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what factors do courts consider for unconscionability and unfairness?
- 1. PP
- 2. unequal burdens
- 3. sophistication of consideration
- 4. arm's length X
- 5. necessity
- 6. length of K
- 7. knowledge/status of parties
- 8. reaosnable alternatives
- 9. good faith
- 10. wealth
what constitutes a K of adhesion?
- 1. form K
- 2. dominant party
- 3. take it or leave it
what issues regarding enforcement of adhesion Ks?
- 1. reasonable expectations
- 2. oppressive/unconscionable
what is the point in addressing adehsion Ks?
factors for exculpatory clauses in IL - O'Callagahan
- 1. PP
- 2. Relationship b/t parties
forum selection clause reasonableness test - Carnival Cruises
this test always favors big business!!!
- 1. benefit to limiting forum - indvl v. business
- 2. dispelling confusion
- 3. lowering costs
- 4. routine transaction
- 5. notice
- 6. place of business
forum selection clauses - fundamental fairness test (Carnival)
- 1. forum chosen to dissuade litigation?
- 2. forum chosen b/c laws more favorable to that party?
arbitration/forum selection clauses - Bremen
was the arbitration clause freely negotiated for by parties with equal bargaining power?
- forum selection clause should govern UNLESS strong showing that it should be set aside
2 aspects of unconscionability
- 1. substantial
- 2. procedural
what is procedural unconscionability?
unfair surprise - fault/unfairness in the bargaining process
process by which allegedly offensive terms found their way into agreement
indicators of procedural unconscionability
- 1. typeface
- 2. obscure, convoluted language that layperson couldn't understand
- 3. adhesion K - disparity in bargaining
- 4. location of clauses (inconspicuous v. conspicuous)
- 5. sharp practices (rush, timing, notice)
- 6. duress/undue influence
- 7. knowledge of someone's lack of understanding
what is substantial unconscionability?
content of the K - something is unfair about how the K is going to work out
unfairness of terms - fault/unfairness in the bargaining outcome
indicators of substantial unconscionability
- 1. finance rates
- 2. price v. fmv
- 3. legal obligation wouldn't ordinarily have
- 4. takes away legal right otherwise would have
- 5. one party benefited while other party only burdened
test for unconscionability
- 1. unfair surprise
- 2. unconscionable/oppressive
how do courts deal with unconscionable K or clauses? Principle? Test?
- 1. refuse to enforce K
- 2. enforce remainder of K w/o the unconscionable clause
- 3. limit application of unconscionable clause
principle - preventing oppression and NOT disturbance of allocation of risk b/c of superior bargaining power
TEST - in light of general commercial background/needs are the clauses so one-sided as to be unconscionable under the circumstances existing at the time of the making of the K
arbitration clauses are unenforceable when:
- 1. unilateral
- 2. procedurally or substantively unfair
- 3. arbitration procedure itself is unfair (one-sided)
why may class actions waivers preventing class actions be unconscionable?
- - act as deterrent to justice
- - prevent consumer from pursuing valid claims
- - relieves wrongdoer from liability no matter how widespread
substantive unconscionability test for arbitration clauses?
- 1. arbitration costs are prohibitively high
- 2. clause is excessively one-sided and lacks mutuality
- 3. clause prohibits joinder/class actions
unconscionability is affirmative defense with burden on party asserting it to prove both P and S unconscionability...sliding scale.
- 1. inequality of bargaining process b/t parties
- 2. P forced to accept D's terms
- 3. K itself is one that a reasonable person of sound judgment might not accept
good faith test
good faith obligation implied into every K but obligation only goes so far
- 1. neither party can do anything that interferes with the other person's rights under the K
- 2. if discretion is permitted, party can't act arbitrarily or irrationally
good faith b/t merchants
- 1. honesty in fact
- 2. observance of reasonable commercial standards of fair dealings in the trade (CoPCoDUoT)
is good faith a duty of candor?
NO - not obligated to become an altruist toward the other party and relax the terms if party gets into trouble in performing his side of the bargain BUT can't deliberately take advantage of an oversight by K partner concerning rts under the K
good faith rules in bargaining process and performance of K
subjective test - must determine what parties actually knew and not what they should have known
- BP - usage of superior bargaining power is acceptable
- PK - each party has duty to exercise its terms in good faith
definition of best efforts
greater duty than good faith
not expected to go bankrupt but must keep other party's interest in mind; must treat it like doing it for yourself
good faith in termination factors
- 1. extent of D losses if obligation to recoup is enforced
- 2. extent of P losses if court doesn't create protective right in its favor
termination in good faith
if K doesn't specify the duration/termination date then party has to have reasonable opportunity to recoup their investments in the venture
can't suddenly terminate the K even if K is at-will
if party is deined this right then can recover in quantum merit for time, labor, and expenses
definition of public policy
protection of public at large against imposition by both parties
PP factors for enforcement of term
- 1. parties justified expectations;
- 2. any forfeiture that would result if enforcement were denied; AND
- 3. any special public interest in enforcement of particular term
PP factors against enforcement of term
- 1. strength of policy as manifested by legislation or judicial decision;
- 2. likelihood that refusal to enforce term will further that policy;
- 3. seriousness of any misconduct involved and extent to which it was deliberate; AND
- 4. directness of connection b/t that misconduct and the term
party has no claim in restitution for performance rendered on K uneforceable as against public policy UNLESS...
denial would cause disproportionate forfeiture
definition of illegal K
K freely entered into but violates certain laws
generally both enforcement and restitution prohibited
why are illegal K unenforceable?
- 1. promise to do something illegal is not valid consideration b/c of pre-existing duty rule
- 2. R2d - promise to do something illegal is unenforceable b/c it is illegal and not b/c of lack of consideration
3 types of illegal K
- 1. inducing official action (presumption that K officers act in good faith must be overcome)
- 2. commercial bribery (fact specfic)
- 3. violations of licensing laws (look to purpose of statute - (a) raise public revenue = no recovery; (b) protect public from unskilled/unethical practitioner = recovery)
judicially created public policy
- 1. policies against restraint of trade
- 2. policies against impairment of family relations
- 3. interference with other protected interests
test/factors - void as against public policy
- 1. nature of conduct
- 2. extent of public harm involved
- 3. moral quality of conduct of parties in light of the prevailing stds of community
who has burden of showing enforcement violates PP?
party opposing enforcement b/c
is illegality a valid defense against enforcement? why or why not?
