Mike Shecket’s Contracts
Outline[1]
I.
What
is a Contract?
a.
Contracts
are promises.
b.
Restatement
§ 1 says “A contract is a promise the law will enforce.”
c.
Some
contracts are written, and others are oral.
d.
Contract
disputes are frequently caused by failures in communication.
II.
Breach
of Contract
a.
To
prove a breach of contract, a plaintiff must prove three things:
i.
Contract
formation
ii.
Breach
iii.
Damages
b.
Anticipatory
repudiation (UCC § 2-610)
i.
When
either party breaches before the date they were supposed to perform, the
aggrieved party has several options.
1.
They
can wait a “commercial reasonable” amount of time for the repudiating party to
change their minds and perform (Oloffson v. Coomer)
a.
Pursuant
to UCC § 2-610(a), one may await performance by the repudiating party for a
“commercially reasonable time”. Then one has a duty to “resort to any
remedy for breach”, pursuant to UCC § 2-610(b).
2.
They
can use a remedy for breach (at § 2-703 for aggrieved sellers, and at § 2-711
for aggrieved buyers)
ii.
The
doctrine of anticipatory breach by repudiation is meant to help the injured
party and thus does not apply when it helps the breaching party (Reliance
Cooperage v. Treat)
c.
Breach
of an employment contract
i.
What
damages should be mitigated by the plaintiff?
The plaintiff must accept employment that is substantially similar to
the employment offered by the breaching defendant. The plaintiff need not seek or accept
employment that is not substantially similar or comparable. The plaintiff is also not required to
mitigate damages by doing the same work at lower pay. (Billetter v. Posell)
ii.
Can
a defendant’s offer of alternate employment mitigate the damages from the
breach of the original employment contract?
The damages to a wrongfully dismissed employee should be the salary for
the period of the contract minus the amount the employer affirmatively proves
the employee did earn or could have earned from another similar job. (Parker v. Twentieth Century-Fox)
III.
Remedies
for Breach of Contract
a.
The
Goals of Contract Damages
i.
There
are no punitive damages for contract breach except in very extreme cases.
ii.
A
court may award expectation damages, reliance damages, restitution damages, or
nominal damages.
iii.
Hawkins
v. McGee – “Hairy Hand” –
expectation damages are awarded, meaning the difference in value between the
hand promised and the hand actually received.
The pain of the operation doesn’t matter.
b.
Nominal
damages
i.
The
injured party does not need to show actual injury to prevail in court.
ii.
If
they don’t show any actual injury, they will collect nominal damages, which are
usually $1 or $0.06.
c.
Expectation
interest
i.
Definitions
1.
Expectation
interest – The interest in getting the value you would have gotten if the contract
had been performed, or in other words, getting damages such that you’d be in
the same position that you’d be in if the promise hadn’t been broken.
2.
“One
is entitled to recover an amount that will put one in as good a position as one
would have been in had the contract been performed.” – Farnsworth § 12.8
3.
This
gives the injured party the “benefit of the bargain”.
4.
It
is based on the actual value the contract would have had to the injured party
if the contract had been performed.
5.
Damages
= loss in value + other loss – cost avoided – loss avoided
ii.
Expectation
damages cap the amount a plaintiff can recover for breach.
iii.
When
expectation damages are improper or insufficient, reliance and restitution
damages may be substituted in certain cases.
(Dempsey)
iv.
Uncertainty
as a Limitation
1.
We
put the burden on the plaintiff to prove their damages to a reasonable degree
of certainty. If you can’t or don’t, you
don’t recover, even though that will put you in a worse position than
performance would have done.
2.
You
must lay an evidentiary foundation for your damages. “The uncertainty principle boils the bullshit
out of claims.” (Security Stove)
3.
When
you think about “certainty”, think about the necessity of establishing an
evidentiary foundation for damages.
d.
Reliance
interest
i.
Definitions
1.
Reliance
interest – the interest in getting back the value you lost because you were
counting on the contract to be performed
2.
“The
interest a nonbreaching party has in recovering costs stemming from that
party's reliance on the performance of the contract.” – Black’s 7th
3.
This
attempts to put the injured party in the position it would have been in if the
contract had never been made.
4.
