GROUNDS FOR AVOIDING CONTRACTS

Recission = Cancellation of a contract

Grounds for avoiding contracts1. Minority

a. People under 18 have an open ended right to rescind contracts within a reasonable time after becoming an adult

b. Mutual restitution – both parties give back what they received from the contract2. Mental incapacity

a. Cognitive test: The person is not able to understand the nature of the transactioni. Doesn’t matter whether the other party knew or not

b. Volitional test: The person understands that a contract was made, but wasn’t acting rationally when they entered into it

i. The other party must have had reason to know of the incapacity3. Bargaining misconduct

a. Contract is void if there was egregious misconduct, such as bodily injury or threat to destroy property (RST 174)

b. Contract is voidable if there was less egregious misconduct; the affected party may void the contract if they choose

4. Economic duressa. One party involuntarily accepted the terms of the otherb. There were no other alternatives but to agreec. The compulsion induced the action

5. Undue influence (balancing test – not all elements must be met)a. Discussion of the transaction at an inappropriate timeb. Consummation of the transaction in an unusual placec. Insistent demand that the business be finished at onced. Extreme emphasis on untoward consequences of delaye. The use of multiple persuaders by the dominant sidef. Absence of third party advisors to the weaker partyg. Saying there is no time to consult financial advisors/attorneys

Types of Improper Threats (RST 176)1. Threat to commit a crime or tort2. Threat of prosecution3. Threat made in bad faith4. Resulting exchange is on unfair terms5. Threatened act would harm recipient and not significantly benefit the other party

Elements of fraud1. Misrepresentation2. Materiality (a party relies on the misleading statement)3. Scienter (bad intent)4. Reasonable reliance on the misrepresentation5. Loss causation (the reliance was the proximate cause of the loss)

Constructive Fraud = Breach of fiduciary relationship

Misrepresentation (RST 162)

1. A contract can be rescinded if one party’s consent was induced by either fraudulent or material misrepresentation

a. Fraudulent misrepresentation = Knowing misrepresentationi. Recission is always allowed

b. Material misrepresentation = Unknowing misrepresentationi. Recission is only allowed if the fact was major

2. There are two types of misrepresentationa. Enough to rescind a contract

i. Limited to restitution damagesb. Enough to amount to the tort of fraud

i. Can get restitution, compensatory and punitive damages3. The recipient of an opinion is entitled to believe that the information is honest (RST 168)4. Once you begin to speak, you can’t withhold facts (RST 161)

RST 161: During the negotiation process, there is a duty to disclose in certain situations1. There is a duty to disclose material facts2. There is a duty to disclose if there is a fiduciary relationship3. (A) and (D) are universally accepted, (B) and (C) are more controversial

a. Some say a party must actually lie to be held liable for misrepresentation

Unconscionability: No definite standard; “ordinary unfairness” is the most common, but some courts require “gross unfairness”

Commercial unconscionability cases are difficult to win, because parties are generally sophisticated

Public Policy1. RST 178/179: We must balance desire to enforce contracts with reluctance to enforce contracts

that are against public policya. Public policy may outweigh other concernsb. No restitution if a contract is void against public policy

Contracts in Restraint of Competition2. RST 186: Contracts in unreasonable restraint of competition should be void3. RST 187: An unreasonable restraint has no valid purpose other than suppressing competition4. RST 188: Some restraint of competition may be valid

a. Example: Partnership agreements/employment contracts (it may be proper to ask a former partner/employee not to compete)

Balancing test for enforcement of covenants not to compete1. Balance following factors:

a. Legitimate interests to be protectedb. Hardship on restricted personc. Hardship on public

2. Determine reasonableness of:a. Geographic restraintsb. Time restraints

3. May depend on uniqueness of skill/level of harm to company

Generally, covenants not to compete among lawyers are pro se prohibited

Totem Marine v. Alyeska Pipeline

1. Facts of the casea. Alyeska hired Totem to transport pipeline but misrepresented the job

i. There was more product than expected and transportation took longerii. Alyeska canceled the contract and unloaded the material in a way that voided

Totem’s insurance policyb. Totem claimed they were owed $260-$300k for work donec. Alyeska receives the invoices but refused to pay quicklyd. Totem needed to money to avoid bankruptcy, so they accepted a payment of $97,500 and

released Alyeska from further obligation2. Question: Does Totem have a claim for recission due to duress?3. Holding: Yes, the case must go to trial because Totem signed the release under economic duress

a. Alyeska acted in bad faith, and Totem was particularly vulnerable... they had no choice but to accept the deal if they wanted to avoid bankruptcy

Odorizzi v. Bloomfield School District***1. Facts of the case2. Question: Does Odorizzi have a claim for duress?3. Holding: Odorizzi has a claim for undue influence

a. There was no fraud, because there was no misrepresentation (if he didn’t resign, he would be removed)

b. There was no fiduciary relationship and there should be no expectation of trust when you’re being fired

c. There WAS undue influence:i. Excessive pressure, Odorizzi was particularly vulnerable, the transaction occurred

in an unusual place (his home), there was extreme time pressure and no chance to consult with anyone

Syester v. Banta1. Facts of the case

a. Dance studio used egregious selling practices to entice students to sign up for lessonsb. They told Syester, a woman in her 60s, that she could become a professional dancerc. Syester bought three lifetime memberships and spent thousands on lessons

2. Question: Does Syester have a claim for misrepresentation?3. Holding: Yes, this was a case of fraud

a. Syester was a lonely widow and particularly vulnerableb. The studio manager knew that Syster wasn’t going to be a professionalc. There was reasonable reliance, the managers purported to be experts/friends

