CONTRACTS- SPRING SEMESTER 2010 DETERMINING THE TERMS OF A CONTRACT PAROL EVIDENCE: When a court determines that parties

have expressed in
their K a fully integrated written agreement the court will not allow extrinsic evidence of prior or contemporaneous oral or written exchanges for the purpose of adding to or contradicting the K terms. Full Integration: Complete and final written expression- Parole Evidence applies Partial Integration: Final but not complete written agreement- Parol Evidence is allowed as long as not contradicting the terms of the original agreement Merger Clause: Writing which says agreement is final expression No-Oral Modification Clause: States that K cannot be modified orally, but usually not upheld by the courts. UCC 2-209- Signed writing which excludes K modification by anything other than writing cannot be modified otherwise. What fails to be a modification may be a waiver Reliance on a waiver can prevent the K recission. 2-209 Doesnt require consideration for a modification of K. Determining Integration: 1.) Four Corners Doctrine: Judge/Court only looks at what is within the four corners of the K to determining whether it is fully integrated 2.) California (Traynor) Doctrine: Credibility of proffered evidence that decides whether a K is fully integrated Exceptions to Parol Evidence Rule: STACCIDS S: subsequent agreement T: trade usage and custom A: ambiguity C: collateral agreements with separate consideration C: conditions subsequent and precedent I: intent to integrate D: duress/undue influence S: sham

INTERPRETING TERMS OF A CONTRACT

Plain Language Rule: If no ambiguity extrinsic evidence is excluded in regards to issue in dispute. Courts differ on how to interpret ambiguity N.Y. Rule: Agreements are to be construed based on the intent of the parties. Intent is to be determined by the text of the writing and evidence is only allowed if on its face the document is ambiguous California Rule: Evidence is always allowed to show ambiguity. If one party claims ambiguity extrinsic evidence is always allowed. Contra Preferentum: When various meaning to a term may be given, interpreted against the drafter of the K. Hierarchy of Interpretation- UCC 2-303. All should be consistent with each other but if not: Hierarchy Applies 1. 2. 3. 4. 5. Express Language: Words given their ordinary meaning Course of Dealing Course of Performance: Trade Usage or Custom: Ordinary Usage and Custom Parties Intent

Contracts on Interpretation 201(a): If one party what meaning is and other party knew or to know that meaning governs. 202: (1): Words are to be interpreted in light of all circumstances (2): Writing interpreted as a whole all writings of same transactions are interpreted together (3): Where there is a prevailing common meaning that meaning will govern (4): Technical words are given their technical meanings (5): Doing things a certain way without objection gives more weight to that interpretation. WORDS ARE AMBIGUOUS IF THEY HAVE MORE THAN ONE MEANING WHEN PARTIES CANNOT AGREE ON MEANING AND BOTH HAVE SEPARATE INTERPRETATION IS A RESAON TO INVALIDATE THE K. Course of Performance: Action of parties in carrying out the K Course of Dealing: Dealings among parties before the K signing Contracts come with a duty to of good faith to observe reasonable commercial standards. When parties have reason to know of ambiguity and do not iron out differences regarding it the correct contract interpretation is up to the court do decide Void Government Contracts 1.) 2.) 3.) Inducing public officials to act in a certain manner Contract with government official to do illegal act Contract that contemplates collusive bidding a. Collusive bidding-(attempt to avoid rules that allow for free and open bidding) UCC ALLOWS A CONTRACT WHENEVER POSSIBLE Trade usage allowed to supplement K terms

Rst. 2d of Rst. had reason Rst.

