Contracts II: Outline

4/9/2005 Revision 0.1 Author: Philip Larson

Contracts II: Outline

Table of Contents

CONTRACTS II: OUTLINE...................................................................................................3 .1 REGULATING THE BARGAINING PROCESS................................................................3 1.1.1 UNCONSCIONABILITY..............................................................................................3 .2 MISTAKE & EXCUSE........................................................................................................4 1.2.1 MISTAKEN FACTS: EXCUSE BASED ON MISTAKE.............................................4 1.2.2 MISAKEN FACTS: MUTUAL MISTAKE & REFORMATION.................................4 1.2.3 IMPOSSIBILITY: TRADITIONAL IMPOSSIBILITY ................................................5 1.2.4 COMMERCIAL IMPRACTICABILITY: MODERN EXCUSE DOCTRINE..............6 1.2.5 FRUSTRATION OF PURPOSE....................................................................................7 .3 CONDUCT CONSTITUTING BREACH............................................................................8 1.3.1 ANTICIPATORY BREACH.........................................................................................8 .4 REMEDIES........................................................................................................................10 1.4.1 REMEDIES: EXPECTATION DAMAGES................................................................10 1.4.2 REMEDIES: SPECIFIC PERFORMANCE.................................................................11 1.4.3 REMEDIES: RELIANCE DAMAGES........................................................................12 1.4.4 REMEDIES: RESTITUTION......................................................................................12 1.4.5 REMEDIES: PUNITIVE DAMAGES.........................................................................13 1.4.6 LIMITATIONS ON COMPENSATION: CERTAINTY.............................................13 1.4.7 LIMITATIONS ON COMPENSATION: FORESEEABILITY...................................13 1.4.8 OTHER........................................................................................................................13

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1. CONTRACTS II: OUTLINE

REGULATING THE BARGAINING PROCESS UNCONSCIONABILITY A. Adhesion Contract: an imprecise term used to describe a document containing non-bargained for clauses in fine print, complicated, and exceptionally favorable to drafter. Non-drafter typically has little bargaining power. B. Contract can be avoided if a. 1. contract is an adhesion contract b. 2. contract is unconscionable C. Procedural vs. Substantive Unconscionability a. Procedural: party is induced to enter K without meaningful choice, or hidden, deceptive terms. b. Substantive: K itself is unduly unfair not the process of arriving at the K. Usually unreasonably favorable and shocks the conscience i. NOTE: some Cts find that extreme Sub. Unc. proves Proc. Unc. D. Unconscionability Elements a. 1. Unreasonable terms (taking advantage of consumer; shocks the conscience) b. 2. Injustice c. 3. Absence of choice d. NOTE: Unc. is often a losing argument. Know how to defend against it. E. Remedies for unconscionability a. Refuse to enforce clause: just strike the offending clause b. Reformation: modify offending clause c. Refusal to enforce whole contract: rare.

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F. UCC 2-302: if ct. finds K or clause in K is so unfair as to be unconscionable, it may enforce remainder of K, or limit K as to avoid unconscionab result. G. Cases a.

COMMON LAW: Williams v. Walker-Thomas Furniture Co. (poor woman must pay for all Ks before she owns anything) i. FACTS: Ms Williams cant read and on welfare enters into rent-to-own K where she owned nothing until shed paid for everything ii. RULE: Ct. found K was unconscionable under common law because there was absence of meaningful choice (limited contracting options, semi-monopolistic power) and the K terms were unreasonably favorable to one party (e.g. shocks the conscience; unfair surprise terms)

b. UCC: Seabrook v. Commuter Housing Co. (apartments not complete rent starts when building is ready) i. FACTS: P agrees to rent apartment. Building construction is late and P tries to get out. Construction clause says he cant. ii. RULE: Ct. finds clauses unconscionable and says 2-302 (protecting against unfair surprise) applies by analogy. Landlord was un affirmative duty to set forth a reasonable time limit and to bring the construction clause to Ps attention. c.

UCC: Henningsen v. Bloomfield Motors, Inc. (car dealers in semi-monopoly have limited warranty clause) i. FACTS: P bought car and signed pre-printed order form limiting warranty. Any other warranties express or implied were expressl disavowed. ii. RULE: Clause found to be unconscionable. Buyer unjustly taken advantage of. Buyer could not negotiate for better protection. Semi-monopoly. Clause was hidden and deceptive.

E OF EXTRINSIC EVIDENCE i. CASE: Frigaliment Importing Co. v. B.N.S. International Sales Corp. (meaning of chicken) 1. FACTS: P and D enter into K for chickens but each has a diff meaning (stewing vs. broiling chickens). K said they sho be gov. inspected chickens, so ct. uses regulations as dictionary.

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2. RULE: Stands for proposition that you allow in usage of trade to define ambiguous terms. However, this case is also sor
like Peerless in which there probably wasnt a meeting of the minds.

