[CONTRACT TERMS]UCC 1-201: "Term" means that portion of an agreement which relates to a particular matter.”

There are two kinds of terms:o Promise: Describes the performance obligations of each party and when each

performance will occuro “I promise to mow your lawn tomorrow if you pay me $10 then.”

o Conditions: Describes an event that will either trigger or excuse a party’s obligation to perform

o “If it is sunny tomorrow morning I will mow your lawn”

Timeline of a Contract:Negotiation Prior oral or written agreement on terms Record(s); Signed Record(s); Contemporaneous Oral Agreement on Terms Modification

[SOURCES OF TERMS]Source of Terms:

1. Express agreement of the parties: this can be oral or written2. Implications generated by circumstances3. Course of dealing between the parties or usage of the trade (R2.d §222, 223; RUCC 1-303)4. Default Rules; Default Terms from Article 2; Remedies for breach of contract; Warranties

[THE PAROL EVIDENCE RULE]Will the evidence make the term a part of the contract?

[Introduction]Parol Evidence is evidence of an agreement that adds to or explains the terms in the record(s). The agreement may occur prior to or at the time the record is signed (can be oral or written). It restricts the extent to which some contextual evidence may be considered in deciding what the parties intended in entering the contract.

Parol evidence is evidence of the parties’ oral agreement, prior or contemporaneous with execution of a record, to a term not included in the record; OR evidence of the parties’ written agreement, prior to execution of a record, to a term not included in the record

o Modifications have nothing to do with Parol evidence; the agreement must be prior to or contemporaneous to the signing of the record.

o The more clear and comprehensive the contract, the higher the barrier to the admission of extrinsic evidence

The trier of fact may not hear parol evidence that adds to or contradicts a complete integration and may not hear parol evidence that contradicts a partial integration.

Parol evidence does not exclude evidence that the parties bring forth to show that no contract was ever formed or that the contract may be invalid or avoidable.

o E.g. Does not exclude evidence showing the presence of joke, misunderstanding, mistake, duress, violates public policy, etc.

Parol evidence is substantive law, not an evidentiary rule: if a federal court deals with a contract case, it follows its own rules of evidence but is bound by the state’s parol evidence rule because it is a matter of state substantive law

In Masterson v. Sine, court holds that extrinsic evidence as to the meaning of the personal option may be included when Masterson sold his property to family with a personal option to buy the property back. Court found that evidence of oral collateral agreements should be excluded only when the fact finder is likely to be misled. (Masterson v. Sine; CA; 1968)

o Restatement of Contracts permits proof of collateral agreement if it “is such an agreement as might naturally be made as a separate agreement by parties situated as were the parties to the written contract.” Court finds that this applies

o UCC: “If the additional terms are such that, if agreed upon, they would certainly have been included in the document in the view of the court, then evidence of their alleged making must be kept from the trier of fact” Court finds that the parties would not have “certainly” included the collateral agreement (personal option) in the deed

Relevant Terminology:o Record: information inscribed on a tangible medium and retrievable in perceivable form

(UCC 9-102(a)(69))o Final Record is a partially or completely integrated agreement; if one concludes that it

contains all the terms to which the parties agreed, it is complete; however the record may be final but not complete

o Merger Clause, sometimes referred to as “integration clause,” is a clause in a record where the parties express their intention regarding the finality or completeness of the record. However, a merger clause is not always conclusive if one of the parties can make a plausible argument that the writing really is not integrated

o A court would be more likely to admit evidence where the merger clause is a standard term in a form contract

Policies for parol evidence:1. Written evidence is more accurate than human memory2. Fear of interested witnesses misleading the finder of facts3. Control the tendency of the jury to find through sympathy4. Prevent a type of fraud that may occur when parties claim after the fact that they in fact

agreed prior to the written record on some term.5. Courts try to balance the parties’ reasonable expectations that arise from the language v.

reasonable expectations that arise from the context

Parol Evidence Analysis:1. There must be a written agreement

a. The more complete the written memorandum, the more rigorous the application of the parol evidence rule

b. Writing must be adopted by both partiesi. Does not need to be signed by both parties, but needs to be a mutual

documentii. Letter written by one party and received by the other without objection

qualifies2. Identify the parol evidence

a. Form:

i. Statement of an oral claim contemporaneous with or prior to executionii. Piece of writing prior to execution indicating the existence of a term

b. Time:i. Prior to execution of the writing may admit both oral and written

evidenceii. Contemporaneous to execution of writing may or may not admit oral,

always admit written evidence since a contract need not be contained in a single document

1. Collateral Agreement: A parol agreement sufficiently distinct from the scope of the writing to be seen as a different contract, related to but separated from the integrated document

a. Subject matter and the consideration for the parol agreement in a collateral agreement must be distinct and capable of being separately identified to qualify as a collateral agreement

b. Evidence of collateral agreement is not barred by the parol evidence rule because parties may not have intended this agreement to be a part of the integrated writing

c. However evidence of collateral agreement that contradicts the writing is still barred

3. Identify whether the evidence would supplement or vary the contracta. Anything that would be contradictory with what has been written may not be

admittedb. EXCEPTIONS:

i. Any evidence that shows fraud, duress, mistake and other bases for invalidating or avoiding the contract is permitted

ii. Any evidence that shows that the agreement was subject to a condition precedent is admitted (R.2d §217 Comment b)

1. On the basis that if a condition exists, the writing cannot be said to be integrated

4. Is the record final? This just means that it was the last draft, but this does not mean that the contract expresses all terms; the parties may have intended additional terms not mentioned in the record

5. Is the record a partial or complete integration? Question of fact – determine the parties’ intent

Objective Test: Look to the “four corners” of the document, without resource to any extrinsic evidence

o This is the traditional approach, and modern courts are moving away from this strict approach

Contextual test: Look beyond the face of the writing to entertain extrinsic evidence that may be helpful in revealing that an apparently integrated writing was in fact not intended as such

o See if there were extended negotiations prior to the written agreement

o See if it was a standardized formo If a term may “naturally be omitted” from the writing, it is

admissible (R.2d §216(2)(b))

o If a term would “certainly have been included,” then the evidence is inadmissible. (UCC §2-202 comment 3)

Much broader standard, since parol evidence will be included unless you find that it certainly would have been included

This test also speaks to consistency as to the finality of the writing

To determine whether record is complete and final: look to the record itself, the parol evidence itself and the circumstances at the time of the writing (course of dealing or trade usage, UCC §2-202(a))

If the alleged agreement would naturally be a separate term, then the document is not completely integrated, and evidence would be admissible.

If the document appears to be clear, unambiguous and complete, the court is likely to assume that it is integrated unless extrinsic evidence is reconcilable with the apparent intent and plausibly demonstrates a justification for going beyond the writing

Even if the parties intended the writing to be a full and final expression of the agreement, if a term in the writing is unclear or ambiguous, the writing cannot be treated as an integration of that term

o Parol evidence would be admitted to clarify the uncertainty or ambiguity of the term

o Evidence must be pertinent to the meaning of the unclear term and be reconcilable with what has been written

If the record is a complete integration; “fully integrated”; or “integrated;” the parol evidence may NOT be brought in

o A writing that is integrated means that the court decides that when the parties signed this record or records, they intended that it would be final and complete, that is, there is nothing more to be added to it

If final but a partial integration, you cannot hear any parol evidence that contradicts what is written in the record, but may admit evidence that supplements additional terms.

6. If admissible, is it believed?a. Determining admissibility is a question of law for the judgeb. Determining credibility is a question of fact for the jury

7. If believed, was the term breached?

Rules for Parol Evidence CALIFORNIA CODE OF CIVIL PROCEDURE: PAROL EVIDENCE RULES

Cal Code Civ Proc. 18561978 California codification of the core parol evidence rules

(a) Terms set forth in writing intended by the parties as the final expression may not be contradicted by evidence of any prior or contemporaneous oral agreement

(b) Terms set forth in writing described in (a) may be explained or supplemented by additional evidence of consistent additional terms unless the writing is intended also as a complete and exclusive statement of the terms of the agreement

(c) Terms set forth in (a) may be supplemented by course of dealing or usage of trade or by course of

performance(d) Court shall determine whether the writing was intended by the parties as a final expression and a

complete and exclusive statement(e) This section does not exclude evidence relevant to a mistake or imperfection of the writing where it is

an issue in the pleadings(f) This section does not exclude evidence relevant to the validity of the agreement if that is the fact in

dispute(g) Section does not exclude other evidence of circumstances under which the agreement was maid or to

explain an extrinsic ambiguity or otherwise interpret the terms of the agreement or to establish illegality or fraud

(h) The term agreement in this section includes deeds and wills as well as contracts between parties

Official Comment to 1856As a general rule, evidence of consistent additional terms is admissible to explain or supplement the terms of an agreement notwithstanding the finality of the terms of the agreement.

Course of dealing, unless carefully negated, become an element of the meaning of the worlds used. Similarly, course of actual performance is considered the best indication of what the parties intended the writing to mean.

UCC §2-202: PAROL EVIDENCE RULEo This section presumes very strongly that the parties intended to contract in light of

their own and the market’s customary practiceso Therefore, trade usage and course of dealing may be admitted even when the

writing is intended as a final expression of the agreement to determine context of the agreement

o This compels parties to use very clear and specific language in the writing if they truly do intend to exclude a course of dealing or a trade usage from their contract

Parol Evidence Rule UCC §2-202Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement may not be contradicted… but may be explained or supplemented by:

(a) Course of dealing or usage of trade or by course of performance(b) By evidence of consistent additional terms unless the court finds the writing to have been intended also

a as a complete and exclusive statement

Official Comment:1. This section rejects:

(a) Assumption that a writing includes all terms(b) Language used has meaning from law not from the commercial context in which it was used(c) Requirement that court must determine that the language used is ambiguous before the admission of

evidence

Comment 3: Only exclude the evidence if it clearly would have been part of the writing if the parties had agreed to it.

Parol Evidence Rule, Plain Meaning Rule, Contractual Merger Clause and the CISG

1. The Parol Evidence Rule has not been incorporated into the CISG. The CISG governs the role and weight to be ascribed to contractual writing.

2. In some common law jurisdictions, the Plain Meaning Rule prevents a court from considering evidence outside a seemingly unambiguous writing for purposes of contractual interpretation. The Plain Meaning Rule does not apply under the CISG.3. A Merger Clause, also referred to as an Entire Agreement Clause, when in a contract governed by the CISG, derogates from norms of interpretation and evidence contained in the CISG. The effect may be to prevent a party from relying on evidence of statements or agreements not contained in the writing. Moreover, if the parties so intend, a Merger Clause may bar evidence of trade usages. However, in determining the effect of such a Merger Clause, the parties' statements and negotiations, as well as all other relevant circumstances shall be taken into account.

[EXTRINSIC EVIDENCE]See Tahoe National Bank, Trident Center

Where a party seeks to prove contextual evidence pertinent to meaning, the court must decide if the evidence should be heard. Some courts are strongly resistant to going beyond the apparent plain meaning of the language used in the four corners of the contract. Other courts are more receptive to extrinsic evidence because they recognize that words do not have a constant meaning and can be colored by context.

Rules for the Interpretation of Terms: Rules of Construction

o R.2d § 201o Cal. Civ. Code 1643; 1651; 1654

Linguistic o Plain Meaningo In pari material – “Upon the same subject”

Designation to statutes enacted at different times but pertain to the same subject

Must be interpreted in light of each other since they have a common purpose for comparable events or items

o Excpressio unius – “The express mention of one thing excludes all others” Items not on the list are assumed not to be covered by the statute However, sometimes a list may be illustrative instead of exclusive; these are

indicated by words such as “includes” and “such as” E.g. “No cats and dogs” means you can have ducks

o Ejusdem generis – “Of the same kind” When specific and general words are connected, the general word is limited

by the specific one so that it is deemed to refer to things of the same kind E.g. “No skateboards, rollerblades, and other means of locomotion”

If the general word is wheels under feet, “other means of locomotion” will not include wheelchairs or bikes; however, if the general word is all items that use wheels, these two items would be included

o Internal definitions (stated or incorporated) Extrinsic evidence includes:

o Parol Evidence (includes only express agreement outside of the record)o Objective Evidence (look to UCC §1-205; 2-208)

Negotiations Discussion and conduct of the parties when they negotiated the

contract Usage of trade/Custom

Customs and usages of the market in which they are dealing with each other

Course of dealing Conduct in prior comparable transactions with each other

Course of Performance Conduct in performing the contract after it was formed

o Circumstantial Evidenceo External Definitions

Recap: when can you use these types of evidence?

Extrinsic Evidence Contradict Supplement Interpret (unclear/clear)Parol (express agreement) X X XUsage SEE UCC 2-202 X Course of dealing SEE UCC 2-202 X Course of Performance SEE UCC 2-202 X Negotiations No No XCircumstances No No X

[INTERPRETATION OF TERMS]See Bond Drug Co., Prytania Park Hotel, Frigaliment Importing Co.

[GENERAL PRINCIPLES]The language of a contract may be vague, ambiguous or an imperfect expression of the intention of the parties. Generally, contract law dislikes breakdown and frustration and prefers instead, where reasonable, to construct an enforceable contract out of whatever raw materials of intention the parties have made available. “Ut res magis valeat quam pereat – the thing should rather have effect than be destroyed.” Courts favor an interpretation that would make the contract valid, not invalid.

If the express agreement is silent, the court will supply an appropriate term through either an implied-in-fact term (course of dealing, performance, usage of trade), or a default term (implied-in-law).

o When possible, it is preferable for a court to find the intended meaning of terms in actual evidence, rather than construe it through law on what the parties probably would or should have meant

In general, construction is appropriate only when the existing evidence supports the reasonable conclusion (objective manifestations of assent) that the parties did intend to make a contract but there is little or no

evidence from which a factual inference can be drawn on their intent regarding a particular aspect of that contract

Sometimes a court will construe a term even though it conflicts with evidence of what was agreed in order to effect some public policy, or is so fundamental to fair dealing that the law insists that tit be incorporated into the contract despite the parties’ actual intent

If the agreement speaks, the court must interpret the languageo Objective Test: Meaning is based on how words and actions would be reasonably

perceived by the party to whom they were manifestedo Subjective Test: If both parties attached the same meaning of the term, court will

interpret language in accordance with the intentions of the parties See R.2d § 201 (1)

o If the shared meaning cannot be ascertained, the court will interpret the language in accordance with the meaning of ONE of the parties

See R.2d § 201 (2)o In all other cases, neither party is bound by the meaning attached by the other

party and in some cases the court may find that the absence of shared meaning was so fundamental that no contract was formed in the first place

See R.2d § 201 (3)

§ 201 WHOSE MEANING PREVAILS (1) Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning. (2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made

(a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or

(b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party.

(3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent.

If the court finds that a contract formed, the court must apply other rules to interpret the contract if the case is not expressed in § 201. See the following sections for other contract rules of interpretation:

Cal. Civ. Code 1635-54o Statutory formulation of interpreting terms

RUCC § 1-303o Defines and states the relevance to interpretation

The parties’ course of performance of the contract The parties’ prior course of dealing Usage of trade

“Any regular practice or method of dealing in a place, vocation, or trade”

§ 1-303. Course of Performance, Course of Dealing, and Usage of Trade.(a) A "course of performance" is a sequence of conduct between the parties to a particular transaction that exists if:

(1) The agreement of the parties with respect to the transaction involves repeated occasions for performance

by a party; and(2) The other party, with knowledge of the nature of the performance and opportunity for objection to it,

accepts the performance or acquiesces in it without objection.(b) A "course of dealing" is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.(c) A "usage of trade" is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage are to be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law.(d) A course of performance or course of dealing between the parties or usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware is relevant in ascertaining the meaning of the parties' agreement, may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement. A usage of trade applicable in the place in which part of the performance under the agreement is to occur may be so utilized as to that part of the performance.(e) Except as otherwise provided in subsection (f), the express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade must be construed whenever reasonable as consistent with each other. If such a construction is unreasonable:

(1) express terms prevail over course of performance, course of dealing, and usage of trade;(2) course of performance prevails over course of dealing and usage of trade; and(3) course of dealing prevails over usage of trade.

(f) Subject to Section 2-209, a course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance.(g) Evidence of a relevant usage of trade offered by one party is not admissible unless that party has given the other party notice that the court finds sufficient to prevent unfair surprise to the other party.

