Part Three: Obligations & Breaches Flashcards
What are “Tailored” vs. “Off-the-Rack” default rules in contract law?
- Tailored rules: Aim to fill gaps based on what’s best for these specific parties.
- Off-the-Rack rules: Apply a uniform default rule for all contracts, regardless of specific circumstances.
What are examples of “Tailored” default rules under the UCC?
- Price: UCC § 2-305(1) – Reasonable price under the circumstances.
- Time/Duration: UCC § 2-309 – Reasonable time for performance.
- Character/Quality: UCC § 2-315 – Implied Warranty of Fitness for a Particular Purpose (when seller knows buyer’s needs and buyer relies on seller’s skill).
What are examples of “Off-the-Rack” default rules under the UCC?
- Quantity: UCC § 2-306 and § 2-201 – May be zero if quantity is unspecified.
- Place of Delivery: UCC § 2-308 – Default is seller’s place of business or residence.
- Character/Quality: UCC § 2-314 – Implied Warranty of Merchantability (goods fit for ordinary purposes).
What are Majoritarian vs. Penalty Default Rules in contract law?
- Majoritarian Default Rules:
Fill in gaps the way most parties likely would have agreed—efficient and widely acceptable. - Example considerations:
- Who is the highest valuer?
- Who is the lowest-cost insurer?
- Who is the lowest-cost harm or risk avoider?
- Penalty Default Rules:
Fill in gaps in a way that parties likely would not choose, to incentivize explicit contracting. - Used to encourage clarity or reveal information during negotiation.
What is the Duty of Good Faith and Fair Dealing (DGFFD) under Restatement § 205?
Every contract includes a duty of good faith and fair dealing in performance and enforcement.
* Comment (a): Good faith emphasizes loyalty to the agreed purpose and the justified expectations of the other party.
* Bad faith includes conduct that violates community standards of fairness, reasonableness, and decency.
How does DGFFD relate to “illusory promises” and consideration?
- Contracts that give one party unlimited discretion (e.g., “unless I change my mind”) may lack consideration.
- Courts often imply DGFFD into such contracts, and that implied duty can satisfy consideration.
- Common in:
- Requirements/output contracts
- Exclusive dealing/commission agreements
What is an output or requirements contract, and how does DGFFD apply?
- A party agrees to sell all output or buy all requirements of a good.
- DGFFD limits discretion by requiring good faith quantities, based on:
- Historical performance
- Commercial standards
- Contractual estimates, maxima/minima
- Reductions in quantity are more tolerated than increases.
- Parties can specify ranges (e.g., estimates, maxima, minima) to guide performance.
- Courts handle disputes case-by-case, applying contextual fairness.
- Range does not include “0” otherwise a bargain for consideration problem
What does UCC § 2-306(1) say about output and requirements contracts?
- Quantities must reflect actual good faith output or requirements.
- Cannot be unreasonably disproportionate to:
- A stated estimate, or if no statement
- Normal/comparable prior output or requirements
What case illustrates DGFFD in requirements contracts?
Eastern Airlines v. Gulf Oil – court enforced a fixed-price requirements contract despite cost increases, emphasizing good faith performance over profitability.
Option holder has discretion within “reasonably foreseeable” quantites but suvject to GF: Historical Performance; commercial standards (merchants)
What does UCC § 2-306(2) say about exclusive dealing contracts/ Goods Contracts and Best Efforts?
Exclusive dealing contracts impose a duty of best efforts:
* Seller must use best efforts to supply the goods.
* Buyer must use best efforts to promote their sale.
* Illustrated by Wood v. Lucy, Lady Duff-Gordon, “Best Efforts”
* Extreme discretion, fiduciary duty
What are the key tools for interpreting contracts?
- Express terms
- Subjective meaning: intent of the parties
- Objective meaning: plain meaning / dictionary definition
- Course of Performance: Conduct under the current contract.
- Course of Dealing: History of previous contracts between parties.
- Trade Usage: Common meanings or practices in the relevant industry.
Goldberg Corp. v. Levy & Crawford Clothes, Inc.
A party cannot invoke a termination clause in bad faith by intentionally causing the condition (e.g., unprofitability) that triggers it.
Even when a contract grants discretion (like the right to terminate), that discretion must be exercised in good faith.
Mutual Life Insurance Co. of New York v. Tailored
Tenants cannot use subterfuge to divert sales off-premises and undermine a percentage rent clause.
Even absent an express prohibition, the duty of good faith and fair dealing may limit actions that deprive the other party of the benefit of the bargain.
How does the duty of good faith vary with the level of discretion and its impact on the other party’s welfare?
