LAW 506 LIBERTY UNIVERSITY Contracts II - Exam Analytical Framework_SUMMARIES_2019.pdf

Statute of Frauds

Definition of Statute of Frauds: a set of provisions which contracts must be evidenced in some kind of

writing.

Policy:

Evidentiary: to ensure that a contract will be enforced only when there is reliable evidence of the

contract’s existence. Underlying the writing requirement is an assumption that written evidence is

more reliable than oral testimony.

Cautionary: to “give pause” to persons entering into contracts, so that they recognize the

importance and content of the contractual relationship that they are about to establish. Underlying

this rationale is the assumption that people will be more cautious when signing a document than

when simply speaking or shaking hands on an oral deal.

Channeling: to provide an effective marker to designate enforceable agreements so parties may

more easily express their intentions regarding enforceability and courts can easily and dependably

distinguish enforceable from unenforceable agreements. Underlying this rationale is the

assumption that parties use the formality of a writing to signal their intent to be bound.

Analytical Framework:

1. Is the contract within the Statute of Frauds?

oDoes the Statute of Frauds require this category of contract to be evidenced in writing?

oIf so, does the contract nevertheless fall within one of the exceptions to the Statute of

Frauds that eliminates the requirement of a writing under particular circumstance?

2. If the contract is within the Statute of Frauds, what kind of writing is required to satisfy the

statute, and does such writing exist?

Manner and Effect of Invoking the Statute of Frauds

The burden is on the party raising the statute of frauds as a defense to contract enforcement to show that

the alleged contract is of a kind that is within the statute of frauds (that is, it is of a kind that is required to

have a writing).

Is the Contract Within the Statute of Frauds?

Is the Contract within a Class of Contract Covered by the Statute of Frauds?

Under UCC § 2-201, any requires writing. The other categories of sale of goods exceeding $500

contracts are elaborated further under Restatement (Second) § 110.

Restatement (Second) of Contracts § 110. Classes of Contracts Covered.

1. The following classes of contracts are subject to a statute, commonly called the Statute of Frauds,

forbidding enforcement unless there is a written memorandum or an applicable exception:

a) a contract of an executor or administrator to answer for a duty of his decedent (the

executor administrator provision);

b) a contract to answer for the duty of another (the suretyship provision);

c) a contract made upon consideration of marriage (the marriage provision);

d) a contract for the sale of an interest in land (the land contract provision);

e) a contract that is not to be performed within one year from the making thereof (the one-

year provision)

Does the Agreement Fall within an Exception to the Writing Requirement?

Contracts for the Sale of Goods

UCC 2-201: Formal Requirements; Statute of Frauds

1. . . .

2. Between merchants if within a reasonable time a writing in confirmation of the contract and

sufficient against the sender is received and the party receiving it has reason to know its contents,

it satisfies the requirements of subsection (1) against such party unless written notice of objection

to its contents is given within 10 days after it is received.

3. A contract which does not satisfy the requirements of subsection (1) but which is valid in other

respects is enforceable

a) if the goods are to be specially manufactured for the buyer and are not suitable for sale to

others in the ordinary course of the seller's business and the seller, before notice of

repudiation is received and under circumstances which reasonably indicate that the goods

are for the buyer, has made either a substantial beginning of their manufacture or

commitments for their procurement; or

b) if the party against whom enforcement is sought admits in his pleading, testimony or

otherwise in court that a contract for sale was made, but the contract is not enforceable

under this provision beyond the quantity of goods admitted; or

c) with respect to goods for which payment has been made and accepted or which have been

received and accepted (Sec. 2-606).

Part Performance Exception

Parties seeking enforcement must prove at least some acts in performance of the alleged contract (1) that

demonstrate the injustice of failing to enforce the alleged contract and (2) that are unequivocally referable

to the agreement, performance which alone and without the aid of words of promise is unintelligible or at

least extraordinary unless an incident of ownership. Courts typically refuse to enforce this exception to

the one-year provision.

Equitable and Promissory Estoppel

Though controversial, a majority of courts are willing to entertain the promissory estoppel exception

under Restatement (Second) § 139.

Restatement (Second) § 139. Enforcement by Virtue of Action in Reliance.

1. A promise which the promisor should reasonably expect to induce action or forbearance on the

part of the promisee or a third person and which does induce the action or forbearance is

enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement

of the promise. The remedy granted for breach is to be limited as justice requires.

2. In determining whether injustice can be avoided only by enforcement of the promise, the

following circumstances are significant:

a) the availability and adequacy of other remedies, particularly cancellation and restitution;

b) the definite and substantial character of the action or forbearance in relation to the

remedy sought;

c) the extent to which the action or forbearance corroborates evidence of the making and

terms of the promise, or the making and terms are otherwise established by clear and

convincing evidence;

d) the reasonableness of the action or forbearance;

e) the extent to which the action or forbearance was foreseeable by the promisor.

Is there a Writing that Satisfies the Statute of Frauds?

What Kind of Writing is Required?

If a contract is within the class of contracts identified as requiring the existence of a writing, and does not

fall within one of the exceptions, and if the statute of frauds is raised as an affirmative defense, the party

seeking to enforce the contract in court must demonstrate that there is a writing that meets the

requirements set out in the particular statute of frauds.

According to Sterling v. Taylor, the statute of frauds requires a note or memorandum that need not contain

every term, but functions as evidence of an agreement. It must show they them made a contract and state

the essential terms with reasonable certainty.

Restatement (Second) § 131. General Requisites of a Memorandum.

Unless additional requirements are prescribed by the particular statute, a contract within the Statute of

Frauds is enforceable if it is evidenced by any writing, signed by or on behalf of the party to be charged,

which

(a) reasonably identifies the subject matter of the contract,

(b) is sufficient to indicate that a contract with respect thereto has been made between the parties or

offered by the signer to the other party, and

Summary of the other Restatements:

A writing does not have to be made with the intention of writing down a contract, the appropriate

content is the critical element. (§ 133)

The writing does not have to be communicated to the other party in the contract. (§ 133)

The writing may be made “at any time before or after the formation of the contract.” (§ 136)

The writing need not exist at the time of trial; if the writing is lost or destroyed “the contents of a

memorandum [sufficient to satisfy the statute] may be shown by an unsigned copy or oral

evidence. (§ 137)

Restatement (Second) § 134. Signature.

The signature to a memorandum may be any symbol made or adopted with an intention, actual or

apparent, to authenticate the writing as that of the signer.

UCC § 2-201. Formal Requirements; Statute of Frauds.

(1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or

more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that

a contract for sale has been made between the parties and signed by the party against whom enforcement

is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly

states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of

goods shown in such writing.

UCC § 1-201. General Definitions.

(37) "Signed" includes using any symbol executed or adopted with present intention to adopt or accept a

writing.

(43) "Writing" includes printing, typewriting, or any other intentional reduction to tangible form.

"Written" has a corresponding meaning.

Writing or Writings?

According to Owens v. Hendricks, to satisfy the requirements of the Texas statute of frauds, the written

memorandum must furnish within itself, or by reference to some other existing writing, the means, or data

by which the particular land may be identified. The writings must contain internal evidence demonstrating

that they relate to the same transaction. However, as Williston points out, it is difficult to justify the

extension of the doctrine of incorporation to permit several writings to be read together simply because it

appears that they relate to the same transaction. Under Williston’s interpretation, it is the signed paper

which must bear the reference to the unsigned paper.

According to Crabtree v. Elizabeth Arden Sales Corp., there must be a sufficient connection between the

papers, evidenced by a reference to them in the same subject matter or transaction. Oral testimony may be

admitted showing this connection. Though it may present a danger of perjury or fraud, but the court

chooses instead to run that risk in cases where there is no ground for doubt.

Content and Meaning of the Contract

Interpreting Express Contract Terms

A Case Study in Interpretation

Frigaliment v. B.N.S. International Sales is the classic case for determining the meaning of the contract.

The court found that the word “chicken” is ambiguous and turned first to the contract itself for its

interpretation. There was little in the contract, beside references to weight and “US Fresh Frozen Chicken,

Grade A, Government Inspected.” The plaintiff also contended that German used in discussion was the

word “Huhn,” which is a general word for chicken. The PL then turned to testimony to establish that

“chicken” meant “young chicken” in the context of definite trade usage.

