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1 Contracts with Vincent Rougeau in Spring Basic Theories 1.1. Classical Theory - Neutral principles can be instilled from cases Characteristics Preference for clear rules over general standards Indifferent to issues of morality or social policy 1.2. Modern Contract Theory Characteristics More attentive to needs of commercial marketplace Characterized less by rules than by standards More responsive to issues of social justice and economic power 1.3. Mutual Assent - Section 17, Restatement Formation of a contract requires "a bargain in which there is a manifestation of mutual assent to the exchange and a consideration" Mutual assent = objective "Meeting of the minds" = subjective Works better to show that no agreement was reached; can defeat the creation of an agreement when minds do NOT meet "Mistake" must be mutual in order to be an acceptable defense Unilateral mistakes are typically not ok (exceptions discussed later) Signatures - Anyone who has the capacity to understand a written document, who reads and signs it is bound by his signature in law 2. Bilateral Contracts: Parties exchange promises of performance to take place in the future 2.1. General idea: A promise for a promise 2.2. Three Basic Components (Classical Approach) Preliminary negotiation Offer by offeror Offeror is master of the offer; he may revoke it at any time before acceptance Power of Acceptance by offeree Withdrawal of offer by offeror = revocation 2.3. Exceptions: Mailbox rule - acceptance of an offer is effective upon post (when letter has been released to US Postal Service) Advertisements - usually considered preliminary negotiations, unless they are attempting a "bait and switch"

2 Indirect notice is an adequate way to revoke an offer Once offeree has knowledge that the deal has been revoked, he can no longer accept 2.4. Counteroffer - a modification of terms is a rejection of the original offer 2.5. Options - separate contracts which make the seller hold the offer open for a set period of time 3. Unilateral Contracts - A promise for a performance 3.1. i.e., Conditionals 3.2. Remain revocable until offeree's full performance of act(s) called for in the offer Completed acts constitute acceptance Legal Realist idea: An offeror may not revoke an offer where the offeree has made substantial performance of the requested act Bonuses are unilateral contracts 4. Consideration 4.1. Theories Benefit/Detriment Defined: some benefit accruing to the promisor, or some legal detriment suffered by the promisee It means not so much that one party is profiting as that the other abandons some legal right as inducement for the promise of the first Bargain Theory (Section 71 of Restatement) Exchange - a quid pro quo Tit for tat; a promise for a promise This test works better than benefit/detriment Is the behavior stimulated by the promise? If so, there is consideration EXCHANGE aspect is necessary 4.2. Invalid forms of consideration Recited consideration; ex: "being a good boy" Past consideration Moral consideration Nominal consideration (violates reasonableness; points to fraud, duress, or lack of capacity) Also, gifts (gratuitous promises) are unenforceable b/c they lack consideration If given within the home or to a charity, there is a presumption that it is a gift

3 Illusory promise - words in promissory form that promise nothing; they do not purport to put any limitation on the freedom of the alleged promisor Thus, no consideration b/c there has been no exchange Commonly applied to "at-will" agreements 4.3. Courts will not "weigh" the consideration, or insist on a "fair" or "even" exchange 5. Promissory Estoppel (Theory of Detrimental Reliance) Section 90 of Restatement 5.1. Promissory Estoppel often used as a replacement for consideration, or to compensate for loss 5.2. For PE, evidence must show: The promise was made under such circumstances that the promisor reasonably expected the promisee to act in reliance on the promise The promisee acted as could reasonably be expected in relying on promise A refusal by the court to enforce the promise must be virtually to sanction the perpetration of fraud or must result in other injustice Facts very important in determining whether or not there was reliance 5.3. Section 87 of Restatement on option contracts rejects the idea that there must be an ACTUAL exchange of consideration; rather, "purported consideration" must merely be put in writing to be legitimate 5.4. Express v. Implied A promise does NOT have to be expressed in order to apply promissory estoppel Implied promises can be inferred from behavior Restatement Section 4: A promise may be stated in words either oral or written, or may be inferred wholly or partly from conduct 5.5. Enforcement of Contracts To be enforceable and valid, a contract to enter into a future covenant must specify all material and essential terms and leave nothing to be agreed on in future negotiations You can't make an agreement to agree later (Postponed bargaining) Essential terms cannot be lacking in order for an agreement to be enforceable Letters of intent Are they contracts, preliminary negotiations, or agreements to

