CONTRACTS II OUTLINE
CONTRACTS II Schooner Spring 20111
THE MEANING OF THE AGREEMENTI. PRINCIPLES OF INTERPRETATION
a. Assume an enforceable K exists or at least have a bargain
b. Three basic theories:
i. Subjective
1. Meeting of the minds
a. What parties thinking at moment they entered into K
b. About protecting autonomy
2. Raffles v. Wichelhaus (Eng.)a. Big K for delivery of cotton;
two ships called Peerless
b. P thought cotton was coming on earlier Peerless
c. Holding: no meeting of minds so no K
3. Problems:
a. Often prevents Ks from being enforced, not what most want
b. Doesnt recognize words that have certain meaning in normal
usageii. Objective
1. What reasonable person would conclude based on words and
conduct of parties
2. Sophisticated business and attorneys often like, judges favor
as well
3. Problem:
a. Neither party may have thought what reasonable person
thought
4. Lands End Hypo:
a. Specific industry definition of red
b. You didnt get red you wanted and Lands End red doesnt follow
industry definitioniii. Modified-objective
1. Most identified w/ Prof. Corbin
2. Three step approach R 201:
a. (1) If parties attach same meaning to term it has that
meaning
b. (2) A is the innocent party, use As interpretation when:
i. If A didnt know B thought different, but B knew what A
thought
ii. If A had no reason to know B thought different, but B did
have reason to know what A thought
c. (3) If neither knows what other was thinking then no K
existsd. Knowledge at the time agreement was made!c. Joyner v.
Adams (NC)i. P Joyner originally K w/ Brown Investment Co. to
develop office park
1. Brown has financial difficulties, lease amended to substitute
D Adams
ii. K includes term if fail to develop by end of Sept., then
rent escalates under price index formula
1. Parties disagree as to what development means
iii. Adams claims developed means get lots ready for
construction (water, sewage, etc)
1. All lots developed, but one has no building
iv. Joyner claims development means constructing buildings on
all lots
v. Trial court: MSJ granted for D Adams
1. Reversed and remanded to determine parties intent
a. Trial ct. then said no meeting of minds on rent escalation
term
i. Takes subjective approach
ii. Ambiguity should be resolved against D Adams as drafter of
amended leasevi. Both parties on appeal disagreed that there was no
meeting of the minds
vii. Memo from accountant saying Adams agreed to completion of
buildings w/in five yrs or rent escalates
viii. D Adams talks about trade usage; sophisticated parties in
real estate business understand develop means get lots ready for
construction
ix. Holding: reversed and remanded; trial court didnt error in
finding no meeting of the minds on rent escalation term
1. But need to determine what parties knew about each others
meaning
a. Court takes side of innocent party
b. Modified-objective approach of R 201(2)
2. Rejects interpreting term against drafter (contra
proferentem); R 206a. Ambiguous as to who chose the language for
the rent term
b. Not an adhesion K, both parties wrote K and arms length
negotiation
x. On remand:
1. Found in favor of D Adams b/c neither knew nor had reason to
know development meant starting construction on all buildings
2. P Joyners testimony reveals two versions of her meaning
3. P lack of communication w/ negotiations didnt give D reason
to know
4. Lack of evidence D assented to K in reliance on completed
building meaning
a. D rejected completed building language
b. None of Ps negotiators informed D that P knew of rejection,
disagreed w/ it, or would not accept it
5. Extensive experience w/ real estate gave D no reason to know
development meant construction
d. Maxims of Interpretation (not in order of importance,
shouldnt be used all at once)
i. Noscitur a sociis: meaning of word affected by others in same
series
ii. Ejusdem generis: general term + more specific terms includes
only like specific termsiii. Expressio unius exclusio alterius: if
one or more specific times listed w/ more general terms, other
items, although similar in kind, are excluded
iv. Ut magis valeat quam pereat: prefer interpreation that makes
K valid
v. Contra proferentem: if two reasonable meanings, interpret
against drafter
vi. Interpret K as whole
vii. Purpose of parties
viii. Specific provision qualifies more general one (states
exception to it)
ix. Handwritten or typed provisions control printed
provisions
x. Public interest preferred
xi. R 203(a): prefer interpretation makes agreement reasonable,
lawful, and effective
1. Posner: common sense approach
e. If courts finds failure to agree on material term, may be
appropriate to find no K; R 33
i. Other cases, may supply reasonable term; R 204f. Frigaliment
Importing v. Intl Sales Co. (NY)
i. Issue: what is a chicken?
1. P Frigaliment says chicken means young chicken, broiler
2. D Intl Sales Co says chicken means any bird of genus meeting
K specifications
ii. Action for breach of warrant on second K
1. First K: 75,000 lbs. 2.5-3 lbs @ $33 and 25,000 1.5-2 lbs. @
$36.50
2. Second K: same except 50,000 lbs. of heavier chicken called
for, price of smaller birds $37
3. Both for US Fresh Frozen Chicken, Grade A, Government
Inspected
iii. Holding: P Frigaliments complaint dismissed; failed to meet
burden showing chicken used in narrower rather than broader sense1.
Plain language: in cables P used English word chicken instead of
German, Huhn, which includes both Brathuhn (broilers) and
Suppenhuhn (stewing chicken)
a. D asked if meant any kind of chickens, and P said yes
2. Trade usage: P claims chicken means young chicken
a. No evidence seller knew about trade usage
b. One witness says when he wants broiler he says broiler
c. Defendants witness says a chicken is everything except a
goose, a duck, and a turkey
3. Legal standard: D claims government regulation should be
dictionary; has several categories of chicken
a. K doesnt say if in doubt use agriculture regulations
4. Price: D claims impossible to obtain broilers at $33
a. P must have expected D to make some profit
b. Schooner: not really good argument b/c Ks are taken for a
loss
5. Course of performance: D points out that after it received
1st shipment of larger birds, D confirmed it wanted 2d shipment
a. If P sincere, wouldnt have allowed 2d shipment
6. Ds subjective intent coincides w/ objective meaning of
chicken
iv. Using R 201(2)(b):
1. No objective evidence seller had reason to know buyer meant
young chicken
2. Given statements, government regulation, and price, buyer had
reason to know D meant larger chicken
v. Parol evidence rule wouldnt apply b/c parties didnt intend
writing to be final expression of agreement
g. Ambiguity & Extrinsic Evidence
i. Courts often state plain meaning of K should govern, and
extrinsic evidence (surrounding circumstances) admissible only if
court finds K ambiguous
ii. Modern contextual approach:
1. R 202(1) rejects ambiguity as prerequisite for extrinsic
evidencea. Words and conduct interpreted in light of all
circumstancesi. Limited by parol evidence rule (see below)2. Unless
different intention manifested R 202(3):a. Words given generally
prevailed meaningb. Technical terms and words of art favored if
transaction in technical fieldiii. Latent ambiguity: not apparent
from words alone, some courts allow extrinsic evidence to
uncover
1. PA only allows extrinsic evidence if court finds it could be
used to support a reasonable alternative interpretation
a. If yes, then fact finder chooses among competing
interpretations
2. 7th Cir.: allows objective extrinsic evidence to establish
latent ambiguity (disinterested parties, trade usage, etc)
a. Doesnt allow subjective extrinsic evidence (parties
intent)
iv. All courts allow use of extrinsic evidence to interpret K w/
patent ambiguityh. Regulations
i. Modern view: definitions in statutes or administrative
regulations not determinative
i. Trade Usage (see below)i. Existence of relevant trade usage
can overcome even apparently unambiguous plain meaning of K
languageii. UCC 1-205 defines usage of trade, says relevant to
interpretation of agreementj. C & J Fertilizer v. Allied Mutual
(IA)i. Action to recover for burglary loss on two separate
insurance Ks
ii. K required visible marks of force and violence made by
tools, etc. on exterior iii. Guy allegedly broke in and stole
fertilizer chemicals
1. Evidence of forced entry on interior door, no visible marks
on exterior
2. Truck tire tread marks visible in mud in driveway leading to
and from Plexiglas door entrance to warehouse
3. Front door could be opened w/ leaving marks
iv. Agent told 37-yr. old farmer there had to be visible
evidence, but didnt say visible marks on front
1. Even agent thought P was covered
v. Farmer didnt recall reading fine print
vi. Trial court: found for D, policy unambiguous, nothing in
record to find door entered by actual force and violence
vii. Holding: reversed and remanded; applies reasonable
expectations doctrine b/c adhesion K1. Interprets non-dickered
terms wrt to reasonable expectations of non-drafting party
a. Even if express language contradicts those expectations!2.
Adhesion K:
a. Boilerplate language or standard form
i. Not all form Ks (e.g., real estate form)
ii. Insurance policy
b. Disparity in bargaining power
i. 37-yr. old farmer w/ high school education
c. Take-it or leave-it language (cant edit)
3. Defeats reasonable expectations if:
a. Eliminates dominant purpose of transaction
i. Policy for burglaries that doesnt cover burglaries
b. Bizarre or oppressive
i. Odd for coverage to depend on skill of burglar
c. Eviscerates non-standard terms explicitly agreed to
i. Not applicable here
4. Court suggests sympathy to farmer, definition doesnt comport
w/ laymans concept or legal interpretation ( not reasonable 5.
Doctrine doesnt apply to terms they dickered for
a. Coverage on chemicals and equipment
b. Inside job clause
i. Some conversation b/w agent and farmer
c. Majority claims visible mark clause wasnt dickered for
6. Dissent: no evidence P believed wrong coverage
a. Not fine print ( must be objectively reasonable std.
b. Purpose of clause to stop inside jobs
c. Farmer knew disputed provision in policy b/c just like one I
have on my farm
viii. Seven Characteristics of Adhesion K1. Printed form w/ many
terms + meant to be a K
2. Drafted by only one party
3. Transaction is routine for drafter
4. Implicit or explicit that only those terms allowed
5. Document signed by innocent party post-dickering
6. Innocent party enters into few of these type transactions
(compared to drafter)
7. Innocent partys obligation is pay $
ix. Reasonable Expectations Doctrine
1. Adopted by more than half of states
2. Three variations: a. Many Js limit by requiring presence of
ambiguity
i. Ambiguous policy should be construed against insurer
b. Fine print undermines more prominent expectations
c. When overall circumstance suggest reasonable expectations
negated
3. As C & J shows, doctrine may involve court refusing to
apply exclusion unambiguously stated
4. R 211(3): standard form + other party knows party wouldnt
manifest assent if knew term
a. Narrower than full-fledged doctrine (insurers
perspective)
II. PAROL EVIDENCE RULE
a. R 209-218; UCC 2-202
b. Give legal effect to intention to make writing final and
perhaps complete expression of agreement; R 209(1)i. If parties had
this intention, then agreement integrated and bars evidence of
prior or contemporaneous communications introduced to add to or
contradict a written agreement
ii. Finality is first gate ( get past integration before
deciding if complete and partial; R 209(2)1. Is there a written
agreement?2. Is it final or can add to agreement?3. Preliminary to
Qs of interpretation and parol evidence; R 209(2)c. Complete v.
