Contracts Haagen Spring 2012 Outline

Promise Definition: commitment made to the promisee to act or refrain from acting in a specified

way (RS 2nd, 1) Express contract: in words, implied: inferred from conduct There can be no contract without the intention of both parties to be bound (or

consideration) – will be seen as gift If party confers measurable benefit upon another without intent to act gratuitously and

affords reasonable opportunity to reject benefit or has reasonable excuse for failing to do so – entitled to restitution

Parties to a valid contract are bound by its term, regardless of whether it’s a good/bad bargain

Consideration Adequacy Common law: Either a benefit to the promisee or a detriment to the promisor RS 2nd 71:

o To constitute consideration, a performance or a return promise must be bargained for

o 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

o 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

o 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

Unilateral contracts: promise on one side as consideration, in exchange for performance/forbearance on the other side

Bilateral contract: promises on both sides of the exchange Reliance and change in position based on another’s promise becomes consideration –

forbearance There is no requirement of equivalence in values exchanged (RS 2nd 79(b); can however

claim no considerationo Enough that buyer agrees that consideration has value – doesn’t need to be novel

Forbearance to assert an invalid claim may serve as consideration if the parties at the time believed in good faith that the claim was valid (RS 2nd 74(1)(b))

o Policy of encouraging settlement Consideration which is only token or nominal is not sufficient Pre-existing duty The performance or promise to perform a pre-existing duty does not constitute valid

consideration (UCC 1-107) -> exceptions through adding condition(s) Performance of a legal duty neither doubtful nor the subject of honest dispute is not

consideration (RS 2nd 73) Contract modifications An agreement modifying a contract needs no consideration to be binding (UCC 2-209(1)) Modifications enforced if the parties voluntarily agree and if (1) the promise modifying

the original contract was made before the contract was fully performed on either side, (2)

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the underlying circumstances which prompted the modification were unanticipated by the parties, and (3) the modification is fair and equitable (RS 2nd, 89(a))

o Prevents one party from taking advantage of necessities of other A party may modify a contract if the modification is the result of some factor that would

cause an ordinary merchant to seek a modification and the reason is legitimate + not pretextual (UCC 2-209)

o Important factor: increased costs, operating at loss Mutuality of obligation In a bilateral agreement, if there is no mutuality of obligation – no consideration If one party has a free way out, contract lacks mutuality A promise given for a promise dependent upon a condition does not necessarily render it

illusory or contract unenforceable Moral obligation Moral obligation is insufficient consideration for a promise Exception: material benefit rule – moral obligation is sufficient consideration to support a

subsequent promise where the promisor has received a material benefit and promisee reasonably expected to be compensated

RS 2nd 86:o (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 injusticeo (2) A promise is not binding if (a) 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

RS 2nd 82(1):o A promise to pay all or part of an antecedent contractual debt owed by the

promisor is binding if the debt is still enforceable or would be except for the effect of a statute of limitations

Promissory estoppel Idea that one might be barred from claiming lack of consideration by conduct which leads

another to act in reasonable reliance RS 2nd 90

o (1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee/third person and which does induce such action/forbearance is binding if injustice can be avoided only by enforcement of the promise – may be limited as justice requires

o (2) A charitable subscription is binding without proof that the promise induced action or forbearance – promises to charities

Importance of these institutions to society Full value of promise enforced, as well as change in consumption preferences Onus/focus on the person making the promise – what he expects to result Limited to cases where reliance on promise brought about substantial changed condition Promissory estoppel does not apply where there is an express contract and consideration

is not lacking – not for “second bite at apple” Statute of Frauds Requires some contracts to be in writing – reduces fraudulent assertions of promise, but

can exacerbate fraudulent denials -> benefits promisor

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If agreement reached + written down -> writing destroyed, SOF does not apply. Can use oral evidence to establish existence of contract

If only one party signs, the other party may enforce the contract against him but not vice versa – violence to mutuality of obligation

UCC 2-201 – sale of goodso (1) A contract for the sale of goods for the price of $5,000 or more is not

enforceable unless there is some record sufficient to indicate that a contract for sale has been made between the parties and signed by the party against which enforcement is sought or by the party's authorized agent or broker.  A record is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this subsection beyond the quantity of goods shown in the record.

o (3) A contract that does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable (exceptions):

(a) if the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller's business and the seller, before notice of repudiation is received and under circumstances that reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement;

(b) if the party against which enforcement is sought admits in the party's pleading, or in the party's testimony or otherwise under oath that a contract for sale was made, but the contract is not enforceable under this paragraph beyond the quantity of goods admitted;  or

(c) with respect to goods for which payment has been made and accepted or which have been received and accepted

o (4) A contract that is enforceable under this section is not unenforceable merely because it is not capable of being performed within one year or any other period after its making.

One year limitation RS 2nd 130: (1) where any promise in a contract cannot be fully performed within a year from the

time the contract is made, all promises in the contract are within the Statute of Frauds until one party to the contract completes his performance

(2) when one party to a contract has completed his performance, the one-year provision of the Statute does not prevent enforcement of the promises of other parties

o Unenforceable unless performance is possible within a year of creationo Construed very narrowly to void as few oral contracts as possible

Oral agreement to convey land RS 2nd 125(1): a promise to transfer to any person any interest in land is within SOF RS 2nd 129: a contract for the transfer of an interest in land may be specifically enforced

notwithstanding failure to comply with SOF if it is established that the party seeking enforcement, in reasonable reliance on the contract and on the continuing assent of the party against whom enforcement is sought, has so changed his position that injustice can be avoided only by specific enforcement

Compliance with statute

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RS 2nd 132: the memorandum may consist of several writings if one of the writings is signed and the writings clearly indicate that they relate to the same transaction

An oral contract which is within and does not satisfy SOF is unenforceable – this is waivable

RS 2nd 139(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 the action or forbearance is enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement of the promise. The remedy granted for breach is to be limited as justice requires

Other equitable doctrines to prevent assertion of suit: misrepresentation, admission

Bargain relationship Assent In order to have contract, must have mutual assent to common terms Standard for assent is objective – if a reasonable person observing the situation would

think that a contract had been agreed upono Actual, unexpressed intent is immaterial

RS 2nd 21: neither real nor apparent intention that a promise be legally binding is essential to the formation of a contract

Offer RS 2nd 24: an offer is the 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

o Encourages clearer communication, offeror has power to make clear RS 2nd 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 a further manifestation of assent

o Comment b: advertisements are not ordinarily intended or understood as offers to sell. It is possible to make an offer by an advertisement directed to the general public, but there must ordinarily be some language of commitment or some invitation to take action without further communication -> only intention to sell/proposal inviting offers

