Contracts II Outline Attached PDF

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Contracts II outline from the summer of 2021....

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Contracts II Professor Tanya Monestier

SUPPLEMENTING THE AGREEMENT A. IMPLIED TERMS •

Definition: This is where the court is “adding” terms to a K. The Court is not adding terms that the parties didn’t want, rather it is adding terms that the parties must have intended to be in the K.

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Implied in Fact v. Implied in law: o Implied in Fact: Based on the K, it is clear the parties must have intended for this term to be part of the K. o EX: assume person X is selling a bike for $100. The term “dollars” is implied to mean American Dollars. It is not something that is needed to be said. Therefore, based on the facts, it must have been a term of the K that we are dealing in US dollars. o Implied in Law: a term that the law implied; usually giving the K legal efficiency (quality of being successful in producing an intended result).

1. DUTY TO USE BEST EFFORTS •

Rule: A contract is still valid if one party's detriment is implied even if it is not an explicit element of the contract. (Good faith).

Case Analysis: Wood v. Lucy, Lady Duff-Gordon: Lady Duff-Gordon (LDG) (∆) contracted to give Wood (π) an exclusive right to market and license all her designs and to endorse designs w/ her name. The way that it worked was that LDG, who was sort of a designer, gave Wood the right to market and license all her designs and endorse designs with her name. In other words, Woods was going to take his products and put LDG's name on the products and market bound. She gave him permission to use her brand (name) to sell his products. The Ultimate agreement if they would split the profits from the sales, evenly. The exclusive K required that they split all profits from Wood's sales evenly. Lucy placed endorsement on clothes w/o Wood's knowledge

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(contracts w/ Sears) and in violation of the K and Wood sued. What ended up happening is that LDG placed endorsements on clothes w/o woods knowledge. In other words, she entered arrangements where she lent her name to other companies –with Sears. This was in violation with the k w/ Woods. Lack of Consideration (LDG’s argument) Lucy’s detriment is giving Wood the exclusive use of her name on his products. Wood is giving Lucy half of her profits ($). “If I make money, I’ll give you half.” He is not promising that he is going to make profit. Therefore, it is an illusory promise. There is no K because of a lack of Consideration. Did Wood Promise anything Not expressly. He did not promise to sell her products; he promised that if he sold products, she would get a cut. The word IF alters an illusory promise. The argument: he is only saying IF he sells these products, he will give a cut, but that is not a return promise. Therefore, his end of the bargain is illusory. If he has not made a return promise the fact that she made a promise is neither here nor there. We need both detriment and bargain for exchange. • What was the outcome? Woods DOES make a promise, it is just not explicit. Woods does not “in so many” words promise that he will use reasonable efforts to place the ∆’s indorsement and market her design, however, su onch a promise is to be implied. The court says that his promise is that he will use "reasonable efforts" to sell her products. He never in writing says that explicitly, however, this promise is implied. This means that it is so clear from the entirety of the K that this is a promise that he has made, he has just not put it into words. How do we know Woods Makes a Promise? • Exclusivity She is only allowed to let him use her name. There is no one else that is allowed to. No one would enter an arrangement where you have use if their name, but you are not doing anything in return. In the K he has a business enterprise that is prepared to market and • Business Enterprise endorse her products. She was to be compensated only though a share of the profits. The • Compensation compensation arrangement would make no sense if he didn’t try to make money because there would be no compensation w/o money. Accounting for Profits Obligation on him to account for profits. And if he wasn’t • promising to try to sell her products, that would not make sense either.

2. DUTY TO GIVE NOTICE IN SOME CIRCUMSTANCES Rule: §309. Absence of Specific Time Provision; Notice of Termination.

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If the time for shipment or delivery or any other action under a K, if not provided in this Article or agreed upon, shall be a reasonable time. 2

a. This is an implied term. When dealing with missing dates for shipment or delivery, assume a time that is reasonable (UCC has gap fillers). b. The problem with no delivery time, is that you will not know how or when to recover. •

Where the K provides for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party. a. If you don’t talk about an end point, we are going to give you an end point. It is valid for a reasonable time depending on the industry and getting a new supplier. b. For example, a supermarket has a standing K on berries with a supplier. The arrangement is to ship berries every week, and the supermarket pays FMV. But the K does not specify and end date. The reasonable time depends on the circumstances (assume 6 months always). If the supplier terminated the K before 6 months, that is a breach. If at the 6 months mark the supplier walks away, that is not a breach.

