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Contracts
University of California, Hastings School of Law
Dodge, William S.

Outline – Contracts – Dodge – Spring 2015

*** CHEATSHEET ***

_Relevant Law

1. If good is moveable, the UCC will govern.

2. If a person is in business and familiar with business practice, they are a merchant.

3. Because [X] are moveable they are goods, and thus UCC Article 2 applies. Both [M1] and [M2] are merchants because they regularly deal in goods of this kind and are familiar with business practice in this area.

4. CISG prevails over UCC which prevails over CL

5. CISG requirements:

a. (1) Sale of goods, (2) btwn parties in diff states, (3) that have ratified the CISG

b. Doesn’t apply to consumer transactions

c. The CISG would govern because this is a contract for the sale of goods between parties whose principle places of business are in different countries, both of which have ratified the CISG.

6. For mixed R2d & UCC contracts, look to “predominate purpose” of the K

Acceptance

1. Acceptance can be by performance or promise

2. Offeror is master of the offer – states how accepted

3. Silence not accept, unless:

a. Offeree takes benefit of svcs w/ opportunity to reject, knows/should have known expectation of compen

b. Offeror states assent may be given by silence, & offeree intended to remain silent & accept

1. UCC: Any reasonable manner of acceptance okay

2. CISG

a. Effective upon receipt

b. Can be by promise/conduct

c. Silence/inactivity is not acceptance

d. No Mailbox Rule – ineffective if doesn’t reach offeror

Adhesion Contracts

1. Standardized form

2. “Take it or leave it” approach

a. Common characteristic – one party enters into this type of K far more commonly than the other (insrnce)

3. Btwn parties of != bargaining power

4. Doctrine of Reasonable Expectations – Meaning of term in K determined by reasonable expectations of party, even if contrary to explicit language of K

a. If term had been understood/known& the party would not have entered into the K bc it, term is thrwn out.

b. Many courts limit its application to insurance K’s

5. EXAM TIP -> [X] drafted the policy, and ambiguities should be interpreted against the drafter

6. EXAM TIP -> eval under PER if conflicting prior stmts

AgreeS To Agree & Open Terms

1. CL: Agreement containing term to be agreed upon later is not enforceable

2. R2d: K may be formed when reached agreement in principle, depends on whether parties intended to be bound?

a. Offer mst have rsnbly certain terms

b. Reasonably certain if provide basis for determining breach & remedy

c. Req Terms: price, quality, quantity, delivery terms

3. UCC: (need quantity, but not price)

a. Even if 1 or more terms left out, K enforceable if parties intended K

b. If price term left open, court will fillin w/ markt price

4. CISG

a. Price may be stated expressly, implicitly, or by mechanism for determining price

1. If not, reasonable market price

AnticipATORY RepudIATION

1. When 1 party makes it definite & unequivocally clear that they are unwilling or unable to perform before time for performance is due

2. AR may be demonstrated by words or actions

3. Repudiation before performance

a. = Total Breach = (1) Sue + (2) Duties discharged

b. Repudiation must be definite & unequivocal

4. Retraction possible before performance due as long as

a. Time for performance hasn’t passed

b. No reliance yet by other party

c. Before non-repudiating party accepts repud as final

Assurances

1. UCC & R2d – right 2 demand Adequate Assurance

a. Must be reasonable grounds for insecurity

b. One may suspend while waiting for AA

c. Don’t have to give what’s asked for, just rsble assur

d. Only need 2 provide rsnble assurance

e. K repudiated & duties discharged when

1. Time for performance has passed, or

2. Failure to assurances in reasonable time

f. UCC or CISG, demand may be oral

2. UCC – rsble time <30days; R2d/ CISG – rsble time

3. UCC – rqr request 2 b in writing bt usual not enfrcd

Battle of the Forms

(1) Definite & seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

(a) the offer expressly limits acceptance to the terms of the offer;

(b) they materially (surprise or hardship) alter it; or

(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.

