CHAPTER 15: Contract Interpretation and Construction CHAPTER 16: The Parol Evidence Rule

(I combined these 2 because easier to understand and our book repeats itself on parol evidence) Interpretation what you have a dispute about in the contract. Parol Evidence Rule outside conversations, documents that are not in the contract but you agreed that they would be. Interpretation: process of discerning the meaning reasonably intended by the parties to a contract focuses on actual intent manifested by parties ORDER TO INTERPRET CONTRACT: 1. first look at express contract terms 2. look at course or performance, course of dealing, trade usage 3. look at statutory language/definitions (commonly accepted meaning in statute) Construction: process of adding contract terms by legal implication (gap filler) supplies contractual content based on public policies or general principles of law use when ambiguity and unclear term/phrase, and need to interpret that term or phrase Construing meaning/termput something that is not theresomething that is not expressly stated, but judge is putting it in there (can construe term by looking at four corners or looking at external evidence)

2 different ways to interpret written agreements: Plain meaning approach/4 Corners Contextual approach/extrinsic evidence approach (hard) approach (soft) Interpret writing in accordance with its Interpret meaning of writing based on plain meaning as understood by a what reasonable person would discern by reasonable person looking at contract itself, as well as outside circumstances Two step test: Look outside document including oral or 1. look at contract terms to determine written communications prior to if ambiguous. If not ambiguous, agreement, discussions surrounding the then end here and use terms in execution of agreement contract.

2. If ambiguous, court can admit parol (extrinsic evidence) to supplement terms. Extrinsic evidence could also be drawn from course of dealing of parties, relevant trade usages, or a course of performance under the written agreement in question Must have obligation of good faith

Must have obligation of good faith ***Need to analyze the issue under both!***

Restatement 2d Sec. 202: Rules in aid of interpretation: 1. Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight. 2. A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together. 3. Unless a different intention is manifested, a. Where language has a generally prevailing meaning, it is interpreted in accordance with that meaning; b. Technical terms and words of art are given their technical meaning when used in a transaction within their technical field. 4. Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement. 5. Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant course of performance, a course of dealing, or usage of trade. What does this mean? ORDER TO INTERPRET CONTRACT: 1. first look at express contract terms 2. look at course or performance, course of dealing, trade usage 3. look at statutory language/definitions (commonly accepted meaning in statute) Restatement 2d Sec. 203: Standards of preference in interpretation: In the interpretation of a promise or agreement or a term thereof, the following standard of performance are generally applicable: a. An interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to interpretation which leaves a part unreasonable, unlawful, or of no effect; b. Express terms are given greater weight than course of performance, course of dealing, and usage of trade, course of performance is given greater weight than

course of dealing or usage of trade, and course of dealing is given greater weight than usage of trade; c. Specific terms and exact terms are given greater weight than general language; d. Separately negotiated or added terms are given greater weight than standardized terms or other terms not separately negotiated. UCC 1-303. Course of performance, course of dealing, and usage of trade: a. Course of performance: sequence of conduct between parties to a particular transaction that exists if: 1. The agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and 2. The other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without object. What does this mean? Look at CONDUCT FOR THIS CONTRACT first b. Course of dealing: a sequence of conduct concerning pervious transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct What does this mean? Look at CONDUCT OF PREVIOUS CONTRACTS second c. Usage of trade: any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law. What does this mean? Look at INDUSTRY STANDARDS third d. Both parties have to be aware of the usage of trade e. express terms prevail over course of performance, course of dealing and usage of trade. Must be construed whenever reasonable as consistent with each other. If such a construction is unreasonable Frigaliment Importing Co. v. B.N.S. International Sales Corp. (U.S. District. NY 1960) Case about 2 companies disagreeing over the meaning of word chicken. Court used UCC 1-303. Court first looked at express terms of contract, then allowed parole (extrinsic) evidence in. looked at court of performance (buyer accepted the shipment), course of dealings and then trade usage. PAROL EVIDENCE RULE = extrinsic evidence bar (limits what you can bring in) PAROL EVIDENCE = can admit extrinsic evidence (cant have RULE following this). This is interpretation. Clarifies something (word like chicken) in contract.

Parol evidence: any evidence other than the parties written agreement that is offered by a party to prove contract terms that do not appear in the writing (can be negotiations, letters, drafts, other documents) Parol evidence rule: Serves as a general bar to bring in any agreement other than what the final writing demonstrates. If the writing was intended to be final agreement, this prevents other evidence from coming into play Hard approach: (judge serves as gatekeeper= makes the determination) 1. determines whether document is fully integrated (final writing) 2. whether evidence is admissible parol evidence cant contradict agreement or vary terms, but can supplement. considers extrinsic evidence of any term alleged by one of the parties to have been agreed to, but not reflected in the writing, to be questionable fact finder will hear parol evidence of meaning only if the court finds the written agreement to be ambiguous fully integrated: written agreement that is final, thorough and complete, parties full intentions when agreement is fully integrated, parol evidence is not admissible when writing is incomplete, evidence is often admissible to supplement gaps left in writing evidence cannot contract whats in the written agreement This is also called Traynor test: when the parties to a written contract have agreed to it as an integration, it is a complete and final embodiment of the terms. partially integrated: some terms complete, some terms not complete extrinsic evidence may be used to supplement incomplete terms but NOT if it is inconsistent with what is written. Guilford Transportation Industries v. Public Utilities Commission (Maine 2000) Contract dispute between utility and rail company about installing fiber optic cables on railroads land. Court says agreement is ambiguous and question for the jury. Court used plain meaning approach here. Rule: The interpretation of an unambiguous contract is a question of law. If the contract is ambiguous, its meaning is a question of fact for the fact finder, and extrinsic evidence can be admitted to show the intention of the parties. Court interprets language by generally prevailing meaning, according to Restatement 2d Sec. 202(3)(A). Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co. (Cal. 1968)

Dispute between gas company and contractor about replacing steam turbine. Turbine damaged during work and question about whos insurance is liable for costs. Court found plain language of contract required defendant to indemnify plaintiff for injuries to plaintiffs property. Court says all parol evidence is fair game to interpret ambiguous agreement. Rule: All credible evidence offered to prove the parties intentions should be considered. Court says the only reason relevant extrinsic evidence should be excluded is if the meaning of parties can be determined by words in contract alone. Atwater Creamery Co. v. Western National Mutual Insurance Co. (Minn. 1985). Creamerys storage building burglarized. Dispute over what insurance policy covers because no sign of forced entry, which is language in insurance policy. Question over whether to use definition of burglary that is in policy or reasonable persons definition of burglary. Rule: Doctrine of reasonable expectations: looks at objectively reasonable expectations of applicants and intended beneficiaries relies on reasonable knowledge of the literal terms and conditions, which are determined by a fact finder. used to require ambiguity in policies in order to be applied. some courts now say ambiguity is NOT needed to apply this doctrine Doctrine of unfair surprise: term that people dont expect to see unfairly included in boiler plate of contract Contra proferendum: drafter held responsible. interpretation in favor of person who is signing it. World Trade Center Properties, LLC v. Hartford Fire Insurance Co. (2d Cir. Ct. of App.) Dispute over insurance on World Trade Center after 9/11 attacks and whether word occurrence referred to total terrorist attacks or two planes hitting buildings. Court relied on extrinsic evidence of pre-binder negotiations, which was draft language. Construction of contract obligations: Gap filler: used to supplement manifested intent of parties because agreed upon terms and implications of parties conduct do not settle dispute first look at circumstances surrounding contract court may have to go beyond contract to settle dispute based on more general principles of law or public policies Restatement 2d Sec. 204: Supplying an Omitted Essential Term

When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court. Whats it mean? court applies reasonable gap filler UCC 2-311: Options and Cooperation Respecting Performance 1. An agreement for sale which is otherwise sufficiently definite (section 2-204(3)) to be a contract is not made invalid by the fact that it leaves particulars of performance to be specified by one of the parties. Any such specifications must be made in good faith and within limits set by commercial reasonableness. 2. Unless otherwise agreed, specifications relating to assortment of the goods are at the buyers option and specifications or arrangements to the shipment are at the sellers option. Whats it mean? UCC will supply price, method of payment, method of delivery and other things if parties failed to do so and intended to be bound. Indefiniteness does not kill contract. Need good faith and reasonableness Specification relating to assortments of goodsup to buyer Specification on shipment up to seller.

Family Snacks of North Carolina, Inc. v. Prepared Products Co., Inc. (U.S. App. 8th Cir. 2002) Dispute between snack maker and food distributor about pricing formula in contract. One party said contract was illusory (not binding and one person can pull out at any time). Other party believed contract was binding. Court looked at whether contract can fail for indefiniteness and said no. Rule: Restatement 2d Sec. 204: Allows to gap fill where indefinite and can still enforce contract. Court says it is clear parties intended to make contract and contract does not fail for indefiniteness. (***this is exception. Should have been UCC here because sale of goods, but state court adopted Restatement instead) UCC 2-306(1): obligation of good faith Obligation to bargain in good faith for output requirements Forbids the demand by a buyer under requirements contract to a quantity unreasonably disproportionate to any stated estimate applies only to this type of situation where the buyer requests more, as opposed to less, of the commodity in question. Indiana-American Water Co., Inc. v. Town of Seelyville (Ind. App. 1998). Dispute over towns contract to get water from specific company. Town abandons contract and digs own well after town grows. Output requirements case.

Rule: UCC 2-306: obligation to act in good faith. Court says town was acting in good faith, so no breach. Always need to operate in good faith. Usually see good faith comes in when outputs requirement or others that require gap filler to be applied.

Restatement 2d Sec. 205: Duty of Good Faith and Fair Dealing Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement. UCC 1-304: Obligation of Good Faith Every contract or duty within the UCC imposes an obligation of good faith in its performance and enforcement United Airlines, Inc. v. Good Taste, Inc. (Alaska 1999) Small catering company enters into in-flight catering company with United Air. Contact includes no-cause termination provision with 90-day written notice, which is standard in contracts in this state. United gave the company 90 day notice and terminated. Catering company claimed breach because of good faith. Courts say there was good faith, contract is NOT ambiguous, and there is no breach. Rule: Implied covenant of good faith cannot supplement clear language in a contract. Apply covenant of good faith, but only when terms are ambiguous. CAN PAROL EVIDENCE BE ADMITTED IN THESE SITUATIONS? Separate agreement -- for separate Parol evidence rule does not apply and consideration evidence is admissible Subsequent agreement entered in after Parol evidence rule does not apply contract Condition precedent evidence to show Evidence of that condition is not barred contract was subject to condition Evidence of fraud, misrepresentation, Evidence is admissible duress Evidence of prior agreement Parole evidence rule applies, cant come in --can use extrinsic evidence/parol evidence to define term in contract --cannot use extrinsic evidence to ADD new terms or contradict existing termparol evidence bar (Exception UCC has gap fillers) Restatement 2d Sec. 209: Judge looks are prior negotiations and circumstances surrounding contract to determine if parties intentions are complete and agreement is integrated. Mitchell v. Lath (NY 1928)

Buyer alleged that seller has promised to remove ugly icehouse from an adjoining property. This was not included in the written agreement, which was signed by both parties. Rule: parol evidence. Judge interpreted contract under four corners approach and found it was complete/integrated. So parol evidence rule applies, barring from permitting additional evidence. **IF IT WAS SO IMPORTANT TO THE CONTRACT, WHY WASNT IT INCLUDED? IMPORTANT COUNTER.** Masterson v. Sine (Cal. 1968) Plaintiff and his wife owned a ranch and conveyed it to defendants by a deed to secure debt. Defendants had the option to purchase property within the following 10 years. Plaintiff filed for bankruptcy and he wanted to get option to buy ranch back. Dispute over contract details. Rule: When the parties to a written contract have agreed to it as integrationa complete and final embodiment of the terms of an agreement parol evidence cannot be used to add to or vary its terms. When only part of the agreement is integrated, the same rule applies to that part, but parol evidence may be used to prove elements of the agreement not reduced to writing. To determine if the agreement is integrated, court says to look at writing itself and circumstances at the time of the writing. Restatement 2d Sec. 240(1) Permits proof of a collateral agreement if it is such an agreement as might naturally be made as a separate agreement by parties situated as were the parties to the written contract. Whats it mean? Parties may show that they entered into a side agreement as long as it does not contradict the main agreement.

Yocca v. Pittsburgh Steelers Sports, Inc. (Pa. 2004) Dispute over which seating chart applies for season tickets at new Steelers stadium. Difference between advertising brochure and actual seats after purchase. Question of whether ticket agreement was fully integrated or if brochure can be used as evidence. Court says ticket contract was integrated. Court says brochure was only an offer, not an agreement, and cannot be admitted as extrinsic evidence. Rule: Parole evidence rule: Unless fraud, accident or mistake be averred, the writing constitutes the agreement between the parties, and its terms and agreements cannot be added to nor subtracted from by parol evidence. Myskina v. Conde Nast Publications, Inc. (U.S. Dist. So. NY 2005) Dispute between Russian tennis star and GQ magazine. Tennis star was photographed nude by magazines photograph. She says he promised not to publish photos, even

though she singed release saying photos could be used for anything. Photos were published in another publication and she sued, alleging photographer breached his promise. She says she doesnt remember signing release and question of whether release was fully integrated. Court says the parol evidence rules bars admission of extrinsic evidence, including alleged oral promise. Rule: Parol evidence rule. When an agreement is not completely integrated, parol evidence may be admitted only to complete the agreement or to resolve some ambiguity. But cannot contradict terms. Test for when extrinsic evidence can be applied: 1. Determine whether the written contract is an integrated agreement 2. If it is, determine whether the language of the written contract is clear or is ambiguous; and 3. If the language is clear, apply that clear language, 4. If not clear, determine if extrinsic evidence contradicts written agreement Presumption is if it is something that would have naturally appeared in contract, then court says it would have been included and is not a collateral agreement. Collateral agreements something you would not expect to see in the contract itself, but almost essential to agreement itself. Collateral agreements treated differently than most parole evidence situations. Merger or integration clauses: Written statement in contract that says contract supersedes any prior agreements and contains the entire agreement of the parties. Best evidence of integrated agreement intended to protect agreement under parol evidence rule and encourage court not to admit any extrinsic evidence misrepresentation, fraud may cause court to look beyond merger/integration clause Parol Evidence under the UCC UCC takes a contextual, soft approach to the admissibility of parol evidence to supplement terms of a written agreement NOT rigid four-corners approach not just for ambiguity, can be used to supplement agreement itself UCC 2-202: Final Expression in a Record: Parol or Extrinsic Evidence (1) Terms with respect to which the confirmatory records of the parties agree or which are otherwise set forth in a record intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be supplemented by evidence of:

(a) Course of performance, course of dealing, or usage of trade (Sec. 1303); and (b) Consistent additional terms unless the court finds the record to have been intended also as a complete and exclusive statement of the terms of the agreement. (2) Terms in a record may be explained by evidence of course of performance, course of dealing, or usage of trade without a preliminary determination by the court that the language used is ambiguous. Whats it mean? CONTRACT IS INTEGRATED AND COMPLETE, CAN EXTRINSIC EVIDENCE COME IN? Restatement No. extrinsic evidence barred if contract integrated UCC Can bring in supplemental evidence (in this order) 1. Course of performance 2. Course of dealing 3. Trade usage

Nanakuli Paving & Rock Co. v. Shell Oil Co. (9th Cir. 1981) Plaintiff paving contractor and defendant oil company entered into asphalt requirements contract. Oil company doubled price during oil embargo and paving contractor sued, urging court to look at past dealings. Rule: UCC 2-202(2). Court looked at contract and ruled that price protection did not conflict with express price term in contract. Because there was no contradiction in terms, the court allowed extrinsic evidence to be admitted under UCC 2-202 to supplement or explain terms. Court found price protection was supported by course of performance or trade usage.

Sound Techniques, Inc. v. Hoffman (Mass. App. 2000) Professional recording studio rents space over bar. Leasing agent says noise wont be a problem. Bar does renovations recording studio says bar noise causes them to lose business and sues for breach of contract and misrepresentation. Sound alleged that Hoffmans agent induced them into signing contract based on negligent statements about bars renovations. Court says contract is integrated and plaintiff signed with merger clause, agreeing that it was not ambiguous.

Chapter 17 Misunderstanding, Mistake, and Excuse Due to Changed Circumstances

Misunderstanding: Words that are often susceptible to more than one meaning. Attaching materially different meanings to words by both parties. Example: Peerless case: Facts: Both parties assumed that peerless referred to one ship however there were two ships. Each party thought they were talking about the same ship but they actually were referring to the other ship. Rule: Where parties attach materially different meanings to their manifestations and neither party has reason to know of the meaning attached by the other, there is no manifestation of mutual assent. Konic International Corp v. Spokane Computer Services, Inc: Facts: Guy went to buy something for his boss. The store employee told the guy one price and the guy assumed he meant another price. Rule: Restatement 20 says: (1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and (a) neither knows or has reason to know the meaning attached by the other. (c ) even though the parties manifest mutual assent to the same words of agreement, there may be no contract because of a material difference of understanding as to the terms of the exchange. Three principles about the case doctrine that are generally in agreement: (1) the doctrine applies only when the parties have different understandings of their expression of agreement; (2) the doctrine does not apply when one party's understanding, because of that party's fault, is less reasonable than the other party's understanding; and (3) parol evidence is admissible to establish the facts necessary to apply the rule. Mistake: one or both parties are operating under a misapprehension of fact when they enter a contract. And though they share a common understanding of the terms of their contract, the complaining party alleges that he would not have concluded the contract but for the mistaken belief. There are three general themes of mistake:

Nature of the mistake - must relate to a fact that was in existence at the time of the contract. Cannot be a mistake in judgment or a mistaken prediction as to future events. 2. Seriousness of the mistake - must relate to something that is central to the contract, rather than a minor or peripheral matter, and it must have a significant effect on the benefits the mistaken party receives or the burdens he undertakes under the contract. 3. In order for relief to be available in cases of mistake, it must be unfair or otherwise inappropriate to allocate the risk of the mistake to the aggrieved party. TWO CATEGORIES FOR MISTAKE:
1.

