Contracts II Outline

Editorial Note: Please forgive the delay in completing this outline. I have been working hard to finish all the outlines and podcast episodes. This outline should be completed in the next day or so. At that point, this editorial note will no longer be needed and disappear.

The Meaning of the Agreement

Last semester, we focused mainly on the structure of a contract. Now, we turn to defining the different parts of the contract to derive what the parties meant when they made an agreement.

Principles of Interpretation

A lot of the time, parties do not agree on what was intended by the contract. In the 19th century, courts followed a subjective approach (what did the people think) to establish whether a contract was enforceable. If they meant different things, then there was no contract.

Rules changed over time to a completely objective approach where a reasonable person would determine what the term meant and the parties needed to follow that standard. However, the problem was that a contract could then be enforced for something neither party agreed to.

So, we have the modified approach outlined in Restatements and cases below:

§201 – Which meaning is binding

1. When the parties agree, that is the meaning.
2. When the parties disagree, we will go for A’s meaning if A did not know of B’s meaning, and B did or have reason to know of A’s meaning. In other words, if B did know, then they were in the position to alter the agreement. Because they did not choose to alter the agreement, we would follow A’s meaning.
3. If no-one knows or has reason to know, then there is no contract.
4. Where parties agree, that is the meaning. That means, that if the parties understand the meaning that is different from the usual meaning, then the parties meaning applies (e.g. A shoe can be a hat if the parties agreed to that term).

Joyner v. Adams – Land Development

This is a good example the 2nd rule above. When the courts determined that defining the word “development” could not be done, then the fact finders must know if one party knew or had reason to know the meaning of the other. Our lesson here is to clearly write what we mean.

Frigaliment Importing Co. v. B.N.S. International Sales Corp. – What is Chicken?

This case is a good example of knowing that you should just define the term. When the term is not defined, the court will use several resources to determine if one party knew the meaning of the other. They will consider:

• Witness testimony as to the meaning
• Plain language of the text
• Relevant terms of the market field
• Dictionary meaning, if provided in the contract

C & J Fertilizer, Inc. v. Allied Mutual Insurance Co. – Insurance of Burglary

Even if the terms are defined unambiguously, they must be reasonably expected. This is because forms are standardized and hardly ever read now, so some it makes sense not to enforce things other than what is reasonably expected.

The Parol Evidence Rule

Any evidence that is relevant can be debated within the court. Relevant evidence is defined as any information that could provide any additional information to the issue at hand. However, the parol evidence rule is designed to limit some of this evidence. The point of the rule is to encourage parties to write down their contracts (written contracts results in a more efficient economy).

Parol means oral or spoken. Thus, the parol evidence rule excludes additional oral (or informal written) evidence that could vary or contradict contract terms. However, this rule only applies to completely integrated contracts.

§209(1)

An integrated agreement is a writing or writings constituting a final expression of one or more terms of an agreement.”

§210(1)

“A completely integrated agreement is an integrated agreement adopted by the parties as a complete and exclusive statement of the terms of the agreement.”

For the parol evidence rule to apply, the agreement needs to only appear to be completely integrated at first glance. A good way of ensuring this is true is by including a merger clause which states that all the terms are within the confines of that specific contract.

Thompson v. Libby – Logs

The warranty term was missing from the final agreement. If the contract appears complete (and it did) then any parol evidence contradicting or adding a term would be excluded.

Taylor v. State Farm Mutual Automobile Insurance Co. – Bad Faith Accident

There are two views about how to admit parol evidence.

1. Four corners rule – plain language rule – the document must be ambiguous before we include any parol evidence. If it is clear, no evidence is admitted. For our class, we adopt the four corners rule.
2. The Corbin view – First, all evidence is admitted and then exclude anything that varies or contradicts the meaning of the contract. This allows the court to evaluate the meaning of the agreement. This rule is adopted by the court in this case.

Sherrodd, Inc. v. Morrison-Knudsen Inc. – Clearing the land

The majority argues that there are two exceptions to the parol evidence rule of the State. First, mistake of fact. Second, fraud. For fraud, any evidence is not “admissible when the oral promise directly contradicts a provision of the written contract.” (Dissent’s summary of the majority opinion).

The dissent disagrees saying that evidence of fraud should be taken into consideration. The fear here is that by not taking evidence into consideration, all a party would need to do, by cunning or otherwise, ensure that an agreement was signed that releases them from any action.

UCC 2-306 Requirement Contracts

Party A is required to purchase the goods at the price established by Party B. How are these prices and goods measured? By the terms in 2-306 with good faith.

Nanakuli Paving & Rock Co. v. Shell Oil Co. – Asphalt

Trade usage are the actions of industry participants.

Course of dealing are actions of these parties on prior contracts.

Course of performance is action of parties on the current contract. This is the strongest argument of the three terms.

Supplementing the Agreement

Implied Terms

UCC 2-306(2) – Requirement Contracts

A Requirement Contract is “everything you buy, I will produce.” when one party agrees that it will

An Output Contract is “everything you produce, I will buy.” One party agrees that it will buy all of the other parties goods at a contract price. One of the issues here is that if party A produces a vastly more amount normal, party B would be required to purchase the goods.

