CONTRACTS OUTLINE I. OFFER AND ACCEPTANCE 1. When are you bound? a.

Rule: If a reasonable man would believe he was assenting (agreeing), he is bound even if he did not intent to be bound, undisclosed intentions of one party are immaterial i. A person cannot say they were kidding or not serious when his conduct would warrant a reasonable person to believe that he intended a real agreement. 1. Restatement 20 (2)(a)- Intent-outward manifestations of intent bind, even when one party does not mean to contract. When one party knows that the other party does not know, then the parties are bound. a. Lucy v. Zehmer- a contract is enforced if one party agrees but later claims he didnt intend to agree. Guys at bar, Zehmer agrees to sell Lucy his farm and he signs in agreement, but later says it was a joke. i. Being drunk is NOT a defense unless u are so drunk you dont understand what u are doing and the other party knows it. 2. Restatement 201 a. If both parties attach the same meaning, it prevails b. If both parties attach different meanings, the one who has no reason to know that the other does not agree is the one that prevails i. Meeting of the minds is no longer necessary in Ks! c. Embry v. Hargadine- Employee asked employer for another years contract to work and employer replied, Go ahead, youre all right, get your men out and dont let that worry you, constituted reasonable assent (agreement) regardless of his intentions. b. Joke Contracts i. If a contract was a joke and both parties knew it was, there is no contract, (Keller v. Holderman) 201(1) c. Offer & Acceptance vs. Mutual Assent: i. Example: If F says to B, why dont u sell this pen to J and both say yes at the same time, it is mutual assent because the offer and acceptance happen at the same time. Parties manifest their mutual assent through offer and acceptance. II. OFFER AND REVOCATION 1. What constitutes an offer? a. RULES: i. Contract is formed when a party accepts an offer. ii. Was it an offer? Restatement 24:

b.

c.

a.

b. c.

1. Manifestation of a willingness to enter into a bargain 2. so made as to justify to another person that assent (agreement) is invited and will conclude it. iii. Factors to consider by Farnsworth: 1. Language (will I accept seal the deal?) 2. Context (second to last statement) 3. Completeness (clear, definite, and explicit, detailed) 4. Number of persons to whom offer is made (to others also means no offer) Examples: Yes an Offer i. Clear, definite, and explicit, nothing left open for negotiation 1. Advertisement to sell coat for $1, first come, first serve (Lefkowitz v. Great Minneapolis Supply Store) ii. Answer to a quote for mason jars exact amount & price specified. iii. Hotel reservations; even when guest has not guaranteed reservations. Examples: Not an offer/only invitations to deal (preliminary negotiations 26 i. No amount or quantity specified- less likely to be an offer. I want $2.25 for this seed. ii. Form letters- are only invitation because sent to many people, further assent required. In response to an inquiry from an ad, the seller sent a letter describing the property and stating, rock bottom price is $2500, for an offer to sell a house. The letter identified itself as a form letter. (Lonergan v. Scolnick) 1. Form letter makes the response an offer and then the seller makes the acceptance. iii. Sign for switchblade knife in window offer for sale, not an offer, only an invitation, so no prosecution for violation of a statute. (Fischer v. Bell) iv. Advertisement letter we are authorized to offer salt at 85 cents per barrel, we shall be pleased to receive your order; Language is too general and offered to too many people. v. Appointments for haircuts, car dealers, dinner reservations, etc.. 2. Things that Terminate the Offerrees Power of Acceptance: Things which terminate an offerrees power of acceptance 36 i. Rejection ii. Counteroffer (Ardente- house furniture) iii. Lapse of time (41- Akers) iv. Revocation by offeror v. Death or incapacity of either party Issues to see if acceptance was valid i. Has the attempted acceptance been effective to close the deal? ii. Was it made when the offeree still had the power of acceptance? Lapse i. 41- An offer must be accepted either: 1. In a fixed time if it is specified 2. Or in a reasonable time.

a. Possibly right away or at the latest- when the conversation ended. ii. Conversational offer, accept face to face during a conversation. (Akers) iii. Mail offer, acceptance reasonable if sent by midnight on day it was received. 41(3) d. Rejection i. A definite rejection once communicated extinguishes the power of acceptance. 38 1. When you reject it, it is over, even if it was to remain open for 2 more weeks. 2. Not a rejection if the offeree says he will take it under advisement. ii. Dismissing an offer and continuing in the conversation is a rejection. 1. (Akers v. Sedberry Inc.) Employees offered to resign, but the employer spent all day discussing business & tried to accept offer 3 days later but it was too late. e. Counteroffer i. If an acceptance has conditions, it is actually a new offer (a counteroffer) and needs to be accepted for it to be valid. 1. Yes counteroffer- Ardente v. Horan- sale of house, accept but include furniture. a. (Freiwald says Ardente tells us that the intent of the parties must be definite and unequivocal.) b. But if there is a counteroffer such as we assume the furniture is included, please confirm, and you then u reaffirm the original offer, u can have the power of acceptance again. Livingston v. Evans. 2. No, not counteroffer (just an acceptance): a. Rhode Island Dept of Trans v. Providence RR- when buyer releases the seller of material obligation, it is considered collateral inquiry, (just a question) rather than a conditional acceptance. (Dont remove the RR tracks and change the name on the offer). b. Signed under protest, is an acceptance, but it just says- I accept but I dont like it. (Price) c. Requests do not indicate an unwillingness to accept an offer (landlord/tenant) ii. Classical contract law required the mirror image rule, the offer and acceptance had to match identically or there was no contract. 3. Power of an Offeror to Terminate by Revoking a. Revocation: i. Option Contracts- Cant be revoked normally: 1. Can accept anytime until a certain date a. Subcontract within the contract b. Need consideration to make option binding, cant be nudem pactum (no consideration). 2. Can be made a firm/irrevocable offer if:

a. Consideration is given for subpromise b. Sale of Goods (UCC 2-205) signed & in writing- no consideration needed. c. Part performance (45)- if someone accepts by starting to perform, then that locks in a unilateral contract (Promise Performance) i. Giving the money is part performance, getting the money is not, (obtaining financing), especially if money obtained before agreement was even made. (Ragosta) ii. 45 only applies when the offeree is seeking acceptance by performance (there was clearly no consideration). d. Promissory Estoppel; Reliance (substitute for consideration) i. 87-2 is promissory estoppel in the options contract setting ii. Works to bind offers and acceptances in contractorsubcontractor agreements. (Drennan v. Star Paving- paving bid for school, then Star Paving said the bid was too low) so long as they are not bid chiselers. 3. Cannot be terminated normally; Restatement 37 a. Power of acceptance is not terminated normally in options contracts by rejection, counteroffer, or death/incapacity. b. The only thing that terminates is when both parties agree to terminate. 4. Mailbox Rule in Option contracts- acceptance not effective until receipt. ii. Regular Revocation: 1. Revoke through Direct Communication 42 saying I revoke. a. When a person receives it or someone designated to receive it, or if its deposited in a place to be specified it is considered received. 68 2. Revoke through Indirect Communication 43 a. If the offeror acts in a way that shows he is revoking and the offeree knows about it. b. (Dickinson v. Dodds) knew the had revoked his offer to sell property because he knew had sold to another person. i. This would be different if it were for the sale of goods instead of land. III. TRANSACTING AT A DISTANCE 1. Mailbox Rule (applies for example where u send out an offer and something gets lost; what happens with the contract?) a. Basics