DF put forward the argument that a chicken is a chicken, and if you want something specific, you have to

specify. The DF also brought forward the Dept. of Agriculture’s regulations classifying chickens.

Ultimately, the court found the objective meaning of chicken to be most persuasive, meaning that the DF

could believe that the PL meant the kind of chicken that DF provided.

UCC § 1-303. Course of Performance, Course of Dealing, and Usage of Trade.

a) A "course of performance" is a sequence of conduct between the parties to a particular transaction

that exists if:

1) the agreement of the parties with respect to the transaction involves repeated occasions for

performance by a party; and

2) the other party, with knowledge of the nature of the performance and opportunity for

objection to it, accepts the performance or acquiesces in it without objection.

b) A "course of dealing" is a sequence of conduct concerning previous transactions between the

parties to a particular transaction that is fairly to be regarded as establishing a common basis of

understanding for interpreting their expressions and other conduct.

c) 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. The existence and scope of such a usage must be proved as facts. If it is

established that such a usage is embodied in a trade code or similar record, the interpretation of the

record is a question of law.

d) A course of performance or course of dealing between the parties or usage of trade in the vocation

or trade in which they are engaged or of which they are or should be aware is relevant in

ascertaining the meaning of the parties' agreement, may give particular meaning to specific terms

of the agreement, and may supplement or qualify the terms of the agreement. A usage of trade

applicable in the place in which part of the performance under the agreement is to occur may be so

utilized as to that part of the performance.

e) Except as otherwise provided in subsection (f), the express terms of an agreement and any

applicable course of performance, course of dealing, or usage of trade must be construed whenever

reasonable as consistent with each other. If such a construction is unreasonable:

1) express terms prevail over course of performance, course of dealing, and usage of trade;

2) course of performance prevails over course of dealing and usage of trade; and

3) course of dealing prevails over usage of trade.

f) Subject to Section 2-209, a course of performance is relevant to show a waiver or modification of

any term inconsistent with the course of performance.

g) Evidence of a relevant usage of trade offered by one party is not admissible unless that party has

given the other party notice that the court finds sufficient to prevent unfair surprise to the other

party.

Canons of Construction

Technical terms and words of art are given their

technical meaning when used in a transaction

whining that technical field.

A writing is interpreted as a whole, and all

writings that are part of the same transaction are

interpreted together.

An interpretation is preferred that gives force to

every term and provision of the contract rather

than one that creates an irreconcilable conflict

between provisions.

Specific terms and exact terms are given grater

weight than general language.

When the same word is used in different parts of

the contract, it will be presumed to be used in the

same sense throughout the contract

Words derive meaning from the words with which

they are associated in an agreement (in Latin,

“noscitur a sociis”).

General terms derive meaning from the specific

terms that proceed them (in Latin, “ejusdem

generis”).

Separately negotiated or added terms are given

greater weight than standardized terms or other

terms not separately negotiated. As a result, terms

handwritten on a form are given greater weight

than standard terms.

When some things are specified in detail in a

contract, other things of the same character are

excluded by implication (in Latin, “expression

unius est exclusion alternius”).

If a contractual provision is susceptible of two

reasonable constructions, only one of which

comports with law, the courts should choose the

interpretation that will make the provision legal.

A modifying phrase at the end of a list is

understood as referring to the last item in the list,

unless there is a reason to understand the phrase

as applying to the rest of the items in the list (the

“last antecedent rule”; in Latin, “reddondo

singular singuilis”).

In interpreting contract language, courts should

follow rules of grammar and pay attention to the

usage of words such as “and” vs. “or”, “may” vs.

“shall” vs. “must”, etc.

If a provision has two reasonable meanings, the

court should prefer the meaning less favorable to

the party drafting the contract language, unless the

parties have equal bargaining power or the

contract is otherwise the product of negotiation

rather than imposed by one party on the other (in

Latin, “omnia praesumuntur contra proferentem”).

Using Extrinsic Evidence to Understand a Contract

Determining Ambiguity

At its heart, contract interpretation seeks to determine the meaning intended by the parties when they

chose the particular words used to express the contract terms. There are two types of ambiguity which

might be present in a contract:

Patent: An ambiguity in a document is an uncertainty in meaning that is revealed by the text or

by extrinsic evidence other than direct evidence of intention contradicting the plain meaning of

the text.

Latent: An ambiguity which arises not upon the words of the instrument, as looked at

themselves, but upon those words when applied to the object or subject they describe.

A contract is ambiguous when its provisions are capable of conflicting interpretations . The meaning of an

ambiguous contract is a question of fact which must be decided by the jury. First, the court must look to

the evidence of practical interpretation and uniform course of conduct , which may inform the court.

Absent a showing of other provisions which could swing the court’s opinion, the jury may apply the rule

of contra proferentem, which allows the jury to construe the ambiguous terms against the drafter of the

contract. Though some will argue that this should be done first when there are no bilateral negotiations,

courts have typically not upheld this doctrine. This is because the primary goal of interpreting any

contract is to honor the intent of the parties.

The Parol Evidence Rule

The parol evidence rule (1) bars use of such evidence to alter a term that the parties considered final in

the written contract and (2) bars use of such evidence to add a term to a contract the parties considered

fully expressed in the written contract.

Policy: The rule presumes that written evidence is better than conflicting oral evidence on the same term.

It presumes that a subsequent written agreement is better evidence than a conflicting earlier agreement on

the same topic. It presumes that when parties produced a written contract document.

The rule is generally considered a rule of law, to be applied by the court, not the jury; that is a judge must

apply the rule and decide that the evidence is admissible to prove a term of the contract before the

evidence can be presented to the fact-finder.

The Effect of the Parol Evidence Rule

The parol evidence rule is designed to implement the parties’ intent as to the effect of a written

memorialization of the contract terms. To do so, the rule organizes the inquiry about the parties’ intent by

categorizing the kind of document the writing represents. As articulated in UCC § 2-202, the rule asks:

First, did the parties intend the document to be a “final expression of the parties’ agreement”

(superseding any conflicting terms they may have agreed to before).

Second, did the parties also intend the document to be a “complete and exclusive statement of the

terms of the agreement” (superseding all terms they may have agreed to before, whether

conflicting or not).

INTENT OF THE PARTIES UCC COMMON LAW

WRITTEN TERMS SUPERSEDE

CONFLICTING TERMS PREVIOUSLY

AGREED TO

“Final expression of

the parties’

agreement”

Integrated agreement;

partially integrated

agreement

WRITTEN TERMS SUPERSEDE ALL

TERMS PREVIOUSLY AGREED TO,

WHETHER CONFLICTING OR

ADDITIONAL

“Complete and

exclusive statement

of the terms of the

agreement”

Completely integrated

agreement

The application of the parol evidence rule flows from analysis of two critical questions

What kind of document is the written contract? Is it a final expression of the terms it contains

(integrated)? Is it a t of the contract terms (completely complete and exclusive statemen

integrated)?

Is the evidence offered to add to the written contract terms? To change the written terms?

Scope of the Parol Evidence Rule: To What Evidence does it Apply?

The parol evidence rule is designed to prevent parties from undercutting the finality of their written

agreements by alter attempting to incorporate into the contract written agreements made before, or oral

agreements made before or at the same time as, the writing was adopted.

The Meaning of an Ambiguous Term. Relevant evidence of all kinds is always admissible to

explain ambiguity or clarify terms that cannot be interpreted without the assistance of evidence.

A Course of Performance, Course of Dealing, or Usage of Trade. Evidence of course of

performance, course of dealing, and usage of trade is admissible to establish the existence of

contract terms as well as to interpret contract language, even if the agreement is “complete and

exclusive,” because it is presumed that the agreement was made in the commercial context

represented by the course of dealing or usage of trade.

Subsequent Modification of a Contract. The parol evidence rule has no effect on admissibility of

the negotiations or agreements that occurred after the writing was executed.

Existence and Contents of a Collateral Agreement. Evidence of an agreement that is separate

from the writing is allowed, because the parties did not intend it to be part of the integrated

contract.

