1. Capacity to Contract
“Unless the statute provides otherwise, a natural person has the
capacity to incur only voidable contractual
duties until the beginning of the day before the
person’s eighteenth birthday.”
- A person incurs only voidable contractual duties by entering into a
transaction if by reason of mental illness or defect
- he is unable to understand in a reasonable manner the nature and
consequences of the transaction, or
- he is unable to act in reasonable manner in relation to the
transaction and the other party has reason to
know of his condition
- Where the contract is made on fair terms and the other party is
without knowledge of the mental illness or defect, the power of
avoidance
Restatement (Second) §16 Intoxication (and Other Drug-Induced
Incapacitation)
Reason to know?
- The defense of infancy may be available even though the other party
has no reason to suspect he was contracting with a minor.
- But the defense of mental incompetence focuses upon both the
condition of the party seeking to avoid the contract and what the other
party had reason to know.
Infancy - Davis v. Clelland
Situation:
- the defendant sold a car to a minor after crashing the car into a
telephone pole.
- The minor sought to rescind the transaction and get his money
back.
Ruling:
- The court ruling for the minor “Those who deal with a minor must
do so charged with the knowledge of the controlling principle of law
which, as here, may work some injustice in individual cases but affords,
in general, the protection of minors against
their own improvidence at a time when they are presumed to be incapable
of protecting themselves.”
Summary:
2. Unilateral and Mutual Mistake
“Where a mistake of both parties at the time a contract was made as
to a basic assumption on which the
contract was made has a material effect
on the agreed exchange of performances, the contract is
voidable by the adversely affected
party unless he bears the risk of the mistake under the rule stated
in § 154.”
A party bears the risk of a mistake when
- the risk is allocated to him by agreement of the parties OR
- he is aware, at the time the contract is made, that he has only
limited knowledge with respect to facts to which the mistake relates but
treats his limited knowledge as sufficient, OR
- the risk is allocated to him by the court on the ground that it is
reasonable in the circumstances to do so.
Mutual Mistake - “Pregnant Cow” - Sherwood v. Walker
Situation:
- Mr. Sherwood was a banker, and he wanted to buy some cattle from
Mr. Walker who imported inbred black Angus cattle.
- He went to one of Walker’s farms but didn’t like any of the cattle
there. He then went to a second farm where he was told the cows were
probably barren. And he decided to buy a cow named Rose the II of
Aberlone.
- Sherwood called up Walker, and they agreed to a price that came to
about $80 at $0.05 per pound. But when Sherwood went to pay for and pick
up Rose, Walker refused to sell, because Rose had turned out to be
pregnant.
- This is a suit for replevin, that is, Sherwood is claiming that
Walker should be ordered by the court to give Sherwood his, namely Rose
the II of Aberlone.
Central Issue & Ruling:
Summary:
- When parties make a contract based on a material false assumption
about the world, the party who came off worse because of the mistake may
void the contract.
- restatement more clearly establish that the mutual mistake
voidability is merely a default allocation of
risks that can be contracted around by the parties
themselves.
Mutual Mistake - Lenawee County Board of Health v. Messerly
Situation:
- Initial owner, Bloom, installed septic tank on the property without
a permit and in violation of the Lenawee County Health Code
- Messerlys purchased the property as an income
investment property
- Barneses bought property from Messerlys and then defaulted on the
contract
- Barneses executed a quitclaim, conveying their interest back to the
Messerlys
- Pickleses bought the land from Messerlys
- The provision in the contract includes: “Purchaser has examined this
property and agrees to accept the same in its present
condition. There are no other written or oral
understandings”
- A few days later, the new owners, Pickleses discovered raw sewage
seeping out of the ground
- Messerlys invoked the case of A&M Development Co. v.
Miller:
- Mistakes that go to the value or
quality of real estate are collateral to an
agreement.
- Such mistakes, even if mutual, do not warrant rescission.
- Pickleses invoked the case of Sherwood v.
Walker
Mutual mistake as to the essence of the
consideration are not collateral to an agreement.
–> “The income producing capacity of the property in question and
the property was uninhabitable. And therefore, unsuitable for
residential use.”
Such mistakes do warrant rescission.
Central issue & Ruling:
Is this mistake as to value/quality, or is it a mistake that
materially affect the essence of the
consideration?
the mistake was about the quality and value of the land but the
court found it was also simultaneously and materially affected the
essence of the contractual consideration.
“The inexact and confusing distinction between contractual
mistakes running to value and those touching the substance of
considerations serves only as an impediment to a clear and helpful
analysis for the equitable resolution of cases in which mistake is
alleged and proven. Accordingly, the holdings of A&M Land
Development and Sherwood with respect to material or collateral nature
of a mistake are limited to the facts of those cases.”
–> This is a polite way for the Michigan Supreme Court to overrule
Sherwood and A&M Land or at least overrule it with regard
to future disputes.
Instead, the court looked to two provisions of the restatement of
contracts. Section 152 of the restatement advises that, “Where a
mistake of both parties at the time a contract was made as to a basic
assumption on which the contract was made has a material effect on the
agreed exchange of performances, the contract is voidable by the
adversely affected party.”
The court pointed to the as-is
clause of the contract. Purchaser has examined the
property and agrees to accept same in its present condition. This clause
indicated the parties had allocated
risk regarding the present condition of the land to
the purchasers. Because of this, rescission based on mistake was not
available to the purchasers.
Summary:
- Rejection of Sherwood v. Walker : the court limit
the holding of Sherwood v. Walker to the facts of that case. The court
adopt the Restatement standard for mutual mistake.
- Discretion of court: Rescission is an equitable
remedy and courts NEED NOT grant it if justice doesn’t demand it. BH:
This is awfully vague…
- Assumption of risk: If there weren’t “as-is” clause
in the contract, the judge might have favored the Pickleses.
3. Fraud
Restatement (Second) § 159
“A misrepresentation is an assertion that is not in accord with the
facts”
Restatement (Second) § 169
“To the extent that an assertion is one of opinion
only, the recipient is NOT justified on relying on it UNLESS
the recipient
- stands in such a relation of trust and
confidence to the person whose opinion is asserted
that the recipient is reasonable in relying on it, or
- reasonably believes that, as compared with himself, the person whose
opinion is asserted has special skill, judgment or
objectivity with respect to the subject matter,
or
- is for some other special reason particularly susceptible to a
misrepresentation of the type involved.”
Restatement (Second) § 164
If a party’s manifestation of assent is induced
by either a fraudulent or a
material misrepresentation by the other
party upon which the recipient is justified in relying, the contract is
voidable by the recipient.
Restatement (Second) § 161
“Affirmative duty to disclose
material facts where:
- Disclosure is necessary to prevent a previous
assertion from being misrepresentation or from being
fraudulent or material;
- Disclosure would correct a mistake of the other
party as to a basic assumption on which that party is
making the contract and if nondisclosure amounts to a failure to act in
good faith and in accordance with reasonable standards of fair dealing;
(it requires disclosure when one party knows the other’s agreement to
the contract is based on a mistake and where non disclosure would not be
in accordance with principle of good faith and fair dealing)”
Anthony Kronman on information
- Deliberately acquired
- Casually acquired
- –> Casually-acquired facts must be disclosed.
Cooter & Ulen on information
- Productive facts: can be used to create value
- Redistributive facts: simply transfer wealth between parties
- –> Redistributive facts must be disclosed.
Disclosure and Misrepresentation - Laidlaw v. Organ
Situation:
- The plaintiff, appellee and buyer Organ, entered into a deal to buy
a 111 hogsheads of tobacco from the defendant, appellant, seller
Laidlaw, for $7,545.
