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CONTRACTS(1) barnes.doc

  1. 1. CONTRACTS § 2 PROF. BARNES SPRING 2005 OUTLINE REMEDIES FOR BREACH: Remedies for breach of K are designed to provide relief to the aggrieved party. There are four fundamental assumptions made by courts enforcing promises: • Relief of promise is to redress breach • Relief granted to promisee should attempt to put promisee in the position they would have been in had the promise been performed • The appropriate form of relief is substantial rather than specific o Substitutional relief: relief that is intended to give the promisee something in substitution for the promised performance, as when the court awards a buyer of goods money damages instead of goods o Specific Relief: relief that is intended to give the injured party the very performance that was promised. • Punitive damages cannot be awarded for a breach of K. (1)EQUITABLE RELIEF: if money damages cannot adequately compensate the aggrieved party and the determination of damages would be too speculative, or damages are simply not a substitute for D’s performance of the K, or where it is not likely damages will be collected, then it may be appropriate for the court to grant equitable relief. a. INJUNCTION: directs a party to refrain from doing a certain act i. Most common cases involve employee contracts, such as preventing the employee from working for a competitor (also sports and entertainment) ii. Injunction granted when damage remedy is inadequate iii. Benefits of substituting injunction for damages 1. shifts burden of determining cost of Δ conduct from court to parties b. SPECIFIC PERFORMANCE: orders the promisor to render the promised performance (basically used in property, unique goods and long-term K) i. A court will not order a performance that has become impossible, unreasonably burdensome, or unlawful. ii. UCC 2-716: specific performance when goods are unique (output Ks and heirlooms) iii. Restatement: 1. §359: specific performance will not be awarded unless damages are inadequate 2. §360: How do you determine if damages would be adequate: a. reasonable certainty problems b. difficulty of procuring c. damages not likely to be collected c. Cases (specific performance): i. Laclede Gas v. Amoco Oil: money damages would not be an adequate relief, evidence shows that P cannot find another propane supplier willing to enter into a long term supply K like the one present. ii. Klein v. Pepsico.: there are similar G-II jets available on the market, the fact that the price has risen does not justify SP- the price rise could be handled by money damages D. LIMITATIONS ON THE AVAILABILITY OF EQUITABLE RELIEF AS REMEDIES: i. Adequacy Test: Only if money is not adequate: 1
  2. 2. ii. Indefiniteness: court will not grant SP or injunction to enforce a K unless the terms of the K are sufficiently definite to provide the basis for an appropriate order; iii. Insecurity: a court will not compel performance if a substantial part of the return performance has not been rendered unless the rendering of that part can be secured to the court’s satisfaction. A party in breach should not be compelled to perform unless assured of receiving what it bargained for in exchange. iv. Difficulty in enforcement or supervision: a court will not grant specific enforcement or an injunction if this would impose on it burdens of enforcement or supervision that are disproportionate to the advantages to be gained. 1. this limitation is often used in construction contracts. 2. And, courts are often unwilling to use SP in personal service Ks a. Often presents public policy concerns (2)REMEDIES AT LAW (money damages): Money damages are rewarded where adequate; Three main measures of money damages: a. EXPECTATION: §344(a) same place the non-breaching party would have occupied had there been full performance (most common); the benefit of the bargain; P awarded: i. Out of pocket costs she incurred, plus ii. The profit which she would have made had the K been completed iii. Expectation damages are only recoverable if P proves them with reasonable certainty. If not shown, other measures of damages available. iv. Measuring Expectation: usually means the non-breaching party is awarded the profit which she would have made had the K been performed 1. the usual formula for calculating expectation damages: A P’s expectation damages are usually said to be equal to: a. value of Δ promised performance (generally the K price) + other loss minus whatever benefits, if any, the P received from not having to complete his own performance 2. § 347: Expectation Formula: loss of value + other losses – Cost avoided – Loss avoided a. Loss in value: difference b/w the value to the injured party of performance that should have been received & the value of what was actually received i. Measured by 1. K value: seller builds a house for $100 & buyer breaches, the K value is $100 2. Mkt Value of product/work: buyer wants a house built for $100, if it doesn’t get built his loss in value will be the MV of a similar house 3. Difference in value: Jacobs & Young v. Kent: Ct held that loss in value was the difference in value b/w the Reading pipes and other pipes b. Other losses: Incidental and consequential damages c. Cost avoided: Amount injured party saves by not having to perform (product costs saved) d. Loss avoided: amount salvaged by the injured party (Ex. Reallocating resources that would have been devoted to the performance of the K) 2
  3. 3. v. Compensatory Damages: most common form ($ awards) vi. Consequential Damages: anything a consequence to the breach itself; not considered “arising naturally” but only as a result of the special circumstances under which the K was actually made; include any loss resulting from the needs which the seller had reason to know of at the time of the K and which could not be prevented by cover or otherwise. Ex. Profits, or b/c of breach I had to breach a contract with union employees, vii. Incidental Damages: necessary to work through the breach but are not the consequence of the breach; includes all commercially reasonable expenses in cover or resulting from breach [extra fuel expenses in obtaining the substitute goods] viii. Overhead: business expenses (such as rent, utilities, or support-staff salaries) that cannot be allocated to a particular product or service; fixed or ordinary operating costs; since overhead is by definition fixed, there is no saving of any of it as a result of P’s not having to finish the K, if the P has not finished performing at the time of D’s breach, P cannot recover a portion of his overhead. ix. Cover Price: A buyer may recover the extra expense of buying goods elsewhere when the original K seller cancels the K to sell goods (the difference between the costs of the substituted goods and the original contract price) x. RE Davis v. Diasonics: Seller may recover, after resale, lost profits from original sale if he can show subsequent sale would have occurred absent the breach. **Spot market: a market (esp. in commodities) in which payment or delivery is immediate b. RELIANCE: §344(b) attempt to put P in as good a position as she was in prior to making the K. This is done by allowing P to recover her out-of-pocket expenditures incurred in performing the K. (generally reliance damages will never be greater than K price) (cost to P, not value to D) i. § 349: compensates the injured party based upon his reliance on the breacher’s promise ii. The promisee is said to have a reliance interest if it has changed its position to its detriment in reliance on the promise iii. The promisee may have incurred expenses in preparing to perform or may have lost opportunities to make other Ks iv. The promisee’s injury consists of being worse off than if the promise had not been made v. Situations in which reliance damages may be appropriate: 1. P cannot show his lost profits with sufficient certainty, but can show items of expenditure a. Recover for preparing to perform K b. And compensation for expenditures from partial performance 2. P is a vendee under a land K who sues the vendor for the latter’s refusal to convey the property to him, and the jurisdiction is one in which expectation damages are not awardable in this situation; and 3. there is no legally enforceable K but the P is entitled to some protection (situation typified by cases invoking the doctrine of promissory estoppel) vi. Sullivan v. O’Connor: patient against plastic surgeon, P shows the doctor affirmatively promised to achieve a particular result 3