UNCONSCIONABILITY
UCC 1-304: Requires good faith in dealing in Contract formations When agreement is grossly disproportional courts can void the contract because of unconscionability 3 Principles of Rescission 1.) 2.) When both parties think terms mean different things When one party knows and other party should have known (doctrine doesnt apply) 3.) Parol evidence allowed to show ambiguities Types of Unconscionability: 1. Procedural Unconscionability: Unconscionability in the formation of a contract: Surprise and/or oppression because of disparity of bargaining power. Can be unconscionability in maze of terms 2. Substantive Unconscionability: Unconscionability in the terms of the K. (End result is one sided). Court options for unconscionability (UCC 2-302, Rst. 2d 208) 1.) 2.) 3.) Refuse to enforce the entire K Enforce part of K which is not unconscionable Reform unconscionable to make the K conscionable

Price Unconscionability: Determined by mathematical ratio between price charged, actual value and sellers awareness Unconscionability in Franchise: Courts far less likely to determine unconscionability if there is equality of bargaining power Arbitration Unconscionability: Requires both procedural and substantive unconscionability: lacks basic fairness and mutuality if requires one contracting party but not the other to arbitrate all claims arising out of same transaction or occurrence. MUST GO TO EQUITY COURTS WITH CLEAN HANDS Courts will enforce injunctions when 1.) 2.) Unreasonable hardship if breached Not fair or sharp dealing

Exculpatory Clauses: Usually enforced between landlord and tenant but not between common carriers Should be 1.) 2.) 3.) Used sparingly Dickered Adequate Notice a. Clear and unequivocal in large print b. Cant disclaim implied warranty of inhabitability

Boiler Plate 1.) 2.) 3.) 4.) 5.) Must be in the same font as anywhere else Must be in plain language White Space Printed headings Signing of important terms

Exceptions to Exculpatory Clauses 1.) 2.) Would be against settled public policy Something in social relationship of the parties mitigating against upholding the agreement

Customers not read what they have no real bargaining power over. Customers not expected to read what they have no real bargaining power over Doctrine of Reasonable Expectation: Reasonable expectation of buyer upheld even upheld even though terms may say otherwise (applies to insurance). Adhesion Contracts: Drafted by party with superior strength, gives weaker party only the option to accept or not to accept Unenforceable if 1.) 2.) 3.) Overwhelming bargaining powers Manifestly unfair If no reasonable person would agree to the K terms

Duty to Read: At common law besides fraud, one who signs a written agreement is bound by its terms whether understands or whether he has read it Plain Language Statutes: Several states require that K be written in a clear and coherent manner using words with common everyday meanings. K must be divided into appropriately divided sections Terms can be deemed unconscionable if Goes with principles of fairness and justice (Can be determined by legislature). Should look at the reason behind the law to find public policy. Boiler Plate Terms: Must be conspicuous 2 Views of Unconscionability 1.) Should be expanded when not fair or when goes against competitive market 2.) The doctrine undermines freedom to contract Test for Unconscionability: Absence of a reasonable choice for one party and terms unreasonably favorable to the other Reasonableness: Reasonableness should be determined in light of all the circumstances when Contracts are made. Duty of good faith is implied in all contracts. When contracts between merchants there is a duty to observe reasonable commercial standards

Public Policy and Illegality: Can be illegal in either formation or performance: Courts wont enforce if in restraint of trade or against intent of a statute In pari Delicto: Courts will not determine who is less culpable for an illegal act. Licensing Statute: In some states operating without a license is enough to make a contract voidable Public Policy and At Will Employment Contracts: Courts will usually not interfere with at will employment unless 1.) If in violation of a statute or judicially conceived notion of public policy (example: Federal statutes against gender, race discrimination) 2.) Employees can recover in tort and are entitled to modicum of judicial protection when their conduct as good citizens is punished by their employees. (Sheets v. Family Frosted Foods) Prenuptual Agreements: Will be enforced irrespective of whether the terms were fully understood by one of the parties. No requirement that a spouse consult with an attorney before signing (traditional K principles apply) Pareto Improving Contracts: One party better off for breaching the K and other party is no worse off and is better for society as a whole. Coase Theorem: Should do what is most efficient.

