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Contracts II Outline

The Parol Evidence Rule and Interpretation of the Contract


If the Parol Evidence Rule applies, parol evidence is not considered/admitted/heard in court. P.E.R. applies to statements made:

prior to or contemporaneous (at the same time) with the drafting of the contract applies to consistent additional terms court will never allow evidence that contradicts the original contract. Hypo: A has a written K to sell B 100 pairs of red jeans. A orally agrees to include 10 pairs of green jeans. B receives shipment of 100 red jeans. Courts wont allow evidence of this oral agreement because it contradicts the terms of the written contract. INTEGRATION 1.) Willistons View (common law)

Reasonable Person Approach

a. Merger Clause (a.k.a. Integration Clause): If a merger integration exists (ex: This writing contains all the terms of the agreement of the parties.), presume integration is TOTAL, unless merger integration clause is obtained by fraud, mistake, etc.

b. If there is no merger integration clause, ask: Would it have been natural for the parties to have included the term in the writing? If yes = total integration If no = partial integration 2.) UCC 2-202

Presumption of integration unless the judge determines that the writing was intended to be a complete and conclusive statement of all the terms of the contract.

The test here is whether the parties would have certainly included the term in the writing. Whether the writing is deemed to be a partial or total integration, it may always be explained or supplemented by course of dealing, usage of trade, or course of performance.

Exceptions to the P.E.R. (this kind of evidence/information is admissible): 1.) Evidence on whether the writing is integrated (final statement of the parties). The judge considers ALL relevant evidence to determine whether the writing is integrated. 2.) Statements/agreements subsequent to the writing. 3.) Evidence to interpret a writing 4.) Evidence to show that a condition to formation of the contract exists. 5.) Evidence to show matters of avoidance exists (fraud, duress, mistake, etc.)

INTERPRETATION If interpretation of an integrated writing requires the introduction of evidence, use common law for services and UCC for goods to determine whether the evidence will be admitted. Common Law: Two Step Approach 1.) Proffer evidence to the Judge to demonstrate that the writing (or a term) is ambiguous 2.) If the Judge agrees that there is an ambiguity, introduce evidence into the record to explain the ambiguity. UCC: Terms in an integrated writing (dealing with GOODS) may be explained/supplemented (but not contradicted) by, inter alia(among other things), course of dealing, course of performance, trade usage. NOTE: Spelled out numbers take precedent over Arabic numbers. For example, if a contract reads, twenty-two (20), the number would be interpreted as 22 not 20.

Conditions/Promises Basic Concepts: Conditions A fact or event, not certain to occur, unless it is non-occurrence, is excused before performance becomes due. Not the mere passage of time. If a condition is not met no liability is attached to a party. Conditional Terms: If, Provided that, on the condition that, only if, when, so that, while Breach of Condition: No liability -party can still claim quantum meruit. Example: If you use Bed Head styling products, you will NOT get paid. = no liability -conditions MUST be clear because of risk of forfeiture. If not clear, the courts will err on the side of promise. (they will assume its a promise, not a condition) Promises A manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promise in understanding that a commitment has been made. Breach of Promise = Liability Example: I will cut your hair and I promise to use Paul Mitchell styling products. If I do not use Paul Mitchell styling products, you will still have to pay me, although you may deduct damages for my failure to use Paul Mitchell products.

