Contracts Final 2
Terms in this set (189)
Predominant Purpose Test (Used in California)
Ask what did the parties really want? Do they want the good or the delivery?
More true to the intent of the parties when they're bargaining
Look at the "nature of the contract."
Look at the relationship of the parties and determine what variables are in contention.
Contract (Restatement §1)
A contract is a promise or set a promises for the breach of which the law gives a remedy or the performance of which the law in some way recognizes a duty.
Requirement of a Bargain (Restatement §17)
The formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.
Mutual Inducement (Clues when Looking for Bargained for Exchange)
1. The promisor made the promise to induce the return promise (or performance).
2. The return promise (or performance) was made to induce (or secure) the initial promise.
Primary mode: offer and acceptance.
Manifestation of Mutual Assent (Restatement §18)
Manifestation of mutual assent to an exchange requires that each party either make a promise or begin to render a performance.
Conduct as Manifestation of Assent (Restatement §19)
(1) The manifestation of assent may be made wholly or partly by written or spoken words or by other acts or by failure to act.
(2) The conduct of a party is not effective as a manifestation of his assent unless he intends to engage in the conduct and knows or has reason to know that the other party may infer from his conduct that he assents.
(3) The conduct of a party may manifest assent even though he does not in fact assent. In such cases a resulting contract may be voidable because of fraud, duress, mistake, or other invalidating cause.
Promise (Restatement §2)
A manifestation of intent to act in a specified way, so made as to justify a promisee in understanding that a commitment has been made.
Reasonable Man Standard (Embry)
1. An objective man knowing what was knowable to the promisee would have concluded an acceptance was made, and;
2. The promisee did in fact so conclude.
Offer (Restatement §24)
A manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.
Joke as an Offer
A joke is not an offer if "offeree knows or has reason to know it is a joke." (reasonable man standard)
Advertisement as on Offer
Does not constitute an offer, except where the advertisement is clear, definite, and explicit, and leaves nothing open for negotiation.
Preliminary Negotiations (Restatement §26)
A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made further manifestation of assent.
Certainty (Restatement §33)
(1) Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain.
(2) The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.
(3) The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance.
Option Contracts (Restatement §25)
An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor's power to revoke an offer.
An option is an "irrevocable offer."
Example: non-refundable deposit.
Rule 1: Under common law, an offer is generally revocable.
Rule 2: An offeror's mere promise not to revoke the offer is not enforceable.
Option Contract Created By Part Performance Or Tender (Restatement § 45)
(1) Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it.
(2) The offeror's duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer.
An Offeree's Power of Acceptance may be Terminated by:
1. Rejection or counteroffer (a counteroffer is a new offer with a new master);
2. Lapse of time (industry specific: use reasonable standard);
3. Revocation (master of the offer). General rule: an offer may be revoked at anytime before acceptance, but notice must be given (even indirect notice ie not from offeror is sufficient);
4. Death or incapacity of the offeror or offeree (contract outlives offeror, but offer dies with him);
5. The non-occurrence of any condition of the contract.
An offer may be revoked at anytime before acceptance, but notice must be given (even indirect notice ie not from offeror is sufficient).
Offeror is master of his offer.
Mirror Image Rule
Acceptance must be identical to the offer. Any discrepancy in terms kills the deal.
An attempt to accept the offer on different terms instead creates a counter-offer, and this constitutes a rejection of the original offer.
Acceptance Which Requests Change of Terms (Restatement §61)
An acceptance which requests a change or addition to the terms of the offer is not thereby invalidated unless the acceptance is made to depend on an assent to the changed or added terms.
Agreements that result from acceptance by a promise.
Can't revoke once you start.
Agreements that result from acceptance by performance. Only full performance is acceptance (offer is not accepted until there is full performance).
Offeree must complete invited performance to get offeror's promise or performance.
Either party can revoke before full performance.
Acceptance By Performance; Necessity Of Notification To Offeror (Restatement §54)
Default, no notice required but offeror needs to know promptly after performance
Acceptance by Silence
Offeree must expressly accept or reject unless:
(a) Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation.
(b) Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer.
(c) Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept.
E-Commerce and Mutual Assent
Circumstances must be sufficient to put a prudent man upon inquiry.
Requires "immediately visible notice of the existence of license terms" or requires an "unambiguous manifestation of assent" (e.g. an "I agree" button) for assent by "reasonably prudent offeree."
Browse wrap = no contract.
Notice + clear assent (apple analogy for repeat transactions).
The "I agree" button is not magical.
Consideration (Restatement §54)
(1) To constitute consideration, a performance or a return promise must be bargained for.
(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.
(3) The performance may consist of
(a) an act other than a promise, or
(b) a forbearance, or
(c) the creation, modification, or destruction of a legal relation.
(4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person.
The exchange of one thing of value for another. It must be legally sufficient and bargained for. The element of exchange which is sufficient to satisfy the legal requirement.
An express or implied promise or contract not under seal on which an action may be brought.
A thing that persuades or influences someone to do something.
