Contracts Outline 2nd. Semester
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I.Contracts Outline LIMITATIONS ON ENFORCEABILITY
1. Fraud 6 Duress 6 Unconscionability
2. Free Mkt interest vs. Fairness - We should preserve ability of persons to bargain VS. how can you be in a position to bargain if you have no options cuz of fraud, duress, or unconscionability.
A. Duress - attempt to overlay notion of fairness on free mkt to prevent disparate deals (used as affirmative defense) - a wrongful act or threat by one party which compels or induces the other pty thru fear to enter into a transaction against his will
a. Wrongful threat
(1) Illegal act - no duress if threat maker has legal right to do what's threatened
(2) Legal act but leaves victim w/ unreasonable alternatives
(a) duress not found when 1 party takes advantage of another's pressing need to enter the k
(b) B's desperate econ need of what A is selling is no defense to enforcement, but econ duress may be found when pty is responsible for victim's econ situation
b. Preclusion of free will - party under duress req'd to go along
(1) Key question: Did party have other viable options?
2. Fact patterns
a. Austin Instrument v Loral Corp
- Austin (subcontractor) told Loral (prime contractor) that it won't fulfill k to supply parts unless Loral agrees to retroactive px increases & award of new K. Unable to locate a 2nd source, Loral agrees, but in the end pays only orig px (like Alaska Packers).
(1) Loral wins, but just barely. Threatened pty must not be able to obtain goods from other source. (Mere threat to breach not enuf.)
(2) Probably following UCC 2-209: don't need consideration for modification, only good faith. Here, lack of good faith.
b. Machinery Hauling v Steel of W. Virginia -
Steel rejected loads of bad quality steel & refused to do any future business w/ M.H. unless M.H. paid for the undelivered loads.
(1) Rule: Depriving of future bus. is not econ duress, cuz Steel can refuse to do what it's not legally bound to do.
(2) Application: Steel's threat didn't constitute econ duress - not a wrongful threat, only an outrageous one (M.H. has choice: whether Steel's business is worth paying $31k).
c. Hurricane Frederick - sold bags of ice for $50 (used for refrigeration)
(1) Threat: not selling ice unless customers paid $50. Wrongful?
(2) Entrepreneur didn't create situation, only took advantage of existing situation.
(3) Were there reas alternatives?
(4) Policy: Tension b/t protecting free marktplace & allowing people to decide for themselves if the bargain is worth it to them VS protecting victims from unfair bargains.
d. Alaska Packers
B. Unconscionability (not very often used) -prevention of oppression & unfair surprise
1. 2 types
a. substantive - very oppressive terms of ag (but voluntarily assented to)
(1) oppressive terms: one sided ag; large disparity b/t cost & price or price & mkt value; terms w/ no reas relation to bus. risk assumed
*(2) if process is fair, cts will tolerate a lot of subst. disparity; if process not fair, cts will not tolerate much substantive disparity (Note: cts are reluctant to look at subst)
(3) Graham v Scissortail
- Bill Graham seeks to avoid oblig under K - arbitration clause found to be uncon. cuz arbitration was to be done only by artists' union (onerous & inherently distasteful)
(4) Weaver v. American Oil
- Commercial transaction: Gas station operator signed lease providing that he would hold Amco harmless & indemnify Amco its neg. Amco's employee later negligently sprayed gasoline on operator & his assistant & damaged prop.
(a) Rule: Party who benefits from k has to make sure opponent understands k.
(b) Even if k had been ok substantively, it may have been invalidated based on process concerns - operator didn't read K & wouldn't be expected to understand its terms.
(c) similar to Morta, who also didn't understand k - ct found no fraud, but maybe there was uncon.
b. procedural - unfair surprise
(1) Lack of knowledge of unconscionable term cuz of inconspicuous print, legalistic lang, disparity in sophistication of pties, lack of opp'ty to study k
(2) Lack of voluntariness - imbalance in bargaining power; stronger party's terms non-negotiable; weaker party prevented by mkt factors, timing etc to go elsewhere.
(3) Cutler Corp. v. Latshaw - K to repair Latshaw's residence incl. warrant of atty with confession of j (allows opponent's atty to act as your atty, etc). *(a) Rule: The law requires explicit voluntary acceptance of such a drastic k provision (interpret K against the drafter)
(b) Applic: Latshaw wasn't aware of provision. It was in fine print on unused side of form. Thus, provisions weren't part of k. (No fraud or duress, could have contracted w/ s.o. else)
(4) Williams v. Walker Furniture
- Cross-collateral provision in k for furniture sale that allowed seller to repossess all items if behind on payment for 1 item. Buyer was welfare mom. (provision not inherently bad)
(a) Absence of meaningful choice created by Williams' econ circumstances + unreas terms
(b) inequality of bargaining power, sophistication of pty
(c) Policy: outcome could make co's not extend credit to high-risk buyers
(5) Jones v Star Credit
- door-to-door sale of refrigerators: $1200 for $300 fridge
(a) Procedurally uncon cuz of inequality of bargaining power & econ circumstances
(b) Not subst. uncon - px can't be uncon (due to free mkt theory), but at some point px might be too onerous
(6) Arthur Murray - uncon, in addition to incapacity
(7) Adhesion k's - unequal bargaining position, inferior pty forced to adhere to dictated terms in order to get some essential service. Pty has to accept k "as is" despite 1-sided provision. E.g. loan ag, leases etc.
(a) Ins., LSAT - these are not uncon. - Take it or leave it, necess. for industry
2. Uncon. usually applies only to K for goods (UCC '2-302). In CA, applies to all Ks.
3. Waiver of liability a. Enforceable if not uncon. ( Weaver v. American Oil - uncon)
(1) CA Test: whether it's in the public int - is it a necessity?
(a) Car repair - it's in public int, okay to expect car shop to take reas care
(b) Skydiving - not a necessity so not in public int, if you die, your estate can't sue instructor for neg
1. Courts will not enforce illegal K's - will not aid in illegal acts, ought not to 'sully' themselves w/illegal acts. Also will not enforce Ks outweighed by public policy.
a. Issue: judicial integrity vs. unjust enrichment. Balance public policy in enforcing/not enforcing k and forfeiture that would result if enforcement denied. (see Res 2d 178).
2. Sinnar v LeRoy - Sinnar sued LeRoy to recover $450 bribe to get S. a liquor license.
a. In favor of LeRoy. Left parties where it found them- ct will not aid in an illegal transaction
3. hypo - Leo pays a student $500 to break leg of another student. Time passes, student spends $500 & never breaks leg. Leo cannot successfully recover cuz ct will not further an illegal transaction. By refusing to decide case, ct has in effect rewarded thug.
a. Generous - recovery under q-k or k implied-in-fact
(1) Watts v Watts (Wis)-
After separating from her 12 year companion,& sought division of their accumulated prop. & did housekeeping & helped in his bus. & says they agreed to share equally. (a) Quasi k: Ct allows & to state a claim for recovery under unjust enrichment. Prevents % from retaining all the assets, which would be inconsistent w/ their equal 'guilt' in maintaining the illicit rel. (b) K implied-in-fact - Leo says you could infer they wanted to split everything down the middle. % accepted her services knowing she expected to share equally in the wealth they accumulated. (Ct. allows & to state a claim under k theory) (2) Marvin v Marvin (CA) - allowed recovery in palimony case (under what theory?) (3) Express k - unlikely theory of recovery; people live together out of love, not mat benefit and pre-nuptial ags rare b. Middle ground - permits q-k recovery, not implied-in-fact (1) Morone (NY) - Ms. Morone lived w/% for 20 yrs & took care of kids. (a) Quasi k: NY will allow - equit remedy based on fairness. (Equit remedy more flexible than legal remedy cuz former is just trying to do justice) (b) K implied-in-fact: NY ct will not allow due to fraud concerns. Leo says this is against common sense - live w/s.o. just to get $ out of them. (Another arg against implied k is that one wouldn't expect compensation in domestic partners context.) c. Stingy (traditional) - cohabitation is against state law, no recovery (1) Hewitt v Hewitt (Ill)
- K unenforceable cuz judicial recognition of mutual prop rights would violate policy of state marriage statute & weaken sanctity of marriage D. Statute of Frauds 1. By statute, a few types of Ks are req'd to be in writing, or at least evidenced by a signed, written memorandum of the essential terms.
2. Purpose of S/F: prevent fraud as to terms of K & provide better evidence of terms in case of dispute. Originally, used to show seriousness of actions.
3. Criticism: S/F is outdated & riddled w/exceptions. (Ex. of outdatedness: securities transactions omitted even tho' they involve big bucks. Lots of Ks are less than 1 yr but involve big bucks)
4. Application: Is k in writing? If not, is it w/in S/F? If yes, it's not enforceable.
5. Rule vs. Standard based (K law is schizo)
a. Rule - capacity example: no 17 yr old can enter into a valid k
b. Standard - mature 17 yr old can enter into fair k cuz goal of rule is satisfied (or into k for necessities. 6. Original law req'd that the following be in writing:
a. Ks for sale of land
b. charges against executors/administrators of estates
c. surety/guaranty Ks (ag. to answer for another's debt)
d. Ks that can't be perf. w/in 1 yr of their formation
e. Any K over $500
f. (marriage Ks) 7. UCC '2-201 (CA enacted as '2201)
a. UCC '2-201 (1)
(1) If K for the sale of goods is > $500 6 must be in writing.
(2) Must be signed by pty against whom enforcement is sought
(3) K will not be enforced beyond the quantity specified
(4) Other terms can be omitted or incorrectly stated.
b. UCC '2-201 (2)
(1) B/t merchants,
(2) rqmt of a writing is satisfied by sending written conf. of K w/in a reas. time
(3) unless receiver objects w/in 10 days following receipt (even tho' receiver never signed anything)
c. UCC '2-201 (3)
(1) A K that doesn't satisfy (1) but that is otherwise valid is enforceable if:
(a) goods are specially-made for buyer
(b) pty against whom enforcement is sought admits in pleading or in ct that K for sale was made (K not enforceable beyond quantity of goods admitted)
(c) goods have been paid for & accepted or have been rec'd & accepted (performance)
d. Application of UCC '2-201
(1) Azevedo v Minister -
Oral ag to buy hay. Azevedo deposit $ in an escrow acct & began hauling hay. As he hauled, Minister provided him w/periodic written accountings. When escrow acct depleted, M. wouldn't release any more hay. M. sued to recover balance.
(a) UCC 2-201 controls, (1) applies since k for goods, (2) applies cuz k is b/t merchants
(b) Issue is whether conf. was sent w/in reas time: yes, cuz conf. was sent when funds in acct were dwindling (when the need for a writing arose), so it was a reas. time w/in context.
(2) DF Activities v Brown -
DF claimed to have reached an oral ag to buy a Frank Lloyd Wright chair from Brown. When DF wrote a conf. letter, Brown returned it & said she'd made other arrangements. DF says if it could depose Brown, she might admit to the K, even tho' she denied it in her pleading & affidavit.
(a) Ct upholds S/F. 2-201(1) applies.
(b) Doesn't fall into exception under 2-201(3)(b) cuz Brown didn't admit that K existed. Unlikely Brown would perjure herself & change her story from her pleading.
(c) UCC 2-201(2) doesn't apply cuz Brown not a merchant & 10 day provision not met (at least based on date Brown sent her letter).
8. CA's Statute of Frauds - CA Civil Code '1624 requires writings for:
(1) leases of property that last longer than 1 year
(2) real estate sales by brokers
(3) Ks not to be performed w/in lifetime of p'or
9. Exceptions to S/F: (judges try to avoid applying S/F to non-fraudulent Ks)
a. Advantage to promisor:
State Auto Ins. v Wilson
- State Auto had issued insurance to the driver of a car that hit a family of 3. Ins. agent came to hospital, told Dr. to "do everything you can for them". Dr. gave treatment w/the understanding that the State Auto would pay for it. Agent asked freq. for statements of Dr's bills. Driver of car found not to be at fault, so State Auto not liable.
(1) Ct found that there was a K implied-in-fact in which agent agreed to pay for medical svc, altho' it was not in writing. Both party rendering svc & one receiving them expected & intended that compensation would be made. (Since there was a k, sole question is whether S/F applies).
