CONTRACT FORMATION, Exercises of Law

Download CONTRACT FORMATION and more Exercises Law in PDF only on Docsity! CONTRACTS PROFESSOR KEVIN DAVIS FALL 2013 GRADE: A CONTRACT FORMATION OBJECTIVE THEORY OF ASSENT • Reasonable, objective, reasonable person standard that looks at outward manifestations, not inner thoughts, to determine if there was an offer (R § 19) o Exception: if either party has special knowledge that the other party does not intend to be bound (i.e. joking) • Policy: evidentiary difficulty of proving subjective intentions, fairness of having speaker bear costs of his misunderstanding, Kaldor-Hicks efficiency considerations • Lucy v. Zehmer: contract for sale of land negotiated in bar upheld even though offeror thought it was a joke; offeree thought it was serious, outward manifestations indicated seriousness, and there was no fraud, so joke was not an excuse • Specht v. Netscape: browse/scroll-wrap licensing terms on a webpage; a reasonable person would not be expected to assent because they were not obviously visible, lacked notice OFFER • Mutually binding promise that become binding when offeree accepts (R § 24) • Offeror must reasonably convey intent to be legally bound to offeree (R § 24), Lucy v. Zehmer • Cannot be merely an invitation to treat or preliminary negotiations o Lefkowitz: advertisements are generally not considered offers but this particular one was because it had limiting language (“first come, first served”), and clear quantity (definiteness); not open to negotiation or unlimited liability ACCEPTANCE • A manifestation of assent to the terms of an offer, as defined by the offeror, either a promise or a performance (R § 50) o Once offeree accepts offer, A BINDING CONTRACT EXISTS • No mutual assent if parties attach materially different meanings to their manifestations of assent (and neither/both know) (R § 20) o Peerless: contract to buy bales of cotton arriving on Peerless ship; two ships with that name, parties meants different ships; no contract for failure of mutual assent, no “meeting of the minds”  BUT if A knows of the meaning attached by B, then B’s meaning governs • BY PROMISE (bilateral contract) o Offer inviting acceptance by promise requires offeree to exercise due diligence to notify offeror of acceptance (R § 59)  Exception – parties can contract around general requirement of notice o Int’l Filter v. Conroe Gin: Intl. sent proposal for purchase of machinery to company: “become a contract when accepted and approved by purchased and approved by executive officer”; C wrote “accepted” and returned (offer); Intl. exec OK’ed and sent confirmation letter next day (acceptance); court held that notice was not required because it was not specified in the contract and the proposal stated that it would become a contract upon exec’s signature • BY PERFORMANCE (unilateral contract) o Only when invited to do so by the offeror can an offeree accept by performance (R § 53)  White v. Corlies: builder sent office estimate, office sent note that “upon agreement to finish in two weeks,” builder could start work “at once” (offer); builder commenced wood work/purchase of lumber, office revoked, saying that “upon agreement” invited acceptance by promise, builder said “at once” invited performance; court said this offer sought a return promise, not acceptance by performance, at least w/o notice and so was unenforceable; performance could have been appropriate if builder had somehow notified office, plus builder’s prep could have applied to any job, compare with:  Ever-Tite: signed roofing agreement stated that it would become binding upon written acceptance of contractor OR commencement of the work (offer); once credit check cleared 9 days later, Ever-Tite loaded material and went to house (acceptance); discovered that Greens had contracted with another contractor; offer had not lapsed since no time was specified in contract and 9 days was reasonable according to circumstances; acceptance by performance was valid o Notice is generally not required UNLESS offeree knows that offeror will likely not know of performance, then offeror’s duty is discharged unless (i) he learns of it in reasonable time, (ii) offeree tries reasonably to notify him, or (iii) offer specifically said that notification was not required (R § 54) 1  Carlill v. Carbolic Smoke Ball Co.: offer/promise (even by ad) that one who used influenza ball and still contracted the flu was entitled to £100 was binding based on offeree’s performance; no notice was required since it was a unilateral contract, also offer itself did not specify notice  Bishop v. Eaton: a unilateral contract involving a loan between one party in Illinois and another in Nova Scotia; did require reasonable notice of acceptance because the offeror was not likely to find out about the performance quickly due to distance • BY SILENCE o Silence is not considered acceptance UNLESS i) offeree takes goods/services with opportunity to reject them, knowing compensation is expected, ii) offeror has given offeree reason to believe that silence can show assent and offeree does so intending to accept offer, or iii) prior dealings indicate that a history of offeree’s silence as manifesting assent (R § 69)  Hobbs v. Massasoit: silent retention of eelskins constituted acceptance due to prior dealings between parties; offeree was required to reject offer by notifying the seller • WITH DIFFERENT TERMS o “BATTLE OF THE FORMS” • “Mirror Image Rule”: Acceptance must be on the exact terms proposed by the offer for contract to binding; if not identical, treated as a rejection/counter-offer • Disputes can arise pre-performance and post-performance o Post-performance: parties believed they had a contract, but their terms did not match  “Last shot” rule – last form sent dictates terms of contract (incentive effect) • Applies in all scenarios not relating to sales of goods o UCC § 2-207 • Definite expression of acceptance/written confirmation can equal acceptance even if it has additional or different terms • (1) Is acceptance expressly conditional on offeree’s assent to additional or different terms? o (a) If yes, no contract without assent – treated as a rejection/counter-offer (unless parties perform, then in (3)) o (b) If no, contract – move to step (2) • (2) Interpreting additional terms as proposals to the contract o (a) If not merchants, additional terms are never part of contract o (b) If between merchants, additional terms become part of contract unless:  (i) Offer expressly limits acceptance to terms of offer  (ii) Additional terms materially alter the contract • Open-ended, indefinite liability indemnification term is material, Union Carbide • Burden is on party opposing incorporation of term, Bayway • Must result in surprise (subjective/objective) and hardship o Objective surprise: reasonable merchant would not have assented to term, Bayway  Ex: NY considers arbitration clauses per se alteration, Marlene  (iii) Timely notification of objection to terms has already been given • *If differing/conflicting terms, no guide from statute o (a) Majority “knockout” rule – conflicting terms knock each other out and replaced with gap-fillers, Northrop o (b) Minority “first shot” rule – offeror’s different terms become part of the contract; offeror is “master of offer” o (c) CA rule – treat them just like additional terms under (2) • (3): Conduct by both parties that recognizes the existence of a contract can establish a contract when forms do not o Court “knocks out” forms and includes agreed-upon terms and gap-fillers • Dorton: an oral purchase order for carpets followed by a written order form containing an arbitration clause did not contain an expressly conditional acceptance, triggering (2); arbitration clause is construed as a proposal that will become part of the contract unless it “materially alters” it; unclear what the exact content of the oral agreement was, remanded • C. Itoh: steel coils purchase; seller’s form contained express condition to acceptance of all terms, including an arbitration clause; buyer never expressly assented or rejected; dispute over quality of coils and timing of delivery; contract implied from conduct (3) (since forms do not establish a contract b/c buyer never expressly assented to term) and arbitration knocked out since it’s not an agreed term or a gap-filler • Bayway: dispute over a tax clause in Bayway’s forms that was never objected to by Oxygenated; involves the application of (2) and the material alteration standard; burden is on party objecting to incorporation of the term; material alteration is one that would result in “surprise (subjective and objective, via “reasonable merchant”) or hardship”; evidence that such tax clauses were standard fare in oil industry, tax clause becomes part of the contract • Northrop: problem of “different” terms not addressed by statute; 90 day v. unlimited warranty provisions; dispute arose over return of goods past 90 days; court likes CA rule, but uses knockout rule (what Illinois would adopt) on different terms and applies gap-fillers of a “reasonable time” (b/w 30-180 days) to reject goods o ROLLING CONTRACT FORMATION 2 o Structural Polymer: SP entered agreement to buy prepreg from Zoltek with a price protection clause allowing SP to go elsewhere if Zoltek did not match competitor’s price; promise enforceable because requirements contracts contain an implied duty of good faith (UCC § 2-306); price protection clause as minimum floor for consideration (if Zoltek did match, SP could not go elsewhere without acting in bad faith) • 3) Adding a satisfaction clause, which implies a duty of good faith in making that judgment o Mattei: Developer entered agreement with owner for purchase of land, subject to developer obtaining leases satisfactory to developer; leases obtained, developer offered to pay balance of purchase price, owner refused to tender deed; agreement enforceable because satisfaction clauses imply duty to exercise judgment in good faith, which is adequate consideration  NY Gen Oblig. § 5-1103 (contract modifications) and § 5-1109 (firm offers) allows these to be enforceable lacking consideration if written down  NY Gen. Oblig § 5-1115 – no consideration needed in real estate deals o Involves past consideration or performance  A promise to reward/give something for an act already completed, not valid for consideration because it did not induce the promise • Feinberg: Company promised employee $200/month for life after she retired to reward her for 37 year tenure; received payments for a few years, new president reduces to $100, then terminates completely; promise not enforceable because past benefit not valid as consideration, did not induce employee to quit or work longer; recovered in promissory estoppel  NY Gen. Oblig. § 5-1105 allows past consideration to count as consideration for written contracts • Policy for: makes sure that contracts are efficient and fair, serve formality functions of evidentiary (evidence that a promise was made), cautionary (makes parties aware of significance of acts), channeling (evidences intention to be legally bound) • Policy against: promises can be efficient without it, consideration does not have to be equal, hampers contract modification STATUTE OF FRAUDS • Ancient writing requirement that renders certain categories of contracts unenforceable if not commemorated in writing o *Only need writing on party that you are seeking to bind  CONTRACT AROUND: put a signature requirement in contract • Policy for: evidentiary, cautionary, channeling functions for these important types of contracts • Policy against: increases transaction costs, prejudices unsophisticated parties • CATEGORIES OF CONTRACTS subject to Statue of Frauds (R § 110) o 1. Executor-administrator – to answer for duty of decedent o 2. Suretyship – a contract to answer for the debt of another o 3. Marriage – upon consideration of marriage o 4. Land contract – for sale of an interest in land o 5. One-year – cannot be completed within one year of formation o 6. Sale of goods over $500 (covered by UCC § 2-201) • REQUIREMENTS UNDER STATUTE OF FRAUDS o Writings must be signed  Almost any writing will suffice o Must contain essential terms  UCC § 2-201 for sale of