Implied Terms

(missing notes for Wood v. Lucy, Lady Duff-Gordon; B. Lewis Productions, Inc. v. Angelou; Market Street Associations v. Frey)

Donahue v. Fedex

- employees win dismissal cases when: Somers: “where dismissal aims at depriving employee of earned benefit” Due to sexual harassment or retaliation Additional consideration (really more akin to detrimental reliance) Employee handbook can be a basis for an implied ‘for cause’ term

More about Implied Terms Courts should imply terms when they are confident that the parties WOULD

HAVE AGREED to the terms (at the time of FORMATION) had they considered them (Cardozo)

BUT: courts should NOT imply terms when doing so forces the parties into a K to which they DID NOT AGREE (Cardozo)

Good faith is breached by opportunistic behavior during K performance But good faith duties are LIMITED in the context of at-will employment to

conduct that violates PUBLIC POLICY Good faith is an implied term in EVERY CONTRACT (if there’s no good faith in

a contract, then what purpose does a K serve?)

Enforceability (affirmative) Defenses Illegality – contracts for illegal performance are not enforced (courts leave

parties ‘as they lie;’ no restitution, no damages) (Everett v. Williams and Carroll v. Bearden)

Public policy - Incapacity Duress Fraud, misrepresentation, or bad faith Unconscionability Mistake Impossibility/impracticability/frustration of purpose

Carroll v. Bearden Bearden’s argument: courts should not aid either party where contract is illegal Rule as applied Enforce K for the sale of property so long as the seller DOES NOT BENEFIT

FROM THE ILLICIT USE Applying the rule, what outcome? Crazy like a Fuchs (Fuchs v. Goe)

Totten v. United States Decedent contracted with President Lincoln Pay: $200 / month Dangers faced: life and limb Honest Abe’s response: stiffed him Court’s response: Too bad, so sad. Since the K was supposed to be secret,

attempting to litigate the case rendered the K useless, since it essentially became public knowledge as soon as it was brought to court

Marvin v. MarvinIssues:

Was there an express agreement? Was there an implied contract? Would any such agreement violate law or public policy? Can she recover via quantum meruit?

-Palimony permitted-ruling for Lee Marvin (male)

This agreement was not about money for sex; it was a REAL relationship The Cory issue

Pre-Cory law was unfair to non-marital spouses Contract law (AND REASONABLE EXPECTATIONS OF THE

PARTIES) govern Fairness will not threaten marriage

Reasonable expectations of the parties should be enforced As long as the consideration of is not MERITRICIOUS Even without a promise or a contract implied (inferred) through conduct, non-

marital spouse CAN recover via quantum meruit

Baby MTerms of the surrogacy agreement:

Mary Beth & Richard will surrender custody to Bill and terminate all parental rights

Bill pays $10k + medical expenses Mary Beth and Richard undergo psychiatric test Bill gets to name the child Bill and Mary must be certified STD-free

The law: Surrogacy agreement invalid (illegal or criminal?) NJ prohibits payment for adoptions (except for payments to

adoption agencies) NJ prohibits termination of parental rights without showing that

the parent is unfit NJ prohibits irrevocable surrender of custody Against public policy

What matters are the best interests of the child NJ disfavors separation of child & mother Mary Beth had no legal or psych counseling

There are just some things that money can’t buy Labor below minimum wage (or child labor) Workers who will do outrageously dangerous things

Review of Illegality Generally, courts will not enforce an illegal contract, but will leave parties where

they lie However, courts will enforce illegal contracts in favor of the NON-BREACHING

PARTY if that party is not ‘in pari delicto’ (if the party doesn’t derive a benefit)

Review of Public Policy Courts can REFUSE to enforce a contract that violates public policy Usually some sort of legislative action is necessary to ESTABLISH public policy

(but not always) (Baby M) Or public policy must seem clear to the court (Totten) But where public policy is unclear (Marvin), courts are left to their own devices

***

Infancy R.2d §14 – all contracts with infants (under 18) are VOIDABLE

Old CL exception (sometimes retained): Ks for ‘necessaries’ not voidable Note: contract is not voidable IF RATIFIED

Halbman v. Lempke Does it matter that Halbman is a plaintiff? Is restitution avoidable here? Rule?