MUTUAL MISTAKE: Restatement 154: A mutual mistake will be grounds for voiding a contract if: The mistake relates to facts in existence at the time of the contract The mistake is shared by both parties The mistake relates to a basic assumption on which the contract was made. The mistake has a material effect on the agreed exchange of performances. The complaining party did not bear the risk of the mistake. Example: Wood v. Boynton: Facts:Ms. Wood sold a stone to Mr. Boynton for $1.00. Both parties guessed that the stone was a topaz but disavowed any actual knowledge of the nature of the stone. When it later became clear that the stone was in fact an uncut diamond worth approximately $1000.00, Ms. Wood sought to rescind the sale. Holding/Rule:The court did not allow the rescission, saying that there was no mistake as to the identity of the thing sold. Rather at most there was a mistaken belief as to its probable value. Sherwood v. Walker Facts:The plaintiff contracted to buy a cow from the defendant for $80. Both parties were under the impression that he cow, Rose 2d of Aberlane, was barren and unable to breed. When the time for performance came the seller refused to deliver Rose to the buyer. Rose, it seemed was pregnant. Being a breeder, rather than barren, she was worth at least $750.00. Holding/Ruling:The court said rescission could be available under facts such as these, where the mistake or misapprehension of the parties went to the whole substance of the agreement, even though there was no mistake as to the identity of the creature. **The difference in these cases is that the stone itself did not change the plaintiff and def just had to diff values on the stone. In the cow case the nature of the cow changed**

Land Grantors in Henderson Union and Webster Counties, Kentucky v. United States Facts: The Government initiated condemnation proceedings shortly after the onset of World War II to establish an Army training facility, and it later closed the facility and sold the land, including profitable mineral rights of which the parties were not aware at the time of the takings. The court first held that the Government did not breach the contracts entered into with the landowners because, even if federal agents advised the landowners that they would receive a preference to repurchase their property, none of the agents had authority to make this promise. However, the contracts were void because they were based on a mutual mistake that no coal, gas, oil, and other mineral deposits existed under the condemned properties. Therefore, S. 794, 2(2), had been satisfied because the landowners were paid less than reasonable value by the Government for their land. Rule: Restatement 152: allows avoidance of a contract by the adversely affected party if a mistake is one as to a 1. Basic assumption on which the contract was made, 2. If it has a material effect on the agreed exchange of performances, 3. And if adversely affected party does not bear the risk of the mistake. The Restatement requires that a party bears the risk of a mistake when: The risk is allocated to him by agreement of the parties or He is aware at the time the contract is made that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient The risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so. Estate of Nelson v. Rice Facts: Personal representatives hired an appraiser to appraise personal property in preparation for an estate sale. The appraiser told the personal representatives that she did not appraise fine art and that, if she saw any, they would need to hire an additional appraiser. The appraiser did not report finding any fine art, and relying on her silence and her appraisal, personal representatives priced and sold plaintiff estate's personal property. Responding to a newspaper ad, defendant buyer attended the estate sale and paid the asking price of $ 60 for two oil paintings. An auction house authenticated the paintings as the work of Martin Johnson Heade, and it sold the paintings for $ 1,072,000. Defendants realized $ 911,780 from the sale. Plaintiff sued defendant, alleging the sale contract should be rescinded or reformed on grounds of mutual mistake and unconscionability. The court affirmed the grant of summary judgment to defendants. Plaintiff was a victim of its own folly, and it was reasonable for trial court to allocate to

it the burden of its mistake. While the results of the transaction may have seemed unconscionable to plaintiff in hindsight, the terms of the contract were not OUTCOME: It was reasonable for trial court to allocate to plaintiff estate the burden of its mistake. The terms of the contract for the sale of the two paintings were not unconscionable, as the transaction involved no negotiation, plaintiff dictated the terms of the contract by naming a price for each painting, and defendant paid the asking prices. RULE SAME AS ABOVE (MAKE SURE YOU KNOW THE DIFF IN THIS CASE AND THE ONE ABOVE) Cherry v. McCall Facts: Cherry, who bought a home from appellees, Brian and Rebekah McCall. After they bought the home, they discovered a walled-in room in the basement that was filled with trash, old plumbing fixtures, bathtubs, sinks, rocks, used b uilding materials, and other junk. It was contaminated with mold. Holding/Ruling: Restatement 2d Sec. 154. Three-part test to prove contract was made under mutual mistake: Mistake of fact Held mutually by the parties Which materially affects the agreed upon exchange Court said there was no mistake in fact UNILATERAL MISTAKE:

The mistake is not shared by both parties The mistake must still be material and The risk must not be borne by the mistaken party And the mistaken party must show the enforcement of the contract would be unconscionable or that the other party had reason to know of the mistake or his fault caused the mistake. 1. To establish unconscionable the mistaken party must ordinarily show not only the position he would have been in had the facts been as he believed them to be but also the position in which he finds himself as a result of the mistake. (Just because of this, doesnt mean the contract has to be voided. The other party could have still relied on his own knowledge)

Bert Allen Toyota, Inc. v. Grasz Facts: Horst Grasz had agreed to buy a 2003 Toyota Tacoma from Bert Allen Toyota. They negotiated a price where he would pay $15,017 and put down $500. He signed a contract that listed the price in four separate locations. When he went to pick up the truck, the dealership told him the computer had an error in math and he owed an additional $2,000 beyond the agreed upon price. Neither party had checked the math when they signed contract. Grasz refused to pay the higher price and sued. The

dealership refunded him his deposit and sold the truck to someone else. Court found contract was enforceable as written and that it would not be rescinded on grounds of mistake. Rule/Holding: Rule: Four-part test for rescission based on unilateral mistake: 1. Mistake was of so fundamental a character that the minds of the parties have not met 2. No gross negligence on part of the plaintiff 3. No intervening rights have accrued 4. The parties may still be placed in status quo (put them back where they were) (THIS IS A CONJUNCTIVE TEST) Drennan v. Star Paving Co., Facts: The facts in this case involved a subcontractor who submitted a bid of $7, 131.60 to do some paving work and subsequently attempted to withdraw the bid as being too low. Holding/Ruling: Where only one party is mistaken, it will take a strong showing on of unconscionability or unfairness to relive that party of the consequences of its own mistaken actions. Here the subcontractor gave the bid and the contractor accepted it. The subcontractor was the only one who made a mistake. The court concluded that the loss should fall on the mistaken party. Mistake in Expression and Reformation This type of mistake occurs when there has been a error a to expresson in recording the parties agreement. An example of this would be a typo that fails to express the parties agreement correctly. Hunt v. Twisdale Facts: Elton and Shelia Hunt bought wine inventory and equipment from their son-inlaw's mother. The Hunts had discussed with the defendant at her home about buying the store's inventory and equipment estimated at $50 - $60k in inventory in the store. The beginning inventory that the Hunts had was actually just $30,500.16. Rule/Holding: In order to relief a party on the grounds of mistake, the mistake must have been: mutual or fraudulent Material to the transaction Must not be due to the complaint's negligence Must show injury. There was a mutual mistake but there was not gross negligence on part of the plaintiff because the parties were close in friendship. Court granted winning to plaintiff (hunts). NOTES: Interpretation is misunderstanding what the terms mean. You are always allow parol evidence to clear up fraud

C. Excuse Due to Changed Circumstances: The doctrine of mistake applies to errors of fact made at the time of contracting. By contrast, the doctrines of impracticability and frustration of purpose look to events subsequent to contract formation. 1. Impracticability: You must show that it was impracticable for the party to perform. Not impossible but technically you can still do it but it is not practicable. 2. Impossibility: It is rare that you get this 3. Frustration of purpose: Frustrates the purpose of the contract. Paradine v. Jayne: after a tenant was ejected the tenant sought relief from his obligation to pay rent. The court ruled in favor of the defendant and stated that if the lessee covenant to repair a house, though it be burnt by lightning, or thrown, down by enemies, the lessee still ought to repair the house. Taylor v. Caldwell: changed the approach above! A music hall hired under a contract burned down before the time for performance. The express terms of the K made no provision excusing the owner from his obligation to furnish the hall under any circumstances. The court held that it was an implied term of the contract that the hall would still be in existence at the time performance was due. Its destruction, not caused by the fault of the owner, made the contract objectively impossible to perform and defeated this basic assumption of the contract. The owner was excused from his obligation to provide the hall and to pay damages for his failure to do so Rest. 2d 261-Discharge by supervening impracticability: 1. Where, after a contract is made 2. A partys performance is made impracticable without his fault 3. By the occurrence of an event the non-occurrence of which was a basic assumption, 4. On which the contract was made 5. His duty to render that performance is discharged, unless the language or the circumstances indicate the contrary. UCC 2-615Excuse by failure of presupposed conditions: *****(PINDER QUESTION) Except so far as a seller may have assumed a greater obligation (A) Delay in performance or nonperformance in whole or in part by a seller is not a breach of the sellers duty under a contract for sale if Performance as agreed has been made impracticable by the occurrence of a contingency The nonoccurrence of which was a basic assumption on which the contract was made or;

By compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

Ling v. Board of Trustees of Doane College Facts: The court affirmed a summary judgment for appellee college in appellant noncitizen teacher's suit for breach of contract alleging that appellee failed to give appellant a 12-month notice of nonrenewal because appellee's hiring committee did not act arbitrarily or in bad faith in determining that appellant was not more qualified than any United States worker who applied for the job, as was required for a labor certification application required to be filed in order for appellant to obtain a visa. Appellee college established a competitive recruitment and selection process, and appointed a selection committee composed of faculty members. The court held that after the contract was made, appellee's performance was made impracticable without his fault by the occurrence of an event the nonoccurrence of which was a basic assumption on which the contract was made, so its duty to render that performance was discharged. Appellee college could not possibly have known more than one year in advance that a U.S. citizen more qualified than appellant would apply for his position, and when a more qualified citizen did apply, appellee could not assert otherwise. Holding/Rule: Restatement 261 (above). There was no bad faith, therefore, contract was impracticable and discharged. Clark v. Wallace County Cooperative Equity Exchange: Facts: Appellant farmer entered into a written agreement with appellee cooperative, in which appellant agreed to sell appellee corn, to be delivered after the crop was harvested. There was a freeze, which severely damaged the corn crop. As a result, appellant's crop fell short of the amount agreed upon, and appellant delivered this lesser amount. Appellant maintained he was excused from delivering the remaining bushels because of the freeze. Appellee held the cost of the shortage out of the grain sale. Appellant brought an action to recover the amount withheld from his grain sale. The court found that appellant was not excused from performance. There was no objective impracticability since the corn to be delivered was not identified in the contract to be from specific land. Appellant could have delivered the full amount by acquiring the corn from another source. Rule/Holding: A seller will not be excused under this section if (1) the nonoccurrence of the contingency was the sellers fault; (2) the seller had reason to know of the impracticability (ie. The contingency was foreseeable); or; (3) the seller assumed the risk of the contingency. NOTES: Treatment of impracticability is the same under the Restatement and the UCC. I cant do it verses it cant be done. Foreseeability is a part of the consideration; you have a duty to provide.

Frustration of Purpose: Krell v. Henry: formulated the doctrine of frustration of purpose. Overview: Krell rented a flat to Henry on June 26-27. The flat was supposed to overlook the coronation procession of King Edward which was to take place on June 26-27. Krell and Henry entered into a contract for the use of the flat on the days in question. Henry paid a deposit. After this occurred the coronation was postponed until a later date. The court here had to decide whether Henry was liable for the remainder of the price of the rooms even though the purpose for which they were hired had fallen away. The court here held that performance would be excused where a change in circumstances following the contract defeated the mutually understood purpose of the contract. This had to be a shared assumption and NOT a private purpose of one of the parties. Rest. 2d 265: Discharge by supervening frustration: Where after a contract is made: 1. A partys principal purpose is substantially frustrated without his fault 2. By the occurrence of an event 3. The non-occurrence of which was a basic assumption on which the contract was made, 4. His remaining duties to render performance are discharged, 5. Unless the language or the circumstances indicate the contrary. UCC is silent on this issue.

7200 Scottsdale Rd. General Partners v. Kuhn Farm Machinery, Inc Facts: Appellant resort sued appellee manufacturer for breach of contract when appellee refused to hold its dealer's meeting as required in the agreement. The appellee did not want to have the meeting there because of a supposed threat of terrorism. Rule/Holding: Rest. sec. 265 (A) performance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event, which supervenes to cause an actual but not literal failure of consideration. Frustration of purpose, unlike the doctrine of impracticability, involves no true failure of performance by either party. Rest. sec. 265-(4 requirements) 1. The purpose that is frustrated must be a principle purpose of that party and must have been so to the understanding of both parties.

2. The frustration must be substantial, severe, not within the risks assumed 3. The non-occurrence of the frustrating event must have been a basic assumption. 4. Relief will not be granted if it may be inferred from either the language of the contract or the circumstances that the risk of the frustrating occurrence, or the loss caused thereby, should properly be placed on the party seeking relief The court concluded that Kuhns cancellation of the convention because of the perceived threat of terrorism was not an objectively reasonable response to an extraordinary and specific threat

Chapter 18 Conditions and Promise

(YOU SHOULD ALSO HAVE HANDOUT) Nutshell: A promise is to make something happen, while a promissory condition is a promise to make an event occur. Promise: Is a commitment to act or refrain from acting in a specified way at some time in the future. Condition: Restatement 224: Is an event, not certain to occur, which must occur, unless its non-occurrence is excused before performance under a contract becomes due. Here the parties agree when making the contract that a promised performance will not become due unless and until a particular event occurs or the condition is excused. A condition cannot be satisfied with substantial performance it is a breach. After this, you would ask if its a material breach or not. Promissory Condition: A duty (rather than a promise) to make an event occur in order to incur an obligation from the other party. Conditions Precedent: Refers to a condition which must occur before the promisors duty to perform arises. Must be proved as an element of the claim by the party alleging a breach. Example: Ashley enters into a contract to buy a pair of boots which states, Buyers duty to pay $250 is conditional on the boots arrival in the store before October 1. The arrival of the boots before October 1 is a condition precedent to Ashleys duty to pay for them. Concurrent Conditions: Where the parties are to render their performances simultaneously---each for the other---. Each partys performance is a condition of the others and must be performed at the same time.

