Timothy Davis
Contracts II
Spring 2012
Supplementing the agreement: Implied terms, the obligation of good faith and warranties
I. Implied terms
a. Two types of implied terms: Implied-in-fact—implicit in the parties’ agreement, even though not expressly mentioned; implied-in-law—made part of that agreement by operation of the rules of law rather than by the agreement of the parties themselves
b. May be imposed by; statute; common law precedent; case-by-case analysis
c. Gap fillers and default terms
i. Rest. 2d 204—when the parties have not agreed on an essential term, the court will supply a reasonable term
d. UCC 2-306
i. Wood v. Lucy Lady-Duff Gordon
1. P promised to use reasonable efforts to market the D’s designs. P claims D broke the agreement; D says their agreement lacks the element of a K because there’s no promise he will use reasonable efforts to market designs
2. Court held that a K can be found when the promise is only implied
3. Rule—UCC 2-306(2): a lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to promote their sale
a. Court found consideration through an implied promise to use “reasonable efforts” to market D’s designs
e. UCC 2-309—absence of specific time provisions; notice of termination
i. (1) Default rule is if the time for delivery or shipment isn’t specified then it shall be a reasonable time
ii. (2) Ks that provide for successive performance but contain an indefinite duration it is valid for a reasonable time, but may be terminated at any time, by either party, unless agreed otherwise
1. A reasonable duration is dependent on the facts surrounding the K
iii. (3) Termination by one party outside of an agreed event requires reasonable notice to be received by the other party
1. How notice is made is irrelevant, the matter of interest is only that notice is made
2. IN the realm of franchise Ks, enough time has to be give to allow the party to recoup some investment and minimize losses
3. Termination can be triggered by an agreed event
iv. Party’s can K around default rules, but doing so is subject to unscionability
II. Implied obligation good faith
a. UCC 1-203—obligation of good faith: Every K imposes an obligation of good faith
b. UCC1-201(2)—Unless otherwise provided, means honest in fact AND the observance of reasonable commercial standards of fair dealing in the trade
c. UCC 2-103(1)(b)—requires not merely honesty, but also the observance of reasonable commercial standards of fair dealing in the trade
d. Rest. 2d 205—Every K imposes upon each party a duty of good faith
i. Bad faith is the undermining of the purpose of the K
e. Commentators
i. Sumners—suggest that good faith does not have a single definition and instead should be understood as an “excluder” in other words only way to determine whether conduct is in good faith is to look for conduct that is in bad faith
ii. Burton—every time you enter into a K with another party that means that they have forgone opportunities or occasions for the realizations of gains that he he should have understood to be precluded by the K at issue. If the party uses its discretion to try to recapture a forgone opportunity, then they have violated the duty of good faith
f. Duty of Good Faith cannot be contracted around
g. Seidenburg v. Summit Bank
i. Good faith cannot override an express term in a K, but it does require a party to act in good death when exercising either discretion in performance of its contractual obligations or its right to terminate
ii. Good faith is breached when the party exercises its discretionary authority arbitrarily, unreasonably, or capriciously, with the objective of preventing the other party from receiving its reasonable expected fruits under K
III. Requirement and Output Ks
a. Requirement K—a K in which you agree to purchase all your requirements of a particular sort from on party
i. Elements—seller promises to satisfy all requirements of a buyer; requires exclusivity; can have requirements limited to particular city or to particular time of year
ii. Benefits to buyer—locks in price; guaranteed supply
iii. Benefits to seller—knows customers; knows how much it will sell
b. Output K—the buyer will be obligated to buy all the seller’s output of a given commodity
i. Characteristics—Seller agrees to sell ALL of output to a particular buyer; could be limited to time period of particular manufacturing plant; buyer could buy from other manufacturers so long as he buys everything this particular seller produces; disadvantage to seller if market price goes up
c. UCC 2-306—focuses on the general requirement of good faith and stresses the likelihood that the parties themselves may have furnished an estimate against which performance may be measured
i. Maximum and minimum
ii. Seller in a requirement K is to be protected against increases in demand that exceed the bounds of good faith—a ballooning of demand by a requirements buyer has often been held to be in bad faith
iii. Protects the requirements seller against a bad faith reduction in the buyer’s demand—dramatic reduction of demand may be held as bad faith unless it is resulting from reasons beyond the buyer’s control
IV. Satisfaction clause—performance obligations are never triggered
a. A promise conditional on the satisfaction of one of the parties could fail as consideration unless there is some limitation on the party’s ability to claim dissatisfaction
b. Objective standard generally applies to Ks that deal with functional utility (the reason for the satisfaction is to ensure that commercial or technical standards are met)
i. Question becomes whether a party is reasonable in being dissatisfied
c. Subjective Standard generally applies to Ks of personal preference involving matters of taste or aesthetics
i. Dissatisfaction has to be honest and genuine
ii. Where a party unreasonably rejects a performance he will have to provide convincing evidence of his peculiar attitude or attributes to explain why his unreasonable dissatisfaction is honest and genuine
d. The promise is to act in good faith or reasonably to cooperate in achieving the fulfillment of the K
e. In cases of doubt the Rest. 228, favors the objective test because a party should not be taken to have subjected itself to the risk of a purely subjective evaluation
f. In the case of third party evaluation there is a greater tolerance for the subjective test because the third party is less likely to be affected by the selfish interests of the obligor
V. Express right to use discretion
a. If one party has discretionary power, there is a duty to of good faith imposed as to the use of that power
b. If a party asserts in good faith that he is not satisfied, then a court cannot question that judgment
c. However, if a D acted in bad faith by categorically rejecting P’s work and refusing to work with her, irrespective of the merits of her proposals such conduct is NOT beyond the reach of the law—Locke v. Warner Bros.
