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CHAPTER 7

Conditions and Promises


Performance and Breach

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BASIC CONCEPTS

Promise:

• An undertaking to act or refrain from act in a specified way at some future time.
• A contractual undertaking, breach of which leads to liability for damages or
equitable relief

Condition:

• An event that is not certain to occur.


• A fact, the occurrence or nonoccurrence of which determines when and if a party
must perform

A promised performance under a contract is subject to a condition if the parties agree


that the performance is contingent on the occurrence of the uncertain event.

Uncertain Event: An event whose occurrence would not be regarded as strongly predictable.
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In other words, an occurrence that is strongly predictable, it is NOT a condition.

If the parties do not intend the performance to be contingent upon the event, it should not be
treated as a condition.

Express Condition:

• Expression of the parties of an intent that performance is dependent upon the


occurrence or nonoccurrence of an event not certain to occur.
• A condition is express if the language of the contract, on its fact, and without
reference to extrinsic evidence, articulates the intent to make performance contingent
on the event. For Example:
○ On condition that
○ Subject to
○ Provided that
○ If

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In order to be expressly conditional, its conditional nature must also be apparent from the
language used.

The insurer’s duty to reimburse for loss is conditional upon the insured giving it written
notice of the loss within 10 days of the loss.

Constructive Conditions:

• Exists if the circumstances and nature of the contract compel the conclusion that
the condition should exist as a matter of policy, or that if the parties had
addressed the issue, they reasonable would have intended it to be part of their
contract.
• Where the intent is unclear, a court may use a condition implied in law to fill in
the blanks concerning the timing of performances

There is no actual evidence that the parties discussed the question or expressed this intent
to each other.

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Condition of One Party’s Performance: if a condition is intended to relate only to the
performance of one of the parties, the party can chose to perform despite its
nonoccurrence and may fully enforce the contract against the other.

Condition of the Contract as a Whole: if the condition relates to the contract as a


whole, its non-occurrence discharges the right of both parties to demand performance,
and neither can unilaterally waive it.

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EXPRESS CONDITIONS AND IMPLIED IN FACT CONDITIONS

Conditions Implied in Fact: contextual evidence that supports the inference that the
parties intended a performance to be conditional.

It is established once contextual evidence is introduced to cast light on what was meant.

The Policy Concerns

Howard v. Federal Crop Insurance Corp.

Law or Rule(s): When it is doubtful whether words create a promise or a condition


precedent, they will be construed as creating a promise. Provisions of a contract will not
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be construed as conditions precedent in the absence of language plainly requiring such
construction.

Contract provisions will not be construed as conditions precedent unless the contract
explicitly says so.

The Policy Concerns, cont.

Jones Associates v. Eastside Properties

Law or Rule: Determination of the intent of the contracting parties is to be accomplished


by viewing the contract as a whole, the subject matter and objective of the contract, all
the circumstances surrounding the making of the contract, the subsequent acts and
conduct of the parties to the contract, and the reasonableness of respective interpretations
advocated by the parties.

Time Sequence

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Conditions Precedent: fulfillment must precede the performance contingent upon it. It
is a prerequisite to the duty arising.

A condition precedent may be either a condition to the formation of a contract or to an


obligation to perform an existing agreement. Conditions may relate either to the
formation of contracts or liability under them.

Time Sequence, cont.

If performances are not capable of being rendered simultaneously because one of them
requires a period of time to perform and the other can be rendered instantly, the general
presumption, unless the contract indicates a different sequence, is that the performance
that takes time must go first and must be concluded before the instantaneous one is due.

The completion of the longer performance is a condition precedent to the instantaneous


one.

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Concurrent Conditions: If a contract provides for counter-performances in exchange for
each other, and the contract does not prescribe a sequence of performances, the general
presumption is that if the performances are capable of being rendered simultaneously,
they are due at the same time.

Condition Subsequent: terminates a duty that came into existence when the contract
was formed.

Time Sequence, cont.

The duty to perform arises immediately upon contracting but is discharged if the
condition occurs.

Gray v. Gardner

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Law or Rule: In regard to the condition precedent, on the occurrence of a certain
contingent event, the promise was to be binding, and not otherwise. To entitle himself to
enforce the promise, the plaintiff must show that the contingent event has actually
occurred.

Time Sequence, cont.

Gulf Construction Co. v. Self

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Law or Rule: Conditions precedent to an obligation to perform are those acts or events
which occur subsequently to the making of the contract that must occur before there is a
right to immediate performance and before there is a breach of contractual duty.

Terms:

• If
• Provided that
• On condition that

However, where the intent of the parties is doubtful or where a condition would impose
an absurd or impossible result, then the agreement should be interpreted as creating a
covenant rather than a condition. Generally, a writing is construed most strictly against
its author and in such a manner as to read a reasonable result consistent with the apparent
intention of the parties.

PERFORMANCE AND CONSTRUCTIVE CONDITIONS

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Breach

A breach can only occur when the promised performance falls due.

The Effects of Material Breach on Performance

A breach is material if the failure or deficiency in performance is so central (important)


to the contract that it substantially impairs its value and deeply disappoints the
reasonable expectations of the promisee.

In other words, one must consider the entirety of the exchange contemplated in the
contract and decide if the defective or absent performance forms a significant part of the
consideration bargained for by the promisee.

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The Effects of Material Breach on Performance, cont.

Things considered:

• The extent of the performance affected by the breach- measured both by its value
and its proportion to the performance as a whole
• The equities between the parties
○ A court may look not only at the deprivation suffered by the promisee as
a result of the breach, but also at the degree of hardship that would be
suffered by the breacher if termination were allowed.

A breach at the outset of performance that affects the value of the entire exchange is
patently more material than one occurring near the end of the performance and having an
impact on only a small aspect of what was promised.

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Note: Although a breach does not need to be deliberate or willful to be material, in
balancing the equities, courts may give some weight to the willfulness or innocence of
the breacher.

