K II Outline Prof.

Roy Spring 2005 Joshua Kyle DEFENSES Age (Infancy) Incapacity Economic Duress Undue Influence Misrepresentation/Non-Disclosure Unconscionability Public Policy Misrepresentation R. 164: Misrepresentation exists when: 1) Assent is induced by a material misrepresentation or fraud 2) P justifiably relies R. 168: Reliance is justifiable for an opinion given when it expresses a belief. Mere opinions are okay. However a purported statement of opinion can amount to a misrepresentation of fact. R. 169: An assertion of opinion cannot be relied upon as fact unless: a) Relationship b/t the two is one of trust and confidence b) Believe person giving opinion has special skill/knowledge c) Special susceptibility, e.g. old, widowed Also, look at the list of factors the court should consider in disclosure issues: Difference in the degree of intelligence Relation the parties bear to each other Manner the info is acquired Nature of the fact not disclosed Importance of the fact not disclosed Any conduct of the person not disclosing something to prevent discovery Requires some sort of affirmative statement, some assertion. Misrepresentation can be innocent or negligent. It doesnt necessarily have to be fraudulent.

Syester v. Banta- Old woman takes dance lessons from company. She sues, then was coaxed into signing a release. The dance cos opinions were held to be assertions of facts, thus, misrepresentations.

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Nondisclosure R. 161: When nondisclosure is equivalent to an assertion that the fact does not exist: a) when disclosure is necessary to correct a previous assertion. b) where disclosure would correct a mistake of the other party as to a basic assumption. c) where disclosure would correct a mistake of the other party as to the contents or effects of a writing. d) where other person is entitled to know the fact b/c of a relation of trust and confidence b/t them. Hill v. Jones- buyer asked about termite damage, and seller didnt disclose certain info dealing w/ this. Failure to disclose is the same as misrepresentation when there is a duty to disclose. If something is easily discoverable, it cannot later be argued that nondisclosure was present. Nondisclosure deals w/ latent defects- something not easily discoverable by ordinary observation or casual inquiry. When the seller knows the facts materially affecting the value of the property which are not readily observable and are not known to buyer, seller is under a duty to disclose them to the buyer. Type of thing must be material. Remember, if seller didnt know, there is no nondisclosure. If you see deception, look for defenses of misrepresentation and nondisclosure. CL no duty to disclose. Where the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer. When one conveys a false impression by the disclosure of some facts and the concealment of others, such concealment is in effect a false representation that what is disclosed is the whole truth. Unconscionability Involves both an unfair bargain and the bargaining process itself The idea that a grossly unfair bargain should be unenforceable. Two elements to Unconscionability: o Procedural: the absence of a meaningful choice. Gross inequality of bargaining power Circumstances surrounding the K (lack of education, financial distress) Misrepresentations

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Lack of understanding Fine print Lack of other options/alternatives Absence of other sellers to provide the goods. o Substantive: the terms of the K are unfair or unreasonable Commercial needs (business justifications?) Customs/business practices (would other Ds in same field have done this?) Common provision? Does is shock the conscience? D must convince that provision is valid and needed. Must have both to have unconscionability. Unconscionability is judged at the time the K is made, not from hindsight. It is decided as a matter-of-law (by the judge) Are we going to protect people b/c of gross inequality of bargaining, and if so, how will we determine that? This forces judges to make assumptions and stereotypes. Advantages of doctrine: Dispels unfair practices Discourages unconscionable terms Gives cts the ability to take a proactive approach when the leg has been silent Helps those in need. Disadvantages: Creates uncertainty Allows cts to change agreements Paternalistic R. 208: If a term is unconscionable, cts may: o knock out term o refuse to enforce K o limit application of unconscionable term UCC 2-302: Test to determine unconscionability: Whether in light of the general commercial background, the clause involved is so one sided as to be unconscionable under the circumstances existing at the time of the making of the K. Williams v. Walker-Thomas Furniture- Furniture store sold uneducated lady furniture. K provision kept balance due on all items purchased. Term haled unconscionable b/c of lack of commercial needs and confusing term. Adkins v. Labor Ready- Employee of temporary employment agency claims arbitration clause in employment K is unconscionable. This goes to substantive unconscionability- argues its too costly. However, P presents no evidence of actual costs. Arbitration term not held unconscionable. Cooper v. MRM Investments- employee hired by KFC/MRM claims arbitration agreement is unconscionable. P claims procedural b/c of lack of bargaining power
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and lack of other options; substantive b/c of requirement that she pay for arbitration. P presents evidence showing her income and the costs of arbitration. Ps right to a court override policy favoring arbitration. Arbitration term ruled unconscionable. Note the two different doctrines the cts adopt in Adkins and Cooper. Cts sometimes follow their own policy. A contract is unconscionable if the inequality of the bargain is so manifest as to shock the judgment of a person of common sense (procedural), and where the terms are so oppressive that no reasonable person would make them on one hand, and no honest and fair person would accept them on the other (substantive). Public Policy Defense re: the substance of agreement itself. The process of K formation may be untainted, but the K may be unenforceable b/c the K itself runs directly contrary to public policy. Three ways K may violate PP: o Legislature says these types of agreements are unenforceable. o Statutes prohibit certain activity. o Ct decides so. Two sides: Freedom of K v. Public Policy: o Freedom of K: Parties should get what they bargained for. o Public Policy: moral issues Restrictive Covenants: Whether K that bars one party from competing with another can be made (Valley Medical Specialists v. Farber) Rules: o Per se rule (regarding doctors): Restrictive covenants are unenforceable b/c they violate the trust and confidence that a client/patient has in their particular practitioner. o Reasonableness Rule: if a ct believes a provision to be against public policy, then ct can modify provision to make K reasonable. Ct looks at: Undue hardship on employee Interest of public Legitimate business interest of employer Make arguments for/against enforcement: For: Freedom of K, autonomy, party is educated, being compensated for provision. Against: Unfair, bad for public, interferes w/ doctor/patient relationship o R. 187: For a noncompetition agreement to be valid, it must be ancillary to other Ks, i.e. a separate agreement. o R. 188: A noncompetition agreement that is ancillary is unreasonable if the restraint is greater than legitimate business interests require and will cause injury to the public This includes:
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promise by seller not to compete w/ buyer promise by employee not to compete w/ employer promise by partner not to compete w/ partnership

