Section 06-11

- Section 6-2 - c. Generally, both a legal detriment and legal benefit are present if one is present d. Not required that consideration be measured in economic or financial terms – but often will be (the rent you pay your landlord) Restatement (Second) of Contracts § 71. Requirement of Exchange; Types of Exchange (1) To constitute consideration, a performance or a return promise must be bargained for. (2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise. (3) The performance may consist of (a) an act other than a promise, or (b) a forbearance, or (c) the creation, modification, or destruction of a legal relation. (4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person. C. Adequacy of the consideration, or fairness of the bargain, are irrelevant as to existence or sufficiency of consideration It is not a proper function of the jury to determine whether the consideration is a fair and adequate exchange for the promise. Fairness and adequacy are for the offeror and offeree to judge for themselves. Any legal consideration, no matter how slight, will be sufficient. However, the mere inconvenience of making or receiving a promise is not itself consideration. WIS JI-Civil 3020 [End of Online Lecture 6-1] II. Contract Law Concepts Related to Consideration A. Illusory promises - imposes no contractual obligation on promisor and, therefore, there would be no binding contract An illusory promise – “one that its maker can keep without subjecting himself or herself to any detriment or restriction” – such a promise does not constitute consideration. FN 1

3. As to a liquidated (i.e., agreed to sum) and undisputed debt – a partial payment, even if offered as payment in full, will not discharge the entire debt; but if additional or different consideration is given (e.g., paying early, paying in different form, etc.), debt is discharged (economic equivalency of different consideration is irrelevant) Example: If Smith owes Jones $400 and this amount is not disputed and is liquidated and is due and payable on June 1, if Smith and Jones agree that the $400 obligation will be satisfied if Smith pays Jones $300 on April 1, 60 days early, and Smith makes the payment, Jones cannot thereafter sue Smith for $100 because the agreement to take the lesser amount was supported by consideration – Smith paying the lesser amount 60 days early, something he was not otherwise obligated to do. 4. As to unliquidated (not an agreed-to amount) and disputed debt (a legitimate dispute as to what is owed by the debtor), acceptance by the creditor of a lesser sum discharges the debt if these elements are present: a. The dispute as to what is owed is genuine and not frivolous b. The debtor in good faith offers a partial payment as payment in full (example: “this payment is payment in full of disputed invoice #4572 . . . .”) c. The partial payment accepted by the creditor (e.g., the check is cashed or the payment is not returned within a reasonable period of time) Example: You are involved in a dispute with a painter who you contracted with to paint your house. The price was $3,000. You paid $1,500 down at the time you entered into the contract. The painter has completed the work. You genuinely feel that the work has not been done in a workmanlike manner and you want a price adjustment. The painter genuinely feels that he has met his obligations to you. You send the painter an additional $750 because you believe this to be a fair settlement. You write on the check, or in an accompanying memo or letter, that the $750 payment is “payment in full” (or you use equivalent language). If the painter does not return the check to you within a reasonable period of time, an accord and satisfaction has been entered into (i.e., your offer of settlement for $750 was effectively accepted by the painter) and the painter cannot recover the remaining $750. 5. Payment-by-check exceptions under UCC Article 3 (Section 3- 311) – adopted by many but not all states - Section 6-5 -

- Section 6-8 - comprehensive in scope as to meet the requirements of an offer that would ripen into a contract if accepted by the promisee. * * * * * * * * A contractor is bound by its bid to a general contractor under the doctrine of promissory estoppel if the subcontractor’s bid induced the general contractor to submit a bid and accept an offer for a construction project. If the subcontractor fails to honor that promise, injustice to the general contractor can only be avoided by enforcement of the subcontractor’s bid. FN 3 [End of Online Lecture 6-4]

- Section 6-11 - the lease, Pine found out that the real estate taxes were higher than he had estimated. Therefore, he asked Bean whether or not he (Bean) would be willing to split equally the responsibility for the taxes. Bean agreed and he and Pine signed a handwritten memorandum to that effect. The lease also provided as follows: "Tenant acknowledges that he has fully inspected the warehouse. Therefore, tenant hereby agrees to hold landlord harmless (and not seek recovery from landlord) in the event any person is injured or the property of tenant is damaged, or the tenant otherwise incurs a loss, during the term of this lease resulting from any act or failure to act on the part of the landlord." (a) When the tax bill came to Bean he forwarded it to Pine indicating that Pine should pay the full amount. Pine vehemently objected because of the agreement reached earlier between them concerning the sharing of the real estate taxes. Bean refused to honor the agreement. Is the agreement concerning the sharing of the real estate taxes enforceable by Pine? Why or why not? (b) Pine sent Bean a check for half of the tax bill and wrote on the check, "payment in full for my share of the real estate taxes." Bean cashed the check and sued Pine for the difference. Who will prevail and why? 9. The Snyder Co., being a large user of coal, entered into separate contracts with several coal companies. In each contract, it was agreed that the coal company would supply coal during the year 2019 in such amounts as the manufacturing company might desire to order, at a price of $49 per ton. In February 2019 , the Snyder Company ordered 1,000 tons of coal from Union Coal Company, one of the contracting parties. Union Coal Company delivered 500 tons of the order and then notified Snyder Company that no more deliveries would be made and that it denied any obligation under the contract. In an action by Union Coal to collect $49 per ton for the 500 tons of coal delivered, Snyder files a counterclaim, claiming damages of $1,500 for failure to deliver the additional 500 tons of the order and damages of $4,000 for breach of agreement to deliver coal during the balance of the year. Decision? Consideration - Answers to Review Questions 1. A. 2. No. The pre-existing duty rule applies. Novack has not given any consideration for Superior's promise of additional compensation. The common law rules apply to contracts for services, and modifications of such contracts must be supported by consideration. In essence, Novack was already bound by a valid contract to perform exactly what he did perform under the modified contract. Hence, he did nothing more than he was legally obligated to do. As a result, there is no consideration to support Superior's promise to pay the bonus.

Section 6a

- Illegal Bargains-3 - (6) Was the clause part of an agreement that addressed other issues (thus, making the exculpatory clause less obvious)? (7) Does the clause give adequate notice as to the nature and significance of the wavier? The following language from a health club “Guest Registration” (which also solicited other typical information such as name, address and telephone number) was held to be unenforceable in Atkins v. Swimwest Family Fitness Center, 277 Wis.2d 303 (2005): Waiver Release Statement I AGREE TO ASSUME ALL LIABILITY FOR MYSELF WITHOUT REGARD TO FAULT, WHILE AT THE SWIMFEST FAMILY FITNESS CENTER. I FURTHER AGREE TO HOLD HARMLESS SWIMWEST FITNESS CENTER, OR ANY OF ITS EMPLOYEES FOR ANY CONDITIONS OR INJURY THAT MAY RESULT TO MYSELF WHILE AT THE SWIMWEST FITNESS CENTER. I HAVE READ THE FOREGOING AND UNDERSTAND ITS CONTENT. SIGNED DATE * * * * * * * We conclude that the exculpatory language in Swimwest’s form is unenforceable since it is contrary to public policy. The waiver of liability language is, first, overly broad and all-inclusive. The use of the word “fault” on the form did not make clear to Wilson that she was releasing others from intentional, as well as negligent, acts. Second, the form served two purposes, guest registration and waiver of liability for “fault,” and thus failed to highlight the wavier, making it uncertain whether Wilson was fully notified about the nature and significance of the document she signed. Finally, Wilson did not have any opportunity to bargain. If she had decided not to sign the guest registration and waiver form, she would not have been allowed to swim. The lack of such opportunity is also contrary to public policy. FN 5 * * * * * * * *

- Illegal Bargains-6 - (not part of or ancillary to an otherwise legal contract) are always considered illegal (e.g., an agreement by competitors to not go after each other’s customers) – the non-compete agreement must be “reasonable” and support legitimate business interests in order to be enforceable b. Factors (analysis points) in determining whether a non- compete provision will be enforceable (1) There must be a salutary (i.e., good) purpose for the provision (i) Employment Agreement – employee’s access to confidential business information, training of the employee, acquired skill sets, access to customers, etc. (ii) Sale-of-a-business agreement – the purchase includes the goodwill of the seller which is deserving of protection by a non-compete agreement (2) The provision cannot be overly broad with respect to what are the prohibited competitive activities (3) The geographical scope of the provision must be reasonable – generally evaluated by looking at the market are of the employer/seller that could be adversely impacted in a material way by the prohibited competitive activities (4) The duration of the provision must be reasonable (no absolute rules) – in an employment agreement, 9 to 18 months; in business sale setting, 5 to 20 years c. Most courts will evaluate the enforceability of post- employment non-solicitation and confidentiality/non- disclosure agreements in the same manner as a traditional non-compete provision incorporated in an employment agreement d. Consideration required if employee is asked to sign while employed – what satisfies this requirement? Payment of a bonus, continued employment if the employee was an at- will employee and could otherwise be terminated without cause, promotion, etc.

- Illegal Bargains-7 - Example of a non-compete provision from an employment agreement: 10. Non-Compete Covenant. As a result of Employee's experience in the business of the Company (which experience will increase while Employee is employed by the Company), the training that may be provided to Employee by the Company, and the fact that she will have access to information relating to the Company while in the employ of the Company, the parties acknowledge and agree that if Employee competed with the Company, either directly or indirectly, such competition would have a significant negative impact on the Company's business and financial condition. Accordingly, Employee agrees that while employed by the Company and for a period of one (1) year from the termination of this Agreement for whatever reason, she shall not directly or indirectly, whether as an owner, stockholder, partner, employee, consultant, agent, independent contractor or otherwise, for herself or on behalf of any other person or entity, engage directly or indirectly, in the in the business of [description of business] or enter into any material aspect of the business of the Company as of the date of her termination of employment. Forms of competition prohibited by this Section 10 shall include, but not be limited to, the following activities to the extent that any of them are competitive with the business of the Company: (a) soliciting or assisting in the solicitation of customers of the Company; (b) supplying goods or rendering services, or assisting in such activities, to customers of the Company; (c) diverting or attempting to divert any customer's business from the Company or otherwise interfering with the business relationships between the Company and its customers; (d) planning for or organization of any business activity competitive with the Company's business; (e) combining or conspiring with other employees of the Company for the purpose of acquisition of any such competitive business activity; (f) hiring or attempting to hire any employee of the Company; or (g) use or dissemination of Confidential Business Information or Trade Secrets, except in furtherance of the business interests of the Company. The foregoing prohibition shall not be interpreted to prevent or limit the right of Employee to invest in the capital stock or other securities of any corporation whose stock or other securities are publicly owned and are regularly traded on any public securities exchange. This covenant not to compete shall be enforceable in Dane County, Wisconsin.

- Illegal Bargains-8 - Employee agrees that the covenants above are reasonably and properly necessary to adequately protect the legitimate business interests of the Company. In the event that any one or more of such territorial, time or other limitations is found to be unreasonable by a court of competent jurisdiction, Employee hereby agrees and submits to the reduction of the said territorial, time and other limitation to such an area, period or otherwise as the court may determine to be reasonable, and the court shall make such findings notwithstanding the provisions of Section 103.465, Wis. Stats. In the event that any limitation in this Agreement is found to be unreasonable or otherwise invalid in any jurisdiction, in whole or in part, Employee hereby acknowledges, warrants and agrees that such limitation shall remain and be valid in all other jurisdictions. 3. Unconscionable agreements or provisions of agreements – more later III. What Is the Result if the Contract’s Subject Matter is Illegal? A. Situations involving violation of statutes – as a general rule, courts will refuse to give a remedy for the breach of an illegal contract and will also refuse to permit a party who has fully or partially performed to recover anything – the courts will leave the parties where they found them – exceptions to this “hands off” doctrine 1. One party withdraws from the agreement before performance by both parties (the court will order the return of any money/property paid or transferred by the withdrawing party) 2. One party is intended to be protected by the statute that was violated (example: violations of regulatory statutes) 3. Divisible contracts – if part of an agreement is legal and part is illegal, the court may enforce the legal part if the two parts can be reasonably separated B. Situations involving unenforceable exculpatory clauses – the clause will not be enforced and the party who suffers the loss will be free to seek any available remedy against the wrongdoer (the other party to the contract) C. Situations involving unenforceable non-compete provisions 1. Generally the provisions simply held to be unenforceable if found to be unreasonable and the party (former employee or seller of the business, as the case may be) is free to engage in any activity

- Illegal Bargains-9 - 2. In some jurisdictions, the courts will engage in “blue-lining” – that is, the court will “re-write” the non-compete agreement with terms are legally reasonable

- Illegal Bargains-10 - Illegal Bargains - Review Questions 1. Mix entered into a contract with Small which provided that Small would receive $10,000 if he stole trade secrets from Mix's competition. Small performed his part of the contract by delivering the trade secrets to Mix. Mix refused to pay Small for his services. Under what theory may Small recover? A. Quasi contract, in order to prevent the unjust enrichment of Mix. B. Promissory estoppel, since Small has changed his position to his detriment. C. None, due to the illegal nature of the contract. D. Express contract, since both parties bargained for and exchanged promises in forming the contract. 2. Cratchett leased an apartment from Grendel. Cratchett was a person of limited means in a locality where low-income housing was scarce. Two months after signing the agreement, Cratchett fell in an unlit stairwell when a step unexpectedly gave way. At the trial of the suit for damages, Grendel relied on a clause in the lease stating that the "Tenant agrees to hold Owner harmless from any claims for damages no matter how caused." Cratchett should A. Win because the exculpatory clause was unenforceable as a violation of public policy. B. Win because the lease was a contract of adhesion. C. Lose because nothing indicates that the lease was unconscionable as a whole. D. Lose because exculpatory clauses are generally upheld in the interest of freedom of contract. 3. Bean (an owner of commercial warehouse space) and Pine, an accountant, entered into a written lease with regard to a warehouse to be used by Pine for storage of accounting records. Pine, as the tenant, was responsible under the terms of the lease to pay all utilities and real estate taxes. Within a few days after entering into the lease, Pine found out that the real estate taxes were higher than he had estimated. Therefore, he asked Bean whether or not he (Bean) would be willing to split equally the responsibility for the taxes. Bean agreed and he and Pine signed a handwritten memorandum to that effect. The lease also provided as follows: "Tenant acknowledges that he has fully inspected the warehouse. Therefore, tenant hereby agrees to hold landlord harmless (and not seek recovery from landlord) in the event any person is injured or the property of tenant is damaged, or the tenant otherwise incurs a

- Illegal Bargains-11 - loss, during the term of this lease resulting from any act or failure to act on the part of the landlord." On October 1, some of Pine's property was damaged by water from a rainstorm which leaked into the warehouse through the roof. Pine sued Bean for the loss, claiming that Bean's failure to maintain the roof resulted in the loss. Bean, although he admits that the lead was a result of lack of proper maintenance, argues that the lease itself (the provision quoted above) precludes him from being liable. Is he correct? Why or why not? 4. Charles Leigh, engaged in the industrial laundry business in Central City, employed Tim Sullivan, previously employed in the home laundry business, as a route salesman. Leigh rents linens and industrial uniforms to commercial customers; the soiled linens and uniforms are picked up at regular intervals by the route drivers and replaced with clean ones. Every employee is assigned a list of customers whom he or she services. The contract of employment stated that in consideration of being employed, on termination of his employment, Sullivan would not "Directly or indirectly engage in the linen supply business or any competitive business within Central City, Illinois, for a period of one year from the date when his employment under this contract ceases." On May 10 of the following year, Sullivan's employment was terminated by Leigh for valid reasons. Sullivan then accepted employment with Ajax Linen Service, a direct competitor of Leigh in Central City. He began soliciting former customers he had called on for Leigh and obtained some of them as customers for Ajax. Leigh brings an action to enforce the provisions of the contract. Decision? 5. Carl, a salesman for Smith, comes to Benson's home and sells him a complete set of "gourmet cooking utensils" that are worth approximately $300. Benson, an 80- year-old man who lives alone in a one-room efficiency apartment, signs a contract to buy the utensils for $1,450 plus a credit charge of $145 and to make payments in ten equal monthly installments. Three weeks after Carl leaves with the signed contract, Benson decides he cannot afford the cooking utensils and has no use for them. What can Benson do? Explain. 6. Fred Alex was engaged in the business of selling home appliances to retail customers who shopped at either one of his two stores in Madison, Wisconsin. Alex had been in the business for 21 years and his operations were very profitable. Based on customer surveys he had done in the past, most of Alex's business came from within a 60 mile radius of Madison. Alex had been entertaining the possibility of retiring and over a several month period had been negotiating the possible sale of his businesses to Jim Mason. Finally, on April 1, Alex and Mason entered into a contract whereby Alex would sell his businesses to Mason for $1,250,000. The total price was to be allocated as follows: Real estate $450,000 Fixtures and Equipment $150,000 Inventory $400,000 Use of Tradename and Goodwill $250,000 The sales contract also included the following provision:

- Illegal Bargains-12 - "Alex agrees that he shall not engage in the sale of home appliances for a period of two years from the date hereof in the State of Wisconsin." The transaction was closed on May 1 and Mason began operating the businesses. On August 15, Alex began operating a business engaged in the sale of different brands of televisions, selling only to retail appliance stores (wholesale only). This new business was located in Waunakee, a small town a few miles northwest of Madison. Alex called on Mason to see if he could sell some televisions to Mason. Mason was shocked to learn that Alex was back in business and reminded him of the quoted provision of the sales contract between the parties. Alex replied that he had gotten restless being retired and that he really did not think he was doing anything wrong. After several months of arguing between the parties, which did not result in a settlement of their dispute, Mason commence a lawsuit against Alex asking the court to prohibit Alex from engaging in the business he was conducting and for damages because of the fact that Alex was violating the quoted provision of the sales contract. Who will prevail and why? 7. Spark owned and operated a local race track where automobile races were held. From time to time Koch would serve as a flagman for Spark and would be paid $100 per race. As a flagman, Koch was responsible for starting the race with a green flag and giving the other necessary flag signals to the racers during the race. Before each race Koch signed a "Track Release and Waiver of Liability" form agreement presented to him by Spark. Koch had signed this form many times over the years. The substance of the waiver form provided as follows: that Koch understood that serving as a flagman could be dangerous and result in injury as a result of car crashes; and that Koch agreed to not sue Spark for any injuries that Koch may suffer while acting as a flagman even if the injuries were as a result of Spark's negligence. Koch was seriously injured when struck by a race car that crashed through a fence which may have been negligently maintained by Spark. Had the fence not been collapsed, the car would have been stopped before hitting Koch. Koch sued Spark for his injuries. Spark raised as a defense the release and waiver form signed by Koch. Under the circumstances, A. Koch will likely prevail because the release and waiver form violates public policy. B. Koch will likely prevail because provisions such as those contained in the release and waiver form are void as a matter of law because they prevent a person from being responsible for his or her acts. C. Spark will prevail and the release and waiver form will be enforceable only if he can show that he had not negligently maintained the fence. D. Spark will likely prevail because the release and waiver form will likely be enforceable even if the fence had been negligently maintained by Spark. E. None of the above is correct.