  4. 4. vii. Limits on recovery: sometimes limited to a sum smaller than his actual expenditures 1. Limited by K price: if D’s only obligation was to pay a sum of money- then reliance damages are limited to K price 2. Limited to profits: most courts refuse to allow reliance damages to exceed expectation damages, but place the burden of proof on the D to show what the P’s loss would have been a. If D’s breach has prevented P from completing performance, and neither D nor P presents satisfactory evidence of how much it would have cost P to complete the K, the P may recover his entire reliance damages, limited only by K price. b. If D is able to prove that P would have suffered a net loss on the K had it been completed, the P’s reliance recovery will be limited to what his expectation damages would have been. 3. Two kinds of reliance: a. Essential Reliance: consists of preparation for and performance under the K in question, it includes the price the party must pay for what it is to receive under the K b. Incidental Reliance: preparations for collateral transactions that a party plans to carry out when the K is performed; those made by P b/c he anticipated that the K would be performed, but which do not relate directly to performance c. Most courts award essential and incidental reliance damages so long as they are reasonable and foreseeable 4. Expenditures prior to signing of the K: not made in reliance on the K c. RESTITUTION: (§344(c)) attempt to prevent the unjust enrichment of D by returning to a plaintiff who has partially performed the value of the performance she has rendered to the D (returning the benefit to the injured party that conferred it). i. §371: (1) the value by which I’ve increased your property OR (2) the reasonable value of item on market. 1. §371 is the soft-line approach. (Majority Rule) : a. How much would it cost to have someone else finish? (generally gives the higher amount) b. (b) How much has the value increased? ii. § 373: restitution when the other party is in breach 1. the promisee has a restitution interest if he has not only relied on, but conferred a benefit on the promisor, thereby preventing unjust enrichment. This allows the promisee to recover any out-of-pocket expenses that he has conferred upon the promisor. 2. The injured party is entitled to restitution for any benefit conferred on the other party by way of part performance or reliance. 3. If full performance then only expectation damages are available. iii. The court may as justice requires pick either of the two. Usually, court will pick higher amount as long as party is not the breacher. iv. Idea of restitution and disgorgement is to put you in the place you would have occupied prior to performance. v. No officious intermeddlers (run around installing garage doors in order to get restitution damages) vi. Quantum Meruit: as much as deserved and measures recovery under implied K to pay compensation as reasonable value of services rendered- 4
  5. 5. measured by the amount for which such services could have been purchased from one in the P’s position at the time the services were rendered. 1. A promisee is allowed to recover in quantum meruit the value of services he gave to D regardless of the profitability of the contract a. unjust impoverishment, b. unjust gain (enrichment), and c. “Double Injustice” – if A not only causes B to lose one unit but appropriates that unit to himself, the resulting discrepancy between A and B is not one unit, but two). (3)UCC: SELLERS’ REMEDIES a. §2-703: General seller’s remedies i. Seller may cover, cancel or get damages ii. Buyer wrongfully 1. Rejects 2. Revoked 3. Failed to make payment 4. Repudiated b. §2-706 – resale (reasonable) i. The seller may resell the goods and still recover damages ii. Damage calculation is easy = K price – resale price + incidental damages – expenses saved due to the breach iii. Resale must be in good faith and in a commercially reasonable manner iv. this comports well with the expectation formula supra c. §2-708 – (general) damages for non-acceptance or repudiation i. (1) difference bt/w M-price and K-price at time/place of tender + incidental damages – expenses saved (very similar to Rstmt formula but different b/c UCC) ii. (2) If the measure of damages provided in (1) (the K price/mkt price differential) 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 seller would have made from full performance by the buyer, together with any incidental damages… due allowance for costs reasonably incurred & due credits for pmts or proceeds of resale. d. Lost volume seller: may recover lost profits; must prove i. Capacity ii. discernable market (i.e. another buyer) iii. profitability of second sale e. Many sellers have a relationship to their own suppliers such that they can obtain from the latter as many items as they can sell. When the customer of such a seller breaches his K and the seller resells the item to another customer at the same price, the seller will end up making one fewer sale b/c of the breach. This is b/c the new customer would have brought an item anyway, regardless of whether the 1st customer had breached. The seller in this situation is a lost volume seller. (4)UCC §2-711: BUYERS REMEDIES a. § 2-711: Buyer’s remedies in general: the buyer may cancel and recover any money he has paid as “cover” or recover damages for non-delivery, or demand specific performance b. Seller in breach 5
  6. 6. i. fails to deliver ii. Repudiates c. §2-712 – Cover- to provide an alternative purchase- after breach the buyer may purchase goods in substitution for those not delivered i. Formula: Damages= Cover cost – K price + incidental & consequential damages – expenses saved ii. Must be: 1. in good faith 2. without unreasonable delay 3. reasonable purchase iii. Cover is not required, but is preferred by the code b/c it increases the stream of commerce d. §2-713 – damages for non-delivery or repudiation i. difference b/w M-price at the time the buyer learned of the breach and the K- price + incidental & consequential damages – expenses saved ii. caps damages b/c you need to buy before the price rises too high e. §2-714 – Buyer’s damages for breach in regard to accepted goods (goods weren’t as warranted) i. Formula: Damages = value of goods had they been as warranted – value of goods at the time & place of delivery + incidental & consequential damages. f. §2-715: Buyer’s incidental and consequential damages i. (1) allows an aggrieved buyer to recover incidental damages (includes expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach. ii. (2) allows consequential damages which include any loss resulting form general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and injury to person or property proximately resulting from any breach of warranty. Usually awarded as part of expectation damages, they may presumably be granted as part of a reliance award as well. g. §2-716: specific performance (5)LIMITATIONS ON DAMAGES: a. AVOIDABILITY: The injured party incurs no liability for failure to mitigate damages, recovery is the same regardless, but the injured party is precluded from recovering for loss that it could reasonably have avoided. i. Restatement § 350: An aggrieved promisee is not allowed to recover loss that it could reasonably have avoided w/o undue risk, burden or humiliation. 1. (1) inferior and substantially different is not acceptable 2. (2) non-breaching party does not have a duty to accept ii. UCC 2-713: where there is a market for goods, a buyers’ damages are based on the assumption that the buyer could reasonably have avoided greater loss by obtaining substitute goods on the market; Measure of damages is the difference between the contract price and the market price 1. This is the majority view designed to encourage the honoring of Ks and market stability 2. The minority view is to award lost profit only (1-106) 6
  7. 7. iii. UCC 2-704: Seller’s right to identify goods to the K notwithstanding breach or to salvage unfinished goods iv. UCC 2-712: If the seller fails to deliver goods, the buyer can go into the market and “cover” by obtaining substitute goods, so that the buyer’s damages should be based on the difference between a presumably greater price that the buyer will have to pay on the market and the lesser contract price (as long as reasonable, in good faith and timely). v. UCC 2-706: If the buyer fails to take and pay for the goods, the seller can go into the market and resell to a substitute buyer, so that the seller’s damages should be based on the difference between the presumably greater contract price and a lesser price it will receive on the market. vi. UCC 2-713: If the seller fails to deliver goods, the buyer fails to go to the market and cover, then its damages are based on the difference between the market price and the contract price. Market damages should be avoided when seller breaches vii. UCC 2-708: If the buyer fails to take and pay for goods, the seller fails to go into the market and resell, then damages are based on the difference between the market price and the unpaid contract price. viii. UCC 2-711: Buyer’s Remedies (general) ix. Avoidability and Cost to remedy defect vs. decrease in value: 1. if P should be put in the same position he would have been had the K been performed, then 2. what about those situations where the difference b/w the economic value of a complete performance under the K and the value of the defective performance is less than the cost of remedying D’s defective performance (will cost substantially more to fix it), so the question is: 3. Should the P be awarded the net economic loss he has sustained by virtue of D’s breach (the lesser sum) or the cost of remedying D’s defective performance (the greater sum) x. Economic Waste: a court is not likely to award the cost of competition where the defect is minor and its completion would involve “economic waste.” This is frequently the case in building Ks where remedying would require destruction of what is built 1. Jacob & Young v. Kent: Damages to repair except (1) economic waste and (2) breach is trivial and the damages are nominal (cost to repair is disproportionate to the value it would give you); the law presumes you will get cost to repair unless it results in economic waste or disproportionate to value. Contractor may recover on the K since he substantially performed and the correct measure of damages is not the cost of replacement, which would be great, but the difference in value which would be nominal or nothing. The cost to repair would be economically wasteful and grossly disproportionate to the good attained. 