Good faith acts as a default rule regulating discretion, with scrutiny increasing as discretion more significantly impacts the counterparty:
Little or None:
* Low impact on counterparty
* Weak DGFFD
* Minimal scrutiny
Moderate:
* Medium impact
* Stronger DGFFD
* Moderate scrutiny
Extreme:
* High impact on counterparty’s welfare
* Best Efforts (Fiduciary Duty) may apply
* Significant scrutiny
The greater the impact of discretion, the more demanding the duty of good faith becomes.
What are the four primary tools for interpreting and constructing contracts?
- Express Terms
- Subjective meaning: what the terms meant to these parties
- Objective meaning: dictionary/plain meaning
2. Course of Performance – Conduct under the current agreement (e.g., installment behavior)
3. Course of Dealing – Prior dealings between the same parties
4. Trade Usage – Industry norms and customs
What is the key takeaway from Raffles v. Wichelhaus (The Peerless case)?
If the courts have to interpret a term relating to a aspect of the contract and
* the term is ambiguous
* The parties never subjectively agreed on its meaning,
* Neither party is aware of the other’s interpretation, and
* No clear objective meaning exists,
Then no contract was formed due to lack of mutual assent.
At the time of contracting
What does Restatement § 201 say about whose meaning prevails when contract terms are disputed?
- § 201(1): If both parties attach the same meaning → that meaning governs.
- § 201(2): If different meanings, a party’s meaning governs if:
(a) The ignorant party did not know of any different meaning by the other and the other knew of the meaning given by the first party, or
(b) That party had no reason to know of any different meaning attached by the other party and the other had reason to know, and they did not. - § 201(3): If neither party knew or had reason to know the other’s meaning → no contract. (Objective)
What case illustrates Restatement § 201 in action?
Frigaliment v. B.N.S. (The Chicken Case) – Dispute over the meaning of “chicken.”
Court examined:
* Express terms
* Course of dealing
* Trade usage
Ultimately found no mutual understanding, leaning on objective meaning and context.
What is the step-by-step flow for determining meaning under Restatement § 201 when a material term is disputed?
- Do the parties subjectively agree on the meaning?
- Yes → Enforce their common interpretation (§ 201(1))
- No → Continue to Step 2
- Is one party aware of the disagreement?
- Yes → Enforce the ignorant party’s interpretation (§ 201(2)(a))
- No → Continue to Step 3
- Is there an objective meaning (from trade usage, course of dealing, etc.)?
- Yes → Enforce the objective meaning (§ 201(2)(b), § 202, UCC § 2-208)
- No → No contract formed (§ 201(3))
What are the key rules courts use to interpret contract terms under Restatement § 202?
- Words and conduct are interpreted in light of all the circumstances; if the parties’ principal purpose is clear, it carries great weight.
- The writing is interpreted as a whole, and all related writings are construed together.
- Unless a different intention is manifested:
- (a) Use generally prevailing meanings
- (b) Use technical meanings for terms used in technical contexts
- Repeated occasions for performance: with knowledge of the perforance then any course of performance (accepted or not objected to) is given great weight in interpreting the agreement.
- Whenever reasonable, interpret the parties’ manifestations consistently with:
- Each other
- Course of performance
- Course of dealing
- Usage of trade
How should courts resolve conflicts between express terms, course of performance, course of dealing, and usage of trade under UCC § 2-208(2)?
- Courts should interpret express terms, course of performance, course of dealing, and usage of trade as consistent with each other whenever possible.
- If consistency is not reasonable, then the following hierarchy applies:
1. Express terms control over all.
2. Course of performance controls over: - Course of dealing
- Usage of trade
- If consistency is not reasonable, then the following hierarchy applies:
What is considered parol evidence (PE)?
- Prior agreements (oral or written)
- Contemporaneous oral agreements
- Not included:
Contemporaneous written agreements
Subsequent agreements (those are governed by modification rules) - UCC: Course of performance, course of dealing, and usage of trade are not treated as parol evidence
What is the key distinction in applying the Parol Evidence Rule (PER)?
Integrated Writing: one that the parties intend to be a final expression of their agreement: Here are the two distinct integrations
* Partial integration: Final as to central terms → PE admissible to supplement (if consistent)
* Complete integration: Final as to all terms → PE inadmissible for anything within the document’s scope
* Merger clauses are evidence of complete integration
How does Restatement §§ 209 and 213 govern the admissibility of parol evidence?
- Completely integrated → PE inadmissible to contradict or supplement, relevant to scope
- Partially integrated → PE admissible to supplement, but not contradict
- Not integrated → PE admissible to both supplement and contradict
What are the dual legal roles of the Parol Evidence Rule?
