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    K II OutlineProf. RoySpring 2005Joshua KyleDEFENSES

    Age (Infancy)IncapacityEconomic DuressUndue InfluenceMisrepresentation/Non-DisclosureUnconscionabilityPublic Policy

    Misrepresentation

    R. 164: Misrepresentation exists when:

    1) Assent is induced by a material misrepresentation or fraud2) P justifiably relies

    R. 168: Reliance is justifiable for an opinion given when it expresses a belief. Mereopinions are okay. However a purported statement of opinion can amount to amisrepresentation of fact.

    R. 169: An assertion of opinion cannot be relied upon as fact unless:a) Relationship b/t the two is one of trust and confidence

    b) Believe person giving opinion has special skill/knowledgec) Special susceptibility, e.g. old, widowed

    Also, look at the list of factors the court should consider in disclosure issues: Difference in the degree of intelligence Relation the parties bear to each other Manner the info is acquired Nature of the fact not disclosed Importance of the fact not disclosed Any conduct of the person not disclosing something to prevent discovery

    Requires some sort of affirmative statement, some assertion.Misrepresentation can be innocent or negligent. It doesnt necessarily have to befraudulent.

    Syester v. Banta- Old woman takes dance lessons from company. She sues, then wascoaxed into signing a release. The dance cos opinions were held to be assertions of facts, thus, misrepresentations.

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    Nondisclosure

    R. 161: When nondisclosure is equivalent to an assertion that the fact does not exist:a) when disclosure is necessary to correct a previous assertion.

    b) where disclosure would correct a mistake of the other party as to a basic

    assumption.c) where disclosure would correct a mistake of the other party as to the contentsor effects of a writing.d) where other person is entitled to know the fact b/c of a relation of trust andconfidence b/t them.

    Hill v. Jones- buyer asked about termite damage, and seller didnt disclose certain infodealing w/ this . Failure to disclose is the same as misrepresentation when there is a dutyto disclose.

    If something is easily discoverable, it cannot later be argued that nondisclosure was present.

    Nondisclosure deals w/ latent defects- something not easily discoverable by ordinaryobservation or casual inquiry.When the seller knows the facts materially affecting the value of the property whichare not readily observable and are not known to buyer, seller is under a duty todisclose them to the buyer.Type of thing must be material.Remember, if seller didnt know, there is no nondisclosure.If you see deception, look for defenses of misrepresentation and nondisclosure.CL no duty to disclose.

    Where the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts arenot known to, or within the reach of the diligent attention and observation of the buyer,the seller is under a duty to disclose them to the buyer.

    When one conveys a false impression by the disclosure of some facts and theconcealment of others, such concealment is in effect a false representation that what isdisclosed is the whole truth.

    UnconscionabilityInvolves both an unfair bargain and the bargaining process itself The idea that a grossly unfair bargain should be unenforceable.Two elements to Unconscionability:

    o Procedural: the absence of a meaningful choice.Gross inequality of bargaining power Circumstances surrounding the K (lack of education, financialdistress)Misrepresentations

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    Lack of understandingFine printLack of other options/alternativesAbsence of other sellers to provide the goods.

    o Substantive: the terms of the K are unfair or unreasonable

    Commercial needs (business justifications?)Customs/business practices (would other Ds in same field havedone this?)Common provision?Does is shock the conscience ?D must convince that provision is valid and needed.

    Must have both to have unconscionability .Unconscionability is judged at the time the K is made, not from hindsight.It is decided as a matter-of-law (by the judge)Are we going to protect people b/c of gross inequality of bargaining, and if so, how

    will we determine that?This forces judges to make assumptions and stereotypes.Advantages of doctrine:

    Dispels unfair practicesDiscourages unconscionable termsGives cts the ability to take a proactive approach when the leg has

    been silentHelps those in need.

    Disadvantages :Creates uncertaintyAllows cts to change agreementsPaternalistic

    R. 208: If a term is unconscionable, cts may:o knock out termo refuse to enforce K o limit application of unconscionable term

    UCC 2-302: Test to determine unconscionability:Whether in light of the general commercial background, theclause involved is so one sided as to be unconscionable underthe circumstances existing at the time of the making of the K.

    Williams v. Walker-Thomas Furniture- Furniture store sold uneducated lady

    furniture. K provision kept balance due on all items purchased. Term haledunconscionable b/c of lack of commercial needs and confusing term.

    Adkins v. Labor Ready- Employee of temporary employment agency claimsarbitration clause in employment K is unconscionable. This goes to substantiveunconscionability- argues its too costly. However, P presents no evidence of actualcosts. Arbitration term not held unconscionable.Cooper v. MRM Investments- employee hired by KFC/MRM claims arbitrationagreement is unconscionable. P claims procedural b/c of lack of bargaining power

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    and lack of other options; substantive b/c of requirement that she pay for arbitration.P presents evidence showing her income and the costs of arbitration. Ps right to acourt override policy favoring arbitration. Arbitration term ruled unconscionable.Note the two different doctrines the cts adopt in Adkins and Cooper . Ctssometimes follow their own policy.

    A contract is unconscionable if the inequality of the bargain is so manifest as to shock the judgment of a person of common sense (procedural), and where the terms are sooppressive that no reasonable person would make them on one hand, and no honest and

    fair person would accept them on the other (substantive).

    Public PolicyDefense re: the substance of agreement itself.The process of K formation may be untainted, but the K may be unenforceable b/c theK itself runs directly contrary to public policy.Three ways K may violate PP :

    o Legislature says these types of agreements are unenforceable.o Statutes prohibit certain activity.o Ct decides so.

