CONTRACTS

Test for UCC 2 Bonebraker v. Cox - 2 governs sale of movable goods What is the predominant factor in the contract? OR what is in dispute, goods or services?

1 REMEDIES

1.1 EXPECTATION INTEREST

UCC 1-305(a): remedies to be liberally administered to put the aggrieved party in as good a position as if the breaching party had fully performed. Prohibits punitive damages except as specifically provided.

1.1.1 SELLERS REMEDIES (CALCULATION)

Resale UCC 2-706 -Non-breaching seller may resell goods and recover damages for the difference; sale must be made in good faith and in a commercially reasonably manner. -Seller must give buyer reasonable notification of intent to sell if resale is private. - 2-706(4) for requirements for public sale (auction).
RESALE PRICE

CONTRACT PRICE + INCIDENTAL DAMAGES EXPENSES SAVED

No Resale UCC 2-708(1)

MARKET PRICE AT TIME AND PLACE OF TENDER SAVED

UNPAID CONTRACT PRICE + INCIDENTAL DAMAGES EXPENSES

1.1.1A DUTY TO MITIGATE DAMAGES -The non-breaching party has a duty to mitigate damages if the contract is breached. -Failure to mitigate damages can be used by the breacher as an affirmative defense. Burden on the breacher to show that the non-breaching party made no attempts to mitigate damages.

Parker v. Twentieth Century Fox Film Corp. Facts: had a contract with for a lead role in a film that got cancelled. offered a lead role in another film, declined. sued for expectation damages; argued had duty to mitigate damages. Summary judgment for ; affirmed. Holding: Affirmed. Non-breaching party has a duty to mitigate damages after a breach; must make reasonable efforts to seek alternative employment. Non-breaching party does not have to accept employment of different or inferior kind; employment must be comparable or substantially similar. De la Falaise v. Gaumont-British Picture Corp Facts: contracted to perform in two movies, but second movie was cancelled without a timely notice. During the time was supposed to be performing in the second movie, she had accepted employment in a radio show. sued for breach, expectation damages. Judgment for , less the amount earned from the radio show. Holding: test for substantially similar/comparable employment is only applicable if nonbreaching party rejects all offers of employment. If non-breaching party accepts work, even if inferior, the amount earned is to be subtracted from the damages awarded due to the overcompensation principle. California School Employees Assn. v. Personal Commn. Facts: bus driver refused to take job as bus driver in a district with less benefits. wins; failed to mitigate. Boehm v. American Broadcasting Co. Facts: VP wrongfully discharged refused to take position working for his replacements. wins; duty met. Manuma v. Blue Hawaii Adventures Facts: hired as musician, refused manual labor job. s duty met. HOLDINGS: All three cases indicate that generally white-collar workers have a better chance to win in court in cases such as these. 1.1.1B LOST VOLUME SELLER -A lost volume seller is one who has the capacity to perform the breached contract in addition to other potential contracts due to unlimited resources or production capacity. -A lost volume seller does not minimize its damages through resale because it would have had the benefit of both contracts if the first one had not been breached.
TEST : OBJECTIVE CAPACITY

+ SUBJECTIVE INTENT

See Jordan v. Worldcom

Neri v. Retail Marine Co. Facts: contracted with for the purchase of a boat, with $4250 down payment. was hospitalized and rescinded contract after the boat had been ordered but before taking possession of it. sued to recover down payment; counter-claimed for lost profits. Discussion: UCC 2-708(2) If the measure of damages provided in Sub 1 is inadequate to put the seller in as good a position as performance would have, then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in 2-710, due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.
UCC PROFITS + OVERHEAD + INCIDENTALS + COSTS RESALE

Problem with UCC formula: algebraic substitution yields damages = incidentals. Probably a legislative mistake when passing the UCC.

Neri ignores (costs resale) in 2-708 when applying the formula to lost volume
sellers.
D AMAGES = P ROFITS + O VERHEAD + I NCIDENTALS P ROFITS = C ONTRACT P RICE E XPENSES S AVED

Vitex Mfg. Corp. v. Caribtex Corp. Holding: Third Circuit held that overhead should be treated as part of gross profits and recoverable as damages. Jordan v. Worldcom Facts: sued for expectation damages, arguing himself a lost volume seller, not having to mitigate damages. Reversed for determination of mitigation; found not to be a LVS. Rule: Lost Volume Seller burden on non-breaching party to establish itself as a lost volume seller. Non-breaching party must show both objective capacity and subjective intent to sell or produce. Burden on breaching party to show that non-breaching party did not make reasonable efforts to mitigate damages.

1.1.2 BUYERS REMEDIES

2-711 General Remedies 2-712 Cover; Substitute Goods 2-713 Buyers Damages for Non-delivery or Repudiation 2-714 Damages from Breach of Warranty

 2-715 Buyers Incidental and Consequential Damages 2-716 Buyers Right to Specific Performance 2-717 Deduction of Damages from Price 1.1.2A 2-716 SPECIFIC PERFORMANCE Usually available in contracts for unique goods; land; where there is an inability to cover; and in other proper circumstances. -Usually only available when money damages are too uncertain to calculate or if legal remedies are simply not a substitute. -Specific Performance will often just change bargaining positions in contract negotiations. Bargaining in the shadow of the law -Specific performance is not available where a contract is complex and has many performances. -Specific performance is not available where a contract involves personal services/employment. Copylease v. Memorex Facts: contracted to be the sole distributor of s product. breached and sold to s competitors, sought specific performance. Rule: California courts are reluctant to order specific performance in continued relationship; exceptions may be made under 2-716 because of uniqueness, inability to find alternative source, and in other proper circumstances. Courts will weigh uniqueness/inability to cover vs. difficulties of enforcement PRECEDENTIAL CASES TO COPYLEASE Long Beach Drug v. United Drug Facts: contracted to sell s products in 1909, at prices set by . In 1936, contracted with third party to sell products and suspended distribution to . sued for injunction ordering to stop supplying other drugs stores in the area. Denied. Discussion: An injunction cannot bed granted to prevent the breach of contract, the performance of which would not be specially enforced. The court was wary to order specific performance where the contract cannot be consummated by one transaction, requiring court supervision and direction. Thayer Plymouth Center v. Chrysler Motors Facts: terminated a franchise agreement. granted an injunction ordering reversal. Reversed.

Holding: Reversed. Ordering the injunction would impose upon the court the impossible task of supervising continuous performance by the parties. 1.1.2B LIQUIDATED DAMAGES -Liquidated Damages: a clause in a contract that explicitly outlines each partys remedies in case of breach. -Enforceable if: -The harm from breach is too difficult to calculate otherwise; -The amount fixed is reasonable relative to the actual loss; Other remedies are not adequate. - 2-718: Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty. Lake River v. Carborundum Facts: contracted to bag and ship s product to customers. K contained a liquidated damages clause if a certain quota was not met by , which occurred when the market for s product crashed. Holding: Liquidated damages clause held to be a penalty clause, invalid. awarded expectation damages instead.
U NPAID C ONTRACT P RICE C OSTS S AVED

Discussion: A liquidated damages clause is a penalty clause if it greatly exceeds a reasonable estimate of what the damages are likely to be. The clause in this case always assured would be awarded more than its actual loss in a breach. Penalty clauses violate the overcompensation principle; Penalty clauses discourage efficient breaches (social utility). UCC 1-305(a) prohibits the award of punitive damages. Some have argued the penalty clauses are alternate performance clauses pay or play clause. EXCEPTION -Golden Parachutes: severance pay upon dismissal of employee not for cause; generally are not subject to a reasonableness test.

-Wisconsin is one of few states that apply traditional penalty rules to golden parachutes and employee termination agreements. Wassenaar v. Panos Facts: terminated, received severance pay. found new employment relatively quickly. argued severance was a penalty, and actual damages were simple to calculate. Holding: Severance was not a penalty. An employee can suffer consequential damages, such as loss of reputation and harm to future career prospects, and should be entitled to severance pay. Discussion: Lost Anticipated Profits and Consequential Damages 2-715(2): Consequential damages resulting from the sellers breach include (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and injury to person or property proximately resulting from any breach of warranty.

(b) Hadley v. Baxendale

Facts: contracted to ship replacement equipment for its mill. informed of the importance of the shipment but did not explain why. s negligence delayed the shipment and sued for lost profits. Holding: A breaching party is not liable for damages that were not foreseeable to it at the time of contracting. Consequential damages must arise naturally out of breach, or breaching party must be given notice of special circumstances at the time of contracting. Rule: Foreseeability Rule: (1) consequential damages must arise natural out of the breach, or (2) special notice must be given to the breaching party at the time of contracting. UCC does not provide consequential damages for sellers, except in unique situations known to the buyer at the time of contract that would prevent resale. UCC 2-710(2) and (3) Sellers can always sell the product to another Buyer. -Baxendale is not as relevant today because many business forms used by sellers contain clauses disclaiming liability for consequential damages. Nobs Chemical v. Koppers Co. Facts: contracted for purchase large quantities of fuel additive. ordered quantities requested from supplier getting a volume discount. cancelled; had to pay a higher price to its supplier on a smaller order, reducing its profits. sued for lost profits.

Holding: The damage was consequential to the breach, not incidental, was not entitled to recovery. The UCC does not provide for recovery of consequential damages by a seller. 1.1.2C NEW BUSINESSES; EXPERTS: PROOF OF DAMAGES WITH REASONABLE CERTAINTY -General Rule: new businesses cannot recover for lost profits unless they can be proven with reasonable certainty. Evergreen Amusement Corp v. Milstead Facts: contracted to build its drive-in movie theater. claims was too slow in completing work, resulting in delays in opening the theater. introduced expert testimony regarding amount of lost profits (market survey of the area, comparison of profits in second year of operation over same period, etc.). Holding: Loss of profits from a business that has not gone into operation is not recoverable; profits are merely speculative and incapable of being ascertained with reasonable degree of certainty. Where lost profits cannot be estimated with reasonable certainty, damages may be measured by the fair rental value of the property. Discussion: Court noted the uncertain nature of theater business. Loss of profits is a definite element for damages in breaches harming established businesses that have operated for a sufficient length of time to estimate with some degree of certainty the probable loss. Antitrust cases have relaxed standards: recovery has even been permitted in cases where the plaintiffs business has never made a profit, and where the business has only been in operation for a matter of months. Todd v. Keene Facts: , a well known actor, failed to make a contractual appearance at s theater, where he had performed in previous years in the same kind of play in the same types of conditions. Holding: Evidence was properly excluded regarding past performance regarding lost profits from the breach. Broadway Photoplay Co. v. World Film Corp. Holding: not allowed to recover lost profits for s failure to supply one feature film a week as contracted. s theater was a new business and it could not calculate the actual amount of the loss based on other businesses in the area. Chung v. Kaonohi enter Co. Facts: contracted with for a ten-year lease on a Chinese restaurant, paying a down payment and arranging for financing, ordering equipment, hiring workers, and incurring other businessrelated expenses. negotiated with third parties on the side and eventually returned the down payment without any notice to . sued for lost profits and emotional distress, as well as

punitive damages, hiring an expert to testify about expected profits with an income stream analysis. Holding: Emotional distress damages allowed; breach was wanton/reckless in nature. Held that future lost profits for new business required showing lost profits with reasonable certainty, and that it was a jury question. Discussion: Hawaii Supreme Court later reversed this ruling on emotional distress damages: recovery for emotional injury only allowed where the parties specifically provide for them in the contract or where the nature of the contract clearly indicates that such damages are within contemplation or expectation at time of contacting. i.e. personal, not commercial contract. Damages for Emotional Distress -Generally, purpose of the contract determines whether ED damages are available (personal vs. commercial). -Damages for ED are potentially recoverable under expectation or reliance interests but courts rarely award them because Too speculative; Unforeseeable; Can be seen as a penalty; -Chung holds where the breach is intentional or reckless in nature, the non-breaching party may be able to recover ED damages in tort law. has the burden of proving ED was caused by the breach. This ruling was later reversed by the Hawaiian Supreme Court (see above). Eastern Airlines v. McDonnel Douglas Conflicts with Experts -Sometimes courts can call their own expert witnesses to provide a more independent source of testimony on damages. Mid-America Tablewares v. Mogi Trading Co. Limiting Damage Awards -Court upheld recovery of lost future profits, but remanded case for new trial on damages.