4 agree? 5.6. Promises in a Commercial Context The principal application of promissory estoppel When is reliance detrimental? In many cases, the plaintiff will have made actual expenditures in reliance on the promise A change in position is also sufficient 6. Restitution 6.1. Unjust enrichment - when someone has gotten a benefit, for which they should have paid, unjustly 6.2. Two basic types of contracts Quasi-contract, quantum meruit, or contract implied-in-law (Restitution only applies here) The court, sua sponte, says "this benefit needs to be paid for" The law thus implies an obligation to pay for the benefit Obligation is imposed by law without regard to the party's expressions of assent either by words or acts Express contracts, or contracts implied-in-fact (Restitution does not apply here; this is classic "tit for tat" bargain theory) There typically would have been a bargain made that would produce compensation for the party providing the benefit, but for whatever reason, that contract was not actually entered into 6.3. Limitation: Officious intermeddler limitation You can't just dump benefits on people; there has to be some sense that if the person could have contracted for the service he/she would have, OR that the circumstances are such that the service was something we would normally expect people to want to pay for You also cannot use restitution to get out of a contract that you've agreed to in order to pay less, when you realize that you are overpaying 6.4. Action for Recovery based on Unjust Enrichment has Three elements Benefits conferred on defendant by plaintiff Appreciation/knowledge by defendant of benefit Acceptance or retention of the benefit by the defendant under circumstances making it inequitable for defendant to retain the benefit 7. Promissory Restitution - The promise follows the benefit conferred 7.1. Traditional View Past consideration/moral consideration not legally binding Express promises founded on pre-existing equitable obligations may be enforced

5 7.2. Modern View Moral obligation IS sufficient consideration to support a subsequent promise to pay where the promisor has received a material benefit "Material benefit" rule - If a person receives a material benefit from another, other than gratuitously, a subsequent promise to compensate the person for rendering such benefit is enforceable This is a subsequent promise based on the receipt of a material benefit Not all courts agree with this rule, but it is in Section 86 of Restatement Benefit to the promisor or injury to the promisee is a sufficient legal consideration for the promisor's agreement to pay 8. Statute of Frauds - Restatement Section Requires certain types of contracts to be in writing to be legally effective (s.m.a.l.l.): A contract of an executor or administrator to answer for a duty of his decedent A contract to answer for the duty of another (the suretyship provision) A contract made upon consideration of marriage (the marriage provision) A contract for the sale of an interest in land (the land contract provision) A contract that is not to be performed within one year from the making thereof (one-year provision) "One year" starts the moment the agreement is reached 8.2. Failure to comply with the Statute of Frauds makes the promise, even if supported by consideration, unenforceable This does not mean that the contract doesn't exist; it just means that the court will not enforce it Any statute that requires a transaction to be memorialized in writing for legal efficacy is a statute of frauds 8.3. Contracts that are not to be performed within one year Signed and unsigned writings may be read together, provided they clearly refer to the same subject matter or transaction Standard view: Contract is not subject to the statutory provision if it is possible to be performed within a year, even though the prospect of such performance is remote Termination: The fact that the contract may be terminated within a year is not sufficient to remove the contract from the requirements of the statute; only performance will do Lifetime contracts: Contracts measured by lifetime are

6 inherently capable of termination by full performance in less than a year; there is always a possibility that the person dies within a year 8.4. Exceptions: Part performance Transfer of possession of the property coupled with the making of valuable improvements is sufficient part performance (to overcome the Statute of Frauds) Part performance can only be invoked when specific performance is wanted You cannot use part performance in order to attempt to get money/damages Performance must be "unequivocally referable" to the alleged oral agreement 8.5. Statute of Frauds v. Promissory Estoppel SOME courts hold that Promissory Estoppel can be used to overcome the Statute of Frauds Other courts do not. Therefore, on an exam, discuss both possibilities 8.6. Approach for Dealing with the Statute of Frauds (Know this for exam) Q1: Is the contract within the Statute of Frauds? No --> Then it doesn't need to be in writing, and the contract may be proved by any relevant evidence Yes --> Q2: Is there some sort of written memorandum signed by the parties that meets Statute of Frauds Requirements? Yes --> Then the case may proceed as any other No --> Q3: Does an exception apply? No --> Then the contract is not enforceable Yes --> Evaluate exception 9. Principles of Interpretation 9.1. The process by which a court gives meaning to contractual language when the parties attach materially different meanings to that language 9.2. Three views Subjective View (Classical approach) What did each party mean by the language? - A "meeting of the minds" Problem: How can we know what was in people's minds when they formed the contract? Objective View Court attaches the meaning that a reasonable person would give under the circumstances Problem: Court substitutes its judgment for the judgment for

