I
Can the document be interpreted?
When some terms are in writing and some are not, and one of the parties tries to establish that prior negotiations or agreements should be included in the contract, the court applies the Parol Evidence Rule to determine what evidence it should consider to interpret the relevant terms of the K.
1 Parol evidence is any evidence, extrinsic to the written memorandum, showing the existence of prior negotiations or contemporaneous oral agreements of terms other than what the written document shows..
1 Parol evidence is an element of substantive law, not procedural or evidentiary.
1 it can be raised on appeal even if party fails to object to it at trial
2 General Rules:
1 Parol evidence is never allowed to contradict the writing. RS 215
2 The writing supersedes earlier negotiations.
3 Evidence of terms made after the K was executed is NOT parol evidence.
4 Contemporaneous writings are usually admissible because the K could be contained in more than one document.
1 Writings made before the K are not admissible.
2 Oral agreements made at the time of the K, or leading up to the K, are not admissible.
5 Parol evidence may
1 add to a partially integrated writing
2 be used to interpret ambiguous terms in a partially integrated writing under the modern rule
3 Reform the writing—narrowly allowed (Bollinger)
4 Establish an invalidating clause (RS 214)
3 Analysis Step 1: RS209- is there a writing that the parties intended as a final expression of one or more terms of the agreement?
1 The judge determines this as a matter of law by looking at the circumstances and facts to determine what the parties intended.
2 A writing can be integrated without the signatures of both parties. Rather, it only needs to be agreed to by both parties.
1 if a letter is sent by one party and accepted by the other party, that writing is subject to the rule.
4 Analysis Step 2: RS 210- if the writing is integrated, is the integrated agreement complete or partial?
1 Complete integration is document that unambiguously, thoroughly and clearly expresses every term in the agreement and is intended to be a final exclusive record of agreement.
1 informal memos, handwritten notes, and causal letters are usually not considered as final expressions
2 Lengthy, detailed, elaborate, formal and signed documents lend themselves towards being complete integrations
3 judge may consider the fact that some terms were left out as evidence that is was not completed integrated
4 Ambiguous terms indicate the document is not fully integrated
2 RS §216(2)(b): agreement is not completely integrated if it omits a consistent additional term that might naturally be agreed upon but inadvertently excluded because
1 The parties were inexperienced
2 Parties didn’t think it was needed because it was implied(i.e. family members)
1 Masterson (p560) where brother deeded property to sister and they implied in their K that the property was to be kept in the family, although the K didn’t say that the court allowed that term to be read into the K via parol evidence. The trust born out of the familial relationship led the parties to feel comfortable omitting the personal aspects of the contract and signing the K more as a legal formality than a mutual promise.
3 terms were in a separate deed/agreement
3 Partial integration: intended to be final, but not intended to include all details of the agreement
1 At least one term must be fully, finally and clearly expressed in the writing to be considered a partial integration
2 Evidence that is inconsistent with the K will not be allowed.
3 Evidence that supplements or explains the K will be allowed.
5 Methods to determine whether writing is complete or partial integration
1 Modern rule: Look at all available evidence to determine parties actual intention including trade usage and course of dealing.
1 aka CA Rule, usually lets evidence in. Judge considers the context in which the K was formed, including prior negotiations, to determine parties intent.
2 Logic is that the writing itself cannot prove its own completeness
3 If the term is “reasonably susceptible” to interpretation, evidence is allowed to prove the meaning of that term
1 PG&E (p.592), CA Sup Ct. articulates this rule
2 Four Corners Rule
1 Gianni, p557-Court disallowed parol evidence from plaintiff that the written K gave him “exclusive right” to sell soda because he was trying to add a term to a completely integrated K)
2 Look solely at the document
3 Does it look like a formal K and complete on its face? If yes, no parol evidence is allowed.
4 Document will prove the parties intent
5 If there are no gaps or inadequacies, it is a complete integration.
6 2-202 prohibits using this logic
3 Plain meaning Rule (p590)
1 Are the terms clear and complete? If yes, no parol evidence is allowed to make them open to interpretation.
2 A.ka. the NY Rule, usually prevents evidence from coming in
1 WWW Associates (p586) K gave either party the option to cancel. When D rescinded, P sued claiming that the K really only gave P the right to rescind and not D. Court disallowed parol evidence because other section of the contract specified terms just for the P and just for the D, so if they meant the recission to be available only to P they would have included that.
6 Analysis Step 3: what parol evidence is allowed?
1 If the document is partially integrated:
1 Evidence is allowed to supplement the meaning of the terms.
1 Masterson (p560), CA Sup Ct said unless the parol term contradicts any express term, it is consistent.
2 If the written agreement is silent as to the term at issue, then it does not contradict the writing.
1 Articulated in UCC 2-202
2 If the document is completely integrated:
1 No evidence of prior negotiations or contemporaneous agreements may be admitted.
7 Merger clauses
1 K uses language like: “this K constitutes the entire agreement” or “there are no promises, verbal understandings, or agreements of any kind, pertaining to this contract other than specified herein”
1 Using the Modern Rule: merger clauses usually will be honored. Given less deference when it is boilerplate language or tucked away in small print.
2 Using the Four Corners Rule: merger clauses almost always honored
3 When used in an Adhesion K: merger clause will not be honored
4 Using the UNIDROIT principles: merger clause can not be contradicted or supplemented by evidence of prior statements or agreements.
8 EXCEPTIONS to the parol evidence rule in RS 214
1 evidence is allowed to show the document is or is not integrated
2 evidence is allowed to show the integrated agreement is either complete or partial
3 evidence of the meaning of the writing
4 evidence of illegality, fraud, duress, mistake, or other invalidating clauses.
1 Rationale- this evidence shows there is no K, so the court doesn’t even get to the parol evidence step to evaluate the meaning of the K (because there is no K).
5 evidence is allowed to show grounds for the court to grant or deny rescission, reformation, specific performance or other remedies.
1 Bollinger (p567), Ds performance under the K allowed as parol evidence to show that D-trash company agreed to sandwich the trash and the dirt when it was dumping on P-landowner’s land, even tho that term was not written in the K.. P allowed to show D performance as evidence that K needed to be reformed.
6 Evidence is allowed to show a fact recited in the writing is in reality false.
9 EXCEPTIONS to the rule – RS 216-
1 evidence is allowed to show collateral agreements exist that are supported by separate consideration if the collateral agreement is distinct enough from the K that it was not integrated into it
1 Ex. K for the sale of a car and as part of transaction, oral agreement to keep car in garage for $15/mo. Allowed to prove prior agreement even though integrated K does not include the agreement.
2 Oral agreement must be distinct from the written agreement AND have severable consideration.
3 How plausible is it that parties would make the other agreement, so that it would naturally be contained in a separate agreement.
10 EXCEPTIONS to the rule - RS 217
1 Evidence is allowed to show the K was subject to a condition.
2 If a condition exists, the writing was not integrated.
11 Subsequent Terms
1 Common law: a K can always be modified. Parol evidence does not exclude evidence of subsequent modifications.
2 UCC 2-209: allows a clause to be written into the K that prevents future modification.
3 UCC 2-202: if a writing is complete integration, you can not add terms to it via oral modification. If writing is final expression, you can not contradict it.
4 Be careful to make sure the agreement really was after the fact…if it was made just after the signing it was contemporaneous and will not be allowed.
1 Kehr Packages, in the process of signing a business loan the plaintiff-borrowers realized they would need more money than they originally thought. Before the signing was complete they asked for more money and the bank agreed, orally. But the change was never put on paper. When the bank refused to loan at the higher amount, borrowed sued. Court did not allow extrinsic evidence because it was contemporaneous, not after the fact.. Lawyers were still present and should have made the change in the final K.
What does the ambiguous language mean?
Contra proferentem
1 Maxim that Ks should be interpreted against their drafters, who likely drafted the K to his own benefit
RS 201(1)- where the parties have attached the same meaning to a promise, it is interpreted in accordance with that meaning.
Good faith requirement always exists, can not be excluded by agreement.
1 Good faith is defined as honesty in fact and observance of reasonable commercial standards of fair dealing.
1 Should protect parties’ reasonable expectations
1 Dalton (p605), Court ruled SAT test adminstrators were not using bad faith. They promised to “look at the evidence” and they did. As long as they weren’t acting irrationally or arbitrarily, they were acting in good faith. \
2 Burger King v. Weaver, 1999 (p609), Court rejected Defendant’s defense that Burger King was acting in bad faith, because the Court only held Burger King to the express terms which did not include a non-compete clause.
1 However, the 9th Circuit held otherwise in a similar case and ruled Burger King to the implied term of a non-compete clause.
2 Sharp dealing is bad faith. Where one party is taking advantage of the other party, he is acting in bad faith.
1 Market Street Association v. Frey, 1991 (p613), Bad faith exists where one party knew the other party was unaware of an express term. If the buyer conjured up his request for a $4M loan, knowing it would be rejected and thus triggering a clause in the K to repurchase the land at a rate lower than market value. IF this was proved at trial, it would be sufficient for bad faith.
A higher duty of “best efforts” may be implied.
1 Best effort is an implied term that requires a party to make such efforts as are reasonable in light of that party’s ability and the means at its disposal and of the other party’s expectations.