i. Offer valid upon receipt ii. Acceptance valid upon dispatch (ie- even before it is received). b. 63, Acceptance effective on dispatch i. Unless: 1. The parties specify otherwise (like performance as acceptance) 63 a. Ex- U can say acceptance is only good upon receipt, 60 OR2. Option contracts they are effective upon receipt by offeror, start counting the days from the receipt, 63(b) 3. PP Note: (Courts in other countries use the opposite of the mailbox rule so that acceptance is effective upon receipt.) ii. Delay: 1. If offerors fault & offeree does not know about it, contract is still enforceable. a. (Adams v. Lindsell)- mailed offer to Leicestrshire instead of Worcestershire, acceptance was late, but party still bound, even though they had sold the wool to someone else by then. b. Mailbox rule says whether it gets there or not, there is acceptance (including in CA)! 2. If delay is offerees fault, then offeror can revoke. iii. Medium of Acceptance: 1. It is reasonable if it is the one used by the offeror or is customary. 2. If it is sent in a strange way, it is operative upon dispatch if it gets there in a regular amount of time. a. Offer may specify how to accept, but if not specified, whatever is reasonable. 3. Must be addressed correctly & ordinary precautions must be taken. 4. Burden is on the offeror, because if the offeree sends it, it is valid, even if it does not reach the offeror. iv. Faxes and emails- are effective on dispatch (like the mailbox rule). c. 42, Revocation effective upon receipt i. Mailbox Rule: acceptance effective upon dispatch, revocation effective upon receipt, so if you send an acceptance and a revocation at the same time, the acceptance supersedes the revocation (even if the revocation is received first b/c acceptance is effective as soon as it gets in the mail??- Gilberts) ii. You can repudiate (disclaim) by phone before an acceptance is received. 2. Transacting by Telephones a. Acceptance by phone or other substantially instantaneous two-way communication is governed by face to face rules, offer lapses when conversation is over.

IV. MODES OF ACCEPTANCE 1. Generally, you need to notify of your acceptance, 56 2. Unspecified way to accept a. Mode of acceptance not specified, it can either be performance or promise, (unilateral or bilateral). 32 b. UCC uses what is reasonable under the circumstances. 3. Specified weird way in contract can constitute an acceptance even without notification a. It can even include not communicating an acceptance, but just sending- like having a general manager ok the shipping order, so that notice of approval was not required. (International Filter Co. v. Conroe). 1925. Freiwalds favorite. i. Facts- Ice mfr. made an offer in the form of a purchase order. The order said this order becomes a K when approved by an Executive Officer of Filter Co. Then the executive officer entered a notation of approval, but before Filter Co. gave notice of approval, Ice Mfr. called and attempted to revoke the offer. The revocation was ineffective b/c a contract was formed when the executive officer entered a notation of approval. 4. 69- Silence or inaction does not equal acceptance unless: a. Offeror takes the benefit of the offered services, knowing compensation is expected. 69(1)(a). i. Ex- Freiwalds husband has repairman fix door without agreeing or accepting, but watches him fix it = acceptance through inaction. ORb. Offeror has stated or given the offeree reason to believe that silence will equal acceptance . 69(1)(b) i. Ex- Freiwald leaves a message and offers to pay kindergarden $10 to turn in application a week late. If she doesnt here back from them, she will assume its ok. ORc. Previous dealings make it reasonable to infer that the offeree should notify the offeror if he does not intend to accept. 69(1)(c) i. (Vogt v. Madden)- No K formed, farming beans was renegotiated annually so silence was not acceptance. ii. Ex that is K same situation as Vogt but in the last few years, they have NOT renegotiated annually. 5. Legally binding agreements can be made over the internet: a. Click-wrap valid: i. Click on the box, I agree, is valid, even if you did not read it. ii. (Caspi v. Microsoft Network) forum selection clauses are valid when someone clicks yes on the internet b. Browse-wrap not valid: i. (Tickets.com)- Just using the website does not mean that you are bound. V. INTERPRETATION/AMBIGUITY 1. Old Rule Plain Meaning/Four Corners Doctrine

a. If the terms are not reasonably susceptible to being understood in more than 1 sense, then no extrinsic evidence is admissible. Traditional Doctrine/Willistonian. b. Judge determines whether the document is clear and unambiguous, extrinsic evidence only admitted if ambiguous. c. Stuart v. McChesney- clear that property was to be sold right of first refusal, to McChesney to be able to purchase below the other offers (for tax assessors value). Too bad it was only 8k instead of 30k, no assessment for 10 years. 1. B/c K said if the Steuarts found a purchaser, McChesneys could exercise their right to purchase right of first refusal, at tax assessors value (only 50% the market value). d. Policy- promotes careful contract drafting, predictability, certainty, stability, restricts perjury. 2. Modern Rule Extrinsic Evidence Admissible a. Modern view/Corbin b. All credible evidence should be admitted to determine the intention of the parties, even when the contract is clear and unambiguous. 212/ UCC 2-202. c. Jury question because there is more than one way to interpret. d. PG & E- extrinsic evidence is admissible to determine the parties intentions to see if 3rd party is covered for indemnity clause (to see if you can make someone else responsible for the $ if there was a loss). e. Trident Center- extrinsic evidence admitted even when contract is clear; no prepayment allowed for 15 year loan, Trident wanted to back out and use the default provision to pay a 10% prepayment penalty so he could get a better loan. Extrinsic evidence admitted. 3. Difference between Plain Meaning Rule and Parol Evidence a. Parole Evidence- comes into play when someone is trying to effectuate a prior agreement. b. Plain Meaning/Context Rule- comes into play when the judge is asked to interpret the meaning of language using extrinsic evidence. c. What they have in common- both have a narrow objective view and are concerned with what fact finders get to hear about and admission of evidence. d. If both are raised on a test- look at the plain meaning rule first, then the parole evidence rule. VI. PAROL EVIDENCE RULE 1. Questions to ask: a. Can you admit evidence not within the contract that relates to the negotiations and agreements (or does the Parole Evidence Bar it)? i. Restatement 213 ii. Makes oral agreements unenforceable which were entered into prior to the written contract. If parole evidence does not apply, then oral evidence is admissible. 1. Used only when there is a written contract and one party says there are additional factors or terms that were added to the agreement (only applies to written agreements). 2. DOES NOT APPLY TO subsequent oral OR written agreements.