If a gratuitous transfer of property is to be effective at some future date, it constitutes a mere promise to make a gift that is unenforceable due to lack of consideration.
One that is subject to or dependent on a condition. Can be revoked if the recipient does not fulfill the conditions attached to the gift.
May be eligible for promissory estoppel.
A promise that is made without consideration and is usually unenforceable
Bargains vs. Gratuitous Promises
A bargain requires mutual inducement, while a conditional gift has no inducement.
Bargained for exchange is lacking when the promisor is not seeking to induce an action by the promisee.
You cannot seek to induce someone's behavior if the behavior has already happened.
There is no inducement since the action has been completed at the time of the promise. Thus, no consideration.
Default rule: past consideration is not consideration (moral consideration is an exception).
When a promisor makes a promise for a past benefit, and the promise becomes binding to prevent injustice.
The promisor must receive great material benefit.
Promise for Benefit Received (Restatement §86)
(1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice
(2) A promise is not binding under Subsection (1) if
(a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or
(b) to the extent that its value is disproportionate to the benefit.
Preexisting Duty Rule (Restatement §89)
Performance of an act by which a party is already contractually bound to perform does not constitute valid consideration for a new promise.
Doctrine of Unforeseen Circumstances (Exception to Preexisting Duty Rule)
Where unforeseen circumstances make the performance of a contract unduly burdensome, and the parties agree in view of the changed conditions to an adjustment in price, a new contract supported by consideration is formed.
Contract Modification (Restatement §89)
A promise modifying a duty under a contract not fully performed on either side is binding
(a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or
(b) to the extent provided by statute; or
(c) to the extent that justice requires enforcement in view of material change of position in reliance on the promise.
Modification, Rescission, and Waiver (UCC 2-209)
An agreement modifying a contract within this Article needs no consideration to be binding. [such modification must still satisfy SOF].
A promise which the promisor should
(1) reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and
(2) which does induce such action or forbearance is
(3) binding if injustice can be avoided only by enforcement of the promise.
Substitutes for consideration.
Promise Reasonably Inducing Action or Forbearance (Restatement § 90)
(1)A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce it is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice required.
(2) Charity subscriptions & marriage settlements are binding (no need to show inducement).
A defensive doctrine preventing one party from taking unfair advantage of another when, through false language or conduct, the person to be estopped has induced another person to act in a certain way, which resulted in the other person being injured in some way.
Promissory Estoppel Elements
1. Promise: Must be clear and definite
- Offer > promise > opinion or prediction
2. Reason to Expect Reliance: Offeror has reason to expect reliance
- Easiest case: conditional promise (Kirksey)
- Objective test: promisor will be bound even if promisor himself didn't expect to induce reliance.
3. Reliance Induced:
- Actual and of sort reasonably expected (reasonable reliance)
- Promise not enforceable until reliance induced
- Must be induced. Cannot be action forbearance that would occur in any event
- If forbearance is induced, promisee must show could have done it
4. Avoiding Injustice: rarely used and very vague...
Promissory Estoppel Categories (the FCC is too PC)
1. Family Promises
Ricketts (cf. Kirksey)
2. Promises to Convey Land
3. Charitable Subscriptions
Allegheny (cf. Otterbein)
4. Promise of a Pension
5. Construction Bids
Gimbel; Drennam; Restatement §87(2)
Option Contract (Restatement §87)
(1) An offer is binding as an option contract if it
(a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or
(2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.
UCC Gap Fillers
UCC has a "high tolerance" for undefined terms since statutory terms "fill the gaps."
Terms that can be filled include: price, place for delivery, time provisions, time for payment.
You must ALWAYS have a quantity term. The UCC will not fill it in.
Silence means the parties have accepted default UCC rules.
Specified Place of Delivery (UCC 2-308)
If no place specified, pick up at seller's place of business.
Open Time for Payment (UCC 2-310)
Payment due at time and place at which the buyer is to receive the goods.
Receiving Single Lot / Installments (UCC 2-307)
Default is to ship / receive single lot, but if buyer or seller reasonably needs multiple lots, then multiple lots required.
Contract Interpretation Hierarchy
1. Express Terms of the Agreement (Four corners)
2. Course of Performance
3. Course of Dealings
4. Usage of Trade
5. UCC Gap Fillers
Agreeing on the same words, but different meanings. Look at the subjective intent of the parties.
With ambiguity, first look for objective ambiguity before proceeding to subjective intent.
Whose Meaning Prevails (Restatement §201)
(1) subjective meaning attached by both parties
(2) where subjective meaning different, interpreted with meaning attached by one if at time of agreement
(a) that party did not know of different meaning and other did know meaning attached by 1st party
(b) that party had no reason to know of different meaning, and the other party had reason to know of meaning attached by 1st party
(3) except as stated in (1) or (2), neither party bound by meaning attached by other even though result is failure of mutual assent (i.e. no K)
Rules in Aid of Interpretation (Restatement § 202)
(1) Words/conduct interpreted in light of all circumstances (principal purpose of the parties given great weight)
(2) A writing interpreted as a whole (4 corners); all writings part of same transaction are interpreted together
(3) Unless different meaning manifested,
(a) Interpreted in accordance with general prevailing meaning
(b) Technical or terms of art given technical meaning when used in a transaction of that field
(4) Course of performance (if repeated with opportunity for objection) performance accepted is given great weight
(5) When reasonable, manifestations of intent interpreted consistent with each other AND with course of performance, course of dealing, usage of trade.