- Illegal Bargains-13 - Illegal Bargains - Answers to Review Questions 1. C. 2. A. 3. Bean is probably correct. In a commercial lease setting (as contrasted with a residential lease involving a landlord and a student tenant, for example), the exculpatory clause (hold harmless clause) will likely be held effective to limit Bean's liability because: (i) it is not violative of public policy because it is not in the context of a consumer-like transaction; and (ii) the parties in a commercial setting are of relatively equal bargaining power. 4. Leigh is entitled to the relief sought. Close was permitted, under the contract, to engage in the home laundry business in which he was previously employed before entering Leigh's employment. He was not being deprived of this means of earning a living. The restriction was held to be reasonable in that it was only for one year and applied only to laundry business with commercial customers. In Bailey v. King, 398 S.W. 2d 906, the court stated: "To say that this contract was unreasonable would actually have the effect of saying that no employment agreement in the laundry or linen supply business could be upheld. . . Whether a provision in an employment contract restraining an employee from competition with his employer after termination of employment is reasonable and thus valid is a matter to be determined under the particular circumstances involved. Numerous cases support the enforceability or protective covenants where the consideration is based simply upon employment." Also see the Restatement, Second, Contracts, Section 188. The breach of a covenant not to compete is, of course, of a continuing nature, and an action for damages is hardly adequate, mainly because of the extreme difficulty in determining the amount of damage caused by a loss of business. It appears that the only realistic relief for a breach of this type of contract is by injunction. One further question which may be discussed is whether the fact that Close was terminated by Leigh should alter the result. The facts only state that Close was discharged for valid reasons and thus the equities involved are not known. 5. Benson is not bound to his obligation. The doctrine of "unconscionability" as set forth in the UCC would probably apply here. If it did, Benson could obtain a release from the obligation for that reason. Smith may have used high pressure tactics and taken advantage of Benson's malleability as evidenced by the unreasonable price agreed to by Benson. As stated in Williams v. Walker- Thomas Furniture Company, 350 F.2. 44 (1965): "Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms

- Illegal Bargains-14 - which are unreasonably favorable to the other party. Whether a meaningful choice is present in a particular case can only be determined by consideration of all the circumstances surrounding the transaction. In many cases the meaningfulness of the choice is negated by a gross inequality of bargaining power. The manner in which the contract was entered is also relevant to this consideration." 6. This question involves whether or not a covenant not to compete will be enforceable. In this case, Alex will probably prevail. In analyzing covenants not to compete, the following four issues must be examined: A. Does a salutary purpose exist for including the covenant in the contract? In this case, since the transaction involved the sale of Alex's goodwill, the requisite salutary purpose exists (that is, Mason was entitled to have this asset that he was purchasing protected against the competition of Alex). B. Is the language describing the prohibited activity too broad? In this instance, it appears that the language is too broad because it prohibits Alex from selling appliances in any capacity (for example, to wholesale customers which would not be competitive with Mason's retail sales). C. The geographical area to which the covenant applies must be reasonable. In this case, the geographical area ("State of Wisconsin") is too broad because Alex's old marketing area (which created the goodwill sold to Mason) was a 60 mile radius around Madison and not the whole state. D. The duration (life) of the covenant must be reasonable (not too long). In this case, two years would probably be considered reasonable. Therefore, because the covenant is too broad in its application and geographical scope, it will not be enforceable against Alex and he will be able to compete with Mason. 7. D.

Section 7

- Section 7-1 - Contracts in Writing In order to avoid disputes over whether a contract exists or what the terms of a contract are, the law requires that certain types of contracts be evidenced by some writing that satisfies very minimal requirements. If these contracts are not in writing, they are not enforceable. It makes sense to get all “important” contracts in writing. I. Doctrine - Background A verbal contract isn’t worth the paper it’s written on. Samuel Goldwyn A. Statutes of fraud require that certain contracts be evidenced by a satisfactory writing These statutes are the prime refuge of the scoundrel who has made a deal and then seeks to welch on it. An honest man’s word is as good as his bond. Don Quixote. To break an oral agreement which is not legally binding is morally wrong. Talmud. Bava Metzi’a B. Other general observations 1. Most contracts do not have to be evidenced by a writing 2. “Important” contracts should be evidenced by a writing regardless of whether or not a statute requires a writing 3. Is the writing the contract or proof of an oral contract entered into earlier (did the parties intend that they would have no contract unless and until a written contract was signed and delivered?)? Example: you fill out an application to rent an apartment that you have inspected. You’ve discussed with the landlord the rent and other basic lease terms. You tell the landlord “I’ll take it” - the landlord responds: “if your application checks out, come in Monday to sign the lease”. Assuming your application is approved by the landlord, was the contract formed when the landlord told you to come in Monday and sign the lease (the acceptance); or will the contract only be formed when you and the landlord actually sign the lease? II. Which Types of Contracts Must be In Writing Under Typical Present Day Versions of the Original 1677 English Statute A. Guarantee (or suretyship) contracts - "If X doesn't pay, I will pay . . ."

- Section 7-2 - 1. Applies to collateral (or secondary) promise - promisor (i.e., the “guarantor”) not primarily liable, but only liable if the party whose performance is guaranteed fails to perform Example: Smith borrows $100,000 from Jones under the terms of a written promissory note. Baker orally tells Jones that if Smith defaults (i.e., fails to pay the note) he (Baker) will pay the note. On the basis of this guaranty of payment Jones was willing to make the loan. He would not have otherwise been willing to do so because of Smith’s weak financial condition. If Smith defaults, Jones will not be able to enforce the guaranty against Baker because it was not in writing. 2. Exception - main purpose doctrine (where the object of the guarantor is to obtain an economic benefit that he or she did not previously have) Example: Smith is the sole shareholder of Smith Corp. The bank will only lend money to Smith Corp. if Smith himself personally guaranties the debt. Smith orally guaranties the debt. Does this guaranty have to be in writing? Probably not, because of the main purpose doctrine. A “main purpose” of the loan to Smith Corp. was to benefit its sole shareholder, Smith. B. Contracts involving interests in real estate 1. Types of contracts (purchase/sale, mortgage, leases, easements, licenses, etc.) 2. An exception - real estate lease with a term of one year or less (typically, your lease with the landlord with respect to your apartment - the term is one year or less - it would not have to be in writing - but would it be good business for you or the landlord to rely on an oral one year lease? – but the lease will likely have to be in writing if its term ends more than one year from the date you sign the lease – example: your apartment lease – you sign the lease May 1 and its term ends August 15 of the following year – see paragraph C. immediately following) C. Contracts incapable of performance within one year from the date made (and not one year from the date performance is to begin - the one year commences with the day after the contract is entered into) - could the contract, under its terms, possibly be performed within one year, however improbably performance within one year may be - if so, no writing is required Example: On February 1, 2014, Smith orally agrees with Baker to provide on a monthly basis elevator maintenance services for

- Section 7-3 - $150 per month. Smith and Baker agree that the contract will have a two year term ending on January 31, 2016. Either Smith or Baker can challenge the enforceability of the contract because it was not in writing and cannot be performed within one year of February 1, 2014. *********************************** Wis. Stat. §241.02 Agreements, what must be written. (1) In the following case every agreement shall be void unless such agreement or some note or memorandum thereof, expressing the consideration, be in writing and subscribed by the party charged therewith: (a) Every agreement that by its terms is not to be performed within one year from the making thereof. (b) Every special promise to answer for the debt, default or miscarriage of another person . . . Wis. Stat. §706.02 Formal requisites. (1) Transactions under s. 706.01(1) [transactions involving interests in real estate] shall not be valid unless evidenced by a conveyance [a written instrument] which: (a) identifies the parties; (b) identifies the land; (c) identifies the interest [e.g., lease, mortgage, fee simple, etc.] conveyed ... and (d) ... (e) is signed by or on behalf of all parties [End of Online Lecture 7-1] III. Type of Writing Required A. Writing need not be a formal document nor must all terms be included in single writing (can draw several writings together to prove existence of contract) B. Writing(s) must include – the basics 1. Identification of parties 2. Identification of subject matter and consideration 3. "Signed" by the party against whom enforcement is sought (typically, the defendant - the “scoundrel”) (exception - Wisconsin Chapter 706 requires signature by all parties with regard to real estate contracts) 4. Other "essential" terms and conditions - will vary with the nature of the contract

- Section 7-4 - C. What will satisfy writing requirement? - written agreements, letters, daybook notations, or other “writings,” whether or not the parties intended the writing to have legal consequence IV. Effect of Failure to Comply A. Judicial enforcement of the contract not available – that is, the parties cannot sue each other for a failure to perform the contract B. A fully executed oral contract cannot be attacked on the basis that it should have been in writing (what better proof of the existence and terms and conditions of a contract is the parties’ performance) C. Effect of an under-oath admission that contract exists – contract is still not enforceable in a majority of jurisdictions (different result under the UCC – more later) D. Equitable recovery based on promissory estoppel may be available to avoid an unjust result from a contract being declared unenforceable (i.e., the party against whom enforcement is sought is unjustly enriched by being able to avoid contractual responsibility) In California, the doctrine of [promissory] estoppel is proven where one party suffers an unconscionable injury if the Statute of Frauds is asserted to prevent enforcement of oral contracts. . . The Statute of Frauds should not be used in this instance to defeat the oral agreement reached by the parties in this case. FN 1 E. Partial performance exception (generally limited to sales of real estate) - no writing required and an oral contract will be enforceable if 1. Buyer has made a partial payment of the price 2. Buyer has taken possession of the real estate 3. Buyer has added substantial improvements (e.g., constructed a building on vacant real estate or remodeled an existing building) [End of Online Lecture 7-2] V. UCC 2-201 – Sale of Goods Statute of Frauds A. Application - sale of goods with a price of $500 or more (amount should be higher, but remember the UCC was written in the late 1940’s and early 1950’s and really has not been amended since then) B. Contracts for services not covered by this UCC rule - how to deal with “mixed” contracts - that is where there is a sale of goods along with services being provided in conjunction with the sale of goods - what is the

- Section 7-5 - predominant purpose of the contract? Factors: how much was charged for the goods and how much was charged for the labor? Was the primary purpose or thrust of the contract for goods or services? How did the language in the contract describe the subject matter? C. Writing required under 2-201 - very lenient requirements – the writing must 1. Evidence contractual intent 2. Be "signed" by party to be charged with performance (the “scoundrel”) 3. Specify some quantity of goods (“a car”, “10 widgets”, etc.) even though the quantity may be incorrect 4. Use of confirmations between merchants 2-201(2) - the “but I never received it” argument; or “it apparently got lost in the mailroom” argument Example: Buyer and Seller enter into an oral contract for the sale of $5,000 of goods. Shortly thereafter, Buyer sends to Seller a written document which sets forth (i.e., confirms) the terms and conditions of the oral contract that the parties entered into. Seller receives the confirmation and does not object to it. Can Buyer enforce the contract against Seller even if Seller wants to avoid liability based on the UCC statute of frauds? In order to answer this question, we need to know whether both parties are merchants. 5. This is a merchant-only section (i.e., both the seller and buyer must be merchants) 6. Party desiring contract must prove oral contract in fact was formed (for example, during a telephone conversation) - risk of perjury and who will the jury believe 7. If recipient of confirmation fails to respond to it in writing within 10 days after receiving it, he is bound by the confirmation even though he did not sign it 8. Receipt of confirmation (1-201[27]) D. Exceptions to any writing requirement under 2-201 under certain circumstances 1. Oral contract for specially manufactured good (goods that cannot be easily re-sold by seller) (must prove oral contract in fact existed)

- Section 7-6 - Example: an oral contract to purchase custom promotional materials (with the buyer’s business information printed on the materials) for $5,000. Buyer repudiates the contract after the seller has begun manufacturing the materials and claims that there is no enforceable contract because the contract was not in writing. Seller will be able to enforce the oral contract (assuming the seller can get the jury to agree that an oral contract was in fact entered into with buyer) 2. An admission under oath by the party (seller or buyer) against whom enforcement is sought Example: the party who is arguing that a contract is not enforceable because there is no written contract in fact admits under oath in a deposition or in court that he entered into the contract. What more proof do you need? 3. Partial acceptance or payment by buyer in an installment contract situation (i.e., where the seller’s performance is spread over time) Example: buyer and seller enter into an oral contract involving 10 monthly shipments of goods with a total price of $10,000. Seller makes delivery for 3 months and then buyer repudiates the contract claiming there is no writing sufficient under the UCC. The contract will only be enforceable to the extent of the 3 shipments already received and accepted by the buyer – but the seller will not be able to enforce the contract with respect to the remaining 7 shipments. 4. But watch out for the one-year rule which could still require the contract to be in writing even if it appears to fall under one of these exceptions – can the contract be fully performed within one year from the date made? *************************************** § 2-201. Formal Requirements; Statute of Frauds. (1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing.

