Contract in General

General Terms
contract a promise or set or promises, for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty promise a commitment to do something in the future

Types of Contracts
As To Formation express - formed by language, oral or written implied in fact formed by conduct, i.e. manifestations of assent other than oral or written language As to Acceptance bilateral an exchange of mutual promises unilateral where the offeror requests performance rather than a promise and promises to pay upon completion of the requested act by the promisee As to Validity void no valid agreement for any purpose; no legal effect voidable - one that one or both parties may elect to avoid by raising a defense unenforceable an agreement that is otherwise valid but which may not be enforceable due to various defenses extraneous to contract formation To determine if there is a contract, ask: Was there mutual assent? Was there consideration or some substitute for consideration? Are there any defenses to creation of the contract?

Offer & Acceptance

Mutual Assent
For a contract to be formed, the parties must reach an agreement to which they mutually assent o Almost always reached through offer and acceptance An agreement on the same bargain at the same time Objective test o What a reasonable person in the position of the other party would conclude that his objective manifestations of assent mean Objective manifestations i.e., what is actually said and done Each party must act in such a way as to lead the other to reasonably believe that the agreement has been reached Caveat: Objective knowledge prevails except where there is actual knowledge o Lucy v. Zehmer

Subjective knowledge that the other party is joking or does not otherwise intend to enter into contract may trump objective reasonableness Ex post behavior speaks to belief regarding the existence of an agreement Subjective knowledge of the other persons state of mind that hurts your own interest is taken into account There is a presumption that parties contract for market price Courts have moved away from the meeting of the minds test Courts, judges, and juries cannot be expected to read minds o A promise which is expected to induce definite action by the promisee, and does induce the action, is binding if injustice can be avoided only by enforcing the promise Cohen v. Cowles Media Co.

Offer
General Creates a power of acceptance in the offeree Creates liability on the part of the offeror Offeror is the master of his offer o May specify the mode of acceptance By default, offers are open for a reasonable period of time o Regardless of whether the offer is for a bilateral or unilateral contract Cannot be negotiated o Options can be negotiated, however Creation An offer is effective only if the terms of the proposed contract are sufficiently definite and the person to whom it is directed may reasonably conclude that an offer is intended Reasonable Expectation o Was there an expression of a promise, undertaking, or commitment to enter into a contract? Must go beyond mere invitation to begin negotiation Must be an intent to enter into contract Look to: Language o Technical language is not necessary Surrounding Circumstances o Circumstances surrounding the language will be considered by courts Statements that are made and are reasonably understood to be made in jest, anger, or by way of bragging have no legal effect Look to objective understanding of the situation and the context Conduct may show intent to contract

Carlill v. Carbolic Smoke Ball Co. o Company made a bank deposit to demonstrate sincerity Prior Practice / Relationship of the Parties o Courts will look to any prior relationship or practice of the parties Method of Communication Industry Custom o Were there certainty and definiteness in essential terms? Ask whether enough of the essential terms have been provided so that a contract including them would be capable of being enforced Typically important: o Identity of the offeree o Subject matter Offers involving real estate must identify the land and price terms Offers for sale of goods must include a quantity Exceptions: o Requirements Contracts A buyer promises to buy from a certain seller all of the goods the buyer requires, and the seller agrees to sell that amount to the buyer o Output Contracts A seller promises to sell to a certain buyer all of the goods the seller produces, and the buyer agrees to buy that amount from the seller o Missing Terms That one or more terms are left open does not prevent the formation of contract Only if it appears the parties intended to make such a contract and there is a reasonably certain basis for giving a remedy The court may supply reasonable terms under common law and the UCC o UCC 2-305(1) Gap Filler Advertisements are generally construed merely as invitations to offer o However, ads can be offers if they are definite, clear, and specific, and leave no room for negotiation o Was there communication of the above to the offeree? Offeree must have knowledge of the offer in order to accept Termination Revocation In the absence of consideration or invited reliance on the part of the offeree, offers are usually revocable by the offeror

o revocation - retraction of an offer by the offeror Terminates the offerees power of acceptance if it is communicated before acceptance i.e., Revocation terminates the offer Generally effective when received by the offeree Irrevocable Offers Firm Offer Rule UCC 2-205 o If a merchant offers to sell goods in a signed writing, and the writing gives assurance that the offer will be held open, it is irrevocable No need for consideration Open for time specified If none specified, for a reasonable time not to exceed three months Part Performance or Detrimental Reliance o Where the offeror could reasonably expect that the offeree would rely to his detriment on the offer, and the offeree does so rely, the offer will be irrevocable Becomes an option for a reasonable length of time o Under certain circumstances, including partial performance of a unilateral contract, reliance may be a substitute for consideration which renders an option irrevocable o Sufficient Reliance Offer for a unilateral contract Options o Beginning of performance by the offeree creates an option contract Not an actual contract; an option only becomes a contract once performance is completed Must be the start of the actual performance Preliminary preparations that are not explicitly called for by the offer do not count o An offeree may convert an offer into an (irrevocable) option by providing consideration An offer plus a paid-for promise by the offeree for the offeror not to revoke o Counteroffer or outright rejection by an option holder will not terminate an option unless the offeror materially changes his position in reliance upon the rejection o Offerors duty under the option contract is conditional on the offerees completing performance as specified in the offer Must be completed within the time specified in the offer Restatement 45(2) Unclear whether the offer is unilateral or bilateral Acceptance occurs as soon as the offeree begins to perform o Difference here is that once the offeree begins to perform, he has accepted the contract and is bound to complete performance Partial Performance

Restatement 87(2) o An offer which the offeror should reasonably expect to induce action or forbearance of substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice o Restatement 87 The offeree is entitled to at least relief measured by the extent of any detrimental reliance Unilateral Contracts o An offer for a unilateral contract becomes irrevocable once performance has begun The contract is not formed until performance is complete Once performance has begun, the offeree is given a reasonable amount of time to complete Offeree is not bound to complete performance May withdraw at anytime prior to completion

Acceptance
General Offerees manifestation of assent to the terms of the offer, made in a manner invited or required by the offer o Form of acceptance may be specified by the offeror o Acceptance may be by conduct or performance Unless the offeror specifies performance, acceptance can be anything that is reasonable under the circumstances Most offers are accepted by promise An offer may be accepted only by a person in whom the offeror intended to create a power of acceptance o Even if the offer does not call for personal performance or special financial responsibility on the part of the offeree Where the performance requested is payment, all the offeree need do to fully accept is to tender payment o i.e., Show he has the payment on hand and that he is willing to transfer it Notice The beginning of performance constitutes acceptance o Where acceptance may be either through performance or promise o Contrast with completely unilateral contracts Where an offer invites acceptance only through promise (and not through some act), acceptance is usually not effective until offeror receives notice An acceptance is usually valid only if the offeree knows of the offer at the time of his alleged acceptance o In order to accept an offer, you have to be aware of it (Glover v. Jewish War Veterans) o True for both bilateral and unilateral contracts Mail Box Rule o Acceptances are effective when they are sent, regardless of when they arrive

Arbitrary rule most communications are effective only when they are received e.g., rejections, revocations Always involves: Parties in two different places Methods of communication that involve delays Acceptance of Offer for Unilateral Contracts Offer is not accepted until performance is completed o Beginning of performance creates an option, rendering the offer irrevocable o Offeree is not obligated to complete performance one he has begun Notice o Generally, the offeree is not required to give notice to the offeror that he has begun the requested performance Offeree is required to notify the offeror within a reasonable time after performance has been completed o No notice is required if: The offeror waived notice; or The offerees performance would normally come to the offerors attention within a reasonable time If performance is obvious to the offeror o The offeree must have notice of an offer of unilateral contract in order to accept it Performance alone will not constitute acceptance in the absence of notice Courts will generally not inquire into the offerees motivation for performance where offeree is aware of the offer UCC 2-206(2) o When a contract is accepted by the beginning of performance, if the offeree fails to notify the offeror of the acceptance within a reasonable time, the offeror may treat the offer as having lapsed before acceptance Acceptance is here is the beginning of performance rather than its completion In this case, no contract would have ever been formed Contrast with Restatement, where a contract was formed, but performance is excused by failure of a condition Acceptance of Offer for Bilateral Contracts Any offer that is acceptable in ways other than performance is a bilateral contract o May be accepted either by a promise to perform or by the beginning of performance Contrast with unilateral contracts Generally, acceptance must be communicated to the offeror o Exception: If the court finds that an offeree silently took offered benefits, acceptance is implied Especially true if prior dealings between the parties, or trade practices known to both, create a commercially reasonable expectation by the offeror that silence equals acceptance

