Contracts.docx

Contracts Remedies Damages for breach of contract Three Damage Interests Measures Expectation measure to put the promisee in the position he would have been in had the promise been performed default Reliance measure to put the promisee in the position he would have been in had the promise not been made where expectation uncertain entitled to reliance damages as an alternative Restitution measure to put the promisor in the position he would have been in had the promise not been made in case of total breach of anticipatory damages has choice between expectation and restitution damages Purpose prevent unjust enrichment Expectation damages Expectation damages loss in value benefit additional loss interests cost avoided RST The value of the undelivered thing is as of the time and place of contracted delivery Bush v Canfield Where the breaching party has substantially performed no material breach the expectation damages here is based on Cost of completion usually or Diminution in value where cost of completion is grossly disproportion to the benefit to be gained Peevyhouse v Garland Coal Hawkins v McGee Award expectation damages that is difference between value of promised perfect hand and present scarred and hairy hand Damages are measured by the terms of the contract Contract is binding because intended for promise to be taken at face value and relied Bush v Canfield Restitution damages awarded for paid in advance for wheat not delivered Where there is a total breach breaching party doesn't perform at all or anticipatory repudiation the injured party has the choice between restitution and expectation damages Here the original agreement was a losing contract so chooses restitution damages Value of the thing is as of the time and place of delivery in the contract Groves v John Wunder Co For breach of the promise to grade land in a land lease contract s damages should be cost of performance because breach was willful in bad faith owner s right to property improvement not hindered by its small value economic waste not applicable only applicable to wrecking a physical structure Davis where the promisee s subjective value of performance is greater than the market value value of performance is inadequate compensation Court here assumes that landowner places subjective value in building construction contracts Peevyhouse v Garland Coal Mining Co Damages for breach of remedial work after least held to be diminution in value instead of cost of performance because remedial work incidental to main contract cost of performance grossly disproportionate to economic benefit This is a default rule and parties are free to contract around it The Theory of Efficient Breach Efficient breach is one popular justification to rules in contract law There are two concepts of efficiency relevant to law both are relevant Pareto efficiency moving from one state to another makes at least one party better off and no one else worse off Kaldor-Hicks efficiency moving from one state to another makes the total system gain greater than total system loss Some scholars believe that the goal of contracts is to create mutual benefit and therefore contract law should promote Pareto efficiency Theory expectation damages rule produces efficient breach because it makes sure no one is worse off promisor will not breach unless his profit is greater than promisee s loss damages But this theory problematically assumes that there are no transaction costs there are other efficiencies other than efficient breach expectation damages adequately compensate promisee s loss Problems with efficiency theory many things incl undesirable things can be justified under efficiency the theory does not explain whether one distribution of wealth is better than another Limitations on expectation damages The award of expectation damages are subject to these three limitations Remoteness Foreseeability was the damage foreseeable at time of contract Uncertainty American courts are reluctant to award damages that are uncertain particular disadvantage to new businesses Avoidability injured party cannot recover damages avoidable through mitigation Foreseeability and avoidability also applies to the reliance measure Remoteness Hadley v Baxendale Courier mill shaft case Damages for breach of contract should be such as may fairly and reasonably by supposed to have been in the contemplation of the parties at the time they made the contract as the probable result of the breach of it Here special circumstances were not communicated at time of contract therefore loss of profits not recoverable Hadley rule default consequential damages not recoverable unless w in the parties contemplation at time of contract foreseeable I e naturally arising or special circumstances communicated RST Unforeseeability and Related Limitations on Damages pp - Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probably result of the breach when the contract was made Loss may be foreseeable as a probably result of a breach because it follows from the breach a in the ordinary course of events or b as a result of special circumstances beyond the ordinary course of events that the party in breach had reason to know A court may limit damages for foreseeable loss by excluding recovery for loss of profits by allowing recovery only for loss incurred in reliance or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation Uncertainty Different responses to damages calculations when involving uncertainty only reliance damages between contract date and breach Chicago Coliseum try to assess lost profits Chaplin award pre-breach wasted expenditures Anglia TV American rule uncertain damages not recoverable but party entitled to reliance damages Chicago Coliseum Club v Dempsey Action against boxer for breach in preparing for another match Only expenses incurred between date of contract and date of breach and those incurred as a necessary expense in furtherance of the performance are recoverable Court awards reliance damages because the expectation damages expected profits are too uncertain to assess Default rule parties may contract for liquidated damages instead Winston Cigarette v Wells Whitehead Tobacco N C S E pp - The allowance of damages upon the basis of a calculation of profits is inadmissible where there is no certain standard to guide the jury General rule may cause individual hardship but it is better that courts stand by a consistent rule than to invent new law RST Availability of Damages p The injured party has a right to damages for any breach by a party against whom the contract is enforceable unless the claim for damages has been suspended or discharged If the breach caused no loss or if the amount of the loss is not proved under the rules stated in this Chapter a small sum fixed without regard to the amount of loss will be awarded as nominal damages RST Damages Based on Reliance Interest pp - As an alternative to the measure of damages stated in the injured party has a right to damages based on his reliance interest including expenditures made in preparation for performance or in performance less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed RST Uncertainty as a Limitation on Damages p Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty Chaplin v Hicks the late beauty finalist case awarded damages for lost opportunity because Damages were in the contemplation of the parties not remote jury can try to assess damages even if the calculation cannot be precise English approach though sometimes followed in U S Anglia Television v Reed Film is abandoned because of s breach recovers wasted expenditure recoverable because foreseeable result of breach wasted because of breach in such cases has choice of claiming lost profits expectation damages or wasted expenditure reliance damages but not both Court awards expenditure because lost profits are hard to predict but would probably break even with the expenses Anglia not much authority Avoidability cannot recover damages that could have been avoided through mitigation Mitigation stop performance and or use resources would ve been devoted to performance to do something else If injured party incurs additional cost in mitigating the cost is recoverable Duty to mitigate kicks in as of date of breach repudiation In employment context injured party should make reasonable efforts to mitigate loss but not required to accept employment not comparable or humiliating Rockingham County v Luten Bridge Co After repudiated continues building bridge and sues for damages Court holds that damages expenses before breach profits which would have been realized had contract been performed Shirley Maclaine Parker v Twentieth Century-Fox Film Corp studio abandoned the contracted film and offers an alternative contract which doesn t accept sues for damages court grants full amount finding reasonably rejected alternative offer because it is different from and inferior to the original One justification it might be hard to assess s value of original contract cost of mitigation in which case requiring mitigation may undercompensate RST Avoidability as a Limitation on Damages p Except as stated in Subsection damages are not recoverable for loss that the injured party could have avoided without undue risk burden or humiliation The injured party is not precluded from recovery by the rule stated in Subsection to the extent that he has made reasonable but unsuccessful efforts to avoid loss Supra-compensatory damages Punitive Damages RST Punitive Damages p Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable Freeman Mills Inc v Belcher Oil Co Accounting firm retained by law firm for sues for breach of contract and punitive damages for tort of bad faith denial of contract Court overrules Seaman s Direct Buying Service Inc v Standard Oil Co holding tort recovery based on bad faith denial of contract unavailable except in insurance cases where there is a special relationship between the parties Restatement view no punitive damages available without a tort Relationship between insurer and insured is one of trust parties held to a higher standard of utmost good faith Problem Two Ellen Hamburger v Megaco In case of insurance company s bad faith denial of coverage punitive damages should be allowed Disgorgement Difference between restitution measure and disgorgement Restitution putting the promisor back in the position he would have been in had the contract never been made to the extent that the benefits were derived from the promisee Disgorgement putting the promisor back in the position he would have been in had the contract been performed Alternative explanation Restitution make promisor give back the benefit derived from the contract Disgorgement make promisor give back the benefits derived from the contract plus the benefit derived from the breach Attorney General v Blake Former secret agent breaches non-disclosure clause and publishes book on non-confidential information w o authorization Court holds that should disgorge profits gained from breach This is an exception to the general rule because s rights were invaded though he suffered no financial loss Davis it is unclear what makes an exceptional case in which disgorgement would be available Problem One Sisterhood of Andrea v Blair model breaches non-disclosure contract and publishes sisterhood secrets for K negotiating TV rights Like Blake may be entitled to disgorgement In addition may get injunction for TV contract Contractually stipulated measures of damages The law allows parties contractually limit liability downward but is reluctant to enforce stipulations for more liability than default rules provide Express limitations on consequential incidental damages Disclaimer clauses allow seller to limit liability and or damages One explanation for allowing such clauses is that the buyer is the superior risk-bearer in a better position to foresee losses and take precautions or insure against them UCC - Contractual Modification or Limitation of Remedy p Subject to the provisions of subsections and of this Section and of the preceding section on liquidation and limitation of damages the agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article as by limiting the buyer s remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts and resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive in which case it is the sole remedy Where circumstances cause an exclusive or limited remedy to fail of its essential purpose remedy may be had as provided in this Act Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation for damages where the loss is commercial is not Penalties Courts are willing to enforce liquidation damages but not penalties But the test to distinguish them reasonableness is vague Enforceable liquidated damages Reasonable forecast of harm Harm of breach difficult to estimate at time of contract If no loss retrospectively then clause is penalty and unenforceable Kemble v Farren Performance contract provided as liquidated damages for breach of any part of the agreement actor partially performs then breaches Court found to be penalty and not enforceable because not limited to uncertain harm Parties may include language specifying applicable situations to make liquidated damages enforceable but it s unclear how far you have to go Wassenaar v Towne Hotel s employment contract included a clause by which will pay for remainder of salary if is discharged before three years term After an early discharge finds other employment after three months then sues for damages Court holds stipulated clause valid not penalty and awards full damages because suffered actual loss unemployment no showing that jobs were comparable liquidated damages clause reasonable enforceable Lake River v Carborundum Under Illinois law liquidation of damages must be a reasonable estimate at the time of contracting of the likely damages from breach If damages would be easy to determine of if they exceed reasonable estimate of likely damages it is a penalty Policy concerns Argument for disallowing penalty penalty clause deters efficient breach Argument against disallowing penalty Willingness to agree to penalty clause makes promisor credible may be essential in inducing efficient contracts Parties will weigh cost benefits in deciding whether to include penalty clause RST Liquidated Damages and Penalties p Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty A term in a bond providing for an amount of money as a penalty for non-occurrence of the condition of the bond is unenforceable on grounds of public policy to the extent that the amount exceeds the loss caused by such non-occurrence Arbitration Parties can opt out of many default rules through liquidated damages choice of forum choice of law and arbitration clauses Arbitration may afford advantages such as secrecy Arbitrators can order splitting costs punitive damages penalty to third parties etc Specific performance and injunctions Equitable remedies are available when the thing is unique and damages do not afford adequate remedy These remedies have special limitations inapplicable to action for damages such as the clean-hand doctrine Two types of equitable remedies Specific