(2) *Main Benefit Rule: If p'or gets something substantial out of a promise, the surety/guarantee writing reqmt doesn't apply. (i.e. where the consideration for the ag redounds to the benefit of the p'or, or the promise is made to protect some interest of the p'or)
(3) Application: S/F will not be applied - State Auto got a substantial benefit out of promise. (Standards-based approach)
(4) Isn't it unfair that ins. co was found not liable but still had to pay? No, agent shouldn't have promised.
b. Contracts which are capable of being performed w/in 1 year
(1) Rule: S/F requires that an ag be in writing if by its terms it cannot by any possibility thereof be performed w/in 1 year from the making of the K. S/F applies only to ags which are, by express stipulation, not to be performed w/in 1 yr.
(2) North Shore Bottling v Schmidt & Sons - N.S. entered into oral ag w/Schmidt whereby N.S. became exclusive distributor in the county of Schmidt's beer. W/in a yr, Schmidt designated another distributor instead. Schmidt argued that ag was void w/in S/F.
(a) Application: In favor of Schmidt. Since ag was capable of perf w/in a yr, it falls outside of S/F. Although parties may have expected ag to last over a long period, Schmidt theoretically could have stopped selling beer in that county w/in a yr.
(3) Possibility of death w/in 1 yr completing req'd perf
Doyle v Dixon -
Dixon leased grocery store to Doyle, orally promising not to open a grocery store himself in town for 5 yrs. Dixon violated ag & argued that S/F prevented enforcement cuz it was to be performed over a period of longer than 1 yr. (Negative covenant not to compete) (a) Rule: An ag which will be completely performed if either pty should die w/in a yr is not w/in S/F (Personal covenant does not survive Dixon's death). On the other hand, the fact that a k may be terminated or made impossible by death of a pty w/in a yr doesn't take it out of S/F. Thus, if p'or's death w/in a yr would merely prevent full perf, it's w/in S/F; but if his death would leave the k fully perf, it's not.
(b) Application: K not w/in S/F, so it is enforceable. If Dixon died, k would be fully perf. (c) Minority view - virtually no k would be w/in S/F if it was followed. Standard-based: Since clearly no fraud here, ct reluctant to apply S/F. (4) Full perf exception to < 1 yr exception (standard-based, not in statute)
Mason v Anderson
- Mason loaned $5k to Miner pursuant to an oral ag. Miner made payments until he died. Administratrix, Anderson, refused to pay balance of loan. (a) Creditor fully performed, debtor happened to die. K not subject to 1 yr provision. K enforced. (Under Dixon, k would have been out of S/F) (b) Quantum meruit - ct could have used this approach instead(?). Where 1 pty has obtained the benefit, restitutionary remedy should give other pty back what he gave. (5) Jane Fonda - Oral k: Rosenthal will represent Jane for 10% of value of projects initiated while he's working for her. 2 yrs later she fires him (after he moves from NY to CA), he sues for 10% of projects initiated during his tenure that continued to produce income after his termination.
(a) CA & NY have same law (CA Civil Code '1624), but interpret diff
i) CA: enforceable cuz it's an open-ended k that could end in < 1 yr (employmt. at will k)
ii) NY: w/in S/F. Since k relies on 3rd pties (movie producers), deals could be initiated w/in the yr but finalized after. 3rd parties control R's entitlement(?). Outcome-determinative.
c. Services vs. Goods - in a mixed k, must det which one predominates
(a) UCC '2-201: A contract for the sale of goods for > $500 must be in writing
(b) Goods: all tangible movable prop. Doesn't incl. securities, K's for labor or other svc.
(c) Nat'l Historic Shrines v Dali - Dali agreed to appear on TV & paint Statue of Liberty, which he would donate to NHS. D refused to appear on TV. i) Issue: is it a sale of goods, and thus subject to UCC '2-201? No, primary purpose is a service to be performed (even tho' painting would be worth $25k). 10. Requirements for an effective writing (easy to satisfy) (1) any written evid of terms of K signed by party against whom it is enforced (2) delivery not necess (3) must specify quantity for goods, other terms can be inferred if necess., verbal terms may be incorporated. a. Drury v Young - Drury orally agreed to sell & Young agreed to deliver tomatoes. Drury prepared a memo of the sale on letterhead. Memo was never delivered but place in its safe. Drury refused to deliver. (a) Existence of writing is enuf. Delivery not necess cuz existence of writing more imp. than whose custody it's in. Purpose of S/F, prevention of mischief, is satisfied. Custody by Drury is even a greater guarantee of no mischief. (b)Letterhead is sufficient to constitute a signed writing: okay that it's typed, provided that name is recognized & adopted by pty as his. (c) Even if these weren't enuf, subsequent letter from Drury denying delivery contains the sig. of Drury in connection w/the ag. The 2 writings can be connected. (d) Letter produced by Young would not have been enuf. b. Integration of docs Crabtree v Eliz Arden - Arden hired Crabtree & an unsigned office memo was prepared stating his starting salary & subsequent increases. Payroll change card for salary increase was prepared but Miss Arden refused to sign it. (a) Office memo, payroll chance card all refer to same transaction & taken together are sufficient to bind Arden. (b) Rule: the K itself doesn't have to be in writing, but a writing has to evidence the K (refer to the K). If more than 1, writings have to be reas connected. 11. Other theories to get around S/F: a. Promissory Estoppel - usu. doesn't work (1) Phillippe v Shapell Industries (CA) - P. is real estate broker seeking his 6% commission. S. refuses to pay commission, raising S/F defense. (a) P argues that under Res 90 he expended efforts & should get recovery (b) Ct denies recovery, ag is covered by S/F i) it would undermine S/F to allow recovery ii) reliance was unreas., P. was a licensed broker who knew about S/F. a) non-licensed broker: a ct found it was reas to rely (Leo: terrible case) b. Quantum meruit (Q-K)
(1) Phillippe - Q-K not allowed cuz it would undermine S/F (same as above)
II. INTERPRETATION - PAROL EVIDENCE RULE
A. Leo's rule: Evidence of prior or contemporaneous statements is inadmissible to vary the terms of an integrated ag. B. General
1. goal of rule is to allow you to use external evid to interpret K's
2. can be applied to exclude writings as well as oral ags.
*3. modifications that come after k not w/in rule cuz not "prior"
4. objections to PE rule: objective theory, certainty
5. lots of play in PE rule: in integration, consistency, & explaining/defining terms
6. Grand statements about S/F & PE rule:
a. the rules purport to embrace objective theory, but in practice they undermine it
b. objective theory doesn't always depict what actually happens
*7. Rule does not exclude evidence offered to prove: duress, fraud, illegality, mistake, consideration, or other K formation issues
-- def: k is complete & final expression of ag
-- If K is integrated, consider whether that prevents rule from being used
1. 4 corners objectivist approach - Look at writing first!
--Examine the writing to determine whether it appears to be complete on its face. Allow introduction of parol evidence only to interpret written terms that are unclear or ambiguous.
a. 3 conditions must be met for an oral ag to vary the written K:
(1) ag must be collateral (separate)
(2) it must not contradict written K
(3) it must not be so clearly connected w/ the principal transaction that it would be expected to be embodied in the writing
b. Mitchill v Lath
- Defs orally promised to remove ice house if pfs bought house.
(1) was collateral
(2) didn't contradict writing
(3) but it was so related it should have been part of K
c. Masterson v Sine
- Pf sold house to sister-in-law reserving option to repurchase for 10 yrs. Pf went bankrupt. His trustee wants to exercise the option.
(1) Issue: whether ct should exclude evidence showing that option was intended to keep the prop in the family & was therefore unassignable to trustee.
(2) Rule: When the parties have agreed to a written K as an complete & final embodiment of the terms of an ag, parol evidence cannot be used to vary terms (same as Leo's - more flexible than Mitchell). When only pt of ag is integrated, parol evid may be used to prove elements of the ag not reduced to writing. (Does this just mean that parol evid can add to but not contradict terms?)
(3) Holding: Evidence should be admitted (even tho' law assumes prop is alienable unless otherwise stated - seemingly contradicts writing)
(4) Not a case where oral term would 'certainly' have been included. 2. Any relevant evidence approach (L v W approach) - Look at parol evid first!
--Use extrinsic evidence of all types to det whether pties intended K to be integrated - lang, intent, conduct (Parol Evid is used to det whether we're going to apply rule). Oral evid not admissible if it contradicts writing.
a. Luther v Williams
- After signing a K for home improvement, def made arrangements w/another contractor. Def says K never came into effect cuz of unfulfilled condition precedent, i.e. def was unable to find financing. K had integration clause saying that " this K embodies entire understanding b/t the parties".
(1) Rule: parol testimony is admissible when a) under the circumstances it may be inferred that the pties didn't intend the writing to be a complete statement of their transaction, and b) it doesn't contradict writing.
(2) a) pties didn't intend K to be complete, b) Integration clause only precludes contradictory terms. Since K didn't mention financing, parol condition didn't contradict writing. 3. Merger clauses - such clauses state explicitly that writing contains entire ag b/t the pties. Not conclusive to establish integration (esp. where disparity in bargaining power) but certainly helps. D. Consistency
1. UCC 2-202: integ. ag. may not be contradicted w/ evid of prior or contemp. ags but can explain or supplement w/ course of dealing or trade and w/consistent add'l terms (sale of goods only).
Inconsistency = lack of reas harmony
a. Alyeska Pipeline
- Alyeska sent letter of intent confirming deal to pf, but adding statement that it was "subject to final approval of the owner committee." Alyeska's committee rejected the proposal. Pf sued for breach of K on the ground that the com. was only supposed to review proposal to see whether px was fair.
(1) Issue: whether PER excluded extrinsic evid to show that com's approval power was limited. Whether external evid that contradicts integrated terms of written K would be restricted.
(2) The written term gave the com. unconditional right to approval. Pf's parol evid would be inconsistent w/that unconditional right.
*b. Even if parol term is consistent, ct will still exclude it if it would naturally have been part of the ag 2. Meaning of K terms - Ambiguity Broad view a. PG & E v Thomas Drayage Rigging - Drayage agreed to indemnify PG&E against all loss or liability arising from its perf, and to obtain an ins policy covering liability for injury to prop. The liability clause indicates that only 3rd-pty prop was covered but PG&E argues that the intention was to cover its prop as well. During the work, PG&E's prop was damaged.
(1) K terms themselves are unambiguous 6 plain lang of ag. req'd Drayage to indemnify for injuries to all prop, incl. PG&E's. But Judge Traynor says we have to look at parol evid to det whether K is ambiguous. Considering parol evid, ct finds in favor of Drayage - clause didn't cover injuries to PG&E's prop.
(2) Traynor: words have no fixed meaning - what pties meant by words they used must be considered. In effect, every K is susceptible to attack by parol evid.
b. Trident - partnership of 2 L.A. law firms get a loan for a big commercial bdlg. K stipulated that loan could not be prepaid. Int rate goes down, Trident wants to repay early.
(1) Applying Drayage, ct remands to trial ct to det whether K saying "you can't prepay" actually means "you can't prepay". Trial ct. had to hear extrinsic evidence on the parties' intention in drafting the ag.
c. Narrow view
- K for lease of fishing boat disclaimed all warranties, express or implied. Ag. did not incl. Bumble Bee's oral representation that engines would be in good working order & freezing system would meet his needs. But Kemp signed it anyway. When boat broke down, Kemp sued for misrep.
(1) In favor of Bumble Bee. To det whether K is integrated, ct looks at parol evid - from letter of intent ct concludes that K was intended to be final ag.
(2) Terms of K not ambiguous - K clearly says there's no warranty.
(3) Ag. regarding the warranties are not collateral ags. that would normally be in separate K's.
(4) Ct is effectively looking at 4 corners of doc. (This ct would have concluded in Drayage that "indemnify" included PG&E's prop)
(5) Rule: "The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is whether such evid is relevant to prove a meaning to which the lang of the instrument is reas. susceptible."
d. Tension b/t approaches: Should P/E be admitted to show that one pty attached a meaning to written lang that differs from the meaning that a reas person would have attached to the written lang, as long as the pty's interpretation doesn't stretch the written lang to the breaking pt beyond which the lang cannot be forced? (Amy)
3. Trade usage of terms
a. Frigaliment Importing v BNS Intern'l Sales
- F. ordered 2 2 - 3 lb chickens. BNS delivered stewing chickens, not frying chicken as F. anticipated.