Unless otherwise provided, an offer is construed as inviting acceptance in any reasonable manner and by any medium reasonable under the circumstances Acceptance Where Offer Invites Either Promise or Performance Often, offers do not make it clear whether the offer seeks a unilateral or bilateral contract o Usually where offers request that goods be shipped UCC 2-206(1)(b) Either shipment or a promise to ship constitutes acceptance Here, the offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by performing o Method of acceptance is up to the offeree Non-Standard Forms of Acceptance Acceptance of a benefit may result in contract where it leads an offeror to reasonably conclude that his offer has been accepted Silence may be an effective form of acceptance o Applies only where through a prior course of dealings: the offeree has give the offeror reasonable grounds for construing silence as acceptance, and the offeror in fact interprets silence in this manner In electronic commerce, offerees will not be deemed to have affected all proffered terms where a reasonably prudent internet user would not be on notice of those terms prior to manifesting assent to the contract

Rejection
Rejections are effective when received by the offeror Express o Statement by the offeree that he does not intend to accept the offer o Terminates the offer Counteroffer o Made by the offeree to the offeror that contains the same subject matter of the original offer, but differs in terms o Serves as a rejection of the original offer as well as a new offer Terminates the original offer o Do not confuse with mere inquiry o Mirror Image Rule Common law doctrine You can only accept the offer that was made Changing material terms and/or insisting on new terms in your acceptance amounts to a counteroffer o Terminates the right of acceptance with respect to the last offer o UCC 2-207 Response cannot be a conditional acceptance, but modification of the offer is allowable Almost always constitutes a contract The essence of the contract cannot be snuffed by the modification

Conditional Acceptance o I accept, with the condition that; if; provided that; so long as

Consideration
General Generally, a bargained for detriment o A promise is supported by consideration if: The promisee gave up something of value, or circumscribed his liberty in a way, and Suffered a legal detriment, in part because of the promise The promisor made his promise in exchange for the promisees giving of value or circumscribing of liberty The detriment induced the promise The consideration offered by each party is understood to induce the others participation in the bargain Indicative of the intent to be legally bound Used as a device to distinguish between enforceable and unenforceable agreements Consideration need not be of economic value o Courts will generally not analyze the adequacy of consideration Sufficient that there is some detriment Consideration does not have to be equal between the parties Past Consideration Past consideration is not valid consideration o Cannot be something that was already given or performed before the promise was made o Satisfies the requirement that consideration be something that was bargained for i.e., something that induced the promise and that the promise induced Past detriment may have induced the promise, but the detriment must have been induced by the promise Something that is already completed cannot be considered bargain for in this agreement A promise to pay for services received in the past is usually held to not be supported by consideration Preexisting Legal Duty Performance of or the promise to perform an existing legal duty is not consideration o Doing what you are already obligated to do is not detriment Promises as Consideration When consideration consists of mutual promises, the undertakings on either side must be real and meaningful o i.e., the promises must be mutually obligatory Conditional promises are enforceable o Unless the condition is entirely within the promisors control Mutual and Illusory Promises

Promises must be mutually obligatory o Both parties must make promises that somehow bind them Illusory Promises o Lack mutuality o Cannot be breached o A promise is not illusory if the promisor cannot control the conditions Conditional promises are enforceable Unless, the condition is entirely within the promisors control o E.g., A promises to deliver goods to B, only if X. There is consideration o E.g. A promises to deliver goods to B, only if A decides to do X. There is no consideration The contingency is entirely within As control Exceptions: o Requirements and Output Contracts Requirements contract a buyer agrees to buy all of a particular good that he requires from the seller Output contract a seller agrees to sell all of the output of a particular good to the buyer Consideration exists here because the buyer has parted with the legal right to buy the goods elsewhere, or the seller has parted with the legal right to sell to a different buyer UCC 2-306 Explicitly validates requirements and output contracts Mutuality of obligation is present because the party who will determine quantity is required to conduct business in good faith so that output or requirements will approximate a reasonably foreseeable figure Modification Proposal of additional terms ex post Common Law Modification is enforceable if: o There is some change in the world, and Unforeseen by contract Was not and should not have been accounted for o The process if fair Timely and truthful Generally enforceable without consideration o Some courts require that the party requesting modification first suffer some loss UCC 2-209 Modifications are enforceable even without consideration, so long as they are adopted in good faith o i.e., Motivated by a legitimate commercial reason The reason must both be good and be used in good faith Restatement 89

Modifications are enforceable even without consideration so long as they are fair and equitable in view of circumstances not anticipated by the parties ex ante o i.e., Modification must be adopted through an uncoercive process for an objectively demonstrable reason Ambiguities Which circumstances can be said to be unforeseen? Does a substantial increase in opportunity costs ever justify modification? What is the line before truthfully communicating that it is no longer rational to perform and threatening?

Substitutes for Consideration

Promissory Estoppel
Where a promise devoid of consideration induces a promisee to rely to his detriment Promises may be enforced where they cause reliance that is: o Foreseeable Foreseeable that the promisee would rely in the particular way that he did in fact rely o Reasonable o Substantial, and Injustice can only be avoided by enforcement of the promise o Actual The promisee must show that he would not have acted but for the promise o This does not render the contract enforceable Availability is contextual o Promises are more likely to be found legally binding in a commercial rather than a familiar relationship o May be available where contract remedies are not available before the promise in question failed to meet requirements of specificity o May not be available where the promissory relationship is already governed by contract o Often applied to enforce promises to make gifts that induce detrimental reliance Bids o Many courts treat a sub-contractors bid as temporarily irrevocable, for the period necessary to allow the contract to obtain the job and accept the subcontractors bid In effect apply promissory estoppel Based on the theory that the general contractor has reasonably relied on the subcontractors bid and would suffer a loss if the subcontractor backs out Restatement 90 A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise o Almost universally adopted

o Reliance may act as a substitute for writing UCC Does not explicitly recognize promissory estoppel o However, most courts hold that a party to a contract for a sale of goods may nonetheless invoke the doctrine in appropriate circumstances o Firm-Offer Rule may act as promissory estoppel A prior benefit plus a later promise o Moral obligation is sufficient consideration to support a subsequent promise to pay where the promisor has received a material benefit Need both a subsequent promise and a material benefit o That there would have been a mutually beneficial agreement is not enough Not considered real consideration because past consideration is not consideration Context is important o e.g., Employees expect compensation, but friends do not Two Primary Contexts: o Existence of moral obligation in itself gives rise to liability o Existence of moral obligation renders subsequent promise enforceable, notwithstanding absence of consideration Justifications: o It may ensure that people fulfill certain moral obligations o In situations where contract is not possible, it incentivizes people to provide goods or service with some confidence that they will be compensated later e.g., Emergency situations

Moral Obligation

Defenses to Formation
Absence of Consideration
There is no contract if the promises exchanged at the formation stage lack consideration

Public Policy
In most cases, statutes do not enunciate specific public policies o However, courts will look for statutes on which to ground policy Generally based on longstanding common law principles Where a term or contract is against public policy, courts will: o Not enforce at all o Blue Pencil Rule Strike particular terms At times, this will produce a rational result Courts do not wish to be involved in drafting agreements Illegality A contract is rendered void and unenforceable if the consideration or subject matter are illegal Need not be pleaded; a court may raise it sua sponte Unconcerned with fairness between the parties

o The court will usually let losses lie where they fall o The goal of the courts is to prevents illegal transactions from ever happening More than mere deterrence Deterrence may promote self-help