- The purchase was made around the time that news broke of the Peace
Treaty of Ghent, which ended the war of 1812.
- During the war, the price of tobacco was very low because of the
British naval embargo around the city of New Orleans. Because of the
war, literally, tons of tobacco were going unsold, warehoused on the
docks of New Orleans. Once the war was over and the embargo lifted, this
tobacco would be worth a lot more money.
- Defendant Laidlaw initially delivered tobacco to the plaintiff, but
later retook the hogsheads by force. The defendant alleged plaintiff had
heard from the British fleet the news about the signing of the peace
treaty before this news was made public and Wisconsin currently able to
buy at an artificially depressed embargo price.
- When the defendant asked if there was any news which was calculated
to enhance the price or value of the article about to be purchase, the
plaintiff apparently remained
silent.
- When the signing of the treaty was announced to the public, the
value of tobacco increased from 30 to 50 percent
Main Issue:
Summary:
- No duty to disclose in arms-length negotiations
- It was only until recently that courts have imposed a duty of
disclosure in certain circumstances.
- Silence in the face of a question
could constitute implicit
misrepresentation
- Making a representation might force other side to disclose
information
Misrepresentation of Opinion - “Dance Class Ripoff” - Audrey E.
Vokes v. Arthur Murray
Situation:
- Vokes was a 51-year-old widow who desired to become an accomplished
dancer.
- She spent over $31,000, and that’s in 1968 dollars, over 16 months
on dance lessons provided by the defendant, Arthur Murray
Incorporated
- relying upon the defendant’s
elaborate assurances that she was dramatically improving and would
become an excellent dancer.
- The complaint alleged that she was a poor dancer in spite of the
instruction and that the defendant’s encouragements were designed to
deceive her and induce her into purchasing additional lessons.
- Vokes sued to rescind the contracts for all of the lessons paid for
but not completed and for the return of her $31,000 less the cost of
lessons that she had received.
Main Issue & Ruling:
May a contract be rescinded for fraud consisting of misrepresenting
one’s dancing abilities?
- Generally a contract can only be rescinded for fraud following a
misrepresentation of fact. Not opinions.
- But exceptions exist where
- there is a fiduciary relationship between the parties, OR
- there has been some artifice or trick employed by the representer,
OR
- the parties do not in general deal at arm’s length, OR
- representee does not have the equal opportunity to become apprised
of the truth or falsity of the fact represented
- “a party having superior knowledge may be regarded as a
statement of fact although it would be considered as opinion if the
parties were dealing on equal terms” –> the court said that it
could be reasonably supposed that Arthur Murray had “superior knowledge”
about Vokes’ dancing ability and potential.
The Reach of “Misrepresentation”
Courts have expanded “mistrepresentations” beyond fraudulent
statements of facts or opinions to include
- half-truths
- e.g. after repeated inquiries by the buyer about an oil storage
facility, the seller disclosed the existence of one leak but not others
of which you’d allegedly knew
- The court held that the disclosure of one leak carried with it
“some implication of exclusivity.” That
is an implication that the seller knew of no other leaks.
- concealment & failures to disclose
- e.g. covering up of some facts such as painting over water damage on
basement walls or hiding evidence of termite damages
- While concealment is not exactly a falsehood or at least not an
expressed misrepresentation, courts have held that such acts constitute
actionable falsehoods by hearing implicit
misrepresentations
The Elements of the Defense
- There must be a representation, express or implied.
- This representation must be untrue.
Summary:
- A contract may be rescinded if one
party made fraudulent misrepresentations to
induce the other party to agree to the
contract.
- Generally, this rule applies to misrepresentations of
fact.
- But misrepresentation may also be expanded, for example to cover
misrepresentations of professional
opinions.
3.2 The Duty to Disclose - “Terminte Infestation” - Warren G. and
Gloria R. Hill v. Ora G. and Barnara R.Jones
Situation:
- In 1963, under earlier owners, the house received its first
treatment for termites from Truly Nolen
- Nolen then gave the owners termite guarantees, which entitled them
to semi-annual inspections and annual termite booster treatments
- When the Joneses subsequently bought the house in 1974, they renewed
these guarantees and continued paying Nolen annual fees for inspection
and treatment, as well as diagrams as where in the house there had been
termite damage. During their ownership, there was additional evidence of
infestation including streamers in the wood tile floor near the entryway
and Truly Nolen came back and treated the house and fence
- 1982 when the Joneses are selling the house. The Hill’s are
attracted to it because of the parquet floors, but they notice a ripple
in the wood. When Mr. Hill asks whether the ripple is
termite damage, Mrs. Jones says that it is water
damage. They enter into an agreement for the Hill’s to
buy the house dependent on the results of the termite
inspection
- The Joneses however, do NOT give the termite inspector the
information they have about the past termite damage and so, he does not
notice that the house is infested. In part, this may be because of
strategically placed boxes and plants that hide all evidence of the past
termite treatments, holes in the patio and the like
- After they move in, the Hills discovered a serious infestation in
the house which would cost them $5,000 to repair.
- The Hills sued the Joneses for rescission of the
contract, arguing that the termite report was
fraudulent because of the Jones’s misrepresentations.
Key Questions & Ruling
Does the integration clause
prevent the court from considering defendant’s silence?
- Judge Meyerson: “Where a misrepresentation is
fraudulent or where a negligent
misrepresentation is one of material factor , the policy of finality
rightly gives way to the policy of promoting honest dealings between
the parties.”
Did the defendants have a duty to disclose the possibility of
termite infestation?
- Florida Supreme Court’s language that quote, “Where the seller
of a home knows of facts materially affecting the value of the
property which are NOT readily observable and are not known to
the buyer, the seller is under a duty to disclose them to the
buyer.”
- Another way to think about this issue is in terms of
implicit default representations. A
jury might find that when sellers don’t mention termite infestations,
they are by default, representing that house has no termite
infestations. The buyer could then reasonably rely on that implied
representation, and the seller would have a duty to disclose termite
infestations to contract around the default
- Judge Meyerson found that there was enough evidence that the trial
court should let a jury decide
- whether the information about past infestations was material,
- whether the Joneses had misrepresented it, and
- whether the Hills had relied on
it.
Promissory Fraud
Restatement of Torts § 530
- “a representation of the maker’s own intention to do or not do a
particular thing is fraudulent if he does not have that
intention”
- “Since a promise necessarily carries with it the implied
assertion of an intention to perform it, it follows that a promise made
without such an intention is fraudulent and actionable” - cmt.
(c)
Restatement of Contracts § 171
- “If it is reasonable to do so, the promisee may properly
interpret a promise as an assertion that the promisor intends to perform
the promise.”
- “It is ordinarily reasonable for the promisee to infer from the
making of a promise that the promisor intends to perform it. If,
therefore, the promise is made with the intention of not performing it,
this implied assertion is false and a misrepresentation.” - cmt.
(b)
Proving Insincere Intent:
- The tort restatement adds as well that the promisor’s nonperformance
doesn’t place on the promisor the burden of showing that he failed to
carry out his promise for reasons that didn’t arise until after the
party’s entered in to an agreement.
- It’s the promisee that retains the burden in a promise or a fraud
claim of actually proving that the promisor did not intend to
perform.
- Evidence:
- Pattern Evidence
- No changed Circumstances
- Impossibility of Performance
- Internal Documents
Summary:
- A promise usually includes an implied intent to perform the
promise
- Misrepresenting an intention to perform can result in
punitive damages under promissory fraud
doctrine
4. Duress and Undue Influence
*Restatement (Second) §§ 174-177
It’s easy to understand that if someone hold a gun to your head to
sign a contract, that contract is not enforcable. But, what if someone
threaten to breach a contract unless you agree to modify its terms?
