CONTRACTS I OUTLINE Prof. Vache' By: Kell E. Bodholt TABLE OF CONTENTS CONSIDERATION 3 Reliance/Promissory Estoppel 4 Unjust Enrichment 4 Moral Obligation 5 Obligations Arising From Tort 5 Obligation arising from Form 6 Statutory Warranty 6 Express warranties 6 Implied Warranty 7 Statute of Frauds 8 DAMAGES 9 Expectation 9 LIMITATIONS 11 Foreseeability 11 Avoidability (Duty to Mitigate) 12 Certainty 13 Emotional and Punitive Damages 13 RELIANCE DAMAGES 13 LIQUIDATED DAMAGES 14 Promissory Estoppel 15 RESTITUTIONARY RELIEF 16 SPECIFIC PERFORMANCE 17 ARBITRATION 18 AGREEMENTS AND PROMISES 18 Mutual Assent 18 Offer 18 Acceptance 19 Duration of Offers 21 General/Subcontractor Relationship 22 Standard From Contracts - UCC  2-207 23 POLICING AGREEMENTS AND PROMISES 24 DURESS 24 MISREPRESENTATION 25 PUBLIC POLICY 25 INEQUALITY OF EXCHANGE 26 UNCONSCIONABILITY 26 Adhesion Contracts 27 PRE EXISTING DUTY RULE 28 THE PERFORMANCE PROCESS 29 Parol Evidence Rules 29 Parol Evidence Rule analysis 31 GAP FILLERS 34 GOOD FAITH 34 CONDITIONS & EFFECTS 35 Conditions 35 Avoidance of Express Cond's 36 Constructive Conditions 36 Grounds of Rightful Cessation 39 Mutual Mistake 39 Unilateral Mistake 40 Impossibility of Performance 40 Impracticability of Performance 41 Frustration of Purpose 41 I. CONSIDERATION A. Definition Each party views his promise or performance as the price of the others promise or performance (Bargain for exchange). "Consideration," in the sense of the law, may consist either in some right, interest, profit, or benefit accruing to one party, and forbearance, detriment, loss or responsibility given, suffered, or under taken by the other." ú You must have mutuality but not equivalency. Can have unequal value, but both parties must give up something of value, or forebear from a legal right. B. Motivations to Enter Contract a.Exchange of Value - People buy and sell only because they appraise the things they give up less then those received. b.Allocates Risks - When parties enter agreements, at time and place, they feel they are locking in a good rate. c.Protect future interests - projecting themselves into future and anticipating benefit from agreement. d.Negotiation of Agreement - People are free to enter into agreements to order there affairs and society will generally recognize these agreements as binding. RESTATEMENT (SECOND) OF CONTRACTS  81 Consideration as Motive or Inducing Cause 1. The fact that what is bargained for does not itself induce the making of a promise does not prevent it from being consideration for the promise. 2. The fact that a promise does not itself induce a performance or return promise does not prevent the performance or return promise from being consideration for the promise. Corbin Comment - Forbearance to bring a suit, or to proceed with own already brought, or to press a claim in any other way, is not sufficient consideration if the forbearance is with knowledge that the claim is ill founded and void. Policy Voluntary agreements are fine; parties are allowed to order there affairs until one person/party breaches agreement then look to the law for answers. 1. Individual should have freedom of choice. 2. Creates "Micro-markets" 3. Promotes economic efficiency through transactions. II. Reliance/Promissory Estoppel A. Definition Restatement (First) of Contracts  90-Promise Reasonably Inducing Action or Forbearance 1. A promise which the promisor should reasonable expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The recovery granted for breach may be limited as justice requires. úPromissory estoppel is a remedy in equity. úPromissory estoppel, estopes the defendant from denying the existence of the promise in which the promisee relied upon. B. Elements of Promissory Estoppel 1.Promise 2.Promisor reasonably expected promisee to forbear. 3.Induces forbearance úThus; binding and enforceable. 4.Can injustice only be avoided by enforcement of the promise. III. Unjust Enrichment A. Definition Restatement of Restitution  1 (1937): A person who has been unjustly enriched at the expense of another is required to make restitution to the other. ú No one should be made richer through another loss...The law will imply a debt or obligation here. B. Elements of Unjust Enrichment 1.Their must be a benefit conferred (if no benefit; no restitution-look to Promissory estoppel). 2.Person conferring benefit must expect compensation (no gifts). 3.Must be acceptance of benefit conferred. 4.Benefit must be reasonable. úBreaching party in a k has to confer a benefit greater than the damage incurred to recover. Benefit has to outweigh damages. IV. Moral Obligation A. Definition Restatement of Contracts (Second)  86 A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice. 1. Not Binding if; a. Promisee conferred benefit as a gift or promisor has not been unjustly enriched; or b. To extent that value is disproportionate to the benefit. Policy: The courts have held that where the promisor originally received from the promisee something of value sufficient to arouse a moral, as distinguished from a legal obligation. One, ought, in morals, to make return for things of value not intended as a gift that he has accepted, and he ought, in morals to do what he knowingly and advisedly gave one acting for his benefit and to his own hurt to understand he would do. V. Obligations Arising From Tort A. Definition Alternative theory to contract liability. Some jurisdictions allow parties to plead alternative theories of recovery simultaneously, such as K and tort. ú Damages for k may be greater because p gets benefit of bargain, rather then compensation for loss. B. Elements of Tort 1.Extent transaction was intended to effect plaintiff. 2.The foreseeability of harm to plaintiff. 3.Degree of certainty of plaintiff suffering injury. 4.The closeness of connection between defendant's conduct and injury suffered. 5.Moral blame attached to defendant's conduct. 6.The policy of preventing future harm. Restatement of Torts 402 A: Products liability Non-feasance: Failure to perform (no tort). Misfeasance: Performed inadequately (can be tort). VI. Obligation arising from Form A. Definition English Common Law Rule: A promise made under seal was binding in a action at law, even without consideration. ú Modern Rule (U.S.): Courts have not required a seal, either wax or impression, as a way of dispensing consideration. ú In some jurisdictions, very few, allow a seal as a substitute for consideration. VII. Statutory Warranty A. Definition A kind of guarantee or promise by a seller of goods that these goods will have certain characteristics or specified performance. U.C.C.  2-313; Warranties by Affirmation, Promise, Description, Sample 1. Express warranties are created by seller when; a.Any affirmation of fact or promise relating to the goods becomes part of the basis of the bargain, creates an express warranty. úBurden of proof on seller to show not part of bargain. úBasis of bargain - Requirement that the buyer rely on the sellers warranty. b.Goods have to perform to sellers description. c.Samples or models create express warranties. 