b. Was the agreement integrated? i. You can tell an agreement is integrated b/c if the contract is very detailed, they must have included everything. c. Was the agreement completely or partially integrated? i. Look at Williston & Corbin approaches (argue both) ii. Divides Contracts into three types: 1. Contracts not in writing and also written contracts that are not integrated a. Oral = not integrated (very rarely are oral agreements integrated). b. In writing but does not represent final agreement of parties. i. Ex- shows what the parties meant, not in the form of a promise or agreement, but in the form of background discussion or surrounding circumstances (ex- a note). 2. Written contracts that are partially integrated a. Evidence of prior and contemporaneous consistent negotiations permissible. b. Does not admit contradictory evidence. c. Ex- A contract to buy a used car that is missing certain things (so we dont have everything we could possibly know because it is not all in writing). 3. Written contracts that are completely integrated = (full and final expression of the parties agreement. 209- discharges all inconsistent prior agreements. a. The most protected by the Parole Evidence Rule b. The only evidence that is admissible is that which is completely outside the scope (NOT in the scope). c. Ex- A contract to buy a car where detail is laid out (integrated) in the contract. d. Flow Chart: i. Is it integrated (a different thing from within the scope)? 1. No all evidence is admissible 2. Yes completely or partially? ii. Complete or partial? 1. Partial Is the evidence consistent? (Test from Hunt) a. Yes Admit b. No Do not admit (Parole Evidence Rule). 2. Complete Is the evidence within the scope (that parties would ordinarily be expected to put in writing)? a. Yes Do NOT Admit b. No (its outside the scope, has no business being in the K) admit i. Ex- Freiwald sells her house and use to cut hair in the basement. Someone buys the home and before he buys the house asks if he can get his haircut also. Freiwald says yes, but it was not written down. If Freiwald later 8

says she wont cut his hair, then its way outside the scope so the judge may hear it. iii. Once evidence is admitted, ask if the parties really agree to this term they did not write into the contract? 2. Two views to integration: a. Williston- traditional view that the parties intent must be determined from the face of the document only. No extrinsic evidence, objective. i. An earlier tentative expression is to be rejected in favor of a later expression that is final. ii. Policy- increases constant stability; reduces litigation; memory fails b. Corbin/UCC-Restatement/Modern Approach- any relevant evidence can be admitted to determine parties intent, including circumstances, subjective. i. Policy- effectuates intent, language is imperfect (Thayer), reduces injustice. 4. Cases: a. Parole evidence bars (Williston approach)- Mitchell v. Lath- sale of land was completely integrated, so the agreement to remove the icehouse is not admissible. b. Parole evidence does not bar (Corbin approach)- Masterson v. Sine- oral agreement that the repurchase option of the farm was non-assignable, so only Masterson could re-buy the place, not his creditors. Ct looked at all evidence to determine that despite the K language, it was implied that the land would stay with the family. So this is admissible, and therefore Mastersons creditors cannot re-buy the place. 1. Ct looked at the fact that the transaction was between family members and the difficulty of putting oral agreements into a deed. VII. THE BARGAIN PRINCIPLE AND ITS LIMITS Performance of a Legal Duty as Consideration; Modification and Waiver 1. Pre-existing Legal Duty Rule = performing a part of your legal duty does not count as consideration. a. Gray v. Marino- Marino offered a $500 reward for finding the people that stole her jewelry. A police officer found the people and tried to collect the reward. i. Ct said NO b/c of PP- if we allowed this than cops would prefer people who tip. b. Denny v. Reppert- Bank employees cant get reward from a bank robbery b/c they have a pre-existing duty to protect the money in the bank. c. Ex- the deputy sheriff of another county was entitled to the reward money b/c the money was in a different county where he wasnt under a duty to do anything. d. Public Policy- if u are suppose to do something under a K and you dont do it until you get more from the person you owe the duty to, you are being paid twice for the same thing. e. Lingerfelder v. Wainwright Brewery Co.- Architect stopped work on the s bldg after the awarded another project to his competitor, refusing to resume work until the promised him 5% more $. i. Rule- When a party merely does what he has already obliged to do, he cannot demand additional compensation, even if he takes advantage of the situation and obtains a promise for more money. ii. Hypo- If had agreed to do extra work, he could ask for 5% more.

f. NOTE: Only comes into play when enforcement hasnt taken place yet (like if the money has not been paid yet). 2. Duress- If you sue to enforce a promise made under duress, not only is the promise unenforceable, but u will also have to pay damages. a. Elements of Economic Duress: i. Threat not to deliver goods ii. No other source of supply iii. The ordinary remedy for breach is inadequate b. Austin Instrument Inc. v. Loral Corp- 2 cases with different decisions about threatening to stop work on Navy parts sub-contract. 3. Sometimes one-sided modifications are enforceable by showing either: a. Restatement 89: i. Modification is binding if 1. 89(a)- it is fair & equitable in view of circumstances NOT anticipated by the parties when the K was made 2. 89(b)- to the extent provided by statute 3. 89(c)- to the extent justice requires enforcement in view of change of position in reliance on the promise. ii. Angel v. Murray- A garbageman contracted with the City for additional compensation when his route had an unexpectantly large increase in pickups. The court adds voluntary to the restatement test. b. UCC 2-209: i. 2-209(1)- A modification of a sales K does not require consideration to be binding. 1. 2-209(2)(a)- An agreement cannot be rescinded or modified without a singled writing if the original agreement is in writing & signed. 2. 2-209(2)(b)- The modification must be separately signed if one party is not a merchant and the term is on a form supplied by the party who is a merchant. c. If neither of the above apply; the one-sided modification will NOT be enforceable. VIII. CONTRACT FORMATION IN A FORM CONTRACT SETTING- CONTRACT SETTING/BATTLE OF THE FORMS 1. What are the terms of a contract when they conflict? a. Parties dont usually negotiate every detail, so the provisions they did not negotiate are governed by the forms b. HYPO- Macys orders jeans from Levis. They negotiate price and delivery, but they dont negotiate returns and every other detail. The purchase order is what governs those little details and Macys purchase order says they have 6 months to return and Levis purchase order says they have only 30 days to return. 2. Questions a. Step one: Has a contract been formed? 2-207(1) i. Mirror Image Rule- any difference between an offer and an acceptance, no matter how minor, prevented the formation of the contract.

10

ii. Last Shot Rule- can accept by conduct, so the person who sent the last form, their terms controlled because then the parties performed by conduct. iii. UCC Modern Rule 2-207(1) 1. Makes response into an acceptance, varying terms are still accepted unless acceptance says acceptance expressly made conditional to these terms. 2. If no expressly made conditional clause, there is still a contract, but we look to 2-207(2) & (3) to see whose terms apply. b. Step two: If so, whose terms control? Additional or different (as long as they are merchants) i. Additional Terms become part of the contract unless: 2-207(2): 1. Offer expressly limits the terms of the offer 2. The terms materially alter the entire contract (would not have entered into the K had they known because they create surprise or hardship) a. If any of these things, it becomes a counteroffer. 3. Notice of the objection to them has been given OR the goods are rejected in a reasonable time. ii. Different Terms become part of the contract- The Knockout Rule2-207(3) 1. If conduct by both parties says there is a contract, there is a contract even if writings dont show otherwise. 2. Conflicting terms cancel each other out, leaving UCC gap filler in place (knockout rule). 3. Cases a. Step Saver v. Wyse Tech- Terms on the box top agreement disclaimed all warranties, court found that box tops cannot be expressly made conditions, its just an acceptance. b. Gardner Zemke v. Dunham Bush- Zemke (buyer) sent a purchase order for Chillers to Dunham (seller). Dunham sent an acknowledgement with a limited warranty. The chillers dont work and there is a dispute over who should pay for it. i. Offer = Zemkes purchase order./// Counteroffer = Dunhams acknowledgement (mirror image rule- terms dont match) /// Acceptance = Zemkes received the chillers ii. Last Shot Rule- Dunhams terms control under common law iii. But UCC 2-207- does not like mirror image rule, so counteroffer was really an acceptance as long as Dunhams form did not expressly state that he would only deal on his own terms. 1. Has Dunham made clear that the acceptance is expressly made conditional on Zemkes acceptance of the terms? a. Case was remanded to see. 2. TEST it must clearly reveal that he is willing only to proceed with the offer on his term.