1.2 RELIANCE INTEREST

-Reliance Interest: out of pocket expenses made in reliance on contract; expenses that were made but-for the contract. -Reliance damages seek to put the non-breaching party in the position it would have been had the contract never been made. -Rarely cover lost opportunities from reliance on the contract; too difficult to prove

-Generally, will seek reliance damages if it cannot pursue expectation damages -Expectation damages are usually much greater -Example: lost profits are too speculative -Foreseeability Principle (Hadley v. Baxendale): only expenses made in reliance on the contract that are foreseeable to the breaching party are recoverable (natural consequence/specific notice). -Restatement 2d 349: Injured party has a right to damages based on his reliance interest including expenditures made in preparation for performance, minus any loss that the breaching party can prove (Hand limitation) -The UCC has no specific clause relating to reliance damages. Reliance damages can be considered under UCC 2-715(2) as consequential damages. Unsure whether the Hand Limitation applies in the UCC. It might be implied in 2715(2)s reference to consequential damages resulting from the sellers breach. Reliance damages can also be view as penalties. Security Stove & Manufacturing Co. v. American Railways Express Co. Facts: relied on to ship part of a stove to a trade show. was given notice of the importance of timely shipping (Hadley v. Baxendale) and negligently failed to deliver it in time. sues for expenses related to the trade show; did not seek lost profits. argues suit violates Interstate Commerce Act and that would have incurred expenses even if contract had not been breached. Holding: Reliance damages awarded. ICA argument is not persuasive; an injured party may recover expenses incurred in reliance upon a contract, even if such expenses would have been incurred had the contract not been breached. whole damage was suffered in contemplation of performing its contract, which it failed to do, and would not have been sustained except for the reliance upon to perform Discussion: Interstate Commerce Act: Common Carrier Law: carriers are legally obligated to provide service on similar terms to anyone who wants the service, subject only to capacity. Adams Exp. Co. v. Egbert Facts: contracted to ship architectural drawings for a competition, but drawings arrived after winner had already been chosen. Holding: Plans had no appreciable value and no recovery was allowed for loss of opportunity to compete for a prize.

HAND LIMITATION -Hand Limitation: a breaching partys right to limit reliance damages by the amount it can prove what the non-breaching party would have lost if contract had been performed. injured party has a right to damages based on his reliance interest, including expenditures made in preparation or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed.

-Burden of proof on the breaching party.

-Policy considerations Court does not want to unjustly enrich non-breaching party (overcompensation principle); Court does not want to deter efficient breaches. Court does not want to make the breaching party an insurer of the non-breaching partys ventures. -Overcompensation Principle: a court will not knowingly put the plaintiff in a better position than he would have been had the contract been fully performed. Albert & Son v. Armstrong Rubber Co. Facts: breached by delivering 2 of 4 refiners later than specified. rejected refiners and sued for reliance damages, claiming reliance on contract resulted in expenses in investment in a reclaim department, cost of rubber scrap, and cost of specific foundation for the refiners. Holding: Reliance damages allowed only for the cost of foundation for the refiners, subject to Hand Limitation. Remanded for determination on whether can produce evidence of losses by if the contract had been performed. Discussion: Bush v. Canfield: allowed a buyer to recover full amount of payment instead of fair market value at the time of breach (Restitution).

1.3 RESTITUTION INTEREST / RIGHT TO EXIT

-Restitution Interest: restores the non-breaching party to a previous position.

1.3.1 ACCEPTANCE OF GOODS

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-Perfect Tender Rule UCC 2-601: gives buyers a right to reject any non-conforming goods. -UCC 2-508: allows sellers a right to cure defective goods. -UCC 2-608: after acceptance, a buyer may only reject goods if non-conformity substantially impairs value. Colonial Dodge v. Miller ACCEPTANCE AND REJECTION OF GOODS Facts: purchased a specially ordered vehicle from , which, upon later inspection, did not have a spare tire as the contract specified. After attempts to get the tire, stopped payments and left the vehicle outside his house, informing he no longer wanted the vehicle. The vehicle was eventually impounded. sues for the price of the vehicle, asserts he never accepted the goods, and if he had, he had properly revoked it under the UCC. Holding: Lack of a spare tire was a substantial defect, and properly revoked acceptance. Discussion: had reasonable opportunity to inspect the vehicle, which it did in time. Parties had stipulated had accepted the car; Supreme Court of Michigan ruled gave suitable form of notice, and had no more duty towards goods. When determining whether non-conformity substantially impairs value, courts may use subjective or objective test as justice requires. -Restitution is not available if a contract has been fully performed or substantially performed. Partial performance exception: if a contract has not been fully performed, the nonbreaching party may be eligible for restutionary recovery Restitution Interest Restatement 2d 371 Restitution Restitution interest may be measured by either: a. The reasonable value of services if obtained elsewhere (quantum meruit) b. The extent to which the other partys property has been increased in value or his interests advanced Plante v. Jacobs Facts: built a house for , which was completed with minor defects (a wall was a foot out of place), and refused to make last payment. Holding: There was substantial performance of the contract, parties cannot exit out of the contract. was not allowed to recover damages or withhold payment to fix-nonconforming wall because it was economically wasteful there was no diminution in value for the average buyer because the wall was a foot out of place.

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Discussion: The key point was how much repairing the defect would cost in this case, $4,000. The court applied an objective test in determining diminution in value (diminution in value for the average buyer, as opposed to the specific buyer. -Restitution is not available if the breaching party has substantially performed the contract. was entitled to the contract price, less any diminution in the value of the house as a result of the breach (which, in Plante, was zero). Oliver v. Campbell Facts: was hired to represent in a divorce for $850. terminated the agreement after the trial, because of a pending appeal. had only paid $450; sued for restitution damages, seeking quantum meruit value of services for 29 days, $5,000. Holding: was awarded expectation damages ($400). Restitution was not awarded because had substantially performed contract.

1.3.2 RESTITUTION FOR BREACHING PARTIES

DeLeon v. Aldrete Facts: Parties contract for conveyance of land for $1,500 in installment. After respondents made late payments totaling two thirds of the price, petitioner declared respondents in default and sold the land to a third party, withholding payments. Holding: buyer is entitled to return of the payments, less any damage done to the seller, ad hoc. Discussion: A default in itself does not qualify the buyer for restitution, nor does it terminate the sellers rights; the seller has the option to terminate the contract. -Majority rule a seller has the option to terminate a contract where the buyer has breached; any payments made are forfeited, depending on the case. Factors considered: whether damages to the seller can be determined with reasonable certainty; whether it was a willful breach, how does the buyers loss compare to the sellers (Vines v. Orchard Hills).

1.3 DAMAGES FOR SUBJECTIVE LOSSES

-Cost of Performance vs. Diminution in Value -Restatement 2d 346(1)(a) Cost of performance is the proper measure of damages if it does not involve unreasonable economic waste; If construction and completion in accordance with the contract would involve unreasonable economic waste, then diminution in value caused by the breach is the proper measure of damages (diminution in value is a form of expectation damages).

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Peevyhouse v. Garland Coal & Mining Company Facts: leased land to for strip mining of coal. specifically agreed to perform restorative and remedial work at the end of the five-year lease, at a cost of $29,000. Remedial work was not performed, sued for $25,000. argues that the diminution of value of the land was only $300, it was economically wasteful to restore it. Holding: Since the remedial work was incidental to the contract, and the economic benefit to was far less than the cost of performance, is entitled to the diminution in value only. Discussion: The court considered the difference in the cost of performance and the economic value of the work that was not performed and determined it would be substantially wasteful to restore the land. Rule: Courts will look to the main purpose of a contract to determine whether cost of performance or diminution of value is appropriate as a measure of damages, among other factors. Hawkins v. McGee Facts: performed skin graft surgery on s hand, promising to restore his burned hand to perfect condition. sued for beach of contract after the surgery failed. Holding: s reliance on s promise was foreseeable; was entitled to recover the difference in value of a perfect hand as promised and the value of the hand after the surgery. Discussion: The court relied on the fact that repeatedly approached over a number of occasions regarding the operation, offering assurances of success multiple times. -When determining whether s reliance on the doctors promise was enforceable, the court used a subjective and objective test. The test relates to the listeners understanding of the promise, not what the speaker meant. -What would a reasonable listener in s position understand? -What did actually understand? -Pain and suffering were not included in the measure of damages because pain and suffering were contemplated in the original contract ( undertook the surgery understanding there would be pain and suffering even if the surgery was successful). -Reliance damages would have been the difference between the pre-op hand and the post-op hand. Pain and suffering would have been allowed under a reliance theory. Sullivan v. Connor Facts: underwent plastic surgery on her nose relying on promises by . s appearance was not improved by operations, and an additional operation had to be performed, resulting on the nose looking worse than before. sued for breach and asking for damages related to: out of

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pocket expenses for surgeries, pain and suffering for additional surgery, and other tort damages for changes to her appearance (physical and emotional damages). Holding: Reliance damages awarded: doctors fees and pain and suffering for additional surgery only. Also, expectation damages claim allowed to the extent that can prove made a warranty as to the results. Discussion: -Expectation damages calculation: difference between the promised results and the actual results; and also pain and suffering for the third operation. -Reliance damages calculation: difference between pre-op nose and post-op nose; as well as out of pocket expenses; and also pain and suffering for all three operations. -Restitution damages calculation: out of pocket expenses only.

CONTRACT AND RELATIONSHIPS 2 CONTRACTS IN THE FAMILY SETTING

Balfour v. Balfour Facts: husband leaves to a different city, promising his wife he would send her a certain amount of money every month. While gone, the husband wishes to end the marriage and does not continue to send money. Wife sues for breach of contract. Holding: Contracts between husband and wives (In a family setting) are unenforceable. Court does not believe the parties intended for the contract to be legally enforceable. Courts will not enforce contracts in domestic context. Mehran v. Dargan Facts: the husband, a drug addict, signed a post-marital agreement to forfeit interest in community properties if he did not refrain from drug use. After husband breached contract, wife filed for divorce and asked for property described in the agreement to be confirmed to her as separate property. Holding: The contract violated public policy favoring no fault divorce. The court also found the contract lacked consideration (refraining from illegal activity does not qualify as consideration). Miller v. Miller Facts: Wife sued husband for breach of contract terms related to her performance of household duties for a certain amount of money monthly. Wife claimed husband was improperly spending money on other women, refusing to pay her enough for clothes, and that she had to buy them herself with her personal earnings.

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Holding: Enforcement of the contract would be against public policy; court would be required to make factual findings about performance of marital duties, which is held to be out of the scope of the judiciary system.

2.1 PRE-MARITAL AGREEMENTS

Posner v. Posner Supreme Court of Florida held that premarital agreements dealing with property divisions upon divorce were no longer necessarily against public policy due to establishment of no fault divorce and the changing role of women. Lane v. Lane Facts: Parties signed a prenuptial agreement three days before marriage; at the time, Paula Lane earned $19,000/yr., while David Lane earned $166,000. Divorce was filed 9.5 years later; Davids income was $1M/yr., while Paula had quit her job and they had two children. Holding: Prenuptial agreements may be deemed unconscionable where the situation at the time of their signing is widely different from the situation at the time of divorce.