2. Groves v. John Wunder: b/c D intentionally breached his promise to restore the land the breacher must pay the $60K to restore the land (willful and w/o good faith) xi. “Clearly Disproportionate” § 348: the court should not grant the cost of remedying the defects “if the cost is clearly disproportionate to the probable loss in value to the P.” 1. Cost of performance v. Value Rule: establish what the purpose of the K is 7
  8. 8. 2. Peevyhouse v. Harland Coal and Mining: where the lessee agrees to perform certain remedial work on the premises at the conclusion of the lease, and the contract is otherwise performed by both parties, the measure of damages is the reasonable cost of performance of the work however, where the contract provision breached was merely incidental to the main purpose in view, and where the economic benefit which would result to lessor by full performance of the work is grossly disproportionate to the cost of performance, the damages by which lessor may recover are limited to the diminution in value resulting to the premise because of the nonperformance b. FORESEEABILITY: breaching party was aware at the time she contracted of the losses likely to result if she breached i. Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the K was made. ii. Loss is foreseeable if it occurs: 1. in the ordinary course of events or 2. as a result of “special circumstances” beyond the ordinary course of events, that the other party had reason to know iii. Special Situations: Hadley v. Baxendale: new rule- when two parties K, and one breaches, damages should be those that 1. arise naturally, or 2. may reasonably be supposed in the contemplation of both parties at the time the K was made. 3. Special circumstances must be made known, damages are those circumstances that you are aware of 4. Indirect or consequential damages are only recoverable if reasonably foreseeable by both parties at the time of the K and arising naturally from such breach. iv. § 351: Unforeseeability and Related Limitations on Damages: you will be liable for those damages which you knew were to occur or possibly would occur because of the reasonable circumstances of the contract you are dealing with or because of a special circumstance known to you under this particular K (the UCC 2-715 says the same thing) v. UCC 2-712(2): buyer’s recovery of incidental or consequential damages vi. UCC 2-708(1): seller’s recovery of any incidental damages vii. UCC 2-715: incidental and consequential damages of seller’s breach; (2)(a) any loss with reason to know viii. UCC 2-710: incidental damages to an aggrieved seller (seller’s do not have many consequential damages because if buyer breaches then seller can resell) ix. Delchi v. Rotorex: entitled to natural and consequential damages when those damages are the probable result of the breach when they are 1) known specially to the parties or 2) they are contemplated in the ordinary course of events. (Hadley v. Baxendale) x. Kenford v. Erie: Damages must have been brought within contemplation of the parties as the probable result of a breach (Special Circumstances can include profits) c. EMOTIONAL DISTRESS: § 353- excluded unless the breach also caused bodily harm or the K or the breach is such a kind that serious emotional disturbance was a particularly likely result. 8
  9. 9. d. CERTAINTY: §352 – uncertainty as a limitation: not recoverable for loss beyond what evidence permits to be established with reasonable certainty i. Fera v. Village: a new business may recover lost profit damages for breach of a lease if profits are not excessively speculative ii. Ways to prove certainty w/ future profits: 1. past performance: juries will listen to how you’ve done before 2. Similar past enterprises (if you don’t have 1) 3. expert views and opinions (6)LIQUIDATED DAMAGES AND PENALTIES: a. LIQUIDATED DAMAGES: the parties may include in the K specific provisions limiting or fixing the amount of damages that can be recovered if breach occurs; requires a good faith effort to estimate b. PENALTY: the parties may include in the K a fixed, definite sum to be paid in the event of a breach. The goal of the penalty is punishment which the treat of will prevent a breach. c. Two requirements for a valid stipulated damages clause: i. Damages must be difficult to estimate at the time of the K ii. The amount agreed upon must be a reasonable forecast of actual damages, i.e. a reasonable forecast of fair compensation for the harm that would occur if breach d. §356(1) – damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy e. UCC §2-718 – liquidation or limitation of damages; damages for breach by either party may be liquidated in the agreement, but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss & the inconvenience or non-feasibility of otherwise obtaining an adequate remedy. i. permits liquidated damages agreements if the tests above are met and if it is inconvenient or infeasible to otherwise obtain an adequate remedy; unreasonably large liquidated damages provisions are declared void as penalties f. UCC §2-103 – consumer contracts defined g. Reasoning of the policy against penalties: there is a long standing judicial policy clause enforcement of penalties for breach of K, the purpose of damages is to put the P in the same position he would have been in had the K been performed, not a better one. h. Where a provision that is labeled a “liquidated damages” clause really serves to penalize a party for breach in an amount far beyond the loss suffered by the P, the courts simply refuse to enforce the provision and award ordinary damages i. Intent irrelevant: if the amount stipulated in the liquidated damages clause is unreasonable, it is irrelevant whether the parties subjectively attempted to provide for liquidated damages rather than a “penalty” save this clause in this situation. i. Damage Computation keyed to gross revenues or the like: where the damages clause is keyed to the P’s lost gross revenues, lost gross profits, or other financial figure, that is not necessarily tried to actual profits, the court is likely to view the clause skeptically as being a poor estimate of actual losses and thus unenforceable if it deviates materially from the actual losses. 9
  10. 10. j. Wasserman’s v. Middletown: liquidated damage clauses will be allowed. Punitive damage clauses will not be allowed (not to discourage breach. Clause is designed to put P back in position he would have occupied had there been no breach) k. Dave Gustafson v. State: the liquidated damages clause is valid because there is no way to measure actual damages for the delay in construction of a new highway. As long as the amount specified by the liquidated damages clause was intended as fair compensation for the loss, inconvenience, added costs, or deprivation of use caused by the delay, it may be deemed reasonable. This court said liquidated damages clause was enforceable because: i. Reasonable amount ii. Difficult to determine damages FINDING THE LAW OF THE CONTRACT (1)Parole Evidence Rule: Where an agreement has been reduced to writing which the parties intend as the final and complete expression of their agreement, evidence of any earlier oral or written expressions is not admissible to vary the terms of the writing. a. R §213 – Effect of Integrated Agreement on Prior Agreements (Parol Evidence Rule) i. A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them ii. A binding completely integrated agreement discharges prior agreements to the extent that they are within its scope iii. An integrated agreement that is not binding or that is voidable and avoided does not discharge a prior agreement. But an integrated agreement, even though not binding, may be