Negotiation and Formation of the Contract

Problems w/ Standard Form Contracts

UCC 2-204 formation in general UCC 2-207 Additional Terms in Acceptance or Confirmation (1) No acceptance if expressly made conditional on assent to additional/different terms (2) Terms of contract a. Two types of additional terms i. Materially change terms 1. Contract = binding 2. Addl terms are proposals subject to acceptance ii. Nonmaterial change in terms 1. Contract + addl terms = binding b. Offer expressly limits acceptance to contain no addl terms i. Original contract = binding Common law - additional terms to acceptance does not insight a contract (mirror image rul) o Definite and seasonable expression of acceptance o Written confirmation sent w/in reasonable time - Last communication (contract/acceptance) holds terms o Contract +provisions of 2-207(2) + UCC gap fillers GARDNER ZEMKE v. DUNHAM BUSH ( owner hires general contract, who hires subcontractor. Contractor sends specs to sub and sub returns with different specs exchange has been agreed upon (w/ diff specs) Issue: Was acknowledgment by Contractor an acceptance? Rule: 2-207(1) acceptance can contain addl language terms are allowed unless clearly and unequivocally communicates to offeror its unwillingness to proceed unless terms are accepted Issue: What terms of contract are binding? Rule: 2-207(2) - Different = addl terms (comment 3) o If materially alter NOT included - different terms in responsive document as an acceptance can never become part of contract o Plain language argument different terms NOT included in the code/statute - Different terms cancel each other out (knockout rule comment 6) o Terms agreed upon = IN o Gap fillers provided by UCC = IN STEP-SAVER DATA SYSTEMS, INC. V. WYSE TECHNOLOGY (185) - P bought software from D over phone, terms and conditions on each box when products arrived Issue: Whether box top licenses became part of contract Holding: No Rule: Agmt consists of only terms expressly agreed to by parties - Disclaimer not conspicuous before contract, so not effective - UCC 2-207 governs analysis, box tops materially alter agmt so dont become part of contract - D didnt clearly express unwillingness to proceed unless box top terms were agreed to by P - 2-206/204 contract was formed PRIOR to box-top Clauses - Choice of law clause says agmt governed by laws of certain state o Ex- Choice of law is MN o Can bring suit in ND, but will be governed by MN law - Choice of forum clause says litigation must occur in certain forum - Arbitration clause: a contractual provision mandating arbitration/avoiding litigation of disputes about the contracting parties' rights, duties, and liabilities CARNIVAL CRUISE LINES, INC. V. SHUTE (196) P bought ticket with choice of forum clause, P brought suit in WA, D says only can bring suit in FL Issue: Whether forum-selection clause is valid (whether claim can be heard in Washington) Holding: Yes, clause is valid (claim can only be heard in Florida) 1

Rule: Contract was routine, and terms are never bargained for in these circumstances - P admitted had notice of terms - Non-negotiated clause may still be enforceable for several reasons: o Cruise line has reason to limit forum because carries people from many areas o Clause saves resources so dont have to determine proper forum o Passengers benefit by reduced fares from cruise saving in limiting forum Dissent - Passengers cant see clause until after ticket is purchased - Tickets not refundable, so passengers cant get refund if dont agree to clause - Ability of cruise line to pass savings on to customers by reducing litigation costs not reason to enforce clause Discussion on Carnival - Prof says if terms are reasonable, fair to enforce when customer continues to hold tickets and go on cruise - Prof thinks case was close call, but ct got it right - Just because this clause is enforceable, doesnt mean all clauses will be (still subject to fairness) - Default rule in US: freedom of contract, but with limits Comparing Carnival to Step-Saver - Step-Saver box-top license not part of agmt - Carnival clause is part of agmt - Whats the difference? o Step-Saver is between merchants, Carnival purchaser is a consumer o Applicable body of law: UCC applies to Step-Saver but doesnt apply to Carnival o Able to negotiate in Step-Saver, but not in Carnival HILL V. GATEWAY 2000, INC. (205) P bought phone, term for arbitration w/ company, P brought suit for defect, D wants arbitration clause enforced Issue: Whether terms shipped w/ computer are effective as contract Holding: Yes, terms are effective Rule: P had opportunity to return after reading terms. By not returned formed contract = binding terms Discussion of Hill v. Gateway - Could say contract had formed over phone o Gateway offered, Hills accepted by giving credit card number o 2-206(b) says clear offer formed on phone unless expressly stated otherwise o But judge here doesnt even consider 2-206 o If contract formed over phone addl terms OUT - Troubling to prof: ct doesnt show analysis under UCC o Ct couldve found way to reach same conclusion by applying the law o Ct instead just followed own preferences for how contract should form o Most courts wouldnt come to this conclusion C&J FERTILIZER, INC. V. ALLIED MUTUAL INS CO (212) Ins company doesnt want to cover burglary because of definition in policy trying to protect themselves from internal theft Issue: Whether burglary clause can be upheld when P didnt reasonably expect its meaning Holding: No, clause not enforceable Rule: Customers are not bound to unknown terms beyond range of reasonable expectation - If party is bound by other sides standard form and form contains terms that cant reasonably expect to be there, term isnt binding unless first party is made aware of term - Backed by Restatement 2d 211(3) o Very broad, not generally followed by courts o Invites parties to be ignorant of terms of policy - UNIDROIT: essentially a model code, agreed upon by scholars in diff jurisdictions, at international level o Closer to what cts follow in US o Party cant be bound by unreasonable term unless its been specifically brought to attention Dissent - Burglary is clear and unambiguous in the policy - No evidence P was made to believe had more protection than he did - Size and style of type cant be described as fine print when similar throughout policy - Ct shouldnt meddle with contract just because doesnt it doesnt like the meaning 2

