Contracts Outline Spring 2010 Simmons

8/2/2019 Contracts Outline Spring 2010 Simmons

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Contracts Outline

I. Supplementing the Agreement: Implied Terms, the Obligation of Good Faith, andWarranties

a. IMPLIED TERMSi. In General

1. Implied in Law: A term not found in the parties agreement, but imposed by Court1. Made part of agreement by operation of law, rather than parties2.

May be imposed by statute, common law precedent, case-by-case basis

ii. Rationale1. Encourage the party w/ the greatest amount of knowledge/bargaining power to share info2. Fairness: it is fair and just to do so3. Efficiency: economically efficient to imply what parties would have agreed to if they had

thought about it If the terms the law would supply are indeed what most parties wouldvoluntarily choose for themselvesthey have less terms to bargain out

iii. Supplying an Omitted Essential Term (R2d 204)1. When the parties to a bargain sufficiently defined to be a contract have not agreed with

respect to a term which is essentialto a determination of their rights and duties, a term which

is reasonable in the circumstances is supplied by the court

iv. Exclusive Dealings1. Exclusive Dealings UCC 2-306(2)A lawful agreement by either the seller or the buyer for

exclusive dealing in the kind of goods concerned imposes an obligation by the seller to use best

efforts to supply the goods and by the buyer to use best efforts to promote their sale.

1. Wood v. Lucy, Lady Duff Gordon (Exclusive Dealing)1. Facts: P promised to use reasonable efforts to market D's designs. P claims D

broke the agreement by placing her endorsement for other designs for Sears;D says their agreement lacks the element of a K because there's no promisehe will use reasonable efforts to market designs.

2. Holding: A contract can be found when there is only an implied, not anexplicit, promise to perform. In this case, there was an implied obligation to

use best efforts. *Cardozo- instinct with obligation

v. Absence of Time Provision and Notice of Termination UCC 2-3091. UCC 2-309 Absence of Time and Notice of Termination

1. The time for shipment or delivery or any other action under a contract if not providedin this Article or agreed upon shall be a reasonable time.

1. Reasonable time in good faith standards2. If the contract provides for successive performances but is indefinite in duration, it is

valid for a reasonable time but unless otherwise agreed may be terminated at any time

by either party.

1. What is reasonable is dependent on the facts, such as the length and durationof the relationship

2. Reasonable/actual notice MUST be given1. The requirement of giving reasonable notification does not relate to the method of

giving notice, but to the circumstances under which the notice is given and the extent ofadvanced warning of termination that the notice gives.

2. Affords requisite protection to the party who may not have as much power as the otherparty


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3. In franchise agreement, the time necessary to enter into transactions to dispose ofinventory where the dealer has made substantial investments in reliance on theagreement so he can recoup investment and minimize losses.

3. Termination of a contract by one party except on the happening of an agreedevent requires that reasonable notification be received by the other party and

an agreement dispensing with notification is invalid if its operation would be

unconscionable. **A term specifying standards for the nature and timing of notice is

enforceable if the standards are not manifestly unreasonable.

1. Recognizes that the application of principles of good faith and sound commercialpractice normally call for such notification of the termination of a going contractrelationship as will give the other party reasonable time to seek a substitutearrangement.

2. An agreement dispensing with notification or limiting the time for the seeking of asubstitute arrangement is, of course, valid under this subsection unless the results ofputting it into operation would be the creation of an unconscionable state of affairs.

3. Justifiable cancellation for breach is a remedy for breach and is not the kind oftermination covered by the present subsection.

4. The requirement of notification is dispensed with where the contract provides fortermination on the happening of an agreed event. Event is a term chosen here tocontrast with option or the like.

2. Leibel v. Raynor Manufacturing Co.1. Facts: agreement for P to exclusively distribute Ds doors. Later D terminated

relationship question if reasonable notification is implied

2. Holding: Reasonable notification is required in order to terminate an on-goingoral agreement for the sale of goods in a relationship of manufacturer-supplier

K did not state duration, but relationship was successive. Where successiveperformances are involved, reasonable notification is required.

Distributor undoubtedly incurs expenses in reliance on continuing relationship.Not unconscionable to require notification; triable issue of fact exists.

b. The Implied Obligation of Good Faithi. General

1. Obligation of good faith a device for protecting the bargain that the parties themselves havemade against later attempts by one party to undermine it.

ii. Common Law Definitions1. Summers approach: Can't really define good faithbut it is defined by its relationship to

bad faith conduct. (this was the chart)

1. Overtime, certain types of conduct will be identified as "bad faith" and the more thatbecame identified, the more we knowif not "bad faith" then good faith

2. Reasonable Expectations Test/ Fruits of Contract Approach/ Foregone Opportunities1.

At the time entered into agreement, what were the reasonable expectations2. Focuses on a party that is overreaching and in doing so, denying the other party the

fruits of the K

3. Good faith should be seen as protecting the "reasonable expectations" of thecontracting parties in light of background practices and customs in which theagreements arose.


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Ps burden of establishing D was not honestly dissatisfied may be difficult but noimpossible to prove, reasonableness standard wont produce a victory necessarily.

3. Morin Building Products Co. v. Baystone Construction, Inc.1. Facts: Aluminum siding installed subject to final approval of GMs agent in

decision matters related to artistic effect. Agent rejected siding due to minoraesthetic flaw. Issue: Will acceptance of performance in a K with purpose primarilyfunctional in nature be based on objective standard?

2. Holding: Yes. Majority rule is where the K in question involves performanceof commercial quality, operative fitness, or mechanical utility, an objective,reasonable person standard will be used in determining whether performance asadequate. *Subjective applies where personal aesthetics are at issue. (Posner)

vii. Express Right of a Party to Exercise Discretion1. Locke v. Warner Bros., Inc

1. Facts: Locke and Eastwood in a relationship; it ended, and she was later hired byWarner Bros. in a director's position. She doesn't get any projects, and alleges thatWarner didn't act in good faith when contracting with her

2. Holding: Triable issue exists as to whether Warner breached its K with Locke byfailing to evaluate her project proposal on the merits

1. D believed it had absolute right to refrain from developing films so long as

they paid Locke. Good faith can be applied in employment context to reach certaintypes of invidious discriminatory treatment based on factors such as race or gender.

3. Rule: Parties cannot contract away the duty of good faith, but the scope of theduty can be narrowed by using express terms

4. UCC 1-102(3)-- The obligations of good faith, diligence, reasonableness and careprescribed by this Act may not be disclaimed by agreement but the parties may by

agreement determine the standards by which the performance of such obligations is to

be measured if such standards are not manifestly unreasonable.

2. When does a party breach a duty of good faith?1. If one party has discretionary power, must use good faith when exercising that power2. If a party asserts in good faith that he is not satisfied, court cannot question that3. However, if a D acted in bad faith, categorically rejecting Ps work, irrespective of

the merits of her proposals, such conduct is NOT beyond the reach of the law.

viii. Requirements and Output Contracts1. Requirements K: Seller undertakes duty to supply all goods of a given type that a buyer

may require during the term of a K

1. Under UCC requires exclusivity or (estimated quantity) **Binds buyer to seller2. Can have requirements limited to particular city or to particular time of year

*Corbin-consideration exists because of commitment.

2. Output K: The buyer is obligated to buy all of the sellers output of a given commodity.1. Could be limited to time period or particular manufacturing plant2. Buyer could buy from other manufacturers so long as he buys everything this

particular seller produces3. Disadvantage to seller if market price goes up

3. Trend: even though open-ended K are discouraged & parties encouraged to be specificwhen can, courts will enforce these types of Ks if there is a reasonable basis for doing so

1. Demanding less than estimate ok if done in good faith and have non-arbitraryreason

2. Can demand a little more/less, but arent free to demand nothing w/o GF reason4. Why make this contract? Provide output seller a guaranteed market for goods and the

requirements buyer with an assured source for its needs; Ability to lock in a price


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2. Donahue v. Federal Express Corp.1. Facts: P, FedEx employee, questioned numerous invoices and other improprieties in

the workplace. After being asked to falsify data and being terminated, P appealedthrough guaranteed fair treatment procedure; termination upheld. Then, filedcomplaint at state level, with the complaint that FedEx had violated the impliedcovenant of GFFD in the at-will employment relationship.