UCC 1-205 – COURSE OF DEALING AND USAGE OF TRADEo Subsection (4) states the general rule to give greatest weight to the express terms

of the parties, followed by course of performance, course of dealing, and usageo Course of dealing refers to any relationship the parties may have had in the

period before the transaction in questiono Usage of trade encompasses any applicable commercial custom, whether it

derives from a particular market or specialized trade or industry that the parties are involved, or from a broader market

If the market has a well-accepted custom or practice that explains language or supplements an omission in an agreement, this customary usage is of value in ascertaining the parties’ intent

The UCC test is simply whether the usage is currently observed by the great majority of decent dealers

Modern common law embraces this broader recognition of usage advanced by the UCC

Analysis Guideline : Define the trade or market with which the transaction is associated

and show that both parties are sufficiently connected to that trade to make the usage fairly attributable to the contract

o If one party is not an active participant you must show that he knew of the usage anyway and the circumstances show that the parties reasonably expected it to apply to the transaction

o Objective standard: doesn’t matter whether the party actually knew of and expected the usage to apply, just that the party reasonably should have known of the usage

Show that the usage is pertinent to the disputed term; usage must be relevant to the contract and must relate to the very matter on which the parties disagree

Party claiming the usage must prove as a question of fact that the usage actually exists in the applicable trade or market

o Requires both proof of the scope and terms of the usage and of its wide acceptance in the trade or market

Usage must not be inconsistent with the express terms of the agreement

o If the parties make it clear that they intend not to use the usage, the expressed intention of the parties overrides the usage

§ 1–205. Course of Dealing and Usage of Trade.(4) A course of dealing is a sequence of previous conduct between the parties to a particular transaction

which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.

(5) A usage of trade is any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage are to be proved as facts. If it is established that such a usage is embodied in a written trade code or similar writing the interpretation of the writing is for the court.

(6) A course of dealing between parties and any usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware give particular meaning to and supplement or qualify terms of an agreement.

(7) The express terms of an agreement and an applicable course of dealing or usage of trade shall be construed wherever reasonable as consistent with each other; but when such construction is unreasonable express terms control both course of dealing and usage of trade and course of dealing controls usage of trade.

(8) An applicable usage of trade in the place where any part of performance is to occur shall be used in interpreting the agreement as to that part of the performance.

(9) Evidence of a relevant usage of trade offered by one party is not admissible unless and until he has given the other party such notice as the court finds sufficient to prevent unfair surprise to the latter.

UCC 2-208 – COURSE OF PERFORMANCE OR PRACTICAL CONSTRUCTIONo Subsection (2) states the general rule to give greatest weight to the express terms

of the parties, followed by course of performance, course of dealing, and usageo Course of performance’s relevance to interpretation is based on the assumption

that the actual performance tendered and accepted without objection is a strong indicator of what must have been intended

o Analysis Guideline: Course of performance must be pertinent to the meaning of the term in

controversy Conduct must show that the party performed or accepted performance

without a protest or reservation of rights

Conduct by only one of the parties, not known and acquiesced in by the other, may show what the performing party understood the agreement to be but does not prove that the other party shared the view

The more extensive or repetitious the conduct, the stronger the inference

§ 2-208. Course of Performance or Practical Construction.     [Ed. Note:  In jurisdictions adopting Revised UCC Article 1, this section is deleted in its entirety in favor of new section RUCC 1-303] 

    (1) Where the contract for sale involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection shall be relevant to determine the meaning of the agreement.

    (2) The express terms of the agreement and any such course of performance, as well as any course of dealing and usage of trade, shall be construed whenever reasonable as consistent with each other; but when such construction is unreasonable, express terms shall control course of performance and course of performance shall control both course of dealing and usage of trade (Section 1-205).

    (3) Subject to the provisions of the next section on modification and waiver, such course of performance shall be relevant to show a waiver or modification of any term inconsistent with such course of performance.

R.2d § 202 – RULES IN AID OF INTERPRETATIONo Mimics the evidentiary value of course of performance in UCC §2-208

§ 202 RULES IN AID OF INTERPRETATION (1) Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight. (2) A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together. (3) Unless a different intention is manifested,

(a) Where language has a generally prevailing meaning, it is interpreted in accordance with that meaning; (b) Technical terms and words of art are given their technical meaning when used in a transaction within

their technical field. (4) Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement. (5) Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage of trade.

R.2d § 203 – STANDARDS OF PREFERENCE IN INTERPRETATIONo Subsection (b) gives greatest weight to express terms

These terms may be oral or written Court does not look to the language of the contract in isolation but

reads it in light of the agreement as a whole; often, terms in one part of a contract cast light on terms in another

§ 203 STANDARDS OF PREFERENCE IN INTERPRETATION In the interpretation of a promise or agreement or a term thereof, the following standards of preference are generally applicable:

(a) an interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to

an interpretation which leaves a part unreasonable, unlawful, or of no effect; (b) express terms are given greater weight than course of performance, course of dealing, and usage of

trade, course of performance is given greater weight than course of dealing or usage of trade, and course of dealing is given greater weight than usage of trade;

(c) specific terms and exact terms are given greater weight than general language; (d) separately negotiated or added terms are given greater weight than standardized terms or other terms not

separately negotiated.

R.2d § 222 – USAGE OF TRADE

§ 222 USAGE OF TRADE (1) A usage of trade is a usage having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to a particular agreement. It may include a system of rules regularly observed even though particular rules are changed from time to time. (2) The existence and scope of a usage of trade are to be determined as questions of fact. If a usage is embodied in a written trade code or similar writing the interpretation of the writing is to be determined by the court as a question of law. (3) Unless otherwise agreed, a usage of trade in the vocation or trade in which the parties are engaged or a usage of trade of which they know or have reason to know gives meaning to or supplements or qualifies their agreement.

R.2d § 223 – COURSE OF DEALINGo The courts may supply the missing element by resorting to trade usage or to any

prior course of dealing between the parties “which is fairly to be regarded as establishing a common basis of understanding”

o Guidelines: Course of dealing is only pertinent if the earlier relationship is comparable

or analogous The transaction must be substantially similar, the term in controversy must

have been present in the earlier dealings, and past conduct must be relevant to the meaning in issue

Repetition strengthens the inference, so multiple transactions with consistent, pertinent behavior more clearly establish intended meaning

§ 223 COURSE OF DEALING (1) A course of dealing is a sequence of previous conduct between the parties to an agreement which is fairly

to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.

(2) Unless otherwise agreed, a course of dealing between the parties gives meaning to or supplements or qualifies their agreement.

[IMPLIED-IN-FACT TERMS]

In Wood v. Lucy, Lady Duff-Gordon, court found implied-in-fact terms when “the implication of a promise here finds support in many circumstances.”

The defendant gave an exclusive privilege. She was to have no right for at least a year to place her own endorsements or market her own designs except through the agency of the plaintiff.

The acceptance of the exclusive agency was an assumption of its duties

In Pugh v. See’s Candies, court found that the employer See’s violated Pugh’s contract of employment. Court ruled that the termination of employment without legal cause after 18 years of employment offends the implied-in-law covenant of good faith and fair dealing contained in all contract, including employment contracts.

In employment law, it was "custom and public policy, not the will of the parties, [which] defined the implicit framework of mutual rights and obligations.

o Under most union contracts, employees can only be dismissed for "just cause"o Recent statutes bar employer’s power of dismissal: for example, employers cannot

fire someone for union membership or activities, race, sex, age or political affiliation. 

Two relevant limiting principles have developed, one of them based upon public policy and the other upon traditional contract doctrine.

o The first limitation precludes dismissal "when an employer's discharge of an employee violates fundamental principles of public policy.”

o The second when the discharge is contrary to the terms of the agreement, express or implied.

The presumption that an employment contract is intended to be terminable at will is subject, like any presumption, to contrary evidence. This may take the form of an agreement, express or implied, that the relationship will continue for some fixed period of time. Or, and of greater relevance here, it may take the form of an agreement that the employment relationship will continue indefinitely, pending the occurrence of some event such as the employer's dissatisfaction with the employee's services or the existence of some "cause" for termination. (Referred to as “permanent employment”

The result is equally explicable in traditional contract terms: the employer's conduct gave rise to an implied promise that it would not act arbitrarily in dealing with its employees. Facts to determine such an implied promise:

o Duration of Pugh’s employmento Commendations and promotions he receivedo Lack of any direct criticism of his worko Assurances he was giveno Employer’s acknowledged policies

[TERMS SUPPLIED BY DEFAULT RULES]See Bailey, Hicks, Market Street, Acree

The purpose of default rules is to supply a logically inferable contract term when it is clear that the parties intended a contract but have failed to provide adequately or at all for the question in issue. Courts will only fill in terms where it is possible to supply the missing term by reasonable inference (courts will not just make up terms).

A prerequisite to the use of default terms is that the negotiated terms were sufficient in themselves to give rise to a contractual obligation in the first place.

o Check R.2d §33 for certainty, is there a viable remedy for breach?

o Check UCC 2-204 for statutory formation for transactions in goods Default terms may be changed by the agreement of the parties by expressing a contrary

intent. o See RUCC 1-302, Variation by Agreement.

o A gap filler is legally implied to supplement or clarify its express language; it does not override the parties’ probable intent

However, some default terms are immutable, such as the remedy for breach of contract (cannot exceed the amount of clearly predictable loss from breach). These rules are so fundamental to fair dealing or so strongly demanded by public policy that they are mandatory irrespective of the parties’ actual intent.

o See RUCC 1-302 (b)

Also review 2-207, Battle of Forms If applying UCC 2-207(1) and the writings do not create a contract, apply (3) to see if

conduct of the parties establish a contract Subsection (3) expressly refers to default terms on matters as to which the writings do

not agree

A court has the power to apply a default term tailored to the particular case: R.2d § 204 SUPPLYING AN OMITTED ESSENTIAL TERM

o When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.

R.2d § 205 DUTY OF GOOD FAITH AND FAIR DEALING o Every contract imposes upon each party a duty of good faith and fair dealing in its

performance and its enforcement. Comment b. Good Faith in Purchase. Particularly in the law of negotiable

instruments inquiry may be limited to "good faith" under what has been called "the rule of the pure heart and the empty head." When diligence or inquiry is a condition of the purchaser's right, it is said that good faith is not enough. This focus on honesty is appropriate to cases of good faith purchase; it is less so in cases of good faith performance.

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

RUCC § 1-304. Obligation of Good Faitho Every contract or duty within [the Uniform Commercial Code] imposes an

obligation of good faith in its performance and enforcement.o This is an obligation to make reasonable efforts to affect the contract’s purpose

UCC §1-203 DUTY TO PERFORM THE CONTRACT REASONABLY AND IN GOOD FAITH UCC § 2-711 BUYER’S REMEDIES IN GENERAL; BUYER’S SECURITY INTEREST IN

REJECTED GOODSo Usually a store will give you a refund or exchange if the goods were damaged. If a

store does not, rules of contract supply you with remedies for the store’s breach of the implied warranty – this is also a default term

DEFAULT TERMS PROVISIONS TO APPLY:

UCC §2-201 STATUTE OF FRAUDS

§ 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 shown 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 is 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 specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller's 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 manufacture 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 (Sec. 2–606).

WARRANTIES Whether the warranty is based on promise or statement of fact, breach of the warranty

has the same consequences as the breach of any other promise. Law does not generally imply warranties with respect to services, and even express

warranties relating to services are uncommon Aggrieved party may recover damages and if the warranty is a constructive condition of

exchange, as it almost always will be, the aggrieved party may be discharged of its own duty of performance

UCC §2-312, 314 and 315 imply certain minimum warranties that a seller makes under defined circumstances regarding the title to and quality of the goods

UCC §2-312 – WARRANTY OF TITLE AND AGAINST INFRINGEMENT; BUYER’S OBLIGATION AGAINST INFRINGEMENT

§ 2–312. Warranty of Title and Against Infringement; Buyer's Obligation Against Infringement.(1) Subject to subsection (2) there is in a contract for sale a warranty by the seller that

(a) the title conveyed shall be good, and its transfer rightful; and(b) the goods shall be delivered free from any security interest or other lien or

encumbrance of which the buyer at the time of contracting has no knowledge.(2) A warranty under subsection (1) will be excluded or modified only by specific language or by

circumstances which give the buyer reason to know that the person selling does not claim title in himself

or that he is purporting to sell only such right or title as he or a third person may have.(3) Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the

goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications.

UCC §2-313 EXPRESS WARRANTIESo Some warranties are statements of fact rather than promise of future performance

and some warranties may be characterized as eithero Seller creates an express warranty by any affirmation of fact or promise which

relates to the goods and becomes part of the basis of the bargaino Seller creates an express warranty by any description of the goods which is made a

part of the basis of the bargain

§2-313 Express Warranties by Affirmation, Promise, Description, Sample(2) Express warranties by the seller are created as follows:

(a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.

(b) Any description of the gods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description

(c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.

UCC §2-314 IMPLIED WARRANTIES AND MERCHANTIBILITYo If a product that you purchase is defective, the merchant has breached an implied

warranty of merchantability.o One of the key definitions of merchantability is that it is fit for “ordinary purpose”

§2-314 Implied Warranty: Merchantability; Usage of Trade(1) Unless excluded or modified (Section 2–316), a warranty that the goods shall be merchantable is

implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Under this section the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale.

(2) Goods to be merchantable must be at least such as (a) Pass without objection in the trade under the contract description; and(b) In the case of fungible goods, are of fair average quality within the description; and(c) Are fit for the ordinary purposes for which such goods are used; and(d) Run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and(e) Are adequately contained, packaged, and labeled as the agreement may require; and(f) Conform to the promise or affirmations of fact made on the container or label if any.

(3) Unless excluded or modified (Section 2–316) other implied warranties may arise from course of dealing or usage of trade.

UCC §2-315 IMPLIED WARRANTY – FITNESS FOR PARTICULAR PURPOSEo Seller must have reason to know:

Any particular purpose for which the goods are required That the buyer is relying on the seller’s skill or judgment

§2-315 Implied Warranty: Fitness for Particular Purpose.Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.

UCC §2-316 EXCLUSION OR MODIFICATION OF WARRANTIESo Although subsection (2) allows the seller to contract out of some of these

strongly implied terms, it only recognizes a warranty disclaimer as effective if it satisfies certain formalities

o In subsection (2), there is a content and conspicuous requirement, and the provision must mention “merchantability”

UCC §1-201 (10): "Conspicuous": A term or clause is conspicuous when it is so written that a reasonable person against whom it is to operate ought to have noticed it. A printed heading in capitals (as: Non-Negotiable Bill of Lading) is conspicuous. Language in the body of a form is "conspicuous" if it is in larger or other contrasting type or color. But in a telegram any stated term is "conspicuous". Whether a term or clause is "conspicuous" or not is for decision by the court.

“Although UCC § 1-201 (10) illustrates some of the means by which a contract term may be made conspicuous, ultimately “the test is whether attention can reasonably be expected to be called to it.” Hicks v. Superior Court

o Subsection 3: Most courts will probably say parts A and B are not dispositive, and the test

is reasonableness. -Profo Subsection 4:

Warranty Disclaimer Breach Remedies (2-719) The party who is responsible for the breach of warranty may limit the

remedy. E.g. “we can give you an exchange but no money back.”

§2-316 Exclusion or Modification of Warranties(1) Words or conduct relevant to the creation of an express warranty and words or conduct tending to

negate or limit warranty shall be construed wherever reasonable as consistent with each other, but subject to the provision of this Article on parol or extrinsic evidence (§2-202) negation or limitation is inoperative to the extent that such construction is unreasonable.

(2) Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for example, that “There are no warranties which extend beyond the description on the face thereof.”

(3) Notwithstanding subsection (2):(a) Unless the circumstances indicate otherwise, all implied warranties are excluded by expressions

like "as is", "with all faults" or other language which in common understanding calls the buyer's attention to the exclusion of warranties and makes plain that there is no implied warranty; and

(b) When the buyer before entering into the contract has examined the goods or the sample or model as fully as he desired or has refused to examine the goods there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to him; and

(c) An implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade.

(4) Remedies for breach of warranty can be limited in accordance with the provisions of this Article on liquidation or limitation of damages and on contractual modification of remedy.

Other Article 2 Default terms: 2-305, Open Price Terms

o If the parties do not specify the price of the goods, this section infers that they agreed to a reasonable price unless the apparent intent of the agreement is otherwise

2-306, Terms in output and requirements of contractso Subsection (1): Implies both a good faith and a reasonableness obligation on the

party who is to determine the quantity of the goods ordered or suppliedo Subsection (2): implies an obligation of best efforts on both parties when the

contract imposes an obligation on one of them to deal exclusively with the other If payment terms are not expressed, the following sections require that the goods be

delivered in a single lot at the seller’s place of business within a reasonable timeo 2-307, Delivery in single or several lotso 2-308, Place for deliveryo 2-309, Time for delivery or other actions

2-310, Time for payment 2-311, Options and cooperation respecting performance 2-503, Manner of seller’s tender of delivery 2-504, Shipment by Seller

CISG Article 35(1) The seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract.(2) Except where the parties have agreed otherwise, the goods do not conform with the contract unless they:

(a) are fit for the purposes for which goods of the same description would ordinarily be used;(b) are fit for any particular purpose expressly or impliedly made known to the seller at the time

of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller's skill and judgment;

(c) possess the qualities of goods which the seller has held out to the buyer as a sample or model;(d) are contained or packaged in the manner usual for such goods or, where there is no such

manner, in a manner adequate to preserve and protect the goods.(3) The seller is not liable under subparagraphs (a) to (d) of the preceding paragraph for any lack of conformity of the goods if at the time of the conclusion of the contract the buyer knew or could not have been unaware of such lack of conformity.