7 one or both of the parties The parties might then be bound by something that neither one of them intended Modified Objective View - Section 200, 201 of Restatement Reasonable meaning of one of the parties will prevail The party who knew or should have known of the other party's meaning will be held to that meaning 9.3. Principles of Interpretation (Never used all at once) Noscitur a sociis - the meaning of a word in a series is affected by others in the same series (context) Ejusdem generis - a general term joined with a specific one will be deemed to include only things that are like the specific one Expressio unius exclusio alterius - if one or more specific items are listed, other items, although similar in kind, are excluded Ut magis valeat quam pereat - interpretation that makes the contract valid is preferred to one that makes it invalid Omnia praesumuntur contra proferentem - preferred interpretation is the one that is less favorable to the one who drafted the document Interpret the contract as a whole Purpose of the parties - what did they intend? Was it the same thing? Specific provision is exception to a general one Handwritten or typed provisions control printed provisions Public interest is preferred Court should prefer an interpretation that makes an agreement reasonable, lawful, and effective to one that produces an unreasonable or unlawful result or that makes the agreement ineffective 10. Parol Evidence Rule (Cannot be superseded by Promissory Estoppel) General Idea: When parties to a contract have mutually agreed to incorporate a final version of their entire agreement in writing, neither party will be permitted to contradict or supplement that written agreement with "extrinsic" evidence (written or oral) of prior agreements or negotiations between them Basic function: the rule does not define what evidence is affirmatively admissible, but rather operates to EXCLUDE evidence Used to prevent CONTRADICTION or SUPPLEMENTATION of a written agreement, when that written agreement is the final expression of the parties' intent Views

8 Classical: An attempt to try to get people to mean what they say (4 corners approach) Presumes that the entire agreement was reduced to writing If writing contains such language as imports a complete legal obligation, it is presumed that the parties have introduced every material item and term No new term may be added by parol Modern: Willing to entertain varying interpretations/discussions Modern courts want to hear ALL evidence to determine what evidence to exclude (circular logic) Special language rule: If the parties use language that is mutually intended to have a special meaning, a court is obligated to enforce the agreement according to the parties' intent, even if the language ordinarily might mean something different Exceptions (What evidence CAN you introduce?) EXPLAIN the meaning - interpretation COLLATERAL AGREEMENT exception - agreements made AFTER the writing may be submitted, because they could not have been integrated into the original writing ORAL CONDITIONS PRECEDENT - this agreement would only go into effect if certain things happened prior, such as one party obtaining a loan INVALIDITY exception - contract is not enforceable b/c of fraud, duress, mistake, etc NB: Fraud exception only applies when the alleged fraud does not relate directly to the subject of the contract Where an alleged oral promise directly contradicts the terms of an express written contract, the parol evidence rule applies The written agreement supersedes all previous oral agreements Evidence designed to establish an EQUITABLE REMEDY COLLATERAL AGREEMENTS between the parties - completely separate contracts Full v. Partial integration A completely integrated agreement is the kind of agreement that the rule is designed to protect, and prevents contradiction or supplementation to that agreement Merger clause - a clause w/in a document that states that the agreement is completely integrated If it is partially integrated, then the parties only intended the writing to be representative of a certain portion of the agreement Evidence would thus be allowed on the portions of the agreement that were not included

9 10.5. Basic approach Determine whether the agreement is completely integrated or partially integrated Determine whether the evidence presented is intended to contradict/supplement, or merely explain/show collateral agreement Latent v. Patent Ambiguities Patent ambiguity Plain meaning; intrinsic ambiguity Latent ambiguity One not apparent from the words alone; extrinsic ambiguity Poses problems b/c someone has to determine if it is worth the effort to do the additional work to uncover the ambiguity Parol Evidence Rule v. Promissory Estoppel Most courts reject the use of promissory estoppel to supersede the Parol Evidence Rule Ways of Undermining Clear Language and the Express terms of the contract First, you MUST look at the express language, but then UCC allows for introduction of: Course of dealing (Defendant has contracted this way in the past) Course of performance (Defendant has contracted this way during this contract) Usage of the trade (What is the common practice for the entire trade? 11. Implied Terms Two types Any term that the court finds to be "implicit" in the parties' words or conduct ("implied-in-fact") Any term that the court holds should be "implied-in-law" - made a part of the agreement by operation of the rules of law rather than by the agreement of the parties themselves Example 1: An implied obligation to use reasonable efforts ("best efforts obligation") will prevent a somewhat indefinite promise from being illusory in a commercial contract Example 2: Reasonable notification is required to terminate an ongoing at-will business agreement, based on terms implied-inlaw Implied Obligation of Good Faith (Parole Evidence Rule does NOT bar) In every contract there is an implied obligation to act in good faith