Problems with Contract Formation. Evidence is admissible if offered to show fraud, duress, undo

influence, mistake, illegality, lack of consideration, or other circumstances that would invalidate

the formation of a contract.

Grounds for Granting Particular Remedies. Evidence offered to show circumstances that support

the availability of particular remedies is not subject to the parol evidence rule because that

evidence is not being used to vary the terms of the contract by instead to show equitable

circumstances that affect how to enforce the agreement reflected in the writing.

Is the Written Contract Integrated, Either Partially or Completely?

In Sierra Diesel Injection Service, Inc. v. Burroughs Corp., the court instituted the fundamental test of

integration: whether the parties intended the writing as a final expression of their agreement to the terms

included therein. The court ruled that while the wording of the integration clause in the agreement is some

evidence of integration, it is not conclusive. Other factors may be present which can overcome the

wording (relationship of the parties, identity of the parties, nature of the deal).

Implied Contract Terms and Provisions

Contracts often fail to explicitly address issues the parties later dispute, sometime because the parties did

not foresee the circumstances that have arisen or because, having foreseen the circumstances, they chose

not to deal with it at the time the contract was created. Assuming the agreement is sufficiently definite and

complete to be enforceable, a court will try to select terms to fill the gaps.

Default provisions or “gap-fillers,” drawn from cases or statutes, usually identify terms that reasonable

parties would likely have agreed upon if they were acting fairly and sensibly. These allow parties to

concentrate on the important dickered terms and leave others to be filled in as default terms.

Terms Implied from the Circumstances

Rule: A term may be added to a contract when it can be established though light of custom or

immemorial and invariable usage. (Fisher v. Congregation of B’nai Yitzhok)

Without an implied promise, the transaction cannot have the business efficiency that both parties must

have intended that at all events it should have.

Duty of Good Faith

Every contract carries with it an implied covenant of good faith that may not be disclaimed . The duty of

good faith arises as part of the commitment each party makes to the other in the contract, so it generally

applies to contract performance, enforcement, and modification, but not to contract formation.

First Nat’l Bank v. Methodist Home for the Aged set out four basic rules: (1) doubtful language is

construed most strongly against the drafter, (2) if possible, contracts susceptible to more than one

construction are to reflect the intent of the parties, (3) the intentions of the parties in an ambiguous

contract are determined by the understanding of the reasonable man, if he were the opposing party, and

(4) the contract must be taken as a whole.

Wood v. Lucy, Lady Duff-Gordon implied the entire contract. The law has outgrown its primitive stage of

formalism when the precise word was the sovereign talisman, and every slip was fatal. The evidence

supports the implication of a promise her. The court does not suppose that one party was to be placed at

the mercy of the other. Her sole compensation for this grant was one-half of the profits, unless he gave

efforts, she got nothing. Without an implied promise, the transaction cannot have such business

“efficiency, as both parties must have intended that at all events it should have.” An agreement will be

inferred when both parties intend to benefit from the arrangement.

Duty of Good Faith in Performance or Enforcement

The first thing to note about the good faith requirement is the fact that it does not establish a fiduciary

relationship between the parties. The court recognizes that the parties are looking out for themselves, even

at times trying to take advantage of the other. The courts make the distinction between “superior

knowledge of the market,” i.e. capitalism, and “sharp dealing.” This is illustrated by the sharp dealing

court in Market Street as taking deliberate advantage of an oversight by the contract partner. While you

may not take this advantage, you are not required to bail out a contract partner who has misread the

market. It is important to note this distinction.

Good faith, as Market Street notes, is a duty halfway between a fiduciary duty (utmost good faith) and

refraining from active fraud.

Duty of Good Faith in Requirements and Output Contracts

Most contracts for sale of goods contain express terms selecting the quantity of goods to be bought and

sold. In contrast, an measures the quantity of goods by the needs of the buyer or the output contract

production of the seller. This allows for buyers and sellers to buy and sell based upon the business needs

and operations, without the precision required by other contracts which the parties may not be able or

want to define.

Older cases questioned the enforceability of these contracts, but by incorporating good faith into the

contracts, modern courts have been able to determine if a breach has occurred if the buyer or seller

demands too much or produces too little.

Duty of Good Faith in Exercising Termination Rights

Agreements may contain express clauses that permit one or both parties to the contract to terminate it,

either for particular reasons or for any reason. If a contract contains no specified end for performance

obligation and no provision for termination by the parties, a court may supply an implied term identifying

when the contract may be terminated.

In the case of , the court found that the only way to salvage an illusory promise is to read good Questar

faith into the contract. In the case specifically, the court found that, “under the covenant of good faith and

fair dealing, a party exercising discretion must refrain from doing anything that will have the effect of

frustrating the right of the other party to receive the fruits of the contract between them.”

This would mean that good faith will have been violated if the party decides to revisit an offer which may

be better in hindsight or shop around for a better deal. Scheming to contract with another company,

canceling the agreement for that reason alone, is a breach of good faith.

Express Conditions

A contract provision may contain a specification of an event that may or may not occur, and on which

contractual duties may depend, otherwise known as a . A binding contract may exist, but the condition

condition included in the contract terms means that some (or all) of the contractual duties may not be

owned because the specified triggering circumstance may not occur.

Contracts may contain express conditions, through which the parties explicitly specify connections

between promises and conditions. Sets of promises within a contract are often also linked through the

operation of “implied (or constructive) conditions,” conditions that are not explicitly articulated by the

parties but that are implicit in the expectations regarding the order of the performance.

A condition may be called a “ ” or a “ ” depending upon condition precedent condition subsequent

whether it triggers a duty (that is, the duty exist unless the condition occurs) or instead terminates a duty

(that is, the duty exists but is extinguished if the condition does not occur).

Identifying and Enforcing Express Conditions

According to , though the language of a contract is a factual question for the jury to decide, the Peacock

general rule is that the interpretation of a document is a question of law rather than of fact. One method

of determining the proper interpretation of the document is to look to the intent of the parties.

Conditions of Satisfaction

One particular kind of express condition that may be included in a contract is a provision making one

party’s contractual duty conditional on that party’s “satisfaction” with the other party’s performance. The

question then becomes, how is satisfaction to be judged by the court? It will be by the intent of the

parties.

There are two alternatives for the court to consider: and personal fancy commercial satisfaction. If the

satisfaction clause relates to matters of fancy, personal taste, or judgement, then a subjective standard is

applied. The test for which is whether the party is satisfied. The second is commercial value or quality,

operative fitness, or mechanical utility. In these contracts, the test is whether the performance would

satisfy the reasonable man.

Waiver and Excuse of Conditions

Sometimes, to avoid injustice, the court will waive harsh conditions. There are several tools at the courts

disposal to do this: (1) interpret contract language to avoid finding that it creates an express condition; (2)

interpret the condition itself in a manner that reduces the risk of non-compliance; and (3) find that the

party whose performance duties would otherwise be affected waived the condition.

In the face of ambiguous language and varying interpretations of the contract, the court will look to the

intent of the parties and the totality of the circumstance to determine whether the contract means the

satisfaction clause to be commercial or personal fancy.

Performance, Breach, and Excuse

A is breach any amount of deviation from the promised performance .

Categories of Implied Conditions

The common law evolved rules recognizing that some promises were related to each other—one party’s

non-performance sometimes meant that the other party did not have to perform its promise or could at

least delay performance while waiting for the other party’s performance to occur. As recognized in current

law, are implied conditions that connect contract performances constructive conditions of exchange

together through conditional relationships implied from the agreement, thereby determining the order of

the parties’ performances within the contract. In other circumstances, performances are expected to be

simultaneous (or nearly so), as in a real estate closing, where payment and title are expected to be

transferred at the same time.

According to Kingston v. Preston, there are three kinds of covenants (or contracts) which are determined

by looking to the intent of the parties and circumstances.

Mutual and Independent: where either party may recover damages from the other, for the injury

he may have received by a breach of the covenants in his favor, and where it is no excuse for the

defendant, to allege a breach of the covenants by plaintiff.

Conditions and Dependent: in which the performance of one depends on the prior performance

of another, and, therefore, till this prior condition is performed, the other party is not liable to an

action on his covenant.