Statute of Frauds
Overview - Common law doesnt require contracts to be in writing, BUT some agmts m/b in writing t/b enforceable - Must be in writing: o Sale of land o Long term leases o Sale of goods above certain price o When taking on debt of another (suretyship) - Article 2 of UCC incorporates the statute of frauds o Were dealing w/ unamended UCC because states havent yet adopted amended version o Unamended version is in red supplement Analysis for Statute of Frauds - Look for oral agmt described in fact pattern - If sale of goods, then apply analysis under UCC 2-201 o Ex- contract is for $400, so not within statute of frauds (must be $500 per UCC) o If is over $500, continue analysis - If say agmt is w/in the statute of frauds, means agmt is not enforceable C.R. KLEWIN, INC. V. FLAGSHIP PROPERTIES, INC. (224) - Oral agmt for bldg project, signed standard form w/o filling in blanks, D unhappy w/ Ps work and contracted w/ another co for rest of project Issue: Whether oral contract is unenforceable when unlikely performance would be complete w/in a year Holding: No, contract is enforceable because doesnt state how long completion of performance will actually take Rule: Oral contract must expressly say performance wont be completed w/in one yr to be void - Outside scope of SoF actual duration is irregardless, expressly state it WILL take > 1 year MIGEROBE, INC. V. CERTINA USA, INC. (233) - Certina orally agreed to sell watches to Migerobe, some written memos re: deal, Certina then said wouldnt sell. Amount in excess of $500.00 Issue: Whether writings are sufficient to satisfy statute of frauds Holding: Yes, writings together constitute writing to satisfy statute Rule: Writing for statute of frauds may consist of separate writings connected together - This is transaction in goods, so UCC 2 applies o 2-201(1) - Contract must be written for sale of goods, for price over $500, or not enforceable o 2-201(2) UNLESS, under subsec (1) (parties dont have to be merchants to show this exception) Have some writing Must have signature of party against whom enforcement is sought Needs to have quantity - Court finds combined writings sufficient to satisfy statute of frauds (see statutory exceptions, below) o Certina memo discussing sale: shows agmt reached, is signed o Certina memo about promo codes, also signed o Unsigned Certina writing w/ quantity, styles, prices: connects other memos together CONAGRA, INC. V. NIERENBERG (237) oral agreement for sale, written confirmation given 10 days after oral agreement Issue: Whether parties formed an enforceable oral agmt Holding: Yes, parties formed an enforceable oral agmt Rule: Written confirmation of oral agmt meets exception under 2-201(2) - Ct finds agmt s/b enforced under 2-201(2), the merchants exception o Applies only to transactions between two merchants o Writing must meet requirements of (1) as against the sender o Sender provides written confirmation of understanding of agmt, gives recipient 10 days to object - Ct finds (see statutory exceptions, below) o 2-201(2), Written confirmation sent by Conagra to Nierenbergs Contained addl terms not discussed on phone 2-207(2) discusses addl terms in acceptance, will be in if dont materially alter agmt Sender sent w/in 10 days, ct finds sufficient time since recipient gets 10 days to object o 2-201(3), when recipient admits to contracts existence at trial Nierenbergs testimony was ambiguous; this argument doesnt win Admission must be deliberate, clear and unequivocal for this section to apply o Note, farmers arent merchants as a matter of law in MT (not raised on appeal, so ct doesnt get to it) 4

UCC 2-201: Statutory Exceptions to Statute of Frauds

2-201(1), applies to everyone, dont have to be merchants o P1 and P2 have oral contract o P1 puts in writing Identifies parties Specifies quantity P1 signs o P1 later wants to get out of deal o If P2 knows about P1s writing and can get copy, P2 can use writing against P1 o Whats used in Migerobe, above 2-201(2), applies to merchants only o Use above example o P1 sends writing to P2, and P2 doesnt object o P2 wants to get out of deal o P1 can use writing against P2, even when P2 hasnt signed o Whats used in Conagra, above What constitutes signature o Entire signature not required, UCC is broad/doesnt require much for sig o Initials may be enough, letterhead could be enough under subsection 1, some jurisdictions email signatures are sufficient 2-201(3), statute of frauds no longer available as defense if meet a subsection below o (a) Exception for specially manufactured goods, when buyer works w/ seller for customized good May apply if seller proceeds w/ production and buyer wants to get out of deal o (b) Exception when party against whom enforcement is sought admits in trial to existence of contract Applies only to quantity of goods admitted o (c) Performance exception, if one party performs and other accepts Neither side can assert statute of frauds defense when above has occurred

Contents of the Contract

Parol Evidence Rule
Overview - 3 categories of agmts to consider o Oral agmts, determining terms of agmt o Have a writing, but has very little to it, will be supplemented by other terms/what they will be o Lengthy written agmt, but words are unclear/inconsistent/ambiguous, how to understand words - Will focus on third category above for parol evidence rule o Determine if words can have multiple interpretations and decide what third party would decide meaning is o If wording doesnt seem quite right, its probably notstop and fix it! - Prevents parties from introducing any evidence at trial that would contradict or add to terms of written contract BAKER V. BAILEY (255) agreement that ONLY Baileys could use water line, Baileys wanted to sell but Bakers would not give permission for anyone else to access water reduces property value to nothing Issue: Whether parol evidence rule applies to water use agmt Holding: Yes, rule applies so no addl evid allowed Rule: When language of written contract is clear and unambiguous, there is nothing for ct to construe - No terms in contract state Bakers will provide water to subsequent reasonable purchasers - Bakers didnt breach terms of agmt, no violation of covenant of good faith and fair dealing MASTERSON V. SINE (259) Bro conveyed land to sis w/ option to repurchase w/in 10 years. Threat of creditors taking option when Bro files bankruptcy. Sis trying to prove option incites property stay w/in familymily Issue: Whether parol evidence regarding personal nature of option s/b allowed at trial Holding: Yes, evidence s/b heard at trial Rule: No integration clause here, so parol evid m/b used to prove elements of agmt not reduced to writing - Ct looks to see if contract is integrated and includes integration clause like, This is final agmt between parties. - When parties have agreed contract is an integration, a complete and final embodiment of terms, parol evidence cant be used to add or vary the terms - When only part of agmt is integrated, same rule applies to part, but parol evidence may be used to prove elements of agmt not in writing - Look to instrument to see if parties intended writing to be exclusive, ex- there are no previous understandings or agmts not contained in the writing Dissent - Majority undermines parol evidence rule - Majority lessens reliance which may be placed on written instruments - Allows new technique for defrauding creditors Discussion on Masterson v. Sine, reconciling with Baker v. Bailey - Language o Water use agmt said was for sole use of Baileys o Here, no language specific to assignability of option - Contract v. deed o Deed is a form, less flexibility w/ wording, used in Masterson o Contracts more flexible, could have used any wording wanted, used in Bailey o Courts more understanding of something be left out of a deed than a contract - Merger clause: not dispositive, but very persuasive o Clause not used in Masterson, would show agmt was complete and exclusive o Was used in Baker v. Bailey Merger/Integration Clauses - Says agmt is final agmt between parties, excludes other docs and conversations - Clause like this is strong evidence that writing is integrated, BUT not dispositive - Example of clause: This agmt is the entire agmt between the parties, superseding any and all prior and contemporaneous agmts, understandings, representations and warranties, whether oral or written, on the subject matter of this agmt. - Common in commercial contracts, not necessarily in non-commercial contracts UCC 2-202 Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not 6

be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented (a) by course of dealing or usage of trade (Section 1-105) or by course of performance (Section 2-208); and (b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

