Contracts II - Colombo - Spring 2008

CONTRACTS II OUTLINE
PROF. COLUMBO - SPRING 2008
CONTENTS
Contents.......................................................................................................................................... 1
Avoidance of Contracts .........................................................................................................3
Fraud...........................................................................................................................................3
Duress or Undue Influence...........................................................................................................5
Unconscionability ........................................................................................................................6
Illegality/Public Policy ............................................................................................................. 7
Parol Evidence Rule .............................................................................................................. 9
Interpretation ....................................................................................................................11
Duty of Good Faith .............................................................................................................12
Warranties .........................................................................................................................13
Express...................................................................................................................................... 13
Implied....................................................................................................................................... 14
Limitation on Warranties...........................................................................................................14
Conditions .........................................................................................................................14
Express...................................................................................................................................... 14
Excuse of Express Conditions....................................................................................................15
Substantial Performance............................................................................................................16
Constructive (IMPLIED) Conditions.............................................................................................17
Impracticability .................................................................................................................. 18
Frustration of Purpose ......................................................................................................... 20
Anticipatory Repudiation (aka Anticipatory Breach) ..................................................................21
Remedies ..........................................................................................................................22
Basics........................................................................................................................................22
Compensatory Damages...........................................................................................................24
Equitable Relief.......................................................................................................................... 26
1 |Contracts II Outline
Liquidated Damages..................................................................................................................28
Limitations of Damages............................................................................................................. 29
UCC Rules for Remedies.........................................................................................................30
Third Party Interests ............................................................................................................32
Assignments.............................................................................................................................. 32
Delegations................................................................................................................................ 33
Third Party Beneficiaries............................................................................................................ 34
AVOIDANCE OF CONTRACTS
• Avoidance protects the party that has a right to get out of the contract.
• Voidable: The contract will be valid until the party harmed objects to it.
• Policy: Courts don’t want to force people to remain bound to contracts that were
entered into under fraud or duress because it takes away the parties’ freedom.
FRAUD
• RULES:
 If Π acceptance is induced by fraud then it is voidable.
 Failure to disclose a material fact generally does not constitute fraud except when
(1) there’s a pre-existing duty to disclose and/or (2) circumstances make the non
disclosure affirmatively misleading. (Laidlaw v. Organ)
 Generally you can only have a contract avoided for the misrepresentation of a
material fact.
 EXCEPTIONS:
• Expert Opinion;
• Equal Opportunity (when there’s more access to facts by one party);
• Fiduciary Relationship;
• Opinion is part of an artifice or trick. (Vokes v. Arthur Murray, Inc)
 ELEMENTS of nondisclosure:
 Party has to be aware and;
 It has to be a material fact.
• It’s up to the jury to determine whether it was reasonable for the party not to
disclose. (Hill v. Jones)
 Regarding writing: If you know the other party’s misinterpreting a term in the
contract you must correct them.
 If you affirmatively lie about anything (even something trivial) then it will
constitute fraud.
 A vendor has an affirmative duty to disclose material facts where:
 Disclosure is necessary to prevent a previous assertion from being a
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;
 Disclosure would correct a mistake of the other party as to the contents or
effect of a writing, evidencing or embodying an agreement in whole or in part;
or
 The other person is entitled to know the fact because of a relationship of trust
and confidence between them.
(Hill v. Jones and R2d § 161)
• CASES:
 Laidlaw v. Organ (p. 498): Facts: Buyer(Organ) agreed to buy hogsheads from
Seller(Laidlaw). Laidlaw asked Organ if there was any news that would change the
price or value of the tobacco. Organ withheld the information that caused the
value to increase from 30 to 50 per cent. Laidlaw delivered the tobacco and then a
few day s later took the tobacco back. Laidlaw argues that the contract is voidable
because of fraud. Holding: Δ did not have to communicate the information he
knew about the price dropping to the Π, especially since the information was made
public in a handbill – therefore, Π had access to it.
 UPSHOTS:
• Fraud allows the defrauded party to avoid a contract.
• Making a material misrepresentation of fact would constitute fraud.
• Failure to disclose a material fact generally does not constitute fraud. Two
Exceptions: (1) Pre existing duty to disclose and (2) Circumstances make the
non disclosure affirmatively misleading.
 Vokes v. Arthur Murray, Inc (p. 500): Facts: Π widow taking dance lessons. Δ
kept telling her she was getting better (when she wasn’t) so that shed continue to
buy more dance lessons. She ended up spending $31g. Holding: Π wins. Rule: “A
statement of 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.”
 UPSHOTS:
• Argument of fraud was expanded to cover opinions.
• Disingenuous can be the basis of avoidance actions in certain circumstances
(exceptions above).
• Whole truth doctrine: Once you start saying things to people you create a
duty to tell the whole truth.
 Hill v. Jones (p. 507): Facts: Hills bought house from Jones. Π asked if ripple in
wood floor was termite damage; Δ said it was from water damage. So the Π’s had
someone come in and do an inspection. The inspection report said that there was
no visible evidence of infestation. Jones never told them of previous termite
damage. Holding: Δ had a duty to disclose their knowledge of the previous
termite damage.
• R2d § 164 When a Misrepresentation Makes a Contract Voidable
 (1) If you get someone to enter into a k by telling them something fraudulent or u
tell someone something that’s not true and its material (even if its accidental) then
the other party can avoid the k if they were justified in relying on that
representation.
 (2) Even a 3rd party can get out of a k if that 3rd party relied on your statements-
UNLESS the party that the misrepresentation was made to has started to rely on
the k.
• R2d § 161 When Non-disclosure Is Equivalent to an Assertion
DURESS OR UNDUE INFLUENCE
• ELEMENTS of DURESS:
 Objective – wrongful threat.
 Subjective – take over someone’s will.
• RULES:
 Test of whether there is duress: When the parties wrongful threat overcomes
the will of the other party of the contract the court is to look at whether or not in
fact the party complaining about the contract was subjectively overcome by the
threat. (Rubenstein v. Rubenstein)
 Wrongful: the threat is so oppressive under given circumstances as to constrain

one to do what his free will would refuse.
 Moral compulsion or psychological pressure may constitute duress, if, thereby,

the subject of the pressure is overborne and he is deprived of the exercise of his
free will. (Rubenstein v. Rubenstein)
 Economic distress may be proved when
 One party threatens to breach a contract; and
 That threat overcomes the will of the other party because
• The threatened party cannot recover from another source; and
• The ordinary contract remedies would be inadequate.
(Austin Instrument, Inc. v. Loral Corp.)
• CASES:
 Rubenstein v. Rubenstein: Facts: Wife tells ex to transfer all his assets to

property or she would poison him with ARSENIC. Consideration- she will take care
of the kids. Holding: Ex- husband wins.
 UPSHOTS:
• Duress: any wrongful act or threat that overcomes the free will of a party.
• Duress makes a contract voidable.
• Psychological pressure can constitute duress.

• Objective prong: wrongfulness. Subjective prong: freewill was overcome.
 Austin Instrument, Inc. v. Loral Corp: Facts: Loral has k with navy. Loral
subcontracted with Austin for parts. At opportunity for another k with Austin,
Austin said they would only continue to deliver under the 1st k if Loral accepted
their higher bid. Loral had to have the parts to navy by a certain time and wouldn’t
be able to do that if Austin didn’t finish delivering under the original k. Holding:
Loral wins because they only agreed to the price increases in consequence of the
economic duress employed by Austin.
 UPSHOTS:
• Case of economic distress.
UNCONSCIONABILITY
• There is a gross unequal bargaining power which leads to terms that are so
shockingly one sided and unfair that the court may be willing to strike the contract
down.
• RULES:
 Heart of the test is whether the term or contract “shocks the conscience.”
 Look for two elements to find something unconscionable:
 Terms of the contract are substantially one sided and;
 Procedural flaw.
•Hidden term
•Legalese or fine print that the other party wasn’t aware of
• Grossly unequal bargaining power
 In order for something to be unconscionable it must be both procedural and
substantively unconscionable. *[Columbo says this is best law]
 Procedural unconscionability looks to how the contract was negotiated and how
the offer and acceptance process played out. (Ferguson v. Countrywide Credit
Industries, Inc.)
 Ct has to examine unconscionability at the time the contract is made!
• CASES:
 Williams v. Walker-Thomas Furniture Co.: Facts: Δ filing complaint for Π

