CONTRACTS ISSUE CHECKLIST

UNCONSCIONABILITY—relieves a party’s duty to perform

• Modern Law requires both procedural and substantive unconscionability.
o Procedural is an interference with the process of assent
o Substantive is a gross disparity in values exchanged.
• UCC § 302 authorizes a court to find as a matter of law that a contract or a clause
thereof was unconscionable at the time it was made.
o The court may refuse to enforce the contract OR
o Excise the objectionable clause OR
o Limit the application of the clause to avoid an unconscionable result.
• Burden of Proof rests on the party who claims the unconscionability, then shifts
to the opposing party to show
o Commercial setting and reasonableness of the provision
o Reasons for the provision and
o Good faith
• Consumer Transactions including warrant of attorney provisions are only
enforceable if expressly assented. The duty of reading is relaxed when this
provision is included in fine print or in the boilerplate. Assent to the boilerplate is
assent to anything that is not indecent.
• Commercial Transactions including hold harmless clauses are
unconscionable. Subjective determinations of a party’s assent to the clause is
permitted if in light of the commercial background and needs of the trade, the
clauses are so one-sided under the circumstances existing at the time the contract
was made.
• Non-Conditional Termination Clauses are permitted under the UCC § 3-309 if
reasonable notice is given in good faith and enforcing the contract would not be
unconscionable.

ILLEGALITY—CONTRACTS ARE UNENFORCEABLE IF AGAINST PUBLIC POLICY

• Restatement § 178 restricts the enforcement of a promise or term if the
legislature provides that it is unenforceable or its enforcement is against public
policy under the circumstances
o Private Interests considered in favor of enforcement include the parties
justified expectations, resulting forfeiture, or any special public interest in its
enforcement.
 The parties justified expectations concern the benefits involved.
 Although courts disfavor forfeiture, the court will allow complete
forfeiture in light of serious misconduct.

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 o Public Interests considered against the enforcement include the strength
of the policy, non-enforcement furthers the policy, deliberateness and
seriousness of the misconduct, and the direct connection between the
misconduct and the term.
 The policy will be great if the misconduct is criminalized by statute or
prevented by the legislature or judicial decisions.
 The misconduct is against public policy if it harms the protected
classes in light of the purpose of the statute.
 The misconduct is against public policy if the a party requires the aid of
the illegal transaction to establish his case against the party claiming a
void contract.
 The misconduct is serious if inherently evil or wrongful.
• Under Common Law, Covenants not to Compete are void unless the covenant
is reasonable in terms of protecting a party’s interest in relation to time, scope,
and geographic area. The party wishing to enforce the covenant may not go
further than necessary to protect his interests.

Performance of the contract requires defining the terms thereof.

• The contract must be Integrated in light of an express integration clause, the four
corners of the agreement, and all surrounding circumstances showing the parties’
intent. If not, parol may be admissible.
• In Interpreting an ambiguous term, common law will allow parol evidence if it is
reasonably susceptible to the writing.
• Alternatively, the UCC § 2-202 allows parol evidence for the purposes of explaining
or supplementing the writing by trade usage and industry or course of dealings,
which objectively show the meaning of the ambiguity.
• Under the Restatement § 201, one party’s interpretation of an ambiguous term
prevails if that party did not know or have reason to know of any other
interpretation, and the opposing party knew or should have known the first party’s
interpretation.
• Finally, the parol evidence must be Consistent with the writing. At common law,
Parol evidence is inconsistent if there is no reasonable harmony between the parol
and the writing.
• If the parol and the writing are reasonably harmonious, the Restatement allows
the parol evidence if it would naturally be in a separate writing.
• Alternatively, parol evidence is inadmissible under UCC if the oral agreement
would certainly be in the writing at issue. Under the Restatement, parol is
admissible if the agreement would naturally be in a separate writing.

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 • Parol Evidence is always allowed when the writing or an oral agreement includes a
condition precedent because the parties are not yet bound and the contract may
not be integrated.
• Parol evidence is allowed for anything that interferes with the contract, such
as fraud, duress, illegality, lack of consideration, assent, or avoidance issues.
• An adhesion contract is always interpreted against the drafter and must be a
clear and plain statement of the terms.