Course of Dealing (UCC 1-205)
A sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.
Usage of Trade (UCC 1-205)
Any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question.
Agreeing on words that are not specifically defined (look at objective meaning).
When analyzing vague terms look at:
1. words of contract (four corners) → 2. course of performance → 3. course of dealings → 4. terms of trade
Courts have also looked at: dictionary definitions, government regulations (Frigaliment), and price term (Frigaliment).
Implied in Fact Terms
Terms that the parties actually, albeit implicitly, agreed to.
Implied in Law Terms
Terms that are imposed on the parties by the court without their consent.
The legal rules that the parties can avoid or vary by means of an express clause that differs from the terms a court will otherwise supply by default.
Rules that cannot be varied by consent and will override any express clause to the contrary.
Agreement to Agree
Arises when an agreement contains obligations to enter into a subsequent agreement in the future, the terms of which are not certain at the time of the initial agreement.
They are unenforceable.
Certainty and Choice of Terms; Effect of Performance or Reliance (Restatement §34)
(1) selection of terms still certain
(2) part performance may remove uncertainty
(3) action in reliance may make remedy appropriate even though uncertainty not removed
Supplying an Omitted Essential Term (Restatement §204)
Court may provide a term reasonable under the circumstances.
This type of agreement is not enforceable in court, as it does not specifically detail performance required by one party, appearing to bind only the other party to perform or pay.
Frozen Treats Ice Cream Company and Tip-Top Sundae Shop enter into a contract in which Tip-Top will buy all the ice cream it needs from Frozen Treats, and Frozen Treats will sell as much ice cream as it wants to Tip-Top. Tip-Top is bound to buy all of their ice cream from Frozen Treats, while Frozen Treats is bound to nothing at all.
Requirements Contract (New York Iron Works)
You will provide me with all of some good for X amount of time.
Does a requirements contract fail for (i) lack of definiteness and/or (ii) lack of mutual assent? How can you agree to something unknown?
Old Rule: Requirements contracts were held to be too "indefinite" to be enforced.
New Rule: UCC does away with old rule. Now UCC 2-306 holds. Basically if it's a requirements contract then the parties have to act in good faith and this will keep requirements orders from increasing or decreasing too radically in a given year.
Supply Contract (Eastern Airlines)
You will buy everything I can supply (think of farmers).
Court look at objective evidence of volume of goods: course of dealings (if there are any), old accounts, comparables, or place a range/cap.
Exclusive Dealings Contract (Lady Duff)
Essentially requirements contracts in which a seller agrees to sell all or a substantial portion of its products or services to a particular buyer, or when a buyer similarly agrees to purchase all or a portion of its requirements of a product or service from a particular seller.
Honesty in fact in the conduct or transaction concerned. In the case of a merchant it means honesty in fact and the observant of reasonable commercial standards of fair dealing in the trade.
Good faith is an immutable rule under both the common law and UCC.
Duty of Good Faith and Fair Dealing (Restatement §205)
Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.
Form Contracts (Contracts of Adhesion)
A contract between two parties, where the terms and conditions of the contract are set by one of the parties, and the other party has little or no ability to negotiate more favorable terms and is thus placed in a "take it or leave it" position.
While these types of contracts are not illegal per se, there exists a very real possibility for unconscionability.
Examples: warranties, refund policies, forum-selection clauses, and arbitration clauses (these all have a high standard of notice)
(a) Standardized K
(b) Imposed/drafted by party with superior bargaining strength
(c) Only choice is to adhere or reject
Form Contracts Default Rule
Adequate notice + simple adherence (taking the deal) = bargained for assent.
How Courts "Soften" the Form Contracts Default Rule
1. Interpretation of Terms (interpret them narrowly)
2. Refuse to hold party to the contract (find there is no offer/acceptance)
3. Refuse to hold party to an offensive term (void the term but keep the rest of the contract)
4. Find that the terms came "too late' ("box top license" - void the "late" terms only)
Formation in General (UCC 2-204)
A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.
Additional Terms in Acceptance or Confirmation (UCC 2-207)
(1) An acceptance or written confirmation operates as an acceptance even if contains additional or different terms from those offered or agreed upon (Mirror Image Rule dead), unless acceptance expressly conditional on assent to such terms.
(2)Additional (or different) terms are construed as proposals for addition to contract. Between merchants such terms become part of the contract unless
(a) offer expressly limits to offers terms
(b) they materially alter the contract
(c) notification of objection has been given (e.g. confirming forms conflict) or is given within a reasonable time
(3) Conduct may establish existence of contract even if writings don't. Then terms are those of agreement between writings and UCC supplements.