Points for understanding and applying UCC parol evidence rule: (1) Application of parol evidence rule is appropriate only when there is a contract. If there is no contract, then there is no need to apply parol evidence rule (2) After determining there is a contract, the next task is to determine whether there is some writing that amounts to a final expression of the parties agreement. If not, then the parol evidence rule is not applicable. BUT if there is writing that is a final expression of the parties agreement, then parol evidence rule is applicable and must be used if either party seeks to prove terms agreed upon outside that writing (3) The parol evidence rule keeps out any and all evidence of any prior agreement, whether oral or even in writing, IF the prior agreement contradicts the writing that constitutes a final expression (4) Parol evidence rule keeps out any and all evidence of agreements allegedly reached contemporaneously w/ writing that constitutes a final expression, if the alleged contemporaneous agreement was oral and contradicts the writing that constitutes a final expression (5) However, PER does not keep out all extrinsic evidence. Some evidence may be considered to explain the final expression of agreement (if terms are unclear) and even to supplement the agreement (if agreement is silent on a particular matter). But what extrinsic evidence is admissible depends on further determination (6) Is writing that amounts to a final expression of the agreement complete and exclusive? If not complete and exclusive then PER will allow the writing that constitutes a final expression to be explained and/or supplemented by two things: a. Course of dealing, course of performance, and usage of grade AND b. Evidence of consistent additional terms. Note that these items can be prior or contemporaneous, and they can be oral or written (7) If the writing is complete and exclusive, then the PER will allow the writing that constitutes a final expression to be explained and/or supplemented by only one thing: a. Course of dealing, course of performance, and usage of trade Thus, even evidence of consistent and additional terms is excluded when the agreement is complete and exclusive

Interpreting the Terms of the Contract

RANDOM HOUSE, INC. V. ROSETTA BOOKS LLC (272) Rosetta published several authors in digial format Random House had license agreement for right to print, publish and sell the work in book form Issue: Whether Random House is owner of right to publish works as ebooks Holding: No, language of contracts not broad enough to include rights to ebooks Rule: Most reasonable interpretation of grant in contracts doesnt include right to publish work as ebook - Separate grant for book clubs/diff editions not necessary if book form covered all types of books - Authors struck out certain phrases, evid of intent not to grant publisher the broadest rights in work - Reasonable person aware of industry would find lang doesnt include ebooks Discussion on Random House - Another argument to make o If parties couldnt have contemplated new medium at time of agmt o Then new medium wouldnt be included in agmt o Counter: if grant was broad, would include new use not yet known o Still language, of book form is specific and limiting WWW ASSOCIATES INC. V. GIANCONTIERI (282) D contract to sell to P, with two provisions: reciprocal cancellation and merger clause. Contract didnt close by date specified and D chose to cancel. Issue: Whether unambiguous provision should be read in light of extrinsic evidence Holding: No, clear and unambig contract s/b enforced according to its terms Rule: When parties set down agmt in clear, complete doc, writing should be enforced according to its terms

Four corners rule: Extrinsic and parol evid not admissible to create an ambiguity in written agmt which is complete and clear and unambiguous upon its face Ct said dealing w/ sophisticated business people, so made big diff why only looked at lang of contract By ignoring plain lang of contract, P is effectively rewriting the bargain struck 5 standard principles cts use in interpreting docs o Entire contract s/b read as a whole and every part interpreted w/ ref to the whole, so as to give effect to its true purpose o Contract itself must be read in light of circumstances under which it was made, necessary to consider the situation of parties at that time, necessities for which they naturally provided, advantages each probably sought to secure, and relation of properties and rights in regard to which they negotiated o Where public interest is affected, interpretation is preferred which favors the public o Specific provisions usually regarded as qualifying the meaning of broad general words in relation to particular subject o Unless contrary to plain meaning of contract, an interpretation given by parties themselves will be favored

PACIFIC GAS & ELECTRIC CO. V. GW THOMAS DRAYAGE & RIGGING CO (288) D agreed to furnish labor/equipment at own risk and expense and to indemnify P cover fell and damaged Ps turbine Issue: Whether extrinsic evidence is relevant to prove a meaning which lang of instrument is reasonably susceptible Holding: Yes, relevant evid allowed to prove meaning here Rule: If ct decides lang is susceptible two interpretations, extrinsic evid relevant to prove meaning is admissible - Exclusion of relevant, extrinsic evid justified only if feasible to determine the meaning the parties gave to the words from the instrument alone - Extrinsic evid not admissible to add to, detract from, or vary terms of contract Discussion on PG&E v. GW Thomas - Indemnification: Like one party saying, I know youre liable but Ill bear the cost - Reason party may agree to indemnify other o Party may be in better position to bear risk o Ex- author plagiarizes, publishing company is sued, author will indemnify publishing company - Here, agmt to indemnify against all loss, damage, expense and liability resulting from injury to property . . . - Prof thinks trade practice shouldnt be used to trump the lang of the contract ZRL CORP V. GREAT CENTRAL INS CO (293) Restaurant ejected 3 black men now suing for racial discrim, Restaurant says claim covered under insurance policy since it covers wrongful eviction Insurance wont pay Issue: Whether wrongful eviction includes racial discrim suit when asking patron to leave Holding: Yes, context shows wrongful eviction meant to include action here Rule: Noscitur a sociis, words or phrases s/b defined in context of associated words or phrases - Term wrongful eviction included in group of torts involving patrons - Insurance co concedes that wrongful eviction would include situation in which insured removed rowdy patron from premises, so follows that term would also cover charge of racial discrim - Arguments for ins co o Co never intended to defend against claims of racial discrim o P knows doctrine of contra proferentem, - construed against the drafter NANAKULI PAVING V. SHELL (297) P bought asphalt from D, P claims D breached by failing to price protect (routine of suppliers in trade) and reinforced by Ds prior course of performance Issue: Whether course of performance and usage of trade can be considered in contract interpretation Holding: Yes Rule: UCC allows for liberal interpretation of comml usages, so cts cant stand in way of comml practices and usages by insisting on narrow/inflexible rules of interpretation - Evidence shows suppliers routinely price protected contractors at this time, small market led to trust among suppliers and pavers - Shell did price protect at other times - Enough evidence for jury to find that price protection in trade existed in HI at time, regular enough to bind seller - Under UCC, comml agmt goes beyond written words on paper, includes course of dealing, usage of trade, course of performance Discussion on Nanakuli - UCC 2-208(2): Pecking order for contract interpretation, if below conflict w/ each other o Express terms o Course of performance Revised 1-303(a) 8

