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Chapter Ten The Law of Contracts and Sales—II

In our discussion of the law of contracts in  Chapter 9 , we were concerned that agreements be enforceable. We noted that without enforceability of contract law by a court, there would be no predictability for enterprises that produce and sell goods. Without this there would be no security and financial stability for a firm. We would see the risk of loss increase and entrepreneurship decline if contracts were not enforceable at all levels of the manufacturing, marketing, and distribution of services and goods.

In this chapter we carefully examine the methods by which a contract can be discharged (particularly through performance), as well as the remedies that are possible for firms and individuals who are injured by a breach of contract for the sale of goods (Articles 2 and 2A of the Uniform Commercial Code [UCC]). E-contracts are highlighted and the concepts underlying them are distinguished from traditional contract principles. This chapter also addresses the international dimensions of contracts and sales agreements.

Critical Thinking About The Law

In  Chapter 9 , we emphasized the importance of predictability and stability for those who enter into contracts. Nevertheless, we do not want parties to jump immediately to the conclusion that they have a contract every time they talk about an exchange. Instead, we want to make it possible for people to talk about an exchange without having actually made a commitment to the exchange. Why?

To aid your critical thinking about issues surrounding contract formation and performance, let’s look at a fact pattern involving concert tickets.

Jennifer and Juan were recently involved in a breach-of-contract case. Juan had two extra tickets to a Garth Brooks concert, and he agreed to sell these tickets to Jennifer. After they had agreed on the price, Juan promised to give the tickets to Jennifer the next day. The next day, however, Jennifer did not want the tickets. Jennifer had discovered that it was an outdoor afternoon concert. Jennifer argued that she should not have to buy the tickets because she is allergic to sunlight and unable to spend any extended period of time outside. The judge ruled in favor of Jennifer.

1. What ethical norms seem to dominate the judge’s thinking (see  Chapter 1 )?

Clue: We have said that security is one reason for enforcing contracts. Review your list of ethical norms. Which norms seem to conflict with security in this case?

2. What missing information might be helpful in this case?

Clue: To help you think about missing information, ask yourself the following question: Would the fact that Juan knew that Jennifer was allergic to sunlight affect your thinking about this case?

3. What ambiguous words might be troublesome in this case?

Clue: Examine the reasoning that Jennifer uses to argue that she should be released from the contract.

Methods of Discharging a Contract

When a contract is terminated, it is said to be discharged. A contract may be discharged by performance (complete or substantial), mutual agreement, conditions precedent and subsequent, impossibility of performance, or commercial impracticability.

Discharge By Performance

In most cases, parties to an agreement discharge their contractual obligation by doing what was required by the terms of the agreement. Many times, however, performance is substantial rather than complete. Traditional common law allowed suits for breach of contract if there was not  complete performance  of every detail of the contract. Today, however, the standard is  substantial performance . This standard requires (1) completion of nearly all the terms of the agreement, (2) an honest effort to complete all the terms, and (3) no willful departure from the terms of the agreement.

complete performance

Completion of all the terms of the contract.

substantial performance

Completion of nearly all the terms of the contract plus an honest effort to complete the rest of the terms, coupled with no willful departure from any of the terms.

Courts usually find substantial performance when there is only a minor breach of contract. For example, A, a contractor, agreed to build a house with five bedrooms for B. By the terms of the agreement, each of the rooms was to be painted blue. By mistake, one was painted pink, and B refused to pay A the $10,000 balance due on the house. The court awarded A $10,000 minus the cost of painting the wrongly painted room, finding that the departure from the contract terms was slight and unintentional and, therefore, insufficient for B to refuse to perform (pay) as agreed to in the contract.

If the breach is material, the injured party may terminate the contract and sue to recover damages. A material breach is substantial and, usually, intentional. Today, courts allow a party to “cure” a material breach if the time period within which a contract is supposed to be performed has not lapsed. In the following case both parties might be in breach of contract. For which party may the breach be material?

 Case 10-1 Kohel v. Bergen Auto Enterprises, L.L.C.

Superior Court of New Jersey, Appellate Division 2013 WL 439970 (2013)

Per Curiam

On May 24, 2010, plaintiffs Marc and Bree Kohel entered into a sales contract with defendant Bergen Auto Enterprises, L.L.C. d/b/a Wayne Mazda Inc. (Wayne Mazda), for the purchase of a used 2009 Mazda. Plaintiffs agreed to pay $26,430.22 for the Mazda and were credited $7,000 as a trade-in for their 2005 Nissan Altima. As plaintiffs still owed $8,118.28 on their Nissan, Wayne Mazda assessed plaintiffs a net payoff of this amount and agreed to remit the balance due to satisfy the outstanding lien.

Plaintiffs took possession of the Mazda with temporary plates and left the Nissan with defendant. A few days later, a representative of defendant advised plaintiffs that the Nissan’s vehicle identification (VIN) tag was missing. The representative claimed it was unable to sell the car and offered to rescind the transaction. Plaintiffs refused.

When the temporary plates on the Mazda expired on June 24, 2010, defendant refused to provide plaintiffs with the permanent plates they had paid for. In addition, defendant refused to pay off plaintiffs’ outstanding loan on the Nissan as they had agreed. As a result, plaintiffs were required to make monthly payments on both the Nissan and the Mazda.

On July 28, 2010, plaintiffs filed a complaint in [a New Jersey state court] against Wayne Mazda.

On February 2, 2012, the court rendered an oral decision finding that there was a breach of contract by Wayne Mazda. On February 17, 2012, the court entered judgment in the amount of $5,405.17 in favor of the plaintiffs against Wayne Mazda. (The defendant appealed to a state intermediate appellate court.)

Defendant argued that plaintiffs’ delivery of the Nissan without a VIN tag was itself a breach of the contract of sale and precludes a finding that defendant breached the contract. However, the trial court found that plaintiffs were not aware that the Nissan lacked a VIN tag when they offered it in trade. Moreover, defendant’s representatives examined the car twice before accepting it in trade and did not notice the missing VIN until they took the car to an auction where they tried to sell it. There is a material distinction in the plaintiffs’ conduct, which the court found unintentional, and defendant’s refusal to release the permanent plate for which the plaintiffs had paid, an action the court concluded was done to maintain “leverage.”

The evidence indicated that the problem with the missing VIN tag could be rectified. Marc Kohel applied and paid for a replacement VIN tag at Meadowlands [Nissan] for $35.31. While he initially made some calls to Meadowlands, he did not follow up in obtaining the VIN tag after the personnel at Wayne Mazda began refusing to take his calls.

The court concluded that “Wayne Mazda didn’t handle this as adroitly (skillfully) as they could. . . .” Kevin DiPiano, identified in the complaint as the owner and/or CEO of Wayne Mazda, would not even take [the plaintiffs’] calls to discuss this matter. The court found:

Mr. DiPiano could have been better businessman, could have been a little bit more compassionate or at least responsive, you know? He was not. He acted like he didn’t care. That obviously went a long way to infuriate the plaintiffs. I don’t blame them for being infuriated.

Here, plaintiffs attempted to remedy the VIN tag issue but this resolution was frustrated by defendant’s unreasonable conduct. We thus reject defendant’s argument that plaintiffs’ failure to obtain the replacement VIN tag amounted to a repudiation of the contract. *

 Kohel v. Bergen Auto Enterprises, L.L.C. Superior Court of New Jersey, Appellate Division 2013 WL 439970 (2013).

Affirmed, for the Plaintiffs Marc and Bree Kohel.

Performance to Satisfaction of Another

Contracts often state the completed work must personally satisfy one of the parties or a third person. When the subject matter of the contract is personal, the obligation is conditional, and performance must actually satisfy the party specified in the contract. For instance, contracts for portraits, works of art, and tailoring are considered personal because they involve matters of personal taste. Therefore, only personal satisfaction of the party fulfills the condition unless a court finds that the party is expressing dissatisfaction simply to avoid payment or otherwise is not acting in good faith.