[AVOIDANCE OF UNCONSCIONABLE TERMS]See Williams v. Walker-Thomas, K.D. v. Educational Testing Service, Hicks v. Superior Court, Donovan v. RRL Corporation

[General Principles]

Although Courts do not inquire into adequacy of consideration, they may permit a party to escape from a contract or a term of a contract if:

Bargaining process failed to provide one party with an opportunity for meaningful choice Impact of the contract or terms is unreasonably favorable to one party

The higher the degree of procedural unconscionability, the less substantive unconscionability you need to prove the contract unconscionable.

Procedural Unconscionability would include:o Contract of adhesion (standardized form?)o “Buried in a sea of fine print”o Mandatory arbitration clause in a certain stateo Narrow language, context and location of the clause

Substantive Unconscionability:o Unfairly one-sidedo Not conspicuously disclosed

Sources of Law of Unconscionability: TRANSACTION IN GOODS: UCC 2-302 – UNCONSCIONABLE CONTRACT OR CLAUSE

UCC 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.

TRANSACTION OF ALL CONTRACTS: Cal. Civ. Code 1670.5

1670.5. (a) 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.(b) 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.

Common Law:In many cases, one party, typically an individual consumer of goods or services, will fail to read or understand some part of a standardized, non-negotiable contract.  With some exceptions, failure to read or understand a term in a contract is not a defense to enforcement of the term

R.2d § 211 – STANDARDIZED AGREEMENTSo Suggests that a rule permitting an adhering party escape from a term in a

standardized agreement if he was unaware of the term at the time he signed the agreement and the other party had reason to know that the adhering party would not have assented to the term had he been aware

o Inclusion of this rule in R.2d Contracts was controversial and this rule has generally not been followed by the courts

§ 211 STANDARDIZED AGREEMENTS (1) Except as stated in Subsection (3), where a party to an agreement signs or otherwise manifests assent to

a writing and has reason to believe that like writings are regularly used to embody terms of agreements of the same type, he adopts the writing as an integrated agreement with respect to the terms included in the writing.

(2) Such a writing is interpreted wherever reasonable as treating alike all those similarly situated, without regard to their knowledge or understanding of the standard terms of the writing.

(3) Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement.

[NATURE AND EFFECT OF TERMS]See Dove, Howard, New York Bronze Powder, Kennedy Associates, Charter Oak Fire, JNA Realty Corp

[PROMISES AND CONDITIONS]

The whole problem of whether something is a condition or the promise can be avoided by being explicit – state in the contract what it is.

PROMISE: By definition, all contracts, express or implied, consist of at least one promise. Identify the promise by applying tools of interpretation

o If the express agreement of the parties is silent, the court will supply the appropriate term, either an implied-in-fact term, a term derived from a course of dealing, course of performance, or usage of the trade, or a default term to determine what the contract requires.

o If the agreement speaks, the court must interpret the language in the process of interpretation: See R.2d § 201 subsections 1-3 above.

If a promisor fails to perform:o Consequences of Breach Remedy, usually compensatory damageso Material Breach (i.e. not substantial performance) discharge of remaining duties

of counter-performance

CONDITION: A condition is an event or non-event that is not certain to occur. A promised

performance is subject to a condition if the parties agree that the performance is contingent on the occurrence of the uncertain event.

o Uncertainty usually relates to future events, but it is possible for both parties to be uncertain about a past event if it is not readily ascertainable by them at the time they are ready to form the contract

o Law regards event as uncertain if, in light of human experience, its occurrence is not regarded as strongly predictable

o Note that the passage of time is not a condition because this is not regarded in law as an uncertain future event. This would merely be a term for the time of performance.

Key to analysis of conditions is interpretation: Determination of the parties’ intent, as expressed by them in their contract OR As inferred from surrounding evidence (implied in fact) and reasonable expectations

(implied in law)

R.2d § 226 – HOW AN EVENT MAY BE MADE A CONDITION

§ 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.

There are different meanings to the concept of “condition” to a contract Condition as Terms

o Conditions can simply mean “terms” or “provisions” of the contract; seller is really describing the promises that he will make and what he expects in return

Condition to Formation/”Condition to a contract”o A contract will not be formed absent the occurrence of an event that is beyond the

control of the parties to the contract.o The non-occurrence of the condition discharges the right of both parties to

demand performanceo Parol evidence rule may bar introduction of evidence offered to establish a

condition to performance but will not bar evidence to establish a condition to formation

Condition as Acceptanceo A condition may refer to the manner of accepting an offer to form a unilateral

contract or sometimes even a bilateral contract. o E.g. “We will insure you on condition that you pay policy premiums.”

Condition to the Performanceo A condition to the performance of an obligation is used to refer to an event, not

certain to occur, the occurrence of which will trigger or discharge the duty of a party to the contract to perform the obligations created by promises.

o If a condition is intended to relate only to the performance of one of the parties, that party can choose to perform despite its non-occurrence and may fully enforce the contract against the other

E.g. Buyer says he will buy the land if the zoning is approved. The zoning is not approved, but since this condition relates only to the Buyer’s performance, he can waive the condition and buy the land anyway. If Seller refuses, Buyer can sue for breach.

Promissory Condition: A party will make a promise, express or implied-in-fact, that a conditioning event will occur

o It is generally assumed that a pure condition is intended when a party has no power to influence the happening of the event, but a promissory condition is intended if she can play a role in affecting the outcome

This is merely an assumption and a party can expressly or impliedly indicate that the parties intended otherwise

o Failure of the promissory condition would give the other party a right to seek remedies for the breach of promise AND would discharge the other party from obligations under the contract

E.g. Soccer coach promises she will get certified before starting to coach the team. If soccer coach does not get certified, the soccer team will have right to compensatory damages AND would not have to pay the soccer coach anything

o Analysis on Pure v. Promissory Condition: Did the parties intend a performance to be excused if the event does not

occur? If Yes, the event is a condition of that performance and we next ask:

Did the parties intend that one of them is responsible for the event’s occurrence and would be liable for breach of contract if it does not occur?

If No, the event is a pure condition If Yes, the event is a promissory condition

Instances of NO CONDITION:o In some cases, a court may conclude that ambiguous language suggestive of

condition reflects the parties’ expectation that performance of duty will normally follow an anticipated event, but is not conditioned on the occurrence of the event

E.g. A general contractor paying a subcontractor “upon payment by the owner”

If the owner does not pay, the court may construe the language as measuring the time at which the general contractor is expected to pay, rather than as a condition to the duty to pay

This is because it is generally more reasonable to assume that the general contractor, not the subcontractor, assumes the risk of the owner’s non-payment

There is a significant impact on the duties of the party on the occurrence of a condition:o Non-occurrence of an event that conditions a performance of an obligation Duty

arising from condition is ENTIRELY DISCHARGED, even if the event seems minor See Dove v. Rose Acre Farms

Court may conclude that the language suggestive of a condition is ambiguous and justifies an interpretation that restricts the reach of the condition to avoid such dramatic consequences

In Kennedy Associates Inc. v. Fisher, a prospective financier balked on lending money to a prospective borrower after inspecting the real property that was to serve as collateral for repayment of the loan…

Court may also conclude that ambiguity justifies an interpretation that language creates a promise rather than a condition (breach would give a right to damages but does not necessary discharge the other party’s duties)

In Howard v. Federal Crop Insurance, insurer refuses to pay benefits to insured tobacco farmer because farmer plowed damage tobacco stalks before inspection on the damaged crop by insurer

In New York Bronze Powder Co., buyer of assets of a business declines to pay 350K still owing absent the seller’s surrender of a promissory not evidencing that debt

o R.2d § 225 – EFFECTS OF THE NON-OCCURRENCE OF A CONDITION

§ 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.

o R.2d § 227 – STANDARDS OF PREFERENCE WITH REGARD TO CONDITIONS

§ 227 STANDARDS OF PREFERENCE WITH REGARD TO CONDITIONS (1) In resolving doubts as to whether an event is made a condition of an obligor's duty, and as to the nature of such an event, an interpretation is preferred that will reduce the obligee's risk of forfeiture, unless the event is within the obligee's control or the circumstances indicate that he has assumed the risk. (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 obligee that an event occur, or (b) the event is made a condition of the obligor's duty, or (c) the event is made a condition of the obligor's duty and a duty is imposed on the obligee that the event

occur, the first interpretation is preferred if the event is within the obligee's control. (3) In case of doubt, an interpretation under which an event is a condition of an obligor's duty is preferred over an interpretation under which the non-occurrence of the event is a ground for discharge of that duty after it has become a duty to perform.

[Conditions Precedent & Subsequent] The distinction just depends on the way the condition is phrased in the contract. In some jurisdictions, this distinction does not matter. In others:

The party alleging injury from breach of contract must plead (and carry the burden of persuasion through a preponderance of evidence) the occurrence of a condition precedent to the breaching party’s obligation to perform

The party defending against an alleged breach of contract must plead and prove the occurrence of any condition subsequent discharging the duty of performance

Condition Precedent: an event that must occur before performance of an obligation is due. When a performance is subject to a condition precedent, the duty to perform, although created at the time of the contract, exists in only a contingent form. When the condition precedent occurs, it is converted to an actual duty.

One common example of a condition precedent is a condition of satisfaction:o “Bill promises to pay $5000 for his self-portrait if satisfied with the rendering”

If the contract does not indicate the sequence for fulfillment of the condition/performance, it must be determined by interpreting the parties’ intent in light of any contextual evidence (implied in fact), or by construing what must reasonably have been intended (implied in law)

o General presumption is that if the performances are capable of being rendered simultaneously, they are due at the same time (concurrent conditions)

Because the performances are concurrent conditions to each other, both parties must show up for the exchange ready, willing and able to tender performance

R.2d § 224 – CONDITION DEFINEDo Only describes “condition precedent,” which has not generally infiltrated the case

law:

§ 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.

R.2d § 228 – SATISFACTION OF THE OBLIGOR AS CONDITION

§ 228 SATISFACTION OF THE OBLIGOR AS A CONDITION When it is a condition of an obligor's duty that he be satisfied with respect to the obligee's performance or with respect to something else, and it is practicable to determine whether a reasonable person in the position of the obligor would be satisfied, an interpretation is preferred under which the condition occurs if such a reasonable person in the position of the obligor would be satisfied.

Condition Subsequent: an event the occurrence of which discharges the obligation. The duty to perform arises immediately upon contracting but is terminated if the condition subsequent occurs.

Event can also be the non-occurrence of an event, e.g. failure to file a suit within two years of accident could be a condition subsequent that discharges the duty of the company to compensate for the injury

R.2d § 230 – EVENT THAT TERMINATES A DUTYo Describes what is more commonly identified as a “condition subsequent,” avoiding

the word “condition” entirely: If under the terms of the contract the occurrence of an event is to terminate an obligor’s duty of immediate performance or one to pay damages for breach, that duty is discharged if the event occurs.”

o Illustration: “No recovery can be had if suit is not brought on the insurance policy within two years after a loss”

If Buyer lets two years pass before bringing suit, the insurance company’s duty to pay for the loss is discharged and Buyer cannot maintain the action on the policy

§ 230 EVENT THAT TERMINATES A DUTY (1) Except as stated in Subsection (2), if under the terms of the contract the occurrence of an event is to terminate an obligor's duty of immediate performance or one to pay damages for breach, that duty is discharged if the event occurs. (2) The obligor's duty is not discharged if occurrence of the event

(a) is the result of a breach by the obligor of his duty of good faith and fair dealing, or (b) could not have been prevented because of impracticability and continuance of the duty does not

subject the obligor to a materially increased burden. (3) The obligor's duty is not discharged if, before the event occurs, the obligor promises to perform the duty even if the event occurs and does not revoke his promise before the obligee materially changes his position in reliance on it.

[Express and Implied Conditions]

Express Conditions: Expressly stated events that condition performance of an obligation Typical language include:

o “If… then…”o “Provided that” / “On condition that” / “In the event that”

Plain language needs to articulate the intent to make performance contingent on the event, with no use of extrinsic evidence

General approach to Express Conditions is to apply them strictlyo Since the parties took the time to express the condition, it must mean that they

intended it to be satisfied exactly as stated

Implied-in-fact Conditions: Even if there is no express language creating a condition, contextual evidence may support the inference that the parties intended a performance to be conditional

Interpret the words used by the parties in light of the circumstances surrounding the formation of the contract

A court may have greater flexibility implying this condition than conditions clearly expressed

General exception to the parol evidence rule when evidence is offered to establish that the contract as a whole was subject to a condition precedent

Constructive Conditions: A court will imply a condition as a matter of law if the circumstances and nature of the contract compel the conclusion that the condition should exist as a matter of policy or that if the parties had addressed the issue, they reasonably would have intended it to be a part of the contract

Often the parties will not express temporal relationships between the obligations that each have undertaken by their promises. Typically:

o Sale of goods exchange performances concurrentlyo Sale of services assume that the party perform the service before receiving

payment Constructive conditions of exchange: when the doctrine of dependent covenants are

not expressly stated in a contract, this may be implied in fact (through trade usage, prior dealings or statements made during negotiations,) or implied in law from the nature of the exchange relationship

o At common law, a contract consisted of independent covenantso Today, promises in a bilateral contract are dependent on one another;

performance by one party of one or more promises is a condition to the performance of a promise or promises by the other party

However, the breach of a promise will only discharge a duty conditioned on performance of the promise if the breach of the promise is material

o Constructive condition must be a condition concurrent or condition precedent:

All Transactions in Goods: UCC §2-507(1) – EFFECT OF SELLER’S TENDER; DELIVERY ON

CONDITION

§ 2–507. Effect of Seller's Tender; Delivery on Condition.    (1) Tender of delivery is a condition to the buyer's duty to accept the goods and, unless otherwise agreed, to his duty to pay for them. Tender entitles the seller to acceptance of the goods and to payment according to the contract.    (2) Where payment is due and demanded on the delivery to the buyer of goods or documents of title, his right as against the seller to retain or dispose of them is conditional upon his making the payment due.

UCC §2-511(1) – TENDER OF PAYMENT BY BUYER; PAYMENT BY CHECK

§ 2–511. Tender of Payment by Buyer; Payment by Check.    (1) Unless otherwise agreed tender of payment is a condition to the seller's duty to tender and complete any delivery.    (2) Tender of payment is sufficient when made by any means or in any manner current in the ordinary course of business unless the seller demands payment in legal tender and gives any extension of time reasonably necessary to procure it.    (3) Subject to the provisions of this Act on the effect of an instrument on an obligation (Section 3–310), payment by check is conditional and is defeated as between the parties by dishonor of the check on due presentment.

Common Law Rules: R.2d § 233 – PERFORMANCE AT ONE TIME OR IN

INSTALLMENTS

§ 233 PERFORMANCE AT ONE TIME OR IN INSTALLMENTS (1) Where performances are to be exchanged under an exchange of promises, and the whole of one party's performance can be rendered at one time, it is due at one time, unless the language or the circumstances indicate the contrary. (2) Where only a part of one party's performance is due at one time under Subsection (1), if the other party's performance can be so apportioned that there is a comparable part that can also be rendered at that time, it is due at that time, unless the language or the circumstances indicate the contrary.

R.2d § 234 – ORDER OF PERFORMANCESo The general presumption is that unless the contract indicates

a different sequence, the performance that takes longer time must go first and must be concluded before the performance that is instantaneous is due

o In other words, completion of the longer performance is a condition precedent to the instantaneous one

§ 234 ORDER OF PERFORMANCES (1) Where all or part of the performances to be exchanged under an exchange of promises can be rendered simultaneously, they are to that extent due simultaneously, unless the language or the circumstances indicate the contrary. (2) Except to the extent stated in Subsection (1), where the performance of only one party under such an exchange requires a period of time, his performance is due at an earlier time than that of the other party, unless the language or the circumstances indicate the contrary.

[Excusing a Condition]

WAIVERA court may find the condition eliminated by mutual agreement (modification) or, if the condition does not reflect a material part of the agreed exchange, court may find the condition waived by the voluntary words or conduct of the parties.

A waiver is one-sided, so the party unilaterally gives up the contractual right without asking for or receiving anything in exchange

o If the right to be given up is an important part of the exchange under the contract, it cannot be validly relinquished by a unilateral waiver; however non-material rights may be waived

o A waiver made prior to the due date of the condition may be retracted

DUTY TO FACILITATE CONDITIONA party may expressly or impliedly promise to make a reasonable or good faith effort to attempt to bring about a condition. If a party violates her duty to deal fairly and hinders the fulfillment of a condition, the other party may claim that the condition is excused and enforce the contract as if the condition had not existed. Even if a party has no duty to actively cooperate in the fulfillment of a condition, the obligation of fair dealing may require her not to do anything to obstruct fulfillment of the condition.