performance ordering promisor to perform Injunction ordering party to refrain from doing something Contracts for land In a contract for land court may awarded specific performance as a matter of course irrespective of adequacy of remedies at law Assumption value of each piece of land is unique making damages inadequate remedy Loveless v Diehl Option to for tenant Diehl to purchase land Loveless repudiates after has made improvements to the land Court awarded specific performance even though in this case it doesn t leave parties better off than damages because was going to sell anyway Contracts for goods Generally no specific performance for contract for goods except where goods have unique or sentimental value or not otherwise readily obtainable Cumbest v Harris Stereo equipment case Court awarded specific performance of option contract for to buy stereo back because there is unique sentimental value and not otherwise obtainable Scholl v Hartzell Chevrolet case tendered deposit repudiates sues for specific performance or expectation damages Court finds Chevrolet not unique denying specific performance It also holds that tender of deposit does not give rise to immediate and exclusive rights therefore no replevin Sedmark v Charlie s Chevrolet Sedmark awarded specific performance of contract for sale of a limited-edition Corvette Reasoning car is limited edition and tailored to Sedmark s requests cannot obtain another without substantial cost and delay UCC - Buyer s Right to Specific Performance or Replevin pp - Specific performance available when goods are unique or in other proper circumstances Buyer has right of replevin take possession of the goods until court decides who owns it if after reasonable time he is unable to cover for such goods or if circumstances indicate such efforts would be unavailing Contracts for personal services Specific performance never ordered for personal services mandatory rule although injunction may be available Mary Clark Clark breaches contract of servitude Once she breaches servitude no longer voluntary and coercing performance would constitute slavery Therefore court cannot constitutionally order specific performance or allow master to personally coerce performance Theoretically however Clark should be allowed to breach but liable for damages Lumley v Wagner Contract stipulates that Wagner would only perform for breaches to perform for Gye awarded injunction preventing from performing in any other venue w o s consent Court here says that K includes negative stipulation but even if it didn t an implied negative stipulation would be consistent with K since good faith prohibits parties from breaching at will Note court awards injunction but cannot award specific performance Dallas Cowboys v Harris football player enjoined from playing for a rival football team Reasoning is a person with exceptional and unique knowledge skill and ability in performing the service contracted for loss hard to estimate in value cannot easily be replaced may be compelled to perform specific performance not available injunction While damages may not provide complete compensation specific performance does Specific performance doesn t necessarily preclude efficient breach because parties can still bargain for release after court orders specific performance and resell to another party Damages value calculated as of date of breach Specific performance value calculated as of date of trial This may be significant where value changes between time of breach and trial Tortious interference with contract Third-party who induces a party to breach may be liable to the injured party for his damages resulted therefrom Lumley v Gye A party may be liable for interference with contractual rights even if he believes that the agreement giving rise to such rights is not legally binding Texaco v Pennzoil where there is only an agreement to agree but held to be enough Punitive damages available because this is a tort Pennzoil awarded B punitive damages Tortious interference with contract does NOT apply to marriage contracts RST Intentional Interference with Performance of Contract by Third Person p One who intentionally and improperly interferes with the performance of a contract except a contract to marry between another and a third person by inducing or otherwise causing the third person not to perform the contract is subject to liability to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract Elements of tortious interference intention improper interference contract pecuniary monetary loss Formation Mutual Assent The objective theory of assent The meeting of minds is determined by manifest intentions expressed by works or acts not parties secret intentions The test is an objective reasonable standard subject to court determination after the fact In assessing the reasonable person s belief courts may consider language reliance formality completeness definiteness promisor s interests custom terms Embry v Hargadine McKittrick Dry Goods Co Employee Embry asked for one-year contract renewal or he would quit immediately McKittrick said Go ahead you re alright Court reversed judgment for holding that if promisor s words would be understood by a reasonable man as a contract and promisee so understood it then contract is formed regardless of promisor s real intentions If belief is reasonable yet promisee doesn t in fact so believe then still no contract Texaco v Pennzoil Look to the intent of contracting parties as outwardly or objectively demonstrated to each other by their words and deeds Not determined by the parties secret inward or subjective intentions Lucy v Zehmer If the outward manifestation of assent forms a contract then promisor s claim that he s not serious is not a defense nor is the fact that they ve been drinking Lucy in fact believes there is a contract and the belief is reasonable because formality K written and signed subsequent conduct Lucy s reliance completeness title satisfactory to buyer terms of K negotiation Court ordered specific performance RST Requirement of a Bargain p Contract formation requires a bargain where there is a manifestation of mutual assent to the exchange and a consideration except Contract may be formed with formalities regardless of existence of bargain Comment c Meeting of the minds parties usually give actual and apparent consent but a party s mental reservation does not invalidate his assent and the contractual obligations RST Manifestation of Mutual Assent p Manifestation of mutual assent to an exchange requires that each party either makes a promise or begin or render a performance RST Conduct as a Manifestation of Assent p Manifestation of assent may be by written or spoken words or by acts or failure to act A party s conduct does not manifest assent unless he intends to engage in the conduct and knows or has reason to know that other party may infer his assent from the conduct A party s conduct may manifest assent even though he doesn t in fact assent In such cases contract is voidable for fraud duress or other invalidating cause RST Mode of Assent Offer and Acceptance p Mutual assent usually is an offer followed by an acceptance There may be manifestation of mutual assent even though the offer and acceptance can t be identified and the time of formation can t be determined The objective standard encourages people to take precautions against inducing other party s reasonable reliance and causing harm Reliance is often used as evidence to establish reasonableness although it only shows what the promisee believes and he can believe for unreasonable reasons Offer Preliminary negotiations An advertisement mail order catalog price quote etc is not an offer but merely an invitation to treat deal because it contains general unspecific terms Note under RST terms must be reasonably certain for K to be binding terms left open may indicate no contract However UCC allows contracts for goods to be formed with terms time place price etc left open if parties intend to be bound UCC has default rules to fill the gap of missing terms Nebraska Seed Co v Harsh The letter and sample sent was merely an advertisement because it was indefinite in its terms cannot have intended to be bound to sell to each party who receives advertisement and buyer should consider this The advertisement was an invitation to treat not an offer therefore cannot simply accept No contract formed Note Under UCC you can have leave some details out and still form a contract Leonard v Pepsico Pepsi points commercial showing Herrier Jet does not in itself constitute an offer because a reasonable person would recognize it is evidently done in jest and because the advertisement is not sufficiently definite refers to Catalog Even if Catalog contained the jet still not an offer merely invitation to deal Empro Manufacturing v Ball-Co Manufacturing Empro negotiated to purchase Ball-Co s assets Parties signed a letter of intent that is subject to a number of conditions a later formal agreement and the approval of Empro s board Negotiations became sticky and Ball-Co started negotiating with someone else Empro sued claiming that letter of intent is binding Court dismissed because the subject to language indicated that parties did not intend to be bound and letter included only general terms and conditions parties have yet to settle on specific terms Davis court here finds that neither party intended to be bound but in fact this is not so clear Empro left itself escape patches but Ball-Co didn t and may have intended to be unilaterally bound Absent a flat disclaimer subject to and letter of intent do not definitely indicate that parties did not intend to be bound Texaco v Pennzoil Question of whether the agreement between Getty and Pennzoil indicated intent to be bound New York law allows parties to be bound formally or informally as they wish The language and completeness of Memorandum of Agreement press release and other correspondence allows reasonable jury to decide either way so appellate court upholds jury verdict for Pennzoil RST Preliminary Negotiations p Manifestation of willingness to enter into bargain is not an offer if the other party knows or has reason to know that the manifesting party does not intend to be bound until he makes further assent RST Existence of Contract Where Written Memorial is Contemplated p Manifestation of assent sufficient to form contract will not be invalidated by the fact that parties also intend to create a written memorial However circumstances may show that the agreements are merely preliminary negotiations not mutual assent RST Certainty p Offer cannot be accepted to form a contract unless the terms are reasonably certain That is provides basis for determining breach and remedy Term s left open or uncertain may indicate that party did not intend to be bound UCC - Formation in General p Contract for sale of goods may be formed by manner sufficient to show agreement including conduct by both which recognizes existence of contract Contract may be formed even though time of formation cannot be determined Contract may be formed even though term s have been left open if parties intended to make a contract and there is reasonably certain basis for determining remedy UCC - Offer and Acceptance in Formation of Contract p Unless otherwise unambiguously indicated by language or circumstances An offer can be accepted in any way reasonable under the circumstances Order or other offers to buy goods invites acceptance by prompt shipment or promise to ship but shipment of non-conforming goods is not acceptance if seller notifies buyer that shipment is offered only as an accommodation to buyer Emanuel seller accepts by shipping regardless of whether or not goods conform Shipping non-conforming goods is also breach unless it is indicated as accommodation in which case buyer can return no K or keep the goods K formed Where the beginning of performance is reasonable acceptance offer may be treated as lapsed if offeror is not notified of acceptance within reasonable time UCC - Open Price Term p If the parties so intend they can form a valid contract even though price is not settled The price shall be reasonable price at time for delivery if Nothing is said as to price or Price is left to be agreed and parties fail to agree or Price to be fixed by some standard set by third-party and it is not so set A price to be fixed by buyer or seller means to be fixed in good faith If price is left to be fixed and it fails to be fixed by one party s fault the other party may treat the K as cancelled or fix a price himself Where parties do not intend to be bound unless price is fixed no fixed price no contract Buyer must return goods received or pay its reasonable value seller must return payment UCC - Absence of Specified Place of Delivery p Unless otherwise agreed Place of delivery is seller s place of business or his residence If the goods is known to be at some other place at time of contract then delivery at that place Documents of title may be delivered through customary banking channels UCC - Absence of Specific Time Provisions Notice of Termination p Time of performance unless specified is reasonable time Where K provides for successive performances but is indefinite as to duration it will be valid for a reasonable time then subject to termination by either party Unless K is to be terminated upon some agreed event termination requires reasonable notification Agreement to waive termination is invalid if unconscionable UCC - Open Time for Payment or Running of Credit Authority to Ship Under Reservation Unless otherwise agreed Payment is due at time and place buyer is to receive the goods Shipping with reservation buyer may inspect the goods before payment is due unless this is inconsistent with K Delivery by document of title payment is due at time and place buyer is to receive documents Shipping on credit credit period starts running from time of shipment but post-dating invoice or delaying dispatch will delay the running of credit Revoking an offer Offer expires after a reasonable time or as soon as it is revoked Offeror is the master of his offer giving offeree power to accept and deciding the acceptable forms of acceptance Under common law offeror may revoke at anytime before acceptance Under UCC however firm offers are available but must be written and signed and no longer than months Dickinson v Dodds Option for purchase of real estate for a certain amount of time When learns that is selling to someone else he accepts in three ways and sues for specific performance Court holds no enforcement because offeror may revoke at any time before acceptance once he has revoked there is no meeting of the minds Offeree may not bind the offeror to a revoked offer even if the revocation has not been communicated RST Option Contracts p A promise which meets the requirements of contract formation and limits promisor s power to revoke RST The Offeree s Power of Acceptance p Offeror gives the offeree power to form contract by acceptance Contract cannot be formed by acceptance after power of acceptance is terminated RST Methods of Termination of the Power of Acceptance p Offeree s power of acceptance may