Indicia of offer: language used, specific audience, completeness – can’t leave out quantity An offer has been made if, under all of the facts + circumstances existing at the time, a

reasonable person would have believed an offer was being made Auctions – UCC 2-328(3): a sale is with reserve unless the goods are in explicit terms put

up without reserve. In an auction with reserve the auctioneer may withdraw the goods at any time until he announces completion of the sale. In an auction without reserve, after the auctioneer calls for bids on an article or lot, that article or lot cannot be withdrawn unless no bid is made within a reasonable time. In either case a bidder may retract his bid until the auctioneer's announcement of completion of the sale, but a bidder's retraction does not revive any previous bids

Acceptance Offer is considered personal to the offeree, cannot be transferred to a third party

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Unless otherwise unambiguously indicated, an offer shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances (UCC 2-206(1)(a)

o Gives offeree choice b/w reasonable methods Where a contract does not specify a time within which it may be accepted, a reasonable

time will be implied UCC 2-206(b): an offer to buy goods for prompt/current shipment shall be construed as

inviting acceptance either by a prompt promise to ship or by the prompt/current shipment of conforming or non-conforming goods, but such a shipment of non-conforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer

o Accommodation: favor to another -> treated as counteroffer If advertisement sets forth offer w/ conditions, performing the conditions is tantamount to

accepting the offero An offeree cannot accept an offer without knowing of its existence

Firm offers (UCC 2-205): an offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror

Acceptance by silence (RS 2nd 69): o (1) Where an offeree fails to reply to an offer, his silence and inaction operate as

an acceptance in the following cases only:o (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

o (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

o (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

o (2) An offeree who does any act inconsistent with the offeror's ownership of offered property is bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if ratified by him

Mailbox ruleo No contract is formed when the offer is revoked before the acceptance is

dispatched to the offeror Notice to agent counts as notice to principal

o Unless the offer provides otherwise, an acceptance completes the manifestation of mutual assent as soon as put out of the offeree’s possession (RS 2nd 63(a))

o Revocation by mail is not effective until receipt – acceptances effective if sent before revocation received

o Once acceptance issued, too late to reject/withdraw the acceptance If rejection issued before the acceptance, acceptance only effective if

offeror receives it before rejection

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o Acceptance of option contracts are effective upon receipt, not dispatch Counteroffer Counteroffer destroys the offer and has the effect of switching the roles of offeror/offeree Traditional common law rule: mirror image rule A proposal to accept that varies from the original terms = a rejection/counteroffer Cannot later revive it and accept the original terms Exception: acceptance which requests a change is not invalid unless acceptance is made

to depend on assent to new terms Last shot doctrine: performance by both parties makes it clear that there is a contract – it

will be on the terms of the party who sends the last counteroffer prior to acceptance by performances

UCC 2-207: battle of the formso (1): Possible to form an agreement even though the terms aren’t mirrored, if

definite and seasonable (timely) response o (2): only applies if both parties are merchants; additional terms become part of the

contract unless the parties make it clear that any deviation from the offer is unacceptable or if the terms materially alter contract

o (3): go with agreed upon terms (cut rest) Purchaser of tangible good is contractually bound after failing to object to license terms

provided with the product E-commerce assent requires: Reasonably conspicuous notice of the existence of contract terms Unambiguous manifestation of assent to those terms Problem of unfair or unreasonable surprise Revocation Can be revoked at any time prior to acceptance Don’t need to expressly withdraw offer Allowed to make multiple offers for same item RS 2nd, 36: (1) An offeree's power of acceptance may be terminated by

o (a) rejection or counter-offer by the offeree, oro (b) lapse of time, oro (c) revocation by the offeror, oro (d) death or incapacity of the offeror or offeree.o (2) In addition, an offeree's power of acceptance is terminated by the non-

occurrence of any condition of acceptance under the terms of the offer. RS 2nd, 43: revoked when offeror takes definitive action inconsistent with intention to

enter into contract + offeree acquires reliable information to that effect Irrevocable contracts Option contract under RS 2nd, 25 1) Acceptance of consideration in exchange for promise to keep offer open 2) Offeree begins to perform the act requested in an offer to a unilateral contract

o Needs reasonable time to completeo Q of what is partial performance (determined by ct)o Voided by any action inconsistent with intent to perform

A counter-offer does not operate as a revocation where the offer is irrevocableo Contract has already been made, is already complete agreement

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Rejection does not terminate an irrevocable offer because usually offeree has paid consideration

o Exception: if offeror detrimentally changed position in reliance on rejection, can no longer accept

Death or incapacity of the offeror does not terminate Acceptance of irrevocable offer is operative when received rather when dispatched

o Different from revocable (when sent) Two approaches to contractor/sub: Common law (NY) – offer may be withdrawn prior to acceptance, even though there was

reliance. If contract, then bound – req’d consideration Contractor’s reasonable injurious reliance renders offers irrevocable

o Substitute for considerationo Reliance must be justified – not palpably low, etco Option contract until contractor does anything inconsistent with intent to accept –

bid chisel RS 2nd 87(2): an offer which the offeror should reasonably expect to induce action or

forbearance of a substantial character by 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

Problems with agreements Insufficient agreements Defective formulation and expression of acceptance

o No contract when parties attach materially different meanings to their manifestations of assent and neither knows/has reason to know the meaning attached by the other (Raffles, RS 2nd 20)

Can argue that one party should have known alternate meaning, especially the one with experience

o If one party is using eccentric language, that meaning not given equal weight – go with standard way

o Courts will look to avoid non-enforcement Indefinite agreements Agreement to agree as to a material term may prevent the formation of a contract – too

vague and indefinite to be enforcedo If you have sufficient indicia for determining what the indefinite term is, contracto Look at: custom, past course of dealing

Party expected to clarify when knew/reasonably should have known of other interpretation – onus on experienced. Incentive to be explicit

Modern law disfavors destruction of contracts based on indefiniteness Incomplete agreements Parties may reach agreement on some terms but leave other terms open for future

agreement UCC 2-204(3): if one or more terms are left open, a contract does not fail if the parties

intended to contract + there is a reasonably certain basis for giving an appropriate remedyo Courts may set a reasonable rate by looking at custom, past course of dealing

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o Exception: lack of agreement on quantity term causes contract to fail (UCC 2-201(1))

o Minority (NY): a mere agreement to agree unenforceable if material term left out – maintain freedom to (not) contract

Letters of intent: language ambiguously disclaiming the intent to be bound create no contract

o Liability may be imposed or breach of duty to negotiate in good faith

Avoidance of contracts Capacity to contract Infancy

o Restatement 2nd 14: until person is 18, can only incur voidable contracts (unless statute authorizes)

Common law states: age of 21 Protection of minor vs unfairness to other party

o Once age of majority if reached, minor has reasonable time to ratify or disaffirm contract – other party already bound

Courts lenient in allowing disaffirmance after reaching age, but also consider reliance interest of other party

