I. INTERPRETING THE CONTENT OF OBLIGATIONS

A. THE PAROL EVIDENCE RULE

Definition: Where an agreement has been reduced to writing which the parties intend as the final and complete expression of their agreement, evidence of any prior or contemporaneous oral or written expressions is inadmissible to vary the terms of the writing. If complete integration, parol evidence MAY NEITHER ADD NOR CONTRADICT WRITTEN K. Rule of substantive contract law, not evidence.

Rationale: The law favors written contracts (as being more reliable). The rule works as rule of contract law indicating what constitutes the contract between the parties. Encourages specifying terms in written contracts.

Limitation: The parol evidence rule only applies where the parties intended the writing as a final expression of their agreement. Many courts now hold that any evidence may be admitted to determine whether the parties intended the contract as a final and complete expression of the agreement, i.e., whether the contract is an "integration."

Writings that evidence a purported contract are not necessarily the "final" expression of that contract. Thus, for example, the parties might only have intended such writings to be preliminary to a final draft. If so, the parol evidence rule will not bar introduction of further evidence. One should note that the more complete the agreement appears to be on its face, the more likely it is that it was intended as an integration.

After establishing that the writing was "final," one should determine if the integration was "complete" or only "partial." If the former, it may not be contradicted or supplemented; in the latter it cannot be contradicted, but may be supplemented by proving up consistent additional terms. Once full vs. partial integration issue settled, judge decides whether parol evidence applies to evidence.

Merger Clause. Where the agreement contains a merger clause reciting that it is complete on its face, this clause strengthens the presumption that all negotiations were merged in the written document.

The is not intended to exclude evidence because of the existence of an "integration clause," but to exclude evidence if the alleged parol condition contradicts some other specific term of the written agreement. Luther Williams Inc v. Johnson

Who makes the decision? The majority view is that the question as to whether an agreement is an integration is one of fact. However, this fact question, unlike others, is decided by the judge, not the jury. Should the judge decide that the writing was an integration of all agreements between the parties, he would exclude any offered evidence. Otherwise, he may admit the offered extrinsic evidence. Then, if there is a jury, it will make its own determination as to whether this extrinsic evidence was part of the agreement.

How is this determination made? The prevailing test is the Williston test: would parties situated as were these parties to this contract naturally and normally include the extrinsic matter in the writing? (Examine four corners of the document to determine if fully integrated) If such reasonable parties would have included the matter in the writing, evidence of the extrinsic matter will not be admitted. On the other hand, if the judge determines as a matter of fact that normal parties would not have included such extrinsic matter in the writing, the parol evidence may be introduced. Other tests include the Wigmore "aid," which asks, was the extrinsic matter mentioned or dealt with at all in the writing? If it was mentioned or dealt with in the writing, presumably the writing states all that the parties intended to say as to that matter and the evidence is excluded. Some courts also suggest another test: an examination of the writing itself to determine whether it appears to be complete on its face. Corbin - you can go outside document to determine if fully integrated. (Corbin's test violates purpose of the rule)

B. EXCEPTIONS TO THE RULE - pretty well swallow up the rule.

1. Attacking Validity

A party to a written contract can attack the agreement's validity. The party acknowledges (concedes) that the writing reflects the agreement but asserts, most frequently, that the agreement never came into being because of any of the following:

a. Formation Defects. (e.g., fraud, duress, mistake, and illegality) may be shown by extrinsic evidence.

b. Condition Precedent. Where the party asserts that there was an oral agreement that the written contract would not become effective until a condition occurred, all evidence of the understanding may be offered and received. This would be a condition precedent to effectiveness. The rationale is that you are not altering a written contract by means of parol evidence if the written agreement never came into being. It should be borne in mind that parol evidence of such a condition precedent will not be admitted if it contradicts the express language of the written contract.

Parol evidence is inadmissible as to conditions subsequent, i.e., an oral agreement that the party would not be obliged to perform until the happening of an event. The latter type of condition limits or modifies a duty under an existing or formed contract.

If no K until financing arranged, then no written K to invoke parol evidence rule. Once we have a K, then parol evidence rule applicable. The P.E.R. does not exclude evidence of an oral condition precedent (financing) when express language in the contract states that the K itself embodies the entire agreement. In this case the contract was silent as to financing and therefore parol evidence of the financing condition does not contradict the writing. Luther Williams, Inc. v. Johnson P sued D to recover liquidated damages on a contract to improve D's home; D thought the K he signed was merely an estimate that would take effect only upon approval of bank financing.

2. Show actual consideration - the parol evidence rule will not bar the admission of evidence showing the "true consideration" paid.

3. Interpretation. If there is uncertainty or ambiguity in the written agreement's terms or a dispute as to the meaning of those terms, parol evidence can be received to aid the fact-finder in reaching a correct interpretation of the agreement. If the meaning of the agreement is plain, parol evidence is inadmissible.

Example where parol evidence allowed: does K say anything about covenants pertaining to other future tenants.

a. If the agreement is ambiguous on its face, or becomes ambiguous in performance (D sells "my car" and it turns out he has two cars), parol evidence is admissible to clarify the parties' intent. Of course, if the ambiguity is so fundamental that there is no way that the court could determine what the parties intended, there may be no enforceable contract at all. Court permitted evidence to determine who John Young meant when he left an insurance policy to his "wife": the current wife whom he married under a new identity. In Re Soper's Estate

b. California Liberal trend. PACIFIC GAS the court allowed parol evidence to show the meaning of an indemnity clause in a contract, where the language of the contract is susceptible to the interpretation argued by D that it only applies to damage against third party property, not the P's property. Here the court is interpreting language, rather than adding new terms - less debatable. This ruling requires courts to consider extrinsic evidence to determine whether a contract is ambiguous. Indemnity clause - normally apply to injuries to a third party.

c. Where P finds final "boat charter agreement" to be different from his understanding of the deal because it did not include representations by D that the engines were in good working order or that the freezing system would meet P's needs, and P SIGNS IT ANYWAY, parol evidence will NOT be admitted concerning P's interpretation of the contract terms. KEMP FISHERIES, INC

P cannot claim this is not a fully integrated K, so P can only argue that the words need interpretation.

The paragraphs cited by the trial judge (who was reversed) pertain to two different periods of time: pre-delivery (guaranteed seaworthiness) and post-delivery (unguaranteed freezers). If the boat had sank, P would have cause of action, because denial of warranties cannot affect prior written representation of seaworthiness.

The Charter Agreement is not reasonably susceptible to an interpretation that D warranted the seaworthiness (guaranteed) of the vessel and the performance of the freezing system (not guaranteed). The paragraphs cited by the judge pertain to two different time period; pre-delivery and post-delivery.

d. Examples where plain language interpretation violates standard industry usage of terms:

(1) Bricklayer to be paid "$5.25 a thousand," means payment for wall surface area including windows and door - presumably cost of finishing around edges makes up for the missing bricks.

(2) 49.53% protein horse scraps. Industry standard is to round up. Therefore, if K says $X if 50% protein, and $Y < 50% protein, then must pay $X.

(3) Property bordering lake to be cut in half and given to two different parties. What does half mean? Midpoint along horizontal axis or equal square acres - in which case left side is skinnier rectangle? Equal mining space makes no sense.

(4) FRIGALIMENT IMPORTING - THE CHICKEN CASE. Order for 125,000 pounds of "chicken" to Switzerland found to contain stewing chickens, not frying or broiling chickens; executed by two big league traders in chicken, then buyer should have known he could not get large "fryers" at this price - only large "stewing chickens." Issue: How should "chicken" be interpreted in this particular K with these sophisticated dealers?

Contract calls for "U.S. Fresh Frozen Chicken, Grade A, Government Inspected, Eviscerated." The USDA definition includes hens or stewing chickens. Since the specifications related to U.S. government ratings, the gov't definition should control, which is broader than just "broiler or fryer."

4. To show a collateral oral agreement. A party may claim that there were two separate agreements made - the first embodied in the writing, and the second a "collateral" oral agreement supported by the consideration of the first agreement (i.e., the "collateral" oral agreement is alleged to have been reached in consideration for the promises set forth in the written agreement). Parol evidence of a second agreement may be admitted since it does not affect the written agreement at all.

a) Requirements. Parol evidence is admitted to show a "collateral" oral agreement if (1) agreement must in form be collateral, (2) its terms do not conflict with the written agreement (narrowly construed, this element would allow correction of typographical errors), and (3) the collateral agreement covers a subject that would not ordinarily be included in the written agreement.

b) Case where Parol Evidence not Admitted: Mitchell v. Lath. In form, removal of an ice house is collateral. In substance, removal of ice house on another parcel is too closely related to the underlying real estate land sale contract. Hence, evidence of the oral agreement is not admissible, because the subject is too closely related and the terms would likely have been covered in the original contract, and the oral contract can be said to contradict the written contract. Here parties dispute whether oral contract to remove ice house existed.

In certain well-known cases, courts have suggested that extrinsic evidence is admissible to show agreements between the parties that are "collateral" to the transaction otherwise evidenced by an apparently integrated writing. Note that the determination that an agreement is "collateral" is nothing more than a conclusion. If it is "collateral," it obviously must be an agreement that parties situated as are the parties to this contract would naturally and normally not include in the apparently integrated writing. Thus, if under the application of the prevailing Williston test, a court decides that evidence of the extrinsic matter may be introduced, it may characterize that extrinsic agreement as "collateral." It is submitted that this characterization adds nothing to the parol evidence rule analysis.

There are two basic approaches to inconsistency. One is an explicit contradiction of the written terms. The other approach assesses whether there is an absence of reasonable harmony in terms of the language and the respective obligations of the party. The latter, broader approach is better. In this case, the language used in D's letter is not reasonably susceptible to P's interpretation. The written term gave the Alyeska committee an unconditional right to approval. P's parol evidence would limit that right of approval, which is inconsistent with an unconditional right. Thus the parol evidence should be excluded. Alaska Northern Dev. Inc v. Alyeska Pipeline

5. To show the writing was only a "partial" integration. The proponent of the parol evidence may claim that the parties intended the writing as the final expression of their agreement only on the subjects covered therein. In such a case, the integration would be only "partial" and the rule would not bar parol evidence on matters not covered by the writing. The parol evidence may ADD TO THE K, but MAY NOT CONTRADICT the K.

a) Application. Masterson v. Sine. Evidence of a limitation on the assignability of an option, so as to keep land within the Masterson family in the event the Sine's were ever forced to sell the land, should be admitted. The personal nature of the option would not ordinarily have been expected to appear in the option. Therefore, the option contract is NOT FULLY INTEGRATED - exception to the P.E.R. Moreover, both parties agree that it was their intention to keep the property within the Masterson family. (Distinguishes from Mitchell above.) The court does not want witnesses interested in the outcome of the litigation (bankruptcy trustee) to mislead the finder of fact.

