Contracts

2nd Half Outline

Concept
Case
Restatement
UCC
Key Points

Illegality
• Works similar as unconsionabiity
• A layer in the formation the parties make
• Either illegal or against public policy
• If performance or formation; bargain; illegal against public policy
In pari delicto = (full, but rarely used form 'In pari delicto potior est conditio
mentula')[1], Latin for "in equal fault," is a legal term used to indicate that two
persons or entities are equally at fault, whether the malfeasance in question is a
crime or tort.
ILLEGALITY IN CONTRACTS
Not enforceable because of
• Illegality- rare, subject matter or performance is illegal
• Public Policy issue- contracts such as surrogate parents and adoption issues
may reflect
• If illegal or performance illegal, courts will not enforce it. Do not have to be
necessarily raised first in the trial court.
• View in terms if you view the reason for this doctrine from the standpoint that
if the court supports this then the court is supporting either an illegal act or
an act that violates public policy.

If a court supports a contract that has a term or provision that is either illegal or the
subject matter is illegal, the court is basically saying that they support either an
illegal act or an act that violates public policy.
• Even when in fact we know that the contract may not be enforceable.
• That is the reason for this section.
• A contract on its face may even look okay with all the elements in it: offer,
acceptance, considerations, agreement will satisfy the Statute of Frauds, and
there will be no issues of fraud, duress or unconscionability.
• But, one of the parties or the court may assert the bargain itself, its
performance or the objectives to be achieved are “illegal” or against “public
policy” and ought not be enforced.
Ex.: Abner and Boscoe agree that Boscoe will murder Clyde for $5,000, with $2,500
down and the balance when the job is done. This is a simple straight forward
contract but the bargain itself are felonies.

RESTATEMENT 2D 178 (1):

A promise or other term of an agreement is unenforceable on grounds of public
policy if legislation provides that it is unenforceable. Thus, if a constitution, statute,
administrative regulation or local ordinance preempts the enforceability question by
clear language, the courts job is to implement that legislative decision (a) But if
there is no clear legislative mandate, the promise or term is still unenforceable if
the ‘interest in its enforcement is clearly outweighed in the circumstances by a
public policy against the enforcement of such terms.’
(Whether Enforceable)
178 (2): provides that in weighing the interest in the enforcement of a term,
account is taken of (a) the parties justified expectations, (b) any forfeiture that
would result if enforcement were denied, and (c) any special public interest in the
enforcement of the particular term.

178 (3): provides that in weighing a public policy against enforcement of a term,
account is taken of (a) the strength of that policy as manifested by legislation or
judicial decisions, (b) the likelihood that a refusal to enforce the term will further
that policy, (c) the seriousness of any misconduct involved and the extent to which
it was deliberate, and (d) the directness of the connection between that misconduct
and the term.

• Works very similar to unconscionability = (Adhesion, no bargain, K w/

someone who has all the bargaining power) It’s a layer, the parties in the
formation or performance.

Sinnar v. Le Roy (guy tells his friend he can get him a beer license by
bribing a city official)
• The court said both parties were in pari delicto (both equally at fault) in their
participation of an illegal act. Even though the issue was not raised (initially),
a party cannot waive his right to set up the defense of illegality—the court
will not knowingly aid in the furtherance of an illegal transaction. The
defendant gets to keep plaintiff’s $450 (the court will not aid in illegality)
because they were in pari delicto. This is usually the result, unless 1) a
disproportionate forfeiture, 2) the plaintiff was excusably ignorant, 3) the
plaintiff was not equally in the wrong, or 4) the plaintiff did not engage in
serious misconduct (de minimus).

Though neither party brought up that the heart of the matter was illegal, the court
brought it up regardless. The Court will not knowingly aid in the furtherance of an
illegal transaction, but it will leave the parties where they find them.
• - We still have unjust enrichment in this case, so the money was returned
regardless, just under another principle.
Restitutionary Exceptions: No restitution to injured party in illegal contract unless
following.
Section 197 Restatement 2nd:
1. The denial of restitution causes ‘disproportionate forfeiture’
2. The plaintiff was excusably ignorant of facts or of legislation ‘of minor character’.
3. The plaintiff was ‘not equally wrong with the promisor’.
4. The plaintiff did not engage in serious misconduct and he withdraws from the
transaction before the improper purchase has been achieved.

Section 199 stating: restitution will be allowed where the plaintiff did not engage
in serious misconduct and allowance of the claim would put an end to a continuing
situation that is contrary to the public interest.
Public Policy = Public Policy is that principal of law which holds that no subject can
lawfully do that which has tendency to be injurious to the public or against the good
of the public which may be termed, as it sometimes has been, the policy of law, or
public policy in relation to the administration of the law.”
Hamani v. Iranzadi (guy silently charges interest on a loan to avoid taxes)
• A contract founded on an illegal consideration, or which is made for the
purpose of furthering any matter or thing prohibited by statute, or to aid or
assist any party therein, is void.
• It makes no difference whether the contract has been partially or wholly
performed. The test is whether the plaintiff requires the aid of the illegal
transaction to establish his case. If the plaintiff cannot open his case without
showing that he has broken the law, the court will not assist him.

EXAMPLE: An electrician that wires your house or a contractor that builds a room—if
they have no license, the contract is illegal & therefore void; however, unjust
enrichment could be argued.

Notes: Agreements beforehand to limit the liability of inherently dangerous

products or other products that can cause harm are not enforceable even if they are
technically valid. A term exempting a party from tort liability for harm caused
intentionally or recklessly is unenforceable on the grounds of public policy. A term
exempting a party from tort liability for harm caused negligently may or may not be
enforceable.

Rule applies to general contractors.

In other words, the courts will not enforce a contract for a unlicensed contractor
seeking to collect money for services rendered. Courts have routinely refused to
grant relief in such cases on the grounds that failure to comply with licensing
requirements violates a law designed to protect and benefit the public. Therefore a
party who has violated the law and entered into an agreement to perform services
while unlicensed cannot obtain the aid of courts to enforce the agreement.

Note: If you argue one of these cases someday, depending on which side you are
on, you want to make sure the court understands that if you are trying to uphold
the contract, one, it is not illegal, and two, the public policy that is being argued
here is one which does not affect its citizens.

Note: Sometimes the court will find that the P should recover on grounds of unjust
enrichment and that it was not a serious illegal act that violated public policy. Ex.:
educated engineer builds a building but he had let his license run out. Owner and
developer was forced to pay him by the court based on reasons stated above.

De minimus: Illegality may not prevent the enforcement of a contract if the court
construes the illegality not to be serious. I.E. an engineer without credentials hired
but then not paid. Court found the illegal behavior contracted for was de minimus.
Minor infraction.
• Has to be serious

Broadley v. Mashpee Neck Marina, Inc.

Vessel owner who was injured on dock at marina brought negligence action against
marina
• This case resembles unconscionability

The doctrine pertinent where a contract provision is unlawfully overbroad

is that which permits a court to sever or divide provisions that are
unlawful as written, retaining those provisions or applications of them
that are permissible.

Restatement (Second) of Contracts § 184 (emphasis added) provides:

A court may treat only part of a term as unenforceable ... if the party who seeks to
enforce the term obtained it in good faith and in accordance with reasonable
standards of fair dealing.

Not all exculpatory contracts are illegal.

“In our view, the better rule is that an exculpatory clause limited to barring liability
for ordinary negligence would be valid, assuming it were not inflicted by a
monopolist or one with greatly superior bargaining power”

RS of Torts 402a
• “ A manufactures or sellers attempt to disclaim or limit liability for damages
to a person or property caused by a dangerously defective product is against
public policy”

Restatement 2nd 195

1. A term exempting a party from tort liability for harm caused intentionally or
recklessly is unenforceable on grounds of public policy.
2. A term exempting a party from tort liability for harm caused negligently is
unenforceable on grounds of public policy if
a. the term exempts an employer from liability to an employee for injury in the
course of his employment
b. The term exempting one charged with a duty of public service from liability to
one to whom that duty is owed for compensation for breach of that duty.
c. The other party is similarly a member of a class protected against the class to
which the first party belongs.
3. A term exempting a seller of a product from his special tort liability for
physical harm to a user or consumer is unenforceable on grounds of public
policy unless the term is fairly bargained for and is consistent with the policy
underlying that liability.

Exculpatory contracts are (generally) not enforceable. Contracts that subjects

one to Arbitration if disputes arise are enforceable.

Data Management Inc. v. Greene

• Two instances where non-compete covenants play a prominent role:
employment situations and sale of businesses.
• The latter is often enforced even if they are broad in geography & time
because it is a negotiated transaction where the business owner gave up his
right to compete for money.
 • With employment non-compete covenants, the law is that limiting a person’s
livelihood violates public policy.
However, employers have rights where proprietary information is shared (e.g.,
customer and patient lists, patented technology). Courts will uphold these
covenants provided that
1) they are limited in duration and
2) geography (in relation to the coverage of the employer). If either is too broad,
courts have taken different approaches as to enforceability:

o 1) Overbroad: If it is too broad, it is unconscionable and void.

o 2) Blue Pencil: Analyze actual words of the contract (relating to time
& geography) and decide if some can be deleted or changed to make it
enforceable.
o 3) UCC Good Faith Approach (TN): The court will remake the
document to protect the interests of the employer and the employee
(limits to good faith expectations of the parties). If the court finds the
contract or a clause of the contract unconscionable at the time it was
made, the court may refuse to enforce the contract, enforce the
remainder of the contract without the unconscionable clause, or so
limit the application of an unconscionable clause as to avoid an
unconscionable result. The party who drafted the covenant may
present evidence as to its commercial setting, purpose, and effect.

Non Competes – an agreement where parties agree that they will not compete
with each other. Arise:
(1) During course of normal employment (enforcement governed by time &
geography). However, if it limits a person’s ability to make a living, generally
speaking they are found to violate public policy.
(2) During sale of business (courts inclined to enforce).

In general, the courts will focus upon two aspects of the covenant:
(1) Whether it protects some legitimate interest (perhaps technology, intellectual
property known only to the company…) of the promisee.
(2) Whether it is reasonable in scope.

Courts generally enforce these clauses for the duration of the original business
relationship, but clauses extending beyond termination must usually be reasonable
in scope, time, and territory. Also termed non-compete covenant, covenant not to
compete, restrictive covenant, promise not to compete, contract not to compete.
Gurski v. Rosenblum and Filan, LLC
Court conclude that an assignment of a legal malpractice claim or the proceeds
from such a claim to an adversary in the same litigation that gave rise to the
alleged malpractice is against public policy and thereby unenforceable. Accordingly,
we reverse the judgment.

The court looks at the substance, and says that certain assignments will not be
enforceable, such as this one. The general rule is that any claim you have is
assignable unless a provision says it isn’t. However, certain people shouldn’t get
these because of the effect it can have on public policy.
General Rule = Any claim, contract, is assignable. BUT certain people should not
be allowed “Adverse Interest”

Watts v. Watts
Couple had been living together as husband and wife, but they were not legally
married for 12 years. She assumed his surname, and they had 2 children together.
During the habitation, there assets grew, and when the relationship ended, he
refused to give her anything. She filed suit for unjust enrichment.

Unjust enrichment is grounded on the moral pricinple that one who has received
a benefit has a duty to make restitution where retaining such a benefit would be
unjust. Because no express or implied in fact agreement exists between the parties,
recovery based upon UE is sometimes referred to as “quasi contract” or “implied in
law” rather than “implied in fact.” Quasi contracts are obligations created by law to
prevent injustice.
Three elements for an action for UE, or QC (p.571):
(1) A benefit conferred on the defendant by the plaintiff.
(2) Appreciation or Knowledge by the defendant of the benefit.
(3) Acceptance or retention of the benefit by the defendant under circumstances
making it unequitable for the defendant to retain the benefit.

There is certainly injustice but no contract. The P wants what a wife would get if
marriage dissolved. She sued based on family law, but the court will not adjudicate
it based on the family law of Wisconsin due to public policy.
• The first issue in this case was whether there was a contract.
• The second was what is the public policy of the state.

The court stated that although they weren’t married, that doesn’t mean the parties
can’t enter into a separate contract to deal with relationships and the courts either
enforce or force damages to be paid in breach of that agreement. The P asserts the
unjust enrichment theory of recovery, not on contract, but on the moral principle
that the recipient of a benefit should make restitution when retaining the benefit
would be unjust, referred to as “quasi contract.” The theory of quasi contract would
prevent D from retaining all the assets.

Parole Evidence Rule

Statute of Frauds req. certain types of writings, for instance, sale of land, over five-
hundred dollars, covering debt of another, incapable of performance in a year, other
than those types, no req. for writing. Once you put in writing, parole evidence rule
comes into effect. Not a rule of evidence but a rule of substance. Once you make a
writing, which is the complete embodiment of the agreement, no oral or written
understanding, agreement, etc. may be offered to contradict the terms of the
original agreement.
• No general requirement that an agreement / promise has to be in writing to
be enforceable.
• Deciding when oral / extraneous evidence may be used to interpret K (When
K is written)
Contracts don’t have to be in writing but if an agreement is put in writing the ability
of the parties to vary the terms of that writing with contemporaneous or pre-
existing agreements is limited.
• The rule deals with what was left out of agreement and what it includes. The
Parole Evidence Rule deals with everything that is within the 4 corners of the
contract, and everything else will not be considered. Usually anyway.
Four corners rule, once you have it, prior contemporaneous agreements won’t be
allowed to change it. Some exceptions.

By the agreement, we mean the intended embodiment of the agreement. If the

Agreement:
1. Not meant to be a full embodiment of the agreement.
2. Nothing to do with subsequent agreements.
3. Fraud, acts not bond by this rule.
Other than the above three, that agreement is sacred.

Collateral-related to or different to the main agreement.

Collateral Contract Doctrine: In a dispute concerning a written contract, proof of

a second (but oral) agreement will not be excluded under the parole evidence rule if
the oral agreement is independent of and not inconsistent with the written contract,
and if the info. In the oral agreement would not ordinarily be expected to be
included in the written contract.

Parole Evidence Rule: Principle that a writing intended by the parties to be a final
embodiment of their agreement cannot be modified by evidence that adds to,
varies, or contradicts the writing. It works to prevent a party from introducing
extrinsic evidence of negotiations that occurred before or while the agreement was
being reduced to its final form.
Mitchell v. Lath (buyer, as a condition of a written contract, relies on
seller’s oral promise to remove ice house)
• Nothing in the written contract mentions the removal of the ice house and
evidence is normally inadmissible under the parol evidence rule. That rule
simply states if there is a written agreement, the ability of the parties to vary
the terms of that writing with any prior or contemporaneous agreements is
limited. If the original contract was oral, prior or contemporaneous
agreements may be used to explain it; thus, the parol evidence rule only
applies to written contracts.
• If three conditions are met, contemporaneous or pre-existing agreements are
admissible. The agreement must be:
NY Rule (From Book)
• (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 that parties would not ordinarily be expected to embody in
the writing, or, put in another way, an inspection of the written contract, read
in the light of surrounding circumstances, must not indicate that the writing
appears ‘to contain the engagements of the parties, and to define the object
and measure the extent of such engagement.’ Or, again, it must not be so
clearly connected with the principal transaction as to be part and parcel of it.
In this case, the last condition was not met.
Alleged promise to remove
• Something that parties would expect to include
• Agree purports to be comprehensive
• Contradicts express terms

If it was reasonable to think that it should be in the agreement and it’s not in the
agreement, then the presumption is the parties excluded it.
• UCC § 2-202 Doesn’t vary much on parol evidence.
§ 47-2-202. Final written express; parol or extrinsic evidence
Terms with respect to which the confirmatory memoranda of the parties agree or
which are otherwise set forth in a writing intended by the parties as a final
expression of their agreement with respect to such terms as are included therein
may not be contradicted by evidence of any prior agreement or of a
contemporaneous oral agreement but may be explained or supplemented:
(a) by course of dealing or usage of trade (§ 47-1-205) or by course of performance
(§ 47-2-208); and
(b) by evidence of consistent additional terms unless the court finds the writing to
have been intended also as a complete and exclusive statement of the terms of the
agreement.
Notes: Certain contracts must be in writing (SOF). Although a contract in writing is
sacrosanct, the parol evidence can still apply. An integration clause that states
“there are no previous understandings or agreements not contained in the writing”
should be in any contract. An integration clause suggests the written contract was
the intended agreement between the parties.
Masterson v. Sine (brother transfers deed via option to sister to protect
assets and then goes bankrupt)
• In bankruptcy, a person’s assets go to a trustee who in turn sells them and
pays off creditors. Here, the trustee wants to act on the undervalued option
and he can because a trustee steps into the shoes of the deceased or, in this
case, the bankrupt.
• Masterson wants to admit parol evidence that states that the house was
intended to stay in the family. However, the written contract only specifies
the term “grantor.” This should have been included in the contract and would
fail the Mitchell v. Lath test because the specific definition of the “offeror”
would 1) ordinarily be in the agreement and 2) it varies the terms of the
contract.

Integration Clauses (Merger) - “The crucial issue in determining whether there has
been an integration is whether the parties intended their writing to serve as the
exclusive embodiment of their agreement. The instrument itself may help to resolve
that issue. It may state, for example, that “there are no previous understandings or
agreements not contained in the writing,” and thus express the parties’ intention to
nullify antecedent understandings or agreements. Any such collateral agreement
itself must be examined, however, to determine whether the parties intended the
subjects of negotiation it deals with to be included in, excluded from, or otherwise
affected by the writing. Circumstances at the time of the writing may also aid in the
determination of such integration.” Paragraph pointed out by Lewis, p.583
Notes: While an integration clause is important in showing that a written
agreement was intended to be the full embodiment of the parties, it is not
conclusive; parol evidence can always be argued.

Alaska Northern v. Alyeska (AND wants to admit parol evidence to enforce

a contract to buy parts)
• AND wants to admit parol evidence that shows that both parties understood
the “subject to approval” language to mean that the Alyeska committee
would review the agreement only to determine whether the price was fair but
that otherwise there was an agreement to purchase the parts. UCC 2-202
applies in this case:
• Written contracts are subject to the parol evidence rule but may be
explained or supplemented:
o By course of dealing or usage of trade or by course of performance
o By evidence of consistent additional terms, but, these terms can only
come in if the court finds that the original writing was not intended
(e.g., no integration clause) to be a complete and exclusive statement
of the terms of the agreement.

Here there was no integration clause; the court must determine whether the
contract was intended to be the full embodiment of the parties (i.e., a full
integration). An integration clause makes the acceptance a mirror image of the
offer; it is protection. The court finds a partial integration (integration is determined
by the court). The court found that parol evidence that the committee’s approval
was limited contradicts the terms of the partial integration (and it thus
inadmissible).

Partial Integration = An integrated writing exist where the parties intrnd that the
writing be the final expression of the agreement.

Notes: First determine whether there was an intention to be integrated—even

beyond that, the UCC will allow additional supplemental terms provided they are
consistent and provided the document itself does not say it is exclusive (integration
clause). Even if the terms are consistent, the terms were something that would
have ordinarily been expected to be in the contract.
• Parol evidence may be introduced for the purpose of showing that 1) there
was another agreement or understanding (Lath), there is an 2) ambiguity
(Friglament), or 3) for showing fraud, illegality, duress, mistake, or lack of
consideration. These are all ways to try to vary “the box.”
• Integration clauses are not favored in consumer settings; if it is unreasonable
to think that you would have agreed to the terms, then it is unconscionable
and unenforceable. Lawyers often draft unenforceable agreements (e.g., for
 car dealers) that disclaim all warranties; of course, these contracts may be
enforceable in a commercial setting.

In order to exclude parol evidence concerning the inclusion of additional terms to a

writing, a court must make the following determinations. First, the court must
determine whether the writing under scrutiny was integrated, i.e., intended by the
parties as a final expression of their agreement with respect to some or all of the
terms included in the writing. Second, the court must determine whether evidence
of a prior or contemporaneous agreement contradicts or is inconsistent with the
integrated portion. If the evidence is contradictory or inconsistent, it is inadmissible.
If it is consistent, it may nevertheless be excluded if the court concludes that the
consistent term would necessarily have been included in the writing by the parties if
they had intended it to be part of their agreement. AS 45.02.202; Braund, Inc. v.
White, 486 P.2d 50, 56 (Alaska 1971); U.C.C. § 2-202 comment 3 (1977).

An earlier agreement may help the interpretation of a later one, but it may not
contradict a binding later integrated agreement. Whether there is a contradiction
depends ... on whether the two are consistent or inconsistent. This is a question
which often cannot be determined from the face of the writing; the writing must first
be applied to its subject matter and placed in context. The question is then decided
by the court as part of a question of interpretation. Where reasonable people could
differ as to the credibility of the evidence offered and the evidence if believed could
lead a reasonable person to interpret the writing as claimed by the proponent of the
evidence, the question of credibility and the choice among reasonable inferences
should be treated as questions of fact. But the asserted meaning must be one to
which the language of the writing, read in context, is reasonably susceptible. If no
other meaning is reasonable, the court should rule as a matter of law that the
meaning is established.

According to comment b, therefore, a question of interpretation may arise before

the contradiction issue can be resolved. If the evidence conflicts, the choice
between competing inferences is for the trier of fact to resolve. Alyeska Pipeline
Service Co. v. O'Kelley, 645 P.2d 767, 771 n. 2 (Alaska 1982). The meaning is
determined as a matter of law, however, if “the asserted meaning [is not] one to
which the language of the writing, read in context, is reasonably susceptible.”
Restatement (Second) of Contracts § 215 comment b (1979). See also J. Calamari &
J. Perillo, The Law of Contracts §§ 3-12, 3-13 (2d ed. 1977).

Other Issues: This is a condition precedent—the committee must act in good faith
in analyzing the price and cannot exercise unfettered discretion or else there is no
mutuality of obligation; UCC 2-203 (good faith) implies a duty to review the deal in a
reasonable manner. Another issue is 2-207; where two letters are in agreement, we
may have a contract. We may have a need for UCC gap-fillers; just because the
price is not present, that does not kill the agreement.
Integration: The full expression of the parties agreement, so that all earlier
agreements are superseded, the effect being that neither party may later contradict
or add to the contractual terms. Also termed merger.

Complete Integration: The fact or state of fully expressing the intent of the
parties.

Partial Integration: The fact or state of not fully expressing the parties intend, so
that the contract can be changed by the admission of parole evidence.

Integration clause: A contractual provision stating that the contract represents

the parties’ complete and final agreement and supersedes all informal
understandings and oral agreements relating to the subject matter of the contract.
Also called a Merger clause.

Suburban Leisure Center, Inc. v. AMF Bowling Products, Inc.

Court calls this “Collateral K Doctrine”
• Case involves 2 distinct agreements
• Thus merger clause can not be evidence of different agreement
• No arbitration clause

Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co.
“Ambiguity”
• If court decides that the language is capable of 2 meanings; extrinsic parole
evidence is admissible
p.682
If the court decides, after considering this evidence, that the language of a contract,
in the light of all the circumstances, is ‘fairly susceptible of either one of the two
interpretations contended for, extrinsic evidence relevant to prove either of such
meanings is admissible.

ConFold Pacific, Inc. v. Polaris Industries, Inc.

• Confold and Polaris entered into a written K of confidentiality relating to
“reverse logistics analysis” of Polaris shipping needs. Confold provided the
analysis
• Polaris requested proposals for the design of the returnable container
• Polaris built its own
• Confold sued claiming that the design was Confolds and was covered by the
confidentiality agreement. Trial judge held agreement unambiguous on its
face

P. 684 Good Analysis

The district judge found the contract in this case ambiguous, but not because of
anything in the commercial context. Rather, he thought it ambiguous on its face,
requiring him to consider extrinsic evidence, because of the further statement in
the preamble that “ConFold and Polaris are desirous of exchanging information for
purposes of both companies developing future business with each other.”

p.683 Important Statement of Law

The district judge might have decided that the contract unambiguously excluded
design information, in which event no evidence beyond the contract itself would
have had to be considered. Especially when dealing with a substantial contract
between “commercially sophisticated parties ... who know how to say what they
mean and have an incentive to draft their agreement carefully,” Bank of America,
N.A. v. Moglia, 330 F.3d 942, 946 (7th Cir.2003), there is great merit to the rule that
the meaning of an unambiguous contract is a question of law rather than of fact,
rev'd on other grounds, with the consequence “that unambiguous contractual
language must be enforced as it is written.”

