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Contracts II

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Contracts II

Professor: Hillman (references throughout) / Rachlinski (co-professor) Semester: Spring 2016

Course Info

Contracts II picks up after formation and works through the full lifecycle of a contract: policing the agreement, modifying it, interpreting and filling gaps, performance and breach, excusing performance, and the rights of third parties. The course uses a blend of Restatement (Second) doctrine, UCC Article 2, and law-and-economics policy analysis. Hillman and Rachlinski offer competing methodological frameworks throughout — objective reasonableness vs. subjective intent, Williston formalism vs. Corbin contextualism.

The course opens with a two-question framing: (1) what is the economic/business context of the transaction? and (2) what are the equities and motivations of each party?

Topics Covered

  • Duress: physical, economic; improper threat; reasonable alternatives; returns exceeding competitive market
  • Undue influence: elements and relationship to duress
  • Innocent, negligent, and fraudulent misrepresentation; fraudulent concealment; duty to disclose
  • Public policy limitations: exculpatory clauses (Rest. 2d § 195), covenants not to compete (Rest. 2d § 188)
  • Constructive fraud and equity doctrines
  • Unconscionability: procedural and substantive (UCC § 2-302); Ryan v. Weiner; Industralease; Jones v. Star Credit
  • Standard form contracts: shrinkwrap, browsewrap, clickwrap; Rest. 2d § 211 reasonable expectation doctrine
  • Modifications: preexisting duty rule; Rest. 2d § 89 (executory contracts); UCC § 2-209
  • Accord and satisfaction; UCC § 3-311 negotiable instruments
  • Parol evidence rule: Williston vs. Corbin approaches; collateral agreement exception; ambiguity exception
  • Rules of contract interpretation: objective, subjective, and purposive; Rest. 2d §§ 201–202
  • Trade usage, course of dealing, course of performance (UCC §§ 1-303, 2-202)
  • Gap filling: intent-based and fairness-based; UCC default terms
  • Good faith obligations; employment at will; Fortune v. NCR; Tymshare v. Covell
  • Conditions: express, implied, promissory, non-promissory, precedent, subsequent
  • Jacob & Youngs three-factor test: purpose, excuse for deviation, balance of hardships
  • Satisfaction clauses: objective (commercial fitness) vs. subjective (taste/judgment)
  • Avoiding express conditions: impossibility, waiver, equitable excuse (Rest. 2d § 229)
  • Order of performance: simultaneous exchange; sequential performance; installment contracts
  • Quality of performance: substantial performance vs. material breach; Rest. 2d § 241
  • Anticipatory repudiation: clear statement or voluntary disabling act; Rest. 2d § 250
  • Adequate assurance of performance: Rest. 2d § 251; UCC § 2-609
  • Mutual mistake: Rest. 2d §§ 152, 154; risk allocation; Sherwood v. Walker
  • Unilateral mistake: Rest. 2d § 153; unconscionability or other party’s fault
  • Impossibility: Taylor v. Caldwell; implied condition of continued existence; Rest. 2d § 263
  • Impracticability: Rest. 2d § 261; substantial change in cost; risk not allocated
  • Frustration of purpose: Krell v. Henry; foundational purpose; not in reasonable contemplation
  • Third-party beneficiaries: creditor and donee; intended vs. incidental; privity problems; Rest. §§ 309, 311
  • UCC extensions of warranty privity: §§ 2-318, 2-313A, 2-313B
  • Assignment of rights; delegation of duties; personal services exception; material change limitation
  • Novation vs. assignment vs. substituted contract

Detailed Outline

I. Policing Agreements

A. Duress (Rest. 2d § 175)

  1. Deliberate exploitation / improper threat (Rest. 2d § 176): threat of tort, crime, or action not privileged; threat to breach preexisting duty
  2. Returns exceed those normally realizable in a competitive market (e.g., 200% of market value)
  3. Lack of reasonable alternative — courts split between objective and subjective tests
  • Economic duress: courts reluctant to interfere with market-based exchanges; scrutinize monopolistic pricing and exploitation of a party’s particular situation
  • Preexisting duty rule: under CL, prior duty bars modification; UCC § 2-209(1) allows good-faith modifications without additional consideration
  • Key cases: S.P. Dunham & Co. v. Kudra; Alaska Packers’ Association v. Domenico (hold-up vs. unanticipated circumstances story)