4. Outcomea. Jury awards restitution – the amount she paid, minus the benefit she actually receivedb. Jury also awards $40,000 in punitive damages

i. Since this was a case of intentional fraud, which is a tort, punitive damages apply

Hill v. Jones1. Facts of the case

a. Hill buys a home from Jones and discovers termite damage that had not been disclosedb. The owners put a large plant in the middle of the floor over the damage, and Jones said

ripples in the floor were from water damage – this was an affirmative misrepresentationc. According to RST 161, once you make an affirmative statement, you can’t withhold facts

2. Question: Were the Jones required to disclose the damage?3. Holding: Disclosure is required when material facts are involved

a. The termite infestation was probably a material fact (remanded to decide)

b. Affirmative acts to conceal may be considered fraudc. If sellers know there is a defect that is not readily observable to the buyer they must

disclose it... once a buyer has notice of the problem, they must make reasonable inquiries

Park 100 Investors v. Kartes1. Facts of the case

a. Kartes owned a video store and signed a lease to move into a new buildingb. Scannell, a representative is Park 100, came and presented Kartes with “lease papers” c. The papers were actually a personal guaranty, and Scannell told Kartes he couldn’t move

out until the papers were signed (this wasn’t true)d. Kartes signed the guaranty, which said “lease agreement” on the front

2. Question: Was Kartes induced to sign the guaranty by fraud? Should he be held to it?3. Holding: This was fraud, the agreement is invalid

a. Scannell intentionally lied, and Kartes reasonably relied on the misrepresentationb. Duty to read doesn’t apply if one party fraudulently misrepresents the agreementc. Trial court (but not appellate court) said that Scannell knew Kartes was mistaken, so he

had a duty to correct him under 161(c)

Higgins v. Superior Court of Los Angeles County1. Facts of the case

a. The Higgins siblings were living with the Leonidas family after the death of their parents and were chosen to appear on Extreme Home Makeover

b. They signed a contract saying that all disputes with the show would have to be arbitrated; they didn’t have any counsel and were told to “flip through and sign”

2. Question: Should the mandatory arbitration clause be upheld?3. Holding: The clause is not valid due to procedural unconscionability

a. Lack of notice/unfair surprise – there was nothing in the contract to draw attention to the arbitration clause

b. Bargaining disparity – The network knew the plaintiffs were unsophisticatedc. Substantive unconscionability – The agreement was one-sided; only plaintiffs had to agree

to arbitration

American Software v. Ali1. Facts of the case

a. Ali was a software salesperson on salary and commission; she had a guaranteed base salary, guaranteed bonus, and additional commissions

b. Employment contract said that if she left the company voluntarily, she would get no commissions after 30 days

c. She left voluntarily and sued American Software for the old commissions2. Questions: Was this contract unconscionable?3. Holding: The contract was valid; it was not unconscionable

a. No procedural unconscionability – This wasn’t a contract of adhesion, Ali bargained for the terms, the contract was straightforward, Ali was a sophisticated employee who had negotiated business contracts before, and she was aware of the provision (no surprise)

b. No substantive unconscionability – There was a good reason for the provision (it creates an incentive for employees to stay), there were risks to both parties (the company would pay the employee’s bonus no matter what), the terms didn’t shock the conscience

Valley Medical Specialists v. Farber1. Facts of the case

a. Restrictive covenant in a doctor’s employment contract said that Farber wasn’t allowed to compete within 5 miles of any VMS office (a total distance of 225 miles)

b. Farber also wasn’t able to provide any medical assistance to clients or competitors of VMS2. Question: Is the restrictive covenant valid?3. Holding: No, the covenant is invalid as a matter of public policy

a. VMS had a legitimate interest to be protected, but public policy outweighed itb. Hardship on the public was great

i. Farber treated HIV patients with a special procedure that not all doctors could doii. Patients would lose the ability to choose their doctor

c. Supreme Court doesn’t approve of “blue penciling” (changing only certain parts of a covenant), because it could create and incentive for drafters to be overly restrictive to see what they could get away with

RR v. MH & Another1. Facts of the case

a. Involves a surrogacy contract – Mother donated the egg and acted as a surrogate for an infertile couple; father had naming rights and full custody; contract allowed for some maternal contact, but if she sought maternal rights she would have to give back the $10,000 she was paid for the surrogacy

2. Question: Is the surrogacy contract void?3. Holding: The contract is void on public policy grounds

a. Surrogacy is similar to adoption, where there can be no advance consent and no payment other than reasonable medical expenses

b. This type of agreement treats babies like commodities and may exploit low-income womenc. Some states have laws saying surrogacy agreements must be evaluated by a court for

fairness before proceeding

JUSTIFICATION FOR NON-PERFORMANCE: MISTAKE & CHANGED CIRCUMSTANCES

MISTAKE

Mistake in Fact (RST 151)1. Fact must have been in existence when the contract was made2. Fact must be related to basic assumptions of both parties3. Fact must have a material effect on the exchange of performances4. RST 154 – Is the risk allocated to one party?