Example: Giuliana agrees to sell and Sasha agrees to buy Giulianas horse, Diego, on Saturday for $10,000. Unless the parties agree otherwise, delivery of Diego and payment of $10,000 are concurrent conditions. This means that if Sasha fails to tender at the appointed time on Saturday, Giulina must be ready, willing and able to tender delivery and vice versa. Conditions Subsequent: An event which discharges or extinguishes a duty of performance that has arisen. Must be proved as a basis for excuse by the party denying a breach. Example: Myra buys homeowner insurance under a policy which provides that no recovery can be had if suit is not brought on the policy within 12 months after a loss. Myra pays her monthly premiums. Myra dryer caught fire and damages her property. If Myra fails to bring her claim within the specified period, then the insurance companys duty to pay for her loss under the policy is discharged. Myras failure to commence the action within the prescribed time is the condition subsequent which extinguishes the insurance companys duty to perform which became due when the loss was suffered. Expressed Conditions: Are created by agreement of the parties and usually can be recognized by the use of such contract language as: if, on condition that, provided that, in the event that, and subject to. Implied Conditions: At times where the language of the contract is not that clear but the existence of a condition can still be found by interpreting the meaning of the contract or by drawing an inference as a matter of law. Condition is not expressly stated but can be inferred by the language of the document. (implied in fact) Construed Conditions: Even where evidence of parties intent not clear, court concludes that one partys promise was a condition of the promise of another (implied in law). Pure and Promissory Conditions- I am waiting on Pinder to respond and simplify this for me.**If you understand please assist** Thanks Koch v. Construction Technology, Inc Facts: CTI was general contract on construction project for Memphis Housing Authority (MHA). CTI subcontracted painting to Koch. The contract included a payment clause that said partial payments were subject to all applicable provisions of the contract shall be made when and as payments are received by the contractor. Also said subcontractor may be required as condition precedent to any payment to furnish evidence satisfactory to the contractor that all payrolls, material bills and other indebtedness to project have

be. Koch completed all the work and CTI paid him $148,110, which was $39,650 less than what he was due from contract CTI refused to pay Koch this remainder, arguing that MHAs payment to CTI was a condition precedent to CTIs obligation to pay Koch. MHA had not paid CTI in full. Koch sued CTI. Rule/Holding: Refers to a condition which must occur before the promisors duty to perform arises. Court says that the parties clearly knew how to write a condition precedent in contract and that this statement was not clear and unambiguous like rest of contract. This means that those terms are not considered a condition precedent. Oppenheimer and co. v. Oppenheim, Appel, Dixon and co. Facts: the plaintiff had the 33rd floor of One New York Plaza leased. It moved to another location and sought a subtenant for the floor at One New York plaza. Dixon and Co. occupied the 29th floor and agreed to sub lease the 33rd from plaintiff. The plaintiff was required to provide the defendant with the prime landlords written notice of confirmation, substantially to the effect that defendant is a subtenant of the premises reasonably acceptable to Prime landlord. If written notice of confirmation was not obtained by a certain date the letter agreement and the sublease was void. Rule: Express conditions must be literally performed, whereas constructive conditions, which ordinarily arise from language of promise, are subject to the precept that substantial compliance is sufficient. Rest. 2d 237If the parties have made an event a condition of their agreement, there is not mitigating standard of materiality or substantiality applicable to the non-occurrence of that event. The court reasoned that the letter agreement provides in the clearest language that the parties did not intend to form a contract unless and until defendant received written notice of the prime landlords consent. Jacob & Youngs, Inc. v. Kent, 129 N.E. 889 (NY App.1921 Facts: The Plaintiff, Jacob & Youngs, Inc. (Plaintiff), built a country house for the Defendant, Kent (Defendant). The Plaintiff brought suit to recover the balance due from the Defendant. However, after the Defendant occupied the dwelling, he noticed that the pipe used for the plumbing was not Reading pipe, the brand specified in the contract. The pipe used was of similar quality, but the Defendant directed the Plaintiff to correct the defect. The defect could only be repaired at a substantial expense, as it would require demolition of substantial parts of the home. In the lower court, the Plaintiff was not permitted to present evidence stating that the pipe used was essentially the same thing as that specified in the contract. Rule/Holding. Where a contract has been substantially performed and the cost of replacement would be grossly out of proportion to the difference in value, the correct measure of damages is the difference in value. The court found that because there was a mere oversight the cost to repair the defect would be grossly out of proportion to the difference in property value resulting from

the defect. Therefore, the proper measure of damages was the difference in value caused by the error. CONDITIONS OF SATISFACTION Mattei v. Hopper Facts: The buyer bought some land and with the intention of developing it for a shopping center if such project appeared feasible. Because the buyer did not want the land if it could not build the center. They added in a provision to the contract subject to the buyers real estate agent obtaining leases satisfactory to the purchase. The buyer did obtain the leases he wanted and wanted to go through with the contract. The seller reneged. The buyer sued for damages and the seller defended herself saying the contract was illusory because the buyer had the sole discretion. Rule/Holding: The buyers promise was not illusory because his discretion was not absolute or unfettered. Even though the contract did not express this, it was implied that satisfaction must be measured by either the subjective good faith standard, or an objective standard based on reasonable commercial standards. The court decided to go with the reasonable standard because the commercial standard had too many factors. Incomm, Inc v. Thermo-Spa, Inc. Facts: Thermo spa a spa manufacturer entered into a contract with Incomm an advertising agency, for the production of a brochure advertising its spas. The contract said nothing about Thermo Spa's payment being conditional on its approval of the final product. It contained no express condition of satisfaction. Over the next weeks the parties put a lot of work in to the broschures. Despite all of the effort, Thermo Spa disliked the end product and terminated the contract. Thermo Spa hired another agency to complete the brochure. The version that was ultimately produced incorporated much of the text and some of the graphics developed in the collaboration under the contract with Incomm. Rule/Holding :The court characterized the brochure as a work of art. As such approval would usually involve aesthetiec factors and personal taste. In the absence of very clear language that the work would be subject to Thermo Spa's actual satisfaction, the court refused to imply such a term. A condition of satisfaction based on good faith judgment alone would be too much subject to Thermo Spa individual taste. The court conceded that it might be justifiable to imply a condition of reasonable satisfaction. Excuse of a condition: 1. Waiver: is a knowing and voluntary abandonment of a right. It may be made expressly or by implication from words or conduct 2. Estoppel: operates in this context where the beneficiary of a condition indicates by words or conduct that he will perform the contingent promise despite nonfulfillment of the condition. (detrimental reliance)

3. Obstructive or uncooperative conduct: where a promisor prevents fulfillment of a condition in breach of the duty not to hinder or impede its concurrence. 4. Unfair forfeiture (rarely used): enforcement of a condition would result in undue and unfair hardship to the party to whom the performance is due. Mercedes Benz Credit Co v. Morgan and Gould v. Artisoft, Inc WAIVER Facts: Involved the repossession of a Porsche following the default of the buyer, who bought the Porsche on credit in 1990. Mercedes financed the purchase and had a security interest in the car, which gave Mercedes the right to take possession of the car if Morgan defaulted on his payments. Under the purchase agreement, Morgan was obliged to pay 48 monthly installments of $253.37 beginning on March 1, 1990. Morgan made monthly payments over the next 14 months, but all except one were late. Some payments were a few days late, and some were as much as a full month late. Mercedes periodically contacted Morgan about his late payment but it always accepted the late payments and never told him that it intended in the future to strictly enforce its right under the contract. In March 1991 Mercedes repossessed the car and Morgan sued Mercedes for conversion. Holding: The jury awarded damages to Morgan, and the verdict was affirmed by supreme court. The court acknowledged that Morgan had defaulted in his payments and that Mercedes would have had the right under the agreement to repossess the car. However, because it had repeatedly accepted late payments, Mercedes had waived its right to repossess' merely because a payment was overdue. Mercedes could at any time have retracted its wavier and reinstated its right to repossess for late payment, but to do so, it had to give Morgan notice that he would have to comply strictly with the payment terms in future. Because it never gave such notice, its repossession was wrongful and a conversion. Gould V. Artisoft, Inc (Estoppel) Facts: Gould was employed by Artisoft in January 1991 and worked in the companys Illinois office. In July 1991, Artisoft offered Gould the position of director of sales, which would require him to move to Arizona. Gould accepted, and the parties entered into a written contract. As part of his compensation under the contract, Gould was to receive 50 shares of Artisoft stock. The contract provided, as a condition of employment, Gould will be required to sign the enclosed non disclosure and non competition agreement. However, Artisoft did not enclose the agreement and never gave it to Gould for signature. Gould was terminated on August 7, just two weeks after the employment contract was signed. At that time he had not yet moved to Arizona to take up his position, but he had begun to make arrangements to relocate. Holding: Gould sued and the trial court dismissed Goulds suit because Gould failed to execute the docs. The appeal court overturned because it was up to Artisoft to provide Gould with the docs first. Gould had no obligation to take the initiative and tender the signed agreement himself.

Sullivan v Bullock(OBSTRUCTIVE OR UNCOOPERATIVE CONDUCT) Facts: Sullivan hired Bullock to remodel her kitchen, hallway, utility room, bathroom and sewing room. No design sketches were agreed upon, communications were less than adequate concerning the final product. The work was not begun, or completed on time. Pl assented to the delays. The work performed was sometimes below the industry standard, not as Pl requested, and was not performed to her satisfaction. PL stated on a certain day, in her absence, that no workmen be present in the home. One workman entered through a window anyway. Pl told the Df to remove his crew from the premises. Rule/Holding: Non-performance under the contract is excused if the other party prevented the performance. To excuse a partys nonperformance the conduct of the party preventing performance must be wrongful and in excess of their legal rights. The act of prevention must have been unreasonable and outside the contemplation of the parties as expressed in the K. When Pl denied access she acted in a manner that was outside the contemplation of the K or the parties when they executed the K. J.N.A. Realty Corp. v. Cross Bay Chelsea(Unfair Forfeiture)Facts: Cross Bay picked up JNA's lease in order to open their business in the space. They extended the current lease of 10 years to 24 years in order to ensure that the business could stay in the spot for the next upcoming years. In the contract, there was a stipulation that it have to renew the lease six months prior to the end of the lease. Cross Bay in their error, failed to notify their intent to renew at the six month marker and when they realized it 2 months before the lease expired JNA refused to accept the renewal. Rule/Holding: Courts ruled that they had to meet certain requirements and it was likely they would meet them. 1. Must show that it had made valuable improvements to the property 2. Failure was an honest and inadvertent accident 3. Other party was not harmed in any way. Courts ruled that it met the first two but the fact finder would have to determine the last one. Court found for Cross Bay believing that JNA didn't act in good faith because they wanted Cross Bay to default on their renewal.

Chapter 19 - Material Breach, Substantial Performance and Anticipatory Repudiation

A. The Distinction Between Material and Non-Material Breach Material Breach Where a breach is so serious that it allows the other party to decline his performance, terminate the contract, and sue for full expectation damages, it is called a material and total breach.

A Partial breach is where the breach is not of this gravity The performance of the breaching party, even though it falls short of what is required by the contract is called substantial performance.

Substantial Performance Promisee must tender her own performance but can seek damages for any loss suffered as a consequence of the promisors defective performance. Have to use facts in order to determine if the breach is material or not. It is still a breach that gives rise to a claim of damages for deficient performance. Material = refers to a breach that justifies suspension of performance Total = describes a breach that justifies termination of the contract. Immaterial = where the defect in performance is not so great as to relieve the injured party of its own performance due under the contract but may allow a claim for partial breach. *If the injured party suspends its own performance in response to an immaterial breach, then that party may itself be committing a breach. Total and Partial Breach and the Concept of Cure Restatement 241 It is possible to avoid a total and material breach by rectifying even a serious defect in performance before the performance gets to the point of becoming a total breach. In Restatement Second 242, it identifies the circumstances to consider in determining whether there is still time to cure a particular failure or whether the other partys duties may be discharged. (We did not discuss this in class.) What you need to know is that a person is able to cure the contract before the contract due date is presented. If they cure it before, no damages, if they cure it afterwards, they breached the contract. Worcester Heritage Society, Inc. v. Trussell, 577 N.E.2d 1009 (1991) Facts: Worcester Heritage Society, which will be referenced from this point as Society, sold a uninhabitable, dilapidated house to Trussell for him to repair the house. They sold the house for $20,100 and Trussell agreed to abide by the historic preservation restriction and do a complete restoration on the house. The terms of the contract outlined that the exterior would be completed in a year and the interior had no time stipulations. It also included that if Trussell failed to comply with the terms of the contract, the Society had the right to engage workers to complete the exterior restoration at Trussell's expense. Trussell illustrated his financial capacity to perform the work however, about a year and a half after the transfer, Trussell lost his job and the work on the house slowed down. The society sued for rescission in 1986 but then agreed by way of a stipulation, to stay its hand and the case wasn't tried til 1989.

Rule/Reasoning: In the absence of fraud, nothing less than conduct that amounts to an abrogation of the contract, or that goes to the essence of it, or takes away its foundation, can be made a ground for rescission of it by the other party. The Court of Appeals agreed with the lower court, that Trussell's action had not amounted to repudiation of the contract. Though the time limit had been greatly exceeded, the court argues that it may not have been realistic to begin with. The courts also noted that if they ordered a rescission, Trussell's sweat equity would be lost, and he would unjustly removed from that equity. Remedies: Expectation damages, rescission The Usual Measure of Relief for Substantial Performance Severity of Remedy Material and Total Breach Victim of breach may terminate the contract and refuse to render her own performance. Can claim expectation damages from the breacher based on the difference between the contract price and the value of the breached performance. Or instead of claiming damages, can seek rescission of the contract and restitution. Major difference is the additional cost of having the performance done by someone else. Lyon v. Belosky Construction, Inc. Facts: Mary Lyon and her sister hired Belosky Construction to build them a custom home in the City of Elmira. Also, upon the advice of the defendant, they hired a professional engineer to oversee the construction and do periodic inspections. Construction began in Nov. 1993. In April 1994, plaintiff became aware of a problem with the dormer. It was removed and rebuilt. However, the plaintiffs found the rebuilt dormer to be unsatisfactory and directed Belosky to remove it. They completed the house minus the interior and exterior of the main entrance. When the plaintiffs moved into the home, they learned that the roof was not centered over the living room as represented in the drawings. Therefore, the plaintiffs commenced an action against the defendants. Rule/Reasoning: General rule, the difference between the amount due on the contract and the amount necessary to properly complete the job or to replace the defective construction, whichever is appropriate. Based on the evidence presented, the defect was substantial. Because the plaintiffs did not get the benefit of their bargain, requiring the defendants to remedy the problem would not, under these circumstances, result in Substantial Performance Cannot terminate; but can offset final price based on damages to rectify the work (Cost to rectify the error)

unreasonable economic waste. Thus ,they agreed with the Supreme court's ruling in using appropriate measure of damages. The Recovery of the Breaching Party: Unjust Enrichment or Recovery Under the Contract Even though normally a breaching party would not recover, there is a way to structure a contract that allows the breacher to argue that it can be divided into self-contained units so that a breach relating to some of the units is isolated and confined to those units and does not affect other aspects of the contract. However, it can only be made where it is consistent with the apparent intent of the parties, as revealed in the structure of the contract. ***The interpretation of the contract as divisible is justified only if the reasonable expectations of the parties would not be defeated by breaking down the contract into independent, self-standing component.*** DEFINIITON OF DIVISIBILITY Based on fairness and desire to avoid forfeiture. A contract is divisible if the performances to be exchanged can be divided into corresponding pairs of part performances so that the parts of each pair are properly regarded as agreed equivalents. Standard determining whether performances can be considered agreed equivalents is flexible and similar to that of materiality under Restatement Second 237. Carrig v. Gilbert-Varker Corp. The developer of a sub-divsion contracted with a builder for the construction of 35 houses. After building 20, the builder repudiated the contract and refused to build the remaining 15. The 20 were built properly and to their specifications. Court awarded developer for expectations damages for the remaining 15 houses. Courts ruled that the failure to build the remaining houses was a material breach. But the courts did find the contract was divisible. Courts stated that each house was held as an independent unit, on its own lot. The pricing and scheduling was for each particular lot, not the total amount of houses. Found divisibility based on party's intent based on the language and structure of the contract, its purpose, and the circumstances of its execution and performance. Menorah Chapels at Millburn v. Needle (Example of not receiving the benefit of the bargain) Facts: The defendant, Emanuel Needle, father-in-law passed and he made funeral arrangements with Menorah Chapels of Millburn. He selected the funeral home because they advertised "Jewish Funeral Chapel." Because the decedent was an orthodox Jew he wanted a watcher or shomerim to conduct a continual vigil until the time of his burial. The contract listed that he would have a ritual washing and watcher

and the usual services. The shomerim would take 6 shifts to complete and was an additional $900. The Chapel supplied the shomerim but because of the Sabbath, about three shifts were not done. No one informed Needle of the failure to provide the service until shortly before the funeral service was to commence and after the body had been left alone in a fashion contrary to orthodox Jewish customs and belief. Rule /Reasoning: Only where a contract is severable into different transactions may one of those separate transactions be avoided. Believed that the contract was not severable and therefore, remanded back for trial for the jury to determine whether the full provision of shomerim constituted a material condition of the contract. Stated that if the jury finds that the Chapel committed a material breach, the Chapel can still recovery of the value of its remaining services on a quantum meruit basis. But the damages cannot be measured solely by referencing a price sheet. Court noted that technically, Needle's didn't suffer a financial loss, he just suffered emotional distress which is normally not claimable for breach of contract. However, funeral contracts have been the exception. Therefore, it is likely he that emotional distress could have been contemplated and should be compensable. C. Breach and Substantial Performance Under UCC Article 2: The Perfect Tender Rule In a contract for sale of goods, a seller breaches when she Seller breaches when she repudiates,

Buyer breaches when she wrongfully rejects goods

fails to deliver, or tenders non-conforming goods.

Wrongfully revokes acceptance of goods Fails to make a payment when due Or repudiates with respect to a part or the whole contract

1. Perfect Tender Under Article 2 Here, you must perform to the letter of the contract, substantial performance is not enough. Product is delivered, buyer inspects the goods; if tender of delivery conforms to contract = must accept and pay for goods. If seller breaches the contract by making a nonconforming delivery, must decided the significance of the breach. (Material, etc.) If material and incurable, the buyer would be able to reject the goods, refuse payment and claim total breach.

If breach is minor, the buyer would be confined to the remedy for substantial performance. **Drafters of the code does not adopt the common law rule in Article 2. They use the Perfect Tender rule from UCC 2-601** UCC 2-2601. Buyers Rights on Improper Delivery (Only applies to buyers, not sellers) Subject to Sections 2-504 and 2-612, and unless otherwise agreed under Sections 2-718 an d2-719, if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may a. Reject the whole; b. Accept the whole; or c. Accept any commercial unit or units and reject the rest. In plain English: if the goods or the tender of delivery fails in any way, the buyer can reject the whole, accept the whole, or accept any commercial unit or units and reject the rest.