Promissory Conditions Promissory Conditions have two steps: 1.) create a condition precedent 2.) promises that that condition will occur What is the consequence of that fact or event not occurring? 1.) the duty is not activated 2.) you are liable for the breach of the promise that it will occur Example: If I make a briefcase, THEN, you have to pay $400 and I promise to make the briefcase. Briefcase isnt made, and one for $600 is purchased instead. Party can sue for the extra $200 they had to pay for a different briefcase. Unconditional Promise Promise not subject to a condition Example: I promise to sell you my car for $400. Conditions Precedent and Conditions Subsequent A condition can have one of two effects 1.) It could activate a duty 2.) It might discharge a duty Conditions Precedent: a condition (fact or event other than the mere passage of time) that activates the duty or promise. Activate: before that act or event occurs, you have no obligation to perform Example: You must file a claim with the insurance company within 10 days of an incident Without the 10 day notice, the insurance company has no duty to pay Conditions Subsequent discharge a duty Example: If you do not complete your insurance claim within one year of filing, the insurance company has no duty to pay. Note: Conditions precedent and subsequent have nothing to do with when the fact or event occurs. They are descriptive of the effect of the duty. Concurrent Conditions: Nothing to do with the fact or event. They involve a bilateral contract (2 promises) in which the parties have not ordered performance. Instead, the promises are simultaneous (we dont know who is supposed to go first.)

Example: I will sell you my car for $400..I promise to buy your car for $400. Expressed Conditions v Constructive Conditions Expressed Conditions: Conditions which the parties have put in their contract either by words or conduct. Constructive Condition: Court imposed condition. A condition the court will read into the contract. We will only consider the constructive condition to order performance. The court will order performance based on whose performance takes the longest.

Types of Expressed Conditions 1. Progress Payments (a.k.a. Installment contract) Usually found in a construction contract. Normally, a contractor has to perform 100% in order to be paid UNLESS the parties agree to chop up the duty into pieces. (I pay you some, you work some, I pay you some.etc) Must be expressed in the contract. 2. Conditions of Satisfaction Personal Satisfaction: Personal, based on taste, requires judgment, not capable of objective evaluation. It doesnt matter what the majority opinion is, or what everyone else thinks. Here the standard is GOOD FAITH. (You assume good faith unless the facts say bad faith.) Need clear language. Conditions of Commercial Satisfaction: Commercial, business, utility. Can be judged objectively. Here, the standard is one of the reasonable person. Exception: A special standard for architects, they will get the good faith standard. 3. Pay When/If Paid If language is not clear, court will likely find a promise not a condition precedent because of the drastic effect it would have on a subcontractor or on somebody who cannot control the risk. The risk of non-payment should not be shifted to someone who cannot evaluate the risk. You can make pay when paid a condition as long as you use very clear language. Pay when paid Indicates WHEN I will pay you. Marks the time of payment. Example: I will pay you on Friday when I get my paycheck. If you dont get your paycheck on Friday you still have to pay by Friday anyway. Pay if I get paid Indicates that I will ONLY pay IF I get paid.

Example: I will pay you on Friday if I get my paycheck. 4. Time is of the Essence Must be clear if the intent is not to pay unless a specific time period for performance is met. This could have a very drastic effect. MUST USE CLEAR LANGUAGE. Absent clear language, the court will find a promise. You have to say, by May 1st, time is of the essence, or by May 1st or you dont get paid. Note: Inclusion of a penalty clause in a contract would say that time is not of the essence because you have said I will go ahead and pay you, but I am going to take off some damages. How do we order performance? How is it determined who goes first? 1. Expressed Condition: parties put expressed conditions into the contract itself 2. The concept of TENDER: One party tenders their performance, therefore the other party has to perform. Tender Rules Common Law / Services For a bilateral contract, our exchange of promises should be performed simultaneously, UNLESS the language indicates to the contrary or circumstances indicate to the contrary. Where one partys performance takes longer and we cant have a simultaneous performance, the party who takes longer will go first. Example: Bill our lyricist has to write all the lyrics before he gets paid. Writing the lyrics takes longer than paying. UCC / Goods The time for shipment or delivery shall be a reasonable time. BUT, when both parties do nothing, their course of conduct may be seen as enlarging the reasonable time for tender or demand for performance. Note: Contract can be terminated by abandonment. If I tender the good, you are supposed to pay me Unless we otherwise agreed, if I tender the money, you are supposed to deliver the goods. For delivery in single lots: Unless otherwise agreed, all goods must be tendered in a single delivery and payment is due on such tender.

Exception: If it wasnt commercially feasible. Allows you to split up the delivery, but you dont get paid until delivery is complete. Example: You order 10 truckloads of coal and I only have 5 trucks.