    Two sides: Freedom of K v. Public Policy :o Freedom of K: Parties should get what they bargained for.o Public Policy: moral issues

    Restrictive Covenants: Whether K that bars one party from competing withanother can be made (Valley Medical Specialists v. Farber )

    Rules:o Per se rule (regarding doctors): Restrictive covenants are unenforceable

    b/c they violate the trust and confidence that a client/patient has in their particular practitioner.

    o Reasonableness Rule: if a ct believes a provision to be against public policy, then ct can modify provision to make K reasonable.

    Ct looks at: Undue hardship on employee Interest of public Legitimate business interest of employer

    Make arguments for/against enforcement: For: Freedom of K, autonomy, party is educated, being

    compensated for provision. Against: Unfair, bad for public, interferes w/ doctor/patient

    relationshipo R. 187: For a noncompetition agreement to be valid, it must be ancillary

    to other Ks, i.e. a separate agreement.o R. 188: A noncompetition agreement that is ancillary is unreasonable if

    the restraint is greater than legitimate business interests requireand will cause injury to the public

    This includes:

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    promise by seller not to compete w/ buyer promise by employee not to compete w/ employer promise by partner not to compete w/ partnership

    Spousal Relationship: Whether one spouse can bargain with the other using

    services that could be considered marital duties.o Ct may use pre-existing legal duty rule in combination w/ general public

    policy statutes to bar spouse from receiving compensation. Borellio In Borelli , a statute specifically stated that K to compensate for wifes

    nursing service to husband should be invalidated. B/c statute doesntspecifically state Ks like this must be unenforceable, make argumentsfor/against:

    For: marriage should not preclude freedom of K; not appropriatefor ct to have idealist view of marriage.Against: pre-existing legal duty; enforces negative view of marriage; marriage is not business-like.Then make judicial determination.

    Surrogate Mothers: Whether a K agreeing to pay a woman a certain sum of money to carry a child to term is unenforceable.

    o States differ over how to address this issue.o Some cts use statute from similar piece of legislation, e.g. adoption laws,

    to establish a rule absent legislative precedent. RR. V. MH (guidelines provided mom must keep child four days and mom can be paid only for medical expenses).

    o Factors ct will take into consideration:

    Consent of surrogate and her husbandMother be an adult w/ one successful pregnancyMother be evaluated for soundnessFathers wife incapable of bearing children.Intended parents suitableAll parties must seek legal council

    o Make arguments for/against enforcementFor: not money-making; freedom of K; no genetic bond; knowingwaiver; expectation of intended parents; contribution of father.Against: commodification of women/babies; best interest of childis more important; sweat equity; emotional attachment

    o Ks for Frozen Embryos: have same enforcement problems as surrogacyKs. Some statutes hold these Ks against public policy. Problems arisewhen couples freeze embryos, then split. Forced procreation is not ctsgoal. Same arguments can be made here as for surrogacy Ks.

    o Note: Sources of Public Policy include constitutional provisions, statutes,and well-established precedent.

    Two types of statutes:

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    Specific statutes prohibiting Ks. General statutes prohibiting conduct (majority)

    o When analyzing PP defense (steps):What PP is implicated?

    What is the source of the PP?What are the arguments?

    For enforcement? Against enforcement?

    What do Restatements provide? Not necessarily dispositive,but discuss for points!

    JUSTIFICATION FOR NONPERFORMANCE

    Two types of justificationso Mistakes - K based on something parties believed to be true, but wasnt.Occurs before K entered into.

    o Changed Circumstances - things that happen after the parties enter into anagreement.

    Problems can sometimes be placed into both categories when it is not known if theoccurrence happened prior to the K being entered into, or after. If its not clear,discuss both mistake and changed circumstances, analyze each, and make conclusion.

    MistakeAn error of fact in existence at the time of the K that was fundamental to the premise

    of the K Occurs at time K is made.K is premised on bad information.Involves misinformation, not deception.Two questions to ask:

    o Materiality: How fundamental is the difference b/t what the partiesthought they were going to get, and what they actually got?

    o Risk: Did one party cause the mistake? Did one party agree to bear the brunt of the mistake? [boilerplate is often enough to allocate the risk Messerly ]

    Mutual MistakeR. 152 Elements of Mutual Mistake

    o The mistaken belief relates to a basic assumption upon which the K wasmade.

    o Materially affects the agreed performance.o Party seeking relief does not bear the risk of mistake.

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    R. 154: When a Party bears the Risk of Mistake:o Risk is allocated to him by agreement, e.g. as is clause (although cts

    split over this)o Party seeking relief knows he should seek out more info, but doesnt.o Ct allocates risk to him.

    Lewanee County Board of Health- Ct found mutual mistake over a basic assumptionthat property would generate income. Also, mistake materially alters K. As for lastelement, the K had an as is clause. Ct makes determination that b/c of as is

    provision, no remedy for the plaintiff, because they assumed the risk. However, asis is not always determinative, so make arguments for/against allocation of risk.

    Unilateral MistakeR. 153: Elements of Unilateral Mistake

    o Mistaken belief relates to a basic assumption upon which the K was made.o Materially affects the agreed performance.o Party seeking rescission does not bear the risk of mistake per 154 (above)

    In order to win on a claim of unilateral mistake : It occurred notwithstanding the exercise of reasonable care The other party can be placed in the status quo

    Wil-Freds- contractor made mistake when submitting bid, and attempted to correctit. Ct allowed rescission for unilateral mistake. Ct did not use Restatement approach.Instead applied reasonableness test.

    Distinguish b/t mistake of fact and mistake of judgment, although modern trend is to blend the two. A mistake of fact can be used as a defense; however, a mistake in judgment wont cut it.

    It is more common for relief to be granted for mutual mistake, than unilateral mistake b/c unilateral upsets expectations of one party.