2.2 MARRIAGE AND COHABITATION CONTRACTS

Marvin v. Marvin Facts: lived with for seven years, who was a married man estranged from his wife for part of that time. claims parties entered into oral agreement that they would combine earnings and would share equally any property accumulated; was to render household services, giving up her career as entertainer. argues there was no express contract, and that oral agreement was unenforceable because it was based on meretricious sexual services. Holding: Quantum meruit awarded for services performed. The implied contract went against legislative purpose of the Family Law Act. Discussion: Courts will enforce express contracts between non-married partners regarding property rights, UNLESS the contract involves consideration expressly founded on sexual services. In Marvin, the court held that consideration was not founded on sexual services, which were merely contemplated. The court held there was a severable part of the contract based on independent consideration that could be enforced. -Family Law Act: intended to eliminate fault as a basis for dividing marital property; court held that implied contract claims should be allowed under the Act. -Common law principles allow implied contracts to arise from the conduct of the parties (generally not recognized). -Courts have generally allowed partners to retain a proportionate part of funds or property contributed to the relationship, but have not allowed such interest based on contribution of services. See Vallera v. Vallera.

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-Marvin v. Marvin is not followed in all states. -Hewitt v. Hewitt, IL protects the institution of marriage; holds that the legislature may determine rights of non-married partners in meretricious relationships.

Friedman v. Friedman Facts: Unmarried partners lived together for 21 years, with children; filing joint tax returns, joint title to property, etc. The wife was injured and claimed there was implied in fact contract for her partner to pay support. Holding: Discussion: Some states presume that couples in meretricious relationships are a joint economic unit; if partners do not wish to be economically responsible for each other, they have to contract out of the relationship. -Meretricious relationships: stable, marital-like relationships where both parties cohabit with knowledge that a lawful marriage does not exist. -Courts vary on whether implied-in-fact/express contracts call for expectation damages or restitution damages.

2.3 CONSIDERATION
-As a general rule, contracts are not enforceable unless there is consideration by both parties. -Consideration is bargain both parties give something up to get something in return. -Purpose: distinguish promises that are enforceable. -Promises to make a gift are not usually enforceable. -Both parties must give consideration, unless the contract falls into an exception. -Courts only look into the existence of consideration, not adequacy, or difference between apparent and real motive behind the bargain. Example: a painter contracted for a painting for $50, who is doing so to become famous. The $50 is sufficient to show consideration. -Consideration Restatement 2d 71 1. To constitute consideration, a performance or a return promise must be bargained for. 2. A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise. 3. The performance may consist of: a. an act other than a promise;

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b. a forbearance; c. the creation, modification, or destruction of a legal relation. 4. The performance or return promise may be given to the promisor or to some other person. It may be given by the promisor or by some other person.

2.3.1 PROMISSORY ESTOPPEL

-Exception to the Consideration Doctrine -Promissory Estoppel Restatement 2d 90 1. a promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and 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. Foreseeable reliance Hamer v. Sidway Facts: uncle promises his nephew $5,000 on this 21st birthday if nephew refrains from using alcohol and tobacco, supported by correspondence between the two. The uncle dies and there is no provision for the $5,000 on his will, and the estate withholds the money. Nephew sues; estate claims there was no consideration: there was no benefit for the uncle and refraining from the use of alcohol and tobacco was to the benefit of the nephew. Holding: Consideration may be found where one party gave up a legal right/freedom in exchange for something (forbearance). Discussion: The court also held that the relationship in Hamer was one of trustee and cestio que trust, not creditor and debtor. Maughs v. Porter Facts: advertised a free drawing for a vehicle at his auction for resident lots. won, and demanded payment, claiming the promise was unenforceable due to lack of consideration. Holding: Attracting people to the auction was held to constitute consideration. Kirksey v. Kirksey Facts: After the death of s husband, s brother-in-law offered her a place to stay at his farm. Some time later he demands that she relocate to a much worse residence in the woods. Holding: Ricketts v. Scothorn Facts: s grandfather offered $2,000 at 6% interest so did not have to work; there was no condition requiring not to work. quit her job, however, when the grandfather died, his estate refused to pay . 17

Holding: There was no consideration, and the promise was unenforceable. However, under the doctrine of promissory estoppel, was awarded expectation damages ($2,000 + interest). Discussion: Promissory Estoppel because the promise by the grandfather was on that he should reasonably expect to induce substantial action by , who relied on the promise in good faith, expectation damages were awarded.

2.4 STATUTE OF FRAUDS

-Requires that certain types of contracts be in writing -Contract of an executor or administrator to answer for a duty of his or her decedent; -Contract to answer for the duty of another (suretyship provision); -Contract made upon consideration of marriage (premarital agreement); -Contract for sale of an interest in land; -Contract that cannot be performed within one year; -Contract for the sale of goods in excess of $500. -General Requisites of a Memorandum - Restatement 2d 131 -Writing must (a) Reasonably identify the subject matter of the contract (b) Be sufficient to indicate that the parties have made a contract with respect to that subject (c) State with reasonable certainty the essential terms of the unperformed promises in the contract -Be signed by the party being charged (in Wisconsin, land contracts must be signed by both parties).

2.4.1 PART PERFORMANCE EXCEPTION

-Courts have recognized claims where a party relied on oral promises to convey land. -Historically, in most cases, has to have taken possession of the land. -Laws of equity can remove the bar of the Statute of Frauds where there has been partial performance. Also extended to contracts that cannot be performed within one year, and contracts for sale of goods in excess of $500.

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-It is a fraud for the vendor to insist upon the absence of a written instrument, when he has permitted the contract to be partly executed. (Seavey v. Drake) -Enforcement by Virtue of Action on Reliance Restatement 2d 139 (1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce the action or forbearance is enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement of the promise. The remedy granted for breach is to be limited as justice requires. (2) In determining whether injustice can be avoided only by enforcement of the promise, the following circumstances are significant: (a) the availability and adequacy of other remedies, particularly cancellation and restitution; (b) the definite and substantial character of the action or forbearance in relation to the remedy sought; (c) The extent to which the action of forbearance corroborates evidence of the making and terms of the promise, or the making and terms are otherwise established by clear and convincing evidence; (d) the reasonableness of the action or forbearance; (e) the extent to which the action of forbearance was foreseeable by the promisor. -Wis Stats 706.02 -If the formal requirements regarding land conveyances are not obeyed and a party relies on an oral promise to convey land, then this statute outlines equitable relief if: (a) The party against whom enforcement is sought would be unjustly enriched if enforcement of the transaction were denied; or (b) The party against whom enforcement is sought is equitably estopped from asserting the deficiency. A party may be so estopped whenever, pursuant to the transaction and in good faith reliance thereon, the party claiming estoppel has changed [its] position to [its] substantial detriment under circumstances such that the detriment so incurred may not be effectively recovered other that by enforcement of the transaction, and either: (c) The grantee has been admitted into substantial possession or use of the premises or has been permitted to retain such possession or use after termination of a prior right thereto; or (d) The detriment so incurred was incurred with the prior knowing or approval of the party sought to be estopped.

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-This chapter shall be liberally construed in cases of conflict or ambiguity, so as to effectuate the intentions of parties who have acted in good faith. -Part Performance and Promissory Estoppel -Courts seem to be gradually replacing part performance exceptions with promissory estoppel. See McIntosh v. Murphy. -Promissory estoppel is easier to apply and it emphasizes protection of reasonable reliance. Rodman v. Rodman Facts: (son) alleged that (father) made an oral promise to make a will to leave him the family farm if he returned and worked on the farm, which did for 22 years. Holding: The promise was in violation of the Statute of Frauds and no exception was granted. Discussion: Performance of services on the farm was not enough to prove part performance. never gave exclusive possession of the property; lived there and made all substantial improvements, paid taxes, etc. Estate of Powell Leading Case in Wisconsin. Facts: Uncle promised to leave his farm to his niece and her husband after his death, if they moved there and worked on the farm while he was still living. Uncle lived near the farm but not in it. The couple made substantial improvements and worked on the property for over 20 years. Holding: Part performance exception applies; specific performance of the promise was allowed. The promisee exercised exclusive possession of the property, AND made substantial improvements. Seavey v. Drake Facts: Father made oral promise to convey land to son, who took possession of property and made improvements. After fathers death, son brought claim in equity for specific performance of oral promise to convey land. Holding: Oral promise was barred by Statute of Frauds; however, partial performance exception applied and specific performance was granted. Discussion: -It is a fraud for the vendor to insist upon the absence of a written instrument, when he has permitted the contract to be partly executed. Boone v. Coe Facts: orally promised s a share of crops if they moved to his farm and worked there for a year. After a 55-day trip and $1,400 in expenses, did not allow s to work.

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Holding: Specific performance and reliance damages denied; oral promise was in violation of the Statute of Frauds. Discussion: Part Performance does not apply because was never allowed to perform or make improvements. Restitution damages (quantum meruit) would have been denied because would have to show some benefit conferred upon . -Today, might be able to sue under Rest. 2d 139 (current part performance exception).

2.5 CONTRACTS TO PROVIDE FOR THE OLD: CONTRACT AND RESTITUTION

-Wills Dead Mans Statute prevents parties from testifying on their own behalf about conversations with people who are now dead. 2.5.1 PAYMENT FOR CARE WITH NO EXPRESS CONTRACT -Enforceability depends in part on whether the donor rendered the services in expectation that payment would be conferred. Estate of Voss Facts: became elderly mans housekeeper; no contract about wages was made. testifies that the man agreed to marry her and that was why she continued working for him. He died without marrying her. Holding: awarded restitution damages (quantum meruit) for the services rendered. RECOVERY BY FAMILY MEMBERS -Law presumes that services given by one member of the family to another are gratuitous. Miller v. Estate of Bell Facts: Two of four siblings cared for elderly parents, providing personal care and household services. The father had made a will accordingly, however he died before the mother, who made no will. The estate was divided between the four children equally. The two siblings who cared for the parents sued for restitution damages. Holding: Services by members of the family are considered gratuitous. Discussion: The court noted that the rewards for the s under the fathers will were more than the fair value of their services (quantum meruit). Estate of Grossman Facts: moved home to care for mother, sacrificing average of $8/day. Afterwards, also made trips home frequently to care for her father. sued for restitution damages.

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Holding: awarded $4/day for the time she was home caring for her mother. Recovery was denied for the time spent caring for her father; the trips home were no different than the trips made prior to her mother and father becoming sick, they do not overcome the presumption that the services were gratuitous. RESTITUTION FOR THE FRIENDLY NEIGHBOR -There is not presumption that services were gratuitous, but a plaintiff will often have difficulty establishing that the person cared for should have known the neighbor expected payment. In re. Goldricks Will Neighbor performed extensive services for deceased; the court denied recovery, noting that the services were various things that a friendly neighbor might well perform. The court also noted these kinds of claims are not favored in law. PROMISES RECOGNIZING PAST SERVICES (PAST CONSIDERATION) In re. Estate of Tulley Facts: Deceaseds neighbor was given a check with a note by deceased prior to her death instead of being added to the will. Holding: The check was an invalid testamentary disposition, and it failed to follow the formalities of execution of the Statute of Wills. There was no proof that expected compensation for services rendered, and no consideration. Discussion: The court found that the check, with the note attached to it regarding the exclusion from the will, was not a promise to pay for the services, but showed appreciation for services. -Exceptions -Under the age of majority when entered into agreement -Statute of Limitations has run on claim -Received discharge of debts in bankruptcy MORAL CONSIDERATION -Moral consideration may allow a promise to be upheld in court even though the promise happened after the consideration. -There is no real consideration in these cases. -Wisconsin courts have found moral consideration in express promise cases. -Example: X falls off a roof, and a hired worker breaks his fall but suffers permanent injury. X says hell pay until the hired workers death. X pays the worker until the time of Xs death. Xs estate refuses to make further payments. Court held there was moral consideration. -Promise for Benefit Received Restatement 2d 86

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(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; or (b) to the extent that its value is disproportionate to the benefit. Estate of Briese Facts: Husband promised dying first wife he would take care of her mother. He afterwards remarried; mother-in-law left in anger and sued for breach of husbands promise to care for her. Holding: No consideration was given for husbands promise; the benefits the husband had received from his first wife were benefits which it was the legal and moral duty of the promisee to confer without compensation. Reliance and Expectation Interest in the Family Context Estate v. Hatten promissory note for $25,000 for past services upheld. Moral consideration given; adequacy of consideration is a matter for parties. Estate of Gerke elderly person promised to leave everything to upon death as compensation for past services. Court limited recovery to quantum meruit, relying on to the extent necessary to prevent injustice.