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Termination of a K by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and agreement dispending with notification is invalid if its operation would be unconscionable. a. Give reasonable notice that you are going to terminate look at the facts, how long you were in the relationship, etc. b. You don’t have to give notice if your K contains a “triggering” event. The even itself is the pre-notification. c. You can agree, in your K, that no notice is required to terminate BUT you cannot do that if the provision would be unconscionable (grossly unfair).

Case analysis: Leibel v. Raynor MFG: Raynor entered into a verbal agreement to give Leibel an exclusive dealer-distributorship for Raynor’s garage doors. Raynor was to provide garaged doors, operations, and parts to Leibel at the factory distributor price. Leibel agreed to sell, install and service only Raynor’s products. The agreement covered an area extending to a fifty-mile radium from Lexington, Kentucky. Leibel borrowed a substantial amount of money to begin the business. After two years, sales of Raynor’s products appeared to be decreasing. Raynor notified the ∆ that the relationship was terminated. In addition, Leibel learned there was a new dealer-distributor in the area and that any future purchases Raynor’s products would have to be made through the new dealer-distributor. Transactions involving goods and merchandise fall under Article II of the UCC. The court finds that distributorships fall under the UCC. The UCC requires that reasonable notice be given if the agreement is for an indefinite duration. The Court interprets reasonable notice as relating to “the circumstances under which notice is given and the extent of advance warning” not the method by

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which notice is given. The Court holds that Raynor was required to give Leibel reasonable notice of intent to terminate.

B. OBLIGATION OF GOOD FAITH •

Definition: You can’t destroy the fruits (good part) of the K for another party. Every K has with it an implied obligation to use good faith and fair dealing. Theis is a negative inference: “Don’t be bad.”

1. SATISFACTION CLAUSE •

Rule: A clause that says the work/K/performance must be done to the other party’s satisfaction. It gives the person, to be satisfied, power to say whether the performance was satisfactory.

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Spotting satisfaction clauses: Any provision that essentially says “the work must be done, subject to the approval or satisfaction of the other party” is a satisfaction clause.

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Framework: 1. What type of K we are dealing with: Utility or Aesthetics? (How you determine Obj. or Subj.). a. Utility (Objective): Something that is useful to the corporation (performing electrical work behind the walls of the office). b. Aesthetics (Subjective): The look and appearance of something is important (taking wedding photos, buyer a car, buying a cake, getting a portrait). 2. What standard of satisfaction did the parties intend: Objective or Subjective? a. Objective Standard: Would a reasonable person consider this work to be satisfactory? i. EX: a window cleaner has a K that contains a “satisfaction guarantee.” An objective standard would look at whether a reasonable homeowner would be satisfied or dissatisfied with the work that is done. b. Subjective Standard: Whether this person is genuinely/honestly dissatisfied. i. EX: a window cleaner has a K that contains a “satisfaction guarantee.” A subjective standard would look at whether the homeowner in question was genuinely dissatisfied. If you had a particularly meticulous homeowner and they see that there are some tiny areas that are still streaky and they are

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genuinely dissatisfied, we ask if they are honestly dissatisfied and it is not a pretense or anything, they are entitled to reject the work.

2. GOOD FAITH UNDER ARTICLE 2 •

Rule: §306. A term which measures the quantity by the output of the seller, or the requirement of the buyer means such actual output or requirements may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded. o Requirement and Output K’s can lend themselves to bad faith (good faith argument). o There is a band in which the Requirements or Output sale purchase will take place. Person X will agree to order at lease “this” much and nor more than “this” much. o K’s most of the time have a buffer (they will have an estimate or rage), but K’s do not always have the buffer so we have this section that says you cannot go so far below or above what is normal under the circumstances. For example, if every year you order 1,000 widgets but now you over 100 or 5,000 (issue usually comes up with high requirements).

