Contracts Outline Mk. II – getting there but still not quite done
Table of contents
UCC § 2-706 – resale
UCC § 2-708(1) – regular seller’s damages
UCC § 2-708(2) – lost volume
UCC § 2-709 – action for the price
UCC § 2-710 – seller’s incidentals
UCC § 2-712 – cover
UCC § 2-713 – regular buyer’s damages
UCC § 2-715 – incidental/consequential
UCC § 2-716 – specific performance
UCC § 2-718 – liquidated damages
UCC § 2-723 – market price
Adequacy of remedy at law
Specific performance of land contracts
Action for the price
“Ordinary course of events”
Oral versus written promises
Land provision of statute of frauds
Not to be performed within one year clause
Imputed versus actual knowledge
Smidgeon of trade = enforceable contract
Settlement of invalid claims
Reliance on a promise to get insurance
Limited vs. fixed damages
Preexisting legal duty rule
Adequacy of consideration is immaterial
Parol evidence rule – § 213 and § 2-202
Hadley v. Baxendale
Restatement § 90
To prevent injustice
Agreed damages clause
Objective mutual assent
Subjective mutual assent
Manifestation of intent
>$500 goods clause
Accord and satisfaction
Mistake – Peerless
Restatement § 45
Statute of frauds
“A contract is a promise the law will enforce.” To prove a breach of contract, the plaintiff must prove: (1) contract formation, (2) breach, and (3) damages. Sometimes it’s a good idea to break a promise: efficient breach. This scheme influences the incentives of a contract breaker or someone considering breaking a promise. A unilateral contract is one where only one party has made a promise. That is, a promise has been exchanged for performance. A bilateral contract is one where a promise is exchanged for a promise. This is now the most common type of contract.
We are compensating the plaintiff’s loss. There are no punitive damages.
The expectation interest, the standard remedy in contracts, puts the plaintiff in the position he/she would have been in if the contract had been carried out. The expectation interest is the weakest…it has the least “tug on our heartstrings”. The reliance interest is 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. The restitution interest is the strongest because the plaintiff has a “minus” and the defendant has a “plus”. With restitution you’re merely taking the benefit away from the defendant that the plaintiff gave him, usually at market price. Sometimes putting someone in the position performance would have done means awarding restitution and expectation, or even all three.
Hawkins v. McGee – The damages that should be awarded are the difference between the value of what the plaintiff would have received if the contract had been carried out and the value the plaintiff currently possesses (plus incidental losses resulting from the contract being breached).
Acme Mills & Elevator Co. v. Johnson – Can a defendant be found liable for breach of contract if no harm was done? The buyer should get the difference between the contract price and the market price at the time of performance. The “injured party” shouldn’t be able to collect expectation damages if they actually benefited from the contract breach. Sometimes the restitution claim is higher than the expectation claim.
Common law applies to land contracts, except for occasional statutes. Common law also applies to services contracts, but there are many statutes involving employment. But the sale of goods uses Article 2.
What law do we use for combination goods and services contracts? One test is the “predominant factor test”. Which factor predominates? You could, e.g. take the part that’s more expensive. Or you could bifurcate the contract: Article 2 applies to the goods, and common law applies to the services. This might be complicated and expensive. If you hire someone to build a house the contract is considered a services contract. But when the contractor goes to buy the materials to build a house, the sale will be governed by Article 2.
UCC Article 2 –
Article 2 applies to goods defined as things that are moveable at a particular time. Part of what moveable means is just understood. § 2-105. Goods doesn’t include money or investment securities but does include the fetal animals and growing crops and things attached to realty.
Property consists of things that are located at a particular place on the globe. Real estate is land. You can take things from the land, but the location of the land is immoveable. Real estate is thus excluded from Article 2. Buildings are part of the real estate.
§ 2-713. Damages for breach by the seller equals the difference between the market price at the time when the buyer learned of the breach and the contract price together plus incidental and consequential damages minus expenses saved because of the breach. Under §2-713, with a fungible good: Damages = Market Price on the date of delivery – Contract Price
Louise Caroline Nursing Home, Inc. v. Dix Constr. Corp. – If you can make up a breach by making a replacement purchase at the same price, then no harm, no foul, nominal damages only. One measure of damages is reasonable cost of completion minus the unpaid contract price. The principle of substitution says that replacement cost puts a ceiling on loss.
The buyer has a loss whenever the market price is higher than the contract price. Market price is “what a willing buyer will pay a willing seller, both of them being informed, with no fraud, misrepresentation or mistake involved.” Sometimes it can be hard to prove market price. Once compensated, the buyer can replace the goods by buying them out on the market.
Laurin v. DeCarolis Constr. Co., Inc. (Gravel case) – The defendant ought to be liable for the fair market value of the materials removed. The court says it is not sufficient to award damages based on how much less the property is worth. Illinois Central R.R. v. Crail – To calculate the market price of a fungible good, you must use the market price from the market where the injured party typically buys. There are typically two markets: retail and wholesale. You use the price from the market where the injured party typically buys. Watt v. Nevada Central R.R. – Replacement cost puts a ceiling on something’s value, and the price realizable puts a floor on something’s value.
Where injured employer hired a replacement at a higher salary, employer was entitled to recover the amount of the additional compensation it was required to pay replacement, since any additional value the employer may have received from the replacement was imposed upon it and could not be characterized as a benefit.
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. The buyer’s right to cover is the equivalent of the seller’s right to resell. § 2-712. After a breach, buyer may "cover" by making honestly and quickly any reasonable substitution. The buyer may recover the difference between the cost of cover and the contract price plus incidental or consequential damages minus expenses saved due to breach. If you don’t cover, you can get another remedy like § 2-713.
Reasonableness of cover is to be judged at the time of the conduct; hindsight doesn’t matter. "Without unreasonable delay" is not intended to limit the time necessary for buyer to shop around. The cover purchase must be in substitution for the defaulted contract goods. Cover can include a series of purchases, even on the spot market, as long as they are reasonable. Unreasonable cover (e.g. too expensive) is not considered a cover. It’s not fair to shift the cost of unreasonable cover to the contract breaker.
A buyer can have damages under § 2-712 or § 2-713 and still have extra damages from § 2-715. Incidental damages resulting from the seller's breach include money spent getting ready to buy goods rightfully rejected (like renting a van to pick up the stuff), reasonable expenses of cover and anything else reasonable. Consequential damages resulting from breach include loss resulting from requirements the seller had reason to know about that couldn’t be prevented by the buyer (like with cover). This is a codification of the principle of mitigation/avoidable consequences. The possibility of cover limits consequential damages. You can’t get specific performance if you can cover.
§ 2-708 (1) – market price minus the contract price – Two different equivalent formulas for damages: (Nonsavable expenses incurred before repudiation – Profit plaintiff would have earned on the job = Damages) or (Unpaid contract price – Savable costs = Damages)
Action for the price: Seller delivers, but buyer breaches. This contract is enforceable because the goods were delivered. Seller has a claim for the full contract price. § 2-709: When the buyer breaches the seller can get incidental damages plus: the price of goods accepted or lost or damaged after a commercially reasonable time after the stuff has passed to the buyer (buyer has it, hasn’t paid for it, but broke it). There’s also an action for the price if the seller can’t find somebody else who will buy the goods at a reasonable price, e.g., customized goods. Where the seller sues for the price he must hold for the buyer any goods still in his control except he may resell them before getting the judgment. The money you get from that resale has to be credited to the buyer and if he pays the judgment he gets any goods not resold. After the buyer has breached, a seller who isn’t allowed to get action for the price can get damages for breach under § 2-706 or § 2-708. If the buyer is found liable and does pay for the stuff, you generally have to give them the stuff. It’s rare that the seller needs the full price.
Resale: Say the seller doesn’t need the full price and won’t get it. Buyer never picks up the goods and never pays. Seller resells the goods for less than she would have received from the buyer and below market price. Seller can’t get the full price. § 2-706: If the seller resells the goods honestly and quickly, the seller can get the contract price minus the resale price plus incidental damages (§ 2-710) minus expenses saved by breach. Seller must (almost always) give the buyer notice of intention to resell. This section is analogous to § 2-712 (COVER) for a buyer’s damages. § 2-706 (2) says that every aspect of the resale must be commercially reasonable. If § 2-706 doesn’t apply you go to § 2-708 (1). When the resale is private, the seller must give the buyer reasonable notification. No notification leads to no resale damages.
Rockingham County v. Luten Bridge Co. – You don’t recover for losses that you could have avoided without undue loss, burden or humiliation, § 350(1). Once a contract is repudiated, the plaintiff should stop working on the project and 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. You’ll recover the same amount of damages if you stop building or if you continue. Otherwise, you’re just digging a hole in your own pocket.
Overhead is another way to say fixed costs, that is, the costs that don’t change as you produce more or less units of a good (e.g. paying the rent). Those costs that do change with your level of production are variable costs (e.g. materials). Don’t separate gross profit into net profit and overhead. You need your gross profit to put you in the position that performance would have done. Savable costs such as variable costs mitigate whether or not they are, in fact, saved. It is the plaintiff’s responsibility to save costs when they reasonably can.
Leingang v. City of
Parker v. Twentieth Century-Fox Film Corp. – The damages to a wrongfully dismissed employee should be the salary for the period of the contract minus the amount the employer proves the employee did earn or could have earned from another similar job. Thus, a job taken mitigates unless the job is either different or inferior in kind to the contract job.
If you (employee or really small company) can only do one thing at a time, the earnings from the job taken mitigate your losses from the breach of contract over another job you would have had during the same time. On the other hand, if you’re a company big enough to do lots of projects at a time, your gain from taking another job doesn’t mitigate your loss. Getting a second job doesn’t mitigate a loss because an expansible service provider could have done both jobs.
Billetter v. Posell – The plaintiff must mitigate by accepting 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, nor is the plaintiff required to mitigate damages by doing the same work at lower pay.
A lost volume seller has many identical goods. Buyer breaches. Seller resells for more money than the contract price. § 2-708 (2): If damages are inadequate to satisfy Golden Rule then damages equal the gross profit (overhead plus net profit) the seller would have made from the buyer, plus incidental damages plus reasonable costs reasonably minus credit for payments or proceeds of resale.
Neri v. Retail Marine Corp. – When contract price minus resale price or contract price minus market price is insufficient to satisfy the Golden Rule, the lost volume seller is entitled to their profit. R.E. Davis Chemical Corp. v. Diasonics – a lost-volume seller can skip directly from § 2-706 (resale) to § 2-708 (regular ol’ damages). But § 2-708(1) and § 2-706 take precedence over § 2-708 (2). You can’t get lost profits if losing one sale made another sale possible. Then the second sale mitigates the loss of the prior sale.
Notice in Neri that there’s a problem with messy language in the statute. UCC § 2-708 (2) seems aimed at a lost profits recovery, yet it allows for resale. Harris argues that the language in the statute refers to something called a component seller. The language at the end of § 2-708 (2) doesn’t make any sense for the lost-volume seller, though it does for the component seller.
Reliance Cooperage Corp. v. Treat – The doctrine of anticipatory repudiation does not apply when it helps the breaching party. You don’t need to mitigate damages until you have actually incurred those damages. § 2-610. When either party breaches before the date of performance, the injured party may wait for the other party to perform for a reasonable time, or get a remedy with § 2-703 or § 2-711 even if they told the other party he would await the other’s performance and has urged retraction.
§251 tells you if you have a repudiation. If you believe that a breach is about to happen, you can demand assurance of performance and suspend your performance until you’re reassured. If you don’t get reassured in a reasonable time, you can treat it as a repudiation. § 2-609: Between merchants the reasonableness suspecting breach and whether the reassurance is believable is judged according to commercial standards. After you get a demand for reassurance, if you don’t provide it in 30 days or some lesser reasonable time, that’s repudiation.
According to § 2-723, when the action comes to trial before the performance date, damages are determined by the date when the aggrieved party learned of the repudiation. In the more usual case, however, when the case goes to trial after the date of performance, the damages are calculated on the date of performance. Is this a conflict? Courts have decided to stick with § 2-610 (a), and let you wait a commercially reasonable amount of time.
Black v. Baxendale – OLD Rule: The question of whether the plaintiff’s expenses are reasonable is entirely a matter for the jury. Hadley v. Baxendale – The defendant will only be held liable for the plaintiff’s lost profits if they are generally foreseeable or if the plaintiff tells the defendant about any special circumstances at the time the contract is formed.
Judges won’t award damages unless they were foreseeable to the contract breaker at the time of contract formation. To the extent that you, the injured party, brought the loss on yourself, you don’t recover. Otherwise, follow the Golden Rule. The judges are taking hold of more power in Hadley than they had before. Hadley means that the Golden Rule will not always hold.
Victoria Laundry v. Newman – When there is a breach of contract, the breaching party should be liable for damages that naturally arise from the breach, or damages that both of the parties contemplated at the time they made the contract. If you were told about something in advance, that would also make it foreseeable, even if it was out of the ordinary.
General damages – this encompasses almost all of the damages we have discussed so far. These would be damages that you could calculate by taking your Restatement off the shelf and looking them up. Special or consequential damages – these damages arise under the “second rule” of Hadley. There is recovery of, for example, lost profits only if the injured party had reason to know of that possibility at the time of contract formation.
UCC § 2-715(2)(a) sort of codifies Hadley. Consequential damages resulting from breach include loss resulting from requirements the seller had reason to know about that couldn’t be prevented by the buyer (with cover, for example).
§ 351(3) says a court may limit damages for foreseeable loss for whatever reason in order to avoid disproportionate compensation. The recovery can thus be less than “make-whole” recovery. “You’ll usually recover the damages unless the judge is shocked out of his mind.”
Lamkins v. International Harvester Co. – You can be liable even if you neither tacitly agreed to be liable nor actually foresaw the damages, so long as you reasonably could have. We need to think of foreseeability with two minds: one that sticks to the letter of the law and one that lets in pure policy decisions.
Valentine v. General American Credit, Inc. – Mental distress damages for breach of contract are not recoverable except when the contract has a personal element or when the damage suffered due to breach cannot be compensated within the terms of the contract. Emotional distress is foreseeable; nobody likes getting fired, but Hadley doesn’t apply because emotional distress damages are hard to quantify.
Hancock v. Northcutt – emotional distress claims in breach of construction contracts for building a home are rejected on policy grounds. See § 353. Erlich v. Menezes – emotional distress liability for home builders would increase housing costs, which is not a desirable policy result. You don’t want contracts to be expensive to make, and you don’t want to deal with damages that are difficult to calculate.
On the other hand, emotional distress damages may be allowed if they are particularly foreseeable, or are accompanied by physical harm. E.g. weddings and funerals; when a telegram saying someone died isn’t correctly delivered. Though economic damages in these cases may be small, there might be big emotional distress damages.
The “English rule” is the loser
pays the winner’s attorney’s fees, which may prevent frivolous lawsuits. Under the “American” rule, plaintiffs in
contract cases don’t recover their attorney’s fees, and thus aren’t truly made
whole. But you can contract out of this
rule, depending on the jurisdiction. In
Freund v. Washington Square
Press, Inc. –The injured party shall not
get expectation damages unless they are established with “reasonable
certainty”. You must lay an evidentiary
foundation for your damages. “The
uncertainty principle boils the bullshit out of claims.”
The expectation interest puts a ceiling on the reliance interest. We shall not put the plaintiff into a position better than performance would have done when we are protecting the reliance interest. If the deal was a big loser, we might not award the plaintiff anything but nominal damages. However, when protecting a restitution interest, we may put a plaintiff in a position better than performance would have done.
