Contracts Outline 2013 SPRING CONTRACTS BURNHAM. PDF Version of Burnham s Introduction to Contract Law

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1 Contracts Outline Professor: Text: Scott Burnham PDF Version of Burnham s Introduction to Contract Law TABLE OF CONTENTS 1. Introduction 2. Bargained For Contract 3. ALTERNATIVE REMEDIES 4. PERFORMANCE OR BREACH a. MODIFICATION i. Executory Contract ii. Accord & Satisfaction b. WARRANTY i. Purpose ii. UCC Warranties iii. Express iv. Disclaimer of Warranties v. Limitation of Remedies (UCC 2 719) c. UNANTICIPATED EVENTS i. Chart ii. How to: iii. Mistake (Restatement 152) iv. Impracticability v. Frustration vi. Force majeure Clause d. Good Faith (Restatement 205) i. UCC Good Faith e. PROMISE AND CONDITION i. Chart ii. Definitions iii. Promise iv. Condition v. Relief from Conditions f. ANTICIPATORY REPUDIATION i. Generally: 1 of 72

2 5. DAMAGES a. Basic Remedial Concepts i. Mitigation: ii. Certainty iii. Causation b. Expectancy damages c. Liquidated Damages: d. Consequential Damages UCC Remedies e. Punitive Damages f. Incidental Damages g. UCC Damages HOW TO: h. Specific Performance i. Foreseeability 6. ARBITRATION AND CHOICE OF LAW a. Choice of Law b. Arbitration c. Mediation 7. Rules 8. ISSUE SPOTTING 9. UCC 1. Introduction a. Terms i. Contracts: a promise or set of promises, enforceable by law. ii. Default Rules: rules that apply in absence of specified terms. First authority is the UCC and then common law. iii. Regulatory Rules: rules that cannot be changed (mandatory, immutable, must be followed). iv. Immutable Terms: those rules which parties are not free to change in a contract. v. Facilitatory Rules: rules that can be changed by the parties mutual agreement (help facilitate the agreement). vi. Contract of Adhesion: there is no option to negotiate the contract (take it or leave it). vii. Freedom of Contract: the rules governing a contract may be changed by adding terms. viii. Uniform Law Commission (ULC): creators of UCC, a group of contract specialists. ix. Uniform Commercial Code (UCC): a number of articles addressing various aspects of commercial law. x. American Law Institute (ALI): creators of the restatements and assisted with the UCC. xi. Rule of the Expectancy: the non breaching party is entitled to the amount of money that would put them where they would have been should the contract have been performed. xii. Goods: means all things (including specially manufactured goods) which are moveable at the 2 of 72

3 time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (Article 8) and things in action. Goods also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be served from realty. (2 107) xiii. Non Goods: services, intangibles, and real estate xiv. Specific Performance: (remedy in equity) xv. Reliance: If one person relies on another person s promise, the promise may be enforceable even in the absence of a bargain. xvi. Tender: offer to perform with the present ability to perform. xvii. Signed includes using any symbol executed or adopted with present intention to adopt or accept a writing. xviii. Void: A contract is void if the affirmative defense provides sufficient evidence that no contract was formed due to additional facts. xix. Voidable: If an affirmative defense is proven then the contract is voidable. This means that the contract was valid when it was formed, but a party has the power to avoid or affirm the contract. xx. Affirm: I waive my defense, and agree that the contract is valid. xxi. Disaffirm: minors can disaffirm their voidable contract while a minor or within a reasonable time after becoming an adult xxii.ratify: if the minor does not disaffirm then they have ratified the contract b. Sources of Law i. UCC Sale of Goods ii. Common Law iii. Restatements iv. Choice of Law 1. Old Rule: Use the laws from the state where the last act of creating the contract occurred 2. New Rule: Use the laws from where there are the most contacts with the transaction c. Types of Rules i. Freedom of Contract: Made by the parties themselves ii. Facilitatory Rules: default rules that are applied if not changed through freedom of contract iii. Regulatory Rules: rules dictated by the government. 2. Bargained For Contract a. Formation of a Contract Requires: i. Offer ii. Acceptance iii. Consideration b. OFFER: a promise to do something conditional on receiving something in return from the promisee. i. Generally: Whether a reasonable person would think that no more than acceptance is 3 of 72

4 required to form a contract. ii. Objective manifestations What the parties did, such as their words or their outward expressions. 1. Would a reasonable person in the position of the offeree have interpreted this as an offer? 2. Subjective intent is irrelevant 3. No meeting of the minds! iii. Advertisements: An advertisement does not constitute an offer of sale but is solely an invitation to customers to make an offer to purchase. (Pepsi) 1. Reasoning: to protect sellers from being liable for breach when they only have a limited supply. 2. Exception: when the advertisement is clear, definite and explicit and leaves no room for negotiation. iv. Types of Offers 1. Promise (bilateral): to accept an offer the party must make a promise 2. Performance (unilateral): both parties make a contract. a. Rewards as Offers Offer to be accepted by performance. 3. Promise or Performance (offeree s choice): an offer can be accepted by either promise or performance, and then both parties are bound as if they had made a bilateral contract. v. Offer Terminates When (Restatement 36) 1. Nonoccurrence of any condition of acceptance under the terms 2. Rejection or counteroffer by the offeree 3. Death or incapacity of the offeror or offeree. 4. Lapse of time: a reasonable amount of time. 5. Revocation a. General Rule: offeror may revoke an offer anytime before the acceptance. b. Exceptions: 1. Option contracts: a contract in which the offeree pays the offeror consideration to keep the offer open. a. Restatement 25: An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor s power to revoke an offer b. May be within the main contract or a collateral offer 2. Firm Offers: (UCC 2 205) applies only to transactions in goods & if elements are satisfied then the offer is open for a reasonable time not to exceed 3 months. a. Offer by a merchant b. To buy or sell goods 4 of 72

