Gaffney - Contracts II - SP22

I. Interpreting Express Contract Terms (what are the terms of the contract?)

Courts have a duty to interpret a contract in accordance with the intent of the parties

Freedom of contract: a policy that the parties are free to set their own terms, & that contracts entered into
voluntarily & that are supported by consideration increase the amount of value in society

Courts’ approaches: “4 corners” (no extrinsic evidence) or “intent of the parties” (extrinsic evidence), but courts
always have a duty to interpret a contract in accordance with the intent of the parties

Interpreting contract language: ascertaining the meaning intended by the parties [R2d § 200]

If meaning is to be derived from the words themselves (unambiguous), courts have often treated it as a question of
law to be decided by the judge [R2d § 212(2)] (if ambiguous/conflicting evidence = question of fact)

Construing (construction) contract language: using legal rules to choose a meaning and determining the legal effect
of contract language (Q of law always)

Valley Juice (contract which contained choice of law provision stating “this agreement shall be interpreted in
accordance with the laws of California” did not preclude a Massachusetts state law action being brought because
language didn’t say “the rights of the parties…” = conflict between intent and construction

3 Sources of Interpreting Contracts: (a) language of the contract itself; (b) canons of construction; & (c) extrinsic
evidence (what the parties wrote/said during negotiations, course of performance, course of dealing, trade usage).

Smith v Wilson (contract language stating buyer would pay “60€ per thousand” [a term of art] for rabbits, buyer was
permitted to prove that a local custom dictated that “thousand” meant “one hundred dozen” or 1,200 rabbits)

Courts DISAGREE on whether extrinsic evidence is admissible to determine whether the language of a contract is
ambiguous

Courts judge a manifestation of assent objectively (based on what a reasonable person observing the
communication would have understood) rather than subjectively (based on what the “speaking” party was thinking
at the time of the communication)

Frigaliment v. B.N.S. International (NY 1960) (a dispute over whether seller delivered right kind of chicken)
 C: the court may look to extrinsic evidence to interpret the proper meaning of a term
 A: “it is clear that ∆ believed it could comply with the contracts by delivering stewing chicken in the 2.5-3 lbs.
size. ∆’s subjective intent would not be significant if this did not coincide with an objective meaning of
‘chicken.’ Here it did coincide with one of the dictionary meanings, with the definition in the Department of
Agriculture Regulations to which the contract made at least oblique reference, with at least some usage in the
trade, with the realities of the market, and with what π’s spokesman had said”
 P failed ot meet the burden of showing chicken was used in narrow rather than broad terms
 Court considered language of the contract, the conduct of the parties, usage of trade, and testimony of witnesses

Nanakuli Paving and Rock Co. v. Shell Oil Co. (9th Cir. 1981) (the court made extensive use of “trade usage” to
interpret the terms of the contract)
 C: the courts can admit evidence of customary trade usage and course of performance for parties to demonstrate
implied contract terms
  A: (a) a reasonable jury could have found that that price protection was reasonably consistent with the express
term of Shell’s posted price at delivery, (b) in the Hawaiian market, price protection occurs when prices
increase, and only for work performed prior to those increases. Hawaiian businesses routinely practice price
protection, and (c) Shell’s past performance of maintaining Nanakuli’s initial price indicated that it was aware
of the practice of price protection and that Nanakuli expected this as part of performance.

Canons of construction: rules that are used to interpret legal text, including statutes and contracts, and were
developed over centuries by courts as a part of the common law

A canon of construction may point in the direction of a particular interpretation, but that canon will not be followed
if the court is convinced a different meaning was intended, considering the parties’ words and conduct, as well as
the surrounding context

4 types of canons:

1. Textual (“semantic”) canons are common sense rules governing how to interpret types of words or
phrases
2. Ancient and medieval textual canons may be competing or even contradictory of each other
3. “Substantive canons” are rules that construe contract meaning in light of public policy concerns
4. Canons that invite the courts to consider commercial evidence outside the 4 corners of the contract

CANONS OF CONSTRUCTION:

1. Omnia praesumuntur contra proferentem: if a provision has two reasonable meanings, the court should prefer the
meaning less favorable to the party drafting the contract language, unless the parties have equal bargaining power
or the contract is otherwise the product of negotiation rather than imposed by one party on the other [R2d § 206]
a. Prefer the meaning less favorable to the party drafting the contract language

2. If a contractual provision is susceptible to two reasonable constructions, only one of which comports with law, the
court should choose the interpretation that will make the provision legal
a. Things specified in detail in the contract exclude implication by other things of the same character

3. An interpretation is preferred that gives force to every term and provision of the contract (there should be no
surplusage) and that does not create an irreconcilable conflict between provisions [R2d § 203(a)]
a. Choose construction that comports with the law

4. A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together
[R2d § 202(2)
a. Give force to every term – no surplusage
5. Noscitus a sociis: words derive meaning from the words with which they are associated in an agreement
a. Writing interepreted as whole

6. Ejusdem generis: general terms derive meaning from the specific terms that precede them (
a. Words derive meaning from the words in ehich they are associated

7. Expressio unius est exclusion alterius: when some things are specified in detail in a contract, other things of the
same character are excluded by implication
a. General terms derive meaning from the specific terms that precede them

8. Reddondo singular singuilis (the “last antecedent rule”): a modifying phrase at the end of a list is understood as
referring only to the last item in the list, unless there is reason to understand the phrase as applying to the rest of the
items in the list
a.
 9. Specific terms and exact terms are given greater weight than general language [R2d § 203(c)]

10. Separately negotiated or added terms are given greater weight than standardized terms or other terms not separately
negotiated. [R2d § 203(d)] As a result, terms handwritten on a form are given greater weight than standard terms

11. When the same word is used in different parts of the contract, it will be presumed to be used in the same sense
throughout the contract

12. Technical terms and words of art are given their technical meaning when used in a transaction within that technical
field
II. Using Extrinsic Evidence to Understand a Contract (what are the terms of the contract?)

Extrinsic (parol) evidence: any evidence that is outside the 4 corners of the contract; anything other than the
contract itself
 Always admissible to interpret the meaning of an ambiguous term in a contract (required if
ambiguous)
 If the language of the contract is clear, then extrinsic evidence as to the meaning of a contract is
inadmissible (limited to “plain meaning” if unambiguous)
 Ambiguous vs unambiguous is a question of law (if unambiguous, no extrinsic evidence allowed)
 Though courts disagree on the admissibility of extrinsic evidence, courts will always consider the
following in determining whether the language of a contract is ambiguous:
o the conduct of the parties (course of performance, course of dealing);
o trade usage; and
o the meaning of “terms of art” (within the industry)

The interpretation of an integrated agreement is directed to the meaning of the terms of the writing or writings in
the light of the circumstances, in accordance with the rules stated in this Chapter [R2d § 212(1)]

A question of interpretation of an integrated agreement is to be determined by the trier of fact if it depends on the
credibility of extrinsic evidence or on a choice among reasonable inferences to be drawn from extrinsic evidence.
Otherwise a question of interpretation of an integrated agreement is to be determined as a question of law [R2d §
212(2)]

Klapp v United Insurance (Mich. 2003) (π sued his previous employer, ∆, over a dispute about the meaning of
contract terms which resulted in commissions to him being unpaid)
 C: the contract language was ambiguous, so external evidence was admissible to determine its meaning
 A: "the point of contract interpretation is to understand the intent of the parties, and extrinsic evidence is the
most appropriate way to understand that intent, if such evidence is available. Construing against the drafter is
not finding intent. Rather, it is substituting for intent when intent cannot be adequately determined. Understood
that way, the canon should be applied only when all else fails"

 Question of law vs question of fact.

o Determines the standard of review for the appellate court.

o If it is a question of law, it is subject to de novo review. The appellate court does not have to
give any deference to the court before them. May be considered stare decisis in subsequent
cases.
o If it is a question of fact, it is reviewable only if the findings of fact are clearly erroneous.
The appellate court owes deference to the determinations of the trial court.
 C&A Construction C. v Benning (Ark. 1974) (subcontractors’ dispute over contract language meaning)
 C: the contract language was unambiguous, so external evidence was inadmissible to determine its meaning
 A: we cannot strain the plain, obvious, and unambiguous language of the contract…Had appellee’s president
and sole owner of the corporation desired that the sum of $20,000 represent a guaranteed profit, as he and his
witnesses so understood from their verbal agreement during negotiations, the wording of the contract should
have so indicated
o First apply the plain meaning of the language, where meaning of contract is ambigiuous,
parol evidence is admissible to explain the writing. Ambiguities are both patent and latent.
Latent arise from undisclosed facts or certainties of the written instrument. The initial
determination of the existence of the ambiguity ...

Pacific Gas & v G.W. (Cal. 1968) (∆ dropped parts while installing π’s wind turbine, causing damage)
 C: the contract language was ambiguous, so external evidence was admissible to determine its meaning
 A: Although that evidence was not necessary to show that the indemnity clause was reasonably susceptible of
the meaning contended for by ∆, it was nevertheless relevant and admissible on that issue. Moreover, since that
clause was reasonably susceptible of that meaning, the offered evidence was also admissible to prove that the
clause had that meaning, and did not cover injuries to π’s property
o Indemnification – if there is damage to third parties and they bring suit against you, and you
become liable to them, we (damaging party) will pay.
o To find a latent ambiguity:
 Is the contract ambiguous or unambiguous? (question of law)
 What is the meaning of the contract?
 If unambiguous  matter of law
 If ambiguous  matter for the trier of fact

III. Parol Evidence Rule (what are the terms of the contract?)

Parol Evidence: is any evidence, whether oral or written, that is external to the words of a contract
Permissive §2-202
 Bars evidence of:
o contradictory terms
o prior oral agreements
o evidence where terms are different from the final expression, evidence of terms that are additional to
and consistent with the final expression (whose terms would not have been included in the final
expression) (?)
o prior written agreements
o contemporaneous oral agreements
 might bar evidence from (grey area):
o extrinsic evidence on the question of whether a writing is either a final expression of the terms that
the writing refers to or a “complete and exclusive statement” of all of the terms of the agreement
(NY v CA)
o evidence of ambiguous terms in the final expression
o evidence that a term in the final expression is, in fact, ambiguous
 does not bar evidence of:
o Matters relating to whether a valid contract was formed (duress, illegality, etc.)
o Problems with contract formation
o Whether there was a condition precedent to the contract going into effect (i.e., a rider)
o The meaning of ambiguous term
o To prove course of performance, course of dealing, or trade usage
 o To prove the existence of a separate contract supported by separate consideration (including
“collateral” agreements, or those where the consideration is to uphold the original contract)
o To prove that the contract was later modified or that a right was waived
o evidence of terms that are additional to and consistent with the final expression (whose terms would
have certainly been included in the final expression)
o contemporaneous written agreements
o subsequent modifications of the contract
o grounds for granting particular remedies

The Parol Evidence Rule: bars evidence of oral and written agreements that the parties may have entered into that
contradict or that are in addition to a written contract

The Parol Evidence Rule: when applicable,

1) bars use of such evidence to alter a term that the parties considered final in the written contract; and
2) bars use of such evidence to add a term to a contract the parties considered fully expressed in the written
contract

The Rule (a substantive law) presumes that…

1) written evidence is better than conflicting oral evidence on the same term;
2) a subsequent written agreement is better evidence than a conflicting earlier agreement on the same topic;
3) when parties produce a written contract document, they usually intend it to take over what they said or did
leading up to the adoption of the written contract
4) if the parties expressly say that their written agreement supersedes all of their previous agreements and
dealings, all evidence from those prior dealings should be excluded, even to add additional terms consistent
with those in the written document
…and affirms that…
1) certainty and stability of contracts is promoted if parties can depend upon written terms
…and acknowledges that
1) words must always be understood in their commercial context and that courts may need additional evidence
to explain ambiguous or incomplete terms

The Rule is designed to implement the parties’ intent as to the effect of a written memorialization of the contract
terms

INTEGRATED VS. NOT INTEGRATED (majority rule = decided by the judge, not the jury):

Where the parties express their agreement in a writing with the intent that it embody the final expression of their
bargain, the writing is an integration (integrated). Any other expressions—written or oral—made prior to the
writing, as well as any oral expressions contemporaneous with the writing are inadmissible to vary the terms of the
writing

Parol Evidence Rule Analysis:

1. Are there any ambiguous terms in the contract? (extrinsic evidence in the forms of course of
performance/dealing, trade usage, and terms of art is admissible for the judge to make this
determination, though courts disagree about other types of extrinsic evidence);
a. If there are no ambiguous terms, the court may interpret the meaning of the contract
(extrinsic evidence is inadmissible for the judge to interpret the meaning of the contract);
2. If there are ambiguous terms, is the agreement integrated or not integrated? (M=decided by
judge)
 a. If the parties express their agreement in a writing with no intent it embodies the final
expression of their bargain, the writing is not integrated (extrinsic evidence of prior
agreements & contemporaneous oral agreements that contradict or change terms in the
written agreement is admissible);
3. If the agreement is integrated, is it “integrated” or “completely integrated?” (jurisdictional split
to making this determination: NY says extrinsic evidence is inadmissible, CA says extrinsic
evidence is admissible)
a. If the parties express their agreement in a writing with the intent it embodies the final
expression of their bargain, the writing is integrated (“partially integrated,” “final
expression”) & extrinsic evidence of prior agreements & contemporaneous oral
agreements with consistent, additional terms to the written agreement is admissible);
b. If the parties express their agreement in a writing with the intent it embodies the complete
and exclusive statement of their bargain, the writing is completely integrated (“complete
& exclusive statement,” “completely integrated”) & extrinsic evidence of prior
agreements & contemporaneous oral agreements with consistent, additional,
contradictory or modifying terms is inadmissible)

The ways the UCC and common law ask the questions of the Parol Evidence Rule:
Intent of parties UCC terminology Common law termino
Written terms supersede “final expression of the parties’ “Integrated agreemen
conflicting terms previously agreement” partially integrated agree
agreed to
Written terms supersede all “complete and exclusive “Completely integrate
terms previously agreed to, statement of the terms of the agreement” Agreement”
whether conflicting or
additional

UAW-GM Human Resource Center v KSL Recreation Corp. (MI 1998)

 C: parol evidence is not admissible with regard to the threshold question of integration even when the written
agreement includes an explicit merger/integration clause for union event workers contract at a hotel
 A: the merger clause is an explicit term of the parties’ contract and therefore an expression of their intent to which this
Court is obligated to give meaning

Sierra Diesel v Burroughs

 Despite the inclusion of comprehensive merger clause in signed contract, the court concludes that
the contract was not integrated
 Court says that the plaintiff was to unsophisticated to know what the merger clause would mean and
would reasonable rely on the seller’s representations during negotiations
 Court considers the nature of the negotiation and the status of the sophistication of the parties in
deciding what was meant.