goods only requires that writings “indicate that a contract for sale has been made between the parties” • Even if missing certain terms like price, still enforceable but “not beyond the quantity of goods shown in such writing” • RELIANCE-BASED EXCEPTIONS UNDER COMMON LAW o Part-performance for sale of land contracts (R § 129)  If party reasonably relied on contract due to continuing assent by the other party and injustice can only be avoided by specific performance • Drastic remedy used only when party seeks specific performance o If restitution is adequate, courts will avoid using this exception • Uses heightened evidentiary standard of “clear and convincing”  Beaver: oral agreement to sell land, Beavers spent $85,000 improving $10,000 piece of land relying on sellers’ assurances that they would work out a written contract, sellers reneged upon discovery of a due on sale clause in mortgage; contract enforceable despite statute of frauds due to part-performance; restitution is inadequate since land is unique, granted SP o Estoppel (R § 139)  Applies exact language of R § 90 to circumvent statute of frauds 5  Originally only covered equitable estoppel (a misrepresentation by breaching party) until Monarco, which expanded it to include promises • Monarco: stepfather reneges on promise to hold property in joint tenancy with wife so that upon death, land would pass to stepson Christie; meanwhile, Christie has relied on this promise by staying on family land venture, passing up opportunities; promise enforceable under estoppel exception which Traynor expands to include promises as well as misrepresentations • EXCEPTIONS FOR SALES OF GOODS CONTRACTS o Reliance-based exceptions: part-performance  UCC § 2-201(3)(a): seller has commenced for custom-made goods • *Can recover in restitution  UCC § 2-201(3)(c): buyer and seller have paid for and delivered goods o “Read your mail” exception  UCC § 2-201(2): contract is enforceable if a written confirmation of it is sent between merchants in a reasonable time and recipient has a reason to know its contents UNLESS recipient objects to it in writing within 10 days of receiving it • St. Ansgar Mills: oral agreement for purchase of corn over the phone followed by written confirmation left in office for buyer to sign when he came in to pay balance, as was customary between the parties; price of corn fell, buyer pled statute of frauds as a defense to not performing; court applied “read your mail” exception to make it enforceable, reasonable time of receipt of written confirmation depends on circumstances of situation, including prior dealings o “Laughing defendant” exception  UCC § 2-201(3)(b): cannot admit in court the existence of a contract and then rely on statute of frauds to block its enforcement o Unclear whether estoppel exception applies to sales of goods  UCC § 1-103(b): “Unless displaced by particular provisions of UCC, the principles of law and equity including…estoppel…shall supplement it” VS.  UCC § 2-201(1): “Except as otherwise provided in this section…” suggesting that only exceptions to statute of frauds are in that section (no estoppel there) • Majority view – estoppel exception DOES apply to sales of goods ALTERNATIVE METHODS OF RECOVERY PROMISSORY ESTOPPEL • Equitable remedy used to enforce promises lacking consideration and that would otherwise fail in breach (gratuitous promises, gifts to charity, firm offers, preliminary negotiations, contract modifications) • Promissory Estoppel (R § 90) – replaces consideration with reasonable reliance o A promise that will reasonably induce reliance (action/forbearance) o Promisee actually relies on the promise o Injustice can only be avoided by enforcing the promise  *Exception – marriage agreements and charitable donations do not need actual reliance • Usually results in reliance damages, but “remedy can be adjusted as justice requires” (sometimes expectation or restitution) o Policy for: enforce promises that promisor intended to be binding OR protect promises who behave reasonably from harm of detrimental reliance (more tort-oriented) o Policy against: concern that PE would swallow up contract law, has not occurred • Ricketts: Grandfather promised granddaughter $2K + 6% annual interest so she no longer had to work, she quit, grandfather died two years later and had not yet paid the balance; promise enforceable under promissory estoppel because promise reasonably induced her to rely on it by quitting her job; would be unjust to deny recovery due to lack of consideration • Feinberg: No consideration because employer’s promise was gratuitous, but recovered in promissory estoppel because employee reasonably relied on it by quitting her job; unjust to deny enforcement since she had cancer and could not return to work • D&G: Manufacturer promised distributor it would not take line elsewhere; relying on promise, D turned down offer to sell company, then M took line elsewhere; D lost opportunity to sell at higher price; promise enforceable though exact promise could not be pinpointed, D can recover reliance damages (lost opportunity price differential from first offer) in promissory estoppel; assurance of continuing relationship sufficient to induce reliance, even though terms of relationship were terminable at-will RESTITUTION – see infra in REMEDIES • Restores to injured party any benefit that he has conferred on the breaching party o Prevents unjust enrichment of breaching party  Quantum meruit – law of quasi-contract • A non-contractual, flexible remedy based on foundation of unjust enrichment used: 6 o When it provides greatest measure of damages for injured party (down payments, market value has fallen dramatically) o Seller has made custom-made goods (part-performance/reliance-based exception for statute of frauds in sale of goods contracts, UCC § 2-201(3)) o A losing contract (Algernon) – discussed infra in REMEDIES o “Guilty party” restitution (Britton) – discussed infra in CONDITIONS o Impracticability – discussed infra in EXCUSES FOR NON-PERFORMANCE (if conferred benefit to other party) o No contract, but unjust enrichment  Benefits