be terminated by Rejection or counter-offer by offeree Lapse of time Revocation by offeror Death or incapacity of either party Power of acceptance also terminated by the non-occurrence of any condition of acceptance RST Termination of Power of Acceptance under Option Contract p Power of acceptance under an option contract is not terminated by rejection counter-offer revocation or death incapacity unless requirements for discharging contractual duty are met RST Revocation by Communication from Offeror Received by Offeree p Offeree s power of acceptance is terminated when he receives offeror s revocation RST Indirect Communication of Revocation p Offeree s power of acceptance is terminated when offeror takes action inconsistent with intent to enter contract and offeree acquires reliable information to that effect UCC - Firm Offers p Offer by a merchant to buy sell goods in signed writing which assures that it will be held open is not revocable for lack of consideration for the time stated or reasonable time but in no event to exceed months If the assurance is on a form supplied by offeree it must be separately signed by offeror Acceptance Acceptance is usually by either a return promise bilateral contract or performance unilateral contract Offeror is the master of his offer and may determine what counts as acceptance Offeree may accept in any manner the offer specifies or where unspecified in any reasonable manner Acceptance rules are default rules and parties can contractually specify what counts as acceptance Acceptance by correspondence The Mailbox Rule When acceptance is communicated by means other than face-to-face it becomes effective upon dispatch even if the communication breaks down and offeror never receives it Default RST Time When Acceptance Takes Effect p Unless offer provides otherwise Acceptance by means invited by offer is operative and completes mutual assent as soon as put out of offeree s possession regardless of whether it reaches the offeror but Acceptance under option contract is not operative until received by offeror RST Acceptance by Telephone or Teletype p Acceptance by substantially instantaneous two-way communication is governed by principles of face-to-face acceptance RST Reasonableness of Medium of Acceptance p Unless circumstances known to offeree indicate otherwise reasonable means of acceptance is one used by the offeror or is customary in similar transactions at time and place the offer is received RST Acceptance Must Be Properly Dispatched p Acceptance at a distance is not operative unless properly dispatched to ensure safe transmission Acceptance by performance and unilateral contracts An offer to a unilateral contract is one that invites acceptance by performance of or refrain from some act Once such offer is made it can only be accepted by complete performance However RST provides that once offeree begins to perform partial performance the offer becomes an option contract temporarily irrevocable even though the contract is only formed after performance is complete Carlill v Carbolic Smoke Ball s advertised award is a valid offer because it is intended to be understood as such Court looked at the assurance promisor s interest and unambiguous terms Since the offeror invites acceptance by performance and the language of the offer does not require notification notice of performance counts as notice of acceptance and is enough to form a contract Bowen J performance is enough notice not required Davis There are three possible points at which this contract could be formed purchase performance as directed or claiming the reward Majority opted for dissent for which would be significant if Carbolic revoked after s performance but before her letter to claim reward Leonard v Pepsico Acceptance by performance not enough because the commercial did not invite acceptance by simply showing up with enough Pepsi Points Instead it referred to the Catalog which does not include the Harrier Jet The commercial is not an offer of reward but merely an offer to deal White v Corlies Tifft builder tenders an estimate receives a note saying upon an agreement you can begin at once partially performs without notifying of his acceptance revokes sues Court finds s partial performance insufficient as acceptance because the determination to accept is not communicated to offeror therefore no binding contract Davis where offer invites acceptance by performance partial performance will qualify as acceptance Here it is not entirely clear whether or not the note invited acceptance by performance However the estimate is clearly not an offer by law Petterson v Pattberg Communication notification is not enough Only complete performance would make a binding contract here made an offer for a unilateral contract offering to discount the mortgage price if it is fully paid before a certain date partially performs by paying the installments but is free to revoke selling the mortgage to a third person before completely performs by tending the full amount RST Form of Acceptance Invited p An offer may invite require acceptance by a an affirmative answer in words b performing or refraining from performing a specified act or may empower offeree to select terms in his acceptance Unless otherwise indicated an offer invites acceptance in any manner and by any medium reasonable under the circumstances RST Invitation of Promise or Performance p In case of doubt an offer is interpreted to invite acceptance by either promise or performance as offeree chooses RST Option Contract Created by Part Performance or Tender Blackboard Where offeror invites acceptance by rendering performance not by promise an option contract is created when the offeree tenders or begins the performance The offeror s contractual duty under such option contract is conditional on the completion or tender of the invited performance Comment b This is to protect the offeree who justifiably relies It does not apply where offeror reserves the right to revoke after performance because it means there is no promise no offer Example where performance requires cooperation of both parties and offeror reserves right to refuse to accept performance there is no offer Acceptance by silence Generally silence does not constitute acceptance However prior dealings may make acceptance by silence reasonable Also if offeree acts inconsistently or takes the benefit with reasonable opportunity to reject the goods she may be bound by her silence Hobbs v Massasoit Whip Co had always accepted and paid for eel skin offered by In this case there was no formal acceptance or payment and retains the skins until it is destroyed sues Court held that silence constitutes valid acceptance based on prior dealings Book club variation Where there no prior dealings silence is not acceptance We don t want people to force acceptance by sending products However if you open the book and starts reading it there is K RST Acceptance by Silence or Exercise of Dominion pp - Offeree s silence and inaction only operates as acceptance where Offeree takes the benefit with reasonable opportunity to reject and with reason to know that they are offered with expectation of compensation Offeror has indicated that silence can be acceptance and offeree intends to accept by remaining silent Previous dealings or otherwise makes it reasonable for offeree to notify offeror if he does not intend to accept Offeree who does any act inconsistent with the offeror s ownership of offered property is bound according to offered terms unless they are manifestly unreasonable Disclaimers of intention to be legally bound Such disclaimers do not always convince court of the parties intentions To be enforceable the disclaimer needs to be clear and conspicuous unambiguous and not contradicted by the parties conduct Ferrera v A C Neilsen Statements made in employee handbook limiting employer s right to discharge may be the basis for breach of implied contract or promissory estoppel claims For implied contract the statements must manifest employer s intent to be bound For promissory estoppel the employer must reasonably have expected the employee to consider the promise a commitment Here employer has clearly and conspicuously disclaimed intent to enter a contract limiting discharge right Summary judgment for affirmed Evanson v Colorado Farm Bureau On similar facts directed verdict held improper and case remanded where there is conflicting evidence as to employer s actual discharge procedure and disclaimer clear not emphasized Eiland v Wolf Medical student sues school for dismissal claiming breach of contract based on school catalog Appellate court holds that because there is express disclaimer of intention to be bound there is no contract and therefore no breach Consideration Bargains and gratuitous promises Consideration must be something Bargained for the consideration is intended to induce the promise and the promise is intended to induce the consideration Benefit detriment the consideration must confer a benefit on the promisee or be a detriment to the promisor Adequacy not important English courts not concerned at all with the adequacy of the consideration American courts generally don t care about adequacy either but may at some point say it s a mere sham Gratuitous promises promises to give gift generally unenforceable for lack of consideration Promise not binding until the gift is actually tendered It is often difficult to distinguish between gratuitous promise and bargained-for promise Can conditions for giving a gift be construed as consideration One approach is to look for a specific thing e g a plaque for donation another approach is to say promise only enforceable under promissory estoppel doctrine instead of consideration Conflicting policy concerns some promisors want the flexibility of changing their minds while others want their promisee to rely on the promise Also there may be efficiency concerns Johnson c Otterbein University Promise to give a gift not enforceable for lack of consideration Duty to apply the gift to a specific corporate purpose is not sufficient consideration because it is not a detriment to the university Hamer v Sidway Refraining from drinking and gambling is consideration Uncle Story s promise of is bargained for and thus enforceable Davis It seems like the parties didn t intend for the promise to be binding The uncle apparently wanted to preserve his flexibility and the nephew didn t seek to enforce the promise before uncle died In the context of family members it is unusual for parties to intend to be legally bound and courts will be skeptical to find consideration Dahl v Hem Pharmaceuticals Patients submitting themselves to experimental drug testing was valid consideration in exchange for year s supply of free drugs Contract binding RST Offer Defined p Proposal of a gift is not an offer unless it specifies a promise or performance by the offeree as consideration Contingency of the gratuitous promise is insufficient as consideration Example A promises B if B goes to college If it is to pay for college then offer If B knows it is only a gift not an offer RST Requirement of Exchange Types of Exchange pp - To constitute consideration a performance or return promise must be bargained for Bargained for promisor sought it in exchange for his promise promisee gives it in exchange for that promise The performance may consist of An act other than a promise or A forbearance or The creation modification destruction of a legal relation The performance return promise may be assigned by promisor and or delegated by promisee Comment b Bargained for mutual reciprocal inducement as manifested externally A mere pretence of a bargain e g false recital or nominal consideration is not enough RST Consideration as Motive or Inducing Cause p The mere fact that a promise doesn t of itself induce the consideration or that a consideration doesn t of itself induce the promise doesn t prevent those things from being valid promise consideration Comment a What counts is that there is the intent to induce the exchange and be induced by it Comment b It doesn t matter if the parties have other motives Unless both parties know that the consideration is mere pretense it is immaterial that the promisor s desire for the consideration is merely incidental to other objectives Past consideration Past consideration does not constitute consideration because there is no relationship of mutual inducement If there was an implied promise that induced the performance then the performance is consideration even though the explicit promise is made later Moore v Elmer Moore told Elmer s fortune at his request but without any understanding or implication of payment After services were rendered Elmer promised to pay Moore s mortgage if he dies before He does but court says promise not enforceable because the service was past consideration rendered before the promise to pay Moral consideration There is a distinction between legal and obligation and moral obligation Legal obligation is always sufficient consideration while moral obligation is not Moral obligation is sufficient consideration however where the promisor himself has received a material substantial benefit Webb In such cases promises made in recognition of previously received benefit may be enforceable to the extent necessary to prevent injustice RST fair amount of judge s discretion Mills v Wyman Father sick son and good Samaritan case After Mills had incurred all the expenses for Levi Wyman he notified the father Seth Wyman who wrote back promising to pay the expenses Here the adult son is no longer the legal obligation of and therefore received no benefit from s services and his promise to pay is merely gratuitous not enforceable Webb v McGowin Webb saves McGowin s life but is permanently injured as a result McGowin promises to support for the rest of his life and makes due payments After his death McGowin s testator discontinues the payments Court held there was valid consideration because promisor received a material substantial benefit and the promisor is himself the beneficiary enforceable RST Promise for Benefit Received pp - Promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice Such a promise is not binding if the promisee conferred the benefit as a gift or for other reasons promisor has not been unjustly enriched or to the extent that the value is disproportionate to the benefit Compromises Compromise of a doubtful right asserted in good faith is sufficient consideration for a promise Dyer Courts generally will not inquire into the adequacy of consideration Dyer v National By-Products Inc forbearance from litigate a claim is valid consideration if the promisor believed in good faith that he had a valid claim even if the claim later turns out to be ill-founded Bad faith assertion of claim is not valid consideration because it is akin to a hold-up Court will not enforce agreements where a bluffing party threatens to bring frivolous suits RST Adequacy of Consideration Mutuality of Obligation p If requirement of consideration is met there is no additional requirement of Gain advantage benefit to promisor or loss disadvantage detriment to promisee Equivalency