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Contracts 2 -Outline 2
By: SunsetSailor Date: February 17, 2011, 9:30 pm
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Contracts II Outline
PAROL EVIDENCE AND INTERPRETATION
I. PAROL EVIDENCE RULE GENERALLY
a. What the rule does: The parol evidence rule limits the extent
to which a party may establish that discussions or writings
prior to the signed written contract should be taken as part of
the agreement. In some circumstances, the rule bars the
fact-finder from considering any evidence of certain preliminary
agreements that are not contained in the final writing, even
though this evidence might show that the preliminary agreement
did in fact take place and that the parties intended it to
remain part of their deal despite its absence from the writing.
II. TOTAL AND PARTIAL INTEGRATIONS
a. Definitions:
i. "Integration": A document is said to be an "integration" of
the parties’ agreement if it is intended as the final expression
of the agreement. (The parol evidence rule applies only to
documents which are "integrations," i.e., final expressions of
agreement.)
ii. Partial integration: A "partial" integration is a document
that is intended to be final, but that is not intended to
include all details of the parties’ agreement.
iii. Total integration: A "total" integration is a document that
is not only a final expression of agreement, but that is also
intended to include all details of the agreement.
b. Statement of rule: The "parol evidence rule" is in fact two
sub-rules:
i. Partial integration: When a writing is a partial integration,
no evidence of prior or contemporaneous agreements or
negotiations (oral or written) may be admitted if this evidence
would contradict a term of the writing.
ii. Total integration: When a document is a total integration,
no evidence of prior or contemporaneous agreements or
negotiations may be admitted which would either contradict or
add to the writing.
iii. Summary: Putting the two sub-parts together, the parol
evidence rule provides that evidence of a prior agreement may
never be admitted to contradict an integrated writing, and may
furthermore not even supplement an integration which is intended
to be complete.
iv. Prior writings and oral agreements: The parol evidence rule
applies to oral agreements and discussions that occur prior to a
signing of an integration. It also applies to writings created
prior to an integration (e.g., draft agreements that were not
intended to be final expressions of agreement).
v. Contemporaneous writing: If an ancillary writing is signed at
the same time a formal document is signed, the ancillary
document is treated as part of the writing, and will not be
subject to the parol evidence rule.
vi. Subsequent agreements: The parol evidence rule never bars
consideration of subsequent oral agreements. That is, a written
contract may always be modified after its execution, by an oral
agreement.
1. "No oral modifications" clause: However, if the written
document contains a "no oral modification" clause, the court
will usually enforce that clause, unless the court finds that
the defendant waived the benefits of that clause.
vii. UCC: Section 2-202 of the UCC essentially follows the
common-law parol evidence rule as summarized above.
III. ROLES OF JUDGE AND JURY
a. Preliminary determinations made by judge: Nearly all courts
hold that the judge, not the jury, decides: (1) whether the
writing was intended as an integration; (2) if so, whether the
integration is "partial" or "total"; and (3) whether particular
evidence would supplement the terms of a complete integration.
i. Conflicting views: Courts disagree about how the judge should
make these decisions. Two extreme positions are: (1) the "four
corners" rule, by which the judge decides whether there is an
integration, and whether it is total or partial, by looking
solely at the document; and (2) the "Corbin" view, by which
these questions are to be answered by looking at all available
evidence, including testimony, to determine the actual intention
of the parties.
ii. Merger clause: Most contracts contain a "merger" clause,
i.e., a clause stating that the writing constitutes the sole
agreement between the parties. The presence of such a clause
makes it more likely that the court will find the writing to
have been intended as a total integration (in which case not
even consistent additional prior oral or written terms may be
shown).
IV. SITUATIONS WHERE PAROL EVIDENCE RULE DOES NOT APPLY
a. Fraud, mistake or other voidability: Even if a writing is a
total integration, a party may always introduce evidence of
earlier oral agreements to show illegality, fraud, duress,
mistake, lack of consideration, or any other fact that would
make the contract void or voidable. In other words, the parol
evidence rule never prevents the introduction of evidence that
would show that no valid contract exists or that the contract is
voidable.
Example: In order to induce Buyer to buy a rental property,
Seller lies about the profitability of the property. The parties
then sign a sale contract that contains a standard "merger"
clause, reciting that the contract constitutes the sole
agreement between the parties. The parol evidence rule will not
prevent Buyer from showing that Seller made fraudulent
misrepresentations to induce him to enter into the contract.
i. Particular disclaimer: But if the contract contains a very
specific statement that no representations of a particular sort
have been made, some courts prevent a party from showing that
the disclaimer is false.
Example: On the facts of the above example, suppose that the
contract stated, "Seller has made no representations or
warranties regarding the profitability of the property, and
Buyer has relied solely on his own investigation as to
profitability." Some courts – though probably a minority – would
prohibit Buyer from showing that Seller in fact made fraudulent
misrepresentations about profitability.
b. Existence of a condition: If the parties orally agree on a
condition to the enforceability of the contract, or to the duty
of one of them, but this condition is then not included in the
writing, courts generally allow proof of this condition despite
the parol evidence rule.
Example: A and B agree that A will sell a patent to B for
$10,000 if C, an engineer advising B, approves. A and B sign a
written agreement that seems to be complete, except that the
contract does not mention C’s approval. Nearly all courts would
allow B to prove that the oral agreement regarding approval was
in fact made.
c. Collateral agreements: An oral agreement that is supported by
separate consideration may be demonstrated, even though it
occurred prior to what seems to be a total integration.
Example: In a written agreement that seems to be a complete
expression of the parties’ intent, A promises to sell B a
particular automobile. As part of the transaction, the parties
orally agree that B may keep the car in A’s garage for one year
for $15 per month. Because the alleged oral agreement is
supported by separate consideration – the $15 per month – B may
prove that the oral agreement occurred even though there is an
integrated writing that does not include that agreement.
d. Subsequent transactions: Recall that the parol evidence rule
never bars evidence that after the signing of the writing, the
parties orally or in writing agreed to modify or rescind the
writing.
