Raechelle C. Yballe
Contracts 2
Prof. Cohen
Spring 2001
1) K satisfies all the traditional elements of a barg-for K but for public policy reasons we disfavor this transaction
2) GENERAL RULE: K must have a lawful object at the time of making
3) Rest. 600 – if it appears to the court that there is some illegality à ct. may bring up the issue of illegality sua sponte
4) Remedy – no restitution damages à leave the parties as they are (MAJ)
5) Central illegality
a) K is illegal OR
b) performance is illegal OR
c) objective of K is illegal
d) REMEDY – not enforced and restitution is RARE
6) Tangential illegality
a) K is legal OR
b) perf is legal OR
c) objective is legal
d) but something about the transaction makes it illegal
e) REMEDY – cts. may allow enforcement and restitution
1) all or nothing approach - no enforcement if covenant is too broad or unconscionable
2) blue pencil approach
a) can terms be deleted? will deletion make covenant enforceable?
b) must be able to divide K
3) reasonable test – reformation allowed
a) covenant must have been drafted in good faith
b) Factors
i) reasonable as to time and space
ii) whether the employee represents the sole contact with the customer
iii) whether employee possessed confidential information or trade secrets
iv) whether the covenant seeks to eliminate competition that is unfair to the employer
v) does covenant seek to eliminate ordinary competition
vi) does covenant seek to stifle employee’s inherent skills and experience
vii) benefit to employer disproportionate to detriment to employee
viii) was talent employer seeks to stifle developed during employment
1) Scenario
a) parties have a written agmt
b) can either party introduce extrinsic evidence of another agreement?
i) some prior oral/written agmt OR
ii) a contemporaneous oral agreement
c) 2d K may nullify prior agreements
d) keep in mind: usually disfavor contemporaneous oral agreements because they are so vulnerable to fraud
2) KEEP IN MIND: PER is a threshold test and not a final ruling
3) Definitions
a) extrinsic evidence = evidence outside of the written document
b) integration = how COMPLETE and FINAL is the K
c) final
i) last word on the subject
ii) was everything included?
iii) did party have something else in mind?
d) contradict = contrary to K’s provisions
e) consistent = additional harmonious terms
f) supplemental = additional provisions
4) AND flow chart
a) Partial Integration?
i) if no, allow evidence à [END]
ii) if yes, go to #2
b) Contradict?
i) if no, allow evidence à [END]
ii) if yes, go to #3
c) Total Integration?
i) if no, allow evidence à [END]
ii) if yes, exclude evidence
5) Conceptualizing the 3-prong PER test
a) Partially integrated
i) is this a partial integration?
ii) is the document FINAL but not necessarily complete
iii) was there a K?
b) Consistency – are the additional terms of the parole evidence consistent with the language of the K OR are the terms inconsistent?
i) Hunt test
(1) specific term in the wrtg
(2) must contradict the parole evidence
(3) BROAD TEST à allows most things in unless the contradiction is explicit
ii) Reasonably harmonious test
c) Total integration – is the document FINAL and COMPLETE?)
i) Restatement – would the item have been naturally excluded?
(1) if yes à ADMIT EVIDENCE
(2) if no à DON’T ADMIT EVIDENCE
ii) UCC – would the item have been naturally included?
(1) if yes à DON’T ADMIT EVIDENCE
(2) if no à ALLOW EVIDENCE
6) EXAM TIP
a) consistency argument = always argue Hunt AND “reasonable harmony” test!!
b) in general, if PER argument exists, a competing interpretation exists as well
c) analyze under Hunt test first à if it doesn’t pass Hunt this baby isn’t passing the 2d test!
1. GENERAL RULE: parole evidence may be provisionally considered to determine whether the writing is reasonable susceptible to the proffered interpretation
2. Two standards
a. reasonably susceptible
b. plain meaning
3. Hierarchy of persuasion (2-208(1))
a. course of performance
1) most persuasive
2) same parties under the same contract
3) we look at the parties’ conduct under the K
b. course of dealing – how did the parties deal with each other under prior, similar Ks?
c. trade usage – what’s the custom of the trade?
4. Rest 201- Where parties attach different meanings to a promise à interpret according to meaning attached by one of them IF
a. party did not know of any different meaning attached by the other AND
b. the other knew of the meaning attached by the first party OR
c. that party had reason to know of a different meaning attached by the other
5. Classic Argument: PER vs. Interpretation – the triggers
a. if K is silent à there can be no interpretation issue (what’s there to interpret?!?!)
b. if K has some language à now we can argue about whether this is interpretation or PER
c. what is the party offering the evidence trying to do?