Spousal Relationship: Whether one spouse can bargain with the other using services that could be considered marital duties. o Ct may use pre-existing legal duty rule in combination w/ general public policy statutes to bar spouse from receiving compensation. Borelli o In Borelli, a statute specifically stated that K to compensate for wifes nursing service to husband should be invalidated. B/c statute doesnt specifically state Ks like this must be unenforceable, make arguments for/against: For: marriage should not preclude freedom of K; not appropriate for ct to have idealist view of marriage. Against: pre-existing legal duty; enforces negative view of marriage; marriage is not business-like. Then make judicial determination. Surrogate Mothers: Whether a K agreeing to pay a woman a certain sum of money to carry a child to term is unenforceable. o States differ over how to address this issue. o Some cts use statute from similar piece of legislation, e.g. adoption laws, to establish a rule absent legislative precedent. RR. V. MH (guidelines provided mom must keep child four days and mom can be paid only for medical expenses). o Factors ct will take into consideration: Consent of surrogate and her husband Mother be an adult w/ one successful pregnancy Mother be evaluated for soundness Fathers wife incapable of bearing children. Intended parents suitable All parties must seek legal council o Make arguments for/against enforcement For: not money-making; freedom of K; no genetic bond; knowing waiver; expectation of intended parents; contribution of father. Against: commodification of women/babies; best interest of child is more important; sweat equity; emotional attachment o Ks for Frozen Embryos: have same enforcement problems as surrogacy Ks. Some statutes hold these Ks against public policy. Problems arise when couples freeze embryos, then split. Forced procreation is not cts goal. Same arguments can be made here as for surrogacy Ks. o Note: Sources of Public Policy include constitutional provisions, statutes, and well-established precedent. Two types of statutes:

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Specific statutes prohibiting Ks. General statutes prohibiting conduct (majority)

o When analyzing PP defense (steps): What PP is implicated? What is the source of the PP? What are the arguments? For enforcement? Against enforcement? What do Restatements provide? Not necessarily dispositive, but discuss for points!

JUSTIFICATION FOR NONPERFORMANCE Two types of justifications o Mistakes- K based on something parties believed to be true, but wasnt. Occurs before K entered into. o Changed Circumstances- things that happen after the parties enter into an agreement. Problems can sometimes be placed into both categories when it is not known if the occurrence happened prior to the K being entered into, or after. If its not clear, discuss both mistake and changed circumstances, analyze each, and make conclusion.

Mistake An error of fact in existence at the time of the K that was fundamental to the premise of the K Occurs at time K is made. K is premised on bad information. Involves misinformation, not deception. Two questions to ask: o Materiality: How fundamental is the difference b/t what the parties thought they were going to get, and what they actually got? o Risk: Did one party cause the mistake? Did one party agree to bear the brunt of the mistake? [boilerplate is often enough to allocate the risk Messerly] Mutual Mistake R. 152 Elements of Mutual Mistake o The mistaken belief relates to a basic assumption upon which the K was made. o Materially affects the agreed performance. o Party seeking relief does not bear the risk of mistake.

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R. 154: When a Party bears the Risk of Mistake: o Risk is allocated to him by agreement, e.g. as is clause (although cts split over this) o Party seeking relief knows he should seek out more info, but doesnt. o Ct allocates risk to him. Lewanee County Board of Health- Ct found mutual mistake over a basic assumption that property would generate income. Also, mistake materially alters K. As for last element, the K had an as is clause. Ct makes determination that b/c of as is provision, no remedy for the plaintiff, because they assumed the risk. However, as is is not always determinative, so make arguments for/against allocation of risk.

Unilateral Mistake R. 153: Elements of Unilateral Mistake o Mistaken belief relates to a basic assumption upon which the K was made. o Materially affects the agreed performance. o Party seeking rescission does not bear the risk of mistake per 154 (above) In order to win on a claim of unilateral mistake: It occurred notwithstanding the exercise of reasonable care The other party can be placed in the status quo Wil-Freds- contractor made mistake when submitting bid, and attempted to correct it. Ct allowed rescission for unilateral mistake. Ct did not use Restatement approach. Instead applied reasonableness test. Distinguish b/t mistake of fact and mistake of judgment, although modern trend is to blend the two. A mistake of fact can be used as a defense; however, a mistake in judgment wont cut it. It is more common for relief to be granted for mutual mistake, than unilateral mistake b/c unilateral upsets expectations of one party.

Changed Circumstances Events following K formation that are so different from the assumptions on which the K was based, that it would be unfair to hold the adversely affected party to its commitment. Impossibility: Something that is objectively impossible. E.g. tap-dancer breaking both legs. No one can do it. If performance is at all possible, even by another party, this defense will fail.

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R. 262: Death or Incapacity of Person Necessary for Performance 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 nonoccurrence of which was a basic assumption on which the K was made.

