Contracts II
Professor Davis
Spring 2010
1) Supplementing the Agreement: Implied Terms, the Obligation of Good Faith, and Warranties
a) Implied terms
i) Rest. 2d § 204: when the parties to a contract have not agreed on an essential term, the court will supply a reasonable term
ii) Implied in fact: implicit in the parties’ agreement, even though not expressly mentioned
(1) Implied by the parties themselves – agreed to in some meaningful way
iii) Implied-by-law: made part of an agreement by rules of law, instead of by agreement of parties
(1) May be imposed by
(a) Statute
(b) Common law precedent
(c) Case by case analysis: court may rule that in a particular case, implication is appropriate
iv) Gap fillers/default terms
(1) Classical view: 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) But over time, courts have been willing to use implied terms, especially when one party has relied on the contract being in existence
v) Court can find consideration through an implied promise (Wood v. Lucy, Lady Duff-Gordon)
(1) Π promised to use reasonable efforts to market Δ designs
(2) Implied promise of good faith is a sufficient detriment to Π to constitute consideration for Δ promise that she would not place her endorsement on anyone else’s designs
vi) UCC §2-309(3)
(1) Parties can contract around default rules, as long as new terms aren’t unconscionable
(2) May expressly identify a triggering event that will take the place of notification (i.e. if sales decline for two years, contract will be rescinded)
vii) Terms often implied
(1) Reasonable price
(2) Place for delivery
(3) Duration/ability to terminate at any time (UCC §2-309(2))
(a) Dealer/distributor relationship – requirement of reasonable notice
(i) Required in order to terminate an ongoing oral agreement for the sale of goods in a relationship of manufacturer-supplier and dealer-distributor (Leibel v. Raynor Manufacturing)
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
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.
3. Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.
(ii) Reasonable time requirement only applies to contracts which do not specify duration
(iii) Only actual notice required – not advance notice
(iv) Reasonable notice is a default term – parties may contract around it (but terms may not be unconscionable)
(v) Gap filler term (Implied in law – based on ideas of fairness and protection)
(vi) Factors to consider
1. Opportunity to enter into substitute transaction
2. Chance to recoup investment
(4) Time for shipment/delivery (UCC §2-309(1))
(5) Time for payment
b) Warranties
i) Express warranty
(1) An explicit promise/guaranty by seller that the goods will have certain qualities
(2) Affirmation of fact, promise, description relating to quality of goods; and factors:
(a) Specificity of statement
(b) Degree seller qualifies/equivocates making the statement
(c) Experimental nature of goods
(d) Price
(e) Statement (oral or written)
(f) Buyer’s knowledge
(3) Express warranty term is no different than any other contract term and is subject to all the same rules of construction
(4) UCC §2-313: express warranties under the UCC
(a) Express warranties created by seller requires
(i) Affirmation of fact or promise that becomes a basis of the bargain
1. The buyer relied on the seller’s warranty
a. Representation in fine print of sales contract is almost always considered basis of bargain, even if there’s no show that buyer read it
b. Consider context (i.e. response to a question)
2. There’s a rebuttable presumption that the if the seller makes the affirmation of fact or description, the buyer relied on it to some extent
a. Seller may establish that the buyer never heard or saw affirmation
b. Seller may show the buyer was aware of defect at time of purchase
(ii) Description of the goods that becomes a basis of the bargain
(iii) Sample or model made part of the basis of the bargain creates an express warranty that the good will conform to model/sample
1. Ads and brochures can create express warranty but must relate to specific good in question (Bayliner v. Crow)
(b) Not necessary that the seller intend to create warranty
(i) Based on an objective determination – conduct determines existence, not subjective belief
(c) Words must be more than just puffery (§2-313(2)
(i) Not necessary that seller use formal words (like “guarantee”)
(ii) Affirmation merely of the value of the goods or statement purporting to be merely the seller’s opinion does not create a warranty
(iii) If seller is merely puffing or clearly expressing an opinion, no warranty
(5) Express warranties cannot be disclaimed
(a) But they can be limited, i.e. putting a time deadline for complaints
ii) Implied warranties
(1) Implied warranties do not apply to services
(2) UCC
(a) §2-312 Warranty of Title
(i) Allows a buyer to take action against seller if title is bad (guarantees that seller has full title, and that goods do not infringe upon any patent or trademark)