B. UCC - UCC 2-202: rejects common law PMR and ambiguity requirement for admission of extrinsic evidence of the meaning of a term. States that even a fully integrated document may be explained or supplemented by usage of trade, course of performance and course of dealing as long as it is consistent with the terms of the final writing. a. UCC 2-202 (comment) - Certain Inclusion Test - Under UCC almost all Ks are partially integrated

b. CASES a. Columbia Nitrogen Corp. v. Royster Co. (K with ceiling but no floor; argument over minimum) i. FACTS: P was long-term customer of D but in this K D was a customer of P. D agreed to buy a minimum at set price with a clause that price would escalate with market but no de-escalation clause (no floor). Prices plummet and D buys less than the minimum. P sues and D wants to introduce prior dealings evidence showing that minimum means that amount or less. ii. RULE: As long as evidence doesnt contradict written terms, it is admissible so Ct. admits it. However, this seems to contrad Ct ignores a merger clause saying it doesnt expressly state that course of dealing and usage of trade cant be used to suppleme written K.

MISTAKE & EXCUSE

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MISTAKEN FACTS: EXCUSE BASED ON MISTAKE A. Definition: 151 2nd Restatement: a mistake is a belief that is not in accord with the facts. The doctrine is applicable only to mistaken beliefs ab an existing fact, not an erroneous belief about what will happen in the future.

B. Mutual mistake: parties are mistaken about the same belief. C. Unilateral: only one party has the mistaken belief. a. Anderson Brothers Corp. v. OMeara (dredge doesnt work for Ps purpose) i. FACTS: D had dredge for sale. P purchased dredge for purposes that it turns out dredge couldnt do. D didnt know what P wante for. P finds out his unilateral mistake and sues D. ii. RULE: There was no mutual mistake, at best two unilateral mistakes. Knowledge by one party to a K that other is laboring under a mistake concerning subject matter of K renders it voidable but here D does not know. It was Ps fault for not making sure the dred would work and he assumes the risk. iii. RULE2: The party with the unusual desire bears the risk. If you want something out of the ordinary, and you dont specify it as a buyer, you bear the risk. b. ***************Raffles v. Wichelhaus (PROVIDED IN CLASS)************************ i. FACTS: ii. RULE:

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MISAKEN FACTS: MUTUAL MISTAKE & REFORMATION A. Definition: 152 2nd Restatement where a mistake of both parties at time a K is made as to a basic assumption on which K was made has a materi effect on the agreed exchange of performances, the K is voidable by the adversely affected party unless he bears the risk of the mistake.

B. Three Requirements for Avoidance: Three requirements must be satisfied before adversely-affected party may avoid the K on account of mutual mistake. a. 1) Basic Assumption: mistake must concern a basic assumption on which the K was made. i. CASE: Sherwood v. Walker (cow is w/ calf) 1. FACTS: P and D think Ds cow is barren. They agree on sale for $80. Turns out cow is with calf and worth ~$1k. D refu to hand over. 2. RULE: Both parties were mistaken about the same thing, that the cow was barren and farrow. This is a basic assumption has a material effect on the K price. No one was assuming the risk that it was not.

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3. DISSENT: P didnt buy the cow for beef. He was gambling on it being able to breed. Risk allocated to D. This test is wr
Test is above elements

ii. Atlas Corp. v. United States (uranium is dangerous. who knew?) 1. FACTS: P sells uranium to D. Later uranium is discovered to be bad and P has to pay more than expected to clean it up p new laws. P sues D for clean-up costs that werent in K b/c of mutual mistake (that Uranium was not dangerous) and asks reformation. 2. RULE: When neither party is aware of existence of a fact (that uranium is bad), they cant have a belief about it, so they c be mistaken about this belief. This is not a basic assumption so there is no mutual mistake. 3. RULE2: Reformation is available only to modify existing Ks to make them conform to parties intent. Parties couldnt ha intended anything here b/c facts were unknown.

b. 2) Material effect: mistake must have a material effect on the agreed exchange of performance.
i. CASE: Sherwood v. Walker (cow is w/ calf) - above

ii. CASE: ALCOA v. Essex Group, Inc. (Greenspan formula fails b/c OPEC) 1. FACTS: P enters into K w/ D where they intend to keep price within narrow range per Greenspans formula. Formula fai during OPEC and D gets a windfall. P sues on mutual mistake and asks for reformation. 2. RULE: Intent of parties was a narrow price range and Ct. finds there was a mutual mistake about whether the formula wo work to keep the price in that range. P didnt assume the risk b/c it didnt enter into the K in a state of conscious ignoranc (like the dredge guy in Anderson). It didnt ask for price floor b/c both parties thought the formula would work. Ct. refor K w/ new price formula that sticks to original intent.

c. 3) Risk: adversely-affected party must not be the one on whom the K implicitly imposed the risk of the mistake. Often the K does not mak

clear the party who bears the risk of the mistake so the Ct. allocates this risk in the way in finds reasonable. 154 2nd Restatement (risk can allocated 1) in agreement; 2) if party is aware he has limited knowledge about mistake but treats it as sufficient; 3) court allocates risk to him on grounds that it is reasonable to do so) i. Anderson Brothers Corp. v. OMeara (dredge doesnt work for Ps purpose) 1. FACTS: above. RULE2: The party with the unusual desire bears the risk. If you want something out of the ordinary, an you dont specify it as a buyer, you bear the risk.

ii. ALCOA v. Essex Group, Inc. (Greenspan formula fails b/c OPEC) 1. FACTS: above: RULE: Intent of parties was a narrow price range and Ct. finds there was a mutual mistake about whether formula would work to keep the price in that range. P didnt assume the risk b/c it didnt enter into the K in a state of conscious ignorance (like the dredge guy in Anderson).