Getting your restitution interest is the disgorgement of unjust enrichment, not the enforcement of a promise. Restitution interest is the benefit that the injured party gave to the breaching party. This will not be reduced by any losses the injured party would have incurred upon performance.
What is the measure of restitution interest? It’s the replacement value for the other party for the stuff they got, that is, the market price. You can get back your restitution interest even if that would put you in a better position than performance would have done. Expectation interest does not limit restitution interest when the contract breaker has gained value from the injured party’s part performance. Notice that when you get your restitution interest, there may not be any real promise being enforced. Instead, it is the disgorgement of unjust enrichment. Making restitution is not the same as enforcement.
Quantum meruit is more or less means a recovery that doesn’t aim at enforcing a promise, but rather recovering the value of performance rendered as restitution (Blair). Usually, this term indicates a restitution claim, but not always, so be careful.
An express contract is contract in which the promises of both parties are expressed in words, whether written or oral. Contracts implied in fact, on the other hand, have no express promise in words to pay, but it is clear that there was a promise to pay. This is a very common contract that occurs all the time. Contracts implied in law are contracts where something was definitely not promised, but the law enforces it anyway to disgorge unjust enrichment.
United States v. Algernon Blair, Inc. – Can the injured party recover damages for services rendered on a losing contract? If expectation damages are insufficient to cover the plaintiff’s losses, the plaintiff may substitute reliance damages. The injured party is entitled to damages for services rendered when the breaching party has benefited from injured party’s loss. The damages should be measured by the replacement value of the goods and services provided by injured party. This is a case of quasi-contract recovery. You don’t recover the value conferred; you don’t recover the amount spent by the injured party. Instead, you recover the contract price.
§ 373 (1) says on a breach by non-performance that gives rise to a claim for damages for total breach or on a repudiation, the injured party is entitled to restitution for any benefit that he has conferred on the other party by way of part performance or reliance. § 373(2) says that you lose your right to restitution when you’ve completed performance and everything’s done except for the other person’s payment. When there has been full performance by the injured party and the breaching party refuses to pay, the remedy is forcing the breaching party to pay the contract price.
Britton v. Turner – The old rule was that if you voluntarily failed to fulfill an employment contract, you were not entitled to recover anything for the work you had done. But today, the breaching party is entitled to compensation for work actually performed unless there is an express stipulation to the contrary in the contract. The restitution interest is capped by the contract price. Then you subtract any damages the aggrieved party can show due to the breach.
The party in breach is entitled to restitution for any benefit conferred by part performance in excess of the loss that he has caused by the breach.
§ 2-718(2)(b): If you paid a down payment but then repudiated before the UCC, you would lose your down payment. That was seen as the purpose of a down payment. Under the UCC, however, the seller has to give back the whole down payment except for $500 or 20% of the contract price, whichever is smaller. When the buyer is in breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds twenty per cent of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller. A buyer in default will not get restitution to the extent that the seller suffers damages. This is a significant “ding” into the restitution interest when the contract price is small, but it gets smaller and smaller as the contract price goes up.
If the buyer’s breach actually damages the seller, then we ding restitution in order to put the seller in the position that performance would have done. You ding the restitution for the $500/20% and then you further ding it for the seller’s damages. You can find this in § 2-718(3).
Whenever the compensatory damages exceed the penal amount, you can usually predict that the penal damages aren’t going to get dinged. This is contrary to the plain language of the statute, but courts just plain don’t like it. When there are no compensatory damages or small compensatory damages, they will impose the penal damages.
§ 2-718(2) only applies when the buyer has made a down payment and is coming into court as the plaintiff trying to get it back. If the seller has damages and chooses to come into court as a plaintiff, the buyer gets 100% credit for the down payment. This “dinging” stuff only kicks in when the breaching buyer comes in as a plaintiff.
If a builder willfully breaches, the court may say you can’t recover anything. We will cap the builder’s restitution interest recovery by the owner’s damages. Since the owner didn’t break his promise, we don’t want to hurt his expectation interest.
The doctrine of substantial performance kicks in when the builder doesn’t perform 100%, but gets close, triggering the owner’s obligation to pay the contract price minus any damages the owner has suffered due to the shortfall in performance. Substantial performance is performance free from serious defects. Sometimes the standard of damages is “diminution of value” and sometimes it’s how much it would cost to fix the defects. Courts don’t like to throw away existing valuable things. Sometimes diminution in value is smaller in dollars than fix-up cost, but sometimes it’s a lot more than fix-up cost. § 348.
If it would cost a lot to fix a small defect, you’ll probably recover the diminution of value. If it would cost very little to fix a big problem, you’ll more likely recover the fix-up cost.
Groves v. John Wunder Co. – Was the
plaintiff entitled to (1) the reasonable cost of doing the work the defendant
was supposed to perform under the contract or (2) the difference between the
value of the land as it was originally and the value of the land as it would
have been had the defendant performed?
The proper measure of damages is the cost of remedying the defect. This is a minority rule. In
Peevyhouse v. Garland Coal & Mining Co. – Expectation damages cap the amount a plaintiff can recover for breach. It would have cost $29,000 to level land in such a way as to make it worth only $300 more. This is the majority rule. In Peevyhouse, the farmers were primarily trying to get money for the coal on their property. The leveling promise wasn’t as important or valuable to them as the coal royalties. We want to prevent unnecessary economic waste.
If there is some loss, and the agreed upon damages are in line either with the real loss or reasonably expected loss, the court will generally uphold that clause. “Agreed damages at the outset” becomes a “liquidated damages clause” if it’s good and it will be enforced. If it’s no good and unenforceable, it’s called a “penalty clause”. A penalty clause doesn’t invalidate the entire contract; instead, you just pretend that the clause was never there and enforce the rest of the contract. § 356: the parties to a contract cannot create a penalty for its breach. As a matter of public policy and economic efficiency, penalties in contracts have no purpose. This is almost identical to UCC § 2-718(1); that It makes it a little easier to uphold agreed damages clauses because you get “two looks”: common law and statutory.
Vines v. Orchard Hills, Inc. – There is a land contract where the purchaser pays something on the price, but then defaults and wants to get restitution for some or all of what they have paid. There is also a liquidated damages clause, so labeled, which specifies that the 10% down payment can be retained as liquidated damages in the event of a breach. The clause will be tested by liquidated damages/penalty analysis.
Here, Vines breached deliberately
for a good reason. The court says that
this is not a willful breach as far as the law of
De Leon v. Aldrete – When there’s a big down payment, it is highly likely that there will be restitution and any agreed damages clause that lets the vendor hold on to a big chunk of cash will be struck down. You must give a plaintiff in default restitution, but you need not and should not give them reliance damages.
Specific performance shall be enforced when the remedy at law is inadequate. We generally won’t move from money damages to specific performance when the former will fulfill the Golden Rule. One reason we are so stingy with equitable relief is that court orders are more expensive to enforce than money judgments. We also think that sometimes it is efficient to let people break their promises.
§ 2-716. Specific performance may be decreed where the goods are unique or in other proper circumstances. The goal is to liberalize the court’s use of specific performance. When you think equity, think “discretion and flexibility”.
Van Wagner Advertising Corp. v. S & M Enterprises (NYC billboard case) – Specific performance is a possible remedy in cases involving real property or unique items. If the contract in question involves, for example, a family heirloom, and what you’re after is the thing and not money, specific performance is more likely to be granted. If money damages are not hard to calculate, you’ll rarely get specific performance.
Curtice Bros. v. Catts – When we decide between equitable relief and money
damages, we want to choose the one that does the best job of guaranteeing the
aggrieved party’s expectation interest.
Only when the remedy in equity is clearly superior to the remedy at law
will we impose equity. For example: Land
contracts, family heirlooms, and stuff that is in short supply.
Laclede Gas Co. v. Amoco Oil Co. – When there is a contract for a good that is in short supply, the contract is “unique” and specific performance may be ordered. One reason we’ll do this is that we don’t know the quantity that has been agreed to be bought and sold in the contract for a long time. We won’t know by how many units the defaulting seller has defaulted until the end of the whole extended contract. If we make this aggrieved party wait until the end of the contract, we will burden them. In contracts like this, prices may vary over time. A long term contract is not often made at a fixed price because this can be risky.
An injured buyer of land will almost always get the actual land they contracted for (specific performance). Each piece of land is unique. So we allow specific performance as an accepted remedy for land contracts. You may also have a money judgment. There are other kinds of remedies you can use: (1) Money damages: if the seller breaks their promise to sell you land, you can attempt to collect the market price less the contract price. It might be difficult, however, to prove the market price of the land. (2) Specific performance against the seller. (3) Specific performance against the third-party purchaser (the person who bought the land instead of you in violation of your contract). (4) Sue the vendor for a substituted asset: it’s easier in this case to prove what the third party paid than it would be to prove the market price.
Fitzpatrick v. Michael – Generally, personal services contracts will not be specifically enforced because we will not force the defendant to accept the services of the plaintiff against his will. We won’t compel obnoxious personal contact. We will not order an employee to work for an employer. We sometimes will order an employer to take back an employee.
When one of your employees breaches a contract with you and goes to work with someone else, there are really two promises that have been broken: (1) a positive covenant which says that your employee promises to work for you for a certain amount of time, and (2) a negative covenant (in some contracts) which says that you won’t work for any other employer for a certain amount of time. Courts will only enforce the negative covenant when the person who repudiated your employment contract is unique. If you can hire someone who is just about as good for a comparable salary, you haven’t suffered an irreparable injury.
Lumley v. Wagner – Where there is an implicit negative covenant, a court may enjoin a party from performing for anyone else. We shall not compel an employee to work, but we will put pressure on the employee such that they may choose to work. If we enjoin you from working for a competitor, that puts a lot of pressure on you to go back to the employer from whom you jumped. We will grant this kind of an injunction when the remedy at law is inadequate because the employee is uniquely talented in such a way that they are made irreplaceable.
Pingley v. Brunson – Courts cannot order specific performance for personal service contracts unless the performer has some unique ability. If the injured party employs a person of great talent who can’t be replaced and who breaches the contract, then the injured party may suffer an irreparable harm.
Non-competition clauses are subject to possible abuse, and therefore they are policed by the courts. Employees ought to be free to make a living, and employers should not restrain competition.
Fullerton Lumber Co. v. Torborg – An employee’s promise not to compete may not be enforced unless the failure to do so would cause the employer considerable harm. Even then, a court might still refuse to enforce it on the grounds of public policy. Data Management, Inc. v. Greene – If a non-competition clause was drafted in good faith, yet a court finds it to be overly broad, the court will cut it down to a reasonable size. If, on the other hand, the court finds it was written in bad faith, it will strike down the entire clause.
Courts are much more willing to enforce non-competition agreements in the case of the sale of a business. Courts will be more likely to grant specific performance in cases like this when damages at law are inadequate.
Northern Delaware Indus. Dev. Corp. v. E.W. Bliss Co. – A court can decline to enforce specific performance if doing so would put a burden on the court that’s out of whack with the benefit of doing so. It’s highly unlikely that you’ll get specific performance in construction contracts. Money damages are going to do just fine in most cases.
Arbitration offers a trade-off: you get less due process, but you get it over with much cheaper and faster. No possibility for appeal. If you are a repeat litigator, arbitration may leave you much better off after twelve disputes even if some of them don’t go your way or aren’t fair.
Arbitrators can make an award, but they have no way to enforce any judgment. Courts are the basis for enforcing awards. Courts aren’t supposed to review the arbitrator’s award, but they must enforce them. Sometimes, the court is going to say that they cannot enforce the award because it goes against some strong policy.
Grayson-Robinson Stores v. Iris Constr. Corp. – A statute that dictates that the courts will enforce arbitration agreements without considering their merits will trump common law. Normally, taking on responsibility to enforce an order that is arguably impossible would be rejected by courts on pubic policy grounds. Arbitrators can make orders that the courts themselves would not and could not have made as a matter of law.
There are four potential grounds for enforcement: (1) Formality, (2) consideration, (3) foreseeable, justifiable reliance (in the absence of consideration), or (4) charitable subscriptions. We will enforce almost all promises.
When you promise to give money to charity, you may be bound simply on the fact that the promisee is a charity. So if you write down a pledge to give money to charity even if there is no consideration, it may be enforceable as a charitable subscription.
Formality has three functions: (1)
The evidentiary function – formality provides evidence
that a contract exists. (2) The
cautionary function – formality forces the parties to slow down and think about
what they’re doing. (3) The channeling
function – formality is a simple and cheap test of enforceability. It is a signal to courts and to laymen that
the contract is good and enforceable. In
the old days, promises had to be: (1) Written on a piece of paper, (2) Signed
(or x’ed), (3) Sealed with a glob of wax
and an imprint, and (4) Delivered to the promisee. Over time the seal got “watered down”; now
it’s hard to tell if a document is under seal under the new requirements. All of the fifty states have now
abolished the seal as far as the sale of goods goes (i.e. according to UCC
Article 2). We don’t have a formality
that will make a promise enforceable anymore in this state and many others. To make an enforceable promise in
Consideration is bargained for. The old rule was: “Benefit to the promisor or detriment to the promisee would make a promise enforceable.” § 79 says you don’t need that anymore. The parties make the bargain and courts will enforce the bargain they make. As long as there is consideration, adequacy is immaterial. We won’t disturb transactions unless there is something wrong. There must be something more than mere inadequacy of consideration in order to kill the deal.
Congregation Kadimah Toras-Moshe v. DeLeo – Every promise, in order to be enforceable, must have accompanying consideration by the promisee. Consideration may consist of some performance or a return promise. Hamer v. Sidway – The consideration for a promise may consist of, among other things, the abandonment of a legal right. Whitten v. Greeley-Shaw – Consideration must consist of either a good or a promise that is “sought after” by the other party. Earle v. Angell – Adequacy of consideration is immaterial. If there is a smidgeon of trade involved, the promise will be enforced.
Fischer v. Union Trust Co. – In order for the contract to be enforceable, it must be accompanied by “real consideration” on the part of the other party. But consideration doesn’t mean motivation. Consideration might be equal to motivation or it might be entirely different from it. § 81 says that even if the consideration itself was the thing that induced the promise, it’s still good consideration.
We won’t enforce promises made under duress, by children, or by people who are not mentally competent. One basis for non-enforcement of promises is unconscionability. If the contract shocks the conscience of a law-abiding person, a judge, as a matter of law, may not enforce the entire contract or just strike down the bad bits.
Gift promises do not include consideration, and thus we will not enforce them. In Hamer, there was a gift but also an element of exchange. In Fischer, there is no element of exchange. Note, however, in ordinary commercial transactions there is no problem finding consideration.
Kirksey v. Kirksey – A purely gratuitous promise shall not be enforced. It is easier to enforce a definite, clear promise than a vague one. Another factor that goes against enforcement of this promise is the fact that there was no trade involved.
A contract for the sale of goods: unless there is something written down to show there’s a contract, the contract is no good unless one of the parties has either made a payment or delivered goods (among other things). If there was no contract to buy the goods, and no money down, the contract may be unenforceable against the buyer.
§ 2-201. A contract for the sale of goods $500 or more is not enforceable unless there is writing signed by the party you’re trying to enforce against. A contract which does not satisfy the requirements but which is valid in other respects is enforceable if the goods are uniquely manufactured and the seller has made a substantial beginning of their manufacture or with goods that have already been paid for or delivered.
If you have an oral agreement that is in the statute of frauds, you can satisfy it and make a binding agreement by doing a writing. Note that the writing will make the agreement enforceable only against the person who signed it. If you don’t sign, you can’t get sued!!!
Contracts for the sale of land
must be in writing under the statute of frauds.
Boone v. Coe – Damages cannot be recovered when a contract is held to be unenforceable under the statute of frauds unless the defendant receives benefit from part performance of a service contract, in which case the plaintiff may obtain restitution for services rendered.