in values exchanged but disparity in value sometimes indicates the consideration is mere formality or pretense and not bargained for in which case the consideration requirement is not met Mutuality of obligation Preexisting duty contract modifications Three rules of contract modifications Preexisting duty rule old common law no longer used if duty already exists and there is no new consideration then modification is not enforceable Concern about hold-ups RST more liberal Allows modification where fair and equitable in view of unforeseen circumstances or detriment in reliance UCC completely abandons the preexisting duty rule Contract modification in sales of goods requires no consideration but comply with the implied good faith requirement To get around the lack of consideration problem the parties can Add or change the duties can be slight but must be more than nominal consideration or Revoke the original contract and make a new one Stilk v Myrick After two crew members deserted and captain unable to replace them he promised to increase the wages of the remaining crew members Court held modification occasioned by emergency but providing no new considerations unenforceable No consideration because sailors duty is whatever necessary to bring ship back to port including under emergency Alaska Packers Assn v Domernico fishermen while in Alaska strike for wage increase Having no choice s superintendent agreed to modify contract s return refuse to pay increased compensation s sue Court holds there is no consideration and s coerced modification unenforceable Brian Construction and Development Co v Brighenti excavation subcontractor after commencing work discovered unexpected underground debris agreed to modify the contract for the extra work Court held where unforeseen circumstances impose additional obligation burden not previously assumed the new agreement is supported by consideration and thus enforceable U S v Stump House Specialties Manufacturing Court should enforce contract modifications regardless of consideration and rely on the defense of duress to prevent abuse J Posner Party is vulnerable to hold-up when there is a credible threat b no substitutes c no adequate remedies sailors can t pay damages d relationship-specific investment Relationship-specific investment If sailors threaten breach shipowner will be willing to pay a wage up to the full value of ship cargo instead of just up to his profits Concerns with enforcing hold-up modifications a discourage investment b makes value of contract uncertain c undermines incentives to take precautions e g against colleagues desertion d increase transaction costs from having to renegotiate terms But refusing to enforce modifications may cause sailors to simply breach without renegotiating creating same concerns as above except saving extra transaction costs Allowing parties to renegotiate for unanticipated situations may be more efficient by saving parties upfront transaction costs American courts do not recognize forbearance from using right to breach as a consideration RST Modification of Executory Contract pp - A modification of executory contract not fully performed on either side is binding if modification is fair and equitable considering the circumstances unanticipated by both parties at time of contract or to the extent allowed by statute or to the extent that justice requires in view of material change of position in reliance of promise UCC - Modification Rescission and Waiver p An agreement modifying a contract needs no consideration to be binding Comment But the modifications must meet the good faith requirement imposed by UCC including observance of fair dealing standards or objectively demonstrable reasons for modification However a market shift that makes performance unprofitable may be sufficient grounds for modification even though it does not create an excuse from contractual performance Formalities The function of formalities Formalities serve these functions Evidentiary evidence that transaction took place Cautionary parties had time to reflect on the transaction before seriously committing themselves through use of a ritual Channeling earmarking signal to court that legal enforcement is desired Clarification reducing agreement to writing helps parties work out the details Some say that consideration is a form of formality but American courts look for more than mere formality in consideration The Seal Traditionally seal imports consideration absent fraud seal serves as substitute for consideration and makes promise enforceable The effect of seal starts to decline however as seals become more and more informal Use of seal is now completely abandoned in sales of goods UCC and where not abolished in common law its effects are greatly limited RST Requirements for Sealed Contract or Written Contract or Instrument p Absent statue a promise is binding without consideration if it is in writing and sealed and the document containing promise is delivered and the promisor and promisee are named in the document or identifiable when delivered UCC - Seals Inoperative p Affixing a seal to a written agreement for sale of goods does not make it an enforceable contract Nominal consideration and false recitals of consideration Where consideration is nominal and clearly intended as such it is mere pretense and not valid consideration K unenforceable However nominal consideration false recital of consideration can make option contracts or promises to pay enforceable purported consideration need not be adequate Schnell v Nell Wife left will to give Nell but had to estate in her name husband Schnell out of love and respect promises to pay in consideration of and s forbearance of claims against wife s estate The agreement was supported by formalities nominal consideration signature writing witness Court found neither love respect forbearance of invalid claim nor intentionally nominal consideration count as valid consideration unenforceable Smith v Wheeler Wheeler offers Smith an option to buy property in consideration of and recites its payment though in fact unpaid Court holds that the recital of nominal consideration gives rise to an implied promise to pay option K enforceable Minority view Majority party can show by parol evidence that no consideration paid or expected K nullified Jolles v Wittenburg Seal imports consideration but rebuttable however recital of nominal consideration is sufficient as a matter of law though it is not actually paid RST Requirement of Exchange Types of Exchange p Comment b A mere pretense of bargain does not suffice False recital of consideration or nominal consideration are not valid consideration K enforceable only as promise binding without consideration e g option contract guaranty promissory estoppel RST Option Contract pp - - An offer is binding as an option contract if it is in writing and signed by offeror recited consideration and proposes an exchange on fair terms within reasonable time Comments Option contract requires consideration formality Nominal consideration shows there is no bargain no consideration However it suffices to support a short-time option that will later lead into exchange on fair terms Absent statue this formality is essential False recital of nominal consideration also supports a short-time option The recital serves only as a formality the option is not invalidated by inadequacy of consideration or by the fact that it wasn t in fact give RST Guaranty Promise to pay perform a contractual obligation if written signed and recites a purported consideration Like option contract nominal consideration or false recital of consideration are enough Written expressions of intention to be legally bound Majority view written expressions of intention to be legally bound do not make enforceable contracts absent consideration or a formality Some states e g PA has made contracts without consideration binding if there is express intent to be bound RST where statues provide that written contract is binding without consideration it must be signed by or assented to by promisor and expressed in writing where both parties manifest assent The Statute of Frauds Certain types of contracts are not enforceable unless made in writing These contracts fall under the Statute of Frauds which is essentially the same in all states Statue of Frauds was designed to prevent meritless claims But this could be a trap for the unweary since promisors can make false promises and revoke at promisee s detriment Parties who have conferred benefits on the other may recover for restitution Boone v Coe s KY farmers were orally promised cultivation of and residence on land in TX for one year starting at a later date s relocate to TX refuse to allow use of land s return to KY and sues for reliance damages Court held for because contract could not be performed within one year i e could not be fully performed within a year thus unenforceable unless written Exceptions to the Statute of Frauds where promisee partially pays or makes improvements may sue for restitution Here s conferred no benefit on therefore not excepted Riley v Capital Airlines agreed to sell and airlines agreed to buy water methanol for five years No written contract If -yr contract then SofF if blanket purchase order then each transaction separately enforceable outside SofF The product is specifically manufactured for and cannot be sold to others Court held that each portion that has been accepted and paid for is enforceable but that the executory portions are not allowed to recover reasonable expenditure made in reliance of K RST Classes of Contracts Covered by Statue of Frauds pp - These classes of contracts are covered by Statute of Frauds Executor-administrator K of executor administrator to answer for a duty of the decedent Suretyship K to answer for the duty of another Marriage K made upon consideration of marriage Land contract K for the sale of an interest in land including lease mortgage etc One-year K not to be performed within one year of the making of the contract must be impossible to be fully performed within one year this provision applies to all contracts These classes traditionally covered by SoF now governed by UCC K for the sale of goods worth K for sale of securities K for sale of personal property where enforcement involves in value or remedy In addition UCC requires a writing signed by debtor Most states SoF provide that contracts cannot opt out of a statue of limitations unless the party to be charged agrees in signed written document In many states there are other classes of contracts that require writing RST Contract to Transfer Buy or Pay for an Interest in Land p A promise to transfer any interest in land in within the Statute of Frauds This is do regardless of who the promisee is When such transfer has been made SofF cease to apply and promise to pay is binding unless the price is itself an interest in land Most states take leases for one year or less out of SofF RST Action in Reliance Specific Performance p Specific performance is available in land contracts despite the Statute of Frauds if promisee in reliance so changed his position that injustice can only be avoided by specific enforcement RST Contract not to be Performed within a Year p If contract cannot be fully performed within one year the entire contract is within the Statute of Frauds until one party completes performance When one party has completed his performance SofF no longer applies and contract becomes enforceable regardless of when the performance is completed RST Enforcement by Virtue of Action in Reliance p A promise which promisor should reasonably expect to induce promisee s action forbearance and in fact induces such reliance is enforceable despite the Statue of Frauds if injustice can only be avoided by enforcement Remedy is limited as justice requires Consider these factors in determining whether justice requires enforcement Availability and adequacy of other remedies The character of the reliance in relation to the remedy sought The extent to which the existence of agreement can be corroborated by the reliance or proven by other evidence The reasonableness of the reliance The extent to which reliance was foreseeable by promisor RST Unenforceable Contract as Evidence p Unenforceable contracts can be used as evidence other than for its own enforcement regardless of SofF UCC - Formal Requirements Statute of Frauds pp - To be enforceable contract for sale of goods for or more must be made in writing and signed by party against whom enforcement is sought Between merchants this writing requirement is satisfied by written confirmation of K made within reasonable time unless the receiving party objects to the contents within days Contract that do not satisfy sub but otherwise valid is enforceable If the goods are to be specially manufacturer for buyer and is not suitable for sale to others in seller s usual course of business and seller has substantially begun to manufacture or has made commitments for procurement before receiving notice of repudiation If the party against whom enforcement is sought admits that contract was made If the goods have been paid for received and accepted Promissory Estoppel Overview and selected cases Absent bargained-for consent a promise may still be enforceable under promissory estoppel theory The reliance must be reasonably foreseeable and the promisee must actually rely to her detriment The recovery is limited to reliance damages to put the promisee back in the position she would have been if she hadn t relied Contract law has not as Gilmore predicted died out because of promissory estoppel no consideration tort-like compensation In practice promissory estoppel claims rarely succeed Feinberg v Pfeiffer Pension case promised annuity foreseeably relied and retired reasonable reliance payment started Then payment was stopped and discovered she has cancer and can no longer work Promise binding because justice requires But if had retired because of illness no required reliance no promissory estoppel not enforceable James Baird Co v Gimbel Bros mistakenly calculated linoleum bid case L Hand is concerned with subcontractor being unilaterally bound The offer asks for reasonable prompt acceptance after the general contract has been awarded no acceptance by performance did not intend to be bound offer retracted before acceptance not binding Drennan v Star Paving Once promise has been used in bid it is legally binding and cannot be revoked partly because offeror wants offeree to rely Traynor bilateral contract because there is an implied contract to be bound on both sides General contractor must accept immediately or lose the right to accept This approach is now the law Davis Traynor is reading too much into the agreement Emanuel Sub-contractor s offer is temporarily irrevocable for the period necessary to allow the general contractor to obtain the job and accept the subcontractor s offer Construction bid Firm offers policy concerns General contractor is not bound by offer still free to shop around after general K awarded This asymmetry makes binding subcontractor to his offer problematic Gimbel Bros L Hand General contractor cannot shop around