It’s
a cost that came out of the plaintiff’s pocket but didn’t go into the
defendant’s pocket. It might have gone to a third party, for example,
Hawkins’s hospital fees.
ii.
Reliance
damages should be granted when expectation damages are seen as excessive
(because, for example, the defendant was not liable for negligence) or too
uncertain but restitution damages are seen as insufficient (because the
agreement ought to be at least minimally enforced).
iii.
Example
– Dempsey’s case
iv.
Most
contract breach cases award expectation damages. However, there seem to be a few cases where
reliance damages are favored. Why don’t
we usually go with reliance?
1.
Reliance
is a lot harder to prove than expectation, and so if you want to ensure good
contracts from a policy standpoint it’s more practical to use expectation.
2.
When
we don’t get what we’re promised, our feelings are hurt. There is an interest in protecting against
the stress of broken promises that is best enforced with expectation damages.
3.
A
modern economy based on credit needs remedies based on expectation because of
the risk and uncertainty involved in changing markets.
4.
Expectation
damages prevent promisors from being tempted by gain through breach of
contract.
e.
Restitution
interest
i.
Restitution
interest – the interest in getting the money back that you paid while trying to
do your part of a contract
ii.
With
restitution you’re merely taking the benefit away from the defendant that the
plaintiff gave him/her.
iii.
Statute
of frauds – restitution ≠ enforcement – that is, even if the contract is
unenforceable under the statute of frauds or for some other reason, you can
still get your money back.
f.
Buyer
in Breach and Seller’s Damages under the UCC (generally at § 2-703)
i.
Resell
the goods and recover damages (§ 2-706) – seller’s “cover”
1.
The
resale must be made in good faith and a commercially reasonable manner
2.
The
seller can recover the difference between the resale price and the contract
price (only if the resale price is less than the contract
price)
3.
The
seller can also recover incidental damages (§ 2-710)
4.
The
seller must deduct expenses saved due to the buyer’s breach
ii.
Recover
damages for non-acceptance (§ 2-708)
1.
The
standard measure of damages (§ 2-708(1))
a.
The
seller can get the difference between the market price and the contract price (only
if the market price is less than the contract price)
b.
The
seller can also get incidental damages (§ 2-710)
c.
The
seller must deduct expenses saved due to the buyer’s breach
2.
The
“lost volume” seller (§ 2-708(2), like in Neri v. Retail Marine)
a.
If
the standard measure is inadequate, the seller can recover the profit the
seller would have made from the buyer
b.
That
profit includes reasonable overhead
c.
The
seller can get incidental damages (§ 2-710)
d.
The
seller can get “costs reasonably incurred”
e.
The
seller can get credit for payments or proceeds of resale
iii.
Action
for the price (§ 2-709) – seller’s specific performance
1.
The
seller can sue for the price of goods that the buyer failed to pay for:
a.
When
the goods get lost or destroyed after they’ve passed to the buyer’s control
b.
When
the goods can’t be resold (like pencils with the person’s name on them)
g.
Seller
in Breach and Buyer’s Damages under the UCC (generally at § 2-711)
i.
Cover
(§ 2-712) – for fungible goods
1.
The
buyer can get substitute goods if their bought in good faith and without
unreasonable delay
2.
The
buyer can get as damages the difference between the cost of the substitute
goods and the contract price (only if the substitute was more expensive
than the contract price)
3.
The
buyer can get incidental or consequential damages
4.
The
buyer must deduct expenses saved
5.
Cover
is an actual transaction when a buyer aggrieved by a breach goes out on the
market and buys something to replace the thing they would have received under
the contract.
6.
What
damages should be awarded to the plaintiff if they made a contract to replace
the original contract part of the way through its term? Damages are to be measured by the difference
between the cost of the goods on the date of delivery and the contracted cost
of the goods. (
ii.
Damages
for non-delivery (§ 2-713)
1.
The
buyer can get the difference between the market price at the time the
buyer learned of the breach and the contract price (only if the
market price is greater than the contract price)
2.
The
buyer can get incidental or consequential damages
3.
The
buyer must deduct expenses saved
4.
This
is a complete alternative to cover
iii.
Specific
performance/replevin (§ 2-716)
1.
Buyer
can sue for specific performance when the goods are unique
2.
Buyer
can get replevin if they try to cover but fail because there isn’t any stuff out
there (like if there’s a shortage of that good)
h.