B. Undue Influence

Elements: unusual time/place; insistent demand; emphasis on consequences of delay; multiple persuaders; absence of third-party advisers to servient party

C. Misrepresentation

  • Innocent, negligent, fraudulent: falsity + knowledge level + intent to induce + reasonable reliance + materiality + damages
  • Remedies scale from rescission/reliance (innocent) to benefit-of-the-bargain + punitives (fraudulent)
  • Effect of disclaimers: cannot disclaim fraud or negligent misrepresentation that induced entry into contract
  • Fraudulent concealment / duty to disclose: material latent fact + knowledge + not within diligent attention of other party + suppression + reasonable reliance + damage
  • Partial disclosures may be fraud; caveat emptor relaxed by courts; Kronman’s allocative efficiency argument for nondisclosure of deliberately produced information

D. Public Policy

  • Illegal contracts: state criminal law policy trumps freedom of contract
  • Exculpatory clauses: Rest. 2d § 195(2)(b) — party charged with public duty cannot disclaim negligence liability; ski-jump hypo distinguishes voluntary assumption of inherent risk
  • Covenants not to compete (Rest. 2d § 188): valid only if (1) protects legitimate interest narrowly, (2) does not deprive person of reasonable livelihood, (3) does not unreasonably restrain trade; Dwyer v. Jung; Karpinski v. Ingrasci
  • Constructive fraud in equity: confidential relationship + reliance + inadequate price; Jackson v. Seymour

E. Unconscionability (UCC § 2-302; Rest. 2d § 208)

  • Procedural: defect in bargaining process — pressure, lack of comprehension, rushed transaction
  • Substantive: one-sided terms, overly burdensome outcome
  • Both elements generally required; more of each makes unconscionability more likely
  • Cases: Ryan v. Weiner (rushed transaction, uneducated alcoholic); Industralease (rushed disclaimer, incinerators that do not function); Jones v. Star Credit (900 with hidden interest)
  • Standard form contracts: Rest. 2d § 211 reasonable expectation doctrine; C&J Fertilizer (unexpected exclusion in definition section, not exclusions section); Caspi v. Microsoft; Specht v. Netscape

II. Modifications and Settlement

A. Preexisting Duty Rule and Modifications

  • Common law: fiction of mutual rescission; token consideration satisfies rule but manipulable
  • Rest. 2d § 89: executory contract modification enforceable if (a) fair and equitable + (b) unanticipated circumstances + (c) or material change from justified reliance
  • UCC § 2-209(1): good-faith modification without additional consideration; § 2-209(2) no-oral-modification clauses
  • Cases: Alaska Packers’ Association v. Domenico; Schwartzreich v. Baum-Basch; Angel v. Murray (§ 89 applied to trash-collection modification for population growth); Flowers v. Diamond Shamrock

B. Accord and Satisfaction (UCC § 3-311)

  • Elements: genuine dispute + voluntary agreement to settle
  • UCC § 3-311: good faith instrument + unliquidated or bona fide disputed claim + claimant obtains payment; discharged unless claimant set up dispute-settlement mechanism (§ 3-311(c)(1)) or repays within 90 days (§ 3-311(c)(2))
  • Cases: ConEdison v. Arroll (instrument sent to billing, not complaints department)
  • Accord vs. substituted contract: accord extinguished only on satisfaction; substituted contract rescinds original immediately