(1) F. had burden of showing that "chicken" was used in narrower rather than broader sense & wasn't able to.
(2) trade usage inconclusive - no established meaning, but USDA says terms incl. hens or stewing chickens.
(3) negotiation - BNS says px was too low for it to be frying chickens - Leo doesn't buy it, could have been trying to build future bus.
(4) Peerless - Ct had luxury of not deciding anything cuz could sell cotton to s.o. else, no perf. Here, since there was perf, can't put parties back into their orig position, so ct is forced to choose. E. Interpretation principles
1. interpret against drafter
2. doctrine of reas expectation - what you can reas expect ins co to defend
3. Gray v Zurich Ins
- ins. co. refuses to defend policy holder against an intentional tort claim.
a. adhesion k - unsophisticated consumer, co. wants to limit liability
b. reas. expectation
c. possible coverage - pleading is plastic, jury may find neg instead of intent'l tort
d. contra preferenta - when in doubt, interpret k against drafter (only d. applies to other K's.)
4. Pollution case - ct held ins. co. must defend cuz it could be neg.
5. Sexual harassment - no oblig to defend, employer couldn't have negligently fondled employee
III. Performance of Contract
1. Express vs. Implied
a. Express 6 strict compliance (100% perf) req'd, but condition must be material
(1) Dove v Rose Acre Farms
- Dove didn't get his bonus cuz he missed 2 days of work due to strep throat, but he got his work done.
(a) No bonus - K contained an express condition precedent, strict compliance necess, subst. perf. not enuf. Absenteeism & tardiness very imp. to Rose Acre Farms, as expressed in K. Dove chose to enter into such a K.
(b) Dove not obligated to fulfill condition - oblig. only to do his reg. job.
(c) Impossibility theory (perf rendered imposs.) - ct doesn't allow, imposs. is a defense, can't be used as a sword to get s.th. you're not otherwise entitled to.
(d) Q-K recovery: Dove got paid for his time, Rose Acre not unjustly enriched. Also, benefit too intangible.
*(2) Jacob & Youngs v Kent
- K specified Reading pipe, but contractor used Cohoes, an equally good kind of pipe. No recovery.
(a) Dif has to be material, must be objective reason for wanting Reading pipe.
*i) Consider: purpose to be served, desire to be gratified, excuse for deviation, cruelty of enforcement
6 wrong pipe was inadvertent, no aesthetic component, purpose was to have serviceable plumbing, whole house would have to be taken apart
6 idiosyncratic desire not enuf
ii) If homeowner was owner of Reading pipe, there may have been a purpose served & reas desire to be gratified.
iii) (In Dove, there was a purpose to be served.)
(b) Is req'mt to use Reading pipe a condition or a promise?
i) condition 6 need strict compliance
a) Cardozo avoids this conclusion: Strict reliance is harsh & can lead to absurd results.
ii) promise 6 breach, but minimal or no damages since pipe was same (a K term - need subst perf)
b. Implied condition - strict compliance req'd
(1) Wal-noon v Hill - Hill replaces leaky roof. Landlord is better off, but Hill never consulted landlord. Now Hill wants landlord to pay for improvement.
(a) No recovery. Notice was an implied condition precedent to lessor's liability and condition not fulfilled. Lessors denied oppt'y to deny a new roof based on Hill's neg.
(b) Q-K: Lessor not unjustly enriched.
(2) Internatio-Rotterdam, Inc
- Pf agreed to purchase rice from def (seller). K req'd that buyer give seller 2 wks notice before delivery & delivery was due in Dec. Buyer didn't give notice til Dec 17, and seller cancelled K (px of rice8).
(a) No recovery. Ct construes 2 wk notice as a condition. Since condition didn't occur, seller's oblig to sell rice never comes into being.
(b) "December delivery was of the essence". Seller was only willing to deal w/ mkt risk until Dec 31.
2. Condition vs. Promise
(1) condition: "if" "on the condition that" "subject to"
(2) If promise, and promise not met, get breach of K
(3) look at intent of parties
(4) In Re Carter' Claim
- Pf entered ag to buy a company. 1) Sales K warranted that there had not been any materially adverse changes in the financial condition of the co. b/t negot. & closing other than from the ordinary course of bus. 2) K also provided that as a condition precedent, if co. was in less favorable fin. condition than it was when negot. commenced, pf was under no oblig to buy. Pf, after purchasing co., claimed that net worth had sig. declined, and sued seller for breach of warranty.
(a) No recovery. Change in net worth was clearly a condition precedent, not a warranty/promise. Pf had option not to buy. (Ct ignores warranty lang)
(b) Lang needs to be explicit, e.g. "Fin condition is warranted up until time of closing. In the event buyer carries thru w/ sale, buyer can recover damages for breach." 3. Non-occurrence of condition may be excused by a) waiver or b) avoidance of forfeiture
a. Waiver - voluntary relinquishment of a known right
(1) dif b/t waiver & modification
(a) assent easier under waiver
(b) waiver doesn't require consideration
(2) Universal Builders v Moon Motor Lodge
- Moon hired UB to build a motel. The K provided that all changes to orig. construction plans had to be in writing. Moon's agent orally requested that UB make several changes. UB agreed in exchange for more money. Moon refused to pay for changes.
(a) In favor of UB. Moon waived the condition & UB relied.
(b) When an owner requests a builder to do extra work, promises to pay for it & watches it being perf. knowing that it is not authorized in writing, he cannot refuse to pay. Unjust to allow Moon, which mislead UB into doing the work w/o written auth., to benefit from nonperf. of that condition.
(c) If oral K supported by separate consideration, don't need to worry whether condition is waived since there's a separate K.
(3) Clark v West
- Clark agreed to write a law book for $6 per page, but $4 of that was conditioned on Clark abstaining from alcohol. Clark drank during the writing. West knew but said n.th.
(a) Issue: whether abstinence is a condition precedent that can be waived? Did West waive?
(b) Remanded to trial ct. Look at West's pattern of conduct. Silence & acceptance not enuf to waive but Clark's allegation that West expressly waived should be heard by ct.
(c) When West implied/said Clark would get the full royalty, he may have waived condition like in Carter's Claim, where pf went ahead & bought co (continue w/K despite condition not being met).
(d) If mkt value was actually $2 6 more likely that condition would be enforced.
(e) Materiality: (ct didn't discuss) Since West got end product, maybe alcohol wasn't material. Abstinence was means to an end (the book). On the other hand, it was imp. to West.
b. Avoidance of forfeiture (form of waiver used by ct)
(1) North American Graphite v Allan
- Allan agreed to provide engineering svc to rehabilitate a graphite mine. After Allan completed the work, NAG refused to pay balance due & abandoned project. NAG argues that lang in ag. serves as condition: "large expenditures req'd for new equip. make it imperative that payment for svc be delayed until plant is producing income." Thus, NAG claims that plant must be operating for payment to be due.
(a) In favor of Allan. Plant opening was not condition precedent, his pay not contingent on plant's success (only time of payment contingent).
(b) Allan would be forced to forfeit his effort if it was a condition. Ct. prefers to avoid forfeiture. NAG got benefit of bargain, it should pay.
(c) If Allan was taking such a risk, K px would have been higher.
(d) contra-preferenta - K interpreted against drafter. Drafter should have put in explicit lang that it was contingent.
(2) Aetna Casualty v Murphy
- Murphy (a dentist) terminated a lease & left premises damaged. Aetna, insurer of bdlg., sued Murphy in Nov '83. Murphy didn't notify his insurer, Chubb group of Aetna's claim til Jan '86. Murphy moved to implead Chubb. Chubb argued that Murphy had not complied w/ K rqmt that Murphy give written notice of occurrence "as soon as practicable" and notice of suit "immediately." Murphy countered that Chubb wasn't damaged by the late notice.
(a) In favor of Chubb, even tho' Chubb didn't show it was harmed by lack of notice. Murphy had burden to show lack of prejudice to Chubb.
(b) Ct. balanced disproportionate forfeiture vs. prejudice to ins. co. for 2 yr delay in notice. K of adhesion, Murphy loses out on his premiums.
(c) This result doesn't translate to other, non-ins. contexts.
4. Dependent vs. Independent
a. types of conditions (approaches)
(1) indep & mutual - even if you don't perf, I'm still bound (e.g. I shine you shoes for $10, you sell me cokes for $0.85)
(2) dependent conditions - where order of perf matters, loses character of independence.
(a) Kingston v Preston
- Pf agreed to work for def for 13 yrs and then def, upon pf presenting good security, would transfer bus. to pf.
i) Since pf failed to give good security, def had no oblig. to perf. (like condition precedent)
(3) simultaneous - same time perf.
(a) Goodison v Nunn
- Goodison contracted to sell land to Nunn. Although G. didn't deliver land, he sued N. for failure to pay for land.
i) Nunn's duty to pay didn't arise until Goodison delivered land. Since that never happened, Nunn's duty to pay never arose. Duty to pay & duty to tender land are dependent covenants.
b. Intent of parties control which type of condition it is - order of perf, parol evid.
c. Presumption of dependence where parties have concurrent duties
(1) Palmer v Fox
- Palmer sold Fox some property. As part of the 5 yr sales K, Palmer covenanted to make several improvement to the prop, incl. to gravel the roads. Fox stopped paying on the basis that P.'s failure to gravel road was a breach of the dependent covenant. P. maintained it was a breach w/ a 'small b' & not material.
(a) In favor of Fox. Default position is that performance (of improvements) is a condition precedent (same as presumption of that conditions are dependent?). Here, it's unlikely Fox would have entered into the K w/o the improvements. It appeared that improvements were to be made w/in 5 yr period.
d. Stewart v Newbury
- Stew. agreed to do some construction work for Newbury.
Written K didn't mention time for payment. S's arg: payments are implied condition precedent to continuing work. Should payment be one-time payment at the end or installment payments?
(1) In favor of Newbury. Industry standard: When no ag made as to payment, work must be subst. perf. before payment can be demanded.
B. Avoidance of Forfeiture
1. Materiality of Breach a. Doctrine of substantial performance as a means to avoid forfeiture. If you have subst. perf, implied condition precedent to payment has been satisfied.
(1) gen rqmts: extent of nonperf. must be trivial; not due to bad faith; easy/cheap to remedy/repair; mat provision may be breached in a trivial way.
(2) used esp. in construction K's
b. subst perf & mat breach very similar: If you have subst. perf 6 your have not mat. breached & vice-versa.
c. continuum approach: at some point, law will say you have subst. perf. & not mat breached (only a 'small b' breach)
d. Test for subst. perf/mat breach (same as J&Y v Kent):
(1) purpose to be served
(2) desire to be gratified
(3) excuse for deviation
(4) cruelty of enforcement
e. Res 2d '241 (essentially identical to J&Y v Kent)
(1) extent to which injured pty will be deprived of benefit expected
(2) extent to which injured pty can be adeq. compensated for benefit of which he will be deprived
(3) extent to which other pty will suffer forfeiture
(4) likelihood that other pty will cure his failure
(5) other pty's adherence to good faith & fair dealing
f. Res 2d '229 - the smaller the deviation & greater extent of forfeiture, the greater the odds that an express condition will be excused
g. Loehmann's Inc
- Late lease payment. K provided that time was "of the essence." L. paid approx. 2 days after 10 day period allowed. Pf terminated lease.
(1) Breach was too trivial to justify forfeiture. Decided under Res 2d '241.
(2) Leo's disagrees: "time is of the essence" was written in K - does the written word mean nothing? too subjective.
h. O.W. Grun Roofing
- Def. installed roof w/ yellow streaks.
(1) Pf recovers damages (cost of removal), and didn't have to pay K amt. (2) Material breach - mistake clearly visible
(a) unlike J&Y v Kent, here desire to be gratified is objectively reas.
(3) Q-K: no, pf didn't really get a benefit - hated the roof
a. Lowy v United Pacific Ins.
- Def completed 98% of construction work in orig K. Dispute arose over payment for add'l work beyond orig K & def ceased work.