Middletown Concrete v Black Clawson Co. (D. Del. 1992)

 C: the parol evidence rule barred consideration of an “Acceptable Performance Letter” between parties, where the
parties signed 3 separate agreements which each contained a merger clause
 A: the court stressed the clear language of the merger clause and the warranty limitation in the contracts

Harold S. Lee v Joseph E. Seagram (2nd Cir 1977)

 C: parol evidence of prior oral agreements is admissible where the parties orally made an arrangement prior to
contracting which was collateral to the agreement itself
 A: (1) the contract was between Seagram and 5 shareholders so it was reasonable to expect a separate agreement
would be included in the sales contract, (2) the close relationship between the men made it unsurprising a handshake
would be sufficient, (3) there was no merger clause, and (4) the oral agreement contained no contradictory terms
 

Statute of Frauds vs Parol Evidence Rule:

Statute of Frauds: Parol Evidence Rule:

Asks whether a contract is enforceable Asks what the terms of a contract are
Makes certain contracts unenforceable unless Bars evidence of certain different or additional
there is written evidence that a contract was terms other than what was contained in the
entered into writings

Standards of review:

Clearly erroneous – question of fact, appellate court has substantial deference to the trial court’s decision
De novo – question of law, appellate courts reviews with no deference to the trial court’s decision, from the
beginning

The Nature of the Evidence Introduced

The types of evidence excluded by the parol evidence rule are determined by whether a written contract is
integrated (a final expression) and, if it is, whether it is completely integrated (a complete and exclusive statement).
For a partially integrated agreement (a final expression) the parol evidence rule excludes evidence of prior
agreements and contemporaneous oral agreements that contradict or change terms in the written agreement, but
allows evidence that adds to the terms to the written agreement. For a completely integrated agreement (a complete
and exclusive statement) the parol evidence rule excludes evidence of any prior agreements and contemporary oral
agreements that contradict, change, or add to terms in the written agreement.

Columbia Nitrogen Corp. v Royster Co. (the merger clause did not keep terms out because such a clause limits only
‘consistent additional terms,’ not course of dealing, course of performance, or usage of trade. So even where the
contract stated price and quantity in plain terms, it could be explained or supplemented by showing a course of
dealing between the parties or usage of trade to vary from the terms in the contract)

Warranty: a guarantee that goods/service will conform to what was agreed

 where parties have equal bargaining power, the courts are less likely to admit extrinsic evidence
 where parties have disparate bargaining power, the courts are more likely to admit extrinsic evidence (canon of
construction to construe towards party who didn’t draft)
 Under UAW, if a contract does not contain any merger clause, the court is free to use any interpretive tool, and to
consider any evidence to determine whether the parties intended integration

Parol evidence has no effect on subsequent modifications of a contract

(p. 608) Potential Final Question: Penny’s Painting Service gets a call from Bob, who wants most of the interior of
his new house painted and who has heard that Penny is a very careful painter. Penny walks through the house,
orally discussing the job with Bob. The next day, she gives him a bid on a pre-printed form that includes her
business’s name, address, phone number, fax number, and email, as well as blanks to be filled in for customer’s
name and phone number, address of painting job, which rooms are to be painted, which such as plaster repair. She
has filled in the blanks with the pertinent information and has bid the job at $3100, including $600 in paint and
$2500 in services. Bob likes the bid amount and the care with which Penny prepared it, so he accepts the bid by
signing and dating the bid form on the customer’s signature line at the bottom of the form, then sending it back to
Penny. Would you characterize the agreement as partially integrated, completely integrated, or not integrated?
Why?
 Common law would apply following the predominate purpose test
 Partially integrated
o There are some terms, so contradictory terms would be inadmissible
o But it is also missing things such as paint color and other important terms
 Things the court would consider: (all factors bear upon whether thr parties intended for it to be a
complete and exclusive statement)
o How extensive were the negotiations?
o How detailed is the agreement?
o Was the agreement drafted by attorneys?
o Are both of the parties experienced businesspersons or sophisticated commercial entities?
o How much money is involved in the transaction?

Summary of lesson on The Parol Evidence Rule (26):

 UCC § 2-202 is the parol evidence rule
 if a contract is a final expression, extrinsic evidence that the parties agreed to consistent, additional terms is
admissible
 if a contract is a complete and exclusive statement, extrinsic evidence that the parties agreed to both
different and consistent additional terms is inadmissible
 the parol evidence rule does not bar
 evidence of oral or written modifications of the agreement
 evidence regarding the validity of the contract
 conditions precedent
 the interpretation of ambiguous terms in the contract
 course of performance, course of dealing, or trade usage
 separate contracts supported by separate consideration

IV. Implied Terms, Good Faith (what are the terms of the contract?)

A court may need to imply additional terms not supplied expressly by the parties, if those terms are necessary to
effectuate the purpose of the contract. Possible reasons the terms are missing could be:
 the parties did not foresee the circumstances that later arose
 the parties foresaw the circumstances, but they chose not to deal with it in contract formation
 an agreement that contains every possible term would be far too long, and transaction costs too high

2 ways in which the courts may find implied terms in a contract:

 1) implied in fact—although the parties did not explicitly agree upon a particular term, there is evidence that
the parties implicitly intended for a particular term to be a part of the contract; or
2) implied in law—the law will automatically supply the missing term, so the court may “fill the gap” so that
the contract can be enforced.

Implied-in-fact terms are implicitly intended by the parties; by implying those terms the courts are simply fleshing
out the intent of the parties (course of performance, course of dealing, and usage of trade usually fall into this
category). Implied-in-law terms are default terms that are required by the law as a matter of public policy.

“Gap-filler” terms are drawn from case law, statutes, or the UCC. examples include:
Requires parties to only have to agree on the dickered terms while maintaining a certain level of certainty
 “reasonableness”
 price
 place of delivery
 time for performance (shipment, delivery, or payment)
 a real estate lease is month-by-month (rather than yearly or a fixed term) if no lease term is specified)
 in the absence of any provision on assignment of contract rights, most rights are assignable by the obligee
unless the rights are personal to the obligee
or for contracts for the sale of goods…
 price will become a reasonable price (usually fair market value)
 goods will be delivered in a single lot
 goods will be delivered to the seller’s place of business or to seller’s residence
 time for delivery, shipment, or other contractual actions is “a reasonable time”
 Mandatory rules come from statute, regulations or court decisions

Fisher v Congregation B’nai Yitzokh, (Pa. Sup. Ct. 1955) (contract between rabbi and synagogue enforced)
 C: When a custom or usage is once established, in absence of express provision to the contrary it is
considered a part of a contract (implied “in fact”) and binding on the parties though not mentioned
therein, the presumption being that they knew of and contracted with reference to it
 A: Fisher and the Congregation had a common understanding at the time the contract was executed
that because the Congregation was an orthodox synagogue, it would observe the seating tradition
during the services for which Fisher contracted. The Congregation’s changing of its policy thus
violated the contract.
 Rabbi was not the agent of the congregation so could not bind the defendant regarding the terms of
the contract. This is why the conversation was used only to show the plaintiff’s state of mind, not to
show that the defendant congregation agreed to the particular seating arrangements.

First Nat'l v Methodist Home (Ka. 1957) (contract between deceased’s estate and nursing home she died in not
enforced)
 C: in determining intention of the parties where ambiguity exists in a contract the test is not what the
party preparing the instrument intended its doubtful or ambiguous words to mean but what a
reasonable person, in the position of the other party to the agreement, would have understood them
to mean under the existing conditions and circumstances
 A: we are impelled to the view that a reasonable person, in the position of the decedent at the time of
the execution of the contract, would have understood the provisions of that instrument to mean that
unless and until she attained the status of a life member in the appellant’s home she, or her estate
would be entitled to a return of the money paid by her for that right, less amounts specified in the
agreement
 Cannot foresee all of the potential things that could go wrong, so the court will fill in the gaps.

Wood v Lucy (N.Y. Ct. App. 1917) (contract between designer and agent enforced)
  Express terms of the contract did not bind Wood to do anything. Court reads into the contract an
implied term that the parties entering into an agreement like this will use reasonable efforts to
perform. Cardozo says that the contract would be useless and not mean anything if they weren’t
going to use reasonable efforts. Could not have one without the other.
 C: the agreement’s silence regarding the π’s required effort to work for ∆’s profit was implied in the
contract, making it enforceable
 A: π’s promise to pay the ∆ one-half of the profits and revenues resulting from the exclusive agency
and to render accounts monthly was a promise to use reasonable efforts to bring profits and revenues
into existence

Every contractual obligation must be exercised in good faith: a requirement in the performance of every term of
every contract

6 types of cases where the formation of the contract was saved by implying the requirements of reasonableness and
good faith:
1) satisfaction clauses;
2) exclusive dealing contracts;
3) output & requirements contracts;
4) modifications to contracts;
5) settlements of claims; &
6) termination clauses

Market Street v Frey (U.S. Ct. App. 7th Circ. 1991)

 C: (“Good faith” is a compact reference to an implied undertaking not to take opportunistic
advantage in a way that could not have been contemplated at the time of drafting, and which
therefore was not resolved explicitly by the parties – Posner, J.)
 A: it was an implicit condition that the promisee examine the work to the extent necessary to
determine whether it was satisfactory; otherwise the performing party would have been placing
himself at the complete mercy of the promise. the parties didn’t write this condition into the contract
either because they thought such behavior unlikely or failed to foresee it altogether”

Good faith purchase: in this context, “good faith” focuses on the honesty of the purchaser, as distinguished from
his care or negligence

The UCC does not deal with good faith in the formation of a contract. But bad faith in negotiation may be subject
to sanctions. Remedies for bad faith in the absence of agreement are found in the law of torts or restitution.

Good faith performance. Subterfuges and evasions violate the obligation of good faith in performance event
though the actor believes his conduct to be justified. But the obligation goes further: bad faith may be overt or may
consist of inaction, and fair dealing may require more than honesty

Good faith in enforcement. The obligation of good faith and fair dealing extends to the assertion, settlement and
litigation of contract claims and defenses

a. Duty of Good Faith in Requirements and Output

Feld v Henry S. Levy & Sons, Inc. (N.Y. 1975) (A has an exclusive sale contract with B where B sells all inventory
in their plant to A and either party can terminate at will. B says it will shut down production of inventory in their
plant if A does not agree to pay a higher rate. A refuses, B stops production and uses another plant to sell to others.
court ruled = BREACH OF CONRACT because violation of GOOD FAITH)
 Orange & Rockland Utilities v Amerada Hess Corp.. (N.Y. App. 1977) (A has a sale contract with B [power
company] where B supplies all of A’s oil at a fixed price for 5 years. A began burning the oil faster and selling to
other power companies once oil prices went up, and their demands exceeded the contract estimates dramatically so
B refused to sell and A sued for breach of contract. court ruled = no recovery because A’s demands were NOT
incurred in GOOD FAITH)

b. Duty of Good Faith in Exercising Termination Rights

Questar Builders, Inc. v CB Flooring. (Md. Ct. App. 2009) (A [construction co] has a contract with B where B
carpets A’s apartment building. after B changed materials and made a change order for a higher price, A found
another company to do it cheaper, arguing that it could terminate its agreement with B because B acted in bad faith
but ALSO because the agreement contained a right to terminate for convenience. court ruled = NO RECOVERY
because A acted in BAD FAITH)

Summary of lesson on Implied Terms and the Duty of Good Faith (27):
 terms may be implied in fact if there is evidence that the parties intended such terms to be part of the
contract
 terms may be implied in law if the parties intended to enter the contract but intentionally left a term open
 if the parties did not intend to enter into a contract without agreeing to a specific term, then no contract was
formed and if part performance has occurred the court will order mutual restitution

V. Express Conditions (what are the terms of the contract?)

Differnce between condition and promise: the failure of a condition excuses performance, while the failure oto
fulfill a promise is a breach of contract. A condition is an event...

