I. What Are the Terms of the Contract
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CONTRACTS OUTLINE Macintosh
I. What are the Terms of the Contract
A. Parol Evidence Rule Definition: says once parties have reduced their agreements to writing, any contemporaneous agreements are discharged - it is not only oral agreements, it can also be writings - *does not speak to subsequent agreements, nothing about modifications - in these transactions, people are negotiating and going back and forth, when the decision is finally reached it will be put in writing - P.E.R. says this writing is the final agreement (integration)
PER- can’t contradict terms that are actually expressed in the agreement, but you can contradict implied terms - as long as it is not an express term, you can contradict it
RS §213- Effect of an Integrated Agreement on Prior Agreements (Parol Evidence Rule) (1) A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them. (2) A binding completely integrated agreement discharges prior agreements to the extent that it is not within its scope.
How to Decide if Parol Evidence Rule Applies: 1st Step – Is this an integrated agreement? - RS §209—the court (not a jury) has to decide whether writing is integrated (the final expression of at least some terms) or is this something like handwritten notes or a casual letter that no one meant to be final o court looks at all the circumstances to determine what the parties intended - if the writing appears complete on its face, we will determine it to be integrated - but you can still bring in other evidence to show it is not the final agreement - *it will discharge/supersede any prior agreements that contradict the writing
2nd Step – Is it complete or partial? - (RS §210) even if this is a final expression of something, you must decide if it is a final decision of all of it, or is it just part of it (partially integrated) - the court looks to any and all relevant evidence to find what the parties intended - *it will discharge prior agreements that aren’t within the scope
Merger Clause - tells you that this is a writing that is completely integrated - under modern approach, you still have to look to all surrounding circumstances o they quickly become boilerplate clauses, no one really knows what they are like - if it is an adhesion contract, then it is most likely completely integrated - you can use unconscionability to knock the merger clause out
1 o ex. you can say it is in fine print, in entire legalese text
RS §214—Evidence of Prior or Contemporaneous (Simultaneous) Agreements and Negotiations Agreements and negotiations prior to, or contemporaneous with, the adoption of a writing are admissible in evidence to establish: a. that the writing is or is not an integrated agreement b. that the integrated agreement, if any, is completely or partially integrated c. the meaning of the writing, whether or not integrated d. illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause e. ground for granting or denying rescission, reformation, specific performance, or other remedy
Why is there the invalidating clause? - b/c the parol evidence rule is based on the assumption that there is a written agreement, it therefore follows that before you apply the rule you have to decide whether there is a written agreement and whether that agreement is valid (by looking at all evidence that touches upon validity) o ex. Bollinger v. Central Pennsylvania Quarry Stripping and Construction Co.- where the Bollingers wanted the contract to be reformed (equitable reformation) to include the clause about the construction workers covering up the dirt. The court said it can only be reformed when there is a mutual mistake at the time of formation in getting the agreement that existed translated into the right language (it was not written down correctly) . The court says if there is a type of mechanical error that it can be reformed. There is enough evidence that both parties meant to put this in the writing b/c the construction workers started performing this part of the agreement and then stopped.
No oral modifications clause - parol evidence rule does not bar subsequent agreements - Common Law- sometimes there is a clause that says there cannot be any oral modifications, and common law says that this is unenforceable - UCC- does enforce these clauses
UCC also has a parol evidence rule (§2-202) - says an integrated agreement supersedes all prior agreements AND contemporaneous oral agreements - anything that would contradict the writing will not be allowed in - first thing to check for to decide if it is a complete expression of the agreement is a merger clause - how do we know whether it is complete or partial? - the threshold test—are these the kind of things that would be naturally excluded if they had been agreed upon o ex. something either obvious or small, that even if it was agreed upon, would not have been included
2 **if we are not told whether or not there is a merger clause, we need to identify this as a MISSING FACT and get more information
§215—Contradiction of Integrated Terms When there is a binding agreement (either completely or partially integrated), evidence of prior or contemporaneous agreements or negotiations is not admissible in evidence to contradict a term of the writing.
Tests of PER: (use one or the other) *four corners test, if the writing appears to be complete, then it is deemed to be the final agreement
§216(b) Threshold Test—an agreement is not completely integrated if the writing omits a consistent additional agreed term which is such a term as in the circumstances might naturally be omitted from the writing.
General Test- What did the Parties Intend? - have to look to all other circumstances, to see if what was naturally supposed to be in there, did not get in - if it the kind of thing that would be naturally left out, we would just say it was partial *we must decide whether it’s partial by looking at the evidence modern approach- wants to let evidence in (court decides whether the fact of the agreement should be let in) - ex. Gianni v. R. Russell & Co.- where the lessee is arguing that the only reason he agreed to a new lease paying higher rent and not selling tobacco is because his LL told him that he would be the only store to sell soft drinks. Then another store in the building began to sell soft drinks. The court says that it would be natural to include exclusive rights, if the contract specified what could be sold, and found for D (landlord)—threshold test o “the written lease was the complete contract of the parties, and since it embraces the field of the alleged oral contract, evidence of the latter is inadmissible under the parol evidence rule.”
Ambiguity in Contracts - comes down to the meaning of ambiguity (sometimes it seems clear and there is a hidden ambiguity that can only be resolved by extrinsic evidence) - but PER, says you cannot contradict a final agreement,
Four Corner’s Test - Court held that clear and complete writings should generally be enforced according to their terms. o the writing should be honored and evidence outside the four corners should not be allowed in - The extrinsic evidence used by P is not material, and the court must look at what was written before it looks at evidence of what was in the party’s minds.
3 - When parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms and no new extrinsic evidence should be admitted that would create ambiguity o ex. WWW v. Giancontieri case—where there was a reciprocal cancellation clause, D said he had the right to cancel, P said the clause was only in there to protect P (due to D’s pending litigation). Court would not allow this information in because it would create ambiguity in an otherwise clear contract.
Plain Meaning Rule (Common law modern approach) - used to find out if terms are ambiguous - always look to the writing to decide whether ambiguous - courts are worried about that the evidence might not necessarily be true (fear that jury will improperly evaluate the evidence)
Four Corners v. Plain Meaning Rules: - Four corners can only be applied when there is a complete agreement because somebody somewhere is trying to add a term - Plain Meaning is when the context shifts to interpretation (trying to understand a term that is already there)
TWO STEP PROCESS TO RESOLVING AMBIGUITIES: 1. Court should look at all credible evidence that can prove the intention of the parties (circumstances surrounding the making of the agreement) 2. If there is ambiguity, the court should allow extrinsic evidence to resolve this ambiguity.
- court has to look at the plain meaning of the language, and if it is ambiguous, you should bring in the evidence to interpret (b/c parol evidence rule does not bar evidence for explanation and interpretation). - Can always bring in evidence to explain the meaning of the words
Modern Approach - we don’t want to exclude evidence for interpretation, so we must look to all the evidence - **this is the main difference between the plain meaning rule (which cuts evidence out) and the modern approach (which includes all evidence) - the more you look at, the more ambiguous this language is going to seem - *you will usually already know if it is an integrated agreement (in these cases we are assuming that it is) - ASK: Is this writing a final expression of at least some terms?
*if it is ANY kind of integration, you cannot contradict *if it is a full integration, you cannot add.
EXAM: - use modern approach (Don’t just say: “Obviously this language is ambiguous) - instead, show what leads you to the conclusion that it is ambiguous
4 STEP 1: Is There A Writing? - if not, it is probably not a parol evidence rule issue - look to statute of frauds
STEP 2: Why is Evidence Being Offered? 1. this contemporaneous agreement is being used to contradict the writing? 2. then you must ask if it is integrated? 3. then you must ask complete integration or partial integration? What if the evidence is to interpret what the writing has to say? - do we apply the plain meaning rule or the modern approach? - *the purpose for which the evidence is offered is what determines what test to use o (add to, invalidate, contradict, reform, etc.)
B. Ambiguous Language
Interpreting Contract Language - a contract involves two parties who may attach different meanings to language - ambiguous- when a word has two entirely different connotations so that it may be at the same time both appropriate and inappropriate
Strategies to Avoid Disputes: 1. Get it in writing (sometimes clients prefer to do it orally) a. Problems with Oral i. It is imprecise ii. Psychological problem—people hear what they want to hear 2. Define your terms (because you may have a complex definition for certain terms, and you don’t want to have to repeat that every time it is mentioned)
Trade Usage §1-205—Course of Dealing and Usage of Trade (1) a course of dealing is a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct. (2) A usage of trade is any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question. (3) A course of dealing between parties or trade usage in the trade in which they are engaged, or of which they should be aware of should be used to supplement terms of an agreement. o anybody in the trade would be liable to know this and also people who should know about this usage (even if you are outside the trade)-- including those who regularly deal with members of the relevant trade (4) the test is whether the new evidence of course of dealing and usage of trade reasonably can be construed as consistent with the express terms of the agreement—do express terms control? o you can take away trade usage by express terms in a contract, but this has to be made very clear
5 Trade Usage Cases - ex. Hurst v. W.J. Lake & Co.-in this particular trade, when they say 50% protein, they really mean anything above 49.5% - ex. Columbia Nitrogen Corp. v. Royster Co.—even though the contract contained a merger clause saying that no new verbal understandings could be admitted, course of dealing and trade usage are not considered verbal understandings (allowed by §2-202— parol evidence rule)
Objective and Subjective Theories of Contract Interpretation - objective standard will always prevail if the parties have attached two different meanings to their language - even if they have the same meaning, the objective meaning will apply even if it is different from what the parties meant o ex. Frigaliment Importing Co. v. B.N.S. International Sales Corp.- where the court found the word chicken was ambiguous, but that D had a subjective belief that the chicken was in compliance with the contract
Awareness of Ambiguity - when any of the terms used to express an agreement are ambivalent, and the parties understand them in different ways, there cannot be a contract unless one of them should have been aware of the other’s understanding. o Ex. Oswald v. Allen- where the buyer thought he was buying two coin collections, and the seller thought she was only selling one—the court held that there was no contract unless the one party should have known what the other party was thinking. - When a term used to express an agreement is ambivalent and the parties understand it differently, and neither of them is aware of the others’ understanding, there can be no contract. o Ex. Raffles v. Wichelhaus- one party thought the cotton was coming on the Peerless in October, and one thought it was coming on the Peerless in December. The court held that the contract did not indicate which Peerless was intended, and neither knew of the other’s interpretation, so there is no contract because there is no “meeting of the minds.”
§201—Whose Meaning Prevails? (1) where the parties have attached the same meaning to a promise or agreement or a contract term, it is interpreted in accordance with that meaning. (2) Where the parties have attached different meanings to a promise or agreement or a contract term, it is interpreted by the meaning attached by one of them, if at the time the agreement was made: a. That party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; OR b. That party had no reason to know of any different meaning attached by the other, and the other had reason to know this meaning attached by the first party. (3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent.
6 - must know what the express terms are, the course of dealing and the trade usage - always start with the language of the contract, but you must interpret that in light of the trade usage and course of dealing in that trade
Hierarchy for Interpretation: (combing the language of §1-205 and §2-208) 1. Express Term 2. Course of Performance 3. Course of Dealing 4. Trade Usage
C. Gap Fillers
RS §204—in the absence of a the parties’ agreement on an essential term, “a term which is reasonable in the circumstances is supplied by the court”
Trade Usage to Supplement or Qualify - ex. Nanakuli Paving & Rock Co. v. Shell Oil Co.— Court said that price protection is a trade usage in paving contracts in Hawaii demonstrated by suppliers in the trade and reinforced by P’s past dealings with Shell for 11 years, therefore it should be assumed that the parties intended to incorporate this into their agreement (Court found the fact that Shell should have been aware of the regular practice was enough to show a trade usage that Nanakuli would have expected to be incorporated in the agreement)
Course of Performance- the action of the parties in carrying out the contract at issue, whereas course of dealing consists of relations between the parties prior to signing the contract - course of performance arises after the contract and is therefore not affected by the parole evidence rule
§2-208—Course of Performance or Practical Construction (1) Where the contract for sale involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted without objection shall be relevant to determine the meaning of the agreement. (cannot be a single occasion) (2) The express terms of the agreement and any such course of performance, as well as any course of dealing and trade usage, shall be construed whenever reasonable as consistent with each other; but when such construction is unreasonable, express terms shall control course of performance, and course of performance shall control both course of dealing and trade usage. o (this reconciles the express terms with the implied terms) (3) Subject to the provisions of 2-209, such course of performance shall be relevant to show a waiver or modification of any term inconsistent with such course of performance.
§ 2-305—Open Price Term (1) The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case, the price is a reasonable price at the time for delivery if: a. Nothing is said as to price; OR
7 b. The price is left to be agreed by the parties and they fail to agree; OR c. The price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person and it is not set or recorded (2) A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.
§ 1-203- Obligation of Good Faith - Every contract of duty within this Act imposes an obligation of good faith in its performance or enforcement. o ex. Dalton v. Educational Testing Service- the court found that the testing service did not act in good faith when they asked Dalton to submit evidence, but never researched the evidence submitted. o Ex. Burger King Corp. v. Weaver- court says that the good faith requirement does not bar competition, and found that BKC acted in good faith when they added a BK near Weaver’s BK in Montana.
Contract Relationship- only have a relationship based on your agreement, you are not obligated to look out for the best interest of all parties Fiduciary relationship—supposed to look out for the weaker party’s best interest (the beneficiary) - Contract law does not require parties to be fair, kind, or reasonable or to share, gains or losses equitably. - It does require parties to avoid taking advantage of the opportunities that arise from sequential performance, when the contract does not cover a particular subject. - There is no duty to negotiate
Examples of Bad Faith: - evading the spirit of the deal o Ex. A leases office space to B and only has to pay him a percentage of whatever he makes—B finds another office that is a lot cheaper, so he moves most of his business to other office, so he only has to pay B a very small amount - lack of diligence and slacking off - deliberate rendering of imperfect performance o Ex. deliberately failing to mitigate the damages - abusing of power to specify terms o Ex. abusing power to terminate contract - interfering with the performance of the other party
§2-306- Output, Requirements and Exclusive Dealings (1) 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.
8 (2) 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.
D. Article 2: Warranties Warranty- A warranty is really just a promise
FRAMEWORK - Has this seller made a warranty to this buyer? o Are the basic elements of warranty met? - Was this warranty effectively disclaimed? - If yes, what are the proper procedures? - Is there a privity problem? - If we assume that the seller has made a warranty, was the warranty broken? - If it was broken, was it the cause of the injury that the buyer is complaining about? - If all of these answers are Yes, what is the buyer’s remedy? o Is there something in the contract that limits the buyer’s remedy? o Is the buyer in a position to prove the facts and extent of his/her damages? . Can you bring forth the evidence to show what happened to you?