Absence of Mutual Assent

Subjective Test o Because we think people are more often than not reasonable, we ask courts to try to figure out the intentions of the parties rather than having them assign risk and determine reasonable terms Mutual Mistake as to Existing Facts A contract is voidable if: o Both parties were mistaken at the time of contract as to a basic assumption on which the contract was made, and e.g., The parties think they are contracting for X, but the object is actually Y To determine if the assumption is basic: Look for unexpected, unbargained-for gain on one side and unexpected, unbargained-for loss on the other o The mistake has a material effect on the agreed exchange of performances e.g., The Y is only worth a fraction of what X is The party must show that the resulting imbalance is so severe that he cannot fairly be required to carry it out o Unless The adversely affected party bears the risk of mistake Mutual mistake is not a defense if the adversely affected party bore the risk that the assumption was mistaken o Commonly occurs where one party is in a better position to know the risks than the other party o Must be a mistake, not merely uncertainty Just because an assumption is doubtful does not make the contract voidable Reliance on an experts opinion shows that the adversely affected party did not intend to assume the risk Mistake regarding the nature or quality of something is considered a mutual mistake o Nullifies the contract Mistake regarding the value of the subject matter will generally not be remedied o Immaterial o Both parties usually assume the risk that their assumption as to value is wrong o Exception: A party that seeks expert opinion does not intend to assume the risk of determining value The expert was sought out to determine the true value Restatement 152

When the mistake of both parties at the time of contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of mistake under the rule in 154. Unilateral Mistake as to Existing Facts A contract is voidable if: o One party was mistaken at the time of contract regarding a basic assumption on which he made the contract o That error has a material effect on the agreed exchange of performances that is adverse to him o He does not bear the risk of mistake, and o The effect of the mistake is that enforcement of the contract is: Unconscionable, or The other party had reason to know of or caused the mistake Restatement 153 Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk under 154 and: o The effect of the mistake is such that enforcement of the contract would be unconscionable, or o The other party had reason to know of the mistake or his fault caused the mistake Ambiguous Language Neither Party Was Aware of Ambiguity There is no contract if neither party was aware of the ambiguity at the time of contracting o Unless: Both parties happened to intend the same meaning o Raffles v. Wichelhaus (Peerless) Neither party was aware of the ambiguity, nor did they intend the same meaning No contract Both Parties Were Aware of the Ambiguity There is no contract if both parties were aware of the ambiguity o Unless: Both parties in fact intended the same meaning One Party Was Aware of Ambiguity If one party was aware of the ambiguity and the other party was not, ex ante, a contract will be enforced according to the intention of the party who was unaware of the ambiguity o e.g. A agreed to buy X1 from B. B was aware that he had both X1 and X2 to sell, but A was unaware. The contract is for X1, because that is what the party unaware of the ambiguity intended to buy. Misrepresentation Misrepresentation entitles the deceived party to avoid a contract where: o There is an assertion not in accord with the facts o The assertion is material or fraudulent o The assertion is relied on by the recipient in manifesting assent

o The reliance of the recipient is justified Honest and/or innocent misrepresentations matter o Differs from tort law, in that intent to misrepresent is not dispositive There is a duty of good faith to correct what you know the other party mistakenly believes o Failure to disclose a material fact may be treated as a misrepresentation if: It is necessary to correct or clarify a previous assertion Disclosure would correct a false but basic assumption of the other party, and nondisclosure amounts to bad faith Where disclosure would correct a mistake as to the contents or effect of a writing Where a relationship of trust and confidence entitles the other person to know The innocent party need not wait until he is sued on the contract o He may take affirmative action in equity to rescind the agreement Right to rescind may be lost if the party so induced affirms the contract in question A finding of misrepresentation is unlikely in situations where there is opinion rather than objective judgment Usually, only facts can be misrepresentations Law of Nondisclosure Neither party has an obligation to disclose what he knows o General rule o Certain relationships may trigger a fiduciary duty If a fact is publicly available, it is unlikely that a party can avoid contract because it was not disclosed Fraudulent Misrepresentation If a party induces another to enter into contract by using fraudulent misrepresentation, the contract is voidable by the innocent party if he justifiably relied on the fraudulent misrepresentation o fraudulent misrepresentation asserting information that you know is untrue Non-Fraudulent Misrepresentation The contract is voidable by the innocent party if he justifiably relied on the misrepresentation and the misrepresentation was material o A misrepresentation is material if either: The information asserted would induce a reasonable person to agree, or The maker of the misrepresentation knew the information asserted would cause a particular person to agree

Defenses Based on Lack of Capacity

Legal Incapacity
The person against whom you are trying to enforce an agreement must have capacity Infancy Age of majority is generally 18 Infants generally lack capacity to enter into contract binding on themselves Mental Incapacity

A contract made where one partys mental capacity is so deficient that he is incapable of understanding the nature and significance of a contract is voidable Intoxication A contract made where one party is so intoxicated that he does not understand the nature and significance of his promise is voidable o Only if the other party had reason to know of the intoxication

Duress and Coercion

General To show duress, a party must show: o Threat an intent to inflict loss or harm communicated through words or conduct An offer is a threat when A tells B that A will only do X if B does Y, and A should have already been doing X o That the threat was improper Restatement 176 o That the threat induced the victims manifestation of assent o That the threat was grave, not trivial The absence or exercise of bargaining power is not duress o Absence of bargaining power does not detract from the confidence that an agreement makes both parties better off o A party lacks bargaining power in economic terms when he has no better option Expected that the party with greater bargaining power will extract most of the transactional surplus This does not amount to duress A party is entitled to use their economic power, with exceptions o However, if one party forces the other to act differently than their entitlements would allow, that is duress o The exercise of even unjust bargaining power does not amount to duress Undue Influence o Involves a non-commercial relationship and mental or emotional vulnerability Rare and difficult to show Physical Duress Renders an agreement unenforceable Economic Duress Generally not a defense However, withholding something someone wants or needs will constitute economic duress if: o The party threatens to commit a wrongful act that would seriously threaten the other contracting partys property or finances, and o There are no adequate means available to prevent the threatened loss

Defenses to Enforcement
Statute of Frauds
Certain agreements, by statute, must be evidenced by a writing signed by the parties sought to be bound

o Only requires one or more writings signed by the person sought to be held liable on the contract that reflect the material terms of the contract Noncompliance renders the contract unenforceable at the option of the party to be charged o i.e., The party being charged may raise the lack of a sufficient writing as an affirmative defense If the Statute is not raised as a defense, it is waived Agreements Covered Promises creating an interest in land o For both the sale of real property and other agreements pertaining to land o Interest in Land Leases for more than one year Easements of more than one year Fixtures Mortgages Performance not within one year o A promise that by its terms cannot be performed within one year Date runs from the date of the agreement Not the date of performance o Exceptions: Possibility of completion within one year If the contract is possible to complete in one year o Not within the one-year prong even though actual performance may extend beyond the one-year period Lifetime Contracts A contract measured by lifetime is not within the Statute because it is capable of being performed within one year o A person can die at any time Goods priced $500+ o A writing is sufficient even though it omits or incorrectly states a term However, the contract is not enforceable beyond the quantity of goods shown in the writing o Exceptions: Specially manufactured goods UCC 2-201(3)(a) If goods are to be specially manufactured for the buyer and are not suitable for sale to others by the seller in the ordinary course of his business, the contract is enforceable if the seller has, under circumstances that reasonably indicated that the goods are for the buyer, made substantially beginning in their manufacture or commitments for their purchase before notice of repudiation is received Payment or Delivery of Goods If goods are either received and accepted or paid for, the contract is enforceable o However, the contract is not enforceable beyond the quantity of goods accepted or paid for