Most other contracts need to be performed only to the satisfaction of a reasonable person unless they expressly state otherwise. When the subject matter of the contract is mechanical, courts are more likely to find the performing party has performed satisfactorily if a reasonable person would be satisfied with what was done. For example, Mason signs a contract with Jen to mount a new heat lamp pump on a concrete platform to her satisfaction. Such a contract normally need only be performed to the satisfaction of a reasonable person.

Material Breach of Contract

breach of contract  is the nonperformance of a contractual duty. The breach is material when it is intentional and usually substantial.

Uniform Commercial Code and Performance and Convention on International Sale of Goods

 The substantial performance doctrine does not apply to the sale of goods. The performance of a sale or lease contract under UCC Section 2-301 requires the seller or lessor to transfer and deliver what is known as conforming goods (perfect tender rule). The buyer or lessee must accept and pay for the conforming goods. The UCC states an exception to the perfect tender rule. If the goods or tender of delivery fail to conform to the contract in any respect, the buyer has the following options: (1) reject all the goods, (2) accept all that are tendered, or (3) accept any number of units the buyer chooses to and reject the rest. The buyer must generally give notice to the seller of any defect in the goods or tender of delivery and then allow the seller a reasonable time to cure the defect.

Seventy nations are signatories to the United Nations Convention on the International Sale of Goods (CISG), and goods are sold worldwide under the authority of the CISG. Under that convention, all four of the following conditions must be met to show an exception to the perfect tender rule: (1) the buyer has resorted to another remedy, such as avoidance or price reduction; (2) the seller failed to deliver or, in the case of nonconforming goods, the nonconformity was so serious that it constituted a fundamental breach; (3) the buyer gave timely notice to the seller that the goods were nonconforming; and (4) the buyer made a timely request that the seller provide substitute goods. As in the civil-law nations, the court may grant specific performance without regard to whether money damages are inadequate.

Discharge By Mutual Agreement

After a contract is formed, the parties may agree that they should rescind (cancel) the contract because some unforeseen event took place that makes its fulfillment financially impracticable. For example, if A agrees to build B a house for $150,000, and then, while building the basement, runs into an unforeseen and uncorrectable erosion factor, both parties may want to cancel the agreement, with restitution to A for expenditures on the basement construction. The contract is then said to be discharged by mutual agreement.

Sometimes the parties wish to rescind an original agreement and substitute a new one for it. This type of discharge by mutual agreement is called accord and satisfaction. If the parties wish to substitute new parties for the original parties to the agreement, this is called novation. Note that novation does not change the contractual duties; it merely changes the parties that will perform those duties. Suppose a rock star (original party) is unable to perform at a concert because of illness, and a star of the same stature (substitute party) agrees to appear instead. If all parties, including the concert impresario, agree to the substitution, there is discharge by mutual agreement.

Applying the law to the facts . .

Bixley and Joe enter into an agreement whereby Joe agrees to buy Bixley’s Cigar Shop. Bixley is planning to retire. As the date for the transfer draws closer, Bixley starts thinking that he really doesn’t want to retire, so he calls Joe and asks whether Joe would be willing to reconsider the deal. Joe was actually starting to worry about whether he could run the operation, so he gladly agreed to just forget the deal. How has the contract been discharged? What if it were only Joe who got cold feet, and he found someone who was happy to buy the business according to the terms of the original sales contract? If Bixley agrees that Carley will replace Joe, then how would we describe the discharge of this contract?

Discharge by Conditions Precedent and Subsequent

Condition Precedent

 A  condition precedent  is a particular event that must take place in order to give rise to a duty of performance. If the event does not take place, the contract may be discharged. For example, when Smith enters into a contract with Jones to sell a piece of real estate, a clause in the agreement requires that title must be approved by Jones’s attorney before closing and execution of the contract for sale. If Jones’s attorney does not give this approval before the closing, then Jones is discharged from the contract. The following case illustrates discharge of a contract by a condition precedent.

condition precedent

A particular event that must take place to give rise to a duty of performance of a contract.

 Case 10-2 Architectural Systems, Inc. v. Gilbane Building Co.

U.S. District Court, Maryland 760 F. Supp. 79 (1991)

Carley Capital Group (Carley) was the owner of a project in the city of Baltimore known as “Henderson’s Wharf.” The project was designed to convert warehouses into residential condominiums. On September 4, 1987, Carley hired Gilbane Building Company (Gilbane) to be the general contractor and construction manager for the project. Gilbane hired Architectural Systems, Inc. (ASI), as the subcontractor to perform drywall and acoustical tile work on the project. The subcontract included the following clause: “It is specifically understood and agreed that the payment to the trade contractor is dependent, as a condition precedent, upon the construction manager receiving contract payments from the owner.”

Gilbane received periodic payments from Carley and paid ASI as work progressed. By late 1988, ASI had satisfactorily performed all of its obligations under the subcontract and submitted a final bill of $348,155 to Gilbane. Gilbane did not pay this bill because it had not received payment from Carley. On March 10, 1989, Carley filed for bankruptcy. ASI sued Gilbane, seeking payment.

Justice Young

ASI argues that it did not assume the credit risk simply by the inclusion of the statement “as a condition precedent” in the subcontract. It may not be sound business practice to accept such a business proposal but that is what occurred. The provision unambiguously declares that Gilbane is not obligated to pay ASI until it first received payment by the owner. The cause for the owner’s nonpayment is not specifically addressed and could be due to a number of causes, including insolvency.

A provision that makes a receipt of payment by the general contractor a condition precedent to its obligation to pay the subcontractor transfers from the general contractor to the subcontractor the credit risk of non-payment by the owner for any reason (at least for any reason other than the general owner’s own fault), including insolvency of the owner. *

Architectural Systems, Inc. v. Gilbane Building Co., U.S. District Court, Maryland 760 F. Supp. 79 (1991).

Decision in favor of Gilbane.

Condition Subsequent

 A  condition subsequent  is a particular future event that, when it follows the execution of a contract, terminates the contract. For example, a homeowner’s insurance contract may discharge the insurer from responsibility for coverage in the event of an “act of war” (condition subsequent).

condition subsequent

A particular event that, when it follows the execution of a contract, terminates the contract.

Discharge By Impossibility of Performance

In early common law, when disruptive unanticipated events (e.g., war) occurred after the parties entered into a contract, the contract was considered enforceable anyway. Thus, if a shipping line could not transport goods it had agreed to transport because of a wartime blockade, or if it could transport the goods but had to take a more expensive route to do so, it (or its insurance carrier) was required to pay damages or absorb the costs of the longer route. Courts today take the view that if an unforeseeable event makes a promisor’s performance objectively impossible, the contract is discharged by  impossibility of performance Objectively impossible is defined as meaning that no person or company could legally or physically perform the contract.

impossibility of performance

Situation in which the party cannot legally or physically perform the contract.

This defense to nonperformance is used most frequently in three circumstances. First is the death or illness of a promisor whose personal performance is required to fulfill the contract when no substitute is possible. For example, suppose that a world-renowned artist is commissioned to paint an individual’s portrait. If the artist dies, the contract is discharged because there is no substitute for the artist. Second is a change of law making the promised performance illegal. For example, if A enters into a contract with B to sell B her home to be used for residential purposes, and subsequent to their agreement the property is zoned commercial, the contract will be discharged. The final circumstance is the destruction of the subject matter. If A enters into a contract with B to buy all the hay in B’s barn and the barn burns down with the hay in it before shipment takes place, the contract is discharged because performance is impossible.

