Outline for Contracts I/ Prepared by J. William Snyder, Jr. Term: Fall 1992 Text: Summers & Hillman, Contract and Related Obligation: Theory, Doctrine, and Practice (2d ed. 1992). Instructor: Professor Blakey NOTE: This outline was originally prepared for my own private study, and it is based primarily on my own class notes, handouts, and excerpts from the textbook, either in paraphrase or direct quote. When possible, I tried to indicate material that has been directly quoted, but it is possible that some material from the textbook has been directly quoted without indication. I. An Introduction to remedies A. Groves v. Wunder 1. Contract- 1927 Groves>>>>>>Wunder !Use of land to extract gravel! Wunder>>>>>>Groves !$105,000! |level land| 2. Breach a. Wunder did not return land leveled- a deliberate breach b. Groves sued for breach, but only got value of comparable land + interest (1) What is land worth at end of contract? ($0) (2) What would it be worth had Wunder faithfully performed? ($12,000) (3) Remedy: Rate of interest(12,000-0) apx = $15,000 c. On appeal, court awarded cost of performance, that is, how much it would cost to put land in the condition Wunder contracted to leave the land in. ($60,000 + interest apx = $76,000) (to do otherwise would reward the breacher for his breach d. Justice Olson's dissent: Groves is not entitled to be put in a better position than he would have occupied had the contract been performed properly: he is only entitled to be put in the position he would have occupied had the contract been faithfully performed. 3. Discussion a. If Groves did get $76,000, would he [be stupid enough to] plow it into his land to level it and make it worth $12,000, or would he put it in the bank? [Is this land "totaled"?] b. How far should we go in making people keep their contracts? The Chicago school of economic thought believes that we SHOULD break our contracts on occasion if it is in our best interest to do so. c. The goal of contract law is to compensate contractors for damages suffered by the breach of the other party; to put them in the positions they would have occupied had the contract been faithfully performed. d. Punitive damages are not common [and, as some have said, alien] to the law of contract. e. $60K is an estimate to level the land now. It would have been cheaper to do it gradually all along. f. Groves might have sued under an unjust enrichment theory if he could show that Wunder was unjustly enriched by the breach. g. The value of a promise is figured by its value at the time performance was due. Groves took a gamble that land would be worth more later, and so he contracted with Wunder to have it leveled. But how does one put a dollar value on an opportunity? h. Ugly statue doctrine: value of the property is not the proper compensation, but rather the actual ugly statue, even if it reduces the value of the property. (Peevyhouse) i. Liquid damage clause: can only be for damages caused by the breach, and not for punitive damages, or it is not enforceable (this is changing) j. Courts have the power to order specific performance (an equitable remedy) but rarely do- we generally don't believe in compelling people to perform their contracts (a la Hobbes)- we can buy our way out of our contracts- this has a positive effect on our economy by creating added incentives to enter into contracts. B. White v. Benkowski 1. Contract White>>>>>Benkowski !$400! |$3.00 a month| |1/2 of all repairs| Benkowski>>>>>White |water from Benkowski's well, and an option to renew after 10 years| 2. Breach a. Relationship between the parties soured. The Benkowski's started cutting off the water. b. The Whites sued for breach. Won a jury verdict for $10 in compensatory damages and $2,000 in punitive damages, but the trial judge struck the punitive damage award and reduced the compensatory damage award to a nominal $1 in damages. The WI Supreme Court reinstates the $10 damage award and also reaffirmed the trial court's denial of punitive damages. 3. Discussion a. Hot facts vs. Cold facts (1) Hot facts are facts that can be molded before relations break down or even before they start. Such molding can prevent litigation in the first place. (2) Cold facts have already occurred and cannot be altered. What appellate courts wrangle with. b. Rarely do appellate courts deal with questions of fact, for they are in a poor position to make findings of fact. Appeals usually come up on denied motions for directed verdicts and errors in the jury instructions as well as post-verdict actions by the judge. c. Why don't we award punitive damages in the law of contract? Principally because we want to put people into the positions they would have occupied had their contracts been faithfully performed. But we award punitive damages in torts? [My answer: Contracts create rights and obligations. You are entitled to what you deserve, and only what you deserve. In contract, people voluntarily give up legal rights in the hopes of ending up in a better position. In tort, where the goal is to restore one to the position occupied before the interaction took place, people usually do not consent to have their legal positions altered in the first place. Accordingly, malicious, wilful, and otherwise reprehensible altering of that person's legal position might be compensated by punitive damages in addition to compensatory damages.] d. Substitutionary remedies: Usually money. Can we fully compensate people for breach of contract by awarding them money? e. 2 possible theories of recovery (plus one more) (1) Expectancy: Sue on the contract for expectancy damages from loss of water (suing for the loss of the water). (2) Restitution: Sue for substantial breach, dissolve the contract [all promises disappear] and see if any party is unjustly enriched at the expense of the other party (sue for the value of the contract). In this case, the Benkowski's have been unjustly enriched to the tune of $400, and thus they would be bound to make restitution of that $400. The Whites give up any claim to damages for loss of water. (a) Only an innocent party can seek restitution. (b) Restitution not a feasible option for the Whites. 2 conditions must subsist before restitution becomes feasible. 1. The contract must be one where the other side benefitted much more than the other, and 2. The party benefitted more still breaches. (c) There need not be a breach in order to recover under a restitution theory, but unjust enrichment is easier to prove if there is breach. (d) Unjust enrichment is a nebulous and circular concept based on a societal judgment about what enrichment is just and unjust. (3) Reliance damages (similar to a tort theory) (discussed later on) C. Sullivan v. O'Connor 1. Contract Plaintiff>>>>>Defendant !Payment for a nose job! Defendant>>>>>Plaintiff |perfect nose| Costs incurred by plaintiff: Hospital fee, 3 surgeries (only 2 of which were originally intended), pain & suffering for all surgeries (P&S for the third was not originally intended.) 2. Breach a. After 3 surgeries, her nose was permanently disfigured. b. She sued under 2 different theories: General malpractice and breach of contract. (1) General malpractice is a tort theory, and in tort, the remedy it to put you back in the position you would have occupied had there been no interaction between the parties. Thus, under this theory, she could only get the difference in the value of her nose to begin with and the value of her nose now. (2) Under the breach of contract theory, she can conceivably recover the value of the nose she contracted to receive. (a) Expectancy damages: Though this is the usual theory of remedy in contract, here her expectancy damages are vague and uncertain. Would be hard to put a value her new perfect nose or what it would have gotten her as an entertainer. (b) Reliance damages: similar to a tort remedy. You sue for the expenses you incurred as a result of your justified reliance on the contract. The goal still is to put her in the position she would have occupied with her new nose, but now the BOP shifts to the defendant to show that what she asks in reliance damages exceeds expectancy damages. c. At trial, she won a judgment for $13,500 for breach of contract. The defendant appealed charging an error in the jury instructions to take into account more than her out-of-pocket expenses. The jury was instructed to award damages "flowing directly, naturally, proximately, and forseeably from the defendant's breach of promise". d. The MA Supreme Judicial Court affirmed the jury verdict, holding that the plaintiff was entitled to recover all of her out-of-pocket expenses, damages for her worsened condition, and damages for excessive pain and suffering and mental distress incurred as a result of the third operation. (The P&S incurred during the first and second operations was contracted for.) II.Groundwork Concepts in the law of contracts A. A contract is an exchanged promise or set of promises that the law will in some way enforce. A contract is also a bargained for exchange of consideration. B. Two types of contracts 1. Bilateral contracts, where there are promises on each side 2. Unilateral contracts, where something is actually done on one side and promises are made on the other. C. Discrete and relational exchanges 1. Discrete exchanges involve an immediately exchange of items- no promises are exchanges, these sorts of agreements are not breachable 2. Relational exchanges involve an exchange of promises- the relationship continues over time. These agreements are breachable. 3. Most contracts are usually mixtures of performances and promises. D. Most completed business deals involve two types of transactions 1. Contract for sale: An exchange of promises (bilateral contract) 2. Contract of sale: An exchange of what is promised. - Agreements to agree are not binding contracts. E. Forms of legal obligation (TOOLBOX A) 1. Contracts with bargained for exchanges of consideration. 2. Promissory estoppel- justified reliance on a promise to your detriment entitling you to recovery. 3. Unjust enrichment 4. Promises for benefit received 5. Obligations arising from tort 6. Obligations arising from statute 7. Obligations arising purely from form III.Theories of legal obligation A. Contract with a bargained for exchange of consideration 1. Consideration is a. A non-promise act b. A forbearance c. Creation, destruction, or modification of a legal relation. d. A return promise - bargained for and exchanged for a promise. Considerations travel in pairs. Consideration only in one direction is a "naked" or gratuitous promise, and it is not legally enforceable (in most circumstances). - for a contract, you need (1) 2 considerations (2) 1 bargain 2. Justice Holmes's definition of consideration: A change in the legal rights of the parties- a narrow definition of consideration. a. A party gets something he was not entitled to have before, or b. He loses something he had a legal right to previously 3. Broad and Narrow definitions of consideration a. Broad definition: The parties must be benefitted by the deal [or at least have the perception of benefit]. Both parties must be happy with the deal b. Narrow definition: One party need not be benefitted or satisfied with the deal for the consideration to be valid 4. Parting with a legal right which one possesses can be good consideration. According to legal rights theory, increase of legal rights in one direction necessarily decreases them in another direction, and vice versa. A legal benefit is anything you want which you do not have a legal right to without the contract. - In Hamer v. Sidway, the estate argued that WSJ's agreement not to smoke, drink, play cards, play pool, etc. until his 21st birthday was not a forbearance but rather a benefit to him, and thus, not consideration for his uncle's promise of $5,000. However, WSJ did have a legal right to engage in those activities, and so his forbearance was good consideration, even if the only benefit his uncle got was satisfaction, peace of mind, etc. 5. Even slight forbearance, payment, or promise can be good consideration. a. According to the "peppercorn theory of consideration", even a peppercorn can be good consideration if it is bargained for. b. The best consideration is a promise, unless the promise is illusory, or the promise is something you already have a right to do or something you can't do in the first place. c. Symbolic consideration is acceptable so long as there is a serious intent to make an exchange. 