2
2 Best efforts are required in exclusive dealings under 2-306.
1 Bloor v. Falstaff Brewing Corp, 1979 (p619), Falstaff had exclusive right to distribute Ballantine beer. Express terms required Falstaff to use best efforts to maintain high volume. Falstaff did not act in bad faith, but they failed to use best efforts. Once Bloor showed Falstaff did nothing to promote Ballantine sales, burden shifted to Falstaff to show it did something (anything!) to promote Ballantine sales.
3 In a requirements contract, where the quantity is “all that the buyer needs,” and the buyer’s needs drop to zero – it is not necessarily a breach of bad faith.
1 Eastern Air v. Gulf Oil, 1975 (p610),K terms used a price index to set the price. The energy crises cuase the price to drop so Gulf wanted out of the K. They accused Eastern of bad faith. Eastern showed it’s conduct was consistent with implied terms, showed it was consistent with course of dealing, course of performance and trade usage. Court ruled Eastern was not acting in bad faith.
4 In an output contract
5 In a percentage lease (where rent= some percentage of profits,) the tenant has an obligation to use best effort, a higher obligation than good faith.
1 If the business/tenant deliberately lowers profits, ex: by moving entire business to another location, that is bad faith and breach of contract.
2 If the business/tenant has a legitimate reason for reducing or changing business and gross receipts fall as a result, then there is no bad faith.
3 If the landlord is guaranteed a minimum amount of rent, the tenant is probably not required to use best efforts because the landlord is protected.
Maybe no K exists
1 RS 201(3)- If the parties both meant different things and understood them in different ways, and neither party had reason to know of the other’s understanding, then no K exists.
1 If one party had reason to know of the other party’s understanding, the unknowing party’s understanding prevails.
2 The party in the best position to know of the different is the party that should suffer the consequences of the mistake.
2 If there was no mutual assent there can be no K.
1 Oswald v. Allen (p584), where buyer thought he was buying all of Allen’s coins but Allen thought she was selling only the coins from a particular collection. Court found no K existed.
3 Latent ambiguities in terms can lead to no K
1 Raffles v. Wichehaus (p582): court allowed parol evidence to show a latent ambiguity in the terms of the K; one party meant a ship named the Peerless and the other party meant a different ship named the Peerless.
Use Gap fillers
1 Purpose
1 To supply logically inferable contract terms when it is clear the parties intended a contract but have failed to provide adequately or at all for the question at issue.
2 The terms are based on common expectations, commercial practice and public policy so they should not take the parties by surprise.
3 The terms construct what the parties must have intended had they been acting fairly and reasonably
2 1-303 (e)
1 requires us to reconcile all the pieces when possible…which should be nearly always. Only rarely do we look to the hierarchy:
1 express terms
2 course of performance
3 course of dealing
4 trade usage
3 Course of performance is the sequence of conduct between the parties subsequent to an agreement, that involves repeated occasions for performance and where the recipient had the opportunity to object.
1 includes the actions of the parties in carrying out the agreement, subsequent to entering the agreement.
2 always allowed as evidence because it must, by definition, happen after the K is formed. All acts after K formation are allowed under parol evidence rule.
3 course of performance actions supplement the K
4 Parties actions can effectively waive express terms.
4 course of dealing
1 relations betwn the parties before the K
2 “sequence of conduct concerning previous transactions between the parties that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.
1 One occasion can not constitute a sequence and therefore cannot constitute a course of dealing.
3 always allowed as evidence for interpreting language because it was there all the time when the K was formed; it was there in invisible ink so it’s not really “extra” evidence.
5 trade usage
1 “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”
2 almost always allowed as evidence for interpreting language because it was there all the time when the K was formed; it was there in invisible ink so it’s not really “extra” evidence.
1 Hurst v. Lake (p601), aka horse scrap meat case: Court allowed evidence that 50% really meant 49.5% based on trade usage. Court rejected the plain meaning of 50% in favor of trade usage.
3 BUT, it must be so consistent and established that no showing can be made to the contrary
1 Frigaliment (p.574), seller and buyer disagreed on what types of chicken seller was supposed to ship to buyer. P- Buyer tried to establish common usage of the word “chicken” mean only broilers. But D-seller was able to produce expert witnesses to the contrary. Buyer should have known which types of chicken he was getting based on the price, knowing the seller would have to make some profit
2 Nanakuli (p651,as long as the usage does not “completely negate” the express term, it is allowed as evidence. Evidence can qualify terms or set up exceptions to terms without necessarily swallowing the entire term.
4 the extent of usage is ultimately a jury question, or a question of fact proved by testimony from expert witnesses
5 Usage does not have to be ancient, it only has to be employed by a majority of dealers
1 Nanakuli (p651). A “regularly observed” practice of price protection of which defendant-Shell “should have been aware” was enough to constitute a usage that plaintiff-Nanakuli had reason to believe was incorporated into the agreement.
6 UCC looks to the actual performance of a K as the best indication of what the parties intended those terms to mean.
7 Party must prove the other party is chargeable with knowing the trade usage. I.e., the other party knew or should have known.
1 Just because a party is new to a trade does not preclude him to being subject to trade usage rules.
8 Could be limited to a particular geographic area or kind of activity
warranties
The analysis framework
1 Has this seller made a warranty to this buyer?
1 Are the basic elements of warranty met?
1 There could be more than one warranty operating in the transaction.
2 was the warranty effectively disclaimed?
3 is there privity between these parties, and if not, can it be overcome?
2 If there was a warranty, has it been broken?
1 what did the warranty promise?
1 Look at express and implied terms
2 Seller’s intent is irrelevant
2 did the goods comply with the warranty?
3 Did the breach of warranty cause buyer’s injury?
4 What is the buyer’s remedy?
1 Does the K limit the remedy?
5 Can the buyer prove the extent of the damage?
2-312 Warranty of Title
1 Every sale contract contains the promise that
1 the title is good and transfer is rightful AND …
2 … the goods are free from security interests and liens other than those the buyer knows about.
1 Seller’s subjective belief or intent is irrelevant.
2 Buyer should not have to fend off 3rd party claims to the title; the mere casting of a substantial shadow regardless of the outcome is enough to violate the warranty of title
1 but those 3rd party claims must be reasonable or colorable in order to constitute the buyer’s valid B of warranty claim.
2 Seller avers he is not infringing on someone else’s patent by selling the goods.
3 2-403 protects good faith purchasers
1 a person w/ voidable title has power to transfer a good title to a good faith purchaser for value even though
1 the seller was deceived as to the identify of the buyer
2 the goods were delivered in exchange for a bad check
3 the parties agreed the transation would be a “cash sale”
4 the goods were delivered via fraudulent and/or larcenous means
Warranty of quality
1 2-313 Express warranty
1 Arises when seller
1 makes an affirmative statement or promise which relates to the goods and creates buyer’s expectations about the characteristics of a good.
1 Oral statements, verbal sales pitch
1 Includes statements made to plaintiff’s agent. If medical device company makes warranty statement to doctor, that sufficies as a warranty for the patient.
2 Advertisement or catalogue…as long as the plaintiff actually saw it or read it
3 Written sales contract
4 Requires substance that relates to the goods…
5 Must be more than “puffing” or opinion
1 Statements that would be difficult to enforce, or to determine if they wound up to be true or not, usually indicate the statement was puffing.
2 EX: “it will look wonderful”- how do we know if it looks wonderful? How easy/hard would it be to show that it did or did not look wonderful?
2 OR describes the goods
3 OR provides a sample or model of the goods
1 A sample is taken out of the exact merchandise stock that the buyer will get
2 A model is a representation of what the buyer could be getting.
2 …AND, seller’s representation became a basis of the bargain.
1 It’s natural tendency is to induce the buyer to purchase the goods.
2 It does not have to be the “only” reason the buyer purchased the goods.
3 If the statement “might” have played some part in the purchase, the seller has the burden of showing the buyer did not rely on the warranty in the purchase.
4 Statements made during the transaction likely to be part of the basis of the bargain.
5 Note: the focus is on the seller’s conduct, even if the buyer was careless.
3 Remember- statements made after the sale could be an oral modification as long as:
1 the deal is still warm
2 it meets Statute of Frauds
3 And the K does not have a clause precluding modifications.
1 Under 2-209 we don’t need new consideration to modify.
2 Parol evidence rule does not bar it from being used as evidence because it occurred after the contract was made.
4 2-316(b) makes it almost impossible to disclaim an express warranty.
1 Proper way to disclaim it is to not claim it in the first place.
5 Ks construed to favor the buyer
2-314: Implied warranty of merchantability for ordinary purposes
1 Arises as a matter of law when a merchant sells goods of the kind he deals in
1 No specific definition in the UCC
2 Serving food/drinks for value ‘counts’ as a sale
1 Courts are split for restaurant liability when items are found in food.
1 Some courts hold restaurants liable only when the substance is a foreign substance, as opposed to a natural substance.
2 Other courts hold restaurants liable as long as the customer’s reasonable expectation is that it would have been removed.
2 When does the warranty take effect?
1 Extends to goods supplied under the contract of the sale
1 Ex: Shaffer v. Victoria Station, 1978 (Whaley 107)when customer buys a glass of wine at a restaurant and the glass bursts in his hand, the restaurant failed the warranty of merchantability b/c the code applies to sales of food/drink and the wine glass was necessary to supply the wine.
2 Extends to goods once the buyer takes physical possession of the goods with the intent to purchase. (i.e., passage of title is not determinative.)