conferred in precontractual settings, Kenyon  An agreement existed but unenforceable due to technicalities (statute of frauds, capacity, public policy)  No agreement – mistake/emergency • Painter paints wrong house, owner watches but does not correct, painter can recover in restitution o Exceptions: if one voluntarily/gratuitously confers a benefit, cannot recover in restitution • Policy for: do not want to allow breaching parties to be unjustly enriched (corrective justice), moral disapproval • Policy against: discourages efficient breach INVALIDITY OF A CONTRACT CONTRACT MODIFICATIONS • PRE-EXISTING DUTY RULE (R § 73) o Cannot modify a contract to charge more money for performing a legal duty already owed to a party because it lacks consideration UNLESS duty changed significantly, so not mere pretense of bargain  How to circumvent this rule: • Mutual promises to rescind a contract supported by consideration, Schwartzreich • Modification supported by even minimal consideration will be enforceable o Alaska Packers: Workmen contract with fishing company to can salmon for fishing season; get to Alaska, stop working, demand more money for same service; company could not obtain other workers, so agree; modification not enforceable because of pre-existing duty rule o Watkins: Excavator and owner orally agreed to raise originally agreed price by 9x for when excavator encountered solid rock when digging cellar; modification valid because implicit mutual agreement to rescind original contract, also modification to meet change in circumstances valid especially when it’s fair and no protest is made; showing shift from § 73 to § 89 • GOOD FAITH AND FAIR DEALING (R § 89) o Modification of a not-yet performed (executory) contract is allowed (even lacking consideration) if:  Modification is fair and equitable in light of unanticipated circumstances, Watkins  To extent provided by statute • NY Gen. Oblig.§ 5-1103 eliminates consideration for modifications as long as they’re written down • UCC § 2-209 eliminates consideration for signed/written modifications for sales of goods contracts but cannot be coercive or in bad faith • Must pass test of good faith and fair dealing that looks at “reasonable commercial standards of fair dealing in the trade” (cmt. 2)  Enforces no-oral modification clauses, must satisfy statute of frauds, attempted modification can operate as a waiver; waivers can be retracted at any time UNLESS someone has materially changed position relying on it (estoppel) • CONTRACT AROUND: no-oral-modification clause, send written reminder each time you do other party a favor that this is not waiver/modification of any kind  To extent justice requires due to material reliance on modification (estoppel-type exception) • DURESS o Manifestation of assent induced by physical/improper threat that renders contract modification invalid; can occur when one party has already relied on contract (i.e. sunk costs), and other party “holds up” to modify to its benefit o Physical compulsion (R § 174) o Improper threat that leaves the victim no reasonable alternative (R § 175, 176)  Crime/tort, criminal prosecution, civil suit in bad faith  Breach of duty of good faith and fair dealing, Austin • UCC § 2-209 (cmt. 2): threat for no “legitimate commercial reason” voids it  If resulting exchange is not on fair terms and • Harms victim without significantly benefitting threatening party • Threat’s effectiveness is enhanced by prior unfair dealing, OR • Use of power for illegitimate ends 7 • PROCEDURAL – “absence of meaningful choice on the part of one party” o No reasonable opportunity to understand the terms (no explanation given, low education level, no cooling off period)) o Gross inequality of bargaining power o No market alternative • SUBSTANTIVE – “contract terms which are unreasonably favorable to the other party” o Must be extreme in light of business practices of time and place • Williams: sold furniture to poor black woman in contract with a cross-collateralization clause (balance kept on all items ever purchased by buyer, so if buyer defaulted on one, seller could repossess all); not enforceable because of absence of meaningful choice (procedural unconscionability) and terms that are unreasonably favorable to seller (substantive unconscionability); dissent argued that this would result in higher interest rates on credit for consumers, legislature should deal with it, not courts • Jones: consumer on welfare bought freezer for $900 from salesman who knew it was only worth $300; void on substantive (price) unconscionability alone (not procedural) because of disparity between price and value; no need to pay rest (but had already paid $600) PUBLIC POLICY • Contracts that violate public policy are unenforceable (R § 178) o Criminal law, licensing requirements, legislative/judicial policy against exculpatory clauses, restraint of trade, antitrust statutes, waiver of obligations to family members • Balance public policy and interest in enforcement – parties’ expectations, possibility of forfeiture, public interest, importance of policy, relative culpability of parties o In pari delicto – position of defendant is most compelling (let losses lie where they fall) • Can order restitution if a contract is voided on public policy grounds (“clean hands”) • Policy for: enhances deterrence, conserves prosecutorial resources, maintains integrity of courts • Policy against: disproportionate punishment, illegitimate punishment, exclusion from benefits of contract law • ILLEGAL CONTRACTS: violate specific criminal laws o Illegal formation, illegal performance, formation is product of illegal activity, performance will promote illegal activity  Bovard: contract for sale of horse corporation involved in manufacturing drug paraphernalia; contract void because public policy against drug paraphernalia was implicit in statute criminalizing marijuana use  XLO: subcontractor sought payment owed by Rivergate (general contractor), who refused to pay alleging antitrust defense under Donnelly Act saying contract was a feature of extortion/labor bribery operation by Italian mob; remanded