5 c. In a signed writing d. Which by its terms gives assurance that it will be held open is not revocable, for lack of consideration. 3. Reliance: If one person relies on another person s promise, the promise may be enforceable even in the absence of a bargain. a. A clear and unambiguous promise; b. A reasonable and foreseeable reliance by the party to whom the promise is made c. An injury sustained by the party asserting the estoppel by reason of his reliance 4. Beginning of performance 6. Damages: the remedy granted for breach may be limited as justice requires. (Restatement 90) You are entitled only to the amount of which you relied on. c. ACCEPTANCE: when the offeree (the one to whom the offer is made) gives the offeror ( the one who made the offer) the thing requested in the offer. i. Generally: A contract becomes binding once an offer has been accepted. 1. Mailbox Rule: an acceptance is made and cannot be revoked once the offeree has placed in the mailbox. This is to prevent an offeree by buying time with a slow acceptance medium. 2. Mirror Image Rule: the acceptance must be the mirror image of the offer in order to form a binding contract. ii. Methods of Acceptance: 1. Performance: binds the offeror not to revoke but does not bind the offeree until completion of performance. (Run to Vegas) a. Mere preparation to perform is not beginning of performance. 2. Promise Only: giving a promise in exchange forms a binding contract. (Sell Pen) 3. Promise or Performance: giving of a promise, beginning of performance acts as a promise and binds both parties. (Paint the Fence) iii. Medium of Acceptance 1. Generally a. Offeror controls the medium of acceptance b. Medium of Acceptance must be equal to or greater than the Medium of the Offer 2. Rule: there is no requirement that a contract be in writing, but depending on the nature and seriousness of the deal it might be that a reasonable person would know that a contract was not completed without a signing or finalization of the deal.(mississippi v Swift) a. Is the contract of the class which is normally found to be in writing? b. Whether it is of such nature as to need a formal writing for its full expression 5 of 72

6 c. Whether it has few or many details d. Whether the amount involved is large or small e. Whether it is a common or unusual contract f. Whether the negotiations themselves indicate that a written draft is contemplated as the final conclusion of the negotiations iv. Battle of the Forms (B of Fs) 1. Common Law (Last Shot Rule) a. If the offeree s form differed in any way, according to the mirror image rule, it did not qualify as acceptance but as a counteroffer. i. If the parties then shipped goods and paid for them, then their conduct manifests assent to the terms of the counter offer. 2. UCC 2 204(3): Contract does not fail for indefiniteness 3. UCC 2 206: Formation of Contract a. Unless otherwise indicated i. An offer invites acceptance by any reasonable manner and ii. An order or offer to buy goods may be accepted by shipping or promising to ship, 4. UCC Step By Step: a. Was acceptance expressly made conditional on assent to the additional or different terms? i. Yes, did the other party expressly accept the new & conditional terms? 1. Yes, there is a contract using the new terms. 2. No, did the conduct of both parties recognize the existence of a contract? a. Yes, there is a contract using terms which the writings of the parties agree upon and the UCC. b. No, there is no contract. ii. No, was there a definite and seasonable expression of acceptance within a reasonable time even though it states terms additional to or different from those offered or agreed upon? 1. Yes, are the terms additional? a. Yes, are both parties merchants? i. Yes, the additional terms become part of the contract UNLESS: (a) the offer expressly limits acceptance to the terms of the offer; (b) they materially alter it; or (c) notification of objection to them has already been given or is given within a reasonable time after 6 of 72

7 notice of them is received. ii. No, the additional terms are considered proposals. b. No, are the terms different? i. Yes, apply one of three rules, depending on jurisdiction: (1) Knockout Rule, (2) Offeror s Terms, (3) Same as Additional ii. No, contract meets mirror image rule and is formed. 2. No, there is no contract. 5. UCC 207 Burnham/Tutoring Style a. Is Acceptance Conditional: If the offeree s form says there is no deal if the offeror does not agree to the new terms, that form is not an acceptance. b. Dealing with Additional or Different Terms i. Additional: a term in the offeree s form that addresses a topic not addressed in the offeror s form 1. The offeror has three chances to reject the proposal: a. the offer expressly limits acceptance to the terms of the offer b. The offeror has a chance to notify the offeree that it rejects the proposed term. c. The additional terms materially alter the contract i. Comment 4: the terms result in surprise or hardship if incorporated without express awareness by the other party. ii. Different Terms: a term in the offeree s form that address the same topic addressed in the offeror s form in a different way 1. Three court based rules: a. Knockout Rule: The court knocks out both terms that differ and reads in the default rule from the Code or common law. b. Offeror s Term Prevails c. Same as Additional Term: Because of the materially alter rule of (2)(b), only an offeree s term that doesn t differ substantially from the offeror s term becomes part of the contract. d. CONSIDERATION i. Old Definition: the promisor s receiving something (benefit) or the promisee s giving up something (detriment) is consideration (Hamer v. Sidway) 7 of 72