4.1 Economic Durass - “Radar Sets” - Austin Instrument,
Inc. c. Loral Corp.
Note, the military background may have influence the decision. If
Loral Corp cannot deliver the Radar sets, the American soldiers might be
in danger during Vietnam War.
Situation:
- The defendant and buyer Loral is a frequent government contractor.
Loral contracted with the US Navy to provide radar headsets.
- In order to have the necessary parts to make these radar headsets,
Loral had to subcontract with the plaintiff and seller, Austin
instrument.
- Loral was awarded a second Navy contract and informed Austin that
Austin would be awarded only those subcontracts for which it was the
lowest bidder.
- Austin, unhappy with this change, decided to play hardball. Austin
threatened to cease delivery under its first
subcontract unless the defendant agreed to a substantial
increase in the contract price.
- Loral contacted 10 alternative precision gear
manufacturers but couldn’t find any that could provide the
parts in time.
- Faced with the prospect of being unable to meet the
government’s deadline, Loral knuckled under and agreed to
Austin’s demands and awarded the second subcontract to Austin at the
higher cost.
- After the parts were delivered, Loral refused to pay the full price.
Austin brought sued to recover 17,750 bucks allegedly due on the second
subcontract. * Loral itself brought suit claiming recovery of the price
increase on the first subcontract.
- The two actions were consolidated.
- The trial judge found for Austin in the first complaint and
dismissed the second. The appellate division affirmed and the ensuing
court affirmed as to the first action and reversed as to the
second.
Central Issue & Ruling:
whether a contractual modification, made under
economic duress is voidable?
–> The court found that yes economic duress can void a
contract.
Economic duress exists when three conditions are met.
- one party threatens to breach a contract.
- the threatened party cannot cover their obligation with another
source.
- the ordinary remedy for a breach of contract is inadequate.
The court found that all three of these conditions were met. More
generally, the court attempted to define the legal standard for economic
duress.
- “A contract is voidable on the grounds 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.*”
- The wrongful threat, in this case, was a threat to breach the
contract. Why was failure to deliver a wrongful threat? Because there
was a prior contract and a pre-existing duty
to provide radar headsets.
One of the key sources of duress is the failure of
contractual damages.
- If expectation damages fully compensated the promisee for a breach
of contract, there would not be anything threatening about a breach. The
promisee could say, “Go ahead and breach, I won’t even notice if you
breach because, I’ll be made whole and put in such a good position as if
the breach had not occurred.”
- But legal damages often do not fully compensate.
- Promisees are NOT awarded their attorney’s
fees
- and more importantly a promisor sometimes have shallow pockets and
cannot pay the damages that are awarded.
- –> The duress doctrine therefore is a substitute for failure of
damages in contractual actions. It’s noteworthy that this court disposed
of the case in terms of the duress element without so much as a mention
of the pre-existing duty doctrine or UCC Section 2-209.
Is it ever unlawful to threaten what one have a legal right
to do?
5. Unconscionability
Court of Chancery in 1750
“unconscientious” bargain as one “such as no man in his senses
and not under delusion would make on the one hand, and as no honest and
fair man would accept on the other.”
–> professor note: “Some bargains are so substantively
unconscionable that there must have been some procedural
defect in their formation. One of the parties must
have been not in his senses or under delusion or somehow tricked into
the contract.”
UCC 2-302. Unconscionable contract or Clause
If the court as a matter of law finds the contract or any clause
of the contract to have been unconscionable at the time
it was made the court may refuse to enforce the
contract, or it may enforce the remainder of the contract without the
unconscionable clause, or it may so limit the application of any
unconscionable clause as to avoid any unconscionable result.
–> professor note: “This language, unconscionable at the time it
was made, makes clear that the doctrine is a formation
defense to be judged at the time of a contract
formation, as opposed to the impracticability defense
that we’ll study later, that often concerns impracticability or
impossibility that arises after the contract is formed”
- Standard form contracts presented on a take-it-or-leave-it basis are
often referred to as “contracts of adhesion”.
- California courts have taken the lead
in holding that a contract of adhesion is always
procedurally unconscionable.The unconscionability
question in California then boils down to whether the bargain is
sufficiently unconscionable from a substantive standpoint to warrant non
enforcement.
- However, notwithstanding California’s position, Contracts of
adhesion are generally enforceable.
- Thus, while the phrase “contract of adhesion” has a pejorative
overtone, it’s important to keep in mind that most adhesive contracts
will be judicially enforced.
- –> Merely arguing that your client signed a standardized
contract, A contract of adhesion that was presented on a
take-it-or-leave-it basis, will not normally be
sufficient to avoid the finding of an enforceable
agreement.
- If this were not the case, internet commerce would be dead because
virtually all internet purchases come via click-it-or-leave-it contract
she offers.
Procedural unconscionability:
how - how the contract is negotiated, does one party has more
bargaining power over the other?
Substantive unconscionability:
what - whether the resulting terms were substantively one-sided or
unfair
5.1 “Substantive Unconscionability” - Fleet v. U.S. Consumer
Council
Situation:
- The defendant United States Consumer Counsel represented that it
would be able to help consumers facing the loss of their homes through
foreclosure.
- In fact, the USCC simply charge consumers for referring them to
attorneys when free referrals were available to these consumers through
their state bar associations.
- The plaintiff Fleet was a consumer who had paid defendant for this
service. Fleet brought this consumer class action suit against USCC in
the instant court, the Federal District Court for the Eastern District
of Pennsylvania and the court found the USCC’s practices were
unconscionable.
Central Issue & Ruling:
Did USCC’s practice of charging ill-informed consumers for a simple
service that could be freely obtained elsewhere violate New Jersey’s
UDAP statute?
The court held that it did. The court first notes that
unconscionability is hard to define but states that its purpose is to
establish a broad business ethic.
Among other factors, the court will consider whether:
- “the price grossly exceeded the price at which similar …
services were readily obtainable in similar transactions by like
consumers.”
- “the professional seller is seeking the trade of those most
subject to exploitation.”
The court found that:
- “Goods sold have little or no value to the consumer for the
purposes for which she was persuaded to buy them,” and
- “The consumers who turned to USCC for help were financially
troubled and distraught.”
- The court noted that unconscionability is more likely to be
applicable when a professional seller is seeking to the trade of those
most subject to exploitation, the uneducated, the inexperienced and
people of low incomes.
- Applying this asymmetry to the case at hand, the Court observed the
consumers who turn to USCC for help were financially troubled and
distraught. Some were unemployed or disabled. Many were facing the loss
of their homes through foreclosure.
- These factors were indicative of imposition. They had nothing to do
with what the contract said the substantive terms but it helped explain
how these unfair terms came about.
Summary:
- under the unconscionability doctrine, a contract will not be
enforced if its terms are seriously unfair to one of the parties.
- However, such substantive unfairness is not usually enough to set
aside a contract. The complaining party must also demonstrate some flaw
in the bargaining process that allowed the unfair terms to arise.
5.2 “One Sided Arbitration” Ferguson v. Countrywide Credit
Industries, Inc
Situation:
- Misty Ferguson was an employee of Countrywide.
- When she began working there, she signed a contract which included a
provision mandating that certain types of disputes between her and
Countrywide would be arbitrated rather than going to court.
- She later filed a lawsuit in court for sexual harassment against
Countrywide and her manager Leo Deleon. When Countrywide tried to force
Ferguson to go to arbitration,
- the court refused to enforce the arbitration clause finding it to be
unconscionable
What is Arbitration:
- A neutral 3rd party looks at the evidence, hears argument, and makes
a decision.
