Contracts II - Cross
I. GenerallyA. CISGa. Article 1(1a): Applies to the contracts of
sale of goods between parties whose places of business are in
different countries (states) and both are parties to the CISGi.
1(1b): If the contract says that the contract is to be governed by
the law of a contracting State, CISG applies because it is a treaty
and trumps state lawsb. Article 6: parties can opt out of the CISG
c. Article 10: If a party has more than one place of business, the
place of business is the one that has the closest relationship to
the contract and its performancetaking into consideration what the
parties knew at the time of the contracti. If a party doesnt have a
place of business, then you look to the parties habitual residence.
d. NOT CISG: Many foreign companies set up US subsidiaries and a
contract between a US subsidiary of a Chinese company and a US
company would not be subject to the CISGe. UCC vs CISG: UCC applies
to the sales of goods to consumers and the CISG excludes consumer
transactions (goods for personal, family, or household use)i. Ex:
buy a car in another country for personal use, does not fall in the
CISG B. Restatements-Common Law
C. UCC- Article 2: Sale of goodsa. 2-105-Goods Defined
i. Includes all moveable items other than money (crops,
livestock, unborn young of animals)ii. Not covered: service
agreements, real estate/propertyiii. Goods have to be identified
and existing or else they are future goods and not coveredthat is a
contract to sell and a contract to sell is not included in the
UCCiv. There can be a sale in a part interest of goodsv. Money is
included if it is being treated as a commodity D. Princess Cruises
v. GE
Facts: Princess hired GE to do some work on a boat; it was to
fix things but included a large order of parts. GE says that UCC
doesnt apply bc it was a contract mainly for services and not goods
Held: UCC does not apply General Rule: Bone Break/predominant
purpose test: To decide if a contract is for services or goods you
must look at (1) the language of the contract (2) the nature of the
business of the supplier and (3) intrinsic worth of the materialsa.
Gravamen Test: Under this test the court does not try to classify
the contract as a whole one way or the other but applies Article 2
UCC if the controversy in question relates to the sale component
and plies common law is the issue arises out of the services
component. E. Asante Technologies v. PMC-Sierra
Facts: P is a Delaware Corporation with primary place if
business in Cali. Plaintiff purchased equipment from D. D says his
place of office and work space is in Canada but sells everything in
Cali. P says forms opt out of CISG and that bc one company that
distributes Ds products is in Cali, the UCC should apply. Held:
CISG applies, place of business is in Canada bc postage was sent
from Canada, goods manufactured there, and P had knowledge that
this was happening all in Canadaa. Opt out didnt work in this
contract bc it just said they wanted California law to apply and
under California Law the CISG would applyb. D wanted this in
federal court and the CISG always goes to federal courtc. Doctrines
such as unconscionability, duress, etc are not governed by the
CISGF. Hypo on Slide: HYPO: A has a computer store and has a
contract with Lenovo (foreign
company) computers to purchase 100 computers. Delivery is
scheduled for September 1. A agrees to make a payment for
the computers. September 1 comes and the computers dont
arrive. A wants to bring a breach of contract against
Lenovo.
Clause said that Illinois law would govern the contract.
What
would the court look to to determine if there is a contract
and
if there is a breach and so on?
ANSWER: The court would look to the CISG because as a treaty,
it
pre-empts Illinois law
II. Remedies: Measuring Expectations Restatement ApproachA.
Three kinds of damages contract damages: (can only claim 1)(Fuller
and Purdue)1. Restitution Interest (Exception): defendant must pay
for the benefit received2. Reliance Interest (Exception): plaintiff
relies on a promise and must be put back to their original
positionsimilar to promissory estoppel, there does not have to be a
benefit received; usually out of pocket costsa. The key is as good
a position as they were before the contract, not if the contract
were fully performed3. **(Focus of this section) Expectation
Interest (RULE): put the plaintiff in the position he would have
been had the defendant made good on his promise (specific
performance or money damages) Give P the benefit of his bargaina.
Profit is awardedgive the plaintiff the benefit of her bargainb.
Contract law does not take into account non-economic damagesc. If
contract does not qualify for specific performance and there are no
economic losses, then there is usually no liability.4.
Justifications for expectation damages rule:a. Plaintiff has relied
substantially, insubstantially, psychologically on a contract and
has been deprived of something (attitude of expectancy)
b. Will theory views contracting parties as exercising
legislative power, making basic rules regarding their agreement
which should be upheld.
c. Barnes theory damages should be measured by the net
expectation interest of the injured party.
d. Bargain principle both fairness and efficiency are served by
full enforcement of the defendants promise rather than mere
restitutionary award to plaintiff.
A. If unconscionability, fraud, duress, undue influence,
knowingly taking advantage of others ignorance may justify only
partial enforcement or no enforcement
B. 3 policies identified may justify full bargain
enforcement:
III. Surrogate-Cost theory: Assured protection of the full cost
of reliance
IV. Facilitation of planning (by deterring breach)
V. Protection of risk-allocation (contract to control price
changes in future)
B. Restatement Approach Defined: put the injured party in as
good of a position as he would have been in had the contract been
performedGeneral Measure = Loss in value + other loss cost avoided
loss avoided
a. Loss in Value (partial and total breach): difference between
the value to the injured party of the performance that should have
been received and the value to that party of what was actually
receivedi. Look at the actual loss in value to the injured party
and not a hypothetical reasonable person on the marketii.
Exception-Partial Breach: seller delivered the wrong goods, that
would be a partial breach and injured party would be awarded the
difference between the actual goods they wantedb. Other Loss
(partial and Total breach): loss other than loss in value, subject
to limitations such as that of unforeseeability i. Incidental
Damages: additional costs incurred after the breach in a reasonable
attempt to avoid loss, even If the attempt is unsuccessful1. Ex:
injured party pays a fee to a broker to obtain a substitute, that
expense is recoverableii. Consequential Damages: items such as
injury to person or property caused by the breach1. Ex: services
furnished to the injured party are defective and cause damage to
the partys property***The first two components apply to partial and
total breach. The next two only apply to total breach. c. Cost
Avoided (total breach only): Injured party terminates and results
in a total breach, save the injured party further expenditure that
would have otherwise been incurredi. Ex: injured party is a builder
that stops work after terminating a construction contract bc of the
owners breach, additional expenses the builder saves is cost
avoidedd. Loss Avoided (total breach only): injured party salvages
or reuses some or all of the resources that would have been devoted
to the performance of the contract i. Ex: builder sells some of the
material on his next jobC. Limitations of the restatement
approach:a. Damages must be reasonably foreseeable (i.e breaching
party had reason to foresee the harm as a probable result at the
time of the contract)b. Harm must be measured with reasonable
certainty (i.e. amount of damages cannot be speculative)c. Duty to
mitigate damages (i.e. damages cannot be recovered to the extent
that they could have been avoided or minimized by reasonable
efforts)d. Recovery only for loss that would not have occurred but
for the breachif it still would have occurred doesnt count e. R347
illustration 15f. Fixed costs/overhead are not included in damages
(electricity bills, things that you would normally pay regardless)
D. Lost Volume Seller:a. Defined: injured party could and would
have entered into the subsequent contract even if the one in
question wasnt broken and could have had the benefit of both. E.
Crabbys Inc v. Hamilton
Facts: D contracted to buy Crabbys restaurant; loan commitment
had to be given within 30 days and had to use reasonable diligence;
buyer made other arrangements like pushing back closing date,
putting utilities in their name, etc; July 30 everything is set and
buyer backs out and buys another property. Seller cant sell again
until May of next year. Buyer says there was no contract bc it was
supposed to expire if they didnt give the loan commitment within 30
days, cant have fair market value as of 11.5 months later, and it
was a distress sale. Held: Damages to seller based on the price
they sold at 11.5 months later being fair market value; 11.5 months
was reasonable to establish fair market value
Restatement approach applied: Loss in value (290k contract
price) + other loss (40k, interest, cost to maintain property)
loss/cost avoided (235k market value)
General Rule: damages for breach of a sale of land is the
difference between the contract price and the fair market value of
the property at the time of the breach (date the sale should have
been completed and one year is not too long to determine fair
market value) a. Fair Market Value: the price property will bring
when it is offered for sale by an owner who is willing but under no
compulsion to sell and is bought by a buyer who is willing to
purchase but is not compelled to do so.i. Can be found by real
estate appraisers, others who are qualified by education, training,
or experienceb. English Rule: where the seller is in breach, courts
restricted (only allowed) the plaintiff purchaser to restitution of
any payments made on the purchase price unless the defendant seller
acted in bad faith. c. American Rule: awards expectation damages
for any unexcused failure to convey regardless of the good faith or
bad faith of the sellerF. Hyposa. Seller agrees to sell computer
for $450. Market value is $600 Buyer breaches. What are the sellers
damages? $450 i. Seller breaches. Buyer has paid the money but the
seller hasnt given her the computer. Damages? She would get the
market value of the computer--$600ii. Nobody has paid anything yet.
But the seller says that she isnt going to deliver the computer.