UCC 2-306(1) Good faith requirements keep parties from taking advantage of the terms of the agreement to harm the other party. In other words, good faith means that the parties guard against any negative surprises.

Actual output means, “how much do you actually need.”

Wood v. Lucy, Lady Duff-Gordon – Exclusive Contract for Fashion

If there is a lawful, exclusive agreement, then it is a responsibility of the seller to supply the goods and the responsibility of the buyer to promote the sale. Although the UCC was not in effect at this time, it applies now as long as it is in goods.

UCC 2-309(2)(3) and Comment 8

Leibel v. Raynor Manufacturing Co. – Garage Doors

UCC 2-309(2) – Can be terminated at any time. (3) – But reasonable notice is required. Comment 8 – Reasonable notice gives the other party reasonable time to find a substitute arrangement.

The UCC applies here because this is an agreement for the distribution of a good, garage doors, as its primary purpose.

The big takeaway from the case is that the UCC can add a term to the deal. This can be avoided if the attorneys add in a term that says the UCC won’t apply to the term in question.

Gap fillers are justified to be fair and efficient.

Obligation of Good Faith

UCC § 1-201(b)(20) Good Faith

Good faith “means honesty in fact and the observance of reasonable commercial standards of fair dealing.”

Seidenberg v. Summit Bank – Merger Gone Bad

Several factors could show that good faith was lacking.

• Bargaining powers
• expectations of the parties
• bad faith or outright dishonesty

Morin Building Products Co. v. Baystone Construction Inc. – GM Siding

If this was a matter of aesthetics, then the person has to act in good faith. If it is about commercial use, then it is a reasonable person. The issue here is that this is a satisfaction clause was buried in standard forms. As a result, the contract was ambiguous because the placement of terms was confusing.

Restatement 228 – the objective standard is preferred. The purpose of this is not to protect the weaker party but simply to match up expectations.

Locke v. Warner Bros., Inc. – Movie Development deal

Locke had a deal with Warner that they would consider her film proposals. When all the proposals are rejected, she claims that they did so with bad faith.

The rule of law is that for creative work, work dissatisfaction can be measured subjectively. However, if the dissatisfaction is done out of bad faith, then that is no longer true.

The way Warner could have gotten around this was if they added a provision saying that they could reject for any reason at all. Or, they could have said, “here are the things we must do to establish that we acted in good faith.”

Geysen v. Securitas Security Services, USA, Inc. – Commission paid on invoice

An at-will agreement is a contract that either party can terminate the agreement for good or no reason. However, if the contract is terminated with bad faith, then the breach can be enforced.

In an instance like the present case, the plaintiff can show that the termination was with bad faith if the invoice was kept longer so the commission would not be paid before termination.

Warranties

Bayliner Marine Corp. v. Crow – Speed Warranty on Boat

UCC 2-313 Express Warranties

“Any affirmation of fact or promise . . . which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.”

“A statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.”

An express warranty is when the seller guarantees the quality or feature of the product. Here, there was no express warranty because all “express statements” were related to a boat that was similar, but not his boat.

Additionally, advertising language that discusses the seller’s opinion is not a warranty.

UCC 2-314 Implied Warranty of Merchantability

“Goods are merchantable if they are such as would ‘pass without objection in the trade,’ and ‘are fit for the ordinary purposes for which such goods are used.'”

When a merchant deals with the same goods repeatedly, it is expected that those goods meet quality requirements (pass without objection in the trade). Here, the purpose is not to go 30 miles per hour. Instead, the goal of the boat is to float and move from place to place. If the boat sunk, then it would have failed.

The above is a two prong test. First, we have to see if the product would pass a quality test. Second, we have to see what people use the product for to determine the purpose of the product.

UCC 2-315 Implied Warranty of Fitness for a Particular Purpose

“Where the seller . . . has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods . . . .”

This is more specific than other implied warranties. It requires the buyer to state their purpose of the purchase. As a result, the seller finds a product that meets this purpose.

1. You have to state your purpose
2. You have to tell the buyer that you are relying on their expertise.
3. Additionally, you have to tell the buyer that you do not have the expertise to pick it.
4. Finally, the buyer chooses the product specifically to meet that purpose.

One thing to note is that you do not need to be a merchant for this to apply. Instead, you only need to have specialized knowledge from which the buyer relies.

Speight v. Walters Development Co.

Note, this is not under the UCC.

The suit here is for a breach of implied warranty of workmanlike construction.

Here, the purpose of a workmanlike construction warranty is to provide equality for the home purchaser and the builder. Additionally, the court determines that this should extend to remote homebuilders. As a result, the statute of limitations starts to run when they had an opportunity to discovery the damage.

Avoiding Enforcement

Minority and Mental Incapacity

Dodson v. Shrader – Minor Pickup Truck

The traditional rule follows:

• Prejudicial against the minor is void.
• Beneficial for the minor is a good contract.
• If it is uncertain, then the minor can choose whether to void the contract (voidable).

Modern rule:

• Is voidable by the minor.