Absent some form of misrepresentation or tortious damages In a K for something that is NOT NECESSARY Infant may recover purchase price Without diminution for use, deprecation, or damage

Is this a good rule?

Infancy: Modern Modifications §15: Ks VOIDABLE, but recovery limited to avoid unjust enrichment, or

to take depreciation into account

may entail a right to restitution but that usually just means return of goods, NOT MONEY and may only apply where depreciation is a product of willfulness

a completed K is NOT VOIDABLE

Mental Incapacity: Restatement Approach §15: Ks voidable IF the party is:

unable to understand nature and consequences of transaction, OR unable to act reasonably in relation to the transaction and other party HAS

REASON TO KNOW Damages may be limited to prevent unjust enrichment

Hauer v. Union State Bank Hauer’s original claims:

Mental incapacity Fraud / misrepresentation Breach of fiduciary duty

Claims that survive summary judgement: Mental incapacity Breach of good faith / fair dealing Breach of fiduciary duty

Mental incapacity is a basis for AVOIDING a K Hauer has the burden of showing her own incapacity But almost any evidence is relevant Reasonable jury could find Hauer incompetent, but why doesn’t it end there?

Wisconsin follows majority rule in infancy But incompetence is different, but it is SUBJECTIVE (infancy is

OBJECTIVE) Result: ordinarily, Hauer would have to repay $30k But here, bank is not entitled to recovery

No duty arising in tort because there was no fiduciary duty UCC’s good faith requirement does not apply

Rule: if a party knew of incompetence and took unfair advantage, consideration dissipated without benefit to the incompetent need not be restored

We don’t protect mental incompetence as much as we protect infancy, because mental incompetence is SUBJECTIVE AND VARIABLE

Common Law of Mutual Mistake Wood v. Boynton

Doctrine of mistake applies when the parties are mistaken as to the ‘very nature of the consideration’

Such mistakes are deemed ‘material’ Doctrine DOES NOT APPLY where mistake only affects the VALUE OR

QUALITY OF THE CONSIDERATION

Lewanee County v. Messerly

A&M Land Development Doctrine does not apply where the mistake only affects the value or

quality of the consideration Such mistakes are deemed ‘collateral’

Earlier cases: Wood v. Boynton, Sherwood v. Walker Restatement approach (§§152, 154)

Was the mistake as to a ‘basic assumption’? Does it have a ‘material effect on the agreed exchange’? Who should bear the risk of the mistake? (Answer: the purchasers,

because it was “as is.”) Remedy of mistake: avoidance Remedy for ‘scrivener’s error’: reformation

Wil-Fred’s v. Metro Wil-Fred’s mistake arguments

Mistake was material It was caused by misleading specification Notice was prompt Enforcement would’ve been unconscionable in these circumstances

Illinois’ mistake analysis -- Contract performance excused if: Mistake is material (testimony on materiality is uncontradicted) It occurs despite reasonable care (evidence suggests this) Enforcement would have grave consequences, thus unconscionable

(bankruptcy) No significant harm to the other party

Illinois law: materiality, reasonable care, grave consequences to mistaken party, no real harm to other partiesRestatement §153: basic assumption, grave consequences make a K unconscionable (OR the other party knew/had reason to know, or caused the mistake). NOTE: No due care requirement.

A party bears the risk of mistake if at the time of the contract the party had limited (but sufficient) knowledge (§154 B)

Court allocates risk of mistake on a reasonable basis – ‘catch-all’

Syester v. Banta Plaintiff is a lonely and elderly widow During 1957 and 1960, she was 68 Was there sufficient evidence to find fraud?

Elements of fraud Misrepresentations (must be material)

Scienter (i.e. knowledge of falsity) Intent to deceive and defraud Belief and reliance on misrepresentations Damages

Hill v. Jones When is there a duty to disclose under modern contract law? (R.2d §161) Material facts must be disclosed when:

Necessary to prevent previous assumption from being fraudulent Necessary to correct a mistaken basic assumption of the buyer where

failure to disclose would be bad faith Necessary to correct a mistaken assumption of the buyer as to a writing Based on a relationship of trust and confidence

Are termites material? That’s best left to the jury. Can buyers be charged with knowledge? That’s also best left to the jury.