R.2d § 245 – EFFECT OF A BREACH BY NON-PERFORMANCE AS EXCUSING THE NON-OCCURRENCE OF A CONDITION

§ 245 EFFECT OF A BREACH BY NON-PERFORMANCE AS EXCUSING THE NON-OCCURRENCE OF A CONDITION Where a party's breach by non-performance contributes materially to the non-occurrence of a condition of one of his duties, the non-occurrence is excused.

Illustrations: 1. A contracts with B to repair B's building for $ 20,000, payment to be made "on the satisfaction of C, B's architect, and the issuance of his certificate." A fully performs his duty to make the repairs, but B induces C to refuse to issue his certificate. A has a claim against B for $ 20,000. B's breach of his duty of good faith and fair dealing contributed materially to the non-occurrence of the condition, the issuance of the certificate, excusing it.

REPUDIATIONWhere a party repudiates and it contributes to the non-occurrence of a condition, the non-occurrence of the condition is excused and the non-repudiating party may sue the repudiating party despite the condition’s non-occurrence. However, if the condition would not have occurred anyway, its non-occurrence is not excused. In that case, both parties are discharged.

R.2d § 255 – EFFECT OF A REPUDIATION AS EXCUSING THE NON-OCCURRENCE OF A CONDITION

§ 255 EFFECT OF A REPUDIATION AS EXCUSING THE NON-OCCURRENCE OF A CONDITION Where a party's repudiation contributes materially to the non-occurrence of a condition of one of his duties, the non-occurrence is excused.

Illustrations: 1. A, an insurance company, issues a policy insuring B against theft, and providing that no payment will be made unless written notice is given within 60 days after loss. A loss occurs, and B immediately notifies A by telephone. A repudiates by informing B without adequate reason that it will not pay the loss. Because of this, B

does not give written notice to A. B has a claim against A for the amount of the loss.

FORFEITUREA court may outright excuse a condition due to forfeiture only if its enforcement would result in an unfair, disproportionate and harsh deprivation of the rights or property of the party who expects performance, and a windfall or unfair benefit to the party whose performance is subject to the condition.

o The purpose is to allow the court to disregard an express condition of a technical or procedural nature where the strict enforcement of the condition would have the unfair impact described above.

Cannot use this doctrine when the condition is a material part of the exchange

o R.2d § 229 – EXCUSE OF A CONDITION TO AVOID FORFEITURE “Forfeiture” is used to refer to the denial of compensation that results when

the obligee loses his right to the agreed exchange after he has relied substantially, as by preparation or performance, on the expectation of that exchange

If the forfeiture is on the plaintiff side, we compare what the plaintiff would be losing against the gravity of the fault.

In Dove, Dove is the obligee, owed $5000 for his work. The court finds away to avoid the forfeiture since the consequences of not meeting a condition were so detrimental to him

o Dove had zero fault, as he missed only two days of work due to strep throat

o There was no prejudice to the landlord because the work got done

In JNA Realty, court found disproportionate forfeiture when the tenant has made considerable investments in improvements on the premises, such as $40,000 of equipment and fixtures and an additional $15,000 of improvements during the tenancy, mostly spent on reliance that what Plaintiff spent would benefit Plaintiff in the future. If the location is lost, the restaurant would undoubtedly lose a considerable amount of its customer good will (expectation damages, a future & potential loss)

o There would be forfeiture and the gravity of the loss is certainly out of all proportion to the gravity of the fault, where here the fault was mere negligence. Thus, under the circumstances of this case, the tenant would be entitled to equitable relief if there is no prejudice to the landlord

Equitable relief must always depend on the facts of the case and not on hypotheticals

§ 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.

Comment b. Disproportionate forfeiture. The rule stated in the present Section is, of necessity, a flexible one, and its application is within the sound

discretion of the court. Here, as in § 227(1), "forfeiture" is used to refer to the denial of compensation that results when the obligee loses his right to the agreed exchange after he has relied substantially, as by preparation or performance on the expectation of that exchange. See Comment b to § 227. The extent of the forfeiture in any particular case will depend on the extent of that denial of compensation. In determining whether the forfeiture is "disproportionate," a court must weigh the extent of the forfeiture by the obligee against the importance to the obligor of the risk from which he sought to be protected and the degree to which that protection will be lost if the non-occurrence of the condition is excused to the extent required to prevent forfeiture. The character of the agreement may, as in the case of insurance agreements, affect the rigor with which the requirement is applied.

[CONSTRUCTIVE CONDITIONS OF IMPOSSIBILITY, IMPRACTICABILITY, AND FRUSTRATION] See Taylor, Mineral Park Land Co., 7200 Scottsdale Road, Power Engineering

Events subsequent to formation of a contract may make performance of the bargain so far beyond the parameters of the gamble that a court may discharge that party’s obligation without liability for breach.

Force Majeure Clause: Parties expressly agree that the occurrence of some event after the contract is formed would excuse a party’s obligation

Hell or high Water Clause: Parties expressly agree that a party is to perform irrespective of an event that occurs that make a party’s obligation difficult or uneconomical

Analysis: Differentiate between impracticability and frustration of purpose:1. Who is seeking to escape?2. As to the party seeking escape, has its performance become more difficult due to

the occurrence of event? IF YES USE IMPRACTICABILITY3. OR if the OTHER party’s counter-performance becomes less valuable USE

FRUSTRATION OF PURPOSE

Effect of these Rules: When impracticability fully defeats the feasibility of performance by a party, it is a

complete defense to that party’s failure to perform, relieving him of the duty of performance and liability for damages

Release of that party also discharges the contractual duties of the other If any performance had already been rendered, the benefit of its value must be returned If impracticability does not go to the entire basis of the contract, the court has discretion

to award relief short of fully excusing performance (UCC 2-615 comment 6 and 7) UCC §2-615 – EXCUSE BY FAILURE OF PRESUPPOSED CONDITIONS

§ 2–615. Excuse by Failure of Presupposed Conditions.Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:

(a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be

invalid.(b) Where the causes mentioned in paragraph (a) affect only a part of the seller's

capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.

(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.

R.2d §261 – DISCHARGE BY SUPERVENING IMPRACTICABILITY

§ 261 DISCHARGE BY SUPERVENING IMPRACTICABILITY Where, after a contract is made, a party's 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.

COMMENT D. Impracticability.Events that come within the rule stated in this Section are generally due either to "acts of God" or to acts of third parties…

Although the rule stated in this Section is sometimes phrased in terms of "impossibility," it has long been recognized that it may operate to discharge a party's duty even though the event has not made performance absolutely impossible. This Section, therefore, uses "impracticable," the term employed by Uniform Commercial Code § 2-615(a), to describe the required extent of the impediment to performance. Performance may be impracticable because extreme and unreasonable difficulty, expense, injury, or loss to one of the parties will be involved.

A severe shortage of raw materials or of supplies due to war, embargo, local crop failure, unforeseen shutdown of major sources of supply, or the like, which either causes a marked increase in cost or prevents performance altogether may bring the case within the rule stated in this Section.

Performance may also be impracticable because it will involve a risk of injury to person or to property, of one of the parties or of others, that is disproportionate to the ends to be attained by performance. 

However, "impracticability" means more than "impracticality." A mere change in the degree of difficulty or expense due to such causes as increased wages, prices of raw materials, or costs of construction, unless well beyond the normal range, does not amount to impracticability since it is this sort of risk that a fixed-price contract is intended to cover. Furthermore, a party is expected to use reasonable efforts to surmount obstacles to performance (see § 205), and a performance is impracticable only if it is so in spite of such efforts.

Substituted Performance: When the manner of delivery required by contract becomes commercially impracticable or the method of payment fails because of government regulation

UCC §2-614 – SUBSTITUTED PERFORMANCE

§ 2–614. Substituted Performance.(1) Where without fault of either party the agreed berthing, loading, or unloading facilities fail or an agreed type of carrier becomes unavailable or the agreed manner of delivery otherwise becomes commercially impracticable but a commercially reasonable substitute is available, such substitute performance must be tendered and accepted.(2) If the agreed means or manner of payment fails because of domestic or foreign governmental regulation, the

seller may withhold or stop delivery unless the buyer provides a means or manner of payment which is commercially a substantial equivalent. If delivery has already been taken, payment by the means or in the manner provided by the regulation discharges the buyer's obligation unless the regulation is discriminatory, oppressive or predatory.

Special Rules on Casualty (e.g. Fire, Theft, etc.) to identified goods: UCC §2-509 – RISK OF LOSS IN THE ABSENCE OF BREACH

§ 2–509. Risk of Loss in the Absence of Breach.(1) Where the contract requires or authorizes the seller to ship the goods by carrier

(a) if it does not require him to deliver them at a particular destination, the risk of loss passes to the buyer when the goods are duly delivered to the carrier even though the shipment is under reservation (Section 2–505); but(b) if it does require him to deliver them at a particular destination and the goods are there duly tendered while in the possession of the carrier, the risk of loss passes to the buyer when the goods are there duly so tendered as to enable the buyer to take delivery.

(2) Where the goods are held by a bailee to be delivered without being moved, the risk of loss passes to the buyer

(a) on his receipt of a negotiable document of title covering the goods; or(b) on acknowledgment by the bailee of the buyer's right to possession of the goods; or(c) after his receipt of a non-negotiable document of title or other written direction to deliver, as provided in subsection (4)(b) of Section 2–503.

(3) In any case not within subsection (1) or (2), the risk of loss passes to the buyer on his receipt of the goods if the seller is a merchant; otherwise the risk passes to the buyer on tender of delivery.(4) The provisions of this section are subject to contrary agreement of the parties and to the provisions of this Article on sale on approval (Section 2–327) and on effect of breach on risk of loss (Section 2–510).

UCC §2-510 – EFFECT OF BREACH ON RISK OF LOSS

§ 2–510. Effect of Breach on Risk of Loss.    (1) Where a tender or delivery of goods so fails to conform to the contract as to give a right of rejection the risk of their loss remains on the seller until cure or acceptance.    (2) Where the buyer rightfully revokes acceptance he may to the extent of any deficiency in his effective insurance coverage treat the risk of loss as having rested on the seller from the beginning.    (3) Where the buyer as to conforming goods already identified to the contract for sale repudiates or is otherwise in breach before risk of their loss has passed to him, the seller may to the extent of any deficiency in his effective insurance coverage treat the risk of loss as resting on the buyer for a commercially reasonable time.

UCC §2-613 – CASUALTY TO IDENTFIED GOODS

§ 2–613. Casualty to Identified Goods.Where the contract requires for its performance goods identified when the contract is made, and the goods suffer casualty without fault of either party before the risk of loss passes to the buyer, or in a proper case under a "no arrival, no sale" term (Section 2–324) then

(a) if the loss is total the contract is avoided; and(b) if the loss is partial or the goods have so deteriorated as no longer to conform to the contract the buyer may nevertheless demand inspection and at his option either treat the contract as avoided or accept the goods with due allowance from the contract price for the deterioration or the deficiency in

quantity but without further right against the seller.

UCC §2-709(1) – ACTION FOR THE PRICE

§ 2–709. Action for the Price.    (1) When the buyer fails to pay the price as it becomes due the seller may recover, together with any incidental damages under the next section, the price

(a) of goods accepted or of conforming goods lost or damaged within a commercially reasonable time after risk of their loss has passed to the buyer; and(b) of goods identified to the contract if the seller is unable after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing.

    (2) Where the seller sues for the price he must hold for the buyer any goods which have been identified to the contract and are still in his control except that if resale becomes possible he may resell them at any time prior to the collection of the judgment. The net proceeds of any such resale must be credited to the buyer and payment of the judgment entitles him to any goods not resold.    (3) After the buyer has wrongfully rejected or revoked acceptance of the goods or has failed to make a payment due or has repudiated (Section 2–610), a seller who is held not entitled to the price under this section shall nevertheless be awarded damages for non-acceptance under the preceding section.

[BREACH OF CONTRACT]

[Establishing Breach]1. Determine the existence and content of the contractual undertaking2. Establish when the promised performance fell due

a. Because most promises are dependent, each party’s performance is an express, implied or construed condition of the other party’s duty to perform

3. Decide if the performance complied with the promise; any shortfall from the promised performance is a breach, even if the party performed partially

4. Decide on the severity of the breacha. Total and Material Breach: Deficiency is so central to the contract that it

substantially impairs its valuei. May entitle the promisee to withhold any return performance (remedy for

non-fulfillment of the condition), terminate the contract and sue for full expectation relief (remedy for failure to perform promise)

b. Partial Breach: not fundamental enough to justify termination of contracti. Substantial performance is nevertheless a breach if it is not a complete

and compliant performance1. UCC supports this doctrine: the buyer is entitled to “perfect

tender” of the goods or has the right to reject the goods that fail to conform exactly

a. SEE UCC §2-601(2)2. In Jacob & Youngs, Judge Cardozo found the failure to use

Reading pipe as a trivial breach, describing the brand specification as an “independent promise”

a. Although promises in a contract are normally dependent, a non-material breach of one of those promises should not be treated as a complete failure of the condition

b. Therefore, the non-breaching party’s remaining obligation of performance must not be treated as conditional on exact fulfillment of the breached promissory condition

c. As a result, non-breaching party cannot claim total breach and withhold his return performance but remains bound to perform, subject to the offset of any damages caused by the breach

ii. Promisor should be given an opportunity to rectify the breach by allowing the promisor to cure it or pay damages to compensate only for the shortfall in performance

1. Cures: deficiency may be rectified to prevent it from reaching the level of material breach

iii. Partial breach may be serious enough to give rise to a right of termination, but termination may be averted if the breacher remedies it in time

A breach by non-performance gives rise to a claim for damages for total breach only if it discharges the injured party’s remaining duties to render such performance (R.2d§243). Because most promises are dependent, a party’s remaining duties are conditioned upon each other’s promises that there are no uncured material failures by the other party to render performance due at an earlier time (R.2d §237). Courts use five factors on a sliding scale to determine whether a failure is material (R.2d §241). If the court finds a material failure on the part of __, then the remaining duties of __ are discharged and __ will have a claim for damages for total breach.

[DISCHARGING REMAINING DUTIES OF THE INJURED PARTY]See Van Oort Construction, Jacob & Youngs, Problems re Swimming Pool, Bar Examination Tutor, Professor’s Plaques

Constructive Conditions of Exchange (Issue in Bilateral Contracts, not Unilateral Contracts): where one party fails to perform, the other’s duties are discharged.

Common law moves away from independent covenants to dependent covenantso Performance of promise by A, due earlier than performance by B, is said to be

constructive conditions to the performance by Bo Uncured Material Failure of Performance requirement

To prevent trivial, unintentional or curable breach by A to discharge the duty of counter-performance of B

Where failure of performance by A is not material, or when a material failure of performance has been timely cured, B remains obligated to perform its own promises

o Substantial Performance requirement for construction contracts

When there is incomplete or defective construction, the aggrieved party is entitled to damages

Aggrieved party is also discharged from paying the balance of the contract price unless the builder has substantially performed

In Jacob & Youngs v. Kent, Judge Cardozo found the failure to use Reading pipe as a trivial breach, describing the brand specification as an “independent promise”

Although promises in a contract are normally dependent, a non-material breach of one of those promises should not be treated as a complete failure of the condition

Therefore, the non-breaching party’s remaining obligation of performance must not be treated as conditional on exact fulfillment of the breached promissory condition

As a result, non-breaching party cannot claim total breach and withhold his return performance but remains bound to perform, subject to the offset of any damages caused by the breach

Common Law Rules on Uncured Material Failure of Performance: These rules abandon the language of substantial performance, assimilating the concept to

material failure of performance, but much of case law continues to use the term of substantial performance in construction cases

R.2d § 237 EFFECT ON OTHER PARTY’S DUTIES OF A FAILURE TO RENDER PERFORMANCE

o In Van Oort, court held that it is a condition of Nuckoll’s remaining duty that there be no uncured material failure by the Siblings to do something that was due at an earlier time. In other words, Nuckoll does not have to pay if the Siblings failed to do something they were supposed to under the contract.

§ 237 EFFECT ON OTHER PARTY'S DUTIES OF A FAILURE TO RENDER PERFORMANCE Except as stated in § 240, it is a condition of each party's 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.

R.2d § 241 CIRCUMSTANCES SIGNIFICANT IN DETERMINING WHETHER A FAILURE IS MATERIAL

o Extent of deprivation is weighed the heaviesto Ability to compensate – how accurately you can determine the compensationo Cure – Look to whether they can cure what happened in the past as well as what

they can cure in the future if there are remaining duties on the contracto Good Faith – did the party have to act honestly, or did the party have to take

reasonable steps to carry out the purpose of the contract?