8 ii. New Definition: whether each party promised something in exchange for the promise of the other. (Bargained For) (Restatement of Contracts) 1. Reciprocal Inducement (O.W. Holmes) 2. Promise: A commitment to do or not to do something. iii. Sufficient and Adequate Consideration 1. Sufficient: satisfies the legal requirement that a bargained for exchange exists. (Necessary) (Wolford v. Powers) 2. Adequate: refers to the equivalency of the exchange; whether each party stood to receive something reasonably equivalent to what they promised. (Not Necessary) iv. Mutuality 1. McIntire v Hart (Cotton Growers) a. An Unconscionable Contract is one that shocks the conscience and thus not enforceable. b. A valid contract must have Mutuality where there is consideration on both sides. It is not necessary for the contract mutuality to be equal. c. UCC Article 2: governs the sale of goods (2 302(1), 2 102, 2 105(1)) v. Detecting Absence of Consideration 1. Nominal Consideration: a phony consideration, no actual bargain, simply the appearance of bargain 2. Pre existing Duty Rule: consideration is absent if a party promises to do what it is already legally obligated to do 3. Finding Past Consideration: a benefit that one party already received at the time he made his promise (past consideration is no consideration) a. Exception: If a legal obligation becomes unenforceable because the statute of limitations expires, then a promise to pay the obligation becomes enforceable even though the promise to pay is for a benefit previously received and no legal obligation to pay exists under the original agreement. vi. Illusory Contracts 1. Promises (defense to the enforceability of the contract) a. Illusory promise: because in reality one party didn t promise the other anything that s legally meaningful b. Lack of commitment: because if a party isn t committed to doing anything, then he hasn t made a promise c. Lack of mutuality: because if one party isn t bound by the bargain, then neither is the other 2. Satisfaction Clauses a. Satisfaction clauses don t make a contract or a promise illusory. Both objective and subjective satisfaction clauses satisfy the consideration requirement. 8 of 72

9 b. Wording that makes a party s promise conditional upon that party s satisfaction with something c. Test: i. Objective: measured in terms of mechanical utility or operative fitness 1. Reasonable person ii. Subjective: measured in terms of personal taste, fancy, or judgment 1. Duty to act in good faith 3. Output and Requirements Contracts: UCC a. A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded. b. A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes, unless otherwise agreed, an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale. vii. Misunderstanding: A problem of interpretation that makes the agreement void because each party ascribes a different meaning to an essential term and each meaning is reasonable. (No Contract) 1. Rule: Restatement 20 a. There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and i. neither party knows or has reason to know the meaning attached by the other; or ii. each party knows or each party has reason to know the meaning attached by the other. b. The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if i. that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or ii. that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party. 2. Objective Method: when there are two objective meanings and one is not better than the other, the contract is thrown out 3. Subjective Method: when one meaning is objectively better than another, the 9 of 72

10 contract is interpreted to read the reasonable meaning. 4. Were there two interpretations of a single term? a. Yes, Are both the interpretations reasonable? (Peerless) i. Yes, Did one party know or have reason to know the meaning attached by a naive party was different? (Konic v Spokane Computers) 1. Yes, Use the interpretation of the naive party. 2. No, There was no contract formed, parties didn t actually agree. ii. No, Use the only reasonable interpretation. (Colfax) b. No, then there is no misunderstanding e. DAMAGES i. Breach of Contract 1. Expectancy: the non breaching party is entitled to the amount of money that will put them in the place that they would have been had the contract been performed. a. US Naval Institute v Berkeley i. Damages for breach of contract are governed by the Rule of Expectancy. ii. Punitive damages are not available in contract breach cases. ii. Restitution The value of the benefit conferred iii. Reliance The Restatement says you are only entitled to the amount of money to the extent of the reliance (the amount that you reasonably relied on) f. AFFIRMATIVE DEFENSES i. Illegal Promises void & unenforceable 1. A contract to do an illegal act or to aid another in violating the law is likewise void and unenforceable, whether executory or executed. 2. Exceptions a. Not every agreement that involves illegality is unenforceable. Society is trying to balance two interests. (McConnell) i. Freedom of contract interest we want to enforce agreements when: 1. Strength of policy is reflected in statutes or case law. (Fundraising fee or public good?) 2. One party is innocent 3. The illegal is not serious 4. The connection to illegality is tenuous ii. Public policy we want to discourage undesirable conduct when it 1. Restrains trade 2. Interferes with family relationships 3. Encourages torts 10 of 72

