CONTRACTS II

SPRING 2013
PROF. KUNEY
THE PAROL EVIDENCE RULE
If a written agreement is fully integrated and intended by the parties to be a
complete statement of their agreement, then evidence of prior or contemporaneous
agreements will not be admitted to change its terms
Integration (R2d 209)
o A writing that is a final expression of one or more terms.
o A preliminary question for the
o Presumption of integration if by completeness and specificity it reasonably
appears to be a complete agreement.
Complete v. Partial Integration (R2d 210)
o Complete = adopted as complete & exclusive statement of the deal.
o Partial = not complete.
o A preliminary question for the court, not the jury.
R2d 213
o Completely Integrated Agreement Discharges Prior and Contemporaneous
Inconsistent Agreements.
o Partially Integrated Agmt. Discharges Prior and Contemporaneous Agreements
w/in its Scope.
The Parol Evidence Rule/Extrinsic Evidence
o What is evidence of prior and contemporaneous agreements and negotiations
good for? R2d 214.
Questions of Integration and its Completeness
the Meaning of the Writing
Illegality
Fraud
Duress
Mistake
Lack of Consideration, or other Formation Defense
and Proper Remedy.
R2d 215
o But, other than as stated in R2d 214, you cant use evidence of prior or
contemporaneous agreements to contradict a completely or partially
integrated agreement!

R2d 216
o Evidence of prior consistent terms can be used to supplement a partially, but
not a completely, integrated agreement, but not to contradict its terms.
The UCC Approach 2-202.
o Basically the same as the Restatement, no contradiction of an integrated
agreement, but we CAN supplement or explain terms using:
o Course of performance, course of dealing, or
usage of trade; or
o Evidence of consistent additional terms unless
the agreement was
completely integrated.

INTERPRETATION
Traditional Four Corners of the Document Rule

look for an ambiguity to justify going outside the four corners of the
document; no ambiguity, you are stuck with the words of the document.
The Traynor 2-Step
o We all have a different dictionary in our heads.
o So, provisionally admit the evidence to determine if the meaning is one to
which the contract is reasonably susceptible. If so, it comes in for real.
o

WARRANTY LIABILITY
General
o A warranty is a statement made about certain facts whereby the warrantor
promises to ensure that those facts are as stated.
o A breached or incorrect warranty will support an action for damages sounding
in contract; standard = strict liability.
o Warranties are risk shifting devices that is their whole point. Fault is
irrelevant to warranty liability.
UCC Warranties
o Express Warranties UCC sec. 2-313
You dont have to say warrant or any other magic words.
A mere description of the goods will do it; the warranty to conform to
the description is implied.
Showing a sample or a model is a warranty that the goods will conform
to it.
UCC 2-313 Issues
When is the statement an affirmation of fact and not just mere
puffing.
Whether it is part of the basis of the bargain something
short of actual reliance perhaps knowledge of the warranty
and rebuttable presumption of reliance.
Cases: Royal Business Machines & Bayliner
o Implied Warranty of Merchantability
UCC 2-314 Read the Statute.
Unless excluded or modified (2-316) warranty of merchantability is
implied if seller is a merchant for those goods.
2-314(2) The laundry list of merchantability.
Cases: Bayliner, Am. Cyanamid, GM v. Brewer, Suminski.
o Warranty of Fitness for a Particular Purpose
UCC 2-315 Read the Statute.
If seller knows of buyers particular purpose and that buyer is relying
on sellers expertise, the warranty arises.
Cases: Lewis v. Mobil Oil, Bayliner
Exclusion or Modification of Warranties
o UCC 2-316(1)
exclude or modify merchantability, must use that word and, if in
writing, do it conspiciously.
o UCC 2-316(2)
sufficient to say there are no warranties beyond those expressed
above.
o UCC 2-316(3)
But, you can use common language to exclued: As is, etc.
And inspection or failure to inspect when that ought to have disclosed
the problem does it too.
Exclusionary Clauses re Warranties

UCC 2-719(1) (a)

One can limit remedies available for breach of a warranty

ex. Return and refund, return for repair or replacement, etc.
UCC 2-719(2)
limits enforcability of exclusionary clauses if they cause the remedy to
fail of its essential purpose.
UCC 2-719(3)
Consequential damages can be limited unless unconscionable. Prima
facie unconscionability to limit damage to the person in consumer
transactions.