When a contract is unenforceable due to the statute of frauds, the expectation interest is zero, and the expectation interest is a cap for reliance interest, so reliance interest is also zero. Restitution is not the same thing as enforcement. The statute of frauds never prevents restitution. Expectation interest does not limit restitution interest. Restitution interest will not be reduced by any losses the injured party would have incurred upon performance.
You can give reliance interest despite the statute of frauds if it’s necessary to achieve justice. But your reliance interest may be reduced by the loss you would have incurred upon performance because we won’t intentionally put the aggrieved party in a better position than performance would have done.
We will allow dropping valid lawsuits to be consideration because we want to encourage settlements out of court. However, dropping invalid claims is not consideration because we want to discourage extortion.
The second bit of § 74 says if you actually write down your promise to drop your claim then this writing makes for valid consideration if that writing was bargained for. So somebody might say, “Please sign a paper that says you won’t bug me anymore.” If they promise money in exchange for such a paper, that promise will be enforced.
There is no ground for requiring payment for services you didn’t ask for. If you expressly promised to pay for a service, or you have a contract implied-in-fact (like hailing a cab), you’ll have to pay. We will impose quasi-contracts when someone is unjustly enriched. If the rule were otherwise, we would just go around heaping benefits on people and then send them a bill. When we do imply a contract in fact, the promise implied is for a reasonable charge. In general, we’ll accept the regular charge of the provider of the service as long as it’s not way out of line.
Martin v. Little, Brown & Co. – Volunteers generally have no right to restitution. In order to construe an implied contract from a course of conduct between two parties, an intention to pay on the part of the alleged promisee must be reasonably inferable. In the absence of a contract, restitution is only available when someone has been “unjustly enriched at the expense of another”. Collins v. Lewis – A quasi-contract may be found when the defendant was unjustly enriched, even if there wasn’t a real contract. We may say that the defendant’s conduct speaks louder than his words.
Past consideration isn’t consideration. § 86: we will sometimes enforce a promise on the basis of a benefit previously received to prevent injustice unless the promisor hasn’t been unjustly enriched or the value is disproportionate to the benefit. It is very rare that we will enforce a promise based on moral obligation without any valid consideration.
Mills v. Wyman – A moral obligation may only form consideration for an express promise in three cases: (1) debts barred by the statute of limitations, (2) debts incurred by kids, or (3) debts previously discharged by bankruptcy. Society has chosen to leave it up to the defendant’s conscience whether to pay back a purely moral debt. Webb v. McGowin – “[A] moral obligation is sufficient consideration to support a subsequent promise to pay where the promisor has received a material benefit”. When the promisor gets a big benefit, it pushes toward enforcement.
§ 90 applies to contracts without consideration when: (1) A promise was made that the promisor should reasonably expect to induce reliance on the part of the promisee, (2) the promisee actually did rely on the promise, and (3) injustice can only be avoided if the promise is enforced.
Limitations on the application of § 90: (1) We’ll only make the promise binding when justice requires it. (2) We may limit the remedy as justice requires: promises enforced under § 90 are without consideration and can lead to a partial enforcement as opposed to a promise with consideration which will lead to full enforcement. When there is no reliance, § 90 and promissory estoppel do not apply. Often in § 90 situations, it’s enough to protect the reliance interest and not the expectation interest.
Ricketts v. Scothorn – There’s a promise but no bargain. If the other party relied on your promise, we will bar the promisor from denying that the promise was made. It would be unfair to let the defendant repudiate that promise. Allegheny College v. National Chautauqua County Bank – Courts will not enforce purely gratuitous promises with some exceptions such as charitable subscriptions. You can bargain for a charitable promise, and you can have consideration. Some charitable promises are enforceable on these grounds. Other charitable promises may be enforced on the basis of foreseeable detrimental justifiable reliance. A “smidgen” of reliance will not cause justice to demand enforcement unless you are dealing with a charity as the promisee.
In Restatement Second § 90(2), charitable subscriptions and marriage settlements are given special status. § 90(2) says that there is no need to show that charitable promises induced action or forbearance in order for them to be enforceable. On the other hand, if the promise was “ill-considered” or extravagant in light of the promisor’s resources the promise may not be enforced.
East Providence Credit Union v. Geremia and Siegel v. Spear Co. – When promises to procure insurance which lack consideration cause a big change in the promisee’s position, they are more likely to be enforced if § 90 is otherwise satisfied, effectively making the promisor an insurer. Goodman v. Dicker – The plaintiffs can recover the money they wasted relying on the defendants’ promise, even if that promise would not have otherwise been enforceable because it lacked consideration.
Seavey v. Drake – Making improvements on land promised by a donor constitutes consideration in equity for the promise. Part performance is a doctrine that is only used for land promises. If you enter the land and occupy it and make significant improvements on it, then the oral promise to give you the land will be enforced. Part performance is usually an equitable doctrine; thus, specific performance is a good remedy. This doctrine involves reliance on a promise which is oral and may also be gratuitous. Reliance takes care of both difficulties: (1) Reliance is very clear and (2) moving onto some land and building stuff on it is very good evidence (as good as a writing) that there really was a promise, which is why there’s a statute of frauds in the first place. § 139: Reliance trumps the Statute of Frauds if necessary to avoid injustice. The remedy is to be limited as justice requires.
A promise to do what the promisor is already legally bound to do is not consideration and will not support a return promise, § 73. But if you throw something into the deal that you weren’t under a preexisting legal duty to deliver, you can make the amended agreement enforceable. Even when there is no consideration on account of the preexisting legal duty rule, promissory estoppel can form a basis for enforcement in appropriate situations.
The preexisting legal duty rule operates with respect to liquidated debts, that is, debts that are undisputed as to both liability and amount. The rule doesn’t operate with respect to non-liquated debts, that is, when there is a good faith dispute as to either liability or amount, because settling uncertainty is really worth something.
Fried v. Fisher – When you take a big risk in reliance, full enforcement shall be granted. Levine v. Blumenthal – 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. To enforce on the basis of reliance we need detrimental reliance; a situation where justice requires enforcement.
§ 74(1) deals with creditor pressure: Someone says “pay me or I’ll sue”, and in response, you promise to pay them to settle the claim. Only if the claim was made in good faith will we uphold the settlement agreement. § 73 deals with debtor pressure: I threaten to default in order to get you to take only part of the debt to satisfy it in full. However, your promise to take less than 100% to satisfy my debt, without more, will be assumed unenforceable, because promising to do something I’m already bound to do is not consideration.
The preexisting legal duty rule may be changed by statute, though this has only been done in a minority of jurisdictions. All fifty states have eliminated the preexisting legal duty rule for the sale of goods under UCC § 2-209. When you make the contract for the sale of goods, you need consideration. Once the contract is made, however, it can be changed without any further consideration. For example, the buyer can agree to pay more than the agreed price or the seller can agree to sell for less than the agreed price without new consideration. Modifications must be made in good faith: § 1-203. You can’t modify a contract with extortion or coercion or duress. Besides, when the only consideration for a promise is something you already owed, you probably have a situation of bad faith anyway. The advantage is that if you use the preexisting legal duty rule, you don’t have to inquire into whether the promise was made under duress. This rule is a cheaper, faster solution than the more contemporary UCC § 2-209 approach.
A useful definition of an illusory promise is that it is a promise that is impossible to break. You can be held to a promise that is possible to breach. To the extent that a promise is illusory, you can’t hold someone to it. This is also known as “mutuality of obligation”.§ 78: However, the fact that a rule of law renders a promise voidable or unenforceable does not prevent it from being consideration.
Davis v. General Foods Corp. – You can’t breach an illusory promise, and you can’t get a remedy if the other party breaches such a promise. Nat Nal Service Stations v. Wolf – If both parties make illusory promises to each other there is no enforceable contract.
Policy can make one-sided enforcement appropriate in cases involving, for example, minors or incompetent persons (a promise by a kid is not enforceable; a promise to a kid may be enforceable). The policy behind the statute of frauds is to prevent people from making up contracts that didn’t really exist. We think that is a considerable risk when there’s no writing. We say that unwritten agreements that fall within the statute of frauds are unenforceable.
§ 77(a): A promise is not consideration if the promisor reserves a choice of alternative performances unless each of those performances could have been consideration by itself.
Obering v. Swain-Roach Lumber Co. – Just because the contract doesn’t kick in until the plaintiff does something to accept it and provide consideration doesn’t mean that the contract is unenforceable once the plaintiff does that thing. The contract was unenforceable when it was signed, but became enforceable against both parties upon the plaintiff’s performance.
Paul v. Rosen – When a contract is conditioned upon the buyer doing something which he is not bound to do, this makes the buyer’s promise illusory. Thus there is no consideration to support the seller’s promise and the seller can walk away from the deal. However, this would not likely be the case now. If there had been an express promise on the part of the buyer to use reasonable efforts to do the thing, then the seller’s promise would have been unenforceable. A majority of courts today would find an implied promise on the part of the buyer to make such reasonable efforts.
Wood v. Lucy, Lady Duff-Gordon – An enforceable contract may be construed through an implied promise of one of the parties. In this case, there is an implicit promise on the part of Wood to try to put Lucy’s endorsements on stuff and sell it.
We divide the world of personal conditions of satisfaction in half: (1) A good faith test; this is a condition of satisfaction that concerns “taste, fancy, or judgment”. (2) “Operative fitness”: If a reasonable person would be satisfied, you must pay because you can figure out objectively whether or not the thing is satisfactory (like by hiring an expert). There may not be a bright line, but there is a continuum.
Lima Locomotive & Mach. Co. v. National Steel Castings Co. – A requirements contract—a promise to fulfill all your requirements by buying from one seller—is non-illusory because it’s promise not only to buy from that seller, but to not buy from other sellers. Thus, that promise is breakable. If the promise were, on the other hand, just to buy as much as the buyer wants, that promise would be illusory since they might want nothing.
UCC § 2-306(1): An output contract or requirements contract means no unreasonable quantity disproportionate to any stated estimate or any normal or otherwise comparable prior output or requirements may be demanded. If there is no stated estimate and the buyer is getting into a new venture, the contract may be held void for vagueness. But even if you can’t come up with an exact stated estimate, you can still come up with, for example, a “ceiling” and “floor”. Sometimes indefiniteness is a good thing, but it can be a bad thing if one party is in total control of that indefiniteness to the detriment of the other party.
Feld v. Henry S. Levy & Sons, Inc. – An exclusive contract implies a promise on behalf of the seller to make their best efforts to make the stuff the buyer needs: UCC § 2-306(2). The defendant would be justified in good faith in shutting down production only if they would incur “more than trivial losses” by continuing. A promise to buy everything that the seller produces is not an illusory promise. Sometimes an output seller can shut down without being in breach. Also, sometimes a requirements buyer can shut down without being in breach. But other times, one side shutting down may constitute a breach.
A franchisor, which is the stronger economic party, deals with a franchisee, which tends to be much weaker. There is a lot of competition to get franchises. The franchisor’s promise is as close to illusory as you can get because they want to be able to dump the franchisee quickly for any or no reason because the franchisor has a huge interest in having each of its franchisees behave. Franchisees take a big risk. Statutes modestly police the franchisor in terms of what it tells the franchisee. The franchisor has to disclose a lot of information. The statutes also control ways in which the franchisor can close out the franchisee. Dealers’ relations with their franchisors have been, for a long time, primarily a matter of arbitration.
If one party says words that can be interpreted making a promise, and the other party interprets those words reasonably as making a promise, then you may have an enforceable promise.
Embry v. Hargadine, McKittrick Dry Goods Co. – 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. Subjective intent doesn’t matter. The parties attach two different meanings to the same words, but that won’t kill the agreement. Kabil Developments v. Mignot – 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). Subjective evidence is relevant, though not completely determinative.
Testimony as to subjective intent and interpretation is relevant insofar as that you believe probably is reflected in your outward behavior. We don’t want to make a contract in the plaintiff’s favor unless the plaintiff really believed they had a contract. You can’t escape contractual obligation by crossing your fingers behind your back. If you sign something that looks like a contract, you’ll be bound by that even if you secretly don’t mean it. The whole idea of the law of contracts is to protect the justifiable expectations of the parties. If both the buyer and the seller were careless (or both careful), we’ll say there was no contract.
Raffles v. Wichelhaus – There is no binding contract unless both sides agreed to the same thing. The buyer will not be held liable because it is claimed that there was no meeting of the minds: “We didn’t agree”. The seller meant the later “Peerless”, while the buyer meant the earlier “Peerless”. The parties didn’t connect. They failed to really make an agreement; thus, there is no contract. Whether the parties were equally careful or equally careless, we’ll say there was no contract.
§ 20: If the plaintiff knows what’s really going on, but the defendant doesn’t, we’ll make a contract on the defendant’s terms. If the parties didn’t connect, and they failed to really make an agreement, there is no contract. If there is no subject of mutual assent, that is, if the minds “miss” each other, we won’t find a contract. (i.e. when neither side was at fault; there was just a failure of communication.) We will come to the same result if both parties were in the know. If they had thought about it in that case, they could have clarified. We would find that they’re both careless and both at fault. But whether neither of them knew or both of them knew, there’s no basis to favor one over the other. The way to declare a tie, in some sense, is to declare that there’s no contract.
§ 201 says that if the parties communicate effectively, we make the deal on that basis. On the other hand, if the two parties intended different meanings, we’ll interpret it in favor of the party that had less information. If you can’t make a contract under § 201(1) or § 201(2), and the parties’ minds didn’t meet, we’ll find failure of mutual assent, no agreement, and no deal.
If you use words in such a way as to act like you’re making a deal, and another party takes your words to mean that you’re making a deal, you’ve made a deal, even if you “crossed your fingers behind your back”. Parties’ subjective intentions are almost never precisely alike. We are constrained to look at the objective manifestations of the parties. If we use objective mutual intent, it saves a lot of time. We just look at the writing and take it to reflect what the people said.
New York Trust Co. v. Island Oil & Transport Corp. – The fact that a writing was a sham trumps the fact that it would otherwise on its face appear legally binding. It doesn’t do anybody any good to enforce such an arrangement. We’ll find no contract only when both parties formed a positive intent not to be legally bound. When people have social engagements (or shams or jokes), we presume that the parties’ intentions were not to be legally bound. Close family relationships are also construed to include the intention not to be legally bound.
McDonald v. Mobil Coal Producing, Inc. – Disclaimers (e.g. in employee handbooks) must be conspicuous in order to be effective against employees. UCC § 1-201: “‘Conspicuous’, with reference to a term, means so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it.” If you want something to be conspicuous, make it obvious.
Kari v. General Motors Corp. – Did the separation pay section in the employee handbook constitute an offer of contract that Kari accepted by accepting employment with GM? An employer’s communications to employees may constitute an offer to contract if that offer contains a promise communicated in a way such that the promisee can justly expect performance and can justly rely on the promise. In both of the above cases, the employers didn’t intend to promise anything; that’s the subjective intent of the employers.
The offeror is the master of the offer.
Moulton v. Kershaw – There is no contract if the communication was an advertisement rather than an offer. Form letters aren’t offers. § 24: An offer is a promise to do something if the other party gives the agreed exchange, which may be a promise (bilateral contract) or it may be a performance (unilateral contract). An offer is a promise to be bound in exchange for a “yes” answer: an offer plus a “yes” (acceptance) makes a deal.
When important terms are left out of an offer, it tends to show that there is no commitment. What we probably have instead is a preliminary negotiation: § 26. A statement of intent isn’t an offer if the person who gets it knows that the person making it doesn’t intend to finish the deal until there has been more negotiation.