    Changed CircumstancesEvents following K formation that are so different from the assumptions on which theK was based, that it would be unfair to hold the adversely affected party to its

    commitment.

    Impossibility:Something that is objectively impossible.E.g. tap-dancer breaking both legs.

    No one can do it. If performance is at all possible, even by another party, this defensewill fail.

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    R. 262: Death or Incapacity of Person Necessary for PerformanceIf the existence of a particular person is necessary for the performance of a duty, hisdeath or such incapacity as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the K was made.

    R. 263: Destruction, Deterioration or Failure to Come into Existence of ThingNecessary for PerformanceIf the existence of a specific thing is necessary for the performance of a duty, itsfailure to come into existence, destruction, or such deterioration as makes

    performance impracticable is an event the non-occurrence of which was a basicassumption on which the K was made.

    Frustration of Purpose: Performance is possible, but meaningless.

    Krell v. Henry- renting room for sole purpose of watching coronation parade, but parade is cancelled.

    Elements:1. Principle purpose substantially frustrated [meaningless, worthless]2. It is NOT the fault of the party seeking discharge.3. By occurrence of event, the non-occurrence of which was a basic assumption4. No risk was assumed or allocated by the K to the party seeking discharge.

    Mutual Profitability cannot be the principle purpose of the K b/c it is the basis of every K. Karl Wendt Farm Equipment .Characterize the Principal Purpose: The party asserting frustration will define the

    purpose as narrowly as possible.Roy: Frustration is NOT commonly available. It is narrowly drawn.

    R. 265: Discharge by Supervening FrustrationWhere, after a K is made, a partys principal purpose is substantially frustrated w/outhis fault by the occurrence of an event the non-occurrence of which was a basicassumption on which the K was made, his remaining duties to render performance aredischarged, unless the language or the circumstances indicate the contrary.

    Impracticability: Performance is possible, but it can only be done at some great/unexpected burden toone party.

    Elements:1. Performance made impracticable [more burdensome, difficult, costly]2. Event occurs of which the non-occurrence of was a basic assumption which the K was made.

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    3. It is NOT the fault of the party seeking discharge.4. No risk was assumed or allocated by the K to the party seeking discharge.

    A change in market conditions is insufficient to make performance impracticable.However, if an entire enterprise is affected (e.g. farm equipment industry), some

    courts may see this as impracticability. Karl Wendt Farm Equipment.Some cts may allow this defense for unforeseen market conditions, as opposed tounforeseeable.Market conditions would be the basis for an impracticability defense if it was of atremendous magnitude, e.g. Stock Market Crash of 29; unforeseeable earthquake;tsunamis, compliance with an unexpected government regulation, wartime, etc.Impracticability is decided as a matter of law.If, despite a change in circumstances, the K has another serviceable use , the K hasnot been frustrated. See Di-Chem v. Mel Frank Tool Supply.Generally, governmental orders will give rise to impracticability. See R. 264. Cf.Mel Frank Tool (property had another serviceable use).

    R. 261: Discharge by Supervening ImpracticabilityWhere, after a K is made, a partys performance is made impracticable without hisfault by the occurrence of an event the non-occurrence of which was a basicassumption, on which the K was made, his duty to render that performance isdischarged, unless the language or the circumstances indicate the contrary.

    R. 264: Prevention by Governmental Regulation or OrderIf the performance of a duty is made impracticable by having to comply w/ adomestic or foreign governmental regulation or order, that regulation or order is anevent the non-occurrence of which was a basic assumption on which the K was made.

    UCC 2-615: Impracticability: Its not a breach of K if a seller makes a K and cant perform when:

    1. An unforeseen event happens that was a basic assumption of the K wouldnthappen, or if 2. The seller is complying w/ a governmental order in good faith (even if theorder later turns out to be invalid)Limitations on Seller: The seller only gets to enjoy the protection of 2-615 if he complies w/ the next two requirements:

    1. He must evenly divide up his remaining production among hiscustomers.2. He must notify the customers of the changes.

    Comments to 2-615:Increased cost alone does not excuse performance unless:1. The rise in cost is due to some unforeseen event.2. Which alters the essential nature of the performance

    Neither is a rise or a collapse in the market itself a justification, because thats the kind of business risk that fixed price business Ksare supposed to cover.

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    But if theres a severe shortage of supplies b/c of an unforeseenevent like war, embargo, local crop failure, unforeseen shutdownof major sources of supply, etc. it is covered by this section if it:

    Causes a sharp increase in costs; or Prevents the seller from securing supplies necessary for his

    performance.

    MODIFICATIONFirst, make sure there is an existing agreement.Then, determine whether CL or UCC applies.Then, look at exceptions.

    Modification Under Common Law:CL requires separate consideration for a modification to be valid. Requires bothmore money and additional services.R. 73: Performance of a Legal Duty (Pre-Existing Legal Duty Rule)A contractual modification based on performance already required under an existingK is unenforceable for lack of consideration. Alaska Packers Assn .Exceptions: for when no consideration is given

    o R. 89 (a) and (c): Modification of Executory K A promise modifying a duty under a K not fully performed on either sideis binding if:(a) Circumstances were not anticipated by the parties when they madetheir K ( impracticability, frustration of purpose ). Note: this may be madew/ a lesser showing than using the doctrines of impracticability or frustration.(c) To the extent that justice requires enforcement in view of materialchange in position in reliance on the modification ( promissory estoppel ).This can probably be argued in every single situation. Can always arguereliance.

    Note: If circumstances change dramatically, a modification can be argued to be a bargain for a different service, thus meeting the consideration requirement.

    Modification under UCC:UCC will apply when dealing with the sale of goods.