Unilateral mistake is less likely to void a contract than mutual mistake

Mistake in drafting the contract: If the evidence shows that both parties meant the contract to say something different but it was mistakenly drafted, it can be re-written to reflect the intent of the parties

Lewanee County Board of Health v. Messerly***

Shore Builders v. Dogwood1. Facts of the case

a. A large piece of unimproved land on the Eastern Shore of DE was sold for residential development during the dry season

b. The buyer carefully inspected the property but didn’t have an opportunity to see the land during the wet season, when it became very marshy and couldn’t be built upon

2. Question: Is the buyer entitled to recission?3. Holding: The agreement may not be upheld

a. The problem was a “hidden defect” that the seller should have given specific notice of

Wil-Fred’s v. Metropolitan Sanitary District1. Facts of the case

a. Wil-Fred was awarded a big for a large project, but their subcontractor (Ciago) made a mistake and grossly underestimated the cost of the project

b. If Wil-Fred was held to the contract they would have lost $1-2 million for forfeiting the bond or $150k as a result of Ciago’s mistake (=15% of contract price)

2. Question: Was the mistake material? Is the contract voidable as a result?3. Holding: The contract is void

a. The assumption was a material mistake because it represented a major part of the contractb. The effect of the mistake is so large that to uphold the contract would be unconscionablec. Recission was reasonably fair for Sanitary District, because they could just choose the next

lowest bidder and the only thing they would lose is the windfall from Wil-Fred’s mistake

CHANGED CIRCUMSTANCES

Impracticability1. Market shifts and economic cycles do not make an argument for impracticability2. Foreseeability does not defeat impracticability

a. However, the more foreseeable something is, the less likely the party can be excused

Relief for Void Contracts = Recission and restitution

UCC 2-209(1): A modification to an existing contract needs no consideration to be binding1. Modifications must meet the test of good faith

a. Must be commercially reasonable, fair and equitableb. There must be a good reason to request to modificationc. Modifications extracted in bad faith are not enforceable

Accord and Satisfaction: If you have a dispute over an “unliquidated obligation” (an obligation not reduced to a dollar amount), then acceptance of a check for payment discharges any remaining obligation

Karl Wendt Farm Equipment v. International Harvester1. Facts of the Case

a. IH decides to leave the farm equipment business due to a downturn in the market, so they sell all of their assets and inventory to Case Tenneco; Case chose which of IH’s dealers they wanted to keep

b. Wendt’s dealership was not chosen by Case and was about to go out of business, so Wendt sues IH for wrongful termination of the contract

c. IH claims impracticability and frustration of purpose, because of market downturns and lack of mutual profitability

2. Question: Was the contract wrongfully terminated?3. Holding: Yes, the contract was wrongfully terminated

a. Market downturns are not enough to prove impracticabilityb. Every contract is based on mutual profitability, so lack of profitability is not a valid

argument for frustration of purposec. IH did not act in the spirit of good faith and fair dealing; they should have shared some of

their profit from the sale with Wendt

d. When there is no express termination agreement, there must be reasonable notice

Wolf Trap1. Facts: A storm knocked out the power in a music venue, so the Boston Opera wasn’t able to

perform and sued for lost profits2. Question: Was impossibility a valid defense?3. Holding: Impossibility was a valid defense, venue wins

a. Electricity was necessary for the performance, and the problem wasn’t foreseeable

Thrifty Rent-A-Car1. Facts: Thrifty couldn’t keep up with contractual obligations due to hurricanes2. Question: Was impossibility a valid defense?3. Holding: Impossibility was NOT a valid defense

a. Hurricanes were foreseeable, they happen in Florida all the time

Harriscom Svenska v. Harris Corp1. Facts of the Case

a. Harriscom was the distributor for products to Iran, Harris Corp was the manufacturerb. Harris Corm was supposed to ship radios to Harriscom so Harriscom could ship them to

Iran, but Harris couldn’t fill the ordersi. The government stopped one of Harris’ shipments to Sweden because they didn’t

want military goods shipped to Iran2. Question: Did Harris breach the contract by failing to fill the orders?3. Holding: Harris did NOT breach

a. The contract was impracticable because the government forced complianceb. The government’s orders were not foreseeable

MODIFICATION

No consideration needed for modification

Alaska Packers v. Domenico1. Old common law rule: There had to be consideration for a modification (not the case now)2. UCC 2-209(1): An modification to an existing contract needs no consideration to be binding

a. But, comments say that modifications must meet the test of good faithi. Must be commercially reasonable; fair and equitable in view of circumstances not

expected by the partiesii. There must be a good reason to request the modification

iii. Modifications extracted in bad faith are not enforceable

Kelsey Hayes*** Economic duress

o The price hike was being forced upon them, and they had no alternatives but to accept the higher prices

There was no other supplier who could supply the castings needed for the brake assemblies

o The court says that whether there was “no reasonable alternative” is to be determined at trial, but Kelsey-Hayes provided enough evidence that it may have been the case

Improper Threato Under the old theory of duress, you had to show that the threat was illegal

o Now all you have to show under RST 176 is that the threat was wrongful Galtaco was threatening to stop supplying the casings unless Kelsey-Hayes agreed to

the higher prices

Brookside v. Mama Rizzo*1. Facts of the case

a. Parties entered into a series of oral agreements to change prices, despite a “no oral modification” clause

2. Question: Were the oral modifications enforceable?3. Holding: The oral agreements were enforceable because the goods were delivered and accepted at

the modified pricea. UCC 2-201(3)(c): Statute of Frauds is overcome if goods are delivered and accepted or if

payment is made and acceptedb. Invoices and receipts all reflected higher prices; there was no surprise

CONSEQUENCES OF NONPERFORMANCE

EXPRESS CONDITIONS

Express Condition: An event that is not certain to occur, but must occur before any performance under the contract will become due

1. If the condition is satisfied, the contract goes forward2. If the condition is not satisfied, the contract collapses

Conditions Precedent: Conditions that must occur before performance is due

Conditions Subsequent: Performance has started, but some later condition discharges performance (rare)