Cook does not like saying "We must look to the true intentions of the parties," because that would obliterate the P.E.R.

Distinguish Masterson: personal nature of option has not been included - not fully integrated. Really must be exception to P.E.R. Begins the liberal allowance of parol evidence.

6. Deceptive exclusionary clauses in insurance contracts -- GRAY v. ZURICH Insur. Co. (Cal. 1966). This court is hostile to insurance co. P accused of provoking a fight. His insurance company refuses to defend for an intentional act. He defends himself and loses judgment, then tries to collect from his insurance company. Court refuses to enforce an unclear exclusionary clause in an insurance contract, because it infringes on the reasonable expectations of the insured. Insurance co. was to defend against even "groundless" allegations. Court holds insurance co. liable for failure to defend, then later would permit co. to determine if it can recover from the insured. The question of intent could not have been decided prior to adjudication. ADHESION contracts - courts inclined to interpret against the drafter.

C. OTHERS ASPECTS OF PAROL EVIDENCE

1. Parol Evidence Rule Only Applies to Prior or Contemporaneous Negotiations

Parol evidence can be offered to show subsequent modifications of a written contract, since the parol evidence rule applies only to prior and contemporaneous negotiations. In short, the parties may show that they have altered the integrated writing after its making.

2. U.C.C. Rule

Under the U.C.C., a party cannot contradict the writing but he may add consistent additional terms unless (i) there is a merger clause, or (ii) the courts find from all the circumstances that the writing was intended as a complete and exclusive statement of the terms of the agreement.[U.C.C. § 2-202] This Code section also provides that a written contract's terms may be explained or supplemented by (i) course of dealing or usage in the trade, or (ii) the course of performance to date, even if the terms appear to be unambiguous. If the court finds the additional terms are such that, if agreed upon, would "certainly" have been included in the document, then evidence of their alleged making must be kept from the trier of fact.

II. CONTRACT PERFORMANCE AND RISK ALLOCATION

A. Express Conditions

Problems of performance of a K are ultimately concerned with determining whether a party is in breach of the K. In order to find a party in breach of K, it must always appear that he was under an absolute duty to perform and that he failed to do so. The problem is to determine when the promisor is under such a duty (i.e., when the duty to perform has become absolute). This requires consideration of the type and legal effect of any conditions in the K, because if the duty is only conditional, the promisor is bound to perform only after the contingency occurs (in the event of conditions precedent or concurrent), or only until the contingency occurs (in the event of a condition subsequent).

1. Conditions precedent, concurrent, and subsequent

a. Conditions precedent. A condition precedent is one which must occur in order to create an absolute duty of performance; i.e., there is no enforceable duty owed until the fact or event happens. P must prove all conditions precedent are met to maintain action.

b. Conditions concurrent. Conditions concurrent are mutually dependent performances capable of nearly simultaneous execution. Such conditions exist only when parties to a K are bound to render performance at the same time. Perhaps the most common example is an ordinary sales K, in which payment and delivery are conditions concurrent; i.e., the condition of payment must occur before the duty to deliver arises, and conversely, the condition of delivery must occur before the duty to pay arises. [UCC § 2-511]

Legal Effect. The legal effect of conditions concurrent is much the same as that of a condition precedent. If the condition occurs, the other party's duty to perform arises; if it does not occur, the duty never arises. Hence, in the ordinary sales K there is no breach of contract until the buyer tenders payment of the seller tenders delivery, either act being sufficient to make absolute the other party's duty to perform.

c. Conditions subsequent. A condition subsequent is one in which the occurrence of the condition extinguishes a previously absolute duty to perform. For example, an employment K whereby E agrees to work for R for a specified period unless he is called into military service; E's promise to remain in R's employ is subject to the condition subsequent that he not be called into military service.

Legal Effect. Occurrence of the condition subsequent cuts off and extinguishes a previously absolute duty to perform as contracted. D must prove a condit. subseq. has occurred that removes him from being in breach.

True conditions subsequent vs. conditions subsequent in form only. The above discussion applies only to true conditions subsequent (which are rare and are generally frowned upon by the courts). Some conditions are worded as conditions subsequent but are really conditions precedent in effect. For example, I insures P against loss by fire and the policy provides "any liability of the insurer under this policy is discharged if either (a) proof of loss is not submitted within 30 days after the accident, or (b) suit is not brought against the insurer for the claimed loss within 12 months from the date of accident."

(1) Submitting notice and proof of loss within 30 days is really a condition precedent to the insurer's duty to pay - even though the notice provision seems to be worded as a condition subsequent.

(2) But failure of the insured to sue within the 12-month period after loss is failure of a true condition subsequent, which extinguishes the company's duty of payment. A true condition subsequent has the effect of a "private" statute of limitations, because after the time has passed, no action is available.

2. Conditions and covenants/promises distinguished. As a matter of approach to problems of K performance, each and every provision of the K must be examined to determine whether it is a condition or a covenant. Certain provisions may be both covenants/promises and conditions, but the distinction must nevertheless be drawn.

a. Covenants/Promises. A covenant is an absolute, unconditional promise to perform (or refrain from performing) some act ; i.e., a contractual promise to which no conditions are attached. A failure to perform a covenant is always a breach of contract per se.

b. Conditions. A condition is a fact or event, the happening or non-happening of which creates or extinguishes a duty to perform on the part of the promisor. Failure of that which is merely a condition is not a breach of contract.

Conditions are important primarily in bilateral contracts. The performance of the bargained-for act in a unilateral contract leaves all the executory duties on the promisor (offeror), and those duties are usually absolute because the offeror's promise of performance is usually a covenant.

c. Interpretation of doubtful provisions as conditions or covenants. The determination of whether a particular contractual provision is a condition or a covenant (or both) is of far-reaching importance. It may determine whether the promisor is in breach of contract. It will fix the rights and duties of the parties under the K.

1. Parties' intent controls. Ordinarily, the words used by the parties will indicate their intent on whether a provision is a covenant or a condition. In cases where the contract language is ambiguous, the court must construe the words used to determine whether the parties intended the act or event specified to modify or qualify a promise (a condition) or to be a basic undertaking by the party to whose conduct it relates (a covenant).

2. Where parties' intent unclear. The ultimate test is the intention of the parties. However, the following factors usually determine the parties' intent:

Words Used - words such as "provided," "if," "when," etc., usually indicate that a condition rather than a covenant was intended, while words such as "promises," "agreed," etc., generally indicate a covenant.

Custom. What would the average reasonable business person have thought was intended, a promise or a condition of duty?

Doubtful provisions will ordinarily be construed as promises, rather than conditions. Such construction will generally operate to uphold the contract and preserve the parties' expectations, since failure to perform a promise will entitle the other party to damages.

3. Cook's Examples on 1-20-95

Fire Insurance: 1) absolute promise from insured, 2) promise subject to a condition (fire), 3) If also require notice of claim within 30 days - condition; if insured never files a claim - neither party in breach of contract.

4. Strict Enforcement - DOVE v. ROSE ACRE FARMS Egg farm sets up bonus system that pays people to be on time and work full week. No exceptions or excuses permitted. This is just the bonus program, not the base salary. No one is required to accept the bonus or work for this employer. Employees like the system. Court will not interfere with parties voluntarily forming conditions precedent (to payment of bonus). P here must forfeit his bonus for being sick two days, even though he put in overtime. If clearly understood by all parties, no matter how silly, you can in theory write a contract to turn on a given provision.

5. Relaxed Enforcement - READING PIPE CASE (Jacob & Young v. Kent). P homeowner is not entitled to literal interpretation of K because: 1) would cause economic waste, and 2) Cohoes pipe is indistinguishable in quality. If Reading Pipe is really important, it has to be written into the K at the beginning as a condition precedent.

Due to economic waste, court would not require enforcement of an apparent de minimis term. As a matter of law, we can make Reading Pipe a highly important term. Why go to court over this? Kent was unsatisfied with house and looking for a way out of the K.

6. NOTICE as a condition implied by contract - WAL-NOON CORP. v. HILL Failure to give notice of a need to repair the roof precluded recovery when the notice requirement was implicit in the lease agreement. Lessor wanted right to decide whether to repair roof or put on whole new roof. Perhaps 1) roof under warranty, 2) roof repaired vs. replaced, 3) get roofs of varying durations, 4) landlord in construction business - get discounts. Without giving notice, place landlord in untenable position of having to reconstruct the situation and determine fair reimbursement.

Notice is an indispensable condition precedent to D's duty to perform under the covenant to repair. The parties did not intend to allow the lessee to unilaterally and conclusively determine the burden of responsibility without offering the lessor the opportunity to dispute the liability or exercise any advantage it might have in solving the problem.

The trial court erred in granting equitable relief to P, which in effect deprive D of part of the bargained-for consideration; i.e., the right of control over repairs for which he was responsible.

Distinguish from merely cleaning ice off sidewalk. Notice is irrelevant, since the cost is the same no matter who is selected. Might not be treated as condition precedent. COMMENT: Notice requirement is often treated as an express condition even absent clear language to that effect.

7. Delivery instructions as a condition precedent to performance of a sales contract. INTERNATIO-ROTTERDAM (The Rice Case) The K clearly called for a December delivery date and buyer was obligated to notify seller of the delivery instructions in sufficient time to allow seller to complete the delivery by Dec. 31.

Buyer conceded that it was obligated to give seller notice, but argued that seller could not get out of the contract. If merely a promise, then failure to give notice does not relieve the other party from performing under the contract (like READING PIPE case - installing COHOES pipe was a breach, but other party still obligated to pay for the house.)