Two limitations on the perfect tender rule: (will discuss later below) 1. Sellers right to cure 2. Substantial performance standard in installment contracts. Printing Center of Texas, Inc. v. Supermind Publishing Co., 669 S.W. 2d 779 (Tex. App. 1984) Facts: Supermind entered into a contract with Printing Center of Texas to print 5,000 copies of a book. The contract covered essential terms such as the quantity, trim size, and type of paper. Printing Center even showed Supermind a sample of the paper to be used for printing the books. According to UCC 2-313(1)(c), if the seller provides a sample to the buyer, the usual understanding is that the seller warrants that the goods will conform to the sample. Supermind paid the deposit of $2900 and later when the books were delivered, Supermind rejected the books for failing to conform with the contract. The books were gray instead of the white paper sample they had seen before, the pages were crooked and wrinkled and the pull out pages were not adequately perforated. Supermind then sued for the refund of its deposit which the jury granted and the Court of Appeals affirmed. Analysis: Court ruled that the doctrine of substantial performance is not applicable to the tender of delivery of goods. Based on UCC 2-601, goods must conform in every respect of the contract. If any non-conformity is found after reviewing the contract, the buyer has the right to reject.

A qualification to the perfect tender rule is that the buyers right to reject nonconforming goods is subject to the general obligation of good faith imposed by UCC 1-304 on both parties in the performance and enforcement of the contract. In other words, if the seller could prove that the buyer only rejected the goods because they wished to avoid the contract, then rejection will not be rightful. (No bad faith rejections.) Restatement 241 - a breach is immaterial when it does not really deprive the buyer the benefit of the bargain or cause it any loss. (This defines materiality). This Restatement identifies five circumstances to be considered in determining if the breach is material. 1. The extent to which the injured party will be deprived of the benefit she reasonably expected; 2. The extent to which the injured party can be adequately compensated for the loss of that benefit; 3. The extent to which the breaching party will suffer forfeiture; 4. The likelihood that the breaching part will cure her failure 5. The extent to which the breaching party meets the standards of good faith and fair dealing. **Keep in mind that a deposit is not an installment contract.** Limitations on the Perfect Tender Rule Perfect tender rule can cause hardship to a seller where the nonconformity is minor and readily curable. Court may invoke the general obligation of good faith where the defect in the tender is trivial and the buyer uses its rejection right in UCC 2-601 as a pretext for evading an unfavorable contract. Sellers right to cure and Article 2 uses a substantial performance standard where the contract calls for delivery of the goods in installments. Two limitations on the perfect tender rule: (will discuss later below) 1. Sellers right to cure 2. Substantial performance standard in installment contracts. Cure If the breacher has a right to cure (which depends on many factors, including the nature of the breach and the partys ability to rectify it within the proper time), the victim of the breach cannot immediately declare total breach.

Has to give breacher an opportunity to cure it; can only treat the breach as total if the breacher fails to cure effectively and in time. Article 2 The right to cure takes on wider significance because UCC 2-601 does not permit a seller to claim that a non-conforming tender constitutes substantial performance.

Common Law The right to cure a breach plays its most important role where the breach would be material if left uncured.

Sellers right to cure is provided for in UCC 2-508. UCC 2-508 (1) Applies if the seller tender the goods and the buyer rejects them before the agreed date for delivery. At this stage, the seller has a broader right to cure by substituting a conforming tender before the expiry of the agreed time for delivery. The act of nonconforming tender must be made in good faith and the seller must give the buyer timely notice of its intent to cure the wrong and pay for any expenses to cure the matter and compensate the buyer for any losses due to the breach. If the seller does all of this, the buyer is obliged to accept the cure and proceed with its own performance. UCC 2-508(2) Applies when a seller seeks to cure a non-conforming tender after the agreed time for delivery has passed. Must comply with all the subsequent section in (1) and requires the cure to be appropriate and timely under the circumstances. (Since the delivery date has passed, the seller must show that the cure will give the buyer its contractual expectations aside from the delay in delivery.) Ramirez v. Autosport Facts: Mr. & Mrs. Ramirez bought a camper from Autosport and scheduled delivery for August 3, 1978. When the camper was delivered, the Ramirez saw that it had scratches and minor dings and rejected the camper but allowed the seller to fix the defects. The buyers called several times to acquire about the status of completion of the cure and on Aug. 14th, Autosport told the buyers that the camper was ready for pickup. When the Ramirez arrived, they found the sellers still working on the car and had discovered that they left the camper opened in the rain and the entire insides were soaked. The buyers again rejected the delivery and gave the sellers another chance to cure. In the following weeks they again called the seller to determine the status of the camper and finally on Sept. 1st, the buyer told them that the camper was ready for pickup. When the buyers came to pick up the camper, they were kept waiting for an hour and a half and finally

decided to terminate the co7untract and requested for the return of the value of the van they had traded in. Analysis: Perfect tender rule was qualified by the sellers right to cure. The seller, who was given several opportunities to cure their mistakes, did not cure in accordance with UCC 2-508(2). (Their cure did not meet the contractual expectations of the Ramirez.) Installment Contracts departs from strict requirement of Perfect tender rule and allows for substantial performance UCC 2-612 (1) One that requires or authorizes the delivery of goods in separate lots to be separately accepted. Does not follow the perfect tender rule but instead adopts the substantial performance doctrine. UCC 2-612(2) Allows the buyer to reject any non-conforming installment only if the nonconformity substantially impairs the value of that installment to the buyer. If the non-conformity can be cured or is not material, the buyer must accept delivery. (Only if it impacts it and it can't be cured.) Note that if the seller fails to cure, then the breach becomes material and the buyer can reject the goods. If the uncured breach is not material, buyer has a right to seek some sort of remedy (price reduction). (This deals with if one installment is defective. To reject it, you must show it affects the entire contract.) UCC 2-612(3) can treat the breach of an installment as a breach of the whole contract if If the non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract, the buyer can treat the breach in an installment as a breach of the whole contract. D. Anticipatory Repudiation and Prospective Nonperformance 1. Anticipatory Repudiation A party cannot breach a promise before its due date. However, the promisor can make it clear by words or conduct that she will not perform when the time for performance falls due. In doing this, she in effect breaches the contract in advance by indicating that she will not perform in the future. (anticipatory repudiation.) Can be a statement or an act showing that the person will not perform before the breach. Repudiation is treated like a breach so you still have to go thru the process of asking: 1. Does UCC or Restatement apply? 2. If UCC applies - Buyer's perfect tender (UCC 2-601)

3. If its not a buyer, a seller must look to Restatement. 4. Restatement - must determine if its material or not. If it is material look towards a remedy. Look to see if is substantial performance. Hochster v. De La Tour Facts: In April 1852, the parties made a contract under which Hochster was to serve as De La Tours courier for a three month European tour, commencing on June 1, 1852. On May 11 De La Tour wrote to Hochster that he had changed his mind and would not use his services. Hochester sued immediately and was met with the argument by De La Tour that the action was prematurethere could be no breach until June 1. Rule/Reasoning:The court disagreed and held that where a party utterly renounces the contract by a clear declaration of intent not to perform or by an act that makes it impossible for him to perform, a cause of action for its breach arises immediately. The court notes that in the absence of such a rule the plaintiff despite knowledge that the def will breach when the time comes to perform, would have to continue preparations for and hold himself available to render his own performance. ***This case is the excepted limitation to the rule.**** Here the doctrine of anticipatory breach does not apply where there is a repudiation of an executor contract for the payment of money only. In this case, the aggrieved party must await the time for performance to bring suit for damages. In short, the doctrine applies only where there are executor obligations on both sides of the contract: it does not apply if a party repudiates a unilateral promise to pay money in the future or in the future installments or there is a bilateral contract where the aggrieved party has fully performed its end of the bargain.

Anticipatory Repudiation: In the language of conditions: where parties exchange promises to perform in the future, these promises are dependent in that, whatever the sequence of performances called for by the contract, each is subject to the condition construed, if not express or implied, that the other party will not repudiate her performance in advance. Restatement 2 250: A repudiation is (a) a statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach under 243, or (b) a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach.

**Normally, the expression of repudiation must be clear, statements like I doubt I will be able to are not enough to sufficiently be considered as repudiation.*** Restatement, Second 253: Repudiation as a Breach 1. committed a breach by non-performance and before he has received all of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach. 2. Where performances are to be exchanged under an exchange of promises, one party's repudiation of a duty to render performance discharges the other party's remaining duties to render performance. UCC 2-610-Anticipatory Repudiation(This is important. You need to know what repudiation means.) 1. When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may: (A) for a commercially reasonable time await performance by the repudiating party; or (B) resort to any remedy for breach as provided in sections 1302.77 and 1302.85 of the Revised Code even though he has notified the repudiating party that he would await the latter's performance and has urged retraction; and (C) in either case suspend his own performance or proceed in accordance with the provisions of section 1302.78 of the Revised Code on the seller's right to identify goods to the contract notwithstanding breach or to salvage unfinished goods. (You have a right to suspend performance.) 2. Repudiation includes language that a reasonable person would interpret to mean that the other party will not or cannot make a performance still due under the contract or voluntary, affirmative conduct would appear to a reasonable person to make a future performance by the other party impossible. **Note - the right of the victim of a repudiation to act on it immediately is no longer subject to question under most circumstances. Difficult issue is what constitutes a material repudiation, especially where the apparent intent not to perform is gleaned from an unclear statement or conduct. This presents a hazard to a party who, believing that the other has repudiated, declares an advance breach and cancels the contract. If she was wrong in her interpretation of the words or conduct, she may herself have repudiated the contract by cancelling it.

Wholesale sand and Gravel Inc v. Decker: Facts:Decker contracted Wholesale to install a gravel driveway. Wholesale agreed to perform earth work, including the installation of a gravel driveway. The contract

contained no provision specifying a completion date for the work. The only time reference made in the contract was that payment was to be made within 90 days. Although Carl Goodenow, Wholesale's president, believed the company had 90 days within which to complete the work, he told Decker that the driveway portion of the work would be completed within one week.Wholesale begin working the weekend after the contract was executed; however, they could not begin because the ground was wet. Wholesale returned the following weekend, but it was still too wet so Wholesale waited for the ground to dry. A month later Decker made several attempts to get Wholesale to complete the driveway. Wholesale made numerous promises without appearing. Decker terminated the contract and hired another contactor to finish the job. Reasoning: Wholesales conduct constituted an anticipatory repudiation of contract, permitting Deck to terminate the contract during the 60-day period. Anticipatory Repudiation o An anticipatory repudiation of a contract is "a definite and unequivocal manifestation of intention on the part of the repudiator that he will not render the promised performance when the time fixed for it in the contract arrives." Manifestation of Repudiation o The manifestation of an intention to repudiate a contract may be made and communicated by either words or conduct. o The words or conduct evidencing such refusal or inability to perform, however, must be definite, unequivocal, and absolute. Repudiation v. Breach Repudiation occurs before the deadline of the contract, breach happens afterwards. Have to use Restatement because this is not related to the buyer's tender (UCC 2-2601) Repudiation is treated like a breach so you still have to go thru the process of asking: 1. 2. 1. 4. Does UCC or Restatement apply? If UCC applies - Buyer's perfect tender (UCC 2-601) If its not a buyer, a seller must look to Restatement. Restatement - must determine if its material or not. If it is material - he breached. Look to see if its substantial performance.

Restatement Second 251 When a Failure to Give Assurance May Be Treated as a Repudiation

Nutshell: Similar to the UCC listed below however, it does not require that the demand of assurances be made in writing and it does not set a 30-day period in which to provide assurances. (1) Where reasonable grounds arise to believe that the obligor will commit a breach by non-performance that would of itself give the obligee a claim for damages for total breach under 243, the obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance. (2) The obligee may treat as a repudiation the obligors failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances of the particular case. UCC 2-609. Right to Adequate Assurance of Performance. Nutshell: This UCC code introduces the concept that where a party has reasonable grounds for insecurity regarding the other partys prospective performance, it may in writing demand adequate assurance of due performance. Code does NOT define the words reasonable grounds or adequate assurances but indicates that they should be defined by commercial standards in accord with commercial practice. Both of these definitions are a question of fact. (1) A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return. (2) Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards. (3) Acceptance of any improper delivery or payment does not prejudice the aggrieved party's right to demand adequate assurance of future performance. (4) After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.

CHAPTER 20: Contract Remedies

The basic goal of contract remedies is simple to state: Contract remedies operate on a compensation principle.

Expectation Damages (breach of contract; direct, incidental, consequential, & lost profits) Represents what the injured party expected to receive if the contract had been fully performed and is often referred to as benefit of the bargain.

Reliance Damages (promissory estoppel) Represents the injured partys loss caused by reliance on the contract and seeks to put the plaintiff in as good a position as she would have been in had the contract not been made. Must be Foreseeable.

Restitution Damages (unjust enrichment) Represents the plaintiffs interest in having restored to her any benefit she has conferred on the other party.

Rest. 2d sec. 344 Purposes of Remedies: Judicial remedies under the rules stated in this Restatement serve to protect one or more of the following interests of a promise: (a) his expectation interest, which is his interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed, (largest dollar amount usually) (b) his reliance interest, which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made, or (middle of the road for dollar amounts) (c) his restitution interest, which is his interest in having restored to him any benefit that he has conferred on the other party. (least generous award) Remedies: operate on compensation principle work to make aggrieved party whole (as if contract was performed) benefit of the bargain NOT intended to deter, punish or revenge Courts options: order breaching party to perform money damages to compensate for net loss of breach enjoin one party from taking some action that will damage or impair contractual right of other *courts usually do expectation damages

Restitution damages least generous Reliance damages more generous that restitution Expectation damages most generous Limitations on Recovery of Expectation Damages specifically for Consequential Damages Plaintiff must show: 1. Damages cannot be speculative, must be reasonably certain of calculation (Reasonably certain) 2. Reasonably contemplated by the parties at the time of the contract (Foreseeable) 3. Act responsibly upon breach and did not run up amount in damages (mitigate damages) Freund v. Washington Square Press, Inc. (NY App. 1974) pg 734 Facts: The plaintiff, an author, entered into a written agreement with the defendant in 1965 for exclusive rights to publish and sell plaintiffs book. Defendant agreed to nonreturnable $2,000 advance upon delivery of manuscript. Defendant had right to terminate contract within 60 days of delivery if manuscript was not suited for printing. Contract called for defendant to publish hard cover book within 18 months and later do paperback book. Contract called for defendant to pay royalties to plaintiff based on percentage of sales. If defendant didnt publish within 18 months, the contract would be terminated. Plaintiff delivered manuscript to publisher and was paid $2,000 advance. Defendant then merged with another publisher and ceased publishing any hardbound books. But the defendant didnt exercise his 60-day out option. Instead, he just didnt publish the book. Plaintiff sued for breach. Rule/Reasoning: Law allows damages for breach of contract to compensate for injury caused by the breach for an injury that was foreseeable or reasonable within the contemplation of the parties at the time the contract was entered into. Court says money damages are to put the injured party in as good a position as he would have been put by full performance of the contract, at the least cost to the defendant and without charging him with harms that he had no sufficient reason to foresee when he made the contract. Plaintiffs expectation on the contract was the advance and royalties. In response, plaintiff got $2,000. Court said there was an error by lower courts because it measured damages not by the value to plaintiff. The breach by the publisher actually resulted in the plaintiff not realizing the gains promised by the contract (the royalties). However, there was no certainty as to how much royalties the plaintiff would have actually netted. Thus, the court says he can only recover nominal damages. Theoretical Perspectives on the Compensation Principle:

Pacta sunt servanda = commitments must be honored/performance (principle goal of contract law) Efficient breach would allow legal system to structure remedies such that breach would be permitted without penalty as long as the nonbreaching party receives adequate compensation - Where the party in breach gains enough from the breach to have a net benefit, even after compensating the injured party for its loss. (Defendant comes out ahead by breaching the contract and paying damages.) Restatement 347. Measure of Damages in General Subject to the limitations stated in 350-53, the injured party has a right to damages based on his expectation interest as measured by (a) the loss in the value to him of the other party's performance caused by its failure or deficiency, plus (b) any other loss, including incidental or consequential loss, caused by the breach, less (c) any cost or other loss that he has avoided by not having to perform. Formula: Damages = plaintiffs loss in value + any other loss (incidential or consequential) any cost or other loss the plaintiff avoided by not having to perform the contract. Handicapped Childrens Educ. Bd. v. Lukaszewski Facts. The Plaintiff, Handicapped Childrens Education Board (Plaintiff), hired the Defendant, Lukaszewski (Defendant), as a speech and language therapist. The Plaintiff offered to renew the Defendants contract and the Defendant accepted. However, prior to the beginning of the next school year, the Defendant accepted another job offer that paid a higher salary and that was closer to her home. The Plaintiff refused to release the Defendant from her contract. The Defendant then obtained a doctors note stating that she had high blood pressure and submitted a letter of resignation. She then began her new position. Only one qualified person applied to be the Defendants replacement. This applicant had more teaching experience than the Defendant and therefore, the Plaintiff was forced to pay her a higher salary. The Plaintiff filed suit against the Defendant for the difference in salary it was forced to pay when Defendant breached her contract. Rule of Law/ Reasoning: The non-breaching party is entitled to full compensation for the loss of the benefit of the bargain. The court reasoned that damages resulting from breach of contract are measured by the expectations of the parties. The court rejected the Defendants argument that the Plaintiff was not damaged by her breach because it gained a more experienced teacher. The court found that the Plaintiffs expectations were not to hire a more experienced teacher. Instead it expected to receive the services specified in the Defendants contract for the salary specified in the Defendants contract.