R. 263: Destruction, Deterioration or Failure to Come into Existence of Thing Necessary for Performance 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 K was made. Frustration of Purpose: Performance is possible, but meaningless. Krell v. Henry- renting room for sole purpose of watching coronation parade, but parade is cancelled. Elements: 1. Principle purpose substantially frustrated [meaningless, worthless] 2. It is NOT the fault of the party seeking discharge. 3. By occurrence of event, the non-occurrence of which was a basic assumption 4. No risk was assumed or allocated by the K to the party seeking discharge. Mutual Profitability cannot be the principle purpose of the K b/c it is the basis of every K. Karl Wendt Farm Equipment. Characterize the Principal Purpose: The party asserting frustration will define the purpose as narrowly as possible. Roy: Frustration is NOT commonly available. It is narrowly drawn. R. 265: Discharge by Supervening Frustration Where, after a K is made, a partys principal purpose is substantially frustrated w/out his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the K was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary. Impracticability: Performance is possible, but it can only be done at some great/unexpected burden to one party. Elements: 1. Performance made impracticable [more burdensome, difficult, costly] 2. Event occurs of which the non-occurrence of was a basic assumption which the K was made.

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3. It is NOT the fault of the party seeking discharge. 4. No risk was assumed or allocated by the K to the party seeking discharge. A change in market conditions is insufficient to make performance impracticable. However, if an entire enterprise is affected (e.g. farm equipment industry), some courts may see this as impracticability. Karl Wendt Farm Equipment. Some cts may allow this defense for unforeseen market conditions, as opposed to unforeseeable. Market conditions would be the basis for an impracticability defense if it was of a tremendous magnitude, e.g. Stock Market Crash of 29; unforeseeable earthquake; tsunamis, compliance with an unexpected government regulation, wartime, etc. Impracticability is decided as a matter of law. If, despite a change in circumstances, the K has another serviceable use, the K has not been frustrated. See Di-Chem v. Mel Frank Tool Supply. Generally, governmental orders will give rise to impracticability. See R. 264. Cf. Mel Frank Tool (property had another serviceable use). R. 261: Discharge by Supervening Impracticability Where, after a K is made, a partys performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption, on which the K was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary. R. 264: Prevention by Governmental Regulation or Order If the performance of a duty is made impracticable by having to comply w/ a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the K was made. UCC 2-615: Impracticability: Its not a breach of K if a seller makes a K and cant perform when: 1. An unforeseen event happens that was a basic assumption of the K wouldnt happen, or if 2. The seller is complying w/ a governmental order in good faith (even if the order later turns out to be invalid) Limitations on Seller: The seller only gets to enjoy the protection of 2-615 if he complies w/ the next two requirements: 1. He must evenly divide up his remaining production among his customers. 2. He must notify the customers of the changes. Comments to 2-615: Increased cost alone does not excuse performance unless: 1. The rise in cost is due to some unforeseen event. 2. Which alters the essential nature of the performance Neither is a rise or a collapse in the market itself a justification, because thats the kind of business risk that fixed price business Ks are supposed to cover.
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But if theres a severe shortage of supplies b/c of an unforeseen event like war, embargo, local crop failure, unforeseen shutdown of major sources of supply, etc. it is covered by this section if it: Causes a sharp increase in costs; or Prevents the seller from securing supplies necessary for his performance.

MODIFICATION First, make sure there is an existing agreement. Then, determine whether CL or UCC applies. Then, look at exceptions. Modification Under Common Law: CL requires separate consideration for a modification to be valid. Requires both more money and additional services. R. 73: Performance of a Legal Duty (Pre-Existing Legal Duty Rule) A contractual modification based on performance already required under an existing K is unenforceable for lack of consideration. Alaska Packers Assn. Exceptions: for when no consideration is given o R. 89 (a) and (c): Modification of Executory K A promise modifying a duty under a K not fully performed on either side is binding if: (a) Circumstances were not anticipated by the parties when they made their K (impracticability, frustration of purpose). Note: this may be made w/ a lesser showing than using the doctrines of impracticability or frustration. (c) To the extent that justice requires enforcement in view of material change in position in reliance on the modification (promissory estoppel). This can probably be argued in every single situation. Can always argue reliance. Note: If circumstances change dramatically, a modification can be argued to be a bargain for a different service, thus meeting the consideration requirement. Modification under UCC: UCC will apply when dealing with the sale of goods. UCC 2-209: An agreement modifying a contractneeds NO consideration to be binding. Comment 2 (to 2-209): Modifications must meet the test of good faith. In UCC, good faith is substituted for consideration. Is there a good faith reason for the change? Notice that market conditions would be sufficient to show good faith under the UCC. Under the UCC, modifications are presumptively valid. Why? B/c modifications are everyday occurrences in the commercial world.
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Bad faith modification: not protesting the modification. Good faith modification: promising additional duties. UCC 1-103: Cannot induce modification under duress. Kelsey Hayes v. Galtaco (economic duress). Remember, UCC allows for CL concepts such as duress. Writing Requirements to Satisfy SOF: A modification that results in a K that is greater or equal to $500 must be in writing. If the K was already in writing (because it was previously over $500), the modification must still be in writing. [Minority rule: modifications may be oral if original K is in writing] o Exceptions to SOF apply to modifications: Specially manufactured goods Judicial admission Part performance goods received and accepted, or payment made and accepted Private SOF: 2-209(2) o NOM clause: include a no oral modification (NOM) clause in the Krequires any modifications to be in writing. Rule: A NOM clause is generally enforceable under the UCC (2-209(4)). o However, actual later conduct can operate as a waiver. 2-209(4): Although an attempt at modification or rescission does not satisfy the [private SOF], it can operate as a waiver. o Waiver- voluntary relinquishment of a known right. So, if the party protesting the modification, previously waived the NOM clause by conduct (performing), the modification is valid. o No waiver clause: provision intended to protect the parties from any claim that the NOM clause has been waived. o However, there are exceptions to the no-waiver clause: part performance. Cts allow these exceptions to the no-waiver clause although the UCC does not provide them. o The no-waiver exceptions seem to invalidate the private SOF. o Pro: the parties did actually modify the agreement; intent of the parties; fairness. o Con: prevents parties from agreeing to effective waiver clause. Answering a UCC Modification Question: 1) Make sure UCC applies (goods) 2) State that no consideration is required, BUT must have good faith. 3) Determine if SOF applies ($500), and if it is satisfied w/ a writing (modification must be in writing- note conflicting rules). 4) If UCC SOF is NOT satisfied, are there exceptions? Part performance (payment made and accepted; goods recd and accepted). 5) If there is an exception to UCC SOF, is there a private SOF (NOM and nowaiver clause)? 6) NOM Clause: has it been waived by actual later conduct (2-209(4))? 7) If NOM was waived, is there a No-Waiver clause? 8) Do exceptions to no-waiver clause apply? (same UCC SOF exceptions)