1. Material: warranties, limitations of liability, indemnification, arbitration, choice of law, choice of forum

2. Immaterial: fix reasonable time for delivery, act of god, reqring interest, requiring complaints in rsble time

3. Knockout Rule – Courts are divided on the treatment of different terms. In a majority of jurisdictions, the different terms cancel each other out and the UCC fills the gap, which here means… In a minority of jurisdictions, the different term would not come in unless expressly agreed to, so… Under California law, the different term would be treated as an additional term, so between merchants would become part of the contract automatically unless the offer expressly limited acceptance to the terms of the offer, the different term was material, or the offeror objected within a reasonable time. Here, …

4. CL & CISG – Mirror-Image Rule (Last Shot Rule)

a. Under the CISG a reply to an offer that contains new terms is a rejection and a counteroffer unless the new terms are not material and the offeror does not object

b. For CISG, non-material terms can become part of contract, unless objected to (but evrythng is material)

BREACH

Non-Material Breach = substantial performance

1. Harmed pty must still perform; But can sue for dmgs

Material Breach

1. Harmed pty may SUSPEND; but must give op to cure

Total Breach

1. Harmed pty is discharged; can give op to cure if u want

Non-Material vs. Material Factors

1. (1) harm to promisee from breach (objective std); (3) burden on promisor of curing breach; (3) reason for breach – the more willful -> more material; (2) ability to adequately compensate for harm; (4) likelihood of failure to cure; (5) whether behavior comports with good faith

2. To determine if the breach is material, a court will weigh the loss to [non-b] from the breach, the forfeiture [b] would suffer, and the reasons for [b]’s breach.

Material vs. Total Breach Factors

1. (1) likelihood of cure; (2) harm from delay; (3) K calling for speedy performance (time of essense)

CONSIDERATION

1. There needs to be a bargained for exchange – promisee must give up something of value or circumscribe their liberty in some way, & as part of a bargain.

2. Consideration consists of a bargained-for exchange – must have legal value

a. Act other than promise, forbearance, creation or mod or destruction of legal relation

3. Adequacy of Consid – Cts wont judge, except sham

Contract Interpretation

1. Word is known by company it keeps

2. Expressing one excludes the others

3. Purpose of the parties

4. Interpret K as a whole

5. Interpret K to make it reasonable

6. Specific trumps the general

7. Handwritten trumps the printed

8. Course of performance – w/in this K

9. Course of dealing – prior K’s

10. Trade usage

11. Interpret ambiguities against the draftor

12. Interpret K to favor the public

DAMAGES – Expectation Damages

1. EDs attempt to put the P in the position P would have been had the defendant performed

2. (loss in value + other damages) – (cost avoided + loss avoided)

3. LIV=How much non-breacher has been harmed

4. LIV=What should have been received minus actual rcd

5. Other Damages=

a. Consequential – Damages that flow as a natural conseq of breach, reasonably foreseeable (Hadley), and provable w/ rsbl certainty (ie. factory shut down)

a. R2d & UCC – Consq damages only recoverable if probable

b. CISG – Consq damages only rcvrble if possible

c. Limits on Consequential Damages

1. Must be caused by breach; must be reasonably foreseeable; must be established with reasonable certnty; may not b allowed if justice so requires; new business may be prevented

2. Clauses limiting damages for economic loss are generally not unconscionable.

b. Incidental – Damages incurred in an effort to reduce loss (ie storage costs)

c. (note: these must be in the rsble contemplation of parties at the time K was made)

6. Cost Avoided=Cost one didn’t incur bc K breached

7. Loss Avoided=Loss from breach that was mitigated

8. UCC/CISG Damages – Non-b has choice:

a. Covering = Byr can buy goods & recover the diff btwn the K price and the price of those goods.

1. Req: Purchase made in good faith w/o unreasonable delay. Items don’t need to be identical, just commercially reasonable substitutes.

2. Market Damages: Mkt price @ time learn of breach – K price

3. Most courts say that if buyer covers, they need to use cover price calculation, but not unanimous

b. Resale = When buyer breaches, seller can sell goods to another buyer. Recover the difference between resale price & K price.