6. Considerations need not be objectively equal- in a good contract, each side believes it is getting the better deal (generally) 7. Lon Fuller's justifications for the doctrine of consideration and its functions a. Evidentiary function: Helps establish the existence of a contract b. Cautionary function: A deterrent to frivolous or inconsiderate promises c. Channeling function: Reduces vague and nebulous promises to words 8. Distinguishing conditional promises from binding contracts with consideration. a. A conditional promise merely sets up an antecedent condition upon which the benefit will be granted. The condition usually involves no legal detriment to the promisor, and is accordingly not good consideration. b. To be good consideration, the condition must be set up as a bargained for exchange. The condition must be a legal detriment to the promisor and must be exchanged for consideration from the other party. Example: A promise to a bum that if he walks around the corner that the promisor will by him a raincoat would probably be viewed as a conditional promise that was not enforceable, but if it was set up as a bargained for exchange and all parties regarded it as an exchange of consideration, then it might very well be considered valid. 9. Illusory promises are not good consideration. Illusory promises purport to promise all kinds of things but allow the promisor to rescind his promises at any time without notice. Thus, one who makes an illusory promise promises nothing at all, and accordingly, that can't be good consideration. - Ways around the illusory promise problem a. The UCC recognizes requirements/outputs contracts as binding and enforceable. b. If you want to negotiate a contract to buy 0-1000 units of a good, you can surrender some legal right to the other party to compensate them for being bound. The easiest way to accomplish this is to simply pay the other party to be bound to the deal. Rule of thumb: if there are problems with the enforceability of the main consideration, add subsidiary consideration that is enforceable. 10. The doctrine of consideration was a tool developed by the common law courts in England as a way to test the legal enforceability of promises and justify why they were enforcing certain promises but not others. In actions for assumpsit, a common law action arising out of the writ trespass on the case, the courts looked for reasons to enforce or not enforce agreements. What they developed was the doctrine of consideration. The looked for the exchange of 2 promises or some sort of quid pro quo. What they looked for in particular was an exchange of risk and expectations without regard to reliance. For some time, the equity courts had been rushing in to enforce certain promises, but the law courts developed consideration as a way to limit themselves. 11. In traditional contract law, the court does not inquire into the propriety of entering the contract, or even if the contract is a losing one. Even a losing contract is enforceable is all the other requirements are met. Additionally, reliance cannot be used to turn a losing contract into a winning contract. EXCEPTIONS: a. Contracts of adhesion b. Unconscionability c. Fraud d. Violations of Statute of Frauds 12. Many contracts are drawn up and performed upon without regard to the legal rights of the parties. This is common in business relationships where the parties care more about continuing to do business rather than their legal rights. But when relationships turn sour and parties want their legal rights, the doctrine of consideration must be applied. 13. Maughs v. Porter: Was there a bargained for exchange of consideration of a chance to win a car in exchange for attendance or not? Court says yes, but holds the exchange to be an illegal lottery. 14. Wood v. Lucy, Lady Duff-Gordon: Was Wood's promise to pay LDG 1/2 of the profits he derived from contracts to market her fashions illusory in that he was not explicitly to enter into or seek out contracts to market her fashions? Cardozo says no in that he finds an implied promise to use reasonable efforts to seek out and enter into such contracts, but that point is debatable. 15. De Los Santos v. Great Western Sugar Co.: Was the contract between DLS and GWS enforceable? Court says no, because GWS had the option of terminating the relationship at any time without notice, and that made its promises to DLS illusory. DLS got nothing in exchange for his promise to haul beets for GWS because GWS got to determine what amount of beets DLS would haul or even if DLS would haul any beets at all. GWS basically hired a bunch of truckers on an at-will basis. Ways to make the agreement enforceable: a. Negotiate an exclusive right to haul beets. b. Minimum tonnage [?] c. Standing ready fee/Availability fee d. Notice prior to termination - Years ago courts felt that a negotiated opportunity to do business was not valuable consideration, but that view is changing. 16. Mattei v. Hopper and options based upon some future event. In Mattei, the contract to buy land was contingent upon the plaintiff's obtaining "sufficient leases". Was that good consideration, or was his promise illusory. The court found it to be good consideration in that the plaintiff gave up his legal right not to buy if he did obtain sufficient leases and that there was an implied promise that he would make a good faith effort to obtain the leases. a. Two views on options (1) Older view: Courts of 70 years ago considered such options as illusory, for they felt the contractor could walk away from the deal without doing anything. And as for conditions like the one in Mattei, they felt there was no authoritative measure of what constituted "sufficient leases". Some jurisdictions still adhere to this view. (2) Modern view: Such options are valuable consideration if they limit the options and rights of the parties. In Mattei, the plaintiff could not just walk away from the deal if he did obtain a significant number of leases, and he made an implied promise that he would make good faith efforts to obtain the leases. b. According to the Restatement, something that was not consideration at first might ripen into consideration at some later time and the occurrence of some performance. c. When negotiating options, make sure to include a time limit. If there is no stated time limit on an option, the court will imply a "reasonable time period" on exercise of the option. The court has several default provisions for contracts it will imply if the contract does not specify the contrary. (When is payment due? Upon delivery. In what form is payment to be made? Cash., etc.) 17. Four problems with contracts with consideration a. Family deal: Unless there is strong evidence to the contrary, the court will presume that "exchanges" and promises to exchange items between and among family members are gratuitous promises made out of a sense of famial obligation and not contracts with consideration. So, a gift of land with a quick exchange of $1 does not make the "exchange" a binding contract. b. Illusory promises: Situations where a promisor purports to promise to do or forebear from all kinds of things but also reserves the right to terminate the relation at anytime without notice. These are not good consideration, for the promisor gives up no legal rights at all. The defense made this argument in Weiner v. McGraw-Hill, but the court found that the employment relationship was not "at-will" and McGraw-Hill was bound to abide by the bargained for discharge procedures. c. Pre-existing duty: (1) At common law, a pre-existing duty is not good consideration, for by agreeing to perform the duty you are not giving up anything you didn't have a right to before. People run afoul of this all the time, especially when they try to unilaterally modify an existing contract without giving the other side any consideration for the change, even if the other side consents to the alteration. (George Steinbrenner wanting to pay his star baseball player more money. Simply amending the player's contract without Steinbrenner getting any new consideration is insufficient. Must either draw up a separate contract with the necessary exchange of new consideration, or terminate the old contract and after a decent interval sign a new contract with the desired change. (2) However, the Uniform Commercial Code (statutory law) did away with the pre-existing duty bar and made unilateral modifications without additional consideration binding and enforceable. subject to certain restrictions and requirements (evidentiary requirements, etc.) d. Invalid consideration/compromises of ill-founded claims: Agreeing to give up something you do not have in the first place. In Springfield v. Nees, 3 of the brothers and sisters agreed to relinquish any claim they had to the Atlantic Ave. property in exchange for Sophie and George's interest in the Sackett Street property. However, the 3 other siblings had no right to claim in the Atlantic Ave. property, so their "forbearance" was not good consideration, and thus their agreement was an unenforceable naked promise. 18. Settlements are a branch of the law of contract. They are binding subject to the above restrictions. Courts will not honor settlements where the legal claim was completely unfounded, but the courts have been willing to enforce settlement agreements where the claim was at least tenuous or when the party had an honest (in some jurisdictions)/honest & reasonable (in other jurisdictions) but mistaken belief that he had a valid legal claim. The policy, of course, it to encourage settlements. B. Promissory Estoppel (PE) 1. In a nutshell, promissory estoppel is a justified reliance on a promise to one's detriment for which damages can be recovered if justice requires it. 2. Development of PE a. Pre-Restatement/90 era. (1) Kirksey v. Kirksey and Ryers v. Trustees of Presbyterian Church of Blossburg (a) In Kirksey the court ruled that a promise by a woman's brother-in-law that if she came to his property he would put her up and give her land to tend was not an enforceable contract, but rather an unenforceable gratuitous promise. 1. It was not set up as an exchange, though there was the potential for consideration. 2. He did not bargain for her performance. 