Court says that the notice was actually a condition precedent, so that contractual obligation never arose. Why? 1) financing arrangement mentioned - no money to pay if not delivered in December, 2) significant volatility in price - time is of the essence. (Seller wants out because price of rice has risen)

8. Condition distinguished from a warranty (which is a promise). "No change in the aggregate net worth of D company and its subsidiaries" was a condition precedent in a meticulously prepared contract. The warranty dealt with another specific situation -changes in financial condition caused by occurrences outside the ordinary course of business. Therefore, when P elected to go ahead with purchase, when he could have refused to write the check closing the sale, he effectively waived the "condition." P cannot claim damages due to a lower (ordinary business fluctuation) valuation. In re Carter's Claim

9. Factors to consider in determining intent -- NORTH AMER. GRAPHITE v. ALLAN The parties' intent to make payment for P's services contingent upon the plant/mine producing income or otherwise must be determined from the language used, the situation, and the subject matter of the contract. If the parties had intended the payment to be contingent, clearer language would have been used and P's price would have reflected the contingency. The liability was therefore not contingent and became due in a reasonable time after completion.

Contract consists of a series of letters. It has never been integrated. Therefore nothing to which the Parol Evidence Rule can be applied.

Only the time of liability was contingent, not the liability itself.

In Masoioni v. Miller, prime contractor's promise to pay subcontractor conditioned on receiving payment from the owner was upheld, because written as explicit condition precedent.

B. EXCUSE OF CONDITIONS

Where either party's duty to perform is subject to a condition precedent or concurrent, that party cannot be held in "breach of contract" until the conditions occur or are legally excused; i.e., a conditional promise does not become absolute unless and until the conditions have been performed or legally excused. The party seeking to enforce the contract always has the burden of pleading and proving the occurrence or excuse of each condition upon which the other party's duty depended.

1. Much criticized case. Provision that P would give D 20 days' notice of any claim arising out of the contract created a condition precedent to a valid claim by P. Such a provision was not unfair or unreasonable since its purpose (to allow D to investigate the merits of any claim) was disclosed and reasonable. Service of the complaint on D by P did not give the kind of notice required by the contract, even though it was served on D within 30 days of the discharge from employment. (This is an irrational decision. It follows form rather than substance, since filing of the suit really did give sufficient notice). INMAN

2. Excuse of conditions by waiver or estoppel. In various situations, a party by his words or conduct may be held to have "waived" his right to insist on the occurrence of performance of some condition upon which his duty of counterperformance depends. Although the courts usually talk in terms of "waiver," in many of these cases the concept is really one of estoppel.

a) Expression of willingness to excuse condition. If either party represents to the other (by words or conduct) that he will not insist upon literal performance of some condition upon which his duty to perform depends, and the other party relies to his detriment thereon, the first party will be held to have "waived" the condition.

b) Voluntary acceptance of defective performance. Where either party knowingly accepts and retains less than he is entitled to under the contract, and it appears that he intended thereby to forgo insistence upon full performance, he waives his right to insist upon full performance from the other party as a condition to his duty of counterperformance.

c) Voluntary performance as excusing condition on which duty to perform depended. Similarly, where a duty to perform is subject to some condition precedent, and the promisor commences performance knowing that the contingency has not occurred, his doing so may operate as a waiver of the condition provided the condition was not a material part of the agreed exchange.

d) Waiver of prior breaches as excuse for present breach. Where the contract requires a series of performances by one party (e.g., the payment of monthly installments on the purchase price) as a condition precedent to the other's duty, the condition of full performance of each installment may be excused by the other's previous acceptance of something less than full performance.

Applications

(1) Expression of willingness to excuse the condition. PAROL EVID. RULE DOES NOT APPLY TO SUBSEQUENT UTTERANCES. When an owner requests extra work, promises to pay for it, and watches it being performed, it would be manifestly unjust to allow the defense that the change orders were not in writing. (Court effectively crosses out written change order provision to ensure fair result. Hard facts making bad law.) UNIVERSAL BUILDERS v. MOON MOTOR LODGE.

(2) If the homeowner in the READING PIPE case had decided to waive that particular pipe, a court would accept the waiver and not force the contractor to go back and reinstall new pipe. However, if home purchaser said he would waive the entire construction, then court would not countenance that waiver as entitling builder to collect his full fee. If waiver is too extreme, court will not allow it.

(3) It is not a K to write books in order that the P shall keep sober, but a K containing a stipulation that he shall keep sober so that he may write satisfactory books. Although D claims that P's abstinence from liquor was the consideration for paying $6 rather than $2, the writing of the law book was the bargained-for consideration in either instance. Therefore, the condition of P's abstinence could have been waived by D, in which case D would be liable to pay $6 per page. CLARK v. WEST

Materiality of Provision - parties did not so intend to make sobriety a key (marketing) feature of the book. West is just trying to widen its profit margin.

Is there any consideration for West's waiver of right, if not then the waiver is not enforceable based on contract theory. Yet the courts do recognize waiver without consideration arising.

(4) Rebuttable presumption of prejudice arising from noncompliance with condition. AETNA CASUALTY v. MURPHY Murphy failed to notify his insurance carrier, Chubb, for three years after he was sued. Court would not allow Murphy to implead Chubb: Most jurisdictions require the insurer to prove material prejudice; some require the insured to rebut the presumption of prejudice, and still others strictly enforce delayed notice provisions. The best approach is t place the burden of establishing lack of prejudice on the insured. Here, Murphy failed to provide facts to support a claim that Chubb had not been materially prejudiced by his delay, so summary judgment for Chubb was appropriate.

In theory, an insured who delays could prevail in attempt to implead his insurer. GROUNDS: 1) a contract of adhesion, the terms of which (notice to insurer) were not truly bargained for. 2) enforcement of the notice conditions will result in a forfeiture to Murphy. 3) insurer still have fair opportunity to investigate the claim.

COMMENT: Note that a failure to give notice is not a breach of the insurance contract, but merely a defense for the insurer, unless waived.

(5) A party cannot by waiver of a condition precedent to his own liability create obligation in himself where none previously existed.

C. IMPLIED CONDITIONS

1. Implied-in-fact conditions. This terms ordinarily refers to conditions the parties would probably have agreed to, had they thought about the subject. The law will imply whatever conditions are inherent in the promises given and necessary to the performance of the contract; i.e., so-called "necessary conditions" and conditions of "good faith and cooperation."

a. Test for implied-in-fact conditions. Would a reasonable person feel that the parties had contracted with the understanding, even though not expressly stated, that certain facts would exist? If so, the existence of those facts will be an implied condition to the promisor's duty to perform.

b. Examples. A promises to deliver certain goods to the "No. 2 loading dock of B's factory. The existence of such a loading dock, its reasonable accessibility for making a delivery, and B's permitting A to make the delivery there are all implied-in-fact conditions precedent to A's duty to deliver.

Example 2: L leases a building to T and promises to maintain and repair the interior of the building as necessary. L reserves no privilege of entering the leased building for purposes of inspection or repair. L's covenant to repair is subject to implied-in-fact conditions precedent that T will give reasonable notification of the need for repairs an will permit L to enter to make the repairs.

c. Implied condition of good faith. An extremely important "implied-in-fact" condition is that neither party will act in bad faith so as to hinder or prevent the performance of the other party. This condition is fundamental to all contracts and is embodied as a cardinal principle of the UCC, which provides that "every contract or duty within this code imposes an obligation of good faith in its performance or enforcement." [UCC § 1 -203]

2. Implied-in-law conditions ("constructive conditions"). Certain conditions which are not expressly provided by the parties, nor of a type which the parties would have necessarily agreed upon, may nevertheless be implied by the courts in the interest of fairness and justice.

a. Early view. Early courts did not recognize "constructive conditions." In a bilateral contract, neither could plead other's lack of performance as an excuse for his own not performing.

b. Landmark case establishing "constructive conditions" for dependent promises. Before D delivered his business to P, P was to show good security for the payment of the money owed to D. Since P failed to give good security, D had no obligation to perform. (Nothing in contract spoke to the sequence of obligations, court is constructively implying them. Court knows this sale represents D's only retirement income. Security is vital to D). KINGTON v. PRESTON

c. Three types of covenants:

(1) Mutual and independent. Either party may recover damages from the other in the event of breach by the other, and an alleged breach by P is no excuse for D's nonperformance.

(2) Conditional and dependent. Performance by one party depends on the prior performance of the other, and until the prior condition is performed, the other party is not liable on his covenant, e.g., as in Kington v. Preston.

(3) Simultaneous (mutual and concurrent). If one party tenders and the other refuses to perform, the first party has an action for default against the refusing party. Neither party must perform if the other party's ability to perform is in question. Order something to pick up at store; if it does not arrive, you do not have to pay for it.

d. MODERN VIEW. Each party's performance (or tender of performance) is deemed an implied-in-law ("constructive") condition to the other's obligation to perform. Thus, neither party's duty to perform arises until the other has performed or tendered performance.

P contract to sell a piece of land to D. P failed to tender performance before bringing suit to recover liquidated damages. Court held since P never tendered, D's duty to pay never arose and D was not in breach. Otherwise P could have a scam to go collecting liquidated damages from hapless buyers without even possessing land for sale. Goodison v. Nunn

Example: Bilateral contract in which Buyer agrees to make $1,000 monthly payments to Seller. On the eighth month, Seller agrees to tender title to land. Payments are due to seller for the first seven months independent of any obligation by Seller. If buyer misses a payment, seller could bring a cause of action to recover. After the eighth month, Seller cannot bring action to collect past due amounts without showing he has title and is ready to transfer.

e. Legal and procedural effect. The legal and procedural effects of implied-in-law conditions are ordinarily the same as if the conditions had been expressly set forth in the contract. The doctrine of substantial performance is generally held to apply only to constructive conditions, and not to express conditions.

f. Types of conditions implied in law: 1) earlier performance condition precedent to later performance. 2) simultaneous performances conditions concurrent. 3) Protracted performance condition precedent to single act. Wherever one party's performance in a bilateral contract will take some period of time, while the other's may be performed in a moment of time, the performance will take the period of time is an implied-in-law condition precedent to the other.

Example of 2): Case requiring streets be paved in subdivision. It would appear that D's payments and P's improvements were to be made within the 5-year period. P's breach was material since the value of D's investment would be substantially impaired if the street improvements were not made. Palmer v. Fox

g. Avoiding forfeitures. The courts do not favor forfeitures and often construe contracts to avoid a forfeiture if possible. One of the significant circumstances under R₂C § 241 which affects the materiality of a breach is the extent to which the party failing to perform or to offer to perform will suffer forfeiture. In effect, the courts will excuse an agreed express condition if there would otherwise be an extremely harsh forfeiture.

