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“Thinking like a lawyer” by Brickman principal of logical relevance. Logically prove assertions derive conclusions with no gaps of reasoning. Relevance be concise say o more no less than u have to. Office Hours Doesn’t really keep them. Just drop by. Brickman on the textbook Kessler and Sharp (??) saw contract law as a “series of contradictions.” (theme vs. counter-theme) “Paired opposite” = thrust vs. counter-thrust • Core syllogism of all law schools subjects • If A then B o if the facts are such and such (A) then the outcome is B • BUT If C then D o if the facts are different such and such (B) then the outcome is D one lawyer arguing facts A, one lawyer C only matters what jduge buys into Legal rules “travel in pairs of opposites” • in some cases you’ll see explicit paired opposites o look for “If...” and “But if...” this will clearly indicate a legal syllogism • some cases you’ll have to construct the paired opposites yourself Book is organized with “paired opposite” cases • often older, Common Law case and more recent (statutory?) case o similar facts, different outcomes anytime u bought exclusive rights you can exclude others from competing who have not purchased exclusive rights. ................................................................................................................................................ Pittsburgh Athletic Club Hypos 1) Operation Sail-Bye 1. Yes 2. Yes 3. Maybe 4. Yes 5. No, interferes with exclusive contract 6. No
BRICKMAN Offers to sell exclusive rights to let trucks cross the Brooklyn Bridge. Can he do this? 4) Pirate Parking Lots Will the Pirates lose money if homeowners can lease out their parking? • Yes, because external parking decreases value of permit parking at Pirates games QUESTION Is the “property” yours to sell? The fact that someone will buy something from you doesn’t mean it was yours to sell. 3) New York City Streets City owns the city streets. City is corporation. • Can a TV station which buys the “exclusive rights” to broadcast “calamities” enjoin other stations from broadcasting from those calamities? 2) Political Convention Brickman What’s the significance of “news”? • Constitutional Issues (1st Amendment) • Refers to AP case references in Pirates o tradeoff between press freedom and commercial value once something is broadcast anyone can comment on it, BUT who broadcasts it first is commercially valuable • Public Interest Political convention Brooklyn bridge- the fact that u sell it does not mean that u own it New york city street—Can they do thisPittsburgh Athletic Co v. KQV Broadcasting Co. Did the plaintiffs win because they have a property right or do they have a property right because they won? this was sui generis (new) this was the FIRST time that a baseball game was broadcast on the radio o therefore no precedent o was “similar” Australian case, but this is distinguished on “unfair competition” How did the court “know” there was a property right?
We have a legal rule (“If the Pirates do A, B, C, D, etc. then they have a legal right.” you have the “facts”... o Pirates own the team, built the stadium, etc. Brickman There is a GAP. It does not follow as a matter of logic that “if A then B” because there was no rule to follow. The court created a rule. So then... Did the plaintiffs win because they have a property right or do they have a property right because they won? In this case, the judge created a legal rule. Why did he do this? How did he know to do this? Brickman (refocusing the question) Create 2 worlds. In one Pittsburgh went the other way (no property right). The other is the world we have the world today. How do you distinguish between these worlds? One has higher GDP (ours) WHY? o if no property right, no one buys, no one advertises o disincentive to innnovate Brickman Was the judge looking at economic effects? wealth creation is “good” this judge favored the creation of wealth, unlike the Australian court If anyone can broadcast, value of those right would be very low. (If 17 stations are broadcasting the same game, why advertise?) ................................................................................................................................................ HISTORICAL OVERVIEW of Contract Contracts based on quid pro quo basic foundation of “reciprocity” which underlies all law Despite evolution of contracts, modern contracts still contain large vestiges of original contracts law ENGLAND Early days claims about transactions heard in domestic (local) courts. William the Conqueror (1066) comes in, conquers, and creates Kings Courts primarily used to prosecute “bad guys” Sets up Chancellor hear disputes in stead of King
become increasingly professional “Law of Equity” evolves from this Raising revenue want to fight costly wars King decides to “create business” in Kings Courts o Writs (which would allow you to go to court) could be purchased from the King Writs Became relatively standardized o Debt recover money owed o Covenant dealing with seals o Trespass When entering court, had to invoke one of these Writs o “No writ, no right” o if your case didn’t fit under one of these Writs, could not go to court Nobles • didn’t like Writs b/c they got sued • got together and decided the King shouldn’t order any more Writs o MAGNA CARTA first significant limitation on the power of the sovereign became the basis for Anglo American law Brickman How do we go from these Writs to modern rights? • creativity of lawyers starting with trespass Trespass • “trespass on the case” Writs o forerunner of negligence o if craftsman does a bad job, can sue o today this would fall under malpractice • “Writ of assumpsit” o where there was an express promise to pay for goods and good were delivered but no paid for promise to pay must be shown o There was no liability for breach of (executory ) promise I promise to sell you my crops, you promise to buy them, one of us renegs... no right to sue Indebitatis Assumpsit • allowed for suit when a delivery was made but not paid for (or paid for but not maid) • key link towards Slade’s Case
Slade’s Case (1692) • first time allowed for suit on “executory promise” o neither side had acted o could sue for “malfeasance” but NOT for “nonfeasance” if you did something badly, could be sued if you didn’t do something AT ALL, could not be sued before this • disposed of the argument that a P who sought to recover a debt had to proceed under certain Writs • after Slade’s, promises were enforceable • before this, promises were “morally binding” (under Canon law) but had no legal force ................................................................................................................................................ Actual Contracts vs. Contracts Implied in Law I. Two kinds of actual contracts 1. Express contract a. Contract is expressed 2. Implied Contract a. No express contract to pay b. EX. Riding the bus i. You don’t enter into a contract with the bus driver ii. this contract is “implied from the facts” c. EX. Supermarket i. don’t sign a contract to pay when you get in line with your groceries II. Contract Implied in Law 1. Quasi-contract a. EX. You lose your wallet, someone finds it, refuses to return it i. no actual contract signed here, but there is “unjust enrichment” 2. These are “contractual-type remedies”
Do you have to enter into contract? NO Traveling on the King’s Highway in 17th century England *Answer to question for next semester Did innkeepers on the King’s highway have the right to refuse rooms to whoever they pleased? NO • As a condition of the “franchise” of having an inn on the King’s highway, must provide a room to any traveler unless they are unruly • Did this to facilitate commerce o commerce = money = taxes = services/WAR Can you refuse to sell your home to anyone for any reason? • Subject to limits • statutes, the King, etc. etc. Person is dying on the street. Does a doctor who sees this have an obligation to treat him? • NO Does a lawyer have to take on a client? • Not unless the court orders him to Hurley v. Eddingfield (1901) pg. 56 Holding Doctor has no obligation to treat anyone. If you were going to argue that there was a contractual obligation for the doctor to assist, would have to show a quid pro quo Quid Could argue that by agreeing to the family’s phsyician (which he had been for many years) he had already entered into an employment contract with the family, whereby he was obligated to attend to them when they became ill. • implied in fact contract Promise to provide service whenever needed. Quo EXCLUSIVITY • would have to show that the family would not rely on other doctors
Great Atlantic & Pacific Tea Co. v. Cream of Wheat Co. (pp. 58-59) Brickman How does this relate to Hurley? • no obligation to enter into contract Cream of Wheat demanded that it set its resale price. Resale price maintenance. A&P was going to cut the set price. Court says that Cream of Wheat can refuse to sell to A&P for this reason. SCOTUS has been divided on this issue. Currently it is not believed to be a violation of the Sherman Act. Optional Case FTC v. Beechnut Refusal to deal was declared to be a violation of the Sherman Act, b/c Beechnut went around and checked to make sure the stores it sold to were charging “its” price. Couldn’t refuse to sell your product to a retailer if the purpose was to violate the Sherman Act.
Poughkeepsie Buying Service Inc. v. Poughkeepsie Newspapers Inc. (1954) pp. 64-66 Facts 1. Plaintiff wants to force newspaper to carry its ads 2. Newspaper asserts its right to not engage in contract Holding Newspaper wins based on its freedom to choose, for any reason, who it enters into a business relationship. Brickman What alternative basis could there be for the ruling? • First Amendment o but does not apply b/c there is no Congressional or state statute but rather at a private business decision
Continental Forest Products, Inc. v. Chandler Supply Co. (1974) pp. 67-73 Buyers & Sellers When identifying plaintiffs and defendants use their business identification (“Buyer” or “Seller”) Facts 1. Buyer (“Chandler”) purchasing 2 cars of lumber for retail 2. attempting to buy from Seller “North American Millwork” (NAM) 3. NAM employee left and took order to Seller “Continental” a. can assume there was nothing “wrong” with the plywood that was eventually delivered by Continental b/c Buyer does not allege this to be the case 4. Buyer also does not contest the price 5. ISSUE is the “trade debt” offset owed by NAM to Chandler a. footnote 7 on pg. 68 says NAM was insolvent therefore Chandler would not be able to collect from them in the future b. either Chandler or Continental is going to lose the value of that credit 6. Brickman What was the “value” of the credit? a. could be NOTHING b. see the mortgage crisis i. $100,000 mortgage could be worth NOTHING 7. Brickman As a matter of fundamental fairness, Continental should be the loser TEMPLATES CRIMINAL JUSTICE TEMPLATE 1. Didn’t do it 2. Did it but not a crime 3. Did it but crime is unconstitutional
CONTRACT TEMPLATE 1. Express contract 2. contract implied in fact 3. contract implied in law (quasi-contract)
Contract implied in law is about “unjust enrichment”
Continental Forest Products, Inc. v. Chandler Supply Co. Seller is suing the buyer. Seller says “We have an express contract.” Buyer says “We don’t have an express contract with you. We had one with NAM.” Seller says “We have a contract implied in fact.” Buyer says “We never asked for anything from you therefore no contract implied in fact.” Seller says “We have a contract implied in law. You used our services and were thus unjustly enriched.” Buyer says “ Amount of enrichment between the parties is what is used to judge... Because Chandler had a right to deal exclusively with NAM, it should not have to pay the full cost of the goods. Watteau v. Fenwick Facts: Defendant owned a hotel-pub that employed Humble to manage the establishment. Humble was the exclusive face of the business; Humble’s name was on the bar and the license of the pub. Defendant explicitly instructed Humble not to make any purchases outside of bottled ales and mineral waters, but Humble still entered into an agreement with Plaintiff for the purchase of cigars. Plaintiff discovered that Defendant was the actual owner and brought an action to collect from Defendant. Issues: The issue is whether Defendant is liable for damages resulting from an agreement between Plaintiff and Humble, who is knowingly acting outside his actual authority as an agent for Defendant. Reasoning: Defendant is liable for damages. Humble was acting with an authority that was inherently reasonable for an agent in that position. The situation is analogous to a partnership wherein one partner is silent but is still liable for actions of the partnership as a whole. Case in a word fraud (a swindle) Terms of contract with company who bought the bar said that Humble could buy ale and mineral water, but not cigars. Seller is suing, because they had sold to Humble on credit, he sold the cigars and kept the money. Seller sues the company that owns the bar to collect, either because the money is gone or Humble is gone. Someone is going to eat the costs, either the bar or the seller. Someone is going to lose = zero sum game. Seller claims that Humble is acting as an “agent” of the company.
Question from BRICKMAN: Is the OWNER a BUYER for purposes of the collection of fees? Doctrine of Principal and Agent The principal is responsible for the actions of their agent which the agent is authorized to make. The agent has authority to bind the principal. Buyer (company) says that Humble did not have the authority to buy the cigars, therefore the company is not obligated to pay for the cigars. Cigars were outside the scope of principal and agent contract. Humble had NO ACTUAL AUTHORITY. Doctrine of Apparent Authority The principal is responsible for actions of the agent that are within the scope of his “apparent authority.” • someone in Humble’s position looks like they have the authority to buy the cigars • When an agent appears to have the authority to exercise authority for purposes of binding the principal. Buyer (owner) says that the seller could not have relied on apparent authority because they did not know that Humble was an agent. If seller did not know Humble was an agent, he could not be relying on apparent authority. Buyer says: Apparent authority is not applicable when there is an undisclosed principal. If we allow undisclosed principals to trump apparent authority, then it becomes a policy issue. Court says that principal and agent theory applies here. • court makes a policy argument o if we allow the buyer not to pay, then it will create an incentive for principals to enlist “secret” agents to defraud sellers What is the economic goal here? • reduce fraud • if don’t hold the buyer liable, sellers will have to deal with owners (CEOs only); our goal is to maximize profits Relative costs to the owner versus the seller • want to make cost the lowest b/c costs get passed on • buyer is the lowest cost avoider b/c he can avoid these costs compared to the alternatives; if you made the seller responsible they would have to hire staff to keep an eye on their buyers and this would be very expensive o buyers already have mechanism and incentive for “monitoring their agents” ACTUAL CONTRACTS v QUASI-CONTRACTS Noble v. Williams Facts: Teachers who were hired to teach public school. The ∆, school board, failed to pay the schoolhouse rent, or furnish necessary classroom materials. The π's allege that they were therefore required to pay for the supplies themselves, and so they sought to recover
their costs in furnishing the schoolhouse. ∆ demurred and circuit court sustained the demurrer. Issues: Was a there an implied contract between the teachers and the school board, solely because the school board benefited from the teachers' actions? Reasoning: The court reasoned that the teachers had no right to provide the supplies themselves and then demand payment, because they would be forcing the school board into a contract that the school board did not intend. Plaintiffs hired as public school teachers. Schoolboard failed to provide.... anything. Teachers bought supplies with their own money and they knew it was beyond their authority. Schoolboard says the teachers were volunteers did it of their own volition (were volunteers) and therefore there is no “unjust enrichment”. Court rules for the schoolboard not the teachers. Brickman HYPO Kid walks by your home and offers to mow your lawn for $20. You say nothing. Kid mows your lawn and then asks for the money. Homeowner acquiesced in receiving the service. Under quasi-contract theory, you have to pay. Owner is accepting the service; his passive acquiescence should require the homeowner to pay. Paradigm for implied in fact, is that you asked for you getting on the bus, you got it and now you have to pay for it even though there is no express contract to pay. Brickman What is the argument the teachers could make supporting what they did? • • schoolboard acquiesced in what the teachers did; argue for “implied in fact” contract; the school board was unjust enriched at its expense.
Look for a variety of legal theories which you can apply. BRICKMAN HYPO What if teachers’ failed to pay the coal company? Can the coal company sue the school board? • Teachers had the apparent authority and coal company could have a viable suit.
Cotnam v. Wisdom Facts Man involved in a terrible car accident. Unconscious. The doctor won. Why did the court say this is different than Noble? • virtual certainty that the patient would agree to the contract • policy argument • teachers could have asked the schoolboard, but the doctor could not ask the patient because he was unconscious In a quasi-contract, the financial condition of the patient doesn’t matter at the time. Davis & Co. v. Morgan Facts Davis signed a one year contract at $40 per month. Got a better offer ($65 per month) after he had already entered into an agreement with current employer. Employer offers Davis $120 bonus if he stays with him. Davis agrees. Davis gets fired before the end of his contract and doesn’t get the $120 bonus. Sues. Brickman Why did the employer agree to give Davis the bonus and then later fire him? • He needed him at one point and didn’t at another (both within the term of the contract and employer did not pay the bonus) Brickman What might Davis’ trade be? • each season work on a different line Employee loses. What is a naked promise? No extra consideration; employee is no worse off if promise is broken. D promising to do what he is already obligated to do so there is no valid consideration. OFFER/ACCEPTANCE/CONSIDERATION What is the legal basis for this? • Davis had a pre-existing contract to stay on • Davis had already promised to “expend all he could expend” o promise for the bonus is void because he had nothing to offer o there was “no consideration that could flow under this common law obligation of pre-existing duty” that which was promised was already committed Is free volition or social control being implemented in this case? Social Control • contact theory used to strike down agreements voluntarily entered into
Schwartzreich v. Bauman-Basch, Inc. Employee has contract for $90 per week. Gets a better offer. Employer agrees to pay him more to keep the employee on. Employer eventually fires him. About a month before his contract is about to begin, Employee gets a better offer and presents to employer. Employer creates a new contract for agreement. Employee sues for the promise of extra compensation. Employee wins. Brickman Why did the employee win here and not in Davis? • Here the new contract (quid) terminated the old contract (quo) • There must be new consideration to support it, but when the old contract was terminated and the new one executed Brickman By what means did the parties enter into a new contract? • by terminating the old one What is the defect in the reasoning here according to Corbin? • circular reasoning • here there are only two steps (termination of old contract, implementation of the new one) • need 3 steps • old contract • contract of termination (missing according to Corbin’s analysis) • formation of new contract Need a quid pro quo • Must have a CONTRACT OF TERMINATION to remove the pre-existing duty In terms of how a court might look at these two sets of fact, can you identify any factors that distinguish these cases? • duress • employer can make a more rational choice in Schwartzreich (employee came before contract started) than in Davis (employee came during the height of the season) because there is a question of opportunity • there was more time for Schwartzreich to find someone else (not seasonal) Social control is being upheld in Davis. Consideration theory can strike down agreements voluntarily entered into. Social control is being implemented to support free volition by taking duress out of the picture where it is apparent. Tearing up a page is not a way to rescind obligation. The only way to rescind a contract is by contract.
UCC is “an abrogation of a large number of contract provisions from common law.” Wood v. Boynton Facts A woman has a stone, doesn’t know what it is, takes it to a local jeweler. Jeweler says that he doesn’t know what it is but he’ll give her $1 for it. Woman refuses to sell but later decides to. Turns out the stone is a diamond worth $700. Woman wants to rescind the contract and wants it back, so she gives the jeweler $1.10 (price paid + interest). Jeweler won’t give it back. If there’s a mistake in value without fraud or misrepresentation, there is no cause to rescind contract. The court is rewarding the jeweler’s ignorance here. If it could be proven that he knew, then there’s a case for fraud. Woman sues, jeweler wins. Caveat emptor “buyer beware” Caveat venditor “seller beware” Brickman Say you’re selling your house for $150,000 and buyer overpays and its only worth $120K, what legal theory can be prescribed? Caveat emptor? You sell house for 120K but its worth $150K, can you rescind? Caveat venditor If buyer knows the true value of property and you sell under the market value. Can you rescind? House sold for 150K and there’s oil underneath and worth 30MM. Can you rescind? The value of anything is the price the seller is willing to sell for and the price the buyer is willing to pay. Where those meet, that is the value and that is the legal rule (absent fraud). Think of the alternative legal regime. You have a constant attack on all transactions by the buyer or seller. This would create a high transaction cost, which would reduce the value of the transaction. The house example is an example of a difference in degree. Difference in Kind vs. Difference in Degree Key distinction is “use.” a difference in degree is when it is the same structure but different, a difference in kind is when it doesn’t even relate, whole new product.
Who has the greatest opportunity to determine the value of the commodity? The Seller Look at cows. What are cows used for? Sherwood v. Walker If the buyer of the cow was a butcher he might want the cow for meat. Buyer here was a banker. Wanted to buy the cow to breed it. But seller said it was a barren cow. Buyer thought he could get the cow to breed (thought it was a deal). Butcher might say that the cow being barren was a difference in degree whereas the actual purchaser would say it was a difference in kind (different product). The key difference is always VALUE.
11/4 Debbie’s First Half Notes
11/4/2008 Caveat emptor: buyer beware Caveat venditor: seller beware We reward diligence, if you sell something with a mistaken sense of its value, tough. Sherwood v. Walker WOOD SHERWOOD Value $700 $750-$1000 Price Paid $1 $80 D/D OR D/K D/K D/D K? K upheld NO K (not upheld)
The function of the object is a purely human creation. If it’s a difference in kind then it is may be rescindable, if it’s a difference in degree then it is not rescindable. Laidlaw v. Organ The Seller asked if there was any news to change the perception of the purchase of tobacco. The demand for tobacco went down and the price also dropped. The defendant bought tobacco from the plaintiff using the depressed price without telling the plaintiff that the war was about to end and consequently that the price would increase. But the defendant did not misrepresent that the war was going to go on, he just did not say anything about it. The judge instructed the jury to find for the plaintiff, and the case was reversed on this ruling
because the jury should not be led to a conclusion by the judge. Case reversed and remanded to trial court to determine if silence constitutes fraud. Common law default rule: there is no warranty unless it is states that there is a warranty UCC rule: there is a warranty unless it is stated there is no warranty Swinton v. Whitinsville Savings Bank The knowledge of termites by the seller was not disclosed to the buyer. At the time, the court ruled in favor of the seller because it did not count as fraud. Largely this view is no longer in effect. UCC adopted in 1963 requires a warranty of merchantability attached to every purchase of personal property (unless there isn’t). Sternaman v. Metropolitan Life Ins. Co. Public policy is a dynamic concept that changes with time. • Parties cannot make a binding contract against binding statutory law or binding public policy School Trustees of Trenton v. Bennett Instituting piles upon which to hold the building due to soil moisture and it will cost contractor more money to build and the contractor did not originally anticipate those costs. p.102: if the covenant is possible, then the thing must be done regardless of new difficulties that come up. But if its impossible, then contract is not upheld. To bring the case within the rule of dispensation, it must appear that the thing to be done cannot by any means be accomplished. Performance bond: construction companies promise to complete a certain amount of work Severable contracts = if the contract is considered severable, then each is a mini contract. If you have progress payments (not severable, part of whole or entire contract). Here, if the contract was severable, then the D would win. Commercial frustration: every contract to the extent that a contract relies on a common assumption by both parties on the state of fairs, and that assumption is incorrect, one of the parties may attempt to get out of the contract based on this. It is possible to get out of the contract, but very rare.
What is a crankshaft? • changes the vector of the force What is important about the crankshaft? • It was broken • was NOT mass produced o therefore no spares on hand o to make a new one, they would use the broken shaft as a model transitional point in history in England (mid 19th century)
IR and the Law • Law changed rapidly in England • Judges saw it as their role to adapt law to facilitate commerce
Industrial Revolution • this mill was not powered by modern means
What was the problem with delivery of the crank shaft? • contracted with Pickford to get the crank shaft to Joyce and Co. • Pickford did not get the crank shaft to Joyce fast enough Hadley changed the law by amending established law that said that damages only paid for “natural consequences” • other judges read this as to exclude injuries which could not be causally related to the breach pre-Hadley the King could sue the blacksmith for loss of his kingdom • familiar chain of events from lack of horseshoe to loss of kingdom TODAY cannot sue for that, because it is too remote causationally Hadley reads the phrase “natural consequences” as “normal (predictable) consequences” • more rigorous • could not predict “fall of kingdom” FACTUAL QUESTION was whether or not there was communication of this “special knowledge” (that there was no spare crankshaft and the mill would lose money unless the crankshaft was needed to make a new one) Have Hadley (a) = normal consequences, and Hadley (b) = communication of special circumstances Baron Alderson in Hadley 1) noted that there were no special circumstances in the contract and therfore loss of profit from when the mill was not in service could not be recovered 2) millers would normally have substitute shaft, so no recovery under normal consequences 3) lower judge should not have told the jury to “butt out” Brickman Baron Alderson and the “reporter” had very different views about the holding of the case. “Reporter” at this time = guy who goes to court and writes about what happens there. This was resolved by the courts. No more “reporters” in this sense today. The court writes its own, authoritative, reports.
NOTE We’re mostly looking at appellate cases here. Looking at less than 1/10th of 1% of contracts. Most of the time contracts are totally fine or disputes resolved out of court (certainly before appeal) BRICKMAN The circumstances of this case are very unusual in that an appeals court judge is overruling a jury based not on the law (really) but on the facts MAKES NEW LAW Baron Alderson is making a normative judgment that the IR is good and expanding the economy is a worthy social goal, etc. etc. Mistake in Value Suppose both Buyer and Seller are mistaken about the value of something. • SEE Restatement • CANNOT rescind the contract • Sherwood is good law “with regard to cows” o there is a case that modifies Sherwood in the second half of class TOMORROW pp. 111-163
Brickman If you make a statement and say “This should not have legal consequences” does that mean it doesn’t have legal consequences? Contract law gives judges a means of distinguishing enforceable from unenforceable promises. EX. You make an appointment to meet with your friend for lunch. They don’t show up. Did they break a promise? YES Are there legal consequences? NO (usually) There is a COST for assessing legal consequences to sth. We should only assess this cost if there is some sort of societal benefit to doing so. Brickman What about marriage? Was the promise in Balfour upheld or not? It was NOT. Court said there was no intention for there to be legal consequencs. Why did the court say this? • didn’t want to allow married couples to sue each other • POLICY reasons... didn’t want a negative effect on marriage
Very different public policy today vs. England in 1919. Would not apply Balfour today. Judge did not predicate his ruling on public policy but rather lack of intent Davis v. General Foods p.121 GF says “payment rests solely at our discretion.” Davis alleges that GF used her idea and didn’t pay for it. • This is Davis’ KEY contention Court rules that GF does not have to pay for her idea. The terms were too indefinite to give rise to binding obligation. Brickman What might a basis for recovery be here? • quasi-contract o GF was enriched at the expense of Davis o would be unjust for there to be no compensation Brickman Here the court holds on policy grounds that Davis cannot sue. This case would generally be decided differently by other courts. See NY Times article about ad agencies and unsolicited ideas General Rule (right now) No intention to contract, no contract Mabley & Carew Co. v. Borden p.124 Brickman Why do they want her to stay on? • she’s a good employee What do they say to her? • If you stay on till you die, we’ll pay one year’s salary to a person who you designate • “purely voluntary and gratuitous undertaking” o sounds like no legal consequences o BUT the court rules there is a contract Brickman draws the “steal jaws of contract” on the board... very artfully. • You’re out for an afternoon stroll, walk across the steal jaws of contract and BAM you’re in contract • Mabley says there was “offer and acceptance” o company’s offer induces her to stay on o she stayed on
o Court says Honor your promise! Despite the stated desire of Mabley & Carew to not make the agreement legally binding, offer and acceptance = CONTRACT Armstrong v. M’Ghee p. 128 Armstrong sells his “valuable” horse to his friend for much less than its proper value. Armstrong wants his horse back, but his friend refuses. Armstrong sues, but while the suit is pending the horse dies (b/c of being ridden too hard.) Armstrong is then suing for damages (initially for replevin, which is return of good). Armstrong (seller) wins. Jury awards 8 pounds in damages. Brickman argues the horse is worth 500 pounds!! • Jury is “sticking it” to Armstrong for starting this whole process and basically being a moron Brickman Its not the subject intent of the offeror, but the objective understanding of the offeree
If an ordinary reasonable prudent person would not regard this offer as seriously stated then there is no offer (and therefore there is no acceptance). Anderson v. Backlund p.129 Tenant (Anderson) can’t pay what he owes landowner (Backlund). Landowner says tenant should get more cattle. Tenant says that there’s not enough water for more cattle. Landowner says this is never a problem in Minnesota. Tenant buys cattle and they die for lack of water. Tenant sues the landowner for breach of contract. • asserts that the landlord promised to provide water and did not Brickman This would be a gift and not an enforceable contract. Tenant did not make this argument. What did the tenant say that the landowner did? Promises “I promise to do X if you promise to do Y.” What is the promise here? Tenant says “If you provide me with water, I’ll buy cattle.” Court rules that the promise was not binding. What’s wrong with it?
Tenant claims it was an offer by the landlord for water, which he could then accept Court says NO OFFER
What’s the problem with the landlord’s offer? • Didn’t say how much water • Didn’t say how he was going to give the tenant the water • The terms are too indefinite for there to be a legitimate offer according to the court Brickman Tenant would fare better today (promissory estoppel). <We’ll talk about this later> So, there must be a reasonable offer with terms that have enough specificity Sullivan v. Connor p. 131 Sullivan got a nose job. Says that the doctor did a bad job (had to do 3 surgeries instead of 2, nose looked bad, etc.) Sullivan is suing for breach of contract and malpractice. • Jury found for the doctor (defendant) on the malpractice claim o no violation of the standard of care What are the terms of the contract (according to Plaintiff)? • Doctor promised an objective outcome o “I will make you a better nose, to your satisfaction” o Not just a promise to do good work, but a specific outcome How does the doctor respond? • Doctor says he didn’t promise it o similar to Armstrong • “Even if I said what you say I said, you couldn’t believe I was serious. Everyone knows that doctors cannot promise an outcome. Statements are ‘advertising’ not a ‘warranty’.” Brickman • This could have been based on puffery and cannot be taken as a serious statement The jury gets to determine whether an objective, reasonable person could interpret the doctor’s statements as promising a result. Jury decides that they could and awards damages. Shaheen v. Knight p. 137 Court says there can be a contract in this situation, but says its invalid on public policy grounds. Children are what is supposed to happen in marriage, they’re good.