effective to render inoperative a term which would have been part of the agreement if it had not been integrated. b. R §211 – Standardized agreements c. R §215 – (209 or 210) no contradiction; prior contemporaneous oral agreements or negotiations are not admissible to contradict a written, integrated agreement, so where the parties have deliberately put their entire agreement in writing, the law declares the writing the only evidence of the agreement. d. Why is the written K important to the courts? i. Evidence: memorializing the K ii. Cautionary: warning, put this in writing iii. Written v. Spoken: if you have written it then it wins over anything oral which contradicts it. 1. Reasoning is judicial economy to prevent fraud and loss of memory over time. e. Gianni v. R. Russell & Co.: no parol evidence is allowed if the writing appears to be a complete K w/in itself and the parol evidence is related to the same subject matter of the K; all preliminary negotiations are merged in and superseded by the subsequent written contract unless fraud, mistake, or accident, and cannot change the written terms i. The test from this case: PN RULE: When does the oral come within the field embraced by the written one? 1. Compare the two and determine whether the parties would have naturally and normally included it in the written. a. If it is one that would have naturally been included, then the court will EXCLUDE the oral agreement 10
  11. 11. b. If they relate to the same subject matter & are so interrelated that both would be executed at the same time & in the same K, the scope of the subsidiary agreement must be taken to be covered by the writing. 2. Where the parties without any fraud or mistake have deliberately put their engagements in writing, the law declares the writing to be not only the best, but the only evidence of their agreement. 3. Restatement §209: Integrated Agreements: an integrated agreement is a writing that constitutes a final expression of one or more terms of an agreement. If the writing appears to be complete, it is to be taken as integrated unless other evidence proves otherwise. a. R §210 – completely integrated agreements: a completely integrated agreement adopted by the parties as a complete and exclusive statement of the terms of the agreement. It contains all the details of their agreement. b. R §210 -- partially integrated agreements: if the document is not intended by the parties to include all the details of their agreement, it is said to be partially integrated. A partial agreement is an integrated agreement other than a completely integrated agreement.(ex: anything less than settling the full agreement, - you agree to buy the Volvo without setting the price or without agreeing if the stereo comes with it) f. Parol Evidence i. Partially integrated agreement 1. cannot contradict a partially integrated agreement 2. can supplement a partially integrated agreement ii. Completely integrated agreement 3. no evidence of prior or contemporaneous agreements or negotiations (oral or written) may be admitted which would either contradict or add to the writing g. UCC 1-205: trade usage; express terms, course of dealing i. Course of Dealing: sequence of previous conduct b/w the parties- establishes a common basis of understanding for interpreting their expressions and other conduct ii. Usage of trade: any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed iii. Express terms: construed reasonable and consistent- but if not, course of dealing and trade usage controls h. UCC 2-202: consistent additional terms not reduced to writing may be proved unless the court finds that the parties intended the writing to be a complete and exclusive statement of their agreement. And, if the court finds the additional terms are such that, if agreed upon, they would certainly have been included in the document, then evidence of their alleged making must be kept from the trier of fact. i. Test of Complete Integration: A strict formulation of the rule under which- whether there was integration is to be determined solely from the face of the instrument, and the question for the court is whether it appears to be a complete agreement. j. §210: A writing cannot of itself prove its own completeness, and wide latitude must be allowed for inquiry into circumstances bearing on the intention of the parties. 11
  12. 12. k. Merger Clauses: clauses in contracts such as: “No promises, verbal understandings or agreements of any kind pertaining to this contract other than specified herein.” a. No-Oral Modifications Clauses: Modifications to the contract are made orally after the contract is made, traditionally are not enforceable; However, a party that seeks to escape the effect of the clause can often do so by showing reliance on the oral modification. i. UCC 2-209(2): a signed agreement which excludes modifications or rescission except by a signed writing cannot be otherwise modified or rescinded 1. (4) what may fail to be effective as a modification or rescission may nevertheless be effective as a waiver 2. (5) a material change of position in reliance on the waiver may prevent its retraction (2)Interpretation of Contract: a. The parol evidence rule deals with whether and when the parties to a written K may use evidence of a prior oral or written agreement to add new, substantive terms that either contradict or supplement the writing. We turn now, to different, but related problem- how the parties may show the meaning of the terms contained in writing. This is a problem of interpretation. That is, the parties seek not to introduce new terms that are not contained in the writing, but to interpret the meaning of the terms which are contained in the writing. b. The Modern Approach: is to allow the parties to introduce evidence of what they subjectively thought the terms in a writing meant, even if the writing is integration. Oral evidence showing the meaning of words should be allowed to the same extent whether or not the parties thought that the writing was a final expression of their agreement. i. Plain Meaning Rule: when the court goes to decide whether a term used in the agreement is ambiguous, the court will not hear evidence about the parties’ preliminary negotiations, but the court will hear evidence about the circumstances or context surrounding the making of the agreement. ii. R. §214: agreements and negotiations are admissible evidence to determine if the agreement is integrated (NY doesn’t apply this rule, but other jurisdictions handle these circumstances like so); applies only if there is an ambiguity in the writing; if clear- 214 not applicable c. Modern courts reject the plain meaning rule: under which the meaning of any writing which appears to be clear, complete and not ambiguous on its face will be determined without resort to any extrinsic evidence at all. i. R. §212: determination of meaning or ambiguity should only be made in light of the preliminary negotiations d. WWW Associates v. Giancontieri: if writing is in clear and complete terms, writing should be enforced and extrinsic evidence is generally inadmissible; will not consider parol evidence when it (actually) adds ambiguity- the more conservative rule of not allowing P to prove his subjective understanding differs from what’s written by admitting parol evidence e. Burden of Persuasion: a party who is allowed to give testimony about what the parties intended by a term will still have problems of proof. If he is the P, his burden of persuading the court that the meaning favorable to him was in fact the one intended by the parties may be substantial. f. Frigaliment v. BNS: a word used in a contract has the meaning a RPP would attach to it unless P can prove special circumstance, practice or knowledge 12