The court also reasoned that although Plaintiff had a duty to mitigate damages, since only one qualified applicant applied for the position, Plaintiff had done all it could to mitigate. New Valley Corp. v. U.S. Facts: January 10, 1984, the Western Union, formalized a launch services agreement with NASA which committed that agency to use its best efforts through September 1995 to launch two of Western Unions satellites. February 3, 1984- Nasa launched the first of the two Satellites. June 24, 1986 a launch was suppose to happen after being postponed several times. January 28, the Space Shuttle Challenger exploded during launch. February 19, 1986- a letter was written from NASA to Western Union to suspend planning for a June 24, 1986 launch. September 25, 1986-President Regan made a decision to restrict NASA's launch services to those satellites with payloads that either were shuttle unique or had national security and foreign policy implications. (NASA subsequently refused to schedule a launch date for the Westar. After the suspension of NASA, Western Union began to look at other launch people, and none proved successful. Western Union suffered a HUGE financial lost after this and filed a petition for protection in bankruptcy court in November 1991. Reasoning: The court concludes that plaintiff is entitled to damages on account of NASA's breach of contract in an amount to be determined through evidence presented in a supplementary trial proceeding. Why wasn't this an impracticability issue? If you were arguing for NASA you would argue that you couldn't because the US govt. stated they would not allow it. However, NASA was still sending up satellites, just not this one. So it wasn't impracticable, they just didn't do it. They used the market price for comparable launch services. In Re WorldCom, Inc. (Bankruptcy NY 2007) Facts: On July 10, 1995, Michael Jordan and MCI entered into a ten year license to use Jordans name, likeness, and other attributes, and personal services to advertise and promote MCIs telecommunications products and services beginning in Sept. 1995 and ending in August 2005. Jordan received a $5 million signing bonus and would receive an annual base compensation of $2 million. The agreement stated that Jordan had to make himself available four days out the year for no more than four hours per day, for television commercials and print advertising and for promotional appearances. From 1995 2000, Jordan appeared in several tv commercials and large print ads for

MCI. However, on July 1, 2002, MCI filed chapter 11 in the US Bankruptcy court for the Southern District of NY. During the bankruptcy, the company rejected Jordans remaining two year agreement. According to Bankruptcy law, the rejection entitled Jordan to file a claim in bankruptcy proceedings for any damages he might be owed for breach of contract. He claimed, among other damages, $4 million for the two years remaining under the agreement. Rule/Reasoning: Doctrine of lost volume. A lost volume seller is one who has the capacity to perform the contract that was breached in addition to other potential contracts due to unlimited resources or production capacity. The lost volume seller theory applies to contracts for services and goods. Here, Jordan lacked a nearly limitless supply and had no intention of continuing to market his services as a product endorser. In order to claim lost volume seller status Jordan would have to establish: That he would have had the benefit of both the original and subsequent contracts if MCI had not rejected the Agreement. (According to Restatement (2d) Sect. 347 non breaching party must show that it could and would have entered into a subsequent agreement.) Classic example of Lost volume seller is the Neri v. Retail Marine Corp. In a situation where a car dealer agrees to sell a buyer a car for $2k and the buyer breaches the agreement, normally the seller would just sell the car to another person for the $2k. But it differs when the dealer has an unlimited supply of standard goods because now, that buyer has caused the seller to only sell one of the good instead of two. Therefore, the buyer shall be liable to pay the profit of the dealers one sale. Restatement Second 347 The plaintiff supposed to receive the loss in value to him of the other partys performance caused by its failure or deficiency. Deficient performance may constitute a material and total breach, or it may constitute substantial performance and only a partial breach, depending on the circumstances. Usual measure of damages in construction cases is the cost of completion or repair. Jacobs &Youngs, Inc. v. Kent Kent, the defendant, contracted the plaintiff to build a country residence using Reading pipe. Plaintiff instead used piping made from another manufacturer. Kent refused to pay plaintiff. Plaintiff sued. Kent argued that plaintiff breached contract and proper means of correcting the error was to replace it. Court agreed that normally you would replace or repair the damages however, in a situation where the cost of completion was so grossly and unfairly out of proportion to the good to be attained then it only made sense to award the defendant the difference between the value of the house according to the difference in pipping.

Lyon v. Belosky Construction, Inc. Plaintiff complained about various discrepancies between the house they contracted for and the house they got. Court adopted the cost of completion or repair as the measure of damages. This court stated that asking the company to remedy this situation would not cost them an economic waste especially since the defendants acted negligently in failing to detect the problem and it was a substantial defect. Peevyhouse v. Garland Coal & Mining Co. (Example of Efficient Breach) Willie and Lucille Peevyhouse leased some farmland to the defendant. They agreed to let the defendant strip-mine for coal so long as they performed remedial work at the end of the five-year lease term. The defendant mined for coal but did not complete the remedial work. Plaintiffs sued saying that they were owed $25k in order to remedy the farmland that the defendants destroyed. Defendants admitted to liability but mentioned that they only should be liable for what the difference of what the farmland is worth v. what it is would be worth if the remedial services were performed, which they calculated to be $300. The jury found on behalf of the plaintiffs and awarded them $5k but the judge reduced the amount to $300. Court held that damages should only be held to diminution of the value of the property because where the breach is merely incidental to the main purpose of the contract, a party should not be grossly compensated. EXPECTATION DAMAGES UNDER THE UCC UCC 1-305(a) Remedies to be liberally administered (a) The remedies provided by the UCC must be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed but neither consequential or special damages nor penal damages may be had except as specifically provided in the UCC or by other rule of law **You do not get consequential or special damages under the UCC, unlike the Restatement, however there are exceptions.** Buyers remedies under the UCC A seller breaches when she repudiates, fails to deliver, or tenders non-conforming goods. When there has been a delivery of non-conforming goods, the buyer may rightfully reject or revoke acceptance. Normally, if the goods have not been tendered, the buyers most critical remedies will be specific performance or cover and the recovery of incidental and consequential damages.
Specific performance is the exceptional remedy and limited to cases where the goods are unique or n other circumstances the court deems proper; if substitute goods are readily available in the market specific performance will not be available.

Seller fails to perform, buyer can make sub purchase and if this is more expensive buyer can sue seller for cover

UCC 2-712 COVER (You dont have to pay) 1. If the seller wrongfully fails to deliver or repudiates or the buyer rightfully rejects or justifiably revokes acceptance, the buyer may cover by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller. 2. The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages under section 2-715, but less expenses saved in consequence of the sellers breach. 3. Failure of the buyer to effect cover within this section does not bar the buyer from any other remedy. This is important. You do not have to cover. You can choose not to cover and just sue for expectation damages - full and entire breach. You can choose between cover and a market measure. If you do cover, the cover is measured by a market of difference. Formula: Buyer Recovery = Cost of cover Contract price + incidental or consequential damages expenses saved from sellers breach. Consequential Damages - The loss must result from or be caused by the breach; the loss must result from general or particular requirements and needs of the buyer of which the seller at the time of contracting had reasonably be prevented by cover or otherwise the loss must be proved with reasonable certainty. Incidental Damages - Damages the buyer incurs as a result of dealing with the breach such as expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected as well as any reasonable charges or expenses in connection with effecting cover and any other reasonable expense incident to the delay or other breach. UCC 2-713 Buyers damages for nondelivery or repudiation-Sides with the seller here ***EXCEPTIONS TO THE RULE OF NO CONSEQUENTIAL/SPECIAL DAMAGES 1. Subject to section 2-723, if the seller wrongfully fails to deliver or repudiates or the buyer rightfully rejects or justifiably revokes acceptance A. the measure of damages in the case of wrongful failure to deliver by the seller or rightful rejection or justifiable revocation of acceptance by the buyer is the difference between the market price at the time for tender under the contract and the contract price together with any incidental or consequential damages under section 2-715 but less expenses saved in consequence of the sellers breach; and

B. the measure of damages for repudiation by the seller is the difference between market price at the expiration of the commercially reasonable time after the buyer learned of the repudiation, but no later than the time stated in paragraph (a) (time of tender) and the contract price together with any incidental or consequential damages provided in this article (sec. 2-715), less expenses saved in consequence of the sellers breach. 2. Market price is to be determined as of the place for tender or, in cases of rejection after arrival or revocation of acceptance, as of the place of arrival. (buyer can look at market cost or cost of substitution/cover. Tells you how to determine market price--time for tender or place where shipment actually arrived. Need to argue if it is a reasonable amount timeargue both waysreasonable and unreasonable.) How do you determine market price? The place where you are paying for it (tender) or place where it arrives. Chronister Oil Co. v. Unocal Refining and Marketing Facts: Chronister is an oil trader and it contracted to provide 25,000 barrels of gasoline to Unocal. The price was 60.4 cents per gallon and was to be delivered on the first five days of march. It was delivered to the pipeline on march 5 but was refused because it had too much water in it. Chronister desperately wanted to sell Unocal the gas but since it could not be delivered until mid March Unocal refused and decided to use its own reserves which was advantageous to Unocal since the market price of gas had fallen and was around 55 cents. This saved Unocal money and even the attorney for Unocal admitted the breach made Unocal better off. Unocal was overloaded with higher priced gas at the time and needed to liquidate some of its inventory. Unocal argues that it was entitled by UCC 2-712 to cover by obtaining a substitute for the lost 25k barrels, even from itself, and to obtain as damages the difference between the cover price, which it deems to be 63,14 cents a gallon, the average cost of the inventory from which it obtained the sub gas and the K price of 60.4. Rule/Analysis: UCC. 2-712 cover. The court said that Unocal misread UCC 2.712 which is purchasing or making a contract to purchase. Here Unocal did not purchase anything, it merely used its own inventory which it needed to sell anyways. you cant purchase what you already own Here Unocal was not hurt therefore it cannot obtain damages for harm. The court went on to say the Unocal has miscalculated the first point, the price of gas it had in inventory; the court also stated that on the second point shows that Unocal had no damages. Unocal therefore is only entitled to nominal damages which all victims are entitled to in breach) The buyers remedies upon acceptance of deficient performance UCC 2-714 Buyers damages for breach in regard to accepted goods

 1. If the buyer has accepted goods and given notification pursuant to section 2-607(3), the buyer may recover as damages for any nonconformity of tender the loss resulting in the ordinary course of events from the sellers breach as determined in any reasonable manner. 2. The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount. 3. In a proper case any incidental and consequential damages under section 2-715 may also be recovered. Sellers remedies under the UCC A. the sellers action for the price B. the sellers remedies when the buyer repudiates, wrongfully rejects or wrongfully revokes acceptance of the goods. UCC 2-706sellers resale including contract for resale 1. In an appropriate case involving breach by the buyer, the seller may resell the goods concerned or the undelivered balance thereof. If the resale is made in good faith and in a commercially reasonable manner the seller may recover the difference between the contract price and the resale price together with any incidental or consequential damages allowed under section 2-710, but less expenses saved in consequence of the buyers breach. UCC 2-708 Sellers damages for non-acceptance or repudiation 1. Subject to subsection (2) and section 2-723: A. the measure of damages for non-acceptance by the buyer is the difference between the contract price and the market price at the time and place for tender together with any incidental or consequential damages provided in Sec. 2-710, but less expenses saved in consequence of the buyers breach; and B. the measure of damages for repudiation by the buyer is the difference between the contract price and the market price at the place for tender at the expiration of a commercially reasonable time after the seller learned of the repudiation, but no later than the time stated in paragraph (a) together with any incidental or consequential damages provided in section 2-710, less expenses saved in consequence of the buyers breach. 2. If the measure of damages provided in subsection (1) or in section 2-706 is inadequate to put the seller in as good a position as performance would have done, the measure of damages is the profit that the seller would have made from full performance by the buyer, together with any incidental or consequential damages provided in this article. This is good for loss volume seller Note that even if the market value is found to be lower than the contracted value, the buyer is still liable for the profit that he would have achieved if the sale had gone by. So

even if the market value was discovered to be lower than what they originally contracted, the buyer would still have to pay the difference. Three important principles operate to limit a plaintiff's potential recovery: 1. the reasonable certainty principle 2. the foreseeability principle 3. mitigation principle (Avoidable) All seek to balance the risk of undercompensating the plaintiff against the risk of imposing excessive liability on the defendant. 1. Reasonable Certainty of Damages When a party to a contract is disappointed by breach, it is up to that party to prove the fact and amount of damages suffered. Allows economic losses measured from an objective point of view. Plaintiff must prove that it suffered economic damage due to the breach, and it must prove the extent of those damages to the court's satisfaction. Plaintiff may encounter problems of proof with direct or incidental damages; however, consequential damages tend to present the greatest challenge. Plaintiffs only have to prove damages with a reasonable certainty, not an absolute certainty. If damages are entirely speculative and uncertain, plaintiff will not be able to recover. Mears v. Nationwide Mutual Insurance Co., 91 F.3d 1118 (8th Cir. 1996). Facts: Nationwide traditionally holds a regional convention for its employees every three years. In 1993, the company solicited the employees for ideas for a theme by introducing it as a contest. They sent out a flyer to the group saying that the convention was being planned and they needed ideas from the employees to ensure its success. They continued to state that a contest for a theme had been created and a person could win "His and Hers Mercedes, an all expense paid trip for two around the world, and additional prizes to be announced." They also noted that the prizes were subject to availability. Nationwide only stipulated two rules, (1) the slogan was limited to no more than 8 words, and (2) all entries must be submitted to Linda McCauley, by Aug. 1, 1993. David Mears, a claims adjuster from Oct. 1985-Sept. 1993, submitted several themes, one including "At the Top and Still Climbing." Several months after submitting his theme, he left Nationwide. In October 1993, Peterson notified Mears that he had won the contest. Mears claims that at this time, Peterson told him that he won the two Mercedes however, Peterson disputes that. In Jan. 1994 when Mears spoke to Peterson again about the Mercedes, Peterson warned Mears of three reasons why he may not get

the automobiles. (1) Nationwide might change the convention theme, (2) he was no longer employed with Nationwide, and (3) the contest was a joke. Nationwide indeed used the theme and when Mears spoke with Handy about the cars, Handy informed Mears that Nationwide never intended to award the two automobiles and offered Mears a restaurant gift certificate instead. RULE/ Reasoning: In order to be binding, a contract must be reasonably certain as to its terms and requirements. It is sufficiently certain if it provides a basis for determining the existence of a breach and for giving an appropriate remedy. When a minor ambiguity exists in a contract, Ark. Law allows the complaining party to insist on the reasonable interpretation that is least favorable to him. Therefore, based on these two factors, there is sufficient evidence to support the jury's conclusion that Mears is owed two of the least expensive Mercedes. Typically, the court will not enforce a contract where the determination of damages is left to speculation and conjecture. The burden is on plaintiff to provide evidence for adequate damages. Here, the court found that Mears damages were not speculative, but were subject to adequate certainty. Mears presented a price of $31k based on a car dealership so the jury found for Mears $60k. Direct loss- recover the value of the contract performance itself. Have to be able to calculate the expectation damages to a reasonable certainty. However, how can you calculate this when the language is ambiguity. The court said that you can make some presumptions. So with the knowledge of the model of the car and the assumption that its a new car, you can draw conclusions to what the damages should be with a reasonable certainty. Rancho Pescado, Inc. v. Northwestern Mutual Life Insurance Co. Facts: In 1971, James Jones (Jones) the president of appellant Rancho Pescado, Inc. (Rancho Pescado), became interested in and began studying the business of commercial catfish farming. He and his wife eventually decided that the Gila Bend Canal in Gila Bend, Arizona, would be an ideal location to raise catfish.Jones spent much of the first half of 1974 raising money to finance his operation and solving an algae problem in the canal. Jones stocked the first delivery of catfish fingerlings in the canal in August, 1974. On the day before Thanksgiving, 1974, Jones was notified by Painted Rock's water development supervisor that the water flow in the canal would be shut off, as usual, for the holidays. Jones complained and the water was eventually turned back on. Northwestern concluded that continued flow of water through the canal when not needed for Painted Rock's ranch operations, such as during the Thanksgiving and Christmas holidays, constituted a serious interference with Painted Rock's ranching operation. As such, on December 10, 1974, Northwestern notified Rancho Pescado by letter that it was terminating the license agreement for cause because Rancho Pescado's demand for continuous flow of water interfered with the ranching operations in

violation of paragraph two of the license agreement. Northwestern concluded the letter by advising Rancho Pescado that it had until April 1, 1975 to remove its property. Rule/ Reasoning: Normally, the court rules that a company that is a new business cannot establish receive damages for loss profits because there is no evidence that they would have made any profit. (Arizona per se rule.) However, this court made a new rule stating that a party could recover lost profits if it could be shown what those profits could have been. Northwestern claimed that Ariz. adopted a per se rule which prohibits an award of damages for loss of future profits to a new business. Also, they claimed that Pescado failed to sustain its burden of proving loss of future profits with reasonable certainty. In the past, the majority rule was that a new biz could not recover for potential lost profits because it was speculative. However now, if damages can be proved with reasonable certainty than they can be allowed. To determine whether a plaintiff has met its burden of proof courts have considered: 1. The profit history from a similar business operated by the plaintiff at a different location. 2. The profit history from the business in question if it was successfully operated by someone else before the plaintiff took over. II. Foreseeability of Damages To be recoverable, must be foreseeable at the time the contract is entered. Will see this with consequential damages - there must be some foreseeability. Hadley v. Baxendale Facts: Plaintiffs run a mill in Gloucester. They discovered a fracture in their crank shaft of the steam engine that ran the mill. The engineering company that made the steam engine was located in Greenwich. They needed to send the old, cracked crank shaft to Greenwich for the engineers to use as a pattern in making a new crank shaft. Plaintiffs hired Defendants, curriers, to take the crank shaft to Greenwich. Defendants told Plaintiffs that if they delivered the crank shaft to them by noon it would arrive in Greenwich the next day. Plaintiffs did not tell Defendants that the mill was stopped because of the missing crank shaft. Because of some neglect, the crank shaft was not delivered for several days and, as a result, the mill could not operate and lost profits. Rule: Where two other parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in contemplation of both parties, at the time they made the contract, as the probably result of the breach of it.