III. Performance: Interpretation and Gap Filling

A. Parol Evidence Rule

  • Rule: writing is privileged means of determining parties’ intent; parol (extrinsic) evidence inadmissible or disfavored
  • Williston: strong preference for writing; exclude PE unless contract facially incomplete
  • Corbin: admit PE, trust juries to weigh; “clear and convincing” standard
  • Exceptions outside the rule: fraud, duress, mistake (go to enforceability, not interpretation)
  • Exceptions within the rule: collateral agreement (Rest. 2d §§ 209–210 — three Mitchill v. Lath elements: collateral in nature, does not contradict express/implied terms, kind parties would not normally write down); ambiguity (PG&E v. Thomas Drayage; genuine ambiguity required)
  • UCC § 2-202: trade usage/course of dealing/performance admissible without threshold ambiguity finding unless full integration

B. Rules of Interpretation

  • Objective: reasonable person standard; Rest. 2d § 201(1) shared meaning controls
  • Subjective exception: where one party had reason to know of other’s different meaning, culpable party bound to other’s meaning (Rest. 2d § 201(2))
  • Both parties unaware of divergence and neither has reason to know: no contract, void for ambiguity (Raffles v. Wichelhaus rule; Rest. 2d § 201(3))
  • Trade usage > course of dealing > course of performance < express terms (UCC § 1-303 hierarchy)
  • Nanakuli Paving & Rock Co. v. Shell Oil Co.: two prior price-protection incidents = course of performance + trade usage overrides “posted price at time of delivery”

C. Gap Filling

  • Intent-based (what the parties would have wanted) vs. fairness-based (what is reasonable at the time of dispute)
  • Penalty default: Hadley foreseeability rule incentivizes information-sharing
  • Good faith constrains discretionary terms (Fortune v. NCR; Tymshare v. Covell); some states (TX) reject implied good faith in employment — City of Midland v. O’Bryant
  • UCC defaults: price (§ 2-305), time (§ 2-309), payment (§ 2-310), installments (§ 2-307)
  • Cases: Haines v. City of New York (duration gap filled by intent of mutual benefit); Haslund (vesting gap for equity); Southwest Engineering Co. v. Martin Tractor Co. (payment structure gap filled by UCC § 2-310)

IV. Conditions and Breach

A. Conditions vs. Promises

  • Condition: if condition fails, contingent obligation does not mature; failure can lead to forfeiture
  • Promise: breach leads to damages but does not relieve other party of obligation
  • Jacob & Youngs three-factor test (key to the whole course):
    1. Purpose of the term — what desire is to be satisfied?
    2. Excuse for deviation — intentional vs. innocent/negligent?
    3. Balance of hardships — cruelty of enforced adherence vs. harm to non-breaching party
  • Default: courts prefer to read ambiguous terms as promises (Rest. 2d § 261), not conditions, to avoid forfeiture
  • Rest. 2d § 229: court may excuse non-occurrence of condition if it would cause disproportionate forfeiture, unless the condition was a material part of the agreed exchange
  • Cases: Jacob & Youngs, Inc. v. Kent; Meritt Hill Vineyards; Brown-Marx v. Emigrant Savings; Gibson v. Cranage (satisfaction clause); JNA Realty Corp. v. Cross Bay Chelsea; Holiday Inn v. Knight

B. Order of Performance

  • Simultaneous exchange as default (UCC §§ 2-507, 2-511; Rest. 2d § 234)
  • Sequential performance when one performance requires a period of time
  • Owner typically better debtor; builder/employee typically better creditor
  • Cases: Stewart v. Newbury (builder must complete before payment unless contract says otherwise); K&G Construction Co. v. Harris

C. Quality of Performance / Material Breach

  • Rest. 2d § 241: (1) purpose of contract frustrated? (2) deviation intentional? (3) hardship on deficient party?
  • Dependent vs. independent obligations; opportunity to cure (Rest. 2d § 242)
  • Cases: Plante v. Jacobs (misplaced wall — moved in, no market value loss → substantial performance); OW Grun Roofing Co. v. Cope (streaky roof — subjective purpose was attractiveness)

D. Anticipatory Repudiation

  • Rest. 2d § 250: clear statement of nonperformance OR voluntary disabling act
  • Consequences: aggrieved party may (a) await performance, (b) resort to other remedies, (c) suspend own performance (UCC § 2-610)
  • Adequate assurance: Rest. 2d § 251; UCC § 2-609 — written demand; failure to provide within reasonable time (not exceeding 30 days) = repudiation
  • Cases: Hoechster v. De La Tour; Walker & Co. v. Harrison; K&G Construction; Magnet Resources Inc. v. Summit; Greghuhn v. Omaha Insurance

