Contracts II Outline I.

Unconscionability—if the court finds that the contract is unconscionable, it may relieve a party from its duty. A. Procedural 1. interference with the process of assent a. look to conduct of the parties B. Substantive 1. Values exchanged are grossly disparate C. Consumer Transactions 1. Warrant of Attorney a. enforceable if expressly assented to b. Unconscionable when included in fine print or Boilerplate 1) Boilerplate a) assent to the Boilerplate is assent to anything that is NOT INDECENT b) Duty of Reading is relaxed or excused 2. UCC § 2-302 authorizes a court to find, as a matter of law, that a contract or a clause thereof was unconscionable at the time it was made, a. the court may refuse to enforce the contract, b. excise the objectionable clause OR c. limit the application of the clause to avoid an unconscionable result. 3. Burden of Proof a. person who claims the contract is unconscionable b. then shifts to the other party to show 1) commercial setting and reasonableness 2) reasons for the unconscionable provision 3) good faith 4. Adhesion Contracts a. unconscionable only if claimant attempted to bargain for terms in the adhesion contract and was refused D. Commercial Transactions 1. Hold Harmless clauses a. Subjective determinations of a party’s assent is permitted if b. in light of commercial background and needs of the trade c. clauses are so one-sided d. under the circumstances existing at the time the contract was made 2. Non-Conditional Termination Clauses a. § 3-309—allows the termination clause if 1) reasonable notice is given 2) good faith 3) enforcing the contract would not be unconscionable 1

Reasonable in terms of protecting interests a. Issue: What are the terms and meanings 1) Defines the obligations of the parties b. Court will allow forfeiture if there is serious misconduct 3. Terms and Meanings: 1) Parol Evidence Rule 2 III. §178—Private interest in enforcing the contract 1. benefits 2. deliberateness 1) whether the party requires the aid of the illegal transaction to establish the case 2) purpose b. Assumption: Contract is Made a. deliberateness and seriousness a. Expressed legislative intent 2. geographic 2. direct connection between misconduct and illegal term C.a) Just because termination is permitted does not make it enforceable b) Must comply with §2-302 II. time b. strength of the policy a. scope c. justified expectations a. purpose of statute 3. forfeiture a. Breach 1) Is Performance Due? c. non-enforcement furthers the policy a. Go no further than necessary to protect that interests Performance of the Contract A. special public interests B. Illegality—unenforceable if against public policy A. Public interest in non-enforcement of the contract 1. Performance Overview 1. Seriousness: 1) Malum in se—inherently wrong and evil 2) Malum prohibitum—not inherently evil but wrong 4. Criminalized? b. Covenant not to Compete 1. protected classes b. .

Parol Evidence and Interpretation Test 1. 2. If there are different meanings. If there is Ambiguity in the writing: 1) As a matter of law. course of dealings to show the meaning OBJECTIVE b) Restatement §201 1. to explain a written contract prior to the writing b) Interpretation 1. Is the parol evidence consistent or inconsistent with the writing: a. Inconsistent 3 . Integration: If yes. that party did not know or have reason to know of another interpretation and the other party did know or have reason to know of the first party’s interpretation b. Final Expression of the parties intent and agreement 2. no parol a. In some cases. what does the contract mean? c) Integrated Writings 1.2) Interpretation a) Parol Evidence rule 1. allow the parol evidence OR 2) Only allow the evidence if it is reasonably susceptible to the writing OR 3) UCC §2-202 and Restatement §212 Rejects the ambiguity step because it is a subjective determination of the parties intent a) UCC—will allow evidence for the purposes of explaining or supplementing the meaning of words by 1. When the parol evidence rule is excused. trade usage and industry OR 2. Look to the four corners of the agreement b. Surrounding Circumstances that show parties intent 2. Cannot offer oral evidence to contradict. Interpretation a. cannot be explained B. or in some cases. Cannot be contradicted by Parol evidence 3. Adhesion Contract Interpretation 1) Interpreted against the drafter 2) Must be plain and clear a) no boilerplate b) no fine print c) only plain language 3. Look for an integration clause c. one party’s interpretation prevails if: a.