REMEDIES FOR BREACH OF CONTRACT

Overview
o Specific Performance
o Expectancy (Benefit of Bargain + Conseqentials)
o Restitution (Benefit Conferred/Rescission)
o Reliance (Expenditures less Benes Received)
o Liquidated Damages
Specific Performance
o Specific Performance is the exception to the rule and is generally only ordered
when money damages are not adequate to give the prevailing party the
benefit of its bargain.
o SP is thus available when the market cannot function well due to a flaw, like in
the case of a unique good.
The Expectation Interest Measure of Damages
o Compare:
The net benefits of the contract that have accrued to the nonbreaching party under the contract in reality;
WITH
The net benefits of the contract that would have accrued to the nonbreaching party if the breaching party had not breached;
AND
The difference the delta () is the measure of damages.
Incidental damages
o additional costs incurred on account of a breach in a reasonable attempt to
avoid loss and mitigate damages.
Consequential damages
o include losses caused by the breach damages to persons or property, for
example, those that naturally flow from the breach or are or should have been
reasonably within the contemplation of the parties at the time of contracting.
Hadley v. Baxendale. Similar to the proximate cause limitation of the tort of
negligence.

UCC 2-706 Sellers Resale Including Contract for Resale

o Seller may resell in good faith and a commercially reasonable manner and then
recover the difference between the contract price and the resale price.
o Public or Private Sale Permitted Watch Requirements as Failure to Meet them will
Result in Loss of the Resale Price as the Measure of Market Price.
o LOST VOLUME SELLER

If, upon breach by a buyer of goods, the seller sells to another

and has a practically unlimited amount of inventory and no
additional costs, then the seller has really lost one sale (could
have had two, now has only one), so award profit on the one lost
sale.
Locks v. Wade juke box example.
o LIMITATIONS ON DAMAGES
Foreseeability (Hadley v. Baxendale the ovular case -- and its progeny)
UCC Damage Fixing Rules.
Certainty (Dempsey, Playgirl, Fera) Courts have been relaxing the
standards of lost profits.
Avoidability/Mitigation (Taco Bell, Parker).
UCC 2-713 Buyers Damages for Non-Delivery or Repudiation
o (1) Subject to the provisions of this Article with respect to proof of market price
(Section 2-723), the measure of damages for non-delivery or repudiation
by the seller is:

the difference between the market price at the time when the
buyer learned of the breach and
the contract price together with any incidental and consequential
damages provided in this Article (Section 2-715), but less expenses
saved in consequence of the sellers breach.
o (2) Market price is to be determined as of the place for tender or, in cases
of rejection after arrival or revocation of acceptance, as of the place of
arrival.

UCC 2-712 Buyers Procurement of Substitute Goods (A Right to Cover)

o (1) After a breach within the preceding section the buyer may cover by
making in good faith and without unreasonable delay any reasonable
purchase of or contract to purchase goods in substitution for those due from
the seller.
o (2) The buyer may recover from the seller as damages the difference
between the cost of cover and the contract price together with any
incidental or consequential damages as hereinafter defined (Section 2715), but less expenses saved in consequence of the sellers breach.
o (3) Failure of the buyer to effect cover within this section does not bar
him from any other remedy.
Avoidability/Mitigation
o Restatement (Second) Section 350 Avoidability as Limitation on
Damages
(1) Except as stated in Subsection (2), damages are not recoverable
for loss that the injured party could have avoided without undue
risk, burden, or humiliation.
(2) The injured party is not precluded from recovery by the rule
stated in Subsection (1) to the extent that he has made reasonable
but unsuccessful efforts to avoid loss.
The Reliance Interest
o Restatement (Second) of Contracts 349
As an alternative to the measure of damages stated in 347, 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.