Lefkowitz v. Great
§ 2-204. You can make a contract any way you want. You can even leave some terms open and not have the contract fail as too indefinite if you intended to make a contract and you can find a remedy if it’s broken.
UCC § 2-305: most open-price arrangements will be enforceable. It’s easier to find that the parties intended to make a contract when there is an established market for the goods they were dealing in. There may be cases where an expert’s judgment is an essential condition to the parties' intent to make any contract at all, like when you hire an appraiser. If there’s an established market for the good, it’s much less likely you need an appraiser.
Joseph Martin, Jr. Delicatessen v. Schumacher – If a provision in a contract specifies that price is “to be agreed upon”, is that provision enforceable? A mere “agreement to agree” is unenforceable.
§ 33. Certainty: A letter of intent might be understood as an offer but you can’t accept it unless the contract it would create is certain enough to tell you how it can be breached and what the appropriate remedy would be. The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance.
Small uncertainties shall not render an agreement unenforceable because it’s impossible for two people to get every detail of a deal on paper. We’ll tend to try to fill gaps and we won’t play games with agreements that parties really meant to make. If we didn’t, enforceable contracts would be very scarce.
Empro Mfg. Co. v. Ball-Co Mfg., Inc. – A letter containing an agreement that is subject to the execution of a definitive contract has no independent force. Intent is judged objectively rather than subjectively in contract law. If intent was judged subjectively, every contract case would go to a jury, and that would be highly inefficient and very bad for business. If one side is free to walk, then it stands to reason that the other side is too. It costs money to engage in negotiations. If you negotiate but don’t reach a contract, each party will bear its own negotiating costs. There’s no reliance because there’s nothing to rely on.
Wheeler v. White – Even when a contract is found too vague to enforce, we may grant relief based on detrimental reliance. Reliance can take an otherwise unenforceable promise and fix its defects to make it enforceable. If you reasonably rely on someone else’s instructions, we’re more likely to protect your reliance interest.
How long does an offer last and when does it lapse? We don’t treat an offer without a given duration to be too indefinite to be an offer; instead, we give the offeree a reasonable time in which to accept. § 41. The power to accept dies when specified in the offer, or else after a reasonable time, the length of which is a question of fact. As a general matter, offers are revocable. Revocations are effective on receipt. You don’t lose the offer until you’ve been informed that the offer has been revoked. This is just an example of objective mutual assent.
Textron, Inc. v. Froelich – When offers
are made in phone or face-to-face conversations and the offeror doesn’t specify
how long they’re going to be open, normally the offer
expires at the time the conversation ends.
Cobaugh v. Klick-Lewis,
Inc. – Making the rules of a contest public constitutes an offer that the
contest promoter is bound to perform if someone acts upon the offer. The contest was an offer. Only mutual mistake voids a contract, not
unilateral mistake on the part of the promisor.
In other words, if you reasonably think there is an offer that is open
to acceptance and you perform in order to accept, then that will make a binding
The offeror can provide in the offer for an exclusive means of acceptance. That means of acceptance can be as unreasonable as you want, and the only way to accept the offer would be in the fashion dictated by the offeror. The offeror ought to be able to control contract formation. But to the extent the offeror is requesting acceptance in an unreasonable or unusual way, the offeror must express himself with clarity or he won’t get the message across.
An option contract is an irrevocable offer. § 45: Once there is consideration or some substitute for consideration for the promise to hold the offer open, then it’s enforceable. In other words, when something has been exchanged for the promise to hold the offer open, that promise becomes an option contract.
Petterson v. Pattberg – As long as the offeror says “I revoke” before the offeree says “I accept”, then the offer is revoked. Offers are generally revocable even though the offeror has promised to hold the offer open because there is no consideration for the promise to hold the offer open, therefore that promise is unenforceable. Brackenbury v. Hodgkin – To accept an offer of a unilateral contract, only performance is necessary. The offeree must complete performance to get the benefit of the offer, but the offer can’t be revoked while the offeree is working on getting it done. In significant sales of land or goods, we will usually see bilateral contracts rather than unilateral contracts.
You can’t rely before you accept. But if I accept before I know that an offer has been revoked, I get the benefit of the deal. § 42: Revocations, when they are communicated, mean that it’s too late to accept. § 43: If I get an indirect communication of a revocation, and the information I get is reliable, then I can’t accept anymore.
Thomason v. Bescher – Instruments under seal are binding at common law even without consideration. When the offer is accepted, it becomes a bilateral contract enforceable at equity. If you’re in a jurisdiction that fully recognizes the seal (many don’t), you can get an irrevocable offer by putting it under seal. However, the seal doesn’t hold up when you’re asking to have a merely gratuitous promise enforced.
Firm offers guarantee a certain period of time for the offeree to use to “mull it over”. In some states you can get a firm offer under seal. You can do firm offers for goods under § 2-205 if you meet all the conditions. You need: (1) An offer – not a preliminary negotiation. (2) The offeror must be a merchant. (3) It must be to buy or sell goods. (4) It has to be a signed writing. (5) It must give assurance, by its terms, that it will be held open and that the offer isn’t revocable. The drafters wanted to protect offerors and they wanted to protect the common law view that offers are generally revocable so they made it kind of tough to make offers irrevocable.
Associates v. M. Gordon Constr. Co. – This deals with § 2-205 and the sale of goods. In particular, there’s a statute in
You may be able to get a firm
offer through a “false recital”. You can
recite a lie to make the offer firm, at least according to the Restatement §
We can also get a firm offer by paying something for the offer. When you pay someone to commit to a firm offer, you’re really getting something of value. It’s common in this kind of an option to provide that the consideration will go towards the final purchase price. If it’s land, we have the statute of frauds. We need the offer in writing, signed by the vendor, and we want it to recite that it will be held open and not revoked until a certain date. Then you pay money to get that writing.
James Baird Co. v. Gimbel Bros. – Ordinarily, if the offer was revoked before it is accepted, then the acceptance is too late. Hand says § 90 doesn’t apply when the defendant is bargaining for an acceptance, not a bid. Hand shall not use promissory estoppel if he can’t find any promise to hold the offer open. When the parties are big and strong and able to protect themselves, we’re not going to go out of our way to protect them. This is the traditional view.
Drennan v. Star Paving Co. – If you make an offer that you should reasonably expect will cause the promisee to act in reliance to their detriment, and it actually does cause them to act, then that offer may become an option contract if necessary to avoid injustice. A mere offer may become an enforceable promise based on promissory estoppel even if the offer is revoked.
An implied subsidiary promise is a promise to hold the offer open until the general contractor accepts the big, main contract. Since the subcontractor wants the job, and the subcontractor wants the contractor to use the subcontractor, the offer by the subcontractor is irrevocable until a reasonable time after the general contract is awarded. The general relies on this promise in putting its bid together.
§ 87(2): In some circumstances, it does make sense to allow reliance on an offer before acceptance and to make the offer irrevocable because of that significant reliance. An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice. This rarely applies: the offeror usually has no reason to expect reliance before acceptance. The offeror supposes that the offeree will accept first and then start relying on the newly-formed contract.
Hoffman v. Red Owl Stores, Inc. – Even if there is never an offer, an enforceable promise can be found on the basis of reasonable reliance on statements or “instructions”, especially when they come from a stronger party. On the other hand, in a commercial situation, you’ll have parties that have more equal bargaining power. In that case, reliance becomes less and less reasonable the more equal the parties are.
§ 36(1)(a): An offeree's power of acceptance may be terminated by rejection or counter-offer. Once the offeree has rejected, the offeree can’t turn around and accept because when the offeror gets a rejection, he stops preparing for acceptance.
Livingstone v. Evans – A counteroffer acts as a rejection of the original
offer. § 39. A rejection of the counteroffer may
act as a renewal of the original offer.
Implicit in a counteroffer is the idea that you didn’t like the offer as
originally presented. The idea that a
rejection terminates the offeree’s power of
acceptance is very strong. The idea that
a counteroffer terminates the offeree’s power
of acceptance is somewhat less strong, because the message of rejection is implicit,
If you have an offer and the offeree rejects it straight out, then that terminates the offeree’s power of acceptance. This reason for this is the probable effect of rejection on the offeror, namely, that the offeror will probably rely on the offeree’s statement. Rejection terminates the power of acceptance without any proof of reliance because we figure the offeror almost certainly relies on the statement of rejection. What do we do with a deviant acceptance (accepting at different terms)? We frequently treat it as a counteroffer.
Under UCC § 2-207 (1), we view the seller’s acknowledgement of the buyer’s purchase order as a definite and seasonable expression of acceptance when it looks, acts, and quacks like an acceptance, even if the seller’s acknowledgement states an additional term. Under § 2-207 (2), such an additional term shall be treated as a proposal for an addition to the contract. It’s a deviant acceptance of the offer, but it still operates as an acceptance. We deal with the proposal for an addition under § 2-207 (2)(b). You get the contract formed early on when the acknowledgement is dispatched.
UCC § 2-207 tries “with a vengeance” to change the common law “mirror image” rule for three reasons: (1) We want rules that make sense for business. (2) We want fast contract formation, not a long period of time when either party can legally walk away. (3) The common law would have the seller, as the counterofferor, dictate the terms to the buyer. The buyer would thus implicitly accept the seller’s terms when the buyer accepts the goods. This was the “last shot” principle: whichever side sends the last form gets its preferred terms, but it was criticized as arbitrary. We need to find a rational way to figure out whose terms control rather than just picking the terms of the party that fires the last shot. But in practice is § 2-207 just a “first shot” principle as opposed to a “last shot” principle? § 2-207 hasn’t worked as well as was hoped.
Acceptance is used two different ways in the text of the statute: (1) “expression of acceptance”, that is, something that looks like an acceptance, and (2) “operates as an acceptance”, that is, having the legal effect of an acceptance. The deviant acceptance operates as an acceptance of the offer on the buyer’s terms. If there is a different term, that’s taken care of in § 2-207 (2). The additional terms are going to be proposals for additions to the contract. Between merchants, the terms become part of the contract except, among other things, the new terms materially alter the original offer. Note that the effect of an additional term differs from the effect of a different term. Parties will focus more on the dickered terms than on the boilerplate.
Sending an acknowledgement at a way different price sounds like a counteroffer. You’re not in § 2-207 (1) because it’s not a definite and seasonable expression of acceptance. If the parties are far apart on a significant term, they haven’t reached agreement.
Idaho Power Co. v. Westinghouse Electric Corp. – UCC § 2-207 says that in commercial transactions, the common law “mirror image” rule will not be used. Instead, a “deviant acceptance” is still treated as an acceptance as long as it is not expressly conditional on new and different terms.
How does the buyer defend against its purchase order being an acceptance of the seller’s terms? The buyer tries to make use of the “unless” clause of § 2-207 (1). You can prevent an acceptance from being an acceptance if you make it expressly conditional on the additional and different terms. That’s a great defensive clause for the person with the responding document. All responding documents will contain this language in ALL CAPS BOLDFACE.
The “unless” clause in § 2-207 (1) is read in an extremely restricted way. Notice that while § 2-207 (1) gives a great defensive opportunity to the party with the responding document, § 2-207 (2) gives two such opportunities to the party that fires the first shot: § 2-207 (2)(a) and (2)(c). The offer can explicitly limit acceptance to the terms of the offer or can reject the other person’s new terms. It’s called the “battle of the forms” because both sides will tend to use outrageous language.
When the seller’s acknowledgement has a big difference in price (for example), the seller’s acknowledgement is treated as a counteroffer and not a “definite and seasonable expression of acceptance”. There is no contract at this point. But if the buyer ships the goods and the seller accepts them, you may be able to treat that as an acceptance of the seller’s counteroffer.
Let’s say the buyer has carefully “lawyered” its form such that the purchase order makes use of the defensive opportunities provided by § 2-207 (2)(a) and (2)(c). It will do so with boldface, all-caps language tracking the language of the statute. It will say that “THIS PURCHASE ORDER OFFER EXPRESSLY LIMITS ITS ACCEPTANCE TO THE TERMS OF THIS OFFER” and that “THIS BUYER OBJECTS TO ANY TERMS VARYING FROM ANY TERMS IN THIS OFFER.” Additionally, the terms in the buyer’s purchase order are strongly pro-buyer. Among other things, the seller is to provide a panoply of warranties and no limitation of liability. The seller replies with a mirror image of the dickered terms. But the boilerplate expressly and conspicuously disclaims warranties and limits liability. This form also uses the defensive “unless” clause from § 2-207 (1). They’ll do this in all-caps and boldface. “ACCEPTANCE IS EXPRESSLY MADE CONDITIONAL ON ASENT TO ADDITIONAL OR DIFFERENT TERMS THIS DOCUMENT CONTAINS.”
It’s hard to find an offer and acceptance given all the boldface, all-caps disclaimers. The buyer has said that you have to accept all our terms, and the seller has said that they expressly refuse to accept the buyer’s terms. What have we got? Do we have offer and counteroffer? Are we back where the common law has left us? Is there another way out under § 2-207? Yes! A suggestion: how about finding a contract when the seller’s acknowledgement is dispatched? We could include terms upon which the two sides coincide, and if the boilerplate differs, we’ll disregard both and fill in gaps with off-the-shelf provisions. We can do it under § 2-207 (3).
The writings of the parties in this case don’t seem to establish a contract, but a lot of courts will follow the suggest that the parties’ conduct treating this as a made deal as soon as the acknowledgement is dispatched and the product is shipped means that a contract is formed. The only problem is figuring out what the terms are.
Here’s some jargon: we’re going to have what’s referred to in the case law as the knock-out rule. Each party knocks out the other party’s terms, and we’re going to fill-in with off-the-rack generic terms where necessary. What can the seller do? They can put “COUNTEROFFER” in big letters when they respond to the purchase order. You could also instruct the seller not to ship until they get the buyer to agree to their terms.
Prior course of dealing between parties will have a lot to do with what the parties have agreed upon. This may have a big influence on just what terms are taken to be part of the contract.
The new § 2-206 (3) codifies much of the current § 2-207, but there’s no grand defensive clause at the end. There’s also a stylistic difference: the current version has a lot of mechanical things that haven’t worked well. The new version is much more general principles rather than mechanical specifics.
Sometimes a large business has a standardized form written on favorable terms, while the consumer or smaller business doesn’t have a form of their own and is weaker. These are sometimes called contracts of adhesion because the only choice of the little guy is to adhere or walk away from the deal.
Allied Van Lines, Inc.
v. Bratton – Under § 211, we start with the proposition that when you’re
offered a deal by a business party and they say “here’s where you sign”, courts
will say that you’re bound by what you sign unless
one or more of the terms is surprising,
oppressive or otherwise wouldn’t be fair
to the adherent. Agricultural Ins. Co. v.
v. Lumberman’s Mut. Cas.
Weisz v. Parke-Bernet Galleries, Inc. – The trial judge says that if you want to sell paintings “as is”, you have to really rub your customers’ noses in it. Parke-Bernet would just as soon not do it that way because it would be sort of uncool and unchic. But the appellate court reverses, pointing to the warranty in the catalog. They also say that this is an auction of old paintings, thus the painters aren’t around to ask whether they really painted the paintings. The best you can do is say: “We think the guy painted these paintings.” But nobody knows for sure!
There are two ways to think about this case: (1) There was a flat out warranty that these paintings were genuine, and then it was disclaimed. But the better argument for Parke-Bernet was: (2) Of course they didn’t warrant they were genuine, and you, the buyer, should have known that too. Everybody knows there are a lot of forgeries going around and you can’t be absolutely certain about anything. Even without the condition of sale, it ought to be a case decided for Parke-Bernet because all they promised was that there is some expert somewhere, who might be wrong, who thinks the painting is authentic.