May also be ratified in court prioro Minor is obliged to return what he still has – no obligation to account for

depreciation When minor tries to use minority as a sword to recover consideration paid,

adult may be allowed to deduct depreciation/value of benefito Restatement: when necessaries are sold + delivered to someone incompetent to

contract, he must pay reasonable price Subjective view of necessity, look at situation Examples: food, clothing, education

o Contractor has duty to ascertain infancy of other party If minor misrepresents age and adult reasonably relied: some courts allow

disaffirmance, some estoppelo If co-signed by adult, adult can be sued for minor’s breach (credit)

If can’t get adult to affirm: don’t sell or pray Mental incompetence

o Voidable contracts if, due to mental defect (RS 2nd15): Unable to understand in reasonable manner the nature/consequences of

transaction or Unable to act in a reasonable manner in relation to the transaction And other person has reason to know of the condition

o If contract made on fair terms, power of avoidance terminates if it would be unjust

o Law presumes everyone is competent – burden of proof on claimero Arbitration: if there is no validity to the contract itself because no capacity, then

the arbitrator has no authority. Should be defense against formation of agreement. Courts not consistent b/c of deference to arbitration agreements

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o Drugs: Self-induced (why get benefit), may not be obvious that other person is impaired (proof problems). Relief normally limited to situations where person is incapable of understanding the transaction and the other party has reason to know the former is impaired

Defects in bargaining process Group one: failure to contract Mistake:

o Belief that is not in accord with the facts (Restatement 2nd) o Facts in existence at time of contract, not judgments about future

Relief is narrowly construed to protect contract reliability + party interestso Restatement 2nd, 152 (1) and (2)

Mutual: when both parties make a mistake as to a basic assumption that has a material effect on the agreed exchange, contract voidable by adversely affected party unless he assumed the risk of the mistake

Unilateral: when one party makes a mistake as to a basic assumption that has a material effect on the agreed exchange and is adversely affected, he may void if the enforcement of the contract would be unconscionable or the other party had reason to know of/caused the mistake unless he assumed the risk of the mistake

Materiality: if reasonable person would consider effect of mistake significant in the making of the contract

Unconscionable: substantial hardship, here through pecuniary loss Assumption of the risk: where the parties know that there is doubt

in regard to a certain matter and contract anywayso As-is basis: buyer assumes risk

Includes error in transfero Reformation: Restatement 2nd S155

Where a writing that evidences an agreement fails to express the agreement because of a mistake of both parties, the court may at the request of a party reform the writing to express the agreement, except to the extent that rights of third parties will be unfairly affected

Burden of proof on P to show mutual mistake through clear and convincing evidence

Trend: broadening basis for reformationo Rescission and reformation are both equitable remedies under court’s discretion

Fraud and duty to discloseo Traditional common law: no duty to disclose circumstances which influence the

price of the good exclusively within the knowledge of one party Caveat emptor – buyer beware, responsibility to discover

o However, party aware of information that the other party might reasonably be expected to wish to know may be liable for failing to disclose

o Disclosure required when silent party has superior information not reasonably available to the other party – more burden on sellers

If it’s information normally expected to be found on your own – no duty Court may require disclosure when information gotten serendipitously

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o Restatement 2nd: disclosure required if necessary to correct a mistake of the other party as to a basic assumption on which that party is making the contract

Right to rescind only when undisclosed information was material Again, materiality: reasonable person in situation would attach

importance to in determining his choice of action Policy: promoting honesty and fair dealing Fiduciary/confidential relationship: duty to disclose Duty when necessary to correct a previous statement Implication: de-incentives acquiring information

Misrepresentation: assertion that is not in accord with the factso Common law traditionally limited recovery to cases where the was intent to

commit fraud by deliberately making a false statement False statement in response to direct inquiry is nearly always actionable

o Effect of such an assertion inducing other party to enter into contract may lead to tort claim for damages or suit for rescinding

Assertion need not be written/spoken, but through conduct Rescinding: return to status quo ante

o Misrepresentation must be one of fact rather than of opinion, promise, or prediction that other party justifiably relies on

Exception: statement by party with expert knowledge may be regarded as fact rather than opinion

o Restatement 2nd 164: if party’s manifestation of assent is induced by either fraudulent or material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable

Fraudulent when it is made with the knowledge that it is not in accord with the facts

Fraud in execution: void contract (example: misrepresenting character of document)

Innocent misrepresentation covered by “material”o Restatement 2nd 159 comment b: half-truth may be as misleading as an assertion

that is wholly falseo UCC 2-711: in contract for sale of goods, seller’s affirmations of fact are

considered express warranties. If goods do not conform to the warranty, buyer may reject the goods, recover price paid, and sue for breach of contract

Group two: particular contract against public policy Duress

o Usually pleaded as a defense or basis for avoiding a transaction + getting relief o Contract voidable on ground of duress when it is established that a party was

forced to agree to it by means of an improper threat precluding exercise of his free will

Improper: illegal, taking advantage in a way against the community moreso Economic duress: party threatens to breach agreement by withholding goods

unless other party agrees to some further demand, threatened party can’t obtain goods from another source + ordinary remedy for breach of contract not be adequate

Key is that there is already agreement, duress modified

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o Restatement 2nd 174: duress by physical compulsion prevents formation of a contract, while duress by threats makes a contract voidable

o Restatement 2nd 175(1): If a party’s manifestation of assent is induced by an improper threat by the other party that leaves that victim no reasonable alternative, the contract is voidable by the victim

Undue influenceo Unfair, high pressure persuasiono Ordinarily limited to situations where there is a relationship of trust/confidence

and one party is particularly susceptible to pressure Unconscionability – hybrid

o UCC 2-302: if contract/clause unconscionable, court may refuse to enforce contract, enforce remainder w/o unconscionable clause, or limit application of unconscionable clause to avoid unconscionable results

Unconscionable clauses will not be reformed (applies only to ambiguous or misleading)

Seeks to prevent oppression (procedural) and unfair surprise (substantive) In conflict with freedom to contract without court paternalism

o Contrary to promissory estoppel, fairness achieved by restricting scope of contractual liability

o Must be proved by party asserting the defense Exception: limitation of remedy clauses in consumer goods cases that

result in personal injuries o Consumer transactions

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

Procedural: one of the parties lacked meaningful choiceo Consider lack of understanding, inequality of bargaining

power o Argument: one of the choices can be not to contract, non-

essential Substantive: terms are oppressively one-sided

o When the question of unconscionability involves price, the disparity between retail value and sales price carries the greatest weight in determining unconscionability

o Can consider lack of mutuality, prohibitive expense to one party

Most states require both procedural and substantive elements, but don’t need to be present in same degree – scale

Contracts of adhesion: contracts presented on a take-it-or-leave-it basis Common law: presumptively enforceable if they conform to

reasonable expectations of the parties Restatement 2nd 211(3): where the other party has reason to believe

that the party manifesting assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement

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o Commercial transactions Merchants not notably successful in invoking defense – assumed to be

more informed However, possible when there is an imbalance in the parties’ relationship UCC 2-309(3) – termination without cause is not per se unconscionable,

provided reasonable notice is given Illegality Public policy

o Restatement 2nd 178(1): promise/agreement unenforceable on grounds of public policy if deemed so by the legislation or if the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms

178(2) – factors favoring enforcement: (a) protecting justified expectations of the parties, (b) any forfeiture that would result by loss of reliance interest if unenforced, (c) any special public interest in enforcement

178(3) – factors opposing enforcement: (a) strength of the public policy involved shown through legislative/judicial decisions, (b) likelihood that refusal of enforcement will further that policy, (c) seriousness of any misconduct involved + deliberateness, (d) directness of the connection between the misconduct and the agreement

o Balancing public policy vs freedom to contract; discouraging illegal bargainingo Common law: ex dolo malo non oritur action – no court will lend its aid to a man

who founds his cause of action upon an illegal act Test of whether P requires the aid of the illegal transaction to establish his

case – if he can’t, law will not help him Non-serious illegality may not prevent enforcement

o Illegality need not be pleaded– court may raise issue sua sponte; defense cannot be waived – RS 2nd Chapter 8, Topic 1

o No restitution as general rule with some exceptions – all assuming illegality not of serious nature (RS 2nd 197)

Denial of restitution causes disproportionate forfeiture P excusably ignorant of illegality of minor nature (198(a)) P was not equally in the wrong with the promisor (198(b)) P withdrew before the improper purpose was achieved (199(a)) Allowance of claim would put an end to situation contrary to public

interest (199(b))o No public policy against exculpatory clauses if they are not unconscionable

Exception: RS 2nd 403A – seller’s attempt to limit liability for damages to person/property caused by a dangerously defective product is against public policy

o Clauses that unreasonably exempt a party in the case of fraudulent + innocent misrepresentation are against public policy (RS 2nd 196)

o Covenants not to compete must protect some legitimate interest of the promise, be reasonable in scope, and not cause unreasonable hardship to the promisor

o Cannot assign legal malpractice claim or proceeds to adversary in litigation that gave rise to the alleged malpractice

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Despite Restatement 2nd 317 (contractual right can be assigned) Justifications: erosion of public confidence in the legal system, undermine

sanctity of attorney client relationship, commoditization of claims + increased/unwarranted malpractice claims

o Unmarried cohabitant can assert a contract claim against the other cohabitant so long a the claim exists independently of the sexual relationship and is supported by separate consideration

Courts generally refuse to enforce contracts for which the sole consideration of sex (meretricious relationships)

May also raise claims based upon unjust enrichment Other side: want to protect institution of marriage, by maintaining clarity

of division o Restatement 2nd 190(2): a promise that tends unreasonably to encourage divorce

or separation is unenforceable on grounds of public policy However, majority enforce prenups – predetermines property right

o Surrogate contracts disallowed – child’s interests valued over the contract, separation of mother from child against will. Beyond matter of contract, PP will not protect

o Contraceptive fraud – underlying child support: strong public policy that makes interests of child paramount, while insulating state from bearing financial burden for child

o Restatement 2nd 264: when performance of legal contract later made illegal act of government, promisor excused from performance on grounds of pp

Performance Scope and content of obligation No general requirement that an agreement/promise be in writing to be enforced as

contracto Statute of Frauds imposes req in particular cases

Modern trend toward informality in formation of contractso UCC 1-201(3): defines agreement as the bargain of the parties in fact as found in

their language or by implication from other circumstances Parol evidence rule

o Purpose: to channel parties into written, final expressions which provide for greater clarity for parties/court

UCC 94-95: Preference towards writings – more reliable than memories, forgeries easier to detect than lying on witness stand

o Integration: if the parties intended to make a writing the final expression of their agreement (Restatement 2nd, 209(a))

Partial integration: if final but not a complete expression of all terms (some unwritten)

Total/complete integration: complete and exclusive statement of agreement (RS 2nd 210A)

RS 213(2): effect of complete integration is to discharge prior written agreements within its scope

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RS 216(2): not complete if writing omits consistent additional term which is agreed to for separate consideration or such a term might naturally be omitted – separate agreement

If integrated, PER may exclude evidence of agreed terms extrinsic to the writing

No intention of finality/unintegrated: evidence of other agreed terms extrinsic to writing admitted

o Limitation: never goes to subsequent written evidence (only previous), any oral evidence

o Bars introduction of contradictory writingso Merger clauses: merge prior agreements into the writing; presumption that writing

contains entire agreemento Collateral contract doctrine: evidence of an oral agreement may be used to vary a

written contract only if The evidence relates to a collateral agreement (independent,

prior/contemporaneous) The oral agreement does not contradict terms of the written agreement ->

key to partial integration Lack of harmony in language or obligations UCC 1-303: evidence of course of performance, dealing, trade

usage allowed to supplement -> general rule, can always bring it in to establish ambiguity

It is one that the parties would not ordinarily be expected to put into writing (must not be too closely related)

Restatement 240(1)(b): permits proof of collateral agreement if it such that might naturally be made as a separate agreement

UCC 2-202: additional terms that would certainly have been included in the document are excluded

o Exclusion of evidence of oral collateral agreements must be based on credibility of evidence – must be misleading

o Evidence admissible to show an oral agreement that writing not to take effect unless stated condition occurs

RS 2nd 217: where parties to writing agree orally that performance is subject to stated condition, agreement is not integrated with respect to condition

Interpretation of contract Context evidence rule: parol evidence rule allows the admission of outside evidence to

determine the meaning of words in a contracto Test: if the language of the contract in light of all the circumstances is fairly

susceptible of either one of the two interpretations, extrinsic evidence relevant to prove either of the meanings will be admitted

Extrinsic evidence admissible in initial stage to determine whether language ambiguous

Language is context specific, varies o Exclusion of evidence only justified when language unambiguous

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o Restatement 2nd 212: determination of ambiguity made in light of all relevant evidence including extrinsic

Plain meaning rule: unambiguous contract language must be enforced as writteno Test: court first determines whether language is ambiguous. If yes, extrinsic

evidence allowed. If no, barredo Enables disputes to be resolved quickly and cheaply, protects from uncertainty of

litigationo Incentive for drafter to spell out agreement carefully

Restatement 2nd 206: in choosing among reasonable meanings, the meaning that operates against the drafter of the writing is preferred

Hierarchy of interpretation rules:o Contract languageo Course of performance – conduct between parties subsequent to particular

transactiono Course of dealing – multiple interactions with other side, history of transactionso Usages of trade – expect people to use language in normal way

Party that advocates special meaning for a contractual term has the burden of proving the special meaning was the one intended by both parties

o Burden of proof on party advocating narrow meaning over broad Insurance contracts

o Insurers are entitled to limit their liability and enforce reasonable conditions on policies

o Reasonable expectations doctrine: First apply the general rules of contract interpretation In view of unequal bargaining strength, court may interpret an ambiguous

term in light of the reasonable expectation of the individual who signed the policy (against insurer)