Doctrine of Substantial Performance 1. Make sure you are dealing with a constructive condition. This doctrine NEVER applies to express conditions. Example: Progress payments were not specified in the contract, therefore the contractor must complete performance prior to payment. 2. Is the performance essentially complete? 3. Was there a willful or fraudulent act that would render the Doctrine of Substantial Performance inapplicable? 4. Was the breach material or trivial? Apply Cardozos 4 factor test: 1. The purpose to be served (what is the main goal?) 2. The desire for gratification (what was the specific request?) 3. The excuse for deviation 4. The cruelty of enforced adherence Then decide: Material breach: If the breach is found to be material court will not apply Substantial Performance Test. Go for Quantum Meruit, or seek to have the constructive condition excused. Trivial breach: If the breach is found to be trivial then enforce contract and deduct damages for failure to complete 100% of performance. Note: A contractor who tenders performance so deficient that it can only be remedied by completely redoing the work for which the contract was established has NOT substantially performed his duties. Note: Cannot use Doctrine of Substantial Performance if the contract says payment upon completion.

The Perfect Tender Rule If the goods fail in ANY respect to conform to the contract the buyer has 3 choices: 1. Accept the goods 2. Reject the goods 3. Accept some, reject the rest 3 Exceptions to the Perfect Tender Rule 1. Where the contract itself says, I will take less than 100% 2. Installment contracts The buyer may reject any nonconforming installment if the nonconformity substantially impairs that particular installment. You can reject that installment if the nonconformity substantially impairs that installment, but you cant reject the whole contract. Just that one installment. You must, however, take that one installment if the nonconformity can be cured. If the nonconformity of that one installment so affects the whole contract, i.e. it substantially impairs the entire contract then you can reject the entire contract. 3. Right to Cure 2 Parts: 1. Where the time of performance has not yet passed. Seller must be given the opportunity to cure any nonconformity. (Even if the deadline is the next day) 2. Where the seller has reasonable grounds to believe that the nonconforming good was acceptable. The seller then has a reasonable time to cure even if the time for performance has past. Exam fact pattern will be some kind of electronic device newer than what was ordered. Demand for Adequate Assurance: Where you have reasonable grounds for insecurity you can demand, in writing, adequate assurances. You can suspend performance, if commercially reasonable, until you get those adequate assurances. The other party will have a reasonable time to respond, not to exceed 30 days. If they do not respond = repudiation. You can sue right away and suspend your performance.

Accepting Goods v Revoking Goods Acceptance If you have accepted the good, you cannot use the perfect tender rule. Merely taking possession or paying for goods is NOT acceptance of goods. You must have a reasonable time to inspect the goods. If your inspection reveals a nonconformity, then you must inform the seller and give opportunity to cure. If buyer inspects the goods and says they are okay then they have accepted. If buyer fails to make an effective rejection, they have accepted If buyer does any act inconsistent with sellers ownership, they have accepted Revocation The nonconformity must substantially impair the value to the buyer, AND, (one of two things) 1. the seller said they would cure and did not, OR 2. the acceptance was induced because it was difficult to discover the nonconformity This revocation must occur within a reasonable period of time AND the buyer needs to notify If you are able to revoke your acceptance you can use the perfect tender rule again and you can reject the goods. Hybrid Transactions If there is a good, a service, and only 1 price, you look at the most important part of the contract to decide whether to sue under common law or the UCC. Examples: 1. I sell you my blue Honda Civic for $15,000. I agree to also wash the car 5 times whenever you choose. Two months after the sale, there is a dispute regarding when I will wash your car. Ask: What is the most important, or predominate, part of the contract? The car or the car wash? Answer: The car. You will sue under the UCC. 2. You and I enter into a contract where I will sell you a can of Paul Mitchell hair spray and style your hair every day for the rest of this term for $1,000. A dispute arises regarding the hair spray. What is the predominate part of the contract? The styling or the hair spray?