The big questions are: (1) When was the contract formed? (2) What are the terms of that contract? When a consumer enters into a “deal now, terms later” deal, and the later terms don’t eviscerate the earlier deal and are reasonable, then the consumer will be bound by them. If all those factors are not present, there will be a different result.
ProCD, Inc. v. Zeidenberg – Shrinkwrap licenses are just as enforceable as contracts in general. This is a case of “deal now, terms later”. Easterbrook says there’s nothing wrong with that, which is a controversial stance. Hill v. Gateway 2000, Inc. – In this case, it’s not face-to-face, but rather done by mail order. In both situations, Easterbrook notes that a license pops up when you start using the software (Zeidenberg) or you see a license inside the packing box (Hill). Easterbrook makes the terms inside the box part of the deal.
It seems that contracts ought to be formed early on. There are arguments that acceptance occurred at the store in Zeidenberg and over the phone in Hill. This is sometimes called a “rolling acceptance”. One thing that will help this be enforceable is the opportunity to return the goods within a certain amount of time.
What does Article 2 have to say about this? Not much that will help Easterbrook. One approach in the Hill situation is you have § 2-206. When people call in to buy goods over the phone or electronically, they’re typically forming a contract when they order. How do we get terms later? Another approach is found in § 2-209, where you have a contract without these terms originally, but then the contract is modified by agreement. The agreement comes when the consumer fails to return the goods within 30 days.
Two parties communicate between each other at some distance. When you operate through the mail, the letter will travel for a certain amount of time, which will create problems. Offers are effective upon receipt. You can’t accept an offer you don’t know about. Revocations are effective on receipt, not on dispatch (§42). It would be unfair to the offeree to have the revocation effective before the offeree receives it. Rejections and counteroffers are also effective upon receipt by the offeror (§40). Rejection terminates the power of acceptance, because the legal consequence of rejection lies in the probable effect on the offeror. If the offeree states that he declines the offer, it’s very likely that the offeror will change his plans. The offeror can’t change his plans until he’s aware of the rejection. Offer, rejection, and revocation are all effective upon receipt. However…
A contract becomes effective when the acceptance is dispatched by the offeree. This is the rule of Adams v. Lindsell. The mailbox rule imposes a burden on the offeror. But notice the beginning phrase of § 63: “Unless the offer provides otherwise…” The offeror is still the master of the offer!
Acceptance is effective when you put it in the mailbox. When you drop your acceptance in the mailbox, a contract is created. Acceptance can be effective on dispatch. But why is that our law? It is a rare and different thing that acceptance is effective on dispatch.
What if the acceptance is delayed or lost in the mail? That’s a contract anyway. The offeror might have a problem with it, but too bad. Restatement § 63 says that we won’t qualify “acceptance effective on dispatch” for the sake of convenience. Even if the post office screws up and delays or loses the acceptance, there will be a contract. Notice there is an exception for option contracts (irrevocable offers). Acceptance (or exercise of the offer) is only effective on receipt. It need not be effective on dispatch when the offeror is disabled from revoking.
Morrison v. Thoelke – The court in this case says you can’t repudiate your own acceptance after it’s in the mail; the contract is created upon dispatch. Before the offeror knew that the acceptance had been dispatched, they were told that the offerees had changed their mind. The problem is that if we let the offerees do that, it would let the offerees create their own, unbargained-for, and thus unfair option contract. If you had the opposite rule, the vendors (offerors) would have an unbargained-for option. But how realistic, in business terms, is this risk of an unbargained-for option? Is the rule all that justified in this situation? It’s debatable. The justification for the rule is a good deal less clear then it is in the situation of the “crossing revocation and acceptance”.
If you put your acceptance in the mail and then revoke before it arrives, your revocation operates as a repudiation of an existing contract. On the other hand, if the offeror doesn’t want a contract possibly because the offeror relies on the rejection that beats the already-dispatched acceptance, then the offeror should not be stuck with a contract against the offeror’s wishes. One way for the offeror to deal with that would be to say that the offeree has accepted and then totally breached the contract.
§ 65 says a medium of acceptance is reasonable and thus invited by the offer if it is the same as the one used by the offeror. To have a mailed acceptance effective on dispatch, it must be properly addressed. If the address is messed up, the acceptance will be effective on receipt, if it’s ever received. The acceptance must also have correct postage in order to be effective on dispatch. All fees for transit must also be paid. When you hand-deliver, the acceptance is technically in your possession until it’s received.
The thing is that we’re trying to figure out if the acceptance was done with a method invited by the seller. § 63 asks: was this medium of acceptance invited by the offer? If it was, then the mailbox rule is triggered and the acceptance is effective on dispatch. When the offer is made by mail, usually acceptance is invited by mail too. If the mailbox rule is negated because the method of acceptance used was not invited, then the acceptance is effective on receipt.
§ 69 talks about silence as acceptance. The most important word in this section is the word “only”. The cases where silence is acceptance are highly limited. Hobbs v. Massasoit Whip Co. – A course of previous dealing between the parties can create the expectation with the offeror that the silence of the offeree implies acceptance. See § 69 (1)(c). Previous dealings can create a duty to speak. If you don’t pipe up, your inaction will be treated as an acceptance because acceptance is the reasonable meaning of silence under the circumstances. The other situation where silence is acceptance is where you take the benefit of services offered when you had the chance to reject them. § 69 (1)(a).
Morone v. Morone – Personal services rendered between the couple will not constitute a contract implied-in-fact because such services are ordinarily understood to be gratuitous. You can make such contracts, but it must be thought through with a lawyer and it must end up with a writing signed by both parties.
This rule governs the effect of a written agreement that comes after prior oral or written agreements between two parties. In essence, if the last writing was intended to be a full and final agreement between the parties, you can’t introduce evidence of prior oral or written agreements.
The parol evidence rule divides people into liberals (like Corbin) and conservatives (like Williston). Some people would admit a lot of extrinsic evidence, and others would keep out huge amounts of such evidence. Williston was an example of a “conservative” on this, while Corbin was an example of a “liberal” view on the rule. Corbin is more in the ascendancy right now, but there’s a little of both in every jurisdiction. Even within one person, no one is probably entirely “liberal” or entirely “conservative”.
Mitchill v. Lath – An oral agreement to modify a written contract is only enforceable at common law if all of the following are true: (1) The oral agreement must be collateral in form. (2) The oral agreement must not contradict any express or implied provisions of the written contract. (3) The oral agreement must not be of the type the parties would ordinarily expect to put into writing. In other words, the written agreement on its face mustn’t appear to contain the complete agreement of the parties.
A contract is a promise or set of promises that the law will enforce. But is the contract only the writing, or the writing plus the oral promise? Why should we bar evidence of oral agreements? The courthouse door is open to liars, and sometimes people win on the basis of lies. So part of what’s going on is an attempt to screen out liars. Writings are pretty objective. Witness testimony is messy and expensive to deal with. Another problem is that if parol evidence is allowed, perjury might increase. But opinion after opinion denies that this is the point. Another “virtue” of the rule is that it favors the party with the writing, which is the economically dominant party. Another justification is that if there were no parol evidence rule, it would be very difficult to decide any contract case on summary judgment. Efficiency pushes towards deciding cases on the basis of the writing.
Some people call this the “collateral agreement exception”. Collateral means “alongside, related but separate, supplementary” and that kind of thing. So the first requirement is: (1) The agreement must be a collateral one in form. (2) The oral agreement mustn’t contradict express or implied provisions of the writing. If the writing looks like a complete agreement, then when you try to supplement it you reach a contradiction. (3) The agreement must be one that the parties would not ordinarily be expected to embody in the writing. If they would ordinarily put it in the writing, they better darn well put it in there or else it doesn’t count. The word “natural” is used. If the agreement had really been made, Andrews says it would be “natural” to include the agreement in the writing.
One reason we have this rule is to let judges keep the testimony of liars away from juries. Judges will claim that credibility is a question for the jury, but in fact they will use the rule to keep people away from juries.
§ 209 asks if we have an integrated agreement. An integration is a writing which finally expresses at least one term of an agreement. § 213 provides the parol evidence rule itself: A binding integrated agreement discharges prior agreements that are inconsistent with it, because they have been abandoned. Those prior agreements are integrated into the writing, and are therefore irrelevant. § 209 (2) says that whether you have an integrated agreement is a question for the judge and not the jury. The judge does this before interpreting the writing (see § 212). Generally, interpretation is also a task for the judge and not the jury. The judge decides if we have an integration, decides what the written words mean, and then the judge applies the parol evidence rule. If the agreement is integrated, it discharges prior inconsistent agreements. If the agreement is completely integrated, prior agreements within its scope are discharged.
The parol evidence rule allows evidence to come to the judge. The judge is able to hear evidence out of the earshot of the jury. Then the judge can decide whether the testimony ought to be admitted or not. The judge first decides if there’s an integration, then interprets it, then decides whether we have parol evidence inconsistent with the integration or within the scope of that agreement. So if you were applying the Restatement to the cases we’ve gone over, we would first ask the question: Do we have integrations?
§ 216 says that evidence of a consistent additional term is admissible to supplement an integrated agreement unless the court finds that the agreement was completely integrated.
There seem to be two kinds of integrations: a partial integration and a complete integration. A partial integration is a final expression of some of the terms of the agreement, but not all of them. A complete integration is a final expression of all of the terms of the agreement. Whether an integration is complete is a matter of the intention of the parties. A smart and artful judge can manipulate the parol evidence rule as an instrumentality to screen out testimony the judge doesn’t believe or to speed a case through the system.
One thing that might make an agreement completely integrated is a clause that repeatedly appears in form agreements: “It is understood that this contract contains all of the terms and conditions agreed upon between the parties and that there are no outside agreements.” This is called an integration or merger agreement (or clause). It’s designed to make something a complete integration, but it will only work sometimes.
§ 214 says that prior agreements and negotiations are admissible (to the judge) to show whether or not a writing is an integration and whether or not it’s complete. This is a pretty liberal, Corbiny approach with a big interest in protecting the justifiable expectations of the parties.
In practice, you hear the phrase “the writing speaks for itself” very often. This is sort of a Willistonly phrase. You could translate this into Restatement Second/Corbin terms: you could say that the contract was a complete integration, that the oral term is inconsistent with the written agreement, the oral term is within the scope of the written agreement, the oral term doesn’t bear on the interpretation of the written agreement, and the oral term would not naturally be omitted from the writing. You can get this from Restatement §§ 209-210 and 213-216. Usually, though, a contract includes a writing and some stuff that’s outside the writing. If you believe the stuff outside the writing, you’ll tend to consider it part of the contract.
Hayden v. Hoadley – People often forget to put stuff in agreements, and to fix that we have gap-filling provisions in the common law and Article 2. For example, we might read in the requirement to finish within a “reasonable time”, or the requirement to do the work in a “workmanlike manner”. These gap-fillers help turn non-contracts into contracts. But on the other hand, these gap-fillers are usually only effective when there hasn’t been an agreement to the contrary.
Comment (b) for § 216 says that you have to consider the consistency of additional oral terms in light of all the circumstances. The meaning of the writing includes not only express terms, but also terms implied by the bargain of the parties in fact. But we don’t include gap-filling rules that the parties didn’t agree to.
§ 2-202 is the source of much of what is in the Restatement Second. It states the parol evidence rule in a succinct way in one long, complicated sentence. The UCC says that the parol evidence rule will exclude any agreement prior to the integrated agreement. However, the parol evidence rule in the UCC does not bar evidence of an agreement subsequent to the writing.
If you’re a disciple of Corbin, you’ll want to read words in a contract narrowly for the purpose of § 2-202, and if you’re a follower of Williston, you’ll want to read them broadly. § 2-202 is a more liberal parol evidence rule than some of the preceding common law stuff where you would keep out stuff that would “naturally” be included in the writing. In the UCC, you only keep out stuff that would “certainly” be included in the writing. The Code is favorable to “course of performance”, “course of dealing” and “usage of trade”: § 1-205.
There is an exception to the exclusionary force of the parol evidence rule for fraud. Check out § 214 (d): prior or contemporaneous agreements and negotiations are admissible to show “illegality, fraud, duress, mistake, lack of consideration” or other stuff. In particular, you can show that you were induced to sign a contract by fraud. You can do one of two things: (1) You could rescind and do away with the transaction. Both parties will be able to back out. (2) You can sue for damages. Such damages are measured either by the “out-of-pocket” rule or the “benefit of the bargain” rule.
Fraud is a tort. What is the “fraud exception”? The parol evidence rule is not going to block you from proving fraud. Check out § 214 (d): You may introduce evidence that, among other things, a contract should be invalidated due to fraud. You could also introduce evidence that you were coerced into signing, that there was a lack of consideration, that the contract was illegal, or that contract terms were entered into by mistake.
The elements of the tort of fraud: There must be a misrepresentation of a material fact done with scienter (serious reprehensible fault on the part of the liar as opposed to innocent mistake). There must be reliance on the part of the victim. There must be damage or loss.
If you were induced to sign by fraud, then the writing can be set aside and you can get damages in tort. On the other hand, sometimes the victim can simply rescind.
A minority of jurisdictions have the “out of pocket” rule (similar to reliance damages), while a majority of jurisdictions have “benefit of the bargain” rule (more like expectation damages). The “benefit of the bargain” is like the expectation interest and protects your profit if you can prove it. The “out of pocket” rule tries to put you back to “square one” as if the deal had never been made.
Lipsit v. Leonard – Can a tort action for
fraud be maintained even if enforcement of the contract on which it’s based is
barred by the parol evidence rule? Under
Making a promise and breaking it is not a misrepresentation of a material fact, but making a promise with the intent to break it when you make it and using it to induce service on the part of an employee could be a valid suit on the theory of torts.
In a “benefit of the bargain” jurisdiction, you get what you were promised minus what you got. Even so, in a “benefit of the bargain” jurisdiction, you may have trouble proving what you were promised. But you’ll be able to try to prove “out of pocket” loss even though you’re theoretically entitled to more.
What can you do in draft a contract that could prevent fraud by the other party? You can try to negate one of the elements of the tort of fraud so there is no tort. Many people try to negate the element of reliance. There is a clause written into the contract saying that one party does not rely on the statements of the other party.
LaFazia v. Howe – The writing that the parties sign contain a non-reliance clause and a merger clause. The Howes tried to prove fraud. They wanted to prove that the sellers made fraudulent misrepresentations, but they’re missing the element of reliance. Various judges have different feelings about reliance clauses. If you try to reconcile the cases on the basis of not only the doctrine, but the facts, you’ll find that in the cases where the non-reliance clause was enforced, but also there was factually very little reliance in the case. The victim knew or ought to have known that any representations about the manner in question weren’t meant to be taken very seriously.
The tort of fraud can be a way around the parol evidence rule. Or you can simply think about it this way: when you have the tort of fraud, and when it’s proved (sometimes beyond the preponderance of the evidence and pleaded with particularity), you need to be compensated. You either should be allowed to rescind or you should be able to get damages.
If something serious that ought to be relied upon had been
said and relied upon and there is a non-reliance clause in the writing, the
court may allow a tort claim to go forward.
The court might say that the clause is “boilerplate” and
“non-specific”. But in reality, the
court might really be drawing a line and saying that you can’t perpetrate fraud
with impunity. But these are just
Another exception to the parol evidence rule is found in § 214 (e): parol evidence can be used to rescind or reform contracts. Evidence can be admitted under § 214 (d) to claim that there is an invalidating clause, or under § 214 (e) there could be evidence introduced tending to show that there was no meeting of the minds, either subjective or objective.