Partial Integrationi. R 209(1); UCC 2-202ii. Partial: everything
that isnt completely integrated; R 210(2)1. Cant contradict written
agreement; R 2152. May supplement w/ additional consistent terms R
216; UCC 2-202iii. Complete: adopted by parties as a complete and
exclusive statement of the terms of the agreement; R 210(1); UCC
2-2021. Cant even supplement the agreement! R 216(1); UCC
2-202(b)d. Determining Integrationi. Strict classical approach:
figure out if integrated or not by reading it; Willistons
four-corners approachii. Today merger clauses commonly used to
indicate complete integrationiii. Liberal modern approach: writing
cannot prove its own completeness; R 210 1. Even if language doesnt
appear unclear on its face (latent ambiguity); R 214(a)2. Corbin:
finding integration should depend on intention of partiesa. Should
consider all facts and circumstances surrounding execution of
contract, as well as writing3. Merger clause doesnt necessarily
controle. Purpose
i. Certainty, take written agreements more seriously, prevent
fraud, deters rewriting or rethinking agreements w/ hindsight
ii. Substantive rule (can reverse on appeal for improperly
admitting parol evidence)
f. Thompson v. Libby (MN)
i. Libby buying logs from Thompson
ii. Libby not paying, claims oral warranty agreement not in
writing
1. Warranty: agreement that logs would be of certain quality
iii. Sold all my logs marked HCA in winters of 1982 and 1983 for
ten dollars a thousand feet, boom scale at Minneapolis
iv. Contradiction: perhaps, K says all logs marked HCA
1. Saying all marked HCA of good quality may contradict
v. Holding: lower ct. erred in admitting parol evidence, strict
four corners approach1. Writing completely integrated b/c doesnt
seem informal or incomplete on its face
a. Therefore, exclude all parol evidence unless exception
2. Warranty term of sale, not separate K ( not collateral
agreementa. Doesnt relate to subject distinct from writing
3. Extrinsic evidence admissible if necessary to apply K to its
subject matter or in order to a more perfect understanding of its
language
vi. Hypo: assume Libby and Thompson talk about warranty,
Thompson sends follow-up letter promising logs of certain
quality
1. Seems letter isnt prior or contemporaneous to agreement
a. Evidence shouldnt be barred
2. What if Thompson says he will send letter before K signed,
but never gets around to it?
a. Helpful to deciding if agreement partially integrated or
not
g. Exceptions to Rule
i. Interpret or explain meaning of agreement; R 214(c); UCC
2-202 comment 2
1. Periods of time included in phrase winters of 1982 and
1983
2. What meant by term boom scale
ii. Oral or written agreements after writingiii. Show agreement
wouldnt take effect unless some specified event occurred; R 217iv.
Invalid for fraud, duress, undue influence, incapacity, mistake, or
illegality; R 214(d)1. Some courts limit fraud exception to fraud
in the execution
2. Most courts will extend to fraud in inducement
a. Some limit exception for fraud in inducement if alleged
misrepresentation contradicts a term in writing (Sherrod)
v. Right to equitable remedy
1. However, most cases reject use of promissory estoppel to
avoid rule
2. Reformation of Kvi. Collateral agreements
1. R 216(2)a. Separate and independent consideration
i. Like going to Best Buy and being offered chance to buy
warranty
ii. Where was consideration for warranty on logs?
b. Term in circumstances would ordinarily be omitted from
writing
2. UCC 2-202(b):
a. More admissible, only exclude if find that if terms had
actually been agreed upon would certainly have been included in
writingh. Taylor v. State Farm (AZ)
i. Bobby Sid Taylor in accident and mad at his insurance
company
ii. Didnt settle w/ other parties w/in amount of his policy, now
has judgment against him for $25 million
iii. Claiming company refused to settle in bad faith
iv. Taylor gets some uninsured motorists money for a release of
future claims
1. In full satisfaction of all contractual claims, causes of
action he has or may have against State Farm and all subsequent
matters
v. Taylor argues didnt intend release to limit tort claims, only
K claims
vi. Trial judge found release ambiguous ( allowed parol
evidence
vii. Appellate court said not ambiguous
viii. Issue: decide if release language reasonably susceptible
to Taylors proffered interpretation in light of evidence relevant
to parties intent
ix. Holding: reversed and remanded; language reasonably
susceptible to Taylors proffered interpretation in light of
evidence relevant to parties intent
1. AZ adopts Corbin view:
a. (1) Examine all evidence to determine integration and intent
of parties
b. (2) Use parol evidence rule to exclude evidence that would
vary or contradict the meaning of the written words
c. Judge may stop listening if proffered interpretation highly
improbable
2. Legal character of bad faith not universally established so
release could be reasonably interpreted as Taylor asserts
3. Parol evidence to support Taylors interpretation:
a. State Farm apparently didnt insist that release contain broad
language ( suggests knew Taylor wouldnt sign if it did
b. State Farm knew large size of bad faith claim, Taylor would
seek something more than $15,000 to release claim
c. Parties used limiting language in release, confining it to
contractual and subsequent matters
4. Substantial evidence supports State Farms interpretation as
well
x. Concurrence: rule amorphous, only this court can make final
determination in K
i. Comparing Thompson with Taylor (approaches to parol evidence
rule and interpretation)i. Thompson = supplementation; trying to
add warranty term
ii. Taylor = interpretation; extrinsic evidence didnt show
separate agreement
1. Showed conduct and background circumstances Taylor claimed
were relevant to issue of whether release covered bad faith tort
claim
iii. Cases demonstrate tension b/w views of parol evidence
rule:
1. Classical Willistonian view: great weight to formal writing
(both to parol evidence rule and questions of interpretation)
2. Modern Corbinian view: much greater use of extrinsic evidence
in determining the completeness and meaning of written K
iv. Cases show relationship b/w four corners approach to
integration under parol evidence rule and plain meaning approach to
interpretation:
1. Courts relying on facial completeness of written K to
conclude complete integration more likely to rely on plain meaning
of words to bar extrinsic evidence to aid interpretationa. Occurs
even though parol evidence rule explicitly states rule doesnt bar
use of extrinsic evidence to explain or interpret!
b. Existence of merger clause may further compel such courts to
assign plain meaning to words
2. Plain meaning doesnt allow extrinsic evidence to uncover
latent ambiguity (see above)
v. Modern approach in Taylor allows use of extrinsic or parol
evidence if disputed language reasonably susceptible to different
proffered meanings
1. In making determination, court will consider at least
preliminarily extrinsic evidence and need not find agreement
patently ambiguous
2. Endorsed by R 214(c)j. Sherrod v. Morrison-Knudsen (MT)i.
Sherrod sub w/ COP who is sub for Morrison-Knudsen
ii. Constructing family housing under government contract for
Army
iii. Disagree about amount of earth that needs to be moved
iv. Sherrod thought it wouldve to move 25,000 cubic yards to get
$97,500
v. Problem: didnt say in K that it was $390 per cubic yard as in
Thompson where it was $10 per 1000 feet
1. Here, bargain $97,500 for lump sum of dirt
vi. Both parties agree LS means lump sum, controversy over how
much LS is
vii. Merger clause barred verbal agreement w/ any agent either
before or after K
viii. Sherrod claims Morrison rep. told him 25,000 cubic
yards
ix. Sherrods bid accepted, started work, then found out double
amount of dirt
x. COP threatened to w/hold payment unless K signed, Sherrod
claimed COP officer verbally promised deal would be worked to pay
for more than sum in K
xi. Sherrod brought suit to set aside price provision, recover
quantum meruit, and tort damages, claimed fraud and breach of good
faith
xii. Trial ct.: summary judgment for D Morrison
xiii. Holding: affirms summary judgment for D
1. Fraud exception to parol evidence rule only applies when
alleged fraud doesnt relate directly to subject of K
a. Here, Sherrod claims fraud over amount of dirt to be
moved
2. Oral promise directly contradicts express terms, parol
evidence rule applies
a. Here, contention that $97,500 covered only 25,000 cubic yards
contradicts merger clause and work done is lump sum
3. Since parol evidence rule applies, bad faith claim fails as
well
xiv. Dissent: acknowledges fraud claim and focuses on injustice
to parties
1. Prime has better information
2. Sherrod lost its credit and bonding, went out of business
3. Majority eliminated fraud exception
xv. Unilateral mistake, not clear bilateral mistake
1. Morrison: no mistake, told them what they were getting
into!
xvi. Less strict parol evidence rule of Taylor would allow fraud
evidence 214(d)
k. Nanakuli v. Shell Oil (9th Cir.)i. Nanakuli second largest
asphaltic paver in HI (only two co. in HI though)
ii. Two long term supply Ks b/w buyer Nanakuli and seller Shell
for asphalt
1. Five yr. K in 1963 for asphalt at reduced prices
iii. Breach of 1969 K for asphalt in Q
1. Price term as stated in K was Shells posted price at the time
of delivery
a. Price and quantity
iv. Price remained the same until 1974 when Shell began to
charge market price
1. Shell management changed in 1974
2. Arab oil embargo
3. Increasing price allowed by K
v. Nanakuli Pres. claims Shell promised never to charge more
than Chevron chargedvi. Trial ct: granted JNOV in favor of D Shell
b/c posted price term in K unambiguous ( exclude parol evidence 1.