3. No business relationship between the two. 4. But even under PE theory, he could not have foreseen that she would rely on his promises to the extent she did. He advised her to get title to her homestead before coming, but she simply abandoned her freehold and came. He did not foresee her abandoning her claim, but he did foresee her coming. (b) In Ryers, the court found that Ryers's repeated promises to bankroll the construction of a church in a neighborhood in which he had significant property interests and the church's reliance on those promises did constitute an exchange of consideration, and thus, an enforceable contract. 1. The potential for consideration was certainly present 2. There might have been a bargained-for exchange of consideration 3. There was a business relationship between the parties. 4. Under PE, the reasons for finding for the church might have been even better. (2) Seavy v. Drake and Siegel v. Spear & Co. (a) In Seavy, though there was only a parol agreement for the transfer of the land, the grantee had substantially performed his end of the deal by entering the land and making improvements upon it. The court used its equity power to compel specific performance though the execution of the deed. (b) In Siegel, the plaintiff justifiably relied on the defendant's promise to obtain insurance for furniture he bailed with the defendant, but the defendant did not obtain the insurance, the warehouse burned, and the furniture was destroyed. The court found consideration and allowed the plaintiff to collect a judgment against the defendant for not insuring his furniture. b. Section 90 of the Restatement (First) of Contracts until the Second Restatement (1) 90 broken down into its key elements (a) "A promise which the promisor should reasonably expect to induce (b) action or forbearance (c) of a definite and substantial character on the part of the promisee (d) and which does induce such action or forbearance (e) is binding if injustice can be avoided only by enforcement of the promise." (2) Justification: reliance to one's detriment. Remedy: expectation (3) Introduced by Corbin, and initially rejected by Williston who favored a strict adherence to the doctrine of consideration as articulated in 75. Corbin saw veins in the law of enforcing some promises on the basis of justified reliance. Ultimately, Williston was the one who defended 90 before the ALI. (4) Originally, 90 awarded justified reliance to one's detriment in an all-or-nothing fashion. Either the full expectancy of the promise was awarded, or nothing was awarded. No discounting of the damages for reliance was permitted (yet). (5) Though the first restaters thought there were merely restating the law, 90 proved to be a significant innovation in contract law, for previously it was thought the decisions to which Corbin pointed were examples of bargained for exchanges of consideration. The restaters ended up changing the law with 90. (6) 90 does not always protect reliance, only those reliances that clearly fit within the provisions of 90 (definite and substantial character, avoiding injustice, etc.) (7) Equitable estoppel is an equitable remedy whereby an individual who has misrepresented significant facts to the other party and who decided later that he wants to use the real facts is "estopped" from backpeddling and invoking the true facts. The result is a legal fiction that has no reality outside the courtroom. "Promissory estoppel" is essentially "estoppel from denying consideration", according to one author (Henderson). (8) Not many cases are won on a PE theory. (9) Almost immediately, PE moved out of its envisioned role in private relations into the arena of business relationships. In cases like Hoffman v. Red Owl Stores, PE was being used to compensate parties who relied to their detriment on promises made during negotiations for a bargained for exchange that went sour. 90 ends up not only explaining enforcement of some gratuitous promises, but also for awards of damages that arose out of failed business deals. (10) PE was originally a means by which agreements with a lack of bargained for exchanges of consideration could be enforced, but it turned into a means of enforcing agreements with no consideration at all. For instance, it was used to enforce promises that were void under the Statute of Frauds, like the promise enforced in Seavey v. Drake. c. Second Restatement and the revision of Section 90. (1) "(1) A promise which the promisor should reasonably expect to induce action or forbearance [] on the part of the promisee or a third party which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires. (2) A charitable subscription or marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance." (2) Four notable changes to 90 between the two restatements. (a) "of a definite and substantial character" deleted. (b) "or a third party" added. (c) "The remedy granted for breach may be limited as justice requires." added. (d) "A charitable subscription or marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance." added. (3) Justification: Reliance to one's detriment Remedy: expectation or reliance damages as justice requires. (4) The second restaters, basking in the success of the First Restatement, especially 90, set out not to restate the law, but rather to "improve" upon it. The rewording of 90 is an example of that sort of "improvement". (5) However, except possibly for the second sentence, the rewording of 90 represented the law as it existed at the time it was written. (6) The first 90 required lots of reliance in order to recover damages. Under the second 90, only a minor amount of reliance is required. (7) The second sentence allows recovery of reliance damages, not just expectancy damages. So, in the case of the uncle's promise to Johnny to give his $1,000 towards a Buick where Johnny buys a Buick for only $500, The second 90 allows Johnny to recover only $500 rather than the full $1,000 that the first 90 would have awarded. No more of Williston's "enforce the promise, or don't enforce the promise." dichotomy. 3. Remedies under PE a. Though expectancy is not precluded in under PE (indeed, expectancy was the only remedy you could recover under the "all or nothing" formula laid down by the first 90), PE is slanted towards reliance as the proper mode of recovery. b. The remedy under the second 90 can be limited as justice requires (essentially a judgment call by the courts as to whether the plaintiff would be adequately compensated by an award of damages less than expectancy.) C. Unjust enrichment - Restitution is an alternative theory of recovery. In deciding whether or not to pursue it as part of a claim for breach of contract, you must determine whether or not to contract still exists. If the contract still exists, it limits your potential recovery. 1. The terminology "unjust enrichment", "restitution", "quasi- contract", "quantum meruit", and "common counts" mean approximately the same thing. - The common counts was a common law action whereby you could do all your pleading related to a breach of contract at once (express and implied contracts as well as unjust enrichment). - Quantum meruit means the value of a person's services as determined by the court in a case of unjust enrichment. 2. By enrichment, we mean to say that one party ends up holding something it is not entitled to have, and in good conscience it should return it or pay its value. Enrichment also mean something more than enrichment to you (the enrichment could have accrued to someone else and you could still have been "enriched" in that you got something done which you had no right to have done in the first place.) 3. Express contract, contract implied-in-fact, and contract implied-in-law (quasi contract) a. Express contract: written, oral, sign language, etc. Both parties expressly agree to enter the agreement. b. Contract implied-in-fact: By the actions, behavior, and circumstances of the situation, the parties are understood as having entered an agreement (eating food in a restaurant, etc.). Contracts implied-in-fact are REAL contracts with bargained for exchanges of consideration. Like unjust enrichment, it also depends upon societal beliefs about which situations give rise to legal obligations. c. Quasi-contract: One party has something they were not entitled to in the first place, and in good conscience he should either return it or pay its value (doctor charging for reviving a person who passes out on the floor). The law implies a contract where no contract existed previously and dispenses relief according to that implied contract. The contract implied-in-law is a legal fiction imposed by the court to remedy injustice. 4. "Unjust enrichment" is utterly circular. A subjective evaluation based on society's values. A sort of "know it when you see it" to paraphrase Justice Stewart. 5. In Gay v. Mooney, Mooney and Gay had an understanding that in exchange for his being permitted to stay with the plaintiff's family that he would devise a certain dwelling to Gay's children. Mooney died intestate, and their verbal agreement was not enforceable under the statute of frauds (Under the SOF, written evidence of a contract for the sale of land is required in order for the contract to be enforceable.). However, Mooney was unjustly enriched at Gay's expense, and accordingly, Gay is permitted to recover restitution. The evidence in this case was sufficient to overcome the presumption that actions taken in the family are done out of family obligation and not as consideration for something expected in exchange. 6. What we call contracts have express and implied elements. Where there is a gap, the courts can often fill it by implying certain standard terms or using rules of construction. All contracts will have gaps and ambiguities. We manage with the gaps and ambiguities by implying the missing elements. 7. Two choices in seeking damages involving breach of contract. a. Sue on the contract itself for expectancy or reliance damages. b. Sue for unjust enrichment. With a substantial breach you can scuttle the contract and sue for restitution. Requires: (1) An innocent party (2) A substantial breach (3) The other party has been unjustly enriched at your expense. 8. Key difference between Gay v. Mooney and Bloomgarden v. Coyer: In Gay, the parties understood that their relationship involved a quid pro quo all along; the promised transfer of real estate was not intended to be a gift and was never regarded as a gift by the parties. However, the thought of compensation did not even occur to Bloomgarden until long after he had rendered his "services". Accordingly, Bloomgarden was not a case that smacked of unjust enrichment. 10. Hyp: A painter paints your house without having asked you, and after he finishes the job, he demands payment. This is NOT unjust enrichment. But, is that result reconcilable with the case where the doctor treats an unconscious person and later demands payment? I would say it any perceived discontinuity boils down to a public policy that seeks to discourage painters from painting other people's buildings without permission but encouraging doctors to treat unconscious people they happen upon. 11. Even when you are suing for restitution "off the contract, you still may find it useful to refer to the (unenforceable) contract to demonstrate that the parties contemplated an exchange and not a gift. - Blakey's West Publishing Hypothetical: a. Blakey and West enter a contract where Blakey agrees to write a book for West and West agree to pay Blakey $20,000 in consideration for his efforts. The book turns out to be worth $50,000. b. Breach: After delivering the completed book to West, West does not pay Blakey the promised $20,000, a clear and substantial breach of their contract. c. Since Blakey is an innocent party in this transaction, he is entitled (if he so chooses) to dissolve the contract and sue for unjust enrichment. Once the contract is "erased", West is left holding Blakey's book, and thus, is unjustly enriched to the tune of $50,000. Blakey's remedy would be the $50,000 value of the book. d. However, though he would be suing "off the contract", he would constantly be referring to the contract to demonstrate that the book was not a gift to West. (The same analysis could be used in Gay v. Mooney where Gay kept referring to the unenforceable contract in order to establish that from the beginning he and Mooney had contemplated an exchange, not a gift. (See the discussion on page 115). 