Five factors of the materiality of breach

Greater Lesser

Extent of deprivation Material Not MaterialAbility to compensate

If it is easy to determine - Not material

Material

R.2d § 229 Comment b

Extent of forfeiture of breaching party

Not material Material

R.2d § 241 comment d

Likelihood of cure Not material Material

Good faith Not material Material

§ 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 which 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.

Comment d. A failure is less likely to be regarded as material if it occurs late, after substantial preparation or performance, and more likely to be regarded as material if it occurs early, before such reliance.

o R.2d §242 CIRCUMSTANCES SIGNIFICANT IN DETERMINING WHEN REMAINING DUTIES ARE DISCHARGED

§ 242 CIRCUMSTANCES SIGNIFICANT IN DETERMINING WHEN REMAINING DUTIES ARE DISCHARGED In determining the time after which a party's uncured material failure to render or to offer performance discharges the other party's 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 for 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 party's remaining duties unless the circumstances, including the language of the agreement, indicate that performance or an offer to perform by that day is important.

ANALYSIS GUIDELINES:

1. Figure out whose promise of performance is due first, or see if they are due simultaneously:

i. Contract may expressly answer this question E.g. Construction contract may call for periodic progress payments by

owner to builder subsequent to the completion of stages of the construction

ii. See if the sequence of performance could be implied from industry custom, course of dealing or other circumstances

iii. Then go to default rules:1. R.2d § 234 ORDER OF PERFORMANCES

In Van Oort, court found that under subsection (1), the Siblings’ promise not to compete cannot be rendered simultaneously with Nuckoll’s installment payments, and under (2), the Siblings’ performance was due earlier.

§ 234 ORDER OF PERFORMANCES (1) Where all or part of the performances to be exchanged under an exchange of promises can be rendered simultaneously, they are to that extent due simultaneously, unless the language or the circumstances indicate the contrary. (2) Except to the extent stated in Subsection (1), where the performance of only one party under such an exchange requires a period of time, his performance is due at an earlier time than that of the other party, unless the language or the circumstances indicate the contrary.

2. R.2d § 238 EFFECT ON OTHER PARTY’S DUTIES OF A FAILURE TO OFFER PERFORMANCE

In some contracts, performances of each party are due simultaneously Tender of performance by each party (i.e. an offer of performance

coupled wit present ability to perform), or performance itself, is a constructive condition of exchange to performance by the other party

§ 238 EFFECT ON OTHER PARTY'S DUTIES OF A FAILURE TO OFFER PERFORMANCE Where all or part of the performances to be exchanged under an exchange of promises are due simultaneously, it is a condition of each party's duties to render such performance that the other party either render or, with manifested present ability to do so, offer performance of his part of the simultaneous exchange.

3. In contracts for the sale of goods, tender of delivery of the goods by the seller and tender of payment by the buyer are due simultaneously unless the parties agree to the contrary

UCC §2-507(1) EFFECT OF SELLER’S TENDER; DELIVERY ON CONDITION

§ 2–507. Effect of Seller's Tender; Delivery on Condition.(1) Tender of delivery is a condition to the buyer's duty to accept the goods and, unless otherwise agreed, to his duty to pay for them. Tender entitles the seller to acceptance of the goods and to payment according to the contract.(2) Where payment is due and demanded on the delivery to the buyer of goods or documents of title, his right as against the seller to retain or dispose of them is conditional upon his making the payment due.

UCC 2-511(1) TENDER OF PAYMENT BY BUYER; PAYMENT BY CHECK

§ 2–511. Tender of Payment by Buyer; Payment by Check.(1) Unless otherwise agreed tender of payment is a condition to the seller's duty to tender and complete any delivery.(2) Tender of payment is sufficient when made by any means or in any manner current in the ordinary course of

business unless the seller demands payment in legal tender and gives any extension of time reasonably necessary to procure it.(3) Subject to the provisions of this Act on the effect of an instrument on an obligation (Section 3–310), payment by check is conditional and is defeated as between the parties by dishonor of the check on due presentment.

2. If a court finds a contract DIVISIBLE, even uncured material failures of performance will not discharge all duties of counter-performance

i. Watch out for this when applying §237 (above)ii. R.2d §240 PART PERFORMANCES AS AGREED EQUIVALENTS

When it is proper to regard parts of pairs of corresponding performances under a contract as agreed equivalents, the contract is sometimes loosely said to be “divisible”

This section has a mitigating effect: It gives a party who has performed one of the parts of promises paired with a corresponding performance the right to its agreed equivalent, as if the parties had made a separate contract with regard to the corresponding parts

A failure to some other part of the contract does not affect this right

§ 240 PART PERFORMANCES AS AGREED EQUIVALENTS If the performances to be exchanged under an exchange of promises can be apportioned into corresponding pairs of part performances so that the parts of each pair are properly regarded as agreed equivalents, a party's performance of his part of such a pair has the same effect on the other's duties to render performance of the agreed equivalent as it would have if only that pair of performances had been promised.

3. An uncured material failure of performance may not be a breach of a promise, but it will still discharge duties of counter-performance if the contract is not divisible

i. E.g. In Taylor v. Caldwell, a party’s obligations were discharged by impossibility, and it is not liable for breach of contract because its duties have been discharged. However, this uncured material failure of performance will discharge the other party from its obligation to perform such that it, too, is not liable for breach of contract

4. The doctrines of material failure of performance or substantial performance do not apply if one party’s performance under a contract is dependent on a condition rather than upon a promise, and there is a failure, even a minor failure, of the condition

i. This is because failure of the condition in any respect means the promised duty never rises (See Dove v. Rose Acre Farms)

ii. However, a court may be willing to dispense a condition that is not material if enforcing the non-occurrence of a condition would cause disproportionate forfeiture (See R.2d §229 in Terms Outline)

5. If the aggrieved party has derived benefit from partial performance by the breaching party, the aggrieved party may still owe something to the breaching party as restitution to avoid unjust enrichment, offset by any damages to which the aggrieved party is entitled

i. See R.2d §374 Restitution for Breaching Party

ii. Availability of restitution may diminish the forfeiture that the party failing to perform might otherwise suffer and bolster the argument that a failure of performance is material

R.2d §241 Comment d: A failure is less likely to be regarded as material if it occurs late, after substantial preparation or performance, and more likely to be regarded as material if it occurs early, before such reliance. For the same reason the failure is more likely to be regarded as material if such preparation or performance as has taken place can be returned to and salvaged by the party failing to perform or tender, and less likely to be regarded as material if it cannot. These factors argue against a finding of material failure and in favor of one of substantial performance where a builder has completed performance under a construction contract and, because the building is on the owner's land, can salvage nothing if he is denied recovery of the balance of the price. Even in such a case, however, the potential forfeiture may be mitigated if the builder has a claim in restitution (§§ 370-77, especially § 374) or if he has already received progress payments under a provision of the contract.

DIFFERENT ANALYSIS FOR THE SALE OF GOODS The buyer aggrieved by the seller’s breach is entitled to damages

Buyer may withhold those damages from any payment of the purchase price remaining due (UCC §2-717)

§ 2–717. Deduction of Damages From the Price.The buyer on notifying the seller of his intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract.

But will be denied damages absent timely notice of breach to the seller (UCC §2-607(3)(a))

Discharge of the buyer’s duty of counter-performance is different from common law:o Prior to accepting a seller’s tender of goods, a buyer may reject and be

discharged from paying for a tender that is non-conforming in any respect (don’t need material)

UCC §2-601 REJECTION The Perfect Tender Rule is subject to exceptions:

Subject to the seller’s rights to cure under UCC §2-508o After acceptance of tender, a buyer must pay the contract price for the goods

(UCC §2-607(a)), offset by any damages to which it is entitled by the breach, unless it property revokes acceptance

UCC §2-606 ACCEPTANCE UCC §2-608 REVOCATION OF ACCEPTANCE

Buyer may revoke its acceptance only if the seller’s tender substantially impairs the value of the goods to the buyer

o This is similar to the common law rule excusing counter-performance only if a breach is material

Analysis from Professor’s Plaques: 2-601 gives you a choice to reject or accept Whether or not you accepted or not depends on 2-606

o If you accept, you can no longer reject (2-607(2)) Pay at contract rate 2-607(1) + 2-709(1)(a) May be entitled to damages if there is notification of breach 2-607(3)

Measure of damages through 2-714/2-715o Direct Damages: Difference between plaque received and

plaque promisedo Consequential/Incidental Damages: None

o If you reject Is it effective? 2-602(1) Is it rightful?

But in some circumstances you can revoke (2-608)

[COMPENSATORY DAMAGES]

[Introduction]Compensatory Damages is an award of money damages, the most common remedy to a breach of contract.

These purport to put the aggrieved party in the same economic position it anticipated from the full and compliant performance of the contract (RUCC 1-305(a))

RUCC §1-305 Remedies to be Liberally Administered: Remedies Generally(a) The remedies provided by the UCC must be liberally administered to the end that the aggrieved

party may be put in as good a position as if the other party had fully performed but neither consequential or special damages nor penal damages may be had except as specifically provided in the UCC or by other rule of law

(b) Any right or obligation declared by the UCC is enforceable by action unless the provision declaring it specifies a different and limited effect

Because it protects the expectation interest of the aggrieved party, it is referred to as either expectation measure or benefit of the bargain measure of damages

Compensatory damages are a default term of contracts If the agreement between the parties establishing a measure of damages for

breach is expressly stated, it is known as a liquidated damages clause and typically states a dollar figure or a formula for a dollar figure

The parties may also agree to other terms that alter the remedies Term may influence a court to order specific performance or issue an

injunction Term may describe specific remedies in lieu of damages (such as repair

or replacement of defective goods)

[EXPECTATION MEASURE OF DAMAGES]

The components of expectation measure of damages: Loss in Value from breach of contract: Direct damages or general damages

+

Consequential Damages: Other loss flowing from the breach that the breaching party had reason to foresee, such as lost profits, personal injury or property damages

+ Incidental Damages: A variety of expenses that an aggrieved party might incur as a

result of the breach–

SUBTRACTED by the costs that the aggrieved party has avoided in consequence of the breach – without that reduction, party would be put in a better, not the same, economic position than anticipated from performance of the contract

[UCC and R.2d PROVISIONS]

Relevant Terminology “Cure” UCC §2-508

o Cure mitigates the harsh effect of the perfect tender rule The perfect tender rule gives the buyer the right to reject late delivery

even if time of delivery is not a material termo Subsection (1) Seller may cure the defect by substituting a conforming delivery

before the contractual delivery dateo Subsection (2) If delivery date has passed, seller may cure within a reasonable

time if the seller had no reason to know that the goods were non-conforming Reasonable comes from nature and purpose of sale

E.g. If delivery on the exact date was a material term of the contract, there is no reasonable time for cure

§ 2–508. Cure by Seller of Improper Tender or Delivery; Replacement.(1) Where any tender or delivery by the seller is rejected because non-conforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery.(2) Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender.

“Conformity”o Question of whether goods conform to the contract is factual, based on:

An interpretation of what was called for under the contract; and The evaluation of what was performed

o Non-conformity could be from: The quality, quantity or attributes of the goods The manner in which they are provided, such as the way they were

packaged or delivered

ANCIPATORY REPUDIATION UCC §2-610 ANTICIPATORY REPUDIATION

o A party may breach in advance of performance by repudiating his obligation in anticipation if he:

Makes clear by words or actions that he will breach when performance falls due, and he says this before the time for performance

o Material and total breach: A clear, unequivocal and voluntary repudiation by one party Stating that he will do or fail to do something in the future that would be a

material and total breach if he did it at the time performance was dueo This advance failure of the promise also amounts to an advance failure of the

condition It is irrelevant whether or not the repudiated performance, in the normal

course, would have been due before the return performance (aka a condition precedent)

o Repudiation Elements:(1) Prospective Action must be serious enough to qualify as material and

total breach of the contract Includes the intent to render a substantially deficient performance

or to refuse performance unless the promisee agrees to do or pay more than the contract requires

Intent to deviate in some minor way does not qualify(2) Promisor’s statement must clearly indicate to the Reasonable

Promisee that the Promisor intends to breach materially when the time for performance arrives

Objective test is used to ascertain meaning through interpretation(3) Promisor’s statement must have been voluntary and deliberate, not

inadvertent or beyond promisor’s control Infer this from:

o Statement of Intent: Easy to infer deliberateness from express statement, unless it was coerced

o Conduct: harder to establish deliberateness; if the action does not lead to the conclusion of willful abandonment, it is premature to declare a repudiation

Change of circumstances: promisor makes no statement at all but a change in circumstances makes it likely that a breach will occur

o If there are not yet grounds to hold the promisor to an advanced breach, promisee’s remedy is to demand an assurance of promise

WATCH OUT FOR: If there is any degree of uncertainty about the existence of

repudiation and the promisee overreacts in response, the promisee may be the one repudiating

§2-610. Anticipatory Repudiation.When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may

(a) For a commercially reasonable time await performance by the repudiating party; or(b) Resort to any remedy for breach (Section 2–703 or Section 2–711), even though he has notified the

repudiating party that he would await the latter's performance and has urged retraction; and(c) In either case suspend his own performance or proceed in accordance with the provisions of this Article

on the seller's right to identify goods to the contract notwithstanding breach or to salvage unfinished

goods (Section 2–704).

R.2d §250 WHEN A STATEMENT OR AN ACT IS A REPUDIATION

§ 250 WHEN A STATEMENT OR AN ACT IS A REPUDIATION A repudiation is (a) A statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach under § 243, or (b) A voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach.

o R.2d §243 EFFECT OF A BREACH BY NON-PERFORMANCE AS GIVING RISE TO A CLAIM FOR DAMAGES FOR TOTAL BREACH

§ 243 EFFECT OF A BREACH BY NON-PERFORMANCE AS GIVING RISE TO A CLAIM FOR DAMAGES FOR TOTAL BREACH (1) With respect to performances to be exchanged under an exchange of promises, a breach by non-performance gives rise to a claim for damages for total breach only if it discharges the injured party's remaining duties to render such performance, other than a duty to render an agreed equivalent under §240. (2) Except as stated in Subsection (3), a breach by non-performance accompanied or followed by a repudiation gives rise to a claim for damages for total breach. (3) Where at the time of the breach the only remaining duties of performance are those of the party in breach and are for the payment of money in installments not related to one another, his breach by non-performance as to less than the whole, whether or not accompanied or followed by a repudiation, does not give rise to a claim for damages for total breach. (4) In any case other than those stated in the preceding subsections, a breach by non-performance gives rise to a claim for total breach only if it so substantially impairs the value of the contract to the injured party at the time of the breach that it is just in the circumstances to allow him to recover damages based on all his remaining rights to performance.

o R.2d §237 EFFECT ON OTHER PARTY’S DUTIES OF A FAILURE TO RENDER PERFORMANCE

A party’s remaining duties are conditioned upon each other’s promises that there are no uncured material failures by the other party to render performance due at an earlier time (R.2d §237).

§ 237 EFFECT ON OTHER PARTY'S DUTIES OF A FAILURE TO RENDER PERFORMANCE Except as stated in § 240, it is a condition of each party's 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.

o R.2d §241 CIRCUMSTANCES SIGNIFICANT IN DETERMINING WHETHER A FAILURE IS MATERIAL

Courts use five factors on a sliding scale to determine whether a failure is material

The first factor is the extent to which the injured party will be deprived of the benefit he reasonably expected. This is the most heavily weighted factor in the analysis.

The second factor is the extent to which the injured party can be adequately compensated

The third factor is the extent to which the party failing to perform will suffer forfeiture

The fourth factor is the likelihood that the party failing to perform will cure his failure

The fifth factor is the extent to which the behavior of the party failing to perform comports with standards of good faith and fair dealing.

o R.2d §205 Comment d. on Good Faith Performance: Subterfuges and evasions violate the obligation of good faith in performance even though the actor believes his conduct to be justified. But the obligation goes further: bad faith may be overt or may consist of inaction, and fair dealing may require more than honesty.

§ 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 which 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.

R.2d §251 WHEN A FAILURE TO GIVE ASSURANCE MAY BE TREATED AS A REPUDIATION

§ 251 WHEN A FAILURE TO GIVE ASSURANCE MAY BE TREATED AS A REPUDIATION (1) Where reasonable grounds arise to believe that the obligor will commit a breach by non-performance that would of itself give the obligee a claim for damages for total breach under § 243, the obligee may demand adequate assurance 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 obligee may treat as a repudiation the obligor's failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances of the particular case.

R.2d §253 EFFECT OF A REPUDIATION AS A BREACH AND ON OTHER PARTY’S DUTIES

§ 253 EFFECT OF A REPUDIATION AS A BREACH AND ON OTHER PARTY'S DUTIES (1) Where an obligor repudiates a duty before he has committed a breach by non-performance and before he has received all of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach. (2) Where performances are to be exchanged under an exchange of promises, one party's repudiation of a duty to render performance discharges the other party's remaining duties to render performance.