2. If seller merely states an opinion or condemnation of a products performance is not a warranty. U.C.C.  2-315; Implied warranty: Fitness for Particular Purpose The seller has reason to know purpose for which goods will be used and buyer relies on seller's skill for judgment to select goods, there is an implied warranty that the goods shall be fit for such purpose. B. Elements of Implied Warranty Buyer must prove three elements 1.That the seller had reason to know the buyer's purpose. 2.Seller had reason to know that the buyer was relying on the seller's skill or judgment. 3.Buyer did in fact rely on the seller's skill or judgment. U.C.C.  2-314; Implied Warranty: Merchantability; Usage of Trade 1.A warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to the goods of that kind. 2. (c)-Fit for ordinary purposes of usage. U.C.C.  2-316; Exclusion or Modification of Warranties Seller can exclude what would be a warranty under 314,315 to modify what would normally be expected (goods shall be merchantable). ú Express warranties may be waived if the buyer/experts inspect product. Implied Warranty: Plaintiff has to rely on knowledge, skill and expertise of seller to make buying decision. VIII. Statute of Frauds A. Definition Some contracts, in order to be enforceable, must be in writing. Primary purpose is to avoid fraudulent claims. Five Categories of Statute of Frauds 1. Executor/Administrator (Wills) 2. Suretyship - Contract to answer for debt or duty of another. 3. Marriage 4. Property contract 5. 1 Year - Any contract for over 1 year must be in writing. U.C.C.  2-201; Statute of Frauds Any contract for over $500 is not enforceable unless a.its in writing b.States quantity c.Must be signed by person enforcing against. B. Exceptions to Statute of Frauds a.Specifically manufactured goods. b.Performance - Goods are received and paid for. c.You admit contract. C. Analysis 1.Does agreement fall within the statute of frauds? úIf no, end of analysis. 2.Has statute been Satisfied? a.is it in writing b.signed by parties. 3.Is there an exception to take it outside statute of frauds? Almost always a way to escape in every jurisdiction through exceptions. IX. DAMAGES A. General Definition What amount in money will adequately compensate the plaintiff for his losses caused by defendant's failure to render performance. B. Expectation 1. Common Law Definition: Put the plaintiff in the position that he would have been in had there been no breach (PPITPTWHBIHTBNB). Includes lost profits. ú Don't put the plaintiff in a better position had performance been carried out. ú The plaintiff is given the benefit of his bargain including any profits he would have made from the contract (Can recover for lost profits). Economic waste: When the cost to complete clearly is disproportionate, it would be an economic waste to fulfil contract. Courts will award diminution in value. Diminution in value: Value of the property had it been completed less what it was worth originally. a. Buyer/Owner/Recipient Damages i)Replacement - Kprice = Damages or Cost to Complete, or Diminution in value. Cost of Completion: The measure of damages is the amount it would cost to repair the deficiency or make the work conform-the cost of completion. Diminution in value: If the repair or reconstruction would involve "substantial economic waste," the measure of damages will be the amount by which the deficiency lessens the value of the completed building. Ex; Builder innocently substitutes a brand of pipe other than that called for in the specifications; to replace the pipe would require tearing out the entire side of the building. The measure of damages is the amount by which the brand installed diminished the value of the building from its value had the proper brand been used. Policy: The policy of the law against economic waste and forfeiture is stronger than the policy favoring full compensation in damages for every breach. ii)Kprice - FMV @ time and place of breach = Damages. b. Seller/Builder/Contractor Damages i)Non-Performance; Kprice - Cost Avoided = Damages. Ex: Contractor to build house for $100,000. Buyer breaches contract. $100,000 - $90,000 = $10,000; $90,000 is the material & labor he would have expended if no breach. $10,000 profit. ii)Partial performance; Cost of Reliance + Profits Ex: Contractor spent $40,000 for materials & labor. C of C = $40,000, Profit = $10,000. $40,000 + $10,000 = $50,000. iii) Full performance; Kprice - what owner has paid 2. Sale of Goods a. Buyer's Damages i)U.C.C.  2-713;Repudiation or Non-Delivery by Seller Market Price (when buyer learned of breach) - Kprice = Damages + incidental & conseq. damages - expenses saved. (1)MP may be determined at the time of repudiation, or when performance was due. (2)Must consider the time and place of tender. ii)U.C.C.  2-712; "Cover" Buyer's procurement of Substitute Goods Cost of Cover - Kprice = Damages + incidental & conseq. - exp. saved. Cost to Cover requires; 1.Good faith 2.Without unreasonable delay 3.Reasonable purchase/same or similar product b. Seller's Damages i)U.C.C.  2-708; Seller's Damage for Non-Acceptance or Repudiation Market Price (@ time & place of tender) - Unpaid Kprice = Damages + incidental - exp. saved. One Sale Short Theory: In volume sales/dealers they can obtain as many items from supplier as they can sell. ú When one customer breaches, and item is sold to another customer, seller will end up making one fewer sales because the second customer would have bought item anyway. ii)U.C.C.  2-718; Liquidation or Limitation of Damages; Deposit 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, the difficulties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty. X. LIMITATIONS A. Foreseeability Restatement  351; Unforeseeability and Related Limitations on Damages 1.Damages are not recoverable for losses that are not foreseeable at time contract was entered into. 2.Losses may be foreseeable as a probable result of a breach because it follows from the breach. a.ordinary course of events, or b.party in breach had reason to know. Hadley v. Baxendale Rule: The breaching party is liable for all losses resulting from his breach which the parties as reasonable persons would have foreseen as likely to result from the breach at the time the contract was made. B. Avoidability (Duty to Mitigate) 1.Restatement  350;Avoidability as a Limitation on Damages. a.Damages are not recoverable if the party could have avoided without undue risk, burden or humiliation. b.If plaintiff makes a reasonable effort to avoid damages he may still recover. Duty: The non breaching party is held to a standard of reasonable conduct in responding to the breach: He must neither increase the loss by affirmative action; nor by inaction fail to minimize the loss, where ordinary prudent conduct would have that effect. Employment contracts - The employee is under the duty to exercise reasonable efforts to locate and accept a position of