Studying is key is studying.

Poop Man Bob · December 17, 2002

PROPERTY OUTLINE

I. Theories of Property

A. Bentham

1. Property is a basis of expectation [of deriving certain advantages from thing we are said to possess]

a) Expectation is work of law

(1) Without law, no expectation that what is yours will remain yours ¡_ therefore, no ¡®natural¡¯ property

B. Locke

1. Labor theory of property

a) Only when I put work into something is it then property

C. Hardin

1. ¡°Tragedy of the Commons¡±

a) If property is communally owned, each individual will seek to maximize their benefits, thus eventually destroying the property

(1) Ex: pasture capable of carrying 120 cattle (10 families x 12 ea.) ¡_ each family will add more cattle, since benefit is greater than cost.

B) Solutions?

(1) Privatization

(2) Auction off right to use

(3) Create disincentives to use (regulation)

D. Posner

1. Property is that which has value.

a) According to the specific owner (illegal drugs)

(1) Law not necessary criteria for recognizing property

2. Goal is to create efficiency

a) Three criteria of an efficient property system

(1) Universality ¨C all resources are or can be owned

(2) Exclusivity ¨C some basis to exclude others from the use of your property

(3) Transferability ¨C able to be transferred from less productive to more productive use

(a) Often how much someone wants something, as opposed to most efficient use. Ex: use of field as nature reserve rather than farm

II. Limitations on Property

A. Three elements are never absolute

1. State v. Shack ¨C Reps. of govt. agencies can enter private (real) property to do their jobs (aiding migrant farm workers). Owner cannot deny entry based on trespass.

a) Here, exclusivity of property weighed against best interest of others

2. Intel v. Hamidi ¨C Yet to be completely decided. Private entity can deny others access to their personal property (chattels), despite open nature (e-mail system).

III. Possession and Property Rights

A. Finding (and owning?)

1. In order to possess unowned (abandoned) property, the finder must:

a) Have physical control of the property (an actual taking); and

B) Have an intent to assume dominion (control)

(1) ¡°Actual¡± physical control of property is circumstantial. Commencement of salvage operations sometimes sufficient.

(a) Policy? Safety ¨C preventing numerous parties from trying to touch and have ¡°physical control¡± over unowned property.

(B) Economic - by giving the property to those who can actually get to it, it becomes marketable sooner.

2. Finder has rights to property superior to everyone but the true owner.

a) In general, prior possessor has rights over next possessor.

3. Lost vs. Mislaid

a) If property is lost (not intentionally deposited by owner), likely to be awarded to finder.

B) If property is mislaid (intentionally deposited by owner, then forgotten), likely to be awarded to landowner.

(1) Problem: implies that location of lost property helps determine lost v. mislaid. If on floor, then lost? If on table, then mislaid?

4. Private vs. Public Land

a) If found on private land, likely to be awarded to landowner.

(1) Public part of a store is sufficiently public.

B) Smith¡¯s Party ¨C If someone holds a party in a private home, how ¡°open¡± does the invitation need to be before it becomes public?

B. Stolen Property

1. Thief cannot pass good title. But what if there is a bona fide purchaser?

2. Two methods of handling:

a) Adverse possession rule: to take title, use of the property must be:

(a) hostile (asserted against all other claims)

(B) actual (real & substantial),

(d) exclusive (there cannot be a sharing of ownership; however, allowing others to use the land periodically does not establish lack of exclusivity)

(e) continuous ¡_ display of the property for the statutory period.

(2) Almost always creates an unmarketable title b/c of chance that previous owner will attempt to assert title (high level of uncertainty).

(3) What constitutes adverse possession depends on the nature of the land

(a) Circumstantial, just like what constitutes possession in general

(4) Exceptions to adverse possession statute of limitations starting:

(a) Mental incompetence

(B) Minor

(5) Problem: how to do this with personal property ¨C ¡°open¡± possession is hard to distinguish ¡_ this leads to the discovery rule:

B) Discovery rule: for the purchaser to take title, the statutory period begins running if the original owner does not make due diligence to find the property.

(1) If uses due diligence and doesn¡¯t find, statute of lim. never starts to run.

(2) If doesn¡¯t use due diligence, statute of lim. begins to run immediately.

(3) For both: if transferred from possessor to new possessor, statute of lim. does not restart

IV. Private Interests in Land

A. Freehold Estates

1. Fee Simple Absolute (aka fee simple)

a) An estate of indefinite or potentially infinite duration

B) Closest thing to absolute ownership in Anglo-American law

(1) ¡°And his heirs¡± no longer required language ¨C now assumed that fee simple is conveyed unless otherwise noted.

(a) If given ¡°to A and his heirs,¡± the heirs have no legal claim to the land until A dies.

(i) However, without the specific words ¡°and his heirs¡± title may be unmarketable ¨C that is, the owner may in fact have a fee simple, but the uncertainty (chance that old owner will assert title) makes the title unmarketable

(B) If Smith gives property ¡°to heirs of his sister,¡± this is a bad idea.

(i) Assume everyone alive. Until sister dies, you can¡¯t tell who the heirs are.

(a) Heirs ¨C people who would take property if sister died intestate (without a valid will)

(2) Caveat ¨C whenever there is doubt as to the meaning of a will/deed, you should:

(a) Try to determine the intent of the instrument;

(B) If unable, the doubts should be resolved in favor of the grantee and the greater estate should pass

2. Life Estates

a) Estate that runs for the life of someone, usually the grantee.

(1) E.g., O grants ¡°to A for life.¡± A has the estate until his death, at which time the estate reverts back to O.

(a) Or: ¡°to B for life of C¡± ¨C measure by someone¡¯s life other than owner

(B) Or: ¡°to B and his heirs for life of C¡± ¨C if B dies before C, B¡¯s heirs get property as special occupants

(2) Life estates are only created if expressly stated as such.

B) A life tenant has an obligation to the remainderman to avoid waste. 2 types of waste:

(1) voluntary waste ¨C actively harming the property

(2) permissive waste ¨C allowing the property to deteriorate

(3) Remember that life tenant¡¯s obligation is to return the property to the condition that she received it in prior to it passing to the remainderman.

3. Defeasible Estates

a) Basically a fee simple w/ strings attached

(1) Owner may use the property, convey it, or have it inherited by heirs, but they have to use it subject to a restriction.

B) Or - an estate where the remainder is vested, but may lose the title on the happening of some event.

c) Three types:

(1) Fee simple determinable (FSD) ¨C fee simple that automatically reverts back to the grantor when an impermissible event occurs.

(a) Created by phrases such as: for so long as, while, during, or until.

(i) Ex: ¡°To church for so long as the land is used for church purposes¡± ¨C creates a FSD in the church; if the land is ever not used for church purposes, the grantor automatically gets title to the property back.

(B) Grantor has interest of: possibility of reverter ¨C a future interest. It can be transferred like any other property.

© Note that under FSD, adverse possession is possible since the grantor has title; if he permits the church to operate on his land for a long enough time, they can claim they have adversely possessed the land.

(2) Fee simple subject to condition subsequent (FSCS) ¨C when the impermissible event occurs, the grantor has the right to take the property back, but nothing happens until he exercises that right; i.e., grantor must take action.

(a) Created by phrases such as: but if, upon condition that, provided that.

(i) Ex.: ¡°To church, provided that the land is used for church purposes¡± - creates a FSCS in the church; if the land is ever not used for church purposes, the grantor has the right to reclaim the land.

(B) Grantor has interest of: right of entry ¨C a future interest

(i) Gives grantor some flexibility in changing mind or negotiating w/ grantee for new terms.

4. In deciding if there is a FSD or a FSCS, the court will look at the document as a whole and the intent of the parties.

5. If court cannot determine how the land was meant to be granted (i.e., it¡¯s unknown what type of fee simple), the court¡¯s preference is to:

a) Fee simple absolute; then if clearly defeasible ¡_

B) Fee simple subject to condition subsequent; then ¡_

(1) Fee simple determinable

B. Future Interests

1. Types of Future Interests:

a) Interests In Transferor:

(1) Possibility of Reverter ¨C created by FSD

(2) Right of Entry ¨C created by FSCS

(3) Reversion ¨C interest retained when grantor transfers a lesser estate than he owns

(a) If there is any chance for the grantor to get the property back, he holds a reversion.

(B) Ex.: to son for life, then to granddaughter and her heirs if she outlives her father creates a reversion in the grantor.

(i) If the granddaughter does not outlive her father, the property reverts back to the grantor.

B) Interests In Transferees (3rd parties)

(1) Remainder ¨C future interest which can become possessory only upon the natural termination of the preceding estate

(a) Vested Remainder ¨C 3 types (Indefeasibly Vested, Subject to Open, and Subject to Divestment)

(i) Indefeasibly Vested Remainder ¨C the remainder is certain to become possessory at some future time

(a) Ex: O ¨¤ A for life; upon A¡¯s death to B.

(i) B = indefeasibly vested remainder

(ii) Vested Subject to Open ¨C in addition to the persons now vested, others may also gain a vested portion. The result of a class gift.

(a) Ex: O ¨¤ A for life, remainder to B¡¯s children and their heirs. B only has 1 child at time of conveyance.

(i) Since there could be more children, child = vested remainder subject to open

(iii) Subject to Divestment ¨C a vested remainder that is subject to divestment on a condition subsequent.

(a) Ex.: O ¨¤ A for life, then to B; but if B smokes pot to C.

(i) B = vested remainder subject to divestment

(ii) Basically, you have it now, but if something happens then someone else gets it

(B) Contingent Remainder ¨C 2 types (Condition Precedent and Unascertained Person) ¨C not property, cannot be transferred!

(i) Condition Precedent ¨C the remainder does not vest unless a given condition occurs.

(a) Ex.: O ¨¤ A for life, then to B if B marries C

(i) B = contingent remainder. B will not vest unless he marries C.

(ii) Unascertained Person ¨C in a class gift (see above) when no members of the class have been born, the interest is contingent on a member of the class being born.

(a) Ex.: O ¨¤ A for life then to A¡¯s kids (A has no kids)

(i) A¡¯s unborn kids have a contingent remainder. (If A has a kid, the kid¡¯s interest vests subject to open)

(B) Ex.: O ¨¤ A for life, then to A¡¯s kids that outlive him (A has two kids, B and C)

(i) B&C have a contingent remainder. B&C do not vest unless they outlive A. (the persons who will outlive A are unascertained)

(2) Executory Interest ¨C a grantee that gets the property on the unnatural termination of the preceding estate (typically a fee, or a life estate cut short)

(a) Ex: O¨¤A, unless A drinks; then to B. B has an executory interest

(B) Executory interest = contingent until right to possession.

(i) Therefore subject to the rule against perpetuities

2. The Rule Against Perpetuities

a) ¡°No interest in property is valid unless it must vest, if at all, not later than 21 years after one or more lives in being at the creation of the interest¡±

(1) When is the interest created?

(a) Conveyance ¨C at time of the conveyance

(B) Devise ¨C at time of testator¡¯s death

(2) If an interest could violate the rule, it (the interest) is void whether it actually violates it or not

(3) The rule never applies to:

(a) The grantor

(B) Remainders subject to divestment

(4) The rule does apply to:

(a) Contingent remainders

(B) Executory interests

(5) Applies to more than simply land conveyances, e.g. ¨C stock

B) ¡°Must vest¡±

(1) When an interest becomes possessory is not an issue; only when the interest vests.

(2) Note therefore future interests in the grantor are always exempt from the rules since they are always vested.

(a) Remember, a grantor¡¯s reversion is transferable as property

c) ¡°Lives in Being plus 21¡±

(1) The life in being does not have to be one person; however, (if a group) it must be a group of people that are clearly identifiable at the time the interest is created (i.e., the class must be closed) for them to be the measuring life.

(a) Ex.: O wills ¡°to my children for life, then to my grandchildren, and then to their children.¡±

(i) O¡¯s children can be (and are) the measuring life since after death O cannot have any more children

(ii) O¡¯s grandchildren cannot be the measuring lives since O¡¯s children could have more offspring after O dies.

(iii) Further note this violates the rule ¨C O¡¯s great-grandchildren could vest more than 21 years after O¡¯s children (the measuring lives). Thus the great-grandchildren¡¯s interest is void.

(2) If the interest is given to a non-human entity (e.g., a church), there is no measuring life (just use 21 years)

d) Note on Survivorship ¨C if a grant requires survivorship, remember the class closes on the expiration of the preceding estate

(1) Thus, to B for life, then to A¡¯s children who outlive B is valid since the class closes when B dies ¨C any children born afterwards are not eligible, and so do not vest, and so are not subject to the rule.

(2) If this were not the case, this would violate the rule.

(a) Ex: to B for life, then to A¡¯s children. B is the measuring life; it is possible A could have kids more than 21 years after B¡¯s death.

(3) Note that if this were done through a trust the class would not close and would be subject to a rule violation.

e) Suspect Rule Violations in the following:

(1) Transfers to three or more generations,

(2) Anything with a time period greater than 21 years,

(3) Anything involving corporations (or other non-human interests).

f) Goofy Perpetuities Problems

(1) The Fertile Octogenarian

(a) To B for life, then to B¡¯s children for life, remainder to B¡¯s grandchildren. B is 80 years old.

