I.

Supplementing the Agreement: Implied Terms, The Obligation of Good Faith and Warranties A. Implied Terms: Any term that the court finds to be implicit in the parties words or conduct, even though not literally expressed

Implied in Fact Term: Implied in fact by the parties. (i.e contract to sell something for $60, it is implied in fact that it is $60 American dollars) Implied in Law Term: made part of the agreement by operation of the rules of law rather than by the parties themselves. (efficiency of contract or fairness) Wood v. Lucy, Lady Duff Gordon (Common Law) Facts: Defendant is a clothes designer. She hired plaintiff to have the exclusive right, subject to her approval, to place her endorsements on his designs. Plaintiff was also to have the exclusive right to sell defendants designs, and market them. Defendant was to get half the profits and revenues received by plaintiff. The exclusive right was to last one yr from 1915 and thereafter year to year unless terminated by 90 days notice. Plaintiff claims defendant breached contract by placing her indorsement on product without his knowledge and withheld profits from plaintiff. Reasoning: There was an implied promise by the plaintiff to use reasonable efforts to place defendants indorsements and market designs. The defendant gave exclusive privilege to have no right to market or place indorsements on her own designs, except through the plaintiff. Because the plaintiffs business was agreed to be the sole supplier of the defendants product, and the defendant was to be paid by the resulting effects of the plaintiffs efforts, the plaintiff did have an implied duty to the defendant. Without this implied promise the transaction would not have such business eficiancy, as both parties must have intended. Holding: Plaintiffs promise to pay the defendant the profits and revenues resulting from the exclusive agency and to render monthly accounts, was a promise to use reasonable efforts to bring profits and revenues into existence. JUDGMENT REVERSED in PLAINTIFFS FAVOR. Note: Lady duff argues that Wood did not bind himself to anything, therefore, there was not a contract but an illusory promise. Court says not an illusory promise because when the totality of the contract is looked at, it indicates that there are promises and Duties placed on Wood (Plaintiff) 1. Promise to pay profits and revenue 2. Account for monthly reports 3. Copywrite stuff/trademark stuff 4. Woods business was set up to market and display this sort of products 5. Clear that this was an exclusive contract and it is understood that you give up rights for something of value. Person marketing uses best efforts Implied Term in Lady Duff: Implied obligation to use reasonable efforts to market and sell designs EXAM: There is always the obligation to use Reasonable Efforts (Common Law) of Best Efforts (U.C.C) 2-309 Absence of Specific Time Provisions; Notice of Termination 1. The time for shipment or delivery or any other action under a contract if not provided in this article or agreed upon shall be Reasonable time. 2. Where the contract provided for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party.

3. Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable. Leibel v. Raynor Manufacturing Co. Facts: Parties entered into an exclusive dealer-distributor relationship via oral agreement for the distribution of garage doors. Defendant agreed to sell and deliver to plaintiff garage doors, operators, and parts (at distributor prices) and Plaintiff agreed to sell, install, and service Raynor products exclusively. After about 2 yrs of declining sales of Raynir products in the area, defendant notified plaintiff that as of (6/30/1976) the relationship was terminated. Defendant also notified plaintiff that they had established a new exclusive dealer-distributor relationship with another company and that plaintiff was to now order any parts, etc.. from this new company. Defendants motion for Summary judgment was based on the ground that the contract was indefinite and could be terminated at will by either party. Plaintiff argues that they were entitled to reasonable notice of the defendants intention to terminate the agreement. Rule: 2-309 (2) where the contract provides for successive performances, but is indefinite in duration, it is valid for a reasonable time but unless otherwise agreed may be terminated at anytime by either party. (3) Termination of a contract requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable. Reasoning: This contract is governed by the UCC and recognized as an agreement for the sale of goods, subject to Article 2. Reasonable notification should be the minimum amount of protection afforded to either party upon the termination of an ongoing sales agreement. Reasonable notification does not relate to the method of giving notice, but to the circumstances under which the notice is given and the extent of advanced warning of termination that the notification gives. The Law holds that the defendant was required to give reasonable notification of intent to terminate the contract, and what constitutes reasonable notification is a material fact for the trier of fact to decide. Note: Threshold issue is if this contract is governed by UCC or Common Law. If Common Law than you would have to find an Implied in Law Term or an Implied in Fact term that the parties intended to have reasonable notice. If governed by the UCC, the manufacturer is out of luck because of 2-309 This case is distinguished from Lady Duff because here it is about the garage doors (product) and in Lady duff it was all about the service (marketing). Lady Duff was governed by Common law requiring a finding of an implied term and here the case is governed by UCC which states that one can terminate at any time with reasonable notice. Factors that went into the reasonableness analysis of Reasonable notice in Raynor a. On going inventory b. One should be given time to re-coop the investment c. Potential customers with orders to fill These factors suggest that ZERO notice is not Reasonable Unconcionability is hard to make out when dealing with Merchant to Merchant (2 merchants are supposed to be sophisticated) EXAM: 1. Distinguish between Common Law (requiring a finding of an implied in fact or implied in law term) and UCC where a K can be terminated at Any time with reasonable notice 2. General Rule: When you terminate a contract you have to give Reasonable Notice 3. Exceptions to the General Rule: a. An EVENT that would trigger termination (no notice Necessary) b. Expressly Agree that no notice is required c. If the termination is Unconscionable

4. The question of reasonableness is a FACT question for the trier of fact 5. Implied Term of Reasonable Notice and Best Efforts are based on different Reasons a. Lady Duff: Business Efficacy- the contract makes no sense without the term b. Raynor: Fairness- It is not fair to NOT give reasonable notice 6. 2-309 will be on Exam. a. If you have a long standing contract that is indefinite in the duration, courts will sat that it is for a reasonable amount of time. If you try to terminate before a reasonable amount of time you will be in Breach. b. UCC has provided Gap filling provisions for what parties may leave open in a K. 7. Implied Term: a Real estate contract that is contingent upon financing, the implied term is that the buyer will use Best Efforts or Good Faith in attempting to obtain the financing. B. The Implied Obligation of Good Faith 1-304 Obligation of Good Faith Every contract or duty within [UCC] imposes an obligation of good faith in its performance and enforcement. 205 Duty of Good Faith and Fair Dealing Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement. NOTE: 1. Bad Faith- has the effect of injuring or destroying the right of the other party to receive the fruits of the contract 2. Categories of the implied covenant of Good Faith and Fair Dealing a. Discretion: Permits inquiry into a partys exercise of discretion expressly granted by a K terms. use discretion within boundaries. Must use discretion in Good Faith. (i.e. Satisfaction Clauses (Morin case)) b. Business Efficacy: Allows for the inclusion of terms and conditions not expressly set forth in the written contract. Contract would not make sense unless terms were implied (Financing Clause in RE contract) (Lady Duff) c. Performance: Where the termination or action by partys appears to be in bad faith or pretextual. Even when the party has not breached an express term. (A party is doing something wrong in performance) (Summit Case) Seidenberg v. Summit Bank (Performance Category and Discretion Category) Facts: Plaintiff formed 2 companies which provided consultation services and sold health insurance benefit plans to employers. Plaintiff then sold its companies to defendant, Summit Bank, in exchange for shares. As part of the transaction plaintiff retained their postions as executives of the brokerage firm and were to be placed in charge of the day to day operations of any other employee benefits insurance business that might be acquired by Summit. In the second complaint plaintiff alleged several breaches by defendant (p. 452). Plaintiff claims that because of the lack of performance on these breaches that the plaintiffs expectations of compensation were effected. These allegations give rise to an inference of bad faith on the part of the defendant. Rule: Implied covenant of good faith and fair dealing: 1) the covenant permits the inclusion of terms and conditions which have not been expressly set forth in the written contract. The covenant acts in such instances to include terms the parties must have intended because they are necessary to give business efficacy. 2) the covenant has been utilized to allow redress for the bad faith performance of an agreement even when the defendant has not breached any express term. 3) the covenant has been held to permit inquiry into a partys exercise of discretion expressly granted by a contracts term. NOTE: implied covenant of good faith and fair dealing cannot override an express term in a contract. It requires that a

contracting party act in good faith when exercising either discretion in performing it contractual obligation, or its right to terminate. ( 205) NOTE: One breaches the duty of good faith and fair dealing if that party exercises its discretionary authority arbitrarily, unreasonably, or capriciously, with the objective of preventing the other party from receiving its reasonably expected fruits under the contract. Note: 1. Court suggests an additional element of Bad Faith- ILL WILL or ILL MOTIVE 2. Parol Evidence Issue: a. P claims they would not be fired until retirement age b. D argues that this was not in the written contract (4 corners) c. P claims that the bank agreed to operate business in a specific manner. d. Court Held: the implied obligation of good faith is an implied term, therefore already in the contract, so the parol evidence rule is irrelevant. e. You have to act in Good Faith in performance of the contract 3. Commercial Sophistication- the higher the commercial sophistication of the parties, the higher the standard for Bad Faith. EXAM: 1. There are 3 Categories to analyze for Bad Faith 2. How the Parol Evidence Rule Impacts the Analysis (Really does not as good faith is implied in all contracts) 3. Does good Faith imply Ill Will or Ill Motive 4. Commercial Sophistication is one factor in the analysis; however it is not determinative.

Good Faith in Requirement and Output K 1. Output Contract: An agreement in which a seller agrees to sell the entire production and a buyer agrees to by the entire production of output (Both parties take risk) 2. Requirement Contract: One in which the purchaser agrees to buy all of its needs of a specified material exclusively from a particular supplier, and the supplier agrees to fill all the purchasers needs during the period of the contract. (Seller takes the risk that requirements are high or low as buyers needs may fluctuate) Note: 1. Requirement K- Obligation to buy EXCLUSIVELY from the seller 2. Indefinite Quantities K- buyer can buy from seller, but NOT obligated to do so. 3. Indefinite quantities K are not enforceable because they are illusory promises, and the buyer is not bound to buy from the seller. 4. Requirement K- the exclusivity equals the consideration. 2-306 Output, Requirements and Exclusive Dealings. 1. A term which measures the quantity by the output of the seller of the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded. 2. A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale. Indiana American Water Comp v. Town of Seelyville (Ct of Appeals 1998)

Facts: Plaintiff and defendant had a contract to last 25 years. Plaintiff agreed to sell the defendant water, at such quantities that the defendant may need from time to time. The contract limits the quantity of water the defendant may purchase to 1M gallons per day; however states in no event shall the company be obligated to supply water in excess of the limitation on usage as provided for expressly in this agreement. The agreement permits the defendant to purchase water but does not require it to purchase all of its water from the plaintiff. The defendant had owned a piece of property, purchased many years before this contract, with the intentions of building a wellfield to supply water. The defendant now wants to start building this well field and the plaintiff is alleging breach of contract. Rule: Requirement contract- one in which the purchaser agrees to buy all of its needs of a specified material exclusively from a particular supplier, and the supplier agrees, in turn, to fill all of the purchasers needs during the period of the contract. Indefinite quantities contract- contract under which the buyer agrees to purchase and the seller agrees to supply whatever quantity of goods the buyer chooses to purchase from the seller. 2-306- buyer in a requirements contract is required merely to exercise good faith in determining his requirements and the seller assumes the risk of all good faith variations in the buyers requirements even to the extent of a determination to liquidate or discontinue the business. Note: Here the K is a requirement K. 2-306 (1) imposes a good faith requirement in output and Requirement K You have to operate in the zone of good faith (if demand is raised or lowered it MUST be in good faith) HYPO: if you are locked into a great price for something and you know you can resell the product at a much higher price, it is bad faith to raise your requirement to resell at a higher price. EXAM: 1. Know the difference between Requirement K and Output K 2. Why are the Requirement and Output K not Illusory? Because the exclusivity of the contracts acts as the consideration. Ill buy from you, and nobody else 3. 2-306: Protects against bad faith (you cannot in Bad Faith change your requirements) Satisfaction Clause: The work or product MUST meet the satisfaction of the buyer Anything where the Ultimate product or approval is subject to anothers satisfaction NOTE: Satisfaction Clauses can be interpreted in 2 ways: 1. Objective Standard: A reasonable person in similar circumstances (commercially reasonable) would find it satisfactory. (Commercial or Utility Value-Functionality/Utility) 2. Subjective Standard: One Personally must be satisfied (I dont like it; I can object). Has to satisfy you, as long as you are not acting in bad faith or with Ill Motive. (Artistic/Aesthetic Value-discretion) Analysis when you have a Satisfaction Clause: 1. Is this an Aesthetic Case or Utility Case? 2. How do you Know what type of case it is? a. Circumstances of the case b. Intent of Parties (language of parties) Morin Bldg Products v. Baystone Construction (U.S. Ct of Appeals 1983) Facts: Defendant hired plaintiff to supply and erect the aluminum walls of an addition, which defendant was hired to build by GM. In the GM/Baystone contract, there were specifics given to the type of aluminum as well as that the final work be approved by GM. Plaintiff erected the walls of the structure,

and viewed in bright sunlight at an acute angle the exterior finish did not give the impression of a uniform finish. GM representative therefore rejected the walls. Defendant then hired another company to rebuild the walls, which they did and was approved by GM representative. Defendant did not pay plaintiff the balance of what was due on their contract because of GMs refusal of the initial instillation. Plaintiff sued defendant for the balance owed on the contract and won. Affirmed in Favor of plaintiff. Rule: 228- it is practicable to determine whether a reasonable person in the position of the obligor would be satisfied, an interpretation is preffered which under the condition occurs if such a reasonable person in the position of the obligor would be satisfied. Reasoning: The reasonable person standard is employed when the contract involves commercial quality, operative fitness, or mechanical utility which other knowledgeable persons can judge, and the standard of good faith is employed when the contract involves personal aesthetics or fancy. Here, because the building was being used for a factory, and aesthetic considerations were secondary (suggested by the fact that the contract specified Mill-finish aluminum and not painted aluminum), the reasonable person standard was practicable. If the defendant and GM had wanted a uniform finish they would have ordered painted siding. The clauses in question were all drafted on form contracts, meaning that they did not necessarily apply or have the intention of applying to this particular situation. Because the contract was ambiguous because of the qualifications with which the terms artistic effect and decision as to acceptability, it suggests that the parties probably did not intend to subject the plaintiff rights to aesthetic whim. Note:

Morin Case: circumstances pull you in the Utility Category because they are building a factory Intent- seems to show that Defendant wanted a specific look What is customary in Other K shall in no way enter into any consideration or discussion Ultimately: Court says in General the intent of the parties should always Rule the discussion. This Case Used the Objective Standard

How Morin Case solved: 1. Took the intent of the parties and explained them away (i.e. even though it seems like they intended a uniform finish, it is impossible to get a uniform finish with mill finished aluminum) 2. Pre-printed, uniform form- Not specifically what was bargained for. 3. The totality of the circumstances appeared to put this contract into the utility category. 4. Counter Argument: Just because a form contract was used does not mean that we did not intend what was in the K. How does Good Faith fit in? Good Faith is how you interpret the satisfaction clause a. Commercially Reasonable; OR b. Subjectively with NO Ill Will or Ill Motive Case: Locke v. Warner Bros (Discretion Case- Subjective Category) Facts: Plaintiff had a contract with defendant to promote and possibly hire her to do films. Contract was part of a settlement deal with Clint Eastwood. Plaintiff claims that the defendant did not use their discretion appropriately and breached the contract. - breach K by refusing to consider her work & deprived her of the benefit of the L/WB agreement o o Breach of the implied covenant of good faith & fair dealing of public policy Alleges fraud ; WB failed to disclose it had no intent to honor K

Holding Tri-able issues are present w/ respect to whether Warner breached its development deal w/ Locke by categorically refusing to work w/ her, & whether Warner frequently entered into said agreement w/out the intention to work w/ Locke o every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract o Where the contract involves matters of fancy, taste or judgment, the promisor is the sole judge of his satisfaction. If he asserts in good faith that he is not satisfied, there can be no inquiry into the reasonableness of his attitude Bear in mind the requirement that subjective dissatisfaction must be an honestly held dissatisfaction, the evidence raises a tri-able issue as whether WB breached the agreement by not considering the merits her proposals The implied covenant of good faith & fair dealing obligated Warner to exercise that discretion honestly & in good faith The agreement contained an implied covenant of GF & FD, that neither party would frustrate the other partys right to receive the benefits of the contract o Some evidence is hearsay from executives @ WB We believe that Fraudulent intent must often be established by circumstantial evidence, & may be inferred from such circumstances as s failure even to attempt performance Notes: Discretion: movie studio had the option to produce or not produce the films (had to use good faith in using their discretion. Defendants Argument: we did nothing wrong under the K, we could produce or not produce your films, paid Plaintiff under K, Adhered to obligations under K. Plaintiff Argument: Defendant purposefully not producing her movies, defendant did not attempt to perform the K, Plaintiff understood that defendant MAY not produce but she should have had a chance. Where you exercise your discretion (to produce or not produce) it MUST be done in Good Faith. Court Says: Even though they paid Plaintiff; the point of the contract was to develop her career and the defendant did not give plaintiff that opportunity. EXAM: 1. You Have to act with discretion in Good Faith 2. Think Ill Will, Bad Faith, Motive, Malice 3. 3 Categories used to enforce a K: a. Efficiacy b. Performance c. Discretion Case: Donahue v. FedEx (Discretion Case) Citation: Superior Court of Penn Parties: Donahue / FedEx

Facts Appellant questioned numerous practices and invoices that were going on @ work, then the Appellant alleges that he was accused of making racial remarks, and bad mouth his supervisor in front of vendors, the appellant also states that FedEx gave him additional duties and ordered him to falsify data before he was terminated FedEx has a Guaranteed Fair Treatment Procedure for employee grievances o Appellant supplied sufficient additional consideration to remove his status from that of an at will employee; & o FedEx violated public policy by retaliating against him for lodging complaints against Marshall

Issue

(1) whether court erred in granting Preliminary objections where Appellant raised breach of duty of GF & FD exception to the employment at will rule (2) where the doctrine of necessary implication dictated that parties in an employment relationship do & perform those things that according to reason & justice they should do in order to carry out the employment relationship (3)Where the Guaranteed Fair Treatment Procedure of the employer created a promise to dismiss only for cause (4) where appellant urges employer specifically intended to harm appellant Holding we hold that Appellant cannot as a matter of law maintain an action for breach of the implied duty of GF & FD, insofar as the underlying claim is for termination of an at-will employment relationship o Supreme Court: an at will employee has no cause of action against his employer for termination of the at will relationship except where that termination threatens clear mandates of public policy Rule Every contract in Penn imposes on each party a duty of good faith and fair dealing in its performance & its enforcement o Good faith has been defined as honesty in fact in the conduct or transaction concerned Generally, no cause of action exists for termination of an at-will employment relationship unless the termination violates public policy Notes: At Will Employee- can terminate whenever you want (terminate at anytime) Plaintiff Argues- He was fired in Bad Faith Plaintiff argues- regardless of at will contract, termination must be done in Good Faith Court says: Not a general duty of Good Faith or Bad Faith in an at will employee K The duty of Good Faith exists beyond the employee/employer relationship in an at will employee K. In an At will relationship, there needs to be something that moves an At will to something more.NEED ADITIONAL CONSIDERATION. Plaintiff tried to argue that his additional consideration was excellent performance; however doing what you are paid to do well is not extra consideration

Warranties: 1. Article 2 Warranties 2. Common Law Warranties Warranties of Merchantability: Implied when you buy goods they are expected to be of satisfactory quality (should work). Fact dependent Only applies when bought from a Merchant

Warranty of Fitness for a Particular Purpose: when buyer communicates to seller you are buying a good for a particular purpose and buyer is relying on seller to provide goods for that purpose. Must Communicate that it is for a purpose Must Rely on the Seller Note: You can contract out of warranties with specific language Warranties under Article 2 are IMPLIED Express Warranty: Obligation to adhere to warranty arises by virtue of intention of the parties Common Law Warranty: 1. Warranty of Habitability: where you live in a place it has to be habitable (no holes in roof, heat works, etc) Implied at Common Law High Threshold- Living situation MUST be REAL bad 2. Warranty of Skillful Construction: warranty that builder has skillfully constructed the building Capacity: (18, sane, and sober) Looks at Age, Minority, and Mental State Minors- Contracts are voidable at the minors expense Exceptions to the Minor Rule: 1. Where contract is void by Minor, Minor MUST pay reasonable expenses for the use value (make restitution for the benefit conferred) 2. Minors are liable for Necessities (food, clothing, shelter) 3. Radification- Where a minor reaches the age of majority (18) can either affirm or reject the K. (if a minor does nothing, then it will be deemed a K by conduct) Mental Capacity: McNaughten test. Significant mental ability to know what they are doing and the nature and consequence of their actions Consequence of No Mental ability: Voidable (need steps to get out) Liable for restitution for benefits received (if loan for 30K, must give back the 30K) Policy: If contracting party knows or has reason to know that they are dealing with someone who is mentally incapable, then there is not requirement for restitution.

We do not want people to take advantage of mentally incapable people.