Where a construction contract makes no provision for installment payments, the work must be substantially performed before payment can be demanded. Stewart v. Newbury

Accident on construction project. Knock down wall of house. General contractor wants damage to house + additional costs to complete excavation. Subcontractor wants past due payments + lost profits. Each party says the other breached. General contractor argued the accident shows the work is not being performed in a workman-like fashion. Therefore, general contractor is relieved of its duty to make payments until work is completed in a workman-like fashion. Court holds general contractor is correct. Sub-contractor in breach. KNG Construc v. Harris

3. Excuse of conditions by SUBSTANTIAL PERFORMANCE. Where complete performance by one party is a constructive condition precedent or concurrent to the other party's duty of counterperformance, that condition may be excused if the party has rendered "substantial" performance. The other party's duty of counterperformance then becomes absolute, although he can deduct any damages suffered because the first party's performance was less than complete.

a. Construction Contracts. The doctrine has been applied primarily in cases involving building contracts, where it would be patently unjust to allow an owner to retain the value of the building on his land free of charge just because the builder made some small deviation from the agreed specifications. The risk of forfeiture and unjust enrichment is simply too extreme. Example: in the READING PIPE case, we have an immaterial variance/breach and substantial performance. Homeowner must pay for house.

b. Other contracts. In theory, the doctrine can be applied to any bilateral contract. But as a practical matter, where the risks of forfeiture are less extreme than they are in the building contract cases, courts are less inclined to protect a party whose performance is defective. Rather, they assert that "a contracting party ought not be forced to accept less than he bargained for."

UCC provision. This is particularly true in contracts for the sale of goods. Both at common law and under the UCC, no delay or deviation from specifications in the contract is permitted (so-called rule of "perfect tender"): substantial performance is not sufficient.

4. Material defects going to the essence of the contract. Since P can secure uniform coloring of her roof tiles only by installing a completely new roof and the court cannot say as a matter of law that a patch job essentially serves the same purpose as a roof of uniform color, D has not substantially performed the contract. In this case, the court inserted into the contract the subjective valuation of the homeowner.

In order to constitute substantial performance, the contractor must have in good faith intended to comply with the contract, and must have performed without pervasive defects that go to the essence of the contract. Such defects must be inadvertent and unintentional and must be remediable without doing natural damage to other parts of the building. O.W. GRUN ROOFING

5. Effect of "time of the essence" clause. Although payment of the common area charge by an anchor store in a mall is a material requirement of the lease, even a material provision may be breached in such a trivial manner that enforcement would be unconscionable.

P contends the contract contains a condition (payment of charges on time). Therefore, the failure to make timely payment will justify his termination of the lease contract, and he can kick the store out of the mall. But the court finds the breach too trivial to justify nonperformance and kicking the store out.

It was not the landlord's intent to terminate for singular and trivial breaches when he added that term to the contract. The store broke its promise to pay on time, but that failure is not a condition justifying the landlord to terminate the lease contract.

Most commercial leases included such clauses, and while the words cannot be dismissed, such stock phrases do not add much to the parties' obligations in most situations. When failure of payment at the exact time does not cause injury, it cannot be deemed a material breach merely because the contract contains the provision.

In this case, P was at most deprived of two days' loss of funds. This could be adequately compensated by an award of interest on $3,566 for two days. On the other hand, D would suffer a significant forfeiture, given the amount of its investment. Finally, D's delay may be explained by normal business practices, given its need to send the bill to its headquarters, P's failure to address it to a particular individual, and the normal pattern of 30 days' payment of such charges. Foundation Dev't Corp v. Loehmann's Landlord could give adequate notice and put its foot down.

6. Divisible contracts. P set a price for grading work and requested a separate surety bond for "street improvements." The BILATERAL contract stated no work was to be performed on that portion of the contract until the bond was supplied.

Since the contract is severable, the doctrine of substantial performance applies to the grading work. D had completed 98% of the work and was prevented from completing the balance through the fault of P. Therefore, D may recover damages from P. LOWY Dealing with a BILATERAL CONTRACT.

b. A contract is divisible if a reasonable interpretation indicates that a failure to perform one installment would not constitute a failure of the basic consideration bargained for. Example: buy a 2-piece suit, and the store ships only a coat - not divisible.

c. P contracts to deliver logs. Flood occurs. Not all delivered. Party is entitled to a pro-rata share of payment for the logs delivered. If P delivered all the logs half the distance, then no recovery. Divisibility does not apply along those lines. GILL If pro-rata benefit, then a court would not even have to confront the substantial performance issue.

d. P, defense contractor, research and preparation and acquired equipment, but never achieved readiness. Court did not allow recovery for completion of 3 out of 4 steps. Gov't only pays for end results in this contract. Penn. Exchange Bank v. U.S.

e. Paul agrees to put up 6 signs: Pete's Place in 4 miles, 3 miles, 2 miles, 1 mile, PETE's PLACE, and you missed Pete's Place. P lets some signs fall down. Made K for big sign at $35, the others at $10. Arguments on either side for divisibility. One sign down amount to forfeiture - unfair. Collective impact is greater than the sum of the individual parts. Plausible that the primary sign is condition precedent to pay anything, but if one or two down - not a condition. JOHN v. UNITED ADVERTISING

D. MEASURE OF DAMAGES

If the builder has performed but there are defects in the building, damages are measured by: (a) the cost of repair or replacement to bring the building up to contract specifications, where this can be done without undue expense; or (b) where repair or restoration is not economically feasible (e.g., where all the pipe in a home must be torn out and replaced), then the difference in the value in the as built and originally contracted bldg.

Even if the court concludes that the performing party did not render "substantial performance" or that the doctrine does not apply, there is still the possibility of recovery in quasi-contract for the reasonable value of benefits conferred.

1. An employee who worked only 9.5 months on a 12-month contract before leaving his employer cannot recover under the contract, but may recover under quantum meruit for the net benefit conferred on his employer not exceeding the contract amount. The employer should not receive a windfall to the detriment of the employee. BRITTON v. TURNER

The court here is reluctant to enforce a forfeiture; the employer had no economic loss. This employee did not have a condition precedent in K to expect payment only after 12 months work. Quantum meruit - awarded based on value of labor, not necessarily the K price. Party can never recover more than K price - ceiling. Also, subtract off employer's costs to locate someone new.

Purpose of K law: redress economic harm, but carry out the intentions of the parties. 13th Amendment bars specific performance of an employment contract against employee.

If employer had breached, the employee may have been able to ask for up to $120 depending on the harm he suffers. He cannot collect whole amount if he could have acquired another job.

2. Retention of down payment. A vendor on a real estate contract is entitled to retain the down payment when the purchaser willfully defaults. The modern rule allows the defaulting party to recover for part performance in excess of actual damages. But the modern rule protects defaulting parties who have substantially performed, not those who have merely paid a down payment or first installment. For down payments in the range of 10%, a defaulting buyer would have difficulty proving that the amount retained exceeded the actual damages. Maxton Bldrs v. Lo Galbo

3. Good Faith and Reserved Discretion. In some situations, the parties may be unwilling to specifically define identified risks or desired performance standards. Instead, the parties may adopt a general standard, leaving to one or both parties the opportunity to exercise discretion. Two of the most common examples are "requirements" contracts and contracts in which adequacy of performance depends on one party's "satisfaction." Because every contract imposes a duty to act in good faith, terms reserving discretion are valid, but application of the good faith standard is often difficult.

a. Good faith requirement does not supersede terms of contract. In K for sale of capital assets, where parties agree on the valuation of the majority of assets, and where P claims it is entitled to payment and the other party is just holding up payment in bad faith, the court does not buy it.

P's suit is an attempt to rewrite the contract, which does not provide for partial disbursement of escrow funds. P's claim that the obligation of good faith requires D to agree to an interim distribution is inconsistent with the express terms of the K. If P wanted such an option, it should have bargained for it.

In this case, the contract did not give D authority to deprive P indefinitely of a portion of the agreed consideration. What P claims is D's discretion over the timing of distribution is actually a power either party may exercise, but only if both agree to do so. Hence, D's refusal to agree to release the funds does not violate its obligation of good faith.

D has not acted in bad faith because its refusal to release the funds in escrow until the arbitration is complete does not give D anything it had bargained away; D does not thereby recapture an economic opportunity.

The agreement that escrow funds would not be released until the arbitration was complete had the effect of protecting both parties. P was the one who determined what the adjustment to the purchase price should be. The failure to provide for partial escrow payment could have been intended to give P an incentive to limit the amount of the adjustment potentially subject to arbitration. Centronics v. Genicom

b. Satisfaction clause for feasibility study in OMNI GROUP did not render K illusory due to embedded good faith argument. The feasibility study requirement for purchase can be viewed objectively or subjectively. Usually, "satisfaction clause" implies subjective valuation, subject to a good faith performance. This implied good faith performance argument is true for any contract containing a subjective element, not just satisfaction clauses.

c. Damages for bad faith rejection. The evidence indicated that D's claim of dissatisfaction with the loads of chipping potatoes was made in bad faith. The price of potatoes had fallen from $4.25 to $2.00. As a merchant, D has a duty to act in good faith. Notwithstanding the "satisfaction clause," the rejection of the potatoes is ineffectual and constituted a breach of contract for which P could recover damages. NEUMILLER FARMS Normally, with "satisfaction clause," one would assume some margin of judgement.

d. Portrait painter subject to buyer's satisfaction - still enforceable because consideration is to make a good faith evaluation. If Pablo Picasso is artist and customer rejects - then subjective valuation reigns supreme. Artist can produce evidence to show bad faith, but evidence of other's valuation is immaterial.

e. Lender liability. In a loan K where the lender can call the note due at anytime, courts read in an implied covenant of good faith and fair dealing that precludes arbitrary termination. Language of the note regarding acceleration of payment and termination under various conditions would be meaningless if D had the power to demand immediate payment without cause. The judge properly instructed the jury to decide the issue of good faith under a subjective standard. REID v. KEY BANK. THIS HOLDING LIMITED TO UCC CASES.

Lender liability for terminating a line of credit or refusing to honor a commitment to provide financing has become a significant risk for banks. These cases present difficult questions of how extensive a bank's obligation to act in good faith really is. This may range from a prohibition of intentional dishonesty to a broad compliance with community standards of "fairness and decency."

f. Output contracts. THE BREAD CRUMBS CASE. Contract allows bakery to stop supplying bread crumbs with 6 months notice. Under UCC § 2-306, an output contract is deemed not to be indefinite since it is held to mean actual "good faith" output; nor does it lack mutuality of obligation since the producer is required to operate in good faith and according to commercial standards of fair dealing. Thus, good faith and reasonable diligence in light of commercial background and intent, not economic feasibility, is the standard, and must be read into every output contract if not otherwise expressly stated. Ordinary production assumed the norm.