2.6 PROMISSORY ESTOPPEL AND FRANCHISE AGREEMENTS

Hoffman v. Red Owl Stores, Inc. Facts: contacted to open a franchise; agent of s gave assurances that it would happen, which led to spending money and making investments in reliance of the promise. continuously increased the total cost of the contract even though had knowledge that had limited amount of money. No contract was signed. sued for reliance damages. Holding: Reliance damages awarded based on promissory estoppel. should reasonably have expected its promise to induce action of definite and substantial character by , the promise actually induced such action, and injustice could only be avoided by enforcement of the promise. Discussion: Hoffman allowed the use of promissory estoppel theories for damages in a commercial relationship. -Hoffman also allowed the use of promissory estoppel where the promise is too indefinite to form a contract. The court held that Restatement 2d 90 (Promissory Estoppel) does not require all the essential details of a proposed transaction between the parties so as to be equivalent of an offer that would result in a binding contract between the parties.

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-Key Inquiry: Was it reasonable for to rely on the oral promise? Neiss v. Ehlers Facts: agreed to work for ten years at s business, and was to obtain 1/3 ownership of the business. Other contract details were not discussed. After two years, the parties parted ways. Holding: Pre-contractual reliance can be compensated under 90. Aimed at compensating promisee for damages that result from reliance on the promise, rather than providing comprehensive relief for the breach of the promise itself. Discussion: Neiss limited damages to reliance only, but other courts have allowed full expectation damages on a promissory estoppel theory. -Cosgrove v. Bartolotta -Facts: agreed to make substantial loan to finance restaurant in return for partial ownership status. assisted with various legal matters related to the restaurant. found alternate financing and did not honor partial ownership agreement. -Holding: awarded full expectation damages based on promissory estoppel (fair market value of the promised ownership interest).

3 EMPLOYMENT CONTRACTS
McIntosh v. Murphy Facts: accepted oral agreement to move to Hawaii to work for . 2.5 months later, was fired. argues that agreement does not violate Statute of Frauds: it can be performed under one year. Holding: Expectation damages awarded on promissory estoppel theory. s reliance on contract was foreseeable to ; injustice can only be avoided by enforcement of the contract. Discussion: The court spent some time rationalizing the Statute of Frauds exception. There was argument regarding when the contract actually started. agreed to the contract on Friday, and started working the next Monday. The Statute of Frauds limitation of one-year relates to time of acceptance and time of full performance, that would constitute more than one-year for full performance. argued that he only accepted the contract when he showed up to work on Monday, which would make it exactly one year. -Historically, employment contracts were always for one-year terms.

3.1 EMPLOYMENT AT-WILL

-Employment at-will allows either party to terminate the agreement at any time. -No fixed contractual term.

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-Unless otherwise stated, employment is always at-will; the employee has the burden of proof. -Permanent employment employee must offer additional consideration. If proven, employer then has to show cause in order to fire the employee. -Policy -Lack of job security gives employees incentive to do well. -Argument can be made that our economic system operates best if employers are given wide latitude in dealings with employees. -Employers having flexibility to fire employees as economic conditions change. -The longer an employee has worked for a company, the more justified courts feel in modifying the at-will doctrine in that specific case. -Exceptions to at-will employment increase temporary employment -No change based on public policy or good faith exceptions. -In Wisconsin, at-will contracts may be terminated for any reason (even in bad faith). Public Policy Exception Employees cannot be terminated for a violation of a Well defined public policy as evidenced by existing law -Termination motivated by bad faith or malice or based on retaliation is not in the best interest of the economic system or the public good and constitutes a breach of the at-will employment contract. Monge, fired for not going out with her superior. -Duty of Good Faith and Fair Dealing Restatement 2d 205 Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.

3.1.1 EXCEPTIONS TO EMPLOYMENT AT-WILL

PUBLIC POLICY EXCEPTION -Most widely accepted -Employees cannot be terminated where the termination is in violation of a specific statute, or public policy interest (in the absence of a specific statute) -Reasoning: state Constitution and statutes embody the public conscience of the people. Palmater v. Harvester LEADING CASE -Definition of Public Policy: Public policy concerns what is right and just and what affects citizens collectively. It is to be found in the States Constitution and statutes and, when they are silent, in its judicial decisions. Although there is no precise line of demarcation dividing

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matters that are public policies from personal matters, the matter must strike at the heart of a citizens social rights, duties, and responsibilities before the tort will be allowed. -It is not enough that an employer ask an employee to do something that the employee believed was wrong. Petermann v. Intl. Brotherhood of Teamsters Facts: was ordered to falsely testify under oath before the CA legislative committee. was fired after the testified truthfully. Holding: Allowing an employer to terminate an employee for refusing to commit perjury is against public policy. Tameny v. Atlantic Richfield Co. Facts: was terminated for unsatisfactory performance after refusing to violate federal and state antitrust laws and consent decree. Holding: Petermann principle applies; allowed to recover tort remedies. Rule: employers have a duty to uphold fundamental public policies of states penal statutes. Terminating an employee for refusal to commit acts that violate public policy breaches that duty. Brockmeyer v. Dun Facts: was told not to testify in a sexual harassment suit. was fired after testifying honestly. Holding: There is no clearly defined mandate of public policy against firing an employee because its testimony might be against the employers interest. Wagenseller v. Scottsdale Memorial Hospital Facts: was an employee of s for 4 years. At a camping trip with supervisor, refused to participate in lewd activities. There was evidence to the camping trip being the reason was fired. did not follow its own termination procedures as outline in their employee manual. Holding: Terminating for refusing to participate in illegal activities was against public policy. The personnel manual also created an implied in fact contract regarding the termination procedures. RULE FOR PUBLIC POLICY EXCEPTION IN WISCONSIN Kempfer v. Automated Finishing, Inc. Facts: was terminated for refusing to drive a truck without a valid license. Holding: allowed to recover back pay and benefits, as well as future lost wages and benefits. allowed to mitigate payment of damages by reinstating .

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Discussion: could not choose to recover damages instead of reinstatement. can choose not to reinstate a former employee and pay damages instead. -Reinstatement and back pay are the most appropriate remedies. Reasoning: primary purpose of the suit is to make the employee whole. -Tort damages are not allowed in Wisconsin. IMPLIED IN FACT EXCEPTION -Exception implied from statements or conduct of the employer. -Burden of proof on employee to show implied in fact promise of fixed term of employment. -Assurances of job security -Memoranda or personnel manuals -Employee does not need to show employers reliance on the manual. -Employers must clearly state that personnel manuals are not part of employment contract, otherwise employees may rely on representations in the manual. -Some courts look at objective intent of employer; others may look at reasonable expectation of employee. Dillion v. Champion Jogbra Facts: was an employee of , who had a personnel manual that clearly stated it was not a part of the employment contract, and that reserved the right to terminate at will. However, manual also contained procedures for disciplinary action. Holding: Boilerplate language of the disclaimer did not necessarily communicate to employees that there was no job security intended by the procedures. The manual contained inconsistent statements. Pugh v. Sees Candies Facts: had worked for for 32 years, being promoted and praised over time. s policy of job security was announced as performance based. Holding: Implied contract was found. Compensatory and punitive damages were allowed. Foley v. Interactive Data Corp. Facts: worked for for seven years without a specific term contract. reported his new superior to officials for criminal violations at his former place of work; was afterward fired by his superior, disregarding s Termination Guidelines Holding: did not have a claim as a public policy exception because information disclosed only served the private interest of . had a claim as an implied in fact job security exception

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because of length of time working at , repeat assurances of job security, promotions, etc. Evidence of breach of written Termination Guidelines was also sufficient to establish breach. Consideration was found in non-compete agreement for one year after termination. Damages were limited to contract damages. Discussion: The alleged implied contract did not violate the Statute of Frauds because it could have been performed within one year ( could have been fired within a year for good cause). Guz v. Bechtel Discussion: Duration of employment, promotions, and favorable performance reviews do not, without more, imply an employers intent to relinquish at-will rights. -Those events were just natural consequences of employment. -The court argues that Foley discourages retention and promotion of employees. PROMISSORY ESTOPPEL IN EMPLOYMENT AT-WILL Hunter v. Hayes Facts: offered a job to , who quit her job in reliance of promise; then withdrew the promise. Holding: allowed to recover under Promissory Estoppel (See Hoffman v. Red Owl) Cleary v. American Airlines Facts: worked for for 18 years before being discharged. did not follow its own internal procedures for termination. Holding: s long term of satisfactory performance and s failure to follow internal procedures operated as a form of estoppel, precluding any discharge without good cause. Worley v. Wyoming Bottling Co. Facts: worked for for 10 years, with restrictive covenant. Personnel manual stated at-will employment. Assurances by s president led to make significant investments. was later demoted. Holding: Promissory estoppel applies based on assurances. IMPLIED IN LAW: COVENANT OF GOOD FAITH AND FAIR DEALING -Protects the rights of the parties to receive the benefits of the agreement they entered into -Protects employees from termination based on employers desire to avoid payment of benefits already earned by employee. -Fortune v. National Cash Register - was fired before receiving large bonus for a sale.

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-Tort recovery is usually limited to insurance contracts because of a special relationship between insured and insurer. -Wisconsin - Tort damages not allowed for public policy termination suits. -Only contract damages promotes predictability and commercial stability. -Purpose is to make whole. -Damages also limited to foreseeable damages and has a duty to mitigate. -Other states: tort damages are appropriate in cases involving terminations that violate public policy. -See Market Street. -Posner notes that the duty of good faith and fair dealing only attaches postcontractually. Gantt v Sentry Insurance Corp - unsuccessfully attempted to coerce into falsely testifying in a sexual harassment suit. was demoted and left firm; awarded $1.34M. Hunter v. Up-Right, Inc. Facts: was told to resign because his job was being eliminated, when it was not. Holding: can recover for misrepresentation only if separate from termination of employment contract.

4 SOCIAL CONTROL OF CONTRACT

4.1 ILLEGAL CONTRACTS
-Illegal contracts are not enforced. -Parties usually cannot recover restitution. Everett v. Williams Facts: Parties agreed in contract to share expenses and proceeds from robberies. Holding: Illegal contracts are unenforceable. No honor among thieves; courts will leave parties as it finds them. Carroll v. Beardon Facts: Parties entered into a contract for conveyance of land; actually a contract to sell a prostitution business. breached; sued for remainder of contract price. claimed it was an illegal contract; it was not just for land but also for the business of prostitution.