Enforcing contracts as written has particular merit when the party that drafted the
contract, which is to say ConFold (though, as we'll see, ConFold was largely copying
an earlier contract drafted by someone else), is arguing that it should be relieved
from the consequences of having neglected to spell out its rights concerning the
very core of the transaction.

If K is ambiguous… it will be construed against the drafter

• “?” What if K say = K reach process of negotiations NOT construed against
the drafter
• Spoden = Courts still construe against the drafter.

Warranties, Disclaimers and the Parol Evidence Rule.

• In contracts for the sale of goods, the seller may make four warranties of
quality: Express Warranties, UCC 2-313; an implied warranty of
merchantability, UCC 2-314; an implied warranty of fitness for particular
purpose, UCC 2-315; and a warranty of good title, UCC 2-312(1). These
warranties when made, are clearly terms of the agreement. To exclude or
modify the implied warranty of merchantability or any part of it the language
must mention merchantability and in case of writing, must be conspicuous.
Similarly, a warranty that “title shall be good and its transfer rightful” can be
excluded or modified ‘only by specific language’ or by special circumstances.
A warranty made may be very difficult to take away by disclaimer. In the
case of express warranties it is impossible: if words or conduct creating an
express warranty and words or conduct tending to negate or limit warranty
cannot be construed as consistent with each other, negation or limitation is
inoperative to the extent that such construction is unreasonable. UCC 2-316
(1).

Parole Evidence Rule

Any agreement or understanding that takes place before the written agreement

Mitchell v. Lath
If prior agreement to written contract, prior agreements dissolve when written.
If you’re concerned about prior written / oral agreements you put in a merger clause
“Final Contract, Early contract merged into document”

Collateral Rule = Separate / Related agreement parties would not normally have
put into the agreement
PE Rule, if prior writing Parole Evidence Rule always turns up.
Ambiguity and Parol Evidence – Unless it’s ambiguous, you can’t introduce evidence to
something that has a plain meaning. If ambiguous, though, you can use it to introduce parol
evidence.

2ND Big Area = Interpretation

• Deals with defining the parameters of the contract so we can understand
performance
• “Where contract is clear and unambiguous…”
• Interpretation= Important in litigation ; and how one is to perform the
contract.

Last 2 cases
• “Honest expectations of the parties as to performance”
• “ If language is ambiguous” you can turn to Parole Evidence”

If you can legitimately bring up ambiguity = Maybe Parole Evidence

UCC
• Course of performance = Watch how the parties perform
• Course of Dealing = Series of contracts; Look at dealings
• Usage of Trade = Industry has guidelines
p.688
“One way to conceive the interpretive process is as the sequential application of a
hierarchical series of rules to resolve contract ambiguity. Courts begin with the
express wording of the oral or written agreement
(#1) If the language of the contract is plain and unambiguous, there is no room for
interpretation or construction. The court merely gives effect to the intention of the
parties as clearly expressed in the contract….
(#2) Where no explicit, unambiguous answer as to the meaning of the contract is
available from with the four corners of the instrument (or , in the absences of a
writing, from the express oral agreement) the surrounding circumstances become
relevant and extrinsic evidence is admissible. However there is a hierarchy among
the available “external” sources as well…The next three layers of the pyramid are,
accordingly, (#3) course of performance,(#4) course of dealing, and (#5) usages
of trade…. A course of performance overrides an inconsistent course of dealing,
which in turn overrides an inconsistent usage of trade….”
• # 1 Plain Language
• # 2 Resort to the Four corner
• # 3 Course of Performance
• # 4 Course of Dealing
• # 5 Usage of Trade

The parole evidence rule requires that courts consider extrinsic evidence to
determine whether the contract is ambiguous. Rational interpretation requires at
least a preliminary consideration of all credible evidence offered to prove the
intention of the parties. But if the extrinsic evidence advances an interpretation to
which the language of the contract is not reasonably susceptible, the evidence is
not admissible. The test of admissibility of extrinsic evidence to explain the
meaning of a written instrument is…whether the offered evidence is relevant to
prove a meaning to which the language of the instrument is reasonably susceptible.
UCC 1-102 provides: that this act shall be liberally construed and applied to
promote the underlying purposes and policies set forth in UCC 1-102 (1) to permit
the continued expansion of commercial practices through custom, usage and
agreement of the parties.
UCC 2-208 provides: Where the contract for sale involves repeated occasions for
performance by either party with knowledge of the nature of the performance and
opportunity for objection to it by the other, any course of performance accepted or
acquiesced in without objection shall be relevant to determine the meaning of the
agreement.
§ 47-2-208. Course of performance or practical construction
(1) Where the contract for sale involves repeated occasions for performance by
either party with knowledge of the nature of the performance and opportunity for
objection to it by the other, any course of performance accepted or acquiesced in
without objection shall be relevant to determine the meaning of the agreement.
(2) The express terms of the agreement and any such course of performance, as
well as any course of dealing and usage of trade, shall be construed whenever
reasonable as consistent with each other; but when such construction is
unreasonable, express terms shall control course of performance and course of
performance shall control both course of dealing and usage of trade (§ 47-1- 205).
(3) Subject to the provisions of the next section on modification and waiver, such
course of performance shall be relevant to show a waiver or modification of any
term inconsistent with such course of performance.
UCC 1-205 provides:
1. A course of dealing is a sequence of previous conduct between the parties to a
particular transaction which is fairly to be regarded as establishing a common
basis of understanding for interpreting their expressions and other conduct.
2. A usage of trade is any practice or method of dealing having such regularity of
observance in a place, vocation or trade as to justify an expectation that it will
be observed with respect to the transaction in question. The existence and
scope of such a usage are to be proven as facts. If it is established that such a
usage is embodied in a written trade code or similar writing the interpretation of
the writing is for the court.

FRIGALIMENT IMPORTING (P / Buyer) V BNS INTL SALES (D / Seller)

P is a Swiss company that wants to buy chickens; D is a NYC company in the
poultry business.
The two company reps met at a trade show. K stipulated US fresh frozen ‘chicken’,
Grade A, gov’t inspected, eviscerated, wrapped and boxed for exporting. Plaintiff
argues = 1 to 2 lbs birds mentioned = Had to be young birds

The key in this case is that the Swiss accepted the first order, but rejected the
second order (prior course of dealings). You cannot even get to parol evidence
unless you can show that there is an ambiguity.
Can’t offer parol evidence until you first establish an ambiguity. Without that, you
can’t go further.

The court looks to the contract (the document is always construed against the party
who drafted it), prior course of dealings (they accepted the first order of “chicken”),
usage of trade (other similar businesses, trade association reports, USDA
definitions), and expert testimony.
A good argument advanced by the Swiss is that the contract was drafted by
American lawyers.

Another aid in interpretation is where the people have attached different meanings
to an agreement and would have never entered into the agreement if they would
have known otherwise. Assuming that both parties were acting in good faith, what
of Peerless—was there a mutual mistake?
• Objective Theory of Contracts governs = Expresses Statement
• What was the word used? “Chicken”

# 1 Plain Language = NO
# 2 Resort to the Four corner
• Definition within the “4” Corners that defines Chicken = NO
• Does P/D ague Definition of Chicken
• Def = “USDA Inspected” Limits only to those 4 things
• Is there a definition = If not = Its Ambiguous
# 3 Course of Performance
“Deals with what have these sets of parties done under these sets of contracts”
Activity of the same party in the same contract
Parties have 2 sets of performances
1. US to Europe = 1st Shipment = “Swiss” = “This isn’t what we wanted “
2. 2nd US “Shipped Them”

# 4 Course of Dealing
First, look to past conduct-here they previously accepted a shipment. The course of
dealing is easy to prove.
# 5 Usage of Trade
Trade Usage = “Extrinsic Evidence beyond Contract”
• Go to indexes = USDA ; Trade Association Rules ; Testimony of Experts
Second, look to usage of the trade. How do you put evidence of trade usage? Look
to trade association reports. If industry regulated by government, look at
government regulations, definitions, magazines of the industry, expert testimony.
Clear that D believed in could comply w/ terms of contract by fulfilling the larger
sized order w/ stewing chickens. D’s interpretation of the word chicken coincided w/
that in the dictionary, in the USDA regulations, the usage in trade, with the realities
of the market and w/ what P’s rep stated.
Subjective intent of P is irrelevant – P has burden of proof regarding narrower
meaning

Who drafted document?

• Always construe the document against the preparer since it is arguable that
drafters draft the contract in their favor.
“Look at the wording of the contract. Try to give Common Sense
Interpretation”

p.696 Rules of Interpretation

1st = Meaning is plain, clear, don’t need to resort to interpretation

RS 206 Interpretation against the Draftsman

a. 1st Whoever drafted the contract; It will be construed against you (2
times as true if an adhesion contract)
b. 2nd Draftsman attorney ; Construed against the attorney

KATRINA CANAL BREACHES LITIGATION. v. Unitrin Preferred Insurance

Company; Hanover Insurance
Policyholders with homeowners, renters, or commercial-property insurance brought
actions in state and federal court, seeking recovery under their policies for damage
arising from flooding resulting from breaches or overtopping of levees which
occurred in aftermath of Hurricane Katrina.
Courts concluded that In light of these definitions that the flood exclusions are
unambiguous in the context of this case and that what occurred here fits squarely
within the generally prevailing meaning of the term “flood.” When a body of water
overflows its normal boundaries and inundates an area of land that is normally dry,
the event is a flood.
• This is precisely what occurred in New Orleans in the aftermath of Hurricane
Katrina.

Omni Berkshire Corp. v. Wells Fargo Bank, N.A.

Borrower under a loan secured by five hotels sued lender, seeking a determination
that it was not required under the loan agreement to obtain terrorism insurance.
Even assuming the “all risk” clause did not require Omni to purchase a stand alone
terrorism policy, the issue remains whether Wells Fargo acted reasonably in
requiring Omni to purchase terrorism coverage under the “other insurance” clause
of the Agreement.

1. First, Wells Fargo's concern that Omni's hotels are at risk is, unfortunately,
reasonable. In the World Trade Center attacks on 9/11, one hotel was
destroyed and two others were damaged. Omni itself has taken steps to
upgrade security at its hotels. The five hotels in question are located in New
York, Chicago, and Texas, and surely there is some risk that they could be
targeted.
2. Second, the record contains substantial proof that the owners of many hotels
and other commercial properties have purchased terrorism insurance.
 3. Third, the cost of the $60 million in coverage that Wells Fargo agreed to
accept is reasonable: approximately $300,000 per year.
4. Fourth, the additional insurance would benefit not only Wells Fargo but Omni
as well.

I conclude that Wells Fargo acted reasonably in requiring Omni to obtain, as “other
reasonable insurance,” an additional $60 million in terrorism coverage.
• Ct says the agreement is ambiguous
• Contemplate things can fall in and our.

Gray v. Zurich Insurance -- Exception to the above rule  In insurance Ks, doubts
as to the meaning of certain types of clauses (here, exclusionary clause relieving
insurer of liability for insured’s intentional conduct) tend to be resolved against the
insurer, unless it is clearly explained to the insured. Rationale: Insureds usually in a
worse bargaining position.
• This case is about how to construe ambiguous adhesion contracts. In
interpreting an insurance policy, doubts as to its meaning must be resolved
against the insurer and any exception to the performance of the basic
underlying obligation must be so stated as clearly to apprise the insured of its
effect. A contract entered into between two parties of unequal bargaining
strength, expressed in the language of a standardized contract, written by a
more powerful bargainer, and offered to the weaker party on a "take it or
leave it" basis carries consequences.
• This general principal is simply another aid in interpretation. Adhesion
contracts, in any setting—such as a bank issuing a promissory note or a
publisher and a songwriter—are always resolved against the drafter—
basically, anywhere the consumer is involved.
Good Faith § 1–203. Obligation of Good Faith.= Every contract or duty within
this Act imposes an obligation of good faith in its performance or enforcement.
2 Contexts
1. Mutuality of Performance =

Only time we’ve dealt with this = Mutuality

In mutuality you have to determine if there is sufficient consideration to make a
legally enforcing agreement. 1 party “looks” like they don’t have to do anything
• McMichale v. Price
• Rhem v. Walker
• Lady McDuff Case

I will paint your room if I feel like it

VS.
I will use best efforts and due diligence to paint the room
• “1 party does something (perform) Other party maybe not perform”

Mutuality of Obligation / Consideration = Honest expectation of the parties

“Honest Expectation of the Parties”
• Try to get a loan
• Try to sale the clothes
• Try to do due diligence of surveying a piece of property
Good Faith to perform

Example
• Ill paint your house if I feel like
• If you promise, ill pay you $200.00
• Next day Def. buys paint, quits job
• So….Guy that was going to paint the house …….Suffers a Forfeiture

Look at Good Faith In

• Performance
• Negotiations

Performance = Performance (Conditional) Contract doesn’t require performance;

Unless contract provided performance
• So…”You don’t have to buy a house if you cant obtain financing”

Any Conditional Contract = Party has a duty to perform those obligations

required of them at the time required to do so.
General Rule = People pay after they receive performance
• Obligation not to interferer with performance
All revolves around RS 205 and UCC 2-302
§205. DUTY OF GOOD FAITH AND FAIR DEALING
Every contract imposes upon each party a duty of good faith and fair dealing in its
performance
and its enforcement.
Good faith is defined in Uniform Commercial Code § 1-201(19) as "honesty in fact in
the conduct or transaction concerned." "In the case of a merchant" Uniform
Commercial Code §2-103(1) (b) provides that good faith means "honesty in fact and
the observance of reasonable commercial standards of fair dealing in the trade."
c. Good faith in negotiation. This Section, like Uniform Commercial Code §1- 203,
does
not deal with good faith in the formation of a contract. Bad faith in negotiation,
although not within
the scope of this Section, may be subject to sanctions....

§ 47-2-302. Unconscionable contract or clause

(1) If the court as a matter of law finds the contract or any clause of the contract to
have been unconscionable at the time it was made the court may refuse to enforce
the contract, or it may enforce the remainder of the contract without the
unconscionable clause, or it may so limit the application of any unconscionable
clause as to avoid any unconscionable result.
(2) When it is claimed or appears to the court that the contract or any clause
thereof may be unconscionable the parties shall be afforded a reasonable
opportunity to present evidence as to its commercial setting, purpose and effect to
aid the court in making the determination.
2 Elements
1. Procedural
2. Substantive

1. Means that the document you signed agreement you entered into was one you
had o choice to doubt in order to acquire / purchase whatever you were entering
into
• Contract is the same anywhere else you go.
2. Substantive / Unfair
• Default Clauses
• Interest Rates
• Collateral Requirements

Centronics Corp. v. Genicom Corp.

• The seller is saying that the arbitration is going to take years (even though he
gets interest for the amount held in escrow)—you should give me the money.
The buyer says, well hell no, it’s not in the contract so how can I be acting in
bad faith? The judge goes into the three typical times we have good faith—
formation (negotiating), termination (agreements, employees), and what we
are talking about—you deserve discretion in condition precedent during
contract performance. The very best example of doing something not in a
good faith manner is to do something which violates the honest
expectations of the parties (very important) when they sign the
 agreement. This means, as here, that the money gets released from escrow
when arbitration ends. We know that because the contract says that.
Everyone understands that and has an obligation in good faith to adhere to it
if it was the honest expectations of the parties and there is no mistake and
not fraud or whatever; you can’t, as here go back and recapture the
agreement through the court—that’s bad faith. In other words, if you have a
condition precedent with the honest expectations of the parties that you are
going to take something to the board directors and you don’t—that is bad
faith. If you do and get turned down—you have exercised discretion in good
faith, but you just lose out.
• If on the exam, you see that a party has an opportunity to exercise their
discretion and they don’t exercise it at all or they exercise it in a way that
they know will result in not succeeding, then that is bad faith and they have
breached the implied duty of good faith. Omni group is a great example too.
Sometimes bad faith can take the form of prevention or hindrance—Texaco v.
Penzoil.

Buyer and seller set up an escrow account

Escrow: = Buyer is paying money to the seller; Instead all going to the sellers,
some goes into an Escrow:
• May be to split
• Not to be taken down
• Put money into Escrow
• Insurance
• Taxes
(Don’t know how much money for these)
So…Money into the Escrow
• Who is complaining about the money = The Seller
• (Buyer has the assets, Doesn’t want to turn lose of the money yet)

Agreement Provides = Once arbitration (Not values of the assets) is determined

money goes to
• Seller
• Buyer
• Pre-Determined things have to happen before seller gets the money
• Many items resolved…
• Seller “Give me my money”
• Buyer says NO
“We have to go through procedure when contract was formed”
Honest expectation of the parties
1st = What are the requirements
• Look at the contract
• 4 steps…then get paid
• Not a word about early release

Let’s say we get 4 KFC’s—we establish an escrow to make sure that the
owner/seller has paid all of his obligations. In this case, we have 5 million in escrow,
and there is $800,000 in claims. The seller has charged the buyer with a breach of
an implied covenant of good faith in refusing, during arbitration, to release a portion
of the escrow fund. Why would the seller be complaining? Because if I am the seller,
I am supposed to get the money, and a certain amount here has been set aside that
I cannot get at because of the arbitration over the claims on the business.

Case all about good faith, how determine by the courts

1ST.
Termination of any Contract
• “At Will employment” =Terminated Tomorrow
• Honest expectation
If your boss says:
• “Lots of theft, I want employees to tell me about it”
• Employee tells = Def fires employee for telling
Termination of “Implied Promise”
• Telling on someone else
nd
2
Good Faith in Negotiating a Contract
• Fail to completely disclose everything you know
• Greater bargaining position than the other party
Required to bring other up to speed = Could Be!
3rd
Exercise of Discretion
• Obtaining a loan
• Performing of discretionary obligation
(Performed in Good faith)

Bad Faith Case = Hindering other sides performance

Case = Marriage Broker
• Marriage Broker $100.00 to put boy and girl together
• Everything is set up
• Night before the boys goes nuts
• Girl calls off the wedding
Court = Boy interfered with marriage
• Marriage broker gets the fee.

“As with a repudiation or breach by material non-performance, breach by

prevention or hindrance or failure to cooperate both excuses the aggrieved party
from any duty to continue performance and gives a cause of action for damages. “

Patterson (P/Seller) v Meyerhofer (D/Buyer)

/\
PRIOR ORAL AGREEMENT |
(House 1) (H2) (H3) (H4) | (H5)
|
5 different houses |
Plaintiff = Re-Seller Defendant = Ultimate Buyer
• Discuss orally; enter into a written contract for houses

(Parole Agreement)
Why did the court not approve? 2 Reasons
1. Why it cant be proven
All prior or contemporaneous agreements merge into the existing contract
2. Why its not enforceable
Statue of Frauds = Contract for land has to be in writing

• Defendant showed up, outbid the plaintiff for the houses

• Did Defendant have to pay Plaintiff $620 = Yes = Def acted in bad faith
• RS 205 = Obligation to perform your part of the contract in good faith

EX.
• You hire Crye Lyke to find you a home
• You go out and look too
• (Probably not if no exclusivity)
• Honest expectation of the parties

KW Plastics v. U.S. Can Co. Important TORT Decision

47-50-109. Procurement of breach of contracts
unlawful — Damages. —
It is unlawful for any person, by inducement, persuasion, misrepresentation, or
other means, to induce or procure the breach or violation, refusal or failure to
perform any lawful contract by any party thereto; and, in every case where a
breach or violation of such contract is so procured, the person so procuring or
inducing the same shall be liable in treble the amount of damages resulting from or
incident to the breach of the contract. The party injured by such breach may bring
suit for the breach and for such damages.
You not only owe damages…..you owe 3 times!

Market Street Associates Ltd. Partnership v. Frey

• Tenant Landlord relationship.
• A provision states that if Tenant goes to landlord and asks for a loan of more
than $250,000, then the landlord has to give reasonable consideration to give
the loan.
• The tenant’s request for $2 million, which is turned down. They then reply by
stating that they will exercise the clause from the provision that allows them
to buy back the property at a formulated price in the agreement.
• Trial court granted summary judgment to GE.
• Good Faith is the honest expectation of the parties. The honest expectations
of the parties is the contract. Paragraph 34 is the intent. Internal intent is
irrelevant. The language stated that they had every right to ask for the
property.
If a party does something to interfere with the contract, that is bad faith.
“Sale and Lease Back”
• Get bank to build building for you, lease it back to them.

J.C. Penny (Market Street) GE

Tenant Landlord
• Cant get a mortgage / Cant get a loan
Need landlord to fix up property = Says NO
SO…MSA has a lawyer look at the contract
• Send them a request
• Then send them a letter to purchase” original price at 6%”
• MSA = We have every right under the contract to do this
• District Court = NO = “You tricked them” = You knew they wouldn’t
respond

Lewis = Problem with good faith

• Honest expectation of the parties = How do you get
• Look at the lease, contract
• Intent = What’s expressed in paragraph 34
• Objective Theory of Contracts
• Look at language to determine the expectation of the parties

Fact Pattern
Plaintiff / Defendant PUPROSELY DOES SOMETHINHG TO PREVENT THE CONTRACTS.

Billman V. Hensel
• Meyerhofer was going to buy 4 parcels of land that plaintiff did not own. He
was going to bid and obtain them at a foreclosure sale.
• They agreed on a price for the property, and agreed
• Under the written contract, he will buy the 4 houses, and then sell them.
• The oral agreement isn’t enforceable because of parol evidence rule and
statute of frauds.
• Buyer went to the auction and outbid seller on each property.
• She had to pay the $620 he would have gotten. Rest 205 means you can’t
interfere with the performance of the obligation.
• Honest expectation of the parties is key.

• Plaintiff: Hensels, seller of house

• Defendant: Billman, buyer of house
$54,000 home
Mortgage = $35,000
Couple had to come up with the remaining funds
Honest expectation of the parties
• If Billman did not go to bank = Breach Duty of Good Faith
• If Billman tells bank “don’t loan” = Breach of Good Faith

Perfect example = Failure to obtain financing

• Def still dint have the money
• Couldn’t get the money / Def attempted in good faith to get the money.

Neumiller Farms, Inc. v. Cornett

Condition precedent here was that potatoes did not chip to the Defendant’s
satisfaction. If condition precedent, the discretion must be exercised in good faith.
In testing good faith of a merchant, requires honesty in fact and the observance of
reasonable commercial standards of fair dealing in the trade. A claim of
dissatisfaction by a merchant buyer of fungible goods must be evaluated using an
objective standard to determine whether the claim is made in good faith. Because
there was evidence that the potatoes would chip satisfactorily, the jury was not
required to accept buyers claim to the contrary. A rejection of goods based on a
claim of dissatisfaction, which is not made in good faith, is ineffectual and
constitutes a breach of contract for which damages are recoverable.