The seller has breached. Damages to buyer? Difference between the
market price (loss in value) and the contract price--$150 b. Owner
hires builder to construct a building for $200k. Cost of
construction is $180,000. The owner breaches by terminating the
contract when the work is partly done. At the time of termination
the owner has paid the builder $70,000 for work done, and the
builder has spent a total of $95,000 for labor and materials. After
the owners breach the builder is able to resell $10,000 of
materials purchased for the projecti. ANSWER: (loss in value =
$200,000 - $70,000 = $130,000) + (other loss = $0) (cost avoided =
$180,000 - $95,000 = $85,000) (loss avoided = $10,000) = $35,000c.
Employer hired employee under a two-year employment contract for a
salary of $50,000 per year, payable in installments at the end of
each month. Six months after the employee starts work, the employer
wrongfully discharges her. The employee looks for other work for
three months, but is unable to find a job. Finally, she hires an
employment agency, paying it a fee of $1,000. Three months later
she obtains a job (similar to the one from which she was fired)
paying $45,000 a yeari. ANSWER: (loss in value = $100,000-$25,000=
$75,000) + (other loss = $1,000) (loss avoided=$45,000) =
$31,000.III. Measuring Loss in Value: Construction ContractsA.
Restatement Rule: if loss in value to the injured party is not
proved with sufficient certainty, damages can be measured by (a)
diminution in market value or (2) reasonable cost of completing
performance or of remedying the defects if that cost is not clearly
disproportionate to the probable loss in value to himB. Two ways to
measure loss in value
1) Cost to Complete: reference to cost in removing the green
paint and painting it blue ($300 or more). 2) Diminution in value:
difference in value that would have been if the contract had been
performed. D cant have breached the contract intentionally and must
show substantial performance made in good faith
**General Rule for damages is cost to complete but in some cases
the difference in market value is awarded when there is
unreasonable economic waste, breach is of a covenant which is only
incidental to the main purpose of the contract, and completion
would be disproportionately costly, good faith, innocent
oversight.C. Factors to decide Diminution in Value or Cost to
Complete:
a. Nature of breach (good faith v bad faith)purposely breach to
avoid costs then court will be less likely to award diminution in
valueb. Economic wastec. Disproportionate difference between
amounts of damages under the two measuresd. Idiosyncratic value
attached to performance (value that cant be reflected in the market
value of the property) e. Whether the breach is incidental to the
main purpose of the contract (Peevyhouse)f. Economic Waste: courts
will rarely award cost of completion where the defect is minor and
completion would involve economic waste (have to destroy whats
already done) D. Jacobs and Youngs: built mansion with the wrong
pipes, the pipes were still sufficient, Held: damages to compensate
for builders use of comparable pipe should be measured by the
difference in market value. E. Peevyhouse v. Garland Coal and
Mining Co
Facts: P owns a farm and D wants to mine coal from the property.
The lease states that D must put the property back to its original
condition after they are done mining. D does not do this, and it
would cost $29k. The value of the farm is only $300 less than if
the $29k work is done. Held: plaintiffs are only awarded $300 bc
the provision requiring the additional work was remedial to the
main purpose of the contract and the economic benefit from full
performance would be grossly disproportionate to the cost of
performing the work.
General Rule: if the cost is clearly disproportionate to the
probable loss in value to the plaintiffs then the court should not
award the cost of remedying the defects just the change in value or
the economic benefit should be awarded. ($30k work to increase the
property by $20k is not unreasonable and they would be awarded the
$30k)F. Handicapped Childrens Education Board v. Lukaszewski
Facts: Luk hired at the school but found another job closer to
home at Wee Care, school wouldnt let her out of her contract; she
resigned from the job and the only replacement they could find had
more teaching experience than Luk and cost $1000 more. Board wants
the additional compensation to find a replacement Held: Damages to
the school board; they lost the benefit of their bargain, only
expected to pay a certain price and took reasonable efforts to find
a replacement and there was only one applicant.
General Rule: damages for breach of an employment contract
include the cost of obtaining other services equivalent to that
promised but not performed, plus any foreseeable consequential
damages. a. The issue in this case is how to measure the value of
Lukaszewskis servicesshould it be what they were paying her or what
it would cost for a substitute? The court ruled that it should be
the cost for a substitute because otherwise the school wouldnt be
getting what it bargained for. G. American Standard v.
Schectman
Facts: P contracted to sell D equipment and buildings on his
property if D promised to excavate the property. D did not do so
and argues measure of damages should be the diminution in property
value without the excavation which was only $3k Held: P gets $90k,
cost to complete. The contract was not substantially performed
General Rule: diminution in value test is only applicable when
the defects are irremediable or may not be repaired without
substantial tearing down (substantial performance is already done)
however, courts have applied the diminution of value even with no
tearing down if the breach is only incidental to the main purpose
of the contract and completion would be disproportionately
costly.
II. Remedies: Measuring Expectations UCC ApproachA. Buyers
Remedies
a. Two ways a seller can commit a breach:1. deliver goods that
fail to conform to the contract in some way (quality of goods)
OR
2. fail to make proper tender of goods (failing to deliver on
time, delivering too few or too many, or failing to deliver at
all)
b. Cover Formula: 2-712
i. Buyer has the option of the cover rule or market value
ruleii. Defined: a buyer is allowed to cover by making in good
faith and without reasonable delay, any reasonable purchase or
contract to purchase goods in substitute and recover the difference
between the cover price and the contract price, plus incidental and
consequential damages, less expenses saved bc of the breach1. Buyer
doesnt have to buy identical goods, just commercially reasonable
substitutes2. Can be more than one contract or sale; 3. This rule
applies to merchants and non merchantsiii. Ex: price of substitute
was $650, contract price was $450. Buyer is entitled to $200iv. Ex:
B bought a different type of computer than the one that A
contracted to sell her. She got a Mac instead of a Dell. It was
fancier and she spent more money on it. Can she still recover the
difference between the c ontract price and the substitute
price?ANSWER: Depends on if her purchase was done in good faith and
without unreasonable delay. It is immaterial that hindsight may
later prove that the method of cover used was not the cheapest or
the most effective.c. Market Formula: 2-713
i. This only applies when the buyer decides not to buy
substitute goods i.e. the buyer has decided not to coverii.
Defined: Damages would be the difference of the market price at the
time the buyer learned of the breach and the contract price plus
incidental and consequential damages, less expenses saved bc of the
breachiii. Market Price: should be determined by the place of
tender (delivery), or in cases of rejection after arrival or
revocation of acceptance, as of the place of arrival. 1. Price of
goods of the same kind and in the same branch of trade
2. When market price is difficult to prove, you can show
comparable market price
3. If you cant show market price bc the scarcity of these goods
on the market, then usually u want specific perf.
iv. Ex: Market value at the time buyer learns of breach is $600,
contract price is $450. Buyer is entitled to $150.
v. 2-714 damages for accepted goods: amount owed is the
difference between what was accepted and the value they would have
been or should have been.
B. Sellers Remediesa. Cover Formula: 2-706(1)i. Defined: Seller
resells the goods after buyer breaches and can recover the
difference between the resale price and the contract price plus
incidental damages, less expenses saved bc of the breach1. Resale
must be made in good faith and in a commercially reasonable
mannerii. 3 steps seller must take to recover damages:1. identify
the goods being resold as the same ones under the contract that was
breached2. give buyer proper notice of resalea. Private sale: give
buyer reasonable notification of intention to resellb. Public sale:
give buyer reasonable notice of the time and place of the resale
except in the case of goods which are perishable or may quickly
decline in value3. Resale must be in good faith and in a
commercially reasonable manner
b. Market Formula: 2-708(1) i. Defined: Damages is the different
between the market price at the time and place for tender and the
unpaid contract price plus incidental damages, less expenses saved
bc of the breachii. Lost Profits: (alternative to market value) If
damages based on this formula are inadequate to put the seller in
as good a position as performance would have done, then the measure
of damages is the profit which the seller would have made from full
performance plus incidental damages. iii. Three cases that should
apply lost profits:1. Lost Volume Seller: 2. Seller who is in the
process of assembling a product for sale when the buyer breaches
(personalized items)3. Jobber: (middle person who purchases goods
for resale) buyer from a jobber breaches before the jobber has
acquired the goodsiv. When seller can recover the price of goods
for damages:1. Buyer has accepted the goods then the seller may
recover the price2. Goods are damaged after the risk of loss has
passed to the buyer3. Seller is unable to resell the goods with
reasonable effortv. Ex: contract price that was not paid is $450,
the market value of the laptop at time of tender is $300. Seller
gets $150. IV. Limitations of Expectation DamagesA. Foreseeability
a. Two types of damages that can be awarded:i. General Damages:
Damages that arise naturally from the breach of contractdont need
to make a special showing to recover these1. Ex: difference between
contract price and market priceii. Consequential/Special Damages:
damages flowing from special circumstances communicated at the time
the contract was formed. 1. Loss profits arising from collateral
contracts (note: lost profit on the actual contract that was
breached would be general damages)2. Injury to person or property
caused by goods that fail to comply with contractual warranties3.
Recoverability of consequential damages depends on whether they
were in contemplation of the parties at the time the contract was
made4. Type of loss must be foreseeable, not the way that it
occurs5. Can use objective analysis: if they had reason to knowb.
