Outline-Final Exam [1] Parol Evidence Rule The threshold question: Did the parties intend their writing

to be final at least as to the matters expressed therein (partially integrated), or did they intend their writing to be both final and complete (fully integrated) so that no prior expression of agreement of any kind will be operative? The parol evidence rule does not come into play whenever a party claims that the written expression is not a manifestation of intention (it only comes into play whenever the parties suggest that it is or is not a complete manifestation of intent) Generally parol or extrinsic evidence will not be received to vary or add to the terms of a written agreement. The rule is designed to preserve the integrity and certainty of written documents against disputes arising from fraudulent claims or faulty recollections of the parties intent as expressed in the final writing. Traudt, 350 PER only applies to prior or contemporaneous utterances Prior oral evidence (parol evidence), which is not supported by a separate consideration, can only be introduced under three conditions: (1) the agreement must in form be a collateral one; (2) it must not contradict express or implied provisions of the written contract; (3) it must be one which the parties would not ordinarily be expected to embody in the writing. Summary: If court determines final writing to be: Not integrated extrinsic terms that are consistent and inconsistent may be admissible Partially integrated extrinsic terms that are not inconsistent may be admissible Fully integrated extrinsic terms that are consistent or inconsistent may not be admissible.

Does not apply to preliminary question of integration (i.e. whether or not the parties intended the writing to be a final and/or complete interpretation of their agreement) Does not apply to interpretation Does not apply to evidence of fraud, misrepresentation, duress, mistake, or other invalidating causes (e.g. lack of consideration) Does not apply to evidence that the writing of parties is mistaken (mistaken expression) (i.e. fails to state true intentions of parties) seeks reformation of the writing (see Davenport v. Beck miscalculated interest in deed) Does not apply to evidence that parties did not intend their writing to operate as a contract until a condition precedent1 occurred (see Smith v. Rosenthal Toyota, Inc.; see also Pym v. Campbell; Jansen v. Herman) Make sure to distinguish a mistaken expression (for which the equitable remedy of reformation is available) from a mutual mistake as to a material fact (for which reformation is not available, though the contract may be voided) Gross negligence in the plaintiff failing to read the document (and catch the scriveners error) may deny the plaintiff the right to reform the contract

UCC & Parol Evidence Rule: Even a complete writing may be explained or supplemented by evidence of course of performance and usage of trade (see Ralphs Distributin Co. v. AMF, Inc.- evidence determining whether agreement granted plaintiff exclusivity is selling Ski-Daddlers; see also Columbia Nitrogen Company v. Royster Co. - UCC allows use of UOT/COD to explain or supplement a contract) 1 If it is a question as to the formation of the contractno parol evidence rule. If it is a question as to whether an existing contract contains a condition precedent to a duty to performparol evidence rule applies.

UCC s 2-202 & 2-208(2) (p.794) creates a hierarchy of sources to look to Express terms course of performance (how parties have treated contract in question)course of dealing (how parties have treated prior contracts with party)usage of trade (how the industry treats such contracts) moving from specific to general

Parol evidence rule does not preclude evidence of subsequent modification (see Ralphs Distributing Co.; UCC 2-209) Condition Precedent [2] Subsequent Modifications UCC 2-209 Modification, Rescission and Waiver - UCC 2-209(3) controversy regarding modifications within Section 2-201 (statute of frauds) [3] Interpretation Interpreting contracts (see Mellon Bank v. Aetna Business Credit Corp.): 1. Words if unambiguous, then the words prevail as are; if ambiguous: 2. Give the terms reasonable construction that is in accord with the intentions of the parties; to ascertain the intentions of the parties: 3. The court must look to the circumstances under which the contract was made, the situation of the parties, the objects they have in mind and the nature of the subject matter Ambiguity: - Patent ambiguity (i.e. on its face) each party assumes the risk of the error (plaintiff bears burden of showing that defendant knew or should have known of his meaning) o Frigaliment Importing Co. v. B.N.S. International Sales Corp. (what is chicken?) - Latent ambiguity parties are allowed to abandon without liability (b/c there is no nonarbitrary way of determing meaning) o Raffles v. Wichelhaus (Peerless) [4] Conditions In contract law, condition is an event, other than the mere lapse of time, that is not certain to occur but must occur to activate an existing contractual duty, unless the condition is excused. R2d 224 The face or event properly called a condition occurs during the performance stage of a contract, i.e., after the contract is formed and prior to its discharge. [Contrast this with condition precedent to formation of contract] Which party has burden of proof? Person trying to enforce duty, has burden of proving that condition precedent has been met Promissory Condition - Where the same event is both a promise and a condition (e.g. buyer promises to notify seller when to ship goods, which conditions sellers obligation to ship goods) it has been labeled a promissory condition. That is same event may be a promised duty of one party and a condition to the duty of the other party. - Internatio-Rotterdam, Inc. v. River Brand Rice Mills shipment of pockets of rice conditioned upon buyer giving shipping instructions (give two weeks notice) duty to give notice was both a promise and a condition

