Contracts II Flashcards
(119 cards)
1
Q
What is the Parol Evidence Rule and when does it apply?
A
- Applies to written or oral evidence within the scope of the application
- Gives effect to the mutual intent of parties to “discharge” effect of prior or contemporaneous written or oral expressions of intent within scope of integrated writing
2
Q
Expressed Merger Clause
A
- Basically, the only thing that counts is what’s in the writing (nothing else that was said during negotiations or etc is included)
3
Q
Implied Merger Clause
A
- If K was well written and complete on its face, then we call it a fully integrated contract (bc it covers everything!)
4
Q
Complete vs. Partial Integration
A
- If “complete”, ALL parol evidence is barred (rare).
- If “partial” (meaning not apply to whole contract), then parol evidence consistent with writing may be used to supplement
- When you cannot say reasonable parties would have “naturally” included the terms then it is reasonable to omit terms and consider outside of writing (extrinsic evidence) - but it cannot contradict writing.
5
Q
Integrated Writing Intended as a Final Expression
A
- An integrated writing is typically a single doc or series of docs signed by both parties
- Complete integration precludes any extrinsic evidence within scope
- Writing is “completely integrated” if term “naturally” or “certainly” (UCC § 2-202 Comment 3) would have been in the writing had it been part of parties’ agreement
- Common law – had parties intended term, would a reasonable person have expected it “naturally” (normally) to be in the writing (if agreed to at all)?
6
Q
What Are Some Exceptions to the Parol Evidence Rule? Meaning where a court WILL allow extrinsic evidence?
A
- No K ever concluded
- K defense (duress, misrepresentation, etc.)
- Entirely distinct and fully collateral agreement (not within scope) - basically think a separate agreement
- Resolving ambiguity within writing
- Establishing right to remedy for breach
- Course of dealing
- Usage of trade
- Course of performance
7
Q
No Oral Modification Clauses (NOM) - Explain with Common Law
A
- In contracts with a no oral modification (NOM) clause, subsequent modifications that are made orally are not valid.
- Under traditional common law, NOM clauses are not strictly enforceable. BUT you can always change by mutual consent
8
Q
No Oral Modification Clauses (NOM) - Explain with UCC
A
- In contracts with a no oral modification (NOM) clause, subsequent modifications that are made orally are not valid.
- Fully enforceable under UCC 2-209(2)
- But can orally modify as a “waiver” under 2-209(4)
- Waiver is subject to retraction with reasonable notice, UNLESS unjust detrimental reliance under 2-209(5)
9
Q
Zipper Clause
A
Merger clause + NOM clause (past, present and future in single writing)
10
Q
Parol Evidence Under the CISG
A
- There is NO PER under CISG
- You need a merger clause to get the result of a PER
- CISG considers all relevant circumstances, including negotiations
11
Q
Plain Meaning
A
- Within “4 corners”
- Completely integrated writing
- Clear and unambiguous on its face
- Will not resort to extrinsic evidence
12
Q
Ambiguity
A
- Can open door to use of extrinsic evidence EVEN WHEN writing is completely integrated with a merger clause - Hence exception to the PER
- A term or provision is “ambiguous” if it is “reasonably susceptible” to more than one meaning
13
Q
Patent Ambiguity
A
- If patent ambiguity (unclear by the looks of it, on its face), extrinsic evidence will be considered
- This is an exception to PER - 4 corners approach
14
Q
Latent Ambiguity
A
- If latent ambiguity (meaning not obvious on its face but when you dig deeper, then you discover its ambiguous) you have to use extrinsic evidence - All corners approach
15
Q
Rules in Aid of Interpretation
A
- Specific terms control over general terms
- Negotiated terms (dickered-thought about) control over standard terms or terms incorporated by reference
- Each term should be interpreted to give effect and validity to all
- Expressio unius est exclusio alterius: Expression of one thing impliedly excludes others
- Contra proferentem: When ambiguity -”construe against drafter”; Nothing to do with “interpreting” actual party intent
16
Q
Course of (Prior) Dealing
A
- Not restricted by complete integration or even a merger clause
- Applicable unless clearly and specifically negated
- Based on past practices of the parties
- No applicability without prior contractual relationship
Requires (UCC I-303):
* Sequence of conduct
* Previous transactions between parties;
* Common basis of understanding
- Presumed to apply going forward, absent clear, careful, specific indication to the contrary
17
Q
Usage of Trade
A
- Not restricted by complete integration or even a merger clause