Hoffman v. Chapman – The parol evidence rule does not bar a claim in reformation. A court will reform a writing when there is evidence by clear and convincing evidence that a “mutual mistake was made…contrary to their agreement”. The idea is that when we have a mistake in integration (like a slip of the pen or the wrong keystroke), under appropriate circumstances we will reform (fix) the writing to make it reflect the underlying agreement that has been reached. This case tells you that “equity aids the vigilant”.
Several safeguards are built into the doctrine: (1) We have a higher standard of proof for a reformation case than for other civil cases. For reformation, the most common standard is “clear and convincing evidence” (somewhere between the “preponderance” and “reasonable doubt” standards). (2) This is an equitable doctrine applied solely by the judge. Some suits are entirely about reformation, whereas other suits seek damages, specific performance and other stuff and reformation is one issue along the way. If the claim is mostly an action at law with a little bit of a suit in equity, the judge will look at the reformation outside the presence of the jury and fix it or not.
If there was an underlying agreement, but the parties changed it and came up with a final written agreement, then this doctrine doesn’t bar reformation, but the parol evidence rule might make it harder to prove that the parties had some different underlying agreement.
In order to have a reformation case, the mistake must be mutual (shared in by both parties). We can say this because the person who wrote the deed is considered an agent for both parties.
What if the mistake is unilateral? Many courts state that you can’t reform in
the case of unilateral mistake. You may
be able to rescind and back out of the contract, but you can’t reform. But when the court wants to reform the
contract, they’ll find some way in which the mistake was mutual in order to get
to the result they want.
If there is no objective mutual assent and no subjective mutual assent, we simply rescind the writing because there is no underlying agreement. We must be able to distinguish these kinds of mistakes. Sometimes the distinction can involve some subtleties and difficulties. There’s a difference between a failure of communication mistake and a mistake of integration.
Some people, led by Williston, are reluctant to admit extrinsic evidence with respect to the interpretation of writings. The “four corners” rule says that you ought to be able to interpret the words that are there just by looking at the piece of paper and reading. It is supposed that a judge can read a writing carefully just as well as anybody else or better. Another way to look at it is that if you sign a paper that has a relatively clear meaning, you ought to be held to that. The standard, dictionary meaning of a writing is said to be the most reasonable. This is called the “plain meaning rule” approach. This approach allows the resolution of many disputes on summary judgment and makes for more efficiency and less litigation. Interpreting a writing is also something that an appellate court can do just as easily as a trial court. That makes it appropriate in many cases for an appellate court to reverse, which lets us develop precedent as to what certain words mean.
Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co. – Here we see the more liberal approach: we’ll always admit evidence for the purpose of interpreting a writing. Also, words don’t just have one meaning, but rather have a context in which they are used. This approach has virtues, but is less efficient and may reward liars.
In § 214, we find that parol evidence is admissible to establish the meaning of a writing. In § 212, the comment says that we can make an effort to figure out what the parties really meant even if the words seem clear on their face. This makes litigation more complicated and expensive sometimes. It creates more uncertainty. It bothers people who write their agreement in plain English and who want it enforced just as it looks.
In UCC § 2-202, it is stated in the comments that words are to be understood in their commercial context and not merely through rules of law. You can use words in a non-dictionary way, and people do it all the time, including commercial people. One of the underlying biases of the UCC is that idea that we ought to interpret agreements and enforce them in a commercial way. The people who made the deals should have the deal they thought they made upheld. They shouldn’t have a deal forced on them that they never contemplated.
Henningsen v. Bloomfield Motors, Inc. – Normally, you’re bound by what you sign whether you read it or not. You can limit remedies to repair and replacement of defective parts, but not when there is an accident resulting in personal injury or property damage. In that case, the limit will fall out. § 2-719 is a statutory way of doing this, but you can count on this being the result.
How can you argue that this kind of agreement should not be enforceable? Whatever restriction we put on the freedom of contract must be balanced out by some other principle. When we talk about personal injury or property damage, things change from the situation where we’re just talking about economic loss. We’ll allow much more freedom of contract when we have merely economic loss than when we’re dealing with property damage, personal injury, wrongful death, and so on. The best policy argument for this decision is deterrence. Refusing to uphold a limitation on liability spurs manufacturers to make safer cars. We have a strong feeling about deterring the events that happened in this case.
Richards v. Richards – A court may find an exculpatory agreement void if on balance the interest in compensating injured people outweighs the freedom of contract. The end result of this case is that you just really, really don’t allow riders anymore!
Broemmer v. Abortion Services of
Brower v. Gateway 2000, Inc. – If the damages are purely economic, we’ll let an arbitration agreement stand, even if it’s pretty outrageous. We want to keep the large fees of tort lawyers out of the economic losses that might be suffered. Notice that this idea, the idea of two different kinds of law depending on personal injury, wrongful death, or property damage as opposed to only economic loss, comes up again and again. The law of contracts as codified in UCC Article 2 will allow you to avoid tort liability for purely economic loss.
Sometimes a bargain definitely has been made, but we won’t enforce it for one reason or another.
This doctrine is intended to keep kids from getting taken advantage of by adults. This is a per se rule. Restatement § 14 says that infancy lasts until the beginning of the day before a person’s 18th birthday. We are protecting the immature from the consequences of their own immaturity. This doctrine makes the minor’s promise voidable. The minor can enforce the return promise from the adult if that’s advantageous. The minor can walk away from the contract if that’s advantageous. However, as a result, people won’t want to make deals with minors! Halbman v. Lemke – When a minor disaffirms a contract, the minor has the duty to return to the vendor as much of the consideration for the contract that he still has.
One of the exceptions to this doctrine in most places is misrepresentation of age by the minor. That’s a tort. If you lie and say you’re an adult when you’re not and the lie is deceiving, that is, the adult on the other side is conned by it, that can take away or qualify your right to disaffirm your contract. There is also the doctrine of necessities. If you supply something that is necessary to the minor, you may be able to enforce a contract against that minor depending on how you define “necessity”. When you get right down to it, this doctrine doesn’t cover a whole lot. It may cover emancipated minors, such as those who are married.
When will mental incompetence on the part of one of the parties allow that party to void the deal? You can tell whether a person was competent when they made a contract partly on the basis of whether the contract was fair. The vast majority of mental incompetence cases involve older people losing mental capacity. It can be very difficult to figure out whether someone was competent to contract in a particular situation at a particular time.
Faber v. Sweet Style Mfg. Corp. – Sometimes the nature of the deal itself is so strange, unfair, or unbalanced that the only way it can be explained is that one of the parties is off their rocker. If there was nothing inherently nutty about the deal, you look at the behavior of the person who is claimed to be incompetent. The finder of fact makes judgments about that person’s behavior.
What if we were to apply § 15? The first test is whether you understand what you’re doing. Under § 15 (1)(a), a manic-depressive person would never be found incompetent because they would always understand their actions. A reform is to add another section, § 15 (1)(b), which asks whether he is unable to act in a reasonable matter such that the other party has reason to know of his condition.
Ortelere v. Teachers’ Retirement Bd. – Mrs. Ortelere opts to have all her pension money paid out without survivorship benefits. The husband succeeds in having her election rescinded. What can we say about this case? Like Faber, the party on the other side didn’t do anything wrong. Either judgment here makes a certain amount of sense. It makes sense for Mrs. Ortelere to make a choice and normally we want those choices to stick. It appears that Ortelere knew what she was doing. Her judgment was very bad because she lived for such a short time, but we don’t usually let people off the hook in hindsight.
Farnum v. Silvano – This is an easier case to decide because there has been some outrageous over-reaching. The competent party is a “bad guy” and the transaction is unfair. The only way to explain it is by Viola Farum’s failing mental health. The handyman who cons Farum into selling her house to him was taking advantage.
Krasner v. Berk – Courts will have a lower standard for deciding whether the person is competent to write a will than to write a contract. A lot of the world’s wealth is held by people who are quite old and aren’t really with it, so dealing with old people is an important practical problem.
Odorizzi v. Bloomfield School Dist. – Undue influence consists of (1) undue susceptibility of the vulnerable person and (2) excessive pressure by the dominant person. There is a dominant party and a servient party. One party has considerable strength, and the other party has some weakened capacity to resist. The servient party might be an older person in some cases. They may have some capacity if they’re not under pressure, but if you compound the difficulties of old age with excessive pressure, you’re on the way toward making an undue influence case. When you have pressure that is “coercive in nature” and “overcomes the will without convincing the judgment”, you’ll have undue influence. This is a doctrine with soft edges. It mustn’t be used too broadly and applied to situations to which it is not intended.
Duress involves improper, wrongful pressure of some sort which actually has the effect of coercion. It’s a rougher situation than undue influence, and has harder edges. We need to figure out whether what is threatened in a duress case is proper or improper and, assuming it’s improper, we need to find out whether that threat actually coerced someone to do something.
The applicable sections of the Restatement are §§ 174-176. It starts out with a very basic rule at § 174 that says that if you were physically coerced into an agreement, your assent is ineffective under those circumstances. At § 175, we get to a threat. The threat can be coercive and highly improper. Cases of physical coercion or coercion by threat are clear, and thus we don’t have to worry about them that much.
Austin Instrument, Inc. v. Loral Corp. – This is a case of economic duress. Was Loral forced to agree to the price increases under circumstances that amount to economic duress as a matter of law? “A contract is voidable on the ground of duress when it is established that the party making the claim was forced to agree to it by means of a wrongful threat precluding the exercise of his free will.”
Not all threats to break a contract will result in economic duress because remedies are available in the courthouse for breach of contract. Thus, the threat doesn’t coerce when the remedy in the courthouse is effective. There is a free choice between sweetening the pot and seeking a remedy in the courthouse.
The editors suggest at the beginning of this section that in contracts there are frequently adjustments after they are made. Many of those adjustments are commercially sensible and ought to be upheld. The adjustments are made under the influence of pressure, just like the originally agreements. Some degree of pressure is appropriate. Duress will undo relatively few deals.
Smithwick v. Whitley – It is found that the agreement to give a higher payment was voluntary. In this case, a remedy was available in the courthouse that would have done the threatened party’s work. Wolf v. Marlton Corp. – The vendor makes an agreement to sell a lot to be improved by a house and the vendor is both selling lots and building houses on them. The purchasers take the position that the vendor is in default because the vendor has refused to go through with the deal because they sold the house to someone else. The vendor avoids being in default because it says that their failure to perform was compelled by duress. How did the purchasers coerce the vendor into failing to perform? They threatened to buy the house and then resell it to someone “undesirable”, which was a euphemism for “black” at the time. The court says that you can make a duress case out of this.
Holmes said: “When it comes to the question of obtaining a contract by threats, it does not follow that, because you cannot be made to answer for the act, you may use the threat.” You can frequently test whether a threat is proper or improper by whether the person making the threat has the right to do it. The threat to sue is a proper threat unless you do it in bad faith. You’ll find this in § 176. On the other hand, the threat of a criminal action in order to obtain an advantage on a contract is improper. You just flat-out can’t do it.
Schwartzreich v. Bauman-Bauch, Inc. – When you have two parties to an agreement that is at least in part executory (not fully performed) on both sides then they can both choose to back out and consideration won’t cause any problem. The two sides can mutually agree to rescind, and then make a whole new deal. There is no problem of consideration for the rescission agreement: each side gives up rights they had under the contract. Once that’s happened, there’s no preexisting legal duty problem and they can make a new agreement.
When there isn’t some actual time between the mutual assent rescission and the new deal, that is a fictional way around the consideration doctrine and not a very sensible basis for upholding the modification. The modification should rise and fall depending on whether it’s fair under the circumstances and makes commercial sense.
An accord is an agreement between the parties to the original contract where one side promises to excuse the other’s original performance in exchange for the promise of some other substituted performance. Satisfaction is when that substituted performance is completed. UCC § 3-311 (a) gives some conditions under which accord and satisfaction can kick in.
What about when there is a full payment check tendered to satisfy an unliquidated debt? That will be effective to kill the debt. There are three factors required: (1) Good faith tender of an instrument to satisfy the claim in full, (2) an unliquidated claim or one subject to good faith dispute, and (3) the instrument is cashed.
But what if the words “payment in full” are scratched out and the words “payment on account” are written? What will happen when the creditor sues? The creditor loses. We like having the debtor be able to tender these “paid in full” checks. What is said is overridden by what is done. When you accept an offer with your actions, we’re not going to pay attention to your protestations in words.
Most courts thought UCC § 1-207 was never intended to apply
to accord and satisfaction, but other courts “screwed it up” according to
A more mechanical way to deal with full payment checks is found in § 3-311 (c), which provides some help for creditors (“organizations”). The creditor can send a conspicuous notice that any disputes about debts must be sent to a particular location (such as a P.O. box). Another approach an organization can take is found in § 3-311 (c)(2). If you prove that you return the payment within 90 days once you realize it’s not really full payment, you can pursue the debtor for the full amount. But all of subsection (c) is subject to subsection (d). Subsection (d) says that the claim will be discharged if, more or less, the creditor has no actual knowledge that the debtor is going to try to tender a check in full satisfaction of the claim.
Denney v. Reppert – Who is entitled to the reward? When a reward is offered for performing some
act, anyone can collect it except someone
acting within the scope of their employment or official duties. There’s a public policy against allowing
policemen and other public officials to solicit bribes for doing their duty. Board
of Comm’rs of
When there is a confidential relationship and the consideration is grossly inadequate you can put it together, and you have a constructive fraud case. You don’t have a constructive fraud case against an outsider or anyone dealing at arm’s length, because there is no basis for implying a promise that such a person is going to treat you fairly. Each party is left to fend for him or herself. The word “constructive” means “pretend”. It is something that is “constructed” by the law. There is no fraud here, so we’ll pretend there is fraud when there isn’t in order to get justice.
Jackson v. Seymour – Constructive fraud is indicated by a combination of the following factors: (1) A confidential relationship between the parties, (2) reliance of the plaintiff on the advice of the defendant, (3) gross inadequacy of the contract price, (4) an offer by the plaintiff to return the purchase price and rescind the contract, and (5) the rejection of the defendant of that offer. One lesson of this case is that you can get relief even when you’ve been a little careless. Negligence doesn’t necessarily bar you from relief in cases like this. In this case, the court tries as best it can to back the parties out of the situation and put both sides in their pre-contract position.
The law of mutual mistake: a useful way to think about it is that when parties make an agreement, some risks are good and others are bad, but some risks are shifted and we won’t avoid the transaction because one of those shifted risks comes to pass.
Why should we void a transaction on the basis of mutual mistake? We’re looking for mutual mistake in regard to a basic underlying assumption. Sometimes we’ll give relief to a party that’s disadvantaged by a mistake. But what are the costs upon the party that would be advantaged by the mistake? We want promises enforced when they are made because we want people to be able to rely on them, so we unwind very few promises.
We will probably roll back this bargain because our intent is to protect the expectation interest, and in this case, the buyer is going to get an unearned, unbargained-for windfall if the contract is not rolled back. We will allow avoidance if and only if the buyer can be backed out of the situation. The seller can avoid if he gives the buyer his money back and compensates the buyer for any reasonable reliance he had on the deal. You try to put both parties back to their pre-contract positions. Sometimes it’s too late to put the parties back in their original position. Also, the power of avoidance is typically limited in time, and you can lose it by not exercising it in a timely fashion by letting the other party rely in some way that prejudices the other party.
Everybody makes mistakes, so we’ll give you relief even if you were careless, § 157. Your fault in being careless won’t bar you from a suit unless your fault was particularly egregious. When you make a mistake, the law may be gentle with you and it may let you avoid the contract.