defaulting on payments. When she defaulted the furniture company tried to
repossess the items. Fine print in agreement said that payments are spread out to
all diff items (so essentially there’s always a balance on each item until total
balance is paid.) – Illustration of only requiring substantive element. Holding:
Cases were remanded to see whether the contracts were unconscionable.
 UPSHOTS:
• Unconscionability is a disfavored doctrine.
• Some courts will invoke unconscionability doctrine when (1) bargaining

power is grossly unequal and (2) the terms of the contract are unreasonably
favorable to one party.
• “Unconscionability has generally been recognized to include an absence of

meaningful choice on one of the parties together with contract terms that
are unreasonably favorable to one of the parties.” (p. 539)
 Jones v. Star Credit Corp.: Facts: Plaintiffs agreed to buy a home freezer unit
for $900 from a salesman representing Your Shop At Home Service, Inc. With the
addition of the time credit charges, credit life insurance, credit property insurance,
and sales tax, the total came to $1234.80. Plaintiffs have paid $619.88. The
defendant claims that with additional credit charges the plaintiffs owe another
$819.81. The freezer unit was only worth $300 at time of purchase.
 Ferguson v. Countrywide Credit Industries, Inc.: Facts: Ferguson signs an

employment contract that has an arbitration clause. She wants to file a sexual
harassment suit against her boss and the company but is told she has to do so in
arbitration. She argues the arbitration agreement is unconscionable. Holding: The
arbitration clause is unconscionable and therefore unenforceable.
 UPSHOTS:
• Good summary of what procedural and substantive unconscionability is.
• Need evidence of both in order to strike down a contract as unconscionable.
• UCC § 2-302
 Added into the UCC so that the courts knew that they had the ability to strike down
a contract on the grounds of it being unconscionable.
ILLEGALITY/PUBLIC POLICY
• RULES:
 A court can strike down the contract even if the parties don’t raise the issue – sua
sponte.
 A court will not enforce an illegal contract. (Sinar v. LeRoy)
 If a covenant not to compete can be reasonably altered to render it enforceable,
then the court shall do so unless it determines the covenant was not drafted in
good faith. (Data Mgt., Inc v. Greene)
• CASES:
 Sinar v. Le Roy: Facts: Π wants to recover $450 he gave to Δ to get him an

illegal beer license. Holding: The contract is unenforceable because it was for an
illegal purpose.
 UPSHOTS:
• A court will not enforce an illegal contract.
• If serious illegality is involved the court can raise the issue sua sponte.
 Data Mgt., Inc. v. Greene: Facts: Δ was fired but there was a broad covenant
not to compete clause. General rule is that overbroad “covenant not to compete”
clauses are against public policy. Holding: Remanded to trial court to determine
whether there was good faith and whether the covenant can be reasonably
altered.
 Different ways to approach an overly broad covenant to compete:
• To just hold it unconscionable and therefore, unenforceable.
• “Blue pencil rule”: If the words in an overbroad covenant not to compete can
be deleted in such a way as to render it enforceable then the court may do
so.
• “Rule of reasonableness”: If it can be reasonably altered to render it

enforceable, then the court shall do so unless it determines the covenant
was not drafted in good faith.
♦ This is the approach this court takes.
 UPSHOTS:
• An overbroad covenant not to compete violates public policy.
• There are multiple factors a court will look at when determining whether a
covenant not to compete is overbroad. –Pg. 594
• The typical remedy is to reformulate the covenant so as to make it

acceptable, UNLESS good faith is lacking.
• R2d § 178 When a Term is Unenforceable on Grounds of Public Policy
 Something is unenforceable if it is something that legislature provides that

something is unenforceable or the interest in enforcing the contract is clearly
outweighed by a public policy against the enforcement of such terms.
PAROL EVIDENCE RULE
• The existence of a final, complete, written agreement will prevent the parties from
introducing any evidence of any prior or contemporaneous understandings that
would vary or contradict the terms of the written agreement.
• Policy: encourages good contract drafting.
• ELEMENTS:
1. Final: the document that the parties going to assert is the final contract you
have to proof to the ct that this is what the parties intended to be the final
contract.
2. Complete/ Integrated: The parties must have intended for it to completely
cover all the grounds of negotiation between the two parties. “It is fully
integrated”- this means that the written agreement integrates everything that
the parties talked about.
a. Partially integrated: if the ct determines that the parties decided to
just put a specific part down in writing, but that they were comfortable
leaving the rest for open discussion.
b. If the court determines it is complete then NO more EVIDENCE can
come in.
c. If the court determines that is only partially integrated- you can add
evidence as long as it doesn’t change the terms of the agreement.
 Test: “Whether the provision is one that the parties would ordinarily be
expected to include in the writing” If yes, then the contract is complete. If no,
then the contract is partially integrated and evidence may be admissible.
3. Written
** If 1-3 are fulfilled then you CANNOT introduce any more evidence** If any of the
three are not met then you CAN introduce more evidence**
THE EVIDENCE THAT CAN BE INTRODUCED IS:
• Any prior or contemporaneous understandings: Bars evidence of any
agreements that were discussed before the contract was entered into – as long as
they don’t contradict what is in the written agreement.
 Only need one element (1-3) to be missing in order to allow evidence to come
in!
• EXCEPTIONS (when the agreement is fully integrated ):
 You can introduce evidence that can invalidate the contract (evidence of fraud,
illegality, or duress).
 You can introduce evidence to show that there was some condition in place that
needed to be fulfilled first before the contract can be effective.
 Can introduce evidence that shows that a term needs to be clarify or interpret a
term.
 Allowed to look at evidence b4 the date the contract was made to see determine
whether the K is partially or completely integrated.
• RULES:
 The parol evidence rule does not apply when there are two totally distinct
agreements. (Mitchill v. Lath pg. 615- orange highlight)
• CASES:
 Mitchhill v. Lath: Facts: Ice house on farm. Conversation about how buyer of
farm will remove the ice house but then they didn’t. Π tried to show that there was
an additional promise to remove the ice house but that it just didn’t make it into
the contract. Holding: Π cannot introduce any evidence.
♦ Π is arguing that the issue about the house was partially integrated. 2 ways to
resolve this problem: (1) Minority position: Look at the contract itself – how
specific; look for integration clause (2) Majority position: At a minimum look at
written agreement and consider alleged side agreement that is being attempted
to be enforced- reasonable person standard.
♦ UPSHOTS:
 This case supplies a test for ascertaining whether a contract is fully or

partially integrated. Test: “Whether the provision is one that the parties
would ordinarily be expected to include in the writing” If yes, then the
contract is complete. If no, then the contract is partially integrated and
evidence may be admissible.
 Wholly independent contracts are not subject to parol evidence rule analysis.
 Masterson v. Sine: Facts: Mastersons sold property and held on a provision to

repurchase the property. They have a right to buy it back at an option. The
Masterson’s went bankrupt and the bankruptcy agent wants to buy back the land
to pay the creditors. The Masterson’s claimed that even though the contract said
that, they only did that so that the property was kept within the family. Holding:
The trial court erred in not including the evidence to show that the parties agreed
to the option so that the property would be kept in the family, because the
contract was not integrated.
♦ UPSHOT:
 Example of the most Corbinesqe approach- the most generous approach to

determining whether something is integrated or not. It allows a huge amount
of evidence to show if something should have been incorporated or not
 Luther Williams Jr., Inc. v. Johnson: Facts: Contract for financing work on
purchase of a home. Contract didn’t say anything about financing but contained a
very broad integration clause. Holding: Ct said the evidence CAN come in
because financing was a condition. The ct looks at the integration clause as
merely evidence that it was intended to be integrated but it really wasn’t.
10 | C o n t r a c t s I I O u t l i n e
♦ UPSHOTS:
 Parol evidence rule doesn’t bar evidence regarding conditions to written

contracts.
 Some courts don’t consider integration clauses as conclusive of integration.
INTERPRETATION
• Plain Meaning Rule (Majority): A judge looks at the contract and if the language has
plain meaning then that’s what the contract means and the court will not look to any
other evidence to explain what the contract means.
 Benefits: Encourages clear & more accurate contract drafting. Court wants to
promote freedom of contract. Encourages predictability. Beneficial for judicial
economy.
 Cons: Might interfere with the intent of the parties. Each judge has different
meaning of things – “what one judge calls soda the other calls pop.”
• Minority Rule: Plain meaning is just a starting point but additional information can
come in to sway a judge one way or another.
 Legal Rules
 Legal gap Fillers
• Contra Proferentem- court will construe the contract against the drafter.
• RULES:
 Allowed to bring in extrinsic evidence to demonstrate that something is