YES even though party may be alleging his own turpitude and in situations of equal fault the position of D is more compelling b/c
- (1) deterrence
- (2) dignity of courts
factors regarding enforcement of K resulting from antitrust conspiracy not illegal on its face:
- 1. excessive price of K and failure to reflect mkt value
- 2. unlawful use of mkt power to inflate K price and eliminate competition
- 3. equity of parties
- 4. PP interest in discouraging unlawful schemes
is anti-trust defense in K action favored?
No b/c fear of unjust enrichment and if enforcing K would enforce illegal conduct then court won't enforce it
reasonableness of restraints of trade (CNC)
- 1. no greater than required for protection of ER's legitimate business interests
- 2. doesn't impose undue hardship on EE
- 3. not injurious to public
court options when dealing with CNC
CL - all or nothing rule
ML - (1) blue pencil rule; (2) reasoanbleness test
must ER have good cause to fire at-will EE?
generally doesn't have to be in good faith or for cause BUT can't fire for unconstitutional reasons
factors for considering wrongful discharge (PP exception)
- 1. statute on point
- 2. recognized pp on point
- 3. EE is forced to choose b/t criminal liability or keeping job
- 4. job scope
- 5. EE's reliable information and expertise
- 6. policy that is furthered for protecting this EE and giving him claim
- 7. legitimate needs of ER
- 8. alternatives to EE that wouldn't have resulted in termination/incarceration
- 9. hardship to EE
- 10. past performance of EE
can't fire in retaliation for:
- 1. refusal to commit perjury
- 2. filing worker's comp claim
- 3. jury duty
- 4. engaging in union activity
can attorneys sue for wrongful termination?
majority - No
minority - yes if was b/c they were following the PRC...not allowing this is greater incentive not to abide by PRC
enforceability of prenup at CL
- 1. reasonable provision for the spouse; OR
- 2. entered into after full and fair disclosure of financial positions of the parties and statutory rights being relinquished
enforceability of prenup at ML
full and fair disclosure of financial positions of the parties...treated like all other Ks
ways courts handle prenups
- 1. like all Ks
- 2. K of adhesion
- 3. adhere to Geyer rule (CL rule)
- 4. hold all as void against PP
- 5. impairing a duty incident to marriage
- 6. evaluate reasonableness
- 7. demand full and fair disclosure of the financial positions of parties
- 8. treat it as relationship category that is special and could trigger an undue influence situation
- 9. require each party to hire attorney
are surrogacy K enforceable?
if involve payment of money to woman who irrevocably agrees to bare child and turn it over then illegal and invalid
balancing test for specific performance
- 1. adequacy of damages
- 2. supervision required
- 3. costs/hardship to 3rd parties
- 4. bilateral monopoly
- 5. terms of K
according to UCC SP is appropriate when:
goods are unique or in other proper circumstances
reasons SP should be awarded
- 1. unavailability of goods on open market - scarce
- 2. reputation of P built on appearance - unique
- 3. courts don't have to supervise
- 4. inability of D to pay damages if awarded
- 5. litigation more expensive than value
benefits of injunctions
- 1. shifts burden of determining costs from court to parties
- 2. bargaining tool - Coase Theorem
- 3. prices/costs are more accurately determined by the market than the gov
costs of injunctions
- 1. requires continuous supervision of courts
- 2. bilateral monopoly
- 3. sometimes imposes costs on 3rd parties
a promise is unforeceable on grounds of public policy if it is unreasonably in retraint of trade; it is a restraint in trade if...
its performance would limit competition in any business or restrict the PR in the exercise of a gainful occupation
reasonableness test for courts dealing with CNC
enforceable if party seeking enforcement of the term obtained it: (1) in good faith; and (2) in accordance with reasonable standards of fair dealing
why are courts hesitant to award injunctions?
- 1. difficult to pass judgment on quality of performance
- 2. don't want to compel continuance of personal relations after disputes have arisen and confidence/loyalty has been shaken
- 3. fear of imposing what might seem like involuntary servitude
definition of a moral hazard?
creates risk that indvls will take less than ideal actions knowing that they will not be made fully accountable for their actions since ordered to perform
definition of negative injunction
preventing party from providing personal services to anyone not included in the K
courts more likely to award these
definition of Coase Theorem
party who values the thing the most will end up with it
definition of bilateral monopoly
parties can only deal with each other which can create its own problems b/c lose idea that everyone is out there to just make money
not rational actors in 2 party deal b/c emotions are involved
with long term K are courts more likely to award SP early or later in the K?
earlier b/c as gets later in the K the damages get easier to calculate
definition of expectation damages
benefit of the bargain...putting party in position he would have been in had the K been performed
LIV + OL - (CA + LA)
defintion of "loss in value"
diff b/t what breacher promised to do and what he actually did
diff b/t K price and cover price
2 types of "other losses"
- 1. incidental damages
- 2. consequential damages
definition of incidental damages
additional cost incurred after the breach in a reasonable attempt to avoid loss even if the attempt is unsuccessful
naturally foreseeable; losses reasonably associated with or related to actual damages
what are the incidental damages available to sellers under the UCC?
commercially reasonable expenses incurred by stopping delivery or transporting/caring for goods after buyer's breach (UCC 2-710)
i.e. - stopping delivery, care & custody after breach; return/resale of goods
what are the incidental damages available for buyers under UCC?
expenses reasonably incurred in for caring for goods after seller's breach (UCC 2-715)
defintion of consequential damages
include, but not limited to, harm to persons/property as a result of breach
those that aren't the natural result of a similar breach but are due to special circumstances surrounding the K
Losses that don't flow directly and immediately from an injurious act but result indirectly from the act
does the UCC treat consequential damages differently with respect to buyers and sellers?
