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Contracts II - SW


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Parol Evidence
Oral or written prior evidence and oral contemporaneous evidence of promises or representations made that were intended to be a final statement of the K (an integrated agreement)
When parties reduce K to a written statement...
...that is final and complete with respect to its terms, extrinsic evidence of prior written and oral or contemporaneous agreements are inadmissible to supplement or contradict writing.
Integrated Agreement
A final, written statement of the K.

May be "fully" integrated - writing states all terms of the agreement.

Or, "partially" integrated - writing states some of the terms (but terms that are included are meant to be final in the K)
PER for fully Integrated Agreements
A fully integrated agreement discharges all prior agreements relating to subject matter of the K.

Parol evidence will not be admitted to vary, add to, or contradict a written K that constitutes an integration
Sale of Good and PER
Fully integrated agreement may be supplemented or explained by evidence of a:

- course of dealing
- trade usage
- course of performance
CA law and PER
The court may consider all surrounding circumstances, including evidence of parol agreement, to determine whether or not the parties intended to make a writing the exclusive statement of their agreement
"Merger" Clause
Signals the parties' intention to fully integrate their K.

E.g. clause specifically states finality of K, and states that no other agreements exist between the parties as of date of K.
UCC 2-202(b)
Test of Complete Integration
A written K is not fully integrated unless writing was intended as a complete and exclusive statement of terms of agreement.

Would the terms "most certainly have been in the writing" if the parties had agreed to them?
- If "yes", then written agreement is fully integrated and extrinsic/parol evidence can't be admitted.
PER for Partially Integrated Agreements
It discharges inconsistent prior agreements

May be supplemented but not contradicted by evidence of prior agreements, promises, representations, etc.
Common Law Test of Partial Integration
Considering all circumstances surrounding the transaction, is the alleged parol agreement one that might naturally have been omitted from the writing?

If "yes", then extrinsic evidence can be admitted.
When is parol evidence admissible?
Admissible to show lack of mutual assent.

- to prove party did not intend to be bound to the K.

- evidence that the agreement was a sham transaction, preliminary negotiation, or otherwise not intended to bind parties.
Admissible Evidence
(grounds for avoidance)
Mistake, duress, fraud, undue influence, lack of consideration, lack of capacity, etc.
Admissible Evidence: To resolve ambiguity
Modern rule: Extrinsic evidence is admissible to prove a meaning to which the written agreement is reasonably susceptible.
Admissible Evidence: Mistake in Interpretation
Extrinsic evidence is admissible to correct a "scrivener's error"
Admissible Evidence: Modification
PER does not bar proof that the K was later modified

- subsequent agreements
Exceptions to PER
Before oral agreement can vary written K, must satisfy 3 conditions:

1. Agreement must, in form, be a collateral one

2. Must not contradict express or implied provisions of written K.

3. Must be one that the parties would not reasonably have been expected to include in the written K ("naturally omitted")
"Naturally Omitted"
Term will be treated as naturally omitted if:

1. term does not conflict with written integration; AND

2. term concerns a subject similarly situated parties would not ordinarily be expected to include in written K.
Separate Consideration
Even if a writing is determined to be an integration, parol evidence is admissible if the written integration and the alleged parol evidence are each supported by separate consideration.
(4 Corners test of Completely Integrated agreement)
Broad approach

The only criterion of the completeness of the written K as a full, expression of the agreement is the writing itself.
Williston view
Writing is treated as an integration if taken as a whole, and on its face writing appears to be an instrument that completely expresses the paries' agreement

- "abstract reasonable person" test
(Corbin view)
Narrow approach

A writing is deemed to be an integration only if the parties intended it to be an integration

Court can consider any relevant evidence to determine parties' intent

"actual parties" test - court looks at the actual parties involved when determining these parties' intent
"Plain Meaning" Rule
If there is no ambiguity in written K on its face, and no special meaning attached to words in K by custom or usage, terms are to be interpreted according to their plain meaning.