EXAM: 1. Void- void from the beginning, Never had a Contract 2. Voidable- Contract did happen, but can take steps to get out of the contract. (requires steps to get out) II. Avoiding Contracts A. Duress and Undue Influence 1) DURESS Historically- threat under duress MUST overcome the will of a Reasonable Person Evolved into Contract is voidable if made under Duress More than just physical threats Looks at the subjective person, NOT just the Reasonable person Duress- Includes both Economic Duress and Business Compulsion. 174 When Duress by Physical Compulsion Prevents Formation of a Contract If conduct that appears to be a manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress, the conduct is not effective as a manifestation of assent. 175 When Duress by Threat Make a Contract Voidable (1) If a partys manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim. (2) If a partys manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transaction. 176 When a Threat is Improper (1) A threat is improper if: a. What is threatened is a crime or a tort, or the threat itself would be a crime or tort if it resulted in obtaining property, b. What is threatened is a criminal prosecution c. What is threatened is the use of civil process and the threat is made in bad faith, OR d. The threat is a breach of the duty of Good Faith and fair dealing under a contract with the recipient. (2) A threat is improper if the resulting exchange is not on fair terms, AND a. The threatened act would harm the recipient and would not significantly benefit the party making the threat. b. The effectiveness of the threat inducing the manifestation of assent is significantly increased by prior unfair dealing by the party making the threat, OR c. What is threatened is otherwise a use of power for illegitimate ends. Totem Marine v. Alyeska Pipeline Facts: plaintiff entered into a K to transport pipeline construction materials. Plaintiff hit several stumbling blocks along the way, increasing the cost to complete the contracted task. Defendant failed to pay its debts and terminated the K. Plaintiff submitted termination invoices. Defendant failed to pay,

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taking advantage of the fact that the plaintiff was close to bankruptcy and would take a less amount due in a renegotiation. Economic Duress (defendant took advantage of plaintiffs economic situation) Rule: Contract can be voided on the grounds of duress only if a party could show that the agreement was entered into for fear of loss of life or limb, mayhem or imprisonment, Any wrong-full threat of one person by words or other conduct that induces another to enter into a transaction under the influence of such fear as precludes him from exercising free will and judgment, if the threat was intended or should reasonably have been expected to operate inducement. Elements of Economic Duress: 1. The party alleging economic duress must show that he has been the victim of a wrongful or unlawful act or threat 2. Such act or threat must be one which deprives the victim of his unfettered will Duress exists where: 1. One party involuntarily accepted the terms of another 2. Circumstances permitted no other alternative 3. Such circumstances were the result of coercive acts of the other party Reasoning: Plaintiff had no choice but to accept the inadequate sum of money Plaintiff was faced with bankruptcy and defendant knew this Plaintiff involuntarily accepted an inadequate sum of money as a settlement offer and executed release forms because of this duress. This constitutes the type of wrongful conduct and lack of alternatives that would render the release voidable on the ground of economic duress. Hold: Lower court erred in granting SJ. REVERSED and REMANDED for new trial Notes: 1. 2 ways you will see Economic Duress: (1) Release of Claims-settlement (2) Amend or Modify the K. 2. Competing Policy Issues of Economic Duress: (1) Want Settlements (2) Do NOT want Fraud 3. 175 lays out the Test or Rule for Economic Duress 4. In Totem, a. Element 1: the threat was the threat not to pay according to K and to delay payment (176(1)(d) b. Element 2: No reasonable alternatives (no other option other than to enter into K), plaintiffs were facing bankruptcy. NOTE: there are normally other options in real life (i.e. sue them) c. Element 3: Actual Inducement Wrongful threat made the person enter the K Subjective Standard-Look at all the circumstances (commercial sophistication, preexisting relationships) d. Potential 4th Element: Threatening Party Actually Caused the hardship All financial woes caused by the defendant Pre-existing financial hardships may or may not be relevant EXAM: 1. 3 Elements of Economic Duress: MUST HAVE a. Wrongful or Improper threat b. Lack of Reasonable Alternative c. Contract was actually induced by a threat 2. Elements of a wrongful or Improper threat in 176 (1) 3. More often than not threats will fall under 176 (1)(d) 4. 3 Types of Duress

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a. Traditional Duress-Gun to your head b. Economic Duress-Business duress (Totem case) c. Duress arising in different circumstances (Holler case- Married) Holler v. Holler Facts: Ukrainian wife suing husband for taking advantage of the fact that she did not speak English well and forcing her to sign a pre-nuptual agreement. Claims she signed under duress Rule: Duress is defined as subjecting a person to a pressure which overcomes his or her will and coerces him or her to comply with demands to which he or she would not yield if acting as a free agent 3 elements of duress: 1. Coercion 2. Putting a person in such fear that he is bereft of te quality of mind essential to the making of a contract 3. That the contract was thereby obtained as a result of this state of mind. Reasoning: Wife did not understand English She did not freely enter into the agreement She attempted to translate the agreement into Russian in order to better comprehend the document She became frustrated as she was unable to complete a satisfactory translation Notes indicate there are several words for which she could not find a translation including undivided equitable and pro rata consequently wife could not understand the agreement Husband was aware of Wifes Visa deadline Husband made it clear, no sign, no marriage Holding: Given the circumstances she faced, wife signed the agreement under duress and without a clear understanding of what she was signing Family court did not err in finding wife signed under Duress AFFIRMED FOR WIFE Note: 1. In Holler, the duress arises in the marriage context with regards to signing a pre-nup. 2. Here there was a problem on all 3 fronts Wrongful threat No reasonable alternative Actual Inducement 3. This case would have been better as an Undue Influence case as opposed to Duress 2) UNDUE INFLUENCE 177. When Undue Influence makes a Contract Voidable (1) Undue influence is unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that that person will not act in a manner inconsistent with his welfare. (2) If a partys manifestation of assent is induced by undue influence by the other party, the contract is voidable by the victim. (3) If a partys manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the undue influence either gives value or relies materially on the transaction.

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Plain English: Excessive pressure by a dominant party in overwhelming the will of a vulnerable party equals undue influence. Odorizzi v. Bloomfield School District Facts: School teacher was arrested for homosexual activity. Superintendent and principle came to his apartment and told plaintiff that he should take their advice, resign now, and that there was no time to consult an attorney. Plaintiff was tired, had not slept in 40 hrs, just got released from jail, and was incapable of being able to think clearly. Plaintiff signed and delivered his resignation on the advice of his supervisors. Plaintiff was then cleared of all homosexual charges and tried to resind his resignation Plaintiff claims Duress, menace, fraud, mistake, and undue influence Rule/Reasoning: 1. Duress or Menace: No duress or menace has been pleaded. Duress consists in unlawful confinement of anothers person, or relatives, or property which causes him to consent to a transaction through fear. Menace is a threat of Duress or a threat of injury to the person, property or character of another The action of duress or menace MUST be unlawful and a threat to take legal action is not unlawful unless the party making the threat knows the falsity of his claim. 2. Fraud No cause of action for fraud Actual fraud involves conscious misrepresentation or concealment or non-disclosure of a material fact which induces the innocent party to enter the contract The complaint failed to assert the elements of knowledge of falsity, intent to induce reliance and justifiable reliance, therefore a cause of action for actual fraud was not stated. Constructive Fraud: arises from a breach of duty by one in a confidential or fiduciary relationship to another which induces justifiable reliance by the latter to his prejudice There was no confidential relationship between the supervisors and the plaintiff, especially because they were trying to get rid of him and he was supposed to be protecting himself and his job. 3. Mistake: The complaint fails to disclose any facts which would suggest that consent had been obtained through a mistake of fact of of Law 4. Undue Influence: The pleading does set out a claim that the plaintiffs consent to the transaction was obtained through the use of undue influence Undue influence is: persuasion which tends to be coercive in nature, persuasion which overcomes the will without convincing the judgment Examples of persuasion: High pressure, a pressure which works on mental, moral, or emotional weakness to such an extent that it approaches the boundaries of coercion. Undue influence includes taking an unfair advantage of anothers weakness of mind; or taking a grossly oppressive and unfair advantage of anothers necessities or distress Overpersuasion is general accompanied by certain characteristics which tend to create a patter: 1. Discussion of the transaction at an unusual or inappropriate time 2. Consummation of the transaction in an unusual place

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3. Insistent demand that the business be finished at once 4. Extreme emphasis on untoward consequences of delay 5. Use of multiple persuaders by the dominant side against a single servient party 6. Absence of third party advisors to the servient party 7. Statements that there is no time to consult financial advisors or attorneys The difference between legitimate persuasion and excessive persuasion rests to a considerable extent in the manner in which the parties go about their business. Holding: Pleading states a cause of action for recission of a transaction to which his apparent consent had been obtained through the use of undue influence JUDGMENT REVERSED Note: 1. 2 categories of Undue Influence: a. Confidential relationships b. Other 2. In Ordizzi, it was not necessary to be in a special/confidential relationship 3. Burden of Proof is differed for each category. a. Confidential Relationships- burden of proof on Dominant party to prove they did NOT have undue influence. b. Other: Regular burden of proof, Plaintiff must establish all the elements of the claim. 4. Ordizzi: No duress- because there needs to be a wrongful threat and there was no wrongful threat No Fraud-because did not lie or misrepresent what they were going to do No Mistake- because there needs to be a Mutual Mistake Undue Influence- facts that suggest are he was tired (40 hrs no sleep), severe emotional strain of being detained and arrested EXAM: 1. Undue Influence: involves one person overcoming the will of another 2. Elements of Undue Influence: a. Undue pressure/over persuasion or coercion b. By a dominant party over a vulnerable party c. Such that the vulnerable parties Will is overcome 3. Characterizations of Who tends to be the Victim of Undue Influence a. Unsophisticated party b. Physical, Mental, emotional Issues c. Age is a Factor Note: If a person on the exam has these charicterizations think Undue Influence 4. 7 Factors that signal Undue Influence a. Discussion of the transaction at an unusual or inappropriate time b. Consummation of the transaction in an unusual place c. Insistent demand that the business be finished at once d. Extreme emphasis on untoward consequences of delay e. The use of multiple persuaders by the dominant side against a single servient party f. Absence of third party advisers to the servient party g. Statements that there is no time to consult financial advisers or attorneys 5. UNDUE INFLUENCE AND DURESS TEND TO BE LOSING ARGUMENTS, Look for UNCONSIONABILITY and MISREPRESENTATION instead. B. MISREPRESENTATION AND NON DISCLOSURE

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1) MISREPRESENTATION 159 Misrepresentation Defined A Misrepresentation is an assertion that is not in accord with the facts. Plain English: A Misstatement of EXISTING facts 160 When an action is equivalent to an Assertion Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist. 163 When a Misrepresentation prevents Formation of a Contract If a misrepresentation as to the character or essential terms of a proposed contract induces conduct that appears to be a manifestation of assent by one who neither knows or has reasonable opportunity to know if the character or essential terms of the proposed contract, his conduct is not effective as a manifestation of assent. Historically: 3 Categories for Misrepresentation a. Fraudulent- false, intended to deceive, intended to be relied on (Most Culpable) b. Negligent-reckless disregard as to the truth or falsity c. Innocent-made misstatement completely innocently

Modern Trend: (Restatement trend) a. Fraudulent Misrepresentation; or b. Material Misrepresentation Note: Consequences are the same so it does not matter what category the misrepresentation falls into 1 category of cases not covered is the non-fraudulent, non-material misrepresentation which is ACTIONABLE Material=Important Fraudulent= Lie 162 When a Misrepresentation is fraudulent or material (1) A misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest his assent and the maker: (a) Knows or believes that the assertion is not in accord with the facts, OR (b) Does not have the confidence that he states or implies in the truth of the assertion, OR (c) Knows that he does not have the basis that he states or implies for the assertion (2) A misrepresentation is Material if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so. Fraudulent Category: 162(1) Plain English: Fraudulent means outright lie (1)(a) and reckless or negligent statements (1)(b) and (c) Material Category: 162(2) Plain English: A statement is material if

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(a) A reasonable person would assent (b) Maker knows that recipient would likely manifest assent Note: the difference between (a) and (b) is that (a) Is Objective- objectively a reasonable person would be induced to assent (b) Is subjective- Playing towards the subjective motives EXAM: 1. 2 categories of Misrepresentation a. Fraud: Outright lies Reckless or negligent statements b. Material Objectively Material, OR Subjectively Material (requires knowledge) 2. 162 Illustrations: If a person is Honestly Mistaken, than it is not fraudulent 3. Non-category: non-fraudulent, non-misstatement= NOT ACTIONABLE 4. Subjective Category: must be a misstatement important to the buyer and objectively known by the seller 5. Consequences of Misrepresentation: Contract is voidable 164 When a Misrepresentation Makes a Contract Voidable (1) If a partys manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient. (2) If a partys manifestation of assent is induced by either a fraudulent or a material misrepresentation by one who is not a party to the transaction upon which the recipient is justified in relying, the contract is voidable by the recipient, UNLESS the other party to the transaction in good faith and without reason to know of the misrepresentation either gives value or relies materially on the transaction. Plain English: Voidable by recipient; UNLESS 6. Misrepresentation by 3rd Party Can get out of the contract unless the other party to the transaction in good faith either gives value, OR relies materially on the transaction (164(2) Contract would be VOIDABLE Note: Agents are NOT 3rd parties 7. 2 prong approach to Misrepresentation (either fraudulent or Material) 8. Material can be objective (reasonable person standard) or Subjective (plus other person knowing) 9. Elements of Misrepresentation: a. Misstatement as to an existing Fact b. Fraudulent or Material c. Must induce recipient to enter the K (reliance) d. Such Reliance MUST be reasonable Note: YOU ARE NOT REQUIRED TO SHOW HARM FOR MISREPRESENTATION Alabi v. DHL (1990) Procedure: Breach of contract. Defendant moves for summary judgment. Facts: plaintiff send money through defendants company labeling it school documents when in fact it was 15K in cash. Defendnats have a rule of not delivering cash. Plaintiff misrepresented what was to be delivered. Rule:

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In order for a contract to be voidable a party must show all four of the following elements 1. That there was a misrepresentation 2. That the misrepresentation was either fraudulent or material 3. That the misrepresentation induced the recipient to enter into the contract 4. That the recipients reliance on the misrepresentation was reasonable Reasoning: 1. Was the labeling of the envelope documents regarding school bills constitute a misrepresentation. A misrepresentation is an assertion that is not in accordance with the facts The term documents regarding school bills does NOT indicate that the contents are inherently valuable to third party interlopers or others in DHLs postion. Plaintiffs description is not in accord with the now alleged fact that there was cash in the envelope, consequently, IS a Misrepresentation of the contents. 2. Is the misrepresentation Fraudulent or Material? If the misrepresentation was non-fraudulent it must be material in order for the contract to be voidable. (164) By making the assertion that the labeling was accurate, plaintiff purposely mislead DHL about the contents of the shipment. Court unwilling to rule that the misrepresentation was fraudulent as a matter of law. A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or the maker knows that it would be likely to induce the recipient to do so. A person will be bound by the contents of an agreement that he purposely signs but fails to inform himself of the contents of the agreement. Plaintiff cannot claim he was unaware to the terms and conditions, because he was a frequent user of DHL and had the airbills stock piled at his house. Plaintiff is bound by the terms and conditions. Because plaintiff is bound by the terms and conditions, and one of the terms was that DHL does not ship cash, the Misrepresentation IS MATERIAL. 3. Did the misrepresentation induce DHL to enter into the contract? The misrepresentation was material DHL attached importance to the misrepresentation by the conditions that the plaintiff signed on the back of the bill (warranting that the seller was to follow the rules) The misrepresentation was a substantial factor in DHLs decision to enter the contract. 4. Was DHLs reliance on the misrepresentation reasonable? Misrepresentation will have no legal effect unless the recipients reliance is reasonable. Plaintiff asked defendant twice if he could insure package up to 15K This indicates that the plaintiff wanted to ship something of value at or above 15K (different than what was described, by plaintiff, on airbill) DHL reserved the right to open packages it accepts for delivery DHL would not reserve the right if it did not believe at some point it would check contents because they reasonably believed the description was inaccurate. Court finds that a material issue of fact exists as to the reasonableness of DHLs reliance on the description supplied by plaintiff. Holding: Granting SJ is improper, as a Matter of Law, because not all four elements have been established. Notes: Defendant rescinding Insurance policy to get out of enforceable insurance K

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Misrepresentation is documents regarding school bills- Not accurate (actually 15K cash) and does not indicate the contents to a 3rd party Not fraudulent according to the court-It was written this way to protect or defend the theft of the property

TAKE HOME: Misrepresentation Analysis Step 1: Material Fact- because under the subjective view the plaintiff knew that by saying that no cash was inside, the defendant would likely ship terms and conditions on Air bills- Important to defendant because they note that the company does not ship cash This would also meet the objective prong because it was in writing and a reasonable person would have known or should have known what was in the package. Step 2: Reliance Prong: Did DHL rely on the statements You rely on something if it substantially contributes to you entering into a decision to enter the K. Step 3: How do you know if it induces? It is almost automatic that a material effect will induce reliance Step 4: Was the reliance on the misrepresentation reasonable? Court says no (look at brief) Syester v. Banta (1965). Facts: Old lady gets tricked into buying dance lessons, believing that she would learn to dance like the professionals. The Dance studio misrepresented what they were selling to this old lady Rule: Where a settlement has been had between competent parties, and a release has been fairly entered into, without fraud or overreaching, it becomes binding and effectual, and will be upheld and enforced. It is undoubtedly the law that an instrument of this character can be impeached for fraud in procuring the same or where the same was executed by a party who was mentally incompetent to legally execute such an instrument. The burden of proof is on the party seeking to impeach such a written instrument. Failure to read an instrument before signing will not avoid it provisions. Reasoning: The evidence was such that the jury could find that there was such a concerted effort, lacking in propriety, to obtain the release as to constitute fraudulent overreaching. Jury concluded that there was a predatory play on the vanity and credulity of an old lady. Holding: AFFIRMED JURY DECISION FOR PLAINTIFF Notes: 1. 2 issues in Syester Legal Releases (Recision of K) K for lessons (Tort Damages) 2. Need to have releases rescinded, then she can sue for tort damages In order to rescind, both sides need to be able to give back what they received Here, Syester cannot give back the dance lessons; however she could get back all her money and then pay the reasonable amount for services received. 3. In Tort: Misrepresentation MUST be both Material and Fraudulent Misrepresentations= plaintiff was told that she would be a professional dancer and that she did not need a lawyer. These statements are probably both fraudulent and Material Hard Prong is the Reliance: was reliance on the misrepresentations by the plaintiff reasonable? -Her age (68) how many 68yr olds are professional dancers?

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-She already had a lawsuit based on fraud Better way to get out of the releases could have been undue influence 4. Defendant argues that the statements made you will be a professional dancer are statements of Opinion and not of existing fact, therefore, are not Acionable 5. 169 states that certain Opinions are actionable 169. Reliance on an Assertion of Opinion is not Justified To the extent that an assertion is one of opinion only, the recipient is not justified in relying on it unless the recipient (a) Stands in such a relation of trust and confidence to the person whose opinion is asserted that the recipient is reasonable in relying on it, OR (b) Reasonably believes that, as compared with himself, the person whose opinion is asserted has special skill, judgment or objectivity with respect to the subject matter, OR (c) Is for some other special reason particularly susceptible to a misrepresentation of the type involved. Note: You only need one of the elements where an opinion is not an opinion and becomes a statement of fact. 2) NONDISCLOSURE, CONCEALMENT & HALF TRUTHS Omissions: virtue of Misrepresentations by non-disclosure Historically: caveat emptor no liability for non-disclosure Modern View: Non-disclosures are actionable 161 When Non-disclosure is equivalent to an assertion A persons non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases ONLY (a) Where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material (b) Where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing. (c) Where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part. (d) Where the other person is entitled to know the fact because of a relation of trust and confidence between them. Note: (b) is a catch all Several factors that a court should consider in deciding when fairness requires disclosure of Material information: 1. The difference in the degree of intelligence of the parties to the transaction (communities sense of judgment demands it) 2. The relation that the parties bear to each other 3. The manner in which the information is acquired 4. The nature of the fact not disclosed 5. The general class to which the person who is concealing the information belongs (sellers more likely to be required to disclose information than buyers) 6. The nature of the contract 7. The importance of the fact not disclosed 8. Any conduct of the person not disclosing something to prevent discovery (active concealment of any material fact)

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Hill v. Jones (1986) Facts: Plaintiff was going to buy the house from the defendant. Defendant was supposed to pay for a termite inspection. Defendant gave the plaintiff a faulty termite inspection which the plaintiff relied on. The defendant has a duty to disclose material facts. Issue: What role does the contract integration clause play? What is the sellers duty to disclose? Reasoning/Holding: 1. Integration Clause Trial court ruled that the agreement of the parties did not give buyers the right to rely on the statement made by Mrs. Jones that the ripple in the floor was water damage. Contract Provision: the purchaser has investigated the said premises, and the Broker, and the Seller are hereby released from all responsibility regarding the valuation thereof, and neither Purchaser, Seller, nor Broker shall be bound by any outstanding, agreement, promise, representation or stipulation expressed or implied, not specified herein Parol evidence is always admissible to show fraud, and this is true, even though it has the effect of varying the terms of a writing between parties. Plaintiff claimed Fraud, THEREFORE The clause cannot shield sellers from liability should the buyers be able to prove fraud. 2. Duty to Disclose: Major issue is whether the seller has a duty to disclose to the buyer the existence of termite damage in a residential dwelling known to the seller, but not the buyer, which materially affects the value of the property. Rule: Vendor has an affirmative duty to disclose material facts where: a. Disclosure is necessary to prevent a previous assertion from being a misrepresentation or from being fraudulent or material b. Disclosure would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if nondisclosure amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealings c. Disclosure would correct a mistake of the other party as to the contents, or effect of a writing, evidencing or embodying an agreement in whole or in part d. The other person is entitled to know the fact because of a relationship of trust and confidence between them. Where a misrepresentation is fraudulent or where a negligent misrepresentation is one of material fact, the policy of finality rightly gives way to the policy of promoting honest dealings between parties. Nondisclosure of material facts affecting the value of property, known to the seller but not reasonably capable of being known to the buyer has the same legal effect as fraud or misrepresentation. Rule: Duty to disclose: Where the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a DUTY TO DISCLOSE them to the buyer. A matter is material if it is one to which a reasonable person would attach importance in determining his choice of action in the transaction in question. Materiality is a factual matter which must be determined by the trier of fact.