ambiguous. If you fail to show that there is ambiguity then the court will apply the
plain meaning approach. (Pacific Gas & Electric Co. v. G.W. Thomas Drayage &
Rigging Co.)
 Π has the burden of proof to show that his argument is right. (Frigaliment
Importing Co. v. B.N.S. Int’l Sales Corp.)
• CASES:
 PG&E Co. v. G.W. Thomas Drayage & Rigging Co.: Facts: Π hurt on the job
but there was an indemnity clause. Δ says the indemnification clause was only
meant to apply to 3rd parties injured. Dispute over whether the indemnification
clause applies to only third parties or the Π and third parties. Holding: Since the
clause was reasonably susceptible to the meaning condemned by the Δ, the
offered evidence was also admissible to prove that the clause had that meaning
and did not cover injuries to plaintiff’s property. Rule: Courts should place
themselves into the positions of the parties at the time the plaintiff was made.
Evidence to prove parties’ intentions includes testimony as to the circumstances
surrounding the making of the agreement, including the object, nature, and
subject matter of the writing.
 UPSHOTS:
• Traynor’s Rule: Extrinsic evidence is admitted to disprove what appears to

be the existence of a plain meaning interpretation.
 Frigaliment Importing Co. v. B.N.S. Int’l Sales Corp.: Facts: What does
“chicken” mean? The ct looked at pretty much all the evidence he could find to
determine what chicken meant. Holding: The ct sides with the Δ saying that
chicken wasn’t limited to the higher quality chicken.
• R2d § 202
• R2d § 203
• R2d § 204
DUTY OF GOOD FAITH
• Three Categories where good faith comes up:
 (Most common) To help interpret the terms of the contract, especially regarding
those terms that have to do with discretion. The exercise of discretion has to be
reasonable.
 Issue of performance – you do something that makes it impossible/difficult for

the other party to do their work.
 (Controversial and rare) Reading good faith as an independent clause in a contract.
• RULES:
 Good faith can’t be negotiated around but the parties can help define it in their
contract. (Centronics Corp. v. Genicom Corp.)
• CASES:
 Centronics Corp v. Genicom Corp.: Facts: Contract between Π seller and Δ

buyer that had an arbitration clause. Dispute over funds and the money must be
put in an escrow until resolution of dispute. Π wants a portion of the money b4 the
end of the dispute and claims that that portion is not part of the money in dispute.
Issue: Is there an implied duty of good faith that requires Genicom to release the
money to Centronics? Holding: There is no duty here.
 UPSHOTS:
• The duty of good faith does not oblige a party to do something that is not
required or contemplated by the contract.
• Good faith serves to limit the discretion of a party in exercising his or her
discretionary contract rights.
 Hillesland v. Federal Land Bank Association of Grand Forks: Facts: Π was

CEO of the bank. A client of the bank is selling the land he hooks his son up with
the client to purchase the land. He was terminated for doing this. Π claims Δ had
no cause to fire him. Δ says he had an employment at will. Holding: Δ wins.
 UPSHOTS:
• Some courts will interpret “at will” really at will for no cause.
• Other courts will apply the good faith duty to at will employment contracts to
exclude malicious firing or firing against public policy.
• UCC § 1-203
 Every contract or duty within this Act imposes an obligation of good faith in its
performance or enforcement.
• R2d § 205 Duty of Good Faith and Fair Dealing
WARRANTIES
EXPRESS
 UCC § 2-313
 Affirmation of fact
 Any description, sample, or model
 “An affirmation merely to the value of the goods or a statement purporting to

be merely the seller’s opinion or commendation of the goods does not create a
warranty.”
• “Puffery” doesn’t create a warranty.
• The more general the more outrageous the promise the more likely it won’t
be considered a warranty.
• The more specific, more credible, then it will be justified in saying that it was
a warranty.
 Not limited to merchants.
IMPLIED
 UCC § 2-314 Merchantability
 Can be modified
 Has to be able to be used for an ordinary purpose.
 Only applies to merchants**
 UCC § 2-315 Fitness for Particular Purpose
 The buyer and seller knows or should have known that the product is going
to be used for a particular purpose.
 There is only liability if the seller has knowledge of how buyer intends to use the
product.
 Not limited to merchants.
LIMITATION ON WARRANTIES
 UCC § 2-316 Exclusion or Modification of Warranties
 You cannot put a limitation on an express warranty.
 Language must mention merchantability.
 Language must be very clear.
 Make sure you comply with section 2.
 Terms such as “As is”, “with all faults”
 Mostly applies to warranty of merchantability.
CONDITIONS
EXPRESS
 If there’s a condition in a K that says party A must do something before B does

what they promised to do, and party A doesn’t satisfy that condition there’s no
breach of K but it lets B off the hook.
 How to distinguish between condition and promise?
 “If” usually means a condition.
 A condition is when an event must occur before performance of a promise comes
due.
 RULES:
 Conditions will be strictly satisfied - you have to actually fulfill the condition
completely exactly as requested. (Dove v. Rose Acre Farms, Inc.)
An express condition need not actually be clearly articulated in a contract it will


be inferred if the terms of the contract demonstrate that the parties intended
for something to occur before a corresponding duty would attach. (Wal-Noon
Corp v. Hill)
 CASES:
 Dove v. Rose Acre Farms, Inc.: Facts: Π signed up for incentive program
that if he works for 10 weeks without coming late or missing work he will get a
bonus. Π gets sick during the last week and misses work- but he already
completed his work before getting sick. Δ says no bonus. Holding: Π did not
perform his part of the contract so he cannot sue Δ for not fulfilling its part.
• UPSHOT:
♦ Strict performance is necessary to satisfy an express condition.
 Wal-Noon Corp. v. Hill: Facts: Π leased building from Δ and Π kept repairing
the roof then got it replaced. Π later read the lease and saw that the Δ agreed
to fix all repairs but that it will not fix repairs that need to be made because of
negligence or improper use by the Π. K did not explicitly say that Π had to give
notice. But it said that if notice is given it has to be given sufficiently- i.e. in
writing. Holding: The only way to interpret the clause is that this is a condition
precedent. The court will read into the contract a requirement that Π notified Δ
of any damage to the roof and unless that notification occurs Δ’s obligation to
repair the roof doesn’t attach. The court concludes there’s no duty to
reimburse.
 R2d § 224 Condition Defined

 “A condition is an event, not certain to occur, which must occur, unless its non-
occurrence is excused, before performance under a contract becomes due.”
EXCUSE OF EXPRESS CONDITIONS
 Ways to excuse express conditions:
 If the condition is not a material part of the agreed exchange it can be excused
if failure to excuse it would result in disproportionate forfeiture.
• Look at intentionality.
• This is the substantial performance doctrine.
Waiver of the party that benefits from it.
• Definition of Waiver: The intentional relinquishment of a known right. It is
voluntary and implies an election to dispense with something of value, or
forego some advantage which the party waiving it might at its option have
demanded or insisted upon. (Clark v. West)
 Unconscionable or against public policy.
 Substantial Performance
 CASES:
 Clark v. West: Facts: Contract to write a book for Δ. A clause stating that Π
can’t drink. K was for $2 a page. If he doesn’t drink he’ll get $4 a page. Δ drinks.
Π says substantial performance. Holding: The stipulation as to the Π’s total
abstinence was a condition precedent. This is a condition because the purpose
of the contract was to make the book not to make Clark stop drinking.
• UPSHOTS:
♦ Express conditions can be waived.
♦ Consideration is unnecessary for the waiver to be effective.
 Ferguson v. Phoenix Assurance Co. of NY: Facts: Contract covered losses
from safe burglaries committed by force and violence (for public policy reasons
to prevent recovery for inside jobs). Condition in the contract that stated that
you have to show evidence of force on all doors. Holding: The contract is
excused because it is against public policy - it is a public policy that insurance
companies pay when there is a burglary.
• UPSHOT:
♦ Conditions, like contracts, generally are subject to public policy and
unconscionability analysis.
 R2d § 229 Excuse of a Condition to Avoid Forfeiture
 If the condition goes to the heart of the agreement the court will not excuse it
so easily.
SUBSTANTIAL PERFORMANCE
• RULES:
 The variation to the contract has to be trivial (non material) and innocent (good
faith) and cannot be due to gross neglect. (Jacob & Youngs v. Kent)
 Failure of a party to abide by an express condition will be excused if (1) it is
necessary to avoid disproportion forfeiture and (2) the failure was unintentional or
innocent and (3) the overall impact of this failure is immaterial or trivial to the
contract as a whole. (Jacob & Youngs v. Kent)
 The substantial performance doctrine will not save a party who has not satisfied an
express condition if the deficiency in question is “so pervasive as to frustrate the
purpose of the contract in any real or substantial sense.” (O.W. Grun Roofing and
Const. Co. v. Cope)
• CASES:
 Jacob & Youngs v. Kent: Facts: Contract to install pipes- contract for a specific
pipe. Only 40% was Reading pipe and 60% was a different manufacturer but same
quality. It would not be cost effective to rip out the pipes and replace them. Δ
didn’t pay because Π used the wrong pipes. Π suing for payment. Holding: Δ wins
because of substantial performance.
 O.W. Grun Roofing and Const. Co. v. Cope: Facts: Π contracted with Δ to
install a new roof- supposed to be uniform in color for $648. Turns out some of the
tiles were yellow. Π complained so Δ went back and replaced the yellow shingles-
but they weren’t “russet glow.” Π suing for damages of 1500 and to have a
mechanics lien set aside. Δ is suing for $648 and for foreclosure on the mechanics
lien. Holding: This isn’t substantial performance because there is disproportionate
forfeiture. It’s material- it was a contract for a roof and they got the roof wrong.
• R2d § 240 Doctrine of Divisible Contracts
• R2d § 241 Circumstances Significant in Determining Whether a Failure is Material
CONSTRUCTIVE (IMPLIED) CONDITIONS