- The decision is binding on the parties and cannot be appealed.
- How the arbitration works is determined by the contract between the
parties
- Some state courts have been skeptical about the impartiality of
arbitrators and the fairness of the arbitration process, but Congress in
1925 passed the Federal Arbitration Act (FAA) to ensure
that courts would enforce arbitration agreements unless those agreements
were unenforceable because of some generally applicable state contract
law doctrine.
- Under the FAA, a state cannot carve out special rules
limiting enforcement of arbitration agreements.Those agreements can only
be set aside for reasons that might also render other types of
agreements unenforceable.
California’s Hostility against Arbitration: (BH: and
so do I. The day in court is a civil human right that should not be
contracted around, just like you can’t sell your kidney)
- Notwithstanding the FAA, some state courts have remained hostile to
the enforcement of arbitration clause, so much so that states like
California have been willing to distort their generally applicable law
in order to reduce enforceability of arbitration agreements.
- Under California law, to find an arbitration clause unconscionable,
the judge must find both procedural unconscionability and substantive
unconscionability,
- but the precise mix of these two elements can vary. “The more
substantively impressive the contract term, the less evidence of
procedural unconscionability is required to come to the conclusion that
the term is unenforceable.”
- In two recent cases, the United States Supreme Court has overturned
California law about the unconscionability of arbitration clauses.
- AT&T Mobility versus Concepcion in 2011, and
- American Express versus Italian Colors in 2013.
- Both of these cases dealt with provisions preventing class
arbitration, the arbitration equivalent of class action lawsuits, and in
both cases, the US Supreme Court overturned California decisions to say
that arbitration clauses were valid and enforceable.
- The US Supreme Court, in a sense understands that states like
California are manipulating unconscionability law to end-run the FAA,
and these two sovereigns can be seen as in a struggle over arbitration
enforceability.
Ruling:
- the court finds both procedural and substantive unconscionability
and so the arbitration clause is unenforceable.
- Procedural unconscionability: The court looks at two factors
to determine procedural unconscionability, which is about the fairness
of the process by which the parties arrived at the contract.
- Oppression: Did the parties have unequal
bargaining power? Was there actual meaningful negotiation between the
parties? Did both parties have a choice? Here, Ferguson had no ability
to bargain to vary the terms of the agreement. The contract was offered
on a take-it-or-leave-it basis.
- Surprise: Was the arbitration clause
hidden? The court didn’t discuss the surprise
question in detail but it seems to reject the Countrywide’s claim that,
“The contract was written in plain
language.”
- One way that California’s hostility to arbitration clauses has
distorted unconscionability doctrine is by changing what constitutes
procedural unconscionability. Today, in California, any form contract
that is offered on a take-it-or-leave-it basis is going to be treated as
having at least some degree of procedural unconscionability. This means
that the vast majority of consumer and employment
contracts have, are going to be procedurally
unconscionable so that the question of unconscionability and
setting aside the term will turn solely on whether the contract is
sufficiently unconscionable in a substantive sense.
- Substantive unconscionability: Judge Pregerson focuses on the
question of whether the terms of the agreement, “Are so one-sided as
to shock the conscience.” He finds three ways in which they are
substantively unconscionable.
- First, the arbitration clause only applies to the sorts of claims
and employee like Ferguson might bring against Countrywide,
discrimination or harassment, tort claims, but the clause leaves
Countrywide free to go to court for the sorts of claims that it might
bring against Ferguson, violations of intellectual property or
unauthorized disclosure of trade secrets.
- Second, the contract forces Ferguson to bear a significant portion
of the costs of arbitration. An earlier California Supreme Court
decision had held that mandatory arbitration clauses in employment
contracts could only be enforceable if the cost to the employee for
arbitration was no more than the cost of going to court. Splitting
the arbitration fees with the employee by itself can be substantively
unconscionable. The court found that Countrywide’s fees to be
substantially unconscionable because they might be higher than employee
would pay in going to court.
- Third, the provisions of the contract that limit
discovery in a way that disproportionately disadvantages
Ferguson was found to be substantively unconscionable. Countrywide, as
the employer, likely has access to all sorts of information about what
happened without needing discovery, while Ferguson needs discovery to
have any information at all.
- These three one-sided aspects of the arbitration provisions seem to
Judge Pregerson like an intentional attempt by Countrywide to bias the
arbitration process in its own favor, and so he ruled that the whole
arbitration clause was unconscionable and therefore unenforceable.
- However, the court’s analysis of substantive unconscionability is
hard to understand, except as an expression of judicial hostility toward
enforcement of arbitration agreements, possibly especially when they are
being used to deny an employee from having her day in court concerning
the civil rights claim. Many individual provisions of the
contract are by themselves one-sided.
6. Illegality
Why an illegal contract between A and B can be unenforeacable?
One important reason is because of the negative
externalities of the agreement with regard to person
Z. Formation defenses, can be seen as policing the revealed preference
inference to make sure that the contract is value enhancing. Formation
defenses, tend to render contracts voidable, when courts aren’t
confident that the agreement really is in the party’s joint interest.
But illegality doctrine sets aside contracts when the agreement may not
be welfare enhancing because of net negative effects on
people outside the contract. The illegality defense
can thus, set aside contracts even when there is no defect in the
bargaining process. Even if the parties manifest sufficient assent,
courts can set aside the agreement if one of the promises exchanged is
illegal or violates public policy.
““[a] bargain is illegal within the meaning of the Restatement of
this Subject if either its formation or its performance is criminal,
tortious, or otherwise opposed to public policy”
- As the comments to this section make clear an agreement could be
illegal either because
- the statute specifically prescribed the
conduct which was the agreement subject or
- because courts had determined, that such
agreements were opposed to public policy.
“A party to an illegal bargain can neither recover damages for
breach thereof nor, by rescinding the bargain, recover the performance
that he has rendered thereunder or its value.”
- If you pay a scalper, for a ticket, when the sale is prohibited by
law, courts under the first restatement standard, would normally not
force the scalper to give you your money back.
- –> the comment provided justification for this effect is further
deterrence. According to the comment,
denied the plaintiffs in such cases recovery, court tends to diminish
the number of illegal agreements. Ticket purchasers may be less likely
to pay for tickets. If the law says the scalper can take the money and
run.
- The no restitution rule, help support the maxim of there being no
honor among thieves. In fact, while most of the formation defenses try
to police certain types of sharp dealing. Illegality is a circumstance
where the law is trying to facilitate and foster opportunism in order to
drive out illegal contracting.
- There are limited exceptions to this no
restitution rule.
Restatement (Second) §178
“a promise or other term of agtreement is unenforceable on
grounds of public policy if legislation provides that it is unenforeable
or the interest in its enforcement is clearly outweighed in the
circumstances by a public policy against the enforcement of its
terms.”
Subsection two offers factors, in the interest of enforcing an
agreement and subsection three, list factors weighing against
enforcement:
| Parties’ Justified Expectations |
Strength of Public Policy in Question (manifested by legislation /
judicial decisions) |
| Resulting Forfeiture if Enforcement Were Denied |
Likelihood that No Enforcement Furthers Public Policy in
Question |
| Any Special Public Interest in Enforcement |
Seriousness / Deliberateness of Misconduct Involved |
|
Connection Between Misconduct and Contractual Terms |
professor note: The second restatement however, has introduced a more
flexible (vs 1st restatement) balancing test on enforceability of
illegal agreements. Courts have significantly more discretion to
determine whether to enforce an agreement, even if it may violate public
policy.