V. INTERPRETATION
a. Modern view: Most courts today allow parties to introduce
extrinsic evidence to aid in the interpretation of a contract,
even if the writing is an integration. That is, parties are
generally allowed to introduce evidence of what they
subjectively thought the terms in a writing meant, even if the
writing is an integration.
b. Maxims of interpretation: There are a number of "maxims" that
courts use in deciding which of two conflicting interpretations
of a clause should be followed:
i. Primary purpose: If the "primary purpose" of the parties in
making the contract can be ascertained, that purpose is given
great weight.
ii. All terms made reasonable, lawful and effective: All terms
will be interpreted, where possible, so that they will have a
reasonable, lawful and effective meaning.
iii. Construed against drafter: An ambiguous term will be
construed against the person who drafted the contract.
iv. Negotiated terms control standard terms: A term that has
been negotiated between the parties will control over one that
is part of a standardized portion of the agreement (i.e., the
fine print "boilerplate").
(Example: A clause that has been typewritten in as a "rider" to
a preprinted form contract, or a clause that has been
handwritten onto a typewritten, agreement, will have priority.)
VI. TRADE USAGE, COURSE OF PERFORMANCE, AND COURSE OF DEALING
a. Definitions: There are three special sources which are used
in interpreting the terms of a contract. These are especially
important in sales contracts, since the UCC gives these sources
specific treatment:
i. Course of performance: A "course of performance" refers to
the way the parties have conducted themselves in performing the
particular contract at hand. (Example: The contract calls for
repeated deliveries of "highest grade oil." Evidence as to the
quality of oil delivered and accepted in the first installments
would be admissible as a course of performance to help determine
whether oil delivered in a later installment met the contract
standard.)
ii. Course of dealing: A "course of dealing" refers to how the
parties have acted with respect to past contracts.
iii. Usage of trade: A "usage of trade" is "any practice or
method of dealing having such regularity of observance in a
place, vocation or trade as to justify an expectation that it
will be observed with respect to the transaction in question."
UCC § 1-205(2). Thus the meaning attached to a particular term
in a certain region, or in a certain industry, would be
admissible.
b. Used to interpret even a complete integration: Course of
dealing, course of performance, and usage of trade may be
introduced to help interpret the meaning of a writing even if
the writing is a complete integration. That is, these sources
are not affected by the parol evidence rule – even though a
writing is found to be the final and exclusive embodiment of the
agreement, it may still be explained by evidence from these
three sources.
i. Contradiction of express terms: But these customs may not be
used to contradict the express terms of a contract. See UCC § 2-
208(2). However, if these customs can reasonably be harmonized
with the writing, then the customs may be shown and may become
part of the contract.
c. Priorities: Where more than one of these types of customs is
present, the most specific pattern controls. Thus an express
contractual provision controls over a course of performance,
which controls over a course of dealing, which controls over a
trade usage. UCC §§ 2-208(2) and 1-205.
VII. OMITTED TERMS SUPPLIED BY COURT
a. Generally: Courts will generally supply a missing term (that
is, a term as to which the contract documents are silent) if it
is apparent that the parties wanted to bind themselves, and
there is a reasonable way for the court to go about formulating
the missing term. Here are some examples:
i. Good faith: The court will normally supply a term imposing on
each party a "duty of good faith." (Example: Where A agrees to
have exclusive marketing rights to a design or invention
produced by B, A will be found to have an implied duty to make
good faith efforts to promote B’s product.)
ii. Duty to continue business: In requirement and output
contracts, generally there will not be a duty to continue the
business (assuming the owner acted in good faith when she closed
it down.)
iii. Termination of dealership or franchise: Some but not all
courts will supply a term to prevent one party from arbitrarily
terminating a franchise or dealership arrangement. Sometimes,
the court will refuse to allow termination except for cause.
More commonly, courts will find an implied requirement of a
reasonable notice prior to termination.
iv. Termination of employment contract: A strong minority of
courts now find that an at-will employment contract contains an
implied term prohibiting the employer from terminating the
arrangement in bad faith. In these courts, an employer may not
terminate an at-will arrangement in order to deprive the
employee of a pension, to retaliate for the employee’s refusal
to commit wrongdoing at the employer’s urging, or for other bad
faith reasons.
Allocation of Risk: Conditions and Warranties – Chapter 11
I. Conditions
a. Definition
i. An act or event other than a lapse of time, which, unless it
is excused, must occur before a duty to perform a contractual
performance arises (condition precedent), or which discharges a
duty of performance that has already arisen (condition
subsequent).
II. Time Based – relation to the particular moment when a duty
to perform a particular promise in the agreement arises
a. Condition Precedent
i. An act or event (other than a lapse of time) which must occur
before a party is obliged to perform a promise made in an
existing contract
1. Example – Insurance company agrees to pay $1 million if a
fire occurs and if the insured files proof of loss within sixty
days after the loss.
2. Conditions precedent – fire and filing of the proof of loss
within sixty days
ii. Parol evidence – can be used to prove condition precedent
iii. Words used
1. If
2. On condition that
3. Subject to
4. Provided
b. Concurrent Conditions
i. Exist where the parties are to exchange performances at the
same time
ii. Unless tender is excused, a party must perform or tender
performance before the party has a claim
iii. Occur in Ks for: the sale of goods and Ks for the
conveyance of land
c. Condition Subsequent
i. Any event the existence of which, by agreement of the
parties, discharges a duty of performance that has arisen
1. Example – Same as above but policy provides that insured must
sue within one year of the filing of proofs of loss
2. Condition subsequent – failure to sue discharges a duty to
pay that has already arisen
ii. Parol evidence – cannot be used to prove condition
subsequent
d. Burden of Proof
i. Party who sues has the burden of proving that the conditions
precedent attached to that promise arose.
ii. Party claiming that a duty that has already arisen has been
discharged has the burden of proof on that issue.