YES - buyers get both incidentials and consequentials whereas sellers only get incidentals
definition of cost avoided
costs party didn't incur b/c of the breach - cost to finish performance
party must mitigate its costs once the K has been breached
applies only if the claim is for total breach; LIV and OL are applicable to claims for either total or partial breach
definition of loss avoided
if have a chance to minimize your damages by salvaging the X in some way (mitigate the damages) then are obligated to do so
can't let supplies sit there out of spite b/c won't get to recover for that loss...materials that can be sold or used in different project
UCC 2-708...Seller's Damage by Buyer
if seller is unable to resell the goods he is entitled to damages measured by the difference in mkt price at the time and place of tender and the K price
time and place of tender determined by sections on manner of tender of delivery and to section on effects of such terms as FOB
UCC 2-713...Seller Breach, Buyer Remedy
damages = diff b/t mkt price at time buyer learned of the breach and K price together with any incidental and consequential damages less expenses saved in consequence of buyer's breach
definition of restitution interest
how much was D unjustly enriched from the breached K...making the PE whole again
entitled to recover under this theory even if is a losing K; may recover more than K price provided performance wasn't completed
generally exculpatory clauses are interpreted...
narrowly such that the scope is as small as possible
can a party who has fully performed and then been refused payment recover more than K price?
NO - once the performance has been completed the K price acts as a cap over which the injured party can't recover
are overhead costs added onto the K price when suing for damages?
generally no b/c these are presumed to have already been included in the K price and the overhead would have been the same w or w/o the K
EXCEPTION - if there is no normal overhead b/c the plant was closed and re-opened specifically for performing this K then UCC allows for the recovery of overhead
does the breach of one party automatically relive the other party of his obligation to perform?
what are the options to the buyer when the seller breaches?
- 1. cover (2-711)
- 2. damages = cover price - K price (2-712)...as long as buyer is acting in good faith to cover then doesn't matter if he spends a little more or less on the goods
- 3. damages = mkt price - K price (2-713)...mkt price comes into play when buyer can't cover, cover was in bad faith, or buyer opts not to cover
test for loss volume sellers
capacity and profitability
whether seller could have produced the breached units in addition to its actual volume and whether it would have been profitable for the seller to sell both units
is a party to a losing K still entitled to restitution and is his recovery reduced by the amt he would have lost had the K been completed?
Yes and No
- - measure of recovery for quantum merit is the reasonable value of the performance
- - K price serves as objective test as to what is reasonable value
- - recovery capped at K price if no fault of either party
definition of reliance damages
putting party in position he would have been in had the promise never been made...what money out of pocket?
includes expenditures made toward performing the K (performance costs) as well as those while not required by the K were made in furtherance of it (surplus enhancing costs)
definition of nominal damages
awarded to party who has proven breach of K but has failed to prove actual damages
usually $1 and symbolizes a vindication of wrong done
definition of sentimental value
fact that damages are difficult to ascertain and measure doesn't diminish the loss to the person who proeprty has been destroyed but compensation for an overly emotional attachment won't be allowed
generally no recovery for sentimental or fanciful values
are emotional distress damages awarded in K cases?
reluctant to award these for breach of K; only when shown that (1) D acted in manner that was an extreme deviation from reasonable standards or conduct and (2) that the act was performed by D with an understanding or disregard for its likely consequences
test - look to the nature of the K and not the manner of breach
generally allowed if: (1) K is personal in nature; (2) disturbance accompanies bodily injury; or (3) K or the breach is of such a kind that serious emotional distress was a particularly likely result
may the injured party keep performing after the breaching party has repudiated?
generally P can't hold D liable for damages which need not have been incurred...duty to mitigate damages caused by D wrongful act
injured party can't continue to perform and recover damages based on full performance...once party to K has notice that the other party is breaching, the non-breaching party must mitigate its damages
definition of mkt damage rule for breach of K
Majority - award market damages even though in excsee of P loss (2-713)...discourages efficient breach and stablizes the market
Minority - reduce mkt damages to P's loss w/o regard to whether this creates a windfall for the D (1-106)...recovery of actual losses b/c don't want to punish for efficient breach
how are damages measured when EE is wrongfully terminated?
Majority = K price - amount earned from alternative employment or with reasonable effort might have earned from other employment
Dissent - test is whether the differences in employment which are present are substantial enough to constitute a different kind of employment
Exam tip - when the new K is with the same ER but for different work at a different salary this could be viewed as a modification of the existing K rather than a breach if there was negotiation b/t the parties for the changes
must an EE who is wrongfully discharge accept any alternative employment?
No - there is no penalty for refusing to accept an offer that is inferior or different in kind from the original employment
also no penalty for failure to seek alternative employment that is different/inferior in kind
burden is on the ER to show that subsequent employment is substantially similar or comparable to employment P deprived of
will offer of re-employment by an ER diminish the EE's recovery for wrongful discharge?
no - not even if the offer is rejected if circumstances are such as to render further association b/t the parties offensive or degrading to the EE
cost of remedy defect/work done incorrectly
part of the cost to remedy the defect and complete performance as agreed will probably be the cost of undoing some of the work already done
total cost to remedy may then exceed the loss in value to the injured party so that an award based on that cost would to that extent be a windfall
general rule for damages when dealing with work done incorrectly
cost of replacement/completion of the work UNLESS the cost is grossly and unfairly disproportionate to the good to be obtained at which point the measure is the diff in value
entitled to the amt of money it would take to complete a project BUT if the cost to correct a completed project because of a minor defective/difference in material is disproportionate to the value of the replacement material then the remedy is limited to the diff b/t material used and material intended
when is it not worth fixing?
- 1. materials are the same grade, quality, effectiveness
- 2. no diminuntion of value to P
- 3. fixing it would require substantial amt of destruction of already completed construction to remedy defect
- 4. D acted in good faith
recovery for substantial performance?
recovery is permitted for substantial performance even if it wasn't done strictly in accordance with the K
when is the dimunition of value the better remedy for work done incorrectly?
when the cost to correct is greatly disproportionate to the value of the replacement materials
courts are split on who has the burden of proving this value
definition of the deliberate breach rule
if party willfully breaches K by failing to perform the other party is entitled to damages = reasonable cost of having performance carried out and NOT the difference in value from non-performance
test for substantial breach
does the breach frustrate the purpose of the K
how do u make something the main objective of the K?