11

a. If there is an expressly made conditional clause, your response does not become an acceptance- it remains a counteroffer. 4. 2-207 doesnt apply, outside the scope of Battle of the Forms when: a. When it is not between merchants. b. When terms have been negotiated or bargained with, i. and then they are included in contradiction in the last contract, there is no K because acceptance becomes a counteroffer. ii. Columbia Hyundai v. Carll Hyundai- buyer of dealership signed agreement and added current year, meaning he did not have to buy older new cars; treated as a counteroffer and rejected. No K! c. When there is only one form i. ProCD- only one form, shrinkwrap licenses valid so that prices can be kept down. Open shrinkwrap, bound by the terms of the contract inside, not feasible to put the contract info details on the outside. d. When a customer orders by phone and then receives by mail i. Customer is bound by the contract terms, not feasible to read the terms over the phone. (Hill v. Gateway) 5. Public Policy a. Battle of the Forms is wasteful, arbitrary, encourages tricky behavior, could lead to surprising results and is bad for society! b. NEGOTIATE instead! If you really want your terms to control, negotiate and come to an agreement. Put it out in the open, not through trickery. IX. MISTAKE 1. Mistake Analysis a. What was the contract for? b. What was the mistaken view? c. What were the actual facts? d. Do we let them out or not? e. Reasons? 2. Misunderstanding a. Two parties attach two different (but both reasonable) meanings to their language, no consensus or common ground, so no contract. i. Seems like a mistake, but not a mistake in the legal sense, in the colloquial sense instead no common understanding. b. Raffels- no consensus on which peerless boat was to bring the cotton, the October or December, so no contract. c. Oswald- Coin collection bought, but seller only intended to sell one coin, no contract. 3. Mutual Mistake a. Definition- a mistaken assumption, shared by both parties as to the conditions of the outside world. b. After a valid offer & acceptance has been made, what is a valid excuse for nonperformance? i. 152- Makes contract voidable: 1. Mutual mistake at the time contract was made on a

12

2. Basic assumption on which the contract was made 3. That has a material effect. 4. Contract is voidable by the adversely affected party 5. Unless he bears the risk of the mistake under 154 ii. 154- When the party bears the risk 1. The risk is allocated to him by agreement OR2. He is consciously ignorant OR3. The court allocates the risk because it is reasonable to do so c. Yes, party can get out of it (very discretionary) i. Sherwood v. Walker- when the mistake goes to the root of the contract; cow was actually fertile, worth $750 instead of $80. ii. Griffith v. Brymer- root of the matter, mis-belief made at 11am, after cancellation of coronation was announced at 10am (but parties didnt know that yet); room rented for viewing coronation. iii. West Coast Airlines- no intention of selling the engines in the pile of junk metal, and the buyer knew of their value. iv. Garb-ko- Seller was adversely affected so the as-is 154a clause only applies to buyers; land for a 7-11 severely leaking oil. K was avoided b/c as is clause does not relieve sellers of their statutory duty to clean up the property. 1. Only the adversely affected party has the right to void the K unless that adversely affected party trying to avoid the K bears the risk. 2. Mistaken view = land was normal 3. Actual facts = land was contaminated. v. Gartner v. Eikil- root of the matter; land for commercial buildings; mistaken belief that buyer could build on the land, but only one building was actually permitted, failure of a party to investigate does not always preclude rescission, reasonable not to go to city hall. 1. Compared to Wood, (diamond case)- shows how discretionary mistake of fact is. vi. Beachcomber Coins- negligent inspection does not bar a claim for rescission; a coin was not actually a Denver dime, only worth 10 cents, not $500, had been counterfeited on it. He was tricked, because it was counterfeit. d. No, cant rescind the contract: i. Wood v. Boynton- Both people were ignorant, but it was conscious ignorance, she knew he did not know what the stone was so she assumed the risk by not researching further 154(b)- (consciously ignorant); he sold it as a topaz worth $1, but it was actually a diamond worth $700. 1. When you sell or buy something with a risk attached and the risk eventuates, and you knew of the risk, the court will not let you out of your deal. ii. Firestone v. Union League- market value of a painting fluctuates, so it has to be final at the time of the sale; no mistake here, only an opinion; belief that it was a Bierdstadt painting worth $500k, but it was only a Key worth $50k.

13

1. No mutual mistake b/c when the parties made their deal there was no mistake as to what they thought vs. the truth at the time (b/c at the time they thought the painting was a different painter). 2. There are no facts, just opinions about who painted and how much its worth depends on changing perceptions in the art world. iii. Everett v. Estate of Sumstad- auctioneer led the parties to believe that he intended to sell a safe, not knowing contents, he did not know, 154(b)assumed the risk; buyers got to keep the unexpected 32k inside. iv. Lenawee County- as is contracts for sale of land shows that buyer has to bear the risk 154(a); had to keep land with the apt building on it even though the horrible sewage makes the property condemned and valueless. 4. Unilateral Mistake a. 153 i. Where a mistake of one party at the time of the contract was made ii. Goes to a basic assumption on which he made the contract. iii. Which has a material affect (Kastorff- 10% was material, Lemoge- 5% was material) iv. That is adverse to him v. Contract is voidable: 1. Unless he bears the risk of mistake 154a ANDa. The other party had reason to know of the mistake or mistake was his fault i. Eisen- school dist. Knew about the mistake (b/c bid was 2 low) and tried to accept anyways b/c they liked the price. b. OR- enforcement would be unconscionable. i. Shocks the conscience- too sharp for law & equity to sustain ii. If reliance then no excuse, void only if other party can be returned to status quo (Drennan- reliance barred b/c Drennan relied by committing itself to do a deal at a lower amount.) 1. Can the non-mistaken party be put in the pre-contractual position? iii. Was it carelessness or a reasonable mistake? b. Examples (can you rescind?) i. Yes, can rescind when mistake is clerical & notice is promptly given: 1. Elsinore Union Elementary School District- a contractor gave bid without including plumbing work in it, 12k less than it should have been, next day he wrote a letter explaining what went wrong; rescission permitted. a. Different from Drennan because in Drennan there was reliance, in Elsinore the party notified the other before either lost anything. ii. No, cannot rescind, where mistake of judgment like underestimating cost of labor/materials

14

c. Available less often than mutual mistake X. THE EFFECT OF CHANGED CIRCUMSTANCES 1. Different from mutual mistake a. Different from mutual mistake because it is an attempt to rescind after the performance has begun, as opposed to mutual mistake where the attempt to rescind is before either party has done much. 2. Impossibility/Impracticability a. 261 Impossibility/Impracticability (discretionary doctrine of excuse) b. This is mostly for sellers, but has also been used for buyers! c. Yes, rescind: i. When a fire burns down a building/music hall the other party planned to rent, 1. No reliance damages are awarded in preparation for concert. (Taylor v. Caldwell) ii. When it would be excessively costly and the contract was loosely constructed 1. s agreed to take the gravel that was available, but it was expensive and impractical to take more than 50% because it was underwater. Excessive and unreasonable costs. (Mineral Park Land v. Howard) d. No, dont rescind: i. When the parties considered it in the first place: 1. Failure to obtain financing is not a good excuse for not developing a park because the parties anticipated and allocated this risk in the contract. (Dills v. Town of Enfield) 2. When the parties made an express warranty (ex- they put a fire clause in their contract, and the place burns down): a. Marcoviches tried to get out of fixing it because it would be impracticable/ costly to do so, but could not rescind b/c of express warranty. b. Not whether it is a bad business risk or even a very poor deal, but whether there was extreme difficulty, expense, or injury or loss which goes way beyond normal range, and whether parties allocated the risk. (Marcovich v. Newberry) 3. Commercial Impracticability (Sale of Goods) a. UCC 2-615 Excuse by Failure of Presupposed Conditions i. After K made ii. Parties Performance became impracticable iii. Without Fault iv. By the occurrence of an EVENT/CONTINGENCY the nonoccurrence of which is a basic assumption on which K was made v. K is voidable unless the parties provided for it or it was FORESEEABLE b. Discretionary Doctrine with weasel words c. Who bears the risk? i. When a seller promises to sell a bushel for $50