11 b. Courts will normally not enforce the agreement but will allow restitution. 3. In Pari Dilecto: only one party is at fault, e.g. insurance company creates policy that is illegal under state laws and when a claim is made the company uses illegality as a defense, but the court would not find it favorable. 4. The legal system has the power to challenge agreements in three ways: a. Civil: The agreement is void as a matter of law, so nobody can base a contract claim on it. b. Criminal: Parties may face a penalty for making the agreement. c. Procedural: Using the courts to enforce such agreements is inappropriate. ii. Unconscionability: a party who adheres to the other party's standard terms does not assent to a term if the other party has reason to believe that the adhering party would not have accepted the agreement if he had known that the agreement contained the particular term. (Williams v Walker Thomas) 1. Test: a. Absence of meaningful choice (Procedural) b. Terms unreasonably favorable to the party (Substantive) 2. Can find term unconscionable as a matter of law and can: a. Throw out the term b. Throw out entire agreement c. Limit application of the term 3. Actual Knowledge: is not relevant. Whether or not a person reads the contract or doesn t read the contract, if the contract is unconscionable neither one should be held to the unreasonable terms. 4. Conspicuous Requirement: A person can put an unreasonable term in a contract, but if he does, he must make it conspicuous and make sure the other party knows or should know about it. (Reasonable Expectations principle) 5. UCC 2 302: The doctrine that a court may use to strike down a contract or a contract term that shocks the conscience of the court iii. Exculpatory Clauses: one party agrees not to hold the other party liable for negligent acts he commits after they make the agreement 1. Tunkl Factor Test (If these factors are present, the court may rule against the exculpatory clause) a. Type of business generally thought suitable for public regulation b. Service of great importance to public c. Willing to perform this service for any member of the public d. Seller has advantage of bargaining strength e. Party confronts the public with a standardized adhesion contract of exculpation f. Is placed under the control of seller subject to the risk of the carelessness of 11 of 72

12 the seller or his agents iv. Fraud and Misrepresentation (Voidable) 1. Prove fraud and either: a. Rescind the contract OR b. Affirm the contract and sue in Tort for damages. (Stambovsky) 2. Elements a. D makes a representation (has to be of fact not opinion) b. It is false c. D knows it is false d. D makes it to induce P to enter the transaction e. The representation relates to a material matter f. P enters the transaction g. P relies on the representation h. It is reasonable for P to rely on it i. P is damaged 3. Duty To Inform: No representation is necessary when there was a duty to inform. (Obde) a. Caveat Emptor: the buyer beware, there is no duty to inform the buyer. 4. Innocent Misrepresentation: not a tort, but is grounds for rescission (AKA constructive fraud) 5. Fraud in Inducement: voidable (requires all the elements of fraud) 6. Fraud in Factum (in the making, rare): void (when a party is tricked into unknowingly executing a contract) v. Mistake: a belief that is not in accord with the facts. (Voidable) 1. Elements (Restatement 152): a. Mistake was made b. Mistake was mutual c. At the time contract is made d. Goes to a basic assumption e. Material effect on the exchange f. UNLESS the party bears the risk under Restatement 154 (Lenawee) because: i. the risk is allocated to him by agreement of the parties. ii. he acted with limited knowledge to the facts, OR iii. if it is reasonable for the courts to allocate the risk to him. 2. Damages: contract becomes voidable by the party adversely affected 3. Restatement 151: A contract defense claiming that the contract can be avoided because one or both parties entered into the agreement based on a belief that was not in accord with the facts. 12 of 72

13 4. Restatement 153: Unilateral Mistake (one party is mistaken) If these elements are present, contract is voidable. a. Effect on the agreed exchange of performance is adverse to him and he does not bear the risk of loss b. Result would be unconscionable OR c. Other party had reason to know of the mistake or his fault caused the mistake vi. Lack of Capacity 1. Mental capacity (Ortelere) a. Generally i. Void: if lack of capacity is determined as a matter of law, then the law also determines that the contract is void or voidable. If a person has been judicially declared incompetent, the contract is void. ii. Voidable: if lack of capacity is determined as a matter of fact, then the contract is voidable by the person who lacks capacity. The advantage of this test is that it is an objective test. b. Cognitive Test: (Do you understand the nature of the transaction?) i. Whether the person understood the nature and consequences of the transaction at the time. A reasonable person should be able to tell from someone s outward manifestations whether she has sufficient understanding. c. Motivational Test i. It looks not only at whether the person understood the transaction, but whether the person was capable of acting in accordance with that understanding. ii. Whether the other party knows or has reason to know of the other s lack of capacity. 2. Minors: as a matter of law, a contract is voidable by a minor a. Timing: A minor may avoid or disaffirm a contract up until the day she turns 18 and for a reasonable time after that b. Ratify: the minor may only ratify or affirm the contract after turning 18 (keeping it for a reasonable time) c. Consideration: all consideration must be returned regardless of the condition, no restitution for damages. d. EXCEPTIONS (Farnsworth): i. Necessaries: voidable but they have to make restitution (reasonable value) 1. (food, clothes, shelter) ii. Misrepresentation: convincingly showed they were over 18, minor 13 of 72