This imposes an obligation on the seller to use its best efforts to supply the goods unless the parties agree otherwise. Good faith cessation of production terminates any further obligations. A D would be justified, in good faith, in ceasing production of the single item only if its losses from continuance would be more than trivial, which is a question of fact.

g. Requirements contracts. AMERADA HESS CORP. A utility set up a long-term contract with an oil supplier to meet it fuel oil needs, but reserved right to substitute gas. Then oil price doubled. P tried to exploit the K by producing cheap electricity for sale to other utilities due to its cheaper input costs: evidence of bad faith.

Here, the increase in requirements for the first year was very large. The reason for the increase was apparently a large increase in sales of power to the New York Power Pool which did not enter into the calculations behind the contract estimates. Additionally, P released natural gas instead of burning it. The massive increase of sales to other utilities was tantamount to making these utilities silent partners in the contract; the change in gas use was an arbitrary change in conditions, intended to take advantage of market conditions. D was justified in refusing to meet P's demands which were not incurred in good faith.

Any demand by P for more than double its contract estimates was unreasonably disproportionate to those estimates. D could not reasonably anticipate such an increase. The clause allowing P the unlimited right to burn gas indicates that P contemplated a decrease of oil requirements. Because the quantity of oil P used after 1970 was not within the reasonable expectations of the parties when the contract was executed, the requirements were unreasonably disproportionate and D was not required to meet them.

Arguments for P: 1) D failed to include variable P term in K. 2) sophisticated player. 3) Amerada Hess also sells oil to other buildings who can use also natural gas. therefore, other utilities are like other building customers. 4) absolute limit of oil required is capacity of plant to produce electricity.

h. Uranium oxide 50% output purchase hypothetical. It may be only feasible to build a plant for supply if you a party who is willing to buy 50% of the output. Then the court will enforce justifiable reliance by the plant owner.

i. BLOOR v. FALSTAFF BREWING Arguing that "best efforts" should require that brewery produce beer for marketing firm to a level of effort "necessary to maximize the joint net product flowing from the relationship." If "best efforts" are not a part of the contract, then a party can satisfy its contractual duty with good faith < best efforts.

Consider also liquid cooking oil marketing contract. It paid marketing firm royalties. Marketing firm allowed to collect damages from D's introducing a second product that competed with the original oil to be marketed.

4. Impracticable Performance.

a. Uncontemplated existing condition rendering performance impracticable. MINERAL PARK LAND The evidence indicates that D took all the gravel and earth available above the water on P's land. No greater quantity could have been taken by ordinary means, except at an expense at least 10 times the usual cost.

When a party agrees, without qualification, to perform an act, he cannot be excused because performance becomes difficult. But when performance depends on the existence of a given thing, and the thing is assumed as the basis for the contract, performance is excused if the thing is nonexistent. Here, the parties thought all the gravel D would need was available on P's land, but the did not. The gravel under water was not reasonably available. If something is impracticable because it can only be done at excessive and unreasonable cost, it is impossible in legal contemplation, so D was excused from taking the remainder of the gravel from P's land. The situation is not different from that of a total absence of earth and gravel. Court unwilling to hold D ASSUMED the RISK - BOTH PARTIES AGREED TO BASIC ASSUMPTION.

b. US v. WEGEMATIC CORP Seller represented that it could build a computer system for the Federal Reserve. Basic engineering difficulties which prevent timely delivery do not constitute commercial impracticability, thereby excusing performance. The seller is not free to express aspirations and gamble on mere probabilities of fulfillment without any risk of liability. P CLEARLY ACCEPTED THE RISK.

It is conceivable that a company would even assume the risks of the impossible. Example: 30 lb tachometer for DoD. Gov't has various missile component subcontractors under K. Gov't tachometer contractor stands to gain from the K, but it may be held liable for the risk that product is impossible to develop. Court will not allow defense of impossibility. Difficult question: liable for all the other subcontractors?

c. Basic Assumption. It is essential in impracticability cases to determine whether the "nonoccurrence" of the event that rendered performance impracticable was a basic assumption on which the contract was made. Unforeseeability is an important consideration, but it should not be confused with the basic assumption requirement. Even if the event was foreseeable, the parties may have omitted reference to it because they thought it was unlikely to occur, or was not an important risk.

d. Supervening impracticability. Where the subject matter of the contract or the specified means for performance or source of supply is destroyed or becomes nonexistent after the contract is entered into, without fault of the promisor, the promisor's duty may be discharged.

(1) Destruction of subject matter: Example: Concert hall burns down. Neither party responsible for the fire. Both parties to the contract are excused. TAYLOR v. CALDWELL Burned down theater would not relieve Taylor's duty to meet his payroll, costume designer contracts, etc. Begin with the assumption that even if the hall burned down, Caldwell is still obligated to perform. Therefore, if possible to repair before lease date, he must repair. Alternative view: the fire terminated the contract. Therefore, no more contractual duty, even if it can be repaired at onerous burden. Contract void.

Impracticability is a matter of degree. If a fire marshal requires more changes, a small fire, or other minor problems that increase the cost of performance, then Caldwell still obligated to perform.

(2) Death or illness in a personal service contract.

(3) Temporary impossibility. - suspends rather than discharges contractual duty while the impossibility continues. After the impossibility ceases, the duty reattaches, but only if it appears that performance thereafter would not substantially increase the burden on either party or make it different from that which was promised.

(4) Specific source of supply contemplated. It must appear that a particular source of supply or means for performance was contemplated or specified by both parties to the contract. For example, a contract to sell potatoes to be grown on specific land is discharged by failure of the crop. But if no particular land was specified or contemplated by the parties, the promisor's duty to supply potatoes is not discharged even though the promisor subjectively intended to fulfill the contract from the crop which failed.

(a) Risk of nonperformance foreseeable. DUNBAR MOLASSES. P had a contract to supply 1.5 million gallons of molasses from D. D took the chance that the molasses refinery's output would remain the same as in past years. D did not even get a contract with the refinery to secure its position. Therefore, D liable for failure of his supplier. This circumstance does NOT amount to impossibility. Question here whether sugar had to be purchased from Nat'l Sugar Refinery - could be critical or just a measure of quality.

COMMENT: The impossibility doctrine really exists to allocate risk between the parties. Thus, where a court believes that the risk was foreseeable and under the control of one of the parties (here D could have foreseen the risk and gotten a contract with the refinery), then the court will not relieve performance due to impossibility (the theory being that the party with control has contributed to the impossibility). The court also stated that had the refinery been destroyed without D's fault (as by an act of God), then D would have been excused, since it would not have been a risk assumed by D.

e. Futility of act impracticability.

Is P excused from submitting plans for development of an industrial park, an independent covenant, if he cannot get financing? No. (Perhaps financial institution will not loan until plans are drawn up.)

P's inability to obtain financing is not an event, the nonoccurrence of which was a basic assumption on which the contract was made. In fact, the parties expressly provided for such an event, by permitting P to terminate the contract. This termination right was to arise only after preparation of satisfactory construction plans, however. Because P never prepared the plans, he never had a right to terminate. The courts cannot change the allocation of risk agreed to by the parties. DILLS v. TOWN OF ENFIELD

COMMENT: An event may be foreseeable, yet its nonoccurrence may still be a basic assumption on which the contract is made. The less likely a foreseen event is at the time of contracting, the less likely the parties are to allocate the risk of its occurrence.

Problem on P. 943 K to build a house for $300K.

Case 1: Excavator hits rock. No tests prior to construction. $100,000 to remove rock. Risk allocated to builder, who should have expertise. This risk easily foreseeable and detectable.

Case 2: Soft spot on soil. Cost $50,000 to repair. Not as easy to detect soft spot. Outside showing of negligence by contractor, probably would not be liable. Need to know what standards contractors normally apply in this area.

Case 3: Adoption of zoning ordinance may act as a supervening cause to discharge contractual duty. Once the K is void, if the ordinance is removed, the contractor is not obligated to restart construction. Can builder recover for work expended? Questionable. Two innocent parties. Intuitively place risk on homeowner: he chose the sight.

Case 4: Contractor dies. If view as contract for personal services, death excuses performance but estate can recover for work performed consistent with contract and not liable further.

f. Commercial Impracticability.

Transatlantic Financing CASE

Unexpected shutdown of the Suez canal was a foreseeable risk assumed by the operator of the ship. Should have known due to the volatility in the region.

Louisiana Power & Light v. Allegheny Ludlum Indust.

D was to supply P with stainless steel tubing for a nuclear power plant. D is unable to show here that performance was commercially impracticable. It did show that its costs had increased by 38% and that performance would have deprived it of its anticipated profit and resulted in a loss of the contract. This increased cost was not so especially severe and unreasonable that performance was impracticable. Other cases have held that cost increases of 50 to 58% were not great enough to excuse performance.

D was merely mistaken as to a future event -- that it would make a profit on the contract. The contract did not contain an escalation clause for price increases to protect D; therefore D cannot now seek such protection. (means party assumed the risk).

g. Loss of profitability as a force majeure event. THE MINIMUM QUANTITY PURCHASE OF NAT. GAS CASE When the market price for natural gas declined, D refused to take or pay for the minimums. Court holds neither a drop in demand nor a drop in resale price is a force majeure event. A force majeure provision is not a substitute for a price redetermination clause.

COMMENT: The force majeure clause is intended to protect against risks beyond the ordinary contract risks. A fixed-price contract is intended to allocate the risk of a market rise to the seller (the buyer gains) and the risk of a market drop to the buyer (the seller gains).

5. DISCHARGE BY FRUSTRATION OF PURPOSE

Where the bargained-for performance is still possible, but the purpose or value of the contract has been totally destroyed by some supervening event, such frustration of purpose will discharge the contract.

a. Requisite elements. The following four elements must always appear in order to find frustration of purpose sufficient to discharge a contract:

a) Some supervening act or event.

b) The supervening act or event was not reasonably foreseeable at the time the contract was entered into.

c) The avowed purpose or object of the contract was known and recognized by both parties at the time they contracted.

d) The supervening act or event totally or nearly totally destroys the purpose or object of the contract.

b. No discharge of lease. PARADINE v. JANE D defended his failure to pay rent on leased property on the grounds that Prince Rupert's army had invaded and put D out of possession. Since the lessee gained the advantage of casual profits, he must also bear the risk of casual losses.