15

ii. Price goes up, seller bears the risk iii. Price goes down, buyer bears the risk iv. If price goes way up to $200 or down to $5, we might discuss impracticability 1. Gross discrepancy 2. Party bargained for and anticipated a range around the number 3. It is outside the bargaining, so it is a windfall d. Examples: i. Yes, rescind: 1. K for sale of building buses. When the source and supply dries up, is a good excuse; the supplier is named in the contract and the supplier goes bankrupt, it becomes a basic assumption. (Selland Pontiac) ii. No, dont rescind: 1. When it is just expensive, but not so expensive that it is prohibitive; still had to pay late fee damages to the US for not delivering the computer system on time, even though fixing an engineering system would have been costly. (US v. Wegematic) a. No rescission because: i. Not costly enough, Impracticable ii. Truly revolutionary assumption No event, you contracted on the basis of possibility when u thought there was a risk iii. Liquidated damages for delay. Problem = they thought about it beforehand b/c the contract covered it and said u pay $100 for every day of delay. 2. When oil embargo was foreseeable, made coal expensive to deliver (Missouri Public Service v. Peabody). Peabodys financial status was considered, and it had enough money to cover it. 3. Barbarossa v. Iten- when the truck supplier is not named in the contract, it is not a basic assumption because the truck could have been supplied from another source. 4. Crop cases, unless it is specified that the crops come from the sellers farm only. iii. Other option: 1. Alcoa & UCC supports- split the difference between drastic price increase. This is NEVER followed because it would ruin stability dissent into fiery hell. 2. But it treats contracts like marriages rather than one-night stands. 4. Frustration a. Elements of frustration 265: i. After K made ii. Parties Performance became SUBSTANTIALLY FRUSTRATED iii. Without Fault iv. By the occurrence of an event the nonoccurrence of which is a basic assumption on which K was made

16

v. K is voidable unless the parties provided for it b. Difference from impracticability is the effect of the supervening event. i. Under frustration, the performance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by the event. c. Examples: i. Yes, rescind: 1. Krell v. Henry- worthless to rent the room for the viewing of the coronation when the coronation was cancelled. a. Compare- Different from MISTAKE in Griffith, b/c the parties made the K at 11am, and at 10am, it was already cancelled. Here, the contract was made at a time when the coronation WAS suppose to happen. Here it is just economically unreasonable, not impossible or mistaken. 2. Marks Realty- hotel did not have to pay for advertisements in a souvenir brochure for an event which was cancelled because of war, even though the people putting the ad together had done a lot of work. 3. La Cumbre Golf v. Santa Barbara Hotel- the hotel did not have to pay for a shuttle bus to the country club when the hotel burned down and there were no guests to take. 4. Chase v. Paonessa- could not continue with highway construction project b/c the town cancelled it, but did not owe lost profit damages to concrete barrier co. because there were no extra barriers made yet, so no reliance damages incurred. ii. No, dont rescind: 1. Power Engineering v. Krug- UCC 2-615 applies to frustration also. When there is an embargo against selling to Iraq, but the contract did not specify that equipment was only being sold to Iraq, the equipment could be sold domestically. Risk fell on the buyer. a. Prof says this case may have been different if they knew Iraq was the ultimate buyer. 2. Derby HYPO- take a cab to Derby and the races are cancelled, because there is no special qualification of the cab driver to take u to Derby days and driver may not know he is taking u there (so its NOT a basic assumption of the K). 5. Nondisclosure a. Generally no duty to tell unless asked. But b. 161- Sellers cannot suppress a material fact (be silent about it), or it is equivalent to a false representation when he: i. Knows he is being fraudulent ii. Fails to act in good faith and fair dealing iii. Knows his knowledge contradicts what is written iv. When the other is entitled to know because of trust and confidence (like lawyer-client privilege, not LL-tenant) c. 159- Misrepresentation is an assertion not in accord with the facts.

17

d. Subjective standard; if a lot of people would care and it would have affected their decision then it is material: i. CA- Material if the value or desirability is affected, and if he knows something others could not find out. 1. Ex- NOT just thinking the bathroom was another color 2. Ex- Freiwald ghosts in apt. (possibly material?) ii. If material, and suppressed, then buyer can rescind. e. Examples: i. Yes, termite & roach infestations are material facts which need to be disclosed. ii. No, not material: 1. When something is a cheap imitation, but is sold cheaply (Eytan v. Bach- paintings which looked old but only cost $50) 2. Kronman (theory)- when the other party could figure it out with a little research. XI. THIRD PARTY BENEFICIARIES 1. Should this third party be able to enforce this contract made by two other people? a. Policy 3 Choices: i. All 3rd Parties Have Rights (not the rule): 1. Prosa. Never had to worry about someone slipping through the cracks that would have rights or someone who isnt able3rd parties would generally be happy. b. Clear rule anyone who thinks to sue can sue 2. Consa. Nothing ever gets done who would make such a K? This would kill contracts!! b. If K does get made, corporation would put price of liability on consumer, you have to cut off liability at some point. rd ii. No 3 Parties Have Rights: 1. Prosa. Clear rule b. Limit liability- no disincentive to K 2. Consa. 3rd party who reasonably relied on promise would be negatively affected especially if parties intended. b. What if the second party enforcing dies? iii. Some 3rd Parties Have Rights: 1. In general, depends on parties intent (not always easy to determine), goals of K, and what is fair. 2. Can sue to recover what benefit was suppose to be conferred on them from one persons promise to another. 3. Hypo- A is the promisor, B is the promisee, and C is the 3rd party. A makes a promise to B that benefits C (3rd party). 4. Look at the 3 parties- who is 3rd party and what promise is he trying to enforce? 5. Is the 3rd party an incidental or an intended party?

18

6.

7.

8.