1. Title
Warranty of Title
§2-312—Warranty of Title and Against Infringement; Buyer’s Obligation Against Infringement (1) Subject to subsection (2), in a contract for sale, there is a warranty by the seller that: a. The title conveyed is good title, and it is a rightful transfer; AND b. The goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge. (2) A warranty of title may be excluded or modified only by specific language or by circumstances giving the buyer reasons to know that the seller does not claim title in himself or that he is only selling the title that he has. o ex. of the Rolexes out of the trench coat—this would give the buyer reason to know that the seller does not have good title (3) Unless otherwise agreed, a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of rightful claim of any third person. But, if the goods are specially manufactured, the buyer automatically makes a warranty to the seller that protects the latter from infringement claims. (this is the only situation where the buyer is the warrantor.) o ex. Moore v. Pro Team Corvette Sales, Inc.—the P bought a car “as is” that turned out to be stolen, and the court held that even an “as is” clause did not disclaim the warranty of title. . Rule of Law: “where the language in a purported disclaimer expresses how the seller’s liability will be limited rather than what title (or lack
9 thereof) the seller purports to transfer, the purported disclaimer is ineffective.”
Warranty of Title Disclaimers - Ineffective Disclaimers: o “This product is sold ‘as is.’” . this is a quality disclaimer, not a title disclaimer, and it does not work o “Seller shall not be liable for warranties including, but not limited to, the warranty of good title.” . court says this is not good enough - Effective Disclaimers o “Seller makes no warranty as to the title of the goods, and buyer assumes all risk of non-ownership of the goods” . court says this is OK o any conduct that gives buyer reason to know that seller does not have title. o *it is questionable as to whether it has to be in writing or if oral will suffice
§ 2-403(1)—Power to Transfer; Good Faith Purchase of Goods; “Entrusting” (1) A purchaser of goods only gets the title that the seller has. A person with voidable title has power to transfer a good title to a good faith purchaser for value. o ex. Fast Eddie Problem- Fast Eddie stole the car and sold it to the dealership, but Fast Eddie had to no title to convey, so the dealership got no title –if you are in possession of stolen goods and you try to sell them to someone else, you will be in breach of warranty (no title always equals no title).
2. Express Warranty of Quality
Two Types of Warranty of Quality: Express and Implied - Express warranties- oral or written statements about the products in ads, the verbal sales pitch, or the written contract o when the seller does something affirmative to create buyer expectations about the characteristics or performance of the goods o must be more than mere “puffing” - Two Requirements: 1. must relate to the goods 2. must become part of the basis of the bargain (its natural tendency is to induce the buyer to purchase the goods) o if the statement might have played some part in the buyer’s decision to buy, the burden is on the seller to prove that the buyer did not rely on the statement
§ 2-313—Express Warranties by Affirmation, Promise, Description, or Sample (1) Express warranties by the seller are created as follows: a. Any affirmation of fact or promise made by the seller to the buyer that relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.
10 . buyer does not have to prove that he relied, as long as the statements were made during the bargaining process b. Any description of the goods which made part of the basis of the bargain creates an express warranty that goods shall conform to the description. c. Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model . focus on the actions of the buyer, did they rely on this when buying (2) The seller does not have to use formal words such as “warrant” or “guarantee” or that he have the specific intention to create a warranty. An affirmation of the value of the goods or the seller’s opinion or recommendation DOES NOT create a warranty. o ex. “These widgets are made of steel, and this brand of steel does not rust.” . this is a statement of fact—if this statement is not true, the warranty has been broken
Examples of “Puffing” - saying the car is in “A-1” condition, is “puffing” - saying the goods are in “mint condition” could be considered more than “puffing” o depending on trade usage - “would look wonderful”
Examples of Express Warranties (from the wallpaper problem) - wallpaper “goes up easily” (when it is actually hard to get up, very stiff, and hard to work with) - wallpaper “can be put on with any paste” (when if fact you need a special one)
3. Implied - Implied Warranties- are automatically part of the contract unless the seller (or the circumstance) does something affirmative to get rid of them. o seller does not need to intend to create an implied warranty - Implied Warranty of Merchantability- the item must be saleable and conform to the normal expectations of the parties.
Merchantability
§ 2-314—Implied Warranty: Merchantability; Usage of Trade (1) Unless excluded or modified, a warranty that the goods shall be merchantable is implied in a sale contract, if the seller is a merchant with respect to the goods of that kind. Under this section the serving for value of food or drink to be consumed, either on the premises or elsewhere, is a sale. (2) Goods to be merchantable must be at least such as a. Pass without objection in the trade under the contract description; AND b. In the case of fungible goods, are of fair average quality within the description; AND c. Are fit for the ordinary purposes for which such goods are used; AND
11 d. Run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; AND e. Are adequately contained, packaged, and labeled as the agreement may require; AND f. Conform to the promises or affirmations of fact made on the container or label if any. *to be Merchantable, goods have to pass all of §2-314(2)’s tests—so if P can prove any one of the tests have failed, then the warranty has been broken
RS §2-104—Definition of a Merchant (1) “Merchant” means a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction. - these hold merchants to higher standards - just has to be somebody that has a professional status regarding the goods in this transaction - can be a dealer or somebody that isn’t technically a dealer, but because of their profession, they have knowledge or skill - a person who makes an isolated sale of goods, is not considered a merchant for the purposes of that transaction o ex. someone selling their old car is not considered a merchant o ex. garage sales - a restaurant falls under Article 2 b/c of the last sentence in §2-314(1)—“the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale.” o Ex. ex. Shaffer v. Victoria Station, Inc.- where P’s wine glass cracked in his hand at D’s restaurant, and the court held under §2-314(1) serving for value of food or drink to be consumed either on the premises or elsewhere is a sale
Defective Conditions in Food (goods) - may arise not only from harmful ingredients, not characteristic of the product itself either as to presence or quantity, but also from foreign objects contained in the product from decay to deterioration before sale, or from the way in which the product is prepared or packed. - the product itself and the container in which it is supplied are sold as an integrated whole —if the container itself is dangerous, the product is sold in a defective condition o ex. Shaffer v. Victoria Station, Inc.- the court held under §2-314(2)(c) and (e) they must be fit for ordinary purposes for which such goods are used; and must be adequately contained and packaged. . Wine cannot be served without an adequate container—therefore the drink sold includes the wine and the glass which both must be fit for the ordinary purpose for which used. o ex. Casino glass Hypo (in-class)—court held that even though the drink was free, by gambling, the customer was paying for the drink and it was considered a sale.
Two distinct tests that the courts have used for food:
12 1. Reasonable Expectation- Was there a reasonable expectation that the food included the object that caused the injury? o ex. Martini Hypo (in-class)- P cracks his tooth on an olive pit, the court applied the reasonable expectation test- you could argue either way (even one who drinks martinis all the time would expect that the pit would be removed from the olive, or you could say that olives have pits, so the expectation would be to use extra care when biting into one). 2. Foreign Substance- Is this a natural substance or a foreign substance? (ex. this is a natural thing to find in chowder) o ex. Webster v. Blue Ship Tea Room, Inc.—where the fish bone stuck in P’s throat was found to be a natural substance. The court held that a fishbone in fish chowder does not constitute a foreign object—does not impair the fitness or merchantability of the product.
**EXAM: you would want to go into detail about the facts, which test you should apply out of these two (get more points for talking about both tests)
Fitness for a Particular Purpose - where the buyer wants to use the goods for something beyond their ordinary purpose, a warranty of merchantability is not enough
§2-315—Implied Warranty: Fitness for a Particular Purpose Where the seller at the time of contracting 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, there is, unless excluded or modified under §2-316, an implied warranty that the goods shall be fit for such purpose. - we don’t require knowledge (salesperson does not need to know that the buyer is relying on them)
4. Disclaimers and Remedy Limitations
Disclaiming Express Warranties - if there is a warranty and a disclaimer—the warranty controls - express warranties are very easy to make, impossible to disclaim—it is not technically possible to disclaim express warranties o ex. Bell Sports, Inc. v. Yarusso—where P fell off his motorcycle, broke his neck and became paralyzed. The owner’s manual says: “The primary function of the helmet is to reduce the harmful effects of a blow to the head.” The court found that the owner’s manual wording did create an express warranty and the helmet did not function as promised, therefore creating a breach. . The wording in the manual, which described the primary function of the helmet created an express warranty that the buyer was entitled to rely on.
§ 2-316—Exclusion or Modification of Warranties (1) Words or conduct that create an express warranty, and words or conduct that disclaim or limit this warranty, shall be construed wherever reasonable as consistent with each other;
13 but subject to the Parol Evidence Rule, negation or limitation is ineffective to the extent that such construction is unreasonable. o makes it impossible to disclaim an express warranty (2) Subject to (3), to exclude or modify the implied warranty of merchantability or any part of it, the language must mention “merchantability” and, when written, must be conspicuous, and to exclude or modify any implied warranty of fitness, the exclusion must be in writing and conspicuous. For example, language to exclude all implied warranties of fitness is sufficient, if it states that: “There are no warranties which extend beyond the description on the face hereof.” (3) Notwithstanding (2), a. Unless the circumstances indicate otherwise, implied warranties can be disclaimed by “as is,” “with all faults,” or other language which calls buyer’s attention to the exclusion of warranties and makes it obvious that there is no implied warranty; AND b. When the buyer before entering into the contract has examined the goods, or the sample or model, as much as he wants to or has refused to examine the goods, there is no implied warranty with regards to defects which would have been revealed in an inspection; AND . saying “no it’s ok” when offered to inspect does not constitute a refusal c. An implied warranty can also be excluded or modified by course of dealing, course of performance, or trade usage. (4) Remedies for breach of warranty can be limited in accordance with the provisions of this Article on “liquidation” or “limitation of damages,” and on contractual modification of remedy. (§2-719).
Ways to Argue for Disclaiming Express Warranties - even though express warranties cannot be disclaimed, seller can always argue that the parole evidence rule will end up blocking parts of it. - can always attack the merger clause, b/c it is probably buried in boilerplate clauses o you can always argue unconscionability or something along those lines
Disclaiming Implied Warranties - implied warranties are much easier to disclaim
Conspicuous Language (applies to all warranties) - an implied warranty of merchantability arises in a contract for the sale of goods unless expressly excluded or modified by conspicuous language—buyer must have reason to know of the disclaimer o but the seller has the burden of proving the buyer’s actual knowledge of the disclaimer - *the test is whether attention can reasonably be expected to be called on it. o This is a reasonable person standard - If buyer knows about disclaimer, but it is not conspicuous o Split of authority on this (courts don’t want to encourage seller’s to ignore the conspicuous requirement)
14 - A disclaimer contained in the text undistinguished in typeface, size or color within a form purporting to grant a warranty is not conspicuous, and is unenforceable unless the buyer has actual knowledge of the disclaimer o ex. Cate v. Dover Corp.- where disclaimer of implied warranties was buried in other language. The court held that D failed to establish that P had actual knowledge of the disclaimer—D’s warranty fails to attract the attention of a reasonable person and is not conspicuous. . if you just put the disclaimer in a box marked “warranty”, it will not suffice - §2-316(3)(a)—says “as is” or “with all faults” is enough to disclaim an implied warranty o Ex. the words “AS IS” written in soap on a used car—it means you are buying the car in its exact condition with all of its faults . it is an exclusion of implied warranties
Post Sale Disclaimers: - A post-sale disclaimer is not effective because it does not go to the basis of the bargain between the parties to the sale. - the buyer is not bound to a disclaimer he had never agreed to at the time of the sale and which first appears to the buyer in the manufacturer’s manual or warranty booklet that accompanies the goods o ex. Bowdoin v. Showell Growers, Inc.—where the warranty disclaimer was mailed with the spray rig to P after the agreement, so it was not effective
Limitations on the Warranty - if there was not a complete disclaimer of warranty, under §2-314, then go to §2-719 to figure out what remedies buyer is entitled to.
§2-719—Contractual Modification or Limitation of Remedy (1) Subject to (2) and (3): a. An agreement may provide for remedies in addition to or in substitution for those provided here and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer’s remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts; AND b. Resort to a seller’s remedy, as provided in the agreement, is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy. (2) When circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act. (3) Consequential damages may be limited or excluded, unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable, but limitation of damages where the loss is commercial is not. o therefore, any clause that tries to limit or modify the remedial provisions of the UCC in an unconscionable manner is subject to deletion, and then the UCC will apply its own remedies . injury to person = unconscionable to limit consequential damages
15 . commercial loss = not unconscionable o ex. Wilson Trading Corp. v. David Ferguson, Ltd.- where the yarn changed colors after it had been knitted into sweaters, but the contract had a clause saying that no claims relating to color could be made after “weaving, knitting, or processing” the yarn within 10 days. The court found that 10 days is not a reasonable time to figure out the defective aspect of the yarn
Limitations on Remedies - rejection of goods and revocation of acceptance are considered remedies (so if you have another remedy, it knocks out the ability to reject the goods) - you do not have to resort to seller’s remedies, unless it is clearly stated that those are the only remedies - It is of the very essence of the sale contract that at least minimum contract remedies be available—there has to be some remedy—you can’t take that away—or else it is not an Article 2 transaction
Remedy: Failing of its Essential Purpose: - typically a limited repair/replacement remedy fails of its essential purpose where: o (1) the seller is unsuccessful in repairing or replacing the defective part, regardless of good or bad faith; OR . most courts would agree that where the seller cannot fix it, the buyer is not getting it benefit of the bargain . buyer can revoke his acceptance of the unit and get his money back . if he had to pay a higher price to get somewhere else, the difference in price should be recovered o (2) there is unreasonable delay in repairing or replacing defective components.
Excluding Consequential Damages: - Boilerplate clauses- seller will try to exclude consequential damages—lost profits, personal injuries o most courts want to see a conspicuous exclusion (even if Code does not say that) o USE ON EXAM
5. Defenses in Warranty Actions: Notice, Burden of Proof & Privity
Notice
§2-607—Effect of Acceptance; Notice of Breach; Burden of Establishing Breach After Acceptance; Notice of Claim or Litigation to Person Answerable Over (1) The buyer must pay at the contract rate for any goods accepted. (2) Acceptance of goods by the buyer precludes rejection of the accepted goods and, if made with knowledge of non-conformity, cannot be revoked because of it, unless the acceptance was based on the reasonable assumption that the non-conformity would be cured. Acceptance does not by itself impair any other remedy provided by this Article for non- conformity. (3) Where a tender has been accepted,
16 a. The buyer must within a reasonable time after he discovers or should have discovered any breach, notify the seller of the breach, or be barred from any remedy; AND b. If the claim is one for infringement or the like (§2-312(3)), and the buyer is sued as a result of such breach, he must notify the seller within a reasonable time after he receives notice of the litigation or buyer is barred from any remedy over for liability established by the litigation. (4) The burden is on the buyer to establish any breach with respect to the goods accepted. o ex. of the race horse that was really expensive, and within hours it is hopping around with a bad limp
Notice within a Reasonable Time - this gives the seller a chance to deal with the problem - incentive to let seller know, so maybe he can fix them, provide replacement, etc. - reasonable time—(§1-204)—what is reasonable depends on the nature of the circumstances involved - if buyer fails to reasonably promptly notify—no recovery
Burden of Proof - in a warranty suit the P has the burden of proving: o (1) the creation of the warranty o (2) its breach o (3) its causal connection to the P’s injury (proximate cause is the usual measure) o (4) the fact and extent of the injury (ex. product was broken, etc.) . ex. Flippo v. Mode O’Day Frock Shops of Hollywood- P tried on a pair of pants in D’s store and was bit by a spider, court found that the pants were not merchantable b/c they were not fit for its ordinary purpose (you should be able to wear pants safely without getting bit by a spider) you have to prove causation—you have to prove the warranty was broken (you can’t just assume b/c someone got sick or injured it was b/c of the product)
Privity - Privity- whether or not P has a contract with D. o Did they have some kind of contractual relationship? - because suits on warranties are contract actions, the buyer must establish that there was “in fact” and “in law” a contract between the two parties o when a buyer has purchased the goods directly from the retailer who gave the warranty, there is obviously privity between the two parties
Two Types of Privity - Vertical Privity- how far up the distribution chain the buyer can go o If buyer has purchased defective goods somewhere, how far up the distribution chain can he go? . ex. he is in privity with the seller, so he can sue him, but can he get the manufacturer? The designer of the specific part?