to trial to see if enforcement of contract will promote very illegalities abhorred by Donnelly Act, reluctant to void contracts on antitrust defenses because it benefits party that receives benefits and doesn’t have to pay o “All or nothing” rule: whole contract is either enforceable or void • CONTRACTS RELATED TO PUBLIC POLICY: “protect some aspect of the public welfare” o Covenants “not to compete”: unenforceable on grounds of public policy if it (R § 188)  Is not ancillary to an otherwise valid transaction OR • Is broader in time, geographic area, and scope than is needed to protect the employer • Imposes undue hardship on the promisor • Is injurious to the public (i.e. physicians) o Remedy is an INJUNCTION  *NOTE: virtually unenforceable in CA (why Silicon Valley is competitive economic environment)  Policy for: incentivizes transfer of information to collaborators, acquisition of assets from competitors  Policy against: economic freedom of promisor, dissemination of info, competition, benefits to consumer  Hopper: non-compete to not practice small animal medicine for 3 years within 5 miles of city; ignored it, opened practice, employer lost business; covenant enforceable, but reduced to one year  If non-compete is overly broad: • “All or nothing”: enforce as written or reject entirely (old approach) • “Blue pencil”: cross/strike out offensive terms to extent possible (form over substance) • “Reasonableness”: enforce covenant to extent necessary to protect employer, used in Hopper o Arbitration: FAA represents federal policy in enforcing arbitration, preempts state policy, Concepcion  Italian Colors: contractual waiver of class arbitration under FAA is valid even though the plaintiff’s cost of individually arbitrating an antitrust claim exceeds potential recovery GOOD FAITH IN PERFORMANCE *Only attaches at moment of contract formation – no duty to negotiate in good faith • Obligatory duty in every contract (R § 205, UCC § 1-304) that CANNOT be contracted out of o UCC § 1-302: can define contours of good faith as long as not manifestly unreasonable 10 • Definition of the duty o R § 205: excludes “bad faith,” faithfulness to an agreed common purpose, consistent with justified expectations o UCC § 2-103: “honesty in fact,” observance of reasonable commercial standards of fair dealing in the trade” • Arises in discretionary contracts that would have been illusory under old contract law for lack of consideration o Output/requirements contracts, exclusive agency agreements (Wood v. Lucy) “if satisfied” clauses (Mattei) • Examples of bad faith: opportunism (ex. holdup – try to wring advantage from fact that other party is vulnerable because it has sunk costs in venture already & to take advantage of party in a way not contemplated at drafting), dishonesty o Market Street: lessee did not disclose ¶ 34 in letter to lessor requesting more financing in a sale-and-leaseback agreement, possibly knowing that if lessor did not agree to financing, lessee could purchase property back for less than market value; Posner remanded to find out if lessee’s state of mind was “tricky” or “sharp dealing,” intending to take advantage of lessor’s oversight; duty of good faith is about “a stab at approximating the terms the parties would have negotiated had they foreseen the circumstances that have given rise to this dispute” • Policy for: protect parties’ expectations at low cost (don’t have to put it in contract), promote efficiency (gap-fillers), fair play • Policy against: uncertainty, increased litigation costs, courts could get it wrong and parties are stuck with an unwanted term, so they try to opt out of it (increased drafting costs) • Dalton: alleged testing service did not use good faith effort in considering his proffered evidence explaining score increase; contract breached because good faith implies promise not to act arbitrarily or irrationally, ETS did not exercise its discretion and test taker is entitled to good faith consideration of evidence; court’s analysis colored by fact of contract of adhesion nature • Bloor: Falstaff bought Ballantine, contracted to use best efforts to promote and maintain high volume of sales; new management came, sales declined for label, but profits up for Falstaff overall; breached best efforts because Falstaff did not treat Ballantine equally with its own products or take advantage of opportunities to distribute it; best efforts doesn’t require bankrupting yourself, but remedy (expectation damages of lost sales using comparable brands) suggests it means comparable efforts in industry standard INTERPRETATION OF A CONTRACT PAROL EVIDENCE RULE • Written agreement supersedes all other agreements; prevents admittance of parol/extrinsic evidence about previous agreements o MERGER CLAUSES: “There are no promises, verbal understandings, or agreements of any kind, pertaining to this contract other than specified herein” o *Parol evidence rule does not bar evidence of subsequent oral or written agreements  No-oral-modification clauses are not generally enforced at common law • But UCC § 2-209 and NY Gen. Oblig. Law § 15-301 make them more enforceable • Step 1: Classify written agreements according to level of integration (R § 209, 210) o Integrated: writing constitutes final expression of one or more terms of agreement  Completely integrated: writing constitutes complete and exclusive statement of all the terms of the agreement • No parol evidence admitted at all  Partially integrated: writing constitutes final expression of some terms of the agreement, but not all terms • Not integrated if omitted consistent additional term might “naturally” be omitted from writing • Parol evidence for consistent additional terms admitted as to the non-integrated terms ONLY • If agreement is integrated (either partially or completely), conflicting parol/extrinsic evidence is never allowed (R § 215) • Parol/extrinsic evidence can ALWAYS come in to show (R § 214): o Whether agreement is integrated – completely/partially – or not integrated o Meaning of the writing (if ambiguous) o Illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause o Grounds for rescission, reformation, specific performance, or other remedy • Policy for: encourages people to put agreements in writing, less evidence in record, lower litigation costs, jury less likely to be confused, judicial control of interpretive process • Policy against: increased drafting costs, prejudice against unsophisticated parties DETERMINING LEVEL OF INTEGRATION OF AGREEMENT • Strict/NY rule: if written contract embraced scope of oral contract, parol evidence excluded o Courts looked at contract and applied own common sense about what would naturally be included in such a contract  Gianni: rented space in office building, lease prohibited selling tobacco; when another store started selling soft drinks, Gianni tried to admit parol evidence that lessor had promised him exclusive right to sell soft drinks; no parol evidence allowed; if subject is dealt with at all in written contract, the writing presumes to represent the entirety of the transaction on subject • Liberal/CA rule: “A document itself cannot prove its own completeness” o R § 214 – exception that allows parol evidence to show if writing is integrated or not 11  Masterson: sellers granted deed to ranch to sister with an option to buy it back; seller went bankrupt, trustee wanted to purchase it back; sister wanted to admit parol evidence to show that right was not assignable; consistent/additional parol evidence admissible because deed is partially integrated; deed alone cannot prove complete integration, issue of assignability is not one that is “natural” to a deed  Bollinger: Construction co. and landowner contract to dump waste on property if sandwiched between topsoil; topsoil part not included in written contract by mistake, but company originally complied; parol evidence admissible due to mistake exception to allowing parol evidence DETERMINING WHETHER AGREEMENT IS AMBIGUOUS • Extrinsic evidence CANNOT be used to explain unambiguous agreements; but can extrinsic evidence be used to determine whether an agreement is ambiguous? o *Generally used only for completely integrated agreements • NY’s “Plain Meaning”/ “Four Corners” Rule: 1) is language ambiguous? – if no, no extrinsic evidence; 2) if yes, then extrinsic evidence is in per R § 214(c) to explain the ambiguous term o Pros: honors written contracts, promotes stability in law, encourages better drafting, better evidence (writing > testimony), lowers litigation costs, lowers reading costs o Cons: higher drafting costs, prejudice to unsophisticated parties o Greenfield: Ronettes signed contract with Phil Specter, signing away ownership rights to recordings of performance and got royalties in return; Specter later earned $ on licensing and sales from synchronization but paid no royalties; Ronettes wanted to admit extrinsic evidence to prove that use for synchronization was not meant to be included in terms; inadmissible, silence does not equal ambiguity, “four corners of contract” were not ambiguous o WWW: Contract with reciprocal cancellation and merger clause; one party wants to introduce extrinsic evidence to show that reciprocal cancellation was really only for them; inadmissible because contract is not ambiguous on its face • CA’s “Anything Goes” Rule: preliminary consideration of all extrinsic evidence in order to determine if agreement is ambiguous (i.e. if language is reasonably susceptible to alternate meaning) o Pros: honors intentions of parties, protects unsophisticated parties o Cons: destabilizes written contracts, sub-par evidence, huge litigation costs, sloppy drafting  CONTRACT AROUND: Sophisticated parties prefer NY over CA rule – opt out using choice-of-law provision, NOT merger clause (could use extrinsic evidence to knock it out) o PG&E: contract for work on a steam turbine with indemnity clause; during work, part of turbine damaged, company doing work sought to admit extrinsic evidence showing that clause covered third party property only; evidence admissible, must do preliminary consideration of parol evidence to find the parties’ intent and decided that language was fairly susceptible of either of the asserted interpretations o Delta Dynamics: contract with minimum quantities for trigger locks with termination clause and recovery for attorney’s fees; upon breach, Delta sued for damages; Pixey wants to include extrinsic evidence showing that sole remedy was termination; admissible as preliminary matter o Trident: contract between two sophisticated parties not allowing pre-payment for first 12 years; one party wants to introduce extrinsic evidence allowing it to prepay; admissible as a matter of CA law, but Kozinski is upset about the destabilizing effect this has on contract law in CA DETERMINING WHETHER EVIDENCE OF COMMERICAL CONTEXT CAN EXPLAIN OR SUPPLEMENT A WRITTEN AGREEMENT • Extrinsic evidence of commercial context admissible to supplement or give meaning to terms as long as it doesn’t contradict express terms; basically Traynor’s super liberal approach even if term is clear o CONTRACT AROUND: include a clause knocking out usage of trade/course of performance/course of dealing as an interpretive tool (merger clauses are not adequate generally under UCC’s liberal approach) • UCC § 1-303: Types of extrinsic evidence in order of weight accorded by courts (following express terms) o Course of performance: past conduct in current contract  Can be evidence of a waiver (ex. consistently accept delivery late) • But waivers can be retracted upon notice to other party o Unless relied upon by the other party (UCC § 2-209)  Can be evidence of a contract modification of an express term, which, unlike a waiver, is binding, even if it is inconsistent with that term (UCC § 1-303(f)) • CONTRACT AROUND: 1) anti-waiver clause in initial contract, 2) send written reminder each time you do other party a favor that this is not waiver/modification of any kind o Course of dealing: conduct in past contracts o Usage of trade: conduct by other parties in a particular vocation  Needs regularity as to justify expectation that it will be observed in the contract in question 12 o Applies in sale of