Contracts II Outline

I. Limits of the Bargain and its Performance

A. Unconscionability a. All clauses or contracts, at the formation of the contract, found to be unconscionable have to have some combination of: i. Procedural unconscionability; and 1. Absence of meaningful choice through: a. Oppression: Unequal bargaining power between the parties b. Surprise: Unconscionable clause is hidden and is not really bargained for. ii. Substantive unconscionability. 1. Terms that are unreasonably favorable to one party. b. Effect of Unconscionability: i. Refuse enforcement of the entire contract; ii. Enforce the remainder of the contract without the unconscionable clause or clauses; or iii. Modify or limit application of any clause to avoid an unjust result. c. UCC i. Allows for usage of trade and other circumstances as a defense to unconsionability. B. Performing in Good Faith a. In every contract there is an implied duty of good faith performance. i. Good faith Honesty. ii. Output contracts honesty requirement in purchasing or in producing contracted requirements. iii. Unique/Exclusive goods has a higher standard of best efforts which is higher than performance in good faith.

II. Remedies for Breach

A. Specific Performance a. To obtain an order of specific performance, the non-breaching party must establish: i. That an award of money damages is inadequate to give the innocent party the benefit of his bargain; 1. The difficulty in proving damages with reasonably certainty 2. The difficulty of procuring a suitable substitute performance upon an award of monetary damages; and 3. The likelihood that an award of damages could not be collected. ii. There is no undue practical limitation on a courts ability to grant equitable relief; 1. Whether the terms of the contract are sufficiently certain so as to provide a basis for an appropriate court order; 2. Whether the nature and magnitude of the performance promised in the contract would impose a supervisory burden on the court that is 1

disproportionate to the advantages to be gained from specific performance and to the harm to be suffered from its denial. 3. Whether the contract calls for personal services. iii. An award of specific relief will not itself be unfair by violating one of the equitable principles governing the grant of equitable relief; 1. Would specific performance be contrary to public policy; 2. Would specific performance be unjust because the breaching partys assent to the contract was induced by an unfair business practice; 3. Would specific performance cause unreasonable hardship; 4. Would specific performance of the contact not result in the nonperformance of a substantial part of the agreed exchange. B. Money Damages a. Expectation damages: Goal is to put the non-breaching party in the position he would have been in had the contract been carried out. i. 5 factors that need to be accounted for in calculating expectation damages: 1. Lost value a. Value of full performance value of what was actually received 2. Incidental loss a. Costs incurred by the non-breaching party, after the breach, in an attempt to avoid increased loss to the breaching party. 3. Consequential loss a. Damages that a reasonable person, present at the time of contract formation, would not foresee occurring as a natural result of the breach. i. Non-breaching party must prove: 1. Loss occurred; and 2. Constructive notice to the breaching party of potential for consequential damages if contract was breached. 4. Cost avoided a. If as a result of the breach the innocent party does not spend certain monies as a result of the breach, the breaching party must get credit for these costs avoided. 5. Loss avoided a. If materials or resources available for performance under one contract can be salvaged, but only if they can be reasonably salvaged, the fair market value of the salvaged materials must be subtracted from the other damages. b. Expectation damages formula i. Expectations Damages = Lost Value + Incidental Loss + Consequential Loss Cost Avoided Loss Avoided ii. E.D. = L.V. + I + C C.A. L.A. c. Construction Contractors: Breach by Builder i. Special rules governing the calculation of lost value

1. If the diminution in the fair market value of the property caused by the breach is greater than the cost of completion or repair, the injured party may only use the cost of completion or repair as the lost value. a. Diminution of fair market value > cost of completion cost of completion 2. If the cost of completion or repair is greater than the diminution in the fair market value of the property caused by the breach, the injured party is still generally entitled to the cost of completion or repair as the lost value. a. Cost of completion > diminution in the fair market value Cost of completion. i. Exception: When the cost of completion or repair is so much greater than the diminution in fair market value to the property caused by the breach so that is clearly disproportionate to the of diminution in market value, the injured party may only use the decreased fair market value as the lost value and is not entitled to use the disproportionately greater amount of the repair or completion cost in computing expectation damages. 1. Factors: a. 5 to 10 times difference b. Willful breach d. Expectation damages for contracts governed by the UCC i. Buyers recovery formula 1. Buyers Recovery = [(Cost of substitute goods from another seller)(Contract price of goods from the breaching seller)] + Incidental damages + Consequential damages ii. Sellers recovery formula 1. Sellers Recovery = [(Contract price from the breaching buyer)-(Price to be realized upon reasonable sale of the goods to another)] + Incidental Damages + Consequential Damages iii. Lost volume sellers recovery of lost profits 1. Sellers Damages = The Profit from the Contract That was Breached + Incidental Damages + Consequential Damages e. Limitations on the recoverability of expectation damages i. Certainty: Damages must be proven with reasonable certainty. (lost profits usually fail the certainty test) 1. In a close case, any doubts as to whether a loss is sufficiently certain are to be resolved against the breaching party. 2. The requirement of certainty is less strictly applied when the breach is deliberate than when it is not. 3. So long as the injured party provides a reasonably basis for his damage calculations, those calculations are likely to be accepted as sufficient under the reasonable certainty test.