- Applicable unless clearly and specifically negated
- Based on existing usage of trade
Requires:
- Regularity/ expectation of observance (of conduct); in which the parties are engaged or aware (party knew or should have known the usage)
- Can give meaning to express terms
- Trade usage can prevail by giving specific meaning to express term
18
Q
Course of Performance
A
- Based on “post-formation” conduct
- Evidence of meaning of agreement if consistent with express terms OR if inconsistent with express terms, as evidence of modification (mutual consent); or waiver
- If evidence of meaning, cannot modify except by mutual consent
- If evidence of waiver, can waive term and unilaterally retract, with notice
19
Q
Hierarchy of Inconsistent Terms
A
Construe sources to be reasonably consistent with each other
If such construction is unreasonable (hierarchy):
- Express terms
- Course of performance
- Course of dealing over usage
- Usage of trade
20
Q
CISG - Article 8 for determining intent or understanding of reasonable person
A
Consider:
- Negotiations
- Practices establishes between parties (C of D)
- Usage (Trade usage)
- Subsequent conduct (C of P)
21
Q
CISG Article 9 Provides That:
A
Parties:
- (1) bound by usages to which agreed and established practices between parties
- (2) unless otherwise agreed, impliedly made applicable usages of international trade of which parties ought to have been aware
Sub (1) takes priority over (2)
specific over general
22
Q
Default Rules
A
Fill in gaps when no contrary intention-in-fact
23
Q
Mandatory Rules
A
Apply regardless of intentions - Good faith compliance
24
Q
Express Warranties
A
Created as part of agreement-in-fact when (expressed)
- UCC 2-313:
- Facts or promises
- Descriptions
- Sample or model
If any of the 3 ^^^^^^^^^^^^^^^^^^ are part of “basis of the bargain”, generally presumed UNLESS circumstances indicate otherwise
25
Implied Warranty of Merchantability
- Implied by law unless otherwise agreed
- ONLY IF “seller is a merchant with respect to goods of that kind”
Goods to be Merchantable, must be at least:
- Acceptable (variations included) within trade
- Of fair average quality
- Fit for ordinary purposes
- Adequately contained, packaged, or labeled (and conform thereto)
- Note-not require top quality goods
- Seller is presumed liable for products that fail generally recognized expectations
26
Implied Warranty of Fitness for Particular Purpose
- Implied by law, unless otherwise agreed
Only if buyer can establish that both:
- Seller had reason to know of buyer’s particular purpose at time contract concluded, AND
- Seller had reason to know that buyer was relying on seller to select goods suitable for that particular purpose
- NO merchant required
- Applies to ANY seller
27
Disclaimers
- Express warranties cannot be disclaimed - UCC 2-316
- Subject to PER
- Otherwise canot disclaim
28
"Safe Harbors" (bright line) To Disclaim Implied Warranties - UCC 2-316
Need to know requirements to disclaim
Merchantability:
- The word “merchantability” must be used;
- May be oral – but if written, must be conspicuous
Fitness For Particular Purpose:
- Must be written and conspicuous
- Wording not crucial (“no implied warranties” likely sufficient)
Otherwise potentially effective disclaimers, based on facts– UCC § 2-316(3) (oral if can prove) (backdoor if can prove)
- General language like “as is” (unless circumstances indicate otherwise)
- Opportunity for buyer to examine actual goods (should have known)
- By Course of dealing, usage of trade, or course of performance
29
Cumulation or Conflict Warranties
Try to construe as consistent (giving effect to all) and cumulative, but if not possible, then:
- Exact or technical specs over sample, model, or general description
- Sample from existing bulk over general description
- Express warranties over implied warranties, except fitness for particular purpose
- Warranties given following hierarchy
Particular purpose exception. (Specific)
- Express
- Merchantability
30
Good Faith
- Implied in all contracts governed by common law and UCC Article 2 – mandatory (cannot disclaim)
- Intentional breach is not bad faith (permit efficient breaches-not oblig to act if will lose money )
- Allegations of bad faith usually add little to claim of breach and damages (no punitive damages)
- Apply to merchants and non-merchants (although can vary by state)
- Requires “honesty in fact” + “reasonable commercial standards of fair dealing”
31
Best Efforts
- For exclusive dealing
- Obligates seller to use best efforts to supply goods and buyer best efforts to promote sale.
- Independent obligation to perform even if costly.
32
What Are the Differences Between Good Faith and Best Efforts?
* G/F precludes neg perf.; Best efforts are affirmatively performed (subtle) that can be breached like any other breach.