  13. 13. i. If the evidence is ambiguous and divided then the court says the person who wins is the person that can prove a special or subjective meaning. ii. The objective meaning is what is put on the paper. iii. Where the contract is deemed to be ambiguous or the word used is ambiguous then the reasonable and objective meaning will be associated with it, when there is more than one the court will adopt its ordinary meaning. g. Maxims of Interpretation: there are a number of frequently cited maxims that courts make use of in deciding which of the two conflicting interpretations should be followed. i. Primary Purpose Rule: if the primary purpose of the parties in making the K can be ascertained, that purpose is given great weight ii. All terms made reasonable, lawful and effective, all terms will be interpreted, where possible so they have a reasonable, lawful and effective meaning iii. Construction against the draftsman, an ambiguous term will be construed against the drafter. h. Misunderstanding: for a k to exist there must be meeting of the minds- both parties agreeing to the deal. Sometimes both parties will think they are agreeing to the same terms, but each has a different subjective belief about what the deal is. If this discrepancy in subjective belief (misunderstanding) is sufficiently major, it may prevent a K from existing at all. i. §20: Effect of Misunderstanding- “attach materially different meanings to their manifestations,” and “neither party knows or has reason to know the meaning attached by the other” ii. Distinguish between ambiguous and vague 1. Ambiguous: words that have two entirely different connotations so that it may be at the same time both appropriate and inappropriate 2. Ambiguity of syntax: an ambiguity of grammatical structure 3. Vague: words when its applicability in marginal situations is uncertain iii. Raffles v. Wichenlhaus: No contract ever formed because there was no mutual assent. Latent ambiguity so mutual mistake. iv. R §201: Whose meaning prevails: If they have something different in mind, and they both contract under the different meaning, then will apply an objective meaning of the term. 1. (2)(a): innocent and you knew I was unaware; person who knows of the ambiguity and resolves it 2. (2)(b): reason- you had reason to know but I did not- person has reason to know of the ambiguity and resolve it v. Comparing §20 with §201: 1. §20: talking about formation ideas- no K if misunderstanding is about formation of the K 2. §201: is misunderstanding of interpretation after the agreement has been made i. R §214: ‘meaning of terms’ allows parol evidence- evidence of prior contemporaneous agreements and negotiations is allowed to establish the character of the written agreement i. Whether or not it is integrated ii. Whether it is completely or partially integrated iii. Illegality, fraud, duress, mistake 1. Bollinger: Court of equity has power to reform a writing as long as mutual mistake exists (exception to PA rule) 13
  14. 14. j. Waiver: you can waive the parol evidence rule, you can say that you want to allow evidence of prior negotiations admitted k. §216 – (complete 210) no additional if complete but OK if partial (natural omission) Parol evidence is allowed if such terms might be naturally omitted from the agreement under the circumstances. So, if the terms would have naturally been included then you can’t admit any evidence (remember, the evidence will not be admitted if it contradicts the writing) i. Masterson v. Sine: CA Rule: when only part of the rule is integrated, the same rule applies to that part, but parol evidence may be used to prove elements of the agreement not reduced to writing. (opposes PN rule. The CA rule is majority and in line with Restatement view) ii. If two parties go to the trouble of putting together an integrated agreement, then the oral agreements prior to the writing are not included. Three factors in this case are 1. they are non-business people, 2. use a form contract, and 3. kind of term that might not have been expressed. These factors make it the kind of thing that might naturally be omitted. iii. Contradiction vs. Interpretation (§§ 214 and 217 of Restatement) iv. Three categories 1. those things that contradict (can never use parol evidence to contradict) 2. those things that supplement (if completely integrated may not supplement, is permitted if partially integrated) 3. those things that explain (whether complete or partial integration you can always explain) v. Restatement Rule used in Masterson: (page 562) naturally and normally might be excluded from the agreement- restatement is much broader than the Pennsylvania rule; gives the court more power to the judge to listen to the subjective intent (240(1)(b)) vi. Pennsylvania rule- will permit the evidence if the type of things that would naturally and normally included in the agreement (if not there the court is not going to listen to it) vii. UCC Rule: only those things that certainly would have been include (UCC § 2-202); UCC is more liberal w/ allowing parol evidence. Evidence is excluded only if it “certainly” would have been included in the agreement. viii. NY Rule: Can’t introduce parol evidence to try to interpret an unambiguous term ix. CA Rule: if language is reasonably susceptible to extrinsic evidence, it may be introduced (rejects 4 corners rule) x. §209(2): all decisions regarding parol evidence are a matter of law and are to be decided by a judge. l. Oswald v. Allen: “When any of the terms used to express an agreement is ambivalent, and the parties understand it in different ways, there cannot be a K unless one of them should have been aware of the other’s understanding.” m. R. §212: Modern/ Liberal View: rejection of the plain meaning rule under which the meaning of any writing which appears to be clear, complete and not ambiguous on its face will be determined w/o resort to extrinsic evidence i. Pacific Gas v. GW Thomas: Test for extrinsic evidence: is not whether it appears to the court to be plain and unambiguous on its face, but whether 14
  15. 15. the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible 1. The court says that the only test for admissibility of extrinsic evidence is whether the offered evidence is relevant not just if the K is plain and unambiguous on its face. Words do not have absolute and constant reference but they vary with the verbal context and the circumstances and their readers. 2. Parol evidence rule: completely integrated cannot be added to or subtracted from with other evidence, if not completely integrated can always be supplemented n. Although extrinsic evidence is not admissible to add to, detract from or vary the terms of a written K, those terms must first be determined before it can be decided whether or not extrinsic evidence is being offered for a prohibited purpose. o. Rules in Aid of Interpretation: i. Purpose Interpretation: generally contracts will begin with a series of recitals of the surrounding circumstances and the objectives of the parties 1. If the recitals are clear and the operative part is ambiguous- recitals govern 2. If the recitals are ambiguous and operative is clear- operative prevails 3. If the recitals and operatives are clear but inconsistent- operative is preferred ii. Public Interest: contracts can affect public policy, promote trade and liberties, etc. iii. Maxims: contracts are to be interpreted against its author or profferer- because the party who decided the contract language had superior bargaining power p. Hurst v. W.J. Lake: Even if not ambiguous on its face, evidence of custom and usage can be used to interpret meaning q. Eastern Air v. Gulf Oil: where a history of having done so exists, a party does not breach a contract by taking delivery where its costs will be the least; this is a custom and trade usage issue r. express terms outweighs i. course of performance outweighs ii. course of dealing outweighs iii. usage of trade s. The UCC recognizes 3 different sources which may be used in interpreting the terms of a K: i. Course of Performance: refers to the way the parties have conducted themselves in performing the particular K at hand. (UCC 2-208(1)) ii. Course of Dealing: also a pattern of performance b/w the 2 parties but it refers to how they acted w/ respect to past Ks, not with respect to the K in question. If a particular term had been used in previous Ks b/w the same parties and had been interpreted by them in a certain manner this interpretation would be admissible under the UCC to show how the term should be interpreted by them in a certain manner, this interpretation would be admissible to show how the term should be interpreted in the current K (UCC 1-205(1)) iii. Trade Usage: defined by the Code as “any practice or method of dealing having such regulatory of observance in place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction.” UCC 1-205(2) 15