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Holding: The contract is enforceable because parties were not in pari delicto (in equal fault). Discussion: It did not matter that the seller knew that the land would be used for an illegal purpose; the seller did not actively participate. Bare knowledge of the purpose for which the property is sold is not enough to raise the defense of illegality. -Fuchs v. Goe mere knowledge does not make the seller an active participant. -Comparative Fault -in pari delicto when both parties are equally guilty; courts will leave parties as it finds them. Coma Corp. v. Kansas Department of Labor Facts: illegal worker seeks compensation for earned but unpaid wages. Employer claims contract was illegal because of federal law making employment of illegal aliens unlawful. Holding: restitution damages awarded (unpaid wages) to prevent unjust enrichment of employer. Expectation damages not allowed because nature of the contract was illegal. -Hoffman Plastic Compounds v. NLRB awarded restitution damages but expectation damages. Greenberg v. Evening Post Assn Facts: parties agree to fix a contest. Party in control of the contest () demanded more money; repudiated the deal and sued for the payment. Holding: Restitution damages allowed if plan was repudiated with reasonable promptness. must act before design is put into effect. Karpinski v. Collins Facts: offered a better contract for s product in exchange for kickbacks. afterwards demanded loans, could not afford kickbacks plus loans. terminated the contract; sued for money paid in kickbacks to . Holding: Illegal contract was enforced; allowed to recover rebated illegally paid to . was slightly at fault, while was grievously at fault because of difference in economic and power positions. Discussion: The court considered several factors in enforcing the contract: 1) s economic survival depending on getting the better contract; 2) was vulnerable to s economic coercion; was not willing to do business with anyone who would not pay him the rebates; 3) was part of a protected class of producers; 4) Enforcing the contract further the purpose of the Milk Stabilization Act, deterring illegal kickback contracts.

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4.2 CONTRACTS AGAINST PUBLIC POLICY

-General Standard of Unenforceability Restatement 2d 178 A promise is unenforceable if the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms.

4.2.1 RESTRICTIVE COVENANTS

-Restrictive Covenants Restatement 516 Restrictive covenants must be reasonably necessary for the protection of the employer or principal, without imposing undue hardship on the employee or agent. Restraint of trade is unreasonable if: a. It is greater than is required for the protection of the person for whose benefit the restraint is imposed; -The burden rests upon the employer to establish a. The necessity for; and b. The reasonableness of the restrictive covenant. -Restatement 515 reasonableness test does not apply to bargains. Fullerton Lumber Co. v. Torberg Facts: signed a non-compete contract preventing him from working for a competitor for 10 years or start his own company for 10 years within a 15-mile radius of without permission. quit and opened his own lumberyard the same year. sued for an injunction. Holding: Blue Pencil Test is abandoned. Court modifies the terms to reasonable restraint, reducing the length of time is restricted from doing business in the area. Discussion: Factors to determine whether to enforce a restrictive covenant -Traditional Blue Pencil Test Restatement 518 If full performance of a promise, indivisible in terms, would involve unreasonable restraint, the promise is illegal and is not enforceable even for so much of the performance as would be a reasonable restraint. -Torberg abandons this test. -Courts evaluating the fairness of non-compete agreements leads to employers making covenants that are unfair, since they know that courts will simply modify the covenant if someone does take a case to court.

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-Evaluation of the fairness of non-compete agreements examines the ability of employees to bargain at the time of contracting as well as the consideration that was provided by the employer in exchange for the clause. -Facts in determining whether to enforce a restrictive covenant: Philip G. Johnson & Co. v. Salmen a. Degree of inequality of bargaining power; b. Risk of the employer actually losing customers as a result of the competition; c. The extent of respective participation by the parties in securing and retaining customer; d. Good faith of the employer; e. Existence of general knowledge about the identity of the customers; f. Nature and extent of the business position held by the employee; g. Employees training, health, education, and the needs of his family; h. Current conditions of employment; i. Necessity of the employee to change his line of work or residence if the covenant is enforced; j. The relativeness of the restraint sought and the need to protect the legitimate interests of the employer. -California prohibits restrictive covenants, but employees generally sign contracts agreeing not to disclose trade secrets. -Bad boy provisions: deferred compensation plans are created, and employees who work for a competitor lose all claims to benefits. Employer does not have to seek an injunction to enforce covenant, but there are incentives for employees not to compete. LIQUIDATED DAMAGES AS ALTERNATIVE FOR NON-COMPETE AGREEMENTS Willard Packing Co. v. Javier Facts: sought $50,000 in liquidated damages from , a former packaging salesperson who went to work for a competitor. Holding: did not meet burden of proving the liquidated damages clause was a reasonable estimate of its loss, particularly due to inequality in bargaining power. Amounted to a penalty clause, and the court did not seek to penalize and punish an employee who went to work for a competitor. Pollack v. Calimag Facts: Petitioner, a doctor, went to work for a competitor after his contract was not renewed, in breach of a restrictive covenant with a liquidated damages clause of $25,000. Holding: covenant and damages clauses were reasonable due to difficulty in determining loss.

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4.3 CAPACITY TO CONTRACT 4.3.1 MENTAL INCAPACITY

-Mental Illness or Defect Restatement 2d 15 1. A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect (a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or (b) he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition. 2. Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance under Subsection (1) terminates to the extent that the contract has been so performed in whole or in part or the circumstances have so changed that avoidance would be unjust. In such a case a court may grant relief as justice requires. Ortelere v. Teachers Retirement Board Relief allowed; relief from contract is only available if the other party knew or should have known of mental incapacity to contract. Tomasino v. New York State Employees Retirement System Facts: Claim by estranged wife of s employee of 22 years, made no election of benefits prior to his death (i.e. received maximum lifetime benefits and modest death benefit), sought to have election changed to increase death benefit on the ground that he had been mentally ill at time of failure to elect. Holding: Affirmed denial of claim. Although there was evidence that system knew of mental illness, distinguished from Ortelere on basis that couple was separated and presumed that Tomasino would have chosen option yielding highest returns during lifetime. Pentinen v. New York State Employees Retirement System denied relief from contract; had no notice of s condition. Keith v. New York State Teachers Retirement System Holding: Adopted the rule from the Restatement: where the other party does not know of the mental illness, the power to avoid terminates only future performance. has the burden of showing that nullification would not be inequitable.

4.3.2 INTOXICATION
-Intoxicated Persons Restatement 2d 16 A person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that by reason of intoxication

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(a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or (b) he is unable to act in a reasonable manner in relation to the transaction -If intoxication is so extreme as to negate consent, there is no contracts. -Voluntary intoxication not accompanied by any other disability has been thought less excusable than mental illness. -Key inquiry is what the sober party should know. Harlow v. Kingston Facts: sold his interest in real estate to for $200, while the fair value was $1388. For ten days prior, had been on prolonged spree and was grossly intoxicated; was not intoxicated during transaction, but was out of money for several days and exhausted his credit. After the sale, went on another spree of two weeks. Holding: was not acting normally and he did not appreciate his actions. knew he was unfairly taking advantage of . Restitution damages.

4.3.3 INFANCY
-Contracts made with minors are voidable (not void per se) at the minors discretion. -Reasoning: protecting children from their own shortsightedness and lack of judgment. -Age of majority: 18. -It is not relevant whether the other party knew the minors age. -Some states hold minors liable for misrepresentation of their age to adults; minors may be responsible for torts, but disaffirms contracts. -Minors may not avoid liability for contract made for necessities: clothing, food, shelter, etc. Halbman v. Lemke Facts: sold a car to , who was a minor. made a substantial down payment and would pay the rest in installments; the car had mechanical problems and refused to pay more, demanding a refund. denied it and never took repossession of the car, which was vandalized. Holding: was entitled to refund of his money. A disaffirming minor need return only so much of the goods as possible; did not have to make restitution for use of the car or depreciation in value.

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4.3.4 DURESS
-Historically, duress did not apply when a party threatened something that it was legally entitled to do. -Modern Doctrine i. ii. iii. iv. was the act threatened a wrongful or unlawful act? Was the victim deprived of its unfettered will? Was the result an unfair exchange? Does the threatened party have no adequate legal remedy?

-Restatement 2d 175 When Duress by Threat Makes a Contract Voidable 1. If a party's manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim. 2. If a party's manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transaction. -Restatement 2d 176. When a Threat Is Improper 1. A threat is improper if a. what is threatened is a crime or a tort, or the threat itself would be a crime or a tort if it resulted in obtaining property, b. what is threatened is a criminal prosecution, c. what is threatened is the use of civil process and the threat is made in bad faith, or d. the threat is a breach of the duty of good faith and fair dealing under a contract with the recipient. 3. A threat is improper if the resulting exchange is not on fair terms, and a. the threatened act would harm the recipient and would not significantly benefit the party making the threat, b. the effectiveness of the threat in inducing the manifestation of assent is significantly increased by prior unfair dealing by the party making the threat, or c. what is threatened is otherwise a use of power for illegitimate ends. -Criticism of 175-176 -Prof. Dalton: Threats turn on highly uncertain measures of appropriate conduct such as unfair dealing or use of power for illegitimate ends. -Praise of 175-176 -Prof. Kronman: Morally required restrictions on contracting; they help better define those lines and create more stability.

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Wolf v. Marlton Corp Facts: s lawyer threatened to resell the house had put a down payment on to an undesirable if did not return s down payment. wanted to cancel contract because the couple was having marital difficulties. Holding: The threat constituted duress. Where a threat is made for the sole purpose of injuring the other party, fundamental fairness requires the conclusion that the partys conduct in making the threat is wrongful. Mitchell v. C.C. Sanitation Company Facts: was a truck driver involved in an accident. s employer threatened to fire him unless he signed releases of liability and a settlement for a very small amount of money. Holding: The threat was improper and constituted duress; the parties were in unequal bargaining positions, there was economic disparity, had an economic interest in signing the waivers. Discussion: the court found that even though was an employee at will, duress and coercion may be exercised by the employer by threats to discharge the employee. Perkins Oil Co. of Delaware v. Fitzgerald Facts: Fitzgerald suffered an accident where he lost both of his arms. Employer told him that if he consulted an attorney or attempted to sue, his stepfather would be terminated and the company would prevent his employment in any other like business. Holding: The determination of whether Fitzgerald signed the release of liability under duress is a jury question. Dissent: Fitzgeralds choice to stay employed was voluntary; had a reasonable alternative: not sign the release and quit. Discussion: This question would fall under Restatement 2d 176(2)(a): the threatened act harmed without significantly benefitting the employer. ECONOMIC DURESS The Selmer Co. v. Blakeslee-Midwest Co. Facts: performed construction work for , who breached by not delivering some necessary materials on time. could have cancelled but chose to orally agree to complete the work if agreed to pay for the extra costs, which later totaled $120,000. offered $67,000, which accepted because of financial trouble. sued later for balancing, alleging settlement was accepted under duress. Holding: There was no duress because the threat was not improper; the settlement exceeded 50% of s demand and did not acknowledge it owed $120,000.

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Discussion: Posner argues that allowing duress in this case would make any settlement deal qualify for under a duress claim. -Alaska Packers Assn v. Domenico Facts: fishermen agreed in writing to work on a fishing boat for a certain sum. After setting sail, they refused to work unless they were paid more money; boat owner agreed because there would not be enough time to find replacements. Owner later reneged, and fishermen sued. Holding: New agreement was not enforceable, there was no consideration given by the fishermen for modified agreement. The courts underlying concern was that the modified agreement had been agreed to under duress. -Capps v. Georgia Pac Corp. Facts: promised percentage of contract for finding a new renter; owed $157,000, but agreed to $5,000 and waived his rights to the rest. sued for remainder, claiming waiver was obtained under duress because of pressing financial problems that had knowledge of. Holding: Duress; key points considered were the s acknowledgement of the amount owed and the unfairness of the settlement. -Economic duress may be found when a settlement is unfair and/or a party had knowledge of the other partys economic situation. However, financial difficulties alone cannot justify the finding of duress if the breaching party was not responsible for those difficulties.