* G/F apply to all contracts; Best efforts apply to limited circumstances by K or statute
* G/F mandatory term; Best efforts implied default term from context
* G/F not independent term (not an indep oblig to perf)- linked to other terms;
* Best Efforts is indep term (stand on own)-requires perf and can be breached
* G/F not require perf at loss; Best efforts must perf, even at loss (even when bad deal) (indep promise) (limited exception for excuse, impossibility, impracability, frustration of purpose)
* Best efforts can require more than Good Faith
33
Termination Rights When No Agreed Term
In absence of an express provision, a distribution contract (and franchise agreement) may only be terminated:
- (1) After distributor has had a reasonable time to recoup investment
- (2) With reasonable notice so can wind down
- UCC § 2-309(3) eliminating term - notice may be invalid if its operation would be unconscionable (read section)
- Distribution and sales rep contracts also subject of considerable other state statutory regulation (concerned about distributee, franchisee-invested in bus)
- Under CL can contract away notice but not under UCC if it applies and term is unconscionable
- UCC provide more protection than CL
34
Conditions
Condition: A **prerequisite** for performing one or more contract obligations; condition precedent
Strict compliance:
- Standard for measuring whether a condition is satisfied
- Close is not good enough under strict compliance
Unmet “condition” discharges any conditional duty
- Usually affects only one party’s performance
Failure is not a breach - no claim for damages
35
Duty
* May be breached and may/ not discharge any corresponding duty
* Breach of a duty will always give rise to claim for damages
* Less likely to excuse performance than failure of a condition - only excused if the other party’s breach is “material” and “uncured”
36
Prevention
Party who prevents condition in K from occurring is not excused by non-occurrence of condition
37
Waiver
Waiver: Voluntary relinquishment of known right
- If condition is “waived”, then non-occurrence has no effect on conditional obligation
- **Unless** the waiver is retracted, with reasonable notice
Retraction is precluded:
* When the other party has detrimentally relied upon the waiver or
* When the condition can no longer reasonably occur (after deadline)
* Key: Waiver only by party for whose benefit condition is included
A waiver of the non-occurrence of a condition after the time for occurrence has already passed is an “election”
* Condition is excused and party estopped from retracting waiver
* An “election” is never subject to retraction
38
Express Conditions
- Actual conditions; “conditions”; condition precedent
- May be express or implied-in-fact
- Generally require strict compliance before conditional duty arises
- If not met, then conditional duty is generally excused
39
Constructive Conditions
- Presumed mutual exchange of promises that each is dependent on performance of the other
40
Material Breach
- Any breach of a promise gives rise to damages claim
- Only “material” breaches excuse performance by other party (not have to do what promised to do)
41
Material Breach Factors
- Deprived of what it reasonably expected under the contract;
- Extent to which loss can be adequately remedied by an award of damages;
- The extent of any forfeiture by the breaching party if performance of the aggrieved party is excused;
- The likelihood of cure; and
- The extent of good faith.
42
Exchange Timing Under UCC
- Seller’s and Buyer’s duties each expressly conditional upon the other
- If no “carriage” (third party carrier) contemplated, simultaneous exchange presumed
- If contract includes “carriage,” then seller must perform first, followed by buyer – payment after reasonable time for inspection
43
Breach by Buyer Under UCC
- If Buyer wrongfully refuses goods or make payment, Seller will almost always be excused from further performance (clear substantial impairment)
44
Single Delivery Contract—Buyer’s Right To Reject Goods
The “perfect tender” rule (exceptional default rule) – UCC § 2-601
* Buyer may “reject” delivery if goods or tender of delivery “fail in any respect to conform to the contract” (Strict, bright line rule-not apply material breach or similar fact intensive Std)
* May reject / accept / or split as to commercial units
* ONLY limit is “good faith”
Important to note that goods may be accepted overtly or indirectly by failing to reject them in a proper manner – UCC § 2-606(1)
If goods are “accepted,” then “rejection” is no longer possible
45
Single Delivery Contract—Buyer’s Right To Revoke Acceptance of the Goods
Buyer may “revoke” earlier acceptance of goods – UCC § 2-608 (1)
* (a) But only if non-conformity “substantially impairs” value to buyer
- Subjective determination based on buyer’s unique circumstances, even if unknown to seller –no foreseeability requirement.
* (b) And, assuming non-conformity could not have been discovered earlier or was not seasonably cured
If delivery effectively “rejected” or acceptance effectively “revoked,” then buyer’s obligations are excused.
46
Seller's Breach as Excusing Buyer -Summary
UCC-2-606(1) (Acceptance of goods)
* Acceptance of goods: After reasonable opportunity to inspect, buyer accepts conforming or non-conforming goods
Refuse goods in two ways:
* UCC 2-601 - Reject any goods prior to acceptance that “fail in any respect to conform to the contract”
* UCC 2-608 - Revoke acceptance of goods if non-conformity substantially impairs its value and acceptance based on reasonable assumption that non-conformity would be cured and it was not (plus other features in statute)
47
Seller's Breach as Excusing Buyer - Installment K (Deliverable in Multiple Lots)
* Applies rule of “substantial impairment” – UCC § 2-612(2)
Substantial impairment rule governs both:
* Rejection under UCC § 2-612(2) (no perfect tender rule) and
* Revocation of acceptance under UCC § 2-608
48
Buyer's Right to "Cancel" K
* The Buyer who has rejected goods or revoked acceptance is entitled to “cancel” the contract for breach– UCC § 2-711(1)
49
Seller’s Breach as Excusing Buyer Under CISG
Buyer may “avoid” contract for fundamental breach – Art 49(1)(a)
“Fundamental breach” defined under Article 25
* 1. Substantial deprivation of buyer’s reasonable expectations under contract
* 2. And reasonably (objective) foreseeable to seller
Buyer may also “avoid” under Article 25 for failure to deliver within reasonable time extended by buyer under Art 47 (“late” becomes “non-delivery”), without need to prove fundamental
50
The Right to Cure
- Cure does not eliminate the prior breach, but may reduce its effect.
- Reducing damages and, perhaps precluding right of aggrieved party to exit contract (terminate, cancel, or avoid)
- The right to cure will generally depend on the nature of the breach and the timing (effect on the aggrieved party of waiting for cure)
Right to cure may sometimes conflict with right (need) of aggrieved party to make as soon as possible alternative arrangements
- Timely cure may also simply be unreasonably difficult or even impossible
- **Two key dates to track**:
- Up to agreed to date of performance and after date for performance
51
Notice of Breach Under Common Law
No right to terminate even when material breach when:
* Aggrieved party knew or should have known of the material breach at the time of its decision to terminate the contract; AND
* Material breach could reasonably have been cured by the breaching party if the party had received reasonable notice.