2. Rule: An at-will employee has no cause of action against an employer fortermination of the at-will relationship except where that termination threatens clear

mandates of public policy (cannot require employee to commit a crime, disobey astatutory duty, or discharge a statute-protected employee)*D had no cause of action under fair treatment procedure/did not create rights underemployee termination

3. Exceptions to the Employment at Will Doctrine1. Duty of Good Faith Performance

1. Every K carries w/ it implied obligation of good faith & courts have used thisto cut back on employers freedom to terminate at will, at least in certainkinds of case

2. Termination violates public policy (or violates a statute)1. EX) EXAMPLE: employer is under investigation by EPA and employee is

fired for refusing to lie as manager told him to

2. Discharged for not complying with a request that violates con/leg/judicialauthority--whistleblowing

3. Additional consideration beyond work environment1. Additional consideration would defeat the at-will employment presumption

and require termination for just cause

2. Performing well is NOT additional consideration though3. EX) Additional consideration can be found in the employees relinquishment

of another job/moves across company (new employer must terminate forjust cause *P. Estoppel)

4. Employee Handbook- Recognize cause of action by public statements in personalmanuals to refrain from terminating employees except for good cause. (Not all

courts agree on this. *Following own internal procedures

II. Warrantiesa. History Caveat Emptor let the buyer beware this is no more

b. Warranty of Title UCC 2-312i. (Seller warranting their ability to sell the product)ii. (1) Subject to subsection (2) there is in a contract for sale a warranty by the seller that

1. (a) the title conveyed shall be good, and its transfer rightful; and2. (b) the goods shall be delivered free from any security interest or other lien or

encumbrance of which the buyer at the time of contracting has no knowledge.

iii. (2) A warranty under subsection (1) will be excluded or modified only by specific language or by

circumstances which give the buyer reason to know that the person selling does not claim title inhimself or that he is purporting to sell only such right or title as he or a third person may have.

iv. (3) Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kindwarrants that the goods shall be delivered free of the rightful claim of any third person by way of

infringement or the like but a buyer who furnishes specifications to the seller must hold the seller

harmless against any such claim which arises out of compliance with the specifications.


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3. Can be disclaimed or modified as set forth in 2-3164. Buyer need not establish reliance5. Type of strict liability

ii. The warranty arises when:1. There is a contract for the sale of goods,2. The seller of such goods is a merchant:

1. The seller deals in goods of the kind or2. The seller holds himself out as having expertise in the goods of the kind

iii. If the implied warranty of merchantability is not modified or waived, the goods must at aminimum be fit for the ordinary purpose for which goods are used.

iv. UCC 2-3141. A merchant who regularly sells goods of a particular kind impliedly warrants to the buyer

that the goods are of good quality and are fit for ordinary purposes for which they are used.

2. To be merchantable, goods must be at least such as1. Pass w/o objection in the trade under the contract description2. Are fit for the ordinary purposes for which such goods are used

v. Elements WE NEED TO SHOWcommon sense1. Sale of goods

2. Goods are merchantable at the time of sale/fit for ordinary purposes for which used.3. P was injured by the goods4. Defect or condition amount to the breach proximately caused the injury5. P gave seller timely notice

e. Implied Warranty of Fitness for a Particular Purposei. This warranty is only created when the buyer relies on the seller's skill or judgment to select

suitable goods and the seller has reason to know of this reliance

ii. Breach of the warranty does not require a showing that the goods are defective in any way, merelythat the goods are not fit for the buyer's particular purpose

iii. UCC 2-315

1. Where the seller at the time of contracting has reason to know any particular purpose forwhich the goods are required and that the buyer is relying on the seller's skill or judgment toselect or furnish suitable goods, there is unless excluded or modified under the next section an

implied warranty that the goods shall be fit for such purpose.

iv. How is this different than Merchantability?1. At time of contracting2. Don't need to be a merchant seller3. Buyer is indeed relyingis necessary to demonstrate reliance

v. Basic Elements1. Warranty arises only if:

1. Seller knows or has reason to know two things (knowledge requirement)1. The buyer's particular purpose; and2. That the buyer is relying on the seller's skill or judgment to furnish

appropriate goods

1. This comes up when a person has done the research on a product andarticulates that THIS is the particular model I want

2. In this instance, the seller can likely claim that the buyer was not relying on hisjudgment in making the decision

a. The buyer came to the table with their mind made up

2. AND The buyer actually relies on the seller's advice and skill/expertise


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f. Disclaimer of Warrantiesi. Generally

1. Warranty disclaimer--an attempt to eliminate a warranty altogether or in some way narrowthe circumstances under which the warranty will operate

ii. Disclaimer of express warranties 2-3161. A disclaimer is inoperative if the disclaimer cannot be construed as 'consistent' with the

terms in the contract that would create the express warranty

2. Since express warranties may be oral or written, the existence of an express warranty mayturn on the application of the parol evidence rule

3. Express warranties are VERY difficult to disclaim4. Express Warranty + Disclaimer = courts try to construe them consistentlyif they can, if

not, the express warranty will prevail

iii. Disclaimer of implied warranty of merchantability1. Language must actually MENTION merchantability2. Disclaimer need not be in writing, but it must be conspicuous

1. What is conspicuous?1. Sub heading that brings it to attention2. How prominent the language is

iv. Disclaimer of implied warranty of fitness for a particular purpose1. To disclaim a warranty of fitness for a particular purposeit must be in a conspicuous

writing and will be effective if it states "that there are no warranties which extend beyondthe description on the face thereof.

1. Can be less specific than required for disclaiming merchantabilityv. General Disclaimer of IMPLIED Warranties 2-316(3)

1. (a) unless the circumstances indicate otherwise, all implied warranties are excluded byexpressions like "as is", "with all faults" or other language which in common understanding

calls the buyer's attention to the exclusion of warranties and makes plain that there is no

implied warranty; and

1. There are some circumstances that it is SO CLEAR that no warranties attach, that weare going to respect that as being adequate as a disclaimer

2. (b) when the buyer before entering into the contract has examined the goods or the sample ormodel as fully as he desired or has refused to examine the goods there is no implied warranty

with regard to defects which an examination ought in the circumstances to have revealed to

him; and

1. There must in addition be a demand by the seller that the buyer examine the goodsfully. The seller by the demand puts the buyer on notice that he is assuming the riskof defects which the examination ought to reveal. The language "refused to examine"in this paragraph is intended to make clear the necessity for such demand.

2. If the buyer does not act upon demand to inspect, the implied warranty has beeneffectively disclaimed

3. (c) an implied warranty can also be excluded or modified by course of dealing or course of

performance or usage of trade.

g. Implied Warranty of Habitability, Skillful Construction, WorkmanlikePerformance (Common law)i. Generally

1. Majority of jurisdictions have recognized an implied warranty of quality in the sale of a newhome by a builder/vendor

ii. Implied Warranty of Habitability


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1. Focuses on the end result expectation that the home will not have any defects that render itunsuitable for habitation

iii. Implied Warranty of Skillful or Workmanlike Performance1. Implied warranty of quality in the sale of a new home by a builder-vendor

iv. Warranty of skillful construction = warranty of habitability, workmanlike performance, ormerchantability

v. Usually the 2 parties involved do NOT have equal bargaining power in relation to potential latentdefects from faulty performance

vi. Builder has superior position because he is the one who can prevent defects; purchaser has nochoice but to rely on builder to deliver what was bargained for

vii. Caceci v. DiCanio Construction Corp.1. Facts: foundation of home built upon biodegradable soil, builder knew prior, it starts to sink)

*D guaranteed plumbing, heating, electrical work, roof, basement, and walls from one yearafter titled closed. D tried to repair cracks in floor after its unk 4 years later.

2. Rule: The housing merchant warranty imposes by legal implication a contractual liability ona homebuilder for skillful performance and quality of a newly constructed home

1. Inspection of premises is impossible w/respects to latent defects.2. Doctrine of buyer-beware (caveat emptor) may not be invoked by D in this case.

viii. Difference between implied warranty of skillful construction and implied warrantyof habitability:

1. the former warranty focuses on the manner in which the work is performed, while2. the latter reflects the end result expectation that the home will not have any major defects

which render it unsuitable for habitation

1. Implied warranty of skillful/workmanlike performance may include defects that donot render the house uninhabitable

ix. Bayliner Marine Corp. v. Crow1. Facts: P brought suit against seller and manufacturer of boat alleging D breached an

express warranty and implied warranties of merchantability and fitness for a particularpurpose. P claimed that the boat was sold significantly slower than what was representedto him.

2. Holding: 2-314- pass w/o objection in trade and fit for ordinary purpose1. P and witness claimed that boat speed was inadequate for intended use, however failed to

address standard of merchantability in trade.

