that they made a contract, identify the subject matter, state the essential terms, and be signed. These categories of contracts are commonly within the Statute of Frauds:

1. Contracts which charge an executor or administrator to answer for the duty of the decedent (executor-administrator provision),

2. contracts in which one person promises to answer for the debt of another (the surety provision),

3. contracts made upon consideration of marriage (marriage provision)

4. contracts for the sale of an interest in land (the land contract provision),

5. contracts that cannot be performed within one year from their making (the one year provision), and

6. contracts for the sale of goods worth more than $500 (with a few exceptions).

The Restatement’s version is at §110 (includes executor, suretyship, marriage, land, and one-year)

The UCC’s version is at §2-201 ($500, and writing is sufficient if no objection made within 10 days)

UCC 2-201: Formal Requirements; Statute of Frauds

( A contract for sale of goods for $500 or more is not enforceable unless there is a writing sufficient to indicate that a contract for sale has been made between parties and signed by the party against whom enforcement is sought.

( A writing confirming a contract between sellers is sufficient as used against the recipient unless written notice of objection to its contents is given within 10 days after it is received.

( A contract that doesn’t meet the writing requirements is enforceable if the goods were specially made for the buyer, the party against who enforcement is sought admits that it was made, or the payment/goods have already been made/accepted.

1. One may admit the verbal contract exists, and yet defend an action by pleading the statute.

Chomicky v Buttolph (defendant agreed to a verbal modification to a contract for sale of land, but then changed their mind and refused to comply with the modification – okay)

2. The UETA says that Electronic Signatures satisfy the Statute of Frauds IF the parties agree to use electronic signatures in lieu of physical signatures

Powell v City of Newton v Shaver Wood (one party specifically asked the other to print out and sign the documents, so email correspondence didn’t satisfy the statute of frauds)

3. Reliance can sometimes serve to enforce a contract that would otherwise be unenforceable because of the Statue of Frauds.

3. Is there an agreement?

Rule: A promissory agreement can be made when one party makes and offer and the other accepts it.

Definition of Offer: An offer is the manifestation of a willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.

A. An Invitation To Enter Into A Bargain Is Not The Equivalent Of An Offer

1. An advertisement or solicitation is generally not an offer.

Mesaros v United States (coin collector advertisement, order form says “Yes, please accept my order…”)

a. HOWEVER, if the offer in the advertisement is clear, definite, and specific, and promises a performance in return for something requested, it can be a binding obligation.

Lefkowitz v Great Minneapolis Surplus Store (advertisement selling furs “first come, first served”)

B. Acceptance Must be Communicated

1. Depositing a check doesn’t count as acceptance.

Houston Dairy v. John Hancock (offer accepted with a check after expiration – became counter-offer, check deposited but counter-offeror allowed to revoke because there was no acceptance of counter-offer)

2. Silence can be assent if the subject of the contract becomes unmarketable by delay.

Cole-McIntyre-Norfleet Co. v Holloway (Travelling salesman solicited and recived an order from Holloway, Holloway heard no acceptance or refusal for 2 months, supply store tried to reject – but that was not allowed – it was trying to sell an option without paying a consideration)

3. A contract can by implied in fact even if there is no acceptance.

Seaview Assn’n of Fire Island v Williams (bought property knowing people pay the homeowner’s association to keep the community nice – owes due)

C. The Power of Acceptance can be Terminated

1. Rejection or counter-offer terminates the power of acceptance.

Ardente v Horan (purchase agreement for a house returned with a letter “confirming” certain items were part of the deal – that was a counter-offer)

2. Lapse of time terminates the power of acceptance. Offers made during a conversation expire at the end of it unless otherwise specified.

Akers v Sedberry Inc (Sedberry did not accept an offer of resignation when made at a personal meeting, but tried to accept by telegram 3 days later – not allowed)

3. Revocation by the Offeror terminates the power of acceptance.

Petterson v Pattberg (When Petterson came to pay off his mortgage per Patterberg’s offer, Pattberg said he’d sold it before Petterson offered him money - revoked before accepted)

BUT there is a tension between the right to rescind and partial performance - An Option Contract Limits the Promisor’s Power to Revoke

4. In a UNILATERAL CONTRACT: Part performance by the offeree in a unilateral contract results in a contract with a condition. The condition is full performance by the offeree. (Marchiondo is the modern view, not Pattberg – partial performance creates an option to complete.)

Marchiondo v Sheck (broker sues for commission on an option contract because the buyer accepted the same day the seller revoked)

In a BILATERAL CONTRACT: A return promise can make the contract binding, you don’t need partial performance.

Davis v Jacoby (Davis promises to come take care of the Whiteheads in return for a promise to inherit, Whitehead commits suicide before Davis begins performance)

D. Negotiations Don’t Necessarily Create a Contract

1. An agreement to agree creates neither a contract nor an obligation to accept reasonable terms.

Sun Printing and Publishing v Remington Paper and Power (agreed to agree at intervals on the price and length of time for that price – no obligation to do so)

BUT if the parties intend to be bound, and the only thing left to agree on is the price, then the price is determined at the market.

2-305: Open Price Term (The parties can make a contract for sale without a price settled. If that’s the case and they fail to agree or say nothing, then the price is the reasonable price at the time of delivery. If the price isn’t fixed because of one party’s failure, the other party can cancel or fix reasonable prices. Where, however, the parties intend not to be bound unless the price be fixed or agreed, and it’s not fixed or agreed, then there is no contract.)

2. If both parties have a clear understanding of the terms and an intention to be bound, then it’s a contract. If not, it’s not a contract.

Arnold Palmer Golf v Fuqua Industries (sign an MOI to be approved by president, president refuses, issue for trier of fact whether they meant to be bound)

A/S Apothekernes Lab v IMC Chemical (Agreement of Sale rejected by parent company, finder of fact said no contract, upheld)

E. The Objective Interpretation Prevails

1. The law imputes to a person an intention corresponding to the reasonable meaning of his words and actions.

Lucy v Zehmer (Zehmer thinks a sale is a joke and Lucy doesn’t, the reasonable person agrees with Lucy - enforced)

Embry v Hargadine, McKittrick Dry Goods (Embry demands a contract renewal, McKittrick says: “Go ahead, you’re all right. Get your men out and don’t let that worry you.” - enforced)

2. When both parties’ meanings are reasonable, there cannot be a contract unless one should have been aware of the other’s meaning.

Oswald v. Allen (Swiss Coin Collection vs. all the Swiss Coins in her collection)

F. The Duty to Read

1. A party to whom a writing is made has a duty to read it or get it read to him.

Allied Van Lines v Bratton (woman moving didn’t read the bill of lading, it insured for less than she thought – she was bound by it)

Carnival Cruise Lines v Eulala Shute (Forum selection clause in contract valid)

a. Interpretation is the responsibility of the party.

Teran v Citicorp (Terns signed a loan consolidation but didn’t know their house was collateral – court said interpretation was their responsibility)

2. If its read to him wrongly, or explained to him incorrectly, then he isn’t bound by it.

Thoroughgood v Cole (document read to Thoroughgood incorrectly by Chicken, not bound by it.)

4. Is there consideration?

Rule: Generally, the formation of a contract requires a bargain in which there is a manifestation of mutual assent as to the exchange and consideration.(Rst 17)

Exceptions: A contract may also be formed if a promise is made for a benefit received (86) or a promise is made which reasonably induces action or forbearance (90).

A. Bargained for exchange

Rule: A promise is bound by consideration if bargained for/exchanged for and the person trying to enforce the contract suffered a detriment or the other person received a benefit (or promise thereof).

Definition of Consideration: Consideration can be a promise or performance, and can be an act, a forbearance, or the creation/modification or destruction of a legal relation.

Requirements:

1. There must be a legal benefit to the promisor or a detriment to the promisee.

Congregation Kadimah Toras-Moshe v DeLeo (synagogue library promise of $25k) agreement not enforced because there was no consideration or reliance.

2. It is not for the court to decide the adequacy of the consideration.

Batsakis v Demotis ($25 in greek currency exchanged for a promise of $2k)

a. However, if consideration is nominal, the court may not enforce.

Schnell v Nell (invalid will, 1 cent exchanged for $200)

b. Also, if what is exchanged is worthless, there is no consideration.