ii. Foreseeability: Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made. 1. Direct damages: if they follow in the ordinary course of events from the breach. 2. Consequential damages: those resulting from general or particular requirements and needs which the breaching party knew, or had reason to know, at the time of contracting. iii. Avoidability: The damages sought by the injured party must not have been avoidable by him without undue risk, burden, or humiliation. f. Liquidated Damages i. Requirements for an enforceable liquidated damage provision: 1. Reasonable in light of the anticipated harm and the amount is reasonable in light of the actual harm suffered by the injured party; and 2. Difficulties in proving the actual loss with precision. a. Under the UCC you can contract for specific performance under a liquidated damages provision.

III Performance and Breach

A. Conditions a. Condition Precedent is (condition) i. An event, not certain to occur, which 1. Must occur before performance under a contract is enforceable, unless 2. The non-occurrence of the event is excused. ii. The party to whom a duty is now claimed to be owed bears the burden of proof to establish that the condition was satisfied. b. Condition subsequent is (event that terminates a duty) i. An event, the occurrence of which is not the result of a breach of the obligors duty of good faith, which 1. If it occurs, terminates a partys duty to perform, unless 2. Its occurrence is excused. ii. The party who at one time owed the duty bears the burden of proof to establish that the condition has occurred. c. Types of Conditions: i. Express condition 1. A condition expressly agreed upon by the parties as evidenced by their words. a. Examples: On the condition that, if but only if, unless, in the event that, provided 2. Condition will be strictly enforced ii. Implied-in-fact conditions 1. A condition agreed upon the parties as evidenced by their actions or circumstances rather than their words. a. Judged on whether a reasonable person would believe a condition has been agreed to by the parties.

2. Condition will be strictly enforced. iii. Constructive condition (Implied-in-Law) 1. A condition the parties have not expressly agreed upon, but which the court decides is necessary to imply in a contract to determine the parties rights and duties under that contract. 2. Not subject to the strict enforcement rule, the court is given some latitude in tailoring the enforcement of a term it has itself supplied to ascertain the parties rights under a contract. d. Rules for interpretation for determining whether an obligation is a conditional promise, and unconditional duty, or both. i. Interpretation that a promise is an unconditional duty, rather than a conditional obligation, is favored when the event necessary to fulfill the condition in within the obligees control. ii. Interpretation that reduces promisors risk of forfeiture is preferred. e. Excuse of Conditions: Promisor will be obligated to perform the duty even if the condition did not occur if: i. Waiver: An intentional relinquishment of a known right. 1. Retraction of a waiver: a. Can be retracted only if the other party has not materially relied on the waiver; or b. Once a party has elected to accept the other partys performance even though the other party accepting the performance cannot thereafter reject the performance and claim his duties are not due because the condition has not been fulfilled. ii. Breach: If an obligor breaches a contract, and that breach caused the nonoccurrence of a condition, the act of breaching the contract will excuse the non-occurrence of the event and transform that partys otherwise conditional duty into an unconditional enforceable promise. iii. Disproportionate forfeiture 1. A court is entitled to excuse the failure to fulfill even an express condition if: a. Enforcement of the condition will lead to disproportionate forfeiture; and b. The condition is not as to a material part of the bargained for exchange B. Constructive Conditions of Exchange a. Tender i. Definition 1. Fulfilled by a partys offer of performance coupled with a manifest present ability to perform ii. Effect 1. One party must tender performance before the duties of the other can be enforced. b. Order of performance: 2 rules