    UCC 2-209 : An agreement modifying a contractneeds NO consideration to be binding.Comment 2 (to 2-209): Modifications must meet the test of good faith .In UCC, good faith is substituted for consideration.Is there a good faith reason for the change?

    Notice that market conditions would be sufficient to show good faith under the UCC.Under the UCC, modifications are presumptively valid. Why? B/c modificationsare everyday occurrences in the commercial world.

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    Bad faith modification : not protesting the modification.Good faith modification : promising additional duties.UCC 1-103: Cannot induce modification under duress. Kelsey Hayes v. Galtaco(economic duress). Remember, UCC allows for CL concepts such as duress.Writing Requirements to Satisfy SOF: A modification that results in a K that is

    greater or equal to $500 must be in writing. If the K was already in writing (becauseit was previously over $500), the modification must still be in writing. [Minorityrule: modifications may be oral if original K is in writing]

    o Exceptions to SOF apply to modifications:Specially manufactured goodsJudicial admissionPart performance goods received and accepted, or payment madeand accepted

    Private SOF: 2-209(2)o NOM clause: include a no oral modification (NOM) clause in the K-

    requires any modifications to be in writing. Rule: A NOM clause isgenerally enforceable under the UCC (2-209(4)).

    o However, actual later conduct can operate as a waiver. 2-209(4):Although an attempt at modification or rescission does not satisfy the[private SOF], it can operate as a waiver.

    o Waiver- voluntary relinquishment of a known right. So, if the party protesting the modification, previously waived the NOM clause byconduct (performing), the modification is valid.

    o No waiver clause: provision intended to protect the parties from anyclaim that the NOM clause has been waived.

    o However, there are exceptions to the no-waiver clause: part performance.

    Cts allow these exceptions to the no-waiver clause although the UCC doesnot provide them.o The no-waiver exceptions seem to invalidate the private SOF.o Pro: the parties did actually modify the agreement; intent of the parties;

    fairness.o Con: prevents parties from agreeing to effective waiver clause.

    Answering a UCC Modification Question:1) Make sure UCC applies (goods)2) State that no consideration is required, BUT must have good faith.3) Determine if SOF applies ($500), and if it is satisfied w/ a writing

    (modification must be in writing- note conflicting rules).4) If UCC SOF is NOT satisfied, are there exceptions? Part performance(payment made and accepted; goods recd and accepted).

    5) If there is an exception to UCC SOF, is there a private SOF (NOM and no-waiver clause)?

    6) NOM Clause: has it been waived by actual later conduct (2-209(4))?7) If NOM was waived, is there a No-Waiver clause?8) Do exceptions to no-waiver clause apply? (same UCC SOF exceptions)

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    CONSEQUENCES OF NONPERFORMANCE

    Four Question Analysis for Breach of Performance:1. Was a promise made? If so, what was promised?2. When was the promised performance due?3. Was the performance in compliance w/ the promise?4. What is the proper response to the breach?

    Question 1: Was a promise made? If so, what was promised? ( Last Semester )

    Question 2: When was the promised performance due? Four different types of conditions that tell us when the promised performance was due:

    Constructive Condition: Imposed by courts as a matter of law to try to figure out

    which party was actually supposed to perform first.Concurrent Condition: Indicate that both parties were supposed to perform at exactlythe same time. E.g. real estate transactions.Express Condition: Provision that something has to happen, and if it doesnt then oneor both parties are relieved from the obligation to perform.

    o Note: Express condition is serious , b/c if the ct finds that there was anexpress condition and it was violated, the whole deal is off. Dont look at

    performance. Courts dont like this.o Condition of Satisfaction: type of express condition where one party

    doesnt perform until they get what they specifically desire from the other party.

    Reasonable person standard: objective standard that askswhether a reasonable person would be satisfied w/ the

    performance. R. 288: should be used whenever practicable; cts prefer.

    Subjective Standard: honest satisfaction standard of person whoK benefited.

    o Arguing express condition did NOT exist:Interpretation: R. 227- If theres any doubt over what type of condition, an interpretation is preferred that avoids forfeiture, i.e. a

    presumption exists against express conditions.Waiver: R. 84- a voluntary relinquishment of a known right

    To waive, condition must be non-material . If material,consideration is required.

    May only be waived by the party for whose benefit thecondition has been included.

    o A waiver may be retracted if there is still areasonable amount of time for the other party to

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    perform the condition AND if the other party hasnot relied on the waiver.

    Estoppel (reliance): Prevents unfair assertion of rights by a party that has acted inconsistently w/ thoserights.

    Prevention: R. 245- When one party prevents an occurrence from happening, it will excuse the non-occurrence of the express condition.

    Obstruction: R. 245- The promisee mustnot hinder the fulfillment of the K.

    Bad Faith: Parties must make good faithefforts to fulfill the K.

    Forfeiture

    Question 3: Was the performance in compliance with the promise? There are threekinds of breach: Minor, Material, and Total.

    Minor Breach : Jacob & Youngs, Inc . Minor deviation from the required performance such that, generally, the breaching party will be held to havesubstantially performed.

    o The defense of substantial performance is not available for K including anexpress condition.

    o Substantial Performance:The purpose to be servedThe desire to be gratifiedThe excuse for deviation from the specificationsThe cruelty of the enforced adherence

    Material Breach R. 241 :o To determine whether theres been a material breach look at:

    Extent that the breach will deprive the injured party of the benefitwhich he reasonably expected.Extent that the inured party can be adequately compensated for the

    benefit of which hes being deprived.Extent that the breaching party will suffer forfeiture.Likelihood that the breaching party will cure his failure (takinginto account all of the circumstances including any reasonableassurances)

    Extent that the breaching party acted in good faith.o R. 237: Once a party has made a material breach,the other party is under no duty to render his remaining duties.