Newman and Snell’s State Bank v Hunter (company insolvent, so a note backed by company shares was worthless, could not be consideration)

3. Forbearance of a legal right is valid consideration

Hamer v Sidway (nephew promises not drink, smoke, or gamble until 21)

a. An agreement to continue an at-will employment relationship is consideration.

Lake Land Employment Group of Akron v Columber (at will employee signs a non-compete agreement in return for continued employment)

Wood v Lucy, Lady Duff-Gordon (fashion designer gives business man the exclusive right to market her products)

b. If the forbearer thought the claim was valid, it does matter that it was actually invalid.

Dyer v. National By-Products, Inc. (worker lost foot in a job accident – didn’t sue in return for lifetime employment – turns out couldn’t sue)

B. Reliance on a Promise

Rule: Rst 90/Demise Theory/Promissory Estoppel – A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only be enforcement of the promise.

Devecmon v Shaw (uncle tells nephew to go to Europe and says he’ll pay for the trip, nephew took the trip – burden incurred on a promise and at a request = sufficient consideration)

Feinberg v Pfeiffer Co (Board resolution to give Feinberg a pension, she retires 2 years later, 7 years after that company tries to reduce payment – not allowed because she decided to retire in reliance on the promise of a pension)

Vs

Hayes v Plantations Steel (Announced he would retire, then told the company would take care of him, received pension for 3 years, then stopped – allowed because he announced he was going to retire before the promise of a pension)

Garwood Packaging v Allen & Co (made a promise to see the deal through “come hell or high water” but plaintiff investment banker should have known that wasn’t a legally enforceable promise)

C. Promise in Recognition of a Benefit

Rule: Rst86 – A promise made in recognition of a benefit received by the promisor from the promisee is binding to the extent necessary to prevent injustice.

Sparks v Gustafson (Gustafson managed building in partnership with Sparks’ dad, Sparks was going to sell to Gustafson but sold to someone else – Gustafson entitled to payment for his business services)

Webb v McGowin (Webb crippled saving McGowin’s life, Webb couldn’t work, McGowin promises to pay him for the rest of Webb’s life – Webb entitled to payment – it was sufficient consideration)

Vs.

Mills v Wyman (sick sailor cared for by Wyman, sailor died, sailor’s dad promises after the fact to pay Wyman, dad doesn’t pay – didn’t have to pay because it was past consideration and the benefit was to his adult son, not him.)

D. Modifications

There is a Split Regarding Consideration:

UCC View: UCC 2-209 doesn’t require consideration for a modification. (That being said, 2-209 also requires that the modification be within the statute of frauds if applicable, the parties act in good faith, and any such modification is not barred or controlled by some prior agreement.)

Gross Valentino Printing v Clarke (price change for magazines because the job cost more than expected, magazines are goods, so change valid) – UCC view

Re: Course of Performance: UCC 1-303 says that, subject to 2-209, a course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance.

Nanakuli Paving and Rock v Shell (Nanakuli argued that price protection, as usage of the asphaltic paving trade in Hawaii was incorporated into an agreement between Nanakuli and Shell as demonstrated by the routine use of price protection by suppliers to that trade and reinforced by the way Shell actually did that – allowed)

Common Law View: The Restatement 89 says that you need consideration for a modification. It’s also important to remember that performance of a legal duty to the promisor is not consideration (73) so one party performing what they were already obligated to do under the original contract is not consideration.

Levine v Blumenthal (reduction of rent for store space because business was bad, no consideration, so change invalid) – common law view

CL Exception for Unexpected Circumstances: At common law, the parties can modify a contract if they voluntarily agree and

(1) the promise modifying the original contract was made before the contract was fully performed on either side, (2) the underlying circumstances which prompted the modification were unanticipated by the parties, and (3) the modification is fair and equitable.

Angel v Murray (garbage collector asked for increase in contract price because of huge, unexpected increase in units – city agreed – contract allowed)

4. Do Any Defenses Apply?

A. Mistakes

Rule: The parties make a mistake when they act on beliefs that are not in accord with the facts existing at the time of contracting. The disadvantaged party may then have a power to avoid the contract (“rescind” it).

Stambovsky v Ackley (haunted house – Stambovsky allowed to rescind because Ackley created a condition that materially impaired the value and that condition was peculiarly within Ackley’s knowledge and unlikely to be discovered by a prudent purchaser)

Wood v Boynton (diamond case – Wood not allowed to rescind because neither of them knew the real value of the stone)

Lenawee County Board of Health v Messerly (both parties were mistaken, rental property worthless because of a septic problem – court said the risk belongs to vendee because of an “as is” clause in contract)

Elsinore Union Elementary School District v Kastorff (contractor allowed to rescind an incorrect bid because the bid-sheet showed an incorrect calculation – other party had reason to know of error) Rakoff says this case is wrong, it should follow Wood v Boynton; plus it only applies to contractor cases.

B. Duress

Rule: Duress is present when one is induced by a wrongful act of another to make a contract under circumstances which deprive him of the exercise of free will. The defense of duress cannot be predicated upon a demand which is lawful or upon doing or threatening to do that which a party has the legal right to do. Rather, the conduct of the party obtaining the advantage must be shown to be tainted by some degree of fraud or wrongdoing in order to have an agreement invalidated on the basis of duress.

Gross Valentino Printing Co v Clarke (Clarke and Gross made a contract for magazine printing services. Gross told Clarke it was going to cost more than they thought, Clarke didn’t object at the time, but later refused to pay the price increase and claimed that they were under “economic duress” because they didn’t think they could meet the deadline if they changed printers – court rejected this reasoning)

It’s important to note that duress is ordinarily not a defense unless the other party is the source of the duress.

Rst 175 (If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.)

C. Fraud

Rule: Fraud is a clear ground for rescission of the contract by the de-frauded party. Fraud occurs when one party makes a deliberate misrepresentation to the other party.

D. General Unconscionability

Rule: UCC 2-302: If the court, as a matter of law, finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract.”

Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.

2-302: Unconscionable Contract or Clause (The basic test is whether, in light of the background/needs, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.)

Williams v Walker-Thomas Furniture Co (lower court could find contract unconscionable for saying you’ve never paid off anything until you’ve paid off everything)

The Brooklyn Union Gas Company v Jimeniz (Jimeniz pressured to sign contract for a burner, it was not translated to him, he made payments, but then a part broke, the company didn’t replace it, and he stopped paying, Gas Company sued for breach – not allowed)

Schnell v Nell (held in part that one cent is not consideration for $600; a contract to pay $600 for one cent is unconscionable at first blush)

1. The existing rule concerning contracts of adhesion is that they are enforceable. You must show that the contract is unconscionable in order to make it unenforceable.

Williams v Walker-Thomas Furniture Co (lower court could find contract unconscionable for saying you’ve never paid off anything until you’ve paid off everything)

5. Can This Party Sue on the Contract?

Rule: The doctrine of privity held that only parties to contracts could bring actions to enforce them and was a salient feature of classical contract law. But if a third party is an intended beneficiary (life insurance recipient example), that 3rd party can sue on the contract

Lawrence v Fox (One party borrowed money from another on the consideration that he would pay a third party. The 3rd party sued the recipient – allowed)

Seaver v Ransom (Woman signed her will – that left everything to her husband – on the condition that he would give property to the niece – niece sues husband’s estate – allowed)

Bain v Gillespie (unintended beneficiary of a contract – people who make money off of basketball merchandise – sue referee for bad call – not allowed)

United States v Wood (Wife promised to pay husband’s tax debt out of the house sale proceeds in return for husband letting go of all claims to house – US sues Wife – allowed)

II. Interpretation – What are the Terms?

1. UCC

Remember that if it’s a UCC case, the UCC implies a lot of definitions/terms. Class example:

“Buyer agrees to purchase and seller agrees to furnish, 10,000 tee-shirts bearing the 2012 Olympic Insignia, for $3.00 each. (On its face, these are two promises. But there are two conditions that are implied)

1. Seller Agrees to furnish goods = seller is obligated to transfer title and deliver physical goods (2-301) at seller’s place of business (2-308) at reasonable time (2-309) if [condition] buyer tenders payment (2-311), where tender essentially means that buyer is ready, willing, and able to pay.