(i) The grant to B¡¯s grandchildren is void, since B could (from a legal perspective) still have children. Therefore the class of B¡¯s children is not closed, B is the measuring life, and the grant to B¡¯s grandchildren could possibly fail to vest until 21 years after B dies.

(2) The Unborn Widow

(a) To B for life, then to B¡¯s widow for life, remainder to the children of B that survive the survivor of B and B¡¯s widow.

(i) The grant to the children is void since ¡°B¡¯s widow¡± could be a person yet unborn (and thus not a life in being). Therefore, B is the measuring life, and the grant to the kids could possibly fail to vest 21 years after B¡¯s death.

g) Perpetuities Reform

(1) Some states are experimenting with reform to eliminate the Rule or stop some of the more bizarre results.

(2) ¡°Wait and See¡±

(a) Aptly named, this reform waits to see if an interest actually violates the rule before invalidating it

(3) ¡°Cy Pres¡±

(a) This reform re-writes the conveyance or devise to make it conform with the rule (e.g., 25 years becomes 21)

(4) Some states combine the two.

(5) Other proposals include a flat time period; others just like the status quo.

3. Trusts

a) A fiduciary relationship in which one person (the trustee) holds legal title subject to equitable rights in the beneficiaries. (the beneficiaries hold equitable title)

B) Advantages of trusts

(1) Tax Reasons

(2) Grantor can exercise more control over how property will be handled.

(3) It can prevent the Rule Against Perpetuities from invalidating a class gift

(a) This is limited, though ¨C eventually the trust must terminate, and the rule applies.

(4) It can prevent a class from closing

(5) It can prevent destructible contingent remainders

C. Concurrent Ownership

1. Traditional Estates

a) Tenancy In Common

(1) Each owner owns a ¡°segment¡± of the land, even if that segment cannot be specifically identified. The segments need not be equal.

(2) This estate is presumed in the absence of language which would create another type of concurrent estate

(3) Interest can be transferred

(4) On a co-tenants¡¯ death, his shares pass to his heirs (contrast with JT, supra)

(5) If there¡¯s a disagreement re: how to use the land, options are:

(a) One interest can buy the other interest out

(B) The property can be leased and the proceeds split

(i) A TIC can be partitioned in kind, meaning the land is physically divided based on value (not size)

(ii) A TIC can be partitioned by sale, meaning the property is sold and the proceeds divided among the owners

(iii) Any co-tenant can force a partition, regardless of his share. A partition in kind is preferred.

(6) Creditors can only reach the interest of the owner with bad credit.

B) Joint Tenancy

(1) The property is owned by one ¡°entity¡± which each co-owner has rights in. The key difference is the right of survivorship ¨C if one owner dies, the other co-owners get his share (equally, if more than one co-owner), as opposed to a TIC, where the decedent¡¯s heirs get the share

(2) The ¡°Four Unities¡± Required for a JT

(a) Unity of Interest (all must have equal undivided shares of the same duration)

(B) Unity of Title (each tenant¡¯s interest must come from the same will or conveyance)

(i) Remember, a person cannot convey to himself what he already owns ¨C use of a straw person can avoid this.

(d) Unity of Possession (each tenant owns the whole; none has greater rights of possession than any other)

(3) During the lifetimes of the tenants, a JT is treated as a TIC; each tenant may transfer away his interest (sever his interest)

(a) If any tenant does so, his share becomes a TIC and his right of survivorship in the JT is destroyed

(4) Simultaneous death severs the right of survivorship, transforming the JT into a TIC.

c) Tenancy by the Entirety

(1) Estate where a married couple (TBE is only available to legally married couples) owns land as one ¡°person.¡±

(a) Stems from old rule where man controlled his wife¡¯s land

(2) Some states simply require a married couple to purchase property together; others require a specific intention to create a TBE.

(3) TBE creates a nonseverable right of survivorship ¨C neither spouse acting alone can terminate the TBE

(a) Except by divorce (or murder!)

(4) Right of management is like a TIC; however, creditors cannot get the husband¡¯s ¡°share¡± ¨C just the right of survivorship.

(a) Creditors can only reach the TBE if the debts are in the name of both the husband and the wife

D. Leaseholds (Non-Freehold Estates)

1. Types of Leases

a) Tenancy for years

(1) Lease has a definite maximum duration.

(2) Typically used for commercial/retail leases.

B) Periodic tenancy

(1) For any recurring period up to a year (i.e., week to week, year to year; typically is month to month).

(a) Requires that one party give notice a set period of time before leaving.

(2) Automatically renews unless tenant gives notice

(3) Typically used for farms and low-income housing

c) Tenancy at will

(1) Either party can terminate at any time (with some reasonable advanced notice)

(2) Typically used during lease renegotiations.

d) Tenancy at sufferance

(1) When tenancy for years or periodic tenancy has run out, but the landlord has yet to take formal action to remove tenant

2. Leases and Building Codes

a) A lease in property that does not meet housing codes at the time of signing is invalid as an illegal contract.

(1) Landlord therefore cannot lease property that does not meet housing codes

B) Posner on Housing Code Enforcement

(1) If housing codes strictly enforced, landlord for sub-par property can:

(a) Upgrade/repair the property and rent at a higher rate

(i) Rent increases b/c landlord has to recoup costs of repair

(B) Abandon the property

(i) Rent increases b/c supply of low-rent housing decreases

(2) Posner therefore advocates rent supplements or public housing to help the poor re: housing

3. Access to the Rental Market (The Fair Housing Act)

a) Federal Housing Act protects:

(1) Race

(2) Color

(3) Religion

(4) Sex

(5) Familial status

(a) Statutory definition ¨C anyone under 18 living with a parent or guardian

(B) Therefore, this does not protect unmarried couples, homosexuals, singles, etc.

(i) However, some states have extended this definition to sexual orientation, etc.

(6) National origin

(7) Handicap

4. More on the Fair Housing Act

a) It does not apply to owner-occupied buildings with less than four rental units.

B) Violations can be either overt discrimination or a preference to discriminate.

(1) Asking about race implies a preference to discriminate

(2) Ads showing all one race or ads that imply exclusion of a protected group ¨C both show a preference to discriminate

(a) For ads, use an ¡°objective ordinary reader¡± test to determine if it is discriminatory; i.e., whether the ad would discourage an ¡°ordinary reader¡± of a particular protected group from answering it.

c) Landlord can, however, refuse to rent on an individualized basis ¨C just not a class-based exclusion.

5. Lessor¡¯s Duties to Lessee (Lessee¡¯s Rights)

a) Duty to Deliver Premises (Tenant¡¯s Right of Possession)

(1) At the start of the lease, the lessor has a duty to deliver the right of possession to lessee.

(2) There are two ways of determining what the lessor¡¯s duty is regarding delivery of actual possession

(a) The English Rule (majority of jurisdictions)

(i) Landlord must deliver actual possession as well as the right to possession; the lessor is therefore responsible for evicting the prior tenant.

(ii) Rationale: landlord is in the best position to deal with a previous tenant who refuses to leave on time; problem is likely more foreseeable to landlord.

(B) The American Rule (minority of jurisdictions)

(i) Landlord has no duty to deliver actual possession; lessee is therefore responsible for evicting a prior tenant.

(ii) Rationale: The lease conveys a freehold, and thus it is up to the lessee to take the property; also, it is unfair to hold the landlord responsible for the tort of another (landlord is 3rd party to lessee-former lessee dispute)

B) Right of Quiet Enjoyment

(1) Virtually every lease is held to have an implied covenant of quiet enjoyment (here, ¡°quiet¡± means secure, not the absence of noise).

(2) Breaches of quiet enjoyment end the lessor¡¯s obligation to pay rent.

(3) Ways it can be interfered with:

(a) 3rd person¡¯s assertion of a title superior to that of the landlord which is used to evict the tenant

(i) Remedies:

(a) If before tenant takes possession, tenant may terminate the lease

(B) If after tenant takes possession (and then evicted), may recover damages

(B) Acts of landlord which interfere w/ tenant¡¯s possession or use of the premises

(i) Remedies depend on whether interference amounts to actual or constructive eviction

(a) Actual Eviction

(i) If tenant¡¯s possession of all or part of premises is literally taken away, may refuse to pay rent

(B) Constructive Eviction

(i) Through the fault of the landlord, the tenant¡¯s use and enjoyment are so interfered with that no longer use the premises as contemplated.

(ii) If tenant abandons property, he is then relieved of all rent obligations ¨C but has burden of proving the substantial interference

(iii) Tenant may lose constructive eviction defense if he fails to move out in a reasonable time period

(i) If entire premises taken/condemned, the lease terminates and no further rent is necessary

(ii) If portion of premises taken/condemned, the lease is NOT terminated ¨C tenant required to pay rent in full

(a) But tenant required to share (w/ landlord) in eminent domain award to the extent of the value of the premises taken from the tenant

c) Implied Warranty of Habitability

(1) In addition to any express warranties made, most modern courts say there is an express warranty in every lease (especially residential ones) that they will meet some minimal level of habitability, usually based on the local housing code

(a) Rationale:

(i) Residential tenants are usually in an inferior bargaining position

(ii) Urban dwellers lack skills and time to do repairs, and often repairs need to be made in areas that a tenant does not have access to.

(iii) Lessee is unlikely to make repairs since his interest is finite.

(iv) Housing Codes require such a warranty.

(B) The court is less likely to impose such a warranty on a commercial lease (although Texas extends warranty to both commercial and residential leases); Rationale:

(i) More sophisticated parties.

(ii) Less likely that one party is in a weaker bargaining position.

(iii) Costs can be passed on to consumer.

(2) Differing views on Leases

(a) Lease as a Deed ¨C the Doctrine of Independent Covenants

(i) This is the traditional view that treats a lease as a deed and thus the promises made between the parties are independent of each other.

(ii) Thus, the lessee must pay full rent even if lessor breaches one of his obligations (e.g., to repair). Lessee¡¯s only remedy is to sue for damages unless he has specifically reserved the right to terminate for such a failure

(iii) It operates the other way, too: a lessor cannot evict for failure to pay rent; rather, he must sue for the rent amount as damages.

(B) Lease as Contract

(i) This is the prevailing view in modern courts.

(ii) It basically means the promises made are dependent on each other: a failure to keep one promise gives the other party the right to cease his obligations to a degree.

(a) Note that it does not waive the right ¨C it just reduces rent to the value of the substandard apartment.

(iii) Like most contract law, the court can also imply terms: in this case, the warranty of habitability.

(3) Posner on Implied Warranty of Habitability ¨C he thinks it actually reduces the amount of low-income housing available, because rather than lose money by repairing premises many landowners will either convert to another use or abandon the property.

6. Lessee¡¯s Duties to Lessor (Lessor¡¯s Rights)

a) Duty to Pay Rent

(1) Most residential leases have a set amount per month

(2) Commercial leases can be more complicated:

(a) Annual percentage increases

(B) Tying rent to an index (e.g., CPI)

B) Remedies for Non-Payment of Rent

(1) Sue periodically for back rent.

(2) Terminate the lease if the defaulting tenant moves out & permit new lessee to move in.

(a) Original lessee could claim trespass, but landlord can respond that move-out implies lessee has abandoned the lease.

(3) Re-let on account of defaulting tenant and apply new rent to old tenant¡¯s obligation as a credit.

(a) Note that if you treat leases as a contract, a landlord has an obligation to do this (i.e., mitigate his damages).

(i) If a tenant abandons the property mid-lease, the landlord must attempt w/ reasonable effort to mitigate damages by trying to re-let the property

(a) If no new tenant found, landlord entitled to receive entire amount of rent reserved for period during which the property could not be rented

c) Note a landlord cannot evict for retaliatory reasons, e.g., reporting housing code violations, but can evict for good reason or even no reason at all.

(1) Note why ¨C if landlord could evict for reporting, no one would report violations.

(2) Landlord can later evict is he shows his retaliatory purpose has dissipated ¨C when it has dissipated is a question of fact

(3) What if eviction is for reporting lessor to IRS? (Answer is that that eviction is OK, probably)

(a) Has to relate to housing and be a statute that relies on private complaints for enforcement

E. Condominiums and Time Shares

1. Owner has a fee simple in their unit (extends to the interior of the external wall)

2. The rest of the areas of the condo are common areas ¨C held in TIC

a) % of ownership turns on size of the condo relative to other condos

(1) It follows that liability of a condo owner is limited to his % interest in the entire regime, where such liability arises from the common areas

B) Owner cannot transfer TIC interest in condo¡¯s common area

(1) Why? ¨C cannot separate TIC interest and fee simple interest

(a) Why? ¨C in order to maintain some limit on who uses the common areas. E.g., tennis courts, workout rooms.

c) Unlike general TIC, single owner can¡¯t make changes to the common areas

(1) Only homeowner¡¯s association can

3. Condominium declaration

a) Make provisions for homeowner¡¯s association

B) Sets out rules for use of condos

(1) Homeowner¡¯s association can make future rules re: use, but the original rules in the declaration are superior

c) Restrictions in declaration can be voided if they violate public policy

(1) E.g., unreasonable restraints on alienation of land are invalid

V. Interests in the Land of Another

A. Easements

1. Easements Defined

a) An easement is a grant in the land itself (as opposed to a promise) entitling its holder to use the land in some particular way. Note both grantors and grantees in a conveyance can have an easement.

(1) The most common example is an easement across another¡¯s land for a road or driveway.

B) Affirmative v. Negative

(1) Affirmative ¨C Gives holder the right to go onto or do something to the burdened land.