Howard v. Federal Crop Insurance Corp. When it is doubtful whether words create a promise or a condition precedent, they will be construed as creating a promise. R2d 261 echoes this: Where it is doubtful whether words create a promise or an express condition, they are interpreted as creating a promise

Construction contracts: contracts that seem to condition payment upon the occurrence of certain events are generally considered promises that merely state a convenient time when payment will be made, and are not conditions upon which payment depend. (see Main Electric, Ltd. V. Printz Services Corp.) Conditions of satisfaction: strong abhorrence to forfeitures. - absent clear evidence to contrary, courts will view satisfaction objectively rather than subjectively - more likely to interpret subjective personal satisfaction where painting and other aesthetic considerations are concerned, as opposed to where the subject matter is normally viewed in terms of commercial value, mechanical utility, or operative fitness - obligor must act in good faith in determining his satisfaction - see Gibson v. Cranage (defendant refused to accept painting); Neumiller Farms, Inc. v. Cornett (defendant rejected potatoes in bad faith); Subjective satisfaction rule: if a contract conditions performance on satisfaction by one party (aesthetic), then that partys rejection is not a breach of contract, as long as it is made in good faith (employed when the contract involves personal aesthetics or fancy) Objective satisfaction rule: reasonable person standard (employed when contract involves commercial quality, operative fitness, or mechanical utility) Restatement 2d 228 Ask yourself: would the other party want to subject his contractual rights to the whimsy of the other? If not, then employ objective satisfaction test Express condition created by words Implied in fact condition created by conduct in absence of words Constructive condition constructed by the court in pursuit of equity and justice Dependent v. Independent Covenants Common law: promises in bilateral contract were seen as independent covenants Modern vew: promises in bilateral contract are seen as mutually dependent covenants (must show ability to perform) [see Kingston v. Preston (Lord Mansfield)] Multiple contracts? Must consider the actual bargain of the parties rather than the form of the agreement; the test is whether the parties exchanged promises contemplating an exchange of performances in which each promise and each performance was contemplated as at least part of the consideration for the other. Divisible contract? Does performance on one side have an intended equivalent agreed exchange counterpart on the other side? - Unless each performance on each side is intended agreed equivalent for the other, the contract is not divisible. - Remember: a material breach of an indivisible contract will discharge the aggrieved party, whereas a material breach of a divisible contract will not discharge the duty of the aggrieved party to other divisible parts. - R2d 183 - Thunderstik Lodge, Inc. v. Reuer - Regarding intention of parties: as long as the severability of the contract does not thwart the intention of the parties, it can be divided, despite the parties intention as to whether the contract may be divided or not.

John v. United Advertising, Inc. (if there would have been no bargain without one of the promises, it is a single contract)

Installment Contracts if a non-conformity in one or more installments substantially impairs the whole contract, there is a breach of the whole contract - UCC 2-612 Where there is no express indication as to the order of performances in a bilateral contract, the law implies a covenant and condition that the related obligations to be performed concurrently. Bell v. Elder. Concurrent conditions neither party is required to perform before the other (so if neither party performs by the specified date or within a reasonable time, both parties are discharged without liability). However, if one party offers to perform and the other fails to, that other party is in breach. - a technical tender is not necessary to place the other in default. Proof of an offer to perform is demonstrated by notice to the other party of a present readiness and willingness to perform Where you have a contract for one party to perform services which will require a length of time (e.g. building a house) and the others performance can be rendered in an instant (e.g. payment), it is uniformly held that the performance that takes time is a constructive condition precedent absent contrary manifestation of contract language or circumstances. [5] Breach & Repudiation A breach of a covenant creates a remedial right in the innocent party. If the breach is material it discharges the duty of the nonbreaching party. Breach in limine (at the outset) general rule is that even nonmaterial breaches at the outset will discharge the innocent party (no forfeiture has occurred yet) Material Breach - A material breach is a nonperformance of a duty that is so material and important as to justify the injured party in regarding the whole transaction as at an end. R2d 241 Willful breaches are more likely to be construed as material. Summary: An innocent party must show that the other partys breach was (1) material, and (2) that the time for curing the breach has passed, before being discharged of his duty Substantial performance if court finds that plaintiff had substantially performed the contract (i.e. there is no material breach), then he will be able to recover the contract price minus any diminution in value for the breach (i.e. full performance will not be viewed as a constructive condition to the defendants obligation to pay) - Cordozo suggested in Jacob & Youngs that the doctrine of substantive performance will not be available to willful defaulters. - If the parties made an event an express condition, no mitigating standard of materiality or substantiality is available. However, recall that if the express condition is not a material part of the contract and its non-occurrence would cause disproportionate forfeiture, the condition may be excused [R2d 229]. If however, the risk has been assumed the condition will be enforced regardless. The three doctrines (dependent/independent covenants, substantial performance, material breach) are simply different facets of the same prism.