1) if he wants to expand the scope – PER
2) if he wants to clarify – interpretation
6. Sources of interpretations (the “chicken” case)
a. government regulation
b. negotiations before K
c. course of performance
d. trade usage
e. price
f. dictionary (duh!)
g. common sense
7. contra preferendum – doubts as to the meaning will be construed against the drafter
1. contract between two parties of unequal bargaining power
2. expressed in language of a standardized form
3. written by the more powerful bargainer
4. to meet the more powerful bargainer’s needs (one-sided)
5. offered to the weaker party on a take it or leave it basis
6. obligations from such a contract is not based on the consent of the parties but is based on their relationship
7. usually arises in the insurance policy context
8. Shaping the expectations of the insured
a. bold print + headings
b. separate signature lines
c. explain the provisions
1) Condition = some act or event that must occur before a duty to perform (trigger)
2) Condition vs. Promise
a) look at the language of the K
(1) condition = provided that; if X, then Y; subject to; on condition that
(2) promise = I will, I promise
b) parties’ intent (look at the context!)
c) if a promise fails
i) offensive – sue for breach of K
ii) defensive – excuse of counter-performance
d) if a condition fails à excuse of performance but no liability
3) if unable to determine if language is a promise or a condition
a) strong favor of construing language as a promise
b) conditions bite hard
c) conditions can lead to forfeiture à DISFAVORED
4) ANALYSIS
a) has A substantially performed?
b) if yes, counter-performance is triggered
c) if no, A breached and B may be excused from perf.
1. Judicial Excuse
2. Waiver Doctrine
a. waiver = voluntary relinquishment of a known right
b. implies an election
1) to dispense with something of value OR
2) to forego some advantage for which the party had the right to demand or insist upon
c. if a condition is waived à it is no longer part of the K
d. waiver can also be accomplished through estoppel
3. Rest. 229 – to avoid an unfair result
a. a court may excuse the non-occurrence of the condition
b. if a disproportionate result will occur
c. UNLESS the occurrence was a material part of the agreed exchange
4. party who defaults has the burden of proof when relief from enforcement is sought
5. When should condition be excused?
a. adhesion K
b. enforcement of the provision à forfeiture
c. protecting the party can be achieved without a forfeiture
d. PE shows PR was NOT prejudiced by the default
1) LEGAL FICTION – we’re just pretending there’s a condition precedent here
2) Analytical pattern
a) who needs to perform first?
b) how much performance is needed?
c) if there is a material breach, can the breaching party get restitution for the benefit conferred?
3) Dependent Promises – strong presumption
a) performance of X depends on performance of Y
b) in order for Y to have remedy for breach. Y must substantially perform
4) Independent Promises (does not apply today)
a) performance of X does not depend on performance of Y
b) Y has a remedy against X even if Y has not performed
5) Factors
a) language of the K shows promises are dependent
b) timing of the K’al performance
c) intention of the parties
d) strong presumption that promises are dependent
6) What if both parties breach?
a) the party who breaches first is liable OR
b) the party who is supposed to perform first and doesn’t
c) WHY? promises presumed to be dependent
7) Constructive condition of exchange = defensive remedy for breach (excuses counter-performance)
8) one party fails to perfectly perform, when is there no defensive remedy?
a) when there is substantial performance
b) if the covenants are independent
9) Rest 234
a) if exchange of promises can be rendered simultaneously, they are due simultaneously unless the circumstances indicate the contrary (concurrent performance)
b) where perf by one party requires a period of time à perf is due before the other’s performance unless the language or circumstances indicate the contrary
10) Modern K law prefers CONCURRENT performance
1) Substantial Performance Rule
a) where the omission is trivial and
b) omission was neither fraudulent nor willful
c) omission will not always be a breach of a condition to be followed by a forfeiture
d) measure of damages = K price – cost to complete – payments made
e) builder breaches à OR value of perf OR cost of perf
f) homeowner breaches à costs of the work done + profits
2) substantial performance rule helps avoid forfeiture
3) Factors (FACT ANALYSIS!)
a) extent of performance
b) was it done in good faith? OR was it an intentional deviation?
c) extent of hardship to the breaching party if strict adherence required
d) PE’s desire to be gratified
e) extent of the benefit given to the other party (value of promised performance vs. value of the tendered performance)
f) how easy is it to remedy the deviation
4) UCC 2-601 à PERFECT TENDER RULE
1) divisible Ks
a) apportioned consideration
b) e.g. $1000 for painting the house, $2000 for painting the barn
2) entire Ks
a) payment scheme is merely a timing issue
b) payment scheme may simply be a way of determining price (e.g. harvesting/threshing hypo)
c) down payments generally should trigger an entire K analysis
3) look to
a) intent of the parties as seen in
b) K’s language
c) the surrounding circumstances
4) if neither party performs, the party who is to perform first is charged with the breach!