U.C.C. 2-703: Where the buyer wrongfully rejects or revokes acceptance of goods...the aggrieved
seller may:
a. withhold delivery b. stop delivery by any bailee
c. proceed under 2-704 d. resell and recover damages
e. recover damages for non-acceptance f. cancel

“Classic Conditional Contract”

• Your performance” Obligation to pay”
• Conditioned on the other party

• Conditional Contract: Your obligation to pay is conditioned on the other

party’s performance.
• Here, the buyer’s condition to pay is conditioned upon U.S. Grade 1 potatoes
that are chipt to satisfaction.
• Mutuality required good faith on the part of the buyer to use good faith to
determine the reasonable evaluation of the potatoes. The buyer actually has
the upper hand because he can sit there and say no good, no good, and no
good.
• Here, the seller goes to someone that is selling them potatoes already, and
turns them in as his own, and the buyer rejects those as well which
demonstrated that he was rejecting in bad faith.
• The court can’t get into people’s mind, so you have to be clever.
• P 753-756 Note on Lender Liability
Discretion buyer
Condition
• The contract required that the potatoes be United States Grade No. 1 and
"chip (sic) to buyer satisfaction." As the term was used in this contract, a load
of potatoes contains 430 hundredweight and is valued at $1,827.50.

Honest Expectation of the Potatoes= Chip to buyer satisfaction

Obligation of a buyer / payer = what requires them / standard they are held by?
• Good Faith

What’s Required
• Perform your exercises if potatoes are satisfactory in an honest manner
• Reasonable Evaluation
• What does the seller do to prove buyer is using his discretion in a bad faith
manner
 • Goes to Roy Hartline = Uses his potatoes

HARD TO PROVE
A bank agrees to lend you money; usually conditions
• Lender liability
• Credit Agreements = Measurements have to be exercised in a good faith
manner
• Bank goes for years allowing you to be late….Then they call your loan
• Landlord = Kick’s you out for not keeping up property….Been that way for 5
years
Exercising BAD Faith

Feld v Henry S Levy & Sons Inc.

Bakery sells bread crumbs to plaintiff. Decides to stop, expensive, cites
impracticability of performance. Buyer defended against this type of thing with a
six month termination clause. Court held: Obviously, a bankruptcy or genuine
imperiling of the very existence of its entire business caused by the production of
the crumbs would warrant cessation of production of that item; the yield of less
profit from its sale then expected would not. Since bread crumbs were but a part of
defendant’s enterprise and since there was a contractual right of cancellation, good
faith required continued production until cancellation, even if there be no profit. In
circumstances such as these and without more, defendant would be justified, in
good faith, in ceasing production of the single item prior to cancellation only if its
losses from the continuance would be more than trivial, which overall, is a question
of fact.
Feld (P), a bread products retailer, entered into a contract with Henry S. Levy (D), a
wholesale bakery, by which D agreed to sell to P all bread crumbs produced in its
Brooklyn factory. After 250 tons of crumbs were sold, D stopped crumb production
because the operation was uneconomical. D informed P that it would resume
production if the contract price were increased. P declined and brought this suit for
breach of contract. P's motion for summary judgment on the issue of liability and
D's counter-motion for summary judgment or dismissal were both denied by the
trial court. Both parties appeal (interlocutory).
Defendant = Wholesale Bread maker = (So crumbs not main business)
Def = No 6 moths, just shut down
• The defense used is lack of mutuality, thus lack of consideration.
• Even if there were no consideration, UCC 2-306 which says that a
requirements contract is enforceable as good faith requires so long as the
quantity is not beyond the scope of the agreement.

Duty of Good faith on Plaintiff

§ 47-2-306. Output, requirements and exclusive dealings
(1) A term which measures the quantity by the output of the seller or the
requirements of the buyer means such actual output or requirements as may occur
in good faith, except that no quantity unreasonably disproportionate to any stated
estimate or in the absence of a stated estimate to any normal or otherwise
comparable prior output or requirements may be tendered or demanded.
(2) A lawful agreement by either the seller or the buyer for exclusive dealing in the
kind of goods concerned imposes unless otherwise agreed an obligation by the
seller to use best efforts to supply the goods and by the buyer to use best efforts to
promote their sale.

Requirements of contract are enforceable

• So long as quantity

Rules of Law
Agreements to sell all goods or services a party may produce or perform are
"output contracts" and serve a very useful commercial purpose.
• Under U.C.C. section 2-306, an output contract is deemed not to be indefinite
since it is held to mean actual "good faith" output; nor does it lack mutuality
of obligation since the producer is required to operate in good faith and
according to commercial standards of fair dealing.

Thus, good faith and reasonable diligence in light of the commercial background
and intent is the standard, not economic feasibility, and must be read into every
output contract, if not otherwise expressly stated.
• This imposes, unless otherwise agreed, an obligation by the seller to use its
best efforts to supply the goods.
• Furthermore, good faith cessation of production terminates any further
obligations.

In these circumstances, D would be justified, in good faith, in ceasing production of

the single items only if its losses from continuance would be more than trivial, which
is a question of fact, and which is unanswered on the face of the pleadings. Hence,
the motion for summary judgment should be denied.
U.C.C. 2-306(1) also provides an objective limit. Under that section, "no quantity
unreasonably disproportionate to any stated estimate, or in the absence of a stated
estimate to any normal or otherwise comparable prior output or requirements, may
be tendered or demanded."
• Under UCC section 2-306, a seller under an output contract has an implied
duty to continue manufacturing the contract product, subject to good faith
cessation, which excuses further performance.
• D quit production because it was not economically feasible, but the good faith
element requires inquiry into D's motives.
• D would be justified in ceasing production only if its losses from continuance
would be more than trivial, as if it would imperil the very existence of D's
business.
• The mere yield of less than expected profit would not justify D's cessation.
• Case remanded for factual determinations.

If you limit your sales, etc, exclusive relationship with person exploiting your
product--
• That person has an implied duty of good faith to exploit your product
• (Has exclusive right ) - Promote / Exploit

If no exclusive right----Still has a performance obligation

• Cant hide the product on a store shelf
Modification
Existing Contract gets modified
• For a new contract , need consideration
• (2nd Agreement
= Is there consideration….Modified on good faith…
• (Modification
Pre-Existing Duty Rule = Good Faith

§ 47-2-209. Modification, rescission and waiver

(1) An agreement modifying a contract within this chapter needs no consideration
to be binding.
(2) A signed agreement which excludes modification or rescission except by a
signed writing cannot be otherwise modified or rescinded, but except as between
merchants such a requirement on a form supplied by the merchant must be
separately signed by the other party.
(3) The requirements of the statute of frauds section of this chapter (§ 47- 2-201)
must be satisfied if the contract as modified is within its provisions.
(4) Although an attempt at modification or rescission does not satisfy the
requirements of subsection (2) or (3) it can operate as a waiver.
(5) A party who has made a waiver affecting an executory portion of the contract
may retract the waiver by reasonable notification received by the other party that
strict performance will be required of any term waived, unless the retraction would
be unjust in view of a material change of position in reliance on the waiver.

§89. MODIFICATION OF EXECUTORY CONTRACT

A promise modifying a duty under a contract not fully performed on either side is
binding
(a) if the modification is fair and equitable in view of circumstances not anticipated
by the parties when the contract was made; or
(b) to the extent provided by statute; or
(c) to the extent that justice requires enforcement in view of material change of
position in reliance on the promise.

Angel v. Murray = For “services” =UCC 2-209 Used for persuasion

“Law moving towards “IF IN GOOD FAITH”

Holding:
Yes, The primary purpose of the preexisting duty rule is to prevent what has been
referred to as the 'hold-up game.
An example of the “hold up game” is the Alaska packers case.
• The courts have been reluctant to apply the preexisting duty rule when a
party to a contract encounters unanticipated difficulties and the other party,
not influenced by coercion or duress, voluntarily agrees to pay additional
compensation for work already required to be performed under the contract.
• The modern trend appears to recognize the necessity that courts should
enforce agreements modifying contracts when unexpected or unanticipated
difficulties arise during the course of the performance of a contract, even
 though there is no consideration for the modification, as long as the parties
agree voluntarily.
Under the Uniform Commercial Code, s 2-209(1), which has been adopted by 49
states,
• '(a)n agreement modifying a contract (for the sale of goods) needs no
consideration to be binding.'

Although at first blush this section appears to validate modifications obtained by

coercion and duress, the comments to this section indicate that a modification
under this section must meet the test of good faith imposed by the Code, and a
modification obtained by extortion without a legitimate commercial reason is
unenforceable.

Section 89D(a), of course, does not compel a modification of an unprofitable or

unfair contract; it only enforces a modification if the parties voluntarily agree and if
(1) the promise modifying the original contract was made before the contract was
fully performed on either side, (2) the underlying circumstances which prompted
the modification were unanticipated by the parties, and (3) the modification is fair
and equitable.

Roth Steel Products v. Sharon Steel Corp.

• Price of steel shoots up and Sharon wants to charge more but they are in a
contract. Roth says we have a preexisting contract; Sharon says unless you
agree to a price modification we are not going to sell—this is duress. Roth
reluctantly agreed to the modification in writing, which, under the UCC, does
not require a new consideration for the modification. So ordinarily they would
be stuck but for the fact that a modification can only be made if it is made in
good faith. 2-209.
• The cutting edge of good faith is whether or not there is a duty of good faith
to modify the contract in light of changed circumstances (impracticability or
anything under 615). Probably not…
• Notes: Mutually agreed upon termination of the contracting relations—this
comes in many forms—but there has to be consideration for a mutual
termination, unless it is for the sale of goods and it is agreed to in writing and
is done in good faith (this case).

In November of 1972, Sharon Steel Corp. (D) made a below published prices
contract with Roth Steel (P) for P to buy 200 tons of “hot rolled” steel per month for
$148 per ton for the entire year of 1973.
Seller = Manufacture = Sharon
Buyer = Reseller = Roth
Price of steel shot up during a long term contract. Asked for more money or would
not sell steel. Entered into a Novation, both merchants, does it require
consideration? No, UCC allows 2-209, incorporates good faith requirement, if no
good faith here in asking for more money, then novation not good.
So..12 months ---200 Tons @ 148 per ton
• (Good over $500.00 falls within the Statute of Frauds)
1973 the market changed (Market opens to China)
• “Costing more for raw materials” = Basis for modification of the contract

(If no UCC – Need consideration under the common law)

Case focuses on whether the request by Sharon was in good faith…

Forseeability = “Is it or should it be known something is going to happen”

• If its foreseeable…Probably not in good faith
• Court in this case = Sharon could not have foreseen the raise in Market
process when the contract was formed.
• p.765 = Initial Contract not foreseeable

Based on the market numbers provided, the court found, these findings do not
support a conclusion that a reasonable merchant, in light of the circumstances,
would not have sought a modification in order to avoid a loss.
• So the first aspect is unforeseeable

The 2nd aspect = Modification Itself = You negotiate; You don’t dictate
The district court found that Sharon “threatened not to sell Roth and Toledo any
steel if they refused to pay increased prices after July 1, 1973” and, consequently,
that Sharon acted wrongfully.
We believe that the district court's conclusion that Sharon acted in bad faith by
using coercive conduct to extract the price modification is not clearly erroneous.

Holding
Therefore, we hold that Sharon's attempt to modify the November, 1972 contract, in
order to compensate for increased costs which made performance come to involve
a loss, is ineffective because Sharon did not act in a manner consistent with Article
Two's requirement of honesty in fact when it refused to perform its remaining
obligations under the contract at 1972 prices.
• When you force the other to act because they have no other alternative, you
violate 209.
• KNOW p 766 & 767

2 Part Test for finding Good Faith:

1. Whether, because of changes in the market or other unforeseeable conditions,
performance of the contract has come to involve a loss.
2. Honesty in Fact

Looking at performing in Good Faith

47-2-103. Definitions and index of definitions. —
(b) “Good faith” in the case of a merchant means honesty in fact and the
observance of reasonable commercial standards of fair dealing in the trade.
§205. DUTY OF GOOD FAITH AND FAIR DEALING
Every contract imposes upon each party a duty of good faith and fair dealing in its
performance and its enforcement.

1. Obligation to perform = Exercising good / faith discretion

2. Terminating Relationships = Lease , License, Employment
“You have the upper hand”

(Can put into the “Have the right to exercise termination” without regard to good
faith)
• If they sign this agreement, not much they can do.

Zapatha v. Dairy Mart, Inc.

“Termination of Franchisee”

• “Twelve month term provision”

• P signed earlier agreement without an attorney
• Brought new agreement…Didn’t want to sign it
So… 90 day term notice by the Defendants

Trial Court Found=

1. Term. Agreemnent was unconscionable /
2. Violated Good Faith

Supreme Court = Reversed “Its in the original agreements” . Court held that:
(1) principles of unconscionability and good faith within Uniform Commercial
Code applied to the agreement;
(2) termination clause of the agreement which authorized franchisor to terminate
the agreement without cause on 90 days' notice was not “unconscionable”
within meaning of the Uniform Commercial Code;
(3) record did not support conclusion that franchisor did not act in good faith or
was not honest in fact; and
(4) franchisees did not show that in terminating the agreement franchisor
engaged in any unfair, deceptive, or bad faith conduct.

Dairy Mart lawfully terminated the agreement because there was no showing that in
terminating it Dairy Mart engaged in any unfair, deceptive, or bad faith conduct.
• Have to look at agreement and performance obligation on both sides
• Now, there is a disclosure mechanism to let franchisee’s know what
there getting into.

§ 47-2-302. Unconscionable contract or clause

(1) If the court as a matter of law finds the contract or any clause of the contract to
have been unconscionable at the time it was made the court may refuse to enforce
the contract, or it may enforce the remainder of the contract without the
unconscionable clause, or it may so limit the application of any unconscionable
clause as to avoid any unconscionable result.
(2) When it is claimed or appears to the court that the contract or any clause
thereof may be unconscionable the parties shall be afforded a reasonable
opportunity to present evidence as to its commercial setting, purpose and effect to
aid the court in making the determination.

Elements
1. Procedural
• Means that the document you signed agreement you entered into was one
you had o choice to doubt in order to acquire / purchase whatever you were
entering into
• Contract is the same anywhere else you go.
2. Substantive / Unfair
• Default Clauses
• Interest Rates
• Collateral Requirements

Hillesland v. Federal Land Bank Ass'n of Grand Forks

“ Termination of an employee”
• No written contract
• At will employee
• Honest expectation = Anybody can be discharged
• Could have “Post Employment Document”

Lifetime employment add in the Newspaper

• P calls, accepts job
• Add is “puff” = Puff does not go into the contract

“May be where we are headed

Given the somewhat erratic development of this doctrine in the courts, we decline
to follow either the California formulation or any of the variant theories developed
in other jurisdictions.
We choose to align ourselves with the emerging majority of our sister states which
have rejected the implication of a covenant of good faith and fair dealing in
employment contracts.

Honest expectation At Will = Can be fired

• Courts are beginning to develop = Perform termination; Done in good faith
• Public Policy = Ethnicity, Gender, Age = Terminate for these = Bad Faith

This court found = Termination OK

Holding
The Legislature has clearly spoken in Section 34-03-01, N.D.C.C. Adoption of the
exception urged by Hillesland would effectively abrogate the at-will rule as applied
in this state.
 • We refuse to recognize a cause of action for breach of an implied covenant of
good faith and fair dealing where, as in this case, the claimant relies upon an
employment contract which contains no express term specifying the duration
of employment.
• Accordingly, we conclude that the district court did not err in granting
summary judgment against Hillesland on this issue.

• Hillesland worked for the bank. Had several promotions. Another bank
customer was in financial trouble, and he knew that another bank client had
offered to purchase the farm from the couple.
• He called the couple, offering to give financial counseling, and the couple
expressed only an interest in selling.
• Hillesland’s sons wanted to buy the farm, and he went through the bank
procedures, and got the purchase approved.
• The bank ends up firing him for these questionable tactics.
• He argues that he did have a contract. At the interview, there were ads
speaking of lifetime employment, lifetime opportunity, etc. He accepts the
job, and they then start paying him.
• The court said those were puffs, and do not go into the employment.
• P 774-777 * At will should mean that the honest expectation is that you can
fire anyone in the room. The courts begin to develop or statutes come along
with the concept that performing the at will firings require god faith. For
example, firing a whistleblower would be bad faith. Age, gender, marital
status, race, and some others are all bad faith conduct if they are the reason
for firing.
• Note p 777-782
• At will can be modified by post employment, or impacted by bad faith
exercise of discretion in that a person was terminated for some of these
reasons.

P. 777- 782 = Good Notes

At will Modified by =
1. Post employment
Bonus Example
• 3 top salesman get bonuses in January
• They are fired in December

2. Impacted by “bad faith”

• Fact Pattern could involve Bad Faith

Very Important Concepts (Vital to Remember when analyzing Conditions)

• 3 Concepts in an agreement.
• (1) Concept of promises-promises of performance, or promise for promises
(Covenants/Promises)
• (2) Representations: A statement in the agreement that something in the
agreement that something is or is not. If you misrepresent something, it’s a
basis to state that the covenant is no good.
 • (3) Conditions: Conditions limit promises. Conditions restrain what you have
to do or don’t have to do. Sometimes they are statements of fact. Sometimes
they are promises, and often times they look like representations.
(Ex- Running hurdles on a track. Every time you go over a hurdle, you get a
reward. If you fall down before getting over the hurdle, you get nothing and
can cause a forfeiture, which can be very harsh.) If it is not a condition, it is
often a promise, or covenant, and you don’t do it, then you have breached
the contract and you owe damages. If you materially breach the contract, it
can lead to the same result.
• Unlike math, there is no formula in taking a clients all inclusive contract and
figuring out what all these things are.
• Conditions must be performed because of good faith.

Conditions
• 3 Concepts in an agreement

1. Promises =
• By Performance
• Bi-Lateral
Old English they were called covenants
Promises / Covenant = Offers and Acceptance

2. Representations =
Statement in agreement that something is or is not
• Represent Something or
• Mis-Represent Something = Covenant is NO Good

3. Condition
• Conditions limit promises
• Conditions restrain what you have to do
• Conditions restrain what you don’t have to do
• Conditions can be Facts
• Conditions can be Promises
• Conditions can be Representations
If not a condition = Most likely a promise or a covenant.
If you don’t honor your promise / covenant = You breech the contract

Most people just “write it” out (W/O a lawyer) = You have to find
1. Promises
2. Representations
3. Conditions

What requires you to perform the conditions? = Good Faith

Conditions

Performing Party gets paid (Hurdle example)

Performing Party has to perform in a good faith manner = Get Paid
Problems = Reward is discretionary
1. Did he jump over the hurdle
2. What if Performing party assumes hurdle is 3 feet tall; but its actually 5 feet
tall and impossiabe to jump over
3. Should performing party be paid for effort to get over the hurdle.

Performing party = Good faith to perform

Paying Party = Evaluate performance in a good faith manner and pay

Sometime = 2 performing parties

Warranties = Representation (Sometimes Promises)

If you put in an agreement (Promise / Representation) for example: Something is =
1. Blue
2. Black
3. Soluble
You have made an express warranty
If you don’t express something specifically = You have an implied
warranty

1. Merchanbility = An item you sold can be re-sold

Communicate focus; or implied its fit for a particular purpose
2. Disclaimer Warranty = “As Is” or “NO Warranties”

What happens when you have a 313 (Express) vs. a 316 (As Is)
• Express will govern

3. Remedial Warranty =
• “10 years at 100,000 miles”
• “5 years at 50,000 miles”

Warranties, Disclaimers and the Parol Evidence Rule.

In contracts for the sale of goods, the seller may make four warranties of quality:
• Express Warranties, UCC 2-313;
• Implied warranty of merchantability, UCC 2-314;
• Implied warranty of fitness for particular purpose, UCC 2-315;
• Warranty of good title, UCC 2-312(1).

These warranties when made, are clearly terms of the agreement. To exclude or
modify the implied warranty of merchantability or any part of it the language must
mention merchantability and in case of writing, must be conspicuous.
Similarly, a warranty that “title shall be good and its transfer rightful” can be
excluded or modified ‘only by specific language’ or by special circumstances.
A warranty made may be very difficult to take away by disclaimer.
In the case of express warranties it is impossible:
• If words or conduct creating an express warranty and words or conduct
tending to negate or limit warranty cannot be construed as consistent with
 each other, negation or limitation is inoperative to the extent that such
construction is unreasonable. UCC 2-316 (1).

§ 47-2-313. Express warranties by affirmation, promise, description,

sample
(1) Express warranties by the seller are created as follows:
(a) Any affirmation of fact or promise made by the seller to the buyer which relates
to the goods and becomes part of the basis of the bargain creates an express
warranty that the goods shall conform to the affirmation or promise.
(b) Any description of the goods which is made part of the basis of the bargain
creates an express warranty that the goods shall conform to the description.
(c) Any sample or model which is made part of the basis of the bargain creates an
express warranty that the whole of the goods shall conform to the sample or model.
(2) It is not necessary to the creation of an express warranty that the seller use
formal words such as "warrant" or "guarantee" or that he have a specific intention
to make a warranty, but an affirmation merely of the value of the goods or a
statement purporting to be merely the seller's opinion or commendation of the
goods does not create a warranty.

§ 47-2-314. Implied warranty; merchantability; usage of trade

(1) Unless excluded or modified (§ 47-2-316), a warranty that the goods shall be
merchantable is implied in a contract for their sale if the seller is a merchant with
respect to goods of that kind. Under this section the serving for value of food or
drink to be consumed either on the premises or elsewhere is a sale.
(2) Goods to be merchantable must be at least such as:
(a) pass without objection in the trade under the contract description; and
(b) in the case of fungible goods, are of fair average quality within the description;
and
(c) are fit for the ordinary purposes for which such goods are used; and
(e) are adequately contained, packaged, and labeled as the agreement may
require; and
(f) conform to the promises or affirmations of fact made on the container or label if
any.
(3) Unless excluded or modified (§ 47-2-316) other implied warranties may arise
from course of dealing or usage of trade.

§ 47-2-315. Implied warranty; fitness for particular purpose; livestock

Where the seller at the time of contracting has reason to know any particular
purpose for which the goods are required and that the buyer is relying on the
seller's skill or judgment to select or furnish suitable goods, there is unless excluded
or modified under the next section an implied warranty that the goods shall be fit
for such purpose. With respect to the sale of cattle, hogs, sheep, and horses, there
shall be no implied warranty that the cattle, hogs, sheep, and horses are free from
disease.

§ 47-2-316. Exclusion or modification of warranties

(1) Words or conduct relevant to the creation of an express warranty and words or
conduct tending to negate or limit warranty shall be construed wherever reasonable
as consistent with each other; but subject to the provisions of this chapter on parol
or extrinsic evidence (§ 47-2-202) negation or limitation is inoperative to the extent
that such construction is unreasonable.
(2) Subject to subsection (3), to exclude or modify the implied warranty of
merchantability or any part of it the language must mention merchantability and in
case of a writing must be conspicuous, and to exclude or modify any implied
warranty of fitness the exclusion must be by a writing and conspicuous. Language
to exclude all implied warranties of fitness is sufficient if it states, for example, that
"There are no warranties which extend beyond the description on the face hereof."
(3) Notwithstanding subsection (2):
(a) unless the circumstances indicate otherwise, all implied warranties are excluded
by expressions like "as is," "with all faults" or other language which in common
understanding calls the buyer's attention to the exclusion of warranties and makes
plain that there is no implied warranty; and
(b) when the buyer before entering into the contract has examined the goods or the
sample or model as fully as he desired or has refused to examine the goods there is
no implied warranty with regard to defects which an examination ought in the
circumstances to have revealed to him; and
(c) an implied warranty can also be excluded or modified by course of dealing or
course of performance or usage of trade.
(4) Remedies for breach of warranty can be limited in accordance with the
provisions of this chapter on liquidation or limitation of damages and on contractual
modification of remedy (§§ 47-2-718 and 47-2-719).
(5) The implied warranties of merchantability and fitness shall not be applicable to a
contract for the sale, procurement, processing, distribution or use of human tissues
(such as corneas, bones, or organs), whole blood, plasma, blood products, or blood
derivatives. Such human tissues, whole blood, plasma, blood products, or blood

UCC § 2-313 – Express Warranties

1. Express Warranties by the seller are created by:
a. Affirmation of fact or promise creates an express warranty that goods conform
to affirmation.
b. Description of the goods creates express warranty that goods conform to description.
c. Sample or model of goods creates warranty that goods conform to model.
2. Use of formal words "warrant" or "guarantee" not necessary, but statement of opinion does
not create warranty.