III. Express Conditions - by agreement of the parties
a. Must be strictly performed
b. Different from a promise
i. Failure to perform a promise – breach
ii. Failure to comply with a condition – not a breach
1. Example – A says to B - “If you walk across the Brooklyn
Bridge, I will pay you $100.”
a. B’s walking the bridge is an express condition precedent to
A’s obligation to pay.
b. If B does not fully perform, A will not be obliged to pay.
2. Example – A says to B – “I promise to pay you $100 if you
promise to walk the Bridge and provided you in fact walk the
bridge.” B promises.
a. Same express condition, but, in addition, B has made a
promise to walk the Bridge. If B does not walk, A need not pay
the $100 because B failed to comoply with the express condition
precedent to A’s promise to pay.
b. Also, since B has made a promise to walk the Bridge, B will
be liable for breach of the promise.
c. Courts prefer a promise over a condition
d. May be implied from language of promise
i. Example – A and B enter into a K for the sale and purchase of
real property. K contains a clause that performance is
“contingent on B obtaining” a describe mortgage loan. B has
impliedly promised to use reasonable efforts to cause the
condition to occur. Failure to use such efforts would be a
breach of K.
IV. Constructive Conditions – imposed by law
a. Substantial compliance is sufficient
b. Constructed in bilateral contracts
i. Fill in gaps – what is the order in which the promises are to
be performed
1. Example –  and  make a K to build 19 houses
on property owned by . There is an agreement for
progress payments according to a formula.  finishes a
portion of the work and  without any justification fails
to make the installment payment.
2.  is justified in suspending performance
3.  could cancel K, if the non-payment is a material
breach – this is related to what time (how far into performance)
the breach occurred. If it occurs early, typically a material
breach.
c. Omitted terms can be supplied by the court – look at
circumstances surrounding the K
d. Scenarios
i.  claims that  has performed – issue is
substantial performance
ii.  claims justification in non-performance b/c of
breach by  – issue is whether  is guilty of
material breach
I. Material Breach
e. Material breach (and no other cure) – non-breacher may cancel
he K and sue for total breach
i. Must show that  would have been ready, willing and
able to perform but for the breach
ii. Damages – assessed on the premise that B will not perform
1. NB – permitted to recover all damages under the K
f. Non-breacher has the option to continue with the K and sue
for a partial breach
g. Non-material breach – NB may not cancel the K but may sue for
a partial breach.
i. K continues
ii. Damages – recover damages that were caused by the particular
breach
h. Material breach – breach that justifies suspension of
performance
i. Total breach – justifies cancellation of the contract
j. Factors considered – material breach
i. To what extent, if any, the K has been performed at the time
of the breach
ii. Willful breach is more likely to be regarded as material
than a breach caused by negligence or by fortuitous
circumstances
iii. Quantitatively serious breach is more likely to be
considered material
iv. Degree of hardship on B
v. Extent to which the NB will receive a substantial benefit
from the promised performance
vi. Adequacy with which damages may compensate for partial
breach
k. Delay in performance
i. Material breach if “time of the essence”
1. Time of the essence – determined by the trier of fact
ii. If time is not “of the essence”
1. Breach if unreasonable delay
2. No material breach – reasonable delay
iii. Does not apply to the sale of goods
II. Substantial Performance
l. Applies to bilateral contracts for an agreed exchange of
performance
m. Part unperformed must not destroy the value or the purpose of
the contract
n. Does not apply where breach is willful
i. Intentional variation of the K
o. Party who relies on the doctrine has breached and is liable
in damages to the NB. The party who has substantially performed
is limited to the K price less appropriate allowance the cost of
completion
p. Burden of proof on the cost of completion is on party who
claims to have rendered substantial performance.
III. Sale of Goods
q. Substantial performance does not apply to the sale of goods
r. Buyer may reject goods if they arre non-conforming in any
respect
s. Time for performance has not expired
i. If the buyer rejects a defective tender of the seller before
the time for performance has expired, the seller has an
unconditional right to cure by making a conforming delivery
within the K time.
t. Time for performance has expired
i. When buyer rejects non-conforming goods, seller has the right
to cure the defect after the time for performance has passed
under 2 conditions:
1. Seller had reasonable grounds to believe that the tender
would be accepted “with or without money allowance”
2. Seller “reasonably notifies the buyer” of the intention to
cure
d. Rejection and Acceptance of Goods
ii. Buyer loses right to reject when:
1. He accepts
2. Rejection is not made within a reasonable time after delivery
u. Does not apply to installment Ks
i. Installment K – Separate lots are to be delivered and
separately paid for and accepted
ii. Only if the non-conformity substantially impairs the whole K
(material breach)
V. Recovery for less than substantial performance
v.  who has breached but has substantially performed is
ordinarily entitled to a recovery based on the terms of a K
w. A defaulting  who has not substantially performed may
be entitled to a restitution in a quasi-contractual action
x. Britton v. Turner
i. Held – defaulting , although unable to recover on the
K, could recover under a quasi-K theory for the reasonable value
of the services less any damages suffered by 
VI. Divisibility
y. Performance by each party is divided into two or more parts
and performance of each part by each party is the agreed
exchange for a corresponding part by the other party
i. Example
1. A and B agree that A will work for B for one year for at a
salary of $1000 per week, K is divisible. Once A has worked for
week, he is entitled to $1000 irrespective of subsequent
events.
