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CONTRACTS II
Professor M. Kniffin
St. John’s University School of Law
Spring 2002
 Remedies For Breach
 Specific Performance
 Requirements:
1. Money damages are not adequate to meet expectation damages
Examples:
 Requirements/Output contracts
 Very difficult to cover (not necessarily unavailability of cover, extreme difficulty
to cover may satisfy this requirement)
 Uniqueness of the subject matter of contract (land, artwork, etc.)
2. Court would not be required to perform extensive supervision
3. Contract terms are clear enough for the court to issue an order
 Violation of court orders is criminal offense, courts must be sure that their orders
will not put parties into position when they perform under an unclear court order
and risk criminal prosecution for not correctly following the order
4. Specific performance will not require the antagonistic parties to perform together
 This requirement is generally applicable to personal, not commercial, parties.
 In some cases courts will issue an injunction rather than ordering performance to
get around this requirement. Example: Court will not force an employee in
breach to work under the terms of contract, but will issue an order preventing the
employee to work for anyone else
 Specific performance is an equitable relief, therefore:
 Even when all four requirements above are satisfied it is up to the court discretion to
order the specific performance
 No jury
 Clean Hands Rule applies
 Court’s order to the buyer to pay contract price after the good were delivered is not
specific performance – does not need to satisfy the four requirements
 Money Damages

Jeff Goland
The general principle is that the expectations of the aggrieved party have to be
protected by giving that party the benefit of the bargain. The usual remedy for the
breach of contract is to put the aggrieved party in the position in which it would have
been had the promise been performed by giving the money damages
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 Buyer’s Remedies
 (1) Specific Performance
 (2) Cover Damages – difference between the contract price and the amount spent by the
buyer in excess of the contract price in buying substitute product
 UCC § 2-712 (1) requirement for cover damages:
 Cover must be made in good faith
 No unreasonable delay in obtaining cover
 Cover must be in like goods
 UCC § 2-712 (2) provides that the buyer may recover “the difference between the
cost of cover and the contract price together with any incidental and consequential
damages . . . , but less expenses saved in consequence of the seller breach”
 The aggrieved party is not required to cover
 Once opted for cover damages buyer can not switch to market formula
 (3) Market Formula - difference between the market price that would have been paid
had the breached party chosen to cover at the time of learning of the breach and the
contract price
 UCC § 2-713 (1) provides that the buyer may recover “the difference between the
market price at he time when buyer learned of the breach and the contract price
together with any incidental and consequential damages . . . , but less expenses saved
in consequence of the seller breach”
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Advantages of Cover over Market Formula
 Buyer does not have to prove market price; he may simply use his cover contract
to show the cover price
 Cover price may be higher than the market price at the time, as long as it was in
good faith and within reasonable time

Incidental and Consequential Damages – given in addition to Cover or Market
Formula
 UCC § 2-715(1) Incidental Damages “include expenses reasonably incurred in
inspection, receipt, transportation and care and custody of goods rightfully
rejected, any commercially reasonable charges, expenses or commissions in
connection with effecting cover and any other reasonable expense...”
 UCC § 2-715(2) Consequential Damages “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 prevented by
cover or otherwise; and (b) injury to person or property proximately resulting
from any breach of warranty”
 (4) Replevin
 UCC § 2-716 – The buyer has a right of replevin if:
 Buyer is unable to effect cover (e.g., when the goods are unique), – and –
 Goods are identified to the contract (either in contract itself or after)
 Replevin is similar to specific performance, but it is remedy at law
 Not up to a court’s discretion (satisfy requirements – get replevin)
 May get a jury
 No “Clean Hands Rule”
Jeff Goland
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 Seller’s Remedies
 UCC §2-703 – Seller’s Remedies in General
 Where a buyer wrongfully breaches, a seller may:
 Withhold delivery
 Stop delivery by bailee
 Proceed under §2-704 and complete contract, or cease and scrap
 Resell under §2-706
 Use market price formula under §2-708 or §2-709
 Cancel the contract
 (1) Recover the Contract Price (Equivalent of specific performance, but does not have
to satisfy specific performance requirements, see section on specific performance above)
 (2) Replevin (Rare, like restitution. Order to give the goods back. Not explicit in UCC)
 (3) Resale Formula (Equivalent of Cover) Seller may recover the difference between the
resale price and the contract price
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UCC § 2-706 (1) Resale must be in good faith and in commercially reasonable
manner
UCC § 2-706 (1) Seller may recover “difference between the resale price and the
contract price together with any incidental damages . . . , but less expenses saved in
consequence of the buyer’s breach”
Requirements for Resale:
 Must be made in good faith
 Must be done in a commercially reasonable manner
 Seller is not held explicitly to a reasonable time, although it may be considered
under commercially reasonable
 Seller also entitled to incidental damages, but NOT consequential damages
 Seller is not required to resell
 (4) Market Price Formula
 If there is no resale or substitute transaction, the seller may collect as damages the
difference between the unpaid contract price and the market price at the time of
delivery
 (5) Lost Profit
 Seller may collect damages for lost profits if he proves that
 The resale or market price formula will not give adequate expectation.
 An example of when a seller may be awarded lost profits is in the case of a lost
volume seller.
 In order to make a claim for lost volume:
 Seller must prove that he had the capacity to make the second sale;
 It would have been profitable to make both sales (some courts)
 It would have been likely to make the second sale even if first contract was
kept
Jeff Goland
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
Overhead
 Includes broadly the continuous expenses of a business irrespective of the outlay
on a particular contract (exec & clerical salaries, taxes, administrative expenses,
etc.)
 In a claim for lost profits, overhead should be treated as part of the gross profits
and recoverable as damages and should not be considered part of the seller’s cost
(Not a cost avoided)
 UCC §2-708 – Provides that lost profits can include reasonable overhead
 Differences Between Buyer’s and Seller’s Remedies:
 Seller cannot collect consequential damages
 Only a seller may ask for lost profits
 A buyer who covers is required to utilize the cover price formula, but a seller who
resells may use either the resale or the market price formula.
 Determining the Expectation Damages:
 To determine the damages for breach courts will look at following:
 (1) Was there a valid substitute transaction (cover or resale)? If yes, cover or
resale price is used to determine damages
 (2) If no, is there a market out there to determine the market price? If yes market
formula is used to determine damages.
 (3) If no, loss profit is given as damages.
 Calculating Lost Profits:
Example: $1 Million contract price
$900K expected to spend
$100K profit expected
$500K expended so far
$400K cost avoided ($900K expected to spend – $500K expended so far)