5) Analytical example
a) order of performance is: D grades, p pays, D makes street improvements, p pays
b) if a entire K ($5K down payment, $8K after grading completed, $7K after street improvements completed)
i) p’s refusal to pay $10K after paving was done is a breach of the ENTIRE K
ii) p’s breach gives rise to a constructive condition of exchange
iii) D’s remedies
(1) defensive – can ask to be excused from street improvement K
(2) offensive – can sue for grading K price
c) if an divisible K (p will pay D $10K for paving and $10K for improvements)
i) p’s refusal to pay is a breach of the paving
ii) p’s breach does not excuse D from the improvements K – still has to perform
6) Unjust Enrichment and a Breaching Party
a) can a breaching party still recover restitution interests?
i) Rest § 374 – a breaching party may
(1) recover for part performance
(2) in excess of actual damages sustained by nonbreaching party
(3) but breaching party has the BoP that a net benefit was conferred to the nonbreaching party
ii) Maxton rule (LIMIT TO REAL ESTATE) – upon breach, the seller may keep the down payment (usually ~10% à if more, this might be seen a too great a forfeiture)
iii) Britton Rule (LIMIT TO LABOR/EMPLOYMENT)
(1) if employee-PR begins performance
(2) PE is accepting part performance from day to day
(3) and receives a benefit from the labor performed
(4) employee may recover part performance
(5) in excess of actual damage sustained by employer
1) In general
a) was there unexpected event contrary to basic assumption of parties?
b) Did event make performance impracticable?
i) a thing is impracticable when it can only be done at an excessive or unreasonable cost
c) Upon whom should risk of event be placed?
i) party at fault?
ii) did K allocated risk?
2) Impracticability triggers
a) destruction of subject matter or means of performance
b) death/illness of person essential to performance
c) supervening illegality
i) K was for services
ii) now, it’s illegal b/c law changed
iii) perf is now impossible
iv) no ct. will make you perform an illegal thing
d) danger to life, health, or property
3) Existing Impracticability
a) impracticability exists at the time of K
b) simply because it becomes difficult for the PR to perform, PR is not excused from perf
c) perf must be IMPOSSIBLE or can only be done at an extremely unreasonable cost
d) Rest 266 (1) – existing impracticability
i) at time of K’g
ii) perf is impracticable
iii) because of a fact
(1) of which the PR has no reason to know
(2) the non-existence of fact is a basic assumption
(3) on which K is made
iv) there is no duty to render performance
v) unless the K or the circumstances indicate risk was allocated
e) UCC 6-15
i) where nonoccurrence of an event/contingency
ii) is a basic assumption on which the K was made
iii) when event/contingency occurs
iv) that makes perf impracticable
v) seller is excused (CHECK ON THIS)
vi) UNLESS seller assumed the risk
f) Mistake and Impracticability – theories of risk allocation
i) impracticability = can’t perform
ii) mistake = might not be able to perform
iii) if you can win on one, you might be able to win on both theories
4) Supervening Impracticability – impracticability materializes after K’g
a) Rest 261 – discharge by supervening impracticability
i) after K’g
ii) performance is made impracticable
iii) by the occurrence of an event
(1) the non-occurrence of which was a basic assumption
(2) on which the K was made
iv) duty to perform is discharged
v) unless the K allocated the risk OR
vi) unless the performance was made impracticable as a result of the party’s fault
b) Rest 262 – death or incapacity à could this person have delegated his duties? if yes, no impracticability
i) existence of a particular person
ii) necessary for the performance of a duty
iii) death or incapacity makes perf impracticable
iv) the non-occurrence of death/incapacity was a basic assumption on which the K was made
c) Rest 263 – destruction, deterioration, etc.
i) existence of a specific thing
ii) necessary for the performance of a duty
iii) failure to come into existence/destruction/deterioration
iv) makes perf impracticable
v) is an event the non-occurrence of which
vi) was a basic assumption on which the K was made
d) Rest 264 – Prevention by Gov’t Regulation or Order == impracticability
e) A party
i) may not create the event causing the impracticability of performance
ii) must make all reasonable efforts to avoid the impossibility
iii) once the event occurs, it must use practicable means of fulfilling the K
f) ANALYSIS
i) did the event make perf impracticable?
ii) nonoccurrence of the event was a basic assumption on which K was made?