VII. Independent Promises
z. A promise is independent (unconditional) if it is unqualified
of if nothing but the lapse of time is necessary to make the
promise presently enforceable.
aa. Must be performed although the other party has not
performed.
i. Example
1. A promises to build a house for B and B promises to pay X
dollars when the house is completed. B’s promise is
constructively conditioned on A’s performance. A must perform
before B is required to do anything. Thus, A’s promise is, by
definition, independent (unconditional) with the result that if
A is guilty of a material breach, B may cancel and sue for a
total breach, although B has not performed.
VIII. Representations and Warranties of Quality
Changed Circumstances: Impracticability – Chapter 13
bb. Existing Impracticability
cc. Supervening Impracticability
dd. Frustration of Purpose
I. Impossibility of Performance
a. A thing is impossible in legal contemplation when it is not
practicable; and a thing is impracticable when it can only be
done at an excessive and unreasonable cost
b. Three requirements
i. Something unexpected must have occurred
1. Not reasonably foreseeable
ii. Risk of the unexpected occurrence must not have been
allocated either by agreement or by custom
iii. Occurrence of the contingency must have rendered
performance commercially impracticable
c. Automatic excuse for non-performance
i. Death of the person who is to personally perform
ii. Supervening illegality of performance
iii. Destruction of the subject matter
iv. Also if –
1. Unexpected events inflict a loss on one party and provide a
windfall gain for the other, OR
2. Where the excuse would save one party from an unexpected loss
on one party and provide a windfall gain for the other or where
the excuse would save one party from an unexpected loss while
leaving the other party in a position no worse than it would
have without the contract
d. UCC – Questions to ask – Impossibility
i. Was there an event that changed a basic assumption shared by
both parties on which the contract was made?
ii. Did that event in fact make performance impossible or at
least impracticable?
iii. Did the party that seeks to utilize the defense of
impossibility assume the risk by the terms of the K?
iv. If the K did not allocate risk, to whom should the risk be
allocated?
1. Who was in a better position to prevent the risk from
occurring?
a. Allocate the risk to the party that could have prevented the
supervening event
2. Who is better able to bear the risk?
a. Who is better able to spread the risk as by insurance, by
hedging on the futures market, or by passing on the economic
impact of the event to the ultimate customer
e. Categories
i. Destruction or unavailability of the subject matter
1. Taylor v. Caldwell
a. s and  agreed to lease The Surrey Gardens and
Music Hall for four days for the purpose of giving four concerts
for 100 pounds each day. The underlying condition is that the
Gardens would be fit for the concert to take place. After the K
was made and before the first concert was given, the Hall was
destroyed by fire.
b. Held - In a contract in which the performance depends on the
continued existence of a given person or thing, a condition is
implied that the impossibility of performance arising from the
perishing of the person or thing shall excuse the performance.
ii. Failure of the contemplated mode of delivery or payment
1. UCC – if the agreed upon manner of delivery becomes
commercially impracticable but a commercially reasonable
substitute is available, such substitute must be tendered and
accepted.
iii. Supervening prohibition or prevention by law
iv. Failure of intangible means of performance
v. Death or illness
1. If K calls for personal performance of the deceased,
promisor’s duty is excused unless the risk was assumed.
2. If the duty is delegable, the death or illness of the
promisor or of a third party who is expected to perform does not
excuse performance.
II. Impracticability
a. Definition – extreme or unreasonable difficulty, expense,
injury or loss
b. NOT an unforeseen increase in cost unless “extreme and
unreasonable.”
c. Mineral Park Land v. Howard
i. Held – Excessive unforeseen cost (10-12 times usual cost)
deemed impracticable and excused non-performance.
III. Impossibility as an Excuse of Condition
a. Impossibility MAY NOT be used to excuse a constructive
condition because a constructive condition of performance is a
material part of the agreed exchange.
IV. Existing Impracticability
a. Exists at the time the K is made
b. Same as supervening impracticability with TWO MAJOR
DIFFERENCES:
i. Party seeking to use the doctrine must show the absence of
knowledge that made performance impossible
ii. Existing impossibility results in a void K; supervening
impracticability discharges a K that has already arisen
V. Frustration of Purpose
a. Buyer or any party who is obliged to pay will use this
defense
b. Krell v. Henry
i. Henry (D) paid a deposit of £ 25 to Krell (P) for the use of
his apartment in Pall Mall, London, for the purpose of a viewing
sight for King Edward VII's coronation procession. The King
became ill, causing a delay of the coronation, upon which Henry
(D) refused to pay a £50 balance, for which Krell (P) sued.
ii. Held -  was excused from duty of payment even though
performance was possible and payment could have been made.
c. Requirements (Restatement):
i. Object of one of the parties in entering the K must be
frustrated by the event
ii. Other party must also have K’ed on the basis of attainment
of this object
iii. Frustration must be total or nearly total
iv. Party seeking to use the defense must not have assumed a
greater obligation than the law imposes
v. Party seeking to use the defense must not be guilty of
contributory fault
d. Temporary Impossibility or Frustration
i. Where the promisor encounters temporary impossibility,
whether or not the encounter provides an excuse, the prospective
inability will normally give the other a right to suspend
performance.
ii. If the prospective inability created by the temporary
impossibility is so serious that there is a reasonable
probability that substantial performance will not be
forthcoming, the other party may cancel the K.
iii. Example
1. A promised to sing the leading female role in a new opera
being produced by B. First performance on May 28th. On May
23rd, A became ill during a rehearsal. At this time the length
of her illness was indefinite and unknown. The only available
sub insisted on being hired for the entire performance and B
hire her for the run of the show. A was ready to perform June
4th at which time she tendered her services which were refused.
Jury found that the engagement of the sub was reasonable.
iv. Party who has the defense of temporary impossibility may
also cancel the K if the delay will make performance
substantially more burdensome.
e. Partial Impossibility
i. When promisors have the defense of impossibility or
impracticability as to only part of their performances they are
excused from performing those parts except that, if they can
render reasonable substitute performances, they are obliged to
do so.
f. Contributory Fault
i. Burden of proof is on the party who asserts impossibility.