Possible exceptions to the modern rule:

• Benefit rule – lets merchants deduct for the minor’s use of the property at the time of refund.
• Benefit + rule – lets the merchant deduct for use, or depreciation, or deterioration.

However, the seller is not allowed to overreach or have undue influence. Additionally, the contract must be fair and reasonable. Finally, the minor must have paid for the something as well as possess and use the item.

Iowa Code § 599.2 says that when it comes to contracts, a minor can disaffirm the contract within a reasonable time of obtaining adulthood.

All in all, it is far easier for merchants to sell to parents instead of minors.

Restatement § 15

Sparrow v. Demonico – Sister Rivalry

A contract is voidable if the person lacks capacity. However, the party claiming incapacity has the burden to show incapacity. See the following tests.

Traditional (cognitive) test:

• Whether the party was incapable of understanding the nature of the transaction and was aware of consequences.

Volitional test:

• When the understanding is affected by mental illness, is the transaction one which a reasonably competent person might have made.

These tests apply whether the incompetency occurs as a long-term effect or even just at the transaction.

Duress and Undue Influence

Restatement §§ 174-76

Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline Service Co. – Economic Duress – Shipping Delays

The traditional common law was that there needed to be a threat of physical harm, loss of limb, mayhem, or imprisonment. Since then, the law has broadened to include forms of economic coercion. This is a subjective test, not objective. Why? People have different thresholds for what could create economic duress (e.g. a poor person may need the money sooner than a rich person).

Economic duress

“Where a party involuntarily accepts terms where circumstances permit no alternative as a result of the coercive acts of the other party.”

So, there are two elements. 1) A wrongful act. 2) The wrongful act has to produce no choice but to accept the terms.

The consequence of economic duress is that the contract is voidable.

Restatement § 177

Odorizzi v. Bloomfield School District – Undue Influence – Forced to Resign

Undue influence is “persuasion which tends to be coercive in nature, persuasion which overcomes the will without convincing the judgment.” So, there are two elements: 1) a weakened party and 2) excessive persuasion. To show excessive persuasion, the courts can examine the following factors:

1. Discussion of transaction at inappropriate time.
2. Enactment of transaction in unusual place.
3. Demand of immediate completion.
4. Emphasis of consequences for delay.
5. Multiple persuaders against one servient party.
6. Lack of third-party counsel to weakened party.
7. Statements that there is no time to seek outside counsel.

Misrepresentation and Nondisclosure

Restatement §§ 162, 164

Syester v. Banta – Too much Dancing

First, there must be some evidence of fraud to rescind a release. Otherwise, the release will bar litigation

Second, to establish fraud, the plaintiff must show:

1. Defendant was the one who made the representation.
2. The representations were false.
3. That the representations “were as to material matters.”
4. The defendant knew the representations were false.
5. That the representations were made to defraud the plaintiff.
6. The plaintiff relied on the representation to enter the agreement and would not have done so otherwise.
7. Finally, that the plaintiff was damaged through the reliance.

Restatement § 161: Duty to Disclose

Hill v. Jones – Termite Damage

§ 161 gives instances where a party needs to disclose material facts:

1. Disclosure is necessary to prevent a previous assertion from being a misrepresentation or from being fraudulent or material.
2. Disclosure would correct a mistake of the other party as to a basic assumption to a failure to act in good faith and in accordance with reasonable standards of fair dealing.
3. The disclosure would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part.
4. The other person is entitled to know the fact because of a relationship of trust and confidence between them.

In other words, there are several ways selling party needs to disclose information. First, if asked directly (to avoid a misrepresentation). Second, when there is a basic assumption. Third, there is a duty to correct a written statement. Fourth, to any parties where there is a special relationship (such as a family member).

So, how does a buyer protect themselves? Either through an external investigation, or a clause saying that the sellers did not know of the issue, or the sellers guarantee that it does not exist (warranty).

Restatement (2d) § 163

Park 100 Investors, Inc. v. Kartes – Late for a Wedding

Contract is invalid if obtained through fraudulent means. This can be determined if:

1. there was a material misrepresentation of fact, which
2. was false,
3. made with knowledge that it was false,
4. was relied on by the complaining party,
5. and the misrepresentation harmed the complaining party.

Unconscionability

Williams v. Walker-Thomas Furniture Co. – Repossession of all furniture

UCC 2-302(1) outlines how a contract is unconscionable. This is defined as “an absence of meaningful choice together with contract terms which are unreasonably favorable to the other party. So, there are two elements:

• Process, which is the absence of meaningful choice. Can be shown by:
  • A gross inequality of bargaining power.
  • The manner in which the contract was entered into.
  • The education of the party, leading to a misunderstanding or lack of clarity of the contract.
• Substance, which is when there are contract terms that are unreasonably favorable. Can be factored by showing:
  • “the terms of the contract considered in light of the circumstances existing when the contract was made.”
  • Additionally, “the terms are to be considered in the light of the general commercial background and the commercial needs of the particular trade or case.”

Higgins v. Superior Court of Los Angeles County – Extreme Home Makeover

The first question is whether this was a contract of adhesion. These are usually standardized forms 1) where one party has superior bargaining strength and 2) where the weaker party has not choice but to adhere or reject. Often this means that the procedural element of unconscionability is met.