Allocation of risk includes conditions and warranties.

• A Condition is an event not certain to occur, which must occur before
performance under a contract becomes due.
• Express conditions require strict or literal compliance unless there is no
reasonable notice of the condition, focusing on the party assuming the risk and
mindful of any change in the allocation of risk.
• Constructive conditions determine which party must perform first. Courts
construe conditions to be dependant unless a contrary intention clearly applies.
Strict compliance with the condition is required before the second party’s duty
matures.
o Under the Restatement, if the exchange of promises can be rendered
simultaneously they are due simultaneously unless the parties’ intention
shows otherwise.
o If one party must perform within a time period, performance is due earlier
than the other party unless the parties’ intention shows otherwise.
• Conditions will be excused where there will be forfeiture.
o Under Cardozo’s approach, a condition may be excused after balance the
purpose of the condition, the excuse for deviation, whether deliberate
or inadvertent, amount of forfeiture, and the value of the breach.
o If the party substantially performed according to the requirements of the
condition but did not strictly comply, the result is an immaterial breach. The
opposing party can sue for the breach but cannot refuse to pay for the
substantial performance.
o Where a constructive condition does not occur, the non-breaching party does
not have a duty to pay and can sue for breach.
• The court uses several devices to avoid forfeiture.
o Where performance occurs in stages, the court can divide the contract
where one party has substantially performed part of the contract.
o For labor contracts, quantum meruit allows restitution or compensation for
the service actually performed.
o Where the benefit received exceeds the cost of a party’s breach, the
defaulting party is entitled to compensation for his substantial performance.

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 The defaulting party has the burden of proving the net benefit. Under the
Restatement, the net benefit theory does not apply if the agreement
expressly provides for liquidated damages or customs and usages show that
the party is not entitled to compensation for substantial performance.
• Express warranties provide that the goods represented fit the description.
• Where a professional merchant is the seller, there is an implied warranty of
merchantability that the goods are of average quality.
• Where a seller has reason to know a buyer is relying on the seller’s expertise for a
particular purpose for which the goods are required, there is an implied warranty
that the goods will be fit for that use.

Existing impracticability may excuse performance.

• At common law, promises ought to be performed regardless of impossibility. The
modern approach provides where the parties assume a certain state of facts
exist, and they in fact do not exist, the promise or performance may be excused.
• Where both parties assumed the source and availability of the product and it does
not exist, the promise to perform is excused.
• Where the promisor assumes the risk, the promise will be enforced.

Supervening Impracticability may excuse performance.

• Where an event makes performance impracticable and the nonoccurrence of
that event was a basic assumption on which the contract was made, through no
fault of the party seeking discharge, and that party assumed no greater
obligation, the supervening event may excuse performance.
• Where an event making performance impracticable is foreseeable, the basic
assumption test does not apply because the party assumed the risk.

Frustration of purpose may excuse performance.

• Though limited, performance may be excused if one party’s purpose, understood
by both parties, is prevented by severe impracticability that was unforeseeable by
both parties.

Good Faith is required in the performance of all contracts.

• For consumers, good faith requires honesty in fact.
• For merchants, good faith requires honesty in fact AND observance of reasonable
commercial standards and fair dealing.
o Fair dealing requires observance of the agreed common purposes between
the parties and consistency with the justified expectations of the other
parties.
• If the contract gives one party discretion, such as a general term requirement of

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 output or satisfactory performance, discretion must be reasonable given the
purpose of the parties to the contract, must not exceed the limits of
reasonableness, and the party with discretion must not be the cause of damage to
meet the good faith requirement.
• Alternatively, the Burton Test defines bad faith as trying to reclaim foregone
opportunities resulting from the contract by broad use of discretion.
• Where one party reserves discretion, the UCC allows a good faith rejection of
non-conforming goods unless the rejection is objectively unreasonable. The only
exception is where the contract is clearly personal in nature.
• Where a cancellation notice exists in the agreement, the notice acts as a risk
allocation device and overcomes any discretion.

REMEDIES

A party can suspend or cancel performance for anticipatory repudiation.