Circumstances Significant in Determining Whether a Failure is Material

1. The extent to which the injured party will be deprived of the benefit which he reasonably
expected
2. The extent to which the injured party can be adequately compensated for the part of that
benefit of which he will be deprived
3. The extent to which the party failing to perform or to offer to perform will suffer
forfeiture
4. The likelihood that the party failing to perform or to offer to perform will cure his failure,
taking account of all the circumstances including any reasonable assurances
5. The extent to which the behavior of the party failing to perform or to offer to perform
comports with standards of good faith and fair dealing.

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NOTE: If a party chooses to treat a breach as partial, she must normally render her own
performance when it becomes due. By electing not to pursue her right to declare total breach, she
forgoes the remedies for total breach, including the right to withhold her own performance.

However, she is entitled to an offset for the damages caused by the breach when those damages
for partial breach are likely to be extensive and may equal or exceed her obligation to the other
party.

Substantial Performance

It is a non-material breach. Once it is determined that a breach is not material, it is


partial, and the performance that has been rendered is substantial.

Occurs when the contract was not performed exactly, but was performed to the extent
that the difference in the end result is insubstantial. Where there is substantial
performance the harmed party may not recover the cost of completion, but rather the
difference in market value.

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General Rule: when one party’s performance falls short of that promised in the
contract, but performance is sufficient to qualify as substantial, the other party is not
entitled to withhold any return performance that is due but has the right to claim
damages for the breach.

NOTE: the doctrine of substantial performance is not applicable to a sale of goods.

Relief for Substantial Performance

The usual measure of damages is the cost to place the promisee in the position he would
have been in had the performance been in full compliance with the contract.

If the breach lies in a failure to complete performance, the completion cost is the proper
measure. If the breach involves a delay in performance, compensation is appropriately
measured by determining the loss caused by the delay.

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If the court feels that damages measured by the cost of rectification are not an accurate
measure of actual harm, but would provide a windfall to the promisee and impose an
unfair forfeiture on the breacher, the court may adjust the damages to better represent the
true harm to the promisee. This measure of damages is based on the different in value
between what was promised and what was performed.

Time is of the Essence

Where parties have not expressly declared their intention as to whether time is of the
essence of a contract, determination as to whether time is of the essence depends on
intention of parties, circumstances surrounding transaction and subject matter of the
contract.

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Where time is of the essence of contract, performance on time is a constructive condition
of the other party's duty, usually the duty to pay for the performance rendered.

Generally time is not of the essence in a building or construction K in the absence of an


express provision.

SUBSTANTIAL PERFORMANCE UNDER UCC ARTICLE 2

Perfect Tender Rule

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The buyer is entitled to perfect tender of the goods ordered and has the right to reject
goods that fail to conform exactly to what was called for by the contract.

§2.601: If the goods or tender of delivery fail in any respect to conform to the contract,
the buyer may reject the whole.

§2.106(2): Defines conforming as meaning in accordance with the obligations under the
contract.

§2.508: Permits the seller to avoid rejection of non-conforming goods by curing the
deficient tender. The breadth of the seller’s right to cure depends on whether the goods
are rejected prior to or after the due date for their delivery.

*** See Page 80 ***

SUBSTANTIAL PERFORMANCE UNDER UCC ARTICLE 2

Cure
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If the seller delivers non-conforming goods before the delivery time stipulated in the
contract, the delivery date may not have passed by the time the buyer exercises the right
of rejection.

§2.508 (1): gives the seller an unconditional right to notify the buyer seasonably of intent
to cure and to affect the cure by substituting a conforming delivery before that time
expires.

Note: The Seller’s initial nonconforming performance must have been in good faith,
the cure must be made at the seller’s expense, the seller must compensate the buyer for
reasonable expenses cause by the breach and cure, and the conforming tender must be
made within the time for performance agreed to in the contract.

Cure, cont.

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If the contractual delivery date has passed, this unrestricted ability to cure is no longer
available, but a qualified right to cure still exists for a reasonable time.

§2.508(2): permits the seller to notify the buyer seasonably of intent to cure and to affect
the cure within a reasonable time, provided that the seller had reasonable grounds to
believe that the tender of delivery would be acceptable with or without money
allowance.* (see UCC for changes)

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EXCUSE

Waiver and Estoppel

A secured party who has not insisted upon strict compliance in the past, who has accepted
late payments as a matter of course, must, before he may validly rely upon a clause to
declare a default and effect repossession, give notice to the debtor that strict compliance
with the terms will be demanded henceforth if repossession is to be avoided.

Waiver

A waiver occurs when, after the contract has been made, the beneficiary of a condition
agrees to perform even if the condition is not satisfied.

A waiver is a voluntary abandonment of a contractual right.

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It is one-sided: one of the parties unilaterally gives up a contractual right without asking
for or receiving anything in exchange.

Waiver, cont.

General Rule: if the right to be given up is an important part of the exchange under the
contract it cannot be validly relinquished by a unilateral waiver. Its abandonment must be
exchanged for consideration in a fully fully-fledged contractual modification.

However, if the right relinquished is non-material- ancillary, and not a central part of the
contractual exchange, the consideration requirement is dispensed with and it can be validly
waived.

Estoppel

Its purpose is to prevent the unfair assertion of rights by a person who has acted inconsistently
with those rights.

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It precludes a person from asserting a right when, by deliberate words or conduct, and with
knowledge or reason to know that the words or conduct will likely be relied on by another,
the actor causes the other party detriment by inducing the justifiable belief that the right does
not exist or that it will not be asserted.

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CHAPTER 8
Anticipatory Repudiation

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The Distinction Between Breach and Repudiation

Breach: can only occur when the promised performance falls due.

Repudiation: a breach in advance of performance; a party may repudiate her obligation in


anticipation if, before the time for performance, and before either party has begun
performance under the contract, the party makes it clear by words or actions that she will
breach when performance falls due.

Repudiation may occur after performance under the contract has begun, but before the due
date of the repudiated performance.

Hochster v. De la Tour Rule: Where there is a K to do an act on a future date, there is a


relation between the parties, that they impliedly promise that in the meantime neither will
do any thing to the prejudice of the other inconsistent with that relation.

