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Contracts II - Coggle Diagram

- - - - Four broad categories of pre formation defenses:
        
        Capacity: some populations are not allowed to enter into contracts
        
        Two populations do not have the capacity to enter into contracts:
        
        Minors
        
        General Rule: Contracts with minors are unenforceable and fully voidable
        
        Lack of knowledge of the child's age is irrelevant
        
        Voidable by the minor when still underage, or within a reasonable time after coming of age
        
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        Incapacitated
        
        Incapacity is determined by the "cognitive test" which tests if a person is unable to understand in a reasonable manner the nature and consequences of the transaction
        
        generally difficult to meet
        
        Usually fully voidable, and the incapacitated person will get everything back
        
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        Formation or Procedural Defenses: problem with the bargaining process
        
        Duress
        
        Contracts formed under duress are unenforceable and voidable
        
        Two types:
        
        Physical Compilation
        
        Improper Threat
        
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        But duress is difficult to prove
        
        Mistake
        
        R151: A mistake is a belief that is not in accord with the facts (cannot be a prediction - must be a fact)
        
        Unilateral Mistake
        
        Most commonly related to construction situations
        
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        Case: Wil-Fred's Inc. v. Metro Sanitary District
        
        Mutual Mistake (R152 & 154)
        
        Case: Lenawee County Board of Health v. Messerly
        
        Common situations of mutual mistake are to overturn releases of liability or for settlement agreements
        
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        A mistake of pure value does not count as a mistake of fact (Ex: value of a race horse is not a mistake but a mistake about how many races a racehorse has won is a mistake)
        
        Misrepresentation
        
        Misrepresentation victims must select a remedy before moving forward - each has slightly different elements
        
        Three remedy options:
        
        Contract Recision
        
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        Tort for Fraud
        
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        Negligent Misrepresentation
        
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        Must pick one -- cannot recover for all
        
        If there is a contract disclaimer, fraud claims may be barred based based on the type of disclaimer or the type of fraud
        
        Background information needed to select approach:
        
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        Contractual disclaimers are provisions of written contracts that attempt to negate the impact of oral promises or oral representations that are not contained in the written agreement
        
        Five approaches used by courts:
        
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        Substantive Defenses: substance of contract makes it unenforceable
        
        Public Policy
        
        agreements that concern a prohibited subject or contain prohibited terms violate "public policy" are wholly unenforceable and void
        
        most times public policy issues will violate common law or a statute
        
        Common Law Situations that are void:
        
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        Statutes:
        
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        only things that matters is the subject and terms of the contract - the parties are not at issue here
        
        Hybrid: these fit into more than one category
        
        Undue Influence
        
        A situation with "high pressure that works on the mental, moral, or emotional weakness that approaches boundaries of coercion"
        
        Voidable by the influenced party if elements are met:
        
        elements:
        
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        Hybrid of capacity and formation
        
        Unconscionability
        
        General Unconscionability
        
        R208 & 2-302: contracts can be unenforceable because enforcement would be "too shocking" to the conscious of the court
        
        elements evaluated on a sliding scale -- one is not more important than the other but must have both (from 2-302):
        
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        Remedies: if the court does find the contract unconscionable, the court can:
        
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        courts are unlikely to hold a contract between two commercial parties as unconscionable unless there is a huge discrepancy in bargaining power and size
        
        Case Example: Williams v. Walker-Thomas Furniture Co.
        
        Unconscionability in Arbitration Clauses
        
        Arbitration is private litigation, where the litigator decides the outcome that binds the parties
        
        Pros and Cons
        
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        Federal Arbitration Act (FAA) governs all contracts for arbitration in "interstate commerce"
        
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        Supreme Court supports arbitration - making it very difficult to undermine even with unconsionability
        
        Case Example: Higgens v. Superior Court of LA County
        
        hybrid problem of procedural and substance
        
        generally ambiguous as a concept for courts
  - - - Changed circumstances do not usually excuse a party from performance EXCEPT when very significant
        
        relief from performance because of changed circumstances can happen in two situations:
        