10 NB: Implied covenant cannot override an express term "Fruits of the Contract" approach In every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract Parol Evidence rule cannot inhibit the application of the implied covenant of good faith and fair dealing because that covenant is contained in all contracts made, by operation of law Implied covenant of good faith and fair dealing applies in three ways: The covenant permits the inclusion of terms and conditions which have not been expressly set forth in the written contract The covenant has been utilized to allow redress for the bad faith performance of an agreement even when the defendant has not breached any express term The covenant permits inquiry into a party's exercise of discretion expressly granted by a contract's terms Easiest application is to measure conduct against "bad faith;" was the defendant acting in "bad faith"? 12. Avoiding Enforcement Duress (Economic) Any wrongful threat of one person by words or other conduct that induces another to enter into a transaction under the influence of such fear as precludes him from exercising free will and judgment, if the threat was intended or should reasonably have been expected to operate as an inducement Elements. Restatement Section 175 says Duress exists where there is: A wrongful or improper threat that causes one party to unreasonably accept the terms of another Lack of a reasonable alternative Victim must have no choice but to agree to the other party's terms or face serious financial hardship Possible reasonable alternatives: Availability of legal action, if that course presents a viable option Alternative sources of goods, services, or funds when there is a threat to withhold such things Toleration if the threat involves only a minor vexation Actual inducement of the contract by the threat Contracts made under duress are voidable, rather than void These Ks are binding unless disaffirmed and may be expressly or implicitly ratified by the victim

11 NB: The defendant typically has to be the one causing the financial hardship Undue Influence: The use of excessive pressure to persuade one vulnerable to such pressure; pressure is applied by a dominant object to a servient object Includes taking advantage of another's weakness of mind, or taking a grossly oppressive and unfair advantage of another's necessities or distress "Overcoming the will without overcoming the mind" Restatement Section 177: Unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that that person will not act in a manner inconsistent with his welfare Undue Influence cannot be used simply as a pretext to avoid bad bargains Conditions of overpersuasion: Unusual or inappropriate TIME Unusual or inappropriate PLACE Inistent demand that the deal be finished AT ONCE Extreme emphasis on untoward consequences of DELAY Use of multiple persuaders by the dominant side Absence of advisers to the 3rd party/recommendation against legal counsel Misrepresentation/fraud Elements: A contract is voidable if a party's manifestation of assent is induced by either a fraudulent OR material misrepresentation by the other party upon which the recipient is justified in relying (Restatement 164) Victim of misrepresentation has 2 choices of redress: A tort action for damages, OR Rescission Remedy of rescission requires the injured party to return any money or property that he has received Rescission amounts to a judicial return of the parties to the status quo that existed before the contract was formed Statements of opinion can be misrepresentations if they do not accurately reflect the state of mind of the speaker Nondisclosure (what you must reveal, but don't) Restatement Section 161: A seller has a duty to disclose material facts where: Disclosure is necessary to prevent a previous assertion from being a misrepresentation or from being fraudulent or material Disclosure would correct a mistake of the other party as to a

12 basic assumption on which that party is making the K if nondisclosure amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing Disclosure would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part The other person is entitled to know the fact because of a relationship of trust and confidence between them Failure to disclose can result in rescission Sellers must disclose known latent defects Unconscionability General idea: A grossly unfair bargain should be unenforceable Test: An "absence of a meaningful choice" on the part of one of the parties together with contract terms which are unreasonably favorable to the other party (procedural) Whether a meaningful choice is present can only be determined by the circumstances surrounding the transaction Procedural unconscionability: Either lack of choice by one party or some defect in the bargaining process Substantive unconscionability: Relates to the fairness of the terms of the resulting bargain (unfair bargain) NB: Unconscionability is only to be judged as of the time that the contract was made, not based on developments after K was formed Contracts of adhesion: Standardized contracts that are imposed and drafted by the party of superior bargaining strength and relegate to the other party "only the opportunity to adhere to the contract or reject it" These types of contracts MAY (but definitely not always) signal unconscionability 13. Justification for Nonperformance Mistake A contract MAY be rescinded because of a MUTUAL misapprehension of the parties The best approach is a case-by-case analysis whereby rescission is indicated when the mistaken belief relates to a basic assumption of the parties upon which the contract is made, and which materially affects the agreed performances of the parties Rescission is NOT available to relieve a party who has assumed the risk of loss in connection with the mistake i.e., when party agrees to accept the property "as is" When mutual mistake consists of the failure of the written contract to state accurately the actual agreement of the parties, reformation of the contract to express the parties' mutual intent is