Mutual Conditions to be Performed Simultaneously: if one party was ready, and offered, to

perform his part, and the other neglected, or refused to perform his part, he who was ready, and

offered, has fulfilled his engagement, and may maintain an action for the default of the other,

though it is not certain that either is obliged to do the first act.

Performance and Breach under the Common Law

When one party to a contract breaches its performance obligations, a critical question for the aggrieved

party is whether or when she is permitted to suspend performance or to cancel the contract in response.

Implied Conditions and Performance Responsibilities

Jacob & Youngs v. Kent found that a trivial and innocent omission will sometimes be atoned for by

allowance of the resulting damage and will not always be the breach of a condition to be followed by

forfeiture. However, an important breach may allow for damages by the DF (non-performance of payment

in this case). Considerations partly of justice and partly of presumable intention are to tell us whether this

promise shall be put in one class or the other. The line cannot be set by formula, in the nature of the case

precise boundaries are impossible. The court held that this issue was an issue of fact, which must be

decided by a jury.

Substantial Performance or Material Breach

If party A fails to perform in some respect but achieves the level of performance necessary to satisfy the

implied conditions, it triggers party B’s duty to perform the connected promises. Party A is then said to

have committed a partial or non-material breach wile rendering “substantial performance.” Substantial

performance does not mean full performance; if party A breaches in some respects while substantially

performing, party B must perform (or pay) but is owed damages for any breach. If party A does not

achieve substantial performance, it is called a “material breach”—the opposite of substantial

performance.

The line defining substantial performance and material breach is a fuzzy one , because it is decided by an

aggregate standard—a standard that depends on the weighing of a number of factors arising from the

particular circumstances in the case, or in other words, the facts.

Rule: A material breach is a failure to perform an essential term or condition that substantially defeats the

purpose of the contract for the other party. Substantial performance occurs when the other party receives a

benefit they expected. (Roberts Contracting Co. v. VWR Public Facility Bd.)

Substantial performance allows the contractor to recover or retain the contract price for the work, with a

deduction for the cost of completion or correction to contract requirements. The courts never say that one

who makes a contract fills the measure of his duty by less than full performance, they do say, however,

that an omission, both trivial and innocent, will sometimes be atoned for by allowance of the resulting

damage, and will not always be the breach of a condition to be followed by a forfeiture.

A party will be allowed to recover or retain the contract price for work, with a deduction for cost of

completion or correction when it is found that they have omitted a portion of their duty that is both trivial

and innocent.

The court stated that a trivial and innocent omission will sometimes be atoned for by allowance of the

resulting damage and will not always be the breach of a condition to be followed by forfeiture. However,

an important breach may allow for damages by the DF (non-performance of payment in this case).

Considerations partly of justice and partly of presumable intention are to tell us whether this promise shall

be put in one class or the other. The line cannot be set by formula, in the nature of the case precise

boundaries are impossible. The court held that this issue was an issue of fact, which must be decided by a

jury.

An omission will allow for damages when the breach is “important” as opposed to “trivial and innocent.”

Partial or Total Breach?

Upon any breach, the breaching party is responsible for paying damages for any injury caused by the

breach. Whether an aggrieved party has the right to withhold performance from the breaching party

depends on whether the breaching party has substantially performed or has materially breached. If the

breaching party commits a material breach:

The aggrieved party acquires the right to or her own performance until the suspend withhold

breaching party substantially performs.

The breaching party may be able to cure the breach within a reasonable time by furnishing the

missing performance, by re-performing, or by repairing defective performance, in order to furnish

at least substantial performance.

If the cure is successful enough to alleviate the material breach, then the aggrieved party no

longer has the right to suspend or withhold performance.

The breaching party may fail to cure (or is unable to cure) the breach. If the breach is serious enough, the

material breach become a . When a party commits a total breach:total breach

The aggrieved party retains both the right to damages for any injury and the right to suspend or

withhold her own performance because of the material breach.

The aggrieved party acquires the right to cancel the contract, eliminating further performance

duties held by any party to the contract.

And after notifying the breaching party of the cancellation, the aggrieved party can hire someone

else to complete the performance once owed by the breaching party.

When determining whether or not there was a total or partial breach, the court uses the following six

factors:

The extent to which the injured party will obtain the substantial benefit which he could have

reasonably anticipated;

the extent to which the injured party may be adequately compensated in damages for lack of

complete performance;

the extent to which the party failing to perform has already partly performed or made preparations

for performance;

the greater or less hardship on the party failing to perform in terminating the contract;

the willful, negligent, or innocent behavior of the party failing to perform; and

the greater or less uncertainty that the party failing to perform will perform the remainder of the

contract.

Repudiation

Defining Repudiation (Renunciation)

A party may breach a contract by “ ” or “renouncing repudiating” a contract, indicating that they will not

perform the contract or will not perform it further. If done in response to a total breach by the other party,

a purported repudiation is really a justified cancellation of a contract, not a breach.

Rule: According to McCloskey & Co. v. Minweld Steel Co., the test for a renunciation amounting to

breach of contract is whether there is an absolute an unequivocal refusal to perform or a distinct and

positive statement of an inability to do so. In other words, a party must either directly refuse or “give up

all hope” that the contract may be performed. Look for indications such as walking off the job or refusing

to cure. Also, beware of the labels the parties give. In order to give rise to a renunciation amounting to a

breach of contract, there must be an absolute and unequivocal refusal to perform or a distinct and positive

statement of an inability to do so.

Anticipatory Repudiation

If a repudiation occurs before the date on which contract performance is due, it is called an “anticipatory

repudiation.” Such an act implicates the parties’ interests in the stability and predictability of contracts

and raises a number of questions about the appropriate consequences.

Hochester v. De la Tour held that after the renunciation of the agreement by the DF, the PL should be at

liberty to consider himself absolved from any future performance of it, retaining his right to sue for any

damage he has suffered from the breach of it.

Reasonable Insecurity about Future Performance

A breach may occur before performance is even attempted, when one party repudiates before performance

is due. If this occurs, the other aggrieved party is absolved from any performance. The court eventually

found that it was an implied term in a contract, eventually promulgating in UCC § 2-609 and Restatement

(Second) of Contracts § 251.

According to Hornell Brewing Co. v. Spry, the court first looked to the existence of a contract and found

that even in absence of a specific writing, the uncontroverted business dealings constituted conduct

sufficient to establish a contract for sale. Reasonable grounds for insecurity is an issue of fact depending

upon various factors, including the buyer’s exact words or actions course of dealing or performance , the

between the parties nature of the sales contract and the industry, and the . Reasonableness and adequacy

are defined by commercial rather than legal standards. Once there are reasonable grounds, the seller must

request assurances from the buyer (not necessarily in writing, contrary to UCC). If the assurances are

adequate, and barring any change in circumstances, the seller must comply with the terms.

Performance and Breach under UCC Article 2

Under the common law only substantial performance, not complete performance, is required in order to

trigger the other party’s dependent duty to perform (unless the parties have agreed otherwise). For sales of

goods under UCC Article 2, however, the rule is different. Consider § 2-601, generally known as the

“perfect tender” rule.

It declares that, if the goods or tender fail “in any respect” to conform to the contract, the buyer may

“reject” the goods. Although this appears to mean that the buyer’s responsibility to take (and pay for) the

goods is dependent on perfect conformity to the contract by the seller, in reality it is subject to several

limitations.

Section 2-601 says the rule does not apply to installment contracts or contracts in which the

parties agree the buyer will not have such a remedy.

A buyer is not permitted to seize on a technical defect in order to reject (which would be

operating in bad faith).

If the contract involves a so-called “shipment contract” which means the seller’s tender

responsibilities involve delivering the goods to a carrier, only certain seller’s breaches in

transporting the goods give buyer the right to reject.

Most importantly, if the buyer rejects the goods the seller often has a right (but not a duty) to cure

the non-conformity by repairing defective goods or replacing them with conforming goods.

If a buyer rejects a tender of goods that conformed to the contract specifications, the buyer breaches the

contract by making a wrongful rejection. In order to make an effective rejection, the buyer must tell the

seller it does not want to keep the goods, according to UCC § 2-602.

If the buyer rejects the goods, the seller may, under § 2-508, have a right (not a duty) to “cure” the defect

by repair or replacement.

