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Contracts II
University of Wyoming School of Law
Glover, Mark B.

Contracts II


Spring 2015

I. Implied Terms of a Contract

§ Terms Implied-in-Fact – Terms that the court find to be “implicit” in the parties’ words or conduct even though not literally expressed by them.

§ Terms Implied-in-Law – Terms that the court find should be made part of the agreement by operation of the rules of law rather than by the agreement of the parties themselves.

· Fairness – Rules of law that supply implied terms for the parties may be supported on the basis that the terms are fair or just.

· Efficiency – Implied terms can also be justified because such terms may represent the probable intention of the parties if they had bargained over the particular issue.

A. Cases:

i. Wood v. Lucy, Lady Duff-Gordon

a. Facts: Defendant was a fashionable woman and designer capable of increasing the sales of certain goods by her endorsement. Defendant entered into an exclusive agreement with Plaintiff allowing him to place her endorsement and market defendant’s designs and keep half of the profits. Plaintiff claimed she broke the contract by placing endorsements without his knowledge and keeping all the profits too herself.

b. Issues: May a promise to use reasonable efforts be implied from the entire circumstances of a contract?

a. General Rule: A promise to use reasonable efforts may be implied from the entire circumstances of a contract.

b. In this case: Plaintiff’s promise to pay the defendant one-half of all the profits & revenues resulting from exclusive agency & to render accounts monthly shows reasonable efforts.

c. Issue: Can an implied promise to use best efforts be considered valuable consideration?

d. General rule: An implied promise to use best efforts in contract performance can be considered valuable consideration.

e. Issue: Can the duty of good faith compensate for vagueness in an agreement to avoid invalidation of a contract clearly intended by the parties?

f. General rule: The duty of good faith can compensate for vagueness in an agreement to avoid invalidation of a contract clearly intended by the parties.

c. Holding: : Neither the P nor the D would make any profits unless the D marketed the products of the P. Without the implied promise, the transaction would not have made sense. The P’s promise to pay the D half of the profits resulting from his marketing was a promise to use reasonable efforts to bring these profits into existence.

d. Policy/ Take-Away: An implied promise is sufficient to constitute consideration.

ii. Leibel v. Raynor Mfg. Co.

a. Facts: Appellant Liebel, entered into a verbal dealership agreement with Appellee Raynor Manufacturing Co. The agreement did not address duration. Appellee terminated the agreement after two years.

b. Issue: Was Appellant entitled to reasonable notice of Appellee’s intention to terminate the verbal agreement?

c. Rule: Where there is a relationship of manufacturer-supplier and dealer-distributor, reasonable notice of intent to terminate an ongoing verbal agreement is required under the UCC.

d. Holding: Article II of the UCC requires that reasonable notice be given if the agreement is for an infinite duration. The Court interprets reasonable notice as relating to “the circumstances under which notice is given and the extent of advance warning” not the method by which notice is given. The Court holds that Appellee was required to give Appellant reasonable notice of intent to terminate.

II. Good Faith & Fair Dealing

A. Restatement (Second) of Contracts § 205 – “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.”

B. Uniform Commercial Code § 1-304 – “Every contract or duty within [the UCC] imposes an obligation of good faith in its performance and enforcement.”

C. Cases:

i. Morin Bldg. v. Baystone Constr.

a. Facts: A contractor’s work was rejected due to a provision in the construction contract stating that all matters relating to “artistic effect” were subject to the final approval of the owner.

b. Issue: Whether a subjective, good faith standard always applies to evaluate the owner’s satisfaction under a standard owner’s satisfaction clause.

c. General Rule: In a contract containing a standard owner’s satisfaction clause, satisfaction is judged by a reasonable person standard when the contract involves commercial quality, operative fitness or mechanical utility which other knowledgeable persons can judge; in the alternative, satisfaction depends on the owner’s good faith judgment when the contract involves personal aesthetics or fancy.

d. In this case: The satisfaction clause depends on whether General Motors reasonably rejected Morin’s work.

e. Holding: An objective standard is the appropriate standard to employ in a contract for the construction of a commercial building. Therefore, General Motor’s rejection of the Defendant’s work on aesthetic grounds was unreasonable.

ii. Locke v. Warner Bros., Inc.

a. Facts: As part of a settlement agreement between Plaintiff Locke and movie star Clint Eastwood, Mr. Eastwood agreed to secure a production deal between Defendant Warner Brothers and Plaintiff. The deal was granted to Plaintiff giving her the opportunity to develop movies with Defendant movie studio. Plaintiff alleged Defendant violated the implied covenant of good faith in that they never intended to make any films with her.

b. Issue: Can a party to a contract require the other party to exercise discretionary duty granted to it under the contract?

c. Rule: A party to a contract can require the other party to exercise discretionary duty granted to it under the contract.

d. In this case: Warner could use discretionary judgment but it still must be honest and with good faith.

e. Holding: The Court held that Plaintiff introduced sufficient evidence to call into question whether Defendant, in exercising its discretionary power to refuse to develop a movie with Plaintiff, did so with good faith. The Court held that where one party holds a discretionary power affecting the rights of another, it must exercise such power in good faith. The Court further held that Plaintiff introduced sufficient circumstantial evidence to show that Defendant had no intent to honor the agreement at the time the agreement was entered into.