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IMPOSSIBILITY: TRADITIONAL IMPOSSIBILITY A. Generally: If Ct. concludes performance of K has been rendered impossible by events occurring after K was created, Ct. will generally discharge parties. B. Three classes: 1) destruction of subject matter; 2) failure of the agreed-upon means of performance; 3) death or incapacity of a person. a.

1) Destruction of Subject Matter: if performance involves goods (e.g. building) essential to performance of K and through no fault of eith party it is destroyed the contract is discharged.

i. Specifically referred to: if property performing party expected to use is destroyed, party is discharged only if destroyed party was

specifically referred to in the K. 263 2nd Restatement: if the existence of a specific thing is necessary for the performance of a d itsdestruction, or such deterioration as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the K was made. 1. CASE: Taylor v. Caldwell (Concert hall burns down) a. FACTS: D agrees to rent music hall to P for concert but it burns down before concert

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b. RULE: In Ks where performance depends on continued existence of a person or thing, a condition is implied (ris
assigned) that the impossibility of performance (assuming it is without fault) excuses performance. 2.

CASE: Howell v. Coupland (potato farm undersupplies) a. FACTS: P enters into K to buy 200 tons of potatoes from Ds land. Through no fault of D his land only produce tons. The express condition was from Ds land. b. RULE: applying Taylor rule, D wins.

ii. Construction K vs. Repair of Buildings: builder in K to construct a building that burns down when partially completed may not
impossibility whereas party w/ K to repair an existing building can use the defense to discharge K. 1.

CASE: Carroll v. Bowersock (house burns down in the middle of reflooring) a. FACTS: P is reflooring Ds warehouse which burns down before completion. P sues for impossibility. b. RULE: Impossibility as a sword b/c P wants D to rebuild the warehouse so it can performstrange. Ct says P ge only portion of the work that had already provided value to D.

iii. Sale of Goods: UCC 2-615(a) unless otherwise agreed, delay in delivery or non-deliveryis not a breach of duty under K for
if performance as agreed has been made impracticable by occurrence of a contingency the non-occurrence of which was a basic assumption on which the K was made 1.

Seitz v. Mark-O-Lite Sign Contractors (diabetes sign guru gets sick) a. FACTS: D agrees to sell P a neon sign but his neon sign maker falls ill from diabetes and cant work. b. RULE: P wins b/c D didnt contract for a particular person to do it, just to deliver the sign. It is not impossible fo to perform, just more expensive. Diabetes guy being healthy was not a basic assumption of the K.

b. 2) Impossibility of essential mode of performance: it an essential and intangible aspect of the K becomes impossible, K can be discharge i. Impossibility due to failure of third parties: where a middleman Ks to supply goods he is procuring from a 3rd party and 3rd part
fails to deliver, middlemans use of impossibility depends on the situation 1. Source Not Specified in K: if K does not specify source, seller whose source doesnt pan out cannot use impossibility. 2. 3. Sellers Supply K is breached: many Cts will allow impossibility if seller has K with 3rd party and 3rd party breaches. a. CASE: Canadian Indus. Alcohol v. Dunbar Molasses (middleman fails to deliver b/c supplier reduces production) i. FACTS: P agrees to buy molasses from D on condition that they be from Refinery X. X cuts back on production so D cant deliver as promised. ii. RULE: No impossibility b/c Dunbar assumed the risk. Dunbar should have Kd with refinery to ensure amount of molasses. If he had, many Cts would have found impossibility.

4. 3rd party excused by impossibility: similarly, if seller makes K with supplier and supplier is excused b/c of impossibility
seller probably also will be discharged. c.

3) Death or Illness: If K specifically provides performance done by particular person, that persons death or incapacity will discharge both parties.

i. Death or illness of 3rd party: K may similarly be discharged by death or illness of 3rd party necessary to perform K even if he is no party to K. 1.

CASE: Seitz v. Mark-O-Lite Sign Contractors (diabetes sign guru gets sick) NOT APPLICABLE b/c P didnt K for diabetes guy to do the work, just for the completed sign.

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COMMERCIAL IMPRACTICABILITY: MODERN EXCUSE DOCTRINE A. Test for Impracticability

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a. c. 1. Contingency occurred 3. condition must have rendered performance commercially impracticable because it is excessively costly

b. 2. Risk not allocated by agreement or custom and was not foreseeable

B. Modern View: courts generally equate extreme impracticability with impossibility. Therefore, if performance would be infeasible from a commercial viewpoint, promisor may be excused. a. UCC: UCC 2-615(a) provides that sellers non-delivery is excused if performance as agreed has been made impracticable by occurrenc a contingency the non-occurrence of which was a basic assumption on which the K was made Complete cut-offs of supplies due to wa crop failure, strike, etc. are often found to be covered under this.

i. Eastern Air Lines v. Gulf Oil Corp. (requirements K for jet fuel screwed up by OPEC) 1. FACTS: P and D enter into long-term K for jet fuel. They fix price to index but OPEC screws it up. Gulf gets screwed b/
is selling at less than it could be. Commercial impracticability was one of Gulfs claims.