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CONSEQUENCES OF NONPERFORMANCE Four Question Analysis for Breach of Performance: 1. Was a promise made? If so, what was promised? 2. When was the promised performance due? 3. Was the performance in compliance w/ the promise? 4. What is the proper response to the breach? Question 1: Was a promise made? If so, what was promised? (Last Semester) Question 2: When was the promised performance due? Four different types of conditions that tell us when the promised performance was due: Constructive Condition: Imposed by courts as a matter of law to try to figure out which party was actually supposed to perform first. Concurrent Condition: Indicate that both parties were supposed to perform at exactly the same time. E.g. real estate transactions. Express Condition: Provision that something has to happen, and if it doesnt then one or both parties are relieved from the obligation to perform. o Note: Express condition is serious, b/c if the ct finds that there was an express condition and it was violated, the whole deal is off. Dont look at performance. Courts dont like this. o Condition of Satisfaction: type of express condition where one party doesnt perform until they get what they specifically desire from the other party. Reasonable person standard: objective standard that asks whether a reasonable person would be satisfied w/ the performance. R. 288: should be used whenever practicable; cts prefer. Subjective Standard: honest satisfaction standard of person who K benefited. o Arguing express condition did NOT exist: Interpretation: R. 227- If theres any doubt over what type of condition, an interpretation is preferred that avoids forfeiture, i.e. a presumption exists against express conditions. Waiver: R. 84- a voluntary relinquishment of a known right To waive, condition must be non-material. If material, consideration is required. May only be waived by the party for whose benefit the condition has been included. o A waiver may be retracted if there is still a reasonable amount of time for the other party to

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perform the condition AND if the other party has not relied on the waiver. Estoppel (reliance): Prevents unfair assertion of rights by a party that has acted inconsistently w/ those rights. Prevention: R. 245- When one party prevents an occurrence from happening, it will excuse the nonoccurrence of the express condition. Obstruction: R. 245- The promisee must not hinder the fulfillment of the K. Bad Faith: Parties must make good faith efforts to fulfill the K. Forfeiture Question 3: Was the performance in compliance with the promise? There are three kinds of breach: Minor, Material, and Total. Minor Breach: Jacob & Youngs, Inc. Minor deviation from the required performance such that, generally, the breaching party will be held to have substantially performed. o The defense of substantial performance is not available for K including an express condition. o Substantial Performance: The purpose to be served The desire to be gratified The excuse for deviation from the specifications The cruelty of the enforced adherence Material Breach R. 241: o To determine whether theres been a material breach look at: Extent that the breach will deprive the injured party of the benefit which he reasonably expected. Extent that the inured party can be adequately compensated for the benefit of which hes being deprived. Extent that the breaching party will suffer forfeiture. Likelihood that the breaching party will cure his failure (taking into account all of the circumstances including any reasonable assurances) Extent that the breaching party acted in good faith. o R. 237: Once a party has made a material breach, the other party is under no duty to render his remaining duties. Total Breach: Material nonperformance that hasnt been cured after a reasonable amount of time. Ways to be in total breach: o R. 242: Analysis to determine when material breach has moved to total breach. Weigh the following factors: Factors in R. 241
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The extent to which it reasonably appears to the injured party that delay may prevent or hinder him in making reasonable substitute arrangements. Extent K calls for performance without delay (boilerplate may not be enoughstronger is your timely performance is condition to my obligation to perform.) o Anticipatory Repudiation: Two ways to anticipatorily repudiate: Regular Repudiation R. 250: A repudiation can occur when: There is a clear and unequivocal statement by the obligor to the obligee that hes going to commit a total breach, or o Clear and unequivocal- a definite unequivocal manifestation of unwillingness to perform-very high standard. The breaching party has done something that makes it impossible for him to fulfill his obligations. *To determine if a repudiation has occurred look at both conduct and language. Failure to give assurances R. 251: When its reasonable to believe that the obligor is going to commit a breach, the obligee may: o Demand adequate assurance o And, if reasonable, suspend any performance until he gets assurance. If the obligor fails to give assurance in a reasonable time, the obligee can treat as repudiation. (reasonable is a fact based determination) Defense to anticipatory repudiation Retraction R. 256: Even if a party gives a 250 or 251 repudiation, it doesnt mean anything if the repudiating party retracts the repudiation before: The other party materially changes his position in reliance on the repudiation; or Before the nonbreaching party lets the repudiator know he treats the repudiation as final o Anticipatory Repudiation UCC 2-609: When there are reasonable grounds for insecurity, a party may in writing demand adequate assurance of the performance. Until he gets the assurance of that performance, he may if commercially reasonable, suspend performance. Reasonable grounds for insecurity: o Words of the party o Conduct o Financial difficulties o Failure to perform K obligations o Failure to perform related Ks o Course of dealing/performance
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o Information from a reliable source The standard for grounds for insecurity and adequacy of the assurance: determined according to commercial standards. If one party improperly delivers or pays for something, just because the other party accepts it doesnt bar him from demanding assurances. The party demanding assurances must be given assurance within a reasonable time not exceeding 30 days. Failure to assure is repudiation.