- Section 7-7 - (2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within ten days after it is received. (3) A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable (a) if the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller's business and the seller, before notice of repudiation is received an under circumstances which reasonable indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement; or (b) if the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or (c) with respect to goods for which payment has been made and accepted or which have been received and accepted (Sec. 2-606). E. Modification of contracts under 2-209 - does an oral contract, as modified, have to be reduced to a written agreement? - yes, if price is $500 or more after the modification [End of Online Lecture 7-3] VI. Other UCC Statutes of Fraud A. 1-206 - other personal (intangible) property ($5,000 limit) B. 8-319 – securities (exception – Wisconsin does not require a writing for contracts involving securities) C. 9-203 - security agreements D. 2A-201 - leases of goods ($1,000 or more)

- Section 7-8 - VII. Concluding General Observations A. Use of customary forms minimizes risk of failing to comply with a statute of frauds - banking forms, real estate forms, broker’s forms, computer generated receipts at retail stores, etc. B. Biggest risk - transactions that are not entered into in well-established business environments VIII. Electronic Contracts – Uniform Electronic Transactions Act (UETA) A. Review outline regarding Formation of Contracts (Section V) B. An electronic “record” satisfies the writing requirement C. An electronic “signature” satisfies the signature requirement - an electronic sound, symbol or process attached to or logically associated with a record and executed or adopted by a person with an intent to “sign” the record - examples: a person’s name affixed to an e-mail, the entering of an ATM code or clicking the “I agree” button IX. Parol Evidence Rule A. Only important if disputed contract is in writing - this rule does not apply to disputes with respect to oral contracts B. The contract formation process - generally the product of numerous different types of communications between the parties leading up to “I offer” and “I accept” C. Parol evidence refers to anything (other than the written contract itself) that was said, done or written before the parties signed the contract or as they signed it D. Substantive rule of law which prohibits admission into evidence of proof regarding terms of written contract (to alter, amend or add to it) - written contract speaks for itself - this rule does not apply to contracts that are not in writing – the court should not, in construing a fully integrated written contract, consider evidence of any prior or contemporaneous oral agreements between the parties When the parties to a contract embody their agreement in writing and intend the writing to be the final expression of their agreement, the terms of the writing may not be varied or contradicted by evidence of any prior written or oral agreement in the absence of fraud, duress, mutual mistake. FN 3 Where, as here, the contract includes an integration clause, evidence of contemporaneous or prior oral [or written]

- Section 7-9 - agreements relating to the same subject matter is not admissible. FN 4 E. In order for rule to apply, the written contract must have been intended to be complete and final expression of the parties' agreement (an integrated contract) - is there an integration clause in the contract supporting this intent? If the parties did not intend that the written contract represent their contract (maybe they intended that the written contract be a part of their overall deal and various oral agreements would also be part of the contract), then the parol evidence rule would not apply. Example of contract language that makes it clear that the written contract is intended to be an integrated contract: This Agreement represents the entire agreement of the parties and supersedes all prior oral and written understandings and agreements with regard to the subject matter hereof. There are no oral or written representations, agreements or understandings except as provided herein. F. UCC 2-202 – this is the UCC parol evidence rule and it is generally the3 same as the common law rule G. Exceptions to the inadmissibility of evidence based on the parol evidence rule - you can offer proof of 1. A partly written, partly oral contracts (the parties did not intend that the written portion of the contract be integrated) 2. Collateral errors (e.g., typographical errors in the written contract) 3. Lack of capacity (e.g., minority) 4. Defense of fraud, misrepresentation, duress, undue influence, mistake or illegality 5. Existence of conditions which make conditional a party’s obligations under a contract 6. A later agreement (a later mutual rescission or modification of an integrated written contract) - agreements that are entered into after the written contract is entered into are not subject to the parol evidence rule unless they too are in writing and are intended to be integrated 7. Clarify an ambiguity (e.g., vagueness, confusion, uncertain meaning) [End of Online Lecture 7-4]

- Section 7-10 - Contracts in Writing - Review Questions 1. The common law Statute of Frauds A. Does not require that all the terms and provisions of the agreement of the parties be contained in a single document. B. Requires that both parties sign the written contract. C. Defines what constitutes fraudulent conduct by a party in inducing another to make a contract. D. Applies to all contracts which by their terms require the payment of $600 or more. 2. Green was the owner of a large department store. On Wednesday, January 26, he talked to Smith and said, "I will hire you to act as sales manager in my store for one year at a salary of $18,000. You are to begin work next Monday." Smith accepted and started work on Monday, January 31. At the end of three months, Green discharged Smith. On May 15, Smith brought an action Green to recover the unpaid portion of the $18,000 salary. Decision? 3. Moriarty and Holmes enter into an oral contract by which Moriarty promises to sell and Holmes promises to buy Blackacre for $10,000. Moriarty repudiates the contract by writing a letter to Holmes in which she states accurately the terms of the bargain, but adds: "Our agreement was oral. It, therefore, is not binding upon me, and I shall not carry it out." Thereafter, Holmes sues Moriarty for breach of the contract. Moriarty interposes the defense of the statute of frauds, arguing that the contract is within the statute and hence unenforceable. Decision? 4. Which of the following terms generally must be included in a writing that would otherwise satisfy the UCC Statute of Frauds regarding the sale of goods: A. The warranties to be granted. B. The price of the goods. C. The designation of the parties as buyer and seller. D. The quantity of the goods. 5. On September 1, Jacobsen, an accounting professor, and Smithson entered into an oral agreement whereby Jacobsen agreed to sell Smithson his used stereo equipment for $450 and take possession on September 7. On September 6, Smithson asked Jacobsen if he would include his record albums in the deal for an additional $70. Jacobsen indicated his willingness to do so. On September 7, Smithson met with Jacobsen to take possession of the stereo equipment and the albums and pay Jacobsen. Jacobsen refused to agree to deliver the records as part of the deal and claimed that his agreement to do so was unenforceable because the

- Section 7-11 - agreement to change the initial contract to include the record albums was not in writing. Is he correct? Why or why not? 6. Reinfort executed a written contract with Bylinski to purchase an assorted collection of shoes for $3,000. A week before the agreed shipment date, Bylinski called Reinfort and said, “We cannot deliver at $3,000; unless you agree to pay $4,000, we will cancel the order.” After considerable discussion, Reinfort agreed to pay $4,000 if Bylinski would ship as agreed in the contract. After the shoes had been delivered and accepted by Reinfort, Reinfort refused to pay $4,000 and insisted on paying only $3,000. Decision? 7. Assume that on May 1, Smith, on behalf of ACME Appliance Co. and Jackson entered into an oral contract with regard to the sale of a stereo system for $1,400. The agreement called for delivery and payment on May 24. During their May 1 telephone conversation Jackson accepted Smith's offer to sell Jackson the stereo system. Shortly after the telephone conversation, Smith sent to Jackson a letter confirming their deal. The letter was received by Jackson on May 5. He did not respond to it. On May 24, Jackson failed to show up at Acme's store to accept and pay for the stereo system. Smith called Jackson and demanded that Jackson honor their contract. Jackson contended that he had no intention of buying the stereo system and, in any event, there was not sufficient written proof of the existence of the contract requiring him to do so. Acme commenced an action against Jackson for breach of contract. Who will prevail and why? 8. Ames, Bell, Cain, and Dole each orally ordered color television sets from Marvel Electronics Company, which accepted the orders. Ames's set was to be specially designed and encased in an ebony cabinet. Bell, Cain, and Dole ordered standard sets described as "Alpha Omega Theatre." The price of Ames's set was $1,800, and the sets ordered by Bell, Cain, and Dole were $700 each. Bell paid the company $75 to apply on his purchase; Ames, Cain, and Dole paid nothing. The next day, Marvel sent Ames, Bell, Cain, and Dole written confirmations captioned "Purchase Memorandum," numbered 12345, 12346, 12347 and 12348 respectively, containing the essential terms of the oral agreements. Each memorandum was sent in duplicate with the request that one copy be signed and returned to the company. None of the four purchasers returned a signed copy. Ames promptly sent the company a repudiation of the oral contract, which received before beginning manufacture of the set for Ames or making commitments to carry out the contract. Cain sent the company a letter reading in part, "Referring to your Contract No. 12347, please be advised I have canceled this contract. Yours truly, (Signed) Cain." The four television sets were duly tendered by Marvel to Ames, Bell, Cain and Dole, all of whom refused to accept delivery. Marvel brings four separate actions against (a) Ames, (b) Bell, (c) Cain, and (d) Dole for breach of contract. Decide each claim. 9. On April 8, Crystal received a telephone call from Akers, a truck dealer, who told Crystal that a new model truck in which Crystal was interested would arrive in one week. Although Akers initially wanted $10,500, the conversation ended after Akers agreed to sell and Crystal agreed to purchase the truck for $10,000, with a

- Section 7-12 - $1,000 down payment and the balance on delivery. The next day, Crystal sent Akers a check for $1,000, which Akers promptly cashed. One week later, when Crystal called Akers and inquired about the truck, Akers informed Crystal he had several prospects looking at the truck and would not sell for less than $10,500. The following day Akers sent Crystal a properly executed check for $1,000 with the following notation thereon: “Return of down payment on sale of truck.” After notifying Akers that she will not cash the check, Crystal sues Akers for damages. Decision? 10. Glass Co. telephoned Hourly Company and ordered 2,000 watches at $2 each. Glass agreed to pay 10% immediately and the balance within ten days after receipt of the entire shipment. Glass forwarded a check for $400 and Hourly shipped 1,000 watches the next day, intending to ship the balance by the end of the week. Glass decided that the contract was a bad bargain and repudiated it, asserting the Statute of Frauds. Hourly sued Glass. Which of the following will allow Hourly to enforce the contract in its entirety despite the Statute of Frauds? A. Glass admitted in court that it made the contract in question. B. Hourly shipped 1,000 watches. C. Glass paid 10% down. D. If Glass in fact paid more than 50% of the purchase price. 11. By telephone, Smith (a widget retailer) ordered 1,000 widgets at $6.00 each from International Widget, Inc. (a widget wholesaler), freight to be paid by International and delivery within 60 days. The order was accepted by one of International's salespersons. Smith had done considerable business with International in the past. The same day, Smith sent out a signed purchase order confirming the order. No communications were sent by International to Smith. Assume International refuses to ship any widgets to Smith because the market price for widgets has risen to $7.60 each and International has buyers willing to pay the higher price. Smith claims breach of contract. Which of the following statements are true or false? A. Neither Smith nor International is bound to the contract because Smith's purchase order was not signed by both parties. ________ B. Only Smith would be bound by the purchase order because he is the only party who signed it. ___________ C. International is bound by the parties' oral contract, even though it did not sign any written contract. _____________

- Section 7-13 - 12. Rachel leased an apartment to Bertha for the term May 1, 1993, to April 30, 1994, at $500 a month "Payable in advance on the first day of each and every month of said term." At the time the lease was signed, Bertha told Rachel that she received her salary on the tenth of the month, and that she would be unable to pay the rent before that date each month. Rachel replied that would be satisfactory. On June 2, with Bertha not having paid the June rent, Rachel sued Bertha for the rent. At the trial, Bertha offered to prove the oral agreement as to the date of payment each month. Decision? 13. Ann bought a car from the Used Car Agency (“Used”) under a written contract. She purchased the car in reliance on Used's employee’s oral representations that it had never been in an accident and could be driven at least 2,000 miles without adding oil. Thereafter, Ann discovered that the car had, in fact, been previously in an accident, that it used excessive quantities of oil, and that Used's employee was aware of these facts when the car was sold. Ann brought an action to rescind the contract and recover the purchase price. Used objected to the introduction of oral testimony concerning representations of its employee, contending that the written contract alone governed the rights of the parties. Decision on the objection of Used? 14. When the parties have entered into a written contract intended as the final expression of their agreement, the parol evidence rule generally prevents the admission into evidence of any A. Other written agreement that is referred to in the contract. B. Contemporaneous oral agreement that explains an ambiguity in the written contract. C. Prior oral or written agreement and any contemporaneous oral agreement that contradict the terms of the written contract. D. Subsequent oral modification of the contract. 15. Deal and Varda are involved in a dispute with respect to a sale of $1,000 of goods. Deal refuses to honor a written agreement which Varda contends satisfies the statute of frauds. Which of the following will prevent the writing referred to by Varda from satisfying the statute of frauds with respect to the sale of goods? The writing A. Is only signed by Deal. B. Does not indicate that a sale of goods was agreed to. C. Fails to specify the time and place for delivery of the goods. D. Includes an incorrect quantity of goods to be sold.

- Section 7-14 - 16. During a telephone conversation on September 1, a Best Deal sales person and Box agreed that Best Deal would sell to Box a $2,300 computer system to be used by Box for household purposes. The computer was to be delivered by not later than September 20. Box is a doctor. On September 3, Box sent a letter to Best Deal confirming the agreement that was reached during the September 1 telephone conversation. The letter was received by Best Deal on September 6. Best Deal failed to deliver the computer system to Box because it ran out of available inventory. Box sued Best Deal claiming breach of contract. Best Deal has defended on the basis that there is no writing evidencing the contract between the parties as is required by the UCC because the computer system cost more than $500. Which of the following statements is correct with regard to this situation? A. If Best Deal had sent Box the letter confirming the September 1 telephone conversation (and Box did not send any letter), an enforceable contract would exist between the parties and either party could enforce the contract against the other. B. Box will prevail provided she can prove the parties actually entered into the sale agreement during the September 1 telephone conversation. C. Best Deal will prevail because there is no writing evidencing the September 1 agreement sufficient under the UCC. D. Best Deal will prevail because there is no written contract signed by both Best Deal and Box. E. Both C. and D. are correct. 17. On February 1, during a telephone conversation, Mason agreed with Jones that Mason would guaranty payment of a debt owed to Jones by Peters (and payable by April 30) if Jones would pay Mason $100 within 30 days. On February 15, Mason had second thoughts and sent the following signed correspondence to Jones: "With regard to our telephone conversation, I am no longer willing to guaranty Peters' debt to you because I understand he is on the verge of bankruptcy. Don't worry about paying me the $100 you promised." Jones has sued Mason for breaching their February 1 agreement. Mason has defended on the basis that her February 1 agreement with Jones was oral. Who will prevail? Discuss. Contracts in Writing - Answers to Review Questions 1. A. 2. Decision in favor of Green. The oral contract of employment between Green and Smith was entered into on Wednesday, January 26, but Smith was not required to begin work until Monday, January 31, five days after the making of the contract.

- Section 7-15 - The agreement was thus not capable of performance within one year from the day on which it was made and is within the statute of frauds. The contract is, hence, not enforceable. Where a contract of service is for the term of a year beginning or which may begin on the day of the making of the contract, the statute of frauds is inapplicable. An oral contract for a year's services, as here, to begin more than one day after the contract is entered into is impossible of performance within one year from the date of making and is therefore unenforceable under the statute of frauds. Part performance of an oral contract not performable within a year does not take a contract out of the statute of frauds. 3. Judgment for Holmes. Moriarity, the party whom Holmes seeks to charge, signed a letter stating the terms of the oral contract. By signing the letter, which serves as a memorandum, Moriarity complied with the requirements of the statute of frauds. Thus, the contract is enforceable and Holmes is entitled to specific performance of the contract. Specific performance is available because land is a unique commodity. 4. D. 5. Jacobsen is correct. The contract, as modified, falls within the scope of the UCC Statute of Frauds because it would be a sale of goods of $500 or more ($520). Therefore, the UCC writing requirement must be satisfied. 6. This problem raises three separate but interrelated issues: (a) Modification of a prior contract. Section 2-209(1) of the UCC, does not require consideration to be given in order to validly modify an existing contract, all that is necessary is a good faith intent to alter the contract. (b) Oral modification of a contract for the sale of goods costing $500 or more. Under the UCC, Section 2-201, this oral modification (to a cost of $4,000) would keep the transaction within the statute of frauds and therefore to be valid must comply with its requirements. (c) Compliance with the statute of frauds by delivery and acceptance of the goods - UCC Section 2-201(3)(c) provides that an oral agreement is valid, even though it is for a sale of goods costing $500 or more, if the goods have been received and accepted as in this case. Consequently, Reinfort must pay Bylinski $4,000, unless Reinfort can prove lack of intent to enter into the contract (for example, economic duress). 7. Jackson will prevail. The letter does not satisfy the UCC Statute of Frauds because it was not signed by Jackson (the party against whom enforcement is being sought). The letter does not qualify as a binding confirmation under UCC Section 2-201(2) because both parties are not merchants. 8. (a) Decision for Ames. The UCC has tightened the so-called special order rule. The Code requires, in order that such an oral contract be enforceable

- Section 7-16 - against the buyer, that the seller, before receiving notice of repudiation and under circumstances which reasonably indicate that the goods are for the buyer, either make a substantial beginning of their manufacture or commitments for their procurement. Section 2-201(3)(a). Ames repudiated before Marvel commenced manufacture of the set or made commitments for procurement of the goods. (b) Decision for Marvel. Bell has made part payment of the purchase price. Section 2-203(3)(c) of the UCC provides that a contract which does not satisfy the requirements of the UCC Statute of Frauds but which is valid in other respects is enforceable "with respect to goods for which payment has been made and accepted or which have been received and accepted." Where the contract is indivisible, as here, there is a division of authority as to whether part payment makes the whole contract enforceable. The better rule is that part payment and acceptance makes the entire contract enforceable. (c) Decision for Marvel. Cain has signed a writing sufficient to indicate that a contract for sale has been made between Marvel and himself. Section 2- 201(1). (d) Decision for Dole. Dole is not liable on the contract. He has done nothing to make his oral contract enforceable. 9. Decision for Crystal. The agreement made in the course of a telephone conversation between Crystal and truck dealer Akers was for the sale by Akers to Crystal at an agreed price of $10,000 for a new model truck. The price was payable $1,000 down, and the balance upon delivery. This is a valid oral contract for the sale of goods by description. Each party manifested to the other over the telephone assent to these terms, and Crystal promptly sent to Akers her check for $1,000 which Akers cashed. The mutual promises exchanged were definite and certain. Akers’ check for $1,000 payable to Crystal and Akers’s notation thereof fulfill all of the requirements of the statute of frauds and make the contract enforceable against Akers in that (1) the notation evidences a contract for the sale of goods; (2) the check bears Aker’s signature as drawer; and (3) the singular number of “truck” refers to the quantity of one truck. 10. A. 11. A. Fa; B. Fa; C. Tr 12. Decision for Rachel. The lease expressly provides that the rent for each month was payable in advance on the first day of the month. The oral agreement that the lessee could pay each month's rent on the 10th of the month would not be admissible to change the terms of the lease because it is contemporaneous parol evidence that contradicts integrated documents. If Rachel had allowed Bertha to

- Section 7-17 - make the payment on the 10th of the month for several months, her actions may give Bertha a stronger argument for enforcement of the oral agreement. 13. Decision for Ann. The Used Car Agency's objection to the introduction of the oral testimony would be overruled. The oral representations by the used car agency's agent that the car has never been in a wreck and could be driven 2,000 miles without adding oil were fraudulent. The parol evidence rule does not exclude the admission of evidence to establish fraud. The reason for the rule is that where the parties have reduced their contract to writing, they intend that all of the terms of the contract are incorporated in the writing. Consequently, the introduction of extrinsic evidence to vary, alter, change, or add to the terms contained in writing would be changing the contract made by the parties. However, fraudulent misrepresentations which induce the contract are not part of the contract but separate and apart from it. The introduction of evidence of fraud, therefore, is not prohibited by the parol evidence rule. 14. C. 15. B. 16. C. 17. Jones will prevail. Mason's February 15 letter satisfies the statute of frauds because it includes the essential information about the parties' oral agreement and was signed by the party against whom enforcement is sought (i.e., Mason).