Promise: A statement of commitment or insurance; the undertaking of a duty to make something happen1. Unfulfilled promise Damages for breach2. Unfulfilled condition Other side is discharged, but cannot sue for breach

Forfeiture: The loss of compensation or an investment that occurs after one party has partly performed or made preparations for performance

1. Court must balance the extent of the forfeiture with the importance of the occurrence of the condition

Waivers can be retracted UNLESS:1. One side pays for the waiver2. There was reasonable reliance on the waiver by the other party

RST 227: Promises and Conditions (hierarchy)1. Pure Promise/Covenant

a. The fulfillment of the promise is not required as an express condition to the duties of the other party

b. The failure to fulfill a promise is a breach, but does NOT discharge the other side from performing

2. Pure/Express Conditiona. Failure of the condition discharges the other party from performing

3. Promissory Conditiona. Both a promise and an express condition

b. Failure to perform is a breach (for which there may be damages) AND discharges the other party from performing

Order of Performance1. When performance can be rendered simultaneously, each performance is a condition of the other2. When one performance takes a long time and the other takes a short time, the long performance

has to be done before the short one

RST 237: It is an implied condition of each party’s duty to perform that there has not been a prior uncured breach of duty

Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co.1. Facts of the case

a. OAD was in negotiations with Oppenheimer to sublease propertyb. The sublease would go forward if two conditions were met:

i. The landlord had to agree to the subleaseii. The landlord had to give written consent to tenant work

c. The first condition was satisfied, but Oppenheimer only gave oral notice that the landlord had consented, and there was no written consent provided by the date specified

d. OAD refused to go forward with the sublease because the condition wasn’t mete. Oppenheimer claimed that because they had “substantially performed” by obtaining oral

consent, eventually provided written consent, and OAD wasn’t harmed, it didn’t matter2. Question: Should the contract be upheld despite the failure of the condition?3. Holding: Part performance does NOT excuse the failure of the condition

a. This was an express condition, so if it is not satisfied exactly as written the condition fails and the other side is discharged from performance

b. Only full performance would be reason to hold OAD to the contract

MATERIAL BREACH

Three Categories of Breach1. Partial Brach (RST 236-2)

a. Plaintiff’s duty to perform is NOT dischargedb. Plaintiff can sue for direct damages (damages directly caused by the breach), but not for

total breach damages (damages arising from the failure of the entire contract)2. Material Breach (RST 241)

a. Plaintiff is not discharged from the contract, but can suspend performance until the breach is cured

3. Total Breach (RST 242-243)a. Plaintiff is discharged, contract is terminated, plaintiff can sue for full damages or other

remedies

RST 241: Was there a partial breach? (Balancing Test)1. To what extent is the breach depriving the injured party of the benefits that he or she reasonably

expected from full performance?2. To what extent can the plaintiff be adequately compensated by partial breach damages?

a. What has the plaintiff invested in the contract? What are they going to lose?b. What has the breaching party put into the contract that they can’t get out?

3. To what extent is it likely that the breaching party will cure his performance?a. If the problem can be fixed, it’s less likely that a material breach has occurred

RST 242: When does a material breach become total?1. A breach becomes total if the plaintiff makes a reasonable demand for a cure and the breaching

party does not cute within a reasonable time

Jacobs & Young v. Kent1. Facts of the case

a. Contractor was working on a very large, fancy home and used a different pipe than the owner had specified

b. The owner failed to make the final payment to the contractor because he thought that the contractor’s mistake was a total breach

c. It would have been nearly impossible to take out and replace all the pipe2. Question: Was the use of the wrong pipe a total breach?3. Holding: The contractor’s mistake was only a partial breach; owner still had to pay

a. The owner was not deprived of a significant benefit (the pipes were comparable) b. The owner should be compensated with partial breach damages (the difference in market

value between the Reading pipe and the other brand)c. Jacobs & Young would suffer a major forfeiture if they were forced to cure the breachd. Jacobs & Young were not willfully negligent

4. Dissent: The use of Reading pipe was a condition that should have been followed

Sackett v. Spindler1. Facts of the case

a. Spindler contracted to sell newspaper shares to Sackett... Contract price was $85,000, Sackett paid $30,000, Spindler later sold the shares for $21,000

b. Spindler’s net loss from the breach was $34,000c. Sackett sued Spindler for the $30,000 he originally paid; Spindler countersues for $34k

2. Question: Was this a partial or material breach?3. Holding: The breach was material

a. Spindler was deprived of a benefit he reasonably expectedb. Partial breach damages (interest) would be insufficient, because they wouldn’t cover the

necessary costs to keep the newspaper alivec. Sackett was unlikely to cure and was acting in bad faithd. Sackett will suffer some forfeiture, but the other factors weigh heavily in Spindler’s favor

ANTICIPATORY REPUDIATION

RST 243: Repudiating a Contract1. Repudiation is immediately equivalent to a breach

a. When a party repudiates a future duty of performance, their repudiation is treated as non-performance, even if the performance was not yet due

b. To determine whether a repudiation is serious, determine how much of the contract the party is repudiating, and the importance of that part

2. If a party accepts repudiation, there is no cure – it is final and irrevocable3. Breach of Performance + Repudiation = Total Breach

a. No need to inquire about seriousness of breach4. If a party only repudiates one installment of an installment contract, the breach is only partial

Request for Adequate Assurances: Allows parties who think there may be an impending breach to determine whether a breach will occur and whether it will be material

1. Response must be given in a reasonable time not to exceed 30 days2. Failure to respond = Total breach

3. There must be a good reason for the requesta. Failure to payb. Discovering that the party is breaching other contracts/failing to pay other creditorsc. Credible rumors may be enough