“Beer Bribe” - Siinar v. Le Roy
Situation:
- Sinnar a grocery store owner, applied to the Washington State Liquor
Control Board for a license to sell beer. But his application was
denied.
- He and Le Roy a friend of his agreed that he would pay Le Roy 450
dollars, so that Le Roy could get a city official Le Roy knew to secure
Sinnar a license. * If this was unsuccessful, Le Roy would return the
450 dollars back to Sinnar. Sinnar did not get his license, and Le Roy
did not return the bribe money.
- Sinnar sued to recover the funds, in the trial Le Roy did not raise
an illegality defense. And the trial court found for Sinnar. An appeal
to the state Supreme Court. Le Roy raised the defense of
illegality.
Central Issues & Ruling:
the first question before the court was whether, illegality as a
procedural matter, could be raised for the first time on appeal?
Usually parties are procedurally barred from raising defenses on
appeal that were not pledged at the trial stage. But the court held not
only that Le Roy could raise it, but also that the court could bring up
illegality on its own, sua sponte.
“Illegality, if of a serious nature, need not be pleaded. If it appears
in the evidence, the court of its own motion will deny relief to the
plaintiff. The defendant cannot waive the defense, if he wishes to do
so. Indeed, if the court suspects illegality, it may examine witnesses
and develop facts not brought out by the parties and thereby establish
illegality that precludes recovery by the plaintiff.”
Professor note: Why the court resolved this issue where the court
of its own motion can raise the question and decide the question of
illegality?
-> Probably because, illegality implicates the public interest to
a far greater extent than other defenses that a defendant might raise in
a contractual dispute. The negative externalities of
illegality, mean the court shouldn’t rely on private incentives of the
parties to raise the defense.
It was clear that there was in fact illegality in this case. So
the next question became whether, that fact would bar the plaintiff from
recovery?
- Not every instance of illegality, the court suggested would
necessarily have the result of barring restitution. If however, the
legality is not serious and neither public policy nor statute clearly
requires denial relief, courts refuse to give effect to facts showing
illegality, unless those facts are essential to establish a prima facie
right of recovery or pleaded by the defendant.
- According to the court, the illegality at issue was of a serious
nature and concerned a matter which is exclusively within the realm of
public policy. Further, the evidence suggested that the parties planned
on using only illegal means presumably, bribery of a city official to
accomplish their aims. Therefore, the court asserted it
would not knowingly aid in the furtherance of an illegal transaction,
but will leave the parties where it finds them.
7. The Scope of the Obligation
Final Written Expression: Parol or Extrinsic
Evidence
Terms with respect to which the confirmatory memorenda of the parties
agree or which are otherwise set forth in a writing intended by the
parties as a final expression of their agreement with respect to such
terms as are included therein may not be contradicted by
evidence of any prior agreement or of a
contemporaneous oral agreement but may be explained or
supplemented
by course of dealing or usage of trade (Section 1-205) or by
course of performance (Section 2-208); and
by evidence of consistent additional terms unless the court finds
the writing to have been intended also as a complete and exclusive
statement of the terms of the agreement .
7.1 Alaska Northern Dev. INc. v. Alyeska Pipeline Service Co.
8. Interpretation
8.1 “Steam Turbine Accident” - Pacific Gas & Electric Co. v. G.
W. Thomas Drayage & Rigging Co.
8.2 “Friendly Chicken” Frigaliment Importing Co. v. B.N.S.
International Sales Corp.
9. Duty of Good Faith
Restatement (Second) §§ 174-177:
every contract imposes upon each party a duty of good faith and fair
dealing in its performance and its enforcement.
Obligation of Good Faith: Every contract or duty within the Uniform
Commercial Code imposes an obligation of good faith in its performance
and enforcement
“Good faith” in the merchant means honesty in fact
and the observance of reasonable commercial standards of fair dealing in
the trade.
- A term which measures the quantity by the output of the seller or
the requirements of the buyer means such actual output or requirements
as may occur in good faith, except that no quantity unreasonably
disproportionate to any stated estimated … may be tendered or
demanded.
- A lawful agreement by either the seller or the buyer for the
exclusive dealing in the kind of goods concerned imposes unless
otherwise agreed an obligation by the seller to use best efforts to
supply the goods and by the buyer to use best efforts to promote their
sale.
9.1 “Unreleased Escrow” Centronics Corp. v. Genicom Corp
9.2 Market Street Associates Limited Prtnership v. Dale Frey
- Formation stage: “duty is minimized” - maybe just honesty
- Performance and Enforcement stage - duty is heightened because of
changed circumstances greater reliance
- Equivalent to finding default conditions
- The concept of the duty of good faith like the concept of fiduciary
duty is a stab at approximating the terms the parties would have
negotiated had they foreseen the circumstances that have given rise to
their dispute
- Halfway - This duty is ,as it were, between a fiduciary duty (the
duty of utmost good faith) and the duty merely to refrain from active
fraud.
- Did Market Street Beach Its Duty of Good Faith?
- “[Market Street and the Trust] want to minimize the costs of
[contractual] performance. To the extent that a doctrine of good faith
designed to do this by reducing defensive expenditures is a reasonable
measure to this end, interpolating it into the contract advances the
parties’ joint goal.”
- Sharp Dealing
- Summary
- Good faith: implied duty not to intentionally take advantage of the
other party’s ignorance of terms.
- Good faith requirements in the performance of a contract help
prevent opportunistic and inefficient behavior.
9.3 “At-will Contract Termination” - Elaine Zapatha v. Dairy Mart,
Inc.
9.4 “Good Faith Output” - Fred Feld v. Henry S. Levy & Sons,
Inc.
- Output and Requirements Contracts:
- Output contract: Buyer agrees to purchase all that
seller makes.
- Requirement contract: Seller agrees to make all
that buyer needs.
- –> note that only one side has discretion over another party
- Summary
- In output and requirement contracts, the party with discretion over
the quantity must act in good faith and stay reasonably close to
estimates.
- if they have an exclusive deal, a party must use best efforts to
secure business for the other party.
10. Warranties and Representations
Representations:
- A representation is NOT a promise.
- Promises are forward-looking.
- Representations are present-looking or
backward-looking. They concern existing or past facts about the
world.
- Express Representations v. Implied Representations
Warranties:
We can think of warranties, on the other hand, as a special kind
of promise, a warranty promises that a person’s representations are
true
Learned Hand, Metropolitan Coal Co. v. Howard: “[A
warranty] amounts to a promise to indemnify the promisee for any loss if
the fact warranted proves untrue”.
A warranty is made (1) by one party to another about existing or
past facts that are knowable but not necessarily known and (2) that
become a term in the contract.
Warranties are very important because they allocate risk, the
party who makes a representation bears the risk that the representation
made will prove “not in accord with the facts”
Express Warranties:
-
- Affirmations of fact about goods create warranty that goods will
conform to those affirmations.
- Descriptions of good creates
warranty that goods will conform to the description.
- Samples or models of goods create
warranty that the whole of the goods will confirm to the sample or
model.
- But…affirmations of the value of
goods, or the seller’s commendations or
opinions, do NOT create a warranty.
- lecturer’s comment: this “value of goods” is ambiguous, as it can be
a central of the bargain.