* Protective and Good Practice-Aggrieved party give laundry list of defects so breaching party cannot claim could have cured if only knew.
52
Notice and Cure Under UCC
UCC § 2-508
Single Delivery
UCC § 2-508: When buyer rejects non-conforming tender (narrow opportunity):
* (1) seller entitled to cure by giving notice and until time for performance has expired
[bright line rule: if seller can make cure before required performance and gives notice of intention, seller right to cure.]
* (2) seller may also have additional time to cure after due date if reasonable grounds to believe initial tender acceptable and with notice to substitute a conforming tender [Requires fact intensive determination of reasonable grounds. Not as useful]
In each case, seller must promptly notify buyer of intent to cure
53
Notice and Cure Under UCC
UCC § 2-612
Installment Contract
Installment Contracts:
* Reject only if substantial impairment that cannot be cured .
* Seller’s right to cure after perf date is inherent in standard for rejection and can apply so long as seller gives adequate assurance of cure and not substantially impair whole contract.
* Not necessary to show reasonable grounds to believe acceptable. Support continuing relationship when installments.
54
More on Notice/ Cure Under UCC
* § 2-602(1) – notice of rejection must be timely to achieve rejection under 2-601 perfect tender rule (cannot keep rejection a secret!)
* Lack of effective rejection equals acceptance under § 2-606(1)(b
* § 2-605(1) – notice-content must state any and all reasonably ascertainable reasons for rejection (knew or should have known)
OR lose as basis for “rejection” or “breach”
* If seller could have cured with timely notice, or
* If seller requested detailed statement of reasons (between merchants)
§ 2-608(2):
* Notice of revocation of acceptance (relevant for cure opportunity)
Within reasonable time of when buyer discovered or should have (before or after performance date)
55
§ 2-607(3)(a): General notice of breach if goods accepted
* Applies to revocation of acceptance or claim for damages
* Buyer reasonable time to notify seller or be barred from remedy
* Failure to particularize defects does not limit ability to rely on the defects in suit ag seller for breach-no need to particularize when no opportunity to cure (separate from notice of defects to give opportunity to cure as a prerequisite to reject a good)
56
Notice and Cure Under CISG:
Article 38(1)-Prompt Inspection
Buyer must examine goods “within as short a period as is practicable in the circumstances”
57
Notice and Cure Under CISG:
Article 39(1)-Explain non-conformity
Buyer loses right to rely on non-conformity (even for breach) unless notice of nature of non-conformity within reasonable time
Subject only to narrow and limited exceptions under Articles 40 and 44
58
Notice and Cure Under CISG:
Article 37
* Near absolute cure right until due date, so long not cause unreasonable inconvenience or expense
* Remember – cure does not preclude damages (but lack of notice can)-CL, UCC, and CISG
59
Notice and Cure Under CISG:
Article 48
Tension between seller’s right to cure and buyer’s right to avoid:
* (1) Right to cure after perf date, without delay, inconvenience, or uncertainty
* But subject to Article 49 right to avoid if fundamental breach
* Right to cure / avoid reflect countervailing interests
* Curable breach less likely to present a fundamental breach
* Fundamental breach less likely pose opportunity for reasonable cure
60
Breach of installment can trigger...?
Breach of installment can trigger:
* Substantial impairment of independent installment – subsection (2)
* Substantial impairment of whole K based on interdependency – subsection (3) (usability of other installments is interdependent)
61
Divisibility - Based on Common Law
Divisible if, and only if,
* (1) the respective performance of the parties can be apportioned into corresponding pairs (structured in installments)
AND
* (2) such corresponding pairs can fairly be regarded as agreed equivalents such that reasonable value of each pair is independent of the contract as a whole (independent installments)
Then, seller can enforce each division and buyer may be able to stop performance and sue for damages for breach of a division while must comply with rest of contract (no excuse).
62
Restitution to Breaching Party
* Assuming basic elements met, breaching party generally entitled to avoid unjust enrichment
Rarely will be officious (unwelcomes) or gratuitous (not expect compensation) (Unless very different from contract)
Matter of equity
* Willfulness may limit access to restitution
* Partial payment treatment-although benefit is conferred, may be treated as liquidated damages liability when buyer is breaching party
If so, no “net” right to restitution after payment of damages by buyer
63
Restitution Under CISG
Expressly provides for restitution in the case of avoidance
64
Pending Cure
Aggrieved party may reasonably suspend performance
If the material breach remains uncured, the aggrieved party may:
* Terminate contract and sue for total breach; or
* Continue with performance of contract, retaining right to sue for any actual breach or breaches
65
Anticipatory Repudiation - Common Law
(1) a statement, including nonverbal conduct, clearly and unequivocally indicating that the obligor “will commit a breach” giving rise to a claim for total breach; or
(2) a “voluntary affirmative act,” including voluntary omissions, rendering the obligor, by all appearances, “unable to perform” by perf date.