(2) Negative ¨C Give holder right to prevent a particular use of the burdened land.

c) Appurtenant v. Gross

(1) Easement in Appurtenant ¨C an easement which is attached to the tract of land itself (by far the most common type)

(2) Easement in Gross ¨C an easement that is attached to a person for a particular use. These are typically utility easements, e.g., AT&T has an easement to come on your land to repair the telephones (an easement for the use of AT&T).

d) Easements distinguished from licenses.

(1) If A gives B permission to use his land in a particular way, B only has a license.

(a) There is no writing (thus, the statute of frauds is not satisfied, though part performance may do so)

(B) There is no right conveyed.

(i) There are exceptions here; if grantee has done substantial improvements, many courts will prevent the grantor from revoking the license without at least compensating for the improvements.

(ii) Criticism: doesn¡¯t that discourage neighborly behavior?

(2) If B has the right to be on the land, it is an easement.

e) Easements distinguished from possessory estates.

(1) Possessory estate cannot be lost by abandonment

(2) Easement can be so lost. Typically need to show:

(a) Intent to no longer use easement, and

(B) Actual lack of use for a reasonably long period of time.

2. Types of Easements

a) Express Easements (Intentionally Created Easements)

(1) This is an easement created on purpose

(2) Note that courts sometimes presume creation of the largest estate possible, and thus will often find an possessory estate rather than an easement, and an easement rather than a license.

(3) The ¡°stranger to the deed¡± rule

(a) Traditionally, a deed transfer could not reserve an easement to a 3rd party to the transaction

(B) Most modern courts, however, will permit such a transfer to occur. Willard v. 1st Church of Christ

B) Implied Easements

(1) Why Imply Easements?

(a) Public policy favors keeping land both usable and alienable.

(i) Criticism: aren¡¯t these people adults? Why give a party a windfall?

(B) Easement is implicit in the purchase price (why would you buy land you cannot use?)

(2) Types of Implied Easements

(a) Easement by Strict Necessity ¨C Typically arises when a ¡®landlocked¡¯ parcel of land is conveyed; must show that an easement is the only way to get to the land.

(i) Elements:

(a) No means of ingress/egress, and

(B) Landowner shows a strict necessity, and

(ii) Note this suggests the public policy rationale for implied easements.

(B) Easement Implied by Prior Use (Quasi-Easement) ¨C More common type of easement.

(i) Elements

(a) Common ownership of both burdened and benefited land, with a subsequent dividing conveyance.

(B) Prior to severance, owner used burdened land for the benefit of the benefited land.

(d) The easement claimed is reasonably necessary for the enjoyment of the benefited land.

(i) Operates in much the same way as adverse possession (same elements).

(a) Key differences: adverse possession is statutory, while prescriptive easements are a common law creation; adverse possession gives title rather than a mere easement.

(ii) Public can acquire this type of easement since an accompanying conveyance is not required.

(iii) Courts do not like prescriptive easements. Why?

(a) It can surprise the landowner ¨C he lets people use his land and suddenly he can¡¯t stop them! (It discourages neighborliness)

(B) The court will usually say the use was not hostile (i.e., implying a license), or was not exclusive (if the landowner still used the land).

(3) Rejection of Implied Scenic Easements

(a) Modern courts mostly reject an implied scenic easement

(B) It doesn¡¯t come under the blanket of ¡®necessity,¡¯ nor does it meet the requirements of prior use.

(i) How to be ¡°open¡± or ¡°obvious?¡±

(ii) What cause of action does landowner have (no trespass for mere observation)?

(d) Some courts will permit it if the landowner sells a portion of his land and the view is clearly implicit in the purchase price (the remaining land is prevented from having built on it a view-obstructing structure).

B. Real Covenants

1. A real covenant is one that runs with the land (as opposed to a mere contract between two parties). It is a promise to do (or not do) a certain thing.

2. Real covenants distinguished from¡_

a) A contract ¨C contract only affects the parties, while covenant stays with the land and affects all subsequent landowners.

(1) Note that covenant only comes into play if land is transferred to a 3rd party ¨C otherwise, contract remedies rule.

B) An easement ¨C an easement is an actual grant of an interest in the land, while a covenant is a promise respecting the use of the land.

c) An equitable servitude ¨C The difference is remedy; a servitude is enforced by injunction, while a covenant gets money damages. Also, criteria for servitude are less stringent.

3. Requirements for a covenant to run with the land:

a) Touch and Concern ¨C the covenant affects the quality or value of the land, e.g., the covenantor¡¯s interest is less valuable, or covenantee¡¯s interest is more valuable. Determined objectively.

(1) Smith says the best way to think about it is to ask if the covenant affects the use of the land, because everything will ultimately impact the monetary value of the land.

(2) Note that rent is generally assumed to touch and concern.

(3) Examples:

(a) Promise restricting use of the land

(B) Promise to pay rent, taxes, or insurance

B) Intent ¨C The parties must have intended for the covenant to run with the land. Determined subjectively.

c) Privity ¨C Privity of estate between the parties.

(1) Traditionally, the courts required both mutual/horizontal and vertical privity; most modern courts only require vertical.

(2) Types of privity

(a) Mutual ¨C Parties have a mutual, continuing interest in the land (typically lessor-lessee) (Old English rule)

(B) Horizontal ¨C Parties have made a conveyance in fee from one party to the other (i.e., grantor-grantee) (American addition)

(i) Don¡¯t need to have equal possessory estate as original covenantor/covenantee for covenant to be enforceable.

(a) As long as you have a significant interest, you can assert a covenant/be subject to a covenant.

d) Writing ¨C vast majority of states require that the covenant must be in writing.

(1) Reasons: usual statute of fraud reasons, plus it demonstrates intent and is a way of establishing notice to later purchasers.

e) Other requirements

(1) ¡°In Esse¡± rule ¨C a minority of states (including Texas) requires the formal language (¡°and his heirs¡_¡±) be present if the covenant is for something not in being yet (e.g., a covenant to build roads).

4. Terminating a Real Covenant

a) All parties agree to terminate.

B) Time limit built w/in covenant itself

c) Legislation restricts length of time covenant can run.

d) Could also argue the covenant is actually a servitude and that enforcement of it would be inequitable.

5. Problems with Real Covenants ¨C a subdivider creates a homeowner¡¯s association to collect fees (part of the covenant) for maintenance. The association owns no property, and thus no privity. Possible ways to deal with:

a) Agency theory ¨C association is acting on subdivider¡¯s behalf.

B) Convey whole tract to association and let it sell the subdivided tracts.

c) (Best option) Convey a portion of the land to the association (e.g., the streets or a small park-ish area)

6. Why all the complexities with covenants? ¨C They reduce alienability and thus courts feel it should be difficult to make them.

C. Equitable Servitudes

1. An equitable servitude is an agreement that may or may not run with the land that has equitable enforcement, e.g., injunctions.

a) Thus note that the choice between a covenant and servitude is largely a choice between remedies (see covenants for distinctions).

B) Note also that a servitude is easier than a covenant to argue for, as the elements are easier to prove.

c) Specialized type of servitude: an ¡°Implied Reciprocal Covenant.¡±

(1) If the owner of two (or more) adjacent lots sells one with restrictions which benefit the lot retained, the servitude is mutual and the owner of the lot retained can do nothing forbidden to the owner of the lot sold (and it runs with the land)

(2) Basically, if you own a big parcel, and sell a part of it, any restrictions on the land sold benefiting your parcel also restrict your use of the remaining parcel, and carries over to any part of that parcel you sell later.

2. Requirements for an Equitable Servitude

a) Intent ¨C The parties intend to create a covenant

B) Notice ¨C A party must have notice of the servitude (though it need not be in writing). This is the most essential element. Types:

(1) Actual ¨C typically, the deed has it in writing.

(2) Inquiry ¨C notice is obvious to a reasonable person from the character of the land or available information.

(a) Problem: it assumes the servitude is obvious ¨C what if it involves a great deal of searching?

(3) Constructive ¨C as a matter of law, the buyer is assumed to have notice (most common type of notice)

c) Equity ¨C the servitude would be fair to enforce against a later party.

(1) Note that touch and concern is implicit in this (some list it as a fourth element).

3. Terminating an Equitable Servitude

a) Changing Conditions ¨C if surrounding conditions have altered the character of the entire neighborhood, the court may not enforce the servitude.

(1) Note the change must be sufficient to have altered the whole of the land burdened, not just the border properties

B) Waiver ¨C only waives the covenant to certain businesses/uses

(1) ¡Ç has waived right to object b/c of other violations they let slide

(2) Note that many courts will let insubstantial violations pass (e.g., a church in a with an agreement that it be residential-only) without invalidating the servitude.

c) Abandonment ¨C permanent and applicable to all

(1) Intent to abandon, and

(2) An unreasonably long period of non-use.

D. Nuisance

1. Essentially, the ¡®right thing in the wrong place¡¯

2. Traditional Elements of Nuisance

a) Actual Harm ¨C the plaintiff experiences some type of harm, such as serious discomfort or inconvenience (lack of sleep, high stress, etc.)

(1) Note that most courts do not consider an aesthetic harm to be a valid to establish a nuisance

B) Inappropriate Use ¨C the nuisance is unreasonable and inappropriate for the area.

(1) Note violation of a regulation is strong evidence of inappropriate use (Some would make it a optional fourth element)

c) Plaintiff is present first ¨C the plaintiff was on the land before the nuisance (because nuisance law is designed to protect expectations)

(1) There are rare exceptions, as when plaintiffs and defendant expand into each other

(2) These cases are exceptions; normally, moving into a nuisance is a defense for the defendant.

3. Approach to nuisance law

a) A Bentham analysis: USE THIS APPROACH ON TEST

(1) The elements of nuisance establish the nuisance

(2) Social utility of D¡¯s actions determines if the remedy will be injunction or money damages

(a) If social utility of D¡¯s actions is great (compared to harm to ¡Ç), then the remedy is compensatory damages ($).

(B) If social utility of D¡¯s actions is small (compared to harm to ¡Ç), then the remedy is an injunction.

VI. Public Land Use, Planning, And Control

A. Traditional Methods of Controlling Land Uses

1. Zoning

a) Generally

(1) Zoning only permits certain types of uses in certain areas; the idea is to structure the growth of a community.

(2) Generally, zoning is done using the Euclidian model, from most desirable (single-family housing) to least desirable (industry). All most-desirable uses are permitted in any given zone (e.g., you can build a house in an industrial zone, but not vice-versa)

(3) How to value land if there is taking? Most courts use fair market value.

B) Constitutional Challenges (first determine basis, then type)

(1) Basis of Challenges

(a) Taking without compensation (5th amendment)

(B) Due Process

(i) Substantive ¨C zoning is not fair, i.e., no substantial relation btwn the ordinance and the ¡°public health, safety, morals, or general welfare.¡±

(ii) Procedural ¨C procedures weren¡¯t followed.

(2) Types of challenges

(a) Facial Invalidity

(i) Courts give a lot of deference to local regulation (they are presumed valid), especially if the zoning is done to an unincorporated area.

(ii) Euclid ¨C established zoning as constitutional; said in determining validity, all circumstances must be taken into account (what¡¯s good for the city may not be good for rural areas)

(B) Invalid as Applied to the Individual

(i) As opposed with the regulation itself being invalid, here you¡¯re saying circumstances make it invalid as applied to you

(ii) Must show there is no substantial relation btwn the ordinance and the ¡°public health, safety, morals, or general welfare.¡±

c) Criticisms of Zoning

(1) Tends to segregate people by wealth

(2) Leads to urban sprawl

d) Alternatives to Zoning

(1) No Zoning (Houston) ¨C no government zoning, but ¡°de facto¡± zoning via private means (e.g., real covenants, etc.)

(2) ¡°New Cities¡± ¨C each zone permits a certain percentage of a type of use.

e) Initial Zoning vs. Rezoning (Facial Validity)

(1) Zoning

(a) Presumption ¨C lies with government (the landowner has the burden of proof.)

(B) Standard of Review ¨C ¡°Arbitrary & Capricious¡± ¨C landowner must show zoning is arbitrary & capricious.

(2) Rezoning

(a) Majority Rule ¨C same as for initial zoning

(B) Minority Rule

(i) Presumption ¨C often rests with city (because the city is the one making the change ¨C the landowners have relied on the zoning and to change it may undercut them)

(ii) Standard of Review ¨C ¡°Reasonable Person¡± ¨C rezoning must be reasonable to a reasonable person.

2. Subdivision Regulation

a) While regular zoning applies to specific plots, subdivision regulation regulates the dividing process.

B) Typically, a local government body must approve subdividing plans to insure roads are wide enough, the infrastructure (e.g., plumbing, etc.) will match up with the existing system, etc.

c) Three questions

(1) When does an exaction become a taking?

(a) An exaction is when the city requires something for subdivision approval, e.g., that a certain amount of the land be set aside for parks or an easement for sewage personnel. See infra.

(2) How much discretion should a planning commission have to reject plans that meet all written standards?