Next, you consider the unconscionability.

• Procedure (Undue Surprise or unequal bargaining power)
• Substantial (Overly harsh or one-sided result)

McFarland v. Wells Fargo Bank, N.A. – Loaned too much

In this case, the plaintiff’s first argument is that this is unconscionable because the bank loaned him too much money. The substantive element is not met here because because loaning too much money is no unconscionable. This is because it is not overly harsh against him since both sides are benefited and both receive risks.

His second argument is that there was unconscionable inducement. This can be shown by misrepresentations meant to induce him into the loan (e.g. “your home is worth this much” when it was worth much less). This only looks at the process, not substance. Because this focuses only on procedure, it is a much more difficult test to prove that unconscionability occurred.

Public Policy

Restatement § 188

Non-compete clauses are enforceable as long as they are reasonable.

It is unreasonable if the restraint is greater than the promisee’s interest. Additionally it is unreasonable if the promisor is harmed or public policy outweighs the benefits of the promisee.

Valley Medical Specialists v. Farber

Traditionally, a restrictive agreement was not enforceable. Recently, restrictive agreements are enforceable if they are reasonable, considering public policy.

Public policy comes from two sources:

1. Announced by judges
2. Legislative

In this case, the public policy was freedom of contract and the right of patients to have access to the doctor they want to see.

P.M. v. T.B.

Steps for Analysis:

1. Identify the policy: Created either through judicial opinions or Statutes
2. Weigh the impact on the public v. the Impact on the litigants.

Justification for Nonperformance

Mistakes

Restatement (2d) of Contracts §§ 151-154

151 – Definition of mistake – A mistake is a belief that is not in accord with the facts. This needs to be a current fact at the time of the contract, not a prediction. This does not apply to aesthetics.

152 – Bilateral mistake: When the contract has a basic assumption to a material effect then it is voidable unless there is a party who bears the risk of mistake.

153 – Unilateral mistake: Same elements as a bilateral mistake but also enforcement would be unconscionable or, “the other party had reason to know of the mistake or his fault cause the mistake.”

154 – When a party bears the risk of the mistake.

Lenawee County Board of Health v. Messerly – Example

BMW Financial Services NA, LLC v. Deloach

A contract could be rescinded if:

1. The party made a mistake about a basic assumption leading to the development of the contract.
2. The mistake has an effect on the performances of parties which negatively affects the mistaken party.
3. Third, the mistaken party does not bear the risk of the mistake. The party bears the risk if:
   1. Contract says the party bears the risk
   2. Is aware that the party does not know the facts, but assumes that the knowledge is sufficient.
   3. The court appoints the risk to the mistaken party.
4. Finally, enforcing the contract due to the mistake, would be unconscionable.

Changed Circumstances

There are three categories of changed circumstances: impossibility, impracticality, and frustration of purpose.

Restatements 261, 266

” . . . A parties performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.”

Note, that some things are so out of place that it cannot be a basic assumption. People need to contemplate the circumstance but not so contemplated that there are provisions about the circumstance in the contract.

262 Death or Incapacity of Person Necessary for Performance

If the contract is dependent into the contract for performance to occur, then if that person dies the contract could be impracticable.

Protect against this reliance by writing into a contract.

263 Destruction, Deterioration or Failure to Come in Existence of Thing Necessary for Performance

Same thing as above but with a “thing”

264 Prevention by Governmental Regulation or Order

Similar as above but regarding a governmental order. The difference is that parties do not need to contemplate the regulation for the contract to be impracticable.

265 Discharge by Supervening Frustration

“Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the nonoccurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.”

Do not rely on these, because they do not make the best arguments.

Hemlock Semiconductor Operations, LLC v. Solarworld Industries Sachsen GmbH

The claim here is that the impracticability and frustration of purpose was based on China’s actions which depressed the market for the price of the polysilicon.

Here, impracticability and impossibility is treated as the same (most courts do). Impracticability does not require impossibility, only that it is “impracticable for the party to perform because of extreme and unreasonable difficulty, expense, injury or loss involved.”

Only if “unanticipated circumstance has made performance of the promise vitally different from what should reasonably have been within the contemplation of both parties.”

The courts also consider if an unforeseen event occurs what would have been the basic assumption if the event did not occur.

To note the difference between impracticability and impossibility, consider a person contracted to paint a ship. If the ship sinks, the ship could still be raised and then painted. Impractical but still possible.

Sachsen could have protected themselves by creating a provision which said if the market place decreases to a certain percentage then the agreement price would decrease by a certain percentage.

Mel Frank Tool & Supply, Inc. v. Di-Chem Co.

Example of impracticability not working.

Contractual Modifications

A modification is an alteration the the original contract that is equally enforceable. However, these parties requesting alterations need to follow certain rules:

1. Parties always have the right to modify a contract.
2. Any modifications must be agreed to by all parties (unless otherwise provided)
3. Modifications sometimes do not need to follow normal contract formation procedures
4. Treat modifications as if you are drafting an original contract

Ultimately, what is the process for how to modify?

1. Agree – meet contract formation standards
2. Document

Without this simple two step process, so many avoidable problems can occur.