[6] Perfect Tender Rule Rejection Revocation of Acceptance Buyer has absolute right to reject non conforming goods [UCC 2-601] (see Ramirez v. Autosport) There are qualifications though: - parties may agree to limit this absolute right - installment contracts can only be rejected if defect is substantial - buyer may only reject a tender of an F.O.B. shipment contract if the defect in the tender (e.g. failure to notify) is material - buyer cannot reject goods in bad faith - if buyer fails to reject goods within a reasonable time, he will be said to have accepted the goods - buyer must give seller time to cure defect (contract time or reasonable time) Rejection includes both the buyers refusal to accept or keep delivered goods and his notification to the seller that he will not keep him - may reject non-conforming goods, no matter how insubstantial - if defect is not cured, the contract will be terminated Revocation of acceptance like rejection, but occurs after the buyer has accepted the goods. It is tantamount to rescission of contract (may cancel the contract) - may only revoke acceptance of non-conforming goods upon a showing of substantial impairment Summary: Before acceptance (of tender, not contract), if goods do not conform: - UCC 2-601 [perfect tender rule]: o buyer may reject the whole; or o accept the whole; or o accept any commercial unit or units and reject the rest - R2d 241 o Rejection doesnt necessarily discharge the contract (time for cure remains; buyers duty is suspended) - UCC 2-508 o seller has right to cure, if they can do so while the time allowed for performance has not expired (see Wilson v. Scampoli (TV repairmen was denied right to repair)) After acceptance, if goods do not conform: - UCC 2-608: o May only revoke acceptance for substantial impairments to buyer [connotes subjective standard] (may have an action for breach if not substantial) o Buyer cannot argue perfect tender rule and reject unless it substantially impairs value to him Summary of rejection & revocation rules: If he fails to reject within a reasonable time, he has, in effect, accepted the goods, as he may no longer reject them. Even if the goods are accepted, however, the buyer will able to revoke his acceptance and return to the status of rejection if the nonconformity in the goods substantially impairs the value of the goods to the buyer, and the nonconformity was not discoverable upon a reasonable inspection or it was discovered and the buyer accepted because the seller gave assurances that he would cure the nonconformity and failed to do so. [7] Repudiation (Anticipatory Repudiation)

Anticipatory Repudiation allows plaintiff to bring a claim for breach whenever it became reasonably clear that the other party will not or cannot perform - What degree of certainty is required? o Older cases nothing short of absolute and unequivocal renunciation o R2d 250 sufficiently positive to be reasonably interpreted to mean that the party will not or cannot perform treats an expression not to perform except on conditions going beyond the contract as a repudiation [Chamberlin v. Puckett Construction Co.] o Statements of doubt by the obligor as to his ability or willingness to perform are insufficientthough may lead other party to demand reasonable assurance and then subsequently declare a breach A positive manifestation that the obligor cannot or will not perform need not be expressed in language. It may be inferred from conduct that is wholly inconsistent with an intention to perform. Any voluntary affirmative act which actually or apparently precludes the obligor from performing amounts to a repudiation. - conduct must be both voluntary and affirmative to give rise to repudiation; absent these elements, it may give rise to repudiation under 251 251. When A Failure To Give Assurance May Be Treated As A Repudiation (1) Where reasonable grounds arise to believe that the obligor will commit a breach by nonperformance that would of itself give the obligee a claim for damages for total breach under 243, the obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance. (2) The obligee may treat as a repudiation the obligor's failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances of the particular case. Tip: be careful not to mix up a request for modification with a repudiation of a contract. See Flatt & Sons Co., Inc. v. Schupf (buyer failed to obtain zoning ordinance and requested lower price) Good Faith Denial/Mistake Notwithstanding such good faith, if a party announces that he will not perform the contract, such a repudiation will have the effect of a material breach that discharges the duties of the other party and places the honestly mistaken party in the position of a repudiator before the time for performance has arrived. An obligee may treat obligors anticipatory repudiation as breach by: (a) commencing action (b) relying on breach (no notice required) (c) by giving notice to obligor An obligor may retract repudiation: - any time before (a) receiving notification from obligee or (b) before obligee relies on the repudiation - the retraction must be unconditional and unambiguous The obligee may set a time limit on the time for retraction, which will bar retraction subsequent to that time limit regardless of not receiving notification afterwards or the obligee not relying on the repudiation - the obligee may even change his mind after giving obligor a time limit