Restatement Approach: Cant recover for damages that the breaching
party didnt have reason to foresee as a probable result of the
breach when the contract was made. Loss is foreseeable when it
follows from the breach (a) in the ordinary course of events
(reasonable person should have foreseen) or (b) as a result of
special/unusual circumstances, beyond the ordinary course of
events, that the party in breach had reason to know (party had
actual notice)i. A court can decide to limit the damages for
foreseeable loss by excluding recovery of loss of profits, by
allowing recovery only for loss incurred in reliance or to avoid
disproportionate compensationii. Objective testiii. If there are
several contributing factors to the loss the party would have had
to foresee all of them. iv. If it is foreseeable that one party
will not be able to cover or get substitute goods, then that will
be taken into acct for damagesc. Special Situations under the
second rule (actual knowledge)i. Contract to Lend money: if the
contract is for D to lend money to P, courts presume money is an
available commodity that can be obtained elsewhereborrower can only
recover the difference between the market rate of interest and the
interest amount in the contract even if borrower cant borrow
elsewhere (if lender was aware borrower cant borrow elsewhere then
other damages can be awardedii. Liability to third parties: third
party liability had to be foreseeable at the time of the making of
the contractbreacher is responsible for reasonable litigation
expenses and settlement the non breaching party has to payd.
Parties can allocate their own risksi. P gives notice to D about
the special circumstances (part 2 of Hadley rule) ii. Parties can
say D will not be liable for reasonably foreseeable circumstancese.
Tacit Agreement Test: (for recovery of consequential damages):
Injured party has to show special circumstances were brought to the
attention of the breaching party and the breaching party
consciously assumed the liability in question. f. Epstein Rule:
(default rule):When the contract is silent on the matter of damages
the court should award the damages that the parties would most
likely have agreed on had they considered the issue of damagesg.
Eisenberg Rule: Allows recovery of all losses that are proximately
caused by a breach, subject to contractual allocation of risk and
principles of fair disclosure of contractual limitations on
liability (essentially a tort standard) h. CISG: Damages for breach
may not exceed the loss that the party of the breach as a possible
consequence of the breach (even broader)i. Hadley v. Baxendale
Facts: P had a mill that stopped operating bc the crank broke;
hired D to transport a new shaft and D said it would take a day but
took longer which made P lose profits for those days Held: for D,
they didnt know that P did not have another shaft and it would
cause P to stop business General Rule: (1) Non breaching party is
entitled to damages that arise naturally from the breach itself
(Direct/general Damages) or (2) those from special circumstances
that were communicated or known by the parties when the contract
was entered into (Special/Consequential Damages) (Have to know
about the special circumstances to be liable for damages)B.
Certainty/Causation
a. Restatement Rule (352): can only recover damages which are
established with reasonable certainty (also have to show amount of
losses with reasonable certainty; profits and the amount of those
profits) i. Have to show that you had losses but also amount of
lossesii. Profits from a new business: usually too speculative;
courts will allow it if plaintiff can show that he ran a similar
business in the past and show those profits iii. Have to be able to
show what the actual cost of completion is or else you wont be able
to offset what your damages should beb. Fact of Damages v. Amount
of Damagesi. Fact: It is established that there was some damage
(even if exact amount isnt established) and jury is given large
leeway as to how much they can awardonly need a general idea of the
actual amount once its proven there were damagesii. Amount: the
actual amount of damages that were sufferedc. Reputation: US courts
are unwilling to award damages for loss of reputation even if it
can be established with reasonable certaintyd. Foreseeability vs.
certainty:
i. Foreseeability has to do with whether the possibility of the
damages was sufficiently likely at the time the contract was
madeii. Certainty relates to how clear it is at the time of suit
that the alleged losses in fact occurred and were caused by Ds
breache. Redgrave v. Boston Symphony
Actress could recover consequential damages for loss of
professional opportunities (different than harm to reputation) bc
the symphony cancelled her appearance bc of political statements
she made. Other orchestras cancelled her appearances and it is
reasonably certain it was from Boston Symphonys actions. f.
Florafax International Inc v. GTE
Facts: Florafax hired GTE to answer calls from flower orders;
GTE knew that Bellerose was one of its main clients. Florafax had
one year, then month by month contract w Bellerose but could be
terminated by either w 60 day notice. GTE argues no lost profits
from third party contract and loss of Bellerose profits were not in
contemplation at the time of the contract Held: Damages to
Florafax; GTE knew/it was reasonably certain the consequences of
breach and dont have to be limited to 60 day period bc it is
reasonably certain that their contract with Bellerose would have
continued longer General Rule: Lost profits are recoverable as long
as they are (1) foreseeable when the contract was made (2) they
directly or proximately result from the breach and (3) they are
capable of accurate estimation (certainty) i. Can only recover net
profits and not gross profits C. Duty to Mitigate
a. Restatement Approach (350): Damages arent recoverable for
loss that could have been avoided without undue risk, burden or
humiliation i. Not precluded from recovery if the injured party
made reasonable but unsuccessful efforts1. Only need to make
reasonable effortsnot expected to incur considerable expense or
inconvenience, disorganize business, damage reputation, break other
contractsii. Lost Volume Seller: If the seller would have entered
into both contracts and received benefits from both, the one is not
a substitute for the other. iii. Personal Service/Employment
Contracts: Courts wont make someone take a position that is at all
different than the one beforemust be completely comparable (Shirley
McClain)D. Duty to Mitigate under UCC
a. UCC Lost Volume Seller2-708(2): If measure of damages is
inadequate to put the seller in as good a position as performance
would have, then damages is the profit (including overhead) that
the seller would have made from full performancei. Has to be able
to have entered into both contractsb. UCC 2-715(2): party has to
cover when it is possible to do so and if they do not where it was
possible they cant recover those damagesi. i.e. buyer doesnt get
goods at all or gets defective goods, buyer has to try to purchase
substitute goods from another supplierii. once buyer rejects the
goods, they have to follow any reasonable instructions form the
seller concerning how to get rid of the goods, without instructions
buyer must make reasonable efforts to sell them if they are
perishable or threaten to decline in valuec. What seller can do:i.
Resell the goods and can recover contract/resale difference orii.
Seller can choose to not resell the goods and get the difference
between the contract price and the market price at the time and
place for tenderiii. Sometimes seller can hold onto the goods and
sue for the contract priceonly allowed where seller is unable after
reasonable effort to resell the goods at a reasonable price or the
circumstances reasonably indicate that such effort will be
unavailing.iv. Lost profits if none of the others workd. Rockingham
County v. Luten Bridge Co
Facts: County hired Luten to build a bridge, county repudiated
and Luten continued to build the bridge Held: Luten only gets
damages from the time of the breach, should have stopped working
General Rule: once a party breaches or repudiates a contract, the
other party cannot continue on with the contract and expect damages
for full performancei. Approach: damages to injured builder =
expenses incurred + expected profit (same result as R347 approach,
just a different way to calculate it) e. Maness v. Collins
Facts: P sold business to D w agreement that he would be manager
for 3 years; they fired him for not fulfilling his duties bc the
son/nephew of D told employees not to listen to him, verbally
abused him, selling drugs out of the company building, so P just
stayed in his office more and more. P built himself a new house and
did not seek other employment, says non compete agreement should be
void. D claims he had to mitigate Held: Damages to P; there was no
evidence at trial that there was comparable work out there for P,
and failure to mitigate damages doesnt preclude damages completely
General Rule: defendant has the burden of proving that there was
suitable alternative employment available, employment is
comparable, and employee failed to use reasonable diligence to
obtain such alternate employment. i. Employee needs to mitigate
with comparable work: Parker v. 20th century Fox Case: D promised P
(Shirley McClaine) to be in a major musical motion picture then
took her out but offered her a non musical motion picture for the
same pay. The second is not comparable to the first bc it is a
different motion picture and different directors, etcii. Fair v.
Red Lion: Employee fired and then offered job back and she said no
bc she had apprehensions about working there again. This is a
failure to mitigate1. It would not have been if they were
previously harassed on the job and there was a hostile work
environment2. Would not have been if when compensation and duties
were difference and employee would report to his replacement f.
Jetz Service v. Salina Properties
Facts: Jetz supplies coin operated laundry machines, has a
warehouse with 1500 machines. 6 yr lease with Salina; Salina pulled
Jetz machines out and put their own and says jetz failed to
mitigate and should only be awarded cost to move the equipment
Held: jetz is a lost volume seller; had enough machines to rent out
more
General Rule: duty to mitigate does not apply to lost volume
sellers; To be a lost volume seller you must prove that (1) possess
the capacity to make an additional sale; (2) it would have been
profitable to make an additional sale and (3) it probable would
have made an additional sale absent the buyers breachi. Fixed
costs: cant get damagesii. Variable costs: can get damagesg. Hypo:
Professor is hired by JMLS under 2 year contract to teach contracts
at $50,000 a year. Fired 6 months after beginning but she was paid
for 6 months. She looks for a job for six months and then finds a
job at Marquette law school at $45,000/year. She incurs $1,000 in
expenses in looking for a new job.What if she doesnt find another
law school job but gets one at the wee-care day care center.