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The question of the buyers knowledge of the termite problem, or their diligence in attempting to inform themselves about the termite problem should be left to the jury. Holding: Reversed and remanded (NO SJ FOR DEFENDANT) Notes: Does the seller have a duty to disclose material facts? Yes Is termite damage a material fact? Integration clause argument does not work because Fraud is an exception to the parol evidence rule The Duty to disclose arises when there are facts that materially affect the value of the house. Either Present or Past history would be Material. 1. Concealment: Non-disclosure plus hiding the fact all together (160) 2. Truths: technically true, but is not true (i.e. have you had the brakes checked? Yes last week; this could be technically true but you failed to tell the person that the brakes were found to be bad) 3. Stigmatized Property-Some say Yes there is a Duty to disclose; Others say NO DUTY 3) FRAUD IN THE EXECUTION Fraud in the Inducement: Statement or fact that induces or causes you to enter K. Fraud in the Execution: Trick someone into signing something they do not know they are signing. Note: Fraud in the execution is VERY rare, similar to Duress. Park 100 v. Kartes Facts: Karteses inquired about a lease agreement with Park 100. Park 100 provided a lease agreement to the Karteses, which did not include any provisions for a personal guaranty of the lease and a personal guaranty was not mentioned in negotiations. The Friday before the Karteses were to move into the building, plaintiff Scannell went to the Karteses store saying that he had lease papers to be signed and that the plaintiffs would not be able to move into the building without signing the papers. The document produced was entitled lease agreement. Kartes phoned another plaintiff to ask if the agreement had been approved by KVCs attorney and Scannell remained silent. Scanell never informed the Karteses that they were signing a personal guaranty. Later, the Karteses refused to affirm that portion of a tenant agreement and sold their interest to a third party who failed to make rent payments. Issue: Did the trial court err in finding that plaintiff used fraudulent means to produce the signatures of the defendants? Rule: a. Elements of Fraud: A material misrepresentation of past or existing fact by the party to be charged, which Was false Was made with knowledge or in recklace ignorance of the falsity Was relied upon by the complaining party Proximately caused the complaining party injury Reasoning: a. Trial Courts reasoning The statements made by plaintiffs agent, that the personal guaranty was Lease Papers, and that defendant could not move into the building until the papers were signed, were each misrepresentations of Material facts. Plaintiff Knew that the document he presented was a guaranty and, therefore knowingly made false misrepresentations

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The defendants, through the use of ordinary care and diligence, believed the document they were signing was a lease Defendants reasonably relied upon plaintiff statements to their detriment.

b. Appeals court reasoning: The Appeals court used the same reasoning as the trial court They noted that the defendants did call to check to make sure that their attorney approved the Lease Agreement (The attorney did approve a lease agreement, but not the fraudulent guaranty) The requirement of reasonable prudence in business transactions is not carried to the extent that the law will ignore an intentional fraud practiced on the unwary. Holding: AFFIRMED for defendants. Notes: In Park 100, they think that they are signing a lease paper when in reality they were signing a personal guarantee In a Rush, the leasor told them they were signing lease papaers. 1. To determine the Fraud, use the elements of Misrepresentation Misrepresentation that these were lease papers They were fraudulent because done with the intent to deceive They were material Relied upon because it was signed under the impression that the attorney reviewed Was the Reliance Reasonable? (a) YES: took steps towards due dillegence before signing (b) NO: A reasonable commercial business person should read documents The court acknowledged the duty to read, BUT where the person actively misrepresents or fraudulently presented documents then there is a way out. 2. Another Argument: Fraudulent Statement by Omission of Fact. Duty to disclose because the other side is operating under a basic assumption. 3. Fraud in the Execution: Straight forward, You trick someone into signing then you can get out of the agreement. 161. When Non-disclosure is Equivalent to An Assertion A persons non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases ONLY (e) Where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material (f) Where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing. (g) Where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part. (h) Where the other person is entitled to know the fact because of a relation of trust and confidence between them. 166: When a Misrepresentation as to a writing justifies Reformation If a partys manifestation of assent is induced by the other partys fraudulent misrepresentation as to the contents or effect of a writing evidencing or embodying in whole or in part an agreement, the court at the request of the recipient may reform the writing to express the terms of the agreement as asserted,

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a. If the recipient was justified in relying on the misrepresentation, AND b. \except to the extent that rights of third parties such as good faith purchasers for value will be unfairly affected Where one employs misrepresentation to induce a partys obligation under a contract, one cannot bind the party to the terms of the agreement. C. UNCONSCIONABILITY 2-302: Unconscionable Contract or Clause (1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. (2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination. 208 Unconscionable Contract or Term If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may limit the application of any unconscionable term as to avoid any unconscionable result. Williams v. Walker Thomas furniture Facts: Plaintiff entered into a contract with defendant for the purchase of various household items. The contract provided that installments were to be made on the items and the title would remain in defendant until the total of all the monthly payments made equaled the value of the item. If a customer ever defaulted, the defendant could repossess the item. In an effort to keep a balance on all items, the payments were pro rata by defendants to apply to any items that the customer purchased. Plaintiff Williams purchased a $500 stereo when she still had a $164 balance due to defendant. It was later determined that defendant knew of her financial condition, having seven kids with a $200 stipend from the government each month. Defendant Thorne purchased multiple items. Both defaulted after years of payment and defendant attempted to take all the items plaintiff had purchased. Issue: Is the obscure clause in the contract unconscionable? Rule: 2-302 and 208 (above) Where the element of unconscionablility is present at the time a contract is made, the contract should not be enforced Unconscionability has been recognized to include the absence of meaningful choice on the part of one of the parties together with the contract terms which are unreasonably favorable to the other party. a. Procedural Unconscionability: Refers to the lack of choice by one party or some defect in bargaining power b. Substantive Unconscionability: Relates to the fairness of the terms of the resulting bargain. Note: Most courts generally require a showing of both procuedural and substantive unconscionability in order to have a cause of action. Reasoning:

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a. Procedural Unconscionability When a party of little bargaining power, and hence little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all the terms. The plaintiff was no educated, low income, and did not know the meaning of the provisions she was signing. b. Substantive Unconscionability: contract considered in light of the circumstances existing when the contract was made. Note: Court commented that because the trial court and the appellate court did not feel that enforcement could be refused, NO FINDINGS WERE MADE ON THE POSSIBLE UNCONSCIONABILITY OF THE CONTRACTS, sufficient to decide the issue as a matter of Law. Holding: Remanded to the trial court. Dissent:

Believes that the lower courts made no finding that there had been unconscionable practice and that the plaintiff knew exactly what she was bargaining for. Notes that one must tread softly on public policy, but also keep a tight leash on controlling how people make agreements and contracts. Notes that CC companies and consumers could have a field day after this decision.

Notes: 1. Unconscionability first appeared in UCC and has become a common Law feature. 2. Take Home from Walker: At what point do we determine Unconscionability: At the time the contract was made!! Reason why we determine unconscionability at the time the contract is made is because this id the time of MUTUAL ASSENT 3. In Walker: Clause in K that is being argued Secured Transaction- Like a mortgage for personal prop Add-on Clause-dragnet clause: every purchase is secured through all the other purchases. Every payment goes toward the total debt. Procedural Unconscionability= the plaintiff had a lack of choice, plaintiff did not understand the clause and the consequences. Substantive Unconscionability= door to door sales technique, and the clause in the K could have made this unconscionable. Defendant Arg.: Add on clauses are standard and not unique to this type of transaction, other jurisdictions have not found them to be unconscionable. 4. Unconscionability has been recognized to include the absence of meaningful choice on the part of one of the parties together with the K terms which are unreasonably favorable to the other party. EXAM: 1. 2 Prongs of Unconscionability Procedural: Lack of Choices (Oppression) and Hidden terms (Surprise) Substantive: Unfavorable terms, terms being one sided, Gross Unfairness 2. Procedural Unconscionability Disparity of bargaining power and lack of meaningful choices Terms being hidden or Unclear (aesthetic: font size, where provision is located) 3. Substantive Unconscionability: Is the provision or the K Unfair?

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 Is the substance Unfair? 4. Four ways to Analyze if a K is Unconscionable (1) Tick Box Approach: Need both procedural and Substantive Unconscionability (2) Sliding Scale Approach: weighs procedural and substantive against one another. If one is low then need a high level of the other. (Attempts to quantify unconscionability) (3) Either Alone (Minority Approach): if you have either procedural or substantive than that alone is sufficient. (high level required) (4) Substantive Alone (Minority): if you only have Substantive unconscionability, and it is REALLY BAD, that alone will be sufficient. (Very High level required) Note: ON EXAM GO THROUGH ALL FOUR APPROACHES. 5. Person alleging the unconscionability is responsible for the burden of proof 6. Can a Price term be unconscionable? Courts are reluctant to find unconscionability because they are not in the business of weighing consideration (Peppercorn theory) At the end of the day, unfair is unfair. If a price term is unfair it can be unconscionable 7. 208 Unconscionable Contract or Term If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may limit the application of any unconscionable term as to avoid any unconscionable result. 8. How to Use Unconscionability Offensively: Affirmitive defense (Higgins case/Ahern case p.594) suing to get $ back Defensively: use for a reason why you are not performing (walker v.williams) Note: some courts only allow the defensive use if unconscionability Higgins v. Superior Court of LA County Facts: Plaintiffs were siblings living in defendants Leomitis home after their parents died. Extreme Makeover had contacted the church to build a house for the family and in 2005 the Leomitis and siblings were chosen to participate. Defendant sent an Agreement and Release form, including the arbitration clause which is in dispute. Nothing in the agreement brought attention to the arbitration clause and in fact that paragraph did not require initials like many other paragraphs. The meeting where the forms were discussed took place between the producers and the Leomitis, after which Mrs. Leomiti told the eldest sibling to flip through and sign anywhere there was a line. It only took Charles 5 to 10 mins to sign the document. Shortly after the home was built, the Leomitis kicked the siblings out saying that it was not their home. Charles contacted the producers for help, but they denied him, and rebroadcasted the episode Issue: Does the plaintiff challenge the enforceability of the agreement and the release, in toto, or does it only contest the arbitration provision? If it is the Arbitration Provision only, is the arbitration provision unconscionable? Reasoning/Rule: a. The court first deals with what is being contested. The trial court thought that the opposition to the arbitration clause was predicated to challenge the Agreement as a whole and not the Arbitration clause ONLY. This court found, the opposition was that the arbitration clause in particular, and NOT the entire agreement was Unconscionable. Because the clause is not ser out or made distinguishable in any manner, it is misidentified within the caption Miscellaneous, not in different font, bold, or color, or Caps, and did not contain a separate waiver notice.

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Holding: because they are only contesting the arbitration clause we must look to determine if the clause is unconscionable.

b. The adhesion Nature of the parties agreement Contract of Adhesion: signifies a standardized contract which imposed and drafted by one party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it. This Case: i. There is a standardized contract ii. None of the plaintiffs names or indentifying information is included in the body of the agreement iii. The TV defendants had superior bargaining power over the plaintiffs iv. Agreement presented to the Leomites, NOT the plaintiffs v. Told only to Flip through Conclusion: the agreement was presented to the plainitffs on a take it or leave it basis by the party with superior bargaining position who was not willing to engage in negotiations. ADHESION CONTRACT c. Procedural Unconsionability: Focuses on the factors of surprise and oppression, with surprise being a function of the disappointed reasonable expectations of the weaker party. Here: i. Arbitration clause appears in 1 paragraph near the end of the document ii. Entire agreement drafted by TV defendants iii. Defendants knew that plaintiffs were young and unsophisticated and recently lost parents iv. Clause was located under a paragraph labeled Miscellanious Hold: Even though the document says to read the entire thing, it does not defeat the otherwise strong showing of procedural unconscionability. d. Substantive Unconscionability Terms that are generally described as being one sided Here i. The clause repeatedly uses I agree with the I referring to the plaintiffs ii. Only time THE PARTIES is used is in the last sentence of the clause iii. Only one side (the plaintiffs) had to agree to the clause iv. Provision barred plaintiffs from seeking appellate review of the arbitrators decision v. Costs to be born equally by both parties Hold The harsh one sided nature of the arbitration provision, combined with the elements of procedural unconscionability, leads the court to conclude that the arbitration provision is unconscionable and therefore, UNENFORCEABLE. Notes: 1. Higgins Case (Extreme Makeover) Plaintiffs trying to get out of K so they can litigate and not arbitrate Possibility that a jury would be more sympathetic than an arbitrator Lawyers for kids strategically do not want it to be confidential because you wont get a big media splash Court uses a sliding scale approach (Need both procedural and substantive to sustain a claim) Court finds the K is an adhesion K Adhesion analysis goes towards the Procedural Unconscionability prong.

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Note: Some courts-if adhesion K than automatically there is procedural unconscionability Some courts- if adhesion K it is good evidence of procedural unconscionability but not determinative. Procedural Unconsionability in Higgins: Focuses on the factors of surprise and oppression, with surprise being a function of the disappointed reasonable expectations of the weaker party. Here: v. Arbitration clause appears in 1 paragraph near the end of the document vi. Entire agreement drafted by TV defendants vii. Defendants knew that plaintiffs were young and unsophisticated and recently lost parents viii. Clause was located under a paragraph labeled Miscellanious Hold: Even though the document says to read the entire thing, it does not defeat the otherwise strong showing of procedural unconscionability. 2. Higgins Case (substantive Unconscionability) Was the arbitration provision substantively unconscionable? Court says it was a unilateral arbitration provision and therefore it was Unconscionable. Court gets bound up in form over function of the arbitration clause Tanya believes that the arbitration clause is Bilateral (1) Barred appellate review- A limit set by arbitration clauses generally (2) Each side has to bear its own costs (question if it would be different if you litigate?) 3. Normally say a K is substantively Unconscionable: if it would leave the party without a reasonable forum for remedy (i.e class action for a cell phone bill) Alder v. Fred Lind Manor Facts: Plaintiff, an immigrant, was employed by defendant. In 1995, he signed an arbitration agreement as a condition to continued employment. The agreement included a 180 day limitation on claims, feesplitting, attorney fees provision. After he was injured on the job in 2001, defendant fired him. Reasoning/Holding 1. Unconscionability Parties to a contract shall be bound by its terms The existence of an unconscionable bargain is a question of law for the courts. There exists both procedural and substantive unconscionability a. Substantive unconscionability Involves cases where a clause or term in the contract is alleged to be one sided or overly harshShocking to the conscience, monstrously harsh, exceedingly calloused. b. Procedural unconscionablity Lack of a meaningful choice, considering all the circumstances surrounding the transactions, Including: i. The manner in which the contract was entered ii. Whether the important terms were hidden in a maze of fine print iii. Whether each party had a reasonable opportunity to understand the terms of the contract. These 3 factors should not be applied mechanically without regard to whether in truth a meaningful choice existed. NOTE: Court in ALDER is holding that Substantive Unconscionability alone can support a finding of unconscionability. 2. Procedural Unconscionability Analysis a. Adhesion contract: Plaintiff assert that the arbitration agreement is an adhesion contract

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The fact that an agreement is an adhesion contract does not necessarily render it procedurally unconscionable. Court finds that the agreement is an adhesion contract; noting that presumably employees were not free to negotiate the terms of the agreement Court found that there was no true equality in bargaining power b. Unequal bargaining power Unequal bargaining power may exist between parties and the mere presence of unequal bargaining power will not (standing alone) justify a finding of procedural unconscionability. Key issue is if the plaintiff lacked a meaningful choice. There is disputed evidence as to whether the plaintiff had time to review and contemplate or if he was forced into signing the agreement. Court notes that within the agreement the arbitration provision was not hidden. Court finds that it needs more information to determine if there is actual procedural unconscionability. Remanded for the trial court to determine if procedural Unconscionablity is present. 3. Substantive Unconscionability Plaintiff contends that the unilateral application of the agreement renders it substantively unconscionable. Plaintiff argues that the agreements fee-splitting, attorney fee, and limitation provisions make the agreement unconscionable. The court took the contextual approach to determine the meaning of the contracts terms. Court found that the wording and terms used did not make the contract one sided and subjected both parties to the arbitration agreement. ARBITRATION agreement is NOT unilateral a. Fee splitting provision Where a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, the party bears the burden of showing the likelihood of incurring such costs. Plaintiff failed to provide any specific information about the arbitration fees he will be required to share and why such fees would effectively prohibit him from bringing his claims. Court determines that plaintiff should have the opportunity to prove that the costs of arbitration would prohibit him from vindicating his claims ON REMAND: trial court should provide the parties with the opportunity to engage in limited discovery regarding costs of arbitration b. Attorney fee provision Plaintiff asserts that the provision is substantively unconscionable because it is one sided, overly harsh, and requires him to waive the right to recover his attorney fees and costs. 203- Specific terms and exact terms are given greater weight than general language. The provision undermines a plaintiffs rights to attorney fees under the statute and helps the party with a substantially stronger bargaining position and more resources to the disadvantage of an employee needing to obtain legal assistance. Attorney fee provision IS substantively unconscionable c. Limitation on actions A contracts limitations provision will prevail over general statutes of limitations unless prohibited by statute or public policy or unless they are unreasonable. By limiting the time in which an employee may bring a claim (180 days from 1 st occurance), defendant obtained an unfair advantage.

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4.

5.

6.

7.

Provision could be interpreted to insulate the employer from potential liability for violative behavior occurring outside the limitation period. 180 day limitations provision is unreasonable and Substantively Unconscionable. Severance of the substantively unconscionable provisions Under 208, court has the right to sever the unconscionable clause and enforce the remainder of the contract. This court severs the attorney fee provision and limitation provision without disturbing the primary intent of the parties to arbitrate their disputes. Jury Trial Rights Court declines to determine if plaintiff knowingly and voluntarily entered into the arbitration agreement. ON REMAND: trial court needs to determine the facts about if plaintiff was forced into signing Waiver Defendant has not acted in a manner which suggests waiver Concluded that defendant neither commenced litigation or ignored arbitration. Conclusion Attorney fees and limitation provisions of the arbitration are substantively unconscionable Court severs these provisions from the agreement preserving the parties intent to arbitrate disputes. Remanded for determination of plaintiffs claim of procedural unconscionablity, including if plaintiff implicitly waived his right to a jury trial and the substantive conscionability of the fee splitting provision.

Notes (p.622) 1. Adler opinion reflects the courts strong inclination to enforce the arbitration agreement before it after severing certain substantively unconscionable aspects. 2. The court departs from the common approach (requiring both substantive and procedural unconscionability) and holds that substantive unconscionability alone can render a contract unenforceable. 3. Court held that it was appropriate to sever the unconscionable provisions and enforce the remainder of the arbitration agreement 4. Earlier courts were hostile to contracts with arbitration clauses, regarding them as an attempt to oust them of their rightful jurisdiction. The attitude has changed and given way to one that encourages arbitration as a means of relieving congested court dockets. (POLICY) Class Notes: 1. Adler: Uses substantive unconscionability alone approach Check brief for Procedural analysis 2. Adler Substantive Unconscionablity: Both sides bound to arbitration (Bilateral) Fee splitting-Not unconscionable Attorney fee provision- IS Unconscionable Statute of Limitations- IS Unconscionable 3. 2 Potential Remedies Sever the unconscionable provisions and enforce the remainder of the K Ignore the provision in its entirety and enforce the rest (entire K is Unconscionable) EXAM: 1. Multiple categories could be engaged (Misrepresentation, Omissions, unconscionability, Fraud, Duress, Undue Influence, Public Policy, Mistake) 2. Procedural Unconscionability

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3. Substantive Unconscionability 4. 4 Approaches to Unconscionability D. PUBLIC POLICY 178 When a term is Unenforceable on Grounds of Public Policy (1) A Promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms. (2) In weighing the interest in the enforcement of a term, account is taken of: (a) The parties justified expectations (b) Any forfeiture that would result if enforcement were denied (c) Any special public interest in the enforcement of a particular term. (3) In weighing a public policy against enforcement of a term, account is taken of: (a) (b) (c) (d) The strength of that policy as manifested by legislation or judicial decisions The likelihood that a refusal to enforce the term will further that policy The seriousness of any misconduct involved and the extent to which it was deliberate The directness of the connection between that misconduct and the term.