Discharge By Commercial Impracticability

The courts have sought to enlarge the grounds for discharge of a contract by adding the concept of  commercial impracticability , defined as a situation in which performance is impracticable because of unreasonable expense, injury, or loss to one party. In effect, a situation that was not foreseeable, or the nonoccurrence of which was assumed at the time the contract was executed, in fact occurs, making performance of the contract unreasonably expensive or injurious to a party. For example, a plastics manufacturer becomes extremely short of raw materials because of a war and an embargo on oil coming from the Middle East. The manufacturer’s contracts with retailers for plastic goods will be discharged in most cases if the court finds that the manufacturer could not have anticipated the war and had no alternative source of materials costing about the same price.

commercial impracticability

Situation that makes performance of a contract unreasonably expensive, injurious, or costly to a party.

Contracts with the Government and the Sovereign Acts Doctrine

When a party’s performance is made illegal or impossible because of a new law, a performance contract is usually discharged, and damages are not awarded. But what happens when a party contracts with the government, and the government then promulgates a new law that makes its own performance impossible? If it no longer wishes to be bound by a contract, can the government discharge its obligations by changing the law to make performance illegal?

According to the sovereign acts doctrine, the government generally cannot be held liable for breach of contract due to legislative or executive acts. Because one Congress cannot bind a later Congress, the general rule is that subsequent acts of the government can discharge the government’s preexisting contractual obligations.

This doctrine has limits, however. If Congress passes legislation deliberately targeting its existing contractual obligation, the defense otherwise provided by

Linking Law and Business Management and Production

Quality is defined as the extent to which a product functions as intended. The measure of excellence for a product is ranked primarily by the purchaser on the basis of certain characteristics and features, but the managers must oversee production processes to ensure that quality standards are being met. Managers are continuing to realize that an improvement in the quality of products leads to greater productivity for the organization. By emphasizing greater quality, a firm will probably spend less time and money on repairing defective products. Also, manufacturing quality products reduces the chance of production mistakes and inefficient use of materials.

One method of providing greater assurance that an organization is producing quality products is with statistical quality control. This is a process by which a certain percentage of products for inspection is determined to ensure that organizational standards for quality are met. Organizations that place a strong emphasis on quality, possibly by implementing an effective statistical quality control strategy, are less likely to be faced with having their goods rejected under the perfect tender rule or facing litigation for a breach of contract over defective products. Thus, a serious and consistent emphasis on quality reaps many benefits for an organization.

Source: Adapted from S. Certo, Modern Management (Upper Saddle River, NJ: Prentice Hall, 2000), pp. 445, 447. Reproduced by permission.

the sovereign acts doctrine is unavailable. The government it not prevented from changing the law, but it must pay damages for its legislatively chosen branch. On the other hand, if a new law of general application indirectly affects a government contract, making the government’s performance impossible, the sovereign acts doctrine will protect the government in a subsequent suit for breach of contract.

The contract dispute in the following case arose out of the cancellation of a wedding reception due to a power failure. Is a power failure sufficient to invoke the doctrine of commercial impracticability?

 Case 10-3 Facto v. Pantagis

Superior Court of New Jersey, Appellate Division 915 A.2d 59 (2007)

Leo and Elizabeth Facto contracted with Snuffy Pantagis Enterprises, Inc., for the use of Pantagis Renaissance, a banquet hall in Scotch Plains, New Jersey, for a wedding reception in August 2002. The Factos paid the $10,578 price in advance. The contract excused Pantagis from performance “if it is prevented from doing so by an act of God (e.g., flood, power failure, etc.) or other unforeseen events or circumstances.” Soon after the reception began, there was a power failure. The lights and the air-conditioning shut off. The band hired for the reception refused to play without electricity to power their instruments, and the lack of lighting prevented the photographer and videographer from taking pictures. The temperature was in the 90s, the humidity was high, and the guests quickly became uncomfortable. Three hours later, after a fight between a guest and a Pantagis employee, the emergency lights began to fade, and the police evacuated the hall. The Factos filed a suit in a New Jersey state court against Pantagis, alleging breach of contract, among other things. The Factos sought to recover their prepayment, plus amounts paid to the band, the photographer, and the videographer. The court concluded that Pantagis did not breach the contract and dismissed the complaint. The Factos appealed to a state intermediate appellate court.

Justice Skillman

Even if a contract does not expressly provide that a party will be relieved of the duty to perform if an unforeseen condition arises that makes performance impracticable, a court may relieve him of that duty if performance has unexpectedly become impracticable as a result of a supervening event. In deciding whether a party should be relieved of the duty to perform a contract, a court must determine whether the existence of a specific thing is necessary for the performance of a duty and its destruction or deterioration makes performance impractical. A power failure is the kind of unexpected occurrence that may relieve a party of the duty to perform if the availability of electricity is essential for satisfactory performance.

The Pantagis Renaissance contract provided: “Snuffy’s will be excused from performance under this contract if it is prevented from doing so by an act of God (e.g., flood, power failure, etc.), or other unforeseen events or circumstances.” Thus, the contract specifically identified a “power failure” as one of the circumstances that would excuse the Pantagis Renaissance’s performance. We do not attribute any significance to the fact the clause refers to a power failure as an example of an “act of God.” This term has been construed to refer not just to natural events such as storms but to comprehend all misfortunes and accidents arising from inevitable necessity which human prudence could not foresee or present. Furthermore, the clause in the Pantagis Renaissance contract excuses performance not only for “acts of God” but also “other unforeseen events or circumstances.” Consequently, even if a power failure caused by circumstances other than a natural event were not considered to be an “act of God,” it still would constitute an unforeseen event or circumstance that would excuse performance.

The fact that a power failure is not absolutely unforeseeable during the hot summer months does not preclude relief from the obligation to perform. Absolute unforeseeability of a condition is not a prerequisite to the defense of impracticability. The party seeking to be relieved of the duty to perform only needs to show that the destruction, or deterioration of a specific thing necessary for the performance of the contract makes performance impracticable. In this case, the Pantagis Renaissance sought to eliminate any possible doubt that the availability of electricity was a specific thing necessary for the wedding reception by specifically referring to a “power failure” as an example of an “act of God” that would excuse performance.

It is also clear that the Pantagis Renaissance was “prevented from” substantial performance of the contract. The power failure began less than forty five minutes after the start of the reception and continued until after it was scheduled to end. The lack of electricity prevented the band from playing, impeded the taking of pictures by the photographer and videographer and made it difficult for guests to see inside the banquet hall. Most significantly, the shutdown of the air-conditioning system made it unbearably hot shortly after the power failure began. It is also undisputed that the power failure was an area-wide event that was beyond the Pantagis Renaissance’s control. These are precisely the kind of circumstances under which the parties agreed [in their contract] that the Pantagis Renaissance would be excused from performance.

Where one party to a contract is excused from performance as a result of an unforeseen event that makes performance impracticable, the other party is also generally excused from performance.

Therefore, the power failure that relieved the Pantagis Renaissance of the obligation to furnish plaintiffs with a wedding reception also relieved plaintiffs of the obligation to pay the contract price for the reception.

Nevertheless, since the Pantagis Renaissance partially performed the contract by starting the reception before the power failure, it is entitled to recover the value of the services it provided to plaintiffs. *

*  Facto v. Pantagis, Superior Court of New Jersey, Appellate Division 915 A.2d 59 (2007).

Reversed for Facto.

Remedies for a Breach of Contract

The fact that a court will enforce a contract does not mean that one party will automatically sue if the other breaches. Businesspeople need to consider several factors before they rush to file a lawsuit: (1) the likelihood of the suit’s succeeding; (2) whether they wish to maintain a business relationship with the breaching party; (3) the possibility of arbitrating the dispute through a third party, thus avoiding litigation; and (4) the cost of arbitration or litigation as opposed to the revenues to be gained from enforcing the contract.