UCC §2-612 INSTALLMENT CONTRACT; BREACHo This section qualifies the Perfect Tender Rule of §2-601 in contracts providing

for delivery in installments

o Issues of repudiation and total breach are highlighted in these types of contracts It can be difficult to know if one breach affects only the defective

installment or is so serious as to undermine the contract in its entirety, operating as a repudiation of all remaining installments

o Subsection (2): Nonconformity in an installment permits the buyer to reject that

installment only if: It substantially impairs the value of the installment and the

nonconformity cannot be curedo Subsection (3):

Deficiency in the installment needs to substantially impair the value of the whole contract

If the breach occurs in one of the earlier installments, it must be determined whether this is a breach so substantial to the contract to constitute a total and material breach of the whole

The question is whether it’s so pervasive and irreparable to make it clear that the promisor is incapable of rendering or unwilling to render complaint performance in the future

If it does qualify, then the breach operates not only as a breach of the current installment but also as the advance breach (repudiation) of the entire contract

o R.2d § 243 (4) deals generally with total breach and adopts language similar to Installments provision in this section

§ 2–612. "Installment Contract"; Breach. (1) An "installment contract" is one which requires or authorizes the delivery of goods in separate lots to be separately accepted, even though the contract contains a clause "each delivery is a separate contract" or its equivalent. (2) The buyer may reject any installment which is non-conforming if the non-conformity substantially impairs the value of that installment and cannot be cured or if the non-conformity is a defect in the required documents; but if the non-conformity does not fall within subsection (3) and the seller gives adequate assurance of its cure the buyer must accept that installment. (3) Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a non-conforming installment without seasonably notifying of cancellation or if he brings an action with respect only to past installments or demands performance as to future installments.

SELLER’S REMEDIES FOR BREACH:§§706, 708 and 709 contain the core of the seller’s expectation remedies.

UCC §2-703 SELLER’S REMEDIES IN GENERALo Catalogue of remedies for the seller (not fully exhaustive), for when the buyer

breaches

§ 2–703. Seller's Remedies in General.(1) A breach of contract by the buyer includes the buyer's wrongful rejection or wrongful attempt to

revoke acceptance of goods, wrongful failure to perform a contractual obligation, failure to make a payment when due, and repudiation.

(2) If the buyer is in breach of contract the seller, to the extent provided for by this Act or other law, may:(a) Withhold delivery of such goods;(b) Stop delivery of the goods under Section 2-705;(c) Proceed under Section 2-704 with respect to goods unidentified to the contract or unfinished;(d) Reclaim the goods under Section 2-507(2) or 2-702(2);(e) Require payment directly from the buyer under Section 2-325(c);(f) Cancel;(g) Resell and recover damages under Section 2-706;(h) Recover damages for non-acceptance or repudiation under (Section 2-708(1) or in a proper case

the price (Section 2-709);(i) Recover the price under Section 2-709;(j) Obtain specific performance under Section 2-716;(k) Recover liquidated damages under Section 2-718;(l) In other cases, recover damages in any manner that is reasonable under the circumstances.

(3) If the buyer becomes insolvent, the seller may:(a) Withhold delivery under Section 2-702(1);(b) Stop delivery of the goods under Section 2-705;(c) Reclaim the goods under Section 2-702(2).

o UCC §2-705 SELLER’S STOPPAGE OF DELIVERY IN TRANSIT OR OTHERWISE

§ 2–705. Seller's Stoppage of Delivery in Transit or Otherwise.(1) The seller may stop delivery of goods in the possession of a carrier or other bailee when he discovers the buyer to be insolvent (Section 2–702) and may stop delivery of carload, truckload, planeload or larger shipments of express or freight when the buyer repudiates or fails to make a payment due before delivery or if for any other reason the seller has a right to withhold or reclaim the goods.(2) As against such buyer the seller may stop delivery until

(a) Receipt of the goods by the buyer; or(b) Acknowledgment to the buyer by any bailee of the goods except a carrier that the bailee holds the goods

for the buyer; or(c) Such acknowledgment to the buyer by a carrier by reshipment or as warehouseman; or(d) Negotiation to the buyer of any negotiable document of title covering the goods.

 (3)(a) To stop delivery the seller must so notify as to enable the bailee by reasonable diligence to prevent

delivery of the goods.(b) After such notification the bailee must hold and deliver the goods according to the directions of the

seller but the seller is liable to the bailee for any ensuing charges or damages.(c) If a negotiable document of title has been issued for goods the bailee is not obliged to obey a

notification to stop until surrender of the document.(d) A carrier who has issued a non-negotiable bill of lading is not obliged to obey a notification to stop

received from a person other than the consignor.

o UCC §2-710 SELLER’S INCIDENTAL DAMAGES Incidental damages are costs incurred by the non-breaching party, after the

breach, in an attempt to avoid increased loss to the breaching party These include out-of-pocket costs, but may include storing the non-

conforming goods at the non-breaching party’s premises

§ 2-710. Seller's Incidental Damages.(1) Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or

commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer's breach, in connection with return or resale of the goods or otherwise resulting from the breach.(2) Consequential damages resulting from the buyer's breach include any loss resulting from general or particular requirements and needs of which the buyer at the time of contracting had reason to know and which could not reasonably be prevented by resale or otherwise.(3) In a consumer contract, a seller may not recover consequential damages from a consumer.

o UCC §2-706 SELLER’S RESALE INCLUDING CONTRACT FOR RESALE A seller of goods who reasonably resells the goods at a lower price

following the buyer’s breach is entitled under this section to the difference between the contract price and the lower resale price

The resale must be: Made in good faith In a commercial reasonable manner to recover the shortfall

Alternatively, Subsection (1) recognizes that damages may be based on a hypothetical resale as an alternative to actual resale

This may be used when the seller elects not to resell or when the resale resulted in too low a resale price

Some courts even allow this when the seller has resold above the market price

§ 2–706. Seller's Resale Including Contract for Resale.(1) Under the conditions stated in Section 2–703 on seller's remedies, the seller may resell the goods concerned or the undelivered balance thereof. Where the resale is made in good faith and in a commercially reasonable manner the seller may recover the difference between the resale price and the contract price together with any incidental damages allowed under the provisions of this Article (Section 2–710), but less expenses saved in consequence of the buyer's breach.(2) Except as otherwise provided in subsection (3) or unless otherwise agreed resale may be at public or private sale including sale by way of one or more contracts to sell or of identification to an existing contract of the seller. Sale may be as a unit or in parcels and at any time and place and on any terms but every aspect of the sale including the method, manner, time, place and terms must be commercially reasonable. The resale must be reasonably identified as referring to the broken contract, but it is not necessary that the goods be in existence or that any or all of them have been identified to the contract before the breach. (3) Where the resale is at private sale the seller must give the buyer reasonable notification of his intention to resell. (4) Where the resale is at public sale

(a) only identified goods can be sold except where there is a recognized market for a public sale of futures in goods of the kind; and

(b) it must be made at a usual place or market for public sale if one is reasonably available and except in the case of goods which are perishable or threaten to decline in value speedily the seller must give the buyer reasonable notice of the time and place of the resale; and

(c) if the goods are not to be within the view of those attending the sale the notification of sale must state the place where the goods are located and provide for their reasonable inspection by prospective bidders; and

(d) the seller may buy.(5) A purchaser who buys in good faith at a resale takes the goods free of any rights of the original buyer even though the seller fails to comply with one or more of the requirements of this section.(6) The seller is not accountable to the buyer for any profit made on any resale. A person in the position of a seller (Section 2–707) or a buyer who has rightfully rejected or justifiably revoked acceptance must account for any excess over the amount of his security interest, as hereinafter defined (subsection (3) of Section 2–711).

UCC §2-707 “PERSON IN THE POSITION OF A SELLER”

§ 2–707. "Person in the Position of a Seller".(1) A "person in the position of a seller" includes as against a principal an agent who has paid or become responsible for the price of goods on behalf of his principal or anyone who otherwise holds a security interest or other right in goods similar to that of a seller.(2) A person in the position of a seller may as provided in this Article withhold or stop delivery (Section 2–705) and resell (Section 2–706) and recover incidental damages (Section 2–710).

o UCC §2-708 SELLER’S DAMAGES FOR NON-ACCEPTANCE OR REPUDIATION If the aggrieved party did not enter into a substitute transaction, she is

entitled to sue for loss based on a hypothetical substitute valued at the market rate

Subsection (1) allows the measure of damages to be:o Market price at the time and place for tender

–LESS– o Unpaid contract price + Incidental Damages

–LESS– o Expenses saved in consequence of the breach

The seller is entitled to the contract-market difference for damages Subsection (2) allows recovery of the seller’s gross profit plus

incidental and reliance expenses, less payments received from resaleo Use this when the remedy of contract-market damages does

not give an adequate recovery, such as cases in which the seller decides not to manufacture the goods following breach, or suffers loss in volume of sales

§ 2–708. Seller's Damages for Non-acceptance or Repudiation.(1) Subject to subsection (2) and to the provisions of this Article with respect to proof of market price (Section 2–723), the measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this Article (Section 2–710), but less expenses saved in consequence of the buyer's breach.(2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this Article (Section 2–710), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.

o UCC §2-709 ACTION FOR THE PRICE Seller’s specific performance remedy for payment of the price of the goods Allows the seller to claim the price of the goods only when the goods have

been accepted by the buyer or they are incapable of being resold because they have been lost, damaged, or are just not resalable

§ 2–709. Action for the Price.(1) When the buyer fails to pay the price as it becomes due the seller may recover, together with any incidental damages under the next section, the price

(a) Of goods accepted or of conforming goods lost or damaged within a commercially reasonable time after risk of their loss has passed to the buyer; and

(b) Of goods identified to the contract if the seller is unable after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing.

(2) Where the seller sues for the price he must hold for the buyer any goods which have been identified to the contract and are still in his control except that if resale becomes possible he may resell them at any time prior to the collection of the judgment. The net proceeds of any such resale must be credited to the buyer and payment of the judgment entitles him to any goods not resold.(3) After the buyer has wrongfully rejected or revoked acceptance of the goods or has failed to make a payment due or has repudiated (Section 2–610), a seller who is held not entitled to the price under this section shall nevertheless be awarded damages for non-acceptance under the preceding section.

UCC §2-704 SELLER’S RIGHT TO IDENTIFY GOODS TO THE CONTRACT NOTWITHSTANDING BREACH OR TO SALVAGE UNFINISHED GOODS

§ 2–704. Seller's Right to Identify Goods to the Contract Notwithstanding Breach or to Salvage Unfinished Goods.(1) An aggrieved seller under the preceding (seller’s remedies in general) section may:

(a) Identify to the contract conforming goods not already identified if at the time he learned of the breach they are in his possession or control;

(b) Treat as the subject of resale goods which have demonstrably been intended for the particular contract even though those goods are unfinished.

(2) Where the goods are unfinished an aggrieved seller may in the exercise of reasonable commercial judgment for the purposes of avoiding loss and of effective realization either complete the manufacture and wholly identify the goods to the contract or cease manufacture and resell for scrap or salvage value or proceed in any other reasonable manner.

BUYER’S REMEDIES FOR BREACH:

SELLER REPUDIATION ON BREACH Repudiation

o 2-711(1)o 2-712 or 2-713o 2-715 (When buyer rejects)

Buyer Acceptso 2-601; 602; 606o 2-714 2-715

Buyer Revokes Acceptanceo 2-608 2-711(1)o 2-713 or 714o 2-715 (Mirror image of “cover”)

When a seller breaches the contract, the buyer has two remedies:1. Attempt to cover and obtain goods in substitution from those from the seller (2-711(1)

(a))o If he covers, he can recover the difference between the cost of cover and the

contract price together with any incidental or consequential damages (2-712(2)) Consequential damages are those damages which did not arise with the

scope of RBM transactions with TTS, but which stemmed in a foreseeable way from loses incurred by RBM as a result of TTS’s breach (2-715(2)(a))

2. Recover the difference between the market price and the contract price (2-711(1)(b); (2-713(1)) commercial judgment

o The contract-market differential is the difference between the market price of the unmodified trailers TTS agreed to provide RBM and the contract price of those trailers

o Buyer can also recover consequential damages under this but only if they could not have been reasonably prevented by cover or otherwise (2-715(2))

If a buyer could have covered but chose not to, he cannot recover consequential damages, only contract-market price differential

If the breach occurred at an earlier time, and RBM chose not to cover when it could have reasonably done so, then it will not be able to recover any consequential damages that accrued after the breach

However if the breach occurred so late in the contract term that RBM was unable to cover, then it can recover its consequential damages

Check for 2-711: Where seller fails to make delivery, buyer may cancelo If the breach as to one or more installments go to the whole, the party is entitled to

cancel the rest of the contract Even when there are future installments still to come, the “whole contract”

has been breached if a substantial part of the contract has been breached. (SEE UCC §2-612 ABOVE)

UCC §2-711 BUYER’S REMEDIES IN GENERAL: BUYER’S SECURITY INTEREST IN REJECTED GOODS

o Catalogue of remedies for buyer (not fully exhaustive), if the seller were to breacho UCC § 2–612 defines “cancellation” as no more responsibilities under the

contract but retaining any rights by virtue of the breach and possibly recovering any price already paid

§ 2–711. Buyer's Remedies in General; Buyer's Security Interest in Rejected Goods.(1) Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract (Section 2-612), the buyer may cancel and whether or not he has done so may in addition to recovering so much of the price as has been paid

(a) "Cover” (Section 2-712) and have damages under the next section as to all the goods affected whether or not they have been identified to the contract; or

(b) Recover damages for non-delivery as provided in this Article (Section 2–713).(2) Where the seller fails to deliver or repudiates the buyer may also

(a) If the goods have been identified recover them as provided in this Article (Section 2–502); or(b) In a proper case obtain specific performance or replevy the goods as provided in this Article (Section 2–

716).(3) On rightful rejection or justifiable revocation of acceptance a buyer has a security interest in goods in his possession or control for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, transportation, care and custody and may hold such goods and resell them in like manner as an aggrieved seller (Section 2–706).

UCC §2-712 “COVER”: BUYER’S PROCUREMENT OF SUBSTITUTE GOODS

o The buyer’s damages are the difference between the cover (repurchase) price and the contract price

o Use of Market Price for basis of recovery if: Buyer does not want to cover Buyer was not reasonable and the cover price is excessive

o Elements of Cover: (1) good faith, (2) without reasonable delay, and (3) reasonable purchase of substitute goods

§ 2–712. "Cover"; Buyer's Procurement of Substitute Goods.(1) After a breach within the preceding section the buyer may "cover" by making in good faith and without

unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.

(2) The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages as hereinafter defined (Section 2–715), but less expenses saved in consequence of the seller's breach.

(3) Failure of the buyer to effect cover within this section does not bar him from any other remedy.

UCC §2-713 BUYER’S DAMAGES FOR NON-DELIVERY OR REPUDIATIONo If the aggrieved party does not enter into a substitute transaction, she is entitled to

sue for loss based on a hypothetical substitute, valued at the market rateo The buyer may recover for the market-contract difference as damages

§ 2–713. Buyer's Damages for Non-delivery or Repudiation.(1) Subject to the provisions of this Article with respect to proof of market price (Section 2–723), the

measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this Article (Section 2–715), but less expenses saved in consequence of the seller's breach.

(2) Market price is to be determined as of the place for tender or, in cases of rejection after arrival or revocation of acceptance (Section 2-606), as of the place of arrival.

o UCC §2-723 PROOF OF MARKET PRICE

UCC §2-601 BUYER’S RIGHTS ON IMPROPER DELIVERYo Buyer is entitled to “perfect tender” or to rejects goods that fail to conform exactly

to what was called for by the contract Failure to conform links back to the discussion on warranties

Goods fail to Conform (2-601) Remedyo Breach could be of quantity, express warranty (2-313),

implied warranty (2-314), fitness for particular purpose (2-315)

§ 2–601. Buyer's Rights on Improper Delivery.Subject to the provisions of this Article on breach in installment contracts (Section 2–612) and unless otherwise agreed under the sections on contractual limitations of remedy (Sections 2–718 and 2–719), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may

(e) Reject the whole; or(f) Accept (Section 2-606) the whole; or(g) Accept any commercial unit or units and reject the rest.

o UCC §2-606 WHAT CONSTITUTES ACCEPTANCE OF GOODS Subsection (a): notification of breach does not qualify as “signifying” to the

seller under this subsection Subsection (b): Reasonable opportunity to inspect Fails to make effective

rejection then this type of acceptance occurs

§ 2–606. What Constitutes Acceptance of Goods.(1) Acceptance of goods occurs when the buyer

(a) After a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that he will take or retain them in spite of their non-conformity; or

(b) Fails to make an effective rejection (Section 2–602 (1)), but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect them; or

(c) Does any act inconsistent with the seller's ownership; but if such act is wrongful as against the seller it is an acceptance only if ratified by him.