    Total Breach : Material nonperformance that hasnt been cured after a reasonableamount of time. Ways to be in total breach:

    o R. 242: Analysis to determine when material breach has moved to total breach. Weigh the following factors:

    Factors in R. 241

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    o Information from a reliable sourceThe standard for grounds for insecurity and adequacy of theassurance: determined according to commercial standards.If one party improperly delivers or pays for something, just

    because the other party accepts it doesnt bar him from demanding

    assurances.The party demanding assurances must be given assurance within areasonable time not exceeding 30 days. Failure to assure isrepudiation.

    Question 4: What is the proper response to the breach?Minor Breach: Because there has been substantial performance, the nonbreaching

    party must perform, but may claim compensation for any loss suffered. Either cost of completion or diminution in value might be the measure of proper damages.Material Breach: Suspend performance and provide an opportunity to cure, i.e. givereasonable opportunity for other party to complete their performance; or claimcompensation for loss suffered.Total Breach: Withhold performance completely and terminate immediately; Mayclaim complete damages for breach.

    EXPECTATION DAMAGES

    Goal: to put the NBP in the position he would have been had the K been performed.

    Loss in Value: (direct damages) the difference b/t the performance promised and the

    performance given.Other Loss: incidental and consequential damages.

    Incidental damages- additional costs incurred after the breach in a reasonableattempt to avoid loss.Consequential damages- further loss in other transactions or endeavors that weredependent upon the K.Cost Avoided: expenditures saved as a result of the breach.Loss Avoided: losses avoided in spite of the breach (mitigation, salvaging,

    reallocating)

    Alternative formula for Builders: ED= net profit + unreimbursed expenses

    Loss in Value:Builder/Owner Construction K :

    o Builder : net profit + unreimbursed expenses OR the regular expectationdamages formula.

    o Owner : Diminution in value or Cost of completion.

    KYLE 15

    Formula: E.D.= Loss in Value + Other Loss Cost Avoided Loss Avoided

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    Most jurisdictions use COC, but R. favors DIV .R. 348(2): DIV preferred over COC, but COC can be awardedwhen not clearly disproportionate . R. is NOT a majority position.Cost of completion: what it would cost to get to place had K beenenforced.

    Policy: freedom of K Arguments against COC: overcompensation. Can avoid

    overcompensation by awarding specific performance .Diminution in Value: difference in value of property as promisedand value of property as it is w/ work partially or completely done.

    Use DIV when:o a) substantial performance was made in good faith

    (Jacobs and Young);o b) Completion would be disproportionately costly

    and cause economic waste .Employee : = salary employee expected salary actually receivedEmployer : = FMV of eee services Salary K for eee.

    o If new employee is found and hired, LV is the salary paid (must bereasonable) to the new eee price K for w/ breaching eee.

    Ways to measure damages for employers:o Lost Profits (if can be proven)o Cost of Replacemento FMV of the employee

    Real Estate :o Seller : K price Fair Market Valueo Buyer : Fair Market Value K price

    Other Loss:Consequential Damages

    Limits on Consequential:o Mitigationo Certaintyability to prove the losseso Foreseeability (at time K was entered into)o Causation breach must have caused these other losses

    Foreseeability: Key is foreseeability .o Hadley v. Baxendale- NBP may recover direct damages [naturally arise

    from breach]; and consequential damage [damages contemplated by the parties at time K was made- foreseeable]. Foreseeable by the breaching party.

    o Foreseeability is determined at the time the K was made.o Lost Profits on a 3d party collateral K: If NBP, as a result of breach,

    loses profits from a collateral K, to be able to recover for the lost profits, itmust have been foreseeable . Did breaching party know or should theyhave known that K would affect collateral Ks of the NBP?

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    o Termination clauses sometimes include consequential damages and lost profits if breach occurs. If its in the K, theres not a foreseeability issue.

    Certainty: must have certainty as to the amount of damages. Not down to exact penny, but close. Documents and invoices help to calculate.Causation: was the NBP the cause of the lost profits from the collateral K? If a

    party had a right to terminate, they can make the argument that it must be somelimitation on damages. Damages must be caused by the breach.Fairness argument: although not part of formula, if the breaching party breached in

    bad faith, you may want to bring it up that lost profits ought to be awarded.Note: Lost profits on the main K are direct damages. Only lost profits on collateralKs are consequential damages.

    Incidental Damages: money spent in an effort to mitigate damages. E.g. money spentto put advertisement in the paper; money spent looking for new employee.

    Interest:

    Pre-judgment interest is normally only awarded when it is a liquidated sum . If itcan be liquidated at a fixed time, it is recoverable. It is determined at the date of breach. Post-judgment interest is also recoverable after a judgment is entered.Interest that could have been made on a particular investment choice is probably NOTrecoverable b/c it is NOT foreseeable.

    Commission:When commission is asked for as a separate item of damages, compare the two Ks todetermine if the NBP ended up in a better position.

    R. 350: Avoidability as a Limitation on DamagesDamages are not recoverable for a loss that could have been avoided. There is aduty to mitigate . However, if the NBP makes a reasonable, but unsuccessful effort tomitigate, he is not precluded from recovery.

    R. 351: Unforeseeability and Related Limitations on DamagesOnly damages foreseeable at the time K was made are recoverable.Foreseeable loss may be:

    o Loss that occurs in the ordinary course of events [direct damages]o Loss that occurs because of special circumstances [foreseeable

    consequential damages]Ct may limit damages for foreseeable loss by:o Excluding recovery for lost profitso Allowing recovery only for reliance interest; or o Excluding recovery to avoid disproportionate compensation.

    R. 352: Uncertainty as a Limitation on Damages

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    Damages are only recoverable if evidence establishes an amount w/ reasonablecertainty .