(1) Def. recovered. Since K is severable, doctrine of subst. perf. applies to 1st phase.
(2) (Outcome would be dif if remaining 2% of work was critical, e.g. research work)
b. Basis to infer that parties intended K to be divisible:
(1) separate or apportioned consideration
(2) performance divided into parts
(3) feasibility/fairness in dividing (can make use of 1 part w/o the other)
3. Quantum Meruit - no subst. perf, but other pty rec'd benefit 6 can still get Q-M recovery for value of benefit conferred
a. Works best in employment & construction K's cuz benefit is more tangible & easy to measure. (Rose Acre - benefit too intangible)
b. Remedy = benefit conferred less damages of breach.
c. Britton v Turner
- K to work for 1 year for $120. Pf only worked for 9 mos.
(1) Recovery permitted.
d. Maxton Builders
- Def. paid Maxton 10% down payment on house, then canceled K & stopped payment on the check.
(1) Seller keeps down payment. No subst perf. No Q-M cuz no benefit conferred (?)..
(2) Hard to show whether amt retained exceeded seller's actual damages 6 10% is close enuf. Litigation control.
(3) Outcome applies only to real estate K's.
4. Good Faith
a. 2 approaches
(1) Summers (subj. view) - GF is behavior consistent w/ (a) common standards of decency, fairness, and reasonableness, and (b) parties' agreed-upon common purposes & justified expectations (2) Burton (obj): not used much (a) bad faith is trying to recapture opp'ties bargained away i) easy to apply ii) too broad, doesn't allow for K modification b. Centronics v Genicom - K to buy assets. Portion of px in escrow pending arbitration, to be released 10 days after purchase px determined. Centronics (seller) claims it should be able to get some of escrow fund w/o waiting for determination of purchase px cuz baseline value of assets can be established. C. claims that buyer is refusing to allow such a partial payment to pressure it into conceding dispute and is acting in bad faith. (1) No bad faith. Buyer couldn't get any of its own $ back until value determined. It has no discretion to allow partial payments before value determined. Not trying to recapture lost opp'ty. c. Neumiller Farms v Cornett - K to buy potatoes for potato chips at $4.25. When px dropped to $2, NF refused to accept any more, saying that potatoes were inferior. (Plenty of clear evid that px was reason) (1) Bad faith. Even tho' K is conditioned on buyer's satisfaction, Cornett can establish that potatoes from an obj. view are satisfactory. (2) Burton's rule works here: NF trying to recapture lost opp'ty. d. Reid v Key Bank of Southern Maine - Reid had 25k line of credit that was "payable on demand." Bank informed him they would not grant any further advances. After a payment was supposedly late, Bank repossessed 2 of his vehicles. (1) Bad faith: in halting advances w/o warning, knowing that Reid's bus. was dependent on it; and in failing to give notice that it intended to terminate the relationship entirely. (2) Not a 'demand' loan in the 1st place: (a) since the whole amt of loan wasn't borrowed, loan wasn't complete. (b) Existence of conditions (to indicate whether Reid was in default) shows bank didn't have unfettered discretion to terminate loan e. UCC '2-306 - "Output, rqmts for exclusive dealings" (1) A term which measures the quantity by the output of the seller or the reqmts of the buyer means such actual output or rqmts as may occur in good faith except that no quantity unreas disproportionate to any stated estimate or comparable prior output or rqmts may be tendered or demanded. (2) A lawful ag for exclusive dealing imposes an oblig by seller to use best efforts to supply the goods (not a quote) (3) Feld v Henry Levy & Sons - Output K: def agreed to sell & pf to purchase all bread crumbs made at its factory. Almost 1 yr after K began, def stopped crumb production cuz it was uneconomical (but said it would resume for a higher px). K contained a 6 mos cancellation provision. (a) Bad faith under UCC '2-306(2). (b) 2 ways out of K: i) severe econ hardship like bankruptcy (here, bread was main bus) ii) Def could cease making bread altogether, if it was in good faith (since crumbs were by-product of bread) (4) Orange & Rockland v Amerada Hess - K to supply fuel oil for about 5 yrs at fixed px. K included estimates of about 1.5 mil barrel per year, although pf reserved right to burn as much nat gas as became avail. Px of fuel oil doubled, and pf's demands went up by about 1 mil. Pf told def it was using less gas cuz it could make more $ selling it than using it to generate power. Pf sued for dif b/t what it paid to buy add'l gas from other suppliers & K px. (a) Bad faith. Request is unreas disproportionate - UCC '2-306 (1). Motion for sum j denied. (b) Leo: Hess req'd to sell at estimate + about 10-15%, but not more.
(c) Factors to det "unreas disproportionate":
i) amount of excess
ii) forecast (whether seller could have anticipated requested increase)
iii) amt by which mkt px exceeded K px
iv) reason for 8 rqmt
(5) Eastern Airlines v Gulf Oil
- EA entered into 5 yr fuel K. Pties used as benchmark px the published px of West TX Sour. Oil embargo caused px to go from $5 to $11. Gulf Oil was forced to sell at $5. EA fueled up as much as poss where Gulf had facilities & as little as poss elsewhere.
(a) Not Bad Faith - see ii, v below
i) amount of excess
ii) reas basis for 8 in demand (here, 8 in passenger miles)
iv) amt by which mkt px exceeded K px
v) industry practice - what other airlines do
a) fuel freighting was common airline practice. C. EXCUSE - imposs, imprac, supervening force, frustration of purpose
a. Label put on situation can be outcome det (as w/mistake)
b. dif b/t impracticability & frustration - unclear
c. dif b/t excuse & mistake - unclear, maybe that in mistake cases you ca "unscramble the eggs" but in excuse cases, it's too late for that 1. Impracticability - UCC concept
a. Common Law - absolute imposs needed (a deal is a deal)
(1) Stees v Leonard - Contractor tries to build house 2x & land fails causing house to fall both times. Land unsuitable for building, but could build at great cost.
(a) No excuse - since it's not strictly imposs, he's held to K.
b. Modern - Imposs. no longer req'd, perf need only be imprac, carrying w/it an excessive & unreas cost
c. Commercial Impracticability
(1) UCC '2-615 - Except as so far as a seller may have assumed a greater oblig., delay in delivery or non-delivery is not a breach if perf as agreed has been made imprac by occurrence of a contingency the nonoccurrence of which was a basic assumption on K was made.
(a) occurrence of a contingency
(b) perf is thereby made imprac
(c) non-occurrence of contingency was basic assumption on which K made
(2) Mineral Park v Howard
- MP agreed to remove gravel from Howard's land & pay him for it. MP took less than half the amt of gravel & paid only 3 of amt. MP took the gravel above the water, but removing the remaining gravel would cost 10x more than usual.
(a) MP has to pay only for gravel it took.
(b) ct holds that this is close enuf to impossible - cost so great, it's as if the gravel isn't there. Assumption that land would be usable was faulty.
(c) factors to det whether cost is unreas & excessive (blurry line):
ii) basic assumption of K
iii) least cost avoidance
iv) who was assigned risk
v) who's in best position to bear the loss/ who will get windfall
(d) usu. k'or is assigned risk cuz should know whether or not gravel is avail. But here, if we hold k'or to orig bargain, owner will get a windfall. Owner is the one w/unremovable gravel, it's not unreas. to ask him to pay for it's removal 6 cost avoidance.
(e) conflict b/t mistake principle & reliance principle: what if Howard had relied?
i) reliance probably wins out
ii) this case similar to mistake - parallel theories
(3) US v Wegematic -
Wegematic (def) agreed to provide its new revolutionary computer system on June 30. Dev't took longer than expected & in October Weg. requested cancellation of K. Wege. claimed perf was impracticable & cites UCC '2-615.
(a) No impracticability
(b) Case decided on the basis of risk:
i) Wege. assumed a greater risk - told Board to rely on their claims of grand new technology
ii) liq. damages clause 6 pties contracted for late delivery
iii) Evidence of imprac. not well-founded: the $1.5 mil Wege said it would take to fulfill K is peanuts compared to K px of $232 mil.
(4) Taylor v Caldwell -
Lease of music hall for 4 days, destroyed by fire.
(a) Both parties excused - supervening impracticability
(b) Existence of music hall was an implied condition, like "basic assumption" idea.
(c) applicable to employment Ks 6 basic assumption is continued viability of company & employee
(5) Transatlantic Financing
- Shipper agrees to carry oil from Middle East to the U.S.. Suez Canal (b/t Africa & Europe) closes, shipper has to go all the way around Africa 6 increases cost by a.
(a) Issue: is route thru Canal a basic assumption upon which K is based?
(b) Ct. decides case under UCC '2-615 and denies relief to shipper.
i) perf is still poss., it just costs more. Unlike Taylor v Caldwell, where Hall was destroyed.
ii) foreseeability & allocation of risk: shipper in best position to assess Middle East situation, everyone knows situation is volatile
iii) a isn't enuf of an increase in cost. iv) (ct could also consider whether shipper got a higher profit margin in exchange for assuming risk) (6) Imprac can't be caused by one of parties Canadian Alcohol v Dunbar Molasses - Dunbar, as middleman, failed to deliver sufficient molasses to C.A.. K provided that molasses was to come from the Nat'l Sugar Refinery, but its output was only 60% of normal. Dunbar argued that by an implied term of the K, the duty to deliver was conditioned upon production sufficient to meet pf's order. (a) No imprac. Dunbar assumed risk that output would be same as previous yrs - didn't secure a K w/Nat'l Sugar Refinery. (b) What's the K? supplying molasses, C.A. doesn't care where it comes from, that's why they hired middleman (c) Dunbar could have put in K a condition that perf. was conditional upon supply (these are sophisticated pties). (d) What if Nat'l Sugar Refinery blew up? buyer probably wants certain quality of molasses i) If Nat'l Sugar was only supplier 6 Dunbar has good case ii) If it's one of many 6 Dunbar is obligated to get from other suppliers (e) What if it were an output K? Farmers often use seller as intermediary to take mkt risk e.g. Bowland Farms. (7) Foreseeability vs. non-occurrence of basic assumption (a) Dills v Town of Entfield - Dills contracted to buy prop from Town for industrial park & put down 100k deposit. Dills could withdraw & recover deposit if, after preparing satisfactory construction plans, he could not obtain financing. Dills' plans were rejected by Town. After being unable to get financing, Dills wanted to terminate & get his deposit back. i) No imprac. ii) Almost a divisibility case: Ct finds plans & financing to be dependent. iii) Dills claims that his inability to obtain financing made submitting plans a 'futile' & "useless act' and therefore doctrine of imprac should discharge his duty. a) No: Dills' failure to obtain financing wasn't "an event the non-occurrence of which was a basic assumption on which the K was made." (b) Louisiana Power & Light v Allegheny Ludlum - Pf contracted to purchase steel tubing for nuclear power plant. Def (AL) sought add'l compensation due to supply & labor cost increase of 38% over K px. i) UCC '2-615: perf not imprac, cost more but not "severe & unreas" ii) Unconscionability: AL sophisticated pty, knew px fluctuates, had bargaining power. iii) Bad Faith: Louisiana Power had no oblig to re-negotiate K. iv) Mutual mistake: def was merely mistaken about a future event, i.e. whether it would make a profit on the K. To excuse perf, a mutual mistake must relate to facts existing at the time of contracting. a) Alcoa v Essex - Essex sells raw materials to Alcoa, who refines it & sells it back to Essex. Price escalator provision created by Alan Greenspan. Indicator turns out not to be accurate and energy costs go thru the ceiling. 1) Mutual mistake allowed since mistake was on the indicator at the time of contracting. 2) Leo:--By involving Greenspan & using formula, Alcoa assumed the risk. It knew that costs were a potential big issue, that's why they involved G. (Closely calculated rather than limitless risk) --AL may have a better case than Alcoa. Both made mistake as to future costs. --Lesson: don't rely on Alcoa - most cts don't like it. Ct more likely to excuse when million of dollars are involved. (c) Kaiser-Francis Oil v Producer's Gas co. - Def contracted to 'take or pay' for certain minimum quantities of gas. When mkt px declined, def refused to take or pay for the minimums. Def claims that a sharp decrease in demand for gas, which led to a corresponding decline in the resale px of gas, constitutes a force majeure event. i) No force majeure. Neither a decline in demand, nor an inability to resell gas at or above the K px, constitutes a force majeure event. a) Oil embargo? Probably still not good enuf. b) flavor of good faith/bad faith in this case (8) Force majeure clauses (a) ex: "not resp for delays caused by acts of God, war, strikes, riots, fires, failure of transportation, labor troubles..." (b) purpose: attempt to allocate risk (c) enforcement is uncertain 2. Frustration of Purpose a. Definition: perf is literally possible, but purpose of K is moot in light of unforeseen event. b. Factors to consider (Julie's outline): foreseability that event would occur, alloc. of risk, fairness, forfeiture & loss to each pty c. Fact patterns (1) Paradine v Jane - Paradine sued Jane for 3 yrs rent due on lease. Jane defended on the ground that Prince Rupert's army had invaded & put him out of possession. (a) No frust. of purpose. Property principle: lessee has an estate in land. (b) Case also shows reluctance to grant relief on basis of imposs.