(b) §2-314 Warranty of Merchantability
(i) Criteria for merchantability
1. Pass without objection in the trade
2. If fungible goods, of fair average quality within the description
3. Fit for the ordinary purpose for which goods are used
4. Run of even kind quality and quantity within each unit and among all units
5. Adequately contained, packaged, and labeled as the agreement may require
6. Conform to the promises or affirmations of fact made in container or label
(ii) Gap filler term
(iii) Most important of all implied warranties
(iv) Must be contract of sale
(v) Merchant must deal in goods of kind (not enough to have expertise in business matters)
(vi) Differs from implied warranty of fitness: look at goods standing alone and ask whether they’re defective or suitable for their purpose (buyer’s needs don’t matter)
(c) §2-315 Warranty of Fitness for Particular Purpose
(i) Three characteristics
1. Seller has reason to know of buyer’s purpose
2. Seller had reason to know buyer was relying on seller’s skill or judgment to furnish suitable goods
3. Buyer does rely on the seller’s skill or judgment
(ii) Underlying foundation is reliance
(iii) Can only make a determination about whether it’s been breached if you look at it in the context of the buyer’s particular needs
(iv) No warranty if the buyer insists on particular brand
(d) Warranties and real estate (generally applies to residences – harder case for commercial)
(i) Warranty of habitability:
1. End result warranty – focuses on the end result expectation that the home will not have any major defects that render it unsuitable for habitation
2. Majority of states recognize in residential leases by virtue of judicial or legislative action
3. Uniform Residential Landlord Tenant Act
4. Standard of breach – structure must be livable
5. Strict liability (intent is irrelevant)
6. Attaches to the sale of new homes
7. Does the warranty extend to subsequent purchasers?
a. Depends on privity
i. Some jxdns don’t require privity
ii. If implied in fact warranty: need privity
iii. If implied in law warranty: probably do
ith
(a) Prof. Robert Summers: flexible standard that serves as an excluder
(i) Bad faith conduct undermines community standards of decency, fairness, and reasonableness
(b) **Prof. Steven Burton: attempts by one party to recapture foregone opportunities
(6) Shared view of good faith
(a) Duty to cooperate
(b) Can’t prevent another party from performing
iii) In exclusive contracts, good faith requires best efforts
iv) Requirements and output contracts and the duty of good faith
(1) Requirements/output terms mean such actual requirements/output that may occur in good faith (except, no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded) (UCC §2-306)
(a) Seller must use best efforts to supply the goods, and buyer must use best efforts to promote their sale
(b) Courts have given the buyer a good deal of flexibility in reducing their requirements
(c) Merely because the requirements contract has become unprofitable is not a sufficient reason for reduction or elimination of demand (can’t shut down just to curtail losses)
(d) Promise to use reasonable efforts (even implied promise) is enough to keep a promise from being illusory
(2) Requirements contract
(a) Elements
(i) Seller promises to satisfy all requirements of buyer
(ii) Requires exclusivity
(iii) Can have requirements limited to particular city or particular time of year
(b) Benefits to buyer
(i) Locks in price – risk is that market price may drop
(ii) Has a guaranteed supply
(c) Benefits to seller
(i) Know customer
(ii) Knows how much he will sell
(d) Common law defense to/arguments against requirements contracts and the modern response
(i) Defenses
1. Lacks consideration: buyer only made an illusory promise to buy
2. Lack of mutuality because only seller is bound
3. Vagueness
(ii) Modern responses (Corbin)
1. Consideration exists because the buyer commits to buy all from seller, or none at all, which is sufficient legal detriment
2. No problem, since many courts consider mutuality of obligation to be a corollary of consideration rule
3. There is sufficient information to allow for enforcement (look to buyer’s past history, parties’ estimates, prior course of dealing)
(3) Output contract
(a) Elements
(i) Seller agrees to sell all of output to buyer
(ii) Could be limited to a time period or manufacturing plant
(b) Buyer could buy from others, as long as he buys all of seller’s output
(c) Disadvantages seller if prices go up
v) Right of party to exercise discretion – duty of good faith
(1) There is a distinction between a right to make a substantive creative decision and the requirement that the dissatisfaction be genuine or bona fide (Locke v. Warner Brothers)
(2) Is there a breach of good faith?
(a) If one party has discretionary power, there is a duty of good faith imposed as to the use it
(b) If a party asserts in good faith that he is not satisfied, than a court cannot question judgment