Section 8

- Section 8-1 - Conduct or Circumstances Invalidating Consent Contract formation is not a dog-eat-dog process. Strict adherence to the rules of contract formation is not enough. There must also be compliance with rules of fair play. No contract will protect you against the dishonorable intentions of a person which are formed before or after the agreement is entered into. I. Doctrine - Background A. Subjective test - was there real consent, or was the formation of contract process tainted in some way? Was objective assent of a party to the contract not knowingly or voluntarily given because of the misconduct of a party, the parties’ mistake as to a material fact or some other factor? If so, the contract is said to be “voidable” by the aggrieved party – which means the aggrieved party can be relieved of the obligations under the contract B. Remedies available to aggrieved party 1. Rescission - "undo" the contract (i.e., you give up what you received and get back what you gave) – you must assert this right promptly (or an unreasonable delay may be construed as a ratification – “acceptance” – of the voidable contract) 2. In some cases, money damages may be recoverable (for example, in a fraud case) II. Examples of Statutes That Address Certain Types of Contracts Where Abuse in the Formation Process Can Occur – So State Regulation May Be Appropriate A. Wisconsin Statute Chapter 100 - Unfair Marketing and Trade Practices - misconduct in the context of certain types of legal relationships may be sanctioned by Attorney General’s office or other state agencies – examples of topics (note that some are of little relevance today): 1. Selling with pretense of prize 2. Ticket refunds 3. Mail-order sales 4. Dating service contracts 5. Fitness center and weight reduction center contracts 6. Unfair trade practices in the dairy industry

7. Cable television subscriber rights B. Section 100.18 of the Wisconsin Statutes - advertisements, announcements, statements or representations made to the public with respect to the sale of goods, services or real estate may not contain any assertions, representations or statements of fact which are untrue, deceptive or misleading – elements of a claim under this statute 1. The defendant made a representation to the public with the intent to cause a contract to be formed ( e.g., you advertise the sale of a used car in the classified ads and state the mileage ) 2. The representation was false or misleading (e.g., your statement as to mileage was inaccurate ) 3. The representation caused a loss to the plaintiff (e.g., the car was not worth what the plaintiff paid for it because of the understated mileage ) C. Chapter 110 of the Wisconsin Administrative Code – specifies prohibited trade practices in the home improvement industry, identifies the types of home improvement agreements that are to be in writing, sets forth required terms and conditions for written home improvement contracts and describes the parties’ rights and obligations if the contract is cancelled – enforced by the Department of Agriculture, Trade and Consumer Protection [End of Online Lecture 8-1] III. Fraud in the Execution - Rare (e.g., switched documents scenario) IV. Fraud in the Inducement - Classic Fraud - Generally Occurs in the Contract Formation Process - A Tort Action – An allegation that one has been led by another’s guile, surreptitiousness or other form of deceit to enter into an agreement to his or her detriment Fraud includes the pretense of knowledge when knowledge there is none. FN 1 [But] . . . in a free market the diligent should not be deprived of the limits of superior skill and knowledge lawfully acquired. FN 2 A. Elements 1. A false representation was made (probably during negotiations leading up to contract formation) – the representation may be in the form of a. Spoken or written words - Section 8-2 -

b. Conduct (e.g., concealment) c. Silence (non-disclosure, standing silent, as forms of a false representation) – when can this be alleged? Generally, you have no duty to do the other party’s due diligence (homework) regarding the contract. When does a party have an obligation to make a disclosure? The general rule is that silence, a failure to disclose a fact, is not misrepresentation unless the non-disclosing party has a duty to disclose the fact. FN 3 Before the contract is signed, the parties confront each other with a natural wariness. Neither expects the other to be particularly forthcoming, and therefore there is [generally] no deception when one is not [forthcoming] . . . . The law contemplates that people will take advantage of the ignorance of those with whom they contract, without thereby incurring liability . . . . The duty of honesty, of good faith even expansively conceived, is not a duty of candor. [For example] you can make a binding contract to purchase something you know your seller undervalues. FN 4 (1) You have a duty to disclose latent (hidden) deficiency that other party did not discover . . . we conclude that a party . . . has a duty to disclose a fact where: (1) the fact is material to the transaction; (2) the party with knowledge of that fact knows that the other party is about to enter into the transaction under a mistake as to the fact; (3) the fact is peculiarly and exclusively within the knowledge of one party, and the mistaken party could not reasonably be expected to discover it; and (4) on account of the objective circumstances, the mistaken party would reasonably expect disclosure of the fact. FN 5 (2) You have a duty to correct prior incorrect statements which were made during negotiations (3) You have a duty to make greater disclosures if there exists a fiduciary relationship (i.e., special relationships involving trust - e.g., attorney/client, guardian/ward, doctor/patient) or any other special relationship between the parties that is not arms’ length (4) Restatement (Second) of Contracts §161 - a person must disclose facts necessary to correct the other party's mistake about a basic assumption of the contract when non-disclosure is a failure to act in - Section 8-3 -

- Section 8-4 - good faith and in accordance with reasonable standards of fair dealing; but “a purchaser is not bound by our laws to make the man he buys from as wise as himself...” 2. Of a fact - can you define in terms of true or false? The following are generally not regarded as facts a. Statements of opinion as to value, quality, authenticity or other matters of judgment - exception to this general rule: statements made by "experts" (example – a jeweler describes a diamond as a “high quality” gem) b. Puffing - sales talk [Sales talk -] exaggerations reasonably to be expected of a seller as to the degree of quality of his product, the truth or falsity of which cannot be precisely determined. Examples of statements courts have held to be puffery are that one’s product is “the best,” “the finest,” “a masterpiece” or “of premium quality.” FN 6 [The plaintiff alleged that the following constituted intentional misrepresentations of facts resulting in her becoming a Snap-On Tools dealer]: (1) Loula would make as much money as doctors and lawyers; (2) Loula did not have to be a salesperson because the tools would sell themselves; (3) A Snap-On dealership is a no-risk proposition; and (4) Snap-On territories are all the same. FN 7 c. Predictions (e.g., of increases in value, of durability, etc.) . . . it is axiomatic that a false representation made by a defendant, to be actionable, must relate to an existing fact or a past event. Fraud cannot consist of mere broken promises, unfilled predictions or erroneous conjecture as to future events. FN 8 Moreover, a party is not justified in relying on and assuming to be true representations consisting of mere expressions of opinion, hope, expectation, puffing, and the like; rather, representations of this nature must be inquired into and examined to ascertain the truth. FN 9 [End of Online Lecture 8-2]

3. That is material - what makes a false representation material? a. Must induce reliance and influence, to a substantial degree, the making of the decision to contract b. Would knowing the truth of the matter have made a difference with regard to the decision to enter into the contract? A fact is “material” if . . . a reasonable [person] would attach importance to its existence or nonexistence in determining the choice of action in the transaction in question . . . FN 10 c. Note - in some jurisdictions [based on the Restatement (Second) of Contracts §164], a fraudulent (i.e., intentional) nonmaterial representation may be a basis for fraud (i.e., need not be material if misrepresentation is intentional) - remedy limited to rescission and aggrieved party cannot recover damages which would be recoverable if the misrepresentation was material - but the issue will then be whether there was reasonable reliance if the misrepresentation was in fact immaterial - see below 4. With knowledge (“scienter”) of falsity and intention to deceive a. Three situations that satisfy this requirement (1) Actual knowledge of falsity, or (2) Constructive knowledge of falsity - a lack of belief in the statement's truthfulness, or A defendant who asserts a fact as of his knowledge, or so positively as to imply that he has knowledge, under circumstances where he is aware that he will be so understood, when he knows that he does not in fact know whether what he says is true is found to have the intent to deceive. FN 11 (3) Reckless disregard for the truth of the statement - a representation made without a sufficient basis of information to support the representation b. Intent to deceive by the wrongdoer may be presumed (if you can show knowledge) 5. Justifiable reliance on the misrepresentation a. You are not deceived if you do not rely - Section 8-5 -

- Section 8-6 - b. Does aggrieved party have knowledge (actual or constructive) that statement is false? Misrepresentations are not actionable unless the complaining party was justified in relying thereon in the exercise of common prudence and diligence. FN 9 The recipient of a fraudulent misrepresentation of fact is justified in relying upon its truth, although he might have ascertained the falsity of the representation had he made an investigation. Restatement (Second) of Torts §540 The recipient of a fraudulent misrepresentation is not justified in relying upon its truth if he knows that it is false or its falsity is obvious to him . . . . . if a mere cursory glance would have disclosed the falsity of the representation, its falsity is regarded as obvious under the rule stated in §540. Restatement (Second) of Torts §541 c. What obligation does innocent person have to discover fraud (blind reliance defense)? - Was the aggrieved party's fault so negligent as to amount to a failure to act in good faith and in accordance with reasonable standards of fair dealing [Restatement (Second) of Contracts §172]? When an individual acts on the representations of another and relies on them in good faith, he has no duty to further investigate . . . FN 12 [End of Online Lecture 8-3] B. Remedies - generally 1. Rescission (avoidance of the contract), or 2. No rescission, but right to recover “benefit-of-the-bargain” damages Example: The seller of a car misrepresents the mileage (he says the mileage is 25,000 when in fact it is 100,000). The price was $5,000 but the car would be worth $8,000 if the representation regarding the mileage was accurate. The buyer has lost a $3,000 benefit of the bargain. 3. Under the UCC - no such election of remedies is required – you can rescind and recover damages V. Nonfraudulent Misrepresentation A. All the elements of fraud except you do not have to show knowledge and intent on the part of the wrongdoer

- Section 8-7 - 1. Negligent misrepresentation – a misrepresentation made without knowledge of the falsity of the representation but made without due care (that is, negligently) 2. Innocent misrepresentation – a misrepresentation made without knowledge of the falsity of the representation but made with due care (that is, innocently) B. Remedy - rescission (generally you cannot recover money damages, except "out- of-pocket" damages if you elect not to rescind) VI. The Economic Loss Doctrine (ELD) A. A limitation on your right to allege fraudulent or non-fraudulent misrepresentation in the formation of a contract involving the sale of goods or real estate if you could sue for breach of contract – this doctrine, or some variation of it, has been adopted by many states – does not apply to contracts for services B. Also is intended to prevent product or real estate liability lawsuits based on negligence or strict liability when a breach of warranty claim could be made C. ELD seeks to preserve the distinction between contract and tort based on the understanding that contract law, particularly the law of warranty, is better suited than tort law for dealing with purely economic loss in the commercial arena D. The point is to prevent an end-run around contract remedies (for example, based on a warranty given) by suing based on the torts of fraudulent or non-fraudulent misrepresentation – to protect freedom of contract and the parties’ ability to allocate risk by contract E. Only applies with respect to an “economic loss” suffered by a party – generally, economic losses are damages arising because the product or real estate does not perform as expected or is not as represented – does not apply to claims for personal injury or damages to other property (that is, not to the goods which are the subject of the contract) – example: a car has a steering defect which results in the car crashing into a building causing considerable damage – the damages to the building would be recoverable but damage to the car itself would not F. Most states have adopted a broad fraud in the inducement exception to the economic loss doctrine. A claim that the contract must be rescinded because a misrepresentation induced the aggrieved party to enter into the agreement will often overcome the economic loss doctrine.

- Section 8-8 - Example of the ELD: the seller of a car misrepresents the mileage of the car during negotiations (see previous example). You purchase the car and discover the misrepresentation. Under the ELD, you could sue for breach of warranty (the mileage was inaccurate and, therefore, the express warranty regarding the mileage was breached – this is a contract claim), but you could not sue for fraud (a tort claim). [End of Online Lecture 8-4] VII. Mistake A. Mutual mistake as to material issue - both parties mistaken (no effective meeting of the minds) – a mutual belief about a material fact that is not in accord with the truth - examples 1. Existence of subject matter - e.g., destruction of the subject matter at the time of contracting 2. Character of subject matter - e.g., Wood v. Boynton (and Wood v. Boynton II) 3. Identity of subject matter - e.g., the “two good ships Peerless” 4. The parties reach an agreement but fail to accurately express it in writing – a “paperwork” error – remedy is usually reforming (correcting) the written contract to make it conform to what the parties intended Here the buyer sought to retain a gain that was produced, not by a subsequent change in circumstances, nor by the favorable resolution of known uncertainties when the contract was made, but by the presence of facts quite different from those on which the parties based their bargain. FN 13 A mutual mistake of fact renders a contract voidable by the adversely affected party, “where the parties are mistaken as to the facts existing at the time of the contract, if the mistake is so fundamental that it frustrates the purpose of the contract,” and where the adversely affected party does not bear the risk of the mistake. A mistake “is a state of mind which is not in accord with the facts.” FN 14 B. Party adversely affected by the mistake must not bear the risk of the mistake - by contract terms or because of a failure to do appropriate due diligence – example: purchasing a used computer in “as is” condition which essentially means you are accepting the computer in whatever condition it is in

- Section 8-9 - C. Why are there not more mutual mistake cases? - because most contracting parties do their homework. How to avoid this type of problem - do the necessary and appropriate pre-contracting due diligence [End of Online Lecture 8-5] D. Unilateral mistake (a mistake by one party) 1. If as to value of bargain ("bad deal") - no relief to the mistaken party 2. Unilateral mistake as to a collateral (secondary) matter that other party was aware of a. Collateral matters - e.g., mathematical error, typographical error, clerical error, description error, etc. b. Other party must have known, or should have known, of the mistake Regarding unilateral mistake, Professor Corbin states, “[T]here is practically universal agreement that, if the material mistake of one party was . . . known to the other or was of such character and accompanied by such circumstances that the other had reason to know of it, the mistaken party has the power to avoid the contract . . .” FN 15 Example: Smith offers to sell to Baker 10 different pieces of used equipment with a price specified for each piece (ranging from $500 to $2,000), all of which is in the offer. Smith’s calculation of the total price is in error – the offer reflects a total price of $1,400 when the correct total should have been $14,000. Baker accepts the offer to sell the equipment and claims that he only has to pay $1,400. Baker will not prevail because Smith’s unilateral mistake is with respect to a collateral matter (the accuracy of his addition) and it was, or should have been, obvious to Baker. 3. In addition to an aggrieved party’s right to rescind based on the foregoing theory, the Restatement (Second) of Contracts §153 also provides that rescission may be available if the unilateral mistake makes enforcement of the contract “unconscionable” (oppressive to the mistaken party, or results in an undue hardship to the mistaken party) Corbin further states that relief due to unilateral mistake is available even if the offeree neither knew of nor had reason to know of the mistake, if enforcement of the contract would be “oppressive” to the mistaken party, and relief from the contract “would impose no substantial hardship” on the other party. FN 15

- Section 8-10 - E. Remedy for mutual mistake or unilateral mistake – rescission – but if the mutual mistake is in a written contract, the aggrieved party may elect to have the contract reformed (corrected) by the court VIII. Duress – wrongful coercion that induces a person to enter into or modify a contract (threat of physical or emotional harm, or more recently, “economic” duress) IX. Undue influence – unfair persuasion exerted by one person upon another during the bargaining process where the relationship between the parties is either one of trust and confidence (e.g., lawyer/client, trustee/beneficiary of the trust, husband/wife) or one in which the person exercising the persuasion dominates the person being persuaded [End of Online Lecture 8-6]