i. If the performance of each party can be accomplished simultaneously, then each party is under an obligation to perform concurrently; and ii. If performance of one party will take time, and performance of the other will not, performance by the party whose performance will take time is a constructive condition of the performance of the party whose performance will not take time. c. Material and immaterial breach i. Material breach 1. Consequence a. The non-breaching party is entitled immediately to suspend his duties under the contract without liability ii. Immaterial breach 1. Consequence a. The non-breaching party must continue to perform or itself be in breach. iii. How to determine when a material breach has occurred. 1. In deciding whether a particular breach results in an unexcused failure of a constructive condition the following factors need to be weighed: a. The extent to which the non-breaching party will be deprived of the reasonably expected benefit of his bargain; b. The extent to which the non-breaching party can be fully compensated for the breach if made to stay in the contract and complete performance; c. The extent to which the breaching party will suffer forfeiture if the breach is declared material and the non-breaching party need not perform under the contract; d. The likelihood the breaching party will cure his failure; e. The good or bad faith exhibited by the breaching party in breaching the contract. 2. How to determine what is a reasonable time for purposes of transforming a material breach into a total breach. The following factors need to be weighed: a. General rule: Upon the expiration of a reasonable time after a material breach, when the breach is neither cured nor waived. i. Factors: 1. The extent to which the non-breaching party will be deprived of the benefit of the bargain reasonably expected under the contract; 2. The extent to which the non-breaching party can be adequately compensated for any losses suffered before the breach is declared total; 3. The extent to which the breaching party will suffer a forfeiture if the breach is declared total; 4. The good or bad faith of the breaching party; 5. The likelihood of cure by the breaching party;

6. The extent to which any further delay will prevent or hinder the non-breaching party from making substitute arrangements; and 7. The extent to which prompt performance is part of the bargain of the parties. b. Partial breach accompanied or followed by a repudiation. i. It is also a total breach when the guilty party has immaterially breached the contract, and accompanies or follows the breach with a repudiation of any further willingness or ability to further perform under the contract. 1. Exception: a. Failure to make payments, even when accompanied by a repudiation, does not become a total breach. iv. How to determine whether a promise has been substantially performed 1. How much of the reasonably expected benefit under the contract has the non-breaching party received under the contract at the time of the breach; 2. How great a forfeiture will the breaching party suffer if the is deemed material; 3. How completely will damages alone compensate the non-breaching party; 4. The good or bad faith of the breaching party; and 5. How likely is it that rectifying the breach will result in economic waste, rather than actually providing a benefit for the non-breaching party. v. Doctrines that transform a material breaches into immaterial breaches 1. Divisibility, or part performance a. Courts are empowered to save contracts when they can prevent the suspension of duties and ultimate termination of agreements whenever possible. i. Requirements 1. To apportion the agreement into corresponding pairs of part performances; and 2. To regard the parts of each pair as agreed equivalents. 2. Cure 3. Waiver

IV. Performance and Breach in Contracts Governed by the UCC

1. The acts necessary to fulfill a sellers obligation to tender delivery. a. Put and hold conforming goods at the buyers disposition; b. Give the buyer reasonable notice so that the buyer may take delivery; and c. Either:

i. Make the goods available at a reasonable time and place if they are to be picked up by the buyer; or ii. Offer delivery of the goods at a reasonable time if they are to be delivered by the seller. 2. The acts necessary to fulfill a buyers obligation to tender payment a. Buyer demonstrates a willingness and ability to pay by any means current in the ordinary course of business. 3. The perfect tender rule: every sellers breach is, at least initially, a material breach a. In a single lot contract if either the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may: i. Reject the entire shipment, ii. Accept the entire shipment, or iii. Accept any commercial unit or units in the shipment, and reject the rest. b. Limitations of the perfect tender rule i. A seller is granted fairly extensive rights to cure the imperfect tender 1. Seller has the right to cure if: a. It has performed in good faith; b. Cure is appropriate and timely under the circumstances; c. The seller gives notice to the buyer of its intentions to cure; and d. The seller pays all reasonable expenses caused by the breach and subsequent cure. ii. In installment contracts 1. A buyer may reject a particular shipment due to a nonconforming tender of that shipment only if the nonconformity both substantially impairs the value of the shipment and is not cured. a. The nonconformity substantially impairs the value of that shipment; and b. Either: i. The non-conformity cannot be cured, or ii. The seller refuses to give adequate assurances of cure 2. A buyer may terminate the entire installment contract due to a non-conforming tender in a particular shipment only when the non-conformity in the particular shipment substantially impairs the value of the whole contract. iii. Some courts have held that the perfect tender rule does not apply when the breach is very minor. iv. The perfect tender rule must be read in conjunction with usage of trade, course of dealings, and course of performance. v. The perfect tender rule does not apply to situations where the buyer has already accepted the goods.