o Course of dealing Revised 1-303(b) o Usage of trade Revised 1-303 Note, court didnt follow above order in this case 2-202 (parol evidence) allows following to explain or supplement, but not contradict, terms of agmt o Course of performance o Course of dealing o Usage of trade

CISG
Overview - An international treaty - Like a contract among countries - When countries adopt, it becomes part of their law o US, Canada, Mexico o Most of EU, but not UK or Ireland o China, Korea, Japan Questions - When is it applicable? o Contracts for sale of goods o Between parties whose places of business are in different countries o When countries are parties to CISG - What happens to UCC and common law when CISG applies? o CISG trumps UCC and common law (US Const makes treaties higher than state law) o CISG will be first place courts will look to answer questions of parties o If answer not in CISG, then can be supplemented by UCC 2 and common law - If parties expressly choose laws of certain state o Choice of law clauses almost universally cant exclude use of CISG o CISG still part of the law of those states o Even when parties want state laws to govern, courts find CISG will be used instead - If parties say want to exclude law of CISG o Then CISG wont apply to relationship o Keep in mind when drafting o This will hold up, but choice of law clauses wont - No parol evidence or statute of frauds, unless contract has merger/integration clause o More flexible for interpretation o Parties can argue intent v. express language - Wont be asked for detailed analysis under CISG for this class o Just be able to recognize when CISG applies instead of UCC article 2 o For analysis, say This is sale for goods Between parties w/ places of busi in diff countries Parties have adopted CISG If unsure about whether country has adopted, just say if has, then CISG would control

Implied Terms and Implied Covenant of Good Faith

Overview - Cts often called upon to supplement express contracts w/ other terms - Rstmt 204, a term which is reasonable in circumstances is supplied by the ct even though one party or other may not wish that term to be present - Led to list of default terms or gap fillers o For sale of goods, many of these terms are codified in statute o Parties may depart from them, but must provide expressly; if not, then UCC terms apply - Implied obligation of good faith and fair dealing adopted in UCC o UCC 1-203, revised 1-304 o Then generalized for all contracts by Rstmt 205 o no requirement to negotiate in good faith

HAINES V. CITY OF NEW YORK (316), implied terms NYC ran sewage for towns, developer wanted to hook new lines, NYC wouldnt allow because of excess/overflow to system Issue: Whether contract missing duration term implies perpetual duration Holding: No, continuing performance does not imply perpetual duration Rule: When parties have not clearly expressed duration of contract, courts will imply they intend performance to continue for a reasonable time - City is obligated to maintain existing plant but not required to expand or build new one - Under circumstances, reasonable to infer that parties intended city to maintain facility until time city no longer needed or desired water, purity of which plant designed to insure Discussion on Haines v. City of New York - Omission of duration in contract o How long contract will last o P arguing that city is perpetually bound to operate/expand facility o Ct finds Duration not perpetual, but for a reasonable time Duration will last until city no longer needs water supply - Omission of scope in contract o Whats included in citys duties o D arguing that contract is terminable at will o Ct finds Citys duty not broad enough to include growing needs of municipalities City doesnt have to expand or build addl facilities Ct says citys duty just to maintain facility at its original max capacity - Requirements Contract required to supply 100% of all production to buyer o If they do not meet 100% of demand = BREACH o UNELSS there is a term that limits this obligation - Foreseeability determines intent of parties o Building a new plant in 1924 was NOT foreseeable could not have been itnent CENTRONICS CORP V. GENICOM CORP (320), implied covenant P selling business asses to D, D putts funds in escrow while P negotiation of price takes place, P wants distribution for undisputed amounts Issue: Whether contract missing term about escrow distribution implied duty to release funds not in dispute Holding: No, distribution not implied Rule: When agmt gives one party a degree of discretion sufficient to deprive other party of portion of value, parties intent to be bound raises implied obligation of good faith to observe reasonable limits in exercising discretion - Duty of good faith arises when one party has discretion given to it by contract - No discretion given here, ct not willing to rewrite agmt Discussion on Centronics - Three categories w/ implied duty of good faith o In contract formation, refrain from misrepresentation (very narrow) o In at-will emp, cant fire emp out of malice/bad faith in retaliation for action taken or refused by employee in consonance w/ public policy (very narrow) o Limits on discretion in contractual performance, at issue here - Ct identifies common rule o When one party is given some sort of discretion, that discretion is not absolute o Party w/ right to exercise discretion has to do so in good faith - Discretion o Sometimes contract confers decision-making authority to one of parties o Law then implies an obligation of good faith in contract performance - Unilateral movement constrained by duty of good faith o Absence of discretion (unilateral right) o (1) deny other party economic benefit (alt. party will suffer loss) o (2) recapture by first party of economic benefit - CISG o No clause requiring good faith in inatl sale of goods by merchants o But most European codes have clauses similar to Rstmt, excluding conduct of bad faith