To give effect to parties’ reasonable expectation, the court must determine the parties’ purpose and intent by looking at the language, the contract as a whole, and the parties’ conduct

o Interpret contract so that each part has meaningo Can always contest reasonableness

Equivocal provisions seeking to narrow an insurer’s obligation are strictly construed against the insurero Generally: ambiguity interpreted against the party who furnished its

texto Policy: incentivizes clear contract writing

However, when words are clear and unambiguous and lead to no absurd consequences, no further interpretation allowed

Fact that term is not defined in policy, explicit as possible, or has multiple meanings doesn’t necessarily make it ambiguous – use generally prevailing meaning

Damages recoverable for breach of an insurer’s duty of good faith are not limited to the amount specified in the policy

Duty of good faith

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Every contract imposes a duty of good faith in its performance and enforcement (Restatement 2nd 205; UCC 1-203)

o Good faith: honesty in fact and the observance of reasonable commercial standards of fair dealing (UCC 1-201(20))

Commercial standards: specific to that particular situation, look at norms in an industry

Defined as the absence of bad faitho Bad faith: so exceeding the standard of commercial decency so as to be

unacceptable o Cannot be disclaimed by agreement, but parties can determine the standards of

good faith so long as they are not manifestly unreasonable (UCC 1-102) Can specify exactly what the responsibilities are, as long as sufficiently

clearo No duty of good faith in the negotiation of an agreemento Once in an agreement, a relationship is established – you have certain duties to

the other party and can’t simply act in self interest Settings where claims of bad faith made:

o Prevention, hindrance, duty to cooperate Every contract contains implicit promise that each will not intentionally do

anything to prevent performance by the other party Party who causes the breach of an agreement is precluded from

recovery for non-performanceo Exercise of discretion granted by contract

A party’s performance of a contract is in bad faith if that party’s exercise of discretion in how the contract is performed deprives the other party of a substantial portion of the value of that contract – economic motive

The deliberate exploitation of an oversight/error by a party in the performance of a contract is a breach of good faith

Goes against presumption that parties know and understand all terms of contract

The promisor depending on a satisfaction clause must exercise its judgment of satisfaction in good faith (RS 2nd 228)

When a party’s performance is subject to a condition, there is an implied obligation to make a reasonable and good faith effort to satisfy that condition

If there is some explanation for the behavior that does not involve trying to get out of the deal for an illegitimate reason, no bad faith

A buyer’s claim of dissatisfaction is evaluated according to an objective, reasonable, good faith standard – range of discretion, but cannot be to escape bad bargain (RS 2nd 228)

If good is unique/dependent upon personal taste, whim, fancy – subjective

A contract to sell a party’s entire output contains an implied agreement to make good faith efforts to continue to produce for the term of the contract, limited by reasonable expectations of the parties (UCC 2-306)

Requirements of buyers also maintained in terms of good faith

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More than trivial losses caused by production would warrant cessation; bad bargain would not

Exclusive dealing of a good imposes obligations upon both parties to use best efforts to supply the goods/promote the sale (UCC 2-306(2))

Exclusivity effort counts as considerationo Termination of the contract for reasons other than cause

No implied covenant of good faith and fair dealing in at-will contracts; may be terminated at the will of either party

Federal/state statutes protect an employee from discriminatory discharges based upon race, sex, age

Some judicial developments: some states have held that at-will employment can be contractually altered through statements made in employment handbooks. Few have imposed implied covenant of good faith and fair dealing

Policies: reduces transaction costs, encourages morally good behavior Allocations of risk: warranties and conditions Go through every one of the interpretative moves to determine whether warranty or

conditiono The fact that something is called a condition creates a presumption of it being a

conditiono Language of condition: “in the event that… there will be no further duty and other

party will be required to…”o If there is uncertainty, it is a warranty not a condition – in order to avoid forfeiture

(condition, loss of reliance interest), and allow damages (warranty) Condition: an event that must occur before performance of a contractual duty becomes

dueo A way of assuring you get exactly the performance you wanto Normally does not give cause of action for damages, restore pre-contract position

Warranty: a promise that certain existing facts relating to good sold are true – if promise is violated – breach + damages

o Express: any representation, description, sample or model that applies to the goods creates express warranty that goods will conform to it (UCC 2-313(1))

Affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of goods does not a create a warranty (UCC 2-313(2))

o Implied: Warranty that the goods will be conveyed with good title (UCC 2-312) Warranty of merchantability – that good is of fair/average quality within

description, fit for ordinary purposes for which such goods are used (UCC 2-314)

Warranty of fitness for particular purpose – when seller has reason to know any particular purpose for which the goods are required and the buyer is relying on the seller’s judgment to select suitable goods – fit for purpose (UCC 2-315)

To disclaim implied warranty: Must be in writing and conspicuous (Amended UCC 2-316(2))

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Or use expressions like “as is”, “with all fault” or other language commonly understood to mean the exclusion of warranties (UCC 2-316(3)(a))

o When buyer before contracting has examined the goods/sample/model or refused to examine the goods, there is no implied warranty with regard to defects which an examination would have revealed (UCC 2-316(3)(b))

o Attempt to reconcile express and implicit warranties, but specific displaces the general – express trumps implied, other than implied for particular purpose (UCC 2-317)

o Non-conforming goods may be rejected by the buyer. Once accepted, can only revoke when it impairs the value of the good

Public policy prohibits enforcement of a disclaimer of warranty when the bargaining power of the parties is unequal and there is no opportunity to negotiate a different agreement

o Need meaningful choice/bargaining power Warranties may be limited, but not to the extent that you destroy the purpose of the

warranty o Agreements excluding liability for personal injuries are prima facie

unconscionable (UCC 2-719(3)) A party’s failure to comply with an express condition in a contract will excuse the other

party from performingo Substantial compliance is not enough – condition must be met strictly

A condition that is necessarily implied in the language of a contract is as much a part of it as that which is expressed

If a contracting party fails to comply with a condition of performance, the other party is under no obligation to continue performance, but may not recover damages if it elects to waive the condition and continue performance

Possible grounds for excuse (typically invoked to prevent disproportionate forfeiture):o Agreement by both parties modifying the contract to discharge the condition

Waiver: knowing relinquishment of a legal right If you place conditions and accept the performance regardless,

conditions are considered waived Waivers can be express or inferred from a party’s conduct and

surrounding circumstances Waiver may be retracted by reasonable notification received by the other

party, unless the retraction would be unjust in view of a material change in reasonable reliance on the waiver (UCC 2-209(5))

Party that attempts to retract when there is reliance will be estopped

Waiver vs modification: waiver may be effectuated by one party, but a modification is the result of bilateral agreement

Says agreement, negotiating it, written, two parties involved – indicia of modification

Unilateral – indicia of waiver

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o Conduct by the party for whose benefit the condition was made that waives the condition