14 cannot void contract iii. Minor Plaintiff: trying to recover money, cannot void the contract 1. Minor pays cash they don t get their money back (Minor Plaintiff) 2. Minor uses credit do not have to pay the creditor (Minor Defendant) 3. Duress: use of a threat to person, property, and (sometimes) economic interests so that the party had no reasonable alternative but to enter into the contract. (Voidable) a. Elements: manifestation of assent is induced by unreasonable threat that leaves no reasonable alternative i. Use of Threat ii. Threat improper iii. Leaves no Reasonable Alternative b. The test for determining whether such a moral compulsion exists is whether the duress is of such severity as to overcome the will of a person of ordinary firmness (Lomanaco, compulsive gambling is not a defense) 4. Undue Influence: inappropriate method of persuasion that dominant party uses to convince a weaker more vulnerable party to enter into a contract against his better judgment. (Voidable) a. Generally if the person who acted is in a dominating or trusting relationship with the other person then there will be a claim for undue influence. b. Persuasion which overcomes the will without convincing the judgment. 5. Intoxication (Restatement 16) (voidable) a. A person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that by reason of intoxication i. he is unable to understand in a reasonable manner the nature and consequences of the transaction, or ii. he is unable to act in a reasonable manner in relation to the transaction. vii. Statute of Frauds (Restatement 110 & 130) 1. Generally: The general rule is that oral contracts are enforceable. 2. The Statute of Frauds is the collective name for the exceptions, statutes that provide that certain oral agreements must be evidenced by a writing to be enforceable. 3. Oral agreements that fall within Statute of Frauds: a. If the agreement can t be fully performed within a year of making (McIntosh) b. An agreement concerning real estate c. An agreement to rent real property for longer then a year d. An agreement to answer for the duty of another (suretyship) 14 of 72

15 e. An agreement for the sale of goods for $500 or more 4. UCC (2 201) a. Applies to contracts for the sales of goods over $500. b. Exceptions i. Merchant s Exception: confirmation of an oral agreement that is sent by one party that is binding on the other party if not objected to within 10 days (UCC 2 201(2)) ii. Specially Manufactured Goods: seller makes goods that are unlikely to be bought by another party on reliance of a request for them. iii. Admitting to Making the Contract: if the party admits in a pleading, testimony, or under oath that a contract was made, no writing is needed. (UCC 2 201(3)(b)) iv. Performance of the Contract: if the contract has been performed, parties have given up their right to raise defense. v. Reliance 5. Writing Satisfies Statute of Frauds when: a. Sufficiently describes the contract by: i. identifying the parties ii. identifying the subject matter, and iii. including the essential terms of the contract b. Is signed by the party against whom enforcement is sought (UCC 1 201(b)) c. UCC: Must include quantity sold 6. Restatement 130 a. Executor of will b. Duty of another c. Consideration of marriage d. Land e. One year contract 7. Conceptual a. Is the oral agreement within the Statute of Frauds? i. NO, it is enforceable. ii. YES, is the agreement evidenced by a writing? 1. YES, is it signed by whom it is enforced against? ("Signed" includes using any symbol executed or adopted with present intention to adopt or accept a writing.) a. YES, does it have sufficient details? (Details include quantity) Does it identify the parties, the subject matter, and the essential terms of the contract? 15 of 72

16 i. YES, it is enforceable ii. NO, see #2. 2. NO, is there an exception? (Merchant Rule, Specialized manufactured goods, Performance of the K, Admitting making the contract, Reliance, CISG International) i. YES, it is enforceable. ii. NO, it is not enforceable. 8. Voidable Under Statute of Frauds a. Prove no contract was formed b. Returned to pre contract positions c. Must provide credible evidence 9. Unenforceable Under Statute of Frauds a. Prove that the party didn t sign any writing b. Contract is enforceable only against the party who signed MIDTERM 3. ALTERNATIVE REMEDIES a. Chart Obligation Source Remedy Tort Social Policy Put P back where P was Contract Voluntary Agreement Put P back where P would have been Reliance Action induced by promise Put P back where P was Restitution Unjust Enrichment Make D give to P the value of the benefit b. RELIANCE (promissory estoppel): bars a party from asserting lack of consideration where reliance was induced by the party asserting there was no requisite consideration. (Drennan v Star Paving) i. Elements (Restatement 90) 1. It must include a promise 2. The promisor must reasonably expect the promise to induce action or forbearance 3. The promise must be successful in inducing the expected action or forbearance 4. Enforcement of the promise must be the only way to avoid injustice ii. Damages: are awarded to the extent of the reliance. iii. Charity Donation: if a charity relies on a promise to give a donation or a pledge then it is enforceable. Even if the charitable organization doesn t rely on the promise or gives some type of consideration, some courts would still require performance because it is good policy. 16 of 72

17 c. RESTITUTION: a person's interest in having another person restore any benefit that he has conferred on that person. Restitution may be used to achieve equity when there is unjust enrichment even though no contract was formed. (a.k.a. implied in law contract, quasi contract). Restitution is a claim, not founded on the contract, but founded on a equitable principle i. Elements 1. A benefit was conferred 2. It was not a gift 3. It was not officious ii. Benefit: 1. Benefit conferred by family creates rebuttable presumption of a gift. (Orr) iii. Gift:a voluntary, immediate transfer of property without consideration from one person (the donor) to another person (the donee). iv. Officious: forcing a benefit on another, interference in the affairs of others not justified by the circumstances under which the interference takes place. (Sidney) 1. NOT Officous When: A reasonable person in the shoes of the defendant would have requested the services if he was in a position to do so, so it would be unjust to allow him to retain the benefit without paying for it. (Quasi Contract) v. Damages: the value of the benefit conferred 1. Quantum Meruit: the plaintiff gets a money judgment for the reasonable value of services that she conferred on the defendant. 2. Quantum Valebant: the plaintiff gets a money judgment for the fair market value of goods that defendant received from plaintiff. vi. Restatement 86: 1. A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice. (Hamer v. Sidway) 2. A promise is not binding under Subsection (1) a. if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or b. to the extent that its value is disproportionate to the benefit 4. PERFORMANCE OR BREACH a. MODIFICATION i. Executory Contract Occurs during the course of performance, neither party has fully performed 1. Restatement 89: A promise modifying a duty under a contract not fully performed on either side is binding: a. if modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or b. to the extent provided by statute (like UCC 2 209); or 17 of 72