Answer: The styling. You will sue under common law. If there is a good, a service, and separate prices for both, you will look at what the dispute concerns. Examples: 1. I sell you my blue Honda Civic for $14,000 and agree to also wash the car 5 times whenever you choose for $1,000. Two months after the sale of the contract, there is a dispute regarding when I will wash your car. What does the dispute concern? Answer: The car wash. You will sue under Common Law 2. You and I enter into a contract where I will sell you a can of Paul Mitchell hair spray for $10,000 and style your hair every day for the rest of the term for $990. A dispute arises regarding the hair spray. What does the dispute concern? Answer: The hair spray. You will sue under the UCC Excuse Doctrines Party seeks to excuse a condition of the contract and continue on with the contract. 1. Prevention and Cooperation A condition may be excused if the other party has prevented you from being able to comply with the condition (either by prevention or failure to cooperate) 2. Extreme or Disproportionate Forfeiture You may excuse a condition if: 1. Extreme or disproportionate forfeiture will result if the condition is enforced, and 2. The fact or event is not material or essential to the contract 3. Public Policy A condition that is against public policy will be excused Supreme Court generally sides with corporations 4. Waiver/Estoppel Waiver: A voluntary surrender, a relinquishment to a known right or benefit.

Reinstatement: A waived clause can be reinstated by the giving of adequate and fair notice of an intention to do so, unless reinstatement would be unconscionable. Estoppel: A party being precluded from insisting on something because their conduct has misled the other party and caused the other party to rely. (Requires reliance) 5. Impossibility An unforeseen or unexpected event that may excuse performance. 6. Anticipatory Repudiation v Prospective Inability to Perform Both doctrines excuse the condition of having to be ready, willing, and able to perform. Prospective Inability to Perform

Exam essay will start here, I may not perform or rumors that you cant perform You must WAIT for the time of performance (law day) to sue A party CANNOT mitigate damages because they are forced to demand assurances

UCC

Demand assurances in WRITING. A failure to reply to a justified demand with a reasonable time not to exceed 30 days will result in Repudiation.

Restatement Demand does NOT have to be in writing. Party has a reasonable time to provide assurance. Reasonable time is a question of fact for the jury. If you are in breach you may not demand assurances If you have reasonable ground for insecurity and you do not exercise your right to demand assurances, this right will lapse. Demand for assurances must be seasonably made, or they will be lost. If you demand more than adequate assurances, you could be in breach.

Exam essay fact pattern will say No response move on to Anticipatory Repudiation

Anticipatory Repudiation

I will not perform 100% clear/no doubt that the party will not perform A party can sue immediately, unless all that is left on the contract is the payment of money. In that case, they have to wait until the time of performance. A party MUST attempt to minimize damages A party can withdraw their repudiation if the other party hasnt relied on it. Third Party Beneficiaries

Steps to Follow in Third Party Beneficiary (TPB) Situations

1. Identify the players Third Party (TP)______________ (On exam, this will be the person who is suing) Promisor (Pr)________________ Promisee (Pee)______________ 2. Determine whether the TP is a TPB Ask: Did the Pee intend to provide a benefit to the TP? If yes, TPB Incidental beneficiary = no TPB rights 3. Is the promisors promise enforceable? Look to see if the promise was supported by consideration, was there a condition precedent, do any of the avoidance doctrines apply? (This wont be a big deal on exam, just look for consideration) If yes, go to question 4 If no, there is no K, and the TPB can have no rights 4. Is TPB a creditor/debt beneficiary or a donee/gift beneficiary? This tells us who they can sue, and how they vest. Ask: Is the TPB a creditor of the Pee? (Does the Pee owe some kind of legal obligation to TPB?) If yes, TPB = c-b debt c-b can sue promisor OR promisee If no, TPB = d-b debt d-b can only sue promisor 5. When do the rights of a TPB vest? If vested, the TPB rights cannot be altered or taken away Creditor beneficiarys rights vest once they rely on the promise = RELIANCE Donee beneficiarys rights vest when the party knows about the promise = KNOWLEDGE Novation: Clear release by both parties. This releases the promisee from liability, but the promisor is still on the hook. The Promisors Defenses Restatement:

(1) A promise creates no duty to a beneficiary unless a contract is formed between the promisor and the promisee; and if a contract is voidable or unenforceable at the time of its formation the right of any beneficiary is subject to the infirmity. (2) If a contract ceases to be binding in whole or in part because of impracticality, public policy, nonoccurrence of a condition, or present or prospective failure of performance, the right of any beneficiary is to that extent discharged or modified. (3) Except as stated in subsections (1) and (2) and in section 311 or as provided by the contract, the right of any beneficiary against the promisor is not subject to the promisors claims or defenses against the promisee or the promisees claims or defenses against the beneficiary. (4) A beneficiarys right against the promisor is subject to any claim or defense arising from his own conduct or agreement. Bottom Line: All you need to know is that if there is a problem with the original contract between the promisor and promisee that makes the contract unenforceable, then that can be used as a defense if TPB sues promisor. Vesting When do the rights of a TPB vest? Hybrid Test: Creditor beneficiarys rights vest on reliance Donee beneficiarys rights vest when they know/assent Can the promisor or promisee change the promise? Not if the TPBs rights have vested Do TBEs have to be identified at the time of the contract? No, provided the third party is identifiable at the time the contract is being enforced. **There are no vested rights until the party is identified. The contract can be modified until then. PROBLEM 181 pg 851 (hinted that she may use this fact pattern on exam.) Promisor: Henry Work Promisee: John Good TBE: ABC College *ABC College was a donee beneficiary they had knowledge so there was vesting. Henry and John therefore cannot change the terms of the agreement by lowering the rental price. Mortgages Assumption of mortgage / Taking subject to a mortgage 1. Assumption of mortgage There is a 3rd party contract - Creates a TBE. Ex: I agree to take responsibility for (assume) payments of your mortgage. The bank can sue the buyer who assumes a mortgage, as well as the original owner UNLESS there has been a novation. Novation: Clear release by both parties. Note: Assumption does NOT equal novationwatch for this on final exam. 2. Taking Subject to a Mortgage -No 3rd party contract you are not assuming any part of the mortgage. You are saying I know the mortgage is out there, but I want nothing to do with it. -Bank CANNOT sue you for the mortgage, but if other party doesnt make the mortgage payments, bank can seize the property and you will lose the house and all the payments you have made on it.

Assignments B owes A $1000 on an enforceable obligation, and A assigns the obligation to C. (A is assigning the RIGHT to the $1000 to C) Obligor: owes obligation Assignor: person to whom they owe the obligation & who transfers it Assignee: person to whom the obligation has been transferred. Has to do with assigning a right (in this class, the right will always be $) General Rule: Rights are freely assignable unless: 1.) there is an anti-assignment clause On exam, say, the general rule is that rights are freely assignable unless there is an antiassignment clause. The facts do not say that an anti-assignment clause existed 2.) too personal Materially changes the duty, or increases the burden or risk On exam, fact pattern will be similar to Cooley owes me $100. I assign the right to my sister in France who requires Euros. This materially changes the duty. Next, look for notice: Once the assignee notifies the obligor of the assignment, the obligor must pay the money to the assignee. If the obligor HAD NOTICE AND STILL PAYS THE ASSIGNOR, the obligor must also pay the assignee. (double payment.) It doesnt matter so much how notice is given, just that there was notice This will probably be M.C. on exam Once A assigns the right, A has no further interest in the right. As interest has been transferred to C. Delegations A owes a duty to B (to paint Bs house) and A delegates the duty to C. POD: Person owed the duty Delegator: original party to perform duty who will be transferring duty Delegatee: new party to perform duty Question: May the Delegator (A) delegate the duty to perform to the Delegatee (C)? Answer: YES, if: There is no anti-delegation clause, and If the duty is commercial, performance is capable of objective evaluation NO, if: The duty is personal, aesthetic, performance is not capable of objective evaluation. -unless POD waives non-delegability/ grants novation Performance by the Delegatee (C) will be the performance of the Delegator (A), but non-performance by Delegatee (C) is a breach by the Delegator (A). There is no way for the Delegator (A) to divest himself of the duty to perform without the consent of the person to whom the duty is owed. (here, B). UNLESS

A novation occurs (B) agrees to substitute the Delegatee (C) in place of the Delegator (A) and releases the Delegator (A) from liability. Very clear, on exam it is a waiver unless party clearly SAYS the other party is released. B can demand assurances from either A or C.