Promise: a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a
promise in understanding that a commitment has been made [R2d § 2(1)]. Creates a legal duty in the promisor and a
right in the promise. If the promise is not performed, the contract is breached

Condition: “an event that either triggers or excuses a party’s duty to perform a contract,” or “an event, not certain to
occur, which must occur, unless its non-occurrence is excused, which must occur before performance under a
contract becomes due” [R2d]. Creates no right or duty, rather, limits or modifies the legal duty created by a
promise. If the condition does not occur, the legal duty that was conditioned is discharged
 may be an event or an act
 it may be something within the powers of the parties or outside their control
 create no rights or duties but modify a right or duty

Condition precedent: when a party’s performance is not yet due but a certain event triggers a party’s obligation to
perform. The party who is seeking to require the other party to perform has the burden of proving that the condition
precedent triggering the other party’s duty has occurred
o may be triggered by
 through lapse of time, or upon a certain date
 if the same party does a certain act or fails to do a certain act
 if the other party does a certain act or fails to do a certain act
 if a third party does a certain act of fails to do a certain act
 if some other event occurs or fails to occur

Condition subsequent: when a party’s performance is already due but the occurrence of a certain event excuses the
party’s obligation to perform. The same party who is seeking to excuse their own performance has the burden of
proving that the condition subsequent has occurred
Express conditions: those that are expressly set forth in the contract as either triggering or excusing the performance
of a party (may include words like “subject to,” “only if,” “conditioned upon”). When express conditions are
conditioned upon something within a party’s control, that party has a duty to act reasonably or in good faith. Can
include conditions “cumulative” or “alternative” (i.e., “unless (a) occurs, (b) occurs, or (c) occurs)
 courts will strictly enforce express conditions, UNLESS
o the provision is not a condition but rather a promise;
o strict construction of the condition does not reflect the intent of the parties;
o it would not be consistent with the remainder of the contract;
o it would not be consistent with the parties’ course of performance, course of dealing, or trade usage;
o the condition has been waived;
o the party seeking to enforce the condition was not acting in good faith or where the party against
whom the condition is being exercised would suffer a disproportionate loss (a “forfeiture”); or
o a party has “substantially performed” (see below)

Morrison v Bare (Ct. App. OH. 2007)

 C: The purpose of constituting some fact as a condition is always the postponement or discharge of
an instant duty (or other specified legal relation). The non-fulfillment of a promise is called a breach
of contract, and creates in the other party a secondary right to damages. It is the failure to perform a
legal duty. The non-occurrence of a condition will prevent the existence of a duty in the other party;
but it may not create any remedial rights and duties at all, and it will not unless someone has
promised that it shall occur
 A: The fact that, to satisfy the “special condition,” Mr. Bare would have had to do something (supply
the bill showing that the heat exchanger had been repaired) did not mean that it was a promise rather
than a condition. A condition can be an act to be done by one of the parties to the contract
 Difference between condition and promise. Promise is express intention and assurance that a future
performance will be rendered, and it creates a duty in the promisor.

Internatio-Rotterdam, Inc. v River Brand Rice Mills, Inc. (2nd Cir. 1958)
 C: notice of shipping instructions on or before December 17 was not merely a “duty” of the
appellant—as it concedes: it was a condition precedent to the performance which might be required
of the appellee. The nonoccurrence of that condition entitled the appellee … to treat its contractual
obligations as discharged."
 A: it is not reasonable to infer that when the contract was made in July for December delivery, the
parties intended that the appellant should have an option exercisable subsequent to December 17 to
postpone delivery until January
 Clause was a promissory condition that is both a condition and a promise.

Peacock Construction Co. v Modern Air Conditioning, Inc. (Fla. 1977)

 C: The intent [of the parties] in most cases is that payment by the owner to the general contractor is
not a condition precedent to the general contractor’s duty to pay the subcontractors. This is because
small subcontractors, who must have payment for their work in order to remain in business, will not
ordinarily assume the risk of the owner’s failure to pay the general contractor
 A: subcontractors don’t usually contract to assume the risk of a contractor not being paid, partly
because they don’t usually have the bargaining power

Burger King Corp. v. Family Dining, Inc. (E. Dis. Ct. PA. 1977) (change in management)
 C: a condition of performance in a contract may be excused without reason if its requirement will
involve extreme forfeiture or penalty, and its existence or occurrence forms no essential part of the
exchange for the promisor’s performance
 A: the development schedule requiring Family Dining to open ten restaurants in ten years does not
create any duties in Family Dining and thus constitutes a condition of the territorial agreement
SIMILAR FINAL ESSAY QUESTION:

JNA Realty Corp. v Cross Bay Chelsea, Inc. (Ct. App. NY. 1977) (landlord didn’t give suffcnt termination notice)
 C: There is a wide distinction between a condition precedent, where no title has vested and none is to
vest until the condition is performed, and a condition subsequent, operating by way of a defeasance.
In the former case equity can give no relief. The failure to perform is an inevitable bar. No right can
ever vest. The result is very different where the condition is subsequent. There equity will interpose
and relieve against the forfeiture
 A: the tenant has made a considerable investment in improvements on the premises $40,000 at the
time of purchase, and an additional $15,000 during the tenancy. In addition, if the location is lost, the
restaurant would undoubtedly lose a considerable amount of its customer good will. The tenant was
at fault, but not in a culpable sense. It was, as Cardozo says, “mere venial inattention.” There would
be a forfeiture and the gravity of the loss is certainly out of all proportion to the gravity of the fault.
Thus, under the circumstances of this case, the tenant would be entitled to equitable relief if there is
no prejudice to the landlord."

Implied conditions: conditions that arise from the contract but which do not use words that expressly signal the
conditional nature of the performance. Often involve the parties’ order of performance.
 either implicitly agreed to or imposed upon the parties by law

The substantial performance doctrine: substantial performance of a contract means that while a party has not
completely or fully performed, the party’s shortcomings do not amount to a “material breach.” If a party has
“substantially performed” its obligations under a contract, then even though it has failed to completely satisfy a
certain condition it is entitled to recover the contract price less any damages for sustained loss by the other party

Satisfaction clause: where a party’s duty under a contract has to be performed according to the satisfaction of the
other party, traditionally the courts distinguished between matters of “personal taste” (wholly discretionary,
subjective standard) and matters relating to commercial reasonableness (subject to a “reasonable person” objective
standard, that is the default test). Language examples of subjective standard include “sole,” “exclusive,” and
“final.” Must be exercised in good faith

When one party rejects the other party’s performance on the ground that the performance was “unsatisfactory,”
then as in other cases of alleged breach the party is obligated to give reasons explaining why the performance was
unsatisfactory. If a party fails or refuses to explain why they are unsatisfied with the other party’s performance, they
may be estopped from suing for breach of contract. If they do specify a reason why they are unsatisfied, they may
be estopped from raising different or additional reasons at trial

Waiver and estoppel: an express condition may be waived by the party for whose benefit the condition was created,
or that party may be estopped from contending that the condition was not satisfied (i.e., if a landlord routinely
allowed tenants to make late payments, or permitted tenants to renew their leases without prior notice, the courts
would likely find that the time provisions in the lease had been waived or that the landlord was estopped from
enforcing them)

Conditions qualify a party’s obligation to perform a contractual promise, and may pertain to contract formation (not
subject to the parol evidence rule) or contract performance (subject to the parol evidence rule)

Courts have two tools at their disposal to alleviate the harshness of the requirement of strict compliance with
express conditions:
 Waiver: finding that the person for whose protection the condition was placed in the contract has
waived compliance with that condition, and
  Excuse: excusing the occurrence of the condition for equitable reasons, for example, to avoid
disproportionate forfeiture, or because the condition was not satisfied because of interference by the
party that would be benefited if the condition were enforced.

Forfeiture: “the denial of compensation that results when [a party] loses his right to the agreed exchange after he
has relied substantially, as by preparation or performance on the expectation of that exchange.”
 To determine whether a forfeiture is “disproportionate” a court must weigh the extent of the forfeiture by
[one party] against the importance to the [other party] of the risk from which he sought to be protected and
the degree to which that protection will be lost if the non-occurrence of the condition is excused to the
extent required to prevent forfeiture. (R2d)

Questions to ask (Burger King):

1. is the contested provision a promise or a condition?
2. was the condition waived?
3. would excessive (disproportionate) forfeiture result if the condition is excused?

Summary of lesson on Express Conditions (28):

 condition: an event that either triggers a party’s duty to perform a contract (a “condition precedent”) or
excuses a party’s duty to perform a contract (a “condition subsequent”)
 express conditions are in general strictly construed
 situations where a court will modify or entirely excuse express conditions:
 the provision is not a condition but rather a promise
 strict construction of the condition does not reflect the intent of the parties
 it would not be consistent with the remainder of the contract
 it would not be consistent with the parties’ course of performance/dealing, trade usage
 the condition has been waived
 courts may also refuse to strictly enforce express conditions where the court finds the party seeking to
enforce the condition was not acting in good faith, or where the contract has been substantially performed
and the party against whom the condition being is being exercised would suffer a disproportionate loss (a
“forfeiture”)

VI. Performance and Breach Under the Common Law (was the contract breached?)

Performance begins once a contract is formed

Contracts may expressly or implicitly provide that the parties are obligated to perform simultaneously or that one
party must perform first before the other party becomes obligated to perform

In the absence of express terms ordering the performance of the parties, the law presumes that mutual promises
that can be performed all at once are due simultaneously, but that if one party’s performance must take place
over a period of time, then that party must complete its performance before the other party is obligated to perform.

Full performance under a contract completely discharges a party’s obligations under the contract. A party who has
fully performed has no other obligations to fulfill, and is entitled to the other party’s full performance or its
equivalent in damages
Substantial performance under a contract does not utterly discharge a party from performing. Instead, a party who
has substantially performed is liable for any shortcomings in their performance. However, if a party has
substantially performed its obligations under a contract it is treated as a partial breach, not a total breach; the other
party is not entitled to cancel the contract, but must honor their obligations with deduction for any loss caused by
the first party’s partial breach

Breach: performance that does not match the contract’s terms (express and implied)
If a party’s breach is total, then the other party is entitled to cancel the contract and has a claim for damages,
granting them all of the benefit they expected to receive under the contract

If a party’s breach is partial, then the other party may not cancel the contract; instead they are obligated to await
full performance by the breaching party for a reasonable time and during that time they have a claim against the
breaching party for only the damages caused by the partial breach

Types of breach:
 Repudiation (a party renounces the contract and refuses to perform)
 Nonperformance
 Late performance
 Incomplete or faulty performance (failing to finish performance, or performing defectively)
 Wrongfully rejecting the other party’s performance
 Wrongful revocation
 Failure to perform in good faith
 Anticipatory repudiation
 Refusal to pay the contract price

Nichols v Raynbred (K.B. 1615) (Raynbred’s promise to pay 50 shillings for a cow was considered to be
independent from Nichol’s promise to sell the cow for 50 shillings. When Nichols failed to deliver the cow, the
court held Raynbred still had to pay the 50 shillings)

STUDY:
Jacob & Youngs v Kent (Ct. App. NY. 1921)
 C: if a party substantially performs its obligations under a contract, that party will not be forced to
bear the replacement cost needed to fully comply with the agreement but instead will owe the non-
breaching party the difference in value between full performance and the performance received
 A: the trier of fact appropriately concluded that the defect in the pipes supplied by Jacob is
insignificant in relation to the overall project. Thus, even though full performance of the contract
was not completed, principles of fairness and equity justify not penalizing Jacob significantly by
withholding payment when the effect of the defect itself was so insignificant
 Track cardozos factors in essay answer

Khiterer v Bell (Ct. App. NY. 2005)

 C: the contract called for crowns of porcelain on gold, so Bell breached by providing porcelain
crowns. However, because Bell substantially performed, Khiterer could sue for damages but not the
full amount
 A: substitution not intentional, the porcelain crowns were suitable, cost was the same, etc.

Sackett v Spindler (Cal. Ct. App. 1967)

 C: [R2d § 317]
 A: Spindler was justified in terminating the contract on October 5 on the basis that despite Sackett’s
“offers” to perform and his assurances to Spindler that he would perform, it was extremely uncertain
as to whether in fact Sackett intended to complete the contract. In addition, in light of Spindlers’
numerous requests of Sackett for the balance due under the contract, the latter’s failure to perform
could certainly not be characterized as innocent; rather it could be but ascribed to gross negligence
or wilful conduct on his part

Economic Waste: the primary purpose of the law of contracts is not to enforce promise-keeping but rather to
promote economically efficient and productive transactions so as to increase the amount of value in society. If a
party has substantially performed a contract and has in good faith committed a breach which is relatively trivial, but
enforcement of full performance would impose damages so great as to amount to a forfeiture, then the breaching
party is liable to the aggrieved party only for the loss actually caused by the breach, not the cost of full performance
 If certain unexpected circumstances arise during contract performance, a party’s duty to perform may be excused,
under the doctrine of impossibility, impracticability, or frustration of purpose

Under old English common law, all contractual promises were considered independent of each other and not
connected to any events external to the contract unless the parties attached an express condition to a promise

Now, that is no longer true and instead, “constructive conditions of exchange” connected contract promises together
through conditional relationships implied from the agreement, thereby determining the order of the parties’
performances

Courts may and often do imply conditions based on interpretation of contract language, extrinsic evidence, usage of
trade, course of dealing, public policy considerations, or what reasonable persons would have intended in the
circumstances.

If a party has fully performed under a contract, then that party's obligations under the contract are discharged and
the party is entitled to all of the benefits of the other party's performance.