Remedies for a breach of contract are generally classified according to whether the plaintiff requests monetary damages (“legal” remedies) or nonmonetary damages (equitable remedies). Remedies for breach set out by the CISG include: (1) avoidance or cancellation of contract, (2) right to remedy or cure, (3) setting of additional time or extension, (4) price/reductions, (5) money damages, and (6) specific performance.

Monetary Damages (“Legal” Remedies)

Monetary damages  (often referred to as exemplary damages) include compensatory, punitive, nominal, and liquidated damages.

monetary damages

Dollar sums awarded for a breach of contract; “legal” remedies.

Compensatory Damages

 The purpose of  compensatory damages  is to place the injured (nonbreaching) party to a contract in the position in which that party would have been in had the terms of the contract been performed. For example, if a firm contracted to buy 8,000 widgets at $10 apiece to be delivered by August 15, the buyer has a right to go out and buy the widgets from another source if they are not delivered by the contract date. Suppose the widgets bought from the other source cost $10.50 apiece. In that case, the buyer can sue for the 50-cent difference in price per unit plus court costs. If the buyer cannot obtain widgets anywhere else, it can sue for lost profits.

compensatory damages

Monetary damages awarded for a breach of contract that results in higher costs or lost profits for the injured party.

The courts have set out three standards that the plaintiff-buyer must meet in order to recoup lost profits:

1. The plaintiff-buyer must show that it was reasonably foreseen by the defendant-seller that if it did not deliver the promised goods, the buyer would have no alternative source and, thus, would lose profits.

2. The plaintiff-buyer must show the amount of the damages with reasonable certainty; the buyer cannot just speculate about what this amount is.

3. The plaintiff-buyer must show that it did everything possible to mitigate the damage—that is, it looked for other possible sources of the goods.

In the case below the court is careful to award damages “naturally and proximately caused by the breach.”

 Case 10-4 Hallmark Cards, Inc. v. Murley

United States Court of Appeals, Eighth Circuit 703 F.3d 456 (2013)

Janet Murley served as Hallmark Cards, Inc.’s, vice president of marketing. In 2002, Hallmark eliminated her position as part of a corporate restructuring. Murley and Hallmark entered into a separation agreement under which she agreed not to work in the greeting card industry for eighteen months, disclose or use any confidential information, or retain any business records relating to Hallmark. In exchange, Hallmark offered Murley a $735,000 severance payment. After the non-compete agreement (see  Chapter 9 ) expired, Murley accepted a consulting assignment with Recycled Paper Greetings (RPG) for $125,000. Murley disclosed confidential Hallmark information to RPG. On learning of the disclosure, Hallmark filed a suit in a federal district court against Murley, alleging breach of contract. A jury returned a verdict in Hallmark’s favor and awarded $860,000 in damages, consisting of the $735,000 severance payment and the $125,000 Murley received from RPG. Murley appealed.

With respect to $735,000, Murley contends Hallmark was not entitled to a return of its full payment under the parties’ separation agreement because Murley fulfilled several material terms of that agreement (e.g., the noncompete provision). Under the circumstances, we cannot characterize the jury’s reimbursement of Hallmark’s original payment under the separation agreement as grossly excessive or glaringly unwarranted by the evidence. Hallmark’s terms under the separation agreement clearly indicated its priority in preserving confidentiality. At trial, Hallmark presented ample evidence that Murley not only retained but disclosed Hallmark’s confidential materials to a competitor in violation of terms, and primary refund of its $735,000 is not against the weight of the evidence.

With respect to the remaining $125,000 of the jury award, Murley argues Hallmark can claim no entitlement to her compensation by RPG for consulting services unrelated to Hallmark. We agree. In an action for breach of contract, a plaintiff may recover the benefit of his or her bargain as well as damages naturally and proximately caused by the defendant at the time of the agreement. Moreover, the law cannot elevate the non-breaching party to a better position than she would have enjoyed had the contract been completed on both sides. By awarding Hallmark more than its $750,000 severance payment, the jury award placed Hallmark in a better position than it would find itself had Murley not breached the agreement. The jury’s award of the $125,000 payment by RPG was, therefore, improper.

The U.S. Court of Appeals for the Eighth Circuit vacated the award of damages but otherwise affirmed the judgement in Hallmark’s favor. The appellate court remanded the case to the lower court to reduce the award of damages to include only the amount of Hallmark’s severance payment.

Punitive Damages

 Damages in excess of compensatory damages that the court awards for the sole purpose of deterring the defendant and others from doing the same act again are known as  punitive damages . They are infrequently awarded in contract cases.

punitive damages

Monetary damages awarded in excess of compensatory damages for the sole purpose of deferring similar conduct in the future.

Nominal Damages

 Sometimes the court awards a very small sum (usually $1) in  nominal damages  to a party that is injured by a breach of contract but cannot show real damages. In these cases, the court generally enables the injured party to recover court costs, though not attorney’s fees.

nominal damages

Monetary damages of a very small amount (e.g., $1) awarded to a party that is injured by a breach of contract but cannot show real damages.

Liquidated Damages

 Liquidated damages  are usually set in a separate clause in the contract. The clause generally stipulates that the parties agree to pay so much a day for every day beyond a certain date that the contract is not completely performed. Liquidated damages clauses are frequently found in general contractors’ agreements with individuals, corporations, and state or local agencies in situations in which it is essential that a building project be completed on time. Such clauses help the contracting parties avoid going to court and seeking a judicial determination of damages—with all the attendant delays and expenses.

liquidated damages

Monetary damages for nonperformance that are stipulated in a clause in the contract.

The UCC (Sections 2-715[1] and 2A-504) permits parties to a sale or lease contract to establish in advance damages that will be paid upon a breach of contract. These liquidated damages will substitute for actual damages. The concept of liquidated damages is illustrated in Case 10-5.

 Case 10-5 Arrowhead School District No. 75, Park County, Montana v. James A. Klyap, Jr.

Supreme Court of Montana 79 P.3d 250 (2003)

Arrowhead School District No. 75 is located in Park County, south of Livingston, Montana, and consists of one school, Arrowhead School for the 1997–98 school year, the School employed about 11 full-time teachers and several part-time teachers. During that school year, the School employed Klyap as a new teacher instructing mathematics, language arts, and physical education for the sixth, seventh, and eighth grades. In addition, Klyap, through his own initiative, helped start a sports program and coached flag football, basketball, and volleyball.

The School offered Klyap a contract for the 1998–99 school year in June 1998, which he accepted. This contract provided for a $20,500 salary and included a liquidated damages clause. The clause calculated liquidated damages as a percentage of annual salary determined by the date of breach; a breach of contract after July 20, 1998, required payment of 20 percent of salary as damages. Klyap also signed a notice indicating that he accepted responsibility for familiarizing himself with the information in the teacher’s handbook that also included the liquidated damages clause.

On August 12, Klyap informed the School that he would not be returning for the 1998–99 school year even though classes were scheduled to start on August 26. The School then sought to enforce the liquidated damages clause in Klyap’s teaching contract for the stipulated amount of $4,100.

After Klyap resigned, the School attempted to find another teacher to take Klyap’s place. Although at the time Klyap was offered his contract the School had 80 potential applicants, only two viable applicants remained available. Right before classes started, the School was able to hire one of those applicants, a less experienced teacher, at a salary of $19,500.

The District Court determined that the clause was enforceable because the damages suffered by the School were impractical and extremely difficult to fix. Specifically, the court found that the School suffered damages because it had to spend additional time setting up an interview committee, conducting interviews, training the new, less experienced teacher, and reorganizing the sports program. The district court also found that such clauses are commonly used in Montana and that the School had routinely and equitably enforced the clause against other teachers. After concluding that the School took appropriate steps to mitigate its damages, the court awarded judgment in favor of the School in the amount of $4,100. Klyap appealed.