12. Restitution without enrichment: an alternative theory of enrichment. [See discussion on page 119]. - Kearns v. Andree a. The parties entered into an oral contract for the sale of a corner lot and the house which stood upon it for $8,500 ($4,500 from a mortgage which the defendant would secure and $4,000 in cash). Later, the defendant became dissatisfied and demanded that certain alterations be made before he would continue with the deal. After the plaintiff made the alterations, defendant backed out of the deal. The plaintiff eventually found another buyer, but he had to make other alterations for the new buyer, and the price he got was less than the one in the first deal ($8,250). b. After arguing unsuccessfully that "part performance" had taken the case out of the SOF, plaintiff argued that defendant had been unjustly enriched at his expense by way of the alteration the plaintiff made at the defendant's request. Defendant argued that no benefit from the alterations accrued to him. c. The court found that "[the plaintiff] has performed those services at the request of the other party to the contract, and in the expectation, known to the other, that he would be compensated therefor. Here is a sufficient basis for an implication in law that reasonable compensation would be made." In other words, the defendant got the plaintiff to do something which he had no right to have the plaintiff do in the first place, and in that sense, the defendant was unjustly enriched at the plaintiff's expense. d. The court allowed the plaintiff to recover the costs of alterations he made to the house at the defendant's request minus any value that had accrued to the plaintiff as a result of the alterations. The costs of the alterations made for the eventual buyers were not recoverable. e. Under PE, he would probably get in addition to his unavoidable costs the difference in the negotiated purchase prices and maybe the costs of fixing the house up for the eventual buyers. 13. Remedies for unjust enrichment a. Most common analysis: How much the defendant has been made better off in the sense that she now has something she can walk away with. b. "Minority" analysis: The cost of giving the defendant what she wanted, regardless if what she wanted actually made her better off or not. (This mode of analysis is much more difficult.) - We do sometimes value enrichment in terms of what it would cost to get the results you wanted, but scope of this remedy is so broad that it can include such things as improvements made to a house you did not own. Accordingly, there is a danger of unchecked expansion of this approach. - The choice between the two modes of analysis is somewhat arbitrary. 14. In Anderco v. Buildtex, the court looks at the value of any enrichment that accrued to the defendant and concludes that no benefit accrued to the defendants [using analysis 13(a)]) 15. Kelley v. Hance (sidewalk case): Where a contractor has failed substantially to perform, he may recover in quasi-contract for the value of his work, less damages caused by his breach, provided he did not wilfully abandon [the] contract without justification. (This is especially true where the work done has been to land, the defendant has not expressly accepted the work, and the defendant is incapable of returning the plaintiff's work.) 16. Britton v. Turner a. The plaintiff, a laborer, and the defendant concluded a contract whereby the plaintiff agreed to work for the defendant for 1 calendar year in exchange for $120 payable at the end of 1 year. Plaintiff left the defendant's employ before the end of 1 year but he now sues the defendant for the quantum meruit of his services. b. Plaintiff if not entitled to sue on the contract because he is the party in breach. But can he now recover the quantum meruit of his services? The settled law in this area seems to indicate that since he is the party in breach he is not entitled to use for unjust enrichment. However, the court is uneasy with this result, for it feels it is not in accordance with the opinion of the community that laborers are entitled to be paid for the work they actually perform. Additionally, it invites employers to "encourage" their employees to breach so as to avoid having to pay them for the work they performed. c. So, it fashions an alternative remedy. (1) The party in breach may not dissolve the contract. (2) The laborer may sue for the quantum meruit of his services MINUS (3) Any damages incurred by the employer as a result of the breach (hiring a replacement for the balance of the contract at a higher rate of pay, costs in securing a replacement, lost profits, etc.- what he could recover in his own suit for damages.) d. Here, the jury awarded the plaintiff $95, the reasonable value of his work. The defendant plead no damages, so he is not entitled to any mitigation of the plaintiff's damages. 17. Non-restitutionary, performance theories of recovery a. Doctrine of substantial performance: Where a construction contractor has substantially performed on a contract but breaches in some minor way, the builder is entitled to the price of the contract minus any damages occasioned by his breach (cost of repairs, cost of securing another contractor to finish the project, etc). The builder does not forfeit any recovery simply because he breached in some minor way. This mode of recovery is ON THE CONTRACT. House case: Contract: $100,000 <-> finished house. Builder completes $75,000 worth of work before walking off the job. Owner hires another builder to finish the job for $55,000. Damages: Builder=$25,000 ($100,000-75,000 in damages) b. Perfect tender rule: In a contract for the sale of goods, a buyer may reject the goods if they are not delivered in accordance with the terms of the contract. (This rule generally applies when the consideration can be returned.) 18. Rule of forfeiture a. A purchaser of real property who fails to tender payment in full for the property by a specified date forfeits any part payment he has made on the property. b. DeLeon v. Aldrete: This case involved an agreement to buy land by making scheduled payments. The purchasing party breaches when he stops making payments. He sued for restitution, but since he is the breaching party, he cannot dissolve the contract. (1) In NC, he would get none of his money back. NC follows the old rule that the party in breach may not recover restitution. (2) In TX, where this case was decided, the plaintiff does get some money back. (The court deducted the difference between the purchase price secured from another buyer and the price agreed upon by the parties in this case from the award of restitution.) The court argues that the majority rule of forfeiture leads to absurd results in that it deprives the purchaser of all payments without any consideration of the damages suffered by the vendor, if any. The vendor would end up receiving payment for the land twice. - This case reflects a trend in the case law that is diverging from the innocent party requirement for restitutionary recover. 19. The limits of restitution: Poser v. Seder a. This case involved a particularly strange employment contract that required the employee work overtime without extra pay at certain times during the year. The defendant breached by firing the plaintiff before the end of his term of service. b. The plaintiff attempts to sue partly on and partly off the contract by arguing he should recover the value of his services as specified in the contract plus the value of the overtime work he performed. However, the court finds that the $17/week called for in the contract purports to compensate him for the overtime he worked. Indeed, some weeks he would not work overtime, and he was to be paid $17/week for those weeks as well. The court concludes that if he wants to sue off the contract, he must sue completely off the contract and seek to recover the reasonable value of his services [as determined by the market price of his labor]. The maximum recovery he may receive by suing on the contract is $17/week. D. Obligations arising from promises for benefits received 1. Restatement 86 (1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice. (2) A promise is not binding under Subsection (1) (a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched. (b) to the extent that its value is disproportionate to the benefit. - This rule is very vague! - Additionally, it does not appear that a majority of the jurisdictions in the US have adopted the Restatement rule. 2. Past consideration and moral obligation. a. "Past consideration" is a legal oxymoron because the term itself it inconsistent with the meaning of "consideration." Thus, the Restatement avoids using the term. Additionally, past consideration is usually held to be insufficient to make a promise binding and enforceable. b. Moral obligation: Many of the courts enforcing promises for benefit received have done so by appealing to some "moral obligation" the promisor is under to make good on his promise. However, not all promises giving rise to moral obligations are enforceable. c. The language of moral obligation (and that of past consideration) is derived from a rule that a promise to pay on an antecedent legal obligation whose enforcement had been barred by the SOL or bankruptcy decree is enforceable. d. General rule: Past consideration is not enough to enforce the promise with small exceptions (where there was an enforceable deal, enforcement of which is not barred by the SOL or bankruptcy.) Promise on top of moral obligation is usually not enough. However, the trend in this country is towards recognizing the enforceability of promises backed up by moral obligation in at least some circumstances, for instance, when injustice would result through non-enforcement. "'Material benefit' plus 'moral obligation' [adds] up to 'valid consideration'." 