Implied Warranties
-
- Implied Warranty of Title
- Applies to all sales
-
- Implied Warranty of Merchantability:
- Applies only to merchants
- “Merchantable” = fit fo the goods’ ordinary
purpose
-
- Implied Warranty of Fitness for Particular
Purpose:
- Applies when buyer disclose they require goods for a particular
purpose and not merely goods’ ordinary purpose. (where the seller has
reason to know any particular purpose for which the goods are required,
and that buyer is relying on the seller’s skill or
judgement to select or furnish suitable goods)
- These 3 provisions are default rules and can be contracted
around
Limits to Contracting Around Warranties
- The UCC provisions are default rules- but the UCC regulates the
altering rules - how to contract around these
defaults.
-
- Implied Warranty of Merchantability: exclusions must explicitly
mention “merchantability” and be conspicuous if in writing.
- Implied Warranty of Fitness for a Particular Purpose: exclusions
must be by writing and be conspicuous.
- However…“As is”/“with all faults”
clauses can exclude all implied warranties (also the
merchantability above)
- Defects buyers know or should have known.
- Warranty provisions for purchasing hard goods have become quite
standard.
- generally disclaim implied warranties
- expressly warrant the goods against defects in material and
workmanship
- usually limit the remedy to repair and replace
- exclude liability for contractual damages
- UCC § 2-719 : when the agreed remedy fails, a buyer may
seek damages using default UCC remedy.
11. Express Conditions
11.1 Warrenties & Conditions - “Failing Finances” - In re
Carter’s Claim
A promisee has 2 ways to protect herself in a contract:
Warranty Protections:
An offensive sword - allows the promisee to actively
sue for damage
Condition Protections:
a defensive shield - allows a promisee to
get out of its own obligation -> advantage of not
having to go to court and win the judgement
Situation:
- The plaintiff, the buyer, and appellant, Lester L. Carden, entered
into a 25 page written contract to purchase a Pennsylvania Corporation
and five of its subsidiaries including the defendant at Pelly, Edwin J.
Shuttle Company.
- About 187 thousand dollars of the purchased price was put in escrow
to indemnify the plaintiff buyer against liabilities specified in the
agreement.
- As we have studied before in centronics versus Jennicam, escrows
involved an arrangement where part of the purchased price is held by a
third party to compensate the buyer with effectively a reduced price if
the seller’s assets turn out to be worth less than expected.
- In the contract, listed under the heading of conditions
precedent was a term “Paragraph nine” that said,
“The financial condition of the defendant company, shall be
no less favorable at the time of closing than on June 30,
1954,” which was probably when the books closed at the end
of the last financial year.
- As you know, the closing date refers to when the sale actually
occurs with title up to the assets transferring to the new buyer.
- The plaintiff claimed that the financial condition was less
favorable at closing and refused, and requested approximately 70
thousand dollars from the escrow.
- The parties submitted this to arbitration, the arbitrator awarded
3,182 dollars to the plaintiff. Plaintiffs appealed to the Court of
Common Pleas was denied and the instant court affirmed.
Central Issue & Ruling
The main issue is whether the financial condition in this case
was actually a warranty such that plaintiff is entitled to damages.
–> The court held the agreement was carefully drafted and is clear
that the provision in question is not a warranty, but a condition
precedent.
- plaintiff had the right to refuse to purchase because of the failure
of this condition. But that option to refuse had to be made by the
closing date
- by accepting sellers performance and going ahead with the closing,
plaintiff waived its right under the condition
Precedent
Supreme Court of Pennsylvania, 1957.
- In this case, the contract has a clear separation of warranty
section and condition section.
- in the warranty (offensive) section, it promises that no materially
adverse change in the company’s financial condition outside of ordinary
course of business
- in the condition (defensive) section, it states the buyer’s
obligation to buy if the financial condition of the company at closing
date is not less than the that of June 30 1954
Therefore, the contract provides more defensive protection than
offensive protection, such that the buyer can walk away from the
contract if it sees that the transaction is no longer attractive because
the value at closing is less than that of June 30 1954. However, once
the buyer complete the purchase at the closing date, it only has limited
power to sue for claim if the company’s value before closing has
materially declined due to non-ordinary course of business (e.g. the
seller of the company sold all machinaries at lost).
Usually, if the contract is not clear whether it’s a warranty or
condition, the court would prefer the warranty interpretation.
12. Excuse of Conditions
Waiving the express condition is in essence modifying the contract,
modifying the contract from “conditional contract” to “unconditional
contract”. However, unless the condition is the core of the
consideration, the promisor benefiting from an express condition can
waive the express condition without the promisee providing any
consideration.
12.1 “Casebook Case” - William L. Clark v. John B. West
Court of Appeals of New York, 1908.
Situation: West agreed to pay $2 per page for Clark to write a
casebook. West further promised to pay extra $4 per page ff Clark stay
sober from any intoxicating liquor during the entire duration of the
work. Clark did not stay sober and West only paid Clark $2 per
page.
West argued that Clark’s promise not to drink was consideration
for the payment of the extra $4 per page. If the promise for not to
drink was the consideration in exchange for the additional $4 per page,
then the promise cannot be modified except by a new agreement by between
by both parties supported by the new consideration.
Clark argued that the his abstinence from alcohol was a condition
precedent. If the abstinence from alcohol is merely a condition that did
not go to the consideration, then it could be waived by West without
additional consideration.
The court held that this promise is merely a condition precedent.
12.2 “Untampered Safe” - Forrest D. Ferguson v. Phoenix Assurance
Company of New York
Supreme Court of Kansas, 1962.
Situation:
Ferguson’s drug store got burgled, and lost $433 in the safe. The
safe has 2 door. The outer door has a combination lock and the inner
door opens with a key. The burglar managed to open the outer door (the
combination door) without leaving trace of visible damage, but he/she
punched out the lock in the inner door. However, Phoenix Assurance point
to the safe burglary policy, which requires that both doors to have
visible damage for the policy holder to recover losses above $50.
Justice Schoeder:
Substantive conditions:
The requirement for the safe doors to be opened by force/violent is
used for determining what kind of risk that the insurance
company is insuring against -that is burglar and not
inside job.
Evidentiary conditions:
The requirement of visible mark is not intended to identify the kind
of risk it is insuring. Rather, it is to determine the character of the
evidence necessary to show liability. The rule of evidence requirement
asserted in the policy in this case is beyond the
reasonable requirements necessary to prevent fradulant
claims against it in proof of the substantive
conditions imposed by the policy, and therefore
contravened the public policy of this
state.
note that, the court
- did NOT find the condition to be unconscionable
- or, construing the contract in favor of the insured
- instead, it’s finding it against the public policy
13. Excuse for impracticibility
Restatement (Second) § 262 - Doctrine of impossibility
“If the existence of a particular person is necessary for the
performance of a duty, his death or such incapacity as makes
performance impracticable is an event the non-occurrence of
which was a basic assumption on which the contract was
made.”
Restatement (Second) § 263 - Doctrine of impossibility
“If the existence of a specific thing is necessary for the
performance of a duty, its failure to come into
existence, destruction, or such deterioration as makes
performance impracticable is an even the non-occurrence of which was a
basic assumption on which the contract was
made”
Restatement (Second) § 265 - Doctrine of frustration of
purpose
“Where, after a contract is made, a party’s principal purpose
is substantially frustrated without his fault by the occurrence
of an event the non-occurrence of which was a basic
assumption on which the contract was made, his remaining duties
to render performance are discharged, unless the language or the
circumstances indicate the contrary.”
13.1 “Technological Difficulties” - U.S. v. Wegematic Corp.
Situation: FRB agree to pay $231,000 and Wegematic to deliver in
9 months the most cutting edge computer with liquidated damage of $100
per day for delay. FRB can procure the service from other providers if
Wegematic failed to and Wegematic would have to pay the excess cost. A
few months later, Wegematic requested to postpone, and later claim that
the due to the technology difficulties, the delivery date is
impractical.