2. RULE: Ct says UCC2-615 (excuse for commercial impracticability) to apply there must be a failure of a presupposed
condition, that was unforeseeable, and that the risk was not allocated. The excess cost must also be more than merely onerous or expensive. It must be positively unjust. Not the case here.

b. Cost Increases: most impracticability cases relate to extreme cost increases suffered by sellers who have signed fixed-price contracts. Sell
here generally lose because they have implicitly assumed the risk of cost increases. It is especially likely seller will lose where the cost increase was foreseeable.

i. CASE: Eastern Air Lines v. Gulf Oil Corp. (requirements K for jet fuel screwed up by OPEC)
1.

FACTS: above. RULE: Ct says the excess cost must also be more than merely onerous or expensive. It must be positive unjust

ii. CASE: Transatlantic Financing Corp. v. United States (suez canal closed so K more costly) 1. FACTS: P agrees to take Ds cargo from TX to Iran. Best route is through Suez Canal, but when P got there it was blocke so it went around Africa at extra cost of $44k for which it sues. 2. RULE: D wins b/c risk was foreseeable to P and the extra cost was not excessively costly for P to perform. iii. CASE: ALCOA v. Essex Group, Inc. FACTS: above. RULE: above.

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FRUSTRATION OF PURPOSE A. Generally: where a partys joint purpose in entering the K is destroyed by supervening events, most courts will discharge him from performing. 2 2nd Restatement where, after a K is made, a partys principal purpose is substantially frustrated w/o his fault by the occurrence of an event the non occurrence of which was a basic assumption on which the K was made, his duties to perform are discharged.

a. Distinguished from impossibility: In frustration cases, person seeking discharge is not claiming he cannot perform. Rather, she is claim
that it makes no sense for her to perform, because what she will get in return does not have the value she originally expected at time of K formation.

i. CASE: Krell v. Henry (coronation of king) 1. FACTS: P leases D room w/ view to coronation. King gets ill and coronation is canceled. D could still sit in empty room (performance not impossible), but purpose is frustrated b/c no coronation. D is excused. 2. RULE: Kings coronation was a basic assumption on which K was made that was unforeseeable to both parties so they didnt assign the risk. P got to keep the deposit. B. Factors to be considered: two main factors should be considered to determine when to use doctrine of frustration: a. Foreseeability: the less foreseeable the event, the more likely Ct. will allow frustration defense. b. Totality: The more totally frustrated the party is, the more likely he is to be allowed to use the defense. i. CASE: Krell v. Henry (coronation of king) kings illness was unforeseeable and Ds purpose was totally frustrated. ii. CASE: Lloyd v. Murphy (selling cars during war)

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1. FACTS: P leases D a locale to be used only for selling cars. Wartime restrictions on car sales come into effect. As sign o
2.

good intent, P waives the car sale purpose and subleasing restrictions. D still leaves the premises and claims frustration. Court doesnt buy it. RULE: Ks value had not been completely frustrated for D b/c he still could have used the locale commercially. Wartim restrictions were foreseeable to both parties.

CONDUCT CONSTITUTING BREACH

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ANTICIPATORY BREACH A. General Rule: If party makes it clear, even before performance is due, that he cannot or will not perform, he has anticipatorily repudiated the K. A states but Mass. Allow victim of repudiation to sue before repudiators time for performance has arrived.

a. CASE: Hochster v. De La Tour (travel job canceled P can mitigate sue) i. FACTS: P agrees to be Ds travel companion. D cancels trip. P mitigates by getting work during time of cancelled trip. P sues D
anticipatory breach.

ii. RULE: Rather than have to continue to prepare for a non trip, P can mitigate and sue for damages (from which mitigation is
subtracted) without waiting for time of performance. B. If other party repudiates you can? a. 1) Wait until breach and sue for full damages(must mitigate to ensure she does not aggravate her damages) b. 2) Treat K as repudiated and sue for damages immediately c. 3) Seek reassurance from the other party and if you dont get it, change your position in the interim. C. TYPES OF REPUDIATION a. Express Repudiation by Statement: sometimes repudiation takes form of a statement. However, stating vague doubts about ability to perform is not enough. You must show unwillingness to perform. i. CASE: Taylor v. Johnston (K for stud to service mares) facts below: sending letter canceling K was repudiation.

ii. CASE: Truman L. Flatt & Sons Co. v. Sara Lee Schupf (rezoning application retracted) 1. FACTS: D sells land to P in K that has option for P to cancel if city council rejects rezoning. P retracts rezoning app and offers less money to D. D says no. P says OK, well pay original amount. D says P had anticipatorily repudiated and the wont sell. P sues for specific performance. 2. RULE: P never repudiated b/c it did not make a clear statement that it wouldnt perform, just offered less money. Even did, it retracted it timely by assuring it would pay the full amount once D rejected the lower offer. D never materially changed its position in reliance of Ps repudiation until after the retraction.