    Duty to Mitigate: NBP can only recover to the point they would have had they made reasonable efforts

    to mitigate their losses.Mitigation benefits the breaching party.Once an anticipatory repudiation occurs, the NBP has a duty to begin mitigation.

    Luten Bridge. ED = Net profit + unreimbursed expenses up to point that builder learns of countys breach.Mitigation in employment K: NBP (eee) has a duty to mitigate (find another job).However, must only act reasonably in looking for new job. Eee does NOT have toaccept just any job.

    o Employer has burden of proof to prove eee didnt mitigate.o Eee is required to take a comparable job if found.o Factors for comparable jobs :

    SalaryPositionTitleAmount of ResponsibilityStatusLocationIndustryBenefitsHours

    Note: If a NBP/eee spends money looking for another job (to mitigate), he is

    entitled to recover that money as incidental loss.R. 350: (see above) If eee CAN mitigate, must do so if reasonable.

    Lost Volume SellersA seller who can accommodate more than one buyer and for whom a buyers breachdoes not release the goods for sale to another customer.The appropriate measure of damages is the gross profit the seller would have earned

    pursuant to the sale.The issue w/ LVS will arise over subsequent Ks and whether they will be calculatedas mitigation.LVS have unlimited supplies of goods. A breach in one K does not affect their other Ks, only their profits.Personal services K : hard to argue LVS unless personal service could be performedsimultaneously.

    Jetz Service- Jetz had enough washers and dryers to service all of their locations plussome extra. So when D breached the K, the fact that Jetz moved washers to another location was not an act of mitigation b/c Jetz could have handled the subsequent K anyway.

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    If ct determined NBP is a LVS, subsequent Ks are not mitigating. LVS really haveno duty to mitigate.LVS are entitled to lost profits

    Calculating lost profits for a LVS

    Gross receipts: the total income brought in. e.g. coins in machineGross profits: gross receipts minus variable/marginal costs.Net profits: gross receipts minus variable costs minus fixed costs.Fixed costs: overhead. Expenses irrespective of the K. e.g. insurance, executivesalaries.Variable/Marginal costs: costs dependent upon the particular K at issue. E.g. rent.

    FORMULA FOR CALCULATING LOST PROFITS FOR LVS:o LV = Gross Profits [gross receipts variable costs]o Note: fixed costs are not factored into the formula. Why? b/c they would

    be incurred regardless of this K, and the NBP cannot escape them.Always ask: could the NBP have performed both Ks?

    Non-recoverable Damages:1) Attorneys fees2) Mental Distress3) Punitive Damages

    Attorneys Fees:American Rule: attorneys fees are not recoverable

    Exceptions:o K provisiono Fee-shifting statuteso Court Rules (e.g. FRCP 11)

    Justification of Am. Rule:o Parties know their risk o Awarding attorneys fees increases litigation.o Access to the system- poor would be discouraged from suing.

    Criticisms of Am. Rule:o No incentive for Ds to go to trial and seek justice, they often end up

    having to settle.o Runs counter to idea of expectation damages.

    Emotional Distress DamagesGenerally not recoverable for breach of K action.R. 353: Loss Due to Emotional Disturbance - No recovery for emotional distressunless the breach also caused bodily harm. or if the K was of such a kind that seriousemotional damage was a particularly likely result.

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    So, you can get these damages for:o Bad faith breach when emotional distress is completely foreseeable.o Emotions /feelings are a primary concern of the K (K to handle dead,

    plastic surgery, wedding K)o Bodily harm occurred.

    Bodily harm must be related to the breach.Policy: if emotional distress damages are allowed, liability in Ks increases. Cts wantto let market regulate itself.These damages could be K for and put into a provision.

    Punitive Damages:Generally not recoverable for breach of K unless the conduct is an independent tort.

    ---------------------------------------------Buyers and Sellers Remedies under the UCC:

    For Buyers:Ways a seller can breach :

    o Delivering non-conforming goods [wrong, damaged]o Failure to deliver/Late delivery [improper tender]o Anticipatory repudiation

    Buyers recoverable damages (their loss in value ):o Cover Damageso Market damageso Incidentals and Consequentials

    Cover Damages: 2-712:o Covers the loss the buyer incurs by getting similar goods elsewhere.o Cover Damages = Cost of Cover K Priceo Buyer is not required to cover ; he can still elect market damages.

    If he covers, but gets it wrong , his only recourse then is to seek market damages.Failure to cover may limit the incidental/consequential damageawards, however.

    o 2-712 requires that Cover be made in good faith and without unreasonable delay . Must be a commercially reasonable substitute theycannot upgrade the goods and then try to make the seller pay for thosesuperior goods. However, if superior goods are really all they can find,then good faith will come in.

    o Buyer is also entitled to incidental and consequential damages that result.

    Market Damages: 2-713o A type of hypothetical cover.

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    o Market damages = market value K price.o Market price is determined at the time the buyer learns of breachMV

    computed at the place of tender:If a shipment contract the place the goods were supposed to bedropped off for shipping

    If a delivery contract the place of arrival

    o Time when buyer learns of breach in anticipatory repudiationsituations: Not always easy to determine.

    At time of repudiation.Revised UCC states time when buyer learns of breach is measured

    by when buyer learns of repudiation plus a commerciallyreasonable time thereafter.When actual performance by the seller is due

    If the buyer has covered, can he elect to claim Market Damages also?o UCC conflicts.o Always say: If the buyer did cover, he is probably limited to cover

    damages.o Cover damages are preferred b/c they more accurately compensate the

    buyer.