It is ruled that the technology difficulties is not sufficient to
establish impracticality.
13.2 “Theater Fire” - Taylor v. Caldwell
- Due to the fire that destroyed the theater, the venue owner is
relieved from the contract.
- Although both parties might not have thought of that the theater’s
existence is the prerequisite condition for the contract, the theater’s
existence is still an implied condition of the contract. Thus, when the
theater ceased to exist, the owner is relieved from the contract.
13.3 “Postponed Coronation” - Krell v. Henry - Frustration of
Purpose
Situation:
Krell owns the apartment that can see the King’s coronation. Henry
booked the apartment for this purpose and paid the deposit. However, the
coronation is postponed. Both party sued each other, one for the
remaining payable, and one for the deposit.
Key question: Was the coronation and implied condition precedent for
the rental contract
Holding:
Court ruled that the coronation is the implied
condition for the contract The impossibility does not
stop the transaction to happen as it is still possible to rent the room
given the delay of the coronation. However, the principle purpose of the
contract is substantially frustrated
and therefore the obligation is excused.
15. Breach by the Buyer
- Except as stated in Subsection (2), damages are not recoverable for
loss that the injured party could have avoided without undue risk,
burden or humiliation.
- The injured party is not precluded from recovery by the rule stated
in Subsection (1) to the extent that he has made reasonable but
unsuccessful efforts to avoid loss.
Restatement (Second) § 371 - calculating restitution
damages
If a sum of money is awarded to protect a party’s restitution
interest, it may as justice requires be measured by either
- the reasonable value to the other party of what he received in terms
of what it would have cost him to obtain it
from a person in the claimant’s position, OR
- the extent to which the other party’s property has been
increased in value or his other interests advanced.
Burden of proof:
- The plaintiff has the burden of proving
damages.
- The defendant has the burden to show that the plaintiff did
not mitigate damages. BH: how is the defendant going to know if
plaintiff did or did not do anything to mitigate at all?
“The measure of damages for non-acceptance or repudiation by the
buyer is the difference between the market price at the time and
place for tender and the unpaid contract price, together with
any incidental damages … but less expenses saved in consequence of the
buyer’s breach.”
professor note: if the market price of the goods at the specified
performance time and place is less than the amount specified in the
contract, the seller can recover the difference. But if the market price
is the same, 2-708(1) wouldn’t provide damages for the seller. This is
where 2-708(2) comes in.
“If … subsection (1) is inadequate to put the seller in as good a
position as performance would have done then the measure of damages is
the profit … which the seller would have made from full
performance by the buyer. together with any incidental damages
… due allowance for costs reasonably incurred and due credit for
payments or proceeds of resale.”
15.1 “Duty to Mitigate” - American Mech. Corp. v. Union of Lynn
To learn:
- How to calculate contractual damages available to a seller when the
buyer breaches
- seller’s duty to mitigate damages
Traditional rule of calculating
- contract price: 100,000
- date of breach: 75,000
- date set for closing: 70,000
-> traditional rule: damage = diff(contract price, market
price at the date of breach)
Trial Court Ruling:
- The price at the date of breach is unavailable, so only nominal
damage is awarded
Appellate Court Holding:
- although the American Mech. Corp didn’t prove market value
- it did prove a foreseeable loss (also known as “consequential
damages”)
Duty to Mitigate:
Union would be entitled to the amount of American’s damage
reduced by the loss that American could have reasonably avoided
-> If once it knew the breach, American could have sold the
property to someone else, then the it would be entitled to damage <=
(contract price - the price it could have sold to someone else)
However, the burden is under Union to prove that the losses by
American could have been avoided by reasonable effort
“[T]he aim in measuring damages in the event of a breach is to
place the injured party in as good a position as he would have been in
had the contract been performed”
Since “Union knew that, if the sale of the property go through,
the result would be that [Saugus Bank] would enforce it’s rights under
the mortgage and that a foreclosure sale was likely”, the “correct
measure of damages, on traditional contract principles, was the full
amount of actual loss, the contract price less the amount received for
the property at the foreclosure sale”
15.2 “Restitution and Losing Contract” - Bernstein v. Nemeyer
Situation:
- Defendant (Nemeyer) promised the plaintiff (Bernstein) to loan money
to cover any negative cash-flow
- Take priority in having loan paid off in future before other
investors
- The apartment decline in value and the defendant loaned $3mm to the
plaintiff due to the negative cash-flow
- defendant stopped loaning money to the plaintiff, then the whole
investment was lost
- Bernstein and other limited partners then sued the general partner
Nemeyer for rescission of the contract and restitution of their
investment
- trial court ruled that the defendant’s breach was not material
Take from Chief Justice Peters:
- Supreme Court of Connecticut Chief Justice Peters found the breach
of not lending money that one promised to lend to be
material. Then can the plaintiff get
restitution?
- Then the question: May a plaintiff obtain restitution
when the breaching defendant obtained no benefit from the
contract?
- Plaintiffs have not tried to put defendants back in their original
position (prerequisite for restitution, though meaningless in this case
since the shares are already worthless).
- No unjust enrichment: defendants lost money due to the
contract.
Review types of recovery for damages:
- Expectation:
“put the non-breaching (injured) party in as good a position as he would
have been if the contract had been performed”
- Reliance:
“put the injured party back in the position he would have been in
if the contract had not been made”
- Restitution:
“put the party in breach back in the position he would
have been in if the contract had not been made”. The calculation
focuses on the defendant, not on the plaintiff. The goal of
restitution is to prevent defendants from being unjustly
enriched by their breach of contract.
- plaintiffs are usually limited to the lesser of
reliance and expectation damages.
If a plaintiff elects to pursue reliance damages, courts will reduce
them to the expectation about if the defendants persuade the court that
expectation damages would be smaller. (BH: if your reliance damage is
higher than expectation damage, then you must be doing something wrong
because your expected value could be negative)
- At common law,
- the plaintiff initially gets to choose among any of the three
classic measures, for damages - expectation, reliance, or
restitution.
- the plaintiff has the burden of proving the amount of the elected
damage measure.
- If the plaintiff chooses reliance or restitution and meets her
burden of proving these damages, the burden then shifts to the defendant
to show that expectation damages would be smaller.
–> in this case the plaintiff sue for
restitution.
–> However, since the “unjustly enriched” amount of the defendants
is negative, the plaintiff cannot receive the amount of “unjustly
enriched” which is negative
Election of Remedies:
- Plaintiff gets to elects reliance, restitution or expectation and
has burden of proving that measure
- If plaintiff elects reliance or restitution, burden shifts to
defendant to prove that expectation would be
lower.
Example:
- A homeowner hires a gardener to landscape the front and back yard
for $25,000.
- The homeowner breaches when the gardener finished the front
yard
- it costs the gardener $8,000
- the market price of the complete work is $10,000
- it increased the home’s value by $12,000
- the whole job (front and back) would have cost the gardener
$16,000
then
- Expectation damages = 17,000 = $25,000 - ($16,000 - $8,000)
- Reliance damages = $8,000 (the cost that the
gardener already spent on doing the front yard)
- Restitution damages (371a) = $10,000 (the plaintiff gets back the
market price of the services that the defendant
received)
- Restitution damages (371b) = $12,000 (the effect/change on the
property value because of the service from plaintiff)
15.3 “Lost Volume Profits” - Locks v. Wade
Situation:
- Jerry Locks was in the business of leasing music equipment. He
contracted to lease a jukebox to the defendant Gerald Wade for two
years. Lock would provide records and replace the worn out parts on the
jukebox.