2. Buyer agrees to purchase = Buyer must accept and pay for goods (2-301) and payment is due at time and place where buyer receives goods (2-310) if [condition] seller tenders delivery of conforming goods (2-503) and gives buyer a chance to inspect goods (2-513).

2. Parol Evidence Rule

UCC 2-202: A writing intended by the parties as the final written expression of their agreement cannot be contradicted by evidence of any prior agreement or contemporaneous oral agreement, but may be explained or supplemented by course of performance, course of dealing, or usage of trade and by evidence of other terms unless the court finds the writing to have been intended as a complete and exclusive statement of the terms of the agreement.

UCC 1-303: The express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade must be construed wherever reasonable as consistent with each other. If such construction is unreasonable, use this hierarchy of interpretation: express terms > course of performance > course of dealing > usage of trade

Restatement 213: A binding integrated agreement discharges prior inconsistent agreements and prior agreements within its scope.

Nelson v Elway (Car dealership case, prior unsigned writing not allowed)

A. Collateral Agreements

1. If the oral and written agreements relate to the same subject matter, and are so interrelated that both would be executed at the same time and in the same contract, the scope of the subsidiary agreement must be taken to be conveyed by the writing

Gianni v R. Russel & Co (P claimed the exclusive right to sell soda was part of the consideration for the deal, given in return for giving up the right to sell cigarettes – too interrelated to not have been in the deal)

2. Evidence of collateral agreements might be allowed if such an agreement might “naturally” have been made as a separate agreement (Restatement) but if it would “certainly” have been included in the document (UCC), no evidence of the collateral agreement is allowed.

Masterson v Sine (allowed evidence that a real estate sale with an option to repurchase should be interpreted with a collateral agreement that the land was to be kept in the family)

3. Corbin says that the writing is integrated if the parties intend it to be and means what they intend it to mean – UCC’s provision that the writing is integrated if “intended by the parties as a final expression of their agreement” sounds like Corbin’s rule – this means the focus in on the intention of the parties, not the integration practices of reasonable persons acting normally and naturally.

Interform v Mitchell (A contract that said “Purchase Order” at the top was interpreted to be a rental form because the parties intended that.

4. A contract might not be integrated even if it has an integration clause if the collateral agreement doesn’t apply to all the parties.

Lee v Joseph E Seagram and Sons (oral agreement between Lee and Seagram’s representative that Seagram would relocate the Lee sons in a new distributorship was part of an agreement to sell an interest in a liquor store – the provision would only have related to shareholders of a 50% interest)

B. Interpreting Existing Terms#1 : Ambiguous or Susceptible?

1. MAJORITY: Extrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face.

WWW Associates v Giancontieri (Clause in real estate sale allowed cancellation by either party if litigation still pending against D on a certain date, P says that clause was for their benefit, but D waited out the litigation and then cancelled the contract – allowed – document unambiguous on its fact)

VS.

MINORITY: 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

Pacific Gas and Electric v GW Thomas Drayage and Rigging (TRAYNOR - Thomas agreed to indemnify Pacific against all loss, but Thomas thought that meant damage to 3rd parties, when Thomas damages Pacific, Pacific wanted Thomas to pay, Thomas refused. – Court must consider extrinsic evidence)

Trident Center v Connecticut General Life Ins (KOZINSKI – thinks Traynor’s rule is dumb, and if language isn’t ambiguous, extrinsic evidences shouldn’t be allowed, BUT Traynor’s rule is the precedent, so – Court must consider extrinsic evidence)

Brinderson-Newburg JV v Pacific Erectors (contract required Pacific to “erect complete,” but Pacific understood a limitation that they thought Brinderson understood too – no evidence of limitation allowed – “complete” not susceptible.)

C. Interpreting Existing Terms#2 : Effect of Trade Usage/Course of Dealing

1. If the trade usage of a term is different from the general usage, the trade usage must be of long continuance, well established, universal, etc so as the presumption is violent tha the parties contracted with reference to it and made it part of their agreement.

Frigaliment Importing Co v BNS International Sales Co (The term “chicken” does not mean young chicken with a violent clarity – D’s belief in the objective meaning of chicken was reasonable, so P’s meaning not enforced. ) – Not UCC

2. The parties’ agreement includes the course of dealing or usage of trade or course of performance, so express terms are not the entire agreement.

UCC 2-208: Course of Performance or Practical Construction (Any course of performance accepted or acquiesced to is relevant to the agreement’s meaning. Where express terms and course of performance are inconsistent, express terms prevail. Course of performance is relevant to show modification or waiver)

Nanakuli Paving and Rock v Shell (The Hawaiian asphaltic paving trade implies a requirement of price protection.)

VS

Express contract terms and an applicable course of dealing or usage of trade shall be construed wherever reasonable as consistent with each other

Corenswet v Amana Refrigeration (contract had clause saying relationship could be terminated by either party on 10 days notice, there was no required reason, after 10 years Amana terminated – allowed)

D. Warranty

1. Any description of the goods that becomes part of the bargain is a warranty that the goods will conform to that description.

2-313: Express Warranties by Affirmation, Promise, Description, Sample (Express Warranties by the seller are created by: any affirmation of fact or promise which becomes part of the bargain, any description of the goods which is made part of the basis of the bargain, or any sample or model which is made part of the basis of the bargain. An express warranty can be created without the use of formal words like “warrant” or “guarantee.” A clause generally disclaiming all warranties cannot reduce the seller’s obligation with respect to the description and therefore cannot be given literal effect. Past deliveries can set the description of quality, either expressly or impliedly by course of dealing.)

2. A limitation or exclusion of a warranty must be conspicuous.

2-316: Exclusion or Modification of Warranties (Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other, but subject to parol evidence. To exclude or modify the implied warranty of merchantability, the language must mention merchantability and be conspicuous if written. To exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous. All implied warranties are excluded by expressions like “as is” or “with faults.” When the buyer has examined the goods before entering the contract, there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed. An implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade.)

Cate v Dover Corp. (lifts never functioned properly, disclaimer was not conspicuous and Cate didn’t establish that Dover knew about it - remanded)

3. Implied Terms

A. Omitted Essential Term

1. An omission to express an intention cannot be supplied by conjecture. But if that instrument as a whole produces a conviction that a particular result was fixedly desired although not expressed by formal words, that defect may be supplied by implication and the underlying intention may be effectuated, provided it is sufficiently declared by the entire instrument.

Spaulding v Morse (implied term that child-support payments were only due when ex-wife was supporting the child- since he was in the army, he didn’t need to be educated or maintained)

B. Good Faith/Fair Dealing

1. Every contract implies good faith and fair dealing between parties.

UCC 1-304 (every contract imposes an obligation of good faith in performance and enforcement)

2. A “best efforts” clause imposes an obligation to act with good faith in light of one’s own capabilities. The party meets the obligations under a “best efforts” contract by performing as well as the average prudent comparable business person.

Bloor v Falstaff Brewing Co (best efforts clause only required Fallstaff to treat the Ballantine brands as well as its own.)

3. A party vested with discretion must exercise discretion reasonably and may not do so arbitrarily or capriciously. If discretion is exercised in bad faith, a breach of contract occurs and the court must grant relief to the aggrieved party.

Greer Properties v LaSalle National Bank (question of fact as to whether the sellers terminated in good faith – if they terminated the deal to get a better price elsewhere, that would be bad faith.)

4. A contracting party cannot use his own breach to gain an advantage by impairing the rights that the contract confers on the other party

Market Street Associates and Orenstein v Frey (Ask for $2m in improvements, refused, prosed negotiations, refused, said they would seek financing elsewhere and exercise option to buy – question of fact as to state of mind)

C. Implied Warranty

1. There is an implied warranty of merchantability of goods (BUT it only applies to merchants, if seller isn’t a member of the trade, you can’t expect the warranty to be implied)

UCC 2-314: Implied Warranty: Merchantability; Usage of Trade (Unless excluded or modified by section 2-316, a warranty that the goods shall be merchantable is implied in a contract if the seller is a merchant of that kind of good. To be merchantable, goods must: pass without objection in the trade; be of fair and average quality; fit for their ordinary purposes; of even kind, quality, and quantity; be adequately contained, packaged, and labeled; and conform to the promise or affirmations of fact made on the label. Unless excluded or modified, other implied warranties may arise from course of dealing or usage of trade.)