Key Questions for "Battle of the Forms"
1. Is there a contract (2-207(1))?
(a) is it a conditional acceptance, and therefore no contract, OR
(b) is it an acceptance with additional terms, and therefore a contract?
2. What are the terms of the contract?
When 2-207(2) Applies
1. Are there additional (or different) terms?
2. What's the status of the parties? (section 2 only applies to merchants)
3. Terms become a part of the contract UNLESS (1) the terms express limits (ie merger clause), (2) materially alter the contract, (3) or the other party objects to the additional terms.
Materially Alter (UCC 2-207(2))
Would it bring surprise or hardship if incorporated without express awareness.
If it alters the risk, then it could be a material alteration.
No unreasonable surprise are to be incorporated without notice.
Terms that Follow Later
Terms that come later are enforceable where you:
1. Are notified that these terms will follow; and
2. You are able to reject and return the product after reading the terms.
Shrink Wrap Licenses
Are usually unenforceable because they aren't contracts because they are inside the box rather than printed on the outside.
Parol Evidence Rule
If the contract is a writing and is fully integrated (full and final expressions of the bargain) then any prior written or oral expressions are inadmissible to vary or contradict the terms of the contract.
Objectivist Approach to Full Integration (Parol Evidence Rule)
Can only use the contract itself (intrinsic evidence) to determine integration (four corners test).
Does the agreement seem complete or incomplete on its face?
Would the proffered contract term have naturally been included in the writing if it had been agreed upon?
Modified Objectivist Approach to Full Integration (Parol Evidence Rule)
Can use the contract, what's happening in the world, what's happening with people (extrinsic and intrinsic) to determine integration ("Modern Contextual Test" similar to UCC approach).
Was there a legitimate reason why the proffered term was omitted from the writing?
Special UCC inquiry for the sale of goods: would the proffered term have certainly been included in the writing had it been agreed upon?
Would the parties, situated as they are, normally include in their writing the extrinsic matter to be introduced? If yes, evidence is excluded.
Partially Integrated Contract (Parol Evidence Rule)
Is the proffered contract term consistent or inconsistent with the writing?
1. If consistent (ie it adds to or supplements the terms of the writing), then it is admissible as evidence to be evaluated by the fact finder.
2. If inconsistent (ie it alters or contradicts any terms of the writing), then it is inadmissible as evidence.
Vagueness and Ambiguity (Parol Evidence Rule)
1. If no ambiguity or vagueness alleged, PER applies (no evidence admissible).
2. If ambiguity or vagueness alleged, PER does not apply, but only evidence to explain ambiguous terms may be admitted.
Parol Evidence Rule does not Attach When
1. Ambiguity - if someone alleges ambiguity
2. Typographical error
3. Mistake (in drafting) [Star paving, Gimble (held to mistakes)]
4. Fraud, duress, undue influence, incapacity, illegality, lack of consideration
5. Patent ambiguity of terms
6. Latent ambiguity of terms w/ extrinsic evidence
7. Course of performance or dealing or usage of trade
8. A condition precedent to performance
9.No K was ever intended
Implied Warranty of Merchantability
Warranties fitness for the ordinary purposes for which such goods are used.
Implied Warranty of Merchantability (need all 6 elements)
1. Pass without objection in the trade and under the contract description; AND
2. in the case of fungible goods, are of fair and average quality within the description; AND
3. are fit for the ordinary purposes for which the goods are used; AND
4. run of even kind, quality, and quantity within each unit; AND
5. are adequately contained, packaged, and labeled as the agreement may require; AND
6. conform to the promises or affirmations of fact made on the container or label if any.
Point 6 opens the door for express warranties.
Implied Warranty of Fitness for a Particular Purpose
Narrower and more specific than warranty of merchantability.
Deals with intent, here we're looking for the relationship between the buyer and seller.
Implied Warranty of Fitness for a Particular Purpose Elements (must plead all 3)
1. The seller must have reason to know the buyer's particular purpose.
2. The seller must have reason to know that the buyer is relying on the seller's skill or judgment to furnish appropriate goods.
3. The buyer must, in fact, rely upon the seller's skill or judgment.
Express Warranty Elements
1. An affirmation of fact (not opinion or mere puffery);
2. that relates to the goods; and
3. becomes a part of the basis of the bargain between the parties.
Creating Express Warranties
(a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain . . . goods shall conform to description.
(b) Any description of the goods which is made part of the basis of the bargain
(c) Any sample or model which is made part of the basis of the bargain
Default rules (not immutable rules) so we may:
1. Provide an express warranty of greater or lesser power than the implied warranties; or
2. Disclaim the implied warranties.
Exclusion or Modification of Warranties (UCC 2-316)
(1) Subject to the provisions of this article on parol or extrinsic evidence...negation or limitation is inoperative to the extent that such construction is unreasonable.
(2) MUST mention merchantability, MUST be CONSPICUOUS
(a) Notice is very important!!!
(3) (a) Unless the circumstances indicate otherwise, all implied warranties are excluded by expressions such as, "as is," "with all faults," etc.