V. Excusing Performance

A. Mutual Mistake (Rest. 2d §§ 152, 154)

  • Elements: (1) both parties mistaken; (2) basic assumption on which contract made; (3) material effect; (4) risk not allocated to adversely affected party
  • Risk allocation (§ 154): agreement of parties; aware of limited knowledge and treats it as sufficient (knowing gamble); court finds it reasonable
  • Cases: Sherwood v. Walker (barren vs. breeding cow — different thing entirely); Wood v. Boynton (found rock — speculative transaction, knowing risk allocation); Lenawee Co. v. Messerly (“as is” clause allocates risk of discoverable defects, not unknown material defects)

B. Unilateral Mistake (Rest. 2d § 153)

  • Enforcement unconscionable OR other party had reason to know of mistake or caused it
  • Public contract bids: Triple A Contractors v. Rural Waters; Donovan v. RRL Corp. (Jaguar ad)

C. Impossibility and Impracticability

  • Impossibility: supervening destruction of something necessary for performance that was basic assumption; Taylor v. Caldwell (music hall burns — implied condition of continued existence)
  • Impracticability (Rest. 2d § 261): substantial change; non-occurrence was a basic assumption; risk not allocated by contract
  • Test: not just higher cost; must be extraordinary change AND unforeseeable AND risk unallocated
  • Cases: Taylor v. Caldwell; Canadian Industrial Alcohol v. Dunbar Molasses (at-fault interference with supply); Transatlantic Financing (Suez Canal — fixed-price = freighter bears route risk); Mineral Park Land Co. v. Howard (gravel at 10x cost = impracticable); Mishara Construction (labor dispute — within party’s control)
  • Force majeure clauses as explicit allocation device

D. Frustration of Purpose

  • Elements: (1) foundational purpose of the contract; (2) purpose frustrated; (3) not in reasonable contemplation of parties when contract formed; (4) risk not allocated
  • Distinguished from impracticability: performance still possible; it is the benefit expected that vanishes
  • Cases: Krell v. Henry (coronation procession — high premium paid, symmetrical foundational purpose); Lloyd v. Murphy (wartime new-car lease — risk of government regulation allocated to tenant; landlord modified lease)

VI. Third-Party Beneficiaries

  • Creditor beneficiary: prior debt + contract to pay it; Lawrence v. Fox
  • Donee beneficiary: contract intends to create gift to third party; Seaver v. Ransom
  • Intended vs. incidental (key distinction): objective reasonableness (Hillman) vs. subjective intent (Rachlinski); must assess whether parties truly meant to subject obligor to suit by beneficiary
  • H.R. Moch v. Rensselaer Water Co. (no intent to create cause of action in general public)
  • Defenses against beneficiary (Rest. § 309): voidable formation; policing doctrines; generally no other defenses unless arises from beneficiary’s own conduct (§ 309(4))
  • Modification / discharge (Rest. § 311): parties can modify until beneficiary materially changes position in reliance, sues, or manifests assent
  • UCC: § 2-318 (Alt A, B, C — extends warranties to family members, foreseeable individuals, any foreseeable victim); §§ 2-313A, 2-313B (extending privity through intermediaries and advertising)
  • Cases: Lawrence v. Fox; Alaniz v. Schal; Morestain v. Kircher (novating promisor back); Rouse v. U.S. (improper-installation defense unavailable because promise was to pay, not to discharge whatever liability promisee is under)

VII. Assignment and Delegation

  • Assignment of rights: default rule is assignable unless material change in contract (Rest. 2d § 317(2)(a)) or personal services exception
  • Delegation of duties: may be prohibited by personal services character of obligation
  • Material change test: Crane Ice Cream v. Terminal Freezing (variable ice contract — Crane bigger, arbitrage risk); Macke v. Pizza of Gaithersburg (not personal services — Macke liable for VA Coffee obligations)
  • Default: assign the rights, not delegate the duties unless express or implied
  • Novation: complete replacement; all parties must agree; original obligor discharged; Utica case
  • Defenses by obligor against assignee (Rest. § 336): only those that accrued before notice of assignment; and impossibility/illegality/non-occurrence/failure of performance afterwards