If the special circumstances are communicated by the plaintiffs to the defendants and are known to both parties, the damages resulting from the breach of contract, which they would reasonably contemplate would ordinarily follow from a breach of contract under these special circumstances. If the special circumstances are unknown to the breaching party, then the damages are what the breaching party would reasonably contemplate in a general situation. Discussion. If a reasonable person would foresee a loss resulting from a breach of contract, then the loss may be counted when calculating damages. If circumstances exist which would cause more loss-one that is not immediately foreseeable, it is the responsibility of the potential plaintiff to tell the potential defendant if the plaintiff hopes to get those losses recouped. When there is a breach of contract, the injured party may be compensated for losses that are natural and probable consequences of the breach-losses that both parties could expect from such a breach. In cases when there are special circumstances that add more losses that might be expected, these losses may be counted if Plaintiff tells the defendant about the special circumstances. In this case, Plaintiff did not tell Defendants that they had only the one crank shaft and that the mill could not operate until they got a new one. A reasonable person would suppose that a mill had more than one crank shaft and was still operating. Thus, the loss of profits Plaintiffs incurred because of the fact that the mill could not operate is not a natural and probable consequence both parties could expect. Wullschleger & Co. V. Jenny fashions Facts: Seller Wullschleger sued buyer Jenny for nonpayment of $28,965 plus interest for fabric sold and partially delivered to Jenny. Wullschleger claimed a defect in fabric. Jenny filed counterclaim for lost profit of $67,361 plus interest. Jenny alleged breach of express and implied warranty of merchantability. The plaintiff makes fabric in NC and sells to manufacturers. Defendant Jenny is a NY dressmaker. Jenny bought 37,500 yards of fabric from Oct 1983 to Jan. 1984 but only 23,577 yards were delivered. Cost was $27,107 an Jenny paid $11,402. Invoice said no claims after 10 days and no allowance for any cut fabric. Jenny inspected fabric and it looked good so she began making dresses. That's when Jenny realized fabric was distorted and dress hems were not coming out right. Jenny made about 5,000 dresses. Eight customers canceled orders. A fabric expert said fabric was skewed and not of first quality. Issue: Whether damages are owed. Rule: UCC 2-715(2)(a) says buyer may collect consequential damages resulting from a seller's breach of warranty for any loss resulting from general or particular requirements and which could not reasonably be prevented by cover or otherwise.

NY law: when it is certain that damages have been caused by a breach of contract and the only uncertainty is as to their amount, there can rarely be any good reason for refusing on account of such uncertainty, any damages whatever for the breach. Holding: Jenny entitled to recover for lost profits resulting from distortion because plaintiff had reason to know of Jenny's intended use and Jenny made reasonable efforts to prevent loss. Jenny would have recovered $82,155 in gross profits if fabric was not defective. Court deducted $20,346 from closeout sale, $9,039 for labor rebate and $15,704 for balance of bill. Jenny resulted with $37,065 in damages for breach of warranty claim, and plaintiffs' actions dismissed. Reasoning: The court said skewed fabric was breach of implied warranty of merchantability and express warranty that fabric was first quality. Court examined Jenny's dress process and found proximate cause of distortion was fabric skew. Court said Jenny's process was common in industry and reasonably foreseeable. Court said invoice language did not bar Jenny's claim. Plaintiff says it did not have reason to know this fabric would be used for skirt circles and it is not liable for Jenny's lost profits. Plaintiff said Jenny should have known fabric was not suitable for skirts. Court rejected this argument and said skirt circles were not an unusual use. Court said Jenny's loss could not be reasonably prevented by cover or otherwise. Defendant tried to argue that it was unforeseeable to know that the fabric wouldn't be adequate for her project. Kenford Co. v. County of Erie Brief Fact Summary. Plaintiff Kenford Co. entered into a contract with Defendant, County of Erie, to donate land for a new stadium. Plaintiff also owned land in the periphery of the proposed stadium site. When Defendant decided not to build the stadium, Plaintiff sued to recover for the loss of anticipated appreciation in the value of the land that Plaintiff owned in the periphery of the proposed stadium site. Synopsis of Rule of Law. A nonbreaching party is only entitled to damages within the contemplation of the parties at the time of contracting. Facts. Defendant passed a bond resolution to finance the construction of a stadium near the City of Buffalo. Plaintiff agreed to donate the land for the proposed stadium in exchange for Defendant permitting the management company of Dome Stadium, Inc. (DSI) to lease or manage the facility. At about the time of contract negotiations, Plaintiff exercised options on several parcels of land. The parties formed a contract that provided that Plaintiff would donate 178 acres of land and Defendant would commence construction within 12 months and negotiate a 40-year lease with DSI. Further, Defendant would receive, inter alia, increased property taxes and other tax revenues

generated by the peripheral lands owned by Plaintiff. Subsequently, Defendant opted not to build the stadium, and Plaintiff sued to recover its lost appreciation in the value of its peripheral lands. Issue. Is Plaintiff entitled to recover damages for lost anticipated appreciation in the value of its lands peripheral to the stadium site? Held. No. A party to a contract may only recover damages that were within the contemplation of the parties at the time of formation of the contract. In the present case, Plaintiff purchased the peripheral lands in order to benefit from the expected appreciation in the value of the lands. However, there is no evidence that the defendant agreed to assume the risk that the lands would not appreciate due to the stadium not being built. In fact, the evidence indicates that Plaintiff alone assumed this risk. Hence, Plaintiff is not entitled to damages resulting from its lost anticipated appreciation in the value of its land. Discussion. Damages awarded for breach of contract must be contemplated by the parties at the time of formation In analysis this case and Jenny fashion, it was foreseeable that she would use the fabric to make skirts but here, the plaintiff took a risk and they should not be held liable for that risk which was unforeseeable. Pg. 790, Question 3. Difference between general v. particular requirements General - nothing specific or unique. Actual, usual use for product/services. Particular - unique, different use than originally intended.

THE MITIGATION PRINCIPLE Contract law places a burden on the non-breaching party to reduce the negative consequences of breach. The mitigation principle discourages wasteful behavior in the face of a breach. Have a duty to mitigate. You should not let a known problem continue when you have knowledge of it in order to benefit from it. Rockingham County v. Luten Bridge Here the county awarded a contract to Luten, the county then amid controversy rescinded the contract and made Luten aware that they did not want to go forward with the K. Luten however, continued to build the bridge and then sued the county. The court held that Luten did not mitigate its damages and that the county was not liable for the full amount of the bridge.

Reasonable efforts to mitigate damages: The mitigation principle is typically raised as an affirmative defense by the breaching party. It is up to the breaching party to prove that the nonbreaching party failed to mitigate damages. All that is required is reasonable efforts. In Re WorldCom, Inc. (Bankruptcy NY 2007) important caselost volume case Facts: On July 10, 1995, Michael Jordan and MCI entered into a ten year license to use Jordans name, likeness, and other attributes, and personal services to advertise and promote MCIs telecommunications products and services beginning in Sept. 1995 and ending in August 2005. Jordan received a $5 million signing bonus and would receive an annual base compensation of $2 million. The agreement stated that Jordan had to make himself available four days out the year for no more than four hours per day, for television commercials and print advertising and for promotional appearances. From 1995 2000, Jordan appeared in several tv commercials and large print ads for MCI. However, on July 1, 2002, MCI filed chapter 11 in the US Bankruptcy court for the Southern District of NY. During the bankruptcy, the company rejected Jordans remaining two year agreement. According to Bankruptcy law, the rejection entitled Jordan to file a claim in bankruptcy proceedings for any damages he might be owed for breach of contract. He claimed, among other damages, $4 million for the two years remaining under the agreement. Issue: whether Jordan is entitled to damages even though he did not mitigate his damages in the face of breach by MCI. Rule: Doctrine of avoidable consequences, which is also referred to as a duty to mitigate damages, bars recovery for losses suffered by a non-breaching party that could have been avoided by reasonable effort and without risk of substantial loss or injury. Jordan argued that (1) he was a lost volume seller and thus mitigation does not apply, (2) there is no evidence that he could have entered into a substantially similar endorsement agreement, and (3) Jordan acted reasonably when he decided not to pursue other endorsements after MCIs rejection of the agreement. Jordan argues that he was reasonable in mitigation of damages and that he was concerned about his reputation and overexposure. MCI is arguing that choosing to take no steps to mitigate is not a reasonable course. Analysis: Jordans harm to reputation argument is flawed because the envisioned harm to Jordans reputation does not rise to the level of harm found in the cited case law. The Eastman Kodak case and the Sony case represent sub-standard products which could adversely affect the plaintiff; here there are no factual assertions that support the proposition that Jordans choosing another endorsement opportunity is

akin to being forced to sell damaged goods. In Jordan's argument that he acted reasonably by avoiding further endorsements the court felt that Jordan is arguing that he would be harmed by doing precisely what he originally contracted to do under the contract and what he has been doing for other clients for years. The court went on to say that Jordan's argument that his goal of owning an NBA team as a reasonable justification for his decision not to enter additional endorsement agreements was unrelated to the duty to mitigate damages resulting from a rejected agreement as a product endorser. The court stated that this argument was a red herring. The court reasoned that the facts reveal that one or more endorsements could have been found without diluting Jordans image and partially or completely mitigating damages. Hold: Jordan's motion for summary judgment is denied. MCIs motion for summary judgment granted to the extent Jordan did not mitigate damages Mitigation under the UCC: Expenses of mitigation can usually be recovered as incidental damages, but they must be reasonable. If the nonbreaching party fails to take reasonable steps to avoid consequential damages, the UCC will prohibit their recovery. Parker v. Twentieth Century-Fox Film Corp. Plaintiff had a leading role in the movie "Bloomer Girl" but the defendant decided to cancel the movie and then offer her the leading role in another movie, "Big Country, Big Man." This role was an inferior role in which she declined and sued for breach of contract. Courts ruled that she did not have to take the role and therefore, she could recover and did not have to mitigate damages. Marshall School District v. Hill A football coach was fired from a school and the courts...pg. 804 UCC 2-710 Sellers incidental and consequential damages: (1) incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care, and custody of goods after the buyers breach, in connection with return or resale of the goods or otherwise resulting from the breach. (2) Consequential damages resulting from the buyers breach include any loss resulting from general or particular requirements and needs of which the buyer at the time of contracting had reason to know and which could not reasonably be prevented by resale or otherwise. (3) in a consumer contract, a seller may not recover consequential damages from a consumer. UCC 2-715 Buyers incidental and consequential damages:

(1) incidental damages resulting from the sellers breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay of other breach. (2) consequential damages resulting from the sellers breach include (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and (b) injury to person or property proximately resulting from any breach of warranty.

Lost profits are consequential damages. Be sure to outline what each damages subdivision entails.

Problem 20.5 According to UCC 2-715, any incidental damages resulting from the sellers' breach can only include reasonable expenses incurred for breach. A plane ticket to go to France is not reasonable. There are no expectation damages. Direct damages are none but the consequential damages are $10,000. Direct damages are $7,000. Lost damages are consequential however, we need to look if its foreseeable that not having wine at the wedding is enough to cancel a wedding and causing the company to lose $20k in profits. Reliance Damages as an alternative to expectation damages: Expectation damages, no matter how certain, must have been reasonably foreseeable in order to hold the breaching party responsible. Further the aggrieved party must take reasonable steps to mitigate expectation damages, or else she loses the right to claim compensation for the losses that could have been avoided. The aggrieved party can recover the costs that she incurred in reasonable reliance on the contract, even if she cannot recover her full expectation damages. Reliance damages are the usual measure for promissory estopple Reliance damages are available if a bargained for exchange can be established and there is no reason to limit the enforceability of the bargain. For reliance the plaintiff must establish damages with reasonable certainty. Reliance damages when expectation damages are inappropriate:

Hawkins v. McGee: the hairy hand case; Doctor promised patient a perfect hand and after surgery the hand began growing hair because the doc grafted skin from the chest. The patient sued for the difference between regular hand and hairy hand. Sullivan v. O'Connor: patient had a straight but long nose, patient was an entertainer and wanted to enhance her beauty and allowed doctor to perform surgery. The post surgery nose was deformed and anything but pleasing. The court concluded that in circumstances where an agreement of this sort should be enforced at all, recovery limited to restitution seemed too meager, while expectancy recovery may well be excessive. The court instead favored applying a reliance measure to facts such as those presented; however the court never did not ultimately decide whether the plaintiff could have received full expectation damages because the plaintiff did not press for full expectation damages on appeal. Any cost she incurred and any rejections she suffered, she would be able to recover. She was also given pain and suffering which is normally unusual in contract remedies. Hollywood Fantasy Corp. v. Gabor Facts: Hollywood Fantasy Corporation was briefly in the business of providing "fantasy vacation" packages that would allow participants to "make a movie" with a Hollywood personality and imagine themselves movie stars, for one week, for a fee. Hollywood Fantasy arranged to have Zsa Zsa Gabor as one of two celebrities at the event. Two weeks before the fantasy vacation event, Ms. Gabor cancelled her appearance. A short time later, Hollywood Fantasy cancelled the vacation event, to which it had sold only two tickets. A short time after that, Hollywood Fantasy went out of business. Hollywood Fantasy sued Ms. Gabor for breach of contract and fraud. Trial judge found that Ms. Gabor and Hollywood Fantasy had reached a contract. Jury found that Ms. Gabor had breached that contract. $100,000 for the breach, as well as $100,000 for fraud. Procedural History: District Court: Set aside the jury's fraud verdict for lack of evidence. $100,000 on the breach of contract, plus attorneys' fees and post-judgment interest. Ms. Gabor appealed. Fifth Circuit Court Affirm the district court's judgment as to liability; Reverse the district court's damages award; Render judgment for a lesser amount of damages. Issue:

Whether Hollywood Fantasy can recover compensatory damages based of speculation and Uncertainty RULE: Reliance Damages: 1. It is a general rule that the victim of a breach of contract should be restored to the position he would have been in had the contract been performed. 2. However, an injured party may, if he so chooses, ignore the element of profits and recover as damages his expenditures in reliance. Forseeable Damages: 1. Actual damages may be recovered when loss is the natural, probable, and forseeable consequence of the defendants conduct. 2. The record must contain evidence that permits the jury to assess with reasonable certainty the degree of the damage by the breach or interference relative to Speculative, Uncertain Conditions1. Profits which are largely speculative, as from an activity dependent of uncertain or changing market conditions, or on chancy business opportunities, or on the success of a new and unproven enterprise, cannot be recovered. 2. The mere hope for success of an untried enterprise, even when that hope is realistic, is not enough for recovery of lost profits. Holding: No Reasoning: Reliance Damages: Ask if it is reasonably certain, foreseeable, and avoidable. Reasonable certainty, foreseeability, avoidable. Can you establish it with reasonable certainty, was it foreseeable? Did the person try to avoid the injury (mitigate damages.)

Saffir Testified That: Hollywood Fantasy lost $ 250,000 in profits from future fantasy vacation events. $1,000,000 in future profits the bloopers/outtakes television series Courts Response: Lost Profit must be proved with Reasonable Certainty. The $ 100,000 damages award cannot be supported as the recovery of lost profits. Although recovery of lost profits does not require that the loss be susceptible to exact calculation, lost profits must be proved with reasonable certainty. Future Profits amount to $250K This was based on his estimate that HF would make a $ 25,000 profit from each of ten future events. However, there was only one previous venture that lost money and the employees did not get paid.

Also, he had no future commitments. No evidence that HF had been a successful enterprise or a prior enterprise. Speculative, Uncertain Conditions The Inquiry is about the Activity and not the Enterprise The relevant "enterprise" in the lost profits inquiry is not the business entity, but the activity which is alleged to have been damaged. Courts Response: Loss of Television Revenue There were no object facts, figures, or data to substantiate the estimate of lost profits. Lost $200K in Good Will The lost of good will or business reputation is not recoverable in a breach of contract. $200K Lost Investment in the Corporation It is pure speculation but for Ms. Gabors breach that HF would not have gone out of business. Forseeable Damages: Courts Response: Out Of Pocket Expenses Did present sufficient evidence. (1) $ 8,500 in printing costs; (2) $ 12,000 in marketing costs; (3) $ 22,000 in personnel and miscellaneous expenses, including air fares, staff accommodations, script-writing costs, telephone calls, and logo t-shirts; (4) $ 9,000 in travel expenses; and (5) $ 6,000 in expenses relating to preparations to film the San Antonio event for a possible television pilot. These expenses total $ 57,500. Mr. Saffir's testimony as to HFs out-of-pocket expenses is sufficient to support an award of $ 57,500 for breach of contract, but not to support an award of $ 100,000. The award of $ 100,000 is reversed in part on the basis that the evidence disclosed in the record does not support compensatory damages beyond $ 57,500.