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Two types of K’s that fall under Sales Law: 1. Requirement K’s o Requirement’s buyer buys all its requirements form one given seller. o The seller agrees to supply the buyer with as much of a good as the buyer wants, in exchange for the buyer’s agreement not to buy that good elsewhere. Perspective of the Requirements Buyer: (1) Guaranteed source of their paper, rather than giving to go to the open market. (2) Agreement made ahead of time that the paper will be at a set price, no matter what. Perspective of the Requirements Seller: (1) Builds a customer base. (2) locks in price so that person X cannot back out. Although, this means they take the risk if their product (in the open market) being worth more. o The seller is not obligated to do the same, in kind.

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o EX: X purchases all its paper requirements from WB Mason. So, whatever paper requirements X has, they are ALL going to be bought from WB Mason and in turn, WB Mason will give X paper. 2. Output K’s o Seller sells their entire output (all products) to one particular buyer whether it is large or small. o Seller has a guaranteed sale and do not have to deal with the hassle of making a new one. Although, there may be someone out there who would have given them more.

Case Analysis: Indiana-American Water Co. v. Town of Seelyville In 1983, Water Company and Town entered a K which prices in pertinent part as follows: Company agrees to sell to the Town, and Town agrees to purchase from Company, at the rates hereinafter mentioned, such quantities of water as the Town may hereafter from time-to-time need, the term of the K is 25 years and will expire in the year 2008. The K limits the quantity of water the Town may purchase to one million gallons of water per day, the K contains other limitations and provides that “in no event shall the Company be obligated to supply water in excess of the limitations on usage as provided for expressly in this Agreement . . . .” in 1967 (many ears before the present K was executed), Town acquired land which could be used as a wellfield to supply water. In 1997, Town announced its plan to sell bonds to finance the construction of the improvements necessary to obtain water from the wellfield. It is not a full Requirements K because there was a cap (maybe that is all the water company could provide). The city was binding itself to buy all the water from the company up to a million gallons and from no one else. It is a Requirements K because of the elements of EXCLUSIVITY. Is developing the well a problem? Taking advantage of technology to decrease water requirements is a good thing this is good faith and a legitimate reason for the lower requirements.

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AVOIDANCE DOCTRINES Generally: What you are trying to do here is you are seeking for a court to declare a K voidable; you are seeking to rescind the K. These are the ways that a party can escape a contract. •

The Three “Ps”: People, the Process, or the Product. Something is wrong with one or more of these three things, and we have to figure out what.

The Distinction Between Void (Ab Initio) and Voidable •

Voidable Ks (Most common): This is like a divorce. Here, we have a K that is valid, however, if a party takes steps to avoid/undue/rescind that K then a court can —in its discretion— undue the K. The party that does not want to go through with the K has to affirmatively step up and say they do not want to go through with the K.

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Void Ks (Ab Initio): This is alike an “annulment,” in that it never happened. We don’t need to undo the K because there was never a K to begin with. If someone put a gun to your head and told you to sign this K, we will say that is a void K. Here, Ks under regular duress (ex: gun to your head) are void.

A. DURESS (ECONOMIC DURESS/ BUSINESS) 1. BACKGROUND/HISTORY RS § 175. "If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.” Duress: Normally, with duress, you have a situation where the party with the greater bargaining power is trying to “blackmail” the other party and the other party (the weaker party) has no reasonable alternative but to go along with it. Here, you feel completely backed into a corner because of this illegal threat and there is no other thing you can do but go along with it. We are trying to say that no one breached here (we are just getting rid of the K). For example, a gun to the head. Here, you are compelling someone to do something not of their own free will, for example: “The only reason I entered into the K was because I had no other choice.” If you can prove that you are the victim of duress, the remedy is rescinding (undoing) the K. Rescinding a K means getting rid of it and pretending it never happened (no consequences for either party).