Justice Nelson

The fundamental tenet of modern contract law is freedom of contract; parties are free to agree mutually to terms governing their private conduct as long as those terms do not conflict with public laws. This tenet presumes that parties are in the best position to make decisions in their own interest. Normally, in the course of contract interpretation by a court, the court simply gives effect to the agreement between the parties in order to enforce the private law of the contract. When one party breaches the contract, judicial enforcement of the contract ensures [that] the nonbreaching party receives expectancy damages, compensation equal to what that party would receive if the contract were performed. By only awarding expectancy damages rather than additional damages intended to punish the breaching party for failure to perform the contract, court enforcement of private contracts supports the theory of efficient breach. In other words, if it is more efficient for a party to breach a contract and pay expectancy damages in order to enter a superior contract, courts will not interfere by requiring the breaching party to pay more than was due under their contract.

Liquidated damages are, in theory, an extension of these principles. Rather than wait until the occurrence of breach, the parties to a contract are free to agree in advance on a specific damage amount to be paid upon breach. This amount is intended to predetermine expectancy damages. Ideally, this predetermination is intended to make the agreement between the parties more efficient. Rather than requiring a post-breach inquiry into damages between the parties, the breaching party simply pays the nonbreaching party the stipulated amount. Further, in this way, liquidated damages clauses allow parties to estimate damages that are impractical or difficult to prove, as courts cannot enforce expectancy damages without sufficient proof.

After reviewing the facts of this case, we hold that while the 20% liquidated damages clause is definitely harsher than most, it is still within Klyap’s reasonable expectations and is not unduly oppressive. First, as the School pointed out during testimony, at such a small school teachers are chosen in part depending on how their skills complement those of the other teachers. Therefore, finding someone who would provide services equivalent to Klyap at such a late date would be virtually impossible. [The anticipation of this] difficulty was borne out when only two applicants remained available and the School hired a teacher who was less experienced than Klyap. As a teacher, especially one with experience teaching at that very School, Klyap would have to be aware of the problem finding equivalent services would pose.

Second, besides the loss of equivalent services, the School lost time for preparation for other activities in order to attempt to find equivalent services. As the District Court noted, the School had to spend additional time setting up an interview committee and conducting interviews. Further, the new teacher missed all the staff development training earlier that year so individual training was required. And finally, because Klyap was essential to the sports program, the School had to spend additional time reorganizing the sports program as one sport had to be eliminated with Klyap’s loss. These activities all took away from the other school and administrative duties that had been scheduled for that time.

Finally, although the School testified it had an intent to secure performance and avoid the above damages by reason of the clause, such an intent does not turn a liquidated damages clause into a penalty unless the amount is unreasonably large and therefore not within reasonable expectations.

Therefore, because as a teacher Klyap would know teachers are typically employed for an entire school year and would know how difficult it is to replace equivalent services at such a small rural school, it was within Klyap’s reasonable expectations to agree to a contract with a 20% of salary liquidated damages provision for a departure so close to the start of the school year.

Accordingly, we hold the District Court correctly determined that the liquidated damages provision was enforceable. *

Arrowhead School District No. 75, Park County, Montana v. James A. Klyap, Jr., Supreme Court of Montana 79 P.3d 250 (2003).

Affirmed for the School.

Critical Thinking About The Law

This case highlights the court’s flexibility. Ordinarily, when a person signs a contract with someone else, the courts will hold the parties to the terms of the agreement. In this case, there was no dispute, for instance, about the fact that a 20-percent-of-salary liquidated damages provision was in the contract between the plaintiff and the school district. Yet, as the reasoning in the case made clear, there are certain ground rules that must be satisfied before the court enforces the provisions of a contract.

1. What evidence would Klyap have had to possess for him to have prevailed in this case?

Clue: Follow the court’s reasoning step by step to see what the judge checked before agreeing to enforce the contract.

2. Why might the court have not enforced the contract provision in question had the liquidated damages provision been 40 percent, rather than 20 percent?

Clue: Is it likely that Klyap would have agreed freely to such a provision?

Equitable Remedies

When dollar damages are inadequate or impracticable as a remedy, the injured party may turn to nondollar or  equitable remedies . Equitable remedies include rescission, reformation, specific performance, and injunction.

equitable remedies

Nonmonetary damages awarded for breach of contract when monetary damages would be inadequate or impracticable.

Rescission

Rescission  is defined as the canceling of a contract. Plaintiffs who wish to be put back in the position they were in before entering into the contract often seek rescission. In cases of fraud, duress, mistake, or undue influence (discussed in  Chapter 9 ), the courts will generally award rescission.

rescission

Cancellation of a contract.

Reformation

 The correction of terms in an agreement so that they reflect the true understanding of the parties is known as  reformation . For example, if A enters into an agreement to sell B 10,000 widgets at $.50 per unit when the figure should have been $5.50 per unit, A may petition the court for reformation of the contract.

reformation

Correction of terms in an agreement so that they reflect the true understanding of the parties.

Specific Performance

 A court order compelling a party to perform in such a way as to meet the terms of the contract calls for  specific performance . Courts are reluctant to order specific performance unless (1) a unique object is the subject matter of the contract (e.g., an antique or artwork) or (2) real estate is involved. To obtain a specific performance order, the plaintiff must generally show that dollar damages (damages “at law”) are inadequate to compensate for the defendant’s breach of contract. Even then, a court will often refuse to grant the order if it is incapable of supervising performance or is unwilling to do so. For these reasons, specific performance in contract cases is infrequently granted.

specific performance

A court order compelling a party to perform in such a way as to meet the terms of the contract.

Injunctions

 Injunctions  are temporary (e.g., 30 days) or permanent orders of the court preventing a party to a contract from doing something. The plaintiff must show the court that dollar damages are inadequate and that irreparable harm will be done if the injunction is not granted. For instance, if an opera singer contracts with an opera company to sing exclusively for the company and then later decides to sing for other opera companies, the court may grant an injunction to prevent her from singing for the other companies. Injunctions, like specific performance, are seldom granted in contract law cases.

injunction

Temporary or permanent court order preventing a party to a contract from doing something.

Remedies for Breach of a Sales Contract (Goods)

Remedies for the Seller

 Under the UCC, remedies for the seller resulting from the buyer’s breach include the following:

· The right to recover the purchase price if the seller is unable to sell or dispose of goods (Section 2-709[1])

· The right to recover damages if the buyer repudiates a contract or refuses to accept the goods (Section 2-708[1])

Remedies for the Buyer

 If a seller breaches a sales contract by failing to deliver conforming goods or repudiating the contract prior to delivery, the buyer has a choice of remedies under the UCC:

· The right to obtain specific performance when the goods are unique or remedy at law is inadequate (Section 2-716[1])

· The right to recover damages after cancellation of the contract

· The right to reject the goods if the goods or tender fail to conform to the contract, or the right to keep some goods and reject the others

· The right to recover damages for accepted goods if the seller is notified of the breach within a reasonable time (Section 2-714[11])

· The right to revoke an acceptance of goods under certain circumstance (Section 2-608[1], [2])

In the case that follows, the issue is whether two years after the sale of goods is a reasonable period of time in which a buyer may discover a defect in goods and notify the seller.

 Case 10-6 Fitl v. Strek

Supreme Court of Nebraska 690 N.W.2d 625 (2005)

In September 1995, James Fitl attended a sports-card show in San Francisco, California, where he met Mark Strek, an exhibitor at the show, who was doing business as Star Cards of San Francisco. Later, on Strek’s representation that a certain 1952 Mickey Mantle Topps baseball card was in near-mint condition, Fitl bought the card from Strek for $17,750. Strek delivered it to Fitl in Omaha, Nebraska, where Fitl placed it in a safe-deposit box. In May 1997, Fitl sent the card to Professional Sports Authenticators (PSA), a sports-card grading service. PSA told Fitl that the card was ungradable because it had been discolored and doctored. Fitl complained to Strek, who replied that Fitl should have initiated a return of the card within “a typical grade period for the unconditional return of a card . . . 7 days to 1 month” of its receipt. In August, Fitl sent the card to ASA Accugrade, Inc. (SAS), another grading service, for a second opinion on its value. ASA also concluded that the card had been refinished and trimmed. Fitl filed a suit in a Nebraska state court against Strek, seeking damages. The court awarded Fitl $17,750, plus his court costs. Strek appealed to the Nebraska Supreme Court.