Determines what performance is due and the time performance is due a. Conditions generally 1. 2. Exceptions a. Express Conditions 1. the parol evidence is inadmissible OR 2) If the oral agreement would naturally be in a separate writing. If there is a Condition Precedent in writing 1) Not integrated because the parties are yet to be bound b. Duty to perform does not arise until the condition occurs 3. condition precedent in oral agreement 1) always get parol evidence in because it relates to whether the contract is integrated and whether the parties will be bound c. which must occur before performance under a contract becomes due. Order of performance a. duress. the parol evidence is admissible 4. or illegality 2) lack of consideration 3) lack of assent 4) avoidance Allocation of Risk: Conditions and Warranties A. Constructive Conditions—must allege that you have undertaken your part of the bargain so the other party’s duty is matured 1. An express condition must have strict or literal compliance unless there is no reasonable notice a. Anything that interferes with the contract is an exception to the parol evidence rule 1) Fraud. Notice Requirement 1) look to the risk allocation—WHO IS ASSUMING THE RISK 2) look to the exchange—THE ALLOCATION OF RISK MIGHT CHANGE C. it is not a breach B. A party’s duty matures AT THE TIME THE CONDITION OCCURS 4. If the condition fails. Consistent 1) If the oral agreement would certainly be in the writing at issue. 1) Absence of reasonable harmony between parol and writing = inadmissible b. An event that is not certain to occur. which party must perform first 1) Independent a) if the parties intend that performance by each of them is in no way conditioned upon performance by the other—promise for promise or performance for performance 4 .IV.

language of the agreement b. Material Breach or Substantial Performance (CARDOZO)—if there is evidence of forfeiture. Excuse of Conditions 1. conduct 2. look to: 1) Purpose to be served 2) The excuse for deviation a) Inadvertent: Good Faith? b) Deliberate 3) Forfeiture 4) What was the Value or size of the breach 5 . a. b) the court will construe covenants to be dependant unless a contrary intention clearly applies 1) presumption of dependence a. If a condition is required and its operation would be unfair. the court may excuse the condition where there is forfeiture. avoids placing the burden on either party of paying the other before he has performed 3) Restatement a) if the exchange of promises can be rendered simultaneously. performance is due earlier than the other party unless the language or circumstances show otherwise 2. they are due simultaneously unless the language or circumstances show otherwise b) if one party must perform within a time period. Quantitative a. intent of the parties 1. maximum security to both parties by allowing each to be assured the other will perform 2.2) Dependant a) if the parties intend performance by one to be conditioned upon performance by the other 1) condition precedent—performed before 2) condition subsequent—not to be performed until the other party has performed a precedent covenant 3) concurrent conditions—promise to be performed at the same time by each party and are bound to perform each. fairness 1. how much performance is required before the second party has a duty 1) Strict or literal compliance 2) Substantial Performance D.

customs and usages. Common Law 1) promises ought to be performed regardless if it is impossible b. Quantum Meruit 1) quasi-contract for restitution—labor contracts: laborer shall be entitled to compensation for the service actually performed c. Court will go very far to avoid forfeiture: a. goods that are represented are promised to fit the description 2. Modern approach—generally 6 . BUT 1) Where the benefit exceeds the cost of the breach. b. Warranties 1. Fit For Use 1) seller has reason to know 2) buyer is relying on seller’s expertise 3) for a particular purpose for which the goods are required Impracticability A. NET BENEFIT TEST 1) Not whether a benefit is received. c. Avoidance of Forfeiture 1. it can be used offensively or defensively: 1) not duty to pay if condition is not met 2) sue for breach E. When a constructive condition does not occur. Existing Impracticability 1. THEN substantial performance does not apply F. Substantial performance = an immaterial breach 1) party can sue for breach but cannot refuse to pay for the substantial performance c. Merchantability 1) professional merchant is seller 2) implied that the goods are of average quality b. Divisible contract—court divides the contract where one party has substantially performed on part of the contract b. Courts will always favor performance UNLESS Impracticable a.V. the defaulting party is entitled to compensation for his substantial performance 2) Defaulting party has the burden to prove the net benefit 3) Restatement: 2 exceptions a. IF express liquidated damages OR b. Implied Warranty a. Express Warranty a.