(a) Durant, where a subdivision was denied permission because of various problems ¨C watercourse disruptions, sight lines from highway, etc. ¨C that were either vague or not listed as technical requirements; Court upholds the denial ¨C board has lots of discretion

(i) Justification ¨C some things can¡¯t be quantified ¨C qualitative zoning standards that can¡¯t be spelled out

(B) Contrast to a plan to build low-income housing that met all technical specifications and was still denied ¨C the court reversed the denial ¨C board has little discretion

3. Administration of Land Control Uses

a) Nonconforming Uses

(1) When zoning first started, it was believed that nonconforming uses would just go away; the opposite happened ¨C they thrived because there was no competition

(2) In response, amortization periods developed to give existing landowners a certain amount of time to cease the nonconforming use.

(a) Amortization periods are the exception ¡_ most nonconforming uses can continue indefinitely and owners can transfer them to successor owners

(B) Defn ¨C amortization period ¨C a period of time given to owners of nonconforming uses during which they may phase out their operations in an opportunity to recoup their investment

(i) Validity of amortization period depends on its reasonableness

(i) After all, turning store into a house is usually impossible

(d) Prohibition of expansion of business

(i) Can¡¯t change the structure to keep up with modern times

(3) Change in zoning after ¡Ç has taken steps in reliance on earlier, laxer zoning standards ¨C then the zoning changes ¡_

(a) How much reliance on earlier zoning is needed to est. nonconforming use?

(B) Two approaches:

(i) When actual construction on a project has started

(a) Thus, in Stone, when a developer had met all the application requirements to build low-income housing and the city suddenly re-zoned, his interest was not considered vested.

(B) Problems with this approach: it results in uncertainty (developer has official go-ahead, but can¡¯t be sure if that won¡¯t change; city can¡¯t be sure if it is worth the time to challenge him)

(ii) When the building permit is issued

(a) This is the minority rule ¨C it prevents the confusion mentioned above.

(4) Destruction of prop

(a) If a nonconforming use¡¯s building is destroyed, it most likely cannot be rebuilt

B) Flexibility & Zoning

(1) How battle problems w/ zoning? How make zoning more flexible?

(2) Six Approaches to Flexibility (least controversial to most controversial)

(a) Variance Exception

(i) Provision for a hardship exception

(ii) How determine if exception is applicable?

(a) If allowing the exception wouldn¡¯t hurt others; and thus would be an unnecessary hardship to disallow the exception

(B) Special Exception

(i) Even though area is zoned in a particular way, there are certain other uses that are compatible

(a) Ex: small child care facility w/in res area

(ii) How get special exception?

(a) Have to apply and show your use is appropriate and wouldn¡¯t harm surrounding area

(i) City zones for certain use, but doesn¡¯t zone any land into that use

(a) If you show your land meets certain requirements, then you can apply to have your land put in the floating zone

(d) Contract Zone

(i) Piecemeal rezoning accompanied by restrictive covenants on the rezoned land

(e) Planned Unit Development (PUD)

(i) Permits a mix of uses (e.g., 50% single-family residential, 20% multi-family residential, 20% retail, 10% parks)

(ii) As long as developer¡¯s plan for entire tract satisfies general requirements

4. Permissible and Impermissible Goals of Land Use Regulation

a) How show ordinance violates Equal Protection Clause?

(1) Show the discriminatory purpose of the regulation

(a) Mere proof of discriminatory impact isn¡¯t enough

(i) Arlington Heights, where proof of a racial impact was not enough to establish a racial motive.

(B) How determine if discriminatory intent was a factor in the decision? Look at:

(i) A pattern of zoning over time

(ii) Evidence showing decision makers considered discriminatory reasons

(iii) Sudden rezoning (e.g., it¡¯s zoned for multi-family, a low-income housing project is proposed, and suddenly it¡¯s rezoned to single-family)

(iv) Discriminatory effect

(2) Equal Protection analysis

(a) Strict Scrutiny ¨C for a suspect class ¨C when a statute impacts race, alienage, national origin, or religious choice

(i) State must show a compelling state interest in the discrimination.

(ii) Burden rests on the government.

(B) Heightened Scrutiny ¨C used for ¡°quasi-suspect¡± classes ¨C when a statute impacts gender or legitimacy

(i) State must prove the statute is substantially related to the achievement of important govt objective

(ii) Burden rests on the government.

(i) State must only show statute is rationally related to a legitimate govt objective

(ii) Burden rests on the plaintiff.

http://www.12ozprophet

December 17, 2002

01

and here you are on 12oz. shame on you!!! jokes

Poop Man Bob · December 17, 2002

CONTRACTS OUTLINE

KELLY ¨C Fall 2002

I. EXPECTATION INTEREST

A. Normal rule of damages from a breach: seeks to place the nonbreaching party (¡Ç) in the position she would have been in had the contract been performed.

1. I.e., how much money will it take to allow ¡Ç to receive all the benefits of the contract.

2. Basic formula: How much should ¡Ç have received (minus) how much ¡Ç actually received.

a) Other formulas:

(1) REVENUE ¨C AVOIDABLE COSTS

(2) PROFIT + UNAVOIDABLE COSTS

B. Value of the promised performance

1. Two ways to assign value to a performance (or lack thereof):

a) Market Value

(1) When performance is available in the market, the price set by the market is the value of that performance.

(a) Where? Market value measured at the place performance was to occur.

(B) When? Market value measured at the time ¡Ç learns of the breach.

(i) If contract is repudiated, market value measured at time performance was to occur.

(ii) If case is tried before performance was set to occur, market value set at time buyer learned of repudiation.

B) Cover Price

(1) Purchase on the open market of goods to substitute for those promised but never delivered.

(a) Might indicate subjective value of performance to ¡Ç. If willing to pay more than K price, likely valued performance more.

(i) Better evidence than hypothetical market price.

(B) Must be w/o unreasonable delay and in good faith

(i) Can¡¯t pay more than a reasonable buyer would have paid, or it strips the cover price of its validity.

(d) Cover only useful if substitute is purchased.

C. Avoiding undercompensation

1. Incidental damages

a) These involve costs incurred because the deal fell through.

(1) E.g., cost to advertise goods for new buyer, cost to store property pending resale. PLUS, costs incurred to obtain substitute goods ¨C commissions, transportation costs, etc.

B) Usually involve direct expenditures. Therefore, the costs are usually closely linked to the failure to deliver the good.

2. Consequential damages

a) These involve the way ¡Ç intended to use the performance ¨C lost profits most common form of consequential damages

(1) Ask yourself, ¡°If you had performed, then I could have ¡_¡±

B) Usually take form of lost gains rather than direct expenditures. Plus, these damages are usually more remote from the breach.

3. Prejudgment interest ¨C a special type of consequential/incidental damage

a) When breach delays the date on which ¡Ç receives money (or property she could have sold for money), ¡Ç loses the uses of that money for that period. Interest compensates for that loss.

(1) ¡Ç could have invested the money and earned interest (consequential damage)

(2) Or, ¡Ç may have needed to borrow money and thus has to pay interest on the loan (incidental damage)

(3) Interest rates are usually set by statute.

(4) Consequential damages for failure to pay money are almost always limited to interest, despite the million other things ¡Ç could have done with the money.

D. Avoiding overcompensation

1. Reasonable Cover

a) Buyer entitled to obtain substitute goods and recover the difference in price.

(1) When goods of equal quality are available, ¡Ç may not substitute higher-quality goods and expect D to make up the difference.

(2) What if ¡Ç must acquire substitute goods quickly to avoid serious consequential damages? If goods of equal quality are unavailable, it may be reasonable to cover with higher-quality goods. When reasonable, the difference between the cover price and the K price is recoverable.

B) What constitutes ¡°equal¡± quality goods?

c) If ¡Ç obtains substitute goods at a better price, ¡Ç is better off than had the K been performed. Likely not to file suit.

2. Lost-volume seller

a) Ex: ¡Ç can enter into more than one contract at once and earn profits on each. First K is breached, but ¡Ç resells K performance to another person and earns profit.

(1) ¡Ç can still recover lost profits from first (breached) K because ¡Ç would have likely entered into 2 profit-creating Ks.

(2) Only applies to people with plenty to sell (usually dealers). If it¡¯s an individual, it likely won¡¯t apply.

(3) Issue only arises when ¡Ç resold the K performance to another b/c it makes it appear she avoided the loss. Unless D can claim that resale eliminated or reduced ¡Ç¡¯s loss, ¡Ç need not bring up the lost-volume seller rule.

E. Limitations on Expectation Recoveries

1. Avoidable Consequences Doctrine

a) Courts subtract the costs ¡Ç should have avoided, even if they didn¡¯t.

B) R2C ¡ì350: ¡Ç cannot recover for any loss that she should have avoided without undue risk, burden, or humiliation.

(1) Inaction included in reasonable efforts: ¡Ç must stop work when D repudiates or notifies ¡Ç of breach.

c) D¡¯s burden

(1) Must identify reasonable efforts.

(a) D must show how ¡Ç could have minimized the loss and prove that these efforts would have been reasonable, i.e. not involved undue risk, burden, or humiliation

(2) Must establish ¡Ç¡¯s unreasonableness

(a) D must show ¡Ç¡¯s unreasonableness in failing to make these efforts. If ¡Ç made other reasonable efforts, courts will not reduce ¡Ç¡¯s recovery merely b/c he didn¡¯t choose D¡¯s preferred method.

(3) Must establish amount of loss avoidable

(a) D must establish how much of the loss ¡Ç could have avoided by taking reasonable efforts.

d) Unreasonable efforts not required, i.e. undue risk, burden, or humiliation.

(1) Particularly applicable in the employment context ¨C some steps have hardened into rules.

(a) Change of career - ¡Ç need not take work in a different field. It may be reasonable to look for more lucrative work than accept the first job offered. (Undue burden and humiliation args can be made) (Exam note: what exactly constitutes a change of career? How different does it need to be?)

(B) Relocation ¨C ¡Ç need not take work in a different locale. If this weren¡¯t a rule, a breaching employer would make the cost of moving an incidental damage! (Undue burden arg can be made) (Exam note: what exactly constitutes a change of locale? How far away from original work does it need to be?)

e) Losses that could not be avoided are recoverable

(1) Futile efforts ¨C if reasonable efforts to avoid the loss would have been futile, ¡Ç can recover the full loss even if she made NO efforts to minimize the loss.

(a) Shouldn¡¯t risk it, though. Always make reasonable efforts to find work b/c employer may be able to prove that other work was out there.

f) Costs of minimization recoverable

(1) Costs incurred to pursue reasonable efforts to minimize the loss are recoverable from D ¨C normally as an incidental damage.

(a) Note that high costs may make it unreasonable for ¡Ç to take such measures. In this case, the costs would not be recoverable.

2. Cost to repair v. Diminution in value

a) Rule: If a breach results in defective or unfinished construction and the loss in value to the injured party is not proved with sufficient certainty, he may recover damages based on:

(1) Cost to repair ¨C award ¡Ç enough money to allow her to repair the inadequate performance to comply with the contract; or

(2) Diminution in value ¨C award ¡Ç the difference in the value between what she was promised and what she received.

B) When the two differ significantly, the court usually awards the smaller amount.

c) Both remedies compensate for expectation ¨C they just take a different view of what was promised

(1) The thing promised ¨C cost to repair permits ¡Ç to obtain thing promised by using money to repair any defects in performance

(2) The value promised ¨C diminution in value gives ¡Ç same value as thing promised.

d) Relation to avoidable consequences ¨C most cases of this sort can be resolved by asking whether ¡Ç acted reasonably to minimize the loss

(1) If cost of repair is less than diminution in value, cost to repair is typical remedy. It would be unreasonable for ¡Ç to fail to repair when that would avoid a large diminution in value.

(2) If diminution of value is less than cost to repair, diminution of value is typical remedy. It would be unreasonable to spend $100 to receive something with a value of $20. (Most cases)

(3) Subjective value

(a) Most cases involve costs of repair that exceed diminution in value.

(B) So does ¡Ç attach subjective value to thing promised?

(i) If so, decision to repair might be reasonable for the ¡Ç, even though other buyers would not pay more for the repaired property.

e) Risk of undercompensation or overcompensation ¨C when cost of repair exceeds diminution in value (as it does in most cases)

(1) Overcompensation ¨C awarding cost of repair - ¡Ç might decide not to repair the property and pocket the money. If so, her wealth has increased b/c she has property worth a little bit less and money worth much more than the difference.

(2) Undercompensation ¨C awarding dim. in value - ¡Ç will be undercompensated if she attaches a subjective value to the repaired property that the market price does not reflect.

f) Relation to specific performance

(1) Cost of repair like specific performance ¨C it simply allows ¡Ç to select a different person to perform the repairs instead of ordering D to perform them.

3. Foreseeability

a) Rule: ¡Ç can recover damages if either a) the loss flows naturally from the breach or B) the D, at the time the K was made, had reason to know that losses of this type probably would result from a breach, i.e. ¡Ç told D of the results of a breach.

(1) When consequences of a breach are unusual, the only way D would have reason to know about them is if ¡Ç told him about the likely consequences.

(2) Foreseeability problems usually involve consequential damages, i.e. the way ¡Ç planned to use D¡¯s performance. This is usually unknown to D, so D has no idea the amount or type of losses ¡Ç would face in the event of a breach (hence the need to inform)

(3) General damages = incidental; special damages = consequential (don¡¯t need to use these terms on the test ¡_ just know them)

(4) Foreseeability creates an incentive to share information

(a) Forces the party who knows how harmful a breach would be (¡Ç) to tell the party who needs to take precautions to avoid the breach (D)

(B) Rule requires ¡Ç to reveal the important reasons for seeking D¡¯s performance or forego damages for the loss of those unusual possibilities

(5) Advance mitigation of damages

(a) Minimizes the loss by discouraging D from breaching.