COMMENT: Although the language in this case deals with frustration of purpose, this case is often cited as an example of subjective impossibility, which does not discharge the promisor of his duty to perform because the promisor assumed the risk of his own inability to perform.

WILLS v. SHOCKLEY

Raise sunken boat in the Atlantic. Boat slips from reef into mud. Salvager now says it is impossible to raise. P brings action for failure to perform. Court holds P wins. D could have written K in such a manner to avoid this liability.

c. Unforeseeable supervening event. Where the purpose of the contract is frustrated by an unforeseeable supervening event, and the purpose was within the contemplation of both parties when the contract was made, then performance is excused. It was clear in this case that the purpose of the high rent for the room was to view the coronation parade. KRELL v. HENRY The attainment of the purpose of the contract becomes an implied condition precedent to performance.

The frustration must be so severe that it was not within the risks assumed under the contract. The purpose that is frustrated must have been a principal purpose of the party making the contract, without which the contract would make little sense.

Distinguish from booking passage on ship to attend parade. (Other people could have ridden in your space)

Distinguish hotel reservation for convention that is canceled: not obvious. Factors: 1) convention hotel? 2) convention rate, 3) recovery possible from convention organizers.

d. Termination of government program that created subject matter of contract. WASHINGTON STATE HOP PRODUCERS In this case, the purpose of the contract was for Ds to purchase hop base that was created by the USDA marketing order. Once the program was terminated, there was no need to purchase hop base; the hop base would not even exist. To the extent the court of appeals relied on the 92% decline in the value of the hop base Ds purchased, it erred, because decline in price alone is not substantial frustration. However, the decline in price may be evidence of the substantiality of the frustration of the purpose of the contract. It is irrelevance of control of hop base after 1985, not the decline in the market value, that supplies the frustration justifying recission of the contract.

COMMENT: Many cases of what might otherwise be considered frustration of purpose are treated by the courts as impossibility of performance due to destruction of the subject matter of the contract.

LLOYD v. MURPHY

Gov't wartime order prevented use of property for sole purpose of lease: the sale of new cars. Although there were restrictions on the lease, the lease was still valuable to the lessee. In the absence of proof that the value of the lease was "totally destroyed," the lease was upheld.

e. Modification to Resolve Performance Disputes.

Under R2C, a promise which modifies a duty under a contract neither side has fully performed is binding if the modification is fair under circumstances not anticipated at the time of contracting. Both parties must assent to a modification.

Modification based on change of conditions. ANGEL v. MURRAY

Man has fixed-price garbage collection contract with City of Newport, which experiences rapid growth. He bargains for an additional $10 K, and the court upholds it. The additional obligation was not enough to meet frustration of purpose. Largely a business risk.

Intent of the party seeking modification. ROTH STEEL PRODUCTS v. SHARON STEEL CORP. Under UCC 2-209(1), a modification does not need to be supported by consideration to be binding. The ability to modify a contract is limited only by the general obligation of good faith. The determination of good faith requires two inquiries: (1) Was the party's conduct consistent with reasonable commercial standards of fair dealing in the trade?; and (2) Were the parties in fact motivated to seek modification by an honest desire to compensate for commercial exigencies?

D's steel costs increased dramatically in 1973. D suffered losses even by performing the contract as modified, so its conduct on first impression was consistent with reasonable commercial standards, at least to the extent that an ordinary merchant would seek a modification in the same circumstances.

The trial court found that D threatened not to sell P any steel if P refused to pay the higher price. This evidence of bad faith was not rebutted by D. D used P's need for steel and its inability to buy elsewhere to force P to agree to the modification. Because D violated the obligation of good faith, the modification is not enforceable. (The court did not reach the issue of whether the modification was voidable due to economic duress on P.)

f. AGREED DISCHARGE - ACCORD AND SATISFACTION

Parties may agree to discharge contractual duties, such as a creditor's agreement to accept less than the full contractual payment to settle a dispute with the debtor. This type of arrangement is known as "accord and satisfaction." Most courts require consideration to support an agreed discharge, but if the parties bargained for the discharge, the consideration requirement is easily met. Some statutes, including UCC 1-107, eliminate the consideration requirement if there is a signed writing. REQUIREMENTS: 1) bonafide dispute over the amount, 2) debtor acting in good faith.

Under the common law, a creditor would have foregone his right to expect full payment when he crosses through "payment in full" on debtor's check and cashes it anyway.

Under the UCC 1-207, a party may explicitly reserve its rights in assenting to performance demanded or offered by the other party, and does not thereby prejudice the rights reserved. Under the minority view, the UCC supersedes the common law. Accordingly, P properly reserved its rights by crossing out D's notation. The rationale for the UCC approach is that the creditor should not be at the mercy of the debtor, who could without justification offer to pay less than what is owed. MUST HAVE A BONAFIDE DISPUTE for accord and satisfaction. AFC INTERIORS v. DICELLO

If a builder completes additional work on house at added expense under protest, he can seek to recover from homeowner.

6. Termination of Contractual Relations

ZAPATHA v. DAIRY MART Dairy Mart terminated the franchise agreement without cause, as per contract. No forfeiture, no unconscionability, and no bad faith. Epstein, Univ. of Chicago: Franchisor is concerned with good will transfer from location to location. Franchisee benefits to the extent he is the most efficient for his location. In aggregate, this policy attracts high quality franchisees.

SEUBERT v. MCKESSON CORP

An employee hired at will may not be terminated without cause if the employer has a written policy that specifies a condition under which employees will be terminated. The presumption that employment is terminable at will may be superseded by a contract, express or implied, that limits the employer's right to terminate. D's personnel policy supports P's position that he could be terminated only for cause.

C. BREACH OF CONTRACT AND ITS REMEDIES

If a promisor is found to be under an absolute duty to perform, and her duty has not been discharged by performance or otherwise, her failure to perform at the time and place provided in the contract constitutes a breach thereof. BREACH = failure to perform that which under absolute duty to perform, without justification or excuse.

1. Criteria: (1) Extent to which the breaching party has already performed; a breach in limine is more likely to be considered a material breach.

(2) Whether the breach was willful, negligent, or the result of purely innocent behavior. A willful breach is much more likely to be held material (which is why a repudiation is always a material breach).

(3) The greater or lesser uncertainty that the party failing to perform will perform the remainder of the contract.

(4) The extent to which the nonbreaching, injured party will obtain (or has obtained) the substantial benefit for which he bargained.

(5) The extent to which the nonbreaching, injured party can be adequately compensated for the defective or incomplete performance through his right to damages.

(6) The degree of hardship imposed on the breaching party by holding the breach to be material and terminating all her rights under the contract.

2. Effect of a "material" breach: Two-fold effect: 1) it excuses any duty of counterperformance and 2) immediately entitles the innocent party to remedies for breach of the entire contract.

3. Effect of a "minor" breach: Even a minor breach entitles the aggrieved party immediately to damages or other remedies, but here the remedies are limited to the damages caused by the breach rather than for breach of the entire contract. A minor breach does not excuse any duty of counterperformance then due from the nonbreaching party; however, it will entitle that party to suspend temporarily any duty which otherwise would have arisen on proper performance of the breached promise. Suspension may continue until the breach is cured, or until it has become material (at which point, the duty of counterperformance is excused).

4. REMEDIES for a material breach: 1) damages, 2) specific performance, 3) rescission and restitution, 4) quasi-contract, 5) tort action. P will have to elect which remedy he desires.

5. ANTICIPATORY REPUDIATION

If either party to an executory bilateral contract, in advance of the time set for performance, repudiates the contract by words manifesting her apparent intent not to render the performance she has promised, the other party may treat such anticipatory repudiation as a present, material breach of contract and bring an immediate action for the entire value of the promised performance.

This doctrine prohibits a repudiatee from continuing with a project; he can only seek recovery for expenditure + profits + incidental expenses to date.

In the face of a repudiation, P's strategies: 1) do nothing and wait, 2) seek retraction, 3) change position (go get another job). P relieved of obligation; D's power of retraction ended with repudiation. D no longer liable, except to extent P obtains less wages. 4) bring suit immediately.

HOCHSTER v. DE LA TOUR

Hochster sued De La Tour for breach of an employment contract; Hochster was to accompany D on a tour. Court ruled Hochster could bring an immediate action for damages when the promisor repudiates the contract before the date set for performance. P has no duty to seek other work; however, to the extent he asks for full damages under the contract, he has a "duty" to mitigate damages in the wake of an anticipated breach.

COMMENT: The court reasoned that P was caught in a conflict: he had to either remain idle waiting for the date of performance and then sue, or obtain another job and thus lose his right of action against D, presumably becuase he would then not be ready and willing to perform, a condition of his performance. The alternative would be simply to hold that repudiation is an excuse of the constructive condition that P be ready, willing, and able, and the cause of action against D is not destroyed.

If Hochster died after the anticipatory repudiation, then his estate could not prove any damages even though a breach of K had occurred. If De La Tour says "you must provide your own horse," then question becomes is this change a material or immaterial breach? If material, then we have K repudiation: sudden change in the rules that radically changes the economies for the journey.

b. Requirement of executory duties on BOTH sides of contract. The doctrine of anticipatory breach applies only where there are executory obligations on both sides of the contract. It is not applicable where one of the parties has already performed his side of the contract, and the other then repudiates her obligation to render some future performance. In such cases, there is no immediate cause of action for breach, and the innocent party must wait until the time set for the other's performance.

c. "Duty" of nonrepudiating party to mitigate damages. Even though the repudiatee has the right to bring an immediate action, there is generally no requirement that he do so. The problem is whether, if he delays, he should be entitled to damages incurred between the date of the repudiation and the date set for performance.

Most courts hold that a Defendant has an equitable defense that the repudiatee did not mitigate the damages arising from the repudiation; and if he failed to do so, he is not entitled to recover such damages as he could have otherwise avoided. The possibility of mitigating damages limits recovery. A plaintiff can never recover more than what his damages would have been with mitigation.

This means that if the repudiatee is in the midst of performance, he has a duty to stop, unless doing so would involve greater damages than completing the tender (as where leaving goods half manufactured would result in total waste).

Alternatively, if the repudiatee is supposed to receive performance, he must - after a reasonable length of time - look elsewhere for the performance which was due under the contract. See UCC 2-610, allowing the repudiatee to wait only a "commercially reasonable period of time" before seeking alternative sources of supply.

d. Legal effect of anticipatory breach.