the same rank, type of work, etc., in the same local, but not the same pay scale. úThe employer has the burden to show that other jobs were available. úUnique employee - more difficult for the employer to show that comparable employment was available. Overhead: Fixed cost to run business; cost of salaries utilities, rent, etc. Overhead does not vary with any one contract. C. Certainty Speculative Damages Not Recoverable: A limitation on the plaintiff's right to recover damages is that the amount of his loss must be reasonably certain of computation. Damages which are too uncertain (i.e., "speculative") are not allowed. úFrequently incurred for "lost profits" úProfits from New Business; the courts have traditionally been reluctant to allow lost profits, on the ground that the profits of a new business are speculative. However, the modern trend it to examine such cases on the merits, an to allow recovery where the lost profits can be determined with reasonable certainty=e.g., the new business was a franchised operation, and profits of units in the franchise are fairly predictable. úDamages must be provable and foreseeable. 1.Cannot put a business in the position it would have if we don't know what that position is (Esp. new bus.). 2.Plaintiff must not only show he had losses, but must prove amount of losses with a reasonable degree of certainty. 3.Certainty relates to how clear it is at time of suit that alleged losses actually occurred. D. Emotional and Punitive Damages 1.Restatement  353; Loss Due to Emotional Disturbance No Recovery for EMOTIONAL DAMAGES in contract. Exceptions: Can recover on an alternative theory such as tort. 2.Restatement  355; Punitive Damages Punitive damages are not recoverable for breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable. XI. RELIANCE DAMAGES A. Definition Reliance damages restore the position of non-breaching party would have been in, if there had been no contract. Put party in position he was in before contract. 1. When to use RELIANCE DAMAGES; a.Use RELIANCE when you cannot calculate expectation damages,lost profits, but still want to get money spent on the contract. 2.No legal enforceable contract, but plaintiff is entitled to some protection under "Promissory Estoppel". úKEY: Burden of proof; whoever can prove lost profits will be able to recover under expectation, if not use RELIANCE. B. Two Types of Reliance: (FUELLER & PURDUE) 1.ESSENTIAL RELIANCE: The cost of preparation and performance of contract & the loss of forgoing opportunity of entering other contracts. 2.INCIDENTAL RELIANCE: Damages that follow naturally and forseeably on contract. XII. LIQUIDATED DAMAGES A. Definition Parties negotiating a contract often make an explicit agreement as to what each parties remedy for the breach of contract will be. U.C.C  2-718(1);Liquidation or Limitation of Damages 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, the difficulties of proof of loss, and the inconvenience of non-feasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty. Elements of a Liquidated Damages clause a.Reasonable forecast of just compensation. b.reasonable range of what could be projected. c.Harm difficult or impossible to calculate. Elements of a Penalty Clause a.If designed always to yield party more than its actual damages (Lake River). b.If the Liquidated Damages is disproportionate to the amount of actual damage then it is unfair and a penalty. c.Fixed amount; does not estimate a possible range. Policy a.Leave punishment to criminal system; we don't want contracting parties to penalize each other. b.Liquidated Damages clauses discourage breaches. c.Parties enter into Liquidated Damage clauses to predetermine what damages will be.if breach. d.Penalty clause may reflect unequal bargaining positions. úAnalysis/FLOW CHART: If Liquidated Damage clause is uncertain & unreasonable go to COMMON LAW remedies first try for EXPECTATION (Fors, Avoid, Certy). "lost profits" provable if cannot calculate profits RELIANCE may be RESTITUTION especially if contract is breached by defendant. XIII. Promissory Estoppel Williston Approach: PE is a substitute for consideration. PE enforces expectation if you can prove damage or the contract. Modern View-Sec 90: Reliance-put party back in position as if contract was not entered. LIMITED AS JUSTICE REQUIRES. A. Definition Restatement (Second)  349;Damages Based on Reliance Interest The injured part has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract performed. XIV. RESTITUTIONARY RELIEF A. Definition Breaching party will recover the amount of the benefit they conferred on other party; force the non-breaching party to give back the (actual) value they have received. Get back from D what you gave him. B. Measure of Recovery Restatement (Second)  371; Measure of Restitution Interest a.the reasonable value to the other party of what he received in terms of what it would have cost to obtain it from a person in claimants position, or b.The extent to which the other parties property has been increased in value. úIf the performance has no value to the D, there can be no rest. damages, regardless of how much it may have cost the P to perform. Policy ú Restitution last resort for damages: Rest. interest is the smallest; the injured party will usually find rest. least attractive as compared to an award of damages based on his expectation or reliance interest. Restatement (Second)  373; Restitution When Other Party Is in Breach 1.When there is a breach the injured party is entitled to restitution for any benefit conferred for part performance or reliance. 2.The injured party has no right to restitution if contract is fully performed. ú"A Losing Contract" When there is a breach and the non-breaching party would have sustained a loss instead of making a profit his rest. recovery will give him a larger recovery then would expectation or reliance. XV. SPECIFIC PERFORMANCE A. Definition Specific performance is available only if the remedy at law is inadequate. The three remedies a plaintiff has is; 1.damages 2.restitution and 3.specific performance. B. Elements 1.Damages under Law are not sufficient, thus plaintiff seeks recovery under Equity. 