NOTE: the issue may be whether or not the defect was latent There was evidence of termite damage Plaintiffs knew what termite damage looks like

Duress Under Restatement, a contract induced through threat of physical force is VOID A contract induced through ECONOMIC DURESS is VOIDABLE Duress consists of an ‘improper threat,’ which could be:

A threatened crime, tort, or breach of duty of good faith & fair dealing But more generally, it can be anything that results in an exchange of

unfair terms

Selman v. Blakeslee-Midwest Co. Is this the kind of offer to deal that we want to discourage because it’s a threat?

Can’t rip open all K settlements on that basis Posner: “settlement SHOULD BE ENFORCED if allegedly threatening party is

NOT the cause of the victim’s economic duress.” Phrased differently: “settlement SHOULD NOT BE ENFORCED if threatening

party IS the cause of the victim’s economic duress.” Other factors: alleged duressor’s ability to pay, alleged duressor’s

responsibility for fiscal hardship, amount paid over amount actually owned (paid/owed ratio). Also, are there any other remedies available?

Undue Influence (overpersuasion)

Odirizzi v. Bloomfield School District Duress claim

Threat was NOT UNLAWFUL as required for duress under California law Threat to pursue legal action not unlawful unless KNOWINGLY FALSE

Fraud claim – no real fraud claim here

Mistake claim – no real mistake claim here

Difference of Undue Influence and Duress? UI only requires ‘overpersuasion;’ i.e. using pressure to take advantage of

another’s weakness Must overcome will but not judgment Due to a weakness that DOES NOT EQUAL mental incapacity Most jurisdictions do just fine without UI because Duress covers the territory But UI arises in familial context (widow with relatives coming out of the

woodwork)

Williams v. Walker-Thomas Cross-collateralization – when she falls behind on payments for stereo, WT can

repossess ALL of her stuff she is low-income, no credit trial court approach (p. 122) – no remedy for Ms. Williams; no relevant statute for

unconscionability; since there’s no statutory authority, there is no basis to avoid K for unconscionability

Walker-Thomas also had door-to-door salesmen/bill collectors that came around when welfare checks arrived

Trial court calls WT’s tactics ‘worthy of condemnation’

Skelly Wright: disagrees with trial court Unconscionability is a Common Law doctrine, so no statutory authority

is required US Supreme Court has recognized that unconscionability permits an

equitable remedy in K Also, UCC §2-302 recognizes unconscionability in FORMATION However, UCC wasn’t in force yet, but it reflects the Common Law

doctrine (which IS in force, technically)

Test for unconscionability?1. No meaningful choice (but can be negated by “gross inequality of

bargaining power” (such as parties’ educations, ‘maze of fine print,’ and ‘deceptive sales practices)

2. Unreasonable terms Substantive unconscionability – when terms are grossly unfair, even compared to

other similar contracts (subjective to context of time & place). To make something NOT unconscionable, just remove the unconscionable term(s)

Doctrine of Impossibility Paradine v. Jane (1647)

Fact that the army occupied the land did not excuse performance Either because contract liability was very strict back then, or

Because the court did not believe that Jane was completely unable to use the land

Force majeure – in case of unforeseen circumstances (unanticipated), contract will be removed at no fault of either party

Taylor v. Caldwell (1861) Implied provision of excuse in case of impossibility E.g. performance is excused on death of a party, or If a party is disabled and can’t perform Result: Caldwell does not need to reimburse Taylor’s expenses

Krell v. Henry (UK) Frustration of Purpose

Condition was a foundation of the K Performance of the K was prevented by non-occurrence of that condition Non-occurrence was not contemplated by the parties

Transatlantic v. United States Suez Canal international crisis Impracticability – when one must perform but it becomes very hard to perform

Skelly Wright: Impossibility doctrine expanded to encompass impracticability Three elements:

1. Unexpected event2. Risk not allocated to a party seeking excuse of performance3. Unexpected event renders performance commercially

impracticable Doesn’t lie the commercial context, because commercial parties can

essentially cover their asse(t)s Wright wants it to be narrow

Unexpected event? Satisfied. Risk not allocated to the party seeking excuse of performance? Seems

risk was more likely to be allocated to Transatlantic. Unexpected event renders performance commercially impracticable? Not

really; there’s another geographical route. Impracticability does not kick in every time there is an unexpected

increase in costs. Transatlantic could have insured against just such a situation Can’t seek voidance, because CONTRACT IS COMPLETED If it really was impracticable, then how were they able to complete it?