Extrinsic evidence would be inadmissible for interpretation or clarification
If language of the K is fairly susceptible to either one of two interpretations...
...extrinsic evidence relevant to prove either of such meanings is admissible
A term that has no single meaning

We understand the term, but more than one description can satisfy the meaning

E.g. apples (different varieties); red (different shades)
Case in which language used has more than one meaning

E.g. ton (depends on the trade); north (magnetic or true)
Provisional Admission Approach
Although the language of a K is facially unambiguous, a party may still proffer parol evidence for purpose of showing that an ambiguity exists which can be found only by looking at the clear language of the K.
Rule of Thumb
Words and conduct are interpreted in light of all circumstances and the principle purpose of the parties.
Unless a different intention is manifested...
1. language is given generally understood (prevailing) meaning

2. technical terms are given their technical meaning when in a technical field
In choosing among reasonable meaning of an agreement...
...meaning is generally preferred which operates against party who supplied the words or from whom a writing otherwise proceeds
(the drafter)
1. Express terms
2. Course of performance
3. Prior course of dealing
4. Trade usage
5. Specific and exact terms have greater weight than general language
6. Separately negotiated or added terms are given greater weight than standardized terms
Role of the trial court
TC must decide:
1. Did the parties enter into a final, written K?
2. Was the writing a complete or only partial statement of terms of the K?
Conditions (defined)
An event, not certain to occur, but which must occur, or be excused, before a party is obligated to perform a K.
Burden of Proof
Burden of proving the satisfaction or excuse of an express condition is on the obligee.

Obligee must prove that the condition was satisfied or excused before it can enforce obligor's duty to perform.
Questions to ask
1. Is there an express condition in the K?

2. Was the condition satisfied (did the event occur)?

3. If the condition was not satisfied, should the condition be excused?
Condition of Satisfaction: Objective test
Unless otherwise agreed, a performance is not unsatisfactory if a reasonable person would be satisfied with the mechanical fitness, utility, etc. of the performance.
Condition of Satisfaction: (Subjective test)
Unless otherwise agreed, the performance is unsatisfactory only if the obligor is in fact dissatisfied based on an artistic judgment, taste, fancy, etc.
Epress Conditions
Refers to an explicit contractual provision which, in substance provides that either:

1. A described event must occur or fail to occur before party has duty to perform; OR

2. If a described event fails to occur or occurs, a party will be released from a duty to perform
An undertaking to perform or refrain from performing some designated act.
Condition distinguished from promise
A provision, the fulfillment of which crates or extinguishes a duty to perform under a K.
Effect on Breach and liability
An excused failure to perform a promise is always a breach of K, and always gives rise to liability

Nonfulfillment of a condition is not a breach of K, and does not give rise to liability
- normally excuses duty to perform that which was the subject to the condition
Promise or express condition?
If doubtful whether words create a promise or express condition, they are usually interpreted as creating a promise, thereby avoiding forfeiture.

Includes ambiguous contractual language, where event conditioning performance is out of the control of the obligee
Implied conditions
Often can be implied that the duty to render performance under a K is conditional upon occurrence of some event, even though K does not explicitly say so.
Implied Conditions of Performance
Most common type of implied condition to duty of each party to a K to render performance - is that the other party has either:

- rendered its performance; OR
- made a tender of its performance
Condition Precedent
A condition under which some state of affairs must occur before a party has a duty to render performance under a K.
Condition Subsequent
A condition under which occurrence or non-occurrence of a state of affairs extinguishes or terminates a duty to perform that had previously arisen.
Dependent Promises
A dependent promise is a conditional obligation.

The dependent promise must be performed only if the other party performs or tenders performance
Doctrine of Substantial Performance
Where applicable, a party can bring suit on the K as a (P), for expectation damages, even though he has breached the K by not rendering perfect performance.
(D) is entitled to offset any remedy against him by the amount of damages he incurred as a result of (P)'s breach
Test of Substantial Performance
Whether the performance meets the essential purpose of the K
Factors in determining substantial performance (essential purpose)
1. Extent of contracted-for benefits innocent party recieved (was he enriched?)

2. Extent to which damages will be an adequate compensation for the breach

3. Extent to which forfeiture will occur if doctrine is not applied

4. Extent to which breach was wrongful or in bad faith (willfulness?)

5. Was the breach a material element of the K?
Concurrent Constructive Conditions
Seller comes with goods; buyer comes with money

Performance of promises are due at the same time
Construction Contracts
Party selling construction services performs over time.

Buyer doesn't pay until services have been rendered.
Divisible Contracts
K is divisible if it is possible to apportion the parties' performances into matching or corresponding pairs that the parties treat as equivalents.