d. Duty of good faith cannot imply a term that contradicts an express term, but it can make it that the express term is not utilized arbitrarily
e. Promissory fraud—a promise to perform made at time when the promisor had not intentions of fulfilling the promise
i. Not premised in K law—look to the nature of the expectation
VI. Employment at will (Donahue v. Federal Express Corp. p. 480)
a. At will employment allow either party to terminate the K at any time and without a requirement of good or just case
i. No duty of good faith unless: document prohibiting the employer from terminating people for certain circumstances; additional consideration; promissory estoppel (may give relief to discharged employee); contractual terms outside the at-will relationship3
b. At will employment has no cause of action against an employer for termination of the at-will relationship except
i. Termination threatens public policy (i.e., cannot require an employee to commit a crime, or discharge a statue-protected employee);
ii. Denied compensation for work prior to termination;
iii. Promised evaluations must be conducted in good faith;
iv. Additional consideration as basis of implied for cause term (relinquishment of another secure job, relocation expenses)
v. Promissory estoppel
c. Ks stating permanent employment are usually treated as an indefinite time frame and thus at will—if interpreted literally are generally held unenforceable unless supported by some additional consideration
VII. Warranties
a. Historically—caveat emptor: buyer beware
b. UCC Warranties
i. 2-313 Express warranties—does not require that the seller have the intent to create an express warranty
1. Most commonly applied to written or orally express warranties given by a seller
2. K term having to do with the quality or description of goods and is no different in kind from other express terms of a K such as price, delivery, or quantity
3. Once made cannot be disclaimed
4. 3 requirements
a. Seller’s statement or conduct must relate exclusively to quality, description, or title of goods
b. Statement must fail within the scope of 313(1)(a)-(c); did it amount to an affirmation of fact, a promise, description, model or sample that relates to the goods
c. Must have been part of the basis of the bargain
i. relied on seller’s warranty; representation contained in the fine print of sales K will almost always be actually read an relief upon that language before signing
ii. 2-314 implied warranty of merchantability—A merchant who regularly sells goods of a particular kind impliedly warrants to the buyer that the goods are of good quality and are fit for the ordinary purposes for which they are used
1. Gap filling terms to describe the merchant’s obligation with respect to the quality of the goods; subordinated to the actual agreement of the parties; can be disclaimed or modified pursuant to 2-316; buyer need not establish reliance
2. Warranty arise when:
a. There is a K for a sale of goods; the seller is a merchant
3. Two tests commonly used for assessing the merchantability of goods
a. Whether the goods would pass without objection in the trade; and
b. Are fit for the ordinary purposes for which such goods are used
because they are below average intelligence, misguided, or weird
b. Mental incompetence is determined at the time of K
c. Burden lies on the party alleging incompetence—requires a showing that the condition existed and that is was in nature and extent severe enough to preclude an adequate degree of assent (generally requires expert psychiatric evidence as well as witness testimony form those who observed the party’s behavior at the time of transaction
d. Presumption is for capacity so the other party is entitled to rely on apparent capacity unless some behavior or other circumstances signal a problem
e. Two tests
i. Cognitive test—person lacks capacity enter a K if the person is unable to understand the transaction and the consequences
1. Severity usually makes it apparent to the other party
ii. Volitional test—person lacks the capacity to enter into a K if the person is unable to act in a reasonable manner in the transaction and the other party has reason to know of the condition
1. Concerns the person’s judgment, self control, and motivation
iii. Neither test is premised on the requirement that the K is unfair, only that there was meaningful assent
f. Avoidance and its consequences
i. If the K is avoided the parties must be restored to their original position—both must return money or property received under the contract, or the value consumed or dissipated, or of services rendered
III. Duress
a. Improper threat—defined as an indication of intent to do or refrain from doing something so as to inflict some harm, loss, injury, or other undesirable consequences that would have an adverse effect on the victim’s person or personal economic interest
i. Includes explicit intimidation and implied threats which are determined through interpretation, taking into account the surrounding circumstances
ii. The party must be responsible for the threat, a threat from a non party is not usually grounds for avoiding the K unless the other party is implicated in the threat or knowingly took advantage of it.
1. However, where the conduct of the non-party amounts to actual physical forces against the victim or the threat of such force, the duress may be serious enough to render the K void (public policy of protecting people from violence)
b. Impropriety
i. Broad view of impropriety which can include a threat to engage in vexatious litigation, to withhold performance or property that the victim is entitled, to disclose information that would embarrass the victim, or otherwise to do something spiteful or vexatious purely for the sake of hurting the victim
ii. Threat to file criminal charges, even if warranted, is regarded as improper because it goes against public policy
c. Inducement
i. Issue of causation—does the improper threat substantially contribute to the decision to manifest assent—thus under all the circumstances, the duress substantially overcame the free will of the party, leaving him no reasonable alternative but to acquiesce
ii. An alternative is only reasonable if it a feasible and practical means of evading the consequences of the threat
d. Remedy
i. When a K is induced by an extreme degree of duress such as actual physical force or a threat of such, then the K is void for lack of assent—the more common approach is to treat the K as voidable at the election of the victim
e. No Duress in the UCC—must instead rely on the requirements of good faith; 1-103 and 2-209
IV. Undue influence
a. Developed to deal with situations in which duress was not present, but one of the parties had a particularly strong influence over the other and abused this position of dominance to persuade the subservient party to enter a disadvantageous contract—abuse of trust
b. Makes the K voidable at the instance of the victim
c. Victim must establish two elements for relief under undue duress
i. He had a relationship of dependency and trust with the other party that gave the other party dominance over him and justified him in believing that the dominant party would not act contrary to the victim’s interests
1. Mere fact that a party is weak, infirm, or aged does not itself suffice to give undue influence though it is a factor to consider when determining if the required relationship exists