AND retain right to accept Must accept immediately or else lose the offer Drennan Traynor In cases where subcontractor is unique not enforcing original offer may create hold-up concerns Hoffman v Red Owl No contract formed b c lack of certainty and formality However the offeree foreseeably and reasonably relied on the promises award a nominal part of reliance damages Davis the reasonableness of s reliance is questionable he should have asked for something in writing first Hoffman shows that there may be liability in such unsuccessful negotiations under promissory estoppel even if the agreement contemplated would not have been enforceable It may be justified as a breach of the implied duty to bargain in good faith or it could be a fraudulent misrepresentation of s intention Efficiency justifications of Hoffman Allows parties to rely on promises It makes sense to have the more knowledgeable party e g franchisor employer give clear disclaimer of its lack of intent to be bound RST Option Contract p An offer which the offeror should expect to and does in fact induce offeree s action or forbearance of a substantial character before acceptance is binding as an option contract to the extent necessary to avoid injustice RST Promise Reasonably Inducing Action or Forbearance p A promise which the promisor should reasonably expect to induce and does in fact induce action or forbearance on the part of the promisee or a third party is binding if injustice can only be avoided by enforcement The remedy is limited as justice requires A charitable subscription written promise to give charitable gift or a marriage settlement is binding under subsection without proof of actual reliance RST Conditions under Which Misrepresentation is Fraudulent Scienter p A misrepresentation is fraudulent if the maker Knows or believes that the matter is not as he represented Does not have confidence in the accuracy of his stated or implied representation or Knows that he does not have the basis for making the representation RST Misrepresentation of Intention p A representation of the intention to do or not do something is fraudulent if the person does not have that intention Misrepresentation of a third party s intention is fraudulent under the conditions in Rights of third parties Assignment and delegation Assignment transferring contractual rights e g right to collect debt to a third party Delegation transferring the obligation to perform contractual duty e g pay debt to a third party RST Assignment of a Right p An assignment of a right manifests the assignor s intention to transfer it by which the assignor s right to obligor s performance is extinguished and the assignee acquires that right A contractual right is assignable unless The substitution would materially change the obligor s duty increase his burden of risk impair his chance of obtaining return performance or reduce its value to him or Forbidden by statute or inoperative by public policy or Validly precluded by contract UCC - Delegation of Performance Assignment of Rights pp - Delegation is allowed unless otherwise agreed or unless the obligee has substantial interest in having the original obligor perform However the delegator remains responsible for performance and breach Unless otherwise agreed all rights can be assigned except where the assignment would materially change the obligor s duty increase his burden of risk or impair his chance to get return performance A right to damages for total breach or a right arising out of assignor s complete performance is assignable despite agreement otherwise Unless circumstances indicate otherwise a prohibition against assignment of a contract is a prohibition against delegation only An assignment of a contract is an assignment of rights and unless language circumstances indicate otherwise also a delegation of duty By accepting the assignee promises to perform the assignor s duty and the promise is enforceable by either the assignor or the original obligor The obligee may treat any delegation as creating reasonable grounds for insecurity and may demand assurances from the assignee without prejudice to his rights against the assignor Third party beneficiaries Intended beneficiary RST may enforce promise Intended beneficiary RST may enforce promise Donee beneficiary Creditor beneficiary Incidental beneficiary may not sue In deciding whether someone is an intended beneficiary you ask what the promisee s intent was When the intent is unclear the court may ask beneficiary s reasonable reliance whether the performance runs directly to the beneficiary or whether conferring the benefit carries out the parties intentions Seaver v Ransom Husband promises dying wife to leave favorite niece value of the house she wanted to leave to in exchange for her to sign the will and leave him the house Wife signs will and dies Husband dies without leaving the money Niece may enforce the promise as donee beneficiary Sisters of St Joseph v Russell Russell was injured at work and treated by Sisters hospital but never actually entered into a contract enters into a worker s comp Disputed Claim Settlement DCS agreement with Aetna and other employer insurers sues Russell and Aetna for payment claiming status as creditor beneficiary in the DCS agreement Court held that the agreement indicated that medical expenses were in fact owed to and that someone was expected to pay for Septembertide Publishing v Stein Day author sold his hardback right to Stein Day and K gave author right to of s income from paperback sales if the right is sold to someone else sells paperback right to NAL later goes broke and assigned all contracts to financer Bookcrafters Author sues to have NAL pay him rather than Bookcrafters the paperback income claiming intended beneficiary status in the S D-NAL paperback contract wins RST Intended and Incidental Beneficiaries p Unless otherwise agreed a beneficiary is intended if recognizing her right to performance is appropriate to effectuate the parties intentions and The performance of the promise will satisfy promisee s obligation to pay the beneficiary creditor beneficiary or Circumstances indicate that the promisee intended to give the beneficiary the benefit of the promised performance donee beneficiary An incidental beneficiary is one who is not intended RST Effect of a Promise of Incidental Benefit p An incidental beneficiary acquires no right against the promisor or promisee Interpretation General Principles General principles of construction When the meaning of existing terms is in dispute court seeks to interpret it The court will seek to construe the meaning as what it thinks the parties had intended Thus parties principal purpose if ascertainable receives great weight bargained-for negotiated terms trumps standardized terms and narrower evidence express terms course of performance controls broader ones course of dealing usage of trade Davis Courts struggle in interpreting terms to reconcile these objectives Assigning meanings that the parties intended Achieving fair outcomes Creating incentives for parties to clarify their intentions balancing the goals of discouraging litigation and minimizing transaction costs RST Interpretation of Promise or Agreement p The interpretation of a promise agreement is the ascertainment of its meaning RST Whose Meaning Prevails p Where the parties attach the same meaning use that meaning Where the parties attach different meanings use one party s A s meaning if at the time of contract Party A did not know or did not have reason to know that B attached any different meaning while party B knew or had reason to know the meaning A attached Otherwise neither party is bound by the other s meaning even if it means no mutual assent no K RST Rules in Aid of Interpretation p Words and conduct are interpreted in light of all the circumstances if the parties principal purpose is ascertainable that s given great weight A writing is interpreted as a whole all writings in a transaction are interpreted together Unless a different intention is manifested Where language has a generally prevailing meaning use that meaning When used in its technical field technical terms are given their technical meaning In contracts involving repeated occasions of performance by one party and knowledge and opportunity to object to such performance by the other any course of performance accepted or acquiesced without objection is given great weight Past course of dealings important in long-term contracts Whenever possible manifestations of parties intentions are interpreted as consistent with each other and consistent with relevant course of performance course of dealing and usage of trade RST Negotiated terms control standard terms boilerplate terms fine print Emanuel UCC - Course of Dealing and Usage of Trade p Course of dealing a sequence of previous conduct between the parties that can fairly be seen as establishing a common basis of understanding for interpreting their expressions and conduct Usage of trade a practice or method of dealing so regularly observed in that place vocation trade as to justify the expectation that it will be observed in this transaction The existence and scope of such usage is to be proven as fact If the purported usage is embodied in a written code or similar writing the court should interpret that writing Course of dealing between the parties and usage of trade within that trade which the parties knew are should be aware of give special meaning to and supplements qualifies terms in an agreement Express terms course of dealing and usage of trade are interpreted as consistent whenever reasonable If not reasonable express terms course of dealing trade usage Trade usage applicable in the place a part of the performance is to occur should apply to that part of the performance Evidence of trade usage is inadmissible as evidence unless and until the party using it gives the other enough notice as to prevent unfair surprise UCC - Course of Performance or Practical Construction p Where the contract of sales involves repeated occasions of performance by one party and the other party has knowledge of the performance and opportunity of objection any course of performance accepted or acquiesced in without objection shall be relevant to interpretation The express terms course of performance course of dealing and usage of trade shall be construed as consistent with each other whenever possible When such construction is unreasonable express terms course of performance course of dealing usage of trade Subject to - such course of performance shall be relevant to show a waiver or modification of any term inconsistent of the course of performance Emanuel Course of performance refers to the way parties have conducted themselves in performing the contract at hand It is different from course of dealing which refers to the way the same parties acted in past contracts Ambiguous terms An ambiguous term is one capable of more than one meaning If and when the court has found the term to be ambiguous it will give the question of interpretation to the jury and will allow a broad range of evidence to be admitted including extrinsic evidence Emanuel Raffles v Wichelhaus Cotton to arrive ex Peerless seller intended December Peerless which arrived in April price lower buyer intended October Peerless which arrived in February price higher Court agreed with who claimed that when two Peerlesses appear term becomes ambiguous and if and attach different meanings there was no mutual assent no contract RST Here the identity of ship was material because the different arrival times significantly changed the price Suppose the two arrived at the same time Court might find that the identity of the ship is immaterial and enforce the contract Background reading the identity is important as it was the only proxy by which to determine time of arrival Vague terms A vague term raises the question about whether it was meant to apply beyond its clear core meaning The party seeking the narrower meaning bears the burden of proof that the other party knew or should have known that usage which is a hard burden to meet Note UCC presumes that parties in a trade knows the trade usage even newcomers common law Weinberg v Edelstein The dress case had a lease contract protecting him from competition in selling among other things ladies dresses was assigned a lease and began selling blouse-skirt combinations At time of assignment knew of s restrictive K and knew s predecessor was selling combinations Court relied on trade customs to find dress B-S combination But the main reason is probably the policy favoring competition against enforcing restrictive covenants and the fact that s predecessor already sold combinations and could have done something about it Frigaliment Importing Co v B N S International Sales Corp The chicken case foreign buyer claims they wanted young broiler chicken while seller understood and delivered stewing chicken Court seems to take the view of RST had no reason to know broiler but had reason to know stewing to find for Davis court looking for the reasonable interpretation being new to the business couldn t have known that chicken meant broiler s agent said any chicken would do K referred to government standard which included stewing chicken conflicting evidence on trade usage didn t specify and after objecting to the first shipment accepted the second should have known couldn t have made a profit without using stewing hen Policy RE holding newcomers to trade usage Should NOT hold to trade usage protect new comers enforce parties actual intention knowledge Should hold to trade usage unfair to have old-timers pay concern over increasing transaction cost Agreements to agree Pre-UCC the common law would find the absence of essential terms fatally indefinite UCC allows enforcement despite lack of definite terms as long as parties intended to make a binding contract Courts will fill the gap with reasonable terms Post-UCC common law takes a similar approach Sun Printing Publishing v Remington Paper agreed to sell agreed to buy newsprint for tons mo X months First months price agreed later price and the term for which price applies subject to agreement with an external index ceiling When time to renegotiate wished to stop demanded delivery at ceiling price Cardozo for Price and time both essential terms when both left open court shouldn t fill the gap no K Davis how do decide which terms are essential Under UCC If parties agree to agree then fail to agree courts supply reasonable terms If one party s fault caused to failure to set a price then other party can treat K as cancelled or supply reasonable price himself This case however is pre-UCC Texaco v Pennzoil Texaco tries to argue that the Pennzoil-Getty agreement too vague and incomplete to be enforceable Court found that the terms were clear enough to allow a court to recognize breach and determine damages not fatally indefinite enforceable RST Certainty and Choice of Terms Effect of Performance or Reliance p The terms of a contract may be reasonably certain even though it allows one or both parties to select terms during performance Part performance may remove uncertainty and make