2.Object of transaction is unique; REAL ESTATE is the prime example. C. Doctrine of "Efficient Breach" Any time you can make a better deal, make more money from K2 then K1, the law will let you do so but you have to pay off the damages you caused. So under this theory it makes sense to breach a contract and pay damages to injured party because if someone is willing to pay more for the goods, or services, then the goods are attaining there greatest value which is the goal of a free market economy. "Efficient Breach" Pros A person should be able to breach if they chose too. Efficient allocation of resources justifies breach. No moral stigma should be attached to contracts, or breaches of contracts; they are merely economic transfers. "Efficient Breaches" Cons Remedy in contract should account for fairness and moral obligation that arise from contract. A remedy should be designed to encourage people to perform contract. Efficient breach assumes pure market place and does not account for real world; great theory but not very practical. Doesn't account for consequential damages, mitigation, business reputation, etc. Policy Efficient breach does not look at parties as individuals, looks at people as abstract entities in a perfect market place; objectifies people and treats them all the same. Back to the tension between individuals interests vs. the needs of society. Too much law looks at people objectively and does not account for fairness or individuals needs and goals. ú Back to Peevyhouse, should we give people what they contracted for, even if not the best way to allocate resources, or should we force parties not to waste societies resources and impose limits on what parties can bargain for (remember unequal bargaining power). XVI. ARBITRATION A. Definition Dispute resolution held outside court system. Parties agree on resolving controversy by private means rather than litigating. B. Aspects of Arbitration 1.Resorted to only by agreement of the parties 2.It is a method not of compromising disputes but deciding them. 3.The arbitrator has no formal connection with our system of courts. 4.Arbitrators judgement is final and binding. Policy ú Don't tie up court ú Saves time because it is resolved immediately without any appeals or delays. ú Experts in field, i.e. construction experts. CONTRACTS II SHORT OUTLINE XVII. AGREEMENTS AND PROMISES A. Mutual Assent (Def) - is found in the objective manifestation of behavior as viewed by a reasonable person in the same circumstances. Requires the reasonable person to be in the shoes of the person to whom the communication was given. B. Offer 1.Manifestation of a willingness and intent to enter a contract. 2.Certainty and definiteness of terms, must lead the offeree to reasonably believe they have such a power to create a contract. a.Subject matter of the proposed bargain. b.Price c.Quantity d.Time of performance 3.Must be communicated to the offeree. Rest.  24 - An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it. Acts which are not offers; 1.Preliminary negotiations. 2.Acts done in jest. 3.Advertisements (offers to accept offers). Except: If performance is promised ("first come first served"). 4.Price quotations. Except: "for immediate acceptance" is an offer. C. Acceptance 1.Gen. Rule = Acceptance must mirror the offer. If acceptance does not mirror, treated as a rejection. Maybe a counter-offer in itself. 2.If offer does not specify method of acceptance, offeree can; a.Accept by another promise. b.Accept by tender of performance. Performance has to be communicated with reasonable notice to the offeror. Rest.  50 - Acceptance by Performance, Acceptance by Promise. 1.Acceptance of an offer is manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer. 2.Acceptance by Promise - An offer that calls for acceptance by a promise is an offer for a bilateral contract. a.Accepted only by a promise. b.If bilateral contract, offeree may accept by promise or performance if; 1.Offeror must have knowledge that offeree is accepting by performance. 2.Must acquiesce to the performance as acceptance. Exception: Tender of full performance prior to termination of the offeree's power of acceptance. Notice of acceptance - The acceptance and the notice of acceptance are normally on and the same except; a.Mailbox Rule - Acceptance is effective when dispatched. Does not require that the offeror actually receive an acceptance, but only that the offeree must exercise reasonable diligence to communicate the acceptance (Rest.  56). 3.Acceptance by a Performance - An offer that calls for acceptance by performance of an act is a unilateral contract. Can be accepted only by performance - not by a promise. Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an OPTION contract is created when the offeree tenders or begins the invited performance, or tenders a beginning of it. But the offeror's duty of performance is conditional on completion or tender of the invited performance in accordance with the terms of the offer (Rest.  45). a.Full performance is required for acceptance since performance is acceptance. b.Notice of performance in a reasonable time is required of the offeree if the offeror wouldn't know in the normal course of events. Note: If offer is unclear, Maj. Jx = bilateral contract, because a promise is expected in return rater than performance. UCC  2-206 - Offer and Acceptance in formation of contract. 1.Unless otherwise unambiguously indicated by the language or circumstances a.An offer to make a contract shall be construed as inviting acceptance in any manner and by andy medium reasonable in the circumstances; b.An order of offer to by goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods, but does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer. 2.Where the beginning of a requested performance is a reasonable mode of acceptance an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance. D. Duration of Offers 1.Fact-to-face communication - The power to accept terminates at the end of the conversation (ear-to- ear, interactive w/computer). 2.Non-fact to face - The offer runs from the time it is received, not the time it is sent. Because an offer isn't an offer until it is communicated. The offeree isn't aware of the offer when sent but when received. a.Obvious delay - time starts to run from the time the offer would normally have been received. b.Not obvious delay - basic rule applies. Rest.  87 - Option Contract 1.An offer is binding as an option contract if; a.Is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or b.Is made irrevocable by statute. 2.An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice. E. General/Subcontractor Relationship 1.Mistake a.Mutual Mistake - A contract is voidable by the party who is adversely affected where the parties enter into a contract while mutually mistaken concerning a basic assumption of fact. b.Unilateral Mistake - Mechanical error of computation, perception, etc... (1)Non-mistaken party unaware of error: There is a binding contract on the terms. (2)Non-mistaken party aware of error: The mistake is said to be "palpable," and prevents formation of a contract. One cannot snap up an offer knowing that it was made in mistake. c.Mistake in words or symbols - Same rules as mistake. There is a binding contract unless party knew or had reason to now of erroneous word or symbol. d.Misunderstanding - Problems of ambiguity arise where the parties expressions are susceptible of more than one logical interpretation. (1)Interpretations not equally reasonable: Where two interpretations are logical, ont interpretation will usually be more reasonable than the other. A contract is formed, and its meaning is that intended by the party whose interpretation is more reasonable. (2)Interpretations equally reasonable: Both parties unaware of ambiguity; If interpretations are equally reasonable, and