Justice Wright

Strek claims that the lower court erred in determining that notification of the defective condition of the baseball card 2 years after the date of purchase was timely pursuant to [UCC] 2-607(3)(a).

The [trial] court found that Fitl had notified Strek within a reasonable time after discovery of the breach. Therefore, our review is whether the [trial] court’s finding as to the reasonableness of the notice was clearly erroneous.

Section 2-607(3)(a) states, “Where a tender has been accepted the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy.” [Under UCC1-204(2)] “[w]hat is a reasonable time for taking any action depends on the nature, purpose, and circumstances of such action.”

The notice requirement set forth in Section 2-607(3)(a) serves three purposes. The most important one is to enable the seller to make efforts to cure the breach by making adjustments or replacements in order to minimize the buyer’s damages and the seller’s liability. A second policy is to provide the seller a reasonable opportunity to learn the facts so that he may adequately prepare for negotiation and defend himself in a suit. A third policy is the same as the policy behind statutes of limitation: to provide a seller with a terminal point in time for liability.

[A] party is justified in relying upon a representation made to the party as a positive statement of fact when an investigation would be required to ascertain its falsity. In order for Fitl to have determined that the baseball card had been altered, he would have been required to conduct an investigation. We find that he was not required to do so. Once Fitl learned that the baseball card had been altered, he gave notice to Strek.

One of the most important policies behind the notice requirement is to allow the seller to cure the breach by making adjustments or replacements to minimize the buyer’s damages and the seller’s liability. However, even if Fitl had learned immediately upon taking possession of the baseball card that it was not authentic and had notified Strek at that time, there is no evidence that Strek could have made any adjustment or taken any action that would have minimized his liability. In its altered condition, the baseball card was worthless.

Earlier notification would not have helped Strek prepare for negotiation or defend himself in a suit because the damage to Fitl could not be repaired. Thus, the policies behind the notice requirement, to allow the seller to correct a defect, to prepare for negotiation and litigation, and to protect against stale claims at a time beyond which an investigation can be completed, were not unfairly prejudiced by the lack of an earlier notice to Strek. Any problem Strek may have had with the party from whom he obtained the baseball card was a separate matter from his transaction with Fitl, and an investigation into the source of the altered card would not have minimized Fitl’s damages. *

Fitl v. Strek, Supreme Court of Nebraska 690 N.W.2d 625 (2005).

Affirmed in favor of Fitl.

Applying the law to the facts . .

Kallie operates a boutique and enters into a contract with JJ Scarves for the purchase of 25 print scarves that she plans to sell at her boutique. If the company fails to deliver the scarves at the agreed-upon date, and two weeks later sends her a letter saying they are sorry but they cannot fulfill the terms of the contract, what would her damages be? What if the opposite situation occurred and Kallie refused delivery of the scarves without even looking at them, saying that she was sorry, but her customers just didn’t seem to purchase scarves, so she just couldn’t accept the order? What would the company’s damages be? In each situation, what would the nonbreaching party have to do to ensure they would be able to recover damages?

E-Contracts

In  Chapter 9 , and in this chapter, we have examined the traditional principles governing contracts for the sale of real and personal property, as well as the sale and lease of goods as defined by the UCC. E-contracts are now an everyday part of a cyberspace era. Although many of the traditional contract principles apply to contracts entered into online, they should include these minimum provisions:

· Remedies that are available to the buyer if any of the goods contracted for are defective.

· A statement of the seller’s referral policy.

· A statement of how the goods are to be paid for.

· A forum selection clause, which indicates the location and/or forum where a dispute will be settled should one arise.

· A disclaimer-of-liability provision by the seller for certain uses of a good sold.

· The manner in which an offer can be accepted (e.g., by “click on”). Similarly, an acceptance may be made under traditional principles or by the provisions of Article 2 of the UCC (previously discussed in  Chapter 9 ).

· Click-on terms that indicate agreement to the terms outlined in an offer.

· Browse-wrap terms that are enforceable (or binding) without the offeree’s active consent, as with click-on terms.

E-Signatures

In the year 2000, Congress enacted a law entitled the Electronic Signatures in Global and National Commerce Act (E-SIGN), 1  allowing consumers and businesses to sign contracts online and making e-signatures just as binding as ones in ink. Such contracts as those for bank loans and brokerage accounts may be entered into over the Internet 24 hours a day. This prevents delays that arise from the need for paper contracts to be written, mailed, signed, and then returned. With e-signatures, the cost of drawing up paperwork, mailing it, and storing agreements is eliminated in favor of electronic retention.

1  15 U.S.C. § 700 et seq.

The law went into effect on October 1, 2000, but questions were raised as to whether people would be able to forge electronic signatures on everything from online purchases to credit card applications. The law does not specify what constitutes a digital signature. Possible requirements include (1) a password that must be entered into a form on a Web page, with the website having to confirm that it belongs to a certain person; or (2) the use of hardware such as thumbprint scanning devices that plug into personal computers and transmit the thumbprint over the Internet to a business, which would keep it on file for authentication purposes.

Laws governing e-signatures differ from state to state. Some states, such as California, prohibit documents from being signed with e-signatures, whereas others do not. In 1999, the National Conference of Commissioners on Uniform State Law and the American Law Institute set out the Uniform Electronic Transcription Act (UETA), 2  which sought to bring uniformity to this area of the law. The UETA, which has been adopted in whole or in part by more than 40 states, indicates that a signature may not be denied legal enforceability solely because of its electronic form.

UETA §§ 102(8) AND (25).

The Uniform Computer Information Transaction Act

Prior to World War II, the common law of contracts was sufficient to handle most of the transactions in a mainly agricultural society. As the distribution and manufacturing of goods came to dominate commerce, the UCC was drafted by the National Conference of Commissioners on Uniform State Law, a consortium of lawyers, judges, businesspeople, and legal scholars. Individual states gradually adopted all or part of the UCC. For purposes of the law of contracts, Article 2 (Sales) and 2A (Leases) are highly significant, as shown in this and the preceding chapter.

As the world of computers and electronic commerce developed in the 1980s and 1990s, the common law of contracts and the UCC did not provide adequate guidelines, because the cyberspace economy is largely based on electronic contracts and the licensing of information. Questions developed as to how to enforce e-contracts, as well as what consumer protection should be provided. Therefore, in July 1999, the National Conference of Commissioners issued the Uniform Computer Information Transaction Act (UCITA).

Scope of the UCITA

 It should be emphasized that the UCITA deals only with information that is electronically disseminated. 3  Under this act, a computer information transaction is an agreement to create, transfer, or license computer information. It does not cover licenses of information for traditional copyrighted materials such as books or magazines.

UCITA § 102.

Many of the provisions of the UCITA are similar to Article 2 of the UCC. For example, a licensing agreement may be interpreted by the courts using the express terms of the agreement, as well as course of performance and usage. There are, however, several differences regarding licensing agreements under the UCITA:

· The party who sells the right to use a piece of software (licensor) can control the right of use by the buyer (licensee). In a mass market this is extremely important. An exclusive license means that for its duration, the licensor will not grant any other person rights to the same information. This is a matter of serious negotiation both nationally and internationally, with firms as well as with governments.

· If a contract requires a fee of more than $5,000, it is enforceable only if it is authenticated. To authenticate means to sign a contract or execute an electronic symbol, sound, or message attached to or linked with the record. Authentication may be attributed to a party’s agent. Authentication may be proven if a party uses information or if he or she engages in operations that authenticate the record.