Brickman Now (50 years later) we have different public policy. Have suits against birthcontrol companies for children being born. Suits seek costs for raising the unwanted child. Tripartite Distinction in Contracts Quasi contracts occur in situations where there’s unjust enrichment. HYPO House painter goes to paint a house, messes up and paints the wrong house. Does the homeowner have to pay the painter? • Probably. unjust enrichment • Painter suing for the value of the job • LIABLE for the increased value of the house o THIS is the unjust enrichment! increment of the value of the house before it was painted and after it was painted (limited by the total value of painter’s services) Benefit inferred without permission; benefit cannot be taken back. Similar to a situation where the bank accidentally deposits someone else’s money in your bank account. You have to give it back unjust enrichment by bank’s mistake; there’s no acquiescence or acceptance here. HYPO. Son works for father for 20years taking care of pop’s business and gave up his own promising career. Father says in exchange for sons’ services, he will give son extra in the will. The father dies and the will leaves everything to the son’s equally. There was a request for services and an acceptance. Sounds like an implied in fact contract-->You asked for it, you got it. Why no implied in fact contract? Asked for it under circumstances where payment would be expected, here the law presumes that in the familial relationship, when you ask for services, you do not expect payment. Ergo, there’s no implied in fact contract.
Hertzog v. Hertzog p.147 Son sued his father’s estate for recovery of services rendered on a farm. Father probably requested the service and got what he asked for. Brickman What’s the problem here? • There was no offer What is an implied in fact contract? • You ask for something you got it you have to pay for it. Brickman Using the general paradigm, how is “You asked for it” modified? • You asked for it under circumstances where payment is expected, you got it, you have to pay for it In Hertzog the court says services rendered within the family are presumably rendered without expectation of payment. • This is rebuttable. Must show expectation of payment! New “Implied in Fact” Paradigm • You asked for it under circumstances where payment is expected, you got it, you have to pay for it
Probate is the process that you implement a will after the death of a party.
Barnet’s Estate Widow wants more than half of husband’s estate. Already getting a lot. She’s greedy. Brickman What is the order of who gets paid after someone dies in debt? 1) Government (taxes) 2) Lawyers 3) Secured creditors 4) Unsecured creditors 5) Legatees (family, heirs, etc.) • Widow is trying to boost herself up into the ranks of creditors Wife wants to convert her position from a statutory heir to a general creditor. As a general creditor, she takes more money from other creditors and gets more money. Suppose that
she is able to do this and there’s not enough money to go around. Who is the dispute between now? Creditors! Previously all creditors would be paid before the widow, but if she gets classified as a creditor she gets a piece of that pie too. Cropsey v. Sweeney p.153 Cropsey thought she was married to James Ridgeway. After he died, found out that he was already married at the time they were married and therefore the marriage is invalid. The putative spouse died and the putative (reputed to be) wife received nothing. What’s the legal claim? What kind of contract? How can I get the result that my client wants? Cropsey gets nothing when Ridgeway dies. Sues to recover for services rendered (housekeeping). Court rules against her b/c they say that she had no expectation of receiving pay for her work (thought she was married.) Should argue quasi-contract. • equate to the House Painter Hypo o thought she was “painting the marriage house” but was actually painting the “not married house”! Shaw v. Shaw p. 154 Goes the other way. Says that widow who thought she was married can recover. Court comes up with an idea about what’s “right” which way to go and “makes legal noises” to justify it. Spouses warrant that they are in a position to be married. Hewitt v. Hewitt p. 155 Trend over time is to recognize the validity of the promise if it can be proved. Brickman’s SUMMARY 1) Whenever services are rendered (at the request of or) with the knowledge of the recipient there is an implied in fact contract, the law will recognize a promise to pay BUT
2) In familial relationships the law presumes the services were rendered gratuitously (may be overcome) • suppose one of the children of elderly parents cares for them while the other siblings “fend for themselves” • parents die and children inherit equally o child who helped care for the parents should get MORE 3) Presumptions may be strong or weak • gives the judge some control over the jury • if judge thinks the child is undeserving or untruthful then he can say the child has not overcome the presumption (of gratuitous service) • other factors that contribute to this analysis o say child left his home to care for the parent, maybe presumption overcome 1. the benefit incurred to the decedent 2. the financial circumstances 3. foregone other opportunities o depends on “how the facts cut” Criteria for determining fairness? What would influence our decision in the hypothetical above? 1. degree to which the work benefited the estate 2. profitableness of other possible endeavors for that child 3. financial circumstances of the parties 4. was there a duty? Amount of the jury verdict will be affected by the amount of expectation and the vividness with which it is shown. Say there is some understood agreement between the child and parents that he “will be taken care of” (something extra) in the will and he is not. Who would the child sue? The Estate What/Who is the estate? • What if the contest is between the “good samaritan son” and general creditors (not the unfilial siblings) more difficult to show that he deserves to collect • Remember, parents could have changed the will but they did not. Court sets up pretty significant burden to do this.
Morris Lefkowitz v Great Minneapolis Surplus Store, Inc. pg 184 The advertisement for fur coat and stole. The issue is whether there is a valid offer? Did the plaintiff accept if there was a valid offer? When the issue is when there’s an offer, put into the notes the “exact words that constitute the alleged offer”. Worth $139.50 is definitive (VALID OFFER), worth to $100 is speculative (NO OFFER). Most advertisements are no offers. Must particularize it in a specific way—must identify the offerees (ie, first come first served, first 25 customers) and may also need to specify the quantity. • The principal requirement to make an ad an offer is the uniqueness of the OFFEREES. • If an ad is not an offer, merchant may change or revoke at his whim. However, a merchant may be legally bound to honor his ad due to public policy and statutory laws re: fraud and deceptive practices. Fairmount Glass Work v Crunden-Martin Woodenware Co. The specific language of the order inquiry and the words “for immediate acceptance”. Channel Master Corp. v. Aluminum Ltd. Inducing another to act or refrain from action in reliance thereon in a business transaction. Brickman Common law has been reluctant to recognize duty to negotiate in good faith. Once contract entered into, obligation of good faith ensues wrt their duties. Today we deal with pre-contract negotiations. Is a duty imposed here? What is the standard? Still have “strong capitalist belief” that you can take advantage of superior knowledge acquired by work and diligence. By contrast to the Common Law rule, National Labor Relations Act imposes duty on labor and management to bargain in good faith. Courts are willing to grant damages when the party claiming lack of agreement has relied on the party being sued. Hill v. Waxberg p. 203 Hill (landowner/Seller) wants to build a building. Contracts with Waxberg (contractor/Buyer) to develop plans for the building. Hill needs financing. Going to get it from the FHA. • Shows an increasing propensity for courts to impose liability
Hill needs someone to do the work for the FHA loan application. Hires Waxberg to do this on the understanding that Waxberg will build the building once the loan comes through. Waxberg incurs expenses based on this reliance. Flies from AK to Seattle several times to deal w/ architects, finalize FHA application, etc. etc. After FHA loan approved, Hill decides to go with different contractor. Waxberg sues under quasi-contract theory (implied in fact). Suing for $5,896.88. Value of P’s services plus expenses. Brickman This would be the value awarded if there was a quasi-contract. Did the court award damages based on Hill’s failure to award him the building contract? • NO How would they determine the value of this contract? • What information do you need in order to compute the value of the contract that was not entered into? Brickman When you sit down with a contractor you make a lot of choices (type of building materials, square footage, etc. etc.) When you solicit competitive bids you get bids all over the place. Brickman Cannot award damages based on hypothetical building contract because it is TOO SPECULATIVE. What is too speculative? The amount of the PROFIT. Profit = Revenue – Expenses. Cannot determine this. This is why he did not sue for “breach of contract.” What DID he sue for? • Reasonable value of his services o sounds like “implied in fact” contract you asked for my services, you got ‘em, PAY for them • Trial court gave him “implied in fact” damages AND “implied in law damages” (based on quasi-K theory) o Trial court gave a total of $11,167.46 ($4800 “unjust enrichment” damages for value conferred on Hill + costs) APPEALS Court overruled, saying he could only collect on his costs, not the “unjust enrichment” component) Heyer Products Co. v. US p. 207 Heyer believes that the US (Army) rejected his bid in “bad faith”. Sues for cost of preparing the bid and lost profits. Court decides that he has NO right to lost profits, b/c even if he were the low bidder, gov’t didn’t have to award him the contract. Court denies motion to dismiss. Allows a trial, where Heyer could try to show that the bid was not considered in good faith. FAILS to show this (very difficult w/o “snitch” in the Army).
Theoretically could have recovered for cost of bid, if bad faith shown. Goodman v. Dicker p. 209 Would-be-Franchiser (Dicker) sues Distributor (Goodman) for expenses plus lost profits, claiming that Distributor had promised that he would get a franchise. Dicker did not get the franchise. Dicker projects that he would have made a profit of $350 on the 30 radios that he bought to start the franchise (total of $1500-- $1150 cost of radios + $350 profit). Trial court awards him damages for both expenses and lost profits. Appeals court allows recovery of expenses but not lost profits. This comes under theory of promissory estoppel. “Justice” requires that when you induce reliance from another party you follow through on your promise (cannot say that you did not make a promise.) In the absence of K, promissory estoppel (action in reliance) is a basis for liability. Brickman In Goodman, unlike Hill, there is no contract. In Hill the court used contract language (always does if it can). Now have an 4) promissory estoppel (“reliance”) added to the template for Contracts. Why can’t he recover for lost profits? • 70-80% of new businesses fail! No guarantee that he would have been able to sell the radios. No track record. • Too Speculative What else do we know about this $350 in lost profit? What’s another reason to deny it? • it would be “double recovery” (recovery for the same components twice) UNLESS they need to show they would have made $1500 in REVENUE o Profits are based on REVENUE – EXPENSES o So, unless they can show revenue of 1500 then you have double recovery Could recover both if the gross profit would cover the expense he incurred plus additional revenue that would generate a profit of $350. • Through the sale of the radios, Dicker may have made money OR lost money Chrysler Corp. v. Quimby p.211 Randall was Pres. of Randall Motors (Chrysler dealer in DC). He dies. Quimby, friend and investor wants to take over the business. Tells Chrysler’s regional manager (Neely) that he wants to take over. Neely says he cannot recommend him. Neely tells Quimby he needs to purchase 51 percent stake in the business from Randall’s widow and the rest from other stockholder. Neely does this.
Most valuable party of this business is the FRANCHISE. W/o Chrysler’s cars there is no business. Tomorrow we will have a play! Curtain goes up. Act I Scene 1... what’s there? Who’s on the stage, who’s saying what to whom? Also more acts...
Setting the Stage 1. Despondent widow a. I don’t know anything about running the business b. How will I survive? Woe is me!! 2. Randall onstage Act I Scene 2 1. Enter Quimby a. lawyer by trade, friend, officer of Randall Motors Inc. b. can’t change oil c. along with the widow, they want to keep Randall’s legacy intact i. Randall was a really great guy d. Chrysler also liked Randall i. they also want to help the widow, but they DON’T want Quimby to take over the franchise ii. doesn’t like Quimby b/c he’s a lawyer... and lawyers sue!
Act I Scene 3 1. Neely (and Chrysler) get Quimby to buy the widow’s share (51%) at a good price a. this “takes care” of the widow (who Chrysler likes) 2. The next step, in Neely’s plan agreed to by Quimby, is for him to buy up the rest of the stock in the company, with the anticipation that Quimby would then sell the stock to someone else at a good price a. Quimby buys the stock, but Chrysler doesn’t name transferee and give the franchise to someone else b. Quimby’s stock is now worth MUCH less “left holding the bag” Brickman Was there a contract here? • No quid pro quo • BUT there was reliance Court awards Quimby reliance costs + lost profits (from 90 day period where he owned the franchise and could have sold cars). Brickman Why lost profits awarded here and not in Goodman?
• • •
Acted in “bad faith” Chrysler involved a franchise for a business already in existence, whereas in Goodman lost profits would have been speculative Goodman franchise was terminable at will, whereas here there was a 90 day retention clause o Brickman Courts have “bounded” these clauses to some extent. Don’t rely on this clause too much
Brickman Can you get “lost profit” damages for reliance suits? Purpose of promissory estoppel is to compensate a party for their loss due to reliance on another party. It would appear, then, that only reliance damages are appropriate. BUT courts will often find that “lost profits” awards are appropriate. Promissory Estoppel does generally result in awarding the expectation interest as well as the reliance interest, where expected profits can be clearly shown. If lost profits are speculative, then no award for them. If promise generates out of pocket losses to the person relying on such promise, should the injured party be allowed to receive “lost profits” in additional to actual losses. Hoffman v. Red Owl Stores, Inc. p. 223 No contract. Promissory estoppel case. Trial court awards reliance damages for loss on the sale of the bakery, rental and moving expenses, down payment for rental in Chilton, profits from grocery store that he sold. • Case says that he sold his bakery “at a loss” o this could mean less than market value sold it b/c he needed the money to buy a grocery store (to gain experience in food management in anticipation of opening a Red Owl store) Does not award lost profits from the sale of his grocery store. The purpose of promissory estoppel is to repay P of losses incurred due to promises relied on by D. Brickman Red Owl does not “advance the ball” on the question of whether the court will award expectation damages in a reliance case. It appears that they don’t award expectation damages, but they actually do. Hoffman would not have purchased the grocery store unless he sold the bakery. Would not have sold the bakery unless he thought he would get the Red Owl franchise. So, awarding damages for the grocery store would be “double recovery”. Brickman says perhaps profits from the grocery store should “offset” the loss from the sale of the bakery (since grocery store only bought b/c he sold bakery b/c he wanted Red Owl franchise.) Court does not do this.
Brickman If the court had awarded lost profits, would have had to have been for the Red Owl store he never got. This is too speculative and would never fly. So the court does not deal with the issue of lost profits. Damages sought are for the loss of profits from the grocery store... but this is a reliance issue, not an expectation issue. Hoffman does not address expectation issues. Restricted to analysis of reliance issue. “As part of his reliance, he should be compensated for profits he would have made from the grocery store.” RULE Courts will, when they consider it appropriate, award lost profits in reliance cases. By and large courts do award reliance AND expectation damages in promissory estoppel cases. Adjustrite Systems When you have back & forth communications and 1 party says K and the other party says no K, then the issue is –is there a K? The answer depends on the intent of the parties (common law). INTENT #1: There is until a formal document has been executed. INTENT#2: we can reach a K if we have agreement on the critical terms and make good faith attempt to resolve other matters. Intent is measured and gleaned by 4 factors: see Adjustrite case pages 6 Sun Printing p.216 Brickman Justice Cardozo is usually the contract maker, but in this case is the contract maker. Buyer agreed to purchase 1000 tons of paper per month. Set a price for first four months, then would agree on the price. Set maximum at the Canadian export price. Seller agrees to sell newsprint to a Buyer. Eventually the Seller refuses to sell, b/c the contract was lower than the market price. They left two things undecided... the price and the length of time for which the price was to govern. • if only one things left unstated, that’s okay • since they had a maximum price set, that would be okay, but there’s not time limit set on it, so Cardozo says no K Rhetorical Question Cardozo says the ruling in this case advances certainty in contract. Does it really? Here the seller didn’t want to sell b/c they could get a better deal than the contract price.... Borg-Warner Corp. v. Anchor Coupling Co. Complicated fact set. Write out a timeline of the transactional history.
What’s the problem here? • Conroy and Fritsch, the chief officers of Anchor Coupling Co., want to sell to Borg Warner o problem is that Conroy wants to stay on (guaranteed job) whereas Fritsch doesn’t care TIMELINE 1. Feb. 20 BW to AC set price with 60 day option to buy 2. Feb. 29 AC to BW “consider this as a letter of intent authorizing you to make the necessary survey”, your offer must give retention of employment of employees and Conroy 3. Feb. 29 BW to AC Firm Offer? 4. Feb. 29 AC to BW (through agent of AC) BW has option to buy, so long as major points are agreed to, other things can be worked out in good faith later; Amplification of information in 4 of communication #2. 5. Mar 14 BW to AC Is this an offer? 6. Mar 14 AC to BW Yes 7. Mar 14 BW to AC We accept Conroy steps in and blocks the deal to protect his job. Appeals Court says that there may have been a contract here. Should go to trier of fact. Were D’s asking that contracts of employments be agreed upon precedent to contract or were they just asking for assurances? 2 ambiguous, allow introduction of “parole evidence” (4) Borg-Warner eventually got $1 million. Parol evidence is evidence extraneous to the contract documents. There is a parol evidence rule, which excludes admission of evidence about the dealings if there is a contract which says “this is our deal and nothing else counts” (written integration clause)... then you cannot bring in parol evidence. Did the parties intend to contract after everything decided and no open issues? Or did parties intend to negotiate w/good faith in spite of open issues? Itek p. 236 Can have contract HYPO 30 day option to buy my land. Do I have to sell my land? YES Do you have to buy my land? NO Noone can force to be in contract, BUT you can agree to be in contract by your silence. HYPO
Fire insurance company to insured. We will renew your fire insurance unless we hear to the contrary from you. Insured says nothing. Fire insurance company sends you a premium bill. You refuse to pay. Is there a contract? Can they collect? NO HYPO Same facts, barn burns down. Insurance company says there was no contract. There was no acceptance on the part of the insured. HYPO Tobacco smoking uncle to nephew, I would like you to take up smoking and I will pay you $5k. No response but nephew takes up smoking. Is there a K? Is there acceptance? NEW HYPO: Tobacco owner to nephew: I will pay you $5K if you don’t smoke for the next 3 years; nephew doesn’t smoke for next 3 years. No express assent. Is this a valid acceptance? If the offeror authorizes silence as a means of acceptance, they are bound by it. But the offeree is not (necessarily) bound by this. NEW HYPO: You receive an offer from a magazine saying that you are entitled to a reduced fee magazine and if you don’t do anything it will be sent to you and we have a deal. However, the offeror cannot impose on the offeree a duty to speak or else be in K. UNLESS, the offeree has agreed prior thereto to allow the offeror to impose on the offeror a duty to speak or else be in K. NEW HYPO: I sell you the option to buy my land for 30 days for $50. You buy the $50 option. Am I bound to sell the land to you during the 30 day period? YES; Are you bound to buy during the 30 day period? NO Prescott v. Jones What is a non-sequitor and is there one here? This does not follow • Court says that the offeror can prescribe the mode of acceptance BUT it is also the case that the offeror cannot impose on the offeree o The INSURER prescribed the mode of acceptance, the INSURED did nothing and fire happened and the INSURED tried to collect and INSURER said NO K bcuz there was no acceptance o CT says NO K Unless the offeree is bound, then the offeror cannot be bound. • • • if the offeree cannot be bound by silence, the offeror likewise cannot be bound by silence The offeror cannot bind the offeree to be in K, but it can authorize offeree to accept an offer by silence. Is Silence “acceptance”? Depends on facts.
SEE HYPO... just because Seller is bound to sell does not mean the Buyer is bound to buy. COURT Even though the offeror can dictate the terms (including silence) since the offeree cannot be bound by their silence, the offeror cannot bind... National Union p. 241 Even though it cost more to try this case than they made, it is a precedential case Prior course of dealings dictates that he has to pay. Austin v. Burge p. 242 Burge subscribes to a newspaper. Subscription runs out, paper keeps coming. Burge keeps “using” the paper (actually pays on two occasions). Newspaper sues for recovery of unpaid subscription fees. Wins under Implied in Fact contract. Given the Statute on p. 244, would he still be liable? YES, b/c the statute refers to “receiv[ing]” the paper... but he did more than this, he used it.
Cole-McIntyre-Norfleet Co. v. Holloway p.244 Brickman Who is the offeror and who is the offeree? Owner is the offeror and the company is the offeree; the company did not accept the offer. The owner became the offeror when he filled out the order form supplied by the offeree. Owner was waiting for order to be accepted so he became offeror and company the offeree. What’s the problem? Owner never received confirmation of the acceptance or rejection of the order. Later the company refuses to sell to owner bcuz price has gone up. Owner sues contending that silence for an unreasonable amount of time constituted an acceptance. CHECK is a credit instrument, unless other specified, an offer to sell is an offer to sell for CASH. COUNTEROFFER rejects the offer and the original offer is no longer valid for acceptance. EACH counteroffer is an OFFER that the OFFEREE is at liberty to accept. On the terms of the form prescribed by the offeree, the offer had to be accepted by their headquarters. Order “was not subject to countermand.” (You cannot choose not to buy.) 60 days later store owner was told there was not K. Price of the good (meal) had risen.
Court concluded that the delay in notifying the shopholder constituted an acceptance of the offer. Given the unreasonable nature of the delay, silence = acceptance. BRICKMAN The first thing you do when you read a case is figure out who the “offeror” is and who the “offeree” is. If you don’t know who made the offer and who accepted the offer, can’t do anything. Offeror (shopkeeper) is harmed by the delay, while the offeree (company) uses this time to “play the market.” This is CONTRACT (not “promissory estoppel”). Brickman What is the common law rule about offers? • An offer is revocable at will provided there has not been acceptance unless there is consideration for keeping the offer open. o ex. In an “option contract” consideration is given to keep the offer open “In exchange for $10 in hand, I give you the option to buy my property for $10,000 within the next 30 days.” • buyer has paid consideration for keeping the offer open • irrevocable w/in that 30 day period
NY General Obligations Law (GOL) -- problems with statutes Problem with codification of common law is that the common law is always changing (modified every day by judges.) Once you have a law, though, it is “set in stone” and will not be addressed, in all probability, for a long time.
§ 5-1109. Written irrevocable offer. Except as otherwise provided in section 2205 of the uniform commercial code with respect to an offer by a merchant to buy or sell goods, when an offer to enter into a contract is made in a writing signed by the offeror, or by his agent, which states that the offer is irrevocable during a period set forth or until a time fixed, the offer shall not be revocable during such period or until such time because of the absence of consideration for the assurance of irrevocability. When such a writing states that the offer is irrevocable but does not state any period or time of irrevocability, it shall be construed to state that the offer is irrevocable for a reasonable time.
What is the difference between this and UCC 2-205? Both agree that it has to be in writing, signed by offeror, differ in terms of who can be the offeror. UCC specifies “merchants” whereas 5-1109 can be anyone. 5-1109 does not require two signatures on forms supplied by offerees. • 5-1109 says that ANYONE can bind themselves by an irrevocable offer • 5-1109 is enacted before UCC • UCC adopted in the 1960s by NY
How do you deal with the conflict between the two? “Except as otherwise provided...” in 5-1109 says that if there is a conflict, 2-205 prevails. Do you need 1 signature or 2 on an offer by a merchant that contains an irrevocability clause on a form supplied by an offeree? 2 because 2-205 HYPO Cole-McIntyre, but seller revokes 3 days after offer. Contract or no contract under NY law? • NO CONTRACT b/c UCC takes precedence and says no contract • Brickman This is the “plain meaning” interpretation o if the form is signed once by the offeror the contract IS revocable b/c 51109 defers to the UCC “Elegant Approach/Interpretation” Common law says no consideration for a term of irrevocability, the K is not enforceable. However, 2-205 abrogates the common law by stating when an K w a term of irrevocability and no consideration is valid and enforceable. These are” • Offer by a merchant to buy or sell goods • In writing • Clause of irrevocability o Form supplied by Offeree 2 signatures If it’s a merchant making the offer and there is a term of irrevocability then we make an exception to the common law, saying that the irrevocability clause IS BINDING. Then 2-205 makes an exception to the exception. If the term of irrevocability is on a form supplied by the offeree, then the irrevocability clause is NOT BINDING unless clause separately signed by the offeror. BOTTOM LINE Common law says no irrevocability (contracts revocable at will provided no acceptance or “option”.) UCC cuts out exception, saying contracts can be irrevocable w/o consideration, but then lays out exception to this, going back to common law (for forms supplied by offeree.) THEREFORE if there is only one signature (offeror), then 2-205 is not “otherwise providing” so it is the regular common law rule. Under this analysis, 5-1109 would prevail if there was only one signature, b/c 2-205 does not “otherwise provide” and therefore there is a contract.
SO, under the elegant approach irrevocability clause IS binding, whereas under the plain meaning approach the irrevocability clause IS NOT binding. • under plain meaning store owner wins • under elegant approach seller wins HYPO Offers to sell house for $100k. Offer open for 3 months. You reply “I accept and will pay in 3 installments.” NO REPLY • this is NOT an acceptance, it is a rejection and a counteroffer 2 days later “I accept and will pay in 2 installments.” NO REPLY 1 week later reply and say “I will pay in cash.” REMOVES OFFER Do I have to sell? NO, b/c once the initial offer is rejected, no longer an offer! HYPO 2 Same scenario, but you show up with a check for $100k immediately. • NO CONTRACT Why? • Offer implies CASH. Check is CREDIT. • “The world operates on credit. Its what makes the world go round.” • BUT if you show up with a check, this is a COUNTEROFFER and destroys the initial offer Langellier v. Schaefer p. 247 BUYER says “I would prefer to do it on credit, but I will pay cash if you require it.” • This is acceptance The terms regarding where to send the deed and all the steps constituted a qualification of the offer and thereby cancelled the contract. BUT, buyer also puts in new term (different place of delivery- St. Paul). This destroys the contract. Butler v. Foley p. 250 Initial offer was for 50 shares, counteroffer was for 44 shares. HOWEVER, “subject” was left out of the telegram. “Subject” here indicated they would not hold the stock for the buyer. So if we hear from you, we will hold the stock, if we don’t hear, we will not hold stock. When D responded by telegraph, made telegraph co. his agent. Fact that agent made mistake is attributed to D. • counteroffer destroys initial offer • new offer INITIATED BY D, therefore D is making telegraph co. his agent WHO is responsible for the telegraph error?
When the seller instituted his counteroffer, he became the offeror and the buyer the offeree. Therefore, the OFFEROR bears the risk of the error on the part on the telegraph company. Therefore there is a contract and therefore a breach of contract. Consequences of the error are attributed to D. US v. Braunstein p. 253 US initiated bidding process for rotten raisins (during WWII). Alcohol was a wartime material used for making gunpowder. Pearl (Buyer) is trying to get out of deal; gov’t screwed up by messing up pounds with boxes and writing an error. Shortly after this contract dispute, War came to end, greatly decreasing the value of the raisins. ZERO SUM GAME. Whoever ends up with or sells the raisins loses money. Gov’t messed up, otherwise Braunstein would have been the “fall guy.” Would have ended up with a bunch of semi-worthless rotten raisins. There was an error in the gov’t reply to Pearl Distilling Co.’s offer (10c per BOX instead of 10c per POUND.) Pearl does not pay, does not reply, raisins never shipped. Later gov’t says that Pearl is bound by initial offer. In common law, language to keep offer open for any period of time is not binding without CONSIDERATION. The UCC pretty much changes this understanding. Court says there was no acceptance (b/c of error) so there was no contract. • Buyer could not, however, have taken advantage of the gov’ts error b/c it was clear that it was an error UCC 2-205 FIRM OFFERS Must have 1. offer by merchant to buy or sell goods 2. signed writing by which its terms gives assurance that it will held open 3. offer is irrevocable w/in that time frame (no longer than 3 months). BUT “any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.” • one “regular” signature, standard to all contracts and ANOTHER signature specifically acknowledging that they have read the irrevocability clause
What if UCC 2-205 had been in effect at the time of Cole-McIntyre? Contract would have been invalid b/c there was only ONE signature on the form (supplied by the offeree). Offer was revoked and the term of irrevocability was not valid. What is the goal of this UCC requirement? To prevent surprise. Allows for irrevocability BUT, if the form is supplied by the offeree, need two signatures. Roto-Lith Ltd. v. F.P. Bartlett & Co. This case is about WARRANTY. This is an “outcome determinative case.” If the court says there IS a warranty, BUYER wins b/c breach of warranty. If the court says NO warranty, SELLER wins. Facts Buyer agrees to buy celophane bags. Contained terms stating that there is no warranty and statement saying “If these terms are not acceptable, you must notify the seller immediately.” BRICKMAN Most contracts today are form contracts. Businessmen usually ignore discrepancies and expect to resolve differences as they go along. • When things go wrong, lawyers come in and start “spouting out” stuff about the common law, etc. etc. Llwelyn wanted to move the law to reflect actual business practices. UCC 2-211 deals with Battle of the Forms. Poel v. Brunswick Seller sends written offer to B offering to sell processed rubber at fixed price. Buyer replies by ordered fixed quantity of rubber from Seller at the price, EXCEPT from included says that Seller must promptly acknowledge acceptance of this offer. Seller does not acknowledge but ships rubber. When rubber arrives, Buyer refused to accept b/c WWII ended and price of rubber fell greatly. Seller sue buyer for Breach of K Buyer defends that b/c of his aknowledgement clause, his order was NOT an acceptance, but rather a COUNTEROFFER which was not accepted b/c they did not reply. Court finds in favor of Buyer, referring to the common law. “Last Shot Rule”- Under the common law, any change in the “last shot” can fundamentally alter the contract You’re a seller, what does your form say? NO WARRANTY
You’re a buyer, what does your form say? ALL WARRANTIES Default under the UCC is that there ARE warranties unless they are excluded. • major change w/ UCC Every time you have a sale, forms exchanged back and forth between Buyer and Seller, all with conflicting clauses. (Seller’s form says “no warranty”, Buyer’s form says “All kinds of warranties for everything operating into eternity, etc. etc.” Under the Common Law this mean there is no contract! UCC 2-207 (a) Can still have acceptance, even with different or additional terms. Applies in two cases. 1. where you have “acceptance” a. DIFFERENT from common law acceptance, in that it does not require “mirror image” – can have different terms (b) If there is a conditionality clause, may or may not be contract (c) Contract by Conduct (subsection 3) 1. parties recognize existence of a contract by their conduct a. applies generally where Seller ships the goods and Buyer uses them (e.g. Roto-Lith) b. Roto-Lith is Contract by Conduct What is the purpose of this? Figure out which terms apply. UCC says that the terms upon which the parties agree are binding, together with any supplementary terms included in UCC (“gap filler terms.”) Conflicting terms cancel each other out. Critical GAP FILLER is WARRANTY. If one form says warranty, the other says no warranty, UCC says there is WARRANTY. BUYER always wants to take Route C. When Seller ships the goods he was agreeing to buyer’s terms and the warranties clause was a counteroffer. By shipping the products, the seller accepted Buyers terms. When do the various routes apply? Route A is when the differing terms are “immaterial.” Or Confirmation. • not relevant enough to prevent acceptance Route B says there is no acceptance under Route A if acceptance is conditional upon “my way or no way” clause • what if both forms have this? • IF goods shipped and used, go to Route C
IF goods not shipped, Route A
Brickman Can you form a contract under Route B by conduct? Say Seller ships and Buyer uses. Is “assent” broad enough to incorporate conduct? Conduct we’re talking about is the Buyer accepting the goods. Seller ships the good with the conditions that Buyer accept his terms. Buyer accepts the goods and uses them. IS THAT ASSENT? • Its possible... its plausible Under Route B, Seller wins. Under Route C, Buyer wins. Which did the UCC intend when the writings don’t create (common law) contract? Route C (it would appear...) 2-207 P 2 Applies to Route A. Tells you what to do with the “additional terms.” Add them to the contract, UNLESS 1. offer expressly limits acceptance to the terms of the offer 2. they materially alter it 3. notification of objection already received Route A changes “mirror image” rule. Route B retains in some measure the “mirror image” rule. • if terms don’t match up, no deal In Roto-Lith the court supposedly uses Route B What facts or terms support using Route B? • looking for conditional terms when you go into Route B you don’t know where you’ll end up... 1. “If the terms are not acceptable, buyer must notify seller immediately...” a. Court DOES NOT rely on this for choosing Route B BRICKMAN This is the core of this case. EXPLAIN how the court chooses Route B. Court must find conditionality.