b. Implied Repudiation by Voluntary Acts: repudiation may occur by means of an act by promisor that makes his performance impossible
Must be impossible not just difficult.

i. CASE: Taylor v. Johnston (K for stud to service mares) facts below: selling the stud was implied repudiation

c. Prospective inability to perform: something analogous to anticipatory repudiation occurs when it becomes evident promisor will be unabl

perform, even though he desires to do so. Cts typically allow promisee to suspend her performance but courts are split about whether promise may immediately sue for breach. i. Insolvency: promisors insolvency usually is not considered to be anticipatory repudiation. However, promisee probably can requ assurances (UCC 2-609(1) reasonable grounds for insecurity) and if promisor doesnt give them, then that is anticipatory repudiation.

D. RETRACTION of Repudiation: Repudiation may normally be retracted until some event occurs to make the repudiation final. UCC2-611(1) until the repudiating partys next performance is due that party can retract the repudiation unless the aggrieved party has since the repudiation cance or materially changed position or otherwise indicated that the repudiation is final. a. Final acts: in most courts, repudiators time to retract ends as soon as the party does one of the following.

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i. 1. sues for breach

ii. 2. changes her position materially in reliance of repudiation iii. 3. States that she regards the repudiation as final

b. CASE: Taylor v. Johnston (K for stud to service mares) i. FACTS: D books stud to service Ps mares. D sells his stud (1st repudiation), then writes to P saying K is cancelled (2nd Repudiatio P demands performance (rejection of repudiation). D arranges for it (retraction). D jerks around P and P ultimately doesnt allow performance. D wins b/c he retracted and ultimately didnt breach. ii. RULE: This case is about retraction and how it can suck. P should have sued for anticipatory breach when D repudiated. c.

CASE: Truman L. Flatt & Sons Co. v. Sara Lee Schupf (rezoning application retracted) i. FACTS: above ii. RULE: P never repudiated b/c it did not make a clear statement that it wouldnt perform, just offered less money. Even if it did, it retracted it timely by assuring it would pay the full amount once D rejected the lower offer. D never materially changed its posit in reliance of Ps repudiation until after the retraction.

E. MITIGATION REQUIRED: after repudiation, aggrieved party may not simply ignore the repudiation if this will aggravate damages. They must mitigate their damages by securing an alternative K, if one is reasonably available. a. UCC2-610(a) expresses this mitigation requirement saying that party may for a commercially reasonable time await performance by th repudiating party i. Meaning: by choosing the time to have to mitigate, the Ct. affects damages and therefore affects the incentive structure for the non breaching party.

F. REPUDIATION DAMAGES a. UCC Damages for Repudiation: i. UCC2-713(1) measure of damages forrepudiation by the seller is the difference between market price at the time when the buyer learned of the breach and the K price, together with any incidental and consequential damages. 1. Meaning: this meaning is ambiguous. Most courts hold that this means time when the buyer learned of the repudiation + commercially reasonable time. This is consistent w/ UCC2-610(a). b. Two Incentive Structures i. Time of Performance: If damages are set at time of performance, aggrieved party has no incentive to cover at what might be the m efficient time. ii. Time of Repudiation: If damages are set at time of repudiation, seller could turn buyer into the breacher by vaguely repudiating a making it cover. c.

Buyer vs. Seller i. Seller repudiates and buyer has to cover: If buyer chooses to cover in commercially reasonable way, they will get damages base on how they covered (Price they paid to cover K price). If cover price is less, they may get nominal damages. ii. Seller repudiates and buyer doesnt cover: If buyer doesnt cover in a proper way, then difference of price when buyer learns of breach and K price. learned of breach usually means repudiation + comm. reasonable time. iii. Buyer Repudiates and seller is left with goods: Depends on whether what is sold is fungible or unique.

d. CASES i. CASE: Cosden Oil & Chemical Co. v. Karl O. Helm Aktiengesellschaft (polystyrene buyer) 1. FACTS: Seller repudiates sale of goods K. Buyer wants mitigation time set at time of performance. Seller wants it at repudiation time. 2. RULE: Ct. says it is time of repudiation + comm. reasonable time. UCC2-713 referenced. ii. Roye Realty v. Arkla, Inc. (gas take&pay vs. pay)

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1. FACTS: Buyer had sequential alternative K with seller to take a minimum amt of gas (take & pay) or, if not, to pay a 2.

3.

minimum amt of money (pay). Buyer repudiates. Seller wants damages calculated on minimum cash payment, buyer wa market-based minimum (take & pay). RULE: In sequential alternative K, if buyer rejects first option the K is now only for the 2nd option. So if buyer breaches, damages are based on the 2nd option (pay). EXCEPTION: When the 2nd option is just money, this turns it into a liquidated damages clause. To prevent this (b/c it would make giving damages the same as giving specific performance), the Ct. in t situation uses the cheaper option. RULE2: Once buyer repudiates its obligation to take & pay, sellers inability to physically deliver gas has no bearing on t measure of damages. a.