Excluded evidence on Shells course of dealing w/ Nanakuli vii.
Buyer Nanakulis breach of K theories:1. Trade usage of price
protection
a. Evidence all aggregate suppliers routinely price protected in
1960s and 1970s in HI, including largest supplier, Chevron
2. Good Faith requires price protection
a. Price protected in past in 1970 and 1971 for four and three
months ( good faith requires it to continue
b. At very least good faith requires more notice of price
change
viii. Seller Shells Arguments:
1. Shouldnt expand trade usage to include suppliers
2. Waiving K Term 2x doesnt = course of performance
a. UCC 2-208 comment 4: one instance not COP, but ambiguous
whether two instances = COP
b. Difference b/w interpreting K a certain way and reading K to
mean X, but willing to do Y this one time (waiver)
c. Interpret as a waiver when the parties acts are ambiguous
3. Price protection is not consistent w/ express K term
ix. Holding: reverse; trade usage of price protection was
reasonably consistent w/ K terms ( enough evidence for reasonable
jury to find for Nanakuli
1. Accepting Nanakulis broad definition of trade usage; includes
both asphaltic pavers and asphalt suppliers in HI2. UCC 1-205(2):
practice of dealing having regularity of observance in place,
vocation or trade as to justify expectation of observance
3. UCC 1-205(3): court interprets to mean usage doesnt have to
be one in partys trade as long as so common in locale should be
aware of it
a. Nanakuli showed more than just regular observance b/c
evidence all aggregate suppliers price protectedl. Standards of
preference in interpretation; UCC 2-208(2); R 203(b)i. Express K
terms
ii. Course of performance; UCC 2-208; R 202(4)1. Must be
consistent w/ express terms
2. Here, evidence Shell price protected Nanakuli in 1970 and
1971 (see above)
iii. Course of dealing; UCC 1-205(1); R 2231. Sequence of
previous conduct b/w parties fairly regarded as establishing common
basis of understanding for interpreting expressions and conduct
iv. Trade Usage; UCC 1-205(2); R 2221. Existence and scope Q of
fact, but if based on writing Q of law; R 222(2)2. Must establish
that usage exists:
a. Clear and convincing evidence
b. Doesnt need to be universal, but well settled
c. Known or shouldve known3. May even add terms to agreement;
UCC 1-205(3); R 222(3)m. Possible to write term to exclude course
of dealings, course of performance, and/or trade usage when
interpreting the contract; UCC 2-202 comment 2n. Three approaches
to COP, COD, and TU:
i. Restrictive approach: all are inadmissible
ii. Middle ground approach: must be consistent w/ express
terms
1. If inconsistent, intent of parties is unclear
2. If unreasonable, express terms = parties intent3. Prof. Kirst
article cited in Nanakuliiii. Modern approach: almost always
admissible, unless it cuts down express terms
o. Nanakuli embraces contextualism: interpret and enforce in
light of commercial setting, parties aims and real-world
context
SUPPLEMENTING THE AGREEMENTI. THE RATIONALE FOR IMPLIED TERMSa.
Implied by law, not the parties
b. Why would a party enter into an agreement w/o terms?
i. Cost of negotiating every term outweighs benefits
ii. Determine how much time to put into K based on experiencec.
Default rules (justifications) for implied rules:
i. Tailored: what parties wouldve agreed to if they had actually
bargained
1. Assumes rational ppl. wouldve decided on X v Y
ii. Untailored: used to save time; economic efficiency
1. Example: implied warranties
iii. Fairness and public policy reasons for imposing regardless
of what parties want
d. UCC wants K to be fulfilled, so courts have power to imply
terms
i. No price term? Court usually uses market value
1. Standard: reasonable priceii. No quantity? Not likely to
imply; UCC 2-201 comment 11. Driven by needs of parties, not
markete. Wood v. Lucy, Lady Duff-Gordon (NY)
i. K signed by both P and D giving P the exclusive right to use
Ds name on fashion items that he finds and then promote the sale of
those items
1. D gets half of all revenues and profits
ii. Breach: D began to promote herself through Sears
1. D says agreement is not a K b/c no consideration; P didnt
have a performance minimum ( no mutuality
iii. Trial ct. denied Ds motion for judgment; appellate ct.
reversed
iv. Holding: reversed; court reads in a garden variety best
efforts requirement1. An implied obligation to use reasonable
efforts will prevent a somewhat indefinite promise from being
illusory2. Must imply terms for K to have business efficacy
a. Otherwise Wood could do nothing, while at same time represent
whomever else he wants
3. Cardozo believes promise to pay = promise to use reasonable
efforts
a. Why would P bind himself if he wouldnt benefit?
i. Implies term b/c believes reflects intention of parties
v. What if it was a non-exclusive agreement? One sided ( no Kf.
UCC 2-306(2): duty to use best efforts to supply goods or promote
sale where K is for an exclusive deali. How exclusive unclear
ii. MDC Corp v. John H Harland Co.1. Holding: even though seller
permitted to maintain certain relationships, sufficiently exclusive
to obligate buyer to generate a market for sellers goodsg. Leibel
v. Raynor (KY)
i. Dealer-distributor relationship for garage doors
ii. Dealer is Leibel; Raynor is the manufacturer and supplier of
the garage doors
iii. Dealer has exclusive right to sell Raynors garage doors for
indefinite time periodiv. Sales decrease over two yrs.
1. Supplier contacts dealer and terminates dealership (effective
immediately), informing dealer that he is giving the exclusive
right to another dealer
v. Supplier says he can terminate at will
vi. Dealer agrees, but says he is entitled to a reasonable
amount of noticevii. Holding: summary judgment vacated; written
notice was not reasonable; what constitutes reasonable is a
question of fact for a jury
1. Reasonable = acceptable commercial conduct based on nature,
purpose, and circumstances
viii. UCC 2-3091. (2) If indefinite in duration; valid for
reasonable time
2. (3) Termination, except on happening of agreed upon event,
requires reasonable notification be received by other party
a. Parties can agree to terminate w/o advance notice as long as
it would not be unconscionable to dispense w/ notification 3.
Comment 8 interprets (3) in light good faith, need time to:
a. Get rid of current inventory
i. Enough time to recoup the initial $ they put into it
b. Seek a substitute agreement (find another manufacturer to go
into business with)
ix. Distribution relationships generally covered by UCC;
Princess Cruises (Coakley):
1. Language
a. Not clear from facts
2. Nature of business
a. Distribution relationship, but overall purpose is sale of
garage doors, not about being paid commissions3. Intrinsic
worth
a. Not clear from facts, but sales primary essence
II. THE IMPLIED OBLIGATION OF GOOD FAITHa. UCC 1-203: obligation
of good faith performance and enforcement for every K covered
b. UCC 1-201(19): honesty in fact in the conduct or transaction
concerned
c. UCC 2-103(1)(b): for merchant good faith = honesty in fact
and observance of reasonable commercial standards of fair dealing
in the tradei. Subjective: honesty
ii. Objective: reasonable; can be wrong, but not
intentionally
d. R 205: every K imposes upon each party duty of good faith and
fair dealing
e. Good faith: intangible, abstract, no technical meaning, no
statutory definition
i. Honest belief, absence of malice and fraud or seek
unconscionable advantageii. Spirit of the Kiii. NY: depriving right
of other party to receive fruits of KForm of Bad Faith
ConductMeaning of Good Faith Conduct
1 Seller concealing a defectFully disclosing material facts
2 Builder willfully failing to perform in full (substantial
performance)Substantial performance w/o knowingly deviating from
specs
3 Openly abusing bargaining power to coerce increase in K
priceRefraining from abuse of bargaining power
4 Hire broker; deliberately prevent consummation of dealActing
cooperatively
5 Conscious lack of diligence in mitigating damagesActing
diligently
6 Arbitrarily/capriciously exercise power to terminate KActing
w/ some reason
7 Adopt overreaching interpretation of K languageInterpret K
language fairly
8 Harass for repeated assurance of performanceAccept adequate
assurances
f. Seidenberg v. Summit Bank (NJ)
i. Ps owned two brokerage firms; sold them to D Bank in exchange
for stock in third co.
1. Ps retained executive positions in the two cos.
ii. Ps took reduced salaries in exchange for a bonus w/
expectation that they would work until age 70
1. K says would work a min of 5 yrs.
2. Bank fires them after 2 yrs.
iii. K said would work together wrt future performance; joint
marketing programs
1. Performance linked to Ps compensation
iv. Ps claim bank:
1. Failed to allow close working relationship
2. Failed to develop existing relationships (low hanging
fruit)
3. Delayed direct mail campaign
4. Failed to provide information and advice concerning employee
benefits
v. Trial ct: dismissed claim
vi. Holding: reversed and remanded; bad faith determined by D
state of mind and context
1. Includes the nature of the alleged breach and applicable
industry standardsa. Can find a breach even when an express K term
was not violated
2. Good faith performance = expectation of parties + purpose of
K3. Parol evidence rule ordinarily has no impact on good faith
claim b/c implied termvii. Three situations for applying good
faith:1. K doesnt provide term necessary to fulfill
expectations
a. Expectation relationship end at age 70 based on oral
agreement
b. May find breach even when no express term of agreement has
been violated (Nanakuli)
2. Bad faith was a pretext for exercising right to terminate
K
a. Bank just wanted Ps co. and were willing to make employment
agreement in order to get them
3. K expressly provides a party discretion regarding its
performance
a. Subjective: imply a term based on reasonableness
b. Dont need to imply when objective
4. Sons of Thunder v. Borden, Inca. When bargaining power is
unequal, cannot and should not assume parties acted in good faithi.