17 - Horizontal Privity- identifies to whom the seller is liable other than the immediate purchaser
§2-318—Third Party Beneficiaries of Warranties Express or Implied (chosen based on jx)
Alternative A: (most common approach) A seller’s warranty, whether express or implied, extends to any natural person [not corporations] who is in the family or household of his buyer, or who is a guest in his home if it is reasonable to expect that such person may use, consume or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the operation of this section. - basically they are saying they can take care of problems even when there is no horizontal privity
Alternative B A seller’s warranty, whether express or implied, extends to any natural person [not corporations] who may reasonably be expected to use, consume or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the operation of this section.
Alternative C A seller’s warranty, whether express or implied, extends to any person [this could be a corporation] who may reasonably expected to use, consume, or be affected by the goods and who is injured by breach of the warranty. A seller may not exclude or limit the operation of this section with respect to injury to the person of an individual to whom the warranty extends. - this is the only one that would allow you to collect for property damages
Warranty Framework - (1) Has this seller made a warranty to this buyer? o (a) Explain whether the basic elements of warranty are met . (there may be more than one warranty) o (b) Has it been disclaimed? o (c) Is there some privity barrier? - (2) Was the warranty broken? o (a) What does the warranty promise? o (b) Did the breach cause buyer’s injury? o (c) What remedy can buyer get? (contract might limit the buyer’s remedy) . buyer has to be able to prove injury and how much he deserves
II. Has the Contract Been Performed?
A. Conditions Conditions- it is something that must occur for performance to be due - they give the parties wide liberty to shape their commitments and protect their expectations through the language of conditions
18 §224—Condition Defined A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance becomes due, under a contract.
Two Types: (1) Express and (2) Constructive (Implied) Conditions - Express Conditions: something that is there (that is talked about) not something that is implied o express conditions must be satisfied through strict compliance—“close” is not good enough in express conditions . ex. Luttinger v. Rosen—where the buyer’s purchase of the house was conditioned on getting a bank loan with an 8 ½% interest rate, and they could only get one with 8 ¾%. This did not satisfy the express condition, so they did not go through with the contract.
Two Types of Conditions: - Condition subsequent- An event that would discharge a duty of performance after the duty of performance already became due. (like a “get out of jail free card”) o Ex. insurance contract that provides that even if you have suffered some kind of loss, which triggers their duty to insure, you only have 12 months to make the claim. If you have not made the claim within 12 months, then they no longer have a duty o this is very rare in Contracts law - Condition precedent: a fact or event which the parties intend must exist or take place before there is a right to performance--has to happen before the duty occurs.
Problems of Interpretation - a party seeking a particular performance from another party might ask the other party to undertake a duty to render that performance, might makes its own performance conditional on the other party rendering that performance, or might do both. o if language is not clear, courts will prefer an interpretation that imposes a duty rather than a condition b/c there is a big risk of forfeiture when conditions are involved - If a provision is clear and unambiguous, it is interpreted as setting a condition precedent, but if it is ambiguous it is interpreted as fixing a reasonable time for the general contractor to pay. o ex. Peacock Construction Co. v. Modern Air Conditioning, Inc.—where P performed the work, but D refused to pay P b/c he had not been paid by the general contractor. . Most courts say this type of language is not usually intended as an express condition, it is more there to fix a reasonable time period within which payment should occur . The court held that if this was the intent of the parties, it had to be stated unambiguously, and the burden of clear expression was on the general contractor.
Conditions that Involve Satisfaction
19 - Forfeiture- a denial of compensation that results when a person loses his rights to an agreed exchange after relying substantially on the expectation of that exchange by preparation or performance (when someone does not get paid for the work they did) o Objective standard of Satisfaction—how a reasonable person would react . courts usually prefer the objective standard b/c subjective standard encourages forfeiture b/c someone is not getting compensated - Good Faith: the law requires that a claim of dissatisfaction be made in good faith, rather than in an effort to escape a bad bargain o ex. Gibson v. Cranage- where P offered to paint a picture of D’s daughter for him, and said he did not have to pay if he was not satisfied, court found that he was not breaking the contract for refusing to accept it because he was not satisfied—he was dissatisfied in good faith. - merchants under § 2-104(1) are held to the objective standard of §2-103, which requires “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade” - Third Parties: you can eliminate some of the risk inherent in making the other party’s duty conditional on its own satisfaction, by making its duty conditional instead on the satisfaction of a third party, usually an expert of some kind . ex. having the architect decide whether the owner has the duty to pay the contractor o Majority rule: good faith is the standard—was the architect honestly dissatisfied? o Minority Rule: objective standard—was the architect’s dissatisfaction reasonable?
Three Ways in Which Courts Mitigate Effects that Non-Occurrence of a Condition Have:
(1) Prevention- one who prevents the occurrence of a condition of one’s own duty may be precluded from later asserting the non-occurrence of that condition - the duty of good faith performance that is usually imposed requires at least that one do nothing to prevent the occurrence of such a condition - “assumption of risk” exception: the doctrine of prevention does not apply if the contract authorizes prevention - a party to a contract cannot rely on the failure of another to perform a condition precedent where he has frustrated or prevented the occurrence of that condition
(2) Waiver, Estoppel & Election:
Waiver- intentionally giving up a right that you know you have o ex. McKenna v. Vernon--where a subcontractor was getting paid in “progress payments” by the owner, on the condition that he get a certificate from the architect. The owner does not ask for the certificate 6 out of 7 times, so the court held he waived his right. - Retraction o a party that has waived a condition before the time for occurrence of the condition, can retract the waiver and reinstate the requirement that the condition occur, unless the other party has relied to such an extent that retraction would be unjust
20 - Anti-Waiver Clause: typically states that no action or inaction by that party shall amount to a waiver of any condition of any duty of that party o but the courts don’t always honor this clause - the conduct of the parties in performing an agreement may be relevant to show a modification or waiver of a provision inconsistent with their conduct in the performance of that agreement - whenever it is difficult to decide whether a particular act merely gives information on the meaning of the contract OR represents a waiver of a term of the agreement, the courts favor a waiver o this occurs whenever such construction, plus the application of the provision on reinstatement of rights waived (§2-209), is needed to preserve the flexible character of commercial contracts and to prevent surprise hardship.
Estoppel - if the other party has relied on the waiver to the extent that retraction would be unjust, estoppel will preclude retraction—owner is estopped from retracting - but, if the party has waived after the time for occurrence of the condition, the waiver cannot be retracted, even if there has been no reliance
Election - when the time for occurrence of a condition has expired, and the condition has not been met, the party whose duty is conditional has two choices - Two Choices for the Party Facing Non-occurrence: o (1) treat the nonoccurrence of the condition as a discharge of his duty; OR o (2) disregard the nonoccurrence and make his duty unconditional . a party that chooses to disregard the nonoccurrence of a condition is bound by an election to treat the duty as unconditional (he cannot retract this waiver) . even if there is no reliance, the party that made the choice is bound by it - *waivers can be retracted, elections cannot be retracted
(3) Interpretation & Avoidance of Forfeiture - courts prefer interpretations of contract language that avoid forfeiture - language that does not clearly make a promise conditional may be interpreted as not imposing a condition at all - interpretation cannot prevent forfeiture, however, if the drafter of the contract has taken pains to make clear that forfeiture is intended - Parol Evidence Rule: o only bars oral conditions precedent that contradict the terms of the written agreement o evidence of an oral condition is not to be excluded as contradictory or inconsistent merely because the written agreement contains other conditions precedent o ASK: Was the writing integrated? Was there a merger clause? Was it unconscionable?
B. Constructive Conditions of Exchange
21 Constructive conditions = implied conditions - Dependant Covenants: if one party fails to render a performance (or fails to offer a performance),it is a possible excuse for the other party not to perform their duty restitution - Independent Covenants: even if one party did not perform, the other still had an obligation to uphold their end of the deal o Old Principle: mutual covenants are independent unless expressed to be otherwise o Modern Principle: now we presume that there is a constructive condition that performance is based on whether or not the other party performs in any contract that includes an exchange of promises, unless there is a contrary intention manifested.
Two Types of Constructive Conditions: - (1) Conditions Precedent- means one party’s promise is impliedly conditioned on the fact that the other party is going to perform first (until that happens there is no obligation) o ex. when contractors enter into agreement there is an expectation that the work is a condition precedent o construction contracts are usually like this (paid after the work, or in long projects, there is usually a payment plan at different intervals) - (2) Conditions Concurrent- exchange of promises and the promise of each party is conditioned on the simultaneous performance of the other o Sometimes it is expressed in the agreement who goes first, but even if it is not said, sometimes other circumstances make it obvious who should go first o ex. contract for the sale of real estate—you can have the person paying at the same time that the person is conveying the title (escrow)
Time Performance - fixing the time for performance creates a risk that one party will perform without getting performance in return - Where a contract is made to perform work and no agreement is made as to payment, the work must be substantially performed before payment can be demanded o the “doing” must take place before the “giving”
Concurrent Conditions and Tender - When two concurrent acts are to be done, the party who sues the other for non- performance must prove that he has performed, or was ready to perform, his part of the contract. - Tender: an offer of performance combined with the present ability to go through with the offer, and must be followed by actual performance if the other party is ready to proceed. o ex. buyer of a house would need to have the money, seller of the house would have to have good title - Contracts for the Sale of Goods: courts say that tender (offer) of the goods by the seller and tender (offer) of the price by the buyer are “concurrent conditions”
C. Mitigating Doctrines
22 1. Substantial Performance - doctrine of substantial performance applies only to constructive conditions (not express) o when constructive (implied) conditions are concerned, the rule is usually substantial performance . ex. often used in construction contracts (b/c neither party in this case has access to the remedy of specific performance) - substantial performance just means there is something less than perfection
Test for Substantial Performance: - Whether or not the performance meets the essential purpose of the contract o whether there has been substantial performance is a question of fact for the jury - ***When deciding whether or not there has been substantial performance, don’t look only at the victim, but also at the breaching party—the court is more likely to look to substantial performance if the alternative is forfeiture
Recovery - for substantial performance, P should recover the contract price minus the damages caused by his incomplete performance
Intentional v. Unintentional - generally a willful deviation from the term of the contract always precludes a finding of substantial performance (depends on the jx) - If the default is unintentional and trivial, the non-complying party may hope for mercy if he will offer atonement for his wrong. o ex. Jacob & Youngs v. Kent – where contractor was supposed to use Reading pipe in the walls, but accidentally used another type of pipe. The court found it was unintentional.
Diminished value Rule - the difference between the house value as it stands with faulty and incomplete construction and the house value, had it been constructed in accordance with the plans and specifications o ex. Plante v. Jacobs- where real estate agents testified that, although the wall was built wrong and takes off a foot of the living room, it does not need to be replaced b/c it does not change the value of the house. - This rule is used to measure the loss in value that the injured party suffered.
Reasonable Cost-of-Replacement Rule - when there are a number of small items of defect which can be easily remedied, the court will allow the reasonable cost of correcting the defect o ex. Plante v. Jacobs—The court allowed them the reasonable costs to fix small defects but they still had to pay the construction guy for his substantial performance
2. Divisible and Separate Contracts - some of these concurrent condition contracts are not unitary, they are divisible
23 Severable v. Entire - Severable: if the part to be performed by one party consists of several and distinct items and the price for each distinct item is set OR the price is left to be implied by law o ex. Gill v. Johnstown Lumber Co.- where P contracted to deliver logs but most of them were lost when a damn broke. The court held that P should still be paid for the logs that he did deliver, b/c the contract was severable, since P’s work consisted of several items (driving all different types of wood to all different points with all different prices). - Entire- the consideration to be paid is single and the contract is held to be entire, even if it may consist of several distinct independent items o Ex. Microwave Magic Tee- where P was making devices for the government in a four step process, but he went bankrupt. The court held that the contract was entire, despite the four step process, b/c none of the devices were ever made and the whole contract was dependent on Step 4, therefore it was not fulfilled. In this case, P did not get anything, and he had to reimburse the government for what they had to spend to find someone else to do the rest of the job for him. - TEST: At the time of contracting would the parties have been willing to exchange part performances? o Then the contract is severable - Progress payments are usually seen as divisible contracts
3. Restitution for a Defaulting Plaintiff Restitution- preventing unjust enrichment - even when there is a breach of an enforceable agreement the aggrieved party may prefer restitution to other forms of relief - when a party receives a benefit, such as labor or materials, which is greater than the damage resulting from the breach of the contract by the other party, he must pay for the reasonable worth of the services rendered - unless he can remove the benefit that has been conferred and then he has no obligation to pay - where the party has received value or has advantages from the labor, he is liable to pay the reasonable worth of what he has received o Ex. Britton v. Turner- where P worked for 9 months for D, then breached the contract, the court held that P should still be paid for the work - Measure of the Damages: o the implied promise is to pay the amount of the full labor minus what it would cost to hire someone to complete the remaining service and also any damage which has been sustained by the nonfulfillment of the contract.
Willful v. Negligent Mistakes - someone who is willful–conscious, moral fault—should not recover - but if you are simply careless and incompetent and are leaving the job with just cause that it different o not all courts will agree with this rule-split of authority by jx o RS says willfulness should not be an absolute bar of recovery
24 . ex. when contractors use the wrong materials on purpose to cut costs, they have forfeited their right to the whole contract price, and they can only recover for the unjust enrichment of the owner
D. Breach in the Course of Performance
Material breach - there must be a material breach before the victim can suspend his performance - if the court later determines that it was not a material breach, then the repudiator will be guilty of a material breach and become the aggressor, not the victim. o ex. Walker & Co. v. Harrison- where the P sold D a sign with the condition that they would come and clean it whenever necessary. They did not clean it when D asked, so D stopped the payments, assuming that this was a material breach.