13 the normal remedy A unilateral mistake may afford ground for rescission where there is a material mistake and such mistake is so palpable that the party not in error will be put on notice of its existence Four conditions generally required for rescission based on mistake: The mistake must relate to a material feature of the contract The mistake occurred notwithstanding the exercise of reasonable care The mistake is of such grave consequence that enforcement of the contract would be unconscionable The other party can be placed in the status quo Evidence of these conditions must be clear and positive Restatement 153 view of unilateral mistake. K may be avoided when: The mistake is such that enforcement would be unconscionable, OR The other party either had reason to know of, or was responsible for causing, the mistake NB: The "duty to read" anything signed can be overcome by lack of capacity, fraud, or unconscionability Changed Circumstances. All three derive from the original notion of impossibility Impossibility Requires a showing of LITERAL impossibility; the thing promised simply could not be performed OBJECTIVE impossibility - "no one could have done it" rather than "I could not do it" This rule therefore does not excuse a party merely because performance had come to be more difficult or expensive or because the contract itself had lost value to that party Death or incapacity allow for this defense Impracticability (see ) Even when performance is clearly not literally impossible, it is sufficiently different from what the parties had both contemplated at the time of contracting as to be impracticable In order for a supervening event to discharge a duty under this section, the non-occurrence of that event must have been a "basic assumption" on which both parties made the contract Only an EXTREME increase in cost may justify nonperformance; normal economic loss or hardship is insufficient Frustration of Purpose When the exchange called for by the contract loses all value to the defendant, because of a supervening change in extrinsic circumstances

14 Requires the establishment of 3 factors: The purpose frustrated by the supervening event must have been the "principal purpose" of the party making the contract The frustration must be substantial The nonoccurrence of the frustrating event must have been a "basic assumption" of the contract For EITHER Frustration OR Impracticability, the disadvantaged party must show: Substantial reduction of the value of the contract The occurrence of an event, the nonoccurrence of which was a basic assumption of the contract Without the party's fault, AND The party seeking relief does not bear the risk of that occurrence of the event either under the language of the contract or the surrounding circumstances NB: If a contract has simply become more expensive or less profitable due to a change in market conditions, courts typically deny relief on claims of Frustration or Impracticability Exception: Restatement 264 recognizes compliance with foreign or domestic governmental orders as a basis for excuse under the doctrine of impracticability These defenses may be used to excuse nonperformance; they may NOT be used for reformation of a contract, or for compensation The distinction between impracticability and frustration is that impracticability concerns the duties specified in the contract whereas frustration of purpose concerns the reason that the party entered into the contract; some jurisdictions have merged the two together 14. Consequences of Nonperformance Breach: Any nonperformance of a contractual duty at a time when performance of that duty is due Performance is not due if for any reason nonperformance is "justified" Express conditions When the terms of an agreement state that performance is not due unless and until some specified event has taken place The happening of the event is an "express condition" to the duty of performance When an express condition has simply failed to occur, the conditional duty never arises and the promisor is therefore justified in not performing When the nonoccurrence of the condition is excused, the conditional duty becomes an unconditional one, and the promisor's failure to perform amounts to breach

15 A party whose performance is conditioned is the "obligor," and the other party is the "obligee" (the one to whom performance is owed) These conditions must be literally performed If the parties have made an event a condition of their agreement, there is no mitigating standard of materiality or substantiality applicable to the non-occurrence of the event Until the conditioning event does occur, the duty does not arise; at the point it cannot occur, the defendant is discharged Often uses the language "if...unless...and until" General rule of courts is strict enforcement of express conditions Exceptions: Section A court may excuse the nonoccurrence of a condition where forfeiture would otherwise result, unless the conditioning event was a material part of the parties' exchange Implied, or Constructive, Conditions Those conditions imposed by law to do justice These conditions arise from the language of the promise and are subject to the precept that substantial performance is sufficient When interpreting doubtful language, Courts will interpret the condition as constructive, rather than express One party's failure to perform should constitute a sufficient justification for the other party's withholding of its performance in return Performance Performances that can be rendered at the same time are due simultaneously If performances cannot be rendered at the same time, the performance requiring the longer period of time must be rendered before the performance requiring the shorter period of time will be due Prevention of a condition: A condition is excused from the entire agreement if the promisor wrongfully hinders or prevents that condition from occurring Breach: Remedies for Nonbreaching party Total and Material Withhold performance Terminate K Claim full damages for the breach Material, but not total Suspend performance Await a cure Claim compensation for any loss suffered because of the breach