Damages? V. Non-Recoverable DamagesA. R353: When damages for
emotional distress can be recovered
a. Breach of contract also causes bodily harm:i. Sullivan v.
OConnor: Dr. did nose job on patient and promised it to look a
certain way and it came out bad; has to get another operation;
damages can include emotional distress of having to undergo
additional operationb. Emotional distress is a particularly likely
consequence of breach: i. Contracts of carriers and innkeepers with
passengers and guests, contracts dealing with carriage or
disposition of dead bodies, contract for delivery of messages
concerning death, anxiety over death, birth of a crippled unwanted
child, ii. Does not include the loss of money c. ED not recoverable
when:
i. loss of money unless left destitute
ii. loss of relationship with child (custody battle)
iii. ED from miscarriage when Dr didn't return calliv.
construction delays/departure
v. not for nervousness or emotional distress
vi. doesn't matter if given notice that person is "delicateB.
R355: When punitive damages are recoverable:
a. Can recover punitive damages if the conduct constituting a
breach is also a tort for which punitive damages would be
appropriatei. In a tort an injured party can recover punitive
damages when the conduct is outrageous. ii. Ex: D a car dealer
sells a used car to P. d states the car Is nearly new with only
3000 miles on it. D set back the odometer from 33,000 miles. P
discovers Ds misconduct a few months after the purchase and sues. P
is entitled to punitive damages since Ds conductfraudis a tort. b.
Two types of breach (Professor Dodge): punitive may apply. i.
Opportunistic breach involves an attempt by the breaching party to
gain at the expense of the non- breaching party. (to prevent
opportunistic breach bc dont increase social wealth.
ii. Efficient Breach occurs when breaching party seeks to engage
in another transaction more profitable (incentive to negotiate for
release from contract and improve efficiency and less transaction
costs)
c. Exceptions:i. Bad Faith Breach of Insurance Contracts: bad
faith refusal to honor claims brought by third parties against
their insured parties and also first party claims 1. Damage for a
fire (first party claim)2. Only limited to insurance contracts (get
punitive damages)3. Factors: for insurance co breach:a. Insurance
is protection against calamity
b. Unequal bargaining position
c. Claimant especially vulnerable economic position
d. Whole purpose of insurance is defeated if Ins. Co can
refuse/fail, without justification, to pay a valid claim.
e. Rationale to encourage fair treatment and penalize corrupt
practices by insurers. 4. If insured party makes valid claim and
they refuse to pay = bad faith. Then both compensatory and punitive
damages
5. Standard must show absence of reasonable basis for refusal to
pay policy or reckless/unreasonable reason for non-payment. ii. Can
claim bad faith for all breaches of contracts, not just insurance
contracts; example is if someone breached voluntarily to make a
better deal somewhere else. d. Note: although punitive damages for
bad faith breach of a noninsurance contract is unlikely, punitive
damages can be recovered if the defendants conduct goes beyond bad
faith to amount to an independent tort for which punitive damages
are recoverablei. Usually cases that involve fraud or breach of
fiduciary dutyii. Allowing punitive damages for other actions would
end in a windfall for the plaintiff and goes against the
expectations principlewould put plaintiff in a much greater
positionVI. Efficient BreachA. Policy for Efficient Breach: If
makes one person better off without making anyone else worse off
then it is 1) socially beneficial 2) efficient breach
B. Justification for the Expectation Damage Rule
a. Executory Contract: Contract that has been neither performed
nor relied on i. However, just bc the contract wanted performed
doesnt mean that one party didnt rely on the contract to make other
arrangementso most contracts are not purely executoryb. Why do we
always pay the injured party his expected profit?i. May compensate
for less tangible elements of reliance that dont always get
calculated in damages. There is a fear of under-compensating.ii.
Encourages reliance on contracts, want to award a full measure.
Rely on the institution of contracts.iii. Deter the decision to
breach.iv. Psychological Argument: the injured party has a property
like interest in that performance and the better approach is to not
limit the injured party to out of pocket expenses; he has an
expectancy once he enters into the contract1. Ex Doctor: you cancel
an apt and they still charge you bc they could have seen another
patient at that time. c. Hypos
i. A agrees to sell corn to B for $2/bushel for corn. B is
planning to resell the corn to C for $3/bushel. The market price at
the time of the breach went up to $4/bushel. Suppose A has better
opportunities and sells the corn to another person1. UCC Market
Formula: Bs damages are the difference between the market price and
the contract price 2. UCC Cover Formula Variation: B went out and
spent $4.50/bushel to keep the contract with third person. With
good faith and without unreasonable delay-he can recover the price
differential which is the difference between the cover price and
the contract price.3. What if C releases B from the obligation to
perform under the contract? B now wouldnt have an obligation
anymore. Could the farmer make an argument that damages should be
limited to less than $2/bushel?4. ARGUMENT: At the end of the
contract, he would have only been getting $1/bushel because that
was what the expectation was under the contract.5. ARGUMENT AGAINST
THIS: Recognize that one function of contracts is that it is a
mechanism by which parties allocate risk. If it shifts in ones
favor, then he should be entitled to the market price. You take a
risk when you contract!C. Theory of Efficient Breach
a. Rule: If breaching would be more profitable or efficient for
the breaching party, then it is efficienti. Posner: breaching a
contract is good if its efficient-Economic Insight 1. Sometimes
better for a party to breach a contract because he gets a better
deal out of it2. Rules of contract remedies are good from a policy
perspective, because breach of contract might not be considered a
socially bad thing3. Perato Superior: Some parties are better off
without some party being worse offii. Holmes: breaching a contract
is amoral- when you breach a contract you either pay damages or you
honor your contract-there is no morality involvediii. Basic Idea:
efficient breach is that no one is worse off but some are better
off. b. Arguments against the theory:i. doesnt take into account
the transaction costs to litigate and to actually get the
damagesii. Doesnt take into account the emotional distress and
other damages that arent usually compensated for.iii. It isnt fair.
The injured party is under compensated and stressed out.iv. Doesnt
capture idiosyncratic value-the value the plaintiff has attached to
the contract.v. The value of contractual relationships-there is an
intangible value of the contract.c. Note: Make sure to argue the
Lukaszweski approach and the Roth approach d. Roth v. Speck
Facts: P owns hair salon, hires D for $75 a week or 50% of
commissions, whichever is greater. D stops working after 6.5
months. P tried to hire two other people but he was making no
profit. Held: couldnt measure against Ds replacement bc D was
irreplaceable so used the difference between what D was actually
worth ($100 being paid at new job) and the difference of salary at
Ps salon ($75) General Rule: Value of an employees services may be
an appropriate measure of damages resulting from breach of an
employment contract so long as these damage can accurately be
proven. (Had to use this approach bc there was no replacement) i.
Disgorgement Principle: recovering beyond damages and also getting
the profits that the breaching party incurred from the breach1. S/B
used in 2 types of cases:
a. Those involving appropriation of some property or
quasi-property interest rightly belonging to plaintiff
b. Those in which deterrence is a major factor
i. Reprehensibility of defendants conduct
ii. Importance of duty he breached
iii. Extent of defendants contribution
iv. Justification for granting plaintiffs windfall
ii. Policy Argument Against this Approach: the jobs could have
been different, in Lukaszewski the two jobs could have been
different; why would anyone go to another job if you would have to
pay the extra money that you are making at your new job; it
punishes the breaching party and provides a disincentive for an
efficient breachiii. Breaching Party bares the burden of showing
the mitigation of damagesiv. Exception: This case is an exception
to the rule in Lukaszewski; requires employee to give up earnings
they got at the new job1. Policy Argument : this approach to
measuring damages overly deters the choice to breach. However,
court justifies it bc it was the only way to make the injured party
whole. VII. Reliance DamagesA. R90 Promissory Estoppela. Elements1.
Promise made
2. Promisee should reasonable expect to induce action or
forbearance
3. Does induce action or forbearance
4. Injustice can only be avoided by enforcement of the
promise
a. Remedy can be limited as justice requires
b. Changes between 1st and 2nd restatement versionsi. 1st
required that the promise be of definite and substantial
characterii. 2nd gives the court discretion to limit the remedy as
justice requires 1. Old Rule: Uncle promises nephew $1000 to buy a
car and nephew relied by purchasing a $500 car. Nephew is still
entitled to the $10002. New Rule: Nephew would only get $500 bc
that is all justice requirese. Promissory Estoppel: if plaintiff
actually sues on promissory estoppel they cant get damages but can
get reliance damagesB. Situations Reliance Damages would be
sought:a. Pre contractual reliance scenario (Walser)b. Employment
contract setting (i.e. reliance on an offer of at will
employment)
c. Where expectation damages cannot be proven with reasonable
certainty i.e. lost profits cant be proven or other damages cant be
proven (then can go to out of pocket with reliance)
i. Under reliance damages P can get compensated for expenses in
preparing to perform and those made in actually making part
performance
d. No legally enforceable contract
e. Plaintiff is a buyer under a land contract and seller does
not want to convey the property
f. P would be able to recover what she has paid on the purchase
price plus expenses that she reasonably incurred in connection with
the transaction (however P can get the benefit of his bargain if
seller did so in bad faith or it was fraud in refusing the
conveyance)g. NOTE: the breaching party is allowed to try and
offset the damage award by proving loss that the injured party
would have suffered had the contract been full performed. C.