The promisor must show that the task to be done could not be
accomplished.
ii. If a party creates the impossibility by his own voluntary
act, no excuse is allowed.
VI. Assumption of Risk
a. Courts presume that the promisor has assumed the risk.
b. Canadian Industrial Alcohol v. Dunbar Molasses
i. Buyer sues a seller for non-performance. The seller was to
provide 1.5 million gallons of molasses. The  delivered
only 344,000 gallons and this suit followed.  claimed
that it was impossible to delver more since the sugar supplier
would not provide him with enough sugar to manufacture the
molasses required.
ii. Held - A special group of circumstances required for a
party’s performance and presupposed by the other party does not
need to be a term included in a contract. Supplier could not
avail itself of the defense of impossibility b/c they were
guilty of contributory fault in failing to enter into a K with
their supplier.
iii. Supplier could have agreed with buyer that the agreement
was contingent upon the performance of supplier’s supplier.
1. Middleman is expected to lock up a source of supply before
committing to a resale.
c. Technological Impossibility
i. United States v. Wegematic
1. Contractor assumes the risk that production was possible
because it knew or should have known of the limits of existing
technology.
VII. Foreseeability
a. If the event that is the basis of a claim of impossibility or
frustration is reasonably foreseeable, according to the abundant
authority, the defense will be lost because the promisor should
have provided for the contingency in the contract.
b. Definition – An event so unlikely to occur that reasonable
parties see no need explicitly to allocate the risk of its
occurrence, although the impact it might have would be of such
magnitude that the parties would have negotiated over it, had
the event been more likely.
VIII. Effect if Impossibility On a Prior Repudiation
a. The effect of total supervening impossibility or frustration
is to discharge the excused party’s remaining duties.
b. Simultaneously, the other party is discharged because the
performance of the excused party will not be forthcoming.
Duty of Good Faith
I. Definition
a. UCC §1-201(19) – honesty in fact in the conduct or
transaction concerned
b. Private parties
i. Subjective standard (“pure heart and the empty head”)
c. Merchants
i. Objective and subjective standard
1. Honesty in fact and the observation of reasonable commercial
standards of fair dealing in the trade
a. Subjective – honesty in fact
b. Objective – standards in the trade
II. Abuse of Rights
a. Bad Faith
i. Attempt to deprive the other contracting party of the fruits
of the contract that he bargained for and the jury found that
the dismissal was in bad faith
b. Three types of abusive actions
i. Malicious motive
1. The exercise of a power of termination granted by the
parties’ explicit agreement or by a rule of law cannot, without
liability, be exercised for a malicious reason in an employment
or any other reason
ii. Exercise of a right is totally unreasonable – no interest in
the exercise of the right and its exercise harms another
iii. Right is exercised for a purpose other than that for which
it exists
1. Different standards
a. Automatic Sprinkler – no leeway for bad faith in exercise of
a K clause – “absolute discretion means absolute discretion”
b. Tymshare -  was not acting for any purposes
implicitly envisioned by the K.
i. “Even the permissible act performed in bad faith is a breach
only because acts in bad faith are not permitted under the K
Breach of Contract and Permissible Remedies
I. Compensatory Damages
a. Basic Policies
b. Breach or Repudiation by Payer
c. Breach or Repudiation by Performer
Anticipatory Breach and Prospective Non-performance
I. Prospective failure of condition
a. Prospective inability to perform
i. Example – A Ks with B to play the leading role in a stage
show. Rehearals are to begin on March 1 and the show is
schedule to begin on April 1. Feb. 15, A is injured in a car
wreck. Unable to perform until June 1. A is prospectively
unable to perform.
ii. B has several options
1. Cancel K and hire a replacement
2. If A miraculously appeared on March 1, B would have a defense
– your prospective inability to perform acted as a failure of
constructive condition, justifying my canceling of the K.
iii. Example 2 - Instead of an accident, B auditions for a part
that will be filmed in a distant city at the same time as the
stage show. B learns of the audition.
iv. Prospective Unwillingness – indicated by A’s actions. B has
several remedies available; cancellation is probably too severe.
v. Example 3 - Instead A accepts another role and informs B of
her acceptance.
1. Prospective unwillingness – acts as a failure of constructive
condition
2. Anticipatory repudiation – unequivocal statement of
unwillingness to perform before any performance is due
b. Prospective unwillingness to perform
c. Prospective inability or unwillingness to perform
i. Words or conduct
ii. Destruction of the subject matter
1. Example - S agrees to sell car to B – delivery and title
transfer on May 1. If car is destroyed April 25th, B could not
enforce the K against S.
a. S – defense - impossibility
b. B – defense - prospective inability to perform
iii. Death or illness of person essential to the K
iv. Lack of title in a K vendor at the time of making the K
1. Example – Vendor does not have title to the property at the
time the K was entered into. Vendee make invoke the doctrine of
prospective inability (change position) unless the vendor has
the right to acquire title or has a justifiable expectation of
becoming owner in time to perform under the terms of the K or
unless the vendee had knowledge of the lack of title when the K
was signed.
v. Existing or supervening illegality of a promised performance
vi. Insolvency of a party
1. What constitutes insolvency? – 3 situations
a. Ceasing to pay debts in the ordinary course of business
b. Inability to pay debts as they mature
c. Insolvency within the meaning of the Federal Bankruptcy Act
2. Mere doubts not enough – reasonable person would conclude
that conclude that a party is insolvent is sufficient
a. Ex – unsatisfied judgments are enough
3. Failure of the insolvent party to make the necessary tender
within a reasonable time discharges the duty of the solvent
party altogether.