- - take a lessor price for consideration of the promise
- - make K conditional on promise to restore
definition of relative economic benefit
where the K provision breached was merely incidental to the main purpose and where the economic benefit which would result to lessor by full performance of the work is grossly disproportionate tot he cost of performance...damages are limited to diminuition in value resulting from non-performance
weigh the potential economic waste against end to be obtained
examples of economic waste
destruction of substantially completed building or other structure
balancing test - cost of performance v. diminution/difference in value
foreseeability test (Hadley)
damages arising naturally from breach or those reaosnably supposed by parties as consequence of such breach
ask if at the time of the K, if the parties were to contemplate a breach what damages would naturally flow
when can D be held liable for consequences of his breach?
when those consequences are (1) the normal result of this type of breach; or (2) known to the D as a probable result of the breach if they are special to this particular K or P
parol evidence rule doesn't preclude the use of negotiations prior to making the K to show for this purpose circumstances that were then known to a party
how do courts limit damages if concluded that justice so requires to avoid disproportionate compensation?
miniority rule and not followed by many courts
- 1. exclude recovery for loss of profits
- 2. allow recovery only for loss incurred in reliance
- 3. otherwise
is a buyer's inability to cover a natural consequence of breach?
ordinarily there is a mkt on which an injured buyer can cover therefore such losses resulting from an inability to do so do not arise naturally from breach and are foreseeable only if hte seller was aware of facts making such inability foreseeable
are the rules regarding international K the same with regards to breach?
yes - only liable for damages that are reasonably foreseeable consequences from such a breach
is a buyer entitled to lost profits caused by the seller's breach?
only way is if the buyer intended to resell the goods all along and the seller was aware of this fact
only applies to current/existing Ks and not future Ks which aren't recoverable
minority rule on foreseeability
test = foreseeability and what liability the D would have assumed consciously or made the P think he had assumed
if it is fair to say that you would have assumed liability then stuck with it but if you wouldn't have assumed liability then not liable
what degree of certainty is required for calculating damages?
reasonable certainty rather than strict certainty...damages need not be calculable with mathematical accuracy and are at best approximate
must be proven with whatever definiteness and accuracy the facts permit but no more
are lost profits to uncertain to be recoverable?
they are recoverable but they must be proven, like all other damages, with reasonable certainty...jury can't be asked to guess or speculate
prove foreseeability first and then lost profits
normal damages = actual rent - rent in lease
general rule for new businesses and certainty
new businesses can't with any certainty calculate what lost profits would have been therefore these aren't recoverable...too speculative and uncertain
EXCEPTION - by reason of the situation if can be reasonably calculated then are recoverable (i.e. - use of expert testimony, economic and financial data, mkt surveys and analyses, business records or similar enterprises, etc)
when are liquidated damages enforceable?
when the are a reasonable estimate of damages and NOT a penalty for breach
when is reasonableness determined for liquidated damages?
at the time of the K formation and not at the time of breach
3 factors to evaluate liquidated damages
- 1. sum stipulated must be reasonable pre-estimate of probable loss
- 2. parties intent must be for damages and not penalties
- 3. injury caused by breach must be difficult to quantify or prove
ways to make liquidated damages clauses reasonable
- 1. tier them such that as time goes on the amt in the clause decreases
- 2. turn it into a bonus structure for finishing early or on time rather than a penalty structure for completing late (construction Ks)
what is the minority "second look" approach to liquidated damages?
reasonableness of damages clause is evaluated both at the time of K formation and time of breach
purpose - compensate PE for breach and will be deemed unreasonable if it does more than compensate P for their approx damages caused by the breach
greater the difficulty of estimating/proving damages, the more likely the stipulated damages will appear reasonable
if based on gross receipts then more likely to be unreasonable b/c could award P a windfall
does PER bar the proffering of evidence regarding a condition precedent?
No b/c goes to whether the agreement ever came into being in the first place
defintion of a promise
- 1. X promises to pay Y $10
- 2. commitment/duty that a certain event will or will not occur in the future
- 3. independent/unconditional promise - not part of condition
- 4. breaking a promise results in a breach of K
- 5. must be a material breach of a promise to allow termination of K
what is a condition
- 1. X promises to pay Y $10 if Y repairs X's widgets
- 2. an event, the occurrence or non-occurrence of which gives rise to (or extinguishes) a duty
- - event not certain to occur
- - must be more than mere passage of time
- 3. older cases refer to "dependent promises" (those dependent on condition)
what is the result of breaking a promise?
constitutes a breach and if material then allows for termination of K
damages but still have duty (unless material)
what is the result of an unmet condition?
doesn't result in breach but it effects whether a duty arises at all
no damages but no duty
what is an express condition?
- - typically introduced by a phrase: "if" "provided that" "on condition that" "subject to"
- - must be met to the letter for the duty to arise
- - strict compliance required
what is an implied in fact condition?
after looking at the language of the K as a whole, it is assumed that the parties assumed for the condition to be implied by its terms
inferable from the facts of the case; normally must be met to the letter
what is a constructive condition?
legally imp[uted as having effect in law but not necessarily in fact; condition not expressly mentioned but imputed by law by the nature of the X or the conduct of the parties to have been tactically understood b/t them as part of the agreement
courts just read it in...generally for equitable reasons
can be met by substantial performance
if something takes a short time and something takes a long time, which is obligated to perform first?
- thing that takes longer
- good rule of thumb - if performance involves doing on one side and giving on the other, the doing side must perform first
definition of mutual and independent covenants
both parties have duty to perform that doesn't matter on the performance of the other
definition of dependent convenant
condition - performance of one depends on the prior performance of another and not until the prior condition is performed the other party is not liable to an action on the covenant
definition of mutual condition
to be performed at the same time; independent unless expressed to be otherwise
definition of promissory condition
- both a promise and condition; entitled to both recovery and discharge of duty
- construed very literally/strictly by the courts the nonoccurrence of whic allow the D to rescind or treat his contractual obligation as discharged
- i.e. - A promises to do X and if he does X then B will pay A $100
example - insurance premium...promise to rebuild house if destoryed by fire on condition that you pay your premiums
definition of pure condition
not related to a promise
- i.e. - will deliver widgets saturday if it doesn't rain
- i.e. - insurance company will pay to rebuild your house if your house is lost by fire (not promisign to burn down your house but will fix it if this ever happens)...condition = house burning down
definition of condition precedent
condition must occur before right or duty arises
fact or event which parties intend must exist or take place before there is a right to performance...if it doesn't happen then no duty arises
definition of condition subsequent
condition comes after a duty or right and if condition doesn't come the right/duty is extinguished
i.e. - X promises to pay Y $100 but if Y doesn't deliver widgets on Friday then X doesn't have to pay
for K and liability distinction b/t precedent and subsequent not really important
definition of "concurrent conditions and tender"
as soon as one party begins performance the other party needs to be ready to perform
- if going to sue for this must be able to show:
- (1) you have performed; or
- (2) you were ready to perform
2 ways that conditions help us understand a K
- 1. order of performance - what must happen first: payment or delivery?