Employee
in breach and employer’s damages
i.
Employer
in breach and employee’s damages
j.
Avoidability
– Hadley and all that
i.
Mitigation
1.
[D]amages
are not recoverable for loss that the injured party could have avoided without
undue risk, burden or humiliation. – RESTATEMENT (SECOND) OF CONTRACTS § 350(1)
2.
Once
a contract is repudiated, the plaintiff should stop working on the
project. They can’t “pile up damages”
for useless work. They should only be
compensated for the labor and materials they had already used at the time of
the breach. (Rockingham County v.
Luten Bridge Co.)
3.
The
principle of substitution says that replacement cost puts a ceiling on
loss. (Louise Caroline Nursing Home,
Inc. v. Dix Constr. Corp.)
ii.
Forseeability
1.
The
injured party cannot recover damages that the party in breach did not have
reason to foresee at the time of contract formation. (Hadley v. Baxendale)
a.
The
injured party may recover damages for losses that “arise naturally” from the
breach of contract itself.
b.
Consequential
damages can only be recovered if the loss was “in the contemplation of both
parties” at the time they made the contract.
i.
Compare
UCC § 2-715(2)(a): consequential damages (of the buyer) include any loss
resulting from requirements that the seller knew about at the time of
contracting.
2.
Foreseeability
test
a.
Foreseeability
is not affected by any events after contract formation. Rest.2d Cont. § 351 UCC § 2-715 (2)(a)
b.
Foreseeability
may be necessary but not sufficient
iii.
Cover
by buyer as injured party
k.
Agreed
damages clauses
i.
Penalties
1.
Restatement
(Second) § 356 says that the
parties to a contract cannot create a penalty for its breach.
2.
Contracts
ain’t torts.
3.
If
a contract contains stipulations of varying degrees of importance that would
cause harm with varying degrees of certainty, a fixed damages clause will be taken
to be a penalty and thus unenforceable.
(Wilt v. Waterfield, practice exam question with the actor)
ii.
Liquidated
damages
1.
A
liquidated damages clause in a contract is enforceable if the damages are
difficult to predict and the damages fixed in the contract are a reasonable
prediction of what it will take to compensate the injured party. (Pacheco v. Scoblionko, City of Rye
v. Public Service Mut. Ins. Co.)
2.
A
liquidated damages clause is enforceable if the damage amount is “reasonable
either at the time of contracting” or, if the injured party suffers actual
damages, “at the time of injury”.
3.
There
is no recovery on liquidated damages when there are no actual damages. (Massman Constr. Co. v. City Council of
Greenville, Miss.)
4.
UCC
§ 2-718
iii.
Limited
damages clauses
1.
Even
if you can’t contractually fix damages, you may
contractually limit damages.
2.
Compare
UCC § 2-718(1) to § 2-719: an agreement may limit damages. The UCC gives broad permission to limit
damages except in cases where it is unconscionable.
l.
Enforcement
by Specific Performance and Injunction
i.
Specific
performance
ii.
Injunction
iii.
The
Adequacy Test
1.
There
can be no remedy in equity (specific performance) if there is an adequate
remedy at law (cash money). (Fitzpatrick
v. Michael)
iv.
Other
Limitations
IV.
Grounds
for Enforcing Promises
a.
Contracts
with consideration
i.
Bargained-for
test
1.
Rest.
§ 71 – The question is: “Was
there a trade here?” Example – Whitten
v. Greeley-Shaw – The defendant’s only promise is that she won’t call the
plaintiff at home. But that’s not a valid
ground to enforce the plaintiff’s promise.
Valid consideration must be something that is “sought after” (another
way of saying “bargained for”) by the other party.
2.
You
can have 99% gift and 1% trade and still have an enforceable promise (§
81). Example – Earle v. Angell –
It’s the aunt who promises $500 to her nephew for attending her funeral. You only need a smidgeon of trade in
order to make consideration valid. This
promise is enforced against the aunt’s estate.
3.
Consideration
has nothing to do with reliance.
4.
If
nothing is traded or exchanged for the promise, we won’t enforce the promise
unless we can find another legal basis to enforce the promise.
ii.
Benefit-detriment
test – We used to talk about this a different way: “Benefit to the promisor or
detriment to the promisee would make a promise enforceable.”