But only one factor in determining good faith
g. Good Faith and Open Price Terms
i. Subjective: honesty in fact
ii. Objective: commercially reasonable behavior
iii. Can show breach of good faith w/ improper motive even if
prices appear reasonableh. Requirements and Output Ks
i. Requirement K: seller agrees to supply whatever buyer
needs
ii. Output K: buyer agrees to purchase whatever seller makes
iii. Potentially illusory? (common law said yes, but no
more)
1. Exclusiveness is one sided: one party has an exclusive
bargain, but other doesnt
2. Indefiniteness raises concern that one party has promised
nothing
a. Example: promise to buy all that you produce, but you produce
nothing so I buy nothing
iv. UCC 2-3061. Applies to dealers and distributors, as well as
manufacturers2. Comment 2 implies good faith outputs and
requirements
a. Good faith variations permitted
b. Minimum or maximum sets limits on intended elasticity
i. Morin Building Products v. Baystone Construction (7th
Cir.)
i. Owner GM hires prime Baystone to build addition prime
contracts sub Morin to build the aluminum siding
1. K said mill finish to match finish and texture of existing
metal siding
2. Owner rejects Morins walls; Baystone refuses to pay Morin
ii. Satisfaction clause: if dispute over quality or fitness of
materials or workmanship, decision as to acceptability rests
strictly w/ owner
1. Work should be first class and what is usual or customary for
other buildings is not part of the decision
2. Decision of architect in matters relating to artistic effect
final
3. Clauses came out of form K
4. Problem: how much discretion does owner have?
iii. Trial ct.: jury verdict for Morin
iv. Issue: was jury instruction that satisfaction clause be
evaluated using an objective, reasonable person standard proper?1.
Difference b/w aluminum siding (commercial job) and a portrait
painting (personal aesthetics/artistic effect)
a. Buying a portrait to be happyv. R 228: satisfaction of a
reasonable person in the obligors position
1. Subjective standard more likely to be applied for personal
servicesvi. Holding: K states satisfaction based on aesthetics, but
K is ambiguous and probably didnt intend to subject subs work to
aesthetic whim1. If it had been about aesthetics, rejection of subs
work wouldve been proper even if unreasonable, as long as in good
faith
2. GMs objective was to build auto plant, not build piece of
art
3. Morin wouldve demanded premium if subjective std.
4. Objective reasonable person std. when K involves commercial
quality, operative fitness, or mechanical utility
j. Locke v. Warner Bros (CA)i. Two agreements:
1. Eastwood and Warner Bros
a. Eastwood agreed to pay WB if Locke didnt succeed in getting
films produced and developed
b. Locke unaware of this agreement
2. Warner Bros and Locke (agreement in dispute)
a. Locke essentially doesnt need to do anything and WB will pay
her $250K/yr for 3 yrs supposed to submit ideas WB can approve or
reject
b. Pay or play: if they take on one of her ideas, they can
either pay her $750K or use her as the director
ii. Background: Locke and Eastwood divorce
1. Locke sues Eastwood for compensation owed, and Eastwood
secures an agreement for Locke w/ WB in return for her dropping the
suit against him
iii. Four claims: sex discrimination, breach of good faith,
breach of K, fraud
1. Violation of positive law (sex discrimination) doesnt
necessarily = breach of K
iv. Trial ct: granted MSJ in favor of D Warner Bros.
v. Holding: reverse MSJ on breach of K and fraud claims
1. Evidence shows that WB may never have intended to accept any
of Lockes proposals
a. She was K-ing for opportunity to make movies w/ WB in order
to get the experience to make movies elsewhere in the future
b. WB could reject based on subjective dissatisfaction, but can
breach K if didnt consider proposals in good faith2. Trial ct.
failed to differentiate subjective decision v. right that
dissatisfaction be genuineIII. WARRANTIESa. Caveat Emptori.
Classical rule: Chandelor v. Lopusii. Now implied warranties in Ks
for sale for sake of high speed, high volume commerce
1. Implied by legislature
b. Warranty of merchantability: UCC 2-314i. Goods quality and
fit for ordinary purpose
c. Warranty of fitness for a particular purpose: UCC 2-315i.
Goods are not fit for the buyers purposesd. Express warranties: UCC
2-313
i. (1)(a) Any affirmation of fact or promise made by seller to
buyer that relates to goods and becomes basis of bargainii. (1)(b)
Any description of goods made part of basis of bargain
iii. (1)(c) Any sample or model made part of basis or
bargain
iv. (2) Doesnt have to use formal words; can be oral1. More than
mere puffery
v. Comment 3: buyer doesnt need to rely on fact, just needs to
show affirmatione. Warranty of habitability
i. Javins v. First Natl Bank Corp (D.D.C.)
ii. URLTA
f. Bayliner Marine Corp v. Crow (VA)i. Crow bought a boat from
Bayliner based on a test run of a model boat and prop matrix
stating the boat (w/ 600 lbs. of equipment) would reach 30 mph
ii. His boat is customized (w/ 2000 lbs. of equipment) and only
reaches 13 mph
iii. Bayliner repairs boat on multiple occasions and gets speed
to reach 24mph once and consistently only 17 mph
iv. Dealer contacts Crow and tells him matrixes misrepresented
the max speed, which is really only 23-25 mph
v. Dealer made no express warranties, but buyer felt the prop
matrixes were an express warrantyvi. Trial ct: agreed w/ buyer and
entered judgment for P
vii. Holding: no express warranty was made to P; prop matrixes
were an express warranty limited to those exact makes and models1.
Buyer didnt make his intended usage known to seller so there is no
implied warranty of fitness for a particular purpose here
2. UCC 2-313: anything express can be an express warranty;
dickered aspects of bargain (comment 1)a. (c) If model had a
speedometer that could have been an express warranty
b. Representation, description, sample/model
3. UCC 2-314: ordinary purposea. Applies to merchants, but
doesnt need to be commercial transaction
i. (2)(a) Pass w/o objection in the trade?
ii. (2)(b) Fungible goods of average, fair quality
iii. (2)(c) Fit for the ordinary purpose for which such goods
used
iv. (3) Others may arise from course of dealing, trade usage
b. Comment 4: if not merchant UCC 2-314 serves as guide to
resulting express warranty
c. Its a boat and it stays afloat so suitable for fishing
i. Crows intended usage is irrelevant; fulfills the expectation
of a reasonable buyer
d. 850 hours of usage suggests it is being used for its ordinary
purpose
4. UCC 2-315: particular purpose, not ordinary
a. Buyer must make purpose known to seller for this to apply
b. Not limited to merchant sellers
c. Warranty created only if rely on sellers skill or judgmentg.
Disclaimers; UCC 2-316i. Express warranties:
1. UCC 2-316(1): disclaimer of express warranty is inoperative
if cannot be construed consistent w/ terms in K that create express
warranty
2. Existence may turn on application of parol evidence rule
(subject to UCC 2-202)
ii. Implied warranties:
1. Requirements: UCC 2-316(2)a. Merchantability: must mention
merchantability and in case of writing must be conspicuous
b. Particular purpose: can be less specific, but must be in
conspicuous writing2. Other ways to disclaim: UCC 2-316(3)a. Can
exclude w/ as is language
i. Most say have to be conspicuous
b. Can exclude or modify w/ course of dealing or performance and
trade usage
i. Example: no warranties extend beyond description on faceh.
Caceci v. Di Canio Construction Co (NY)
i. Have to redo foundation of house four yrs. after house built
b/c builder built on decomposing soil
1. Builder had guaranteed for one year from title closing; title
closed 1977
2. Repairs ($57K) more than house is worth ($55K)ii. Builder
does repairs four years after title closes in 1981
1. Hires firm who finds out house placed on bad soil
iii. Holding: adopts implied housing merchant warranty
1. Two components: (may be two separate warranties)
a. Constructed in skillful manner
i. Manner in which work is performed
ii. May include defects that dont render house uninhabitable
b. Free from material defects
i. End result 2. Merger clause, for one year from title closing,
has no legal effect wrt latent defects
a. Latent defects would not be exposed through a reasonable
inspection
b. Against public policy, illusory, and self-contradictory
3. What reasonable builder shouldve known
a. Sellers knowledge is not important
b. Want to encourage them to find problems
4. Fact that builder came back willingly time and time again to
fix floor suggests implied term
5. Disclaimers can be used, but viewed w/ suspicion
iv. Extensions and limitations:
1. Doesnt apply to non-merchant owner who sells home
2. May extend to lenders when involved in construction
3. Divided on whether applies to commercial buildingsIV.
AVOIDING ENFORCEMENT
a. Sometimes otherwise enforceable bargains are voidable
i. One party lacked ability to assent b/c of lack of capacity
(age/mental infirmities)
ii. Procedural, process unfair to one party (duress, undue
influence, misrepresentation, fraud)
iii. So unfair shouldnt enforce (unconscionability)
b. Minority or infancy doctrine
i. Traditionally K voidable by minor, but power to affirm upon
reaching majority; R 141. Very restrictive: no restitution unless
minor misrepresented age or willfully destroyed the property
2. Justified on ground didnt have judgment to protect themselves
in market place
ii. Today less justification given sophistication of teenagers
and great involvement in consumer marketplace
1. More minor understood and exploited party, less sympathetic
ct.
2. Some Js: minor who misrepresents age can still disaffirm, but
may be liable for tort for fraud
iii. Dodson (P) v. Shrader (D) (TN)
1. 16-yr. old Dodson borrowed money from girlfriends grandmother
to buy car
2. Runs it into the ground; w/in 9 mo takes in for service, cant
afford burnt valve repairs
3. Calls Shraders and wants money back
4. Parks car in parents front yard, gets hit by passing car
a. Originally worth $5000, now worth $500
5. Two rules:
a. Benefit rule
i. Focused on value minor got from K
ii. Lease payments for similar vehicle
b. Use rule
i. Focus on depreciation
ii. What can potentially be returned?
6. Holding: throws rules togethermodified use rulea. If minor
hasnt been overreached, no undue influence, K fair and reasonable,
minor actually paid, and took and used article,b. Then minor must
provide reasonable compensation for use, depreciation, and willful
or negligent damage
i. Doesnt apply if fraud or unfair advantage over minorc.