Brickman Beauty of UCC is that it is uniform (though each state has to adopt it, and there are some issues with this).
Will tell us either to use the Elegant Approach, the Plain Text approach... or give us a factual setting and we have to determine How do we get to Route B? pg. 263 Where there is a response to the offer which states a condition solely to the What this court is saying is that the equivalent of conditionality is a response with a materially different term that benefits the responder Make an argument in favor of the Buyer that the Seller accepted the Buyer’s offer. • Buyer knew of the Sellers’s term and shipped the good • if the Seller really wanted to attach conditions, they should not have shipped the goods • under Common Law can say that there was offer and acceptance b/c the goods were shipped Court says the contract depends on the “materiality” of any given term • purpose was to inject certainty.... but term materiality is inherently unclear and subject to interpretation • Related policy object of 2-207 was to close the loophole for the “welcher” HYPO If between the time of the exchange of the forms and the time the emulsion was shipped, the market price went down, under Roto-Lith what could the buyer do? • could “welch” b/c under Roto-Lith contract wasn’t formed until the buyer received and used the goods Suppose that Roto-Lith is the law. You’re a buyer and you read about Roto-Lith. You go to a lawyer and say “what do I do?” • hire a bunch of lawyers and every time you get an acknowledgment of an order you send a response • put in your form offer the “magic words” from 2-207 2 (a) o use those terms, seller ships the goods and uses a form that contradicts your form What do you have to do to overcome Roto-Lith? • ALWAYS SEND THE LAST FORM Where does your client want to go? • Route C Air Products Hartford is identical to Air Product
Trial Court held that Provision Number 6 became part of the contract under 2-207 after shipment. AC reverses. Since 6 is a “material alteration” of the contract, under 2-207 it does not become part of the contract. If we have different terms, we treat them as if they were additional terms. Professor White has a different view of “different terms”. Terms cancel each other out and there is no gap filler in the code. He is relying on comment 6 to 2-207 which deals with written confirmations sent by parties after having reached an oral agreement. Assume that the buyer sends a purchase order saying that any dispute will be resolved in the state in which the seller is located. Is that an acceptance? • Brickman Yes, b/c 2-207 (a) was designed to resolved battle of the forms where the parties agree on the “terms of bargain” (goods, price, place of delivery, etc.) Assume that there is a dispute. • Seller’s acceptance is an acceptance to all terms on the Buyer’s form • Arbitration clause in the offer survives the no arbitration clause in the response (b/c the offer controls) and it therefore drops out • How much can terms differ, before they are “material terms”? o as long as they are not traditional bargaining terms HYPO: Arbitration clause in K for sale. Seller will contend that its acceptance was expressly made conditional by the reasoning in RotoLith. Prof. White argues that Air Products should not have been decided under P2 Argues that the sellers return form is acceptance only on what the seller and buyer agree (NOT arbitration vs. litigation)... no gap filler on this issue as there is for warranty COMMENT 6 to 2-207 when you have a written confirmation (a la Route A) of a prior oral agreement... suppose you have 2 written confirmations w/ differing terms Conflicting terms knock each other out Add them to the contract, UNLESS 1. offer expressly limits acceptance to the terms of the offer 2. they materially alter it 3. notification of objection already received From this Prof. White extrapolates to the Acceptance term Does not limit Comment 6 to “written confirmations that have differing terms”
In this case you don’t have written confirmation. Offer says arbitration, Response by Seller says disputes resolved in court where seller is located. SO, the end deal would not include an arbitration provision Prof. Summer believes that Comment 6 is NOT APPLICABLE. Says comment 6 only applies to the same form (here we have separate forms... and Offer form and an Acceptance form). White says this gives the Buyer an unearned “first shot advantage.” Summers says this advantage is not unearned. White is adding a Route A knockout. Most judicial decisions side with Prof. White. 10th Circuit canvassed cases and the majority decided with White. Flender v. Tippins Adopts the knockout, affirming the refusal of the trial court to compel arbitration. What are the implications of a Route A knockout? • only in Route A if there is an acceptance • if the acceptance has different terms (warranty, arbitration, etc.) the plain meaning (as Summers would say) they are conflicting terms they are ignored • CRITICAL DISTINCTION o What if we have the exchange of forms in a jurisdiction w/ Route A kfnockout and a dispute arises b/4 goods shipped would say there is a CONTRACT in Route C there is no contract under White’s analysis the different terms knock each other out, you “gap fill”... there is no gap filler for arbitration TOMORROW Review 2-205, 5-1109 Look at Roto-Lith and see how the court used Route B (diametrically opposed outcome from Route C, which was what the UCC intended) Pro Hill Shrink Wrap 2003 Amendment to 2-206 and 2-207
UCC 2-207 says that when multiple forms are exchanged that conflict over “dicker” terms, the first form controls and the contract is still valid.
White analysis only applies to 2-207 (1) (“different terms”) NOT to 2-207 (2) (“additional terms”) Where is the White analysis? See White & Summers assignment on assignment sheet to be read after Roto-Lith CONTRACTS in the Information Age You call up a company and order something (say software or a computer). You agree to pay and they ship it. You have a CONTRACT, right? NO Does software qualify as “goods”? UCC Articles 1,2 and 3 only apply to goods... software MIGHT be goods. Undecided. Most courts treat software as goods. ProCD Inc. v. Zeidenberg ProCD sells two versions of software that bundled 3000+ phone books on CD. Sold two versions, one to consumers and one to businesses. Cost millions of dollars to produce. Sold in shrinkwrap box. Box said that use of product was subject to terms inside the box. You were buying a license to USE the product. Whether you were buying it commercially or at a store, it was shrinkwrapped. Terms inside the box and alert within the software stated that you were just buying a license to use the software, not the software itself. Gave right to return D copied the material from the CD (phone numbers- not copyrightable) posted them online and sold them. ProCD sues. DC rules for Zeidenberg. AC overturns holding for ProCD Judge says that in order to invoke 2-207 you need two forms with different terms. This is not the case here, there is only one form. BUT Judge is wrong. 2-207 does not require two forms with competing terms. Hills v. Gateway Hills order computer from Gateway. Get it. No terms on the box or indication that they’re inside. They are inside. Contain an arbitration clause. If buyer objected to the terms, sole remedy is to return the computer w/in 30 days. Did not do this, found defects, wanted to go to court. Gateway wants arbitration clause enforced. DC won’t enforce the arbitration provision. AC overrules
Brickman Court is enforcing a layered contract. There are stages. Phone. Delivery. Inspection of Terms (which buyer may accept or reject).
Klocek v. Gateway (2000 KS case) Court says since Klocek was not a merchant, could not add terms (applying common law rules). This is an outlier. Most courts follow ProCD and Hills. Courts have generally “ignored” the common law and the UCC. Specht v. Netscape Communication Corp. Clickwrap. Have to check “I agree” when purchasing things online. Usually license terms. Browsewrap. Browsewrap license can only be found by scrolling to that license. Must click on a button to look at the terms, but you DO NOT HAVE TO b/4 you click “I agree”. Courts have held that these are not enforceable, b/c of “mutual assent.” Brickman ProCD judge misinterpreted 2-207. Said that since you don’t have formS (plural) this is not a 2-207 problem. It is. But it doesn’t matter. KEY DISTINCTION Is there a common law (or 2-207 abrogated common law) contract or a “rolling” contract? PROMISSORY ESTOPPEL Was there a promise? Should the promisor have expected the promisee to act? Was the reliance foreseeable? Did the promisee take this action? Was action substantial? Can injustice be enforced only by finding reliance? Amendments to 2-206 and 2-207 2-206 (revised) Adds P3, allowing for “Route A acceptance” under 2-207 terms 2-207 (revised) See Statute Book Removed provisions and put them in 2-206. Revised 2207 only applies if there is a contract formed under some other provision of the UCC (e.g. 2206, 2202 or other provisions)
Compare old and new 2-207 New does not deal with contract formation. What happens to Route B (“counteroffer”)? • Boilerplate language in all forms Courts require assent to contract terms.... Whether there has been acceptance or a counteroffer is now dealt with over 2206. 2207 gives the advantage to the “first shotter” White gets rid of this advantage Amended 2-207 it doesn’t matter who is the offeror or offeree Deals with the TERMS of the contract Route B is out of 2-207 (now resolved under 2-204 and 2-206) What happens to Route B under new 2-206? Still can say “My way or no way”. If both sides say that, good are shipped and used, goes to Route C. ............................................................................................................................................... Bargain Theory of Contract Consideration is not an “ironclad” condition of enforceability. Unfairness of contracts (in the minds of the courts) led to promissory estoppel and now to bargain theory. RELIANCE (Consideration) 1. Promise? 2. Expected promisee to act (reliance foreseeable?) Was reliance substantial? 3. Action taken? 4. Action substantial? 5. Unjustice avoided only by enforcement of the promise? (discretionary) Holmesian/Williston Theory To count as consideration must be a bargain Parable Benevolent gentleman says to a tramp “You may go around the corner to that shop and buy an overcoat on my account.” When the tramp arrives there, the man takes back his offer. Is this a contract or simply a promise to give a gift? Key is going around the corner (some risk there). If the promise had been made in front of the store, no risk. Holmes said no bargain here, b/c going around the corner didn’t benefit the man.
Promissory Estoppel (Reliance) Opposite of Holmes
Siegel v. Spear & Co. QUERY Why does the defendant want the furniture in storage? Protect it. Why does he care about protecting it? Who is the promissor here? SELLER (says he’ll take insurance) Is that pure altruism or does he have a commercial motive? SELLER keeps title to the furniture. Just like when you buy a car with a bank loan, the bank still owns the title of the car until you pay off the loan. Here, SELLER has a security interest in the furniture. It was in the interest of the SELLER to have the furniture insured since he still “owns” it, therefore his promise to take out insurance for the purchaser could be seen as consideration. NY Court of Appeals finds liability on an expanded consideration theory (w/ some help from property law.) Holmsian court would not have found consideration. Most courts would apply “promissory estoppel”- relied to his detriment on the SELLER to take out insurance (even though there was no CONTRACT). NY Court of appeals didn’t use promissory estoppel. When the bailee made the promise, misfeasance was the equivalent of consideration. They found consideration by means of trust law. Fisher v. Jackson Baker goes to work for newspaper as reporter. Claims they offered him a “permanent position.” He had no skills. How likely is this? Court relies on BARGAIN THEORY Could have gone two ways: 1) “I don’t believe you.” 2) Bargain Theory This is the “nice way” of framing “I don’t believe you.” Underwood Typewrite Co. v. Century Realty Co.
Underwood wants to sublet its space. Asks Century Realty for permission. CR says if they can find a suitable tenant, its okay. Underwood finds a tenant and is planning to charge them more for the space (make a profit). Century then says they cannot sublet. Court finds for Underwood (tenant) under unilateral contract theory. CR had promised to allow Underwood to sublet and so they have to. Obligation is only on ONE SIDE Capital Savings & Loan Asssn. V. Przybylowicz Bank makes error on loan amount. In reliance on this D sells his house. Bank realizes its error and tries to correct it. Court rules that the bank is bound by its original rate quote. Key factor is that P was not very well educated and Bank should have known better. PROMISSORY ESTOPPEL Chapman v. Bomann Promissory estoppel often enforced as a contract. If you don’t have an oral contract (just a promise with reliance) then promissory estoppel can create K. This contradicts with statute of frauds (saying certain contracts must be in writing). Most courts say PE trumps statute of frauds. Feinberg v. Pfeiffer Co. STRATEGIC OR TACTICAL ISSUE Plaintiff is dying of cancer. P is suing for past due amount. COULD have sued for past due amount + future amount (given her life expectancy, which was limited.) Lawyer made clear choice to forego asking for future amount, believing the court would more readily rule in her favor. “We look better” if we don’t try to get every dollar possible. Brickman “In line” with Mabley and Carrew Court finds reliance under Section 90 estoppel. Firm Offers and the Bargain Principle So far have looked at UCC 2-205, Restatement 2nd Section 87, GL 5-1109 (?) [Look at Restatement 2nd Section 87] “At the time the offeree came to accept the offer, there was no more offer, therefore no meeting of the minds, therefore no contract.” Dickinson v. Dodds
Dodds offers to sell piece of land to Dickinson (gives him two days to accept.) Dickinson becomes aware that Dodds is going to sell the property to another person. When Dickinson discovers that Dodds is going to the sell the property to another, it is an implied revocation of the offer. Therefore there is no longer an offer.
§ 43 Indirect Communication of Revocation An offeree's power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to that effect. Here it seems the court would say that Dodds offer to sell to a third party would fall under “taking definite action inconsistent with an intention to enter into the proposed contract” SECTION 43 was based (at least in part) on this case. Jordan v. Dobbins Guarantee by Dobbins expired upon his death. Brickman DON’T GENERALIZE from this. Many cases where an offer of a guarantee is found to have sufficient consideration to keep it open even after the death of the guarantor. Wilhelm v. Chain Doesn’t take much for there to be consideration, which survives death…. James Baird Co. v. Gimbel Bros. (memorize this case) This is a Learned Hand decision, which makes it memorable. 25 years later, another great jurist, Justice Traynor reaches the opposite conclusion. Plaintiff: General contractor, bidding for the construction of a public building Defendant: Subcontractor, sold linoleum to general contractors What was the subcontractor doing in this case? • Making a bid for providing the linoleum for this job Here general contractor is suing the subcontractor for breach of contract. If successful, what would the subcontractor have to pay? • Difference between subcontractor’s bid and the amount general contractor actually paid for linoleum
Defendant argues that he revoked his offer before acceptance. Defendant made his offer to many different general contractors. Brickman Was the defendant’s communication even an “offer”? Could he argue that he never made an “offer”? • Could argue Molton v. Kershaw where offer sent to many parties at once, this is the beginning of a negotiation, NOT an offer What is the “decisive consideration” the other way? • Pg. 323 Explicit language in the communication which makes it an offer (“…we are offering these prices for reasonable prompt acceptance after the general contract has been awarded.” What is the subcontractor bargaining for with this offer? • An acceptance • What form would the acceptance take? o RETURN PROMISE o Bilateral Contract Making an offer which could be accepted by a return promise to buy the linoleum at the bid price This is CONTRACT When did the subcontractor notify the contractor that he was withdrawing the offer? • AFTER the general contractor had submitted his bid, but BEFORE the bid was accepted Why did the general contractor not just withdraw his bid? • Because it was a PUBLIC BUILDING he had been required to put down a “performance bond” to guaranty he would do the work • This bond was generally around 10% of bid o General contractor would lose this money if he withdrew his bid General contractor argues promissory estoppel. Why does Learned Hand reject this? There are 5 elements of promissory estoppel. 1. Promise 2. foreseeability of reliance 3. reliance to the detriment 4. substantial damages 5. justice be prevented only by upholding • • LH says there is no promise LH says offer becomes promise only when it is accepted
LH says that for purposes of promissory estoppel that there is no promise upon which there can be reliance
If offer only becomes a promise when it is accepted, at that point there is a CONTRACT, therefore there can be no promissory estoppel (in the commercial world.) • Offer made • Contractor submits bid • Subcontractor presents mistake to contractor • Sub withdraws his bid • What is the GC to do? Learned Hand here says that PROMISSORY ESTOPPEL does not exist in the commercial world! HYPO We are counsel for a major general contractor. Baird comes down. GC is upset. Asks for advice on how to plan business going forward. What would LH advise you to do? • Ensure that there is a contract between the general and subcontractor which is conditional on the acceptance of the general contractor’s bid • Brickman How might this contract read? o “I the subcontractor promise to supply X amount of linoleum for Y dollars, if you, the general contractor are awarded the contract using my bid.” General Contractor is not happy with this. Would have to have a lot of lawyers checking all kinds of subcontracts all the time. How can we do this without lawyers? General contractor wants a FIRM OFFER from the subcontractor. Wants the subcontractors bid to be irrevocable . Brickman Remember the importance of bonds. All general contractors and subcontractors have bonding limits, which mean that they cannot keep offers open indefinitely. Subcontractor may agree to keep the offer open one or two days after the general contract has been awarded. Form must be signed twice (once near the terms of irrevocability). Brickman Remember that 5-1109 applies to everyone (2-205 applies only to merchants). Why is this “form” strategy not available in Drennan? Because Drennan deals with paving (which is a service and thus not governed by UCC).
§ 5-1109. Written irrevocable offer. Except as otherwise provided in section 2-205 of the uniform commercial code with respect to an offer by a merchant to buy or sell goods, when an offer to enter into a contract is made in a writing signed by the offeror, or by his agent, which states that the offer is irrevocable during a period set forth or until a time fixed, the offer shall not be revocable during such period or until such time because of the absence of consideration for the assurance of irrevocability. When such a writing states that the offer is irrevocable but does not state any period or time of irrevocability,it shall be construed to state that the offer is irrevocable for a reasonable time.
What if Drennan happened in NY? • 5-1109 does NOT only apply to goods • therefore, you COULD have a form in Drennan under 5-1109 Remember Hand said “An offer isn’t a promise until it is accepted by the offeree.” Drennan v. Star Paving Co. Did Traynor find a promise? YES -- Implied Subsidiary Promise Traynor is implying a promise that the offer would be kept open and that is the promise that promissory estoppel is based on. Who won? General contractor What did the subcontractor do? Found an error in his bid and refused to perform What is the subcontractor arguing? He withdrew his offer before acceptance. What is the legal theory that the court uses to find for the general contractor? PROMISSORY ESTOPPEL 1. Promise? Traynor says “yes” There was a promise to keep the offer open. Where did this contract comes from? TRAYNOR’S HEAD!!! He calls this an “implied promise” (implied in his head) There is no express promise… he finds it there. How did he find it? • “Subsidiary promise” is the promise to keep the offer open (subsidiary to the promise to do the work) o Traynor says this is implied o Refers to Section 45 of Restatement
Says that once you begin performance in reliance on the offer, then the offer is not revocable “once you start halfway up the flagpole, you can’t revoke the offer.” • This deals with “unilateral” contracts and doesn’t apply here, BUT Traynor is “reasoning by analogy”
Could you use Traynor’s reasoning to find for the general contractor in Baird? • Is there an express promise to keep the offer open in Baird? o YES… “prompt acceptance after the general contract has been awarded.” o Can argue that there is a subsidiary promise, BUT we don’t even need that because we have an express subsidiary promise which was RELIED ON to make a bid for the general contract A faxed acceptance is treated the same as email which is treated the same as mail. The mailbox rule. Brickman Here’s where we are. Cover the rest of the cases quickly next class and then move on to the material for the next class. CONSIDERATION & CONTRACT BY CORRESPONDENCE Mailbox rule: offer binding when received; acceptance binding when sent UNILATERAL vs. BILATERAL CONTRACTS UCC 2-206 collides the bilateral/unilateral routes. Bilateral: each promise is sufficient consideration for the other; Unilateral: doing of act constitutes acceptance/consideration CARLILL v CARBOLIC SMOKE BALL The flu had wiped out a 1/3rd of population. Mrs. Carlill did as ad said and tried to collect. I promise to pay 100, if you do something. • Was it an offer? • Was there notice? TAFT v HYATT • The accused sought legal advice from atty and the atty turned him in • The chief of police should not be rewarded for doing his job. • The offeror gets to keep the money STRONG v. SHEFFIELD • The holder of a note is asked by a 3rd party to forbear collection. Husband (maker of note), wife (3rd party) and wife’s uncle (holder of note). Maker of note does not have finances to pay the note; wife goes to uncle and ask that he forbear collection of the note. Uncle agrees to forbear on the condition that wife forbears the note so that she pays if husband does not pay. She endorses. 2 years go by and uncle seeks payment, husband has no assets and wife refuses to pay. Uncle sues wife on the basis of collateral agreement to reimburse the note.
Who should prevail and what are the legal mechanism to reach that result? Ct found mutual promises; promise to forbear and promise to endorse: so could be BILATERAL K o Promise to forbear is not a promise to do anything bcuz of its indefinite terms and cannot be consideration because it was too vacuous and did not impose a legal “detriment” to Offeree • If we wanted to find for the uncle, we would use UNILATERAL K HAY v. FORTIER • There are 2 agreements; D is liable for surety; there is a 2nd action based on D’s promise to pay $100 on account and the balance by April. D’s contends that there is no K bcuz there is no consideration. • Pre-existing duty • I promise to pay $100 and the balance in exchange for your forbearance against the suit DAVIS v JACOBY •
Swindell (pg. 424) Is there a requirements contract here? Court says NO (though this is a factual issue and it could theoretically have gone either way) Bank agreed to lend Swindell up to $20,000 when he needed it. Today we would call that a “credit line.” Typically companies pay a fee (say 1%) to a bank to keep the line of credit open Companies may also be required to do their business with him Why was this determined to be a UNILATERAL contract? Swindell’s company never had to get the credit Brickman This is clearly an OPTION contract. In an option contract the one who paid the consideration doesn’t have to buy. Brickman Why didn’t the bank want to lend money to Swindell? Probably because Swindell became insolvent or nearly insolvent. Brickman Court is looking for a way to find for the bank and they “stumble” a bit in defining it as a unilateral contract. Lima Locomotive pg. 427 EASY. There is a requirement contract here. Eastern Air Lines, Inc. v. Gulf Oil Corp. pg. 428 Was there a requirements contract here? YES What was the reason given by the court? Course of Dealing (long-term relationship). Court determined this to mean that EA had agreed for a long period to buy its oil from Gulf and Gulf had agreed to provide it. Utah International Inc. pg. 437 Brickman What’s the problem here? Colorado Ute built larger electric plants than agreed Brickman This has a “take or pay” clause. Common in contracts where one party invests a large amount of money in infrastructure (as the coal mine here). If Buyer reneges, Seller is out for a large “sunk cost.” This creates an incentive to renege. HIGH incentive to breach.
Take or Pay. “If I’m going to build this coal mine, then you must agree to take or pay a minimum amount of coal (defined in the contract).” – this “insures” the Seller for their sunk cost. IF this was a requirements contract with no stated minimum, then Colorado-Ute’s building of larger plants might have invalidated the entire deal. BUT what we have here is a contract with a “minimum amount.” Court says Colorado-Ute is entitled to this minimum amount. NOT entitled to any coal above that minimum amount. NOTE: The coal company wants out of the deal b/c they can sell the coal for more than the value set forth in the contract. Brickman Requirements contracts are difficult (and that’s why common law didn’t really recognize them) b/c there are no hard numbers. The requirements could be anything… its about anticipation of requirements based on facts. MINIMUM could be ZERO, if in good faith the Buyer’s requirement is zero. UCC 2-306 sets a MAXIMUM (industry standard??) Schlegel Manufacturing Co. pg. 446 Supply of dolls from Germany cut off due to WWI so there was an increase in the production of dolls (as well as boxes and other products that require glue). Also, people were increasingly eating their horses (making them worth more as food than as glue). “Perfect storm” driving up the price of glue. Brickman Is there is a requirements contract here? What determined how much they bought? How much they could sell. What determined how much they could sell? The differential between the market price and the contract price. Therefore when the market price goes up they can sell more (b/c they have a fixed price contract) Is this then a requirements contract? NO, b/c middleman (“jobber”) doesn’t have requirements like retailers have. What determined how much fuel Eastern Airlines needed? The amount of their BUSINESS. If they have more passengers, they need more fuel. If less then less. This is the same for other requirements contracts (e.g. if you’re providing all the steel for a car company the amount of steel they need will be based on how many cars they can sell.)
HERE the court is saying that this is really a supply contract as opposed to a requirements contract. They call it an “illusory” contract b/c P is not a “consumer of glue” but rather a middleman. If UCC 2-306 had been around could have used that to decide for D.
Additional Reading Homestack Mining Huge bankruptcy case. END of the nuclear power era in the US. Nuclear plants became losing proposition after this b/c of political opposition, union opposition, etc. PAIRED OPPOSITE: Option contract vs. Requirments contract Price of uranium shot up b/c of OPEC embargo. Ore went from $7/lb to $20+/lb. Court found that this is a requirements contract. …………………………………………………………………………………………. Instinct with an Obligation Lady Lucy was a big-time fashion icon. She gave rise to the cartoon character “Betty Boop.” Lady Lucy was a Titanic survivor along with her husband. Husband lost his position in society b/c he paid to get on the lifeboats. Wood v. Lucy, Lady Duff-Gordon pg. 451 Wood was selling Lady Lucy’s name. He was essentially an agent for her. Brickman Key reason why LL reneged on the deal to give Wood “exclusive rights” to deal in her name was that she was negotiating a deal with SEARS. Cardozo “saves the deal.” How does he do this? LL promised to share half of the revenue generated from these endorsements. Wood expressly promised to do NOTHING. Cardozo found an “implied promise” by Wood to use his “best efforts” (whatever he can do) to get LL endorsements. KEY In order to bind HER we have to bind HIM. Cardozo does this with his “implied promise.” “Instinct with Obligation” comes out of this case. Logic is that it doesn’t make any sense for LL to bind herself to this exclusive deal unless there was an implication by Wood that he would use his best efforts to make her money!