3 What is merchantable?
1 Item must be saleable and conform to the normal expectations of the parties.(trade usage shows the goods are typical of the kind)
2 “Goods must be fit for the ordinary purposes for which goods are used” (aka, implied warranty of fitness.)
3 “Goods must be adequately contained, packaged, and labeled.”
4 Goods that are similar to other brands in the market are usually merchantable.
5 Goods that fail gov’t standards are usually not merchantable.
2-315: Implied warranty of fitness for a particular purpose
1 Much more narrow than the warranty of merchantability
2 At the time of the contract, the seller must have known the goods were going to be used for a particular purpose AND that the buyer was relying on his judgment or skill to select or furnish suitable goods
3 AND the buyer must have actually relied on the seller’s skill or judgment
1 EX: if buyer insists on a particular brand, he is not relying on seller’s judgment, he is making his own judgment about brands.
Breach and causation
1 Flippo (p170) brown recluse spider found in a pair of pants in the store is not a breach and not a cause of the
Affirmative defenses to breach of warranty:
1 warranty disclaimed
2 notice of breach not timely
3 no privity
4 assumption of the risk
5 statute of limitations expired.
Warranty disclaimers
1 No post sale modifications, EVER.
2 2-316(1) makes it almost IMPOSSIBLE to disclaim express warranties.
1 The proper way to disclaim is to NOT make the express warranty in the first place!!!
2 Denies the effect of a disclaimer that negates an express warranty.
1 Designed to protect the buyer from unexpected or unbargained language
3 2-316(2)- explicit disclaimer of implied warranties
1 To exclude or modify the implied warranty of merchantability, the verbal or written language must
1 Specifically mention the word “merchantability”
1 BUT, 2-316(3) allows other words to suffice
2 Language that is too general will fail to disclaim
2 And must be conspicuous IF done in writing.
1 Conspicuous is described in 1-201 when the reasonable person against whom it was designed to operate ought to have noticed it; attention can reasonably be expected to be called to it.. A question of fact for the jury.
1 Contrast with the rest of the document
2 Type face
3 Location in the document
2 Buyer does not have to “actually” notice the disclaimer for it to be effective. But if the buyer does notice the disclaimer, it is effective whether or not it was conspicuous.
3 Extent of prior negotiation is relevant to the degree of conspicuousness required..
4 Cate v. Dover Corp (1990) Whaley 132. A disclaimer undistinguished in text by typeface, size or color within a form is not conspicuous and is therefore unenforceable, unless the buyer has actual knowledge of the disclaimer.
2 To exclude or modify any implied warranty of fitness the exclusion MUST
1 Be by a writing
2 And must be conspicuous
4 2-316(3)
1 Language like “as is” or “with all faults” effective disclaims implied warranties
2 A seller can not disclaim the obligation to deliver conforming goods
3 2-316(b): if the buyer examines the goods/model/sample before the K, there is no implied warranty for defects that he ought to have discovered under the circumstances.
1 By demanding buyer to examine the goods, seller puts buyer on notice that no implied warranties exist.
2 a lay person is not expected to discover the same defects as an expert.
4 2-316(c) allows trade usage, course of performance and course of dealing to disclaim implied warranties
1 Members of the trade are bound despite their individual ignorance
5 Merger clauses can act as a disclaimer
1 By including a merger clause, the party prevents parol evidence from being admitted. Thefore, evidence of any oral warranty is negated/disclaimed by a merger clause.
1 But, if the merger clause conflicts with other language in the K, the court may still consider the document incomplete and look to parol evidence to explain or clarify it. Then, the oral warranty would be admissible.
2 If the document is ambiguous, parol evidence can come in.
6 Disclaimers made after the sale are unenforceable because they do not form a basis of the bargain.
1 Disclaimers inside packaging have been enforced. (Rinaldi v. Iomega Corp 1999, Whaley 147).
2 UNLESS, the disclaimer is made in a modification that satisfies 2-209
Buyer must notify seller of breach within a reasonable time of discovering the defect, or when he should have discovered the defect. 2-607(3)
1 Notice does not have to include every single breach or every single defect or tell him he’s being used. Just tell him his products are nonconforming.
2 A reasonable time defined by Revised 1-205 by the nature and circumstances of the deal.
1 EX: perishable goods will have a shorter reasonable time
3 Buyer must notify all the parties in the supply chain
Plaintiff must prove he was in privity with defendant 2-318
1 Vertical privity includes buyers within the distribution or supply chain.
1 A hardware store buys a hammer from a wholesaler who bought it from a manufacturer. The hardware store intends to sell it to a consumer.
2 Horizontal privity includes the party who is consuming the goods, using the goods or is affected by the goods.
1 EX: woman poisoned by a bottle of beer her husband bought.
2 EX: employee hurt by equipment purchased by employer.
3 2-318 Alternative A: Extends sellers express or implied warranty liability horizontally to natural persons in the family or household of the buyer and to his guests but only where it is reasonable to expect that such persons may use, consume or be affected by the goods.
1 Does not overcome vertical privity problems by itself, but it invites Courts to do that.
2 This is the rule in a majority of states
4 2-318 Alternative B: Extends sellers express or implied warranty liability vertically to any natural person who may reasonably be expected to use, consume or be affected by the goods AND who suffers a personal injury from the goods.
5 2-318 Alternative C: Extends sellers express or implied warranty liability vertically to any person (including businesses) who may reasonably be expected to use, consume or be affected by the goods AND who suffers any injury (property damage, other damage beyond personal injury).
Damages for breach of warranty
1 2-714(1)
2 2-714(2)
1 Go back in time to the moment the goods were accepted.
2 Measure the (Value of the goods as warranted) – (value of the goods as accepted).
1 Cost of repair or replacement is usually a good measure of
3 2-715(1) incidental damages (see Damages)
4 2-715(2) consequential damages (see Damages)
Damages for any sellers breach
Limits on Remedies
has the contract been performed?
Conditions
According to RS 224, a condition is an event, not certain to occur, that must occur, unless the occurrence is excused, before the duty to perform under the K becomes due
1 Conditions may NOT be things such as:
1 Events that are certain to occur (like the passage of time)
2 Events that must occur before the contract comes into existence.
3 Events that extinguish a duty after the performance has become due.
2 Purpose of using conditions is to allocate the risk of uncertainty, usually to the party who has the most control over the condition.
3 RS 225(1) indicates that performance of a duty subject to a condition does not become due until the condition occurs or its non-occurrence is excused.
Express conditions are those found in the language of the contract that articulates the parties intent to make performance contingent on the occurrence of an event uncertain to occur.
1 When performance is subject to express conditions, the duty to perform does not arise until the conditions are exactly satisified. (doctrine of strict compliance.)
1 Substantial performance is not good enough.
2 The rationale: If the parties have taken the trouble to clearly express their intent to subject themselves to the stated condition, the court should honor this intent by upholding the party’s right to demand nothing less than exact fulfillment.
1 Even if the failure to perform is based on a minor technical detail or trivial point, the court will find the condition has not been met.
1 Ex: Luttinger v. Rosen (p665), Buyers put a down payment on a house w/ condition they would buy the house if they could find a bank to loan them the money at a specific interest rate. Only one bank in town would possibly do it, but didn’t. Sellers offered to cover the difference. Buyers rejected. Sellers claimed buyer did not use good faith in their duty to make the condition occur. Court disagreed. Held strict compliance of condition was not met so buyers had no obligation to buy.
2 If at all possible, the court will interpret the term to avoid a harsh result.
2 Parties may contract for personal satisfaction in express terms.
1 EX: Gibson v. Cranage (1878 p677), where painter-Gibson contracted with buyer-Cranage to make a painting of his daughter “to his satisfaction.” Cranage wound up not liking the painting. As long as he honestly (in good faith) did not like it, he does not have to pay for it.
3 Be wary of express conditions to satisfy a 3rd party.
1 Some construction jobs require architect certification before payment.
2 If architect refuses certificate in bad faith, dishonestly, or fraudulently most courts will dispense with the certificate as a condition for payment.
3 If the architect refuses the certificate unreasonably from an objective point of view, some courts will dispense with the requirement as a condition for payment but other courts will not (i.e., the architect’s refusal must be more than just unreasonable.)
4 Be wary of express conditions that payment is due “when” a certain event occurs.
1 It is unlikely the creditor is assuming the risk of losing payment if the event does not occur.
2 This express language is probably not a condition but rather creating a reasonable time for when payment is due.
1 Ex: Peacock (1977 p674) Owner of building failed to pay general contractor. As result, General contractor failed to pay sub contractor. Sub contractor sues general contractor. K read “payment is due within 30 days of full payment by owner”. Court held this language was setting a time frame for payment. It did not release general contractor from paying subcontractors.
5 Conditions on one party are distinct from conditions over the whole contract.
1 Conditions imposed on one party mean that the other party has the opportunity to excuse the condition and proceed with the contract.
2 Conditions imposed on the contract as a whole means that one party can not unilaterally excuse the condition; the entire K falls apart.
6 Pure conditions are those events that are uncertain to occur and that must occur before performance is due, and no party has made a promise to make the condition arise.
1 If the condition never occurs, the duty to perform falls away and the other party has no basis for a claim of breach of contract.