contract enforceable b c a bargain is formed Action in reliance on an agreement may be contractual remedy appropriate even if uncertainty is not removed RST Supplying an Omitted Essential Term p When parties to a bargain sufficiently defined as a contract i e not quite there but good enough have not agreed on an essential term essential to determining their rights duties the court may supply a reasonable term under the circumstances Implied terms Courts may use the implied obligation of good faith and fair dealing and implied terms based on this obligation to find contract enforceable The requirement of good faith is mandatory parties cannot contract around it New York Central Iron Works v United States Radiator Requirement contract in which agrees to supply with its entire radiator needs When required more than it ever did before refused on deliver claiming mutual mistake Court held the requirement contract enforceable as promise to deal exclusively with was valid consideration But can only is still under the obligation of good faith and fair dealing and can only use the contract for its reasonable needs and not for speculation Eastern Airlines v Gulf Oil Also requirement contract Modern view requirement contracts binding where the purchaser had an operating business Court could solve indefiniteness by using objective evidence to determine the volume required for buyer s operation RST and UCC view K definite enough if it allows court to find breach and give remedy Here industry practice and prior dealings show that did not act in bad faith for Davis It s difficult to know whether the parties by leaving open a gap in the K was inviting the court to fill the gap or intended to enforce K as written Wood v Lucy Lady Duff-Gordon Exclusivity contract enforceable because it contains an implied term good faith obligation for to use reasonable efforts to market the products and bring in revenue UCC - Output Requirements and Exclusive Dealings p A term which sets the quantity by the seller s output or the buyer s requirements refer to the output requirements as occur in good faith except you can t tender demand quantity unreasonably disproportionate to any stated estimate or where no estimate to any normal comparable amount Unless otherwise agreed a contract of exclusive dealing imposes an obligation for the seller to use best efforts to supply to goods and the buyer to use best efforts to promote their sale Comment In exclusive dealings parties are bound by implied terms agent is bound to use reasonable effort due diligence to market product principal is bound to refrain from supplying others in the exclusive territory Standardized agreements To decide whether a standardized term form contract is enforceable courts look at its fairness reasonableness Under RST if you signed something knowing it is a contract contains terms then by signing you are deemed to have agreed regardless of whether you read understood the terms But unreasonable terms are not enforceable if the signer doesn t know Reasonable if known the term would have been agreed to Carnival Cruise Lines v Shute Forum-selection clause buried in fine-print on the back of a cruise ticket Majority forum-selection clause is enforceable if a notice b fair and reasonable found there is notice and not unreasonable for Stevens dissent requires a notice b bargained-for and c no additional expense bar to recovery for a standard form K to be enforceable Dissent here worried about the disparate bargaining power take-it-or-leave-it having received the ticket must either accept terms or forfeit the ticket without refund unclear there was notice considering the fine print and inconspicuous type doesn t understand the term The understanding problem if we disregard the fact whether or not parties understood and assented to the term incentive for vendors to make terms as opaque and inconspicuous as possible RST unreasonable terms are unenforceable if the agreer does not know about it The reasonableness of the FL-selection clause cost to Shutes may be low savings to Carnival by knowing only one forum s law and consolidating all suits together potentially great net savings Compagno v Commodore Cruise Line Congressional efforts to overturn Shute have failed Shute remains good law forum-selection clauses in passenger tickets are enforceable unless unreasonable Caspi v Microsoft Network Shute did not address issue of notice In the case of software EULA customer had ample opportunity to read the terms before agreeing Having agreed then whether actually read the term becomes irrelevant Absent fraud forum-selection clause is enforceable RST Standardized Agreements pp - If a party who signs manifests assent to a writing knowing that it is a contract contains terms then by signing he is deemed to have agreed to the writing as a whole including all of its terms except as state in sub Such a writing is interpreted whenever reasonable as treating alike everyone similarly situated regardless of their level of knowledge understanding of the terms Thus an illiterate person and a lawyer who sign the same contract will be held to the same average layman standard of understanding If the drafter has reason to believe that the signor would not have gave his assent if he knew that the contract contained a certain term then that term is not part of the agreement Unreasonable term not part of contract Comment a Standardized agreements reduce transaction costs and benefit all Comment b Neither vendors nor customers usually expect the signor to read understand the terms The point is to avoid bargaining over details and customers rely on the vendor s good faith that others would ve agreed to these terms Comment c Standardized terms usu drafted by one party are enforced by subject to these limitations May be superseded by separately negotiated or added terms Construed against the draftsman Subject to the obligation of good faith Court has power to refuse to enforce unconscionable terms contract May be unenforceable if against public policy Conflicting manifestations of assent At common law the offer and acceptance must be exactly the same for there to be a valid contract mirror image rule If acceptance differs at all from offer then the original offer is invalidated and the acceptance becomes a counteroffer This leads to the last shot rule which makes the last term to be proposed in the exchange of forms controlling Thus buyer and seller engage in a battle of the forms in which each drafts increasingly one-sided terms and strives to be the last This usually means the seller wins and buyer by accepting and paying for the goods with seller s form is deemed to accept the counteroffer and the seller s terms govern entirely UCC - negated the mirror image rule Under the UCC there are essentially two questions Was a contract formed If so whose terms govern Unless offeree expressly makes his acceptance conditional on offeror s assent to the new terms the modified acceptance is valid a contract is formed and the changed added terms are incorporated into the parties agreement If the acceptance is expressly conditional which is difficult to qualify then treated as a counteroffer Once a contract has been formed the question becomes what are the terms of that K If the offeree proposed an additional term it is incorporated unless the offeror doesn t want to agree by specific objection or by requesting an acceptance that conforms to the offer or unless the addition term materially alters the contract If the proposed term conflicts with that in the offer then majority of courts apply the knockout rule whereby both terms are knocked out and courts supply gap-filling terms provided by either UCC or the common law Post - the common law usually follows the UCC approach and no longer use the mirror image rule UCC allows contract to be formed by conduct One context is ProCD s shrinkwrap license where the license is contained in a box and the buyer couldn t have read until after the transaction In such cases if the seller gives the buyer the right to cancel the transaction by returning the goods if he doesn t agree to the terms and the buyer retains the goods then buyer is deemed to have agreed to the terms Note Written confirmations following oral agreement is dealt with in three ways If only confirmation additional new term incorporated unless materially alter or objected to If only confirmation different term not incorporated expressly conditional has no effect If confirmations contradict knock-out UCC gap-filler applies Policy concern with knock-out rule would force parties to be bound by UCC even if they didn t want to One alternative best-shot rule where court selects the most reasonable least one-sided of the parties terms to apply But what is best shot is still murky Ardente v Horan In some cases the right interpretation may be that no contract was formed Here homeowners offered to sell buyer accepted but requested confirmation for inclusion of furniture Court found this to be a counteroffer refused no K Step-saver Data Systems v Wyse Technology Step-Saver buys software from TSL The parties first agree on the sale over the phone then sends a P O and ships the goods with an invoice Nowhere does either party mentions warranty However each box contains a box-top license which contains an integration clause disclaims all warranty and provides that by opening the box buyer agrees to the license unless he sends it back within days During the course of dealing had objected to the license but both parties kept performing K obviously formed sues on breach of implied warranty court held for since s warranty disclaimer materially alters the contract and is expressed objected to therefore does not enter the parties agreement unless expressly agrees Davis TSL could argue that after the first shipment S-S has read the box-top license and therefore the license becomes implied terms in the parties oral agreement in subsequent orders TSL s arguments Court s answer Term indefinite not too indefinite because there are default rules RE implied warranty Counteroffer conditional acceptance not conditional b c TSL continued to ship willing to deal Proposed term in subsequent oral agreements license materially alters K and thus not incorporated Davis Implied term in oral agreement ProCD v Zeidenberg made an offer by putting the product on the shelf and accepted by buying it then agreeing to the license terms The shrinkwrap license together with reference of it on the box and the opportunity for customer to return product if he does not agree is enforceable For Hill v Gateway buyer made an offer seller accepted Gateway s arbitration clause is contained in the box but accompanied by the opportunity to return within days Although there was no indication prior to transaction that the box contained additional terms there are ways in which consumer could have found this out By retaining the product Hill assented to the terms For Klocek v Gateway Similar facts as Hill court here held for Reasoning not a merchant didn t communicate the -day review-and-return policy as a conditional term of acceptance did not expressly assent shrinkwrap license not enforceable Davis The law is messy Outcome turns on the judge ProCD and Hill both by Easterbrook Standard view of retail sale consumer makes offer merchant accepts Klocek got it right Emanuel - applies only btw merchants Where at least one party is not a merchant additional terms are NOT incorporated unless by express assent Silence not enough Policy review-and-return policy may be unfair to customer making refusal returning costly So for it to be enforceable seller should make sure customer knows the terms terms must be reasonable RST Acceptance which Requests Change of Terms p An acceptance that requests a change addition of terms is not thereby invalidated unless the acceptance depends on the assent to these terms Basically follows UCC s approach UCC - Additional Terms in Acceptance or Confirmation pp - A definite and seasonal acceptance or a written confirmation sent within reasonable time operates as acceptance and forms a contract even if it states terms different from or in addition to those offered agreed upon unless acceptance is expressly made conditional on assent to the different additional terms The additional terms are construed as proposals for addition to the contract Between merchants they become part of the contract unless The offer expressly limits the acceptance to the terms of the offer The additional terms materially alters the original contract Notification of objection to the additional terms has been given or is given w in reasonable time Emanuel if one party not merchant then additional term must be expressly agreed to Conduct by both parties that recognizes the existence of a contract is sufficient to establish a contract even though the writings do not otherwise establish a contract In such cases the contract s terms are those expressly agreed upon supplementary terms supplied by UCC Comments This section deals with a written confirmation oral informal agreement followed by formal writing and b offer and acceptance situations where the written acceptance adds or proposes different terms Deal in fact closed is recognized as a contract If additional different term materially alters the original bargain then it is not incorporated unless expressly agreed to however if it does not materially alter the bargain then it is incorporated unless objected to Materially alter refers to terms that will result in hardship or surprise if incorporated without express assent such as disclaimers of implied or standard warranty clause requiring complaints be made within time shorter than customary or reasonable etc If no answer is received within reasonable time then terms are assumed to be assented to assent by silence Where clauses contradict each other each party is assumed to object to the other s terms satisfying sub s objection requirement and neither term becomes part of the agreement and the missing term is supplied by UCC UCC - Exclusion or Modification of Warranties p Whenever reasonable words conduct tending to create a warranty and those tending to negate limit warranty is construed as consistent with each other But subject to parol evidence rule in - negation limitation is inoperative to the extent that such construction in unreasonable Language excluding or modifying implied warranty of merchantability fitness must be clear and conspicuous In the case of warranty of fitness it must be in writing Written agreements The parol evidence rule Parol evidence evidence of agreements dealings prior to the written instrument or oral agreements contemporaneous to the written instrument P E Rule No extrinsic evidence may be used to contradict vary add to a valid written instrument except Agreement not final not integrated Agreement incomplete partially integrated use P E to supplement Agreement ambiguous susceptible to more than one meaning use P E to interpret meaning Agreement invalid use P E to show lack of consideration duress fraud etc Agreement is integrated if it is a final expression of the parties agreement P E cannot be used to contradict terms in the written