E.g. a partial performance by seller is the agreed equivalent of a partial performance by buyer
Perfect Tender Rule in Sale of Goods
UCC adopts this instead of substantial performance

In a single delivery of goods, the buyer may reject the goods if they fail in any way to conform to the K.
Perfect Tender Rule: Exceptions
If time for performance has not yet expired, the seller has the right to notify the buyer of intention to cure, and has the right to make a conforming delivery w/in the K time.
Buyer's choice when goods are non-conforming: Reject or accept?
The buyer agrees to take the good after a reasonable opportunity to inspect them; OR

The buyer fails to make an effective rejection; OR

The buyer does an act that is inconsistent w/ the seller's ownership
Consequences of Accepting Goods
No right to reject goods for breach (damages)

No perfect tender rule

Buyer must pay K price

Buyer has burden of proving breach and the amount of any damages
Revocation of Acceptance
Remedy allowing you to return goods to seller and get money back
A buyer may revoke acceptance of goods if:
1. The breach is material (substantially impairs value of goods to him); AND

2. The buyer has an excuse for failure to reject the goods (latent defects, sellers assurances)
Factors in determining whether there had been a material breach
1. Did non-breaching party receive substantial benefit from the bargain?

2. Will award of damages adequately compensate non-breaching party?

3. Does breaching party face an unreasonable forfeiture if K is not enforced?

4. Is it likely breach will be cured?

5. Did breaching party act in good faith?
Effect of Material Breach
1. Gives rise to an immediate cause of action for breach of entire K

2. Excuses further performance by the innocent party
"Time is of the Essence"
Modernly, if circumstances indicate that date set for performance was not of great importance to the parties, a minor delay will not constitute a material breach even though K contains a provision that time is of the essence (in absence of more explicit language concerning effect of delay)
Minor Breach
1. Gives rise to immediate cause of action for whatever damages were caused by breach, BUT

2. does not give rise to cause of action on entire K.
Response to the breach
Non-breaching party may:

- sue breaching party for damages resulting from breach, but let K continue; OR
- terminate K and sue for breach of entire K
(unless breach is minor - can't terminate the K)
Quantum Meriut
Materially breaching contractor may sue for the reasonable value of goods conferred in excess of damages caused by the breach
Wrongful Prevention: No Damages
A person who wrongfully prevents the performance of any promise cannot recover damages for breach

(performance of promise is excused)
Wrongful Prevention: Total Breach
A contracting party who wrongfully prevents substantial performance by the other party is in material breach (and total breach) of the K and can't sue for breach of K
Wrongful Prevention: As an Excuse of Express Condition
An obligor who wrongfully prevents (or fails to cooperate in) the occurrence of an express condition must perform

(failure of the condition is excused, and there is an unconditional obligation to perform)
Delay of performance may be excused...
...where it is caused by an act or default of opposite party, or person for whom opposite party is responsible
Anticipatory Repudiation
Obligor's statement to the obligee that it will commit a total breach of the K

A voluntary affirmative act which renders the obligor unable to perform w/out a total breach of the K
Satisfaction of an immaterial condition can be waived by words or conduct
A party indicates by words or conduct that she will not insist on literal compliance w/ a condition, and enforcement would result in unreasonable forfeiture
Estoppel (majority rule)
The lender must give borrower reasonable notice that it will require strict compliance with the payment terms in order to "reinstate" a condition of timely payment
Performance of a K will normally be excused if the performance has been made impossible (impracticable) by the occurrence of an event whose non-occurrence was a basic assumption on which the K was made

UNLESS: adversely affected party has explicitly assumed the risk that the contingency might occur
Taylor v. Caldwell
When performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance
Commercial Impracticability
1. Delay or non-delivery may be excused if an event has made performance impracticable

2. Non-occurrence of event was a basic assumption on which the K was made

3. Party asking to be excused was not at fault (was the event w/in control of party seeking excuse?)

4. Party seeking excuse did not assume the risk of the event
Is projected loss from performance extraordinary?

Not impossible, but an extraordinary burden making the K significantly different than the parties entered into it.
Force Majeure Clauses
Acts of God

Acts of Government

Failure of an exclusive source of supply
Casualty Loss to Identified Goods
(seller's excuse)
Contract requires the delivery of goods:

1. identified when K was made
2. that were damaged or destroyed
3. w/out the fault of either party before the risk of loss passed to the buyer
Frustration of Purpose
Performance of a K may be excused under doctrine of frustration where the purpose or value of the K had been destroyed by a supervening event that was not reasonably foreseeable at the time the K was entered into
Frustration of Purpose
1. An event has substantially frustrated a principle purpose for entering into the K

2. Non-occurrence of event was basic assumption on which the K was made

3. Party asking to be excused was not at fault

4. Party seeking excuse did not assume the risk of the event
What is the effect of anticipatory repudiation?
Excuses the other party's obligation to remain ready, willing, and able to perform the K