2 The injured party can not sue the other party to make the condition occur to get performance.
7 Promissory conditions are those events that are uncertain to occur that must occur before the duty to perform becomes due AND at least one of the parties promised to make the event occur.
1 The party who is waiting for the condition to occur can withhold counter-performance AND sue for breach of contract.
8 Condition precedents are those events that are uncertain to occur that must occur before performance becomes due. (they give rise to a duty to perform)
1 The plaintiff has the burden of proof to show the condition was met and therefore show the contract is enforceable.
2 When the terms are ambiguous, RS 227 requires the court to interpret the term as a condition precedent.
9 Conditions subsequent terminate a duty that arose at the time of contract.
1 The defendant has the burden of proof to show the condition subsequent was/was not satisfied, therefore justifying non-perfomance (because the duty was discharged.)
2 The contract is made. The party has a duty under that contract…unless the event happens. Then that parties duty is discharged.
1 Ex: Homeowner buys fire insurance. At the time of the K, the insurance company has a duty to pay homeowner if her house burns down. The condition subsequent is that if the homeowner fails to file a claim within 30 days of her home burning down, the insurance company does not have to pay her. If the homeowner does file in 30 days, the condition subsequent is not met and the insurance company’s duty is not discharged; it must pay her.
10 Concurrent conditions are events that are capable of being performed at the same time, or that need not occur in a specific temporal order.
11 Parol evidence
1 oral evidence may be presented to show that conditions existed in addition to conditions in the K as long as the oral evidence does not contradict the writing.
2 This is a special application of parol evidence because a condition imposed on the entire K (vs. just one of the parties) might mean a K does not even exist. We always allow that evidence as long as it doesn’t contradict the writing.
1 EX: Hicks v. Bush, 1962 (p690), merger deal gone bad. P said the Ds breached by not transferring their stock into the deal. Ds said the condition of raising $600k had not been met. Even tho that condition was not expressly included in the K, evidence to show that it existed was allowed b/c the K was silent as to any such condition. I.e., the $600k condition did not conflict with the written K so it was allowed.
Express duties
1 A duty is an act; any performance created by a promise.
1 A condition is an event and a duty is an act. So duties can be conditional.
1 EX: A building owner has a duty to pay $1M when the architect certifies the building. Paying the money is a duty. The architect certification is a condition. So the duty does not arise until the condition is met.
2 If language is unclear, a court will prefer an interpretation that imposes a duty rather than a condition.
3 Waiver – RS§84
1 After a K is formed, an obligor whose duty is conditional may promise to perform despite the nonoccurrence of a condition or despite a delay in its occurrence.
2 RETRACTION- RS§84(2)
1 A party who waives a condition, without consideration, that is within the other party’s control before the condition is supposed to occur, said party can retract the waiver and reinstate the requirement that the condition occur
1 Unless the other party has relied on the original party’s waiver to the extent that retraction would be unjust.
3 ELECTION- A party who waives the condition after the condition was supposed to occur can not retract the waiver even if the other party has not relied.
1 I.e., if a party ELECTS to disregard the nonoccurrence of a condition he must treat the duty as unconditional.
4 Anti-waiver clauses make if difficult to argue a wavier occurred via repeated conduct.
1 Party should not rely on the conduct that is waiving the condition b/c its is unreasonable to ignore K terms.
2 Anti-waiver clauses can be tossed out if they are unconscionable, create surprise, or were not part of the bargain.
Constructive conditions of exchange
1 Unless expressly stated otherwise, bilateral contracts are presumed to be dependent on each other.
2 They give rise to self-help remedies.
A constructive condition is one that, in the absence of clear intent, the court construes as a matter of law the parties must have intended in order to give reasonable effect to the parties’ agreement.
1 Ex: the parties may not have expressly stated that an event is a condition precedent, but if the contract is worded in such a way that a particular sequence was expected, the Court may construe that event as a condition. I.e., it is a constructive condition.
2 Examples of clear intent might be trade usage, course of dealing or course of performance. If none of these exist, the court might still interpret the K to find constructive conditions.
2 A court might also construe conditions if the circumstances and nature of the contract compels that interpretation as a matter of public policy.
Substantial performance doctrine mitigates the possibility of forfeiture.
1 When the constructive terms have been substantially performed the performing party has the right to enforce the contract, minus any damages incurred by the other part.
1 Substantial performance is a question of fact, a vague notion left to the trier of fact to determine by weighing the circumstances in each individual case.
1 Courts have been known to point to facts such as a building’s structural defects, or the high cost of defects vis a vis the price of the contract as evidence that substantial performance has not occurred.
1 In addition, parties who willfully breach are generally precluded from claiming substantial performance as a method of enforcing the contract.
1 Willfulness in this sense is bad faith plus deliberate action. Rather than just incompetence or slothfulness.
2 By contrast, when unessential details are changed, damages are easily compensated, or the owner can easily find another builder to complete the work and withhold payment to the existing builder, courts have been more lenient to find substantial performance.
2 To determine if substantial performance has occurred, courts examine the degree to which the injured party has lost the essential purpose of the K that he reasonably expected to receive.
3 If substantial performance has occurred, the plaintiff can recover the contract price minus the damages to caused by the defendant.
1 The diminished-value rule is a useful tool to determine the damages the owner has suffered. The owner is entitled to the value of the project as it should have been done minus the value of the project as it was done.
1 The cost of repairs or replacement alone is not an accurate measurement, however, because the cost of replacement may exceed the value it would add to the project. It is, however, one factor for the Court to consider.
2 Most courts assign the burden the owner with showing losses.
2 The rationale for the substantial performance doctrine stems from the unacceptable high risk of forfeiture a party would incur if he were held to strict performance standards of conditions he did not specifically assent to. The slightest breach of a condition a party did not expressly agree to could deprive a party of his right to enforce the contract.
1 The payer is not allowed to withhold substantial payment for an insubstantial breach.
3 UCC- The substantial performance doctrine typically is not applied to a seller’s claims against a buyer in a contract for the sale of goods because the seller can recover his losses by selling the goods to another buyer.
1 Instead, the code adopts the perfect tender rule. This allows the buyer to reject receipt of goods that do not conform to the contract. (2-601)
Divisibility doctrine avoids the possibility of forfeiture.
1 A contract is divisible when the performances to be exchanged can be divided into independent pairs of bargained for performances and agreements. (RS 240)
1 A contract is usually divisible when it lists prices for units of work or states different prices for various parts/items/goods.
1 Ex: the case of the logs run amuck- the logs that arrived were divisible from the logs that never arrived. The recipient can easily use the logs he received and only pay for the logs he received.
2 The fact that progress payments have been made during the course of performance do not necessarily indicate the contract is divisible.
1 If the injured party can not make use of the part received without receiving the rest of it, then the contract is not divisible.
1 Ex: the case of a contractor who walks off the job, a foundation is not divisible from the rest because the payments do not fairly represent the extent to which the owner’s interests have been advanced.
Some courts allow the breaching party restitution
1 The breacher will get the value of the enrichment to the party, NOT a percentage of the K price.
1 EX: Homeowner pays painter $10,000 to paint the house. It’s a bad deal for the homeowner because it is only going to increase the home’s value by $3k. The painter stops halfway through the contract (material breach.) He wants to get half the K price, $5k .TOO BAD. He only gets half the value to the homeowner, $1.5k.
2 Notice—this gives an incentive to the contractor to breach if it was a bad deal for him. So, the K price serves as a ceiling of recovery.
1 Ex: Homeowner pays contractor $5/hr to build her some cabinets. The market price is $8/hr. The contractor stops building the cabinet halfway through the job. He wants to recover restitution for $3/hr. TOO BAD. The K price is the maximum recovery for breacher.
3 The breaching party might not get restitution if he willfully breached in bad faith.
1 EX: Where contractor neglected to use the correct materials (wood vs metal), did not install insulation, etc. that might be evidence of bad faith.
Breach in the course of performance
1 Has the breaching party partially breached?
1 If the breach is partial, the injured party must keep performing.
2 But he can bring suit for damages.
1 The court assumes the parties will continue performing. The injured party recovers for loss it suffered as the result of delay or defect in the performance that occurred in the past.
2 Has the breaching party materially breached?
1 RS 241 indicates the following factors should be evaluated to determine if a breach is material:
1 Extent to which injured party will be deprived of the benefit he reasonably expected.
2 Extent to which the injured party can be adequately compensated with money
1 A breach that can be paid for in money is less likely to be a material breach.
3 Extent to which party in breach will suffer forfeiture
4 Likelihood the party in breach will cure
5 Extent to which party in breach fails to comport with standards of good faith and fair dealing.
2 If the breach is material, the injured party can suspend performance.
3 If the party has materially breached, has he had a chance to cure?
1 If the breaching party cures, the injured party must resume performance and sue for damages incurred as a result of the partial breach.
4 If the party has materially breached and failed to cure the injured party can terminate the K and sue for total breach.
Repudiation occurs when a party indicates he will not or can not perform, and when he has no justification for doing so.
1 No good faith defense—if the party repudiates b/c he honestly thinks he doesn’t have the duty to perform, but then the Court finds he did, he is a repudiator.
2 Can be done with words
3 Can be done with conduct making it impossible to perform.
2 RS 243(2): nonperformance + repudiation= claim for total breach by injured party
3 An obligee’s refusal to accept performance by a purported delegate is a repudiation (unless the duty was nondelegable.)