Alaska Packers’ Association v. Domenico

Lack of consideration may be a reason why a modification is not enforceable (but not always). First, we need to ask if a consideration requirement exists (See UCC). If there is a requirement for consideration, then we need to ask if there is consideration present (See Restatement).

• Under UCC § 2-209(1) there is no need for consideration for a modification to be binding. However, there may be a requirement for good faith.
• If the UCC does not apply, then we need to go towards the Restatement 2d Contracts § 89.

Consideration under the original contract does not transfer to the modification. There must be additional consideration for the modification. This is called the “pre-existing duty rule.”

Kelsey-Hayes Co. v. Galtaco Redlaw Castings Corp.

Typically a modification will supersede the original contract. However, a modification made under duress is not enforceable.

Brookside Farms v. Mama Rizzo’s Inc.

Parties are allowed to agree how modifications are to be made (modification clause). In the present case, a modification must be done in writing. Even without this clause, if the statute of frauds apply, then the modifications must abide by the statute of frauds. If the modification does not meet statute of requirement rules, then an exception may need to apply.

These exceptions may include:

1. Reliance
2. Good faith
3. See below

2.201(c)(3) Exception to Statute of Frauds for modification

“With respect to goods for which payment has been made and accepted or which have been received and accepted.”

Consequences of Nonperformance

Express Conditions

Express conditions are provisions written into the contract that outline when performance is due. The performance becomes contingent on a specified condition occurring. Thus, the condition is expressly listed out in the contract, telling which party has the obligation of duty (and when).

§ 235(2)

When performance of a duty under a contract is due any non-performance is a breach.

UCC 2-301

The obligation of the seller is to transfer and deliver and that of the buyer is to accept and pay in accordance with the contract.

§ 344 Purpose of Remedies

Judicial remedies . . . serve to protect one or more of the following interests of a promise:

(a) his “expectation interest,” which is his interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed . . .

Note that the exception interest does not mean a specific performance.

§ 355 Punitive Damages

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.

Note, punitive damages are almost never recordable. Only occurs for committing a tort or for wedding related contracts.

§ 224 Conditions

A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.

1. Ascertainable event
2. Not certain to occur (e.g. death is certain but say performance needs to occur if the person dies before a certain date).
3. Not excused. Excuses include:
   1. Waiver (add, who had the ability to waive)
   2. Forfeiture
   3. etc.

When the condition occurs, the performance becomes due. Another smart idea is to add a provision for what happens if the condition never occurs (by setting a time limit for the condition).

enXco Development Corp. v. Northern States Power Co.

If A, then B. This is pretty common for example:

• If your house burns down, I will replace it.
• If you buy the hotel, I will manage it.
• etc.

This condition can also be within your control or not.

Sometimes, we become confused with the difference between an express condition and a promise to perform. One of the differences is that an express condition requires strict compliance, not just substantial performance. Additionally, the failure of a condition excuses the performance.

J.N.A. Realty Corp. v. Cross Bay Chelsea, Inc.

Forfeiting the use of a condition excuses the inability to meet the condition.

Material Breach

235 Effect of Performance as Discharge and of Non-Performance as Breach:

1. Full performance of a duty discharges the duty
2. When performance of a duty is due any nonperformance becomes a breach

241 Significant Circumstances

Is it material?

The factors to consider when determining if a breach is total (material) are:

1. How much the injured party would have gained without the breach
2. How much the injured party would be adequately compensated for lack of performance
3. The extent the failing party has already partly performed
4. Examine the greater or less hardship on the failing party when the contract is terminated
5. Consider willful, negligent, or innocent behavior of the failing party
6. The certainty the failing party will perform the remainder of the contract.

The following is the analysis we should ask when determining if a breach matters.

1. Is it a breach?
2. Is it material?

Note also that damages are different from material breach. An immaterial breach will only provide nominal damages. A material breach allows for compensatory for present and future damages.

Time is of the essence clause

Adding a time is of the essence clause shows that the deadline is not just there as a place holder, but it is a hard and fast deadline.

Anticipatory Repudiation

Repudiation is the rejection of an idea. In the form of a contract, it would be the rejection to perform. As such, Anticipatory repudiation is when the circumstances illustrate that a breach is going to occur, but has not yet done so. In these instances what right does anticipatory repudiation give the parties? Can they preemptively terminate the contract, even though the total breach has not yet occurred?

253 Effect of a Repudiation as a Breach

If a party repudiates before a breach, repudiation alone gives rise to a claim for total breach. This is important because it allows the non breaching party to take steps to recover.

250 When a Statement or an Act is a Repudiation

How does anticipatory repudiation occur?

1. B says that it won’t perform, in a way that would be a total breach.
2. B takes a voluntary affirmative action which makes it unable or apparently unable to perform, in a way that would be a total breach.

So, if B is anticipating repudiation, does A need to wait to terminate the contract?

256 Nullification of Repudiation or Basis for Repudiation

A repudiating party can retract the repudiation if the injured party does not materially change their position (based on the repudiation) or gives the repudiating party notice that the repudiation is final.