DAMAGES 1. Expectation Damages

a. Incidental Damages: Money spent to cover or to resell (advertisements etc. b. Consequential Damages: Lost profits on other jobs etc. from consequence of entering into the K i. Damages that are the direct consequence of entering into a breach with someone (ex: entering into a K to build a house and as a consequence hire an interior designer= consequential damages) ii. Expectation Damages Formula 1. Loss in value to the promisee caused b/c of the other parties failure

+
Consequential/incidental loss caused by the breach

Costs and loss avoided by not having to perform COVER Buyer Cover: 2-712 (must be done in good faith and without unreasonable delay and in substitution). Damages are difference between K price and cover price minus loss avoided. MARKET VALUE: Alternative to cover. UCC 2-713. Difference in market price at time buyer learned of breach and the K price. Buyer can recover money already paid. UCC 2-711.

c. Substitution i. Covered under UCC 2-706 1. If K is made or replaced with another K Usually
only damages are consequential damages

d. Loss Volume Seller: i. Can recover lost profits under 2-708(2) only if 2-708(1)
damages are not sufficient. Lost volume Seller= able to make more than one contract at a time ii. 2-708- (1): difference between the market price and the unpaid contract price. (2): If damages under section (1) are inadequate the difference is the amount of profit including overhead, would have made from the K (Usually given to loss volume sellers) Seller Remedy when a manufacturer is 2-704: Salvage unfinished goods and sell for scrap. Seller Cover: 2-706: difference between resale money made and the contract price Reliance Damages: Awarded when expectation damages cannot be proven with certainty. Puts the party back in the position it was in prior to the breach

2.

3. Restitution: Restores to the injured party some benefit he has

bestowed upon the breaching party

4. Specific Performance a. Only allowed if the goods involved are unique and money
damages are not adequate. i. Example: Campbell Carrot case

Liquidated Damages: Damages may be liquidated but only at a

reasonable amount in light of the anticipated or actual harm caused by the breach. Must be difficult to calculate actual damages. Escalation Clause: term/clause that lays out when and how there will be a raise in money ex: rent

Doctrine of Avoidibility
When K is executor and one party gives notice of a breach of the K the non breaching party cannot continue to pile up damages. Must stop and sue for damages that had been incurred up to that point. Exception to avoidability/stop doctrine= Manufacturers can continue producing and sue for damagaes Mitigating Damages in Construction Ks: Usually the party against whom there has been a breach is entitled to money allowing him to complete but if cost of completions is grossly and unfairly out of proportion to the good to be obtained, damages is the difference in the value of the faulty work and the K work. (Substantial Performance not considered as a total breach). Mitigating Damages in Employment Ks: Duty to mitigate damages but only if there is a similar job available for similar pay. Foreseeability of Damages: Can recover for the natural and probably arising damages from the K. Special Circumstances/ Damages are not able to recover unless it was in the contemplation of both parties at time K was made or was expressly agreed upon in the K (Hadley v. Baxendale). CONDITIONS Condition: An event other than a lapse of time that must occur before anothers performance is due. Failure to perform a duty that is subject to a condition precedent is not a breach Doctrine of Strict Compliance: Express Conditions will be strictly enforced. (Substantial Performance is an exception to the doctrine. Ex; Jacob & Young v. Kent) Concurrent Conditions: When concurrant conditions/acts are to be done, party who sues must have performed or been ready to perform his side of the K. Mitigating Doctrines: 1. Doctrine of Performance: If a party prevents occurrence of a condition he cannot assert the non occurrence 2. Waiver: Where a party agrees to forego the non occurrence of a condition and proceed as if it had occurred

3. Estoppal: If the other party relies on the waiver, he is stopped from retracting the waiver. But if no reliance on the waiver a party can retract the waiver 4. Party whose duty is conditional, may elect to perform anyway. If one party takes longer than the other to perform must do work before the payment is due Divisibility of Ks: Contracts are severable if the part to be performed by one party consists of several and distinct items and the price to be paid by the other is. 5. Apportioned to each item to be performed 6. Is left to be implied by the law. 7. If consideration to be paid is single and entire the K must be held to be entire Perfect Tender Rule: Buyer can accept the whole, reject the whole or a portion. (rejection must be within a reasonable time. Buyer has a right to inspect the goods. If buyer rejects and gives notice to the seller, the seller must be given an opportunity to cure. Buyer does not have to accept if cure is not accomplished. Exception to the rule if parties have agreed otherwise