An Effective Delegation ALWAYS Creates a TPB Contract A owes B a duty. A delegates the duty to C. A = delegator C = delegatee B = person owed duty (POD) To make the delegation effective, C must promise A to perform the duty owed to B. Cs promise to A creates a TPB contract. Promise can be implied. Promise is NOT implied in land sale contracts

The TPB is always a creditor beneficiary contract and hence both delegator (A) and delegate (C) are liable to B, TPB (Unless there is a novation.) Gratuitous Assignments Restatement (1) A gratuitous assignment is irrevocable if (a) it is made in writing (or signed under seal) & delivered or symbolically delivered (2) A gratuitous assignment is revocable and terminated by: (a) the assignors death or incapacity, or (b) by a subsequent assignment by the assignor, or (c) by notification from the assignor received by the assignee or by the obligor (3) A gratuitous gift ceases to be revocable to the extent that before the assignees right is terminated he obtains: (a) payment or satisfaction of the obligation, or (b) judgment against the obligor, or (c) a new contract of the obligor by novation (w/ consideration, not gratuitous) Assignments: When Do We Need a Writing?

If the assignment involves an interest in real property

Assignments of a transfer of an interest in an accounts receivable

When are assignments too personal? Restatement An assignment can be assigned unless it would (a) materially change the duty of the obligor or, (b) materially increase the burden or risk imposed on him by the contract or, (c) materially reduce the value to him UCC An assignment can be assigned unless it would (a) materially change the duty of the other party, or (b) increase materially the burden of risk imposed on him by the contract, or (c) impair materially the chance of obtaining return performance Partial Assignments Partial assignments are allowable but only permitted as long as they are not too personal Waiver of Defense Clause

Adding into the contract that you are giving up your right to defend Generally found to be against public policy

Setoff & Recoupment Setoff


Arises outside of the third party contract Must accrue (be ready to sue on) before notice Look to see if crazy claim happened before day of notice.

Recoupment

Arises out of the third party contract You can always use recoupment, no time limit

Hypo: Joseph Armstrong signed the usual contract with Wonder Spa. It contained the required FTC legend preserving his ability to assert defenses against assignees. The spa assigned his contract to Nightflyer Finance company, which notified Armstrong that in the future he should make payment directly to it. Two weeks later one of the instructors at the spa negligently dropped a barbell on Armstrongs foot. (a) May he subtract the doctors bills from the payment to Nightflyer?

Yes. Dropping the barbell on his foot in the gym was a foreseeable occurrence within the contract. (b) What if the sole owner of the spa was driving around town in the spas car and accidently ran over Armstrongs dog? May Armstrong subtract the value of the dog from the payments due to Nightflyer? No, this is a setoff. It occurs two weeks after notice is given and it is outside the third party contract. (c) Does your answer to this last question change if the dog were already dead before Armstrong learned of the assignment of his contract to the finance company? Yes. This is a setoff because its outside the third party contract, but it accrued before notice was given. Warranties By the Assignor (1) Unless stated otherwise in the contract, an assignor warrants to the assignee: (a) that he will do nothing to defeat or impair the value of the assignment, and that he was no knowledge of any fact which would do so (b) that the right, as assigned, exists (c) that any writing evidencing the right which is delivered to the assignee or exhibited to him to induce him to accept the assignment is genuine and what it purports to be. (2) An assignment in itself doesnt operate as a warranty that the obligor is solvent or that he will perform his obligation