Excuses dudty of counterperformance. The prospective failure of the promisor's performance excuses the promisee's duty to hold himself ready to perform or to tender performance on the date set.

Retracting repudiation. A repudiator may retract her repudiation at any time prior to the date set for her performance by notifying the other party that she will perform the contract. Such a withdrawal of repudiation will revive the other party's duty of counterperformance, unless in the interim the repudiatee has either accepted the repudiation (in which case the contract is discharged by rescission), or has changed his position in detrimental reliance thereon (in which case the repudiator is estopped to retract).

TAYLOR (P) v. JOHNSTON (D)

Case of the stallion in California sold to new owner in Kentucky. D arranges for breeding in Kentucky, which never actually occurs. P was patient to a fault. P's wrong move - not cutting his losses in Kentucky - letting it play out, and recover for actual breach. P, the injured party, treated the contract as still in force until there is an actual breach. Consequently, he is left to his remedies at the time of performance.

D repudiated the contract by selling the stud. When P opted to treat the contract as still in force and arrangements were made for performance, P was left to his remedies upon actual breach. Since it was possible for P's mares to breed with the original stud when P decided to take them elsewhere, the contract was still capable of being performed and the courts will not imply a repudiation. Court says the modified K was never repudiated.

Distinguish voluntary disablement from anticipatory repudiation: generally governed by the same principles. Voluntary disablement refers to conduct by a contracting party (e.g., conveying land to a third person) which makes it appear that she is unwilling to perform (i.e., from which her repudiation is implied). Anticipatory breach refers to words by a contracting party manifesting her intent not to perform (i.e., an express repudiation of the contract).

Immediate cause of action for breach. The very essence of the doctrine of anticipatory breach is that it gives rise to an immediate cause of action at the time of the repudiation; i.e., the repudiation is treated as a present, major breach of contract.

If you charge the other party with anticipatory repudiation and break off the contract and are wrong, then you have role reversal and you become the repudiator. For example, breeding the mares with another stallion in frustration renders performance impossible by original promisor. More prudent to wait for a month and sue for actual damages.

e. Requirement of unequivocal repudiation. The words used must manifest the promisor's positive, unconditional refusal as promised in the contract. A mere expression by the promissor of "doubt" that she will be able to perform is insufficient to constitute a repudiation. Such experessions may, however, constitute a prospective inability to perform, permitting the other party to suspend counterperformance.

UCC remedy. Under the UCC, (and R2K is the same), either party to a contract for the sale of goods has the right to demand "adequate assurances of performance" from the other party if reasonable grounds exist for believing the other party's performance may not be tendered (e.g., insolvency). Unless such assurances are given, the first party has the right to suspend any performance due by him. Any unjustified failure to comply with a demand for assurances for a period exceeding 30 days constitutes a repudiation of the contract as a matter of law. Sometimes just the other party's words - though unsatisfying - may meet the criteria for adequate assurances under the law.

AMF, INC. v. MCDONALD'S CORP The courts will not enforce a contract where McDonald's has reasonable grounds for believing AMF cannot produce the cash registers ordered, requests assurances, and receives none. The record clearly indidcates that McDonald's had "reasonable grounds for insecurity" as required under UCC 2-609, since the prototype had not performed satisfactorily, P was behind schedule for production to meet even the delayed delivery date, and P had attempted to reduce the order from 23 to five units.

Although UCC 2-609 requires a written demand that assurances be given, the court chooses to interpret the Code liberally. AMF had notice that D had suspended performance until it received adequate assurances, which AMF failed to provide. Therefore, McDonald's repudiation was justified.

Problem p. 1026

Adequate assurances are a function of how high the stakes are. Possible that the repudiation will deal a death blow to a struggling company.

Pittsburgh-Des Moines Steel v. Brookhaven

Builder did not establish reasonable grounds for insecurity, because Brookhaven's financial condition had not changed. The parties agreed to a contract with payment at the end. PDM's actions in saying it would perform only if paid up front amounted to anticipatory repudiation.

f. Requirement of a material breach in order to excuse performance.

Whether or not the aggrieved party (A) can cancel his own peformance to B depends on whether the breach by B of a condition or covenant is a material breach or only a minor breach.

Case of a partially performed installment contract. PLOTNICK v. PENN. SMELTING AND REFINING CO. Failure to pay one installment does not amount to a material breach enabling P to cancel any further performance on his part. Materiality of breach depends on the circumstances. Factors to consider: 1) whether nonpayment makes it difficult for seller to continue to perform, 2) whether failure to pay creates such a large risk in the seller's mind that he should not have to continue to perform. Neither was the case here. Thus, no material breach.

Clincher here is the sight draft: sign off on payment (draft) before delivery can be accepted. Purchaser has offered no consideration without asking for anything in return. This offer should have allayed the seller's fears.

Under UCC When goods are sold on credit, and seller has a bonafide concern that the buyer is insolvent, seller can say it will only perform if seller gets money at the time of delivery. But his concern does not excuse his performance altogether. If the buyer is bankrupt, then seller has no duty to perform.

6. COMPENSATORY AND PUNITIVE DAMAGES

General theory of damages: place injured party in the same position as if the contract had been properly performed. MEASURES: expectation, reliance, and restitution. Because contract damages are primarily compensatory, courts have traditionally been unwilling to award punitive damages for breach of contract. P must prove loss with reasonable certainty. Recovery is limited to what P would have received had the contract been performed. Nominal damages may be awarded without actual loss. Avoidable damages are not recoverable.

BURKHOLDER v. SANDROCK

Punitive damages are normally recoverable in breach of contract actions only when a separate tort accompanies the breach or tort-like conduct mingles in the breach. The evidence in this case proved that D engaged in intentional wrongful acts of fraud, misrepresentation, deceit and gross negligence. Persons in P's position must rely on D's expertise. D should not be permitted to use deceptive practices in building construction or to disclaim responsibility for damages when it knows its work was the cause.

BOISE DODGE INC. v. CLARK

D discovered P had turned the odometer back on a car and that it had been a demonstrator. Punitive damages must not be so disproportionate to actual damages as to be the result of passion or prejudice. No mathematical formula; applied on a case-by-case basis. In this case, there is a need to deter future illicit business.

COMMENT: California recognizes a tort action for an insurer's refusal to settle within the terms of an insurance policy or to pay an insured's undisputed claim. California expanded tort liability for "bad faith" breach of an oil supply contract in Seaman's Direct Buying Service v. Standard Oil. This approach has been criticized as unpredictable and vague. It is difficult to draw a line between a legitimate attempt to rescind a contract, a dispute over contract terms, and a bad faith denial that a contract exists. The Seaman's decision has been limited and may soon be overruled.

a. Building and Construction Contracts.

Owner breaches. If the owner breaches, the builder will always be entitled to at least the profits he would have made on the contract. If the breach occurs at the outset (e.g., the owner never lets the builder come onto the land), the prospective profits are all that the builder will recover. If the breach occurs after part performance (e.g., owner kicks the builder off the job after he has commenced construction or made substantial preparations for same), the builder can recover the profits plus whatever expenditures he made in part performance. If the breach occurs after full performance (e.g., owner refuses to pay the contract price), the builder can sue and recover the full contract price.

Builder breaches. If the builder breaches, the owner basically can recover the cost of completion (i.e., the amount it costs him above the contract price to get the building done) plus reasonable compensation for any delay in performance.

(1) Where the builder breaches after substantial performance, the courts ordinarily apply the cost-of-completion test, except where this would lead to substantial economic waste.

(2) Where the only breach is later performance, the owner can recover damages for loss of use of the property. This is measured by loss of sale value, if the property was built for sale; otherwise, it is the reasonable rental value, and if that is not easily determined, it is the prevailing rate of interest in the capital investment involved.

Compare building vs. repair contracts. In the event the building is destroyed prior to completion of the work, the builder must rebuild if he has a "building" contract. If the building is destroyed and the builder only has a "repair" contract, then his duty is discharged and he can recover in quasi-contract for part performance prior to the destruction.

Alternatives of quantum meruit or actual damages. NEW ERA HOMES CORP. v. FORSTER A contract provision which requires payments at fixed points of progress under a construction contract does not render the contract severable. Since language in the contract suggests that there was one consideration for the total project and payments were based on mutual convenience rather than a desire to create independent contracts, the courts will not rewrite the agreement. The proper measure of damages is either the value of what had been completed (quantum meruit) or the value of P's loss (the contract price less payments made and the cost of completion). Question in this case is the computation of damages. COMMENT: Most courts consider progress payments under construction contracts as intended for the mutual convenience of the parties rather than intended to create divisible contracts.

If profits are negative, then builder is lucky if owner breaches. The builder may be able to recover for the amount expended even though with factoring in profits, he would have had a loss.

Distinguish: signing bonus for a professional football player, which is severable from his actual salary. Player would still get his bonus even if he was injured in pre-season training and never gets to play.

Substantial performance of construction contract, damages measured by cost of completion. AMERICAN STANDARD v. SCHECTMAN Facts: P decided to close down a large pig iron plant. D received the equipment inside plus $275,000 in exchange for tearing down building and take the foundations down to one foot below grade line. D chose to breach contract instead of taking foundations down. Diff. in market value of property was $3,000. The additional work would have cost $90,000: a 30:1 ratio. Court finds for P.

D agreed to bring the foundations down. The fact that fulfillment of D's promise would add little to the sale value of P's property does not excuse D. A person is entitled to performance for which he bargained. Completion of the contract would not involve economic waste; nothing which was done in good faith but improperly need be undone. D's failure was intentional. P may get to pocket the $90,000 - which in a sense he paid for in the $275,000 payment to D.

DISTINGUISH from Reading Pipe case. (1) breach of substance, not trivial breach. (2) contractor can fulfill obligation now at no additional cost over original completion. (3) intentional breach vs. inadvertent breach - cheaper to breach than complete. (cynical)

b. Lease agreements where the lessor has unlimited supply (is a volume-loss dealer)

In situations where the lessor has an unlimited supply of similar property, the difference between the market price (or the price at which lessor was able to re-lease the property) and the contract price may reflect an inaccurate measure of actual damages.

LOCKS v. WADE

An innocent lessor who has an unlimited supply of similar machines (jukeboxes) readily available on the market does NOT have to reduce his recovery by the amount he acquired by re-leasing the same machine. The rationale is that the lessor could have made two lease agreements: the original one with the lessee and a separate one with the new customer. Thus he would have received profit on two leases, not one. The correct measure of damages is the contract price less the cost of performance.