neither party knows or has reason to know of the ambiguity, a contract is formed if the same meaning. If different meanings, not contract. F. Standard From Contracts - UCC  2-207 1.An acceptance that varies the terms of an offer is an acceptance, unlike at common law. Which terms control? Look to UCC 2-207. a.Is there a contract? (1)Subsection 1 of 2-207 provides for: Acceptance with additional or different terms [is not a counter offer under common law mirror image rule; and instead] is an acceptance, unless [proviso kicks in] acceptance is made [conditional] upon offeror's assent to the additional or different terms. (2)Subsection 3 - Conduct by both parties recognizing a contract is sufficient; extraneous writings don't establish terms. (3)An acceptance with different or additional terms is an acceptance (as long as there is price and quantity established). If the acceptance is made expressly conditional on the offeror agreeing to the different terms then thee is no contract. If the parties perform as if thee is a contract it falls under subsection 3. (a)Subsection 1, no contract = subsection 3 controls. (b)Subsection 1, contract = subsection 2 controls. b.Analysis for applying 2-207 (1)Is there a sale of goods? (2)Is the sale between merchants? (3)Is there a contract? (a)Identify offer and acceptance. (b)is the proviso relevant. (4)If no contract is est. under subsection 1, but conduct by parties recognized a contract, go to subsection 3 and ask the question - "What terms control?" (a)Writings agreed upon by both parties. (b)Gap filler terms provided by other sections of the UCC. (5)If there is a contract under subsection 1, and the proviso does not apply, look to subsection 2 to determine what terms apply. (6)Subsection 2 says the additional or different terms become part of the contract unless they fit one of 3 exceptions. (a)If the offer expressly limits acceptance to the terms of the offer. The exact opposite of the proviso in subsection 1. if this exception applies the different/additional terms are not part of the contract, but there is still a contract. (b)if the offeror objects to the additional/different terms in the acceptance in a timely manner. This applies to all the additional/different terms. (c)The terms become a part f the contract unless they materially alter the offer. If it does materially alter then that term is struck and it does not become part of the contract. This applies only to the specific term in question. What is material? i)Any change in price. ii)Any change in warranty provisions. XVIII. POLICING AGREEMENTS AND PROMISES Issues of concern; (1) The right of individuals to have the freedom to contract. (2) The interest of the society in interfering when the contract is against public policy. A. DURESS (Def) - An overreaching by one side over another that undermines the arms length bargain and exchange between two relatively equal parties. Rest.  175 - There has been undue pressure from the other party and there was no reasonable alternative available other than submitting to the pressure. 1.Elements a.Threat - a manifestation of intent to inflict loss or harm (undue pressure and no reasonable alternative). b.Impropriety of the threat - must be a wrongful threat (physical harm is improper). A threat not to perform is not in itself improper but can be. c.Induce victim's assent - Assent must be induced by the threat. A "thin skull" analysis; a subjective test, a reasonable person in the shoes of the victim. d.Sufficiently grave to justify the victim's assent - Public policy consideration. Must reach a level for the court to justify voiding the contract, a reasonable person standard. B. MISREPRESENTATION (Def) - a misstatement of existing fact. A person seasonably may rescind a K to which he has been induced to become a party in reliance upon false though innocent misrepresentations. 1.Elements a. Assertion not in accord with the facts. b.Fraudulent or material (either one). (1)Fraudulent - consciously false and intended to mislead. (2)Material - is the statement the basis for the bargain. Induce reasonable person to enter into contract. c.Assertion must be relied upon in manifesting assent. d.Reliance must be justified. 2.Duty to Disclose Elements a.Pre-existing fiduciary relationship. b.Party expressly/or reposes a trust and confidence in the other w/reference to transaction. c.Contract/transaction calls for "perfect good faith and full disclosure." C. PUBLIC POLICY (Def) - Public policy may outweigh the freedom to contract. The policy being served is establishing general minimum levels of conduct in society and will not allow individuals to take themselves out of that level of conduct. 1.Public policy concerns may outweigh freedom to K. 2.Restrictive covenants - courts generally not very sympathetic to these clauses. Factors to look for include: a.Geographic limitations b.Time limitations c.Protection of confidential information. Without these factors the court will generally be disinclined to enforce. D. INEQUALITY OF EXCHANGE 1.The relative values of the consideration in a contract between business men dealing at am's length without fraud will not affect the validity of the contract. 2.Constructive Fraud - inequality so strong, gross and manifest that it must be impossible to state it to a man of common sense without producing an exclamation at the inequality of it. Breach of duty which the law declares fraudulent b/c of its tendency to receive others, violate public/private policy. Neither actual dishonesty or intent is a essential element. 3.Actual Fraud - An intent to deceive is an essential element of actual fraud. 4.Factor for Reasonableness for enforcement; a.Inadequacy of consideration. b.The small benefit of one party compared to the greater benefit received by the other. c.Oppressive conditions. E. UNCONSCIONABILITY 1.Courts will not enforce oppressive or Uncons. K terms. Uncons. protects against one-sided K's in which one side has little or no bargaining power. 2.UCC 2-302: The Ct will examine any sales K's to determine if the agreement as a whole, or any part of it, is Uncons. Uncons. is a ques of law to be decided by the Judge. 3. a.Court must find as a matter of law. b.At the time of the making of the contract - this is key. c.That the contract or clause is unconscionable. d.If found unconscionable the court may: (1)Refuse to enforce the contract. (2)Refuse to enforce the clause. (3)Rework the contract. e.Procedural Unconscionability - absence of meaningful choice at the time the bargain was made. (1)Belief by the stringer arty that the other party couldn't perform. (2)One party knowing that the other couldn't receive the benefit of the contract. (3)One party knowing that the other party couldn't protect their interest (illiterate, incapacity). f.Substantive Unconscionability - unreasonably favorable terms. (1)Modification or limiting a remedy available. (2)Failure in essential purpose. (3)Fine print or very convoluted language. F. Adhesion Contracts: 1.Adhesion Contract - is one where the parties occupy substantially unequal bargaining positions and the inferior party, in order to obtain some essential item or service, is forced to adhere to the terms of the superior party. These contracts are found primarily in standard form contracts under a take it or leave it premise. a.Section 211 - Restatement b.Factors in determining adhesion contracts (1)Whether the parties agreed or assented to the contract as a whole or to the particular term. (2)Whether there is gross disparity in bargaining power and the terms are inordinately favorable to the party who created the contract. 