* Focus is solely on statements and conduct of the obligor (not a third party)
* Prospective breach must be material, so that it would excuse performance of the aggrieved party
* Cure not generally possible (due to circumstances-contrary declaration or inability to perform)
66
Anticipatory Repudiation - UCC
Uses same CL definition of “repudiation” (CL supplement UCC)
But employs “substantial impairment” standard
When anticipatory minor breach of single delivery contract and perfect tender rule (UCC 2-601):
* When minor, should buyer have to wait for actual breach? Yes, given subst impair std for activating anticipatory repudiation section
67
Anticipatory Repudiation - CISG
Article 72
(1) If prior to performance, it is clear that party will commit a fundamental breach, aggrieved party may avoid
* Fundamental breach—not just any breach
* But includes broader range of circumstances than common law/Article 2
* Not limited to statement or conduct of party likely to breach (can be triggered by circumstances unrelated to parties- ex. war)
(2) If time allows, the party intending to avoid must give reasonable notice to permit other side to provide assurance of performance
* More important with broad range of possible evidence of fundamental breach( under 1)
(3) Preceding paragraph does not apply if other party has declared that he will not perform his obligations (no notice requ)
More like common law/Article 2
But limited to “declaration”—not conduct
68
Anticipatory Repudiation Excusing Performance
Right to terminate common law contract
* Easy if aggrieved party’s performance is due before repudiated (other party’s) performance
* Early mitigation is more effective in reducing damages
Right to sue immediately for total breach and damages
Rule balances each, depending on when aggrieved party performance is due
* If future (Aggrieved party Not yet performed) – terminate, mitigate, and sue when other party repudiates.
* If past (Aggrieved party already performed) – wait for actual breach before suing (nothing to terminate or mitigate and damages uncertain) (should have acceleration clause when installment payments)
69
Options of Aggrieved Party -After Repudiation (Common Law)
Aggrieved party may
* Terminate and sue; or
* Wait and encourage retraction of repudiation (hope other party will change mind)
* Not an “election,” as date for performance has not yet passed
* Right to terminate for anticipatory repudiation remains and then matures into right to terminate for material breach when time arrives
* Then, a decision not to terminate and sue for total breach is an “election”
70
Options of Aggrieved Party -After Repudiation (UCC)
UCC § 2-610 – Aggrieved party may:
* (a) for reasonable time await performance by repudiating party; or
* (b) resort to any remedy for breach, even if he has notified repudiating party he will await the latter's performance and urged retraction; and
* (c) in either case suspend his own performance .
71
Retraction of Repudiation (UCC)
Until date of performance passes, repudiation remains subject to retraction, if no reliance on repudiation by aggrieved party.
UCC 2-611
* (1) Until performance due, party can retract repudiation unless the aggrieved party has cancelled, materially changed position, or otherwise indicated repudiation final
* (2) Retraction must clearly indicate the repudiating party intends to perform and include any assurance justifiably demanded
* (3) Retraction reinstates repudiating party's rights under contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation
72
Resolving Amibguity Under Common Law
If uncertainty in absence of repudiation, aggrieved party must wait for date of performance to assessed whether other party breached
73
Resolving Amibguity Under UCC 2-609
Implied obligation not to impair reasonable performance expectations of other party
* When reasonable grounds for insecurity arise with respect to performance, insecure party may demand in writing adequate assurance of performance
* May suspend until receive assurance (if reasonable and not received agreed exchange for performance)
Failure to respond to justified demand within reasonable time (not > 30 days) with adequate assurance becomes a repudiation
* Resolution - Either receive assurances or convert uncertainty into repudiation
Section 2-609 offers alternative route:
Can reduce risk of aggrieve party becoming breaching party by resolving insecurity before reaching point of repudiation by receiving assurances or converting basis for insecurity into a repudiation
Significant “default” Rule: Right to feel secure about other party’s performance, with opportunity to convert insecurity into a repudiation.
74
Resolving Ambiguity Under CISG
* Art 71 offers analogous policy for assurances when insecure
* Art 71 – may suspend if “apparent” party will not perform a “substantial part” of obligations
* Suspending party must give notice
Must resume performance if party provides adequate assurances
* If not? - Then breach likely “clear” under Art 72, and party may avoid if “fundamental”
75
Expectation Remedy
Entitles promisee to be placed in as good a position as if contract had been fully performed
* Normal or ordinary “legal” remedy is monetary value of performance
* Not in a better position than full performance
* No punitive damages even if willful breach
* Exceptional or extraordinary “equitable” remedy is actual performance of the contractual promise
76
Specific Relief -Common Law
* Available, as a matter of equity, in circumstances in which money damages are inadequate (Key Principle).