251 When Failure to Give Assurance May be Treated as a Repudiation

When there are reasonable grounds to believe that the other party will not perform, the injured party may request adequate assurances that they will perform.

In other words, “I see that you may not be able to perform, tell me if you will be able to perform. Otherwise, if you do not assure me within a reasonable time, you will have repudiated the contract and I will receive damages for breach.”

UCC 2-610 Anticipatory Repudiation

If repudiation occurs, the injured party has three options

1. For a commercially reasonable time await performance by the repudiating party
2. Resort to any remedy for breach
3. In either case suspend his own performance.

2-611 Retraction of Anticipatory Repudiation

Mirrors the restatement. Repudiation can be retracted unless the injured party materially changes or send notice of finality.

2-609 Right to Adequate Assurance of Performance

1. Again mirror the restatements as long as the assurance is commercially reasonable.
2. Between merchants, must follow commercial standards
4. The reasonable time to receive a justified demand for assurances is within 30 days.

Truman L. Flatt & Sons Co. v. Schupf

If a party anticipates the lack of performance before the deadline, they must say so clearly. Otherwise, the contract will not be deemed to be repudiated. A request to alter a term does not repudiate the contract.

However, if a party anticipatory repudiates the contract, they can retract the repudiation as long as the second party has not altered their position and notified the first party of the second party’s  intent to rescind the contract.

Hornell Brewing Co. v. Spry

A party may anticipate repudiation if they:

1. Feel insecurity as to the fulfillment of the contract. This is measured by:
   1. The buyers words and actions
   2. Course of dealings or course of performance between the parties,
   3. Nature of the sales contract and the industry
2. Demand assurances which are not met.

Both elements are measured by a commercial standard and fair dealing.

Expectation Damages

We turn to remedies available for a breach, specifically damages. Although nominal damages are available, most plaintiffs find them inadequate and wish for additional compensatory damages. These damages may be awarded in three ways:

1. Restitution interest (to repay for unjust enrichment)
2. Reliance interest (to repay for reliance on a promise)
3. Expectation interest (to pay for the expected fulfillment (gain) value of the promise)

Computing

The Formula

Exception damages are the damages referred to when the court wants to put the injured party in as good as a position they would have been if the contract was met. There are four considerations that go into that determination.

• Loss in fair market value – If the breach of the contract means that goods were not shipped or services rendered, a lot of the time the loss in value is calculated by subtracting what was received by that not received.
• Other loss – These are indirect or consequential damages that may be faced, such as failure to meet other contracts due to the nonperformance of the breaching party.
• Cost avoided – The first two principles apply whenever a breach occurs. However, when there is a total breach resulting in an early termination, the next two principles are examined. Cost avoided are costs that would have been incurred if the injured party continued performing (e.g. cost of materials to continue building a home).
• Loss avoided – These are instances where the plaintiff saves money by reallocating saved resources into other good contracts (e.g. a builder who uses left over materials on a new contracts).

The formula in every case: Loss of value + other loss = expectation damages. The formula for total breach resulting in terminated contract: Loss of value + other loss – costs avoided – losses avoided = expectation damages.

The factors that go into the fair market value considers time between the two contracts and the reason for the sale. Note that what is reasonable is considered on a case-by-case basis.

Handicapped Children’s Education Board v. Lukaszewski

The takeaway:

• Even if the new person is better than the old person, the Board had bargained for the first person (didn’t want to be in a better position, the first person was good enough). There was no opportunity to mitigate the damages and so the damages are adequate. So, even if there appears to be no harm, there is harm caused because you did not get the bargained for deal.

Pre and Post judgment interest. You get interest after the judgment is entered (post). This includes time waited when appeals are pending. The interest rate is set by the court. Sometimes you receive interest for the time before the judgment is entered.

347 Expectation Damages

What was the value of what actually happened v. what is the value of the promise + incidental or consequential loss – any cost or other loss that he has avoided.

Limiting

As part of the expectation damages formula, the recovering party can gather “other loss.” Other loss is defined by the Restatement 2d of Contracts include consequential injuries. These consequential injuries are subject to limitations on expectation damages including foreseeability, certainty, and causation.

The restatement defines both the loss of value and other loss as such:

There are two types of categories: See 347(a) and (b)

• Direct damages that occur naturally, according tot he usual course of things (such as a breach). These are general damages. Additionally, these are damages that are always obtained (e.g. the refund).
• Indirect damages that may incur if it is reasonably within the contemplation of the parties. These are consequential damages. In other words, these are costs that are incurred by special circumstances. Those special circumstances need to be communicated to obtain the special damages. Simply, there is a requirement of foreseeability.

“General damages – including profit on the contract breached – require no special proof that they were within the contemplation of the parties, although proof of the amount of damages is still required.

“Consequential damages – including profit on collateral damages, including a requirement of foreseeability.

§ 351

1. Damages are not recoverable for loss that the party in breach did not have a reason to foresee as a probable result of the breach when the contract was made.
2. Loss may be foreseeable as a probable result of a breach because it follows from the breach
   1. in the ordinary course of events, or
   2. as a result of special circumstances, beyond the ordinary course of events, that the party has a reason to know.

Note that the consequences must be foreseeable at the time of the contract formation.