Unilateral contracts (exclude disability insurance here) are not subject to anticipatory repudiation rules Demanding Adequate Assurances: - R2d 251 - UCC 2-609 [AMF, Inc. v McDonalds Corp] - You cant add to contract and then argue that nonperformance of new term is violation of contract and therefore a repudiation (Scott v. Crown) - There must be reasonable grounds for insecurity [Pittsburgh-Des Moines Steel Co. v. Brookhaven Manor Water Co. (seller demanded payment put in escrow, even though this was not part of the original deal, and nothing in defendants financial status had changed)] - Unreasonable demands for adequate assurance may become statements not to perform which act as a repudiation of the contract (PDM) - UCC requires demand be in writing (Restatement prefers writing, but does not require it) - Obligee must give the obligor reasonable time to give assurances - Must make good faith demand for adequate assurances Reasonable grounds for insecurity must occur after the contract; obligee will be deemed to have assumed the risk of those insecurities he was aware of before contracting. Effects of Anticipatory Repudiation The effects of an anticipatory repudiation may be catalogued as follows: (1) it discharges the duties of the obligee; (2) it permits but does not require the obligee to bring an immediate action for total breach of contract; (3) it excuses the nonoccurrence of a condition to the duty of the obligee; [see Murray p.701] (4) if it accompanies nonperformance which would otherwise constitute only a partial breach, the combination of that nonperformance and repudiation will give rise to a total breach Important: a repudiation is not, in itself, a breach. It may or may not become a breach. The distinction can be important in a given situation, such as where a statute of limitation would bar action if it began to run at time of repudiation and not breach. Insolvency is not a repudiation because the act is not voluntary and affirmative. [8] Excused Conditions Repudiation will excuse a condition Where a party manifests an intention to perform his promise notwithstanding the nonoccurrence of a condition to his duty before the time for the condition has arrived, the condition will be excused if it was not a material part of the agreed exchange. - immaterial conditions are usually technical or procedural, such as those requiring proof of loss or notice within a certain time [the new duty does not differ significantly from the original duty] - if the condition is material part of agreed exchange, it will not be waived [an absurd example: an insurance policy will be paid up to $200,000 on condition that the insured suffers a casualty. If the insurer promises to pay $200,000 to the insured even though no casualty has been suffered, the condition is not excused (waived) because it was a material part of the agreed exchange] Waiver a voluntary or intentional relinquishment of a known right. By language or conduct, a promisor may manifest his intention to forego the benefit of (waive) a condition. This manifestation may occur (1)

prior to or at the time of contract formation, (2) after formation but prior to the time for occurrence of the condition, or (3) after formation and after the time for occurrence of the condition. Under the UCC, acceptance of goods with knowledge of a nonconformity will preclude the buyer from later rejecting the goods or revoking acceptance unless the acceptance was based on the assumption that the nonconformity would be cured. If the occurrence of a condition becomes impossible or impracticable and the condition is not a material part of the agreed exchange, the condition is excused (e.g. payments in a building contract conditioned upon an architects acceptance, and then the architect dies) Where the waiver [excusing a 60 day notice of loss] occurs prior to the time for the occurrence [when loss occurs] of the condition, it may be possible to reinstate the condition. Rohde v. Massachusetts Mutual Life Insurance Co. if the defendants own conduct prevents the occurrence of a condition precedent to plaintiffs receiving his benefit of the bargain, then the condition will be excused (life insurance company failed to determine whether plaintiffs husband was insurable before he died) Sullivan v. Bullock implied in every contract is a duty to cooperate (i.e. to allow the other party to perform) (plaintiff failed to allow defendant into house to finish remodeling her kitchen) Since a material breach is subject to cure, a material interference with the right to cure operates to excuse the condition to the promisors duty. Anytime we have a waiver, we probably will have a consideration issue (because one party is giving up a right) [9] Risk Allocation: Impossibility, Impracticability and Frustration of Purpose The modern doctrine of impossibility of performance emerged from the case of Taylor v. Caldwell in 1863. Doctrine of Impossibility: - Taylor v. Caldwell (from the nature of the contract, it appears that the parties must from the beginning have known that it could not be fulfilled unless when the time for the fulfillment of the contract arrived some particular specified thing continued to existthe contract is not to be construed as a positive contract, but as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor.) Doctrine of Impracticability - UCC 2-615 Impracticability (no longer impossibility) o UCC takes a much more direct and liberal view to excuse for impossibility o performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made o Elements: Event must have occurred making performance excessively burdensome (impracticable); The nonoccurrence of that event must have been a basic assumption on which the contract was formed (i.e. it must not have been foreseeable or expected); The event must not have been caused by the promisor; and The greater risk caused by the event must not have been allocated to promisor under the contract