2.RULES: Accord and satisfaction is dependant on the following: a.Knowledgeable settlement of a bona fide dispute. b.Honest dispute c.Clear offer to settle d.And a clear acceptance of the offer. G. PRE EXISTING DUTY RULE: (Def) - A promise to a person, to do exactly what one is already under duty to do/perform for that person, is not supported by consideration and thus not enforceable. If the oral/written modification is not agreed to and the work is stopped an action may be grought under the pre- existing duty rule. if the modification is agreed to and work continues an action may be brought under a theory of duress. A court won't enforce a promise to modify and existing agreement if 2 conditions exist; a.A legal duty already exists to perform that which modification concerns. b.A subsequent modification is not supported by second consideration. 1.Exceptions - the key to the rule a.Consideration is given for the modification. If you promise to do anything additional. (Novation, accord and satisfaction). (1)Novation, accord & satisfaction; (a)Knowledgeable settlement of a bona fide dispute. (b)Honest dispute. (c)Clear offer to settle. (d)And a clear acceptance of the offer. b.Mutual Rescission - Both parties decide to rescind the original contract and start over. Must be in writing. c.Modification is fair and equitable - Rest. 2d.  89, a promise modifying a duty under a contract not fully performed is still binding if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made. d.Sale of Goods. The UCC explicitly says the pre-existing duty rule does not apply to the sale of goods. 2-209. e.Some state's have not adopted the rule and have expressly said so by statute. XIX. THE PERFORMANCE PROCESS A. Parol Evidence Rules (Def) - Where an agreement has been reduced to a writing which the parties intend as the final and complete expressionf their agreement (integration), evidence of any earlier oral or written expressions, or any contemporaneous written expression, is not admissible to vary, add, or contradict the terms of the writing. 1.PER is a rule of Substantive Law, to be decided by the trier of fact. 2.Integration: Before the PER applies, it must appear that the parties intended the writing to be the final, complete expression of their agreement. a.Integration is a question of fact for the Judge to decide. b.If writing is complete/final PE is excluded. c.If writing is incomplete/partially integrated Pe is admissable. 3.3 Assumptions of PER: a.Later agreements supersede earlier agreements. b.Writing people engage in at end of negotiation are the best expression of what parties really wanted/intended. c.We are sometimes willing to exclude evidence of prior negotiations, that may be relevant, rather then letting parties open up the ques of who is telling the truth. 4.4 questions to ask for PER:(Vache' Approach) a.Did parties intend that the writing be there final agreement? (1)No, PER doesn't apply. (2)Yes, PER applies & could prevent trier of fact from hearing parol evidence. b.If intended to be a final expression then parties integrated agreement. (1)Is agreement fully integrated/complete? *** No prior evidence that adds to or contradicts writing may be allowed. (2)If details left out then partial integration; can introduce supplementary, but not contradictory evidence. c.How do we decide if it is a final agreement, & if partially or fully integrated? Final Doc? Degree of integration? (1)Williston/Conservative: Look at "4 corners" of document. (a)Merger Clause? if No, (b)Look to rest of writing (c)Terms naturally put in separate agreement? (d)Williston approach uses a Reasonable Man Standard: would reasonable men in the position of the parties have put the terms of the alleged oral agreement into the final writing, or would they have left them out. (2)Corbin/Liberal: Actual intent of parties should be judged by looking at all available evidence, including all prior oral & written negotiations. (3)Traynor/UCC/Middle: Evidence of additional terms may be given unless the ct finds that the writing was intended as a complete and exclusive statement of the agreement. - If additional terms would certainly have been included in the document, then they must be kept from the trier of fact. d.Exceptions to PER: (1)To clarify ambiguous terms. (2)To show defenses; fraud, duress, forgery, mutual mistake, illegal agreement. (3)PE is used to show entire agreement is unenforceable, not to contradict writing. e.To show an extrinsic Condition Precedent: (1)PE is admissable to show parties did not intend a binding K until some extrinsic condition was satisfied. (a)Ex; Approval of 3d party. f.To est. terms of a Collateral Agreement. (1)Parties actually made 2 agreements (a)2d must be collateral in form. (b)Terms of 2d agreement must not contradict 1st agreement. (c)Subject so distinct parties would not normally have placed it in the writing. g.Show the writing is only a partial integration. h.PE is allowed to est. subsequent agreements. (1) PE allowed to show modifications. B. Parol Evidence Rule analysis. 1.Is there a final agreement. 2.Is it integrated a.Partially b.Totally c.How to determine integration. (1)Is the agreement final (a)Parties intent. Did the parties intend the writing to be final. Look to the four corners of the writing, any evidence to prove intent is admissable. (2)Is the agreement partially or totally integrated. If it is a final agreement no evidence will be allowed which will contradict the writing. (a)If final can't contradict any term, if not final evidence can be entered. (b)If partially integrated, can't contradict the writing but can add or supplement. (c)If totally integrated can't contradict and can't add or supplement. d.Approaches for determining integration. (1)Conservative view - would the parties reasonably have included that term in the contract in the first place. Not a lot of leeway to introduce evidence. If yes the finding is total integration and the evidence won't be allowed in. (2)Liberal view - would the term have been naturally excluded, much more room to introduce evidence outside of the contract. If yes, the contract is partially integrated and evidence will be allowed in. (3)Williston - the contract must appear on its face to be incomplete, if it does then it is partially integrated. Parol evidence rule applies and evidence is allowed in only to add or supplement. A conservative view because it will be hard to find