3. Can Mills v. Wyman and Webb v. McGowin be reconciled in light of their seemingly contradictory holdings. a. Mills: Case in which a father promises to pay the person who took care of his now deceased son while the son was sick. He later refused to pay. The court refused to enforce his promise to pay for the care the plaintiff rendered to the defendant's son. b. Webb: The plaintiff in this case was a workman who saved the life of his company's president by falling with a pine block he was attempting to throw to the ground so that he could deflect its path and thereby save the life of the president. Unfortunately, the plaintiff was crippled for life. The president promised to pay the plaintiff $15 a week for the rest of his life. The president made the promised payments until his own death when the executor of the estate discontinued the payments. The court enforced the promise. c. Except for a few side issues, the basic holdings of these cases cannot be reconciled. Webb might be described as a "derelict upon the waters of the law." But, in Webb, there was part performance of a definite and substantial nature which seemed to indicate that the company president considered himself bound to pay his worker $15 a week for the rest of his life. 4. Harrington v. Taylor is much more representative of the promises for benefit received cases. a. This case involved a promise by a man to pay a woman for injuries she sustained when she stopped the man's wife from killing him with an ax. b. The court held the promise unenforceable for lack of consideration. D. Obligations arising from tort 1. Maudlin v. Sheffer a. In this case, the plaintiff (Sheffer), the general contractor for the building and repair of 5 school buildings, contracted with the defendant (Maudlin), a registered professional mechanical engineer, to develop and deliver engineering designs for the project. The plaintiff was to pay the defendant $200 a week for his services. The defendant produced and delivered the requested specifications, and the plaintiff presented them to the GA State School Building Authority. The authority recalled the bids put out for the project and rejected the plans in part because the designs they called for violated the laws of physics as well as other standards laid down by the GA Department of Education. This process was repeated, but the plans still came back defective. The authority ended up suing the plaintiff and hiring another engineering firm to complete the job. b. The complaint was vague in that from it was unclear whether the plaintiff was attempting to sue in contract or in tort. The theory under which he is suing is critical in figuring his damages. Because of the potential for a high damage award, the plaintiff wants to sue in tort. (1) Substantial certainty that the plans were defective might constitute an intentional tort (Apparently, the plans consisted of diagrams and designs the plaintiff had used for previous jobs.). (2) With an intentional tort comes the possibility of punitive damages, a remedy unavailable in contract. (3) Also could recover damages for the injury caused by the defendant's misfeasance. c. Why can he sue in tort? - Independently existing legal obligation set by the law and the regulations of the profession. As a professional engineer, the defendant is obligated to abide by ethical standards set up by the profession and the state. (The basic duty is to act ethically and responsibly). The defendant is basically charged with failing to exercise a reasonable degree of care, skill and ability exercised by members of the profession under similar circumstances. d. Here, the defendant is under both (1) A contractual duty, and (2) An obligation imposed by law. to perform his work in accordance with the standards of his profession. e. The trial court overruled the general demurrer, and the GA Ct. of App. upheld that action. It found that the plaintiff sufficiently alleged a tort violation in his complaint, and accordingly, the case could proceed. f. Election of remedies (1) Formerly, you had to specify in your pleading the theory under which you were suing: contract or tort (2) Now, early election or remedies is not required. You may plead in the alternative and keep both theories alive until you can decide which one you will have the best luck with. 2. J'Aire Corp. v. Gregory a. Plaintiff operated a restaurant in an airport run by the county. The county entered into a contract with the defendant for improvements to the airport's air conditioning and other renovations. The contract specified no time table for the completion of the job. During the defendant's work (or lack of it), the plaintiff's restaurant was closed or partially closed. The restaurant lost business and profits because of the defendant's dawdling and untimely performance. b. Gap filer rule- Civ. Code  1657: When the time for performance is not specified in the contract, performance must be completed within a "reasonable time". (Still a little vague; what exactly is a "reasonable time"?) c. The restaurant was not a party to this contract, but they were a third party beneficiary. d. The court permitted the plaintiff to proceed under a tort theory. Tort: Tortious interference with economic opportunity/Negligent interference with prospective economic advantage. (This tort pushes tort law to the limit in absence of a more defined duty of care. (1) The contractor's conduct was closely connected with the restaurant and was negligent towards the restaurant. (2) The damages occasioned by his slothful performance were foreseeable. 3. Foley v. Interactive Data Corp. a. The plaintiff, a former employee of the defendant, sued the defendant for firing him after he revealed to his former supervisor that his new supervisor, Kuhne, was being investigated for embezzlement from his former employer. b. Foley sued under three theories (1) Tort action: wrongful discharge in violation of public policy. (2) Contract action: Implied in fact element in his employment contract not to discharge except for good cause. (3) Implied in law covenant of good faith. c. On his tort action, Foley alleged that in making his revelation he acted as a "whistleblower", and firing whistleblowers is contrary to public policy. However, the court believed that his revelation only benefitted his employer, so the discharge on that ground was not in violation of public policy. (No public policy against firing internal whistleblowers.) d. Implied in fact contract: The trial court held any such contract unenforceable under the SOF. However, the CA S.Ct. held that the implied contract did not run afoul of the 1 yr requirement set by the statute of frauds, and that if he established his factual allegations at trial that the jury might be able to infer the existence of an implied in fact contract. e. Implied covenant of good faith: The terms of the covenant are essentially, "Deal with me fairly, and if you do not, you are liable for damages." Plaintiff invokes a string of insurance cases where the court held that tort damages, like P&S and emotional distress, were recoverable from insurance companies who breached insurance contracts by refusing to pay benefits. However, the court refused to accept the plaintiff's analogy between insurance companies and employers or to cast the employer-employee relationship as a "special relationship". The court sets forth the four requirements for classification of the relationship as "special", and thus, eligible for tort remedies. (1) One of the parties enjoys a superior bargaining position. (2) The purpose of the weaker party is not to make a profit but to obtain a necessary service or product, financial security, or peace of mind. (3) The weaker party places his trust and confidence in the larger entity. (4) There is conduct on the part of the defendant manifesting an intent to frustrate the weaker party's enjoyment of his rights under the contract. Though the court concludes that the employer-employee relationship does not meet these characteristics, and thus, does not call for the award of tort remedies, Foley may seek and recover contractual remedies for the breach of this covenant. E. Warranties 1. Definitions a. A warranty is basically a promise concerning the quality of the goods or performance of a seller. b. A warranty is nothing but another promise which can be exchanged as consideration. c. Warranties may either be express or implied (in fact and in law; usually there is not much difference) c. The theory of implied warranty: What the parties meant or should have meant, unless the parties otherwise agree. 2. 1st type of warranty: did you fulfil the terms of the contract? (Did you do what you said you would do?) Hyp: Contract: $200 <-> car "Car" party delivers a bicycle instead. This is a case of breach of warranty. 3. Implied warranty of merchantability (UCC 2-314) a. Provisions (1) If the seller is a merchant of the kind of goods he is selling, then his sales of that good carry with them an implied warranty of merchantability. (2) The warranty specifies that the goods will (a) Be of "fair average quality", and (b) Will "pass without objection" in the trade of which the merchant is a part among other things. (3) "Merchantability" refers to the minimum standards which a good must meet in order to pass for acceptable goods of the kind in the trade. Obviously, this is not a particularly exacting standard. b. Webster v. Blue Ship Tea Room (1) Plaintiff ordered a cup of fish chowder at the defendant's restaurant. While she was eating it, a fish bone from the chowder lodged in her throat, requiring surgery to remove. (2) Plaintiff sues for breach of an implied warranty of merchantability (fitness for use). (3) In ruling against the plaintiff, Judge Reardon notes that (a) Plaintiff was a New Englander who was presumably familiar with fish chowder. (b) Time honored recipes for fish chowder do not call for the removal of the bones. Encountering bones is part of eating fish chowder. [Ax hypothetical: a man is injured while using an ax, so he sues the manufacturer of the ax charging them with knowingly marketing a product with a sharp edge.] (c) Cases from CA and OH indicate that a person who eats fish or oysters runs the risk of encountering fish bones and oyster shells while eating those foods, and those risks are expected when consuming those foods. 4. Implied warranty of fitness for a particular purpose (UCC 2- 315) a. Provisions (1) "Where the seller at the time of contracting has reason to know (a) any particular purpose for which the goods are required, and (b) that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods There is unless excluded or modified...an implied warranty that the goods shall be fit for such purpose." b. Keith v. Buchanan (1) Keith contracted with Buchanan to purchase the defendant's sailboat for $75,610. The advertisement for the boat described the vessel as a "seaworthy vessel" and "a picture of sure- footed seaworthiness." Keith had his good friend Buddy Ebsen [Jed Clampett] inspect the vessel prior to purchase, and Ebsen said that the vessel would suit Keith's needs. After the vessel was delivered, a dispute arose between the parties regarding its seaworthiness. (2) Keith alleged several different theories of recovery. (a) California warranty (Consumer Warranty Act) (b) Implied warranty of merchantability (c) Implied warranty of fitness for a particular purpose. (d) Express warranty (3) The defendant argued that the statements made in the advertisement were only "commendations" of the goods, and thus, could not be express warranties. Additionally, he argues that the plaintiffs own expert inspected the vessel and approved it. However, the court disagreed and found that the statements were (1) "affirmations of fact" and "descriptions" relating the quality or condition of the sailboat. (they could not be reasonably construed as anything other than affirmations of fact). Additionally, it appears that the warranty was also (2) "part of the basis of the bargain." The presumption is that the affirmations of fact are part of the basis of the bargain, and the burden is on the seller to rebut that presumption. Here, the seller has not done so. (4) As far as the implied warranty for fitness for a particular purpose, the court finds that the plaintiff did not rely on the seller's expertise to direct him towards goods suited best for his needs. In fact, Keith relied on his own sailing experience and Buddy Ebsen's advice in purchasing the boat. Accordingly, there can be no implied warranty of fitness for a particular purpose. (4) The UCC has clarified that express warranties are elements of contracts, and therefore, only contract remedies may be recovered as a result of their breach. (5) The court chickens out on reliance and holds that he wins under either an expectancy or reliance theory of damages. 