        Impracticability
        
        elements:
        
        event after the contract is formed makes the performance impractical
        
        impractical = extremely difficult or worse
        
        non-occurrence of the event was a "basic assumption"
        
        was fundamental to the contract and it was assumed it would not happen
        
        party that want's out of contract cannot be at fault through intentional or negligent conduct
        
        party who wants out did not have the allocation of risk of the event occurring
        
        Common situations:
        
        death of person necessary to the contract
        
        an object necessary to the contract is destroyed (ex: fire burns an event space)
        
        government imposes a regulation that makes performance illegal or very difficult
        
        must be more than just increasing the cost
        
        Frustration of Purpose
        
        elements:
        
        principle purpose of the contract must be substantially frustrated
        
        non-occurrence was a basic assumption
        
        party who wants out cannot have been at fault
        
        party who wants out did not have the allocation of risk of the event occurring
        
        Classic Example: Hotel room was rented to watch the King walk by. The King got sick and cancels the walk. Room renter was allowed out.
    - - Under Restatement
        
        Rule: modifications are not enforceable even if there is reliance unless there is new consideration
        
        Three exceptions:
        
        R89(a): modification is fair and equitable given the change in circumstances that were unforeseen at the time the contract was made
        
        R89(c): If there was reliance that was material
        
        Exception to Exceptions:
        
        If there is a live dispute - a good faith belief that you are giving up a legal detriment can be enough in settling a live dispute
        
        pre-existing duty rule: if you make a promise to preform in your existing K, that cannot be consideration for a modification of the K (Case: Alaska Packers v. Domenico)
        
        must be new consideration by both parties, even if it is tiny
        
        Under both: consideration works, but if there is not consideration than an unseen economic circumstance can create a valid modification
      - Under UCC - UCC 2-209
        
        Rule: no requirement for new consideration for a modification to be valid if there is the duty of good faith
        
        Roth Steal Test of "good faith":
        
        seeking a modification because of unforeseen economic exigencies
        
        cannot threaten to breach (unless you have a legal basis to do so)
        
        But modifications are invalid if there is duress (Case: Kelsey Hayes Co. v. Galtaco Casting Co.)
        
        Duress elements
        
        improper threats (can be merely wrongful or illegal)
        
        threats induced the contract modification
        
        there was no reasonable alternative
        
        victim must protest
- - - - Resolving Ambiguities
        
        Common Law:
        
        Two approaches to contract interpretation
        
        Contextualism
        
        Two step process:
        
        Which reasonable interpretation wins?
        
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        Is there a genuine issue of material fact?
        
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        endorsed by the Restatement
        
        Different in Two main ways:
        
        Contextualism allows extrinsic evidence at Stage 1 - meaning it mostly occurs after discovery
        
        Contextualism eliminates assessment of ambiguity
        
        Textualism: four corners rule
        
        Two stage process:
        
        Resolve the ambiguity.
        
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        Is the contract patently ambiguous?
        
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        this is the majority
        
        Necessary Definitions:
        
        A contract is ambiguous if it is reasonably susceptible to the meanings argued for by the parties in the case
        
        Types of ambiguities:
        
        Patent Ambiguity: on the face of the contract
        
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        Latent Ambiguities: only becomes apparent when considering extrinsic evidence/ the outside world
        
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        ambiguities in the contested respect
        
        UCC
        
        1-201(3): Contracts include the express terms from the language, but also is inferred from other circumstances like course of performance (behavior in this K), course of dealings (behavior in past Ks), and usage of trade (industry practices that justify an expectation)
        
        This means that the Big 3 can always:
        
        interpret the agreement
        
        supplement and add to the contract (even if it is a full integration)
        
        General Rule: Big 3 evidence must be read as consistent with express terms and admitted UNLESS if it is reasonable to do so
        
        If it is not reasonable to do so, the ranking is:
        
        express terms
        
        course of performance
        
        course of dealings
        
        usage of trade
        
        Courts are divided on when big 3 is admissible when contradicting the express terms:
        
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        Case Example: Nanakuli Paving v. Shell Oil)
        
        UCC follows the common law with 3 exceptions:
        