Merchants UCC 2-201(2) In contracts between merchants, if one party, within a reasonable time after an oral agreement has been made, sends to the other party a written confirmation of understanding that is sufficient under the Statute of Frauds to bind the sender, it will also bind the recipient if: o He has reason to know of the confirmations contents, and o He does not object to it in writing within 10 days of receipt

Unconscionability
Allows a court to refuse to enforce a provision or an entire contract to avoid unfair terms o Also allows modification by the court However, the usual response is to strike the term or contract Determined by the circumstances as they existed ex ante UCC 2-302 o If a court finds as a matter of law that a contract or any clause of the contract was unconscionable when made, the court may: Refuse to enforce the contract Enforce the remainder of the contract without the unconscionable clause Limit the application of any clause so as to avoid the unconscionable result A defective process that falls short of mistake, misrepresentation, or duress may still be unconscionable Justification for refusal to enforce o Paternalism o Distributive justice o Inefficiency Not welfare-enhancing o A backstop given the imprecision of related doctrine Deals with an unbalance between the parties Substantive Unconscionability Problems with the terms o So problematic as to shock the conscience Procedural Unconscionability Problems with the agreement process o Reflects an inequality of bargaining power o e.g., Contracts of adhesion (standard, mass forms) Inconspicuous Risk-Shifting Provisions o Standardized printed form contracts often contain a material provision that seeks to shift a risk normally borne by one party or the other o Invalid because they are inconspicuous and incomprehensible to the average person Contracts of Adhesion o Take it or leave it o A clause is unconscionable and unenforceable if the signer is unable to procure the necessary goods from any seller without agreeing to a similar provision Where the buyer has no choice Exculpatory Clauses

o Clauses releasing a contracting party from liability for his own intentional wrongful acts are usually unconscionable Against public policy in most states o Clauses releasing a contracting party from liability for his own negligent acts may be unconscionable if they are inconspicuous Usually upheld if they are in contracts for dangerous activities Non-Compete Covenants o Enforceability depends on whether there is a: Reasonable business need Reasonable geographic limitation, and Reasonable time limit Limitations on Remedies o Clauses limiting liability for damages to property generally will not be found to be unconscionable, unless they are inconspicuous o UCC 2-719(2) If a contract limits a party to a certain remedy and that remedy fails of its essential purpose, a court may find the limitation unconscionable and ignore it Contracts must meet a threshold of specificity in order to be enforceable o Modern courts are more willing to fill in terms and enforce contracts with apparent gaps Restatement 33 o Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain. o The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy. o The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance.

Incomplete Contracts

Insufficient Agreement
An agreement may be incomplete if: o The parties unknowingly fail to address some contingency or to resolve a basic ambiguity o The parties knowingly choose to defer agreement with respect to some material term to a later point in a long-term contract Deferred agreement Exception: It is sometimes impossible or inappropriate to set material terms o The parties have not completed negotiations Incomplete bargaining Enforceability Questions a court will ask when determining whether to enforce an incomplete agreement:

o Did the parties intend to enter a legally binding agreement? Did the parties behavior suggest that the parties believed their agreement was final and enforceable? Did the parties intend to assume obligations short of those that would be created by the anticipated contract? e.g., A duty to bargain in good faith or obligations arising from promissory estoppel o Is it possible for the court to determine breach and remedy? How likely is it that a court will get it right? i.e., That it will fill in contract gaps in the way the parties would have had they addressed the issue themselves Is it more or less difficult or costly for the court to fill in the missing term, compared to how costly it would have been for the parties to have resolved the issue themselves? Or, how costly it would be for future parties to address similar issues? Was one of the parties more aware of incompleteness or better positioned to ensure that the gap or ambiguity was addressed? An agreement to agree on a material term is unenforceable o At best, it opens up an opportunity to negotiate in good faith Filling in the Gaps In deciding how to fill in a gap, courts will ask: o What would most parties want? Majoritarian default Objective test o What would these parties have wanted? Subjective test o Which party was in a better position to avoid this gap? Penalty default Contract referendum a contract will be interpreted in favor of the non-drafting party o Missing terms will not favor the drafter If the court wishes to incentivize future parties to address the gap themselves, it may ask: o What default will motivate the party better positioned to raise or resolve the gap to do so?

Interpretation
General Contracts will be construed as a whole o Specific clauses will be subordinated to the contracts general intent Courts will construe words according to their ordinary meaning o Unless it is clearly shown that they were meant to be used in a technical sense If provisions appear to be inconsistent, written or typed provisions will trump printed provisions o i.e., Form contracts

Courts will generally look to see what custom and usage is in the particular business and in the particular locale where the contract is either made or to be performed o UCC 1-303

Ambiguity
true ambiguity where neither partys definition is more reasonable than the other Plain Meaning Rule o Whether there is an ambiguity is determined by reference to the writing itself To resolve an ambiguity, courts will look to the contract, dictionaries, and other judicial opinions Case law promotes consistency Absent evidence of the intention of the parties, ambiguities in a contract are construed against the drafting party o Same as Restatement 206 o The drafter is in the best position to avoid ambiguity o Provides incentive to draft unambiguous contracts o e.g., Ambiguity in insurance contracts are resolved against the insurance company Principle of Objectivity o You will be held to the most reasonable meaning of a term in ordinary language Does not hold true for interpretations that look to trade usage That a contract is not the most airtight or specific does not mean that it is unenforceable o Likewise, the court need not find the best possible meaning Whether or not a plaintiffs expectations are reasonable is immaterial o If a term is found to be ambiguous, there is no need to decide reasonableness of reliance Parol evidence may be used to explain ambiguities in a written agreement Extrinsic Evidence All jurisdictions will hear extrinsic evidence to resolve ambiguity Interpretation of Ambiguity o Extrinsic evidence may be admitted to interpret an ambiguous term in a written agreement o Other courts will admit contextual evidence that speaks to whether a purportedly ambiguous term is reasonably susceptible to the proposed meaning o Courts will consider: Course of dealing Usages of trade Courts can consider regulatory usage even in cases where it is not directly incorporated into the contract Judicially imposed defaults Other evidence proffered by the parties that speaks to their common understanding of a term in order to resolve its ambiguity The ultimate goal is to enforce what the parties actually agreed to Parol Evidence Rule Terms finality refers to the chronology of the agreement

partialness/completeness refer to scope of the agreement integration a writing that is considered a final agreement is an integrated writing o Determined by the court General If a court concludes that there is a final, written agreement, any prior or contemporaneous contradictory evidence is inadmissible o Only works when there is a final writing or integration o Excludes evidence of preceding or contemporaneous oral terms Not always oral May be a writing that is not the writing Question is of the admissibility of evidence o Evidence of agreements made subsequent to the contract is always admissible Written contracts may always be modified after execution, by oral agreements o Contradictory evidence is inadmissible at all times, regardless of the level of integration That a term is not excluded by the Parol Evidence Rule does not mean that the term is actually a part of the agreement Can be used to add terms, unless the writing is a complete integration Justification: o If two parties have reduced an agreement to writing, the final, written version is a more reliable indication of what was agreed to than anything that was said or written beforehand o That is to be determined by the court Integration If parties intend a document to represent the final expression of their agreement, the document is said to be an integration of their agreement Partial Integration o If the document is not intended by the parties to include all details of their agreement, it is called a partial integration o If the document is a partial integration, no evidence of prior or contemporaneous agreements or negotiations may be admitted if this evidence would contradict a term of the writing Total Integration o If the document is intended by the parties to include all details of their agreement, it is called a total integration o If the document is a total integration, no evidence of prior or contemporaneous agreements or negotiations may be admitted which would either contradict or even add to the writing Test Is the agreement collateral (i.e., additional but subordinate)? o Cannot be supported by separate consideration o Ancillary to the main agreement Does it contradict an express or implied condition? Would it normally be expected to be included in the writing?