If the buyer does not reject the goods, the buyer then “accepts” the goods, as defined in § 2-607. Even if

the buyer has a right to reject goods for any nonconformity, the buyer may instead accept the goods and

seek damages for any defect.

An accepting buyer has a second but much more limited chance to return the goods by “revoking

acceptance” of the goods.

Regardless of whether the buyer ends up keeping defective goods or successfully rejects them or revokes

acceptance, the buyer will be entitled to recover damages for injury caused by the breach, though the

measure will be different under those different circumstances.

A seller may also breach by repudiating the contract or otherwise failing to deliver. Under such

circumstances, the buyer has no goods to reject but has other remedies available (damages or specific

performance). On the other side of the transaction, a buyer may breach by wrongfully rejecting or

unjustifiably revoking acceptance, by failing

to pay all or some of the contract price, by

paying ate, or by repudiating the contract

in advance of delivery of the goods. The

remedies for all of these breaches are covered

later.

There is a distinction in the timing of the rejection. The rights of the parties vary depending on whether

the rejection occurs before or after acceptance of the goods. , the buyer may reject Before acceptance

goods for any nonconformity. The rejection includes both the buyer’s refusal to accept or keep delivered

goods and his notification to the seller that he will not keep them. Though, the seller does have the right to

cure, and this does not necessarily cancel the contract. After acceptance, the buyer may revoke

acceptance . Revocation of only if the nonconformity the value of the goods to himsubstantially impairs

acceptance is like rejection but occurs after the buyer has accepted the goods. This provision protects the

seller from revocation for trivial defects and prevents the buyer from taking undue advantage of the seller

by allowing goods to depreciate and then returning them for minor defects.

The rights of the parties also vary if rejection occurs after the time set for performance. Within the time

set for performance in the contract, the seller’s right to cure is unconditional. After expiration of that time,

the seller has further reasonable time to cure if he believed reasonably that the goods would be acceptable

with or without a money allowance.

However, rejection does not terminate the contract. The seller still has the right to cure within a

reasonable time. If the defects remain uncured, the buyer may cancel the contract. Otherwise, a seller’s

failure to cure minor defects would compel a buyer to accept imperfect goods and collect for any lass

caused by the nonconformity.

According to Ramirez v. Autosport, if goods do not conform to the contract if they are not in accordance

with the obligations under the contract. The buyer is authorized to reject goods if they or the tender of

delivery fail in any respect to conform to the contract. The rights of the parties initially depend upon

whether the rejection occurs before or after the acceptance of goods. The seller also has the ability to cure

the defect. The buyer may reject goods with insubstantial defects, and also may cancel the contract if

those defects remain uncured.

Excuse Defenses: Impossibility, Impracticability, and Frustration of

Purpose

Policy: Because contracts are designed to hedge against the risk of change in this fashion, the early

common law concluded that contractual duties were absolute and not excusable merely because of

unanticipated circumstances.

Historical Background of the Excuse Defense

Impossibility

The law continued to recognize this limited set of excuses for two centuries before the King’s Bench ruled

in Taylor v. Caldwell that the precedents should be viewed in a more cohesive and expandable framework.

Taylor found that a party may be excused from performance in contracts in which the performance

depends on the continued existence of a given person or thing, and performance became impossible

because of the perishing of the person or thing. The court limited this to contracts which contain the

implied provision of this excuse, determined by the nature of the contract. Both parties are excused from

performance.

The Restatement of Contracts § 460 provides:

1. Where the existence of a specific thing or person is, either by the terms of a bargain or in the

contemplation of both parties, necessary for the performance of a promise in the bargain, a duty

to perform the promise

a. never arises if at the time the bargain is made the existence of the thing or person within

the time for seasonable performance is impossible, and

b. is discharged if the thing or person subsequently is not in existence in time for seasonable

performance, unless a contrary intention is manifested, or the contributing fault of the

promisor causes the non-existence.

2. Material deterioration of such a specific thing or physical incapacity of such a specific person as

is within the rule stated in Subsection (1) has the same effect as non-existence in preventing a

promisor's duty from arising or in discharging it, except that if the other party remains ready and

willing to render in full the agreed exchange for whatever performance remains possible, the

promisor is under a duty to render such partial performance

Frustration of Purpose

Krell is essentially an extension of Taylor v. Caldwell. In this instance the essence of the contract, it’s

purpose (viewing the coronation) was destroyed. The essence of the contract is determined by the intent

of the parties. The contract is valid; however, its performance is excused. It is important to note that this is

distinct from the impossibility defense because the apartment is still able to be rented, but the purpose for

the contract has died.

NOTE: THE KRELL CONTRACT EQUATES TO $10,000-$15,000 IN TODAY’S MONEY

Under the doctrine of commercial frustration, if the occurrence of an event, not foreseen by the parties

and not caused by or under the control of either party, destroys or nearly destroys the value of

performance or the object or purpose of the contract, then the parties are excused from further

performance. If the event was reasonably foreseeable, then the parties should have provided for its

occurrence in the contract. The absence of a provision in the contract providing for such an occurrence in

the contract indicates and assumption of risk by the promissory. In determining foreseeability, the courts

consider the terms of the contract and the circumstances surrounding the formation of the contract. The

doctrine is limited in application so as to preserve the certainty of contracts.

The Rule: 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.

Application:

a contingency—something unexpected—must have occurred;

the risk of the unexpected occurrence must not have been allocated either by agreement

or by custom; and

occurrence of the contingency must have rendered performance commercially

impracticable.

Impossibility Broadens into Impracticability

There are thee defining characteristic of the defense of (impracticality): (1) it operates to impossibility

excuse a non-performing obligor from liability; (2) only when performance of the obligor’s part is

impractical; and (3) the unanticipated expense must be much greater.

Note that the defense of impossibility acts to excuse performance of a party, it does work to modify not

the terms of the agreement to obtain more compensation.

Force Majeure Clauses

A Force Majeure clause specifies how particular risks are allocated between the parties and may also help

define how the excuse defense will be applied. A well-drafted clause may serve one or more of the

following functions:

Specifying and clarifying aspects of the excuse doctrine:

oWhich events the parties assume will not occur and why those non-occurrences are basic

assumption on which the contract is made,

oPayor’s principal purpose,

oWhich risks are allocated to one of the parties, and

oHow much difficulty of performance is necessary to find impracticability.

Adding events that can serve as excuses

“Contracting out” of the default rules on excuse.

When Do Courts Grant Excuse

Remember, UCC 2-615 excuses the , not the buyer.SELLER

Synthesizing the UCC & Restatements, there are 4 Elements:

Event must have made performance impracticable (see Transatlantic)

The nonoccurrence of the event is a basic assumption of the contract (as evidenced by non-

discussion)

Without the fault of the party to be excused

Party must have assumed a greater obligation than the law requires

BONUS FACTOR: Do not apply when the risk was foreseen, either explicitly or impliedly

Remedies

After a breach, the aggrieved party is entitled to seek remedies against the breaching party. These

remedies may be “ ” (money damages) or “ ” (court orders to perform, or to act or refrain at law in equity

from acting in specific ways). Historically, courts have preferred to award damages rather than to order

equitable relief.

Remedies at Law (Damages)

Determining appropriate damages is more dependent on understanding the purposes and policies served

by damage awards and their limitation than it is on any mathematical construct.

Policy Corollary/Competing Policy

Award only those damages

caused by the breach.

Do not award damages for injuries that the aggrieved party

could have avoided or prevented or mitigated (because these

were not caused by the breaching party).

Avoid over-compensation,

windfalls, and double recovery.

Avoid under-compensation, forfeitures, and penalties.

Avoid speculative damages. Avoid letting the breaching party profit from the uncertainty

caused by the breach, even if the measure of damages is

somewhat uncertain, and resolve uncertainties in favor of the

aggrieved party to ensure adequate compensation.

Award consequential damages for

injury foreseeable to breaching

party at time of contract

formation.

Avoid burdening the breaching party with damages the risk of

which was not reasonably contemplated when deciding whether

to enter into the agreement.

Recall that there are three kinds of recovery, and hence three ways of computing damages for a breach of

contract.