Beachcomber Coins, Inc. v. Boskett – Both sides know something about old coins. The semi-pro bought a coin for $450 and sold it to the dealer for $500. Then the dealer turned around and tried to make a deal for $700. But the coin turns out to be a counterfeit. The semi-pro and the pro just assumed that it was genuine. The risk that it was a counterfeit was not shifted in the court’s view. The risk that the dealer could have gotten $850 or $350 was shifted, but the risk that it was a counterfeit wasn’t shifted at all. This is a “classic case for rescission for mutual mistake”.
We’ll mostly likely have relief and avoidance when mistakes are clerical, mechanical, and dumb-headed. Such a contract is voidable by the party to whom the mistake is adverse. We’ll also grant relief if the benefiting party had reason to know of the mistake. When the mistake is particularly egregious, the other party may well have reason to know a mistake has been made. You can’t snap up an offer that’s too good to be true.
When we put mistake together with promises, we’ll often get warranties. For breach of warranty, you can get rescission, just like you would for mutual mistake, but you also might get protection of your expectation interest, which may give much more money to the buyer. Sometimes a seller will want to use mutual mistake defensively against an aggressive buyer trying to win a big verdict based on breach of warranty.
Warranty liability is promissory, and the remedy is to protect the buyer’s expectation interest by putting them in the position performance would have done. Another remedy for breach of warranty is simply rescission. So both mutual mistake and breach of warranty can potentially lead to the same remedy. That’s one lesson from the case.
Tribe v. Peterson – In order for a seller to make an express warranty, they must make a statement of fact that relates to the goods and becomes part of the bargain.
A standard word of description in different contexts can mean different things. One helpful index to what the seller has agreed to sell is price. That will tell us a good deal about what the words of description mean.
Does the UCC take away the chance to argue mistake in a warranty situation? Should we ever let the seller off the hook on the grounds of mutual mistake, limiting the buyer to a rescission and avoidance remedy rather than protecting the buyer’s expectation interest? The answer depends on putting together § 1-103 with §§ 2-313 and 2-714(2). § 1-103 “grandfathers” in common law principles, including mistake. But do the provisions of §§ 2-313 and 2-714(2) displace the law of mistake, or do we allow the law of mistake to supplement those provisions? Not every court will apply the statutes the same way, but a number of courts would allow the law of mistake to supplement if the seller is especially sympathetic. Once in a while, though not often, a seller in a warranty case can obtain some relief by using a mistake argument defensively.
Notice that whether we have a § 2-313 warranty turns on whether the description, affirmation of fact, promise, sample or model becomes part of the basis of the bargain. Mutual mistake turns on the finding of an untrue underlying basic assumption.
But how do we figure out what the basis of the bargain is? That’s just as hard as finding out what the parties’ basic assumptions were.
Contract liability is by and large strict liability. We usually don’t recognize any excuses.
To get an excuse under § 261, your performance must be rendered impracticable. Notice that § 261 ends with the words: “unless the language or the circumstances indicate the contrary”. An employee’s death will typically be “the occurrence of an event the non-occurrence of which renders performance impossible”. But the employee could promise that in the case of his death the employer will be compensated. So you get an excuse in a personal services contract if you die or if you get sick enough that you can’t work. The sickness excuse may not be a total excuse: it’s only temporary, and when you get better, you probably have to go back.
Who’s got the risk? When you make a promise, you typically have to keep it, even when doing it becomes more troublesome and expensive than you previously anticipated. But there are some troubles that are so great and so surprising that we’ll say that the risk of such events were not assumed. So granting an excuse is good for the person excused, but it’s bad for the person on whom the excuse operates.
Tompkins v. Dudley – A builder almost finishes building a new school, but then it burns down. The builder says that he ought to get an excuse, but the court says no and says that he must build it over again, at which point he’ll get paid once even though he built it twice. One way to explain this result is precedent. There is authority for saying that we’ll put the risk on the builder. Just like mutual mistake and identifying the underlying basic assumptions, there are hard issues here.
Keep in mind two things: (1) The parties could have just contracted to say what would happen in the case of unlikely events. (2) There’s something to be said for predictable precedents when we’re dealing with unpredictably destructive events. Having predictable rules also makes it easier to contract out of them. The parties can choose to shift the loss to an insurance company.
The builder promises to create an asset. The creator of the asset bears the risks of loss. The builder is not excused, and so the builder is in breach when the builder refuses to rebuild. Therefore, the builder must put the owner in the position that performance would have done.
Primarily, this rule is based on precedent. But if you want to, you could contract out of this “off-the-rack”, default rule. More importantly, the builder can buy insurance against the risk of loss and then include the cost of such insurance in the price to the owner. So this rule may not be the world’s best, but you can contract out of it or insure against it. One virtue of this rule, however, is that it’s clear and offers predictable results.
Carroll v. Bowersock – If what is lost in the fire has been wrought into (or out of) the structure, then it’s a benefit to the owner and the builder can recover for it. If it hasn’t been wrought into the structure, then the builder cannot recover for it. Materials sitting around the site and not yet wrought into the structure in any way can be lost entirely at the builder’s risk. In order for the builder to get restitution, the owner must get a benefit, and there is no benefit until the builder has made something a part of the building. One reason for this rule is that the court is spreading the loss around. The loss is split between owner and builder based on how much value is wrought into the structure.
These are relatively common situations where you have unforeseen circumstances that occur after contract formation but before performance: § 2-613: When goods suffer “casualty” (like theft or fire) without the fault of either party after a contract for their sale, and the bargain was for these particular “identified” goods, and the loss is total, then the contract is avoided. The consumer doesn’t have to pay the dealer, and if she had made a down payment she doesn’t have to get it back. Also, the dealer need not deliver a car to the consumer, even if the consumer got a good deal.
The risk of loss doesn’t pass to the consumer until the consumer receives the car. When the seller is a merchant, the risk of loss passes to the buyer upon receipt of the goods.
UCC § 2-615 says that even though the seller might not get a complete excuse, the seller might get a partial excuse for delay in delivery. Maybe the seller can get a refrigerator from a different source. But the buyer was entitled to have the contract performed. If the buyer gets notice that the seller will be late, the buyer can call it quits and decide to deal with someone else. Alternatively, the buyer can agree to a later delivery date and hold the seller to the agreed price and get it at a reasonable later time. But we won’t cram something down the buyer’s throat to which the buyer didn’t agree.
With goods, the seller has the risk until the goods are received by the buyer. On the other hand, with land, the starting place is the equitable conversion doctrine which says that the purchaser has equitable title and bears the risk from the very moment of contract formation. So you better have insurance at the moment that you sign the contract! Or you can contract out of this. This rule is avoided by contract in pretty much every land contract with which any kind of a professional has contact. The only time it probably won’t get contracted out is when two amateurs make a homemade contract without being aware of the rule.
American Trading &
Prof. Corp. v. Shell Int’l Marine, Ltd. – Who took on the risk that the
ship might have to go around the
Consider UCC § 2-615 and its comments. If you can see that a difficulty may increase the cost and expense of performing a contract, what should you do? You ought to qualify your promise so that you have an out if the difficulty materializes. Part of how we decide whether to let the promisor off the hook is whether or not the supervening circumstance is really surprising.
Mishara Contr. Co. v. Transit-Mixed Concrete Corp. – In industries where there are frequent strikes, contracts for the sale of goods can be reasonably read to include the intention to perform whether or not there is a strike. However, if you’re in a line of trade where there has never been a strike or there hasn’t been one for many years, then the occurrence of a strike might grant you an excuse even absent an express “out” in your contract.
When you’re representing somebody, think about whether it is wise to qualify your promises. If you qualify your promises too much, you’ll turn off the other party and you might fail to come to an agreement. Your ability to qualify your promises is limited by the bargaining situation.
Maple Farms, Inc. v. City School Dist. – These are commercial contracts for the sale of a lot of goods over a significant period of time at fixed prices. The purpose of this kind of contract is to shift the risk of the market. The buyer wants to assure that it will get the named goods at the price specified in the contract, and the seller wants to assure that it will get the named price for the goods. This is understood as a risk-shifting agreement.
If the parties don’t want to shift risk, they can enter into things like open-price agreements. If they choose not to do that, we should be slow to grant an excuse because we figure the parties knew what they were doing.
The “yellow-cake” cases – These are an extreme example. Westinghouse promised to supply fuel uranium at fixed prices over a very long period of time in order to encourage the building of nuclear power plants. Westinghouse had to buy the yellow-cake at prices that became very high. But we don’t grant an excuse. This is catastrophic for Westinghouse. What do the buyers do? They settle. They don’t want Westinghouse to go bankrupt because they needed the uranium.
Price escalation and inflation is rarely going to grant a fixed-price seller an excuse. In order for it to do so, it must be catastrophic and caused by a catastrophic event that tends to surprise you.
§ 265 says you need not only the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made, but also a party’s principal purpose must be substantially frustrated.
Krell v. Henry – This is the landmark case on frustration of purpose. Why is this a “frustration of purpose” case rather than an impossibility or impracticability case? The promise of the defendant is to pay £50. This promise is not impossible to perform. It’s not impracticable either. When you have a promise to pay a fixed sum, the sum doesn’t go up because of the supervening event. Paying £50 isn’t impossible. When you look at § 265, don’t neglect the stuff at the very end.
Lloyd v. Murphy – This is the modern frustration case. Was the purpose for which the property was leased so frustrated by war conditions that the defendant will be excused from performance? Frustration arises when the “expected value of performance to the party seeking to be excused has been destroyed” by an unexpected event that causes an actual failure of consideration. The purpose of a lease must be totally destroyed or must become really difficult to accomplish in order for a lessee to be excused from paying rent.
What’s the historical background of unconscionability? A “hard” or unconscionable bargain will not be enforced. We started out with this idea on the equity side and not on the law side. Unconscionability often overlaps with other older, more established doctrines that are easier to apply like actual fraud, constructive fraud, undue influence, or even lack of capacity.
Woollums v. Horsley – Was the bargain made so unconscionable that specific performance should not be granted to the plaintiff? A court sitting in equity should not grant specific performance of a contract that is unjust under the circumstances, including cases of fraud, mistake, and undue advantage.
This court is sitting in equity! The plaintiff seeks specific performance! That means the court is given the chance to think about what’s fair. The judge has the change to say that “this deal stinks, and I refuse to enforce it”. The judge doesn’t rescind the contract here, but rather refuses performance in equity. The judge forces a jury to do the dirty work in this dirty case.
The court of equity could deny specific performance, then haul off and award huge money damages on the basis of the proof. This is the “cleanup principle”: the court of equity might retain jurisdiction over the suit for the purposes of awarding damages. When the court of equity stays its hand in one of these cases, it is likely to be a total victory or total defeat. Maybe the court of equity is kidding itself when it says: “No relief in equity, but you can always sue at law” when as a practical matter you can almost never sue successfully at law. Maybe it would be better if they just put the contract to an end both at law and in equity. But in the law, we often operate in terms of fictions and mysteries, and that’s not all bad. But that’s what we have in this situation.
Williams v. Walker-Thomas Furniture Co. – This is the modern landmark case on unconscionability. This case rules that a trial court can consider unconscionability as part of the common law. The UCC says that courts must think about unconscionability in cases like this one. This case might have an effect on non-sale-of-goods situations. “Absence of meaningful choice” is often referred to as procedural unconscionability. “Unreasonably favorable terms” of one party is referred to as substantive unconscionability. We usually need both of these to get unconscionability.
Something is unconscionable when it would shock the conscience of a law-trained judge (not a jury). But that’s only the first step toward determining that something is unconscionable. The opposing party will have a chance to show that this provision isn’t really that bad of an idea.
Unconscionability is a question for the judge and not the jury. The provision deals with whether the provision was unconscionable at the time of contract formation. If bad things happen later, we may give some relief, but we will give it under some other doctrine. Under certain circumstances, the court will disregard what the parties did and will either declare that they made no contract or the court will fix up the agreement in some way that the judge thinks is conscionable. The court has flexibility and either can refuse to enforce the whole contract, or can decide to cut out a “cancer of unconscionability” and leave the rest of it. Or the court can limit the application of particular clauses in order to avoid an unconscionable result.
The parties get to present evidence to the court as to whether the contract really was unconscionable at formation. There is both a visceral and an intellectual element. The court may not like the contract, but you have to let the other side come in, often with economic evidence, that tends to show that a certain provision is necessary for some reason. The proponent of the provision as written will often come forward with a lot of testimony like this. Litigation on this matter is likely to be complicated, difficult, and expensive because of the need to introduce all kinds of evidence to try to put the agreement in an economic context.
The definition of “unconscionable” is deliberately excluded from the statute. One-sidedness may be related to unconscionability. There is a threshold of “one-sidedness” that will make an agreement unconscionable.
However, the fact that a bargain is one-sided doesn’t make an agreement unconscionable. The principle is the avoidance of “oppression” and “unfair surprise”. Notice that we don’t want to disturb the allocation of risks due to superior bargaining power. If you have superior bargaining power, you can use it to allocate risks to the party with inferior bargaining power, unless you’re “too piggish” about it. It’s permissible to use your bargaining power up to a certain limit, but not beyond that limit.
Sometimes the unconscionability comes in because the price is way too high. Some decisions have held a contract unconscionable simply due to an excessively high price, especially to poor people. But at what price does a contract become unconscionable?
Waters v. Min Ltd. – Unconscionability is decided on a case-by-case basis, with consideration of the following factors: (1) The oppressiveness of the contract upon the disadvantaged party, (2) unfair surprise to the disadvantaged party, (3) allocation of risk to the disadvantaged party due to superior bargaining power on the part of the stronger party, (4) gross disparity in consideration, (5) evidence that the stronger party knowingly took advantage of the weaker party, and (6) the presence of high pressure sales tactics or misrepresentation.
Brower v. Gateway 2000, Inc. – Is the designation of the ICC as the arbitration body unconscionable? UCC § 2-302 allows courts to flexibly police against clauses that they find unconscionable as a matter of law. Unconscionability consists of a combination of grossly unequal bargaining power plus terms that are unreasonably favorable to the more powerful party.
You can tell the buyer of the terms when the buyer receives the goods and it will still count for Gateway if and only if Gateway gives the customer the opportunity to return the goods within 30 days. If you don’t do that, then you’re buying into the terms and conditions found in the box. The court says that this will work, and does two things: (1) This is the right way to decide the mechanics of agreement. The agreement was made when the buyer failed to return the computer within the 30 day period. (2) There’s nothing wrong with doing business that way. There is no procedural unconscionability. The conditions were written in English, they weren’t in tiny type, and they were reasonably understandable to a layman. There is also an easy way to disagree: you can return the computer.
“A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.” Restatement Second § 224. A condition is like a “switch” in an “electric circuit”. A condition switches on a promise. The occurrence of a condition triggers the duty to perform a promise. If the condition doesn’t occur, then there may be a promise “out there”, but there won’t be a duty to perform it. Some promises are subject to one condition and some promises are subject to numerous conditions.
Some things in a contract are conditions only. Other things are promised only and aren’t conditions. There aren’t too many of them in the actual world of contracts. A lot of things are both a promise and a condition. Learn this vocabulary and learn the consequences of deciding that something is a condition, a promise, or a combination of both. These tools will help you build a contract that will do what your party wants accomplished.
Howard v. Federal Crop Ins. Corp. – We resolve ambiguities in two ways: (1) against forfeitures, and (2) against drafters who are unclear. One result of this case is to show us how a condition works versus how a promise works. Sometimes a condition will do the work you want, but a promise won’t help. Sometimes a promise will do the work you want, but a condition won’t help. Also notice that it’s rare for a provision to be found to be a condition only.
Whether a condition is precedent or subsequent has no effect on the substantive law. It only affects procedure. That procedural importance is small and shrinking, in fact, the Second Restatement says that we need not worry about the words “precedent” and “subsequent”. A condition is a condition precedent under the first Restatement if it is a fact that must exist before a duty of immediate performance of a promise arises.