* But subject to equitable considerations (Discretionary, not a matter of right)
* Also specific relief restricted by other considerations (courts hostile)
* Difficulty in measuring quality of performance (difficult to det compliance)
* Moral hazard of involuntary servitude
Positive promise for personal service not enforced
* Burden of continuing supervision
77
Transaction In Goods - UCC 2-716
Unique goods or other proper circumstances
* “Uniqueness” takes many forms, including contract circumstances
* Go beyond common law boundaries (liberalize a little the opp’t for sp perf)
* Inability to cover is strong evidence of “other proper circumstances”
78
Transaction In Goods - CISG
Article 46 -NO uniqueness requirement
* Right to performance unless buyer avoids
* Right to replacement if fundamental breach
* Right to repair, unless unreasonable (Under CL, services so unlikely)
But Article 28 (give Common Law parties-esp seller. way to avoid Civil Law approach)
THE COMPROMISE
* Precludes enforcement by court whose local law would not enforce
* Place of enforcement typically place of seller, so benefit from local law (if US, limits on sp perf.) (not considered for Singapore Convention to limit enforcement of non- monetary terms)
79
Formula A for Calculating Damages
Loss in value - cost avoided (passive mitigation) + other loss - loss avoided (active mitigation)
80
Formula B for Calculating Damages
Profit + actual cost incurred (after passive mitigation) + other loss- loss avoided (active mitigation)
81
Damages: Terms To Know
Loss in Value = What seller was supposed to get under the contract minus what they actually received
* If a seller has received an interim payment, then it will
Reduce the “loss in value” (formula A)
Reduce the “actual cost incurred” (formula B)
Other Losses = Extra costs caused by breach (e.g., storage, reshipping, lost business)
Costs Avoided = Expenses saved because the breach happened (e.g., didn’t have to ship or build)
Consequential Damages = Losses from events that are not directly subject to the K breached
* Includes personal injury
Incidental Damages = Extra, out-of-pocket expenses caused by the breach, incurred to prevent further loss or deal with the fallout.
82
Mitigation
Must make reasonable efforts to mitigate - An obligation to recover full expectation interest
* “Passive” mitigation - “Costs avoided”
Seller cannot run up the costs
* “Active” mitigation - “Loss avoided”
Affirmative steps to reduce losses may also be required
Individuals
* As a rule, individuals have one job at a time
* Must reasonably seek and take another or lose right to recover whatever loss could have been reasonably avoided
Businesses
* Can perform multiple jobs, thus next job not “mitigation” of that breach, as long as business could and would have done both jobs w/o breach of either
* Restitution as an alternative
83
Quantifying Buyer's Loss in Value
Basic loss of value of performance promised by seller (2 components)
* (1) Direct loss (direct damages) of what was promised by seller
* (2) Indirect “consequential” loss
Subjective value of performance to buyer (“loss in value”)
* Not like value money to seller
* Difference in value to the buyer
Cost of replacement
* If seller entirely fails to perform
* Cost of replacement will almost always be recoverable as damages reflective of the loss in value (based on reasonable cost of replacing that lost value)
Cost of completion or repair
* If seller begins, but fails to complete, and/or performs defective work, then calculations become more complicated
* Cost of completion or repair
* Consequential damages
84
Buyer's Damages Under UCC
When Buyer Refuses the Goods
UCC 2-711 - Right to:
* Cancel the K and damages
* Based on “cover”, recover damages under UCC 2-712 OR
* Based on Market Price minus K price, recover damages under UCC 2-713
85
Cover Transaction
UCC 2-712 and comment 2:
* Requires good faith commercially reasonable substitute under the circumstances of the transaction
* Need not be identical
* Buyer entitled to difference between cover price and K price, less any savings resulting from breach
Comment 2 test for proper cover:
* Reasonable, and immaterial that might have been cheaper based on hindsight
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Recovery Based on Market Price
UCC 2-713:
* Cover not required
* Buyer may instead recover difference between Market Price and Contract P
* Plus incidental or consequential damages under UCC 2-715
May have other incidental damages not related to cover
May also have consequential damages under subsection (2) without having goods to substitute for those promised by seller
Deduct any savings resulting from breach
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When Buyer Retains Goods
UCC 2-714(2)
* Sue for damages based on difference between value of goods as contracted for and value of goods actually delivered, at time and place of delivery (include subjective value although unusual)
UCC 2-717 (if retain goods, must pay for them)
* Buyer must pay for goods retained, but can deduct damages (including consequential and incidental although unlikely when retain goods)
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Seller's Basic Options
Seller’s options when buyer wrongfully refuses goods, as provided by UCC 2-703:
* Resell goods and recover under 2-706; or
* Do nothing (retain goods) and recover damages under 2-708; or
* In a proper case, recover the price under 2-709
* And, in any event, cancel the contract
In contrast to buyer, seller has no right to compel performance under any circumstances (cannot force B to take the goods)
Contrary to CISG Art 62 - can compel buyer to accept and pay for goods under some circumstances
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Seller's Right To The Price
Under UCC 2-709(1), seller may recover the price
* (a) of goods accepted by the buyer; and (used here as disjunctive)
* (b) of goods identified, as intended for buyer if seller is reasonably unable to resell them
* Goods still under control of seller
* Seller need only make reasonable efforts to resell under the circumstances
* If unsuccessful, seller may recover full price
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Seller’s Damages Based on Resale
Under 2-706(1), seller is entitled to:
* Difference between K price and resale price
* Plus incidental damages under 2-710
* Commercially reasonable resale will often be the easiest way for the seller to establish a right to damages
* Also fully consistent with duty to mitigate -cannot simply demand price from buyer who refuses goods
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Liquidated Damages
Common Law
- Reasonable under the circumstances
UCC
- Reasonable certain basis for remedy