        Big 3 are always considered at Stage 1 even in a textualist state
        
        Big 3 are always admissible to add to a complete integration
        
        When Big 3 and Express Terms contradict, courts use different strategies
      - Tools of Interpretation:
        
        Evidence:
        
        Types:
        
        Extrinsic
        
        c. preliminary negotiations
        
        d. commercial context: catch all for stuff that does not fit into other categories
        
        Big Three:
        
        e. Course of Performance: parties actions in preforming the contract at issue
        
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        f. Course of Dealings: parties actions relating to prior contracts between them
        
        g. Trade Usage: industry standards or practices
        
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        h. unexpressed intent
        
        Majority rule: a party cannot include evidence about their own expressed intent but can include evidence found during discovery about the other sides unexpressed intent
        
        Non-extrinsic
        
        b. dictionaries
        
        a. text of the contract
        
        most important tool!
        
        Order of importance: UCC 303(e)
        
        express terms
        
        course of preformance
        
        course of dealings
        
        usage of trade
        
        moves from specific to more general
        
        Rules: legal standards that apply to the evidence and what evidence has priority
        
        Interpret the contract as a whole
        
        mandatory in all jurisdictions
        
        some rules are mandated and others are just recommended
        
        most rules can be used at Stage 1 or Stage 2 of interpretation (except rule 5 and 10)
        
        Avoid Conflicting Terms
        
        Avoid superfluous terms: interpret the contract so that all the terms have an effect
        
        Prefer reasonable meanings
        
        The purpose of the contract matters
        
        given considerable weight
        
        Words are impacted by immediate context
        
        When a general term is joined with a specific one, the general term only includes things that are the same type as the specific
        
        Specific terms without a general clause = exclusive
        
        Specific terms are given more weight than general terms
        
        Construe against the drafter
        
        Last resort rule - go through all the others first
        
        Courts use a "jumble approach" when using tools of interpretation -- tool use depends on the totality of the circumstances
      - Interpretation v. Parol Evidence:
        
        interpretation = determining meaning of terms (can use parol evidence)
        
        parol = what evidence can be used to add or contradict a writing
        
        Meaning parol evidence rule always permits extrinsic evidence to interpret the meaning of a contract
        
        Example:
        
        "Early December":
        
        evidence to prove it means Dec 5 = interpretation evidence
        
        evidence to prove it means Jan 15 = contradiction evidence and is barred by parol evidence rule
        
        evidence to add that logs would be milled on delivery = additional evidence (maybe barred based on level of integration)
    - - Parol Evidence Rule
        
        When a contract is completely integrated and in writing, neither party will be permitted to contradict terms or add terms with extrinsic evidence
        
        When a contract is partially integrated and in writing, neither party will be permitted to contradict a term, but a term may added by the extrinsic evidence
        (Restatement §209-218 & UCC §2-202))
        
        Two Stages:
        
        Stage 2: Apply the Rules.
        
        Rules:
        
        Interpretation: the parol evidence rule does not apply to evidence that explains the meaning of a contract (Restatement 214(c))
        
        rules of interpretation might still keep out the evidence - subject to governing rules
        
        Integration: the parol evidence rule does not apply to evidence that explains the level of integration (how final the contract is)
        
        rules of integration might block the evidence - subject to governing rules
        
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        Post or after contract: the parol evidence rule does not apply to evidence post contract - essentially a modification which is not barred by the parol evidence rule
        
        could be barred by other governing rules
        
        Parol evidence only applies to evidence prior to or contemporary to when the contract was signed
        
        Invalid/ Illegal/ Oral Agreement Proceedings: the parol evidence rule does not apply to evidence about fraud, illegal activities, or oral agreements proceeding
        
        Example of oral agreements proceeding: Libby needed a bank loan to buy the logs
        
        Exception - Equitable Remedies: the parol evidence rule does not apply if equitable remedies are requested
        
        Stage 1: Determine the level of integration.
        