(2) Krell v Henry
- Henry contracted to hire Krell's apt for 2 days to view the King's coronation parade. Parade was postponed.
(a) Frust. of purpose allowed (perf still poss, but no point anymore). K cancelled, but Krell allowed to keep deposit (risk equitably borne by both).
(b) Even tho' K didn't mention coronation, the fact that px was so high indicates that K is to view coronation, not just have use of rooms.
(c) cab hypo - You pay a premium to take a cab on Derby day & Derby day is cancelled. You probably have to pay just what normal px would have been.
(3) Parker v Arthur Murray
- After convincing Parker he was an excellent dancer, he signed up for 2,734 hours of lessons for 25k paid up front. Parker was in car accident & was injured. K says that it's non-cancelable & non-refundable.
(a) Frust. of purpose allowed.
(b) Ct found that K was to help Parker achieve a certain level of expertise, not just dance lessons. Due to injury, couldn't dance at higher level.
(c) clause in K didn't make sense in this context, like force majeure & merger clauses. It was a basic assumption of K that accident wouldn't occur.
(d) No commercial impracticability since UCC deals only w/goods IV. MODIFICATION, DISCHARGE, TERMINATION
1. Modification due to changed conditions
Angel v Murray
- K to collect garbage; new housing built; modified K a. mistake-like issue: modify or ask ct to resolve it b. no duty to modify but enforceable if accepted
2. Good faith & no duress req'd to make modif. enforceable (UCC '2-209(1))
a. Roth Steel Products v Sharon Steel
- Def notified customers that it was discontinuing px concessions. Def negotiated w/ pf to charge a px b/t agreed px & published px. Although reluctant, pf agreed to change cuz def was a major supplier. Def's deliveries were still delayed. When pf found out def was reselling the steel for a higher px, it sues. (1) In favor of pf, modification of K fails. (2) Def is being predatory & acted in bad faith. Used pf's need for steel & inability to obtain it elsewhere to force pf to agree to modification. (a) ( Here, modif. invalidated cuz of bad faith, not econ duress. Coercive means will not invalidate a modification made in good faith, Note 3, p.993. But other cts. rely exclusively on econ duress when evaluating modifications, Note 4, Roth Steel Products) B. Discharge 1. Accord & Satis - a discharge of a debtor's oblig to his creditor when consideration other than that originally bargained for is given (a kind of modif.) 2. Conditional bank checks w/"payment in full" or similar lang. a. Common Law: ignores words of protest - need mirror-image. (1) Since cashing check is inconsistent w/ words, ct ignores words. Cashing check is acceptance. (2) Pinnel's case: Need hawk, horse, or robe. If you accept lesser amt, you're getting the $ before it's due & I have no oblig to pay the rest b. UCC '1-207 - Perf. or Acceptance Under Reservation of Rights --A party who with explicit reservation of rights performs or promises perf. in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as "without prejudice", "under protest" are sufficient. (1) Allows words of protest to have effect. (2) Favors creditors: creditor not at mercy of debtor. Doesn't have to face dilemma of either accepting lesser amt as full settlement or returning check & gambling on his chances of collecting anything. Risk shifted to debtor. (3) Reduces litigation - a creditor who get $0.70 on the dollar is less likely to sue (alternatively, it could prolong the dispute cuz lessens likelihood of settlement). (4) Makes mkt safer so creditors will be more likely to extend credit (5) AFC Interiors v DiCello - Check to AFC has notation that it is payment in full. AFC crosses out notation & inserts "payment on account," then sued for balance due. (a) In favor of AFC. Under UCC '1-207, AFC properly reserved its rights by crossing out def's notation. (6) Non-goods (e.g. svc) (a) Horn Waterproofing (NY) - applied UCC to non-goods (roofing K) (b) CA rejects UCC approach for non-goods, uses C/L approach cuz it favors debtors
C. Termination Termination-at-will clauses must be: in good faith, honest, valid commercial reason a. Zapatha v Dairy Mart - Zapatha agreed to run a Dairy Mart store. Either party could terminate w/o cause on 90 days notice. If Dairy Mart terminated w/o cause, it had to repurchase inventory. After 4 yrs, Dairy Mart presented new ag which was less favorable to Zapatha & he refused to sign. DM gave Z. notice of termination. (1) In favor of Dairy Mart. Termination-at-will clause & DM's conduct not unconscionable (2) Like Feld v Henry Levy & Sons (bread crumb case) & Red Owl (franchise case where def convinced pf to sell his store by saying they'd sell him a bigger one - Res 90 relief) b. Seubert v McKesson Corp.(CA) - Seubert was hired on an "at-will" basis. S lost commissions when computer systems he sold were returned due to defects. S. failed to meet sales quota req'd by new personnel policy cuz of defects in system. He was fired. (1) Seubert wins. (2) Presumption that employment is terminable at will may be superseded by a K, express or implied, that limits employer's right to terminate. Existence of personnel policy governing termination of sales personnel shows implied K that emp'ees could only be terminated for cause. (a) W/o such a quota rqmt, Seubert could have been terminated just as Zapatha was terminated. At-will K was modified by the subsequent quota rqmt. (3) Foley v Interactive Data Corp. (CA) - In an employee termination case, tort damages are not available for breach of the implied covenant of good faith & fair dealing. Bad motives on the part of the employer are fine acc. to torts (and contracts?), except if it contravenes public policy, e.g. discrimination. (a) Foley got econ damages for breach of the implied covenant, as did Seubert. (b) Seubert: Bad faith was not in termination but in carrying out the ag & making it impossible for S. to fulfill K. [are K damages allowable if bad faith was in the termination?]
A. Anticipatory Repudiation
1. Definition: express or implied repudiation of a material part of agreed exchange. (Breach committed before arrival of actual time of req'd performance.) a. express - unequivocal refusal to perform b. implied - p'or put it out of her power to perform 2. Pf's options: a. ignore AR & treat K as if it's still in force, then sue if def fails to perform when perf actually come due b. stop all return perf & sue for breach 3. Arguments for/against AR doctrine a. For: (1) Promissory Estoppel - p'ee ought to be able to rely on promisor's words & actions that he's not going to perform. (2) promisee ought to be able to mitigate to reduce damages by 1) suing earlier and 2) making other arrangements. Benefits p'or also cuz it reduces his exposure (3) harm to promisee is now, even tho' perf. is to take place in future b. Against: (1) denies breaching pty opp'ty to cure (2) difficult to measure damages (3) no harm accrues til time of perf. (4) p'ee may be unable to perform at time of perf (e.g. could break a leg) (5) p'ee unjustifiably improves his position by being allowed to sue early [cuz p'ee get $ earlier] 4. Fact Patterns a. Hochster v De La Tour - Hochster was hired by De La Tour to accompany him on a tour to begin June 1. On May 11, D. wrote to Hochster to repudiate the ag. Hochster sued for breach on May 22. H. was hired for another job b/t May 22 & June 1. (1) In favor of Hochster. Promisee may wait until the date set for perf or sue immediately. b. Taylor v Johnson (CA)- Horse breeding K. Def sold stallion & informed pf that K could no longer be performed. Def arranged w/ new owner to allow pf to have stud svc in KY. After stallion was booked several times when pf's mares were in heat, pf gave up & had mares bred by another stallion. Both conceived twins which were aborted. (1) In favor of def. No breach cuz perf was not imposs, just more difficult (2) If injured pty treats the K as still in force until there's an actual breach, then he's left to his remedies at the time of perf. 5. Insecurity: UCC '2-609 a. UCC '2-609 - Right to Adequate Assurance of Perf (in sales Ks) When reas grounds for insecurity arise the other pty may in writing demand adeq. assurance of perf. Until he receives such assurance, he may suspend perf. Time for receiving assurance is 'reas, not exceeding 30 days'. (not exact quote) (1) what constitutes sufficient assurance? UCC doesn't say. Innocent pty has to det whether assurance is reas. b. Certainty: Allows one pty to det whether the other is about to breach. (If he doesn't ask for assurance & walks away 6 he's guilty of a breach.) If other pty doesn't give requested assurance, he can treat it as an anticipatory repudiation altho' pty's conduct would not otherwise constitute repudiation. c. Conduct does not have be indicative of anticipatory repudiation for UCC '2-609 to be used d. AMF v McDonald's - Computerized cash registers were going to be delivered very late & there were many probs w/test machines. McDonald's requested that production cease for further negotiation. After meeting w/McD, AMF concluded that McD had cancelled all orders & sued for repudiation of K. (1) In favor of McD. McD had 'reas grounds for insecurity' as req'd by UCC '2-609. *(2) Written request for assurance not enforced here even though UCC '2-609 requires it. Not necess. as long as both parties knew what was going on & assurances were documentable. McD's repudiation was justifiable. 6. Unilateral Ks - AR doesn't apply to uni. Ks or where 1 party has already performed a. If one pty has fully performed, K is now unilateral & AR not appropriate (must wait until breach. b. Rationale for denying AR recovery in uni Ks: (1) reliance won't cause you to act, cuz you've already performed (2) ability to mitigate is gone (3) harm is not "now", you can't be harmed anymore cuz you've already acted (4) no disadvantage to waiting til actual breach, when damages will be easier to estimate (5) allow AR suit puts non-breaching pty in better position than they would have been w/o the breach, since they get their $ before time of perf. c. John Hancock Life Ins. v Cohen - After Cohen, the beneficiary of a life insurance policy, had been receiving payments for 15 years, the co. stopped paying. Ins co. mistakenly claimed parties had intended only 15 yr protection, not 20 yr. Cohen sued for full amount due over the next 5 yrs ($8k). (1) AR doesn't apply here. Since insurer has fully performed, this has become a unilateral k. (2) Future payments must be made to Cohen as they come due, not in lump sum. Terms of K shouldn't be changed so that insurer is forced to pay now what it contracted to pay later. d. Minor v Minor - CA divorce case. Wife releases claims in exchange for installment payments from husband. Husband stops making payments & says he has no plans to pay. Wife sues for AR on installments due in the future. (1) Since this has become a unilateral K, AR is inappropriate. (2) Ct. allows her to sue for harm already occurred. Then she'll have to continue to go to ct. regularly to collect in the future (but can get a blanket order). e. Diamond v USC - Diamond purchased season tickets which incl. a Rose Bowl ticket if USC got invited. Not enuf Rose Bowl tickets left for season ticket holders cuz USC allocated some tickets to big donors. (1) No recovery. Ct. held that since Diamond had fully performed, K was unilateral 6 AR not appropriate.