16 Breach that is not material (substantial performance given) Limited to a claim of compensation for any loss suffered Material Breach - A breach so central to the K that it substantially impairs its value Occurs when one party's failure to perform justifies the other party in refusing to render a performance of his own Jacob and Youngs: The court's option for damages are either the cost of replacement or the difference in value Diminution in value is only used where the breach relates to an element of the K that was not central, AND when cost-to-complete would lead to waste Condition: When applying diminution in value, the complained-of defect could not have been done in bad faith Typically, courts use the cost-to-complete option instead of diminution in value Whether a breach is total or partial depends upon its materiality. In determining the materiality of a failure to fully perform a promise, the following factors are to be considered: (CHECK RESTATEMENT 241) The extent to which the injured party will be deprived of the benefit which he reasonably expected The extent to which the injured party can be adequately compensated for the part of that benefit for which he will be deprived The extent to which the party failing to perform or to offer to perform will suffer forfeiture The likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurance The extent to which the behavior of the party failing to perform, or to offer to perform, conforms with the standards of good faith and fair dealing Totality of a breach also depends on 2 other factors: The extent to which further delay appears likely to prevent or hinder the making of substitute arrangements by the nonbreaching party, AND The degree of importance that the terms of the agreement attach to performance without delay Only the Restatement draws a distinction b/w material and total breach (241) Total Breach Relieves or discharges the nonbreaching party from his duties under the contract The injured party may collect not only actual damages, but also any future damages that will reasonably flow from the breach Partial Breach

17 Does not discharge the nonbreaching party, who must continue to perform his obligations under the contract Produces a right to damages only for the actual harm, and NOT for future harm (NO right to expectancy damages) Anticipatory Repudiation Advance refusal to perform by one party; it may be expressed orally, in writing, or by conduct showing an unwillingness to perform The doctrine of anticipatory repudiation requires a clear manifestation of an intent not to perform the contract on the date of performance That intention must be DEFINITE and UNEQUIVOCAL Doubtful and indefinite statements that performance may or may not occur are not enough to constitute anticipatory repudiation A suggestion for modification of a contract does not amount to repudiation Language that under a fair reading amounts to a statement of intention not to perform except on conditions which go beyond the contract constitutes a repudiation Conduct can also be sufficient ( ) The effect of a statement as constituting a repudiation is nullified by a retraction of the statement if notification of the retraction comes to the attention of the injured party before he: Materially changes his position in reliance on the repudiation, OR Indicates to the other party that he considers his repudiation to be final This can be accomplished by: Bringing suit By notifying the repudiating party, OR By some other way manifesting an election to treat the contract as rescinded Prior to such indication, the repudiating party is free to retract its repudiation For mere conduct to constitute anticipatory repudiation, it must indicate that performance is a practical impossibility Financial difficulty, even to the level of insolvency, does not constitute an anticipatory repudiation UCC authorizes a party who has "reasonable grounds" for insecurity to demand "adequate assurance" of due performance from the other party (Restatement also adopts this view) The failure to give such assurances constitutes anticipatory repudiation of the contract 15. Expectation Damages: Principles & Limitations Three basic interests that the law may seek to protect in