- 2. quality of performance - satisfaction, workmanship
what effect does a breach of one K have on separate contracts?
party's breach of a k doesn't allow the other party to erminate a different K exisiting b/t the two or even suspend performance of other K UNLESS the parties have otherwise agreed
if the language is ambiguous as to whether is a condition or duty, which is presumed?
preference for imposing a duty rather than a condition
what is the result of an broken promise, unmet condition, and an unmet promissory condition?
- BP - damages but no discharge of duty
- UC - discharge of duty but no damages
- UPC - discharge of duty AND damages
3 ways courts mitigate harsh effects of the non-occurrence of a condition
- 1. prevention
- 2. doctrines including waiver, estoppel, and election
- 3. interpretation and avoidance of forfeiture
what is prevention regarding mitigating unmet conditions?
requires good faith - if there is a condition in your favor you can't do something to prevent that condition from being met
party to K can't rely on the failure of another to perform a condition precedent where he has frustrated or prevented the occurrence of the condition
doesn't apply if the K allows prevention
what effect does the doctrine of waiver have on mitigating an unmet condition?
waiver - required condition may be waived by the parties thereby excusing the nonoccurrence of a condition of a duty
- this is binding whether the promise is made before or after the time for the condition to occur, unless:
- (1) occurence of the condition was a material part of the agreed exchange for the performance of the duty and the PE was under no duty that it occur; or
- (2) uncertanity of hte occurrence of hte condition was an element of the risk assumed by the PR
- condition may be reinstated after having been waived if it is w/i the control of the PE and PR gives sufficient notice of his intent to do so and:
- (a) there is a reasonable time for the PE to come into compliance;
- (b) reinstatement isn't unjust b/c PE has detrimentally relied on the waiver; and
- (c) the promise isn't binding apart from the waiver itself
what effect does the doctrine of estoppel have on mitigating an unmet condition?
prevents retraction of waiver where it has been detrimentally relied on
NC use of promissory estoppel - can't bring K into existence with it but can be used when involves reliance of waived condition in an existing K
what effect does the doctrine of election have on mitigating an unmet condition?
is a waiver that occurs after the time of occurrence and can't be retracted even w/o reliance by either party
binding on the party that makes it even w/o reliance by the other party that duty is unconditional
definition of forfeiture
have expended time and money but b/c of some small condition not being met, will not profit from their hard work
ways to get around forfeiture
- 1. interpret condition in way that it has been met
- 2. if satisfaction clause court might be willing to apply the objective test rather than subjective
- 3. interpret it as only a promise and not a condition
what effect does interpretation and avoidance of forfeiture have on mitigating unmet conditions?
courts have preference for interpreting K such as to avoid forfeiture
not available if drafter explicitly states that forfeiture is intended however even then if the forfeiture is disproportionate the courts will sometimes excuse it
may the person not intended to benefit from a condition hide behind that condition?
when the conditions obvious intent/purpose is to protect only one of hte parties to the K then only that part can benefit from it...other party can't later hide behind it in an attempt to benefit from it as well
most conditions are written to protect only one party and shift the risk involved in the X...must look to see who the condition is trying to protect
factors in determining when a failure to render or to offer performance material
- 1. magnitude of injury to nonbreaching party
- 2. adequate compensation for deprived party
- 3. magnitude of forfeiture to breaching party
- 4. likelihood and ability of breaching party to cure failure
- 5. good faith and fair dealing of breaching party
- material failure = NO substantial performance
- nonmaterial failure = substantial performance and other party must fulfill his duty under the K
- in almost every court withholding payment in subcontractor Ks is a material breach!!!!
factors significant in determining when remaining duties are discharged
a material failure to perform or offer to perform on a stated day doesn't of itself discharge the other party's remaining duties unless time is of the essence
- 1. those used in determining if failure is material (5)
- 2. extent to which it reasonably appears to the injured party that delay may prevent or hinder him in making reasonable substitute arrangements
- 3. the extent to which the agreement provides for performance w/o delay,
when is time of the essence?
- 1. generally not in a K unless the K specifically so states, even if a particular time schedule is specified
- 2. open to the parties to make performance/tender by a stated date a condition by their agreement
- 3. specific date for performance doesn't necessarily mean that performance by that date is of the essence of the K
- 4. can be implied in fact from surrounding circumstances or trade customs....particularly likely in cases involving rapid fluctuation of mkt price
whenever have fact pattern with question of when payment is due to subcontractor, is this always a question of law?
- language not ambiguous - YES
- language ambiguous - extrinisic evidence permitted to determine the timing
how are payment clauses for subcontractors construed?
- ambiguous statements regarding final payment in contractor Ks will be construed in favor of the subcontractor b/c the risk of non-payment is assumed by the general contractor
- Majority rule - payment clauses in these fact patterns are absolute promises to pay and not conditions precedents
shifting this risk is allowed but must be expressed clearly
if ambiguity is regarding a condition or promise will always be a promise in favor of subcontractor!!
what is the test regarding operative fitness?
reasonable person objective test which requires good faith
what is the test for personal satisfaction clauses?
subjective test, only person whose satisfaction matters is the P regardless of what the RPP would think
good faith requirement!!!
when dealing with UCC, merchants, and satisfaction clauses, what is the test?
it is an objective standard which requires honesty in fact and the observance of reaosnable commercial standards of fair dealing in the trade
where parties deliberately enter into an agreement which violates no rule of pp and which is free from all taint of fraud or mistake is there a hardship in holding them bound by it?