Question 4: What is the proper response to the breach? Minor Breach: Because there has been substantial performance, the nonbreaching party must perform, but may claim compensation for any loss suffered. Either cost of completion or diminution in value might be the measure of proper damages. Material Breach: Suspend performance and provide an opportunity to cure, i.e. give reasonable opportunity for other party to complete their performance; or claim compensation for loss suffered. Total Breach: Withhold performance completely and terminate immediately; May claim complete damages for breach.

EXPECTATION DAMAGES Goal: to put the NBP in the position he would have been had the K been performed. Formula: E.D.= Loss in Value + Other Loss Cost Avoided Loss Avoided Lo

ss in Value: (direct damages) the difference b/t the performance promised and the performance given. Other Loss: incidental and consequential damages. Incidental damages- additional costs incurred after the breach in a reasonable attempt to avoid loss. Consequential damages- further loss in other transactions or endeavors that were dependent upon the K. Cost Avoided: expenditures saved as a result of the breach. Loss Avoided: losses avoided in spite of the breach (mitigation, salvaging, reallocating) Alternative formula for Builders: ED= net profit + unreimbursed expenses

Loss in Value: Builder/Owner Construction K: o Builder: net profit + unreimbursed expenses OR the regular expectation damages formula. o Owner: Diminution in value or Cost of completion.
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Most jurisdictions use COC, but R. favors DIV. R. 348(2): DIV preferred over COC, but COC can be awarded when not clearly disproportionate. R. is NOT a majority position. Cost of completion: what it would cost to get to place had K been enforced. Policy: freedom of K Arguments against COC: overcompensation. Can avoid overcompensation by awarding specific performance. Diminution in Value: difference in value of property as promised and value of property as it is w/ work partially or completely done. Use DIV when: o a) substantial performance was made in good faith (Jacobs and Young); o b) Completion would be disproportionately costly and cause economic waste. Employee: = salary employee expected salary actually received Employer: = FMV of eee services Salary K for eee. o If new employee is found and hired, LV is the salary paid (must be reasonable) to the new eee price K for w/ breaching eee. Ways to measure damages for employers: o Lost Profits (if can be proven) o Cost of Replacement o FMV of the employee Real Estate: o Seller: K price Fair Market Value o Buyer: Fair Market Value K price

Other Loss: Consequential Damages Limits on Consequential: o Mitigation o Certaintyability to prove the losses o Foreseeability (at time K was entered into) o Causation breach must have caused these other losses Foreseeability: Key is foreseeability. o Hadley v. Baxendale- NBP may recover direct damages [naturally arise from breach]; and consequential damage [damages contemplated by the parties at time K was made- foreseeable]. Foreseeable by the breaching party. o Foreseeability is determined at the time the K was made. o Lost Profits on a 3d party collateral K: If NBP, as a result of breach, loses profits from a collateral K, to be able to recover for the lost profits, it must have been foreseeable. Did breaching party know or should they have known that K would affect collateral Ks of the NBP?

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o Termination clauses sometimes include consequential damages and lost profits if breach occurs. If its in the K, theres not a foreseeability issue. Certainty: must have certainty as to the amount of damages. Not down to exact penny, but close. Documents and invoices help to calculate. Causation: was the NBP the cause of the lost profits from the collateral K? If a party had a right to terminate, they can make the argument that it must be some limitation on damages. Damages must be caused by the breach. Fairness argument: although not part of formula, if the breaching party breached in bad faith, you may want to bring it up that lost profits ought to be awarded. Note: Lost profits on the main K are direct damages. Only lost profits on collateral Ks are consequential damages.

Incidental Damages: money spent in an effort to mitigate damages. E.g. money spent to put advertisement in the paper; money spent looking for new employee. Interest: Pre-judgment interest is normally only awarded when it is a liquidated sum. If it can be liquidated at a fixed time, it is recoverable. It is determined at the date of breach. Post-judgment interest is also recoverable after a judgment is entered. Interest that could have been made on a particular investment choice is probably NOT recoverable b/c it is NOT foreseeable. Commission: When commission is asked for as a separate item of damages, compare the two Ks to determine if the NBP ended up in a better position. R. 350: Avoidability as a Limitation on Damages Damages are not recoverable for a loss that could have been avoided. There is a duty to mitigate. However, if the NBP makes a reasonable, but unsuccessful effort to mitigate, he is not precluded from recovery. R. 351: Unforeseeability and Related Limitations on Damages Only damages foreseeable at the time K was made are recoverable. Foreseeable loss may be: o Loss that occurs in the ordinary course of events [direct damages] o Loss that occurs because of special circumstances [foreseeable consequential damages] Ct may limit damages for foreseeable loss by: o Excluding recovery for lost profits o Allowing recovery only for reliance interest; or o Excluding recovery to avoid disproportionate compensation. R. 352: Uncertainty as a Limitation on Damages

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Damages are only recoverable if evidence establishes an amount w/ reasonable certainty.