18 fashioning remedies for breach of contract: Restitution interest - the court may force the defendant to disgorge the value he received from the plaintiff Object: The prevention of gain by the defaulting promisor at the expense of the promisee Reliance interest - Damages are awarded to the plaintiff for the purpose of undoing the harm which his reliance on the defendant's promise has caused him Object: To put plaintiff in as good a position as he was in before the promise was made Expectation interest - Court seeks to give the promisee the value of the expectancy which the promise created Object: To put plaintiff in as good a position as he would have occupied had the defendant performed his promise Restatement, and most courts, adopt this approach when possible Computing Damages Section 347 of Restatement LV = Loss in value OL = Other losses (incidental and consequential) CA = Costs avoided LA = Loss avoided Damage amount = (LV + OL) - CA - LA See Notes from K 410 for examples; p The one bringing suit must find some way to prove market value In a personal services contract, the death or incapacity of a person necessary for performance may excuse nonperformance Performance may be impracticable because it will involve undue risk of injury to a person (Section 261) General Rule of damages for breach of a construction contract is that the injured party may recover those damages which are the direct, natural and immediate consequence of the breach and which can reasonably be said to have been in the contemplation of the parties when the contract was made Restatement Section 348(2) If the loss in value to the injured party is not proved with sufficient certainty, damages may be measured by either (a) the diminution in market value, OR (b) the reasonable cost of completing performance or of remedying the defects if that cost "is not clearly disproportionate to the probable loss in value to him" In ordinary cases of defective or unfinished construction work, courts appear to be generally inclined to award cost-to-complete

19 damages Restrictions on the Recovery of Expectation Damages: Foreseeability, Certainty, & Causation "Other loss" - recovery for this type of loss is subject to certain controls not applied to ordinary damages Rule: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be: (A) Such as may fairly and reasonably be considered either arising naturally from such breach of contract itself, OR (B) Such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of breach of it Modern formulation of this rule is understood to depend on defendant's knowledge at the time the contract is made It is only necessary that the loss be foreseeable Direct v. Consequential Damages General, or direct, damages: Damages that arise naturally The plaintiff need not make any special showing to recover general damages Consequential, or special, damages: Damages flowing from special circumstances Most important type in commercial cases is lost profits arising from collateral contracts Also includes injury to person or property caused by goods that fail to comply with contractual warranties Rule: Before lost profit damages are recoverable, it must be adequately shown such profits were reasonably certain to have been made by the non-breaching party absent breach Loss of future profit is recoverable in a breach of contract action: If the loss is within the contemplation of the parties at the time the contract was made If the loss flows directly or proximately from the breach, AND If the loss is capable of reasonably accurate measurement or estimate Mere uncertainty as to the EXACT amount of damages will not preclude the right to recovery But an injured party may not recover damages that are speculative Plaintiffs must prove their damages with "reasonable certainty" Courts often draw a distinction b/w uncertainty about the FACT of damage and uncertainty regarding the AMOUNT of damage When plaintiff establishes FACT of damage, the jury is

20 given wide leeway in awarding compensation "New business" rule: Plaintiffs have traditionally encountered great difficulty in recovering lost profits in a new business venture that has no history of prior profitability Mitigation damages These are off-setting factors that may have the effect of reducing the plaintiff's recovery, or even eliminating it altogether They are referred to in the Restatement as "cost avoided" and "loss avoided" Also called the doctrine of avoidable consequences General idea: The plaintiff may not recover for those injurious consequences of the defendant's breach that the plaintiff herself could, by reasonable action, have avoided After an absolute repudiation or refusal to perform by one party to a contract, the other party cannot continue to perform and recover damages based on full performance Plaintiff must, so far as he can without loss to himself, mitigate the damages caused by defendant's wrongful act The measure of plaintiff's damage is an amount sufficient to compensate plaintiff for labor and materials expended and expense incurred in the part performance of the K, prior to its repudiation, PLUS the profit which would have been realized if it had been carried out in accordance with its terms Mitigation, in the context of an employment dispute, requires that the employee make a good faith effort to find suitable alternative employment "Suitable employment" is that which is substantially equivalent to the position lost and suitable to a person's background and experience The measure of damages is the amount the plaintiff would have earned absent the breach, less what the plaintiff actually earned, or could have earned by the exercise of reasonable diligence, during the K period after plaintiff's termination In seeking substitute employment, a wrongfully discharged employee may have to spend money in various ways to gain new employment These "incidental expenses" may be recoverable from the previous employer "Lost Volume Seller" measure of damages Refers to the lost volume of business a non-breaching seller incurs on a buyer's breach When the seller resells the entity he expected to sell to the original buyer, he usually deprives himself of something of value - the sale to a new buyer of another similar entity The duty to mitigate damages cannot be imposed to deprive a plaintiff of the benefit of subsequent contracts which would have been available to him irrespective of the original breach