goods, real estate deals o Perfect tender: tendering performance (showing you’re ready to perform) is a condition of each party’s duty MITIGATING HARSHNESS OF CONSTRUCTIVE CONDITIONS • SUBSTANTIAL PERFORMANCE o SUBSTANTIAL PERFORMANCE REQUIRED WITH CONSTRUCTIVE CONDITIONS  NOT STRICT COMPLIANCE; done to mitigate harsh effects of forfeiture on breaching party o If B substantially performs but commits minor breach, A must still perform but can sue later and get damages  Jacob & Youngs: builder’s oversight in not using Reading pipe was not willful (which always precludes finding of substantial performance), not every minutiae of contract is a dependent condition when departure from the specification is not substantive but insignificant, will not allow departures to be excused when they would frustrate purpose of the contract itself, justice demands that forfeiture not be allowed when departure is minute in comparison o CONTRACT AROUND: make explicitly clear that use of Reading pipe is a condition precedent to payment, not a duty (as the original language of the contract said), discussion in recitals of contract of why use of the pipe is subjectively valuable (model home) • DIVISIBILITY: if one party’s performance consists of several distinct items and the price to be paid is apportioned to each item (corresponding pairs of part-performances) o A’s non-performance of one part of the contract only excuses B’s performance of the corresponding part of the contract, NOT B’s entire duties under the contract  Protects breaching party by making other party pay for the part of the contract that was substantially performed o Gill: contract to drive logs downstream but flood came and swept many downstream; Gill sought payment of logs already driven downstream; contract was severable since payment was apportioned per 1000 feet of logs driven • “GUILTY PARTY” RESTITUTION: Breaching party is entitled to restitution for any benefit conferred by part performance o Party has materially breached (cannot sue in contract), but can sue in restitution for market value of work done  Measure of restitution is usually capped at total contract price  Policy for: eliminates bad incentive effect of employers mistreating employees after 11 months in a 12 month contract to get employee to leave, and reap benefits of 11 months of free labor o *If injured party rejects the goods, and thereby derives no benefit from them, breaching party cannot recover anything because there has been no unjust enrichment o Britton v. Turner: plaintiff walked off the job after nine months, defendant refused to pay; concluding that barring recovery altogether results in unjust enrichment where employer has derived months benefits of labor, court allowed breaching party to recover in restitution for market value of work performed o Kirkland: due to plaintiff’s mistake in using wood lath instead of rock lath (material breach, so can’t recover in contract based on substantial performance), defendant made him stop working; court allowed plaintiff to recover in restitution for value of work performed MISTAKE & IMPRACTICABILITY • Results in excusal of both parties’ contractual duties and recovery in restitution for both parties o Can be used to excuse the non-occurrence of an express condition to avoid forfeiture • MISTAKE o Involve an existing, but unknown fact at the time of contract formation  Results in material adverse effect  Risk has not been allocated o UNILATERAL MISTAKE: only one party is mistaken about an existing fact that was basic assumption (something parties never imagined would be different) of contract  Difficult to result in excusal unless it’s unconscionable to hold one to duties or other party caused mistake o MUTUAL MISTAKE: both parties are mistaken about an existing fact that was basic assumption of contract • EXISTING IMPRACTICABILITY 15 o Involves an existing, but unknown fact at the time of contract formation o ELEMENTS OF EXISTING IMPRACTICABILITY CLAIM (R § 266)  1. A fact which party had no reason to know  2. Non-existence of which was a basic assumption of contract  3. Made performance impracticable (“excessive and unreasonable cost”) o Mineral Park: contract to build bridge in which defendant was to take all necessary gravel and earth for construction form plaintiff’s land; only half was taken because other half was below water level; court excused performance because it would be “unreasonable and excessive” to remove rest of gravel • SUPERVENING IMPRACTICABILITY o Involves facts that arise after time of contract formation (one of most difficult claims to win) o Originally very restricted to only “acts of God;” slowly expanded by English judges to include implied conditions that the occurrence would not happen  Classical categories (death/incapacity of person, destruction of a specific thing, prohibition/prevention by law)  Taylor v. Caldwell: performers rented out music hall, but it was destroyed by fire before the time of performance at no fault of either party; both parties excused because in contracts where performance depends on the continued existence of a given thing, there is an implied condition that impossibility of performance arising from its destruction excuses performance of respective duties o ELEMENTS OF SUPERVENING IMPRACTICABILITY CLAIM (R § 261/UCC § 2-615)  1. Occurrence of event (contingency) • CANNOT be breaching party’s fault  2. Non-occurrence of which was basic assumption of contract • “Not fairly to be regarded as within risks assumed under contract” o Mere foreseeability is NOT enough to assume party assumed that risk, Transatlantic  3. Made performance impracticable • “A thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost,” Transatlantic • Mere price increase is never enough UNLESS the “the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance” (cmt. 3) o Transatlantic: Ship transporting wheat to Iran had to take alternate route around the Cape of Good Hope because the Suez Canal had been closed due to Egyptian government nationalizing it; shipper wanted restitution for price differential from US government; performance was not impracticable, even if it lowered profit; alternatives available and risk foreseen, ship owner superior risk-bearer; not treated as sale of goods, but UCC used as persuasive evidence o How to decide if party assumed risk under contract?  