Also note that there is no need to inform if the breach flows from an ordinary course of events (e.g. a builder’s beam fails and the house crashes down. A beam is used in the ordinary course of events and the builder should not need to inform the supplier of the intended use).

UCC § 2-715(2) Incidental and Consequential Damages

Again, make sure that the contracting party has reason to know of the potential loss.

§ 351(c)

A court may limit damages for foreseeable loss by excluding recovery for lost profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that justice requires the limitation.

New Business Rule

Recovery of lost profits from a start-up business is often unsuccessful. Traditionally, there was no recovery. Now, there may be recovery, but it is hard to prove that new profits are likely to remain. In other words, the court wants to see at least some history of successful business engagement.

Sometimes parties add “liquidation” damages in the contract clauses so a set amount of recovery is allowed.

Summing up the Rule

1. Damages must be within the contemplation of the parties.
2. Only a party subject to a notice termination clause has the right to limit damages to cancellation.
3. The damages must be caused by the breach of the contract.
4. The loss is capable of a reasonably accurate measurement.

Requirement to Mitigate Damages

Although a plaintiff may recover expectation damages, they are required to mitigate damages or risk losing all they won in a jury verdict. In other words, mitigating damages are to offset expectation damages.

Rockingham County v. Luten Bridge Co.

When a breach has occurred, the injured party may recover for their expenses up to the breach plus the fulfillment of the profit they would have realized if there had been no breach. However, if the injured party continues to incur costs, they will be required to absorb those costs.

Sometimes the best way to mitigate damages is to stop performance. Other times, the best way to mitigate is to finish performance.

Biggest takeaway: What is a commercially reasonable (the standard) way for a non breaching party to behave depending on the facts of the situation.

Maness v. Collins

• The plaintiff had the requirement to mitigate damages
• However, the defendant had the burden to show that he had failed to mitigate damages:
  • He could have found reasonable work
  • Chose not to seek out that work

Lost Volume Doctrine

Jetz Service Co. v. Salina Properties

“The ‘lost volume seller’ measure of damages ‘refers to the lost volume of business the non-breaching seller incurs on buyer’s breach. When the seller resells the entity he expected to sell to the original buyer, he usually deprives himself of something of value – the sale to a new buyer of another similar entity.’” To simplify, if you contract to sell to one, the one breaches, and then sell to another, you lost the sell to the original buyer. Both would have purchased, regardless of the breach.

UCC §2-708(2) outlines the doctrine.

Restatement §250 comment d and 347 comment f also outlines the doctrine.

Nonrecoverable Damages

There are three main types of expectation damages that are not collectable for a breach of contract:

1. Plaintiff’s attorney fees
2. Damages for mental distress
3. Punitive damages

Attorney Fees

Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Company, Inc.

The American rule is that the winner covers their expenses. The European rule is that the loser covers the expenses of the winner. Attorney fees may only be recoverable if a statute or convention authorizes it, the contract agrees to it, or through a court rule (such as sanctions during litigation).

Note that the breach of a contract is not necessarily wrongful.

Emotional Distress

Erlich v. Menezes

Damages must be within the contemplation of the parties. Emotional distress is typically not within the contemplation of the parties unless expressly agreed to within the contract.

When the emotional damages are not included in the scope of the contract, they are generally not recoverable. This is because motional distress is a tort claim. Although a breach of contract may bring both contract and tort claims, the tort claim must be based on a duty independent of the contract in order to recover.

Punitive Damages

The Restatement 2d of Contracts § 255 states:

“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.”

In other words, mere breach is not sufficient to recover punitive damages. There must also be a tort associated with it, and that specific tort must allow punitive damages as a remedy. The main exception to this rule are insurance companies who breach on bad faith.

Remedies Under UCC

Remedies Available to the Buyers

• Cover, § 2-712
• Market Damages, § 2-713
• Damages for Accepted Goods, § 2-714
• Specific Performance, § 2-716
• Incidental and Consequential Damages, § 2-715

Sellers Remedies

• Resale Damages, § 2-706
• Market Damages, § 2-708(1)
• Lost Profits, § 2-708(2)
• Seller’s Action for the Price, § 2-709
• Seller’s Incidental and Consequential Damages, § 2-710

Alternatives to Expectation Damages

Reliance and Restitutionary Damages

Ventura v. Titan Sports, Inc.

Restitution – quantum meruit – is to take back what the defendant wrongfully obtained.

quantum meruit:

• “Based on failure of consideration, fraud, mistake, and situations where it would be morally wrong for one party to enrich himself at the expense of another.”
• “But it only lies where one party was unjustly enriched in the sense that the term ‘unjust‘ could mean illegality or unlawfully.”

Restatement 371

Alternative means of quantifying restitutionary damages: (a) reasonable value of plaintiff’s services and (b) value of property: as justice requires.

Specific Performance

City Stores Co. v. Ammerman – Bad Mall

1. Terms of the contract must be sufficiently certain and definite for specific performance to apply. This is true even if the contract is lacking in terms (those can be worked through with negotiation and good faith).
2. Other forms of remedy would be inadequate to put the plaintiff is the same position (e.g. performance would be unique, monetary damages are difficult or impossible to calculate).
3. Other factors the court considers include:
   • Difficulty of court oversight
   • Unreasonable hardship to breaching party

Specific performance is fairly disfavored, only being applied in the rare circumstances mentioned above. More examples of the disfavor is illustrated below.