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Doctrine of Anticipatory Repudiation

Per Hochster, when one of the parties clearly repudiates a material promise in advance,
the other may treat this as a breach immediately and may seek relief for breach without
delay.

UCC and the Anticipatory Repudiation

• Leaves the issue of repudiation to common law, even in regards to the sale of
goods.
• A clear, unequivocal, and voluntary repudiation by one of the parties is
recognized as the equivalent of a material and total breach, provided that the
threatened action or failure to act would be a material and total breach if it
happened at the time due for performance.

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Response to Repudiation

The other party may:

• Accept the repudiation by treating it as an immediate breach


○ Party is entitled to refuse to render her own performance, to terminate the
contract, and to sue for relief for total breach.
○ Party risks the chance that the other party will deny that he repudiated,
and declare termination to be a breach.
 The more equivocal or unclear the alleged repudiation, the
greater this risk becomes.
• Delay responding to the repudiation to see if the repudiating party repents.
○ Party may, to encourage retraction of the repudiation, notify the promisor
that he has a specified time to recant, failing which the repudiation will
be accepted.

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 If party does this, he may change her mind at any time before
retraction and accept the repudiation.

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Response to Repudiation, cont.

○ Party risks the court finding that she aggravated her damages by not
terminating immediately and taking action to mitigate her loss.
 The clearer and firmer the repudiation, the greater this risk
becomes.

Elements of Repudiation

The promisor must clearly, unequivocally, and voluntarily communicate an intention not
to render the promised performance when it falls due. This intention could be
communicated by words or conduct. The following rules inhibit the promisee’s ability to
react to a prospect of future breach.

1. The prospective action or inaction indicated by the promisor must be serious


enough to qualify as a material and total breach of the contract.

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Elements of Repudiation, cont.

2. The promisor’s statement or conduct must clearly indicate to the reasonable


promisee that the promisor intends to breach materially when the time for
performance arrives.
a. The law is not so much concerned with the promisor’s actual intent or
the promisee’s subjective interpretation of the statement or action, but
with the way in which the promisee should reasonably have understood
it.
3. The promisor’s statement or conduct in repudiating must be voluntary, that is, it
must have been deliberate and purposeful rather than inadvertent or beyond the
promisor’s control.

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Retraction of Repudiation

• Because the promisee does not have to wait for a retraction, the promisor’s
ability to retract is lost as soon as the promisee notifies the promisor that the
repudiation has been accepted.
• Even in the absence of such notification, the promisor cannot take back the
repudiation if the promisee has treated it as final and has taken action in reliance
on it, resulting in a significant change in her position.

Prospective Non-Performance and Assurance of Performance

• UCC §2.609: provides that if a party has reasonable grounds for insecurity
regarding the other’s performance, she may make a written demand for an
adequate assurance of due performance.
○ Until that assurance is received, the party requesting it may, if
commercially reasonable, suspend any of her own performance for which
she has not already received the agreed return.

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Prospective Non-Performance and Assurance of Performance, cont.

○ The party receiving a justified demand for assurance must provide an


adequate assurance within a reasonable time, not exceeding 30 days.
• Restatement §251: is largely similar to the UCC.

Hopes Architectural Products Case: To suspend its performance pursuant to 2-609,


defendant must:

1. Have had reasonable grounds for insecurity regarding plaintiff’s performance


under the contract
2. Have demanded in writing adequate assurance of plaintiff’s future performance
and
3. Have not received from plaintiff such assurance.

A party already in breach is not entitled to invoke §2.609 by demanding assurances.

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Prospective Non-Performance and Assurance of Performance, cont.

Policy: To hold otherwise would allow a party to avoid liability for breaching its contract
by invoking §2.609 to extract from the non-breaching party an assurance that no damages
will be sought for the breach. A non-breaching party in need of prompt performance
could be coerced into giving up its right to damages for the breach by giving in to the
demands in order to receive the needed performance.

Rule: What constitutes adequate assurance is to be determined by factual conditions; the


seller must exercise good faith and observe commercial standards; his satisfaction must
be based upon reason and must not be arbitrary or capricious.

If the assurances he demands are more than adequate and the other party refuses to
accede to the excessive demands, the court may find that the demanding party was in
breach or a repudiator.

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Prospective Non-Performance and Assurance of Performance, cont.

RESTATEMENT §252: Effect of Insolvency

1. Where the obligor’s insolvency gives the obligee reasonable grounds to believe
that the obligor will commit a breach under the rule states in §251, the obligee
may suspend any performance for which he has not already received the agreed
exchange until he receives assurance in the form of performance itself, an offer
of performance, or adequate security.

2. A person is insolvent who either has ceased to pay his debts in the ordinary
course of business or cannot pay his debts as they become due or is insolvent
within the meaning of the federal bankruptcy law.

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CHAPTER 9
Third Party Beneficiaries

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Third- Party Beneficiary

Incidental Beneficiary:

• Someone who indirectly obtains a benefit as the result of the main purpose of the
trust.
○ The benefit anticipated was purely a fortuitous and incidental result of a
transaction between others.
• A beneficiary who is not an intended beneficiary.

Intended Beneficiary:

• One for whose benefit a contract is made.


○ If the contract is breached, he or she can sue the promisor
• When the intended contract is for the benefit of the third party.
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Promisor: when a contract is intended to confer a benefit on and create enforcement
rights in a third-party beneficiary, the contracting party who is to render the performance
to the beneficiary is referred to as the promisor.

Third-Party Beneficiary, cont.

Promisee: the contracting party whose right to performance has been conferred on the
beneficiary

Lawrence v. Fox: Even where no agency or trust is established, the parties to a contract
do have the power to create rights enforceable by a person who is not a party to a
contract, and that person can sue the promisor to enforce the performance undertaken to
the promisee for his benefit.

• Creditor Beneficiary: a nonparty to a contract who receives the benefit when a


promise is made to satisfy a legal duty
• Donee Beneficiary: a non-party who benefits from a promise that is made for the
purpose of making a gift to him or her.
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Concept of the third-party beneficiary doctrine: the third party only acquires the right
to enforce the benefit if it is apparent that the parties intended to give him that right –
they have elected to create the beneficiary status as part of their agreement.