4. Remedies
a. Aggrieved party is permitted to suspend performance
b. Entitled to receive adequate assurance
c. Failure to supply adequate assurance may create an
anticipatory repudiation
vii. Defective performances rendered under other Ks
II. Anticipatory Repudiation
a. Party repudiates the K before the time for performance arises
b. Hochster v. De La Tour
i. A promisee that contracts to a promisor may sue immediately
and accept work from another after learning that the promisor
has breached on the K for future performance.
c. Repudiation – 3 actions
i. Positive statement to the promisee or other person having a
right under the K indicating that promisor will not or cannot
substantially perform his contractual duties
1. Statement must be so unequivocal that the intent not to be
bound
2. Must be sufficiently positive to be reasonable interpreted
that a party will not or cannot substantially perform
3. Party’s inability to perform is not a repudiation
ii. Transferring or contracting to transfer to a third person an
interest in specific land, goods or in any other thing essential
for the substantial performance of his contractual duties
iii. Any voluntary affirmative act which renders substantial
performance of his contractual duties impossible or apparently
impossible
1. Example – If A agrees to work for B for one year starting on
June 1, in exchange for B’s promise to pay, and on May 25th A
embarks on an ocean voyage around the world, there is not only
prospective inability and unwillingness to perform, but there is
also repudiation
III. Retraction of Anticipatory Repudiation
a. Until the repudiating party’s next performance is due he can
retract his repudiation unless the aggrieved party has since the
repudiation cancelled or materially changed his position or
otherwise indicates that he considers the repudiation.
b. No other act of reliance is necessary where the aggrieved
party indicates that the repudiation will be considered to be
final
c. May take place any time before the injured party has changed
position, or has indicated that the repudiation is final or has
commenced a law suit
IV. Responses to an Anticipatory Repudiation – 3 types
a. Injured party may bring an immediate action for a total
breach
i.  must show that he would have been ready, willing and
able to perform but for the repudiation
b. Insist that the other party perform – urge the repudiating
party to undo the repudiation
c. Ignore the repudiation and proceed with performance
i. Promisee may not continue to perform if the effect of
performance would be to enhance damages.
ii. Conversely, if the contractor repudiated, the owner must
mitigate damages, for example, by securing another contractor
1. Injured party must act promptly after learning of the
repudiation
V. Exception to Anticipatory Breach – Unilateral Obligations
a. No action will lie for the anticipatory repudiation of
unilateral obligation to pay money at a future time or in future
installments
b. Two factors
i.  has completely performed
ii.  is entitled to a fixed payment of money at one time
or in installments
1. Example – B says to A, “If you walk across the bridge, I’ll
pay you $100 one year after you finish walking” and A walks and
B repudiates his obligation, A cannot bring an immediate action
for the $100. AR does not justify an immediate action because
of the exception for unilateral obligation.
2. Example – A lends B $12K and B promises to pay $1000 per
month starting one month from the making of the loan. Before
the time for the first payment arrives , B repudiates.
3. A may recover only $1000 and may not recover for the other
installments until they severally mature.
VI. Exception to Anticipatory Breach – Independent Promises
a. Example – A and B enter into an employment K for 5 years. A,
the employee, signs a non-compete clause. After A starts to
perform, B repudiates the K.
i. A is still liable on the promise; if A breaches the promise B
may sue for breach of this covenant even though B has repudiated
Damages
Once there is breach, we need to determine damages
I. Nominal Damages
a. Aggrieved party has suffered no compensable damages –
judgment for nominal damages will be entered
b. Usual amount – one dollar – symbolizes vindication of the
wrong done
c. Two reasons:
i.  may bring only nominal damages in a test case – not
likely could use declaratory judgment instead
ii.  is likely to institute an action in the belief that
substantial damages will be obtained
II. Punitive Damages
a. Used to punish malicious or willful and wanton conduct
b. Not usually awarded
c. Awarded where the breach constitutes or is accompanied by a
malicious tort
III. Compensatory Damages
a. Put the aggrieved party in the same economic position the
aggrieved party would have attained if the contract had been
performed
b. CL Measure – gains prevented + losses sustained
i. Example -  K’ed to manufacture a number of specially
designed auto parts. The K was repudiated by the  buyer
after production had commenced and ¼ were delivered. Since
there was no market for this special product,  could not
mitigate damages.
ii. Held – Damages set: profit  would have made had
 fully performed. The amount of gains prevented was
calculated by the difference of what would have been the cost of
performance and K price. Also,  was permitted to
recover for losses sustained (consisted of payments for labor
and material and “overhead” costs).
c. Modern Measure
3 types of compensatory damages:
1. Expectation
i. Difference between what was promised and what was received
ii. Economic value of the K – want to keep the benefit of the
bargain
iii. Attempt to put the non breaching party in a position if the
K would have been fully performed
iv. Typically as a buyer – bargain for less than fair market
value
v. As seller – for more than market value
2. Reliance
i. Put the non-breaching party in the pre-K position
ii. Actions taken by the non-breaching party in reliance upon
the K – need to be compensated
iii. Any K where you had to expend money to get the other party
to perform
3. Restitution
i. Put the breaching party in pre-K position
ii. Make them disgorge the benefit they got from the K – make
them give it back
d. Primary concern is to protect the expectation interest
e. Sometimes cannot be recovered - lack of probative evidence
or policy reasons
IV. Foreseeability
a. Economic Injury
i. Hadley v. Baxendale -  operated a mill and a custom
shaft broke that shut down the mill. The shipper 
delayed the shipment for several days. This delay caused the
mill to be shut down for a greater period of time than it would
have been if it had been seasonably dispatched.