Duress is going to be a REALLY HARD claim to make because the requirements are quite strict. There is usually not an overt threat, and there is a lot of wiggle room in “reasonable alternatives.”

2. ELEMENTS OF DURESS

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1. Wrongful or Improper Threat. (§175. A threat is improper if): a. What is threatened is a crime or a tort, or the threat itself would be a crime or a tort if it resulted in obtaining property, b. What is threatened is a criminal prosecution, c. What is threatened is the use of civil process and the threat is made in bad faith. (Suing someone when you don’t have the grounds to sue that person). d. The threat is a breach of the duty of good faith and fair dealing under a K with the recipient. (This is the MOST COMMON. When you are acting in bad faith, then that will be problematic in terms of constituting a wrongful or improper threat). • For example, this often progresses where the threatening party is threatening to breach. They say, “I am not going to pay you.” Even though they know that they must pay you. They are threatening to not pay you to extort something from you. 2.

No Reasonable Alternative: A lack of reasonable alternative a. If the victim has a reasonable alternative, he is expected to take that reasonable alternative or else he cannot avoid the K on the basis of duress. b. The availability of reasonable alternatives is fact dependent. i. Think about all the other things you could have done to show that their backs were not against the wall, and they are just unhappy with the new bargain (this is the party looking to uphold the modification or release). ii. Consider things like: could they have sued? could they have gotten the goods from an alternative supplier?

3. Causation: Actual inducement of the K by the threat: a. The threat must cause the party to enter into the K. However, it is usually not an issue if you establish elements (1) and (2). i. If there is some other reason, then we cannot say that the K was procured by duress. You must show there was some other reason they entered into the K. 4. (?) Pressuring party must have caused the hardship: a. Courts debate whether this is required. Essentially, the hardship cannot come from the weaker/servient party. It must come from the dominant party. Note: Each element MUST be shown (maybe not 4) to prove duress. There is TOLERATION OF THE THREAT IF IT’S A MINOR VEXATION.

3. CONTEXT IN WHICH DURESS ARISES Modification of an original K: • • •

Here, a party “renegotiates.” You take the OG K and modify the K by changing the terms of the K so that the OG K is no longer offered. Duress and modification, the party that is seeking to get out of the modified K is saying they were blackmailed into the modified K and want to rescind to the OG K. For example, in K1 you have a price of $10,000. A modification involves getting rid of that OG K and substituting a new price, $15,000, instead. 8

A Settlement and Release Agreement • • •

In a Settlement agreement, we have a dispute as to who owns what, and instead of going to court we have settled on a certain amount of money, and we go on our separate way. A release is a separate agreement that has an effect of terminating (rescind/undo) the OG K. We will see a party calming that the release was signed under duress. Duress and settlement/release: the party (victim) here wants to reinstate the OG K (go back to the top/OG K) because the release was a product of duress, and they want to reinstate the OG K: “we want to be released from the release.”

4. CASE ANALYSIS Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline Service Co FACTS: Π contracted with ∆ to transport pipeline construction materials. Π encountered numerous difficulties which severally delayed performance of the K. After receiving the pipes, ∆ cancelled the K. π presented ∆ with an involve with charges of $260,000 to $300,000. Π alleged that it was in urgent need of cash, and that if it didn’t soon pay off its bills, it would have to declare bankrup, and that ∆, who had knowledge of π’s financial troubles, deliberately stalled on payment to reach a settlement. Π eventually agreed to release ∆ from all liability in exchange for $97,500. • Let’s understand the position of the parties: o Alyeska --> release is enforceable we paid $97,000 and now we are done. o Totem --> release is subject to rescission; we now want the full amount owing ($300,000ish). • Issue: can Totem avoid the release? (i.e., rescind the release). ANALYSIS: π’s argue the duress is in the release statement. Was there an improper/wrongful threat? • Yes. Alyeska is threatening to withhold payment. Given that the π owes...