UCC § 2-314 – Implied Warranties : Merchantability (Commercial Warranty)

1. Unless excluded or modified, a warranty that the goods shall be merchantable is implied in a
contract for the sale if the seller is a merchant with respect to goods of that kind.
2. Goods to be merchantable must be at least such as:
a. pass without objection in the trade
b. are of fair average quality
c. are fit for the ordinary purposes for which such goods are used.
d. are within quality permitted by agreement
e. are adequately packaged and labeled
f. conform to packaged labels
UCC § 2-315 – Implied Warranties : Fitness for Particular Purpose
Where the seller at the time of contracting has reason to know any particular purpose for which
the goods are required and that the buyer is relying on the seller's skill or judgment to select for
furnish suitable goods, there is unless excluded or modified under the next section an implied
warranty that the goods shall be fit for such purpose.

Note: Most warranties cannot be disclaimed in the consumer world. In adhesion contracts
warranties probably cannot be disclaimed.
- In dealing with consumers and basically dealing anywhere where you have inequality in
bargaining position, probably “as-is” will not disclaim that type of warranty.

Henningsen v. Bloomfield Motors, Inc.

• Couple is driving down the road
• She was making a left hand turn; Steering Wheel came off
• P sues Chrysler

Chrysler = Manufacture
Y
Dealer
Y (Warranty b/w these 2)
Customer

No Contract between manufacturer and the customer = Privity

Why does the court say the warranty is not effective

Adhesion Contract = Court does not enforce = Unconsionbility
• Procedural = All languages / All dealers the same
• Substantive = Doing away with all damages

See = Netscape = Warranties, Excessive Charges , Arbitration

• These types are not enforceable

Rules of Law
As we have said, warranties originated in the law to safeguard the buyer and not to
limit the liability of the seller or manufacturer.
• It seems obvious in this instance that the motive was to avoid the warranty
obligations which are normally incidental to such sales.
• The language gave little and withdrew much. In return for the delusive
remedy of replacement of defective parts at the factory, the buyer is said to
have accepted the exclusion of the maker's liability for personal injuries
arising from the breach of the warranty, and to have agreed to the
elimination of any other express or implied warranty.
• An instinctively felt sense of justice cries out against such a sharp bargain.
But does the doctrine that a person is bound by his signed agreement, in the
absence of fraud, stand in the way of any relief?

The traditional contract is the result of free bargaining of parties who are brought
together by the play of the market, and who meet each other on a footing of
approximate economic equality.
 • In such a society there is no danger that freedom of contract will be a threat
to the social order as a whole.
• But in present-day commercial life the standardized mass contract has
appeared.
• It is used primarily by enterprises with strong bargaining power and position.
Such standardized contracts have been described as those in which one
predominant party will dictate its law to an undetermined multiple rather
than to an individual.
• They are said to resemble a law rather than a meeting of the minds.

Application of Opinion
The warranty before us is a standardized form designed for mass use. It is imposed
upon the automobile consumer.
• He takes it or leaves it, and he must take it to buy an automobile.
• No bargaining is engaged in with respect to it. In fact, the dealer through
whom it comes to the buyer is without authority to alter it; his function is
ministerial-simply to deliver it.
• The form warranty is not only standard with Chrysler but, as mentioned
above, it is the uniform warranty of the Automobile Manufacturers
Association.

The gross inequality of bargaining position occupied by the consumer in the

automobile industry is thus apparent. There is no competition among the car
makers in the area of the express warranty. Where can the buyer go to negotiate
for better protection?

• Such control and limitation of his remedies are inimical to the public welfare
and, at the very least, call for great care by the courts to avoid injustice
through application of strict common-law principles of freedom of contract.
• Because there is no competition among the motor vehicle manufacturers with
respect to the scope of protection guaranteed to the buyer, there is no
incentive on their part to stimulate good will in that field of public relations.
• Thus, there is lacking a factor existing in more competitive fields, one which
tends to guarantee the safe construction of the article sold. Since all
competitors operate in the same way, the urge to be careful is not so
pressing.

Although the courts, with few exceptions, have been most sensitive to problems
presented by contracts resulting from gross disparity in buyer-seller bargaining
positions, they have not articulated a general principle condemning, as opposed to
public policy, the imposition on the buyer of a skeleton warranty as a means of
limiting the responsibility of the manufacturer.

For the reasons set forth in Part I hereof, we conclude that the disclaimer of an
implied warranty of merchantability by the dealer, as well as the attempted
elimination of all obligations other than replacement of defective parts, are violative
of public policy and void

“Conditions”
Each week builds off the next
Most difficult subject matter all year

1. Formation
2. Interpretation
3. Performance
4. Conditions

Condition – an event that everybody who enters into a contract expects should and can occur,
but for whatever reason it does not occur or is not fulfilled. Then there has been a breach of that
condition, a hurdle that has to occur before the other side is obligated to perform. Will occur
must occur before the other party’s obligation arises.
• Restatement § 224: "An event, not certain to occur, which must occur, unless its non-
occurrence is excused, before performance under a contract becomes due."
• The failure (or non-occurrence) of a condition relieves at least one party of her obligations
to perform the contract.
• By contrast, the failure of a warranty gives the non-breaching party a right to
recover damages.

Series of Hurdles
Time for performance
Events which are anticipated to occur, but if they do not occur the other party is not
obliged to perform
Events can be
1. Times
2. Conditions
• When street is paved, You will start striping
• Events / Acts that a 3rdParty performs
• Events/ Acts you perform
• Events / Acts other party performs

Great Rule – Conditions must be performed. If not performed, the other party may be
discharged from their obligation to perform.
Exceptions to the GR:
1) A condition must be performed or discharged unless it is an Independent, stand-alone
condition.
- What I promise to do is independent from what you have to do. You have to do it, regardless of
what I do.
2) Divisible Contract
3) Substantial Performance
4) Quantum Meriut
5) Modification of a condition or the promise, which reuires consideration, maybe estoppel, or
UCC § 2-209.

Condition Precedent – Event that must occur before the obligee must perform his part of the
contract.
- Note: conditions precedent must be pleaded up front in court, or are deemed waived.
Other issue = We don’t label things “conditions”
Is it a condition or promise that’s not a condition
 (Uncle / Nephew example)
B for $500.
Nephew = B , Promise you want me to make
Vs.
Uncle = “Condition” I will pay so long as you maintain a “B” average
• Condition you have a B

If condition precedent…Must occur, assumption will; other parties

requirement go by the wayside
Ex.
• Paint the room = Condition
• Pretty Color = Subjective
• Still an obligation to paint

Dove v. Rose Acre (strep boy misses his bonus)

• The bonus was expressly conditioned on a number of items, one of which was
to show up to work every day, sick or not. He met all of the requirements,
except he misses 2 days because of strep throat. The court denies his claim
of substantial performance because the events (conditions) had to occur for
him to receive a bonus. This rule is harsh; but there are ways to get around
condition precedent, one of which was mentioned in this case—substantial
performance.

• If a party accepts conditions precedent (here, not being tardy or absent from
a job), he is bound to perform all conditions before the other has to perform
(bonus).

Lewis said: The condition is an event that has to occur before the obligee must
perform his part of the contract. In this case, the P must work every day. He didn’t
do it. P argued substantial performance. Still, court said that the payment of the
bonus was conditioned on him doing everything he was supposed to do. P also
argued impossibility of performance, because he was sick, but court didn’t buy that.
Note
An obligor will often qualify his duty by providing that performance will not become
due unless a state event, which is not certain to occur, does occur. Such an event is
called a condition. An obligor may make an event a condition of his duty in order to
shift the oblige the risk of nonoccurrence.

Wal-Noon Corp. v. Hill(tenant goes and fixes the roof without notifying
landlord)
Normally a conditions precedent is express—in this case, the court finds an implied
condition precedent. The condition precedent was the notice—you must give me
notice so we can investigate the circumstances. Here, the roof was fixed by the
tenant without notice to the landlord, and because this implied condition of notice
was violated, the landlord was relieved of the paying for the roof.
 • Notice of leaky roof not explicit in contract. Obligation to roof, but the notice
itself is not listed in the lease. Nonetheless, it is implied that he must be
informed before he can repair it.

Notes:
• Conditions are promises, but different than promises because they are
events which must occur, and whose non-occurrence will excuse performance
by the other party. A promise might excuse performance if there is a material
breach; however, damages are usually awarded.

Lewis said: This case is important because we have a condition precedent but it is
not express. The lessor, D, says he has no obligation because the tenant didn’t give
any notice. The problem with this argument is that there is nothing expressed in
the contract. There is an obligation to repair the roof, but there is nothing at all
about notice.

Law: That which is necessarily implied in the language of a contract is as much a

part of it as that which is expressed. Unexpressed provisions of a contract may be
inferred from the writing.
Holding: Notice is an indispensable condition precedent to D’s duty to perform
under the covenant to repair. In this case, notice as a condition precedent to the
lessors’ obligation to repair is not only clearly apparent from the terms of the
written lease, it is indispensable to effectuate the intentions of the parties. The
notice is an indispensable condition precedent to D’s duty to perform under the
covenant to repair.

Note pg. 642: A breach of a condition precedent discharges other party from their
performance but doesn’t necessarily give rise to damages.

Note by Lewis: We deal with implied construction, which is the implied promise of
good faith performance. Restatement 2d § 205, in every contract there is an
implied promise that you will perform the contract in a good faith matter. In
applying this to the case above, good faith performance on the part of the lessee
implies the duty to give notice. This is only one other way to make the case above
besides the constructive express condition.
EX.
• “Cut my grass”
• But its “Cut my grass to my expectation” Not spelled out in the contract, but
it’s a constructive condition
What about the benefit bestowed = “Unjust Enrichment” Quasi Contract
Should I get (money) for that

p.801 = Cant have an Express and Quasi contract at the same time
If there’s a specific contract provision that covers it , not unjust enrichment

(Always make unjust enrichment argument)

“Unjust Enrichment” = Different game.
• Accept a service or performance under circumstances when it is reasonable
to comprehend “Your going to have to pay for that”
 • “If you accept service / receive a benefit “act performed” reasonable for you
to comprehend your going to have to ay for the service

Restatement (Second) sec. 86 provides:

• (1) A promise made in recognition of a benefit previously received by the
promisor from the promisee is binding to the extent necessary to prevent
injustice.
• (2) A promise is not binding under Subsection (1),
• (a) if the promisee conferred the benefit as a gift or for other reasons the
promisor has not been unjustly enriched; or
• (b) to the extent that its value is disproportionate to the benefit."

In Re Carter (battle over escrow funds and waiver)

• Under the Warranty Section, there is a promise that there will be no changes
in the financial condition of the company except in the ordinary course of
businesses. Meanwhile, the value plummets (either because of lost sales or
inventory problems) and the buyer wants to take money out of the escrow
fund to compensate for the lost value.
• Buyer's position is that Conditions Precedent Section also constituted a
'warranty' on the sellers' part that the financial condition of the company was
not less favorable than demonstrated by the financial statement of June 30
and, therefore, sellers having breached the warranty the buyer is entitled to
claim the difference (as damages) between the net worth on June 30 and
September 17 (date of closing). A warranty is simply a promise that
something will be in a certain condition.
• Sellers take the position that the Conditions Precedent Section constituted a
'condition' and not a warranty and the buyer had simply the right to refuse a
consummation of the sale if the 'condition' was not fulfilled; when the buyer
elected to consummate the sale it waived the condition. In other words, the
buyer could have invoked the condition that the seller’s business be in a no
less favorable condition (for any reason, not just the ordinary course of
business—the condition precedent was broad and sweeping), but this had to
occur prior to or at the time of closing. The non-occurrence of this event
released the buyer’s ability to invoke the condition.

Seller wins. As mentioned in the previous case, the contract was drafted with
particularity—there were no ambiguities. The drop in value was because of ordinary
course of business (permitted under the warranty) and the buyer waived the
condition precedent when he consummated the deal.

Sale of businesses. Contract included warranty and conditions precedents sections

indicating the financial condition at closing would be same as when negotiated, in
the normal course of business. It wasn’t, and suit followed.
• Was it a warranty of same financial condition, or a condition precedent that if it wasn’t in
the same financial condition they didn’t have to close the deal? Court found latter.
• - Condition precedent was that company would be in said financial shape. If not, the buyer
doesn’t have to buy the company. All they could sue for is a change that was not in the normal
course of business.
• - Not a warranty. If it were a warranty, the remedy would have been damages.
Schoettle v. Kardon –

Omni Group, Inc v. Seattle-First National Bank

Clark v. West (story of the drunken lawyer turned writer)

• A waiver does not require consideration. A modification of a contract, on the
other hand, does require consideration (the preexisting duty rule requires
something new and different) unless it is under UCC 2-209 which does not
require any new consideration, as long as it is in writing, signed by both
parties, and done in good faith (KFC mid-term example).
• Plaintiff treats this as a condition precedent which he didn’t fulfill but that
they waived. The court says that if plaintiff can prove that the defendant had
full knowledge of the plaintiff's non-observance but allowed him to continue
under the understanding that he would be paid the full amount, the
defendant should be estopped from pleading that there was not an express
waiver.

Excuses of Conditions by Waiver: Since a condition is a term of the contract, it

can be deleted or modified by a subsequent agreement between the parties. If,
however, the condition is a material part of the agreed exchange, the agreement
must satisfy the usual requirements for an enforceable modification, including, on
occasion, consideration (like for services or the sale of land that requires something
new and different, but not the sale of goods, as discussed above under 2-209). It is
frequently asserted, however, that a condition can be excused by conduct by one
party to the contract which falls short of an agreed upon modification (but, as Lewis
says, it is better to put this in the contract if you can—only argue waiver if you have
to). A word used to describe this situation is waiver, which is defined as “the
voluntary relinquishment of a known right.” Where express conditions are involved,
waiver is associated with the following recurring fact patterns, aptly illustrated by
insurance contracts:
o 1) Plaintiff insured has not satisfied an express condition that notice
will be given within 30 days after a covered accident, but Defendant
insurer, with full knowledge, elects to process the claim rather than to
deny payment. Because of the “election” after the condition has failed,
the insurer cannot thereafter insist upon the condition.
o 2) Immediately after the accident, Defendant insurer tells plaintiff
insured not to worry about the 30 day notice condition. Relying on this,
Plaintiff submitted the notice 45 days of the accident and defendant
refused to process the claim. The condition is waived because Plaintiff
materially changed his position in reliance of defendant’s
representation.
o 3) After the plaintiff has substantially performed the contract, the
defendant insists that it will not insist upon a non-material condition.
The condition is waived without “election” or “estoppel.” More broadly,
(Lewis points out) when one party has promised or represented that he
will not insist on express conditions, “waiver” becomes a judicial
device where an agreed modification cannot be found.
• A contract term that prohibits a non-written modification can be waived
without a writing under common law and maybe under UCC 2-209.
 • An anti-waiver clause is relevant, but not dispositive. If a condition is
continually allowed to be breach, then, as Lewis would point out, you have an
obligation in good faith to do what you say you would do if the condition is
breached. If you don’t, waiver might be successfully argued.

Law: A waiver has been defined to be the intentional relinquishment of a known

right. It is voluntary and implies an election to dispense with something of value, or
forego some advantage which the party waiving it might at its option have
demanded or insisted upon.

Difference between a modification & waiver:

• Modification requires new consideration, unless it’s under UCC § 2-209, and
• Waiver requires known relinquishment of a known right. You have got to
know that you have a right to waiver.

Holding: D had full knowledge of P’s non-observance of that stipulation (not

drinking), and with
such knowledge he not only accepted the completed manuscript without objection,
but repeatedly avowed and represented to P that he was entitled to and would
receive the royalty payments, and D relied on this. P was entitled to receive and
would receive the $6 per page, full royalties. Although D’s silence and acceptance
alone would not constitute a wavier, P’s allegation that D expressly waived the
condition ought to be heard by the court.

Lewis says from this case: (verbs p. 133)

Even if you have this horrible condition precedent, there are 3 ways around
it:
(1.)You can elect not to require it,
(2.)You can waive it either supported by consideration or estoppel
(3.)You can just waive it under the doctrine of waiver.

Waivers do not require consideration. Modification requires consideration because

that is novation (except under UCC 2-209).

Note pg. 659 (You better etch this note under your eyeballs!!!) It is frequently
asserted that a condition can be excused by conduct by one party to the contract
which falls short of an agreed modification. An umbrella covering some of these
situations is the word “waiver,” which has been defined generally as the “voluntary
relinquishment of a known right.”

#1: Analysis reveals that that where express conditions are involved, “waiver” is
associated with three recurring fact patterns, aptly illustrated by insurance
contracts:
(1.) P-insured has not satisfied an express condition that notice be given
within 30 days after a covered accident, but D-insurer, with full
knowledge, elects to process the claim rather than to deny payment.
 Because of the “election” after the condition has failed, the insurer cannot
thereafter insist upon the condition.
Note: Restatement 2d § 84 (1): conduct of insurer is a “promise to perform all *
* * of a conditional duty under an antecedent contract in spite of the non-
occurrence of the condition * * *”.

(2.) Immediately after the accident, D-insurer tells P-insured not to worry
about the 30-day notice condition. Relying on this, P submitted notice
within 45 days of the accident and D refused to process the claim. The
condition is waiver because P has materially changed his or her position in
reliance upon D’s representation. See UCC 2-209 (5); Restatement 2d §§
84 (2), 89 (c).

(3.) After P has substantially performed the contract, D states that it will
not insist upon a non-material condition. The condition is waived without
‘election” or “estoppel.” More broadly, when one party has promised or
represented that he or she will not insist upon express conditions,
“waiver” becomes a judicial device to avid forfeiture in particular cases
where an agreed modification cannot be found.

#2: Effect of Term Requiring Written Modification: (page 659-660)

A contract term that prohibits a non-written modification can be waived

without a writing at common law.
UCC 2-209(2), however, provides that “A signed agreement which
excludes modification or rescission except by a signed writing cannot be
otherwise modified or rescinded . . .” Does this foreclose a non-written
waiver? In Wisconsin Knife Works v. National Metal Crafters, the court,
relying on UCC 2-209(4), held it did not. An “attempt at modification or
rescission [which] does not satisfy the requirements of subsection (2) . . . can
operate as a waiver.” The court, however, disagreed on the type of waiver
required. The majority, speaking through Judge Posner, concluded that the
waiver conduct must induce reliance by the other party. See UCC 2-209(5).
Another Judge dissented finding that UCC 2-209 incorporated a broader
concept of waiver. In short, proof of reliance was not required if the
promisor, with knowledge of the failed condition, elected not to insist on it
and proceeded with performance.

UCC 2-210 (c) provides:

Subsection (c) permits a term “prohibiting modification or rescission except
by a signed record” and then provides: “However, a party whose language or
conduct in modifying or rescinding a contract is inconsistent with a term requiring a
signed record to modify or rescind the contract may not assert the term if the
language or conduct induced the other party to change its position reasonably and
in good faith.”

Dynamic Mach. Works, Inc. v. Machine & Elec. Consultants, Inc.

Issus = “Under the Massachusetts version of the Uniform Commercial Code, does a
buyer have a right to retract a written extension allowing more time for the seller to
cure defects in a delivered product absent reliance on the extension by the seller?”
Application of Opinion
Dynamic contends that its letter of December 9, 2003, is a waiver (or at least a
partial waiver) of the time by which Machine had a duty to perform, and not a
mutual agreement to change the terms of the contract.
• In support of this position, it points out that the letter does not expressly
state that both parties “agreed” to the “last and final deadline” of Friday,
December 19, 2003, and reflects only what Dynamic's president “stated” in
that regard, without any reference to Machine's position on the matter.
• Moreover, it argues that the use of the word “grant,” as opposed to “agree,”
is dispositive.

Machine, on the other hand, argues that Dynamic's extension of the commissioning
deadline constitutes a modification because
(1) the extension satisfies the Statute of Frauds
(2) the extension was granted in a letter written and signed by Dynamic's
president
(3) the letter granting the extension “clearly demonstrates that both
parties had discussed and agreed to the new commissioning deadline”;
and
(4) the terms of the letter are sufficiently definite.
Holding
Determining whether Dynamic's letter of December 9 (or the conversation to which
it refers) constitutes a waiver or a modification is in large measure a question of
fact.
• As applied to this case, the answer turns on whether Dynamic and Machine
mutually agreed to extend the commissioning deadline to December 19,
2003.

(“Under Massachusetts law, generally speaking, one party cannot unilaterally

change the obligations of another under contract.... Rather, the parties must
expressly or impliedly agree to a modification”).
(One party cant dictate or modify the terms)
• The fact that the extension was granted in a signed writing does not of itself
establish that the extension was intended to be a modification, and not a
waiver.
• A waiver “can be inferred from a party's conduct and the surrounding
circumstances,” but it can also be “express,” , and there is no reason why it
cannot be in writing.
• Conversely, the absence of consideration for the extension of the time of
performance does not preclude a finding that the extension was the product
of a mutual agreement to modify the contract terms, as the UCC explicitly
states that “[a]n agreement modifying a contract ... needs no consideration
to be binding.”
Disposition
• We answer only the certified question and cases cited, and the judge has not
asked us to determine whether the December 9 letter extending the time for
 performance constitutes a modification of the July agreement or a waiver of
Machine's duty to perform by a particular date.
Ferguson v. Phoenix Assur. Co. of New York

On the facts in this case money was taken from the assured's safe by an admitted
entry into the safe by actual force and violence, which was evidenced by visible
marks upon the inner door of the safe.
• Under these circumstances the assertion by the insurance carrier of the
evidentiary requirement, that there be visible marks of force and violence
upon the exterior of the outer door, is obviously designed to defeat recovery
on a just claim under the policy which insured the felonious abstraction of
money from within the safe, by a person making felonious entry into such
safe by actual force and violence, where both doors of the safe were duly
closed and locked.

Holding
• Had the insurance carrier desired to exclude loss by safe burglary where the
combination of the outer door is worked by manipulation, such provision
should have been incorporated under the ‘EXCLUSIONS' in the policy.
• The appellant asserts in its brief that the appellee is demanding payment ‘for
a loss that clearly was excluded in the contract,’ (Emphasis added) thus
recognizing the need for an exclusion in the policy to support its contention,
but without actually having made such exclusion in the policy.
• The judgment of the lower court is affirmed.

The next few cases don’t specify the “Condition Precedent”

Conditions Precedents are events (promises or acts) that must take place before the
requirement of the other party’s duty to perform arises. If the precedent is not
performed, then the duty of the other party to perform is discharged.

The Great Rule of Conditions

• Must be performed or event occur

Exceptions to such a harsh rule of forfeiture:

• (1) Waiver-Known relinquishment of a right.
(a) Unconditional-(Can be retracted)
(b) Relied upon by other party (Estoppel)-Can’t be retracted
(c)Written per-2-209(5)- (Can be retracted)
• (2) Modification
- New contract, must have consideration or 2-209
Note p 817-819
Interpreting Conditions to lessen their harshness. (Can be a harsh rule)

Exceptions have been created to avoid the harsh rule of forfeiture

1st.
Waivers = Known relinquishment of a right
a. Unconditional Waiver
b. Relied upon by the other party
c. Written per 2-205
How do these (a) and (c) differ (b) = These can be retracted
• b. Relied upon to the deterimnet of the other party = Estopple
(Dynamic Case)
2nd.
Modification
New Contract
a. Supported by consideration
b. 2-209

p.817-819 discusses this.