• If you deem a condition to be constructive you can always argue substantial
performance.
• RULES:
 Conditions are presumed to be dependant unless otherwise specified. (Kingston v.
Preston)
 Failure of one party to perform discharges the duty of the counterparty to
perform.
 Types of Dependent Conditions:
• Concurrent: two conditions that can occur at the same time. Conditions that
have no ordering of time attached to them.
• Precedent: Condition that must come first.
• Subsequent: Condition that comes later.
• CASES:
 Kingston v. Preston: Facts: Δ is a salesperson and agreed to sell his business
but wants Π to pay him a monthly income for security. Δ claims that Π failed to
produce the security- failed to convince him that he was able to make the
payments so the Δ said he’s not going to give him his business. Holding: the
promise to provide security is a condition- and since Π failed to satisfy his
condition, Δ doesn’t have to satisfy his. And as such he can’t claim that he has to
give you his business.
 UPSHOTS:
• Turning point in the law which gave rise to the modern rule that promises in
a contract are presumed to be conditions of one another – as conditions
failure of one party to perform discharges the duty of the counter party to
perform.
• The presumption may be overcome by facts and circumstances that
demonstrate that the promises are truly independent of one another.
 Palmer v. Fox: Facts: Δ stopped paying because Π didn’t do the improvements
on the roads that he promised to do. Π sued for the remaining money plus interest.
Δ says the Π failed to cinderize and that was a dependent condition, so since Π
failed on his condition Δ doesn’t have to fulfill his condition. Δ says this is a
material breach – because it is a constructive condition and in order for Δ to get
out of performing Π’s breach must be material. Holding: Its material because it’s
obviously a big deal to a land owner whether their street is paved for not. The
court held that the conditions were concurrent.
 UPSHOTS:
• Demonstration of presumption the promises in contracts are dependent
conditions of one another.
• It also demonstrates the importance of identifying whether a condition is
precedent, concurrent, or subsequent.
• Demonstration that substantial performance- and not strict performance- is
all that is necessary to satisfy a constructive condition.
 R2d § 226 How an Event May be Made a Condition: An event may be made a
condition either by the agreement of the parties or by a term supplied by the
court.
IMPRACTICABILITY
• RULES:
 ELEMENTS:
 Impracticability
• Performance would be extremely and unreasonably difficult, expensive or
injurious.
 Fault
• It can’t be the aggrieved parties fault that performance of the contract is
impracticable.
 Assumption of Risk
• Unless the language or the circumstances indicate the contrary, there is no
explicit or implicit assumption of the risk in the contract.
 Basic Assumption
• Usually, if something is foreseeable, then its nonoccurrence is not a basic
assumption.
♦ EXCEPTIONS:
 When the risk was foreseeable but at the time of contracting it seemed
trivial but turned out not to be.
 Foreseeable but considered too remote.
 Common law: The parties are responsible for performing under the contract even if
it is no longer possible for them to perform. They must pay damages for failure to
perform. Nonperformance is considered a breach.
 Impossibility Rule: If something truly became impossible, the court would
excuse it.
 Impossibility rule has become the impracticability rule because impossibility is a
very high standard.
 Force majeure clause – a clause in a contract that says that in the event that the
parties cannot perform the promise, and addresses impracticability and assigns
one party or another the burden or dealing with that problem. [This goes to
assumption of risk]
• CASES:
 Taylor v. Caldwell: Facts: Music hall burns down in Great Britain. One party
wants to license the hall. Holding: Court concludes here that this is without the
fault of either party, therefore one of the prongs of impracticability is satisfied.
Given that this event was not foreseeable, the court here concludes that it was
impossible for this contract to be performed so the D was able to walk away from
the contract without having to pay damages
 UPSHOTS:
• When a contract is based on the existence of a certain person or thing,
destruction of that person or thing renders the contract void on grounds of
impracticability.
• This is an early articulation of the doctrine of impracticability which has
broadened over time.
 US v. Winstar: Facts: Winstar entered into an agreement with the Federal Home
and Loan Bank Board (FHLBB). The agreement promised to give Winstar favorable
regulatory treatment, presumably until the goodwill was amortized. The
agreement did not expressly promise that the United States would not
subsequently change the law or agree who would bear the risk if a law with
retrospective effects was enacted. Holding: Winstar wins – the government didn’t
meet its burden of showing impracticability.
 Defendant’s Burden:
• Must show that the passage of the statute rendering its performance
impossible was an event contrary to the basic assumptions on which the
parties agreed, and
• Must ultimately show that the language or circumstances do not indicate
that the Government should be liable in any case.
 UPSHOT:
• It is presumed that change in law is unforeseen and thus a change in law can
serve as the basis of an impracticability argument.
 Canadian Industrial Alcohol Co. v. Dunbar Molasses Co.: Facts: Δ was the
middle man between the supplier and the buyer. Δ claims impracticability because
the Π failed to produce that same amount they were producing in the past years.
Holding: There was some implicit assumption of risk by being the middle man
because your whole reason for existing is to get the molasses.
 UPSHOTS:
• A promisor is generally assumed to be responsible for foreseeable risks
pertaining to his/her promise.
• When the promisor is a broker it seems to be industry custom that the broker
is insurable.
• A promisor cannot invoke impracticability to discharge his/her contractual
duties if he/she was at fault in creating or contributing to the
impracticability/impossibility.
• R2d § 261 Discharge by Supervening Impracticability
FRUSTRATION OF PURPOSE
• ELEMENTS:
 What’s frustrating has to go to the heart of the contract.
 And the frustration has to be a really high level of frustration.
 Cannot be aggrieved party’s fault that the purpose was frustrated.
• CASES:
 Pradaline v. Jane: Facts: Paradine owns property that the Prince occupies. Jane
had a 3 yr lease on the property. Jane stops make the lease payments since he
can’t use the property bc of the army. Holding: Δ still has to pay because its not
Π’s fault that the army took over the land.
 UPSHOT:
• Illustration of the old rule in common law.
 Krell v. Henry: Facts: Δ rented an apartment to watch the coronation of Henry
VII. The coronation didn’t happen so now he wants to get out of the contract. Δ
wants his money back; the landlord wants the contract enforced. Holding: Not
impracticable because he can still rent the room.
 UPSHOT:
• Classic case articulating the doctrine of frustration of purpose.
 Washington State Hop Producers, Inc. v. Goschie Farms, Inc.: Facts: If you
wanted to sell hops you needed to have a hops license. After taking bids for these
licenses. The hops base dramatically decreased in value because the rules
changed and now licenses weren’t needed anymore. Π wants the contracts
enforced. Δ wants out of the contracts because licenses were no longer needed.
Holding: The price drop alone is not the frustration just that it is evidence of the
frustration. The real frustration is that the licenses are no longer needed.
 UPSHOTS:
• Foreseeability is an important but non – dispositive factor in assessing
frustration as well as impracticability.
• Frustration of purpose is less likely to be successful than an argument for
impracticability.
• R2d § 265 Discharge by Supervening Frustration
ANTICIPATORY REPUDIATION (AKA ANTICIPATORY BREACH)
• RULES:
 If someone announces their intention to bring a breach of contract regardless or
not of whether they’ve done anything to make it impossible for them to perform
(a) we treat it as a breach and (b) it gives you the right to suspend your
performance. (Hochster)
• CASES:
 Hochster v. De La Tour: Facts: Δ was going to be the tour guide for the Π. Then
on May 11th Δ calls and tells Π that he changes his mind and is not going to be his
tour guide. Π sues from breach of contracts. Then Π goes on to get another job.
Holding: Breach has to be material.
 UPSHOTS:
• When a party repudiates a material aspect of his/her contractual obligations,
then the aggrieved party may immediately sue for breach (or may wait until
the date of performance before suing) and the aggrieved party may hold off
on performing his/her own obligations.
• Repudiation- when a party makes clear by words or deeds that he or she is
not going to honor his/her contractual obligations.
• Repudiation may be retracted.
♦ You can retract your repudiation anytime before the counterparty accepts
your repudiation.
♦ If the other party has not yet relied on the repudiation you can retract it,
even if the party has accepted the repudiation.
• If you guess wrong and it turns out that the ct doesn’t think the repudiation
was that clear then you have breached.
 AMF, Inc. v. McDonald’s Corp (pg. 876): Facts: AMF was supplying computer
systems for McDonalds but the computers weren’t performing up to standard.
McDonalds wasn’t happy so they backed out of the contract and sued for its $20g
back. AMF sues back to get the money for the computers. McDonald’s demand for
assurance wasn’t enforced because it wasn’t in writing.
 UPSHOT:
• Illustration of adequate assurances.
• UCC § 2-609 Right to Adequate Assurance of Performance
• UCC § 2-610 Anticipatory Repudiation
 Reasonable time standard because you have an obligation on the UCC to “cover” –
mitigate harm done to you.
• UCC § 2-611 Retraction of Anticipatory Repudiation
REMEDIES
BASICS
• Explicit policies that permeate the process of translating losses into dollars:
 The PLAINTIFF must prove that
 The breach was the substantial cause of the loss complained of, and
 The amount of the loss caused with reasonable certainty.
 The provable losses caused by the breach must have been reasonably
foreseeable to the Δ at the time of contracting; otherwise consequential damages
are not recoverable. (Hadley)
 The Π has a “duty” after the breach to make all reasonable efforts to avoid the
consequences of the breach (duty to cover)
• In contract law we want to encourage an efficient breach – we want to allow parties
to get out of a contract if it’s better for them to do so.
• Reliance Damages- brings the parties back to the position they were in before the
contract was made. A lot easier to prove.
• Nominal Damages- situation where a party wins the case but there are no real
damages to award. Think $1 in damages.
• Expectation Damages- the whole point it to put the non-breaching party in the
position he/she would have been in had the contract been performed. Imagine the
world as if the contract had not been breached. What amount of money would it take
to get the Π there. (Hawkins)
• Incidental: Think of these as expenses- money that someone has to pay to mop up
because of the breach. Not the harm caused by the breach- but any money you have
to spend to deal with the breach.
• Consequential: Damages that are consequences that flow from the direct harm.
Additional damages that result from the breach beyond what is readily apparent. I.e.
Lost profits. (Hadley)
 Consequential damages have to be foreseeable by both parties at the
time of contracting in order to be recoverable.
• CASES:
 Hawkins v. McGee: Facts: Π had burnt hand and Δ promised to make it 100%
fixed. Promised a perfect hand. Instead he has a burned and hairy hand.
 How to calculate expectation damages: Whatever dollar amount represents
the difference perfectly healed hand and the hand he was left with.
 Curtice Brothers Co. v. Catts: Facts: Contract for canning tomatoes. Holding:
Specific performance is appropriate in this case because there was no adequate
compensation at law.
 UPSHOTS:
• Specific performance may be decreed when there is no adequate remedy at
law.
• Specific performance will rarely include a demand that personal services be
performed.
 Hadley v. Baxendale: Facts: Π was a miller. The crank shaft in the mill broke. Π
hired a carrier from Δ to bring the shaft to get fixed. Something happens and the
shaft isn’t delivered right away. Δ told Π that he’d probably get the shaft back to
him in a day. As a result of the Δ’s neglect the Π didn’t receive the shaft for a
couple days. Π sue for lost profits. Holding: The losses suffered by Π were not
foreseeable by Δ so consequential damages are not recoverable.
 UPSHOTS:
• Consequential damages are generally of a special character and are usually
indirect (involving a third party).
• Consequential damages are only recoverable to the extent that they are
reasonably foreseeable to both parties at the time of contract.
MENTAL ANGUISH/PUNITIVE DAMAGES-
• Done to punish the other party. Almost NEVER awarded under contract law.
• CASES:
 Bohac v. Department of Agriculture: Facts: Π fired by Δ and is claiming non
pecuniary damages as a result of her life changing because of her firing. Ct is
interpreting a provision in the statute that is supposed to be interpreted by
contract law. Holding: Π does not get compensatory damages because the
statute did not intend for these kinds of damages.
 UPSHOT:
• Damage from mental anguish and emotional distress generally won’t be
recoverable under contract law. If the damages are foreseeable then they
can be awarded as legitimate consequential damages.
 Boise Dodge, Inc. v. Clark: Facts: Δ bought a car from Π that was described as
a new car. Turns out it’s not a new car- fraudulent contract. Δ wants punitive
damages. Holding: The jury’s award of $12,500 in punitive damages against Boise
Dodge, Inc. was justified. Reasoning: In Idaho the law says that punitive
damages may be assessed in contract actions where there is fraud, malice,
oppression or other sufficient reason for doing so. Rule: the amount of punitive
damages must bear a “reasonable relation” to the amount of actual damages.
COMPENSATORY DAMAGES
• RULES:
 Usually you measure damages at the time of the contract breach. Once the
breach happened, you should look to the market price at that time. (American)