Liquidated Damages cts dont like because 1) give someone an incentive not to breach when it would be efficient; 2) overcompensation will prevent efficient breach; 3) more litigation b/c there is more incentive to claim breach.

G. ASSURANCES: RIGHT TO DEMAND a partys speech or conduct will sometimes not constitute an unequivocal repudiation, but will give the other party reasonable grounds for insecurity about whether there will be performance. In this situation, party who is insecure has the right to deman assurances from the other party that they will perform. If they fail to provide insurances, this will be considered anticipatory repudiation.

a. 251 2nd Restatement: (actually a suggestion not a restatement slowly being adopted) the obligee may treat as a repudiation the obligors
failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances assurance of due performance Common Law: Under traditional common law, you could not seek assurances. Your uncertainty was your own burden.

b. UCC2-609(1): when reasonable grounds for insecurity arise wrt the performance of either party the other may in writing demand adequa
c.

d. CASE: National Farmers Organization (NFO) v. Bartlett Grain (multiple existing Ks 4 future Ks) i. FACTS: Seller and buyer have multiple Ks. Seller begins to fall short on some of them. Instead of asking for assurances, buyer begins to default on those Ks saying that they wont go through with future Ks unless they get delivery on current ones. This is a condition precedent and counted as repudiation. ii. RULE: Buyer was allowed under UCC2-609(1) to take bad performance on existing Ks as reasonable insecurity of other Ks and could have demanded assurance. He did not have the right to modify future Ks with a condition precedent. e.

CASE: Norcon Power Partners v. Niagara Mohawk Power Corp ($610 million at end of K) i. FACTS: Under strange K, P (seller) would have owed D $610 million at the end of K. D requests assurance that P would perform (probably trying to trigger breach) and P sues saying D cant ask for one. ii. RULE: Ct says P could request assurance and that UCC2-609 applies by analogy (even though this is service). He says it works f oil (goods) and therefore should work for electricity (service). This is the minority view b/c D didnt do enough to create reasona grounds for insecurity.

REMEDIES

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REMEDIES: EXPECTATION DAMAGES A. General: In most breach cases, P will seek and receive protection for her expectation interest. Here, the Ct. tries to put the P in the position he would have been in had the contract been performed. This would include any profits she would have made. B. Calculation: Ps expectation damages are equal to value of Ds promised performance (usually K price) minus whatever benefits P has received from not having to complete his own performance.

a. Cost of Completion vs Decrease in Value: When D has defectively performed, P can recover the cost of completion. Cost of completion

the default. However, if the cost of remedying performance is clearly disproportionate to the loss in market value, P will only recover the in market value. i. Economic Waste: the reason for this rule is to prevent economic waste. 1. If someone has in bad faith done something that will require economic waste to fix, they cant use economic waste defens

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ii. In general, if K is commercial and injured party intends to buy and sell the thing, their object is profit so they should get diminutio

value and not cost of completion. Whereas, if one party is not commercial and they intend to keep the thing, you cant measure th value to them so the rule should be cost of completion. iii. Peevyhouse v. Garland Coal & Mining Co. (company doesnt clean up familys land as promised) 1. FACTS: P leases farm to D so it can strip mine it. D promises to put land back like it was. P isnt commercial party and probably wants to live on the land. D doesnt return land to normal. Cost of completion is $29k and diminution in value just $300. D wins. B: probably decided wrong. 2. RULE: Ct says cost of completion is default but that there is an exception when the breached K provision was merely incidental to the main purpose. NOTE: this could be bad b/c it could encourage fraud and misrepresentation on the part commercial entities King with ordinary ppl.

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REMEDIES: SPECIFIC PERFORMANCE A. Specific Performance vs. Injunction: specific performance orders the promisor to render the promised performance whereas an injunction directs a party to refrain from doing a particular act. Both are equitable remedies. B. Test: a. 359 2nd Restatement: specific performance or an injunction will not be ordered if damages would be adequate to protect the expectation interest of the injured party. i. Determining Adequacy of Damages: 360 2nd Restatement: in determining adequacy of damages vs specific performance, court look at 1) difficulty of proving damages with reasonable certainty; 2) difficulty of procuring suitable substitute performance by means of money awarded; 3) likelihood that an award of damages could not be collected. Therefore, factors include: 1. Object is Unique 2. Damages are uncertain 3. Money cant buy substitute (e.g. patents; controlling interest in Company) 4. Land 5. Damages cant be recovered b/c party is insolvent

b. UCC2-716(1): Specific performance may be decreed where the goods are unique or in other proper circumstances

i. CASE: Sedmak v. Charlies Chevrolet, Inc. (corvette seller reneges) 1. FACTS: P orders special edition Corvette from D and gives deposit. Later D gives deposit back and says market price ha gone up and it can bid with the others. P wins specific performance. 2. RULE: Ct. allows specific performance saying UCC2-716(1) applies because although car is not unique, its mileage, condition, ownership, and appearance would make it difficult to replace w/o considerable expense and delay. (i.e. too difficult to cover).

ii. Klein v. PepsiCo, Inc. (CEO reneges on sale of jet) 1. FACTS: P buys jet from D. Ds CEO thinks twice and reneges. P sues for specific performance and loses. 2. RULE: Jet wasnt unique b/c there were others on the market. P was just buying to resell so damages are adequate. Ct. sa UCC2-716 does not abrogate the maxim that specific performance is inappropriate where damages are recoverable and adequate. C. Personal Services Ks: Cts almost never order specific performance of a K for personal services. a. Peevyhouse v. Garland Coal & Mining Co. (company doesnt clean up familys land as promised) i. FACTS: above. RULE: this is a service K so it is difficult to get specific performance. However, they should have gotten cost of completion not diminution in value.

