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Contracts II
University of South Carolina School of Law
Crystal, Nathan M.

CONTRACTS II
VI. Supplementing the Agreement: Implied Terms, the Obligation of Good Faith, and Warranties
A.     The Rationale for Implied Terms:
a.       17th Century – “caveat emptor” (“Let the buyer beware”); the seller bore no responsibility for the quality of the product he was selling unless he expressly guaranteed or gave warranty
b.      Now courts use implied warranties (imposed by law on the seller)
·        Implied term: any term that the court finds to e “implicit” in parties’ words or conduct even though not literally expressed by them
o       Implied in Fact: implied by the parties themselves
o       Implied in Law: made a part of the agreement by operation of the law than by the agreement of the parties themselves
 
·        Wood v. Lucy, Lady Duff Gordon: (implied in fact) P contracted with D to sell her products and have the exclusive right to sell her products; D sold some things herself, and gave no profit to P.
o       D stated that the K is void because P had no obligation to sell her products and that the K was instead “illusive” (R 2 77)
o       Court finds that there was an implied obligation of good faith and that the K necessarily arranges that the P will sell the products, so D’s argument is not valid.
o       Cardozo claims that the P’s promise was necessary to give the parties’ agreement “business efficacy” – “we are not to suppose that one party be placed at the mercy of the other.” (the K was “instinct with obligation”); the obligation was to use “reasonable efforts”
§         UCC 2-306(2): imposes a duty to use “best efforts”
·        Suggested to carry a higher burden that rises nearer to fiduciary duty of obligation; easier to determine when it has bee breached
 
·        Leibel v. Raynor Manufacturing: (implied in law) P was to distribute D’s products (garage door openers) and was an at-will distributor. D cancelled the K without any real notice.
o       By not establishing a length of time for the K to exist, either party may terminate at will, but not without the requirement of good faith, otherwise either party may be severely damaged.
o       UCC 2-309: Requires notification of termination as will give the other party reasonable time to seek a substitute arrangement.
§         Doesn’t relate to the method of notification but the circumstances under which the notice is given and the extent of advance warning.
a.       Gap filler provisions of Article 2:
a.       2-208 – place of delivery
b.      2-310 – time of payment
c.       2-509 – risk of loss
d.      2-513 – buyer’s right of inspection
e.       Economic efficiency – justification for implied terms (fewer terms for parties to bargain out)
b.      Court’s role: to set default rules – those which the parties probably would have bargained for if they had bargained ove

her (though the $ option was fulfilled completely)
o       Court asked whether D, in exercising discretionary power was done in good faith; where one party has this – against rights of the other, it must do so with good faith.
§         Implied obligation of good faith won’t be used to contradict any express terms of a K (if one party’s actions are expressly authorized, the other party can’t combat it with this provision)
·        Should serve to protect the fruits of the K
·        R 2 205: bad faith evades the spirit of the bargain
 
·        Empire Gas Corp. v. American Bakeries Co.: D entered into a requirements contract to purchase 3000 units from P, but didn’t buy any.
o       UCC 2-306(1): prevents buyer from requesting unreasonably disproportionate amt more than was originally K-ed for. (buyer may request less than original K or none at all, as long as not in bad faith)
§         D didn’t give the court any reason why he didn’t buy any, so violated good faith
Dissent: the requirement that D given legitimate business reason for failure to purchase places burden of proving good faith on D rather than P