Brickman “Implied promise” not always available. Many contracts say “If I do X, you will do Y.” In these situations it is not necessarily true that the promissor has agreed to get the lease (or whatever) but rather may remain free to act of not act. If one party has full freedom to act or not to act, can they still BIND the other party with their action? Mixed outcomes in the cases that come up, but courts have generally found that contracts where the promissor binds himself minimally is still binding. Back to Lady Lucy… Keep in mind that WOOD is suing for breach of K. To show K that binds her, he must show that HE is bound (even though no express promise on his part to do anything.) Hammond v. C.I.T. Financial Corp. pg. 453 Hammond is suing for his commission. He wins. Brickman Why is this case here? b/c the court implies a “best efforts” undertaking by the broker in order to allow the broker to sue the seller for his commission. Who is suing who? Broker (Hammond) is suing Seller (C.I.T.) What is Hammond arguing? Bilateral contract. Promise by the company to pay him a commission. Hammond’s quid to the company’s quo is his “best efforts.” No express promise to deliver his best efforts. Must show that he was BOUND by this. Sylvan Crest Sand & Gravel Co. pg. 457 Brickman If K can be cancelled at any time, then the contract is ILLUSORY. Here the gov’t cancelled a contract. BIG PROBLEM: If this contract is “illusory” then literally millions of WWII contracts entered into by the gov’t would be illusory. Court needs to find a contract here. Court points to “good faith.” Gov’t gave NO NOTIFICATION saying that they have the right to cancel whenever they want. “The power of cancellation, though unlimited, could not be exercised merely by failure to give delivery orders.” Gov’t had to give notification if it was going to cancel. This notification requirement was enough to create consideration, making a binding contract. Carlton 461 & Reinert 463
Question in these cases is: “Have you bound yourself to make a good faith effort (to get the lease or rezoning, etc.)?” It depends. You can reserve for yourself the full freedom to act or not to act. Does that make this an “illusory contract”? Modern courts say NO, b/c if you do perform (say, get the lease) then you are BOUND. This is enough to create a K. Moreover, there may be a “good faith” duty to try to perform (get the lease or whatever). This is a factual determination. Bernstein v. W.B. Manufacturing Co. pg. 465 Why was the right to terminate the issue in this case? Came before the court twice. First time dealing with Clause 1. First case upheld the contract by reading significant limitations into the words “delivered to the best of our ability” (saying it is an objective rather than a subjective standard.) There are reasonable bases for excusing performance (e.g. fire, natural disaster, whatever) but otherwise performance is due. Second case dealing with Clause 2 focused on “determination at any time by us.” Buyer says that this means they can exit the deal whenever they want. Seller is arguing that this only refers to the solvency of the Buyer (if Seller determines Buyer is insolvent they don’t have to sell.) Same court that “saved the contract” the first time went to great lengths to destroy the contract this time. This is a much criticized case. Gurfein pg. 467 Seller is arguing “illusory contract” b/c buyer had the unrestricted option to cancel the shipment. Brickman Remember that in Sylvan the court found K even with a very tiny amount of consideration by the gov’t. Under what circumstance could Seller have bound Buyer here? If they shipped IMMEDIATELY upon receiving the order. Court says this is all that is necessary to constitute a legal obligation and create K. ……………………………………………………………………………………………… Gratuitous Noncommercial Promise
Recurrent theme in our history has been the development of specialized areas of contracts (insurance, collective bargaining, etc.) These areas tend to go their own way, taking little from and contributing little to general contract law. NEVERTHELESS having a general theory of contract is deeply rooted in our legal tradition. 19th Century theorists were trying to find fundamental principles (“Satisfactory General Theory of Contract.”) Had reasonable success and got to “contract law is commercial law.” Noncommercial promises then had to be judged against the same criteria as arms-length promises by merchants. This “could never have worked.” Under strict bargain theory, an “executory gift promise” (I promise to give you something) could never be supported. Courts devise ways to make these enforceable, especially when there are improvements. We’ll see a case where this applies to land (even though no DEED transferred, which is the only way to give land.) Brickman Cardozo court in NY never adopted “bargain theory.” Therefore Cardozo’s court could ALWAYS find consideration. Kirksey v. Kirksey pg. 473 Court finds that sister’s coming to brother-in-law’s land was not “bargained for.” There was an “executory promise” but no deed transferred. BUT suppose the letter had said “… besides I’m lonely here.” This could have been interpreted as something “bargained for” (companionship). Seavey v. Drake p. 476 Land not given b/c NO DEED transfer. (Court says land transferred but it was not.) In reliance on promise, however, P made improvements to the land. Court says this is consideration and therefore the promise will be enforced. Brickman This is an example of how courts get around the harsh results stemming from bargain theory. Roberts-Horsefield pg. 478 SAME IDEA as Seavey Devecmon v. Shaw pg. 480 UNILATERAL CONTRACT which is the antithesis of bargain for theory.
Benefit to D is irrelevant. P had promised to pay for the trip. “I promise to do X if you do Y.” Bargain For Theory would classify this as a promise to make a gift and the fact that D benefited would be relevant. NY CASES WHO DIDN’T ADOPT STRICT BARGAIN THEORY/EXTENDED CONSIDERATION THEORY Hamer v. Sidway pg. 483 Saying that plaintiff had the right to do all sorts of things (drink, play cards, swear, etc.) that he DID NOT DO in reliance on the contract… therefore contract valid. Ricketts v. Scothorn pg. 491 Basis of the contract is an “estoppel”. Here there is reliance. Same time frame as Hamer and also in NY… didn’t need estoppel b/c they had this expanded consideration theory. De Cicco v. Schweizer pg. 494 Breach of contract to marry is eliminated as a Tort today, but during this time engagement to marry is a binding contract. Seems that the father’s promise is unenforceable b/c the couple had already agreed to marry. Nonetheless Cardozo finds consideration. He held that the promise to pay was made to induce the couple not to rescind their enforceable agreement. They had this right to rescind their “marriage contract” by entering into another contract. The promise by the father to provide money induced them not to exercise this right. Cardozo sees an implied admission that the couple may be wavering in their commitment (thinking about rescinding) b/c otherwise there is no reason to offer the money. NOTE: Most courts would have found promissory estoppel here, but Cardozo’s court doesn’t need such parochial notions. Cardozo’s court had a “relaxed view of consideration.” Allegheny College pg. 501 Brickman What does Cardozo want to do here? BIND the promisor. What does he need to do this? Find CONTRACT What does have to show to find contract? CONSIDERATION
Here he goes back to Lady Lucy and finds a bilateral contract. Cardozo acknowledges that other courts would find promissory estoppel but does not sue this theory. Instead says that when the College agreed to publicize the gift they entered into contract. Implies a request by donor to have donee publicize the gift. This therefore is the DUTY of the donee, which it accepted when it took the gift and therefore it is a CONTRACT. REMEMBER There is a distinction between a “gift” and an “executory promise to give a gift”… a gift is already given.
Provisional Contracts: “I promise to do Y if you do X.” Although X is not really bound by this contract (doesn’t have to do X) modern courts do not find this to be an illusory contract, b/c IF you do X then you ARE bound (so not TOTAL freedom of action). What affect does death have on an offer to enter into a contract? • Unless there is some consideration the offer is closed – BUT it doesn’t take much consideration to keep the offer open (see Bank case, where the bank could still collect after person died b/c the President had declared them depository bank) What application does the UCC have for money? • NONE --- sections 1, 2 and 3 of UCC only apply to goods • REMEMBER – transaction in goods is more broad than sale of goods ……………………………………………………………………………………………… Moral Consideration Theory of causa – all promises seriously made that are not illegal or immoral are binding 19th century slogan was “eaten away by its own exceptions.” The only way that a past consideration would not count would be when there was a Lampleigh Requested a service got the service… no express promise to pay. Quasi-contract. (Implied in fact) No express promise to pay Got a lawyer, presumably, to go and try to find the king.
Common, ordinary implied in fact contract, except that it took place in the 17th c. b/4 implied in fact contract. This is the development of moral consideration. Lampleigh is an overbroad statement by a court that didn’t have implied in fact theory available to it. Eastwood chopped down the moral consideration Good Samaritan strain A seeks reimbursement for acts committed in kindness. Today they are more likely to collect than in the past. These cases can be constructively compared to quasi-contract cases. Maritime principle that salvors are rewarded for finding property, contrast that with generally no reward for good Samaritans. **Sometimes courts will simply cite “moral obligation” where they cannot find anything else.** Eastwood v. Kenyon NEW RULE: pg. 519-520 Promisor promises to pay part of the barred debt. That promise is binding, if it is a new promise. NOTE: Can only be bound by YOUR debt, not someone else’s debt. Some states require that Perreault v. Hall P was promised that if she never married and worked full time for D’s business she would be taken care of for life. P continued to work for D until 1937 when she retired. D agreed to pay her $20 for life as a pension, provided she doesn’t marry. D pays her until his death in 1943. P seeks continued payments and D’s estate refuses. Court “obviously wants to find in favor of the plaintiff.”
Court says no consideration, no K. BUT she promised never to marry… isn’t that consideration? NO, b/c it is void as against public policy. BUT the court “rescues this promise” by saying that she was only promising not to marry while she was working. P says that she performed the request of D. Court says its not clear whether there is a unilateral or bilateral contract, BUT we don’t care b/c D says in his letter that she complied. The deal was done b/4. It was either a promise for an act or a promise for a promise. Doesn’t matter. 1937 letter was an ACKNOWLEDGMENT of a pre-existing deal. This is a finding of what you could find. Therefore motion to dismiss should be denied. There is a QUESTION OF FACT. Mills v. Wyman Moral (but NOT legal) obligation (b/c son was an adult.) C v. W Father of illegitimate child did not want to pay child support. Father says there was no consideration and therefore no agreement (contract). No estoppel here b/c the father acknowledges his paternity. **When we get to Cook v. Wright (566) come back and look at this C v. W** In most jurisdictions the agreement in C v. W would have been enforceable. • If father BELIEVED he had an obligation, that would be sufficient consideration Perrault v Hall. At common law, the executor is responsible for any payments by estate that are improper. Since promisor paid during his lifetime, the judge is likely to find a way to continue payment. Promise is not enough becuz no consideration. The promise not to marry is against public policy and would eviscerate any agreement whatsoever. However, ct wants to uphold K so finds UNILATERAL. In re Schoenkerman’s Estate Moral Obligation Theory In previous case wife mistakenly believed that she was caring for her own family but she was NOT (put her effort into something that was not hers)
Court says their claim should be dismissed b/c they were relatives and there was no express promise to pay so services are rendered free of charge. HERE, though the “rebuttable presumption” that family members offer services for free is rebutted here. The court cites this as the reason why it can’t simply say that this is implied in fact K. Remember in Perrault v. Hall the court acknowledges the letter as evidence in a similar fashion Elbinger Court just had to “add to the litany” statute of frauds (in addition to stat. of lim., bankruptcy and infancy). When a debt is barred by statute of frauds then unless there is a written agreement the statute is BINDING. There is a broker SOF which required that agreement be buttressed by a written agreement. Webb v. McGowan This is a tactical decision by the lawyer in terms of what he is suing for. Lawyer is NOT seeking payments for life (could have) but rather seeking value up to the time of the suit. Lawyer knows that this case is “balanced on a knife’s edge” that could go either way (doesn’t want to overdo it w/ a greedy claim.) Medberry v. Olcovich Look at CA Civil Code Section 1606 Does P have claim? NO “existing legal obligation” There is a moral obligation (it was his son driving the car) but was there a BENEFIT CONFERRED? Maybe… (made father feel better) Look at NY General Obligations Law Does P have a claim? NO – no promise in writing Section 86 of Restatement Second Does P have a claim? NO – difficult to interpret… REVIEW 12/3
Route A “Knockout” vs. Route C Route C is “contract by conduct.” You have two forms with conflicting terms and therefore no K. BUT if goods are shipped and used then there is Route C contract, where the terms upon which the parties agree are binding, the others are eliminated and you use UCC “gap fillers.” Route A Knockout (White) – this is not a traditional Route A analysis. Two ways to Route A. 1) Written confirmation OR 2) definite and seasonal acceptance White applies Comment 6 (written confirmationS of a prior oral agreement). Eliminates “first shot advantage.” The response, so long as it is not conditional and accepts the “dicker terms” (quantity, price, etc.) is binding. If conflicting terms they “knock each other out.” Brickman Remember Cole v. Brunswick (rubber case). Buyer wanted to get out of the deal. Took advantage of a clause in his response to invalidate the contract. (“Last shot advantage”) White Knockout Rule has nothing to do with 2-207 P 2. Other scholar says 2-207 P 2 was a drafting error and they meant to say “additional or different terms.” KEY DIFFERENCE In Cole there was no performance, BUT you could still have contract under Route A. Under Route C you MUST HAVE PERFORMANCE. So, Route A can lead you to contract even without performance. Roto-Lith Turned Route B into Route C (which is no good.) There should be no Route B “contract by conduct.” Route B says “conditionality” – Roto Lith says “any materially different term” = conditionality… what does this MEAN? No basis in Route B. Remember ROTO-LITH has been overruled. Sherwood Continues to be cited by many courts on the question of mistake. BRICKMAN Is it relevant whether Sherwood was a butcher? Not really b/c steak comes from steers (not from cows) so the meat wouldn’t be very valuable.
TAKE HOME: Read the “paired opposite” about difference in kind vs. degree and see how much “there is there”
DIFFERENCE IN KIND vs. DEGREE If you’re looking at an object that is a human creation, with utility in a social context, then that utility is subjective depending on your purpose. Compare this to objective differences (which do not rely on your purpose – e.g. The molecular weight of something.) Amended 2-207 NOT part of NY Code Need to know that this is “pretty much Route C” No application to the question of formation (only applies to the terms of a K formed under other code provisions) MUTUAL MISTAKE Formal doctrine is that contracts are void by mutual mistake. But courts will void contracts (sometimes) for unilateral mistake. -- see General Contractor cases The more the mistake hurts the General Contractor, the less likely the court is to let the Sub contractor out – NOTE, this is not a legal principle. -- NOTE, we have yet to do mistake in a formal way HADLEY (B) Don’t worry about it! BILATERAL CONTRACT Definition is “a promise for a promise” vs. offer to enter into a unilateral contract (“If I do X, you promise to do Y”) Offer to enter into a bilateral contract cannot be accepted by an act, must be return promise.
CONTRACTS BY CONDUCT – very LARGE part of the exam
Need to know various “permutations” Acceptance on dispatch, revocation on receipt.
If you send a rejection and then you send an acceptance, and the acceptance overtakes the rejection, what happens? If you send an acceptance to the wrong address, what happens? --See the RESTATEMENT… these questions WILL be on the exam SHRINKWRAP CASES Judge Easterbrook says that 2-207 requires multiple forms (conformations)… that’s not true, but courts have adopted his interpretation. “Rolling contract” Under common law if you call and order a computer, that is K. Easterbrook says no K until computer arrives. …………………………………………………………………………………………… CONTRACTS II 1/21/09 Fairness of the Bargain BRICKMAN: Basic theme is “to what extent does the theory of contract yield to ‘fairness’, ‘justice’, etc. “? If there is a “valid” contract is it assured? NO Answer is really “it depends.” Section 1 (553-583): Formation of Contract Section 5: Contracts entered into and partially formed- release from validly formed contract Courts don’t want to get into the question of valuation to the extent they can avoid it. The question of value discussed in the first semester (Sherwood, etc.). Caveat emptor and caveat venditor are “Newtonian physics”… now we’re getting into “wave theory” (quantum fluctuations). Things at the level of fact aren’t always what they appear. “Peppercorn” theory- nominal consideration still good Haigh v. Brooks Consideration was a piece of paper, with no inherent value. Writing had no value, b/c under the statute of frauds cannot bind someone to pay the debt of another without a stated consideration in the instrument.
Court is using “nominal consideration” (Peppercorn theory) to reach justice. In order to make the transaction binding, the court finds that the exchange of the piece of paper was consideration. (Consideration is a threshold issue… you either have it or you don’t- no intermediate value). Newman & Snell’s State Bank v. Hunter (1928 Michigan) Widow (D) bought her dead husband’s note from the bank by giving her own note. His note had no value b/c his company was defunct. Bank gave up a valueless piece of paper (estate had no assets, collateral was of no value) in exchange for the wife’s note (wife had assets). Court finds that surrender of the note was not sufficient consideration b/c the note was valueless. Brickman: Does not conflict with Haigh b/c in Haigh you had underlying value (lending of money) whereas here you have nothing (bank gives worthless note). Why did widow make this trade? Court speculates that widow was overwhelmed with shame and guilt, placing on her a desire to clear his name (posthumously). Court refuses to support this transaction. Cook v. Wright Notes issued by someone who knows he’s not liable. Trying to “get the city off his back.” Fact that he entered into this agreement to pay settled the dispute. Settling the dispute is consideration. Brickman: Case is important to introduce the heavy reliance courts give to settlements. Applying Cook to Hunter Could say that the widow’s consideration was in the value of clearing the name of her husband. Brickman: Outcomes in these types of cases are not “preordained.” Often could go either way. Heavily dependent on fact-finding. If the court discovered that the bank had taken advantage of a bereaved widow, the court would likely find for the widow. If the facts indicate that she knew what she was doing, could reach the opposite conclusion. Jackson v. Symour Brother paid sister what he believed to be the actual value of a property. If this had been an “arms length” bargain then there would be no fraud.
Why did the court find for the sister? Court says that brother owed her a “fiduciary duty.” “Fiduciary duty” is concept invented by courts. Goes back more than 1000 years, to England. King had Privy Council. Privy Council owed the King a duty which they did not consciously take on; confidential relationship.. This is the origin of “fiduciary duty” (though this terminology didn’t emerge until the 19th century.) Fiduciary Duty (loosely defined): When one party has to rely on another party, instead of requiring this person to hire a guard to ensure the other party fulfills their duty, a legal duty is imposed on the other party (the “fiduciary”). So the “fiduciary” is required to act in a certain way (irrespective of marketplace standards) towards the “beneficiary.” Must keep confidence, act in a disinterested manner (as opposed to self-interested). Quintessential “fiduciary” is a lawyer. Brickman: Certain principles are associated with “equitable relief.” Law and equity are now merged into one court (used to be separate). Maxims: “He who comes to equity must come with clean hands.” Remedy at law for breach of contract is damages. BUT, can go to court and argue that equity demands something else (specific performance, etc.) Marks v. Gates Marks is suing for “specific performance” of a contract which would give him a 20% stake in Gates property in Alaska (valued at $750,000). 1/22/09 What is the difference between Embolla and Marks? Embolla is suit in law and Marks is suit in equity. In Embolla he is seeking damages. In Marks he is seeking specific performance. Why does Marks sue in equity and not in law, when it subjects him to more stringent “fairness” requirements? He wants to keep getting his 20% of Gates property into the future. KEY: When you argue for equitable relief you must argue that relief in law is inadequate. If you sue in equity and lose, you can still sue at law. Today (not in 1907) you can sue “in the alternative” – sue in equity but if the court determines equitable relief is unavailable, court can grant damages at law.
The court in Marks is looking at “fairness.” This does not mean that they would not have granted suit at law. The Promisor (Gates) says first “I didn’t do it.” Issue of credibility. In Embolla, the Promisor says “give him the money.” Consumer Protection – Unconscionability Today usually no bargaining (standard form contracts). Consumers have option to “shop around” in competitive market. Consumer Revolution (beginning in the 1960s). Laws to protect consumers. Legal services provided by gov’t to consumers. Host of statutes (federal, state and local) regulating consumer transactions. Doctrine of unconscionability has been codified in UCC 2-302 Addition to Assignment #9: Read article from New Mexico Law Review (“Unconscionable Quandry…) – on ANGEL Procedural Unconscionability: Key terms not disclosed Substantive Unconscionability: Price unfair; “You charged me too much” – usually not sufficient in and of itself Courts weigh both elements. The more PU you have the less SU you need and vice versa. Williams v. Walker-Thomas Furniture Co. Need two elements for unconscionability: 1) absence of meaningful choice and 2) presence of contract terms unreasonably favorable to the seller Brickman: Courts have expanded this slightly so that today one prong is sometimes sufficient (more difficult to establish SU – what is “too much”?) There is a trend, however, towards finding unconscionability based on SU (where they were previously reluctant). Perhaps the most important change in the case law over the last 45 years is that courts have begun to recognize unconscionability claims brought by business plaintiffs. Usually a smaller business suing a bigger business. American Homes Federal Reg. says that the document in an installment contract must explicitly state the interest rate. The fact that there was no forfeiture here was critical. Williams v. Walker-Thomas Furniture Co. Seller (WT) suing the Buyer (Williams) to repossess items. Judge Skelly Wright remanded the case, with instructions to determine if the contract was unconscionable.
Wright knew that Walker-Thomas would settle the case (by walking away) given this judgment, but he did not declare the contract unconscionable. We know Walker-Thomas was not “super profitable” because there were not other businesses entering the market. Ms. Williams had been purchasing a wide variety of items since 1957 from WT and had been making regular payment. Add-on Clause: Every time you purchase a new item from a seller becomes additional collateral on the money owed. Although the court did not say the add-on clause was unconscionable, it was clear that it would be declared so in the next case. Brickman: One consequence of this case is that less credit is available to a certain class of purchasers (poor people). Jones Substantive Unconscionability largely the basis for this case. 1/26/09 Brickman: Kugler v. Romain is notable b/c it is a suit initiated by the AG of NJ. This has become an increasingly important area of consumer protection law. NY Home Sales Act helps protect consumers (mainly low income) from door-to-door salesmen. General Business Law 396-r: Cannot charge excessively high prices due to emergencies (strikes, weather, etc.). 1988 case – Long Island store, doing business as Honda Yamaha, in the aftermath of a hurricane, sold 100 generators at a considerable markup (up to 66% extra) b/c so many people without power. AG sued for unconscionability under GBL 396-r and won. ……………………………………………………………………………………………. Common law rule that new agreements must be subject to new consideration has many “escape routes.” Courts use this rule to strike down unfair or coerced agreements. UCC 2-209 and “sister statute” in NY (5-1109) designed to codify the desire to come to a “fair” outcome. Stilk v. Myrick No consideration for paying seamen more after 2 crew members desert.
Lingenfelder v. Wainwright Brewing Co. Is threatening to quit a job duress? Sometimes… in order to exit or modify an agreement, threat must be made “in good faith.” Here, the threat was NOT in good faith. Common law case (not statutory case) so court says no consideration and strikes down the coerced agreement under common law principles. Goebel v. Linn Michigan case that took place between Hackley I and Hackley II (where a lumberman went to get paid, employer gave him a “take it or leave it” offer for less. Hackley I court ruled for employer – “you made the deal, stick with it”; Hackley II court reversed itself and found duress. b/c the employer KNEW he owed more money – there was no dispute about the money owed.) Brickman: Contract had a variable price structure which accounted for the possibility of a diminished supply (KEY according to Brickman). Brewery contends that they were “over a barrel” because their beer would spoil and so they were forced to pay what the ice company demanded ($3.50 per ton, instead of the contract max of $2). Court says that the second contract is enforceable. It was a fair price at the time of the renegotiation. Brickman – we do not know what their real options were for going out and finding other sources of ice. Brickman: What if we had UCC 2-209 or NY Gen. Stat. 5-1109 at the time of this case? What would we look to? Good faith Buyer is taking the price that the market price will fall. Seller is taking the risk that the market price will rise. Brickman: What would you have to look at then to determine “good faith”? Would look at inventory. See if they are simply taking advantage of the market to mark up the price OR is their inventory depleted so that they have to go buy more ice at a loss to fulfill the contract terms. ALSO, must look at the fact that there is a variable price to take into account the possibility of a bad “ice crop.”
Austin Instrument, Inc. v. Loral Corp. Case is about the creation of “black boxes” that enable our military to “look without being seen.” Very complex, top-secret, radar sets. TRIAL COURT: Austin (1-0) INT’D COURT: Austin (2-1) APPEALS COURT: Loral (4-3) Brickman: Even though Austin won 6 judges and Loral 5, Loral won the “right judges.” Case is “balanced on a knife’s edge.” “…a mere….adequate.” pg. 659 – very close issue, which holding is based on. Threat to breach a contract is WRONGFUL, but does not by itself constitute duress. Must be other circumstances which make it coercive. READ: Peterson v. Crown Financial and Chouinard v. Chouinard. BOTH turn on “good faith.” BRICKMAN: These cases were decided correctly and distinguished properly. Figure out why. Peterson- Court finds duress. There was extortion over alfalfa shares. Chouinard – company in great financial distress. Needs loan. Lender demands that who owns what stake in the company is resolved before lending. By use of this “pressure point” Ds were able to obtain notes for $195,000. President of the company is suing to invalidate the notes, claiming duress. Court rules against president, b/c there was a good faith dispute. Central London Property Trust Ltd. V. High Trees House, Ltd. Court approved the modification to a lease, but said that after the exigent circumstances (the war) had passed, return to original lease rate was valid. Skinner v. Tober Foreign Motors, Inc. Ps purchased a plane, which turned out to need a new engine. Ps were going to return the plane b/c they couldn’t afford a new engine, but D agreed to lower monthly payments so they could afford it. After 5 payments D demanded increase in payments. Ps refuse and D repossesses plane. Court rules for Ps. Statute or frauds not applicable b/c not pleaded below. D breached contract by repossessing the plane. Oral contract revision was valid. Brickman: Consideration theory is being used to “mask a decision reached for other reasons, as we have seen before.”
“Curious and nonsensical common law ruled called the “executory accord” – Peterson. 1/28/09 Foakes v. Beer -- implied interest on debts Interest is implied on promises to pay debt over time. Otherwise no condideration. Hackley v. Headley (pg. 674) Court rejects the claim for more money b/c of duress. “Dire economic straights” does not mean duress, simply because the other party plays “hardball.” This was used as a precedent for Goeble. Hackley II reverses this decision. Found for the plaintiff on the grounds that the defendant’s assertion was not made in “good faith” and so there was no consideration. o There was no valid dispute. Defendant acknowledged that he owed more than he was offering. Therefore the “take it or leave it” condition shows duress. o Brickman: Its all about “good faith.” This is often a matter of perception. Hackley II probably correctly decided, BUT these are based on changing ideas about “business morality.” For example, in the tobacco case where the merchant did not reveal his special knowledge (end of a war) and the court said it was okay (arms length standard.) Contrast with not arms length (fiduciary duty). Arms length standard changes. 19th century probably more “hard nosed.” Fitts v. Panhandle & S.F. Ry. (pg. 679) - 1920 Courts were sympathetic to plaintiffs injured on the job at this time. Brickman: “Courts looking out for the working guy.” No strong unions or lobbies for workers at this time. Rickets v. Pennsylvania R.R. Decision based on the fact that the attorney was not authorized to settle. Created separate category for workers who signed releases. Brickman: Judge in this case says this is not really part of contract law. Its simply giving relief to someone who was terribly injured even though they signed a release. Law of Releases (Settlements) Looking at payments tendered by check. Specifically at cases where a debtor submits a check, writing on the check something to the effect of “this is payment in full, you accept by cashing the check.” Creditor writes “accepted in protest” on the check, attempting to reserve the right to get the rest of the alleged debt owed. Who wins? In Con Ed, we’re dealing with a large institutional creditor. Unreasonable for them to look at the tens of thousands of checks coming in. Now there is a UCC provision for this.
PRE-1990 A party who… does not thereby prejudice the rights reserved. Such words as “w/o protest” “under If debt “unliquidated” (good faith dispute) then offering less than full payment is accord and satisfaction under the common law and the pre-1990 UCC. Most courts held that this was the case. NY did not. Horn says that acceptance of payment less than the alleged full debt owed does not bar the creditor from pursuing the rest of the debt, provided they write on the check they accept it in protest. Say UCC trumps the common law. UCC revised in 1990 and now explicitly states that 1-207(1) does not apply to “accord and satisfaction.” 1-207(2) explicitly rejects the Horn decision. BUT NY has not adopted this revision. “Under protest” still trumps “paid in full” in NY. Revised 3-311 provides for the special circumstance of a large creditor (Con Ed, etc.) Liquidated Debt is where there is no good faith dispute. Classic case of this is a judgment. Court has said “this is the debt, pay it.” Liquidated v. Unliquidated Debt Brickman: Liquidated + unliquidated = unliquidated. If a court finds that there was one debt (unliquidated) then “offer and accord” = satisfaction of whole debt. If court does not want this outcome, they find two debts, one of which is liquidated. Hudson v. Yonkers Fruit Co., Inc. P takes check from D, cashes it but says it reserves the right to get the commission back. Brickman: This is about “credibility.” Do you believe the apple grower or the agent. If court finds for the apple grower (P) must say NO “accord and satisfaction. To find no accord and satisfaction you must find that the debt us liquidated. If there is one debt and the dispute is over the commission, then it is unliquidated. If there are two debts (one for the apples, one for the commission). Debt for the apples is liquidated. ????? Tanner v. Merrill P was a lumberman. D agreed to pay for transportation to the logging site. P needs to get home to deal with sick mother. D pays him w/o transportation cost. P accepts under protest, sues to get back the amount deducted. Wins but is reversed on appeal.
Legal Issue: Liquidated v. unliquidated. If its liquidated, then P wins. If its unliquidated P loses. Court says unliquidated so acceptance of the money was a valid settlement. Majority finds one debt, dissent finds two debts. Brickman: Example of the court finding one debt with two components (liquidated + unliquidated = unliquidated). Dissent finds two separate debts. No reason why an unliquidated debt cannot lead to “accord and satisfaction” b/c you are settling a dispute. Cannot have this with a liquidated debt b/c there is no dispute. Petterson v. Pattberg Extreme unilateral contract theory Goldbard v. Empire State Mutual Life Insurance Co. P allegedly agreed to settle for $800, never went in to sign and accept this agreement, subsequently won a verdict for $2800. D claims the settlement should preclude them from paying this judgment. Court looks at “accord executory.” (Agreement to take less on a debt.) At common law this is not a bar to a suit on the debt. An “accord and satisfaction” (where the agreement is actually fulfilled – the amount agreed upon is paid) is a satisfaction of a debt. 1) If the parties have merely agreed to take future performance of a debt owed, not in writing, this is an “accord executory” and is not binding. NY Law provides that if it WERE in writing it would be binding. 2) If no agreement at all, no discharge of the debt. 3) Substituted agreement. (“Weird” according to Brickman). There is a possibility of a new agreement replacing an old agreement (which doesn’t necessarily have to be in writing.) Brickman: This is lawless, invisible. Boshart: Was there an “accord executory”? Does the court find that enough to override the original agreement. 1/29/09 15-501 NY Obligation Law. NY Statute allows for an accord executory, in writing, to be legal. Can have a lesser payment satisfy a larger debt. Boshart v. Gardner Agreement to take lesser for a greater, if they can get a federal loan to pay 50% of what they owe within 60 days. Landowner is suing to foreclose the land.