Third-Party Beneficiary, cont.

Elements:

1. Contract calls for performance to be rendered to the third party; it must manifest
the intention to give the third party the right to enforce the performance if it is not
rendered.
a. Restatement §302(1), recognizes a right to performance (right to enforce
the performance) in the beneficiary only when it is appropriate to
effectuate the intention of the parties.
b. The intent to establish third-party enforcement rights is a matter of
interpretation.

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c. For mutual intent to exist, the promisee must have communicated this
intent to the promisor sufficiently for the promisor to have reasonably
understood that she was assenting to it.
2. There must be some relationship between the promisee and the beneficiary from
which it can be inferred that the parties had the beneficiary’s interest in mind
when entering the contract.

Third-Party Beneficiary, cont.

A beneficiary can be regarded as intended, rather than incidental, only if one of two
conditions is satisfied:

1. The beneficiary must be a creditor of the promisee


2. Or it must be clear that the promisee intended to make a gift of the benefit to the
beneficiary.

Restatement §280: Novation

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A novation is substituted contract that includes as a party one who was neither the obligor
nor the obligee of the original duty.

Seaver v. Ransom: recognized that a person could qualify as an intended beneficiary


when the purpose of conferring the benefit was not to pay any debt, but to give her a gift.

The court found that there was no reason in principle to confine the third party
beneficiary doctrine to cases involving creditor beneficiaries.

Third- Party Beneficiary, cont.

Restatement §133

1. Where performance of a promise in a contract will benefit a person other than the
promise, that person is:
a. A donee beneficiary (GIFT PROMISE) if it appears from the terms of
the promise that

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i. Purpose of the promisee in obtaining the promise of all or part of
the performance thereof is to make a gift to the beneficiary
ii.Or to confer upon him a right against the promisor to some
performance neither due nor supposed to be asserted to be due
from the promisee to the beneficiary.
b. A creditor beneficiary (PROMISE TO DISCHARGE THE
PROMISEE’S DUTY) if
i. No purpose to make a gift appears from the terms of the promise
in view of the accompanying circumstances and performance of
the promise will satisfy an actual or supposed or asserted duty of

Third- Party Beneficiary, cont.

Restatement §133

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the promisee to the beneficiary, or a right of the beneficiary
against the promisee which has been barred by the Statute of
Frauds
c. An incidental beneficiary if neither the facts stated in Clause (a) nor
those stated in Clause (b) exist.
2. Where it appears from the terms of the promise in view of the accompanying
circumstances that the purpose of the promisee is to benefit a beneficiary under a
trust and the promise is to render performance to the trustee, the trustee, and not
the beneficiary under the trust, is a beneficiary within the meaning of this
Section.

The Promisor’s Defenses

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General Rule §309 (READ IT): Unless the contract makes it clear that it confers rights on the
beneficiary free of defenses, the beneficiary’s rights are subject to any limitations inherent in the
contract.

The promisor may raise against the beneficiary any defense that would have been available against
the promisee:

• Arising out of a defect in the formation of the contract


• Based on the promisee’s breach of contract
• Arising out of post-formation occurrences that affect the very basis of the contract
○ Supervening impracticability
○ Nonoccurrence of a condition

Although a wrongful act of the promisee can be raised by the promisor as a defense against the
beneficiary, it does not impose any liability on the beneficiary. Any recourse that the promisor
has must be pursued against the promisee. Unless the contract expresses a contrary intent, the
promisor cannot raise against the beneficiary any defense that is purely personal against the
promisee.

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Vesting of the Beneficiary’s Rights

To protect the beneficiary’s actual or potential reliance on the contract, the rule has been
developed that at some point after the contract is made, the benefit vests in the beneficiary- it
becomes irrevocably settled on her so that it cannot be changed or withdrawn by the
contracting parties without her consent.

Note: if the parties do agree to modify or discharge the contract after the benefit has vested,
this agreement binds the parties beween themselves, but it binds only them. It does not affect
the rights of the beneficiary, who can enforce the performance as it vested under the original
agreement

Restatement §311(3):

• Seeks to clarify and standardize the rule for vesting, irrespective of the nature of the
underlying relationship between the promisee and the beneficiary.
• Provides that the benefit vests in the beneficiary when she manifests assent to it at
the request of one of the parties, or she sues on it, or she materially changes her
position by acting in justifiable reliance on it.
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Vesting of the Beneficiary’s Rights, cont.

The right vests in the beneficiary either:

1. When she accepts it by manifesting assent to it, or


2. When she detrimentally relied on it.

As creators of the benefit, the contracting parties can confer it subject to whatever limitations
and conditions they see fit.

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Mortgages and Third Party Beneficiaries

Mortgage: a consensual lien on real property (a deed transferring the legal interest in the
realty to the lender) given by the mortgagor (the fee simple owner) to the mortgagee (the
financing entity)

Equity of Redemption: a right to redeem the property, even if the debt was recently
defaulted, by paying off the mortgage and recovering the property.

DO THE PROBLEMS FOR THIS IN THE CASE BOOK. SEE WHAT HE WANTS YOU
TO KNOW.

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CHAPTER 10
Assignment and Delegation

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Terminology

See EE, p 700 for definitions of (Assignor/ Assignee, Obligor/Obligee,


Delegator/Delegate(e))

The law favors the free transferability of contractual rights and obligations and inclines to
uphold the right of a party to make such a transfer.

General Rule: Unless a contract specifically prohibits a party from transferring her rights
acquired and duties assumed under it, or the nature of the contract is such that the transfer
would impair the other party’s reasonable expectations or would offend public policy, a
party has the power to transfer contractual rights and obligations. (Established under
common law, and §317(2), and in regard to the sales of goods §2.210(2).

Note: Assignment and Delegation are only possible once a contract has been made and
those rights and obligations have come into existence.
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Assignment

A voluntary manifestation of intention by the holder of an existing right to make an


immediate transfer of that right to another person. Components:

1. The assignor must voluntarily manifest intent to assign the right


2. The right must be in existence at the time of assignment and its transfer must take
effect immediately.
a. The transfer must be a complete relinquishment of the right by the
assignor in favor of the assignee, so that the assignor retains no control
over it and no power to revoke it.
b. The transfer of the right must actually be accomplished, so that the
transferee acquires it immediately.