Nichols v. Raynbred – This is from the bad old days when two promises made in a bilateral contract were assumed to be completely independent rather than each being a condition precedent to the duty to perform the other one. The result is that in the bad old days, both sides could be in total breach! Not so anymore!
Often, we will think about the order in which the transaction is going to go. The transaction might require one side to go first. In other cases, it might be possible for both sides to move simultaneously. When tender of payment is a condition to the seller’s duty to tender delivery of the goods, and both parties stay home, then neither party can collect damages from the other party.
The Lord Mansfield approach is that we won’t make people extend credit against their will, and we won’t make them extend more credit than they would like against their will. Nobody ought to have to extend credit to anybody else unless he or she has agreed to do so! Lord Mansfield’s idea of concurrent conditions working out in a sale-of-goods context is codified at § 2-507 and § 2-511. § 2-507(1) says that the seller has to tender deliver of the goods before the buyer incurs the duty to pay. Under § 2-511, tender of payment is a condition to the seller’s duty to tender delivery of the good.
Sometimes we have a stalemate! Neither party is in default, and neither party can get into the other’s pocket to recover damages. Neither party deserves to recover damages, because neither “came out of his hole” and offered performance. On the other hand, neither party deserves to be held liable in damages because neither party was offered the exchange performance. Neither party’s non-performance is reprehensible enough to deserve a remedy in damages.
Consider what’s happening in terms of Williston’s writings: it’s possible under a bilateral contract to have a stalemate where neither party is in default. In our legal system, however, it is impossible to have a situation where both parties are in total breach. If your analysis comes out that way, you must have screwed something up. Both parties can be in no breach at all, but both parties cannot be in total breach.
What puts the buyer in default? If the buyer doesn’t show up, but the seller shows up ready and willing to perform, then the buyer is in default. The seller will be in default if the buyer shows up willing and able to tender the cash, but the seller doesn’t show up.
Price v. Van Lint – “Where a contract contains mutual promises to pay money or perform some other act, and the time for performance for one party is to, and does, arrive before the time for performance by the other, the latter promise is an independent obligation.”
Ziehen v. Smith – §§ 234 and 238: When performances can be rendered simultaneously, they are due simultaneously unless something indicates otherwise. The court is constructing conditions and order of performance in order to make this go forward as a sensible deal. The court will supply gap-filling terms that protect both parties.
At closing, there is usually going to be a title defect: the mortgage against the property. That mortgage will get paid off by the purchaser’s money.
Cohen v. Krantz – It’s not uncommon that someone will regret getting into a deal that will end up costly. The purchaser looks for a legal “escape hatch” to get out. Don’t get too “rambunctious”. Don’t grab onto something small when you’re just trying to get out of a bad deal. If you do so, you’ll run the risk that you’ll be the party in breach and you’ll be liable for damages.
In order for the vendor to be able to sue the purchaser, the vendor would have to tender the deed to the property. That switches on the purchaser’s duty and puts the purchaser in breach if she doesn’t tender her payment and her signature. But even if tender is excused, the vendor must show that he could have performed. If the vendor was unable to perform, because, for example, the vendor had incurable title defects, then the idea is that the vendor doesn’t deserve to recover damages even though the purchaser repudiated. The repudiation must be the “but-for” cause of the vendor’s non-tender of performance.
Stewart v. Newbury – This is another “who’s-in-default” case. This is a construction (services) contract. In the absence of some other express provision, substantial performance is required before payment can be demanded. That’s the constructive condition or off-the-rack rule here! When you have a performance on one side that takes time in exchange for a performance on the other side that can be performed in an instant (like paying money), the constructive order of performance is that the performance that takes time goes first. Only when that performance is completed is the obligation to pay triggered.
Recall that substantial performance means “meets the essential purposes of the contract”. It’s a practical test and what it means in particular circumstances can vary and be fuzzy. But nothing half-finished or less will constitute substantial performance. Substantial performance is based in part on the fact that construction of a perfect building is impossible. If you meet the essential purposes of the contract, that will trigger the owner’s duty to pay the price. The owner is entitled to all of the plans and specifications, and thus can recover any damages suffered by any small shortfall between the actual performance rendered and what was promised.
Kelly Contr. Co. v.
Hackensack Brick Co. – This is both a goods contract and a services
contract. The terms of the goods
contract are that the brick will be delivered bit by bit.
Tipton v. Feitner – Was delivery of the whole, both live and dead hogs, a condition precedent to payment for the dead ones? The court will not force either side to extend credit to the other more than the parties agreed upon in the contract.
The court says that we should minimize the extension of credit. In order to deserve to get the dead pigs, the buyer needs to be tendering the price of the pigs, and the buyer doesn’t do that! The seller could have required payment against the delivery of the dead pigs, but he didn’t do that! He was lenient with the buyer and gave the buyer a break. The buyer was pretty much given the dead pigs on credit. That turns out to be a bad decision by the seller.
Is this contract divisible? Check out § 240: if you can pair up performances in pairs that correspond, one party’s performance of half of each pair has the same effect as if the contract only consisted of that one pair of performances. Most contracts aren’t divisible. Most are “entire”, which is the opposite of divisible. In most contracts, you can’t divide them up into agreed equivalents. Take, for example, a standard construction contract. The basic agreement is to build a certain building according to certain plans. The owner’s promise is to pay some contract price. Generally, by agreement, there will be progress payments. Otherwise, there will be too much credit extended by the builder to the owner. The stages of constructing the building are not separable; they are just convenient times to pay part of the cost of the building. Such a contract will be interpreted as entire.
For goods, § 2-307 says that unless specified otherwise, all the goods have to be delivered and paid for at the same time. So § 240 applies to non-sale of goods contracts, not including construction contracts which are entire. Employment contracts are generally divisible at common law, but there are lots of employment statutes such as periodic pay statutes. The common law doesn’t do much work as far as employment contracts work. But in any case, most employment situations are at-will.
What kind of quality is necessary to trigger the opposing party’s duty? Let’s look at sales of goods contracts and find out what performance by a seller is needed before the buyer’s duty to pay the price is triggered. We’ll generally assume a “barrelhead” transaction: if the seller gets up to the required level of performance, that will create the duty to pay.
Oshinsky v. Lorraine Mfg. Co. – The purchaser has the duty to accept and pay only for those goods that are delivered on the day specified on the contract. This is the perfect tender rule. In the UCC, the current version is § 2-601. The buyer has some choices if the goods that are delivered or the tender of those goods have something wrong with them. The buyer can accept everything, reject everything, or accept some units and reject others.
Under § 2-507(1), the seller’s tender is a condition to the buyer’s duty to accept and pay. The tender we’re talking about is a tender pursuant to § 2-601 which conforms to every aspect of the contract. § 2-106 (2) says that goods conform when they are in accordance with the obligations under the contract. This means that perfect tender doesn’t mean “perfect in the abstract”. It means perfect in relation to the contract. But what’s a contract under the UCC? It’s the “total legal obligation that results from the parties agreement as effected by the law”…but what’s the “agreement”? It’s the bargain of the parties in fact or by implication from things like course of dealing.
A course of dealing is a sequence of previous conduct between the parties to a particular transaction which is to be regarded as establishing a basis of understanding for interpreting what they say and write in regard to their current deals.
§ 2-601 references § 2-612 which talks about installment contracts. It turns out that in essence the perfect tender rule doesn’t apply to installment contracts. Installment contracts require or authorize delivery of goods in separate lots to be separately accepted. This statute does something similar yet different from divisibility. Note that the text of § 2-612 addresses what the buyer can do but not what the seller can do. However, in case law, this has been extended to the seller.
Today under the UCC, the buyer can reject any particular installment that is non-conforming such that its value is “substantially impaired” by an incurable defect. If we have an installment contract, rejections will almost always be wrongful. Thus, if you represent a seller, try to interpret the facts to produce an installment contract! That’s good for the seller! But don’t get too rambunctious, because we interpret contracts as for single deliveries unless we say otherwise in the contract.
Prescott & Co. v. J.B. Powles & Co. – Can the seller be excused from full performance because the government commandeered shipping space for wheat? The buyer has the right to refuse the goods if they aren’t delivered in the exact amount agreed upon.
§ 2-615 says that, among other things, non-delivery in part isn’t a breach of the seller’s contract if it is caused by good faith compliance with government regulation. The seller is definitely excused under this section if the above facts happened today. The seller has to follow subsections (b) and (c), though. The seller must do its best and also give the buyer notice that there will be delay or delivery.
But will the buyer be in breach if the buyer rejects the “less than everything” delivery? § 2-616 says no! The buyer has a choice to accept the 240 crates or reject them all without being in breach. There is an excuse here because it was essentially impossible for the seller to perform. But the case stands for the idea that “you can’t tender an excuse”…or rather, you can, but it won’t trigger the other party’s duty to perform. § 2-616 (2) says that when the buyer doesn’t respond to the justified notice from the seller that the seller’s performance will be delayed or partial within a reasonable time not exceeded 30 days, we’ll act like the buyer is saying “I don’t want it.”
Beck & Pauli Lithographing
But there are some cases where this doesn’t work. In a case like this, the court will try hard to “wiggle off the perfect tender hook” and help out the seller. The court might try to turn the contract into an installment contract, for example. The court might also try to argue that it’s not a sale of goods contract but rather a services contract. Or the court might find that the buyer’s rejection is bad faith under the circumstances under § 1-203. Or the court could find in the circumstances that it doesn’t make sense to have a perfect tender rule, and instead the court would substitute a substantial performance rule. But this isn’t always the case! It may be important to the buyer to get the goods precisely on time (consider the wedding dress example, or Christmas cards on December 26th).
Bartus v. Riccardi – Can the plaintiff recover even though he initially delivered a hearing aid not in exact conformity with the contract given that he later tendered a model that did meet the terms of the contract? This comes under § 2-508. § 2-508 (1) is simple enough, but § 2-508 (2) allows an extension of contract time to the seller under certain circumstances.
It is not often that a seller, having contracted to sell X, tenders Y and reasonably expects that Y will make the buyer happy but then gets a surprise rejection. This isn’t the most frequent case, though. Most often, the seller will believe that he is tendering X, but the wrong stuff, Y, is in the box. Do we give the seller a further reasonable time in those circumstances? Under § 2-508 (2), we could find that the seller reasonably believed he was tendered precisely what was called for by the contract. But a counterargument is that this would knock too big a hole in the perfect tender rule and we would give the seller more time too often. But case law seemed to have answered this question in favor of the seller.
Compare this to the proposed new § 2-508…§ 2-508 (1) is similar to the current § 2-508 (1). But the new § 2-508 (2) removes the “reasonably believes” requirement and talks about good faith instead. But it also gives protection to the buyer. The cure must be “appropriate and timely under the circumstances”. If the buyer’s need for the goods wasn’t that immediate, cure is appropriate, and the seller will have some reasonable time to cure. But if the buyer needs the thing right now, the seller won’t have the chance to cure.
Consider § 2-607: acceptance is significant! It would be easier to reject the goods. Has the buyer accepted the goods in the § 2-606 sense? Did the buyer, in accordance to § 2-606 (1)(a), signify to the dealer that the car conformed to the contract? Has the buyer had a “reasonable opportunity to inspect” as in § 2-606 (1)(b)? A significant number of cases will say that the buyer hasn’t had a reasonable opportunity to inspect, and thus the goods haven’t been inspected. With new cars, you don’t get a reasonable opportunity to inspect until you really get the car out on the road for a while. The buyer can reject the goods because there is a non-conforming tender because the brakes don’t work.
Can you reject if you haven’t yet accepted? Note that the perfect tender rule is expressly subject to the sections on contractual limitations on remedy. The case law will vary based on whether the defect is windshield wipers or brakes. If the windshield wipers don’t work, the dealer should have the chance to cure. But if the brakes are broke, you should be able to thrust the car back on the seller.
Oddo v. General Motors Corp. – Once the buyer’s confidence is shaken, a repair is not proper tender of the goods purchase. This is the so-called “shaken faith” doctrine. When something seriously shakes the buyer’s faith in the goods, the buyer will be able to reject. But if you have a dome light that doesn’t work, you won’t get as much sympathy and you can’t reject the car.
Worldwide RV Sales & Service v. Brooks – Here’s where we find out what a cure is. To cure, the seller must make the goods into conforming goods. In this case, that wasn’t done. It was a half-baked effort to cure, and that’s not going to cut it.
Fortin v. Ox-Bow Marina, Inc. – This is about revocation of acceptance. Once you have accepted, it’s too late to reject. Under § 2-608, you can revoke acceptance, but it’s harder to do than reject. You can’t revoke unless the good’s value is substantially impaired in its value to you. Moreover, you must have accepted the good either assuming that the non-conformity would be cured but it wasn’t, or that it would have been time-consuming and expensive to discover the non-conformity.
In a service contract, the servicer renders the service. If the buyer refuses, then the services are consumed and gone. Unless the servicer can enforce the contract against the buyer, the servicer will experience a big forfeiture! That’s a big reason why we don’t have a perfect tender rule in services contract: instead, we have a substantial performance rule.
Plante v. Jacobs – Has there been substantial performance of the contract to build the house, and if so, what should be the measure of damages? The contract was substantially performed if the performance meets the essential purpose of the contract. If the performance is substantial but incomplete and faulty, the correct measure of damages is the difference between the value of the house as it stands and the value it would have had if it had been built correctly. If there are a small number of small defects that can be fixed at some reasonable expense, that cost is allowed as part of the remedy.
What quality standard by the servicer will trigger the payor’s obligation to pay? The servicer must substantially perform (meet the essential purposes of the contract), which triggers the owner’s obligation to pay. The payor pays the contract price but then can have damages for the shortfall in the builder’s performance.
There are two possible rules for damages in a case like this: (1) The diminished value rule – How much would the building be worth if perfect? How much is it worth the way it is? Subtract the second from the first and you’ll have the damages. (2) The “fix-up” rule – How much would it cost to fix up with over-half-baked house and make it fully baked?
Jacob & Youngs v.
But in most states, you could condition a builder’s right to
be paid on an architect’s certificate that says that the building meets the
plans and specifications. Recall how we
talked about conditions of personal satisfaction. The “architect’s certificate” condition is an
analogue in the realm of “professional” opinion. But note that this doesn’t work in
Reynolds v. Armstead – You can get restitution to disgorge unjust enrichment if we’re confident that otherwise the owner would be unjustly enriched. But if the performance is bad enough, you might be able to take the position that there is no unjust enrichment because by deviating so far from the contract, the builder has become a volunteer or officious intermeddler who deserves no restitution. There will be significant flexibility and vagueness in determining whether someone who has performed less than substantially is entitled to restitution.
Suppose that the contractor deviates from the contract
intentionally? Does the contractor get
nothing? Cardozo says yes. He says that the “willful transgressor” must
accept the consequences of his sins. If
he willfully deviates from the contract, it will usually prevent his
performance from being substantial and it won’t be unjust for the owner to keep
the value of the work. Is that bad
Recall, however, that we’re arguing about the last payment in an installment contract. It will probably be something like the last 5% of the contract price.
What if the defendant in Jacob & Youngs willfully uses the wrong kind of pipe and then tries to get away with it? Does that make that person so bad that they shouldn’t get paid? Not according to the Second Restatement in § 374.
Hadden v. Consolidated Edison Co. of
K & G Contr. Co.
v. Harris – Does the contractor have the right to withhold progress
payments to partially pay for the damages caused by the subcontractor’s
negligence? “If the performing party
stops performing, or performs badly, the paying party can stop paying.”