2. P used boat for fishing for a few years after purchasing it, many hours spent on modificationdoes not change fact that he used it to fish (ordinary purpose)

3. Statement in brochure about model did not create an express warranty; did not distinguishbetween factual representation of quality and mere puffery sales talk that does not serveas basis as binding commitment.

4. Court noted record did not support conc. That he informed manufactuer or seller of precisespeed req. Although he discussed speed, facts did not establish that seller actually knew ondate of sale that boat incapable of reaching those speeds was unacceptable.

III. Avoiding Enforcement: Incapacity, Bargaining Misconduct,Unconscionability, and Public Policy

a. Generally

i. 3 Grounds for Avoiding Enforcement:1. concerned w/ the competency of the parties to make an agreement2. concerned w/ the bargaining process by which an agreement is reached3. concerned w/ the substance of any resulting agreement


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b. Capacityi. Minority

1. Generally, cannot make a contract and contracts they do make cannot be enforcedagainst them because they were legally incapable in making them in the first place

1. In most jurisidictions, minors are under 18

2. Effect of a K with a minor

1. Contracts with minors are voidable2. Minors can affirm or disaffirm Ks upon reaching the age of majority

1. if the minor does not disaffirm in a timely manner they will affirm by default

3. Impact of Rescission1. Benefit Rule--minor may be able to recover the full purchase price subject to a

deduction for the minor's use of the merchandise

2. Oregon Rule--recovery of the full purchase price is subject to a deduction for theminor's use of the consideration he or she received under the K or for thedepreciation or deterioration of the consideration in his or her possession

4. Exceptions--certain situations when the infant CANNOT choose to avoid the K entered into1. Necessities--an infant is bound to pay the reasonable value of necessities; what

qualifies as a necessity depends on the infant's station in life

1. Ex: food, shelter, clothing2. Statutory Exceptions--some states have statutory exceptions that encompass

insurance contracts, student loan contracts, etc.

5. Dodson v Shrader1. Facts: Minor tries to disaffirm the contract after he has completely destroyed the

car that he bought

2. Holding: vendor is entitled to reasonable compensation for use/wear of goods if1. minor was not overreached2. no undue influence3. contract was fair and reasonable4. minor has paid for it and used it

ii. Mental Incapacity1. Generally

1. Parties are presumed competent until proven otherwise2. A party that suffers a mental illness or defect at the time the contract is made may

avoid the contract where the mental impairment prevented him from:

1. understanding the nature and consequences of the transaction; or2. acting in a reasonable manner in relation to the transaction, and the other

party had reason to know of his condition.

3. However, if the contract is made on fair terms and the other party was withoutknowledge of the mental illness or defect, the incapacitated party may be precludedfrom avoiding the contract where:

1. the contract has been fully or partially performed; or2. the circumstances have changed such that avoidance would be unjust.

2. Two Tests


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1. Cognitive test--Person lacks capacity to enter into a K if the person is unable tounderstand the transaction and the consequences

1. Does NOT require the seller to have knowledge of the incapacity2. Volitional test--Person lacks the capacity to enter into a K if the person is unable to

act in a reasonable manner in the transaction, and the other party has reason toknow of the condition

1. Determined on the day the instrument was executed2. Does require the seller to have knowledge

3. Restatement Approach (Combination of the two)1. unable to understand the consequences of the transaction2. unable to act in reasonable manner and other has reason to know of the

condition

3. Three Key Factors1. Person must be incompetent2. Is the person deemed to be incompetent, able to restore?3. If no--was there bad faith on the part of the vendor (i.e., overreaching)?

4. Similarities/Differences between Minority & Mental Incompetence

1. With minority the other party is generally not entitled to restitution2. With mental incapacity the other party IS generally entitled to restitution (unless

they had knowledge of the degree of incapacity)

iii. Intoxication1. A party that was intoxicated when the contract was made may avoid the contractonly if the

other party had reason to knowthat, by reason of intoxication, the party was unable tounderstand the nature and consequences of the transaction or was unable to act in areasonable manner in relation to the transaction.

c. Duressi. Elements (R2d 175)

1. An improper threat: manifestation of intent to inflict some loss or harm onto another2. The improper threat induces the victim's manifestation of assent; and

1. This is a causation issue--does the improper threat substantially contribute to thedecision to manifest assent? If so, this element is satisfied

2. Must look at factsa subjective standard

3. The victim has no reasonable alternative other than succumbing to the threat1. A failure by victim to take advantage of a reasonable alternative precludes

avoidance

ii. When is a threat improper? (R2d 176)1. Presumptively unfair (because the threats are so shocking, a court will not inquire into the

fairness of the resulting exchange)

1. Threats amounting to crimes or torts are per se improper--no inquiry into goodfaith


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2. Threats of criminal prosecutions are per se improper, based on misuse, for legalgain, of power given for other legitimate ends

3. Threats to bring a civil suit that is made in bad faith4. Threats amounting to a breach of the duty of GFFD (e.g., a bad faith threat to breach

the K)

2. If the resulting exchange is unfair (improper threat combined with unfair substantiveterms)

1. Threatened act would harm the recipient and not significantly benefit the party

making the threat1. Cases in which a party threatens to do an act that would significantly benefit

the party making the threat (eg, threat to make public embarrassinginformation concerning the recipient unless he or she makes the proposedcontract)

2. Need to look at actual K and resulting exchange2. The effectiveness of the threat in inducing the manifestation of assent is significantly

increased by prior unfair dealing by the party making the threat, or

3. What is threatened is otherwise a use of power for illegitimate means

iii. The improper threat induces the victim's manifestation of assent1. Causation issue--does the improper threatsubstantially contribute to the decision to

manifest assent?

1. If yes, the element is satisfied.2. This is a subjective standard. You have to look at whether the particular victim was

actually induced by the threat.

iv. The victim has no reasonable alternative other than succumbing to the threat.1. Failure to take advantage of reasonable alternative precludes avoidance.2. Possible reasonable alternatives:

1. Availability of legal action2. Alternative sources of goods, services, or funds when there is a threat to withhold

these things

3. Toleration of the threat involves only a minor vexation

v. Must threatening party cause hardship?1. Courts differ

1. Posner states that the fact that a party agreed to a settlement because of a desperateneed for cash could not be the basis for settlement unless the other side had casuedthe financial hardship

2. For economic duress, there must be a causal link between coercive acts andcircumstances of economic duress

d. Undue Influencei. Generally

1. one party takes advantage of the other party's position of weakness, e.g., based on age,illness, mental state, intoxication, etc., thus preventing the latter from exercising free will inthe transaction; or

2. one party breaches a fiduciary relationship with the other party.

ii. Two Elements


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1. Undue susceptibility to pressure that is caused by:1. The domination by one party over another, OR

1. (resulting perhaps from mental, emotional, or physical problems),2. A confidential relationship

1. (e.g. - parent child, physician patient, husband wife, clergyman parishioner.3. This element involves subjective considerations:

1. Do circumstances exist that give undue weight to the other's attempt atpersuasion?

2. The mere fact that a party is weak, inform, or aged, does not suffice, althoughit may be a factor in determining whether the required circumstances arepresent

2. Unfair persuasion or excessive pressure applied to induce a manifestation of assent byone vulnerable to such pressure

1. This element -unfair persuasion - involves an objective inquiry that considers avariety of circumstances, including those enumerated in Odorizzi.

iii. Factors to Consider in Unfair Persuasion (Odorizzi Factors)1. discussion of the transaction at an unusual or inappropriate time,2. consummation of the transaction in an unusual place,

3. insistent demand that the business be finished at once,4. extreme emphasis on untoward consequences of delay,5. the use of multiple persuaders by the dominant side against a single servient party,6. absence of third-party advisers to the servient party,7. statements that there is no time to consult financial advisers or attorneys.

iv. Odorizzi v. Bloomfield School District1. (Principle/Superintendent arrive at front door and push teacher to resign after being falsely

arrested for homosexual activity and in jail allnightno time for lawyer, fire if he didnt)

1. P is in a weakened condition and susceptible to domination2. After no sleep in 40 hours, confronted by 2 most powerful people in his school

district

2. Holding: valid undue influencehigh pressure carrot & stick technique at weak moment

e. Misrepresentation and Nondisclosurei. Generally

1. An aggrieved party may avoid a contract based on misrepresentation where:1. the assertion was either material or fraudulent; and2. the person seeking to avoid the contract reasonably relied to his detriment on such

assertion.