How to Allocate Risk? There are no real guidelines for determining how to allocate risk absent express allocation in contract, though we may look to reasonable man standard; trade usage; prior dealings, foreseeability (Opera Company case). There is a presumption that the party making the promise (promisor) assumes the risk of contingencies rendering performance of promise impossible, absent an explicit or implicit shift of that allocation. General rule of risk allocation: if contingency was foreseeable as a real possibility which could affect performance, then the promisor implicitly accepts risk unless the contract provides otherwise. Restatement 263 non-occurrence of which was a basic assumption on which the contract was made Opera Company of Boston, Inc. v. Wolf Trap Foundation For The Performing Arts (Foreseeabilityis at best one fact to be considered in resolving [1] how likely the occurrence of the event in question was and, [2] whether its occurrence, based on past experience, was of such reasonable likelihood that the obligor should not merely foresee the risk but, because of the degree of its likelihood, the obligor should have guarded against it or provided for non-liability against the risk.) NY Paper v. Rockefeller (1914) case involving sell of pulp wood, to be cut from a particular piece of land; forest fire wiped out a lot of the trees, but enough remained, though at a higher altitude and thus higher cost. Seller held liable to perform, because objective possibility remained to perform, despite the increased financial burden Transatlantic Financing Corp. v. United States - As a general principle, a claim for increased financial burden to perform will not render a performance commercially impracticable (this would be too broad); though this may be a question of degree (e.g. excessive and unreasonable cost) United States v. Wegematic Corporation - Even if performance is rendered impossible or unreasonably expensive, if defendant expressly assumed the risk of nonperformance, then the court will hold defendant liable for nonperformance (ALWAC computer systems to Federal Reserve Board) Increased Financial Burden? Any promisor must be said to have anticipated that the contract might prove to be unprofitable, even extremely unprofitable. He should, therefore, be viewed as having assumed that risk. Occasionally, however, extreme unprofitableness results from factors abnormal and unexpected, and under circumstances that make it unreasonable to suppose that the promisor would have been expected to assume such a risk had the possibility been contemplated. Missouri Public Service Co. v. Peabody Coal Co. - Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance.But a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in cost or altogether prevents the seller from securing supplies necessary to his performance, is within the contemplation of this section. Summary: the doctrine of impracticability will release a promisor of his duty for increased costs that are excessively burdensome and accompanied by an unforeseen contingency. Mutual Mistake Impracticability Similarities:

all three discharge an obligor from his duty to perform a contract where a failure of a basic assumption of the parties produces a grave failure of the equivalence of value of the exchange to the parties

Differences: - Mutual mistake requires only that a party show a material effect on the agreed exchange - Impracticability requires a supervening risk that goes well beyond materiality and, even then, will constitute an excuse only if it was unforeseeable and not a risk that should have been assumed by the party seeking to be excused. - Mutual mistake must exist at beginning of contract formation Application of the Doctrine of Commercial Impracticability: 1. occurrence of contingency 2. the nonoccurrence of which was a basic assumption upon which contract was made; 3. by which occurrence of further performance has become commercially impracticable; 4. which requires a supervening risk that goes well beyond materiality which must be unforeseeable, 5. and not a risk that should have been assumed by the party seeking to be excused. Force Majeure Clause - contractual provision allocating the risk if performance becomes impossible or impracticable, esp. as a result of an event or effect that the parties could not have anticipated or controlled (may also absolve parties of liability) - see Northern Indiana Public Service Co. v. Carbon County Coal Co. (A fixed-price contract is an explicit assignment of the risk of market price fluctuations (risk of increased costs on the promisor; risk of decreased costs on the promisee)) Distinguish impracticability from frustration of purpose: o Impracticability exists when there is an impediment to performance o Frustration exists when change in circumstances makes one partys performance virtually worthless to the other; performance remains possible Frustration of Purpose The rule deals with the problem that arises when a change in circumstances makes on partys performance virtually worthless to the other, frustrating the purpose in making the contract. Elements of Frustration of Purpose: - principal purpose must be substantially frustrated - frustration must not have been fault of party claiming frustration - the purpose, the non-occurrence of which, was a basic assumption of contract - must not have assumed the risk otherwise Krell v. Henry (Coronation case) When performance is excused by impracticability or frustration of purpose, yet one party is unjustly enriched, the action is one for restitution of benefits occurred. The American rule is that the party that has been frustrated is entitled to get all of his money back. Frustration excuses entire performance and restores parties to state before contract Even if original purpose is frustrated, if the land (for example) can be used for other profitable (serviceable) purposes, then there is no frustration of purpose. See Lloyd v. Murphy (contract to sell new cars; interrupted by bombing of Pearl Harbor; court held that the land could be used for other purposes (i.e. other serviceable uses)); see also Mel Frank Tool & Supply, Inc. v. Di-Chem Company (The tenant is

not relieved from the obligation to pay rent if there is a serviceable use still available consistent with the use provision in the lease) Where a partys performance has been excused through impracticability or frustration of purpose, he is not liable for breach of contract. Yet, he has not fulfilled the constructive condition to the other partys performance. Thus, it is treated as a breach of contract (but the promisor is not liable) [10] Remedies for Breach of Contract Three interests protected by contract law: 1. Restitution interest a. Object: to prevent the defaulting promisor from gaining at the expense of the promisee (unjust enrichment) b. May only recover for benefit transferred not cost incurred (even though cost may be greater than benefit transferred) 2. Reliance interest (plaintiff has changed position in reliance on promisors promise) a. Object: to put plaintiff in as good a position as he was in before the promise was made b. Plaintiff has duty (though not really a duty) to mitigate reliance damages; and reliance must be justified 3. Expectation interest (give the promisee the value of the expectancy which the promise created) a. Object: to put the plaintiff in as good a position as he would have occupied had the defendant performed his promise b. May also want to seek specific performance (must convince court that it could not be compensated properly by money damages) No punitive damages in contracts (Allapattah Services, Inc. v. Exxon Corp.)