4. Cannot be used to change a contract or make it better

Truman Flatt & Sons v. Schupf1. Facts of the case

a. Buyer’s obligation to purchase the property was contingent on their ability to get a zoning variance to build an asphalt plant

i. If the buyer can’t get the variance, the buyer may choose whether to void the contract or waive the condition

ii. The failure of the condition is NOT an excuse for the buyer to get out of the contractb. Buyer realized he couldn’t get the variance but was still interested in the property, so he

requested a modification of the purchase price (offered to buy it for $140k instead of $160)c. When the seller refused the modification, the buyer attempted to still purchase it for $160kd. Seller said the contract failed when the buyer repudiated it by requesting the modification

2. Question: Did the request for modification amount to a repudiation?3. Holding: The request did NOT amount to an anticipatory repudiation

a. Anticipatory repudiations must be completely clear and unambiguousb. Even if there was a repudiation, it was quickly retracted

Hornell Brewing Co. v. Spry1. Facts of the case

a. Hornell granted distribution rights to Spry, but they never signed a written contractb. The parties actions constituted a distributorship, requiring total breach to release Hornellc. Spry was consistently late in payment, ends up $80,000 in debt, bounced checks, etc.d. Hornell makes a request for assurances, Spry gives assurance that he has a credit line, and a

later request for assurance was never responded to2. Issue: Was the contract breached?3. Holding: Yes, this was a total breach

a. Spry’s failure to respond to request for assurances amounts to a total breach, giving the requesting party the right to terminate the agreement

b. Hornell’s requests were reasonable – the first time, Spry had failed to pay; the second time, Hornell had learned that Spry’s operation was a sham

EXPECTATION DAMAGES

COMPUTING VALUE OF EXPECTATION

RST 344: Damages and remedies reflect the following interests1. Expectation interest2. Reliance interest3. Restitution interest

Expectation Damages1. Preferred remedy2. “Benefit of the bargain”

a. Forward-looking remedyb. What would the plaintiff have gained if the contract had been completed?

Lost Value of Performance + (Incidental + Consequential Damages) – Cost Avoided – Loss Avoided

LVP + (ID + CD) – CA – LA

Expectation damages for Real Estate Contracts1. If a buyer breaches, damages are Contract Price – Market Price

a. If the contract price was better than market value, seller should be able to get the benefit of the better price

2. Determining market valuea. Resale price within reasonable time period (approx. 1 year)

RST 348(2): For defective/incomplete construction, plaintiff is entitled to the following damages...1. If the loss in value is not proved with sufficient certainty,

a. Diminution of market value, ORb. Cost of remedying the defect

i. IF the cost is not disproportionate to the probable loss in value to the injured party

Handicapped Children’s Education Board v. Lukaszewski1. Facts of the case

a. Lukaszewski signed a contract to serve as a speech therapist at a school 45 min from her house, but she was then offered a higher paying job at a day care nearer her house

b. She told the Board she wanted to resign but they refused to release her from the contractc. She suffered high blood pressure as a result of the stress and resigned for health reasonsd. The board could only find one qualified person to replace her, and because the new teacher

had more experience they had to pay her more2. Issue: Did Lukaszewski breach? What damages is the Board entitled to?3. Holding: Lukaszweski breached, Board entitled to the difference of the contract prices

a. The Board had the right to hire someone at least as good as Lukaszewskib. They didn’t choose to hire the more experienced teacher; that was their only option, so

they properly mitigated their damages as best they couldc. They can recover the additional compensation they were required to pay the replacement

American Standard, Inc. v. Schechtman1. Facts of the Case

a. Plaintiff wanted to convert an old manufacturing plant into a vacant lot for resale, so they sold the equipment on the property to defendant, and in return the defendant agreed to remove all the structures on the property and re-grade the lot

b. Defendant took the equipment but didn’t properly demolish the building/grade the land2. Issue: Was this a breach? What kind?3. Holding: This was a partial breach of the contract

a. The deviation was material, because the lot was uneven and not appropriate for resaleb. Damages = Cost of completion

i. This is the NY rule; RST would have used diminution in value

RESTRICTIONS ON EXPECTATION DAMAGES

Reliance Damages1. Used when expectation damages are too uncertain/speculative2. Unwinds the contract

a. Backwards-looking remedyb. Puts the plaintiff back in the position he would’ve been in had the contract not been made

c. Reimburses for...i. Out of pocket expenses

ii. Preparation costsiii. Foregone opportunities

Requirements for Lost Profits1. Loss must have flowed directly from the breach2. There must have been actual or constructive notice to the defendant about what the

special/consequential/indirect damages would be if the contract were breacheda. Notice must have been given at the time of making the contractb. No special notice needed if the damages were foreseeable

RST 351: No actual notice required if defendant had reason to know of the special circumstances

Calculation of damages doesn’t have to be exact, but must be reasonable/likely1. New business are less likely to be eligible for lost profits because we don’t know if they would

have succeeded despite the breach

Direct damages flowing from a breach are not likely to have a foreseeability problem, but still must be proven with reasonable certainty

Hadley v. Baxendale1. Facts of the case

a. Production at a mill was stopped when shaft broke; the shaft was sent out for repair but there was a shipping delay and the mill lost profits

2. Issue: Can the mill recover lost profits from the shipping company?3. Holding: No, the shipping company is not liable

a. They didn’t have reason to know how important the shaft was; they weren’t on noticeb. Most mills would have had a backup