(Hint: it wasn’t really impracticable.) Conclusion: performance not excused and quantum meruit remedy

unavailable because Transatlantic ALREADY PERFORMED and GOT PAID.

Frustration of Purpose R.2d §265 Event occurs that substantially frustrates a party’s purpose of entering the K The parties had a basic assumption that the event would not occur Performance excused if PARTY SEEKING EXCUSE IS NOT AT FAULT and

DOES NOT BEAR RISK

NIPSCO v. Carbon County Coal Terms of the agreement 20 years to buy set amount of coal Price floor, subject to escalation What’s a requirements K? (Answer: a contract where a seller agrees to sell

everything that the buyer REQUIRES.) But NIPSCO has agreed to buy 1.5M tons of coal, whether it needs it or not (so

this is not a requirements K) Impracticability & frustration of purpose Posner: This doctrine is really about assignment of risk (§2-615) It’s rarely impracticable for the buyer to pay, but his purpose must be frustrated But NIPSCO’s purpose was not frustrated, and it assumed the risk; so it must pay

up Does IN recognize the defense? We’ll leave that for another day.

Impracticability R.2d §261 If an event occurs that renders performance impracticable, and The parties had a basic assumption that the event would not occur, Performance is excused if the PARTY SEEKING EXCUSE WAS NOT AT

FAULT AND DID NOT BEAR RISK

UCC on Impracticability §2-615 basically follows R.2d §261, except:

seems to only apply to sellers seller may assume obligations and thus waive the defense by K creates explicit impracticability defense based on gov’t regulation Posner: We can’t rely on this, because NIPSCO was not a seller. Seller

may allocation production in a fair and reasonable manner

Express Conditions Conditions vs. promises: failure of condition discharges other party’s duties;

breach of promise only gives rise to damages Consequences of failure of condition are MORE SEVERE Breach of promise results in claim for remedy, while failure of condition

EXCUSES PERFORMANCE (i.e. is a defense) Conditioning a promise reduces promisor’s risk

Clark v. West The K language at issue: “If [Clark] abstains from the use of intoxicating liquor and otherwise fulfills his

agreements, he shall be paid an additional $4 per page…”

Dispute: West says that total abstinence is consideration (for additional $4 per page); Clark says it is a condition precedent to payment which could be (and was) waived

Is sobriety consideration or a condition? It might be a condition; if it were consideration, then there would be no

obligation to perform on either side the moment Clark had a drink Was there a waiver here?

Waiver involves voluntary and intentional relinquishment of a known right

Purpose of the doctrine is to prevent forfeiture Forfeiture – ‘a great loss falling to one party that is disproportionate to

the injury befalling the other party’ Not to recognize a waiver here would indeed entail a forfeiture on

Professor Clark’s part

Modification Requires consideration at Common Law, not the UCC If statute of frauds applies, it needs a writing Must be agreed upon by both parties; cannot be undone by a single party Effects are a permanent change in the contract

Waiver Consideration NOT required (except under UCC) Need not be in writing Unilateral; does NOT require agreement Can be revoked, unless other party relied May only have temporary effect

Express and Constructive Conditions Express conditions usually follow an ‘if… then’ formula One party’s contractual obligations are conditioned on the other party’s

performance of the condition Always enforced unless enforcement would result in a forfeiture (e.g. if 98% of

the work was done on the appointed day, condition of timely delivery may not be enforced)

Implied (constructive) conditions UCC gap-fillers help courts determine rules for time, manner, place of delivery,

and manner of payment

CL rule: if one party’s performance takes time, the default rule requires that party to perform first (performance, then payment)

Morin Bldg. Co. v. Baystone Cons. Was the jury instruction proper? Two options:

Some courts – rejection of performance permitted, unless in bad faith R.2d §228: ‘reasonable person’ standard applies even though contract

gives one party discretion Applies where objective evaluation is possible Not where rejection is a matter of aesthetics or fancy Court should imply term that parties would have agreed to

But what about… Artistic effect clause? ‘First-class in every respect’?