18 ii. c. to the extent that justice requires enforcement in view of material change of position in reliance on the promise 2. Consideration a. Pre Existing Duty Rule: a promise is not consideration if the promising party is already obligated to perform that promise. b. To get around the pre existing duty rule, use these for consideration: i. agree to do something additional or different (+ a peppercorn); ii. clearly rescind the first contract and form a new contract (mutual rescission); iii. agreement to the modification was fair and equitable under the circumstances. (Restatement 89) 3. No Oral Modification Clause: modifications have to be in writing a. Usually oral modifications are enforced, especially where they induce reliance by the other party. b. An oral modification is usually a waiver of the right to enforce the no oral modification clause c. Almost every contract has a boilerplate provision that has a no oral modification clause that says all modifications have to be in writing. 4. Statute of Frauds:(Restatement 110) modifications of agreements that fall under the Statute of Frauds must be in writing. a. If the agreement can t be fully performed within a year of making (McIntosh) b. An agreement concerning real estate c. An agreement to rent real property for longer then a year d. An agreement to answer for the duty of another (suretyship) e. A marriage provision f. An agreement for the sale of goods for $500 or more 5. To spot a modification issue look for these facts: a. there is an original contract between the parties. b. the contract is wholly executory; that is, it has not been fully performed by either party. c. the parties agree to change the duties of at least one of the parties. 6. UCC Modifications (UCC 2 209) a. Modifications UCC 2 209: no consideration necessary but it is assumed that the modification must be made in good faith. (Only with sale of goods is no consideration necessary) UCC (1 304) Accord & Satisfaction Occurs after one party has fully performed, creditor debtor relationship exists. 1. How To: a. Was the creditor given something additional or different as consideration? 18 of 72

19 i. YES, the debt is discharged ii. NO, was the obligation liquidated and undisputed? 1. YES, is there a state law that provides a mechanism for settlement? a. If YES, the obligation is discharged if the mechanism was followed b. If NO, the obligation is not discharged 2. NO, did the debtor clearly communicate an offer? a. NO, the obligation is not discharged b. YES, did the creditor knowingly accept the offer? i. NO, the obligation is not discharged ii. YES, an accord is formed b. Did the debtor perform the accord (satisfaction)? i. YES, the accord and the original obligation are discharged ii. NO, the creditor may sue on either the accord or the original obligation 2. Definitions a. Accord: agreement between creditor and debtor to discharge a debt by the payment of less than is owed i. Accord If the creditor accepts the debtor's performance in exchange for the discharge ii. Substituted contract If the creditor accepts the debtor's promise in exchange for the discharge b. Satisfaction: performance of an accord 3. Restatement 281: a. An accord is a Contract under which a creditor promises to accept a stated performance in satisfaction of the debtor s existing duty. Performance of the accord discharges the original duty. b. Until performance of the accord, the original duty is suspended unless there is such a breach of the accord by the debtor as discharges the new duty of the creditor to accept the performance in satisfaction. If there is such a breach, the creditor may enforce either the original duty or any duty under the accord. c. Breach of the accord by the creditor doesn t discharge the original duty, but the debtor may maintain a suit for specific performance of the accord, in addition to any claim for damages for partial breach. 4. Accord a. Generally: There is no consideration for reducing a debt if it is a liquidated, undisputed debt. 19 of 72

20 b. One party is a creditor and the other is a debtor i. One party has fully performed in a contract and the other has not ii. One party has a tort claim against another (release) iii. One party has loaned money to another c. Accord: an agreement (O + A + C) between creditor and debtor to discharge the debt by payment of less than is owed. i. Offer must manifest intention that it is part payment in full satisfaction of the debt ii. Acceptance creditor can t accept as part payment and then cash it because that would be changing the terms of the offer. Creditor has two options (Con Edison v. Arroll): 1. Accept the partial payment and discharge the debt OR 2. Reject the payment, get nothing and sue for full payment iii. Consideration Accomplished If: 1. Paying something additional or different (not less) 2. Liquidating an unliquidated price: parties never specified the amount to be paid (Kibler v Garrett) 3. Resolving a disputed debt (dispute must be in good faith) (Con Edison) iv. UCC doesn t require consideration for an accord 5. Satisfaction: performance of the agreement of accord. a. If debtor fails to perform, he s breached the accord, and the creditor may sue either on the accord or on the underlying debt. b. By Check: jurisdictions are split on whether fine print on a check constitutes an accord (see UCC for use of instruments) 6. UCC Accord & Satisfaction (UCC 3 311) a. No consideration required for accord b. How To: i. Debt is discharged if 1. Good faith payment in full satisfaction of debt, 2. Unliquidated/bona fide claim, and 3. Payment received ii. Unless 1. Creditor is organization that: a. Within reasonable time notified debtor that disputed debt payments must be sent to a designated place, AND b. The instrument was NOT received by the designated place 20 of 72