1. Unless the non-conformity substantially impairs the value of the good to the buyer, and either was: a. Difficult to discover when it was accepted, or b. Accepted knowingly by the buyer with the reasonable assumption the seller would fix it.

V. Anticipatory Repudiation
A. Common Law Elements of Anticipatory Repudiation 1. The repudiation was received under a bilateral contract in which there were executory duties remaining at the time of the repudiation; 2. The repudiated duty would result in a material and not an immaterial, breach if it were not performed when due; and i. The extent to which the non-breaching party will be deprived of the reasonably expected benefit of his bargain; ii. The extent to which the non-breaching party can be fully compensated for the breach if made to stay in the contract and complete performance; iii. The extent to which the breaching party will suffer forfeiture if the breach is declared material and the non-breaching party need not perform under the contract; iv. The likelihood the breaching party will cure his failure; v. The good or bad faith exhibited by the breaching party in breaching the contract. 3. The repudiation was definite and unequivocal. i. A reasonable person in the position of the innocent party must find it unmistakable that the repudiator is unwilling or unable to perform under the contract. 1. Repudiation by words: a. Cannot or will not perform. 2. Repudiation by conduct a. The act of the repudiator must render him unable, or apparently unable, to perform under the contract as viewed by a reasonable person in the position of the innocent party. B. UCC Elements of Anticipatory Repudiation: 1. The contract is a bilateral one with unperformed duties remaining on both sides at the time of the repudiation. 2. Failure of the repudiating party to perform the repudiated duty would substantially impair the value of the contract to the innocent party. 3. The repudiation whether by words or by conduct, must definitely and unequivocally indicate the repudiating partys unwillingness or inability to perform his promised duties. C. Anticipatory Repudiation by Failing to Provide Reasonable Assurances 1. Whenever one party as reasonable grounds for insecurity with respect to the others ability or willingness to perform, he may in writing demand adequate assurances of due performance. The party receiving such a demand must then

provide assurances that its promised performance will be forthcoming or else be deemed to have anticipatorily repudiated the contract. i. 4 Questions 1. When does a party have reasonable grounds for insecurity? a. If innocent party would, in good faith, have reasonable doubt as to the other partys willingness or ability to provide a substantial part of the bargain. 2. What kinds of things constitute adequate assurances of due performance by the responding party? a. Assurance that would indicate and ability and willingness to perform under the contract to a reasonable person in the position of the insecure party. 3. What are the rights of the insecure party while waiting for assurances? a. If it is commercially reasonable to do so, insecure party may suspend performance wile waiting for the assurances. 4. What are the consequences of failing to provide adequate assurances? a. Must respond within 30 days, failure to do so will be treated as an anticipatory repudiation. D. Mechanics of Anticipatory Repudiation 1. To fulfill the condition of anticipatory repudiation, the innocent party must do something which indicates he is treating the repudiation as final. This can be done by: i. Informing the repudiator of his intention to treat the repudiation as final; ii. Bringing suit for anticipatory repudiation; or iii. By materially changing his position in reliance on the repudiation. E. Effects of Anticipatory Repudiation 1. Sue for total breach immediately upon the receipt of an effective anticipatory repudiation; and 2. Discharge duties owed.

VI. Basic Assumptions: Mistake, Impossibility, Impracticability, and Frustration

A. Mutual Mistake a. A mistake is a belief that is not in accord with the true facts. i. Erroneous belief as to the future is not a mistake. 1. Measured by the facts as they exist at the time the contract is made. ii. Mistake of law can be a mistake of fact. b. Elements necessary to establish a mutual mistake: i. The mistake of both parties must be as to a basic assumption on the which the contract was made. 1. Does the mistake change the essential nature of the contract? ii. The mistake must have a material affect on the agreed exchange of performances.