9.

a. 302i. Incidental- has no rights to enforce promise- 315 ii. Intended- has rights to enforce promise- is beneficiarys reliance reasonable and probable? 1. The performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary - 302(a) OR2. The circumstances indicated that the promisee intends to give beneficiary the benefit of the promised performance- 302(b) Lawrence v. Fox a. B owes debt to C and promises land to A. A promises to pay price to C. B gives land, but A refuses to pay C. i. Parties: 1. A- promisor 2. B- promisee 3. C- 3rd party b. Holding- a promise made to one for the benefit of another, he for whose benefit is made may bring an action for its breach- 304 c. Its important that the 3rd party beneficiary was a creditor! (Lawrence was a creditor of Holly). d. Consideration does NOT have to move from the person enforcing the contract (Farley) e. LANDMARK CASE Seaver v. Ransom a. Extends Fox, beyond debtor/creditor cases b. Circumstances indicate promisees intent c. Clearly cases in which allowing 3rd party to enforce effectuates parties deal Salesky a. Retired president of a company amends his employment K so that his wife is no longer the beneficiary of the pension. When he dies, wife sues. b. If 3rd parties rights have not vested yet, parties can modify, amend, or rescind without 3rd parties assent c. Used to be that rights vest when K is made-- 142 of original Restatement d. New Rule- change at any time, do not vest automatically e. 311- Rights have vested if: i. Terms in K provides that it cannot be changed ii. Beneficiary has justifiably relied- materially changed position in reliance- or manifested assent at request of parties Rouse a. A man bought a house and agreed to take on the previous owners payments for a newly-installed heating plant; and when he later refused to make payments, the government, which had guaranteed the debt, sued. b. A 3rd party creditor beneficiary (US) under a K is subject to the same defenses that the promisor (Rouse) has against a promisee (Winston)- Rouses fraud defense works i. Still had to pay because he didnt assume debt- assumed arbitrary sum ii. Beneficiarys right rises no higher than that of the promisee

19

c. If K between A and B is fraudulent, and A assumed Bs debt to C, A does not have to pay. i. 309(1)- K formed under fraud are voidable (this is a defense both to the promisee and to the 3rd party). XII. THE OBLIGATION TO PERFORM IN GOOD FAITH 1. Obligation in every contract to act in good faith and fair dealing- what does judge intend to rule out by use of this phrase? 2. Look at what parties intended: 3. R2nd- 205- Every contract imposes upon each party a duty of good faith and fair dealing in performance and enforcement 4. UCC 1-201(19)- Genuine means honesty in fact in the conduct or transaction concerned 5. UCC 1-201(20)- Good faith, means honesty in fact and the observance of reasonable commercial standards of fair dealing a. Note the difference btwn (19) and (20) the new version 6. UCC 2-103(j)- Good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing. 7. Best v. US National Banka. People were mad when they found out how much their checking fees were increased without notice to them. Suit was based on breach of Obligation of Good Faith. b. Unconscionability is more about a defect in contract formation and this is about a defect in contract performance AND- Bottom Line = it doesnt shock the conscience! XIII. ASSIGNMENT AND NEGOTIATION 1. Introduction- concerns cases in which A and B have made a K that did not benefit a 3rd party at the outset, but in which A subsequently either transferred (or attempted to transfer) his rights under the contract to a 3rd party or delegated (or attempted to delegate) his duties under the contract to a 3rd party. 2. Assignmenta. The transfer of a contract right b. An act or manifestation by owner of right indicating the intent to assign that right to another party. c. An equitable assignment need not transfer the entire future right but rather may be a partial assignment of right d. An assignment by definition is irrevocable. 3. Delegationa. The transfer of a duty b. Evening News v. Paterson- Post News (assignor) assigned Petersons (obligor) services to Evening News (assignee). Post News also delegated the duty to pay Peterson to Evening News. c. You cannot delegate contracts that rely upon the skill, judgment, and taste of the delegating party 4. Attack Plana. What is the legal claim & what are the damages? b. Was there consideration?

20

c. Terms/Parties: obligor, obligee-assignor, assignee? i. Transferor of rights = assignor ii. The other party to the original K = obligor iii. Transferee of rights = assignee d. Is the right to assign valid and has notice been given? i. Valid if assignor relinquished his rights & retained no control ANDii. Under 317: 1. Contract does not prohibit transfer by saying not assignable or delegable. 2. The other partys expectations are not impaired a. By materially varying the duty, b. Increasing the burden of risk imposed by K, c. Impairing ability to obtain return performance, or d. Materially reducing its value to the obligor 3. The transfer does not offend public policy (right to sue, alimony) a. Cannot assign a contract for personal services. 5. Other Things to Considera. Consent & franchise/lease context b. Duty still there after delegation c. Assignment by definition is irrevocable. d. EXAM TIP- If an issue of the ability to assign rights comes up, makes sure to analyze the rights and duties of each party separately, b/c maybe one of the parties can assign and the other cannot. 6. Vocabularya. Obligor- owes a duty/conveys rights (I am the obligor of the duty). b. Obligee- owed a duty/has a right c. Right- an owed duty d. Rights are assigned, duties are delegated. 7. Breach of Assignment and Delegationa. When a person (assignor/obligor) assigns a pot of money to go to another (assignee), and the obligor does not transfer that money to the assignee, the assignee can sue the obligor for the money. i. Injured person (assignor) assigned his settlement money to the doctor (assignee) in exchange for surgery, but the attorneys (obligors) gave the money back to the assignor (injured person) because the assignor told them to do, so the doctor (assignee), sued the attorneys (obligor). (Herzog v. Irace) 1. Rule- an assignor may not retain a power of revocation. b. Contract rights are assignable/delegable, even for employment contracts: i. Post Newsweek can assign the right to have Peterson as a newscaster to Evening News, who bought the TV station. 1. Even though Peterson tried to argue he had a great relationship with his first employer, but not the second who took over. Ct didnt care. 2. HYPOS-

21

a. Instead of assigning to Evening, assigned to a station in Iowa NO! Materially changed duty of assignor. b. Assigned to an entertainment station NO! Materially changed duty. c. Fledgling station that was stable but crappy NO! Materially impairs obligors chance of obtaining return performance (the exposure) d. Always on verge of going bankrupt NO! Materially imposes a burden or risk. e. Peterson assigned his duties to another anchorman NO! You cant delegate unless the oblige has a substantial interest in having that particular person. (Peterson). ii. Run of the mill employment contracts like providing soda vending machine contracts can be delegated (Macke v. Pizza Shop) 1. Cant delegate a contract which relies on skill, judgment, or taste. (Ad Campagin) iii. Exclusive distributorships CANNOT be delegated to a competitor without obligees consent. 1. Sally Beauty v. Nexxus- Best cannot delegate their duty to distribute to Sally since Nexxus cannot rely on Sally to do a good job (since they also sell the competitors product)- they have a competing interest. a. 318(2)- there is a substantial interest in Sally not selling the Nexxus products. Duty of best efforts. iv. When you delegate a duty, the oblige is the 3rd party beneficiary. c. Consent: i. A franchiser must consent to the sale of a franchise unless they have good reason to withhold consent. Good faith & fair dealing. (Larese v. Creamland Dairies) 1. Unless it is explicitly stated, written, and freely negotiated. ii. A landlord must consent to a sublet unless he has a commercially reasonable objection. (Kendall v. Ernest Pestana) d. Delegation does NOT discharge liability of the delegating party 318(3), unless the obligee agrees otherwise. i. If delegatee fails to perform, the delegant remains liable. ii. Best still has a duty to Nexxus. iii. Virginia still has a duty to Pizza if Macke does not perform. 8. Policya. Credit enriches nations. b. Borrow now, pay back later. c. People can trade their future claims for money. d. Courts encourage assignment & delegation. XIV. THE DOCTRINE OF SUBSTANTIAL PERFORMANCE 1. Problems with performance