- Section 8-11 - Conduct or Circumstances Invalidating Consent - Review Questions 1. On February 10, Mrs. Sunderhaus purchased a diamond ring from Perel & Lowenstein for $6,990. She was told by the company's salesman that the ring was worth its purchase price, and she also received at that time a written guarantee from the company attesting to the diamond's value, style and trade-in value. When Mrs. Sunderhaus went to trade the ring for another, however, she was told by two jewelers that the ring was valued at $3,000 and $3,500, respectively. Mrs. Sunderhaus knew little about the value of diamonds and claims to have relied on the oral representation of the Perel & Lowenstein's salesman and the written representation as to the ring's value. She seeks rescission of the contract or damages in the amount of the sales price over the ring's value. Decision? 2. The primary distinction between an action based on innocent misrepresentation and an action based on common law fraud is that, in the former, a party need not allege and prove A. That there has been a false representation. B. The materiality of the misrepresentation. C. Reasonable reliance on the misrepresentation. D. That the party making the misrepresentation had knowledge that it was false. 3. Beginning in 1971, Treasure Salvors and the state of Florida entered into a series of four annual contracts governing the salvage of the Nuestra Senora de Atocha . The Atocha is a Spanish galleon that sank in 1622, carrying a treasure now worth well over $250 million. Both parties had contracted under the impression that the seabed on which the Atocha lay was land owned by Florida. Treasure Salvors agreed to relinquish 25% of the items recovered in return for the right to salvage on state lands. In accordance with these contracts, Treasure Salvors delivered to Florida its share of the salvaged artifacts. In 1975 the United States Supreme Court held that the part of the continental shelf on which the Atocha was resting had never been owned by Florida. Treasure Salvors then brought suit to rescind the contracts and to recover the artifacts it had delivered to the state of Florida. The state appeals from a judgment in favor of Treasure Salvors. Decision? 4. In February, Gardner, a schoolteacher with no experience in running a tavern, entered into a contract to purchase for $40,000 the Punjab Tavern from Meiling. The contract was contingent upon Gardner's obtaining a five-year lease for the tavern's premises and a liquor license from the state. Prior to the formation of the contract, Meiling had made no representations to Gardner concerning the gross income of the tavern. Approximately three months after the contract was signed, Gardner and Meiling met with from the Oregon Liquor Control Commission (OLCC) to discuss transfer of the liquor license. Meiling reported to the agent, in Gardner's presence, that the tavern's gross income figures for February, March, and April were $5,710, $4,918, and $5,009 respectively. The OLCC granted the required license, the transaction was closed, and Gardner took possession on June

- Section 8-12 - 10. After discovering that the tavern's income was very low and that the tavern had very few female patrons, Gardner contacted Meiling's bookkeeping service and learned that the actual gross income for those three months had been approximately $1,400 to $2,000. Gardner then sued for rescission of the contract. Decision? 5. Delray and Maxco entered into a written contract which provided that Delray was to purchase vacant land from Maxco. The contract provided that Delray was to pay the purchase price of $300,000 to Maxco over ten years in equal monthly installments of the principal amount plus interest at the rate of 10% per year. Further, assume that during the course of their negotiations, Maxco had told Delray that it (Maxco) had purchased the land in "late 2014 " for $200,000, and that it "certainly should be worth at least $300,000 today" ( 2019 ). On September 30, Maxco assigned to J&I Bank its right to collect the $300,000 from Delray. J&I paid Maxco $260,000 for the assignment. Delray was unaware of the assignment until October 19, when it was notified by J&I that it (Delray) should make its monthly payments directly to J&I. In the meantime, Delray had made its October payment to Maxco and had learned that, in fact, Maxco had actually purchased the land in January of 2015 for $36,000, and that the current ( 2019 ) market value was only around $200,000. J&I had demanded that Delray pay it for October, despite the fact that Delray had paid Maxco the October monthly payment. Delray believes that Maxco committed fraud in the formation of the contract. Which of the following statements are true or false? A. Delray will probably not be able to rescind the contract if it claims that Maxco's assertion that the parcel "should be worth at least $300,000 today" constituted fraud or misrepresentation. _________ B. Based on all of Maxco's representations regarding the vacant parcel, Delray will probably be able to rescind the contract based on fraud or misrepresentation. ___________ 6. Kemp entered into a contract to sell Ward a parcel of land. Kemp was aware that Ward was purchasing the land with the intention of building a high-rise office building. Kemp was also aware that a subsurface soil condition would prevent such construction. The condition was extremely unusual and not readily discoverable in the course of normal inspections or soil evaluations. Kemp did not disclose the existence of the condition to Ward, nor did Ward make any inquiry of Kemp as to the suitability of the land for the intended development. Kemp's silence as to the soil condition A. Renders the contract voidable at Ward's option. B. Renders the contract void. C. Will not affect the validity of the contract. D. Entitles Ward only to money damages.

7. Ney cleaned his basement and found a painting of tomato soup cans. He really did not like the painting and, therefore, he offered to sell it to Lee for $100 who had shown an interest in it. Lee, Ney's neighbor and an accounting professor, accepted the offer, paid Ney the $100, and took possession of the painting at Ney's home as was agreed to by the parties. It was later discovered that the painting is worth $200,000 because it was painted by Andy Warhol. Obviously, Ney was unaware of this fact at the time of contracting. Lee thought the painting was easily worth more than $100 when he bought it, but had no idea it was a Warhol original. Ney has sued Lee to recover the painting based on various legal theories. Which of the following statements is correct? A. Ney will likely prevail if he claims that the contract was unconscionable (because of the difference between the sale price and the fair market value of the painting). B. Ney will likely not prevail under any legal theory despite the fact that he made a mistake as to the value of the painting. C. Ney will likely prevail because Lee believed the painting to be worth more than $ 100 and had a duty to advise Ney of his belief. D. Ney will likely not prevail even if Lee new the painting to be a Warhol original. E. Both B. and D. are correct. 8. In order to establish a cause of action for fraud, the plaintiff must show that the defendant knew that the representation was false. This element of a fraud cause of action will be established if the plaintiff can show that the A. Defendant made the representation with a reckless disregard for the truth. B. Defendant made a false representation of fact. C. Plaintiff reasonably relied on the defendant's misrepresentation. D. Plaintiff relied on the defendant because of defendant's superior skill and knowledge regarding the subject matter of the contract. E. Both A. and B. are correct. Conduct or Circumstances Invalidating Consent - Answers to Review Questions 1. Decision for Mrs. Sunderhaus. Although in general a statement of opinion as to the value is not considered to be a statement of fact, the opinion here was given by a jeweler who was an "expert" upon whose advice Mrs. Sunderhaus relied. Whenever a party states a matter, which might otherwise be only an opinion, and does not state it as the mere expression of his own opinion, but affirms it as an existing fact material to the transaction, so that the other party may reasonably - Section 8-13 -

- Section 8-14 - treat it as a fact, and rely and act upon it as such, then the statement clearly becomes an affirmation of fact within the meaning of general rule, and may be fraudulent misrepresentation. The layman must of necessity rely upon the integrity of the jeweler in purchasing a diamond or other precious stone. Mrs. Sunderhaus was in no position to make her own determination as to the weight and value of the stones. She relied upon the jeweler's statement of value and had a right to rely upon the statement of value. The written guarantee of the ring's value, style and trade-in value is a statement of fact for purposes of fraud. Sunderhaus v. Perel & Lowenstein, 215 Tenn. 619, 388 S.W.2d 140 (1965). 2. D. 3. Judgment for Treasure Salvors affirmed. Both parties based their contracts upon the erroneous assumption that the state of Florida owned the land in question. But for this belief, neither party would have entered into agreements. The contracts are therefore voidable under the doctrine of mutual mistake of fact. Accordingly, Treasure Salvors may rescind the contracts and recover the artifacts to the state of Florida. State of Florida, Dept. of State v. Treasure Salvors, Inc., 621 F.2d 1340 (5th Cir. 1980). 4. Judgment for Meiling. To sustain a case of fraudulent misrepresentation, the injured party must prove that he actually relied upon the false representation, causing him to enter into the bargain. Meiling's only representations concerning the tavern's gross income were made months after the contract was formed. Since these misrepresentations came after the binding agreement of February, they could not have been relied upon by Gardner in making the agreement. Therefore, rescission of the contract is not permitted. Gardner v. Meiling, 230 Or. 665, 572 P.2d 1012 (1977). 5. Tr; B. Tr 6. A. 7. E. 8. A.

Section 8a

Contractual Capacity A contract is not formed unless the parties knowingly assent to its terms. Assent is lacking if a party is under a legal disability which the law presumes impairs such knowing assent. I. Doctrine - Background A. Need to protect those who are under recognized legal disability B. To assure the voluntariness of contract C. Typical situations involving no capacity - "contract" is void 1. A person adjudicated incompetent 2. Children who have not reached the age of reason (7-10 years old) D. Typical situations involving persons with revocable contractual capacity; contract is not void, but voidable at option of person under the disability 1. Minors 2. Incompetent persons in fact (but not under guardianship) 3. Extremely intoxicated persons II. Minors A. Definition B. Right to disaffirm (avoid) contracts previously entered into The purpose of the infancy doctrine is to protect “minors from foolishly squandering their wealth through improvident contracts with crafty adults who would take advantage of them in the marketplace.” FN 1 1. When - at any time during minority or within reasonable time after reaching the age of majority (exception for real estate) 2. How - express (words) or implied (actions) 3. Other requirements - minor must a. Disaffirm in total b. Return consideration received in whatever condition it is in - Capacity - 1 -

- Capacity - 2 - 4. Types of contracts - minor is buyer, seller, recipient of services or provider of services C. Extent of recovery for the minor 1. As to executory contracts - complete recovery for minor 2. As to executed contracts - split of opinion a. Majority rule - complete recovery b. Minority rule - "charge" the minor for any reduction in value or for the benefit of use ("rent") D. Contracts for necessities 1. Definition of necessity 2. Minor liable for reasonable value on quasi contract theory E. Ratification of the contract by the minor 1. Definition 2. How it happens (can only occur after reaching age of majority) 3. Implied ratification (e.g., waiting too long after reaching the age of majority) vs. right to disaffirm F. Misrepresentation of age - effect

- Capacity - 3 - Contractual Capacity - Review Questions 1. On May 1, 2018 , Mint, a 16-year old, purchased a sail boat from Sly Boats. Mint used the boat for six months at which time he advertised it for sale. Which of the following statements is correct? A. The sale of the boat to Mint was void, thereby requiring Mint to return the boat and Sly to return the money received. B. Sly may disaffirm the contract with Mint at its option. C. Mint's use of the boat for six months after the sale on May 1 constituted a ratification of that contract. D. Mint may disaffirm the May 1 contract at any time prior to reaching majority. 2. On May 7 Roy, a minor, a resident of Smithton, purchased an automobile from Royal Motors, Inc., for $7,750 in cash. On the same day, he bought a motor scooter from Marks, also a minor, for $750 and paid him in full. On June 5, two days before reaching the age of majority, Roy disaffirmed the contracts and offered to return the car and the motor scooter to the respective sellers. Royal Motors and Marks each refused the offers. On June 16 Roy brought appropriate actions against Royal Motors and Marks to recover the purchase price of the car and the motor scooter. By agreement on July 30, Royal Motors accepted the automobile. Royal then filed a counterclaim against Roy for the reasonable rental value of the car between June 5 and July 30. The car was not damaged during this period. Royal knew that Roy lived twenty-five miles from his place of employment in Smithton and that he would probably use the car, as he did, for transportation. Decision as to: (a) Roy's action against Royal Motors, Inc. and its counterclaim against Roy; and (b) Roy's action against Marks? 3. Ten days before her 18th birthday, Simon purchased a used car from Sells for $750. The vehicle was purchased for Simon's personal use. She took delivery and paid the $750 purchase price to Sells. Nine (9) months later, after Simon had put about 12,000 miles on the car, she was involved in an accident which seriously damaged the car. The accident was as a result of Simon's negligence. Simon had no insurance to cover the damage to the car. Within a few days after the accident occurred, Simon attempted to disaffirm the contract with Sells by advising Sells that Simon was a minor at the time of the sale and demanding a refund of the $750 purchase price. Simon will A. Not be able to disaffirm because she was not able to return the car to Sells in the same condition as when she purchased the car. B. Not be able to disaffirm because the car was damaged as a result of her negligence. C. Not be able to disaffirm because, under the circumstances, she has ratified the contract with Sells.

- Capacity - 4 - D. Be able to disaffirm, but she will recover from Sells only the value of car in its damaged condition. E. Be able to disaffirm provided she can show that Sells knew, or should have known, that she was a minor at the time of the sale. 4. Perkins purchased a used television from Jason. Jason was a minor at the time the contract was entered into and Perkins was unaware of this fact. Perkins subsequently sold the television to Baker for $75 (a price that was at least $200 less than the value of the television). Baker was unaware of Jason's minority. Jason has now disaffirmed her contract with Perkins (based on her minority) and has demanded that Baker return the television to her (Jason) claiming that Baker does not have good title to it. Under these circumstances, A. Jason will not be entitled to recover the television from Baker but is entitled to disaffirm the contract with Perkins. B. Jason will be able to cause Perkins to rescind his contract with Baker and then recover the television from Perkins. C. Baker would not be obligated to return the television to Jason even if Baker was aware of Jason's minority at the time he purchased the television from Perkins. D. Jason will be entitled to recover damages from both Perkins and Baker, but will not be entitled to recover the television from Baker. E. Baker will not be able to retain the TV because he did not pay the fair value for it. 5. L.D. Robertson bought a pickup truck from King and Julian, doing business as the Julian Pontiac Company. At the time of purchase, Robertson was 17 years old, living at home with his parents, and driving his father's truck around the county to different construction jobs. According to the sales contract, he traded in a passenger car for the truck and was given $723 credit toward the truck's $1,743 purchase price, agreeing to pay the remainder in monthly installments. After he paid the first month's installment, the truck caught fire and was rendered useless. The insurance agent, upon finding that Robertson was a minor, refused to deal with him. Consequently, Robertson sued to exercise his right as a minor to rescind the contract and to recover the purchase price he had already paid ($723 credit for the car traded in plus the one month's installment). The defendants argue that Robertson, even as a minor, cannot rescind the contract, since it was for a necessary item. Decision? Contractual Capacity - Answers to Review Questions 1. D.

- Capacity - 5 - 2. (a) Roy, a minor, had the right to disaffirm the contract for the purchase of the automobile, if it is a non-necessary. On the other hand, if the car is considered a necessary Roy would either be liable for the reasonable value of the automobile or if allowed to disaffirm for the reasonable value of use and depreciation of the automobile. Here, since Royal accepted the return of the automobile it may have forfeited its right to the former: the reasonable value of the automobile. (b) Decision for Roy and against Marks for the return of the purchase price of the motor scooter. The general rule that the contracts of a minor are voidable at his option applies to an executed contract between two minors. To hold the rule inapplicable the court in Hurwitz v. Barr, D.C. App., 193 A.2d 360 said: "would converse the privilege of infancy, which the law intends as a shield, to protect the minor, . . ." While Marks, as a minor, has the option of disaffirming the contract, this option cannot nullify any rights or privileges which Roy, also a minor, is capable of asserting. Accordingly, Marks cannot destroy Roy's right to rescind, and the contract was, therefore, voidable by Roy. 3. C. 4. A. 5. Judgment for Robertson. A minor may rescind a contract to purchase where the property involved is not a necessary. There was no evidence that Robertson, who lived at home with his parents, needed the truck in connection with any work he was doing. Since the defendant failed to prove that the truck was a necessary item, Robertson, as a minor, may rescind. Upon avoidance of the contract Robertson was then entitled to recover the car traded in on payment for the truck, but the defendants had already disposed of it. Robertson was therefore entitled to receive the actual value of the traded-in car. Nevertheless, the actual value of a trade-in may be less than the value stated in the contract. Neither party is bound by the contract value. Thus, Robertson is entitled to recover the reasonable market value of the car at the time of purchase ($250), rather than the value stated in the contract ($723). Robertson v. King, 225 Ark. 276, 280 S.W.2d 402 (1955).