Defendant argues the accord executory bars foreclosure. (This is not the case in common law.) Brickman: Is the court saying that the landowner is barred from foreclosing on this mortgage? NO Court is saying that the landowner must wait for 60 days and give the debtor an opportunity to get the loan and pay the debt. Court is declaring a moratorium on the landowner foreclosing for 60 days. Court is NOT saying that “accords executory” are a bar on enforcing the original agreement. READ: Parole Evidence handout CHAPTER 5 Formalism in Contract (pp. 705-707) Contract law exists to facilitate exchange. Antithesis of contract is uncertainty. Certainty and predictability is valued and it would be good to have a system where the use of the courts is minimized. Formal system of contracts seems to appear first in most place. Informal system of evidencing contract appears later. These systems co-exist but the informal rules tend to dominate. Formal ritual is a necessary component b/c it is cheaper than discovering evidence and going to court. Peppercorn Theory 1. Courts will always try to invalidate extorted bargains 2. Examples of situations where courts justify decisions based on “nominal consideration” (Peppercorn theory) a. Fischer v. Union Trust Co. SEAL (need to know very little – but know the following) 1. Suited a largely illiterate society 2. 19th Century anti-seal legislation a. Why did the common law seal come to seem as an urgent matter for law reform? Why were the reformers so successful in “driving out” the seal? b. Statutes were poorly drafted and difficult to understand what they meant c. Even if its inaccurate to talk about the abolition of the seal by legislation, it became clear that seals were no longer valid for removing consideration 3. Historical Context a. Seal becomes unacceptable as Bargain Theory becomes more prevalent b. Law constricted behavior (no more seal) so other methods are devised i. Rise of “nominal consideration” Statute of Frauds 1. UCC Article 2
a. 2-201 states the statute of frauds provision i. 2-201 (1) states the statute of frauds for goods ($500 or more) ii. 2-201 (2) & (3) are exceptions 1. (2) is only for deals between merchants 2. (3) permits certain other conduct besides writing which satisfies statute of frauds b. KNOW 2-201 2. 2003 revisions to UCC 2-201 a. raised $500 limit to $5000 b. allowed for electronic signatures, etc. c. Federal law (E-SIGN) does most of this 3. Conflict between statute of frauds and promissory estoppel a. READ Restatement Second 139 b. Alaska Airlines recognized promissory estoppel as an exception to the statute of frauds 4. NY’s Position a. Follows the general trend but with some hesitation b. Circumstances must be such that it would be “unconscionable to deny the oral promise upon which the promissee has relied.” i. Statute of frauds would be severely undermined if it could be set aside every time there was some “unfairness” ii. HIGH threshold Parole Evidence Rule When there is a written integration (a contract that says “this is it, all that came before is irrelevant”) then you cannot look to any previous writings, negotiations, etc. that might contradict the writing. NOTE: Does not affect future writings (new agreements, etc.) READ Parole Evidence Handout Brickman: When someone seeks to bring in something that contradicts a written agreement in which there is an “integration clause” the court will rule on the admissibility of the evidence. The judge, then, always sees the evidence and then decides whether or not to admit. When the judge decides to admit the evidence based on the parole evidence rule. Implicit in this decision process, then, is the issue of credibility. The greater the credibility the greater the likelihood that the court will allow it. Less credible, more likely to invoke parole evidence rule. MONDAY: Meet in room 206 10-12 2/4 Impossibility and frustration refer to errors in judgment about future events. Mistake and parol evidence are about past events.
Contracts are purposeful acts. Typically commercial. Based on “self interest.” Buy something because you think it has personal utility (its worth more to you than the price you pay for it). This is based on a lot of suppositions about what you think it can be used for, etc. Infinite number of suppositions in contract. Question becomes “At what level do these suppositions rise to the level that will allow relief from the court?” --REMEMBER: Relief from these obligations is the “atithesis” of contract. Contracts seek to fix these obligations. This is a key component of the Rule of Law. You enter a contract to establish certainty AND provide legal recourse. This is why many developing countries (who do not have a strong Rule of Law tradition) suffer from under-investment. Investors want a clear and functioning structure to enforce their investments. What kind of mistakes ALLOW for relief and which DO NOT? HYPO: Say a contractor begins work on a project and finds that he has to dig through bedrock, which is significantly more expensive. Say there is not provision in the contract for this. Burden SHOULD be on the contractor. Generally you get some sort of settlement. Frustration Failure of your predictions to come to fruition, which may allow for a remedy. Raffles v. Wichelhaus P sells cotton. D buys cotton. D either manufactures material OR resells it. Probably resells it. D agrees to buy the cotton and then reneges. Probably because the market price of cotton had gone down (due to the shipment of October cotton). P claims he believed that the cotton was coming on a ship named Peerless which was to arrive in October but the cotton actually arrive on another ship named Peerless which arrive in December. This is latent ambiguity (as opposed to “patent ambiguity” which is obvious on the face). Here the ambiguity cannot be determined until you have looked “behind” the words. Court says this was an honest mutual mistake and rescinds the contract. Brickman: Holmes would have found that there was no “meeting of the minds.” This would not change this case, but could change others. Frigaliment Importing Co.,Ltd. V. B.N.S. International Sales Corp. Difference between “stewers” and “friers”
--when you are an old worn out hen, you become a “stewer” – not appropriate for frying or boiling --“broilers” are generally young chickens (under 3 pounds) Brickman: US leads the world in mass produced chickens (egg to supermarket in 6 weeks). France has “breast chickens” which cost more than $100. Why would the Swiss company buy these chickens? To sell them Why would buyer purchase from Swiss company? To cook them (NOT stew) --So the chickens Swiss company received not suitable PRICES Contract – 33 cents Stewers (market price) – 30 cents Broilers (market price) – 37 cents Clearly seller was not contemplating LOSING 4 cents per pound (thought stewers). Buyer did not specify particular form of chicken. P (buyer) is suing for BREACH of WARRANTY (essential element of this is “quality”) NOT suing under Breach of Contract (which would have been based on a claim that they did not receive what they had contracted for) Breach of warranty: good not sufficient QUALITY Breach of contract: did not provide the goods specified in the contract Brickman: They accepted the first shipment. What if they had declined this shipment and said initially that the goods were not what they ordered? Dadourian Export Corp. v. United States US advertised surplus cargo nets which P contracted to buy without inspecting. Nets turned out to be inferior quality to what was advertised. P is suing to recover their deposit ($7,000). P is saying NO CONTRACT based on mutual mistake (didn’t get the nets he thought he was getting.) P is saying “broilers” and D (US) is saying “chickens.” P is claiming “Manilla nets” is a term of art and D is saying it is a generic terms (the same as just “nets”.) HYPO: You’re selling a tractor without a motor (as is). Someone calls you up and asks “This is the X brand, right?” You say “yes.” They says “I’ll take it for X dollars.” Contracts says “as is.” Buyer comes back and refuses to pay. Argues that the word “tractor” has a specific meaning which includes having a motor. Without any motor whatsoever it is NOT a
tractor (as advertised.) Even with an “as is” clause there is a minimal meaning to what a tractor actually IS. Brickman: If the tractor had a motor but it didn’t work, could not argue this. If you KNOW that something is being sold “as is” then you know there are problems. Buyer beware. BUT still must get the item that has been described (with all its defects, but complete.) Miller v. Stanich About REFORM of a contract. Initially ruled for P (no reformation). On rehearing court allows for rescission of the contract PROVIDED that D agrees to sign the “right” contract. Mistake regarding which of two renewal leases were to be signed by a landlord. LL signed the wrong one (intended to sign A but accidentally signed B). This gave P another 5 year lease which D did not intend to give. Steinmeyer v. Schroeppel (pg. 881 NOTE 4) Unilateral mistake. Formula says rescission only granted for “mutual mistake”. In reality the court grants rescission whenever they think its “just” to do so. Brickman: The more the court grants relief, the less stability there is in contract law. In this case court lays down RIGID rule adhering to this. Bromagin v. City of Bloomington Allowed recovery. Brickman: Two lines of cases in Illinois after this. When courts want to excuse they cite Bromagin and when they don’t they cite Steinmeyer. Rickets v. Pennsylvania RR Personal Injury case. Court invalidated release and allowed suit. Brickman: Today’s releases are incredibly complicated and courts are probably more reluctant to invalidate releases today. At this time courts were more willing to step in and protect workers because most claimants did not have counsel. Today most people are. CONTRACTS CLASS NOTES: 02/05/09 *Issue of the meaning of words: what does the word used to describe the object that is being sold convey? What is the minimal content. In particular, in a context where there is a denial of warranty does the use of the word itself create some warranty of the minimal content of the good in the context where the good is sold “as is” with no warranties? Seems, YES, b/c of the tractor hypo & dedurian… in Dedurian the court didn’t give it to them b/c they had an opportunity to protect themselves (to look at the nets) and didn’t. But in many govt surplus cases, people don’t have the opportunity to take a look first and the
courts will be more willing to help out the buyer b/c people would not be as inclined to buy such goods if they *If you have NO contract, you can use promissory estoppel… if you DO have a contract, you cannot! MESSERLY (p. ?) Sherwood is still good law, but only with respect to barren cows. NOTE CASES: SMITH v. ZIMBLEST (p. 893)
Violins Buyer (not seller) who was evaluating the quality… but turns out that the buyer was wrong & wants out of the contract (no indication of what the seller thought, but he acquiesced Ct found mutual mistake & plaintiff was not entitled to get $6000 reamining due. Warranty: trial court found no warranty & appellate ct agreed with outcome but may not have agreed on the warranty issue BUT felt that caveat emptor gives way here (for equity) Keep in mind that Buyer did not seek to get his $2000 back… that would have made it more difficult to find for him Oil on land case (discussed last semester)
CADY v. GALE
BELL v. LEVER BROTHERS (p. 896)
Misconduct of employees not known when their contract was bought out. If they had known, they would not have had to buy them out, could have just fired them. Plaintiff is arguing broilers [we bought an unbreached contract of employment… had we known it was breached, we would not have bought it!] & Def is saying chickens [simply, you bought a contract of employment] Most persuasive fact here was the financial status of the company (bought out the subsidiary who are turnaround artists to turn around the business & they did) they got what they bargained for: wanted a turnaround & got it: ‘don’t be greedy!’ Today, this would be called insider trading & a breach of fiduciary obligations of a high ranking employees & today would almost certainly
be seen by the courts as illegal. Here, the court does not have a problem with what the employees did.
MacRAE v. COMMONWEALTH DISPOSALS
The appellate court wants to get the Plaintiffs the reliance they paid Alternatives: 1. fraud (tort of deceit – normally, tort is the promised land, but escaping from contract is very difficult) BUT there is no liability for negligent but non-fraudulent misrepresentation [Def of FRAUD: deception, deciept, trickery to gain an unfair advantage to secure something of value no benefit here for the disposal company] The tort here would be negligent but non-fraudulanet misrepresentation: no liability there for this at this time 2. Mistake – they were mistaken about the existence of a tanker (both sides): mutual mistake remedy for mutual mistake = rescission doesn’t do it for them here 3. Contract: this one works BUT the problem with Contract here is the COUTOURIE v. HASTY (?) case: court held there that the contract was void; Court here, distinguishes this case to escape that grasp by saying that in that case, the court never got to the question Contract element that was breached: the fact that there was the existence of a tanker (implied or express part of the promise) There WAS a contract, it was breached, entitled to damages 4. An American Court here would have found Promissory Estoppel (no contract through mutual mistake OR no meeting of the minds w/ justifyiable reliance)
NOW: CHANGES IN EXISTANT CIRCUMSTANCES (Mistake deals with the past, this deals with the future) PARADIGM v. JANE *IF it aint impossible, you must do it tenant evicted by an enemy - Court says you must do what you promised to do HALL v. WRIGHT
Suit for promise to marry, groom tries to get out Court does not enforce specific performance but gives damages b/c not impossible to marry
ABSOLUTE LIABILITY IN ENGLAND (this case & the above) this changes in the following cases (court evolves excuses based on circumstances not anticipated that occur after the contract is formed
HYPO THETICAL: EEL BAND [ASSIGNMENT #52] & POUSSARD (p. 919)
“eel was indispensible to the group’s success”… but not to its going on! [Opera singer could have gone on & lipsynched] Not impossible, but an implied condition of the contract that there will be continued good health of the opera singer or the eel Covenant (obligation [subsidiary promise of the contract] which does not go to the core of the contract) v. Condition (obligation which goes to the core of the contract) Breach of COVENANT allows for damages (if there are any) Breach of CONDITION allows for damages & -
POUSSARD (p. 919)
Fairness requires that we allow the opera company to decide whether to take her back even though she did not breach the contract D is at liberty to rescind & is not liable A convenant, not a condition
BETTINI (p. 919)
KRELL v. HENRY (p. 926)
Implied supposition that it was a condition of the contract that he be able to see the coronation parade from the apartment (no impossibility in this case as in the eel case) D has music hall & engages in contract w/P to give a series of concert joint venture Hall burns down: who gets stuck? Does the fact that the hall burned down breach the contract to enable the P to collect damages? move away from HALL v. WRIGHT
TAYLOR v. CALDWELL (p. 920)
Contract is subject to implied condition of the continued good health of the hall (that it would not burn down)
2/9 When an event occurs, the non-occurrence of which was an implicit agreement of the contract, everything stops and the liability lies wherever it was at that point. English proposition was ultimately overturned by its legislation due to its fundamental unfairness. Krell v. Henry Coronation was an implied condition of the contract. Frustration of condition. Court does not deal with the deposit. This was taken up in Chandler. Here D wins both the deposit and balance (b/c they were due BEFORE the coronation.) Implicit in this ruling is the idea that if the balance had been due AFTER the coronation, liability would lie where it was at that time and Chandler would NOT have had to pay the balance. Brickman: When does the obligation mature as compared to the frustrating event. Fibroa Spolka Akcyjna v. Fairborn Lawson Combe Barbour Ltd. (pg. 932) The absence of war was an implicit part of the contract. War discharges obligation. P wins under quasi-contract theory. Court says unjust enrichment. Essentially “you have money of mine, give it back.” Generally courts don’t “split the baby” so D (manufacturer) cannot be compensated for the work already done. This overrules Chandler. <Parliament soon passed a law providing for compensation for manufacturers in cases like Fibrosa.> Butterfield v. Byron Two ways you can contract to build a building. 1) Hire general contractor (who then hires a subcontractor) In this case, liability for the destruction of the building while under construction lies with the GC 2) Be your own GC and hire subs OWNER is then liable for destruction of the building Under 2) continued existence of the building is an implied condition of the contract. Brickman: What happens with regard to the value of the work done on a building that is destroyed (through no fault of your own) while under construction? Quantum meruit allows the subs to recover for their work.
FACTS: 1. Owner’s insurance company is suing the sub-contractor to recover what the owner had paid him 2. Building is destroyed 3. Insurance company pays the owner the money he had paid to the sub-contractor Brickman: Insurance company “now stands in the owner’s shoes.” Since they have repaid the owner, they are “effectively the owner.” 4. Insurance company argues that the subcontractor had not finished the job and therefore was not entitled to be paid Brickman: Insurance company’s position is”greedy.” They charged a premium, based on an actuarial assessment of risk, and when that risk came to fruition they don’t want to have to pay for it. Issue 1: Entire vs. Severable Contracts. In an “entire contract” there is one consideration for the whole job. In a “severable contract” there are a series of considerations for different parts. Court finds that it is an entire contract and subcontractor didn’t do it. BUT, we know this is going to turn out badly for the “greedy” insurance company… how does the court get there? Sub-contractor comes out ahead. Brickman: Every contractor takes the oath that they will never make a profit. How do we know this? Whenever a contractor is able to escape the contract price in a suit, the reasonable value of the goods and services is MUCH HIGHER than the contract price. So, therefore, every contract is a losing endeavor. BOTTOM LINE: One way or another, whenever a contractor is able to escape a contract price, the reasonable value of the goods and services greatly exceeds the contract price. SO, by finding and “entire” contract the contractor gets the right to be reimbursed for the “reasonable value of his goods and services” which vastly exceeds the contract price. Entire vs. Severable Contracts 1) If entire contract, its “not a done deal until you’ve done the whole work.” 2) If a contract is severable, each part is independent. How do you tell the difference? Tell me who wins and I’ll tell you which it is. Albre Marble Court does not want to make a doctrine that would institutionalize the payment of…. National Presto
Brickman: One case where the court “splits the baby.” This is a court of claims case (Article II court). Involved a fixed price contract for building artillery shells. New method of production used. Company incurred a substantial expense above the fixed price b/c the new process turns out to be MORE expensive. Court says “mutual mistake.” Basic rule on defense contracts is that cost overruns are VERY high and companies use their political allies to get their money. Brickman: This case is an outlier. Interesting but NO precedential value. Canadian Industrial Alcohol Co. v. Dunbar Molasses Co. o Shortage of output from refinery o D contends that the continuation of the refinery’s output was an implied condition of the contract Brickman: What is the sequence here? D sells the molasses (through contract with P) BEFORE he buys it from the National Refinery. Sold it first, speculating that when he needed to buy it he could get it for less. Brickman: Does he get out of the deal? NO If the refinery had burned down, or a strike had shut it down, etc. D could have gotten out. Here the defendant could have ensured himself of a timely supply by entering into an agreement with the refinery, but he did not. There was nothing in the agreement that said that it depended on the output of the refinery. THEREFORE, D had to either ensure that the refinery provided the molasses needed OR take the risk. Chose to take the risk and LOST. Under the terms of the deal D had to provide molasses from a particular refinery. 2/11 Canadian Industrial Alcohol Co. v. Dunbar Molasses Co. D is seeking discharge of his obligation based on the implied condition that they would be relieved of their obligation if the refinery’s production went down. Anderson v. May Unusually early frost destroys farmer’s crop of beans, which he had contracted to sell to a buyer. Court rules that he must honor the contract b/c P was under no direction as to where
to grow the beans. Analagizes to a manufacturer whose plant is destroyed by lightening and is not discharged of their contractual duties. Brickman: Most courts would not follow this decision. Continued good health of the atmospheric conditions would be considered an implied condition. Scamaty P contracted to sell grapes to D. Delivered 5 of 10 loads and then heat destroyed the rest of his grapes. o Court held that the contract was for specific grapes from a specific place and an “act of God” destroyed them, therefore the contract is void
New England Construction Company (note 3, pg. 947) Contract removes seller from responsibility for acts “beyond there control.” Mill burns down and P wants D to prove that the fire was “beyond their control.” Court rejects this argument. Lloyd v. Murphy Brickman: “Reads” like a classic Traynor case, where he prospectively lays out a new theory of frustration (as if he were a super-legislature, which in some sense he was.) At the time of the lease it was foreseeable that the sale of cars would be restricted. Can still sell cars at other locations and sell gas. This is a lease case and doctrine of frustration does not apply to lease cases. <Is this right??> Suez Canal Cases Time charter v. Voyage Charter o Time Charter: Price agreed upon could be for a fee per day or per month. During the time of the charter, the charterer runs the ship (they essentially “lease” the ship.) Charterer pays owner for use. o Voyage Charter: Hire a shipping company to ship your goods. Charter the entire ship. Ship owner quotes a fixed rate for shipping the goods. In all cases except one, the party seeking to be discharged based on the closing of the Canal lost. The closing was foreseeable. Rigid and tough attitude from the courts. They will not remove a party from contract unless it’s a very serious event, which are relatively rare. Brickman: What you see here are attempts to get relief from a contract based on the necessity of taking an alternate route (not Suez Canal) which raised the cost by about 1/3. Court says this is not enough.
Westinghouse Electric Company Case (pg. 970) 1960s there was a booming business for the construction of nuclear power plants. At that time, uranium ore was selling for about $7/lb. Nuclear power plants are shut down each year to replace the rods, check the plant, etc. Westinghouse said (for strategic reasons) that if you let us build your plant we’ll supply you with uranium at a fixed price for the life of the plant (about 40 years.) Entered into many contracts with this term ($7/lb.) Westinghouse does nothing to ensure its supply of uranium. OPEC comes around the price of uranium ore went up to $34/lb. After awhile of performing on their contracts, Westinghouse stops delivering uranium at the $7 rate, arguing frustration under 2-615 (occurrence which the non-occurrence of was an implied condition of the contract.) Court rejects this argument from the bench. Court is not “letting them lose from the onerous obligation.” View is that P prevails, but essentially mandates settlement. Deal was agreed to where Westinghouse will do the yearly maintenance of the plants for free, in exchange for being released from the deal. Natural Gas Cases Pipeline company going to build a pipeline. Investors won’t give money unless the pipeline company can get long-term commitments from buyers. All of the contracts were “take or pay”. Related to requirements contracts. “Take or pay” is where the purchaser agrees to take a certain quantity (measured in cubic yards…) on an annual basis. Pipeline company, for example, agrees to sell up to 5 billion BTUs per year, where purchaser MUST buy up to 80% of that. Even if purchaser does not need 80% of that, still must pay. These were contracts at a fixed price. OPEC leads to rise in the price of natural gas. Pipeline company buying at market rate (5 to 6 times the price from the “old gas” which is the contract price.) Pipeline companies stop selling at the fixed prices. Pipeline companies lose in court. 2-615 is there and you’ll see it on the exam, BUT courts are VERY reluctant to use it. 02/16/2009 Boone v. Eyre Objective standard Brown v. Foster Subjective standard
The court distinguishes between contracts which have an objective standard and contracts which have a subjective standard. Norrington v. Wright Huge demand for rails (i.e. steel, i.e. iron) because they were building the railroad at the time to connect the coasts. However, as the months went by, the prices started falling because the railroad had already been connected. Once the demand for nails was gone, this created an oversupply of nails and a drop in the market price. The plaintiff wants to get out of the deal because the contract price is now higher than the market price. He tries to get out of it because it is an installment contract. After finding out about the small shipment in February, plaintiff writes the defendant a critical letter stating that if they are entitled to get out of the contract, then they are giving notice with the letter and doing so. Is this a true rescission? No. This is because the lawyer is telling them that they may be able to be absolved of the contract, but are not sure so do not want to rescind the deal and possibly suffer damages if they are mistaken. Perfect tender rule: In order for the seller to receive payment, the tender of goods has to conform to the nth degree of the contract. However, this runs into problems. Nondelivery of installment, or delivery of installments in non-installment contract. - When can this be treated as a total breach discharging the buyer from further duty? o UCC 2-612: the breach must be “substantial” to impair o The UCC is not a great guide. However, in Norrington the court finds that there was a breach. Only the buyer knows how it has been affected by the insufficient first and second delivery. Thus, the burden should rest on the buyer to prove how it has been damaged by the insufficient deliveries. However, this court incorrectly puts the onus of burden on the seller where it should properly rest on the buyer. Under the contract, the buyer did not have to pay until after the goods were received, so there was no monetary loss connected to paying for goods which were not received. If the seller breached the first installment and the buyer was significantly and adversely affected, then the buyer is entitled to damages. But there is nothing in the record to prove that the buyer was significantly and adversely affected. Any material breach gives the other party damages and makes any subsequent nonperformance by the other party NOT a breach of the contract because they are no longer in contract. A nonmaterial breach only gives damages to the injured party. A partial breach gives the other party leave to sue immediately. LOOK at diagram #68, middle route. UCC 2-609: the one who did not breach the contract can demand assurances (bank letter of credit, etc.). In the absence of assurances, he can consider the contract discharged.
The perfect tender rule lives on in UCC 2-601. However, White and Summers say that the perfect tender rule was already on the decline before the UCC was written, and that the UCC de-shrines it. They hold that many other rules in the UCC have eroded the perfect tender rule. Basic test: Goods have to be “substantially nonconforming”. UCC 2-612(2): “The buyer may reject an installment which is non-conforming if the nonconformity substantially impairs the value of that installment and cannot be cured” Restatement 241 sets out the six factors. It really is so fact dependant that there is no general rule. Indication of a right to discharge if you did not have a right can cause you to incur damages. Cure (UCC 2-508): - New section in UCC, yet old in that merchants have always tried to resolve differences without going to court. - Cure is a novel legal doctrine, not novel in business practice. - Gives legal recognition to business practices to make up for a shortfall. - Only cash credit is not a cure. 2/18 Miron v. Yonkers Burden of Proof Court imposes burden of proof on Miron b/c he failed to inspect the horse promptly Brickman: Teaches you how to reason a case using the UCC. UCC 2-607(4) – issue in this case is: “Were the goods accepted?” GO TO UCC 2-606 (a) and (c) are not applicable here (b) buyer did have a reasonable opportunity inspect the goods… did he “fail to make an effective rejection? -- see 2-602(1) FAILED to make an effective rejection Therefore it is an acceptance Did he signify (represent in some way) to the seller that the goods are conforming or that he will take or retain them despite of their non-conformity? Signifying is not failing to make any representation to the seller. Signifying is a POSITIVE ACT -- Here there was no signification Here the court has to decide what a “reasonable time” is. Court says in this case it is a very short time (same day) pursuant to custom.
Terms of the sale fixes a reasonable time as 24 hours. In order for a warranty to be valid you must report defects within a reasonable time, which here is the same day. NOTE: Need to be able to do this UCC analysis, going from one to the other. What rights does a breaching party have for any partial performance by the breaching party? Rule set out in Britton v. Turner and Smith v. Brady Britton – If you substantially perform and you breach by not completing performance, you are entitled to some quantum meruit recovery (reasonable value of goods and services) Smith – progress payments made all along. Failure was to collect the LAST payment. No recovery. When only the last payment is involved (such as with employees) issue of forfeiture is less serious. Avery v. Wilson (pg. 1038) is a case where there is “judicial forfeiture” (Brickman’s words) where doctrine forbids any recovery for partially performed services. There is a waiver found in this case HYPO: I agree to sell you my car for $1000. Day comes and I say “you don’t have to pay me.” You take the car. Next day I call and say, “I changed my mind, I’d like the money.” Closest thing here is “a promise to make a gift.” CORE of the contract is not waivable. Brickman: How do you terminate a contract? Two ways: 1) contract or 2) performance Here there was no contract to terminate the original contract and there was no performance by the buyer. Therefore Seller can demand the $1000 Clark v. West What is the “core of the contract” for the $4? ABSTINENCE This is looking at it as a $2 + $4 Contract Contract can be viewed either at a $6-$4 K OR $2+$4 K Clark says that there was a WAIVER for the condition of the $4 part of the contract Clark got the money b/c his book was a bestseller. West wanted a book that sold a lot and they GOT a book that sold a lot. Brickman: Now that we’ve decided West should pay, we get to the mechanics. Court talks about “waiver” but if we’re going to look to this technically we would have to look to a set of facts that is not present here.
Suggested that you can’t waive abstention if you look at this as 2 contracts (where abstention from drinking is the core of the $4 contract). Remember the snow tire waiver. (You agree to purchase a car along with a set of snow tires. Seller delivers the car without the snow tires. You waive your right to them and seller relies on this. NO RIGHT. – If no reliance could get your right back.) Court says that Clark relied on the waiver by continuing to drink. Reading Pipe Case – Jacobs and Young, Inc. v. Kent Dispute over construction of a house. Kent (a wealthy lawyer) wanted “revenge” against builder (Cardozo saw this). Reading pipe is a standard, K was really for pipe “like” this (Cardozo did not see this, or at least did not argue it) Cardozo looks past the words of the contract (giving Kent significant power) and looks to the “real deal.” Says, in essence, “no harm, no foul.” Kent got essentially what he asked for. Cost of replacement vs. difference in value In order to replace the pipes you would have to rip the walls out, etc. HUGE COST Difference in value = $0! (House worth the same amount with Reading Pipe and the pipe that was there.) Brickman: What if the K had explicitly said that if builder did not use Reading pipe they get no money? It DID! Cardozo says “who cares?” How do you ensure that you get Reading pipe? Hire an architect to oversee the construction. Kent did this and the architect didn’t raise an objection. Indicates there was no difference (therefore no damages). 2/19/09 Brickman: Looking at the right of the breaching party to recover for part performance versus the right of the non-breaching party. Problem: A contracts to erect a building for B who promises to pay $10,000 on completion. After spending $8,000 on the work, A becomes insolvent and cannot complete it. The uncompleted building is worth $7,000 as an addition to B's property. It costs B $4,000 to complete the building, and he loses $500 in rent because of the delay. What is the amount A is entitled to? Could it ever exceed $7,000? Damages:
Owner suffers the lost rent due to the breach. Must offset the damages caused by the breach, apart from the damages. Computation: 1) K price ($10,000) 2) $10,000 – [cost of completion ($4,000)] + [damages ($500)] 3) TOTAL: $10,000 - $4,500 = $5,500 in damages to builder Brickman: Value of the complete building is assumed to be $11,000 (based on a dollar for dollar value added for cost of completion). OWNER is entitled to end up with the “benefit of the bargain” (a building for $10,000. Here, that’s what we get. $5500 to builder, $4000 to whoever completes the building and $500 for delay damages. Assume that instead of the completed building being worth $11,000, it is worth $9000; all other facts are the same. What is the amount of A's damages? Damages: What has changed here? Building is worth LESS than K price. What is the object? Owner pays K price ($10,000). Brickman: Look at the value of the land before the building was begun. It had a value. Now there is a partially constructed building. Before, it was worth X. Now it is worth X + Y. Owner has been enriched by Y. (Presumably the value or Y is >0). Owner has been enriched and he’s made some money. But he must be made whole. Think about unjust enrichment. Owner should only have to pay for the amount he was enriched. Shouldn’t require him to pay more than the amount by which his property has been augmented in value (because he is the non-breaching party.) Additional step in computer quantum meruit. There is a CAP (the value by which his property has been augmented.) Computation: The $9,000 number MEANS that the value of the building at this time must be $5,000 In order for the owner to not pay more than the amount to which he has been enriched, he cannot be required to pay more than $4,500 – this is the CAP. Even though the calculation would come out the same, still only pay the CAP amount of $4,500.