Test of a Material Breach: - (1) One asks whether there is an uncured breach by the other party? - (2) Is it a breach of a duty of performance that was to be exchanged under an exchange of promises (as opposed to a duty under a promise on which the injured party’s promise does not depend)? - (3) Did the breach go to a performance that was to be rendered at an earlier time than that of the aggrieved party? - (4) Assuming that there was an uncured breach by the other party with respect to a performance due at an earlier time under an exchange of promises, is the breach serious enough to justify self-help in the form of suspension or termination? - (5) Is it a material breach? o If NO, the aggrieved party has no choice but to continue performance and treat the breach as a partial breach, which gives a right to damages but not a right to suspend or terminate. o If YES, the aggrieved party has a choice: . (1) they can either continue performance and treat the breach as a partial breach; OR . (2) stop performing and treat the breach as a total breach—which discharges them of their duties and gives rise to a claim for damages for total breach.
RS §241—Circumstances Significant in Determining Whether a Failure is Material In determining whether a failure to render or to offer performance is material, the following circumstances are significant: - (a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; - (b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived; - (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture - (d) the likelihood that the party failing to perform will cure his failure taking account of all the circumstances including any reasonable assurances.
25 - (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.
After-acquired evidence: - if a party terminates a contract and later finds facts that would have justified termination, the prevailing view is that it can use those facts even though they were ignorant of them at the time of the breach
Restitution - Split of authority as to whether or not the breaching party has a claim for restitution o some jx still follow the rule that you don’t get restitution at all o some say there should be restitution, but it should be very limited - *the breaching party can only recover the amount of which the injured party has been enriched. - breaching party can not recover more than the contract
Framework: (not every court adopts this framework) 1. Has there been a material breach? (look to §241) a. No, then party has to continue with her performance, and does not have the right to discontinue her performance (no opportunity to walk away) b. Yes—then injured party has the right to suspend their performance 2. Even if there is a material breach, the breaching party has to be given an adequate opportunity to cure, or to fix the breach. a. What is an opportunity to cure? i. What effect is further delay going to have on the contract? (in some cases a delay can further hurt the injured party—must look at the impact) ii. Look at breaching party, courts will be more tolerable of a delay, if there will be a possibility of forfeiture b. Is the breaching party able to cure? c. If they can, the breaching party must continue her performance (the damage claim does not disappear for the injured party, they can still be compensated for whatever damage was caused by the breach) 3. If we have material breach, and there is no cure, we think about what rights the injured party has: a. She can bring a claim for eternal breach—the action is stopped and look at all un- kept promises and the consequences of them (she can get out of the contract and sue for whatever she suffered) Factors: - we look at who is the first person to cross the line and commit the material breach - if you jump the gun and walk away from the deal and it is found that there is not a material breach, then you are the one who will owe damages
Independent v. Mutually Dependent Promises - promises are either independent of each other OR mutually dependent (one upon the other)
26 o independent- when the parties intend that performance by each of them is in no way conditioned upon performance by the other . a failure to perform by one party does not excuse the other from his performance o mutually dependent- the parties intend performance by one to be conditioned upon performance by the other . precedent- a promise that is to be performed before a corresponding promise on the part of the adversary party is to be performed . subsequent- a corresponding promise that is not to be performed until the other party to the contract has performed a precedent covenant . concurrent- promises that are to be performed at the same time by each of the parties, who are respectively bound to perform each. - Modern Rule- there is a presumption that mutual promises in a contract are dependent and are to be so regarded, whenever possible.
Partial v. Total Breach - when a party materially breaches a contract, the non-breaching party must choose between these two remedies: o he can elect to terminate the contract and recover damages OR he can continue the contract and recover damages solely for the breach - a party indicates that he wants to continue the contract by continuing to perform under the contract or by accepting the performance of the breaching party - once a party elects to continue the contract, he can never thereafter elect to terminate the contract based on that breach
Hindrance and Prevention - a party’s breach of the duty of good faith performance may have the same effect as any other breach under the doctrine of constructive conditions - the conduct of one party to a contract which prevents the other from performing his party is an excuse for nonperformance - implied complimentary obligation on the part of the promisee: o he will not intentionally and purposely do anything to prevent the other party from carrying out the agreement on his part - acts or omissions which are clearly within the obligor’s control and which are the normal or obvious means of the obligee’s performance are presumably required of the obligor, or he assumes the risk of their nonoccurrence. - mere difficulty of performance does not excuse a breach of contract o ex. Iron Trade- where D did not deliver the iron rails so P went to their competitor and ordered a huge shipment, making them almost impossible to get. The court found that P did not “prevent” D from performing, even if P made it more difficult.
E. Anticipatory Repudiation (think of §2-609, §2-610 and §2-611 as a package) - Repudiation- It is when one party can not/will not perform his obligations under the contract (the threatened breach has to be material)
27 o can be by words (A sends B a telegram telling him that the contract is terminated) . to constitute a repudiation, the party’s language must be sufficiently positive to be reasonably interpreted to mean that the party will not or cannot perform . can be by conduct (someone walking off of the job) o the only question is whether you had the duty, and did you repudiate the duty? - Present Repudiation- party repudiates the obligation at the time of performance—this gives the injured party the right to terminate performance o Ex. if someone is not doing the job and saying he is not going to do the job - Anticipatory Repudiation- a repudiation that is not accompanied by a breach by nonperformance (b/c it occurs before the time for performance has arrived) o Ex. Hochster v. De La Tour- where P was going to be a courier for D and was all ready to perform, then D wrote to P telling him that he didn’t need his services, so P got a new job before the date of performance. Court found that P should not be required to maintain readiness all the way up to the date of performance—he should have the opportunity to secure other employment
Consequences of Repudiation: - if repudiation is accompanied by a breach by nonperformance, it gives rise to a claim for damages for total breach
§ 2-610—Anticipatory Repudiation (What Can Injured Party Do?) When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may (a) for a commercially reasonable time await performance by the repudiating party; or (b) resort to any remedy for breach, even though he has notified the repudiating party that he would await the latter’s performance and has urged retraction; and (c) in either case suspend his own performance or proceed in accordance with the provisions of this article on the seller’s right to identify goods to the contract notwithstanding breach or to salvage unfinished goods.
Exception for One-Sided Contracts - But the doctrine of anticipatory repudiation does not apply when one side had completed full performance, and all the other side has to do is pay money. - simple solution: the acceleration clause- it accelerates the balance of the debt, so it becomes immediately payable, so if there is a repudiation, the entire balance becomes immediately due and payable, and you can sue for it. - Acceleration Clause: says if party misses a payment, the party that has rendered performance can make all payments due immediately. - Unilateral Contracts: o the doctrine of breach by anticipatory repudiation does not apply to contracts which are unilateral in their inception or have become unilateral by complete performance by one party.
Concurrent Conditions (Readiness of Injured Party)
28 - one party’s repudiation of a bilateral contract containing simultaneous obligations does not normally make immaterial the question whether the other party could perform his obligation. - when performance under a contract is concurrent, one party cannot put the other in default unless he is ready, able, and willing to perform and has manifested this by some offer of performance o a tender of performance is not necessary if the other party has shown that he cannot or will not perform. - P has to be able to prove that had the D gone through, you would have been able to come up with the money
Unequivocal Refusal to Perform - in order to give rise to a renunciation amounting to a breach of contract, there must be an absolute and unequivocal refusal to perform or a distinct and positive statement of an inability to do so - there needs to be an unequivocal refusal to do the work - a mere expression of doubt as to whether you can or will do something is not a repudiation (need to draw the line between doubt and I can’t/won’t do something) o ex. McKloskey & Co. v. Minweld Steel Co.- where the subcontractor told general contractor that he needed some help getting the steel to get the job done, and the general contractor took that as a repudiation. Court found that this was not clear enough, and there was no indication that the subcontractor intended to terminate the contract.
Summary of Repudiation - if somebody refuses to perform, unless their contract partner complies with additional requirements, is considered a repudiation (failure to cooperate in the implied covenant in good faith and fair dealing)—how far does this go? o Ex. McKloskey v. Minweld Steel Co.- there was a national crisis going on, making it difficult to obtain certain materials, there is a duty to help by your contracting partner - Under the common law, there was is right to demand assurance of performance. o Ex. McKloskey has no right to demand this - If there is a good faith duty to help Minweld, and McKloskey failed to do this, that would be a material breach.
§2-611—Retraction of Anticipatory Repudiation (1) Until the repudiating party’s next performance is due, he can retract his repudiation, unless the injured party has, since the repudiation, cancelled or materially changed his position or otherwise indicated that he considers the repudiation final. (2) Retraction may be by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform, but must include any assurance justifiably demanded under the provisions of §2-609. (3) Retraction reinstates the repudiating party’s rights under the contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation.
29 Assurance of Due Performance - § 2-609(1)- A contract imposes an obligation on each party that the other’s expectation of receiving due performance will not be impaired - therefore when an obligee reasonably believes that the obligor will commit a breach by nonperformance that would give him a claim for damages for total breach, he may be entitled to demand assurance of performance - UCC § 2-610 only applies when a party “repudiates the contract”
§ 2-609- Right to Adequate Assurance of Performance (1) a contract for sale imposes an obligation on each party that the other’s expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party, the other may in writing demand adequate assurance of due performance and until he receives such assurance may, if commercially reasonable, suspend any performance for which he has not already received the agreed return.
(2) Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards.
(3) Acceptance of any improper delivery or payment does not prejudice the aggrieved parties right to demand adequate assurance of future performance.
(4) After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.
Demanding the Assurance - have an opportunity to argue the facts of the case - if you are feeling insecure and need adequate reassurance, you do have the right to suspend you performance after you send the demand o what constitutes reasonable grounds for insecurity is “fact dependent” o what constitutes adequate assurance is “fact dependent” - the party then must send the adequate reassurance within a reasonable time o if it is not sent within a reasonable time, repudiation is forced - at a minimum, the assurance should repair the defect - but the adequate assurance must depend on the seller’s reputation o if he has a good reputation, a promise that it won’t happen against, is sufficient
F. Impracticability of Performance and Frustration of Purpose
1. Impracticability - if one is bound by a positive, express contract, to do an act, he must perform his engagement, unless prevented by the act of God, the law, or the other party to the contract. - No hardship, no unforeseen hindrance, no difficulty short of absolute impossibility, will excuse him from doing what he has expressly agreed to do.”
30 - Traditional Exceptions (Common Law Approach): o (1) Some branch of government says you are banned from doing this o (2) Some person whose presence was necessary for performance dies or is seriously injured/ill (personal service) . (a) Something that cannot be delegated to someone else (you can’t sue his estate) . (b) If it is something like someone to fix your roof, the estate would be expected to send someone else to fix the roof o (3) The destruction of something necessary to perform . ex. Taylor v. Caldwell- where the music hall burned down, where the performance was to take place. The court found that the parties to the contract must perform it or pay damages for not doing it, even though in because of unforeseen accidents, the performance of his contract has become impossible
§2-613—Casualty to Identified Goods Where the contract requires for its performance goods identified when the contract is made, and the goods are accidentally ruined, before the risk of loss passes to the buyer, then: (a) if the loss is total the contract is avoided; AND (b) if the loss is partial or the goods have so deteriorated so much that they no longer conform to the contract, the buyer may nevertheless demand inspection and choose to treat the contract as avoided or accept the goods with a discount from the contract price for the deterioration or the deficiency in quantity, but without further right against the seller.
§2-614—Substituted Performance (1) Where without fault of either party the agreed facilities fail or an agreed type of carrier becomes unavailable for the agreed manner of delivery otherwise becomes commercially impracticable, but a commercially reasonable substitute is available, such substitute performance must be tendered and accepted. (2) If the agreed means or manner of payment fails because of a domestic or foreign governmental regulation, the seller may withhold or stop delivery unless the buyer provides a means or manner of payment which is commercially a substantial equivalent. If delivery has already been taken, payment by the means or in the manner provided by the regulation discharges the buyer’s obligation unless the regulation is discriminatory, oppressive or predatory.
§2-615—Excuse by Failure of Presupposed Conditions Unless the seller has assumed a greater obligation, and subject to §2-614: (a) Delay in delivery, or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale, if performance as agreed has been made impracticable by the occurrence of a contingency, the non-occurrence of which was a basic assumption on which the contract was made, or by compliance in good faith with any applicable foreign or domestic governmental regulation or order, whether or not it later proves to be invalid. (increase in cost is not an excuse for non-performance)
31 (b) Where the causes mentioned in paragraph (a) affect only a part of the seller’s capacity to perform, he must allocate production and deliveries among his customers, but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable. (c) The seller must notify the buyer seasonably that there will be delay or non- delivery and, when allocation is required under (b), of the estimated quota thus made available for the buyer.
Elements that Must be Satisfied for Impracticability or Frustration 1. Is there some event that occurs after the contract is made that makes performance impracticable? o does not have to be outright impossible, but something more than mere inconvenience or additional expense—it would have to be extreme additional expense . ex. Transatlantic Financing Corporation v. United States- where the court found that although the closing of the Suez Canal made the trip more inconvenient and expensive, it did not make it impracticable. The contract assumed that the Suez Canal would remain open and it was neither one of their faults that it closed 2. Was the non-occurrence of this event an assumption on which the contract was based that goes to the heart of the agreement? o Parties contracted on the basic assumption that this occurrence would not happen . Ex. §2-614—parties agreed that goods would be shipped in a certain way, if there is a commercially available alternative, the parties have to go along with this (b/c it’s minor) o Non-availability of the goods is not minor 3. Must have arisen without the fault of neither party a. Whoever is trying to get out, must not somehow have assumed the risk in some way - Assumption of Risk o Does the contract assign the risk to the person seeking to be excused? o Does course of dealing, trade usage or course of performance? o Do other circumstances allocate the risk? 4. must consider the role of forseeability - Can we then imply that if one party has foreseen this risk then they assumed the risk? o split of authority on this (some say this does not imply assumption of risk, some say it does) **What happens to these parties now?
Analysis - if all four steps (above) are complete, then the party is off the hook from performing - the other party does not have to continue their performance either—everybody walks away - if the seller’s capacity to perform is only affected in part, seller then has the duty to produce the goods in a fair and reasonable manner
32 - forseeability or even allocation of a risk does not necessarily prove its allocation o it is only one factor to be considered
Force Majeure Clause - name of a clause put into a contract to excuse a party from performing the contract if an event arises that the parties anticipated during the negotiations of the parties, that it cannot prevent and that may impede performance o must draft this clause carefully - these are not a way of broadening excuses available under the UCC’s impracticability rule o ex. “Publisher may suspend its obligations due to ‘acts of God, earthquake, strike, civil commotion, acts of government and delays in the delivery of material and supplies, or any similar or dissimilar reason.”—court said that last sentence was too ambiguous
Objective v. Subjective Impracticability - Objective- “the thing cannot be done” . ex. the music hall burned down o a party generally assumes the risk of his own inability to perform his duty—even if a party contracts to render a performance that depends on some act by a third party, he is not ordinarily discharged b/c the third party did not perform, b/c he assumes the risk” - Subjective- “I cannot do it” o ex. I cannot pay for it (financial inability)
2. Frustration of Purpose
*use the same Four Step Test
Difference b/t Impracticability and Frustration - Impracticability--“It’s too hard, I can’t do it” - Frustration--“Yeah, I can do it, but what is the point?” o When they can do it, but they don’t want to b/c they don’t see the purpose, or they are not getting what they want o performance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event . Ex. Krell v. Henry- where D was going to rent a flat from P to watch the procession of the King, but then the King got sick so it was cancelled. The court found that there was a basic assumption on which the contract was based that the coronation would take place. This was the foundation of the contract, so both parties are discharged.