2. If the seller knows that the goods are to be used for a particular purpose, there is an implied warranty that the goods are fit for that purpose.

UCC 2-315: Implied Warranty: Fitness for Particular Purpose (Where the seller at time of contracting has reasons to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified an implied warranty that the goods shall be fit for such purpose.)

3. If the hazards or defects are anticipated or acceptable, that doesn’t impair their fitness or merchantability.

Webster v Blue Ship Tea Room (fish chowder generally has fish bones in it.)

4. Defects don’t have to be uncovered or undiscoverable by the seller. It’s only required that the goods upon delivery weren’t merchantable or fit for their purpose.

Vlases v Montgomery Ward (chickens had bird cancer)

5. An implied warranty can be expressly excluded or modified by conspicuous language (conspicuous = a reasonable person would have noticed) BUT IF the buyer has actual knowledge of the disclaimer, then the conspicuousness requirement is waived.

Cate v Dover Corp. (lifts never functioned properly, disclaimer was not conspicuous and Cate didn’t establish that Dover knew about it - remanded)

Note UCC 2-316 doesn’t actually say knowledge excuses conspicuousness.

III. Was There a Breach?

1. Material Breach

A. Perfect Tender v Substantial Performance

1. The UCC allows the buyer to reject the goods if they do not perfectly conform to the contract. Any failure to conform is thus a material breach.

2-601: Buyer’s Rights on Improper Delivery (If the goods or the tender of delivery fail in any respect to conform to the contact, the buyer may reject the whole, accept the whole, or accept any commercial units and reject the rest. A buyer accepting non-conforming goods is not penalized by the loss of any other remedy otherwise open to him. Acceptance made with the knowledge of the other party is final, but an original refusal to accept may be withdrawn by a later acceptance if the seller has indicated that he is holding the tender open.)

VS

2. A material breach under the common law requires more than the UCC’s perfect tender rule. Under common law, substantial performance on the contract by one party is enough to hold the other party to performance of their side of the contract. To say that a party substantially performed is to say that the performance meets the essential purpose of the contract.

Jacob and Youngs v Kent (Contract specified Reading pipe, equally good pipe was installed and it would be super expensive to fix. The contractor was not required to replace the pipe because he had substantially performed.)

Plante v Jacobs (House was built with a misplaced wall; the court found that the defendant had substantially performed on the contract to build the house.)

B. Conditions

1. The plaintiff may not recover upon its contract without proof that it has performed all conditions precedent required of it.

Jungman and Co v Atterbury Brothers (Condition that P advise D by cable in advance of shipment, since P didn’t do that, D had no obligation to accept goods)

2. In most contracting cases, payment by the owner to the general contractor is not a condition precedent to the general contractor’s duty to pay the subcontractors

Peacock Construction Co v Modern Air Conditioning (Building owner didn’t pay general contractor, but GC was still obligated to pay air conditioner and pool subs)

3. If a condition of the contract is entirely within a party’s control, he must make a good faith effort to fulfill it.

Fry v George Elkins Co (House sale conditioned on Buyer getting a loan at 5% for 20 years, he could have gotten it from a company seller recommended, but didn’t because he didn’t like another term – Buyer wanted his deposit back, he got it less the broker’s commission)

Pannone v Grandmaison (House sale conditioned on Radon inspection, results normal but very low risk, Buyer rejects because of cancer phobia – that’s allowed)

C. Prevented Performance

1. In order to amount to a prevention of performance by the adversary party, the conduct on the part of the party who is alleged to have prevented performance must be wrongful, and, accordingly, in excess of his legal rights.

2. The mere fact that permitted conduct of this nature by one promisor renders unpleasant or inconvenient performance by the other of his agreement effects no discharge of that obligation.

Godburn v Meserve (old woman promised to will her house to a family if they lived with her until she died, she became difficult, and they moved out – that wasn’t prevention)

D. Failed Performance

1. Traditional rule: if the labor is specified to be performed at a certain price, and the performer fails to compete it, he isn’t entitled to recover for any of the labor performed.

VS

New Rule: Quantum Meruit

Britton v Turner (Plaintiff entitled to recover as much as the labor performed was reasonably worth)

E. Repudiation

1. If a party, before he has fully performed his duty under a contract, manifest to the other party his assent to discharge the other party’s duty to render part of all of the agreed exchange, the duty is to that extent discharged without consideration (Rst 275)

Walker and Co v Harrison (plaintiff didn’t maintain sign as promised during sign rental, so defendant stopped paying – not a valid ground for repudiation)

F. Cure

1. If the buyer rightfully rejects and the time for performance has not yet expired, the seller may try to cure the problem.

UCC 2-508: Cure by Seller of Improper Tender or Delivery; Replacement (Where tender or delivery is rejected because nonconforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and by then within the contract time make a conforming delivery. Where the buyer rejects a non-conforming tender which the seller had reasonable rounds to believe would be acceptable the seller may, if he seasonably notifies the buyer, have a further reasonable time to substitute conforming tender.)

2. Excuse for Nonperformance

A. Impracticability

1. Where there is a positive contract to do a thing, not in itself unlawful, the contractor must perform it or pay damages for not doing it, although in consequence of unforeseen accidents, the performance of his contract has become unexpectedly burdensome or even impossible.

Northern Indiana Public Service Co v Carbon Country Coal Co. (the buyer making a bad forecast of the market doesn’t make something impossible.)

Transatlantic Financing Corp v United States (performance wasn’t impossible because ship had to sale around Cape of Good Hope rather than the Suez Canal)

2. BUT in contracts 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.

Taylor v Caldwell (music hall burned down, renters excused from providing a place for the concert - Impossibility)

Krell v Henry (Coronation didn’t take place – window renter didn’t have to pay for window rental - Frustration)

2-615: Excuse by Failure of Presupposed Conditions (Delay or non-delivery by a seller is not a breach if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any governmental regulation. If such causes affect only part of the seller’s capacity to perform, he must allocate production and deliveries among his customers fairly and reasonably. The seller must notify the buyer seasonably that there will be delay or non-delivery.)

IV. What is the Remedy?

1. Types of Remedies

Definition:

1. An EXPECTATION INTEREST is one’s interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed.

2. A RELIANCE INTEREST is one’s interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made.

3. A RESTITUTION INTEREST is one’s interest in having restored to him any benefit that he has conferred on the other party.

A. Expectation vs Reliance

Rules:

1. Courts usually prefer the expectation remedy.

Hawkins v McGee (100% perfect hand surgery case – trial court awarded reliance, appellate court says correct measure is expectation)

a. Specific Performance (an expectation remedy) is not available unless money damages would be inadequate.

McAllister v Patton (deposit paid to get into a queue for a car, Patton didn’t give him the car, McAllister denied specific performance because car wasn’t unique)

Courts usually don’t want to mandate specific performance when the contract requires a performance. ( This is probably because they don’t want to have to supervise completion.

London Bucket Co v Stewart (plaintiff wants specific performance on the installation of a heating system – court says that building contracts are not specifically enforced because ordinarily damages are adequate)

When a Court Might Give Reliance Instead:

1. A court may award reliance if the expectation is hard to calculate/speculative.

Security Stove and MFG v American Ry Express (P told D that they were going to a trade show to try to get a contract, their product was unique, and they needed the parts to get there at a certain time. D lost one part. P allowed to recover reliance because expectation was too speculative and was at least reliance.)

Sullivan v O’Connor (a botched plastic surgery job could have been settled with reliance or expectation – case argues that reliance is better in medical cases.)

2. A court may award reliance instead of expectation if the contract provision breached is “incidental” to the main purpose in view and the cost of performance is grossly disproportionate to the economic benefit of performance.

Peeveyhouse v Garland Coal and Mining Co (after mining the P’s farm for coal deposits, D refused to do the restorative work because it would cost >$25k and the diminution in value of the land was $300)

3. If the consideration for the contract was reasonably induced reliance on a promise, then the court might award reliance damages.