With regard to the illustration to § 346 reproduced at p. 1053, note 7, ¶ 4, note that the identical computation as in the above problems indicates that B has to pay $1000. That is why B is entitled to the return of $1800.
UCC 2-718 (2) Where the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds
(a) the amount to which the seller is entitled by virtue of terms liquidating the seller's damages in accordance with subsection (1), or (b) in the absence of such terms, twenty per cent of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller.
(3) The buyer's right to restitution under subsection (2) is subject to offset to the extent that the seller establishes
(a) a right to recover damages under the provisions of this Article other than subsection (1), and (b) the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.
Brickman: If 20% comes out to $400 and his down payment, entitled to get back the difference between $400 and the down payment…. EXCEPT that (3) says that the buyer’s entitlement to get back his down payment is offset by any damage to the seller. So, UCC 2-718 no judicial forfeiture with regard to the sale of goods. (Judicial forfeiture would mean that seller – breaching party – would get nothing.) How does this apply to the sale of land? <this is going on with some frequency now, as buyer’s default> UCC overrules judicial forfeiture (though sale of land is not covered under the UCC) If liquidated damages clause, THEN WHAT? If no liquidated damages clause, THEN WHAT?
Calculate based on down payment of <10% and >10%. Liquidated Damages DP less than 10% DP more than 10% SEE Maxton. Lawrence v. Miller Amtorg Avoids need to decide whether a NY court would have changed its view (in 1950s) based on a Congressional statute. Discussion focuses on why NY rule should not be the “reigning rule.” 2/23/09 Acme Mills is here to illustrate a point. Damages are compensatory. They are designed to compensate the aggrieved party for loses because of the breach. The word “breach” must be defined in a specific place and time. The measure of damages is the difference between the contract price and the market price at the time and place of delivery. Because at the time and place of delivery the market price was less than the contract price, the aggrieved party suffered no loss and is thus entitled to no damages. “Law day” (day performance was due). Buyer tried to speculate, “play the market” and now he’s trying to get damages. Doesn’t work. HISTORY Land held a special place in English society and came to hold a special place at law. Chancellor would hold court and apply equitable principles, which became the law of equity. In US the courts were not separate, but in federal court judges used to wear different hats depending on whether they were sitting in a case of equity or law. Most prominent form of equitable relief is specific performance. Specific performance is rarely ordered, but it is much more common in land cases. Note: Trend has been to make it a “less extraordinary” remedy (more common in more cases.) This largely comes from the “Chicago school” of law and economics. Based on the idea that parties decide on the worth of something based on information, subject to bargaining, etc. Courts generally should not be determining No Liquidated Damages
whether or not the contract was “good” or “bad” or “fair” since they have less information than the parties. Lumley v. Wagner (pg. 1075) Can order someone to pay money but cannot order someone to perform (sing, dance, etc.) Brickman: This is the “13th Amendment exception.” Cannot order someone to do something. Ordering someone to do something creates serious problems. Order someone to sing… what if they sing badly? Economic aspect of this is that they cannot sing anywhere else. You can sit here and not sing but you won’t make any money OR you can “buy out” and go sing somewhere else. Injunctive Relief: You don’t have to sing here, but you can’t go sing elsewhere for the term of your contract. Brickman: Familiarize yourself with the Tort of “Intentional Interference with Contractual Relations” --- read in any Hornbook (Prosser, etc.) Stokes v. Moore NON COMPETE – Hornbook it City Stores (pg. 1089) Brickman: Calculating damages here is very difficult. Contracts provide for complex profit-sharing in malls. Lots of provisions about “anchor tenants.” In complex deals sometimes specific performance is the only way that makes sense. Here the landlord and tenant both have an interest in doing well. LL gets a piece of everything tenant sells over a certain amount. Northern Delaware Brickman: “Hardhat problem.” -- court says “I’m not going out and supervising a construction project.” Now courts do this, through special masters. They also go into schools and other places. Brickman: Often special masters appointed in “public law” cases – where there is a public project that needs to get finished. Eastern Rolling Mills v. Michlovitz Output contract for scrap from steel maker. This scrap was of a particular quality that was not available in the Philly market. SELLER reneges. BUYER sues. COURT orders specific performance.
If court were going to award damages, how would they calculate them? 1. Uncertain amount of scrap 2. Uncertain market value (over the 5 year contract) 3. Uncertain transportation charges a. Scrap was not in Philly market… would depend on what market it was coming from UCC 2-716 (comment 2) “cover” means when the buyer goes out and buys replacement goods when the seller has reneged. Could be paying more or less than the market value. § 2-716. Buyer's Right to Specific Performance or Replevin. (1) Specific performance may be decreed where the goods are unique or in other proper circumstances. (2) The decree for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just. (3) The buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered. Brickman: Buyer has right to replevin (my goods in your possession) to go into Sellers warehouse and take “their” (buyer’s) goods, pursuant to the contract (they have become the Buyer’s through the assumption of risk) Campbell Soup v. Wentz Brickman: What was special about the carrots? They retain their color and texture when boiled. They belonged only to Campbell. They had been “genetically engineered” the old-fashioned way. Campbell wanted to keep the carrots out of the marketplace. Brickman: Who has the carrots? Campbell has the carrots. Why are they suing for specific performance? Why not just sue for the “cover difference” ($60 per ton)?
Campbell wrote the terms of the contract. They are relatively onerous. Remember that specific performance is an equitable remedy (“clean hands and all that.”) CONTRACT: Limited Campbell to $50 per ton (its own liquidated damages clause.) So, if they were to sue for damages, would not be able to get their $60 per ton. They then seek equitable relief.
Campbell loses. 2/25/09 Brickman: Is it better for the parties to a contract to negotiate a settlement or for the jury to do it? How would you make someone perform, other than putting it in a contract? Say they just don’t do it and say “sue me.” 1) Have them pay it up front – but how do you make them do this? United mine workers had this problem. Solved it by paying a certain amount into the “pot” every time a certain amount of coal was sold. DOCTRINE OF ECONOMIC WASTE play a role here. Not worth it to pay $25,000 to get $300. Remember the “heater” case where the court just decided not to enforce the language in the contract, as it was impossible for it to be performed to the specs in the contract. Difference between the market price and the contract price. How/when do we determine the market price? Contract Market Rule Gainsford v. Carroll (pg. 1129) Brickman: Probably would not come up with this rule today. Comes from the peculiar facts in the case. UCC 2-708 (Seller’s Damages) 2-713 (“mirror image” Buyer’s Damages) HYPO
Seller reneges. What damages can Buyer receive? Buyer can make the “kingdom fell” argument. Because he didn’t get his goods, Buyer lost a lot of business. Buyer’s damages could be (theoretically) infinite. What does the Seller say? “You didn’t pay me.” And they can make a chain of events argument as well. (I couldn’t buy what I need to continue my business.) BUT, this is rejected. SELLER is limited in the damages he can claim to the money not paid for the goods. BUYER is not as limited. Vitex HYPO PROBLEM based on Vitex: Assume buyer breaches a contract to purchase one widget for $10,000. D sues for damages. The market price of a widget at the time for tender was $9000. Seller’s cost of materials was $6000; cost of sales, etc.-- $600. In addition, the total of the seller’s salaries plus property taxes plus utility costs, etc. was $20,000. Seller projected that he would sell 50 widgets in that year. What is seller’s gross profit (in an accounting sense)? What is seller’s “lost profits” as calculated under the UCC and in light of Vitex?
K Price [$10,000] – Cost of material [$6,000] – Per unit overhead [(20,000/50) = $400] – Cost of sales [$600] = $3,000 Brickman: Does this “make him whole”? Is he as well off, better off or worse off than when he entered into the contract, assuming we award $3,000? PICKLE JAR. We give him $3,000. He doesn’t spend $6,000. He doesn’t spend $600. Every time he sells a widget he puts $400 in the pickle jar. At the end of the year, assuming that 50 widgets sold he has $20,000 in the jar. But what if, due to the breach, sells one less widget. Then he’s only got $19,600. BUT his overhead (which is fixed) is still $20,000. What if you give him $400 extra ($3400)? Then he puts the $400 in the pickle jar and can pay his overhead and they make him whole. Must pay for OVERHEAD. Brickman: Gainsford is a difficult case. Court says he gets overhead. Read it carefully.
§ 2-713. Buyer's Damages for Non-delivery or Repudiation. (1) Subject to the provisions of this Article with respect to proof of market price (Section 2723), the measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this Article (Section 2-715), but less expenses saved in consequence of the seller's breach. (2) Market price is to be determined as of the place for tender or, in cases of rejection after arrival or revocation of acceptance, as of the place of arrival. Brickman: What does “less expenses saved in consequence of the seller’s breach” mean? In the context of transportation costs? F.O.B. (Freight On Board) Seller vs. F.O.B. Buyer F.O.B. Seller means tender at the seller’s loading dock (may transport to railway, at buyer’s expense) F.O.B. Buyer means that seller pays for transportation (includes a shipping component) NOTE: All of the below are SELLER BREACH cases. HYPO 1 – FOB Seller (rejected goods) F.O.B. Seller contract where the good are shipped by Seller, but rejected by Buyer before the Buyer pays for shipping cost. Seller breached in that goods are non-conforming. Assumption is that where you have rejection upon arrival the Buyer will eventually cover (or has already covered) at the place of arrival (the Buyer’s place of business.) Buyer will obtain replacement goods “in his neighborhood.” Had the goods conformed to the contract, the Buyer would have paid for shipping. As a result of the breach the Buyer will save money because he will (in theory) obtain replacement goods at the place of arrival (thus saving shipping costs.) In this circumstance, Buyer is obligated to pay Seller the transportation cost. SEE UCC 2-713 (comment 1) White and Summers: Chicago mfg ships goods to San Diego company, under contract to pay $20,000. SD company rejects goods. Shipping cost is $4000. Buyer covers for $25,000. DAMAGES = (25000-20000) – 4000 = $1000
HYPO 2 – FOB Seller (goods never tendered) Assumption is that the Buyer will search for a replacement contract at the shipping point. If it obtains replacement goods at the shipping point, Buyer may recover comparable shipping costs. NO expenses saved. SEE Panhandle Only true calculation is “Market Price Differentiation” – ZERO. Assumption is that similar transportation costs will be incurred.
HYPO 3 – FOB Buyer (no shipping cost) Buyer does not pay for transportation. Since no shipping cost, no costs saved. Panhandle Trial court awarded Buyer Cover Contract – offset. Seller says Cover Contract – Contract Market. Brickman: All their calculations are WRONG. SC gets it right. (Mkt price [$62] – K price [$45]) = $17/ton Why not $67/ton (Buyer had K to sell hay at $67/ton)? This represents a profit he would have had, which he would have gotten if he didn’t deliver the hay. These are consequential damages. Court says he is not entitled to get that. Why not? Buyer did not COVER (therefore no lost profit damages)
§ 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.
Globe (pg. 1144) Primarily focuses on Hadley B formulation. Holmes attempts to establish a “tacit agreement test” in this case (eventually fails.) UCC 2-715 (2)(a) “reason to know” rejects this agreement. In addition to the Market – Contract price differential, P is seeking transportation (and associated) costs. Holmes says this is a “double recovery” and Corbin agrees. This is an F.O.B. Seller contract. Brickman: Negligent misrepresentation argument (Seller knew they were going to breach in time to notify Buyer) is pretty strong. Buyer should have Tort claim. “Double recovery” – transportation costs are (theoretically) included in the contract price and therefore recovering them would be “double recovery” Heron II (pg. 1157) Ship is delayed. Shipper is trying to get the lost profit. Issue is foreseeability. Brickman: This is a “gloss on Hadley.” Brickman’s (minority) view: Court contracted Hadley. (Most commentators think that this case enlarged Hadley). Foreseeability is not in Hadley (commentators say that’s what “arising naturally” means in Hadley.) “Sufficiently likely to result” – Brickman thinks that this contracts Hadley, adding a “likiness” requirement to the “foreseeability” requirement. Many commentators think that “not unlikely” is the NEW standard and that it is a lower standard than that in Hadley. Quick and dirty Victoria Laundry
Delayed delivery case. Trial court rejected claim under Hadley. AC reversed, holding that it should have been obvious at the time of the contract that the seller had a commercial use for the boiler (being sold) and thus lost profits should be recovered. Heron II sued for unreasonable delay in the delivery of sugar and lost profits are awarded. “Must have known that their purpose was commercial” and that it was “not unlikely” that sugar would be sold in the market (which the Seller knew existed there.) Brickman: AS APPLIED the cases expand Hadley.
3/2 LOST PROFITS UCC 2-708(1) was addended by 2-708(2) allowing sellers to seek lost profits. (2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this Article (Section 2-710), less due allowance for costs reasonably incurred and due credit for payments or proceeds of resale. Brickman: Suppose I am a seller of widgets. My Buyer reneges. Code drafters did not take into account the volume seller. When that Seller resells the widgets, for the same value, he has no damages under a literal reading of 2-708(2). BUT, in reality, if Buyer 1 had not reneged he still would have sold the widgets to Buyer 2. So, Seller has actually lost one sale. This is known as the lost volume Seller. Courts eventually recognized that this Seller is entitled to lost profits even if he resells the widgets to another buyer (presuming he can show that he is a lost volume seller.) Key difference here is between an individual selling an item (say a used car) and a volume seller. (NOTE: We are not talking about manufacturers but Sellers.) SEE Neri v. Retail Marine Corp. (pg. 1165)
Suppose Buyer agrees to purchase a car from Dealer for $2000. The retail value of the car is $1800 and its wholesale value, which is the amount Dealer paid for it, is $1400. Buyer reneges and Dealer sells it to another for $1900. Salesman received a commission of $100 on both sales. What are Dealer's damages? What is his net profit? Are damages and net profit the same? Now assume that Dealer's overhead cost per car is $200. What are Dealer's damages? What is his net profit? Are damages the same in both problems? Net profits? (See the Vitex case, No. 50). 1. Net Profit K Price [$2,000] – Price Paid [$1,400] – Commission [$100] = $500 2. Damages $300 Brickman: Purpose is to put the aggrieved party in a position of full performance. Look to UCC 2-708(2). What do we have to give the car dealer to put him in that position? $600 $500 profit + $100 commission Care dealer is a lost volume seller. Brickman: What are the damages when we consider overhead? 1. Net Profit K Price [$2000] – Price Paid [$1400] – Overhead [$200] – Commission [$100] = $300 2. Damages (to put the Seller in same position as performance) Commission [$100] + Overhead [$100] + Net Profit [$300] = $600
Brickman (on note 4, pg. 1171) – COST OF PRODUCTION: Relevant issue is not whether the post-breach mfg had the physical capacity to produce the excess widgets, but whether it would have been profitable to do. If the Seller loses no volume due to the breach, they are (obviously) not a lost volume seller. This is to say, if the Seller immediately replaces the lost order with someone who they would NOT have been ABLE to sell to before, no UCC 2-708(2). NOTE: The courts have not been very receptive to this idea. Don’t want to consider the added cost of producing that “51st widget.” If you’re looking at manufacturers probably can argue that they are at (or near) capacity, but this is more difficult with sellers. Reliance Damages US v. Behan (pg. 1174) Defendant could not show lost profits from US breach (they are too speculative). Should this deny him his reliance damages (out of pocket expense)? NO Why not? Defendant is a “dirty breacher.” Reliance damages are the cost of breach. Don’t want to allow breaching party to “take refuge” in the claim that we can’t tell if there would be lost profit. Brickman: If there is a breach, non-breaching party can forego other damages, say contract is rescinded, and seek quantum meruit damges (restitution). If non-breaching party elects to sue under the contract, allowed expenses + lost profits. \ Court here awards costs but not profits (too speculative.) SEE page 1179 Behan Formula and compare to New Era formula (they end up the same).
CONSTRUCTION CONTRACTS Kehoe v. Rutherford (pg. 1179) and Philadelphia v. Tripple (pg. 1182) Owner breaches. Builder seeks damages, but in what measure? Restitution ISSUE: Is the contract price a limit on the restitutionary award to the builder? Kehoe says YES; Tripple says NO.
Tripple (which is the majority rule) says builder can seek quantum meruit because the Owner is a “dirty breacher.” What method did the court use in Kehoe to calculate damages? First calculated the percentage of the work done. Did this by taking the fair cost of the work done divided by the total fair cost of the work (reaching a figure of 62.5% of the contract price). This came out to around $1700. Already had been paid $1800. So the contractor get NOTHING. Philadelphia v. Tripple MAJORITY RULE (K price is not a limit to damages)
Security Stove v. American Railway Express (pg. 1188) RR Express agrees to deliver a furnace to a stove manufacturer. Security Stove is trying to sell their stoves at a convention. RR Express is shipping it to the convention center in pieces, where it will be reassembled. RR Express failed to deliver 1 piece (out of 21 pieces). It was an essential piece that made it so that Security Stove could not display their stove. Seek lost profit? RR Express says lost profits are too speculative. New mfg, cannot determine how many sales he would have made. RR Express argues that they should not have to pay for Security Stove’s expenses, either. Their argument is that since SS cannot show any lost profits, then they cannot collect reliance damages (since they would have incurred those costs anyway and they cannot show that they lost any benefit from RR Express’ breach.) Court rejects this argument. Says that since RR Express is the breaching party, they must pay reliance damages. But what are these damages? Hadley B (foreseeability) damages. RR Express knew that it was possible that any piece being shipped was a key piece and therefore finds that RR Express had adequate knowledge and had to pay reliance damages. L. Albert & Son v. Armstrong Rubber Co. (pg. 1197) Case is about machines that are supposed to recondition rubber. Two are delivered on time and two are delivered late. Why were we reconditioning rubber?
To reuse it for wheels and such. Rubber trees are in Malaysia (this will be on the exam). The Japanese have occupied Malaysia and so we can’t get it. BUT, the war ends (during the delay in getting the machines) and the price of rubber goes way down. Buyer claims breach by Seller rescinded contract. Seller is suing for contract price payment. Buyer is counter-claiming for reliance damages. ISSUE: How much reliance damages can the Buyer claim? Court allows Buyer to offset damages owed Seller by $3000 for cost of a foundation (reliance damage). Brickman: How does the Seller argue against this? Says that Buyer must prove lost profit. These expenses may not have been covered, if the business was not profitable. Court says that Buyer is allowed reliance damages. Who has the burden of showing the losses that Buyer would have incurred? SELLER. Neither party can realistically show this (whether profits or losses would have been incurred.) In theory, if Seller could have shown that Buyer would have incurred losses, then the losses could not exceed Defendant’s reliance on Plaintiff’s performance. They could not, then, end up accruing to the benefit of the Plaintiff. In short… Seller is breaching party. Buyer is allowed to offset what he owes by his reliance cost (even though he cannot show lost profits. Only foundation claim is held up as reliance cost.) Seller is allowed to argue to “offset” the reliance damages by showing lost profits up to the reliance expenses (here, $3,000). This is not (realistically) possible to show. SO: Seller is entitled to K price – Buyer’s reliance expenses + “offset” for lost profits. READ: 1202-1269 March 18 & 19: Review UCC for Buyer’s Damages and Seller’s Damages – this will be done quickly. Don’t take too many notes. Prepare by reading through the damage sections. 3/4
Power of Parties to Control Remedy and Risk Generally lowers the transaction cost for parties to be able to set their own terms for damages in case of breach. BUT, can be problems where parties have unequal bargaining power. Previously there were harsh remedies for breach of contract. Courts no longer (generally) recognize penalties for breach, but try to make non-breaching party whole. Over time courts have moved away from “turf” arguments (we get to decide the remedy for the breach) towards acceptance of the parties themselves choosing the remedy. Courts are now more willing to allow for “displacement” of their role. Courts today generally strongly support arbitration (because it reduces the burden on the courts.) Other factor is the rise of the Law and Economics movement. Idea that law should promote efficient exchanges. Leads to a greater regulation of party Nute v. Hamilton Mutual Insurance Co. (pg. 1203) If the contract specifies no legal remedy, it will always be struck down. SEE introduction notes (Maybley) where there was a contract for life and they didn’t honor it, saying there was no legally cognizable remedy. The courts said this was invalid (you got something, you have to pay for it.) Smith BarneyShearson v. Sach In NY law only judges can award punitive damages, not arbitrators. This is largely irrelevant, however, since federal arbitration law usually applies. In this case, NY adopted Mastroboiano -- Contract with broker had a choice of law provision for NY law in arbitration. Supreme Court concluded that the arbitration clause does not support that punitive damages are prohibited in arbitration (even though they are prohibited under NY law). Court said the contract was ambiguous and, as such, interpreted against the drafter (brokerage firm) allowing for “substantive principles of NY law” but disallowing special provisions (such as the provision that arbitrators cannot award punitive damages.) Brickman: Can be claims that while there is an arbitration clause, a party did not agree to arbitrate a specific issue. Courts have said it is their job to decide, if there is an arbitration clause, whether something is arbitrable. In large measure, however, they have delegated this responsibility to arbitrators to decide if the issue is arbitrable. <Since arbitrators are paid by time, there is a natural inclination to find something arbitrable.>
Arbitrators can fashion remedies. Did this in a case with IBM. Every time IBM changed its PC, arbitrator said that for the next 25 years changes in configuration must go through the arbitrator to see if changes made will inhibit others. EXTREME example of how arbitrators further their own interests. Arbitration is a closed process so we don’t know exactly what happens. In consumer contracts arbitration clauses are put in to avoid class action suits.
Kemble v. Farren (pg. 1223) Common Law three part test for liquidated damages: 1. damages difficult or impossible to ascertain 2. reasonable in light of the anticipated harm a. some courts hold that it also must be reasonable in light of the actual harm b. UCC provides for this (though it used or not and) so it can be either the anticipated harm or the actual harm 3. must not be intended as a penalty (“do this or else”) FACTS Liquidated damages clause for 10,000 pounds. Very large. Court strikes this down as a “strawman” saying it is actually a penalty clause. They say it is not a “good faith effort to estimate actual damages.” Alyssa the Happy Camper (Happy Kappy) HYPO Alyssa goes to the same camp for nine years. One year the phone company screws up and the call to get her a spot doesn’t go through. The camp fills all their spots but Alyssa can’t go. The camp loses good will. They lose repeat business. This is a real loss. It is liquidated damages. It isn’t just the immediate damages of whether the camp fills up. Say the camp leases its facilities to someone and they fail to open the camp. There are liquidated damages here. BUT in McCarthy one of the judges says there are no liquidated damages (because he wasn’t a “happy camper.”) Difficult to measure loss of “goodwill.” Illustration of the difficulty of measuring damages.
Brickman on Economic Consideration Adherence to a freedom of contract approach says that courts should largely defer to parties in their construction of damages clauses. Whether and why rational parties would go to the trouble of negotiating liquidated damages clauses?
Getts & Scott Article Difficult for promissor to recover losses for things of “subjective value” (goodwill, etc) Liquidated damages provision is in essence an insurance policy. Promisor can provide this insurance more cheaply than a third party b/c they are in a better position to calculate the risk of non-performance. Getts and Scott refute the commonly held view that such a clause necessarily represented overreaching by the promissee. Enforcement would be maximized by enforcing these clauses. BOTTOM LINE: Should be a strong bias in favor of enforcing these provisions unless there is strong evidence of overreaching. UCC 2-718. In 2003 there were substantial amendments to Articles 1 and 2 of the UCC. NY has not adopted these changes. Make sure you are reading the PRE-AMENDED version of the Code!!! 2-718 (1) the last sentence is taken out in the amendment. Of course an unreasonably large or small liquidated damages clause is taken out. The broad language of the rest of the article is sufficient to indicate this. 2-718(2)(b) is removed in the amendment. TRANSTION to Better Food Markets (note case on 1231) Is the CA statute a 2-718 or 2-719 clause. Does it matter? What is the CA statutory law with which it is concerned? 3/5 Better Food Markets v. American District Telegraph Co. (note, pg. 1231)
Better Foods suing ADT for consequential damages. ADT failed to respond to an alarm. Contract said liquidated damages were for $50. SEE CA statute Section 1670 & 1671 (pg. 1227) Brickman: Is the liquidated damages provision of this contract valid under the CA statute?
Two elements of the statute: 1) Were damages capable of ascertainment? Supermarkets know how much cash is in the register. Every day they count it up and give it to someone (Brinks) to deposit it in the bank. On average they will have an idea of how much is in the register. 2) Was the $50 liquidated damages clause a real attempt to estimate these damages? Clearly not! Would have been much higher (and was). Brickman: Court upholds this provision. WHY?... Making public policy: 1. Identify the goal a. Reduce crime i. Inefficient ii. Deadweight transfers iii. Increases the price of goods 2. Identify the policies we want to adopt to effectuate the goal a. Encourage growth of private security businesses 3. Identify the factors necessary to promote this business a. Want to reduce costs – adopt policies that affect the cost structure 4. Allocation of liability for failure of the system to work (affects cost structure) a. Marketplace is a regulator (of a sort) b. Must choose who to assign the risk (primarily) i. Should be ADT 1. this is a cost which must be passed on to the consumer 2. What effect on the consumer? Less careful – this may actual raise crime a. MORAL HAZARD
c. Look for least cost avoider i. Here the court says it is the supermarket BRICKMAN’S POINT: Court completely ignores the statute, presumably for the policy reasons mentioned above (want to facilitate the development of this security industry.) HYPO You try and snap a picture of ET, but the film fails. What damages can you get from Kodak? ONLY the value of the film. That’s what it says on the box and there are limits on consequential damages. Brickman: Vast majority of business to business contracts have limitations on consequential damages (usually to repair or replacement). Historically (and this is changing) only car buyers had the power to stop sellers from limiting consequential damages. This was because of unequal bargaining power (Big Three were hugely powerful and car buyers had no leverage.) UCC 2-719 (2) (2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act. SM Wilson v. Smith Smith sells Wilson a machine for digging coal mines. Smith limited its liability to repair and replacement. Machine Smith sold did not work properly. Wilson seeks consequential damages. Court hold that 2-719(2) does not necessarily authorize consequential damages (only damages to make non-breaching party whole.) Brickman: “…fail in its essential purpose” means that it simply cannot perform up to contract specifications (even with repair). Klar v. H & M Parcel Room (pg. 1237) Klar checked a parcel containing valuable furs. Parcel room lost it. Claim their liability is limited to $25 because that’s what it said on the parcel check. Court says that the parcel room did not provide sufficient notice and thus was liable.
Brickman: You can limit your liability in a bailment, but the bailor must be aware of the limitation. Henningsen v. Bloomfield Motors, Inc. (pg. 1243) Action brought by the wife of a purchaser of a car which veered off the road (possibly due to mechanical defect.) There was a potential privity problem (didn’t buy from mfg, bought from dealer) but court says its alright. Court holds that carmakers cannot use their enhanced bargaining position to remove liability. 3/9 Old common law tradition that landlords and tenants had independent contracts (so the tenants obligation to pay rent was separate from the landlord’s obligation to provide the property.) This tradition (which stood for more than 900 years) was changed through means of common law (judges changed the law.) Fair v. Negley (pg. 1257) Holds that there is an implied warranty of habitability in all landlord tenant contracts. This is based on public policy grounds (superior bargaining power of landlords, as well as inability of tenants to adequately inspect, scarcity of housing, and effect on public health and safety.) Anticipatory Repudiation Hochester v. Hurst (modern rule) Performance was to commence on June 1. Prior to June 1, P is engaged on equally appealing terms to fulfill on July 4. Court concluded that it had been given two choices: 1) P could not sue until June 1 and by taking a new contract before June 1 he has given up his right to sue. 2) P could sue immediately Option 1 is “unacceptable on its face” because it means you can breach a contract and force the party with whom you were dealing to seek another contract (thereby giving up right to sue) or remain idle (economically inefficient). Court rules for P.