A party may only waive a condition if it is for that party’s own benefit o Changed circumstances that make compliance by the promise with the condition

impracticableo Discharge by the court

For contravention of public policy or ambiguity – if there is a provision in the contract inconsistent with the entire spirit/purpose of the agreement, interpret it consistent with the rest of the agreement + purpose

Constructive conditions of exchange: Independence of transactions and order of performance must be determined from the

parties’ intento Independent: performance by each not conditioned upon performance by the

other – breach by one party does not trigger right to stop performing on part of other, divisible

Even in a divisible contract, if non-performance impairs the contract as a whole with catastrophic consequences, may be in breach

o Dependent: performance of one conditioned upon performance by the other, indivisible

Divisibility allows pro rata recovery for the proportion of the performance renderedo Requirements for divisibility: it must be possible to apportion the parties’

performances into corresponding pairs of part performances and it must be proper to regard the parts of each pair as agreed equivalents (RS 2nd 240)

Apportionment req. met if the price for parts of the performance can be feasibly calculated (Comment d)

Agreed equivalent req. can be shown by intent of parties, but usually guided by considerations of fairness – injured party will not be required to pay for part performance if he cannot make full use of that part without the remainder of the performance; court must take account of possibility that remainder of performance can be easily obtained from some other source (Comment e)

Agreements that call for reciprocal acts to be performed at the same time are dependento Courts will construe agreements as dependent unless a contrary intention (independence)

clearly appears – presumption of dependent o Where all or part of the performances to be exchanged can be rendered simultaneously,

they are due simultaneously, unless the language or circumstances indicate the contrary (Restatement 2nd 234)

Policy: security against disappointment of expectations of a subsequent exchange of performances (RS 234, Comment a)

o Where the performance of only one party requires a period of time, his performance is due at an earlier time than that of the other party, unless the language or circumstances indicate the contrary (RS 234)

o A trivial and innocent omission will not always be a failure of a condition that causes forfeiture of the contract

Balancing forfeiture against triviality of failure

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Factors in determining triviality: purpose to be served, desire to be gratified, the excuse for deviation from the letter, the cruelty of enforced adherence

Additionally in the calculus: how hard is it to get it right, how effectively did you communicate how peculiar you are – more effective communication = more important condition

Parties may unequivocally make performance of every term a condition The extent to which the behavior of the party failing to perform comports with

standards of good faith and fair dealing is a relevant circumstance (RS 2nd 241)o Deficient performance is not substantial performance if the deficiency frustrates the

purpose of the contract in any real or substantial senseo A party is entitled to partial compensation for substantial performance if the other party

prevented full performanceo A party who receives a benefit from the partial performance of a contract is liable for the

value of that part performance, less any damages suffered due to non-completion – recovery on theory of quantum meruit

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 – no Q of morality of breach (RS 2nd 374(1))

Party in breach not allowed to recover more than the total contract price (RS 2nd 374, comment b)

Changed circumstances- impracticability and frustration of purpose Where a party’s performance is made impracticable without his fault by the occurrence of

an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary (RS 2nd 261, see also UCC 2-615)

o Applies in absence of fault by party seeking reliefo Applies whether event existed at time of contracting (266) or occurred after

contract formation (261)o Ties into 152(1), mutual mistake

Same test for frustration of purpose, except latter requires substantial frustration of party’s primary purpose (RS 2nd 265)

o Frustration of purpose: changed events that so change the nature of the obligations that it makes no sense to go forward

o Impracticability has to do with deliverer of goods/performance, frustration with deliverer of money

Surrounding circumstances and terms of contract will sometimes justify an inference that a party assumed the risk of impracticability

If the existence of a specific thing is necessary for performance, its failure to come into existence, destruction or such deterioration as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the contract was made – parties excused from performance (RS 2nd 263)

o Person’s death or incapacity -> RS 2nd 262o Necessity determined by agreement or arguable (if substantial interest in certain

thing or person)

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A party may not, by its own conduct, create the event causing impracticability of performance. It must make all reasonable efforts to avoid the impossibility, and once the event occurs, it must employ any practicable means of fulfilling the contract

Impracticability will excuse performance only if it results from a condition that was not foreseen and its nonoccurrence was assumed

o If foreseeable, ask if parties attempted to deal with that risk in their contract o Can argue risk was not significant enough to include in contracto If unexpected magnitude of risk: turns on what parties thought was reasonable

level of risk Additional expense does not necessarily make performance impracticable – only in

exceptional cases – slippery slope Subsequent acts of government that prevent performance of existing contracts or make

performance illegal discharge parties’ duty to perform (RS 2nd 264)o Presumption by both parties that law would not change – up to D to say legal

change likely

Breach of contract and permissible remedies Basic rules and types General rules for compensation post-breach:

o When there is breach, you must behave in a reasonably prudent commercial manner. As long as you do this and can prove the harms with reasonable certainty, entitled to damages

o A party who breaches a contract may be held liable for all damages which could reasonably have been anticipated at the time the agreement was entered into (Hadley)

o Must take actions to mitigate against the breach ; failure to do so may limit recovery

Expectation interest: attempts to put promise in position in which he would have been had the promise been performed; benefit of the bargain – favored

o Loss in the value to him of the other party’s performance caused by its failure or deficiency (RS 2nd, 347(a))

Reliance interest: attempt to put the promise back in the position in which he would have been had the promise not been made; change in position

o Contractor can recover reliance expenses in preparation or part performance (RS 2nd, 249)

Restitution interest: similar to reliance, deprives promisor of benefits conveyed. Doesn’t take into account lost profit or adverse reliance

o On a breach by nonperformance that gives rise to a claim for damages for total breach or on a repudiation, the injured party is entitled to restitution (RS 2nd, 373(1))

o Must have expected to be paid and given other party opportunity to reject benefit, unless reasonable excuse for failing to do so

o Quantum meruit: court might enter a judgment requiring restoration of a specific thing or awarding a sum of money to prevent unjust enrichment (RS 2nd 345, c & d)

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o P entitled to restitution only to the extent that he has conferred a benefit on the other party by way of part performance or reliance (RS 2nd 370)

o Sum of money awarded to protect restitution interest may be measured by (a) reasonable value to the other party of what he received in terms of what it would have cost him to obtain it from a person in the claimant’s position, or (b) the extent to which the other party’s property/interests increased in value (RS 2nd 371) -> lower value (374), good faith (373 comment d)

o An injured party is not entitled to restitution where the breaching party has not been enriched and cannot be put back in the position he would have been in before the contract

Objective of restitution: prevent unjust enrichment of breaching party To be entitled to restitution: must show that he has attempted as best as

possible to put the breaching party in the same situation that existed before the contract was made

Innocent party gets to elect the remedy, gets to pick one that is provable and works to their advantage

Doctrine of efficient breach: if a party finds an opportunity better than the one entered into, should be able to take it and negotiate out. Don’t want to force upholding of contract if everyone still as well off as before

Steps of analysis: what is the interest? If can prove with reasonable certainty, entitled to protect provided damages were foreseeable and you took reasonable steps to mitigate