The Restitutionary Interest

o Southern Painting Company of Tennessee, Inc. v. U.S. for E.M Silver,
dba Silver Plumbing & Heating (10th Cir.1955).
o Subcontractor v. Contractor dispute. Breach by contractor found and
judgment of $13,000 entered for Sub. (But the contract was $10,000 plus fair
share of profit, total, and he had already been paid $7,000, leaving a balance
of $3,000 plus share of profit).
o Sub chooses to proceed in quantum meruit and recovers value of services;
recovery for non-breacher is not capped by contract price.
Lesson: When you have a great contract price, dont breach the
contract, that opens you up to quantum meruit claims from the other
side that are not capped by the contract price. You want to stick the
subcontractor to the contract.
Liquidated Damages
o Historical Prejudice Against Them Leads to Lots of Messy Case Law About No
Penalties but Incentives are Alright and 1.Must be a Reasonable Estimate of
Likely Damages, 2. which Must be Hard to Calculate at the time of
Contracting. (Flexible std. that is applied)
o These standards and incantations still appear in the case law and apply, but
Unless found to be unconscionable or nearly that, Liquidated Damage
Clauses will generally be enforced.
Unconscionability is highly unlikely to be found outside of the BigCo.
vs. little guy/gal context these days.
o Tips on Liquidated Damages
Dont make performance less profitable than breach!
Do have damages differ for different breaches
(i.e., per day late charge, interest measured in basis points over
prime or other index, etc.).
Include recitals regarding prospective difficulty of proving damages
and reasonable efforts to estimate them up front.
Specific Performance
o The test is not whether it is real property? Or is it unique? It is whether
an adequate remedy can be had at law. (RP and Uniqueness are just
special cases of the general rule).
o Where it is hard to value which includes most real property and unique items
-- legal remedies are often inadequate.
o But dont loose the real standard in the categorical rule that emerges from
repeated application in a particular context:
Money Damages are inadequate S.P.

REPRESENTATIONS & WARRANTIES

Overview
o Historical distinction focused on remedy and timing: Representations
rescission & restitution or damages, termination at closing; Warranties
damages, survival after closing. Distinction fading due to draft arounds, like
survival clauses.
o Three key functions:
Mechanism for obtaining disclosure.
Risk allocation device that affects indemnification rights.
Mechanism for terminating the deal prior to closing.
Express Conditions
o R2d Definition in 224:

A condition is an event, not certain to occur, which must occur, unless

its non-occurrence is excused, before performance under a contract
becomes due.
Seems to leave out conditions subsequent, but it is the
Restatement, which treats those as matters of discharging the
duty.
Conditions trigger and untrigger covenants.
o Express Conditions trigger or un-trigger a duty (a covenant).
Conditions precedent must occur to trigger a duty to perform a
covenant.
Conditions subsequent must occur to untrigger or modify a duty to
perform a covenant.
All conditions are subsequent to the contract that is not the
distinction!
o Express Conditions Strict Compliance.
o But, when a condition:
(a) does not occur but
(b) applying the condition strictly would cause a disproportionate
forfeiture,
(c) a court may excuse the non-occurrence,

(d) unless the occurrence was a material part of the agreed

exchange.
Restatement 2d 229.
Other Fundamental Provisions
o Covenants (pre-closing & post-closing)- duties in a contract
o Guaranties and other forms of support- cosigner of a loan
o Events of default and remedies
o Boilerplate
o Dispute resolution
o Choice of Law where the dispute happens or where provided for in the
contract as long as the location is reasonably related to the parties in the
contracts.
o Choice of Forum
Conditions relate to Covenants, which are duties to perform.
o Conditions and Covenants are different from representations and
warranties, which relate to states of the world, the subject matter of the
contract, the parties, etc., and are made to induce reliance or provide
comfort and a route to recovery in the future (that is, they allocate risk).
o There are also such things as guaranties, indemnities, events of default,
remedies etc. They function as support -- or as remedies for nonperformance of covenants, when the triggering condition has occurred, or for
incorrect representations and warranties.
o Use the right provision for your purpose or it wont work.
A Mere Covenant or a Covenant and a Condition Rules of Interpretation
o Look to the whole contract to construe the provision in terms of the
manifestation of the parties intent.
o When ambiguous, construe it as a mere covenant and not a condition.
(Why? To prevent forfeiture.) R2d 227.
o Construe a writing against its drafter.
o 6th Cir. Rule -- follow the normal construction of the relationship of the
parties sort of like usage of trade, no?
o When drafting, try labeling it clearly and correctly!
Call it by a -- the right -- name.

Other Rules of Interpretation

o Restatement 227
In the common tongue: If in doubt, construe provisions as nonconditions if to do otherwise would result in a forfeiture unless the
other party could control the event or had assumed the risk.
Formally: The preferred interpretation is that which will reduce the risk
of forfeiture unless:
the trigger event is within the forfeiting partys control; or
the circumstances indicate an assumption of risk.