• Repudiation is an express and unequivocal statement OR an act that
renders the other party’s performance impossible. The breach occurs at the
repudiation, excuses the condition of performance, and allows the non-breaching
party to sue or wait to see whether the breaching party will perform. If the
aggrieved party waits, he must be ready willing and able to perform.
• When one party is reasonably insecure that another party will not perform
because of his statements or actions, the first party may demand assurance of
performance in writing. A failure to respond to the demand within 30 days acts as
a repudiation. Reasonable insecurity is a question of fact for the jury.

Compensatory Damages
• The normal measure for damages is the difference between the contract price
and the fair market value.
• Alternatively, the ∆ is liable for all actual damages he did or should have foreseen.
• Seller’s remedy for resale after breach is the difference between the original
contract price and costs for resale.
• Seller is also entitled to lost profits for breach before the sale of an unlimited
supply of goods at market price.
• Buyer can cover after a breach and purchase goods elsewhere. Buyer is entitled
to his out of pocket costs had the original contract been performed.
• Party is entitled to incidental damages flowing from the handling of goods.
• Party is entitled to consequential damages if naturally, normally, or directly
flowing from the breach, foreseeable to the breaching party, or under special
circumstances.
• Under the UCC § 715, a party is entitled to consequential damages if

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 reasonably foreseeable, ascertainable, unavoidable by cover or otherwise, or when
an injury to person or property occurs.
• Party is only entitled to punitive damages if serious misconduct is present, and
the damages must bear a reasonable relation to actual damages.

Equitable Remedies
• Equitable remedies are proper if remedies at law are inadequate.
• Typical output contracts and requirement contracts require specific
performance if the goods are unique, the parties are unable to ascertain future
damages, quantity, price or other relief, and the buyer is unable to cover.
• Court can enjoin an employee from working for others if there is an express,
reasonable covenant not to compete and the employee has another valid source of
income.
• Posner’s economic analysis for injunction considers Π ’s burden to show
damages are inadequate and costs for issuing injunctions.
o Factors include costs, competition in the market, problems of supervising the
injunction, forfeiture and any possible negotiations of damages.
Liquidated Damages can be enforced by foresight and hindsight.
• Party can recover liquidated damages if they are a reasonable forecast of
anticipated damages at the time the contract was entered into and damages
are difficult or impossible to ascertain at the time of contracting unless the intent is
to penalize the other party.
• Alternatively, a party can recover liquidated damages if they are a reasonable
forecast in light of actual damages at the time of breach unless the intent is
to penalize to other party.
• Parties can limit or modify remedies under the UCC § 719 with repair or replace
clauses unless the remedy fails of its essential purpose.

Intent of the parties governs arbitration agreements.

• Parties consenting to delegate power to a 3rd party is binding on the parties to the
contract.
• If the agreement expressly provides for arbitration or the language is sufficiently
broad to cover the issue in dispute, the court and the parties are bound to
arbitration.

Assignment of Rights
• Common law and the UCC allows assignments of rights if notice is given to the
obligor.
• Assignments are improper where the obligor’s duty, burden, or risk is materially
changed by the assignment unless consent to the assignment is given.

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 • Anti-assignment clauses are ineffective under the UCC and are interpreted
as preventing the delegation of duties.
• Common law requires strict interpretation of anti-assignment clauses.
• Modifications by the original parties after an assignment is allowed if necessary
and legitimately called for between original parties. UCC and Restatement require
good faith and observance of reasonable commercial standards in modifications.
• Assignee is vulnerable to all defenses that the obligor has against assignor.
• An implied warranty is created after an assignment preserving the right to
recover from the assignor if the obligor fails to pay the assignee.

Delegation of Duties
• Under the UCC, delegation of duties is permitted unless the obligor has a
substantial interest in having the original party perform because the contract
calls for specific type of performance or is personal in nature.
• If the contract calls for performance that is commercially standard, delegation is
usually not questioned.
• Delegation never relieves the original party from its duty to perform.

Third Party Beneficiaries

• The intent to benefit test necessarily requires the promisor to confer a benefit to
a 3rd person and performance must run directly to that party.
• Both promisor and promisee must understand the intent to benefit the
third party.