- Procedural: Operates as an evidentiary exclusion rule (bars certain external evidence)
- Substantive: Treated like a rule of substantive rule during argument (e.g., no need for timely objection; affects choice of law)
Is the Parol Evidence Rule a default or immutable rule?
- Generally a default rule — parties can contract around it with express terms making them able to narrow or broaden its application
- However, some exceptions operate more like immutable rules, such as fraud or illegality exceptions
What is an integrated agreement under Restatement § 209?
- An integrated agreement is a final expression of one or more terms of a deal.
- Determined by the court.
- If the writing appears complete and specific, it is presumed integrated unless proven otherwise.
What does UCC § 2-202 say about final written expressions and parol evidence?
- A final written agreement may not be contradicted by prior or contemporaneous oral agreements.
- But it may be explained or supplemented by:
(a) Course of performance, course of dealing, or usage of trade
(b) Consistent additional terms unless the writing is intended as complete and exclusive
- But it may be explained or supplemented by:
What are the main exceptions to the Parol Evidence Rule (PER)?
PER does not apply to:
* Interpretation of ambiguous terms
* Subsequent agreements (oral or written)
* Evidence of fraud, duress, mistake, or incapacity
* Evidence offered to establish an equitable remedy
* Collateral agreements
* Contracts subject to constructive conditions of exchange
What is the PG&E Rule regarding interpretation and parol evidence?
If a party offers parol evidence to offer an alternative interpretation of a written term:
* The court must review the contract in camera (privately).
* If the language is reasonably susceptible to either interpretation,
* Then extrinsic evidence is admissible to support the offered meaning.
Trident Center v. Connecticut General Life Ins. Co.
Extrinsic evidence is admissible to show that apparently unambiguous language is “reasonably susceptible” to another meaning—even if the contract is clear on its face.
“Specter of ambiguity”: The mere assertion that a term is ambiguous may be enough to admit parol evidence which can lead to potential manipulation via self-serving testimony
A commercial loan agreement explicitly prohibited prepayment for 12 years. Trident still tried to argue that the parties intended to allow prepayment, despite the clear language, by introducing extrinsic evidence.
What is the purpose of conditions in contract law?
To recognize that some promises are enforceable only upon the occurrence or non-occurrence of certain contingencies.
Define “condition” in contract law.
A state of the world whose occurrence either brings into effect or extinguishes a party’s duty to perform.
What is a condition precedent and subsequent?
Precedent: A condition that must occur before a party’s duty to perform arises.
Subsequent: A condition that, if it occurs, extinguishes a duty that has already arisen.
How does mistake doctrine relate to conditions?
It operates as an implied condition subsequent that discharges duties when a critical shared assumption proves false.
What is a “mistake” under Restatement § 151, and how is it categorized?
A mistake is “a belief not in accord with the facts.” It may be mutual (both parties are mistaken) or unilateral (only one party is mistaken).
Sherwood v. Walker
Cow Case
A contract is voidable for mutual mistake if, at formation:
(1) both parties made a mistake,
(2) about a material fact,
(3) that goes to the substance of the agreement, not mere quality.
The dissent argued the seller took a calculated risk, not a mutual mistake as to the cow being barren.
Wanted a barren cow, before sale found out cow was actually pregnant which made her more expensive 80$ to 750$
What is the modern four-part test for mutual mistake under Restatement § 152?
- Mutual mistake at the time of contracting
- About a basic assumption of the contract
- With a material effect on performance
- The party asserting the mistake did not bear the risk under § 154
Under Restatement § 154, when does a party bear the risk of a mistake?
- Express allocation by agreement
- Conscious ignorance (knew they lacked full info but proceeded anyway)
- Reasonable allocation by court based on fairness and efficiency
What are the policy reasons for allocating risk to a particular party?
- Party best able to insure against the risk
- Party best able to avoid or control the risk
- Fairness in light of access to information
- Incentivizing information gathering and entrepreneurial effort
What are the consequences of a successful mutual (or unilateral) mistake claim?
- The contract is voidable at the option of the mistaken party, Caveat: both parties have the option to void
- Restitution is awarded to reverse any benefits conferred to each party
- Under § 158(2), court may use reliance damages if needed to avoid injustice
Donovan v. RRL Corp.
Wrong Car Price
Traditionally, unilateral mistake did not excuse performance.
The modern trend allows it, but only if the mistaken party proves an extra element—such as unconscionability or that the other party knew or caused the mistake.
Donovan shows this modern view, where a dealer rescinded a sale due to a misprinted car price, meeting the high bar for relief.