o Silence regarding a condition may be construed as an affirmative statement that it was not to be included Approach Does the writing represent the final agreement? o No Parol Evidence Rule does not apply o Yes Does the proposed term contradict the writing? Yes Parol Evidence Rule applies; evidence is excluded No Is the writing completely integrated with reference to the proposed term? Yes Parol Evidence Rule applies; evidence is excluded No Agreement is only partially integrated; evidence admitted Some courts are more open to hearing evidence that speaks to whether the term was meant to be included o Look more to the totality of circumstances o Contrast with NY/East Coast courts Objective test Formalist approach Competing Views Majority o West Coast view o Takes into account the specific circumstances of the transaction involved e.g., Are the parties related or strangers, was it a large transaction, etc. o Asks whether similarly situated parties would naturally and normally include in their writing the extrinsic matter that is sought to be introduced If it is found that the matter would normally be included, the extrinsic evidence is excluded under the Parol Evidence Rule o Actual intention of the parties Less emphasis on the writing o Effect: Follows the general rule that a later agreement supersedes an earlier one, if the parties intend that it do so Under this rule, no Parol Evidence Rule is necessary Strips the written document of its power Minority o East Coast view Formalist o Look only at the face of the written document and decide whether contracting parties, in general, would include the term sought to be proved If it is found that the term would be included, the extrinsic evidence is excluded under the Parol Evidence Rule Looks to the four corners of the written document o Test: To determine whether there is an integration and its scope, look exclusively to the document

Whether similarly situated reasonable people would have natural put the terms of the alleged oral agreement into the final writing, or would have instead left them out Is there a merger clause? A clause that conclusively establishes that the document is a total integration o Unless the document is obviously incomplete, or the clause was included as a result of fraud, mistake, or some other conduct that renders the contract void or voidable If there is no merger clause, examine the writing as a whole. A writing will be treated as a partial integration if it is obviously incomplete or it expresses the duty of only one of the parties o If so, consistent additional terms may be demonstrated through oral evidence A writing will be treated as a total integration if it appears on its face to be a complete expression of the rights and duties of both parties o Unless the alleged oral additional terms were ones which might naturally have been made as a separate agreement by reasonable parties similarly situated

UCC 2-202 o Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by parties as a final expression of their agreement with respect to such terms are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented: By course of performance, course of dealing, or usage of trade; and Course of Performance UCC 1-303(a), (d) o Where a contract involves repeated occasions for performance by either party and the other party has the opportunity to object to such performance, any course of performance accepted or acquiesced to is relevant in determining the meaning of the contract Course of Dealing UCC 1-303(b), (d) o Sequence of conduct concerning previous transactions between the parties to a particular transaction that may be regarded as establishing a common basis of their understanding Usage of Trade UCC 1-303(c), (d) o A practice or method of dealing regularly observed in a particular business setting so as to justify an expectation that it will be followed in the transaction in question 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 agreement

Evidence Outside the Parol Evidence Rules Scope Attacks on validity of the agreement o A party may concede that the writing reflects the agreement, but assert that the agreement never came into being because of: Formation Defects Fraud, duress, mistake, illegality May be shown by extrinsic evidence, regardless of scope of integration Parol Evidence Rule never prevents the introduction of evidence that would show that the contract is void or voidable Conditions Precedent Where a party asserts that there was an oral agreement that the written contract would not be effective until a condition occurred, all evidence of the understanding may be offered and received o The condition is a condition precedent to effectiveness o You cannot alter a written agreement by means of parol evidence if there wasnt a written agreement to begin with However, parol evidence of such a condition precedent will not be admitted if it contradicts the express language of the written contract Do not confuse with conditions subsequent o Parol evidence is inadmissible as to conditions subsequent Oral agreement that the party would not be obliged to perform until the happening of an event Limits or modifies a duty under an existing or formed contract If there is uncertainty or ambiguity in the written agreements terms, parol evidence can be received to aid the fact-finder in reaching a correct interpretation of the agreement o If the meaning of the agreement is plain, parol evidence is inadmissible The Parol Evidence Rule will not bar extrinsic evidence showing if and how much consideration was paid Collateral Agreements and Naturally Omitted Terms Parol evidence is often admissible if the alleged parol agreement is collateral to the written obligation and does not conflict with it o i.e., Related to the subject matter but not part of the primary promise Restatement 240 Naturally Omitted Terms Doctrine o Allows evidence of terms that would naturally be omitted from the written agreement o A term would naturally be omitted if: It does not conflict with the written integration; and It concerns a subject that similarly situated parties would not ordinarily be expected to include in the written instrument o Masterson v. Sine, Mitchill v. Lath Duty of Good Faith An immutable and mandatory rule

o Cannot be contracted around o A breach of duty of good faith implies deceit Contrast with general breach of contract, which may have economic benefits without being morally wrong Usually used to fill in what other obligations are o There is an implied obligation that neither party interfere with the other and make performance impossible o May be used to interpret the scope of contractually specified duties o To determine the obligations of the parties, look to what the parties could have conceivably agreed to One does not usually claim a breach of duty of good faith o The claim would be a breach of contract vis--vis an obligation that should be construed in light of the duty Usually construed based on context There is no general duty of good faith with regards to negotiation Possible test: o Is one party exercising discretion that the parties did not intend to allocate to it or did not anticipate would be exercised in that manner? Does a partys exercise of discretion exceed the limits of reasonableness? o Is the party reclaiming a course of conduct that it forfeited at the time of contract?

Risk Allocation
Warranties
Assigns risk to the seller Allocate the risk of defect in products or workmanship May be conceived of as: o Representations as to reliability of authenticity Distinguish from misrepresentations of existing fact o Promises to indemnify in the event a good falls short of a specified standard

UCC Warranty of Title UCC 2-312 In most cases, contracts for the sale of goods automatically include a warranty of title o Any seller of goods warrants that the title transferred is: Good Rightful; and Free of liens or encumbrances against the title of which the buyer is unaware ex ante o May also include certain implied and express warranties o Because it arises automatically, it need not be mentioned in the contract Implied Warranty of Merchantability UCC 2-314 There is an implied warranty in every contract for sale by a merchant who deals in goods of the kind that the goods are merchantable o Whether somebody is a merchant turns on how steeping in selling the product he is

Factors: Frequency of transactions, dollar value of transactions, etc. To be merchantable, the goods must at least: o Pass without objection in the trade under the contract description; o In the case of fungible goods, be of fair average quality within the description o Be fit for ordinary purposes for which such goods are used; This is the most important prong o Be, within the variations permitted by the agreement, of eve kind, quality, and quantity within each unit and among all units involved; o Be adequately contained, packaged, or labeled according to the contract; and o Conform to any promises or affirmations of fact made on the label. Other warranties of merchantability may arise from the course of dealing or usage of trade Implied warranties are based on absolute liability that is imposed on certain sellers o Does not matter that the seller himself did not know of the defect or that he could not have discovered it Implied Warranty of Fitness for a Particular Purpose UCC 2-315 A warranty will be implied in a contract for the sale of goods whenever: o Any seller, merchant or not, has reason to know the particular purpose for which the goods are to be used; and that o The buyer is relying on the sellers skill and judgment to select suitable goods; and o The buyer in fact relies on the sellers skill or judgment Note that particular purpose varies from ordinary purpose for which goods are used o particular purpose a specific use by the buyer which is particular to the nature of his business o ordinary purpose those envisaged in the concept of merchantability Express Warranties UCC 2-313 Any affirmation of fact or promise made by the seller to the buyer, any description of the goods, and any sample or model creates an express warranty if the statement, description, sample, or model is part of the basis of the bargain o To be part of the basis of the bargain, it need only come at such a time that the buyer could have relied on it when he entered into the contract Buyer need not prove actual reliance o Seller need not intend the statement, description, sample, or model to create a warranty Exception: o A sellers statement relating merely to the value of goods, opinion, or commendation of the goods does not create an express warranty Exclusion or Modification of Warranties UCC 2-316 Warranty of Title o Can be disclaimed or modified only by specific language or by circumstances which give the buyer notice that the seller does not claim title or that he is selling only such rights as he or a third party may have Implied Warranties o By Specific Disclaimers