Right to suspend performance/cancel upon prospective breach Repudiation prior to breach by nonperformance: anticipatory breach If a party renounces the contract before its provided start date, the non-repudiating party

may immediately sue – he rendered performance impossible; other party should not suffer greater damages as a result, delay would risk witnesses

A repudiation is (a) a statement by the obligor to the obligee indicating that he will commit a breach that would give obligee a claim for damages for total breach or (b) a voluntary affirmative act which renders the obligor apparently unable to perform (RS 2nd 250)

o May give rise to claim for damages for total breach, discharge the other party’s duties, or excuse the non-occurrence of a condition (comment a)

o Requirement that breach must be serious Repudiation includes language that a reasonable party would interpret to mean that the

other party will/cannot perform or voluntary affirmative conduct that would appear to a reasonable party to make future performance impossible (Amended UCC 2-610(2))

o When other party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other (UCC 2-610):

o Suspend performance and for a commercially reasonable time await performance by the repudiating party

Preserves contract for possible settlement, but allows for retraction of repudiation prior to cancellation/material change in position/indication that repudiation considered final (UCC 2-611(2))

o Or suspend performance and resort to any remedy for breach

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If a promisee suspends and a court finds that one of the requirements was not present – constitutes breach by promisee

Expressions of doubt as to performance do not constitute repudiationo Must be clear, unequivocal, and made by the other party of the contract

If the injured party disregards the repudiation and treats the contract as still in force and it is retracted prior to time of performance, repudiation = nullified

o Injured party must then wait until time of performance in order to sueo Once nullified, no anticipatory breach unless the repudiation is expressly or

impliedly repeatedo Material change in position in reasonable reliance on repudiation =/= nullified

Where reasonable grounds arise to believe that the obligor will commit a material breach, the obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance (RS 2nd 251(1))

o Obligee may treat obligor’s failure to provide such assurance within a reasonable time as a repudiation (RS 2nd 251(2))

When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return (UCC 2-609)

o Adequate assurances: something sufficient to make you believe that there is going to be full performance – statements, actions

Requirement may be different under different circumstances – seller of good repute vs known corner cutter, latter may require more

Party that has rightfully demanded assurance may be entitled to greater security than was provided for in the contract

o Request allows parties to mitigate risk of erroneous suspensiono Demand of adequate assurance must be in writing and received within 30 days

under UCC 2-609, not under Restatement AMF precedent: rejected formalistic requirement of writing

o UCC deals with sale of goods, Restatement not so limited Some jurisdictions have extended UCC 2-609 by analogy, like NY

Doctrine of anticipatory breach is inapplicable to actions for the enforcement of contracts for unconditional, unilateral contracts

o Ie: the future payment of money only, in installments or otherwiseo Changes terms of contracts and forces party to pay now what he contracted to pay

latero Corbin: discount full amount of payments to present value, relieve from paying

any agreed interesto Where an obligor repudiates a duty before he has committed a breach by non-

performance and before he has received all of the given exchange for it, his repudiation alone gives rise to a claim for damages of total breach – bilateral (RS 2nd, 253(1))

Limit: repudiation alone gives no claim for damages at all if he has already received all of the agreed exchange for it (comment c) – unilateral

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o Where at the time of the breach the only remaining performance is that of the party in breach and is for the payment of money in installments not related to one another, his breach by non-performance as to less than the whole, whether or not accompanied/followed by repudiation, does not give rise to a claim for damages for total breach (RS 2nd, 243(3))

o Avoiding exception: explicitly contract so balance of performance due on default, find some part of the exchange has not been rendered

Additional measures of damage Compensatory damages - breach or repudiation by payor For breach of real estate purchase contract, an injured party is entitled to recover his

actual, reasonably foreseeable losses when the traditional recovery formula is inadequateo Traditional: difference between contract and market priceo General rule: place the injured party in the position he would have been had the

contract been performed (expectation interest)o Damages may be reduced to the extent that injured party could reasonably have

avoided the loss (RS 2nd 350) Burden of proving the losses could have been avoided by reasonable effort

rests with breaching party (comment c) Mitigation of leases: if lessor fails to make reasonable efforts to relet,

lessee’s obligation will be credited with the amount of rent that the lessor reasonably could have obtained (comment b)

The inclusion of a provision in a contract for partial payments to be made as the work progresses does not render the contract divisible where it is not clear from the contract terms that each progress payment is intended to be so apportioned to the corresponding portion of the work as to be the full consideration for that part

o Parties may make it divisible and expressly stipulate value of each divisible part o Alternatively, P can recover in quantum meruit for what had been finished, in

contract for contract price less payments made + cost of completion, reliance expenditures

Burden of proof regarding cost of completion on party with superior access to info about completion costs (defendant)

o Fear of rewriting contracts that may be unjust When contract to sell goods is formed and goods are finished + ID’d in contract prior to

buyer breaching by refusing to accept delivery:o Since buyer did not accept the goods, seller cannot recover the price unless a

reasonable resale is not available. Seller must prove that it is unable after reasonable effort to resell them at a reasonable price or that the circumstances reasonable indicate that such effort will be unavailing (UCC 2-709(1)(b))

o Seller can resell and recover the difference between the resale price and the contract price together with any incidental damages, less expenses saved in consequence of the breach (UCC 2-706)

o Whether or not goods are resold, seller can claim damages measured by the difference between the market price at the time and place for tender and the unpaid contract price, together with any incidental damages, less expenses saved in consequence of the breach (UCC 2-708(1))]

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o Lost volume problem: when seller resells for approximately the contract price, not constrained by limited supply

If the measure of damages is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from the performance by the buyer, together with any incidental or consequential damages (UCC 2-708(2))

Measure of recovery by a wrongfully discharged employee is the amount of salary agreed upon for the period of service, less the amount which the employer affirmatively proves the employee has earned or with reasonable effort might have earned from other employment

o If but-for the breach, employee could not have taken the second job – deduct income from damages

o Deducting income from collateral sources (unemployment or similar benefits) is less compelling (RS 2nd 347)

When a tenant breaches a contract with a landlord, the usual penalty is to be liable for all resulting damages which are reasonably foreseeable – like consequential

Compensatory damages – breach by supplier of goods/services Whether a seller breaches by giving the buyer notice of renunciation or fails to perform,

damages awarded shall be measured as difference between contract price and the market price on the date delivery was due

UCC 2-712o (1) After a breach, the buyer may "cover" by making in good faith and without

unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.

o (2) The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages but less expenses saved in consequence of the seller's breach

o (3) Failure of the buyer to effect cover within this section does not bar him from any other remedy