Satisfactory Performance 2.VI. no fault of the party seeking discharge d. the promise is excused 2) look to: a) source of the product b) availability c. One party’s purpose 1) Understood by both parties b. Requirements a. Scope and Content of Good Faith 1. Supervening Impracticability 1. Limited “excuse” doctrine: Restatement: a. 1) Where the parties assume a certain state of facts exist. and they do not exist. Good Faith required in the performance of all contracts 7 . The party assumed the risk C. Discretion a. Severe Impracticability 1) Prevention of performance c. common understanding of the parties 1) language of the agreement 2) business customs and trade B. Foreseeability a. Basic assumption test does not apply BECAUSE c. where promisor assumes the risk the promise will be enforced 1) Amount of Risk promisor undertook a) language of the agreement 2) Purpose of the promisee a) Developmental v. event makes the performance impracticable b. Frustration of Purpose 1. b. that party has not assumed a greater obligation than the law imposes 2. Unforeseeable by both parties The Duty of Good Faith A. the nonoccurrence of that event was a basic assumption on which the contract was made c. Results Oriented contracts b) Developmental = assumption that result will not occur c) Results oriented = results must occur—assumption that promise will be performed d. If the event is foreseeable. general term requirement for output OR b.

Merchants 1) Honesty in Fact AND 2) Observance of Reasonable Commercial Standards 3. Cancellation Notice included in the agreement: EFFECT ON DISCRETION a. Exception 1) CLEARLY a personal contract 2. ALTERNATIVE 1) Burton Test—Economic Analysis a) contracts = foregone opportunities b) bad faith = trying to reclaim opportunities by broad use of discretion B.VII. Does Discretion exceed the limits of reasonableness? 1) common purposes 2) community standards of honesty. Objectively unreasonable rejection of goods b. When breach occurs. Reasonable given the purpose of the parties to the contract 1) How much discretion does the ∆ have 2) Will it deprive the other party of a benefit (ILLUSORY PROMISE) b. Was the ∆ the cause of damage or was it out of his control? d. good faith rejection of non-conforming goods is allowed UNLESS a. Reserved Discretion 1. REPUDIATION is a decrease in the value of an agreement if: a. An act that renders the other party’s performance impossible c. a. Π can sue AND is absolved from performing 3. Fair Dealing a. consistent with the justified expectations of other parties 4. IF UNCLEAR: 1) UCC § 609—reasonable insecurity because of statements or actions 2) Belief that the party will not perform 3) Demand assurance in writing within 30 days 8 . Right to suspend performance or cancel for anticipatory repudiation 1. STANDARD For DISCRETION a. Allocates the risk b. Repudiation excuses the condition of performance 4. agreed common purposes between the parties b. decency and fair dealing c. Express and unequivocal statement OR b. Consumers 1) Honesty in Fact b. Exercising discretion is OVERCOME by the express allocation of the risk Remedies for Breach of Contract A. Breach occurs at repudiation 2.

Alternative c. Implied—created by operation of law a. General Rule for expectation measure 1.4) Failure to respond acts as repudiation = BREACH 5) Reasonable Insecurity a) question of fact for the jury VIII. Courts can mix and match between the three d. Look to language of the agreement B. goods are at least the average that is acceptable in the trade b. Expectation is the normal measure D. Example 1) Use expectancy theory of recovery and award restitutionary measure of damages 9 . fit for use 1) buyer relies on expertise of seller 2) goods for a particular purpose 3) seller must provide goods “fit for that purpose” C. Difference between contract price and fair market value 2. Look to warranties 1. Express—if there is a description of the goods a. goods must conform to the description 2. a. Compensatory Damages INTERESTS VALIDATION ______________________________________________________________________ EXPECTATION IF K CONSIDERATION FORWARD LOOKING DAMAGES PUT Π WHERE HE WOULD BE WERE PERFORMED RELIANCE STATUS QUO OR AT PROMISSORY ESTOPPEL BACKWARD LOOKING RESTORE Π TO OUT OF POCKET EXPENSES TIME OF CONTRACT RESTITUTION CONFERRED VALUE TO Π MORAL CONSIDERATION BACKWARD LOOKING REMOVE BENEFIT TO ∆ AND RESTORE THAT A. If expectation does not work. Foreseeable damages 4) ∆ is liable for all actual damages he did or should have foreseen 3.