Florafax International v. GTE Market Resources1. Facts of the case

a. Florafax, a flower company, signed a contract with Bellerose, whereby Florafax would handle Bellerose’s telephone orders

b. Florafax contracted with GTE to handle the callsc. GTE knew the Florafax contract would not be very profitabled. The Florafax account was losing money, so GTE cut its staffe. GTE couldn’t handle all the calls on Mothers Day, so Bellerose lost business and canceled

their contract with Florafax as a result2. Issue: What damages are Florafax entitled to?3. Holding: Florafax is entitled to lost profit damages

a. Lost profits were foreseeable... GTE knew that Florafax had third-party contracts that were contingent on GTE’s services

b. Both sides used experts to value the loss, jury gave an award for $750,000c. Lost profits could be reasonable calculated because Bellerose had been in business a while

Pauline’s Chicken Villa v. KFC1. Facts of the Case

a. Pauline operated many chicken restaurants around Kentuckyb. She contracted with KFC to open another one; KFC breached and Pauline sued

2. Holding: Pauline entitled to lost profits

a. “New business rule” didn’t apply because Pauline had successfully operated several restaurants and KFC was a well-established franchise

MITIGATION OF DAMAGES

RST 350: Duty to Mitigate Damages1. Limits the amount of damages a plaintiff can recover2. You must not “pile up” damages that could have been avoided3. Duty to mitigate doesn’t apply if it would cause undue burden or humiliation

Duty to Mitigate in Employment1. Duty to mitigate includes finding other work after wrongful termination

a. BUT, the positions must be substantially similar in terms of pay, responsibilities and status

Rockingham County v. Luten Bridge1. Facts of the case

a. County commission authorizes the building of a bridge in the middle of a forestb. When control of the commission switches they revoke the contractc. The contractor continues building (seems to hope control would switch back) and then

sues for the total cost of construction2. Issue: Is the contractor entitled to damages? Should be have mitigated?3. Holding: There was a duty to mitigate; awarded only expectation damages

a. The contractor had no right to continue building after the contract was repudiated, so he’s not entitled to damages for the total cost of construction

Manness v. Collins***

Boehm v. American Broadcasting Company1. Facts of the case

a. Boehm was a VP at ABC Radio for 14 years, had a guaranteed contract for salary + commission until retirement

b. He was wrongfully terminated, but refused a different position at ABC with the same salary2. Issue: Did Boehm fail to mitigate by refusing the substitute job offer?3. Holding: No, Boehm did not fail to mitigate

a. The positions were not substantially similar – the replacement job had no commission and was of lower status

b. Surprisingly, they award Boehm “front pay” from the time of the trial to his retirement

Jetz Service Co. v. Salina Properties1. Facts of the case

a. Jetz leased space in Salina’s apartment complex and installed laundry machinesb. They signed a 3 year lease, but Salina replaced Jetz’ machines with their own 16 months

before the lease endedc. Jetz later installed some of those machines on another property

2. Issue: What type of damages is Jetz entitled to?3. Holding: Jetz is entitled to lost profits

a. Lost profits were foreseeable and flowed directly from the breachb. Jetz is a “lost volume lessee,” meaning he was not required to mitigate damages

i. He could have kept the machines at Salina AND installed other ones elsewhere, so he was still losing out as a result of Salina’s breach despite re-leasing the machines

c. Damages calculated by using average profits during the contract period

NONRECOVERABLE DAMAGES

Damages generally not recoverable:1. Attorneys fees

a. Exceptions: i. Contractual provision allowing recovery

ii. Statute allowing recovery2. Emotional distress3. Punitive damages

Bad faith behavior is not a reason to grant attorneys fees1. See Zapata v. Hearthside2. Breach of contract is not inherently wrongful3. Contract law is strict liability, not fault-based, so damages shouldn’t be based on fault

English v. American Rule (Rationale)1. English rule discourages people from taking a change

a. Consumer cases might not be brought, because smaller parties may not be able to afford attorneys fees so the wont bring suit at all

2. American rule deprives plaintiff of full compensationa. Encourages frivolous defenses, but also could encourage frivolous litigation in hopes of

getting a settlement

Requirements for Emotional Distress Damages1. The breach directly caused physical harm2. There was fraud or coercion3. Emotional distress was a likely result

a. If the contract specifically concerned someone’s well-being, or in cases of common carriers/innkeepers

4. The breach was tortiousa. Some independent duty arising from tort law was violated

You can only get punitive damages when the breach of contract led to an independent tort for which punitive damages are available

Zapata Hermanos v. Hearthside Baking Co.1. Facts of the case

a. Zapata (Mexican cookie manufacturer) sued Lennell cookie company for paymentb. Lennell owed Zapata $900,000 for 110 invoicesc. Case governed by the CISG, but American law governs where the CISG is silent

2. Issue: Are attorneys fees recoverable?3. Holding: No, attorneys fees are not recoverable

a. CISG is silent on the issue of attorneys fees, so American rule governsi. If the CISG had said something, it would apply, because it is a federal treaty and

therefore preempts state lawb. Nothing in the contract provided for the recovery of attorneys feesc. Attorneys fees may not be granted for bad faith behavior

Erlich v. Menezes1. Facts of the case

a. A couple wanted to build their “dream house” but the contractor completed ruined the construction... the couple lived in the house for 5 years but were in constant fear of it collapsing and didn’t have the money to move elsewhere

2. Issue: Can the Erlichs recover for emotional distress?3. Holding: No, emotional distress damages are not appropriate here

a. People should know that building a house will be a stressful undertakingb. Allowing emotional distress damages would severely harm the construction industryc. There was no direct physical harm (which is the standard for the tort)