1.
Example
– Hamer v. Sidway – Story promised his nephew cash in exchange for
foregoing drinkin’, smokin’ and that kind of stuff. The court enforces the promise because not
drinkin’ and smokin’ was valid consideration for the uncle’s promise of $5,000.
2.
This
is 82% right, and the drafters of the Restatement have changed it – Restatement
§ 79 says if you have consideration according to § 71, you don’t need the old stuff
like benefit/detriment or “equivalence of values” or “mutuality”.
iii.
Settlements
of Valid (Disputable) Lawsuits
1.
We’ll
enforce promises where the consideration is dropping a lawsuit if there’s any
chance at all it’s valid. “The claim
upon which settlement is based must be made in good faith [honestly].”
2.
There
are policy reasons for this: we want to encourage out of court settlements
because they’re fast and cheap.
iv.
Past
benefit – The Restatement § 86 will enforce promises based on past
benefit if it’s necessary to prevent injustice.
b.
Contracts
without consideration
i.
Reliance
– Old view – Example – Kirksey v. Kirksey – The plaintiff’s
brother-in-law said she could move in with him, and this was held to be a gift
promise without any consideration.
Later, he broke the promise.
Justice doesn’t require enforcement because the sister-in-law was
allowed to live on the property for two years before she got kicked out. It’s sort of a “conditional gift”. “Come and get it!”
ii.
Reliance
– Restatement § 90
1.
The
doctrine of promissory estoppel can be applied when:
a.
There
is a promise.
b.
The
promisor foresees reliance by the promisee.
c.
The
promisee actually relies on that promise.
d.
We’ll
only make the promise binding when justice requires it.
e.
We
may limit the remedy as justice requires.
2.
Same
thing as unbargained-for reliance
3.
Doesn’t
apply when there is consideration
4.
§
90 is the most famous section of the whole Restatement – If someone makes a
promise to you, and you reasonably rely on it to do something or not do
something, then that promise will be enforced “if justice demands it”.
5.
This
can lead to partial enforcement
6.
Exceptions:
a.
Marriage
settlements
b.
Charitable
subscriptions
7.
Examples
a.
Ricketts
v. Scothorn – Katie gets her
dough because the executor of her grandfather’s estate was barred from claiming
a lack of consideration. Why? Because Katie relied on the promise of money
(which was gratuitous) to quit her job.
b.
Allegheny
College v. National Chautauqua County Bank – Cardozo says there is consideration. The promise wasn’t enforceable until Johnston
paid the first $1,000. The college
promised to memorialize Johnston in a small way. It’s kind of a reach overall. But some charitable promises are enforceable
on the basis of consideration.
8.
Promises
to procure insurance
a.
East
Providence Credit Union v. Geremia
– consideration is thin, so is reliance, but the promise of the credit union to
pay the Geremias’ insurance premiums is enforced.
iii.
Contracts
implied-in-fact
1.
The
promise to pay is implicit in the circumstances.
2.
Business
stuff
a.
You
know, or certainly should know that you’re asking for a service from someone
who is in the business of charging for that service.
b.
You
implicitly promise to pay a reasonable charge.
c.
Examples
i.
Like
hailing a cab
ii.
Going
to a restaurant where you eat then pay
iii.
Going
to get a haircut
3.
Other
stuff – Example – Collins v. Lewis – The deputy sheriff seized some
cows. The defendant didn’t have room to
keep the cows. The defendant was told
that the plaintiff would keep the cows for him at the defendant’s expense. The plaintiff in fact kept the cows for 38
days until the defendant sold them. It
was held that there was a quasi-contract under which the defendant owed the
plaintiff for boarding the cows.
iv.
Charitable
subscriptions – everybody loves charities, they’re so warm and fuzzy and we’re
going to make sure they get the money that’s promised to them.
v.
Formality
1.
Characteristics
a.
Written
b.
Signed
– with an “X” if you were illiterate
c.
Sealed
– with wax
d.
Delivered
2.
Functions
a.
Formal
contracts are good evidence that a promise was made!
b.
Contracts
with a lot of rigmarole made people stop and think about what they were getting
into.
c.
The
seal was a cheap test of enforceability, which promoted faster, cheaper
courts.
3.
All
50 states have now abolished the seal.