When there were no performance before the breach:
 Damages = Expected Profit
Damages = 100K

When performance is complete at the time of the breach:
 Damages = Contract Price
Damages = $ 1 Million

When there is partial performance before the breach:
 Formula A:
Damages = Contract Price – Cost Avoided
Damages = $1 Million – $400K = $600K
 Formula B:
Damages = Cost of Performance + Expected Profit
Damages = $500K + $100K = $600K

Both formulas work when the contract would be loosing (e.g., loss = $100K):
 Formula A: cost avoided would be equal $600K ($1.1 Million expected to spend
($900K expected to spend originally + $100K expected original profit + $100K
new expected loss) - $500K expended so far)
Damages = $1 Million - $600K = $400K
 Formula B:
Damages = $500K +(- $100K) = $400K
Jeff Goland
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 Restitution
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Requirements:
 Benefit was received by the defendant
 Benefit was at the plaintiff’s expense
 Unjust to allow the defendant to retain benefit without compensating the plaintiff
 Benefit was not intended as a gift, but with expectation of compensation
Restitution is always measured according to the value conferred upon the breaching
party, not the cost to the aggrieved party
Plaintiff is allowed to recover (in restitution) the value of service he gave to
defendant, who breached the contract, irrespective of whether the plaintiff would
have lost money had the contract been fully performed (unable to recover in a suit on
the contract).
Courts are divided about the limitations that should be placed on restitution damages:
 Should expected loss be included in the calculation of restitution?
 Should the contract price limit the restitution recovery?
 Pro Rata Share (Minority view)
 Measures expectation in proportion to the aggrieved party’s completed performance.
 % of the contract price based on either:
 Actual work completed – or How much of the expected expense was spent. (This will include start up costs,
cost of purchasing materials, etc.)
 Limitations on Damages
 (1) Avoidability
 An aggrieved party is not allowed to recover loss that it could reasonably have
avoided
 Duty Not to Pile Up Damages – duty not to increase damages; injured party cannot
recover for loss that could have been avoided by simply stopping performance
– compare to –
 Duty To Mitigate Damages – duty to decrease damages; injured party cannot
recover for loss that could have been avoided by taking affirmative steps to arrange
the substitute transaction
 UCC provides for mitigation of damages by using the market formula to
calculate the damages when buyer fails to mitigate (does not cover)
 However, a seller may proceed to manufacture the goods upon the buyer’
repudiation (and take additional expenses) “in the exercise of reasonable
commercial judgment” UCC §2-704(2)
 The injured party incurs no liability to the party in breach for failure to mitigate. The
injured party is simply precluded from recovering for loss that it could reasonably
have avoided. Recovery for the other loss is same regardless of whether injured party
takes steps to mitigate or not
 In employment situations employee who suffers the breach of the employment
contract must make reasonable effort to find a substitute employment. However, the
employee does not have to take a job of a different kind or inferior kind (not
substantially similar) to mitigate damages
Jeff Goland
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
Material v. Non-Material Breach
 The party that suffers a material breach is supposed to stop the performance and
get damages
 The party that suffers a non-material breach should continue performance and
sue for damages, otherwise if it stops performance it may be in breach itself

Avoidability and Cost to Remedy Defect
 If the breach consists of merely incomplete performance the damages are
generally based on the cost of completion
 If the breach consists of defective performance, rather than incomplete, the cost
of completion (remedy of defect and completion according to contract terms)
may exceed the loss in value to the injured party – award of damages may be a
windfall. In such situations the damages may be based on difference in value
 Difference in value is given as damages when:
 Economic Waste - The cost of completion is grossly and unfairly out of
proportion to the good to be attained
 Contract provision breached was merely incidental to the main purpose
in view
 Exceptions:
 When the owner explicitly states his needs, even if they are
incidental to the contract’s main purpose, and builder breaches that
specific provision cost of completion will be awarded. (Example:
Owner contracts to build a house and asks for specific ceiling height
to accommodate his custom build bookshelves)
 Breach creates an unsafe or structural flaw in a finished structure
 (2) Foreseeability
 Foreseeability is used to put limitation on “outrageous and excessive” damage
awards; generally speaking the damages not foreseeable at the time of contracts are
not awarded when the contract is breached
 Hadley v. Baxendale: Damages are foreseeable when they are:
 Direct or natural consequences of the breach – or –
 Contemplated by both parties at the time of contract formation
 Incidental damages are damages arising naturally from the breach - generally
foreseeable
 Consequential damages are “indirect”, “chain reaction damages” - only awarded
when they are foreseeable
 Under UCC only the buyer can get consequential damages
 Damages should be reasonably probable (not certain) to be foreseeable
 Damages themselves have to be foreseeable, not the fact the breach will occur
 Restatement 2d §351(3): Damages (even if foreseeable) may be limited by court if
their award will provide disproportionate (to consideration) compensation.
Currently this is not a law and not generally followed. Prof. Kniffin thinks this rule
should be a part of UCC
 Tacit Agreement Test – the breaching party either agreed to be liable or would
agree had it known all circumstances at the time of contract formation
 Tacit Agreement Test is in addition to, not instead of, foreseeability test for
consequential damages
 This is a minority rule, but followed in NY
Jeff Goland
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
Emotional Distress
 General Rule: Damages for emotional distress are not recoverable in a contract
action, even if they were foreseeable within the rule of Hadley v. Baxendale
 Exception: The emotional distress damages may be awarded for the breach of
contract when nature of the contract (not the manner of the breach) is of such
kind that serious emotional disturbance is a particularly foreseeable result of the
breach – usually in contracts personal in nature (e.g., doctor/patient contract)