Provision liquidating damages for specified breach enforcement, provided it reflects reasonable estimate, by reference to either:
- Damages reasonably anticipated at the time K was concluded or
- Damages actually incurred as a result of the breach
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Penalty Clauses
* Payment of fixed sum that exceeds any reasonable estimate of actual damages
* Punitive
* Designed to deter breach and compel performance
* Favor performance
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Liquidated Damages -Goods
UCC 2-718(1)
* Unreasonably large amount void as a penalty
UCC 2-718(2) - statutory liquidated damages
* Allows for buyer’s restitution of payments by buyer when buyer breaches, but reduced by 20% of value or $500 (whichever less)
* Essentially “liquidated” damages for financial inconvenience to seller of receiving and returning net payment to breaching buyer
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Mutual Mistake - Default Rule
Mutual mistake will render K voidable and subject to rescission by adversely affected party where:
* A. At the time of K
* B. Both parties shared the same mistaken belief,
* C. As to a basic assumption on which the K was made (essence of K),
* D. That had a material effect on the agreed bargain
Unless
* Risk of mistake already assigned to that party
* By agreement
* Through assumption of risk by knowingly acting on incomplete information; or
* By other circumstances suggesting party that bores the risk
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Mutual Mistake - Basic Assumptions
Affirmative/ Positive
* Explicit assumption
No/ Negative Assumptions
* Make no assumption (not basic assumption of K)
Easier to rescind based on mistaken affirmative assumption than no assumption that proves true
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Mutual Mistake - Restitution
In event of rescission,
* Restitution is generally available -recover any benefits conferred by rescinded K
* Reliance may, in a proper and extraordinary case, be available as necessary
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Mutual Mistake - Unilateral Mistake
Rescission available based on “unilateral” mistake on narrower grounds where:
* Other party had reason to know (notice-essentially not offer)); or
* Other party caused mistake (estoppel)
* Also rescission may be available on same grounds as mutual mistake if enforcement “unconscionable”
Mutual mistake - 3 elements:
* Basic assumption
* Material
* Reasonable allocation of risk when honest mistake
Unilateral mistake - 4 elements:
* Basic assumption
* Material
* Reasonable allocation of risk when honest mistake
* Whether enforcement unconscionable
Test: Is party making unilateral mistake sufficiently surprised and mistake sufficiently oppressive/ harsh to establish unconscionability to justify rescission?
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Risk Arising from Performance/ Impracticability
Modern Impracticability - Common Law
Modern Impracticability - Common Law
After K formed
Promisor duty to render performance is discharged where:
* 1. Rendered impracticable
Not impossible, but close (greater expense or burden rarely enough)
* 2. Without fault of either party
Often simply assumed, absent contra evidence
* 3. By event or circumstance occurring after conclusion of K
Pre-existing issues as impracticability or mistake?
* 4. And non-occurrence of event or circumstance was basic assumption on which K was made
Foreseeability can be relevant in assessing impracticability for promisor (impliedly assumed risk of foreseeable events)
* 5. Unless the K language or circumstances indicate otherwise
Was the risk expressly or impliedly assigned to either party
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Impossibility Under Article 2-613
UCC 2-613(a) - Bright line rule when seller cannot perform
* Narrow specialized, bright line rule when goods identified at time of K suffer casualty prior to passage of risk to buyer
* If loss total, contract avoided entirely, no further obligations
* If partial, buyer option - avoid K or accept goods with due allowance
* If risk of loss already passed to buyer when goods destroyed, buyer obligated to pay under UCC 2-709(1)
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Impracticability Under 2-615
Seller’s duty to deliver goods excused (not a breach) where ability to perform:
“Has been made impracticable”
* Increased cost alone is not enough
“By the occurrence of a contingency”
* Comment 1: Impracticable due to unforeseen supervening circumstances
* Comment 4: Increased cost not excuse performance unless unforeseen that alters essential nature of performance
“The non-occurrence of which was a basic assumption on which the contract was made”
* Statute also provides for specific application when caused by government regulation (in effect, lack of preclusive regulation was basic assumption)
“Except so far as a seller may have assumed a greater obligation"
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Failure of Seller’s Supplier
UCC 2-615 (Impracticable), Comment 5
* Failure of source of TP supply expressly or impliedly identified (directly or indirectly chosen by buyer) in K will generally satisfy statute as to impracticability
* Performance of particular supplier was basic assumption of both parties
* Buyer and seller share risk of agreed supplier
* Seller has taken all reasonable steps to secure supply necessary for contract with buyer
* Seller asserting defense must assign to buyer any right of action against TP supplier
* Key: Buyer (not seller) bears risk of non-performing supplier in K identifying such supplier (buyer bear ultimate loss) because when impracticable, seller not in breach if taken all reasonable steps to secure supplier. Buyer assumes any loss
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Force Majeure
* Clause in contract that defines events or circumstances in which seller is excused
* In effect, buyer bears risk in contract of own damages resulting from seller’s non-performance caused by defined extraordinary events or circumstances
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Fustration of Purpose
After K has been formed
Duty to party to render performance is discharged where:
* 1. After the K is concluded,
No R2d provision for existing frustration
* 2. Party’s principal purpose is substantially frustrated,
This happens all the time
* 3. Without party’s own fault,
Again, not much of a limit
* 4. By the occurrence of an event the non-occurrence of which was a basic assumption on which the K is made,
So the question will generally turn on this one - was the non-occurrence a basic assumption on which the K was made?