V.
Grounds
for Not Enforcing Promises
a.
Statute
of frauds – some promises must be in writing in order to be enforceable!
i.
What
promises must be written?
1.
Contracts
for the sale of goods, value $500 or more
2.
Contracts
for the sale of land
3.
Contracts
not to be performed within a year (that can’t be performed within a
year)
4.
Contracts
in consideration of marriage (Clovis won’t bug us about this)
5.
Contracts
to answer for the debt of another (same here, don’t worry about it)
ii.
The
statute of frauds never prevents restitution.
b.
Illusory
promises
i.
An illusory
promise is a promise that is impossible to break.
ii.
To
the extent that a promise is illusory, you can’t hold someone to it.
c.
Gift
promises – we won’t enforce promises of gifts in most cases.
i.
Example:
Fischer v. Union Trust – the father didn’t make a deal with his mentally
incompetent daughter; he gave her a gift with the mere illusion of
trade. It was just pretense. We won’t enforce his promise to pay off the
creditors. The completed gift of stuff
(land) is OK, but the gratuitous, non-bargained-for promise shall not be
enforced.
ii.
Counterexample:
Simmons v. United States – Mr. Simmons caught Diamond Jim in Chesapeake
Bay and tried to pass off his prize as a gift from the beer company in order to
avoid taxes. Can’t do that! It was no gift, it was a completed contract. The offer was the announcement of the
contest, and the acceptance was the catching of Diamond Jim.
iii.
Example:
Batsakis v. Demotsis – The consideration here was slight, basically
trading very little money for a lot more money later, but mere inadequacy of
consideration will not void a contract.
d.
Unconscionability
i.
The
unconscionability of a contract is a question of law (for the judge)
rather than a question of fact (for the jury). If the contract shocks
the conscience of a law-abiding person, the court may choose not to enforce
the entire contract or just strike down the bad bits.
e.
Past
Consideration – it isn’t consideration
i.
Moral
obligation
1.
Example
– Mills v. Wyman – The father promised to pay for the care of his son
after finding out he died. This promise
isn’t enforceable because the promisor got no benefit. This isn’t a case to promise to pay past
debts.
2.
Counterexample
– Webb v. McGowin – “Human rudder” case – promisor got a big benefit by
having his life saved. There was a lot
of time to think before making the promise.
The promise was performed for eight years before performance was stopped. This promise gets enforced
ii.
Preexisting
Legal Duty Rule
1.
“A
promise to do what the promisor is already legally bound to do is an unreal
consideration.”
2.
An
agreement to amend an earlier contract must rest on “new and independent
consideration” in order to be enforceable.
Performance of an existing legal duty can never constitute consideration
for a new contract. (Levine v.
Blumenthal)
f.
Settlement
of Invalid Lawsuits
i.
We
won’t enforce more or less extortionary claims.
ii.
Old
rule
1.
In
order for dropping a claim to be consideration:
a.
The
claim must be made in good faith and
b.
The
claim must have some substance
2.
Example
– Duncan v. Black – Dropping a bogus lawsuit doesn’t constitute valid
consideration.
iii.
Restatement
rule: § 74 – it’s not and, it’s or
1.
Either
good faith or
2.
Substance
(some doubt as to outcome)
3.
If
you write it down, that writing is consideration if bargained for
g.
Volunteer
Activities – “Unsolicited action”
i.
There
is no ground for requiring payment for services you didn’t ask for.
ii.
In
the absence of a contract, restitution is only available when someone has been
“unjustly enriched at the expense of another”.
iii.
Volunteers
generally have no right to restitution.
iv.
Example
– Martin v. Little, Brown & Co. – If your voluntary actions enrich
another party, but not unjustly, like writing in to let them know they’re being
plagiarized, you can’t exact compensation from them.
VI.
Contract
Formation
a.
Mutual
Assent
i.
If
a reasonable person would have taken a party’s words to constitute assent to
the formation of a contract, then that contract will be enforceable. (Embry v. Hargadine, McKittrick Dry Goods
Co.)
ii.
When
a court determines whether a party has assented to an agreement, the only
intention that matters is the party’s apparent, objective intention (or the
intention that a “reasonable person” would infer). (Kabil Developments v. Mignot)
b.
Offer
c.
Acceptance