NO - (gibson v. cranage)
how can one dispel some of the risk inherent in satisfaction clauses?
make the duty conditional on satisfaction of an independent 3rd person who will be held to an honest, but not reasonable, satisfaction
NY - the test is reasonable satisfaction rather than merely honest
if repeatedly waive a condition do you lose the right to later enforce it?
can't repeatedly wiave a condition and then suddenly insist that the condition must be met however the benefit of lenience doesn't mean that once patience is gone that compliance isn't required or forborne...fine line b/t lenience and waiver
may reinstate a condtion that has been previously waived as long as you assert such intent giving the other party adequate notice
how conditions are waived
- 1. expressly
- 2. implied from conduct
definition of legal effectiveness
when the K comes into being, when it will take effect
if the condition is such that w/o it there is no K then evidence regarding that condition/agreement is permitted even if it occurs orally before the signing of a seemingly completely integrated K...normal PER rules apply to partially integrated Ks
why doesn't PER bar extrinsic evidence regarding legal effectiveness?
PER not a bar b/c not trying to contradict the K but instead trying to refute the formation of the K entirely
if the prior oral agreement deals with a term in a K that is in existence or would have been in existence regardless of that oral agreement then doesn't fall under the exception of legal effectiveness...term v. condition
if there is no agreement as to when payment is to be made, what is the default rule?
payment at the end or after substantial performance of the K
if agreement comes later after K has been signed which motifies the timing of payment, this must be supported by its own valid consideration
definition of substantial performance
doesn't mean that every detail must be in strict compliance with the specifications/plans...something less than perfrection is the test unless all details are made the essence of the K
test for substantial performance?
whether performance meets the essential purpose of the K...
if a good faith attempt to perform doesn't precisely meet the terms of hte agreement or statutory requirements, performance will be considered complete if the agreement's essential purpose is accomplished subject to a claim for damages for the shortfall
what are the additional tests for substantial performance?
- 1. structural defects - no recovery (sometimes)
- 2. % of K completed - no recovery (sometimes)
what recovery options are availabe in substantial performance?
- 1. recovery for substantial performance - K price minus damages caused by D's incomplete performance
- 2. recovery for faulty construction = diminished-value rule - diff b/t value of hte house as it stands with the faulty and incomplete construction and the value of the house had it been constricted in strict accordance
test for determing whether to use substantial performance rule or diminished-value rule
nature and magnitude of the defect
factors: (1) amount of work completed; (2) economic waste involved in correction
perfect tender rule
under the UCC if goods deviate from the K even in a non-material way, the buyer can reject them (send them back and refuse to pay)
doesn't really apply outside the UCC
nonbreaching party's options under perfect tender rule
- 1. reject the whole
- 2. reject just the defective part
- 3. accept the entire shipment and sue for damages
what are the exceptions to non-breaching party's ability to reject under the perfect tender rule?
- 1. cure - seller has the option but not required to do so
- 2. revocation of acceptance - only allowed if the breach is substantial
- 3. installment Ks - can only claim breach of the entire K if the breach is material such that it impairs the value of the whole K
- 4. seller can show that rejection made in bad faith for minor defects
factors in determining if provision is promise or condition
- 1. purpose to be served
- 2. desire to be gratified
- 3. excuse for the deviation
- 4. cruelty of enforced adherence
cost of replacement rule
when there are a number of small items of defect/omission which can be remedied w/o reconstruction of a substantial part of the building or great sacrifice of work/material already wrought in the building, the reasonable cost of correcting the defect should be allowed
diminished value rule
when the separation of the defects would lead to confusion this rule can apply to all defects
damages = diff in value created by the faulty construction
definition of divisibility
K that contains at least 2 promises, each of which may be performed separately such that failure to perform one of hte promises doesn't necessarily put the PR in breach of the entire K
structured payments are not terms of divisibility...especially in construction Ks
if the consideration to be paid is single and entire then the K must be held to be entire although the subject of the K may consist of several distinct and wholly indpt items
what effect does divisibility have on K?
if K is divisible then items/promises are severally distinct and can be apportioned...if this is the case then complete performance can be evaluated by each of there severally distinct/apportioned items
even if not apportioned in K but are apportionable that is generally sufficient for the courts to apportion into severally distinct "mini-Ks"
perference for this outside UCC b/c avoids forfeiture
when is restitution available?
- 1. when parties haven't dealt with each other
- 2. parties have engaged in negotiations but fell short of K
- 3. parties made an agreement that proved to be unenforceable for some reason such as the SoF
- 4. public policy dictates
- 5. remedy for breach
- 6. nonoccurrence of a condition
- 7. agreement has become unenforceable by reason of mistake, impracticability, or frustration of purpose
what is the CL rule regarding restitution?
breaching party not entitled to it
what is the ML rule regarding restitution?
party may recover for any benefit/services rendered to the other party, despite being in breach of their K, with the offset of any damages caused to the other party by the breach of K
this is based on unjust enrichment theory
what percentage constitutes substantial performance
defaulting contractor who has by his labor and materials materially enriched the other party should be afforded relief to the reasonable value of the work done less whatever damage the other party has suffered UNLESS...
- 1. no benefit to the owner
- 2. gross deviation from the K
- 3. abandoned the work and left it unfinished
recovery = value - damages
what is suspension and termination?
happens at earlier stage in performance than doctrine of substantial performance covers and involves an aggrieved party seeking to suspend performance or to refuse to render performance and terminate the K
question is whether this is justified
how to analyze suspension and termination (4 questions)
- 1. whether there is an uncured breach by the other party
- 2. whether it is a breach of a duty of performance that ws to be exchanged under an exchange promise
- 3. whether the breach went to performance that was to be rendered at an earlier time than that of hte aggreived party...constructive condition
- 4. was the breach serious enough to justify self-help in the form of suspension or termination?
if there is no material breach which justifies supsension or termination, what must the aggrieved party duty?
no choice but to continue to perform and treat the breach as partial which gives a right to demand damages but not to suspend/terminate
what are aggrieved parties options if the breach is material?