2. Types of Misrepresentation

1. Fraud2. Material Misrepresentation3. Non-Disclosure4. Concealment

ii. Elements of Misrepresentation1. Essence is assent induced by misleading information supplied by another party2. Four Elements must be satisfied

1. A misrepresentation


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1. Definition = statement not in accordance with fact2. That is fraudulent or material3. That induced the recipient to make the contract

1. Rest. 2d 167 states that a misrepresentation induces a party's manifestationof assent if it substantially contributes to his decision to manifest his assent

4. The recipients reliance must have been justified

iii. When a misrepresentation is fraudulent or material

1. A misrepresentation isfraudulentif the maker intends his assertion to induce a party tomanifest his assent and the maker:

1. knows or believes that the assertion is not in accord with the facts, or (Scienter req.)2. does not have the confidence that he states or implies in the truth of the assertion, or3. knows that he does not have the basis that he states or implies for the assertion.

2. A misrepresentation is materialif1. it would be likely to induce a reasonable person to manifest his assent, or2. if the maker knows that it would be likely to induce the recipient to do so.

iv. Five elements of fraudulent misrepresentation:1. A misrepresentation omission

2. Of material fact3. Made knowingly and with the intent to deceive an innocent party4. On which the innocent party justifiably relief5. Resulting in injury to the innocent party

v. Two Different Types of Fraud:1. Affirmative Misrepresentation2. Failure to Disclose

1. Rest. 2d 161 When Non-Disclosure=Assertion

vi. Reliance on Statements of Opinion?1. As a general rule, statements of opinion are NOT actionable2. Taken together, Rest 2d 168(2) and 169 indicate when it is appropriate for the recipient of

an opinion to rely on it such that it becomes actionable as a misrepresentation

3. R2d 168 Reliance on Assertions of opinion1. An assertion is one of opinion if it expresses only a belief, without certainty, as to the

existence of a fact or expresses only a judgment as to quality, value, authenticity, or

similar matters

2. Section 168(2) addresses those situations when a statement is more than anexpression of opinion. This occurs when:

1. 168(2)(a): A party misrepresents her state of mind. In other words, shestates that she holds a certain opinion when in fact she does not.

2. 168(2)(b) Where a party makes a statement that implies that she knowscertain facts that support her opinion when she, in fact, does not.

4. Section 169 When Reliance of Opinion is NOT Justified


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3. where disclosure wouldcorrect a mistake of the other party as to the contents oreffect of a writing, evidencing or embodying an agreement in whole or in part.

4. where the other person is entitled to know the fact because of a relation of trust andconfidence between them.

1. Sometimes the status of the parties will matter2. It matters if there is a relationship of trust or fiduciary duties.3. It significantly increases the disclosure duties on part of the parties

4. Nondisclosure related to concealment1. Concealment is always a case for rescinding an agreement

5. Hill v. Jones: house had termites but sellers didnt disclose1. Sellers non-disclosure was legally the same as express assertion that there were no

termites

2. It was a material fact and they had duty to disclose the information

viii. When a Misrepresentation as to a Writing Justifies Reformation (166)1. If a party's manifestation of assent is induced by the other party's fraudulent

misrepresentation as to the contents or effct of a writing evidencing or embodying in the

whole or in part an agreement, the court at the request of the recipient may reform the

writing to express the terms of the agreement as asserted,

1. If the recipient was justified in relying on the misrepresentation, and2. except to the extent that rights of third parties such as good faith purchasers for value

will be unfairly affected.

2. Reformation - a type of remedy where the court will just nix the clause in conflict, orreforming it to the party's intent

3. Park 100 Case1. Misrepresentation in a lease agreement about a personal guaranty for liability2. Court held that they obtained the signature of the lease through fraudulent means

f. Unconscionabilityi. Generally

1. Unconscionability has been recognized to include an absence of meaningful choice on thepart of one of the parties together with contract terms that are unreasonably favorable tothe other party

2. A defense based on Unconscionability must have both procedural and substantive

Unconscionability1. Was there an absence of meaningful choice on the part of one of the parties?

(Procedural unconscionability)

2. Were the terms unreasonably favorable to one party? (Substantiveunconscionability)

3. UCC 2-302 (pretty much the same as common law)4. NOTE: If Unconscionability is found, court may enforce the remainder of the contract

without the unconscionable term, or it may so limit the application of any unconscionableterm as to avoid any unconscionable result.


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ii. Procedural Unconscionability1. Manifested by unfair surpriseand relates to the aggrieved partys understanding of the

contract terms due to factors such as:

1. Inconspicuous print in the writing2. Unintelligible legal language3. Lack of opportunity to read the K or seek clarification4. Illiteracy

5. Imbalanced bargaining positions (such as adhesion Ks)2. Lack of meaningful choice/Oppression

1. Primary focus on lack of meaningful choice brought upon by extreme disparities inbargaining power

iii. Substantive Unconscionability1. Relates to the Ks that are in whole or in part deemed to be oppressive, such as:

1. Term must be so one-sided that it shocks the conscience1. Must be a high standard because could be viewed as paternalistic if not a high

standard

2. Provisions that deprive one party of the benefit of the agreement or an adequate

remedy for the other partys breach3. Provisions that bear no reasonable relation to the risk involved4. Provisions that are substantially disadvantageous to one party w/o producing a

commensurate benefit to the other party

5. A great disparity between the cost and the selling price of the item that is subject ofthe K in absence of objective justification for such disparity

2. Price Unconscionability1. A form of substantive Unconscionability2. A high price alone is NOT enough to satisfy this element3. Courts consider

1. Is the K price much higher than the market price for a similar purpose? (somekind of benchmark)

2. Sellers profit margin and try to look at in absolute manneris it simply toohigh?

iv. Williams v. Walker-Thomas Furniture1. (single mom bought lots of itemsdefaults on payments and the repossess all items)

1. never got a copy of the K2. never saw or understood the Khad little choice3. buried in complex language, and she was not very educated, not much power

2. Holding: unconscionable to sell w/ clause that keeps balance on all until all are paid off

v. Consumer Protection Litigation1. Legislatures have stepped in to protect consumers who may not be able to meet the

elements of unconscionability, undue influence, or duress, but the situation is not one that isan accepted way of conducting business

2. Courts have not abused unconscionability, but there must be something in addition to themarketplace serving as a limit because parties will not always act rationally

vi. Unconscionability and Arbitration Agreements


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1. General policy to favor arbitration agreements2. But the agreements must meet the basic requirements for formation of a binding K,

including presence of mutual assent and consideration

3. BUT1. Some courts have found that the fact that a K is adhesive is enough to render the

contract proceduraly unconscionable

2. Many courts have recognized that the arbitration agreement may be substantivelyunconscionable if excessive costs of arbitration effectively precule the claimant from

pursuing relief.4. Higgens Case

1. Facts The Extreme makeover situationhorrible family2. Court held that arbitration clause was procedurally unconscionable.

1. The siblings were young and unsophisticated, and had recently lost bothparents.

2. Clause was one paragraph near the end of a lengthy, single-spaced document.3. No words were printed in bold letters or larger font, nor were they

capitalized. Although the siblings were required to place their initials inboxes adjacent to six other paragraphs, no box appeared next to thearbitration provision.

3. Court also held substantively unconscionable.1. It required only the siblings to submit their claims to arbitration. Only the

television defendants, not the siblings, could compel arbitration.

2. The arbitration provision barred only the siblings from seeking appellatereview of the arbitrator's decision

g. Public Policyi. Generally

1. Why might a court invalidate a K based on public policy?1. Courts look at what is best for society as a whole; will not allow a party to use the

mechanism to do anything that will be injurious to the public

2. Deterrence

2. Comes into play in a situation in which, although process of K formation is untainted, Kmay still be unenforceable b/c the K itself either violates or runs directly against somepublic policy

1. Recognizes legal limitation on freedom of K

ii. When a term is unenforceable on grounds of public policy (Restatement 178)1. A promise or other term of an agreement is unenforceable on grounds of public policy if

legislation provides that it is unenforceable or the interest in its enforcement is clearlyoutweighed in the circumstances by a public policy against the enforcement of such terms.


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2. In weighing the interest in the enforcement of a term, account is taken of (balancingtest)

1. the parties' justified expectations,2. any forfeiture that would result if enforcement were denied, and

1. What would the outcome be if we enforced this?3. any special public interest in the enforcement of the particular term.