Limitations on Reliance Damagesa. Cant be more than the contract
price
b. Most courts also refuse to allow reliance damages to exceed
expectation damages but place the burden of proof on the defendant
to show what the plaintiffs loss would have been. i. If D proves
that P would have actually lose money on the contract, that lost
profit will be subtracted from the reliance damages PG 314 Emanuels
reliance is compensation for the harm and reliance on the promiseD.
Hypo: P applies to D, a radio distributor, for a franchise to sell
radios. D erroneously tells P that the franchise has been approved,
that P can proceed to employ salespeople and solicit orders and
that an initial shipment of thirty radios will be made. P spends
$1150 in preparing for the business but doesnt receive the
franchise or radios. P sues on promissory estoppel. Cant get lost
profits but can get reliance damages i.e. expenses in preparing E.
Walser v. Toyota Motor Sale USA
Facts: P applied to open and run a Toyota dealership, district
manager told P that they were their dealer and the letter of intent
was formally approved. In mean time P bought land for dealership
and then found out they werent getting it. Awarded out of pocket
expenses but P claim they should also be awarded lost profits and
the limit of out of pocket expenses shouldnt just be the difference
of the market value and contract price, they should also get all
their other investment expenses which is more than $1 million Held:
only gave them difference between the value of the land now and
what they bought it for bc that was reasonable reliance based on
the promise
General Rule: damages from a promissory estoppel claim may
properly be limited to out of pocket expenses; damages may be
limited to what justice requires and that can just be to the extent
that the plaintiff relied based on what is reasonable for the
promise made i.e. compensation for what they actually lost. a. Can
limit damages less than full expectation damages to go only as far
as justice requiresthink pre contractual reliance
b. At will employment: offered a job by law firm in NYC, sell
house, get apartment in NY, week into employment you are let go: if
the contract is an at will contract cant recover expectation
damages. Courts will sometimes award reliance damages insteadc. If
expectation damages cant be proved with reasonable certainty: lease
agreement to open a book store, make some out of pocket
investments, furniture shelves inventory; then landlord breaches
and says you cant rent; bc its a new business cant show lost
profits with any degree of certainty so maybe you can recover out
of pocket damages i. RULE: where expectation damages cant be proved
with reasonable certainty the court will go to out of pocket
expensesVIII. Restitution DamagesA. Generally:a. Defined:
restitution interest is the value to the defendant of the
plaintiffs performance; want to give damages to plaintiff for
however much the defendant was enriched. b. Goal: To prevent unjust
enrichment c. Trying to award the value rendered to the defendant
regardless of how much the cost to the plaintiff and how much the
plaintiff was injured by the defendants breach. d. If the
performance has no value to the defendant then it has no
restitution damages (regardless of how much it cost P) B.
Restitution when the other party is in breach:a. R373: When there
is either a breach by non performance that gives rise to damages
for total breach OR a breach by repudiation, the injured party can
get restitution for any benefit that he has conferred on the other
party by part performance or reliancei. Non Performance: Must be a
total breach and cant be a partial breach (i.e. you accept
performance w knowledge of defects then you cant claim total
breach) b. Exception: Cant claim restitution if the contract is
complete and all that is left to be done is a sum of money paidthen
have to claim expectation theory and just get contract price plus
interestC. Restatement 371: Measure of Restitution:
a. Damages award is the lesser of i. The reasonable value to the
other party of what he received in terms of what it would have cost
him to obtain it from P or someone exactly like P (essentially the
benefit D receivedusually calculated by market price) ORii. The
increase in property value or how much the breaching partys
interest has advanced. iii. Limitation: Not limited to contract
priceD. Restitution as a remedy for breach of contract
a. If one party commits a material breach, the other party can
rescind and recover in restitution.b. Usually where expectation
damages cant be calculated with reasonable certaintyc. Ex:
Contractor does part of the work and the owner breaches, contractor
may be unable to show what his cost of completion would have been.
Contractor will normally be permitted to recover restitution
damages, calculated as the market value of the partially completed
performance. E. Restitution is not limited to the contract
price
a. Work done by P prior to Ds breach has already enriched D in
an amount greater than the contract priceF. Restitution not
available where P has fully performeda. If at time of Ds breach, P
has fully performed (and D owes only money) most courts dont allow
P to recover restitutionary damagesmust go to expectation damagesb.
P can sue if it is based on non performance or repudiationi. If the
breach is based on non performance it has to amount to a total
breach and not just damages for a partial breach in order to be
able to get restitution damages. G. Restitution for the breaching
party a. R374: Breaching party is entitled to restitution for any
benefit that he has conferred in excess of the loss that he has
caused by his own breachi. If the contract explicitly says that
performance should continue if there is a breach, the party cant
get restitution if the value of the performance as liquidated
damages is reasonable in the light of anticipated or actual loss
caused by the breach ii. Note: if a party purposely gives services
that are different than what was promised that person acted
officiously and will be denied recovery H. Losing Contractsa.
Defined: if a party would lose money under the contract if it were
completed, they can still sue under restitution and get the
reasonable value of their work regardless. b. Party in breach is
only liable to the extent that he has been benefitted from the
injured parties performancesimilar work donec. If all is left is
the to pay a certain sum, then that would be the expectation
damages and cant get restitution damagesI. Impracticability: you
can recover under restitution if the contract is rescinded on
grounds of impracticabilitya. Ex: hire someone to paint house, they
bring equipment, painted half the house, and then the house is
destroyed by fire. Contract is rescinded on grounds of
impracticabilityeven if the house has been destroyed he did confer
a benefit and would be entitled to damages measured by the value of
the benefit conferred. J. Lancellotti v. Thomas
Facts: P bought Ds business and D agreed that he would make an
addition or else the rent would go down. P made $25k down payment
and only operated the business for one summer. P wants his $25k
back and D wants $52k for the rent for the summer and compensation
for damages to business, good will, physical operation Held: it has
to be determined if $25k is actually what D lost and if they should
keep that money, if not actual damages it would be a windfall
General Rule: a breaching party is entitled to restitution in
excess of the loss caused by the breach (r374)a. Breaching party
cant sue under expectation theoryb. Britton v. Turner: laborer
agreed to work for 12 months on employers farm for $120 to be paid
at the end. Laborer quit at 9.5 months and sued in quantum meruit
for labor performedK. Maglica v. Maglica
Facts: Couple lived together for 20 years, not married but acted
as husband and wife; worked at husbands company and both built it
up and it is worth hundreds of millions when they split; business
boomed largely bc of her; Held: only can be awarded reasonable
value of her services bc otherwise it would give her ownership in
the company and that was not bargained for; in quantum meruit it
only matters that there was a benefit received General Rule: For a
restitution claim the damages are measured by the reasonable value
of the services so long as there was an actual benefit received by
the defendant; cant measure by the value of the benefit to
defendant L. US ex rel. Costal Steel Erectors v. Algernon Blair
Inc
Facts: Blair had contract w US to construct a naval hospital and
subcontracted Coastal for steel work. Coastal started working and
Blair wouldnt pay for the crane rental after 28% of the work was
done. Coastal stopped working and Blair hired another. Coastal
brought action for labor and equipment and claims quantum meruit
(reasonable value of services); D claims P shouldnt get reasonable
value of services bc P would have actually lost money on the
contract Held: can recover quantam meruit (reasonable value of
services) bc under restitution damages are the reasonable value of
the performance and not diminished by loss if there was complete
perf. General Rule: When recovering under restitution, a party can
recover in quantum meruit regardless of whether they would have
lost money on the contract and not been entitled to recover for a
suit on the contracta. Injured party can choose to sue under
restitution or expectation theory or relianceb. If there is
complete performance then it is not a restitution claim, it is
expectation damages i.e. contract pricec. Restitution is not to put
the injured party in the position it would have been but to give
the party the value of the benefit conferreddamages are the
reasonable value of services determined by what those same services
could be purchased form one in the plaintiffs position at the time
and place services were rendered. d. Constantino: P had to clean 33
grain storage tanks for $30k to be paid by D. D breached and P had
cleaned 24 of the 33 tanks. P claimed reasonable value of services
was $69k. Held: Damages are 24/33 x $30k so about $22k. Used
contract price to figure out how muchi. Pro rata: use contract
price to determine the damagese. Majority Approach: Algernon: in a
losing contract the party can choose either restitution or
expectation theoryf. Minority Approach: Constantino: sometimes can
get a prorated portion M. Hypos
a. A and B enter into a contract. A agrees to pay B $300 if he
paints the house. After he paints the house, B sues in restitution
and the reasonable value is $500. The market value is $500. Can he
do this?ANSWER: No because he bargained for it. If there is a
contract, he cant bring a cause of action for restitution, for
something the parties have already agreed to. He can only get the
value under the contract.
b. Corey paints house for me and I pay him $300. Total estimated
costs for Corey are $360 so it is a losing contract. Costs incurred
at time of breach are $120.