Full performance under a contract completely discharges a party’s obligations under the contract. A party who has
fully performed has no other obligations to fulfill, and is entitled to the other party’s full performance or its
equivalent in damages

Substantial performance under a contract does not utterly discharge a party from performing. Instead, a party who
has substantially performed is liable for any shortcomings in their performance

Kingston v. Preston, 99 Eng. Rep. 437 (K.B. 1773) (finding a silk merchant who agreed to sell his business to an
understudy was not obligated to perform because the understudy did not provide sufficient security, and to provide
sufficient security was clearly an implied condition precedent to the merchant’s duty to sell the business – the
“essence of the agreement”). Distinguished 3 types of relationships between promises:
1) “Mutual and independent promises,” in which either party may recover damages from the other for the injury
incurred by the breach of the other’s promise; breach of one party’s promise is not an excuse for the other party’s
failure to perform
2) “Sequential dependent promises” in which “the performance of one depends on the prior performance of another”;
until the prior promise is performed, the other party does not owe a duty to perform his promise
3) Simultaneous dependent promises,” to be performed at the same time. “If one party is ready, and offers, to perform
his part, and the other neglects, or refuses, to perform his part, the first party, upon fulfilling his engagement, may
maintain an action for the default of the other
 Whichever party is not If either party is not ready If one party does not
ready to perform is in to perform, they are in perform and is not ready
breach breach to do so, the

Whether promises are dependent or independent depends on the evident sense and meaning of the parties

If party A achieves the level of performance necessary to satisfy the implied condition, even though the
performance might be defective in some respect, that satisfaction of the implied condition triggers party B’s duty to
perform the connected promise(s). Party A is then said to have rendered “substantial performance”

If party A does not achieve substantial performance, then party A has not satisfied the implied condition and
therefore has committed a “material breach,” so party B’s duty to perform the connected promise(s) does not arise

Upon any breach, the aggrieved party acquires the right to a remedy for the breach

If the breach is immaterial, the collection of a remedy is the extent of the aggrieved party’s rights

Upon a material breach (a lack of substantial performance), the aggrieved party acquires the right to withhold
(“suspend”) its own performance until the breaching party “cures” its defective performance and renders at least
substantial performance

Cure can be by
 furnishing the missing performance;
 re-performing the flawed performance; or
 repairing a defective item (depending on the contract and the nature of the breach)
The breaching party has only a “reasonable time” to cure, and in some circumstances, that reasonable time can be
very short. Some breaches cannot be cured, usually because the time or opportunity to perform has passed

If the breaching party has a right to cure, then a material breach is considered only to be a “partial breach” (think
of it the other way: partial breach = right to cure)

If the breaching party has no right to cure, then the material breach is a “total breach.” The aggrieved party retains
both the right to a remedy for the breach and the right to suspend/withhold its performance and acquires a new
right: the right to declare that the contract performances are at an end (called a “cancellation”—effective when
aggrieved party notifies the breaching party
(think of it the other way: total breach = no right to cure)

Summary of lesson on Performance and Breach Under the Common Law (29):
 the express or implied order of the parties’ performance plays a role in determining whether a party has
breached a contract
 the parties may be obligated to perform simultaneously, or one party’s performance may be conditioned and
dependent upon prior performance by the other party
 if a party fully performs a contract, then their obligations are discharged
 if a party substantially performs a contract, the other party may still be obligated to perform, but the other
party is entitled to recovery for any loss
 total breach: the aggrieved party is entitled to cancel the contract
 partial breach: the aggrieved party must give the breaching party an opportunity to cure any defects in its
performance
 factors in whether a breach is material or non-material:
 the extent to which the injured party will be deprived of the benefit which he reasonably expected
 the extent to which the injured party can be adequately compensated for the part of that benefit of
which he will be deprived
 the extent to which the party failing to perform or to offer to perform will suffer forfeiture
 the likelihood that the party failing to perform or to offer to perform will cure his failure
 the extent to which the behavior of the party failing to perform or to offer to perform comports with
standards of good faith and fair dealing
 economic waste: if a party has substantially performed a contract and has in good faith committed a breach
which is relatively trivial, but enforcement of full performance would impose damages so great as to amount
to a forfeiture, then the breaching party is liable to the aggrieved party only for the loss actually caused by
the breach, not the cost of full performance
VII. Repudiation, Demand for Adequate Assurance, Performance and Breach Under Article 2 of the U.C.C. (was the
contract breached?)

Repudiation: a clear and definite declaration by a party that it does not intend to perform its obligation under the
contract (a statement that the party does not intend to perform any of its obligations under the contract)
 it is a total breach, not a partial breach
 if one party repudiates then the other party’s duty is completely discharged (not just suspended) and the
aggrieved party is entitled to cancel the contract and sue for damages

1. total breach
2. other party’s duty is completely discharged
3. aggrieved can cancel the contract
4. aggrieved can sue for damages

To constitute a repudiation a party’s statement that it does not intend to perform must be definite and unequivocal

If a party repudiates in response to a total breach the repudiation of future performance is not a breach; it is a
justified cancellation of the contract. But if done without such justification, repudiation is itself a breach of contract

If a party does not respond to a justified demand for adequate assurance within a reasonable time, then that party is
in breach of the contract (demanding party must have “reasonable grounds for insecurity”). Reasonable grounds for
insecurity might arise in any of the following situations:
 if the other party has breached the contract;
 if the other party has delegated its duty to perform under the contract to another party;
 if the other party has repudiated the contract but now attempts to retract its repudiation;
 if the other party has made an ambiguous statement regarding its intent or ability to perform; or
 if the party has received information regarding the lack of intent or inability of the other party to
perform

McCloskey & Co v Minweld Steel Co. (3d Cir. 1955) (“to find a renunciation amounting to a breach of contract,
there must be an absolute and unequivocal refusal to perform or a distinct and positive statement of an inability to
do so”)

Anticipatory repudiation: repudiation made by a party before the date on which its contract performance is due

Hochster v De la Tour (Q.B. 1853) (once an anticipatory repudiation occurs, the aggrieved party may consider the
contract breached, may sue, and may enter into a substitute contract. If, however, one party merely has doubts about
the other party’s intention or ability to perform, but no repudiation has occurred, traditional common law offered
the “insecure” party no recourse)

Corn Products v Fasola (N.J. 1920) (courts recognized parties could include [express] clauses in agreements which
allowed them to protect themselves give them the power to act upon something less than a repudiation)

James B. Berry’s Sons v Monark Gasoline (8th Circ. 1929) (courts recognized an implied term giving the parties the
right to demand assurance in certain circumstances)

Jay Dreher v Delco Appliance (2nd Circ. 1937) (courts recognized the right to demand assurance based only on an
implied term)

Hornell Brewing Co. v Spry (NY. 1997)

  C: whether a seller, as the π in this case, has reasonable grounds for insecurity is an issue of fact that
depends upon various factors, including the buyer’s exact words or actions, the course of dealing or
performance between the parties, and the nature of the sales contract and the industry
 A: these circumstances, coupled with information received in early May (on which it reasonably
relied) that Spry misled Hornell about the scope of his operation, created new and more acute
grounds for Hornell’s insecurity and entitled Hornell to seek further adequate assurance from
defendants in the form of a documented line of credit or other guarantee

Contractual insecurity clauses (Corn Products):

 an insecurity clause should give a party the right to demand proof of financial responsibility, for example,
proof that the other party is paying its bills on time or that the other party’s debt to equity ration is below a
certain level
 an insecurity clause may also give your client the right to unilaterally modify the contract. for example, if
your client is a seller the contract should give your client the right to demand payment in advance or to
shorten the credit period if your client reasonably “deems itself insecure” due to new information
 if your client is a lender it should have the right to demand more collateral to secure the loan or the right to
“accelerate” the loan, that is, to demand immediate repayment of the loan interest
 the insecurity clause may also give your client the right to terminate the contract

If the seller delivers the goods on time then the buyer must choose whether to accept or reject them. The buyer has
a reasonable time to inspect the goods before deciding whether to accept or reject them. If the buyer decides to
reject the goods then the buyer must notify the seller within a reasonable time and identify the particular defect
that is the basis for rejection. The seller then has a reasonable time within which to cure the defect. If the seller
cannot cure the defect then the buyer may return the goods and sue for breach. If the buyer wrongfully rejects the
goods then the seller may sue for breach

Once the buyer accepts the goods then the buyer may not reject the goods; the buyer is obligated to pay for the
goods; and if the buyer wishes the revoke acceptance, the burden of proof shifts to the buyer to prove that the goods
are substantially nonconforming
If after acceptance, the buyer discovers the goods are non-conforming, then the buyer may be entitled to sue for
breach of warranty, which is measured by the difference between the actual value of the goods as delivered and the
value that the goods would have had if they had been as warranted. Under certain circumstances a buyer is entitled
to revoke its acceptance of nonconforming goods and return the goods to the seller

Once a latent defect is discovered the buyer must notify the seller of the defect and the seller has a reasonable time
within which to cure the defect. If the seller is unable to cure, and if the non-conformity substantially impairs the
value of the goods to the buyer, then the buyer may revoke its acceptance and return the goods to the seller. The
buyer would then be entitled to the return of its purchase price as well as any expectancy, incidental and
consequential damages. Alternatively, a buyer may elect to retain the non-conforming goods. The buyer would then
be entitled to expectancy damages for breach of warranty, which is measured by the difference in value between the
goods as delivered and the value that the goods would have had if they had been conforming to the contract

Summary of lesson on Repudiation and Demand for Adequate Assurance (30):

 repudiation (or renunciation): a clear and definite statement that the party making the statement does not
intend to perform its duties under the contract
 when another party clearly and definitely states it does not intend to perform a valid and enforceable
contract, the statement is a breach and the party receiving the statement may cancel the contract and recover
the damages to which it is entitled
 if the other party’s statement is not a repudiation but merely an attempt to discuss and overcome difficulties
that stand in the way of performing the contract, then its statement is not a breach
 if the party receiving such a statement treats the statement as a breach and cancels the contract, then the
party that received the statement has breached
 when a party has received an ambiguous statement or incomplete information regarding the intent or ability
of the other party to perform, the safest course of action is to demand adequate assurance from the other
party
 if the other party does not respond to a justified demand for adequate assurance within a reasonable time,
then the other party is in breach

Summary of lesson on Performance and Breach Under UCC Article 2 (31):

 UCC Article 2 establishes a 3-stage process governing performance and breach:
 a breach may occur before delivery in the form of an anticipatory repudiation
 a breach may occur when the goods are delivered and the buyer decides whether to accept or reject
the goods
 a breach may occur when a latent defect arises after the buyer has accepted the goods and the buyer
asserts a claim for breach of warranty or attempts to revoke their acceptance
 a seller of goods is obligated to deliver goods that conform precisely to the contract (the “perfect tender”
rule)
 § 2601: if they fail in any respect to conform to the contract, then buyer may:
 Reject whole;
 Accept whole; or
 Accept any commercial unit or units and reject the rest.
 *Buyer still has a duty to act in good faith*
 Honesty in fact and the observance of reasonable commercial standards of fair dealing
 Duty to mitigate: not expressly written in UCC, but a part of good faith.
 A buyers acceptance of non-conforming goods is not penalized by the loss of any remedy that may
otherwise be available to him
 if a buyer accepts the goods then the buyer may not reject them – the buyer is obligated to pay for the goods
and if the buyer later wishes to revoke acceptance, he has the burden of proof to prove the goods are
substantially nonconforming
  a buyer who either rejects or revokes acceptance must notify the seller of the alleged nonconformity and
give the seller a reasonable opportunity to cure the defect

Summary of lesson on Acceptance and Rejection of Goods (31.2):

 if a buyer accepts goods, he is obliged to pay the price
 buyer can no longer reject the goods but can only revoke acceptance (a much higher standard)
 acceptance does not require the buyer to sat “I accept the goods” or even physically accept delivery of the
goods
 acceptance: occurs if buyer, after reasonable opportunity to inspect, indicates he will take the goods even if
nonconformities exist
 when nonconforming goods are delivered, the buyer may accept the whole, accept only part and reject the
rest, or reject the whole
 Acceptance: 2-606 and 2-607
 Rejection: 2-602, 2-603, 2-605
 Buyers options: 2-601

VIII. Excuse Defenses Under the Common Law and Article 2 (was the contract breached?)

If a party’s performance is excused then its failure to perform its duty is not a breach of contract. Instead, the legal
consequence of excuse of performance is as if the contract had been avoided or cancelled.* Each party must make
restitution to the other of any partial performance, but neither party is liable to the other for any expectancy or
consequential damages

If at the time of contracting the parties foresaw or should have foreseen the occurrence of an event, and the
contract explicitly or implicitly assigned the risk of that occurrence to one of the parties, then that party’s
performance is not excused upon the happening of that event

Taylor v Caldwell (K.B. 1863) (music venue burned down = the concert is effectively irreplaceable)
 C: where, from the nature of the contract, it appears that the parties must from the beginning have
known that it could not be fulfilled unless, when the time for the fulfillment of the contract arrived,
some particular specified thing continued to exist, so that when entering into the contract they must
have contemplated such continued existence as the foundation of what was to be done, there, in the
absence of any expressed or implied warranty that the thing shall exist, the contract is not to be
construed as a positive contract, but as subject to an implied condition that the parties shall be
excused in case, before breach, performance becomes impossible from the perishing of the thing
without default of the contractor
 A: the principle seems to us to be that in contracts in which the performance depends on the
continued existence of a given person or thing, a condition is implied that the impossibility of
performance arising from the perishing of the person or thing shall excuse the performance

Adbar, L.C. v New Beginnings C-Star (Mo. Ct. App. 2003)

 C: under the doctrine of commercial frustration, if the occurrence of an event, not foreseen by the
parties and not caused by or under the control of either party, destroys or nearly destroys the value of
the performance or the object of purpose of the contract, then the parties are excused from further
performance…the absence of a [force majeure clause] indicates an assumption of the risk by the
promisor
 A: the possibility that ∆’s funding may be threatened was foreseeable. yet, ∆ did not provide for that
possibility in the lease. therefore, ∆ assumed the risk that their funding may be threatened and that it
might frustrate the purpose of the lease

Krell v Henry (K.B. 1903)

 C: in each case one must ask oneself, first, what, having regard to all the circumstances, was the
foundation of the contract? secondly, was the performance of the contract prevented? thirdly, was
 the event which prevented the performance of the contract of such a character that it cannot
reasonably be said to have been in the contemplation of the parties at the date of the contract?”
 A: I think that the coronation procession was the foundation of the contract, and that the non-
happening of it prevented the performance of the contract; and, secondly, I think that the non-
happening of the procession was an event ‘of such character that it cannot reasonably be supposed to
have been in the contemplation of the contracting parties when the contract was made, and that they
are not to be held bound by general words which, though large enough to include, were not used
with reference to the possibility of the particular contingency which afterwards happened