4 Under common law, a party who fears the other party is going to breach is not entitled to demand assurances. So refusal to provide assurances does NOT constitute repudiation.
5 Under UCC 2-609, a party who has reasonable grounds for insecurity can make a written demand for adequate assurances.
1 A party must have commercially reasonable grounds for insecurity.
2 Ex: buyer falls behind in his accounts with seller, buyer discovers seller is making defective deliveries of similar goods to other parties.
3 Repeated delinquencies are considered cumulatively.
4 Delegation of a duty to a third party.
2 Party can suspend performance until he gets adequate assurance.
1 Adequate assurance= promise from party he will perform unless the guy is known to be a liar,
2 Verbal assurances are not sufficient when not accompanied with replacement, repair, refund, etc.
3 The party may not demand assurances that were not part of the original K.
1 Ex: PDM v. Brookhaven Water Co., where the builder wanted the buyer, as an assurance, to put the purchase amount in an escrow account. That was not part of the K. The money was not due for several months. (P773)
4 Failure to provide assurances within a reasonable time and not exceeding 30 days constitutes repudiation.
Anticipatory repudiation occurs when a party manifests he can not or will not perform before the time for performance actually becomes due; the injured party’s duties are discharged
1 In order to constitute repudiation, a party’s language must be directed specifically to the other party in the contract AND must be sufficiently positive to be reasonably interpreted to mean that the party will not or cannot perform (or, that the breach will in fact occur.)
1 Although ,a party can also indicate repudiation via voluntary affirmative conduct that would appear to a reasonable person to make a future performance by the other party impossible.
1 Ex: A vendor of land conveying the deed to a 3rd person shows he does not intend to give it to the original buyer.
2 A mere delay is not repudiation.
3 Inability to perform must be voluntary; if the party can not perform due to incompetence or financial difficulties it does not constitute repudiation.
2 A party’s expressions of doubt as to willingness or ability to perform are insufficient.
3 A proposal or demand of performance of terms that go beyond the contract is not a repudiation unless it is coupled with a threat to withhold performance if the modifications are not accepted.
2 Under common law, the injured party need not wait until the time performance is due to bring an action for total breach.
1 Ex: Hochester v. De la Tour (1853), where D hired P as his courier for 3 months during European travels. Before they left, D changed his mind. P did not have to wait until the day they were scheduled to leave to bring a cause of action. P also did not have to prepare to leave and be ready and willing to leave on the day of their scheduled departure.
2 MA is the only state that does not recognize this.
2 To succeed in a cause of action, the injured party must prove that he could have performed absent the repudiation.
1 Kanavos v. Hancock
3 Under UCC 2-610, the injured party may
1 for a commercially reasonable time, await performance
2 pursue a remedy for breach, even if he has notified the repudiating party that he intends to wait for performance or for retraction.
3 and/or suspend his own performance or proceed to salvage unfinished goods.
4 Anticipatory repudiation doctrine does not apply to unilateral contracts.
1 The action for total breach may not be brought if the non-performance is the fail to pay one of several installments… (RS 243(3), 253—the former section is limited to obligations “for the payment of money in installments” and the latter section is not so limited.)
1 Because once one party has fully performed, the contract is now essentially unilateral. The doctrine does not apply to unilateral contracts.
2 The party entitled to payment can wit for the installments to mature…just as a landlord may not accelerate the rent for the remainder of the term just because one rent payment was late.
2 ..Unless there is an acceleration clause in the contract.
1 An acceleration clause usually allows the person collecting the money to immediately demand the entire amount of the contract if the payer fails to make one installment payment.
1 UCC 1-208 allows a party to accelerate payments when he deems himself insecure but not in the event of default alone.
Impossibility
1 Three exceptions
1 If a supervening governmental action prohibits a party’s performance by prohibiting it or imposing requirements that make it impossible, the party is excused.
1 Requirements making it more difficult are insufficient to excuse performance.
2 If the contract calls for personal performance by the promisor, the promisor is excused if he dies before performing.
3 If performance requires a “thing”, the party is excused if the destruction or deterioration of the thing prevents performance.
1 Taylor v. Caldwell, where the music hall burned down so the contracted musicians were excused from performing.
Impracticability of performance (it just can’t be done, it’s just too hard)
1 Available under common law (RS 261) and UCC 2-615. They are analyzed the same way.
1 An unforeseen “supervening event” took place after the K was made.
1 Death or incapacity of a person necessary for performance
2 Destruction of a thing necessary for performance
3 Prohibition or prevention by law
2 The non-occurrence of the event was a basic assumption to which the parties agreed.
1 Ex of sufficient events:
1 Shortage of materials due to war, embargo, crop failure
2 Extreme and unreasonable difficulty, expense, injury or loss.
3 Involves risk of injury to person or property that is disproportionate to the ends attained.
2 EX of insufficient events:
1 Rise or collapse of a market is insufficient.
3 Neither party caused the event
1 Court will identify the superior risk bearer, whichever party was in the best position to avoid the risk.
4 The K did not allocate the risk for a supervening event to either party.
1 If the event was probable and foreseeable, a Court might be more likely to hold a party liable for assuming the risk.
2 Trade usage, course of dealing, course of performance might imply one of the parties carries the risk.
5 Seller notified buyer w/in reasonable time that delivery would be delayed, K would be terminated or modified.
2 Existing impracticability will also work.
1 As long as the parties did not know and could not have known the event/facts already existed, they will be excused from performing.
1 Ex: Mineral Park (1916 p830)
1 Defendant agreed to pay for gravel from Plaintiff’s land to build a bridge. D actually only got half of its supply from Ps land because the rest of the gravel was under water. The gravel was underwater the entire time, before K was made so it was not a supervening event. But neither party knew it, so it was existing impracticability.
2 Party claiming existing impracticability will also usually have a claim for mistake.
3 If a K is terminated for impracticability, restitution may still allow some recovery if one party conferred benefit on the other before performance was frustrated.
4 Force majeure clauses are used when parties anticipate an event that might impede their ability to perform but they are incapable of changing it, so the negotiate the allocation of risk.
Frustration of Purpose is a defense to non-performance when performance remains possible, but the expected value of performance to the party seeking to be excused is destroyed by a fortuitous event. (what’s the point?)
1 Operates to the advantage of parties that are to pay money in return for goods and services.
1 Courts are much less likely to excuse a party on grounds of frustration.
2 KEY question: what is the buyer’s purpose?
3 Five requirements
1 the supervening event
2 must have substantially frustrated the party’s principal purpose
1 view the party’s benefit broadly- it’s not enough that the party couldn’t get the expected benefit; the party must have received NO benefit.
2 Frustration must be nearly total
1 Ex: Swift Canadian v. Banet (1955 p834), pelt buyer could not sell pelts in Phillie as he originally planned but he could still sell them somewhere else, so no frustration of purpose. Some lost profit is not sufficient.
2 Change these facts—if pelt buyer was going to use them in his home in Phillie and he could no longer bring pelts into Phillie, his purpose would be frustrated.
3 it must have been a basic assumption on which the contract was made that the supervening event would not occur
4 the frustration must have resulted without the fault of the party seeking to be excused.
5 the party seeking to be excused did not assume the risk.
1 Through express terms
2 Through implied terms (course of dealing, course of performance,trade usage)
3 A fixed price contract is an explicit assignment of risk of price increases to the seller and the risk of price decreases to the buyer
4 Forseeable events indicate some assumption/assignment of risk
4 If a K is terminated for frustration of purpose, restitution may still allow some recovery if one party conferred benefit on the other before performance was frustrated.
Performance under the ucc
The code presumes a simultaneous transaction.
1 A seller’s duty to tender is a condition to the buyer’s duty to pay.
2 If neither party “shows up” neither party is in breach.
Gap fillers
1 2-307- goods should be delivered at once unless K says otherwise.
2 2-308- if no palce for delivery is specified, the seller’s palce of business or residence.
3 2-310: the buyer must pay before he gets the goods
4 2-511: if no payment method is specified, the current payment method is acceptable.
5 2-513: buyer has the right to inspect goods before paying for them
6 2-504: most Ks are shipment contracts where tender occurs at the moment of shipment. The buyer bears the risk of loss in transit.
7 2-601: Perfect tender rule: if goods or the delivery of goods fail to conform in any respect the K, the buyer may reject the whole, accept the whole or accept any commercial units and reject the rest.
1 inapplicable to installment Ks
2 But, 2-612 allows rejection only if the non-conformity must substantially impair the value of the goods to the buyer
3 And, 2-508 requires buyer to give seller the chance to cure.
4 And, 2-504 allows rejection only if improper shipment results in delay or actual loss.
5 And, trade usage might mean that 19 items is the equivalent of 20 items so the buyer may not reject.
6 And, 1-203 requires the buyer to reject in good faith.
2-612 under installment contracts, Seller has not performed if the nonconforming goods substantially impair the whole value of the K.
1 If seller gives repeated assurances, buyer must accept them.
2 But, repeated nonconformity can lead to substantial impairment of the K.
1 Repeated nonconformity following assurances leads to shaken faith.
2-508 gives seller right to cure when…
1 Buyer rejects nonconforming goods (or revokes) and the time for performance has not yet expired.
2 Or, when buyer rejects nonconforming goods, and seller reasonably believed buyer would accept the goods, with or without a money allowance, the seller can seasonably notify buyer of his intent to cure and get further reasonable time to provide substitute conforming goods.