ANSWER: he wouldnt want to sue under expectation damage bc its a
losing contract and the costs are higher than the contract pricehe
wants to sue under a restitution theory bc the reasonable value of
the services rendered would be more than $120.c. Corey paints my
house and charges me $300. Corey completes the work, spending $250
on labor and materials, but his work is defective. Costs me $100 to
hire Daniel to fix the defects. Coreys work increased the value of
my house by $200
ANSWER: the reasonable value of Coreys services to me are $200;
since Corey is the breaching party we have to subtract the damages
suffered by the breach which was the $100 I paid Daniel. So corey
gets $100.
i. If its the breaching party seeking restitution you should use
the lesser of the two measures
VIX. Specific PerformanceA. Factors of Specific Performance:1.
Contract is sufficiently definite
a. Rights and obligations of the parties be specified with
greater definiteness than if it were for just money damages to
allow the court to frame an adequate order 2. Money damages would
be inadequate or they would be impracticable
a. Speculative or hard to calculate damages; may involve matters
of taste or sentiment i.e. contract to sell a work of art which has
sentimental value to the purchaserb. There is no substitute
available; Ex is P having contract with D for propane for
subdivision and D repudiates, P wins specific performance bc we
cant predict the future of P finding propane bc of the
unpredictable world supply, also evidence P cant find another
supplier to enter into a long term contract
c. Land bc its unique
i. Seller refuses to convey can award specific performance even
buyer has already contracted to resell
ii. If the buyer breaches specific performance will be awarded
to seller
iii. If the seller has already conveyed then damages can be
awardeddifference in market value.
d. Patents and copyrights; sale of a business; forbearance (not
to compete)
e. Forbearance: damages usually no adequate when someone says
they will not compete
f. Sale of business: unlikely to find a comparable business
3. Enforcement would not require excessive court supervision
a. Construction contracts usually require thisdifficult to judge
complex work and judge the results b. Personal service
contractsalmost never award specific performance for this (Goes for
both sides of the contractif employer or employee repudiates)
4. Performance would not create undue hardship to defendants
B. Injunctionsa. In employment contracts: courts will not force
the person to work for their employer but will prohibit them from
working for a competitor b. In order to get an injunction three
things must be met: i. Unique Skills: employer has to show
employees services are unique or extraordinary (either she has a
special skill or has acquired special knowledge of the employers
business)usually found for athletes or starsii. Other way to make a
living: injunction wont be granted if it will likely leave the
employee without other reasonable means of making a livingcant
satisfy this if the only alternative is for the employee to perform
the contractiii. Employers willingness to perform: if there are
other ways to make a living, but its probable that the employee
will choose to just perform the contract, the employer should be
prepared to continue employment in good faith so that the personal
relations where the enforced continuance is undesirable. C. UCC
Approacha. 2-716: Specific performance can be awarded when the
goods are unique (in terms of the total situation which
characterizes the contract)i. Rare, sentimental valueii. Piece of
art, family heirloomb. Just bc the price of an item has risen
doesnt mean anythingc. Even if the goods were not unique, if the
party can show they were not able to cover or find substitute goods
within a reasonable amount of time then they can get specific
performance. d. Ex: Contract to sell 1933 renovated unique
automobile. Seem that it wouldnt be able to find it on the
market.-Could be seen as a unique good.e. Ex: Contract to sell a
corporate jet. Suppose that there are 2 or 3 on the market for
saleMonetary damages over specific performance would be awarded.f.
Ex: Contract to sell a shipment of steel. 5 tons of steel for $500
a ton. Dramatic shift in market for steel. $500 a ton to $1200 a
ton. Can buyer seek specific performance for the contract?Doesnt
seem like steel isnt available. Monetary damages should be awarded
as opposed to specific performance.g. Ex: Contract is between the
star pitcher for the Cubs for the 2009 season and he is going to
break the contract to play for the St. Louis Cardinals. Can they
get specific performance?Courts will not affirmatively issue an
injunction for a personal services contract. D. Liquidated Damages:
Generally has to be a reasonable amounta. In order for a liquidated
damages clause to be enforceable it must be (1) reasonable in light
of the anticipated or actual loss from the breach AND (2) must be
reasonable in light of the difficulties of proof of loss (has to be
uncertain or difficult to calculate accurately) i. Large damages
that act as a penalty are not enforceable bc of public policy. ii.
If there turns out to be no actual loss then the liquidated damages
clause will not be enforcedb. How to decide if liquidated damages
are a penalty:i. (1) Amount is reasonable to the extent that it
approximates the actual loss that has resulted from the particular
breach (even though it doesnt anticipate losses from other types of
breach); according to the anticipated amount at the time of
contracting. ii. (2) the greater the difficulty in proving the loss
has occurred or of establishing its amount with certainty, easier
it is to show the amount fixed is reasonable.iii. If there is no
loss at all then there a liquidated damages clause will not be
enforced. c. Damages computed by gross revenues, etc: If damages
are calculated by Ps lost gross revenues, lost gross profits, or
something similar, courts will view it as a poor estimate of actual
losses and deem it unenforceable if it greatly deviates from actual
lossesi. Examples pg 340-341 supplement E. City Stores Co. v.
Ammermanspecific performance
Facts: D wants to open strip mall, needs Ps help to write a
letter to convince the board for rezoning; letter proves there was
an agreement that if P helped get the rezoning approved P would get
a spot in the mall on terms at least equal to those granted to
other major tenants; D argues the it is not an option contract bc
it is not sufficiently definite in the terms; Held: P gets the
option contract bc there are other stores in the mall already so
that can be used for the terms of this contract
General Rule: Even if a contract contains some terms that are
subject to further negotiations, there can still be specific
performancea. D also says it would cause hardship bc they would get
sears in that spot otherwise and that would make them more money
and they can only have 3 dept. stores in the mallmajority says it
would not ruin them so it is not hardship, D is the one who agreed
to only have 3 dept. stores in the mall so P shouldnt be punished
for thatb. Court supervision: the fact that there is no other
adequate remedy bc this is a unique piece of property trumps the
notion that there might have to be a lot of court supervision of
the verdict. F. Reier Broadcasting Co v. Kramer - cant apply
specific performance Facts: Reier paid Kramer (head coach of MSU)
for exclusive rights to broadcast MSU athletics. Kramer then gave
the rights to another company. Reier says this is a negative
covenantdont want to make them give the rights to Reier, just want
to make them not give the rights to anyone else. Held: cant enjoin
Kramer from performing services w another company bc then it is
essentially forcing them to give the services to Reir bc they wont
have another option. a. Lumley v. Wagner: Agreed to sing only at
Lumleys opera for a specified time and then went against that and
sang at another. Judge said that he could tell her not to sing at
the one but could not tell her to sing at Lumleys. If she chose to
since at Lumleys instead that was not his faultG. Barrie School v.
Patch liquidated damages
Facts: D enrolled daughter at school; liquidated damages clause
said if they didnt ask for a refund before May 31 they had to pay
full tuition. Didnt ask for a refund in time; D wants down payment
back and wont pay remainder of tuition. D says school had to
mitigate by finding another student Held: liquidated damages is
reasonable bc there was no way to find actual damages and it was
not so large to be a penalty; no reason to find actual damages bc
it is a valid liquidated damages clause therefore not requiring us
to consider mitigating damages. Ds must pay the tuition General
Rule: A liquidated damages clause means that the non breaching
party does not have the duty to mitigate damages. a. Barrie
Approach: Assessing the liquidated damages clause should be done at
the time of the conclusion of the contract and not later, only has
to be valid at that time (different than restatement bc R says you
can use the actual losses and how that effects the clause) b.
Assess liquidated damages from barrie approach and R approachc.
Wassenaar v. Panos: employee had 3 year agreement with employer and
liquidated damages clause stated if employer breaches, he will
still pay the entire financial obligation. Employee fired with 21
months remaining and then found a job within 3 months. Clause was
upheld, taking into consideration harm to reputation and emotional
distressH. Hyposa. Paul makes a down payment and then decides not
to buycan the seller keep the $10k down payment? Paul is the
breaching party but will argue restitution to prevent unjust
enrichment on Sally; she would argue they agreed to liquidated
damagescourt would say that retaining the $10k would be
unreasonable.X. Interpretation of Terms and MisunderstandingA.
Restatement approach R201: Objective Approacha. Defined: What a
reasonable person would have interpreted the contract to mean,
sometimes neither party intended the reasonable result. b. Modified
Objective Approach court should answer two questions: MUTUAL
ASSENT
i. Whose meaning controls the interpretation of the
contract?
ii. What was that partys meaning?
iii. Corbin based this on premise that it was absurd for a court
to give a contract a meaning that neither of the parties
intended.
iv. No longer use subjective approach Peerless case (what
parties meant) or objective approach (words and conduct interpreted
by reasonable person standard)c. If parties share the same meaning,
that meaning prevailsd. A party that knows or has reason to know of
the other partys meaning is held to that meaninge. If there is no
sensible basis for choosing between the parties conflicting
meanings, there may be a failure of mutual assent if the
misunderstanding is material to the contract. B. Omitted Terms
supplemented by the court
a. Restatement Approach R204: when the parties have made it
clear they intend to be bound by a contract but havent agreed to a
term that is essential to determine their rights and duties, a term
which is reasonable is supplied by the courti. Usually the courts
have to add in in good faith C. Policy: a. Contra Preferendum:
ambiguity in contract terms must be construed most strongly against
the party that drafted the contractb. Policy Reasons:i. Drafter is
more likely to have provided for the protection of his own
interestsii. Likely to have had a reason to know if
uncertaintiesiii. Could have been deliberately obscurec. Repeated
course of performance is given great weight, d. Usually try to give
a reasonable, lawful meaning to the interpretation of termse. Look
to whether they were separately negotiated rather than standardized
termsD. Joyner v. Adams
Facts: P leased property to Brown. The property was to be
subdivided and the rent would increase over the term of the lease.