Remand
i. Findings on gross negligence wrt valve damage
ii. Review tortious counterclaim
iv. Minor liable for reasonable value of necessaries; R 12
comment f1. Parents responsible if minor cant pay2. Not true
rescission b/c cant take them backv. Mere ignorance of minors age
no defense to disaffirmance
vi. Minor must disaffirm w/in reasonable time
1. Depends how fast will depreciate
vii. Statutory limits:
1. Still bound to checking account if under 18
2. If statute says age is irrelevant, cannot use minority to
avoid K.
viii. Courts split on pre-injury exculpatory agreements
ix. Courts split on effect of marriage and capacity to K
x. Mills v. Wyman reconsidered:
1. Make Levi a minor, different case?
2. Wanted compensation for alcohol, lodging, necessaries
3. Now a K, instead of restitution
c. Mental Incompetence
i. Hauer v. Union State Bank of Wautoma (WI)
1. Motorcycle accident results in brain injury
2. Guardianship eventually terminated after physician writes
letter
3. Living off mutual fund of $80K
4. Bank loans Eilbes $7600 to start small business, defaults on
loan
a. Suggests to Hauer that she take out short-term loan and
invest in company using stocks as collateral
b. Promises to give job, pay interest on loan, and pay loan off
when due
5. Schroeder (banker) called Hauers financial advisor
a. Concedes possible told him about Hauers brain damage
b. Was told Hauer needed interest income to live on
6. When loan matured, Hauer sued and tried to disaffirm
a. Jury finds Hauer lacked capacity and bank failed to act in
good faith
7. Bank claims lack of evidence, asserts estoppel based on end
to guardianship (objective standard)
8. Holding: affirms incompetence; adopts traditional cognitive
testa. Whether person involved knew what he or she was doing and
nature and consequences of the transaction; 15(1)(a)b. Finds jury
had credible evidence
i. Under guardianship one-yr. before loan
ii. Lacked understanding of nature of transaction
1. Thought she was co-signing for Eilbes
iii. Expert found Hauer very gullible
c. Minority doctrine doesnt apply b/c adult incompetents subject
to different degrees of infirmity
i. Avoidance must accord w/ equitable principles
1. Traditional rule: K not voidable if parties cant be returned
to original positions; R 15(2)a. Exceptions:
i. Breach of good faith
ii. Unfair terms/consideration
iii. Knew or shouldve known of incompetence
d. Breach of good faith tied up in constructive knowledge of
Hauers condition
ii. Restatement test:
1. Adopts traditional cognitive test, but also incorporates a
reasonable test; 15(1)(b): qualified volitional test
a. Unable to act in reasonable manner wrt transaction and other
party has reason to know
b. Person may understand what he is doing, but lack control
c. Did they understand (cognitive)? Were they able to act
(volitional)?
2. Example: old lady changes life insurance to no death benefit
w/ larger annuity after stroke, unable to change back b/c of
nervous breakdown and prospect she will die before husband, company
knows about it
iii. Burden of proof generally on party seeking to avoid K;
presumption of competencyd. Duress and Undue Influence
i. Legally unenforceable b/c of process by which K was madeii.
Traditionally courts refuse recognize undue influence unless
confidential relationship
iii. Modern approach: broader definition of threat and undue
influence; has been applied to situations where no confidential
relationshipiv. Totem Marine Tug v. Alyeska Pipeline (AK)
1. Totem Marine shipping load from Houston to AK via Panama
canal2. Supposed to load 6,000 tons of material on West Coast
3. Stopped in Houston and had to reconfigure barge to load 7,200
tons of haphazardly stacked steel beams, etc.
a. Took a long time to load b/c Alyeskas delay in assuring Totem
it would pay additional expenses, bad weather, etc.
4. Alyeska unloads barge in CA and terminated K w/
explanation
5. Totem wanted reimbursed for $300K
a. Alyeska admits owes money, says will pay in day to eight
mos.
6. Had to take $97.5K from Alyeska or go bankrupt (ultimate
threat to co.)
a. Possible accord and satisfactionb. Perfectly legitimate
tactic to avoid litigation, unless in bad faith
7. Totem sues to rescind settlement based on economic duress
8. Holding: duress is improper threat that overbears the
will
a. Elements:
i. One party involuntarily accepts terms of another
1. Did against will, will being $300K instead of $97.5K
ii. Circumstances permitted no reasonable alternative
1. No time to go to court, bankrupt in 30 days when payments
due
iii. Such circumstances result of coercive acts of other party,
not Ps necessities
1. No alternative b/c Alyeska was one who terminated K and
jerked Totem around by withholding payment
b. Alyeska doesnt have to admit to owing precise sum, just
approximately what Totem thought
v. When duress makes K voidable; R 1751. Less emphasis on free
will element (involuntary acceptance of terms)
2. (1) Wrongful/improper threat, (2) no reasonable alternative,
(3) actual inducement (subjective standard; is this particular
victim induced?)
a. Reasonable alternatives:
i. Use of legal action if possible
ii. Alternative sources of goods, services, or funds
iii. Toleration if threat involves minor vexationvi. Improper
threat; R 1761. (a) Crime or tort
2. (b) Criminal prosecution
3. (c) Use of civil process in bad faith
4. (d) Threat is breach of duty of good faith and fair dealing
under K
5. (2) Resulting exchange not on fair terms, and:
a. (a) Harm recipient w/ no gain for party making threat
b. (b) Effectiveness increased by prior unfair dealing
c. (c) Other illegitimate use of power
vii. K under economic duress voidable rather than void
viii. Most courts require causal link b/w coercive acts and
financial hardship
1. Selmer Co. v. Blakeslee (7th Cir.)
a. Posner: just b/c agree to settlement b/c desperately need
cash is not basis for duress
ix. Rationale: excessive gain resulting from exploitation of
impaired bargaining-power
x. Criticisms:1. Undermines autonomy or free-will that makes
economic system work
2. Can only use as band-aid, cant work all the time
3. Settlements or bargains b/w parties w/ disparity in
bargaining power not inherently bad in market
e. Odorizzi v. Bloomfield School District (CA)i. Gay bar sweep
likely, no facts about being involved w/ student
ii. Day after being arrested and charged w/ homosexual
activities, Odorizzi submits written and signed resignation
1. Superintendant and principal came to house, told events
wouldnt be publicized if resigned immediately
2. K in question is resignation
iii. Odorizzi claims K voidable b/c of duress, fraud, and undue
influence
iv. Holding: no duress or fraud
1. No duress b/c threat of civil action was not in bad faith
a. Initiating dismissal proceedings under education code was not
only legal right, but positive duty
2. No fraud b/c Odorizzi failed to allege that school officials
knew falsity of statements
a. No constructive fraud b/c no confidential relationship b/w
employer and employee (very arms-length)
3. Finds undue influence: over-persuasion that overcomes will
w/o convincing the judgment
a. Doesnt require misrepresentation
4. Existence of dominant and servient party is key element; R
177(1)a. Could be lesser weaknesses such as elderly, sick, other
forms of lessened capacity
i. Here, exhaustion and emotional turmoil of Odorizzi
b. Often confidential relationship, but trust is important
5. Over-persuasion factors:
a. Discussion of transaction at unusual time
i. Didnt sleep for forty hours
b. Consummation at unusual place
i. Negotiation terms of employment at his house
c. Insistent demand business be finished at once
i. Said he needed to resign immediately
d. Extreme emphasis on untoward consequences of delay
i. If didnt resign at once, they would fire him and publish (
wouldnt get another job
e. Multiple persuaders by dominant party against servient
party
i. Principal and superintendant v. Odorizzi
f. Absence of third-party advisors
i. Just Odorizzi
g. Statements no time to consult financial advisors or
attorneys
i. Told him there was no time to consult attorney
ii. Like seduction v. rape, manner is important w/ undue
influence
v. Odorizzi and duress:
1. Court used much narrower definition than R 176
2. CA duress now encompasses wrongful threats that leave victim
w/o reasonable alternatives
a. Dont resign ( never get another job
b. Could threaten lawsuit, but will publicize and get no job
still
3. R 176(1): improper threat
a. Bad faith threat of civil process wrt firing (knew charges
were going to be dropped?)
b. Breach of duty of good faith wrt employment K
(publicizing)
4. R 176(2): resulting agreement unfair (substantive)
a. Odorizzi doesnt want to argue unfair, he doesnt want
agreement b/c process unfairf. Misrepresentation and
Non-Disclosure
i. At time K is formed!ii. Choice b/w two significant avenues of
redress: tort action for damages or right to avoid K by
rescissioniii. Rescission can be defense to action to enforce or
affirmative action seeking restitution of benefits conferred1.
Requires injured party to return any money or property received
2. May not be allowed if injured party unable to return property
received
iv. R 164(1) broader than Syster: misrepresentation may be
material or fraudulent as long as party justified in relying1.
Fraudulent; R162(1): intends assertion to induce assent
a. (a) Knows or believes not in accord w/ facts
b. (b) Doesnt have confidence he states or implies
c. (c) Knows doesnt have basis for assertion
2. Material R 162(2): likely to induce reasonable person or
maker knows it will likely induce person
v. Syester v. Banta (IA)
1. Widow living alone who buys 4,000 hours of dance instruction
for $33K
2. Syester wants to get out of release, claims fraudulent
misrepresentationsa. Can then assert tort claim for damages based
on fraud in inducing her to enter dancing Ks
3. 1st release: manager of studio convinces her at home to
discharge her counsel and agree to settle for refund of $6,000
4. 2d release: signed note to pay them $4,000!5. Holding: jury
needed to find (1) concerted effort, (2) lacking in propriety, to
(3) obtain releases as to constitute a fraudulent overreachinga.
Evidence was sufficient to find fraudulent representations
i. Mr. Carey told her at her job she still had ability to be
professional dancer
ii. Told her she didnt need a lawyer b/c he and studio manager
only friends
iii. Implied he had romantic relationship w/ her
b. Two damage options: out of pocket and benefit of bargain
i. Benefit of bargain rule: sounds like K, but many courts may
apply in tort
1. Depends on bargain she was seeking
2. Professional dancer or seeking companionship of Mr.
Carey?
ii. Out of pocket rule: difference b/w value she paid and what
she received 1. No value for what she was seeking (making progress
toward becoming professional dancer)
c. Court committed to benefit of bargain rule
i. Verdict for Ms. Syester for $14K
ii. Knowingly overcharged $20K
iii. Possible jury factored in value of Ms. Syesters
enjoyment
iv. Also got $40K in punitive damages
vi. Restatement and Syester:
1. Misrepresentation:
a. Fraudulent: told her she could be professional dance and knew
it wasnt true; R 162(1)(a)i. Made it w/ intention of inducing her
to sign release
b. Material:
i. Knew telling her she could still be professional dancer and
hinting at romantic relationship would likely induce her to sign
release; R 162(2)
ii. Not reasonable though? She knows already sued them once!