179 Bases of Public Policies Against Enforcement A Public policy against the enforcement of promises or other terms may be derived by the court from (a) Legislation relevant to such a Policy, OR (b) The need to protect some aspect of the public welfare, as is the case for the judicial policies against, FOR EXAMPLE i. ii. iii. Restraint of trade (186-188) Impairment of family relations (189-191) Interference with other protected interests (192-196, 356)

187 Non Ancillary Restraints on Competition A Promise to refrain from competition that imposes a restraint that is not ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade 189 Promise in Restraint of Marriage A promise is unenforceable on grounds of public policy if it is unreasonably in restraint of marriage 190 Promise Detrimental to Marital Relationship (1) A promise by a person contemplating marriage or by a married person, other than as part of an enforceable separation agreement, is unenforceable on grounds of public policy if it would change some essential incident of the maritial relationship in a way detrimental to the public interest in the marriage relationship. A separation agreement is unenforceable on grounds of public policy unless it is made after separation or in contemplation of an immediate separation and is fair in the circumstances. (2) A promise that tends unreasonably to encourage divorce or separation in unenforceable on grounds of public policy. 191 Promise Affecting Custody

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A promise affecting the right of custody of a minor child is unenforceable on grounds of public policy unless the disposition as to custody is consistent with the best interest of the child. EXAM: 1. Public Policy: There is not a defect in the bargaining position of the parties. You have a K that both parties agree on but the courts will not enforce because there is something against the moral fiber of the society we live. Valley Medical Specialists v. Farber (1999) Facts: 1985 VMS hired Dr. Farber Dr. Farber became a shareholder a few years after joining Dr. Farber entered into a new stock and employment agreement The employment agreement contained a restrictive covenant. 1994 Dr. Farber left VMS and began practicing within the area defined by the restrictive covenant (p.633) Issue: Whether the restrictive covenant between Dr. Farber and VMS is enforceable? Rule: 188 A limited restraint is valid when the restraint is reasonable and the restraint is reasonable when it imposes no shackle upon the one party which is not beneficial to the other. A covenant not to compete is invalid unless it protects some legitimate interest beyond the employers desire to protect itself from competition. Public policy concerns may outweigh any protectable interest the remaining members may have Reasoning: Historically covenants were viewed as restriants of trade and were invalid at common law The practice of medicine affects the public and for this reason the AMA has consistently taken the position that noncompetition agreements between physicians impact negatively on patient care. Court reasoned that because this agreement is between parties it is analogous to an employer/employee agreementRather than a sale of business Court concluded that the doctor patient relationship is special and entitled to unique protection. In light of the great public policy interests involved in the covenants not to compete between physicians, each agreement will be strictly construed for reasonableness. 1. Reasonableness: Reasonableness is fact driven and depends on the totality of the circumstances A restriction is unreasonable and will not be enforced if: a. The restraint is greater than necessary to protect the employers legitimate interest b. If that interest is outweighed by the hardship to the employee and the likely injury to the public Covenant prohibited Farber from providing any and all forms of medical care 2. VMS protectable interest Personal relationship between Dr. and patient as well as the patients freedom to see a particular doctor affects the extent of the employers interest Dr. Farber did not learn his skills from VMS, and restrictive covenants are designed to protect an employers customer base by preventing skilled employee from leaving an employer and based on skills acquired from employment, luring away the employers business while the employer is vulnerable It is agreed that VMS does have a protectable interest in its referral source. 3. Scope of the restrictive covenant

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Restriction cannot be greater than necessary to protect VMSs legitimate interest Idea is to give the employer a reasonable amount of time to overcome the former employees loss. The duration is reasonable only if it is no longer than necessary fro the employer to put a new man on the job and for the new employee to have a reasonable opportunity to demonstrate his effectiveness to the customers. Court noted that the 3 year restriction is UNREASONABLE 4. Public Policy The geographic scope of the covenant is about 235 square miles. This makes it difficult for Farbers patients to continue treatment with him if they desire Covenant was broad and against public policy Specifically; a. The 3 yr duration was unreasonable because pulmonology patients typically require contact with the treating physician once every 6 months. Thus a restriction over 6 months is unnecessary to protect VMS economic interest. Patients would have had an opportunity within approximately 6 months to decide which doctor to see for continuing treatment. b. The 5 mile radius was unreasonable because with 3 offices the restriction covered more than 235 square miles c. The restriction was unreasonable because it did not expressly provide for an exception for emergency medical treatment d. The restriction was overly broad because it is not limited to pulmonology e. The covenant violates public policy because of the sensitive personal nature of the doctor/patient relationship. 5. Severence Contract contained a severance clause; restricting him from providing medical care or medical assistance for any person or persons who were patients or employer during the period that employee was in the hire of employer. Arizona Law will Blue Pencil any restrictive covenants that are unreasonable provisions. Supreme court finds that the appeals court rewrote the agreement in an attempt to make it enforceable Where the severability of the agreement is not evident from the contract itself, the court cannot create a new agreement for the parties to uphold the contract. Class Notes: Restrictive covenant- Non compete Clause Historically non-compete clauses were unenforceable because they were a restriction on trade. Modern Day- if the covenant is ancillary to some other agreement. They are enforceable but scrutinized to a high level of scrutiny What is the level of scrutiny? (1) Employer/employee relationship= High level of scrutiny (2) Business relationships= Lower level of scrutiny Court says this is like an employer/employee relationship, therefore, it requires a high level of scrutiny Court decides that they regard Doctors as providing a public service and they feel the need to protect the publics interest. Court looks at the scope of the restrictive covenant to determine the reasonableness of the legitimate interest. (a) Distance (geography)-need to look to the facts and what the other alternatives are (b) Time Frame of covenant (duration) (c) Nature of Prohibited activity-how narrow or broad do they define the restrictive covenant Court found the restrictive covenant Unenforceable; however there are several options (a) Unenforceable

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(b) Fix the agreement (re-write the K to be reasonable) (c) Blue Pencil- strike the unreasonable parts of the agreement. (if this is done, the rest of the provision must hang grammatically on its own) NOTE: with fixing the K or Blue Penciling, the court is making a contract that the parties did not agree to. The negative effect of Fixing or Penceling is that it encourages parties to draft very restrictive (broad) non-compete clauses knowing that the court will come in and fix it if there is a problem Better Option: Not enforcing the covenant. It is harsh but will result in the drafting of better noncompete clauses. Restatement Position: 184 is the middle ground 184 When Rest of Agreement is Enforceable (1) If less than all of an agreement is unenforceable under the rule stated in 178, a court may nevertheless enforce the rest of the agreement in favor of a party who did not engage in serious misconduct if the performance as to which the agreement is unenforceable is not an essential part of the agreed exchange. (2) A court may treat only part of a term as unenforceable under the rule stated in subsection (1) if the party who seeks to enforce the term obtained it in good faith and in accordance with reasonable standards of fair dealing. EXAM: 1. Legal Requirements for Scrutiny of Non-Compete Clauses (a) Legitimate Interest (has to protect the legitimate interest beyond a desire to protect itself from competition) (b) Reasonableness of the Non-compete 2. Legitimate Interest Prong Protect referrals Protect info and know how they have given the person Protect time it takes to replace the person 3. Reasonableness Prong: depends on the totality of the circumstances Greater than necessary to protect legitimate interest Employees interest is outweighed by the harm to the employee and the public interest 4. 188 Ancillary Restraints on Competition (1) A promise to refrain from competition that imposes restraint that is ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade if: (a) The restraint is greater than is needed to protect the promisees legitimate interest, OR (b) The promisees need is outweighed by the hardship to the promisor and the likely injury to the public. (2) Promises imposing restraints that are ancillary to a valid transaction or relationship include the following: (a) A promise by the seller of a business not to compete with the buyer in such a way as to injure the value of the business sold; (b) A promise by an employee or other agent not to compete with his employer or other principle; (c) A promise by a partner not to compete with the partnership. 5. Need to find both: A legitimate Interest to the employee; AND Reasonableness of the interest (greater than necessary or hardship)

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RR v. M.H. & another (D.H. husband of M.H.) Facts: Plaintiff father and his wife contracted with defendant mother for surrogacy services because wife was infertile. Defendant mothers motives for the surrogacy was to get money for her other childrens education and to help the couple out. Defendant signed agreement on Nov 1 and the father signed it on Nov 18. The agreement held that she would be the egg donor and the surrogate, that she would receive $10,000 over the term of the pregnancy, and that she would forfeit any payments and make retribution if she decided not to relinquish her parental rights. The father assumed all of the pregnancy expenses, but would be required to make retribution of this if the plaintiff was not the father or if the mother didnt allow the father to take the baby home from the hospital. In May, at 6 months pregnant, the mother told her lawyer that she had changed her mind and made no refund of the money and services she had received thus far Reasoning: Trial court found that the mother entered into the agreement on her own voilition after consulting legal counsel. There was no evidence of undue influence, coercion, or duress The mother fully understood that she was contracting to give custody of the baby to the father. Court determined that MA law was appropriate to determine the surrogacy relationship between the parties (WHY as there was a CHOICE OF LAW FOR RI?) Adoption requires written consent, and any such consent is not to be executed sooner than the fourth calendar day after the date of birth of the child to be adopted. The legislative judgment that a mother should have time after a childs birth to reflect on her wishes concerning the child weighs heavily in the courts consideration whether to give effect to prenatal custody agreements. Conclusion: Consent to custody in the agreement is ineffective because no such consent should be recognized unless given on or after the fourth day following the childs birth The payment of money to influence the mothers custody decision makes the agreement as to custody void. Compensated surrogacy arrangements raise concern that, under financial pressure, a woman will permit her body to be used and her child to be given away. Public Policy grounds: to apply a surrogacy agreement of the type involved here the general principle that an agreement between informed, mature, adults, should be enforced absent proof of duress, fraud, or undue influence..is DECLINED BY THE COURT Other considerations in determining the enforceability of a surrogate agreement: a. The mothers husband give informed consent to the agreement in advance b. The mother be an adult and have had at least one successful pregnancy c. The mother and her husband and the intended parents have been evaluated for the soundness of their judgment and for their capacity to carry out the agreement d. The fathers wife be incapable of bearing a child without endangering her health e. The intended parents be suitable persons to assume custody of the child f. All parties have the advise of counsel Any custody agreement is subject to judicial determination of custody based on the best interest of the child. A surrogacy agreement judicially approved before conception may be a better procedure. Class Notes: 1. No rule that says you cannot enforce surrogacy agreements 2. 2 prongs: Surrendering the child and Compensation (a) Surrendering the Child Prong Statute dealing with adoption Court looks to adoption statute with regards to surrendering your parental rights 4 days intended to give the mother enough time to reflect on giving up her parental rights (b) Compensation Prong Payments were not for services

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Last payment was upon receipt of the child Would not have been a clause that required her to refund the money (suggesting that they are buying the baby) PUBLIC POLICY: do not want people to give up their bodies to sell babies for $. Tries to protect poor people. The ultimate determination on Surrogacy Agreements is THE BEST INTEREST OF THE CHILD

EXAM: 1. Public Policy- tends to arise in the context of Family Law 2. 189- promise unenforceable if in the restraint of marriage (could be general, specific, class of people) 3. 190- Not enforceable if detrimental to marriage relationship (indecent proposal) 4. 191- ultimately the decision will be made in the best interest of the child. 5. Consequences of Non-Enforceability: (a) Historically- If illegal the court will just leave it alone (b) Modern Day- If illegal courts apply a balancing test to determine if restitution is appropriate (178) (c) If parties are equally culpable then the court will leave people as they stand (178) III. Justification for Non-Performance: Impossibility, Impracticability & Frustration A. MISTAKE Note: the fundamental difference between all of the other ways to get out of a K (undue influence, duress, unconscionability, etc..) and Mistake is that for all the other ways, one of the parties did something improper or had some bargaining misconduct and HERE (MISTAKE) something happens that was not planned for or a change in the circumstances or assumption underlying the K. Mistake- a legal doctrine with specific elements (1) Misunderstanding (2) Mutual Mistake (3) Unilateral Mistake 152 When Mistake of both parties makes a contract voidable (1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in 154. (2) In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise. 154 When a party bears the risk of Mistake A party bears the risk of a mistake when: (a) The risk is allocated to him by agreement of the parties, OR (b) He is aware, at the time the contract is made that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, OR (c) The risk allocated to him by the court on the ground that it is reasonable in the circumstances to do so.

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1) MISUNDERSTANDING: parties are prescribing very different meanings of the same term. There was not meeting of the minds because they are each thinking the term means something different. (NO K) Konic International corp v. Spokane Computer Services (Misunderstanding Case) One party thinks $52.60 and the other party thinks $5,620.00. In order to fall under the misunderstanding, both parties belief MUST be reasonable No idea that the other party was thinking something different 20 Mutual assent: encompases both actual and constructive knowledge Must Approach Misunderstanding cautiously because if misunderstanding is found there is no K. Note: 1. 2 prongs to Misunderstanding (a) Material different meanings (b) Both meanings must be reasonable 2. It is very rare to have a misunderstanding case because the consequence is that there is no K 2) MUTUAL MISTAKE Sherwood v. Walker Facts: Contracted for barren cow, which ended up not being barren. Test: o Mistake that went to the essence or substance voidable o Mistake that goes to value or quality not voidable o THIS TEST IS OVERRULED BECAUSE TOO DIFFICULT TO APPLY - Holding: mistake that cow was barren was substance because it was the thing they were contracting for; different creature - Counter-argument: still contracting for the same cow Lenawee County Board of Health v. Messerly Facts: Pickles purchased land from the Messerlys which had a three-unit apartment building on it. Included in the contract for the land was a clause that the purchaser had examined the property and accepts it in its present condition. Shortly after the transaction closed, the property was condemned because of a defective sewage system, and an injunction was brought against the landowners to prohibit human habitation on the land. The Messerlys predecessor in title had put the sewage system in. The Pickles defaulted on the loan because that refused to make the payments Issue: Whether there was a mistaken belief entertained by one or both parties to the contract, AND If there was a mistake, what the resultant legal significance of the mistake. Rule: 151 Contractual Mistake: A belief that is not in accord with the facts A contract may be rescinded because of a mutual misapprehension of the parties, but this remedy is granted only in the sound discretion of the court. Rescission is indicated when the mistaken belief relates to a basic assumption of the parties upon which the contract is made and which materially affects the agreed performances of the parties. 152 Rescission is not available to relieve a party who has assumed the risk of loss in connection with the mistake. Reasoning Both parties mistakenly believed that the property which was the subject of their land contract would generate income as rental property. The fact that the property could not be used for human habitation, deprived the property of its income earning potential and rendered it less valuable.

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This mistake cannot accurately be characterized as collateral because it also affects the essence of consideration. BEST Approach is a case by case analysis where Rescission is indicated when the mistaken belief relates to a basic assumption of the parties upon which the contract is made and which materially affects the agreed performances of the parties All the parties assumed that the property was suitable for human habitation and could be utilized for rental income This court Reversed the court of Appeals because they conclude that equity does not justify the remedy sought (getting out of the contract) Here the risk should be on the purchaser (guided by 154) Because of the clauses in the contract (as is and the purchaser examined clause) the risk of the properties current condition should lie with the purchaser. Holding: Pickleses not entitled to equitable remedy of rescission. REVERSED Class Notes: 1. Sherwood= Old Law; Lenawee= GOOD LAW 2. Sherwood: test used to determine mutual mistake is that the fact needs to be in existence at the time the K is formed (a) 2 prong test (1) Something that goes to the substance of the transaction (2) Something that goes to the quality of something 3. Sherwood: barren cow goes to the substance because a barren cow is not the same creature as a non-barren cow. HYPO: Selling Jewlery: (a) Substance- Gold ring not a gold ring (b) Quality- thought it was 24K turned out to be 14K Note: all you need to do is form it into a Macro Argument to go towards the Substance Prong. Class Notes: Lenawee Case 1. 3 prong test (a) Mutual mistake has to relate to a fact in existence at the time the K is executed (i.e. did the problem with the septic pre-exist the K?) (b) Fact has to relate to a basic assumption underlying the K and materially affect performance (i.e. property was capable of being income producing and the assumption turned out to be false (bad septic) therefore paying for something that it is not) (c) Risk must not have been born by one of the parties (i.e. if party assumed the risk then there is no mistake) this is where Lenawee fails because there is an as is clause in K. 2. 152 relates to prongs 1&2 3. 154-more detail on Risk 4. 3 circumstances of Risk (154) (a) Risk is allocated by the agreement of the parties (as is) (b) Aware at the time the K is made that he has only limited knowledge with respect to the facts to which the mistake relates but treats limited knowledge as sufficient. (conscious ignorancepaintings sold for $60 turned out to be worth $1M) (c) Risk allocated him by the court on the ground it is reasonable in the circumstance to do so (catch all) Note: If you satisfy the elements of 154, the K is subject to rescission. Rescision is subject to restitution. EXAM: 1. Distinguish Misunderstanding and Mutual Mistake

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(a) With Misunderstanding there is no K (b) With Mistake (unilateral or Bilateral) you do have a K and need to take steps to rescind K. 2. USE LENEWEE FORMAT OF ANALYSIS (ONLY MENTION OLD LAW)

3) UNILATERAL MISTAKE Wil-Freds v. Metro Sanitary District Facts: Plaintiff entered a $100,000 bid to do work for defendant. Before plaintiff was awarded the job, he sought to withdraw because his subcontractor had mistaken his bid by $150,000, but the defendant denied and granted plaintiff the job. In the bidding contract, it stipulated that the bidder was unable to withdraw his bid and in the event that he was granted the job and refused to do it, the deposit would be held by the defendant as a fair measure of the damages incurred by the defendant Issue: Whether Wil-Freds can obtain rescission of its contract with the Sanitary District because of its unilateral mistake. Rule: Relief will not be granted if but one party to a contract has made a mistake Unilateral mistake may afford ground for rexcission where there is a material mistake and such mistake is so palpable that the party in error will be put on notice of its existence Mistake must relate to a material feature of the contract; that it occurred notwithstanding the exercise of reasonable care; that it is of such grave consequence that enforcement of the contract would be unconscionable; and that the other party can be placed in statu quo Reasoning: Trial court decided that the excavating companies mistake related to a material feature of the rehabilitation contract and that this condition was supported by clear and positive evidence. The sanitary district is not placed in any hardship by the withdrawel of the bid. Plaintiff did exercise reasonable care when choosing the excavating company Holding: Affirm the trial courts order granting rescission of the contract and the return of the deposit. Class Notes: 1. Unilateral Mistake: it is much harder to get out of K on the basis of a Unilateral Mistake 2. Elements of a Unilateral Mistake: (a) Fact in existence at the time of K (b) Basic Assumption and Materially affect performance (c) Risk, OR (d) Hardship/unconscionability prong (fundamental unfairness) Note: reason to enforce the 4th element is that it should be harder to get out of K if unilateral 3. 153. When Mistake of one party makes a contract voidable Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performance that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in 154. And (a) The effect of the mistake is such that enforcement of the contract would be unconscionable, or (b) The other party had reason to know of the mistake or his fault caused the mistake. 4. General Rule: If Unilateral Mistake you do nto get to get out of the K. 5. In Wil-Fred: Mistake: fact that he could drive over plastic pipes with heavy machinery

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Affected Performance: because excavator could not drive trucks over pipes and totally changed how they could perform their work and it increased the $ it would cost significantly Risk: Did one party bear the risk?- contractor did his due diligence and did everything they could -contractor used sub before and never had a problem in the past Why would enforcement be unconscionable -excavator would go bankrupt -contractor would lose 100K plus bonding capacity How would it be if Sub was capable of bearing the cost? -could be the other partys fault with the mistake of Filler or that they knew about it because the Bid was 200K lower than any other bid Cannot make a mistake if you are negligent Is there a requirement to show you were not negligent -Courts are split (a) if negligent do not get to get out of K (b) negligence does not bar you from getting out of K

6. 157. Effect of Fault of Party Seeking Relief A mistaken Partys fault in failing to know or discover the facts before making the contract does not bar him from avoidance or reformation under the rules in this chapter, UNLESS his fault amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing. Plain English: Negligence is irrelevant to state a claim for unilateral Mistake. The only exception to unilateral mistake is if Fraud or misrepresentation. 4) MISTAKE IN RECORDING Doctrine of Reformation: When mutual mistake consists of the failure of the written K to state accurately the actual agreement of the parties, reformation of the contract to express the parties mutual intention is the normal remedy. Note 6 p. 673 Example: Lease for $1400 Mistake in typing ($1800) Where typegraphical error the remedy is reformation (court will change the K to reflect the parties intentions). B. CHANGED CIRCUMSTANCES Class Notes: 1. Changed circumstances include Impracticability, Frustration, and Impossibility 2. Primary distinguishing factor between Changed circumstances and Mistake is that a Mistake is made with respect at the time of bargaining and with changed circumstances, something changes after the K is made. 3. Historically- with changed circumstances there was a form of strict liability (what you promised is on you) 4. Historical Cases: (a) Perdine v. Jane: Government came and took land and tenant was still made to pay rent for 3yrs (b) Taylor v, Caldwell (Impossibility) Music Hall rented then burned down Under the Jane approach tenant would still have to pay, BUT Here the court let Caldwell out on Impossibility (c) Krell (Frustration) Rented room to watch King go by

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 King changed date of appearance Court let Krell out because the purpose of the K was frustrated (d) Mineral Park v. Howard (Imparcticability) Extract gravel from land Difficult to extract the gravel Impracticable to perform as Is

1) IMPOSSIBILITY & IMPRACTICABILITY Impossibility- Arises where it is literally Impossible to perform the K as is. (easiest way to get out of K, courts take sympathy). Arises when the person or thing necessary for performance no longer exists. 262. Death or Incapacity of Person Necessary for Performance If the existence of a particular person is necessary for the performance of a duty, his death or such capacity as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the contract was made. 263. Destruction, Deterioration or Failure to Come into Existence of Thing Necessary for Performance. If the existence of a specific thing is necessary for the performance of a duty, its failure to come into existence, destruction, or such deterioration as makes performance impracticable is an event the nonoccurrence of which was a basic assumption on which the contract was made. Note: It is important to distinguish what is necessary for performance (i.e. just because a person dies does not mean it is in the realm of impossible)(i.e. hire a painting company to paint house, frank was supposed to paint the house, frank dies, but Ted (who works for the company) can still come and paint the house) Note: Impossibility can arise out of legislation or a statute. 261 Discharge by Supervening Impracticability Where, after a contract is made, a partys performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary. Wendt v. IH Facts: 1974 Wendt entered into a Dealer Sales and service agreement with IH Agreement provided a specific provision for the termination of the contract Recession in farm equipment market hit, IH started to lose substantial business IH negotiated to sell its farm equipment to Case/Tenneco Case/Tenneco did not acquire IHs existing franchise network Wendt was not offered a Case franchise Issue: Is the defense of Impracticability applicable under Michigan Law? Rule: 261 Discharge by Supervening Impracticability Where, after a contract is made, a partys performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract

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was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary. Impossibility is a valid defense not only when performance is impossible, but also when supervening circumstances make performance impracticable. The mere lack of profit under a contract is insufficient for a defense A mere change in the degree of difficulty or expense due to such causes as increased wages, price of raw materials, or the costs of construction, unless well beyond the range of normal, does not amount to impracticability since it is this sort of risk that a fixed price contract is intended to conver. In order for a supervening event to discharge a duty, the non-occurrence of that event must have been a BASIC ASSUMPTION on which both parties made the contract 265 Discharge by Supervening Frustration Where, after a contract is made, a partys principle purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary. There are three factors to establish a frustration claim i. The purpose frustrated by the supervening event must have been the principle purpose of the party making the contract ii. The frustration must be substantial iii. The frustrating event must have been a basic assumption of the contract Impracticability: The fact that IH experienced a down turn in the farm equipment market and decided to go out of business does not excuse its unilateral termination of its dealership agreement due to impracticability. Neither market shifts not the financial inability of one of the parties changes the basic assumption of the contract such that it may be excused under the doctrine of impracticability. The agreement provided for a means of termination of the agreement. IH was responsible for the remedy in which it chose to terminate the agreement. IH had an alternative where they could have terminated the agreement and share the proceeds of the sale with its dealers. Frustration: The primary purpose of the agreement was to establish the dealership and the terms of interaction and was not Mutual Profitability The dramatic downturn in the farm equipment market, resulting in reduced profitability did not frustrate the primary purpose of the agreement. The continuity of market conditions or the financial situation of the parties was NOT a basic assumption or implied condition to the enforcement of the contract The doctrine of frustration is an equitable doctrine meant to fairly apportion risks between the parties in light of unforeseen circumstances. Holding: Impracticability Impracticability is an inappropriate defense in this case IH had alternatives which could have precluded unilateral termination of the contract District court erred in permitting the defense of impracticability to go to the jury Wendt was entitled to a directed verdict on this issue as a matter of Law Frustration The district court was proper in awarding Wendt a directed verdict on the frustration defense AFFIRMED Notes:

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1. Doctrines of impracticability of performance and frustration of purpose are separate, but the elements are essentially identical a. Substantial reduction of the value of the contract b. Because of the occurrence of an event, the non-occurrence of which was a basic assumption of the contract c. Without the partys fault d. The party seeking relief does not bear the risk of that occurrence of the event either under the language of the contract or the surrounding circumstances

Class Notes: 1. Does IH get out of K based on Imparacticability or Frustration 2. Imparacticability Argument IH argues that changes in the market make it impracticable to perform the K as is Not impossible to perform, just impracticable 261 lays out the test for Impracticability 3. Elements of Impracticability Basic assumption which no longer holds true (something that both parties believes is true) Performance of K must be impracticable Impracticability not arising through fault of 1 of the parties One Party did not assume the risk 4. In Wendt: Basic Assumption: IH argues the continuous nature of the market; Court says cannot have a basic assumption of a continuous market conditions because it would undermine ALL contracts. IH Argues Impracticable because they are losing 2M/day Court says No, Impracticability not an issue because: (a) IH had other options (b) Fault- IH chose their remedy but had other options Frustration: Arises when whole reason or purpose of the K is destroyed (no longer makes sense to perform) The purpose of the K was to have a dealership agreement in this area Court says- Purpose of the K was not frustrated 5. Elements of Frustration: (a) Purpose frustrated must have been the principle purpose (b) Frustration must be substantial (c) Frustration must be a basic assumption (d) Fault-frustrating event MUST NOT be caused by one of the parties (e) One of the partys assumed the risk (conduct, circumstances, or terms of the agreement) 265 Discharge by Supervening Frustration Where, after a contract is made, a partys principle purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary. 6. Courts are more willing to allow you out of a contract if the contract is frustrated or made impracticable by Government regulations

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 264. Prevention by Government Regulation or Order If the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption which the contract was made. EXAM: 1. Impractical- Not convenient 2. Impracticable- extremely difficult, extremely expensive (close to impossible) 3. Frustration- Not hard to perform, it just does not make sense to perform. 4. The availability of other options suggests that Impracticability will not succeed. 5. Frustration- Arises when the entire purpose of entering the K is destroyed 6. If you couch the basic assumption or purpose of the K very broadly it will undermine the basis of every K.

2) FRUSTRATION Mel Frank Tool v. Di Chem Facts: Di-Chem rented a storage facility from Mel Frank for the purpose of storing chemicals, some of which were hazardous (but never expressed to Frank). One provision of the lease required Del-Chem to make no unlawful uses of the premises and to comply with all city ordinances. There was also a destruction-of-premises provision that allows either party to terminate the lease under certain circumstances. The building was inspected by the fire dept., who determined that hazardous chemicals could no longer be stored there because of deficiencies in the building. Since Di-Chem could no longer store all of its chemicals, it vacated the premises before the lease was over Rule: Impracticability of performance and frustration of purpose 261 Discharge by Supervening Impracticability Where, after a contract is made, a partys performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary. 265 Discharge by Supervening Frustration Where, after a contract is made, a partys principle purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary. There are 3 distinct grounds for the discharge of performance i. Obligor may claim that some circumstance has made his own performance impracticable ii. The obligor may claim that some circumstance has so destroyed the value to him of the other partys performance as to frustrate his own purpose in making the contract iii. The obligor may claim that he will not receive the agreed exchange for the obligees duty to render that agreed exchange on the ground of either impracticability or frustration Rational behind both impracticability and frustration is whether the nonoccurrence of the circumstance was a basic assumption on which the contract was made. 3 distinct times a contract can be discharged for frustration i. The purpose of frustration must have been the principle purpose of that party in making the contract ii. The frustration must be substantial iii. The non-occurrence of the frustrating event must have been a basic assumption on which the contract was made

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Reasoning: Di-Chem was still able to store some of the chemicals on the premises, so the entire purpose hadnt been frustrated, it just became unattractive. Generally, if there is still some serviceable use, cannot use the doctrine of frustration. Holding: Di chem failed to establish that it is entitled to relief via its impossibility defense or the terms of the lease. AFFIRMED for Mel Frank Class Notes; 1. In Mel-Frank- Argued frustration because the purpose to enter the agreement was to have a place to store and distribute chemicals. 2. Court said K was not frustrated because it only related to hazardous material and not ALL chemicals. 3. Court also noted that the principle purpose may have been frustrated; However it was not substantial. 4. Force Majeure clause: The parties own agreement as to when they can get out of a K Used to avoid litigation Broader than impracticability, impossibility, or frustration Strictly construed against the drafter EXAM: 1. Very High standard for determining the substantialness of the purpose as long as there is a serviceable use or use value of the property you do not get to get out of K on frustration C. MODIFICATION OF CONTRACT 1) MODIFICATION and the PRE-EXISITING RULE Pre-existing Duty Rule: Where you have a pre-existing duty under a K, Agreeing to do what you already have agreed to do-there is NO CONSIDERATION A promise to do what you already promised to do is not consideration. Coercive Bargains- Reason for the pre-existing duty rule is that we do not want one party to be able to extract more out of a K because of a more powerful bargaining position Alaska Packers v. Domenico Facts: It is claimed that the appellant promised to pay each of the libelants the sum of $100 for services rendered. fishing season. Libelants were to go as sailors and fishermen, agreeing to do regular ship work, both up to Alaska and back to San Fran. Terms of the agreement were to be for $50 plus 2 cents for each red salmon each caught. Another contract had them being paid $60 for the same work. After starting to work, the libelants stopped working and demanded being paid $100. The companies superintendent told the men that he could not change the contract without permission, but did so in pen to get the men to continue the work. Rule: Merely promising to perform an existing obligation will not serve as valid consideration for additional return compensation from the other party. Reasoning: The men claimed that the ship was provided with defective nets.

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Given the short nature of the season and the fact that the boat was in a remote area, the appellants did not have a reasonable alternative in finding other people to work. the alteration of the contract was made without consideration, and based solely upon the libelants agreement to render the exact services that they were already under contract to render. It cannot be justly held that there was any voluntary waiver on the part of the appellant of the breach of the original contract. The supervisor informed the libelants that he had no authority to waive any rights under the original contract. Holding: Judgment for the Appellants (shipping company) Class Notes: 1. In Alaska Packers- the modification arose because the original K of $50, fisherman stopped working and held out for more $. 2. Court held that the modification was unreasonable because of a lack of consideration (they had already agreed to do the work for $50) 3. Distinguishing factor- if you believe the fisherman, they had defective nets and it makes their jobs more difficult; However the court believed the Fishing Comp. because they thought that a company was in the business of fishing and the purpose is to bring in fish, it would not be likely that they supplied defective nets. 4. Could have potentially argued- they did give additional consideration by showing that there is something that they were giving up (i.e. take less per salmon caught) 5. The condition of the nets was an unforeseen circumstance because of the harder job, the price increase was reasonable. 6. Fishermen relied on the extra $ to finish the job It is not detrimental reliance to just perform the modified K If they had pre-spent the $ then it would be a better argument EXAM: 1. Modification Analysis (How to) (a) Step 1- can you find additional consideration (benefit/detriment test) (b) Step 2- Exceptions Unforeseen circumstances (do not have to raise to the level of frustration, Impossibility, Impracticability) Reliance on a promised modification (detrimental) Mutual release followed by a new agreement (problematic because it is a made up fiction-same consideration) 2. 89. Modification of Executory Contract A promise modifying a duty under a contract not fully performed on either side is binding (a) If the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; OR (b) To the extent provided by statute; OR (c) To the extent that justice requires enforcement in view of material change of position in reliance on the promise 3. 90. Promise Reasonably Inducing Action or Forbearance (1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promise or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires. (2) A charitable subscription or a marriage settlement is binding under subsection (1) without proof that the promise induced action or forbearance.

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4. Pre-existing Duty Rule: requires additional consideration no matter how nominal the consideration is. 5. Distinguish UCC AND Common Law Common Law- requires additional consideration (pre-existing duty Rule) UCC- does not have arbitrary barriers. Modifications are normal. Does not require additional consideration. UCC is only concerned with Bad Faith and Duress (2-209) 2) MODIFICATION and DURESS/GOOD FAITH Kelsey-Hayes v. Galtaco Redlaw Facts: In 1987, the parties entered into a three year requirements contract where defendant would provide plaintiff with all of the castings it needed, in return for a fixed price. In 1989, the defendant was suffering monetary loss and the Board of Directors made a final decision to discontinue its operation and cease production of castings. Defendant, knowing that an immediate shutdown would seriously inconvenience its customers, offered an agreement to keep the plant operating for several months in exchange for a 30% increase in shipping costs. Plaintiff contends that it would have take somewhere between 18-24 weeks to obtain a sufficient supply of casting from another source, which would cause one of its major clients, Ford, to halt production. The next month, defendant informed plaintiff it required another 30% increase to continue business. Plaintiff didnt pay for 84 shipments, totaling around $2 million. Issue: Did Kelsy present enough evidence to allow a reasonable finder of the facts to conclude the 1989 agreements were executed under duress. Rule: A subsequent contract or modification is invalid and therefore does not supersede an earlier contract when the subsequent contract was entered into under duress. A contract is voidable if a partys manifestation of assent is induced by an improper threat by another party that leaves the victim no reasonable alternative Economic duress can exist in the absence of an illegal threat, the threat must merely be wrongful. Even acts lawful and non-tortious may be wrongful depending on the circumstances. Reasoning: Entering superseding inconsistent agreement, covering the same subject matter rescinds an earlier contract and operates as a waiver of an claim for breach of the earlier contract not expressly reserved. In order to make a claim for duress a person must be subjected to the threat of an unlawful act in the nature of tort or a crime. A contract is voidable if a partys manifestation of assent is induced by an improper threat by another party that leaves the victim no reasonable alternative. Kelsey had no reasonable alternative other than acquiescing to Galtaco demands for a contract modification. The trial court held that a company in this position was deprived of free will and had no alternative other than to give in to the demands of the party threatening to breach the contract. Kelsey vigorously objected to Galtaco breach of the 1987 contract and its demand for price increases. Holding: There is sufficient evidence to allow a reasonable finder of fact to determine that Kelsey was under duress when it executed the 1989 agreements Galtaco motion for SJ DENIED A reasonable trier of fact could determine that Kelsys protests effectively put Galtaco on notice that the 1989 agreements were agreed to under duress. Kelsey motion to amend is Granted. In Kelsey-Hayse Wrongful threat was the threat to breach the K

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There was no other reasonable alternative. Plaintiff had a contract with Ford who was relying on these castings Consequential Damages- Lost profits, Halt in productivity Plaintiff did protest the modification

Class Notes: 1. UCC-not concerned with additional consideration to modify contracts. Focus on Bad Faith and Duress. 2. 2-209- Modifications are effective without additional consideration. 2-209. Modification, Rescission and Waiver (1) An agreement modifying a contract within this article needs no consideration to be binding. (2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party. (3) The requirements of the statute of frauds section of this article must be satisfied if the contract as modified is within its provisions. (4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver. (5) A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the either party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver. 3. Elements of Duress: Wrongful or Improper threat (threatening to breach a K is a wrongful threat) Must have NO reasonable alternative Causation- Threat must induce party to enter K Notice of protest against the modification (do not need to reserve the right, just need to make it clear that you protest to the modification) 4. Notice of Protest is Required so that there is no problem of BAD FAITH Have to come to court with clean hands, cannot sneakily agree to modification, then sue for duress (BAD FAITH on your part) 5. Bad Faith- standards of Commercial Reasonableness 6. Test for Bad Faith: (1) A Party may in good faith make a modification if there are unforeseen circumstances (2) Even where the circumstances do justify a modification, it is still Bad Faith to coerce. Note: if you generally believe that you do not have an obligation to perform under the K, it goes toward Good Faith. 7. Bad Faith vs. Duress (a) Duress- comes from gun to the head, no other alternative. (harder to satisfy than Bad Faith) (b) Bad Faith- All you need to so is coerce a bargain (wrongful threat). (easier to meet). Bad Faith starts when you coerce a breach and it does not matter if the other party has any alternatives. EXAM: Problem 8-3 p. 713 (Analysis) 1. Are you dealing with Common Law or UCC (a) If common Law- Pre-existing Duty/Duress (Consideration Needed) (b) If UCC- No extra consideration needed. Look to Bad Faith and Duress 2. Force Majur Clause: Is there a legal justification for Whaler to get out of the K. If there is a legal excuse to void the K, then the contract just does not exist K is not Impossible

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K is not frustrated (purpose is to install tiles) Is K Impracticable? (a) Cost more (economic hardship) (b) Market prices change and we are only talking about a 30% increase in price Note: the K probably does not rise to the level of Impracticability! This clause only appeared in the Buyers form (why would a buyer allow a seller out of a K for an increased price of Raw materials?) A buyers force Majure clause would not include unforeseen circumstances of the seller. 3. Price Modification: No Additional Consideration No nominal consideration 4. Look to Exceptions: Maybe unforeseen circumstances Detrimental Reliance Legal Fiction of Rescind with New K Answer/Advice: If you go forward with this action under the common Law, the court may find one of these exceptions. 5. Real Issue: Is there Bad Faith or Duress (a) Duress Threat- time constraint, want the star pattern Alternatives- Really want the star pattern Detrimental Reliance(b) Bad Faith Like in Kelsay, can they come to the table with clean hands. Note: the point of this fact pattern is that Impracticability, contract modification, duress, Common Law and UCC are all invoked! IV. CONSEQUENCES OF NON-PERFORMANCE: EXPRESS CONDITIONS, MATERIAL BREACH AND ANTICIPATORY REPUDIATION

EXPRESSED CONDITIONS/MATERIAL BREACH/ANTICIPATORY REPUDIATION WILL BE ON EXAM!!! 224 Condition Defined A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due. 225 Effects of the Non-Occurrence of a Condition (1) Performance of a duty subject to a condition cannot become due unless the condition occurs or its non-occurrence is excused. (2) Unless it has been excused, the non-occurrence of a condition discharges the duty when the condition can no longer occur. (3) Non-occurrence of a condition is not a breach by a party unless he is under a duty that the condition occur. 226 How an Event may be made a Condition An event may be made a condition either by the agreement of the parties or by a term supplied by the court. 227 Standards of Preference with regard to conditions (1) In resolving doubts as to whether an event is made a condition of an obligors duty, and as to the nature of such an event, an interpretation is preferred that will reduce the obligees risk of forfeiture, unless the event is within the obligees control or the circumstances indicate that he has assumed the risk.

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(2) Unless the contract is of a type under which only one party generally undertakes duties, when it is doubtful whether (a) A duty is imposed on an oblige that an event occur, OR (b) The event is made a condition of the obligors duty, OR (c) The event is made a condition of the obligors duty and a duty is imposed on the obligee that the event occur. The first interpretation is preferred if the event is within the obligees control 237 Effect on Other Partys Duties of a Failure to render Performance Except as stated in 240, It is a condition of each partys remaining duties to render performances to be exchanged under an exchange of promises that there be no uncured material failure by the other party to render any such performance due at an earlier time. A. EXPRESS CONDITIONS 1) GENERALLY Express Condition: Included in the contract for the benefit of one of the parties. Designed to protect one of the parties. The party that is protected by the condition has the ability to WAIVE the condition. Just because the condition does not happen does not mean the K is void (the party can waive the condition and proceed) Note: Express conditions must be strictly complied with and completely performed!! Contract Conditional vs. Performance Conditional (a) Contract conditional- Entire contract is conditional on the event (b) Performance conditional- one party benefits and has the right to waive the condition Oppenheimer &CO v. Oppenheim, Appel, Dixon & CO Facts: Plaintiff moved to a new building, but still had three years remaining on its existing lease. Defendant agreed to sublet the space upon satisfaction of certain conditions. The condition was that the defendant had to receive notice before December 30, 1986 that the landlord had written a notice of confirmation stating that the defendant was an acceptable subtenant. Another condition of the agreement was that the plaintiff would get written consent from the landlord for tenant work involving construction of a telephone communications system by January 30, 1987. If the notice was not received, the agreement was null and void and the parties would have no obligations to one another. Later, the deadline was extended to February 25, 1987. However, after the plaintiffs attorney phoned (instead of providing written notice) defendant on the 25th, they informed the plaintiff that the agreement was invalid and they would not extend the deadline. Issue: Whether the doctrine of substantial performance applies to the facts of this case? Rule: Condition: an act or event, other than a lapse of time, which unless the condition is excused, must occur before a duty to perform a promise in the agreement arises. Conditions can be expressed or implied a. Expressed conditions: Must be literally performed b. Implied conditions: ordinarily arise from the language of promise and are subject to the precept that substantial compliance is sufficient. Interpretation CANNOT be employed, to reduce the risk of forfeiture, if the occurrence of the event as a condition is EXPRESSED in unmistakable language

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To the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was a material part of the agreed exchange. If the parties have made an event a condition of their agreement, there is no mitigating standard of materiality or substantiality applicable to the non-occurrence of that event. Reasoning: The letter was unambiguous to the fact that a contract would not be formed between the parties until the condition was satisfied by February 25, 1987 and the intent of the parties to no enter into the contract until the condition was satisfied. Further, the flexible concept of substantial compliance directly conflicts with a strict compliance that protects a party that has taken the precaution of making the duty expressed. Also, the plaintiffs had not suffered a forfeiture or conferred a benefit on the defendant in performance of the condition because there was nothing in the facts to indicate that it would not get the $1 million licensing fee back and the plaintiffs new landlords promised to indemnify the plaintiffs if they could not sublease the space. Consequence of not fulfilling condition is other party does not have to perform obligations of contract (dont call breach of contract or breach of condition) - Distinctions between promise & condition o Look for conditional words o If ambiguous, courts consider it a promise because consequence of not fulfilling condition is so harsh - Defenses o Waiver: party protected by condition says dont worry about it o Estoppel: waiver plus reliance (not limited to material things) o Prevention: a condition is excused if the promisor wrongfully hinders or prevents condition from occurring (aspect of good faith) o Forfeiture: denial of compensation that results when obligee loses right to agreed exchange after relied substantially a. Forfeiture

Class Notes: In Oppenheimer: Condition to give notice of Land Lords consent of sublease 2nd condition to get landlords permission in writing to the tenant work Issue: have a clause in K that unless and Until written permission of tenant work and if not provided the K is null and void Arg of Landlord: they substantially performed by giving phone call (NOTE: you can not substantially perform a condition) Arg 2 Landlord: Lessor waived by accepting the letter on March 20. Arg of Lessor: we did not receive written notice of the ability for tenant work and therefore K is void Note: if we can say that the lessor waived their rights, we can move forward (1) did accept letter, (2) telephone conversations and the lawyer did not say anything about written notice. This case hinges on Substantial performance (landlord argument that they substantially performed) Doctrine of Substantial Performance does NOT apply to express conditions. Express conditions must be strictly complied with and fully performed. EXAM: 1. Condition: An act or event other than the lapse of time that unless the condition is excused that must occur before duty to perform comes due. Conditions can be expressed or Implied Plain English: A condition is something that has to happen before your performance comes due. 2. Look for a conditional contract in the housing context

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3.

4.

5.

6.

7.

8.

9.

Insurance- Home insurance requires adequate smoke detectors, pre-existing condition for medical insurance. Family context- Ill pay for school id you get As Employment context- employment conditional upon passing a drug test, entitled to bonus if achieve sales performance. Language Used to show a condition Exists IF Unless Provided Until Three Categories of Conditions (a) Express Condition- Can locate promise, whether oral or written (look for language) (b) Implied Condition- Implied on word or conduct (sometimes by law)(i.e K may not say that the buyer must use good faith when obtaining financing, if not said it could be implied) (c) Constructive Condition- Law deems it to be true. Express conditions: Must Strictly be Complied with and fully performed Supports the policy of freedom of K. If the partys took the time to put it in the K, it probably is there for a reason. YOU CANNOT BREACH A CONDITION, you can only NOT perform a condition If you do not perform a condition the contract is NOT void, because the party still has the right to waive the condition. Distinction between breach of promise and not satisfying the condition When a promise is breached one can sue for the breach of the promise Not satisfying a condition does not make the K void Promissory Conditions: usually expressed (i.e. condition of employment K to go get drug tested, you promise not to do drugs and if test positive you can be terminated) This is both a condition (if you test positive the employer can fire you) and a promise (you promised not to use drugs and employer can sue for breach of the promise) Courts do not like Promissory Conditions and the default courts use is the Promise because promises are subject to a less strict standard where conditions are held to strict interpretation Exceptions (defenses) to Strict Performance a. Waiver: A party who is the beneficiary of the condition can waive the condition. Intentional relinquishment of a known right. Limitation: Only allowed to waive something that is NOT material b. Estoppel (Waiver, Plus): Involves waiver coupled with detrimental reliance. Focus on conduct or words which causes the detrimental reliance. c. Prevention: A condition excused when one of the parties purposefully prevents the condition from occurring If you prevent the condition from happening, you cannot get out of the K d. Forfeiture: The financial consequence is so harsh to the party that they can get out of the K. 2) FORFEITURE

JNA Realty Corp v. Cross Bay Chelsea Issue: Will the tenant suffer forfeiture if the landlord is permitted to enforce the letter of the agreement? If there will be forfeiture, may a court of equity grant the tenant relief when the forfeiture would result from the tenants own neglect or inadvertence? Facts: Plaintiff leased the premises to two third parties for a 10 year term, with an option to renew for another 10 years provided that the tenant notify the landlord in mail by 6 months prior to the last day of the term. The third parties later assigned the lease to defendant, with the condition that the defendant would have the right to renew for 24 years, at which point there was 5 years left on the current lease.