Adams would get discounted rent as long as he developed and divides
the property into lot leases. Difference in meaning of develop and
divide the lots. Joyner thinks it means the lots must have complete
buildings and Adams thinks it means lots must be ready for
constructiongraded, w roads, water, and sewer lines installed.
Held: Remanded to decide whether one or both knew about the others
meaning
General Rule: the rule that an agreement should be construed
most strongly against the party who drafted the contract applies to
contract construction but not contract interpretation (no
indication here who wrote or chose the language of the contract)
(Contra preferendum not applicable) a. Burgess v. JC Penney Life
Insurance Co: Burgess bought a $100k life insurance policy from
JCP. Policy excluded benefits if the loss (of life) occurred while
the covered persons BAC was .10% or higher. BAC at time of accident
was .12%. BAC at time of death was below .10%. Court ruled in favor
of beneficiaries bc JCP wrote the clause and they should have
written it better. E. Frigaliment Importing Co v. BNS International
Sale Corps
Facts: P (in Switzerland) ordered chickens from NY and thought
they would be broiling and frying chickens but they were fowls,
suitable for stewing. BNS thought they meant any type of chicken.
Evidence considered: express contract terms, negotiations, trade
usage, course of performance (parties conduct under the contract at
issue) Held: BNS bc Frigaliment did not meet its burden of showing
that trade usage indicates chicken mean broiling ones
General Rule: The party that asserts that there is a trade usage
of a term undefined in the contract has the burden of proving that
the party in the trade had actual knowledge of the usage or that
the usage is so generally known in the community that his actual
individual knowledge of it may be inferred. a. Bc the word chicken
is ambiguous on its face, the court allows in evidence of
negotiations between the partiesb. Course of performancec. Hurst v
Lake: Steven sells horsemeat to Peter for $50 a ton. Peter is
entitled to a discount if a given shipment is analyzed at less than
50% protein. Peter gets the shipment and pays Steven the discounted
price and Steven sues for the difference. Shipment was 49.5%
protein. Can Steven bring in trade usage evidence that 49.5% should
be rounded up to 50%? Trade usage is objective evidence; F.
Hypos:
a. I ask Corey to paint my house. I know I have two homes but he
only knows that I have one. I think my home in Wisconsin and he
thinks my home in IL: Corey would prevail because I know that I
have two homes and that I should specify which one. XI. Parol
Evidence RuleA. Generally
a. Defined: bars the fact finder from considering evidence of
preliminary agreements that are not contained in the final
writingB. Integrationa. Defined: b. Partially integrated v.
completely integrated: Once you decide that a document is a final
expression of the agreement (i.e. integrated), you have to decide
if it is partially or completely integratedi. Partially Integrated:
document is not intended by the parties to include all details of
their agreement1. You cant supplement if it contradicts the terms
of the agreement ii. Completely Integrated: document is intended by
the parties to include all the details of their agreement1. You
cant supplement the writing at all. iii. Judge decides whether it
is partially or completely integrated; first considers all the
evidence leading up to the agreementiv. If you want to supplement a
term, you would argue that it is ambiguous and needs additional
evidence. v. Ex: Pg 173 supplementvi. Policy: the final writing
should be given greater weigh since the parties negotiated and came
to a final decision c. R216: Completely or partially integratedi.
An agreement is not completely integrated if the writing leaves out
a consistent additional agreed term which is1. Agreed to for
separate consideration OR2. That type of term in the circumstances
would naturally be omitted from the writing. C. Parol Evidence Rule
Exceptions
a. Interpretation of ambiguous termsif a term is found to be
ambiguous (capable of more than one meaning), evidence is allowed
to clarify, or just to allow the court to interpret an ambiguous
term and not supplementi. Ex: Pg 184 Supplement ii. Used to show
that the writing is or isnt integratedthis is allowed (completely
or partially) b. Post-contract modifications (statements made after
contract is concluded)c. Oral conditions precedent (parties premise
their agreement on something occurringfinancing condition like in
Crabbys)d. Contract defenses (mistake, fraud, etccant prevent a
party from trying to prove that there is not a valid contract at
all)e. Equitable reformationf. Collateral agreements g. **PER
Doesnt apply to statements made after the written agreementD.
Exception: Fraud, Mistake or Other Voidability a. Rule: Even if a
contract is completely integrated, a party can always introduce
evidence of earlier oral agreements to show illegality, fraud,
duress, mistake, lack of consideration or any other fact would make
the contract void or voidable i.e. parol evidence rule doesnt bar
evidence that would show no valid contract exists. i. Even if there
is a merger clause, can still show fraudii. Ex: Buyer buys
apartment from Seller and contract has a merger clause. Later Buyer
finds out seller lied about the profitability of the building. PER
will not prevent buyer from showing seller made fraudulent
misrepresentations. (Doesnt matter there was a merger clause) b.
Collateral agreement supported by separate consideration: if there
is an oral agreement that is collateral to the main agreement and
is supported by separate consideration, you can show proof of this
even if the contract is completely integratedi. Ex: A and B, in an
integrated writing, promise that A will sell a car to B. They
orally agree that B may keep the car in As garage for the next year
at a rent of $50 a month. Can show evidence of this oral agreement
despite parol evidence rule bc it has the $50 a month separate
consideration in there. c. Sherrod v. Morrisoni. Facts: Sherodd was
a subcontractor and D (general Contractor) stated that the job
would involve excavating 25,000 cubic yards. Job based on that
number then P discovered that the job would involve more than
25,000 cubic yards, but signed the contract anyway because work had
already been started and D threatened not to compensate P for the
work that had already been performed. P claims D said he would be
paid more. The contract included a provision that it could not be
modified by a verbal agreement.ii. Holding: Written contract
governsiii. Sherrod Approach: Fraud exception WILL NOT APPLY if it
pertains to a major term of the contractthe statement the plaintiff
is trying to introduce is completely contradicting the agreement.
(different than regular approach) d. Conditions: If the parties
make a condition to performance or the existence of the contract
and then dont put it in the written contract, courts will allow
proof of the condition despite the PERE. Contemporaneous and
Subsequent Expressions
a. If an oral agreement occurs at the same time as the writing
is signed it proves that the writing was not intended to be a total
integration and would allow evidence of the oral agreement to
supplement (not contradict) the writing. b. Two
documents/Ancillary: If two documents are signed at the same time
they are said to just make one document c. Subsequent Agreements: a
written contract can be modified afterwards by an oral agreement,
parol evidence rule does not apply to this situation F. How to
decide whether a contract is partially or completely integrated:
Classical vs. Modern Approach to PER
a. Merger Clause: a clause indicating the writing constitutes
the sole agreement between the partiesi. This conclusively
establishes that it is completely integrated, unless the document
is obviously incomplete or it was included bc of fraud or
mistakeii. If there is no merger clause, then the writing as a
whole should be examined: 1. If, for example, the writing is a
lease with no mention of price or only expresses the duty of one
person, it will be treated as partial integrationthe consistent
additional terms can be added through oral evidence 2. If, on the
other hand, it seems to be a complete expression of the rights and
duties of both parties, it should be a total integration. b.
Whether a contract is completely integrated:i. Classical: four
corners approachonly look at the document and decide if it is
ambiguousif a reasonable person would have put the other terms in
or would have left them out. (Thompson)ii. ModernRestatement
approach: All extrinsic evidence is relevant to decide if the
parties intended the document to replace oral agreementsc. Contract
Interpretation:i. Classical: Plain meaning rule: exclude evidence
unless the contract is ambiguous on its face (court will not hear
evidence about parties preliminary negotiations) ii. Modern: admit
evidence unless it contradicts the express terms (admissible to
reveal if there is a latent ambiguity) (Taylor)first have to look
at the evidence they want admitted and if it shows something is
ambiguous and if it contradictsG. UCC Parol Evidence Approach
a. Terms:i. Merchant: a person who deals in goods of the kind or
otherwise by his occupation holds himself out as having knowledge
or skill peculiar to the practices or goods involved in the
transaction.ii. Merchant Good Faith: honesty in fact and the
observance of reasonable commercial standards of fair dealing in
the trade. iii. Good Faith for non merchant: Honesty in factb.