2. Undue influence
a. R 177(1):
i. Mr. Carey dominant party v. Ms. Syester servient party due to
romantic overtones
1. Fact that brought Mr. Carey back to persuade her implies
dominant/servient relationship
ii. Justified in assuming Mr. Carey wouldnt act inconsistent w/
her welfare?
1. Justified to her given romantic overtones?b. Odorizzi
elements:
i. Discussion of transaction at unusual time
1. Mr. Carey showed up at Ms. Syesters workplace
ii. Consummation at unusual place
1. Danced together for 45 minutes right before settlement was
signed!
iii. Use of multiple persuaders by dominant party against
servient party
1. Mr. Carey and Mr. Theiss in on it together
iv. Statements there is no time to consult financial advisors or
attorneys
1. Not no time, but told her she didnt need lawyer
vii. Assertion of opinion; R 1691. Claim just opinion or puffing
v. statements of fact?
2. R 168(1): opinion is an implied representation (quality,
value, authenticity)
a. R 168(2): if reasonable, party may interpret as assertion
that:
i. (a) Facts known are not incompatible w/ his opinion
1. Mr. Carey knew Ms. Syester old lady
2. Admitted Ms. Syester wasnt progressingii. (b) Knows facts
sufficient to justify opinion being formed
3. Reliance on opinion not justified unless: R 169a.
Relationship of trust and confidence such that reasonable to rely
on opinion
i. Romantic relationship, teacher-student relationship
b. Reasonably believes person has special skill, judgment, or
objectivity wrt to subject of opinion; ori. Mr. Carey is
professional dance teacher
c. Particularly susceptible to misrepresentation of type
involved
i. Lonely widow
viii. Hill v. Jones (AZ)
1. Hills enter into K to purchase Jones home for $72K
2. Agreement provided sellers were to pay for and place in
escrow a termite inspection report
3. During inspection Mr. Hill asks if ripple in dining room step
termite damage ( Mr. Hill had seen such damage before as
janitor
a. Mr. Jones said it was water damage
4. Mr. Hill decided that report would establish if damage or
not
a. Report came back w/ no termite damage
5. After moving in Hills find out $5,000 in termite damage
a. Also find out that there was past damage and treatment that
Jones never disclosed
6. Inspector returned and found out that he didnt find damage
b/c boxes and plants were covering the infested areas
7. Want to rescind K (so they can get rid of house), but K
included merger clause
a. Jones argue K is completely integrated, misrepresentation
after the fact
b. Hills claim not bound by K until satisfactory termite
report
8. Holding: seller has duty to disclose material facts; merger
clause cannot free one from own fraud (parol evidence
exception)
a. R 161(a): non-disclosure is assertion if knows disclosure of
fact is necessary to prevent some previous assertion from being a
fraudulent or material misrepresentation
b. If Mr. Jones doesnt disclose past termite damage, then
assertion that house is free of termites and/or ripple was water
damage would be fraudulent and material
i. Fraudulent R 162(1)(a): knows about termite damage past and
present
ii. Material R 162(2): knows it would likely to induce them from
buying home b/c Mr. Hill said he was going to rely on termite
report!
c. More generally, court adopts FL rule: seller of home under
duty to disclose facts materially affecting value of property which
arent readily observable and unknown to buyer
i. Existence of termite damage past or present is material
ix. R 161
1. (a) Knows fact necessary to prevent previous assertion from
being fraudulent or material misrepresentation
2. (b) Knows fact would correct assumption and non-disclosure is
breach of good faith and fair dealinga. Broader basis for
relief
3. (c) Knows fact would correct mistake as to contents or effect
of writing4. (d) Entitled to know b/c of fiduciary relationship5.
Doesnt cover innocent non-disclosures!
a. Different case if Jones didnt know about termite damage
b. Possible tort liability for non-disclosures though
x. Laidlaw v. Organ1. 1817 large sum of tobacco
2. War ends, tobacco worth more, seller wants out of K
3. Asked if any information calculated to enhance price or
value
a. R 161(b): not responding is bad faith, shouldve written back
and told seller to do more research
4. Case shows how courts are inclined to distinguish b/w
information that one party shouldve known from information other
parties havexi. Prof. Keeton fairness factors: (applied to
Hill)
1. Difference in degree of intelligence of parties
2. Relation of parties to each other
3. Manner in which information acquired
a. Hills discovered hard way, didnt hire somebody to do their
own research
4. Nature of fact not disclosed (latent defect not reasonably
discoverable)
a. Termite damage hard to uncover if not trained eye
5. More likely seller must disclose than buyer
a. Jones were selling home to Hills
6. Nature of K
a. K included requirement of termite report
i. Would expect seller to disclose past termite damage then
7. Importance of fact
a. Wooden home, termite damage
8. Active concealment
a. Evidence used boxes and plants to conceal
xii. Economics
1. Kronman says courts should favor non disclosing information
obtained through deliberate and costly investigationa. As opposed
to acquiring by chance
xiii. Disclaimer or merger clause
1. Unlike Hill, some courts find if disclaimer is specific then
cant rely on oral representations
xiv. Fiduciary relationship; R 161(d)1. Special relationship of
trust and confidence; R 173a. Lawyer-client, trustee-beneficiary,
etc.b. Mere friendship not enough
i. One party reposes trust, other accepts and fosters
xv. Park 100 Investors v. Kartes (IN)
1. Kartes owned a video store, KVC; Park 100 leases commercial
real estate
2. Kartes Ks w/ Park 100 to lease space for growing
business.
3. Park 100 brought suit to collect unpaid rent from Kartes
under signed personal guaranty
4. Ps rep. came day before lease began for Ds to sign more lease
papers
a. Potential issueits been yrs. how do Ds remember exactly what
Ps rep told them they were signing?
5. Ds called their lawyers who told them to sign
a. Ds had a rep. negotiate lease for them
6. Ds just leaving to go to daughters wedding rehearsal and were
running late
a. Rep. told Ds their signatures were needed in order to move in
the following day
7. Ds signed a personal guaranty; Ps rep never told Ds this was
what signing
8. After some yrs. go by, P sends D their tenant agreement and
Ds refuse to affirm the personal guaranty
9. Ds then sell KVC and buyers fail to pay P; P sues Ds
10. Holding: affirm fraud b/c papers misrepresented to Kartes
who relied believing only signing a lease
a. Rep had a duty to inform the Kartes of what they were
signing
b. Elements of fraud: (must prove all)
i. (1) Material misrepresentation of past or existing fact by
the party charged, which:1. Said more lease papersii. (2) False1.
Werent lease papers; was personal guaranteeiii. (3) Knew or
shouldve known was false1. Appears knew; did it right before Ds
leaving for wedding rehearsaliv. (4) Relied upon
1. Relied on lawyer, not Park 100
v. (5) Proximately caused the complaining partys injury
11. Park 100 is fraud in execution (so was Ray v. Eurice
Bros.)
a. Sherrod, Syester, and Hill represent fraud in the
inducement
12. Misrepresentation justifies reformation; R 166
a. Recipient justified in relying upon
b. Extent 3d parties as good faith purchasers not unfairly
affected13. Dont assume family business = small business
(Hilton)
14. Dont assume small businesses are weak or unsophisticated
g. Unconscionabilityi. Procedural and substantive elements1.
Minority, mental capacity, duress, undue influence, and
misrepresentation are only proceduralii. Does it shock the
conscience? 1. Everyone must react the same, must think it is a
grossly unfair bargainiii. Must be unconscionable at time K entered
into1. R 208:a. Matter of law for judge to decideb. May refuse to
enforce whole Kc. May enforce w/o unconscionable termd. May limit
application to avoid unconscionable result2. UCC 2-302a. Matter of
law for judge to decideb. Opportunity to present evidence regarding
commercial setting, purpose, and effectc. Same enforcement options
as R 208d. Some courts find unconscionability a defensive
conceptiv. Williams v. Walker-Thomas Furniture (DC)1. Store sends
sales reps. out to houses of welfare recipients right after welfare
checks are received every mo.a. Sold welfare recipient an item more
than two times value of welfare check when needs check to pay for
necessities for her and her kids2. Purchase items from seller and
make mo. payments, but cross collateral provision (add-on clause)
in K keeps a balance due on every item purchased until the balance
on all items is liquidated3. Buyers defaulted and seller seeks
repossession of all items purchased from them; buyers appeal when
trial ct. finds in favor of sellera. DC hasnt adopted UCC 2-3024.
Holding: reversed and remanded; trial ct. can determine whether
unconscionable a. Procedural: absence of meaningful choice for one
partyi. All circumstances surrounding transaction1. Shes on welfare
$218 per mo.2. Seven kids to feedii. Negated if gross inequality of
bargaining power (one-sided bargain)1. Walker-Thomas knew situation
a. Almost done paying off and sold her new itemiii. Important terms
hidden or minimized1. Hidden in long Kiv. Reasonable opportunity to
understand terms1. Education of parties may be significantb.
Substantive: K terms unreasonably favorable to other partyi.
Outcome of enforcing K term1. Unable to pay her kids will sit on
floor b/c going to take all her furnitureii. Fairness of terms
considered in light of commercial background and needs of trade1.