B) Buyer¡¯s losses

(1) More likely to arise on an exam because the consequences of breach are usually harder to foresee. (As opposed to a seller who usually loses money and then receives the interest on that money as damages)

c) Common errors re: Foreseeability

(1) Foreseeability only requires reason to know, not actual knowledge. D cannot plead ignorance if they had reason to know of the type of loss.

(2) Foreseeability only requires D have reason to know of the type of damages, not the amount of damages.

(3) Foreseeability does not depend on a tacit (implied but not expressed) agreement to accept responsibility for damages.

(4) Foreseeability can arise without actual notification by the buyer to the seller.

4. Certainty doctrine

a) Rule: ¡Ç cannot recover damages unless she can prove them with reasonable certainty.

(1) Uncertainty applies to all damages, but is most important for consequential damages (usually lost profit)

(2) ¡Ç must show existence of loss resulting from the breach.

(3) Then ¡Ç must show amount of loss. Jury is not allowed to speculate re damages, thus evidence must be entered to show amount of loss. Expert testimony re amount of loss is sufficient basis for allowing the jury to estimate the amount of loss.

(a) Established businesses with a history of profitability will help ¡Ç prove losses with reasonable certainty.

(B) If a new business, comparable businesses will help ¡Ç prove that this venture would have been profitable.

(i) However, new businesses may have trouble showing enough similarities between themselves and other businesses.

(a) Usually run by other people, usually in other places.

B) Lack of reasonable certainty frequently = use of reliance interest.

(1) Here, reliance is simply expectation interest w/ zero profit (as it always is).

(2) I.e., assume that ¡Ç would have broken even had the breach not occurred ¨C let the party who wants to prove differently do so w/ reasonable certainty

(a) Anglia exception ¨C if D is part of a larger project where his performance is crucial, D held liable for expenditures incurred before and after K was signed, as expenditures would reasonably be in contemplation of the parties as likely to be wasted if the K was broken

c) Wrongdoer exception ¨C suggested by some courts

(1) If D¡¯s conduct prevents ¡Ç from demonstrating profits with reasonable certainty, then the court will allow the jury to make a reasonable estimate of loss profits, although the jury is still not allowed to speculate.

(a) Courts use this as an explanation for why they allow ¡Ç who has proven that lost profits were greater than zero to recover profits, even though no certainty attaches to that particular amount.

(B) Not smiled upon by Kelly ¨C if taken literally, would eliminate the certainty doctrine, for D¡¯s breach is always the reason ¡Ç cannot demonstrate profits.

d) Summary:

(1) ¡Ç¡¯s burden to recover profits:

(a) ¡Ç must prove with reasonable certainty that profit would have existed AND prove with reasonable certainty the amount of profit

(B) ¡Ç can, however, recover expenditures w/o proving the venture would have broken even

(2) D¡¯s burden to avoid paying profits:

(a) D must prove the venture would not have broken even

(B) D still has to pay costs already incurred in reliance of the K

(3) Default presumption:

(a) Allocates the risk of uncertainty between the two parties by assuming profits would be zero, i.e. reliance interest. (Assumes no profits but also no losses)

5. Emotional Distress

a) Rule: damages for distress are usually not recoverable in contract actions, with 2 exceptions:

(1) 1st exception: Physical harm: when a breach of K causes physical injury, emotional distress/pain & suffering are part of the recovery.

(2) 2nd exception: Emotional contracts: when a K or breach is likely to cause severe emotional harm, damages may be recoverable

(a) Examples: Burials/funerals gone horribly wrong

(B) Insurance ¨C insurers refusal to pay a person who has just suffered a tragedy

B) R2C ¡ì353 ¨C emotional distress will be excluded unless ¡°the contract or the breach is of such a kind that serious emotional distress was a particularly likely result.¡±

6. Attorney¡¯s Fees

a) Rule: attorney¡¯s fees are usually not recoverable as an element of damages, with exceptions:

(1) Express contract: when K provides for recovery of attorney¡¯s fees as part of the damages, it is usually enforceable.

(2) Collateral litigation: when D¡¯s breach forces ¡Ç to incur attorney¡¯s fees against 3rd parties, fees are recoverable as consequential damages.

(3) Statutes: some statutes allow recovery of fees.

7. Punitive Damages/Penalty Clauses ¨C more discussion later

a) Rule: punitive damages are not recoverable in contract actions, with exceptions.

B) Exceptions (awarded by some courts): breach of promise to marry, insurance contracts

II. RELIANCE INTEREST

A. Rule: goal is to place ¡Ç in the position she would have occupied had the K not been made.

1. Allows ¡Ç to break even ¨C no recovery of profits and no losses suffered.

2. Remember that expectation interest is the normal rule re: damages.

B. When is reliance interest used?

1. When expectation damages are uncertain (see uncertainty doctrine, supra)

2. When a K is unenforceable, but restitution provides an inadequate remedy

a) If a K is unenforceable for whatever reason, restitution may be used to recover any benefits ¡Ç bestowed on D. When that proves inadequate, courts sometimes allow reliance interest.

3. Disproportionate recovery

a) When courts conclude that full expectation interest recovery is too great in proportion to the wrong committed. (Rare)

(1) Only relates to damages that are foreseeable.

(2) Restatement comments: when informality of K or limited price charged implies D did not intend to assume the duty to pay large recovery.

C. Calculating reliance interest

1. Rule: goal is to place ¡Ç in the position she would have occupied had the K not been made.

2. Expenditures incurred ¨C reliance primarily involves reimbursing ¡Ç for expenditures made in reliance of D¡¯s promise.

a) Expenditures include:

(1) Partial performance such as down payments

(2) Preparations ¨C costs in preparation for performance

(3) If D¡¯s performance is part of a larger venture, expenditures include other expenses incurred to pursue that venture

(a) Otherwise, other expenses might be wasted (Anglia Television v. Reed) ¨C see supra

3. Lost opportunities ¨C (rare, but ¡_) in theory, reliance requires D to compensate ¡Ç for lost opportunities as a result of the K

a) Application of this rule is problematic b/c ¡Ç often cannot identify terms of other Ks (lost opportunities)

(1) Courts reluctant to speculate ¨C even if next best offer is fairly identifiable

(2) Courts rarely give reliance remedies that exceed expenditures

B) Exception ¨C when employee leaves one job to take another

(1) Because terms of other K are identifiable (b/c it was an actual K)

D. Reliance interest cannot exceed expectation interest

1. In losing Ks, reliance will exceed expectation

a) In this case, expectation will be awarded.

B) Why? B/c if it was a losing K, then ¡Ç would not have recovered all expenditures

2. Expectation cap on recovery ¨C as noted above

a) If reliance exceeds expectation, ¡Ç limited to expectation

B) ¡Ç may recover all expenditures minus any losses D can prove

(1) Courts will not make a better K for ¡Ç than the one she entered into.

(2) Reliance is primarily a compromise measure of damages: it does not allow ¡Ç the full expectation interest, but it doesn¡¯t limit ¡Ç to recovering benefits bestowed on D (restitution)

(3) Kelly¡¯s article: reliance interest doesn¡¯t really exist. We¡¯re just coming as close as possible to the expectation interest. When profits are uncertain, we still allow expenditures b/c we assume (until D proves otherwise) that ¡Ç would have broken even.

(a) Reliance is therefore expectation with zero profit.

3. Allocating burden of proof

a) D bears responsibility of proving ¡Ç¡¯s losses, and ¡Ç has the responsibility of proving any profits.

(1) If neither changes result, court awards expenditures b/c it assumes ¡Ç would have broken even.

(2) Certainty required ¨C explains why ¡Ç cannot usually recover for lost opportunities

(a) And ¡Ç cannot recover expenditures unless they can be proven with reasonable certainty (usually not a problem)

(3) Strict application of certainty rule undermines goals ¨C strict application would preclude recovery unless ¡Ç could show she would not have suffered even greater losses had D performed.

(a) Most important reliance interest application ¨C when ¡Ç cannot establish lost profits with reasonable certainty; i.e., ¡Ç cannot prove she would have at least broken even.

(i) ¡Ç may then have difficulty proving she would not have incurred serious losses had D performed.

(B) Strict application seems unjust b/c D¡¯s breach caused the uncertainty.

(i) Breach creates need for damages and undermines their ascertainability that would prevent their recovery

4. Summary of allocation of burden of proof

a) ¡Ç ¨C must prove expenses and profits w/ reasonable certainty. Profits more difficult to prove, so usually only recovers expenses

B) D ¨C must prove ¡Ç¡¯s losses. If cannot prove w/ reasonable certainty, court will not reduce recovery of expenses.

c) Zero profit is assumed! If either party wants a different recovery, they must prove it with reasonable certainty.

III. REMEDIES AGREED UPON BY PARTIES

A. Agreements excluding consequential damages

1. Sellers frequently seek to exclude liability of consequential damages.

2. Generally enforceable ¨C price of product will reflect the risk.

3. Unless unconscionable ¨C UCC makes two express provisions re: unconscionable limitations

a) Personal injuries ¨C any clause excluding consequential damages for personal injuries is prima facie unconscionable.

B) Commercial loss ¨C NOT prima facie unconscionable.

c) Exam note ¨C unconscionability is the only K defense that is likely to help ¡Ç combat limitations on remedies. I.e., ¡Ç wants to enforce the K (to get damages), but wants to avoid application of clause excluding consequential damages

B. Agreements specifying an exclusive remedy

1. Generally enforceable

a) Repair or replace ¨C provides that only recourse available to buyer is repair or replacement at seller¡¯s expense. Thus, excludes option to cover and charge seller for difference in price.

B) Refund ¨C refund if not satisfied w/ performance. But cannot claim damages.

2. Optional v. Exclusive remedies

a) Rule: remedial provision in a K is optional unless the contract explicitly specifies that the remedy is exclusive. Otherwise, ¡Ç may seek either the specified remedy or any other remedy allowed by law.

(1) Same rule usually applies to liquidated damages. (see infra)

3. Remedy that fails its purpose

a) If an exclusive remedy fails of its principal purpose, ¡Ç may resort to other remedies allowed by law despite the clause limiting recourse to those remedies.

(1) When a limitation destroys relief from the breach, courts will not deprive ¡Ç access to alternative remedies.

B) Mere undercompensation does NOT equate with failure of its principal purpose.

(1) All limitations will prevent recourse to some options that the law would have allowed.

c) When a limited remedy cannot be implemented it is worthless.

(1) Ex: clause limiting relief to repair or replacement becomes worthless when item cannot be repaired or replaced.

d) Multiple limitations

(1) Some Ks provide multiple limitations ¨C e.g., limit remedy exclusively to obligation to repair or replace AND explicitly disclaim any liability for consequential damages

(a) When 1st remedy fails of its essential purpose, ¡Ç obtains the right to sue for damages ... but the 2nd limitation (excluding cons. damages) may be enforceable.

C. Liquidated Damages and Penalties

1. Rule: courts enforce liquidated damages clauses but refuse to enforce penalties.

2. Liquidated damages must be reasonable regarding either a) the anticipated loss or B) the actual loss ¡_ and the uncertainty of the loss (uncertainty is one factor of a general reasonableness test)

a) Anticipated loss ¨C agreement on an amount that is reasonable at K formation is valid.

(1) Courts sometimes stretch to deny recovery when the liquidated amount greatly exceeds the actual loss, no matter how reasonable it originally seemed.

B) Actual loss ¨C turns on reasonableness of result, not intent of parties

(1) Thus, could have intended clause to be penalty, but if it turns out to be accurate, it is valid.

c) Uncertainty of loss ¨C greater the difficulty of ascertaining damages, the more likely the liquidated damages clause will be held reasonable.

(1) Thus, where actual loss is easy to calculate, the liquidated damages clause needs to be pretty close

(a) But where damages are harder to calculate, the court is likely to allow more leeway for a damage estimate that misses the mark

(2) However, some courts treat uncertainty as a threshold requirement ¨C if actual damages are easy to prove, the liquidated damages clause will be unenforceable.

d) Once liquidated damages are found to be reasonable, the employee no longer has the duty to mitigate damages under the avoidable consequences doctrine

(1) Therefore, reasonable liquidated damages should not be reduced because of ¡Ç¡¯s action/lack of action

3. What happens when anticipated losses are large, but actual losses are small? The results would look like a penalty

a) How to be tolerated:

(1) Bargaining provided opportunity to prevent getting into a bad deal

(2) D gets benefit of an undercompensatory clause (where ¡Ç gets less than actual losses), so shouldn¡¯t D bear risk of overcompensatory clause?

(3) If point is to reduce cost of proving damages, we must allow ¡Ç to rely on anticipated losses

B) However, some courts allow recovery of the actual damages or the liquidated amount ¨C whichever is smaller.

(1) Not a good rule - ¡Ç must bear risk of undercompensation w/o prospect that liquidated damages amount would be generous.

4. Parties can include losses court wouldn¡¯t have included in calculations

a) E.g., can include distress in a liquidated damage clause, as long as the clause specifically shows an intent to include distress

(1) Without express provision re: distress, courts should not read in distress as a way to save an overcompensatory liquidation clause

5. Some courts evaluate reasonableness re: a hypothetical breach

a) If unreasonable in that instance, then the clause is held to be a penalty and is unenforceable.