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SHELL OIL CO V. HR, INC (330) - Ps think D is intending to drive dealers out of business w/ high gas prices, claiming breach of duty of good faith Issue: Whether the price fixed by a refiner for the sale of its gasoline was in good faith as required by code Holding: Yes, price was fixed in good faith Rule: Commly reasonable price is good faith price under 2-305 absent some evidence that refiner used pricing to discriminate among its purchasers Shell Oil v. HR, Inc - UCC 2-305(2) in dispute here o Price to be fixed by seller or buyer, means price to be fixed in good faith o Good faith includes observance of reasonable, comml standards in trade if party is merchant - Posted price satisfies good faith requirement o 2-103(1)(b) good faith honesty in fact and reasonable terms of trade - Good faith has general definition o Here, have seller setting price in contract, must be done in good faith o Look to official comment 3 for more guidance, focus on objective standard o One way to understand, posted price automatically satisfies good faith requirement o BUT, official comment isnt law, adopted statute is law so must look to lang of statute - Ct ultimately looks back to language of contract for setting price DONAHUE V. FEDERAL EXPRESS CORP (340) Employee accused supervisor of improprieties, eventually terminated, appealed term under cos fair treatment procedure, but co upheld term Issue: Whether employer violated implied covenant of good faith and fair dealing in terminating an at-will emp Holding: No, in this case employer didnt violate implied covenant Rule: Private emp hasnt violated public policy when fires whistle blower who didnt have public or legal duty to report - Ct says o Emp was at-will o Grievance procedure existed, but didnt become part of employment contract o FedEx doesnt have to follow grievance procedure since not part of contract o Note, other companys policies may become part of emp contract, but not here - Public policy claim o To violate public policy, emp can Require employee to commit crime Prevent emp from complying w/ a statutorily imposed duty Discharge employee when specially prohibited from doing so by statute o Public policy is to be ascertained by ref to laws and legal precedents and not from general considerations of supposed public interest - To defeat at-will presumption o Emp can show he gave employer addl consideration other than services for which he was hired o Donahue claiming addl consideration was substantial, superior job performance o Ct finds this insufficient

Express and Implied Warranties

CARPENTER V. CHRYSLER CORP (348) - Man bought car asking for reliable car, car had many problems dealer knew about, but sold stating it was a reliable car Issue: Whether salesmans statements regarding car was express warranty Holding: Yes, salesman provided express warranty Rule: Seller may exaggerate w/o becoming liable for breach of express warranty, but cant misrepresent a fact - UCC says express warranty created by affirmation of fact or promise made by seller to buyer which relates to goods and becomes part of basis of bargain - For P to make case of breach of express warranty, must prove following o Ds sale of goods to P o Ds representation to P that goods were of certain kind or quality o Ds representation induced Ps purchase or was material factor in Ps decision to purchase o Nonconformity of goods to the representations made o Ps notice to D, w/in reasonable time of discovery of nonconformity, of failure to conform o Ps damages Discussion on Carpenter v. Chrysler Corp 11

Not in LA, car is a good, so UCC governs transaction, doesnt matter that buyer isnt a merchant UCC 2-313 discusses express warranties o Three categories that can give rise to express warranties under subsection 1 a. affirmation of fact or promise b. description of conforming goods c. sample or model made for which goods shall conform to o Above 3 create express warranty when relate to goods and form part of basis of bargain o Subsection 2 Seller doesnt have to use specific wording of warranty Seller doesnt need specific intention to make a warranty Arguments why salesman gave warranty as opposed to using puffery o Look at salesmans precise language under 2-313 subsection 1 Looks like affirmation of fact or promise, 1a Could be a description too Not a sample or model though o Customer said needed X Salesman pointed to X Customer relying on salesmans judgment in making purchasing decision Looks like affirmation of fact Arguments against warranty o Most reasonable consumers are expecting that salesman will engage in puffery o Salesmans job to move vehicles, so puffery used and is allowed o Not salesmans fault vehicle didnt work, since mechanic signed off on work o Wasnt specific, just said good and reliable car Ex of specific- this car gets 30 mi/gal, is a warranty Not ex- this car gets good mileage, not a warranty Prof thinks lang alone doesnt look like warranty o But looking in context looks more like express warranty o And knowing customers needs, also looks more like express warranty

UCC Implied Warranties - 2-314 implied warranty: merchantability; usage of trade - 2-315 implied warranty: fitness for particular purpose - 2-316 exclusion or modification of warranties Warranties - Promise a seller makes about a good being sold - Where can find warranties o In contract, can be in warranty section or any other place o Statement of salespeople, either oral or written o Advertisements, promotional literature, documentation on product o Sample presented to potential buyer o Industry standard: course of dealing and usage of trade o UCC VLASES V. MONTGOMERY WARD & CO (354) Man bought chickens from MW. Chickens died after delivery MW says they didnt know disease was present when shipped Issue: Whether seller is liable for breach of implied warranty when unable to detect the defects in its product Holding: Yes, seller is liable Rule: Seller is liable for quality of goods/breach of warranty (like strict products liability) - Two implied warranties at issue, both to protect buyer from loss when no express promise but goods not good o Merchantability o Fitness for a particular purpose - Purpose behind implied warranty sections of code is to o Hold seller responsible when inferior goods are passed to unsuspecting buyer o Dont need evidence that defects should/could have been discovered by seller o Just need evidence that goods not of merchantable quality or fit for their particular purpose - Implied warranty arises only if the seller is a merchant w/ respect to goods of that kind

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MASSEY-FERGUSON, INC. V. UTLEY (357) Dealer sold combine attachment to farmer. Assigns contract to manufacturer farmer defaults on payment claiming manufacturer breached implied warranty Issue: Whether breach of implied warranties can be asserted against assignee when buyer agreed in contract not to assert defenses against assigned that might have asserted against the seller Holding: Yes, buyer can assert breach of implied warranties and bring defense against P in this case Rule: Exclusionary lang disclaiming warranty not conspicuous, so not properly disclaimed UCC 2-316 - How is this different from implied warranty of merchantability (in 2-314)? o Doesnt just apply to merchants, applies to any seller o Seller has reason to know of merchantability for buyers purpose o Particular purpose this buyer has in mind for this good, could be completely out of the ordinary - Subsection 1 o Cts will take words of express warranty and look at limitations and construe in way for both to be enforced as much as possible o Express warranties trump limiting language - Subsection 2 o Language must mention merchantability o If in writing, must be conspicuous o To exclude or modify any implied warranty of fitness, must be in writing and conspicuous Magnuson-Moss Act (361) - Just know it exists - Fed law that regulates how warranties can be made when seller selling consumer good to consumer - Dont spend time studying