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The defendant did not renew the lease (express condition) in a timely fashion due to negligence and the plaintiffs sought to evict the defendants. Rule: Notice exercising an option is ineffective if it is not given within the time specified At Law, time is of the essence of the contract Default on an option usually does not result in forfeiture, because the option itself does not create any interest in the property. Equity will not intervene because the loss of an option does not ordinarily result in forfeiture of any vested rights Equitable interest is recognized and protected against forfeiture in some cases where the tenant has in good faith made improvements of a substantial character, intending to renew the lease, if the landlord is not harmed by the delay in the giving of the notice and the lessee would sustain substantial loss in case the lease were not renewed. Reasoning: The tenant made considerable investment in improvement on the premises and if the location was lost, the tenant would lose a considerable amount of its customer basis. Class Notes: JNA is a forfeiture case: financial consequence so harsh to the party. a. Rule: strict compliance with the terms of the condition b. Only fallback is one of the exceptions (waiver, estoppel, prevention, or forfeiture) c. They did not breach the terms of the lease, they only did not fulfill the provision (condition) d. Court says that the exception of forfeiture Applies e. Forfeiture is about losing money f. Forfeiture: the denial of compensation that results when the oblige losses his right to the agreed performance after it has relied substantially on the expectation of that exchange. g. Why the court says there was a forfeiture: Spent 155K to buy Spent 40 K immediately on improvements Loss of business location (clients)- this is most compelling to the court, it was a restaurant and would lose good will with clients h. Court acknowledges a balancing test Fault is relevant, but must be balanced with the potential negatives EXAM: 229 Excuse of a condition to avoid forfeiture To the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was a material part of the agreed exchange. 1. Express Condition: Must be complied with strictly and completely performed. Know you have an express condition by looking at the language. 2. Constructive condition: Condition that are implied by the court without reference to the partys intent. (figure out who has to do what0 3. Doctrine of Constructive Conditions a. Who goes first? the party whos performance obligation goes longer, goes first. (subject to modification by K) In contract for services: the party whos performance obligation takes longer goes first (i.e. mechanic fixes your car, then you pay him or hair dresser cuts your hair, then you pay her) In cases where simultaneous performance is possible (sale of goods/sale of land)-neither party has a duty to render performance first.

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As a practical matter: one party has to tender performance to make the other parties performance obligation kick in. If in K it states payment upfront then that is what needs to happen. b. How much do you need to do in order for the other parties performance obligation to kick in? Leads us to material Breach and Substantial performance. B. MATERIAL & SUBSTANTIAL BREACH 1) DOCTRINE OF MATERIAL BREACH & SUBSTANTIAL PERFORMANCE What is a Breach of K? when a party fails to perform their part of the K A BREACH IS A BREACH- NO MATTER HOW SMALL (i.e. you are never a little pregnant.you either are pregnant or are not pregnant) Any breach entitles you to sue for breach of K. Where you only have a minor breach, you are not likely to have damages. You are entitled to sue, but not damages and not worth it to sue. Important: JUST BECAUSE THERE IS A BREACH DOES NOT MEAN THAT YOU DO NOT NEED TO FULFILL YOUR PART OF THE PERFORMANCE!!! Substantial Performance: where the breaching party has substantially performed, the other party is still obligated to perform their end of the K. HYPO: You pay a painter $500 to paint your fence. The presumption is that the painter paints your fence 1st because his promise takes longer. Painter only paints 90% of the fence. Painter breached the K, you are entitled to sue for damages. Are you entitled to withhold the $500? Probably Not! If K said painter will not be paid UNLESS the fence is painted by X date, and fence was not finished until Y date, You are not obligated to pay because it was an express condition. Here the painter would have to look at exceptions (waiver, estoppel, forfeiture) or claim it was unfair. Jacob & Youngs v. Kent(leading Case on Damages) Facts: Jacob built a home for the defendant and sued to recover on the remaining balance unpaid. The contract called for standard piping of Reading manufacturer. The plaintiff had used both Reading pipe and some from other manufacturers, but all being rod iron piping. Rule: Must weigh the purpose to be served, the desire to be gratified, the excuse for deviation from the letter, and the cruelty of enforced adherence. Reasoning: The court reasoned that all wrought iron pipe is the same (effectively) The defect was not so material as to effect the actual product Just because a different manufacturers stamp is on the pipe, it is the same pipe. Dissent: Justice says this was an express condition that wasnt met, homeowner should have gotten what he wanted. Class Notes: In Jacob and Young: Specific type of Pipe called for in K Only 2/5 of the pipe used was correct Breach- Failure to use Reading Pipe is the breach which entitles Kent to sue for damages, but does not entitle Kent to withhold payment. More than 50% of pipe used was not reading Pipe

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 Functionally getting the same thing and this K was for the sale of a house, not just the pipe Court concluded that the breach was not willful. Difficult Question: What is the measure of damages 1. Cost of completion: what it will cost to replace the pipes that were not appropriate Argument in support: It was specifically in the K, and not good enough to say- you almost got there. 2. Dimunition in Value: what is the difference in the value of a house that has reading pipe compared to a house that has some other type of iron pipe Court says use the Dimunition in value to asses damages Rule: - Where the breaching party has substantially performed their promise, the other parties performance must take place. - You are allowed to withhold performance when there is a Material breach. EXAM: 1. Factors to look at to determine the substantial performance Willfulness of the breach (where the breach is willful it might look like the party has not substantially performed) Reason for the breach The Fault of the party (how bad was the breach) How serious was the breach Timeliness of the breach (1 day late, 1 wk late) Cost of the breach or cost of fixing the breach Does the breach frustrate the purpose of the K Percentage of performance complete How much of a benefit has been conferred upon the party Type of K involved (sale of goods-perfect tender or service K) Aesthetic factor (what you were bargaining for) 2. If you are the breaching party and you did not substantially perform, your only option is to sue for restitution. 3. Where a party has committed a material breach (not substantially performed) the other partys performance obligations do not kick in. 4. 241. Circumstances Significant in Determining Whether a Failure is Material In determining whether a failure to render or to offer performance is material, the following circumstances are significant: (a) The extent to which the injured party will be deprived of the benefit he reasonably expected; (b) The extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived (c) The extent to which the party failing to perform or to offer to perform will suffer forfeiture (d) The likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (e) 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. Take Home: 1. Any breach however minor entitles you to sue for damages 2. When does the breach become so material that performance is not required: Doctrine of Substantial performance 2) TOTAL AND PARTIAL BREACH Material Breach: One that is so bad that you can withhold your performance obligation

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Partial Breach: Allowed to withhold performance obligation; BUT not entitled to treat K at its end. Total Breach: if a total breach you are entitled to treat the K at its end Note: The severity of the breach is fact driven. Whether a breach is Total or Partial depends on many factors. 1. Factors for Partial vs. Total Breach (a) How bad was the breach (b) How important is timing 2. Idea of Partial Breach: Does not rise to the level of SO BAD that you are able to walk away Have to give the other party an opportunity to fix the breach When you have a partial breach, you have to give the other party more time to cure the breach. (242 comment a) 242. Circumstances Significant in Determining When Remaining Duties are Discharged In determining the time after which a partys uncured material failure to render or to offer performance discharges the other partys remaining duties to render performance under the rules stated in 237 and 238, the following circumstances are significant: (a) Those stated in 241 (b) The extent to which it reasonably appears to the injured party that delay may prevent or hinder him in making reasonable substitute arrangements; (c) The extent to which the agreement provides performance without delay, but a material failure to perform or to offer to perform on a stated day does not of itself discharge the other partys remaining duties unless the circumstances, including the language of the agreement, indicate that performance or an offer to perform by that day is important. Note: These are timing issues. Did the K provide a timing of the essence clause?, did the K specify timing?, would the delay in timing hinder the injured party from their own performance? Sackett v. Spindler Facts: Sackett promised to pay a certain amount for shares in a newspaper over a period of payments, with an interest rate attached to the unpaid balance. Spindler took the stocks in escrow after Sackett failed to pay the remaining balance twice. Rule: Whether a breach of contract is total or partial depends upon its materiality (317) In determining materiality there are several factors (p.820) Reasoning: It was because he didnt pay over half of the money on the contract; Sackett continued to not pay for the stocks. Holding: Judgment modified by deleting the award of interest from Sept 29 to present. Judgment Affirmed Defendant to recover costs Class Notes: Sacket case: (idea of partial and total breach) Defendant breached the K for the sale of stock for a newspaper Question: when he doesnt pay the 85K, do you have a right to wipe your hands of the K? Court determined that he was entitled to terminate the K. EXAM:

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1. If the breach is only partial and you treat the K as done, YOU ARE IN BREACH OF K. The innocent party has to be very careful not to put themselves in breach for wrongful repudiation. 2. A breach of K does not necessarily allow you to terminate the K. 3. If total breach: you do not get a windfall, have to give the $ back minus your damages Breaching party has to make you whole. 4. Black Letter Law: A total material breach entitles you to treat the K at its end. 5. Total vs. Partial Breach Analysis: (a) Any breach entitles you to damages (b) Then you need to determine whether the breach is total or partial (c) If total breach allowed to treat K at its end (d) If partial breach allowed to suspend performance but not allowed to treat K at its end 6. You have the option to treat a total breach as a partial breach 7. Material breach deals with Promises, NOT conditions 8. When it is unclear if it is a promise or condition, courts tend to treat it as a promise because it is a less stringent analysis than a condition which has to be literally and strictly complied with. C. ANTICIPATORY REPUDIATION 1) ANTICIPATURY REPUDIATION GENERALLY Anticipatory Repudiation: Type of breach that is not an actual breach, but an anticipatory breach. You do not have to wait for a breach, for you to cure the breach Major Issue: At what point do you know for SURE that the other party is going to breach the K. Important to asses the situation and be careful before you terminate the K. Hypo: you hire a painter to paint your house on 4/15 for 1K. On 4/1 painter calls and says that he cant do it for 1K and needs 1.5K. Is this an anticipatory breach? If you have not provided additional consideration you cannot modify the K You can arose rescission of the 1st K and a new K (be careful looks like a sham) Could argue bad faith on the painter Unforeseen circumstances argument: needs to be something more than a miscalculation in profit.

Class Notes: Truman v. Schumpf Anticipatory repudiation: Letter stating that the zoning did not approve K to buy land with a condition that the zoning get approved Zoning did not get approved so plaintiff sent letter requesting a price reduction to reflect the value without the appropriate zoning. Rule: A party anticipatorily repudiates where he clearly manifest an intention not to perform the K on date of K, the intention must be unequivocal and clear (unambiguous) Very High Standard to Anticipatory Repudiation: The repudiation MUST be clear and unequivocal; where it is doubtful then it does not raise to the level necessary. The court here said that the letter was NOT anticipatory repudiation because it was ambiguous and does not clearly show that the buyers were going to terminate. Court determined that even if the letter was anticipatory repudiation, it was timely reteracted. EXAM: 1. Anticipatory Repudiation: High standard and MUST be clear and unequivocal

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2. Ways to Repudiate: (a) By your words (indicating that you are not going through with the K) (1) Expressly (2) Impliedly (b) By your conduct: where your conduct is inconsistent with your obligations 3. Financial insecurity alone does not raise to the level of Anticipatory Repudiation - Financial insecurity can give the injured party the Right to Require assurances that the other party will perform. 4. 2 circumstances where you cannot Take Back the repudiation (a) Reliance: if the innocent party relied on your repudiation you cannot take it back. (Innocent party moved on). THERE IS NO NOTICE REQUIREMENT FOR THE INNOCENT PARTY WHO HAS RELIED ON THE REPUDIATION. (b) Where the innocent party accepts Repudiation as final - There is a notice requirement (written) that you are treating the repudiation as final. 5. Courts tend not to see financial hardship as a reason for anticipatory repudiation. 6. Right to request Assurrances: designed for the intermediate (grey area) if it is repudiation or not 7. 251. When Failure to Give Assurances May be treated as a Repudiation (1) Where reasonable grounds arise to believe that the obligor will commit a breach by nonperformance that would of itself give the oblige a claim for damages for total breach under 243, the oblige may demand adequate assurances of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance. (2) The oblige may treat as a repudiation the obligors failure to provide within a reasonable time such assurances of due performance as is adequate in the circumstances of the particular case. 2) RIGHT TO DEMAND ADEQUATE ASSURANCES 2-609. Right to Adequate Assurances of Performance (1) A contract for sale imposes an obligation on each party that the others expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other party may in WRITING demand adequate assurances of due performance and until he receives such assurances may if commercially reasonable suspend any performance for which he has not already received the agreed return. (2) Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurances offered shall be determined according to commercial standards. (3) Acceptance of any improper delivery or payment does not prejudice the aggrieved partys right to demand adequate assurances of future performance. (4) After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract Note: 2-609 was enacted to respond to commercial reality (POLICY) You have the right to feel secure when the other party is possibly going to default. Assurances MUST be in writing Until you receive assurances (in writing) you do not have to render performance (suspend performance). Grounds for insecurity have to be commercially reasonable Assurances have to be commercially reasonable After receipt of demand, you have 30 days to respond. 251 of the restatement is the common law equivalent of 2-609 Hornel v. Spry

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Facts: Plaintiff Hornell Brewing Co. is a supplier and marketer of alcoholic and nonalcoholic beverages. Defendant Stephen Spry approached Hornell about becoming a distributor of Hornell's Arizona beverages in Canada. Hornell in early 1993 granted Spry the exclusive right to purchase Arizona products for distribution in Canada, and Spry formed a Canadian corporation, Arizona Iced Tea Ltd., for that express purpose. Between November and December 1993, and February 1994, defendants' unpaid invoices grew from $20,000 to over $100,000. In May 1994, after an increasingly problematic course of business dealings, Hornell de facto terminated its relationship with defendants and permanently ceased selling its products to them after assurances were not given to Hornell. Hornell learned from several sources that Spry's warehouse was empty, that he had no managerial, sales or office staff, and he had no trucks Note: For assurances, it matters what type of contacts the parties have. (i.e. if you have a long term K, an oral agreement or assurance May suffice) VERY FACT DRIVEN EXAM 1. Differences between the common law (251) and UCC (2-609) (a) In common law the assurance request and assurances do not have to be in writing (b) In common law the 30 day rule does not apply. (REASONABLE AMOUNT OF TIME) V. EXPECTATION DAMAGES: PRINCIPLES & LIMITATIONS EXAM: 1) Damages: There are 3 interests that you seek to protect 1. Restitution Interest: Prevention of unjust enrichment Defendant is not profiting from the plaintiff An agreeved plaintiff gets his $ back (i.e. return a tv, you get your $back) 2. Reliance Interest: Protects the plaintiff against damages caused by relying on the guilty party. Put the party in as good as a position he was in before the K was made $ paid in reliance on K is returned 3. Expectation Interest: Value of expectancy that the K created. Putting the plaintiff in as good a position as he would have been in had the K been performed. Note: each of these measures of damages plays out differently. Generally Expectancy damages is the NORM. (we chose this as a society)- you get the benefit of the bargain.

344. Purpose of Remedies Judicial remedies under the rules stated in this Restatement serve to protect one or more of the following interests of a promise: (a) His expectation interest, which is his interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed. (b) His Reliance interest, which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made, or (c) His Restitution interest, which is his interest in having restored to him any benefit that he has conferred on the other party. A. COMPUTING THE VALUE OF PLAINTIFFS EXPECTATIONS Formula: General measure= loss in value + other loss cost avoided loss avoided

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1. Loss in value: the difference between the value to the injured party of the performance that should have been received and the value to that party of what, if anything, actually was received 2. Other loss: exactly what it says 3. Cost avoided: the breach may have a beneficial effect on that party by saving it the further expenditure that would otherwise have been incurred 4. Loss avoided: allowing non-breaching party to avoid some of the loss by salvaging and reallocating some or all of the resources that it otherwise would have had to devote to performance of the contract. 347. Measure of Damages in General Subject to the limitations stated in 350-53, the injured party has a right to damages based on his expectation interest as measured by (a) The loss in the value to him of the other partys performance caused by its failure or deficiency, plus (b) Any other loss, including incidental or consequential loss, caused by the breach, Less (c) Any costs or other loss that he has avoided by not having to perform Note: Loss in Value + any other loss (incidental or consequential) any loss avoided (check p. 850 and notes 3/25 for problems and answers) Roesch v. Bray(Real Estate) Facts: Roesch entered into a contract with Bray for the sale of Roeschs home for $65,000; $45,000 to be paid at closing and $20,000 to be paid upon sale of Brays home. Five days after the contract was made, Bray informed Roesch he would not be able to perform the contract. Before the breach, Roesch had entered into another contract to purchase a home. Due to the breach, Roesch had to get a $65,000 loan at 16% interest. Roesh eventually sold the home for $63,500. Rule: Seller may recover the difference between the contract price and the market value fo the property at the time of the breach. When the sale of RE after a breach of contract is madewithin a reasonable time and at the highest price obtainable after the breach, it is evidence of the market value on the date of the breach. Holding on Damages: Plaintiffs are entitled to the benefit of their bargain: the contract price less the actual price. The resale price was $63,500, not $52,149 (which is the net proceeds) Arg 2: court erred in awarding damages for the cost of holding property until resale and for interest on the 45K Damages on a breach of contract are limited to losses that are reasonably to be expected as a probable result of the breach. Damages awarded include utility expenses, plus other expenses to resell the property. These expenses could end up going on for a very long time. The duration and extent of those expenses could only be speculated A breaching party could be subjected to liability for similar expenses for months or even years. Accordingly the Defendants argument is TAKEN. (COURT DID ERR) Class Notes: Issue in Roesch is how to calculate the expectancy damages in the breach of a K (for seller) Is the seller entitled to incidental damages As a seller you need to show that you made a good deal to be entitled to damages Market value can be determined by Real estate experts, appraisers, and sometimes by the eventual sales price. The market value is used because the sales price can be affected by many variables (seller just sells to first person at lowest price)

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Here the court was worried about other incidental costs (carrying costs- electricity, etc) Are the incidental costs actually caused by the breach? And are they foreseeable? Always remember that the non-breaching party has a duty to mitigate their loss (exercise due diligence)

Handicapped Child Education v, Lukaszewski Facts: Defendant contracted with plaintiff for employment as a speech therapist at a school 45 miles away from her home. When she found a better job offer, she attempted to get out of her employment contract with no avail. Soon after she resumed work with plaintiff, she started have health problems. Defendant got doctors note saying she was unable to continue employment due to the health conditions. Plaintiff searched for another speech therapist and was only able to find one available replacement, which they had to pay more because she had more educational experience. Rule: An employer may recover damages from an employee who has failed to perform an employment contract Damages in breach of contract cases are ordinarily measured by the expectations of the parties The non-breaching party is entitled to full compensation for the loss of his or her bargain Damages for breach of an employment contract include the costs of obtaining other services equivalent to that promised but not performed, plus any foreseeable consequential damages. Reasoning: There was no question that there was an additional cost of salary flowing from the breach. Even though the board received a higher valued teacher because of the breach, the board did not expect or wanted a more experienced therapist. The board lost the benefit of its bargain Dissent: Believes the major question was if her resignation is somehow justified The objective symptoms of the defendants condition (hypertension) whether self induced or caused by the boards actions, would be the same In Justice Days opinion, the termination of the contract is justified where the physical symptoms are medically certifiable Day would hold no breach because the termination was justified based on the defendants medical problems. Class Notes: Issue in Handicap is (1) did she actually breach her K? and (2) what is the assessment of damages? Did she breach her K? (a) Sickness= factual aspect (b) Impracticability (Legal aspect) 262, 261- performance may be impracticable because it will involve undue risk of injury to a person. Court said that she brought the stress on herself and legally you cannot be the source of your own impracticability. If your substitute product is more expensive and there is no alternative, you should not be responsible for the damages. Possible incidental expenses involved: (a) Advertising for a new teacher (b) Cost to interview (c) Cost of a substitute (d) Background checks American Standard v. Schectman Facts: Defendants didnt finish grading and taking down foundations on plaintiffs property to prepare it for sale. The property only sold for 3,000 less, but there was 90,000 left on contract. Rule:

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Damages for breach of a construction contract is that the injured party may recover those damages which are the direct, natural and immediate consequence of the breach and which can reasonably be said to have been in the contemplation of the parties when the contract was made Where a contractors performance has been defective or incomplete, the reasonable cost of replacement or completion is the measure Where there has been substantial performance of the contract made in good faith but defects exist, the damages are measured as the difference between the value of the property as constructed and the value if performance had been properly completed. Under the restatement (346) the completion of the contract must involve unreasonable economic waste Where the breach of the contract is only incidental to the main purpose of the contract and completion would be disproportionately costly, courts have applied the diminution in value measure even where no destruction of the work is entailed (Jacob & Young-reading pipe) In order to apply the diminution of value measure as an instrument of justice the breaching party MUST not have breached the contract intentionally and Must show substantial performance made in good faith. Reasoning: Neither one of the situations applied in this case because D just decided not to do, contract was not substantially performed because there was still 90,000 left on contract, & dont have to tear anything down; also (2) doesnt apply because part of a big contract and in language of contract that it was supposed to be aesthetically pleasing Class Notes; This case is about the difference in cost of completion vs. Dimunition in value recovery. Cost of completion may overcompensate the non-breaching party In most economic waste cases you are going to get both economic waste and over compensation. Dimunition in Value has NO place where something has personal or aesthetic or idiosyncratic value to you. Cost of completion should be awarded. Take Home: Dimunition in value is the exception. Take Note of the 2 exceptions under Exam of this section If we apply the dimunition in value exceptions to American Stnd, do either apply? (a) Is the breach incidental to the K? No, because what you K for was the removal and the removal of underground stuff is not incidental, It was what you were being paid to do! (b) Not within the 1st exception; However was the K substantially performed? No, you have not substantially performed when a large part of what you were being paid to do was left undone. Move to Good Faith- defendant did not act in good faith because they are willfully not doing something which they agreed to do in writing. Court concluded Cost of Completion was the appropriate measure of damages EXAM: 1. Damages you incur in order to avoid loss are recoverable (incidental damages) 2. For employment K or Real estate K (cost of completion vs. dimunition in value) 3. Expectancy damages: benefit of the bargain damages. Entitled to the value of expectation had the K been performed. 4. For real estate, expectation damages = the difference between the K price and the market value at the time of the breach. 5. If the market value is equivelant to the K price, YOU HAVE NO DAMAGES. (only where the seller has made a good deal will the seller have a claim. 6. If the Seller backs out of a K: (a) English Rule: Restitution damages (get your $ back) (b) American Rule: Expectation damages Regardless of Good or bad faith

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 Damages= market value-K price (seller backs out) Damages = K price-market value (buyer backs out)-seller made a good deal 7. Pre-judgment Interest: time of breach to the time of judgment Impose a statutory interest rate in order to make the party whole 8. Post judgment Interest: interest that accrues from the time of the judgment to the time of collection of the judgment. Note: Most courts will give post judgment interest and courts are split on Pre-judgment interest 9. Cost of Completion: amount of $ necessary to hire someone else to finish the work 10. Dimunition in Value: get the difference in the value with the performance as is as opposed to the value of the property had the K been performed. (will only apply when you have economic waste in the cost of completion) Note: Cost of completion is the Normal measure of recover; Dimunition in Value is the exception 11. The Measure of Damages in failed construction: (a) Cost of completion (b) Dimunition in value (economic waste) 12. General rule: entitled to cost of completion (you bargained for the completed product) 13. Exception to the Rule: Dimunition in Value to prevent economic waste (Jacob v. young) 14. If Personal, Aesthetic, or Idiosycratic value than you are entitled to COST OF COMPLETION 15. 2 circumstances where Dimunition in Value qualifies: (a) When the K has been substantially performed in good faith and the cost of completion will involve economic waste (Jacob v. Young) (b) When there is do destruction of the work performed, but breach was incidental to the main purpose of the K and completion will be disproportionately costly. KNOW HOW TO APPLY THESE EXCEPTIONS (LOOK TO CLASS NOTES AMR. STND. B. RESTRICTIONS ON RECOVERY OF EXPECTATION DAMAGES: FORESEEABILITY, CERTAINTY & CAUSATION Restrictions on Damages: 1. Foreseeability: (Hadley v. Baxendale) 2. Certainty 3. Causation Principle of Foreseeability: 1. General or Normal Circumstances: (a) Damages that flow naturally from the breach, AND (b) Are in contemplation of the parties at the time of the breach 2. Special or Specific Circumstance (a) Damages that flow from specific circumstances (b) MUST BE COMMUNICATED NOTE: If you do not know about any Special or Specific Circumstance, you are ONLY liable for what damages flow Naturally from the breach. Plain English: As a breaching party you are only liable for what damages are naturally foreseeable. The more you know, the more you naturally forsee.

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Hadley v. Baxendale (1854) Facts: Plaintiffs mill was stopped by a breakage in the crank shaft by which the mill was worked. The plaintiffs servant went to the clerk of the defendant to get the shaft carried to the manufacturer to get fixed. The clerk told the servant that the shaft would be delivered the next day if it was brought in before noon. The shaft was taken the next day to be delivered at which point the clerk was told to put a special entry to hasten the delivery. The delivery was delayed by some neglect and plaintiffs suffered loss of profits because the delivery of the shaft was delayed several days Rule: The measure of damages if the contract is broken is the amount which would have been received if the contract had been kept. NEW RULE: 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 from such a breach, OR such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract. If the circumstances were known to both parties, the damages resulting from the breach, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. Reasoning: The plaintiff only communicated that they wanted to ship a broken shaft They did not tell the defendant that without the shaft their mill was shut down. It is possible that the plaintiff had another shaft, or there were other problems that actually broke the shaft. The special circumstances of this case were never communicated by the plaintiffs to the defendants Notes: 1. General and Consequential Damages (a) General or Direct Damages: damages that arise naturally(plaintiff does not need to make any special showing to recover) (i.e. contract for sale of land- difference in contract price and market value constitutes a general damage) (b) Consequential or Specific Damages: damages which flow from specific circumstances(lost profits arising from collateral contracts) 2. The recoverability of consequential damages depends on whether such damages were in the contemplation of the parties at the time they made the K 3. 351. Unforeseeability and Relates Limitations on Damages (Modern Rule) (1) Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made. (2) Loss may be foreseeable as a probable result of a breach because it follows from the breach (a) In the ordinary course of events, OR (b) As a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know. (3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation Class Notes: In Hadley, court said Do not recover lost profits because defendant did not know the mill was shut down. Shut down could have been for other circumstances Carrier was not deemed to have constructive knowledge Cannot charge Defendant with knowledge Absent express communication Policy: Agency law was not that well developed It is a huge liability for carriers if they will be held responsible for lost business expenses Are we OK to say that the losses fall on the carrier

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Carriers charge very little for what they do to be held with that giant liability (cost of shipping would increase)

Florafax v. GTE Facts: Plaintiff had a contract with a third party (Bellarosa aka Bella) to take phone calls and deliver flowers on their behalf. Plaintiff hired GTE to take the calls and place the appropriate orders. Plaintiff contract with Bella: one yr, automatically renew month to month after the yr, either party without cause can terminate with 60 days written notice Plaintiff Contract with GTE (defendants): 3yrs, certain provisions where it might result in termination after 2yrs, included a termination clause (p.875 bottom). GTE failed to perform on K which caused Bella to terminate K with plaintiff Plaintiff incurred costs of setting up their own call service as well as the lost business with Bella Jury awarded Plaintiff with 750K in lost profits and 820K other damages Issue 1: Collateral K and Lost Profits If damages are properly proved, lost profits from 3rd party collateral K are recoverable Rule: loss of expected monetary gain is recoverable in breach of contract action if 1. The loss is within the contemplation of the parties at the time the contract was made 2. If the loss flows directly or proximately from the breach 3. If the loss is capable of reasonably accurate measurement or estimate Reasoning a. Sufficient evidence to show that GTE had contemplated their potential profits from an association of plaintiff and Bella b. GTE knew plaintiffs were soliciting other entities c. Defendants liked the plaintiff soliciting other entities because of the chance for increase profits. d. GTE intentionally failed to perform during part of the term of contract Holding: because of the failure to perform, it supports a determination that the lost profit clause of the plaintiff defendants contract be implicated. Issue 2: 60 day termination clause precluding recovery beyond 60 days Rule: no party to a K may recover more in famages for a breach of the K than might have been gained by full performance Reasoning a. Defendant had no right to terminate the K upon any notice provision b. The right to terminate belonged to the Plaintiff c. Full performance could not have been supplied by simple expediency of GTE giving 60 days notice d. Plaintiff and Defendant K had a minimum term of 2 yrs based on the effect of the proce renegotiation provision Holding: Plaintiff is not precluded from recovery of lost profit damages associated with the loss of the Bella relationship in excess of a 60 day period Issue 3: Complete evidence exists to support the award of Lost profit damages to a reasonable certainty: Before lost profit damages are recoverable it must be adequately shown that such profits were reasonably certain to have been made by the non-breaching party, absent the breach. It is ONLY required that it be established with reasonable certainty that profits would have been made had the contract not been breached Hold: sufficient evidence was presented of lost profit with the requisite degree of reasonable certainty. Reasoning: a. Bella considered the plaintiff relationship to be a long term relationship

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b. The relationship with Bella would have continued after the relationship with the defendant c. Damage projections were shown by both partys experts d. Both presented that plaintiff could have made profits had the relationship survived e. The amount awarded was within the range of the estimates of both the experts Conclusion: The jury award for lost profit damage was an appropriate remedy It was consistent with the substantive law of recovery of lost profits and supported by competent evidence. Trial Court Judgment AFFIRMED Notes: 1. The Lost profits for the Bella K were subjected to the 2nd prong of the Hadley test because they arose from a collateral K rather than from the breach of the K of the plaintiff and defendant. 2. The Plaintiff/Defendant K specifically provided that defendant would be liable for consequential damages in the event the K was terminated for cause. 3. Limitations of consequential damages- 351(3) limits the recovery of consequential damages where justice so requires in order to avoid disproportionate compensation (a) This is intended to apply in cases where there is extreme disproportion between the price charged by the defendant under the K in question and the liability sought to be imposed on it. (b) Because 351(3) is unconventional, only a few courts have relied on it to limit recovery from consequential damages 4. An injured party cannot recover damages that are only speculative. 5. 352. Uncertainty as a limitation on Damages Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty. 6. You are only entitled to recover net as opposed to gross profits 7. Generally you are not entitled to recover both the decline in market value of the business and present value of the future net income from the business because these two methods are normally alternative ways of measuring the same injury. 8. Lost profits should be awarded ONLY where no other reliable method of valuing the business is available Class Notes: 2 K, one Bella/Flora and one Flora/GTE General damages for the breach of the K would be the Loss Expectancy of the main K. (fees paid, cost of finding someone else, Consequential damages here are those damages that flow from the Bella/flora K (lost profits from Bella K) If the damages meet all the elements of foreseeability they will all be recoverable Were the Damages foreseeable at the time the K was entered into? - Yes, GTE know that bella took 100K-200K calls - GTE was aware that Flora had a deal with Bella - GTE ran a cost benefit analysis prior to entering K with Flora - GTE wanted Flora to enter more K so GTE would make more $ - The K itself states that GTE will pay for consequential damages For the above reasons, the Profits were found to be foreseeable, NOW need to prove 2 additional elements - Certainty, AND - Causation Court said, Lost profits were shown as a matter of fact (not speculative)(Certainty Prong) Both parties projected profits and losses Bella president thought they had a long term K with Flora Causation Prong: court determined that GTEs breach caused Bella to terminate with Flora

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Certainty: Have to show that lost profits would have actually been made (NOT SPECULATIVE) Lost profits do not have to be shown by absolute certainty, Just REASONABLE certainty Fact that damage occurred= absolute certainty, how much Lost profit= Reasonable certainty

EXAM: 1. 2 Prongs of Hadley: (Old View) (a) General Damages: Those that flow naturally from the breach (b) Specific Damages: Those that flow from specific circumstances that have been communicated. 2. Modern formulation of the Rule: (351 and 2-715 (2) (a) Foreseeability is measured at the time the K was made (NOT the breach) (b) It is only necessary that the TYPE of loss be foreseeable, not the specific manner in which it occurred (c) You focus on the foreseeability of the Breaching Party (d) Standard of foreseeability is objective in part (reasonable person should have foreseen) (e) Loss must be foreseeable as a PROBABLE result of the breach 351. Unforeseeability and Related Limitations on Damages (1) Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made. (2) Loss may be foreseeable as a probable result of a breach because it follows from the breach (a) In the ordinary course of events, OR (b) As a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know. (3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation. 3. Certainty of Lost Profit: (a) Existing K (pretty certain that there is lost profit) and Expected K (may be too speculative) (b) New Business Rule: difficult to establish if the new business would have been profitable Historically: New business do not get to recover Lost Profits Modern Rule: New business is a factor, but not determinative as evidence of recovery 4. Causation: Defendants breach MUST cause the lost profits 5. Quantification of Damages: the fact that damage would have occurred needs to be proved with certainty. (the actual recovery damages may fluctuate) C. RESTRICTIONS ON RECOVERY OF EXPECTATION DAMAGES: MITIGATION OF DAMAGES Doctrine of Avoidable Consequences: A plaintiff may not recover for the consequences of a defendants breach that the plaintiff could have reasonably avoided. A plaintiff is not entitled to Pile Up damages A plaintiff is under a Duty to Minimize his damages The doctrine precludes the infliction of damages without benefit to the plaintiff (if no benefit to plaintiff, why saddle the defendant with higher bills) Rockingham v. Luten Bridge Facts: Parties contracted to build bridge. Before construction started, county said wouldnt go through will deal. Idiot built bridge anyway.

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Rule: After an absolute repudiation or a refusal to perform, the other part may not continue his performance in order to recover damages based on full performance. Notes: 1. The Mitigation Principle: Duty to Mitigate Damages= a limitation on the plaintiffs right to recover damages If a plaintiff in a K action reasonably could have mitigated his damages, but fails to do so, he will be unable to shift that portion of his loss to the defendant and will be forced to absorb it himself (350 comment b) 2. The Principle of Mitigation is based on Market Value You have to enter a Mitigation K for fair market value Imposed duty/obligation that your mitigating K be a reasonable one (i.e K value 10K, mitigating K cannot be for 1K). If you unreasonably enter into a mitigating K, You CANNOT saddle the defendant with your Unreasonableness. Havill v. Woodstock Soapstone Co. Facts: plaintiff was an employee and the defendant fired her. Plaintiff is claiming breach of employment contract and seeking damages. Plaintiff did find work right after she was fired, and then also became self employed (mitigation). Rule: The measure of damages for wrongful termination of an employment contract is the amount the plaintiff would have earned absent the breach, less what the plaintiff actually earned or could have earned by the exercise of reasonable diligence during the contract period after termination. Class Notes: Factors to consider when assessing damages in an employment K - Time of employment (how long employed) - Mitigation (by finding another job) - Plaintiff said wanted to work forever - Defendant claimed that plaintiffs performance was already in question - Vacation time (double compensation) - Bonuses and Raises The Mitigating K does not have to be the same as the K that was breached. Theory: what you bargained for was a certain type of K and you do not need to accept a K of significantly less value (i.e CEO to flippin burgers) You CANNOT contract out of the Duty to mitigate Jetz service v. Salina Properties Facts: Plaintiff leased washing machines to the defendant. Defendant breached K, and plaintiff removed the machines at their cost. Plaintiff is suing for lost profits for the remainder of the K that was breached. Plaintiff is a lost volume seller and therefore can recover for their lost volume. Plaintiff had the capacity to service multiple contracts and would have serviced all the K as well as would have profited from both contracts. Rule: Lost Volume Seller: the lost volume of business the non-breaching seller incurs because of buyers breach. IMPORTANT: 3 Part Test to determine if you are a Lost Volume Seller: 1. Have to show the innocent party had the capacity to make the additional sale 2. It would have been profitable to make the additional sale 3. Probably would have made the additional sale, absent the breach.

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Notes (p.909) 1. Mitigation versus additional K Mitigation K: contract that the plaintiff was able to perform only because of the defendants breach freed the plaintiff from the obligation to perform the original contract. Additional K: the plaintiff is entitled to the profit from both K and the defendant will not have the benefit of any deduction from its damage liability. 2. To establish the status of a lost volume seller, the plaintiff must prove (1) it possessed the capacity to make additional sales (2) it would have been profitable for it to make an additional sale (3) it probably would have made an additional sale absent the buyers breach. 3. Recovery is usually denied in 3 types of K (1) Damages to compensate the plaintiff for amounts expended on attorney fees (2) Damages for mental distress (3) Punitive damages 350. Avoidability as a Limitation on Damages (1) Except as stated in subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation. (2) The injured party is not precluded from recovery by the rule stated in subsection (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss EXAM: 1. You always have a duty to mitigate your loss when a contract is breached 2. You CANNOT pile up expenses for the breaching party. 3. If the reason you do not mitigate is your own fault you cannot put those losses on the employer. 4. Lost Volume Seller: the lost volume of business the non-breaching seller incurs because of the buyers breach. 5. The measure of damages for wrongful termination of an employment contract is the amount the plaintiff would have earned absent the breach, less what the plaintiff actually earned or could have earned by the exercise of reasonable diligence during the contract period after termination. 6. ALWAYS LOOK TO THE 3 PART TEST TO DETERMINE IF A SELLER IS A LOST VOLUME SELLER D. NON-RECOVERABLE DAMAGES General Rule: Each party bears their own costs (Attorney Fees are not recoverable) This is the American Rule Policy behind the English Rule: If you lose you pay, Acts to deter frivolous lawsuits Policy behind the American Rule: if you are worried about bringing a case it may be too much of a detterent and you may miss Novel cases. Exceptions to Recovering Attorney Fees; 1. Rule 11/ Courts Inherent Powers: Sanctions for frivolous suits which give the court the power to make the loser pay lawyer fees 2. Contract around the default rule 3. Statutory Fee Shifting: consumer protection (want the underdog to have an incentive to bring the case)

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Erlich v. Menezes Facts: Plaintiff contracted with the defendant to build their dream home. Defendant negligently built the house, with multiple structural issues. Plaintiff is suing defendant for cost of completion damages as well as punitive damages for causing intentional emotional distress. Court found that only in certain circumstances can tort damages be recovered from the breach of a K. Held for Cost of completion damages. Class Notes: In Erlich, the emotional distress is being treated as a consequential damage which flowed naturally from the breach of the K (Hadley v. Baxendale) Possible argument to allow the Plaintiff to recover damages - If the contractor was grossly negligent, as opposed to just negligent, it could show that he intentionally or recklessly did what he did, allowing for recovery of tort damages, OR - If he built the house in Bad Faith, cutting corners to increase his profits (could be found to be intentional) Policy: Adding an emotional distress component to recovery for construction defects could increase the already prohibitively high costs of housing, affect the availability of insurance for builders, and greatly diminish the supply of affordable housing. The potential for such broad ranging economic consequences means that the task of fashioning appropriate limits on the availability of emotional distress claims should be left to legislations. EXAM: 1. You can only receive tort liability if, Either: (a) The duty arises completely independent of the K, OR (b) The duty arises from conduct which is both intentional and independent harm. Plain English: you only get tort damages for breach if the conduct which amounts to the breach violates an independent duty arising from tort principles. 2. You can only recover Tort damages for breach of contract where there is: (a) Physical injury (b) Insurance Ks (c) Wrongful discharge in violation of Public Policy (d) Where the K was fraudulently induced 3. 3 part Test to determine if there is a tortious breach of K (a) The breach is accompanied by a traditional common law tort (fraud/conversion) (b) The means used to breach the contract are tortious (deceit/undue influence) (c) One party intentionally breaches the K intending or knowing that such a breach will cause severe unmitigable harm in the form of mental anguish, personal hardship, or substantial consequential damages. 4. More than mere negligence is required to recover Tort damages from the breach of a K 5. You may be entitled to recover damages for emotional distress when The breach causes Physical Injury, OR Where the essence of the K is some emotional or safety concern.