Goodman v Dicker (D, a local distributor for a Corp, told P that he would get a franchise, P incurred expenses preparing to do business under the franchise, but the franchise was not granted – P allowed to recover reliance)

a. However, if there are an infinite number of identical contracts to be made and reliance is viewed as opportunity cost in taking one promise instead of an identical other, the profit loss that is viewed as expectation, might be called reliance.

Walters v Marathon Oil (Walters prepared to open a gas station in reliance on Marathon’s promise, Iranian Revolution made Marathon refuse to sign the final agreement – Walters awarded lost profits)

B. Restitution

Rule: Restitution is often available to prevent unjust enrichment.

How its different from Reliance: Restitution includes benefits conferred on the breacher by the non-breaching party, but excludes expenditures made to 3rd parties by the non-breaching party. Restitution can take the form of specific relief – like the return of a delivered good. Accordingly, restitution is often a component of reliance but the reverse is not the case.

1. The measure for quantum meruit is the reasonable value of the performance and recovery is undiminished by any loss which would have been incurred by complete performance.

United States v Algernon Blair (contract dispute between general contractor and sub-contractor, sub-contract terminates performance because general contractor breaches, expectation interest was negative, but allowed to recover quantum meruit)

2. Restitution is not available to one who has fully performed his part of the contract if the only part of the agreed exchange that has not be rendered by the defendant is a sum of money constituting a liquidated debt.

Oliver v Campbell (client fires attorney at the end of the divorce trial, attorney sues for payment in restitution – which is worth more because the reasonable value of services was more than the amount contracted for. Attorney only allowed the contract amount)

C. Specific Performance

Rule: Specific performance is only available as a remedy when the good is unique and money damages would be inadequate to put the non-breaching party in as good a position as they would have been in had the contract been performed.

UCC 2-716: Buyer’s Right to Specific Performance or Replevin (Specific performance may be decreed when the goods are unique. The buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable to effect cover for such goods.)

Rst §359 Effect of Adequacy of Damages ((1) Specific performance or an injunction will not be ordered if damages would be adequate to protect the expectation interest of the injured party. (2) The adequacy of the damage remedy for failure to render one part of the performance due does not preclude specific performance or injunction as to the contract as a whole. (3) Specific Performance or an injunction will not be refused merely because there is a remedy for breach other than damages, but such a remedy may be considered in exercising discretion under the rule stated in 357.)

a. Specific Performance is regularly available in land sale contracts.

Rst §129 Action in Reliance; Specific Performance (A contract for the transfer of an interest in land may be specifically enforced notwithstanding failure to comply with the Statute of Frauds if it is established that the party seeking enforcement, in reasonable reliance on the contract and on the continuing assent of the party against whom enforcement is sought, has so changed his position that injustice can be avoided only be specific enforcement.)

D. Punitive Damages

1. Punitive Damages are not allowed.

White v Benkowski (well shut off case – jury awarded $10 compensatory and $2k punitive – punitive damages taken away)

2. If Liquidated damages are disproportionately large with respect to the foreseeable harm, they are considered punitive.

City of Rye v Public Serv Mut Ins Co (developers post bond to be paid to city if they don’t finish building in time – city not allowed to recover because the amount fixed was grossly disproportionate to the harm likely to be suffered or actually suffered)

E. Liquidated Damages

1. Liquidated damages provided for in the contract are allowed where they are reasonable. But if they are unreasonably high, they may be rejected as punitive, and where they are unreasonably low, they may be rejected as unconscionable.

2-718: Liquidation or Limitation of Damages; Deposits (Damages for breach by either party may be liquidated in the agreement but only at an amount which reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and inconvenience or non-feasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty. An unreasonably small amount would be subject to similar criticism and might be stricken under the section on unconscionable contracts or clauses.)

F. Consequential Damages

Consequential damages, a type of compensatory damages, may be awarded when the loss suffered by a plaintiff is not caused directly or immediately by the wrongful conduct of a defendant, but results from the defendant's action instead. (For example, if a defendant carried a ladder and negligently walked into a plaintiff who was a professional model, injuring the plaintiff's face, the plaintiff could recover consequential damages for the loss of income resulting from the injury. These consequential damages are based on the resulting harm to the plaintiff's career. They are not based on the injury itself, which was the direct result of the defendant's conduct.)

2-715: Buyer’s Incidental and Consequential Damages (Consequential damages resulting from the seller’s breach include any loss resulting from general or particular requirements and needs of which the seller at time of contracting had reason to know and which could not be reasonably prevented by cover or otherwise and injury to person or property proximately resulting from any breach of warranty.)

G. Incidental Damages

2-710: Seller’s Incidental Damages (Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer’s breach, in connection with the return or resale of the goods or otherwise resulting from the breach.)

2-715: Buyer’s Incidental and Consequential Damages (Incidental damages resulting from the seller’s breach include expenses reasonable incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach)

2. Calculating Damages

A. UCC

1. Seller’s Damages:

2-708: Seller’s Damages for Non-acceptance or Repudiation (The measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in 2-710 but less expenses saved in consequence of the buyer’s breach. BUT if the measure of damages above is inadequate to put the seller in as good a position as performance would have done, then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages in 710, due allowance for costs reasonably incurred and due credit for payments of proceeds of resale.)

2. Buyer’s Damages:

2-711: Buyer’s Remedies in General; Buyer’s Security Interest in Rejected Goods (Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or revokes acceptance, the buyer may cancel and, in addition to recovering so much of the price as has been paid, may cover and have damages under 2-712, or recover damage for non-delivery as in 2-713.)

2-713: Buyer’s Damages for Non-delivery or Repudiation (The measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages but less expenses saved in consequence of the seller’s breach.)

2-714: Buyer’s Damages for Breach in Regard to Accepted Goods (Where buyer has accepted goods and given notification, he may recover as damages for any non-conformity of tender the loss resulting in the ordinary course of events from the seller’s breach as determined in any manner which is reasonable. The measure of damages for breach of warranty is the difference at time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted. In a proper case, any incidental and consequential damages under the next section may also be recovered.)

C. Common Law

Expectation Interest:

1. If you expect a 100% good hand and get a 10% good hand, you are entitled to be compensated for a 90% difference.

2. You do not get reimbursed for the doctor’s fee or nurse’s fee because you expected to have to pay those fees.

3. You also expect pain and suffering and generally will not get reimbursed for it. However, if you get a hairy hand and your pain and suffering goes way beyond what you expected, then you can get reimbursed for (Actual pain and suffering – Expected pain and suffering)

Reliance Interest:

1. The goal is to get you back to where you started. If you started with a 50% good hand and ended with a 10% good hand, the goal is to compensate you for 40%.

2. You also get compensated for doctor and nurse fees.

3. You also get compensated for both expected pain and suffering and additional pain and suffering because this compensation will restore you to where you were before the operation.

Restitution Interest:

1. Plaintiff would argue that the doctor and nurses were unjustly enriched. Plaintiff would probably get the money back that was paid to doctor. Plaintiff may not get the money that went to the nurse because the nurses probably did what they were supposed to do and therefore were not unjustly enriched.

3. Factors that Affect Recovery

A. Limited Information

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

Locke v United States (Typewriter repairman enters into service contract with the Government, but his name is accidentally taken off the list, he loses business, but it’s unclear how much – still can recover based on his proportional share of the work)

2. However, the damages cannot be merely speculative, possible, or imaginary, but must be reasonably certain and directly traceable to the breach, not the result of other intervening causes.

Kenford v County of Erie (County breached a contract by which Kenford and DSI were to build and manage a domed stadium, the plaintiffs wanted damages for the prospective profits during the 20 year management contract – denied – too speculative.)

3. Damages recoverable after a breach are limited to those that reasonably may be supposed to have been in the contemplation of both parties at the time of the breach.

a. If there are special circumstances that aren’t communicated to the defendant, the plaintiff cannot recover.

Hadley v Baxendale (24£ in several days of lost profits for a mill were not the reasonably foreseeable consequence of a delay in delivery for shipping a crank shaft for 2£ - not allowed)

UCC 2-715 (requires that the seller “had reason to know”)

b. BUT If the special circumstances are communicated to the defendant, the plaintiff can recover.

Security Stove and MFG v American Ry Express (P told D that they were going to a trade show to try to get a contract, their product was unique, and they needed the parts to get there at a certain time. D lost one part. P allowed to recover reliance because expectation was too speculative and was at least reliance.)