JUSTIFICATIONS FOR THE EXPECTATION DAMAGES RULE

Policy for preferring expectation damages1. Expectation is a better protector of the party’s reliance interest than reliance damages

a. Reliance damages don’t allow recovery for planning and preparation costs incurred before the contract was made

b. Reliance damages only allow recovery for foregone opportunities if they were foreseeable2. We should encourage efficient breaches when continued performance doesn’t make sense

a. Posner’s view – Goods and services should go to the highest bidderb. Price is the best indicator of highest/best use

Arguments against efficient breach1. Moral argument

a. Contract law should not be insulated from moral considerationsb. Contracts are based on trust and confidence, which is undermined when there’s a breach

2. Pragmatic argumentsa. People will make less contracts if they expect they might be brokenb. A breached contract results in multiple transactions/higher transaction costsc. Efficient breach theory doesn’t take into account potential for reputational harm

Disgorgement Theory1. Opposite of efficient breach doctrine

a. Punishes the breaching party rather than rewarding himb. Breaching party is forced to give up the gains of his breach

i. Common remedy for breach of fiduciary duty

Roth v. Speck***1. Facts of the Case

a. Speck was a hairdresser who left his salon job 6 months into a year long contractb. He had been making $75/week, then made $100/week at his new jobc. Hairdresser couldn’t find someone to replace him

2. Issue: Is the plaintiff entitled to damages for Speck’s breach?3. Holding: Speck should pay $25/week for the rest of his contract period

a. Plaintiff recovers “lost value” – the different of the employment costsb. Speck is essentially forced to give up the ill-gotten gains of his breachc. Court uses $100 figure to estimate the value of Speck’s service

ALTERNATIVES TO EXPECTATION DAMAGES

RELIANCE DAMAGES

Three types of reliance damages

1. Part performance2. Preparation for performance3. Foregone opportunities

Generally, reliance costs incurred before the contract is made aren’t recoverable1. Some courts have allowed pre-contract reliance damages if the defendant was on notice that

expenditures had been made and would be lost if the contract were breached

RST 90: In promissory estoppel cases, the promise can be enforced as if it were a contract, and the remedy may be limited as justice requires

1. Expectation damages are a possibility, but there is NO presumption in their favora. You would have to prove that expectation damages would be appropriateb. Factors include the extent to which the plaintiff actually relied, and whether reliance was

reasonable

You can’t do better from reliance damages than you would under expectation damages1. Any net loss from the contract must be subtracted from reliance damages

Wartzman v. Hightower1. Facts of the case

a. Promoters coordinated a stunt where someone would break the record for flagpole sitting while living in a “house” atop a pole

b. Promoters put up $20,000 and got several investors for the projectc. They hired Wartzman, an attorney, to incorporate the venture, but the attorneys failed to

make the required disclosures and the project fell apart2. Issue: Should Wartzman be held liable for Hightower’s losses?3. Holding: Wartzman is liable for reliance damages

a. Wartzman’s failures were the root cause of the lossesb. It was foreseeable that the venture would fail if it couldn’t sell stockc. It was unreasonable to expect Hightower to mitigate damages by hiring a securities expert

Walser v. Toyota1. Facts of the case

a. Walser was negotiating with Toyota to start a Lexus dealership; no contract was signed but there were a series of oral assurances

b. Walser’s father bought land for the dealership and incurred other expenses, but Toyota decided not to go forward with the agreement

2. Issue: Should plaintiffs in a promissory estoppel case ever get more than reliance damages? Could Walser recover expectation damages?

3. Holding: Walser is not entitled to recover expectation damages/lost profitsa. There was never a final contract with Toyotab. There were several conditions in the contract that Walser may not have been able to meetc. Lexus was not a well-established brand, so it was hard to predict lost profits

RESTITUTIONARY DAMAGES

Restitution is almost completely focused on the benefit to the defendant, not the cost to the plaintiff1. Used when part performance results in unjust enrichment to the breaching party2. Especially useful when the benefit conferred is greater than expected

RST 374: Even total breachers can get restitution, subject to certain limitations

1. They can only obtain the lesser of fair market value or wealth enhancementa. Restitution normally entitles you to the greater of the two

2. They can never get more than a “pro rata” part of the contract pricea. If you perform 20% of the contract, you can’t get more than 20% of the contract price

3. Any claim made in restitution must be offset against damages they caused the other party

There cannot be restitution for partial breach, because at that point the parties are still bound by the contract... you can only sue for direct damages for the part of the contract that wasn’t paid for

Coastal Steel v. Algernon Blair1. Facts of the case

a. General contractor (Blair) breached contract with subcontractor (Coastal)b. Blair owed Coastal $37,000 for servicesc. It would have cost Coastal more than $37,000 to finish the contract, so Blair argued that

they weren’t actually harmed (net loss must be subtracted from reliance damages)2. Issue: Can Coastal sue “off the contract” for restitution, not reliance damages?3. Holding: Yes, Blair is liable for restitution damages

a. After a total breach, the plaintiff can either sue “on the contract” for expectation/reliance damages, or “off the contract” for restitution

b. Not universally accepted

Lancellotti v. Thomas1. Facts of the case

a. Lancelotti paid $25,000 in upfront costs, then breached a contractb. He sues to get the $25k back

2. Issue: Can a breaching party get restitution?3. Holding: Yes, Lancelotti is entitled to restitution

a. Even a willful breacher can get restitution, subject to some limitationsb. The rent he owed the defendant was subtracted from his $25,000 in damages

SPECIFIC PERFORMANCE

Equitable remedies1. Specific performance2. Injunctions

a. Used only when damages are inadequate!