Limitations of damage recovery: - Foreseeability o Hadley v. Baxendale established a foreseeability limitation on damage liability (The court recognized general damages as foreseeable to a reasonable person while special damages are those that a party would not have reason to foresee as a natural consequence of the breach when the contract was made) o imputed foreseeability (that which any reasonable person should have foreseen) vs. actual foreseeability (what the reasonable with particular knowledge should have foreseen) - Certainty o Requires that the proof of contract damages be certain both in terms of the fact of loss and the amount of loss. o New business rule can a new business seek projected lost profits as damages? Modern trend is to view the distinction between established businesses and new ones as a distinction that goes to the weight of the evidence and not a rule that automatically precludes recovery of profits by a new business (The Drews Co. v. Ledwith-Wolfe Associates, Inc.) Standard for lost profits: (1) profits must have been prevented or lost as a natural consequence of the breach of contract; (2) a breaching party is liable for those damages, including lost profits, which may reasonably be supposed to

have been within the contemplation of the parties at the time the contract was made as a probable result of the breach of it o Cannot recover speculative damages. See Friedlander v. National Broadcasting Company (quiz show contestant could not recover for an award he claimed he would have won had the other contestant not cheated) o Kenford Company, Inc. v. County of Erie (lost profits from dome contract rejected - (1) payment of lost profits not within the contemplation of the parties; (2) the ultimate conclusions are mere projections) Emotional Distress o Deli v. University of Minnesota (In the absence of specific statutory provisions, extracontractual damages, such as emotional distress, are not recoverable for breach of contract except in exceptional cases where the breach is accompanied by an independent tort [or is clearly foreseeable (e.g. funeral contract)].) Avoidable Consequences (Mitigation) o Soules v. Independent School District No. 518 (It is the well-settled law in this state and elsewhere that in employment contract cases an employer is entitled to a reduction in the amount of the recoverable wage loss of a wrongfully discharged employee if the evidence establishes that the employee made no reasonable effort to seek or accept similar employment. o Rockingham County v. Luten Bridge Co. (the court held that plaintiff may not recover damages which could have been avoided by ceasing performance upon notice of the repudiation) o Parker v. Twentieth Century-Fox Film Corporation (Shirley McClaine case - The general rule is that the measure by a wrongfully discharged employee is the amount of salary agreed upon for the period of service, less the amount which the employer affirmatively proves the employee has earned or with reasonable effort might have earned from other employment. However, before projected earnings from other employment opportunities not sought or accepted by the discharged employee can be applied in mitigation, the employer must show that the other employment was comparable, or substantially similar, to that of which the employee has been deprived)

Liquidated Damages A liquidate damage clause must not be a penalty clause. Common law test: - intent to agree upon damages; - the anticipated damages are uncertain; - the amount stipulated was a reasonable forecast of losses [the test is applied at contract formation if the forecast was reasonable at the time of formation, actual damages should be irrelevant] UCC & R2d (Modified test) - similar to common law, but the amount in the clause must be reasonable in the light of the anticipated or actual harm caused by the breach. Lost-volume seller - Rodriguez v. Learjet, Inc. - Lost volume sellers are entitled to the profits on both contracts because, presumably, they could have performed both contracts and received both profits absent strong evidence to the contrary. - To qualify as a lost volume seller and recover lost profits, the seller must establish three factors: (1) it must demonstrate that it had the capacity to make the additional sale; (2) the additional sale would have been profitable; (3) if the original buyer had not breached, the additional sale would have been made.

R.E. Davis Chemical Corporation v. Diasonics, Inc. seller may recover under four theories in the UCC: - 2-706 contract price less resale price - 2-708(1) contract price less market price - 2-708(2) profit - 2-709 price Expectation Recovery Cost of Completion v. Diminution in Value Cost of completion is usual measure of expectation damages, unless the cost of completion far exceeds the increased value of performance, then diminution in value is measure of damages (seeks to prevent economic waste and avoid a windfall to plaintiff) Examples Construction Contract Contract: $100,000 Builders Cost: $90,000 Builders Profit: $10,000 Owner Breaches: Two formulas for calculating damages for builder: (1) cost already expended + anticipated profit; (2) contract price minus cost of completion [if builder has expended $60 already:] Cost ($60) + Profit ($10) = $70; Contract Price ($100) Cost of Completion ($30) = $70 [there may be a difference in formulation if the contract becomes a losing one and the plaintiff only seeks costs expended and not profits (which would be negative)] - if plaintiff has already expended more than the contract price, courts probably will not grant damages higher than contract price agreed to between parties Builder Breaches: [contract price of $100,000; part payments of $60,000; contractor doesnt finish job; cost of completion is $50,000 (i.e. the best price owner can get someone else to finish job for)] Partial payment + cost of completion contract price = damages to buyer Diminution in Value Economic waste may lead court to award damages based on diminution in value instead of cost of completion (see Jacob & Youngs). Courts may look to the use purpose of the land (e.g. to resell or use as farm) in determining whether to apply diminution in value rule. Reliance Damages Chicago Coliseum Club v. Dempsey: - preparatory damages (those incurred prior to formation of contract) are not recoverable - cannot recover for expenses incurred in attempting to resolve breached agreement (once there is a breach, the plaintiff proceeds at his own risk) - reasonable expenses incurred in furtherance of a contract are recoverable (would not have been incurred but for the contract)