 Lost business volume damages (profits) are available generally if the market
supply of the plaintiff’s goods or services exceeds the market demand (i.e. if you
have more goods to sell than people want). (Locks v. Wade)
 When a breach of contract is substantial or intentional (when the defense of
substantial performance is lacking), the plaintiff is entitled to expectation
damages, namely the cost to repair or rebuild and not merely the diminution in
value measure of damages. (Rivers v. Deane)
• CASES:
 American Mechanical Corp. v. Union Machine Co. of Lynn: Facts: Π was in
financial trouble and they entered into a contract with Δ where Π agreed to sell
some real estate and property for $135,000 and then Δ reneged on its deal to buy
this property. Seven months later the property was sold at a foreclosure sale and
the property was then sold for $90K. Here the rule does not apply because it is
seven months later and it is sold at foreclosure so they don’t know what the
market price would have been. Holding: The court awards the $45K. The court
awards damages EQUAL to actual loss. They recognize that the $90K does not
reflect the actual value of the property, but they are in a bind so they have nothing
else they can do.
 UPSHOTS:
• Plaintiff bears the burden of proof in proving damages generally, both to the
fact of the damage’s existence, and to their actual amount.
• If a Plaintiff cannot prove the exact amount of damages, but is able to
convince the court that they were somehow damaged, then courts may
sometimes enter a damages award within its discretion.
• Breaching party in a contract bears the burden of proving lack of
cover/mitigation on the part of the non-breaching party (usually the plaintiff)
 New Era Homes Corp. v. Forster: Facts: Defendant hired Plaintiff to make
adjustments to his home where there would be four payments. Plaintiff completed
the rough carpentry and plumbing but did not do any work beyond that. Holding:
The court says that this is not a divisible contract. It is one big contract for the
whole amount.
 UPSHOTS:
• Illustration of the importance of divisibility in regards to the damages
assessed
• The importance of subtracting out the plaintiff’s damages – money saved or
not spent because of the breach
 Bernstein v. Nemeyer: Facts: Defendants got the Π to invest over $1 million
into a partnership by promising a negative cash flow guarantee. Basically, it is a
promise that the partnership will put in whatever money it takes every year to
keep the partnership afloat. Despite good faith efforts and loans to the partnership
of $3 million, the Δ defaults on their obligations. Π sues for rescission and
restitution. The defendants failed to continually lend money which led to the
breach of contract. Holding: Plaintiff sues for restitution but there is no restitution
here because there is no ‘unjust enrichment’ because the defendant lost money.
The plaintiff might have said that they expected to make money here but this is
impossible to prove. Expectation damages here are not ‘expected’ here because
there is no proof that this investment would have ever made money for him.
 UPSHOTS:
• Rescission is an action to have a contract set aside because of an uncured
material breach
• Restitution damages are damages equal to the benefit that the breaching
party received
• Restitution damages are available in situations of UNJUST ENRICHMENT
♦ In a case of rescission
♦ In a quasi-contract
 Locks v. Wade: Facts: Π runs a jukebox leasing business. Π was going to lease to
Δ a jukebox for 2 years and the terms were that they would split the profits on the
jukebox and there was a minimum guarantee that you would get at least $20 per
week. Δ repudiates and changes his mind. Π sues b/c he expected the K to go
through and the Π sues for damages. Holding: Plaintiff gets $836 in expectation
damages.
 UPSHOTS:
• Lost business volume damages (profits) are available generally if the market
supply of the plaintiff’s goods or services exceeds the market demand.
 Rivers v. Deane: Facts: Homeowners contracted with Δ to do construction on the
house and they did a terrible job so homeowner sued. At trial, difference in market
value is $10K. The cost of fixing this problem with the deck was much > $10K.
Holding: Deane loses here because the breach was material so expectation
damages are necessary. Here it was the amount of money that it would cost the
Rivers’s to build a new deck as they had originally contracted for.
 American Standard, Inc. v. Schectman: Facts: Δ failed to grade the property
like they were supposed to as part of a construction contract. Grading would have
cost $90K. Property value without the grading was reduced by a mere $3K. Δ
argued that the diminution in value should be the measure of damages and argues
that they substantially performed. Holding: Court says damages award should be
$90K because they did not attempt to finish the construction contract (which
means that the breach is intentional and therefore does not constitute substantial
performance).
 UPSHOTS:
• Sets a very high standard for what constitutes disproportionate forfeiture by
linking it to economic waste as a predicate to awarding merely diminution in
value damages.
EQUITABLE RELIEF
• Positive injunction: The court orders someone to do something – harder to police.
• Negative injunction: The court restricts someone from doing something. –Granted
more easily.
• RULES:
 General Rule: It is axiomatic that specific performance will not be ordered when
the party claiming breach of contract has an adequate remedy at law. (Laclede)
 An adequate remedy at law exists when:
 The subject matter of the contract is unique;
 Where money damages cannot fully compensate the injured party;
 Money damages cannot be adequately assessed.
(Laclede Gas Co. v. Amoco)
 EMPLOYMENT CONTEXT : Injunctive relief in the form of an order not to work for
someone (a negative injunction) is sometimes awarded under certain
circumstances:
 Where the employee is a threat to your trade secrets or intellectual property.
 Where the employee is still under contract with the employer.
 Where the contract already contains a reasonable covenant not to compete.
(Abc v. Wolf)
• CASES:
 Laclede Gas Co. v. Amoco: Facts: Amoco agreed to supply propane to any new
house set up in Laclede developments. Δ wants out of the contract and the Π is
arguing that he should get specific performance. The way the contract was set up
was that Laclede could walk away from the contract whenever but Amoco couldn’t.
Holding: there was no adequate remedy at law because this was a long term
contract and Π wouldn’t have been able to find anyone else to enter into a long
term contract with them at that time.
 UPSHOTS:
• SP is available where there is an inadequate remedy at law.
•This case shows the trend toward a more liberal application of specific
performance.
 Northern Indiana Public Service Co. v. Carbon County Coal Co.: Facts: Π
has a k with Δ to supply coal for 20 years. 7 years into the contract the price for
coal increased greatly. At this point it was cheaper for Π to have its energy needs
provided by other means. Π tries to get a declaratory judgment to excuse it from
the k. The Δ counterclaims and wants specific performance. Holding: No SP bc
there was an adequate remedy at law - the court was able to come up with a $
amount that would make Δ whole.
 UPSHOTS:
• Example of strict approach to specific performance.
• Articulates that third party concerns shouldn’t play a role in SP analysis
unless such 3rd parties have a legally recognized interest in the law suit.
 Walgreen v. Sara Creek: [Judge Posner] Facts: In agreement Δ agreed not to
lease space in the mall to any other pharmacy. Δ decides to lease space to
Pharmore. Holding: The court is unable to assess adequate damages, therefore
an injunction is granted.
 Factors that Judge Posner points to as informing the decision:
• Fact driven analysis.
• Π has to show that the case is unique so that damages would be inadequate.
 The parties (as opposed to the court) are better people to figure out the
damages in a situation like this.
 UPSHOTS:
• When a party is asking for an injunction they have the burden of proving that
an injunction is necessary.
• Judge Posner applies a cost benefit analysis to decision making. Looks at
the most efficient way of accurately assessing the damaged amount. With
just two parties an efficient way is to issue an injunction. Court also looks a
judicial economics.
 ABC v. Wolf: Facts: Δ worked for Π and his contract was going to terminate on
3/4/80. In his contract there was a clause that said there was a 90 day period prior
to his k termination in which he was obliged to partake in good faith negotiated.
There was also a 3 mth period in which Π had right of first refusal. During the first
45 days of the 90-day period there is an additional covenant- negotiations with
other parties prohibited. In 10/79 theres a negotiation with CBS and Δ- they talk
but don’t reach any conclusion. On 2/80 CBS and Δ agreement. Π is seeking an
injunction that prohibits Δ from working at CBS. Holding: Negative injunction is
not granted.
 UPSHOTS:
• Because of both philosophical and practical concerns specific performance is
almost never used to order an employee to continue working for his or her
employer.
• The key to whether or not they’ll be granted is going got be the
reasonableness of their scope and duration.
LIQUIDATED DAMAGES
• Parties provide in the contract what the damages will be if the contract is breached.
• Some ways to tell if the provision is enforceable:
 The damages bear some reasonable proportion to the harms incurred by the
breach.
 Evaluate the reasonableness of the reward at the time of contracting.
• RULES:
 A liquidated damages provision will not be enforceable if it is deemed punitive.
 In order for a liquidated damages provision to be enforceable it must:
 Be a reasonable forecast of just compensation for the harm that is caused by
the breach; and
 The harm that is caused by the breach must be one that is incapable or very
difficult of accurate estimation. (this is MINORITY view)
(Southwest Engineering v. United States)
• CASES:
 Southwest Engineering Co. v. United States: Facts: Δ hired Π for 4
construction jobs. There was a liquidated damages provision for every day that the
project was completed late. Π argues that since Δ didn’t sustain any damages that
bars recovery. Holding: Liquidated damages are allowed.
 UPSHOTS:
• Liquidated damages provision must be reasonable estimates of the expected
harm caused by the breach.
• Reasonableness is measured at the time of contracting.
• Minority rule is that reasonableness will be measured at time of breach. Adds
a second element that liquidated damages provision must address harm that
is incapable or very difficult of accurate estimation.
 United Air Lines, Inc. v. Austin Travel Corp.: Δ argument is that liquidated
damages clause is unenforceable. Court says that the clause is enforceable. Δ
makes argument that the damages estimate isn’t a good one- there could have
been a more accurate assessment of damages at the time of contracting.
Holding: The question is whether the estimation is reasonable or not – not
whether a more accurate one could have been made. The question becomes:
would liquidated damages be triggered by a trivial breach? RULE: Liquidated
damages will only be available in the case of a trivial breach if it is
explicitly stated in the agreement of the parties.
 UPSHOTS:
• Indicative of the modern trend in which a liquidated damages clause will
generally be upheld by the court unless the liquidated damages amount is a
penalty because it is plainly or grossly disproportionate to the probable loss
anticipated when the contract is executed.
• The amount of damages specified need not be the best estimate of
damages; merely it must be a reasonable estimate.
• It will be presumed that liquidated damages clauses are not applicable to
trivial breaches.
 Leeber v. Deltona Corp: Facts: sales contract that says the Δ was to retain
deposit of %15 if the closing isn’t settled by July 20. Π ultimately fails to pay
balance Δ wishes to keep the deposit – Π sue to get the money back. Π says the
liquidated damages clause is unenforceable. Unconscionability- you’d have to say
that this amount somehow shocks the conscience. Holding: It doesn’t shock the
conscience.
 UPSHOTS:
• Liq damages clause may be held unenforceable if they would shock the
conscience. – look at the day of contracting.
• If its reasonable at the time of contracting but then is unconscionable on the
day of enforcement then most courts will deem it unenforceable.
• UCC § 2-718(1) Liquidation or Limitations of Damages
LIMITATIONS OF DAMAGES
• GENERAL RULE: As long as it’s not unconscionable it will be enforceable.
• Lewis v. Sawyer: Facts: Lewis sold malfunctioning refrigerator to Sawyer. Since it
kept malfunctioning Δ didn’t pay. Δ brought a counterclaim and sued for loss profits
and costs. Three Issues: (1)Did the trial court err in allowing the jury to consider
whether the exclusive remedy clauses had failed their essential purposes? Exclusive
remedy clause was that they’d repair or replace. Δ didn’t want this bc they were
having a dreadfully difficult time repairing the fridge. The trial court made no mistake
by letting the jury answer these questions. (2)Given the fact that the damages
provision failed at its essential purposes is it fair for the jury to consider consequential
damages generally speaking? This contention is incorrect.(3)The k also had a
provision that said that there should be no consequential damages to the contract
ever. SO, do we throw out the clause that says there shall not be any consequential
damages? Ct says whether or not that section remains enforceable is to be looked at
separately and independently. Holding: A consequential damages provision is
only enforceable if it is not unconscionable.
 UPSHOTS:
 Illustration of UCC § 2-719
 A remedy will fail of its essential purpose if it no longer provides meaningful
relief.
• UCC § 2-719
 1(a) In addition to the remedies you can provide your own in addition to them or in
substitution.
 1(b) Unless the contract makes clear that the contracts list of remedies are
exclusive anything you write in your k with regard to contracts will just be
interpreted as additional options.
 (2) Where circumstances cause an exclusive or limited remedy to fail of its
essential purpose, remedy may be had as provided in this Act.
 Specifically to consequential damages – damages can be limited unless they are
for injury to the person in the case of consumer goods.
UCC RULES FOR REMEDIES