foreseeability starts on that date. Hadley Test: 1) Naturally. Specific Performance (SEE NEXT SECTION) 4. Incidental Damages a. If agreed date is in the future. 2) So the court could encourage industry and reduce crushing damages b. unusual for contract claims. criminal or tortuous acts in contracting 10 . buyer has cover—entitled to out of pocket costs had the original contract been performed 3. Consequential Damages a.E. or directly flowing from the breach 2) Foreseeability—reasonable person in the business a) What ∆ should have known THEN b) What ∆ actually knew c) At some relevant time i. not at the time the contract is made 3) Special Circumstances a) Assumption is that party’s do not contemplate damages b) Damages should be proportional to consideration for agreement c) Courts assume that the risks are proportional to consideration c. mitigation devices—entitled to expectation measure of damages: a. Damages 2. seller has resale—gets difference between the original contract AND costs for resale b. Punitive damages 1. usually compensatory UNLESS 2. At the time the contract is made OR ii. damages that do not OBVIOUSLY flow from breach 1) limited to cut off liability at the earliest possible point. flowing from the handling of goods 5. Buyer and Seller’s Primary Remedies are virtually the same: UCC 703 and 711 1. UCC § 2-715—consequential damages if: 1) reasonably foreseeable 2) ascertainable 3) unavoidable a) unable to prevent by cover or otherwise 4) Injury to person or property F. normally.

fraud a. employees rights = encourages competition 2. LOSS OF ONE PROFIT is recoverable XI. Individual employment contract with covenant not to compete a. unique goods or other proper circumstances 2. must favor competition c. Balance employer’s property rights vs. employee must have another valid source of income 11 . Lost Volume Seller 1. quantity. MUST bear reasonable relation to actual damages a. Injunctions and Restrictive Covenants 1. factors: 1) motive 2) willful 3) culpability 4) disregard of law 5) deterrence a) deterrence to present ∆ AND b) similarly situated ∆ s G. buyer breaches 4. Equitable Remedies—discretionary decisions by the court tailor made to the circumstances of each case A. unlimited supply 3. Specific Performance 1. buyer’s is unable to cover a. oppression 3. General Rule—monetary damages for breach UNLESS the remedy is inadequate at law: B.a. court will not create non-competition clause b. malice b. inability to ascertain future damages. Output Contacts AND b. express covenant not to compete b. Court CANNOT enjoin employee to stop working for employer 1) slavery—working for someone against your will 3. goods at the market price 2. USE specific performance C. Court CAN enjoin employee from working for others IF: a. price or other relief 3. Requirement Contracts c.

must be reasonable: 1) time 2) scope 3) and geographic area 12 .d.

Agreed Remedies UCC § 2-719 1. allocates the risk f. INTENT a. may cause a court to strike down liquidated damages in the contract ONLY WHEN the intent is to PENALIZE rather then to compensate d. Difficult or impossible to ascertain damages at the time of contracting OR 2. Reasonable forecast of anticipated damages a. Then consequential damages can be awarded BECAUSE if repair and replace clause fails. mitigation of damages is irrelevant in light of liquidated damages E. Alternative a. balance economic costs and benefits of injunction remedy vs. consider Π ’s burden to show damages are inadequate 1) determine costs 2) competition 3) market and demographics change 4) length of time c. parties can limit or modify remedies 2. rescission is the only other remedy c. At the time of breach AND 3.4. Liquidated Damages—FORESIGHT AND HINDSIGHT 1. does not discourage the negotiation of damages e. Reasonable forecast in light of actual damages a. favored because the burden to calculate damages is off the courts b. no consequential damages UNLESS 4. Economic Analysis a. Repair and replace clause and consequential damages are treated separately 13 . with repair or replace warranty 3. repair or replace provision in agreement b. REPAIR OR REPLACE FAILS OF ITS REMEDY 5. example a. market/damages remedy b. then the consequential damages clause fails 5. At the time the contract is entered into AND b. consider costs for issuing injunctions 1) problem of supervision 2) possible forfeiture of business if injunction is granted 3) possible negotiations of damages because of wide range in damages D.