Section 9

Third Parties to Contracts Under certain limited circumstances, strangers to a contract may acquire rights, or undertake duties, under a contract that they are not a party to - an exception to privity of contract. I. Doctrine - Background A. General rule - privity of contract - only those persons who are parties to a contract can have rights/obligations under it - privity addresses the question of who has standing to sue whom for what A party wishing to enforce a contract must either be a party to that contract or a third party beneficiary. FN 1 B. Exceptions 1. Third-party beneficiary contracts – when the contracting parties intend to benefit a third party (a person who is not a party to the contract) 2. Assignment of contractual rights (effectively a substitution of a new party for one of the original parties to the contract as to the right to receive performance of the contract – your sub- let’s right to occupy your apartment and receive the other benefits under the lease) 3. Delegation of contractual duties (effectively a substitution of a new party for one of the original parties to the contract as to the duty to perform the contractual obligations under the contract – your sub- let’s obligation to perform the tenant’s duties under the lease ) Example of languag e: “I hereby assign my rights and delegate my duties under my con tract with Smith to Jones.” II. Third Party Beneficiary Contracts A. Third party must be more than an incidental beneficiary (threshold requirement) - test: did the parties intend to confer on the beneficiary the right to bring suit to enforce the contract? The general rule is that only a party to a contract may recover for its breach [the privity requirement]. FN 2 There is, however, an exception to this general rule [as follows]: [W]hen one person, for valuable consideration, engages with another, by simple contract, to do some act for the benefit of a third, the latter, who would enjoy the benefit of the act, may maintain an action for the breach of such engagement. FN 3 - Section 9-1-

In order for a person to be declared a third-party beneficiary, the person must show that the contract was entered into “directly and primarily” for the person’s benefit. An “indirect benefit, merely incidental to the contract” is not sufficient. FN 4 The precise identity of the third-party beneficiary need not be ascertainable at the time of the agreement so long as the agreement specifies or identifies a group or class to whom the party must belong to benefit thereby. FN 5 B. Incidental or more than incidental? Another example is suggested by a case in which a number of hatters agreed to close their shops on Sundays and further agreed that the damages for breaching the agreement would be $100 payable to a specified charitable society. The charitable society was held to be a mere incidental beneficiary to the contract. The case provides an excellent illustration of the difference between an intended beneficiary and a mere incidental beneficiary; obviously, the charitable society stood to benefit from the terms of the agreement as stated, but this could only occur on the breach of the agreement, not its fulfillment. Moreover, without question, the main object of the contract was not to benefit the society but to enforce performance of the promise made by the parties by imposing specified damages in the event of a breach. § 37:21. Incidental beneficiaries, 13 Williston on Contracts § 37:21 (4th ed.) [End of Online Lecture 9-1] C. Examples of third-party beneficiary analysis: 1. Landlord leases to Tenant. a. Landlord has mortgage on property. Is Landlord’s bank a third party beneficiary? No. b. Tenant subleases property to Subtenant. Is the Landlord a third party beneficiary of the sublease? Yes. Who can the Landlord sue if not paid? Tenant and Subtenant both. 2. Homeowner hires Builder to build home. a. Are the lumber company, the builder’s employees, the hardware store third party beneficiaries? Likely not. They are like the hatters in the example above. - Section 9-2 -

b. What about the neighbor whose property value will increase from the construction? No. c. What if the Builder enters into a subcontract with a Subcontractor? Probably yes. D. Status of parties 1. Third party can sue (has "standing") 2. Third party's rights are subject to all defenses contracting parties could raise against each other (e.g., fraud, failure of consideration, misrepresentation, mistake, etc.) 3. Third party beneficiary generally has cause of action against original obligor (the collection action – for example, the landlord can always sue the original tenant) Example: if you sublet your apartment, you are not off the hook, and if your sublet fails to pay the rent or otherwise honor the lease terms, you can still be sued by the landlord (unless as part of the sublet arrangement the landlord expressly released you from any responsibility under the lease – which would be highly unlikely). III. Assignment of Rights A. An assignment is a transfer of contractual rights Example: A owes $5,000 to B which is payable over two years. B needs money now. B assigns its right to receive $5,000 over two years to C in exchange for C paying B $3,000 now. B. Contract rights are intangible property interests (as opposed to your tangible property interests – your computer, for example) C. Persons who transfer contract rights are assignors; persons to whom they are transferred are assignees D. Assignments may be with or without supporting consideration (an assignment of a contractual right as a gift, for example, is an assignment without consideration supporting it) E. No particular formalities are required – no “special” rules regarding how the assignment must be evidenced – but an assignment will likely have to be in writing if the underlying contract must be in writing (for example, a contract involving an interest in real estate) [End of Online Lecture 9-2] F. What contract rights are assignable? - Section 9-3 -

1. Generally all (most common, the right to receive money which is frequently assigned by the person entitled to the payment) 2. Exceptions to this general rule – in other words, there are circumstances where you can’t assign your contract rights a. If the assignment would materially increase the risk or burden to the obligor (e.g., assignment of your rights under a casualty insurance policy insuring your home) b. The assignment of the right to receive the performance of highly personal contract rights (e.g., performance of personal service – you can’t assign away your right to have a lawyer provide you legal services to another person in need of the same legal services) c. A contract prohibition against assignment - in a majority of jurisdictions, an assignment in violation of such a provision is simply a breach of contract (but the assignment is unaffected) – also, Restatement (Second) of Contracts §322(1) and Article 2 of the UCC provide that a provision prohibiting the “assignment of the contract” (or similar language) should be interpreted to mean that only the delegation of the contractual duties is prohibited and the assignment of the rights under the contract would not be prohibited; example of language that may be found in a contract Neither party shall assign its rights nor delegate its duties hereunder without the express written consent of the other party. From a typical student apartment lease: Tenant shall not assign this Lease or sublet the Premises or any part thereof without the express written consent of Landlord, which will not be unreasonably withheld. d. An assignment prohibited or limited by law (e.g., a wage assignment) G. Status of assignee Example: A owes $5,000 to B which is payable over two years. B needs money now. B assigns its right to receive $5,000 over two years to C in exchange for C paying B $3,000 now. 1. Assignee “stands in shoes” of assignor (e.g., C stands in the shoes of B) - Section 9-4 -

2. Assignee has no greater rights than assignor had (e.g., C has no greater or lesser right under the contract with A than B had) 3. Assignor does not guarantee performance by obligor (e.g., B does not guarantee that A will in fact perform.) [End of Online Lecture 9-3] H. Importance of notice of the assignment to obligor - if obligor is not given notice of the assignment, the obligor will perform for the wrong party (the original obligee/assignor) - e.g., if A is not advised of the B to C assignment, A will pay B and not C I. In every assignment, these implied warranties (“promises”) are given by an assignor who receives value (if any of these are breached, assignee can recover from assignor) 1. Assignor will do nothing to defeat or impair assignment (e.g., B will do nothing to lessen the likelihood that A will perform) 2. The right assigned actually exists (e.g., B warrants that the right to receive payment actually exists) 3. The right assigned is not subject to defenses (e.g., B warrants that the right to receive payment from A is not impaired by any contract defenses such as misrepresentation) 4. Any related writings evidencing the contract are genuine (e.g., B warrants that the written contract with A is genuine) 5. Assignor has no knowledge of any fact that would impair value of the assigned right (e.g., B is unaware of any information that would lead a reasonable person to believe that A will not perform) IV. Delegation of Duties A. Authorizing another person to perform a contract duty (e.g., B assigns its rights under the contract to C and delegates any duty it may have under the contract) B. Delegant (or delegator) authorizes delegatee to perform C. What duties to perform under a contract are delegable? 1. Generally all contractual duties can be delegated to another party 2. Exceptions to this general rule a. If performance requires the obligor's personal skill, judgment, discretion or supervision (this exception would apply to a doctor who wants to delegate to another - Section 9-5 -

physician the duty to perform surgery on a patient – because, of course, the patient has an interest in who performs the surgery) b. If there exists a contract prohibition against delegation - in a majority of jurisdictions, a delegation in violation of such a provision is simply a breach of contract (but the delegation is unaffected) - example of language Neither party shall assign its rights nor delegate its duties hereunder without the express written consent of the other party. c. If there is a statutory or public policy prohibition against a particular form of delegation D. Assignment/delegation generally occurs simultaneously - effect of certain language ("I hereby assign my contract with Jones to Smith . . ." is generally construed as an assignment of rights and a delegation of duties) - e.g., you sublet your apartment [End of Online Lecture 9-4] - Section 9-6 -

Third Parties to Contracts - Review Questions 1. Barr entered into a contract with Gray which required Gray to construct a warehouse on land owned by Barr. The contract specifically provided for Gray to use Apex Corp. pipe fittings for all the plumbing. Gray failed to use Apex pipe fittings. Apex had learned of the contract between Bar and Gray and, in anticipation of receiving an order from Gray, manufactured additional pipe fittings. Apex is A. Entitled to money damages due to Gray's breach of contract. B. Entitled to money damages since it changed its position to its detriment by relying on the contract. C. Entitled to money damages since it is in privity of contract with Gray and Barr. D. Not entitled to money damages since it is merely an incidental beneficiary. 2. Northwest Airlines leased space in the terminal building at the Portland Airport from the Port of Portland. Crosetti entered into a contract with the Port to furnish janitorial services for the building, which required Crosetti to keep the floor clean, to indemnify the Port against loss due to claims or lawsuits based upon Crosetti’s failure to perform, and to provide public liability insurance for the Port and Crosetti. A patron of the building who was injured by a fall caused by a foreign substance on the floor at Northwest’s ticket counter brought suit for damages against Northwest, the Port and Crosetti. Upon settlement of the suit, Northwest sued Crosetti to recover the amount of its contribution to the settlement and other expenses on the grounds that Northwest was a third- party beneficiary of Crosetti’s contract with the Port to keep and floors clean and, therefore, within the protection of Cros etti’s indemnification agreement. Decision? 3. On December 1, Euphonia, a famous singer, contracted with Boito to sing at Boito's theater on December 31 for a fee of $25,000 to be paid immediately after the performance. A. Euphonia, for value received, assigns this fee to Carer. B. Euphonia, for value received, assigns this contract to sing to Dumont, an equally famous singer. C. Boito sells his theater to Edmund and assigns his contract with Euphonia to Edmund. What are the legal consequences of each of these assignments? 4. The Smooth Paving Company entered into a paving contract with the city of Chicago. The contract contained the clause "contractor shall be liable for all damages to buildings resulting from the work performed." In the process of construction, one of the bulldozers of the Smooth Paving Company struck and - Section 9-7 -

broke a gas main, causing an explosion and a fire that destroyed the house of John Puff. Puff brought an appropriate action against the Smooth Paving Company to recover damages for the loss of his house. Decision? 5. The assignment of a contract right A. Will not be enforceable if it materially varies the obligor's promise. B. Is invalid unless supported by consideration. C. Gives the assignee better rights against the obligor than the assignor had. D. Does not create any rights in the assignee against the assignor until notice is given to the obligor. 6. Georgia purchased an option on Blackacre from Pamela for $1,000. The option contract contained a provision by which Georgia promised not to assign the option contract without Pamela's permission. Georgia, without Pamela's permission, assigned the contract to Michael. Michael now seeks to exercise the option, and Pamela refuses to sell Blackacre to him. Decision? 7. On March 1, Mechanic agreed to repair Ohner's car for $6,000, to be paid on completion of the work. On March 16, before the work was completed, Mechanic sent a letter to Ohner with a copy to Jones, telling Ohner to pay the $6,000 to Jones, who was one of Mechanic's creditors. Mechanic then completed the work. Which of the following, if true, would best serve Ohner as a defense in an action brought against him by Jones for $6,000? A. Jones was incapable of performing Mechanic's work. B. Mechanic had not performed his work in a workmanlike manner. C. On March 1, Mechanic had promised Ohner that he would not assign the contract. D. Jones was not the intended beneficiary of the Ohner-Mechanic contract. 8. Lisa hired Jay in the spring, as she had for many years, to set out in beds the flowers Lisa had grown in her greenhouses during the winter. The work was to be done in Lisa's absence for $300. Jay became ill the day after Lisa departed and requested his friend, Curtis, to plant the flowers, promising to pay Curtis $250 when Jay received his payment. Curtis agreed. On completion of the planting, an agent of Lisa's, who had authority to dispense the money, paid Jay, and Jay paid Curtis. Within two days it became obvious that the planting was a disaster. Because Curtis did not operate Lisa's automatic watering system properly, everything set out by Curtis died of water rot. May Lisa recover damages from Curtis? May Lisa recover damages from Jay, and, if so, does Jay have an action against Curtis? - Section 9-8 -

9. A common law duty is delegable even though the A. Contract provides that the duty is nondelegable. B. Duty delegated is the payment of money and the delegatee is not as creditworthy as the delegator. C. Delegation will result in a material variance in performance by the delegatee. D. Duty to be performed involves personal services. 10. One of the requirements for a valid assignment of the seller's rights under a sale of goods contract is that A. The assignment must be supported by adequate consideration. B. The assignment must be in writing and signed only by the assignor. C. Both parties are of relatively equal bargaining strength. D. The assignment must not materially increase the buyer's risk or duty under the contract. 11. Hilton Hotels, Inc. obtained a loan from City Bank to refurbish a hotel in Atlanta. Hilton signed a promissory note which provided that it would repay the loan to City Bank over 10 years in equal monthly installments plus interest at the rate of 9% per year. Before the note was paid off by Hilton, it sold the hotel in Atlanta to Ace Lodging, another hotel operator. As part of the transaction, Ace agreed to assume the Hilton obligation to City Bank and make the remaining payments to the bank. City Bank was aware of the transaction but was not asked to consent or agree to it. A year after the sale, Ace breached its agreement with Hilton and stopped making payments to City Bank under the promissory note. Which of the following statements is incorrect with regard to this situation? A. City Bank can only sue Ace because Ace had agreed to make the payments required under the promissory note. B. City Bank can sue both Ace and Hilton to enforce the promissory note (but it can only collect the amount owed once). C. If Ace believes that Hilton committed fraud in the sale transaction, Ace could raise this as a defense if City Bank sued Ace to enforce the promissory note. D. Hilton was not relieved of its obligations under the promissory note despite the fact that City Bank was aware of the fact that Ace had assumed the responsibility to pay it. - Section 9-9 -

12. Re-read Question 5, Conduct or Circumstances Invalidating Consent. A. Delray is not liable to J&I because Maxco could not assign its right to receive payment from Delray to J&I without Delray's consent. ___________ B. Delray is liable to J&I for the October payment. __________ C. Delray may not raise as a defense against J&I any claim that Maxco committed fraud in the formation of the contract. __________ 13. Bain, a college basketball referee, had a contract with the Big 10 Conference to referee various basketball games. During a game that took place on March 6, 1982, Bain called a foul on a University of Iowa player that permitted free throws by a Purdue University player. That player scored the point that gave Purdue a last-second victory which prevented Iowa from winning the Big 10 championship. John and Karen Gillispie, and other Iowa fans, believed that the foul call which resulted in the winning free throws was clearly in error. The Gillispies operated a novelty store in Iowa City that sold University of Iowa sports memorabilia. They sued Bain for $175,000 in lost profits alleging that his negligent refereeing constituted a breach of his contract with the Big 10 and destroyed a potential market for their products. The Gillispies believed that they would have sold significant University of Iowa products had Iowa won the Big 10 championship. Will the Gillispies likely prevail? Discuss. Third Parties to Contracts - Answers to Review Questions 1. D. 2. Plaintiff Northwest leased space in the terminal building at the Portland Airport from the Port of Portland. Defendant Crosetti entered into a contract with the Port to furnish janitorial services for the building which required Crosetti to keep the floor clean, to indemnify the Port against loss due to claims or lawsuits based upon Cros etti’s failure to perform, and to provide public liability insurance for the Port and Crosetti. A patron of the building who was injured by a fall caused by a foreign substance on the floor at Northwest’s ticket counter brought suit for damages against Northwest, the Port, and Crosetti. The court held that, at most, Northwest was an incidental beneficiary, and as such had no right of recovery. Northwest Airlines, Inc. v. Crosetti Bros., Inc., 483 P.2d 70 (Or. 1971). 3. (a) The assignment by Euphonia of her fee is valid, and Carter can collect it from Boito. Euphonia has assigned her right to the payment of money, as represented by the fee to be paid to her for singing at Boito's theater. It makes no legal difference to Boito whether he pays the fee to Euphonia or to Carter so long as such payment absolves him from his obligation to pay the fee. (b) The delegation of the contractual duty to Dumont is invalid. The personal element is the dominant feature of the contract. Dumont may be equally - Section 9-10 -

famous as a singer and yet Boito may, for perfectly valid reasons, not wish Dumont to sign in Boito's theater. (c) This contract is assignable. The contract required Euphonia's special skill as a singer, but Euphonia was not required to perform any differently for Edmund than for Boito. Should this not be the case, then it may be that the contract may not be assignable because of its personal nature. 4. Decision in favor of Puff. Even though the contract did not clearly designate the party to whom the contractor was to be liable, the terms of the contract express clearly and unequivocally that the contractor assumed liability to the property owner. By so doing, the contractor assumed liability to protect the property owner and, as a result, the property owner was a third party beneficiary and entitled to sue and recover. It is not essential to the third person's right to enforce a contract made for his benefit that he be expressly named in the contract if he is otherwise sufficiently described or designated and he may even be one of a class of persons if the class is sufficiently indicated. 5. A. 6. Decision for Michael. A provision in a contract prohibiting an assignment of the contract, unless a different intention is manifested, gives the obligor a right to damages for breach of the terms forbidding assignment but does not render the assignment ineffective. Therefore, since an option contract is assignable, the assignment is valid. However, since Georgia did assign the contract without Pamela's permission, Georgia did breach her contract and is liable to Pamela for damages, if any, caused by the assignment. 7. B. 8. Lisa may maintain an action against Curtis for breach of the contract between Jay and Curtis. Lisa is an intended beneficiary of the contract between Jay and Curtis. Lisa may maintain an action against Jay. A promisor cannot delegate or relieve himself of his duties under a contract, even though they are of such type or character as to be delegable. "Unless the obligee agrees otherwise, neither delegation of performance nor a contract to assume the duty made with the obligor by the person delegated discharges any duty or liability of the delegating obligor." Restatement (Second) Contracts §318(3). Lisa may recover damages against Jay and Curtis. Jay has an action over against Curtis based upon their assignment and delegation agreement. 9. B. 10. D. 11. A. 12. A. Fa; B. Fa; C. Fa - Section 9-11 -

