Contracts 2 Outline
(1) Implied duty of good faith
a. Restatement Section 205-every contract imposes upon each party a duty of good faith and fair dealing.
b. UCC 1-203-every contract imposes an obligation of good faith.
c. UCC 2-103-good faith in the merchant context means honesty in fact and the observance of reasonable standards of fair dealing in the trade.
d. This duty can generally not be contracted around-if the parties expressly attempt to do so, the court will generally find it unconscionable.
e. In order to determine whether a party was acting in good faith, the court will generally look to the objective manifestations, facts of the case, and the circumstances surrounding the business decisions.
f. The element of good faith often concerns the purpose the action was taken, not the action itself.
i. Goldberg v. Levy (pg 799)-the parties contracted for a lease, where the defendant, the tenant, had to pay the lessor a certain percentage of gross receipts, and had the option to cancel the lease if sales did not exceed a certain amount. The sales did not meet the amount, and defendant canceled the lease. The plaintiff claims that the defendant allowed the store to be mismanaged and diverted business to another store operated by them in order to be able to get out of the lease. The court found that the tenant’s promise to pay a percentage of gross receipts was also a promise to use reasonable efforts to bring profits into existence. Therefore, the tenant, by doing what the plaintiff claimed he did, was breaching the covenant of good faith and fair dealing and was liable for damages to plaintiff.
g. Mutual Life Insurance of New York v. Tailored Woman (pg 800)-plaintiff leased bottom four floors of a building to the defendant for use as a women’s apparel store. The lease included a clause stating that the defendant would pay a portion of gross receipts in excess of a certain amount to the plaintiff. The plaintiff later leased to the defendant the fifth floor; that lease did not require that the defendant pay a percentage of sales. The defendant moved its fur department up to the fifth floor. The court found that there was still an implied covenant of good faith in every contract, but in this case the defendant was merely exercising its rights to sell its merchandise where it saw fit.
h. Stop and Shop v. Ganem (pg 806)-parties entered into a lease for the plaintiff to lease a building. He was to pay a minimum rent, and then a percentage of gross sales to the defendant if sales exceeded a certain amount. The lease did not state the purpose for which the building was to be used. The plaintiff operated a supermarket in the building for a while, and then planned to cease operating a supermarket and continue to pay the rent; however, the defendant threatened to sue to compel the operation of a supermarket. The defendant claimed that the plaintiff had opened two competing stores near the premises. The court found that the lessees were just following normal business practices and were not acting in bad faith.
(2) Implied Warranties
a. Implied warranty of merchantability
i. UCC 2-314-requirements for the creation of a warranty of merchantability:
1. Merchant seller-UCC 2-104 gives the definition. A merchant seller is one who deals in goods of that specific kind or someone who holds themselves out as having skill or knowledge in that profession.
2. The goods will pass without objection in the trade AND
3. The goods are fit for their ordinary purpose
4. If these elements are met, an implied warranty of merchantability will automatically be created.
a. Policy: the rationale for this is that the buyer’s expectation will be that the goods will meet these criteria.
b. Implied warranty of fitness for a particular purpose
i. UCC 2-315-can be created by a merchant or a non-merchant.
1. Seller has to know or have reason to know of the particular purpose for which the buyer is purchasing the product.
2. Seller has to know or have reason to know that the buyer is relying on the seller’s skill and judgment in selecting the goods.
3. The buyer must actually rely on the seller’s skill and judgment. In determining this, the court would inquire into whether the reliance was reasonable
iii. Courts will look at particular purpose one of two ways:
1. Uses outside of the ordinary purpose of the product (i.e. using a car to go mudding)
2. A use by the buyer that is particular to that buyer’s specific needs (i.e. mountain climbing shoes)
iv. UCC 2-714-If the buyer has already accepted the goods, the buyer can recover damages in the amount of the difference between the value received and the value promised.
c. When analyzing a warranty issue, address:
i. Was there creation of the warranty?
ii. Has there been a breach of the warranty?
iii. Was there a disclaimer of the warranty?
(3) Express warranties
a. UCC 2-313-elements for creation of an express warranty:
i. Affirmation of fact or promise (description, sample, or model)
1. Statements of the seller’s opinion do not create an express warranty.
ii. Facts must relate to the goods in question (must relate to the quality, characteristics, or performance capabilities of the goods)
iii. Facts must become a basis of the bargain (it was a factor in the buyer’s decision to purchase)
b. Policy: no magic language is required for the creation of an express warranty in order to protect the expectations of the buyer.
c. Royal Business Machines v. Lorraine Corp. (pg 818)-Royal sold Lorraine several copying machines. Lorraine sued Royal for breach of several express warranties. The court found that some of the representations that Royal made were not express warranties, because statements that the machines were in good condition or were high quality were mere sales talk. However, some of the statements that Royal made, such as that the machines could not cause fires, were in fact express warranties.
d. CBS, Inc. v. Ziff-Davis Publishing (pg 824)-CBS made the highest bid to purchase several magazines from the defendant. After the parties entered into an agreement containing express warranties stating that the financial conditions were as the defendant said th
crops until the inspector came, and because the plaintiff did not do so, he could not recover on the policy. The court found that there was no condition precedent, based on the language in the policy, and therefore the plaintiff’s claim on their policy was not barred.
iv. Chirichella v. Erwin (pg 849)-The parties contracted for the sale of a home, and the contract stated that the settlement should coincide with the defendant’s settlement of their new home, which would be approximately October 1971. Settlement never occurred on the defendant’s new home, and after defendant’s refusal to settle, the plaintiffs filed suit for specific performance. The defendants claimed that the settlement of the new home was a condition precedent to performance. The court found that the language of the contract did not create a condition precedent, but merely fixed a convenient time for settlement, and therefore the defendants are liable for failing to perform the contract within a reasonable amount of time.
v. Restatement Section 226 and comment-explains how a condition may be created.
b. Condition subsequent-the party’s duty to perform has already arisen, but because the condition subsequent is never met, the duty is discharged. Terminates the duty that has already come up.
i. The defendant is the one trying to argue that their duty has been discharged, so they have the burden of proof to affirmatively plead that defense.
c. There is a presumption in favor of promises, so if the court is in doubt as to whether a condition is created, then it will probably be found to be a promise.
(3) Avoiding conditions
a. Waiver-voluntary abandonment of a contractual right; when the beneficiary of the condition agrees to perform even though the condition hasn’t been met.
i. A waiver can be revoked prior to the date of the condition’s fulfillment, unless the other party has relied on it.
ii. If it appears that the original deal is being changed; that what was being put forth in the contract is being altered, then it is a contract modification, not a waiver, and therefore requires consideration and mutual assent.
Clark v. West (pg 852)-plaintiff entered into a contract to write books for the defendant. The contract said that the plaintiff would abstain from intoxicating liquors while he was writing. If he didn’t then he would be paid a smaller amount for each page. After the defendant refused to pay the higher amount for plaintiff’s work, the plaintiff claimed that the defendant waived the