Sentimental Value – no recovery
 (3) Certainty
 In order to recover damages the plaintiff has a burden of proof to show the damages
with reasonable certainty
Restatement 2d §352: No recovery “for the loss beyond an amount that the evidence
permits to be established with reasonable certainty”
 Established Businesses may recover future profits on the basis of its past history
 New Businesses
 General Rule (followed in NY) – future profit are too speculative and not
awarded
 Exception – some courts (federal courts for example) may allow the recovery of
future profits if proof is available
 The following may be used to proof future profits:
 Subsequent profits
 Expert testimony
 The same plaintiff run similar business in the same area before
 Liquidated Damages and Penalties
 Liquidated Damages - “fixed” damages set by the contract
 Courts generally do not like when somebody else (contracting parties) does the
court’s job (sets damages for breach)
 The liquidated damages will be allowed when:
 The damages for the breach are very difficult to predict at the time of contract
formation – parties try to protect themselves
 Reasonable method is used to determine the damages
 Amount of damages must be reasonable in relations to possible (contemplated at
time of contract) or actual (time of breach) damages – Courts are split here:
minority of jurisdictions will only consider anticipated, not actual damages
 If the liquidated damages are too much – penalty – not enforceable
 If liquidated damages are too little – unconscionable – not enforceable
Jeff Goland
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 Finding the Law of the Contract
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Parol Evidence Rule and Modification – adding or taking out the term(s) to or from
contract
Interpretation – interpretation of existing term(s) already in contract
 Determining the Subject Matter to Be Interpreted

Parol Evidence Rule - Substantive rule of law used to determine whether terms can
be added to the principle written contract
 Requirements of Parol Evidence Rule
1. There is a main written agreement
2. The case is within the scope of Parol Evidence Rule
 Common Law Scope: parties argue about adding written or oral,
prior or contemporaneous term to the main written contract
 UCC §2-202 Scope: parties argue about adding written or oral prior
or oral contemporaneous term
3. The main contract is a final agreement
 Some courts require the contract to be final, meaning the parties are
no longer negotiating
 Some courts feel a written contract is impliedly final so they don’t
ask this question
4. Proffered term (alleged term) does not conflict with the terms of main
contract
 If there is a conflict between the proffered and contract terms the
alleged term cannot come in into the contract
 Some courts will also look if the proffered term conflicts with any
implied terms of the main contract
5. The parties did not intend their contract to be complete and exclusive
(completely integrated)
Courts will consider:
 If there is a merger clause in the contract – the contract language that
says that everything is in the contract
 Some courts will use the merger clause as conclusive evidence
 Some courts will use the merger clause as persuasive evidence
only
 Whether contract is very detailed
 If the contract is very detailed it is unlikely that the parties
intended to have any other terms not stipulated in the contract
 Whether the inclusion of an alleged term would be natural and
normal (common law) or certain (UCC in comments)
 Some courts use Subject Matter Test to determine if the
proffered term would be natural and normal: if the same subject
matter was covered in contract and the alleged term is not
included it is likely that the parties did not intend to include it

