Contracts II outline

Each K needs to be analyzed separately!!! 1. Filling Contractual Gaps a. Duty of good faith and fair dealing i. Implied in all contracts ii. Duty to not do anything that would destroy the fruits or benefits of the K b. Best efforts i. Higher standard than good faith ii. Implied in exclusive contracts, unless a different standard is agreed upon iii. Treat their products at least as well as you would treat your own

CONDITIONS (X is in breach unless something suspended or discharged his duty) Only promises can be breached (includes implied promises) Conditions can t be breached; they either occur or fail to occur 2. Express Conditions (only thing u can t recover via restitution on) a. Event that MUST occur before performance under K becomes due i. Identifies an event, AND ii. Says that if event doesn t occur, some contractual promise need not be performed 1. Just because an event is identified, doesn t make it a constructive condition iii. Ex. subject to these events occurring b. Strict compliance: every detail expressed in the contract has to occur i. Interpreted against the drafter c. Mitigating doctrines i. Prevention: duty is excused if a party prevents a condition from occurring ii. Waiver: party indicates they will perform even if condition doesn t occur 1. Can be retracted, unless: a. Condition is an election (continuing to perform) b. Waiver is supported by consideration c. Waiving party is estopped to retract iii. If you can t tell whether it s an express condition, always interpret to avoid forfeiture 3. Constructive Conditions: Dependent covenants (duties) a. When one party s performance must be performed earlier in time, and it must be of great importance to the contract b. When K doesn t specify order of performances, work before pay rule i. If the K is silent as to the order of performance, it would be interpreted as if it had called for the performance to occur first, under the general rule of construction that where one party s performance requires a period of time and the other s does not, the former party s performance is due at an earlier time than that of the other party. c. Substantial performance (much lesser than strict compliance) i. Condition has occurred if there is a tender of performance ii. Did one party get essentially what they paid for

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d.

e.

UCC: perfect tender rule i. Can reject if goods are not exactly what was contracted for (like strict compliance) ii. Curing 1. Deliver 100 widgets by Saturday 2. On Friday, seller delivers, buyer doesn t like the quality, rejects 3. Seller still has until Saturday to send the goods of the right quality a. Buyer can t reject, has to pay Mitigating doctrines i. Prevention, waiver, election apply to constructive conditions as they did to express conditions ii. Divisibility (severability) 1. When K severable? a. Part to be performed by 1 party consists of several and distinct items, AND b. Price to be paid by other party is apportioned to each item i. If it is left to be implied by law, generally severable c. If it is appears that the parties viewed each side of each pair as agreed equivalences. iii. Restitution 1. Enrichment = market value (value of benefit to D) 2. P who breaches is entitled to price of K what they would owe for breaching

4. Prior Material Breach a. Material breach of a prior contractual duty suspends the other party s duty to perform its side of that K. (the bigger the breach, the more likely it is material) i. If it is not a material breach, they must continue performance ii. If it is a material breach, and the other party continues performing, this is waiver iii. If it is a material breach, and it is cured, they must resume performance 1. Interference/prevention is a material breach of the duty of good faith that is implied in every contract b. A prior material breach of one K does not justify suspending/terminating another contract!!! 5. Prospective nonperformance suspending other party s duty a. Repudiation: a manifestation by a party that it will not or cannot perform, where such manifestation would, if carried out, be a material breach i. I m not going to perform b. Anticipatory repudiation: a repudiation that occurs prior to the time for the repudiated duty s performance (must be clear and absolute) i. I m not going to perform, but duty is not due until tomorrow and I say this in advance ii. If I know you don t have money to perform, it is silent anticipatory repudiation c. The victim of anticipatory repudiation does not have to wait until the actual breach occurs, they may sue immediately. i. Unless repudiation occurs after performance, and the duty is one to pay money 1. I promise to wash car if you pay me Saturday 2. I wash car, then you repudiate 3. I can t sue until you actually breach on Saturday

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d.

e.

Party can retract a repudiation (they are no longer in breach, and the other party s duties are no longer discharged) unless: i. The anticipatory repudiation has ripened into an actual breach ii. The victim of the repudiation accepts the repudiation (indicates they are treating it as a breach) iii. Reliance (detrimental reliance on the repudiation precludes a party form retracting its repudiation) If X thinks Y will not perform, and X is scheduled to perform before Y: i. Reasonable grounds for insecurity, ii. Allows X to make a written demand for assurance, iii. Until X receives assurance, they may suspend performance until commercially reasonable 1. If Y says they can t perform, this is anticipatory repudiation, discharges X s performance 2. If Y doesn t respond to demand for assurance, within reasonable time (not more than 30 days), it is treated as Y repudiation

6.