Key Doctrines

Key Cases

Exam Approach

1. Policing the Agreement

  • Duress? → (1) improper threat, (2) returns exceed competitive market, (3) no reasonable alternative
  • Undue influence? → unusual circumstances + multiple persuaders + no advisers
  • Misrepresentation? → falsity + knowledge level + intent + reliance + materiality + damages; can disclaimer block?
  • Fraudulent concealment? → material latent defect + knowledge + not in other party’s diligent reach
  • Constructive fraud / equity? → confidential relationship + reliance + grossly inadequate price
  • Public policy? → exculpatory clause (public duty? gross negligence?); non-compete (legitimate interest? narrowly tailored? livelihood?)
  • Unconscionability? → procedural defect in bargaining + substantively one-sided outcome; both generally required

2. Modification Issues

  • Preexisting duty bar? → common law friction of mutual rescission; token consideration satisfies but is manipulable
  • Rest. 2d § 89: (a) fair and equitable + (b) unanticipated circumstances, or (c) reliance?
  • UCC § 2-209: good-faith modification without consideration; no-oral-modification clause still modifiable by conduct?
  • Accord and satisfaction: genuine dispute + voluntary agreement; UCC § 3-311 dispute-settlement mechanism

3. Interpretation and Gap Filling

  • Parol evidence rule: integrated writing? Full or partial integration?
  • Collateral agreement? (Mitchill three-part test)
  • Ambiguity? → limited version or broad Corbin approach?
  • Rest. 2d § 201 shared meaning / reason to know / mutual misunderstanding
  • Trade usage, course of dealing, course of performance hierarchy (UCC § 1-303)
  • UCC gap-fillers; good faith constraint on discretionary terms

4. Conditions and Breach

  • Express condition or implied promise? → Apply Jacob & Youngs three-factor test: purpose, excuse, balance of hardships
  • Substantial performance or material breach? (Rest. 2d § 241)
  • Order of performance: simultaneous exchange or sequential? Who is the better debtor/creditor?
  • Waiver of condition? (course of conduct; retractable absent reliance)
  • Equitable excuse of forfeiture? (Rest. 2d § 229 — disproportionate forfeiture + condition not material part of exchange)
  • Anticipatory repudiation: clear statement or voluntary disabling act (Rest. 2d § 250)?
  • Adequate assurance: reasonable grounds for insecurity → written demand → 30-day clock (UCC § 2-609; Rest. 2d § 251)

5. Excusing Performance

  • Mutual mistake? → basic assumption + material + risk not allocated (§§ 152, 154)
  • Unilateral mistake? → unconscionable to enforce OR other party knew/caused
  • Impossibility? → supervening destruction + basic assumption + no fault + risk unallocated (Rest. 2d § 263)
  • Impracticability? → substantial change + basic assumption + non-occurrence + risk unallocated (Rest. 2d § 261)
  • Frustration of purpose? → foundational purpose of both parties + purpose completely frustrated + not reasonably foreseeable + risk unallocated
  • Force majeure clause? → explicit allocation; check scope

6. Third-Party Beneficiaries and Assignment

  • Intended vs. incidental beneficiary? → objective or subjective intent of parties
  • Creditor vs. donee? → helps assess but intent-vs.-incidental distinction controls
  • What defenses can promisor assert against beneficiary? (Rest. § 309; defects in formation, policing doctrines, beneficiary’s own conduct)
  • Can parties modify or discharge? (Rest. § 311 — not after beneficiary relies, sues, or assents)
  • Assignment: does it materially change the contract? Personal services exception?
  • Delegation: separate from assignment of rights; default is duties are delegated with assignment unless personal services
  • Novation: requires all parties’ agreement; original obligor fully discharged

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