Jeff Goland
If all five requirements are satisfied the proffered terms “comes in” into the
contract and becomes part of contract
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Exceptions to Parol Evidence Rule
 The Parol Evidence Rule will not apply if there has been:
 Fraud
 Accident
 Mistake
 Trade Usage, Course of Dealings and Course of Performance can all be
exceptions to the Parol Evidence Rule
 If the “Trade Usage” term can be proved, one does not have to go
through the 5 Parol Evidence steps to get it into the contract.
 If the “Trade Usage” term conflicts with express language of the
contract, it cannot be allowed in
 A Condition Precedent to the effectiveness of the entire contract is an
exception to the Parol Evidence Rule – the rule is not used in this case
 Such condition still may come in into contract if it does not conflicts
with any express term
Part performance is evidence that proffered term was meant to be included in the
contract
Modifications – parties to the contract may modify their contract by later agreements
 Common Law
 Parties can always modify contract as long as there is a consideration
 “No Oral Modification” is not effective – the whole contract (including this
clause) can be modified
 In NY under Gen. Ob. Law, “no oral modification” provision in contract may
be effective
 UCC §2-209
1. Modification does not need a separate consideration
2. “No Oral Modification” is effective (merchants must separately sign this
clause)
3. Statute of Frauds must be satisfied
4. Modification can operate as waiver (if it does not satisfy 2 and 3 above)
5. Waver may be retracted, unless retraction would be unjust (material reliance
on the waiver prevents retraction)
 Interpreting Contract Language
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Jeff Goland
Interpreting Contract Language is a process by which court determine the meaning
that will be given to the language used by the parties in determining the legal effect
of the contract
Disputes over the interpretation of contracts fall into two categories:
 Contract term is vague - unclear, broad, non specific enough
 Ambiguity – a term has more than one reasonable meaning
Courts use objective approach to interpreting contracts
 If parties attach different meaning to the terms of the contract and neither party
knows of the other party’s different meaning – no mutual assent – no contract
 Both parties attach different meaning to the terms and both parties know that they
have a different understanding – no mutual assent – no contract
 If one party knows or should have known of the different meaning attached by
the other party – contract exists based on the meaning attached to the terms by
the other party
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Jeff Goland
If it is unimportant term or minor part of the contract and the parties attach
different meaning to the terms and neither party is ware of other party’s
conflicting interpretation, then the term is dropped, but the rest of the contract
remains intact
Courts look at the intention of the parties and meaning that was attached to the
words at the time of contract formation
Extrinsic Evidence
 Extrinsic evidence – evidence outside the contract
 Extrinsic oral evidence sometimes is called parol evidence (do not confuse with
parol evidence rule)
Three approaches to allowing extrinsic evidence to interpret contracts:
1. Plain Meaning Rule – majority rule (incl. NY)
 Extrinsic evidence allowed only to interpret the ambiguous terms
 “For Corners Rule” - Some courts will not look outside the contact language
to determine whether the term is ambiguous or clear; these courts will allow
extrinsic evidence only if the term is ambiguous as in the written instrument.
It usually only means that the courts will not look at the parties prior
negotiations. Court will look into the context of the entire agreement to
determine ambiguity
 Courts first look at the meaning of the term and then (if it is ambiguous)
at the evidence that helps to interpret the term
 UCC does not use plain meaning rule. So even in NY the plain meaning rule
does not apply to the sale of goods.
2. “Intention” Rule (Pacific Gas Rule)
 Extrinsic Evidence is allowed if it explains the intentions of the parties, but
only if the parties’ intentions are expressed in the contract language
 Extrinsic evidence must explain the contract language as to the meaning that
is reasonably susceptible (interpretation must be reasonably susceptible to
the intentions of the parties as expressed in the contract)
 Courts first look at the extrinsic evidence and then, if extrinsic evidence
is reasonably susceptible, at the meaning of contract term
3. “Alaska” Rule – minority view followed by few Northwestern States
 All extrinsic evidence is allowed in
 Courts look at unrestricted extrinsic evidence and then at the meaning of
the terms
Rules in Aid of Interpretation
When the contract language and extrinsic evidence fail to determine the meaning of
the contract term courts may use the following to interpret contracts:
 The Statutory Analogy – the transaction history may be looked at
 Purpose Interpretation – Recitals (the part of the contract that does not contain
promises and conditions, usually prefixed by the word “whereas”) – if the recitals
are clear and the operative part is ambiguous, the recitals govern the construction
 Public Interests – when the terms of the contract are unclear courts may select the
interpretation that is more in line with the public policy
 Maxims – basically rules of thumb, e.g.:
 Contra Proferentem - Contract is interpreted against the author of the
contract
 If there are printed and handwritten terms, the handwritten term will prevail
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
Course of Dealings, Course of Performance and Trade Usage may be used in:
 Adding the term to the contract
 Interpreting the term already in the contract and
 Filling the gaps
 The evidence of course of dealings, performance and trade use
overcomes Plain Meaning Rule and Parol Evidence Rule – more on this
in Filling Gaps section below
 Filling Gaps
If the contract language when interpreted does not cover the case at hand courts may
supply terms by using a process called “implication” to secure the expectations of the
parties; such terms are implied in law
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Jeff Goland
Good Faith (lesser degree) – will be implied in all contracts
 Under UCC §2-301(1)(b) good faith “in the case of merchant means honesty in
fact and the observance of reasonable commercial standards of fair dialing in the
trade”
 For non merchants under UCC and for contracts outside UCC good faith means
only honesty in fact
 Good Faith is subjective standard, however court may use following objective
criteria to determine if the parties acted in good faith:
 Course of performance
 Course of dealings
 Trade usage
 Good faith is not a fiduciary duty – an expert can take advantage of superior
knowledge, but it is not acceptable to take deliberate advantage of an oversight
by the other party of an important fact
Reasonable Effort may be implied in exclusive agency contracts (Wood v. Lucy)
Best Efforts (highest degree of effort) – sometimes the contracts will include best
effort clause; if it is not there courts generally will not imply it (lesser requirement of
good faith will be implied)
 UCC § 2-306(2) will imply best effort clause in the contract for exclusive
dealings
Other Implied Terms
 Every contract implies a duty that neither party shall do anything to destroy or
injure the right of another party to receive the fruits of the contract
 Contracts for sale of goods and services imply that the payment will be made in
US currency
 When one party has a discretionary power over the term of contract it has an
obligation to use best effort in the initial production and promotion and after that
required only to use good faith – Zilg v. Prentice Hall (book about DuPonts)
 Contract under UCC will have all sort of implied terms in addition to good faith
requirement, e.g.,
 Place of delivery (usually seller’s place of business), UCC §2-308(a)
 Time of delivery (reasonable time) , UCC §2-309(1)
 Time and place of payment (upon delivery), UCC §2-310(a).
 Implied warranty of merchantability, UCC §2-314(1)
 Implied warranty of fitness for particular use, UCC §2-315
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Jeff Goland
Implied Termination Clauses – there is an implied duty to give reasonable
notice of termination
 Some courts say that if there is no mention of duration the contract goes on
indefinitely (Listerine case)
 Majority of courts, however, will allow the contract that is silent on duration
to be terminated provided there is reasonable notice
 Some court allow for a reasonable time to recover the initial investment
 Other may allow time to make a reasonable profit
Determination of intent and expectations of parties
 1. Express language
 2. Course of performance – history of performance under the current contract
 3. Course of dealing – a sequence of previous conduct between the parties,
meaning performance of the same parties in other contracts between them
 4. Trade usage – words used in the trade, customs common to a particular
business (e.g., baker’s dozen)
 Both parties to the contract must be members of the trade or persons who
know or should know about the trade practices
 Trade usage may be used to qualify or limit an express term, but may not
eliminate or contradict it
 Hierarchy
 Only when there is a clear cut conflict between 1, 2, 3 and 4 the hierarchy is
used – 1 takes over 2, 3 and 4; 2 takes over 3 and 4 and 3 over 4
 When there is no direct conflict 1 is used to determine the contract term and
2, 3 and 4 may only supplement the term
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 Performance and Breach
 Conditions
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Condition is an event that must occur before a particular performance is due
 Condition Precedent – condition must be fulfilled before the performance is due;
majority of conditions
 Condition Subsequent – performance due before the condition is satisfied.
Example: “you can get your money back if not satisfied” – performance (paying)
before condition (satisfaction)
Satisfaction clauses – court will look into subject-matter of the contract:
 Artistic conditions (painting a portrait) – dissatisfaction has to be in good faith
(honest) – subjective test
 Commercial contracts – dissatisfaction has to be reasonable – objective test
(experts witnesses may be called)
 Express Condition – conditional relationship must be spelled out in the contract –
strictly enforced
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Avoidance of Forfeiture (express conditions)
 Forfeiture is the refusal to give the party compensation for performance
 Since the general rule is to strictly enforce the express conditions it can lead to
the forfeiture of the contract – courts may try to avoid the harshness of this rule
by:
 Interpreting the condition as something less than express condition
 Recognizing the condition, but interpreting the facts as if the condition
has been met – rare
 Giving restitution – minority view – rare
 When there is a disproportionate forfeiture some court will simply ignore
(read “brake”) the rule
 When condition is the satisfaction clause the standard that courts use
(good faith, commercial reasonableness) will allow the courts to rule that
the condition was satisfied
 Waiver, Estoppel, Election
 Waiver – conscious relinquishing of the known right – the party for whose
benefit the condition was put in contract may waive the condition
 Some court require the consideration for the waiver of substantial rights
 Waiver for continuous contract performance is revocable provided there
is a notification of revocation within reasonable time (before the other
party relies on the waiver)
 If consideration for the waiver is given it is in effect a new contract and
waiver is not revocable
 Election – irrevocable deliberate choice between alternatives
 Implied Condition – constructive condition – not strictly enforced
 Courts look whether the material breach has occurred
 Dependent Condition (e.g., doing before paying) - breach of covenant by
one party relieves the other party’s obligation to perform another covenant
dependant on the first one; the performance of the first covenant is an
implied condition precedent to the duty of performance of the second
Jeff Goland
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 Concurrent Condition – performance is simultaneous (e.g., real estate
transaction) – when dealing with concurrent acts the plaintiff must show that
he performed or was ready to perform his part under the contract (gave
tender or was ready to give tender)
 Independent Conditions - neither one is dependent on the other