RECAP: In a bilateral K between X and Y, X s failure to perform, refusal to perform, incorrect performance, or incomplete performance is not a breach if: a. X s promised performance is expressly conditioned on an event that hasn t occurred b. Y s promised performance is a constructive condition to X s duty to perform, and Y hasn t substantially performed c. Y previously committed an uncured material breach of his express or implied contractual duties d. Y has committed an anticipatory repudiation i. (Y s duty must come before X s)

7. Mutual Mistake a. At the time of the K formation, both parties had made the same incorrect assumption about some important existing fact. i. Ex.) K for purchase of land to grow crops, no water underground to irrigate crops, both parties were unaware of this. 1. Ct. said K would not have been formed without the water, that was the only reason P bought the land (to grow crops) ii. Basicness (goes to the heart of the bargain) 1. Applies to the noun, not the adjective a. Apples vs. oranges, not round apples vs. square apples iii. Courts more likely to side with buyers because sellers (which are usually the owners of the item in question) have a better opportunity to learn all the facts/info of the item in question (because they own it) 1. Assumption of the Risk

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8. Impossibility/Impracticability a. After K formation, something happens that makes the promised performance much more difficult than contemplated b. Impracticable: something can only be done at an excessive and unreasonable cost. c. Elements i. Post formation event makes party s performance impracticable 1. Concert hall burns down ii. Events nonoccurrence was a basic assumption on which the K was made 1. Band assumed the concert hall would not be burnt down iii. Impracticability resulted without fault of the party seeking to be excused 1. Hall owner didn t burn it down himself (bad faith = breach) iv. That party did not, by agreement or otherwise, assume the risk of the event s occurrence 1. Not a lot of fires in that area a. A canal being closed can be assumed in times of war d. Assumption of the risk i. If an event is not foreseeable, a party cannot assume the risk of that event s occurrence ii. If an event is foreseeable, it doesn t mean they assumed the risk, it is just a factor in determining assumption of the risk iii. Pure middle-men ALWAYS assume the risk 9. Force Majeure Clauses a. Sub-category of express conditions b. Typically begin with: X is relieved to perform duty of K if any event occurs that makes it more difficult, including i. Acts of God, war, labor strike, financial disaster ii. Unforeseeable events that are defined very vaguely iii. Doctrine of strict construction iv. Interpreted harshly against the drafter c. Ejusdem generis i. Gets rid of but not limited to ii. Therefore force majeure clauses are not very helpful 10. Frustration of Purpose a. After K formation, something happens that prevents one party from enjoying the benefit it would otherwise have had from the other party s performance i. Something other than the other party not performing b. Elements: i. Post formation event that substantially frustrates a party s principal purpose for entering the K ii. Assumption of events nonoccurrence iii. Without fault iv. Assumption of risk c. Ask: would it offend the conscious of the court to not allow a party to back out of the K?

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REMEDIES 11. Specific Performance (court orders party in breach to do the very thing he promised to do) a. Extraordinary equitable remedy b. Elements i. Inadequacy of legal remedy (damages) 1. 5M contract for famous art, it s worth 6M. 2. If I don t deliver art, you normally recover 1M 3. But painting is very unique, money can t get you in the position to by another piece of art ii. K as a whole is fair and equitable iii. Promise sought to be specifically enforced is supported by adequate consideration iv. P has fully performed, or Ct. determines he will do so (mutuality) 12. Damages a. To put Plaintiff (not both parties!!!) in the position he would have occupied had both parties fully performed b. General Damages i. Compensate P for injuries that naturally and necessarily flow from the breach ii. D must pay for any loss P experiences, but gets credit for and savings P experiences iii. General damages = Loss in value cost avoided 1. Loss in value = a. value of D s full promised performance value of D s actual performance 2. Cost avoided = a. Cost of P s full promised performance cost of P s part of performance that was discharged by D s breach iv. When determining loss in value, first use cover cost, then market value 1. Cost of cover: value of same item, reasonable time after breach, in good faith v. Substitutes (cover costs) 1. Employment contracts: a. if employee is wrongfully fired, and immediately finds same job, general damages are 0$ because P is already in the same position as he would have been in 2. Construction contracts: a. Contractors can do multiple jobs at the same time by using subcontractors, so the next job is not a substitute, D will owe damages i. Cost avoided is the cost of labor/materials for the breached job 3. Manufacturing goods a. Sellers that are also manufactures of goods can easily make additional goods, so these are not substitute transactions, therefore D will owe general damages 4. 5. P can never recover negative damages (from losing contracts) P can recover damages based on P s reliance interest (swimming pool ex.)