Degree of Frustration - it is not enough that one party has in mind some specific objective, that the contract would not be made without the objective o but it not only has to be there, it has to be significant
33 - not enough that the transaction is less profitable, or that someone would sustain a loss - Free on Board (FOB)- when goods are delivered “free on board” pursuant to contract the presumption is that the property pursuant to contract the presumption is that the property passes thereupon
Restitution - when one party has conferred a benefit on the other party through part performance, before the other party’s performance became impracticable, courts will often grant restitution - it is also usually available when a contract has been terminated by the doctrine of frustration - also granted when a contract is rescinded for mistake
III. What Remedies are Available for Breach of Contract?
A. Expectation, Restitution & Reliance - the usual remedy for a breach of contract is an award of damages - ON THE EXAM: state why the party would want one of these three, and which one
1. Expectation Expectation = benefit of the bargain o awarding a sum of damages that will put the promisee in as good a position as it would have been in, had the promise been performed (no more, no less)
4 Ways the Breach Might Affect the Injured Party - (1) loss in value- it may cause the injured party a loss by depriving it of the expected return performance o calculated by finding out the difference between what the injured party should have received and what they actually received - (2) other loss- it may cause other losses, such as physical harm to person or property, or other expenses incurred when attempting to save the transaction - **in either of these instances, the injured party can choose to continue on or terminate the contract—if they choose to terminate there are two other ways they could be effected - (3) cost avoided- breach could have a beneficial effect – it could save the injured party further expenses that would have been incurred if the performance had continued - (4) loss avoided- could allow the injured party to avoid some loss by salvaging and reallocating some of the resources that it would have had to use when performing the contract
General Measure of Damages: Damages = loss in value + other loss – cost avoided – loss avoided
How to Figure Out if an Actionable Breach has Occurred: - What exactly is the duty of performance (what has been promised)? o Reread the facts and find out what the individual did or did not do. - Has there been a failure to perform?
34 - Whether the failure to performance amounts to a breach o Was the duty subject to an express condition? . Unless there was strict compliance with the condition, failure to perform is not actionable o Was the duty subject to a constructive condition? . Must be substantial compliance (fact question, not easily solved) . Also think about whether or not there was a prior material breach . Waiver, estoppel, and election issues to contend with . Prevention/Failure to cooperate . Impracticability and Frustration of Purpose - If there has been a breach, what course of action is available to the injured party? . See material breach and repudiation . Use timeline diagrams to place things in chronological order and evaluate them properly. Finger the person who commits the first material breach or the first repudiation.
Formulas for Figuring Out Damages: - Formula A o Loss in value – Cost avoided [ - Loss avoided] + other loss = damages - Formula B o Cost of reliance + profit [ - Loss avoided] + other loss – payments made = damages . Profit = revenue – expenses We do not deduct overhead from the profits
Employment - same theory of expectation occurs in employment o ex. if you are hired to work at McDonald’s in a contract for one year at $1,000/month, then they fire you 6months into it. If BK hires you for $500/month, McDonald’s would have to pay $3,000 (the difference in what you would have made there and what you make at BK) . but if BK paid you the same, you would have no claim for damages against McDonald’s because you did not suffer a loss
2. Restitution and Reliance - an injured party does not have to choose expectation. o they have the option to forego that and only sue for restitution - Restitution – someone has been unjustly enriched and they should have to give back the benefit or pay for the value from it. o Even a breaching party may get some restitution, but recovery is subject to strict limitations o The law treats a victim seeking restitution much more generously o Have to calculate the value of the benefit . Victim gets whatever it would have cost the breaching party to have obtained the benefit from a third party. . Whether or not the breaching party truly benefited economically.
35 . Victim must also cough up any benefit that they received - So why choose restitution over expectation? o When the victim has entered into a losing bargain
Losing Contracts - contracts where the injured party would have sustained a loss had the contract been performed - proper solution: o the promisee may recover his outlay in preparation for the performance, subject to the privilege of the promisor to reduce it by as much as he can show that the promisee would have lost, if the contract had been performed - measure of recovery is the reasonable value of performance (not necessarily the contract price)—the amount for which such services could have been purchased from one in the P’s position at the time and place the services were rendered - recovery in restitution may exceed the contract rate - exception: o -when an injured party has fully performend and all the breaching party had to do was pay a sum of money, restitution is not available (Expectation is all you can get)—this is not very common . courts want to avoid problems in measuring damages
Restitution Damages: - contract price – payments made = loss in value - loss in value – cost avoided = DAMAGES
Expectation Remedy: - FORMULA B: o cost of reliance + profit – payments made = damages
B. Limitations on Damages: Avoidability, Forseeability & Certainty - these can be used in both common law and UCC o ex. the UCC does not talk about compensatory damages - (UCC is always supplemented by common law)
Three Doctrines that Limit Damages - (1) Mitigation (also called the Doctrine of Avoidable Consequences) - (2) Forseeability - (3) Certainty
1. Avoidability
Mitigation - if you are the victim of a breach, you can’t get damages for things you reasonably could have avoided - duty to mitigate - courts want to encourage the injured party to mitigate the damages and lessen the injury
36 - but the injured party incurs no liability to the party in breach for the failure to mitigate o Ex. Rockingham County v. Luten Bridge- where P continued to build the bridge even though D repudiated and then tried to make D pay for the bridge. The court found that even though D breached, P was still under a duty to lessen the damages. The court said P should have stopped building the bridge as soon as they had notice of the repudiation and then sued for whatever damages they suffered.
Avoidability Under Contracts for the Sale of Goods - it is assumed that the injured party can generally arrange a substitute transaction, and under the principle of avoidability it is assumed to do so o §2-712—if the seller fails to deliver goods, the buyer can go into the market and buy other goods, and then the seller’s damages are the difference between the contract price and what the buyer had to pay for the market price o §2-706—if the buyer does not take and pay for the goods, the seller can resell them, and the seller can recover the difference . if a seller or buyer fails to do this, the difference is based on the market price
General Rule for Wrongful Termination: - the measure of recovery is the amount of salary agreed upon for the period of service, minus the amount which the employer affirmatively proves the employee has earned, or could have earned from other employment with reasonable efforts. - but the employer must show that the other employment was comparable o Ex. Parker v. Twentieth Century Fox- where P was supposed to be in D’s film, but they would still have to pay her if they didn’t make the movie. Instead they offered her a role in another film, but the court found this was not comparable employment, so she was not obligated to take the role.
Avoidability and Cost to Remedy Defect - problems arise when performance is defective, as opposed to incomplete - the court “must weigh the purpose to be served, the desire to be gratified, the excuse for deviation from the letter, the cruelty of enforced adherence” - The owner is entitled to the money which will permit him to complete, unless the cost of completion is grossly and unfairly out of proportion to the good to be obtained. o ex. Jacob & Youngs v. Kent- where builder put in the wrong pipes by mistake, and would not redo the work because it was too much extra work to tear the pipes out of the wall. . court said that usually we will give you “cost of repair” unless that will overly compensate you - Intentional v. unintentional o the willful transgressor must accept the penalty of his transgression o for him there is no occasion to mitigate the rigor or implied conditions. o But the transgressor whose default is unintentional and trivial may hope for mercy if he will offer atonement for his wrong.”
37 - Economic Waste- you are not supposed to do anything that created economic waste o court has to find some way around this law o an award of damages can never produce economic waste o but you can get an award that is wasteful in another sense, that it has over- compensated someone - Diminution in Value: o where the contract provision was merely incidental to the main purpose of the contract, and where the economic benefit which would result to lessor by full performance of the work is grossly disproportionate to the cost of performance, the damages which lessor may recover are limited to the diminution in value resulting to the premises because of the nonperformance.
2. Forseeability - damages can be recovered that can be considered to arise naturally or forseeably and probable from a breach of contract, at the time they made the contract (see p. 522-23) o ex. Hadley v. Baxendale- where P paid D to take their crank shaft to the manufacturer, which D failed to do. As a result, P had to shut down their mill for five extra days, causing a huge loss in profits. The court found that these unfortunate consequences could not have been known at the time of contract.
§351- Unforseeability and Related Limitations on Damages (1) Damages are not recoverable for loss that the party in breach did not have reason to forsee as a probable result of the breach when the contract was made. (2) Loss may be forseeable as a probable result of a breach because it follows from the breach a. In the ordinary course of events, OR b. As a result of special circumstances beyond the ordinary course of events, that the party in breach had reason to know. (3) A court may limit damages for forseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that, in the circumstances, justice so requires in order to avoid disproportionate compensation. o courts are sometimes reluctant to award damages that are so disproportionate
Consequential damages: damages that would not be considered as “arising naturally” but only as a result of the “special circumstances under which the contract was actually made.” - Loss in Value – Cost Avoided = Damages - UCC §2-712(2)- buyer’s recovery of incidental/consequential damages - UCC §2-708(1)- seller’s recovery of only “any incidental damages” o damages that arise out of special circumstances
§348—Alternatives to Loss in Value of Performance (1) If a breach delays the use of property, and the loss in value to the injured party is not proved with reasonable certainty, he may recover damages based on the rental value of the property or on interest on the value of the property. (2) If a breach results in defective or unfinished construction and the loss in value to the injured party is not proved with sufficient certainty, he may recover damages based on:
38 a. The diminution in the market price of the property caused by the breach, OR b. The reasonable cost of completing performance or of remedying the defects if that cost is not clearly disproportionate to the probable loss in value to him. (3) If a breach is of a promise conditioned on a fortuitous event, and it is uncertain whether the event would have occurred had there been no breach, the injured party may recover damages based on the value of the conditional right at the time of breach.
Loss in Value Analysis: - ex. If the specifications call for a blue tile roof, but the contractor installs a red tile roof, even though the tiles are the same quality and have the same market value, the owner should recover the loss in value to him o there is no doubt there is a breach - diminution in market value v. cost of repair o the diminution in market value is not going to be very high o the alternative is the cost of repair, . you would have to take the tile off and put new tile on - the goals of contract remedy is compensatory—giving them what they would have gotten had the contract been performed
Emotional Distress - it is difficult to give recovery for emotional distress for breach of contract, b/c its hard to measure - can recover emotional damages, if the emotional disturbance is forseeable should breach occur - Personal Contracts: o where the contract is personal in nature and it should be known to the parties that emotional suffering will result from its breach, compensatory damages may be recovered. - can only recover emotional damages when the contract is personal in nature (not just business) and serious emotional distress will result o ex. Funeral Parlor case- where the water leaked into the vault and the undertaker says “To hell with the whole damn thing” in front of the widow - punitive damages o should be awarded only in the most unusual and compelling circumstances and will be sustained on appeal only when it is shown that the D acted in a manner that was an extreme deviation from reasonable standards of conduct, and this act was performed by the D with an understanding of an disregard for its likely consequences.” o Awarded in cases where the breach of contract is also a tort.
3. Certainty
§352- Uncertainty as a Limitation on Damages Damages are not recoverable for loss that the evidence cannot establish with reasonable certainty.
39 - means that the certainty required is less than absolute precision, but something more than “more likely than not” o Ex. new businesses seldom recover loss profits because there is no track record (ex. can’t look at last year’s profits)
**ON THE EXAM: always start with expectation, move down to mitigating the damages, then forseeability, move to certainty, etc. (that should be your analysis)
C. Punitive Damages Punitive Damages for Breach of Contract - punitive damages are not usually granted for breach of contract o even if the breach is willful, it does not matter whether you broke the promise on purpose - some courts have departed from this rule to allow them when the breach is accompanied by “fraudulent” conduct - they are unpredictable in nature - Two Main Purposes: 1. retribution 2. deterrence (maybe they will learn from this, and won’t do the same thing again) o people who break contracts disrupt other people’s lives, they should be punished
D. Liquidated Damages Liquidated Damages- an amount of money agreed upon by both parties to a contract which one will pay to the other if he breaches - amount is determined by a good faith effort at estimating the actual damages that will probably ensue from the breach - makes the person who breaches liable for a specific amount of damages - if there is a valid liquidated damages clause it will displace the legal remedy for breach (regardless of whether the liquidated damages are larger or small that what would have been recovered—it is not about equitable relief) - *these are used when it is hard to determine actual damages
Penalty- a fixed amount a party agrees to pay if he breaches, as a punishment - these are simply not valid - the risk is that the clause will be put in as a penalty - *the goal in contracts is simple compensation, not punishment - if there is a penalty clause the court will declare it invalid, but the injured party will still get damages for breach (actual damages) - if damages are hard to measure, a liquidated damages clause will make sure the injured party gets something
Stipulated Damages - the purpose is not to compel the promisor to perform, but to compensate the promisee for nonperformance - they avoid the uncertainty, delay, and expense of using the judicial system to determine actual damages
40 - allow private parties to perform the judicial function of providing the remedy in breach of contract cases - *for a stipulated damages clause to be valid, it must be reasonable (a reasonable forecast of just compensation for the harm that is caused by the breach) o you can assess reasonableness at the time of the contract formation or at the time of the breach - *most courts today place the burden on the party challenging a stipulated damages clause o courts usually only ask whether it is REASONABLE - someone injured by a breach is entitled to just and adequate compensation o therefore the clause is unreasonable if it does more than compensate Ps for their approximate actual damages caused by the breach
§2-718—Liquidation or Limitation of Damages; Deposits (1) Damages for breach by either party may be liquidated in the agreement, but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, and, in a consumer contract, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty. (2) Where the seller justifiably withholds delivery of goods or stops performance because of the buyer’s breach, the buyer is entitled to restitution of any amount by which the sum of the buyer’s payments exceeds: a. the amount to which the seller is entitled by virtue of terms liquidating the seller’s damages in accordance with (1); OR b. In the absence of such terms, twenty percent of the value of total performance for which the buyer is obligated under the contract or $500, whichever is smaller. (3) The buyer’s right to restitution under (2) is subject to offset to the extent that the seller establishes: a. A right to recover damages under the provisions of this Article other than (1), AND b. The amount or value of any benefits received by the buyer directly or indirectly by reason of the contract. (4) Where a seller has received payment in goods, their reasonable value or the proceeds of their resale should be treated as payments for the purposes of (2); but if the seller has notice of the buyer’s breach before reselling goods received in part performance, his resale is subject to the conditions laid down in §2-706 on resale by an aggrieved seller.