5. The UCC tells us how to disclaim any and all implied warranties: Specify that the goods are purchased on an "as is" basis. All implied warranties are disclaimed by that proviso. 6. When injury results from a breach of warranty, the UCC bails out; you must jump over to tort in order to recover damages (SL/product liability, etc.) 7. Historically, we have used "warranty" to refer to describe actions in both contract and tort. 8. Lawyers move between tort an contract theories to as to avoid obstacles in the was of one theory or another. In some instances, a tort theory may be more appropriate for a case [or may get you farther] than a contract theory, and vice versa. 9. In contract, we do not talk about the reasonable person standard; we speak of other standards, like merchantability. 10. A guaranty is a form of warranty. [Merchants want to say they stand behind their products and will make good in the event that the product is defective, but they do not want to be legally bound to such statements.] F. Promises enforceable on the basis of form 1. At CL, a person could make a promise binding by putting the promise in writing and sealing it with a wax impression from his signet ring. While this is still the law in England, only a handful of states recognize this form of legal obligation today. 2. Consideration is a sort of formal requirement, and it is the requirement that the Anglo-American system of jurisprudence has accepted as the touchstone for legal enforceability. However, using consideration as the touchstone leads to a few problems. a. The parties want to make a gift rather than a deal. The doctrine of consideration stamps promises not backed up by consideration to make a gift in the future invalid. b. The parties intend to make a deal, but during the course of negotiations the contemplated exchange becomes so complicated that it may fall victim to the pitfalls of consideration (1) An illusory promise (2) Pre-existing duty (3) Non-existing legal right However, where there is a deal, it is usually not difficult to find consideration. If the parties can phrase their deal as an exchange, they can probably meet the requirements of consideration. 3. Other societies use different formalities for making promises enforceable a. The Seal: wax impression from a signet ring (discussed earlier). However, over time the wax impression has been replaced by words on a page (L.S.) Problems (1) Inconsiderate promises: the promisor may not realize that by signing the document she is consenting to be bound by the promise. (2) The seal has become a too unknown way of making promises enforceable. It has been phased out in most areas either by legislative repeal or judicial fiat (by requiring that the promise be backed up by consideration. However, some courts hold that the seal establishes a presumption of consideration.) (3) The potential for forgery is high under a system where written promises would be made enforceable. (4) Too much of an emphasis on writing (5) Who will prepare the writings? (a) Laypersons who wish to make their promises binding? (b) Lawyers? (c) Mass producers of L.S. documents? 4. Courts in this country prefer consideration over other conceivable formal requirements. (1) It better satisfies the cautionary function. (2) An exchange better satisfies out moral and societal sense. The idea of exchange satisfies our sense of justice. 5. Promissory Estoppel has developed to fill the void left by the atrophy of the seal. IV.Multiple requirements for enforceability - The existence of a bargained for exchange of consideration may not be enough to make the promise enforceable. A. Statute of Frauds (SOF) 1. The SOF is an additional requirement that must be satisfied in order to make a contract binding. It only applies when you have a valid contract (bargained for exchange of consideration.) 2. The SOF originated in England in response to defects in the English rules of evidence which were susceptible to exploitation by perpetrators of fraud and perjury bent on getting the jury to believe that a non-existent contract actually existed. It required that there be written evidence of certain types of contracts in order to make them enforceable. 3. Today, all states have some sort of SOF, but the types of contracts which must be in writing to be enforceable vary from state to state. - However, one SOF provision is common to virtually all SOF's: Contracts for the sale of land or long term leases or land interest. 4. Written evidence a. Memorandum b. Note, letter, or even a pleading! c. Written contract itself. 5. Four tests regarding whether or not a contract is within the ambit of the SOF a. Is the contract subject to the SOF at all? b. Does the writing satisfy the SOF? c. If not, is there an exception? d. If there is no exception, are there any mitigating circumstances? [ Have you relied to the extent that we want to do something for you? ] 6. Which SOF applies? - You must apply the SOF of the jurisdiction in which the contract was made. 7. Schoor v. Holmdel a. The defendant firm hired the plaintiff to perform some engineering work, planning, and surveying. The defendant began defaulting on its payments. The parties eventually convened a hearing to discuss the situation. At that meeting, Sugarman, an 18% interest holder in the company and a lawyer who often acted as the firm's attorney, presented the plaintiffs with a check for $2,000 from his own personal trust account and allegedly promised to be personally responsible for the firm's debt to the plaintiff. Sugarman also made other payments on the company's indebtedness. b. Sugarman maintained that he made no such promise to be personally responsible for the company's debt to the plaintiff, and even if he did, the promise was not enforceable under the SOF for want of written evidence. (This is a common defense pattern in SOF cases.) c. The court found that he did make such a promise, and thereafter it grappled with the issue of whether or not the SOF bars enforcement. The SOF requires that any promise to answer for the special obligations of another be in writing, or it is not enforceable. In addressing the SOF question, the court applies the leading purpose test by inquiring into whether the promise was for (1) Sugarman's own benefit, in which case the SOF does not bar recovery, or (2) The sole benefit of his company, in which case the SOF would bar recovery. d. If on balance the leading purpose of the promise was to protect his own interests, the court must find that the SOF does not apply and the promise is enforceable. The court found that given Sugarman's association with and financial stake in the firm that the leading purpose of his promise was to protect his own interests. Accordingly, the SOF does not bar enforceability. e. Drawing this distinction when both motives may be at play can be difficult. The goal will be to look to see if one motive overshadows another. 8. McIntosh v. Murphey a. Plaintiff sought employment as a manager in a car dealership. He and the defendant car dealership concluded an oral employment contract over the phone and through telegrams for a 1 year term of service. On Saturday, 25-APR-1964, McIntosh received a telegram that the position of assistant sales manager was open and he could begin work on the following Monday morning. He and his family moved to Hawaii on that Sunday, and McIntosh began work the next day. Two and a half months later he was fired. McIntosh sued for damages. b. The car dealership responded by denying that it and the plaintiff had concluded a 1 year employment contract (they contended their arrangement was employment at will), and even if they had concluded an employment contract with a 1 year term, the SOF bars enforcement because performance was due in over a year (367 days), and the HI SOF requires that such contracts be in writing in order to be enforceable. c. The trial judge denied the defendant's motion for a directed verdict on the SOF question, holding that as a matter of law the SOF did not apply. (1) McIntosh was not bound by the contract until he showed up for work on Monday morning. (2) Even if McIntosh was bound earlier, the part of Saturday left when he received confirmation did not count, and Sunday is normally a day of rest, so it does not count. Accordingly, the contract was not within the SOF. - [No one is sure how the one year requirement crept into the English SOF, but it is nevertheless there.] d. After a synopsis of the history of the SOF and criticisms made of it, the court notes that other courts have used their equity powers to mitigate the harsh results of the SOF under the labels of "part performance" and "equitable estoppel". The court then looks to the policies behind the SOF in an attempt to determine if barring enforcement would promote those policies or not. The policy behind the SOF is to prevent fraud and unconscionable injury, and courts have refused to apply the SOF to adjudge oral contracts unenforceable when fraud would result from the decision. The court adopts the Restatement (Second) test for applying the doctrine of equitable estoppel to the SOF (the test is strangely reminiscent of 90. Applying the Restatement test, the court concludes that moving his family to Hawaii from California in order to take this job did constitute reliance of a definite and substantial character, and to deny him relief by barring the enforceability of the contract would be manifestly unjust. "Injustice can only be avoided by the enforcement of the contract and the granting of money damages." e. The dissenter argues that the SOF could not be waived through use of the court's equity powers. Additionally, the dissenter believes that the plaintiff was hired on a trial basis, and that the SOF was enacted to prevent the kind of fraud he believes the plaintiff is attempting to perpetrate. Any amelioration of the SOF must be effected by the legislature, not the courts. f. The SOF is about not trusting juries to decide certain contract claims correctly. The legislature has evidently made a determination that employers are more likely than not to be the victims of fraud, and so it has chosen to protect them with provisions like the 1 year requirement. 