D. Sale of Goods: specific performance will sometimes be granted in Ks involving the sale of goods. This is especially likely in the case of output and requirements Ks, or where the item is unique and not in ready supply.

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REMEDIES: RELIANCE DAMAGES A. General: Sometimes P receives protection for her reliance interest. Here the Ct puts P in as good a position as he was in before the K was made. Damages dont include profits but do include the amount P spent out-of-pocket in performing or preparing to perform. a. When Used: Reliance interest is used when: i. 1) Profit too speculative: it is impossible to measure expectation interest accurately because lost profits are too speculative. 1. CASE: Sullivan v. OConnor (bad nose job) a. FACTS: P got bad nose job from D who promised to make her beautiful. b. RULE: Expectation damages too speculative so Ct. prefers reliance damages (e.g. cost of operation, subsequent care, cost of operation, lost wages

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2.

ii. 2) Promissory Estoppel: Where P successfully wins on Promissory Estoppel. Here the court is trying to reduce injustice to it give
more than nothing but less than expectation damages.

B. Limits on Reliance Recovery: Ps reliance damages are sometimes limited to a sum less than actual expenditures. a. K price as limit: Where Ds only obligation under K is to pay a sum of money, reliance damages will almost always be limited to this K pr b. Recovery limited to profits: Courts dont allow reliance damages to exceed expectation damages. c. Expenditures prior to signing: P usually cant recover reliance damages for expenditures made before the K was signed because these werent in reliance of the K.

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REMEDIES: RESTITUTION A. General: Courts sometimes protect Ps off-K restitution interest. That is, it is the value to the D of the Ps performance. Restitution is designed to prevent unjust enrichment. a. When used: Restitution is most commonly used where: i. 1) non-breaching P has partly performed (on-contract but in restitution she wouldnt be limited to K price as she would for expectation and reliance damages) ii. 2) breaching P has not substantially performed, but is allowed to recover the benefit of what he has conferred on D. (off-contract) b. Market Value: Restitution is based on value rendered to D, regardless of how much conferring that value costs P. This is usually the sum would have to pay to acquire Ps performance not the subjective value to D. i. 371 2nd Rest.: restitution interest may be measure by either reasonable value to the other party of what he received in terms of w it would have cost him to obtain it from a person in the claimants position or extend to which the other partys property has been increased in value or his other interests advanced. c.

CASE: United States v. Zara Contracting Co. (bad soil D uses Ps equipment to finish) i. FACTS: P agrees to do grading work for D. Work turns out to be more difficult and costly because of soil and P asks for more money. D denies request and gets fed up with Ps delays and cancels K (breach). Therefore, D breached even though P was a pain in the ass. D finishes job using Ps equipment. P gets expectation damages for work they had done and restitution for ren value of their requipment. ii. RULE: P bore the risk of bad soil under K. if it had breached it could not recover restitution. However, since D breached, P g restitution. Calculation is not increase in value to Ds land but how much it would cost P to pay 3rd party to do this.

B. Not limited to K price: The main use of restitution is that, in most courts, it is not limited to K price for the non-breaching party. a. CASE: United States v. Zara Contracting Co. (bad soil D uses Ps equipment to finish) facts above: Susi could get damages above K price for extra work done because they are not the breaching party.

C. Breaching P: A P who has materially breached may normally bring an off-K suit and recover his restitution interest, less Ds damages for the breac This is sometimes called quantum meruit. (as much as he deserves). a. CASE: Britton v. Turner ($120 K for 12 months of work)

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i. FACTS: P agrees to work for D for one year for $120 and right to stay on land. After 10 months, he leaves and doesnt come back ii.

(breach). P (breacher) sues for restitution for the work he performed. RULE: Breacher can sue for restitution. P gets the value of the work minus damages to D (zero here). Value of the work is measu as actual value to D, not the market value. K price cannot be exceeded.

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REMEDIES: PUNITIVE DAMAGES A. Cases a.

6 LIMITATIONS ON COMPENSATION: CERTAINTY A. Certainty: 2nd Rest. 352: damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty. a. 1. the amount of loss with reasonable certainty. b. 2. D had reason to foresee the damage would occur if he failed to keep his promise. B. TEST: Lost Profits? (Drews Co., Inc. v. Ledwith-Wolfe Associates, Inc.) a. 1. Profits must have been lost as a natural consequence of the breach of the K b. 2. Foreseeability lost profits were probable result of breach of K c. 3. Lost profits established with reasonable certainty both in terms of existence and amount. C. Cases a.