  16. 16. (3)Gap Fillers: courts will generally imply terms to fill gaps to the agreement if necessary to assure the intention of the parties. a. Objective: fill gaps to meet the meaning a reasonable person would attach b. The court will not imply terms that contradict the express terms of the K c. Types of Terms court will imply: i. Good faith: 1. § 205: every K imposes upon each party a duty of good faith and fair dealing in its performance a. Dalton v. Educational Testing Service: implicit in all contracts is a covenant of good faith and fair dealing b. According to the UCC, good faith requires: i. Honesty in fact (can’t be motivated by malice or ill- will) ii. Act in a commercially reasonable manner c. Can’t vary the express term w/o a supplied implied term. d. Burger King v. Weaver: where a party to a contract has in good faith performed the express terms of the contract, an action for breach of the implied covenant of good faith will not lie 2. Test for Gap Fillers: a. What’s the Gap? b. What’s the standard by which we fill the gap? c. What will be the gap filler itself? 3. Dickey v. Philadelphia Minit Man: A lease provision specifying a certain use of the premises is a covenant against a non-complying use not a covenant to use. What is the purpose of D using the clause to require him to continue washing and waxing the cars? The gap begins to develop by looking at the purposes, the context and the other implicit understandings of the parties. The common purpose is money. Gap filled in with good faith and exercise of good business judgment- exercise of reasonable commercial judgment ii. Best efforts: 1. 2-306: when a K is made for requirements or outputs, good faith will be implied. For exclusive dealings, best efforts will be implied 2. Bloor v. Falstaff: best efforts means best efforts; liquidated damages based on best efforts to promote and maintain a high volume of sales under the P that is triggered if D allows the substantial decrease in distribution of P’s product a. What is the gap? ‘best efforts’ is ambiguous-reasonable, commercial effort. no need to drive company into bankruptcy. b. no parol evidence rule problems because not dealing with any prior negotiations c. Reasonable efforts depend on what a reasonable person would have done iii. Reasonable Efforts: every K has an obligation of good faith, must give the parties the fruits of the K 1. Zilg v. Prentice Hall: a publishing contract requires the publisher to use best initial efforts to promote the work, yet allows discretion to guide continuing marketing efforts; initial effort is critical to ‘best efforts’ but publisher’s ability to rely on its own judgment in trying to 16
  17. 17. make the book a success while not losing their ass by throwing good money on top of bad. Good faith business judgment at publisher’s discretion (4)Time Period for Exclusive Agreements a. Reasonable recovery period allowed- must allow the party to an exclusive agreement, a reasonable time to allow the party to recoup investments i. Bak-A-Lam: Gap: how long is the exclusivity agreement? Reasonable time to allow the party to recoup investment (5)Public Policy: a. §2-314: warranty of merchantability b. §2-315: fitness for a particular purpose c. Termination of employment K- “Woods Rule” At will employment is still approved- so you may quit at any time and they may fire you at any time i. Limitation of Wood’s rule: can’t fire for unconstitutional reasons or for a reason protected by a statute (natl guard or jury duty) ii. Can’t fire employee trying to effectuate a purpose that is recognized by public policy iii. A client may fire his attorney for any reason he wishes (6)Course of performance, course of dealings, trade usage: all of these may be used to imply terms. a. Hierarchy under § 1-205 i. Express Terms of K ii. Course of Performance iii. Course of Dealing (prior dealings) iv. Trade usage b. Contradiction of Express term under the UCC: UCC states that course of dealing, course of performance and trade usage may not be used to contradict the express terms of the K - §2-208(2) provides that these items must be construed as consistent with the express terms, wherever it is reasonable to do and then goes to say that “when such construction is unreasonable, express terms shall control” So, if the court concludes that there is no way to harmonize, say a trade usage asserted by one of the parties w/ an express provision of the K, the court must treat the express term as controlling. i. Some courts have gone to great lengths in order to find that a particular custom or usage merely supplemented and did not contradict an express contractual term. One way courts do this is to hold that custom or usage merely removes part of the express term, rather than negating that express term completely. So, as long as the custom or usage does not wholly swallow up the express term, the court may find that the 2 can be reasonably construed to co-exist. ii. Nanakuli Paving & Rock v. Shell: exceptions will be allowed if they don’t negate the express term; the price protection was proven to be a trade usage in the industry, “does not swallow the express term.” **UCC 1-203: obligation of good faith and fair dealing PERFORMANCE AND BREACH (1)DEFINITIONS a. §224: A condition is an event, not certain to occur, which must occur unless its non- occurrence is excused, before performance under a contract becomes due. 17
  18. 18. i. Condition Precedent: until the condition is satisfied, the duty doesn’t arise ii. Express conditions: conditions that are agreed to by the parties (strict compliance is normally required) iii. Constructive conditions: not express but “implied in law.” The court is assuming that had the parties thought about it, they would have made one party’s performance to be dependent on the happening of some event, typically the other party’s contemporaneous performance (not normally strict compliance). b. Duty: a positive obligation, whereas a condition is uncertain. The obligation must be fulfilled or remedy will result. An obligation for the breach of which will provide a remedy c. Language such as “provided”, “if” and “when” indicates an express condition d. Functions of conditions i. Establish order of performance ii. Secure the expectation of the parties (2)EFFECT OF CONDITIONS: a. §225: Non-occurrence: i. performance of a duty subject to a condition cannot become due unless the condition occurs or its non-occurrence is excused, ii. unless excused, the non-occurrence of a condition discharges the duty when the condition can no longer occur iii. non-occurrence of the condition is not breach by a party unless he is under a duty that the condition occur. b. Luttinger: the buyer was able to obtain a refund for his house deposit because he couldn’t obtain the interest rate agreed upon in the K. Court required strict compliance with the condition (interest not to exceed 8.5%) c. Internatio Rotterdam: when a sales K specifies a delivery time and requires the buyer to provide delivery instructions, is the buyer obligated to provide timely delivery instructions as a condition precedent to receiving the goods? Yes b/c D’s facilities were working at full capacity in Dec. and its storage capacity was limited, the requirement for Dec. shipment went to the essence of the K. Since there is nothing express saying they’ll get it in Dec. we have to construct it to give the seller and buyer the fruits of the bargain. The condition is implied. Once P failed to satisfy the condition precedent D could rescind the K or treat its contractual obligation as discharged. The K was severable as to the 2 ports, so D’s continued shipments to one part did not constitute an election to proceed with the entire K. d. Interpretation Problems: In an ambiguous situation, the law will prefer the interpretation that results in non-forfeiture, unless the condition is entirely within the power of the promisor. i. Peacock Construction Co.: no express language of a condition, court considered the context of the language and the parties’ intent- that intent is that such provisions do not create conditions precedent b/c subs will not ordinarily assume the risk of the owner’s failure to pay. The parties may shift this risk to the sub, but only by clear unambiguous language. e. Satisfaction Clauses: i. Personal Satisfaction: 1. §228: when it is a condition of an obligor’s duty that he be satisfied with respect to the obligee’s performance or with respect to something else, and it is practicable to determine whether a reasonable person in the position of the obligor would be satisfied, an 18
  19. 19. interpretation is preferred under which the condition occurs if such a reasonable person in the position of the obligor would be satisfied. 2. §205: Duty of good faith and fair dealing imposed in every contract ii. Satisfaction for commercial purposes: the law requires a claim of dissatisfaction to be made in good faith, rather than in an effort to escape a bad bargain. iii. Third-Party Satisfaction: duty is conditional upon the satisfaction of an independent third-party, generally an expert. This is common in construction contracts- owner’s duty to pay contractors if architect is satisfied. This expert’s decisions are final if they are made in good faith. The test is for honest satisfaction. (3)EXCUSE OF CONDITIONS: Mitigating Doctrines (ways the courts mitigate the harsh effect that the nonoccurrence of a condition may otherwise have.) a. Hindrance: a party cannot willfully prevent the occurrence of a condition. If she does, the condition is excused. b. Waiver: if a party begins performance after learning that a condition to his performance has failed to occur, he may be held to have waived the benefit of the condition. However, don’t find waivers to have occurred unless you are sure that the buyer knowingly and intentionally declined to take the benefit of the condition’s non-occurrence. Excuse of the nonoccurrence of a condition of a duty (a requirement that a condition occur may be eliminated by an agreement between the parties) Restatement § 84- voluntary relinquishment of a right that is known to you to exist at the time. c. Prevention: one who prevents the occurrence of a condition of one’s