4.3.5 UNDUE INFLUENCE

-Undue influence falls outside the impersonal market setting. -Related to emotional attachment or confidence between the parties. -Exertion of psychological pressure and the fairness of the deal. -Courts will generally examine the fairness of the bargaining more critically where parties are emotionally attached. -May also be present where a fiduciary relationship is present -Fiduciary relationship: where a party has an obligation to look after the interests of another. Example: lawyer/client, parent/child, etc. -Typically held to high standards of fairness. -Typically an issue with gifts and wills. -Restatement 2d 177. When Undue Influence Makes a Contract Voidable

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(1)

(2) (3)

Undue influence is unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that that person will not act in a manner inconsistent with his welfare. If a party's manifestation of assent is induced by undue influence by the other party, the contract is voidable by the victim. If a party's manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the undue influence either gives value or relies materially on the transaction.

Frowen v. Blank Facts: Couple that lived next to an elderly, blind, uneducated woman drafted a one-page document for the woman to sell them her farm for $15,000. Fair value was $35,000. Holding: Case was remanded for the young couple to present evidence as to why the price was so low and that the transaction was fair. Discussion: The court found that, because of the close relationship between the parties, there was a higher level of trust, and there should be a high level of fairness in the dealings between them (fiduciary relationship). Rule: Where a fiduciary relationship is present, courts will hold parties to a higher standard of fairness, requiring full disclosure and to state opinions truly held. Odorizzi v. Bloomfield Facts: After was arrested on charges of homosexual activity, the principal and superintendent of the school where worked went to s apartment and convinced him to resign immediately to avoid publicity and embarrassment, claiming they were looking out for s interest. had been awake for 40 hours. Holding: Undue influence was found; overpersuasion. There is a close relationship between duress and undue influence. Discussion: Odorizzi can be classified under an expanded doctrine of duress: the threat was improper in that it would harm and not significantly benefit the school board; and had no reasonable alternative.

4.3.6 MISREPRESENTATION (FRAUD)

-If I trick you into signing a contract, then I have robbed you of free choice. The deal will not reflect your assumptions or expectations. -However, the legal system may insist that you take care of yourself and it may deny remedies for fraud that you might have avoided. -Incentive for parties to exercise care; allows for a more efficient market. 38

-caveat emptor: let the buyer beware classic rule. -Clear and convincing evidence is required for proof of fraud. -Statement had to be intentionally false. -Statement of fact, not opinion: victim had to take reasonable steps toward self-protection. -Higher standard discourages invalid claims of fraud from being litigated. -Innocent Misrepresentation -Some states impose liability on parties for unknowingly committing fraud. -Simple justice demands that when both vendor and vendee are innocent, the one making the false statement should bear the loss of the benefits of the transaction. -Remedies -Expectation Interest -Measured by the difference in value between the thing represented and that value that the thing would have were the misrepresentation true. -Reliance Damages -Out of pocket damages as a result of fraud. Example: cost of repairs. -Punitive Damages -Limited to cases of intentional misrepresentation. -Growing trend to allow punitive damages for intentional fraud. Obde v. Schlemeyer Facts: bought a house infested with termites from , who knew of the problem and had fixed surface damage. did not ask specifically about termites and did not volunteer the information. Holding: liable for fraudulent concealment. Damages calculated as the difference in value of the property as it was and the house without termites (expectation damages). Rule: where there are concealed defects in the premise, which are dangerous to the property or health of the tenant and the defects are known to the seller, the seller has a duty to inform the buyer. Failure to do so is fraud. -Perkins v. Marsh extended the rule to require buyers to disclose information as well. Discussion: Mitchell v. Straith interpreted Schlemeyer to require proof that the undisclosed fact was a material fact substantially affecting the value of the property adversely, or operating to materially impair or defeat the purpose of the transaction. 39

-Seller Disclosure Forms: real estate agencies now require sellers who utilize services to fill out disclosure forms to protect agency from liability. Hughes v. Stusser Facts: sued for fraudulent failure to disclose a concealed dry rot and termite condition in a house sold by . did not have knowledge of the condition at the time of sale. Holding: There was no duty by to disclose where has no knowledge of the problems. could not conceal a condition unknown to them. -Warranty Theory -Express warranties: descriptions, affirmations of fact, and promises about goods can constitute express warranties. -Implied warranties: fitness for the ordinary purposes for which goods are used, merchantability, etc. -Merchantability: goods will conform to the average quality expected. -Generally, sellers and/or manufacturers are strictly liable. House v. Thornton builders impliedly warrant that new houses foundations are secure and that houses are safe for occupation. A buyer can recover damages without proof that builder knew of defective condition or many any affirmative statements. Klos v. Gockel limited Thornton -Sale must be commercial rather than casual or personal in nature. -House must be a new house. -Sale must be nearly contemporaneous with completion. -Intervening tenancy must not interrupt transaction. -Avoidance -A contract can be voidable by the recipient of fraudulent or material misrepresentation, who can seek restitution for any benefits conferred upon the other party. Texas Gulf Sulfur Facts: paid a small sum plus 10% of profits for use of s land for mineral extraction. knew there was a high probability of valuable minerals and did not inform . Discussion: Where parties have roughly equal access to information, courts generally do not require disclosure. -Buyers rarely have a duty to disclose.

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4.3.7 GOOD FAITH

-UCC 1-201 Honesty in fact and the observance of reasonable commercial standards of fair dealing. -UCC 1-304 Every contract or duty within the UCC imposes an obligation of good faith in its performance. -It is an implied clause in every contract not to take advantage of another in a way that could not have been contemplated at the time of drafting and therefore, was not resolved or bargained for in the process. See Market Street Associates v. Frey. Market Street Associates v. Frey Facts: Petitioner had a sale/leaseback agreement with Respondent, which included a provision for financing of improvements: if Respondent was unwilling to provide financing, Petitioner could buy the property back at the original price plus 6% /year. Petitioner wished to buy back property to obtain financing from another source, and withheld information from Respondent, leading to Petitioner being able to buy back the property. Holding: Petitioner breached their duty of good faith, and it may or may not constitute fraud. Discussion: The court argued that Petitioner should have advised Respondent of the buyback provision; parties may utilize superior knowledge, but theres no social utility in allowing parties to deliberately take advantage of ones oversight to trick them. -This is different from Texas Gulf Sulfur because Petitioner is deliberately taking advantage of a contract partners oversight, while in Texas Gulf Sulfur the negotiations were prior to any contract being made. (pre-contractual vs. post-contractual). Reasoning: prior to a contract, parties negotiate with natural wariness; after a contract is made, a partnership is formed and parties are entitled to some degree of trust. -Nauga v. Westel Milwaukee Co., Inc. Facts: , s dealer, had another claim against in violation of the Wisconsin Fair Dealership Act. then offered a new dealership agreement to all dealers, with a clause buried in it releasing from any existing claims. s lawyer discovered the clause and substituted it for a settlement for $250,000. did not discover the clause; sued for $250,000. Holding: Negligence does not relieve from contractual obligations; recovered. Discussion: The court may have reacted to the original clause since there was no consideration provided, and it violated the duty of good faith. -Hennig v. Ahearn Facts: firm was negotiating to hire a new CEO; both sides represented by lawyers and exchanged numerous contract drafts; changes were always highlighted and explained. Firm changed 9 words in the middle of a paragraph in a way that greatly reduced CEO's 41

compensation, didn't bring attention to it. CEO signed without noticing change. Sued for misrepresentation and sought reformation of the contract. Holding: Breach of duty of good faith; genuine issue of material fact. Discussion: the court in Ahearn set forth a standard for good faith: The advantage taken of s ignorance must be so shocking to the ethical sense of the community and so extreme and unfair as to amount to a form of swindling, in which is led by appearance into a bargain that is a trap, of whose essence and substance he is unaware. -Courts should refuse to act for the relief of one who blindly acts and a may not close his eyes to what is obviously discoverable by him, but there is not a rule of law that a party much read each and every word of successive draft of a complex document. Vokes v. Arthur Murray, Inc. Facts: used questionable sales tactics to get to sign up for thousands of dollars of dance lessons, misrepresenting her skill level and overall improvement. argued that the flattery and attention given to was an essential part of the contract. Holding: s actions were held to be unlawful. Discussion: There was no doctrine that applied to Arthur Murray Fraud/Misrepresentation does not apply because alleged misrepresentation must be a statement of fact; trade puffing may be considered opinions, predictions, or expectations. Court held that the standard of fact standard does not apply in a fiduciary relationship, or one that is not at arms length, or one where one party does not have equal opportunity to evaluate the truthfulness of a statement. -Even when a defendant does not have the duty to disclose facts, if it choses to disclose, it must disclose the whole truth, including adverse facts. Rule: Misrepresentation is only actionable if it is one of fact rather than opinion, UNLESS the parties are not dealing at arms length or the parties do not have equal opportunity to evaluate the truthfulness of facts represented. Parker v. Arthur Murray Facts: constantly praised s abilities, despite lack of improvement. signed up for thousands of hours of dance lessons before getting severely injured in auto accident. Sued for fraud and punitive damages. Holding: Statements regarding dance ability and potential were opinions and not fraudulent. However, was granted rescission of contract and restitution of unused lessons due to his injury. -Many states have passed legislation requiring dance studios, fitness gyms, and similar businesses to allow contract rescissions and full refunds of unused lessons.

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4.4 STANDARD FORM CONTRACTS

McCutcheon v. David MacBrayne Ltd. Facts: paid to have his car ferried; had a standard form risk note with waivers of liability but neglected to have sign it, which had occurred in prior transactions. was aware of the risk note but not of its terms and conditions. s boat sank due to negligence, and sued. Holding: was allowed to recover since no risk note was signed for that transaction. Discussion: argued that regular course of dealing should allow the waiver of liability to stand, even if not signed in this specific transaction. also argued that the ticket for the ferry validated the contract. -Course of Dealing: the court considered that since there were other occasions when did not sign the note, course of dealing could not be proven; also, was not aware of its terms and conditions. The court notes, however, that signed the note, lack of knowledge would not invalidate the contract (Harris v. Western Railway Co.) Yauger v. Skiing Enterprises, Inc. Facts: s daughter due to s negligence in maintaining its facilities. The season pass contract signed by defendant contained an inconspicuous waiver of liability for any inherent risks in skiing. Holding: s contract was void as against public policy; the waiver failed to clearly, unambiguously, and unmistakably inform the signer of the significance of it, or of its breadth. Also, the clause inconspicuous. Rule: waivers of liability must clearly, unambiguously, and unmistakably inform the signer of what is being waived. The form in its entirety must alert the signer to the nature and significance of what is being signed. Discussion: -Plain English Law: several states have adopted plain English statutes, requiring that consumer contracts be drafted in a clear and coherent manner using words with common and everyday meanings. -Benefits to both consumers and businesses (generates good will and fosters confidence and trust in the business) -Normative vs. Predictive Model when written contract has unfavorable terms not in accordance with orally agreed upon terms, buyers experience cognitive dissonance, rationalizing unfavorable terms as unimportant. ProCD v. Zeidenberg shrink-wrap licenses; rejection of goods Facts: Zeidenberg purchased ProCDs database software, which included a noncommercial use license provision inside the box and when the application was ran. He made the database 43

available online to profit from it. ProCD also sold commercial licenses of the application for substantially more. Issue: Do terms in a shrink-wrap license become part of the contract? Holding: Yes. The UCC permits parties to structure the contract so that the buyer has a chance to make a final decision after review of the terms. After opening the box and inspecting the product and the terms, the buyer could reject the product if the license was unsatisfactory. Under UCC 2-206, after having the opportunity to inspect the goods, a buyer accepts the product and the terms if he fails to make an effective rejection. Discussion: the decision depends on the buyers opportunity to reject the project if the terms seem unfair. Its not the sellers job to maximize the buyers gain. -UCC 2-204: A contract for the sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract. A vendor may invite acceptance by conduct. Buyers can prevent formation of a contract by returning the product 2-206. Rule: If a buyer is presented with additional terms and fails to reject the product after having opportunity to review the terms, the buyer is found to have accepted them. Hill v. Gateway Facts: The Hills purchased a computer from Gateway over the phone. The box included additional terms, which included an arbitration provision. The terms were not read to the Hills over the phone when they purchased the computer. The terms also included a thirty-day return guarantee. Issue: Did the terms agreement become part of the contract? Holding: Yes. A contract can be effective even if not read. Those who accept a contract without reading it assume the risk it will be unfavorable. The Hills had opportunity to review the terms and thirty days to reject the goods. When they failed to return the computer, they accepted the terms of the contract. Discussion: Gateway limited the actions required for acceptance by allowing a thirty-day window for rejection of the terms. A buyer must have the opportunity to review the terms and reject them. -Opinion noted that the market would police itself in regards to the terms: enough buyers would return products because of unfair terms that the seller would change them. Rule: Additional terms included in a box shipped to the buyer become part of the contract between the parties, even if the buyer is not aware of the terms and non-rejection constitutes acceptance.