Disclaimer of Warranty of Merchantability Can be specifically disclaimed or modified only by mentioning merchantability o If the sales contract is in writing, the disclaimer must be conspicuous Disclaimer of Warranty of Fitness for a Particular Purpose Can be specifically disclaimed only by a conspicuous writing o conspicuous so written, displayed, or presented that a reasonable person against whom it is to operate ought to have noticed it o By General Disclaimer Implied warranties of merchantability and fitness can be disclaimed by expressions such as as is, with all faults, or other expression that in common understanding call the buyers attention to the fact that there are no implied warranties When the buyer, before entering into the contract, has examined the goods, or a sample or model as fully as he desires or has refused to examine, there is no warranty as to defects that a reasonable examination would have revealed to him Implied warranties may also be disclaimed by the course of dealing, course of performance, or usage of trade Express Warranties o The Parol Evidence Rule may sometime exclude evidence of express oral warranties that are not present in the written contract Sellers may limit remedy in case of defect, within constraints UCC 2-719 e.g., Remedy limited to replacement, refund of shipping charges, etc. There is a limit on how much the remedy may be limited

Conditions
Assigns risk to the promisee

Whether a Duty to Perform is Absolute

Definitions promise a commitment to do or refrain from doing something o If a promise is unconditional, the failure to perform according to its terms is a breach of contract unconditional not subject to any conditions condition either: o An event or state of the world that must occur or fail to occur before a party has a duty to perform under contract; or o An event or state of the world the occurrence or nonoccurrence of which releases a party from its duty to perform under contract i.e., A provision the fulfillment of which creates or extinguishes a duty to perform under a contract Distinctions

Promise v. Condition A promise dictates whether a person is bound under a contract o A person is bound if there has been an offer, an acceptance, and an exchange of consideration A condition dictates whether a party who is bound has come under a duty to perform However, the contract may provide (impliedly or explicitly) that a party who is bound does not come under a duty to perform unless or until some specified condition occurs One must distinguish between an absolute promise and a condition Failure of Condition v. Breach of Contract The failure of a contractual provision that is only a condition is not a breach of contract o However, it discharges the liability of the promisor whose obligations on the conditional promise never mature o Nonfulfillment of a condition normally will excuse a duty to perform that was subject to the condition An unexcused failure to perform a promise is always a breach of contract o Breach of a promise may or may not excuse the other partys duty to perform under contract o However, if a partys promise to perform is subject to a condition, there can be no breach of contract by that party until the condition has been fulfilled General Restatement 224 o An event, not certain to occur, which must occur before performance under a contract becomes due Promise to pay or perform is not due until the event occurs If the event on which a promise is conditions does not occur, performance or promise is excused Unless occurrence is excused Distinguish from: events certain to occur, that must occur before contract comes into effect, or that extinguish a duty after performance is due A condition is a promise-modifier o There can be no breach of promise until the promisor is under an immediate duty to perform. Therefore, the promisor may insert conditions on his promise to prevent that duty of immediate performance from arising until the conditions are met. Off-sets the duty to perform The practical effect is to shift the risk of the nonoccurrence of an event onto the promisee Failure to meet a condition is not breach A partys failure to perform is normally justified if the condition was not fulfilled.

Classifications
Condition Precedent One that must occur before an absolute duty of immediate performance arises in the other party Express Conditions Normally refers to an explicit contractual provision Express statement in the contract providing that either:

o A party does not have a duty to perform unless some event occurs or fails to occur; or o If some event occurs or fails to occur, the obligation of a party to perform one or more of his duties under the contract is suspended or terminated Express conditions will be enforced, even where they appear to render the contract unreasonable o Enforced without scrutiny e.g., Conditions of satisfaction Promisors Satisfaction as Condition Precedent o Many contract include an express condition that a party will pay only if satisfied with the other partys performance Because it is a condition, the promisor is under no duty to pay until he is satisfied o Promisors satisfaction is construed according to the subject matter of the contract Mechanical Fitness, Utility, or Marketability Fulfilled by a performance that would satisfy a reasonable person o Immaterial if the promisor was not personally satisfied Personal Taste or Judgment Fulfilled only if the promisor is personally satisfied o However, a lack of satisfaction must be honest and in good faith If a third partys satisfaction is a condition, it also requires personal satisfaction o Honesty and good faith similarly apply to the third party Restatement 228 Satisfaction of the Obligor as a Condition o When it is a condition of an obligor's duty that he be satisfied with respect to the obligee's performance or with respect to something else, and it is practicable to determine whether a reasonable person in the position of the obligor would be satisfied, an interpretation is preferred under which the condition occurs if such a reasonable person in the position of the obligor would be satisfied. Implied Conditions It is sometimes implied that the duty to render performance under a contract is conditional upon some event or state of the world, even though the contract does not explicitly so state A condition will be implied where operation of contract would be irrational without it Implied Condition of Performance o The most important and common implied condition o The duty of each party to render performance is conditioned on the other party either rendering his performance or making a tender of his performance Implied Conditions of Cooperation and Notice o Also common o Cooperation The obligation of one party to render performance is impliedly condition on the other partys cooperation in that performance e.g., A promise to deliver to a certain location is condition on the locations existence, reasonable accessibility, and permission of delivery o Notice

A condition to one partys performance of duty under a contract that the other party give him notice that the performance is due Most commonly applied where a party could not reasonably be expected to know a fact that triggered the duty to perform unless such notice was given e.g., A landlords duty to repair an apartment is conditioned on the tenant notifying the landlord of the need for repair Implied Condition of Order of Performance o Courts will imply conditions relating to the time for performing under the contract o Simultaneous performance is possible If both performances can be rendered at the same time, they are impliedly concurrent Each condition is a precedent to the other Absent excuse, each party must first tender his own performance if he wishes to put the other under a duty of immediate performance resulting in breach if he fails to perform Constructive conditions of exchange o If one performance will take a period of time to complete while the other can be rendered instantly, completion of the longer performance is an implied condition precedent to execution of the shorter performance The longer performance must be complete before the other partys obligation to perform accrues Waiver A condition may be waived far more easily than consideration may be modified Waiver may be express or implied o implied waiver acts evincing an intention to relinquish the right to withhold performance in the event of the nonoccurrence of the condition A non-waiver clause in a written contract is not dispositive Past performance may speak to whether a party is willing to waive a condition o If an exception regarding the condition has been made in the past, it is difficult to disprove waiver in the present situation

Interpretation
It is of considerable importance whether any given contractual provision is to be interpreted as a promise or condition o Modern courts will construe most contracts as an exchange of dependent promises i.e., Neither party is in breach until the other has performed However, a provision may be both a promise and a condition o i.e., A party may commit (promise) to bring about a given state of events, and the contract containing that commitment may also expressly state that the other partys duty to perform under the contract is conditioned on the occurrence of the state of events e.g., A promises to do X, but B only has to pay if X occurs X is a promise by A and a condition to Bs liability Basic Test

Look to the intent of the parties o Criteria: Words of Agreement Conditional provided, if, when Promissory promise, agree Both specific words of a phrase and the words of the rest of the agreement (basically, the entire contracts context) will be examined by the courts in drawing a conclusion Prior Practices Particularly prior practices with one another Custom With respect to that business in the community Third-Party Performance If performance is to be rendered by a third party, it is more likely to be a condition than an absolute promise o When trying to determine the reasonable expectations of the parties, determine whether the performance of the stipulation goes to the very root of the contracts consideration If so, it is probably a condition rather than a promise Courts tend to prefer promise in doubtful situations o This result will serve to support the contract, thereby preserving the expectancy of the parties o Particularly significant in situations where the breaching party has substantially performed If the provision was treated as a condition, the non-breaching party is completely discharged from his obligation Instead, if the provision is treated as a promise, the non-breaching party must perform However, he may recover for the damage suffered as a result of the breach