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Herzog Case Rule: An assignment is an act or manifestation by the owner of a right
indicating his intent to transfer that right to another, and to be valid and enforceable
against the assignor’s creditor, the assignor must make clear his intention to relinquish
the right to the assignee and must not retain any control over the right assigned.

Assignment, cont.

Restrictions:

1. An assignment cannot be validly made if the contract prohibits it; the contractual
bar must be clearly expressed.
a. §322 and UCC §2.210(3) call for a restrictive interpretation of contract
provisions that appear to preclude assignment.
i. Any doubt or ambiguity should be resolved in favor of
transferability
ii.A clause that prohibits assignment of the contract should, if
possible, be taken to forbid only the delegation of duties.
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b. Even in the absence of a clear prohibition, §317(2) and UCC §2.210(2)
recognize that unless the contract specifically authorizes assignment,
rights may not be assigned if this would materially change the obligor’s
duty, increase the burden or risk imposed by the contract, impair her
prospects of getting return performance, or otherwise substantially
reduce its value to her.

Assignment, cont.

Macke Case Rule: In the absence of contrary provision, rights and duties under an
executory bilateral contract may be assigned and delegated, subject to the exception that
duties under a contract to provide personal services may never be delegated, nor rights be
assigned under a contract where the choice of the person was an ingredient of the bargain.

Effect of Assignment:

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Note that the obligor must be notified of the assignment in order to know the person to
whom performance is due. The notice must be received by the obligor either:

• Come to obligor’s attention


• Or, be delivered so that she reasonably should be aware of it.

Defense Against the Assignee

The assignee takes the rights subject to any conditions and defenses that the obligor may have
against the assignor arising out of the contract. Examples:

Assignment, cont.

• If the contract is avoidable by the obligor or unenforceable because of a defect in


formation of the contract
• The obligor’s duty is subject to an unsatisfied condition
• The assignor breached the contract
• The obligor’s performance has become impracticable
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The obligor may only use the assignor’s breach defensively against the assignee. However, the
assignee has no liability for the obligor’s damages to the extent that they exceed the amount of the
offset.

Rule: The the Assignee’s rights are subject to any such right of set off that arose before a notice of
assignment, but cannot be defeated by one that arose afterwards.

Unless the assignment indicates intent to the contrary, the assignor impliedly warrants to the
assignee that the rights assigned are valid and not subject to any defenses.

Assignment

GIFTS

§332 Revocability of Gratuitous Assignments

Unless a contrary intention is manifested, a gratuitous assignment is irrevocable if:


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1. The assignment is in writing either signed or under seal that is delivered by the assignor;
or
2. The assignment is accompanied by delivery of a writing of a type customarily accepted as
a symbol or as evidence of the right assigned

A gratuitous assignment is revocable and the right of the assignee is terminated by the assignor’s
death or incapacity, by a subsequent assignment by the assignor, or by notification from the
assignor received by the assignee or by the obligor.

A gratuitous assignment ceases to be revocable to the extent that before the assignee’s right is
terminated he obtains

1. A payment or satisfaction of the obligation, or


2. Judgment against the obligor, or
3. A new contract of the obligor by novation

A gratuitous assignment is irrevocable to the extent necessary to avoid injustice where the
assignor should reasonably expect the assignment to induce action or forbearance by the assignee
or a sub-assignee and the assignment does induce such action or forbearance.
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An assignment is gratuitous unless it is given or taken

1. In exchange for a performance or return promise that would be consideration for a


promise
2. Or as security for or in total or partial satisfaction of a preexisting debt or other
obligation.

ASSIGNMENTS FOR CONSIDERATION

§324 Mode of Assignment in General

In an assignment of a right, the obligee must manifest an intention to transfer the right to
another person without further action or manifestation of intention by the obligee.
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An assignment of an interest in real property requires a writing under the Statute of Frauds.

§326 Partial Assignment

An assignment of a part of a right, whether the part is specified as a fraction, as an amount, or


otherwise, is operative as to the part to the same extent and in the same manner as if the part
has been a separate right.

If the obligor has not contracted to perform separately the assigned part of a right, no legal
proceeding can be maintained by the assignor or assignee against the obligor over his
objection, unless all the persons entitled to the promised performance are joined in the
proceeding, or unless joinder is not feasible and it is equitable to proceed without joinder.

Limitations on the Assignment

Chose in action: a right of a contracting party to performance under an executory


contract  the right to sue someone in contract or tort.

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Cheney Case: Where a contract provides that the matter of approval of performance is
reserved to a party, he must “act fairly and in good faith in exercising that right. He has
no right to withhold arbitrarily his approval; there must be a reasonable justification for
doing so.” When a matter in a contract is left to the determination of one party alone, that
party’s determination is conclusive if he acts in good faith.

Holding: when a contract grants the purchaser the right to assign his interest in the
contract, or in the property in issue, condititioned upon obtaining the consent of the
seller, the seller must act reasonably and in good faith in withholding his consent to a
propsed assignment.

Defenses of the Obligor

WAIVE OF THE DEFENSE CLAUSES


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Read Unico v. Owen (page 822)

Delegation

Restatement §317 and UCC §2.210(1): An obligor is entitled to delegate his contractual
duties unless this violates the contract or public policy.

The law’s general approach to delegation is that a party should be given the freedom to
engage someone else to perform his contractual duties unless the contract prohibits this or the
delegation otherwise impairs the obligee’s reasonable expectations.

Unlike assignment, delegation does not result in a complete substitution of the delegate for
the delegator. Unless the obligee agrees to release the delegator from any further
responsibility, he remains obligated under the contract.

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CHAPTER 6
Avoidance of the Contract

Mistake

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Definition:

• Errors of fact
• Error about some thing or event that actually occurred or existed and can be
ascertained by objective evidence.

General Rule: A mistake must relate to a fact in existence at the time of contracting.