B. Compensatory Damages/Remedies
1. General (see pgs. 1036-9) a. Preference for substitution: money judgement rather than force breacher to perform. b. Purpose of K damages is to put aggrieved party back in the position he'd be in if def had fully performed - get benefit of bargain. c. Damages usu. not intended to be punitive or to act as a deterrent, just compensatory - allows "efficient breach". d. Factors to consider: (1) will chosen doctrine result in a windfall or inadeq. damages? (2) how was risk allocated? (3) divisibility - was breach of whole or just part? 2. Policy a. advantage: econ. efficiency (1) breach of K is not a moral proposition, not inherently 'bad' (2) can be good to breach a K: value maximizing, efficient use of resources b. disadvantage: may not be econ. efficient (1) social cost in non-breacher being shortchanged, no longer able to manufacture its products, workers kept idle (ct. assumes he can sell to s.o. else) (2) penalizes non-breacher: B may have foreseen an increase in px, maybe we should reward B's mkt savvy (3) e.g. B contracts to buy widgets from A, but A finds a better deal selling to C. A can't lose - if A breaches, A pays B lower px. But if B tries to buy cheaper, B has to pay higher px to A as damages. 3. Foreseeability of damages a. Inherent conservatism in K law in regards to scope of responsibilities b. Hadley v Baxendale - Hadley stopped operation of its mill when a crank shaft broke. H. contracted w/ Baxendale to deliver broken shaft to the manu.w/in a reas. time so that a duplicate could be made. B. was neg. in not completing delivery w/in a reas time. H. sued to recover lost profits & wages paid while mill stood idle. **(1) 2 prong rule to assess liability: (a) Natural, general, usual, incidental damages i) those which would be expected by both parties to probably flow from a breach (b) Special circumstances (consequential, unusual, unnatural) i) only liable if breacher knows or has reason to know about a) reasonably w/in the contemplation of both parties as being probably consequences of a breach. b) risk premium- need outward signs that def is bearing risk, e.g. pf has to pay higher px for def to assume risk. Rule of proportionality. (2) Application: Since shipper (Baxendale) didn't know that plant was shut down, shipper not liable for lost profit. (broken shaft wouldn't naturally result in closure of bus) c. Hypos (1) Leo's Photos - Developer ruins Pulitzer prize winning photos. Since not foreseeable, developer not liable for special damage of loss of prize. (a) If Leo told developer about prize & how imp. film was, parties might have made some special provision, such as charging more. (What if they didn't charge more? Then no recovery) (b) Low px is indicator that developer didn't assume risk (2) Victoria Laundry - Boiler breaks. Lost productivity from customers is an expected damage that need not be communicated. (But loss of dyeing K w/gov't not foreseeable) (3) Leo getting fired - General damages incl. salary, ads (newspaper, not TV), not new suits - since have use after job interviews. (4) Puerto Rico trip - If Delta cancels flight from Atlanta to San Juan, is Delta liable for lodging & meals in Atlanta? Yes (a) layover in Las Vegas 6 not liable for gambling debts. Natural impulse to gamble in LV, but there's inherent conservatism of H v B rule. (5) Spang Industries, Fort Pitt Bridge Division v Aetna Ins. - Construction co. had to work all night to pour concrete before freezing temperatures, due to late delivery of steel. (a) Issue: Is Spang liable for increased labor costs? (b) Yes, Spang knew or should have known that it's harder to pour concrete in the winter. Impute industry knowledge Didn't need to be specifically communicated cuz it was foreseeable. d. Criticism of Hadley v Baxendale (altho' it's very widely used) (1) too limited, most applicable to large custom sales Ks. In routine sales of fungible goods, risks are well-known. (In small Ks, rule suggests that range of liability will be limited). (2) Too restrictive of K damages - reigns in damages too much (3) Too easy to contract around. Sellers put limitation on label, e.g. Kodak film, Fed Express. Laptop-you'll get it replaced but no conseq'l damages.
4. Certainty a. New businesses generally cannot recover 'lost profit' cuz too uncertain to calculate (1) El Fredo Pizza v Roto-Flex Oven - Defective oven in new El Fredo store resulted in increased labor costs & lost sales. (a) Recovery for labor costs but not lost sales. (inherent conservatism) (b) Exception to general rule cuz damages could be shown w/reas certainty. Labor costs more easily determinable than lost profits. (c) Lost profit - how to determine: i) use comparable bus ii) bus. records from before & after defective oven was used iii) track record: other restaurants in chain can be used as evid iv) expertise (d) Oven costs $4,800, but claim is $25k. Replacement value may not adeq. compensate for loss caused by breach. (Award was $13.5k = $8k labor + $5,400 incidental expenses) (2) Freund v Washington Square Press - Book by prof, no evid that it will sell. Too speculative, no recovery. (3) Erickson v Playgirl - New model claims lost revenue as model for accidental omission of his photo from back cover of magazine. Sues for expectancy damages - anticipated exposure. No recovery, too speculative, not track record. (4) Dempsey v Chicago Coliseum Club - On March 13, Dempsey agrees to fight Willis in Sept. In July, Dempsey anticipatorily repudiates, saying it will interfere with his fight w/Tunney, also in Sept. (a) CCC brings successful action for declaratory relief for existence of K & injunctive relief to make him fight. Dempsey fights Tunney anyway & loses. (b) CCC successfully brings another action for breach of K. What damages? i) Lost profits - ct doesn't allow, too speculative. Leo disagrees: even tho' exact amt is uncertain, conduct is so egregious, CCC should get s.th. Also, we know his fight w/Tunney grossed $1.8 mil and his salary would have been $800k. ii) Expenses before K was signed - not allowed. Dempsey couldn't be held responsible for expenses before signing - he might have refused. iii) Expenses after breach (attys) - not allowed. Atty's fees not recoverable in U.S. even tho' foreseeable. Ct. said CCC undertook suits at its own risk. (Leo somewhat disagrees w/) iv) $300 deposit for renting site after K was entered into but before breach - ct allows recovery, it's certain & foreseeable. (c) $300 total damages is stingy. Cts today may not be quite as stingy after El Fredo, but still stingy. 5. 3 types of compensatory damages: expectancy, reliance, & restitution a. Expectancy (1) Value of thing promised minus value of thing rec'd (benefit of bargain) (2) Excludes hospital costs (3) Hawkins v McGee - Pf had scar on hand. Dr. promised to give him a perfect hand. Hand ends up w/limited function & hairy. Pf sued in tort & K. (a) No tort recovery: Dr. performed up to standard of care for Dr's. (b) K recovery succeeds. Expectancy measure used: value of perfect hand promised minus hand as provided. (not cost of surgery 6 would have had to pay that anyway) (4) hypo: Martinez cuts his hand. Dr. promises "slam-dunk hand". Resulting hand is only normal. (a) No established way to decide which measure of damages to use. Atty should argue for most lucrative one. Expectancy measure seems to be too much. (5) New Era Homes v Forster - Pf hired for construction K. D was to make payments of $150 (upon signing of K), $1000, $1500 (completion of rough carpentry & plumbing), and $450 (when job completed). After pf had done rough carpentry & plumbing, def refused to pay 3rd payment of $1500. (a) Proper measure of damages is either: i) value of what had been completed (quantum meruit) ii) value of pf's loss (K px minus payments made and cost of completion) a) ordinarily this would be the higher amount. b) this is like expectancy measure (b) K is not divisible - payments were based on mutual convenience, separate payments were not allocated to particular parts of the K. Thus, recovery for 3rd payment of $1500 is not appropriate. (c) Loss contracts: value of what you provide is $150, but you contracted for $100. Rationale: drive out competitors, keep workforce busy etc. Quantum meruit would provide higher damages in loss Ks, but can't get more than K px. b. Reliance (1) Puts injured pty back in status quo (a) out-of-pocket costs (b) proximate & foreseeable detriment due to breach (c) may incl. pain & suffering (2) Sullivan v O'Connor - Dr. promised 100% nose thru plastic surgery - enhance pf's beauty & improve her appearance. (a) Reliance damages used - puts injured pty back in status quo i) Out-of-pocket costs, worsening of condition, pain, suffering & mental distress. (13k award also has element of punishment in it) ii) includes consideration of her being an "entertainer" c. Restitution (1) Puts breaching pty back in status quo (2) Berstein v Nemeyer - Berstein & other investors put in $1 mil as limited partners in real estate partnership. Defendants induced pfs to invest by guaranteeing to lend the partnership the operating capital it would need in excess of cash flow. After loaning the partnership $3 mil, defs defaulted on their commitment, and mortgages were foreclosed. Both pfs & defs lost their entire investment. (a) Issue: may a ct award restitution when breaching pty has not benefitted from breach? (b) Holding: No, restitution puts breaching pty back in position they would have been in if K had not been made. Defs' property interests were not increased in value, nor were they otherwise unjustly enriched. (c) Expectancy measure inapprop. - lost profits hard to measure Reliance - K stated that relying on any promise as to return was unjustified. 6. Punitive damages - cts reluctant to apply (1) May get if breach accompanied by fraudulent conduct, involves breach of fiduciary duty, or arises in a specialized K (consumer sale or insurance) (a) CA declined to apply pun. damages to employment, limits it to 3rd party insurance relationships (harder to act in bad faith w/insured) (2) Can get if breach is also a tort for which pf could get punitives: "The breach must constitute an indep & willful tort accompanied by fraud, malice, wantonness, or oppression." - Res 2d '355 (3) Allen v Jones- Mortician supposed to cremate remains & mail them to deceased's brother. When package arrived, it was empty & remains had been lost. (a) Recovery allowed (partly punitive). Certain Ks so affect vital concerns of indiv. that severe mental distress is a foreseeable result of breach. Damages recoverable for mental distress w/o physical injury for negligent mishandling of a corpse. (b) Expectancy measure hard to concoct. Restitution is inadeq. Reliance can be force-fit: compare mental distress before & after incident. (c) General rule: mental distress or pain & suffering not recoverable in breach of K. In majority of Ks, it's not foreseeable that breach will cause significant mental distress. (supposed to have thick skin) (4) Boise Dodge v Clark - Clark bought car w/165 miles on odometer that salesman described as 'new'. Car actually had 7,000 miles on it. Should punitive damages be allowed? (a) Punitive damages of 13k allowed cuz conduct was fraud & was outrageous enuf that it deserved to be punished. (Area of sales where consumers unable to gain accurate info about product) (b) Expectancy damages would have been inadeq. Dif in value of promised car vs. actual car was only $350 7. Mitigation/Lost Volume Sellers a. scenarios (1) "one of me": Leo teaching at Boalt vs. Hastings - gets damages only if salary is less (2) unlimited supply = lost volume seller (3) more than one but less than infinite - use Diasonics b. UCC '2-703 - menu of choices for seller when buyer breaches 2-706 - seller can resell & get diff b/t resale px & K px *c. UCC '2-708: Seller's Damages for Non-acceptance or Repudiation (1) measure of damages is diff b/t mkt px and unpaid K px (a) appropriate when buyer breaches w/o paying anything (b) inapprop. if buyer pays entire or part of K px & then breaches cuz then damages to buyer are greater than if nothing paid (c) inapprop for lost volume sellers cuz breach cost the seller a 'profit' (2) if (1) is inadequate, then use lost profit d. Completion (1) UCC '2-704 - aggrieved seller may complete perf & damages that accrue will be chargeable to breaching buyer (2) Common Law - Once a breach occurred, parties went their own separate ways e. (UCC is designed to deal w/large volume of essentially fungible goods. Bulk of transactions involve lost volume seller, but UCC doesn't mention it.) f. Lost Volume Sellers - damages are lost profit (1) LV sellers have no oblig to cover. Can't make up for lost sale, cuz would have made the subsequent sale anyway (2) Locks v Wade - Wade repudiated K to lease jukebox for 2 years. Locks was able to rent jukebox to s.o. else. (a) Damages to Locks for K px minus cost of perf. [profit] (b) Rule: Where supply in mkt is unlimited, lessor should not be deprived of benefit of bargain. (c) Applic: Jukeboxes were readily available in the mkt but locations were hard to find. Locks would have been able to acquire & lease another machine if Wade had not defaulted. (3) R.E. Davis v Diasonics - Def contracted to sell some medical equip. to pf, which had contracted w/2 other parties to establish a medical facility. The 2 other parties breached, and pf breached its K by refusing to accept delivery of def's equip. Def resold equip to another pty for the same px. Pf sued to get its deposit back. D claimed damages for loss of profit on sale as a 'lost volume seller.' (a) Remanded. Diasonics can get damages under UCC '2-708(2) [lost profit] if it can establish, not only that it had the capacity to make the sale to Davis as well as resale buyer, but also that it would have been profitable for it to make both sales. It also must show that it probably would have made 2nd sale absent the breach. (test to det whether it's a lost vol seller)