22

I. Substantial Performance- condition or promise? If promise, then substantial performance i. A party who substantially performed is entitled to the other partys performance minus an offset for the deviation. (Jacobs & Young v. Kentowner wanted Acme plumbing pipes, builder used Baker pipes instead (which are functionally similar). Owner is only entitled to difference between the 2 pipes, not the cost of replacing the pipes). 1. Different from last semester because it is the breacher/contractor suing 2. HYPO- If the contract expressly stated the pipe must be manufactured by Redding and no other brand would do outcome would be different. 3. HYPO- If the Redding name on the pipe were visible in the bedroom and the owner liked the status symbol outcome could be different. ii. Replaces harsh background rule of the common law: of the builders performance is defective in any way, the homeowners duty to pay is discharged. 1. Mitigation of the CL & Perfect Tender Rule: a. Restitution (quantum meruit to party in breach) b. Installment Contracts partial payment c. Forfeiture (builder can forfeit work) d. Substantial performance e. The good faith requirement you cant seize on a minor deviation to take advantage of a falling market f. Cure- if it happens before the contract delivery time. g. Revocation iii. Measure substantial performance by Cardozo factors which look at the parties intent (with Jacobs Ex)* 1. Purpose to be served; a. Build a house. 2. The desire to be satisfied (is it artistic or functional?) a. He wanted Acme pipe b/c of the quality of Redding. 3. The excuse for deviation (honest mistake), a. It was inadvertent b. Here is where you talk about good faith. 4. The cruelty of enforced adherence (how cruel to make builder replace pipes, oppressive retribution.) a. In order for the builder to exactly perform, he would have to tear down the house. If it were easy for him to do so, then it wouldnt be cruel. Its cruel because its impossible to fix without a lot of money. iv. Policy for substantial performance 1. Enhances freedom of contracts 2. Eliminates trivial excuses for non-performance

23

v. When a contractor leaves much of the work undone, it is incomplete performance so he can only recover quantum meruit. (Keyer v. Driscoll) 1. Restitution damages are given because they are the least generous. vi. When the work involves taste or preference, substantial performance does not apply. (OW Grun Roofting v. Coperusset colored roof) vii. If there is substantial performance, there is not material breach. II. Cure- if the time for performance has not yet expired, then the seller can cure the defect by making a conforming delivery within the contract time. a. UCC 2-508(1)- within contract time frame i. A buyer rejects non-conforming tender ii. Time for performance has not expired iii. Seller can seasonably notify buyer of his intention to cure & then cure iv. Buyer must be rejecting goods in good faith* b. UCC 2-508(2)- time has expired i. A buyer rejects nonconforming tender ii. Seller had reasonable grounds to believe that the goods would be acceptable 1. TW Oil- seller acted in good faith and did not know about the defects (high sulfur content of the oil). iii. Seller can seasonably notify the buyer of his intention to cure. iv. And can have further reasonable time to cure. v. Buyer must be rejecting goods in good faith* c. Mitigates harshness of the perfect-tender rule, where a buyer could reject any nonconforming goods, no matter how trivial, and be excused when there is any deviation. d. NOTE: A buyer who fails to accept qualifying cure is himself breaching his K. e. A seller of new cars cannot cure when the first car was defective as soon as it was driven off the lot and needed a new transmission; new cars are about dependability and safety. (Zabriskie) f. Different from substantial performance because cure ultimately requires perfect tender, more strict because seller can take goods back. g. Pay attention to who owes whom first. III. Revocationa. UCC 2-608- Revocation if you have already accepted & imperfection alters the value of the goods: i. Must do it in reasonable time ii. Not effective until buyer notifies seller iii. Must have assumed that non-conformity would be cured or must not have discovered non-conformity iv. Same rights and duties as one who rejects. IV. Rejection of Goods i. Must be in good faith; bad faith can be shown by motivation to reject the goods to escape the bargain. ii. UCC 2-601- Perfect Tender Rule- A buyer can reject tender which fails in any respect. iii.

24

XV. EXPRESS CONDITIONS 1. Difference between promises and conditions: a. Conditions are similar to promises however a condition tells us what a party must do b. Non-performance of a promise = breach & Non-performance of a condition = discharges a duty (whatever is set out in the K). 2. Languagea. Must = the best indication of a condition, not a promise b. Unless and until c. If 3. Rst 227 applies to conditions an interpretation is preferred that will reduce obligees risk of forfeiture. 4. When an express condition is specified in a contract, substantial performance does not apply 5. Questions to ask: a. Obligor? Duty? b. Thing which did not occur? Condition or promise? c. Who suffered a forfeiture and of what? d. Are there 2 sets of promises? (1- promise to sublease if consent is given, 2- actual sublease, sale of land) 6. If there is a condition, standard is strict performance. Example: condition was for written consent. Because condition was not fulfilled, not obliged, no K was formed. Condition precedent. (Oppenheimer) 7. Failure to meet a condition does NOT lead to breach of contract liability (damages), it leads to whatever consequences are set out in the contract. (Merritt Hill Vineyardsdeposit returned) 8. Promise- when you agree to a future performance, but the liability arises before performance is necessary. Can be subject to substantial performance, also called condition subsequent. Failure to perform promises leads to breach of contract damages. Doubtful words = promise. 9. Condition precedent- condition which must be satisfied before liability on the contract will arise. Conditions are strict, cannot be done a day late. No damages for conditions. a. When drafting a contract, make the first part a promise and the second part a condition. XVI. SATISFACTION CLAUSES- (allow a party to terminate a contract) 1. TEST- When can a contracting party refuse to perform based on a satisfaction clause (the satisfaction was an express condition of the K)? What is the limit on a parties ability to claim lack of satisfaction when there is a condition of satisfaction? a. Objective reasonable person standard- Whether a reasonable person would be satisfied and whether he was actually satisfied. i. When the contract involves mechanical utility or commercial quality. Posner supports this. b. Good faith subjective standard- when the contract involves personal aesthetics or fancy.

25

i. Still subject to requirements of good faith (cant be claiming lack of satisfaction to renegotiate a price- Forman v. Benson- approval of buyers credit report). ii. Damages- Ct will not award damages just because a party has rejected for honest dissatisfaction, they have to look into the facts of the case. Damages can be awarded based on dissatisfaction as long as they did not breach, and as long as the other party has breached the promise. c. Should satisfaction be measured from an objective or subjective standard? It depends on the nature of the contract: i. Painting of a personal portrait Subjective satisfaction 1. Good faith standard (of judging satisfaction) used for personal aesthetics. a. Fursmidt v. Hotel- didnt like the quality of the laundry and valet guy. Use good faith standard! ii. Building a factory for purposes of utility Objective/R/s person standard. 2. 227, Illustration 5-8 even when honest good faith satisfaction is required, the cannot base its claim of dissatisfaction on a gross misstatement of fact or a failure to make a proper inspection. 3. Examples: a. McCartney v. Badovinac- diamond stolen from R. Rs husband accuses Mrs. M. Mrs. Ms husband hires an investigator who finds Mrs. M DID steal it. Mr. M refuses to pay investigator because he didnt like the result. i. You must have good faith in dis-satisfaction, u cant base dissatisfaction on achievement of your desired result. Must be based on quality of investigation. b. Morin v. Baystone- aluminum siding appearance not uniform is utility, so objective satisfaction. Even though contract referred to artistic effect, it was a form contract, so look at the parties intentions. c. Mattei v. Hopper- parties can build in good faith satisfaction clauses for leases. You interpret the condition as placing some limit on the parties so it is not an illusory promise. 4. Farnsworth (theory): Risk to the contractor in satisfaction clauses can be avoided by making the conditions of satisfaction an independent 3rd person, like an architect. Architect has to inspect though, and if he makes a mistake, A can still sue B. XVI. CONDITIONS OF PAYMENT 1. Thos. J. Dyer Co. v. Bishop Intl Engineering Co.- Condition in K said that payment will be due 5 days after the owner pays the general contractor. Owner of construction project filed for bankruptcy. General contractor sought to avoid paying the balance to a subcontractor. a. A contractual provision which merely states that a subcontractor is to be paid when the general contractor receives payment from the owner, does NOT shift to the subcontractor the risk that the owner will not pay the general contractor. b. Generally- the insolvency of the owner is NOT a bar for recovery for a subcontractor from a general contractor.