§2-718—(must apply this test at the time the contract was made) - (1) Does the damage amount bear a reasonable relation to what we anticipated at the time the contract was made? - (2) But if this test fails, you can still ask whether it ended up being a good measure of actual damages? o it matters whether they were a good estimate at the time - *the harder it is to estimate what actual damages would have been, the better chance you have of proving that your estimate is reasonable
Measuring Liquidated Damages
41 - ex. If there is a landlord/tenant contract with a liquidated damages clause, which gives tenant 25% of his gross revenue for a year. Tenant was under rent control and landlord realizes this is not a good deal so he kicks him out, - DAMAGES = substitute rent – rent under the lease x number of years left in the lease o lost profits = revenues – expenses (consequential damages) o moving expenses (incidental damages) - **ON THE EXAM: to analyze liquidated damages clause, you have to first have some sense of what the damages would have been under expectation theory
E. Specific Enforcement - money damages are the norm, and specific relief is the exception - an injured party can always claim money damages for breach of contract, that party’s right to specific relief as an alternative is much more limited - if you can establish that you were in a contract and you were the victim of a breach, you will be entitled to legal remedies (damages in money) - if you want an equitable remedy, you will have to prove that you are entitled to that - specific performance- court order that makes the contracting party do what they said they were going to do o every piece of land is considered to be unique, so damages are not considered adequate o therefore specific performance is appropriate - injunction- requires the contracting party not to breach anymore o ex. Walgreen Co. v. Sara Creek Property Co.- where the mall promised not to rent to any other pharmaceutical stores, but ended up renting to one when they needed a big name store. The court granted Walgreen’s an injunction to stop the mall from allowing this new store’s presence.
Personal Service Contracts - a court will not usually order specific performance of a contract to provide a service that is personal in nature - a court will not grant an injunction unless the remedy in damages would be inadequate o this occurs when employee’s services are unique or extraordinary, either because of special skill that the employee possesses or because of special knowledge that the employee has acquired of the employer’s business o this often happens in professional sports
§2-716—Buyer’s Right to Specific Performance or Replevin (1) Specific performance may be decreed where the goods are unique or in other proper circumstances. (2) The decree for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just. (3) The buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing, or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered. In the case of goods bought for personal, family or household purposes, the buyers’ right of replevin
42 vests upon acquisition of a special property, even if the seller had not then repudiated or failed to deliver.
Uniqueness - the test of uniqueness must be made in terms of the entire situation of the contract o output—contracts where the quantity of goods delivered depends on how much the seller produces; AND o requirements contracts involving a particular or peculiarly available source or market present today the typical commercial special performance situation, o as contrasted with contracts for the sale of heirlooms or priceless works of art which were usually involved in older cases - ex. family heirloom, paintings, etc. - but most times buyers are expected to purchase substitute goods and sue for the damages
Why Injunctions are Problematic: (public policy) - they require continuing supervision by the court, which is costly - they impose costs on third parties - they lead to bilateral monopolies, when parties can only deal with each other - *but we don’t want damage awards that are too small, b/c then people will breach too often, but if they are too big, they won’t ever breach, and as we have seen breaches can be good
Other Limiting Factors for Specific Performance: - if you conclude you are the victim of a contract breach, you are almost always entitled to damages, but you would have to convince a court that you are entitled to equitable relief - as long as there is consideration, we do not investigate whether it is adequate o but if an equitable remedy is being requested, the court has more discretion (the court can decide they do not deserve what they are getting) - if you come into court with “unclean hands”—the court will refuse to give you equitable relief o failure to disclose a significant defect (telling a lie or half truth those are actionable, if you remain silent, well that depends on the jx) o caveat emptor jx- means seller does not have to tell o sometimes a court won’t go the extra mile and give you equitable relief, but usually you can still get damages - you have to have definite contract terms o the court can conclude that the contract is too indefinite - there are some contracts where the court will simply not grant equitable relief o the law is reluctant to compel people to work jobs against their will (ex. if you want to quit a law firm, the court will not make you go back b/c that creates a bad work product)
Contracting Out/In - there is a possibility that you might want to contract out of equitable relief - just b/c you have a liquidated damages clause, it does not preclude you from getting equitable relief
43 - If you want equitable relief instead of damages, can you put in a term that grants you specific performance? o NO, b/c certain remedies were once available only from equity courts and are seen as a limitation on jx of the courts o some jx don’t have this kind of power, therefore courts will not enforece these contract terms - some contracts describe certain facts that would lead a judge to conclude that specific performance is necessary (ex. listing the reasons why a certain actor or athlete is unique and cannot be replaced by another) o sometimes this works, sometimes it does not
IV. Article 2: Performance and Remedies - seller’s job is to “transfer and deliver” o must offer “conforming goods” - buyer’s job is to “pay in accordance with the contract” o must pay for the goods - §2-507(1) and §2-511(1) only apply when the buyer and seller intend a simultaneous swap of money for the goods. o If the parties did not intend a contemporaneous swap, then they would have “otherwise agreed.”
§2-507—Effect of Seller’s Tender; Delivery on Condition (1) Tender of delivery is a condition to the buyer’s duty to accept the goods, and, unless otherwise agreed, to his duty to pay for them. Tender entitles the seller to acceptance of the goods and to payment according to the contract. (2) Where payment is due and demanded on the delivery to the buyer of goods or documents, of title, his right as against the seller to retain or dispose of them is conditional upon his making the payment.
§2-511—Tender of Payment by Buyer; Payment by Check (1) Unless otherwise agreed, tender of payment is a condition the seller’s duty to tender and complete any delivery. (2) Tender of payment is sufficient when made by any means or in any manner current in the ordinary course of business, unless the seller demands payment in legal tender and gives any extension of time reasonably necessary to procure it. (3) Payment by check is conditional and is defeated as between the parties by dishonor of the check on due presentment.
A. Perfect Tender Rule
1. Installment Sales Substantial Performance - in installment contracts, defined in §2-612(1), substantial performance is still the law o the seller is entitled to payment even where the tender of the goods fails to conform exactly to the contract as long as it “substantially” conforms
44 - May reject only if the non-conformity substantially impairs the value of the installment and cannot be cured o If seller gives adequate assurance of cure you have to accept the installment - All problems are cumulative when you try to judge whether the whole K has been substantially impaired
§2-612—“Installment Contract”; Breach (1) An “installment contract” is one which requires or authorizes the delivery of goods in separate lots to be separately accepted, even though the contract contains a clause “each delivery is a separate contract” (or something equivalent). (2) The buyer may reject any installment which is non-conforming if the non-conformity substantially impairs the value of that installment and cannot be cured or if the non- conformity is a defect in the required documents; but if the non-conformity does not fall within (3) and the seller gives adequate assurance of its cure the buyer must accept that installment. (3) Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a non-conforming installment without seasonably notifying seller of cancellation, or if he brings an action with respect only to past installments or demands performance as to future installments. o you have to give an opportunity to cure in installment contracts
Example of §2-612 Analysis - An order of 12 statues, with 20 statues in each shipment, in the first shipment, one was broken, so they replaced it, in the second, half were broken, and then lastly, the seller sends paintings instead of statues. - Analysis: o First shipment – there was substantial performance and could be cured o Second shipment –§2-612(2) says it can still be cured, so even that installment cannot be rejected. o Third shipment – here there is substantial impairment again. Defects are cumulative, but it is still a fact question and uncertain as to whether it is whole. Buyer will argue that his confidence has been shaken enough that the K should be over. . You can ask for assurance under §2-609, but would an assurance that it wouldn’t happen again be adequate? Probably not. The seller’s word is no good at this point.
2. The Perfect Tender Rule - the substantial performance rule has never applied to single delivery contracts between merchants o Common law requires only substantial performance - §2-601—to prevail in a single-delivery sale, the seller must make a perfect tender, one that complied with all of the terms of the contract, and then show that buyer refused to take the goods - §2-601 tells us when buyer has the right to reject non-conforming goods (rightful v. wrongful rejection).
45 - In single-delivery sales, the buyer does not have the same bargaining position a buyer would have in installment sales (where the seller needs to keep dealing with the buyer on repeated occasions and therefore must, as a business matter, keep the buyer happy). - If the tender is conforming, rejection is not available. o This can be affected by trade usage (trade usage might allow certain non- conformities, etc.)
§2-601—Buyer’s Rights on Improper Delivery Subject to the §2-612, and unless otherwise agreed under the sections on contractual remedies (§2-718 and §2-719), if the goods or the tender of delivery fail to conform to the contract, in any respect, the buyer may (a) reject the whole; OR (b) accept the whole; OR (c) accept any commercial unit or units and reject the rest.
What does it mean to conform? - if there is no warranty, then there is no standard for conforming o there has to be another reason for non-conformity
3. Cure - §2-508—If the seller has not made a perfect tender, and as a result the buyer has rejected the goods, the seller has the right in some circumstances to cure the defective performance o ex. where buyer buys 5 cars from seller, but when they were delivered, she returned two of them b/c one had ripped carpet and the other’s audio system did not work. The dealer offered to fix both, and she said no. §2-508 says buyer has to give seller a reasonable opportunity to cure, as long as it does not inconvenience buyer, before buyer has a right to rescind the contract. - Parties can choose whether tender occurs at shipment or destination, but the assumption is that tender occurs at the place of shipment so the risk of loss in transit is on the buyer.
§2-508—Cure by Seller of Improper Tender or Delivery; Replacement (1) Where any tender or delivery by the seller is rejected because it is non-conforming, and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then, within the contract time, make a conforming delivery. (2) Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable, with or without money allowance, the seller may if he seasonably notifies the buyer, have a further reasonable time to substitute a conforming tender. o Ex. Wilson v. Scampoli- where buyer’s new TV had a reddish tint, so repair man came out and said he would have to take it back to the shop, and seller agreed to replace it if it could to be fixed. The court found that the seller should be able to cure the defect under §2-508(2) as long as it did not subject the buyer to any great inconvenience, risk or loss.
46 Shaken Faith Doctrine- For a majority of people, the purchase of a new car is a major investment, rationalized by the peace of mind that flows from the dependability and safety. Once their faith is shaken, the vehicle loses not only its real value in their eyes, but becomes an instrument whose integrity is substantially impaired and whose operation is fraught with apprehension.
4. Inspection - Reasonable opportunity to inspect (§2-513)—buyer is entitled to a reasonable trial-use period to see if the goods conform
§2-513—Buyer’s Right to Inspection of the Goods (1) Unless otherwise agreed and subject to (3), where goods are tendered or delivered or identified to the contract for sale, the buyer has a right before payment or acceptance to inspect them at any reasonable place and time and in any reasonable manner. When the seller is required or authorized to send the goods to the buyer, the inspection may be after their arrival. (2) Expenses of inspection are on buyer, but may be recovered from the seller if the goods do not conform or are rejected. (3) Unless otherwise agreed and subject to this Article, the buyer is not entitled to inspect the goods before payment of the price when the contract provides: a. For delivery “C.O.D.” or on other like terms; AND b. For payment against documents of title, except where such payment is due only after the goods are to become available for inspection. c. If parties deal at a distance, where is tender considered to occur?
5. Risk of Loss and Delivery Shipment Contracts - if something is shipped “F.O.B.”(and then place of shipment) it means that the shipping costs are not included, so if it costs extra, buyer has to pay for it. o It also means that tender is taking place before the goods get onto the boat o Risk of loss is on the buyer Destination Contracts - If it is shipped F.O.B. (and then the place of the buyer), then shipping is included and tender takes place where goods are delivered to buyer. o Risk of loss is on the seller here
§2-509—Risk of Loss in the Absence of Breach (1) Where the contract requires or authorizes the seller to ship the goods by carrier: a. If it does not require him to deliver them at a particular destination, the risk of loss passes to the buyer when the goods are duly delivered to the carrier, evn thought the shipment is under reservation; BUT b. If it does require the seller to deliver them at a particular destination and the goods are duly tendered there while in the possession of the carrier, the risk of loss passes to the buyer when the goods are there, so duly tendered as to enable the buyer to take delivery.
47 (2) Where the goods are held by a bailee to be delivered without being moved, the risk of loss passes to the buyer a. On his receipt of a negotiable document of title covering the goods; OR b. On acknowledgment by the bailee of the buyer’s right to possession of the goods; OR c. After his receipt of a non-negotiable document of title or other written direction to deliver. (3) In any case not within sections (1) and (2), the risk of loss passes to the buyer on his receipt of the goods if the seller is a merchant; otherwise the risk passes to the buyer on the tender of delivery. (4) The provisions of this section are subject to contrary agreement of the parties.
B. Rejection and Acceptance - seller tenders the goods, and buyer must decide whether to reject (§2-602) or accept (§2- 607) o these are mutually exclusive actions (cannot do both) o payment of goods is not enough for acceptance, but words can be o ex. Plateq case- buyer sends an engineer to look at the tanks, seller says he will fix the goods by tomorrow, buyer did not give any indication that this was a problem, this was considered acceptance
REJECTION-§2-602 - Even if you have the right to reject you must follow the proper procedure - must occur within a reasonable time following tender o Reasonable time must be long enough to inspect the goods o A buyer is entitled to a reasonable trial-use period to see if the goods conform (“reasonable opportunity to inspect”); and o must seasonably notify the seller of the rejection o What information should the buyer include? (See §2-605) . Buyer must state any defects that can be discovered through a reasonable inspection. o What if you fail to assert a particular defect in the notice? . Buyer is then precluded from relying on that defect in the subsequent litigation. Main Elements of an Effective Rejection: - notice - within a reasonable time
Framework - If B has inspected the goods, and then rejected, followed the procedure - The next question, is does S have the right to cure under §2-508 o If S does not cure, B has the right to cancel the contract and he can get his down payment back if he put one down - If B looked at the goods and did not find anything wrong with them, and then he accepted under §2-606 (we have already done this analysis), now rejection is no longer acceptable, but the goods are nonconforming
48 o If you have accepted the goods, you now have to pay the contract price, but you can sue for damages under §2-714 and possibly under §2-715 o If goods are accepted and there has been a breach, B has to notify S that the transaction is in trouble and needs attention - If you don’t notify you are barred from any remedy o Acceptance shifts the burden to B to prove that they were non-conforming o Prior to acceptance, S has to prove that a perfect tender was made (goods were conforming) - HYPO: B buys a race horse, shortly after buying, B realizes that the horse is limping and is lame in one leg. The frist question is when did this happen? Did it happen while in B’s care or before it left S?
- §2-603 if buyer notifies seller that he is rejecting but seller gives no instruction as to what to do with the goods. o Buyer can store them, send them back, or sell them for seller’s account o Merchant buyer has to do anything reasonable that seller requests with the goods. If it is perishable, the merchant buyer has to sell it at whatever price it can get for seller.
§ 602—Manner and Effect of Rightful Rejection (1) Rejection of goods must be within a reasonable time after their delivery or tender. It is ineffective unless the buyer seasonably notifies the seller. (2) Subject to §2-603 and §2-604 on rejected goods: a. After rejection any exercise of ownership by the buyer with respect to any commercial unit is wrongful as against the seller; AND b. If the buyer has before rejection taken physical possession of the goods in which he does not have a security interest under §2-711(3), he is under a duty after rejection to hold them with reasonable care at the seller’s disposition for a time sufficient to permit the seller to remove them; BUT c. The buyer has no further obligations with regard to the goods rightfully rejected. (3) The seller’s rights with respect to goods wrongfully rejected are governed by the provisions of this Article on Seller’s remedies in general (§2-703).
