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Contracts Outline 4 - Negotiations, Indefiniteness, Duty to Bargain in Good Faith, Remedies, Study notes of Law

University of Florida (UF)Law

Final exam outline for Contracts class for Law School. Contracts is a general requirement of all law school students. This outline is for Contracts at UF Levin College of Law specificially. Section four topics include: Negotiations, Indefiniteness, Duty to Bargain in Good Faith, Remedies

Typology: Study notes

2011/2012

Uploaded on 05/09/2012

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Fall 2003 Contracts – Professor Dawson
us.docsity.com
Negotiations, Indefiniteness, Duty to Bargain in Good Faith
(p.541 – 586)
Classical contract law: expressions were viewed as either offer-and-acceptance or preliminary
negotiations. A binary characterization, either had immediate legal effect or no legal effect at all.
Modern contract law: Restatements and UCC allow for much more uncertainty before voiding a
contract
Restatement: have to tell when breach occurs and have appropriate remedy [§33]
UCC: does not fail for indefiniteness if parties intended to be in contract
Necessary Terms:
1. Parties to the contract
2. Subject matter of the contract
3. Time for performance
4. Price
Courts will supply a missing term when:
• Parties intend to leave term to reasonable implication – both manifest an intent
that a reasonable term will apply (UCC, don’t have to supply a price)
• Agreement to Agree – agree that term will be determined by a future mutual
agreement
• Indefiniteness cured by performance – action/performance can fill the missing
term (course of performance)
Implication of Reasonable Terms:
• UCC: will supply price, place for delivery, time for shipment or delivery, time for
payment, etc.
• Implied obligation of good faith
o Behave in way that is consistent with other party’s reasonable expectations
o Interference with or refusal to cooperate in other party’s performance
o Obligation to act affirmatively (best efforts, exercise its discretion)
o Output and requirement contracts
• Usually will NOT supply a duration for employment contracts
• Parties must have manifested an intent to enter into a contract. If important term(s) are
missing, courts may conclude that there was never a manifestation of mutual assent.
• Terms must be certain enough to determine breach and remedies
ACADEMY CHICAGO PUBLISHERS v CHEEVER (1991) [validity of contract]
Widow of author John Cheever entered into contract with publishing company to publish his
short stories. Project turned out to be bigger than the widow wanted and she wanted out of the
contract, said terms were too indefinite. Publishers sued her for lost profits (how prove?).
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Download Contracts Outline 4 - Negotiations, Indefiniteness, Duty to Bargain in Good Faith, Remedies and more Study notes Law in PDF only on Docsity!

Negotiations, Indefiniteness, Duty to Bargain in Good Faith (p.541 – 586) Classical contract law: expressions were viewed as either offer-and-acceptance or preliminary negotiations. A binary characterization, either had immediate legal effect or no legal effect at all. Modern contract law: Restatements and UCC allow for much more uncertainty before voiding a contract Restatement: have to tell when breach occurs and have appropriate remedy [§33] UCC: does not fail for indefiniteness if parties intended to be in contract Necessary Terms:

  1. Parties to the contract
  2. Subject matter of the contract
  3. Time for performance
  4. Price Courts will supply a missing term when:
  • Parties intend to leave term to reasonable implication – both manifest an intent that a reasonable term will apply (UCC, don’t have to supply a price)
  • Agreement to Agree – agree that term will be determined by a future mutual agreement
  • Indefiniteness cured by performance – action/performance can fill the missing term (course of performance) Implication of Reasonable Terms:
  • UCC: will supply price, place for delivery, time for shipment or delivery, time for payment , etc.
  • Implied obligation of good faith o Behave in way that is consistent with other party’s reasonable expectations o Interference with or refusal to cooperate in other party’s performance o Obligation to act affirmatively (best efforts, exercise its discretion) o Output and requirement contracts
  • Usually will NOT supply a duration for employment contracts
  • Parties must have manifested an intent to enter into a contract. If important term(s) are missing, courts may conclude that there was never a manifestation of mutual assent.
  • Terms must be certain enough to determine breach and remedies ACADEMY CHICAGO PUBLISHERS v CHEEVER (1991) [validity of contract] Widow of author John Cheever entered into contract with publishing company to publish his short stories. Project turned out to be bigger than the widow wanted and she wanted out of the contract, said terms were too indefinite. Publishers sued her for lost profits (how prove?).
  • Trial court wrote the contract terms for the parties (not what they are supposed to do); courts can supply a missing minor term, but cannot write the contract for the parties
  • Must have meeting of the minds or mutual assent as to the terms of the contract
  • “language of the agreement lacks the definite and certain essential terms required for the formation of a contract”
  • publishing contracts are probably structured this way for a reason – a creative product, difficult/ineffective to put strict limits, page numbers, or deadlines; this is likely a type of “form” contract in the field
  • This contract lacked lots of terms – 204 provides for the court providing a term, not lots of terms
  • Even though parties acted as if they were in a contract, court is now saying there was never a contract b/c terms were too indefinite to determine what breach or remedies would be [§33(2)]
  • §204 – court could supply term, but there are too many uncertain terms
  • a fine line b/w drafting contracts that are too fixed (have to have some flexibility) and being too uncertain; a line we cannot draw until after the fact R § 204: Supplying an Omitted Essential Term When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court. R § 33: Certainty (1) Offer cannot be accepted to form a contract unless the terms of the contract (offer) are reasonably certain. [offer has to be certain to open power of acceptance] (2) The terms are reasonably certain if they provide a basis for determining when there is a breach and what the remedy would be. [*most applicable to this case] (3) If one or more terms of a proposed bargain are left open or uncertain, it may show that a manifestation of intent is not intended to be offer and acceptance. R § 34: Certainty and Choice of Terms; Effect of Performance or Reliance (1) The terms of a contract may be reasonably certain even though it empowers one or both parties to make a selection of terms in the course of performance. (2) Part performance under an agreement may remove uncertainty and establish that a contract enforceable as a bargain has been formed. (3) Action in reliance on an agreement may make a contractual remedy appropriate even though uncertainty is not removed.
  • UCC is much more liberal, contracts do NOT fail for uncertainty or indefiniteness as long as parties intended to make a contract.
  • If parties act like there is a contract, under UCC courts do best to keep it going UCC 2-204 Formation in General (1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.

HOFFMAN v RED OWL STORES (1965, Wisconsin) [negotiation, reliance] Red Owl grocery stores negotiated with Hoffman about him selling his bakery, moving to different town, and running one of their stores.

  • Red Owl made series of promises, but there was never an agreement to agree nor a contract; they never formalized the negotiations like they did in Channel
  • The parties only have negotiations, but courts provide a remedy for Π based on reliance: Π did lots of things in reliance upon Red Owls promises (sold his bakery, bought a small store as test run, sold that store, moved towns)
  • This case was a leading example of §90 (reliance), pushed 90 further than it had been previously
  • Damages are complex: but provided reliance damages ; reliance damages frequently under-compensate if they are limited to out-of-pocket expenses, often much greater than that (but difficult to prove amounts) Remedies (pp. 194 – 271)
  • Most remedies in K cases is money, exceptions are specific performance and injunctions
  • Damages have to be reasonably certain and foreseeable – lots of limitations to damages
  • Contracts damages are inherently conservative, Π shouldn’t be over compensated
  • §344 outlines basic structure of remedies R § 344 Purpose of Remedies Judicial remedies under the rules state in this Restatement serve to protect one or more of the following interests of a promisee: (a) expectation interest – having benefit of bargain by being put in as good a position as he would have been in had the contract been performed (b) reliance interest – being reimbursed for loss caused by reliance on the contract by being put is as good a position as he would have been in had the contract not been made (c) restitution interest – restoring any benefit that he has conferred on the other party R § 347 Measure of Damages in General (Expectation Damages) Expectation interest damages measured by: (a) loss in the value to him of the other party’s performance caused by its failure or deficiency, plus (b) any other loss, including incidental or consequential loss, caused by the breach, less (c) any cost or other loss that he has avoided by not having to perform. Expectation damages = Loss in value (contract price) + incidental/consequential loss - avoided loss Expectation Damages:
  • Usually includes lost profits
  • Formula: contract price – benefits