§ 47-2-209. Modification, rescission and waiver

(1) An agreement modifying a contract within this chapter needs no consideration
to be binding.
(2) A signed agreement which excludes modification or rescission except by a
signed writing cannot be otherwise modified or rescinded, but except as between
merchants such a requirement on a form supplied by the merchant must be
separately signed by the other party.
(3) The requirements of the statute of frauds section of this chapter (§ 47- 2-201)
must be satisfied if the contract as modified is within its provisions.
(4) Although an attempt at modification or rescission does not satisfy the
requirements of subsection (2) or (3) it can operate as a waiver.
(5) A party who has made a waiver affecting an executory portion of the contract
may retract the waiver by reasonable notification received by the other party that
strict performance will be required of any term waived, unless the retraction would
be unjust in view of a material change of position in reliance on the waiver
• If you want to make something a Condition Precedent = Call it a CP in the
contract

Rule by Lewis, THE GREAT RULE: Conditions must be performed. If the

condition is not performed, the other party may be discharged from their
obligation to perform.

The exceptions to the GREAT RULE are as follows:

(1.) That a condition must be performed or discharged unless it is
an independent, stand- alone contract. What I promise to do is
independent from what you have to do. Ex.: If I promise to build
a house and I also promise to put in a swimming pool and I build
the
house and I don’t perform the other promise of building the pool,
you
are not discharged. But if I promise to build the house and I
don’t build
the house, your obligation to pay is discharged.
(2.) A contract is divisible.
(3.) The condition has been substantially performed
(4.) Quantum meruit.
Kingston v. Preston
Kingston – Buyer (Plaintiff)--------------Preston – Seller (Defendant)

Facts:
• P contracted with D to serve him for 1 year and a quarter as a covenant-
servant, in his trade of a silk mercer @ $200/year and in consideration of the
premises the D covenanted that at the end of the year and a quarter he
would give up his business of a mercer to the P, and a nephew of the D or
some other person to be nominated by the D, and give up to them his stock
in trade at fair valuation. And that between the young traders, deeds of
partnership should be executed for 14 years, and from and immediately after
the execution of the deeds the D would permit the said young traders to
carry on the business in the D’s house.
• Then the declaration stated that the P would accept the business & stock at a
fair valuation with the D’s nephew, or such other person, and execute such
deeds of partnership & that the P should and would at or before the sealing
and delivery of the deeds cause and procure good and sufficient security to
be given to the D to be approved by the D of $250/month to the D in lieu of
the monthly stock trade until the value of the stock should be reduced to
$4000.
• When the time arrived, D refused to perform the transfer. P sued for non-
performance, claiming that he had begun performance and was willing to
continue to perform but that D refused to perform. D claimed that P did not
offer sufficient security.

Have a document, look within the four corners

Events / Promises within

1. 1 years as an apprentice / 200lbs
2. End of the year give up business
3. Tender his stick
4. Let them stay at the house

1. Pay def. 250 lbs per month until stock $4,000.00

2. Give security for the payments
Security / Collateral = Security for payment
e.g. “Reposes car for payments”

Before you (Buy house / car/ $) bank will want security for those loans.

3 Types of promises
1. Independent Promise
A. Smile when we do business
B. Keep shoes shined

Don’t go toward the consideration of the agreement.

2. Dependant Promise
 • Condition Precedent

3. Mutually Dependant = Both promises must occur at the same time

How do you determine if it’s a CP or MD

Look at the language of the contract

• MD = Logical both things occur at the same time -----Occur at the same
time
• CP = Conditions that must be performed 1st before.

Courts don’t like the CP = “Harsh with forfeiture”

“Contingency Cases” = Work years on a case, lose the jury trial, get nothing”

3 Types of Covenants: (KNOW)

(1.) Mutual and Independent-where either party may recover
damages from the other for the injury he may have received by a
breach of the covenants in his favor,
(2.) Conditional and Dependent-in which the performance of one
depends on the prior performance of another and until this prior
condition is performed the other party is not liable to an action
on his covenant, and
(3.) Simultaneous or Mutual Conditions to be performed at the
same time-if one party is ready and offered to perform his part
tend the other neglected or refused to perform his, he who was
ready and offered has fulfilled his engagement and may maintain
an action for the default of the other, though it is not certain that
either is obligated to the first act.

Holding: Before D delivered his business to P, P was to show good

security for the payment of the money to be received by D. Since P
failed to give good security, D had no obligation to perform.
Notes: Historically, all promises were treated as independent ones; however, this
was terribly unfair. Let’s say you promise to sell me a house and I promise to pay
you. Then, you say “show me the money” but I say “I am not showing you the
money, but sell me the house, and “if you don’t I will sue you” and I do sue you. I
get a judgment against you for not selling the house and I have never shown you
that I have the money and ability to pay for the house. This is why condition
precedent is valuable and needed.

PALMER V. FOX
Is this promise or covenant dependant or independent? General rule is that courts
will construe covenants to be dependant unless a contrary intention clearly
appears. Where acts of the parties are concurrent and to be done or performed at
the same time, the covenants are dependant, and neither party can maintain an
action against the other, without averring and proving performance on his part.

Here covenant concurrent. The covenant to improve the property must have been
intended by the terms of the contract to have run concurrently with the covenant to
pay the full purchase price within five years.
• The parties’ intent controls whether a particular promise is a condition or a
promise. The courts, however, will construe covenants (especially if there are
multiple promises in the contract) to be dependent unless a contrary
intention clearly appears. A party should not be forced to pay out his money,
unless he can get that for which he stipulated.
Here, the promise to pay is dependent on the promise to cinderize. Ask
yourself which promise take the longest time. Those events that take longer
(cinderize) usually go before events that take shorter (write a check). When
the performance of one requires a length of time and one does not, then the
one that requires the length of time comes first—use common sense.
• Here the judge says that courts will try to construe promises in a contract as
dependent—however, that depends on the circumstances. If there is a single
promise that is not conditioned upon performance (i.e., a promise to pay a
real estate commission at a convenient time after the sale is completed)—
then the courts will construe that as an independent promise—but if the
promise is one conditional, that is, if I bring you a ready and willing able
purchaser you will pay me—then those types of conditional promises are
construed as being dependent upon the promise to pay.
• Unless it is expressly stated, it is hard to prove that something was intended
to be construed as an independent promise. If you have a question of your
inability to finish the swimming pool, but you need to make sure that all the
lot owners pay you for everything, you need to say that my promise to do the
finishing work is totally independent of your promise to pay me for the lot.
The breach does not mean that you are off the hook; it simply means that in
order to get relief the other party will have to sue for specific performance or
sue for damages, but they still have to perform their end of the bargain (pay
you).
More Notes: Once you determine a promise is dependent, the real question comes
down to what type of dependant promise is it: condition precedent (the promise to
pay is conditioned on your performance to pay), condition subsequent (rare), or
concurrent. If it can all be done at the same time, then it is a simultaneous
performance requirement of the covenants (paying, tendering the deed, tendering
the survey, getting the keys); neither party can maintain an action against the other
without averring and proving performance upon his part. If not, where the
performance of only one party under such an exchange requires a period of time,
the duty that takes the longest always goes first, unless otherwise specified.
• Leases: The promise to pay and the promise to furnish a habitable leasehold
with water, gas, electricity, are dependent promises so that the promise to
pay the lease is conditioned upon the lessor to provide a habitable abode.

NOTE * p. 835-838 (Know this Note) How you determine independent and
dependent promises.
 • If promises are dependent, they are to be performed at a mutual period of
time. If it is clear that one performance will take a period of time, and the
other doesn’t, then the one that requires time must be performed first.

Court states in case: We want to treat all promises as being

dependent promises. If we treat everything as a dependent promise, or
dependent covenant, then we are forced to figure out what promise must
be performed first unless the contract writer has done a very good of
detailing what comes first and saying the “cinderizing” is an independent
promise, and, if the other party signs it, there is an agreement. If it is not
specifically set forth what is dependent and what is independent, the
presumption is that everything is dependent. That is the great
assumption.

Holding: Here, the covenants appear to be concurrent and

dependent since it would appear that both D’s payments and P’s
improvements were to be made within the five-year period. P’s breach
was material since the value of D’s investment would be substantially
impaired if the street improvements were not made.
Lewis said: The P being guilty of a substantial breach of a dependent
covenant cannot maintain this action.

I. Notes pgs. 676-679: Discuss in study groups and you better

know!!!
#2 note: Summary of the last case. It talks about independent or
mutually dependent promises. It is independent if the parties intend that
the performance by each of them is by no means conditional on the
performance of the other. In other words, the parties exchange promises
for promises, not the performance of promise for the performance of
promises. A failure to perform an independent promise does not excuse
nonperformance on the part of the adversary party, but each is required
to perform his promise, and, if one does not perform, he is liable to the
adversary party for such nonperformance. That is hard to prove this day
and age, so you need to specifically state that in there. Ex.: If you have a
question about your ability to finish the house, but you need to make sure
that all the lot owners pay you for everything, you need to say that my
promise to do the finishing work is totally independent of your promise to
pay me for the lot. The breach of an independent promise doesn’t mean
you are off the hook. It simply means that in order to get relief the other
party will either have to sue for specific performance or sue for damages,
but they still have to perform their part of the bargain.
Promises are mutually dependent if the parties intend performance
by one to be conditioned upon p-performance by the other, and, if they be
mutually dependent, they may be (a) precedent, i.e., a promise that is to
be performed, (b) subsequent, i.e., a corresponding promise that is not to
be performed until the other party to the contract has performed a
precedent covenant, or (c) concurrent, i.e., promises that are to be
performed at the4 same time by each of the parties, who are respectively
bound to perform each. * * *
 Judge Mansfield changed the rule and decided that performance of
one covenant might be dependent on prior performance of another,
although the contract contained no express condition to that effect. * *
*The modern rule, which seems to be of almost universal application, is
that there is a presumption that mutual promises in a contract are
dependent and are to be so regarded, whenever possible.

Pg. 677 #3:

The doctrine of constructive dependency of promises should * * * be
rested solely on their fairness, and not on any intention of the parties
where they express none. Thus, the determination of mutual dependency
should arise from the “inherent justice of the situation and not the
unexpressed intention of the parties. Question: What is the inherent
injustice in requiring the vendee to pay before the improvements are
completed if parties did not agree that the improvements should be
completed before payment?

Pg. 678 #4:

The modern view on the order of performance is stated in
Restatement 2d § 234:
(1)Where all or part of the performances to be exchanged under an
exchange of promises can be rendered simultaneously, they are
to that extent due simultaneously, unless the language or the
circumstances indicate the contrary.
(2)Except to the extent stated in Subsection (1), where the
performance of only one party under such an exchange requires a
period of time, his performance is due at an earlier time than that
of the other party, unless the language or the circumstances
indicate the contrary.
Note: Lewis says that the restatement is where you have
independent promises, each taken different lengths of time, longest
promise must occur first. (Ex.: You don’t pay someone before
painting your fence.)

To clarify everything said: If it can all be done simultaneously, it is considered to

be a simultaneous covenant. Paying, tendering the deed, tendering the survey,
getting the keys—if all could be done at the same time, that performance is due
earlier than the other party’s, unless specific language indicates otherwise. If
you are to paint a house and you are to be paid, which takes place first?
Painting the house.

Pg. 679: #5:

The modern view on leases: The promise to pay and the promise to
furnish a habitable, leasehold with water, gas, electricity, are
dependent promises so that the promise to pay the lease is conditioned
upon the lessor to provide a habitable abode.

Independent and Dependant promises.

Promises and counter promises made by the respective parties to a contract have
certain relations to one another, which determine many of the rights and liabilities
of the parties.
1. Independent of each other, or
2. Muturally dependent, on upon the other.
They are independent of each other if the parties intend performance by each of
them is in no way conditioned upon performance by the other. The parties
exchange promises for promises, not the performance of promises for the
performance of promises.

A failure to perform an independent promise does not excuse non performance on

the part of the adversary party, but each is required to perform his promise, and, if
one does not perform, he is liable to the adversary party for such non performance.

Promises are mutually dependant if the parties intend performance by one to be

conditioned upon performance by the other, and if they be mutually dependant,
they may be:
a. Precedent, ie a promise that is to be performed before a corresponding promise.
b. Subsequent, a corresponding promise that is not to be performed until the other
party to the contract has performed a precedent covenant
c. Concurrent, promises that are to be performed at the same time by each of the
parties, who are respectively bound to perform each.

JACOB & YOUNG v. KENT

• Owner puts in a condition precedent that the builder must first build the
house.
• Later, the owner discovers that the pipe was not all Reading brand, and the
builder did not perform the build.
• Builder says that what he used was just as good (Substantial Performance).
The other argument is that the pipe brand was just an independent promise.
• The defense of the owner is that the pipe brand is also a condition precedent.
• The court finds that the building of the house was the condition precedent,
and the mistake in pipe was done in good faith and that equates to
substantial performance.

Final Amount Owner keeps = $3,500 -------Contends house wasn’t completed to

speck
• CP to payment “Build the house” = “I’ll pay”
• “Architect / Builder” = I built; Its been inspected
• Home owner = “You didn’t complete the project”
Def = “Just as good pipes”
• Substantial Performance
• Independent Promise

House with specific pipes in contract, but other pipes were put in.
• Change in pipe was neither willful nor fraudulent.
Were specific pipes a condition precedent that must occur before you have pay?
• No, not expressed or implied.
Was a different pipe good enough, Substantial Performance? Yes.

Independent v. Dependant Promises, or between promises and conditions.

- Some promises are so Independent that they can never by fair construction be conditions of
one another.
- Others are so Dependant that they must always be conditions.
- Others, though dependant and thus conditions when there is departure in point of substance,
will be viewed as independent and collateral when the departure is insignificant.
(This is the case here. It was dependant and thus a condition, but the departure was
insignificant.)

O.W. Grun Roofing and Construction Co. v. Cope

Grun installs a fully functional roof, but the wrong color; the owner didn’t want to
pay. Grun says they substantially performed; the owner says, “put on a roof that is
to my satisfaction.” Can this satisfaction be illusory? No—good faith requires the
owner to use reasonable discretion.
• The principle which allows recovery for part performance in cases involving
dependent promises may be expressed by saying that a promisor who has
substantially performed is entitled to recover, although he has failed in some
particular to comply with his agreement.
• To constitute substantial compliance the contractor must have in good faith
intended to comply with the contract, and shall have substantially done so in
the sense that the defects are not pervasive, do not constitute a deviation
from the general plan contemplated for the work, and are not so essential
that the object of the parties in making the contract and its purpose cannot,
without difficulty, be accomplished by remedying them (cannot be a material
breach). Such performance permits only such omissions or deviations from
the contract as are inadvertent and unintentional, are not due to bad faith, do
not impair the structure as a whole, and are remediable without doing
material damage to other parts of the building in tearing down and
reconstructing.
The court reasons that “a party should not be forced to pay out his money,
unless he can get that for which he stipulated”. The general rule is full
performance, or no payment. They then try to argue quantum merit (unjust
enrichment because they received a benefit), but the court says that the owner
received no benefit because it wasn’t what the owner wanted.
• The roof was installed and functioned properly, but it didn’t match.
• Contractor said that the condition precedent was to build the roof, and so the
fact that it did not match was not a condition. He had performed substantial
performance. (p. 845-845)
• The court said that having a non matching roof was not a substantial
performance.
• Substantial performance must be a good faith attempt to comply with specs.

• In this case, roof so defective in appearance that court felt contract not
substantially performed.
Lewis reminds us: What is the great rule? The owner doesn’t have to pay until the
roof is finished. Unless the roof is finished, there is no obligation to pay.
Note #3: The willful transgressor must accept the penalty of his transgression but
the “transgressor whose default is unintentional and trivial may hope for mercy if he
will offer atonement for his wrong. Section 241 of the Restatement 2d is in accord:
the “extent to which the behavior of the party failing to perform or to offer to
perform comports with standards of good faith and fair dealing” is a circumstance
relevant to the question. In other words Lewis says: In order to be substantial
performance, there cannot have been bad faith committed. The jury also
determines this.
Since there is evidence that P can secure uniform coloring only by installing a
completely new roof and the court cannot say as a matter of law that the
patch job essentially serves the same purpose as a roof of uniform color, D
has not substantially performed the contract.

LOWVY V UNITED PAC. INS. CO.

Here a contractor was hired by a developer for 1) excavation and grading and 2)
street improvements. A dispute arose over some additional costs, and the
developer says get lost before he starts the street improvements, hires another
contractor, and doesn’t pay. Their argument is that the whole job was a condition
precedent—that is, if you don’t finish the whole job, we are excused from paying.
Can the contractor claim substantial performance? No, because less that half the
job was complete (he never starts the street improvements). What can the
contractor claim then? That it is a divisible contract. It’s hard here because it was all
one contract price, but the court did an analysis and determined that it was divisible
(mainly because the contractor performed additional grading work worth $7,200,
necessitated by changes in requested plans on the part of plaintiffs and not
attributable to defendant). Remember, however, that the presumption is that it is
an entire contract and not divisible.
• “The consideration was apportioned and thus a divisible contract (A contract
under which the whole performance is divided into two sets of partial
performance, each part of each set being the agreed exchange for a
corresponding part of the set of performances to be rendered by the other
promisor, is called a divisible contract). This is important, because under the
circumstances, the fact that defendant did not perform the second phase of
the contract does not prevent his recovering for work done under the first
phase.”
• Now the key is that because it was divisible and split into two sets of partial
performance, then the contractor could rely on substantial performance—
here he finished 98% of the work in the first division and was granted
compensation based on that amount.
Notes: What if you are paid 100K when it is framed, 100K when the roof is
completed, 100K when the exterior walls are completed, 100K when the interior
walls are completed, etc.? You would have to make the determination whether
those times for payments are condition precedents or are simply convenient times
for payment. If they are simply convenient times for payment and you don’t
substantially complete the entire house, you shouldn’t get paid under the great rule
(KKKEYYY!!!!!) don’t complete the whole job, you don’t get paid). If they are
condition precedents, they may or may not make the contracts divisible (where
substantial performance could be argued), but it would certainly discharge the other
party’s performance.
Court found the contract to be divisible
• Different times for payment
• Not necessarily a condition precedent, but convenient time for payment
• 4 Corners of K
• The court finds that there is one contract with 2 phases.
Owner = Condition Precedent = You do all the work or you don’t get paid
Court = Makes it a divisible contract
• The court finds that the excavators substantially performed the first phase,
and should be paid for that portion, but not the second.
Another Exception = Divisible Contract

Lewis states regarding this case: If there is a contract that is divisible in nature, if
you substantially perform one part of the contract, they you should be paid for that
even if you don’t substantially perform the second part. To determine if the
contract is divisible or not, you must look at the words of the contract. The general
rule is that contracts are not divisible unless it can be shown that the intention of
the parties is that they are divisible.

Note pg. 689 #2:

It is commonly stated that whether a contract is divisible depends upon the
intention of the parties, and the intent to have a divisible contract may be inferred
from such factors as the ease with which the agreed consideration can be
apportioned to separate performance.
Restatement 2d § 240 states: the question is whether the “performances to
be exchanged under an exchange of promises can be apportioned into
corresponding pairs of part performances so that the parts of each pair are properly
regarded as agreed equivalents. * * *” Comment d states “the process of
apportionment is essentially one of calculation and the rule can only be applied
where calculation is feasible.” Even so, the contract is not divisible unless it is
“proper to regard the parts of each pair as agreed equivalents” and, in many cases,
the “parties * * * cannot even be said to have had any actual intention on the
point.” Comment e.
Put another way, the “injured party will not be required to pay for a part of
the performance that he has received if he cannot make full use of that part without
the remainder of the performance” and, in making this determination, a court “must
* * * take account of the possibility that the remainder of the performance can be
easily obtained from some other source.”

Divisible Contract – a contract under which the whole performance is divided into two (or more)
sets of partial performance, each part of each set being the agreed exchange for a
corresponding part of the set of performances to be rendered b the other promisor.

Note: Unless there is a clear intent to make a contract divisible, the court will presume it to be a
total contract rather than a divisible one.
UCC 2-307 – “Unless otherwise agreed all goods called for by a contract for sale must be
tendered in a single delivery and payment is due only on such tender but where the
circumstances give either party the right to make or demand delivery in lots the price if it can be
apportioned maybe demanded for each lot.”
IOW, where the circumstances indicate that a party has a right to deliver in lots, the price may
be demanded for each lot if it is apportionable.
- Both the Common law and UCC will assume against a divisible contract.

Doctrine of Substantial Performance

• When a contract is divisible in nature, if someone substantially performs on
one part of the contract, then you should be paid for that even if they don’t
substantially perform on the second part.
Commentary.
• To prevent the harsh result of leaving D, the contractor, with no recovery for
his work, the courts will apply the doctrine of substantial performance to
parts of divisible or severable contracts.
• A contract is "divisible" only if it is expressly made so (e.g., by stipulating
compensation for each separate installment as performed), or if a reasonable
interpretation indicates that a failure to perform one installment would not
constitute a failure of the basic consideration bargained for.

Britton v. Turner
March to March = 12 Months
• Plaintiff Left in December
The plaintiff Britton worked for the defendant Turner for one year for a compensation of $120. He
only worked for 9 ½ months then left without cause. Defendant refused to pay Plaintiff anything
for his work and plaintiff sued to recover the value of his services.
Law: The employee may recover the benefit to the employer less damages the
employer suffers by reason of the early termination, with the contract providing a
limit on the amount of recovery. To deny recovery would place the party
committing the earlier breach in a better position than one who substantially
completes the contract, thus defeating the policy of encouraging the fulfillment of
contracts. The employer should not be allowed to receive a windfall to the
detriment of the employee.

Holding: Defendant actually received a benefit from the labor performed over and
above the damage occasioned by the failure to complete, and there is as much
reason why he should pay the reasonable worth of what has thus been done for his
benefit.

Lewis says regarding this case: The great rule is full performance. Exception one is
substantial performance. Don’t forget that you could’ve argued that this was a
divisible contract, monthly contract. Of course, P argues unjust enrichment that D
received a benefit of P’s work. That argument works in this case and not the roofing
case above because the owner didn’t receive the benefit that was bargained for in
the roofing case.

- Quantum meriut - reasonable amount for services rendered (unjust enrichment, quasi-
contract).
- The benefit and advantage which the party takes by the labor, therefore, is the amount of value
he receives, if any, after deducting the amount of damages. (Here, $95 – no damages proven by
defendant = $95)
- The defendant gets the benefit of labor day by day, as opposed to a manufacturing contract
when if he stops he receives no benefit.

You have to perform Condition Precedent to get paid

NO EXCEPTIONS = So they argue…
• Unjust enrichment BUT…They already contracted the work.

Conditions: Great Rule: Performance or Event occur; If not other party discharges/
forfeiture.
(Britton v. Turner)
• Exceptions:
(1) Modification
(2) Waiver
(3) Substantial Performance
(4) Divisible Contract
(5) Unjust Enrichment
(6) Impracticability of Performance
(7) Frustration of Purpose

Impracticability and Frustration of Purpose.

Ex: Landowner has 1 million tons of rock under their property. They enter K to
remove the rock. Contractor will pay the owner a certain sum for the rock, and
repair the land.
• There are underground rivers on both sides. An earthquake occurs, and the
rock gets covered up with water.
• Since the contractor can’t get to the rock, he is excused.
• They can’t get to the rock.

A basic assumption is present.