Modifications
Pre-Existing Duty Rule Restatement 73 - Common law rule, applied when not dealing w/ goods - Modification is a contract itself, so requires consideration to be enforceable - Agreeing to do something already agreed to do, so cant get addl compensation - Still in use, but in decline, and UCC 2-209 deals w/ issuemod needs no consideration to be binding ANGEL V. MURRAY (363) - city had contract for garbage removal, additional 400 houses led to higher collection costs asked for more money (5 year contract) Issue: Whether modifications (addl payments) were illegal because they lacked consideration Holding: No, modifications were legal Rule: Modification of a contract is itself a contract, unenforceable unless supported by consideration - Subsequent agmt for addl pay is unenforceable if contractor is only doing work which wouldve been required of him under original contract - BUT cts reluctant to apply pre-existing duty rule when one party encounters unanticipated difficulties and other voluntarily agrees to pay addl compensation for work already required under contract - Rule doesnt compel a modification of unprofitable/unfair contract, just enforces if parties voluntarily agree and if: o Promise modifying original contract was made before contract was fully performed on either side o Underlying circumstances prompting modification were unanticipated by parties o Modification is fair and equitable - Restatement 89 Modification of Executory Contract - Promise modifying duty under contract not fully performed on either side is binding o Modification is unfair and equitable in view of circumstances not anticipated by parties when contract was made: or o To extent provided by statute: or o To extent that justice requires enforcement in view of material change of position in reliance on promise Discussion on Pre-Existing Duty Rule - Implicates o Statute of frauds o Parole evidence rule o Reliance

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BROOKSIDE FARMS V. MAMA RIZZOS, INC. (376) requirements contract between P and D, forbids oral modifications, D asked P for addl performance in consideration for increased price, D would write change on purchase order ssue: Whether oral agmt to change contract and put modification in writing is enough to modify contract when contains clause forbidding oral modifications of terms Holding: Yes, oral agmt enough when one party relies to its detriment on promise of other party Rule: Promissory estoppel can be used when one party promises but fails to create writing changing contract Discussion on Brookside Farms v. Mama Rizzos - Consideration given: one party has increased performance, other party paying more for this service o Pre-existing duty rule consideration made - Statute of Frauds contract, not enforceable by SoF if oral o IS enforceable under (3) goods for which payment has been made and accepted or which has been received and accepted - 2-207 oral changed not materially altered obligations are not barred - 2-209 o Agreement to modify needs no consideration o Signed agreement exclusion modifications (except in signed writing) cannot be modified, except between merchants such requirement form must be signed by each party o Requirements of SoF must be satisfied IF contract is modified w/in provisions - But problem is contract forbid oral modifications - Court found modification was enforceable though promissory estoppel o D promised to write in modification on their contract o Parties performing as if both agreed to modification Unilateral v. bilateral contracts - Unilateral has only one promisor - Other party hasnt contractually obligated itself - Classic ex of unilateral contract, Hamer v. Sidway (Uncle Willy) ASMUS V. PACIFIC BELL (385) - PB has policy giving job security to managers, gave notice of would be policy change Issue: Whether employer may terminate or modify unilateral contract thats been accepted by employees performance Holding: Yes Rule: Employer may terminate after a (1) reasonable time, (2) on reasonable notice, and (3) w/o interfering w/ the employees vested benefits Discussion on Asmus v. Pacific Bell - Employer made unilateral promise to employees o No return promise made by employee o Consideration is continuing to work in response to unilateral promise - Different approaches could adopt, ct follows third o Employer could terminate w/o notice at any time before completion of contract o Impose bilateral concepts to require mutual assent and addl consideration to support termination o Employers must have mechanism which allows them to alter the employee handbook to meet the changing needs of both busi and employees - Arguments for majority and dissent o Majority, favors employer Fair and reasonable policy, allows for time and notice to change agmt Would be crazy for employer to be stuck w/ many policies, inefficient and chaotic If no right to change unilateral policy, co will be stuck w/ it forever Dissent - Pacific Bell would only be stuck w/ policy for length of employment of people w/ policy in their employment contract - Must show respect for terms of contract, allows employees to rely on promises of employers In profs view, this was bad decision - Employers will make promises - But wont be obligated to keep promises - Employees will be skeptical of promises of employer, less likely to be loyal to employer WONG V. PAISNER (401) P sent bill for $5400, more than quoted price of $1500. Customer paid $1500 with payment for full noted on check this crossed out then deposited Issue: Whether have enough evidence for instruction of accord and satisfaction Holding: Yes 14

Rule: Dispute about method of calculating amount owed is enough for jury to consider accord and satisfaction Doctrine of accord and satisfaction - Offer by someone who has obligation to another party to substitute performance in satisfaction of existing obligation - Amount of underlying obligation must be in dispute for accord and satisfaction o Ex- promissory note for $1000 One party owes, but can only pay $750 Party pays $750 marked payment in full Other party cashes check but sends bill for remaining $250 No accord and satisfaction since $1000 amount not in dispute Neither partys rights or duties have changed, no consideration to change amount o Another ex- parties dispute about amount due One party wants $5400 Other party thinks should only pay $1000 When party pays $1000, marked payment in full and other party cashes, Then theres accord and satisfaction - How to establish amount is in dispute o Question of fact, fact-finder must determine o Usually dispute about method of calculating amount owed Can have evid like receipts, time entries, oral agmts, etc. Good example in above case w/ amount for services of architect o Possibility to accept lower pymt (that says in full) if accepted in protest Must be very careful in doing so Check law in jurisdiction Can be risky, but might be option if party really needs partial payment

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Legal Regulation of Contracts

