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Contracts II
University of South Carolina School of Law
Nelson, Eboni S.

Contracts II


Spring 2011

1/13/2011-pg. 815-831- Implied Duty of Good Faith—————————

Goldberg Corp v. Levy à Goldberg sought damages for unpaid rental payments based on Levy’s intentional diversion of profits so as to reduce rental payments under a lease agreement and trigger provision allowing him to terminate the contract. – A covenant of good faith and fair dealings is inherent in every contract, requiring a party to a commercial lease that requires part of the rental payments be based on a percentage of gross receipts, to utilize his best efforts in order to generate earnings. In this case there was not an express provision in the contract to forbid “running the business into the ground”, but the question is whether such behavior solely to cancel the lease arrangement is allowed.

Breaching a contract by itself is not necessarily a breach of the implied duty of good faith

Merchant à honesty in fact + reasonable commercial standards

Rest § 205-Duty of Good Faith and Fair Dealing- every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement à Duty not to violate decency, fairness, or reasonableness

· Court must determine motives and kind of behavior (purpose), not just the fact that the action was taken. Asks questions like are there receipts, advertising, etc…

· Nelson: “If someone is doing something in the performance of a contract they are not specifically forbidden from doing where the contract is silent on a particular issue, they are not allowed to intentionally take advantage of that “gap” in order to not meet terms in the contract”

Mutual Life Insurance Co. of New York v. Tailored Woman à Clothing store on Fifth Ave. was supposed to pay a fixed lease and also a percentage of gross receipts over certain amount. The store moves its fur business to the fifth floor of the store, and the PL is upset because they are no longer receiving gross receipts from that portion of the store’s business

· To what extent do the contract terms matter? The contract limits the sale to women’s clothing, but not to furs. If they wanted to specify in the contract they could have. In keeping with the ASSENT POLICY

· The court is willing/but hesitant to step in because they do not want to rewrite the contract

· Is there bad motive/behavior

· Look at all behavior

· Look at terms themselves

· Balancing carrying out intentions of the parties vs. rewriting the contract

Stop & Shop, Inc. v. Ganem à (1) When considering good faith, court should take into consideration the motives; is party trying to subvert contract. (2) Commercial must state terms explicitly for court to uphold a term.

· Nelson: “IF people agree as to how to use the property, or to use it in a certain way, we want to be very careful about extending covenants in such situations. What kind of intent was there on both parties’ side?”

1/18/2011- pg. 831-835- Warranties- Implied————————————

Certain warranties will apply to certain transactions regardless of whether it is expressed

What’s important to Nelson:

· The creation of the warranty

· The breach of the warranty (Don’t talk about warranty unless you can talk about a breach)

· Any possible disclaimers of the warranty

· Must talk about each in turn

· Look for both the ordinary and particular purpose*

· Then specific performance situations

· Then Damages in general

· Implied warranty: merchantability; usage of trade:

1) Only applies to merchant sellers



Sometimes referred to as for ordinary purposes

3) IN the business of that kind àOrdinary purpose

4) Created where there is a merchant seller (car example of manufacturer having an implied warranty of merchantability to Hertz)

5) Warranting (to Hertz) the goods are fit for their ordinary purpose

§ IWM à UCC § 2-314(2) a-f

§ UCC § 2-314(2)(e)- “are adequately contained, packaged, labeled, as the agreement may require”

§ UCC § 2-314(2)(c)- WHERE LAWYERS HANG THEIR HATS WHEN BRINGING AN IWM CLAIMà “are fit for the ordinary purposes for which such goods are used

· Unless excluded or modified as provided for under 2-316, a warranty that goods shall be merchantable is implied in contracts where the seller is a merchant with respect to goods of that kind.

· For goods to qualify as merchantable they must:

o Pass without objection in the trade

o In the case of fungible goods are of fair average quality

o Are fit for their ordinary purpose

o Conform to promise made on container

IF it was Best Buy then the warranty would probably be breached, because Best Buy sells refrigerators and they are in the business of that particular good à Best Buy wouldn’t have to do anything but sell the good for an IWM to be created because they are a merchant seller and warranting that the goods are fit for their ordinary purpose

– Argument: If the refrigerator didn’t work AT ALL then the IWM wouldn’t be met – Counter-argument would be that the rest of the fridge works à counter-counter-argument would be that the good in the trade wouldn’t pass without objection

– Probably need to be in the IWFPP realm for a breach of warranty in this case

IWFPPà Suzy told the seller what she wanted the refrigerator to do, relying on the seller’s skill and judgment so there was an IWFPP

– Counterargument = was the reliance reasonable on her part? We counter but still need to make a counterargument.

– Warranty was breached because the fridge didn’t work to her specifications (have to be sure to write out the reasons why the warranty is created AND why it’s breached for finals purposes)

2) IWM à it depends on if the transmission should have lasted far belong 50,000 miles, or if the ordinary purpose was within that 50,000 mile range. If it was “time” for the transmission to reach the end of its life then there was no breach of IWM

3) Brenda =not a merchant so no IWM à Sarah may win under IWFPP because the product doesn’t do what she specifically SAID she wanted it to do

– Why do we only require merchants to have IWM?

o We don’t want to have to hold individuals to that high of a standard for selling individual items (encourages transactions amongst individuals)

§ Only a heightened responsibility if the individual makes some warranty or promise about the condition or working nature of the item

Nelson: “Not every breach of contract is a breach of warranty”