Waiver - Another Way Around a Harsh Result

o Waiver is a voluntary relinquishment of a known right.
o Is it a subspecies of equitable estopple or merely a closely related doctrine?
Probably the later as waiver, strictly speaking, does not require reliance by the
other party.
o Can you waive a no waiver/all amendments in writing clause? Two approaches:
strict enforcement (TN) or
no sudden enforcement, must let other party have reasonable notice so
that they can comply (R2d and UCC approach).
Condition of Approval by Party
o When a condition of performance (say, payment) is a partys satisfaction with the
others performance, use either:
-- Subjective satisfaction -- a good faith standard if the performance
involves taste, fancy, or personal judgment; (corollary duty not to mislead
the other party i.e., to be brutally honest); or
-- Objective satisfaction a reasonableness standard if the
performance involves utility, fitness, or value.
Constructive Conditions
o Constructive Conditions are used to Order or Excuse Performance When the
Contract is Silent about a Circumstance. (Conditions that are interpreted into the
contract)
o Again, Conditions, even constructive conditions, are about the relationship
between covenants.
It is all about relationships.
o Why do we need constructive conditions?
Because some things are left unsaid.
Friendship based upon mutual relations and expectations not all written
down. (you will not use me)
Loss of Friendship At some point the others behavior reaches a point at
which they are no longer your friend. They have not met the conditions of
friendship. Thats breach.
Relationships between Covenants
o Mutual & Independent Covenants. Absolute duty. No express or implied
condition to trigger performance. Breach gives rise to a claim of damages, setoff
or recoupment, but not excuse of (not-counter) performance. If your house burns
down you still continue to pay.
o Conditional, Dependent Covenants. Express or implied condition relates
them. A breach gives rise to a claim for damages, setoff or recoupment, and
excuse of counter performance.
o Mutual, Simultaneous Covenants. Tender is sufficient. No counter tender,
then there is a claim for damages, setoff or recoupment, and cessation of
performance. Things that happen at the same time.
Implied Condition Interpretative Rules

Restatement 2d 234
If mutual, simultaneous interpretation possible, use that;
If one performance takes time, then that performance is due first;
UNLESS PROVIDED OTHERWISE.
Holmes Admits It:
o You can always imply a condition in a contract. But why do you imply it? It is
because of some belief as to the practice of the community or of a class, or
because of some opinion as to policy, or, in short, because of some attitude of
yours upon a matter not capable of exact quantitative measurement, and therefor
not capable of founding exact logical conclusions. Such matters really are battle
grounds . . . where the decision can do no more than embody the preference of a
given body in a given time and place. We do not realize how large a part of our
law is open to reconsideration upon a slight change in the habit of the public
mind.
-- Oliver Wendell Holmes, Jr., The Path of the Law, 10 Harv. L. Rev. 457, 466
(1897) (emphasis added).
Material Breach of Covenant or Substantial Performance?
o A material breach is one that goes to the heart of the contract. It will suspend
executory counter-performances as well as support a claim for damages. It will
ripen into total breach after expiration of a reasonable time for cure, which
excuses executory counter-performance.
o The doctrine of substantial performance is the flip side of material breach. If
a party substantially performed, or the breach is immaterial, counter-performance
is not excused. A claim for damages will still lie.
Events of Default and Remedies
o Your contract can provide for conditional remedies with events of default that
allow a party to declare a default and invoke remedies. This is where so called
financial covenant defaults come in.
o More like a suit to enforce a contract than for breach of it.
o When managing the contractual relationship, declaring a default, or exercising
remedies:
Establish dominance from the beginning and maintain it
throughout.
There is always time to surrender control or make gifts later.

Dominance does not require being mean or a jerk, just being in

control and making sure the other party perceives you as being
so.

Do not make threats--dispassionately document enforcement of

identified contract rights. Make promises, then follow through.
o

PERFORMANCE UNDER UCC KS

The Perfect Tender Rule:
o UCC 2-601. Non-conforming goods: buyer can accept all, reject all, accept
any commercial units (whether conforming or not) and reject the rest.
Sellers right to cure. UCC 2-508. Absolute right to cure before time for performance;
reasonable time if seller had reasonable grounds to believe that the non-conforming
goods would be acceptable.
2-612
Acceptance, Rejection, Revocation of Acceptance.
o UCC 2-601. Acceptance or Rejection.
o UCC 2-602. Rejection within reasonable time of delivery and seasonable
notification to the seller.
o UCC 2-606. What is acceptance?

After a reasonable time to inspect & buyer signifies to the seller that
will accept;
Failure to make effective rejection;
Any act inconsistent with sellers ownership (remember mixing the gas
or the milk with existing stock?).
UCC 2-608. Revocation of Acceptance if non-conformity substantially impairs
value to the buyer and:
Reasonable assumption that non-conformity would be cured and not
seasonably cured; or
Accepted without knowledge of the non-conformity because of
difficulty of discovery.
Must be within reasonable time after discovery or should have
discovered and before change of condition of goods not caused by nonconforming feature.