own duty may be precluded from later asserting the non-occurrence of the condition d. Estoppel: non-voluntary relinquishment of rights based on reliance; a party that without consideration has waived a condition that is within the other party’s control before the time for occurrence of the condition can retract the waiver and reinstate the requirement that the condition occur unless the other party has relied to such an extent that retraction would be unjust. If this reliance has occurred a party can be estopped from retracting. i. UCC 2-209(5): a party that has made a waiver affecting an executory portion of the K may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver. ii. Restatement Second § 84(2)- if such a promise is made before the time for the occurrence of the condition has expired and the condition is within the control of the promisee or a beneficiary, the promisor can make his duty again subject to the condition by notifying the promisee or beneficiary of his intention to do so if 1. (a) the notification is received while there is still a reasonable time to cause the condition to occur under the antecedent terms or an extension given by the promisor, and 2. (b) reinstatement of the requirement of the condition is not unjust because of a material change of position by the promise or beneficiary; and 3. (c) the promise is not binding apart from the rule stated in (1) iii. firms a waiver that is otherwise retractable, upon reliance the waiver becomes non-retractable 19
  20. 20. e. Election: signifies a choice, one that is binding on the party that makes it, even without reliance by the other party. A party that chooses to disregard the nonoccurrence of a condition is bound by an election to treat the duty as unconditional. i. when time for occurrence of condition has expired the party who has a duty that is conditional can choose to either determine their duty as being discharged or treat the duty as unconditional and disregarding the nonoccurrence of the condition. ii. by it’s terms you have one or the other but you can’t have both f. Disproportionate forfeiture: §229: a condition may be excused to avoid disproportionate forfeiture unless its occurrence was a material part of the agreed exchange (4)STANDARD OF PREFERENCE WITH REGARD TO CONDITIONS: §227: only use §227 when there is a doubt or ambiguity (don’t use if you can infer from the circumstances or express language),§ 227 prefers a duty if the language is ambiguous. A duty is preferred unless it’s wholly within the obligee’s control, or the circumstances indicate that he has assumed the risk. a. (1) in resolving doubts as to whether an event is made a condition of an obligor’s duty, and as to the nature of such an event, an interpretation is preferred that will reduce the obligee’s risk of forfeiture, unless the event is within the obligee’s control or the circumstances indicate that he has assumed the risk. b. (2) Unless the K is of a type under which only one party generally undertakes duties, when it is doubtful whether i. (a) a duty is imposed on an oblige that an event occur, or ii. (b) the event is made a condition of the obligor’s duty, or iii. (c) the event is made a condition of the obligor’s duty and a duty is imposed on the oblige that the event occur c. The first interpretation is preferred if the event is within the obligee’s control. d. (3) In case of doubt, an interpretation under which an event is a condition of an obligor’s duty is preferred over an interpretation under which the non-occurrence of the event is a ground for discharge of that duty after it has become a duty to perform. (5)TENDER OF PAYMENT BY BUYER, PAYMENT BY CHECK: UCC 2-511: unless otherwise agreed, tender of payment is a condition to the seller’s duty to tender and complete any delivery. (6)PAROL EVIDENCE AND CONDITIONS: §217: where the parties to a written agreement agree orally that performance of the agreement is subject to the occurrence of a stated condition, the agreement is not integrated with respect to the oral condition. a. Rule: parol testimony is admissible to prove a condition precedent to the legal effectiveness of a written agreement. i. Hicks v. Bush: parol testimony is admissible to prove a condition precedent to the legal effectiveness of a written agreement… if the condition does not contradict the express terms of such written agreement. Summary: how to approach an express condition: Step 1: condition or duty Step 2: How to decide? • Express • Reasonable Prudent interpretation • 227- if ambiguous Step 3: Look at the effect Step 4: Mitigating Doctrines 20
  21. 21. • Prevention • Estoppel • Waiver • Election • Disproportionate Forfeiture (7)CONSTRUCTIVE CONDITIONS: conditions which are not agreed on by the parties, but which are supplied by the court for fairness, used in bilateral contracts – where each party makes one or more promises to the other, each party’s substantial performance of his promise is generally a constructive condition to the performance of any subsequent duties by the other party. a. Dependent Covenants: Kingston v. Preston: the court held that the promises were not independent, and that the giving of security by P was a condition to D’s duty to convey the business. To compel D to turn over his business to P w/o the security for which he had explicitly bargained, and to leave D only the remedy of an action for breach, by which time the business might be hopelessly ruined and the buyer judgment-proof would be the greatest injustice. b. Three types of covenants: i. Mutual and Independent: either party may recover damages from the other in the event of breach by the other, and an alleged breach y one party is not an excuse for the other party. ii. Conditional and Dependent: performance of one party depends on the prior performance of the other and until the prior condition is performed, the other party will not be held to performance of his covenant. This is the rule applied in Kingston. iii. Simultaneous: if one party tender and the other party refuses to perform, the first party has an action for default against the refusing party. (mutual conditions to be performed at the same time) c. Progress Payments: Stewart v. Newbury: if there is no agreement or custom regarding time of payment, P was not entitled to anything until he finished the job, and by walking off the job prior to completion he breached. Where a K is made to perform work and no agreement is made as to payment, the work must be substantially performed before payment can be demanded. i. UCC §2-507(1): tender of delivery is a condition to the buyer’s duty to accept the goods and pay for them ii. UCC §2-511(1): tender of payment is a condition to the seller’s duty to tender and complete any delivery d. Mitigating Doctrines: this doctrine is normally applied in construction Ks where hardship is created if the owner is allowed to retain the value of the building w/o payment just b/c the builder made some small mistakes- generally prefer an interpretation that avoids forfeiture. i. Mitigating Doctrines of Conditions: (1) substantial performance, (2) Divisibility, and (3) Restriction ii. Material Breach/ Substantial performance: the condition deemed satisfied if there was “substantial performance” by the party who had to satisfy the condition. 1. 3 factors to determine if breach was material: a. How completely was the party who benefits from the condition deprived of her expected benefit in entering the contract? (more = more likely material) b. Can A be adequately compensated for the breach with money damages (if so the breach is more likely to be non-material) 21
  22. 22. c. Was the breach willful? Yes= material 2. Determining if performance was substantial: a. Does the performance meet the essential purpose of the K, b. Substantial performance gives you the fruit of the bargain c. §241: in determining if a failure to render or to offer performance is material, these circumstances are significant: i. The extent to which the injured party will be deprived of the benefit he reasonably expected ii. The extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived iii. The extent to which the party failing to perform or to offer to perform will suffer forfeiture iv. The likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; v. The extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing. 3. Jacobs & Young v. Kent: P got the fruits of the bargain & the difference in value b/w the 2 pipes is sufficient to compensate P; They are independent and collateral of one another. a. They are divisible, each one stands on its own basis, therefore the breach of one does not constitute the breach of the other. Each has their own right to damages b. Exceptions: i. If you expressly state that every little detail must be met, or you don’t get paid, then it must be met, you can’t use mitigating doctrine ii. §241: willful breach: willful deviation from the terms will always preclude a finding of substantial performance iii. SP- does not mean every detail must be in strict compliance w/ the specifications & the plans – the basic test is have you received the essence of the K? iv. Plante v. Jacobs: court held that substantial performance had occurred, even though the living room wall had been misplaced iii. Perfect Tender Rule: if the goods deviate from the K even in just a non- material way, the buyer can reject them (send back and refuse to pay) 1. Nonbreacher’s options: UCC 2-601: if shipment is composed of non-conforming and defective goods he can a. Reject the whole shipment b. Reject just the part that’s defective c. Or accept the entire shipment and sue 2. Exceptions to PT Rule: a. Cure: seller has a right to try to cure the nonconformity after rejection b. Revocation of acceptance: if the buyer has already accepted the goods the buyer may revoke the acceptance only if the non-performance is substantial 22