Excuses the other party from rendering performance, or tending performance

Aggrieved party can respond by canceling K and suing immediately for the breach
How can a party to a sales K respond to anticipatory repudiation?
1. Await performance for a commercially reasonable time, OR

2. Resort to any remedy for breach; AND

3. In either case, suspend performance
Demand for Adequate Assurances
If there are reasonable grounds to believe that the other party will not perform, the party who is "insecure" can make a written demand for adequate assurances of due performance
Failure to provide adequate assurances...
...w/in a reasonable time, not to exceed 30 days, is an anticipatory repudiation of the K
A party who has breached the K...
...may not demand assurances from the other party before suspending performance
Exceptions to Anticpatory Repudiation
- Doctrine does not apply where, at time of repudiation, the only remaining duty of performance is the duty of the repudiating party

Does not extend to unilateral contracts
Money damages are unusual for breach of K

Extraordinary/equitable remedies are available only if damages are inadequate
Emotional Distress
General Rule - Emotional distress damages can't be recovered unless the breach caused personal injury or emotional distress was a probably result of the breach when the K was made.

E.g. morticians, carriers of the body, etc.
Expectation Damages
Purpose - placing the victim of the breach in the position he would have been in if the promise had been performed

- (P) is as well off as w/ full performance
Limitations on Expectation Damages
A party injured by breach of K can only recover those damages that:

- should reasonably be considered as arising naturally from the breach, OR

- might reasonably be supposed to have been in the contemplation of the parties (both) at the time the K was made, as probable result of it
Ordinary Losses (General Damages)
Damages that flow from given type of breach w/out regard to particular circumstancess of the victim of the breach

These losses can be recovered w/out any special showing that they were foreseeable b/c they would have been anticipated by any reasonable person who made the K
Types of ordinary losses
1. Cost of repair
- damage = cost of repairing defect

2. Loss in value
- damages = value of goods as promised - actual value of goods

3. Delay of completion
- may look at fair rental value of the property had it been complete - what expenses were incurred as result of delay?
Extraordinary Losses (Special/Consequential Damages)
Damages, above and beyond general damages, that flow from a breach as result of buyer's particular circumstances

Typically consists of lost profits
Reasonable Foreseeability
Damages can be recovered onl if the breaching party knew that these losses would probably occur b/c of special circumstances that were known to him or should have been known to him when K was made
Consequential Damages include:
Any loss resulting from general or particular requirements and need of which the seller at the time of contracting had reason to know and which could not be reasonably prevented...; AND

Injury to person or property proximately resulting from any breach of warranty
Types of Consequential Damages
1. Loss of primary profits

2. Loss of secondary profits

3. Loss of good will damages (prospective damages)
Loss of primary profits
What buyer would have earned from reselling the goods in question - what was earned after the breach occurred = damages
Loss of secondary profits
The sales of other products which suffered as a result of the breach

(primary product doesn't conform to the warranty, so foreseeable that there will be secondary loss of profits)
Damages must be proved w/ reasonable certainty (not too speculatively) and adequately proven
Duty to Mitigate
The non-breaching party cannot recover losses that could have been reasonably avoided

General rule - damages that can be avoided w/out undue risk, burden of humiliation cannot be recovered
Repudiation of the K
After repudiation by one K party to perform, the other party cannot continue to perform and recover damages based on full performance

- stopping performance would have mitigated the damages, and therefore it was (P)'s responsibility to do so
Sale of Goods K
Standard is not whether the seller makes the right choices, but whether the seller acts in a commercially reasonable manner
Recovery for wrongfully discharged employee
General measure of damages - amount of salary agreed upon for the period of service, less the amount which the employer affirmatively proves the employee has earned or w/ reasonable effort might have earned from other employment.

- employee's rejection of, or failure to seek other available employment of a different or inferior kind may not be used to mitigate damages
Employer Breach: General Damages
Damages = Contract price - actual earnings made possible by the breach

"actual earnings" - earnings made from another job the employee took after breach
Incidental Damages
Cost of mitigating damages

Any reasonabe expense to mitigate loss can be recovered

- expenses reasonably incurred in inspection, receipt, transportation, etc. of goods rightfully rejected
- any reasonable expenses incident to delay or breach
Reliance Damages
Based on non-breaching party's costs and have the purpose of putting the non-breaching party in the position he would have been in had the promise not been made

(P) is not worse off for having entered into the K
Waste of Expenditure
(P) can claim wasted expenditure from before and after K as long as the expenditures were such as would reasonably be in the contemplation of the parties as likely to be wasted if the K was broken