g. Employment Ks/Services- "one of me" (1) An emp'ee cannot be a lost volume seller - there's only one of you (2) Not obligated to mitigate BUT (3) Failure to mitigate will reduce damages (a) has to be similar work, don't have to take inferior job (painting houses) or move to another state (b) if you do take inferior job, it acts as mitig. & reduces your damages (4) Breaching employer also has to pay reas costs for newspaper ads, Ks w/placement agencies, etc. (5) Cts reluctant to require specific perf - raises indentured servitude concerns (6) Parker v 20th Century Fox - Shirley McClaine agrees to act in "Bloomer Girl" for $800k. Fox decides not to make "Bloomer Girl" but offers starring role in "Big Country, Big Man" for same salary. (a) Issue: does offer by Fox act in mitigation of its damages? i) If yes, 2nd offer means that there's no breach. a) "Filmwork is filmwork, this is your job" ii) If no, she gets $800k for doing nothing. 6 ct chooses this a) "This is so diff, it's not a reas substitute" h. Timing of Duty to Mitigate (1) duty arises at time specified for K performance (not time of AR) *(a) Reliance Cooperage Corp. v Treat - Treat agreed to sell RCC oak staves for $450 (per 1000) on Dec 31. On Aug 12, Treat said he couldn't sell the staves at the K px. Mkt px on Dec 31 was $750. Px had been $500 on date of repudiation. 450(K)----500(AR)----750(perf) *i) Measure of damages is diff b/t K px & mkt px on the date delivery was due (not mkt px on day of repudiation). Otherwise, where mkt px rising, seller would be encouraged to repudiate. ii) RCC not req'd to mitigate til Dec 31. Ct adopts anti-anticipatory repudiation theory, on the basis that def might change his mind & perform, and we don't want to reward def's breach (2) OR duty arises after a commercially reas time (a) UCC '2-610(a) - when one party anticipatorily repudiates, the other may await perf. for a 'commercially reas time'. i) depends on mkt availability a) a lot of product 6 reas time is short b) a little of product 6 longer time to cut deal, time closer to perf ii) reas time for perf in Treat - short time would be comm. reas. + need to prevent predatory conduct by injured buyer if mkt px keeps rising, seller has to pay more. (Why would that be unfair? It'd just put RCC in position they would have been in if Treat hadn't breached) *(3) UCC '2-711 - Buyer's Remedies i) 'cover' - purchase substitute goods from s.o. else under '2-712 - recover diff b/t cost of cover & K px ii) recover damages for non-delivery under '2-713 - recover diff b/t mkt px at the time buyer learned of breach & K px i. Diminution in value - applies only to expectancy damages (a) Policy: balance econ waste against purpose to be served. (b) Peevyhouse v Garland Coal - GC contracted to remove coal from the Peevyhouses' land & then restore it to its previous state. GC doesn't restore and farm has become a wasteland. i) ct. holds that diminution of value of prop is appropriate remedy 6 $5000. (this is expectancy measure in a broad sense) a) economists: triumph of efficient breach over K, highest use of resources b) cites Jacob & Young: but pfs in completely dif position, not just wrong pipe. Desire & purpose here diff than outcome, unlike JY. ii) Cost to restore land to previous state is $30,000. a) Some values transcend K. Law ought to be practiced w/imagination. Judge should be artist, not stone-cutter. iii) Peevyhouse has never been followed. (c) American Standard v Schechtman - Pf conveyed bldgs & equip on land in return for $275k & def's promise to remove all structures & equip and to take down the foundations to one foot below the grade line. Def failed to take it down one foot. Pf was still able to sell it for $183k, $3000 below its full mkt value. Cost to complete taking down was $110,500. Pf sued for cost of completion. i) In favor of pf for $90,000. ii) Rule: When there's been subst. perf in good faith but defects exist & correction would result in econ waste, 'diminution in value' measure is approp. iii) Applic: Here, completion of K would not involve econ waste cuz nothing needs to be undone (unlike J & Y). iv) No subst perf: grading & removal of structures were not incidental to pf's purpose of 'achieving a reas attractive vacant plot for resale" (d) Eastern Steamship - Gov't K to use ship to transport soldiers. Gov't agreed to restore ship to orig. condition. Damages to ship were $4 mil, but value of restored ship would only be $2 mil (value of damaged ship - $1 mil). i) Damages only $1 mil (diff in value of restored ship & value of damaged ship) (e) Comparison of 3 cases: i) Peevy ignores desire to be gratified & purpose to be served Am.Std. - Landowner's conduct (selling) undermines desire & purpose E.Steamship - a ship is just a ship, no aesthetic component like land ii) Peevy hypos: a) If GM had mined wrong prop 6 full damages to owner - intentional nature of conduct is sufficient to make ct weigh that heavier than econ waste (like Am Std) b) Mitigation: If Peevyhouses' had covered & paid another co. to fix land for $29k, ct. has to assess whether mitigation was reas under the circumstances: 1) pf's acting out of line, attempt to bootstrap recovery OR i) GM can't search for cheapest option to restore, can't cure 2) a deal is a deal, pf's expect GM to pay for restoration i) pf's actually have out-of-pocket costs, GM has induced conduct as a form of reliance ii) mitig. is evidence of desire to be gratified & purpose to be served C. Implied Duties - Duty of Cooperation & good faith a. Patterson v Meyerhofer - Pf contracted to buy 4 properties for def at a foreclosure sale. Def attended sale & bought props herself for $620 less. (1) Since pf could have purchased the prop at the same price that def paid, pf should recover the $620 dif b/t the K px & what def paid. (2) Properties were unique. (3) Rule: a party may not intentionally & purposely do anything to prevent the other party from carrying out their part of ag. b. Iron Trade Products v Wilkoff - Def failed to supply pf with iron rails. Def claimed that there was a limited supply of rails & that after the K was signed, pf began to buy up this supply, raising the px above that where def could profitably perform the K. Pf sued for the added amt it had to pay to purchase the rails elsewhere. (1) Recovery allowed. ITP is free to go into the mkt & buy iron rail, esp. if it needs more, even tho' it's a thin mkt. ITP didn't know effect of its actions. (2) If ITP reselling steel 6 that would be evidence of bad faith c. Comparison of 2 cases: (1) In both, parties are competing for the thing which they contracted for (2) but in ITP, perf is still possible. In Patterson, perf is impossible, props were unique. (3) If mkt in ITP was too thin, it'd be like Patterson. d. Billman v Hensel - Billmans contracted to buy a home from Hensels & put up $1,000 in earnest money. A condition of the K was the Billmans' ability to get financing. Billmans tried 1 bank which wouldn't cover the whole amt. The Hensels offered to lower the px but the Billmans refused & stopped payment on check. (1) In favor of Hensels. The Billmans' token effort was not sufficient. Going to only one bank was a breach of the duty of cooperation. (2) A p'or cannot rely upon the existence of a condition precedent to excuse his perf when he prevents perf. of the condition. The Billmans had an implied oblig to make a good faith effort to satisfy the condition. D. Equitable Remedies/Specific Perf 1. Arguments against specific perf (cts disfavor): a. compulsion -13th Amend (invol servitude) concerns about compelling s.o. to perform b. difficulties of supervision - hard to oversee relations of 2 warring pties, force 2 pties who have had a dispute to continue to work together. c. certainty of K terms - ct must be able to det. duty of each pty w/ reas certainty 2. Arguments for specific perf: a. money is inadeq in some cases - e.g. special edition Corvette b. equitable considerations (1) uniqueness - Van Gogh painting (2) distaste for giving windfall to breaching party - car dealer ought not to be able to keep Corvette & sell it for higher px (3) manufacturing goods into an end item, e.g. Pentium chips in computer, aluminum coke cans c. inability to get product elsewhere - product in short supply d. difficulty of determining damages 3. Laclede Gas v Amoco Oil - Laclede was to purchase its rqmts of propane gas from Amoco & Amoco was to supply the gas req'd. A propane shortage caused Amoco to repudiate the K (px going up, Amoco wants to sell to s.o. else for higher px). Amoco claimed that it had the right to cancel the ag cuz the ag lacked mutuality - Laclede had the right to cancel but Amoco didn't. a. Specific perf ordered. Mutuality is nonsense, 1-sided provision is fine. b. Money damages inadeq 6 gas is unique, Laclede has promised homeowners to supply them w/gas. c. Ct's supervision will not be close supervision - indiv personalities don't play a part like in employmt context. d. Compulsion - applies more in employmt context, not K for fungible goods. e. Impracticability? No, risk of px rise is part of doing bus. for large co. like Laclede. 4. City Stores v Ammerman - Ammerman offered City Stores a place in their shopping ctr. in exchange for CS's favorable letter to zoning board. A. got a better offer from Sears. CS sued for specific perf. A. claimed that terms of option too indefinite to enforce. a. Specific perf ordered. K not too incomplete - can use leases for other dept stores as a guide. b. compulsion or supervision concerns - not big elements in a lease situation c. real prop is unique d. specific perf avoids complexity of trying to compute damages. 5. Not used in employment Ks a. ABC v Wolf - The last 90 days of Wolf's K w/ABC were to be a renegotiation period, and during the 1st half Wolf was not to negotiate w/anyone but ABC. If at that point the pties couldn't agree, Wolf could not accept any employmt w/o giving ABC right of 1st refusal (right to match terms). Wolf enters into oral ag w/CBS during the 2nd 45 day period.
(1) ABC entitled to monetary damages but not injunctive relief.
(2) Neg. specific perf can't be req'd cuz K ended already. Wolf breached the K negotiation clause, but it wasn't such as to permit an open-ended restraint on Wolf's ability to earn a living.
(3) Negative covenant not to perform/work elsewhere for a time is often an appropriate injunction, e.g. for entertainers, athletes.
b. Restrictive employmt ags (1) Ownership or proprietorship - if 1 of 2 partners split 6 law will respect ag not to compete (2) Regular employmt K - subject to state anti-trust provisions, viewed by cts w/suspicion, scrutiny (incl. emp'ees w/a little stock) (a) If enforced, temporal & geographic restrictions will be tight to allow employee to earn a living (b) It's bad public policy to force s.o. to be idle (c) Exception: Ags not to use proprietary info are enforced
E. Liquidated Damages Ags/Limitation Ags 1. Common Law: 2 rqmts to determine whether the liq damages provision will be interpreted as an enforceable liq damages clause rather than an unenforceable penalty clause: a. Hard to predict - the harm that is caused by the breach must be one that is incapable or very difficult of accurate estimation at time of contracting (1) Since it's hard to predict, wide latitude will be allowed. b. The amt must be a reas forecast of harm caused by breach at the time of contracting. 2. UCC '2-718: liq dam clause will be upheld if "reas in the light of the anticipated or actual harm caused by the breach" (slightly more liberal than CL) 3. CA Civil Code '1671(b): party seeking to invalidate clause has burden of proving that it's unreas. (free-mkt: allows pties to det consequences of breach). 4. Rationale for making liq provisions hard to enforce: a. Usurps too much of cts inherent power. We encourage freedom of K, but only to a certain point. b. Imbalance of bargaining power c. Prevent incentive to breach by underestimating liq damages 5. Southwest Engineering v U.S. - SW entered into Ks w/ gov't to build radio facilities. Liq damages clause for $50/day for 3 of Ks and $100/day for 4th K. SW was late on every K. SW argued that the liq damages were a penalty for breaching K - K damages not supposed to be punitive, and that there were no actual damages. a. Liq damages were a reas prediction of harm at the time of contracting (doesn't matter that there were no actual damages). Wide latitude allowed.