The Business Community: Criticisms of the UCITA

 The UCITA would benefit software makers because it favors click-wrap agreements, and there would be uniformity to such agreements. This still leaves the question of enforcement of such agreements when they are between other business entities or governments.

Debate exists among those who want uniformity and critics who believe software makers would use uniformity to argue that they are not responsible for defect in the software they sell. For example, who would be held responsible for a software virus? Will consumers read the fine-print disclaimers? Some would argue that problems associated with e-contracts are similar to those encountered in dealing with contracts for real property, goods, and personal property.

Global Dimensions of Contract and Sales Law

As more nations in Europe, Latin America, and Asia have shifted toward market- oriented economies, international trade has increased, and, along with it, contracts implementing transactions between foreign entities (either governments or private companies) and U.S. companies have increased. International and regional treaties lowering or eliminating tariffs have hastened the trend to free trade. (See  Chapter 8  for a detailed description of recent trade pacts.)

Given this accelerating tendency toward free trade, the United Nations Commission on International Trade Law drafted the Convention on Contracts for the International Sale of Goods 4  to provide uniformity in international transactions. The CISG covers all contracts for the sale of goods in countries that have ratified it. An estimated two-thirds of all international trade is conducted among

15 U.S.C. App. (1997).

Scope

Battle of the Forms

Warranties

Statute of Fraud

Common Law

1. Provision of services

2. Contracts for sale of land or securities

3. Loan agreements

Mirror image rule

Any express warranties made

1. Transfer of real estate

2. Contract cannot be performed within one year

3. Prenuptial agreement

4. Agreement to pay debt of another

UCITA

Computer information (including software, computer games, and online access)

Contract even if acceptance materially alters the offer

1. Warranty of noninterference and noninfringement

2. Implied warranties of merchantability of computer program, informational content, fitness for licensee’s particular purpose and fitness for system integration

Contract for $5,000 or more

CISG

Sale of goods by merchants in merchants in different countries unless parties opt out

In practice, mirror image rule

1. Implied warranties of merchantability and fitness for a particular use

2. Any express warranties made

None

UCC

Sale of goods

If both are merchants additional terms are incorporated; if not, minor rules apply

Implies warranties for a particular purpose

Sale of 500 or more

the 70 nations that were signatories to the CISG as of April 2009. 5  Parties to a contract can choose to adhere to all or part of the CISG, or they may select other laws to govern their transactions.

See N. Karambelas, “Convention on International Sale of Goods: An International Law as Domestic Law,” Washington Lawyer, April 2009, p. 27; R. Schauffer et al., International Business Law (9th edition, 2015) pp 90–92.

On January 1, 1988, the CISG was approved as a treaty and incorporated into U.S. federal law. As a treaty, it overrides conflicting state laws dealing with contracts. Each of the 50 states is now examining conflicts between the Uniform Commercial Code (as adopted in the state) and the CISG, which supersedes it.

Some of the differences between the CISG and the UCC are highly significant. For example, under the CISG, a contract is formed when the seller (offeror) receives the acceptance from the offeree, whereas under the UCC, a contract is formed when the acceptance is mailed or otherwise transmitted. To take another example, under the CISG, a sales contract of any amount is enforceable if it is oral, whereas the UCC requires a written contract for a sale of goods of $500 or more.

Present and future business managers must become knowledgeable about these and other differences between the UCC and the CISG if they are to avoid costly and time-consuming litigation as international transactions in goods increase. You might want to review  Chapter 8  at this point to refresh your memory about the methods and details of international transactions.

Summary

Contracts are discharged by performance, mutual agreement, conditions precedent and subsequent, and sometimes through impossibility of performance. Remedies for breach of contract include dollar remedies such as lost profits, punitive, nominal, and liquidated damages. Often, when dollar damages are insufficient, the court will rely on equitable remedies (nondollar damages) such as rescission, restitution, specific performance, and reformation.

E-contracts require some minimum provisions that may differ slightly from common-law principles. With the help of statutory and case law, e-contracts are now becoming part of everyday business transactions. Contract laws became more uniform with the ratification by many nations of the Convention on Contracts for the International Sale of Goods. This has wide implications for the conduct of international transactions.

Review Questions

1. 10-1 List the criteria used by the courts in determining lost profits.

2. 10-2 Why do courts rely on equitable remedies? Explain.

3. 10-3 What is meant by “punitive damages?” Explain.

4. 10-4 Explain what is meant by the “reformation” of a contract.

5. 10-5 Why should a party who has not breached a contract be required to mitigate the damages of the breaching party?

6. 10-6 What are some provisions that should be included in e-contracts?

Review Problems

1. 10-7  In 2003, Karen Pearson and Steve and Tara Carlson agreed to buy a 2004 Dynasty recreation vehicle (RV) from DeMartini’s RV Sales in Grass Valley, California. On September 29, Pearson, the Carlsons, and DeMartini’s signed a contract providing that “seller agrees to deliver the vehicle to you on the date this contract is signed.” The buyers made a payment of $145,000 on the total price of $356,416 the next day, when they also signed a form acknowledging that the RV had been inspected and accepted. They agreed to return later to have the RV transported out of the state for delivery (to avoid paying state sales tax on the purchase). On October 7, Steve Carlson returned to DeMartini’s to ride with the seller’s driver to Nevada to consummate the out-of-state delivery. When the RV developed problems, Pearson and Carlson filed a suit in a federal district court against the RV’s manufacturer, Monaco Coach Corp., alleging, in part, breach of warranty under state law. The applicable statute is expressly limited to goods sold in Nevada. How does the Uniform Commercial Code (UCC) define a sale? What does the UCC provide with respect to the passage of title? How do these provisions apply here? Discuss.

2. 10-8  Internet Archive (IA) is devoted to preserving a record of resources on the Internet for future generations. IA uses the “Wayback Machine” to automatically browse websites and reproduce their contents in an archive. IA does not ask the owners’ permission before copying the material but will remove it on request. Suzanne Shell, a resident of Colorado, owns a website that is dedicated to providing information to individuals accused of child abuse or neglect. The site warns, “IF YOU COPY OR DISTRIBUTE ANYTHING ON THIS SITE YOU ARE ENTERING INTO A CONTRACT.” The terms, which can be accessed only by clicking on a link, include, among other charges, a fee of $5,000 for each page copied “in advance of printing.” Neither the warning nor the terms require a user to indicate assent. When Shell discovered that the Wayback Machine had copied the contents of her site—approximately eighty-seven times between May 1999 and October 2004—she asked IA to remove the copies from its archive and pay her $100,000. IA removed the copies and filed a suit in a federal district court against Shell, who responded, in part, with a counterclaim for breach of contract. IA filed a motion to dismiss this claim. Did IA contract with Shell? Explain. Internet Archive v. Shell, 505 F. Supp. 2d 755 (D. Colo. 2007).

3. 10-9  McDonald has contracted to purchase 500 pairs of shoes from Vetter. Vetter manufactures the shows and tenders delivery to McDonald. McDonald accepts the shipment. Later, on inspection, McDonald discovers that 10 pairs of shoes are poorly made and will have to be sold to customers as seconds. If McDonald decides to keep all 500 pairs of shoes, what remedies are available to her? Explain.

4. 10-10  Kirk has contracted to deliver to Doolittle 1,000 cases of Wonder brand beans on or before October 1. Doolittle is to specify means of transportation 20 days prior to the date of shipment. Payment for the beans is to be made by Doolittle on tender of delivery. On September 10, Kirk prepares the 1,000 cases for shipment. Kirk asks Doolittle how he would like the goods to be shipped, but Doolittle does not respond. On September 21, Kirk, in writing, demands assurance that Doolittle will be able to pay on tender of the beans, and Kirk asks that the money be placed in escrow prior to October 1 in a bank in Doolittle’s city named by Kirk. Doolittle does not respond to any of Kirk’s requests, but on October 5 he wants to file suit against Kirk for breach of contract for failure to deliver the beans as agreed. Explain Kirk’s liability for failure to tender delivery on October 1.