7 LIMITATIONS ON COMPENSATION: FORESEEABILITY A. 2nd Rest. 351: damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when th K was made. B. UCC 2-714: says you can recover for goods already accepted from seller. C. UCC 2-715: says buyer can recover for any loss resulting from general or particular requirements and needs which the seller at the time of contracting had a reason to know a. Particular needs must be made known to seller b. General needs rarely need to be made known to charge seller w/ having the knowledge D. Allocation of Risk: in addition to telling other party of particular needs, they must take on the additional risk. (Fed Ex) E. Cases a.

Hadley v. Baxendale (shaft of mill being fixed damages dont include lost profits) i. FACTS: P (miller) sends shaft to D for fixing. Ds courier returned it late. What are damages? ii. RULE: P cannot recover for lost profits. Foreseeability requires that you explain the special circumstance to the other party and t they take on the additional risk. 1. Two options for damages a. 1. Arising naturally out of the breach. b. 2. In contemplation of parties at time K was formed Spang Industries v. Aetna Casualty and Surety Co. i. **************FACTS: p1041 & 1042 explains the rule well; READ THIS PART OF THE CASE ii. RULE:

b.

c.

8 OTHER A. Duty to mitigate a. Aggrieved party has to make sure existing damages arent increased as long as it is costless for it to mitigate. You have a duty to passively raise damages, but not to actively reduce damages.

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d Rest. 151............................................................................. Mistake..................................................................................4 d Rest. 151 - Mistake...........................................................4 d Rest. 152............................................................................. Mutual Mistake.....................................................................4 d Rest. 152 - Mutual Mistake...............................................4 d Rest. 154............................................................................. Risk Allocation.....................................................................5 d Rest. 154 - Risk Allocation...............................................5 d Rest. 251............................................................................. Assurances..........................................................................10 d Rest. 251 - Assurances....................................................10 d Rest. 263............................................................................. Commercial Impracticability................................................5 d Rest. 263 - Commercial Impracticability..........................5 d Rest. 265............................................................................. Frustration of Purpose...........................................................7 d Rest. 265 - Frustration of Purpose....................................7 d Rest. 359............................................................................. Specific Performance..........................................................11 d Rest. 359 - Specific Performance....................................11 d Rest. 360............................................................................. Specific Performance Adequacy of Damages..................11 d Rest. 360 - Specific Performance Adequacy of Damages...............................................................................11 equacy of Consideration................................................10, 11 mbiguous Terms..................................................................4, 9 ticipatory Repudiation.................................................8, 9, 10 Express..................................................................................8 Implied..................................................................................8 sic Assumption..........................................................4, 5, 6, 7 nsistency............................................................................4, 9 unteroffer...............................................................................5 mages....................................................................................... Expectation......................................................5, 7, 10, 11, 12 Expectation Cost of Completion................................10, 11 Expectation Diminution in Value..............................10, 11 Punitive...............................................................................13 Reliance.......................................................................8, 9, 12 Restitution.....................................................................12, 13 Specific Performance............................................5, 8, 10, 11 ress......................................................................................10 onomic Theory.....................................................................10 cuse.......................................................................................... Commercial Impracticability............................................6, 7 Frustration of Purpose.......................................................7, 8
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Impossibility.......................................................5, 6, 7, 8 Mistake.............................................................................. Mutual Mistake................................................................. Fraud....................................................................................... Insecurity..............................................................................8 Insolvency............................................................................8 a.Integration............................................................................ Full..................................................................................... Partial................................................................................ Material.................................................................................. Merger Clause......................................................................... Misrepresentation.................................................................... Nominal consideration............................................................ Offer....................................................................................... Output Contracts..................................................................... Plain Meaning Rule................................................................. Promise................................................................................... Promissory estoppel................................................................ Promissory Estoppel............................................................... Repudiation............................................................................. Mitigation.......................................................................... Retraction.......................................................................... Requirements Contracts...................................................4, 7 Risk Allocation........................................................4, 5, 6, 7 Statute of Frauds..................................................................... One Year Provision............................................................ Time of Performance............................................................. Time of Repudiation............................................................... UCC2-202............................................................................. Parol Evidence Rule........................................................... UCC2-202 - Parol Evidence Rule......................................... UCC2-202(comment)............................................................ Certain Inclusion Test........................................................ UCC2-202(comment) - Certain Inclusion Test..................... UCC2-302............................................................................. Unconscionability.............................................................. UCC2-302 - Unconscionability............................................ UCC2-609............................................................................. Assurances......................................................................8 UCC2-609 - Assurances.....................................................8 UCC2-610............................................................................. Mitigation........................................................................... UCC2-610 - Mitigation......................................................... UCC2-611............................................................................. Retraction........................................................................... UCC2-611 - Retraction.........................................................
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C2-615.................................................................................. Commercial Impracticability............................................6, 7 C2-615 - Commercial Impracticability..........................6, 7 C2-713.................................................................................. Repudiation Damages...........................................................9 C2-713 - Repudiation Damages.........................................9 C2-716.................................................................................. Specific Performance..........................................................11 C2-716 - Specific Performance........................................11 conscionability......................................................................3 Procedural.............................................................................3 Substantive............................................................................3 ilateral....................................................................................4 itten Promises........................................................................4

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