Legal Excuses
A duty of immediate performance with respect to a conditional promise does not become absolute until the conditions: o Have been performed; or o Have been legally excused Hindrance or Failure to Cooperate If the party having a duty to performance that is subject to a condition prevents the condition from occurring, the condition will be excused if such prevention is wrongful o i.e., The other party would not have reasonably contemplated or assumed the risk of this type of conduct Not necessary to prove bad faith or malice Both active and passive noncooperation may render a condition excused Actual Breach

Actual breach of the contract when performance is due will excuse the duty of counterperformance o The breach must be material A minor breach may suspend, but not excuse, the duty Anticipatory Repudiation Occurs when a party who has not yet fulfilled his performance obligations under a contract repudiates the contract by indicating that he will not perform Repudiation may be verbal or by conduct o verbal repudiation firm indication that the obligator will breach o repudiation by conduct an affirmative act which renders the obligor unable or apparently unable to perform without such a breach Under common law, the non-repudiating party may: o Accept the breach and terminate; or Here, the non-repudiating party may immediately sue for damages o Insist on performance and wait Here, the non-repudiating party must wait until performance is due before there is breach Once the breach occurs, he can sue for damages Once performance has been insisted upon, if the other party retracts their repudiation, the non-repudiating party no longer has a right to terminate and sue for damages UCC If a party insists on performance even where the other party makes it clear that he will not perform, at some point, the non-repudiating partys damages will be limited to what his losses would have been had he terminated at a reasonable time Test Applies only if there is a bilateral contract with executory (unperformed) duties on both sides o Does the non-repudiating party have anything further to do at the moment of repudiation? If no, it does not apply e.g., a unilateral contract, or a bilateral contract fully performed by the non-repudiator Non-repudiator must wait until the time originally set for performance by the repudiating party o Until then, the repudiator has the option to change his mind and withdraw the repudiation and perform in accordance with the contract If yes, then it applies o Was the repudiation an unequivocal indication that the repudiating party cannot or will not perform when the time is due? If no, this is not anticipatory repudiation If yes, this is anticipatory repudiation Mere expression of doubt or fear as to performance will not suffice

o However, they may establish a prospective inability to perform Effect Where there is anticipatory repudiation, the non-repudiating party has four alternatives: o Treat the anticipatory repudiation as a total repudiation and sue immediately o Suspend his own performance and wait to sue until the performance date o Treat the repudiation as an offer to rescind and treat the contract as discharged; or o Ignore the repudiation and urge the promisor to perform By urging performance, the non-repudiating party is not waiving the repudiation He can still sue for breach and is excused from performing unless the promisor retracts the repudiation o [Very similar to UCC 2-610] Retraction A repudiating party may at any time before his next performance is due withdraw his repudiation o Unless the other party has cancelled, materially changed his position in reliance on the repudiation, or otherwise indicated that he considers the repudiation final Withdrawal may be in any manner that clearly indicates intention to perform o Must include any assurances justifiably demanded UCC 2-611 Prospective Inability or Unwillingness to Perform Occurs when a party has reasonable grounds to believe that the other party will be unable or unwilling to perform when performance is due Not anticipatory repudiation o Anticipatory repudiation must be unequivocal o Prospective failure to perform involves conduct or words that merely raise doubts that the party will perform A different of degree Any conduct that a reasonable person would find demonstrates a prospective inability or unwillingness to perform will suffice Effect Allows the innocent party to suspend further performance on his side until he receives adequate assurances that performance will be forthcoming If he fails to obtain adequate assurances, he may be excused from his own performance and may treat the failure to provide assurances as repudiation Retraction Retraction is possible if the defaulting party regains his ability or willingness to perform Must be communicated to the other party in order to be effective If the other party has already changed his position in reliance on a prospective failure, an attempted retraction may be ineffective Substantial Performance Generally, the condition of complete performance may be excused if the party has rendered substantial performance o Generally applied only where there is an implied condition

Not available for an express condition because that would defeat the express intent of the parties o Technically, if a promise has not been completely performed, the other performance is not yet due May cause a forfeiture if the breach is minor, because the promisee can receive almost complete performance with no duty to perform in return Substantiality Test o Whether the breach of contract by the performing party is material or minor If material, performance has not been substantial Where the obligee does not receive the substantial benefit of his bargain as a result of failure to perform or defective performance Courts will consider whether the non-breaching party would be deprived of a benefit she reasonably expected, whether the breaching party would experience forfeiture, and the prospect of waste Question of fact: o Amount of Benefit Received The greater the extent to which the non-breaching party will receive substantially the benefit she could have anticipated from full performance, the less material the breach o Adequacy of Damages The greater the extent to which the injured party may be adequately compensated in damages, the less material the breach o Extent of Part Performance The greater the extent to which the party failing to perform completely has already performed or made preparations to perform, the less material the breach o Hardship to Breaching Party The greater the extent of hardship on the breaching party should the contract be terminated, the less material the breach o Negligent or Willful Behavior The greater the extent of negligent or willful behavior of the party failing to perform, the more material the breach o Likelihood of Full Performance The greater the extent of likelihood the party who has failed to perform will perform the remainder of the contract, the less material the breach If minor, performance was substantial Where the obligee gains the substantial benefit of his bargain, despite the obligors defective performance Immaterial breach does not relieve the obligee of his duty to perform under the contract

o Whether the breach was willful or unintentional Willful breach bars application of the substantial performance doctrine Contrast with UCC 2-601 Perfect Tender Rule o Not a substantial performance doctrine Divisibility If a party performs one of the units of a divisible contract, he is entitled to the agreed-on equivalent for that unit, even if he fails to perform the other units The non-breaching party has a cause of action for failure to perform the other units and may withhold his counterperformance for those units Test [Restatement 240]: o Is the performance of each party divided into two or more parts under the contract?; o Are the number of parts due from each party the same?; and o Is the performance of each party by one party agreed on as the equivalent of the corresponding party from the other party? i.e., Is each performance the quid pro quo of the other? Divisibility is a question of interpretation o Courts will generally construe contracts as divisible so as to avoid hardships and forfeitures o However, if contract is expressly indivisible, the court cannot construe it otherwise UCC 2-307, 2-612 o A contract is not divisible until it authorizes deliveries in several lots Here, the contract is called an installment contract Waiver or Estoppel A party may by words or conduct indicate that he will not insist on a conditions being met No consideration is necessary for a valid waiver of a condition o If there is no consideration, however, the condition must be ancillary or collateral to the main subject and purpose of the contract for the waiver to be effective If a party indicates that he is waiving a condition before it is to happen, or he is waiving some performance before it is to be rendered, and the other person detrimentally relies on the waiver, the courts will consider this to be a binding (estoppel) waiver o Retraction of a waiver may be done at any time before the other party has changed his position to his detriment UCC 2-307 o In an installment contract, if a waiver is not supported by consideration, the beneficiary of the waived condition can insist on strict compliance with the terms of the contract for future installments As long as there is notice and no detrimental reliance Discharge of Duties Due to Impossibility, Impracticability, or Frustration Impossibility Contractual duties will be discharged on both sides if it has become impossible to perform them o The impossibility must be objective i.e., The duties could not be performed by anyone