B. Mitigation

1. If one party breaches the contract, the other party has to try to mitigate the damages.

Rst § 350: Avoidability as a Limitation on Damages (1) Except as stated in Subsection 2, damages are not recoverable for loss that the injured party could have avoided without undue risk, burden, or humiliation.(2) The injured party is not precluded from recovery by the rule stated in Subsection 1 to the extent that he has made reasonable but unsuccessful efforts to avoid loss.

2. But if the substitute offered by the defendant is different or inferior, the other party has no obligation to accept.

Parker v 20th Century Fox (a role in a drama was different from/inferior to a role in a musical – the plaintiff actress did not have to accept the substitute offer)

C. Cover

1. If the seller breaches, the buyer is entitled to the cost of cover.

UCC 2-712: Cover, Buyer’s Procurement of Substitute Goods (After a breach, the buyer may cover by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller. The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages but less expenses saved in consequence of the seller’s breach. Failure of the buyer to effect cover does not bar him from any other remedy)

2. The non-breaching party is entitled to its entire expectation interest. Anything that’s a part of that is not reduced, so if the goods are not unique, cover/a subsequent sale does not reduce the expectation damages, because, theoretically, there should have been two sales with two profits if not for the breach.

Neri v Retail Marine Corp (Buyer breached deal to buy a boat after putting down a deposit, seller later sold the boat to someone else, but buyer’s restitution was the deposit less the Seller’s lost profit and incidental damages) – UCC case

Fertico Belgium v Phosphate Chemicals (Seller made a later delivery, buyer had to cover for its 3rd party buyer, but then accepted the late delivery and sold that to another 3rd party buyer – buyer got damages = increased cost of cover, but seller got no credit for buyer’s profits from the subsequent sale of late goods because the buyer could have made both 3rd party sales) – UCC case

b. Since overhead expenses are not affected by performance, they are recoverable as damages for lost profits and are not considered part of the seller’s costs.

Vitex Mfg Corp v. Carbitex Corp (overhead not considered in lost profits)

D. Substantial Performance v Perfect Tender

1. Perfect Tender Rule (UCC) – Buyer can reject the goods if they don’t conform.

VS

Substantial Performance Rule – I promise to pay at the contract rate if you substantially perform

2. Substantial Performance means that the performance meets the essential purpose of the contract and damages are equal to the diminished value.

Jacob and Youngs v Kent (Contract specified Reading pipe, equally good pipe was installed and it would be super expensive to fix ( recovery = difference in value = nothing)

Plante v Jacobs (House that has a misplaced wall; plaintiff entitled to the dimished value of the house because of the misplaced wall)

UCC Rule List:

1-302: Variation By Agreement

( If both parties agree, they can contract out of any of the UCC provisions except for “good faith, diligence, reasonableness, and care”

1-303: Course of Performance, Course of Dealing, and Usage of Trade.

( Definition of each term

( Provides for a hierarchy of construction: express terms, course of performance, course of dealing, usage of trade

( Course of performance is relevant to show waiver or modification of a term

1-304: Obligation of Good Faith

( Every contract imposes a duty of good faith

2-101: Short Title

( This is called UCC-Sales

2-102: Scope; Certain Security and Other Transactions Excluded from this Article

( Applies to transactions in goods

2-105: Definitions: Transferability, goods, future goods, lot, commercial unit

2-201: Formal Requirements; Statute of Frauds

( A contract for sale of goods for $500 or more is not enforceable unless there is a writing sufficient to indicate that a contract for sale has been made between parties and signed by the party against whom enforcement is sought.

( A writing confirming a contract between sellers is sufficient as used against the recipient unless written notice of objection to its contents is given within 10 days after it is received.

( A contract that doesn’t meet the writing requirements is enforceable if the goods were specially made for the buyer, the party against who enforcement is sought admits that it was made, or the payment/goods have already been made/accepted.

2-202: Final Written Expression: Parol or Extrinsic Evidence

( A writing intended to be the final written expression of the parties’ agreement may not be contradicted by evidence of a prior agreement or contemporaneous oral agreement, but may be supplemented by course of performance, course of dealing or usage of trade, and by evidence of consistent additional terms unless the court finds the writing to have been intended as a complete and exclusive statement.

2-208: Course of Performance or Practical Construction

( Any course of performance accepted or acquiesced to is relevant to the agreement’s meaning.

( Where express terms and course of performance are inconsistent, express terms prevail

( Course of performance is relevant to show modification or waiver

2-209: Modification, Rescission and Waiver

( An agreement modifying a contract doesn’t need consideration to be binding.

( A signed agreement that excludes modification or rescission cannot be modified or rescinded.

( Statute of Frauds must still be satisfied

2-301: General Obligations of Parties

( Seller must transfer and deliver

( Buyer must accept and pay.

2-302: Unconscionable Contract or Clause

( If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract or clause

( The basic test is whether, in light of the background/needs, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.

2-303: Allocation of Division of Risks

( Agreements may shift of alter the burdens/risks

2-304: Price Payable in Money, Goods, Realty, or Otherwise

( Price can be made payable in money or otherwise

2-305: Open Price Term

( The parties can make a contract for sale without a price settled. If that’s the case and they fail to agree or say nothing, then the price is the reasonable price at the time of delivery.

( If the price isn’t fixed because of one party’s failure, the other party can cancel or firx reasonable prices.

( Where, however, the parties intend not to be bound unless the price be fixed or agreed, and it’s not fixed or agreed, then there is no contract.

2-306: Output, Requirements and Exclusive Dealings

( A term which measures the quantity by the output of the seller or the requirements of the buyer means good faith outputs or requirements

2-307: Delivery in Single Lot or Several Lots

( Unless otherwise agreed, all goods contracted for must be tendered in a single delivery and payment is due only on such tender

2-308: Absence of a Specified Place for Delivery

( Unless otherwise agreed, the place of delivery is the seller’s place of business (or if he doesn’t have one, his residence)

( But if, at the time of contracting, the parties know that the identified goods are in some other place, that place is there place of delivery

2-309: Absence of Specific Time Provisions; Notice of Termination

( If no time for shipment or delivery is specified, the time is a reasonable time.

( Where the contract provides for successive performances, but is indefinite in duration, it’s valid for a reasonable time but can be terminated at any time by either party

( Termination of a contract by one party requires reasonable notification to the other. An agreement dispensing with notification is invalid if its operation would be unconscionable.

2-310: Open Time for Payment or Running of Credit; Authority to Ship Under Reservation

( Payment is due at the time and place at which the buyer is to receive the goods

( If delivery is authorized and made by way of title, then payment is due at the time and place that the buyer receives the documents

( If the seller is authorized to send the goods, he may ship them under reservation, but the buyer may inspect the goods after their arrival before payment is due unless such inspection is inconsistent with the terms of the contract

2-313: Express Warranties by Affirmation, Promise, Description, Sample

( Express Warranties by the seller are created by: any affirmation of fact or promise which becomes part of the bargain, any description of the goods which is made part of the basis of the bargain, or any sample or model which is made part of the basis of the bargain.

( An express warranty can be created without the use of formal words like “warrant” or “guarantee.”

( A clause generally disclaiming all warranties cannot reduce the seller’s obligation with respect to the description and therefore cannot be given literal effect

( Past deliveries can set the description of quality, either expressly or impliedly by course of dealing.

2-314: Implied Warranty: Merchantability; Usage of Trade

( Unless excluded or modified by section 2-316, a warranty that the goods shall be merchantable is implied in a contract if the seller is a merchant of that kind of good

( To be merchantable, goods must: pass without objection in the trade; be of fair and average quality; fit for their ordinary purposes; of even kind, quality, and quantity; be adequately contained, packaged, and labeled; and conform to the promise or affirmations of fact made on the label

( Unless excluded or modified, other implied warranties may arise from course of dealing or usage of trade.

2-315: Implied Warranty: Fitness for Particular Purpose

( Where the seller at time of contracting has reasons to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified an implied warranty that the goods shall be fit for such purpose.

2-316: Exclusion or Modification of Warranties

( Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other, but subject to parol evidence

( To exclude or modify the implied warranty of merchantability, the language must mention merchantability and be conspicuous if written. To exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous.