The Court was quick to note, however, that the implied covenant of good faith will not be used to contradict any express terms of a contract. Thus, where one party’s actions are authorized by an express provision to the contract, no covenant of good faith can be implied to forbid such conduct.

III. Caveat Emptor & Warranties

A. “Let the Buyer Beware” – This doctrine meant that the seller bore no responsibility at all for the quality of the product he was selling unless he expressly guaranteed it or gave a “warranty” to the buyer.

B. Express Warranties – “’Express’ warranties rest on ‘dickered’ aspects of the individual bargain . .” (UCC § 2-313 cmt. 1)

a. Express warranties by the seller are created as follows:

b. Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods conform to the affirmation or promise.

c. Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

d. Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.

e. Uniform Commercial Code § 2-313

C. Implied Warranties – “’Implied’ warranties rest so clearly on a common factual situation or set of conditions that no particular language or action is necessary to evidence them and they will arise in such situations unless unmistakably negated.” (UCC § 2-313 cmt. 1)

a. Implied Warranty of Merchantability

1. “[A] warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind.” (Uniform Commercial Code § 2-314)

b. Implied Warranty of Fitness for a Particular Purpose

1. “Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified . . . an implied warranty that the good shall be fit for such purposes.” (Uniform Commercial Code § 2-315)

c. Implied Warranty of Skillful Construction

1. “Clearly every builder-vendor holds himself out, expressly or impliedly, as having the expertise necessary to construct a livable dwelling. It is equally as obvious that almost every buyer acts upon those representations and expects that the new house he

g: The Court held that, under established Wisconsin law, an incompetent person’s transactions are entirely voidable, and such person will have the ability to rescind a contract or conveyance for lack of capacity.

The Court held that Plaintiff introduced sufficient evidence such that a reasonable jury could find Plaintiff incompetent. This was based on Plaintiff being declared incompetent in 1987, her testimony which signaled a complete lack of understanding on her part with respect to the loan, and on the basis of a psychological expert who testified that Plaintiff was malleable, gullible, and people could convince her of anything.

The Court, in interpreting the implied obligation of good faith that is read into all contracts, stated that where a contract is fairly entered into, and neither party knows of the other’s incapacity, the contract is not voidable if the parties cannot be restored to their previous positions. However, if one party knows, or has reason to know of the other party’s incompetence, the contract may be voided and the consideration that was given need not be restored. The Court stated that there was sufficient evidence introduced to give Defendant Bank constructive notice that they should have proceeded more cautiously with Plaintiff. Bank based its findings on the fact that the loan was essentially set-up by Eilbes, that Eilbes was already in default of his loan, that Plaintiff relied on her mutual fund for income, and that it was possible that Plaintiff’s financial advisor told Schroeder that Plaintiff had previously been declared mentally incompetent.

b. Mental Capacity – Restatement 2d Contracts § 15

1. A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect

(i) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or

(ii) he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition.

2. Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance under Subsection (1) terminates to the extent that the contract has been so performed in whole or in part or the circumstances have so changed that avoidance would be unjust. In such a case a court may grant relief as justice requires.

b. Process

i. Duress

a. Totem Marine v. Alyeska Pipeline

(i) Facts: Plaintiff Totem and its vice-president Robert Stair brought suit against Defendant Alyeska to rescind an agreement releasing Defendant from all claims in exchange for $97,500. Plaintiff argued that he was forced to sign such agreement to avoid being bankrupt and therefore seek to avoid the agreement on grounds of economic duress.

(ii) Issue: Whether Plaintiff was forced to accept the terms and conditions of the amendment such as to allow rescission based on economic duress.

(iii) Rule: Economic Duress exists where (1) one party involuntarily accepts the terms of another, (2) circumstances permitted no other evidence, and (3) such circumstances where the result of coercive acts of the other party.

(iv) Holding: Plaintiff showed that Defendant had deliberately withheld payments of a debt, with knowledge that Plaintiff had no choice but to accept the conditions of the amendment or declare bankruptcy, and that the only way Plaintiff would be able to avoid bankruptcy would be to accept the amendment. The Court then remanded the case back to the trial court for a complete factual determination of whether a claim for economic duress truly existed.