Acceptance
1 2-606(1) Occurs when buyer has had a reasonable time to inspect the goods AND signifies the goods are conforming and takes them OR signifies the goods are nonconforming but he will take them anyway.
1 Signify= words. Payment is not necessarily conclusive of acceptance.
2 2-606(2) Occurs when buyer fails to reject after reasonable time to inspect the goods.
1 If the buyer waits too long he accepts by default.
3 2-606(3) Occurs when the buyer does something with the goods that is inconsistent with the idea that the seller still owns them.
1 Using them for a long time
2 changing them in some way
4 2-607(1) Buyer must pay the K price when he accepts.
Acceptance followed by revocation
1 2-608(1) Buyer can revoke when
1 nonconformity substantially impairs its value to him AND
2 buyer knew about the defects but reasonably assumed they would be cured and they have not been
3 OR buyer didn’t know about the defects but his complacency was induced either by seller’s assurances or by the difficulty of discovering the defect.
2 2-608(2) Buyer can revoke
1 within a reasonable time after the buyer discovers or should have discovered the defects
2 AND before any substantial change in condition of the goods takes place, which is not the caused by their own defects.
3 Revocation is effective upon buyer’s notice to the seller.
REMEDIES FOR MATERIAL BREACH UNDER COMMON LAW
Expectation interest puts the innocent party in a position as good as if the K had been performed.
1 The gold mine
2 Injured party can recover for economic damages only
3 Focus in on rectifying harm, not sanctioning breaching party.
2 RS 347 defines expectation recovery as the default recovery. It sets out this formula for recovering damages:
1 loss in value to the injured party
1 Such as cost of substitute transaction compared to the bargained for transaction.
2 PLUS incidental and consequential damages
3 MINUS any cost or other loss he has avoided by not performing.
3 Formula B:
1 Cost of reliance (or amount innocent party has spent performing thus far)
2 PLUS expected amount of profit
3 MINUS loss avoided
4 PLUS other losses (incidental and consequential)
5 MINUS payments the innocent party has already received.
4 Note, the numbers need to be calculated at the time of the train wreck not at the time of K formation.
1 The innocent party may have calculated $1M profit in the beginning of the job. But as the job progressed he reduced that number to $500k. If profit sunk really low, restitution might result in more money.
5 Lost volume theory does not penalize the innocent party for finding replacement work.
1 Ex: employee contracts with employer to make $2k/mo for a year. EE is wrongfully terminated after 6 months. EE gets a new job paying $2k a month. EE has no expectation recovery. EE can only work one job at a time.
2 Versus: Subcontractor contracts with general to do a job for $1M. General wrongfully repudiates. Subcontractor gets another job for $1M. The subcontractor could have hired more employees to work for him, so he could have done both jobs and earned $2M. So the fact that he got another job does not preclude expectation recovery.
Reliance recovery put the innocent party back in the same position as if the K had never been made. (less than expectation but more than restitution)
1 Use this amount when the amount of expected profit is immeasurable/uncertain or negative amount.
2 Includes costs incurred by the injured party that did not necessarily confer benefit on the breaching party.
Restitution recovery requires the breaching party to disgorge any benefit conferred on it. (usually lowest amount of recovery)
1 Courts are split on whether an innocent injured party can recover more than the K price.
1 Say a general contractor and a sub enter into a K for $10,000. The general should have had to pay $30k but the sub was desperate for a job so he low balled it. The sub does half the work. The contractor breaches. Contractor has made no payments.
1 If sub had completely performed, the K price would be the maximum amount of recovery.
2 Courts are split on how sub should recover when he’s done half the work:
1 Some courts: K price is the maximum
2 Other courts: sub should recover $15k, or half the value of a $30k job.
2 Restitution is not available where the innocent injured party has fully performed and the only performance left for the breaching party is to pay a definite sum of money.
RS 353 allows loss due to emotional distress in some narrow circumstances.
1 When the breach also causes bodily injury.
2 When the breach is of the type that serious emotional disturbance was particularly likely to result.
1 EX: Undertaker contracts with widow to provide casket. Casket is not water proof, must be dug up and reburied. This was inherently a K involving emotional distress.
NO punitive damages
Liquidated damages clauses displace other legal remedies.
1 Allows parties to contract how much each will receive in the event of breach, because otherwise the damages are too uncertain or potentially huge.
1 Courts like them b/c they don’t have to pin point damage amounts, they can just use the clause. Helps efficiency.
2 One party is bound to get screwed.
2 BUT, if a liquidation clause is really functioning as a punitive damage, deterrent, penalty, etc. it will be tossed out.
3 Test for upholding a liquidated damage clause:
1 Damages will be difficult to determine
2 parties intended to fix a fair compensation amount as opposed to a penalty.
3 the liquidated damages amount bears a reasonable relationship to the actual approximate damages (RS 357 and UCC 2-718(1)
1 Figure out what the actual damages are.
2 See if its related to actual damages.
4 Existence of a liquidated damages clause does not preclude equitable relief as well.
Be careful not to over compensate the injured party. No windfalls allowed.
Equitable remedies are allowed only when legal remedies are inadequate to compensate the injured party.
1 Injunctions
1 Use this when damages are too hard (extreme) to determine or too uncertain in the extreme.
2 Specific performance
1 More likely when K involves sale of land.
BUYER’S REMEDIES FOR BREACH OF CONTRACT UNDER UCC
1-106(1) The aggrieved party should be put in as good a position as if the other party had fully performed.
2-602 Buyer’s right of rejection under one time contract
1 Rejection must be w/in reasonable time after delivery or tender.
2 Buyer must seasonably notify seller.
1 2-605 If the seller requests a written explanation of the rejection, or if the seller could have cured had he known about the defects, the buyer’s rejection must include a description of what exactly the defect is, or buyer will lose that as a defense to nonpayment.
2 If the seller could not have cured or if the seller does not demand in writing to know the problem, the buyer does not have to state w/ particularity the defect.
3 Buyer may not act as if he owns the commercial unit.
4 Buyer must hold goods with reasonable care and for a reasonable time for the seller to get the goods back.
2-603 if the seller does not tell the buyer what to do with the rejected goods, the buyer can store the goods, sell them or send them back.
2-612(3) Buyer’s right of rejection under installment contract
2-607(3) In any event, buyer must notify seller of the problem within a reasonable time of discovering defects, or when he should have discovered defects
If buyer repudiates, rightfully rejected or justifiably revoked, he may
1 Cancel the K
2 Recover any money he paid to seller
3
If buyer accepted goods
1 2-607(1) he must pay K price
2 2-607(2) he can still sue for breach
3 2-607(4) he bears the burden of proving the goods were defective at the time of receipt
If buyer accepted the goods and then properly revoked
1 2-711
1 Buyer may cancel K
2 Recover the cost of “cover”
3 Recover the cost of reasonable expenses incurred in their inspection, receipt, transportation, care and custody.
2-712 Cover—gives the buyer the difference between the K price and the substitute goods price.
1 After seller breaches or repudiates, buyer can cover by making in good faith and without reasonable delay any reasonable purchase of or contract to purchase substitute goods.
2 Formula:
1 K price
2 minus cost of the substitute goods.
3 plus incidentals and consequentials
4 minus expenses saved
3 Cover is not mandatory
4 This transaction can serve as evidence to determine a fair price for expectation recovery.
When buyer has accepted and properly revoked, 2-713 gives the buyer the difference between the K price and the market price.
1 Definitely comes into play when buyer does not cover.
2 If buyer covers, he can still choose this option. But, his cover price is going to be strong evidence of the market price.
3 Use this formula if the cover price was artificially high because buyer waited too long to cover, she chose an unreasonable substitute, the market was rising, etc.
4 Formula:
1 K price
2 minus market price at the time/place where the buyer would have entered the market, when she learned of the breach
1 if buyer learned of breach before shipment, use the place/time of shipment as market price
2 if buyer learned about breach after goods arrived, use arrival place/time as market price.
3 Some courts will allow buyer a commercially reasonable time after discovering breach to find cover, learn of other options, etc.
3 plus incidentals and consequentials
4 minus expenses saved
When buyer has accepted goods and properly notified seller of nonconformity 2-714
1 Allows buyer to recover damages for any nonconformity of tender resulting in the ordinary course of events from the sellers breach.
2 Formula:
1 value of goods as warranted
2 minus value of goods as accepted
3 plus incidentals and consequentials (2-715)
Buyer can recover incidental and consequential damages (2-715)
1 2-715(1) incidental damages
1 Reasonably incurred expenses relating to the sellers breach including storage, inspection, transportation, care and custody of the goods.
2 Commercially reasonable expenses relating to cover, delay.
2 2-715(2) consequential damages
1 Losses resulting from buyer’s requirements and needs that the seller has reason to know of and that could not be prevented by cover or otherwise
1 Key case: Hadley v. Baxendale
2 Ex: losses resulting from lawsuits brought as result of breach
2 Injury to person or property proximately caused from any breach of warranty.
1 Ex. Lost profits for companies
2 Ex. Medical expenses for personal injuries.
3 includes lost profits
Buyer can deduct damages from payment
1 (because remember, a buyer who accepts goods must pay the K price)
Buyer’s damages are still limited by certainty, avoidability and forseeability.