Provisions from form contracts not clearly intended to apply to the aesthetics of a mill-finish FACTORY wall

Why does Posner think parties did not bargain for a provision that would give GM a unilateral right to reject Morin’s work? (Answer: Because it would have been grossly unfair to Morin, and they most likely wouldn’t have agreed to it)

Introducing: the CISG It’s supreme law of the land (trumps state law) Applies to the INTERNATIONAL SALE OF GOODS

Between parties whose places of business are in different ‘states’ (nations)

And both states are parties to the CISG BUT: does NOT apply to goods sold for personal/household use

(UNLESS they’re commercial entity who sells/uses such products) Doesn’t apply to ships, vessels, or aircraft

Firm offer requires NEITHER WRITINGS NOR CONSIDERATION (Art. 16) No Statute of Frauds (Art. 11) No parol evidence rule (Art. 8) Easy Battle of the Forms

No MIR (article 19(1) ) Additional terms come in unless they are material (article 19(2) ) Generally, everything is material (article 19(3) ) Result? Offeror’s terms govern (which may not be fair, but at it’s

CLEAR)

Sackett v. Spindler second payment late. Did Sackett breach? (Yes.) was the breach total or partial? (Was the breach material? See R.2d §241, similar

to old R §317)

was the bounced check a material breach? Did Spindler repudiate on October 5th? And in any case, the repudiation was retracted when he offered to accept cash

Anticipatory Repudiation §2-610: aggrieved party has choice of remedies §2-611: repudiation can be retracted if the aggrieved party has not changed its

position If in doubt, aggrieved party can demand assurances of reasonable to do so UCC 2-609 R.2d 251 CISG articles 71 & 72

Jacob & Youngs v. Kent Conditions for substantial performance?

Incomplete performance Not intentional nor willful Does not frustrate purpose of contract

Restatement on Substantial Performance §241: is the failure material? Was the injured party deprived of a benefit that she reasonably expected? Is adequate compensation possible? Will non performing party suffer forfeiture? Is cure likely? Good faith & fair dealing (NOTE: this replaces dissent’s focus on willful or

negligent conduct) §240: Recovery in quantum meruit permitted if K can be apportioned standard remedy of these cases is COST OF COMPLETION but NOTE Jacob & Youngs v. Kent if cost of completion is grossly & unfairly out of proportion to the good to be

attained, the measure is the DIFFERENCE IN VALUE but because there is NO DIFFERENT IN PRICE, there are NO DAMAGES

Peavyhouse: The Law Old Restatement §346: cost of completion is ordinary measure of damages, unless

this involves unreasonable economic waste What is economic waste? Usually involves depriving a party of a bargained-for

benefit. Alternative approach/formulation: costs of completion must not be grossly

disproportionate to the results to be attained Where a coal-mining contract is fully performed except for the remedial work Measures of damages for breach is reasonable cost of performance, UNLESS

Contract provision breached is INCINDENTAL to the main purpose

Economic benefit of full performance is grossly disproportionate to cost of performance

Then, measure of damages is diminution

The Measure of Expectation Damages Restatement 2d §347

Loss in value to the injured party caused by the other party’s failure to perform

Plus incidental or consequential loss caused by the breach E.g. ‘cover’ costs reasonably incurred, lost profits on related

agreements But contracts damages must be readily calculable and NOT

SPECULATIVE Minus cost or loss avoided by not having to perform Three limitations:

Reasonably foreseeable Provable with reasonable certainty ‘duty’ to mitigate damages

Handicapped Children’s Ed. Bd. V. Lukaszewski Issue 1: was there a breach?

Should L be excused from performance due to illness? Majority says no, dissent says yes

Issue 2: did the Board suffer any compensable damages? Damages = cost of obtaining other services plus forseeable consequential

damages Appellate Court: giving the Board damages would make it better off than it would

have been had the K been performed Supreme Court: No, it was not the Board’s choice to hire a more experienced

speech therapist; this was simply imposed on it. Mitigation requirement is satisfied here b/c the Board hired the only

qualified person they could find for the job

Parker v. 20th Century Fox General rule: damages = salary agreed upon MINUS amount earned or what

reasonably might have been earned Reasonably?