(2) Acceptance of a part of any commercial unit is acceptance of that entire unit.

o UCC §2-607 EFFECT OF ACCEPTANCE; NOTICE OF BREACH; BURDEN OF ESTABLISHING BREACH AFTER ACCEPTANCE; NOTICE OF CLAIM OR LITIGATION TO PERSON ANSWERABLE OVER

§2-607 Effect of Acceptance; Notice of Breach; Burden of Establishing Breach After Acceptance; Notice of Claim or Litigation to Person Answerable Over.(1) The buyer must pay at the contract rate for any goods accepted.(2) Acceptance of goods by the buyer precludes rejection of the goods accepted and if made with knowledge of a non-conformity cannot be revoked because of it unless the acceptance was on the reasonable assumption that the non-conformity would be seasonably cured but acceptance does not of itself impair any other remedy provided by this Article for non-conformity.(3) Where a tender has been accepted

(a) The buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy; and

(b) If the claim is one for infringement or the like (subsection (3) of Section 2–312) and the buyer is sued as a result of such a breach he must so notify the seller within a reasonable time after he receives notice of the litigation or be barred from any remedy over for liability established by the litigation.

o UCC §2-602 MANNER AND EFFECT OF RIGHTFUL REJECTIONo After effective rejection, buyer is entitled to:

Cancel the contract Discharged of his duties Seek the return of payments made Any additional damages incurred

§ 2–602. Manner and Effect of Rightful Rejection. (1) Rejection of goods must be within a reasonable time after their delivery or tender. It is ineffective unless the buyer seasonably notifies the seller.(2) Subject to the provisions of the two following sections on rejected goods (Sections 2–603 and 2–604),

(a) After rejection any exercise of ownership by the buyer with respect to any commercial unit is wrongful as against the seller; and

(b) If the buyer has before rejection taken physical possession of goods in which he does not have a security

interest under the provisions of this Article (Section 2–711(3)), he is under a duty after rejection to hold them with reasonable care at the seller's disposition for a time sufficient to permit the seller to remove them; but

(c) The buyer has no further obligations with regard to goods rightfully rejected.(3) The seller's rights with respect to goods wrongfully rejected are governed by the provisions of this Article on Seller's remedies in general (Section 2–703).

o UCC §2-603 MERCHANT BUYER’S DUTIES AS TO RIGHTFULLY REJECTED GOODS

§ 2–603. Merchant Buyer's Duties as to Rightfully Rejected Goods.(1) Subject to any security interest in the buyer (Section 2–711(3)), when the seller has no agent or place of business at the market of rejection a merchant buyer is under a duty after rejection of goods in his possession or control to follow any reasonable instructions received from the seller with respect to the goods and in the absence of such instructions to make reasonable efforts to sell them for the seller's account if they are perishable or threaten to decline in value speedily. Instructions are not reasonable if on demand indemnity for expenses is not forthcoming.(2) When the buyer sells goods under subsection (1), he is entitled to reimbursement from the seller or out of the proceeds for reasonable expenses of caring for and selling them, and if the expenses include no selling commission then to such commission as is usual in the trade or if there is none to a reasonable sum not exceeding ten per cent on the gross proceeds.(3) In complying with this section the buyer is held only to good faith and good faith conduct hereunder is neither acceptance nor conversion nor the basis of an action for damages.

o UCC §2-604 WAIVER OF BUYER’S OBJECTIONS BY FAILURE TO PARTICULARIZE

§ 2–604. Buyer's Options as to Salvage of Rightfully Rejected Goods.Subject to the provisions of the immediately preceding section on perishables if the seller gives no instructions within a reasonable time after notification of rejection the buyer may store the rejected goods for the seller's account or reship them to him or resell them for the seller's account with reimbursement as provided in the preceding section. Such action is not acceptance or conversion.

UCC §2-714 BUYER’S DAMAGES FOR BREACH IN REGARD TO ACCEPTED GOODSo Because the goods have been accepted by the buyer, damages based on an actual

or hypothetical repurchase are not appropriate This section therefore measures damages for accepted goods based on the

loss suffered by the buyer as a result of the deficiency in the goods o Subsection (1) talks generally about any non-conformityo Subsection (2) specifically highlights how the damages are measured in a breach of

warranty Determine the value as it had been warranted Subtract the value of goods as it was accepted

o Subsection (3) allows for incidental and consequential damages

§ 2–714. Buyer's Damages for Breach in Regard to Accepted Goods.(1) Where the buyer has accepted goods and given notification (subsection (3) of Section 2–607) he may recover as damages for any non-conformity of tender the loss resulting in the ordinary course of events from the seller's breach as determined in any manner which is reasonable.(2) The measure of damages for breach of warranty is the difference at the time and place of acceptance between

the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.(3) In a proper case any incidental and consequential damages under the next section may also be recovered.

UCC §2-715 BUYER’S INCIDENTAL AND CONSEQUENTIAL DAMAGESo Sometimes, not only has the breach disappointed the direct expectations under the

contract, but it has caused further losses in other transactions or endeavors that were dependent upon the contract

Incidental damages accompany but is not a major part of the breach; these are expenses reasonably incurred in inspection, receipt, transportation and care and custody

Consequential damages include any loss resulting from general or particular requirements and needs of which:

The seller at the time of contracting had reason to know; and Could not reasonably have been prevented by cover or otherwise

o Sellers don’t have a right to consequential damageso USE THIS PROVISION WHEN:

Seller repudiates and Buyer rejects Buyer Accepts (apply after 714) Buyer revokes acceptance

§ 2–715. Buyer's Incidental and Consequential Damages.(1) Incidental damages resulting from the seller's breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.(2) Consequential damages resulting from the seller's breach include

(a) Any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and

(b) Injury to person or property proximately resulting from any breach of warranty.

WHEN BUYER REVOKES ACCEPTANCE: UCC §2-608 REVOCATION OF ACCEPTANCE IN WHOLE OR IN PART

o Although this doesn’t use the word “material breach,” once you have accepted, it is more difficult to get out need a substantial loss in value to get out of the acceptance

o Then apply 2-711(1)o Also may apply UCC §713 or §714o §2-715 (mirror image of cover)

§ 2–608. Revocation of Acceptance in Whole or in Part.(1) The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it

(a) On the reasonable assumption that its non-conformity would be cured and it has not been seasonably cured; or

(b) Without discovery of such non-conformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller's assurances.

(2) Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have

discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it.(3) A buyer who so revokes has the same rights and duties with regard to the goods involved as if he had rejected them.

OTHER PROVISIONS: UCC §2-313 EXPRESS WARRANTIES BY AFFIRMATION, PROMISE, DESCRIPTION,

SAMPLE

§ 2–313. Express Warranties by Affirmation, Promise, Description, Sample. (1) Express warranties by the seller are created as follows:

(a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.

(b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

(c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.

(2) It is not necessary to the creation of an express warranty that the seller use formal words such as "warrant" or "guarantee" or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller's opinion or commendation of the goods does not create a warranty.

UCC §2-712 REMEDIES FOR FRAUDo Basically just states that the remedy for fraudulent breach is the same as non-

fraudulent breach

§2-721. Remedies for fraud. Remedies for material misrepresentation or fraud include all remedies available under this Article for non-fraudulent breach. Neither rescission or a claim for rescission of the contract for sale nor rejection or return of the goods shall bar or be deemed inconsistent with a claim for damages or other remedy

UCC §2-708 (2) LOST VOLUMEo When the usual measure of damages – the difference between the contract price an

the market price on resale – is inadequate to fully compensate the seller, the seller’s lost profit on the sale is the appropriate measure

§ 2–708. Seller's Damages for Non-acceptance or Repudiation.(2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this Article (Section 2–710), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.

[COMMON LAW PROVISIONS]

R.2d § 347 MEASURE OF DAMAGES IN GENERAL

o The general formula consists of Plaintiff’s loss in value caused by the D’s non-performance added to any other loss (consequential and incidental damages) less any cost or loss the plaintiff avoided by not having to perform (R.2d §347).

o Comment F: Lost Volume If a party could have entered into a subsequent contract even without the

breach, and could have had two transactions rather than a substitute transaction, he has lost volume

Substitute Contract: it needs to be clear that aggrieved party would or could not have entered into the other contract in the absence of the breach

The injured party’s damages is the net profit that he has lost as a result of the broken 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

(d) The loss in the value to him of the other party's performance caused by its failure or deficiency, plus (e) Any other loss, including incidental or consequential loss, caused by the breach, less (f) Any cost or other loss that he has avoided by not having to perform.

Comment F. Lost volume. Whether a subsequent transaction is a substitute for the broken contract sometimes raises difficult questions of fact. If the injured party could and would have entered into the subsequent contract, even if the contract had not been broken, and could have had the benefit of both, he can be said to have "lost volume" and the subsequent transaction is not a substitute for the broken contract. The injured party's damages are then based on the net profit that he has lost as a result of the broken contract. Since entrepreneurs try to operate at optimum capacity, however, it is possible that an additional transaction would not have been profitable and that the injured party would not have chosen to expand his business by undertaking it had there been no breach. It is sometimes assumed that he would have done so, but the question is one of fact to be resolved according to the circumstances of each case. See Illustration 16. See also Uniform Commercial Code §2-708(2).

Sometimes it may be inappropriate or not feasible to calculate expectation interest damages. Courts may award nominal damages instead (e.g. $1) or might use a reliance measure of damages that compensates the aggrieved party for expenditures made in reliance of the contract.

R.2d § 349 DAMAGES BASED ON RELIANCE INTEREST o May apply as an alternative to general damages under R.2d §347 MEASURE OF

DAMAGES IN GENERAL

§ 349 DAMAGES BASED ON RELIANCE INTEREST As an alternative to the measure of damages stated in § 347, the injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed.

Enforcement of Remedies:Typically the judgment may be enforced rpending the conclusion of an appeal. Absent an appeal or an unsuccessful appeal, the breaching party may file bankruptcy.

Filing of a bankruptcy triggers an automatic “stay” or an injunction that, among other things, temporarily prohibits the aggrieved party from taking any action whatsoever to enforce the judgment.

This prohibition may become permanent, and the liability of the breaching party under the judgment may be significantly reduced or permanently discharged

Important to notify clients of the effects of bankruptcy before the lengthy and expensive litigation

Even without a bankruptcy filing, the breaching party may simply not comply with the terms of the judgment, sometimes out of spite but often because of insufficient resources.

Judgment is simply a official statement of that to which a party is entitled Judgment is not self-executing Aggrieved party sometimes must take additional action to enforce the judgment

o Party may bring a motion for contempt, seeking sanctions for failure to comply with a judgment for specific performance

o Party may cause a sheriff to seize and sell assets of the judgment debtor and pay the proceeds to the judgment creditor in satisfaction of the judgment for the payment of money

However, absent sufficient assets, the judgment debtor is judgment proof and the judgment becomes essentially useless

[LIMITATIONS ON THE EXPECTATION MEASURE]In the absence of a valid liquidated damage clause, recovery is subject to limitations:

UCC §2-718 LIQUIDATION OR LIMITATION OF DAMAGES; DEPOSITSo If the goods have been accepted and the acceptance cannot be revoked the buyer is

confined by this section to damages based on the loss in value as a result of the non-conformity

o Subsection 2(b) allows a defaulting buyer to obtain restitution of payments to the seller to the extent that they exceed any amount of validly agreed damages or the smaller of $500 or 20% of the price

o Subsection (2) is offset by (3) by any damages to which the seller is entitled under Article 2

§ 2–718. Liquidation or Limitation of Damages; Deposits. (1) Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.(2) Where the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds

(a) The amount to which the seller is entitled by virtue of terms liquidating the seller's damages in accordance with subsection (1), or

(b) In the absence of such terms, twenty per cent of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller.

(3) The buyer's right to restitution under subsection (2) is subject to offset to the extent that the seller establishes

(a) A right to recover damages under the provisions of this Article other than subsection (1), and(b) The amount or value of any benefits received by the buyer directly or indirectly by reason of the

contract.(4) Where a seller has received payment in goods their reasonable value or the proceeds of their resale shall be treated as payments for the purposes of subsection (2); but if the seller has notice of the buyer's breach before reselling goods received in part performance, his resale is subject to the conditions laid down in this Article on resale by an aggrieved seller (Section 2–706).

UCC §2-719 CONTRACTUAL MODIFICATION OR LIMITATION OF REMEDY

§ 2–719. Contractual Modification or Limitation of Remedy.(1) Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on liquidation and limitation of damages,

(a) The agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts; and

(b) Resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.

(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act.(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

[THREE LIMITATIONS ON THE RECOVERY OF DAMAGES]

[Foreseeability]See Hadley, Problem Dispute – Leak in SUV

Most foreseeable damages in the natural course of business are usually recoverable, but whether or not consequential damages are recoverable is a harder question.

Aggrieved party may not recover damages for loss that the breaching party, at the time contract was made, did not foresee or have reason to foresee as a probable result of breach

“Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, or it must be one that may reasonably be supposed to have been contemplated by the parties at the time of the contract as a reasonable consequence of breach” Hadley

Both Restatement and UCC breaks damages into two categories:o General or Direct Damages

Include not only all easily imaginable direct damages, but also those consequential damages that should be obvious to the breacher without any special or particular knowledge of the other party’s circumstances or affairs

2-712 – 2-715 (Buyer’s Damages) 2-706 – 2-709 (Seller’s Damages)

o Special Damages

Reasonable contemplation does not require that a reasonable person in the breacher’s position would have foreseen the exact loss with great precision and specificity

All that is required is that a loss of that nature and approximate extent could be conceived of as a probability

In requiring the contemplated loss to be probable, rather than just possible, the law does not cover every possibly imagined consequence but it does cover more than those outcomes that are obviously inevitable

o UCC 2-715(2)(a) UCC does not use the word “foreseeability” but the term “had reason to

know” means foreseeability

(2) Consequential damages resulting from the seller's breach include(a) Any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and

o R.2d §351 FORESEEABILITY Ordinary course of events are always foreseeable Special circumstances is limited only to damages that the breaching party

had reason to know

§ 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.

Third Party Beneficiary Rule:o UCC §2-318 (C) Third Party Beneficiaries of Warranties Express or Implied

Alternative CA seller's warranty whether express or implied extends to any person who may reasonably be expected to use, consume or be affected by the goods and who is injured by breach of the warranty. A seller may not exclude or limit the operation of this section with respect to injury to the person of an individual to whom the warranty extends.

UCC §2-316 (4) EXCLUSION OR MODIFICATION OF WARRANTIES

Remedies for breach of warranty can be limited in accordance with the provisions of this Article on liquidation or limitation of damages and on contractual modification of remedy (Sections 2–718 and 2–719).

UCC §2-719 (3) CONRACTUAL MODIFICAITON OR LIMITATION OF REMEDY

(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

[Avoidable Consequences]See Rockingham Bridge, Problem: Pet Store Neon Signs (A), Problem: Planning – Law Professor, Parker, R.B. Matthews

After a breach, the aggrieved party’s remedy is to treat the contract as broken and sue for recovery of damages from the breach, including any profits he would have realized upon performance and any other losses that have resulted to him. However, the defendant is not held responsible for the increase in loss caused by the plaintiff.

The measure of plaintiff's damage is an amount sufficient to compensate plaintiff for labor and materials expended and expense incurred in the part performance of the contract, prior to its repudiation, plus the profit that would have been realized if it had been carried out in accordance with its terms

Duty to Mitigate Damages: It is the aggrieved party’s duty to do nothing to increase the damages flowing from that breach (Rockingham County)

Employment Contracts (Parker)o The general rule is that a wrongfully discharged employee is entitled to the

amount of salary agreed upon for the period of service less the amount that the employer can prove as:

Amount the employee has earned or with reasonable effort could have earned from other employment

o Employer must show that the other employment was comparable or substantially similar to that which the employee has been deprived

o Employment of a different or inferior kind will not count

In R.B. Matthews, the case is remanded to see if RBM had an opportunity to cover by purchasing trailers elsewhere. If RBM had an opportunity to cover reasonably quickly after the material breach by TTS, RBM can recover consequential damages

o If RBM had no such opportunity, the profits RBM would have made had there been a full delivery of 600 trailers becomes the proper measure of damages

APPLICABLE RULES & PROVISIONS: Aggrieved party may not obtain damages for loss that might reasonably have been

avoided (R.2d §350)o The plaintiff’s action must be evaluated by an objective standard under all the

circumstances of the case: If the breach compelled P to take action to safeguard P’s interests, courts

are inclined to respect P’s judgment if P had an honest and rational basis Because P is the wronged party, P is not expected to take heroic or

exhaustive action to keep damages at a minimum There is no failure to mitigate if the action required to reduce loss

would have been unduly burdensome, humiliating or risky to the P Apply §2-610 ANTICIPATORY REPUDIATION Apply §2-703 SELLER’S REMEDIES IN GENERAL

Apply §2-704 SELLER’S RIGHT TO IDENTIFY GOODS TO THE CONTRACT NOTWITHSTANDING BREACH OR TO SALVAGE UNFINISHED GOODS

Apply §2-706 SELLER’S RESALE INCLUDING CONTRACT FOR SALEo Use this if Seller is selling the scrapo Make sure the parties end up in the same position they would’ve been in had the

contract been performed Apply §2-708 SELLER’S DAMAGES FOR NON-ACCEPTANCE OR REPUDIATION

o Use this if selling after completing manufacture Apply §2-709 ACTION FOR THE PRICE

o Use this if selling after completing manufacture

[Reasonable Certainty]See Texas Instruments, Chicago Coliseum Club

Aggrieved party may not obtain an amount of damages beyond that which it can prove with reasonable certainty.