UCC 2-713o (1) The measure of damages for non-delivery or repudiation by the seller is the

difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages but less expenses saved in consequence of the seller's breach

o (2) Market price is to be determined as of the place for tender/arrival RS 2nd 347: damages are the loss in the value to him of the other party’s performance

caused by the failure or deficiency plus incidental and consequential damages less any cost or other loss that he has avoided by not having to perform

o RS 2nd 348: breach results in defective or unfinished construction and the loss in value to the injured party is not proved with sufficient certainty. P may recover damages based on (a) the diminution in the market price of the property caused by the breach or (b) the reasonable cost of completing performance or of remedying the defects if that cost is not clearly disproportionate to the probably loss in the value to him

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Diminution: works efficiently to prevent waste, cost of completion: parties intend to get work done

Which depends on your assessment of markets, nature of transaction, and the desire of parties – want to effectuate parties’ intent. When you can’t figure it out – specific performance

Measure of recovery may also take into account whether breach was inadvertent or intentional

Consequential damages – foreseeability, mitigation, certainty, incidental reliance All you need to reasonably foresee is action of taking reasonable steps in mitigation, not

the actual steps UCC 2-715(2): consequential damages resulting from the seller’s breach include any loss

resulting from 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 -> duty to mitigate

o Comment 2: older rule at common law which made the seller liable for all consequential damages of which he had reason to know in advance is followed

RS 2nd 351o (1) Damages are not recoverable for loss that the party in breach did not have

reason to foresee as the probable result of the breach when the contract was madeo (2) Loss may be foreseeable as a probably result of breach because it follows from

breach (a) in the ordinary course of events, or (b) as a result of special circumstances that the party in breach had reason to know

o (3): A court may limit damages for foreseeable loss when justice so requires in order to avoid disproportionate compensation

Examples: excluding recovery for loss of profits, recovery only for loss incurred in reliance

RS 2nd 350(1): damages are not recoverable for loss that the injured party could have avoided without undue risk, burden, or humiliation

o Comment: if party in breach offers to perform for a different price, may be suitable alternative. But not if the offer is conditioned on surrender of claim for breach

Mitigation in sale of goodso Normally, seller who delivers goods to buyer in exchange for promise to pay

cannot recover goods if buyer fails to pay. Buyer liable for price of goods accepted (UCC 2-709(1)(a))

o If seller has possession of goods at the time of breach, seller may either resell the goods to third party (UCC 2-706(1)) or sue for damages (UCC-2-708(1))

o If seller unreasonably fails to resell goods still in its possession and ID’d to the contract, seller can claim damages measured by the difference between the market price at the time and place for tender and the unpaid contract price, together with any incidental damages, less expenses saved in consequence of the breach (UCC 2-708(1))

Consequential damages also must be reasonably ascertainable and such that you can prove with reasonable certainty

o Proving loss of future profits is difficult, but can look to business history to try and infer. Harder for new business, but possible if reasonably certain

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Tendency in law to undercompensate for harms suffered – supposed to get on with your life

Mental anguish and punitive damages Recovery for emotional disturbance will be excluded unless the breach also caused bodily

harm or the contract or the breach is of such a kind that serious emotional disturbance was a particularly likely result (RS 2nd 353)

o Damages for emotional disturbance are not ordinarily allowed – even if they are foreseeable, they are often particularly difficult to establish and to measure” (comment a)

Punitive damages are not recoverable for breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable (RS 2nd 355)

o Although an award of punitive damages must be reasonably proportionate to the amount of actual damages suffered by the plaintiff, a judge/jury is entitled to exercise consideration discretion in determining the amount – dynamic deterrence factor

Equitable remedies – injunction and specific performance Equitable remedies make it possible for P to obtain actual performance rather than

damages – exception rather than rule Noncompliance punished by fine/imprisonment for contempt Specific performance will not be ordered when the party claiming breach has an adequate

remedy at law Buyer’s right to specific performance/replevin: UCC 2-716(1)

o (1) Specific performance may be decreed where the goods are unique or in other proper circumstances – like inability to cover (comments)

Unique: like real estate -> money damages can’t adequately comp.o (2) The decree for specific performance may include such terms and conditions as

to payment of the price, damages, or other relief as the court may deem justo (3) The buyer has a right to replevin (recovery) for goods ID’d in the contract if

after reasonable effort he is unable to effect cover or circumstances reasonably indicate that such effort will be unavailing -> commercial feasibility of replacement

Specific performance in Restatement 2nd:o Specific performance or order enjoining nonperformance are remedies available

for breach (345(b))o Granted at discretion of the court, drawn as best to effectuate the purposes for

which the contract was made and on such terms as justice requires (358(1))o Damages or other relief may be awarded in the same proceeding (358(3))o Specific performance/injunction will not be ordered if damage would be adequate

to protect the expectation interest of the injured party (359(1)) Factors affecting adequacy: (a) difficulty of proving damages, (b) the

difficult o procuring a suitable substitute performance by means of money awarded as damages, (c) the likelihood that award of damages could not be collected

Doubts resolved in favor of specific performance (comment a)

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o Specific performance/injunction will be refused if such relief would be unfair because the exchange is grossly inadequate or the terms of the contract are otherwise unfair (364(1)(c))

If it is likely that the cost/benefit of damage remedy would exceed the cost/benefit of an injunction, for efficiency’s sake, injunction is the proper remedy

o Burden of persuasion on P who seeks injunction o Also considered is burden on the court – like ongoing supervision

Contracts for personal service/supervision – RS 2nd 367:o (1) A promise to render personal service will not be specifically enforced.o (2) A promise to render personal service exclusively for one employer will not be

enforced by an injunction against serving another if its probable result will be to compel a performance involving personal relations the enforced continuance of which is undesirable or will be to leave the employee without other reasonable means of making a living.

o The refusal is based in part upon the undesirability of compelling the continuance of personal association after disputes have arisen and confidence and loyalty are gone and, in some instances, of imposing what might seem like involuntary servitude (comment a)

Argument that specific performance precludes parties in an efficient breach from negotiating, lowers transaction costs of judicial system

Liquidated damages Must not be a penalty – stipulated sum significantly larger than amount required to

compensate injured party for losso Will not be enforceable because contract is about compensating for harm from

breach, not for deterrence Reasonableness determined at time of contracting UCC 2-718(1):

o Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in light of anticipated or actual harm caused by the breach, and in a consumer contract, in addition the difficulties of proof of loss and inconvenience or nonfeasibility of otherwise obtaining an adequate remedy

Restatement 2nd 356(1) – similar to unamended UCCo Damages for breach by either party may be liquidated in the agreement but only at

the amount that is reasonable in light of anticipate or actual loss caused by breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty

Reasons for liquidation: only possibility of compensation for the injured party for loss that is not susceptible of proof with sufficient certainty, limits damages due by party in breach to the sum stipulated, cuts expenses of litigation

UCC 2-719: modification/limitation of remedyo (1) (a) the agreement may provide for remedies and may limit or alter the measure

of damages recoverable, as by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts; and

o (1)(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.

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o (2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had

Reasonable person standardo (3) Consequential damages may be limited or excluded unless the limitation or

exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not

Protects consumers against abuse in contract formation, allows risk limiting by merchants

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