  23. 23. c. Installment Ks: if so, if 1 installment is substantially non- conforming the buyer may not cancel the entire K unless the problem with the 1 substantially impairs the value of the entire K. iv. UCC 2-513: unless otherwise specified, every buyer has an implicit right to inspect the goods before acceptance or payment. Buyers bear the expenses, but may recover if goods do not conform. Inspection must be reasonable in time, place and manner. v. UCC 2- 606: What constitutes acceptance of goods: 1. occurs when the buyer a. after a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that he will take or retain them in spite of their nonconformity; or b. fails to make an effective rejection, but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect them, or c. does any act inconsistent with the seller’s ownership; but if such act is wrongful as against the seller it is an acceptance only if ratified by him. 2. Acceptance of a part of any commercial unit is acceptance of that entire unit. vi. UCC 2-607: once you have accepted the goods you must pay for them- upon acceptance goods can no longer be rejected unless such acceptance was on the reasonable assumption that a non-conformity would be seasonably cured and such was not cured. The buyer must notify the seller of any breach w/in reasonable time after he discovers or should have discovered the breach. vii. UCC 2-608: a buyer may revoke acceptance of goods whose non-conformity substantially impairs its value to them 1. on the reasonable assumption that defects would be cured, or 2. w/out discovery of such non- conformity, if his acceptance was reasonably induced by either the difficulty of discovery or the seller’s assurance. Revocation must occur w/in a reasonable time after discovery and is not effective until the seller is notified. viii. Divisibility: A divisible K is one in which both parties have divided up their performances into units or installments, in such a way that each part performance is the rough compensation for a corresponding part performance by the other party. If a K is found to be divisible it will for purposes of constructive conditions be treated as a series of separate contracts. 1. §240: a K is divisible if it can be apportioned into corresponding pairs of part performances so that the parts of each pair are properly regarded as agreed equivalents. 2. Ultimate Objective Test: whether a K is entire or divisible is determined by the ultimate objective of the K. If securing specific pieces is the objective, the K is divisible. If the end result is the purpose, the K is not divisible. 3. Factors to consider: payment means, subject matter, place of delivery, purpose/use of buyer 23
  24. 24. 4. Significance of Divisibility: if a K is divisible, a party who has performed one or more parts can collect the K price (expectation) for those parts completed, even though he breaches the other parts. ix. Restitution as a mitigating doctrine: if you fail to meet a condition, you still get restitution (even if you’re a dirty breacher) 1. §371: measure of restitution interest: a. Value conferred- “increase in value of the other person’s property” or b. FMV of the same services provided by someone else 2. §373: restitution when other party is in breach- the injured party is entitled to restitution for any benefit that he has conferred on the other party by way of part performance or reliance 3. §374: restitution in favor of party in breach-(1) if a party justifiably refuses to perform on the ground that his remaining duties of performance have been discharged by the other party’s breach, the party in breach is entitled to restitution for any benefit that he has conferred by way of part performance or reliance in excess of the loss that he has caused by his own breach, (2) to the extent that, under the manifested assent of the parties, a party’s performance is to be retained in the case of breach, that party is not entitled to restitution if the value of the performance as liquidated damages is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. 4. Ways to determine restitution: a. FMV- amount of increased value to property, b. Cost- the cost of obtaining similar goods, c. The court will usually award the lower of the 2 to the breaching party 5. Britton v. Turner: P breached his employment K of 1 year at 9.5 months, the court allowed him to recover a reasonable sum for the services he had performed. 6. Kirkland v. Archbold: Contractor didn’t do the work as stipulated, the court allowed him to recover the benefit conferred. (8)REQUESTS FOR ASSURANCE OF PERFORMANCE: a. If a party has reason to worry that the other party won’t perform, the insecure party may demand assurances that the other party will be able (and willing) to perform all its obligations. The demanding party may then suspend his own performance until he receives the assurances. A failure to provide assurance is a breach. (see section under Anticipatory Repudiation) (9)BREACH IN COURSE OF PERFORMANCE: a. Implied duties in the performance of a K: i. Good faith ii. Secure expectations iii. Not to materially breach iv. Substantial performance b. The implied covenant not to materially breach. i. Whether a breach is material or minor is to be determined on a case by case basis. 1. Intent: the most important factor in determining whether the parties to the K intended for the breach to be material. A slight delay in 24
  25. 25. performance would normally be a minor breach. However, if the K contains a “time is of the essence” clause, the delay becomes a material breach. 2. Factors in determining if breach is material: Q for fact finder a. extent to which the injured party will be deprived of the benefit reasonably expected. b. Extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived. c. Extent to which the party failing to perform or to offer to perform will suffer forfeiture. d. The likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; e. The extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing 3. Barnes says the question to ask is “have you substantially impaired the fruits of the K by what you’ve done today?” So after an uncured breach occurs, then must ask “have you substantially interfered with the fruits of the bargain, so the injured party is released from his obligations?” Failure by substantial breach = failure of condition ii. Walker v. Harrison: D refused to make payments to P b/c P was delayed in cleaning the sign. The court held for P (who was suing D to pay) b/c P’s failure to give maintenance was a breach, but the tomato did not make it a material breach which was needed to release D from the K. By not paying, D was the first to breach. iii. K& G Construction v. Harris: the court found for P b/c P’s obligation to make the progress payments was dependent upon fulfillment of all D’s prior promises, including that the work be in a workmanlike manner. When the house was damaged a condition to P’s duty to make progress payments failed to occur, and P did not have to make payment. Since P was not in default by refusing to make payments, D breached the K by walking off the job and is liable for P’s extra cost of completion. iv. §241: circumstances significant in determining whether a failure is material c. Effects of breach: i. Material: gives rise to an immediate cause of action for breach of entire K, excuses further performance by the non-breaching party. This is due to an implicit condition in every K that says “if you don’t, I don’t have to either.” ii. Minor: gives rise to immediate cause of action for whatever damages were caused by the breach, may suspend, but do not excuse further performance by the non-breaching party. d. Responses to breach: i. If A’s breach is material, B may: 1. sue for damages, but let K continue 2. terminate K ii. If A’s breach is minor, B may: 1. sue for damages, but not terminate the K e. Hindrance and Prevention: Ex: selling of the Volvo, you agree to buy but you want to inspect for conclusion, the day before, Barnes stops the inspection and repudiates 25