it incomplete by looking at the contract. (4)Corbin - every time should take into consideration the surrounding circumstances to the transaction. Basically, ignores the parol evidence rule and lets everything in, a very liberal view. (5)UCC 2-202 (applies only if there is a sale of goods) Certainly included, if yes then the contract is totally integrated and evidence won't be allowed in. e.Legal effect of the parol evidence rule. (1)Not final, no parol evidence rule everything goes. (2)Final, can't contradict. (3)Partially integrated, can't contradict, can add or supplement. (4)Totally integrated, can't contradict, can add or supplement. f. When does the parol evidence rule not apply (1)Formation defenses - fraud, duress or misrepresentation. Parol evidence rule does not apply. (2)Collateral agreements (contemporaneous contracts). (3)Interpretation, when you decide ambiguity. (4)Parol evidence rule applies to prior or contemporaneous agreements, not to agreements made after the contract is in force. If parties agree to modify, that evidence can be introduced. g.Two kinds of ambiguity (1)Patent - obviously ambiguous. (2)Latent - language clear on its face but subject to two interpretations. h.Three tests to determine ambiguity (1)Plain meaning - don't care how the parties interpret a term, the term is given the plain meaning. (2)Conservative (a)Latent - no interpretation. (b)Patent - documentation allowed to determine interpretation. (3)Liberal - asks the parties what they intended to mean. (a)mutual agreement. (b)intent of the parties. (c)custom and trade usage. (d)exclusive dealings. C. GAP FILLERS 1.A K may simply fail to deal w/ some matter, it may have left a gap and the cts will sometimes fill the gap & enforce K. a.Something is left out; subject, price, duration, payment schedule. b.Cts are supplying an omitted term. c.Cts may look at intentions of parties, or simply do what is fair, normal or reasonable. d.Use interpretation devices to fill gaps. 2.The writing should be construed as a whole, w/ particular clauses read in light of parties' general intent. 3.The writing should be interpreted under the circumstances which it was made, including trade practices and custom or usage which both parties as reasonable persons should know about. 4.Objective Standard used to define how to fill gaps: - Nature of K, custom in community, prior dealings of parties. 5.Adjust expectations to what really happened. a. Try to complete agreement parties have entered. b. Cts will fill a small gap in K; a fairly complete agreement. However, Cts will not fill a large gap in agreement because K is too indefinite. D. GOOD FAITH 1.Many cts hold that in every K there exists an implied covenant of good faith and fair dealing. 2.UCC 1-203: Every K or duty w/in this act imposes a duty of good faith in its perf. or enforcement. 3.Good faith and fair dealing does not especially arise from agreement of parties, but may be imposed on parties by ct. Policy of policing of peoples behavior by defining obligations. 4.Sometimes Cts shape substantive content of agreements, by imposing socially approved restraints on behavior---> duty to act in GOOD FAITH a. Cts imposing restraints on behavior of contracting parties interferes w/ parties freedom to K. XX. CONDITIONS & EFFECTS A. Conditions: Provisions which fix the time or order of performance or specify the circumstances under which duties become (or cease to become) present legal obligations are conditions. 1.2 Types of Conditions; a.If the event must happen before the promisor's duty becomes a present obligation, it is a condition precedent. b.If the contingent circumstances will discharge an existing present duty to perform, it is a condition subsequent. 2.Express Conditions: An express condition arises from the explicit language of the agreement. A EC applies to any condition the parties agree on, whether their agreement explicitly stated, or merely implied from parties conduct. a.Express conditions must be exactly satisfied or no duty ripens. Substantial compliance is inadequate for express conditions.(No subst. perf). b.If a condition is not satisfied, then the other party's duty to perform never ripens. c.Whether or not a condition is satisfied is judged by a reasonable person standard. Would a reasonable person find a deviation from the condition to be immaterial. d.Subjective satisfaction is appropriate when the condition is for personal satisfaction and is unmeasurable; however, must act in good faith. e.Where the agreement makes the perf. to the satisfaction of a designated 3d party a condition precedent to the promisee's counter perf, then the cond. is only satisfied if 3d party says so. B. Avoidance of Express Cond's (Def) - Interference by the party that is benefitting from the condition not being satisfied results in the condition being satisfied. 1.Interference - acts as a waiver or excuse of the condition, if the conditions are waived or excused the condition is removed and the duty ripens. 2.Excuse by Waiver: If a promisee whose duties are conditional tenders her counter-perf. knowing that the condition has not been satisfied, the condition is held to be excused by waiver. a.Condition may be waived either expressly or impliedly. b.If you excuse (waive) the condition before it occurs you can change your mind unless the other party has justifiably relied on the waiver. 3.Excuse by Breach: Non-performance, prevention of the condition or failure to cooperate (good faith) waive the condition if there was foul play. a.Repudiation - refusal to perform. One party saying the contract is off so sue me. 4.Excuse by Forfeiture: If forfeiture would be the result of enforcing a condition then the condition will be excused. a.If occurrence of condition becomes impossible or impractical to meet and forfeiture would result if not excused. EX: Architect certification required and architect dies before signing. b.Disproportionate forfeiture. Balancing test. Balance what one would suffer from forfeiture against the interest the other party sought to protect. C. Constructive Conditions: (Def) - Certain conditions which are neither expressly provided by the parties, nor of a type which the parties would have necessarily agreed upon, may nevertheless be implied by the courts in the interest of fairness and justice. 1.The party suing must demonstrate that you are ready, willing and able to perform and that the other side wasn't in order to be excused from you duty and claim that the other side is in breach. Can not anticipate non-performance by the other party in the contract. If you do anticipate non-performance, failure to tender your performance may led to breach of the contract. 2.Simultaneous exchange required if perf. is possible at same time. 3.Sequential Conditions - majority of problems fall in this category. One party's duty to perform can be conditioned or dependent on the other party's rendering a performance that is due at an earlier time. a.Where perf. by promisor is to be accomplished in stages, while counter-perf (usually payment) can be accomplished by a single act, the perf. which takes time must go first. 