ii. Held – 2 rules:
1. General - NB may recover those damages as may fairly and
reasonably be considered arising naturally
2. Special - NB may also recover damages in excess of general if
the additional damages were in the contemplation of both parties
as a probable consequence of breach
b. Mental Distress
i. No damages will be awarded for the mental distress or
emotional trauma that may be caused by a breach of K
ii. Exception – situations where ’s interest of
personality are involved
V. Carrier and Telegraph Cases
a. If shipment is of such a character that its purpose will be
obvious and the consequences of non-delivery equally obvious,
the carrier will be held liable for consequential damages
i. Telegraph cases are very similar
b. Both receive relatively small compensation for services
which, if not duly performed, could result in catastrophic
financial losses to their clients
c. Courts have been more strict in applying the test of
foreseeability – must be clear what the nature of the loss would
be for damages to be awarded
VI. Certainty
a. Jury’s verdict will be set aside if the standard of
“certainty” is not met
i. “Reasonable” certainty will suffice
b. Used primarily for special damages
c. Certainty – means that the quality of the evidence must be of
a higher caliber than is needed to establish most other factual
issues in a lawsuit
d. If NB is unable to prove losses without certainty – may still
recover damages based on reliance interest:
i. Expenses of preparation and of part performance
ii. Other foreseeable expenses incurred in reliance upon the K
e. Examples –
i. ’s breach of K prevents the staging of a theatrical
event -  will be permitted to recover all expenses in
preparation for performance
1. Uncertain as to amount lost from ticket sales – probably
cannot recover
ii. Farmer is permitted to recover the amount paid for the seed,
the rental value of the land on which it was sown and the cost
for preparing the land and sowing the seed.
f. Reliance recovery – limited to the K price, apparently on the
theory that if reliance expenditures exceed the contract price
VII. Concept of Value
a. Fair Market Value – what a willing buyer would pay a willing
seller, each having full knowledge of all the relevant facts and
neither under any compulsion to buy or sell.
b. Market value – does not compensate fully for the peculiar use
of property by the owner, “value to the owner” is used as a
standard
c. Variable values – use the market in which the NB may obtain
replacement of the property
VIII. Mitigation
a. Rule in Ks that damages for breach by the seller are measured
by the difference between the market price and the K price is
based on the idea that in event of breach,  can minimize
damages by purchasing similar goods on the open market.
b. Example –
i. Experienced farmer is supplied defective seed, farmer will
not be permitted to enhance damages by planting the seed and
losing the crop
c. Reasonable efforts must be made to mitigate damages
IX. Exception to Mitigate Damages - Non-exclusive Contracts
a. If relationship is such that the wronged party was legally
free to enter into similar contracts with others, that
subsequent to the breach the wronged party could have actually
made similar Ks, in no way reduces the entitlement to damages.
b. Example –
i. Lessee of cars from a rental company braeches the lease,
damages will not be reduced by the fact that the lessor leases,
or could have leased, the cars to another. Lessor was free to
obtain as many customers as it was willing and able to secure,
provided that as a practical matter it could secure additional
cars for such customers.
ii. Jukebox case – can still recover damages even though can put
jukebox into another location. Damages are measured by
---------?
X. Damages in Particular Actions
a. Wrongful Discharge of Employee
i. Employee entitled to the salary that would have been payable
during the remainder of the term reduced by the income which the
employee has earned, will earn with reasonable diligence earn
during the unexpired term.
ii. Mitigation - If employee does engage in employment
elsewhere, damages are reduced by the amount earned
iii. Special damages are rarely awarded – damages to reputation
are said to be too remote
b. Total Breach of Sales Contracts
i. Measure of general damages for a total breach pf K by the
seller is the difference between the market price of the goods
and the K price
ii. Additionally – buyer may choose to “cover”; that is make a
good faith purchase or K to purchase substitute goods without
unreasonable delay
1. Buyer may then recover difference between cost of “cover” and
the K price
iii. If buyer does not cover and uses the market price –
relevant price is that which is in effect at the time the buyer
learned of the breach.
iv. UCC Changes
1. Postpones the date on which damages are assessed in cases
where the buyer is unaware of the breach until after performance
is due
2. Accelerates the date on which damages are assessed in cases
where there is a breach by anticipatory repudiation
c. Breach of Warranty
i. Measure of general damages – difference between the goods
accepted and the value they would have had if they had been as
warranted
d. Consequential and Incidental Damages
i. Ordinary case
1. Buyer is made whole by the rules of general damages
2. Contracted to purchase sugar at 60 cents per pound and the
seller breaches when the market price is 70 cents, purchaser is
entitled to damages of 10 cents per pound.
3. What if there is no sugar available on the market or no sugar
available for delivery in time – lost profits and other
proximate damages are recoverable only if these were foreseeable
to the seller.
ii. Sufficient that at the time of the breach no substitute is
reasonably available and that the seller had reason to know the
buyer’s needs.
iii. Example – Seller delivers goods to a manufacturer knowing
they are going to be used in the manufacturing process, the
seller has reason to know that defective goods may cause a
disruption of production and consequent loss of profits.
1. Seller is liable for such lost profits
iv. Incidental damages – expenses reasonably incurred in
inspection, receipt, transportation and care and custody of
goods rightfully rejected.
e. Seller’s General Damages – Non-acceptance or repudiation
i. Seller’s general damages for repudiation by the buyer is the
difference between the market price and the unpaid K price. May
not always place the seller in as good a position as performance
would have – need another rule
ii. Example –
1. Dealer contracts to sell a car at the retail market price of
$20K. Recovery on the standard formula  give nominal
damages.