3. In weighing a public policy against enforcement of a term, account is taken of1. the strength of that policy as manifested by legislation or judicial decisions,

2. the likelihood that a refusal to enforce the term will further that policy3. the seriousness of any misconduct involved and the extent to which it was

deliberate, and

4. the directness of the connection between that misconduct and the term.

iii. Bases of Public Policy Against Enforcement (R2d 179)1. A public policy against the enforcement of promises or other terms may be derived by the

court from

1. (a) legislation relevant to such a policy, or2. (b) the need to protect some aspect of the public welfare, as is the case for the judicial

policies against, for example,

1. (i) restraint of trade2. (ii) impairment of family relations3. (iii) interference with other protected interests

iv. Licensing - Effect Of Failure To Comply With Licensing Or Similar Requirement1. If a party is prohibited from doing an act because of his failure to comply with a licensing,

registration or similar requirement, a promise in consideration of his doing that act or of his

promise to do it is unenforceable on grounds of public policy if

1. the requirement has a regulatory purpose, and2. the interest in the enforcement of the promise is clearly outweighed by the public

policy behind the requirement.

v. Restraints on Trade1. Two Types

1. Non-Ancillary restraints (ex. agreement to fix prices) are not enforceable1. No legitimate interest

2. Ancillary restraints (something incident to an otherwise valid agreement) may be

enforceable subject to certain restrictions1. Law field is an exception2. Medical field can be an exception3. Any overriding public policy can be exception

3. How to analyze if an ancillary restraint is valid?1. If restraint is greater than is needed to protect the promisee's legitimate

interest, or

2. promisee's need is outweighed by the hardship to the promisor and the likelyinjury to the public.


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1. THEN UNENFORCEABLE3. This is a test of reasonableness he scope of the covenant with

regard to the time period covered, the geographical reach, and the scope ofactivities prohibited

4. So, Covenants not to compete are ok if:1. Reasonable in terms of time2. Reasonable in terms of territory3. Reasonable in terms of the legitimate interest of the employer - Other than

prohibit competition4. And No other public interest that would militate against enforcement

vi. Valley Medical Specialists v. Farber

1. (restrictive covenant prohibiting dr. from competing in area for 3 years)

1. Scope: prohibits any medical care or service

2. Duration: for 3 years

3. Geographic Territory: in an area of 265 square miles

2. Holding: restrictive covenant is not enforceable b/c patients and public interest

3. Blue Pencil Rule: courts can edit covenant not to compete to make it reasonable & thus

enforceable1. Restatementrejects this approach

vii. RR and MH

1.

baby

2. Holding: Voided on grounds of public policyContract affecting the custody of a child is

unenforceable on grounds of public policy unless it is consistent with the best interest of the

child

IV. Justification for NonperformanceMistake, Changed Circumstances, and Contractual Modificationsa. Generally

i. The kinds of excuses from performance here at issue are those arising not from overreaching rdeception by either party, but from changes in circumstances that have either occurred or come tolight since the original agreement was made

ii. Contracts that have as their main purpose some mutually beneficial exchange of performances(the sale of goods for money) may have as a subsidiary function the protection of one or bothparties against the risk that certain unfavorable events may occur before the time whenperformance is to take place (a rise in the market price of the goods).

iii. These excuse doctrines are tied to risk allocation, which is a principal function of K law. Thesedoctrines are essentially asking to what extent should courts interfere with the risk allocation ofthe parties


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iv. Padversely affected either performance itself, or value thereof, should the party be permitted as aresult to escape the obligation of performance the K would otherwise impose

b. Mistakei. Generally

1. A mistake is a belief not in accord with the facts as they exist at the time of contractformation

2. Classic mistake case: Sherwood v. Walker(barren cow case)1. Buyer thinks cow is barren, but it is really pregnant. Since the mistake went to the

whole substance of the agreement, NOT just to the value of the cow (which went upsignificantly when it was discovered that she was not barren), K rescinded

3.4. Note: there is often a close relationship between mistake and nondisclosure

1. If one party knows another is operating under an assumption that is not correct anddoesnt speak up, this becomes a nondisclosure issue.

ii. Elements of Mutual Mistake1. A Mistake has been made (R2d 151)

1.

Comment (a) to Section 151 provides the erroneous belief must relate to facts asthey exist at the time of the making of the contract. A partys prediction or judgmentas to events to occur in the future, even if erroneous, is not a mistake as that word isdefined here.

2. The mistake must relate to a basic assumption on which the contract was made (anassumption that is foundational to the contract);

1. Basic assumption:an assumption so fundamental to the contract such that one orboth parties would not have entered into the contract had they know the truth

2. Comment b to Rest. 2d. 152--two types of assumptions that will NOT be basic:1. Mistakes as to market conditions AND2. Mistakes as to financial ability

3. The mistake must have a material effecton the agreed exchange of performances.1. Material effect: when one party is placed in a worse position than contemplated

while the other is placed in a more advantageous position than was bargained for

2. Comment (c) to section 152 provides: A party cannot avoid a contract merelybecause both parties were mistaken as to a basic assumption on which the contractwas made. He must, in addition, show that the mistake has a material effect on theagreed exchange of performances. It is not enough for him to prove that he wouldhave not made the contract had it not been for the mistake. He must show that theresulting imbalance in the agreed exchange is so severe that he cannot fairly berequired to carry it out. Ordinarily he will be able to do this by showing that theexchange is not only less desirable to him, but is also more advantageous to theother party.

4. The party seeking reliefmust not have assumed the riskof the mistake1. A party bears the risk of mistake if (R2d 154)1. the risk is allocated to him by agreement of the parties, or2. he is aware, at the time the contract is made, that he has only limited

knowledge with respect to the facts to which the mistake relates buttreats his limited knowledge as sufficient, ora. called conscious ignoranceb. what you dont know WILL hurt you


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3. the risk is allocated to him by the court on the ground that it isreasonable in the circumstances to do so.

5. Lenawee County Board of Health v. Messerly: Pickles bought a lot with bad septic system lotdeclared unfit for human habitation property now has negative value, but K had as isclause)

1. No grounds for rescissionparties agreed to allocate the risk per as is clause in K2. Was mutual mistake b/c neither knew3. BUT Parties allocated the risk with as is clause (154)

iii. Elements of Unilateral Mistake (153)1. Rest 2d 153--A mistake by one of the parties will NOT excuse his or her performance of the

K UNLESS:

1. The party seeking relief establishes all the elements of mutual mistake,AND alsoestablishes either:

1. That the other party knew or should have known of the mistake, or2. That enforcing the K despite the mistake would be unconscionable, and,

1. This is a different that unconscionability that we covered earlier2. Unconscionable in this sense merely means severe enough to cause substantial

loss

3. That the party seeking to be excused does not bear the risk of mistake.2. Effect of Negligence1. Must a unilateral mistake me non-negligent to form a basis of relief?2. Some courts say so, but there is a tendency to relax this requirement where

proof of mistake is so strong and effect of enforcement will be devastating tothe mistaken party

3. R2d 157 expressly negates any requirement that the mistaken party be non-negligent, requiring only that its conduct not fall below the level of good faith andfair dealing

3. Unilateral Mistake as to the Content of Writing1. Duty to read is not a principle that always carries the day--it may be overcome by

lack of capacity, fraud, or Unconscionability

2. Where both parties are equally mistaken, can be reformation of the K4. Relief typically sought:

1. Rescission2. Restitution to bring parties to place they were in prior to contract

5. Will-Freds Inc. v. Metropolitan Sanitary District: sub-contractor made mistakenassumption, so gave GC low bid & GC used low bid in giving his bid

1. Subcontractor and GC had history so no reason not to trust bid2. BUT GCs bid so low that owner should have been put on notice that it was a

mistake

c. Changed Circumstancesi. Generally

1. Changes that occur between the making of the contract and the time set of performance2. These doctrines apply when, after the formation of a K, unexpected events occur that affect

the feasibility or possibility of a party's performance and cause the parties to be excusedfrom continued performance under the K

3. Changed circumstances are different from the mistake doctrines since relief is based on asupervening event (unexpected occurrence) that occurred after parties made contract


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4. Contractual liability is historically a form of strict liability, in that nonperformance isactionable simply because the defendant has failed to perform what he or she promised, notbecause that nonperformance is also culpable in any sense

1. Common law exceptions to strict liability:1. Death or illness of the promisor (even temporarily)2. Intervention of government regulation or law (supervening illegality)3. Destruction of the goods

1. For this exception to apply, goods had to be specific and unique

ii. Force majeure clause1. Provision in the contract which specifies certain events that will discharge the parties of

performance obligations

2. provide an excuse where performance is prevented/delay by circumstances beyond theparty seeking the excuses control, such as

1. partial or total destruction of the leased facilities2. OR, a change in zoning law

3. WOULD INCLUDEa hurricane

4. WOULD NOTINCLUDEthe closing of Suez Canal, b/c you could take a different route

d. Impossibility

i. Generally1. When a person or thing "necessary for performance" of the agreement dies or is

incapacitated, is destroyed or damaged, the duty of performance is accordingly excused

