Contracts II Outline

I. Unconscionability—if the court finds that the contract is unconscionable,

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

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 a) Just because termination is permitted does not make it enforceable
b) Must comply with §2-302

II. Illegality—unenforceable if against public policy

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

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

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

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

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

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

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

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 5) Reasonable Insecurity
a) question of fact for the jury
VIII. Compensatory Damages

INTERESTS VALIDATION DAMAGES

______________________________________________________________________

EXPECTATION CONSIDERATION FORWARD LOOKING PUT Π WHERE HE WOULD BE

IF K
WERE PERFORMED

RELIANCE PROMISSORY ESTOPPEL BACKWARD LOOKING RESTORE Π TO

STATUS QUO OR
OUT OF POCKET EXPENSES
AT
TIME OF CONTRACT

RESTITUTION MORAL CONSIDERATION BACKWARD LOOKING REMOVE BENEFIT

CONFERRED
TO ∆ AND RESTORE THAT
VALUE
TO Π

A. Look to language of the agreement

B. Look to warranties
1. Express—if there is a description of the goods
a. goods must conform to the description
2. Implied—created by operation of law
a. goods are at least the average that is acceptable in the trade
b. fit for use
1) buyer relies on expertise of seller
2) goods for a particular purpose
3) seller must provide goods “fit for that purpose”
C. Expectation is the normal measure
D. General Rule for expectation measure
1. Difference between contract price and fair market value
2. Alternative
c. Foreseeable damages
4) ∆ is liable for all actual damages he did or should have
foreseen
3. If expectation does not work,
a. Courts can mix and match between the three
d. Example
1) Use expectancy theory of recovery and award restitutionary
measure of damages
E. Buyer and Seller’s Primary Remedies are virtually the same: UCC 703 and 711
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 1. Damages
2. mitigation devices—entitled to expectation measure of damages:
a. seller has resale—gets difference between the original contract
AND costs for resale
b. buyer has cover—entitled to out of pocket costs had the original
contract been performed
3. Specific Performance (SEE NEXT SECTION)
4. Incidental Damages
a. flowing from the handling of goods
5. Consequential Damages
a. damages that do not OBVIOUSLY flow from breach
1) limited to cut off liability at the earliest possible point,
2) So the court could encourage industry and reduce crushing
damages
b. Hadley Test:
1) Naturally, normally, or directly flowing from the breach
2) Foreseeability—reasonable person in the business
a) What ∆ should have known THEN
b) What ∆ actually knew
c) At some relevant time
i. At the time the contract is made OR
ii. If agreed date is in the future,
foreseeability starts on that date, not at the
time the contract is made
3) Special Circumstances
a) Assumption is that party’s do not contemplate
damages
b) Damages should be proportional to consideration for
agreement
c) Courts assume that the risks are proportional to
consideration
c. UCC § 2-715—consequential damages if:
1) reasonably foreseeable
2) ascertainable
3) unavoidable
a) unable to prevent by cover or otherwise
4) Injury to person or property
F. Punitive damages
1. unusual for contract claims, usually compensatory UNLESS
2. criminal or tortuous acts in contracting
a. fraud

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

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3) and geographic area

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

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

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X. Dispute Resolution
A. Role of Architect or Engineer
1. parties consenting to delegate power to 3rd party is binding on the parties
to the contract
2. UNIFORM ARBITRATION ACT
a. validity—favors arbitration
g. court must enforce arbitration provision UNLESS fraudulent (no
consent, vitiates contract
e. vacating an award is limited to a showing of corruption, fraud, etc.
3. Intent of Parties Governs
a. Expressly provided in the agreement OR
b. broad language that covers the fraud issue in the agreement

XI. Third Party Interests

Seller CONTRACT FOR GOODS Buyer

(Assignor) PAYS MONEY FOR GOODS (Debtor, Obligor)

Transfer/Assignment of rights to
Assignee for money owed to seller
***Buyer is obligated to pay assignee upon
NOTICE of the transfer

Assignee
(Obligee, Creditor)
A. Assignment—Transfer of rights to collect payment from one party to another
1. RULE—An assignees rights against the obligor vests when the obligor has
notice of the transfer
2. Where there is multiple assignees, the assignee who first gives notice to
the obligor is first in line to collect from the obligor
3. After an assignment, the original parties CANNOT change the original
agreement because the assignment would be harmed.
4. A valid defense against an assignor is a valid defense against the
assignee
a. If so, look to the agreement for a clause that holds the assignor
liable if the assignee is not paid OR
b. Enforce the warranty at law which provides that an assignee can
recover from an assignor
5. UCC § 9-318: Anti-assignment clauses are ineffective
a. Allows a party to borrow under an accounts receivable financing plan
B. Delegation of Duties:
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 1. UCC—Substantial Interest Test
a. Where an assignor delegates duty to a 3rd party,
the obligee does not have to accept performance from the delegate if
the obligee has a substantial interest in having the assignor perform
1) The obligee has a substantial interest if the delegate
CHANGES THE RISK of the obligee
C. Outline
1. Assignment of Rights or Delegation of Duties?
2. Diagram the Parties
3. Rights
1) Common law recognizes the assignment of rights
2) UCC-recognizes the need for assignments in modern economy
a. Article 9—secured transactions
b. Assignor
i. Present intention to make a transfer of rights
ii. Extinguishes rights and creates assignee’s rights
after the assignment and notice to obligor
iii. Exception
1. Adverse effects on the obligor
a. UCC 2-210—if the assignment materially
changes the obligor’s duty, burden or risk is
materially impaired, or impairs obligor’s
chance of obtaining return performance unless
waived by the obligor by consent in advance or
after the fact
b. Reasoning—justified expectation of the obligor
at time of contract
3) Anti-assignment clause
a. Common law disfavors, but allows
b. Narrow and strict interpretation—expressly say “no assignment
and any attempt is void
c. UCC voids anti-assignment clauses
i. 9-318 Anti-assignment clause is ineffective
ii. 2-210—anti-assignment clause is interpreted as
prohibition against delegation of duties, not rights.
4) Modification by original parties
a. If necessary and legitimately called for between original parties
i. UCC and RESTATEMENT—modification made in good faith
and according to reasonable commercial standards is
effective against assignee
5) Assignee is vulnerable to all defenses that obligor has against assignor

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 a. Assignee’s position is no better than assignor
b. Stands in shoes of assignor
4. Delegation of Duties
1) Never relieves delegating party of its duty
2) Prevention or exception to allowing the delegation
a. Substantial interests test
i. All circumstances considered
ii. Performance of a personal or specific nature UNLESS
iii. Performance is commercially standard
1. Delegation is probably not questioned
XII. Third Party Beneficiaries
A. Generally, party must intend to benefit the 3rd party
1. Necessarily requires the promisor to confer a benefit to a 3rd person
2. Performance must run directly to the 3rd party
B. Promisor and Promisee must understand the intent to benefit

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