(P) can either sue for loss of profits, OR wasted expenditure
Damages based on the Reliance Interest
Damages = expenses in performance or preparation to perform - loss w/ full performance*

*burden of proof is on breaching party
Based on reasonable value of a benefit conferred

Order by court to give back that which you should not retain in the interest of justice

(D) is not better off by breaching than by fully performing
Restitution most commonly used when...
A party has conferred a benefit under a K that turns out to be unenforceable b/c of some defense
(e.g. statute of frauds)

- contract was a losing one for innocent party, and she is better off with restitution than w/ expectation damages
Buyer accepts goods that are defective and can't (or doesn't want to) rightfully revoke acceptance
Damages = value of goods as warranted - actual value of goods accepted
Seller fails to deliver, or buyer rejects good, or properly revokes acceptance
Damages = fair market value at time of breach - the K price + incidental and consequential damages

- buyer can't recover consequential damages if they were unforeseeable or reasonably avoidable
Substitue goods from other sources

If buyer covers in good faith and in commercially reasonable manner, she can recover:

cost of cover - contract price + incidental and consequential damages
Seller delivers the goods
Seller gets the price of accepted goods
Buyer refuses the contracted-for goods
Seller can recover K price of goods - market price at time of K
Seller's ordinary measure
Contract price - market price
Sale of Realty:
Fair Market Value
FMV increases - buyers loss

FMV decreases - sellers loss

FMV represents mitigated loss
Construction contracts: Breach by Owner
Contractor entitled to recover contract price – out-of-pocket costs remaining to be incurred by contractor at time of breach, with an offset for amounts already paid by the owner.
Cost of Completion
Difference between contract price and cost of completing the K by contracting with a substitute contractor
Diminished value damages (if cost of completion would be unreasonably disproportionate)
The value of what the owner would have received if the contractor had performed the K in full – the value of what the owner actually received
Liquidated Damages
(Damages by agreement)
1. Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.

2. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty

3. If, at the time of breach, there is a disparity between actual loss and liquidated amount, all you get are actual, provable damages.
Indicia of Invalidity
1. Liquidated damages bears no reasonable relationship to the probable loss

2. Amount is excessive in light of easily provable actual loss

3. The contract specifies a single sum as damages for breaches that are not of the same gravity
Punitive Damages
No punitive damages for breach of K, UNLESS (D)'s conduct is an independent tort worthy of punishment

E.g. conduct involves fraud, malice, gross negligence, oppression

If elements of tort mingles with the breach and public interest will be served by awarding them
3rd Party Beneficiaries: Traditional Rule
Both in law and equity, privity (of contract) between a (P) and (D) is necessary to the maintenance of an action on the K.
Is the third party an intended beneficiary?
Intended Beneficiaries Can Sue If:

The promisor’s performance of the K will satisfy the promisee’s obligation to pay money to the 3rd party, OR

The circumstances indicate the promisee intends to give the 3rd party the benefit of the promised performance
Incidental Beneficiaries
A third party who is an incidental beneficiary of the K performance can’t sue for breach of the contract.
Direct Beneficiary
(Creditor Beneficiaries)
Performance by the promisor will satisfy debt or other obligation owed by the promisee to the 3rd party.
Direct Beneficiaries
(Donee beneficiaries)
A 3rd party can sue for breach of K if the performance of the promise will give effect to the promisee’s desire to make a gift to the 3rd party.
Test as to whether a party is a beneficiary under a K is...
...whether the contracting parties intended that a 3rd person should receive a benefit which might be enforced in the courts.
Defenses of the Promisor
(In Formation)
Contract is voidable or unenforceable

E.g. no consideration, mistake, duress, fraud, undue influence, unconscionability, statute of frauds, etc.
Defenses of the Promisor
(In Performance)
Performance is excused

E.g. failure of express condition, material breach, impossibility, frustration of purpose, anticipatory repudiation
Defenses of the Promisor
If the K is illegal, it is unenforceable

E.g. “underground” gambling
The 3rd Parties Rights Vest if:
1. The contract prohibits modification or discharge without the consent of the 3rd party beneficiary – stated in the K
- Rights vest on formation
2. Before notice of a modification or discharge, the 3rd party materially changes position in justifiable reliance on the K

3. Before notice of a modification or discharge, the 3rd party brings suit or manifests assent at the request of the promisor or promisee.
Substitutes a new party and discharges one of the original parties to a K by agreement of all 3 parties.
One cannot claim to be a 3rd party beneficiary of a K involving a municipality merely be virtue of being a resident of that municipality.

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