Brickman: Neither the court nor the lawyers considered the fact that by allowing P to sue immediately it destroys D’s option to withdraw the repudiation. OPTION 3: P can look for another job without giving up his right to sue, but he cannot sue before “law day” (June 1 here). If D were to withdraw his repudiation and P had already taken another job (and therefore could not perform original K with D) P is not obligated to perform (reliance). Courts realize this third option in Daniels. There is also a fourth option, which the court finds in Roehm. Daniels v. Newton (pg. 1270) -- OLD RULE Daniels contracted to purchase land from Newton, with payment due on June 15. Newton contracts to sell the land to a third party and repudiates the contract on May 29. Daniels sues on May 30. Court holds that the suit is premature (has to wait until law day – June 15). Roehm v. Horst (pg. 1279) Installment K for the sale of hops. Buyer sues Seller (who has repudiated.) Here SCOTUS is deciding state substantive law (this is pre-Erie). Previous doctrine was that if Seller has disabled himself from performing on the contract (say by selling a piece of land to another buyer) Buyer could sue immediately. SCOTUS expands this doctrine to repudiation. If one party repudiates a contract this allows other party to sue at once. Court criticizes the reasoning of Daniels. SCOTUS makes a “strawman” argument about promissory notes (which is not before the court). Argues that there would have been four suits here, which would be inefficient. This is actually not true. You only get “one bite at the apple.” All could have been liquidated together. Phelps v. Herro (pg. 1291) HYPO: You give a party a promissory note with payment due on June 1. You repudiate on Feb. 1. Phelps says that you cannot sue until June 1, even under the law of anticipatory repudiation. Court says that if the note were paid on February 1, the note would be worth more (due to the time value of money – interest).
This is probably still the majority rule. The modern law, however, allows for suit when the repudiation occurs, with the damages discounted to the current value. Mathematically it’s a very simple process which simply depends on the discount rate you use. HOLDING: Cannot sue under anticipatory repudiation where the sole obligation is a promise to pay money in the future.
New York Life Insurance Co. v. Viglas (Note 1 on pg. 1298) Whole Life Insurance: Two parts. Life insurance part and investment part. You are giving the Life Insurance Company money on top of your premiums purely for investment purposes. You get a dividend on the second part (and bonuses if the Life Insurance company does well.) You can borrow against this. Term Life Insurance: No cash value. You are only paying premiums. Much cheaper. Here it is a whole life insurance policy. P becomes wholly and permanently disabled. Under this policy P does not have to pay premiums and starts collecting monthly payments from the insurance company. At some point D stops paying, claiming that P is no longer “totally and permanently disabled.” Brickman: There is significant abuse of the “permanent and total disability” conditions. See Long Island Railway scam of a few years ago. P is suing for full payments discounted to current value. CARDOZO concludes that the company was acting in good faith in carrying out the policy provisions as it understood them. The company was wrong but it was not a repudiation. Company breached but did not repudiate. Awards P damages (around $98) and orders reinstatement of the contract. Brickman: Focusing on the procedural approach which the company might have followed. They could have sought declaratory judgment. (Section 2201) This is probably the preferred strategy. In this case the insurance companies mounted a serious campaign (including amicus briefs from all the “white shoe” insurance providers) against the “Kentucky Rule” (which would have mandated investigation of “permanent and total disability” claims). Argument was that it would have been too expensive to employ the investigators.
Queries with Viglas: How equitable is this result to P (assuming he is totally disabled)? Will he have to sue and incur attorney's fees each and every time the insurance company considers him no longer totally disabled? How equitable would it be to award to P the damages he was seeking from the insurance company? Suppose P had prevailed and the next week he was miraculously cured. Could the insurance company get its money back?
What would be an equitable award or disposition of the case? If the Supreme Court had agreed with First Circuit that there had been "repudiation" as well as "breach", then, on Cardozo's reasoning, what result do you come to? Missouri Furnace (pg. 1301) is paired with Olafson (pg. 1308). Missouri says you can’t pay immediately, Olafson says you must pay immediately. BOTH ARE WRONG. 3/11/09 When you sue for damages on an installment contract, you get “one bite at the apple.” Any damages you do not seek in your initial suit are LOST. Brickman: Corbin criticizes Phelps b/c we can discount damages to current value. Missouri Furnace (pg. 1301) Repudiation of a futures contract. At the time of repudiation P entered into a contract for $4/ton to cover. This was an artificially high value due to an overexcited market. P seeks damages for the difference between the price they paid and the contract price. Court refuses to award those damages, instead awarding damages based on the value of coke at the time of each delivery. (Market excitement was brief in duration and soon settled down to much closer to the contract price.) Brickman: What does a company (say Pillsbury) do to fix the price of a commodity (say wheat)? They look to the futures market When there is a breach of a contract (repudiation) what are your options? 1. Cover immediately on the futures market 2. Wait and see for a bit and then cover on the futures market 3. Wait until “law day” (date of delivery) and then cover on the “spot market” a. No real way to predict what the “spot price” will be
Missouri Furnace court is WRONG in saying that the non-breaching party made a bad decision. There was no way to know what the price in the future would be. Olaffson v. Coomer (pg. 1308) June 3 Seller makes an “unequivocal repudiation” refusing to sell the corn to Buyer. Buyer had already made a contract for the resale of the corn. Buyer went out into the market and bought corn at $1.35 and $1.49 per bushel in the fall. Buyer sues for the difference between the price paid and the contract price. Court rules that Buyer was obligated to cover immediately upon repudiation (on June 3) and therefore could only recover the difference between the market price on June 3 and the contract price. Brickman: There was a peculiar fact in Olaffson (special contract provision – see pg. 1311 par. 1) which may have validated the result, but the court does not base its holding on that provision. Therefore the result is WRONG. Should have relied on UCC 2-610(a) as commonly understood (giving Buyer a “commercially reasonable time” to cover.) Brickman’s Clever Ways for a Seller to Repudiate without Repudiating 1. Looks like market price is going up 2. I’m very unhappy about this deal 3. I’m looking into my options 4. It might be a good idea for you to look elsewhere 5. I’m not sure I can go ahead with this deal 6. Given what I owe for diesel and my tractor I don’t think I can go ahead 7. I really don’t think I can go ahead with this deal 8. I’m not going to supply the corn (CLEAR REPUDIATION) **If you can wait a month, UCC 2-609 is “the way to go”** SEE Coal Hypo and go through the “center route” (not “side routes”) of the UCC diagram
As of WHEN do you measure Buyer’s damages? § 2-713. Buyer's Damages for Non-delivery or Repudiation. (1) Subject to the provisions of this Article with respect to proof of market price (Section 2-723), the measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this Article (Section 2-715), but less expenses saved in consequence of the seller's breach. o At the time Buyer learned of the breach o Could be: When Buyer actually became aware of the breach A “commercially reasonable time” after such knowledge Delivery day White & Summers View (Minority) vs. Majority View – Anticipatory Repudiation Majority rule is that damages should be measured from the day when the Seller repudiated. Minority (W&S) rule is that when the Buyer “learned of the breach” means on the day delivery was due. o if Code drafters meant “at the time of repudiation” why didn’t they say so? o UCC 2-610(a) gives you a “commercially reasonable time to act” – if we interpret 2-713(1) to mean from the time of repudiation, it will hurt Buyer’s rights under 2610 b/c the market price is uncertain o If “learned of the breach” means “learned of the repudiation” then the court would always look to time of repudiation regardless of what happened after – making 2723(1) superfluous o “Learned of the breach” means from time performance due In anticipatory repudiation cases where the trial occurs after the time of performance W &S say that “learned of the breach” time is “law day”. Majority says that “learned of the breach” means when Buyer became aware of the repudiation plus a “commercially reasonable time.”
MARCH 12 – 1313 - 1328 MARCH 16 (Monday)– SELLERS DAMAGES UCC MARCH 18 (Wednesday) – BUYERS DAMAGES UCC MARCH 19 (Thursday) – 1329-1361 ……………………………………………………………………………………………… 3/12/09 MITIGATION Non-breaching party has duty to mitigate damages (by stopping production/work, etc.) after repudiation, unless such mitigation would result in waste (such as a half-build widget which would be completely useless.) Non-breaching party must decide whether to complete production (or whatever) after repudiation. If they choose to continue, must show they did so in good faith. Clark v. Marsiglia (1845) pg. 1313 Right at the beginning of “anticipatory repudiation” doctrine. P begun work to restore paintings -when D told him to stop, p continued anyway and sued d for the full k price I. Holding-When breach occurred, p was not at liberty to go forward and incur more expenses to be charged against d a. UCC exceptionif you are a manufacturer and you believe in good faith will cost less damage than if you just abandon then in those situations you are permitted to finish. Jameson v. Board of Education Jameson had the obligation in her first suit (after two months) to seek full damages under the contract. Cannot get damages in this second suit. Jameson also had the obligation to seek alternate employment. Non-breaching party must try to offset the breaching parties damages (not entitled to “sit back” for a period of time.) QUESTION: What if teacher were offered a position at a lower wage? Brickman: “Host” of questions with regard to this doctrine. Most courts hold that you don’t have to take employment too far away, different kind of work (schoolteacher doesn’t have to become a coal miner). If you take employment at a
lower rate, that hurts your earning potential into the future and the courts take this into account. Whether you are compelled under the mitigation doctrine to take similar employment at lower wage is debatable and rulings are inconsistent.
Mt. Pleasant Stable Company v. Steinberg (1921) pg. 1316 Lost volume seller. Think about it like a solo practitioner vs. a big law firm. To the extent that a solo practitioner takes on a job and there is a breach (a repudiation) the solo lawyer immediately takes on another job and this is mitigation. In the case of a law firm, there is not mitigation because the law firm could have done the additional job as well. Brickman: The issue here is “a measure of the elasticity of capacity” (not really “personal services”). The more elastic your capacity, the less duty to mitigate… the less elastic the more duty to mitigate. Of course there should be offset for the expenses saved (such as not paying the associates at a big law firm – though typically the law firm will argue the associates were already onboard and would be getting paid anyway.) U.C.C. Sect. 2-708 Seller's Damages for Non-acceptance or Repudiation (1) Subject to subsection (2) and to the provisions of this Article with respect to proof of market price (Section 2-723), the measure of damages for nonacceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this Article (Section 2-710) but less expenses saved in consequence of the buyer's breach. (2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this Article (Section 2-710), less due allowance for costs reasonably incurred and due credit for payments or proceeds of resale. QUESTION: What is the different between and entire and a divisible contract? Similar to the situation with a unilateral and a bilateral contract. “Tell me who wins and I’ll tell you whether its unilateral and bilateral contract.” SEE Butterfield (American doctrine of repair case). Question becomes whether each of the payments is part of a larger contract OR whether it is a divisible contract where each payment represents a separate contract. Today this is no longer relevant.
Louise Caroline Nursing Home, Inc. v. Dix Construction Co. pg. 1324 What damages is P seeking? Value of building at completion – value of the building at time of default BREACH OF WARRANTY DAMAGES --difference in value of the thing as promised and the thing as delivered Say we have a contract for a certain grade of tomatoes (suitable for eating) and Seller delivers a lower grade of tomatoes (suitable for sauce). Buyer accepts and then sues for the difference in value between the tomatoes contracted for and the tomatoes delivered. Only available if you accept. Brickman: Were the goods accepted in this case? YES. Goods as delivered is the incomplete building. Goods as promised is the complete building. P will go ahead and complete the building, at K cost (assuming no loss of value from delay). Damages from D then would be a windfall (“something for nothing.”) Under Breach of Warranty standard if Seller breaches Buyer is entitled to market value at time of tender – contract price.
Third Party Beneficiaries B→A→C Q1: If a doesn’t pay C, can C sue? Q2: Can C cut out A and go directly to B? Vrooman v. Turner (pg. 1346) Brickman: Important today because property values are declining.
How property is conveyed Blackacre is worth $200,000, owned by Seller. Mortgagee (Bank) owns mortgage worth $100,000. Option 1: Buyer can pay cash. Transfer of deed at closing (along with other documents. Seller, Buyer (G) and Mortgagee (Bank) present. Buyer (Grantee) gives Seller $100,000 and Bank takes $100,000. Mortgage is satisfied and Buyer owns property. Option 2 (rare): Buyer gives Seller some amount of money (say $80,000) and takes on the mortgage obligations. Buyer is unlikely to trust Seller to convey land properly. Option 3 (common): Buyer (Grantee) needs to borrow money to buy property (say $100,000) from Bank2. Bank2 takes out mortgage on the land. Four parties at closing: Seller, Bank1, Buyer (Grantee) and Bank2. Bank2 puts in $100,000, Buyer puts in $100,000, Bank1 takes $100,000 and marks mortgage as paid in full, Bank2 gets Seller to sign agreement to pay $100,000 or lien created on the property, Seller takes $100,000. Closing Diagram 1. Buyer (grantee) puts in $100,000 2. Bank 2 puts in $100,000 a. Bank 2 gets Buyer to sign a document binding him to pay back the $100,000 creating a lien on the property (mortgage) 3. Bank 1 takes $100,000 and marks mortgage as paid in full 4. Seller takes $100,000 Option 4 (when mortgage rates have risen beyond current mortgage rates – say from 5% to 7%): In this scenario Seller has a valuable asset (the mortgage). <<This led to the first S&L crisis. S&L’s were “borrowing short” and “lending long,” Lending based on borrowers (who could take their money out at any time) but giving 30 year mortgages. Banks have to charge more to lend money because they are paying more to borrow money. Say you have a 5% mortgage (where S&L’s are paying 3.5%) and the market rate has gone up to 7%, Seller has an asset with their 5% mortgage. Buyer might be willing to pay more for the right to pay off the money at a cheaper rate. This no longer occurs, b/c the S&L’s got “burned” and inserted “due on sales” clause, saying that full mortgage was due at time property was sold. Now there are no more pure S&L banks.>>
Bank has 2 options. Foreclose on land or sue Seller on promissory note. When seller sells to grantee and grantee assumes mortgage, seller does not lose their liability.
Option 5: Seller sells to Grantee (Buyer) and the mortgage is not paid off, but Buyer does not assume the mortgage. In scenario where Buyer and Seller want to keep the mortgage (have Buyer assume the mortgage) there are two options: 1. Third Party Beneficiary Contract (A B C) – promise by Buyer (A) to pay Seller’s (B’s) debt to Bank (C). This creates rights by C against A in event of default. Bank has three options(not exclusive): Foreclose, sue A or sue B. 2. A does not promise to pay B’s debt to C. B relies on the fact that if A does not pay C then the bank will foreclose. If A does stop paying then C can foreclose and sue B, but CANNOT sue A (because A never assumed the mortgage.) Different between assuming a mortgage and taking subject to a mortgage. Question: What happens when there is a break in the chain of assumption? A sells to B2. B1 sells to B2. B2 sells to B3. B3 sells to B4 but B4 does not assume the mortgage (takes subject to the mortgage.) B4 sells to B5 who assumes the mortgage. Why would B5 do this? NOBODY KNOWS that B4 is not subject to the mortgage. Vrooman says the break in the chain means that B5’s assumption is not valid. B5 assumed an obligation that did not exist (B4 had no obligation to the bank) and therefore B5 does not have an obligation to the bank. Break in the chain of assumption means that subsequent assumptions are not binding. Seller has a contractual right with B1 that B1 will be primarily responsible for any deficiency. Say bank sues Seller. Seller can turn around and sue B1 (if he can find him). Can extend this out to other Bs.
Seaver v. Ransom -- CARDOZO (pg. 1356)
Husband never had title to the property. Husband only had life estate, so there was no property to be put into a trust. Fairness dictated that the husband (or his estate) pay the niece the money for the value of the house. (Husband was supposed to put this in wife’s will, but did not.) CARDOZO finds a “gift promise” with an act under third party beneficiary theory. Does not lay out a general rule. Based on the facts of the case. Plaintiff was a donee beneficiary. Has to deal with some language in Vrooman -- ends up expanding third party beneficiaries. Leads into tripartite group of : creditor beneficiaries, donee beneficiaries and losers. Now we’ve just got winners and losers (creditors and donees merge.) 3/25/09 Socony-Vacuum Oil Co. Inc. v. Continental Casualty Co. (pg. 1364) Socony-Vacuum
At common law, laborers or material men who weren’t paid could file leans against the building, but not on gov’t buildings. o The Miller act requires that the general takes out a payment bond which allows suit for non-payment of employees of the general or sub. Sub workers must give written notice w/n 90 days of the last work done.
In this case the general has both a performance and a payment bond.
If there is a claim against the bond, the bonder will pay it but will seek to get the $ from the general. So general still has skin in the game. o Sub had to furnish a surety bond (covered general in case there was liability under the Miller act) o The plaintiff is a worker who filed his claim too late to file against the general’s surety (under the Miller act) and is sueing under the subs surety. But the subs surety was put in place at the request of the general to protect the general. o But the court implied an intent to benefit the materialmen (the surety was put in place because of the Miller act which was in place to protect the workers).
Queries with Socony-Vacuum: What kind of 3rd party beneficiary is the P here? (The "sub's" surety is the promisor and the "general" is the
promisee.) What does Corbin say? Intended beneficiaries Williston? What is the difference between a performance bond and a payment bond? (see note 1, p. 1370). Note & Corbin: In private contracts, however, the owner can be saddled with mechanics' liens if the general contractor fails to pay the labor and material suppliers. Since such liens are available to the suppliers, a payment bond may be interpreted as only providing indemnity for owners against mechanics' liens. Under this interpretation, the laborers and materialmen become incidental beneficiaries. The language of the bond is critical. Where a payment bond provided that the principal shall pay for all equipment used in the project, the designer and manufacturer of the equipment used in the project was an intended beneficiary of the payment bond
Lucas v. Hamm (pg. 1371) Issue of lawyer’s negligence. If a lawyer “screws up” (say in drafting a will) can a thirdparty beneficiary sue the lawyer? Courts have historically said “no” largely on grounds of privity (lawyer represented the testator, not the third party.) Often comes up with regards to corporate documents (such as errors in security documents drafted by a lawyer.) Purchasers want to sue lawyer for error. Lucas is the first case where a state court held that a third party could sue a lawyer on the basis of third party beneficiary theory. Court ultimately decided that the lawyer had not been negligent, based on the fact that he had screwed up the rule against perpetuities and nobody really understand the rule against perpetuities. Brickman: This is a “this is what we’re going to do going forward” case. Note that this is a Tort case (negligence) and not a contract case (as these usually would be.) Court says that Contracts and Torts are related. Message by the court is: “Lawyers beware! We will allow third party beneficiary suits with regard to negligently drafted wills in the future.” Heyer v. Flaig (pg. 1375 note 1) Court allowed suit against lawyer. Cause of action in Tort under Lucas.
Brickman: Lawyers are more liable than they have in the past, but it varies from state to state. Lawyers are increasingly liable for actions they take which affect a third party (whether through negligence or otherwise.) Very factually dependent. Used to never be allowed and now sometimes is allowed. EXAMPLE: In the area of purchasing businesses, where a third party relies on documents a lawyer drafts for purchasing the business, if there are errors they (increasingly) can sue. Brickman: With regards to wills, usually contract action won’t hold but tort action will (based on a contract principle.) Normally third party beneficiary theory creates contract rights only, but in the area of professional responsibility have been held to create a tort right. Isbrandtsen Co. Inc. v. Local 1291 (pg. 1380) Suit against a very powerful union. (At this point in history, longshoremen could almost literally shut down the country.) -- Brickman: This is a factor to be taken into account. LMRA (Labor Management Relations Act) provides that labor-management relations law is delegated in some measure to courts. Courts had been restricting suits by labor unions and allowing suits by management. PARTIES Shipowner Isbrandtsen (subcontracting to Scott Paper) Scott was to load and the vessel Stevedorian companies (hire longshoremen) Levino (largest in Philly) was hired to unload the ship Levino had a deal with union which included a “no-strike” clause Why did Levino negotiate a no-strike clause with the union? Marketing tool. Gives assurance to potential customers that they will perform. (There were frequent strikes at this time.) Isbrantdtsen is paying the shipowner on a monthly basis and the delay in unloading cost Isbrandtsen money. QUESTION: Is there a basis for Isbrandtsen suing the union? Court says NO. They were not in privity. Isbrandtsen contracted with Scott who contracted with Levino who contracted with the union. Too far removed. HYPO 1
Levino negligently delays unloading the ship and as a consequence Isbrandtsen which agrees to transport the pulp and is harmed by the delay (set a price based on prompt unloading.) Can Isbrandtsen sue Levino as a third party beneficiary under the Scott-Levino contract? HYPO 2 Can Scott sue the union? (Was the promise by the union to Levino for the benefit of Scott?) Brickman: So if I is 3rd party beneficiary of SL K and S is 3rd party beneficiary of LU K then I and U are connected and I is then a beneficiary of the SL contract and an assignee of …. In Socony court went to great lengths to find obligation. Here court goes to great length to find NO obligation. Court did not want to allow suits against unions by any party other than management. This is a policy judgment. Courts do not want third parties “interfering” with labor management relations, even if it may be allowed under third party beneficiary rules. 3/30/09 Practice exam. Take it under exam conditions. Isbrandtsen Reviews third party damages. HR Moch Co. Inc. v. Rensselaear Brickman: What is the policy basis for this decision? How is it similar to another case we’ve read? Suing the water company for not providing sufficient water. There was a fire and there was not enough water pressure in the fire hydrant so the building burned down. CARDOZO says there is no “legal duty.” Why? Policy goal is to minimize fires. (Similar to ADT case.) If you place a burden on the water company to face liability in the case of a fire, there is a cost.
Brickman: Where you place the liability affects the number of fires. If you put the onus on the water company you face a “moral hazard.” (Homeowners and businesses won’t have the incentive to take precautions.) Insurance can actually increase incidence of bad things happening. Motorists, for example, may take more risks on the road if they have airbags and anti-lock brakes, etc. QUESTION: Who is the least cost avoider? CARDOZO uses the same analysis as in the burglary case. Putting the owner at risk is likely to decrease the number of fires because owners will be more careful. Brickman: Social policy is often key to third party beneficiary theory. A Brief History of Private Property Wealth used to be measured in gold. After the Norman conquest in 1066 moved to land. Later moved to indirect ownership (stocks, etc.). Over the last 70 years there has been a shift to government entitlements as a source of wealth. The more you look, the more you see government contracts (particularly in the Defense industry) as a source of wealth. Reich argues that this new source of wealth should serve the same function as other forms of private property -- to protect the individual from the state. Freedom of speech would have much less meaning if it wasn’t protected by the “moat” of private property. It enables you to be free from the servitude that you would be under if your wealth stemmed from the government. Government created wealth should be infused with the same “protective aura” that other rights are. Third party beneficiary theory gives third parties the ability to assert rights based on contracts between government and contractors (giving more protection to those affected by, and benefiting from, government contracts.) Martinez v. Socoma Companies, Inc. Company had received a contract under the Equal Opportunity in Employment Act (part of LBJ’s “Great Society.”) In this case, the court finds the plaintiffs to be “incidental beneficiaries” and thus not eligible to sue under third party beneficiary theory. Brickman: Other courts with similar facts have gone the other way. Holbrook v. Pitt
Here the court finds plaintiffs were intended beneficiaries. Book refers to this as part of Reich’s “New Property” movement, protected by a “zone of privacy.” Brickman: Rise of class action lawsuits has had a huge affect on society and has given courts much more power in policy decisions (can literally wipe out whole industries.) 4/1 ABC 1) If there is a failure in consideration from A to B can this be used by A against C? 2) If there is a failure of consideration from B to C can that be used by A against C? 3) Can the contract be restructured? Copeland v. Beard (pg. 1421) Vendor (Seller) sells to Buyer and Buyer assumes certain debts of the Seller. Buyer resells to second Buyer in part consideration that the second Buyer will assume the debt that the second Buyer had required the first Buyer to assume. The second Buyer then enters into an agreement to relieve debts… Second Buyer assumes the debts that the first Buyer assumed. Seller renegotiates the deal with the first Buyer to abrogate his obligation to a creditor of the Seller. Can Seller sue the original purchaser? NO Creditor’s rights are purely derivative of the transaction between Seller and Buyer. Seller and Buyer can renegotiate the deal so long as the creditor has not already relied on it. Creditor still has the right to go against the second Buyer, but his right to assert a claim against the first Buyer is terminated. Rouse v. US (pg. 1428) Bessie Winston purchased a heating system from Associated (who installed it). BW then sells the house to R and included the heating system in the deal. (R was to pay the debt on it.) o Debt was insured by the federal government (to the bank) o R defaults and the bank pays out, recovering from the US, and US now stands in the shoes of the bank Brickman: Here we have a promissory negotiable in form. Discussion of law merchant. To make the note eminently saleable the concept of a negotiable instrument was created in the 17th century. Note must be in “the magical form” and if it is sold to a “holder in due
course for value” then the holder in due course purchaser cuts off the defenses the maker of the note may have against the initial holder of the note. So, here, if Associate still had the paper and Bessie stops paying then Associated can sue Bessie but she can assert as a defense that the heating system didn’t work. BUT if the note is sold to a holder in due course, then Bank can sue Bessie as a holder in due course in default and she CANNOT assert the defense that the heating system does not work (as she could against Associated.) QUESTION: What happens to Associated? Do they get off even though the system didn’t work? Not in theory. Bessie can sue Associated for breach of K. What are Rouse’s defenses? 1. BW fraudulently represented the condition of the heating plant to R – failure of consideration a. So he is saying that when he promised to assume her debt ($850), when he bought the house, she was in turn promising a working heating system b. Because it was a separate promise with the sale of the house, no caveat emptor 2. Associated did not satisfactorily install the heating plant – Brickman: Rouse is saying that he is “standing in BW’s shoes”; saying that when he assumed her debt he gets her defenses – “I owe Associated for a good heating plant. If its not a good heating plant and Associated sued me for failure to pay I could assert failure of consideration defense.” a. This defense fails – WHY? He didn’t assume her debt because he didn’t sign the note – he agreed to pay $850. i. What’s the difference? CONDITIONALITY 1. Bessie agreed to pay $850 minus any deduction for bad work 2. R agreed to pay $850 unconditionally Court strikes R’s second defense because R agreed to pay a specific sum (unconditionally) – Rouse’s only source of obligation is his promise to BW; it does not arise from the note Rouse’s liability is purely a function of his promise to BW. Brickman: What if part of the consideration for R buying the house had been that R pay BW’s cousin $850. Is that enforceable? YES. Does he have a defense if B Presumably when Bessie and Rouse negotiated the price of the house, he paid BW less than he would have if he had not agreed to take over the monthly obligations for the heating plant.
When BW bought the heating plant she executed a promissory note. If Associated sued her for default, she could defend by asserting failure of consideration, breach of warranty, etc. There is NO WAY that Associated could have insulated itself from BW for improper work. Associated financed the sale by selling the note to the Bank. Assuming that the note was negotiable and Bank was holder in due course. If on default Bank sues BW she would be liable for the whole value (her defenses would be cut off.) KEY HERE is the difference between $850 as an unconditional promise and an agreement to assume BW’s debt. TOMORROW: Rouse and Schneider Moving and 1437 NOTE 3 GET NOTES…. 4/20 – Assignment Muller v. Ponder is one form of assignment as a financing device Assignment as a payment device is seen in the Village case Traditionally the payment form was the dominant form of assignment. Historical Review of Assignment 17th Century England. Currency was gold and silver. There was trade. As trade became more complex. Moved from barter system to a currency exchange, which brought with it new problems. HYPO: In that place and at that time there is a sale of goods. A silk merchant in Wales is selling Chinese silk to a buyer in Scotland for 100 pounds. Goods are traveling from Wales to Scotland. (Brickman draws a little picture of a river. Adds a forest. Robin Hood lives in the forest and robs people.) The buyer in Scotland sends gold along the King’s Highway to pay for the silk, but Robin Hood robs it. This is a transactional cost, which raises the cost of doing business and inhibits business. Commerce is good, costs are bad. What do we know? 1. Seller needs to get paid
2. Wants to get paid IN WALES (so that it doesn’t have to travel from Scotland, thus avoiding possible transaction costs) – by (X) 3. Buyer has to pay for goods 4. Buyer wants to pay someone in Scotland (Y) Brickman: Why would X give Seller money? Suppose X is also a merchant who buys from Buyer in Scotland. Say X owes 100 pounds to Buyer in Scotland. Buyer tells X to pay Seller in Wales instead of him. Buyer in Scotland is ASSIGNING the debt due him from the Buyer in Wales to the Seller in Wales. What does this “trading game” depend on? Third party with debt owed to the same person. This drastically limits the scope of the “game.” Expanding the “game”
Scotland B £100 £100 assignment of £100, to be paid by debtor Creditor (assignor) Debtor (obligor -– owes Creditor £150) £100 goodsWales S (assignee)
Include any Creditor in Scotland and any Debtor in Wales. 1. Buyer in Scotland pays Creditor, discharging debt of Debtor. 2. Debtor pays Seller in Wales. Say Debtor owes Creditor 150 pounds…. Then what? Balancing the Books 1. Creditor owed 100 pounds. Paid 100 pounds. Debtor owes 100 pounds. Pays 100 pounds. 2. Creditor owed 150 pounds. Paid 100 pounds. Debtor owes 150 pounds. Pays 100 pounds. Debtor still owes 50 pounds. Buyer and Seller are using the assigned rights of third parties to complete their transactions.