“Impracticability” – a situation in which the excuse … (see slides from class)

 more than just “impracticality” – a mere change in the degree of difficulty or expense due to such causes as
increased wages, prices of raw materials or costs of construction, unless well beyond the normal range, does
not amount to impracticability since it is this sort of risk that a fixed-price contract is intended to cover.
Furthermore, a party is expected to use reasonable efforts to surmount obstacles to performance, and a
performance is impracticable only if it is so in spite of such efforts

Problem 9-10 on pg. 779

“Commercial impracticability” – excuses a party’s performance if the occurrence of an unforeseen event would
make it oppressively unfair to require the party to fully perform its promises under a contract

Impossibility
 i.e., a person who is obligated to perform contractual services to another dies
 or a couple reserves a hotel stay for their wedding but the hotel burns down before the couple gets there

Frustration of purpose (possible to perform contract but no longer possible to achieve underlying purpose of the
contract because of an unforeseen event)
 i.e., a hotel near PNC Park offers a higher room rate during a playoff game but because of an unforeseen
event (such as a fire happening in Cleveland) the game is canceled, and the hotel must lower its prices)

Commercial impracticability (possible to perform contract and to fulfill its purpose, but performance under the
contract became economically ruinous because of an unforeseen event)

Changes in market price alone do not justify excusing a party’s performance and cancelling the contract

Summary of lesson on Excuse (32):

 Similar to the doctrine of mistake, a party’s performance may be excused upon the occurrence of an event
the non-occurrence of which was a basic assumption of the contract.
 If a party’s performance is excused then its failure to perform its duty is not a breach of contract.
 The doctrine of excuse has evolved under the common law from the doctrine of impossibility, to frustration
of purpose, to commercial impracticability.
 The doctrine of commercial impracticability has been incorporated into Article 2 of the UCC.
 A ”force majeure” clause may be used to expressly identify the types of events that would excuse a party’s
performance. A force majeure clause may be read as not excusing performance in the case of difficulties
resulting from events that are not expressly set forth in the clause.

Summary of lesson on Excuse of Performance Under UCC Article 2 (33):

 UCC § 2-613: if the contract requires the goods to be identified at the time that the contract is entered into,
and if those identified goods are destroyed before the risk of loss has shifted to the buyer, then the seller’s
performance is excused
  UCC § 2-615: a party’s performance is excused if performance is rendered impracticable by “the occurrence
of a contingency the non-occurrence of which was a basic assumption of the contract” or by “compliance in
good faith with any applicable foreign or domestic governmental regulation or order”

IX. Direct Expectation Damages (what is the appropriate remedy?)

Expectancy Damages: the money equivalent of the benefit that a party reasonably expected to gain if the other party
had performed its obligation under the contract. Only the aggrieved party is entitled to expectancy damages
 Direct expectancy damages: naturally and inevitably flow from the breach by the other party
 Indirect expectancy damages: incidental or consequential damages
o Incidental damages: expenses incurred as a result of the breach. Expenses that are incurred as a result
of (after) the other party’s breach
o Consequential damages: injury to person, injury to property, or business losses that are caused by the
breach

When a contract is canceled because one of the parties has breached the contract, then typically both parties are
entitled to restitution

Reliance Damages: expenses that are incurred by the aggrieved party before the breach occurred. Consist of
expenses incurred in preparing to perform a contract or in performing the contract. Typically awarded in situations
where the aggrieved party is barred from recovering expectancy damages. Expenses or losses that are incurred in
reliance on the other party’s promise before the other party breaches

Equitable relief is unavailable unless the aggrieved party

 has no adequate remedy at law and
 would suffer irreparable harm if the equitable remedy were not granted

The remedial principle in contract law: “one who unjustifiably fails to perform a promise must pay to put the
promise in the position of full performance”

Remedies for Breach of Contract:

 Remedies at Law
o expectation damages (Preference)
 direct (general) damages
 measure the difference between value of full performance and the value of
performance received
 indirect (special or specific) damages
 incidental damages
 consequential damages
o reliance damages
o restitution damages
o Legal Maxim: P cannot have equitable remedy if there is an adequate legal remedy available
  Agreed/liquidated damages
 Punitive damages
 Remedies in Equity
o specific performance
o prohibitory injunction
o specific injunction

1. Compensatory Remedies
 money damages
o expectation damages (put π in position she would have been if contract had been performed)
o reliance damages (restore π to a position as if the contract had never been entered into at all)
 goal: restore π to her “rightful position”
2. Preventative Remedies
a. Coercive Remedies – direct court order to parties; violation is contempt
o injunction – personal command from a court to litigants, ordering them to do or refrain from doing
some specific thing
b. Specific Performance Decree (ordering defendants to perform duties under contract)
 writs of mandamus
 prohibition
 habeas corpus
c. Declaratory Remedies – authoritatively resolve disputes about parties rights
3. Restitutions Remedies
 goal: restoring both sides to their original position
 designed to restore to π all that ∆ gained at π’s expense
 sometimes this is the same as compensation
 can be used to reverse a mistaken or voidable transaction
 can award the π the profits ∆ earned through conscious wrongdoing
4. Punitive Remedies
 goal: punish wrongdoers
 punitive damages (i.e., “treble damages” or triple damages in antitrust law)
 deliberate violation
 oftentimes statutes provide maximums or guidelines on punitive damages
5. Ancillary Remedies (court can fashion to try to keep plaintiffs whole)
 in aid of other remedies
 court costs and attorney’s fees
 means of enforcing the remedy
o means of collecting money is ancillary to remedies that end in money judgments
o writ of execution / sheriff’s sale
o garnish wages
 punishment by contempt (ancillary to coercive remedies)
 receivership: court appoints 3rd party to manage assets while litigation is pending

2 ways of classifying remedies:

Substitutionary Remedies: π suffers harm and receives a sum of money to compensate that harm
o compensatory damages
o attorney’s fees
o restitution of money value of ∆’s gain
o punitive damages
Specific Remedies: seek to avoid this exchange by preventing harm, repairing harm of restoring the specific thing
the π lost
o injunctions
o specific performance-contract
o restitution of specific performance
o restitution of specific sum of money

Expectation damages
 designed to put the aggrieved party into the position it would have been in if it had received the full
performance promised (and fully performed its own part of the bargain)
 make the π whole by paying the amount necessary to approximate the value of full performance
o direct expectation damages
 awarded for injury to or loss of the value of the performance promised in the contract
 measure the difference between the value of full performance (i.e., the contract price) and the
value of performance actually received
o indirect expectation damages
 awarded for other secondary losses resulting from the breach
 incidental damages
o extra costs incurred by the aggrieved party in dealing with the breach or mitigating losses from the
breach
 consequential damages
o other losses arising as a consequence of the breach

Sackett v Spindler (Cal. Ct. App. 1967)

 C: where the title to goods has not passed to the buyer and the seller has the property in his
possession or under his control, the measure of damages upon the buyer’s refusal to accept and pay
for goods for which there is an available market is, in the absence of special circumstances, the
difference between the contract price and the market or current price or value at the time and place
where the goods ought to have been delivered and accepted, or, if no time is fixed for acceptance,
then at the time of the refusal to accept
 A: the ordinary measure does not apply, though, when there is no market available at the time and
place of performance, but rather, damages based upon the value of the goods as best as can be
ascertained

Jacob & Youngs v Kent (Ct. App. NY. 1921) (reading pipe case)
 C: the measure of the allowance is not the cost of replacement, which would be great, but the
difference in value, which would be either nominal or nothing
 A: the owner is entitled to the money which will permit him to complete, unless the cost of
completion is grossly and unfairly out of proportion to the good to be attained. The rule that gives a
 remedy in cases of substantial performance with compensation for defects of trivial or inappreciable
importance has been developed by the courts as an instrument of justice

Lyon v Belosky Construction (NY. 1998)

 C: where the contractor’s breach was unintentional and constituted substantial performance in good
faith, and remedying the defective performance would result in unreasonable economic waste,
damages should be based on the difference between the value of the property as constructed and the
value if performance had been properly completed
 A: Belosky admitted he had little experience reading drawings and relied upon the framer to whom he
had subcontracted the work to make sure the home was constructed properly. Inasmuch as plaintiffs’
expert testified the misalignment of the roof should have been discovered when problems with the
dormer became apparent, the evidence supports the Supreme Court’s finding that defendants, at the
very least, acted negligently in failing to detect the problem

Peevyhouse v Garland (OK. 1962)

 C: the prime consideration in McCormick and Jacob was the relationship between the expense
involved and the end to be attained—in other words, the relative economic waste
 A: where the contract provision breached was merely incidental to the main purpose in view, and
where the economic benefit which would result to lessor by full performance of the work is grossly
disproportionate to the cost of performance, the damages which lessor may recover are limited to the
diminution in value resulting to the premises because of the non-performance

If a seller or supplier of goods or services breaches a contract with a buyer by failing to deliver and buyer seeks to
recover direct damages without having purchased a substitute, those damages are calculated by subtracting the
contract price from the market price.
 the market price at the time when the buyer learned of the breach is usually used to calculate direct
damages. in the context of anticipatory repudiation, could also be:
o market price when buyer learned of the repudiation;
o market price at a commercially reasonable time after buyer learned of the repudiation (MOST
POPULAR); or
o market price when performance is due under the contract
 the market price at the place where the seller was supposed to have tendered the goods is used to
calculate direct damages if the seller has repudiated or failed to perform
 the market price at the place where the goods arrive is used to calculate direct damages if the seller has
tendered defective goods or otherwise breached

Reliance damages
 designed to put the aggrieved party back in the position it would have been in today if the parties had
not entered the contract
 compensate the out-of-pocket expenses incurred by the aggrieved party in reliance on the existence of
the contract, as well as opportunities the aggrieved party let pass in reliance on the contact

Restitution damages
 designed to avoid unjust enrichment of a party by forcing that party to restore (disgorge) to the other
party any as-yet-unpaid-for benefits it retained

Three possible moments in time when a party “learned of the breach” if one party anticipatorily repudiates:
 when he learns of the repudiation,
 *a commercially reasonable time after he learns of the repudiation (most common), or
 when performance is due under the contract

Damages in General
 A person asserting a claim for breach of contract may seek money damages or may seek a court order directing the
breaching party to engage in certain conduct, either to specifically perform the contract or to be enjoined from
acting in a manner inconsistent with their obligations under the contract

3 traditional types of money damages:

1. expectancy damages (position π would have been in if contract was performed)

 money equivalent of the benefit that they reasonably expected to gain if the other party had performed its
obligation under the contract (incurred as a result of the breach)
 recoverable when a contract has been canceled because one of the parties breached the contract, or when a
contract has been performed and one of the parties is proven to have breached it
 include direct and indirect damages
o direct expectancy damages naturally and inevitably flow from the breach by the other party
o indirect expectancy damages
 incidental damages are expenses incurred as a result of the breach
 consequential damages constitute injury to person, injury to property, or business losses

2. reliance damages (position π would have been in if contract was never entered into)
 expenses incurred by the aggrieved party before the breach occurred
 expenses incurred in preparing to perform a contract or in performing the contract
 typically awarded in situations where the aggrieved party is barred from recovering expectancy damages

3. restitutionary damages (avoid unjust enrichment by forcing party to disgorge benefits retained)
 measured as the reasonable value of the goods/services rendered
 intended to put the parties back into the position they were in before the contract was entered into
 recoverable when a contract is canceled because one of the parties has breached it
 usually available to the breaching party, while other forms of money damages are typically not

Summary of Remedies for Breach of Contract

 remedies for breach of contract may be in the form of money damages or may involve equitable relief such
as specific performance or an injunction
 traditionally three types of monetary damages:
 expectancy damages (designed to place the aggrieved party in as good a position as it would have been in if
the other party had performed the contract);
 restitutionary damages (designed to restore the parties to the position they were in when the contract was
entered into); and
 reliance damages (designed to reimburse a party for expenses incurred in reliance on the promise of the
breaching party)

Direct Expectation Damages (vids)

Expectation/expectancy damages are intended to grant the aggrieved party the benefit of their bargain; the value
that they bargained for and reasonably expected to gain had the other party fully performed their obligations under
the contract
 The purpose of expectancy damages is to put the aggrieved party in as good a position as if the
contract had been fully performed
 only an aggrieved party is entitled to expectancy/expectation damages

Direct expectation damages: based upon the contract itself, measured by the terms of the contact, including the
contract price
Indirect expectation damages: caused by the breach but which are not measured by the terms of the contract,
consist of either
 incidental damages (expenses incurred in stopping performance or otherwise mitigating damages)
 consequential damages (involve injury to person, damage to property, or detriment to the business of the
aggrieved party)

When the person who is contractually obligated to perform (or sell) breaches the contract, then the expectancy
damages of the aggrieved party is how much more the buyer would have to pay for the same items or services
 another measure of damages is the diminution in value of the item or service the breaching party is
responsible for (an alternative remedy – CANNOT BE AWARDED BOTH)

When the person who is contractually obligated to pay breaches the contract, there are 3 possible measures of
expectancy damages:
a) contract price (if the breach occurs after the seller or service provider has fully performed)
b) how much less the performing party would earn by selling or providing the same item or services to another
person
c) how much profit the seller or service provider lost on the contract as a result of the payer’s breach

When an employer breaches an employment contract, the employee is entitled to any wages, salary, or commissions
that the employer owes under the contract for past performance, as well as any future wages, salary or commissions
that the employer was obligated to pay under the contract.