13. The Gillispies will not prevail. They were only incidental beneficiaries to the contract between the referees and the Big 10 because neither the referees nor the Big 10 intended to confer a benefit on the Gillispies. - Section 9-12 -

Section 10

Performance, Breach and Discharge After a contract has been entered into, the parties must satisfactorily perform their obligations, or have a legal excuse for not doing so, in order to avoid a claim of breach. I. Doctrine - Background A. Purpose of analysis - to determine whether a breach has occurred? [People] keep their agreements when it is an advantage to both parties not to break them. Solon (c. 600 B.C.). B. Contractual duties may be conditioned (made contingent) on the occurrence or non-occurrence of an event - a condition 1. Effect of a condition - creates, extinguishes or limits a contractual duty – you are in favor of conditions if they create for you opportunities to escape contractual responsibility 2. Types of conditions a. Express – using words (most typical) – you contractually agree to do something “provided that” or “subject to” or “on condition that” or “upon” or “as soon as” or similar words conditioning your duty of performance on the occurrence or non-occurrence of an event Example: Buyer - “I offer to purchase your home on March 15 provided I can get a first mortgage loan in the amount of $100,000.” Seller - “I accept your offer.” Thus, the parties have a binding contract. But the Buyer will not be in breach of contract for failing to buy the home if the Buyer could not get a first mortgage loan in the amount of $100,000 provided the Buyer made a good faith effort to do so. * * * * * * * * * Where the parties to the proposed contract have agreed that the contract is not to be effective or binding until certain conditions are performed or occur, no binding contract will arise until the conditions specified have or occurred or been performed. FN 1 b. Implied-in-fact (a condition that can be implied from the circumstances or the parties’ conduct) – e.g., a contractor is contractually obligated to construct a building but cannot legally commence construction until the owner secures a building permit – securing the building permit would be an implied-in-fact condition of the contractor’s obligation to construct the building - Section 10-1 -

- Section 10-2 - c. Implied-in-law (constructive conditions) - e.g., a condition to your obligation to pay rent to your landlord is the availability for occupancy of the apartment you rented C. After a contract is entered into, what happens to the contractual duties of the parties (the party who is obligated to perform a contractual duty is an “obligor” and the person who receives the benefit of that performance is the obligee)? 1. First of all, was the duty to perform made conditional on the occurrence or non-occurrence of an event or action? If so, first ask the question whether the condition been satisfied 2. If the duty is not conditional, or it is conditional but the condition has been satisfied, then the duty a. Must be discharged by performance; or b. The parties by agreement agree to discharge each other from performance (e.g., a mutual rescission – the parties agree to end their contract; a substituted contract – the parties agree to substitute for one contract a new contract; accord and satisfaction – the parties agree to substitute one type of performance of a duty for another that was in the original contact); or c. The obligor is excused from performing the duty; or 3. If the duty is not discharged by performance, then the obligor is in breach of contract for failure to perform the duty [End of Online Lecture 10-1] D. Importance of determining whether a breach (that is, the failure to perform) is material or nonmaterial – this determines the remedies available to the aggrieved (non-defaulting party) 1. If the breach is material, the aggrieved party is excused from performing the contract 2. If the breach is nonmaterial, the aggrieved party is not excused from performing the contract but is entitled to damages from the breaching party for breach of contract One party’s material breach of a contract frees the other party from its contractual obligation. A breach is material if it destroys the essential object of the agreement. A relatively minor breach, on the other hand, does not excuse the other party from its contractual performance. Whether a party’s breach is material is a question of fact. FN 2

II. Methods of Discharge of Contractual Duties A. Contractual duties are discharged if they are performed – so if you do everything you are supposed to do under your lease with your landlord, your duties under the lease are discharged B. What degree of performance is required to discharge a contractual duty? In other words, how “perfect” must your performance be so that your duty to perform is discharged? 1. Total performance (i.e., perfection) - when is this the appropriate standard? - e.g., the duty to pay rent v. the duty to construct an office building in accordance with detailed plans and specifications – in other words, under certain circumstances it is reasonable to expect that the performance by a party under a contract will be strictly in accordance with the contract – other times, expecting such strict compliance is unreasonable and probably not achievable 2. 2-601 ("perfect tender" rule under the UCC as it pertains to the sale of goods) - perfection is the standard for seller’s performance under a sale of goods contract (but the seller has a right to cure imperfect performance) – more later – this rule is covered in the online lecture regarding Performance Under the UCC 3. Doctrine of substantial performance - issue: when does less than 100% performance not constitute a material breach which would discharge the non-defaulting party? a. This doctrine is applicable to only certain contacts - what is the nature of the obligations involved? Is it reasonable to hold the contracting party to a perfection standard? b. If perfection is not the appropriate standard, performance must be substantial - has the non-defaulting party received, with relatively minor and unimportant deviations, what was bargained for? c. Breach must be unintentional and not in bad faith 4. Measure of recovery – what damages can the parties recover (rights of the parties) a. If the performance is substantial but not perfect - the aggrieved party will receive the cost of replacement or repair; or, in some jurisdictions, the amount of diminished (reduced) value b. If the performance is not substantial (thus the breach is material), the aggrieved party has the right to not perform - Section 10-3 -

- Section 10-4 - the contract (that is, the aggrieved party is excused from performance) but the breaching party may be entitled to equitable recovery for value of work actually performed (e.g., a contractor has not substantially performed the construction of a home on land owned by the other party – but the construction nonetheless adds considerable value to the property – the contractor will likely be able to recover something for the added value but will not be able to recover the contract price) 5. Importance of this analysis - was a breach material or nonmaterial - the answer tells you what rights the aggrieved party will have [End of Online Lecture 10-2] C. Time for performance - generally, performance by the stated time or within a reasonable time thereafter is acceptable – that is, a minor delay in performing is not a material breach (but it is a breach and it is likely that no damages would result to the non-breaching party) 1. However, you must determine if the parties had intended that time for performance is "of the essence" (i.e., is performance by one party by a stated time a condition precedent to the other party performing - in other words, is being late by definition a material breach which excuses the other party?)? 2. Is "time of the essence" expressly or impliedly? From lines 23-24 of WB-13 Vacant Land Offer to Purchase: TIME IS OF THE ESSENCE as to: (1) Earnest money payment(s); (2) binding acceptance; (3) occupancy; (4) date of closing [STRIKE AS APPLICABLE] and all other dates and deadlines in this offer except: ______________________. * * * * * * * Time may be made of the essence by implication: Smith Co. contracts with a newspaper to run advertisements related to the July 4 th holiday. The contract specifies that the ads be run on July 2 nd and 3 rd . Time was not made expressly of the essence. The newspaper runs the ads on July 5. The newspaper’s failure to run the ads on July 2 nd and 3 rd would be a material breach because time was of the essence by implication. 3. Effect - if time is of the essence, failure to timely perform is a material breach If a contract specifies a certain time for performance, the contract must be performed at that time, even if time is specified by the hour . . . . [if the contract specifies that time is of the essence]. FN 3

4. 2-601 ("perfect tender" rule) - time is of the essence as to sale of goods - more later (but the seller has a right to cure) – more later – in the online lecture regarding Performance Under the UCC 5. Importance of this analysis - was a breach material or nonmaterial - the answer tells us what rights the aggrieved party will have - but court may consider the equities (fairness issues) 6. Equitable (fairness) considerations to prevent the application of the rule resulting in an unfair result [E]ven where the parties clearly intended to regard a specific. . . date as crucial [that is, time is of the essence], equity will refuse to enforce such a provision when to do so would be unconscionable or would give one party an unfair advantage over the other . . . the focus should be on factors such as: whether the breach defeated the bargained-for objective of the parties; whether the non-breaching party suffered disproportionate prejudice; and whether undue economic inefficiency and waste, or an unreasonable or unfair advantage would inure to the non-breaching party. FN 4 D. A material breach of contract excuses the non-defaulting party - what makes a breach material? Factors, none of which may alone determine the issue: 1. Was performance substantial (does the substantial performance doctrine apply because if it does then the breach is nonmaterial if performance was substantial)? 2. Was time of the essence (if so, late performance is a material breach unless equitable considerations would dictate otherwise)? 3. Was breach serious? 4. Was breach intentional? 5. Does contract specify what breaches are material? [End of Online Lecture 103] E. Excuses for non-performance – where the law provides you with an excuse for whatever would otherwise be your breach of the contract 1. Legal impossibility causing inability to perform discharges a contractual duty - what is "legal impossibility" (“It can’t be done” v. “I’m sorry, I simply can’t do it”)? Examples: a. The death or incapacity of the promisor prior to the performance of a personal service contract - Section 10-5 -

- Section 10-6 - b. The destruction of the subject matter of a contract prior to performance c. Supervening illegality which makes performance of the contract illegal 2. Frustration of purpose – some unanticipated event has occurred and as a result the contract now has no value to one party – one party’s principal purpose in making the contract is frustrated without that party’s fault, by the occurrence of an event, the non- occurrence of which was a basic assumption on which the contract was made 3. Commercial impracticability (Restatement and UCC 2-615 as to sale of goods) - mechanism for shifting risk in accordance with the parties' presumed intentions – some unanticipated event has occurred and performing the contract would be extraordinarily difficult and unfair to one party – examples: a weather-related event, an earthquake, outbreak of war, or a governmental order or decree – elements of this excuse a. Did an unexpected event occur (should the occurrence of the event have been reasonably expected or taken into account? – should someone living in California be held to accept the risk that earthquakes could disrupt the performance of a contract – or the same questions for someone living in Louisiana with respect to hurricanes)? b. Did the event render performance impossible or impracticable (impracticability is easier to show then impossibility – impracticability is demonstrated if it can be shown that, although performance was possible, forcing performance would make the contract no longer financially sensible from the non-performing party’s perspective)? c. Did the non-performing party assume the risk that the event would occur (by the terms of the contract or by implication)? d. Was the nonperforming party at fault in causing the unexpected event However, this harsh rule [of objective impossibility] has gradually been eroded, and the Restatement of Contracts has departed from the early common law rule by recognizing the principle of “commercial impracticability”. Under this doctrine, a party is discharged from his contract obligations, even if it is technically possible to perform them, if the costs of performance would be so disproportionate to that reasonably contemplated by

the parties as to make the contract totally impractical in a commercial sense. FN 5 ************** § 2-615. Excuse by Failure of Presupposed Conditions. Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance: (a) Delay in delivery or non-delivery in whole or in part ... is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid ... **************** Restatement (Second) of Contracts §261. Discharge by Supervening Impracticability. Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary. e. Examples to which doctrine may apply to excuse a party from performance (1) Death or incapacity of a person necessary for performance (2) Destruction of subject matter necessary for performance (3) Failure of anticipated source of supply (4) Supervening illegality, government regulation or order (5) Extraordinary weather event or other act of God f. Examples to which doctrine not likely to apply (1) Increased costs - Section 10-7 -

- Section 10-8 - (2) Labor disputes (3) Change of market conditions g. Use of force majeure clause to create by contract excuses for non-performance - examples: From a Lease: FORCE MAJEURE. In the event that either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lock-outs, labor troubles, inability to procure materials, failure of power, restrictive governmental laws or regulations, riots, insurrection, war or other reasons of like nature not the fault of the party delayed in performing work or acts required under the terms of this Lease, then performance of such act shall be excused for the period of the delay and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay. The provisions of this section shall not excuse the Tenant from the payment of any monthly rent, Percentage Rent or any other payments required by the terms of this Lease. From AIA Document A201, General Conditions of the Contract for Construction: 8.3.1 Delays and Extensions of Time. If the Contractor is delayed at any time in the commencement or progress of the Work by an act or neglect of the Owner or Architect, or of an employee of either, or of a separate contractor employed by the Owner; or by changes ordered in the Work; or by labor disputes, fire, unusual delay in deliveries, unavoidable casualties or other causes beyond the Contractor’s control; or by delay authorized by the Owner pending mediation and arbitration, then the Contract Time shall be extended by Change Order to the extent such delay will prevent the Contractor from achieving Substantial Completion within the Contract Time and if the performance of the Work is not, was not, or would not have been delayed by any other cause for which the Contractor is not entitled to an extension in the Contract Time under the Contract Documents. The Contractor further acknowledges and agrees that adjustments in the Contract Time will not be permitted for a delay to the extent such delay (i) is caused by the Contractor, (ii) could have been limited or avoided by the Contractor's timely notice to the Owner of the delay or reasonable likelihood that a delay will occur, or (iii) is of a duration not less than one (1) day. [End of Online Lecture 10-4]

- Section 10-9 - Performance, Breach and Discharge - Review Questions 1. On October 1, 2019 , Jackson entered into a signed written contract with Peters whereby Jackson agreed to employ Peters as an account executive as of November 1, 2019 . Jackson had earlier made a similar offer of employment to Smith but had not yet received an answer from Smith as to whether or not he (Smith) was going to accept. Therefore, Jackson included the following provision in his contract with Peters: "Jackson's obligations hereunder are contingent upon Smith not accepting Jackson's previous offer to him on or before October 31, 2019 . In the event Smith accepts said offer by October 31, 2019 , this contract shall not be binding on either party hereto." On October 30, 2019 , when Peters called Jackson to confirm that he was to start work that day, Jackson advised him that he had hired Smith instead. Peters was outraged and sued Jackson for breach of contract for failing to employ him pursuant to their October 1 contract. Jackson claims that he has no obligation to do so. Is he correct? Why or why not? 2. Webster, Inc., dealt in automobile accessories at wholesale. Although it manufactured a few items in its own factory, among them windshield wipers, Webster purchased most of its supplies from a large number of other manufacturers. In January, Webster entered into a written contract to sell Hunter 2,000 windshield wipers for $1,900, delivery to be made June 1. In April, Webster's factory burned to the ground, and Webster failed to make delivery on June 1. Hunter, forced to buy windshield wipers elsewhere at a higher price, brought an action against Webster for breach of contract. Decision? 3. The plaintiff, a seller of milk, had for ten years bid on contracts to supply milk to the defendant school district, and had supplied milk to other school districts in the area. On June 15, 2018 , the plaintiff contracted to supply the defendant’s requirements of milk for the school year 2018-19 , at a price of $. 2659 per half- pint. The price of raw milk delivered from the farm had for years been controlled by the U.S. Department of Agriculture. On June 15, 2018 , the department’s administrator for the New York-New Jersey area had mandated a price for raw milk of $ 15 .03 per hundredweight. By December 2018 , the mandated price had been raised to $ 18 . 00 per hundredweight, an increase of nearly 20 percent. If required to complete deliveries at the contract price, the plaintiff would lose nearly $ 8,000 on its contract with the defendant and would face similar losses on contracts with two other school districts. The plaintiff sued for a judgment that its performance had been impracticable through unforeseen events, particularly unanticipated grain crop failures and the huge amounts of grain sold to Russia. Decision? 4. Erwick Construction Company contracted to build a house for Charles. The specifications called for the use of Karlene Pipe for all plumbing. Erwick, nevertheless, got a better price on Boynton Pipe and substituted the equally good Boynton Pipe for Karlene Pipe. Charles's inspection revealed the change, and Charles now refuses to make the final payment. The contract price was for $200,000, and the final payment is $20,000. Erwick now brings suit seeking the $20,000. Decision?