VI. THIRD PARTIES
A. Assignment & Delegation
1. Policy: free alienability/assignment of K rights 2. Terms a. obligor 6 obligee 6 assignee b. s.o. who owes another an oblig is called an obligor or promisor c. recipient of promise is obligee or promisee d. if recipient assigns right to s.o. else, the latter is an assignee e. obligor can transfer her oblig to delegate f. Assignee's rights are derivative, assignee gets only what assignor has. Assignee steps into shoes of obligee. (there are exceptions)
3. Assignment can mean
a. narrow: assignment of rights
b. broad: assignment of rights and delegation of duties together 4. UCC '2-210(2) and Res 2d '317 a. Assignment will be effective unless: (1) it would increase obligor's duty, burden, or risk (2) impair return perf (3) reduce value of return perf (only in Res) 5. Prohibition of assignment a. A contract term which prohibits assign. of rights doesn't render the assign. ineffective, rather it gives obligor right to pursue damages for breach of K. UCC '2-210(3) b. Damages: you get $ damages, not specific perf. If assign. is otherwise effective (except for term of prohibition) damages will be very small, cuz you don't have 8 burden, duty, or risk. c. Unless circumstances indicate the contrary, a prohibition of assignment is to be construed as barring only the delegation of perf. (UCC) - why? d. Errs on side of free alienability. 6. Assignments not enforced when duty, burden or risk increased: a. Alaska hypo - Leo is obligor to Hastings to teach K. Hastings assigns K to Alaska Law School. Assign. will be held ineffective cuz it increases his burden, impairs return perf, & reduces value of return perf. b. Crane Ice Cream v Terminal Freezing - Terminal contracted w/Frederick to supply him w/ up to 250 tons of ice per week. F. assigned his rights & delegated his duties to Crane, who took over his ice cream bus. Terminal refused to deliver ice. (1) Frederick was orig. obligee. Crane is assignee and delegate. (2) In favor of Terminal. (a) This was a 'personal' K emphasizing Frederick character and established track record. (b) Assign. would change T's obligations under the K. Crane had extensive business connections elsewhere & might not have purchased any ice or might have purchased 250 tons/week (F averaged much less than 250/wk) (3) Creditworthiness: Assign. increases risk if s.o.'s balance sheet is questioned. But it really goes to delegation side(?). 7. Other fact patterns a. Burrows v. Burrows - Mable gave daughter a post-dated check for $700, then died the next day before daughter cashed it. (1) Death of donor prior to payment operated as revocation of the order. A personal check is revocable by donor at any time prior to payment of check. (2) Rule: Generally, a gratuitous assignment will work (no consideration needed). Here, postdated check doesn't work under state law to evidence the assignment.
b. Continental Purchasing v Van Raalte
- Ethel Potter worked for Van Raalte under an employment K. Ethel assigned her wages to Steckler Sporting Goods, who subassigned them to Continental Purchasing. Van Raalte rec'd written notice of the assign. but arranged to pay Ethel $2/wk rather than leave her w/o income. CP sued Van Raalte to recover the wages paid to Ethel.
Van Raalte 6 Ethel 6 Steckler 6 Continental Purchasing
(1) Since CP succeeds to the rights of Ethel, Van Raalte must pay CP.
(2) Van Raalte should have argued that if we give effect to this assignment we might get diminished return since emp'ee's incentive to work 9.
(a) NY law precludes assign. of wages for partly this reason.
c. Ernst & Young v FDIC
- Ernst & Young agree to audit Western Savings. When WS goes belly up, it assigns its cause of action against E & Y to FDIC. E & Y claimed WS' net worth was $49 mil, when it was actually $200 mil in the hole.
(1) FDIC can maintain action against E & Y, FDIC is assignee.
*(2) But FDIC takes subject to defenses the obligor had against obligee, i.e. that WS was contributorily neg by giving false info. to E & Y.
8. Waiver of Defense clause
a. By such a clause, the buyer agrees not to assert against the assignee (bank, finance co., etc) claims or defenses which are available against the assignor (merchant).
b. Such clauses are not per se unenforceable. Test is whether it's unconscionable.
c. Leo's Electronics hypo - Leo sells "new" stereo to consumer, turns out to be a demo. Leo has assigned K to Continental Purchasing.
(1) Consumer 6 Leo 6 CP (assignee)
(2) Due to waiver of defense clause, consumer has to go after Leo, while still making payments to CP.
d. Holder in Due Course - assignee takes free of defenses (gen contract theory)
(1) Must meet certain conditions
e. Elderly person hypo - Gullible elderly man enters into K w/repairperson. Recommended repairs were bogus. Due to HDC & waiver of defense provision, K is enforced.
f. HDC & waiver of defense clauses are allowed cuz they aid marketability of these rights - assignee more likely to be willing to take it on. Waiver of defense stands up pretty well against unconscion. test.
9. Delegation of Duties
a. UCC '2-210(1): A party may perform his duty thru a delegate unless the other party has a substantial int in having orig p'or perform the K. (Res 2d '318 - same)
b. CA rule: there's a subst. int. when rare genius or extraordinary skill is req'd.
c. hypos: weigh desire to be gratified
(1) Leo can't delegate Hastings teaching responsibility to Farnesworth.
(2) Leo can't delegate oblig to paint Alison to a famous artist.
(3) Paint fence, shoeshine 6 only if it's of the type to require rare skill & genius
(4) Brain surgeon 6 no deleg allowed
(5) Law firm can delegate to newest assoc. (that's how law firm works)
d. Arnold Productions v Favorite Films
- Arnold contracted with Favorite for the sole and exclusive right to distribute etc. Arnold's films. The ag provided that it was personal & could not be assigned. Favorite subsequently contracted w/ a third party (Nationwide) to carry out distribution.
(1) Nationwide (delegate) - Favorite (o'or) - Arnold (o'ee)
(2) This was not a true assignmt cuz Favorite didn't divest complete right of control. F. was keeping tabs on Nationwide. (There was subst. int however).
(3) Both parties contemplated that most of actual dist to theaters would be delegated.
e. Sally Beauty v Nexxus
- Best became the exclusive TX distributor of Nexxus products. Sally Beauty purchased Best & Nexxus cancelled the dist. ag. Sally Beauty was a subsidiary of one of Nexxus' direct competitors.
(1) Deleg. not upheld. Nexxus has a subst. int in having distribution done by a non-competitor.
(2) Posner dissent: Sally Beauty would act in its own best fin. int. Leo's response: SB would have have access to N's pricing structure & insight into competitor.
f. Langel v Betz
- Langel made a contract w/H for the sale of land. H assigned the contract to B who assigned it to Isador Betz. Betz refused to perform duty under the contract, i.e. paying for land.
(1) Issue: is it both an assign of rights and a deleg of duties?
(2) Here, ct decides Betz has no oblig to pay for property cuz it's like an option relationship - this holding limited to real prop. (3) General rule: default position is blanket assignment - rights & duties. UCC & Res. B. Intended Beneficiaries
1. When a K is made for the benefit of one not a party to it, the third party as a creditor beneficiary may bring an action for its breach. a. Lawrence v Fox - Holly loaned $ to Fox and in consideration for the loan, Fox agreed to pay Lawrence, who Holly owed $ to. Lawrence, a 3rd pty beneficiary, sued Fox for payment. L (intended beneficiary) - Holly (p'ee) - Fox (p'or) (1) Action upheld. Enforceability of orig K is irrelevant: (a) Orig. debt b/t L & Holly may not have been enforceable, but the fact that L might not have been able to enforce the debt against Holly is irrelevant. Fox's oblig is against Holly & this contract is enforceable. Fox doesn't stand in Holly's shoes.?? (2) Gift - what if Holly gave Fox's oblig as a gift to Lawrence? L. could not enforce against Holly cuz it's a gratuitous promise (unless q-k). But L. could enforce against Fox cuz we're not looking contract betwn. L & Holly. (K b/t Holly & Fox must be enforceable & supported by consideration). 2. Intended vs Incidental beneficiaries: a. Calamari test: To whom does perf run? If the perf is to run directly to the p'ee, the 3rd pty is ordinarily an incidental ben., but if it is to run to the 3rd pty, he is ordinarily an intended ben. (1) e.g. If a bank promised A a loan to pay his creditors, the creditors are incidental ben. But if bank promised to pay the creditors directly, they are intended ben. b. Intent to benefit 3rd parties should be manifested in K c. Res 2d '302 - Unless otherwise agreed b/t p'or & p'ee, a beneficiary of a promise is an intended beneficiary if approp. to effectuate intention of parties and either (a) perf will pay p'ee's debt to beneficiary or (b) circumstances indicate that p'ee intends to give beneficiary the benefit of the promised perf. [may not be dominant view] 3. Assignee vs. Intended beneficiary
a. beneficiary not necessarily aware of his status (more informal)
b. beneficiary has status at time of K; assignee arises after K b/t p'or & p'ee 4. The absence of any duty of the promisee to the beneficiary has been held to negate an intention to benefit. (Status of promisee as gov't agency that owes no duty to citizens)
a. Fourth Ocean v Interstate Wrecking -
The Village of Atlantic Beach hires Interstate Wrecking to demolish burnt hotel belonging to Fourth Ocean. Fourth Ocean sued IW for incomplete job. 4th Ocean - city (p'ee) - IW (p'or) (1) Before K, city owed Fourth Ocean no duty, so after K intent to benefit it is negated. (even tho' benefit runs to Fourth Ocean) b. hypo: City has K w/ Water Co. After a fire, resident sues Water Co. cuz fire hydrant had no water in it. Resident claims to be an intended beneficiary since he's w/in class of persons the K is designed to benefit
(1) The city's lack of duty to its citizens (immunity) extends to resident. Since city had no duty to resident before K, intent to benefit him is negated 5. A 3rd pty may enforce a K if he can show that he is a member of a class intended to be benefitted by the K. (look at terms of K)
a. Johnson v Lincoln-Mercury
- When Caldera purchased a new car, the salesman promised to provide 'full coverage' on the car. Caldera got into an accident and hit the Johnsons, who sued the car dealer as 3rd party beneficiaries. (1) Applic: Johnsons are w/in the class of intended beneficiaries.
b. Zigas - Landlord had financing K w/HUD that included a rent schedule. Landlord charged Zigas & other pfs rent in excess of allowed rent.
(1) The lang of the Nat'l Housing Act shows that pfs were members of the class the Act was intended to benefit, thus pf are intended beneficiaries who have standing to sue as 3rd pty beneficiaries.
(2) Class of persons can be clearly determined here. You're an intended beneficiary unless you're shown not to be. (3) Ct doesn't address rule that since gov't isn't otherwise liable, intent to benefit is negated (in Martinez also) . c. Martinez v Sacoma - Sacoma promised DOL to give unemployed East L.A. residents jobs & breached. (1) Ct. held residents didn't have standing to sue as 3rd party beneficiaries: not w/in class, K intended to benefit neighborhood, not indivs. (Leo: class of intended beneficiaries harder to get a hold of). d. Suthers v Bookers Hospital Dist (TX) - Neil got a scholarship from the Eula Perry Memorial Scholarship fund for med school in exchange for practicing medicine in Booker for 10 yrs. 3 lawsuits as 3rd party beneficiaries: (1) Citizens of Booker - class too broad, depends on who gets injured (2) Booker Hospital District - After K was signed, BHD was created. Since it was after K & not part of K, no status as intended beneficiary. (Promissory Estoppel has a good chance tho') (3) Eula Perry - w/in class 6. Three types of 3rd party beneficiaries (Res uses only intended & incidental): a. Donee - recipient of a "gift promise" b. Creditors - recipients of "a promise to discharge the promisee's duty" (1) Visintine -V.'s work for the State was delayed due to the Railroad's nonperf. V. sued the Railroad for damages arising out of R's nonperf under its contract w/the State. (a) The state owed V certain oblig. which were to be performed by R. Altho' the State is not subject to suit cuz of immunity, the duties were still owed, making V. a creditor beneficiary. (How does this square w/Fourth Ocean?) c. Incidental - unintended recipient
7. Atty's liability to 3rd parties a. A maj of jdx still maintain privity barrier, barring 3rd pty recovery against attys. b. Hale v Groce - Client told his atty (Groce, p'ee) to prepare a bequest to Hale. After client died, Hale sued atty for failing to do it. (1) Hale is intended beneficiary under Res 2d '302. (2) Sort of a donor beneficiary - instead of promising to give $, atty is promising to draft a competent will. Enforce K to perform up to the standard of care. (3) Lucas v Hamm (CA S.Ct.) - attys can be liable to intended testamentary beneficiaries either for neg or for breach of atty's K with the testator.
c. Biakanja v Irving (CA S.Ct.)
(1) extent to which the transaction was intended to affect the pf
(2) foreseeability of harm to the pf
(3) degree of certainty that pf suffered injury
(4) closeness of connection b/t def's conduct & injuries suffered
(5) moral blame attached to def's conduct
(6) policy of preventing future harm
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