ANTICIPATORY REPUDIATION
Overview
o Anticipatory Repudiation is notice of an intent by the other party to breach.
o It can be express or implied.
o Express repudiation is a clear, positive, unequivocal refusal to perform.
(marry someone else, sell house to someone else)
o An implied repudiation results from conduct where the promisor puts it out
of his/her power to perform so as to make substantial performance impossible
(or total breach inevitable).
o Simple rules that are hard to apply in real life! (have to ask for assurances)
Anticipatory Repudiation Options of the Non-Repudiating Party
o When a promisor repudiates, the other party has an election of remedies:
-- Treat the repudiation as breach and immediately seek damages or
other remedies; or
-- Await the time for performance, exercising remedies then, or
suffering retraction and performance by the other should they change
their mind.
UCC Overlay on Repudiation
o UCC 2-609 and 2-610.
o 2-609
reasonable insecurity, use a writing to request adequate assurances of
performance. If they are not provided in reasonable time, not to
exceed 30 days, you may treat it as repudiation
o 2-610
repudiation leads to the right to:
Resort to remedies for breach (even if one told the other side
one would wait for their performance);
Suspend performance or identify goods to the contract or
salvage unfinished goods.
Retraction of Anticipatory Repudiation
o UCC 2-611
Retraction possible up to the time for performance unless the other
party has cancelled or materially changed position or considered
repudiation final.
Retraction may be by any reasonable method; must include assurances
if requested under 2-209.
Retraction reinstates the contract with due adjustment for delay
caused by repudiation.

IMPRACTICABILITY AND FRUSTRATION OF PURPOSE (EXCUSE OF PERFORMANCE)

Overview
o Impossibility old standard; if really impossible, then excuse performance.
Performance being possible = constructive condition.
o Impracticability modern standard, if it is just really tough, cost alone almost
never enough, especially a less than 100% increase.
o Frustration of Purpose -- Different.
Occurrence of some unanticipated event or circumstance that renders
the basic purpose of the contract impossible or pointless. Basic
purpose = constructive condition.
If the event that causes the problem was or might have been
anticipated and guarded against (i.e., its risk could have been
allocated between the parties), then do not excuse performance.

THE COVENANT OF GOOD FAITH & FAIR DEALING

Overview
o Based upon the mechanics of implied conditions (i.e., it is both a covenant
and a condition).
o Its The Anti-Sucker Punch Rule.
Use the contract for the purposes that the parties intended when they
entered into it. (when they try to use it for something else bad faith.
Make a loan to me knowing that I cant pay it off. He knows Im going
to go into default and he will get my house for cheap)
Dont hit too hard in a friendly game of pad-less touch football, right?
Good faith
o There is a general obligation of good faith that applies to all contracts.
o A party to a contract has a duty to avoid doing anything that will injure the
ability of the other party to receive the contemplated benefits of the Contract.
Summer and Kuney on Good Faith
o Prof. Summers: It is impossible to say what good faith is, but it consists of
avoiding conduct that does not conform to accepted norms of decency,
fairness, and reasonableness.
o Kuney: It is impossible to say what good faith is, but contracts are about
relationships, and lack of good faith is present when a party acts in a manner
inconsistent with the original, reasonable, shared expectations of the parties,
i.e., the underlying intent of the parties, as expressed in their contract and
interpreted in context.
Good faith means avoiding opportunistic behavior, which, in turn, is defined as using
a contract term to get an un-bargained for advantage, usually because of an
unanticipated change of circumstances.
Limitations
o The obligation of good faith does not override the express terms of the
contract.
o The obligation of good faith should not be used to protect parties from things
they should have protected themselves from when they negotiated and
documented the deal. If they could reasonably forseen the
risk, they
should have allocated it among themselves, and perhaps they did without
saying so.
THIRD PARTY ISSUES

Assignments and Delegations

Third party beneficiary contracts
o When enforcable intended vs. incidental beneficiary;
o When modifiable up to time of suit or reasonable reliance by third party.

POLICY
Policy is a Fancy Word for Reasons Why We Do The Things We Do
Freedom of Contract
Freedom of Alienation
Economic Efficiency
Allowing (or Encouraging) Parties to Plan their Affairs and Allocate Risk Themselves
Deterrence
Efficient Administration of Justice