When an employee breaches an employment contract by leaving during a period of obligated employment, the
employee is liable for the reasonable additional cost of hiring a replacement

Reno ordered a bouquet of three dozen roses from Albuquerque Florists for Frankie, and then realized that it might
be too “over the top,” so Reno called back an hour later and cancelled the order. Unfortunately the bouquet had
already been prepared. The contract price was $50. 3 possible measures of damages:
a) entire contract price ($50) if Florist made reasonable efforts to resell but was unable to resell
b) the difference between the contract price ($50) and the resale price ($40) = $10, if these were all
the roses that the florist had access to and another customer entered the shop and purchased the
bouquet for $40
c) the lost profits from the sale of the flowers to Reno, so if it sold the bouquet to a new customer for
$40 and incurred $20 for materials and labor in creating the bouquet for Reno, then Reno would owe
the Florist $30 if the florist has hundreds of roses in the shop and another customer entered the shop
and purchased the bouquet that had been prepared for Reno, because it would have made the 2nd sale
anyway

Expectancy damages must be proven with “reasonable certainty” – that the aggrieved party suffered a loss, that the
∆’s breach proximately caused its loss, and the measure, extent, or value of its loss
 if the aggrieved party seeks the difference between the contract price and the cost of substitute performance,
lost profits, or diminution in value, the aggrieved party must prove its loss by a preponderance of the
evidence

In any particular case it may be necessary to award not only expectancy damages to the aggrieved party but also
restitution to one or both of the parties. The aggrieved party may also be entitled to incidental and consequential
damages. If the aggrieved party is not entitled to direct expectancy damages, it may still be entitled to recover
reliance damages

An aggrieved party has a duty to mitigate its damages and if it does not mitigate then its recovery for expectancy
damages may be reduced or eliminated, or a court may grant an equitable remedy
 Summary of Direct Expectation Damages
 only aggrieved parties are entitled to recover expectancy damages
 direct expectancy damages
 measured by the terms of the contract
 intended to award to the aggrieved party the benefit it bargained for and reasonably expected
 only one piece to the puzzle of fashioning a remedy in a breach of contract case

Four measures of expectancy damages the seller may be entitled to as a result of the buyer’s breach:
 The entire contract price
 The contract price minus the resale price
 The contract price minus market value, or
 The contract price minus the cost of the goods

X. Indirect (Incidental and Consequential) Damages, Mitigation of Damages (what is the appropriate remedy?)
Lost profits as a result of seller’s breach = consequential damages

The breaching party has the burden of proving the aggrieved party has not acted reasonably to mitigate its damages.
Once the aggrieved party has proven the extent of its damages the breaching party is allowed to present evidence
[SEE RECORDING]

Incidental damages: expenses incurred by the aggrieved party in stopping performance or otherwise in mitigating
damages after a breach and as a result of the other party’s breach. May include the costs of:
 storing or reshipping or reselling defective or repudiated goods;
 boarding up and paying extra insurance on a building left unfinished by a vendor;
 handling a defective delivery;
 arranging the purchase of substitute goods;
 paying a broker to find a substitute buyer; or
 spending employee time negotiating a replacement contract with a new party
 *attorney’s fees (those not related to dispute resolution, but those actions made necessary by the breach)

Seller’s incidental damages: seller or service provider may in all cases recover expenses for actions that were made
necessary as a result of the breach, to the extent those expenses are commercially reasonable (for sellers of goods,
could be expenses incurred in stopping shipment, storing, and reselling the goods after the buyer’s breach)

Buyer’s incidental damages: any expenses reasonably incurred as a result of the seller’s breach (typically involve
commercially reasonable expenses for inspecting, storing, reshipping, and reselling the goods)

Consequential damages must meet the following requirements:

 Certainty (the damages are not speculative and can be proved with reasonable certainty)
 Causation (the breach caused the damages)
 Mitigation (the aggrieved party cannot recover damages that it could have prevented by taking
reasonable steps)
o *Foreseeability (the damages may reasonably be supposed to have been in the contemplation of both
parties, at the time they made the contract, as the probable result of the breach of it) *unique to
consequential damages

Hadley v. Baxendale (Exch. 1854) (milling company’s (π) handle broke, sent servant to bring broken handle to
manufacturer, shipping company (∆) negligently delayed transportation, π sued for lost profits (consequential
damages))
 C: π can recover for all damages reasonably foreseeable to both parties at the time of contract
formation, as well as damages stemming from any special circumstances, even if those
circumstances are not known by all parties at contract formation
  R: A breaching party is not liable for lost profits unless the “special circumstances” giving rise to the
loss were “fairly and reasonably” contemplated by the parties at the time the contract was entered
into.
 A: At the time of making the shipping contract, Hadley never told Pickford that the functioning of its
mill was entirely dependent upon obtaining a new crank shaft. This is a special circumstance that is
not common among all requests to ship crank shafts. Without Hadley’s communication to Pickford
that its business could not continue until it received a new crank shaft, Pickford could not reasonably
foresee at the time of making the shipping contract that any delays would result in lost profits for
Hadley
o “Where two parties have made a contract which one of them has broken, the damages which the
other party ought to receive in respect of such breach of contract should be such as may fairly and
reasonably be considered either arising naturally, i.e., according to the usual course of things, from
such breach of contract itself, or such as may reasonably be supposed to have been in the
contemplation of both parties, at the time they made the contract, as the probable result of the breach
of it”

Consequential damages are commonly awarded for the following types of harm:
a) Personal injury;
b) Injury to property; and
c) Economic harm, such as lost profits (π has a higher standard of proof, and must prove ∆ had “reason to
know of the special circumstances or requirements”)

Consequential damages are recoverable if the loss was “foreseeable” at the time the parties entered into the contract
[R2d]

Consequential damages in the form of injury to person or property are recoverable if the breach was the “proximate
cause” of the loss [UCC]

Consequential damages are “downstream” damages, as opposed to incidental damages

Limitations on the Recovery of Consequential Damages:

a) A contract may expressly limit or bar recovery for consequential damages. However, in cases involving
personal injury resulting from the sale of goods, such a limitation would be struck down as unconscionable
b) The court may interpret the contract as providing that the aggrieved party assumed the risk that the loss
would occur
c) The aggrieved party may be unable to provide that the harm occurred or that the harm was foreseeable or
proximately caused by the other party’s breach
d) In “special circumstances” (usually involving economic loss like lost profits) to be liable, the breaching
party must have had reason to know of the general or particular needs or requirements of the aggrieved party
giving rise to the loss (Hadley v. Baxendale)
e) If the economic loss is so disproportionate to the compensation received by the breaching party a court may
find that it would be unjust to assign all or a part of the loss to the breaching party

Redgrave v. Boston Symphony Orchestra, Inc. (1st Cir. 1988) (BSO cancelled contract with π who was to narrate a
performance, she sued for BOC citing a loss of future economic opportunity)
 C: π can recover consequential damages
 R: A plaintiff in a breach of contract action may recover consequential damages if the plaintiff proves
with sufficient evidence that the breach proximately caused the loss of identifiable professional
opportunities
 A: Redgrave did not provide sufficient evidence of a causal connection between the breach and the
cancellations. Redgrave thus may not recover consequential damages for these opportunities. The
testimony of Mann, however, indicates that he would have hired Redgrave for his Broadway show
 but for the BSO cancellation. Accordingly, Redgrave may recover consequential damages for the
loss of economic opportunity of working on Mann’s play

Kenford Co. v. County of Erie (NY 1985), modified (1986) (π sold ∆ rights to land where a stadium was to be built
[including for peripheral lands] in exchange for the rights to lease or manage the stadium, ∆ county contractor bids
came in $20 mil over budget so they accordingly cancelled and π sued for BOC and $495M in lost potential profits)
 C: ∆ is not liable for the appreciation value of peripheral land for which the non-breaching party holds
an option to purchase if the construction project is cancelled
 R: Any further liability than for damages naturally and directly flowing from the breach must be
predicated on such unusual or extraordinary damages being brought within the contemplation of the
parties as the probable result of a breach at the time of or prior to contracting

o 3 requirements under Kenford I:

1. Lost profits are direct and proximate result of breach;
2. Profits were contemplated by the parties;
3. Rational basis on which to calculate the lost profits (wasn’t met by πs here)
 R (court of appeals):
1. Such damages have been caused by the breach; and
2. The alleged loss must be capable of proof with reasonable certainty
 A: At the time the contract was executed, all the parties expected that the proposed stadium would bring about an
economic boom in the county resulting in increased land values and increased property taxes. This expectation was
evidenced by the terms of the provision of the parties' contract requiring the county and DSI to undertake
negotiations of a lease which would provide for specified revenues to be derived from the increased taxes on the
peripheral lands. But this hope or expectation of increased property values and taxes does not necessarily lead to the
conclusion that the parties contemplated the county would assume liability for Kenford's loss of anticipated
appreciation in the value of its peripheral lands if the stadium were not built
 A (court of appeals): “the party claiming them must demonstrate “with certainty that such damages have been
caused by the breach” and the alleged loss “must be capable of proof with reasonable certainty”

Mitigation or “Avoidability”
 If an aggrieved party could take action to avoid or reduce the loss it would otherwise sustain as a result
of the breach by the other party, then the aggrieved party must take that action
 If an aggrieved party fails to take reasonable action to mitigate damages, its recovery from the
breaching party may be reduced or eliminated

Parker v Twentieth-Century Fox Film Corp. (CA 1970) (Shirley MacLaine (π) contracted with ∆ that she’d act in a
musical for $750,000, but ∆ decided not to produce it and instead offered her a role in a film, which she declined.
She sued for BOC to recover the guaranteed compensation under the original contract)
 C: π did not have to accept a role in a different film to mitigate damages from the ∆’s failure to
produce the original film
 R: The measure of recovery by a wrongfully discharged employee is the amount of salary agreed
upon, less the amount which the employee has earned or with reasonable effort might have earned
from substantially similar employment
 A: The offer of the lead in Big Country, Big Men is different from and inferior to the lead in Bloomer
Girl. The female lead as a dramatic actress in a Western film cannot be considered the equivalent of
or substantially similar to the lead in a musical. Moreover, because MacLaine had been offered
director and screenplay approval under the Bloomer Girl contract, but not under the Big Country,
Big Men offer, the contract for Big Country, Big Men, was inferior.

If a seller or supplier of goods or services breaches a contract with a buyer by failing to deliver and buyer seeks to
recover direct damages without having purchased a substitute, those damages are calculated by subtracting the
 contract price from the market price (the market price at the place where the seller was supposed to have tendered
the goods is used to calculate direct damages if the seller has repudiated or failed to perform)

XI. Reliance Damages, Restitution Damages, Liquidated Damages, Punitive Damages (what is the appropriate
remedy?)

*Reliance damages: expenses incurred in preparation for or in performance of a contract before the other party
breaches
 *In the alternative to expectancy damages (R2d) – may NOT be awarded with expectancy damages
 Incidental damages are expenses incurred after the other party breaches (i.e., storing, reshipping or
reselling goods to mitigate loss)
 Designed to put the aggrieved party into the position it would have been in today if the parties had not
entered the contract
 Not recoverable for expenses that could have been avoided through reasonable actions to mitigate or
avoid losses

Security Stove v American Railway (Mo. Ct. App. 1932) (reliance damages awarded to appliance company who
expected their products to arrive at a convention by being transported by railway, who did not deliver them in time,
when the appliance company told the railway in advance that it required prompt shipment)
 C: where the carrier has notice of peculiar circumstances under which the shipment is made, which
will result in an unusual loss by the shipper in case of delay in delivery, the carrier is responsible for
the real damages sustained from such delay if the notice given is of such character, and goes to such
extent, in informing the carrier of the shipper’s situation, that the carrier will be presumed to have
contracted with reference thereto
 A: the case at bar was to recover damages for loss of profits by reason of the failure of the ∆ to
transport the shipment within a reasonable time, so that it would arrive in Atlantic City for the
exhibit. There were no profits contemplated. The furnace was to be shown and shipped back to
Kansas City. There was not money loss, except the expenses, that was of such a nature as any court
would allow as being sufficiently definite or lacking in pure speculation. Therefore, unless π is
permitted to recover expenses that it went to, which were a total loss to it by reason of its inability to
exhibit the furnace and equipment, it will be deprived of any substantial compensation for its loss.
The law does not contemplate any such injustice. It ought to allow π, as damages, the loss in the way
of expenses that it sustained, and which it would not have been put to if it had not been for its
reliance upon the ∆ to perform its contract

Goodman v Dicker (D.C. Cir. 1948) (reliance damages awarded to π who applied for a “dealer franchise” for ∆’s
radio company and made substantial expenditures based on representations by its agents that π had been granted a
franchise, when they actually had not)
 C: justice and fair dealing require that one who acts to his detriment on the faith of conduct of the kind
revealed here should be protected by estopping the party who has brought about the situation from
alleging anything in opposition to the natural consequences of his own course of conduct
 A: we are dealing with a promise by ∆s that a franchise would be granted and radios supplied, on the
faith of which πs with the knowledge and encouragement of ∆s incurred expenses in making
preparations to do business

Restitutionary remedies: measured by the value of benefit (usually goods, services, etc.) conferred on other party
 Can be calculated as net enrichment, cost of the services or supplies provided, or pro rata portion of
contract price
 Purpose is to restore to a party the benefit that it conferred on the other party, NOT the contract price
 However, restitution may be limited by the contract price. Courts are reluctant to award a party more
restitution damages than it what it would have earned under the contract it bargained for
  May be awarded to both parties (and can be damages or “specific restitution” = an order in equity to
restore a particular object to the rightful person)
 May be awarded when at least one party conferred a benefit on the other party but:
o The parties failed to mutually assent to a contract supported by valid consideration;
 Each party is entitled to restitution when the parties failed to form a contract because there
was no mutual manifestation of assent or no valid consideration
o The contract was voidable and was avoided by one of the parties;
 Each party is entitled to restitution when a contract is voidable because of lack of capacity,
mistake, misrepresentation, duress, undue influence, or abuse of a fiduciary relation
 Exception: if a contract is voidable on account of lack of capacity due to minority, the
minor is entitled to restitution, but the other party is usually only entitled to replevin
o The contract was found to be unenforceable under the Statute of Frauds
 Each party is entitled to restitution when a contract is unenforceable under the Statute of
Frauds
o The performance of one or both of the parties was excused; or
 Each party is entitled to restitution when a party’s performance is excused because of an
event the non-occurrence of which was a basic assumption of the contract
o The contract was partially performed but was cancelled because one of the parties breached
 The aggrieved party is entitled to restitution when it partially performs a contract which is
cancelled because of a breach