Injunctions for Employment Contracts1. Employer may be entitled to an injunction if an employee is about to go to a competitor and the

employer can show the potential for irreparable harm2. An injunction may also be appropriate if the contract included a valid post-employment covenant

not to competea. Common for highly-skilled employeesb. Will be honored as long as reasonable in scope/time

RST 365: The court can decline to grant specific performance for public policy reasons

City Stores v. Ammerman1. Facts of the case

a. Defendants (property developers) asks Lansburghs (a department store) to support them in front of the Fairfax County Zoning Committee

b. In exchange, defendants promised to allow Lansburghs to join the shopping center at a rate comparable to the other stores

c. Lansburghs writes a letter supporting the project, but defendants decide to give the space in the shopping center to Sears instead

2. Issue: Is Lansburghs entitled to an injunction/specific performance?3. Holding: Yes, the appropriate remedy is specific performance

a. Defendant’s letter was a binding unilateral contract which gave them an option to accept a lease at the shopping center

b. Services performed by defendant constitute adequate considerationc. Money damages wouldn’t adequately compensate them for loss of the right to the lease

ABC v. Wolf1. Facts of the case

a. Involved a very complicated employment contract between ABC and Wolfb. Wolf eventually left ABC for a competitor, allegedly breaking covenant not to compete

2. Issue: Should ABC be issued an injunction to stop Wolf from going to a competitor?3. Holding: No, there was no covenant not to compete in the contract

a. Nothing in the extension agreement bound Wolf to stay with ABCb. ABC was a sophisticated party and should have known what they were getting into

AGREED REMEDIES

Liquidated Damages1. Damages agreed upon in advance

a. Parties agree that if a contract is breached, the breaching party will pay a certain amountb. The amount agreed upon must be reasonable

i. To determine reasonableness, ask if it was a reasonable estimate of what damages could be

BUYERS REMEDIES UNDER THE UCC

Warranties1. Express warranties2. Implied warranty of merchantability3. Implied warrant of fitness

Express Warranties1. Created through...

a. Assurances, promises or affirmations of facti. These assurances must be the “basis of the bargain”

ii. Basis of the bargain = Rebuttable presumption of reliance1. The buyer doesn’t have to show that he actually relied on the assurances, but

the seller can prove that the buyer knew the warrant was false or shouldn’t have relied on it

b. Descriptions of goods on packaging, etc.c. Samples or models that purport to be like the product

2. A statement is a valid warranty (not just puffery) if...a. It is objectively verifiable, and can be proved true or falseb. It is reasonably specificc. The seller did not hedge his statements or express them as mere opiniond. The seller did not reasonably think the buyer knew more than he did

Implied Warranty of Merchantability1. Arises automatically if the seller is a merchant2. Requirements

a. Are the goods of acceptable quality in the trade?b. Are the goods of fair-average quality?c. Are the goods fit for the ordinary purpose for which they’re intended? (Most important)

3. If buyer inspects the goods, there is no implied warranty as to any apparent defects

Implied Warrant of Fitness1. Must involve a particular purpose that is more specific/demanding than the ordinary purpose2. Seller must have reason to know the purpose3. Seller must know the buyer is relying on the seller’s skills when purchasing the goods

a. Doesn’t need to be a formalized understanding

Multiple Warranties (UCC 2-317)1. Warranties are read cumulatively

a. Express warranties trump implied warrantiesb. Implied warranties of fitness trump express warranties

Disclaimer of Implied Warranties (UCC 2-316)1. To disclaim an implied warranty of merchantability...

a. You must use the word “merchantability” in the disclaimerb. Disclaimer can be oral or writtenc. If written, it must be conspicuous

i. Language must be highlighted, bolded, etc.ii. Judge, not jury, decides whether something was conspicuous enough

2. To disclaim an implied warranty of fitness...a. Disclaimer must be in writingb. Disclaimer mist be conspicuous

3. Using the words “as is” disclaims all warrantiesa. Not necessary to use the work “merchantability”b. Oral “as is” disclaimer good enough to disclaim merchantability but not fitness

Remedies for Breach of Warranty (2-719)1. Seller can specify an exclusive remedy

a. Example: Repair, replacementb. Unless specified, buyer can choose other remedies

2. If for some reason the exclusive remedy is inadequate, broader remedies are availablea. Example: If the goods have significant inherent defects that cant be fixed, or if the defect

caused a catastrophe

Accepting/Rejecting Goods1. Buyer accepts by holding on to the goods without giving reasonable notice of rejection

a. Seller still owns the goods until buyer accepts, so buyer cannot change the goodsb. Changing the goods means accepting ownership

2. If a buyer rejects and the time for performance has not expired, the seller can cure/remedy any non-conformities (UCC 2-508)

3. Acceptance may be revoked if... (UCC 2-608)a. Buyer discovers a substantial non-conformity/hidden defect, ORb. Seller promised to fix a defect and never did

i. The seller has no right to cure after the revocation of acceptance4. If seller rejects revocation, the buyer can cancel the contract and recover the purchase price and

other damages (UCC 2-711)

Measuring Lost Value of Performance1. Preferred method = “Cover” (UCC 2-712)

a. Buyer must attempt to find commercially reasonably substitute goodsb. Buyer is entitled to the difference between the contract price and the replacement pricec. If the replacement price was less than the contract price, buyer is not entitled to damages

2. Market Damages (UCC 2-713)a. Buyer may recover the difference between the contract price and the market value of the

goods on the date the buyer learned of the breach3. Consequential Damages (UCC 2-715)

a. Buyer is not entitled to consequential damages if he could have mitigated the damages by buying a replacement