§605—Waiver of Buyer’s Objections by Failure to Particularize (only applies to rejection) (1) The buyer’s failure to state in connection with rejection a particular defect which is ascertainable by reasonable inspection precludes him from relying on the unstated defect to justify rejection or to establish breach a. Where the seller could have cured it if stated seasonably; OR b. Between merchants when the seller has after rejection made a request in writing for a full and final written statement of all defects on which the buyer proposes to rely. (2) Payment against all documents made without reservation of rights precludes recovery of the payment for defects apparent on the fact of the documents
§606—What Constitutes Acceptance of Goods (1) Acceptance of goods occurs when the buyer:
49 a. After a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that he will take or retain them in spite of their nonconformity; OR b. Fails to make an effective rejection, but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect them; OR c. Does any act inconsistent with the seller’s ownership; but if such act is wrongful as against the seller it is an acceptance only if ratified by him. (2) Acceptance of a part of any commercial unit is acceptance of that entire unit.
§607—Effect of Acceptance; Notice of Breach; Burden of Establishing Breach After Acceptance (1) The buyer must pay at the contract rate for any goods accepted. (2) Acceptance of the goods by the buyer precludes rejection of the goods accepted and, if made with knowledge of a non-conformity, cannot be revoked because of it, unless the acceptance was on the reasonable assumption that the non-conformity would be seasonably cured. But the acceptance does not of itself impair any other remedy for non- conformity. (3) Where the tender has been accepted a. The buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy; AND (4) The burden is on the buyer to establish any breach with respect to the goods accepted.
C. Revocation - even after technically accepting the goods, a buyer can still bring a breach of warranty action if proper notice has been given under §2-607(3)(a) o if Buyer wins, he can get damages under §2-714 and §2-715, and buyer will still have the goods o if buyer does not want the goods, and wants his money back, this is revocation of acceptance . buyer can also get consequential damages Rejection v. Revocation: - Rejection: a buyer can reject the goods if they “fail in any respect” - Revocation: the buyer must show that the defect “substantially impairs the value of the goods”
Requirements of Revocation: - (1) Has to be a non-conformity that substantially impairs the value o This is based on totality of the circumstances—whether or not the car failed to be what the seller was obligated to provide for P, and whether this nonconformity substantially impaired the value to P - (2) But it also has to be shown that Buyer was justified in accepting the goods in the first palce o Either buyer assumed goods would be cured, and they weren’t (seller said they would, etc.); OR o he inspected and could not find the defect
50 - (3) He also has to revoke within a time, so that it was not him that caused the non- conformity - (4) then he has to notify within a reasonable time – if you don’t notify it is not an effective revocation - (5) if you revoke your acceptance, you have the same requirements as rejection (you are not supposed to use them, you may have to dispose of them to seller, etc.) . all of the same rules apply
§2-608—Revocation of Acceptance in whole or in Part (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 a. On the reasonable assumption that its nonconformity would be cured; OR b. Without discovery of such nonconformity if his acceptance was reasonably induced either by the difficulty of the discovery before acceptance or by the seller’s assurances. (2) Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until buyer notifies the seller of it. (3) A buyer who so revokes has the same rights and duties with regard to the goods involved as if he had rejected them.
- §2-608(1)—a B can revoke only if there is substantial impairment of the value of the car to him o Based on the need of the B (including any unique circumstances) o After the circumstances are determined, the court will ask whether the nonconformity would substantially impair the value of the car to a reasonable person in the circumstances of the buyer o Ex. Rester v. Morrow- where something different on P’s car broke almost every week, and he had to travel regularly which requires a properly functioning car. . Once you take a car off the lot you are deemed to have accepted it, b/c it reduces the car’s value - Totality of the circumstances—argue “cumulative impact” and that revocation should be allowed, it substantially lowers the value of the car in her eyes
Lemon Laws: - NY has a law that says a refund from the D should be reduced by “a reasonable allowance for the consumer’s use of the car in excess of 12,000 miles of operation and for any damage not attributable to normal wear or improvements
D. Seller’s Remedies
§2-501—Insurable Interest in Goods; Manner of Identification of Goods (1) The buyer obtains a special property and an insurable interest in goods by identification of existing goods as goods to which the contract refers, even if the goods so identified are non-conforming and he has an option to return or reject them. Such identification can be
51 made at any time and in any manner explicitly agreed to by the parties. In the absence of explicit agreement, identification occurs: a. When the contract is made if it is for the sale of goods already existing and identified; b. If the contract is for the sale of future goods other than those described in paragraph (c—crops and animals), when goods are shipped, marked or otherwise designated by the seller as goods to which the contract refers; (2) The seller retains an insurable interest in good as long as title to or any security interest in the goods remains in him and, where the identification is by the seller alone, he may, until default or insolvency or notification to the buyer that the identification is final, substitute other goods for those identified. (3) Nothing in this section impairs any insurable interest recognized under any other statute or rule of law.
Three Examples of When Identification Has Occurred: - (1) where seller has a furniture store with one purple velvet lounge chair, buyer sees that particular chair and says he wants this. The lounge chair exists, and the contract identifies this as the goods being sold. o identification occurs when the contract is made, from the beginning o (this type of situation is very rare) - (2) Sears has a “floor model” of some refrigerator. Buyer enters into a contract to buy a refrigerator of that type and model (but not that exact one). Sears has a warehouse with hundreds of those same refrigerators. A Sears employee selects one of those, and puts a tag on it, saying that it is buyer’s property. o this is when identification has taken place - (3) A farmer agrees to sell his wheat to someone. The crop is identified when crop is planted, b/c the goods will be sold when the wheat is actually harvested.
§2-703—Seller’s Remedies in General (1) Where the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due on or before the delivery, or repudiates with respect to a part or the whole, then with respect to any goods directly affected and, if the breach is of the whole contract, then also with respect to the whole undelivered balance, the aggrieved seller may: a. Withhold delivery of such goods; b. Stop delivery by any bailee as hereafter provided; c. Proceed under §2-704, respecting goods still unidentified to the contract; d. Resell and recover damages as hereafter provided (§2-706) e. Recover damages for non-acceptance (§2-708) or in a proper case the price (§2- 709) f. Cancel. - whether pursuing one remedy, bars seller from pursuing another, depends on the facts of the case
§2-706—Seller’s Resale Including Contract for Resale (when the B repudiates before delivery or rejects the goods)
52 (1) If the seller resells, under §2-703, and it is made in good faith and in a commercially reasonable manner, the seller can recover the difference between the resale and the contract price together with any incidental damages allowed under the provisions of this Article (§2-710), but minus expenses saved as a result of buyer’s breach. o contract price – resale price + incidentals – expenses saved = §2-706 DAMAGES o public policy worries about people manipulating the formula by selling for a really low value and then suing buyer for a way larger amount than she is entitled . ex. of “expenses saved”—destination contract where the price includes not only the price of the goods, but also the price of getting them to the destination (what if seller arranges this, but buyer never pays) (2) Unless otherwise agreed, resale may be at public or private sale including sale by way of one or more contracts to sell, or of identification to an existing contract of the seller. Sale may be as a unit or in parcels and at any time and place, and on any terms but every aspect of the sale including the method, manner, time, place, and terms must be commercially reasonable. The resale must be reasonably identified as referring to the broken contract, but it is not necessary that the goods be in existence or that any or all of them have been identified to the contract before the breach. (3) Where the resale is at private sale the seller must give the buyer reasonable notification of his intention to resell. (4) Where the resale is at public sale (a-d)— - public sale is defined as an auction where there are multiple people bidding—the key element of public is competition (if it is public, notice to buyer is still required, but you have to tell the buyer the time and place), seller is also permitted to buy if it is public (a) only identified goods can be sold, except where there is a recognized market for a public sale of futures in goods of the kind; AND (b) it must be made at a usual place or market for public sale if one is reasonably available, and except in the case of goods which are perishable or threaten to decline in value quickly, the seller must give the buyer reasonable notice of the time and place of the resale. (c) If the goods are not to be within the view of those attending the sale, the notification of sale must state the place where the goods are located and provide for their reasonable inspection by prospective bidders; AND (d) The seller may buy. (5) A purchaser who buys in good faith at a resale takes the goods free of any rights of the original buyer even though the seller fails to comply with one or more of the requirements of this section.
§2-708—Seller’s Damages for Non-acceptance or Repudiation (if no resale occurs—this is an alternative to §2-706)
(1) Subject to (2) and to proof of market price (§2-723), the measure of damages for non- acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in §2-710, but minus expenses saved in consequence of the buyer’s breach.
53 - contract price – market price + incidentals – expenses saved = §2-708(1) DAMAGES - they are trying to make a “hypothetical resale” to show what would happen if seller could resell at market price—shows how good a deal this was for the seller) - time and place for tender is not always easy to see - if the goods need to be shipped, usually the point of shipment is where the goods are said to be tendered (if tender is supposed take place at destination, this must be clearly stated in the contract) (2) If the measure of damages in (1) is inadequate to put the seller in as good a position as performance would have done, then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in §2-710, due allowance for costs reasonably incurred and due credit for payments or proceeds of resale. - PROFIT + INCIDENTALS + COST INCURRED – PAYMENTS – PROCEEDS OF RESALE = §2-708(2) DAMAGES - component seller- if seller is getting the goods to make the products from someone else, and buyer repudiates, then seller will not use the goods and you won’t be selling the finished product, but you will still have some cost incurred, and you should be compensated for this reliance. - Lost Volume Seller: if the law forces them to use §2-706 or §2-708(1), they lose the profit they would have made from the sale to the second customer (they could have been doing both contracts at the same time)
REMINDERS ON §2-706 and §2-708 - **b/t §2-706 and §2-708—in real life, seller is going to want whichever one will get them the most money If seller has not resold, you cannot even talk about §2-706 - KEEP IN MIND: do not over look the possibility that you are dealing with lost volume— sometimes the person could have been working on two sales at the same time. - If they seller in a commercially unreasonable manner, you have to go down to §2-708
§2-709—Action for the Price (when buyer has already accepted, or has the risk of loss) (1) When the buyer fails to pay the price as it becomes due, the seller may recover, together with any incidental damages under §2-710, the price: a. Of goods accepted, or of conforming goods lost or damaged within a commercially reasonable time after risk of loss has passed to the buyer; AND b. Of goods identified to the contract if the seller is unable, after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing. (assumes seller is in the best position to resell) (2) When the seller sues for the price, he must hold for the buyer any goods which have been identified to the contract and are still in his control, except that if resale becomes possible, he may resell them at any time prior to the collection of the judgment. The net proceeds of any such resale must be credited to the buyer and payment of the judgment entitles him to any goods not resold.
54 (3) After the buyer has wrongfully rejected or revoked acceptance of the goods, failed to make a payment due, or has repudiated (§2-610), a seller who is held not entitled to the price under this section shall still be awarded damages for non-acceptance under §2-708. - this is the basic remedy when buyer has accepted goods - seller does not always have the option to sue for the price, if the buyer does not pay, but sometimes seller can - esp. if buyer has accepted the goods (this means buyer has them in his possession)
REMINDERS: - only use §2-708 when buyer has not accepted or repudiated - use §709 when buyer really wants the money back, instead of the goods
§2-710—Seller’s Incidental Damages Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commission, incurred in stopping delivery, in the transportation, care and custody of the goods after the buyer’s breach, in connection with return or resale of the goods or otherwise resulting from the breach.
General Rule (§1-103): you don’t get consequential damages unless specifically called for in the UCC (ex. supplementing the UCC with common law)
E. Buyer’s Remedies - where seller never delivers the goods or where buyer rejects or revokes acceptance, §2-711 allows buyer to recover the price and other damages (including consequential and incidental) - buyer can also seek specific performance or replevin under §2-716—this eliminates the requirement of uniqueness for specific performance, also allowing it for “other proper circumstances - **REMINDER: the UCC’s purpose is to put the injured party in as good a position as if performance had occurred - Buyer’s do not have to “cover,” but if they don’t, they will not get consequential damages that they deserve Financial inability is an excuse for non-cover
§2-711—Buyer’s Remedies in General; Buyer’s Security Interest in Rejected Goods (1) Where the seller fails to make delivery or repudiates, or the buyer rightfully rejects or justifiably revokes acceptance, then with respect to any goods involved, and with respect to the whole, (if the breach goes to the whole contract) then the buyer may cancel and whether or not he has done so, may, in addition to the price as has been paid: a. “cover” and have damages under §2-712, as to all the goods affected whether or not they have been identified to the contract; OR b. Recover damages for non-delivery (§2-713) (2) Where the seller fails to deliver or repudiates, the buyer may also: a. If the goods have been identified, recover them as provided in §2-502; OR b. In a proper case, obtain specific performance or replevy the goods (§2-716)
55 (3) On a rightful rejection or justifiable revocation of acceptance, a buyer has a security interest in goods in his possession, for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, transportation, care and custody and may hold such good and resell them in like manner as an aggrieved seller (§2-706).
REMINDERS: - §2-711(3)—allows buyer to keep the goods as collateral to secure payment of all these repairs and expenses - Buyer does not have the right to keep his benefit of the bargain damages
§ 2-712. "Cover"; Buyer's Procurement of Substitute Goods
(1) After a breach within the preceding section the buyer may "cover" by making, in good faith and without unreasonable delay, any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.
(2) The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages as hereinafter defined (§2-715), but minus expenses saved in consequence of the seller's breach.
(3) Failure of the buyer to “cover” within this section does not bar him from any other remedy.
§ 2-713. Buyer's Damages for Non-delivery or Repudiation
(1) Subject to the provisions of this Article with respect to proof of market price (§2-723), the measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this Article (§ 2-715), but minus expenses saved in consequence of the seller's breach.
(2) Market price is to be determined as of the place for tender or, in cases of rejection after arrival or revocation of acceptance, as of the place of arrival.
§ 2-714. Buyer's Damages for Breach in Regard to Accepted Goods
(1) Where the buyer has accepted goods and given notification (§2-607(3)) he may recover as damages for any non-conformity of tender the loss resulting in the ordinary course of events from the seller's breach as determined in any manner which is reasonable.
(2) The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.
(3) In a proper case any incidental and consequential damages under the next section may also be recovered.
56 FORMULA
Goods as warranted – goods as are + incidentals + consequentials = DAMAGES
- “Goods as warranted” is not necessarily the K price (he may have gotten a good deal) - Incidentals and consequentials are outlined in §2-715 o Incidentals = cost of inspecting, caring, transporting, care and custody, etc. o Consequentials = any loss that results from general or particular needs which seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise . Hadley v. Baxendale – they must be foreseeable . Also personal injury or property damage that results from any breach of warranty. o Mitigation, or lack thereof, can be an issue here. . If buyer fails to inspect or notices and does nothing, seller is not liable for damage caused by that failure.
§ 2-715. Buyer's Incidental and Consequential Damages
(1) Incidental damages resulting from the seller's breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.
(2) Consequential damages resulting from the seller's breach include:
(a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and
(b) injury to person or property proximately resulting from any breach of warranty.
§ 2-717. Deduction of Damages From the Price
The buyer on notifying the seller of his intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract.