Restitution for a breaching party:

 If a party justifiably refused to perform on the ground that his remaining duties of performance have
been discharged by the other party’s breach, the party in breach is entitled to restitution for any
benefit that he has conferred by way of part performance or reliance in excess of the loss that he has
caused by his own breach [R2d § 374]

Pauma Band of Luiseno Mission Indians v California (9th Cir. 2015) (restitutionary damages awarded to π who
agreed to a modification to an existing agreement for gaming on tribal lands which required them to pay higher
rates after ∆ misrepresented that no cheaper gaming licenses were available)
 R: under general contract principles, when calculating restitution, we must offset the π’s award by the
value of any benefits πs received from the ∆ under the contract, so that only the actual, or none, loss
is compensated
 A: the state is not entitled to a setoff here because the Indian tribes would have made the same profits
under the earlier contract if the state had not miscalculated the number of available licenses

Britton b Turner (N.H. 1834) (restitutionary damages awarded to laborer who worked for ∆ for 9.5 months of a 12-
month contract, payable at the end of the year, and received no payment from ∆)
 R: the laborer’s recovery was the value received and pocketed by the employer (not necessarily the
same as, but no more than, the contract price) minus any damages to the employer caused by the
laborer’s non-completion
 A: if the employer could and did reject and return any of the value (for instance, any goods produced
by the laborer) then that amount would also be subtracted from the recovery

Eker Brothers, Inc. v Rehders (Ct. App. N.M. 2011) (restitutionary damages awarded to subcontractor by general
contractor when the latter paid some but refused to pay the former for some work already performed)
 C: a party that has breached a contract is entitled to restitution for the value of benefits conferred to the
nonbreaching party that exceeds the amount of damages suffered
 R: If a party justifiably refuses to perform on the ground that his remaining duties of performance have
been discharged by the other party's breach, the party in breach is entitled to restitution for any
benefit that he has conferred by way of part performance or reliance in excess of the loss that he has
caused by his own breach [R2d § 374(1)]
 o The contract price is frequently used as evidence of the value of the benefit conferred
 A: the district court found that π’s invoice for work from August 1 to September 7 should have been in
the amount of $74,964.05 and that ∆ was damaged in the amount of $42,448.29 by π’s breach. The
amount of the benefit conferred is $74,964.05. The amount of damages to ∆ is $42,448.29. Applying
§ 374, since the benefit is greater than the damages, π is owed the difference of $32,515.76

Blanton v Friedberg (4th Cir. 1987) (restitutionary damages awarded to)

 C:
 A:

When a seller or service provider has fully performed their obligations under a contract and all that remains is for
the buyer or customer to make payment, then the seller or service provider is not entitled to restitution; instead, the
seller of service provider is entitled to payment of the contract price

Restitutionary remedies summary:

 The purpose is to restore a party to the position it was in before the contract was formed
 Recovery is measured by the value of the benefit that was conferred upon the other party, not the
contract price
 Restitution is a unique remedy in that in many cases both parties are entitled to it
 Restitution may be the only damage remedy awarded, or it may be one factor among other types of
damages
 Restitution may be awarded when the parties failed to mutually assent to a contract supported by (5
reasons above)

Liquidated damages: contractually agreed to between the parties by clause [R2d § 339]
 Must be reasonable (unreasonably large remedies constitute a “penalty” and are unenforceable, and
unreasonably small remedies may be unconscionable and unenforceable)
o Reasonableness is measure by:
1) Whether the amount of liquidated damages reflects the anticipated or actual harm caused by
the breach, and
2) The difficulties that the aggrieved party would have in proving loss
 A liquidated damages clause is valid so long as it is reasonable in light of either anticipated or actual
harm to the aggrieved party
 “Liquidated damages clauses will be reviewed like any other contractual provision (not subject to any
heightened judicial scrutiny)” [Commercial Real Estate Inc. v Comcast of Utah II, Inc. (UT 2912)]
 i.e., an “early termination fee” for early cancellation of a cell phone contract (deterrent)

Wassenaar v Panos (WI 1983) (liquidated damages awarded to π who was able to recover an amount pursuant to a
stipulated damages clause in the agreement between him (A hotel manager) and ∆ (a hotel))
 C: a stipulated-damages clause will be upheld if the harm caused by breach was difficult to estimate at
the time of contracting and the stipulated damages are not unreasonably disproportionate to such
harm
 R: the overall single test of validity is whether the clause is reasonable under the totality of
circumstances. over time, the cases and commentators have established several factors to help
determine whether a particular clause is reasonable: (1) did the parties intend to provide for damages
or for a penalty? (2) is the injury caused by the breach one that is difficult or incapable of accurate
estimation at the time of contract? And (3) are the stipulated damages a reasonable forecast of the
harm caused by the breach?
o The first factor has generally been discarded because contracts are evaluated on an objective standard
o The second and third factors are intertwined and both use a combined prospective-retrospective
approach. Although traditionally this amount must be calculated at the time of contract formation,
 the cases demonstrate that the facts available at trial significantly affect the court’s determination of
the reasonableness of the stipulated damages clause
 A: we do not know in the case at bar how the parties calculated the stipulated amount, but we do know
that both the employee and employer were concerned about job security. The employee desired a
steady, long-term job and the employer wanted the employee, who was experienced in managing the
Towne Hotel, to remain on the job. The parties did not suggest that the stipulated damages clause
resulted from unequal bargaining power. The contract drafted by the employer provided for a fixed
term of employment with a provision for stipulated damages in the amount of unpaid wages if the
employer breached. Under these circumstances it is not unreasonable to assume that the parties
might have anticipated elements of consequential damages and drafted the stipulated damages clause
to include salary lost while out of work, expenses of finding a new job, lower salary on the new job,
and consequential damages. In examining the instant stipulated damages clause and the record, we
conclude that the parties’ estimate at the time of contract formation of anticipated damages was
reasonable when consequential damages are taken into account

Liquidated damages summary:

 In lieu of having a court or arbitration panel measure damages for breach of contract, the parties to a
contract may agree in advance to establish the damages for breach contractually by means of a
liquidated damages clause
 Liquidated damages must be "reasonable” in amount; unreasonable high ones are a “penalty” rather
than compensation and are unenforceable, and unreasonably low ones may be unconscionable and
unenforceable

Punitive damages: “damages other than compensatory or nominal damages, awarded against a person to punish him
for his outrageous conduct and to deter him and other like him from similar conduct in the future” [R2d of Torts §
908]
 Generally not granted for breach of contract, because the purpose of the law of contracts is
compensatory and economic in nature
 Granted if the conduct of the breaching party is not only a breach of contract but is also a tort for
which punitive damages could be awarded, then the courts will permit the trier of fact to consider
awarding punitive damages
 May be awarded when the conduct of the tortfeasor if the conduct of the tortfeasor is outrageous or if
the tortfeasor acts with an evil motive or acts with reckless indifference to the rights of others [R2d
of Torts § 908]
 If a punitive damages award is so large that it appears to be the product of passion and prejudice then
the courts will reduce or overturn it
 In awarded punitive damages, it is appropriate to consider the nature and consequences of the act but
also the wealth of the ∆ (but unduly large ones violate constitutional Due Process and must be
proportionate to the amount of compensatory damages, usually never more than 10x or even 3x!)

Romero v Mervyn’s (N.M. 1989) (punitive damages awarded to π who fell in ∆’s department store on the day after
Thanksgiving, and was promised by ∆’s store manager that her medical expenses would be paid for but in fact were
not, and that he knew the store would never compensate them)
 C: in contract cases not involving insurance, punitive damages may be recovered for breach of
contract when the defendant’s conduct was malicious, fraudulent, oppressive, or committed
recklessly with a wanton disregard for the plaintiff’s rights
 R: “malice” as used in our punitive damages instruction does not imply “actual malice” or “malice in
fact” in the sense of an intent to harm. Instead, malice means “an intentional doing of a wrongful act
without just cause or excuse. The means that the ∆ not only intended to do the act which is
ascertained to be wrongful, but that he knew it was wrong when he did it.” This definition is a broad
one and undoubtedly encompasses situations that also connote “fraudulent” or “oppressive” conduct.
The term “Wanton” as used in our punitive damages instruction, suggests a similar quality of
 wrongfulness when the evidence demonstrates conduct committed without concern for the
consequences, rather than intentionally, and connotes an “utter indifference to or conscious disregard
for the rights of others.” Thus, these words broadly distinguish “wrongful” breaches of contract from
those committed intentionally for legitimate business reasons or those that are the result of
inadvertence
 A: the evidence reasonably could be viewed as indicating the promise was made because, on one of
the busiest shopping days of the year, Wolf wanted to get the Romeros out of the store as quickly as
reasonably possible without causing a scene. Mervyn’s also presented evidence that Wolf’s promise
was inconsistent with the store’s policy regarding customer injuries, and that Wolf subsequently took
no action other than to submit the claim to Mervyn’s insurer. This evidence reasonably supports the
inference that Wolf entered into the contract simply to end his encounter with Romero and her
daughters, without intending to follow through on the promise, and with knowledge that his
employer thereafter would not perform

XII. Specific Performance, Prohibitory Injunction, Specific Restitution, Assignment of Rights and Delegation of
Duties, and Third-Party Beneficiaries (what is the appropriate remedy? WILL BE ON THE FINAL)

Restitutionary remedies generally have 4 requirements (in various combinations):

1. Likelihood of serious and irreparable harm (seeking party will likely suffer this)
2. Unavailability of an adequate remedy at law (seeking party cannot be made whole by money damages)
3. Balancing the equities between the parties (the benefit to the seeking party outweighs the harm to the party
against whom the relief is sought)
4. Public interest (failing to grant the remedy would unduly harm the public interest)

SPECIFIC PERFORMANCE REQUIREMENTS:

1. No adequate remedy at law
2. Clean hands and contract is “fair and equitable”
3. The “balance of equities” must favor issuance of the order, the order must not harm the public or
violate public policy
a. Balance whether issuing performance or the injunction will do more harm than good.
4. Must be feasible for court to enforce [SEE RECORDING]
a. Supervising the parties conduct to ensure that they adhere to the courts order
b. Ancillary remedies to hold the defendant in contempt if they don’t adhere

Specific performance: a court order directing one party to a contract to perform its obligation under the contract
 An equitable remedy
 Subject to the following principles:
1. Issuance of an order of specific performance is subject to the sound discretion of the issuing court –
only rarely is a party entitled to specific performance as a matter of law;
2. A party is not entitled to an order of specific performance if the party would have an adequate remedy
at law – if an award of money damages would be a sufficient remedy;
3. The party seeking an order of specific performance must have “clean hands” – it must not be in breach
of the contract or guilty of bad faith
 Traditionally, specific performance was the standard remedy for a breach of a contract to sell land or a
contract for the sale of a piece of art or an heirloom (unique nature of land and art/heirlooms)
 Traditionally not awarded in contracts for personal services (i.e., employment contracts or artistic
performances)
 The modern trend is an expansion of the right to specific performance for “other proper
circumstances” (especially if the burden on the breaching party to specifically perform is relatively
small, the need of the aggrieved party is relatively great, or because the rights of third parties or the
general public would be served better)
  Specific performance is the primary remedy for buyers under the CISG (“Contracts for the
International Sale of Goods”)

Prohibitory Injunction: a court order prohibiting another party from taking action that would be a violation of a
contract. 3 types of contractual provisions (or “restrictive covenants”) a party might seek to enforce by means of a
prohibitory injunction:
1. Non-compete agreement (agreement not to work for a competitor for a specified period of time after
leaving employment)
• Disfavored by Pennsylvania courts, and they will only enforce them to protect a legitimate business
purpose, not simply to eliminate competition. Will be struck down if extend for too long (2 years),
have too broad a geographic scope (50 miles), or are in conflict with the public interest
• Employee must receive adequate (more than nominal) consideration for signing the non-compete,
and if an employee is fired without cause, the court will be less likely to enforce the non-compete
• An employee’s noncompete clause:
1. Must be contained within a valid contract for consideration;
2. Cannot be harmful to the public (i.e., doctors practicing in a small town)
3. Must be written as narrowly as possible while protecting the legitimate business interests of
the employer; and
4. Must be reasonable in restricting time, place, and manner of the employee’s future
employment
2. Non-solicitation agreement (agreement not to solicit customers or other employees of the employer
after leaving employment)
• More likely to be enforced than non-competes. It is a breach of the duty of loyalty an employee owes
to an employer. It is an attempt to extend that duty once the employment has terminated. If a court
finds the agreement extends for too long (2 years), or has too broad a geographic scope (50 miles), it
will be struck down
3. Non-disclosure agreements (agreement not to disclose the employer’s trade secrets)
• Prohibits the disclosure of trade secrets or customer lists
• Nondisclosure of trade secrets may be enforced even in the absence of an express NDA
• The Uniform Trade Secrets Act (“UCSA”) prohibits misappropriation of trade secrets obtained by
“improper means” (i.e., known should be kept confidential)