6. Posner ¨C penalty clauses prevent some efficient breaches ¨C proposes that the law allow parties to make any agreement they want, including one for penalties.

7. A formula clause would likely be enforced before a flat fee.

a) It corresponds to the degree of breach and is thus more reasonable

B) Reduces amount of risk involved in placing clause into K

D. Bonuses

1. A way to contract around the penalty rule: provide a bonus, not a penalty.

a) E.g. ¨C bonus for early performance rather than a penalty for later performance.

B) Technically, it¡¯s not liquidated damages, and it¡¯s not a penalty as it doesn¡¯t deprive a party of anything promised in the K.

2. No reasonableness limit applies.

E. Arbitration

1. Parties can agree to arbitration when they enter into the K or can agree to submit dispute to arbitration after the breach (after breach, however, only one party usually wants to go to arbitration)

a) How to fight arbitration once it¡¯s agreed upon

(1) File suit instead of submitting to arbitration

(2) Ask a court to set aside an arbitration award after it has been made

2. Filing suit instead of submitting to arbitration

a) Courts will usually stay proceedings pending the outcome of arbitration ¨C if the other party requests a stay.

B) D can waive arbitration clause by simply defending in court rather than requesting arbitration

c) Court must ascertain that the current dispute is w/in the scope of the arbitration clause before staying proceedings.

3. Review after arbitration

a) Caveat: arbitrators do not have official power to enforce their judgments ¡_ thus, arbitration awards still come to court for approval

B) Grounds for setting aside the decision of an arbitrator:

(1) No valid arbitration clause ¨C if invalid, no need to decide whether to enforce the arbitration award

(2) If the arbitrator exceeded his authority (dispute is outside the scope of the arbitration clause)

(a) But, party who litigates before an arbitrator may unintentionally waive the limitation by failing to object when that issue was considered.

(3) Serious misconduct ¨C fraud, bribery, corruption ¨C but must have proof of taint

(4) Complete irrationality ¨C if the decision falls outside the realm of any reasonable result

(a) But remember that arbitrators need not apply the law as a court would ¨C so result doesn¡¯t need to be in accord with the law.

(5) Against public policy ¨C general ... bounds not well defined.

4. Arbitration and punitive damages

a) Some courts allow punitive damages (arbitrators don¡¯t need to follow substantive law) ¡_ some courts rule against penalties (public policy is against punishing breach of K)

(1) Punitive damages forbidden (esp. in NY state courts)

(a) Questions that arise:

(i) But only for private wrongs? Can arbitrators award punitive damages for public wrongs?

(ii) Could arbitrator award punitive damages when K allows for it?

(iii) Same court previously affirmed arbitration award of treble liquidated damages (a clear penalty)

(2) Punitive damages allowed (esp. in fed. courts)

(a) Usually deal with public wrongs

(B) When parties agree that arbitrator may award punitive damages, courts may enforce such an award

(i) Implied consent may occur with one party asks for punitive damages in arbitration and the other party fails to object to that request

IV. SPECIFIC PERFORMANCE (Equitable Relief)

A. Rule: specific performance is an injunction ordering a party to perform as promised under the K.

1. Like expectation interest, it seeks to place ¡Ç in the position she would have been in had D performed ¨C but by forcing D to perform, not trying to calculate the equivalent in money damages.

2. Penalty of not obeying injunction is contempt of court.

a) This is a serious use of state¡¯s power to enforce a K, so judges prefer to award damages.

B. Irreparable Injury Rule (When to use equitable relief?)

1. Rule: courts will deny injunctive relief if the remedy at law (usually damages) is adequate.

a) When inadequate? (when to grant spec. perf.?) ¨C If thing promised is unique ¨C OR ¨C When damages are not as complete, as practical, and as efficient.

(1) When not as complete? ¨C when damages cannot be determined/paid

(2) When not as practical? ¨C when specific performance would be much easier

(3) When not as efficient? ¨C when its wasted court time or wasted ¡Ç¡¯s time trying to cover.

B) Uniqueness ¨C most courts will grant specific performance if the promised performance is unique.

(1) Land generally held to be unique ¨C thus, specific performance is common in Ks involving land.

(2) If sentimental value is attached to the item, it is usually held to be unique

(a) Art, family heirlooms

c) Shortage of goods ¨C if money damages would not allow ¡Ç to buy the same performance elsewhere due to scarcity, specific performance is proper.

(1) Might fall under practical ¨C see above

d) OR ¨C If ¡Ç has a good reason that specific performance will be better, it will usually be granted.

C. Limitations on Injunctions (when to deny spec. perf.)

1. General rule ¨C if remedy at law is adequate, spec. perf. will be denied

2. Undue hardship ¨C when harm to D greatly exceeds the benefit to ¡Ç, a court may deny an injunction.

3. Excessive judicial supervision ¨C when burden of enforcement exceeds the benefits an injunction has over the damage remedy.

a) Courts may need to resolve disputes about what the K or injunction requires ¨C court may then deny injunction.

(1) Puts undue burden on court

4. Compelling individuals to perform personal services (employment Ks)

a) If court ordered person to work for someone, it would be a throw-back to slavery

B) Problem of supervision ¨C how will court know if employee is working at maximum effort or if they are slacking off?

c) Strained relationship between employer and employee would create a tense situation

d) Modern exception - specific performance against employers

(1) Now, courts can force employers to accept workers they otherwise wouldn¡¯t have accepted or keep a worker they otherwise would have fired

(a) E.g., statutes such as anti-discrimination laws

e) Exam note ¨C personal service v. service

(1) Not all services are personal ¨C employment Ks are ¡_ construction Ks are not

(2) Promises by companies are not personal service

(a) Therefore, ordering a construction company to finish a project is not against public policy

D. Enforcing Negative Covenants

1. A promise to work for one employer implicitly includes a promise not to work for another at the time you are working for this employer.

2. The promise not to work for another employer can be specifically enforced.

a) I.e., employees cannot be forced to work for someone, but can be forbidden to work for any other.

3. Rule: injunctive relief will be granted to restrain violation by an employee of a negative covenant in a personal service K if the employee is a person of exceptional and unique knowledge, skill, and ability in performing the service called for in the K

a) Unique does not mean one-of-a-kind, only that it would be difficult to locate someone as good.

B) Negative covenant clause doesn¡¯t need to be expressly stated in the K as long as the substance of the K implies the negative clause.

4. Enforcement beyond the K term

a) Some promises not to work extend after the employment ends in order to protect trade secrets.

(1) Courts are reluctant to limit employment after the contract period w/o an express clause in the K.

5. Public policy implications of enforcing negative covenants

a) No person compelled to work for another

B) The performance need not be supervised for quality

c) A broad injunction may prevent a person from earning a living

(1) Courts need to tailor their injunctions narrowly.

V. RESTITUTION

A. Seeks to place D in the position she would have occupied had the K not been made

B. When is restitution used?

1. When no enforceable K exists, but ¡Ç has performed services that benefit D

a) Unjust enrichment exists if D has received a benefit which she cannot in fairness keep w/o compensating ¡Ç - creates a ¡°quasi-contract¡±

(1) Must be a benefit to D

(a) If no benefit, then no cause of action for restitution

(2) Some benefits are fair to keep ¨C e.g., gifts, acts by volunteers

(a) If ¡Ç could have bargained but didn¡¯t, likely a volunteer

(B) Gift

(i) Requires donative intent on part of donor;

(ii) Delivery; and

(iii) Acceptance

2. Restitution for breach of an enforceable K

a) How measured? One of two ways:

(1) If ¡Ç¡¯s performance increased D¡¯s wealth, D must refund the amt. of the increase in wealth

(a) If partial performance, assume the project will be completed. I.e., a half-finished building is a benefit since D will hire someone to complete the rest

(2) If ¡Ç¡¯s performance saved D the need to hire another to provide that performance, D must pay the amt. another party would have charged to provide that performance at the time ¡Ç performed

(a) Note: not the K price, but what others would have charged

(B) Note: measured at the time of performance, not the time of K formation

B) If D breached an enforceable K: (restitution to the nonbreaching party)

(1) ¡Ç may elect the larger of the two measures of restitution

(2) Restitution may exceed the amt. recoverable under expectation

(a) Usually why ¡Ç might opt for restitution over expectation ¡_ to avoid any losses the would have suffered

(3) If ¡Ç has fully performed and D¡¯s only remaining duty is to pay, ¡Ç cannot recover in restitution but may sue for the price owed

c) If ¡Ç breached an enforceable K: (restitution to the breaching party)

(1) The court usually awards the smaller of the two measure of restitution

(2) Restitution may not exceed a pro rata share of the K price

(a) If ¡Ç only works 75% of K before breaching, can only recover 75% of K price

(3) Restitution is available only if the value of ¡Ç¡¯s performance exceeds the amt. of damages to which the nonbreaching D is entitled

(a) I.e., breaching ¡Ç may owe the other party damages caused by the breach

VI. CONSIDERATION

A. To be enforceable, a promise must be supported by consideration.

B. To constitute consideration, a performance or return promise must be bargained for:

1. Bargained for = if something is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise

a) SOUGHT, IN EXCHANGE; GIVEN, IN EXCHANGE

B) Promisor is typically D ¨C the breaching party

2. Gift promises are not enforceable until delivery is made; but exchanges are enforceable from the time the promise is made

a) Conditional gifts are not bargained for

(1) E.g., ¡°if you go around the corner to the store, I¡¯ll let you buy a coat on my credit.¡±

(a) Promisor is specifying how the promisee will receive the gift. The promisor didn¡¯t seek the man¡¯s going around the corner in exchange for giving the man the coat.

(2) Unless the promisor¡¯s words seek the future occurrence and the promisee causes the condition to occur ¨C then there¡¯s consideration

C. Exceptions ¨C where K is enforceable w/o consideration

1. Moral Obligation

a) Involve acts of generosity that prevent bargaining in advance ¡_ and afterwards, the recipient promises to compensate for the generosity

B) Promisee must establish 4 things:

(1) The existence of a promise;

(2) That the promisor received a benefit;

(a) Promisor must personally receive the benefit

(B) Like unjust enrichment, ask if there really was a benefit

(3) That the promisee provided that benefit;

(a) Promisee must personally provide the benefit

(4) That failure to enforce the promise would produce injustice

c) Defenses to moral obligation: (I made the promise after the generous act, but now I don¡¯t want to pay)

(1) Gift

(a) When the promisee (person who did the generous act) intended a gift; or

(B) When the promisee bestowed the benefit w/o request even though bargaining was possible (officious intermeddlers)

(2) Disproportionality

(a) When the promisor makes a promise that is disproportionate to the benefit received, the courts may limit the promise to the value the promisor actually received

2. Past Consideration

a) When there was an enforceable K (w/ consideration), and some action cuts off liability (bankruptcy, stat. of limitations) ¡_

B) Then the promisor comes forth and renews the promise, even though he doesn¡¯t have to ¡_

c) The new promise waives the defense that cut off liability

(1) The new promise is thus enforceable, even if it¡¯s different than the old promise

3. Reliance

a) When someone relies on a promise even though they didn¡¯t give anything in exchange

B) General circumstances in which courts will enforce promises based on promisee¡¯s reliance:

(1) A promise;

(2) The promisor reasonably should have expected the promisee to rely on the promise;

(3) The promisee did rely on the promise (in a way the promisor reasonably should have expected); and

(4) Injustice can be avoided only be enforcing the promise

c) When reliance is proven, it establishes promissory estoppel

(1) The court will then not consider the arg. that the promise is unenforceable b/c of lack of consideration. I.e., they are estopped from denying the existence of consideration

d) On test:

(1) Start by arguing that reliance did occur

(2) Then argue that reliance was reasonably foreseeable (not that reliance was reasonable ¡_ just that promisor should reasonably foresee the reliance)

VII. Improper Promises

A. Incapacity

1. If a party lacks the capacity to enter a contract, any agreement she makes is voidable. (only voidable at the request of the incapacitated)

a) 4 basic sources of incapacity:

(1) Infancy

(2) Mental illness or defect

(3) Intoxication

(4) Guardianship

2. Infancy

a) Persons under the age of 18 lack the capacity to enter contracts

(1) Exceptions:

(a) In some states, marriage removes the incapacity, regardless of age

(B) In some states, contracts to obtain the necessities of life are enforceable despite infancy

B) How to protect the parties unaware of another¡¯s infancy?

(1) A minor who misrepresents her age may be estopped to raise it as her defense

(2) Limitations on restitution

(a) Specific restitution ¨C when an infant asserts the defense, the other party is entitled to recover the item given in exchange for the infant¡¯s promise

(i) Property may not be in same condition, though

(a) In some states, the infant¡¯s recovery of amounts paid is reduced to account for the value of her use of the property

(i) Pay fair rental value for time used if property in good condition

(ii) Pay depreciation value of property if property has depreciated

(B) Restitution in money is generally unavailable

(i) An infant who cannot return the specific thing received often need not return anything to the other party

(a) No need to return fair value of services received

3. Mental Illness or Defect

a) Two types of incapacity, both of which must stem from a mental illness or defect, i.e. mental illness is what caused you not to understand the K

(1) Cognitive incapacity ¨C if person is ¡°unable to understand the nature and consequences of the transaction¡±

(a) Thus, party¡¯s assent is not evidence that she valued what she received more than what she gave up

(2) Volitional incapacity ¨C exists if 1) a person is ¡°unable to act in a reasonable manner in relation to the transaction,¡± AND 2) ¡°the other party has reason to know of his condition.¡±

(a) What is meant by ¡°condition¡±? Mental illness itself or the inability to act in a reasonable manner?