Duty to Mitigate: NBP can only recover to the point they would have had they made reasonable efforts to mitigate their losses. Mitigation benefits the breaching party. Once an anticipatory repudiation occurs, the NBP has a duty to begin mitigation. Luten Bridge. ED = Net profit + unreimbursed expenses up to point that builder learns of countys breach. Mitigation in employment K: NBP (eee) has a duty to mitigate (find another job). However, must only act reasonably in looking for new job. Eee does NOT have to accept just any job. o Employer has burden of proof to prove eee didnt mitigate. o Eee is required to take a comparable job if found. o Factors for comparable jobs: Salary Position Title Amount of Responsibility Status Location Industry Benefits Hours Note: If a NBP/eee spends money looking for another job (to mitigate), he is entitled to recover that money as incidental loss. R. 350: (see above) If eee CAN mitigate, must do so if reasonable. Lost Volume Sellers A seller who can accommodate more than one buyer and for whom a buyers breach does not release the goods for sale to another customer. The appropriate measure of damages is the gross profit the seller would have earned pursuant to the sale. The issue w/ LVS will arise over subsequent Ks and whether they will be calculated as mitigation. LVS have unlimited supplies of goods. A breach in one K does not affect their other Ks, only their profits. Personal services K: hard to argue LVS unless personal service could be performed simultaneously. Jetz Service- Jetz had enough washers and dryers to service all of their locations plus some extra. So when D breached the K, the fact that Jetz moved washers to another location was not an act of mitigation b/c Jetz could have handled the subsequent K anyway.

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If ct determined NBP is a LVS, subsequent Ks are not mitigating. LVS really have no duty to mitigate. LVS are entitled to lost profits

Calculating lost profits for a LVS Gross receipts: the total income brought in. e.g. coins in machine Gross profits: gross receipts minus variable/marginal costs. Net profits: gross receipts minus variable costs minus fixed costs. Fixed costs: overhead. Expenses irrespective of the K. e.g. insurance, executive salaries. Variable/Marginal costs: costs dependent upon the particular K at issue. E.g. rent. FORMULA FOR CALCULATING LOST PROFITS FOR LVS: o LV = Gross Profits [gross receipts variable costs] o Note: fixed costs are not factored into the formula. Why? b/c they would be incurred regardless of this K, and the NBP cannot escape them. Always ask: could the NBP have performed both Ks?

Non-recoverable Damages: 1) Attorneys fees 2) Mental Distress 3) Punitive Damages Attorneys Fees: American Rule: attorneys fees are not recoverable Exceptions: o K provision o Fee-shifting statutes o Court Rules (e.g. FRCP 11) Justification of Am. Rule: o Parties know their risk o Awarding attorneys fees increases litigation. o Access to the system- poor would be discouraged from suing. Criticisms of Am. Rule: o No incentive for Ds to go to trial and seek justice, they often end up having to settle. o Runs counter to idea of expectation damages. Emotional Distress Damages Generally not recoverable for breach of K action. R. 353: Loss Due to Emotional Disturbance- No recovery for emotional distress unless the breach also caused bodily harm. or if the K was of such a kind that serious emotional damage was a particularly likely result.

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So, you can get these damages for: o Bad faith breach when emotional distress is completely foreseeable. o Emotions/feelings are a primary concern of the K (K to handle dead, plastic surgery, wedding K) o Bodily harm occurred. Bodily harm must be related to the breach. Policy: if emotional distress damages are allowed, liability in Ks increases. Cts want to let market regulate itself. These damages could be K for and put into a provision.

Punitive Damages: Generally not recoverable for breach of K unless the conduct is an independent tort. --------------------------------------------Buyers and Sellers Remedies under the UCC: For Buyers: Ways a seller can breach: o Delivering non-conforming goods [wrong, damaged] o Failure to deliver/Late delivery [improper tender] o Anticipatory repudiation Buyers recoverable damages (their loss in value): o Cover Damages o Market damages o Incidentals and Consequentials Cover Damages: 2-712: o Covers the loss the buyer incurs by getting similar goods elsewhere. o Cover Damages = Cost of Cover K Price o Buyer is not required to cover; he can still elect market damages. If he covers, but gets it wrong, his only recourse then is to seek market damages. Failure to cover may limit the incidental/consequential damage awards, however. o 2-712 requires that Cover be made in good faith and without unreasonable delay. Must be a commercially reasonable substitutethey cannot upgrade the goods and then try to make the seller pay for those superior goods. However, if superior goods are really all they can find, then good faith will come in. o Buyer is also entitled to incidental and consequential damages that result. Market Damages: 2-713 o A type of hypothetical cover.