Jeff Goland
Avoidance of Forfeiture (implied conditions)
 To avoid the harsh consequences when implied condition is not satisfied several
mitigating doctrines may be used:
 (1) Substantial Performance
 Work Before Pay – performance is a condition precedent to being paid;
when contract is to perform work and no agreement is made as to
payment, the work must be substantially performed before payment can
be demanded
 The test to determine whether there is substantial performance is whether
performance meets the essential purpose of the contract; it does not
mean that every detail must in strict compliance with the specifications
or plans
 In addition to lack of substantial performance some courts (minority,
incl. NY) will use willfulness to determine whether the breach has
occurred
 Perfect Tender Rule – the doctrine of substantial performance does not
apply to sale of goods, UCC §2-601
 Buyer has the right to reject defective goods no matter how
immaterial the defect
 Rejection must be prompt
 Buyer may:
 reject the whole
 accept the whole
 accept any unit and reject the rest
 If buyer accepts he looses the right to reject the goods, but may still
revoke acceptance under UCC §2-608
 Rule is not strictly applied and is subject to:
 Express conditions regarding quality
 Custom and usage
 Right to cure – automatic for seller (UCC §2-508)
 Buyer promptly rejects – seller must give the notice of intent
to cure within contract time
 If seller believes the buyer would accept, but does not, seller
will have an extended reasonable time to cure beyond the
contract time (one test to determine reasonable time is the
buyer’s need if it is communicated to seller)
 If buyer rejects the goods he must give grounds for rejection
(if buyer has X and Y reasons but only tells seller about X
and Y is not cured, buyer must accept)
 If goods are returned in accordance with contract buyer must
accept
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 (2) Divisibility – used to protect the party that commits material breach
Contract is in effect broken down into mini-contracts and each is evaluated
separately to see whether there was a breach of this material mini-contract, the
party that materially breached the main contract may still recover some
compensation for rendered performance.
 Requirements for divisibility:
 Consideration itself is apportioned in the main contract; apportionment
can be either express or implied (in the contract to build two houses the
separate price for each house is listed)
 Main purpose of the contract can still be fulfilled (would the parties
contracted anyway had they anticipated severability) – contract calling
for stages of performance will not be divisible if the stage are merely
incidental to the main purpose of the contract

Restitution
 Requirements:
 Benefit was received by the defendant
 Benefit was at the plaintiff’s expense
 Unjust to allow the defendant to retain benefit without compensating the
plaintiff
 Benefit was not intended as a gift, but with expectation of compensation
 Majority view – no restitution to the breaching party
 Minority view – even if the breach is material but benefit was conferred the
breaching party may recover in restitution; most courts that allow restitution to
the breaching party will not look into willfulness of breach (some, incl. NY, do)