1) repair and replace requires a failure of essential purpose 2) consequential damages requires personal injury to consumer a) limitation of consequential damages is prima facie unconscionable 14 .

UNIFORM ARBITRATION ACT a. Intent of Parties Governs a. Assignment—Transfer of rights to collect payment from one party to another 1. 4. vacating an award is limited to a showing of corruption. broad language that covers the fraud issue in the agreement XI. A valid defense against an assignor is a valid defense against the assignee a. Obligor) Transfer/Assignment of rights to Assignee for money owed to seller ***Buyer is obligated to pay assignee upon NOTICE of the transfer Assignee (Obligee. parties consenting to delegate power to 3rd party is binding on the parties to the contract 2. court must enforce arbitration provision UNLESS fraudulent (no consent.X. Where there is multiple assignees. 3. fraud. Role of Architect or Engineer 1. RULE—An assignees rights against the obligor vests when the obligor has notice of the transfer 2. vitiates contract e. Expressly provided in the agreement OR b. validity—favors arbitration g. Enforce the warranty at law which provides that an assignee can recover from an assignor 15 . Seller (Assignor) CONTRACT FOR GOODS PAYS MONEY FOR GOODS Third Party Interests Buyer (Debtor. Creditor) A. After an assignment. the original parties CANNOT change the original agreement because the assignment would be harmed. etc. Dispute Resolution A. If so. look to the agreement for a clause that holds the assignor liable if the assignee is not paid OR b. the assignee who first gives notice to the obligor is first in line to collect from the obligor 3.

Extinguishes rights and creates assignee’s rights after the assignment and notice to obligor iii. UCC § 9-318: Anti-assignment clauses are ineffective a. Diagram the Parties 3. UCC—Substantial Interest Test a. Delegation of Duties: 1. Outline 1. 2-210—anti-assignment clause is interpreted as prohibition against delegation of duties. not rights. Assignment of Rights or Delegation of Duties? 2. UCC 2-210—if the assignment materially changes the obligor’s duty. Assignor i. Common law disfavors. Adverse effects on the obligor a. burden or risk is materially impaired. 9-318 Anti-assignment clause is ineffective ii. Article 9—secured transactions b. the obligee does not have to accept performance from the delegate if the obligee has a substantial interest in having the assignor perform 1) The obligee has a substantial interest if the delegate CHANGES THE RISK of the obligee C. If necessary and legitimately called for between original parties 16 . Narrow and strict interpretation—expressly say “no assignment and any attempt is void c. or impairs obligor’s chance of obtaining return performance unless waived by the obligor by consent in advance or after the fact b. Reasoning—justified expectation of the obligor at time of contract 3) Anti-assignment clause a. Rights 1) Common law recognizes the assignment of rights 2) UCC-recognizes the need for assignments in modern economy a. UCC voids anti-assignment clauses i. but allows b. Allows a party to borrow under an accounts receivable financing plan B. Where an assignor delegates duty to a 3rd party.5. Present intention to make a transfer of rights ii. 4) Modification by original parties a. Exception 1.

Assignee’s position is no better than assignor b. Performance is commercially standard 1. Delegation is probably not questioned Third Party Beneficiaries Generally. All circumstances considered ii. B. Stands in shoes of assignor 4.XII. Delegation of Duties 1) Never relieves delegating party of its duty 2) Prevention or exception to allowing the delegation a. Necessarily requires the promisor to confer a benefit to a 3rd person 2. i. A. Performance must run directly to the 3rd party Promisor and Promisee must understand the intent to benefit 17 . Substantial interests test i. UCC and RESTATEMENT—modification made in good faith and according to reasonable commercial standards is effective against assignee 5) Assignee is vulnerable to all defenses that obligor has against assignor a. party must intend to benefit the 3rd party 1. Performance of a personal or specific nature UNLESS iii.

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