§ Benefits = the costs/expenditures the Π saves by not having to complete contract o Allocation of overhead is usually not included in “benefits” b/c a fixed amount and is not really saved by not having to perform contract o Cost of completion vs decrease in value: § has to be proportionate (Peevyhouse) § no economic waste (when have to destroy what has already been done to repair minor breach, Jacobs & Young)

  • deprives owner of right to get what he bargained for § If breach is willful (in bad faith), courts are more likely to award cost-of- completion over diminution-in-value § Cost-of-completion awards makes most sense in construction contracts
  • Π has to prove expectation damages with reasonable certainty o Profits from new business o When profits would be based on public whim (entertainment and sporting events) o Cost of completion unknown o Non-competition agreements, difficult to prove lost profits o UCC is more liberal on certainty requirement – doesn’t require mathematical precision Reliance Damages:
  • Used when: Cannot show expectation damages (lost profits) with reasonable certainty, or No legally enforceable contract (promissory estoppel)
  • A built-in part of expectation damages (cost of work already performed)
  • Compensation for expenses made preparing to perform or actually rendering part performance
  • Limited by: o The contract price (prevent windfall for when reliance damages are greater than expectation damages would have been) o Recovery limited to profits – courts usually do not allow reliance damages (expenditures) to exceed expectation (lost profits) damages. Burden of proof is on Δ to show what Πs loss would have been. If Δ can prove that Π would have suffered a net loss on the contract, the Πs recovery is limited to what his expectation damages would have been o Incidental Reliance Damages: not related directly to performing the contract, but made in anticipation that contract would be performed. Courts usually deny recovery of these. o Expenditures prior to signing of contract – not recovered if before contract (not technically in reliance of the contract)
  • UCC: Doesn’t name reliance damages directly, but allows for: o Incidental damages – includes expenses reasonably incurred in inspection, receipt, transportation, care & custody of goods, reasonable charges/expenses o Consequential damages – if seller has reason to know of the particular loss

o Δ wants difference in Contract price and cost to complete. Since Π completed bldg for same or less amount, then there are no damages. o Loss in value caused by the breach is the general rule , no double recovery allowed PEEVYHOUSE v GARLAND COAL & MINING CO (1962) [proportionate] Unusual circumstances for strip-mining contract. Land owners contracted with Co for them to do lots of work to restore the land ($29K worth of work), but would have increased value of the land only $300.

