Contracts II
Kniffin
Fall 2014
1. Good Faith
An aggrieved party may recover damages for breach of good faith, similar to any other contract term.
Good Faith is required under UCC Article 2 and Common Law, and implied in the performance, BUT NOT FORMATION, of every contract.
Ø Minority View: breach of good faith is only actionable if there was also a breach of an express term in the contract.
§1-304/Restatement §205: Every contract or duty within Article 2 imposes an obligation of good faith in its performance and enforcement
§2-103(b) Good Faith for merchants: Honesty in fact and the observance of reasonable commercial standards of fair dealings in that trade
Disputed Contract Terms
Hierarchy of Importance
1. Express Language – express words in the contract that deal with the disputed term
You can have express terms to require someone to use a certain amount of effort.
2. Course of Performance – If there is previous performance within the same contract.
Example: Window Cleaning company that you hire for a year, used Windex for 6 months, then stopped using Windex. A court will say that the washer must use soap, as the washer himself implied by the first part of the performance that he must use soap.
3. Course of Dealing- Previous contracts between the same parties
4. Trade Usage- A “baker’s dozen” in a contract with be 13 not 12 even if it’s not in the contract.
3 standards of effort can be implied or expressed in the contract:
Best Efforts
Reasonable Efforts
Good Faith/ Honest Efforts
No specific termination date in the contract:
Courts are split!
a. Some say it terminates at a reasonable amount of time
b. Some say the contract continues indefinitely
Liquidated Damages
These are pre-assessed damages that are stipulated in the contract (such as “in case of breach the breaching party will pay $500 to the other party”). Courts are not always happy with this as the parties are taking the law into their own hands
Not all liquidated damages clauses are enforceable because some are considered penalties
3 requirements to enforce the clause:
1. Damages must be very difficult or impossible to predict at the time of the making of the contract.
2. The method use to calculate the amount of liquated damages must be a reasonable method.
3. The amount set must be reasonable –
Courts are split whether we look to see if the amount was reasonable at the time of the making of the contract only, or if the amount could be reasonable at the time of t
price
Incidental damages:
These are incurred by the breach (such as if the breaching seller had shipped non-conforming goods and the buyer paid to send them back) are recovered by the breached party.
Consequential Damages:
UCC §2-715 – These are damages that could not be reasonably prevented by cover or otherwise. The consequential damages must be PROBABLY foreseeable at the time the contract was made OR if most reasonable people would know it.
Foreseeability can be created by one party telling the other party that certain damages will occur if contract is breached.
Minority View (Common law) – Tacit agreement test: consequential damages are awarded only if the other party consciously (explicitly) agrees to be liable for those damages.
Market Price Formula:
§2-713 If the buyer does not cover, money damages are based in market formula = the court calculates the difference between the original contract and the higher price of the goods, at the time the buyer found out about the breach (less expenses saved).
With incidental and consequential damages