Restrictive covenants (NCAs, NSAs, NDAs) are also used when a business is sold. It is common to provide that a
seller will not establish a competing business, solicit former customers or employees, or use or disclose any trade
secrets that were sold with the business
• Courts are more likely to enforce restrictive covenants against a party that has sold a business than against a
former employee, because (1) the parties to a sale of business are more likely to be of equal bargaining
power, and (2) restrictive covenants go to the core of a business sale contract because the purpose of the
transaction was to sell an ongoing business to the other party

Laches: an equitable defense asserting a claimant waited for an unreasonable time and prejudiced the other party by
“sleeping on his or her rights” – basically an equitable a statute of limitations

Ammerman v City Stores Co. (D.C. Cir. 1968) (construction option contract enforceable for dep’t store)
• C: the option-lease agreement between the parties is sufficiently definite and certain in terms of design, type
of construction, and price to be specifically enforced
• R:
o as a rule of law, the mere fact that a contract, definite in material respects, contains some terms
which are subject to further negotiation between π and ∆ will not bar a decree for specific
performance, if in the court’s discretion specific performance should be granted
o Where the contractual obligation being enforced involves more than the mere construction of a
building and the building is to be built on land controlled by its owner (making it impossible for the
 enforcing party to have the job done by another and charged to the defaulting owner) specific
performance becomes entirely appropriate
• A: Lansburgh’s could have had no adequate remedy in damages for any attempt in that respect would have
been impractical because of the impossibility of an appropriate measurement. Moreover, damages could
hardly compensate for the loss of the sought for opportunity to raise Lansburgh’s image and economic
position in the Metropolitan Washington area by its anticipated expansion into the suburbs, and for that
reason alone could have been deemed inadequate

Laclede Gas Co. v Amoco Oil Co. (8th Cir. 1975) (propane supplier that breached contract with distributor entitled
distributor to specific performance)
• C:
o Laclede’s right to terminate did not render all its other promises in the agreement illusory so that there
was a complete failure of consideration
o Laclede is entitled to specific performance
• R:
o (the 4-prong test above)
o Specific performance will not be decreed unless the terms of the contract are so expressed that the
court can determine with reasonable certainty what is the duty of each party and the conditions under
which performance is due [R § 370]
o In Missouri, as elsewhere, specific performance may be ordered even though personalty is involved
in the “proper circumstances”
• A: Laclede’s right to terminate was neither arbitrary nor unrestricted. It was limited by the agreement in at
least three ways. First, Laclede could not cancel until one year had passed after the first delivery of propane
by Amoco. Second, any cancellation could be effective only on the anniversary date of the first delivery
under the agreement. Third, Laclede had to give Amoco 30 days written notice of termination. These
restrictions on Laclede’s power to cancel clearly bring this case within the rule that the contract is not
illusory
o As to all developments for which a supplemental agreement has been signed, Amoco is to
supply all the propane which is reasonably foreseeably required, while Laclede is to purchase
the required propane from Amoco and pay the contract price therefor. Likewise, the fact that
the agreement does not have a definite time of duration is not fatal since the evidence
established that the last subdivision should be converted to natural gas in 10 to 15 years. This
sets a reasonable time limit on performance
o There was uncontradicted testimony that Laclede probably could not find another supplier of
propane willing to enter into a long-term contract such as the Amoco agreement, given the
uncertain future of worldwide energy supplies. And, even if Laclede could obtain supplies of
propane for the affected developments through its present contracts or newly negotiated ones,
it would still face considerable expense and trouble which cannot be estimated in advance in
making arrangements for its distribution to the subdivisions
o The burden enforcement is outweighed by the benefit to the party.

Cancelation v termination
 Cancelation implies that one or both of the parties is in breach while termination discharges the parties
of their obligations.
 Substantive difference between the two is the damages.
 Termination is cleaner than cancvelation

American Broadcasting Companies v Wolf (N.Y. Ct. App. 1981) (prohibitory injunction based on non-compete
clause not granted against newscaster who breached contract with ABC)
• C:
 o ABC is not entitled to a prohibitory injunction against Wolf when he breached the “good faith”
provision of his contract with them
o ABC is not entitled to specific performance against Wolf when he breached the “first refusal”
provision of his contract with them
• R:
o Where an employee refuses to render services to an employer in violation of an existing contract, and
the services are unique or extraordinary, an injunction may issue to prevent the employee from
furnishing those services to another person for the duration of the contract
o When circumstances justify implication of a negative covenant, an injunction is warranted because the
employee either expressly or by clear implication agreed not to work elsewhere for the period of his
fcontract. And since the services must be unique before negative enforcement will be granted,
irreparable harm will befall the employer should the employee be permitted to labor for a competitor
(Corbin § 1206)
o 3 factors:
 Scope
 Duration (2 or 3 years is reasonable in Pennsylvania)
 ?
• A:
o ABC’s request for injunctive relief must fail. There is no existing employment agreement between the
parties; the original contract terminated in March, 1980. Thus, the negative enforcement that might
be appropriate during the term of employment is unwarranted here. Nor is there an express
anticompetitive covenant that ∆ Wolf is violating, or any claim of special injury from tortious
conduct such as exploitation of trade secrets
o Although in a proper case an implied-in-fact covenant not to compete for the term of employment may
be found to exist, anticompetitive covenants covering the postemployment period will not be
implied. Indeed, even an express covenant will be scrutinized and enforced only in accordance with
established principles

Rights: what a person is entitled to receive from the other party (i.e., a seller has a right to payment for the sale of
goods, a buyer has a right to delivery of the goods. For every right there is a corresponding duty)
 May be assigned to other parties
 More freely alienable than duties (assignments therefore more likely to be upheld by courts)

Duties: what a person is required to do for the other party (i.e., a buyer has a duty to pay the seller of goods, a seller
has a duty to deliver the goods. For every duty there is a corresponding right)
 May be delegated to other parties
 Less freely alienable than rights (delegations therefore less likely to be upheld by courts)

Under the common law, duties were not delegable if they were personal (i.e., the contract is for personal services,
the contract is based on personal trust or confidence between the parties, or if the contract was entered into because
of the particular characteristics of the individual or company that was originally obligated to perform the duty) –
THIS HAS BEEN MODIFIED

Under modern law, duties are delegable even if they are personal, but not if the other party has a “substantial
interest in having his original promisor perform or control the acts required by the contract” [UCC § 2-210]

3 types of 3rd parties: those who…

 Acquire contract rights by assignment;
 Acquire contract duties by delegation; or
 Are 3rd party beneficiaries of contracts made by other parties

Assignor: the assigning party

Assignee: the party whose payments are assigned
Obligor: the person who is obligated to perform under the original contract
Obligee: the person who will receive the performance

Whether rights are or are not assigned under a contract is governed by whether the assignment will:
a) Materially change the duties of the other party;
b) Materially increase the other party’s burden of risk; or
c) Materially impair the other party’s chance of return performance

2 competing policies in favor and against assignability and designation of contractual duties:
 Freedom to have contractual dealings with a particular chosen party; and
 Free alienability of contract rights and duties

British Waggon Co. v Lea & Co. (QB 1880)

 C: π, lessor, did not breach its annual contract with ∆ when it assigned its right to pay and delegated its duty
to repair the leased wagons to a third party (also a π) (*also, the assignment is not an issue but, rather, the
delegation is the issue)
 R: where a person contracts with another to do work or perform service, and it can be inferred that the
person employed has been selected with reference to his individual skill, competency, or other personal
qualification, the inability or unwillingness of the party so employed to execute the work or perform the
service entitles the other party to treat the contract as at an end, notwithstanding that the person tendered to
take the place of the contracting party may be equally well qualified to do that service. personal
performance is in such a case of the essence of the contract, which, consequently, cannot in its absence be
enforced against an unwilling party [Robson v Drummon]
 A: all that ∆ cared for was that the wagons should be kept in repair; it was indifferent to them by whom the
repairs should be done. Thus if, without going into liquidation, or assigning these contracts, π had entered
into a contract with any competent party to do the repairs, and so had procured them to be done, we cannot
think that this would have been a departure from the terms of the contract to keep the wagons in repair

Crane Ice Cream Co. v Terminal Freezing & Heating Co. (Md. Ct. App. 1925)
 C: ∆, supplier, did not breach its [“requirements”] contract with π/assignee when it refused to continue
supplying ice to π when the original buyer (an individual) assigned his rights to π
 R: *a party to a contract that is based on personal relations or characteristics of the parties may not assign
his rights and liabilities under the contract to an assignee without the consent of the other contracting party
(*today would be governed by UCC § 2-306)
 A: the rights and duties of the contract under consideration were of so personal a character that the rights of
Frederick (the original buyer/assignor) cannot be assigned nor his duties by delegated without defeating the
intention of the parties to the original contract

UCC § 2-210 R2d §§ 317, 318, 322

Upon an assignment, what Silent It is extinguished
 happens to the assignor’s right
under the contract?
In what situations would an assignment
Rights are
be assignable: Same as UCC, plus:
invalid? Unless § 9-406 says If the assignment (a) would materially reduce its
otherwise; value to
Unless otherwise agreed; or him or (b) is barred by statute
or public
If the assignment would (a) materially policy
change
the other
party’s duty; (b) increase materially the burden
or risk imposed on the other party
by the contract; or (c) impair materially his
chance
of obtaining return perform-

Upon a delegation, what hap- No change in duty or liability Same as UCC, except:
pens to the delegator’s oblig- No exceptions Unless the obligee agrees
ation under the contract? Are otherwise
there any exceptions to that
rule?
In what situations would a Duties are delegable: Duties are delegable:
delegation be invalid? Unless otherwise agreed; or Unless contrary to public
Unless the other party [rec- policy; or
Unless contrary
ipient of performance] has a substantial interest to the
in having terms of delegator’s
his original promisor per- promised
form or control the acts re-
quired by the contract …to interpret promise

 After an assignment is made, the assignor no longer has the right to receive the performance owed under the
original contract
 After a delegation is made, the original obligor remains responsible to the obligee, unless the obligee consents to a
substitution
 Assignments and delegations, if part of a contract supported by consideration, can never be revoked. However, if
the assignment/delegation was a gift, it is revocable until delivered (i.e., promissory note)
 If the obligor could have asserted a defense against paying the original obligee, the obligor may assert that defense
against payment to the assignee

UCC § 2-210 R2d §§ 317, 318, 322

The clause bars only dele- The clause bars only deleg-
gation of performance (duty) ation of duty or condition,
“neither party may assign the contract”
unless the circumstances ind- unless the circumstances indi-
icate the contrary cate the contrary

The clause bars assignment of Except as limited by (a) rights

“neither party may assign its rights, because rights are gen- are assignable, but the assign-
rights under the contract” erally assignable unless other- or must pay damages for
wise agreed breach of this clause
 The clause bars delegation of
The clause bars delegation of
duties, because duties are gen-
“neither party may delegate duties,
its because duties are generally delegable unless
erally delegable unless the
duties under the contract” other-
delegation is contrary to the
wise agreed
obligor’s promise

“neither party may assign its

rights or delegate its duties The clause bars both assignment and delegation,
The clause bars delegation
under the contract. Any att- because
[SEE RECORDING]
empted assignment or dele- oth (1) and (2) say “unless otherwise agreed”
gation is void”

Beneficiaries
Intended 3rd-party beneficiaries: a person whom the parties intended to be able to enforce the promise - may
enforce a contract – “stand in the shoes” of the promisee (if the promisee can enforce the promise, so can the
intended beneficiary. If the 3rd party cannot enforce the promise, neither can the intended beneficiary) – examples
include (a) a life insurance policy, (b) health insurance policy, or (c) union contract
 Creditor beneficiary: a person whom the parties intended to be able to enforce the promise because the
promisee was indebted to the beneficiary
 Donee beneficiary: a person whom the parties intended to be able to enforce the promise because the
promisee wished to make a gift to the beneficiary

Incidental 3rd-party beneficiaries: a person who will benefit from the performance of a promise, but who was not
intended by the parties to have the right to enforce the promise - may not enforce a contract – examples include (a)
a government construction contract, (b) employment contract, or (c) other business contracts

Lawrence v Fox (N.Y. 1859)

 C: Lawrence may enforce a contract between Fox and Holly, of which he is a 3rd-party beneficiary
(*creditor)
 R: where one person makes a promise to another for the benefit of a third person, that third person may
maintain an action upon it
 A: even though Fox expressly made his promise only to Holly, to pay Holly’s debt to Lawrence, the contract
between Fox and Holly was supported by consideration, and Lawrence could recover under that contract as
a 3rd-party beneficiary

Seaver v Ransom (N.Y. 1918)

  C: Seaver (niece to a deceased party) may enforce a contract between two deceased parties to an oral
promise they made on one’s deathbed, of which Seaver was a 3rd-party beneficiary (*donee)
 R: where one person makes a promise to another for the benefit of a third person, that third person may
maintain an action upon it
 A: if Mrs. Beman had left her husband the house on condition that he pay the π $6,000, and he had accepted
the devise, he would have become personally liable to pay the legacy, and π could have recovered in an
action at law against him, whatever the value of the house because the testatrix had in substance bequeathed
the promise to the π, and not because close relationship or moral obligation sustained the contract. The
equities are with the π, and they may be enforced in this action, whether it be regarded as an action for
damages or an action for specific performance to convert the ∆s into trustees for π’s benefit under the
agreement

Current 3rd-party beneficiary law is a mixture of common law, the Restatement, and the Restatement (Second)

The 3rd-party beneficiary “stands in the shoes” of the promise, so if the promisor and promisee modify or rescind
the contract, the beneficiary’s right to recover is also modified or rescinded, BUT
 If the beneficiary reasonably relied on the contract as originally agreed on, then, at some point, the
beneficiary’s rights “vest” and become “irrevocably settled” to that the beneficiary’s rights cannot be
changed without his or her consent
o The parties can then change the contract as between them, but they cannot change how it operates on
the beneficiary