Whose willingness to play the game is most crucial? SELLER – willingness to be paid by assignment is the critical event from the point of view of commercial expediency. He is the party most at risk. Brickman: What kinds of protections from the law would Seller want in order to engage in this transaction? …. Creditor is somebody else’s debtor! He may have assigned this debt previously for money. So you get Creditor’s creditors, some of whom claim a prior right to the money. What if the goods/services that Creditor provided to Debtor were defective? Debtor will claim that he does not owe Creditor and so does not have to pay Seller. Seller does not want to deal with this. What if Creditor and Debtor modified their contract? Could “disenfranchise” the Seller. Problems for Seller 1. Debtor wants to be able to assert defenses available against Creditor against Seller. 2. Creditor may try to sell the debt more than once. 3. Debtor could be a credit risk. 4. Could be modification of the deal between Debtor and Creditor after assignment a. Creditor might say “Instead of paying Seller, pay me.” The Letter To: Debtor (Wales) Pay to [order of] Seller (Wales) 100 Pounds s/ CREDITOR
Brickman: What does this look like? A CHECK! Muller v. Pondir
GET NOTES FROM 4/23
Assignments must occur contemporaneously. (A standard check is credit and therefore it is not an assignment because it does not constitute a contemporaneous exchange – unless it’s a cashier’s check.) LANGUAGE is key. BRICKMAN talks about co-ops and UCC searches (to see if there are liens on the property.) Making a Movie Starts with a producer. Gets the rights to a screenplay (maybe from a book, play or other source.) Gets more investors, contracts for various other things. From the backend the money eventually comes from sales from showing in movie theaters. Sillman v. Twentieth Century-Fox Film Corp. Parties 1. 2. 3. 4. Swarttz (S) National (N) 20th Century Fox (F) Plaintiffs (P)
Assignments 1. S (assignor) assigns P (assignee) rights to percentage profits from movie which would come from F 2. S (assignor) assigns N (assignee) contract rights from P 3. N assigns S contract rights from F 4. N assigns F contract rights from Swarttz Issue 1. Is anti-assignment clause in contract valid? 2. …. ASSUMPTION means Third Party Beneficiary. UCC 2-210 (4) An assignment of "the contract" or of "all my rights under the contract" or an assignment in similar general terms is an assignment of rights and unless the language or the circumstances (as in an assignment for security) indicate the contrary, it is a delegation of performance of the duties of the assignor and its acceptance by the assignee constitutes a promise by him to perform those duties. This promise is enforceable by either the assignor or the other party to the original contract.
20th Century Fox wants to deposit the money in a bank (Chemical Bank.) Bank won’t take it because they don’t want to get involved in the lawsuit. 20th Century Fox put no assignment clause in the contract to avoid exactly this outcome. Brickman: Only issue remaining is WAIVER. Claim is that F waived its right to refuse assignments when it accepted the contract bundled with assignments. F had anti-assignment clause with N. N goes to film festivals and finds movies for F. N brings F a movie deal with a bunch of contracts, all of which have assignments. Is that a waiver of the anti-assignment clause? MAYBE. Which means no summary judgment and trial on facts. ****Description of Case from OUTLINE***
Sillman v. 20th Century Fox 1. Facts: Swartz enters into k w/ ps agrees to pay ps % of profits of movie i. Part of the deal with Swartz- include in the k with Swartz-agreement to assign to plaintiffs the k rights that would accrue to Swartz with the distributor 20th century(promise to assign) b. Deal btw Swartz and National-Swartz assigns to National all of Swartz’s k rights with the plaintiff c. National assigns to Swartz the k rights it has with 20th century d. National assigns to 20th its k rights with Swartz and Swartz’s k rights with plaintiff 2. Roles-Swartz is an assignor, plaintiffs are both obligor and assignee, national is an assignee of Swartz, but an assignor of the k rights it acquires through Swartz of the plaintiffs, 20th is the assignee 3. 4 assignments: a. Swartz’s agreement to assign to the plaintiffs k rights that would accrue to Swartz from 20th b. Swartz’s assignment with National of k rights to plaintiff(plaintiff is obligor) c. National also assigns to Swartz its k rights with 20th (20th is obligor) d. National assigns to 20th the k rights that it had acquired from Swartz, including k rights that Swartz had from plaintiff (Swartz is the obligor here, plaintiff remains obligor) 4. Issue-Now plaintiffs are suing 20th- that’s where the $ is a. Plaintiff has no direct contractual relationship with 20th so in order for p to assert right against 20th, it has to either be: i. the assignee of rights that were assigned to it w/ 20th as obligor ii. or a third party beneficiary 5. Option #1- when national assigned to 20th, there was an assumption by 20th of National’s obligations to Swartz and plaintiff a. UCC 2-210(4) provides for an assumption unless there is no assumption
b. UCC 2-210(4) An assignment of "the contract" or of "all my
rights under the contract" or an assignment in similar general terms is an assignment of rights and unless the language or the circumstances (as in an assignment for security) indicate the contrary, it is a delegation of performance of the duties of the assignor and its acceptance by the assignee constitutes a promise by him to perform those duties. This promise is enforceable by either the assignor or the other party to the original contract. c. This the court rejects on the grounds that the rule prevailing in NY at that time was contrary to 2-210(4)-the default was no assumption unless there was an assumption i. NY is one of the few states that applies the principle(Langel v. Betz) that an assignee’s acceptance of the assignment of “the k” does not constitute a delegation of the assignor’s duties, even outside the land-sale context Option #2- Swartz and national assigned to ps their k rights with 20th a. Court said you had that right but you waived it by accepting the right with all these assignments in it i. 20th knew of assignments and did not notify National that assignments were in breach of kwaived k provision to nonassignability Holding-We have to have a trial to see if there is a waiver, but deny summary judgment UCC 2-210-Delegation of Performance; Assignment of Rights a. 2-210(2)-“Unless otherwise provided in 9-406 unless otherwise agreed, all rights of seller or buyer can be assigned except where the assignment would materially change the duty of the other party or increases materially the burden or risk imposed on him by k or impair materially his chance of obtaining return performance.” i. Example the substitution of the assignee for assignor ii. 2-210(2)-second sentence “A right to damages for breach of the whole k or a right arising out of the assignor’s due performance of his entire obligation can be assigned despite agreement otherwise”relevant for anti-assignment clauses b. 2-210(4)-“An assignment of ‘the contract’ or ‘all my rights under the k’ or an assignment in similar general terms is an assignment of rights and unless the language or circumstances indicate the contrary, it is a delegation of performance of the duties of the assignor and its acceptance by the assignee constitutes a promise by him to perform those duties. This promise is enforceable by either assignor or the other party to the original k.” UCC 9-102-Definitions a. UCC 9-102(2)-Account-“ a right to payment of a monetary obligation, whether or not earned by performance…” b. UCC 9-102(3)-Account debtor(obligor)-“ person obligated on an account, chattel paper or general intangible. The term does not include persons obligated to pay negotiable instrument, even if instrument constitutes part of chattel paper.
10. UCC 9-406(d)-Assignment of a right by payment is allowedseller
who is owed money normally is permitted to assign that right to payment even if k between buyer and seller says assignment prohibited.
NOTE: On Monday, be ready for Wednesday. Anti-assignment Clause World in 3 parts 1. goods 2. services 3. transaction of goods Articles 1 2 and 3 deal with transactions in goods. MOST limited to sale of goods. What is a transaction of goods that is NOT a sale of goods? Usually a LEASE. SEE Assignment 131. Even if you have an anti-assignment clause, a right arising out of the assignors due performance of the obligation can be assigned. (Restricted to sale of goods.) HYPO You agree to buy a book from someone for $10. Can you assign the right to the book? YES What if there is a clause in the contract that says “No assignments”? NO I give you the book. You haven’t paid yet. Can I assign the right to payment? YES (Mature Right) Contract for goods, contract for transaction of goods, contract for services. Each party in a contract has certain rights, which may be mature or not mature. This leads to 12 permutations. Tell me for each whether an anti-assignment clause is valid. MATURE RIGHTS (2-210(2)) 4/27/09
When is an Anti-Assignment Clause Valid? a. Sale of Goods BRICKMAN: Know that 2-210 applies to sale of goods because it refers to “Buyer” and “Seller” ii. Mature right to money? Invalid 9-406(d) iii. Immature right to money? Invalid 9-406(d)
iv. Mature right to performance? Invalid 2-210(2)-second sentenceobligor
already owes assignor v. Immature right to performance? Validobligor does not yet owe assignor 1. 2-210(2) first sentencethis would materially change the duty of the other party Sale of Non-Goods(services)-except real estate vi. Mature right to money? Invalid 9-406(d) vii. Immature right to money? Invalid 9-406(d) viii. Mature right to performance? Valid 1. See Comment 5(9-406)– Does not apply to sale of a payment intangible (services/leases) 2. Increases materially the burden or risk imposed on him by his K. 3. Materially changes the duty of other party. 4. not restricted by 2-210 or 9-406 ix. Immature right to performance? Valid 1. same sale of non-gods mature right to performance Transaction/leasing of Goods x. Mature right to Money? Invalid 9-406(d) xi. Immature right to money? Invalid 9-406(d) xii. Mature right to performance? Valid 1. 9-407 it says that you cannot assign a lease interest that will affect performance. xiii. Immature right to performance? Valid 1. 9-407 it says that you cannot assign a lease interest that will affect performance.
Queries with Bedford (p. 1485): In the light of the Bedford case, is Judge Hand's second opinion in Rockmore still an accurate statement of New York law? Does Bedford overrule Williams? Field? For Rockmore, Bedford, Field and Williams, indicate for each whether the assignor won or last.
Brickman: Back to Scotland and Wales. SELLER is key to the trading game. SELLER wants to be protected from claims from outside parties. In the four cases above, the ASSIGNEE stands in the position of the SELLER. He is lending money on the security of an assignment Who’s the WINNER? Assignee Rockmore Field Williams Trustee/Creditor/Obligor
Bedford (over DISSENT) ROCKMORE
Assignee won (on rehearing.) Brickman: Why did they grant a rehearing and why did the assignee win? Banks (represented by top law firms) filed amicus briefs arguing for assignee’s position. What’s going on here? o Bunch of people “reaching in for money” – more hands than money o Surf needed money in order to perform (similar to Hazeltine and Fibralast) o Surf has a contract which they use as collateral to get a loan from Abrams o Fiegal also needed money o Lehman lent him money o Abrams and Lehman are suing to get their money o BANKS are concerned that if Abrams and Lehman lose to the trustee in bankruptcy, it will be a bad precedent for their business o BANKS therefore argue that Courts are making banks collateral subservient to the Trustee BANKS thus will lend less money (because of added cost/risk) Argue that it will be the Court’s fault o BANKS therefore want Abrams and Lehman (and them) to stand “above” the Trustee (and other creditors) Brickman: Money didn’t exist yet. Yet to be earned by Surf and Fiegel. So trial court found it wasn’t contemporaneous exchange. AC reverses, saying that since then-existing contractual right, could assign future income. BEDFORD (pg. 1485) Assignee assigns rights to money from contracts he had yet to enter into. Brickman: 9-102 is relevant here (see COMMENT 2 for explanation) § 9-102. Policy and Subject Matter of Article. (1) Except as otherwise provided in Section 9-104 on excluded transactions, this Article applies (a) to any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures including goods, documents, instruments, general intangibles, chattel paper or accounts; and also • (b) to any sale of accounts or chattel paper.
(2) This Article applies to security interests created by contract including pledge, assignment, chattel mortgage, chattel trust, trust deed, factor's lien, equipment trust, conditional sale, trust receipt, other lien or title retention contract and lease or consignment intended as security. This Article does not apply to statutory liens except as provided in Section 9-310. (3) The application of this Article to a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which this Article does not apply. Note: The adoption of this Article should be accompanied by the repeal of existing statutes dealing with conditional sales, trust receipts, factor's liens where the factor is given a non-possessory lien, chattel mortgages, crop mortgages, mortgages on railroad equipment, assignment of accounts and generally statutes regulating security interests in personal property. • Where the state has a retail installment selling act or small loan act, that legislation should be carefully examined to determine what changes in those acts are needed to conform them to this Article. This Article primarily sets out rules defining rights of a secured party against persons dealing with the debtor; it does not prescribe regulations and controls which may be necessary to curb abuses arising in the small loan business or in the financing of consumer purchases on credit. Accordingly there is no intention to repeal existing regulatory acts in those fields by enactment or re-enactment of Article 9. See Section 9-203(4) and the Note thereto.
Brickman: City, despite being notified of the assignment, paid the assignor. Assignor becomes insolvent. Assignee is now trying to get the money from the City. Assignee is saying that since their assignment came before the City paid the assignor and they had notice of the assignment. ASSIGNEE wins. Speelman (pg. 1492) Judgment creditor of the assignor vs. the Assignee. Assignee wins. BEDFORD (pg. 1485) Got loan based on liquor license. Very difficult to get a liquor license in NY and therefore strong indicator that business will be profitable.
The only time the bank would like to access the money is if the bar fails. o This is perfect for the Bank b/c they either get paid on their loan or collect the money if the bar fails CITY (judgment creditor) vs. BANK (Assignee) CITY wins (assignee loses.) Court refers to this as an “equitable claims”. (SEE Muller v. Pondir) Here the court is saying that between the bar and the bank, bank wins BUT between City and bank, City wins. City is the “equitable assignee.” Muller v. Pondir is about assigning a negotiable interest (which is NOT a contract issue…??) MATTER OF CAPITAL DISTRIBUTORS o Legal assignment of an existing fund owned by its assignor because the application for a liquor license was turned down o Court in Bedford distinguishes based on characterization of bank’s claim as inchoate Brickman: Court is saying that there was not contract here because it didn’t come into existence until the bar failed. Points to this as reason why prior claim of City (for unpaid taxes) prevails. DISSENT No reason in “law or logic” why an Assignee should not take precedent over a judgment creditor. NEXT: Speelman and beyond. Speelman v. Pascal Brickman: Is it inconsistent with Bedford? o In Bedford assignee loses – in Speelman assignee wins o Who are the parties here? Speelman (executive secretary) Estate of George Bernard Shaw Who benefits from the estate? o Creditors (gov’t first) o Legatees (family and other beneficiaries) Distinguishing Bedford and Speelman o Bedford was between Assignee and Judgment Creditor
o Speelman was between the Assignee and the Legatees Brickman: Assignee in Speelman is pitted against not the creditors but the legatees. Courts are MUCH more inclined to rule in favor of the Assignee when going against Legatees than when going against Creditors. ……………………………………………………………………………………………
Assignment vs. Delegation Langel v. Betz (Old Rule – 2-210 would change) Brickman: 2-210 (5) CHANGES the common law to say that unless you write out of it in a contract, you assume duties under the contract as an assignee. (5) The other party may treat any assignment which delegates performance as creating reasonable grounds for insecurity and may without prejudice to his rights against the assignor demand assurances from the assignee Brickman: This section means that unless the language or circumstances indicate to the contrary, assignment includes assumption of duty. Looking at every permutation between the VENDEE and ASSIGNEE 1. VENDEE assigns his right but does not delegate his duties 2. VENDEE delegates his duty (to pay purchase price) while retaining his rights 3. VENDEE assigns and delegates, but there is no assumption of duties a. ASSIGNEE here makes not promise to take on duties b. Brickman – Is still possible if ASSIGNEE fails to pay the price, VENDEE may have a right against the assignee, but the VENDOR has no right to sue assignee 4. VENDEE assigns, delegates and there is assumption of duty Brickman: Assumption in New York at the time of Langel was “you don’t unless you do”. Now (under UCC) the assumption is “you do unless you don’t.”. UCC 2-210 (2) Unless otherwise agreed all rights of either seller or buyer can be assigned except where the assignment would materially change the duty of the other party, or increase materially the burden or risk imposed on him by his contract, or impair materially his chance of obtaining return performance. A right to
damages for breach of the whole contract or a right arising out of the assignor's due performance of his entire obligation can be assigned despite agreement otherwise. British Waggon Co. v. Lea & Co. Look to whether the contract was for personal service or whether any competent person “working in that genre” could perform the obligations. Court reserves the question of Parkgates dissolution but says since this was not a personal contract any competent assignee can fulfill the obligations without violating the contract. Arkansas Valley Smelting Co. v. Belden Mining Co. (pg. 1511) Brickman: Key issue here was whether Belden’s right to payment has been impaired in any way by the assignment. Agreement here was based on trust. There was no security for the time between delivery and assay and payment. Court says: When Billings & Eilers assigned to Billings,that was probably okay, but when Billings assigns to Arkansas this was not okay. Brickman: When Billings & Eilers assigns to Billings, what is Eilers status? o Still liable under contract No novation If it had been cash COD there would be no credit risk, so A assigning to B in such an arrangement would not pose a new credit risk (though other parts of 2-210 may apply). Crane Ice Cream Co. v. Terminal Freezing and Heating Co. (pg. 1518) Brickman: What was the key element of the agreement in Crane? o It was a requirements contract for up to 250 tons of ice per week When C replaces B there may be a change in the requirements. If C is running B’s plant, maybe no change (factual issue which we don’t deal with.) What about the credit risk – was it changed? o Credit risk DECREASED the credit risk Instead of credit its COD o This assignment improves the position of the Assignor (provided the requirements contract requirements don’t change.) Brickman: There is muted opposition by the judge to assignment in general. (MD in 1925)
In this case the assignment is held to be INVALID even though the position of the VENDEE (the company selling ice) was improved by the assignment. Under UCC 2-210 this assignment would have been VALID. Tolhurst v. Associate Portland Cement Manufacturers Question: How does Boston Ice fit into this? o At the time Boston Ice was decided, MA courts were suspicious of assignment o MA had developed common law rules that were somewhat hostile to assignment o Negative language in Boston Ice is similar to that language in Crane Question: What about the notice requirement from Boston Ice – is that still required under 2-210? o Required to protect Assignee from future Assignees o EXAMPLE: Person with interest in a trust assigns his interest in a trust to Assignee A for a discounted price. Blows the money in Vegas so assigns the same right to Assignee B. And then to C, etc. Remember: 2-210 (5) applies ONLY to the sale of goods ……………………………………………………………………………………………… Problem of Defenses Modification and Rescission Brickman: By and large these are three party tranactions. Obligor, Assignor and Assignee. Cuban Atlantic v. Marine Midland (pg. 1521) FACTS Ship owner (Garibaldi) charters to Ocean o Ocean has to pay Garibaldi Does this through subchartering the boat to Cuban to carry sugar from Cuba to Japan Ocean needs money to pay Garibaldi • Cuban is not going to pay until the sugar is on the ship • Ocean needs to pay Garibaldi before that so it borrows it from the Bank (Marine Midland) o Ocean assigns money from deal with Cuban to the Bank Brickman: Quirk in facts, in that Cuban has pre-paid directly to Marine Midland. Problem: Ship’s master refuses to sign bills of lading b/c Ocean had defaulted on its payment to Garibaldi. At this point Cuban has already sent the money to Marine.
Cuban has paid for a service it did not receive and wants its money back. Court orders RESTITUTION. (Essentially this is a MISTAKE case, but since there are assignees and such its in this chapter.) Brickman: Effectively there is a defense here. Failure of consideration between Cuban and Ocean. If Cuban had not paid Marine and everything were the same and Marine sued Cuban, Cuban would argue failure of consideration between Marine and Ocean. Brickman: Here we see a case where the SELLER in our trading game is not favored. The assignee has what we believe is a superior right because the assignor has not fulfilled it obligations under the contract. Usually we term the OBLIGOR to refer to the party that has not acted. Firestone Tire and Rubber Co. v. Central National Bank of Cleveland (pg. 1525) Firestone gives money to the Bank who then deposits the money in Stan Wood’s checking account (which Stan Wood took out). Firestone was defrauded by Wood. Firestone sues Bank to get its money back. COURT rules that it was Firestone’s error to not check and see if sleds were delivered, so they don’t get the money back that went to Wood. Firestone gets the money the Bank had applied to reduce Stan Wood’s loan. Commercial Credit Corp v. Orange County Machine Works (pg. 1529) Machine Works is buying from Ermac who is buying from General American (Ferracute press). Brickman: May be a tax-credit situation (where Ermac can benefit from a tax credit but Machine Works cannot, so Ermac buys the press.) Deal between Ermac and Machine Works is on a contract (both promissory note and negotiable instrument.) K is promissory note. Issue 1: Where a negotiable instrument is attached to a non-negotiable chose in action (which is transferable only by assignment) does this negate the viability of the negotiable instrument? o Here the promissory note (contract) is the “non-negotiable chose in action” o Court rules that fact that negotiable instrument is attached does NOT change the character of the negotiable instrument
Ermac gets it money from Commercial Credit Corp. Brickman: Usually used car companies make more money off financing than off the car. Lender pays a fee to the used car company for referring the business and makes money off the interest. Ermac’s check bounced. General American did not deliver the press. Machine works refuses to deliver the note to CCC. CCC claims holder in due status of note. Question: Is the holder of the note going to prepare over the maker? IF holder is holder in due course for value without notice, then… COURT holds that CCC is not a holder in due course because of its active participation with Ermac. CCC is regarded as so close to Ermac that it is aware of Ermac’s insolvency. NO arms length transaction. Ermac and CCC are really partners in this deal. CCC doesn’t have the distance from the transaction to be considered a holder in due course. Therefore Machine Works prevails. Brickman: Not an unusual holding. Consumer credit of this sort used to be readily available. Would lend money to high-risk creditors at very high interest rates, usually without security. 9-206 of UCC has been replaced by 9-403 (1). Brickman: Read Comment on 9-403 (1) on how it is different from 9-206. NOT RESPONSIBLE for the distinctions, but helps understand these cases. 9-403 is very similar to holder in due course. Allows for a clause that gives assignee the protections that a holder in due course would have with regards to a negotiable instrument (cutting off defenses -- such as lack of consideration between assignor and debtor.) If debtor agreed in the contract to forego defenses against assignee then they cannot sue the assignee (but can still sue assignor for breach of K or whatever). BANK won’t lend money to account debtor without waiver of defenses. This could be dangerous for the account debtor because even if the obligor fails to deliver cannot use this as a defense when bank tries to collect its money. (must instead sue the obligor with little chance of actually collecting.) 9-403 9-406 (5)
MONDAY: Finish modification.
5/4 Why waive defenses? Brickman: Imagine that a company wants to build a power plant, but needs a steady supply of coal. Wants to enter a long-term contract with coal company. They would need to dig a mine to meet the needs of the power company. Very expensive enterprise (say $30-40 million). They need to get financing from a bank and the only collateral they have is the contract with the power plant. Coal company would be willing to waive their defenses (such as lack of consideration between them and the power plant if power plant didn’t deliver on K) in order to get the loan. Homer v. Shaw (pg. 1538 NOTE case) 9-405 is contrary to this case. Allows for modifications only if they are made in good faith and if they assign corresponding rights under the contract to the assignee and assignor. (“corresponding rights” is oblique language…. Not really sure what that means.) 9-405 and Homer are probably consistent in outcome. Instead of saying K was modified, however, in Homer they say it was terminated and then reach a new contract. (Issue is with how this affects the assignee.) Babson v. Village of Ulysses (pg. 1541) FACTS o Ulysses made a deal with Blue River Power Co. for 2 purposes Supply power Pay for construction of transmission line to the village (pay $100/mo. For 200 mos. to amortize this cost – primary charge) Pay per kilowatt hour (secondary charge) o Babson owns Blue River Sells to United Light and Power Blue River assigns the $100/mo. contract right to Babson Nebraska succeeds United Iowa succeeds Nebraska o 1930 – Ulysses sells its distribution system to Iowa Light and Power Iowa now directly responsible for distributing electricity
Regarded as terminating the agreement Village relieved of all obligations – including payment to Babson • CAN THEY DO THIS – cut out assignee?
City of Ulysses -- Obligor Blue River (and all subsequent power companies) – Assignor Babson – Assignee HYPO Coal company/Power Company/Bank You represent the Bank (in a Babson jurisdiction – where assignee lost) How do you protect the Bank? o First, try to contract directly with the power company to ensure that they pay the loan (even if coal company stopped supplying coal) Power plant probably would not want to do this o Second, try to get Coal Company to agree not to modify the agreement with the power company without Bank approval What if Coal Co. modified K with Power Co. anyway? • Coal Co. has breached BUT o If Coal Co. is not mining coal then it is not getting any income (verdict proof) o Bank would realistically have to go after Power Company Brickman: Only way to get rights against Power Co. is to contract directly with Power Co. (but they don’t want to do this.) Bank wants to get at the money to repay the loan. Power Co. has the money. How can the Bank get at the power company? o Have Coal Co. and Power Plant enter into a contract that makes Bank an intended beneficiary BUT under Rouse if there is a failure of consideration between Coal Co. and Power Co. this is a valid defense for the Power Co. not to pay the Bank. **SO, THIRD PARTY BENEFICIARY THEORY doesn’t really protect Bank – need more** Look to the UCC because coal is a good.
Brickman: How can we “resurrect” our 3rd party beneficiary theory? NEED A waiver of defense clause – tough to get from the Power Co.
Brickman: What feature of the contract in Babson did the court rely on to allow modification? o EXECUTORY -- ongoing Done deal (transmission line in Babson) + ongoing (supplying power in Babson) = ongoing deal SOLUTION is to have two deals. (One for the mine and one for supplying the coal.) QUESTION: Which is “better” – done deal or ongoing deal? 5/6 REVIEW Liquidated vs. Unliquidated Debt Hudson – apple case Court decided on the facts that the apple grower should win. Needed to make a legal noise in support of the apple grower. If you want to find accord and satisfaction when he took payment (in favor of the broker) then the debt would be UNLIQUIDATED. If you want to find for the apple grower, then you need to find it LIQUIDATED. To make it a LIQUIDATED debt, you break it up and make it its own transaction. • Two debts • If one debt it would be LIQUIDATED + UNLIQUIDATED = UNLIQUIDATED Buyer’s Damages Cab Calloway – a chicken ain’t nothin’ but a bird (EXAM ANSWER -- ??) Chicken Case Buyer accepted the first batch of chickens and then sued for breach of warranty. • Didn’t say “This is not what I ordered!” – accepted that they were chickens
o Said instead that they were not of sufficient QUALITY (wanted broilers and got stewers) • Think about it in reality o What are you going to do with the chickens you get if you REJECT? Must look at the consequences of your actions in case the court doesn’t go your way (would lose a lot of money on the stewers b/c he didn’t resell them and they would go bad or whatever) REVOKING is very different from REJECTING goods. • Duties on buyer are much greater when REVOKING acceptance than when REJECTING had called on arrival of chickens and said “These are not what I In Chicken Case, if buyer ordered, what do you want me to do with them? Give me money to do whatever you want me to do with them” this would have been a straight rejection (and in this case buyer may have been in a better position in terms of possible breach damages – but would risk it all if he lost.) Novation vs. Substitution Substitute TWO STEP – A and B can modify K any way they see fit Novation THREE STEP -- Second K between A and B. B agrees to buy a car from A and agrees to pay for it. C comes along and wants to be the car. B is willing to step out of the transaction and let A deal with C. But B needs A’s approval. A, B and C come into the room to do the closing. A would acknowledge that in exchange for C agreeing to buy the car on the terms I agreed to with B, I release B’s obligation to me. B says the converse. C says “I promise to buy the car from A at a certain price.” Liability is not just DELEGATED it is ELIMINATED. Can only be accomplished with permission of both parties to the K (A and B). Brickman: By statute now you can modify a contract without consideration. SUBSTITUTED CONTRACT was just a legal fiction to recognize modified contract without consideration. “Didn’t have a lot going for it.” Parole Evidence EXAM (?) – Judge always gets to look at the evidence and decide whether its admissible. If the judge thinks it should get in, can find a way around the rule (“interpreting intent of parties” or whatever). Heating System Case Courts are suspicious of UNJUST ENRICHMENT
Is the consumer vs. commercial context significant? • Brickman implies that this is not something we should worry about b/c K won’t come to fruition and tells us to see the movie TIN MAN CAR and SNOW Tires Car is CONDITION (“core” of K) / Snow tires are COVENANT (“non-core of K”) • Today we talk about SUBSTANTIAL BREACH and PARTIAL BREACH Anticipatory Repudiation Majority of cases say that there is no place for this when the only obligation left is to pay money at a future date. • Courts are scared of math and it is problematic to discount money to present value Inability to Waive Core Obligation Can waive your right to timely performance, but cannot waive right to be paid. EXAMPLE: If I agree to sell you my car for $4000 and later I say “Forget it you don’t have to pay” and you go and blow the money in Vegas and later I say, “You know what, I want you to pay” – you HAVE TO PAY (though you have a reasonable time to get the money) If I sold the snow tires then TOUGH (they were not “core” aspect of K) 5/7 When the builder breaches, cannot BENEFIT FROM THE BREACH. • Builder IS entitled to restitution (if he has substantially performed) o Owner can still get damages Pays Builder $X for work performed Pays Builder2 $Y to finish project • If X + Y is greater than K price then Owner is entitled to DAMAGES o Also factor in Costs of Delay If OWNER breaches • Contractor can get o Contract price – Cost of completion Brickman: By changing the cost of completion, there are other changes that you must be aware of. Assume dollar for dollar accretion in value to the structure arising from the cost of completion. If the incremental increase in value is LOWER than the K price, then the cap is lower than the K rate (though you must also include delay costs.)
SEE Turkish Bathhouse Case
Parole Evidence Need to know basic structure. American Repair Doctrine (Buttefield ??) Severable vs. Entire Contract was part of the process of the court “sticking it” to a greedy builder. The way the court interpreted and Entire Contract, the builder made out better.