Observations:

1. An error in judgment does not qualify as a mistake


2. An incorrect prediction of future events if not a mistake
3. Mistake doctrine is not concerned with mistaken understandings between the
parties
4. The law is a fact, so that a mistake in law IS covered by mistake doctrine
5. Situations that appear to call for the application of Mistake Doctrine may be
more properly treated as a breach of a contractual commitment.

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Misunderstanding

Restatement §20: Effect of Misunderstanding

There is no contract if each party has a different understanding about the manifestations
of the contract if:

• Neither party knows or has reasons to know the meaning attached by the other, or
• Each party knows or each party has reason to know the meaning attached by the
other

The manifestations of the parties are operative in accordance with the meaning attached
to them by one of the parties if:

• That party does not know of any different meaning attached by the other, and the
other knows the meaning attached by the first party, or
• That party has no reason to know of any different meaning attached by the other,
and the other ahs reason to know the meaning attached by the first party
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Raffles Rule:

• If a latent ambiguity arises that shows that there had been no meeting of the
minds, there is no mutual assent to contract.
• Parol evidence is admissible to determine the meaning each party had assigned
regarding a latent ambiguity.

Mistake

Mutual Mistake:

• The error is shared by both parties


• A mistake is only mutual if it relates to a factual assumption so shared by the
parties, that it is a joint premise of their bargain.
• Exists when the contract has been written in terms that violate understanding of
both parties

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Unilateral Mistake:

• A mistake of only of the parties


○ One party knows the true facts and the other does not
○ Both parties may be unaware of the truth, yet the fact in issue affects the
decision of only one of the parties and is of no interest or relevance to the
other.

Elements of Mutual Mistake

Restatement §152: A mutual mistake is avoidable by the adversely affected party if the
following prerequisites are satisfied:

1. At the time of contracting, the parties must have shared an erroneous belief
concerning a fact
2. The erroneous fact was a basic assumption on which the contract was made

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a. The mistaken fact must be so fundamental to the shared intent and
purpose of both parties that it is reasonable to conclude that they would

Elements of Mutual Mistake, cont.

not have had the contract at all or on the present terms had they known
the truth.
b. Examines the aggrieved party’s motivation, as shared with the other
party
3. The mistake must have a material effect on the agreed exchange of performances
a. Materiality calls for an assessment of the mistake’s impact on the
balance of the exchange to see if it substantially deprived the adversely
affected party of the value expected.
b. The court examines the effect of the mistake on both the parties to decide
the fairness of enforcing the contract despite the mistake.
4. The adversely affected party must not have borne the risk of the mistake.
a. How can one tell who assumed the risk of the mistake:

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i. The contract expressly addresses the risk
ii.Risk allocation may be inferred from the contract terms in
context by the usual process of interpretation or construction

Sherwood Case Rule: A party who has given an apparent consent to a K of sale may
refuse to execute it, or he may avoid if after it has been completed, IF the assent was
founded, or the K made, upon the mistake of a material fact -such as the subject matter of
the sale, the price, or some collateral fact materially inducing the agreement; and this can
be done when the mistake is mutual.

Wood Case Rule: The only reasons for rescinding a sale and revesting title for the
recovery of possession against the vendee are 1) that the vendee was guilty of some fraud
in procuring the sale to be made to him; 2) that there was a mistake made by the vendor
in delivering an article which was not the article sold, - a mistake in fact as to the identity
of the thing sold with the thing delivered.

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Williams Case Rule: A release is a K, and subject to avoidance on grounds such as fraud,
mistake. When the parties have Ked under a misconception or ignorance of a material
fact, the agreement will be avoided. PER does not bar extrinsic proof of mutual mistake,
and mutual mistake does not preclude a person from intentionally assuming the risk of
unknown injuries in a valid release.

Bailey Case Rule: A mistake is an unintentional act or omission arising from ignorance,
surprise, or misplaced confidence. The mistake must be material or so substantial and
fundamental as to defeat the object of the parties. A unilateral mistake is not normally
grounds for the mistaken party.

Elements of Unilateral Mistake

Restatement §153: Because only one party has made a mistake, the expectations of the
non-mistaken party must be protected insofar as they are reasonable and legitimate.
Unilateral mistake is grounds for relief only if the equities favoring release of the
mistaken party outweigh the need to uphold the rights of the non-mistaken party.
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1. The error concerns a fact
2. The fact is a basic assumption on which the mistaken party made the contract
3. The mistake has a material effect on the exchange, adverse to the mistaken party
4. The mistaken party must not bear the risk of the mistake
a. If negligent conduct inevitably placed the risk of error on the mistaken
party, unilateral mistake would seldom permit relief.

Elements of Unilateral Mistake, cont.

b. However, a serious degree of negligence, or worse, a recklessness or a


dereliction of duty owed to the other party, is likely to lead to the
conclusion that the mistaken party took the risk of mistake.
5. The equities must favor relief for the mistake
a. Would enforcement of the contract result in such severe hardship on the
mistaken party that it would be unconscionable to uphold it
b. Would avoidance impose an unfair hardship on the non-mistaken party

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First Baptist Church of Moultrie Rule: Rescission of a contract is permitted where there
has been a mistake of fact by only one party. The mistake must be an unintentional act,
omission, or error arising from ignorance, surprise, imposition, or misplaced confidence.
Relief will be granted even in cases of negligence if the opposing party will not be
prejudiced.

Relief for Mistake

Avoidance

• Brings the contract to an end and both parties must restore any benefit resulting
from performance that was rendered prior to termination
Reformation

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• An equitable action whereby the court is asked to rewrite the contract so that it represents
the true agreement of the parties.
○ Remedy involves a declaration by the court that the contract is on terms other
than reflected in the writing, and enforcement on those terms
• Relates to the way in which the agreement is expressed in writing
○ The problem is not that the manifestation is based on a faulty premise, but that it
is false in itself.
○ When the mistake is in transcription, the desired relief is to have the writing
changed to reflect what was actually good.

Reformation, cont.