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o Market damages = market value K price. o Market price is determined at the time the buyer learns of breachMV computed at the place of tender: If a shipment contract the place the goods were supposed to be dropped off for shipping If a delivery contract the place of arrival o Time when buyer learns of breach in anticipatory repudiation situations: Not always easy to determine. At time of repudiation. Revised UCC states time when buyer learns of breach is measured by when buyer learns of repudiation plus a commercially reasonable time thereafter. When actual performance by the seller is due If the buyer has covered, can he elect to claim Market Damages also? o UCC conflicts. o Always say: If the buyer did cover, he is probably limited to cover damages. o Cover damages are preferred b/c they more accurately compensate the buyer. For Sellers Ways a Buyer can Breach: o Anticipatory repudiation o Wrongful rejection or revocation of acceptance o Failure to pay altogether/failure to make a payment when due Sellers recoverable damages: o Resale Damages o Market Damages o Lost Profits o Incidental Damages ONLY Resale Damages: 2-706 o Resale Damages = K price resale price. o To get resale damages, seller must: Identify resale K Give buyer proper notice of resale unless goods are perishable Make resale in good faith Resale must be commercially reasonable o If seller has resold, he is probably limited to resale damages, and will not be able to recover market damages. Market Damages: 2-708(1) o Market Damages = K price market price.

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o Market price determined at time and place of tender. o If Market Prices are inadequate look to lost profits. Lost Profits: 2-708 o Lost profits damages are recoverable when market damages are inadequate. Thus, this is a limitation on market damages. o Lost profit damages do NOT subtract fixed overhead from the equation the position is that fixed overhead is not a cost avoided. o Lost profits damages are often appropriate for: Lost Volume Sellersthey must prove that they were, indeed, a LVS; must show that they could have sold more and kept the contract that was breached. Component Seller- often, market is too small for a certain component; lost profits must be awarded, because the seller would be unable to find other buyers for that specific of a product. Jobber or Intermediary- buys stuff to sell it; thus, if the jobber has paid for the goods but not received them yet, he really has no market damages, because he hasnt been able to sell the goods. So, another method must be used to return him to his original position. Incidentals and Consequentials: 2-710 o Seller can recover incidental damages. E.g. expenses in stopping delivery, transport, and custody of goods. o UCC does NOT mention consequential damages. So, we can conclude that Seller is NOT entitled to consequential damages. o Revised UCC: Consequential damages are recoverable by seller.

Expectation Damages Theory Reasons for Expectation Damages: o Protects against lost opportunity o Facilitation of planning. o Protection of risk allocation. Efficient Breach: the law should promote efficiency (value maximization). o Occurs when a party can breach, compensate the NBP, and still be better off. o Supports the award of expectation damages. Assumptions Underlying Efficient Breach: o Stable competitive market o Rational economic actors o Full information regarding costs and alternatives o Low transaction costs Criticisms of Efficient Breach: o Non-economic values- its just morally wrong

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o Transaction costs eclipse gain o Encourages party to disregard K rights and expectations of others ALTERNATIVE MEASURES OF DAMAGES Expectation Damages: The preferred measure of damages. Goal- to put the parties in the position they would have been in had the K been performed. Benefit of the bargain. Reliance Damages: measured by out-of-pocked expenses. Restitution Damages: measured by a benefit that was unjustly incurred.

Reliance Damages: An alternative to expectation damages when they are difficult or impossible to determine. The same limitations on ED apply to reliance damages: foreseeability, certainty, causation, mitigation. If K is a losing K, NBP cannot recover reliance damages. R. 349: Reliance Damages: As an alternative to ED, reliance damages may be recovered, including expenditures made in preparation for performance, less any loss that the party in breach can prove w/ reasonable certainty the injured party would have suffered had the K been performed. Equal Opportunity Doctrine: When both parties have an equal opportunity to mitigate loss, and the BP fails to do so, he cannot later claim that NBP failed to take the same mitigation. Applies when both parties have control to mitigate. R. 90: Promissory Estoppel: for an action in PE, the court can award reliance damages, expectation damages, or the court may limit damages as justice requires. Comment D to R. 90: In particular, relief may be limited to restitution or to specific relief measured by reliance rather than by the terms of the promise. Cts have much discretion when choosing what damages to award. Factors cts consider in determining whether to award Reliance or ED. o Whether property has changed value o Time period or reliance o The certainty of lost opportunities o Presence/absence of good faith When you have a COA based in reliance (PE), there are two schools of thought: o You get reliance damages. o You get expectation damages Its not clear which school of thought the R. favors. Just know that it is possible to get either. And know that for a PE action, a P may be able to get ED depending on the court.
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Restitution Damages: Measured by market value rule. A party can sue in restitution in spite of any loss that would have been incurred had the K been performed. (note: ED and Reliance damages would be limited) R. 370: A party is entitled to restitution under the rules stated in this R. only to the extent that he has conferred a benefit on the other party by way of part performance. R. 371: Restitution, may as justice requires be measured by either: a) the reasonable value to the other party of what he received in terms of what it would have cost him to obtain it from a person in the claimants position, or b) the extent to which the other partys property has been increased in value or his other interests advanced. Rationale for awarding restitution even when performance would have resulted in a loss: o The breaching party is getting something they get to keep without paying for it. o A suit in restitution is a suit off the K, and the K is not part of the calculation. Exception to rule that allows restitution recover even for losing Ks: o Full Performance: by the NBP. o K Price: sometimes used as evidence of FMV. Cts will limit restitution to what party could have received had full K been performed. Rule: Restitution is available for the breaching party. o Policy For: Not morally wrong to breach and recover damages. Otherwise, NBP could get a windfall (unjust enrichment). o Policy Against: Morally wrong to breach. R. 374 Restitution in Favor of Party in Breach: (1) If NBP refuses to perform b/c the other party breached, the BP can recover in restitution for any benefit conferred by way of part performance or reliance minus the damages owed to NBP for the breach. (2) In some situations, the breaching party is NOT going to get back the benefit they conferred, in that that benefit would amount to liquidated damages. Confused? This subsection is an exception to when the NBP will be able to keep all the benefit as a form of liquidated damages. To determine if this subsection applies, court will look at whether its fair and reasonable. Limits on Restitution for BP: o BP must first compensate NBP. o K Price: limitation on value of services or benefit. Note: If you talk about restitution damages, mention that there are two ways to measure damages: i) reasonable value of what other party received; and ii) the extent by which the others property has been increased or his interests advanced. On exam, mention both, then decide what the best measure for the hypo given is and analyze.