Misrepresentation and Mistake of Fact
Overview - Person asserting mistake is almost always D trying to get out of contract - Mistake m/b something big, a mistake of fact - Claim is destroyed if risk of mistake was allocated to one party or another - Mistake pleas are rarely successful today Definitions - Misunderstanding: when offeror means one thing and offeree understands another, or vice versa - Fraudulent misrep: when ones mistaken belief was intentionally fostered by another - Warranty: where mistake is fostered by honest and good faith assurances of another - Mistake and misunderstanding o Usually lead to finding of no binding contract o No damage recovery - Misrep and breach of warranty usually result in damage recovery Weintraub v. Krobatsch (408) Facts: Home for sale, always saw during day, came at night and full of roaches Issue: Whether seller has duty to disclose defects in property when buyer doesnt address those defects Holding: Possibly, case should go to full trial; Reverse and remand, buyers will appeal Rule: Minor conditions parties would reasonably find immaterial dont call for judicial intervention (but this isnt minor) Discussion - Rstmt 164(1): If agmt to contract induced by fraud misrep, contract is voidable - Rstmt 161 o Material misrep can include failure to disclose info o But Comment A says party not required to disclose all info knows about situation - Murky standard, no bright-line rules - Representations and Warranties o Section of contract o Will include promises of seller made about condition of thing being sold o If seller makes rep about no roaches, but turns out there are and misreped, then seller has breached rep and warranty of contract - Or could have express as is clause, so seller not liable for later conditions found out Lenawee County Board of Health v. Messerly (415) Facts: P agreed to buy property in present condition, found raw sewage seeping out, bldg condemned Issue: Whether buyers can avoid contract on basis of mutual mistake and lack of consideration Holding: Parties did have mutual mistake, but no rescission warranted because risk of loss assigned to buyers Rule: Rescission not available to party who assumed risk of loss in connection w/ mistake (as is clause) Discussion - What is a mistake? A belief not in accord w/ the facts. - How to analyze now that establish theres a mistake o Ct says will use case-by-case analysis o Rescission appropriate when Mistake is about essential assumption of parties upon which agmt made, AND which materially affects agreed performance of parties - Both elements for rescission met, but ct finds cant rescind here o Because of as is clause o One party assumed risk of loss

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Public Policy and Illegality

Overview - Cts willingness to enforce contract is not w/o limits - Wont enforce when contract or performance of obligation is illegal Clouse v. Myers (426), illegality Facts: Liquor license in Ds name, became partners w/ P but called contract something else to avoid new liquor license Issue: Whether P gets money back when knowingly entered into illegal contract Holding: No, P cant recover Rule: Ct cant redress a wrong that has resulted from the injured partys own wrongful and illegal conduct Restatement and Unilateral Mistake (424) - Restmt 153 says contract is voidable due to unilateral mistake under certain circumstances - Where one party made contract, made mistake about basic assumption w/ material effect on performances that is adverse to him, - Contract is voidable by party if he doesnt bear risk of the mistake - AND if o Enforcement would be unconscionable, OR o Other party had reason to know of mistake or his fault caused the mistake Hopper v. All Pet Animal Clinic, Inc. (430), public policy Facts: Vet working and later signed non-compete covenant, left and started own competing practice Issue: Whether covenant not to compete is enforceable Holding: Yes, but ct narrows scope Rule: Traditional disfavor of restraints, so non-compete covenants are construed against party seeking to enforce - Covenant: No small animal practice in 5 mi radius of city for 3 yrs - Duration unreasonable: One yr limit is sufficient to moderate risk of injury from unfair competition Discussion - Why are courts hesitant to enforce restrictive covenants? o May create undue burden/hardship on one party, ability to earn a living o Could burden society at large, be a restraint on trade, stifle innovation - Ct found restrictive covenant enforceable here, considered three elements o Nature of activity being prohibited Here was small animal vet practice Hopper could still practice large animal med o Geographic scope Five-mile radius of city here Ct found okay, Hopper couldve gone elsewhere in county and practiced o Duration Three years here, ct found unreasonable restraint on trade Ct said one year more reasonable, sufficient to moderate risk of injury from unfair competition Ct narrows this term and then enforces covenant - Approaches to covenant w/ unreasonable terms o Throw out whole thing and dont enforce any o Throw out unreasonable term and enforce rest o Blue pencil rule: rewrite bad term and then enforce entire covenant Note 3 (441) - If Hopper was partner instead of employee, signed non-competed, sold out to other partners, same outcome? - Analysis o Should look at amount paid for partnership If a great compensation, more likely to enforce If not that much, less likely to enforce o Also look at covenant not to compete If narrow (short amount of time, still practice some med), more likely to be enforced If broad (cant practice at all or for a long time), less likely to be found reasonable and enforced Also consider whether public is being denied an important service

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AZ v. BZ (441), public policy Facts: Couple to IVF clinic, H signed donor form then W added terms, couple separated and embryos left Issue: Whether old consent form can be enforced when relationship between signing parties has fundamentally changed Holding: No, cant enforce form; affirm, wife loses appeal/husband wins Rule: As matter of public policy, wont force one donor to become parent against his/her will Discussion - Husband signed before wife added terms, so no intent to agree to terms added - Note: cts will usually enforce anyway, this case is an exception - Two separate issues o Contract formation o Contract enforcement - Public policy reason to not enforce o Court wont order husband or wife to do whats necessary to prevent or do whats necessary to conceive o Prof thinks above is strongest public policy argument - Strongest legal argument, in profs opinion o Could strictly construe language o Say parties only addressed event of separation o Since divorce happened here, then cant enforce contract

Unconscionability
Williams v. Walker-Thomas Furniture (450) Facts: Series of purchases from furniture store, term that if default store can repo all items, customer defaulted Issue: Whether pro rata (all debts pooled/all items collateral) clause is enforceable Holding: Possibly, remanding for trial Rule: Ct options w/ unconscionable clauses (note: ct didnt say clause was unconscionable, wants trial ct to decide) - Throw out whole thing and dont enforce any - Throw out unreasonable term and enforce rest - Blue pencil rule: rewrite bad term and then enforce entire covenant Notes on Unconscionability - Ways cts look at now, need both below o Procedural unconscionability, how was this contract entered into? Unfair leverage Unclear, hidden terms o Substantive unconscionability, whats in the agreement - Cts use unconscionability sometimes to protect categories of people, like consumers - But not often used, and almost never used in comml transactions