Restitution under UCC §2-718
 When the seller justifiably withhold delivery of goods the buyer (breaching
party) is entitled to restitution:
 If contract provides for seller’s liquidated damages:
Buyer’s restitution = Payments made by buyer – Liquidated damages
 If there no provision for damages in contract:
Seller’s damages = 20% of the value of total performance or $500,
whichever is less
 Buyer’s restitution is subject to offset if the seller can establish additional
incidental (no consequential damages for seller) damages; seller damages can
exceed the amount that due back to buyer
 Suspending Performance and Terminating the Contract


Jeff Goland
Material v. Non-Material Breach
 The party that suffers a material breach is supposed to stop the performance and
get damages
 The party that suffers a non-material breach should continue performance and
sue for damages
The party that suffers the breach and decides to stop performance does so on its own
risk – if canceling party overreacts and the breach turns out to be non-material the
canceling party will be in breach of contract itself (tomato & sign case)
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


Restatement 2d §241: Factors to consider in determination of whether the breach
material or not:
 The extend to which injured party will be deprived of expected benefit
 The extend to which injured party can be adequately compensated
 The extend to which the party failing to perform will suffer the forfeiture
 The likelihood that the party failing to perform will cure its failure
 The extend to which the behavior of the failing party comports with standards of
good faith and fair dealings
Self-Help
 Courts disagree about whether the aggrieved party can deduct the cost of
damages from the future payments – some courts allow it if there is a material
breach; other courts hold that one must pay in full and then bring an action for
damages
 UCC §2-717 does allow self-help to aggrieved buyer provided there is a notice to
the seller
The party that suffers material breach may waive its right to get excused from
performance by encouraging the other party to continue performance
 Waiving the right to be excused from performance does not waive the right to get
damages

Prevention – in every contract there is an implied duty not to prevent performance
by the other party
 If one party prevents the other from performing there is a material breach
 If one party makes it more difficult or expensive for the other party to perform it
is not a prevention

Cooperation – when the nature of contract is such that it is impossible to perform
without the other party cooperation, the contract may also include implied duty to
cooperate – in this situation the other party to the contract is required to take some
affirmative steps to cooperate
When one party asserts that the other is in breach it must give the reasons for such
assertion - courts are split on whether the reliance on the reason given for assertion of
the breach will prevent the party from asserting additional reasons
 Some courts will not allow the party to give other reasons
 Some courts will not allow the party to give the other reasons only if the
other party relied to its detriment on the fact that additional reasons were not
given at the time of assertion of the breach

 Prospective Nonperformance

Jeff Goland
Anticipatory Repudiation – one party breaches before the performance is due
 There must be a definite statement that the party cannot or will not perform
under the contract on the due date
 Conduct of the party may satisfy the requirement of the definite statement
 Permissible Responses to Repudiation
 Aggrieved party does not have to go through useless act of tendering its own
performance, but plaintiff has to show with reasonable probability (no need
to demonstrate with absolute certainty) that he would be ready, willing and
able to perform
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

 Aggrieved party has an option to await performance for commercially
reasonable time
 The aggrieved party has an option to sue immediately or to wait until the
time for performance
 Even if aggrieved party has notified the repudiating party that he would await
performance and urged retraction of repudiation, he can still resort to any
remedy for breach
Mere doubts as to one ability to perform is not enough to invoke repudiation
One side’s interpretation of contract is not a repudiation, unless it is coupled with
the threat not to perform

Retraction of Repudiation – unlike the present breach (breach on the due date of
performance), anticipatory breach can be retracted by repudiating party both under
common law and UCC §2-611
 One can retract his repudiation unless:
 The other party materially changed its position in reliance to repudiation
 the other party indicates to the repudiating party that he considers the
repudiation to be final
 Retraction must be clearly communicated to the victim and include reasonable
assurances of performance

Time to Measure Buyer’s Damages
 UCC §2-713 provides that the buyer’s damages are to be measured at the time
that the buyer learned of the breach
 Anticipatory repudiation brings some complexities into the determination of
point in time when damages has to be calculated (market formula is used, if
buyer covers cover price is set) – there are three possible interpretations (there is
no majority rule):
 (1) time when anticipatory breach occurs (breaching party may still retract
and there will no longer be a breach)
 (2) due date of performance (there will be no retraction)
 (3) time when anticipatory breach occurs plus a commercially reasonable
time

Assurance of Due Performance
 Under UCC §2-609 and common law, when reasonable grounds for insecurity
exist, a party may in writing demand adequate assurance of due performance and
until receiving such assurance may suspend its own performance
 If the other party refuses requested assurance it is in breach
 UCC §2-609 provides that if requested, assurance must be given
within reasonable time but no more than 30 days
 If there were no reasonable grounds for insecurity the party that demands
assurances and threatens to suspend performance will be in breach itself
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 Basic Assumptions: Mistake, Impracticability and Frustration