( All implied warranties are excluded by expressions like “as is” or “with faults”

( When the buyer has examined the goods before entering the contract, there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed.

( An implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade.

2-503: Manner of Seller’s Tender of Delivery

( Tender of delivery requires that the seller put and hold conforming goods at the buyer’s disposition and give the buyer any notification reasonably necessary to enable him to take delivery. Tender must be at a reasonable hour and the buyer must furnish facilities reasonably suited for the receipt.

( Where goods are in the possession of a bailee and are to be delivered without being moved, tender requires that the seller either tender a negotiable document of title or procure the bailee’s acknowledgement of the buyer’s right to possession.

2-504: Shipment by Seller

( Where the seller is required to send the goods to the buyer and the contract doesn’t specify where, then he must give them to a carrier and make a reasonable contract for goods under the circumstances, tender any document necessary to enable the buyer to obtain possession, and promptly notify the buyer.

( Failure to notify the buyer or make a proper contract with the carrier is a ground for rejection only if material delay or loss ensues.

2-505: Seller’s Shipment Under Reservation

( Where the seller has identified goods by or before shipment, his procurement of a bill of lading reserves in him a security interest in the goods

( When shipment by seller with reservation of a security interest is in violation of the contract it constitutes an improper contract for transportation

2-506: Rights of Financing Agency

( A financing agency by paying or purchasing for value a draft which relates to a shipment of goods acquires to the extent of the payment or purchase any rights of the shipper in the goods

2-507: Effect of Seller’s Tender; Delivery on Condition

( Tender of delivery is a condition to buyer’s duty to accept the goods and pay for them.

( Tender entitles the seller to acceptance of the goods and payment

( Where payment is due and demanded on delivery to the buyer, his right as against the seller to retain or dispose of them is conditional upon his making the payment due.

2-508: Cure by Seller of Improper Tender or Delivery; Replacement

( Where tender or delivery is rejected because nonconforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and by then within the contract time make a conforming delivery

( Where the buyer rejects a non-conforming tender which the seller had reasonable rounds to believe would be acceptable the seller may, if he seasonably notifies the buyer, have a further reasonable time to substitute conforming tender.

2-511: Tender of Payment by Buyer; Payment by Check

( Tender of payment is a condition to the seller’s duty to tender and complete any delivery.

( Tender is sufficient when made by any means or in any manner current in the ordinary course of business unless the seller demands payment in legal tender and gives any extension of time reasonably necessary to procure it.

2-512: Payment by Buyer Before Inspection

( Where the contract requires payment before inspection, non-conformity of the goods does not excuse the buyer from so making payment unless the non-conformity appears without inspection, or the circumstances would justify injunction against honor under provisions of this Act

( Payment pursuant to this section does not constitute an acceptance of goods or impair a buyer’s right to inspect or any of his remedies.

2-513: Buyer’s Right to Inspection of Goods

( The buyer has a right before payment or acceptance to inspect goods at any reasonable place an time and in any reasonable manner.

( Expenses of inspection must be borne by the buyer, but may be recovered from the seller if the goods do not conform and are rejected.

( The buyer is not entitled to inspect the goods before payment when the contract provides for delivery COD or for payment against documents of title.

( A place or method of inspection fixed by the parties is presumed to be exclusive

2-601: Buyer’s Rights on Improper Delivery

( If the goods or the tender of delivery fail in any respect to conform to the contact, the buyer may reject the whole, accept the whole, or accept any commercial units and reject the rest.

( A buyer accepting non-conforming goods is not penalized by the loss of any other remedy otherwise open to him.

( Acceptance made with the knowledge of the other party is final, but an original refusal to accept may be withdrawn by a later acceptance if the seller has indicated that he is holding the tender open.

2-602: Manner and Effect of Rightful Rejection

( Rejection of goods must be within a reasonable time after their delivery or tender. It is ineffective unless the buyer seasonably notifies the seller.

( A tender or delivery of goods made pursuant to a contract of sale, even though wholly non-conforming, requires affirmative action by the buyer to avoid acceptance.

2-603: Merchant Buyer’s Duties as to Rightfully Rejected Goods

( Merchant buyer is under a duty after rejection of goods in his possession or control to follow any reasonable instructions received from the seller with respect to the goods and in the absence of such instructions to make reasonable efforts to sell them for the seller’s account if they are perishable or threaten to decline in value speedily.

( If the buyer sells goods under such instructions, he is entitled to reimbursement out of the proceeds for reasonable expenses in caring for and selling them.

2-604: Buyer’s Options as to Salvage of Rightfully Rejected Goods

( If the seller gives no instructions within a reasonable time after notification of rejection, the buyer may store, reship, or resell them and such action is not acceptance or conversion.

2-605: Waiver of Buyer’s Objections by Failure to Particularize

( If the buyer can’t state a particular defect that is ascertainable by reasonable inspection, he cannot rely on the unstated defect to justify rejection or establish breach either where the seller could have cured it if stated seasonably or between merchants where the seller makes a request for such specification after a rejection.

( Payment against documents made without reservation of rights precludes recovery of the payment for defects apparent on the face of the documents.

2-606: What Constitutes Acceptance of Goods

( Buyer accepts goods when: after a reasonable opportunity to inspect the goods he signifies to the seller that the goods are conforming or he will take or retain them in spite of their non-conformity; buyer fails to make an effective rejection after he has had a reasonable opportunity to inspect them; or if the buyer does any act inconsistent with the seller’s ownership

( Acceptance of a part of any commercial unit is acceptance of that entire unit.

2-607: Effect of Acceptance; Notice of Breach; Burden of Establishing Breach After Acceptance; Notice of Claim or Litigation to Person Answerable Over

( The buyer must pay at the contract rate for any goods accepted.

( Acceptance of goods by the buyer precludes rejection of the goods accepted and if made with the knowledge of a non-conformity cannot be revoked because of it (unless the acceptance was on the reasonable assumption that the non-conformity would be seasonably cured)

( Where a tender has been accepted, the buyer must notify the seller of any breach within a reasonable time after he (should have) discovered the breach or the buyer is barred from any remedy

( The burden is on the buyer to establish any breach with respect to the goods accepted

2-608: Revocation of Acceptance in Whole or in Part

( The buyer may revoke his accept of a lot or a commercial unit whose non-conformity substantially impairs its value to him if he has either accepted it on the reasonable assumption that its non-conformity would be cured and it has not be seasonably cured or accepted it without discovery of the non-conformity and his acceptance was induced either by the difficulty or discovery before acceptance or by the seller’s assurances.

( Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in the condition of the goods which is not caused by their own defects. Revocation is not effective until the buyer notifies the seller of it.

( A buyer who so revokes has the same rights and duties with regard to the goods involved as if he had rejected them.

( The buyer is not required to choose between revocation of acceptance and recovery of damages for breach. Both are available to him.

2-609: Right to Adequate Assurance of Performance

( A contract of sale imposes an obligation on each party that the other’s expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may demand adequate assurance and suspend performance if he doesn’t get it.

( The section rests on the recognition of the fact that the essential purpose of a contract between commercial men is actual performance and they do not bargain merely for a promise

2-610: Anticipatory Repudiation

( When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contact to the other, the aggrieved party may await performance or resort to any remedy for breach (2-703 or 2-711) and, in either case, suspend his own performance.

2-611: Retraction of Anticipatory Repudiation

( Until the repudiating party’s next performance is due, he can retract his repudiation unless the aggrieved party has since the repudiation cancelled or materially changed his position or otherwise indicated that he considers the repudiation final.

2-612: “Installment Contract”; Breach

( An installment contract is one which requires or authorizes the delivery of goods in separate lots to be separately accepted.

( The buyer may reject any installment that is non-conforming if the non-conformity substantially impairs the value of that installment and cannot be cured

( Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts the non-conforming installment without seasonably notifying of cancellation or if he brings an action with respect only to past installments or demands performance as to future installments.

2-613: Casualty to Identified Goods

( If the contract requires identified goods and the goods suffer casualty without fault of either party before the risk of loss passes to the buyer then if the loss is total the contract is avoided but if the loss is partial then the buyer has the option to either avoid or accept with allowance from the contract price for deterioration.