Expectation Damages are designed to put the aggrieved party into the position that it would

have been in if it had received the full performance promised (and had fully performed its

own part of the bargain). Expectation damages make the PL whole by paying the amount

necessary to approximate the value of full performance

Reliance Damages are designed to put the aggrieved party back in the position that it would

have been in today if the parties had not entered into the contract. Reliance damages

compensate the out-of-pocket expenses incurred by the aggrieved party in reliance on the

existence of the contract, as well as opportunities the aggrieved party let pass in reliance on

the contract (“lost opportunity costs”).

Restitution Damages are designed to avoid unjust enrichment of a party by forcing that party

to restore (“disgorge”) to the other party any as-yet-unpaid-for benefits it retained.

The court prefers expectation damages, on the theory that full compensation should mean giving the

aggrieved party the “benefit of the bargain.” Anything else is not enforcement of the contract. But if

expectation damages are inadequate or too speculative or do not otherwise fulfill the policies listed above,

courts will consider reliance or restitution damages. Most often, reliance damages provide a higher

damage award and are more compensatory than restitution damages, so reliance damages will be

preferred over restitutionary relief, but the critical inquiry is to ask which measure best fulfills the policies

underlying damage awards.

Expectation Damages

Categories of Expectation Damages

There are two broader categories of expectation damages: direct expectation damages (“general

damages”) and indirect expectation damages (“specific damages”).

Direct Damages are the amounts awarded for injury to or loss of the value of the

performance promised in the contract. It measures the difference between the value of full

performance and the value of performance actually received. For example, direct damages

would compensate for the value of services not performed, payment not made, or a defect in

the goods or services.

Indirect Damages are the amounts awarded for other secondary losses resulting from the

breach. They are classified as “incidental damages” or “consequential damages.”

oIncidental Damages are extra costs incurred by the aggrieved party in dealing with

the breach or mitigating losses from the breach, for example, by handling a defective

delivery or arranging for the purchase of substitute goods.

oConsequential Damages are other losses arising as a consequence of the breach.

They may include such items as lost profits, lost customers, lost business volume,

and downstream breaches caused by the original breach. However the court is

reluctant to grant this form, as they are speculative.

Thinking Sensibly about Expectation Damages

The goal of expectation damages is to put the aggrieved party in the position it would have been in if both

parties had fully performed.

Traditional Formula Explanation

+ Direct Loss Difference in value between what was promised and what was

received (“direct” or “general” damages).

+ Extra Loss Additional costs and losses caused by the breach and mitigating

the breach (“indirect” or “special” damages: incidental and

consequential damages).

- Cost Avoided Expenses that the aggrieved party did not incur because

performance stopped early.

- Loss Avoided Losses that the aggrieved party would have suffered but was

able to prevent/avoid because of its own mitigation efforts or

other circumstances.

Measuring Typical Direct Damages

If a case involves a breach by a buyer/recipient of goods or services, the seller/supplier who is left with

the goods often sells the item or service to another party.

If the replacement contract price is lower than the original (breached) contract, direct damages are

measured by the difference between them.

If the replacement contract price is higher, direct damages are inappropriate, but the seller may

recover for indirect damages, if any.

If the seller/supplier does not enter into a replacement contract, the market price for the promised

goods or services can fulfill the same function as the replacement contract price. The direct

damage measure will be how much the market price is below the contract price, if at all.

The inverse is true for buyers, with regard to replacement contracts.

Special Problems in Measuring Damages

Expectation damages can sometimes be measured in more than one way and choosing among the

alternatives requires balancing and selecting among competing policies. Some situations present special

challenges in measuring direct damages. The cases in this section deal with such special challenges and

demonstrate how courts have made choices between alternative measures in typical cases. The issues

presented include deciding when to measure damages after anticipatory repudiation, measuring loss from

incomplete or defective performance of a construction contract, and measuring lost profits.

Damages Resulting from Anticipatory Repudiation

A is an absolute and unequivocal refusal to perform or a distinct and positive statement of anrepudiation

inability to do so. An is a repudiation that occurs before the date on which the anticipatory repudiation

performance is due. The UCC § 2-713 uses market price at the time the party learned of the breach to

determine the damages, as this is the point at which the parties can begin to act to replace the performance

lost through breach. There are three interpretations of “learned of the breach.”

When the buyer learns of the repudiation,

When the buyer learns of the repudiation plus a commercially reasonable time, or

When performance is due under contract.

The majority opinion is the second (repudiation + commercially reasonable time), allowing the buyer time

to replace the performance lost through breach most efficiently.

NOTE: Essentially, the UCC and traditional formula are the same, with the exception of setting time.

Owner’s Cost to Complete versus Diminution in Value

It can be either Owner’s Cost to Complete or Diminution in Value, typically the value of completing

performance. While it is clear that an aggrieved party is entitled to direct damages for breach, it is

sometimes less clear how to measure those damages

Jacob & Youngs v. Kent

Diminution in Value & Benefit of the Bargain. The measure of allowance is the difference in value, which

would be nominal or nothing. In cases of defects of trivial or inappreciable importance damages will be

nominal or nothing.

Khiterer v. Bell

Where substantial performance has been rendered, the remedy is the cost of completion or correction,

unless that cost is grossly and unfairly out of proportion to the good to be attained. When that is true, the

measure is the difference in value.

Lyon v. Belosky Construction Inc.

Substantial performance is NOT the determining factor. What is the determining factors is “grossly and

unfairly out of proportion.

Peevyhouse v. Garland

Does not want to give PL a windfall ($29,000), the cost of completion. The court will rule based on the

essence of the contract. The court found that the remedy clause was incidental. In contract formation, bear

in mind how a court will interpret the contract if things go sour. Lawing is all about understanding what

the law is trying to achieve.

Damages for “Lost Profit” and “Lost Volume”

UCC § 2-708 provides that the measure of damages for non-acceptance or repudiation by the buyers is the

difference between the market price at the time and place for tender and the unpaid contract price together

with any incidental damages provided in this article, but less expenses saved in consequence of the

buyer’s breach. However, this provision is made expressly subject to subsection (2), which provides “if

the measure of damages provided in 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 (including reasonable overhead)

which the seller would have made from full performance by the buyer, together with any incidental

damages provided in this Article, due allowance for costs reasonably incurred and due credit for payment

or proceeds of resale.

Indirect Expectation Damages

Consequential Damages are the downstream losses caused by the breach. They are often where the “real

money” is in the dispute because these ripple effects of the breach can cause lost profits, lost customers,

lost business volume, and downstream breaches caused by the original breach. As with other damages the

aggrieved party must prove the consequential injury was caused by the breach. Causation alone is not

enough, however. The cases that follow illustrate additional standards that govern the award of

consequential damages

At common law, the classic case is Hadley v. Baxendale. “Recovery is limited to such damages as may

fairly and reasonably have been in the contemplation of the parties when the contract was made.”

The lynchpin of the rule is the of the consequence of the breach. There are three problems natural flow

with Hadley v. Baxendale, the first being Risk Allocation, the court does not want to impose on the

parties a damage for a risk that was not considered. The second being the of the Speculative Nature

damages. A court will not award damages when they are speculative. It is unknown how much profits the

mill would have made during the days of shutdown. The final problem was the , though not Agency

expressly stated, the court does not want to bind the company to the word of a single clerk, for damages

to be awarded here (particularly to this unusual extent), it requires unusual negotiations.

In Redgrave v. Boston Symphony Orchestra, Inc. the court affirmed the Hadley v. Baxendale rule, while

affirming the general rule that damages for reputation are not available in contract action. If the damages

are not remote are within the contemplation of the parties, then they will be allowed.

Mitigation of Damages (Avoidable Damages)

Consequential damages are limited to those which could not be reasonably prevented by cover or

otherwise. There are two steps an aggrieved party can take to mitigate damages: (1) cease performance

under the contract and (2) take affirmative steps to avoid further losses. The first is relatively

straightforward. The second is a little harder.

Reliance Damages

Definition: Reliance Damages allows the PL to recover as damages the expenses it sustained, and which

it would not have been put to if it had not been for its reliance upon the DF to perform his contract.