(b) When the buyer before entering into the K has examined the goods...or has refused to examine the goods, there is no implied warranty with regard to defects which an examination ought...to have revealed to him.
(4) "As is" is sufficient, does not need to say merchantability
Damages for Breach of Warranty (Common Law)
The measure of damages is the difference between the value of the machine, if it had corresponded with the warranty and its actual value, together with such incidental losses as the parties knew, or ought to have known, would probably result from a failure to comply with its terms.
Damages for Breach of Warranty (UCC)
The difference at the time and place of acceptance between the value of the goods accepted and the value that they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.
An event, that is not certain to occur, which must occur before performance under the contract becomes necessary.
A condition explicitly stated in the contract.
Hypo: Owner of house pays insurance $1k in return for company's promise to pay if house is destroyed by fire
Burning of the house is the condition for company's duty to pay
A condition not expressly stated in the contract.
Hypo: House painter promises to paint a house in return for the owner's promise to pay $1k
It doesn't explicitly say it, but ct would imply that IF the guy painted the house, the owner would pay the money
Promise vs Condition
If you don't do something that's a promise, you've breached, so liable for damage; if you don't do something b/c of non-occurrence of a condition, no breach
Breach a promise doesn't mean that K is no longer valid, just means you owe some money (damages=money)
If there is non-occurrence of condition, it could be inconsequential, or it could invalidate entire K.
Means there may be no obligation as to certain performance, but the promise side of that means you may be liable for damages.
3 Ways to Avoid the Effect of a Condition
Waiver, estoppel, and excuse (excuse is sometimes used more broadly to describe any doctrine that avoids the effect of a condition).
How to Argue Against Conditions
1. It's not a condition.
2. If it is a condition, it should be struck out because it's terrible.
3. I met the condition.
The relinquishment of a known right voluntarily and with full knowledge of the facts.
1st: determine who the waiver protects (that's the only person who can revoke the waiver)
2nd: determine if the waiver was revoked
Waiver vs Modification
Waiver is unilateral, modification is bilateral.
Excuse to Prevent Forfeiture
To the extent that non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence (unless the condition was a material part of the contract).
A declaration by the promising party to a contract that he or she does not intend to live up to his or her obligations under the contract.
Must be clear and unequivocal to the other party that you have no intention of going through with the deal; you can retract as long as the other party has not relied on or accepted (Sea Colony).
Adequate Assurances of Performance
Often sought by a party when he wishes to withhold performance because it is suspected that the other party may not perform.
Party must have reasonable grounds to demand adequate assurance, demand must be in writing (if oral it must be very clear), can't modify contract, and must give 30 days to respond (Scott v. Crown).
Deprives non breaching party of its reasonable expectations under the contract.
(a) Partial breach: was the material breach cured? Non-breaching party may suspend performance while waiting for cure. If not then...
(b) Total breach: a material breach that the breaching party fails to cure:
(i) within a reasonable time, OR
(ii) within the time during which performance was due.
Only in total breach may non-breaching party discharge its obligations.
Materiality of Breach (Restatement § 241)
(a) extent to which injured party will be deprived of benefit
(b) Extent injured party can be adequately compensated
(c) Extent breaching party will suffer forfeiture
(d) Likelihood of cure
(e) extent to which breaching party's actions comply with standard of good faith & fair dealing
Anticipatory Repudiation vs Nonperformance
(a) always injures interest in present performance
(b) it may injure interest in future performance but if it does it is a material breach
2. Anticipatory Repudiation:
(a) only impairs future performance interest
(b) manifestation of unwillingness or inability to perform future duties
Present Performance Interest
Interest in receiving proper performance when due.
Future Performance Interest
Acquired at moment of formation, the interest in the likelihood that the contract will be performed as agreed.
While not completely in compliance with the terms of the contract (still in breach), performance is sufficient to not deprive the non-breaching party of reasonable expectations.
Factors for Determining Materiality of a Breach (Restatement §241)
1. The extent to which the injured party will be deprived of the benefit which he reasonably expected;
2. The extent to which the injured party can be adequately compensated for that part of the benefit of which he will be deprived;
3. The extent to which the party failing to perform or to offer to perform will suffer forfeiture;
4. The likelihood that the party failing to perform or offer to perform will cure his failure, taking account of all the circumstances including reasonable assurances;
5. The extent to which the behavior of the party failing to perform or offer to perform with standards of good faith and fair dealing.
Perfect Tender Rule (UCC)
A seller has a duty to tender goods that conform precisely to the contract and the buyer has the right to reject any goods that do not.
If goods do not conform, buyer has 2 rights:
1. Right of rejection
2. Right to revoke acceptance
Right of Rejection (Perfect Tender Rule)
When the buyer does not accept the nonconforming goods and immediately returns them to the seller.
Frees the buyer from paying the price, send it back, ends the contract.
Right to Revoke Acceptance (Perfect Tender Rule)
When the buyer accepts the nonconforming goods, then attempts to return them to the seller.
May revoke acceptance only if the nonconformity substantially impairs the value.
If the good has not been seasonably cured, or if the seller assured against the nonconformity, buyer must revoke within a reasonable time.