1. (R2d 262 Death or incapacity of person necessary for performance)2. Destruction, Deterioration Or Failure To Come Into Existence Of Thing Necessary For

Performance (263)

1. EX) Superbowl to take place in Dallas stadium, but 3 days before superbowl, theactual arena is blown up.

3. Prevention By Governmental Regulation Or Order (264)1. If the performance of a duty is made impracticable by having to comply with a

domestic or foreign governmental regulation or order, that regulation or order is an

event the non-occurrence of which was a basic assumption on which the contractwas made."

ii. Subjective v. objective impossibility1. Objective: the contract cannot be performed (ex. Person dying)2. Subjective: I dont want to perform because doing so would be unfavorable for some reason

e. Frustration of Purposei. Promises could have technically been performed, but the reason for which they entered into the K

has been destroyed; "Why bother anymore?")Whats the point?

ii. Objectively possible to perform the K, but events make it almost valueless1. Underlying purpose for entering into the K no longer exists2. Unanticipated events cause the value of the K to be greatly reduced

iii. Can only claim if the "principal purpose" of the K has been violatediv. Parties must show the court the true agreement and purpose behind the K.v. Economic loss/insolvency cannot be a frustrated purpose

1. You assume the risk of market fluctuationsvi. Elements


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1. purpose that is frustrated was a principal purpose;1. It is not enough that the contracting party had in mind a specific object

without which he would not have made the contract.2. The object must be so completely the basis of the contract that, as both

parties understand, without it the transaction would make little sense.2. frustration was substantial;

1. It is not enough for profits to be lessened2. The frustration must be so severe that it is not fairly to be regarded as within

the risks that he assumed under the contract. The fact that performance hasbecome economically burdensome or unattractive is not sufficient to excuseperformance.

3. non-occurrence of the frustrating event must have been a basic assumption on whichthe contract was made;

4. party seeking relief does not bear the risk of that occurrence

f. Impracticalityi. Its not impossibleits just substantially more burdensomeii. "Impracticability" means more than "impracticality." A mere change in the degree of difficulty or

expense due to such causes as increased wages, prices of raw materials, or costs of construction,

unless well beyond the normal range, does not amount to impracticability since it is this sort ofrisk that a fixed price contract is intended to cover.

1. Note: this is different from frustration of purpose in which your whole purpose has becomeobliterated.

iii. Generally 261 Discharge by Supervening Impracticability1. Where, after a contract is made, a party's performance is made impracticable without his fault

by the occurrence of an event the non-occurrence of which was a basic assumption on which

the contract was made, his duty to render that performance is discharged, unless the language

or the circumstances indicate the contrary.

iv. R2d 264 recognizes compliance with governmental orders as a basis for excuse under the doctrineof impracticability

v. Elements:1. a partys performance is made substantially more burdensome without his fault;2. non-occurrence of the frustrating event must have been a basic assumption on which the

contract was made;

3. party seeking reliefdoes not bear the risk of that occurrence

vi. Ask:1. Was the intervening circumstance fairly within the risk assumed by the parties making the

contract?

2. Do the intervening circumstances subject the party claiming impracticability to extremehardship?vii. Extremely difficult defense to prove, because assumption of risk is part of K law

viii. Karl Wendt Farm Equipment v. International Harvester: parties had distributorship

1. Change in market conditions or change in profitability are ordinarily not basicassumptions of the contract


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1. Promissory estoppel exception still applies2. If one party promises to put it in writing but doesnt and the other party relies then first

party is estopped from asserting SOF defense

iii. Alaska Packers v. Domenico: original contract between company & fishermen. Time passes andfishermen threatened to strike unless they get a raise

1. the company doesnt have to give them raise2. no modification b/c no new consideration3. application of Pre-Existing Duty rule

i. Modification under the UCC 2-209i. Generally

1. Consideration is not required2. Good faith is policing mechanism (see comment 2)

1. Relevant in the performance and enforcement stages, NOT the K formation stage2. Comment 2--emphasis placed as a means of determining whether a modification will

be effective

1. An agreement modifying a sales K needs no consideration to be binding.2. However, modifications made thereunder must meet the test of good faith and

fair dealing imposed by this Act.

3. The effective use of bad faith to escape performance on the original K terms isbarred, and the extortion of a modification without legitimate commercial

reason is ineffective as a violation of the duty of good faith.

4. Nor can a mere technical consideration support a modification made in badfaith.

ii. An agreement needs no consideration to be binding1. Good faith is the policing mechanism regulating the validity of modifications2. This allows the courts to get at the underlying concernwhether the modification is based

on good commercial practice and whether or not they have been entered into by coercion

3. Rejection of technicalities + focus on demonstrated intent of parties4. What does good faith mean?

1. Threats intended to coerce modifications create a rebuttable presumption of badfaith

2. Roth Steeltest for good faith in modification1. whether there is a legitimate business reason for suggesting a modification in

the first place;

2. if you threaten, that threat is presumptively made in bad faith. But thatpresumption can be rebutted if you show a good faith belief.

5. Good faith applies to both parties (Kelsey-Hayes)1. Party seeking modification must have a legitimate commercial reason for seeking

modification;2. Party agreeing to the modification must show some sort of protest to put the party

seeking the modification on notice that the agreement will be challenged

iii. Validates "No Oral Modification" clauses (often referred to as a private statute offrauds)

1. Ex: "The parties hereby agree that no modification of this K shall be of any effect unless thatmodification is evidence by a writing signed by both parties to this K"


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2. Courts used to say that these were an invalid restraint; now, they are enforced because theyare considered to be like a private statute of frauds

3. NOM is ineffective if it is contained on a form supplied by a merchant (professional dealingin goods of the kind involved, UNLESS either

1. The other party is also a merchant OR2. The other party has separately signed the NOM clause)

iv. Modifications must comply with the SoF if the contract is modified within its

provisions1. Meaning: if the original contract is within the statute of frauds, then any modification of the

contract must be within the statute of frauds

2. When must an oral modification comply with 2-201 in order to be given effect? Thereis controversy over language if the contract as modified within its provisions

1. Interpretations1. if the original contract was within 2-201 (sale of goods in the amount of

$500 or more), any modification thereof must also be in writing MAJORITYAPPROACH

2. a modification must be in writing if the term it adds bring the entire dealwithin 2-201 for the first time (price from $400 to $600)

3. modification must be in writing only if it changes the quantity terms of theoriginal agreement

v. Although an attempt at modification or rescission does not satisfy the requirementsof SoF, it can operate as a waiver

1. Can waive requirements by virtue of conduct1. Ex:

1. A and B sign a K containing a NOM clause and setting a firm delivery date2. B later orally says to A, "I won't insist on firm adherence to the delivery date--

you can take an extra three weeks."

3. If A relies materially on this statement, B will probably be held to havewaived the benefit on the NOM clause and will thus be held to have effectively

modified the K to provide for a later delivery date

vi. Kelsey-Hayes v. Galtaco: D makes castings for P. D has $ problems and increases the price. Paccepts modification only b/c he cant get goods anywhere else

1. Sale of goods so UCC applies so under general rule modification is good b/c noconsideration required

2. UCC adds good faith requirement though and a duress claim was raised so that must beconsidered on remand

3. TAKE HOME POINT: modification is no good if under duress

j. Accord and Satisfactioni. Definitions:1. Accord: an agreement by the parties to a contract by which one promises to render a

substitute performance in the future, and the other promises to accept that substituteperformance in discharge of an existing duty; an agreement to settle a prior unliquidated ordisputed obligation.

1. unliquidated obligation: dispute as to the amount2. Satisfaction: the performance of the accord (e.g., where a check is tendered and is marked

as payment in full, the accord and satisfaction occur simultaneously).