iii) impracticability resulted without fault of party seeking to be excused
iv) party did not bear the risk (look at language or circumstances)
5) Basic Assumption Test
6) Foreseeability Test
a) event upon which the party relies to excuse his performance cannot be an event that the parties foresaw at the time of K’g
b) even if foreseeable à nonoccurrence may still be a basic assumption
7) UCC 2-615 – exclusive source
a) if parties specify a particular source of supply in K
i) source fails
ii) both parties assumed source was exclusive
iii) seller employed all due measures to assure the source would perform
iv) seller turned over to buyer any rights against the supplier corresponding to seller’s claim of excuse
v) seller will be excused
Frustration of Purpose
1) In general
a) where one party’s objective is the basis of K
b) perf is constructively conditioned on attainment of the objective
c) frustration must be SUBSTANTIAL
d) it is not enough that transaction has become less profitable
e) party who asserts the defense
i) cannot be at fault AND
ii) did not have the risk assigned to the them in the K or impliedly
2) Rest. 265 – discharge by supervening frustration
a) if after K is made
b) principal purpose is frustrated
c) as a result of the nonexistence of a frustrating event
d) the existence of which was a basic assumption
e) and the party seeking discharge is without fault
f) the remaining duties are discharged
g) UNLESS the language of the K allocates the risk to that party
3) Rest 311
a) frustrating event is not foreseeable
b) may not be basic assumption
c) if frustrating even is foreseeable à parties may have not considered the occurrence an important risk
4) Frustration of purpose vs. Impracticability
a) FoP – performance is practicable
b) but the underlying reason/purpose why the parties undertook this K no longer exists
1) K formation
a) don’t commit fraud;
b) don’t be dishonest
2) employment at will
a) retaliation is bad faith
b) not because of K law
c) it’s labor policy
3) K performance (discretion cases) – did you exercise discretion in good faith?
4) Theories of Good Faith
a) Burton Analysis (recapture)
i) bargaining away an opportunity for something of value
ii) if you recapture the opportunities you gave away that’s bad faith
b) Summer’s Excluder Theory
i) anything that’s not bad faith
ii) conduct inconsistent with decency, fairness, and reasonableness
5) the duty of good faith is an IMMUTABLE RULE
a) you cannot K around it!!!
b) but you can define what good faith is OR
c) define what bad faith is
1) SCENARIO: creditor lends X $5K à X has already paid $3K à X sends a check to creditor for $500 with a notation “payment in full”
a) creditor must accept amount tendered and on the terms of the condition
b) OR creditor must reject amount tendered entirely or return the check
c) PROBLEM: too often creditors did not realize that there had been accord and satisfaction
2) Accord
a) offer to give or accept
b) a stipulated performance
c) in the future
d) in discharge of an obligor’s existing duty
e) and acceptance of offer
3) Satisfaction – performance of the agreement
4) Elements
a) offer and acceptance
b) satisfaction/performance of the agreement by the OFR
c) consideration
5) liquidated claims
a) no dispute as to the claim
b) you know who owes what
c) to whom
d) and it is indisputably due NOW
6) unliquidated claims
a) there’s a dispute as to who owes what
b) the amount is not due now
7) UCC 1-207
a) if a party reserves its rights
b) perf/prom perf/assent in a manner demanded/offered by the other party
c) does NOT affect or prejudice the reservation of rights
8) MAJ (common law) has decided in favor of accord/satisfaction rather than UCC 1-207
9) the comment to the new UCC 1-207 states that it no longer applies to accord/satisfaction
10) WHEN DO PROBLEMS CROP UP?
a) D owes $100 NOW (liquidated claim) + sends a check for $50 marked “payment in full” + C cashes the check
i) D made an offer of “payment in full”
ii) when C cashes the check he has accepted
iii) cashing the check is satisfaction
iv) BUT THERE IS NO CONSIDERATION!!!
(1) D is already obligated to pay $100 NOW
(2) this is a pre-existing duty
(3) D is not incurring a legal detriment
Anticipatory Repudiation
1) when parties enter into K there is an implied promise that neither will hinder the other’s performance under the K
2) Hochster – where there is a K to perform in the future
a) one party repudiates
i) express, unequivocal refusal to perform
ii) conduct that puts performance out of the PR’s power à perf is substantially impossible
b) the other party may treat this as an anticipatory breach
c) and can sue seek a remedy NOW
3) damages are speculative à why do we allow them?
a) promote productivity
b) encourage parties to mitigate damages
c) moral theory: D is the one at fault so why should P have to wait and possibly incur losses
4) Rest 250 – Repudiation
a) is a statement that a party will commit a breach
i) which would have given rise to a claim for damages
ii) the other party has a claim for damages for total breach
OR
iii) is some voluntary affirmative act hinders the other’s performance
5) UCC 2-609
a) K for sale
i) imposes an obligation on each party
ii) that the other’s expectation of rec’g due performance will not be impaired
iii) if reasonable grounds for insecurity arise with respect to some performance due
(1) the other party may, in writing, demand adequate assurance of the performance
(2) and may suspend any perf until he receives the assurance if
(3) commercially reasonable AND
(4) he has not rec’d the agreed return
b) Between merchants
i) reasonableness of grounds for insecurity AND
ii) adequacy of assurance offered
iii) will be determined according to commercial standards
c) must provide adequate assurance within 30 days of receiving demand
6) if it turns out the breaching party would have been excused because of impracticability à they will not be responsible for damages
1. In general, damages are recoverable for a breach if they
a. naturally arise from the breach