1. Req: Resale must be in good faith & in rsble time.

c. Consequential Dams too! The non-breaching party may also be able to recover consequential damages such as lost profits that were caused by the breach, reasonably foreseeable, and provable with reasonable certainty.

d. Warranty Damages (If buyer accepts goods…)

i. Diff btwn value of goods accepted & value if correct or cost to correct + incidental/consequential dams

9. CISG, unlike UCC, cover is crystal clear. If 1 covers or resells 1 can only get cover or resell dams, nt mkt dams

1. K for Real Estate: Mkt Price @ time of brch – K price

1. K for Constructn: Expected Net Profit on Entire K + Builder’s Unreimbursed Expenses at Time of Breach

2. Construction Damges – (1) Cost of completion unless disproportionate to (2) diminution of value. P may recover either as long as cost of comp is not clearly disproportionate (like J&Y)

3. Diminution in Value: Reduction in the market price for the property as a result of the breach. Recovery will be limited to the diminution in value (here, probably zero) if the cost of completion is clearly disproportionate to the loss in value, particularly if completion would cause economic waste, if the breaching party acted in good faith, or if awarding cost of completion would result in a windfall.

DAMAGES – Non-recoverable

1. Attorney’s Fees

a. “Amer rule” – unless allowed by statute or K

b. CISG – recoverable if foreseeable

2. Emotional Distress

a. No ED damages unless breach causes bodily injury or emotional distress is particularly likely, or breacher is a carrier, innkeeper, or mortuary.

b. Not recoverable if ED caused the bodily injury.

3. Punitive Damages

a. Not avail unless breach is also tort

b. Exception – Insurance bad faith

DAMAGES – THEORY OF EFFICIENT BREACH

1. [2] Types of willful breaches: (1) Opportunistic Breaches: a breach where there is no net gain to society; (2) Efficient Breach: when breach to engage another more profitable K.

2. Efficient Breach – Cons: (1) Assumption that ED will put party in fair position; (2) ignores trans costs (attorney fees); (3) strategic behavior; (4) poss of failed negotiations

3. Dodge Theory: Punatives & Spec Perf should be allwd to force party to negotiate out of K rather than breach

DAMAGES – Justifications for ED Rule

1. Advantages:

a. Allows for efficient breach,

b. Way of protecting opportunity costs & reliance on transaction

c. Facilitates planning,

d. Protects risk allocation of K

2. Disadvantages:

a. Won’t put party in original position – too many limits like foreseeability, attny fees, no ED damages)

b. Not necessary – people will negotiate from inefficient Ks

DAMAGES – RELIANCE

1. Reliance damages attempt to put the P in as good a position as she was in prior to the making of the K

2. If breaching party can prove non-breacher would have had a loss, that loss will b deducted from reliance dams

a. Must deduct losses in a prospective losing contract.

b. In theory, no more than expectation damages, but losses hard burden to prove, so may make better off

3. Monies spent in prep for performance are recoverable

DAMAGES – Restitution

1. Goal: Parties back to orig postn, disgorge benefits

2. Non-B – May receive restitution, even if >ED (!)

a. Not Limited to the K-price, may exceed K-price (!)

b. Full Performance Exception – just get K price

3. B – Must deduct costs that B caused Non-B

a. However, don’t need to deduct prospective loss in an eventual losing contract.

b. Only type of dams breaching party can receive

4. Rescinded/Unenforceable K – parties can get restitution if rescind on minority, mental, imposs, etc.

5. Measuring Dams – market, K value, benefit conferrd

6. Defense Recission – If you can rescind on the basis of a defense (misrep), you can unwind K & recvr K-price.

DAMAGES – Specific Performance

1. Order by the court to the promisor to render performance when there is not an adequate remedy at law, the matter is court supervisable, and it would it wouldn’t create hardship to the D or a 3p.

2. Uncertain damages – Difficult to prove with rsble certainty or insufficient to cover expectation interest

a. Speculative or dams w/ long-term consequences

3. Uniqueness – no substitutes, land, art work,

retarded/intox) may sometimes avoid K’s they sign

2. Cognitive Test – Person unable to understand the trans

3. Vol Test – May undrstnd bt unble to act in rsbl manner

4. Under R2d, voidable with either

a. However, if K fair & no reason to know & avoidance of K would be unjust, K upheld to extent that other party’s reasonable reliance protected

5. Remedy: Rescission of contract.

Minority

1. Until a person has reached the age of maj (day b4 18th) most Ks which he enters into are voidble at his option

2. K with minor is voidable at election of minor

3. Minor up until the day before the person’s 18th b-day

4. Exceptions: If minor affirms K, then K is enforceable

a. Minor only liable to return what’s left of K’s perf

b. Minors/mentals held liable for rsbl val of necessities

c. If misbehavior, fraud by minor, unable to avoid K

5. Damages: Minor not responsible for depreciation/use; returns item, receives full refund

6. Remedy: Rescission of contract.

Misrepresentation

1. An aggrieved party may sue for rescission or breach or defend in a suit when the other party to the K makes a material/fraudulent misrep & there’s reliance on it. The aggrieved party must hv justifiably relied on the misrep.