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13. Limitations on Damages a. Avoidability i. P who fails to act reasonably to avoid a loss cannot recover for that loss if it could have reasonably been avoided ii. P can recover for reasonable costs of trying to avoid losses, even if attempts are unsuccessful iii. Employment K 1. It is only reasonable to take substitute employment if substitute job is neither substantially different or inferior than job he was discharged from iv. Construction K (D uses wrong pipe on P s house) 1. Preferred/default method: complete or correct by substitute transaction a. What it costs owner to have another contractor complete or correct the defective performance 2. Alternate (diminution in value) a. Difference between value owner s land would have if contractor had performed as promised i. If D uses wrong pipe, it would be horribly wasteful to spend money putting in the correct pipe when the product would be of very little difference (alternate approach) Foreseeability i. D is only liable for such losses as he (at the time K was made) foresaw or should have reasonably foreseen as a probable result of his breach (majority rule) ii. Consequential damages 1. Sentimental value or emotional disturbance a. P can recover only if that emotional disturbance was either foreseen or foreseeable that the event was particularly likely if they breached. i. Almost sure to occur ii. Funeral/wedding K (already very emotional) Certainty i. P can recover for a component of his claimed loss only if: 1. It is more likely than not that the loss exists, and was caused by D s breach, AND 2. The trier of fact is provided with a basis, other than speculation, from which it can reasonably estimate the amount (in $) of the loss a. If P is a new business, and P can t open the new business because of D s breach, P can t recover for lost profits ii. Stipulated damages clause 1. Enforceable if, when viewed from the time of K formation: a. Damages would be uncertain and difficult to prove b. Amount stipulated is a reasonable approximation of the anticipated loss the breach would cause c. The term is not intended to be a penalty (small amounts are better) 2. Bad: in event of breach, X entitled to 10,000$ (many ways to breach a K) 3. Good: multiple stipulated damages terms for different possible ways of breach a. use formulas to determine damages, not absolute numbers

b.

c.

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NON PARTIES AS BREACH LITIGANTS 14. 3rd Party Beneficiaries a. C (non-party) can sue if: i. Non party would benefit from the performance of the promise in question ii. The parties have not agreed that the beneficiary cannot enforce the promise 1. no 3rd party can enforce iii. Either: 1. Performance of the promise would satisfy an obligation the promisee owes to the beneficiary OR 2. The promisee intended to give the beneficiary the benefit of the promised performance iv. Recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties 1. It would be appropriate to have the city sue a water company as opposed to a bunch of citizens separately sue them b. Vesting of 3PB s rights i. X and Y agree (with consideration) to modify the K in a way that performance that would originally benefit Z, now benefits X 15. Delegation of Duty a. A (obligor) arranges for B (delegant) to perform the duty A (obligor) owes to C (obligee) i. If B performs, C cannot refuse to accept performance 1. Unless K prohibits delegation OR 2. Obligee has a substantial interest in having the original obligor perform the promised acts ii. If duty is nondelegable, obligee (C) doesn t have to accept performance of that duty 1. When the delegant is a competitor with the obligee, non-delegable iii. If obligee agrees to relieve delegant of the duty, this discharges the duty (novation) 1. Novations do not require consideration

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16. Assignment of Rights a. Transfer of rights from obligee to another person i. Y (obligee, assignor) transfers right to Z (assignee) ii. After the assignment, obligee becomes an assignor, and the right exists only in the assignee 1. Duty is now owed only to assignee b. Gratuitous promises are revocable, unless put in writing or accompanied by a symbolic transfer (you don t need consideration for gratuitous promises) c. Unassignable rights i. Obligee (Y) cannot make an assignment that would either: 1. Materially change the obligor s duty OR 2. Increase the risk undertaken by the obligor a. Transfer of insurance policies ii. Y may not assign its rights to anyone without express written consent of all parties 1. This does not render assignment ineffective, but obligor can recover damages if obligee breaches this provision a. Takes away right to assign, not power to assign b. Would need to say: any assignment of Y s rights are void 2. UCC article 9: these provisions have no effect, even if very clear d. Obligor s (X) defenses against assignee (Z) i. In general, assignee (Z) stands in assignor s (Y) shoes 1. If Y commits material breach, X refuses to perform, Z sues a. X was justified in not performing, Z loses 2. If Y breaches, but not materially and X refuses to perform, a. Z wins e. Notice of assignment i. If X has already fully performed to Y, and Z sues X, Z can t win ii. If Z provides notice to X that he got an assignment, and X pays Y instead, X will still have to pay Z (pays Y and Z) 1. Having paid the wrong person is no defense to breach 2. But could recover what he paid Y under restitution (unjust enrichment)