    For SellersWays a Buyer can Breach:

    o Anticipatory repudiationo

    Wrongful rejection or revocation of acceptanceo Failure to pay altogether/failure to make a payment when dueSellers recoverable damages:

    o Resale Damageso Market Damageso Lost Profitso Incidental Damages ONLY

    Resale Damages: 2-706o Resale Damages = K price resale price.o To get resale damages, seller must:

    Identify resale K Give buyer proper notice of resale unless goods are perishableMake resale in good faithResale must be commercially reasonable

    o If seller has resold, he is probably limited to resale damages, and will not be able to recover market damages.

    Market Damages: 2-708(1)o Market Damages = K price market price.

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    o Market price determined at time and place of tender.o If Market Prices are inadequate look to lost profits.

    Lost Profits: 2-708o Lost profits damages are recoverable when market damages are

    inadequate. Thus, this is a limitation on market damages.o Lost profit damages do NOT subtract fixed overhead from the equation

    the position is that fixed overhead is not a cost avoided.o Lost profits damages are often appropriate for:

    Lost Volume Sellers they must prove that they were, indeed, aLVS; must show that they could have sold more and kept thecontract that was breached.Component Seller - often, market is too small for a certaincomponent; lost profits must be awarded, because the seller would

    be unable to find other buyers for that specific of a product.Jobber or Intermediary - buys stuff to sell it; thus, if the jobber has paid for the goods but not received them yet, he really has nomarket damages, because he hasnt been able to sell the goods. So,another method must be used to return him to his original position.

    Incidentals and Consequentials: 2-710o Seller can recover incidental damages. E.g. expenses in stopping delivery,

    transport, and custody of goods.o UCC does NOT mention consequential damages. So, we can conclude

    that Seller is NOT entitled to consequential damages.o Revised UCC: Consequential damages are recoverable by seller.

    Expectation Damages Theory

    Reasons for Expectation Damages:o Protects against lost opportunityo Facilitation of planning. o Protection of risk allocation.

    Efficient Breach: the law should promote efficiency ( value maximization ).o Occurs when a party can breach, compensate the NBP, and still be better

    off.o Supports the award of expectation damages.

    Assumptions Underlying Efficient Breach:o Stable competitive marketo Rational economic actorso Full information regarding costs and alternativeso Low transaction costs

    Criticisms of Efficient Breach:o Non-economic values- its just morally wrong

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    o Transaction costs eclipse gaino Encourages party to disregard K rights and expectations of others

    ALTERNATIVE MEASURES OF DAMAGES

    Reliance Damages:

    An alternative to expectation damages when they are difficult or impossible todetermine.The same limitations on ED apply to reliance damages : foreseeability, certainty,causation, mitigation.If K is a losing K, NBP cannot recover reliance damages.R. 349: Reliance Damages: As an alternative to ED, reliance damages may berecovered, including expenditures made in preparation for performance, less any lossthat the party in breach can prove w/ reasonable certainty the injured party wouldhave suffered had the K been performed.

    Equal Opportunity Doctrine: When both parties have an equal opportunity tomitigate loss, and the BP fails to do so, he cannot later claim that NBP failed to takethe same mitigation. Applies when both parties have control to mitigate. R. 90: Promissory Estoppel: for an action in PE, the court can award reliancedamages , expectation damages , or the court may limit damages as justice requires. Comment D to R. 90: In particular, relief may be limited to restitution or to specificrelief measured by reliance rather than by the terms of the promise.Cts have much discretion when choosing what damages to award.Factors cts consider in determining whether to award Reliance or ED.

    o Whether property has changed valueo Time period or reliance

    o The certainty of lost opportunitieso Presence/absence of good faith

    When you have a COA based in reliance (PE), there are two schools of thought:o You get reliance damages.o You get expectation damages

    Its not clear which school of thought the R. favors. Just know that it is possible toget either. And know that for a PE action, a P may be able to get ED depending onthe court.

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    Expectation Damages: The preferred measure of damages. Goal- to put the parties inthe position they would have been in had the K been performed. Benefit of the bargain.

    Reliance Damages: measured by out-of-pocked expenses.

    Restitution Damages: measured by a benefit that was unjustly incurred.

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    Restitution Damages:Measured by market value rule.A party can sue in restitution in spite of any loss that would have been incurred hadthe K been performed. (note: ED and Reliance damages would be limited)

    R. 370: A party is entitled to restitution under the rules stated in this R. only to theextent that he has conferred a benefit on the other party by way of part performance.R. 371: Restitution, may as justice requires be measured by either:

    a) the reasonable value to the other party of what he received in terms of whatit would have cost him to obtain it from a person in the claimants position, or b) the extent to which the other partys property has been increased in valueor his other interests advanced.

    Rationale for awarding restitution even when performance would have resultedin a loss:

    o The breaching party is getting something they get to keep without payingfor it.

    o A suit in restitution is a suit off the K, and the K is not part of thecalculation.

    Exception to rule that allows restitution recover even for losing Ks:o Full Performance: by the NBP.o K Price: sometimes used as evidence of FMV. Cts will limit restitution to

    what party could have received had full K been performed.Rule: Restitution is available for the breaching party.

    o Policy For: Not morally wrong to breach and recover damages.Otherwise, NBP could get a windfall (unjust enrichment).

    o Policy Against: Morally wrong to breach.

    R. 374 Restitution in Favor of Party in Breach:(1) If NBP refuses to perform b/c the other party breached, the BP canrecover in restitution for any benefit conferred by way of part performance or reliance minus the damages owed to NBP for the breach.(2) In some situations, the breaching party is NOT going to get back the

    benefit they conferred, in that that benefit would amount to liquidateddamages. Confused? This subsection is an exception to when the NBP will

    be able to keep all the benefit as a form of liquidated damages . To determineif this subsection applies, court will look at whether its fair and reasonable.