4.Substantial Performance: The perf. tendered must be so nearly complete that the promisee obtains the substantial benefit of her bargain. This is a question of fact. a.Cannot willfully w/hold some benefit promised. (1)Must be inadvertent or (2)A good faith substitution reaching same result. b.Was breach material - frustrate purpose of K. (1)Critical to determine who was 1st to materially breach; whoever is in material breach is liable. (2)If party thinks material breach & cancels his perf. & is wrong he is in material breach. 5.Anticipatory Repudiation: If the promisee expressly repudiates any intention to perf. his K duties, the promisor may treat repudiation as a present material breach, excusing all cond's & giving promisor immediate action on the K. a.Measured by reasonable person std. b. Restatement 250 (1)Has the individual made a reasonably clear statement indicating he will not perform. (2)If the breaching part takes an action which makes it impossible for them to perform. 6.Order of Performance analysis; a.Intent of the parties (4 corners of doc.) b.Law favors simultaneous performance. Gen. Rule : Performance over time on one side against promise to pay on the other side, substantial performance is required for he duty to pay to ripen. 7.Divisibility: A K is "divisible" if (i) it is made expressly made so, or (ii) each installment could be compensated separately w/o denying the promisee the basic benefit of her bargain. a.If K is divisible, the promisor may recover a pro-rata portion of the K price for any installments actually tendered and accepted. b.Failure to completely perf. all parts of K is still a breach. c.Rst.  240: A K is divisible if it can be apportioned into corresponding pairs of part perf's so that the parts of each pair are properly regarded as agreed equivalents, 8.Cure: Buyer's right to reject & his right to revoke an acceptance are subject to the seller's right to cure the non-conformity. a.Even after the time for perf has passed under the K, the seller may still have a limited right to cure. b.RULES: Restatement  242: If a party fails to substantially perform but defect can be timely cured, the injured party's duty is merely suspended and a constructive condition prior to recision is to give the defaulting party an opportunity to cure. If you don't that might be a material breach in itself. XXI. Grounds of Rightful Cessation A. Mutual Mistake (Def) - A belief that is not in accord with the facts at the time the contract was entered. One party claims the mistake is a basis which can be used to void or reform the contract. Not a judgment error about future events. Three requirements to meet a mutual mistake for rescission. Restatement 152. 1.Mistake must concern a basic assumption on which the contract was made. Assumption must deal with a central part of the bargain as opposed tot he periphery. Look at the outcome if the contract is enforced. a.Does it result in an unanticipated, unbargained for gain on one side, coupled with b.An unanticipated, unbargained for loss on the other. 2.Have a material effect on the agreement. The consequence of enforcing the contract would be a severe imbalance in the exchange as agreed to. One side gets a significant unanticipated advantage. How to remedy: a.Rescission and return the parties to the status quo, can't always be accomplished if there was performed. (1)If balance could be achieved by other means than rescission (more or less money) the court has the flexibility to consider other options. b.Person seeking rescission must not be the one who is to bear the risk of loss. Even if a mistake relates to a basic assumption and has a material effect, the injured party may not recover if the party claiming relief was allocated the risk. Look to restatement 154 for how the risk is allocated. (1)Parties may expressly allocate the risk in the contract. (2)Parties may allocate the risk by their behavior or actions. A party proceeds with conscious ignorance. (3)Court may interpret allocation from the contract. Court must do what is reasonable. When is it reasonable? As between two innocent parties, the person in the better position to know of the risk and do something about it. B. Unilateral Mistake (Def) - Traditionally courts did not allow avoidance for a unilateral mistake. Restatement 153 is more liberal. Must prove all 3 elements of mutual mistake plus two others: 1.Must prove that the other knew or should have known of the mistake. 2.Enforcement would be unconscionable. a.Mistaken party must show that they were reasonably prudent. b.Look to the context of the mistake. Note: Contract will be rescinded for ordinary negligence but will not be for gross negligence. Must demonstrate the relative innocence in the context and that it would be unconscionability to allow a rescission. Must show: c.Injury if the contract is enforced. d.No reliance by the other party on the mistake. C. Impossibility of Performance (Def) - When the promisor is literally incapable of performing due to circumstances unforeseeable at the time the contract was entered. Does a supervening event make performance literally impossible. The narrow, classic distinction found the only event which makes performance impossible is death of the promisor. Everything else is really impracticable. Modern courts find other events. Parties may expressly allocate the risk for unforeseen or unknown future events. If not allocated courts will look to who can better bear the risk. General Rule in a Property Contract - Buyer bears the risk of loss falls on the buyer, particularly when the buyer is in possession. Third party is involved there is a fairly strict risk allocation analysis. Courts generally allocate the risk to the party dealing with the third party because he was in a better position to know of any change in conditions. If plaint is destroyed it would be a different question and possibly a different outcome. The effect of allocating the risk is to deny use of the impossibility doctrine. 1.Personal services - General rule is risk won't be allocated to a dead person's estate. But if there is a volitional act on the part of the person who is to perform which results in death or disability then courts may allocate the risk to them. D. Impracticability of Performance (Def) - If an unanticipated changed circumstance that makes performance infeasible then the promisor is relieved from performance, unless the risk for the unforeseen event was allocated to the promisor. E. Frustration of Purpose (Def) - Performance is excused when, though still possible its purpose or value has been totally destroyed by some unforeseen contingency which results in the non- existence of the state of things assumed by both parties as the foundation of the contract. 1.Elements; a.There has been an unforeseen contingency. b.The risk was not allocated in the contract. c.The occurrence rendered the contract commercially valueless.