Would the case be different if the lessor only had one jukebox to lease? No, because he could obtain others in ready supply on the market. He is a volume-loss dealer.

COMMENT: Note that in computing actual damages there are some costs to P which were reduced or abated due to D's breach. Such savings to P must be subtracted from P's recovery, in keeping with the policy to mitigate damages and to award damages which do not exceed actual loss.

c. Lost profits for volume-loss seller.

R.E. DAVIS CHEMICAL CORP v. DIASONICS, INC.

When the buyer of special medical equipment breaches his contract, but the seller resells the equipment to a third party for the same price as originally contracted, the buyer is liable for the profits the seller lost on the original contract.

A lost volume seller is one that has a predictable and finite number of customers and has the capacity either to sell to all new buyers or to make the one additional sale represented by the resale after the breach. For such a seller who would have made the post-breach sale anyway, damages measured by the difference between the contract price and the market price do not put the seller in as good a position as it would have been in had the buyer performed, because the breach cost the seller a profit.

Recovery of lost profit by a lost volume seller is predicated not only on the seller's ability to produce the additional units it would have had to produce but for the breach, but also on the profitability of the production of the extra unit. On remand, D must show that it would have been profitable for it to have produced and sold both pieces of equipment. (uniqueness of equipment may be diminished with an additional sale.)

ALTERNATIVE RECOVERY THEORIES UNDER THE UCC:

1) Contract Price - Resell Price = time-value, perishability (truckload of bananas), luxury item tailor-made products, like a yacht in which the owner can specify various details.

2) Contract Price - Market Price = seller chose not to resell good but could have

3) Profits = typical claim by volume-loss dealer

4) Contract price = delivered goods, but other party would not pay; artist paints a portrait.

e. Employment Contracts where employer breaches

The employee is generally entitled to recover the full contract price, subject only to his duty to mitigate damages. This is true whether the employer's breach occurs at the outset of the contract, after part performance by the employee, or even after full performance (i.e., employer refusing to pay).

PARKER v. TWENTIETH CENTURY FOX

D cancels film in which it agreed to pay P to star (musical). D offers alternative movie role (Western), which court rejects as inferior work. Sui generis - no roles at this level are comparable; actors not just in it for the money. General Rule: measure of recovery by a wrongfully discharged employee is the amount of salary agreed upon for the period of service, less the amount which the employer affirmatively proves the employee has earned or might have earned with reasonable effort from other employment. The employee's rejection of or failure to seek other available employment of a different or inferior kind may not be resorted to in order to mitigate damages.

f. Consequential Damages

Lost profits of an established business. HADLEY v. BAXENDALE P stopped operation of its mill when a crankshaft broke. D was negligent in not completing delivery (in a highly personalized cart and wagon operation) of the new crankshaft in a reasonable period of time. P seeks to recover lost profits and wages paid while the mill stood idle. Court holds that damages from special circumstances (here lost profits due to the mill shutdown), will be assessed against D only where they were reasonably foreseeable as a consequence of the breach.

D must have been informed of the damages reasonably foreseeable and assumed the risk at the time the K was formed. Nature of modern commerce that risks not assumed by carrier for consequences of delay. Same for cleaner delaying suit cleaning.

How do you compensate for delay, if you can't compensate for lost profits? (1) refund shipping cost; (2) if lose package, pay liquidated damages up to $500; (3) lost rental value of plant.

Herron II. Sugar shipment delayed so price fell. P seeks damages. Court holds price drop was not foreseeable consequence to carrier. Fortuity of events beyond the control of the parties - owner of goods ordinarily assumes risk.

Machine Co. v. Compress Co. (TN 1900). K for machine at start of cotton season. Manufacturer failed to complete on time and then delivered a poor product. P sought lost rental value of plant. Court gives him $.

Newsom v. Western Union. P sent telegram saying he needed whiskey to persuade crew to take timber down the river. P sued Western Union for garbling the message. Delay results in price of timber falling. Court held damages too speculative.

Awareness to be determined as of the time when a date for performance is set. SPANG INDUSTRIES v. AETNA CASUALTY Building contractor and supplier form K for delivery of steel. Later agree delivery to be at end of June. D's firm is late supplying steel until mid-Sept. P has to engage in crash program to use steel during season in which concrete would dry normally.

Knowledge of the consequences of failure to perform will be imputed as of the time when a date for performance is set. When the parties agreed to performance in late June, it was reasonably foreseeable that a substantial delay would postpone the cement work to a time of year when the climate would require extra expenses and precautions. Since P's expenses were reasonably foreseeable at that time, the award of consequential damages was appropriate.

COMMENT: Under UCC 2-715(2), where the seller fails to deliver, the buyer has a right to "cover"; and if he fails to do so, he will be barred from recovering any consequential damages which he could have prevented by covering.

ARMSTRONG RUBBER CO. CASE

A court may place a nonbreaching party in a better situation than he would have been in had the contract been fully performed. Armstrong contracted to purchase four rubber refiners, but when delivery of two of them was late, it refused to accept all four refiners. Armstrong relied on timely delivery in constructing a foundation for the boilers. Due to change in market price for rubber, operations under the contract would have resulted in a loss. Court permits Armstrong to collect $3000 for cost of foundation, but P can offset by losses Armstrong would have incurred by operating under the K. Negative of the Hadley problem. Here, asking if P is entitled to deduct lost losses.

C. DUTY NOT TO HINDER OR PREVENT COUNTERPERFORMANCE

Courts read all contracts as containing an implied condition that the parties will act in good faith and will not hinder or prevent the other party from performing under the contract. Thus, if A has a duty to perform under a contract with B and B in bad faith hinders A from performing, the condition of "good faith" means that A's duty to perform is excused, since the implied condition precedent to A's duty to perform (that B will act in good faith) has not been performed. Thus, A's duty to perform has not become absolute.

Element of Wrongfulness. The other party would not have reasonably anticipated such conduct, whatever its motivation. No need to prove malice or bad faith.

Extent of Hindrance. BLANDFORD v. ANDREWS Andrews was obligated to procure a marriage between Blandford and Palmer, at or before a specified feast. However, Blandford called Palmer a whore and made threats to her. When Blandford sued for 80 pounds, Andrew defended by claiming that Blandford had hindered his performance. The court held that Andrews failed to show he tried to procure the marriage and that the marriage might have occurred despite Blandford's acts.

Interference with seller's only source of supply. PATTERSON v. MEYERHOFER D agreed to purchase four parcels of land from P. D repudiated the contract prior to the foreclosure sale, which she attended. D, bidding against P, purchased the property for $620 less than the contract price. Court held since P could have purchased the property at the same price that D paid for it, P should recover the $620 difference between the contract price and the price D paid. (Implied term that party will not intentionally and purposely prevent the other party from carrying out his performance.)

NOTE: 1) D bidding against P = direct hindrance; 2) D knows this.

Innocent interference which makes performance more difficult. IRON TRADE PRODUCTS v. WILKOFF CO. P contracted to buy rails from D, and D failed to perform. P sued for the added amount which P had to pay to purchase the rails elsewhere. D countered that P bought up rails to a price above which D could not profitably perform the contract. Court sides with P.

Something more must be alleged than that P began buying rails in the market, thus making performance more difficult. D did not show that (1) P had knowledge that the supply was limited and that (2) P intended to prevent, interfere with, or cause D to default. (3) There was no express understanding that P would not buy elsewhere as well as from D. It makes no difference what P intended to do with the rails. Buyer is not obligated to keep the seller informed of his total purchasing activity.

Effort to satisfy condition precedent. BILLMAN v. HENSEL Bilmans put up $1,000 earnest money to buy a home. The contract contained a condition that Bilmans would be able to obtain a conventional mortgage for at least $35,000. All Ds did was ask one bank about a loan. They made no formal loan application, and they did not inquire about a loan for the full amount they needed. That was insufficient. Court awards Ps the $1,000.

A promisor cannot rely upon the existence of a condition precedent to excuse his performance when he prevents performance of the condition. Ds had an implied obligation to make a good faith, substantial effort to satisfy the condition (secure a mortage).

D. EQUITABLE REMEDIES

Specific performance available when damages alone are inadequate remedy. Specific performance for contract for sale of goods: uniqueness, damages are difficult to estimate, substitute performance entails a hardship. (If not unique or hardship, damges are adequate remedy at law)

1. Goods which are necessary and unavailable. CURTIS BROS. v. CATTS P engaged in tomato canning business. P plans year round for six week tomato season then runs plant at or near capacity. D reneged on K to sell P his tomato crop. Court grants specific performance become P will suffer irreparable injury (when his business fails) if the tomatos are not delivered. No adequate supply of tomatos left on the market at any price at this time. Curtis Bros. would also lose shelf space in stores, and customer loyalty if they went out of business for a year - cannot be quantified.

2. Mutuality of Obligation. LACLEDE GAS v. AMOCO OIL P had a requirements contract with Amoco for the supply of propane gas. With propane shortage, D repudiated the contract claiming that it lacked mutality for enforcement. P seeks specific performance. Courts interpret even slight restrictions on the right to cancel as legal detriment adequate as consideration. Cancellation clauses invalidate contracts only if they are unrestricted. In this contract there are several restrictions on cancellation sufficient to support this contract: 1) P could not cancel until one year had passed; 2) cancellation could be effective only as of the anniversary date of the first delivery; 3) P had to give 30 days' notice.

COMMENT: this case reflects the courts' tendency not to deny specific performance to one party because it is unavailable to the other in situations where one party can terminate and the other cannot.

3. Unconscionable contract for unique goods. CAMPBELL SOUP CO. v. WENTZ A court will not grant specific performance where the contract is so one-sided as to render the bargain unconscionable. Campell Soup was not required to take the Chontenay carrots under certain circumstances, but even then D could not sell to someone else without Campbell Soup's permission. Even though Wentz breached by selling his carrots to another party (at $90/ton instead of the K price of $30/ton), Campbell Soup cannot expect equity to enforce so unconscionable a bargain. Pro-farmer bias with court. Hard facts making bad law.

4. Economic rationale for rejecting specific performance. NIPSCO v. CARBON COUNTY COAL CO. NIPSCO contracted to purchase 1.5 million tons of coal every year for 20 years from D. D seeks to specific performance to protect the miners who lost their jobs from the mine closure and the related businesses that shut down. The losses of nonparties to the contract are irrelevant (incidental 3rd-party beneficiaries, not intended beneficiaries). NIPSCO