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1. Will enforcing the contract be too unfair as is called in the contract, for one party would get far more than both parties thought he was bargaining for; alternatively, one party would get far less than both parties thought he was bargaining for. iii. The party seeking to avoid the contract must not bear the risk of the mistake. 1. 3 ways to find a party bore the risk of mistake: A. The risk was allocated to that party by express agreement of the parties; B. The party is aware, at the time the contract is made, that he has only limited knowledge of the true facts, but decides to treat that limited knowledge as sufficient; or C. As a matter of law the court finds it reasonable to place the risk of the mistake on that party. c. Effect of Mutual Mistake i. If the contracting party adversely affected by a mutual mistake can establish the elements of mutual mistake, the contract is voidable by that party. ii. Restitution required if contract avoided on the basis of mutual mistake. B. Unilateral Mistake a. When only one party to a contract has an erroneous belief as to the true facts present in exchange. b. Elements needed to establish a unilateral mistake: i. The mistake of both parties must be as to a basic assumption on the which the contract was made. ii. The mistake must have a material affect on the agreed exchange of performances. iii. The party seeking to avoid the contract must not bear the risk of the mistake. 1. Plus; either iv. The effect of the mistake is such that enforcement against the mistaken party would be unconscionable; or v. The non-mistaken party either had reason to know of the mistake or caused the mistake c. Limitation i. Not brought within a reasonable time after the contract was entered into. ii. If the non-mistaken party has substantially relied by changing position based on the promises made by a party entering a contract under unilateral mistake, most courts hold that the adversely affected party loses his power to disaffirm the agreement. d. Effects of Unilateral Mistake i. Mistaken party can enforce it, or may disaffirm it. ii. Restitution must be made by the party seeking to avoid contract for benefits received. C. Impossibility

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a. Applies when an unexpected event occurs which makes performance by a party objectively impossible. (Sellers defense) i. Elements necessary to establish impossibility: 1. The occurrence of the event which makes performance of a duty objectively impossible; 2. The non-occurrence of the event causing impossibility was a mutually shared basic assumption on which the contract was made; 3. The event causing the impossibility occurred without the fault of the party asserting the defense; and 4. The party asserting the defense did not implicitly or explicitly assume the risk of occurrence of the event causing the impossibility of performance. D. Impracticability a. Applies when an unexpected event occurs which makes performance by a party much more burdernsome. (Sellers defense) i. Elements necessary to establish impracticability: 1. The occurrence of an event which makes performance commercially impracticable; A. Cost increase tenfold 2. The non-occurrence of the event making performance impractical was a mutually shared basic assumption on which the contracts was made; 3. The event making performance impractical occurred without fault of the party asserting the defense; and 4. The party asserting the defense did not implicitly or explicitly assume the risk of the occurrence of the event making performance impractical. A. If the party trying to assert the defense could have somehow managed his risk (contracting a ceiling price, insurance) the defense would not be allowed. E. Frustration of Purpose a. Applies when an unexpected event occurs which renders virtually worthless the value of a partys bargain. (Buyers defense) i. Elements necessary to establish frustration of purpose: 1. The occurrence of an event which frustrates a principal purpose of the party in entering into a contract; A. Benefit viewed extremely BROADLY. B. If the party can achieve any benefit from the contract, the element will not be met. 2. That non-occurrence of the event causing frustration was a mutually shared basic assumption on which the contract was made; 3. That the event causing the frustration occurred without fault of the party asserting the defense; and 4. The party asserting the defense did not implicitly or explicitly assume the risk of the event causing frustration. A. Foreseeability of the event that caused frustration?

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VII. Third Party Beneficiaries

A. Third party beneficiary contracts a. When is the beneficiary entitled to sue the promisor for breach if the promisor does not perform? i. Intended beneficiaries (can sue) 1. Did the promisor and promisee intend to grant the beneficiary a right to enforce the promises? a. Bargaining directly for the benefit to the beneficiary; or b. Did not intend to create an enforceable duty in the beneficiary 2. Performance of the promise fulfill a antecedent obligation to pay money or promisee intended to make a gift to the beneficiary. ii. Incidental beneficiaries (cant sue) 1. Beneficiary who is not an intended beneficiary. b. May the promisor and promisee effectively modify (or even recind) the third party beneficiary contract to the detriment of the beneficiary without first securing the beneficiarys consent? i. The promisor and promisee can freely modify or terminate the promisors duty to the beneficiary until the beneficiary both knows of the promisors promise, and relies on it to some extent.

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