* 5. Unless the K language or circumstances indicate otherwise
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Intended 3PBs
* A. Parties intended TBP beneficiary of promise - beneficiary’s right to performance will give effect to contracting parties’ intended bargain (enforceable). Third party intended beneficiary of K that not a party to
AND either……
* B. Performance by or of promise will satisfy PE obligation to pay money to 3PB (underlying obligation as evidence of TPB)
*If not intended, then 3PB is “incidental” and cannot enforce promise, irrespective of likely benefit *
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Vesting
PR and PE can always change or terminate K
* Thereby depriving 3PB of any right - even if intended
Unless, 3PD rights have vested by:
* Materially and justifiably reliance or brings suit on the promise before receiving notice of the modification or discharge; or
* Manifests assent by TP to the performance of the promise by the promisor at the request of either PR or PE
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Alternative B
New York – slight variation in wording-most common)(Assume in Exams unless otherwise indicated) - this will be the answer most of the time
A seller's warranty whether express or implied extends to any natural person who may reasonably be expected to use, consume or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the operation of this section.
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Delegation
* Cannot delegate duty of original party if performance by original party is essential.
* Also, money is delegable! Courts will enforce.
Duties are delegable (general rule), unless:
* Individual personal services (original obligee has substantial interest in personal performance by obligor) (ex. Singer, artist, or keynote), or
* Precluded by contract
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Novation
* Duty assumed by another, as a replacement of duty of original obligor
* New obligor makes direct promise to obligee – privity (no 3PB issue), and obligee releases original obligor from liability
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Obligor/ Obligee
Obligee can enforce against original obligor
* And, may be able to enforce against party to whom performance is delegated, if obligee is intended TPB in separate K between delegor and delegee who performs for benefit of obligee as TPB
Delegation alone does not discharge original obligor
* Even after delegating the duty of payment to delegee, delegor remained liable to obligee until the debt is paid
* Unless the arrangement was a novation (new K), that requires consent of obligee (substitute first K with new one)
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Delegation in a Sale of Goods
Duty to deliver goods usually delegable (presume)
* Buyer wants goods (identity of seller often less relevant)
* But circumstances of long-term relationship may be different
* Especially exclusive dealing (best efforts) or requirements contracts
Under UCC 2-210 (1), cannot delegate if “other party has a substantial interest in having his original promisor perform”
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Assignment of Payment of Rights
* Rights to receive payment of money are (almost) always assignable – UCC § 9-406(d)
Exceptions for certain consumer transactions
* Virtual absolute right to payment or assignment as security
* Contractual preclusions of assignments generally ineffective (key)
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Before Notice of Assignment
If the Obligor pays the Assignor before receiving notice of the assignment:
* The payment is valid and discharges the Obligor's duty.
* Even if the Assignor already assigned the right to the Assignee, the Obligor had no notice, so they are not liable to the Assignee.
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After Notice of Assignment
If the Obligor pays the Assignor after receiving notice of the assignment:
* The payment is not valid — the Obligor still owes the Assignee.
* Only payment to the Assignee will discharge the Obligor’s obligation after notice.
* The Obligor may have to pay twice: once mistakenly to the Assignor, and again to the Assignee.
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Who Can Bring Claims if Payment Was Made To Wrong Party?
Assignee can sue Obligor for payment if payment was wrongly made to Assignor after notice.
Obligor can sue Assignor to recover mistaken payment.
Assignee may also sue Assignor if they wrongfully accepted payment.
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Natural (Implied) Limits on Assignment - Other Than Payment Obligation
Right assignable, unless:
* Substitution for assignee for assignor would materially change the nature of the bargain in a manner adverse to obligor
assignment would materially change duty of other party,
* Increase materially burden or risk imposed by contract, or
* Impair materially the chance of obtaining return performance (or reduce value) –
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Defenses Against Assignee
AE takes assigned rights, subject to any defenses arising from the transaction out of which rights arise between OB/OE, as well as any defenses the OR may have against the OE/AR
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Recoupment
* Claim or defense arising out of same contract
* Does not mean (OR) can make affirmative claim against AE beyond obligation owed to AE, but obligation owed to AE is subject to (OR) claim against (OE)
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Setoff
Only subject to those existing at time of notice of assignment:
* If effect, assignment of right is subject to any infirmity in that right at the time, as between (OR) and (OE)—whatever the source of rt
* Burden on AE to investigate
* After notice, cuts off set off claims that arise AFTER notice
* Before notice, (AE) subject to all offset claims
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What's the default rule to constructive conditions?
Simultaneous versus Sequential performance of promises
Default rule: Promises that can be performed simultaneously must be. If not, promise requiring time to complete is performed first (ie. build garage first, payment after building promise completed)