2. Damages – profit lost on the sale – measured by the
difference between the K price and the cost to the dealer of the
car
iii. Damages – measured by lost profit
1. Anytime the seller has an unlimited supply of goods of the
kind involved in the transaction. Seller’s lost profits can be
calculated by subtracting the cost to the dealer of the K price.
f. Seller’s General Damages Following Resale
i. In the event of breach by the buyer that leaves the goods in
the seller’s possession or control, the seller may identify the
goods to the K and resell them at a private or public sale.
ii. Seller may recover from the buyer the difference between the
resale price and K price provided the resale is conducted in a
commercially reasonable manner.
g. Consequential Damages – NOT available to the seller (one
exception)
i. Exception – where payment is to be made to a third person,
the creditor has been allowed to recover special damages
suffered, often consisting of injury and reputation
h. Seller’s Damages for Contracts to Manufacture Special Goods
i. It is clear manufacture is completed the seller may maintain
an action for the price if the goods are reasonably resalable
and if resalable, the seller may utilize the resale remedy or
maintain an action for damages.
ii. Repudiation before completion of manufacture – 2options:
1. Complete the manufacture, appropriate the goods to the K and
then exercise the remedy of resale or of an action for the price
2. Cease manufacture and resell for scrap or salvage value and
proceed in any other reasonable manner
iii. Seller may sue for damages measured by the difference
between the market price and contract price plus incidental
damages, or for the profit that would have been made
iv. Complete performance results in the contractor’s
unquestionable entitled to the agreement price
v. If no work has been done, contractor is entitled to the
profit that would have been made, measured by the difference
between the K price and the prospective cost of performance
vi. If contractor delayed by breach, recovery for at least the
rental value of the equipment tied up during the period of the
delay plus increased overhead costs, and high labor costs may be
recovered
vii. If the work has commenced, the contractor is entitled for a
total breach to the unpaid contract price less the amount it
would have cost to complete performance
i. Construction Contracts: Measure of Recovery by the Owner
i. An owner whose building contract is defectively performed is
entitled to damages measured by the cost of remedying the defect
ii. Jacobs & Youngs v. Kent – Contractor installed wrong brand
of pipe even though it was specified in the contract. Owner
discovers the breach only after the walls are plastered. Cost
of removing the pipe is $35K, the value of the house is worth
$250K. If defect is remedied, its market value would be
precisely the same.
iii. Held – Refused to apply the usual measure for damages and
held that the owner is entitled to merely the difference between
the value of the structure if built to specifications and the
value as constructed
Specific Performance
I. Inadequacy of the Legal Remedy
a. Specific Performance – only used as a remedy if  can
show that irreparable injury will result if equitable relief is
refused
II. Real Property
a. Every interest in land is conclusively presumed to be unique
and a K to convey will be specifically enforced, even where the
presumptive unique value of the land is rebutted as when the
vendee has in turn contracted to resell the interest to a third
party
b. K to convey real property contains an implied term that the
title be good.
III. Personal Property
a. Specific performance may be decreed where the goods are
unique
b. Goods may be deemed “unique” if there is an inability to
cover
i. Market shortages or monopoly on the market on the part of

c. Requirements and output Ks – frequently use specific
performance
i. Damages are difficult to determine when goods are to be
delivered in installments over a long term
d. If party can cover – will not grant specific relief
IV. Insolvency of 
a. Specific performance will be ordered against an insolvent
because damages are no good against a person who is judgment
proof.
b. Must be careful that the rights of other creditors are not
infringed
V. Service Contracts
a. No court will order a person to render personal services.
i. Violation of the 13th Amendment
b. Courts will indirectly enforce Ks to render personal services
by restraining the  from working for a competitor.
VI. Difficulty of Supervision
a. Courts have sometimes refused to grant specific performance
on the ground that supervision of performance would involve an
undue investment of judicial time and effort.
VII. Burden of Proof
a.  must show that he is ready, willing and able to
perform but for ’s breach. In an action for specific
performance,  must additionally show that he continues
to be ready, willing and able.
VIII. Considerations
a. Impracticability
b. Adverse effect on a third person
c. Public interest
Liquidated Damages
I. Liquidated Damages vs. Penalties
a. Liquidated damages – parties determine in advance what
damages will be assessed in the event of a breach.
b. Penalties – used to deter a party form breaching the K and to
punish the breacher in the event the deterrent is ineffective
II. Criteria – 3 factors to determine if a liquidated damages
clause
a. Parties must intend to provide for damages rather than for a
penalty
i. Almost always assumed
b. Injury caused by the breach must be uncertain or difficult to
quantify
i. 5 kinds of uncertainty:
1. Difficulty of producing proof of damages from a breach after
it has occurred
2. Difficulty of determining what damages were caused by the
breach
3. Difficulty of ascertaining what damages were contemplated
when the K was made
4. Absence of any standardized measure of damages for a certain
breach
5. Difficulty of forecasting, when the K was made, all the
possible damages which may be caused by any of the possible
breaches
ii. Liquidated damages clause – most likely to be upheld in
cases where actual damages are most difficult to prove, as in
the case of covenant not to compete ancillary to the sale of a
business
c. Sum stipulated must be a reasonable pre-estimate of the
probable loss
i. Unreasonably high liquidated damages clause is void as a
penalty
ii. Judged at the time of contracting rather than as of the time
of the breach.
iii. Liquidated damages clause if reasonable should be enforced
even if there was no damage
d. Calculation can be used in place of a liquidated sum of money
e. Burden of proof that the agreed damages clause is
disproportionate to the foreseeable (or actual) harm is on the
.
III. Efficient Breach Theory
a. If a party breaches, and is still better off after paying
damages to compensate the victim of the breach, the parties are
better off because of the breach and the breach makes no party
worse off.
b. Contains simplifying assumptions:
i. First, it assumes the absence of transaction costs
(litigation and negotiation)
ii. Second, the rules of K damages often fail to compensate for
all the losses of the party injured by the breach.
1. Doctrines of foreseeability and certainty are barriers to the
recovery of genuine losses
#Post#: 78--------------------------------------------------
Re: Contracts 2 -Outline 2
By: Ashantier Date: February 3, 2015, 3:16 am
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Last, it's exactly as I knew it.
#Post#: 84--------------------------------------------------
Re: Contracts 2 -Outline 2
By: Acezenoevo Date: April 21, 2015, 4:34 am
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Read, listen and think on it.
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