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Remedies
Overview - How to make an injured party whole - Look to contract first, may list specific remedy for breach - If contract addresses, is that sole and exclusive remedy, or is it just one of many? - If contract says remedy w/in is sole and exclusive remedy, usually upheld as only remedy Expectation Damages - Remedy thats most appropriate, common - Putting harmed party in same position economically as if contract had been performed - Example o Lawyer had contract to work for one year for $100k o Fired w/o cause and gets job for $60k o Expectation damage is then $40k - Must respect idiosyncratic tastes o Even if contract would decrease value o Need to respect subjective happiness o Ex- author paints house lavender, decreases value but he likes it - Farnsworth formula o General measure = loss in value + other loss cost avoided loss avoided o Loss in value: diff in value between what injured wouldve recd and what did rec Ex- buy nice new car Go to pick it up, and has big dent in it Diff between new car and car w/ dent in it (worth less) o Other loss: injureds costs from breach Ex- Transactional costs, need to negotiate w/ new supplier when old one breaches Damage to reputation o Cost avoided: what injured doesnt pay as result of reach Ex- Contractor was hired for job to be paid $100k, hiring party breached But contractor wouldve paid subcontractor $50k Should subtract $50k didnt have to pay subcontractor Also subtract materials didnt purchase, labor costs, etc o Loss avoided: any savings injured may make after breach Other Damages (quickly went over, just know definitions) - Reliance damages o Rare, but given when P cant show what expectation damages would be o Return to P of his outlay in performing the contract o Dont include Ps profit - Restitution damages o More rare o Part of Ps outlay that benefitted D o Dont include Ps profit o Ex- caring for lost pet until owner is found, owner benefits - Specific performance or an injunction o Equally rare o Not given if damages are adequate to protect expectation interest of injured party UCC Damage Formulas - 2-711(1), Buyers remedies in general o Buyer may cancel o Buyer gets back down payment if cancels - 2-713(1), Buyers damages for non-delivery or repudiation o Buyers remedy o RBPP + MP KP + ID + CD ES = D o Letters Return buyers purchase price 19

Market price Contract price Incidental damages, 2-715(1) Consequential damages, 2-715(2) Expenses saved Damages 2-708(1), Sellers damages for non-acceptance or repudiation o Sellers remedy o KP MP + ID ES = D o Letters Contract price Market price Incidental damages Expenses saved

FREUND V. WASHINGTON SQUARE PRESS, INC. D agreed to publish book in hardcover w/in said amount, did not exercise 60-day right to terminate and never printed. P had payed nonreturnable $2000.00 advance Issue: Whether P can recover damages in excess of value of contract being fully performed Holding: No, P can only get nominal damages Rule: Damages not recoverable for loss beyond amount that evid permits to be established w/ reasonable certainty Discussion - Self-publishing, which would cost $10k, not the same thing as publishing through pub co - Thus ct finds $10k damages not appropriate award, would put author in better position than if contract performed - Could only get nominal damages - P wasnt able to show amount of damages from lost royalties 359/360 determines whether remedy in damages would be adequate - FACTORS: o Difficulty in proving damages w/ reasonable certainty o Difficulty in procuring suitable substitute performance by means of money award o Likelihood award of damages could not be collected **professor thinks this is a good case for determining damages specific performance may have been more fair PEEVYHOUSE V. GARLAND COAL MINING CO. D specifically agreed to perform certain restorative and remedial work at end of lease not done Issue: Whether damages for performance can exceed value of property after work performed? Holding: No, damages s/b limited to diminution in value of premises because of non-performance Rule: When provision breached is incidental to main purpose of contract, damages are limited to diminution in value resulting to premises because of non-performance (perform cost $29k, but value loss only $300) Discussion: What more could P have done, when they put the outcome they wanted in the contract? - Couldve had clause for liquidated damages of cost of performing if company didnt perform o Courts will enforce unless the amount looks like a penalty o Courts wont enforce penalties on contracts - Couldve had clause for completion of work o Want company to do job, but if company not done by certain time, then can hire other company o First company will pay bill for other company doing work o Problem: getting first company to pay the bill - Couldve gotten a deposit, kept money in escrow account or letter of credit, bank guarantee for money - Couldve had clause for specific performance o Parties intent that specific performance be granted o Note: ct wont be bound by this, but will consider it - Couldve emphasized importance of restoration of land in recitals o Still not binding on court o But more difficult for ct to say restoring land was ancillary issue to contract - Best way: Couldve gotten a surety bond for amount of performing remedial work o Wouldve protected P here, wouldve been able to get money to complete job o But tough to get company to agree to it since expensive

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HADLEY V. BAXENDALE P hired D to transport broken mill shaft d promised tP to deliver next day. Delivery did not occur for multiple days P lost addl week of work Issue: Whether damages for delay/lost profits was foreseeable Holding: Possibly, remanding for jury to determine (ct hints damages were foreseeable) Rule: Damages should be limited to those foreseeable when contract was made DISCUSSION - 351 Unforeseeability and Related limitations on Damages - 2-715 Buyers Incidental and Consequential Damages o (1)(a) loss from genera or particular requirements/needs which seller had reason to know and which could not reasonably be prevent by cover (obligation to mitigate damages) MITIGATION Repudiation - one party purports to terminate K, w/ no right to do so CLARK v. MARSIGLIA painter refused repudiation and continued to finish painting Issue: Did painter had duty to mitigate damages when P repudiated Holding: YES Rule: one party does not have right to insist on performance, which increases cost MADSEN v. MURRY & SONS agreement for D to make pool table and P to furnish w/ special rails (use for a pinball/pool table). P did not finish rails D salvaged tables for significantly less than pool table value Issue: is there a duty to mitigate damages? Rule: Mitigation of Damages Rule no party suffering a loss as a result of breach is entitled to any damages which could have been avoided if aggrieved party had acted in a reasonably diligent manner in attempting to lessen losses Discussion: - P paid $42,500 advance - MP exists wherein aggrieved seller can market its goods - MP = 21250 and KP =33750 - BD (42,500) SD (33,750) $8750 to Buyer o Buyer not entitled to further credit for expenses saved by seller o Only gets difference between what he lost and what he could have had BD KP EXAM - No need to talk about case law - APAC o Applicable law UCC or Common Law o Principles likely to be relevant for analysis Statute of Frauds, Parol Evidence, etc Description of and citation to principle Further analysis of other principles implicated o Analysis argue BOTH sides o Conclusion not as important as analysis Play TENNIS and come to reasonable solution

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