Material Breach:
If only a partial breach the non breaching party has no right to terminate the entire K but should continue performing and sue for damages arising from the partial breach After Acquired Evidence: If party has no justification in breach but later discovers evidence that will justify, the party can use that evidence. Determining Material Breach: 1. Extent to which injured party will receive benefit which he could have reasonably anticipated 2. Extent to which the injured party may be adequately compensated in damages for lack of complete performance 3. Extent to which party failing to perform has already partly performed or made preparations for performance 4. Hardship on party failing to perform 5. Greater or less uncertainty that the party failing to perform will perform remainder of the K (WALKER CO.V. HARRISON). Non breaching party has option to treat material breach as a partial breach. Mere difficulty in performance will not excuse a break of K Party who terminates K de to breach by the other party doesnt need to convey all reasons for termination in notice of termination (can be oral or in writing). Unless detrimental reliance on circumstances/ grounds that were asserted.

Hindrance and Prevention:

Hindrance: Makes it difficult to perform (usually not an excuse for not performing) Prevention: when a party is prevented from performing the K because of acts by the other party, is an excuse for non performance Anticipatory Repudiation: Repudiation before time for performance has arrived (must be certain and unequivocal) Damage for Anticipatory Repudiation: appropriate measure of buyers damages after anticipatory repudiation by seller is at time buyer learned of the breach plus a commercially reasonable time (UCC 2713). Renouncing Anticipatory Repudiation: 1. Anticipatory breach can be retracted prior to the other party relying on that breach 2. All required for renunciation not to be accepted is definite action showing breach has been accepted as final. Consequences of Anticipatory repudiation: 1. Gives rise to a claim of breach 2. Claim may be filed immediately

3. Recipient of an anticipatory breach can make other arrangements 4. Can go to court before time for performance is due Assurance of Performance: At common law no right to seek assurance for performance but allowed under UCC 2-609 when there are reasonable grounds for insecurity can in writing demand assurance of performance .( Many jurisdictions now take this approach for non UCC contracts). Mutual Mistake: For a K to be rescinded because of mutual mistake the mistake must be a basic assumption of the K that the occurrence of which neither party was aware at the time of the K formation (Main reason why K was entered into) Impossibility/Impracticability Defense: Impracticable when can only be done with excessive and unreasonable costs. When performance depends on the continued existence of a given person or thing there is an implied condition and perishing of such person or thing makes performance impossible and excuses parties from their obligations UCC 2-613: If K goods are completely destroyed without fault by either party K is avoided, but if only partially destroyed buyer has option to accept the goods anyway (Only applies to situations in which the goods are the only goods that would satisfy the K). 2-614: Relief when agreed method of delivery becomes commercially impracticable Test For Impracticability: 1. Contingency must have occurred a. Must be after the K made a non occurrence, the occurrence of which was a basic K assumption (must not be fault of either party) 2. Unexpected occurrence must not have been allocated either by agreement or custom 3. Contingency must have rendered performance commercially impracticable Force Majeur Clauses: When parties anticipate one or more events that it cannot readily prevent and that might impede its performance, a term intended to excuse it if that arises Casualty to Goods: Not impracticable if a mere price increase on goods unless positively unjust Third Party Beneficiaries: where it appears by expression or implication that party would receive a benefit 2 types of beneficiaries 1. Creditors (if debt owed to third party) 2. Donee (object of a gift etc) Vested Rights of Donee Beneficiaries 1. Rights can vest when parties agree they will vest 2. When donee beneficiary brings an action to enforce the promise

Creditor beneficiary rights vest when learns of K and assents to it Assignment of Rights: Nearly all rights can be assigned unless 1. Assignment would materially change the duty of the other party or 2. Increase materially the burden of risk imposed on him by the K or 3. Impair his chance of obtaining return performance Assignment must be communicated to the other party in the K by the assignee Terminology Obligor: Person performing the K duty Obligee: Assignor Assignee: Steps into the position of the assignor (assignor cannot sue the obligor because he is no longer a party to the K) Obligor does not have to accept the assignment in order for it to be valid. Rights for personal services cannot be assigned Voidable Assignments = Minors, fraud, duress, undue influence Delegation of Duty: Duty to pay money is delegable Cannot delegate a duty when K depends on the identity of a person UCC 2-210(1): Can delegate unless otherwise agreed upon by the parties, or personal service K or performance under a distributorship K may not be delegated to a competitor wholly owned subsidiary.