• The condition has to be a basic assumption. If it is foreseeable that the rocks
aren’t there, or the machine can’t be made, etc., then it is allocated risk
among the parties.
• Neither party can be at fault
• Parties can allocate risk in the K
• You may be excused from full performance, but it is an equitable thing that
the courts might require some repayment of sorts. / Court may allocate risk
based on the language of the contract

Restatement and UCC UCC 47-2-615 (Know this section)

47-2-615. Excuse by failure of presupposed conditions
Except so far as a seller may have assumed a greater obligation and subject to the
preceding section on substituted performance:
(a) Delay in delivery or nondelivery in whole or in part by a seller who complies
with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if
performance as agreed has been made impracticable by the occurrence of a
contingency the nonoccurrence of which was a basic assumption on which the
contract was made or by compliance in good faith with any applicable foreign or
domestic governmental regulation or order whether or not it later proves to be
invalid.
(b) Where the causes mentioned in paragraph (a) affect only a part of the seller's
capacity to perform, he must allocate production and deliveries among his
customers but may at his option include regular customers not then under contract
as well as his own requirements for further manufacture. He may so allocate in any
manner which is fair and reasonable.
(c) The seller must notify the buyer seasonably that there will be delay or
nondelivery and, when allocation is required under paragraph (b), of the estimated
quota thus made available for the buyer.

§ 47-2-616. Procedure on notice claiming excuse

(1) Where the buyer receives notification of a material or indefinite delay or an
allocation justified under the preceding section he may by written notification to the
seller as to any delivery concerned, and where the prospective deficiency
substantially impairs the value of the whole contract under the provisions of this
chapter relating to breach of installment contracts (§ 47-2-612), then also as to the
whole:
(a) terminate and thereby discharge any unexecuted portion of the contract; or
(b) modify the contract by agreeing to take his available quota in substitution.
(2) If after receipt of such notification from the seller the buyer fails so to modify the
contract within a reasonable time not exceeding thirty (30) days the contract lapses
with respect to any deliveries affected.
(3) The provisions of this section may not be negated by agreement except insofar
as the seller has assumed a greater obligation under the preceding section.

U.S. v. Wegematic Corp.

D contracted with government to deliver a computer system and be
delivered on 6/30/57, with liquidated damages of $100 per day for delay,
and by terms that P could charge any excess cost to D if P procured
alternative services. Development of system took longer than expected
and in October D requested cancellation of contract. P purchased a system
form IBM and sued D for contract amount plus another $4,000 in interest.
Trial court found for P and affirmed. Issue: Does practical impossibility
excuse performance? No. Or, do basic engineering difficulties which
prevent timely delivery constitute commercial impracticability excusing
performance? No.

• Wegematic relies on 2-615. UCC 2-615, entitled 'Excuse by failure of

presupposed conditions,' provides that: Except so far as a seller may have
assumed a greater obligation delay in delivery or non-delivery is not a breach
of his duty under a contract for sale if performance as agreed has been made
impracticable by the occurrence of a contingency the nonoccurrence of which
was a basic assumption on which the contract was made.
• The latter part of the test is really a complex way of saying “how much risk
the promisor assumed.” We see no basis for thinking that when an
electronics system is promoted by its manufacturer as a revolutionary
breakthrough, the risk of the revolution's occurrence falls on the purchaser;
the reasonable supposition is that it has already occurred or, at least, that
the manufacturer is assuring the purchaser that it will be found to have when
the machine is assembled. 'The Board in its invitation for bids did not request
 invitations to conduct a development program for it. The Board requested
invitations from manufacturers for the furnishing of a computer machine.'
Notes: Once again the big issue is forseeability: the developers of this device must
have known that this might have been the case. Existing impracticability is much
more problematic that supervening impracticability because it is foreseeable that
something might happen (i.e., that the coal might not be there, we might not be
able to design this system in time). If it’s foreseeable that it’s going to occur, then
you don’t get the excuse of impracticability.
• If you don’t disclose something that is material, it could be either fraud or
become impracticable and excuse performance. What about differing site
conditions? The standard contracts for contractors generally provide that
they will evaluate the property in the bid process as to the cost of preparing
the site for the building. The liability falls with the contractor, because it is
foreseeable based on this process; unless of course, it is bargained otherwise.

Existing Impracticability v. Mutual Mistake: The major difference is that in

mutual mistake both parties are making an assumption, the existence or non
existence of which is part and parcel to the agreement—its material—it is the
essence of the agreement. An existing impracticability usually involves a unilateral
mistake. You would argue both.
• Superior Risk Test: If you are in the business, even if it might not be
foreseeable (that the oil is not in the ground)—if you don’t contract around it
—you bear the risk.

UCC 2-615 – Excuse by failure of Presupposed Conditions (Lewis said KNOW!)

This is the basic assumption test. Was the agreed performance made impracticable by
something happening that was assumed not to happen? If so, the delay in delivery or non-
delivery may not be a breach of his duty. “The fact that the event was unforeseeable is
significant as suggesting that its non-occurrence was a basic assumption. However, the fact that
it was foreseeable, or even foreseen, does not, of itself, argue for a contrary conclusion, since
the parties may not have thought it sufficiently important a risk to have made it a subject of
bargaining.”
- Another significant factor may be relative bargaining positions and the relative ease with which
either party could have included a clause. Another may be the effectiveness of the market in
spreading the risks around.
(See p.722-23 for more details on 2-615 and Restatement counterpart)

Government – If the government has furnished detailed specifications that the contractor must
follow, or specifications which require a particular result and the contractor is unable to perform
on time, the risk is placed upon the government if the specifications were “defective” or an
implied warranty of “suitability” was made. (Note: In Wedgematic, if the “technical impossibility”
makes performance “impracticable, or unfeasible or commercially senseless”, the contractor
would have been excused. Wedgematic could have foreseen them, though…) (p.721)

Superior Risk Bearer – The most efficient bearer of the particular risk in the particular
circumstances. Thus, the promisee may be the superior risk bearer when the promisor could not
“reasonably have prevented” the event and the promisee could have “insured against the
occurrence of the event at a lower cost than the promisor.” (p.724)
In Wegematic there was an allocation of risk by virtue of the fact that they said they
could create the computer. The fact that there was liquidated damages in the K
meant that they contemplated the fact that it might take longer, etc.
• If that’s in the agreement, then that’s a foreseeable event, the occurrence of
which was contemplated.
UCC 2-615 works like this= It incorporates, impracticability, frustration of purpose,
and force majeure. (A party’s performance is excused if there’s a flood, a fire, a riot,
etc.)
• What happens if there’s a force majeure means that they’ve discussed the
whole spectrum of bad things, and only those mentioned are the excuses for
performance.
• If the parties require due diligence of property, and only bid after doing this,
then the owner has allocated the risk to the contractor.

Supervening Impracticability:
Taylor v. Caldwell
• Music hall was rented for a series of concerts. Before the first concert, the
hall burns down. It was not the fault of either party.
• If the K stipulated insurance, or required the owner to provide another place
to perform, then the event was foreseeable, and he would be liable. If parties
contract around possible events then they are assuming that events could
occur that interfere.
• Here, the parties assumed the hall would be there, and no provisions were
made. It is a condition precedent, and both parties are excused.
Holding
Both parties to the contract are excused. In a contract where the performance
depends on the continued existence of a person or thing, a condition is implied that
the impossibility of performance arising from the perishing of the person or thing
shall excuse the performance of the contract.

Commentary.
Note that the court distinguished this case from a lease contract since there was
authority that covered the situation of a lease holding that a lease must be
performed despite unforeseen hardship on one of the parties. There is not,
however, a satisfactory distinction for the lease cases.
• UCC 2-613 states that where a specified thing is destroyed, the contract is
voided, or if the thing is goods which have deteriorated so as to no longer
conform to the requirements set forth by the contract, then the contract can
be avoided or the goods can be accepted with an allowance for their lesser
value.

1. What if K provided =
• Music Hall must have insurance
• Music Hall must have another venue
Foreseeable = Does not excuse performance

2. Party could move music Hall (Contract around fire)

• How do we know he won’t move it on a whim?
• Good Faith exercise of discretion
Excused performance of parties.

p. 869 Treat as implied “condition precedent” existence of a building for the

performance
P 872: Constructive condition of the assumption that the hall would be there.
P 873: Non existence of a person.
• Rest. 262. If a particular person’s existence is necessary, then his death
excuses performance.
• Existence as condition

Rest. 2d 262 Death or incapacity of an essential person: If the existence of a

particular person is necessary for the performance of a duty, his death or such
incapacity as makes performance impracticable is an event the non occurrence of
which was a basic assumption on which the contract was made.
Rest. 2d 263: If the existence of a specific thing is necessary for the performance of
a duty, its failure to come into existence, destruction, or such deterioration as
makes performance impracticable is an event the non-occurrence of which was a
basic assumption on which the contract was made.

Canadian Industrial Alcohol Co. v. Dunbar Molasses Co.

P, buyer, entered into a contract with D for the sale of 1.5 million galls of molasses.
It was stated in contract that D was to buy the molasses from National Sugar
Refinery. Amount was about 60% of the refinery’s normal run. However, D shipped
only 344,000 gallons since the total output of the refinery was only 485,000 gallons,
much below the plant’s capacity. D had no contract wit the refinery. P sued for
breach. Judgment for P and affirmed.
Issue: Does failure of a seller’s supplier amount to impossibility of performance?
No.

The CIA contracted with DM for the delivery of molasses. DM was purchasing from National Sugar
Refinery.
NSR reduced their output, so DM couldn’t deliver as promised.
Was NSR’s production level an implied condition of the contract? No.
Was NSR’s reduction foreseeable? Yes.
Change in production was not a supervening impracticabliliy. If DM wanted the contract to be
conditioned on NSR’s output, they should have said so in the contract (made it an expressed
condition).
- If it is not specified, impracticability cannot be used. It is foreseeable that you could not supply
what you promised if you plan on getting it from someone else. If you depend on that supplier,
you better specify it in the contract. Otherwise, if something happens to them, you will not have
anything to turn to for relieve from liability.

Law: Where a court believes that the risk was foreseeable and under the control of
one of the aprties (here, D could have foreseen the risk and gotten a contract with
the refinery), the court will not relive performance due to impossibility (the theory
being that the party with control has contributed to the impossibility). Had refinery
burnt down, D would have been excused since destructio would not have been a
risk assumed by D.
 • Notes: The court argues that this is not impracticability of performance. The
case should have been decided on condition precedent. The defendant is a
jobber/wholesaler—this is different from a broker because a jobber actually
owns the commodity and then resells it to the ultimate buyer (you could see
how this could be important in asserting warranties). A broker will not take
title—he will arrange the sale but does not own the commodity—
consequently, all the risk passes completely by him. In this case the
defendant/jobber says I will supply you with 1,500,000 tons. A jobber can be
long or short—it just depends what the price is (speculation): long (you
contract for the sale and you have plenty of the commodity) and sometimes
you might be short (have less or none at all at the time of contracting).
• The defendant/jobber is smart—he names the manufacturer—the usual run
from a particular company. This is key—if hadn’t done that, he was absolutely
short and when he only sells a certain amount he would be liable. I named
the manufacturer and it was clearly a condition precedent—I have to get it
from this manufacturer, and if I can’t because they didn’t produce enough, I
am excused. Unfortunately, he does not specifically say it is a condition
precedent—he argues it is implied. Lewis thinks it was a condition precedent
—although it is not spelled out in the bargaining process, it is an implied
condition precedent. (Because they named that particular place)If I’m the
ultimate buyer, I want to negate this condition precedent by saying that you
can name the manufacturer, but I want a clause in there says that you have
to get it from somewhere then. You want to specify a source!!!!! If you don’t,
you can get into big trouble because there might be other places you can get
goods from.

Dills v. Town of Enfield

The plaintiff, Dills, sued the Enfield development agency to recover a $100,000
deposit Dills had paid the agency under an option. This contract included provisions
for its termination by either party. One provision allowed the developer to withdraw
and to reclaim his deposit if, AFTER the preparation of construction plans
satisfactory to the agency, the developer could not obtain the necessary mortgage
financing. Section 703(b) of the contract allowed the agency to terminate the
contract, retaining the deposit as liquidated damages, if the developer failed to
submit acceptable construction plans. This is the battle of the condition precedents.
The word “after” is the key here.
• Next, the defendant wants to argue supervening impracticability—the trial
court rejects this because it was bargained for as a risk in the contract as a
condition precedent—if it was bargained for, how could it be unforeseeable?

A party claiming that a supervening event must demonstrate that: (1) the event
made the performance impracticable; (2) the nonoccurrence of the event was a
basic assumption on which the contract was made; (3) the impracticability resulted
without the fault of the party seeking to be excused; and (4) the party has not
assumed a greater obligation than the law imposes (which they did because there
of the bargained for condition precedents).
More Notes: Unless you contract around it, fluctuations in the market and price
volatility are no excuse because everyone has to deal with it. Now if you specify a
source, unless it was foreseeable, then you will be excused—otherwise, forget it!
1. Submission of plan
2. Financial Capacity
T3. Terminate if
• Plans
• Cant get financing
4. “You contracted for it”
• Condition Precedent = In order to get his money he had to turn in the plans

Def could have/ should have argued

• Substantial performance
• Bad Faith (Accept plans on good faith)
• Unjust Enrichment (Rule ) If you have a contractual provision on point, you
don’t get it.

Condition precedent Note, the specific terms control the general ones in a contract
interpretation. Here the contractor has to submit plans before they back out.
Plaintiff said can’t get financing so why submit plans? Is this a superceding
impracticability? No, Condition precedent. Parties are businessmen and should
have been more careful. Superceding impracticability is like a bomb on a building
site (not with failure to plan).

Foreseeable risk of no financing so not an impracticability. Also, increased financial

burden means greatly increased financial burden.
Restatement § 261 (p.735) – Certain conditions cannot be met because of unforeseen
occurrences. A party claiming that a supervening event or contingency has prevented, and thus
excused, a promised performance must demonstrate that:
1) The event made the performance impracticable.
2) The nonoccurrence of the event was a basic assumption on which the contract was made
3) The impracticability resulted without the fault of the party seeking to be excused; and
4) The party has not assumed a greater obligation that the law imposes.

Foreseeability Test is The Key! - The event upon which the obligor relies to excuse his
performance cannot be an event that the parties foresaw at the time of the contract. The
“central inquiry” is whether the nonoccurrence of the alleged impracticable condition “was a
basic assumption on which the contract was made.”
- If an event is foreseeable, a party who makes an unqualified promise to perform necessarily
assumes an obligation to perform, even if the occurrence of the event makes performance
impracticable. (p.736)

Changes in Market Price or Cost of Performing (p.738)

– In cases where the market price at the time of performance is either dramatically higher or
lower than the contract price but the cost of performance is relatively stable, the courts have
refused relief.
- A similar result – no excuse – is reached when the promisor’s cost of performance dramatically
exceeds the contract price due to supervening events beyond its control and without its fault or
negligence. Commercial impracticability require and “especially severe and unreasonable loss.”
- In cases involving increased costs of performance however, the risk event, whether it be an Act
of God, war, extreme inflation, or an oil embargo, may, unlike market price fluctuations, be a
“”contingence the non-occurrence of which was a basic assumption on which the contract was
made.” UCC 2-615(a).
Centex Corp. v. Dalton
Thrift (Like a bank (Savings and Loan)
• Dalton is to be paid $750,000 for Centex closing on a deal to buy a thrift.
• Government passes a regulation that forbid Centex from paying Dalton. If
they had paid him, then it would be illegal.Dalton is to be paid $750,000 for
Centex closing on a deal to buy a thrift.
• Government passes a regulation that forbid Centex from paying Dalton. If
they had paid him, then it would be illegal.

Kaiser-Francis Oil Co. v. Producer’s Gas Co.

• Essentially, PGC contends that a force majeure event occurred because the
demand for gas sharply decreased, with a corresponding decrease in the
resale price of gas that PGC was obligated to take or pay for under the
contracts. Force majeure provision do not protect against a decline in
demand or an inability to sell something at a profit. Risk allocation was
bargained for in the “take or pay.”
• The purpose of a take-or-pay clause is to apportion the risks of natural gas
production and sales between the buyer and seller. The seller bears the risk
of production. To compensate the seller for that risk, the buyer agrees to
take, or pay for if not taken, a minimum quantity of gas. The buyer bears the
risk of market demand.
• Take or pay provisions favor the seller because they get paid regardless.
Lewis favors “reopen” clauses that allow the parties to negotiate the contract
if there are dramatic price fluctuations.
Force majeur: Common law equivalent of 2-615 except Force majeure means that
there is a provision in the K that excuses performance under certain conditions.
Strikes, War, Acts of God, etc.
• This provision in a sale of goods K takes away from 615. Anything that occurs
subsequent to the execution of the K that hasn’t been contracted around,
and is unforeseen excuses performance.
Should have language that says any other event that is unforeseen that materially
alters performance.
• P 893-894 NOTES: Reopener Contract: When a major price change occurs,
then a good faith reopen contract can occur to adjust for those changes.
Kaiser-Francis Oil v Producer’s Gas: Take or pay K—you either have to take the
minimum order or pay for the minimum if you don’t want the commodity.

• Good case: the court said the force majeure argument was ridiculous. Just
because you’ve lost profit doesn’t mean you’re excused from performance.
• Remember, Lewis has a problem with force majeure. He likes a 2-615
provision.

Frustration of Purpose – It can be done, but there’s no purpose to do so.

- Example – Tyson fight and the renting of Vegas arena. After Tyson couldn’t get Nevada boxing
license, the renting of the arena would serve no purpose, even though it was still possible to do
so.
1) What was the foundation of the contract, the event? The object must be so completely the
basis of the contract that, as both parties understand, without it the transaction would make little
sense. The frustration must be substantial as well, not merely some event that would make the
event less profitable or even make them sustain a loss.
2) Was the event prevented?
3) Was it possibly contemplated that this event could happen?

Paradine v. Jane (frustration of purpose)

• Jane failed to pay the rent on leased property for a period of 3 years.
Paradine, lessor, sued to recover the rent, but defendant defended on the
ground that Prince Rupert’s army had invaded and put the defendant out of
possession. The issue was whether the defendant had to be paid.

This is close to a supervening impossibility because he can’t occupy the land and an
argument could have been made that it was impossible for him to occupy the land,
but it is certainly not impossible for him to pay the rent. It is not impossible to
perform. He can pay the rent. We don’t really have an impossibility. This is not
Taylor v. Caldwell impossibility because there the stage burned down and there was
an impossibility to perform on the stage. But here it is possible to pay the rent. The
court said it was possible to pay the rent, so the defendant was not discharged
because the thing no longer exists. How is frustration of purpose different from the
doctrine of impracticability? With frustration of purpose, you could do it, but the
purpose is no longer there

Krell v. Henry.
• The defendant paid a deposit for some rooms on the day of the King’s
procession, which never happened. Defendant sues for his deposit back,
plaintiff for the rest of the balance.
• In my judgment the use of the rooms was let and taken for the purpose of
seeing the Royal procession. It was not a demise of the rooms, or even an
agreement to let and take the rooms. It is a license to use rooms for a
particular purpose and none other. And in my judgment the taking place of
those processions on the days proclaimed along the proclaimed route, which
passed 56A, Pall Mall, was regarded by both contracting parties as the
foundation of the contract.
• Frustration of purpose—three steps. First, was the foundation of the
contract the event? Second, was the performance of the event prevented?
Third, was it possibly in the contemplation of the parties that this could
occur? What about Tyson-Mandalay?

A lease agreement to rent an apartment for 2 days to view the coronation out of the
window. The coronation was postponed. The whole reason for the K was to view the
coronation parade. They were excused from renting for frustration of purpose.
“each case must be judged by its own circumstances….” That is frustration of
purpose.
1. Having regard to all the circumstances, what was the foundation of the K?
2. Was the performance of the K prevented?
3. Was the event which prevented the performance of the K of such a character
that it cannot reasonable be said to have been in the contemplation of the
parties at the date of the K?
 If all these are answered yes, then both parties are excused.

Washington State Hop Producers, Inc. v. Goshie Farms, Inc.

• Hop base existed only by virtue of the market order. Its value to these
purchasers consisted not of its resale market price, but of its franchise to sell
hops. Therefore, it is not the decline in market price (because frustration
rarely applies to a change in financial position), but the irrelevance of control
of hop base after the 1985 crop year that supplies the frustration justifying
rescission. Without this basic assumption, there wouldn’t have been an offer
and acceptance in the first place.
• The plaintiff argues that this event (that the USDA would terminate the
program) was foreseeable and that the growers assumed the risk by
contracting for the bid. While this may be true, the converse is also true—it
could have been argued that the same applied to the trust, and they could
have allocated that risk into the contract, especially since they were the
drafters.
• For frustration of purpose, the object must be so completely the basis of the
contract that, as both parties understand, without it the transaction would
make little sense. Second, the frustration must be substantial. It is not
enough that the transaction has become less profitable or that he will sustain
a loss. For example, if the lease was to sell new cars and there are no more
new cars, it doesn’t make sense to have the lease.
Notes: It is very hard to win with frustration and impracticability arguments. 2-615
includes all of the excuses. Force majeure is not another category like the others—
force majeure clauses uses all of those excuses, and more—it includes things
foreseen or unforeseen that are not forecast to happen, but if do happen, excuses
the performance of the parties—it is a codification of impracticability and
frustration, and more.

Breach of Contract: A failure to perform when performance is due. (3 Types)

• (1) When the agreement calls for performance, and you don’t perform, then
there is breach.
• (2) Repudiation or Anticipatory Breach: Prior to performance, you state that
you are not going to perform, or you do an act that shows you are not going
to perform.
• (3) Duty of Good Faith: If you have an obligation to exercise discretion, or you
prevent another from performing in good faith, then you have breached.

A promisor commits a “breach” of contract when he or she fails without justification

to perform when a promised performance is due (actual). If the promisee has fully
performed the agreed exchange, the remedy for breach is limited to an action in
damages or specific performance. If the promisee still has duties to perform under
the agreed upon exchange, the breach, if material, may also discharge those
remaining duties. Thus, for a “material” breach by the promisor, the promisee has
both the affirmative (sue for damages) and defensive (cancel the contract)
remedies.

A promisor commits a breach of contract, when by words or conduct, he repudiates

a performance not yet due under the agreed upon exchange (anticipatory). If both
parties still have obligations under the contract and the promisor’s repudiation is of
a material part of the agreed upon exchange and the repudiation has not been
nullified by a retraction or otherwise, the promisee, again, has both the affirmative
and defensive remedies and these remedies can be invoked before the time set for
performance.

Finally , when the circumstances or the promisor’s words or conduct create doubt
whether the performance will be forthcoming as agreed but do not amount to a
breach, the promisee has a more limited remedy. In the proper circumstances, the
promisee may suspend performance and demand adequate assurance form the
promisor. If the assurance of due performance is not forthcoming, the promisee
may treat it as a repudiation and resort to the usual affirmative and defensive
remedies.

Hochster v. De La Tour (promisor says I don’t need you as a courier

anymore on a future date)
• The original contract was entered into in April 1852 to commence on June 1.
On May 11, defendant said he had changed his mind. What do we call that
when prior to the time of performance one party says they are not going to
perform? This is an anticipatory breach because the time for performance has
not occurred.
In a situation like this, what choices does plaintiff have?
o He can sue. He doesn’t have to wait until the time to perform. He can
bring suit now.
o He can demand performance. If time for performance comes and there
is no retraction, an actual breach occurs and you can sue.

• A courier was reserved for a 3 month tour of Europe.

• Contract was made in April.
K says you will perform June 1, & I will pay you. (June 1 is the start date.)
• May 11, there is a repudiation. De La Tour states that he is not going to use
Hochster.
• D argues that he did not breach, and couldn’t breach until the due date, or
the starting date here which was June 1.
• The court held that the victim of an anticipatory breach has 2 choices. He can
accept the repudiation, and treat the K as breach and still have the right to
sue for damages. Or, you can demand that the other side continue to perform
and don’t accept repudiation. Then, if time of performance comes, and they
don’t perform, you can sue.
• Common Law, 2 choices are to accept, or demand performance.
• P 919: Discussion of repudiation.