○ May also occur when the parties chose words in their writing that do not have
the legal effect intended.
• Party seeking reformation must:
○ Show that an error was made in recording the terms agreed

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○ Explain why the error was made and why he failed to notice it when signing the
document
○ NOTE: Parol evidence rule does not bar the introduction of evidence for the
purpose of showing a mistake in transcription.

Beynon Building Corp Rule: In order to be considered a mistake, the mistake must:

1. Have existed at the time of the execution of the instrument


2. Have been mutual and common to all parties
3. Have been such that the parties intended to say one thing but by the written
instrument expressed another

Reformation, cont.

A written agreement is presumed to express the intention of the parties and will not be
reformed unless the evidence of mutual mistake or other ground for reformation is strong,
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clear, and convincing. The mistake must be one of fact rather than law, the proof clear
and convincing that a mistake was made, and the mistake mutual and common to both
parties to the instrument.

Fraud

Occurs if at the time of the assertion, the party making it has no genuine belief in the
correctness of the prediction, or no intention of performing as promised

To claim fraud, the victim of a misrepresentation, whether of fact, opinion, prediction, or


promise must prove that the misrepresentation was dishonest.

Fraud, cont.

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Fraudulent Misrepresentation:

• Types:
○ Affirmative False Statement:
 Deliberate conduct to hide a fact
 Deliberate action to conceal the truth
 Often an affirmative statement in the form of words, either
written or oral
○ Non-disclosure:
 Fraud misrepresentation made by conduct or silence.
 General disclosure is required when it is demanded by
reasonable standards of fair dealing
 Restatement §161: When Non-Disclosure is Equivalent to an
Assertion
• A person can be held liable for non-disclosure only
when:

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Fraud, cont.

○ The party knows that the fact’s disclosure is


necessary to prevent some previous assertion
from being a misrepresentation, or from being
fraudulent or material
○ The party knows that the fact’s disclosure would
correct the other party’s mistake to a basing
assumption on which the party is making the
contract and if non-disclosure of the fact
amounts to a failure to act in good faith and in
accordance with reasonable standards of fair
dealing.
○ The party knows that disclosure of the fact
would correct a mistake of the other party as to
the contents or effect of a writing, evidencing or
embodying an agreement in whole or in part
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Fraud, Cont.

○ The other person is entitled to know the fact


because of a relation of trust and confidence
between them
• A guilty state of mind is essential to fraud
○ Knowledge of falsity (scienter)
○ Intent to mislead

Vokes Rule: A statement of a party having superior knowledge may be regarded as a


statement of fact although it would be considered as opinion if the parties were dealing
on equal terms.

Stambovsky Rule: Where a condition which has been created by the seller materially
impairs the value of the contract and is peculiarly within the knowledge of the seller or
unlikely to be discovered by a prudent purchaser exercising due care with respect to the
subject transaction, nondisclosure constitutes a basis for rescission as a matter of equity.

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Cousineau Rule: A K may be rescinded if there was a misrepresentation, which was
fraudulent or material; and which induced the recipient to make the K; the recipient must
have been justified in relying on the misrepresentation

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CHAPTER 3
Remedies

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Damages

Purposes which may be pursued in awarding contract damages:

1. The plaintiff has, in reliance on the promise of the defendant, conferred some
value on the defendant
a. Restitution interest: The goal may be termed the prevention of gain by
the defaulting promisor at the expense of the promisee; the prevention of
unjust enrichment.
i. Restitution is premised on the theory of disaffirmance; it treats
the breach as having caused the contract to fall away
ii.It seeks to return to the plaintiff the value of any benefit
conferred on the defendant under the breached contract
2. The plaintiff has in reliance on the promise of the defendant changed his position
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a. Reliance interest: The goal is to put the non-breaching party in the
position as he was in before the promise was made.
3. Without insisting on reliance by the promisee or enrichment of the promisor, the
promisee may be given the value of the expectancy which the promise created.

Damages, cont.

a. Expectation interest: Puts plaintiff in the position as if contract had been


performed.
i. Damages are made up of expected profit on the whole contract
plus expenditure already incurred in reliance on the contract.
ii.Note: When the plaintiff would have made a loss in full
performance of the contract, a negative expectation, the
defendant’s breach is a lucky breach.
1. General Rule: when the defendant can prove that the
plaintiff would have suffered a loss in the event of
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complete performance, the plaintiff’s reliance damages
should cut back to bring his recovery into line with his
expectations.

Restatement §347: Measure of Damages in General

Subject to the limitations states in §§350-353, the injured party has a right to damages
based on his expectation interest as measured by:

1. The loss in the value to him of the other party’s performance caused by its failure
or deficiency, plus
2. Any other loss, including incidental or consequential loss, caused by the breach,
less
3. Any cost or other loss that he has avoided by not having to perform

Hawkins Rule: The damages that should be awarded are the difference between the value
of what the plaintiff would have received if the contract had been carried out and the
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value the plaintiff currently possesses (plus incidental losses resulting from the contract
being breached). This is known as expectation interest, which means damages shall be
awarded such that the plaintiff will be as well off as he would have been if the contract
had not been breached.

Reliance Interest

Reliance is a remedy based on affirmation of the contract; it is an enforcement of the


contract.

Reliance damages aim to refund expenses wasted or equivalent losses by the plaintiff in
reliance on the contract, thereby restoring her to the status quo ante- the position she
would have been in had no contract been entered.

The basis of awarding reliance damages is waste. The expense or loss must cause
prejudice to the plaintiff in that something of value had been wasted and cannot be
salvaged.

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Sullivan Rule: Reliance damages should be granted when expectation damages are seen
as excessive (because, for example, the defendant was not liable for negligence) but
restitution damages are seen as insufficient (because the agreement ought to be at least
minimally enforced).

Restatement §349: Damages Based on Reliance Interest

As an alternative to the measure of damages states in §347, the injured party has a right
to damages based on reliance interest, including expenditures made in preparation for
performance, less any loss that the party in breach can prove with reasonable certainty the
injured party would have suffered had the contract been performed.

Limitations on the Recovery

Consequential damages are expenses or other losses beyond general damages that the
plaintiff would never have occurred but for the breach.