Texas Instruments v. Teletron Energy: Profits that are largely speculative cannot be recovered.  This may include:

o Profits from an activity dependent on uncertain or changing market conditionso Chancy business opportunitieso Promotion of an untested product or entry into unknown marketo Success of a new and unproven enterprise

In Chicago Coliseum Club the court found that the loss of profits from the event that did not take place was not certain enough to be recovered:

o Plaintiff not able to prove with reasonable certainty the profits from a boxing contest open to the public, since the profits would be “dependent upon so many different circumstances and not susceptible of definite legal determination.”

o Compensation for damages must be established by evidence from which a court are able to ascertain the extent of such damages by the usual rules of evidence and a reasonable degree of certainty

R.2d §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.

[ALTERNATIVE MEASURES OF DAMAGES]

[TORT DAMAGES]Tort v. Contract Law: Intentional infliction of a tort is seen as amoral, but breach of contract is seen as morally neutral, which is why a breach of a contract is not criminal and courts command the remedy of specific performance (to perform its contractual obligations) only infrequently.

Contract Damages are limited to those within the contemplation of the parties when the contract was entered into or reasonably foreseeable by them at that time

Consequential damages beyond the expectations of the parties are not recoverable, so damages do not usually include emotional disturbance nor punitive damages

Also does not include the emotional impact of seeking a remedy, costs of litigation, etc, except as provided by state statutes (typically include filing and motion fees, videotaping or transcription of depositions and jury fees (Cal. Code. Civ. Pro. 1033.5))

Sometimes punitive damage are awarded for the redress of intentional torts, such as battery or fraud

Viable claim for punitive damages significantly increases the settlement value of a lawsuit

For this reason, parties aggrieved by alleged breach frequently seek to state an alternative claim for punitive damages

Recovery for emotional disturbance will be excluded unless the breach also caused bodily harm or the contract is of such a kind that serious emotional disturbance was a particularly likely result

R.2d §353 LOSS DUE TO EMOTIONAL DISTURBANCE

§ 353 LOSS DUE TO EMOTIONAL DISTURBANCE Recovery for emotional disturbance will be excluded unless the breach also caused bodily harm or the contract or the breach is of such a kind that serious emotional disturbance was a particularly likely result.

[RELIANCE MEASURE OF DAMAGES]See Sullivan, Chicago Coliseum Club v. Dempsey

Reliance damages aim to refund expenses wasted or equivalent losses by the plaintiff in reliance on the grant, returning the plaintiff to the position she would have been in had no contract been entered in the first place. The general rule is that in an action for breach of contract, a party can recover damages that naturally flow from and are the result of the act complained of, instead of seeking expectation damages . A party would seek this remedy when he is unable to prove his expectation damages or when such damages are not sufficiently foreseeable to be recovered.

In Chicago Club, the P was able to recover in reliance damages:o The money paid to the architect (trying to fix the stadium for the fight after the

contract was signed)o Traveling expenses: Expenses incurred after the contract was signed; not before

the breach of the contract (his legal actions after breach were at his own risk)o Rail Road publicity: Making arrangements to transport people to the fight and to

publicize the fighto Extra wages for secretarial serviceso Any other items incurred in furtherance of the general plan and properly

proven In Sullivan v. O’Connor, the P was able to recover in reliance damages:

o All medical expenditures: Fee paid to the doctor for the operation Amounts paid for medicine and nurses Any expenses to care for the worsening of the P’s medical condition due to

the breach This “intermediate pattern of recovery” makes sense since:

o Expectation measure would be too high

Difference between P’s condition as promised (good nose) and condition actually resulting from the treatment (bad nose), taking into account P’s occupation as performer

o Restitution measure would be too low Amount paid to defendant doctor for the operation

o However this middle ground will put the plaintiff back in the position she occupied just before the parties entered upon the agreement, compensating for her the detriments she suffered

[RESTITUTION MEASURE OF DAMAGES]See United States v. Algernon Blair, Inc., Fish v. Correll

Restitution seeks to return to the plaintiff the value of any benefit conferred on the defendant under the breached contract. Restitution is only available when the breach is serious enough to give rise to total and material breach.

Unusual, but P may waive right to contract damages and use this when:o P cannot recover expectation damages because she cannot prove themo P had a negative expectation and would have lost money on the contract

Focus is not on the plaintiff’s expectation from the contract or expenditure in reliance of the contract, but on the extent of the defendant’s enrichment at the plaintiff’s expense.

o Unlike expectation damages (loss-based recovery), restitution is a gains-based recovery.

Based on theory of Unjust Enrichment: defendant should be returned to the same economic position as before the contract as well

Restitution may be awarded even when the P would have lost money had the contract been performed.

In United States v. Algernon Blair, Inc., the court found that AB was entitled to recover for the value given to the breaching party.

o The reasonable value is determined by estimating the amount for which such services could have been purchased from one in the plaintiff’s position at the time and place the services were rendered – i.e. go to another subcontractor and ask how much they would charge for the job rendered.

R.2d § 373 RESTITUTION WHEN OTHER PARTY IS IN BREACH

§ 373 RESTITUTION WHEN OTHER PARTY IS IN BREACH (1) Subject to the rule stated in Subsection (2), on a breach by non-performance that gives rise to a claim for damages for total breach or on a repudiation, the injured party is entitled to restitution for any benefit that he has conferred on the other party by way of part performance or reliance. (2) The injured party has no right to restitution if he has performed all of his duties under the contract and no performance by the other party remains due other than payment of a definite sum of money for that performance.

The law recognizes a right of restitution in favor of a material breacher to the extent that the benefit conferred on the other party exceeds the aggrieved party’s claim for damages

In Fish v. Correll, court held that Fish couldn’t recover for costs under the contract because he has failed on his part, and if he has suffered detriment he can only blame himself. There was no added benefit conferred on Correll on the wrong tombstone.

R.2d § 374 RESTIUTION IN FAVOR OF PARTY IN BREACHo Subsection 1: the party in breach is entitled to the difference between the benefit

conferred on the injured party and the loss he caused by his own breach

§ 374 RESTITUTION IN FAVOR OF PARTY IN BREACH (1) Subject to the rule stated in Subsection (2), if a party justifiably refuses to perform on the ground that his remaining duties of performance have been discharged by the other party's breach, the party in breach is entitled to restitution for any benefit that he has conferred by way of part performance or reliance in excess of the loss that he has caused by his own breach. (2) To the extent that, under the manifested assent of the parties, a party's performance is to be retained in the case of breach, that party is not entitled to restitution if the value of the performance as liquidated damages is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.

Illustration 55. A contracts to tutor B's son for six months in preparation for an examination, in return for which B promises to pay A $ 2,000 at the end of that time. After A has worked for three months, he leaves to take another job and B is unable to find a suitable replacement. In the absence of any reliable basis for measuring the benefit to B from A's part performance, restitution will be denied.

R.2d § 371 MEASURE OF RESTITUTION INTERESTo Subsection (a): what others in the breaching party’s position would have charged

for the broken contracto Subsection (b): what the breaching party gained in increase in value of property or

other interests

§ 371 MEASURE OF RESTITUTION INTEREST If a sum of money is awarded to protect a party's restitution interest, it may as justice requires be measured by either (a) The reasonable value to the other party of what he received in terms of what it would have cost him to obtain it from a person in the claimant's position, or (b) The extent to which the other party's property has been increased in value or his other interests advanced.

[REMEDY OF SPECIFIC PERFORMACE OR INJUNCTION]Specific Performance is an order to the defendant requiring him to perform as promised.

Courts will typically not order specific performance of: There is a difficulty with these types of contracts about framing or enforcing orders:

o Employment contractso Construction contracts

Courts however will order specific performance for: Transactions in Real Property:

o Each parcel of property is pretty unique, so compensatory money damages would not be an adequate remedy because buyer cannot be fully compensated between the difference in price for the unique piece of property they contracted for

Unique Items, such as a Van Goh paintingo This is a question of degree

o The item needs to have a particular value that cannot be quantified To enjoin athletes or artists with unique or extraordinary ability from performing

elsewhereo In Smith, et al. v. Burnett, court found that although Burnett’s skills were not

unique enough to warrant a preliminary injunction. Injunctive Relief Elements:

(1)P has a clearly ascertained right which needs to be protected(2)P will irreparable harm without injunctive relief

a. Proof of a speculative possibility of harm is not sufficient, but the court does not need to wait until injury actually occurs to grant an injunction

(3)There is no adequate remedy at law (4)P is likely to be successful on the merits of the case

a. In order to enforce a negative covenant in an employment agreement, the employee must exhibit unique or exceptional skills that would justify the injunctive relief.

o Burnett’s skills of negotiation and maintaining client relationships, though admirable, do not rise to the level of “unique or exceptional”

o Had the firm argued his specialty in worker’s compensation cases, they may have prevailed

UCC §2-716 BUYER’S RIGHT TO SPECIFIC PERFORMANCE OR REPLEVINo This is a secondary remedy, available only when damages cannot adequately

compensate because the goods are fairly regarded as uniqueo In other cases where the buyer rejected nonconforming goods or seller fails to

deliver goods at all, the buyer is confined to substitutionary damages, based on an actual good faith and reasonable repurchase of the goods, Cover under 2-712, or a Hypothetical Repurchase under 2-713

§ 2–716. Buyer's Right to Specific Performance or Replevin. (1) Specific performance may be decreed where the goods are unique or in other proper circumstances. (2) The decree for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just. (3) The buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered.  In the case of goods bought for personal, family, or household purposes, the buyer's right of replevin vests upon acquisition of a special property, even if the seller had not then repudiated or failed to deliver. 

In certain circumstances a seller of goods is entitled to the price where the buyer has failed to pay (a form of specific performance).

UCC §2-709 ACTION FOR THE PRICEo 1(a) If the buyer fails to pay the price as it becomes due, the seller may recover the

price of goods accepted

§ 2–709. Action for the Price.(1) When the buyer fails to pay the price as it becomes due the seller may recover, together with any incidental

damages under the next section, the price(a) Of goods accepted or of conforming goods lost or damaged within a commercially reasonable time after

risk of their loss has passed to the buyer; and(b) Of goods identified to the contract if the seller is unable after reasonable effort to resell them at a

reasonable price or the circumstances reasonably indicate that such effort will be unavailing.(2) Where the seller sues for the price he must hold for the buyer any goods which have been identified to the contract and are still in his control except that if resale becomes possible he may resell them at any time prior to the collection of the judgment. The net proceeds of any such resale must be credited to the buyer and payment of the judgment entitles him to any goods not resold.(3) After the buyer has wrongfully rejected or revoked acceptance of the goods or has failed to make a payment due or has repudiated (Section 2–610), a seller who is held not entitled to the price under this section shall nevertheless be awarded damages for non-acceptance under the preceding section.

The CISG adopted a compromise between common law systems and civil law systems (which sanction the remedy of specific performance more broadly than common law systems).

Authorizes the remedy in a variety of circumstances but also provides that "a court is not bound to enter a judgment for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by this Convention." 

CISG ARTICLE 28

Article 28If, in accordance with the provisions of this Convention, one party is entitled to require performance of any obligation by the other party, a court is not bound to enter a judgement for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by this Convention.

CISG ARTICLE 46

Article 46(1) The buyer may require performance by the seller of his obligations unless the buyer has resorted to a remedy which is inconsistent with this requirement.(2) If the goods do not conform with the contract, the buyer may require delivery of substitute goods only if the lack of conformity constitutes a fundamental breach of contract and a request for substitute goods is made either in conjunction with notice given under article 39 or within a reasonable time thereafter.(3) If the goods do not conform with the contract, the buyer may require the seller to remedy the lack of conformity by repair, unless this is unreasonable having regard to all the circumstances. A request for repair must be made either in conjunction with notice given under article 39 or within a reasonable time thereafter.

[AGREEMENTS ABOUT REMEDIES]

[Liquidated Damages, Remedy Substitutes, Remedy Limits]See Resnick v. Uccello Immobilien GMBH, Inc., Vanderbilt, Milgard, Leak in SUV (B)

In the absence of agreement between the parties, remedies are supplied by default rules. However, Parties may “contract out” and add their own terms, which fall under three types:

Terms that establish liquidated damages (UCC §2-718)o E.g. Amount of moneyo E.g. A formula for deriving an amount of damages

Terms that provide remedies (UCC §2-719)o Parties may provide remedies in addition to or in lieu of damages

E.g. Repair in addition to or in substitution of damage remedieso A limited repair remedy serves two purposes:

Shield the seller from liability during her attempt to make goods conform Ensures that buyer will receives goods conforming to the contract within a

reasonable period of time Terms that limit or exclude consequential damages (UCC §2-719)

Requirements and Restrictions: The liquidated damages term does not need to contain language about damages

o Two requirements (UCC §2-718): Damages need to be of a kind difficult or impossible to prove or calculate at

the time of breach Terms need to constitute a reasonable estimate of either the anticipated or

actual loss from the breach Rules from Resnick:

o Liquidated damages arising from breach of contract are appropriate when: Damages from the breach are not readily ascertainable The sum stipulated is not grossly disproportionate to the damages

reasonably expected to follow from the breach OR not grossly disproportionate to actual damages incurred

Liquidated damages will serve as compensation for failure to perform, not as punishment for the breaching party

In Resnick, the court found the damages punitive since it was disproportionate and did not even get paid to the plaintiff; it was ordered to a charity of plaintiff’s choice

In Vanderbilt, the court did not find the damages as a penalty since it was (1) reasonable in relation to the anticipated damages for breach, (2) measured prospectively at the time contract was entered into, and (3) not grossly disproportionate to the actual damages

If requirements are not met, the term will be labeled a “penalty” and unenforceableo This is consistent with the principle that remedies for breach may not punish the

breaching party for breach but rather restore the aggrieved party to the economic position anticipated from performance of the contract

o However, a penalty does not mean the aggrieved party is not entitled to other damages

APPLICABLE RULES: UCC §2-718(1) LIQUIDIATION OR LIMITATION OF DAMAGES; DEPOSITS

§ 2–718. Liquidation or Limitation of Damages; Deposits. (1) Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.

UCC §2-719 CONTRACTUAL MODIFICATION OR LIMITATION OF REMEDYo This section requires a court to examine the contract in general and the remedy

provision in particular to determine what the remedy's essential purpose is and whether it has failed.

o A contractual provision limiting the remedy to repair or replacement of defective parts fails of its essential purpose within this section if the breaching manufacturer or seller is unable to make the repairs within a reasonable period.

Unnecessary to show negligence or bad faith on part of the seller, for the detriment to the buyer is the same whether the seller was diligent or negligent

o The task before the trial court in Milgard was to examine the remedy provisions and determine whether D’s default caused a loss which was not a part of the bargained-for allocation of the risk

If the breach caused a loss not reasonably contemplated by the parties, then the cap on consequential damages will be unenforceable

§ 2–719. Contractual Modification or Limitation of Remedy.(1) Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on liquidation and limitation of damages,

(a) the agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts; and

(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.

(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act.(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

R.2d §356 LIQUIDATED DAMAGES AND PENALTIES

§ 356 LIQUIDATED DAMAGES AND PENALTIES (1) Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty. (2) A term in a bond providing for an amount of money as a penalty for non-occurrence of the condition of the bond is unenforceable on grounds of public policy to the extent that the amount exceeds the loss caused by such non-occurrence.

CAL. CIV. CODE §1671 LIQUIDATED DAMAGES TERMS

Cal. Civil Code 1671

(a) This section does not apply in any case where another statute expressly applicable to the contract prescribes the rules or standard for determining the validity of a provision in the contract liquidating the damages for the breach of the contract.

(b) Except as provided in subdivision (c), a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.

(c) The validity of a liquidated damages provision shall be determined under subdivision (d) and not under subdivision (b) where the liquidated damages are sought to be recovered from either:     (1) A party to a contract for the retail purchase, or rental, by such party of personal property or services, primarily for the party' s personal, family, or household purposes; or     (2) A party to a lease of real property for use as a dwelling by the party or those dependent upon the party for support.

(d) In the cases described in subdivision (c), a provision in a contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.