Sullivan v. Oregon Landmark-One Ltd. Note case.no notes. Restatement Second 349 As an alternative to the measure of damages stated in 347 the expectation measure, the injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered has the contract been performed. Acing Contracts says: A party's recovery of reliance damages cannot exceed the full contract price. This is a possibility in a losing contract - one where the non-breaching

party would have suffered a loss rather than a profit and is actually saved from further loss by virtue of the breach. Here, the non-breaching party may recover reliance damages "less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed." Wartzman v. Hightower Productions, Ltd. Brief Fact Summary. A corporation could not achieve its stated purpose because it was not properly structured due to the negligence of its attorney. Synopsis of Rule of Law. In the event of a breach of contract, damages for expenses incurred in reliance on the contract are recoverable, less any loss that would have resulted if the contract had been performed. Facts. The Appellee, Hightower Productions, Ltd. (Appellee), was formed for the purpose of breaking the Guinness World Record for flagpole sitting. The Appellee hired the Appellant, Paul Wartzman (Appellant), as a lawyer to incorporate the venture. The Appellee informed the Appellant that it needed to sell stock to raise the funds necessary to finance the project. After the Appellee began selling the stock, the Appellant informed the Appellee that the corporation was structured wrong and was not properly authorized to sell stock. The Appellee also advised the Appellant to retain a securities attorney to correct the problem, which would cost approximately ten to fifteen thousand dollars. The Appellees shareholders elected to abandon the project. The Appellee then filed suit on breach of contract and negligence grounds seeking damages for expenses incurred in reliance of the contract, including the promoter's initial investments, shareholders investments, outstanding liabilities, liability to talent consultants and accrued salaries to employees. Issue. If anticipated profits are speculative, are damages incurred in reliance on the contract recoverable? Held. Yes. Judgment affirmed. The Appellant was entitled to recover any loss that he incurred from relying upon the contract. Discussion. The court reasoned that in the instant case, the Appellant knew that the Appellee was dependent upon the ability to sell stock to finance the venture. Therefore, the nexus between the breach and the failure of the project was established. The court examined case law and the Restatement of Contracts to find that recovery of reliance damages is proper where lost profits are too uncertain to calculate. It noted that this doctrine is limited in cases where the breaching party can prove that the other party would have sustained greater loss if the contract had been performed. Furthermore, while generally a breaching party is liable only for those expenses that are a foreseeable result of a breach at the time the contract was made, these limitations do not apply to an attorney when his client is relying upon his skill and knowledge. Finally, the court

reasoned that the Appellant was under no duty to mitigate its damages by hiring a security specialist because this would cost a substantial amount of money and parties are not obligated to mitigate damages by incurring large expenses. Also, the Appellant himself could have hired a specialist and chose not to do so.

Restitution as an Alternative to Expectation or Reliance Damages When a court requires a party to account for the benefits it has received from the other party, the remedy to disgorge the benefit received is called restitution. There are times when restitution is not the result from a contract being formed. However, it can be appropriate for times when a contract is unenforceable for some reason, such as indefiniteness, a defect in the bargaining process, or failure to satisfy the statute of frauds. Reliance damages aim to reimburse a person for any losses they may have suffered in preparation for or in reliance on the contract, and thus place them in the position they would have occupied had there been no contract. Restitution focuses on the benefit received by the breaching party - and in order to prevent unjust enrichment, courts require a breaching party to disgorge the benefit he received from the non-breaching party under the contract.

It is measured by what the defendant gained vs. what the plaintiff loses. This makes restitution unique. The common place you see this is unjust enrichment where you gained something unjustly or unfairly and therefore, the court rules to disgorge you from the benefit. If the injured party comes in with unclean hands, then the court may reduce the amount they would disgorge from the defendant. Bauch & Lomb, Inc. v. Bressler Facts: B&L entered into a series of contracts with Sonomed where it was awarded the exclusive rights to distribute Sonomeds products (the A and B Scan devices for the eyes) within a certain territory. In exchange, B&L paid Sonomed $550k and agreed to purchase certain minimum annual quantities of Sonomeds products. Sonomed had operational difficulties and it caused the delivery of the products were delayed. When Sonomed failed to cure the default, B&L stopped purchasing products from Sonomed and instead started manufacturing them itself. Though B&L complained about the delays, B&Ls internal records showed it had over 200 Sonomed products in stock and B&L sales were declining and retail prices for competitive products were also declining. The trial court found that B&L engaged in crash sales operation and discounted its prices for Sonomed products by as much as 40%. Sonomed ultimately cancelled the contract and claimed that B&L had no right to stop purchasing its products under the contract. The trial court concluded that Sonomed

was in material breach because it had no right to terminate the contract. Also, the court held that even if B&L had been in breach, Sonomed did not give a 30 day notice of termination as required by the contract. The Court of Appeals affirmed that Sonomed was in material breach. Procedural History: District court denied B&Ls claim for lost profit damages based on sales by Sonomed in B&Ls exclusive territory because there was no evidence linking Sonomeds sales to profits lost by B&L. Court awarded $500k to B&L for prepaid royalty paid to Sonomed as a right to sell their products. Court ruled that Sonomeds breach vitiated B&Ls exclusive distribution right and stated that return of the payment made whole and reasonably compensated B&L. Sonomed appeals to challenge the $500k damage award to B&L. B&L claimed lost profits but did not present evidence to prove that it would have made the same sales or same profits if Sonomed did not breach the contract. Therefore, the district court denied these claims as speculative, a determination B&L does not challenge on appeal. Issue: How restitution damages are determined? Rule: New York law requires that a plaintiff prove with a reasonable degree of certainty that any claimed loss of profits were caused by the defendants breach. Holding: Vacate the district courts award and direct the court on remand to grant a restitutionary award to B&L consistent with the opinion. Reasoning: The district court may have been seeking to apply the doctrine of expectation damages which gives force to the provisions of a contract by placing the aggrieved party in the same economic position it would have been in had both parties fully performed. However, the court stated that if the district court awarded the$500k as expectation damages, the district court erred. The reasoning is because there is no evidence showing that B&L would have realized a $500k return if the contract had been fully performed. And because there is no evidence connecting the $500k to any profits that B&L would have received, the district courts award cannot be sustained pursuant to an expectation theory of recovery. The district court suggested that the award of the $500k may be pursuant to the doctrine of reliance damages. Under reliance damages, a plaintiff may recover his expenses of preparation and of part performance, as well as other foreseeable expenses incurred in reliance upon the contract. The alternative reliance measure of damages rests on the premise that the injured partys reliance interest is no greater than the premise that the injured partys reliance interest is no greater than the partys expectation interest. The courts will not knowingly put the plaintiff in a better position than he would have occupied had the contract been fully performed. Therefore, the court stated a reliance recovery will be offset by the amount of any loss

that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been fully performed. Because the district court did not address the losing contract limitation upon awards of reliance damages, there is no evidence that B&L was entitled to the damages. There was no justification for the $500k as reliance damages. However, the court ruled that B&L may be entitled to damages by way of restitution. The doctrine of restitution is premised upon the equitable principle that a person who has been unjustly enriched at the expense of another is required to make restitution to the other. If a defendant is liable for material breach, the plaintiff may recover the reasonable value of services rendered, goods delivered, or property conveyed less the reasonable value of any counter-performance received by him. Restitution looks to the reasonable value of any benefit conferred upon the defendant by the plaintiff, and is not governed by the terms of the parties Agreement, restitution is available even if the plaintiff would have lost money on the contract if it had been fully performed. As long as B&L can show that Sonomed is unjustly enriched by keeping the $500k, they can be entitled to restitution. However, restitution does not guarantee the entire $500k payment. The contract was in place for 2 years so therefore, the time that lapsed must be offset. In order to determine how much B&L can recover, it should look to the benefit in the contract as the best valuation measure available. Snepp v. United States Snepp, a former employee of the CIA published a book about CIAs activities in S. Vietnam. His employment contract prohibited him from exposing classified information and also required him to submit anything he might write about CIA to them for their review. Though the book did not expose any classified information, he did not allow the CIA to pre-approve his book before publishing it. Since he breached his contract with CIA, the CIA requested that Mr. Snepp be disgorged from his profits from the book. The Supreme Court affirmed a district courts judgment ruling that he should be disgorged from the profits of his book due to his actions. Three judges dissented, holding that this was an ordinary breach of contract rather than a breach of fiduciary duty. The dissent argue that the Government would be unjustly enriched if Snepps had to be disgorged from his profit from a legitimate activity. Problem 20.6 What damages would you award and why? Expectation Damages - Alison breached the contract and it was a material, unjustifiable breach. However, you cannot calculate what she would have made because its speculative. Reliance Damages would be $75,000 for the training. Restitution damages - its hard to calculate.

Therefore, it is difficult to show how they can recover any damages. Problem 20.7 (a) Fred would be unjustly enriched because not only did he get a better job but to keep the $2k would unjustly enrich him. Hal gets his $2k back. (b) Hal gets nothing back. Fred gets $5k because he's a lost volume seller. (c) Hard to say. They are both present with unclean hands and its difficult to say that he's unjustly enriched because he isn't working so this may be a wash. Limits on Recovery of Restitution Restitution is sometimes described as an alternative to recovery on the contract. When D breaches a contract, P may seek to enforce it. Can sue for full expectation damages or failing that, reliance damages. Liquidated damages clause Liquidates (or makes certain) the damages that are available to the aggrieved party. Liquidated damages are useful because: Parties may be able to agree to a dollar value in advance that is likely to approximate the damages they will suffer upon breach. Relives the aggrieved party of having to establish damages with reasonable certainty Puts breaching party on notice of the extent of its potential liability. Facilitate negotiated settlement of dispute rather than costly and uncertain litigation. Restatement, Second 356. Liquidated Damages and Penalties (1) Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty UCC 2-718. Liquidation or Limitation of Damages; Deposits. (1) Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual harm caused by the breach and, in a consumer contract, the difficulties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaining an adequate remedy. Section 2-719 determines the enforceability of a term that limits but does not liquidate damages

Both require that the damages be reasonable in light of the anticipated or actual harm caused by the breach. Reasonableness by anticipated or actual harm (Both UCC and Restatement)

Reasonableness is something determined by facts which means you would have to argue and counter this because it could be either side. Reasonableness is something determined by facts which means you would have to argue and counter this because it could be either side. Lake River Corp v. Carborundum Co. Facts: Carborundum manufacturers Ferro Carbo an abrasive powder used in making steel. Carborunum entered into a contract with Lake River by which the latter agreed to provide distribution services in its warehouse in Illinois. Lake River would receive the powder in bulk from Carborundum, bag it, and ship the bagged product to Carborundums customers. The powder would remain Carborundums property until delivered to the customers. Carborundum insisted that Lake River install a new bagging system to handle the contract. In order to be sure of being able to recover the cost of the new system (89,000.) and make a profit of 20% of the contract price, Lake River insisted on the following minimum-quantity guarantee. The minimum quantity guarantee was for 22,500 tons and any difference between the quantity bagged and the guaranteed Lake River would bill Carborundum. The market for steel plummeted and Lake River did not get what was guaranteed to them and Carborundum still owed Lake River $241,000.00. Procedural History: Lake River brought suit for $241,000.00. Carborundum Counter Claimed. The district Judge, after a bench trial, gave judgment for both parties. Both parties appealed. Issue: Whether the formula in the minimum guarantee clause imposes a penalty for breach of contract or is merely an effort to liquidate damages. Rule: A liquidation of damages must be a reasonable estimate at the times of contracting of the likely damages from breach and the need for estimation as that time must be shown by reference to the likely difficult of measuring the actual damages from a breach of contract after the breach occurs. If damages would be easy to determine then, or if the estimate greatly exceeds a reasonable upper estimate of what the damages are likely to be, it is a penalty. Holding:

The damage formula in this case is a penalty and not a liquidation of damages, because it is designed always to assure Lake River more than its actual damages. Reasoning: The formula---full contract price minus the amount already invoiced to Carborundum--is invariant to the gravity of the breach. When a contract specifies a single sum in damages for any and all breaches even though it is apparent that all are not of the same gravity, the specification is not a reasonable effort to estimate damages; and when in addition the fixed sum greatly exceeds the actual damages likely to be inflicted by a minor breach, its character as a penalty becomes unmistakable. The fact that the damage formula is invalid does not deprive Lake River of a remedy. The parties did not contract explicitly with reference to the measure of damages if the agreed on damage formula was invalidated, but all this means is that the victim of the breach is entitled to his common law damages. In this case that would be the unpaid contract price of $241,000.00 minus the costs that Lake River saved by not having to complete the contract. Case remanded to the district judge to fix these damages. If you are trying to challenge the liquidated damages clause, you have to show both actual and anticipated damages. Wedner v. Fidelity Security Systems, Inc. Facts: This action involved a contract for a burglar alarm system. There was a burglary involving the loss of $46,180.00 in furs. Liquidated Recovery The appellant suffered a loss of $ 46,180.00 due to the appellee's wrongful failure to perform under a burglary protection service contract, but because of a contract provision he was allowed recovery of only $ 312.00. Contract Provisions The contract provided that the appellee, FEPS, was not to be liable for any loss or damages to the goods of the appellant and then continued: "If there shall, notwithstanding the above provisions, at any time arise any liability on the part of FEPS by virtue of this agreement, whether due to the negligence of FEPS or otherwise, such liability is and shall be limited to a sum equal in amount to the yearly service charge hereunder, which sum shall be paid and received by the Subscriber as liquidated damages." Wedner Args

The appellant contends that this is an unreasonable forecast of the probable damages resulting from a breach of the contract.

Giving Effect to (Penalty or Liquidation Clause) There is a well settled general principle that courts will not give effect to a provision in a contract which is a penalty, but will give effect to a provision in a contract which is deemed a liquidated damages provision Procedural History: First Trial nonsuit outcome Nonsuit - A judgment against a plaintiff for failure to prosecute the case or to introduce sufficient evidence.It was first tried by Judge Silvestri without a jury and a nonsuit resulted. The nonsuit was removed and a new trial granted. New Trial Liquidated damages It was then tried by Judge McLean without a jury and although although he found the contract had been negligently breached, the appellant was only entitled to liquidated damages in the amount of $ 312.00 by the terms of the contract. Appellant Court Affirmed Issue: Whether there was any reason why the limitation on liability should not be given? No Rule: 339 Protection of Obligor in Cases of Adverse Claims Where a claim adverse to that of an assignee subjects the obligor to a substantial risk beyond that imposed on him by his contract, the obligor will be granted such relief as is equitable in the circumstances. Contracting parties can by agreement limit their liability in damages to a specified amount, either at the time of making their principal contract, or subsequently thereto. Holding: NO Reasoning: In the contract it stated that Liability is and shall be limited to the yearly service charge of $312 are anything but a limitation of liability and not really a liquidated damages clause. In this case there was a private arrangement. The appellant had a choice as to how to

protect his property. He had a choice to obtain insurance. Both parties are experience and established business persons. The Pl had 20 years of this type of burglary alarm protection with the Df competitor. The Pl is not a sheep keeping company with the wolves. 2-719. Contractual Modification or Limitation of Remedy. (1) Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on liquidation and limitation of damages, (a) the agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts; and (b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy. (2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act. (3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not. If you're selling something like a product, you can't limit your liability for what you sold. Chapter 20 pt 2 Tuesday, April 12, 2011 7:00 PM You can get consequential/incidential damages even though you are not getting expectation damages. (Normally consequential damages is a subset to expectation damages.) Expectation As though performed Restitution Disgorge benefit