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Punitive Damages for Bad Faith Breach: sum awarded with no consideration of the breach, not intended to make you whole. Intended to punish the defendant for committing socially undesirable behavior (BAD Breach) Has a deterrence factor because if you award punitive damages people will be more cautious in their behavior Compensation is NOT an aspect of punitive damages Very Rarely awarded in K (Reasons): 1. Damages remedy available in K, goal is to make the plaintiff whole, whereas we do not want to put the plaintiff in a better position than they would have been 2. K remedies are not founded on Fault 3. Economic Rational: we should encourage efficient breaches and if we have punitive damages for the breaching of a K it would deter the efficient breaches. Efficient Breach: sometimes it makes sense to breach a K and pay damages rather than continue on in the K. Circumstances where a court may consider Punitive Damages 1. Where the breach constitutes an independent tort (fraud/fiduciary duty) 2. Insurance K- can get punitive damages for Bad Faith denial of claim (whole point of insurance is to protect you when something goes wrong. 2) RELIANCE AND RESTITUTIONARY DAMAGES, SPECIFIC PERFORMANCE & AGREED REMEDIES A. RELIANCE DAMAGES Definition: out of pocket loses caused by reliance on partys promise a. Ask for reliance instead of expectation when difficult to quantify expectation damages. b. Still subject to the same standard as expectation WARTZMAN V. HIGHTOWER Facts: Three principals created the idea to perch a man on a mobile flag pole from April 1, 1975 until New Years Eve, at which point he would descend. The principals invested money to get the amount they needed to start the project and found the man who would be Woody Hightower. Principals attorney messed up with the investment and told principals to get another lawyer. Issue: Should Hightower been awarded reliance damages? Yes. Rule: Where the breach has prevented an anticipated gain and made proof of loss difficult to ascertain, the injured party has a right to damages based upon reliance interest, including expenditures made in preparation of performance, less any loss the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed. Reasoning: Attorney knew or should have known that the success of the venture rested upon the ability of plaintiff to sell stock and secure advertising and in reliance thereof, plaintiff sold stock and incurred substantial obligations. Mitigation: Had no more money, could not mitigate. Limitation: innocent party would have had a lose if contract actually went through. a. Defendant has burden to prove because unclear about what profit would have been, plus D is one who did something wrong. Notes: 1. Cannot get reliance damages for actions before contract was made, risk is on parties because cannot rely on a promise that doesnt exist yet. 2. Forgone opportunities some courts include, but not typical B. RESTITUTIONARY DAMAGES

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Definition: value of benefit that defendant received same thing as quantum meruit. a. Ask when expectation is zero or in negative (made a bad deal) b. Argument for them: Allow because other party retaining benefit is unfair; Counter: innocent partys fault entered into bad deal c. Legal theory: Not in contract anymore because after breach contract is rescinded (WEAK) market value restitution

Scenarios: a. P elects restitutionary damages instead of expectation damages b. Breaching party wants restitution c. Contract rendered unenforceable US V. ALGERON BLAIR Facts: General contractor was granted job to construct naval hospital. Hired subcontract to perform steel erection and supply certain equipment. Contractor refused to pay for crane rental and subcontractor terminated its performance after 28% completion because of this refusal. Later, contractor had the work completed by another subcontractor. Issue: May a subcontractor, who justifiably ceases work under a contract because of the prime contractors breach, recover in quantum meruit the value of the labor and equipment already furnished pursuant to the contract irrespective of whether he would have been entitled to recover in a suit on the contract? Yes. Rule: Miller Act the promisee upon breach has the option to forego any suit on the contract and claim only the reasonable value of his performance and is not limited to the general contractor. Additionally, a plaintiff may join a claim for quantum meruit with a claim for damages from breach. The standard for measuring the reasonable value of the services rendered is the amount for which such services could have been purchased from one in the plaintiffs position at the time and the place the services were rendered. Reasoning: Blair retained the benefits from Coastal without fully paying for them. Limitations: 1. Only applies to situations of total breach 2. If contract is fully completed, breach is only that D doesnt pay bound by contract rule and can only get payment LANCELLOTTI V. THOMAS (Material Breach) Facts: Parties entered into an agreement for the purchase of Thomas business and rent the premises on which the business was run. Agreed on 25,000 at signing, with Ls promise to erect addition on the property and if not, pay the rent T waived. L paid the 25,000, but later had issues with addition and then backed out of contract. Issue: Can a defaulting purchaser of a business recover any part of his payments made prior to default? Yes. Rule: Courts have moved from strict rule where breaching party could not get restitution to more modern approach. If party justifiably refuses to perform on ground that his remaining duties of performance have been discharged by the other partys 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 breach. POLICY: innocent party shouldnt get windfall. Reasoning: 25,000 was in excess of expectation. Exceptions 1. Where breaching party intentionally varies from contract 2. Where part acts in bad faith (maybe) C. SPECIFIC PERFORMANCE

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Generally a. Only used in extraordinary circumstances b. Used when money damages are not adequate When ordered a. Land/real estate contracts unique 1. More likely to force seller to sell 2. Courts will not order where buyer is just buying to flip b. Unique goods/chattels (personal property) c. Difficulty with damages (restatement 360) 1. Difficulty proving damages 2. Difficulty collecting damages 3. Difficulty producing substitution When not ordered a. Personal Service 1. Dont want to force something against will (indentured servitude) b. Employment contracts 1. Bad blood, soured relationship 2. Exception is when fired against statute (like discriminatory) c. Where 3rd parties are affected d. Substantial hardship to breaching party e. Other restatement factors party seeking specific performance has unclean hands 1. Hardship 2. Contract induced by mistake or by unfair practices 3. Exchange grossly inadequate f. Difficulties of supervision g. Ordinary building contracts CITY STORES V. AMMERMAN Facts: The defendants were trying to get some land rezoned and they promised the plaintiff a store in their new shopping center if the plaintiff would support their rezoning application. The defendants got the rezoning and opened the shopping center but refused to give the plaintiff a store. The plaintiff sued to make the defendant give them a store. Issue: Should specific performance be granted? Yes. Rule: Specific performance shall be enforced when the remedy at law is inadequate. Reasoning: Money damages cannot be awarded because cannot quantify damages (expansion & foottraffic), plaintiff didnt want money, wanted lease. Other notes: hardship can only be used if substantial; if all material terms are there court can order specific performance, courts dont like to supervise, but will if necessary REIER BROADCASTING V. KRAMER Facts: Coach entered contract with radio station and subsequently school said had to do other radio shows. Radio station tried to say couldnt have do it with anyone else. Issue: Injunction? No. Rule: Dont get injunction where couldnt get specific performance. Couldnt get in this case because personal services. D. AGREED REMEDIES (liquidated damages) Definition: damages that parties designate if one party breaches a. Burden of proof on party who is seeking to avoid the clause because presumed to be valid. WESTHAVEN V. COST CUTTERS Facts: Cost Cutters in contract to be in mall. Left mall. Mall had to find new tenant. Liquidated damages clause to pay daily rent until find new tenant. Issue: Liquidated Damages legit? Yes.

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Rule/Reasoning: Courts will enforce liquidated damages when they are reasonable & cannot be a punishment. 1. Factors a. Intention of parties not a good factor because test is what is reasonable b. Injury caused by breach difficult to ascertain at time of contracts formation c. Difficult to determine because foot traffic, etc. domino effect of what happens when big store leaves d. Reasonable forecast of harm caused i. If CC stayed numbers would have been even higher 2. Approaches a. Wassenaar ever unreasonable, unenforceable b. Cali sugar co. either reasonable at 2 or 3, then will be enforceable 3. Different tests a. Modern: add forecast element (look at time) i. Problems: clause may be denied enforcement if it is unreasonable in light of actual harm even if appeared reasonable at contract formation b. Traditional: just look at time of contract was formed dont care what happened after contract was entered into Notes: 1. Usually id not loss, courts reluctant to uphold liquidated damages provision 2. Depending on size of deposit court may say liquidated damages a. Keep deposit or b. LD analysis 3) STATUTE OF FRAUDS A. GENERALLY EXAM: 1. Statute of Frauds: Certain classes of K have to be in writing Is a consumer protection mechanisim used to protect the parties intent is an Affirmative Defense Has to be raised by the party resisting enforcement 2. The consequence of not complying with the Statute of Frauds is that the K is unenforceable. There is a K; BUT there is a technical requirement to be in writing. 3. The Purpose of the Statue is that certain K are in writing to prevent fraudulent claims. 4. They refer to the compilation of a main statute plus all other statutes out there. 5. 110. Classes of Contracts Covered (1) The following classes of contracts are subject to a statute, commonly called the Statute of Frauds, forbidding enforcement unless there is a written memorandum or an applicable exception: (a) A contract of an executor or administrator to answer for a duty of his decedent (the executor-administrator provision) (b) A contract to answer for the duty of another (the suretyship provision) (c) A contract made upon consideration of marriage (the marriage provision) (d) A contract for the sale of interest in land (the land contract provision) (e) A contract that is not to be performed within one year from the making thereof (1yr provision) Note: Use the Numonic: MYLEGS- Marriage, year, Land, Executory, Goods ($500), Surety. To list the contracts that are required to be in writing.

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6. A K that needs to be evidenced by writing is different than a K. (i.e. a letter, e-mail, check, can all be evidence that there is a K). 133. Memorandum not made as Such Except in the case of a writing evidencing a contract upon consideration of marriage, the Statute may be satisfied by a signed writing not made as a memorandum of a contract. 7. Statute of Frauds Analysis: (a) Is there a K? if yes, then move to step 2. If not then not an issue. (b) Is the Statute of Frauds Satisfied? (1) Is the K within the statue of frauds (does it have to be in writing?) (2) Is there a sufficient writing to evidence the K? (3) Is there an exception to the statute that would allow you to satisfy K, notwithstanding (no writing) Crabtree v. Elizabeth Arden Facts: Final negotiations landed him a 2yr contract with an annual salary of 20K for the 1st 6 months, then 25K for the next 6months, and 30K for the 2nd year, plus expenses of 5K per yr. Memmo was made with all the relevant parties and information. Plaintiff accepted the job and after the 1st 6 months received the pay increase The last pay increase was not paid to the plaintiff Defendant denied the existence of any agreement to employ plaintiff for 2yrs. Rule: 131 General requirements of a Memorandum Unless additional requirements are prescribed by the particular statute, a contract within the Statute of Frauds is enforceable if it is evidenced by any writing, signed by or on behalf of the party to be charged, which a. reasonably identifies the subject matter of the contract b. is sufficient to indicate that a contract with respect thereto has been made between the parties or offered by the signer to the other party, AND c. States with reasonable certainty the essential terms of the unperformed promises in the contract 132 Several Writings The memorandum may consist of several writings if one of the writings is signed and the writings in the circumstances clearly indicate that they relate to the same transaction. Holding: The writings pieced together satisfy the statute of frauds Class Notes: 1. Elements necessary to satisfy the Statute of Frauds: (a) Needs contain all the relevant details (b) Only needs to be signed or endorsed by the party who is resisting the document 2. Signature needs to be interpreted broadly because the statute of frauds is a technicality, and courts do not like technicalities. 3. The statute of frauds can be satisfied by linking multiple documents 4. Documents can only be combined if: (a) Documents taken together have all the essential terms (b) At least one of the documents is signed by the resisting party (c) Unsigned document shows on its face that it relates (refers to) to the same transaction (can establish linkages with parol evidence) 5. The writing does not have to be the K, it can be a note, scribbles, e-mails, a check, office letter Exceptions to the Statute of Frauds:

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1. 1 year- contracts that are not performed in 1yr are subject to the statute of frauds and have to be in writing. (a) Term K: (5yr/2yr) if it exceeds 1yr must be in writing (b) K that are considered lifetime K- Not within the statute of frauds because you MAY die in 1yr, therefore not subject to the statute. (c) Even if a K looks like it will take longer than a year, but is POSSIBLE to perform in 1yr, then it is not subject to the statute of frauds (d) Courts bend over backwards to negate statute of frauds because if there is a K (oral), courts do not want to negate the K by requiring it to be in writing. 2. Part Performance Exception (ONLY TO LAND) Just paying for something is not enough for part performance There has to be a transfer of possession with the land, coupled with improvements to the land If the remedy you are seeking is Damages you CANNOT use part performance Part performance is only used to make you whole (equitable doctrine) Acts as a substitute to prove the existence of a K 3. Detrimental Reliance exception (BROAD) Seeking to enforce a K that has come into existence but does not satisfy the statute of frauds Example: employer hired employee for 5yrs (oral), employee packed up family and moved because he has a job (a) There was a promise intended to be relied on (b) You relied on the promise (c) Detrimental result 139. Enforcement by virtue of action in Reliance (1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce the action or forbearance is enforceable notwhithstanding the statute of frauds if injustice can be avoided only by enforcement of the promise. The remedy granted for breach is to be limited as justice requires. (2) In determining whether injustice can be avoided only by enforcement of the promise, the following circumstances are significant: (a) The availability and adequacy of other remedies, particularly cancelation and restitution; (b) The definite and substantial character of the action or forbearance in relation to the remedy sought; (c) The extent to which the action or forbearance corroborates evidence of the making and terms of the promise, or the making and terms are otherwise established by clear and convincing evidence; (d) The reasonableness of the action or forbearance; (e) The extent to which the action or forbearance was foreseeable by the promisor. Winternitz v. Summit Hills Joint Venture Facts: When Summit Hills (D) reneged on an oral agreement to renew Winternitzs (P) lease and allow him to assign it to a financially sound purchaser of his pharmacy business, Winternitz (P) sought damages for breach of lease, breach of an assignment agreement, and malicious interference with his contract to sell the business. Rule: 129 Action in Reliance; Specific Performance A contract for the transfer of an interest in land may be specifically enforced notwithstanding failure to comply with the Statute of Frauds if it is established that the party seeking enforcement, in reasonable reliance on the contract and on the continuing assent of the party against whom enforcement is sought, has so changed his position that injustice can be avoided only by specific enforcement.

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Where the defense of part performance is raised, the dispute often concerns the nature and quality of the performance. Here the plaintiff alleges that the $1,700 payment in rent constitutes sufficient part performance Part performance is an equitable doctrine available only where the principal relief sought is specific performance of the oral agreement. Holding: Statute of frauds not met because lease was not signed by person who enforcement was sought, but there was an exception. Class Notes: In Winternitz, there was a lease agreement and the K needed to be in writiting Ultimately nobody signed the lease Even if the landlord signed the sample it would satisfy the statute of frauds (any document signed by opposing party with all the key terms is sufficient) NOTE: Even if you have a K that is required to be in writing to satisfy the statute of frauds, ALWAYS look to the exceptions to see if the problem falls within one of them.

B. STATUTE OF FRAUDS & THE UCC 2-201. Formal Requirements; STATUTE of FRAUDS (1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods show in such writing. (2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents given within 10 days after it is received. (3) A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable (a) If the goods are to be specifically manufactured for the buyer and are not suitable for sale to others in the ordinary course of the sellers business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacturing or commitments for their procurement; or (b) If the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or (c) With respect to goods for which payment has been made and accepted or which have been received and accepted. Buffaloe v. Hart (UCC CASE) Facts: Buffaloe (P) alleged that an oral contract he had with the Harts (D) to purchase their barns was valid because it fell under the partial performance exception to the Statute of Frauds Issue:

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Is a personal check describing the property involved and containing the amount representing partial payment sufficient to constitute a writing under the statute of frauds? Note: a check may constitute a writing sufficient to satisfy 2-201 if: Contains a writing sufficient to indicate a contract of sale between the parties Is signed by the party or his authorized agent against whom enforcement is sought States the quantity Holding on satisfying 2-201: Because the defendants signature is not on the check, and they are the party whom enforcement is sought against, the alleged oral contract between the plaintiff and defendant is unenforceable under this section. Next Argument- Part Performance 2-210 (3) The seller must deliver the goods and have them accepted by the buyer. Acceptance MUST be voluntary and unconditional and may be inferred by the buyers conduct in taking physical possession of the goods or some part of them Here the plaintiff told several people he purchased barns. He paid for improvements, took possession, enlisted an auctioneer and the paper to sell the barns, received deposits from 3 buyers

Class Notes: It is clear that there was a K for the sale of barns, the question is if there was a writing to evidence the K to satisfy the statute of frauds. Plaintiff argued that the check constitutes the writing (has the quantity term); however the defendant did not sign the check NOTE: if it were the plaintiff trying to get out of the contract than the check would have satisfied the statute (he signed it). Plaintiff relied on the acceptance exception: he paid for the barns, they accepted payment for barns The tender of the check was sufficient. EXAM: 1. Common Law vs. UCC statute of Frauds (a) Common law- All the key terms must be in the writing (b) UCC- all you need is a quantity term, and it needs to appear that there is a K for the sale of goods. 2. 4 general exceptions (2-201) (a) Specifically Manufactured goods exception: manufacturer do not make custom goods for no reason. Provides evidence that there was K (b) Admission exception: if you admit in an official document that a K was made, you cannot use statute of frauds to resist enforcement. (c) Acceptance exception: if payment made and accepted or goods received, delivered, and accepted. Performance exception for the UCC. Parties acting like a K was made, cannot later say there was no K. (d) Merchant Confirmation exception: both confirmation and refusal must be in writing. If informal agreement (oral) and one party puts it in writing and notifies the other party, and the other party does nothing in 10 days, the K is enforceable If one party sends a follow up (e-mail, etc..) it will satisfy the statute of frauds. If you do nothing in 10 days the K will be enforceable (admitting you have a K). 3. Merchants confirmation elements i. Both parties have to be merchant

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ii. Confirmation in writing and signed iii. No objection within ten days Rights and Duties of Third Parties: A. Third Party Beneficiaries a. Traditionally i. Creditor beneficiary 1. Lawrence v. Fox: A made loan to B, B loans same amount to C, C pays A 2. A is the third party seeking to enforce the contract between B & C (he is the creditor beneficiary) ii. Donee beneficiary 1. Definition: one party promised the other party to benefit a third person outside of the contract (like a family member) 2. Seaver v. Ransom: Husband promised wife that her niece would be taken care of in the will b. Modern (intended/incidental)

Restatement Section 302 (Intended and Incidental Beneficiaries): 1. Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either a. The performance of the promise with satisfy an obligation of the promisee to pay money to the beneficiary; or b. The circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. 2. An incidental beneficiary is a beneficiary who is not an intended beneficiary. INTENDED: VOGAN V. HAYES Facts: Hayes was hire by MidAmerica to monitor the progress of the Vogans home construction. The Vogans obtained a construction loan from MidAmerica. MidAmerica was to disburse progress payments to the builder based of progress reports received from Hayes. When there were cost overruns on the job, the Vogans took out a second mortgage to complete the home. In March, Hayes certified that the home was 60% done and 8 days later, certified that it was 90% done. Still, by October, the home was not complete, when the builder defaulted. Vogans stopped mortgage payments and MidAmerica brought suit against them, which was settled. Issue: Were the Vogans 3rd party beneficiaries of the contract between MidAmerica and Hayes? Yes. Rule: Intended beneficiary a. Performance of the contract will be of pecuniary benefit to the third party b. Contract is so expressed as to give the promisor reason to know that such benefit is contemplated by the promisee as one of the motivating causes of his making the contract Reasoning: The contract was so expressed as the give Hayes reason to know that the Vogans benefit was contemplated by MidAmerica as one of the motivating reasons for creating the contract. The invoices given to Hayes included the names of the owners, indicating that the purpose of the contract was to give the Vogans progress reports to provide them with protection of the money they invested. Three tests for determining intent

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1. Look to dual intent both promisor & promisee must intend to give the third party rights under the contract. 2. One partys intention the promisee because that party owed performance under the contract 3. ***Rule of 2 plus knowledge of other party in the contract of the intention a. Evidence of Intent 1. Totality of the circumstances language, background, considerations of fairness/ practicality 2. Pecuniary (financial) benefit book notes that this is too narrow of a test b. Incidental: not entitled to recovery B. Assignment & Delegation a. Assignment Generally Definition: situation where one party transfers a right they have under a contract to somebody else Example: A B C B could assign right to recover to A B= assignor A= assignee C= obligor (owes performance) Another example: assigning a lease different from subletting because in sublet, the party who sublet the apartment is still liable, when assign, transfer all rights & obligations under the lease Assignor= present tenant Assignee= new tenant Obligor= landlord

Restatement Section 317 (Assignment of a Right) 1. An assignment of a right is a manifestation of the assignors intention to transfer by virtue of which the assignors right to performance by the obligor is extinguished in whole or in part and the assignee acquires a right to such performance 2. A contractual right can be assigned unless a. The substitution of a right of the assignee for the right of the assignor would materially change the duty of the obligor, or materially increase the burden of risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reduce its value to him, or b. The assignment is forbidden by statute or is other inoperative on grounds of public policy, or c. Assignment is validly precluded by contract. HERZOG V. IRACE Facts: Assignor Jones: for right to payment of accident claim; Assignee doctor; Obligor Lawyers Issue: Was the assignment valid? Yes. Rule: (1) For assignment to be valid, assignor must manifest complete intention to relinquish rights; (2) Generally, obligor is not required to agree or accept the assignment; (3) Once obligor knows of assignment, must render performance to assignee; (4) Normally right are freely assignable (with some exceptions) Reasoning: The words of the letter indicated a complete relinquishment of rights. **look at language to determine whether it is a request or assignment Restatement Section 322 (Contractual Prohibition of Assignment) 1. Unless the circumstances indicate the contrary, a contract term prohibiting assignment of the contract bars only the delegation to an assignee of the performance by the assignor of a duty or condition. 2. A contract term prohibiting assignment of rights under the contract, unless a different intention is manifested,

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a. Does not forbid assignment of a right to damages for breach of the whole contract or a right arising out of the assignors due performance of his entire obligation; b. Gives the obligor a right to damages for breach of the terms forbidding assignment but does not render the assignment ineffective; c. Is for the benefit of the obligor, and does not prevent the assignee from acquiring rights against the assignor or the obligor from discharging his duty as if there were no such prohibition. NOTE: Magic Language: have to say its void or non-assigning party or will not recognize assignment Restatement Section 328 (Interpretation of Words of Assignment; Effect of Acceptance of Assignment): 1. Unless the language or the circumstances indicate the contrary, as in an assignment for security, an assignment of the contract or all my rights under the contract or an assignment in similar terms is an assignment of the assignors rights and a delegation of his unperformed duties under the contract. 2. Unless the language or the circumstances indicate the contrary, the acceptance by an assignee of such an assignment operates as a promise to the assignor to perform the assignors unperformed duties, and the obligor of the assigned rights is an intended beneficiary of the promise. Delegation (transferring duties) Example: Hire Mike to paint fence, Bob shows up. 1. Not a big deal because Mike is still responsible 3. With delegation cannot completely get out rights, unlike assignment

Restatement Section 318 (Delegation of Performance of Duty) 1. An obligor can properly delegate the performance of his duty to another unless the delegation is contrary to public policy or the terms of his promise. 2. Unless otherwise agreed, a promise requires performance by a particular person only to the extent that the obligee has a substantial interest in having that person perform or control the acts promised. 3. Unless the obligee agrees otherwise, neither delegation of performance nor a contract to assume the duty made with the obligor by the person delegated discharges any duty or liability of the delegating obligor SALLY BEAUTY V. NEXXUS Facts: Best entered into a contract with Nexxus, under which Best would be the exclusive distributor of Nexxus products in Texas. Subsequently, Best merged in Sally Comp. and Nexxus cancelled agreement. Sally is a wholly-owned subsidiary of Alberto-Culver, a competitor of Nexxus. Issue: Is assignment of the contract barred by the UCC? Yes. Rule: The Code sanctions delegation except where the delegated performance would be unsatisfactory to the obligee: A party may perform his duty through a delegate unless otherwise agreed to or unless the other party has a substantial interest in having his original promisor perform or control the acts required by the contract. Personal service contracts are generally non-delegable. Reasoning: Allowing delegation to a competitor defies common sense. The contract between Best and Nexxus was for the best efforts, which could not be expected to be fulfilled by a competitor of Nexxus. This simply was not what Nexxus bargained for and therefore they did not have to comply with the contract. Policy: Rights & duties should be freely alienable versus party of a contract shouldnt have to perform for something they didnt bargain for.

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Dissent: Alienation of financial benefits (Sally & AB will want to make money regardless; contract was short-term, could terminate; even if AC didnt use best efforts, competitive market will even it out. 1. Remedy should have been assurances 2. Courts are much more likely to give effect to no delegation clauses.

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