Defined: A final agreement (Integrated) can never be contradicted
by prior agreements, written or oral or by any writing that was
signed at the same time as the writing (must show that it
supplements and doesnt contradict) c. HOWEVER, a final agreement
can be explained or supplemented by:i. Evidence of course of
dealing, trade usage, and course of performance (applies to
completely and partially integrated contracts) andii. By evidence
of consistent additional terms unless the court concludes that the
writing was intended not only as a final statement but also as a
complete and exclusive statement of the terms of the agreement (can
only do this if its partially integrated and not completely
integrated.) d. Course of Performance: a sequence of conduct
between the parties to a transaction that exists if :i. The
agreement of the parties with respect to the transaction involves
repeated occasion of performance by a party ANDii. The other party,
with knowledge of the nature of the performance and opportunity for
objection to it, accepts the performance or acquiesces in it
without objection. iii. Defined: refers to the way the parties have
conducted themselves in performing the particular contract at
handhelps to supply evidence as to what they intended the contract
terms to mean.1. Ex: if the contract calls for repeated deliveries
of highest grade oil, evidence as to the quality of oil delivered
and accepted in the first installments would be admissible as a
course of performance to help determine whether the oil delivered
in a later installment met the contracts standardiv. Policy:
Parties best know what they meant by their wordse. Course of
Dealing: a pattern of performance between the two parties to the
contract with respect to past contracts i. Only applies to conduct
before the agreement, after or under the agreement is course of
performance f. Usage of Trade: any practice or method of dealing
having such regularity of observance in a place, vocation, or trade
as to justify an expectation that it will be observed with respect
to the transaction in question.i. Meaning attached to a particular
term in a certain region or in a certain industry would be
admissible. ii. Existence and scope of usage must be proved as
factsg. They cannot contradict each otheri. Express terms prevail
of course of performance, course of dealing and usage of tradeii.
Court of performance prevails over course of dealing and usage of
tradeiii. Course of dealing prevails over usage of tradeiv. Express
terms ( course of performance ( course of dealing ( usage of
tradeh. When those things are barred
i. If a contract specifically bars introducing evidence of the
three things above then they cannot be admitted i.e. specifically
say you need 1000 of something regardless of what trade usage says.
i. Nanakuli v. Shell Oili. Facts: Nanakuli contracts to buy asphalt
from Shell under a long term contract. Written contract says the
price will be Sellers posted price at time of delivery. Years later
Shell increases its price by 75% and refuses price protection
(locking in prices for orders already placed) Shell has given price
protection on prior occasions. Nanakuli says trade usage granting
price protections should be part of the contract. ii. Holding: the
trade usage was enough evidence to only supplement the express term
and not swallow it entirely. If it would have tried to set the
exact price then the express term would have prevailed) iii. Good
Faith Requirement: Shell was bound by the observance of reasonable
commercial standards of fair dealing in the trade (did not give
Nanakuli advance notice of no price protection) j. Policy: a
standard merger clause is not enough bc course of performance, etc
will still be allowed in. Also cant just say that course of
performance etc wont apply, have to specifically say which course
of performance, or trade usage will not apply (In Nanakuli had to
explicitly say price protection didnt apply) H. CISG Parol Evidence
Approach
a. Article 8(3): in determining the intent of a party, due
consideration is to be given to all relevant circumstances of the
case including the negotiations, any practices which the parties
have established between themselves, usages and any subsequent
conduct of the parties. b. MCC-Marble v. DAgostino:i. Facts: MCC is
a US buyer and DAgostino is an Italian Seller. MCC says they had no
intention of being bound by the terms on the back of the contract
and want to introduce evidence of oral agreement and DAgostinos
reps who can give testimony of this. ii. Holding: considers the
evidenceiii. General Rule: CISG rejects the parol evidence rule and
extrinsic evidence will always be permissible, only way to allow
parol evidence rule is to opt out of the CISG. (Merger clause still
wouldnt have made a difference bc that is an aspect of the PER)I.
Thompson v. Libby(Classical Approach)
Facts: P owns logs and D contracted to buy the logs. D says that
there was an oral warranty as to the qualities of the logs and is
trying to introduce evidence to show that there was an oral
warranty and says its not against the parol evidence rule bc it is
collateral to the contract; this case is about supplementing and
not contradicting. This is a completely integrated contractwe only
look at the 4 corners at the writingit looks like it covers
everything. (no gaps) Held: parol evidence cannot be admitted to
prove there was an oral warranty bc this is a completely integrated
contract a. Thompson Approach: Classical view: only look to the
four corners of the writing to distinguish if it is completely
integratedif there are not gaps and it all makes sense then its
completely integrated. b. Merger Clause: language in the contract
that states this is the entire agreement between the parties w
respect to the subject matter of the contract and trumps anything
that may have come before itagreement that it is a completely
integrated contract. i. BUT, just bc there is a merger clause
doesnt mean a court willalways say that its completely integrated
(when the parties are not at equal bargaining power or there are
gaps in the document and it is clearly not integrated) J. Taylor v.
State Farm (Modern approach) a. Facts: This claim arises from a
three-car accident involving Plaintiff. Defendant is Plaintiffs
automobile insurance provider. Plaintiff received a judgment
against him in excess of his policy limits. Defendant argues that
the claim is barred by a release Plaintiff signed. P says the
release relinquished D from contractual rights and P is bringing a
bad faith suit and that should be allowed. Holding: court used the
modern view and decided, and the extrinsic evidence was allowed for
reasons of interpretation. General Rule: Used modern view: to
determine the intent of the parties and the extent of integration
in the written document and looks at all extrinsic evidence, then
the court applies the parol evidence rule to exclude any extrinsic
evidence that varies or contradicts the written document.K.
Hypos:a. Sally sells her apartment to Paul for $100k. As they are
talking, Paul notices a stereo system built in to the wall and asks
if that comes with the apartment, Sally makes verbal promise to
throw in the stereo system within the sale. In writing the verbal
promise isnt in there. So is the verbal promise enforceable? They
wrote out and signed the contract so it is a final agreement. Would
the language of the stereo agreement contradict the contract? i. If
the contract said no fixtures are included in the contract of sale
then it would directly contradict the contract if the stereo is a
type of fixture XII. Implied Terms
A. Restatement Approacha. Rule: if its a condition that the
obligor has to be satisfied with the obligees performance, and we
are able to determine whether a reasonable person in the position
of the obligor would be satisfied, then we should interpret it by
deciding whether a reasonable person in the position of the obligor
would be satisfiedi. Good Faith: Every contract imposes a good
faith requirement and satisfaction must be in good faith. ii. Non
Merchants: Held to a standard of honesty in factb. Objective Test:
When reasonable person standard applies: when the contract involves
commercial quality, operative fitness, or mechanical utility which
other knowledgeable persons can judge, then the courts will decide
it based on whether a reasonable person would be satisfied1. Good
Faith: Even under this test, the partys dissatisfaction must be in
good faith, even though it is unreasonable if he is honestly not
satisfied thats ok2. If satisfaction depends on a third party, like
an architect, the court will usually take that opinion as
controlling. 3. Fraud, bad faith will excuse the condition.c.
Subjective Test: When the good faith standard applies: when the
contract involves personal aesthetics or fancyi. Person is held to
a duty of good faith and honesty1. Ex: to Paint a painting2. Ex:
hire a band to play at your inn, A occasionally objects when B is
absent and a guitar is substituted for Bs string bass. A says he is
dissatisfied. B has no claim bc it is not practicable to apply an
objective test d. Employment Contractsi. Help to decide when an
employer may terminate an employment agreement. ii. At will
employment: most employment is at will, without a contract
specifying length of employment and does not contain a good faith
requirement1. Either party may terminate employment for any reason
or no reason at all unless:
a. Theres an express statement in the as to termination or
duration ( which wouldnt make it at will anymore) e. Morin v.
Baystone Construction Inci. Facts: Baystone subcontracted Morin to
erect aluminum walls and the contract said what is customary in
erecting other buildings does not matter, approval regarding
quality and type of work done lies within GM. GM rejected the
walls, removed them, hired someone else and didnt pay Morinii.
Holding: Morin prevails and gets paid, reasonable person standard
applies bc it was not an aesthetic issuecontract was ambiguous and
didnt suggest approval was subject to aesthetic approval. iii.
General Rule: If common product, then personal aesthetic isnt
applicable, only if specialized or specific product (art, specific
type of marble, photo, etc). B. UCC Approach
a. Merchant: Subject to honesty in fact and observance of
reasonable commercial standards of fair dealing in the trade. b.
Good Faith: Every contract imposes good faith requirement,
UCC/R2dc. Output or Requirements Contracts: limits contract to such
actual output or requirements as may occur in good faith i. Best
Efforts: An agreement for exclusive dealing imposes, unless
otherwise agreed, an obligation by the seller to use best efforts
to supply the goods and by the buyer to use best efforts to promote
the sale1. Buyer cannot buy from another seller while under the
contract. ii. Output and requirements contracts automatically
instill a good faith and best efforts standard. iii. Also applies
to exclusive dealings contractsiv. This prohibits a party from
doing things to try and escape the contract v. What if the market
goes up and now they want to order a whole lot more than they
normally order in an output or requirements contract? Can demand
any quantity that is unreasonably disproportionate to prior
contracts that are similar, prior dealings become the benchmark.
vi. What if the market shifts so that they dont want to p