Mutual Mistake, Impracticability, Impossibility and Frustration of Purpose will
excuse the performance
 The court will rescind contract – and –
 Will put the parties into position as before contract – restitution
 Mutual Mistake
 Mistake is a conscious misassumption of an existing fact, not a mistaken projection
of future events
 Mutual mistake involves condition that is already present at the time of contract
 Requirements
 (1) Mistake must be mutual – both parties must be mistaken about the same
circumstance
 (2) The mistake involves the term that is basic to the contract – basic assumption
on which the contract was made
 (3) Neither party assumed the risk of mistake at the time the contract was
formed
 Party may assume the risk expressly in the language of the contract
 Court may imply the assumption of risk from the circumstances
 Trade Usage – the risk is usually assumed in the trade
 Conscious Ignorance – a party knows that he does not know a basic fact but
enters into contract anyway – this is an assumption of risk
 Unilateral Mistake – mistake by one party will excuse the party from performance
only when:
 The enforcement of contract will be unconscionable – or –
 The other party had reason to know of the mistake or his fault caused the mistake
 Impossibility of Performance
 Generally party seeking excuse from performance should try to argue impossibility
first and then, as a fall back, impracticability
 Both parties will be excused from performance when:
 (1) Performance is absolutely, objectively impossible
 (2) Neither party caused impossibility
 (3) Neither party assumed the risk that performance becomes impossible
 In contracts in which the performance depends on the continued existence of given
person or thing, a condition is implied that the impossibility of performance arising
from the perishing of such object will excuse performance
 Partial Impossibility - a party may be excused only for the portion of performance
that is impossible
 Impracticability of Performance
 Similarly to impossibility, both parties will be excused from performance when:
 (1) Performance is commercially senseless
 Something more than added expense of performance
 (2) Neither party caused impracticability
 (3) Neither party assumed the risk that performance becomes impractical
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 Impossibility and Impracticability of Performance involve conditions that occurs after
contract was made
 Foreseeability
 Foreseeability is a tool in determining whether either party assumed the risk, but
 Courts are split on whether foreseeability by itself constitutes an assumption of risk

Force Majeure Clauses – when during the negotiation of contract, a party anticipates
one or more events that it cannot prevent and that might impede its performance, it
may introduce a term intended to excuse its performance if the event arises
 Frustration of Purpose
 Either party will be excused from performance if the purpose of contract was frustrated
 Requirements:
 (1) Mutual purpose of the parties was frustrated
 Mutual purposes does not have to be an exclusive purpose of either party
 (2) Neither party caused the frustration
 (3) Neither party assumed the risk of frustration
 Half Measures
 Restitution
 If a party performs any part of contract according to its term, it confers the
benefit on the other party no matter what happens later, therefore
 If party is excused from continuing performance due to impossibility,
impracticability or frustration of purpose courts will award restitution damages
for portion that was performed
 Example: If house burned down during moving (no fault of owner or mover),
mover can recover in restitution the cost of moving the house so far, but he is
excused from completion of the move because of impossibility
 Reliance
 Courts are split – some courts (and restatement 2d) will award reliance damages
(e.g., cost of preparation for performance) in cases when parties are excused from
performance
Jeff Goland
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 Third Party Beneficiaries
 Old English Rule – contract cannot be enforced by or against a person who is not a party
to a contract
 Two legal fictions were developed (and still can be used as an alternative to third
party beneficiary claim) to get around that rule:
 (1) Agency Fiction – promisee is a fictitious agent of the third party beneficiary,
in effect the original contract is between a promisor and third party beneficiary
 (2) Trust Fiction – promisor is fictitious trustee of the third party beneficiary;
third party beneficiary is a “true owner” of the benefit – trust must have res
(subject-matter, thing) that can be held in trust for third party
 Modern American Rule of Third Party Beneficiary – Lawrence v. Fox – the contract
may be enforced by someone who is not the party to the contract provided that:
 (1) It was intended for the third party to receive a benefit of the contract – and –
 (2) It was intended that the contract would be legally enforceable by the third party
 The following factors have to be considered in third party beneficiary claim:
 There is a third party seeking to enforce a contract
 There is a valid underlying contract (consideration, mutual accent and other
requirements for enforceability are satisfied)
 There was an intention that the third party would be able to enforce the contract
 The contract was intended for the benefit of third party