instrument but may be used to supplement if partially integrated Agreement is completely integrated if it embodies all details of the parties agreement P E cannot be used to contradict or add terms in the written instrument Judge can probably look at P E to decide whether agreement is integrated or complete Parties intent Thompson v Libbey Log sale contract dispute over quality which was not discussed in the written contract buyer seeks to introduce evidence that oral warranty was made at time of writing but court looks only to the writing itself and finding it prima facie complete excludes parol evidence new trial Brown v Oliver Dispute over whether furniture was included in the sale of a hotel when written K didn t mention the furniture Court allowed to introduce evidence of prior oral agreement App ct affirmed question of whether K embodied an element not mentioned in the writing is dependent on parties intent which can only be shown by P E Pacific Gas and Electric Co v G W Thomas Drayage Rigging contracted to repair s steam turbine and agreed to indemnify for any loss resulting from the work Work damaged turbine sued for indemnity claims the clause only for damage to third-party property J Traynor looked to the circumstances P E to understand parties intention then finding the term ambiguous susceptible to different meaning allows P E to interpret its meaning Includes a weird Saussurean discussion of the intrinsic ambiguity of words to require P E in understanding the meaning of a writing p Trident Center v Connecticut General Life Insurance Trident borrows from Connecticut a loan K providing that cannot pay it off in the first years Interest rate drops and seeks to show K term ambiguous and that it should be allowed to pay off Court after criticizing Pacific Gas s decision creates judicial diseconomy and undermines the power of written instruments grudgingly acknowledges that it is good law therefore allows to introduce P E to show ambiguity United Nationals Convention on Contracts for the International Sale of Goods CISG governs sale of goods contracts between parties of different countries It does not have the parol evidence rule and requires suit losers to pay attorney fees However these are default rules and can be contracted around RST Integrated Agreements pp - An integrated agreement is a writing which constitutes a final expression between the parties on one or more terms of their agreement Whether there is an integrated agreement is to be determined by the court and is preliminary to interpretation or the application of the parol evidence rule Where in light of a written instrument s completeness or specificity it appears to be a complete agreement it will be taken to be an integrated agreement unless otherwise establish by other evidence RST Completely and Partially Integrated Agreements p A completely integrated agreement is one adopted by the parties as a complete and exclusive statement of the terms of their agreement A partially integrated agreement is an integrated agreement that is not completely integrated Whether an agreement is completely or partially integrated is a question to be determined by court preliminary to interpretation or application of parol evidence rule RST Effect of Integrated Agreement on Prior Agreements Parol Evidence Rule p A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them A binding partially integrated agreement discharges prior agreements to the extent that they are within its scope An integrated agreement that is not binding or that is voidable and avoided does NOT discharge prior agreements However an integrated agreement that is not binding may be used to render inoperative a term which would have been a part of the agreement had it not been integrated RST Evidence of Prior or Contemporaneous Agreements and Negotiations p Agreements and negotiations prior to and contemporaneous with at the same time as the adoption of a writing are inadmissible as evidence to establish That the writing is or is not an integrated agreement That the integrated agreement if any is completely or partially integrated The meaning of the writing whether or not integrated Illegality fraud duress mistake lack of consideration or other invalidating cause Ground for granting or denying rescission reformation specific performance or other remedy RST Consistent Additional Terms p Evidence of a consistent additional term is admissible to supplement an integrated agreement unless the court finds the agreement to be completely integrated An agreement is not completely integrated if the writing omits a consistent additional agreed term which is Agreed to for separate consideration collateral agreement or Such as would naturally be omitted from the writing UCC - Final Written Expression Parol or Extrinsic Evidence p Terms which are agreed to by confirmatory memoranda or in a writing intended as the final expression of the parties agreement regarding the terms included may not be contradicted by evidence of any prior agreement or contemporaneous oral agreement but may be explained or supplemented By course of dealing or usage of trade or course of performance and By evidence of consistent additional terms unless the court finds the agreement to be intended as complete and exclusive statement of the terms of the agreement completely integrated Reformation When a writing fails to express parties prior oral agreement but not negligence in failure to read the writing court may reform the writing to reflect the true agreement Travelers Insurance Co v Bailey By clerical mistake insurance company entered s policy on the wrong form which stated the wrong annuity Thirty years later discovers the error and sues in equity for reformation Court held for when parties true agreement can be definitely established original application still on file and the other side has not relied didn t discover the mistake then the party harmed is entitled to reformation RST When Mistake of Both Parties as to Written Expression Justifies Reformation p Where a written memorial fails to express the agreement because of a mistake of both parties as to its contents or effect court may at one party s request reform the writing to express the agreement expect to the extent that the rights of third parties may be unfairly affected Excuse Policy RE whether or not courts should excuse a contract Excuse No excuse Encourage disclosure Discourage disclosure Avoid unjust enrichment Incentives for acquiring information Avoid undue hardship of disadvantaged party Avoid undue hardship of the other party Avoid drafting costs Avoid litigation Encourages promisor to mitigate loss Encourages promisee to mitigate loss Non-performance One party s non-performance will excuse the other party from performance if If the promises were dependent and If the term breached was a condition and If there was material breach no substantial performance anticipatory breach Non-performance does not excuse the injured party from making restitution to the breaching party Constructive conditions and substantial performance material breach Condition something that must happen before a party is obliged to perform Express condition condition that parties agreed to explicitly or implicitly requires strict compliance This is different from a warranty the failure of which does not excuse A from his performance but entitles him to a discount Constructive condition condition that court supplied as a matter of law e g A s performance is condition to B s subsequent performance requires substantial performance Promises can be Independent non-performance of A s promise does not excuse performance of B s promise Dependent sequential conditions performance to occur sequentially non-performance of A s promise excuses performance of subsequent promises Dependent concurrent conditions performances to occur simultaneously if one is not ready to perform the other is excused from performance For performance to be excused the other party s breach must be material In sale of goods UCC perfect tender rule applies buyer can reject the goods if it deviates at all Kingston v Preston The silk merchant case promises to sell his business to after his term of service but on the condition that first gives good and sufficient security does not give the security and refuse to give up his business sues for breach Held for because the giving of security is conditional to s duty to perform Morton v Lamb Contract for sale of corn tender of corn and payment to occur simultaneously didn t deliver because wasn t ready to pay Party suing for breach must show that he himself performed or that he was ready to perform failed to show he was ready to pay held for Jacob Youngs v Kent The Reading pipes case Cardozo where there has been substantial performance and a breach trivial and incidental and that forcing to replace the pipes would be cruel and the cost could be grossly disproportional to the benefit homeowner is not excused from paying and Kent s remedy is limited to difference in value which is nominal or nothing Dissent s breach was intentional or grossly negligent and the majority rule would create incentive for people to breach Cardozo s decision is based on the premise that in the absence of stipulation the breach is trivial by parties reasonable intentions But this runs the risk of under-compensating if he places subject value on the use of Reading pipes Dissent s view is similar to UCC s perfect tender rule customer should get what he contracted for Note Even Cardozo would not countenance contractor s willful breach Policy concerns problems with Cardozo and dissent s approaches Homebuyer not excused Cardozo Homebuyer excused dissent Risk of under-compensating homebuyers Risk of depriving contractors lost reliance expectations Encourage breach Cause builders to take excessive precautions Promisee homebuyer mitigates Promisor contractor mitigates Allow homebuyers to avoid paying w minor excuses Unjustly enriches homebuyers B B Equipment v Bowen The flaky third partner case B B hired Bowen to replace a partner with a loan to help him purchase shares of stock Bowen starts to slack and B B tries to rescind their contract Court found Bowen s job performance goes to the root substance of the agreement his poor performance is material breach B B allowed to rescind Restitution for the party in breach The non-breaching party if excused must pay restitution damages to the breaching party unless otherwise stipulated This stipulation is limited to reasonableness keeping the benefit as liquidated damages which is not enforceable if it is unreasonable thus penalty Britton v Turner employee contracts to work for year employer to pay at the end quits after months without good cause and sues for value of service performed Held for Policy concerns unjust enrichment employers abusing employees at the end of their term RST Restitution in Favor of Party in Breach p If a party is justifiably excused from performance the breaching party is entitled to restitution for any benefit he has conferred on the non-breaching party through part performance or reliance in excess of the loss caused by his breach Restitution benefit conferred reliance damage from breach Parties may by stipulation allow the non-breaching party to retain value of performance as liquidated damages breaching party cannot recover restitution but only if such liquidated damages is reasonable in light of the anticipated actual loss and the difficulty of proof of loss Misrepresentation May also sue in torts May also sue in torts - Fraudulent misrepresentation excuse Negligent misrepresentation excuse - Innocent misrepresentation may be valid excuse if material e g Halpert Excuse Damages PE rule exception Fraudulent misrepresentation Yes Yes Yes Negligent misrepresentation Yes Yes Yes Innocent misrepresentation Some courts Halpert No Yes Condition Yes Must make restitution Warranty condition No Yes No Opinion statement of belief qualifies as misrepresentation only when Bad faith belief opinion is not genuinely held Justified reliance giver knows should know recipient would rely on the representation e g fiduciary relationship superior knowledge Materiality the misrepresentation is material Alternative paths to remedy in misrepresentation case Tort Only on fraudulent and negligent misrepresentations but may allow punitive damages Warranty If so then can sue for breach of warranty even on innocent misrepresentation Condition If so then the injured party may be excused from performance Halpert v Rosenthal The termite case homebuyer wants to rescind K after discovering termites seller sues for damages difference in sale price counter-claims for K deposit A misrepresentation is material if it is likely to affect a reasonable person s decision of whether or not to enter into the transaction If a party induces the other to enter into a contract by means of a material misrepresentation whether innocent or fraudulent the other party may rescind Held for Court ignores the claim that termite representation is only one of opinion because is appealing and facts must be construed against her in favor of buyer Byers v Federal Land Co buys land from sight unseen then leases it to represented that it was owner of land did possess the land and that land was of certain value sues to cancel contract on fraudulent misrepresentation Court honest opinion to land value is not fraudulent m r but the misrepresentation on actual possession was material because was never given possession of land Vokes v Arthur Murray The gullible dancing widow case Vokes is excused from contract because she justifiably relied on s fraudulent misrepresentation of her abilities Court found the reliance justifiable b c a had superior knowledge b is susceptible to misrepresentation Opinion givers shouldn t be unjustly enriched recipients shouldn t be put into hardship Courts split on cases of written misrepresentations where the injured party didn t bother to read it Enforcing a K entered into under misrepresentation would not give parties what they wanted e g a termite-free house RST Misrepresentation Defined p A misrepresentation is an assertion that is different from the facts RST When a Misrepresentation is Fraudulent or Material p A misrepresentation is fraudulent if the maker intends for it to induce assent and the maker Knows or believes it to be different from the facts or Does not have confidence of the truthfulness of his assertion or Knows that he does not have the basis to make the assertion A misrepresentation is material if it is likely to induce assent or if the maker knows that it would likely induce assent RST When a Misrepresentation Makes a Contract Voidable p If a party s manifestation of assent is induced by the other party s fraudulent or negligent misrepresentation on which he is justified to rely the contract is voidable Excuse requires fraudulent negligent m r justified reliance induced assent If a party s manifestation of assent is induced by a fraudulent or negligent misrepresentation made by a third-party upon which he is justified to rely contract is voidable unless the other party in good faith and without reason to know about the m r gives