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1. Satisfaction discharges the original duty owed.3. Novation: A novation is a form of a substituted contract. It is one where either the creditor

or debtor is replaced by a 3rd party.

ii. Consideration Requirement1. In order for an accord or a substituted K to be enforceable, it must be supported by

consideration

2. The rule ofFoakes v. Beer, provides

1. Part payment of a liquidated debt that is due is not consideration for discharge ofthe whole debt.

1. Liquidated debt = undisputed debt

iii. Exceptions to consideration requirement:1. Additional or different performance exception:

1. different time of payment, novation, different place, and any additionalconsideration is enough to get around the rule ofFoakes

2. Un-liquidated/disputed debt exception:1. Unliquidated claim is one where the amount due is disputed2. gets around the rule because each party gives up the right to claim that it is owed

more or owed less than the agreed amountmutual surrender of rights serves asconsideration to bind the new agreement

3. What is the Consideration in cases involving unliquidated debt?1. The consideration is found in the debtor giving up the right to assert that the

amount allegedly owed is less than or different than the compromise amount

2. The creditor gives up the right to assert that the amount due is greater thanthe compromise amount.

3. Thus the mutual surrender of rights to receive more or to pay less representsdetriments that constitute consideration for the mutual promises of theparties to pay and receive the settled amount.

iv. When a debt is unliquidated (disputed debt but unsure of amount owed):

1. parties may enter into an accord (agreement to settle a disputed obligation).2. upon entering into an accord, the initial duty is suspended.3. if there IS satisfaction of the accord, the initial duty is deemed fulfilled.4. if there is NOT satisfaction of the accord, the aggrieved party may sue breaching party for:

1. the initial duty; OR2. for the accord.

v. When a debt is liquidated (when there is a concrete amount owed), there must be some sort ofconsideration for a modification to that amount.

1. Courts do not really like this rulethey say it stands in the way of commonsense businesstransactionsvi. Hypos:

1. Debtor, who believes in good faith that it owes less than a creditor claims is due, tenders acheck to a creditor. What is the effect of the creditors acceptance of the check?

1. Accepting the check amounts to an accord (its an agreement to settle a prior un-liquidated/disputed obligation)

2. Ray owes Mary $500. Ray promise to deliver a machine to Mary within 30 days insatisfaction of debt. Mary promises to accept the machine in satisfaction of the debt.


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1.2. Satisfaction occurs when the machine is delivered (it discharges the original debt

and the obligation under the accord)

3. If Ray fails to deliver the machine, Mary can sue for $500 OR for the machine1. Important: Note that Mary does not give up her right to demand performance of the

original obligation

4. At the time they enter into the new agreement, Ray and Mary wish to discharge the originalobligation and be subject only to the obligation created by the new agreement.

1. Original obligation is discharged2. So if Ray fails to deliver the machine, Mary may only sue for the machine3. Intent of the parties is dispositive in accord/satisfaction

5. If Ray owes Mary $500, and Ray enters into an agreement whereby Ed agrees to pay Raysdebt to Mary.

1. Novation occurredsubstitution of third party2. Novation took care of the consideration because the payment was different

V. Consequences of Nonperformance: Express Conditions, MaterialBreach, and Anticipatory Repudiation

a. Overview Of Steps In Analysis In Determining Breach:i. Is it a condition or a promise?ii. If it is a condition, is it an express condition or constructive condition?

1. Apply the rules for eachiii. Was the condition excused?

iv. If not, Was it a partial or material breach or a total breach?1. If express condition breached, it is a total breach2. If a constructive condition, need to ask if it was partial or material

v. If it is a material breach, had that material breach become a total breach?

b. Condition Defined (R2d 224)i. A condition is an event, not certain to occur, which must occur, unless its non-occurrence is

excused, before performance under the K becomes due.


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1. Example: A contracts to sell and B to buy goods pursuant to a writing which provides,under the heading "Conditions of Sale," that "the obligations of the parties are conditionalon B obtaining from X Bank by June 30 a letter of credit" on stated terms.

1. The quoted language is a term of the agreement but NOT a condition2. The event referred to by the term, obtaining the letter of credit by June 30 is the

condition

ii. Mere passage of time is NOT a conditioniii. A condition must qualify a duty under an existing K.

1. Doesnt include events such as offer and acceptance2. Example: David makes a promise to sell his car to you on the condition that you pay him

1,000;

1. the 1,000 payment or promise to pay is not a condition. It is the acceptance of anoffer

iv. Conditions can be cumulative, alternative, or qualify the duties of both parties1. Example: A and B contract to merge their corporate holdings into a single new company. It

is agreed that the project is not to be operative unless the parties raise $600,000 additionalcapital.

1. The raising of the additional capital is a condition of the duties of both A and B.2. If it is not raised, neither A's nor B's performance becomes due.

v. R2d approach does away with the distinction between a condition precedent / subsequent

c. Express Conditionsi. Analysis

1. Was there a condition or promise involved?2. Has the condition been satisfied or not? (Has there been a breach of promise?)3. Are there circumstances that would suggest that the condition has been excused?

ii. Defined1. Express conditions require strict compliancesubstantial performance is not acceptable

1. Exceptions of strict compliance1. If would result in forfeiture

2.Have to make their intention clearAND express itotherwise courts will imply theconstructive condition rule instead

iii. Satisfaction of the Obligor as a Condition1. Standard of satisfaction with express conditions is strict compliance

1. If not, null and void2. Standard of satisfaction with constructive conditions is substantial performance3. Standards to use

1. Reasonableness/objective (for quality, operative fitness, mechanical utility)2. Honest dissatisfaction/subjective (aesthetics or fancy)

4. Rest 2d 2281. Preference for an objective standard, because much easier

1. Hard to tell if compliance with subjective standard2. Heightened standard (subjective) creates risk of forfeiture

5. When deciding what standard to employ:1. Price may be a factor

1. If charge premium price, may infer assuming risk2. Court looks at language

1. If boilerplate, not negotiated, so can't be that impt3. If K focuses on artistic effect, could imply application of subjective standard


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4. Trade usageiv. If the events do not occur, you have the non-occurrence of an express condition and

performance is discharged unless the condition is excused.

1. Substantial performance does NOT excuse express conditions

d. When are Express Conditions Excused?i. Normally there is no obligation to perform a contractual duty unless all applicable express

conditions have been fulfilled. In some cases, however, a condition may be excused, so that a duty

must be performed despite the fact that the condition has not be fulfilled.ii. The non-occurrence of a condition of a duty is said to be excused when the condition need

no longer occur in order for performance of the duty to become due

iii. Excuse by WAIVER1. Difference between waiver and modification

1. Modification need mutual assent2. Waiver just unilateral

2. R2d 841. (1) A waiver is the intentional relinquishment of a known right or conduct or an

even that excuses the nonoccurrence of a condition

1. A condition can be waived either orally or by conduct

2. (2) Waiver is restricted to immaterial conditions that are technical/procedural suchas oral notification given when written notification was an express condition3. Waiver applies when condition involved is non-material

1. Also waiver that occurs after the condition occurs (Election Waiver)1. This party has the ability to:

1. Terminate their liability under the agreement2. Continue under the agreement2. If choose option 2, then that conduct will be deemed to have waived the

condition.

3. Cannot reinstate the condition; nothing to reinstate, because the conditionhad passed. Ex:

1. A had a month to file his insurance claim, but waited too long2. Insurance company says, "Don't worry, we'll take care of it"3. Insurance company waived the condition after the time expire

4. Also waiver with estoppel (Estoppel waiver)1. Obligors expression of intention not to require the condition, followed by obligees

reliance on that manifestation of intention.

2. Broader than the other forms of waiver that occurs in the absence of reliance3. If there is reliance, applies to material and non-material

iv. Excuse by PREVENTION1. Condition is excused if promisor wrongfully hinders or prevents the condition from

occurring.2. Violates the duty of good faith3. Nonoccurrence of the condition is excused4. In order to know whether an obligor's prevention of the occurrence of a condition to her

duty is wrongful, it is necessary first to ascertain what degree of obligation (if any) theobligor has wrt the happening of the condition in question

1. Where the conditioning event is to some extent within the obligor's control, theobligor is likely to have at least the obligation to attempt to cause the condition tooccur


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2. Even if the event is not within the obligor's control, she may be under an obligation(express or implied) to cooperate with the obligee in causing the condition tohappen, or at the minimum not to impede those efforts

3. Courts have often held that the possibility of prevention of the condition by theobligor was a risk assumed by the obligee and thus not wrongful

v. Excuse by FORFEITURE1. R2d 229 - To the extent that the non-occurrence of a condition would cause disproportionate

forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was amaterial part of the agreed exchange.

2. Forfeiture = denial of compensation that results when the obligee loses right to the agreedexchange after it has relied substantially as by preparation or performance on theexpectation of that exchange.

1. Court may find that fulfillment of the condition is excused where extreme forfeiturewould occur

1. The condition will generally only be excused only if such excuse would notcause material prejudice to the interests of the party (the promisor) forwhose benefit the condition existed

3. Realty Case - (DEF, a lessee, is running a biz, has made substantial improvements in goodfaithlease contains an option to renew which must be executed 6 months prior to last day of

the termtenant either doesnt know or forgetstime passes and laterin the term, tenantsays he wants to renewlandlord says its too late (was negotiating with other potentialtenant), tenant didnt exercise his option properly)

1. Holding A tenant or mortgagor should not be denied equitable relief from theconsequences of his own neglect or inadvertence if a forefeiture would result.