Limitation - ceiling - excludes type (i.e. consequential & incidental) versus Liquidated - formula or agreed/specified amount H. Noneconomic and Noncompensatory Damages Economic consideration is especially strongly expressed in the law of contract remedies. Despite this, there are times when aggrieved parties continue to pursue noneconomic or noncompensatory damages such as pain, suffering, or emotional distress and even punitive damages. However, though normally these plaintiffs are unsuccessful in their quests, there are some narrow circumstances in which the courts grant them relief they seek. 1. Damages for Pain, Suffering, and Emotional Distress Cost of litigation itself are not compensable. Damages are recoverable only if they can be established with reasonable certainty, they were foreseeable, and they were not reasonably avoidable. Erlich v. Menezes Facts: The Erlichs hired Mr. Menezes to build their dream home. In December 1990, they moved in and shortly thereafter, February 1991, the rain came in and began to ruin their house. The house leaked from every conceivable location. Walls were saturated, two bedrooms downstairs and a pool room were ruined. The living room was filled with three inches of standing water. The ceiling in the garage became some saturated that the plaster liquefied and fell into chunks on the floor. They contacted Menezes and he attempted to make repairs however, his fixes proved to be ineffectual. The Erlichs got their home inspected by another general contractor and a structural engineer. In confirming the defects in the roof, exterior stucco, windows and waterproofing, the inspection revealed serious structural components. None of the 20 load bearing walls were constructed properly and the foundation that was supposed to be support 12,000 pounds, could only support 2,000 pounds. The couple testified that they suffered emotional distress as a result of the defective condition of the house. Barry Erlich stated that this ordeal caused his heart condition, superventricular tachyarrhythmia, to be aggravated and Sara Erlich feared the house would harm her daughter. Procedural History: Plaintiffs brought suit for the full costs associated with repair of the home, and for emotional distress. At trial of this matter, the court found that the Defendant had not acted with intent, and that he was not guilty of fraud and negligent misrepresentation. The trial court, however, did find that he breached his contract and he was assessed the cost of repairs on the house. Additionally, Plaintiffs were awarded

damages for emotional distress. The Court of Appeals affirmed the judgment, noting in their opinion that a breach of contract action may support a tort claim as well. Defendant appealed. Issue. Are tort remedies available in a breach of contract action, when a plaintiff can prove the elements of the tort? Rule: Recovery for emotional disturbance will be excluded unless the breach also caused bodily harm or the contract or the breach is of such a kind that serious emotional disturbance was a particularly likely result. Tort remedies are not available in breach of contract actions. A claim for breach of contract alone does not give rise to damages in tort, even if that breach is negligent. Holding: No. Reversed and remanded for further proceedings consisted with the opinion, as a matter of public policy. Reasoning: As a general rule, tort remedies are not available in breach of contract actions. The exception to this rule is when the breaching party breaches an additional or special duty, or acts with intent and malice. In this case, Defendant was negligent, but he was not guilty of fraud and had no duty to insure that Plaintiffs emotional stability remained in the status quo. In reversing the judgment of the lower courts, the California Supreme Court held that damages for emotional distress were unavailable to these Plaintiffs. Because Plaintiffs could not prove that Defendant had acted with bad intent, such that he was guilty of any fraud or misrepresentation, the Plaintiffs only remedy was for breach of contract. In reaching its opinion, the California Supreme Court also found that Plaintiffs could not prevail on an emotional distress claim, when they continued to reside in the residence for five years. Tort Damages = No Recovery

Consequential or Special Damages = No Recovery

Only available where the plaintiff suffers only property damage or economic loss The Erlichs did not suffer physical injury (no one was hit with a falling beam.) Even with Barrys heart

Contract damages are generally limited to those within the contemplation of the parties when the contract was entered into or at least reasonably foreseeable by them at the time. Consequential damages beyond the expectations of the parties are not recoverable.

disease, it was not directly from the negligent construction. A public policy argument was made that adding an emotional distress component to recovery for construction defects could increase the already prohibitively high cost of housing in California which would affect the availability of insurance for builders, and greatly diminish the supply of affordable housing. Onion Growers Two brothers went into bankruptcy when their onion crop failed. The growers sued the supplier of the onion seed. They argued that in a calculated and considered effort to rush the seeds to the market, the supplier failed to adequately test the quality of the seed. The brothers introduced evidence supporting their claim and the court held that there was indeed evidence of willful and wanton breach adequate to support an award of damages for emotional distress. Ross v. Cemetery Francine Ross sued for emotional disturbance damages when the cemetery violated their contract to have a private ceremony and burial for her 17 yr old daughter, Kristie. Francine asked for a private ceremony because her daughter was a punk rocker and she feared that her former friends would cause problems at the ceremony. However, because the cemetery did not honor the contract, several punk rockers attended both services wearing outrageous hair colors, some wearing white face with black lipstick, others wearing leather and chains with batons and another wore a dress with live rats. The uninvited guest were drinking and using drugs and were physically and verbally abusive to the family members and invited guest. The family had to call the police when a disturbance ensued. The court held that Ms. Ross should recover and the trial court erred when they dismissed her lawsuit. Lane v. Kindercare Learning Centers, Inc. Facts: On December 9, 1992, the plaintiff dropped her daughter off at the defendants daycare. The plaintiffs daughter was prescribed medicine and the plaintiff signed a form stating that she authorized the defendant to administer medicine to her child. Just after 5pm, the child had fallen asleep where a defendant employee placed the child in a crib. Around 6pm, defendant employees locked the doors of the facility and went home for the day, unaware that the child was still asleep in the crib. Shortly thereafter, the plaintiff arrived to retrieve her child and discovered that her child had been left in the facility alone. She called the police who saw the child sleeping in the crib through a window and broke the window to retrieve the child. Once inside the facility, the plaintiff discovered that the defendant did not administer the medicine as she directed them to.

Procedural History: Plaintiff filed a complaint against the defendant alleging breach of contract, statutory, regulatory, and internal policy violations, negligence, and gross negligence and sought exemplary damages. Defendants moved for summary disposition of plaintiffs claims. The trial court granted summary disposition of plaintiffs claims. Plaintiff first argues that the trial court erred in granting summary disposition of her breach of contract claimon the ground that plaintiff failed to allege compensable emotional distress. Issue: Whether the Plaintiff can recover from emotional distress due to a breach of contract. Rule: Damages for emotional distress may be recovered for the breach of a contract in cases that do not involve commercial or pecuniary contracts, but involve of a personal nature. Holding: Trial court erred in granting summary disposition of plaintiffs breach of contract claim. Reasoning: Court ruled that a contract to care for ones child is a matter of mental concern and solicitude and at the time the contract was executed, it was foreseeable that a breach of contract would result in mental distress damages to plaintiff, which would extend beyond the mere annoyance and vexation that normally occurs in a breach of contract. Court also ruled that the trial court erred in granting summary disposition of plaintiffs breach of contract claim. The trial court said that absent a definite and objective physical injury from her emotional distress, the plaintiff could not recover however, this court ruled that physical injury does not have to occur. How do you establish emotional disturbance damages? Vomiting Physical changes Psych fees However, it can be tricky. Its hard to quantify 2. Punitive Damages Intends to punish the breacher and deter others from following the breachers example. Because of the deterrent effect, these are also called exemplary damages Exemplary damages damages that are intended to make an example of the evil defendant. Restatement, Second 355. Punitive Damages

Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable. **UCC 1-305(a) takes a similar approach, stating neither consequential or special damages nor penal damages may be had except as specifically provided in the UCC or by other rule of law.

Both rely on tort or other rules outside of contract law to justify the award of punitive damages. Generally, a tort can justify punitive damages if it is willful, wanton, reckless, or malicious.

Seamans Direct Buying Services, Inc. v. Standard Oil Co. Court held that a party may commit a tort by denying, in bad faith and without probable cause, that a contract exists in an effort to shield itself from liability. This case dicta suggested that other relationships with similar characteristics and deserving of similar treatment allowed for any case that showed bad faith without probably cause should allow for punitive damages. Freeman & Mills, Inc. v. Belcher Oil Co. This case noted that Seamans ruling was a bad ruling and over turned it. Went back to the rule that if the breach of a contract caused a tort which would normally allow for punitive damages, then the party could recover. No longer made on bad faith without probable cause ruling. I. Specific Performance and Injunctions Specific performance still retains its character as an equitable remedy. - Land is always treated as specific performance **These force you to do or not to do something.** It is controversial because it is viewed as "servitude." Restatement, Second 359(1) states: specific performance or an injunction will not be ordered if damages would be adequate to protect the expectation interest of the injured party.

Concept of adequate damages conceal much subtlety and ambiguity. Sometimes damages are inadequate due to difficulty of obtaining a substitute for the promised performance. If the performance promised is unique and no amount of damages will allow the plaintiff to retain a replacement on the open market, then specific performance may be ordered.

Any unique, non fundable good - you may get specific performance. If you can be compensated for the damages, you will not get specific damages. Inadequacy of Damages: Restatement 2d Sec. 359(1) Specific performance or an injunction will not be ordered if damages would be adequate to protect the expectation interest of the injured party. UCC 2-716(1) Unless parties agree to that remedy, specific performance may be decreed where the goods are unique or in other proper circumstances -courts unlikely to grant specific performance for contract disputes -exception is real estate sales Van Wagner Advertising Corp. v. S&M Enterprises (NY App. 1986) pg 860 Facts: Plaintiff entered into contract with Barbara Michaels to lease exterior building wall in Manhattan for three years with option of seven additional years. Assumption was plaintiff would erect billboards, since wall faced Midtown Tunnel exit ramp. Plaintiff erected illuminated sign and leased it to Asch Advertising for three-year period starting March 1, 1982. Two months prior, Michaels had sold building to defendant, S&M. In August 1982, S&M contacted plaintiff and with letter saying they were canceling lease as of Oct. 18. Plaintiff abandoned space and filed suit in Nov. 1982. Procedural history: Plaintiff filed action, alleging contract cancellation by S&M was ineffective and lease was still in existence. Plaintiff sought specific performance and damages. Both parties introduced parol evidence at bench trial, including testimony about negotiations to explain meaning of cancelation provisions in lease. One party testified that S&M purchased building for purpose of demolition to build residential-commercial development starting in 1987 or sooner. Trial court declared lease valid and subsisting and found that the space was unique for advertising purpose intended in original contract between plaintiff and Michaels. But court did not mandate specific performance and ruled that plaintiff had adequate remedy at law for damages. Court said specific performance would be disproportionate in its harm to the defendant and its assistance to plaintiff. Court awarded lost revenues from plaintiffs contract with Asch sublease. Plaintiff appealed. Issue: Whether specific performance applies. Rule: Uniqueness test: Applying specific performance must not lie in any inherent physical uniqueness of property, but instead in the uncertainty of valuing it. What matters in measuring money damages is the volume, refinement, and reliability of the available information about substitutes for the subject matter of the breached contract. Restatement 2d Sec. 360: uniqueness does not entitle a plaintiff to remedy of specific performance. Adequacy of damages: Difficult of proving damages with reasonable certainty. Holding: Affirmed. Appeals Court rejected specific performance also.

Reasoning: Court found breach, but would not grant specific performance for plaintiff. S&M agreed to money damages, but said amount was improper. Court then looked for adequate remedy. Court said decision to award specific performance is one that is at discretion of trial court. Here, court says trial court did not err in its ruling. Court says specific performance is usual in sale of real estate, but not lease of real estate like situation here. Plaintiff argued that since trial court said space was unique, specific performance must be granted. This court says uniqueness does not guarantee specific performance. Court says there is a reasonable certainty a price could be fixed and without imposing an unacceptably high risk of undercompensating the injured tenant. Plaintiff argues damages should be higher to compensate for future subleases. Defendant argues that there is no guarantee there will be future subleases and damages too high. Court rejected both of these arguments. Plaintiff argues that it was unlikely building would be sold since only sold once in past 40 years. Defendant argues that they paid millions of dollars for building and can do what they want with it. Court says when uncertainty is generated by the two parties, then benefit of that doubt must go to plaintiff and not contract violator. However, court says despite these uncertainties, they do not mean that damages are inadequate. Court says trial court correctly denied specific performance. Court says that imposition of an equitable remedy must not work itself into an inequity and specific performance should not be awarded if it creates undue hardship. Problem 20.10 Under UCC 2-716, Fred likley can compel Argo to sell the combine. Under UCC 2-716, unless parties agree to that remedy, specific performance may be decreed where the goods are unique or in other proper circumstances. Fred can argue that this combine was unique because of his situation and the proper circumstances and loss of harvest. And since the company cannot afford to pay him back his deposit, he likely won't get damages back and so the court will order specific performance. Discretionary nature of the remedy: If equities do not factor performance, court often declines specific performance Kilarjian v. Vastola ***This is case from first semester Contract for sale of property. Elderly woman suffers from spinal muscular atrophy and wants to stay in her home during height of her illness. Buyer sues for specific performance. Court refuses to grant specific performance because it would impose future physical and mental hardship on elderly seller. Campbell v. Carr (SC App 2004) pg 865 Facts: Martha Carr of NY inherited 108-acres of lane in SC from her mother in 1996. In 1998, Carr contacted the Campbells, who had leased property for 30 years, about selling

to them. Campbell told Carr the propertys agriculture value was $54,000, according to tax assessor. Carr and Campbell then entered into written contract for property sale for $54,000, or about $500 an acre. Campbell paid earnest money deposit of $1,000. Carr didnt attend closing because she thought price was unfair. She returned deposit, but Campbells gave it back to her. A year later, Carr conveyed one half interest of property to her cousin, Ruth Riley Glover. Tax Assessor said fair market value of property was $103,700. County had originally computed taxes using agricultural value, not fair market. Campbell admitted they only told Carr agriculture value. Real estate expert testified at trial that property is worth $162,000 or $1,500 an acre. Carr testified she had only seen land once when she was a child, and that she was on medication for schizophrenia and depression when she entered into contract. Procedural history: Campbell sued Carr and Glover for specific performance of land contract. Master-in-equity tried case without jury and ordered specific performance. Issue: Whether specific performance applies. Rule: Specific performance should be granted only if there is no adequate remedy at law and specific enforcement of the contract is equitable between the parties. To compel specific performance, court must find: 1. Clear evidence of valid agreement 2. Agreement had been partly carried into execution on one side with the approbation of the other, and 3. The party who comes to compel performance has performed his or her part, or has been and remains able and willing to perform their part. Holding: Reverse Reasoning: To show inadequacy there must be other inequities or be so gross as to show fraud. When other inequities show bad faith, concealment, misrepresentation, undue advantage, oppression, ignorance, weakness of mind, incapacity, combined with inadequacy of price, court is easily induced to grant relief. Price inadequacy determined by date contract was entered. Court says inadequacy must be not be measured by grains, but it ought to be palpably disproportioned to the real and market value of the property, so as to constitute a hard, unreasonable and unconscionable contract. But it is not necessary that it should be so gross as to excite and exclamation or to indicate imposition, oppression or fraud, for this would be sufficient ground not only for refusing specific performance but for rescinding the contract. Court says consideration here was inadequate and $54,000 sales price was significantly below appraised value of $162,000. Court also pointed to Carrs

weakened state of mind. These things make it inequitable to order specific performance. Injunctive relief as an alternative to specific performance: specific performance is form of injunctive relief positive action by court = mandatory injunction (usually involve decree and supervision of compliance) negative action by court = prohibitory injunction court reluctant to force personal services (violation of 13th Amendment) More likely to give a prohibitory injunction instead of a mandatory injunction. Lumley v. Wagner Facts: Opera Diva Johanna Wagner was contracted to sing exclusively at Lumleys theater in London for three months. Before her contract was complete, she made arrangements to sing at competing club, Covent Garden. Holding: Court said it could not force her to sing at Lumleys. Court said would be hard to force without proof damage, which plaintiff did not show. Rule: Standards for obtaining injunction against actions inconsistent with contract are similar to specific performance: need to show damages would be inadequate remedy for breach. Example of prohibitory injunction: non-compete clauses (like the crap Darmun tried to pull) Must be reasonable. Systems and Software, Inc. v. Barnes (Vt 2005) pg 870 Facts: This is a non-compete case. Plaintiff Systems and Software is a Vermont company that designs and sells software for billing, accounting and finance. In August 2002, plaintiff hired defendant Barnes at-will to be a regional vice president of sales. Defendant signed a non-compete that prohibited him from working for competitors during his employment and six months after employment. In 2004, defendant quit and started company with his wife called Spirit Technologies Consulting Group. Spirits only customer was Utility Solutions, a competitor to the plaintiff. Procedural history: Plaintiff filed complaint seeking injunctive relief to enforce noncompete. Trial court issued order enjoining Barnes from working as a consultant or with Utility Solutions or any other competitors of the plaintiff for term of non-compete. Barnes appealed. Issue: Whether non-compete can be enforced Rule: Restatement 2d Sec. 188(1): restrictive covenant is unreasonably in restraint of trade if:

a. the restraint is greater than is needed to protect the promisees legitimate interest, or b. the promisees need is outweighed by the hardship to the promisor and likely injury to the public. Holding: Affirmed. Reasoning: Court relied on Restatement Sec. 188 and looked at Roys Orthopedic Inc. c. Lavigne, which says non-competes can be enforced unless violates public policy. Barnes arguments 1. plaintiff did not have legitimate protectable interests Courts ruling Not a valid argument because it is based on faulty promise that non-competes can be enforced only for trade secrets and confidential customer information. Court says most jurisdictions do not limit scope of non-competes. Restatement 3d Sec. 6.05: non-competes can protect legitimate employer interests such as customer relationships and employee-specific goodwill that are significantly broader than propriety information such as trade secrets or confidential info. Trial court says there is a legitimate business interest here to protect. This court affirms. 2. the agreement contains unnecessary restrictions and imposes an undue hardship on him, (he suggest court impose less restrictive non-compete such as not soliciting current Court rejects these arguments and says dont see anything that shows unequal bargaining relationship between employer and employee. Court says defendant willing to sign non-compete when he took job with plaintiff and that agreement does not prohibit him from

customers from plaintiff)

earning a living. Court finds no error in trial courts ruling. Court says six-month restriction is not unreasonable.

3. he did not violate the agreement, and

Court rejects this and says evidence supports that he violated agreement because his only customer Utility Solutions is a competitor of the plaintiff on at least 2 contracts. Defendant also went to trade show to represent Utility Solutions at booth near plaintiff.

4. even if he did, plaintiff should be enstopped from enforcing it.

Court finds no merit in this argument and finds no evidence to support defendants claim that he was misled when he signed noncompete.

Thus, court finds that trial courts ruling was correct. Problem 20.12 Need to know - is a year reasonable? - what is the market like? - is it an undue burden on the employee? - are you there for two days or two years? Restatement 188(1) would apply.