9. What writing will satisfy the SOF? a. Jonesboro Investment v. Cherry (1) Plaintiff entered a contract with the defendants to purchase 2,400 acres from the defendant for $900,000. Defendants later refused to convey the property, so the plaintiffs sued for specific performance. (2) In part, the defendants argued that the terms in the contract were not stated, so the written evidence of the contract is insufficient to satisfy the SOF. Plaintiffs argue that in such instances, the court should apply a "gap filler rule" and find that payment of the full amount of the purchase price is due in cash upon delivery. (3) However, according to Arkansas case law, the terms and conditions of a land sale must be stated in the written evidence to satisfy the SOF. Indeed, all essential provisions of the contract must be stated in the written memorandum in order to satisfy the SOF. (4) The writing requirements of the Arkansas SOF are particularly stiff. However, what writing will satisfy the SOF varies from state to state, so it is entirely possible that a memorandum that fulfills the requirements of the SOF in one state would not fulfil the requirements of the SOF in another state. YOU MUST CONSULT THE SOF FOR THE STATE IN WHICH THE CONTRACT WAS MADE IN ORDER TO DETERMINE IF THE WRITING SATISFIES THE SOF. b. Restatement (Second) of Contracts Section 131: writing requirements Unless additional requirements are prescribed by statute, a contract within the SOF is enforceable if there is written evidence, signed by or on the behalf of the party being charged, that (1) Reasonably identifies the subject matter of the contract (2) Sufficiently indicates that a contract over the subject matter has been concluded by the parties or is being offered to the aggrieved party by the party being charged. (3) States with reasonably certainty the essential terms of the as yet unperformed promises. Provisions with support in the case law as well. (1) Several writings may be used to satisfy the SOF so long as one of them is signed by the party being charged and the evidence shows that they relate to the same transaction. (2) The memorandum need not have been created for the purpose of serving as a memorandum of the contract. A letter referring to the contract, even one purporting to refute the contract, may suffice if it meets the other requirements of the SOF. (3) The signature need not be handwritten. Any symbol affixed to the document with the intent to authenticate the document as that of the signer will do. (Letterhead and printed initials beside a typed name have been held to be sufficient). Some SOF's require a signature at the bottom of the memorandum, but most do not. (4) The writing can be signed at any time before or after the conclusion of the contract. (5) An unsigned copy or oral evidence can be used if the original memorandum has been lost or destroyed. (6) Oral or written evidence of a term inadequately stated or omitted from a memorandum may be admitted as evidence of the missing or defective term. Mutual mistake or fraud empowers the court to reform the document to satisfy the statute. c. Blakey's provisions that must be included in a writing in order to satisfy the SOF. (1) Price (2) Indication of a deal (3) Parties (4) Subject matter (5) Signed by the party to be charged (aka. Defendant) - Because of the "party to be charged" proviso, it is possible that one party could win with a piece of written evidence while the other party could not win using the same document. d. Hypothetical: Deal to convey the property and building of a 7/11 store in Chapel Hill for $120,000. After receiving a better offer, the seller attempts to revoke the contract by sending a handwritten memorandum to the buyer saying that unless he was willing to match the price he would sell to the higher bidder. Does the memorandum satisfy the writing requirement of the SOF? (1) Subject matter of the deal: The memorandum indicates that the deal was for the sale of the 7/11 property. (2) Price: Though the $120,000 price is not explicitly stated, the seller does say he has received a bid higher than the agreed purchase price by $20,000, and additionally, if the buyer was willing to match the bidder's price of $140,000, seller would still be willing to sell to the buyer. From this, we can derive the $120,000 purchase price. (3) Parties: The memo clearly indicates the parties to this transaction were Ed Trustful (buyer) and Jack Jump (seller). (4) Indication of the deal: The seller explicitly acknowledges that the two had a deal for the sale of the 7/11 property. (5) Signature of the party to be charged: The seller made out this memorandum in his own handwriting, and his handwritten name appears at the head of the memorandum. Therefore, this writing appears to satisfy the SOF. e. UCC 2-201: Contracts for the sale of goods (text is on page 197). (1) A contract for the sale of goods for a price of $500 or higher is not enforceable unless there is some writing sufficiently indicating that - A contract for the sale of the goods between the parties had been made, and - The writing is signed by the party to be charged or his authorized agent or broker. The writing cannot be insufficient because it omits or incorrectly states a term, but the contract is not enforceable beyond the quantity of goods stated in the writing. (2) Between merchants, if within a reasonable time a writing that confirms the contract that is "sufficient against the sender" is received and the receiver has reason to know its contents, the writing satisfied subsection (1) unless the receiving party tenders written notice of objection to the writing's contents within 10 days after receipt of the writing. (3) A contract otherwise valid but which is not enforceable under subsection (1) is enforceable if one of the following is satisfied: (a) The goods are specially manufactured for the buyer and are not suitable for sale to anyone else during the normal course of business and the seller, before repudiation and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of the manufacture of the goods or commitments for the procurement of the goods. (b) If the party being charged admits in a pleading, testimony, or otherwise in court that a contract for the sale of goods existed between the parties, then the contract is enforceable, but not beyond the quantity of goods specified in the contract. - The UCC will not let contractors for the sale of goods plead the existence of a contract and then try to weasel out of it on a technical deficiency. (c) If payment has been made or received and accepted for the goods, then the contract is enforceable. f. The UCC SOF for the sale of goods is much more lenient than other SOF's (1) No requirement that the price be stated (2) Writing need not contain all material terms (3) All the writing need do is provide evidence that the exchange is rests on a transaction. (4) Only the quantity of goods must be stated, but the quantity need not be precise or even correct, but the contract is only enforceable for the quantity of goods stated in the writing. g. Hypothetical: Contract for the sale of the inventory of the 7/11 for $120,000. Similar to the previous transaction, only the writing purporting to terminate the deal does not specify the price of the goods. The writing is sufficient to satisfy the UCC SOF for the sale of goods where the price exceeds $500. (1) Though the price is not stated, the price need not be included in the memorandum in order to satisfy subsection (1). (2) The writing establishes that a deal was struck. (3) The quantity of the goods is specified. h. Hypothetical: Same as above, but the putative deal was to include $10,000 worth of stock at the seller's home. The writing does not mention this stock. (1) CL: Deal not enforceable- the terms are not clearly stated. (2) UCC: Last sentence of 2-201(a): Enforce the deal up to the quantity of goods described in the writing. i. Merchants' exception (UCC 2-201(b)): Though the buyer could sue the seller based on the document used in the two hypothetical above, the seller could not sue the buyer with the same document UNLESS - Both parties were merchants of the kind of goods sold. The deal would then fall under the merchants' exception V. Damages and remedies (TOOLBOX B) - The overriding goal in the law of contracts is to restore the injured party to the positions she would have occupied had the contract been faithfully performed. *** Upon breach, you as the aggrieved party have 2 obligations. a. Stop performing on the contract b. Mitigate your damages by not incurring avoidable costs after the breach. 1. Expectancy: Damages based on the benefit you expected to receive on the contract. The contract remains in force, and the relationship might continue. Under expectancy theory, the damages to which the wronged party is entitled are a. Any lost value caused by the charged party's breach b. Any expenses incurred by the suing party in carrying out his obligations under the contract. [You figure expectancy damages by looking at the position you would have occupied when performance was due and deduct anything you were supposed to give up to the other party but did not as well as the value of what you now have.] c. Duty to "pre-mitigate" damages A party to a contract is under a duty to, as much as possible, pre-mitigate any damages that would be caused by a breach. This could be anything from advising the other party of the potential harm that would be caused by a breach to taking contingency measures so as to ameliorate the consequences of a breach as much as possible. d. 2 kinds of adjustments that must be made in figuring expectancy damages. (1) Increase damages to cover unavoidable costs in order to put the party in the position he would have occupied had the breaching party fully performed (profit/loss-wise) These costs hat to have been (a) Incurred in order to perform the obligations under the deal, and (b) Cannot be avoided after the other party has breached. (2) Decrease damages as additional revenue accrues to the aggrieved party e. Limits on expectancy recovery (1) Avoidability: you may only recover those costs which are an unavoidable result of your performance of the contract. You may not recover damages for those expenses which you can avoid incurring. [As time passes, originally avoidable expenses can become avoidable. (2) Foreseeability: the party-in-breach will be liable only for those damages that were a foreseeable consequence of the breach. (3) Certainty: You must be certain about any damages for lost value or lost profits in order to recover them. f. Common law damages for breach of sale: Market price - contract price at the time and place set for delivery or performance. (1) CL damage formula applies to transactions for land, services, and any other non-goods saleable items. (2) Damages for contracts involving the sale of goods are now covered under the UCC, which has been adopted in most of the United States. (3) Cover/Resale prices were not recoverable at common law. g. Under the UCC, which applies only to goods (tangible personal property), sellers and buyers have different measures of damages. h. Hierarchy of expectancy remedies (1) You may purchase substitute goods (or services) so long as they are the "best-fit-cheapest" substitutes that are available at the time after the breach or a reasonable time afterwards. Your damages will be the difference between the price you paid for the substitute goods and the contract price. (a) 2 assumptions made by this mode of recovery which are sometimes not true. (1) A readily-accessible market at which you can procure a substitute exists. (2) Simultaneous procurement of a substitute is possible. - If either assumption is false, then there is no market from which a substitute can be obtained. (b) Consequential damages: Consequential damages are incurred when a substitute transaction is not available. Conversely, consequential damages do not exist if a substitute can be procured at all or in time. (c) Incidental damages are those damages incidental to a breach, like storage, insurance, travel, etc. (d) UCC sections applying to substitute transactions for the sale of goods. (1) UCC 2-712: A buyer may recover the difference in price between the price of a "cover" contract and the original contract price (plus incidental and consequential damages) minus expenses saved by the breach so long as the buyer makes the substitute transaction in good faith and without