5 WARRANTIES, DISCLAIMERS, AND REMEDY LIMITATIONS

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-Warranty: regulation of the quality of goods or services supplied by sellers.

UCC WARRANTIES
-Designed to protect the likely expectations of a reasonable buyer. -Express Warranty UCC 2-313 -Seller will be found to make an express warranty if he makes an explicit promise that the goods will have certain qualities. -Generally, sellers cannot disclaim express warranties. -Affirmation of fact: any affirmation of fact or promise which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the promise. -Basis of the bargain: relied upon by the buyer. -Description of the goods: any description of the goods that is made part of the basis of the bargain creates an express warranty that the goods will conform to the description. Example: sample or model upon which the buyer relies. -As Is language has no effect on express warranties. -An affirmation of the value of the goods or a statement purporting to be merely the sellers opinion or commendation of the goods does not create a warranty. -Implied Warranty of Merchantability UCC 2-314 -Sellers implied warrant that the goods are merchantable, that is, of at least average quality. -Merchantability six factors -Pass without objection in the trade under the contract description; -Are fir for the ordinary purposes in which such goods are used. -Warranty of Fitness for a Particular Purpose UCC 2-315 -Sellers who know any particular purpose for which the goods are required and know that the buyer is relying on the sellers skill or judgment to select or furnish suitable goods make such a warranty.

5.1 LIMITATIONS ON UCC WARRANTIES

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-The UCC makes a distinction between clauses that disclaim warranties and clauses that grant warranties but limit remedies. -UCC 2-316: exclusion or modification of warranties. -UCC 2-316(1) express warranties. -UCC 2-316(2) and (3) implied warranties. -UCC 2-719: exclusion or modification of remedies. -Limitation of consequential damages for injuries to persons is unconscionable prima facie. -UCC 2-719(1) requires that the remedy be listed as the only or exclusive remedy. -UCC 2-719(2) when limitations cause remedies to fail their essential purpose, remedy may be had as provided in the UCC. Courts have held essential purpose to mean the situation for which the remedy was devised. -UCC 2-719(3) commercial limitations for commercial injuries are always valid except when they are unconscionable. Usually, limitations of remedies consist of: exclusive remedy of repair or replacement at the sellers option; and exclusion of consequential damages. -Steps to consider regarding warranties. (1) Were any warranties given? If yes, classify it: express/implied? If implied, is it regarding merchantability OR fitness for particular purpose? (2) Was the warranty given disclaimed successfully under 2-316? (3) Did the seller limit remedies for breach under 2-719? Hunt v. Perkins Machinery Co., Inc. implied warranties, disclaimers. -Supreme Court of MA, 1967. Facts: Hunt, a fisherman, purchased a boat engine from Perkins, on recommendation from a Perkins representative. The contract signed by Hunt had terms in the back disclaiming all warranties by Perkins. The back page was not visible to Hunt and the warning on the front page of the contract did not mention additional terms in the back. The engine did not perform to the level expected by Hunt, and Perkins was unable to repair it after several tries. Hunt was

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awarded damages for the installation costs and loss of profits under implied warranties of merchantability and fitness for a particular purpose. Perkins appealed. Issue: Was the contract clause modifying the implied warranties enforceable? Holding: no. UCC 2-316 requires the clause to be conspicuous and the issue of merchantability to be written into the contract. Hunt could not read the warranty terms in the back of the contract when he signed it. Discussion: UCC 1-201(10) a term is conspicuous when it is written as to draw a reasonable persons attention. Hunt could not read the terms in the back of the purchase order until he received a copy of the executed document in the mail. The terms and conditions warning did not mention a back page. -UCC 2-316(3) allows disclaimers through common language that calls the buyers attention to the risk. Such clauses must be conspicuous. Ex.: as is clauses. -UCC 2-316(3)(c) allows exclusion or modification of warranties through course of dealing, course of performance, or usage of trade. -Course of dealing how the parties have dealt in the past. -Course of performance how they have performed the particular contract. -Usage of trade regularly observed methods of dealing that justify an expectation that they will be observed in this transaction. Consequential damages (installation costs and loss of profits) were allowed under 2-715. Murray v. Holiday Rambler, Inc. remedy limitations, failure of essential purpose, consequential damages. Opposite of Chatlos. Supreme Court of Wisconsin, 1978. LEADING CASE IN WISCONSIN (AS OF 2012). Facts: Murray purchased an RV from defendant, and the vehicle had to be taken in for repairs repeatedly. Murray sued for cost of the vehicle and damages for loss of use. Rule 1: When a buyer gives a seller reasonable opportunity to repair goods but the goods fail to perform, the limited remedy of replacement or repair fails of its essential purpose under 2-719(2). Rule 2: When the exclusive contractual remedy fails, buyer may recover damages as though the clause never existed, including consequential damages under 2-715.

Chatlos Systems, Inc. v. National Cash Register Corp. remedy limitations, failure of essential purpose, consequential damages. Opposite of Holiday Rambler. Third Circuit, 1980.

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Facts: NCR sold a computer system to Chatlos. 18 months after the deadline for implementation, the system was still not functional. Chatlos sued for loss of profits and consequential damages. Holding: limited remedy of repair and consequential damages exclusion are two separate terms in a contract. Chatlos could recover a buyers remedy under 2-714(2), not including consequential damages. Rule: The failure of a limited remedy clause does not invalidate exclusion of consequential damages. Fiorito Bros, Inc. v. Fruehauf Corp. remedy limitations, failure of essential purpose, consequential damages. Middle ground to Holiday Rambler and Chatlos. Ninth Circuit, 1984. Facts: Fruehauf sold Fiorito dump truck bodies later found to be defective. Bodies were covered by a five-year warranty, but seller disclaimed incidental or consequential damages. Fruehauf denied responsibility for the defects. Holding: Limited remedy failed its essential purpose to insure that plaintiff would acquire defective-free goods. Consequential damages exclusion was invalidated the divisibility of risk allocation must be judged on each cases merits. Discussion: The purpose of the exclusive remedy provision was to insure that plaintiff would not suffer from downtime and other consequential harms that follow from defective goods. The remedy provision was designed to avoid consequential harms, the consequential damages exclusion is inseparable from the exclusive remedy provision.

5.2 PAROL EVIDENCE

-Parol Evidence: evidence outside the final writing, including oral statements and preliminary writing -Integration: incorporates terms of pre-contract agreement into final written contract, full and partial -Parol evidence cannot contradict integration, but may explain it -A merger clause excludes parol evidence; final writing supersedes and cancels all other agreements (oral or preliminary writing) -If theres no merger clause, courts may then examine parol evidence as a whole -Parol evidence rule does not bar admission of evidence or oral agreements made after the writing -Fraud is an exception to the parol evidence rule

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-Wisconsin has upheld that economic loss doctrine which says that if fraud is proven, tort damages are not allowed where losses are purely economic. Boud v. SDNCO, Inc. parol evidence; exclusion of prior terms; express warranties Facts: bought a yacht based off brochure he saw; yacht had mechanical and electrical problems. attempted to rescind and recover restitution. argued that ad created an express warranty and that breached it; also that s salesmen engaged in deceptive sales practices and negligent misrepresentation. Holding: Express warranty was not created by the brochure. Even if it was, the contract effectively disclaimed any warranty except for the limited warranty in the contract. Discussion: The brochure does not make any objective factual representations, but only opinions, sales puffery. -Parol evidence rule precludes a search for additional or contradictory terms outside of the contract absent some proof of fraud or mistake; terms are limited to those in the written contract. Rule: Express warranties are only created by affirmations of fact. Key inquiry is whether the fact is capable of being proven true, and it must be high specific or definite. C&J Fertilizer, Inc. v. Allied Mutual Ins. Co. parol evidence rule; reasonable expectations. -Supreme Court of Iowa, 1975. Facts: had an insurance policy from against burglary. After a burglary occurred, refused to pay because there were no signs of forced entry, which were required by the policy. sued, trial court found for ; reversed. Issue: Did the burglary definition in the policy violate s reasonable expectations? Holding: Yes. The policy was an adhesion contract. Policy definition of burglary violated s reasonable expectations; it did not match laymen or legal definitions. There was no notice regarding the different definition. A reasonable person might anticipate provisions against inside jobs, but not provisions related to the burglars skill like the one in the policy. Discussion: Doctrine of Reasonable Expectations: Customers are not bound by terms which are beyond the range of reasonable expectation. A term which changes or eliminates the main purpose of the transaction is not binding. Reasonable Expectations may be applied in favor of either party. A blanket assent by the customer does not give assent to specific terms. Doctrine is generally not extended beyond insurance cases, except in Arizona. -Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co. Sup. Ct. AZ 1984 Leading case extending reasonable expectations in Arizona.

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Application: Insurance agents representations contrary to the contract, which was not read by the business insured because of agents assurances. -Broemmer v. Abortion Services of Phoenix, Ltd. Sup. Ct. AZ 1992 Application: consumer in a high-stress situation did not have arbitration clause explained to her. Court held had no reasonable expectation that a malpractice claim would go through arbitration. Dissenting: J. LeGrand: reasonable expectations should not apply in a case where did not read the policy, but rather in cases where the policy was misunderstood. -Magnussen Moss Act -A supplier of a consumer product need not give any written warranty; HOWEVER, if it does offer a written warranty, then it must clearly and conspicuously define the warranty as either full or limited. -Full Warranty: seller must remedy any defect within a reasonable time with no charge. -If the seller fails, the customer may elect a refund or replacement (Lemon Law) -Limited Warranty: any warranties that are not full warranties. -Sellers cannot disclaim or modify implied warranties. -Sellers cannot limit implied warranties to less than the duration of a written warranty of reasonable duration. -Requires exclusions or limitations of consequential damages to be conspicuous. -Claims under the MMA must be in federal court if over $50,000. -Attorneys fees are allowed.

6 UNCONSCIONABILITY
-UCC 2-302 if the court, as a matter of law, finds the contract or any clause of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the offending clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. Williams v. Walker-Thomas Furniture Co. Facts: sold multiple items under a rent-to-own contract with add-on clause stating that would not own any of the items until the total balance owed was paid. missed payments, which led to repossession of the items. Holding: Add-on clause was unconscionable; remanded back to trial.