- He and Wade would split the profits and with Wade paying Lock a
minimum of $20 per week.
- Wade, the lessee repudiated the agreement
before the jukebox was installed
- Lock’s leased the equipment to others. But he sued Wade for breach
of contract and recovered $836 an amount representing the $20 per week
for the two years that he would have received if the contract had been
performed minus the cost Locks would have had to put in the jukebox and
to maintain it.
- Wade appealed. He argued at because the plaintiff was able to lease
the equipment elsewhere, he hadn’t really lost those two years of
profits. To the extent he owed anything, Wade argued, he only owed the
amount that remained after the amount he’d gained from the leases were
taken into account. Considering our home sale example again, suppose a
court awarded you the full purchase price for the first buyer’s breach
even though you’d completed the sale with a different buyer. Wade argued
this was essentially what happened in this case.
Ruling:
- The court disagreed. It explained that Locks had many
jukeboxes to sell or rent. Where in our earlier
hypothetical, you only had one house you could sell. Locks had many
jukeboxes. Because of this ample supply and limited
demand, if Wade had kept his promise and leased the
jukebox equipment, Locks still would have been able to lease additional
jukebox equipment to the same people that wanted the equipment after
Wade breached. He would have realized the profits from both
agreements.
- “Where, as here, a plaintiff lessor agrees to lease an article
of which the supply in the market is for practical
purposes not limited, then the law would be depriving
him of the benefit of his bargain if, on the breach of the agreement, it
required his claim against the lessee to be reduced by the amount he
actually did or reasonably could realize on a reletting of the
article.”
- Lost-volume damages should only be awarded if the breach is
but-for cause of a change in the seller’s
volume.
- It is the breaching lessees burdened to prove that
there was no lost volume in these cases.
16. Breach by the Seller
When either party repudiates the contract with respect to a
performance not yet due the loss of which will substantially impair the
value of the contract to the other, the aggrieved party may
- for a commercially reasonable time await
performance by the repudiating party, or …
The measure of damage for non-delivery or repudiation by the seller
is the difference between the market price at the time when
the buyer learned of the breach and the contract price
The Restatement on Economic Waste
[The promisee in defective or unfinished construction contract is
entitled to:]
- the reasonable cost of construction and completion in accordance
with the contract, if this is possible and does not involve unreasonable
economic waste; or
- the difference between the value that the product contracted for
would have had and the value of the performance that has been received
by the plaintiff; if construction and completion in accordance with the
contract would involve unreasonable economic waste.
16.1 “Mitigation” - Reliance Cooperage Corp. vs. Treat
Main issue: Was the plaintiff under an unconditional duty to mitigate
damages upon learning of defendant’s anticipatory repudiation?
Answer: No - there is no duty to mitigate until the date of
performance
Does covering that satisfies UCC § 2-712 preclude a claim under §
2-713?
Summary:
- This case (Common law), the court rules that - No obligation to
mitigate until date of performance
- UCC: Obligation to mitigate starts at the time the buyer
learns of breach
16.2 Peevyhouse vs. Garland Coal & Mining Co.
Central Issue:
Is the measure of contract damages the cost of
performance or the diminution in
value as a result of the breach?
Holding:
The court relied on Oklahoma statues which
“limit the damages recoverable to a reasonable amount not ‘contrary to
substantial justice’” and “prevent plaintiffs from recovering a ‘greater
amount in damages for the breach of an obligation’ than they would have
‘gained by the full performance thereof.’”
The majority referenced the restatement on economic waste -
346(1)(a)
Dissent by Justice Erwin:
The “defendant had knowledge, when it prevailed upon the plaintiffs
to execute the lease, that the cost of performance might be
disproportionate to the value or benefits received by plaintiff for the
performance” and that “there were several negotiations between the
plaintiffs and defendant before the contract is executed.
Professor:
There might be a reason why Garland agreed to the contract but then
later breach, that is close to promissory
fraud, i.e. Garland in making the promise to restore never
intended to perform.
16.3 American Standard Inc vs. Harold Schectman
Angles to consider:
- Intentional or un-intentional breach
- subjective value or objective value. e.g. does the owner intend to
use the land himself or to sell it?
16.4 Hadley vs. Baxendale
Situation:
Ruling:
The judge pretty much left the jury to decide, and the jury award the
damage of
Direct vs. Consequential damage
- Direct damages: The damages need to acquire substitute goods or
services or their equivalent
- Consequential damages: The damages flowing from the loss incurred as
a consequence the plaintiff not having the promised goods or
services
Why the Hadley Rule
Example: FedEx’s shipping contract
FedEx’s liability for each package is limited to US$100 unless a
higher value is declared and the charge for the higher value is paid.
See the FedEx Service Guide for full terms and conditions regarding
declared value and our shipping services in general
If not for this provision, then FedEx would have to increase the
shipping price for everyone (also those who ship low value packages) to
cover the cost when it accidently damages some package of high value
17. Mental Anguish and Punitive Damages
Loss Due to Emotional Disturbance
Recovery for emotional disturbance will be excluded unless the breach
also caused bodily harm or the contract or the
breach is of such a kind that serious emotional disturbance was a
particularly likely result.
Professor:
The focus for the second restatement, is the likelihood of emotional
disturbance at the time of breach, not the time of contracting.
Second Restatement of Torts § 766
One who intentionally and improperly interferes with the performance
of a contract (except a contract to marry) between another and a third
person by inducing or otherwise causing the third
California’s Seamans Rule
A contracting party seeking to avoid all liability on a meritorious
contract claim by adopting a “stonewall” position (“see you in court”)
without probable cause and with no belief in the existence of a defense.
Such conduct goes beyond the mere breach of contract. It offends
accepted notions of business ethics….Acceptance of tort remedies in such
a situation is not likely to intrude upon the bargaining relationship or
upset reasonable expectations of the contracting parties.
Seaman’s Direct Buying Service, Inc v. Standard Oil Company of
California, 36 Cal.3d 752 (1984)
17.1 Janice Bohac vs. Department of Agriculture - Emotional
Damages
Main Issue:
Do non-pecuniary emotional damages
constitute consequential damages?
Recalling from Hadley vs. Baxendale, the court ruled that a breaching
party is liable for consequential damages, for losses that the
contracting parties should have foreseen.
–> question then becomes, is the non-pecuniary damages foreseeable
when the contract is signed?
Court’s Answer is No.
- non-pecuniary damages are NOT sufficient
foreseeable to be awarded. Non pecuniary damages are
general unforeseeable when the contract is signed
- –> Consequential damages are limited to pecuniary damages and
out-of-pocket costs.
Tort or Contract ?
- The emotional disturbance results from a breach of contract
(e.g. wrongful termination), but the injury might be called a tort
instead of a contract interest
- In addition to losing the value from the contract, the plaintiff is
worse off physically than before the contract
17.2 Rite Aid Corp vs. Lake Shore Investors - Punitive damages
Situation:
- Lake Shore sued the defendant, Rite Aid, for falsely claiming that a
valid lease agreement existed between the two of them, when it did
not.
- Lake Shore also sued Rite Aid for interference with another
contract, because Rite Aid refused to provide a release allowing a third
party purchaser to withdraw from its deal with Lake Shore if the right
aid claim over the property became an issue.
Trial count ruling:
- The trial court did not distinguish between these two separate
causes of action.
- And it also refused to award punitive damages.
Court of Special Appeals reversed:
Lake Shore should have been able to prove damages that would
“reasonably” flow from a tortious contractual interference.
Main issue:
Factors required to award punitive damages:
- Compensatory damages are also awarded.
- There is actual malice.