• UCC § 1-106 Remedies to Be Liberally Administered
 Expectancy damages. No consequential or punitive damages unless otherwise
specified in the Act.
• UCC § 2-508 Cure by Seller of Improper Tender or Delivery; Replacement
 (1) If buyer rejects because of non conforming goods the seller can cure the defect
before the end of the contract time.
 (2) If buyer rejects non conforming goods that the seller had reasonable grounds to
believe would be acceptable the seller may have more time to make the goods
conforming.
• UCC § 2-703 Seller’s Remedies in General
 If buyer wrongfully rejects the goods or doesn’t pay the seller may:
 Withhold delivery
 Stop delivery
 Proceed under § 2-704
 Resell and recover damages
 Recover damages for non acceptance or in certain cases the price
 Cancel
• UCC § 2-706(1) Seller’s Resale Including Contract for Resale
 Seller must act in good faith and act in a commercially reasonable manner when
reselling.
 If he does so then he may recover difference in price and any incidental damages
less expenses saved in consequence of buyer’s breach.
• UCC § 2-708 Seller’s Damages for Non-acceptance or Repudiation
 (1) Subject to subsection 2- the damages for non-acceptance is [(unpaid contract
price + incidental damages) – market price - expenses saved in consequences of
buyer’s breach].
 (2) If the damages of section 1 do not put the seller back into the same position as
he would have been had buyer not breached he may recover additional damages
to put him in that place.
• UCC § 2-709(1)(b) Action for the Price
 Seller can recover incidental damages and the price of the goods only after making
a reasonable effort to resell the goods.
• UCC § 2-710 Seller’s Incidental Damages
 Includes commercially reasonable charges, expenses or commissions incurred in
stopping delivery, in the transportation, care and custody of goods after the
buyer’s breach and in connection with the return or resale of the goods.
• UCC § 2-711 Buyer’s Remedies in General; Buyer’s Security Interest in
Rejected Goods
 (1) If the seller refuses to deliver or the buyer rightfully rejects and it is a material
breach the buyer may recover the amount already paid or cancel the order. He
may also (a) cover or (b) recover damages for non-delivery.
 (2) If the seller refuses to deliver the buyer may also (a) if the goods have been
identified recover as specified in § 2-502; or (b) in certain circumstances obtain
specific performance or replevy the goods as specified under § 2-716.
 (3) If buyer has received and paid for some of the goods already he may resell
them in a like manner as an aggrieved seller.
• UCC § 2-712 “Cover”; Buyer’s Procurement of Substitute Goods
 (1) Cover means to make a good faith effort without unreasonable delay to
purchase goods in substitution of the ones due from the seller.
 (2) Buyer may recover [(cost of cover – contract price) + (incidental or
consequential damages) – expenses saved in consequence of seller’s breach].
 (3) If the buyer doesn’t cover that doesn’t bar him from recovery.
• UCC § 2-713 Buyer’s Damages for Non-delivery or Repudiation
 (1) Need proof of market price but damages are [(contract price – market price at
time buyer learns of breach) + (incidental and consequential damages) – expenses
saved].
 (2) Market price is to be determined based on place of tender. In cases of rejection
the place of arrival.
• UCC § 2-715 Buyer’s Incidental and Consequential Damages
 (1) Incidental damages include: expenses reasonably incurred in inspection,
receipt, transportation and care and custody of goods rejected and any
commercially reasonable charges, expenses, or commissions in connection with
effecting cover and any other reasonable expense incident to the delay or other
breach.
 (2) Consequential damages include: (a) loss resulting from requirements and
needs that the seller had reason to know of and which could not be prevented by
cover; and (b) injury to person or property proximately resulting from any breach
of warranty.
• UCC § 2-716 Buyer’s Right to Specific Performance or Replevin
 (1) Specific performance is proper where the goods are unique.
 (2) Specific performance may include payment of the price, damages or other
relief the court feels just.
 (3) Buyer has right of replevin if after reasonable effort he is unable to cover for
the goods. In the case of goods bought for personal, family, or household
purposes, the buyer’s right of replevin vests upon acquisition of a special property.
THIRD PARTY INTERESTS
ASSIGNMENTS
• Assign your rights.
• Promisees assigning the benefits they get out of a contract to somebody else.
 A agrees to cut the lawn for B, B agrees to pay on a monthly basis to A. A assigns
his right to be paid to X. A keeps cutting the lawn for B but B pays X.
 A is Assignor
 X is Assignee
 B is Obligor
• Generally you can assign something if it doesn’t substantially effect the burden on the
obligor.
• If the contract is silent to assignability then it is allowed to be assigned.
• CASES:
 Fitzroy: Facts: Δ owed 5 creditors money. The creditors decide to assign their
rights to this money to the Π. Turns out Π didn’t really want to collect the money
he just wanted to force Δ into bankruptcy so he could remove him from
directorship. Issue: Does Π’s motivation matter? Δ says assignment was not valid
because it the assignee wanted the assignment for bad faith reasons. Court says
the motives don’t matter for assignment. Why they assigned it or took it on is
irrelevant.
 UPSHOT:
• Although there are limits to what can be assigned the motivation of the
parties involved in the assignment are irrelevant to the calculus.
 Allhusen v. Caristo Construction Corp.: Facts: subcontract with language that
said the contract couldn’t be assigned unless there was written consent. Consent
wasn’t received in writing. Issue: Is this prohibitory clause enforceable? Ct holds
that where clear language is used this will be honored. If the language isn’t
clear enough you still have the right to assign – it will be considered a
mere promise not to assign and this does not take away your right to
assign – you still have the right but if you breach your promise you can be
sued for damages.
 UPSHOTS:
• Clauses prohibiting assignment are disfavored and will be narrowly
construed, thus clauses prohibiting assignment shall generally be read as
limiting a parties’ contractual right to assign but not its power to assign.
• If sufficiently clear however such terms will be held to eliminate the power to
assign.
 Owen v. CNA: Facts: Contract with a nonassignment clause. Owen assigned her
rights regardless of the nonassignment clause. CNA refused to make payments to
the assignee. Π brought action for say that this is ok. CNA probably cares because
of tax reasons. Holding: Clause didn’t take away the right to assign but it was a
covenant in the contract. The assignment is valid but Owen is on the hook for
damages. Can’t make an assignment if it’s going to make it harder on the obligor
to fulfill its responsibilities.
 UPSHOT:
• Recognize the legal limits of assignability. Summarized nicely on pg. 1089
and R2d § 317.
 Continental Purchasing Co. v. Van Raalte Co.: Facts: Ethel Potter assigned all
her future wages to Π. Δ is her employer. Δ received written notice of the
assignment. Δ keeps paying Potter. Π sues Δ for the payments. Issue: Is Δ
(obligor) liable to Π (assignee) for the payments? Holding: The Δ is liable because
they had notice.
 UPSHOT:
• Obligor is obliged to honor an assignment once he/she receives notice of it.
• R2d § 317 Assignment of a Right
• R2d § 322 Contractual Prohibition of Assignment
DELEGATIONS
• Delegate your duties.
 I.e. A agrees to cut the lawn for B, B agrees to pay on a monthly basis to A. A
doesn’t want to cut lawns anymore, but doesn’t want to be sued for breach. A gets
X to cut the lawns. A still gets paid but X cuts lawn.
 A is Delegator
 X is Delegatee
 B is Obligee/Obligatee
• Even if there is a completely valid delegation then the original person is normally still
responsible.
• Sally Beauty Co. v. Nexxus Products Co., Inc.: Facts: Δ had an agreement with
Best for an exclusive distributor agreement. So Best had to give “best effort” to sell
Δ’s product. Π acquires Best. Π is a competitor of Δ. Issue: Was Δ entitled to cancel
the contract? The duty to do the distribution was assigned exclusively to best so now
a diff company was going to be doing this work. Holding: This delegation is void
because of the substantial interest of the obligee.
 UPSHOTS:
 Application of § 318- Duties cannot be delegated to a third party if such
delegation would impair a substantial interest of the obligee.
• R2d § 318 Delegation of Performance of Duty
THIRD PARTY BENEFICIARIES