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Discussion: Test for Determination of Unconscionability: -For a clause to be unconscionable, it must be both substantively and procedurally unconscionable. -Substantive Unconscionability: contract terms which are unreasonably favorable to one party. -Procedural Unconscionability: relates to how the contract was negotiated. -Absence of meaningful choice by one party; -Relative bargaining power of the parties; -Whether the weaker party understood the terms; -Whether the terms were conspicuous. -Walker-Thomas established the unconscionability doctrine; this made defendants much more disposed to settling claims that actually made it to court. Jones v. Star Credit Facts:, a welfare recipient, signed a rent-to-own contract for a freezer for a total purchase price of $1,200; the freezers retail value was $300. Holding: The contract was unconscionable. The court amended the contract so that would take possession of the freezer and her balance would be zero, since she had already paid $600. Discussion: The court found procedural unconscionability because of the great disparity in bargaining power between the parties; substantive unconscionability was found because the contract charged four times more than the fair market value of the freezer. Guthmann v. La Vida Llena Facts: personal representative of sought refund of entrance fee paid by to s life care retirement center, arguing it was unconscionable. Holding: The fee was not unconscionable; evidence of s financial independence was relevant. Discussion: The court noted that unconscionability suits are usually only won by poor or otherwise disadvantaged consumers. A consumers financial standing is relevant in determining whether a clause is unconscionable because of cost. -UCC 2-302s original design analyzed contract provisions as if they were not read or understood; a s particular situation was not considered.

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6.1 UNCONSCIONABILITY IN ARBITRATION AGREEMENTS

Rent-A-Center West, Inc. v. Jackson -SCOTUS upheld the validity of contract clauses mandating the enforceability of arbitration clauses within the same contract to be decided by the arbitrator. -Courts may only decide if giving the arbitrator power to decide enforceability of arbitration agreement is unconscionable; not whether underlying arbitration procedures are unconscionable. Conflict of interest, since an arbitrator is unlikely to find his companys arbitration policys unfair. AT&T Mobility v. Concepcion -SCOTUS upheld class action waivers in arbitration agreements as not unconscionable. -Rejected Discover Bank v. Superior Court Sup. Ct. CA held that class action waivers were unconscionable in a setting where: 1) individual disputes would predictably involve small damages; and 2) there were allegations of a scheme to cheat a large number of customers. In this setting, class action waivers effectively insulate parties from responsibility for fraud and willful injury. -Dodd Frank Wall Street Reform and Consumer Protection Act: aims at restricting use of predispute arbitration agreements. Johnson v. The Cash Store Facts: borrowed money from at over 600% APR ($75 finance charge on a $500 loan due in ~9 days). was not able to pay the principal, paying the finance charge fourteen times (roll-over). sued for unconscionability and CPA violations related to the interest rate, and harassment. failed to respond, and default judgment was entered for . requested damages for total amount paid to , emotional distress, and attorneys fees. filed motion to vacate judgment; claimed failure to respond was due to mistake/excusable neglect. Holding: Regarding the underlying action: failed to establish a prima facie defense; rollovers are illegal in Washington. The high risk of default does not justify high finance fees since the rollover practice is part of the business model and the risk of capital loss decreases over time. Regarding the motion to vacate judgment: denied, s failure to appear/respond was not due to excusable neglect or mistake. Regarding damages: damages were appropriate: failed to present a defense against damages for emotional distress. Discussion: payday loaners allow consumers to borrow money on a check postdated no more than 31 days. When the consumer fails to pay the principal (which must be paid whole on the 52

exact date), the loaner requires the consumer to present $575, which is returned to the consumer immediately, except for the $75 finance charge, rolling over the principal until the next cycle (practice known as Touch and Go) -Washington statutes allowed a prima facie defense to the charges because the payday practice is legal; however, failed to produce evidence against the harassment violations, and the rollover practice. -The Truth in Lending Act contains an elaborate federal disclosure statute for consumer lending.

6.2 DAMAGES FOR UNCONSCIONABILITY

-Restatement 2d 208 and UCC 2-302 are silent on damages. Walker v. Sheldon *punitive+ damages have been allowed in cases where the wrong complained of is morally culpable or is actuated by evil and reprehensible motives, not only to punish the defendant, but to deter him, as well as others from similar conduct in the future. -Moral culpability standard. -Deterrence -Trend to limit punitive damages: punitive damages seen as a violation of the Due Process Clause of the Sixth Amendment (freedom from excessive fines). Browning-Ferris Industries of Vermont, Inc. v. Kelco Disposal punitive damages do not violate Sixth Amendment in civil cases. Honda Motor Co. v. Oberg courts cannot hold punitive damages unconstitutional unless theres no evidence to support the verdict. BMW v. Gore struck down punitive damages award as unconstitutional. Cooper Industries v. Leatherman Tool Group, Inc. de novo standard of review for appellate courts to review damage awards (more authority)

6.3 PROFESSOR LEFF AND UNCONSCIONABILITY

-Prof. Leff is a critic of the unconscionability doctrine. -Function of Unconscionability Doctrine: to control the quality of a transaction when free market control is considered ineffective. -Substitutes government regulation for regulation by the parties. -Supported by the Classical Contract Theory: mass-market production of goods and mass-market contracts should be regulated by the free market maximization of the welfare of the parties. 53

-Issues: 1. Market powers may change the welfare gain of the parties. Ex: monopolies. 2. Information necessary for consumers to make informed choices may not be readily available. 3. Most of the provisions in boilerplate contracts deal with contingencies; single consumer may not pay special attention to unlikely scenario provision; free market will not protect consumers from a huge variety of injuries. -Leff argues that adhesion contracts should be viewed as products themselves. -Government regulation of consumer adhesion contracts would lead to faster regulation of contracts than repeat lawsuits against inventive wrongdoers. -UCC 2-302 should exist only to deal with particularly egregious consumer contract provisions. -Prof. Leffs argument against the litigation model (current model): -Sellers can continuously modify their contracts slightly, and each time a case will have to be litigated. -Not every consumer will be able to go through the time and cost involved in filing a complaint. even if courts reach a conclusion that a clause is unconscionable, that does not necessarily mean a seller will remove the offending clause from the contract. -Problem when common law is used to regulate small transaction on a case-bycase basis economically trivial suits will be settled even if can find legal help, not setting a precedent for future litigants.

7 ECONOMIC LOSS DOCTRINE IN CONSUMER TRANSACTIONS

Below v. Norton Economic Loss Doctrine; denial of tort damages in real estate Facts: purchased a house from for her personal use. After taking possession, found out the sewer line to the main line was broken; claims no knowledge of this defect. sued under various tort and contract claims. The tort claims were dismissed under the economic loss doctrine (ELD). Issue: Does the Economic Loss Doctrine bar common-law claims for intentional misrepresentation in a noncommercial real estate transaction? Holding: Yes. The ELD seeks to preserve the distinction between tort and contract law. The ELD encourages a purchaser to assure, allocate, or insure against the risk of economic loss, protecting parties freedom to allocate economic risk by contract. Injured parties may still recover under contract law.

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Discussion: -Economic Loss Doctrine: a commercial purchaser cannot recover from a manufacturer under tort theory for purely economic losses. In Wisconsin, it has been extended to bar tort recovery in consumer goods, intentional misrepresentation, and real estate transactions. Services and personal injury claims are excepted. See Kaloti v. Kellog Sales, 283 Wis.2d 585, 699 N.W.2d 205. -ELD Inducement Exception: the misrepresentation must have induced to enter into the contract AND must not have been specifically related to the subject matter of the contract. -UCC 1-103(b) states that the common law of fraud is to supplement remedies available under the Code. Extending the ELD to consumer goods transactions makes fraud claims under common law no longer available. -Wisconsin passed legislation in 2009 allowing residential real estate buyers to sue under fraud theories. -Attorneys fees: legislature passed law limiting costs at three times the compensatory damages, unless it can be shown that special circumstances exist. Dissent: J. Bradley application of the ELD to consumer transactions is improper application of the law and poor public policy.

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Contracts ......................................................................................................................................... 1 1 Remedies ...................................................................................................................................... 1 1.1 Expectation Interest .............................................................................................................. 1 1.1.1 Sellers Remedies (Calculation) ...................................................................................... 1 1.1.1A Duty to Mitigate Damages ....................................................................................... 1 1.1.1B Lost Volume Seller .................................................................................................... 2 1.1.2 Buyers Remedies ........................................................................................................... 3 1.1.2A 2-716 specific performance................................................................................... 4 Precedential Cases to Copylease ..................................................................................... 4 1.1.2B Liquidated Damages ................................................................................................. 5 Exception ......................................................................................................................... 5 1.1.2C New Businesses; Experts: Proof of Damages with Reasonable Certainty ................ 7 1.2 Reliance Interest .................................................................................................................... 8 1.3 Restitution Interest / Right to Exit ....................................................................................... 10 1.3.1 Acceptance of Goods .................................................................................................... 10 1.3.2 Restitution for Breaching Parties ................................................................................. 12 1.3 Damages for Subjective Losses............................................................................................ 12 Contract and Relationships ........................................................................................................... 14 2 Contracts in the family Setting ................................................................................................... 14 2.1 Pre-Marital Agreements ...................................................................................................... 15 2.2 Marriage and Cohabitation Contracts ................................................................................. 15 2.3 Consideration ...................................................................................................................... 16 2.3.1 Promissory Estoppel ..................................................................................................... 17 2.4 Statute of Frauds ................................................................................................................. 18 2.4.1 Part Performance Exception......................................................................................... 18 2.5 Contracts to Provide for the Old: Contract and Restitution ................................................ 21 2.5.1 Payment for care with no express contract ..................................................... 21

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Recovery by Family Members ................................................................................... 21 Restitution for the Friendly Neighbor .................................................................... 22 Promises Recognizing Past Services (Past Consideration)......................................... 22 Moral Consideration .................................................................................................. 22 2.6 Promissory Estoppel and Franchise Agreements ................................................................ 23 3 Employment contracts ............................................................................................................... 24 3.1 Employment At-Will ............................................................................................................ 24 3.1.1 Exceptions to Employment At-Will............................................................................... 25 Public Policy Exception .............................................................................................. 25 Rule for Public Policy Exception in Wisconsin ........................................................... 26 Implied In Fact Exception .......................................................................................... 27 Promissory Estoppel in Employment At-Will............................................................. 28 Implied in Law: Covenant of Good Faith and Fair Dealing ..................................... 28 4 Social Control of Contract........................................................................................................... 29 4.1 Illegal Contracts ................................................................................................................... 29 4.2 Contracts Against Public Policy ........................................................................................... 31 4.2.1 Restrictive Covenants ................................................................................................... 31 Liquidated Damages as Alternative for Non-Compete Agreements ......................... 32 4.3 Capacity to Contract ............................................................................................................ 33 4.3.1 Mental Incapacity ......................................................................................................... 33 4.3.2 Intoxication ................................................................................................................... 33 4.3.3 Infancy .......................................................................................................................... 34 4.3.4 Duress ........................................................................................................................... 35 Economic Duress ....................................................................................................... 36 4.3.5 Undue Influence ........................................................................................................... 37 4.3.6 Misrepresentation (Fraud) ........................................................................................... 38 4.3.7 Good Faith .................................................................................................................... 41

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4.4 Standard Form Contracts .................................................................................................... 43 5 Warranties, Disclaimers, and Remedy Limitations..................................................................... 44 UCC Warranties ......................................................................................................................... 45 5.1 Limitations on UCC Warranties ........................................................................................... 45 5.2 Parol Evidence ..................................................................................................................... 48 6 Unconscionability ................................................................................................................... 50 6.1 Unconscionability in Arbitration Agreements ..................................................................... 52 6.2 Damages for Unconscionability ........................................................................................... 53 6.3 Professor Leff and Unconscionability .................................................................................. 53 7 Economic Loss Doctrine in Consumer Transactions ................................................................... 54

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