  • Jury awarded $5000 (no one knows where that # came from, more like a tort award, K awards are usually closely tied to actual damages – either the $29,000 or the loss in value of $300 – not some # in between) à general damages – an English term, not permissible in US
  • Issue of bad faith – doesn’t make a difference in terms of law if Δ breached in bad faith b/c parties are allowed to breach. But makes court more willing to award damages to Π if breach was made in bad faith (and juries too); Very subjective.
  • Court emphasizes that this part of the contract (restoring the land) was merely incidental to purpose of contract. Real purpose was to mine the land. Issue of damages has to be the focus of the contract, not incidental.
  • Damages also have to be proportionate to loss in value [R § 348(2)(b)] – here, the $29K it would take to repair the damage was clearly disproportionate to the value of the land ($3K) à economic waste – would have to be the focus of the contract if courts were going to enforce R § 348 Alternatives to Loss in Value of Performance (2) If breach results in defective or unfinished construction and loss of value to injured party is not proved with sufficient certainty, he may recover damages based on: (a) diminution in market price , OR (b) reasonable cost of completing performance or of remedying the defects if that cost is not clearly disproportionate to the probable loss in value to him JACOBS v YOUNG (case we’re covering later) Judge Cardozo
  • Involves economic waste of tearing down new house to replace the brand of pipe used.
  • Cardozo refused to force damages when it was an unreasonable waste and disproportionate to loss in value AIELLO v NATIONWIDE TRACTOR TRAILER Owner breaches by not paying contractor for services completed.
  • Have to figure out who breached first, b/c then other party didn’t. If Π stopped work because Δ stopped paying, they would not be in breach.
  • BUT, also have to figure out if not paying was a material breach. If so, then deal is off, Π can stop performance and can sue and recover damages. If not, then Π is in breach for stopping work and Δ can sue.
  • Trial and appellate courts used different formulas, but had same outcome (often the case). Trial formula: (costs + profit) – amt already paid = damages awarded Appellate formula: contract price – cost of completion [cost + amt paid] = damages
  • The 2nd^ formula is easier to calculate, don’t need to bring in extra #s to calculate profit, but doesn’t really make a difference. UCC 1-305 Remedies to be Liberally Administered (a) Remedies provided … must be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed but neither-consequential or special damages nor penal damages may be had except as specifically provided in the UCC or other law. [expectation measure] UCC 2-703 Seller’s Remedies in General [index section] If buyer breaches, seller may: (a) withhold delivery of goods; (b) stop delivery [2-705]; … (d) resell and recover damages [2-706] (parallel to cover damages) (e) recover damages for non-acceptance [2-708] (f) cancel
  • 2 - 706: seller can re-sell item in market and recover damages of difference in costs. This assumes that buyers don’t breach unless market price goes down, but not always true. When it is true, seller may be forced to sell item at lower price than had contracted for, in that case they get to recover the lost amount. UCC 2-711 Buyer’s Remedies in General [index section] (1)If seller refuses to deliver, buyer may cancel and whether or not he has done so may recover: (a) cover expenses and have damages re all goods affected whether or not they are identified in the contract [2-712] (b) recover damages for non-delivery [2-713] … UCC General types of damages: market price, cover, incidental, & consequential
  • 2 - 708, 2-713 are parallel provisions: with both, you do not have to actually move the goods (seller still has the goods), whereas with cover or resale damages you do.
  • Prior to UCC, courts generally used market price to determine damages
  • 2 - 711 doesn’t list incidental or consequential damages, but doesn’t mean buyer can’t recover
    • they stand alone in 2- 715 BURGESS v CURLY OLNEY’S INC. (1977, Nebraska) [cover damages]
  • Issue: determining damages from contract price or market price
  • Location of transaction is important to determine market price
  • Burden of proof of damages claim is on Π; Here, Π didn’t show sufficient evidence establishing market value damages (need to have more than estimate of market value)
  • Π asks for consequential damages of lost profits [2-715(2)]
  • If can’t cover, can get consequential damages. If can cover, only get cover damages.

(2) Buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages (2-715), but less expenses saved in consequence of seller’s breach. (3) Failure of buyer to effect cover does not bar him from any other remedy. KGM HARVESTING v FRESH NETWORK (1995, Cal) (p.258) [cover] Contract for purchase of lettuce (44,000 lbs @.09).

  • This is a cover case, Π doesn’t ask for consequential (lost profit) damages.
  • No dispute over the cover issues: good faith, w/o unreasonable delay, reasonable purchase, substitute goods (in many cases, it is not this simple and have lots of dispute over these issues)
  • Dispute is over whether damages are recoverable since the loss was made up from other sources
  • What remedy would put Π in position would have been in had Δ not breached (market price vs cover amount)? Cover, b/c to cover Π had to actually purchase the goods from someone else (their real loss); more precise than market value.
  • All court looks at is THIS contract. It doesn’t matter that Π had contract with someone else, that is not at issue for this case. That the forward contract protected the buyer doesn’t matter in eyes of the court.
  • Also, profit the Δ made by breaching doesn’t matter – people are allowed to breach as long as they pay the difference to the party they breached. However, the decision is designed to inhibit breaches. If they didn’t award cover costs, there is no incentive for Δ to not breach again (a judgmental aspect to this case).