Similarities between Right of Rejection and Right to Revoke Acceptance
1. Free the buyer from paying the price
2. May cancel the contract, and EITHER:
a. recover damages for non-delivery, OR
b. "cover" and collect damages.
You can go out and find an alternative for what you expected from the contract, then sue for the difference.
Buyer's Rights on Improper Delivery (UCC 2-601)
If the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may
(a) reject the whole; or
(b) accept the whole; or
(c) accept any commercial unit or units and reject the rest.
Does not apply to installment contracts because buyer hasn't received the whole good until the full delivery.
Installment Contracts and Perfect Tender Rule
Perfect tender rule doesn't apply.
Rejection allowed only if "the nonconformity substantially impairs the value of the installment."
3 kinds: expectation, reliance, and restitution.
Places promisee in position he would have been if contract was performed.
Hawkins (hairy hand), Restatement § 347
Places promisee in position he would have been if there had never been a contract.
Places promisor in position he would have been if there had not been a contract.
Calculating Damages Example
The K: RS in exchange for $10 and class notes.
Market Value of RS: $15
Market Value of Notes: $1
Cost of note to me: $10
Cost to photocopy notes: $3
You pay $10 and give me your notes; I give you no RS
Expectation: $15 (expected $15 RS)
Reliance: $13 (spent $10 on RS and $3 copying)
Restitution: $11 (you got my $10 and my notes with a market value of $1)
Changing your position based upon another's statement of alleged fact, claim or promise.
Measure of Damages in General (Restatement § 347)
(a) the loss in the value to him of the other party's performance caused by
its failure or deficiency, PLUS
(b) any other loss, including incidental or consequential loss, caused by the breach, LESS
(c) any cost or other loss that he has avoided by not having to perform.
Limitations on Damages
1. Remoteness or Foreseeability of Harm
2. Certainty of Harm
3. Avoidability of Harm (Duty to Mitigate)
Foreseeability of Harm
If damages that result from your breach are so ridiculous, you will not be liable for the damages that result from that ridiculousness.
Default is expectation damages (no one can be better off than they would have been if there had not been a contract ie no punitive damages)
Unforeseeability and Related Limitations on Damages (Restatement § 351)
a. General damages if injury were foreseeble to a reasonable man - need not be the most forseeable of possible harm but must be a probable result of breach
b. Special damages only if actual notice were given the carrier of the possibility of injury
i. Notice sufficient
ii. "Tacit Agreement Test" implied or express assent to special damages?
Tacit Agreement Test
Plaintiff must prove Defendant's knowledge that a breach of contract will entail special damages to the plaintiff, and it must appear that Defendant at least implicitly agreed to assume responsibility.
Certainty of Harm
Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty.
Expenses have to flow from the breach.
Loss of profits are not certain.
Avoidability of Harm (Duty to Mitigate)
Obligation on breaching party not to incur more costs; duty to mitigate more damages.
Damages are not recoverable for the loss that the injured party could have avoided without undue risk, burden, or humiliation.
Specifies a predetermined amount of money that must be paid as damages for failure to perform under a contract.
The amount of the is supposed to be the parties' best estimate at the time they sign the contract of the damages that would be caused by a breach.
Useful for recovering things that are difficult to calculate and recover under common law standards (such as reputation).
Liquidated Damages vs Penalties
Penalties are essentially unreasonably large liquidated damages clauses.
Liquidated Damages and Duty to Mitigate
There is no duty to mitigate if you have a liquidated damages clause.
Reasonableness Test for Liquidated Damages
1. Is the injury caused by the breach one that is difficult or incapable of accurate estimation at the time of contract?
(a) The more uncertain it is to estimate damages, the more reasonable this part becomes.
2. Are the stipulated damages a reasonable forecast of the harm caused by the breach?
(a) we have to pretend that we don't know what we know...
(b) the more data we can accumulate the easier it is to calculate.
When the court forces the breaching party to actually complete the contract.
A judicial order that restrains a person from beginning or continuing an action threatening or invading the legal right of another, or that compels a person to carry out a certain act.
Remedy for Land Contracts
Expectation interest cannot be recovered by money, so the courts award specific performance (ie the land).
Remedy for Personal Property Contracts
The strong default remedy in a goods contract is money, but courts will award specific performance in certain scenarios.
Specific Performance Exceptions for Personal Property Contracts
(1) when a damage award would not be an adequate remedy,
(2) when the personal property has "peculiar, sentimental or unique value," and
(3) when such personal property is not easily obtainable because it is rare.
Remedy for Personal Service Contracts
You cannot get specific performance because a judge can't force labor.
Since we can't make someone do something, we can STOP them from doing something else (negative injunction).
Injunctive Relief for Personal Service Contracts
Injunctive relief only when remedy in damages is inadequate:
(a) services are unique
(b) special knowledge
(c) need not require that would work for competitor (you can give injunction even if they aren't going to work for a competitor)
(d) unlikely if it would force compulsion of performance because only income source (not letting them work for someone else would force them to work for you bc it's their only source of income)
Courts look at length of time and geographic limitations.