2-614: Substituted Performance

( Where, without fault of either party, the agreed manner of delivery becomes unavailable/ commercially impracticable but a commercially reasonable substitute is available, such substitute performance must be tendered and accepted.

( If the agreed means/manner of payment fails because of governmental regulation, the seller may withhold delivery until the buyer provides a substantial equivalent.

2-615: Excuse by Failure of Presupposed Conditions

( Delay or non-delivery by a seller is not a breach if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any governmental regulation

( If such causes affect only part of the seller’s capacity to perform, he must allocate production and deliveries among his customers fairly and reasonably

( The seller must notify the buyer seasonably that there will be delay or non-delivery.

2-702: Seller’s Remedies on Discovery of Buyer’s Insolvency

( Where the seller discovers the buyer to be insolvent he may refuse delivery except for

cash. And where the buyer has received goods on credit, the seller may reclaim them on demand.

2-703: Seller’s Remedies in General

( Where the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due on or before delivery, the seller may withhold delivery, resell and recover damages, recover damages for non-acceptance, or cancel.

2-704: Seller’s Right to Identify Goods to the Contract Not-withstanding Breach or to Salvage Unfinished Goods

( An aggrieved seller under the preceding section may identify to the contract conforming goods not already identified if at the time of the breach they are in his possession or control; or treat as the subject of resale goods which have been demonstrably intended for the particular contract even though those goods are unfinished

( Where the goods are unfinished, the seller may either complete the manufacture and wholly identify the goods to the contract or cease manufacture and resell for scrap or salvage value.

2-705: Seller’s Stoppage of Delivery in Transit or Otherwise

( The seller may stop delivery of goods when he discovers the buyer to be insolvent or the buyer repudiates or fails to make a payment due before delivery.

( As against such buyer, the seller may stop delivery until the receipt of goods by the buyer

2-706: Seller’s Resale Including Contract for Resale

( Under the conditions in 2-703, the seller may resell the goods and recover the difference between the resale price and the contract price together with any incidental damages allowed under the provisions of this Article but less expenses saved in consequence of the buyer’s breach.

( A purchaser who buys in good faith at the resale takes the goods free of any rights of the original buyer

( The seller is not accountable to the buyer for any profit made on any resale.

2-707: Person in the Position of a Seller

( A person in the position of a seller may as provided in this Article withhold or stop delivery and resell and recover incidental damages

2-708: Seller’s Damages for Non-acceptance or Repudiation

( The measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in 2-710 but less expenses saved in consequence of the buyer’s breach.

( BUT if the measure of damages above is inadequate to put the seller in as good a position as performance would have done, then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages in 710, due allowance for costs reasonably incurred and due credit for payments of proceeds of resale.

2-709: Action for the Price

( When the buyer fails to pay the price as it becomes due, the seller may recover, together with incidental damages, the price of goods accepted and goods identified to the contract that the seller is unable to resell after reasonable effort at a reasonable price.

( Where the seller sues for the price he must hold for the buyer any goods which have been identified to the contract except if resale becomes possible, in which case he may resell them

( After the buyer has wrongfully rejected or revoked acceptance of the goods or failed to make payment, a seller who is not entitled to the price under this section can get damages under the previous section.

2-710: Seller’s Incidental Damages

( Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer’s breach, in connection with the return or resale of the goods or otherwise resulting from the breach.

2-711: Buyer’s Remedies in General; Buyer’s Security Interest in Rejected Goods

( Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or revokes acceptance, the buyer may cancel and, in addition to recovering so much of the price as has been paid, may cover and have damages under 2-712, or recover damage for non-delivery as in 2-713.

2-712: Cover, Buyer’s Procurement of Substitute Goods

( After a breach, the buyer may cover by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller

( The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages but less expenses saved in consequence of the seller’s breach.

( Failure of the buyer to effect cover does not bar him from any other remedy

2-713: Buyer’s Damages for Non-delivery or Repudiation

( The measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages but less expenses saved in consequence of the seller’s breach.

2-714: Buyer’s Damages for Breach in Regard to Accepted Goods

( Where buyer has accepted goods and given notification, he may recover as damages for any non-conformity of tender the loss resulting in the ordinary course of events from the seller’s breach as determined in any manner which is reasonable.

( The measure of damages for breach of warranty is the difference at time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted

( In a proper case, any incidental and consequential damages under the next section may also be recovered.

2-715: Buyer’s Incidental and Consequential Damages

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

( Consequential damages resulting from the seller’s breach include any loss resulting from general or particular requirements and needs of which the seller at time of contracting had reason to know and which could not be reasonably prevented by cover or otherwise and injury to person or property proximately resulting from any breach of warranty.

2-716: Buyer’s Right to Specific Performance or Replevin

( Specific performance may be decreed when the goods are unique

( The buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable to effect cover for such goods

2-717: Deduction of Damages from the Price

( The buyer on notifying the seller of his intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract.

2-718: Liquidation or Limitation of Damages; Deposits

( Damages for breach by either party may be liquidated in the agreement but only at an amount which reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty. (An unreasonably small amount would be subject to similar criticism and might be stricken under the section on unconscionable contracts or clauses.)

( Where the seller justifiably withholds delivery of goods because of the buyer’s breach, the buyer is entitled to restitution of any amount by which the sum of his payment exceeds the amount to which the seller is entitled by virtue of terms liquidating the seller’s damages.

( The buyer’s right to restitution is subject to offset to the extent that the seller establishes a right to recover damages and the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.

2-719: Contractual Modification or Limitation of Remedy

( Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

Summing up the Doctrine of Consideration:

The doctrine of consideration is everything we’ve been talking about – what contracts are we going to enforce? All of these ideas are floating around in our culture – bargain (“let’s shake on it”), benefit (“no free lunch”), reliance (“I trusted you”), promise (“promise made is a debt unpaid”).

The common law is the formalization of general norms. How do they come together?

Rakoff’s view:

For each of benefits, bargains, and detriment, there is an area where it overlaps with promise, overlaps with the other two, and overlaps with only promise.

Core = half-completed exchange = promise bargained for with detriment and benefit (tv example- the store relied on it to detriment, you have the benefit of the tv, you must live up to the promise to pay. – nobody doubts this one).

§ 86 = benefit, no promise, no bargain

? = bargain, promise, but no benefit or detriment – complicated ones – promises exchanged not yet carried out

Trade = immediate exchange, bargain but no promise (garage sale example)

§ 90 = detriment, promise, no bargain

Synagogue Case = promise, no benefit, no detriment, no bargain.

The Bargain Principle is dominant, the detriment and benefit principles are recessive.

The basic principle is the bargain. Everything within that principle gets enforced. §§ 86 and 90 are dangling on the outside as extra pieces. But note that bargain is only dominant because we’ve chosen it to be. Because we have chosen bargains, 86 and 90 are pieces that we have to explain. The law assumes that the bargain principle is dominant; assumes promises are just when bargained for.

Promise + Bargain ( Bargain Principle, Dominant; doesn’t need further consideration of justice because we have defined justice as a bargain with a promise.

Promise + Reliance ( 90

Promise + Benefit ( 86

90 and 86 (the side pieces) are only enforceable if it’s necessary to prevent injustice.

This means that we recognize that the bargain principle is under-inclusive but the other parts (86 and 90) have to fight for recognition.

The ? space doesn’t have an “avoid injustice” qualifier the way that 86 and 90 do. If you bargain and promise then it’s a deal – assumed just. Rakoff says it reflects market mentality. Deals are our paradigm of a contract. Promises exchanged but not carried out have value and the law will enforce them. This is not true of the other categories occupying similar space in the diagram.

The take away point here is that contract law is an attempt to be just, but it’s justice from a point of view. If you get on that wavelength, then it will all make sense.

-----------------------

Benefit

Or

Detriment

(or promise thereof)

Exchange

= Restatement §§ 71, 72, 75, 79

Promise

Bargain

Promise

Reasonably Expect

= Restatement § 90

Detriment

Does Induce

+ avoid injustice

Made in recognition of

= Restatement § 86

Benefit

Promise

+ prevent injustice

bargains

benefits

Sparks

Trade

?

§ 86

Half completed exchange

§ 90

The domain of all promises

detriment/ reliance

Synagogue Case

Tort

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