§ 2-719. Contractual Modification or Limitation of Remedy
(1) Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on liquidation and limitation of damages,
(a) the agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages
57 recoverable under this Article, as by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts; and
(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.
(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act.
(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.
V. What Roles Do Third Parties Play in Contract
A. Third Party Beneficiaries - Definition: Claims made on contracts by persons who were not parties to them - use diagrams
- PROMISEE ------PROMISOR PROMISE ------ CONSIDERATION
(3RD PARTY BEN.)
- could be an existing obligation b/t promisee and 3rd party beneficiary—called a creditor beneficiary - but he could just be conferring a gift—called a donee beneficiary
Who Can Sue? - when one makes a promise to another for the benefit of a third party, the third party can bring an action for its breach - General Rule: if a contract is entered into for the direct benefit of a third person, the third person may sue for breach of the contract in his/her own name, even though the third person is a stranger to the contract and the consideration o This increases judicial efficiency by removing the privity requirement o ex. Lawrence v. Fox- where Holly owed Lawrence money, so Holly loaned $300 to Fox with instructions to pay it back to Lawrence (P). Fox did not pay, so Lawrence sued Fox to recover the money. The court found for P.
Holly(promisor)------promise to pay $300 to Lawrence------Fox (promisee)
------
58 $300 loan
(obligation to pay (payment of $300) $300 to Lawrence) Lawrence (Creditor Beneficiary)
-trustee can be sued if he does not carry out his duty
§ 302—Intended and Incidental Beneficiaries (1) Unless otherwise agreed a beneficiary between a promisee and promisor, 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 a. the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; OR b. the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. (2) An incidental beneficiary is a beneficiary who is not an intended beneficiary.
Incidental Beneficiaries - Most of the time it is not an intended beneficiary, but an incidental beneficiary o Incidental beneficiaries have no rights—their relationship is so attenuated that a lawsuit should not be permitted o If someone not party to the contract is trying to come in and say they have a right to sue, then they are an incidental beneficiary - TEST: o Unless the contract is made primarily for the benefit of the third party, he is only a beneficiary and cannot enforce the contract. Therefore, to be enforceable by the third party, it must appear that a major purpose of the contract was to benefit the third party.
MUNICIPAL CONTRACTS AND PUBLIC SERVICE - contracts where private firms undertake to provide services wanted by a broad public often require payment by a governmental unit o Ex. Water Works case- where the city contracts with the water works for WW to supply fire hydrants. They don’t do it, so warehouse bruns down. The warehouse comes in and says “we are a 3rd party beneficiary to this contract”—they say that they have a right to come in and sue for breach of contract. The court dismissed the claim b/c they said the state does not have a legal duty to supply its inhabitants with protection from fire o Ex. Koch v. ConEd (Blackout Case)- where the lights went out in NYC. D had contracts to sell power plants to the state of NY. Part of that contract was that they expressly promised to supply power to the state (including NYC). The court allowed the consumers who were disturbed by this to sue as third party beneficiaries, b/c the P’s were exactly the consumers who were meant to benefit
59 from the contract (contract specifically said that they were to supply power to consumers).
How do we know who is the promisor and who is the promisee? - the promisor is the person who is supposed to do something and did not - find somebody who is not part of the contract who thinks one party is wrong—then you ask who made a promise to that person that did not keep it - process of elimination—the last party is the promisee - **figure this out before making your diagram
Most common example: insurance policies - the beneficiary of a life insurance policy may enforce a right to the death benefits, even though the beneficiary did not apply for it, or have any other connection with it. - Incidental beneficiary- a 3rd party who may enjoy an advantage through the performance of the contract but has no enforceable interest in its performance. - Donee beneficiary/creditor beneficiary/intended beneficiary- a beneficiary who has an enforceable interest in performance of the contract. - Agency law o An undisclosed principal of one of the named parties may enforce a contract made on its behalf
- Express Trust- a fiduciary relationship with respect to property, subjecting the person who holds the property to equitable duties, to deal with the property for the benefit of another person, which arises as a result of the manifestation of an intention to create it. o there is always some property which is held by the trustee for the benefit of the trust
Steps to Third Party Beneficiaries: - first you have to figure out if you have one, b/c often times you don’t o the TPB’s rights on the contract, are only as good as the promisee’s rights o statute of fraud, capacity, mistake, all come into play and could limit the rights - if contract was never formed, or it was formed but is somehow unenforceable, then TPB would not be able to enforce it either - express condition may not be satisfied, promisee could have commited a material breach which would allow promisor to cancel the contract, etc. - promisor may assert against any beneficiary any defense that the promisor could assert against the promisee if the promisee were suing on the contract
§309- Defenses Against the Beneficiary (1) A promisor creates no duty to a beneficiary unless a contract is formed between the promisor and the promisee; and if a contract is voidable or unenforceable at the time of its formation the right of any beneficiary is subject to the infirmity. (2) If a contract ceases to be binding in whole or in part because of impracticability, public policy, non-occurrence of a condition, or present or prospective failure of performance, the right of any beneficiary is to that extent, discharged or modified.
60 (3) A beneficiary’s right against the promisor is subject to any claim or defense arising from his own conduct or agreement.
§ 311—Variation to a Duty to a Beneficiary (USE THIS TEST ON THE EXAM) (1) Discharge or modification of a duyt to an intended beneficiary by conduct of the promisee or by a subsequent agreement between promisor and promisee is ineffective if a term of the promise creating the duty so provides. (2) In the absence of such term, the promisor and promisee retain power to discharge or modify the duty by subsequent agreement. (3) Such a power terminates when the beneficiary, before he receives notification of the discharge or modification, materially changes his position in justifiable reliance on the promise, or brings suit on it, or manifests assent to it, at the request of the promisor or promisee. (4) If the promisee receives consideration for an attempted discharge or modification of the promisor’s duty which is ineffective against the beneficiary, the beneficiary can assert a right to the consideration so received. The promisor’s duty is discharged to the extent of the amount received by the beneficiary.
- Frozen liability- an insurer must honor a worthy claim, made by a victim, even if the motorist procured the policy by means of one or more material misrepresentations, and even if the motorist did so fraudulently. o Where a loss must be borne by any innocent third party or by an insurance company which has a written policy pursuant to a compulsory insurance statute and accepted a premium therefore, it should be the insurance company that bears the loss up to the required amount of insurance
B. Assignment and Delegation
1. Assignment
§ 317- Assignment of a Right (1) An assignment of a right is a manifestation of the assignor’s intention to transfer it by virtue of which the assignor’s right to performance is given up in whole or in part and the assignee acquires a right to that performance. (2) A contractual right can be assigned unless: a. The substitution of the assignee for the assignor would materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reduce its value to him, or b. The assignment is forbidden by statute or is otherwise inoperative on grounds of public policy; OR c. Assignment is validly precluded by contract. - You can assign the rights of a seller or a buyer, unless the contract states otherwise (or the exception in § 317(2))
General Principles of Assignment:
61 - most contract rights having commercial value are transferable - person that the assignor assigns to is called the “obligor” or the “non-assigning party” - if the assignee succeeds in collecting from the account debtors on an amount greater than the purchase price, the assignee is enriched by the surplus o but, a shortfall of the collections is the assignee’s loss - debts o if the assignee collects an amount over the debt, he must give it to the assignor— the debtor—for surplus o if there is a shortfall, the assignee can charge the debtor with the deficiency - it is essential to an assignment of a right, that the obligee manifest an intention to transfer the right to another person without further action or manifestation of intention - a check is not an assignment - Rule of Law: after receiving notice of the assignment, the obligor cannot lawfully pay the amount assigned either to the assignor or to his other creditors and if the obligor does make such a payment, he does so at his peril b/c the assignee may enforce his rights against the obligor directly Intent- - handing over a signed document is enough to show intent
Elements of Assignment: - (1) intent o Do not even need to use the words “assign” or “transfer”—but using these words can help - (2) Present intent- cannot just be that you want to do it someday, you have to intend to transfer it NOW - (3) contract right – have to have something to assign o Must be valid: offer, acceptance, consideration o Ex- an owner and contractor enter into a construction contract, contractor promises to build, owner is paying $400,000. The contractor wants to assign it to supplier, who gave him a lot of supplies that he used on other projects, so he wants to offer him the contract right. Suppose that contractor has actually built the home, therefore the owner’s contract right has matured. As long as there is a contract b/t contractor and owner, the contractor actually has something that can be assigned. But, what if contractor tries to assign this before the deal has actually been made between him and owner? Then there is nothing that can be assigned
Fraud defense: - Common law: unless obligor had notice that he was supposed to pay assignee, he is discharged from his duty (b/c he had no idea that he was supposed to pay someone different) o Ex. if obligor had a promise to pay assignor $100,000 for machines and assignor assigns his right to pay to assignee, but Obligor pays assignor instead of assignee, so assignee goes to obligor for the money, obligor is discharged of his duty to pay b/c he already paid assignor.
62 Principle of Derivative Title: assignee gets the same right as the assignor had
Gift Assignments - in assignments made in a commercial settings, the recipient nearly always gives “value, sometimes purchasing the right assigned, sometimes making a loan secured by the assigned right.” o A promise to the assignor can constitute value o Antecedent debt- if the assignee receives the assignment to secure a prior loan, the assignees has given value - Gifts—where value is not given o A gratuitous (gift) value is not invalid, but it is revocable unless some formality is complied with, such as a signed writing that is delivered by the assignor, or the delivery of “a writing of a type customarily accepted as a symbol or as evidence of the right assigned o Assignee’s rights are terminated, if: . Assignor makes a subsequent inconsistent assignment, OR . Assignor dies; OR . Assignor simply gives a notice of revocation o A gift is not effected even by handing over a symbolic document unless the intention of giving has been expressed
2. Delegation of Performance - Assignment- assigning contract rights - delegation- the appointment of another to perform one’s duties (delegating contract duties) o assignment and delegation can happen at the same time - sometimes one party to a contract attempts to delegate its performance, but the other party may object to receiving performance from the delegate - usually the courts will say that the person receiving performance must accept it from the delegate o and if the payee has a reciprocal obligation (to do something for the money), the duty is not conditioned upon receiving money from the original party, they still must perform their obligation regardless of who the party giving the money . exception- if performance is of the type that depends upon the identity of the party that is to perform (switching Pavarotti for Michael Jackson was not good enough)
Three Ways to Set this Up: o (1) just telling the delegate to do something—not very effective, b/c he may not do it o (2) contracting with a delegate and the delegate has promised to do this for me (delegate has assumed the obligation) o (3)
Diagram
63 DELEGOR ------promise to perform (K duty)------DELEGATE (OBLIGOR)
Duty 2 Duty 1
OBLIGEE (TPB)
Explanation of Diagram - what happens to the original duty that the delegor owes? o Obligee never agreed to the duty to be forgotten o If the duty is not carried out, the obligee can sue one or both parties (but in the end, he is only entitled to one promise/recovery) - After the contract was formed, who was really responsible for performing the promise? o Delegate—b/c he has now taken over the duties of the delegor
§318—Delegation of a Performance or Duty (1) An obligor can properly delegate the performance of his duty to another unless the delegation is contrary to public policy or the terms of his promise. (2) Unless otherwise agreed, a promise requires performance by a particular person only to the extent that the obligee has a substantial interest in having that person perform or control the acts promised. o ex. Sally Beauty v. Nexus- where Nexus had a substantial interest in having BBS perform instead of Sally. (3) Unless the obligee agrees otherwise, neither delegation fo performance, nor a contract to assume the duty made with the obligor by the person delegated, discharges any duty or liability of the delegating obligor.
§ 2-210—Delegation of a Performance; Assignment of Rights (1) A party may perform his duty through 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. No delegation of performance relieves the parties delegating of any duty to perform or any liability for breach. (2) Unless otherwise agreed, all rights of either seller or buyer can be assigned except where the assignment would materially change the duty of the other party, or increase materially the burden or risk imposed on him by his contract, or impair materially his chance of obtaining return performance. A right to damages for breach of the whole contract or a right arising out of the assignor’s due performance of his entire obligation can be assigned despite agreement otherwise.
Terms of Delegation - the language of the assignment decides whether the taking of an assignment serves to impose duties on the recipient, as well as to vest the recipient with rights o must be said explicitly o assignment implies “rights only”
64 - UCC §2-210(4): an assignment expressed is a delegation of performance of the duties of the assignor and its acceptance by the assignee constitutes a promise by him to perform those duties. o One may be taking on not just rights, but also duties without knowing it - No promise of the assignee to assume the assignor’s duties should be inferred from the acceptance of an assignment of a bilateral contract, in the absence of circumstances surrounding the assignment itself which indicates a contrary intention. - You can delegate corporation duties o exception: if the obligee has a substantial interest in having the original obligor performing - **make sure you know whether you are in an agreement that involves both assignment and delegation
Personal Contracts - when performance of personal services is delegated, the trier merely determines that it is a personal services contract. If so, the duty is per se nondelegable. - There is no inquiry into whether the delegate is as skilled or worthy of trust and confidence as the original obligor: the delegate was not bargained for and the obligee need not consent to the substitution - But if it feels the delegate is worthy, it is free to consent to the delegation. o ex. Sally Beauty Co. v. Nexxus Products Co.- where Nexus had a contract with Best Beauty supply who was bought by Sally Beauty, one of Nexus’ competitors. Nexus had made a personal agreement with BBS, and did not want Sally Beauty Co. to sell its products, so they terminated the agreement. The courts found this was a contract for goods, so they used the UCC . Relies on §2-210(2)—the duty of performance under an exclusive distributorship may not be delegated to a competitor in the marketplace–or the wholly owned subsidiary of a competitor—without the obligee’s consent.
3. Contests Between Obligor and Assignee
Defenses of an obligor - the assignee stands in the shoes of the assignor - if an assignee sues the obligor, the obligor can only use defenses that could have been used against the assignor o the obligor’s defense against a claim for payment by assignee, is “claim already paid” (even if the payment was made before the assignment) - test: whether or not the payment was made before or after notification to the obligor of the assignment - after receiving notice of the assignment, the obligor cannot lawfully pay the amount assigned to the assignor and if the obligor does make such a payment, he does so at his peril because the assignee may enforce his rights against the obligor directly
§ 336—Defenses Against an Assignee
65 (1) By an assignment the assignee acquires a right against the obligor only to the extent that the obligor is under a duty to the assignor; and if the right of the assignor would be voidable by the obligor or unenforceable against him if no assignment had been made, the right of the assignee is subject to the infirmity. (2) The right of an assignee is subject to any defense or claim of the obligor which accrues before the obligor receives notification of the assignment, but not to defenses or claims which accrue after, except as stated in this section or by statute. (3) Where the right of an assignor is subject to discharge or modification in whole or in part by impossibility, illegality, non-occurrence of a condition, or present or prospective failure of performance by an obligee, the right of the assignee is to that extent subject to discharge or modification even after the obligor receives notification of the assignment. (4) An assignee’s right against the obligor is subject to any defense or claim arising from his conduct or to which he was subject as a party or prior assignee because he had notice.
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GENERAL FRAMEWORK: - is there a contract? - What does the contract say? - Before you even begin the analysis, state what the parties have promised.
66