In California, if it is one year in length and limited to one region of the state then it is usually enforceable.
Limitations on Specific Performance and Injunctions
1. The adequacy test (we're asking whether a remedy at law ie damages is adequate)
2. Indefiniteness (often because it's unique)
3. Insecurity (doubt about not being able to perform yourself, not being able to get into the market - need the "thing")
4. Difficulty in enforcement
5. Personal service contracts
6. Public policy
Restitution Damage Interest and Cause of Action
Injured party is entitled to restitution for part performance (372)
Party in breach entitled to restitution for any benefit in excess of loss caused by his own breach (374)
When is restitution the appropriate remedy?
1. Exp. damages diff. to calculate
2. Losing contracts
3. In some "quasi-contracts"
Statute of Frauds
A defense to enforcement of a contract.
Best to deal with as a threshold issue.
If it isn't satisfied then the contract is void.
All contracts can be oral, except the 6 that fall under this statute (MYLEGS).
Statute of Fraud Requirements
1. a writing
2. signed by the party to be charged
3. with sufficient content to evidence the contract.
6 Categories that Fall Under the Statute of Frauds (MYLEGS)
1. Marriage (don't worry about this one)
4. Executor (don't worry about this one)
5. Guaranty (don't worry about this one)
6. Sale of Goods ($500 or more)
If it is capable of being performed in within one year, then it does not fall within the SOF.
If it is not capable of being performed in one year, it must be in writing.
Date runs from time of agreement.
Contract for life is not within SOF because you could die within the year.
Capable of performance means theoretically possible with unlimited resources (ie building a skyscraper would not fall under SOF because with unlimited resources it could be built within one year).
How to Satisfy SOF for Service Contracts
1. a writing, and/or
2. Full performance (partial performance does not satisfy SOF, but a remedy may still be available in equity ie restitution)
Land is a big deal so a writing is required for:
1. Sale of property
2. Leases for more than 1 year
How to Satisfy SOF for Land Contracts
1. a writing; or
2. Conveyance (full performance); or
3. Part Performance (need two of the following PPI):
(i) Payment (in part or whole)
Sale of Goods (SOF)
If sale of goods $500 or more a writing is required.
How to Satisfy SOF for Sale of Goods
1. writing must indicate contract for goods;
2. have a quantity term; and
3. be signed by the opposing party (signature requirement met by "merchants confirmatory memo")
Exception: party to be bound need not sign if:
(i) both parties are merchants
(ii) one sends a confirmatory written memo of oral agreement (other party bound if they: (a) had reason to know of contents; (b) failed to send an objection within 10 days of receipt)
Exceptions to SOF for Sale of Goods
Writing is not required if:
1. Specifically manufactured goods
2. Admission in pleadings or court (don't worry)
3. Payments or delivery of goods.
Legal Consequences of Failure to Satisfy the Statute of Frauds
It's an affirmative defense that prevents the plaintiff from proceeding with case unless they can prove:
(a) K doesn't fall "within" the statute, OR
(b) they have satisfied the requirements.
How to Approach Statute of Frauds
Don't think about it as written vs oral Ks.
Instead, identify subject matter of the contract.
Does K fall within MYLEGS? If it does, have I satisfied my requirements for SOF?
Defenses to Formation
3. Misrepresentation [Fraud]
5. Undue Influence
7. Mistake [mutual vs. unilateral]
1. Impossibility (common law)
2. Commercial Impracticability (UCC)
3. Frustration of Purpose
Incompetence (Status Formation Defense)
Standard: "so affected as to render him wholly and absolutely incompetent to comprehend and understand the nature of the transaction."
Two Tests: Cognition Test and Volitional Test ("but for" test)
Cognition Test (Incompetence)
Party was unable to understand the nature and consequences of the transaction.
Volitional Test (Incompetence)
Not a cognitive disability but one that affects a person's judgment. Still makes genuine assent unlikely.
"But for" the mental illness the contract would not have been made.
Infancy (Status Formation Defense)
Minors can't contract.
Leases, automobiles, some specific types of instantaneous contracting (like buying a motorcycle) are void if the buyer is a minor.
Prior to turning 18, or for a short period after turning 18 (until you're 19 in some states) the minor can avoid (or affirm) a contract unless a parent signed.
1. If the minor is contracting for a "necessary" ie something essential that they need to live and can't acquire otherwise.
- What is necessary is determined at time of contract formation (lawyers are necessaries)
2. Infant as plaintiff seeking cash paid other party gets restitution in full
3. Misrepresentation of age (minority) view must be of substantial nature, simple assertion unlikely to lead to estoppel.
Misrepresentation (Behavior Formation Offense)
A misrepresentation of fact provides a basis for avoiding a contract when:
1. "a party's manifestation of assent is induced by either (a) a fraudulent or (b) a material
3. by the other party
4. upon which the recipient is justified in relying
1. Knows or believes assertion not in accord with facts
2. Does not have confidence in assertion's truth that he states or implies
3. Knows that he does not have the basis that he states or implies for the assertion
1. a material misrepresentation of fact;
2. known to be false;
3. upon which the party relied; and
4. relied on to its damage.