Nobody wants used furniture; Walker Thomas has to protect itself by
getting back before depreciatesc. Dissent: believes policy decision
not for court to decidev. Ahern v. Knecht (IL)1. A/C breaks during
heat wave and P picks repair co. out of phone book based on claim
of honesty 2. Charged $762 when services really only worth $150;
demanded check before P left for doctors appointment3. Left A/C
inoperable; hired someone else who did it for $724. Holding: K
unconscionable; took advantage of condition, circumstances or
necessity of other partiesa. Heat wave, P didnt know anything about
A/C and relied on repair guy5. Excessive price may be a basis for
finding unconscionabilitya. Some empirical evidence under UCC
people feel greater than 100% objectively unconscionable b. But in
Batsakis ct. refused to consider adequacy of considerationc. Market
changes allow rates to increase or decreasevi. Goals of Consumer
Protection Legislation:1. Greater disclosure to consumers so they
are more informed2. Substantive regulation- unfair K terms are
unlawful3. Improve enforcementvii. Higgins v. Los Angeles County
(CA)1. Before moms funeral five kids dad dies2. A church family,
the Lemoitis, adopts orphans; Extreme Home Makeover contacts family
about renovating familys home3. EHM offers K w/ 24 single-spaced
pages and 72 numbered paragraphsa. Said in all caps: do not sign
this until you have read it completely4. Paragraph 69 included
arbitration clause:a. EHM could seek injunctive or other equitable
relief while kids cannot b. Contained in last section of K among 12
numbered paragraphs, w/o titles or headingsc. No different font or
caps used; didnt contain box to initiali. Six other paragraphs in K
had box to initiald. Said I agree, instead of parties agree 5. One
orphan, Charles (21-yr. old), served as guardian for three minor
orphansa. Told to flip through and sign Kb. Ten minutes b/w being
handed K and signingc. Didnt know what arbitration clause was; or
other legal terms6. EHM took three-bedroom house and turned it into
nine-bedroom house (one bedroom for each orphan, plus familys
children); also paid off mortgagea. Show first aired on Easter
Sunday; Leomitis said home theirs; kicked orphans out afterwardb.
EHM continues to air episode anyway7. Issue: arbitration clause
unconscionable?a. Orphans want jury trial b/c more sympathetic
party8. Holding: arbitration clause unconscionable a. (1) Adhesion
Ki. Form K1. Big company w/ long form; 72 paragraphsii. Disparity
in bargaining power1. TV co. v. orphansiii. Take it or leave it
language1. If dont sign, dont get on show2. No prior negotiations;
told to flip through and signb. (2) Procedural unconscionabilityi.
Entire agreement drafted by stronger partyii. Clause appears near
end of lengthy, single-spaced document1. Not titled, in
miscellaneous sectioniii. Had to initial multiple clauses in K, but
not the arbitration clauseiv. Vulnerable and unsophisticated party
doing signing1. TV co. knew thisc. (3) Substantive
unconscionability i. One sided1. Says, I agree, not the parties
agree2. Only requires orphans to submit their claims to
arbitration; TV co. free to sue in court 3. Orphans cant appeal
arbitrators decision, while TV co. can appeal if lose in courtii.
Excessive costs to party requesting relief9. Although ABC is giving
the home as a gift, trying to profit off of the most vulnerable
ppl. they can findviii. Arbitration clauses look good, but it is
actually not as prompt or inexpensive as ppl. think and consumer
rarely chooses this method1. Lack of formal rules and preclusion
from suing via class action make this not an attractive
optionJUSTIFICATION FOR NONPERFORMANCEI. MISTAKEa. Mistaken belief
using language w/ same intention (Frigaliment)i. Judicial response
usually to choose one of intended meanings and apply itb. Lenawee
County v. Messerly (MI)i. Pickles bought 600-square-foot tract of
land from Messerlys, w/ three-unit apartment building situated on
itii. Barneses assigned all interest in property to Messerlys using
quit-claim deediii. Pickles inspected land and purchased it for
$25Kiv. Six days after buying land, Pickleses discovered raw sewage
seeping out of ground1. Previous owners the Blooms installed
nonconforming septic tank w/o permit2. 2500 square-feet of property
needed for three-unit dwelling!v. Lenawee County condemned
property: injunction prohibiting human habitation until sanitation
unit is brought up to codevi. Pickleses stopped paying and
Messerlys filed complaint seeking foreclosurevii. Pickleses
counterclaimed for rescission, misrepresentation against
Barnesesviii. Trial ct.: neither party knew of Blooms mistakes w/
septic tank ( no fraud or misrepresentation 1. Property bought as
isix. Appellate ct.: mutual mistake b/w Messerlys and Picklesesx.
Holding: mutual mistake, but allocation of risk via as is clause1.
Mistake: belief not in accord w/ facts; R 151a. Must relate to fact
in existence at time K entered into (execution)!
i. Noncompliant septic tank at time K entered intoii.
Income-producing capacity of property in Q?1. Mistake AFTER K
signed2. Sewage wasnt seeping out of ground when K executed2. A
& M Land Development a. P bought 91 lots, but could only
develop 42 b/c couldnt obtain septic tank permits for the other
lotsb. Ct. refused to allow rescission: got what K for just less
valuable3. Sherwood a. Barren Cow Caseb. Parties agreed to sell cow
which both thought was barrenc. Seller found out cow fertiled.
Barren = $80; pregnant = $750e. Ct. granted rescission; said animal
K for was not in existence4. Court references old common law
distinction b/w quality or value v. essence of consideration5.
Ultimately goes w/ case-by-case analysis of R 152:a. Mistaken
belief at time K entered intoi. Thought that there was compliant
septic tank
ii. Blooms installed noncompliant tank w/o permitb. Relates to
assumption on which K was made
i. Would be habitable by humans
c. Materially effects agreed performances
i. Land has no value, people cant live there
d. Unless party bears risk of mistake; R 154i. Allocated by
agreementii. Examined property and accepts in present conditione.
Pickleses stuck w/ as is clause in K R 154(a)i. (b) Aware limited
knowledge wrt facts to which mistake relates, but treats as
sufficient1. Mr. Pickles asked Barneses about septic tank and they
told him they cleaned it once w/o problems 2. Also, quit-claim deed
(as is deed)xi. Reasonable under circumstances to bear riskxii.
Correctly decided?1. Most people expect reasonable inspection of
improvement to real propertya. Not septic tank (unless inspector
involved)c. Law and Economics
i. More modern law is if nobody knows put on sellerii. Lack of
consistency in mistake casesiii. Gartner v. Eikill (MN)1. Purchaser
of land sought rescission by mutual mistake2. Claimed unknown that
land was subjected to past zoning restrictiona. K said seller would
convey marketable title subject to zoning laws3. Ct. allowed
rescission, relying on Sherwood in part!4. Difference b/w
Lenawee:a. Put on notice by zoning laws, shouldve checkediv.
Possible cases are backwards?1. Could argue everybody shouldve seen
it in Gartner
2. Latent in Lenaweev. Risk allocation b/w cases right?d.
Conscious Ignorance; R 154(b)i. Nelson v. Rice (AZ)1.
Representative of estate sold expensive paintings for $60 w/
getting them appraised, actually worth more than $1 million2. Aware
of possibility worth more, but didnt bothere. Mutual Mistake
Written Expression i. Remedy is reformation to express intent of
partiesii. Exception to parol evidence rule 1. E.g., promissory
note fails to state correct interest ratef. Equitable Relief Remedy
for Mistakei. Rescission + restitution that is appropriateg.
Wil-Freds, Inc. v. Metropolitan Sanitary (IL)i. Wil-Freds answers
Metros 11/26 ad w/ sealed bid and $100K1. Rehabilitation of sand
drying beds2. Must remove clay pipe and old filter material, then
replace w/ plastic pipe and new material3. Pipes must withstand
standard construction equipment4. Estimated cost $1.257 millionii.
12/22: addendum changed material to less expensive typeiii. 1/6:
bids close: Wil-Freds bid = $882K; next lowest = $1.118 millioniv.
Wil-Freds president told chief estimator and Ciaglo to check
figures immediately after being notified on 1/6 that bid $235K
below next co.v. 1/8: realizes mistake made in sub Ciaglos bid1.
Ciaglo thought it could drive heavy construction equipment on
filter bed b/c ad said standard equipmentvi. 1/12 sends explanatory
letter to Metro1. Used Ciaglo in past, always performed skillful
work ( acted reasonably in relying on Ciaglos quoted pricevii.
2/26: after withdrawal denied, Wil-Freds files suit, alleging
irreparable injury if required to perform at unconscionably low
price1. Wants $100K security deposit backviii. Issue: rescission
due to unilateral mistake
ix. Holding: Wil-Freds granted rescission and gets security
deposit back1. Elements for rescission due to unilateral mistake:a.
Mistake at time K made
i. Ciaglo thought could use heavy equipmentb. Relate to material
feature of K
i. Resulted in 17% decrease in Wil-Freds bidii. Severing
ramifications v. magnitude1. Other cases (Drennan) combine elements
two and threec. Reasonable care exercised
i. Wil-Freds never withdrew bid quote beforeii. Worked w/ Ciaglo
on 12 previous ocassionsiii. Ciaglo inspected job site and examined
specs. w/ Wil-Freds estimatorsiv. Wil-Freds made two separate
reviews of bidd. Enforcement unconscionable
i. Ciaglo not financially able to sustain $150K loss (bankruptcy
ii. Wil-Freds would lose $2-3 million in bonding capacity if lost
security deposite. Other party can be placed in status quo
i. Mistake discovered w/in 48 hr. of bid opening, Sanitary
District awarded K to next lowest bidder2. Mixed mistake of
judgment and fact
a. Plastic pipes would support trucks ( judgmentb. But
predicated on misleading ad by sanitary district ( factc. Facts
surrounding error are what is importantd. Must be genuine +
identifiable mistake, not a poor prediction wrt outcome of Kh.
Unilateral mistake elements; R 153i. Mistake at time K made
ii. Relates to basic assumption
iii. Material effect on agreed exchange
iv. Doesnt bear risk of mistake under R 154; and either1.
Assumption wont back out of bid = bearing risk?v. Unconscionable
or;
1. Unconscionable = substantial lossvi. Other party had reason
to know or his fault caused mistakei. R 157 doesnt require mistaken
party to be nonnegligenti. Only requires good faith and reasonable
standards of fair dealing
j. Unilateral Mistake as to Content of Writingi. Generally still
bound by K if fail to read (Ray v. Eurice Bros.)ii. Duty to read
may be overcome by number of doctrines1. Lack of capacity (Hauer),
fraud (Park 100), or unconscionability (Higgins) iii. Nauga v.
Westel1. Nauga attorney added to proposed agency agreement clause
requiring Westel to pay $250K for settlement of all claims2.