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SPECIFIC PERFORMANCE A court ordered remedy that requires precise fulfillment of a K obligation. Available when money damages are insufficient. So, if damages would be adequate remedy, no SP. Advantages: o NBP gets their expectation o No time wasted on estimating damages o No problems in wondering whether one party is getting more than they bargained for, etc. Disadvantages: o Time/money saved in calculating damages is put into legal costs. o Time and money o Restricts liberty (personal services K) o Requires court supervision. o Undercuts efficient breach R. 360: Factors for determine if damages would be adequate: o Difficulty of proving damages w/ reasonable certainty. o Difficulty of procuring a suitable substitute. o Likelihood that award of damages could not be collected. R. 362: SP wont be ordered unless K is specific enough (sufficiently certain) to provide a basis for an appropriate order. R. 364: SP will be refused if it would be unfair b/c: o K formed by mistake or unfair practices o Unreasonable hardship to BP o Exchange is grossly inadequate R. 366: No SP if it would impose a burden of supervision on the court where burden outweighs advantages of SP. [balancing test: burden v. advantages] UCC 2-716: o If buyer has wrongfully refused goods/revokes, the sellers action is for the price. So, sellers SP = price! o If seller breaches, buyer can get SP when goods are unique. Buyers SP = goods (if unique)!!

K for Sale of Real Estate: Buyers are usually able to get SP. However, courts are NOT as willing to give sellers SP. Personal Services/ Negative Injunction: Rule: Generally, NO specific performance is given for a personal services K b/c:
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Limitations by 13th Amd (involuntary servitude) Difficulties associated with compelling performance even more difficult than in other contracts, because supervision must be so individualized; can you really make someone do a good job?

Negative injunction: The opposite of SP -- Prohibits BP from performing w/ 3d party. To get a negative injunction, need: o Unique services: if services are NOT unique, no need for NI b/c can get services anywhere. Determine if services may easily be replaced. It can ALWAYS be argued that its not unique!!! o Personal services have not terminated: NPB must have a legal claim on BPs timei.e. D should still be barred from taking another job b/c K isnt over yet! Wolf o A non-compete clause: Must be reasonable (public policy). If it is, this would weigh in favor of NI. R. 367(2): If NI would cause eee no other way to make a living, it wont be enforced. You cant get indirectly, what youre prohibited from doing directly. Always argue that eee has other options to work (just NOT what hes doing now).

Justifications for Prohibiting SP in Employment Ks: 1) Involuntary Servitude 2) Performance wouldnt be good anyway Liquidated Damages: [we skipped this section in class b/c of time constraints] Just know that an agreed remedy will NOT be awarded if it amounts to a penalty!

DRAFTING Building Blocks of Agreement: Title (Description) Most common: AGREEMENT. Sometimes a little more descriptive. Caption (1st Paragraph) Introductory, identifies parties (any detail about parties), Date of agreement maybe leave this area blank and match it with the date of the signatures when that is filled in. Recitals Background information for reader (client, other party, COURT) Whereas may be appropriate, but other legalese is generally discouraged. Be careful to not create any liability in recitals. It is agreed. Or, Mr. Newman and Mr. Smith hereby agree as follows. Etc. Whereas, on March 15, 1993, Seller promised to deliver 100 widgets to Buyer; Whereas, Buyer alleges that 40 of the widgets were defective..Now, therefore, the parties agree as follows.
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Heart of Agreement: Definitions: Does not have to be a separate definition section; depends on size of agreement. It is possible to define terms as they come up in the agreement. Define any terms that may be ambiguous. Covenants: THE MOST IMPORTANT PART! Promises made by the parties; conditions of the agreement. Even if working with a form, this part is ALWAYS drafted from scratch, even if the deal looks exactly like a deal covered by a previous agreement. Notices: Generally, parties will need to notify each other of certain aspects, like termination issues; this section is extremely important and lays out how the parties will get in touch with each otherproper address, proper means, proper times, what to do in holiday situations, etc Representations and Warranties: Things that the parties are representing to be true. Be careful not to make promises in this section. o Seller hereby represents and warrants that seller has marketable title. (This is different from a promise). Why it is different from recitals: Difference between saying that seller will sell property and seller actually has the correct title. Information with serious consequences o Seller has no obligation to anyone else. What happens if a representation is false? Put in remedy: rescission, express conditions, is it a breach? Declarations: Miscellaneous provisionsall optional and dependent on type of contract Force majeure, not construed against drafter, as is clause, governing law, best efforts clause, attorneys fees, statements that all parties represented by counsel, headings have no meaning Closing: Signatures, names of signers Approved By: Both lawyers signatures should be put herethis will keep another party from claiming they do not know what they signed 3 Ps of Drafting: 1) Predict what may happen. 2) Provide for the contingency. 3) Protect your client Types of drafting: Form based: using form book (faster) Zero based: from scratch (better) Draft: In the active voice

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In present tense Using gender neutral language Delete unnecessary language

Language: SHALL: Language of Obligation. has a duty to MAY: Language of Authorization. is authorized to MUST: Language of Condition Precedent. has to do X b/f Y will happen

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