2. Material or fraudulent (intent 2 decv) misrepresentation

3. Justifiable reliance on this misrepresentation

4. Statements of opinion actionable if: (1) when you lie about your opinion, (2) opinion purports to know facts (3) relationship of trust, (4) person giving opinion has superior skill, or (5) person relying on opinion is particularly susceptible

5. Remedy: Rescission of contract.

Mistake, Mutual

1. Where both parties to a trans acted on mistaken belief about a basic assumption, the mistake had a material effect on the deal, and the risk was not allocated to the party trying to rescind.

2. Both parties mistaken about existing fact at time of K

3. Mistake about basic material (important) assumption

4. Party trying to void must not bear risk

a. Agreement of parties (“as-is” clause), conscious ignorance, or allocation by court

b. Sellers are often in better position & bear the risk

5. Remedy: Rescission of contract.

Mistake, Unilateral (TIP: Do nondisclosure too)

1. When 1 party is mistaken about a basic assump of K, that the party seeking to void the K not bear the rsk of the mistake, & that enfcmt of the K would b unconsc, the othr pty knew of or caused the mistake.

1.

2. Pick (Enforcement would be unconscionable | other party had reason to know | other party caused mistake)

3. Remedy: Rescission of contract.

Mitigation

2. Non-breaching party can’t recover dams that cld have been avoided w/o undue risk, burden or humiliation.

3. Breacher has burden of showing dams mitigatable

4. In employment context, only comparable jobs mitigate

5. UCC Lost Volume Exception

a. Unlimited supply, seller could have entered both K’s & 1 more sale

6. Additional K – breach party can’t deduct income

1. K that party would have been able to enter into regardless of original breach

7. Mitigating K – breaching party can deduct

Modification (EXAM TIP -> Defenses? duress?)

1. EXAM TIP -> Prior obligations excused by impos?

2. (PE Duty): Perf of a promise already legally owed is not consideration for a new promise.

3. Is modification enforceable? Pre-existing duty? = No.

a. Exceptions to Pre-Existing Duty Rule:

i. Unanticipated circumstances; reliance; honest dispute on pre-existing duty; change the performance (not sham); rescind/re-create new K (SPLIT);

ii. [BREACHER] might also argue that the party mutually agreed to rescind the original K and form a new K, in which case their promise to perform would be consideration. Or they might argue the modification was fair and equitable in light of unanticipated circumstances or that they relied on the modification by completing performance.

4. The UCC provides that a mod of a contract for the sale of goods doesn’t have to be supported by consid

5. UCC = No pre-existing duty rule – modification doesn’t require consid, but must be done in good faith (w/ commercial reason & no coercion [breach threat])

6. The UCC does not require consideration for modifications to be binding but does require good faith — that is, a legitimate commercial reason for requesting the modification and no coercion.

7. Oral Mods – CL: if “fair & equitable” and relied on; UCC: requires good faith, not consideration

8. UCC & R2d – No Oral Mod Clause Ok – however, oral mod clauses can be waived orally. Waiver is rescindable untl relied on

a. UCC – merchants must separately sign modification

Offer

1. Be addressed to specific offeree

2. Must contain reasonably certain terms

3. Manifest willingness to be bound

a. ie. reasonable person’s expectations

Option Contract (R2d)

1. 87(1) – An offer is binding as an option K if it is in writing and signed by the offeror, recites a purposed consideration, & proposed an exchange on fair terms at a reasonable time

2. 87(2) – An offer which would be reasonable expected to induce reliance on the part of the offeree before acceptance and which does induce such reliance is binding as an option K to avoid injustice.

3. 87(1)

a. In writing & signed by offeror

b. Purported consideration

4. 87(2)

a. Expected to induce reliance

b. Does induce such reliance

c. To extend needed to avoid injustice

5. No mailbox rule – acceptance not good until rcvd

6. CISG – if states irrevocable, its irrevocable, or it was reasonable for offeree to rely on it as irrevocable

a. No writing required under CISG