CBS, Inc. v. Merrick (if a contract is illegal or void from its inception, the only damages recoverable are restitution damages. When a breach occurs after the execution of the contract, the injured party in a contract is entitled to both restitution and reliance damages) Can a plaintiff recover restitution damages (assuming defendant breached contract) if he would have been in the hole should he have continued under the contract? The courts allow the plaintiff to recover under quantum meruit the fair market value of the services rendered. See United States v. Algernon Blair, Inc. Note: you cannot recover under both quantum meruit (benefit conferred) and the contract see Transatlantic Financing Corp. Defaulting plaintiff entitled to pro rata share of contract price (not benefit conferred) minus whatever damages defendant could prove as resulting from the breach. See Britton v. Turner (employee, who was to be paid at end of year, walked after 9 months; employer paid him nothing; court said employee could recover pro rata share of contract price minus damages from breach) - Telespectrum Worldwide, Inc. v. Grace Marie Enterprises, Inc. (a breaching plaintiff is entitled to restitution for benefits conferred in excess of damages caused by plaintiffs breach) Quasi-Contract Recovery Anderson v. Schwegel (argument over the meaning of restore) - measure of recovery under quasi-contract is not the amount of enrichment, but the amount of unjust enrichment - Rule: Mistaken improvements = restitution includes enhanced property value - Rule: When improvements are assented to = damages include unjust enrichment - This case is treated as a quasi-contract case and not a quantum meruit case; its quasi because the services were requested; if they werent requested, then the case would be quantum meruit Quasi-contract unjust enrichment Quantum Meruit reasonable value of services rendered [Professor Cook really doesnt make a distinction between the two recovery of value conferred] Unjust enrichment = the unjust retention of a benefit to the loss of another, or the retention of money or property of another, against the fundamental principles of justice or equity and good conscience. Courts grant restitution of benefits conferred under voidable contracts (such as not satisfying Statute of Frauds) as well as contracts discharged because of the non-occurrence of a condition, impracticability, or frustration of purpose. Estate of Frances Cleveland v. Gorden (rebuttable presumption that services rendered by family members are gratuitous) - A person who voluntarily and officiously pays anothers debts is not entitled to reimbursement.The general rule is not applicable when the payment is made under the compulsion of a moral obligation, in ignorance of the real state of facts, or under an erroneous impression of ones legal duty. Specific Performance Specific performance will be granted where damages cannot be computed. Specific performance will also be granted where goods are unique (e.g. land). May even enforce specific performance in service contracts if the service is unique.

Walgreen Company v. Sara Creek Property Company - The choice between remedies requires a balancing of the costs and benefits of the alternatives. The task of striking the balance is for the trial judge, subject to deferential appellate review - Benefits of injunctive relief: o Shifts the burden of determining the cost of the defendants conduct from the court to the parties. And if the benefits to the defendant (Sarah Creek) are greater than the costs incurred by Walgreen (plaintiff) by Sarah Creek contracting with Phar-Mor, then Sarah Creek would pay Walgreen for the right to breach its agreement in the market (both will be better off). Posner argues that private negotiation is less costly than forensic fact determination by the courts. o Prices and costs are more accurately determined by market forces than by government - Costs of injunctive relief: o Court supervision costs o Costs on third persons o High transaction costs due to bilateral monopolies (the parties to the contract are the only parties to an exchange of rights) (lack of alternatives jacks up costs) - Benefits of damages remedy: o Avoids the costs of continuing supervision o Avoids costs of third-party effects o Avoids costs of bilateral monopoly - Costs of damages remedy: o Diminished accuracy in the determination of value o Increased expenditures on preparing and presenting evidence of damages, and the time of the court in evaluating the evidence Bloch v. Hillel Torah North Suburban Day School - Where the contract is one which establishes a personal relationship calling for the rendition of personal services, the proper remedy for a breach is generally not specific performance but rather an action for money damages. - see also American Broadcasting Companies, Inc. v. Wolf In addition to direct or general damages, the UCC also permits buyers to recover consequential damages and it also permits buyers or sellers to recover incidental damages. - Consequential Damages any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know. - Incidental Damages (result of partys breach) include a variety of expenses to care for goods which the buyer has rejected, expenses connected with reasonable efforts to cover, or other reasonable expenses caused by the sellers breach. [11] Third Party Beneficiaries In exchange for a consideration promised to B, A agrees to perform a promise that will benefit C. If A does not perform the promise for Cs benefit, may C sue A? Lawrence v. Fox (that where one person makes a promise to another for the benefit of a third person, that third person may maintain an action upon it) Test of Intention to Benefit