- 1. terminate K
- 2. continue K - electing to do this means that party can't later terminate based on that breach
majority rule - these are not available simultaneously and the aggrieved party must choose one or the other
if performance has been made more difficult or expensive, is that an excuse for nonperformance?
conduct of one party to a K which prevents the other from performing his part is an excuse for nonperformance
- - can't hinder the other's performance and must do whatever is necessary to enable him to perform
- - enthusiasm isn't required in performing contractual obligationss
- - can't intentionally or purposely do anything to prevent the other party from carrying out the agreement on his part
golden silence rule
when party believes taht a K is terminable at will and elects to terminate, he isn't required to give his reasons for that termination...if it turns out that he was wrong he will be allowed to justify his termination of it
when a party originally gives one reason for his conduct/decision regarding a controversy he can't later present different reasons at trial for that conduct if:
- - he has acted in bad faith with his primary assertion; or
- - the other party has detrimentally relied on his first reason
requires some reliance
or change in position
based upon the assertion b4 party is estopped later from giving a different reason
definition of anticipatory repudiation
an absolute and unequivocal refusal to perform OR a direct and positive statement of inability to perform
cl rule for anticipatory repudiation
party had to wait until the future date of performance to sue on K if other party acknolwedged it had no intent of perfoming his duty, in order to make sure the other party really wasn't going to perform
ml rule for anticipatory repudiation
renunciation is considered a breach and injured party is entitled to sue for that breach at any time, even if the date of performance hasn't arrived yet
EXCEPTION - CA still applies the CL rule
5 questions for consequences of AR
- 1. is the recipient of repudiation free to make other arrangements
- 2. can the recipient of repudiation go to court immediately, even before the time for performance has arrived?
- 3. can the recipient of repudiation ignore the repudiation and await performance?
- 4. what are the consequences if the recipient of repudiation urges retraction of the repudiation?
- 5. can a party that has repudiated withdraw the repudiation?
when is a repudiation a total breach?
when accompanied by a breach by nonperformance...the repudiation must be absolute and unequivocal refusal to perform or a distinct and positive statement of an inability to do so
options available to injured parties caused by AR
- 1. wait until date of performance and prepare
- 2. cover
- 3. just wait with no preparation
how may repudiation be conveyed?
words, actions, conduct
actions/conduct carry more weight than statements of anticipatory repudiation...must be clearly indicated that party intends to repudiate; vague doubts about his willingness or ability to perform isn't sufficient
what must party seeking to recover under repudiation be?
ready, willing, and able to perfom in order to recover damages...if not then no recovery
suspension of performance under a K is a breach unless there is sufficient justification for the suspension such as:
- - refusal to sign a K or clarify vague terms
- - failing to make progress payments upon demand
- - demanding K modifications
"learned of the breach" can be interepted 3 different ways
- 1. when he learns of the repudiation
- 2. when he learns of the repudiation plus a commercially reasonable time
- 3. when the performance is due under the K
time to retract repudiation expires once:
- 1. party sues for breach; or
- 2. when a definite action is given to indicate that the anticipatory breach has been accepted as final
- 3. detrimental reliance on the repudiation
had no right to assurance of performance b/c party doesn't K for oral assurance of performance but for performance of the K
ml rule regarding assurance
created acception to CL no right rule
- UCC 2-609: no right unless a reasonable ground for insecurity arises the alarmed party may demand assurance of due performance and if commercially reasonable may suspend his own performance until assurance is received...30 days to give assurance once request is made
- DEMAND FOR ASSURANCE MUST BE REASONABLE!!!
- R2d 251 - PE who reasonably PR will commit a breach by nonperformance has a claim for breach of total damages and entitled to demand assurance of performance (not majority yet)
test for determining if UCC applies when K contains both goods and services
predominate factor test
- more services then goods = no UCC
- more goods than services = UCC
what are options if something goes wrong in the K?
- - ask for adequate assurance under UCC that they are solvent, if they aren't you may still ask; pay may cave and say ok
- - characterize their conduct as anticipatory breach and pray that you are right
- - fix the prob yourself and send bill or deduct cost from your payments (RISKY)
- - if they have breached make sure it is material at which point you can suspend performance or terminate
what is the risk if you ask too much in your assurance?
treated as repudiation for which you will be liable entitling the other party to terminate or suspend performance
how to ask for adequate assurance
- 1. write letter to correct person/corporation rather than personal demand on corporate person
- 2. state that event X has given us reasonable grounds for insecurity
- 3. demand reasonable assurance
- 4. specifically state type requested and reference to express/implied K provisions (can't dictate something outside the K)
- 5. make it clear you aren't repudiating
- 6. don't go outside the appropriate channels
- both parties to K are mistaken as to the same basic assumption:
- (a) belief in accord with the facts
- (b) must be at the time of the K, not after
- (c) contrast with errors in judgment
PER is not a bar!
how to analyze mistake of fact questions
- 1. both parties
- 2. at the time of the K:
- (a) after-arising facts relate to impracticability and frustration
- (b) was made as to a basic assumption on which the K was made
- (c) has a material effect on the agreed exchange of performances
- (d) K is voidable by the adversely affected party (the party that ends up losing out)
- UNLESS he bears the risk of the mistake
a party bears the risk of mistake when
- - parties agreed to allocate risk to him; or
- - he is aware, at the time the K is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient
- - court allocatese it to him b/c it is reasonable in the circumstances to do so (catch all)
mutual mistake and construction Ks
generally even if hte destruction is not the fault of the builder, if it occurs before hte delivery/completion date then the destruction doesn't dispel his obligation to complete/deliver...must start over!
performance specification Ks and mutual mistake
when contractor is required to produce a specific result w/o specifying the means of achieving that result then all liablity on the contractor if fail to complete
design specification K and mutual mistake
K specifies the design, materials, and methods and impliedly warrants their adequacy, not liable if the failure is the result of the designs
how does mutual mistake differ from material misunderstanding of the meanings?
in the second there is no mutual assent therefore a K was never formed
is ignorance a mistake?
NO - if u know that you don't know something then you have assumed the risk of your mistake
can K be rescinded for mutual mistake?
YES if it is a mistake of material fact which constitutes an essential part and condition of K
are compensatory damages available to party who rescinds a K?