Policy: Reliance damages are designed to put the aggrieved party into the position that it would have

been in if the parties had not entered into the contract. compensate for out-of-today Reliance damages

pocket expenses incurred by the aggrieved party in reliance on the existence of the contract, as well as

lost opportunity costs, if provable. While expectation damages are the preferred remedy for enforcing

contractual promises, reliance damages may be appropriate if there are no identifiable expectation

damages, if such damages are too speculative in amount, or if for other reasons expectation damages do

not seem appropriate. Reliance damages may also be awarded when a promise is enforced under

Restatement § 90, recall that the remedy for promissory estoppel “may be limited as justice requires,”

though few courts have chosen that route.

Reliance damages are available only for reasonable expenses incurred in reliance on the existence of the

promise, and the aggrieved party may not recover for expenses that could have been avoided through

reasonable actions to mitigate or avoid losses. In a promissory estoppel case, the reliance must be the kind

that “the promisor should reasonably expect to have been induced by the promise. Because the promisor

would not expect a promisee to spend more than it would have made on the contract, the promisee cannot

recover more in reliance damages than it could have gotten in expectation damages.

NOTE: Some jurisdictions cap reliance damages at expectation damages, as there may be a great

possibility of injustice if they do not.

Restitution Damages

Restitution Damages are relief that seeks to return the parties to their pre-contract positions—the “status

quo ante”—by requiring each party or restore (“disgorge”) to the other party any benefit conferred by that

other party that it would be unjust to retain. Restitutionary relief comes in two forms— (paying damages

the value of the benefits conferred) and specific restitution (an order in equity to restore a particular

object to the rightful party). Damages are preferred, as are all remedies at law.

Because multiple measures of damages are possible, it can be challenging to determine the value of the

benefit conferred on the party. Here is an example of some of the measures:

Net Enrichment. How much the aggrieved party’s wealth has been increased measured by

oThe appraised value of the construction or other material retained by the aggrieved party,

oThe amount by which the value of the aggrieved party’s property has been increased, or

oThe value of the retained services to the aggrieved party.

Cost of the services provide. What it would cost to the aggrieved party to purchase the retained

services on the open market (quantum meruit).

Pro rata portion of the contract price.

In practice, “net enrichment” furnishes a lesser amount that “cost of services” or “pro rata contract price”

since the market and contract prices almost always include profit for the performing party, but that profit

is often not included in measuring the value obtained or retained by the aggrieved party.

Damages for the Party Who Materially Breaches

A party who substantially performs is entitled to enforce the contract and therefore obtain the contract

price, albeit reduced by the damages owed the non-breaching party for uncompleted performance. But if

the payee does not achieve substantial performance and is in material breach, they are not entitled to sue

under the contract to receive any portion of the contract price.

However, the case of Blanton v. Friedberg quantum meruit , the court found the measure of recovery for is

the reasonable value of the performance and recover is undiminished by any loss which would have been

incurred by complete performance. While the contract price may be evidence of reasonable value of the

services, it does not measure the value of the performance or limit recovery. Rather, the standard for

measuring the reasonable value of the services rendered is the amount for which such services could have

been purchased from one in the PL’s position at the time and place the service was rendered.

Damages for the Party Who is Prevented from Performing

A party who is prevented from performing may recover in . The measure for recovery of quantum meruit

quantum meruit is the reasonable value of the performance…and recovery is undiminished by any loss

which would have been incurred by complete performance. The standard for measuring the reasonable

value of the services rendered is the amount for which such services could have been purchased from

one in the PL’s position at the time and place the services were rendered.

Agreed and Liquidated Damages

Given the uncertainties surrounding the measurement of damages, parties may agree upon particular

remedies, including damages, that will be owed upon any breach or a specific kind of breach.

Rule & Policy: In Wassenaar v. Panos the court examined the validity of a stipulated damage clause,

finding that it will be upheld when it is reasonable. This test is a compromise reached by two competing

viewpoints towards the clause: those in favor (the avoidance of uncertainty, demonstrating the intent of

the party, advancing judicial economy and freedom of contract) and those not in favor (public law not

private law should define the remedy, unfairness in bargaining). It attempts to balance the logical divide

inherent in this issue. There are three factors to this test:

Did the parties intend to provide for damages or for a penalty?

oGenerally discarded by the courts, because subjective intent has little bearing on whether

it is objectively reasonably.

Is the injury caused by the breach one that is difficult or incapable of accurate estimation at the

time of contract of both the time of contracting and the time of the breach.

oThe “difficulty of ascertainment” test is generally viewed as helpful in assessing the

reasonableness of the clause. The greater the difficulty of estimating or proving damages,

the more likely the stipulated damages will appear reasonable.

Are the stipulated damages a reasonable forecast of the harm caused by the breach?

oCourts test the reasonability of the party’s forecast as they test the “difficulty of

ascertainment” by looking at the stipulated damages clause from the perspective.

Although courts have frequently said that the reasonableness of the stipulated damages clause must be

judged as of the time of contract formation (the prospective approach) and the amount or existence of

actual loss at the time of breach or trial is irrelevant, except as evidence helpful in determining what was

reasonable at the time of contracting (the retroactive approach).

Punitive Damages

Courts rarely award punitive damages in a contracts case. Breaking a contract is not considered to be “bad

behavior.” Even a willful breach should simply result in compensation for the aggrieved party. However,

the exception to this rule may be made when the court wishes to deter the DF and others from engaging in

similar behavior.

The majority rule is that punitive damages may be awarded when the breach of contract is also an

independent tort.

The court of Romero v. Mervyn’s found punitive damages. The court first looked to the rules for punitive

damages in contract cases not involving insurance, punitive damages may be recovered for breach of

contract when the DF’s conduct was malicious, fraudulent, oppressive, or committed recklessly with a

wanton disregard for the PL’s rights. Each of the terms listed, standing alone, would support an award of

punitive damages.

Malice is an intentional doing of a wrongful act without just cause or excuse. This means that the DF not

only intended to do the act which is ascertained to be wrongful, but that he knew it was wrong when he

did it. This definition also encompasses fraudulently and oppressively. The term wanton suggests

wrongfulness when the evidence demonstrates conduct committed without concern for the consequences,

rather than intentionally, and connotes an utter indifference to or conscious disregard for the rights of

others.

The general rule is that punitive damages should not be awarded. However, this rule is not absolute. There

are several longstanding exceptions:

Fraudulent breach of contract.

Independent torts.

When elements of fraud, malice, gross negligence, or oppression are also present.

Intentional wrong, insult, abuse or gross negligence as to consist of a separate tort.

Policy: Overreaching, malicious, or wanton conduct such as targeted by these rules is inconsistent with

legitimate business interests, violates community standards of decency, and tends to undermine the

stability of expectations essential to contractual relationships. When this is the case, it is appropriate to

allow the jury to determine whether “the public interest will be served by the deterrent effect punitive

damages will have upon future conduct.”

NOTE: The amount of the award of punitive damages is not so plainly unrelated to the injury or actual

damages, such as to raise a question of sympathy, passion, and prejudice as a matter of law.

Equitable Remedies: the “Extraordinary Remedies”

Equitable remedies are reserved for instances in which there is no adequate remedy at law (meaning

damages are inadequate) and PL would suffer irreparable harm in the absence of equitable relief. There

are three equitable remedies considered in this class: specific performance, prohibitory injunction, and

specific restitution.

Specific Performance

Specific performance is a remedy by which the court orders a party to perform the unfulfilled promises in

the contract, rather than ordering payment of the value of those performances; the other party receives

actual performance rather than damages representing the value of performance.

Specific performance is most common as a remedy in real estate contracts, because real estate is

understood to be unique in most cases; receiving money in lieu of the land is not considered adequate.

Grants of specific performance and other injunctive relief are within the discretion of the court, guided by

a collection of factors and general policies of equity and fairness.

Restatement of Contracts. § 355. Punitive Damages.

Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is

also a tort for which punitive damages are recoverable.

NOTE: Contract & Torts are argued in alternates.

The court will grant specific performance when the it will require minimal supervision (balanced with

public interest), it is possible to determine with reasonable certainty the duty of each party and the

conditions under which performance is due, and damages in law are not adequate.