• TPB’s are bound by the whole contract – I.e KMART bound by the arbitration clause.
• Any defenses that the Δ would have had against the original counterparty they can
raise against you as well.
• Intended Beneficiary: The parties to the contract intended you to have rights under
that contract.
• Three standards of when a 3d parties rights vest:
 Upon formation of the contract – knowledge is irrelevant.
 Knowledge – vest when the 3d party finds out they have these rights.
 Reliance – when the 3d party acts in reliance on the contract.
• CASES:
 KMART v. Balfour Beatty, Inc.: Facts: Contract btwn BBI and TPL (owner of the
shopping center). KMART sues BBI for breach of contract because the roof wasn’t
up to specification. Π argument: They were intended to benefit from the contract.
They are a tenant of the shopping center. The contract specifically mentioned
KMART in it. Rule: You’re an intended beneficiary if the parties to the
contract intended you to have rights under that contract. What the third
party thinks doesn’t matter – just what the parties to the contract thinks. Holding:
KMART is an intended beneficiary.
 UPSHOTS:
• Only intended beneficiaries have rights that can be asserted under contracts.
• Intended beneficiaries are those parties whom the parties to the contract
intended to grant the legally enforceable rights to.
♦ Look at circumstances and contract language.
• A Δ may assert against a TPB any defenses that it could have asserted
against its original counterparty.
 Johnson v. Holmes Tuttle Lincoln – Mercury, Inc.: Facts: Caldera bought a
car from Δ. They get into an accident with Π. Whne the car was purchased Caldera
was told by the dealership that they’d get full insurance coverage and they didn’t.
Π is suing to recover the money they were awarded when they sued the Calderas.
Π was not named in the contract. Holding: Even though Π wasn’t named or even
thought of – there was a class of people that the parties intended to be protected.
i.e. Anyone damaged by their car. RULE: Even though you as an individual
were not the intended beneficiary, so long as there is a class of intended
TPB your protected if you’re in that class.
 UPSHOTS:
• A party need not be named in a contract to be a TPB or even individually
intended to be a TPB, all that is necessary is that the TPB be a member of a
class for whose benefit the contract was made.
 Hale v. Groce: Facts: Δ was an attorney. He was instructed by his client to make
a will and include Π as a beneficiary but Δ never does this. Δ’s client dies and the
will gets discharged. Π brings a lawsuit against Δ for breach of contract. Holding:
Π was an intended beneficiary.
 UPSHOTS:
• Illustration of the third party beneficiary rule.
 Zigas v. Superior Court: Facts: US gov’t – housing and urban development
(HUD) – is financing apartment building in return for the housing only being for rent
control price. Landlord raises rent above the amount permitted under the contract
with HUD. Tenants sue claiming the landlords are violating the contract with HUD.
Different rule when the government is involved – much higher standard. The test
is “whether there was manifested an intention that petitioners be
compensated in the event of real parties’ nonperformance.”
 UPSHOTS:
• There is a heightened standard for asserting third party beneficiary claims in
the context of gov’t contracts.
• An intention to compensate the third party for injuries resulting from breach
must be manifested in the contract itself.
 Tweeddale v. Tweeddale: Facts: Mom gives son property. But if he ever sells it
he has to get 100 to his brother and 50 to his sister. The brother is not a party to
the contract. The son sells the land but doesn’t give the brother any money. The
brother sues to get his $100. Rule: The right of a 3d party to sue vests once
the contract is made, regardless of knowledge of the right. Another rule:
A third parties right to sue only kicks in when the 3rd party relies on their
status as a third party beneficiary.
 UPSHOT:
• A 3d party beneficiary’s rights must vest before they can be asserted.