No unless there has been fraud or misrepresentation
who bears the cost of a mutual mistake and rescission?
it must be shared as evenly as possible b/t the two parties b/c to do otherwise shifts the risk of that mistake onto one party over the other
exceptions to general rule that nonperformance is a breach at traditional common law - doctrine of impossibility
NC stops here and doeesn't go any further than true impossibility outside the UCC
- - death of person who was to render specific, personal services
- - change in law occurring after formation of K that makes nature, essence, or performance illegal
- - thing that is essential/essence of the K is destroyed w/o fault of either party
modern courts generally equate extreme impracticability with impossiblity
impracticability - CL rule
K should impose matching burdens on the parties so that a party who could take advantage of a favorable change in circumstances ought to bear the risk of an unfavorable one
no longer absolute but still effective argument in certain situations
performance becomes impracticable b/c of some event occuring after the K is formed
- duty to render a performance is discharged if:
- (a) After a K is made,
- (b) a party's performance is made impracticable
- (c) w/o his fault
- (d) by the occurence of an event the non-occurrence of which was a basic assumption on which the K was made, unless the language or the circumstances indicate the contrary (i.e. - foreseeability, AOR, etc)
3 requirements for impracticability
- - contingency must have occurred
- - risk of the unexpected occurrence must not have been allocated by agreement or by custom
- - occurrence of hte contingency must have rendered performance commercially impracticable
what should guide courts in deciding impracticability cases?
- 1. pp
- 2. reasonableness of performance
- 3. cost differential
- 4. risk (foreseeability and AOR)
- 5. cost increase tied to the event
- 6. impossibility v. commercial impracticability
marks of well qualified risk bearer
- - approp insurance mkt
- - mode of risk distribution
- - ability to avert the event that impeded performance
- - ability to mitigate its loss when the events occur
force majeure clauses
escape clause if performance becomes impossible, impracticable, difficult b/c of something that may be foreseeable but can't be readily prevented
- - read in light of mercantile sense and reason
- - sets up the commercial standard for normal and reasonable interpretation
- - provides the min beyond which agreement can't go
when casualty to identified goods happens w/o fault of either party...(2-613)
if total loss = K avoided
applies if hte goods were destroyed at the time of K w/o knowledge of either party or if they are destroyed after the formation but before the risk of loss has passed to the buyer
- if partial loss the buyer has 2 options:
- (1) treat K as avoided
- (2) accept goods with due allowance from the K price for the deterioration/deficiency in quanity
TEST - whether the seller has or has not underaken the responsibility for the continued existence of the goods in proper condition thru the time of agreed/expected delivery
substituted performance (2-614)
w/o fault of either party the carrier becomes unavailable or manner of delivery becomes otherwise commercially impracticable but a commercially reasonable substitute is availabe...the substitute MUST be tendered and accepted
excuse by failure of presupposed conditions (2-615)
- unless the seller has assumed greater obligations:
- (a) delay of delivery, in whole or part, by seller who complies with (b) and (c) is not a breach of his duty if the performance as agreed has been made impracticable
- (b) seller must allocate production/deliveries among his customers in any manner which is fair and reasonable
- (c) must notify buyer
2 tests: (1) basic assumption = AOR; (2) commercial impracticability
frustration of purpose
when an event neither anticipated nor caused by either party, the risk of which was not allocated by the K, destroys the object/purpose of hte K, thus destroying the value of performance, the parties are excused from further performance
value of performance to party receiving it turns out to be significantly different then expected
2 factors considered in frustration of purpose
foreseeability - less foreseeable the event which thwarts the PR's purpose, the more likely courts will allow frustration defense
totality - more totally frustrated the party, the more likely he is to be allowed to use the defense
requirements of frustration of purpose
- 1. purpose that is frustrated was principal purpose of that party for making the K
- 2. frustration was substantial
- 3. non-occurrence must have been basic assumption upon which K was made
- 4. frustration is w/o fault of hte party who seeks to take advantage of the rule
2 ways to determine who should bear the risk b/c better able to (FoP)
- 1. party in better position to prevent the risk from materializing
- 2. party can better reduce the disutility of hte risk if the risk does occur
goods not identified at time of K
shipment K - seller's only obligation is to deliver goods to carrier and risk of loss passes to the buyer as soon as the seller delivers the goods to the carrier
destination K - risk of loss doesn't pass until the carrier actually delivers the goods to the buyer or their destination
issues regarding FoP
NO doctrine shifts the risk that has been allocated!!! once done it is binding and can't be changed just b/c no longer favorable
- - foreseeability of supervening event
- - allocation of risk of occurrence of event
- * allocated then not excused
- * not allocated then excused
- - degree of hardship to the PR
party is excused based on impracticability or frustration the other party is excused from having to perform but this doesn't compensate them for losses incurred...court-imposed compromise
- - restitution
- - divide K up so that loss/forfeiture isn't total
"do nothing" rule
loss must remain where it first falls and neither of the parties can recover of the other for anything done under the K
3 general concepts of TPB
TIP - DEFINE THE PR WHO CAN SUE
- 1. assigning rights or delegating duties to TPB
- 2. K was made that benefits C
- 3. creditor beneficiary
- where the PE's purpose is:
- (1) to make a gift to beneficiary; or
- (2) to confer on the beneficiary a right against the PR neither due nor asserted to be due from the PE to the beneficiary
where no intention to make gift appears from terms of hte promise and performance of promise will satisfy an actual, supposed, or asserted duty of hte PE to beneficiary
- - not giving a gift
- - performance will satisfy actual debt
- - peformance will satisy actual or asserted duty
third party who may enjoy an advantage thru the performance of a K but has no enforceable interest in its performance
(gets the benefit but the parties to K weren't thinking about him when made the K)
3rd party eligible to enforce a K b/t other parties
only if recognition of a right to performance in the claimant is appropriate to effectuate the intention of the parties...EXCEPTION - overriding policy that requires 3rd party enforce regardless of intent
- must also meet one of 2 qualifications:
- (1) performance of promise will satisfy an obligation to PE to pay money to claimant; OR
- (2) circumstances indicate that PE intends to give the claimant the benefit of the promise
majority rule - TPB
beneficiary may sue on a K made expressly for his benefit
rights are assigned and an assignment involves:
- - OE transfer of K right to an AE
- - present intent to transfer the right
- - no magic words needed
- - may be prevented by law if would materially change hte duty of the OR
- - may be voidable, void, conditional, or prohibited in original K
duties are delegated and delgation involves
- - OR empowers another to perform the OR's duty to the OE
- - delegator remains liable to OE
- - if permitted by law the OE may not refuse performance by the delegate
- - no magic words needed...look to intent
- - some duties aren't delegable (original K prohibits; OE has substantial interest in performance by particular person)
one who owes an obligation/duty (PR/debtor)
one to whom an obligation is owed (PE/creditor)
has the right to performance
one who assigns K rights
one to whom K rights are assigned
generally stands in the shoes of hte assignor regarding rights/defenses
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