Requires reasonable EFFORTS Did the Court inquire into Parker’s efforts? Not raised, says the court

Does not relate to reasonableness in rejecting the inferior offer The Parker holding: no duty to mitigate if the second offer is ‘different

and inferior’ so long as the difference is substantial (to be determined by the court)

No duty to mitigate if the employee subjectively but in good faith BELIEVES the offer to be different and inferior

Evergreen Amusement Co. v. Milstead The ‘new business’ rule: new businesses can’t recover lost profits because b/c

TOO SPECULATIVE Does Maryland Court adopt the rule that new business may NOT recover lost

profits? It says it does not

What was the nature of the proffered evidence? Maryland DOES seem to have a rule against awarding lost profits to new

businesses

The Substantial Performance Issue In Jacobs & Young, the question is whether the Court should treat the Reading

Pipes term as a PROMISE or as an IMPLIED CONDITION Cardozo says we don’t want to imply a condition where it will lead to a forfeiture Here, work not completed amounted to less than 10% of total But was the non-performance willful?

General Rule on Lost Profits Presumable if:

Within the contemplation of the parties The loss flows directly or proximately from the breach The loss is reasonably measurable

What about new businesses? Restatement DOESN’T FOLLOW NEW BUSINESS RULE

Hadley v. Baxandale Damages are either

DIRECT, arising according to the usual course of things, or CONSEQUENTIAL, where they may reasonably be supposed to be in

contemplation of both parties at the time K was made There are also incidental damages, of course

Why should this be the rule? If consequential damages are known Parties can agree to a liquidated damages (‘ballpark,’ reasonable) The breaching party can avoid harm more cost-effectively

Does it work well in this case?

General Comments on Damages General (direct) v. consequential (special) damages

Lost profits can be either (direct -> Evergreen, consequential -> Hadley) Restatement limits on damages

Restatement §351(3) permits courts to limit consequential damages to avoid disproportionate compensation

Restatement §352: damages CANNOT BE SPECULATIVE; one effect of this is that new businesses can almost never recover lost profits because they have no track record of profits

Rockingham Co. v. Luten Bridge Ruling: Lutem is not entitled to compensation for costs incurred after notice Proper measure of damages: compensation for labor and materials expanded &

expense incurred in part performance of the K Plus anticipated profits

Reliance Damages Put a party in as good a position as she would have been in if the promise had

never been made Availability

To protect reasonable reliance on promises Can substitute for expectation damages when expectation is hard to

demonstrate Strategy: attorneys should seek damages on whatever theory will bring

the best recovery for their clients (‘half a loaf is better than an empty stomach’)

Summary of Reliance Damages Subject to the same limitations as expectation damages:

Foreseeability Causation Certainty Mitigation

Security Stove arguments American Railway’s position

Did they breach? What are Security Stove’s expectation damages?

Security Stove’s arguments Not seeking expectation damages Seeks reliance damages

Why are reliance damages available here? But for AR’s promise, SS would not have incurred any expenses in

connection with convention Reliance damages are the best measure here

Restitution: Lancellotti v. Thomas Possible rules: no recovery for breaching party; recovery only if breach not willful

(Old Restatement); recovery in quantum meruit (R.2d) Court adopts R.2d rule

Liquidated Damages & Penalties Liquidated damages:

Specified damages without requirement of showing actual damages Must be reasonable in light of anticipated harm Term fixing unreasonable damages is void as a penalty

Use when damages are uncertain

U.S. v. Algernon Issue: can subcontractors recover in quantum meruit after General Contractor

breaches? Problem: losing Ks

Coastal was due $37k under the K But had it performed anyway, it would have lost even more

But recovery here is not based on K damages; it is based on RESTITUTION

How to calculate quantum meruit? Amount for which plaintiff could have purchased services rendered at the

time and place What if value to plaintiff exceeds cost to defendant? Too bad for defendant if he breached YOU DON’T GET EXPECTATION DAMAGES WHEN YOU

RECOVER IN RESTITUTION. Breaching party has limited recovery

Efficient Breach Efficient breach; example. Breach harms promise by $12k, benefits promisor by

$20k. Theoretically, promisor could breach, pay expectation damages, and still have an $8k surplus

Equity and Law Ordinary remedies for breach of contract are money damages Equitable relief (e.g. specific performance, injunctions) are available when money

damages are inadequate Special equitable defenses: Laches (equitable analog to Statute of Limitations,

‘can’t wait til it’s convenient’), Unclean Hands Courts will often not order specific performance of a K for personal services