Westels attorneys didnt notice and signed3. Court enforced even
though seemed harsh4. No ambiguity, fraud, or mutual mistake
presentk. Unilateral Mistake in Advertisementi. Donovan v. RRL
Corp. (CA)1. Used Jaguar for sale in newspaper ad for $12K less
than $38K due to errors made by newspaper2. Ad was considered offer
(ads not usually offers though)3. Holding: K, but subject to
rescission by unilateral mistakeII. CHANGED CIRCUMSTANCES:
IMPOSSIBILITY, IMPRACTICABILITY, AND FRUSTRATIONa. Supervening
event after K entered into!
i. Deprives party of apparent benefit fairly expected from
original bargainb. Impossibility: R 262-64; UCC 2-613i. Taylor v.
Caldwell
1. First exception to rule of strict K liability 2. Fountainhead
of impossibility3. Agreed to rent music hall, but burned down
shortly before first performanceii. Destruction (casualty): R 262,
263; UCC 2-6131. Easy to apply w/ unique goods (racehorse)2. Harder
to apply w/ fungible goodsiii. Impossibility via government action:
R 264; UCC 2-615(a) and comment 10c. Frustration of purpose: R 265;
UCC 2-615i. Krell v. Henry1. Sudden illness of King forced
cancellation of coronation, making room reservation uselessd.
Impracticability: R 261; UCC 2-615-16i. Mineral Park Land Co.
(CA)1. Agreed to purchase and extract all gravel from land at fixed
prices required for construction of concrete bridge2. Removed all
gravel from above water line, but removing below would cost 10 to
12 times as much3. Extreme increase in cost justified
nonperformancee. Karl Wendt Farm v. Intl Harvester (6th Cir.)i.
Severe downturn in farm equipment marketii. 1974 dealer sales and
service agreement b/w Karl Wendt and IHiii. IH negotiated an
agreement w/ Case and Tenneco to sell farm equipment division1.
$479 million paper lossiv. 400 conflicted areas were not given new
Case dealership and Karl Wendt onev. Wendt filed suit against IH,
alleging breach of IHs dealer agreementvi. IH relied on defenses of
impracticability, frustration, and implied covenant limiting
duration of Kvii. Jury found for IH on impracticability, but
directed verdict for Wendt on frustration of purpose, and implied
covenant limiting duration of Kviii. Holding: denies all defenses
relied on by IH1. No impracticability under R 261:a. Occurrence of
event
i. Fallout in farm equipment marketb. Non-occurrence was basic
assumption of K
i. Continuation of strong farm equipment market not basic
assumptionc. Unless:
i. His fault1. Not responsible for downturn, but responsible for
chosen remedy2. What if economists said FOS farm equipment business
going south?ii. Language of K1. Agreement had detailed 6 mo.
termination clause; UCC 2-309(3)iii. Circumstances say otherwise1.
IH would avoid liability and Case would pick up only dealerships it
sees fit2. Windfall for IHd. Must be extreme and unreasonable
difficulty, expense, injury, lossi. Mere lack of profit due to
market downturn not excuse; R 261 comment b; UCC 2-615 comment 41.
IH claims losing $2 million a day and if division not sold wouldve
had to declare bankruptcy ii. Severe shortage of raw materials or
supplies due to war, embargo, local crop failure, unFOS source
shutdown
iii. Different if corp. dead b/c no longer Q of profitability2.
No frustration of purpose under R 265:a. Principal purpose
i. Purpose to establish dealer relationship b/w IH and Wendtii.
Not mutual profitability iii. That would be principal purpose of
every K!b. Substantially frustrated
i. Reduced profitability, but doesnt affect dealership
relationshipc. By occurrence of event
i. Severe downturn in farm equipment marketd. Non-occurrence
basic assumption of K
i. K didnt assume that market would continue to be stronge.
Unless:
i. His fault1. Frustrating event actually IHs decision to sell
farm equipment business w/o following termination clauseii.
Language of K1. Termination clauseiii. Or circumstances say
otherwise1. Purpose of doctrine to apportion risk as parties
wouldve for unFOS circumstances3. No implied covenant limiting
duration of K:a. IH argued that reserving right to terminate
certain lines from dealership agreement = right to go completely
out of businessb. K provided for termination for cause!c. Neither
party anticipated IH would go out of business completelyd. Places
all risk on dealerix. Dissent: Q of fact for jury whether no
downturn was basic assumption of K1. But under Restatement Q of law
for judgef. War and natural Disaster
i. Generally not allowed as excuses
ii. American Trading v. Shell (2d Cir.)1. Denied relief when
prices increased b/c Suez Canal closed due to war2. Route not basic
assumption of Kiii. Wolf Trap Foundation (4th Cir.)1.
Impracticability allowed when thunderstorm caused power outage at
outdoor theater2. Dissent: Wolf Trap failed to provide for
auxiliary power equipmentg. Impracticability and Terrorismi. Bush
v. ProTravel (NY)1. R 261 comment d: may be impracticable b/c
involve risk of injury
2. Sought refund for $1500 deposit on honeymoon safari trip mo.
after 9/113. Claimed damage to telephone systems made it nearly
impossible to contact travel agents office in Manhattan and NYC
under state of emergency4. Ct. said she shouldve been able to prove
temporary impossibilityii. Scottsdale Road v. Kuhn Farm Machinery
(AZ)1. Good faith apprehension of terrorism danger to conference
attendees traveling on airline b/c of 1991 Gulf War2. Not
substantial enough for impracticability or frustration3. Perception
of danger must be objectively reasonableh. Role of FOSi. Relief
under impracticability and frustration not denied just b/c event
FOS
ii. R 261 comment c: other factors may explain failure to
allocate FOS riskiii. UCC 2-615 comment 1: unFOS supervening
circumstances (may deny if FOS?)i. Law and economics i. Posner:
allocate risk to superior risk bearerii. Not simply deepest pocket
or bigger co.iii. Party in best position to prevent event from
occurring iv. Or minimize consequences at lowest cost, usually by
purchasing insurancej. Mel Frank Tool v. Di-Chem (IA)i. 1994:
three-yr. warehouse lease to Di-Chem to use it for storing
chemicalsii. No evidence Mel Frank owner knew hazardous chemicals
were going to be stored1. Lease limited Di-Chems use of premises to
storage and distributioniii. Had to comply w/ all city
ordinancesiv. Also destruction of premises provisionv. 1995: citys
fire chief comes and inspects and finds not up to 1994 Uniform Fire
Code adopted by cityvi. Hazardous materials have to be removed w/in
seven days to eliminate hazardvii. Mel Frank and Di-Chem discussed
splitting costs to bring up to code, but Mel Frank thought too
expensiveviii. End of Oct. Di-Chem vacates premisesix. Mel Frank
sues for breach of lease worth $55K, Di-Chem raises several
defensesx. Holding: no impracticability or frustration of
purposes1. Frustration due to government regulation (uses R 265
instead of R 264)a. Change in circumstances makes one partys
performance worthless to otherb. Both parties understand that w/o
object transaction makes little sensei. Mel Frank didnt know about
hazardous chemicals 2. Regulation indirectly affected principal
purpose
a. Purpose of lease was to store chemicals, not just hazardous
chemicals3. No substantial frustration of purpose
a. Not substantial b/c can still store chemicals, not just
hazardous onesb. Di-Chem can still store its food additives4. Cant
claim impracticability or frustration when serviceable use still
available consistent w/ use provision of K
a. Less profitable or unprofitable doesnt = substantial
frustration5. Force majeure clause:a. Total destruction of business
useb. Purpose of clause is building being damaged, not subsequent
government regulation prohibiting a particular usexi. Law and
economics: Di-Chem deals in chemicals, should be aware of
regulations and K to protect itself if regulations changek.
Government Regulation as Excusei. Courts much more willing to grant
rescission over war, natural disaster, or market changeii. UCC
2-615 specifically mentions good faith compliance w/ government
regulationiii. R 264: performance impracticable b/c supervening
regulation1. Regulation goes to basic assumption of K
a. Mel Frank: basic assumption was being able to store
chemicals, not just hazardous chemicalsiv. Courts still impose
stringent limits1. Frustration must be quite substantial (Mel Frank
said virtually worthless)2. May deny relief if supervening
regulation FOS or failed to guard againstl. Impracticability and
Frustration under UCCi. UCC 2-615 broad enough to encompass both
impracticability and frustration1. Addresses sellers breaching, but
courts have given relief to buyersa. Buyers K must in reasonable
commercial understanding be conditioned on specific venture or
assumption
i. Example: war procurement subcontract when prime K subject to
termination m. Force Majeure Clausesi. Clauses that anticipate
partial or total destruction of propertyii. Windstorm, fire, flood,
other acts of God1. Also may include strikes and labor disputesiii.
Clauses may be subject good faith, UCC 1-102(3), UCC 1-203, and
unconscionability provisions, UCC 2-302n. Remedyi. Normal remedy is
rescission + restitution for benefits conferred (same as
mistake)ii. Most courts uniformly reject reformation so performance
obligation continues1. Aluminum Co. of America v. Essexa. Granted
reformation of long-term K for supply of aluminum processing
services to account for costs increasesb. Increases not reflected
in negotiated price increase formulas 2. No longer binding
precedent b/c opinion vacated as part of settlementIII.
MODIFICATIONa. Qs to ask:i. Was there separate consideration for
the modification?ii. Did the parties agree to the modification
under legitimate circumstances?b. Preexisting duty rule; R 73i.
Performance of legal duty neither doubtful nor subject to honest
dispute is not considerationii. Slightly different performance if
reflects more than pretense of bargainc. Modification binding if: R
89i. Equitable b/c unFOS circumstances
1. May apply even if impracticability defense wouldnt workii.
Provided by statute
iii. Justice requires due to material change of position in
reliance on promise
1. Promise means accepting reformationd. UCC 2-209(1) dismisses
pre-existing duty rule
i. Modification must abide by SOFii. Attempt at modification may
amount to waiver of limitation on modifications or SOFiii. Can
retract waiver w/ reasonable notification that strict performance
required1. Unless unjust in view of material change of position
iv. Modification doesnt need consideration to be bindingv. Good
faith bar to ext