value or materially relies on the transaction RST When a Misrepresentation is an Inducing Cause p A misrepresentation induces a party s manifestation of assent if it substantially contributes to his decision to manifest assent RST Reliance on Assertions of Opinion p An assertion is one of opinion if it expresses only a belief of a fact without certainty or if it expresses only a judgment of quality value authenticity etc If reasonable recipient of an assertion of opinion RE facts not disclosed to known by the recipient may interpret it as an assertion That the facts known to the giver are not incompatible with his opinion or That he knows facts sufficient to justify him in forming that opinion RST When Reliance on an Assertion of Opinion is Not Justified p To the extent that an assertion is one of opinion only the recipient is not justified in relying unless she Is justified in relying based on a relationship of trust and confidence with the giver Reasonably believes that the giver has special skill judgment objectivity RE subject matter Is for some other reason particularly susceptible to such misrepresentation Unilateral mistake and the duty to disclose Unilateral mistake only one party acted on a mistake To rescind the mistaken party must show Basic assumption material effect allocation of risk same as mutual mistake AND a Enforcement would be unconscionable or b Other party has reason to know the mistake or actually caused it At common law parties generally have no duty to disclose caveat emptor Modern view seller has duty to disclose material defects known to him yet unknown to buyer Tyra v Cheney subcontractor submits oral bid was told to submit a written bid and mistakenly omitted an item in the writing Court held knew the amount in oral bid and that the written one was mistaken contract unenforceable no meeting of minds on the mistaken writing for Drennan v Star Paving subcontractor s mistake is unknown to justifiably relied contract enforceable Laidlaw v Organ tobacco buyer Organ seeks damages for seller s seizure of delivered tobacco Court party with exclusive knowledge of extrinsic circumstances affecting the deal has no duty to disclose if the information is accessible to both parties However he may not do or say anything tending to impose on the other Case remanded on question of fraud imposition The baseball card problem store owner sued for replevin of a baseball card offered at but mistakenly sold for Under contract is probably voidable The Laidlaw case is about allocation of risk Parties agreed to allocation of risk should be respected Laidlaw assumed the risk of mistake by proceeding without information should bear the loss Creates incentive for parties to go out and get information Does the seller of termite house have duty to disclose if she actually knows of the infestation For disclosure cheaper for seller to disclose rather than have buyer do inspection Against disclosure transaction cost too high for seller to disclose everything and difficult to judge what disclosures are required what is material RST When Mistake of One Party Makes a Contract Voidable p Where one party makes a unilateral mistake as to a basic assumption of the contract and has a material effect on the agreement that is adverse to him he may void the contract if he does not bear the risk under and The effect of the mistake makes enforcement of K unconscionable or The other party has reason to know of the mistake or his fault caused the mistake RST When Action is Equivalent to an Assertion Concealment p Action intended to or known to be likely to prevent another from learning a fact is equivalent to an assertion that that fact doesn t exist Concealment misrepresentation RST When Non-Disclosure us Equivalent to an Assertion p A person s non-disclosure of a fact is equivalent to an assertion that the fact doesn t exist only where He knows that the disclosure is necessary to prevent a prior assertion from being a material or fraudulent misrepresentation He knows that the disclosure would correct the other party s mistake as to a basic assumption upon which that party is making the contract and non-disclosure is contrary to the requirements of good faith and fair dealing He knows that the disclosure would correct a mistake of the other party of the contents or effects of a writing embodying an agreement in whole or in part The other person is entitled to know based on a relationship of trust and confidence Failure of a basic assumption Mistake of existing facts unilateral and mutual mistakes Errorneous belief of future circumstances impossibility impracticability frustration of purpose Mutual mistake Where both parties have acted on the same mistaken belief the party seeking rescission must show Basic assumption the mistake goes to a basic assumption upon which K was made Material effect the mistake had a major effect on the fairness of the deal Allocation of risk the risk of such mistake was not allocated to him by agreement or by court absent stipulation court usually finds that the buyer bears the loss Sherwood v Walker The barren cow case Court allowed seller to rescind finding the mutual mistake on the cow s ability to breed went to the whole substance of the agreement A barren cow is substantially a different creature than a breeding one Dissent there was no mistake of existing fact Rose d was promised and she was delivered buyer speculated and should be able to profit from his correct speculation Most courts take the dissent s view no excuse Davis another argument is that the court is concerned with inefficient outcome but there are other ways to avoid inefficiency Nester v Michigan Land Iron The pine logging case Court refused to excuse land buyer from paying contract price because the written agreement was completely integrated and contains no warranty as to quality Plus parties bargained over the quantity quality and yield of timber and given no assurance decided to purchase must bear the foreseen loss Michigan rejected Sherwood s substance test basic assumption test Wood v Boynton The topaz uncut diamond case In direct opposition with Sherwood here court refused to allow seller to rescind because a no fraud b no mistake in the identity of thing sold Lenawee County Board of Health v Messerly The bad sewage apartment building case Court refused to excuse buyer b c a although mistake did go to basic assumption b buyer accepting an as-is clause assumed the risk Davis if the as-is clause was standard boilerplate term court might ignore it Here the parties specifically added the clause therefore given more weight Nonetheless failure to disclose a material defect known to seller may be considered fraud RST Mistake Defined p A mistake is a belief not in accord with the facts Comment a Mistake here refers to an erroneous belief whether or not articulated as to an existing fact at time of contract including the contents effect of a written agreement RST When Mistake of Both Parties Makes a Contract Voidable p Where a mutual mistake at the time of contract goes to a basic assumption upon which K was made and has a material effect on the agreed exchange contract is voidable by the adversely affected party unless he bears the risk of the mistake as under In determining whether the mistake has a material effect courts takes into account reformation restitution or other relief Emanuel court may decide that justice is best served by adjusting the K rather than voiding it in which case the material effect no longer present RST When a Party Bears the Risk of a Mistake pp - A party bears the risk of a mistake when The risk is allocated to him by the parties agreement He is aware at time of contract that he only has limited knowledge and yet treats his knowledge as sufficient and proceeds The risk is allocated by court b c it is reasonable under the circumstances Comment d courts will consider the parties purposes and its general knowledge of human behavior in bargains RST Effect of Fault of Party Seeking Relief p A mistaken party s fault in failing to know discover the facts usually does not bar his relief of excuse or reformation unless his fault amounts to a failure of good faith and fair dealing RST Relief Including Restitution pp - In these cases either party may have a claim for relief including restitution If these rules still don t avoid injustice court may grant reliance relief as justice requires Changed circumstances Changed circumstances rules deal with parties erroneous belief as to future events Impossibility traditional if performance of contract depends on the continued existence of a person or thing and the thing perishes by no fault of the party his performance is excused Impracticability if unforeseeable circumstances so increase the cost of performance as to severely disappoint one party s expectations performance is excused Frustration of purpose if unforeseeable circumstances so reduce the value of performance as to completely negate the primary purpose of the contract performance is excused A party who has been allocated the risk of changed circumstances may not invoke impossibility impracticability or frustration of purpose to avoid performance but can still claim fraud duress unconscionability Requirements similar to mutual mistake The changed circumstances materially changes the possibility cost value of performance The changed circumstances go to the parties basic assumption The changed circumstances were unforeseeable and by no fault of the party Implied the party seeking relief has not been allocated the risk Taylor v Caldwell The music hall case The K depended on the continued existence of the music hall As it has been burned down an unforeseen event parties are excused from performing the K no recovery for lessee s cost of advertising and preparation impossibility Lloyd v Murphy leases space to sell new cars B c of war government restricts the sale of new cars gave a discount allows sublet and allows use for other purposes but still vacates the space sues for back rent and wins Court refuses to excuse from performance b c a parties knew of the government restrictions and b value to the lessee was not completely negated frustration ALCOA v Essex Long-term aluminum smelting contract Parties negotiated a complicated pricing structure with a ceiling price and a variable floor partially tied to a trade index WPI Oil embargo ALCOA s price significantly but WPI failed to reflect the changes Enforcing K would result in a M loss Instead of simply voiding the contract which would give ALCOA a windfall court reformed the contract making the price the lower of either a the ceiling price or b price that gives ALCOA a cent lb profit remedy to fulfill both parties expectations impracticability anomaly For reformation parties can foresee everything reformation saves transaction costs Against reformation court may get it wrong hard to ascertain ALCOA s profit margin manipulation Northern Indian Public Service Co v Carbon County Coal Long-term coal K where NIPSCO would buy fixed amount of coal for years K contained a force majeure clause allowing to stop taking the coal if a cause beyond its control prevents it from utilizing the coal Court did not find Public Service Commission s rejection of letting NIPSCO shift its risk to consumers is not valid force majeure and that by signing a long-term contract the seller bears the risk of price increase while buyer bears that risk of price decrease Since the risks have been allocated cannot claim frustration or impracticability Held no specific performance but entitled to damages Posner s efficiency considerations a Who is in better position to take precautions b Who is better able to insure against the risk Who is in better position to foresee the magnitude of the loss Who is in better position to foresee the probability of the loss UCC - Casualty to Identified Goods p Where K requires goods identified at time of contract and the goods suffer casualty without either party s fault before the risk of loss passes to the buyer or in a case under no arrival no sale term then If total loss K avoided If partial loss or goods deteriorated so much as to no longer conform to K buyer may demand inspection and choose to either avoid the K or accept the goods with discount but with no further right against seller UCC - Excuse by Failure of Presupposed Conditions pp - Except where seller assumed greater obligation Delay in delivery or non-delivery by a seller compliant with sub b and c is not a breach if performance has been made impracticable by the occurrence of something K s basic assumption being it wouldn t occur or by his good faith compliance with applicable regulation order regardless of whether or not it turns out valid Where the causes in sub a affect only a part of seller s capacity to perform he must allocate performance among his customer but may take into account the requirements of himself and regular customers He may allocate in any manner fair and reasonable The seller must seasonably notify buyer that there will be delay non-delivery In case of allocation must also inform of estimated quota available to buyer RST Discharge by Supervening Impracticability p If after K made a party s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption upon which K was made his duty to perform is discharged unless the language or circumstances indicate otherwise RST Destruction Deterioration or Failure to Come into Existence of Thing Necessary for Performance p If the existence of a specific thing is necessary for performance its destruction deterioration failure to come into existence is an occurrence the non-occurrence of which was a basic assumption upon which K was made RST Discharge by Supervening Frustration p If after contract made a party s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption upon which K made then his remaining duty to perform is discharged unless language or circumstances indicate otherwise Unconscionability Unconscionability undue influence and duress are excuses that aim to protect vulnerable parties These are mandatory rules parties cannot contract around them And parol evidence is always allowed to show these situations of illegality - Underlying policy concerns in illegality cases Coercion no meaningful choice Procedural problems Procedural problems Lack of information Inability to understand Substantive problems Substantive problems Substantive unfairness Redistribution to protect poor people Duress is available to those entering into agreements so one-sided that they are shockingly unfair Though not specifically defined the doctrine is used to prevent oppression or unfair surprise not to disturb allocation of risks because of superior bargaining power RST and UCC agree if K or term is unconscionable as of time of contract court may Refuse to enforce entire contract or Enforce only the other parts of the contract without the unconscionable term or Limit the application of that term to avoid unconscionable result Courts may look at parol evidence to determine whether a K term in unconscionable Williams v Walker-Thomas Furniture The welfare mom furniture replevin case Court refused to enforce K containing cross-collateral