It is not necessary that identity of the third party beneficiary would be known
when the contract is made
It is also not necessary that the event that creates liability have already occurred
when the contract was made
 Incidental Beneficiary – third party who may enjoy an advantage as result of the
performance of a contract but was not intended to either receive the benefit or to be able
to enforce the contract – such person is not a third party beneficiary and has no legal right
to enforce the contract
 All courts will look into promisee intention to determine if the third party was intended
beneficiary of the contract
 Some court will look into the promisee intention only
 Some courts (minority incl. NY) will consider intentions of both promisee and
promisor
 Most contracts are bilateral and have reciprocate promises – third party beneficiary can
only enforce the promise that was intended for his benefit and intended to be enforceable
by him
 The third party may either a donee beneficiary or a creditor beneficiary
 Donee Beneficiary – a gift from promisee to third party
 Creditor Beneficiary – there is an underlying debt owed by promisee to third party –
creditor beneficiary has a choice to sue either (1) the promisor as third party
beneficiary of the contract between promisor and promisee or (2) the promisee on the
underlying obligation between promisee and third party
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 The parties to the contract may modify their contract and destroy the rights of third party
beneficiary at any time before third party’s rights are vested
 When third party’s rights are vested the parties can modify the contract only to the
extend of their own rights and obligations
 Old Common Law Rule – third party beneficiary (donee or creditor) rights are vested
immediately
 Restatement 2d Rule (Majority) - third party beneficiary rights are vested:
 For donee beneficiary – immediately
 For creditor beneficiary when
 Third party brings suit on the promise – or –
 Third party materially changes its position in reliance on the promise – or –
 Third party manifestly assents to the promise at the request of the promisor
or promisee
 Courts are split whether mere knowledge of benefit is enough to
constitute assent or manifestation of assent is required
 Municipal Contracts and Public Service – private individual may recover as a third
party beneficiary on the contract between a government and service provider – very rare
 Note: Any defense that the promisor would have against the promisee if the promisee
were suing on the contract can be raised against a third party beneficiary
Jeff Goland
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 Assignment and Delegation
 General Principles
 Assignor – person who gives an assignment
 Assignee – person who receives an assignment
 Assignment
 An assignment is an act or manifestation by the owner of a contract right which
indicates his intention to transfer, without further action, that right to another
 There must be complete and present transfer of contract rights
 The promise to transfer right in the future is not an assignment
 Partial rights can be assigned, but whatever is assigned must be transferred fully
 Notice
 The other party to original contract must receive unequivocal notice of the
assignment either from an assignor or assignee
 After notice is given and if the other party renders the benefit to the assignor it
does so on its own risk, however it may recover from an assignor in restitution
 The party receiving the notice may demand the proof of the assignment. Until
such proof is received the party still has to render benefits to assignor
 Gift Assignment – assignment for which no consideration was given is effective, but
revocable
 Verbal gift is not valid assignment – there must be a transfer of control over the right
(e.g., passbook, keys)
 Assignment for Value – most assignments are sales of rights, consideration is given and a
contract is created – all contracts rules apply
 Most common types of assignments for value are:
 Transfer of Entire Contract – typically when there is sale of business all
contracts rights are assigned to the new owner
 Assignment for Security – typically the assignor transfer his right to receive the
benefit due to him under one contract as a consideration for another contract,
usually a loan (builder gets a loan from a bank and in exchange assigns as
security the proceeds from the building contract)
 Assignment contracts have two implied warranties:
 (1) Assignor knows of no problem that may diminish the value of the assignment
(warranty “to the past”) – and –
 (2) Assignor promises that he will do nothing in the future to diminish the value
of the assignment (warranty “to the future”)
 Assignability of Rights – courts disagree on whether the language in the original contract
may prohibit the assignment:
 Some courts will not recognize any prohibition of the assignment
 Some court will allow such prohibition
 If the language of contract says “any assignment will be void” and assignment is
given anyway, these courts find that assignment is void
 If no specific “void” language is in the contract, the assignment may be valid; the
other party has to honor the assignment but may sue the assignor for breach and
recover damages
Jeff Goland
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 Delegation of Performance
 There may be merely assignment of contract rights – or – both assignment of rights
and delegation of duties – or – just a delegation of duties alone
 UCC §2-210(5) – general language indicates both an assignment and delegation,
unless the language or circumstances indicate otherwise
 Common Law:
 Some courts will follow the UCC Rule
 NY Rule is opposite – general language does not implies delegation of duties
 Limitations
 Personal services contracts are not assignable
 If the assignment will materially changes the expectation, reduces value, increases
risk, etc, it is not valid
 Other party to the original contract may object the assignment on the basis that the
right or duty are too personal (usually it is duty that is too personal to delegate):
 In general the right to collect payment is never too personal, however
 The duty to pay may be too personal (e.g., payments on credit)
 Defenses
 The other party to the original contract may assert against the assignee any defense it
could use against the assignor
 Assignee may use the following two devices against the other party defenses
 (1) Holder in Due Course – the concept is that lender tries to set himself up
as an innocent assignee who took assignment knowing nothing of any
problems
 (2) Waiver of Defense Clause – other party to the contract agrees not to raise
any defenses against assignee and limits himself to action against an assignor
 Most courts do not apply Waiver of Defense rule to consumer contracts
 Requirements for Waiver to be effective
 Assignee must take the assignment for value
 Assignment made in good faith
 Assignee takes an assignment without any knowledge of the defect
 Court may find that a business relationship between the assignor
and assignee is so close that assignee had to know of defects
(this is a situation when bank sets up the table in the retail store)
 Some defenses (real defenses) cannot be waived – duress, “unusual
species” of fraud, incapacity
 Personal defenses can be waived – want of consideration, failure of
condition, breach of warranty, etc.

The other party to the original contract cannot bring an affirmative claim against an
assignee, but it still may sue the assignor – one cannot sue bank who takes the
security assignment for performance due from the assignor, but if bank sues the other
party that party can assert all defenses it could use against the assignor (provided they
are not waived)

Note: In contest between third party beneficiary and assignee, the third party
beneficiary prevails, because the assignor cannot assign more rights than he has
(basically third party beneficiary was there first)
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 Novation
 Until released by the other party the assignor has stand by liability and may still be
sued under the contract
 Assignor may ask the other party to release him from liability – he must be careful:
if he simply tells the other party that he has assigned the contract to assignee and he
is not responsible for the contract any more he will be in breach, even if the other
party accepts the assignment itself
 The novation can be achieved on two ways:
 (1) Expressly – assignor notifies the other party of the assignment and asks for
release and the other party expressly releases the assignor – or –
 (2) Impliedly:
 Assignor notifies the other party of an assignment and that he is
trying to set up a novation
 Assignee renders performance for reasonable time
 The other party to the original contract does not object
 Assignees in Contest with Third Parties
 The principle of assignment is especially important in case when many creditors are
trying to recover their debts from the same party (bankruptcy cases)
 There is an hierarchy of creditors – the one who is higher in the hierarchy
recovers first, and whoever is lower recovers last (if anything left)
 Highest Level – Secured creditor with perfected security interest
 Assignment becomes perfected security interest if it is recorded by
certain state procedures and filing financing statement (Article 9 of
UCC) – filing must be renewed after 5 years or protection expires
 Lien Creditor
 Court order or judgment allows the creditor to place a lien on
property
 Secured Creditor (Assignee who did not perfect his assignment)
 Payable up to the entire extend of the debt
 If assignment is not valid, then alleged assignee becomes just a
general creditor (Get in line!)
 Lowest Level – General Creditor
 Any assets that are left are shared equally between all general
creditors
 All get paid in the same proportion
Jeff Goland
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