    Limits on Restitution for BP:o

    BP must first compensate NBP.o K Price: limitation on value of services or benefit.

    Note: If you talk about restitution damages, mention that there are two ways tomeasure damages: i) reasonable value of what other party received; and ii) the extent

    by which the others property has been increased or his interests advanced.On exam, mention both, then decide what the best measure for the hypo given is andanalyze.

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    SPECIFIC PERFORMANCE

    A court ordered remedy that requires precise fulfillment of a K obligation.Available when money damages are insufficient . So, if damages would be adequate

    remedy, no SP.Advantages:

    o NBP gets their expectationo No time wasted on estimating damageso No problems in wondering whether one party is getting more than they

    bargained for, etc.Disadvantages:

    o Time/money saved in calculating damages is put into legal costs.o Time and moneyo Restricts liberty (personal services K)o Requires court supervision.o Undercuts efficient breach

    R. 360: Factors for determine if damages would be adequate:o Difficulty of proving damages w/ reasonable certainty.o Difficulty of procuring a suitable substitute .o Likelihood that award of damages could not be collected .

    R. 362: SP wont be ordered unless K is specific enough (sufficiently certain) to provide a basis for an appropriate order.

    R. 364: SP will be refused if it would be unfair b/c:o K formed by mistake or unfair practiceso Unreasonable hardship to BPo Exchange is grossly inadequate

    R. 366: No SP if it would impose a burden of supervision on the court where burden outweighs advantages of SP. [balancing test: burden v. advantages ]

    UCC 2-716:o If buyer has wrongfully refused goods/revokes, the sellers action is for

    the price . So, sellers SP = price!o If seller breaches, buyer can get SP when goods are unique.

    Buyers SP = goods (if unique)!!

    K for Sale of Real Estate: Buyers are usually able to get SP. However, courts are NOTas willing to give sellers SP.

    Personal Services/ Negative Injunction:Rule: Generally, NO specific performance is given for a personal services K b/c:

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    Limitations by 13 th Amd (involuntary servitude) Difficulties associated with compelling performance even more difficult than in

    other contracts, because supervision must be so individualized; can you reallymake someone do a good job?

    Negative injunction: The opposite of SP -- Prohibits BP from performing w/ 3d party.To get a negative injunction, need:

    o Unique services : if services are NOT unique, no need for NI b/c can getservices anywhere. Determine if services may easily be replaced. It canALWAYS be argued that its not unique!!!

    o Personal services have not terminated : NPB must have a legal claim onBPs timei.e. D should still be barred from taking another job b/c K isnt over yet! Wolf

    o A non-compete clause : Must be reasonable (public policy). If it is, thiswould weigh in favor of NI.

    R. 367(2): If NI would cause eee no other way to make a living, it wont beenforced. You cant get indirectly, what youre prohibited from doing directly.Always argue that eee has other options to work (just NOT what hes doing now).

    Justifications for Prohibiting SP in Employment Ks:1) Involuntary Servitude2) Performance wouldnt be good anyway

    Liquidated Damages: [we skipped this section in class b/c of time constraints]Just know that an agreed remedy will NOT be awarded if it amounts to a penalty!

    DRAFTING

    Building Blocks of Agreement:Title (Description)

    Most common: AGREEMENT. Sometimes a little more descriptive.Caption (1st Paragraph)

    Introductory, identifies parties (any detail about parties), Date of agreement maybe leave this area blank and match it with the date of

    the signatures when that is filled in.Recitals

    Background information for reader (client, other party, COURT)Whereas may be appropriate, but other legalese is generally discouraged.Be careful to not create any liability in recitals.It is agreed . Or, Mr. Newman and Mr. Smith hereby agree as follows. Etc.

    Whereas, on March 15, 1993, Seller promised to deliver 100 widgets to Buyer; Whereas, Buyer alleges that 40 of the widgets weredefective..Now, therefore, the parties agree as follows.

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    Heart of Agreement :Definitions :

    Does not have to be a separate definition section; depends on size of agreement. It is possible to define terms as they come up in the agreement.Define any terms that may be ambiguous.

    Covenants : THE MOST IMPORTANT PART!Promises made by the parties; conditions of the agreement.Even if working with a form, this part is ALWAYS drafted from scratch, even

    if the deal looks exactly like a deal covered by a previous agreement.Notices : Generally, parties will need to notify each other of certain aspects, like

    termination issues; this section is extremely important and lays out how the parties will get in touch with each otherproper address, proper means, proper times, what to do in holiday situations, etc

    Representations and Warranties : Things that the parties are representing to betrue.

    Be careful not to make promises in this section.o

    Seller hereby represents and warrants that seller has marketabletitle . (This is different from a promise).Why it is different from recitals: Difference between saying that seller will

    sell property and seller actually has the correct title.Information with serious consequences

    o Seller has no obligation to anyone else.What happens if a representation is false?Put in remedy: rescission, express conditions, is it a breach?

    Declarations :Miscellaneous provisionsall optional and dependent on type of contract

    Force majeure , not construed against drafter, as is clause, governing

    law, best efforts clause, attorneys fees, statements that all partiesrepresented by counsel, headings have no meaningClosing : Signatures, names of signersApproved By : Both lawyers signatures should be put herethis will keep another partyfrom claiming they do not know what they signed

    3 Ps of Drafting:1) Predict what may happen.2) Provide for the contingency.3) Protect your client

    Types of drafting:Form based: using form book (faster)Zero based: from scratch (better)

    Draft :In the active voice

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    In present tenseUsing gender neutral languageDelete unnecessary language

    Language:SHALL: Language of Obligation. has a duty to

    MAY : Language of Authorization. is authorized to

    MUST : Language of Condition Precedent. has to do X b/f Y will happen