26

XVIII. BREACH & RESPONSE 1. Questions: a. Who is suing whom? b. What is the timeline? c. Is the breach material or immaterial? d. What remedy is sought? (total or partial breach) 2. When there is breach by the first party, what options does the non-breaching party have? What can he do? a. No performance releases the other side from performance. 3. Who is to perform first? a. The law has a preference for simultaneous performance. b. If neither party performs neither party can sue. c. If both parties perform no breach, neither can sue. d. If only one party shows up for performance and the other does not he can sue. 4. RULE The party must show that he was ready, willing, and able to perform. 5. Kanavos v. Hancock Bank- the bank promised K the right of first refusal and then sold it to a 3rd party without telling him. a. We must figure out if Kanavos was ready, willing, and able to perform. b. Kanavos right to recover depends on whether he had the financial ability to buy stock at the relevant time. c. Kanavos had the burden of proof (the bank cannot know if he is able)- It is more realistic for K to prove that he was ready & willing. How could the bank know if he could get the money? i. The had the burden of proof. 6. When one party breaches, what can the innocent party do? a. When is one party justified in terminating his performance in response to the other partys behavior? b. The innocent party cannot overreact i. Like self-defense ii. It cannot be disproportionate or excessive c. Disproportionate responses by a victim of a contract problem are themselves in breach. (Walker) 7. Material Breacha. If you are the victim of a material breach, you have 2 choices i. Total Breach 1. Treating the partys breach like a total breach. 2. Terminate your performance and sue for damages ii. Partial Breach 1. Tell the other party to keep performing 8. Immaterial Breacha. The other party gets to get the damages they have suffered b. But the innocent party does not get to terminate his own performance c. Treated like a partial breach TOTAL breach is NOT an option d. You must continue to perform (and then you can recover the amount of the partial breach). 27

9. K&G Construction v. Harris- subcontractor bulldozed into a house, contractor said they breached and stopped paying them, so the sub stopped work. a. Trial Court i. Treated the bulldozing mess as an immaterial breach- so the withholding of the $ was a material breach- so the sub was justified in stopping work. b. Appellate Court i. Treated the bulldozing as a material breach- so the withholding of the $ was justified- so the subs stopping work was a material breach. 10. Victim of an immaterial breach must treat it as a partial breach and continue to perform- they cannot withhold the money (then get damages later). 11. Victim of a material breach is justified in withholding the payment (and suspending performance) but MUST give a reasonable period of time for the breacher to cure. Then choosea. They can choose to treat it as a partial breach and continue to perform, insist the other party performs, and get damages later i. UCC- you can withhold the partial breach damages (take money back) ii. Common Law- they cannot do self help and subtract it from what they are owed. They would have to settle it and agree on an amount. 1. If they withheld the $, they would be in breach. 2. Both parties have to keep performing. b. OR- they can choose to treat it as a total breach, stop performance and sue for damages. 12. Restatement 241- In determining whether failure to render or to offer performance is material, consider the following (NOTE: This test is similar to Jacobson-Young test- so u can either know this or that)a. What benefit is the injured party being deprived of? b. Can the harm be adequately compensated? c. Will the party in breach suffer forfeiture? d. What is the likelihood that the breacher will cure? e. Was the breachers behavior in good faith? 13. The decision to repudiate is fraught with peril a. Walker v. Harrison- A dry cleaner stops making rental payments on his neon sign when the sign company refuses to clean it according to routine maintenance (tomato on sign). Harrisons repudiation was its own material breach. 14. Relationship Between Material Breach and Substantial Performance: a. If there is a breach close to full performance, the injuring party will treat it as substantial performance and the injured party will treat it as immaterial breach. b. If there is a breach close to non-performance, the injured party will treat it as a material breach and the injuring party cannot treat it as substantial performance. c. When can it not be analyzed as SP or breach? i. When there is an expressly made conditional clause d. When can it be analyzed as breach but NOT SP? i. When it is too early to be substantial performance so it is just an immaterial breach (it would be overreacting to treat it as a material breach).

28

XVIV. ANTICIPATORY REPUDIATION, PROSPECTIVE INABILITY TO PERFORM AND ADEQUATE ASSURANCE OF PERFORMANCE 1. What happens when a party announces his intention not to perform before the time of performance? 2. Restatement 250- repudiation is an announcement of a failure to perform (that would give the injured party a claim for total breach) 3. When you say, I am not performing, it is repudiation- if you say that before performance is due, it is anticipatory repudiation. 4. Hochester v. DLTa. Can H sue before performance is due? i. Yes. He can rescind and just accept the offer to end K or he can wait and see if he performs- or he can just sue now. b. Can H recover even though he could not have actually performed on 6/1 since he accepted a substitute job? i. Yes. We want to encourage mitigation. H does not have to hold himself ready, willing & able to perform throughout the period. c. H can sue- it is a breach of an implied duty (the point of making promises is to plan so the other side can rely) d. Precedents- If I promise to marry you and then I go marry someone else first, at the time I marry someone else, you can sue me OR- if I say I will sell certain goods to you and I sell them to someone else first, you can sue me at the moment of the disabling act. i. Difference from this case = this case, could change his mind. Ct doesnt care anyways. 5. Two Choices (what is the diff. btwn- sue, accept & rely) a. Sue Immediately i. That means that you have treated the repudiation as a total breach. ii. If you sue, it is advisable that you mitigate (or else that might be subtracted from your damages). b. Wait until performance is due and then sue i. If you are going to wait, you should still lock in the repudiation since there is a possibility that in the mean time, the repudiator will nullify (retract) his repudiation ii. Restatement 256- Locking it in 1. By mitigating, you have relied on the repudiation and you have locked it in. 2. As long as the party has changed his position before he has learned of the nullification, then he has locked it in. 3. As long as the notice of nullification does not come to the attention before the injured party changes his position, the repudiation will be final (nullification is good upon receipt). c. Repudiation must be clear and definite (not just expressions of doubt). i. Ex- If DLT had said, Im not sure youre the right guy for the job, this is NOT repudiation. d. Repudiation can be conduct-

29

e. f. g. h.

i. Restatement 250(b)- a voluntary, affirmative act which renders the obligor unable to perform is repudiation. ii. Wholesale Sand & Gravel- at a certain point, conduct counts- reasonable for the injured party to conclude that the obligor will not complete performance. iii. Ex- Instead of H receiving a letter, H learned that DLT hired Brad Pitt. This is repudiation! Creating new conditions that must be met before you continue the work is anticipatory breach (Unique Systems) In order to recover, the injured party must have been ready, willing, and able to perform if there was no repudiation (Record Club) If repudiation is retracted in time, it can be nullified (Taylor) A clear closing of the door to the injuring partys ability to nullify his repudiation is a definite action indicating that the breach is final. (Seacoast)

30