P 920-921: UCC treatment of anticipatory breach.

-Very similar to common law, but one major difference. The difference is under
common law, there is a repudiation, you can sue immediately and accept the
repudiation, or you can wait for the start date. Under UCC, you can only wait for a
commercially reasonable amount of time. If it were in the delivery of oil, and the
supplier says im not going to deliver, you couldn’t wait until the oil got to $150 a
barrel.
Retraction of Repudiation: If you say I don’t accept the breach, and you insist on
performance, then the bad guy says I will go through with the contract, then the
repudiation goes out the window. You are saying that you want performance, and if
they perform, you can’t come back and say wait, you repudiated and I want to sue
now.

If you bring a lawsuit right away due to repudiation, you still have the mitigation
obligation (you don’t have to mitigate, however, where you are demanding
performance and not accepting the repudiation/anticipatory breach). You have an
affirmative duty to mitigate your damages and attempt to find work. If you cannot
find work, defendant will be liable for the difference in the amount of money you do
make and the amount of money you were to make. This is one reason why a
promisor, if he knows he is not going to perform, should consider repudiation early
—it gives the promisee more time to find substitution work. If the promisee does not
sue immediately or treat the anticipatory breach as a discharge of your obligations,
there is an opportunity for retraction and you lose those options.

Early notification that one party intended to breach, when can you sue?
• Hochester sues right away.
• When there is a repudiation, does the plaintiff have to wait until date of
performance to sue? No, duty to mitigate damages.
• Breaching party benefits by quick suit so plaintiff has time to seek other
arrangements to cushion the harm.
Two options, 1) immediate suit. 2) reject repudiation and wait for performance. Can
do either.
In repudiation, no duty to mitigate until you either sue or accept the breach.
Options under UCC 2-610 codifies common law. One option is to suspend own
performance for a commercially reasonable time await performance by the
repudiating party. This has the advantage of preserving the contract for a possible
settlement and the disadvantage that the repudiating party may retract the
repudiation before the aggrieved party has canceled or materially changed his
position or otherwise indicated that he considers the repudiation to be final.
Another option was to suspend performance and resort to any remedy for breach
under the UCC. Sections 712 and 713 give the other party some rights also. If you
choose to accept repudiation than all your obligations discharged. Only way to avail
yourself of it is to accept repudiation which terminates obligation. If he does not
discharge this obligation by accepting repudiation then…
Restatement § 250—Repudiation (p.818)
A repudiation is a statement by the obligor to the obligee indicating that the obligor will commit
a breach that would of itself give the obligee a claim for damages for total breach under Section
243, or a voluntary affirmative act which renders the obligor unable or apparently unable to
perform without such a breach.

U.C.C. § 2-610- Anticipatory Repudiation - (Codifies the Common Law)

When either party repudiates the contract with respect to a performance not yet due the loss of
which will substantially impair the value of the contract to the other, the aggrieved party may
(a) For a commercially reasonable time await performance by the repudiating party; or
(b) Resort to any remedy for breach even though he has notified the repudiating party
that he would await the latter's performance and has urged retraction; and
 (c) In either case, suspend his own performance or proceed in accordance with the
provisions of this article...

U.C.C. § 2-611- Retraction of Anticipatory Repudiation

(1) Until the repudiating party's next performance is due he can retract his repudiation unless
the aggrieved party has since the repudiation cancelled or materially changed his position or
otherwise indicated that he considers the repudiation final.
(2) Retraction may be by any method which clearly indicates to the aggrieved party that the
repudiating party intends to perform, but must include any assurance justifiably demanded
under the provision of this article.
(3) Retraction reinstates the repudiating party's rights under the contract with due excuse and
allowance to the aggrieved party for any delay occasioned by the repudiation.

U.C.C. § 2-711- Buyer's Remedies in General

(1) Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or
justifiably revokes acceptance then with respect to any goods involved, and with respect to the
whole if the breach goes to the whole contract, the buyer may cancel and whether or not he has
done so may in addition to recovering so much of the price has been paid
(a) Cover and have damages under the next section as to all the goods affected whether or not
they have been identified to the contract; or
b) Recover damages for non-delivery.
(2) Where the seller fails to deliver or repudiates the buyer may also
(a) If the goods have been identified recover them as provided in this article.
(b) In a proper case obtain specific performance or replevy the goods.
(3) On rightful rejection or justifiable revocation of acceptance a buyer has a security interest in
goods in his possession or control for any payments made on their price and any expenses
reasonably incurred in their inspection, receipt, transportation, care and custody and may hold
such goods and resell them in like manner as an aggrieved seller.

SO: If you accept anticipatory breach, you are discharged from your duty to perform. You can
then hold them liable for the UCC rules difference fin what you had to pay for a new contract and
what you would have paid had they performed. You do still have the option to reject the
repudiation and demand performance if you feel like there is a good reason to do so. Do so at
your own risk, though (see note 4 on p.819).
Express repudiation - clear, positive, unequivocal refusal to perform.
Implied repudiation – results from conduct where the promisor puts it out of his power to perform
so as to make substantial performance of his promise impossible.

Taylor v. Johnston
• Jan. 19, 1965: K is entered.
-K says that 2 mares to be bred to Fleet Nasruliah.
• Oct. 4, 1965: Act or statement of repudiation. The owners of Fleet Nasruliah
sell him, and he is shipped to Kentucky.
• Taylor wants performance. Taylor had 2 options:
(1) Accept repudiation, and seek remedies.
(2) Avoid and Demand performance.
• The mares are shipped to Kentucky for performance. Difficulties occurred in
getting the mares in to breed. Eventually, the owners said that they had
enough, and went to a different horse for stud. They then sue for breach.
 • The contract has to be interpreted as to whether the year of 1966 meant the
full calendar year, or only the breeding season of the year.
• The court reversed the lower court. The court said that there was a
repudiation, but the victim of the repudiation decided to wait and seek
performance. They found that D attempted to perform, but then the plaintiffs
did something that prevented D from performing.

Remedies for Repudiations are:

• 1) Treat as an anticipatory breach and immediately seek damages for breach of contract,
terminating the contractual relation between the parties.
• 2) Treat as an empty threat, wait until the time for performance arrives and exercise his
remedies for actual breach.
Lewis – Tattoo this:
There can be no actual breach of a contract until the time specified therein for
performance has arrived—in other words, there cannot be a breach if there was still
time left in which to breed the mares, whether or not it was a breeding season or a
calendar year.
• Anticipatory breach occurs when one of the parties to a bilateral contract
repudiates the contract before performance is due. The repudiation may be
express or implied. An express repudiation is a clear, positive, unequivocal
refusal to perform; an implied repudiation results from conduct where the
promisor puts it out of his power to perform so as to make substantial
performance of his promise impossible—the latter never happened because
the promisor had the power to perform, they had just postponed it until an
opening was available.
Rights of a victim of repudiation: When a promisor repudiates a contract, the
injured party faces an election of remedies: he can treat the repudiation as an
anticipatory breach and immediately seek damages for breach of contract, thereby
terminating the contractual relation between the parties, or he can treat the
repudiation as an empty threat, wait until the time for performance arrives and
exercise his remedies for actual breach if a breach does in fact occur at such time.
However, if the injured party disregards the repudiation and treats the contract as
still in force, and the repudiation is retracted prior to the time of performance, then
the repudiation is nullified and the injured party is left with his remedies, if any,
invocable at the time of performance.

Anticipatory Breach is at 2-610.

• UCC only allows you to wait a commercially reasonable amount of time.
• Good Faith dictates what that amount of time.
Precursor to Anticipatory Breach:
• You are under the impression that the other party is not going to perform.
• Under the UCC, you can ask for written assurance for performance. If you
don’t get it, then it’s a repudiation, and you can sue for remedies.

§ 47-2-609. Right to adequate assurance of performance

(1) A contract for sale imposes an obligation on each party that the other's expectation of
receiving due performance
will not be impaired. When reasonable grounds for insecurity arise with respect to
the performance of either party the other may in writing demand adequate
assurance of due performance and until he receives such assurance may if
commercially reasonable suspend any performance for which he has not already
received the agreed return.
(2) Between merchants the reasonableness of grounds for insecurity and the
adequacy of any assurance offered shall be determined according to commercial
standards.
(3) Acceptance of any improper delivery or payment does not prejudice the
aggrieved party's right to demand adequate assurance of future performance.
(4) After receipt of a justified demand failure to provide within a reasonable time
not exceeding thirty (30) days such assurance of due performance as is adequate
under the circumstances of the particular case is a repudiation of the contract.

AMF v. McDonald’s Corp.

Point of Sale System computer system with cash registers. McDonalds wants and
AMF thinks they have. End up not having a very good one. McDonalds had meeting
with AMF because they are beginning to feel insecure. Good Faith still applies so
have to be up front with worries per Good Faith. UCC 6-609 demands adequate
assurance and if not, then can suspend performance if you don’t get assurance then
2-610 allows repudiation. Here demand not in writing, this is a very good tool for
getting out of contracts. Generally, you want the demand in writing. UCC and Rest.
2d 251.

McDonalds ordered cash registers from AMF, but AMF couldn’t deliver. Once McDonalds had
reasonable grounds for insecurity (UCC § 2-609), they were entitled to demand adequate
assurance of performance. Since AMF couldn’t assure, McDonalds were permitted to suspend
performance, thereby repudiating the contract under §2-609(4). At that point, §2-610(b),
permitted McDonalds to cancel orders pursuant to §2-711
• Good case to read for K formation.
• AMF’s prototyped register doesn’t work. More meetings occur about
standards, and the machines still don’t work. McDonald’s says, take them
out.
• AMF said they did work, and that they should be paid for their installations.
• McDonalds said that AMF could keep the money for the first prototype.
• 2-609 requires a written request for assurance.
• P 934: Common law form of 2-609 and 2-610
• P 935: The difference between breach and failure of a condition precedent.
• Breach of K, if it is material, works just like a condition precedent, and the
other party is not obligated to perform.
• If the breach if immaterial, then there can possibly be remedies, but
termination is not available.
• P 937: Post breach conduct. (Don’t know for exam)

Remember, you cannot pretend to be worried—you have to look at the

circumstances and be genuinely concerned—in other words, good faith applies. You
can prove this by bringing in an expert. There has to be a written demand—
McDonalds gets away with it here.

Restatement § 251 (p.827)

(1)“[W]here reasonable grounds arise to believe that the obligor will commit” a material breach,
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)”[O]bligee 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.”

Damages:
• (1) Prove Breach
• (2) Prove that the Breach caused damages.
• (3) Prove with reasonable certainty what those damages were.
• (4) Types of Damages resulting from breach of K.
(a) Expectation Damages: I sold a painting, you offer to pay $100. I give
you the painting, and you don’t pay. The expectation is the $100.
(b) Reliance Damages: What did I do in reliance on the K. You are going to
sell me a house, so I go out and put down concrete, and prep the land, and
you never deliver the house. Now I can’t use what I have expended.
(c) Unjust Enrichment.
• Chapter 3. Review the general discussions from that chapter.

There are three interests of the promisee that might be protected upon the breach
by the promisor: expectation, reliance, and restitution (these are all different forms
of compensatory damages).
• His expectation interest, which is his interest in having the benefit of his
bargain by being put in as good as a position as he would have been in had
the contract been performed. For example, if you break your promise to paint
my fence for $500, I am going to have to hire someone else. If I end up
paying $700, you owe me $200.
• His reliance interest, which is his interest in being reimbursed for loss
caused by reliance on the contract by being put in as good a position as he
would have been in had the contract not been made, or his restitution
interest, which is his interest in having restored to him any benefit that he
has conferred on the other party.
Put another way, expectation refers to the gain or profit that would have been made
on full performance and reliance and restitution refer to the post contract
investment made by the promisee to earn that gain.
• The law of contracts is not generally aimed to punish or compel the promisor
to prevent a breach in the future, but to provide relief to redress the breach—
the aim is to compensate the aggrieved party for losses suffered rather than
punish the breacher.

Contract performance obligations:

If there is a long period of work to be done, and a short period to pay, then the long
part comes first.
• Breach cases always involve a breach by a performing party, or a breach by a
paying party.
• If it is by the paying party, then the damage is payment.
 • When the breach is on the performers part, it is more difficult. Trying to find
the value is difficult because you have to find the cost of performance.

John Hancock Mutual Life Insurance Co. v. Cohen

Anticipatory repudiation when one party has performed and the other owes future
payments
Insured died, with paid up policy that called for monthly payments for 20 years and a lump sum
settlement at the end. After 15 years, the insurance company refused to pay more, saying 20
year figure had been a mistake.
Under anticipatory breach, the plaintiff’s options are: (1) demand performance (2) sue
immediately (3) demand adequate assurance. He choose (2), and the trial court granted him
total damages. Appealed.
The court held that anticipatory breach in future payments cannot work, since it’s a re-writing of
the contract to hold that the defendant must pay immediate total damages what he contracted
to pay out over time in installments.
Expectation damages – the original details of the contract is what was expected.
Present Value – Cohen could have asked for the present value of the contract, where they
devalue it to present terms, but they did not ask for that.
Restatement § 243(3): “Where at the time of the breach the only remaining duties of
performance are those of the party in breach and are for the payment of money in installments
not related to one another, his breach by non-performance as to less than the whole, whether or
not accompanied or followed by a repudiation, does not give rise to a claim for damages for total
breach.”

• P 944 NOTE 5: Discounting the present value.

• If you are being paid over time, then you will get a judgment today that…

Consequential Damages for failure to pay or failure to lend money.

If you know that your borrower must have the money, and they don’t get it and you
know that will result in a foreclosure, or business failure, then that breach can result
in consequential damages.

American Mechanical v. Union Machine Co. of Lynn, Inc.

• American contracted with Union to sell its real estate and business
equipment for 135,000. Union knew that it was in arrears on mortgage
payments. Union ends up repudiating the contract and the assets were
foreclosed on for a total of $85,000. American sues for damages. Here you
have two considerations—one for the sale of land and one for a sale of goods
under the UCC (equipment).
• The buyer in this case is aware that the seller is going to be foreclosed upon
if the sale does not go through. If the buyer did not know this, the case would
have been different because the expectation would not have been known. If
you are representing a seller in distress, or a buyer that needs land by a
certain date, you want to communicate that you will be severely damaged if
the contract does not go through. That heightens or solidifies the expectation
damages. Here the buyer says, if you don’t buy this property, I am going into
bankruptcy; the seller repudiates anyway.
• Classic compensatory damages. Memorize it. The measure of damages for
the breach of an agreement to purchase the real estate (or personal
 property) was the difference between the contract price and the fair market
value on the date of the breach. Compensatory damages CP – MV. The
question becomes does the total value of the foreclosed items equal the
market value? In this case yes, especially because the seller did not bring any
information into rebut that the value at the foreclosure was the not the MV.
The damages ended up being $50,000.
• If I agree to sell you my car for $5000 but it is a piece of shit worth $100 and
you don’t go through with the contract, I can sue you for the difference
because that was the expectation of the parties at the time the contract was
entered into.

American agreed to sell property to Union for $135K. Union knew AMC was shaky financially, and
repudiated. AMC’s bank then took possession and sold for $90. AMC sued Union for breach of
contract.
Real estate breach – Damages are the difference between the contract price and the fair market
value.
- It was foreseeable to Union that American would not be able to sell it and the bank take
possession and sell it for less. AMC couldn’t sell it to anyone else for more. Since it was
foreseeable, the sale price becomes the fair market value, even though it’s probably worth more.

• Defense is P 948: When there is a breach of K by a paying party, the measure

of damages is the contract price less the market value.
• The market value is established by an appraisal. Whatever that number is will
be the market value. IF they are the same, then there is no damage.
P 949-950
A contract price less the market price (If that makes the injured performer whole). If
it was foreseeable that the foreclosure would take place.

Law on Leases:
The landlord must use reasonable means to try and relet the premises, but they
don’t have to mitigate in a such a way as to lessen the value that they would have
gotten from the original leaseholder.
• Mitigation: The victim is protected, but so is the breaching party. That is why
there are no punitive damages. The victim has to try and mitigate the
damages. Lessor needs to try and get a new lease.

New Era Homes v. Forster

New Era Homes was doing construction work for Forster.
“All above material, and labor to erect and install same to be spplied for $3,075.00 to be paid as
follows:
• $150 on signing of contract
• $1000 upon delivery of materials and starting
• $1500 on completion of rough carpeting and rough plumbing
• $425 upon job completion.
After rough work was done, NE asked for $1500 payment, but defendants wouldn’t pay it.
Brought suit for value of work performed, less payments made, plus lost profits.
Contract judged not divisible, and it wasn’t completed so the plaintiff cannot receive full contract
damages.
Plaintiff can either collect quantum meriut (reasonable amount for services rendered) for what
work had been finished or in contract for what the plaintiff lost, iow restitution damages (contract
price – less payments made – cost of completion).
• This is a case of breach by the owner while the contractor is in the midst of
performing a construction contract. Unless the contract is divisible or
substantial performance, an action for the job will not lie. Moreover, any
performance after the breach is normally out of the question and, in any
event, would probably run afoul of the mitigation principle (unreasonable
expenditures after the breach are not recoverable). What can the contractor
recover?
A Useful Formula: This case stated that the plaintiff could recover in quantum
meruit for what had been finished…or in contract for what plaintiff had lost
(contract or expectation damages)—that is, the contract price, less payments
made and less cost of completion. Leaving the quantum meruit or “restitution”
aside for the moment, the damage recovery can be illustrated as follows. If the
contract price was $3075 and, at the time of the breach, the estimated cost to
complete the project was $425 (savings realized), and contractor had been paid
$2000 in progress payments, the damages breach would be 3075 – 425 = 2650 and
then 2650 – 2000 = 650. This figure will be enhanced if Contractor can prove other
losses, including incidental or consequential damages, and, of course, and owner
can attack contractor’s attempt to prove the savings realized by the breach.
In this case, proving the cost to perform is easy. How do we prove the cost of
performance in more complex projects like building a house? Expert witnesses. Why
didn’t this guy get paid here?
• The court says that the whole job was a condition precedent, and that you
can only get paid once you complete the whole job. He tries to argue that the
contract is divisible and argues on the substantial performance of the
individual considerations, but the court said it was intended to be a whole
contract. Because of this, he is not entitled to contract damages;
instead, the court says, you are limited to what you could get in quantum
meruit (restitution). Restitution is an equitable remedy. In order to get that,
you would have to prove that there has been a benefit bestowed upon the
homeowner. So, the payor will probably have to pay for the amount of benefit
received, or an amount of money to put the parties back into a position that
they would have been in the very beginning, which is restitution.

Reliance Damages: Because proving that someone received a benefit (in the
restitution example) or what the cost of performance is for contract damages (the
defendant may prove that if contractor had completed performance there would
have been a loss) can be extremely difficult, you may prove expenditures in part
performance up to the breach but not try to prove lost profits. These are reliance
damages—it focuses on the total cost incurred instead of the savings realized.
• IMPORTANT CASE
• Construction case where there are payments scheduled at certain points
during construction.
• The issue is either all four payment times are one condition that requires
completion of all four stages to get damages.
• The other theory is that each time of payment is an individual condition
making the contract divisible.
 • The court says that it is one condition of full performance and the pay points
were merely convenient time for payment.
• P 951 & 952: paragraph about divisible K’s

This court holds that each installment does not represent a separate
consideration – “it is hardly conceivable that the amount of $150, payable ‘on
signing of contract’ was a reward to plaintiff for the act of affixing its corporate
name and seal.” Most courts consider progress payments under construction
contracts as intended for the mutual convenience of the parties rather than
intended to create divisible contracts.
• Reliance vs. Restitution & Expectation Damages.
• In Breach, the damages are usually expected damages that are seen from
the making of the contract.

Bernstein v. Nemeyer:
Bernstein’s group invested in real estate partnership in which Nemeyer’s group would loan to
cover the negative cash flow. Eventually, Nemeyer stopped the loans. Both parties lost money.
Bernstein sued under quantum merit with restitution and rescission.
- In quantum meriut, you still have to show a benefit was conferred. Here, since Nemeyer lost as
well, there was no gain on his part (no unjust enrichment), so there were no damages awarded.
Restitution is an equitable remedy: “When a court grants [restitution] for [a] breach, the party in
breach is required to account for a benefit that has been conferred on him by the injured party…
[T]he effort … is to prevent unjust enrichment of the party in breach by protecting the injured
party’s restitution interest. The objective is not to put the injured party in as good a position as
he would have been in if the contract had been performed, nor even to put the injured party
back in the position he would have been kin if the contract had not been made; it is, rather, to
put the party in breach back in the position he would have been in if the contract had not been
made.” p.883

NOTE: There is a duty to mitigate damages at breach, as opposed to notice of repudiation.

Notes: Sometimes it is so hard to prove contract damages but you can prove that
they received a benefit (contract damages would have been pointless—your
expectation damages are nonexistent if the business is bankrupt). Before an injured
party of a breach gets restored, they have to prove that the other party received a
benefit. More than that though, the benefit has to be the one that was bargained for
—not just any benefit. Just like the roof case, there might have been a benefit (a
functional roof) but it was not what was bargained for (a brown colored functional
roof).
Breach by the Paying Party:
• Expectation is the Contract price- Market Price.
• If it is a construction case it is the Contract Price- Cost of Completion plus
interest.

Locks v. Wade: (Lost volume Vs. Sale of 1 )

 • Locks leased a jukebox to Wade for two years. Before the machine was
installed, Wade repudiated the K. Locks was awarded the total rent less his
costs and depreciation. After the breach, Locks rented the same machine to
another person. He introduced evidence that the jukeboxes were readily
available on the market but that locations were difficult to get.
• 2,040 was the K price. The Cost of Performance was 1,200, so the profit was
840. That is what the amount of damage awarded was.
• D argues that since Locks leased that exact same jukebox, then he should
not get any damages.
• If the seller has an unlimited number of objects, but a finite market to sell it
too, then 2-708 comes in.
• P 964 NOTES
• P 968: Employees remedies for employer breach.
General rule is the measure of recovery is the measure of recovery 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.

1. The defendant says that your expectation is still satisfied because you sold
the jukebox to someone else—in other words, he is saying apply the same
rule that is used in the sale of land, that is, that he should be credited on the
claim sued upon. This is logical, but the court says that the seller should be
compensated for the loss of volume because he has an “unlimited” number
of jukeboxes. Land, the court argues, is different because it is only one thing
and is unique (it cannot be duplicated). But note, leases of land and
apartments are viewed as “unlimited.”
2. Where the seller has an unlimited number of jukeboxes, he should have the
benefit of every bargain he receives. The recoverable damages in the case of
a contract are such as may reasonably be within the contemplation of the
parties at the time of the contract, and with that in view, we should not deny
the lessor the benefit of his bargain.

Inchaustegui v. 666 5th Avenue Limited Partnership

• Commercial lease with a provision that the tenant had to have general
liability insurance and it was to also include the landlord as an insured.
• Tenant did not have the landlord insured.
• Landlord had gotten insurance of his own.
• Part fell on premises, and sued landlord.
• Collateral source rule differs in tort than in Contracts.

Paying Party Breaches

Last few lessons.
Performing Party Breaches.
• Seller doesn’t sell
• Supplier doesn’t supply
• Builder doesn’t build

Rule is Called COVER:

 • Contract Price less Cost of Performance.
• Focus is what is the cost to perform?
• Prices can go up from the price of the K, and the difference in the new price
would be the damage.
Cover- cost of replacement of goods or cost of performance. This is the measure of damages to
replace (or cover) the damage done.
If the buyer repudiates (2-610) and the seller accepts, the seller can then sell the product to
someone else and sue for the difference in the market price at the time and place for tender and
the unpaid contract price and any incidental damages (2-710), but less expenses saved in
consequence of buyer’s breach. UCC § 2-708.

Reliance Cooperage Corp. v. Treat.