        Three possible levels of integration (Restatement 209):
        
        Completely integration: writing intended to be final with complete and exclusive statement of all the terms of the agreement (R210)
        
        Collateral Agreements can create exceptions to a complete integration:
        
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        Partial integration: writing intended to be final but incomplete because it deals with some but not all aspects of the transaction between the parties
        
        Non integration: a writing not intended to be final
        
        Courts are split on how to do this: Two Approaches on what evidence to use
        
        Classical Approach
        (Case: Thompson v. Libby)
        
        If ambitious to integration status, extrinsic evidence can be used
        
        If integration status is clear on its face, then use only the four corners of the contract
        
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        Modern Approach (Restatement 210)
        
        Always look at any relevant evidence to the intent of the parties, including the text of the contract and extrinsic evidence
        
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        Both approaches agree that this is a question of law to be determined by a judge
        
        This is a question of intent - did the parties intend for the writing to be final and complete?
        
        Goal is to exclude specific types of evidence because the final written contract is the best evidence of the parties agreement
        
        Classic situation: parties engage in preliminary negotiations, then form a contract, but later after the contract formation there is a dispute and one side wants to include evidence from preliminary negotiations to show that the term was supposed to be a part of the deal
      - rule of substantive law
  - - - implied terms are everything other than the express terms
      - Can be:
        
        implied in fact (through actions or words)
        
        or implied in law (Case: Wood v. Lady Duff Gordon)
        
        Two types of implied in law terms:
        
        Mandatory Terms: added to the contract regardless of parties intention
        
        these are not waive-able, regardless of express terms
        
        Examples:
        
        Implied Duty of Good Faith
        
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        Notice - UCC 2-309(3): reasonable notice is required even if the contract says that no notice is required
        
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        small number of these
        
        Default Terms: added to address topics that the party did not expressly refer to in the contract
        
        fills gaps in a contract but does not apply if the contract actually addresses the subject
        
        When are gap fillers used:
        
        genuine gap in the contract
        
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        interpretation gap: a gap in the contract crated by the rule of interpretation that says neither party can be bound by the other side
        
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        used for efficiency
        
        Warranties can be implied in fact or implied in law:
        
        Implied in Fact: Express Warranties
        
        statement of fact describing the good made by a seller to a consumer -- can be created by oral or written statements
        
        must be a statement of fact - not opinion
        
        intent is not needed - if there was a description of the good, the express warranty was formed
        
        cannot be disclaimed
        
        but evidence of an oral express warranty is usually barred by parol evidence rule
        
        Implied in Law: Warranty of Merchantability
        
        the idea that the goods are fit for the ordinary purpose of the good that is added to any contract for a sale of goods IF the seller is a merchant
        
        can disclaim an implied warranty - but must be in specific writing
- - - - very rare to get a specific performance remedy
    - - Formula for Total Breach:
        Expected Interest = Loss in Value (LIV) + Other Loss (OL) - Cost Avoided (CA) - Loss Avoided( LA)
        
        How to calculate each part:
        
        Loss In Value (LIV)
        
        LIV = should have received - actually what you received
        
        If Real Estate situation:
        
        Formula of Loss In Value Damages:
        
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        Fair Market Value Calculation:
        
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        Other Loss (OL) or special damages
        
        these are incidental (immediate costs to address the breach) or consequential damages (economic loss)
        
        Requirements:
        
        Must be foreseeable
        
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        Must be proven with reasonable certainty - not speculation
        
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        Consequential Damages for Employment: Case: Handicapped Children Education Board v. Elaine Z.
        
        Cost Avoided (CA): costs reduced because of the breach
        
        CA = cost the non-breaching party should have spent - cost they actually occurred
        
        there is a duty to mitigate loss
        
        Rule: if a party repudiates the contract, the other party must not acquire more damages by continuing to preform.
        
        Case: Rockingham v. Luten
        
        Loss Avoided (LA): what the injured party avoids loss by reallocation
        
        LA = EITHER actual loss avoided OR loss that should have avoided
        
        use the larger of the two
        
        Actual Loss Avoided: amount actually avoided is used
        
        Ex: salary from a new job, or leftover material was used on a different project
        
        Loss that should have avoided
        
        elements in employment situation
        
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      - Formula for Partial Breach:
        Expected Interest = Loss in Value (LIV) + Other Loss (OL)
        
        still have to preform in a partial breach, so no way to mitigate or avoid costs/ loss
- - - - Constructive Conditions
        
        Big Question: When does a party's failure to preform justify the other party to refuse performing if there are no express conditions?
        