They granted to avoid injustice
The basic assumption was a mistake, there was a material effect on exchange (willing to buy with defects), the dealer did not take risk of mistake, unilateral, donovan did not cause the mistake and had no reason to know the mistake –> no avoidance under common law but in order to avoid injustice they sided with the dealer
What are the five elements of unilateral mistake under Restatement § 153?
- Mistake by one party at time of contract
- About a basic assumption
- With a material, adverse effect
- Mistaken party did not bear the risk under § 154
- PLUS:
a. Enforcement would be unconscionable, OR
b. Other party had reason to know of the mistake or caused it
What is the full test for contract avoidance under the Mistake Doctrine in Restatement §§ 151–154?
A contract is voidable for mistake only if:
1. There’s a mistake about a basic assumption (§§ 151, 152(1), 153)
2. That has a material effect on the exchange (§ 152(2))
3. The mistaken party did not bear the risk (§ 154: via express allocation, conscious ignorance, or reasonable allocation by court)
4. If mutual mistake → contract is voidable
If unilateral mistake → must also show that enforcement is unconscionable or the other party knew or caused the mistake (§ 153)
What are the 4 elements of an impracticability claim?
- Supervening event makes performance impracticable
- Non-occurrence was a basic assumption
- Party seeking excuse is not at fault
- Party didn’t assume a greater obligation (risk)
How do courts assess whether a party assumed a greater obligation under impracticability?
They apply Rest. § 154-like logic:
* Express allocation of risk
* Conscious ignorance
* Reasonable allocation by court (based on foreseeability & policy)
What is a Force Majeure clause?
A contractual provision that allocates risk of performance failure due to uncontrollable events (e.g., Acts of God, war, government orders)
What distinguishes frustration of purpose from impracticability?
- Impracticability = seller’s performance is too burdensome
- Frustration = buyer’s purpose is destroyed
- Otherwise, the doctrines share similar elements
What are the consequences of a successful impracticability/frustration claim?
- Contract is discharged (duties excused)
- Restitution may be available (modern trend)
- Exceptions: installment Ks, partial impracticability (UCC § 2-615/616)
How do conditions differ from promises in contract law?
- Promises = obligations that must be performed regardless of other events
- Conditions = obligations that depend on external events
- Condition precedent = triggers duty
- Condition subsequent = extinguishes duty
Why does the promise vs. condition distinction matter?
- Breach of promise = damages
- Non-occurrence of condition = excuse from duty, no damages
What are the Rest. § 241 factors for determining material breach?
- Loss of expected benefit
- Adequacy of compensation
- Forfeiture to breaching party
- Likelihood of cure
- Good faith/fair dealing
What is Rest. § 251 (adequate assurance)?
When a party has reasonable grounds to believe the other will breach, they may:
* Demand assurances
* Suspend performance until received
* Treat failure to respond as repudiation
What is anticipatory repudiation?
A clear and unequivocal refusal to perform a future duty that would be a material/total breach if carried out; allows the other party to act immediately.
What does Rest. § 348(2) allow in construction breach cases?
Damages can be measured by:
* (a) Diminution in value, OR
* (b) Cost of completion, unless clearly disproportionate
How does material breach work under the UCC?
- UCC uses the Perfect Tender Rule: any nonconformity = breach
- But seller has a broad right to cure
- Result: most breaches are treated as material initially, but fixable
Krell v. Henry
“The Canceled Coronation Case”
Rule: A contract is voidable for frustration of purpose when a supervening event destroys the principal purpose of the agreement.
Trigger Fact: Rented a flat to view the king’s coronation, which was cancelled—purpose of the contract was defeated, though performance was still possible.
Jacob & Youngs v. Kent
“The Wrong Pipe Case”
Rule: Substantial performance in good faith is enough to recover under a contract, even if minor terms are breached.
Trigger Fact: Builder used non-Reading pipe of the same quality—homeowner refused to pay, but court allowed recovery.
Transatlantic Financing Corp. v. U.S.
“The Suez Canal Case”
Rule: Impracticability requires that performance be extremely burdensome, not just more expensive.
Trigger Fact: Suez Canal closure forced a longer route, but performance was still possible—no excuse granted.
Lane Enterprises v. L.B. Foster Co.
“The Late Pipe Delivery Case”
Rule: A material breach occurs when late or defective performance undermines the contract’s purpose.
Trigger Fact: Late and nonconforming pipe delivered for a public project—buyer withheld payment and won.
Ramirez v. Autosport
“The Broken Camper Case”
Rule: Under the UCC Perfect Tender Rule, buyers may reject goods that fail to conform, if seller fails to cure in reasonable time.
Trigger Fact: Buyers rejected a defective camper after repeated failed attempts to repair/replace it.
