CONTRACTS II – Prof. Davis Spring 2014
I. SUPPLEMENTING THE AGREEMENT: IMPLIED TERMS, THE OBLIGATION OF GOOD FAITH AND WARRANTIES
a. The Rationale for Implied Terms
i. Types
1. Implied-in-fact – Implicit in the parties’ agreement, even though not expressly mentioned
2. Implied-in-law – made part of that agreement by operation of the rules of law rather than by the agreement of the parties themselves
a. May be imposed by:
i. Statute
ii. Common law precedent
iii. Case-by-case analysis
b. Gap fillers/default terms
i. Rest 2d. 204 – when the parties have not agreed on an essential term, the court will supply a reasonable term;
1. UCC 2-204(3) – “Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.”
a. QUANTITY is exception: UCC is a stickler for Quantity
b. Otherwise, to get around Statute of Frauds in UCC, only need:
i. Signature
ii. Quantity
iii. Evidence of the K
1. Know who parties are
2. Subject matter of the K
ii. UCC § 1-302 – Variation by Agreement
1. Provisions of UCC may be varied by agreement – may be contracted around, except for:
a. Good faith
b. Diligence
c. Reasonableness and care prescribed by UCC
iii. UCC § 2-301
1. Seller’s basic obligation: Transfer and deliver goods
2. Buyer’s basic obligation: Accept delivery and pay for goods
iv. UCC § 2-304
1. Price may be payable in money or otherwise (e.g. goods).
v. UCC s. 2-305: Open Price Term
1. The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if (See p. 40 for additional requirements)
vi. UCC § 2-310(a)
1. Time for Payment: Unless otherwise agreed, payment is due at the time and place at which the buyer is to receive the goods…
vii. UCC § 2-308(a)
1. Place of Delivery: Unless otherwise agreed, goods are to be delivered at the seller’s place of business or (if he has none) the seller’s residence. (Note that § 2-308 typically applies only to non-commercial sales).
viii. UCC § 2-309(1)
1. Time for delivery: Unless otherwise agreed, the time for delivery, shipment and all other action must be a reasonable time.
a. Go to UCC s. 1-205(a): Whether a time for taking an action required (by the UCC) is reasonable depends on the nature, purpose, and circumstances of the action.
b. UCC s. 1-205(b): An action is taken seasonably if it is taken at or within the time agreed or, if no time is agreed, at or within a reasonable time.
c. ALSO – reasonable time for delivery can also be established by prior course of dealings (in that case, no need for gap-filler)
ix. Historically
1. A contract without all of the terms is incomplete, and could be held unenforceable for lack of consideration or lack of mutuality of obligation
2. Over time, courts have shown themselves to be more willing to use implied terms, especially when one party has relied on the contract’s existence.
x. Wood v. Lucy, Lady Duff-Gordon, 1917
1. Facts: Defendant was a fashionable woman and designer capable of increasing the sales of certain goods by her endorsement. D entered into an exclusive agreement with P allowing him to place her endorsement and market D’s designs and keep half of the profits. P claimed she broke the contract by placing endorsements without his knowledge and keeping all the profits to herself. D violated the exclusivity provision.
2. Issue: Does the contract lack mutuality because it does not expressly bind or require the P to actually place endorsements or market D’s designs?
3. Rule: Mutuality or a return promise may be implied from the circumstances surrounding the contract and the nature of the whole writing.
a. UCC 2-306(2) – imposes a “best efforts” obligation in cases where the contract for sale calls for “exclusive dealing”
4. Holding: The circumstances supported a promise by implication that P would use reasonable efforts to place the endorsements and market the designs. Unless he gave his efforts neither party would gain anything from the contract. Also, the one-half arrangement was a promise to use all of his efforts in order that the contract would have value to the P.
a. “The acceptance of the exclusive agency was an assumption of its duties.”
5. “Reasonable efforts” or “best efforts” – implied-in-fact – why?
a. Cardozo is trying to ascertain the intent of the parties
i. Intent of parties = implied-in-fact
b. “Best efforts” implies a higher standard; “reasonable efforts” is closer to good faith
c. See § 2-306 (Output, Requirements, and Exclusive Dealings) – now reasonable efforts are implied-in-law
d. An implied obligation to use reasonable efforts will prevent a somewhat indefinite promise from being illusory
6. Why is parol evidence rule irrelevant?
a. Court is not trying to add a term, they are looking at an implied term
xi. UCC 2-309 – Absence of Specific Time Provisions; Notice of Termination
1. The time for shipment or delivery or any other action under a contract if not provided in this Article or agreed upon shall be a reasonable time.
a. Basically, the default rule, if parties do not specify
2. Where the contract provides for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party.
a. What is reasonable is dependent on the facts, such as t
ship – requirement of reasonable notice
a. Required in order to terminate an ongoing oral agreement for the sale of goods in a relationship of manufacturer-supplier and dealer-distributor
c. The Implied Obligation of Good Faith
i. Generally
1. Implied in every contract
2. Good faith is a way to protect reasonable expectations
3. Bad faith actions are those which prevent the other party from receiving the fruits of the contract
4. Good faith applies to performance stage of the K
ii. Definitions
1. UCC 1-304 – Obligation of Good Faith: Every K or duty within the scope of the Act imposes an obligation of good faith in its performance or enforcement – SUBJECTIVE STANDARD
2. UCC 1-201(b)(20) – Good faith, except as otherwise provided in Article 5, means honestly in fact AND the observance of reasonable commercial standards of fair dealing in the trade – SUBJECTIVE STANDARD
3. UCC 2-103(1)(b) – Good faith requires not merely honesty, but also the observance of reasonable commercial standards of fair dealing in the trade – OBJECTIVE STANDARD
4. Restatement 2d § 205: Duty of Good faith and Fair Dealing
a. Every contract imposes upon each party a duty of good faith/fair dealing in performance and enforcement
b. Bad faith includes “evasion of the spirit of the bargain” (Comment d)
5. Art. 7(1) CISG
iii. Commentators
1. Sumners – suggests that good faith does not have a single definition; instead, should be understood as an “excluder.” In other words, the only way to determine whether conduct is in good faith is to look for conduct that is in bad faith.
a. Criticized as too flexible, amorphous; we need more structure, guidance
2. Exercise of discretion taken into account when determining “good faith”
a. Sometimes the party has acted in bad faith because it obstructed the other party from trying to gain the fruits of the contract – obstructionist
b. Other times, party failed to do something that allowed the other party to gain fruits of K – failure to act
3. Patterson – parties have reasonable expectations at the time they enter into K
a. How is good faith and fair dealing applied so they arrive at these expectations?
4. Ultimately – it is about whether or not one party undermines the spirit of the K