Implied terms, surrounding circumstances, custom, and usage of trade  SUPERIOR RISK-BEARER: Posner & Rosenfeld article (Transatlantic) • Best situated to either control probability of risk materializing or insure against this risk by minimizing magnitude of loss • If can’t insure or control: who has diversified asserts and can better spread risk  Foreseeability does NOT prove allocation, but is suggestive • Should parties reasonably have foreseen it? (i.e. changes in market value, concert hall could be closed) • Did parties actually anticipate it? (Suez canal closing in Transatlantic) • Did parties “tacitly agree” on it?  Force majeure clauses: party anticipates events that it cannot readily prevent and might impede its performance, so it introduces a clause excusing it from performance if the impediment arises • Must be careful not to be too broad or courts will just ignore them • Ejusdem generis – courts can interpret “or any additional events” like previous events listed • UCC § 2-615, cmt. 8: suggestion that force majeure clause cannot broaden too much the excuses available under the existing impracticability rule, and that “hell or high water” clauses can be manifestly unreasonable o CONTRACT AROUND: force majeure clause to expressly disclaim liability for a supervening event; hell or high water clause to expressly assume liability for a supervening, unforeseeable event (used in leases) • RECOVERY for losses incurred in reliance on contract when party excused from performance due to impracticability o If contract is divisible – party is excused only to that part of their performances o If losses incurred in reliance have conferred a benefit to other party – courts allow recovery in restitution, usually capped at contract price  If party rejects the partial performance, then much harder to argue unjust enrichment  Work done “must have become so far identified with contract such that but for the destruction, it would have gone to the other party as contemplated by the contract” • Young v. Chicopee: contract for bridge repair specifying that work could not begin until half of all material was present to prevent hindering travel, plaintiff piled lumber along bridge/river bank; bridge 16 burned down, destroying piled lumber as well; recovery allowed in restitution but not for damaged lumber because it had not yet become identified with the bridge, still in exclusive control of plaintiff o Courts have discretion under § 272 to award reliance/partial expectation, but rarely do so (Alcoa–exception) REMEDIES SPECIFIC PERFORMANCE • Equitable remedy compelling performance of contract available when remedy at law (money damages) is inadequate (i.e. land) o Injured party has “clean hands” and has not delayed (“laches”) o Contract is not too indefinite, not for personal services (indentured servitude), Bliss o Promisor would receive security for performance (i.e. promisee will actually pay) o Compelling performance will not be unjust, oppressive, or impossible, or unduly burdensome on court to supervise  Will not force party to break another existing contract • Reasons for traditional rule against SP o Deters efficient breach by encouraging overinvestment o People don’t want to work together o Hard to enforce, supervise by courts o Money easy to calculate and almost always adequate • Reasons in favor of SP o Hard to calculate $ value o Forces parties to have private negotiation better at setting price o Can implement negative injunction preventing similar work (not forced servitude) o Some goods are unique (land, heirlooms) and money isn’t adequate o Contemporary trend: follows Posner's theory and expands SP using cost-benefit analysis  If costs and benefits are equal, then give damages  If costs are less for SP, then give SP, Walgreen  Coase theorem: absent transaction costs, parties will bargain to an allocatively efficient outcome under ANY remedy • Klein: purchase of a jet to resell at profit, seller backed out; SP not appropriate because monetary damages (expectation of potential profit) are adequate, jet was not unique enough • Morris: breach of promise to give horse to Sparrow; SP appropriate despite evidence of a robust market for roping horses because Sparrow had invested time and effort in training Keno to be a roping horse, giving it a “peculiar and unique value” • Laclede: breach of long-term requirements contract to provide propane; SP appropriate because of the difficulty in calculating expectation damages, public policy in providing gas, difficult to cover (OPEC embargo) • Walgreen: Sara Creek breached promised not to lease space to competing pharmacy; injunction appropriate, Posner says parties will negotiate, Walgreen will give up its right to injunction for a payoff, leads to allocatively efficient outcome regardless RESTITUTION • Restores to injured party any benefit that he has conferred on the breaching party o Returns breaching party to position had contract never been entered into • FORMULA: Recover reasonable/market value of services/benefits conferred at the time of breach o Not diminished by any loss that would have been sustained by complete performance • LOSING CONTRACTS o Valid contract exists, but expectation damages would be zero or negative o Allow recovery in restitution or else breaching party would be unjustly enriched  Policy for: fairness and prevents unjust enrichment, moral theory of corrective justice  Policy against: discourage efficient breach o Algernon: SC had contracted to erect steel and do other work for GC’s contract for naval hospital; SC would have lost $37K if GC had performed by paying for crane use and K was completed; GC breached by refusing to pay for crane use; restitution available instead of expectation since this was a losing contract, equal to market value of performance RELIANCE • Returns injured party to position as if contract had never been made 17