Seller’s remedies under the ucc
2-703 Lists seller’s remedies as:
1 Withholding delivery of goods
2 Stop delivery of goods by a bailee (2-705)
3 Follow rules under goods not yet identified
4 Resell and recover damages
5 Recover damages for non-acceptance (2-708) or the price (2-709)
2-706 allows the seller to resell the goods:
1 K price
2 Minus resale price
3 Plus incidentals
4 Minus expenses paid
2 as long as the seller
1 does so in good faith
2 in a commercially reasonable manner
1 If private sale
2 If public sale, there must be an auction or element of competition
3 and notifies buyer of intent to sell, and time and place of sale if public
3 If the resale price is really low, it might indicate the seller did something that was not commercially reasonable.
4 If seller doesn’t follow these rules, he must use 2-708 recovery.
2-708(1) allows an alternative formula when seller can not resale the goods, and sets forth the formula to use when buyer does not accept goods or repudiates
1 K price
2 Minus market price at the time/place where seller would have entered the market (place of tender)
3 Plus incidentals
4 Minus expenses saved
If 2-708 does not put the seller back into the position as good as if the K had been performed, use 2-708(2) formula:
1 Profit
2 Plus incidentals
3 Plus costs incurred
4 Minus payments made by buyer
5 Minus proceeds of the resale.
If seller is recovering under a lost volume theory, use 2-708(2) but do not subtract proceeds of resale.
Seller’s ability to get the price is very limited (2-709)
1 When the goods have been accepted by the buyer
1 Otherwise seller can resell the goods for cover.
2 When the risk of loss has passed to the buyer and the goods have been lost or damaged within a reasonable time after risk has passed OR
1 Seller can no longer resale the goods if they have been destroyed or are missing.
2 Usually happens when the goods are destroyed in transit.
3 When goods have been identified to the contract and the seller is unable to resell them after a reasonable price or when the circumstances indicate such an effort will be unavailing.
1 2-501 good in the K have been identified when the goods have been shipped to the buyer, they have been labeled as the buyer’s, they have been grown/conceived for the buyer, or otherwise designated by the seller as goods to which the K refers.
2 Seller can recover the price if any one condition is met, and he can still recover incidental damages under 2-710.
3 If seller sues for K price and wins, he must give the goods to the buyer. (i.e., he must keep them pending the lawsuit)
2-709 allows seller to recover the K price under narrow circumstances.
1 When the goods have been accepted by the buyer.
2 When the goods are incapable of being resold because they have been lost, damaged or are too unique.
2-710 defines seller’s incidental costs
1 Cost of stopping shipment
2 Transportation
3 Care and custody of goods
4 NOT interest b/c that is a consequential damage and sellers do not receive consequential damages
Limits on remedies
ALL REMEDIES DESCRIBED ABOVE (COMMON LAW AND UCC) ARE SUBJECT TO LIMITATIONS.
Look at the K itself to determine if it includes a limited remedy clauses.
1 Repair and replacement provision
2 Exclusion of consequential damages
3 They are not material alterations if they are reasonable.
2718 allows liquidated damages in some cases
1 Amount must be reasonable given:
1 actual harm caused by the breach
2 difficulties of proving loss
1 If losses are straight forward, there is no valid reason to have the clause so it’s thrown out. It was a penalty cloaked in a liquidated damage, or it was not freely bargained for/adhesion.
2 Sellers costs are usually ascertainable and do not give rise to need for liquidated damages.
3 inconveneience or unfeasibility of obtaining other adequate remedy
2 A term fixing unreasonably large liquidated damages is invalid.
3 A term designed to compel performance or disincentivize breach is invalid.
2-719 plays dominant role in limiting remedies
(1)(a) the agreement may provide for remedies in addition to OR in substitution for those in the Code and may limit or alter the measure of damages recoverable under the Code.
Such as, by limiting buyer’s remedies to returning the goods and being reimbursed the purchase price OR
By limiting buyer’s remedies to repair or replacement of non-conforming goods.
(1)(b) if parties choose to do this, these remedies are considered optional unless expressly agreed to be exclusive
In which case the remedy outlined in the agreement is the SOLE remedy available to buyer.
Notes:
Rationale: Allows parties to shape their agreements
Still subject to Unconscionability.
Buyer can get around it by showing it was not expressly agreed to an exclusive remedy.
Courts show more sympathy to consumers than to business persons.
A good limit on remedy might not stand up in court but it might serve as a good negotiation/settlement tool.
2-719(2) tosses out any limited remedies that fail of their essential purpose
1 where circumstances cause an exclusive or limited remedy to fail of its essential purpose, then the treasure box of remedies allowed by the Code opens up.
1 Examples of when a remedy fails of its essential purpose:
1 Usually occurs when novel circumstances arise that the parties did not contemplate.
2 Seller’s good faith or due care is irrelevant in most courts.
3 Where the goods are experimental, the remedy is less likely to fail of its essential purpose b/c there was no guarantee the goods will work as hoped.
4 Buyer’s expectations are completely thwarted.
1 EX: Buyer buys microwave. W has limited remedy of “repair or replace.” Microwave blows up and injure Buyer.. Replacing the microwave does not meet the expectation that the microwave was safe. The remedy of replacement or repair does not meet the buyer’s expectations. The limited remedy is tossed out and all remedies available under the Code kick in.
5 Deprives the buyer of the “substantial value of the bargain.”
1 EX: Buyer buys microwave. W has limited remedy of “repair or replace.” Turns out to be a lemon. Seller can not fix it. Seller does not have the same model available. Therefore buyer is not getting value of the bargain. Limited remedy ges tossed out and Code remedies fill in. Seller must repay buyer with cost of micro plus the difference.
6 Fails to provide buyer with a minimum adequate remedy.
1 EX: Wilson Trading. Defect in yarn not discoverable until after it was knitted into sweaters. K contained limit on remedy to repair or replacement within 10 days. The time limit would always be exhausted in every case so it left no remedy for the buyer. The remedy fails of its essential purpose so it’s tossed out.
7 Seller is unwilling or unable to repair the defective goods in a reasonable time.
2 Buyer must provide seller a reasonable opportunity to carry out the exclusive/limited remedy before the buyer can successfully argue failure of essential purpose.
2-719(3) consequential damages may be limited or excluded, unless the limitation/exclusion is unconscionable.
Limits on consequential damages for personal injury in the case of consumer goods is prima facie unconscionable
Limits on consequential damages for commercial loss is not prima facie unconscionable.
Limits that are too vauge might be thrown out.
Most courts want to see this exclusion in conspicuous language. Still subject to Unconscionability.
Courts are split on conflicts between opening the treasure box and limits on consequential damages.
EX: Catalina (Whaley p161). P buys a boat. K contains limit to repair and replace and limit on consequential damages. Boat’s gel coat blisters. Seller refuses to repair or replace. P sues for cost of repair and consequential damages. The repair and replace remedy failed of its essential purpose so it was tossed out. Then, what’s left of consequential damages?
Some courts hold the limit on consequential damages gets tossed out with the repair and replace remedy.
Some courts hold the limit on consequential damages is its own beast and evaluate it independently of the repair or replace remedy.
1 In this case, you need to convince the Court to toss out the limit on consequential damages because it’s unconscionable.
Equitable remedies are allowed only when legal remedies are inadequate.
1 Discretionary
1 Court wants to see a party with clean hands asking for equitable relief.
2 If the K is one sided or oppressive the court won’t like it and might not award relief.
3 Lack of consideration might lead court to deny equitable relief.
2 Injunctions
1 Use this when damages are too hard (extreme) to determine or too uncertain in the extreme.
3 2-716 Specific performance
1 Parties are allowed to negotiate/contract for specific performance, even if legal remedies would be adequate.
1 EX: Injunctive relief was proper where gas company had an requirements contract with supplier. It was impossible to know how much longer the gas would be needed, what the cover prices would be for the next 10,15,20 (unkown number) of years.
2 Use this when the goods involved are unique or under other proper circumstances.
1 A buyer's inability to cover is evidence of "other proper circumstances."
3 The typical specific performance situation today involves an output or requirements contract.
4 Practical obstacles to awarding equitable relief
1 the terms must be clear; we must know with certainly what was promised.
2 The court doesn’t want to supervise parties forever, unless a significant public interest is at stake.
3 court won’t order specific performance to compel an ee to work
Avoidability is a limitation on the amount the injured party can recover.
1 Injured party must avoid loss by suspending performance
1 EX: bridge to nowhere. City council repudiated contract with builder to build a bridge. Builder continued to build. Those losses were not recoverable.
2 Injured party must avoid loss by taking some action.
1 employment contracts
1 If ee is wrongfully terminated he can’t just sit on the couch, he has to try to find another job.
2 Ee is not required to take inferior job or different work all together.
3 RS 350 precludes recovery of losses that could have been avoided without undue risk, burden or humiliation.
Certainty is a limitation on the amount the injured party can recover.
1 Plaintiff must be able to show on the preponderance of the evidence the fact and extent of her loss.
2 Step 1: Has plaintiff shown an injury?
3 Step 2: Has plaintiff provided sufficient evidence of the amount of the loss?
4 RS 348(2) indicates when the loss in value to the injured party is uncertain, we should use
1 the diminution in value
2 OR cost of completing performance or making repairs
1 EX: pipe installer uses the wrong type of pipe. It would cost a LOT to rip out the pipe and install the right kind. The injured party would pocket the money and still have a very valuable property. There was no real material difference between the two types of pipe.