2. JNA leading case for the principle of equitable relief against forfeiture, for tenantsseeking to renew and in some other types of cases as well

3. *Tenant might intentionally delay beyond time prescribed in order to exploit afluctuating market.

4. *Landlord could be prejudiced if they relied on agreement in good faith and madeother commitments for premisis.

e. Promise or Condition?i. Promise: A commitment to do or refrain from doing something.

1. Promise may be conditional or unconditional.2. An unconditional promise is absolute3. A conditional promise may become absolute upon the occurrence of a condition4. Where promise is unconditional, failure to perform under the terms is a breach5. Look for language such as "use best efforts" or "reasonable efforts"

ii. Condition: event, other than the passage of time, the occurrence or nonoccurrence of which willcreate, limit, or extinguish the other contracting partys duty to perform.

1. A condition modifies or qualifies a promise

2. One may assert conditions on their promises to prevent the duty of immediate performancefrom rising until conditions are met.3. The failure of a contractual provision that is ONLY A CONDITION, is NOT A BREACH OF

CONTRACT, but merely discharges the liability of the promisor whose obligations rest onthe conditional promise that never matured.

iii. Why Does the Distinction Matter?1. Non-performance of condition is not a breach of K; other party is not obligated to perform

1. If a party's promise to perform is subject to an express condition, there can be nobreach of K by that party until the condition has been fulfilled


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2. Non-performance of promise is ALWAYS a breach of contract and ALWAYS gives rise todamages.

3. Non-performance of promissory condition is no duty AND damagesiv. In deciding between the two, look to:

1. Intent of Parties of Paramount Importance1. May be indicated by choice of words--such as if, provided that, unless

1. However, words are only one indication of parties' intent2. May be indicated by actions

1. If actions make it clear that a promise was meant, contractual language usingterms such as condition will be ignored

v. Interpretation of Promise is Preferred (R2d 227)1. Preference for Promise In resolving doubts as to whether an event is made a conditionan

interpretation is preferred that will reduce the obligees risk of forfeiture, unless the eventis within the obligees control.

2. Preference for Interpretation: Unless the K is of a type under which only one party generallyundertakes duties, when it is doubtful whether:

1. A duty is imposed on an obligee that an event occur (promise)2. The event is made a condition of the obligor's duty (express condition)3. The event is made a condition of the obligor's duty and a duty is imposed on the

obligee that the event occur (promissory condition)The first interpretation is preferred if the event is within the obligees control

f. Constructive Conditionsi. Def: A condition that was not agreed upon by the parties, but that is supplied by the court to

ensure performance

1. Only substantial compliance with constructive conditions is usually required2. Substantial Performance is the OPPOSITE of Material Breach

1. If party has substantially performedthan hasnt committed a material breach2. If has committed material breachhasnt substantially performed

3. In most cases, each party's substantial performance of any promise that have come due is aconstructive condition to the performance of any subsequent duties by the other party

ii. Constructive conditions developed over time in cases where it seemed that one party's failure toperform should constitute a sufficient justification for the other party's withholding of itsperformance in return

iii. The doctrine of constructive conditions is a set of rules that addresses three broad matters:1. (1) The order of performance

1. Which party is to perform first, or2. Whether they are to perform at the same time

2. (2) Anticipatory Repudiation, and1. Truman case

3. (3) Breach

1. What is the impact of one party's failure to perform as promise on the other party'sperformance obligations?

iv. Order of Performance R2d 2341. Where all or part of the performances to be exchanged under an exchange of promises can be

rendered simultaneously, they are to that extent due simultaneously, unless the language or

the circumstances indicate the contrary.

1. Whenever possible, do it at the same time


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2. Except to the extent stated in Subsection (1), where the performance of only one party undersuch an exchange requires a period of time, his performance is due at an earlier time than that

of the other party, unless the language or the circumstances indicate the contrary.

1. The performance that takes the longer period of time goes first

v. Quality of Performance Breach1. Is a particular party's breach of such a nature that the non-breaching party's duty is

discharged?

2. MATERIAL BREACH3. If a material breach occurs, it will have the effect of suspending the other partys obligation,

but the K is not necessarily over if material breach hasnt ripened into a total breach

1. R2d 241 - Circumstances when a Failure is Material In determining whether a failure to render or to offer performance is material, the

following circumstances are significant: (a) the extent to which the injured party will be deprived of the benefit which

he reasonably expected; (b) the extent to which the injured party can be adequately compensated for

the part of that benefit of which he will be deprived; A and B address the question of whether the party's have received what

they bargained for (c) the extent to which the party failing to perform or to offer to perform will

suffer forfeiture; (d) the likelihood that the party failing to perform or to offer to perform will

cure his failure, taking account of all the circumstances including anyreasonable assurances;

(e) the extent to which the behavior of the party failing to perform or to offerto perform comports with standards of good faith and fair dealing.

C-E look at the impact What's going to happen if we deem this to be a material breach

4. No one single factor is a judgment call.5. Generally, a, c, and d are critical factors.

6. Jacobs and Young Case1. House owner wanted to withhold payment b/c builder used a different pipe than

specified although of the same grade

1. Different pipe considered substantial performance of contract2. Substantial performance satisfies a constructive condition3. So house owner still had to pay4. When the defect is insignificant, the court will find that there was substantial

performanceand excuses the breach of using the same type and quality of pipe whichparties had agreed were the same except for brand name. Measure of damages is notthe cost to rip out the old pipe and install the new, but the difference in value whichin this case is zero dollars.

7. PARTIAL BREACH1. Idea that there has been substantial performance2. Breach that occurs when it is either NOT material or Material breach that the

defaulting party has cured within a reasonable period of time

3. Partial breach doesnt discharge duty4. Can only have damages UP TO date of harmno future damages.

8. TOTAL BREACH (R2d 242)
http://en.wikipedia.org/wiki/Substantial_performancehttp://en.wikipedia.org/wiki/Substantial_performancehttp://en.wikipedia.org/wiki/Substantial_performancehttp://en.wikipedia.org/wiki/Substantial_performancehttp://en.wikipedia.org/wiki/Substantial_performance


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1. Total breach doesn't mean that a party has breached all of her obligations2. Total if the breach is sufficiently serious to justify discharging the non-breaching

party from her obligations to perform.

1. If party given the opportunity to cure material breach and doesnt after areasonable time, then total breach)

3. R2d 242 In determining when the time after which a party's uncured materialfailure to render or to offer performance discharges the other party's remainingduties to render performance, the following circumstances are significant:

1. The extent to which it reasonably appears to the injured party thatdelay may prevent or hinder in making reasonable substitutearrangements

1. Amount of time allowed to cure depends on circumstances2. The extent to which the agreement provides for performance without

delay, but a material failure to perform or to offer to perform on astated day does not itself discharge the other party's remaining dutiesunless the circumstances, incl. the language of the agreement, indicatethat performance or an offer to perform by that day is important

1. Delay in performance on the part of one party does not excuse performance of theother party unless K states that time is of the essence

4. After a total breach, injured party is entitled to recover not only actual damages butalso future damages that will reasonably flow from the breach.

9. Material Breach v. Total Breach?1. MATERIAL: R2d 241- non=occurrence of a constructive condition to the other

party's duty to render any performance not yet due

2. "TOTAL" - effect of discharging the other party's remaining duties of performanceand permitting that party to proceed immediately to pursue a claim for damagesfrom total breach.

3. If performance substantial but defective, nonperformance would only be a partialbreach.

4. When does a Material Breach become a Total Breach?

1. The materiality factors of 241 plus two additional conditions1. Extent to which further delay appears liekly to prevent or hinder the making

of substitute arrangements1. Degree of importance that the terms of the agreement attach to performance

w/o delay

10.Sackett v. Spindler Case1. Spindler owned and operated a newspaper; Sackett agreed to spend $85,000 on

over 6,000 of the newspaper's stocks and to pay off the balance in three installmentsto. Sackett paid the first two on time per the agreement, but had a great deal ofdifficulty paying the third. Spindler worked with him for several months, but nopaid. Spindler said delay ended agreement. Sackett Sued

2. Holding: The repeated assurances never happened and it was uncertain that hewould ever fulfill it, Missed payments not innocent, willful and reckless

3. this was a total breach and it discharges Spindlers duty to perform

vi. Overview of Effects of Br

Contracts Outline Spring 2010 Simmons

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