A remedy at law adequate to defeat the grant of specific performance “must be as certain, prompt,

complete, and efficient to attain the ends of justice as a decree of specific performance.”

Prohibitory Injunction

A court may issue a which forbids a party from taking particular action in violation negative injunction

of the contract. As with other forms of equitable relief, an injunction cannot be granted unless the PL will

suffer irreparable harm without the injunction and there is no adequate remedy at law.

Courts of equity historically refused to order an individual to perform a contract for personal service.

Where an employee refuses to render services to an employer in violation of an existing contract, and the

services are unique or extraordinary, an injunction may issue to prevent the employee from furnishing

those services to another person for the duration of the contract. Even where there is an express

anticompetitive covenant, it will be enforced only if it satisfies certain established requirements:

necessary to protect trade secrets, customer lists or good will of the employer’s business, or special harm

because of the unique nature of the employee’s service.

A non-compete clause must be reasonable. Three factors will be considered in reasonableness: trade

secrets, time (no more than 3 years), and geography.

Specific Restitution

Third-Party Rights and Duties

Assignment of Rights and Delegation of Duties

In most contracts, a third party can gain rights under a contract by obtaining an “assignment of rights”

from the contract. The assigning party is the “assignor,” and the receiving party is the “assignee.” The

party whose payments are assigned is the “obligor” (the person who is obligated to perform). The

assignor is an “obligee” (the person who is obligated to perform). Contract performance is then owed to

the assignee, not to the original obligee.

Competing policy concerns underlie common law and statutory response to assignment and delegation.

On one hand, the original contract parties have an interest in the stability of their contract rights and

duties. If a right to receive performance is assigned, the obligor may be faced with somewhat different

performance responsibilities. Likewise, if a responsibility to perform duties is delegated, the obligee may

receive different performance than what was originally promised. On the other hand, contracting parties

and others have a strong interest in the “free alienability” of contract rights and duties—the ability to

transfer those rights and duties to others, which makes them more valuable and provides more flexibility

to contracting parties. The law in this area seeks to balance those competing policies.

A contract cannot be enforced by or against a person who is not a party to it, but there are circumstances

under which either of the contracting party may substitute another for himself in the rights and duties of

the contract without obtaining the consent of the other party to the contract. Under the circumstances of

this contract the right and duties were of so personal a character that the rights of Frederick cannot be

assigned nor his duties be delegated without defeating the intention of the parties to the original contract.

When rights arising out of contract are completed with obligations to be performed by the contractor, and

involve such a relation of personal confidence that it must have been intended that the rights should be

exercised, and the obligations performed by him alone, the contract cannot be assigned without consent.

Common Law Approach

The court of Sally Beauty Co. v. Nexxus Products Co. decided the case based on the UCC and common

law approaches. Texas applies the “ ” test to determine whether the UCC applies to a dominate factor

given contract or transaction: was the essence of or dominant factor in the formation of the contract the

provision of good or services? Distributor contracts are typically more involved, but courts apply the

UCC nonetheless because the sales aspect in such a contract is predominant. The UCC sanctions

delegated performance except where delegation would be unsatisfactory to the obligee: “a party may

perform his duty through a delegate unless otherwise agreed to or unless the other party has a substantial

interest in having his original promisor perform or control the acts required by the contract.”

However, the court adopted a new rule: “The duty of performance under an exclusive distributorship may

not be delegated to a competitor in the market place—or the wholly-owned subsidiary of a competitor—

without the obligee’s consent.” The policy behind this is that the DF should not be required to accept the

“best efforts” of Sally Beauty when those efforts are subject to the control of their competitor. It is

entirely reasonable that DF should conclude that this performance would be different than what it

bargained for. As the court noted, “it defies common sense to require a manufacturer to leave the

distribution of its products to a distributor under the control of a competitor or potential competitor.”

Judge Posner disagreed. In his dissent, he argued against a fundamental aspect of this discussion: whether

or not it was actually assigned. He argued instead that this was a merger, and the general rule of a change

in corporate form—including merger—does not in and of itself affect contractual rights and obligations.

He questioned the harm that DF would actually suffer. He found instead that DF jumped the gun, and

should have demanded assurances, such was their right under UCC § 2-210(5).

UCC and Restatement Provisions

Many jurisdictions still retain their common law rules, but some jurisdictions have adopted the

Restatement’s approach, which tracks some of the rules in UCC § 2-210. (See Rules Sheet)

Additional Issues

A variety of Additional issues may arise with respect to assignment and delegation, including:

Whether the owner of a contract right or the obligor has manifested the intent to assign contract

rights or delegate contract duties;

oThe intent of the contracting party to make an assignment or delegation is judged as are

other questions of intent, from all the circumstances including word and conduct.

oTo make an effective assignment of rights, the party must manifest the intent to make an

assignment.

oExample: a promise to pay later does not transfer the rights, as it does not immediately

transfer the right to collect.

Whether an assignment or delegation can be revoked by the party making it;

oAn assignment or delegation is usually made as part of a contract agreement. In such

cases, the assignment is a term in a contract supported by consideration and the

assignment cannot be revoked.

oIf it is made as a gift, it is subject to typical contract law regarding gifts, or in other

words, it is revocable until “delivered.” Though the analysis is complicated by the fact

that the gift is an intangible assignment or rights.

What defense are available to the assignee or delegate based on the original contract; and

oThe assignee stands in the shores of the assignor, if the assignor could have raised the

defense, so can the assignee.

oSome contracts contain waivers of defenses if the contract is assigned. In which case,

there may be some form of statutory or common law intervention to protect the assignee,

however, this varies by jurisdiction.

What rights and liabilities remain for the original contracting parties after the transfer.

oIf an assignment is made, the assignor no longer has the right to receiver performance

owed under the original contract, by definition, that right now belongs to the assignee.

oThis may be complicated by additional performance by the original parties. Whether the

obligor remains liable after such performance depends on whether proper notice of the

right assignment was received by the obligor.

Third-Party Beneficiaries

Common Law Roots of the Doctrine

Generally, where one person makes a promise to another for the benefit of a third person, that third person

may maintain an action upon it. This is often, but not exclusively, applied in trustee cases.

Generally, privity is necessary to the maintenance of an action on the contract. The consideration must be

furnished by the party to whom the promise was made. The contract cannot be enforced against the third

party, and therefore cannot be enforced by him. On the other hand, the right of the beneficiary to sue on a

contract made expressly for his benefit has been fully recognized in many American jurisdictions.

In New York, in the case of Seaver v. Ransom, the court recognized four third parties who could enforce

the contract.

In cases where there is a pecuniary obligation running from the promisee to the beneficiary.

In cases where the contract is made for the benefit of the wife, affianced wife, or child of a party

to the contract.

In public contract cases where the municipality seeks to protect its inhabitants by covenant for

their benefit.

In cases where, at the request of a party to the contract, the promise runs directly to the

beneficiary although he does not furnish consideration.

NOTES: It must be clear that the parties intended to benefit the 3 party.

Third-Party Beneficiaries in the Restatements

Under the approach of Restatement (Second) § 302, if recognition of third-party benefits is appropriate

and either the duty owed or the intent to benefit test is met, the third party can recover as an “intended

beneficiary.” For third parties to recover, there is no need to satisfy both requirement.

A contract, made expressly for the benefit of a third person, may be enforced by him at any time before

the parties thereto rescind it. This excludes incidental or remotely benefited persons. A person cannot be a

creditor beneficiary unless the promisor’s performance of the contract will discharge some form of legal

duty owed to the beneficiary by the promisee. No intention can be imputed to the Government as

promisee.

Intent to Benefit Test: Unless otherwise agreed between promisor and promisee, a beneficiary of a

promise is an intended beneficiary if recognition of a right to performance in the beneficiary is

appropriate to effectuate the intention of the parties and either

(a) the performance of the promise will satisfy an obligation of the promisee to pay money to the

beneficiary; or

(b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the

promised performance.

Duty Owed Test: A promise in a contract creates a duty in the promisor to any intended beneficiary to

perform the promise, and the intended beneficiary may enforce the duty.

LAW 506 LIBERTY UNIVERSITY Contracts II - Exam Analytical Framework_SUMMARIES_2019.pdf

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