21 Mitigating vs. additional contracts Mitigating contract - a contract that the plaintiff was able to perform only because the defendant's breach freed the plaintiff from the obligation to perform the original contract (Loss avoided) Additional contract - the plaintiff would be entitled to the profit from both contracts, and the defendant will not have the benefit of any deduction from its damage liability Efficient Breach: Encouraging Breach of Contract Theory: When nonperformance would be economically efficient, the law should not only permit breach but indeed regard it as appropriate behavior to be encouraged rather than condemned Few courts have explicitly relied on this doctrine Example of hairdresser case The measure of damages for breach of contract by employee was the cost of obtaining other service equivalent to that promised and not performed Defendant would have made $75 a week, and replacement cost $100 a week, so defendant had to pay plaintiff the $25/week difference 16. Alternatives to Expectation Damages Reliance Damages Where anticipated profits are too speculative to be determined, monies spent in part performance, in preparation for, or in reliance on the contract are recoverable The very nature of reliance damages is that future gain cannot be measured with any reasonable degree of reliability The injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance, or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed Often, but not always, pairs with promissory estoppel claims Relief MAY be limited to restitution or to damages or specific relief measured by the extent of promisee's reliance rather than by terms of the promise Language is permissive; Court MAY limit relief Relief MAY be limited to a party's out-of-pocket expenses made in reliance on the promise Out-of-pocket expenses are the only difference between the market value and the amount paid for the property Many modern courts believe that recovery for promissory estoppel should always be limited to the amount of actual reliance Precontract reliance - courts will not allow a party to recover for reliance costs incurred before the contract was made

22 Another crazy twist: Some contracts, that were formed on the basis of promissory estoppel, might even allow more than reliance damages They might allow expectation damages. How crazy! Restitutionary Damages General: Modern contract law allows a nonbreaching party to elect recovery of restitutionary rather than expectation damages for breach of contract (373) Even a breaching party may in some cases be entitled to restitution by virtue of the benefit conferred on the other party by part performance (374) If the performance obligations imposed by the contract have been "discharged" for some reason, such as incapacity or impracticability, either or both of the parties may be entitled to restitutionary relief ( ) The measure of recovery for quantum meruit is the reasonable value of the performance, and recovery is undiminished by any loss which would have been incurred by complete performance The standard for measuring the reasonable value of the services rendered is the amount for which such services could have been purchased from one in the plaintiff's position at the time and place the services were rendered This is the rule of "market value restitution" If a plaintiff elects to rescind the contract and recover in restitution, the contract no longer legally "exists"; therefore any loss that would have resulted from performance of the contract should not act as a limitation on the amount of recovery Full performance exception to market value restitution: If the nonbreaching party has fully performed his obligations under the contract and the breaching party's only remaining duty of performance is the payment of a liquidated or specified sum of money, the nonbreaching party may not elect a restitutionary recovery but is limited to expectation damages Compensating a defaulting party via quantum meruit Recovery by a defaulting party is limited to the LESS of either: (a) the value of the benefits conferred OR (b) the defendant's increase in wealth Applies only if it would be unjust for nonbreaching party to be enriched by breaching party's part performance (374) Section 371 of the Restatement recognizes both means of measuring Restitution (reasonable value of the performer's services and value of increase to the recipient's property) and indicates that relief may be measured as justice requires Specific Performance

23 General Specific performance is not a remedy to which the plaintiff is automatically entitled, even when an unexcused breach has been clearly established Courts often will not undertake to coerce a performance that is personal in nature Courts also reluctant to order specific performance where difficulties of supervision or enforcement are foreseen Courts will often require that contract terms be express with someone greater certainty if specific performance is to be granted than if damages are to be awarded Ordinarily, a promisee must be content with money damages Specifics When specific performance is to be granted, the essential criterion has been the inadequacy or impracticability of legal remedies Contracts involving interests in land or unique chattels generally are specifically enforced because of the clear inadequacy of damages at law for breach of contract The mere fact that a contract, definite in material respects, contains some terms which are subject to further negotiation between plaintiff and defendant will not bar a decree for specific performance, if in the court's discretion specific performance should be granted But, failure to agree on MATERIAL terms may result in denial of specific relief Section 360: Circumstances which support a claim that damages are inadequate: Difficulty of proving damages with certainty Difficulty of procuring a suitably equivalent substitute performance Likelihood that a damage award would not be collectible Section 364: Other factors in determining whether specific relief should be available The possibility that the contract was the product of mistake or unfair practices The exchange it calls for is grossly inadequate The terms of the contract are otherwise unfair Section 367: A promise to render personal services will not be specifically enforced But some courts have been willing to grant "negative enforcement" by way of injunction that prohibits a breaching party for performing for anyone other than the nonbreaching party Requirement that services be unique