Reier Broadcasting Company, Inc. v. Kramer – Go Coach

• Courts do not want to specifically enforce personal service agreements for policy and practical reasons (bad look and hard for the court to manage).
• The act of preventing one from violating the contact is an indirect way of enforcing the contract.
• Appropriate damages will be damages when the breach actually occurs.

Restatement (2d) Contracts § 367(1)

“A promise to render personal services will not be specifically enforced.”

However, some courts will enforce some noncompete agreements using the method denied by Montana.

Agreed Remedies

There are a few methods of agreed remedies. First, settlement. Second, stipulate damages after breach (only litigate whether there was a breach). Third, draft a clause into the original contract outlining the cost of the damages for breach. Although this final method would save the court and parties considerable time and litigation expenses, the courts generally disfavor the solution.

Barrie School v. Patch – Enrollment Issues

Penalty v. Compensation:

Liquidation damages need to focus on the intent of the parties to compensate the plaintiff for loss rather than to penalize the defendant for failing to comply. If there is any doubt, the agreement should be treated as a penalty.

Mitigation:

There is no need to mitigate liquidation damages because those damages are designed to avoid the calculation. In other words, you already worked out the damages, no need to calculate later.

The defendant has the burden to show that liquidation damages should not be enforced.

Enforceable Also see Restatement § 356(1)

1. When anticipated damages are in their nature uncertain and incapable of exact ascertainment.
2. Unless the amount is grossly excessive and out of all proporitions to the damages that might reasonably have been expected from a breach.
   • Reasonableness is judged at contract formation, not at the time of breach. Modern trends and the restatement has the court look at either or.
3. If it turns out that liquidated amount is higher than the actuals, it will still be enforced unless it was a penalty. This goes the other way as well. See § 356(1).

Other types of liquidation damages appear in consumer (although limited), construction, employment, and real estate contracts.

Rights and Duties of Third Parties

Third Party Beneficiaries

Vogan v. Hayes Appraisal Associates, Inc.

Creditor beneficiaries – A owes money to B, B owes money to C. A and B contract that A will pay C directly, rather than through B (e.g. cutting out the middle man).

Donee beneficiaries – A promises B to do something that will benefit C. C is a donee beneficiary able to go to the court to collect from A.

Restatement 2 Contracts § 302

“Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either

1. the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or
2. the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.

Subsection 1 is creditor while subsection 2 is a donee.

Whose intention matters to determine if the individual is an intended beneficiary? Argument 1: must be the intention of 1. Argument 2: Promisse’s intention. 3rd Argument: could be promisors intention if promisee has reason to know of that intention.

Chen v. Chen – Daughter v. Father

The courts have the discretion to see if it would be appropriate to determine that there is an intention of the parties. However, the court here finds it inappropriate because of strong public policy. Absent special circumstances (designation to pay directly, inability to enforce by an actual party), enforcement would not be appropriate.

Assignment and Delegation of Rights and Duties

Assignment of Rights under § 317

Herzog v. Irace – Doctor v. Lawyer

§ 317 Assignment of Rights

Assignor’s right to performance is extinguished in whole or in part and assignee acquires right to such performance. Typically these rights include the right to pay money. For example, debt collectors are often assigned the right to collect money (from the original party).

Rights are assignable unless the assignment would 1) materially change the duty of the obligor, 2) materially increase cost or risk, 3) materially impair return performance, 4) materially reduce value, or 5) is barred by law, public policy, or contract. Typically, when assigns concern money, this does not apply.

§ 322 When assignment cannot occur

Case Notes

The doctor was assigned the rights to payment. That means that the doctor had the right to recover in accordance with the settlement.

For an assignment, there is no need for the obligator to agree to it, they only need to be on notice of it. Unless there is a prohibition (materially affect, ect.), the assignment is going to be fine.

Delegation of Duties under § 318

Sally Beauty Co. v. Nexxus Products Co. – Bad Hair Day

§ 318 Delegation of Duties

Delegation can occur unless barred by public policy or contract. Additionally, performance by a particular party is required only if obligee has a substantial interest in having that person to perform. This situation is typically met when there is a personal service contracts. Further, the ability to delegate does not mean that the obligator no longer has a requirement to ensure the enforcement of the contract.

Case Notes

This was a delegation of duty to distribute.

Nexxus’s first argument was that this was a personal service contract requiring consent to delegate. However, this is not a personal service contract because this is a distribution agreement, not a service agreement.

Second Nexxus argues that they have a substantial interest in having his original promisor perform. They didn’t want a competitor to distribute their product.

UCC 2-210(1):

A party may perform his duty thorough a delegate unless otherwise agreed or unless the other party has a substantial interest in having his original promisor perform or control the acts required by the contract.

Best Practice

Delegation should have some restrictions in the contract drafting. This could include language to approve delegation requests, outlining qualifications, or good faith requirements.

Disclaimer

The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.