Treat was to produce and deliver to Reliance 300,000 white oak bourbon staves, but repudiated
before the delivery date. They attempted to hold off the damages owed the plaintiff Reliance by
claiming that Reliance had a duty to mitigate by purchasing staves immediately upon learning of
the repudiation, when the staves were going for less than when the actual delivery date was
listed.
- The court thought different. No obligation to mitigate damages arises until there are damages
to mitigate. Under the circumstances, Reliance refused the repudiation so the damages didn’t
occur until the delivery date. The damages are therefore the difference between the market
price and the contract price of the staves on that date.
• Reliance contracted to buy barrel staves from Treat at $450 per thousand for
bourbon quality and $40 per thousand for oil grade quality.
• D wrote Reliance stating its inability to deliver staves at the K price.
• Under UCC 2-610, waiting until December to file the suit may not be
commercially reasonable.
• Here, there was no UCC.
• D is arguing that repudiation is in August, and they want P to cover it then
instead of waiting.
• P 975 & 976 GOOD CASE on REPUDIATION
Under UCC 708, the measure of damages for repudiation by the buyer is the
difference between the contract price and the market price. In the case of the
ACTUAL breach of the seller or an acceptance of repudiation, the buyer may
“cover” (i.e., make a good faith purchase of, or contract to purchase,
replacement goods within a reasonable time and then collect damages based
on the difference between the CP and MP) or recover damages equal to the
difference between the market price and the contract price. In this case, it
was an anticipatory breach but the buyer insisted on performance (did not
accept repudiation); when the actual breach occurred some months later,
then the buyer must cover or seek damages between the market price and
the contract price. If the buyer would have accepted the repudiation, he
would have to cover as well.
• Notes: If an employer wrongfully terminates the employment, the
employee is under a duty to mitigate by looking for a comparable job.

Rivers v. Deane
General rule in faulty construction is that the measure of damages is the market
value of the cost to repair the fault construction. The damage was substantial
enough for this type of damage figures (market price of completing or
correcting the performance), as opposed to a failure to perform that amounted
to damages trivial and innocent where the damage amount would be diminution
in the value of the building.
• The general rule in cases of faulty construction is that the measure of
damages is the market value of the cost to repair the faulty
construction. The court erred here in applying the “difference in
value”, as originally set forth in Jacobs v. Kent. The rule in that case is
limited to instances where the builder’s failure to perform under a
construction contract is “both trivial and innocent”—if this is the case,
then such damages may be measured by a dimunition in value of the
building rather than the cost of tearing apart the structure and
properly completing the project (very practical). Where, as here, the
defect arising from the breach of the contract “is so substantial as to
render the finished building partially unusable and unsafe, the
measure of damages is the market value of the cost of correcting the
deficiencies in the addition from defendant’s breach.
• Notes: This general rule is the cost of completion, not dimunition in
value. It is “cover”—it is the amount of money that you have to spend
to substitute the performance that was supposed to be covered under
the contract.

• Substantial Performance: Damages are difference in value of

Completed Performance and the substantial performance.
• Here, the damage is material, the house had to be torn apart.
• Damages were the cost of Repair.
• Note P 981 COST OF COMPLETION

Damage Theories to Know:

• To prove damages, you must show with reasonable certainty that the
breach caused the damage.
 • If it is a breach by a paying party, it is the difference in the cost of K
and what if anything has been paid. Expectation that the selling or
performing party was to get and interest. You also might get restitution
or reliance damages.
• The paying party gets Cover, or cost of performance when the seller or
service provider breaches.
• Ways to accelerate or award other damages other than the direct
damages.
o Consequential Damages: Breaching party has to know or be
aware of the special services or value involved to recover those
damages.

Text p. 911:
§ 2-313 – Express warranties
§ 2-513 – Buyer has a right to inspect goods to determine whether they conform
to the express warranty
§ 2-508 – After a rightful rejection, the seller has a limited right to cure the
defects.
§ 2-711 & 715(2) – The buyer may pursue remedies if the defects are not
remedied.

§ 2-606 - If Buyer has accepted the goods before the defects are discovered:
§ 2-607 – Acceptance of the goods precludes the remedy of rejection, makes the
buyer liable for the price and puts the burden of proving a breach of warranty
on the buyer.
§ 2-608 – Special remedy called “revocation” of acceptance, but it’s complicated
and will be denied if defect is insubstantial, or buyer should have discovered it
before acceptance, or notice is given after an unreasonable time has elapsed
since the defect was or should have been discovered.

If timely notice of breach is given,

§ 2-714 – Buyer can recover damages for any non-conforming goods after
acceptance and notification.
§2-715 - If appropriate, for incidental and consequential damages.
- In this situation, the buyer must keep the goods and pay the agreed price, but
the price will be adjusted downward to reflect the loss of bargain from the
breach.

§ 2-711 – A buyer who cancels after a seller’s breach may recover “so much of the price as
had been paid” (down payment) and expectation damages.

Consequential Damages
4 Aspects:
1) Foreseeability – the losses must be foreseeable
2) Mitigation – non-breaching party must attempt to mitigate damages
3) Provability – must be able to prove damages, iow, what profits were lost with
reasonable certainty.
4) Speculative (lost profits)
Four elements of consequential damages:
1. Were the losses forseeable consequence of the breach at the time of
contracting.
2. Reasonable mitigation of damages possible.
3. Prove lost profits with reasonable certainty.
4. Incidential Reliance expentures if profits to speculative.

Hadley v. Baxendale, p.915 – Awareness of Special circumstances

Millers shaft broke, and sent to get repairs. The shipper delayed, and millers sued for lost
profits. Special circumstances that the millers would lose profits if the shaft wasn’t shipped
there and back quickly wasn’t communicated nor was it reasonably foreseeable on the
part of the shippers.
- Special circumstances must be foreseeable.
Consequential damages flow from a breach as a result of the buyer’s particular
circumstances (either in the ordinary course or in special circumstances). You must
communicate the special circumstances—put them on notice! Consequential damages can
only be recovered if, at the time the contract was made, the defendant had reason to
foresee the damages as a probable result of the breach. Typically, consequential damages
consist of lost profits (although other kinds may occur). In this case, the damages would
be the difference between the (i) profits he actually earned after the breach and (ii) the
profits he would have earned if the contract was performed as promised
In sum, should have made it forseeable to defendant that lost profits and
ovehead would result if they breach.

UCC 2-715 (2) provides:

Consequential damages resulting from the sellers breach include (a) any loss
resulting from general or particular requirements and needs of which the
seller at the time of contracting had reason to know and which could not
reasonably be prevented by cover or otherwise; and (b) injury to person or
property proximately resulting from any breach of warranty.

Restatement 351 provides:

1. Damages are not recoverable for loss that the party in breach did not
have reason to foresee as the probable result of the breach when the
contract was made.
2. Loss may be foreseeable as a probable result of a breach because it
follows from the breach (a) in the ordinary course of events, or (b) as a
result of special circumstances, beyond the ordinary course of events, that
the party in breach had reason to know.
3. A court may limit damages for foreseeable loss by excluding recovery for
loss of profits, by allowing recovery only for loss incurred in reliance, or
otherwise if it concludes that in the circumstances justice so requires in
order to avoid disproportionate compensation.

UCC § 2-715(2)
Consequential damages resulting from the seller’s breach include (a) any loss resulting
from general or particular reuirements and needs of which the seller at the time of
contracting had reason to know and which could not reasonably be prevented by cover or
otherwise; and (b) injury to person or property proximately resulting from any breach or
warranty.
Restatement § 351
(1) Damages are not recoverable for loss that the party in breach did not have reason to
foresee as the probable result of the breach when the contract was made.
(2) Loss may be foreseeable as a probable result of a breach because it follows from the
breach (a) in the ordinary course of events, or (b) as a result of special circumstances,
beyond the ordinary course of events, that the party in breach had reason to know.
(3) A court may limit damages for foreseeable loss by excluding recovery for loss of
profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes
that in the circumstances justice so requires in order to avoid disproportionate
compensation.

Spang Industries, Fort Pitt Bridge Division v. Aetna Casualty and

Surety
Steel supplier delivered late, forcing bridge manufacturer to incur overtime to emplace
steel before pouring concrete to beat freezing weather. Court holds this injury was
foreseeable, and upholds award of consequential damages.
- “A party is liable for all the direct damages which both parties to the contract would have
contemplated as flowing from the breach, if that the time they entered into thaey have
bestowed proper attention upon the subject, and had been fully informed of the facts.”
p.923
Late delivery of steel caused problems with concrete pouring in bridge
construction. Plaintiff spent more money than intended to perform contract
by having to rush (crash construction). Steel worker should have known time
was of the essence because they dealt extensively with bridge construction.
Foreseeability element, here supplier familiar with bridgework and should
have known.
A party is liable for all the direct damages which both parties to the contract
would have contemplated as flowing from its breach, if at the time they
entered into it they had bestowed proper attention upon the subject, and had
been fully informed of the facts.
It appears to us that this eventuality should have reasonably been
anticipated by Fort Pitt as it was experienced in the trade and was supplying
bridge steel in northern climates on project requiring concrete.

Make sure you make known to other party so it is foreseeable—ie. Letters.

• For consequential damages, the damages must be foreseeable at the

time of contract that if you don’t perform, then the extraordinary
damages are available.

§ 47-2-715. Buyer's incidental and consequential damages

(1) Incidental damages resulting from the seller's breach include expenses
reasonably incurred in inspection, receipt, transportation and care and
custody of goods rightfully rejected, any commercially reasonable charges,
expenses or commissions in connection with effecting cover and any other
reasonable expense incident to the delay or other breach.
(2) Consequential damages resulting from the seller's breach include:
(a) any loss resulting from general or particular requirements and needs of
which the seller at the time of contracting had reason to know and which
could not reasonably be prevented by cover or otherwise; and
(b) injury to person or property proximately resulting from any breach of
warranty.

(At time you entered into the K , you breach, is it foreseeable damages will
occur?)

Hydraform v. American Steel

• American delivers under trial run contract steel for stove
• Steel arrives employee signs delevry ecipt

• UCC Provision…2-316 Limited Warranty

• Disclaimer
• Limited Warranty

• Big 2-207 case—battle of the forms. We have an exchange of forms,

some of which are similar, some of which might exclude damage
remedies.
Three ways we can perform a contract under 2-207:
1) oral conversation and then memorandum
2) exchange of forms
3) there is no third way, except where the parties agree on certain issues
(e.g., price, quality of steel), but where they don’t agree (breach of warranty,
doing away with damages) we treat them as proposals of additional terms.

Additional terms are part of the contract unless

1) the offer expressly limits acceptance to the terms of the offer
2) the additional terms materially alter it or
3) the offeror notifies the offeree within a reasonable time that he objects to
the additional terms.
Here, the exclusion of damages did not become part of the agreement
because it would have materially altered it. UCC gap fillers are used if needed
to make the contract work. Under the common law, this would be a counter
offer under the mirror image rule—then, when the goods are shipped and
then accepted, the contract would be formed.

• Consequential damages, such as lost profits, are recoverable only if

the loss could not be reasonably prevented by cover or otherwise. In
summary, consequential damages must be on the good faith
expectations of the parties, foreseeable, ascertainable, and
unavoidable.
• Normally a court will not award lost profits for a new business because
the profits are too speculative, unless it can be proven that these types
of businesses usually make X (taco bell). For existing businesses, lost
profits are usually based on prior profits because it shows the history.
p.1008 Consequential Damages
3 Requirements
1. Forseeabilty
• Parties know, should have known or foreseen the injury
• Foreseeable to both parties

2. Reasonable Ascertainable Damages

3. Cover = Go somewhere else to get “steel”(Mitigation)

p.1013
“Don’t get punitive damages / mental anguish for breach
Exc.
1. Burial
2. Break contract, foreseeable mental anguish

Everyone has a right to breach a contract

AIG Example.
“Federal govt. just not pay bonuses”

Boise Dodge v. Clark– Punitive Damages; Actual in Contracts & Torts.

Dodge sold Clark a new car, but they actually sold him a demo that had the odometer
miles turned back. Punitive allowed.
Restitution damages – car and $ go back to original owners. Rejected.
Expectation remedy – Compensatory damages – difference in the represented value and
the actual value of the car = $350.
Punitive damages were allowed due to the tort-like / fraud element involved.
More of a typical case, payor expected new car, seller sold a used car with
odometer fraud. If restitution damages, could have returned car and got
money back. Expectation remedy for compensatory damgages would be
difference between sale price of new and actual value. Here got car and
damages for difference in price. That is the difference between expectation
and restitution. Also received punative damages

Willful actions of parties to commit fraud like tort elements can bring punitive
damages to punish. Sometimes called exemplary damages.

Court said: Exemplary damages are more likely to serve their desired
purpose of deterring similar conduct in a fraud case, such as this one, than
any other area of tort. One who acts out of anger or hate, for instance, in
committing an assault or libel, is not likely to be deterred by the fear of
punitive damages. On the other hand, those who deliberately and coolly
engage in a far flung fraudulent scheme, systematically conducted for profit,
are very much more likely to pause and consider the consequences if they
have to pay more than the actual loss suffered by an individual plaintiff. An
occasional award of compensatory damages against such parties would have
little deterrent effect. A judgement simply for compensatory damages would
require the offender to do no more than return the money which had been
taken from the plaintiff. In the calculation of his expected profits, the
wrongdoer is likely to allow for a certain amount of money which will have to
be returned to those victims who object too vigorously, and he will be
perfectly content to bear the additional cost of litigation as the price for
continuing his illicit business. It stands to reason that the chances of
deterring him are materially increased by subjecting him to the payment of
punitive damages.

RESTATEMENT 2D 355: Punitive damages are not recoverable for a breach of

contract unless the conduct constituting the breach is also a tort for which
punitive damages are recoverable. A common statement of the rule is that
the breach must constitute an independent and willful tort accmompanied by
fraud, malice, wantonness, or oppression.

It is sufficent to recognize that a party to a contract may incur tort remedied

when, in addition to breaching the contract, it seeks to shield itself from
liablility by denying, in bad faith and without probable cause, that the
contract exists.

Restatement § 355: “Punitive damages are not recoverable for a breach of contract
unless the conduct constituting the breach is also a tort for which punitive damages are
recoverable.” A common statement of the rule is that the breach must constitute and
independent and willful tort accompanied by fraud, malice, wantonness, or oppression.

Actual Damages:
In a breach of contract (misrepresentation), the damages are the difference between the
actual value and the value of a new vehicle.
In Torts, it would be the difference between the price paid and its actual value.
Difference between the two: The actual value might not be the price paid.

2 Types of Remedies for Breach of Contract

1. Remedies at Law
2. Equitable Remedies

Remedies at Law
1. Breach by Payor = Lost Volume
2. Breach by Performer = Cover
3. Consequential = Forseeability / No punitive

Equitable Remedies can be anything

• You will not play football
• You will refrain from this

Harder to enforce, formulate

• Great Rule = If you have adequate remedy at law/ damages are

satisfactory cant get Equitable Remedy
• Before Equitable Remedy, must be inadequate remedy at law
Curtice Brothers v. Catts (goods which are necessary and
unavailable)
• Plaintiff entered into a contract to purchase the defendant’s tomatoes,
but the defendant repudiated that contract and refused to supply the
tomatoes. What UCC provision would apply today? 2-306 Output
Requirements and Exclusive Dealings. It states that a term which
measures the quantity by the output of the seller or the requirements
of the buyer means such actual output or requirements that may occur
in good faith. A lawful agreement by either the buyer or the seller for
exclusive dealing in the kind of goods concerned imposes an obligation
by the seller to use best efforts to supply the goods and by the buyer
to use best efforts to promote the sale. Similar to sand case. Makes an
otherwise illusory output contract enforceable via good faith.
• The seller in this case defends against injunctive relief by saying that
they haven’t proven that damages are not adequate to compensate
the victim. If damages are sufficient, then you don’t get injunctive
relief. Then we go to the next elements—is it practical? Can the court
oversee the enforcement of this judgment? Is it a personal services
contract which the court cannot make you do? The court says it is
practical and it is not a personal services contract.

Laclede Gas v. Amoco Gas (Mutuality of Obligation)

• Laclede entered into a requirements contract with Amoco under which
the plaintiff was to purchase the requirements of propane gas from the
defendant and defendant was to supply the gas to plaintiff required.
• By the terms of the contract, it was to continue in force for 1 year and
would be automatically renewed unless plaintiff notified defendant of
any discontinuance 30 days before the end of the year. Defendant had
no similar power to cancel.
• The agreement worked well for more than two years until there was a
shortage and defendant repudiated the contract.
• Defendant claimed that it had the right to cancel the agreement
because it lacked mutuality by its terms—plaintiff had the right to
cancel and defendant did not. Plaintiff, on the other hand, sought
specific performance of the contract.
1. Adequate Remedy at Law = Buy propane somewhere else
2. Not Practical / Enforceable
3. Fairness = Enforce against Amoco; Cant do the same
Court = It happens all the time

• Requirements contracts, like this one, are enforceable based on the

good faith expectations of the parties. It makes an otherwise illusory
contract (what Amoco is claiming because the other party could cancel
and they could not therefore no mutuality of obligation) enforceable
based on good faith—the buyer must by in good faith and the seller
must sell in good faith.
• On the remedy aspect, Amoco said that specific performance would be
impracticable for the court to oversee and said that regular damages
 would be adequate because you could get the natural gas from other
vendors of natural gas.

Walgreen v. Sara Creek

• Walgreen seeks an injunction preventing Sara Creek strip mall from
letting Phar-mor lease a space because it was in the contract. This is
called a restrictive covenant—when you are restricted from doing
something. The mall argues that Walgreen should be awarded
damages only. Walgreen fires back that it would be to difficult to
calculate the losses because we would have to forecast lost profits 10
ahead.
• Developers Defense = “We can do damage calculating for Wall-Greens,
pay them for business they lose
• Adequate remedy at law

• Walgreens = TOO Difficult to calculate

American Broadcasting Company v. Wolf

• While courts cannot force you perform a personal services contract
(e.g, baseball) they can prohibit you through a negative injunction (we
are not going to force you to play for the Yankees, but we can prevent
you from playing on any other team). This is what was requested in
this case. Thus, an argument between companies often turns on
whether the contract is based on personal services or otherwise.
• If we are buying and selling a business, part of the value of the
business is goodwill. Goodwill is simply the historical value of the
business; it is goodwill based on their reputation and good name. So if
you sell Bell South to someone, that person will want to prevent you
(through a restrictive covenant) from immediately going into
competition—they want to protect the goodwill of the company that
you sold. The distinction between the sale of a business and that of an
employer/employee relationship (see previous) is very well “testable.”
• He wont test directly on equitable remedies and damages, but you
should certainly touch upon them if you think they are pertinent in the
fact patterns.

Conttacts preventing competing = Normally against pulic policy

Unless reasonable geographically/ area
Unless reaonsonbale in time

Courts take something overly broad, make it specific

Liquidated Damages
• It is commonplace for contracting parties to determine in advance the
amount of compensation due in case of a breach of contract. A
liquidated damages clause will generally be upheld by the court, unless
the liquidated amount is plainly or grossly disproportionate to the
probable loss anticipated when the contract was executed. Liquidated
damages are not penalties if they bear a “reasonable proportion to the
probable (foreseeable) loss and the amount of the actual loss is
 incapable or difficult of the precise estimation.” Whether actual
damage occurs or not does not prevent recovery from the non-
breaching party.

Third Party Beneficiaries (Assignment and Delegation)

Assignment
• Our economy is built upon the right to assign and delegate contractual
rights. Mortgages, cars—the second you sign a note which says I
promise to pay Ford 18,000, it is sold to bank. The bottom line is that
the assignment of contractual rights is presumed. It is unusual for
someone to deny you that right.
• When you see assignment, you should think contract, which means
there must be consideration (unless, of course, it is a gift—you can
assign a gift). Two classic types of assignments—assignment of 1)
accounts receivable and 2) accounts payable (unusual). A/R is like the
car example above—those assignments are not only fostered, but any
attempt to prohibit their assignability is void (unless specifically agreed
to in the contract), because our whole economy is based on the ability
to sell A/R and other contractual rights. Now, if it’s a personal services
contract, this might not fly because the party contracted for you to do
it, not some other hack mother fucker.

Fitzroy v. Cave
• Fitzroy comes along here and starts buying up the debts from people;
he says sell me the A/R that Cave owes you. The Fitzroy’s motive was
to put Cave into bankruptcy—a bad motive. However, the court says
this is immaterial; all debts are to be regarded as pieces of property
that can be sold for consideration. Unless there is a contract provision
that makes the assignment non-delegable, this is perfectly legitimate.
• Notes: Gratuitous assignments—as long as you have a valid perfected
gift, it is assignable.

Allhusen v. Caristo (anti assignment clauses)

• Kroo Painting subcontracted with Caristo construction to do painting in
public schools The contract contained a prohibition against assignment
without the consent of the defendant and stated that any assignment
by Kroo in violation of the contract would be void. Kroo assigned the
contract to a trust company who assigned it to Allusen. Plaintiff sued to
enforce the contract.
• Why would Kroo assign it to a bank? To get some money, and he
probably have the contract with the general contractor as collateral.
He assigned the right to receive the monies now. The painter needed
money. Rather than wait for the general contractor to pay him, he
decided to borrow some money from the bank. The anti assignment
clause is valid because the parties contracted for it; the bank should
have seen that language and not accepted it as collateral.
Continental Purchasing v. Van Raalte
• She makes a wage assignment; she tells her employer to pay this
store. Don’t pay me—pay them. She works and her employer pays the
sporting goods store. What happens next? They sell the wage
assignment to Continental Purchasing. We call that discounting. They
did not want to wait around to collect this money, so, for a certain
amount of money, they sold the right to collect the 19.20 to someone
else. They got $5 and went about there business.
• So now this third party comes along and finds out it is not getting all of
its money that it is owed by the employer and sues to collect the
money. The employer’s defense is that they never received a copy of
the assignment. The court said that does not matter. Here the
employer is not able to use the defense for nonpayment the fact that
they had not seen the initial contract between Potter and the sporting
goods store. They knew that they had a contractual duty, and that was
all that was needed. The same thing happened in one of his cases—the
employee had a judgment against him, the employee says to the
employer pay this 3rd party, but then the employee quits. The employer
then stops making payments and the 3rd party sues the employer—can
he do this? Yes, when you agree to do this for your employee you
become contractually obligated—the employer has to provide notice to
the third party that the employee no longer works there, and then you
are ok.

Delegation

To what extent can one party delegate the duty of performance created by a
contract to a third party without the consent of the other party? UCC 2-210: A
party may perform his duty through a delegate unless otherwise agreed or
unless the other party has a substantial interest in having the original
promisor perform or control the acts required by the contract. No delegation
of performance relieves the party delegating of any duty to perform or any
liability for breach.

Sally Beauty v. Nexxus

Initially we had Best. Sally bought Best. We have a manufacturer and a
distributor. They enter into a contract. Sally buys Best, who now stands in the
shoes of the distributor. Is there anything in the agreement between the
manufacturer and the distributor that would prohibit the assignment of sale
of the business? No. What if there was? That would be called a restrictive
covenant. Here, the court granted summary judgment for the defendant on
the basis that it was a personal services contract and therefore not
assignable; here, according to 2-210, it would violate a substantial interest of
Nexxus because Sally also sold the competitors products.

Creation of Rights

Anytime the parties agree that a third party is the intended beneficiary of the
agreement, that third party, whether they are aware or unaware of the
original contract, may enforce the agreement. As long as there was an
intention to benefit some person or some class, the beneficiary does not have
to be named. In Johnson v. Tuttle Homes, there was a contract for full
coverage insurance, which benefits a third person, so the intended
beneficiary of a contract for insurance is the class of people who might be
injured by the car buyer.