(B) Person may seem to understand what the transaction entails, but the disorder prevents her from exercising a free choice

(i) Party¡¯s assent may or may not reflect the value she attaches to the items exchanged

B) How to protect the parties unaware of another¡¯s mental illness?

(1) Reason to know requirement ¨C means Ks will be enforced if the other person had no reason to know.

(a) Helps protect those who entered into a K with a mentally ill party without knowing

(2) Detrimental reliance

(a) Partial performance or other changes in circumstances may prejudice the other party so greatly that avoidance of the K would be unjust

(i) In that case, the K would not be able to be disaffirmed by the mentally ill party

(3) But, courts will allow the mentally ill to disaffirm an unfair contract even after the party has performed

4. Intoxication

a) K is voidable if the intoxication caused a person to be:

(1) Cognitive incapacity ¨C unable to understand in a reasonable manner the nature and consequences of the K; or

(2) Volitional incapacity ¨C unable to act in a reasonable manner in relation to the K

(3) AND if the other party has reason to know of the incapacity, i.e., that the intoxication has left the person unable to understand the transaction or unable to act reasonably

B) Protection for parties unaware of another¡¯s intoxication

(1) Most stems from the ¡°reason to know¡± requirement

(2) Intoxicated person must disaffirm K promptly after becoming sober

B. Duress

1. Involves 3 elements:

a) An improper threat; that

B) Induces a party¡¯s assent to the agreement; under the circumstances where

c) She had no reasonable alternative but to assent

2. Elements in detail:

a) Improper threat:

(1) The threat need not be stated expressly ¨C it can be implicit

(2) Focus on whether the threat was improper, not the mere existence of a threat

(3) The following threats are always improper:

(a) A threat to commit a crime or a tort

(B) A threat that itself would be a crime or a tort if the threatener obtained property as a result, e.g., blackmail

(d) A threat to use of civil process in bad faith

(i) I.e., threat to commence a civil suit

(e) A threat to breach an obligation of good faith under a K

(i) Usually arises when one party seeks to modify a K

(ii) Note: some threatened breaches are proper ¨C new circumstances may justify renegotiation, or there may be a chance for efficient breach

(a) But, improper when the threat is made w/o any legitimate basis for seeking modification

(4) The following threats are improper if the resulting contract is not on fair terms:

(a) The act threatened would harm the other party without significant benefit to the threatener

(B) The effectiveness of the threat is enhanced by prior unfair dealing by the threatener

(i) If the threatener caused the weakness that increases susceptibility to a threat

(i) A catch-all provision

(d) Application difficulties:

(i) ¡°Fair terms¡± are often unascertainable ¨C no standard exists

(i) Many terms used are standardless, as well:

(a) E.g., ¡°illegitimate ends¡±, ¡°prior unfair dealings¡±

B) Inducement:

(1) Only applies if the threat induced the assent ¡_ not if the party would have assented anyway.

(2) If the threat ¡°substantially contributed to the manifestation of assent,¡± the threat induced the assent

(a) The burden is on the threatener to show the party would have assented regardless of the threat

c) No Reasonable Alternatives:

(1) If the party has reasonable alternatives to succumbing to the threat, courts may reject efforts to disaffirm

(2) Ask: is there a way you could have said no and avoided the harm of the threat?

2. Threats by 3rd parties:

a) Threats by 3rd parties will make the K voidable ¡_

(1) Unless the other party to the K relies materially on the agreement in good faith and w/o reason to know of the duress

B) A person who makes a threat at the request of a party to the K may be an agent of that party ¡_ not a 3rd party

c) If the party has reason to know, reliance is unreasonable

B. Undue Influence

1. Rule: if assent was induced by undue influence, the K is voidable

2. Extends the rules re: duress to cover situations where the threats are unintended or too subtle to identify.

a) Inducement

(1) Same as in relation to duress ¨C ¡°substantially contributed to the manifestation of assent.¡±

B) Undue influence

(1) Unfair persuasion, PLUS either domination or relationship of trust.

(a) Unfair persuasion: need to ID forces that made it harder for a person to recognize the merits of the deal being offered ¨C one example may not be sufficient

(i) A few examples:

(a) When assent occurs in an unusual place or time, and the party who selected the place/time did so to lower resistance

(B) When one party insists on immediate or rushed assent ¡_

(B) Domination: when a person is under the domination of the party exercising the persuasion, they have less ability to resist unfair persuasion

(i) How define domination?

(a) Dependency/necessity: when one party depends so heavily on another that she feels she cannot refuse the other¡¯s offer. Refusal would cause the party to rescind that support

(B) Overbearing presence: when one party possesses power that the other cannot resist. E.g., physical intimidating presence in one¡¯s home

(i) Nonfamilial relationships: can arise w/o family ties. E.g., doctor, pastor, close friendship ¨C this relationship may lead the party to believe that the other would not act inconsistently with her welfare.

3. Undue influence by 3rd party will make the K voidable unless the uninfluenced party to the K relies materially on the agreement in good faith and w/o reason to know of the undue influence

C. Misrepresentation

1. 4 elements to prove:

a) A misrepresentation was made;

B) The misrepresentation was either fraudulent or material;

c) The misrepresentation induced the party¡¯s manifestation of assent; and

d) The party was justified in relying on the misrepresentation.

2. Elements in detail:

a) Misrepresentation ¨C ¡°an assertion not in accord with the facts¡±

(1) Assertion need not be express - silence can be an assertion (see infra)

(2) Assertions are not limited to statements of fact ¨C includes promises, opinions, and statements of law

B) A misrepresentation is material if:

(1) The assertion would substantially contribute to a reasonable person¡¯s decision to assent to the transaction; or

(2) The speaker knows the assertion would substantially contribute to the other party¡¯s decision to assent to the transaction.

c) A misrepresentation is fraudulent if:

(1) The party intends the assertion to induce another party to assent to the transaction; AND one of three conditions applies:

(a) Believed false - the speakers knows or believes the assertion is inaccurate; or

(B) Exaggerated confidence - the speaker implies she has confidence in the accuracy of the assertion when she does not have such confidence; or

(2) Most statements made in negotiations fail to withstand the first part of the test ¨C that the assertions had the intent to induce the other party to enter the deal

d) Inducement:

(1) A misrepresentation induces a party¡¯s assent if it substantially contributes to his decision to assent to that particular deal

(a) Depends on the particular party ¨C not a reasonable person

e) Justified reliance:

(1) Reliance is justified if the speaker implies she has a factual basis for an opinion

(2) When is reliance unjustified?

(a) If one already knows the truth;

(B) If one could discover the truth so easily that failure to do so would constitute bad faith; or

(i) Exceptions to reliance on pure opinion: (reliance is justified)

(a) There is a relationship of trust btwn. the parties;

(B) The deceived party reasonably believes the speaker has special expertise; or

3. Concealment v. Nondisclosure

a) Concealment: active attempts to prevent the other party from discovering the true state of affairs ¨C usually is misrepresentation

B) Nondisclosure: when a party doesn¡¯t volunteer correct information w/o an inquiry from the other party.

(1) When will this silence be considered an assertion?

(a) If a party knows that a prior assertion would mislead the other party unless she makes additional disclosures;

(B) If a party knows that disclosure will correct a mistake about the character or essential terms of a K;

(d) If a party knows that disclosure would correct a mistake of basic assumption, and nondisclosure would breach an obligation of good faith and fair dealing.

(i) Basic assumption ¨C must be a mistake re: a fundamental part of the transaction

(ii) Known mistake ¨C deceiver must know about the mistake

(iii) Good faith ¨C remember no duty of good faith exists in negotiations.

(a) Disclosure required by good faith will vary with the type of K ¨C cf. used car salesman v. medical appliances

D. Mutual Mistake

1. K is voidable for mutual mistake if both parties were mistaken (about the same thing) and:

a) The mistake involved facts at the time the K was formed;

B) The mistake concerned a basic assumption upon which the agreement was made;

c) The mistake materially affected the agreed exchange; and

d) The adversely affected party did not bear the risk of the mistake.

2. Elements in detail:

a) Mistake at formation

(1) Must be a present mistake ¨C one discovered after the K was made

(2) Mistaken prediction about future events does not fall w/in the scope of the rule

B) Basic assumption

(1) Mistake must go to the heart of the deal ¨C usually affecting the subject matter of the transaction

(2) Rule of thumb: if you cannot tell who values the thing actually sold more, the mistake probably implicates a basic assumption

c) Material effect on exchange

(1) Must be a significant mistake

(2) Usually, material effect is likely where each party is affected

(a) I.e., one gets more than she expected and the other gives more than she expected

d) Risk of mistake

(1) Allocation by K

(a) The agreement itself may contain provisions that impose the risk on one party

(2) Conscious ignorance

(a) Party who enters a K even though she lacks info assumes the risk that the facts prove adverse to her

(i) This provides incentive for people to investigate before entering Ks

WhAt_dA_fUcK · December 17, 2002

Originally posted by sneak
01

and here you are on 12oz. shame on you!!!

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nomadawhat · December 17, 2002

Originally posted by Poop Man Bob
CONTRACTS OUTLINE

KELLY ¨C Fall 2002

I. EXPECTATION INTEREST

A. Normal rule of damages from a breach: seeks to place the nonbreaching party (¡Ç) in the position she would have been in had the contract been performed.

1. I.e., how much money will it take to allow ¡Ç to receive all the benefits of the contract.

2. Basic formula: How much should ¡Ç have received (minus) how much ¡Ç actually received.

a) Other formulas:

(1) REVENUE ¨C AVOIDABLE COSTS

(2) PROFIT + UNAVOIDABLE COSTS

B. Value of the promised performance

1. Two ways to assign value to a performance (or lack thereof):

a) Market Value

(1) When performance is available in the market, the price set by the market is the value of that performance.

(a) Where? Market value measured at the place performance was to occur.

(B) When? Market value measured at the time ¡Ç learns of the breach.

(i) If contract is repudiated, market value measured at time performance was to occur.

(ii) If case is tried before performance was set to occur, market value set at time buyer learned of repudiation.

© Lack of a market? If performance is unique, experts can testify re: market value. Or specific performance may be available (see infra)

B) Cover Price

(1) Purchase on the open market of goods to substitute for those promised but never delivered.

(a) Might indicate subjective value of performance to ¡Ç. If willing to pay more than K price, likely valued performance more.

(i) Better evidence than hypothetical market price.

(B) Must be w/o unreasonable delay and in good faith

(i) Can¡¯t pay more than a reasonable buyer would have paid, or it strips the cover price of its validity.

© Point is not whether you got the best deal out there, just that the cover was reasonable under the circumstances

(d) Cover only useful if substitute is purchased.

C. Avoiding undercompensation

1. Incidental damages

a) These involve costs incurred because the deal fell through.

(1) E.g., cost to advertise goods for new buyer, cost to store property pending resale. PLUS, costs incurred to obtain substitute goods ¨C commissions, transportation costs, etc.

B) Usually involve direct expenditures. Therefore, the costs are usually closely linked to the failure to deliver the good.

2. Consequential damages

a) These involve the way ¡Ç intended to use the performance ¨C lost profits most common form of consequential damages

(1) Ask yourself, ¡°If you had performed, then I could have ¡_¡±

B) Usually take form of lost gains rather than direct expenditures. Plus, these damages are usually more remote from the breach.

3. Prejudgment interest ¨C a special type of consequential/incidental damage

a) When breach delays the date on which ¡Ç receives money (or property she could have sold for money), ¡Ç loses the uses of that money for that period. Interest compensates for that loss.

(1) ¡Ç could have invested the money and earned interest (consequential damage)

(2) Or, ¡Ç may have needed to borrow money and thus has to pay interest on the loan (incidental damage)

(3) Interest rates are usually set by statute.

(4) Consequential damages for failure to pay money are almost always limited to interest, despite the million other things ¡Ç could have done with the money.

D. Avoiding overcompensation

1. Reasonable Cover

a) Buyer entitled to obtain substitute goods and recover the difference in price.

(1) When goods of equal quality are available, ¡Ç may not substitute higher-quality goods and expect D to make up the difference.

(2) What if ¡Ç must acquire substitute goods quickly to avoid serious consequential damages? If goods of equal quality are unavailable, it may be reasonable to cover with higher-quality goods. When reasonable, the difference between the cover price and the K price is recoverable.

B) What constitutes ¡°equal¡± quality goods?

c) If ¡Ç obtains substitute goods at a better price, ¡Ç is better off than had the K been performed. Likely not to file suit.

2. Lost-volume seller

a) Ex: ¡Ç can enter into more than one contract at once and earn profits on each. First K is breached, but ¡Ç resells K performance to another person and earns profit.

(1) ¡Ç can still recover lost profits from first (breached) K because ¡Ç would have likely entered into 2 profit-creating Ks.

(2) Only applies to people with plenty to sell (usually dealers). If it¡¯s an individual, it likely won¡¯t apply.