Claims of subjective impossibility will not suffice i.e., Where the duties could be performed by someone, but not the promisor o The impossibility must arise after the contract has been entered into If the facts giving rise to the impossibility already existed ex ante, the question is not about a discharge of contractual duties, but rather whether there was a problem with the contract formation e.g., Voidable because of mistake Effect: o If a contract is discharged because of impossibility, each party is excused from duties arising under the contract that are yet to be fulfilled In the event of partial possibility, the duty may be discharged only to that extent o Remainder of contract may be required according to the contractual terms True even though the remaining performance might involve added expense or difficulty Temporary impossibility suspends the contractual duties o Not discharged o Once performance becomes possible again, the duties return Duties will not spring back if the burden on either party to the contract would be substantially increased or different from that originally contemplated Impracticability To find impracticability, the party to perform: o Has to have encountered extreme and unreasonable difficulty and/or expense; and o Its nonoccurrence had to have been a basic assumption of the parties Subjective impossibility is sufficient o A mere change in difficulty or expense due to increased wages, prices of materials, costs of construction, etc. does not amount to impracticability Unless well beyond the normal range These types of risks are usually covered in a fixed-price contract o Restatement 261 UCC 2-615 If performance has become impossible or commercially impracticable, the seller will be discharged to the extent of the impossibility or impracticability The seller generally assumes the risk of the occurrence of an unforeseen event and must continue to perform o However, if it is fair to say that the parties would not have placed the risk of the occurrence on the seller, the seller will be discharged Applies equally to frustration of purpose Frustration Where the purpose of the contract has become valueless by virtue of some supervening event not in the fault of the party seeking discharge o A number of courts will discharge contractual duties even though performance of these duties is still possible Elements:

o Some supervening act or event leading to the frustration; o The parties did not reasonably foresee, ex ante, the act or event occurring o The purpose of the contract has been completely or almost completely destroyed by this act or event; and o The purpose of the contract was realized by both parties ex ante [Sellers usually raise impossibility and impracticability defenses to discharge performance; Buyers will raise frustration of purpose (because paying money is never impracticable.] Rescission Mutual An express agreement between the parties to rescind o The agreement to rescind is a binding contract supported by consideration i.e., The giving up by each party of his right to counterperformance from the other Successful rescission requires that the duties be executory (unperformed) on both sides o Unilateral Contracts A contract to mutually rescind where one party still has a duty to perform will be ineffective The original promisor, who has not suffered a legal detriment, has not given consideration For an effective rescission in a unilateral contract where the offeree has already performed, the rescission promise must be supported by one of the following: An offer of new consideration by the non-performing party; Elements of promissory estoppel; or Manifestation of an intent by the original offeree to make a gift of the obligation owed him o Partially Performed Bilateral Contracts Usually enforced when a bilateral contract has been partially performed Whether the party who has partially performed will be entitled to compensation will depend on the terms of the rescission agreement Formation o Mutual rescission may be made orally, even if the contract to be rescinded expressly states that it can be rescinded only by a written document Exceptions: If the subject matter falls within the Statute of Frauds, the rescission should generally be in writing UCC 2-209(2) o Requires a written rescission if the original contract expressly requires a written rescission Unilateral When one party wants to rescind it but the other party wishes the contract to be performed according to its terms Party desiring rescission must have adequate legal grounds o e.g., Mistake, misrepresentation, duress, failure of consideration, etc.

Breach
General A breach occurs where: o The promisor is under an absolute duty to perform, and o The absolute duty of performance has not been discharged o Non-breach party can show that he is willing and able to perform, but for the breaching partys failure to perform Effect Minor Breach o Where the obligee gains the substantial benefit of his bargain, despite the obligors defective performance e.g., Insignificant delays in completing performance, small deficiencies in the quality or quantity of performance when precision is not critical, etc. o Aggrieved party is not relieved of his duty of performance Material Breach o Where the obligee does not receive the substantial benefit of his bargain as a result of the failure to perform or defective performance o Non-breaching party may treat the contract as at an end i.e., Any duty of counterperformance owed by him will be discharged Non-breaching party has an immediate right to all remedies for breach of the entire contract o A minor breach coupled with anticipatory repudiation may be treated as material breach The non-breaching party may sue immediately and is permanently discharged from any duty of further performance Aggrieved party must not continue performance, because to do so would be a failure to mitigate damages o A material breach of a divisible contract does not bar recovery for substantial performance Determining Materiality Question of fact Courts look to: o Amount of Benefit Received The greater the extent to which the non-breaching party will receive substantially the benefit she could have anticipated from full performance, the less material the breach o Adequacy of Damages The greater the extent to which the injured party may be adequately compensated in damages, the less material the breach o Extent of Part Performance The greater the extent to which the party failing to perform completely has already performed or made preparations to perform, the less material the breach

o Hardship to Breaching Party The greater the extent of hardship on the breaching party should the contract be terminated, the less material the breach o Negligent or Willful Behavior The greater the extent of negligent or willful behavior of the party failing to perform, the more material the breach o Likelihood of Full Performance The greater the extent of likelihood the party who has failed to perform will perform the remainder of the contract, the less material the breach Failure of Timely Performance Assuming that the defaulting party had a duty of immediate performance when his failure to perform occurred, then his failure to perform on time will always be a breach Specific Rules: o Failure by a promisor to perform at the stated time will generally not be material Unless the nature of the contract is such as to make performance on the exact day agreed upon of vital importance, or The contract by its terms provides that time is of the essence o Delay at the onset of performance before the delaying party has rendered any part of his agreed-upon performance is more likely to be considered material than delay where there has been part performance UCC 2-606 Perfect Tender Rule If goods or their delivery fail to conform to the contract in any way, the buyer generally may reject all, accept all, or accept any commercial units and reject the rest commercial unit one that by commercial usage is treated as a single whole for the purpose of sale, and division of which materially impairs its value o May be a single article or a set of articles Buyers right to reject is cut off by acceptance Acceptance occurs when: o After a reasonable opportunity to inspect the goods, he indicates to the seller that they conform to requires or that he will keep them even though they fail to conform; o He fails to reject within a reasonable time after tender or delivery of the goods, or fails to seasonably notify the seller of her rejection; or o He does any act inconsistent with the sellers ownership

Remedies
Nonmonetary
Specific Performance Available where a legal remedy is inadequate e.g., Where the subject matter of the contract is rare or unique o Always available for land sale contracts and for goods that are rare or unique at the time performance is due An order from the court to the breaching party to perform or face contempt of court charges Not available for service contracts

Monetary

Compensatory Damages Put the non-breaching party where he would have been had the promise been performed Expectation Damages Default damages Require that the breaching party make the non-breaching party whole = Expected Profit Actual Profit Reliance Damages Require that the breaching party return the non-breaching party to his pre-contractual position Used where expectation damages would be too speculative to measure o e.g., The plaintiff cannot show with sufficient certainty the profits he would have made if the defendant had performed the contract Liquidated Damages Parties may stipulate what damages are to be paid in the event of a breach Must be in an amount that is reasonable in view of the actual or anticipated harm caused by the breach Two Requirements: o Damages for breach must have been difficult to estimate or ascertain at the time the contract was formed o The amount agreed on must have been a reasonable forecast of compensatory damages in the case of breach Reasonableness: Comparison between the amount of damages prospectively probable at the time of contract formation and the liquidated damages figure UCC 2-718(1) o Allows a court to consider actual damages to validate a liquidated damages clause o Valid if reasonable in light of the subsequent actual damages Mitigation A plaintiff must refrain from adding to losses after he receives the notice of breach o Must not incur further expenditures or costs o Must take reasonable efforts to cut down losses

Restitution
Based on preventing unjust enrichment when one has conferred a benefit on another without gratuitous intent Can provide a remedy not only when a contract exists and has been breached, but also when a contract is unenforceable, and sometimes where non contractual relationship exists at all Grounds for rescission must have occurred either before or at the time the contract was entered into: o Mutual mistake of a material fact; o Unilateral mistake if the other party knew or should have known; o Unilateral mistake if hardship by the mistaken party is so extreme it outweighs the other partys expectations under the contract;

Rescission

o Misrepresentation of fact or law by either party as to a material factor in the negotiations that was relied upon; o Other grounds, such as duress, undue influence, illegality, lack of capacity, and failure of consideration If the plaintiff paid money to the defendant, she is entitled to restitution in addition to rescission