As courts developed rules for third-party beneficiary cases, they began distinguishing between two common fact patterns: those where promisees sought to indirectly discharge an obligation and those where promisees wanted to make a gift. - First Restatement: donee vs. creditor - Second Restatement: intended vs. incidental only the intended beneficiaries may enforce a promise against the promisor Hickman v. Safeco Insurance Company - Generally, a stranger to a contract does not have rights under the contract, but an exception exists if a third party is an intended beneficiary. Restatement 302 states that a third party may recover as an intended beneficiary if (1) recognition of third-party beneficiary rights is appropriate and (2) either the duty owed test or the intent to benefit test is met. - Intent to benefit test: circumstances must indicate that the promisee (here Guaranty) intends to give the beneficiary (Hickman) the benefit of the promise. Raritan River Steel Co. v. Cherry, Bekaert & Holland - The Court, in determining the parties intentions, should consider circumstances surrounding the transaction as well as the actual language of the contract. We further note that when a third party seeks enforcement of a contract made between other parties, the contract must be construed strictly against the party seeking enforcement. Bain v. Gillispie (claim against referee for throwing the game, denying home team chance to win championship game, and consequently hurting his business in preventing him from selling winning Tshirts court found Bain an incidental beneficiary at best) Can a plaintiff sue as a third-party beneficiary on a contract between defendant and government? Yes, if they are among the class of people the contract was meant to protect. [Zigas v. Superior Court of the City and County of San Francisco] Owners and Subcontractors Payment and Performance Bonds Third-parties arguments in construction contracts: [O contracts with GC; GC contracts with SC] (1) GC fails to pay SC, so SC goes after O on the basis of third-party beneficiary No recovery, SC are not TPB under these circumstances (SC is incidental beneficiary at best) (2) Services arent performed properly, and O cannot recover from GC, therefore O goes after SC, claiming to be a TPB No recovery, O is not an intended TPB It is now generally agreed that performance bonds are designed to benefit the owner (i.e., the performance bond insures the owner or party contracting for services of contractor to guarantee compensation for any monetary loss up to the amount of the performance bond). Courts have struggled with the question of whether payment bonds are designed simply to indemnify (save harmless) the owner from liability, or whether labor and materialmen are intended to be protected third part beneficiaries. [Murray suggests that payment bonds provide third-party beneficiary status to labor & material suppliers. In Board of Education v. Hartford Accident & Indemnity Co., however, the court found that the payment bond was not issued for the benefit of the third-party plaintiff] Mortgage Assumption Problem: $100,000 home $40,000 mortgage O B1 (assumes mortgage) [Bank/mortgagee is TPB to contract between O & B1]

Original owners remain liable as sureties for the debt, absent a novation to the contrary; the person who pays off obligation gets property (according to Cooke) Vesting of Third Party Rights An important corollary to the third-party beneficiary rule is that the promisor may assert against the beneficiary any defense that the promisor could assert against the promisee if the promisee were suing on the contract Olson v. Etheridge Vesting doctrine when does a third-partys rights under a contract become irrevocable? Restatement 2s precludes any modification or rescission of the contract without the third partys consent where (1) the parties have so contracted, or (2) where the third party materially changes his position on the promise, or (3) brings suit thereon, or (4) otherwise manifests assent to it. If the promisor and promisee attempt to modify or rescind the contract after the beneficiarys rights have vested, the beneficiary is not subject to any defenses the promisor may assert against the promisee which affect the rights of the third party. Important: neither knowledge nor assent is necessary to give the beneficiary a right under the contract, though his assent is required to vest his interest. Restatement 311 (is the majority rule): absent language in a contract making the rights of third-party beneficiary irrevocable, the parties to the contract retain power to discharge or modify the duty by subsequent agreement, without the third-party beneficiarys assent, at anytime before third-party beneficiary changes position in justifiable reliance. Therefore, the rights of the third-party are considered vested whenever the third-party justifiably relies on their interest. Defenses Available Against Beneficiary It is important to recognize that the rights of a third party beneficiary can rise no higher than the rights of the promisee. The general rule is that all of the defense that the promisor would have against the promisee on the original contract are available to the promisor in an action by the third party. The rights of a protected beneficiary are direct rather than derivative. [12] Assignment of Rights & Delegation of Duties Assignment of rights - extinguishes a right in assignor and recreates it in assignee - assignor has no right against obligor, only the assignee does - doesnt create a third party beneficiary contract Delegation of duties - does not extinguish duty in assignor; assignor remains liable as a surety for the performance of the duty - third party beneficiary contract is created (obligee can sue assignee and assignor if needs be) Assignable rights are usually freely assignable, but there are limitations: - not assignable if it creates a material change in the duty of the obligor, or materially increases the burden of risk imposed on him by his contract, or materially impairs his chance of obtaining performance

probably not assignable where there is a personal relationship or special confidence factor partial assignments requires the consent of the obligor unless all parties entitled to the entire promised performance are joined in the proceeding assignments that are contrary to public policy will not be allowed

What about assignment of future rights not currently guaranteed under a present contract? Courts will treat it as equitable assignment, i.e. a promise to assign when the time comes (courts will specifically enforce this promise) Future rights properly refer only to those rights which arise form an existing continuing contract. Delegations of duties are usually freely delegable, but there are limitations: - personal skill and services - expressly prohibited in contract