5. 10-11  Julius W. Erving (Dr. J) entered into a four-year contract to play exclusively for the Virginia Squires of the American Basketball Association. After one year, he left the Squires to play for the Atlanta Hawks of the National Basketball Association. The contract signed with the Squires provided that the team could have his contract set aside for fraud. The Squires counterclaimed and asked for arbitration. Who won? Explain.

6. 10-12  TWA had a sale/leaseback agreement with Connecticut National Bank. Because of the Gulf War, air travel was decreased and TWA was having trouble making its payments. Discuss the extent to which TWA could use commercial impracticability or impossibility as a defense for nonpayment.

Case Problems

1. 10-13  After submitting the high bid at a foreclosure sale, David Simard entered into a contract to purchase real property in Maryland for $192,000. Simard defaulted (failed to pay) on the contract. A state court ordered the property to be resold at Simard’s expense, as required by state law. The property was to be resold for $163,000, but the second purchaser also defaulted on his contract. The court then ordered a second resale, resulting in a final price of $130,000. Assuming that Simard is liable for consequential damages, what is the extent of the liability? Is he liable for losses and expenses related to the first resale? If so, is he also liable for losses and expenses related to the second resale? Why or why not? Burson v. Simard, 35 A.3d 1154 (Md. 2012).

2. 10-14  Cuesport Properties, LLC, sold a condominium in Anne Arundel County, Maryland, to Critical Developments, LLC. As a part of the sale, Cuesport agreed to build a wall between Critical Development’s unit and an adjacent unit within thirty days of closing. If Cuesport failed to do so, it was to pay $126 per day until completion. This was an estimate of the amount of rent that Critical Developments would lose until the wall was finished and the unit could be rented. Actual damages were otherwise difficult to estimate at the time of the contract. The wall was built on time, but without a county building code. Critical Developments did not modify the wall to comply with the code until 260 days after the date of the contract deadline for completion of the wall. Does Cuesport have to pay Critical Developments $126 for each of the 260 days? Explain. Cuesport Properties, LLC v. Critical Developments, LLC, 209 Md. App. 607, 61 A.3d 91 (2013).

3. 10-15  The Northeast Independent School District in Bexar County, Texas, hired STR Constructors, Ltd., to renovate a middle school. STR subcontracted the tile work in the school’s kitchen to Newman Tile, Inc. (NTI). The project had already fallen behind schedule. As a result, STR allowed other workers to walk over and damage the newly installed tile before it had cured, forcing NTI to constantly redo its work. Despite NTI’s requests for payment, STR remitted only half the amount due under their contract. When the school district refused to accept the kitchen, including the tile work, STR told NTI to quickly make the repairs. A week later, STR terminated their contract. Did STR breach the contract with NTI? Explain. STR Constructors, Ltd. v. Newman Tile, Inc., S.W.3d, 2013 WI, 632969 (Tex. App.–El Paso 2013).

4. 10-16  United Concrete purchased concrete from Red-D-Mix and later claimed that the concrete was defective because of issues with bleed water. Bleed water is excess water that seeps out of concrete after it has been poured; it rests on the surface and can weaken the concrete, leading to premature degeneration. United Concrete then sued Red-D-Mix for fraudulent representation under Wisconsin law. United Concrete claimed that a Red-D-Mix salesperson had assured United Concrete that the bleed water issue had been resolved. Red-D-Mix asserted in its defense that its salesperson’s statement was mere puffery and therefore not actionable.

Were the statements by the Red-D-Mix salesperson puffery? Why or why not? Does it matter whether the Red-D-Mix salesperson had any reasonable basis for making the statements? How could United Concrete have avoided this lawsuit? United Concrete & Construction, Inc. v. Red-D-Mix Concrete, 836 N.W.2d 807 (Wis. 2013).

5. 10-17  William West, an engineer, worked for Bechtel Corporation, an organization of about 160 engineering and construction companies, which is headquartered in San Francisco, California, and operates worldwide. Except for a two-month period in 1985, Bechtel employed West on long-term assignments or short-term projects for 30 years. In October 1997, West was offered a position on a project with Saudi Arabian Bechtel Co. (SABCO), which West understood would be for two years. In November, however, West was terminated for what he believed was his “age and lack of display of energy.” After his return to California, West received numerous offers from Bechtel for work that suited his abilities and met his salary expectations, but he did not accept any of them and did not look for other work. Three months later, he filed a suit in a California state court against Bechtel, alleging in part breach of contract and seeking the salary he would have earned during the two years with SABCO. Bechtel responded in part that, even if there had been a breach, West had failed to mitigate his damages. Is Bechtel correct? West v. Bechtel Corp., 117 Cal. Rptr. 2d 647 (2002).

Thinking Critically about Relevant Legal Issues

Judges should start offering punitive awards in breach-of-contract cases. Punitive damages are awarded for the sole purpose of deterring the defendant and others from doing the same act again. Our courtrooms are flooded with enough cases. Businesses know that they can get away with breaching their contracts. If we start imposing punitive damages, however, these businesses will alter their behavior.

This change would specifically affect those businesses that make it a practice to breach a contract whenever necessary. People are losing faith in the security of a contract. A survey of 100 first-year business students suggested that contracts are little respected and rarely followed in business.

1. What is the conclusion offered in this argument, and the reasons supporting the conclusion? Return to  Chapter 1  of this text.

2. The author cites a survey of 100 first-year business students who suggested that contracts are “little respected and rarely followed in business.” Do you see any problems with this evidence?

3. What additional information do you need to evaluate this argument?

4. What arguments could you make that are the opposite of those made by the author of this essay? Return to  Chapter 1 .

Assignment On The Internet

This chapter briefly introduces the UCITA as a means of regulating the increasing volume of e-commerce and electronic contracts. Not everyone, however, is in favor of the UCITA. Using the Internet, search for articles and opinions that present multiple perspectives about how the UCITA influences business operations.

You can begin by visiting the Americans for Fair Electronic Commerce Transactions (AFECT) site (www.ucita.com). What arguments does it present against UCITA? Then visit http://www.repository .law.indiana.edu/cgi/viewcontent.cgi?article =1251&context=fclj to read an article containing arguments in support of UCITA.

Now draft a brief response to what you have read. Would you support or oppose wider enactment of UCITA? Why? Would you recommend that any changes be made if your state was considering adopting parts of UCITA? What would those changes be?

On The Internet

1. www.law.cornell.edu/ucc/2/overview.html This site contains the part of the Uniform Commercial Code relevant to contracts and sales.

2. www.lectlaw.com/files/bul08.htm This site provides more information on nonperformance and breach of contract.

3. www.cisg.law.pace.edu/cisg/text/treaty.html Here you can find the United Nations Convention on Contracts for the International Sale of Goods.

4. http://www.uniformlaws.org/ Go to this site and do a search for Uniform Electronic Transactions Act to find out more about this uniform law.

For Future Reading

1. DiMatteo, Larry. “A Theory of Efficient Penalty: Eliminating the Law of Liquidated Damages,” American Business Law Journal 38 (2001): 633.

2. Eagan, William. “The Westinghouse Uranium Contracts.” American Business Law Journal 18 (1980): 281.

3. Karambelas, Nicholas. “United Nations Convention on International Sale of Goods.” Washington Lawyer (April 2009): 261–35.

4. Pryor, Jeremy. “Lost Profit or Lost Chance: Reconsidering the Measure of Recovery for Lost Profits in Breach of Contract Actions.” University Law Review 19 (2006–2007): 561–80.