Parol Evidence and Defenses
PER does not apply to fraud, duress, or misrepresentation, so evidence is admissible.
1. If it is likely to induce a reasonable person to manifest assent, OR
2. if the maker knows it would be likely to induce the recipient to do so
Duress (Behavior Formation Offense)
1. a threat
2. threat is improper (improper does not equal wrongful or illegal. Threatening to sue someone is not improper, but threatening to sue someone for criminal activity is)
3. threat must induce the victim's assent
4. threat is sufficiently grave to justify the victim's assent (not always going to be a physical threat, but can't just be pressure)
Economic duress can be an improper threat.
Always have modification and duress in the same sentence.
Test for Improper Threats
Should the test be impropriety of threat (motive) or unfairness of result (impact)?
Motive is better for analysis: if motive is good faith or exogenous circumstances, then no law against breaching, so no duress.
Improper does not equal wrongful or illegal. Threatening to sue someone is not improper, but threatening to sue someone for criminal activity is.
Undue Influence (Behavior Formation Offense)
Taking an unfair advantage of another's weakness of mind, or...taking a grossly oppressive and unfair advantage of another's necessities or distress.
It's good to have undue influence as a backstop for duress (the difference is that the threat is not really improper).
Undue Influence Elements
1. Discussion at an inappropriate time
2. Artificial pressure that time is of the essence
3. Multiple persuaders
4. Stating there is no time to consult an attorney.
Unconscionability (Behavior Formation Offense)
FIRST: Threshold question in discussion of unconscionability: Is it a K of adhesion?
(a) Standardized K
(b) Imposed/drafted by party with superior bargaining strength
(c) Only choice is to adhere or reject
NEXT: other factors that render it unenforceable?
(a) Does K (term) not fall within the reasonable expectations of weaker (adhering) party?
(b) Even if within reasonable expectations, will be denied enforcement if "unduly oppressive"
Unconscionability has both procedural and substantive elements.
(a) Procedural - focuses on "oppression" or "surprise" (due to unequal bargaining power)
(b) Substantive - "overly harsh" and "one-sided" results
- Must look at the totality of the K, not merely the clause at issue. The K has to be so one-sided, not just when focuses on one thing that is harsh w/in the K that allows the rest of the K to work.
The more substantively oppressive the K term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.
Unconscionability in formation of contract (fraud, duress) look for oppression or surprise; if in CA, may simply be "contract of adhesion" plus unequal bargaining power.
Unconscionability in substance of contract (illegality, against public policy) look for overly harsh or one-sided results.
Unconscionable Contract or Term (Restatement § 208)
If a contract or term thereof is unconscionable at the time the contract is made acourt may refuse to enforce the contract, or may enforce the remainder of the contract
without the unconscionable term, or may so limit the application of any
unconscionable term as to avoid any unconscionable result.
Mutual Mistake (Behavior Formation Offense)
1. "Mistake" of a fact that was in existence at the time of formation of K;
2. Fact is "basic" or "material" to basis of K; and
Both parties make a factual error about a fundamental issue that has a material effect on the agreed exchange.
The adversely affect party may rescind the K
How to counter the defense of Mutual Mistake
Plea in Avoidance (assertion of failure of basic assumption):
1. "conscious ignorance"
2. "as is"
Impossibility and Impracticability (Performance Defense)
Where, after a contract is made, a party's performance is made impracticable without his fault, his duty is discharged (Restatement § 261)
These defenses basically argue that there was nothing wrong w/ the K, but the world has changed such that the K can't be fulfilled, is unfair.
Asks Court to assign risk and excuse performance
New Standards for Commercial Impracticability
(a) A contingency - something unexpected - has occurred (maybe by both parties)
(b) The risk of the unexpected occurrence must not be allocated either by agreement (either expressed or implied)or by custom
(c) The contingency has rendered performance commercially impracticable (UCC §2-615 = UCC is highly influencing formation of the CL here)
(d) Regardless of route, as a shipper they are responsible for delivering their product
Excuse by Failure of Presupposed Conditions (UCC 2-615)
(a) Event must make performance as agreed impracticable
(b) The non-occurrence of the event must have been a "basic assumption" in the K formation
(c) Impracticability was in no way fault of party who seeks excuse
(d) That party must not have assumed a greater obligation than the law imposes
Frustration of Purpose (Performance Defense)
The world has changed in such a way that we don't want it anymore; you COULD give it to me, but it no longer has value. Consideration is still here, but it's not the consideration we wanted
(a) What is purpose of the K?
(b) Was the performance of the K prevented?
(c) Was the event which causes frustration one which was or might have been anticipated or guarded against at the date of the K?
If event was foreseeable, K should provide. If K did not provide gives rise to inference risk was assumed by promisor.
2 Part Test for Frustration of Purpose
1. the value of the lease was destroyed by an
2. unanticipated circumstance wholly outside the contemplation of the parties at the time of K formation