        Constructive conditions are judicially created devices used to determine the consequences of breach when the parties have failed to put express conditions in the agreement
        
        The type of breach determines the constructive condition added to the contract
        
        Types of breach:
        
        Partial Breach: if performance is substantial but defective
        
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        Material Breach: not substantially preforming
        
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        Total Breach: sufficiently serious
        
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        Process to determine type of breach:
        
        Evaluate R241 factors for material breach, if not material, then it is partial
        
        If it is material, evaluate R242 to determine if it is total
        
        R235: Anything less than full performance is a type of breach
        
        R240: If contract is divisible, breach can be divided
        
        The breaching party can flip-flop -- if party 2 suspends performance because they thought it was a material breach from party 1, but it was only a partial breach, then party 2 is actually breaching by halting performance.
        
        operates like default rules - they are gap fillers unless there are express conditions
        
        majority of contracts
        
        Situations when there are conditions implied by the parties reasonable expectations but are not writen directly into the contract (Case: Jacob & Young pipes)
      - Express Conditions
        
        Express conditions are things put into contract where performance is conditional on a specific performance or event
        
        Eight Issues Related to Express Conditions - evaluated in order:
        
        1. Is there an express condition?
        
        Courts require very clear language (ex: "this is an express condition," "on condition that," subject to, only if) (not examples: until)
        
        iI language is doubtful, there is not an express condition, especially if there would be forfeiture (R227)
        
        2. What type of express condition?
        
        Event Condition: there is an event (ex: if it is sunny, I will paint.)
        
        Promissory condition: other party promised to do something first (ex: I will build after you pay.)
        
        Hybrid condition: combination of both (ex: I will buy if I can get financing.)
        
        3. Was the condition satisfied?
        
        condition must be fully met - substantial performance is not enough
        
        can have situations that the condition relies on a subjective standard (think art, design)
        
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        Case: Oppenheimer
        
        General rule: express conditions are enforceable in a contract unless there is a waiver or hinder of performance, UNLESS there is forfeiture
        
        minority of contracts have express conditions
        
        Vocab:
        
        obligor: owe a conditional duty
        
        obligee: party owed the conditional duty
    - - Anticipatory Repudiation: advanced refusal to preform
        
        Something happens that gives a party serious doubts about the other party's ability to preform the contract
        
        Process of anticipatory repudiation:
        
        There is an anticipatory repudiation made by a very clear statement that a party will commit a total breach, or a voluntary aft rendering a party unable to preform (R250)
        
        must be definite - doubtful statements are not enough
        
        can be through conduct - but conduct must indicate performance is a practical impossibility
        
        more than just financial difficulty
        
        After the anticipatory repudiation, the other party must choose between three options:
        
        treat as a breach and bring a suit
        
        suspend performance and wait
        
        treat the contract as terminated and communicate it
        
        Anticipatory Repudiation can be retracted if the other side has not relied or communicated that they are treating the repudiation as final (R256)
        
        Case: Truman Flatt & Sons v. Schupf
      - Adequate Assurance of Performance
        
        Used in situations if it is unclear what type of breach as occurred or if it is unclear if there was an anticipatory repudiation
        
        Process:
        
        Reasonable grounds for insecurity exist.
        
        must be from something new that occurred post formation of the contract
        
        factors
        
        Big 3: course of performance, course of dealing, trade usage
        
        Nature of the contract
        
        Any other relevant factor
        
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        words or actions by the other side
        
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        IF there are reasonable grounds, a party can make a demand for adequate assurance of performance.
        
        Demands depend on the facts and circumstances of the case and commercial reasonableness
        
        must be in good faith
        
        must be in writing
        
        can make multiple demands if circumstances change
        
        If the party fails to provide requested assurance, this is automatically an anticipatory repudiation.