21 2. Creditor is anyone that: a. Gives refund within 90 days of the payment, AND b. Does not designate a place for disputed debts 7. Issue spotting: a. in an accord issue, look for these facts: i. There is a duty arising either from a tort or from a contract that is partially executed; that is, it has been performed by one of the parties. The party who has performed is a creditor. ii. 2. The parties enter into a contract that discharges the duty of the debtor. iii. 3. The debtor agrees to give the creditor some performance (or promise). b. WARRANTY i. Purpose: to determine what it is that the seller has agreed to sell. (Official Comment 4 to UCC 2 313) ii. UCC Warranties 1. Title (UCC 2 312): a. Warranty of Title: i. Seller warrants that they have title/ownership to sell ii. Seller warrants that there are no unknown liens/infringements b. Exclusion or modification of this warranty is only by clear language. c. Merchants are not liable if a title claim arises out of compliance with buyer s specifications. 2. Merchantability (Implied) (UCC 2 314) a. Goods are fit for ordinary purposes for which such goods are used when the seller is a merchant of that kind of good b. Merchantability: fit for the ordinary purposes 3. Fit For a Particular Purpose (Implied) (UCC 2 315) a. Goods shall be fit for a particular purpose where: i. Seller has reason to know any particular purpose for which the goods are required AND ii. Buyer is relying on the seller s skill or judgment to select goods iii. Express: an affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain. (UCC 2 313) a. Affirmation/Promise: fact or promise made by seller i. Usually difficult to determine if the fact can be objectively measured. b. Relation: the warranty must relate to the goods c. Bargain: the warranty must be part of the basis of the bargain, there are two interpretation of how to determine this: 21 of 72

22 i. buyer relied on the warranty as part of the deal ii. whether warranty is part of the basis of the bargain is a matter of timing. d. Sample: any sample or model creates an express warranty iv. Disclaimer of Warranties 1. Exclusion or Modification of Warranties (UCC 2 316) a. Express (UCC 2 316(1)) i. Warranties may be disclaimed orally or through a written statement. (e.g. there are no express warranties ) ii. HOWEVER, when express warranties are both given and disclaimed, the warranty is interpreted as given. b. Implied Specific (UCC 2 316(2)) i. Merchantability: disclaimer of implied warranty must be conspicuous and mention merchantability. ii. Title: To disclaim implied title warranty: specific language iii. Fitness: disclaimer must be conspicuous and in writing. Sufficient: There are no warranties which extend beyond the description on the face hereof. c. Implied General (UCC 2 316(3)) i. The seller may disclaim implied warranties by using the phrases as is with all faults as is, where is or similar language. ii. No conspicuous requirement from statute but it is required by courts. v. Limitation of Remedies (UCC 2 719) 1. Limitation of Remedies: a seller may limit remedies and offer a warranty, instead of disclaiming all warranties. (e.g. promising to repair or replace) a. Limit the amount the buyer may recover for direct damages b. Limit the consequential damages to particular number c. Limit the duration of the promised remedy 2. Parties can contract different remedies a. Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act. (code lemon law) (Murray) b. Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. i. Personal Injury: limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but (consumer) ii. Commercial: limitation of damages where the loss is commercial is not unconscionable. 22 of 72

23 3. Damages a. Consequential Damages: default rule is that there are consequential damages for breach of warranty. i. Methods for interpretation when the remedy fails and consequential damages are disclaimed (e.g. when repairing or replacing the vehicle will not help the consumer) (Murray): 1. Throw out consequential damage limitation with the remedy 2. Keep consequential damage limitation but throw out remedy 3. Throw out consequential damages limitation when in the same paragraph as the remedy b. Buyer s Incidental and Consequential Damages (UCC 2 715) i. Incidental: direct result of the breach, usually the good itself ii. Consequential: any damages 1. which the seller had reason to know which, and could not reasonably be prevented 2. injury to person or property property proximately resulting from breach c. Revocation of Acceptance in Whole or in Part (UCC 2 608) i. (1) The buyer may revoke his acceptance of a lot or commercial unit whose non conformity substantially impairs its value to him if he has accepted it c. UNANTICIPATED EVENTS i. Chart What about the doctrine of impossibility? Claim Mistake Impracticability Frustration [See Restatement 152] [See Restatement 261] [See Restatement 265] When At time K was made After K is made After K is made What happens Mutual mistake was made (belief not in accord with the facts) Performance is impracticable because of an event Principal purpose is frustrated because of an event What it goes to Belief was a basic assumption Non occurrence of event was a basic assumption Non occurrence of event was a basic assumption How much Material [material how [material how 23 of 72