- Section 10-10 - 5. A party to a contract who fails to perform according to its terms is in breach of the contract. Which of the following is the best statement of the law? A. Any breach discharges the other party. B. A nonmaterial breach discharges the other party if it is not cured within a reasonable time. C. A material uncorrected breach discharges the other party. D. A nonmaterial breach does not give rise to an action for damages. 6. The University entered into a contract with Best Builders whereby Best would construct a 2-story building to be used for classroom space to accommodate 1,000 students. Because Best failed to follow precisely the construction plans and specifications, the second floor of the building that was constructed can only support the weight of 200 students, thus reducing the capacity of the building to 500 students. To correct the construction defect would require rebuilding the entire structure. The University has refused to pay Best any portion of the construction price. Best has demanded payment of the entire contract price less an appropriate amount to compensate the University for Best's failure to precisely follow the plans and specifications. Under these circumstances, A. The University will be required to pay Best 50% of the contract price. B. The University will not be required to pay Best any of the contract price only if it can show that Best intentionally breached the contract. C. The University will not be required to pay Best in accordance with the contract because Best failed to substantially perform the contract. D. Best's breach of the contract was not material and the University will be obligated to pay Best the contract price less an amount to compensate the University for Best's breach. E. None of the above is correct. 7. On May 25, Smith contracted with Jackson to paint Smith's house. The work was to begin on May 31. On May 26, the house was destroyed by a fire caused by the negligence of one of Smith's neighbors (he was burning leaves on a windy day). Needless to say, Jackson was not able to paint Smith's house in accordance with the contract. Smith and Jackson are uncertain as to the status of their contract. Which of the following statements is correct? A. Neither party is liable to the other because of mutual mistake. B. Smith will be liable to Jackson for breach of contract but he will then be able to sue his neighbor for negligence.

- Section 10-11 - C. Jackson will not be liable to Smith because his performance has become impossible. D. None of the above is correct. Performance, Breach and Discharge - Answers to Review Questions 1. Jackson is correct. Jackson's contractual obligation to employ Peters was made contingent on (conditioned on) Smith not accepting the offer of employment made to him. Since Smith did accept, Jackson is not contractually obligated to employ Peters. 2. Decision for Hunter. This is not a case of impossibility of performance by Webster. Although Webster may have expected to manufacture the windshield wipers in his factory, the agreement did not require him to do so. Windshield wipers purchased from other manufacturers would have served the purpose. Had Webster, Inc. contracted to manufacture the wipers in his factory and sell them to Hunter, who contracted to buy, and thereafter Webster's factory was destroyed by fire, without his fault, the contract would be discharged. There would have been destruction of the specific means of performance, rendering performance impossible. In the problem, however, the fact that Webster's factory burned to the ground did not constitute destruction of the specific means or source of performance. 3. The UCC recognizes that performance may be excused in instances where it would be commercially impracticable. This is not to say that mere inconvenience or financial hardship would be sufficient. The impediment to performance must be something that was unforeseen and not within contemplation of the parties at the time the contract was formed. Although the grain sales in Russia may have been unexpected, Plaintiff did not adequately demonstrate that this factor should act as a complete release to his performance as prescribed by the contract. 4. Judgment for Erwick Construction Company. Although Erwick deviated from the contract specifications, its conduct would be evaluated as to whether it constituted a material breach. The critical question is whether Charles received substantially what he had bargained for. Since the substitution of the comparable pipe did not qualitatively alter the value of the house, there is no material breach. Charles is not entitled to a performance discharge. 5. C. 6. C. 7. C.

Section 11

Sale of Goods A sale of goods contract is the most common contract. You probably enter into one almost every day of your adult life. I. Article 2 - UCC A. Application 1. To the sale of goods (goods defined: 2-105) – “all things (including specially manufactured goods) which are moveable . . . other than the money in which the price [or other forms of payment] . . . “ 2. Mixed contracts (contracts involving sale of goods and services) – how do you decide whether Article 2 should apply in these cases: shingle a roof v. sale of carpet, or purchase of an over-the-counter drug v. purchase of a prescription drug which requires that the drug be dispensed by licensed pharmacist; the construction of a house – the sale of goods, the new house, or a contract for services – the construction activities; the licensing (not selling) of computer software stored on a CD-ROM – one consideration or factor: were the services necessary only because the buyer wanted the goods?? Ordinarily, a court determines whether a mixed contract for goods and services is subject to [the UCC] by considering whether the contract is for goods with labor incidentally involved or for services with goods incidentally involved. FN 1 3. Sale of goods 2-106 - "... the passing of title [of goods] from the seller to the buyer for a price ..." B. Basic code principles that permeate the various code rules 1. Merchants sometimes treated differently 2-104(1) - who is a merchant: a. Tier 1 (the “dealer”) - a person who deals in goods of the kind b. Tier 2 (the “professional”) - a person who by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved c. Tier 3 (the “merchant by agency”) - a person to whom the knowledge or skill referred to above is attributed by his employment of any person who by his occupation holds himself as having such knowledge or skill - Section 11-1 -

- Section 11-2 - § 2-104. Definitions: "Merchant" . . . (1) "Merchant" means a person who deals in good of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of any agent or broker or other intermediary who by his occupation holds himself as having such knowledge or skill. [End of Online Lecture 11-1] 2. What “type” of merchant may be relevant to those sections that are merchant-limited in their application [for example, implied warranty of merchantability requires a Tier 1 merchant but other “general business practices” sections (such as 2-201(2), 2-205, 2- 207 and 2-209(2)) are applicable to all types of merchants] 3. Good faith 1-203 [is it an independent cause of action so that you can sue for a person’s “bad faith”? - see 1-106(20] - not in majority of jurisdictions] - probably does not extend to pre-contract shenanigans because other remedies may be available, for example a claim of misrepresentation, duress or mistake § 1-203. Obligation of Good Faith. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement. a. Non-merchants 1-201(19) - honesty in fact (i.e., “an honest intention to abstain from taking unfair advantage of another, through technicalities of law, by failure to provide information or to give notice, or by other activities which render the transaction unfair . . .” WI-JI-Civil No. 3044) b. Merchants 2-103(1)(b) - honesty in fact and fair dealing c. Under Revised UCC (2002) - definition the same for both (the merchant standard applies to both merchants and non- merchants) d. Note: in most states, including Wisconsin, the duty of good faith and fair dealing in inherent in every contract, not just sales of goods contract The duty of good faith is intended as a guaranty against “arbitrary or unreasonable conduct” . . . Breaches of good faith

- Section 11-3 - include conduct which violates community standards of decency, fairness or reasonableness. FN 2 Bad faith may consist of “subterfuges and evasions . . . evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of power to specify terms, and interference with or failure to cooperate in the other party’s performance.” FN 3 4. Unconscionability 2-302 a. Procedural unconscionability - the manner in which the contract was formed is unconscionable – unfairness in the formation of the contract which may include a variety of inadequacies or weaknesses such as age, literacy, lack of sophistication, hidden or unduly complex contract terms, bargaining tactics and the particular setting surrounding the contract formation process b. Substantive unconscionability - a term or condition of the contract is unconscionable – harsh, unfair or disproportionately one-sided terms c. Not intended to create an affirmative cause of action and a basis for recovery of damages (that is, can’t sue someone for “unconscionable conduct”) – but rather unconscionability is a defense to enforceability of a contract or its terms (you argue that a provision is not enforceable against you because it is unconscionable) d. Some courts (including Wisconsin) require both procedural and substantive unconscionability to have a right to attack the enforceabililty of the contract – “To tip the scales in favor of unconscionability requires a certain quantum of procedural plus a certain quantum of substantive unconscionability.” FN 6 e. Whether unconscionability is present is a matter of law for the court (and not the jury) to decide § 2-302. Unconscionable Contract or Clause. (1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

- Section 11-4 - (2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination. *************** Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party . . . FN 4 An unconscionable contact is one which no man in his senses, not under delusion, would make, on the one hand, and which no fair and honest man would accept on the other. FN 5 Unconscionability is an amorphous concept that evades precise definition. It is a determination to be made in light of a variety of factors not easily unifiable into a formula. The underlying principle is one of prevention of oppression or unfair surprise and not of disturbance of allocation of risks because of superior bargaining power. FN 6 [End of Online Lecture 11-2] 5. Reasonableness as to time 1-204 § 1-204. Time; Reasonable Time; "Seasonably". ...(2) What is a reasonable time for taking any action depends on the nature, purpose and circumstances of such action. (3) An action is taken "seasonably" when it is taken at or within the time agreed or if no time is agreed at or within a reasonable time. ********************** Example of language from a contract: “Whenever either party is required to take an action or give a notice hereunder, taking such action or giving such notice within 10 days after the event giving rise to such required action or notice shall be deemed reasonable.” 6. Importance of notice 1-201(26) § 1-201. General Definitions and Principles of Interpretation. ... (25) A person has "notice" of a fact when

(a) he has actual knowledge of it; or (b) he has received a notice or notification of it; or (c) from all the facts and circumstances known to him at the time in question he has reason to know that it exists. A person "knows" or has "knowledge" of a fact when he has actual knowledge of it. "Discover" or "learn" or a word or phrase of similar import refers to knowledge rather than to reason to know. The time and circumstances under which a notice or notification may cease to be effective are not determined by this Act. (26) A person “notifies” or “gives” a notice or notification to another by taking such steps as may be reasonably required to inform the other in ordinary course whether or not such other actually comes to know of it. A person “receives” a notice or notification when (a) it comes to his attention; or (b) it is duly delivered at the place of business through which the contract was made or at any place held out by him as the place for receipt of such communications. ********************** Example of language from a contract: “Whenever either party is required to give notice to the other hereunder, such notice shall be in writing and shall be deemed given (i) upon personal delivery thereof; or (ii) three (3) days after such notice is mailed by United States first class mail, proper postage affixed, registered or certified, return receipt requested to the address set forth below; or (ii) upon transmission by electronic mail if on the same date such notice is also given by United States first class mail, proper postage affixed to the address set forth below; or (iv) upon transmission by facsimile if the same date such notice is also given by United States first class mail, proper postage affixed, to the address set forth below; or (v) one (1) day after such notice is delivered to an nationally-recognized overnight courier (such as Federal Express) for delivery to the address set forth below.” 7. Expansion of commercial practices 1-102(2) a. Course of dealing 1-205(1) - prior dealings between the parties b. Usage of trade 1-205(2) - business customs or practices - Section 11-5 -

c. Course of performance 2-208 - prior performance by a party in an installment contract 8. Freedom of contract 1-102(3) § 1-102. Purposes; Rules of Construction; Variation by Agreement. ... (3) The effect of provisions of this Act may be varied by agreement, except as otherwise provided in this Act and except that the obligations of good faith, diligence, reasonableness and care prescribed by this Act may not be disclaimed by agreement but the parties may by agreement determine the standards by which the performance of such obligations is to be measured if such standards are not manifestly unreasonable. [End of Online Lecture 11-3] II. What Goods Can Be Sold? A. The goods must be existing (you can’t sell something that doesn’t exist – but you can enter into a contract to sell something that will exist in the future – e.g., an automobile to be manufactured) B. The goods must be identified 2-105(2) and 2-501 - generally occurs at the time the contract is made - more than merely describing the goods - identification is physically associating specific goods with a specific sale of goods contract (for example, boxing up the goods, setting them aside in a warehouse) 1. Can occur at other times Seller: “I offer to sell you this used Dell laptop computer for $300.” Buyer, after examining the computer, responds: “You’ve got a deal.” When was the computer identified to the contract? Seller: “I offer to sell you 100 new model 1000 Dell laptop computers for delivery in two weeks. They are presently stored in my warehouse along with 900 other model 1000 computers.” Buyer responds: “You’ve got a deal.” When will the computers be identified to the contract? 2. Effect of identification having occurred - special property right created in the buyer a. Buyer has an insurable interest (i.e., the right to insure the goods) - Section 11-6 -

- Section 11-7 - b. Availability of certain remedies to the buyer in the event seller refuses to deliver the goods – more later in UCC Remedies c. Buyer’s right to inspect the goods is triggered 2-513 III. Trial Sales A. Whenever buyer has contracted for the privilege to return the goods even though they are conforming – two types of contracts 1. Sale or return (translated: “I’ll sell the goods to my own customers or I’ll return them to my seller”) – regarded as a completed sale subject to the return policy 2. Sale on approval (translated: “The sale is completed if I approve the goods because they serve my purpose”) - buyer is treated as a bailee until buyer accepts the goods Example: a sporting goods store enters into the following two transactions: Transaction 1 - the store purchases a line of ski clothing from a manufacturer and negotiates for the right to return unsold clothing to the manufacturer by on or before March 31 for a refund of the purchase price. This is a sale or return. Transaction 2 - the store enters into a contract to purchase a computer system to be used by it in managing the store. The store negotiates for the privilege of trying the computer system for 90 days to determine if it is suitable for its intended uses and, if not, the store is not obligated to purchase the computer system. This is a sale on approval.

- Section 11-8 - B. Sections 2-326 and 2-327 of the UCC Sale on Sale or Return Approval Type of Goods Purchased for resale Purchased for use When to Make In accordance with the contract Same Election or within reasonable time How to Make Actual return Give notice Election Who Bears Buyer Seller Expense of Return? Who Bears Buyer Seller Risk of Loss During Election Period? When Does Normal rules Upon Title Pass? Acceptance Are Goods Yes No Subject to Claims of Buyer's Creditors? Example: who is better off – an unpaid seller in a sale or return situation or an unpaid seller in a sale on approval situation if the buyer is in bankruptcy or is otherwise financially distressed? The unpaid sale on approval seller is in a better position because the seller still has title to the goods and the right to get them back from the buyer. On the other hand, the goods which are subject of the sale or return right or considered to be owned by the buyer and thus would be subject to the claims of all of the buyer’s creditors. C. Compare personal satisfaction contracts (“satisfaction guaranteed or your money back ...”) - how do you decide if a claim that the goods/services are not “satisfactory” is legitimate (subjective standard v. objective standard)? [End of Online Lecture 11-4]

- Section 11-9 - Sale of Goods - Review Questions 1. The distinction between contracts that are covered by the Article 2 of the UCC and those that are not is A. Basically dependent upon whether the subject matter of the contract involves the purchase or sale of goods. B. Based upon the dollar amount of the contract. C. Dependent upon whether merchants are involved. D. Of relatively little or no importance since the laws are the same. 2. Which of the following contracts falls within common law rules and is not covered by the UCC? A. A requirements contract involving the sale of fuel oil. B. A contract for the sale of 200 chess sets. C. A contract for the sale of goods that are manufactured according to the buyer's specifications. D. An employment contract that by its terms has a term of 18 months. 3. On October 3, 2019 , Lede sold a Model PC-62 computer to Master Distributors to be used by Master in its accounting department. The written contract between the parties provided as follows: "Master shall have until November 3, 2019 , to determine whether or not it wants to keep the PC-62 computer. If not, Master may ship the computer back to Lede at Master's expense for a full refund." On October 23, 2019 , Master decided it didn't want to keep the computer and shipped it back to Lede pursuant to a contract with UPS that required UPS to collect its freight charges from Lede. During the shipment back to Lede, the computer was damaged as a result of mishandling by the UPS truck driver. Lede now claims that it will not issue a credit to Master for the purchase price of the computer because it was returned in a damaged condition. Master thinks it is entitled to the credit. Who is correct and why? 4. Lede is also upset with the fact that Master had shipped the computer back to Lede expecting Lede to pay the UPS freight charges. Lede demanded that Master reimburse it for the freight charges. Master has refused. Is Master correct in doing so? Why or why not? 5. On March 11, Vizac Sales Corporation entered into a contract with Watson Company whereby Vizac was to purchase 1,000 cases of coffee from Watson. Assume that the contract between Vizac and Watson also provided as follows: "Vizac may return any unsold coffee (whole cases only) by May 30 for full credit." Further assume that Watson made the coffee available and Vizac took delivery on April 16. Which of the following statements is true or false?

- Section 11-10 - A. Title to the coffee does not pass to Vizac until it elects not to exercise its right to return the unsold coffee. _________ B. If Vizac elects to return unsold coffee by May 30, it must bear the expense of shipping the goods back to Watson. __________ C. The risk of loss for the coffee until June 1 rests with Watson. __________ 6. Which of the following statements correctly applies to a sale on approval under Article 2 of the UCC? A. Both the buyer and seller must be merchants. B. The buyer must be purchasing the goods for resale in the ordinary course of business. C. Risk of loss for the goods shifts to the buyer when the goods are accepted by the buyer. D. Title to the goods passes to the buyer on delivery of the goods to the buyer. Sale of Goods - Answers to Review Questions 1. A. 2. D. 3. Master is correct. This is a sale on approval agreement because Master is entitled to return the computer which it was purchasing for its own use (as opposed to resale). Therefore, risk of loss remained on Lede (the seller) until the computer was accepted by Master (that is, when Master did not decide to return it). 4. Master is not correct. Although the contract was a sale on approval (and therefore Lede would typically pay the freight expense for returning the goods), the contract provided otherwise (Master was required to pay the freight expense for shipment back to Lede). 5. A. Fa; B. Tr; C. Fa 6. C.