unreasonable delay and the substitute transaction is not unreasonable. (2) UCC 2-706: A seller may resell goods or the undelivered balance thereof and recover the difference between the resale contract price and the original contract price (plus incidental damages) minus expenses saved by the breach so long as the resale is made in good faith and in a commercially reasonable manner (which includes time). *** The UCC has a policy of encouraging substitute transactions. (2) How to figure substitutionary damages Hypothetical contract: quantity of goods in exchange for 10 credits. Delivery is due on 01- JUL-92 (a) Damages under the common law (1) Buyer breaches July 1. Market is at 8 credits. Seller gets 2 (if the mkt price > contract price, then the seller is damaged) (2) Seller breaches July 1. Market is at 8. Buyer is not damaged and can make no recovery. (Buyer can get the goods cheaper on the market than under the contract, so seller's breach is a boon.) (3) Seller breaches on June 15. Market is at 12, but by July 1 market is at 8. Buyer is not entitled to damages. Under the CL, damages are figured as of the date delivery was due. (4) Buyer breaches on June 1. Market is at 6, but by July 1, the market is 8. Seller gets 2 credits in damages. His damages are also figured as of the date delivery was due. *** AT CL, YOU CANNOT RECOVER THE RESALE/COVER PRICE OF A SUBSTITUTE TRANSACTION CONTRACT!!! (b) Damages under the UCC (1) Buyer breaches July 1. Market is at 8 credits. Same as CL result. (2) Seller breaches July 1. Market is at 8. Same as CL result. (3) Seller breaches on June 15. Market is at 12, but by July 1 market is at 8. Buyer gets 2. His damages are figured as of the date he discovered the breach (June 15) (UCC 2-713) (4) Buyer breaches on June 1. Market is at 6, but by July 1, the market is 8. Seller gets 2 (Same as CL). Seller's damages are figured under UCC 2-708. Lukaszewski/Special Education teacher case. - When L. breached her employment contract the school board immediately began advertising for a replacement. Only one person applied, but she had a better education than did L., and so, she commanded a higher salary. The school board had no real choice but to hire her. Accordingly, the school board was entitled to the difference between the higher salary and the salary they would have paid L. plus costs occasioned by her breach. *** However, L. STILL comes out better off even after paying the damage award. In effect, it made economic sense for her to breach the contract: her breach was an efficient breach. (2) Alternatively, you also may sue for lost profits occasioned by the breach so long as the loss of profits was a reasonable foreseeable consequence of the breach. Formula to figure the damages under this mode of recovery: Damages = accounting profit + unavoidable costs Accounting profit = Total revenue - all costs (a) Figure the lost profit: the lost profit will be figured as accounting profit (gross revenue minus all costs [avoidable and unavoidable]) (b) Add back in all unavoidable costs. - The idea is to give the plaintiff a damage award which puts him in the position he would have occupied had the breaching party fully performed. At the end of the calculation, the aggrieved party should net the profit he would have had if the contract had been fully performed; the award of costs compensates the plaintiff for covering those unavoidable expenses from his back pocket when he had expected to cover them from the revenue he was to accrue. (c) UCC provisions applying to damages occasioned by breach of contract (1) UCC 2-713: A buyer's damages for non-delivery or repudiation by the seller is market price when the buyer learns of the breach minus the contract price (plus incidental and consequential damages. Market price means the price at the place for delivery or the place of arrival in cases of rejection after arrival or revocation of acceptance minus expenses saved by the breach. (2) UCC 2-708: (1) A seller's damages for non-acceptance or repudiation is the contract price minus the market price at the time and place for delivery (plus and incidental damages) minus expenses saved by the breach. (2) If the damages in section (1) are inadequate to put the injured party in the position he would have occupied had full performance been rendered, then the seller may recover lost profit from the contract plus incidental expenses. *** An injured party has the right to refuse to accept the breach of the other party for a reasonable time. This gives the breaching party the opportunity to withdraw the breach and perform on the contract. When the an injured buyer finally accepts the breach, he has the right to change the market date for determining the market price necessary to figure damages. (3) UCC 2-714: If the seller delivers goods which damaged or defective (breach of warranty), and the buyer accepts the goods, the buyer may recover the difference between the value of the damaged goods and the value of undamaged goods at the time and place for acceptance. *** Warner v. McLay (a) Plaintiff, a party to a building contract that the defendant had breached, argued that he was entitled to a 10% profit (a reasonable profit) (b) The court disagreed. It held that he was entitled only to the profit that he would have gotten if the contract had been fully performed (accounting profit) *** Neri v. Retail Marine (a) Plaintiff made a contract with the defendant to purchase a boat which the defendant would have to order. After ordering the boat, the plaintiff was injured and had his lawyer notify the boat company that he would not fulfil his end of the contract. The boat company eventually sold the boat for the same price in the original contract. The plaintiff sued for restitution of the $4,250 he put down on the boat, and the boat company counterclaimed for lost profit of $2,579 plus incidental expenses or $674. (b) Under the UCC, a breaching party is entitled to restitution. UCC 2-718: A breaching party is entitled to restitution minus (1) Reasonable liquidated damages, or (2) if no such stipulation, (a) 20% of total performance, or (b) $500 (c) The trial court ruled that since the boat company resold the boat for the same price that it was not damaged, but it awarded it $500 under UCC 2-718 and awarded the plaintiff $3,750. That judgment was affirmed on appeal. (d) The Ct. of App. for NY ruled that the trial court had incorrectly applied UCC 2-718. The defendant was at least entitled to incidental damages (storage, insurance, etc) (e) The boat company was a volume dealer. It argued that it was damaged because in the time that it took to get rid of the plaintiff's boat it could have sold 2 boats instead of the one it actually sold. Therefore, it has lost profit as a result of the plaintiff's breach and is entitled to recover that lost profit from the plaintiff. Here, market damages do not put the injured party in the position he would have occupied had there been full performance (as they normally would). - A volume dealer is characterized by an unlimited supply of goods and a limited pool of customers. [Also, volume sellers measure their business in terms of sales per unit time.] (f) UCC 2-708(2) is there in part to protect the lost volume seller, but it can be tough to get the judge to accept it. (The CL market damage formula is so ingrained into some judges that they simply cannot think in UCC terms.) UCC 2-718(3) [Offset of buyer's restitution.] is also there to protect lost volume sellers. Though the sections are ambiguous, courts have implied an "or", meaning the injured party has the option of seeking (1) Actual damages under 2-708, or (2) Artificial damages under 2-718(2). The injured party would ordinarily seek the higher of the two damage figures, but seeking artificial damages in lieu of actual damages can be an attractive option when figuring or proving actual damages would be difficult. (g) The court concluded that the boat company was a lost volume dealer, and therefore it awarded the company its lost profit and incidental damages as an offset against the plaintiff's restitution, so the plaintiff netted only $997. 2. Reliance: Damages based on the expenses you incurred as a result of your justified reliance on the contract, so long as reliance damages do not exceed expectancy damages. If reliance damages put you back in the position you occupied prior to entering into the agreement, that is merely a coincidence. The contract remains in force, and the relationship might continue. a. Whether or not consideration is a reliance expenditure depends on the jurisdiction. b. Calculation or reliance damages: Under reliance, you are entitled to all unavoidable costs made in reliance on the promise so long as those costs are a foreseeable consequence of reliance on the promise. c. Reliance damages are (1) Limited by expectancy damages, but (2) They are usually less than expectancy damages (3) You may not get reliance on the basis of foregone opportunities. d. The courts will not allow a party to use reliance to turn a losing contract into a winning contract, but it is up to the defense to show that the prayed for reliance damages would exceed expectancy. 3. Restitution: Dissolve the contract after a substantial breach and sue for unjust enrichment. Requires 3 things. a. An innocent party b. The contract must be one where the other side benefitted much more than the other at the other side's expense, and c. The party benefitted more still breaches substantially enough to warrant termination of the contract. - Limiting feature of restitution: You may only recover what the other party got, that is, the amount of the unjust enrichment. Costs/expenses are not recoverable. - Usually, restitution is an undesirable remedy. Where only promises are exchanged, there would be nothing to be restored to the plaintiff in an action for restitution. *** Under the UCC, a breaching party is entitled to restitution. UCC 2-718: A breaching party is entitled to restitution minus (1) Reasonable liquidated damages, or (2) if no such stipulation, (a) 20% of total performance, or (b) $500 *** At CL, it is not clear if a breaching party can recover restitution. 4. Punitive damages generally cannot be awarded for breach of contract. VI.The UCC differs from the CL in three different ways A. Consideration - Pre-existing duty rule: While under common law modification of an existing contract could not be done without starting from scratch or adding some additional consideration, under the UCC, modification of existing contracts requires no new consideration. B. Statute of frauds - Sale of goods for $500 or more. a. Price need not be stated b. Establish contract was made c. Signed by party to be charged d. Quantity of goods must be indicate, and the contract is not enforceable beyond that quantity. e. Merchant exception f. Specially manufactured goods exception g. Pleading, testimony, etc. can be used as the writing required for the SOF. h. Part performance (payment) can be used as evidence of the contract. C. Remedies 1. At CL, market price minus contract price (or contract minus market) was the standard remedy for both the buyer and seller at the time performance was due. 2. Substitute transaction was not necessary at CL. 3. Under the UCC, market price is changed for the buyer but not for the seller (The buyer has the benefit of using the market price at the time he learned of the breach in his damage calculations. 4. Recovery for a substitute transaction is available if you meet the requirements.