24 impracticable?] substantial?] Relief K is voidable Duty is discharged Duty is discharged Exception Bears the risk language or circumstances Bears the risk language or circumstances Bears the risk language or circumstances ii. How to: 1. Did the event occur after contract formation? a. Yes, did performance become impracticable? i. Yes, was nonoccurrence of the event a basic assumption (i.e. Whether reasonable parties at the time they entered the K would ve expected performance if the event occurred (foreseeability))? 1. Yes. Did the party seeking to discharge carry the risk? a. Yes, not out of K. ( b. No, performance excused (may still be liable for reliance and restitution) 2. No, ii. No, not party gets out of K. b. No, then try for mistake, and avoid the contract. iii. Mistake (Restatement 152) 1. Mistake: a belief that is not in accord with the facts 2. IF a. At the time the contract was made b. There is a mistake of both parties c. As to their basic assumption d. That is material 3. Then a. The contract is voidable b. Unless one of the parties bears the risk i. Look to language & circumstances for risk assumption iv. Impracticability 1. Definition: event that makes performance difficult without seller assuming risk (Alcoa) 2. Existing Impracticability (Restatement 266) a. IF i. At Formation: At the time the K was made ii. Impracticable: a party s performance is impracticable 24 of 72

25 1. the contingency is a hardship on the party. (i.e., which greatly increases the cost, difficulty, or risk of the party s performance) (Alcoa) iii. No Fault: Without his fault iv. Unforeseen: because of a fact he had no reason to know v. Basic Assumption: the non existence of which is a basic assumption b. THEN i. The duty is discharged ii. Unless the party bears the risk 1. Look to the language and the circumstances 3. Supervening Impracticability (Restatement 261) a. IF i. During Performance: after the K was made ii. Impracticable: a party s performance is impracticable 1. the contingency is a hardship on the party. (i.e., which greatly increases the cost, difficulty, or risk of the party s performance) (Alcoa) iii. No Fault: without his fault iv. Event: because of an event v. Basic Assumption: the non occurrence of which is a basic assumption b. Then i. The duty is discharged ii. Unless the party bears the risk 1. Look to the language and the circumstances 4. UCC Impracticability (UCC 2 615) a. Delay or failure to deliver is not breach when i. Impracticable: non occurrence of an event which was a basic assumption on which the contract was made. ii. Allocation: when part performance is impracticable, reasonable allocation must be made iii. Seasonable notice of the failure and allocation, if any, must be made. iv. Official comment 4 Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance. v. Test whether any objective, reasonable party would be able to perform b. Allocating the loss when a performance is partially excused i (b) may allocate in any manner which is fair and reasonable 25 of 72

26 ii Seller must notify buyer of allocation 1. v. Frustration 1. Definition: event that makes buyers performance not worth it. (Alcoa) vi. Restatement 266 Existing Impracticability or Frustration vii. Same elements as impracticability 1. Exception is that the party seeking to be discharged from the contractual obligations must prove that a certain event frustrated the principal purpose of the contract a. The party is able to perform, but the performance no longer holds any value for him. Money is usually not enough to qualify for frustration. 2. Supervening Frustration (Restatement 265) a. IF i. When: after the K was made ii. Frustration: a party s principal purpose is frustrated iii. Fault: without his fault iv. Event: because of an event v. Basic Assumption: the non occurrence of which is a basic assumption b. Then i. the duty is discharged ii. unless the party bears the risk 1. Look to the language and the circumstances viii. Force majeure Clause force majeure clauses in a contract typically excuse party obligations in named extraordinary circumstances such as war, strike, riot, crime or Acts of God. d. Good Faith (Restatement 205) 1. Definition a. Bad Faith(lack of diligence, willful rendering of imperfect performance) i. Summers and the Restatement like unconscionability, it emerges in a context, so you can t define it. ii. Burton it arises when a party tries to recapture foregone opportunities. iii. Williamson it arises when a party engages in opportunism behavior which is contrary to the other party s understanding but not necessarily contrary to the express terms of the agreement. b. Good Faith: (an immutable rule that requires parties to act honestly and reasonably) c. Being Honest: subjective duty of good faith (need evidence that proves the 26 of 72

27 person had ulterior motives for her actions) d. Being Reasonable i. objective duty of good faith 1. Duty to observe reasonable commercial standards of fair dealing 2. Testimony from someone in that business could be proof of those standards 2. Required When a. Every Covenant has an implied covenant of good faith and fair dealing. b. Satisfaction Clause: when a party reserves discretion it must exercise its discretion in good faith. (Omni Group) c. Consideration: there is consideration for the settlement of the claim, even if the claim is not valid, as long as the claim was brought in good faith (Fige v Boehm) d. Conditions: there may be an implied covenant of good faith to bring about an event that conditions performance or not to hinder the event. (Billman v Hensel) e. Output Requirement: in an output requirements contract, the quantity supplied or purchased is constricted by a good faith requirement. (Feld v Levy) (UCC 2 306) 3. Good Faith is always accompanied by something a. Reid recall the loan in good faith b. Neumiller accept potatoes c. Dalton examine the evidence in good faith ii. UCC Good Faith 1. Good Faith: except as otherwise provided in Article 5, means (UCC 1 201(b)(20)): a. honesty in fact AND b. the observance of reasonable commercial standards of fair dealing. 2. Using freedom of contract to refine the definition of good faith (UCC 1 302(b)) a. Cannot disclaim duties of diligence, reasonableness, and care b. May define duties if you use standards that are not manifestly unreasonable e. PROMISE AND CONDITION i. Chart Term Definition Consequence Promise Manifestation of intention to act Restatement 2 Other Party must still perform and sue for Damages Condition Event that must occur before some The performance is not due. 27 of 72