5 Lost profit are particularly susceptible to uncertainty.
1 New businesses (some JX even have bright line rule that new businesses can not recover lost profits)
2 entertainment or sporting events where profit depends on public turnout.
6 Consequential damages are susceptible to uncertainty.
Forseeability is a limitation on the amount the injured party can recover.
1 Hadley v. Baxendale—parties are only liable for the potential damage they could forsee at the time the K was made.
2 RS 351 Losses are foreseeable when they occur in the ordinary course of events or from special circumstances that the breaching party had reason to know about.
3 2-715(2)(a) codifies the forseeability requirement
4 Most likely applies to consequential damages.
5 Step 1: determine date of formation.
6 Step 2: what damages were foreseeable at that moment?
1 should the party in breach have reasonably realized that the nature and approximate extent of the actual damages would be a likely consequence or a probably result of the breach?
1 Often depends on the amount of information available to the party in breach
2
7 Note: parol evidence rule does not prevent injured party from showing the breaching party had reason to know of special circumstances via prior negotiations or communications.
Plaintiff’s duty to mitigate precludes plaintiff from holding defendant responsible for increases in loss.
1 RS 350(2) Plaintiff is not precluded from recovery to the extend that she has made reasonable but unsuccessful efforts to avoid loss.
2 It is not codified in UCC, but it is implied from all the remedy provisions that buyer act in good faith.
3 If plaintiff acts in bad faith or unreasonably and aggravated her damages, the defendant is not liable for those increased costs.
1 Must be more than poor judgment or preference.
2 Plaintiff must have been dishonest, opportunistic or vindictive, or greatly deviated form the normal rational response.
4 Plaintiff’s failure to mitigate does not preclude all recovery, it only precludes recovery for those unreasonable costs.
5 Consider the following factors to determine if plaintiff’s response was reasonable:
1 what P did/didn’t do
2 what alternatives were available
3 what risks, hardships or inconveniences were involved with each choice
4 what was Ps motivation
5 how much time did she have to respond?
6 Ps ability to find a substitute transaction helps show mitigation
third party beneficiaries
RS 302 Intended beneficiaries
1 Intended beneficiaries are implicated when recognition of a aright to performance in the beneficiary is appropriate to effectuate the intention of the parties AND
1 either the performance of the promise will satisfy an obligation of the promise to pay money to the beneficiary
2 OR the promise intends to give the beneficiary the benefit of the promised performance.
1 Key question: why is the promisee entering the K? is it to benefit himself primarily, or someone else?
1 EX: Landlord Ks with electric company for power. Landlord’s tenants are NOT TPBs.
2 When the promisor doesn’t know the third party or have reason to know, it’s unlikely that party is an intended beneficiary.
2 The promisor is the person performing to the third party beneficiary; or the potential defendant if the third party beneficiary wants to sue.
RS 309 TPBs rights are dependent on the K made by the promise and promisor.
1 If that K is unenforceable, so are the TPBs rights.
2 If promisor is relieved against promise, he is also relieved against TPB.
RS 311 Vesting
1 Let’s say promisee and promisor have agreed that promisor owes a duty to TPB. Promisee and promisor are still free to make subsequent agreements that modify or discharge the promisor’s duty to TPB. BUT, at some point the TPB’s right to performance “vests” and the promisee and promisor are no longer free to alter the duty owed to TPB.
1 What is that point?
2 TPB’s right to performance vests when he materially changes his position in justifiable reliance on the promise, or brings suit on it, or manifests assent to it at one of the parties’ request.
1 After TPB relies on the duty the promisor owes to him, the promisee and the promisor are no longer free to modify or change their K.
Assignment and Delegation
AN ASSIGNMENT IS THE PRESENT TRANSFER OF AN EXISTING RIGHT TO A THIRD PERSON
1 Unlike a K where the promise is doing something in the future, an assignment happens right now.
1 Many assignments turn out to be Ks. Ks need consideration. So the K might not have been formed.
2 Assignments do not need consideration
2 Owner of the K right must intend to give it to the third party although there are no magic words to show this intent.
3 The RS and the UCC presume Ks are assignable unless
1 it would materially change the duty of the obligor
2 materially increase the risk imposed on him
1 Ex: tenant assigns insurance policy to new tenant who is more careless, insurance co does not have to let him assign it
3 materially impair his chance of obtaining return performance
4 materially reduce its value to him
4 The obligor is only liable to the assignee if/when the obligor has notice of the assignment.
5 The assignee steps into the shoes of the assignor, so any defense the obligor would have against the assignor he also has against the assignee (and vice versa)
6 Common yet incorrect language that one “assigns the contract” to someone else will usually result in assignment of the K right and delegation of the duty to perform.
A delegation occurs when a person owing a duty manifests an intention to confer upon another person the power to perform that duty.
1 Does not relieve the delegor’s duty to perform or his liability for breach.
2 Does not impose a duty on the delegate to perform.
1 He “can” perform but he does not “have” to perform.
2 But the delegate can promise to peform, or assume the duty to perform. Even here, the original obligor’s duty is not discharged. Now the delegate owes the duty and the obligor is a surety of the performance. The obligee is still entitled to one performance.
3 Not all duties are delegable:
1 express non-delegation clauses prevent delegation
2 the identity of the obligor was specifically bargained for by the obligee
3 where the obligee has a substantial interest in having the original obligor perform the duty
4 where the performance is “personal” or based on the obligor’s character, skill, reputation, taste, etc.
4 Novation occurs when the obligee discharges the obligor’s duty to perform in exchange for the delegate’s duty to perform.
1 the delegate’s promise is the consideration for the discharge
2 Obligee must specifically assent to the substitution, not just to the delegate’s performance.
Unconscionability
A) Unconscionability – tool to undue a clause or K
1) Applicability
a) Matter of law (not a jury question)
¤ Policy driven, no set definition of unconscionability. Rarely applied to merchantsB
b) Flexible doctrine
¤ Court will look at this K in this time and place (not a binding public policy decision for all time)
c) Considered at the time of K formation
2) Procedural unconscionability – unfairness in bargaining process
¤ Element of surprise
– Fine print boilerplate
– Technical language an average person cannot understand
○ High pressure sales
¤ Element of oppression (unequal bargaining power)
– All providers have the same clause on Ks (no options)
– Necessity v discretionary purchase
– Lack of meaningful choice
○ Williams v Walker-Thomas Furniture Co welfare mother purchasing a stereo repo
▪ Absence of a meaningful choice for one party and K terms that unreasonably favor the other party (procedural unconscionability)
▪ To determine a meaningful choice, look to manner in which the K was entered and all the circumstances surrounding the transaction
▪ Meaningful choice often negated by gross inequality of bargaining power
▪ Lack of reasonable opportunity to understand the terms or “hidden terms”
▪ Terms are to be considered in light of the general commercial background and commercial needs of the trade
3) Substantive unconscionability – unfairness in content of agreement or in the K itself (outcome/terms)
¤ exculpatory clauses
¤ limiting remedies
¤ excessive high prices
– Jones v Star Credit door-to-door freezer salesman
○ Disparity in value motivates the court to find substantive unconscionability
○ Crt reforms the K so that amount paid meets amount owed
¤ Overly harsh or one-sided results
– Armendariz v Foundation Health sexual harassment/discrimination termination
○ Arbitration clauses can be substantively unconscionable when a stronger party, through a K of adhesion, imposes the arbitration forum on a weaker party w/o accepting that forum for itself.
▪ Unilateral arbitration clauses can be enforceable – when justification grounded in something other than employer’s desire to maximize advantage based on perceived superiority of judicial forum
▪ Generally, states have strong public policy of favoring arbitration as a method of dispute resolution
○ Does not permit full recovery of damages for employees but no restrictions on employers
○ Lacks mutuality
a) NOTE: Both categories must be present but not to the same degree
¤ Analyze it on a sliding scale
– the more substantively oppressive a term is, less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable and vice versa
– Note: the lower the procedural unconscionability, the less likely the court will find the clause/K unconscionable since more likely there was equal bargaining power.
4) Court remedies
a) Invalidate K as a whole (if entire K permiated)
b) Invalidate only only the particular clause(s), but enforce the rest of the K
c) Limit (w/o striking) the application of the unconscionable clause(s)
Damages
PENALITES ARE NOT ALLOWED.
1 The penalty clause is eliminated and the injured party can still recover under the other avaialbe remedies at law.
Liquidated damages are allowed as long as:
1 1) The amount is reasonable and not disproportionate to the presumable loss or injury at the time of contract.
1 In most courts, actual loss at the time of breach is irrelevant.
1 BUT, under the UCC, the actual loss can sustain upholding a stipulation. Actual loss can not be used to strike a stipulation.
2 This is a matter of law.
3 Courts usually resolve doubts in favor of unenforceability.
4 A single large sum to be paid in full regardless of the degree of breach is usually unenforceable.
2 2) The damages resulting from possible breach are uncertain or difficult to prove at the time of contract.
3 3) Parties intended to liquidate damages in advance.
1 The Court looks at the compulsory effect of the clause, regardless of whether parties use the term “liquidated” or “penalty.”
2 Securing performance by compulsion is bad.
4 Liquidated damages take the place of other remedies for breach under the law.
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