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CONTRACTS II OUTLINE

PROF. COLUMBO - SPRING 2008

Avoidance of Contracts .........................................................................................................3

Duress or Undue Influence...........................................................................................................5

Illegality/Public Policy ............................................................................................................. 7

Parol Evidence Rule .............................................................................................................. 9

Duty of Good Faith .............................................................................................................12

Excuse of Express Conditions....................................................................................................15

Constructive (IMPLIED) Conditions.............................................................................................17

Frustration of Purpose ......................................................................................................... 20

Anticipatory Repudiation (aka Anticipatory Breach) ..................................................................21

UCC Rules for Remedies.........................................................................................................30

Third Party Interests ............................................................................................................32

Third Party Beneficiaries............................................................................................................ 34

• R2d § 161 When Non-disclosure Is Equivalent to an Assertion

DURESS OR UNDUE INFLUENCE

 Wrongful: the threat is so oppressive under given circumstances as to constrain

 Moral compulsion or psychological pressure may constitute duress, if, thereby,

 Economic distress may be proved when

 One party threatens to breach a contract; and

 That threat overcomes the will of the other party because

• The threatened party cannot recover from another source; and

• The ordinary contract remedies would be inadequate.

(Austin Instrument, Inc. v. Loral Corp.)

 Rubenstein v. Rubenstein: Facts: Wife tells ex to transfer all his assets to

• Duress makes a contract voidable.

• Psychological pressure can constitute duress.

• Case of economic distress.

 Look for two elements to find something unconscionable:

 Terms of the contract are substantially one sided and;

 Ct has to examine unconscionability at the time the contract is made!

 Williams v. Walker-Thomas Furniture Co.: Facts: Δ filing complaint for Π

• Unconscionability is a disfavored doctrine.

• Some courts will invoke unconscionability doctrine when (1) bargaining

• “Unconscionability has generally been recognized to include an absence of

 Ferguson v. Countrywide Credit Industries, Inc.: Facts: Ferguson signs an

• Good summary of what procedural and substantive unconscionability is.

• Need evidence of both in order to strike down a contract as unconscionable.

 A court will not enforce an illegal contract. (Sinar v. LeRoy)

 Sinar v. Le Roy: Facts: Π wants to recover $450 he gave to Δ to get him an

• A court will not enforce an illegal contract.

 Different ways to approach an overly broad covenant to compete:

• To just hold it unconscionable and therefore, unenforceable.

• “Rule of reasonableness”: If it can be reasonably altered to render it

♦ This is the approach this court takes.

• An overbroad covenant not to compete violates public policy.

• The typical remedy is to reformulate the covenant so as to make it

• R2d § 178 When a Term is Unenforceable on Grounds of Public Policy

 Something is unenforceable if it is something that legislature provides that

• Policy: encourages good contract drafting.

 This case supplies a test for ascertaining whether a contract is fully or

 Masterson v. Sine: Facts: Mastersons sold property and held on a provision to

 Example of the most Corbinesqe approach- the most generous approach to

 Parol evidence rule doesn’t bar evidence regarding conditions to written

 Some courts don’t consider integration clauses as conclusive of integration.

 Legal gap Fillers

 Allowed to bring in extrinsic evidence to demonstrate that something is

• Traynor’s Rule: Extrinsic evidence is admitted to disprove what appears to

DUTY OF GOOD FAITH

• Three Categories where good faith comes up:

 Issue of performance – you do something that makes it impossible/difficult for

 (Controversial and rare) Reading good faith as an independent clause in a contract.

 Centronics Corp v. Genicom Corp.: Facts: Contract between Π seller and Δ