CERTAINTY
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• The evidence must be sufficient to persuade the factfinder that the loss is more
likely to have occurred than not, and must give the factfinder enough basis for
calculating a monetary award.
• Inquiries:
○ Whether the plaintiff has proved injury
○ Whether the plaintiff has provided sufficient evidence to enable the
factfinder to determine the amount of the loss
• General Rule: the more clearly the plaintiff can demonstrate the first element (the
fact that some injury was suffered), the greater effort the court (or jury) will
make to come up with some kind of compensation figure.
○ Restatement §352: although damages cannot be recovered for loss
beyond the amount established with reasonable certainty, the policy of
holding the breacher accountable for her wrongful act requires that
doubts should generally be resolved against her once it is established that
a significant injury has occurred.

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Freund Rule: Damages are not awarded based on the benefit to the breaching party, but
rather according to the consequences of the breach to the plaintiff.

FORESEEABILITY

• An objective concept, concerned not with what a particular person actually did
foresee, but what she would have foreseen had she reasonably contemplated the
course of likely future events.
• Damages are foreseeable when: at the time of making the contract, the party who
ultimately breached reasonably should have realized that those damages would
be a likely consequence of the breach.

Hadley Rule: Damages for breach may only be recoverable if one of two conditions is
satisfied:
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1. Either the loss must be one that may fairly and reasonably be considered to arise
naturally in the ordinary course of thing from the breach
2. Or it must be one that may reasonably be supposed to have been contemplated by
the parties at the time of contract as a reasonable consequence of breach

AVOIDABILITY

Rockingham Country Rule: If a man engages to have work done, and afterwards
repudiates his contract before the work has been begun or when it has been only partially
done, it is inflicting damage on the defendant without benefit to the plaintiff to allow the
latter to insist on proceeding with the contract.

DAMAGES BY AGREEMENT

Restatement §356(1): Liquidated Damages and Penalties


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Damages for breach by either party may be liquidated in the agreement but only at an
amount that is reasonable in the light of the anticipated or actual loss caused by the
breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated
damages in unenforceable on grounds of public policy as a penalty.

Liquidated (Agreed) Damages

A term in a contract under which the parties agree that in the event of a breach by one of
them, the breacher will pay damages in a specified sum or in accordance with a
prescribed formula.

If valid, it has the effect of settling in advance what damages will be due in the event of a
breach.
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Liquidated damage’s purpose, sometimes, is to discourage breach by imposing a penalty
designed to make breach too costly.

Lake River Corp Rule: Liquidated damages must be a reasonable estimate at the time of
contracting of the likely damages from breach, and the need for estimation at that time
must be shown by reference to the likely difficulty of measuring the actual damages from
breach after the breach occurs.

Damages under the UCC

Buyer’s Damages (See Index Card #17 for rejection of nonconforming goods)

§2.606: If the buyer holds on to nonconforming goods for too long or uses them without
regard to the seller’s rights, the right to reject the goods disappears- acceptance has occurred.

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§2.608: Even after the acceptance, the buyer may still be entitled to revoke acceptance of the
goods depending upon the nature of the defect and exactly when the buyer attempts to revoke
acceptance.

§2.712 or §2.713: if the buyer has rightfully rejected or revoked acceptance or the seller never
delivered the goods at all, the buyer’s actual damages are determined by these sections of the
UCC.

§2.715: the buyer may also be entitled to incidental and consequential damages

§2.718 or §2.719: the amount of damages may e limited by provisions in the sales contract
that set a max amount for damages.

Damages under the UCC, cont.

Seller’s Damages

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§2.706; §2.708(1); §2.708(2): If the buyer breaches before acceptance or wrongfully revokes
the acceptance, the seller’s right to damages is determined by this section.

§2.706: The seller is entitled to resell the goods; the measure of damages is the difference
between the resale price and the contract price.

§2.710: The seller may add any incidental damages, but must deduct any expenses saved

Teradyne Case: It is universally agreed that in a case where after the buyer’s default a seller
resells the goods, the proceeds of the resale are not to be credited to the buyer if the seller is a
lost volume seller—that is, one who had there been no breach by the buyer, could and would
have had the benefit of both the original contract and the resale contract.

Restitution
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QUASI CONTRACT

• Contract is implied in law for the purposes of giving a remedy


• It is not a real contract
• It is to be distinguished from a contract implied in fact
○ A contract implied in fact is an actual contract in which agreement is
inferred from conduct rather than express words

Quantum Meruit: the value of services rendered to another

Quantum Valebant: the value of property delivered to another

Money had and received: money held by one person but belonging to another

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Restitution for Breach of Contract

Algernon Rule: The impact of quantum meruit is to allow a promisee to recover the value of
services he gave to the defendant irrespective of whether he would have lost money on the
contract and been unable to recover in a suit on the contract.

The measure of recovery is the reasonable value of the performance; and recovery is
undiminished by any loss which would have been incurred by complete performance.

Restatement §371: Measure of Restitution Interest

If a sum of money is awarded to protect a party’s restitution interest, it may as justice requires
be measured by either:

He reasonable value to the other party of what he received in terms of what it would have cost
him to obtain it from a person in the claimant’s position, or

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The extent to which the other party’s property has been increased in value or his other
interests advances.

Restitution for Breach of Contract, cont.

Rosenberg Rule: The measure of damages is the full contract price, minus damages, services
and expenses not expended by the discharged attorney; or the reasonable value of services
performed prior to discharge.

Equitable Remedies

§4.8 Fundamental Principles of Contract Damages

When a beach of contract is established, the issue becomes one of the proper remedy.

1. The promisee’s reliance loss


2. The expectation loss

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3. Liquidated damages
4. Consequential damages
5. Restitution
6. Specific performance
7. A money penalty specified in the contract, or other punitive damages

Centex Homes Corp Rule: Specific performance should be confined to those special
instances where a vendor of real estate will otherwise suffer an economic injury for which his
damage remedy at law will not be adequate or where other equitable considerations require
that relief. Mutuality of remedy is not the basis for granting or denying specific performance.

Lumley Rule: An injunction compelling specific performance shall issue to a true and literal
performance of their agreements.

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