(3) Issue only arises when ¡Ç resold the K performance to another b/c it makes it appear she avoided the loss. Unless D can claim that resale eliminated or reduced ¡Ç¡¯s loss, ¡Ç need not bring up the lost-volume seller rule.

E. Limitations on Expectation Recoveries

1. Avoidable Consequences Doctrine

a) Courts subtract the costs ¡Ç should have avoided, even if they didn¡¯t.

B) R2C ¡ì350: ¡Ç cannot recover for any loss that she should have avoided without undue risk, burden, or humiliation.

(1) Inaction included in reasonable efforts: ¡Ç must stop work when D repudiates or notifies ¡Ç of breach.

c) D¡¯s burden

(1) Must identify reasonable efforts.

(a) D must show how ¡Ç could have minimized the loss and prove that these efforts would have been reasonable, i.e. not involved undue risk, burden, or humiliation

(2) Must establish ¡Ç¡¯s unreasonableness

(a) D must show ¡Ç¡¯s unreasonableness in failing to make these efforts. If ¡Ç made other reasonable efforts, courts will not reduce ¡Ç¡¯s recovery merely b/c he didn¡¯t choose D¡¯s preferred method.

(3) Must establish amount of loss avoidable

(a) D must establish how much of the loss ¡Ç could have avoided by taking reasonable efforts.

d) Unreasonable efforts not required, i.e. undue risk, burden, or humiliation.

(1) Particularly applicable in the employment context ¨C some steps have hardened into rules.

(a) Change of career - ¡Ç need not take work in a different field. It may be reasonable to look for more lucrative work than accept the first job offered. (Undue burden and humiliation args can be made) (Exam note: what exactly constitutes a change of career? How different does it need to be?)

(B) Relocation ¨C ¡Ç need not take work in a different locale. If this weren¡¯t a rule, a breaching employer would make the cost of moving an incidental damage! (Undue burden arg can be made) (Exam note: what exactly constitutes a change of locale? How far away from original work does it need to be?)

© Same employer - ¡Ç need not take inferior work with the same employer. (Undue humiliation arg can be made). Plus, employer has already shown that he can¡¯t be trusted to keep Ks with ¡Ç.

e) Losses that could not be avoided are recoverable

(1) Futile efforts ¨C if reasonable efforts to avoid the loss would have been futile, ¡Ç can recover the full loss even if she made NO efforts to minimize the loss.

(a) Shouldn¡¯t risk it, though. Always make reasonable efforts to find work b/c employer may be able to prove that other work was out there.

f) Costs of minimization recoverable

(1) Costs incurred to pursue reasonable efforts to minimize the loss are recoverable from D ¨C normally as an incidental damage.

(a) Note that high costs may make it unreasonable for ¡Ç to take such measures. In this case, the costs would not be recoverable.

2. Cost to repair v. Diminution in value

a) Rule: If a breach results in defective or unfinished construction and the loss in value to the injured party is not proved with sufficient certainty, he may recover damages based on:

(1) Cost to repair ¨C award ¡Ç enough money to allow her to repair the inadequate performance to comply with the contract; or

(2) Diminution in value ¨C award ¡Ç the difference in the value between what she was promised and what she received.

B) When the two differ significantly, the court usually awards the smaller amount.

c) Both remedies compensate for expectation ¨C they just take a different view of what was promised

(1) The thing promised ¨C cost to repair permits ¡Ç to obtain thing promised by using money to repair any defects in performance

(2) The value promised ¨C diminution in value gives ¡Ç same value as thing promised.

d) Relation to avoidable consequences ¨C most cases of this sort can be resolved by asking whether ¡Ç acted reasonably to minimize the loss

(1) If cost of repair is less than diminution in value, cost to repair is typical remedy. It would be unreasonable for ¡Ç to fail to repair when that would avoid a large diminution in value.

(2) If diminution of value is less than cost to repair, diminution of value is typical remedy. It would be unreasonable to spend $100 to receive something with a value of $20. (Most cases)

(3) Subjective value

(a) Most cases involve costs of repair that exceed diminution in value.

(B) So does ¡Ç attach subjective value to thing promised?

(i) If so, decision to repair might be reasonable for the ¡Ç, even though other buyers would not pay more for the repaired property.

© However, courts tend to simply award the lesser amount rather than attempt to determine whether the subjective value claims are valid. (After all, they are, by nature, subjective)

e) Risk of undercompensation or overcompensation ¨C when cost of repair exceeds diminution in value (as it does in most cases)

(1) Overcompensation ¨C awarding cost of repair - ¡Ç might decide not to repair the property and pocket the money. If so, her wealth has increased b/c she has property worth a little bit less and money worth much more than the difference.

(2) Undercompensation ¨C awarding dim. in value - ¡Ç will be undercompensated if she attaches a subjective value to the repaired property that the market price does not reflect.

f) Relation to specific performance

(1) Cost of repair like specific performance ¨C it simply allows ¡Ç to select a different person to perform the repairs instead of ordering D to perform them.

3. Foreseeability

a) Rule: ¡Ç can recover damages if either a) the loss flows naturally from the breach or B) the D, at the time the K was made, had reason to know that losses of this type probably would result from a breach, i.e. ¡Ç told D of the results of a breach.

(1) When consequences of a breach are unusual, the only way D would have reason to know about them is if ¡Ç told him about the likely consequences.

(2) Foreseeability problems usually involve consequential damages, i.e. the way ¡Ç planned to use D¡¯s performance. This is usually unknown to D, so D has no idea the amount or type of losses ¡Ç would face in the event of a breach (hence the need to inform)

(3) General damages = incidental; special damages = consequential (don¡¯t need to use these terms on the test ¡_ just know them)

(4) Foreseeability creates an incentive to share information

(a) Forces the party who knows how harmful a breach would be (¡Ç) to tell the party who needs to take precautions to avoid the breach (D)

(B) Rule requires ¡Ç to reveal the important reasons for seeking D¡¯s performance or forego damages for the loss of those unusual possibilities

(5) Advance mitigation of damages

(a) Minimizes the loss by discouraging D from breaching.

B) Buyer¡¯s losses

(1) More likely to arise on an exam because the consequences of breach are usually harder to foresee. (As opposed to a seller who usually loses money and then receives the interest on that money as damages)

c) Common errors re: Foreseeability

(1) Foreseeability only requires reason to know, not actual knowledge. D cannot plead ignorance if they had reason to know of the type of loss.

(2) Foreseeability only requires D have reason to know of the type of damages, not the amount of damages.

(3) Foreseeability does not depend on a tacit (implied but not expressed) agreement to accept responsibility for damages.

(4) Foreseeability can arise without actual notification by the buyer to the seller.

4. Certainty doctrine

a) Rule: ¡Ç cannot recover damages unless she can prove them with reasonable certainty.

(1) Uncertainty applies to all damages, but is most important for consequential damages (usually lost profit)

(2) ¡Ç must show existence of loss resulting from the breach.

(3) Then ¡Ç must show amount of loss. Jury is not allowed to speculate re damages, thus evidence must be entered to show amount of loss. Expert testimony re amount of loss is sufficient basis for allowing the jury to estimate the amount of loss.

(a) Established businesses with a history of profitability will help ¡Ç prove losses with reasonable certainty.

(B) If a new business, comparable businesses will help ¡Ç prove that this venture would have been profitable.

(i) However, new businesses may have trouble showing enough similarities between themselves and other businesses.

(a) Usually run by other people, usually in other places.

B) Lack of reasonable certainty frequently = use of reliance interest.

(1) Here, reliance is simply expectation interest w/ zero profit (as it always is).

(2) I.e., assume that ¡Ç would have broken even had the breach not occurred ¨C let the party who wants to prove differently do so w/ reasonable certainty

(a) Anglia exception ¨C if D is part of a larger project where his performance is crucial, D held liable for expenditures incurred before and after K was signed, as expenditures would reasonably be in contemplation of the parties as likely to be wasted if the K was broken

c) Wrongdoer exception ¨C suggested by some courts

(1) If D¡¯s conduct prevents ¡Ç from demonstrating profits with reasonable certainty, then the court will allow the jury to make a reasonable estimate of loss profits, although the jury is still not allowed to speculate.

(a) Courts use this as an explanation for why they allow ¡Ç who has proven that lost profits were greater than zero to recover profits, even though no certainty attaches to that particular amount.

(B) Not smiled upon by Kelly ¨C if taken literally, would eliminate the certainty doctrine, for D¡¯s breach is always the reason ¡Ç cannot demonstrate profits.

d) Summary:

(1) ¡Ç¡¯s burden to recover profits:

(a) ¡Ç must prove with reasonable certainty that profit would have existed AND prove with reasonable certainty the amount of profit

(B) ¡Ç can, however, recover expenditures w/o proving the venture would have broken even

(2) D¡¯s burden to avoid paying profits:

(a) D must prove the venture would not have broken even

(B) D still has to pay costs already incurred in reliance of the K

(3) Default presumption:

(a) Allocates the risk of uncertainty between the two parties by assuming profits would be zero, i.e. reliance interest. (Assumes no profits but also no losses)

5. Emotional Distress

a) Rule: damages for distress are usually not recoverable in contract actions, with 2 exceptions:

(1) 1st exception: Physical harm: when a breach of K causes physical injury, emotional distress/pain & suffering are part of the recovery.

(2) 2nd exception: Emotional contracts: when a K or breach is likely to cause severe emotional harm, damages may be recoverable

(a) Examples: Burials/funerals gone horribly wrong

(B) Insurance ¨C insurers refusal to pay a person who has just suffered a tragedy

© Vacation: breaches that destroy vacations

B) R2C ¡ì353 ¨C emotional distress will be excluded unless ¡°the contract or the breach is of such a kind that serious emotional distress was a particularly likely result.¡±

6. Attorney¡¯s Fees

a) Rule: attorney¡¯s fees are usually not recoverable as an element of damages, with exceptions:

(1) Express contract: when K provides for recovery of attorney¡¯s fees as part of the damages, it is usually enforceable.

(2) Collateral litigation: when D¡¯s breach forces ¡Ç to incur attorney¡¯s fees against 3rd parties, fees are recoverable as consequential damages.

(3) Statutes: some statutes allow recovery of fees.

7. Punitive Damages/Penalty Clauses ¨C more discussion later

a) Rule: punitive damages are not recoverable in contract actions, with exceptions.

B) Exceptions (awarded by some courts): breach of promise to marry, insurance contracts

II. RELIANCE INTEREST

A. Rule: goal is to place ¡Ç in the position she would have occupied had the K not been made.

1. Allows ¡Ç to break even ¨C no recovery of profits and no losses suffered.

2. Remember that expectation interest is the normal rule re: damages.

B. When is reliance interest used?

1. When expectation damages are uncertain (see uncertainty doctrine, supra)

2. When a K is unenforceable, but restitution provides an inadequate remedy

a) If a K is unenforceable for whatever reason, restitution may be used to recover any benefits ¡Ç bestowed on D. When that proves inadequate, courts sometimes allow reliance interest.

3. Disproportionate recovery

a) When courts conclude that full expectation interest recovery is too great in proportion to the wrong committed. (Rare)

(1) Only relates to damages that are foreseeable.

(2) Restatement comments: when informality of K or limited price charged implies D did not intend to assume the duty to pay large recovery.

C. Calculating reliance interest

1. Rule: goal is to place ¡Ç in the position she would have occupied had the K not been made.

2. Expenditures incurred ¨C reliance primarily involves reimbursing ¡Ç for expenditures made in reliance of D¡¯s promise.

a) Expenditures include:

(1) Partial performance such as down payments

(2) Preparations ¨C costs in preparation for performance

(3) If D¡¯s performance is part of a larger venture, expenditures include other expenses incurred to pursue that venture

(a) Otherwise, other expenses might be wasted (Anglia Television v. Reed) ¨C see supra

3. Lost opportunities ¨C (rare, but ¡_) in theory, reliance requires D to compensate ¡Ç for lost opportunities as a result of the K

a) Application of this rule is problematic b/c ¡Ç often cannot identify terms of other Ks (lost opportunities)

(1) Courts reluctant to speculate ¨C even if next best offer is fairly identifiable

(2) Courts rarely give reliance remedies that exceed expenditures

B) Exception ¨C when employee leaves one job to take another

(1) Because terms of other K are identifiable (b/c it was an actual K)

D. Reliance interest cannot exceed expectation interest

1. In losing Ks, reliance will exceed expectation

a) In this case, expectation will be awarded.

B) Why? B/c if it was a losing K, then ¡Ç would not have recovered all expenditures

2. Expectation cap on recovery ¨C as noted above

a) If reliance exceeds expectation, ¡Ç limited to expectation

B) ¡Ç may recover all expenditures minus any losses D can prove

(1) Courts will not make a better K for ¡Ç than the one she entered into.

(2) Reliance is primarily a compromise measure of damages: it does not allow ¡Ç the full expectation interest, but it doesn¡¯t limit ¡Ç to recovering benefits bestowed on D (restitution)

(3) Kelly¡¯s article: reliance interest doesn¡¯t really exist. We¡¯re just coming as close as possible to the expectation interest. When profits are uncertain, we still allow expenditures b/c we assume (until D proves otherwise) that ¡Ç would have broken even.

(a) Reliance is therefore expectation with zero profit.

3. Allocating burden of proof

a) D bears responsibility of proving ¡Ç¡¯s losses, and ¡Ç has the responsibility of proving any profits.

(1) If neither changes result, court awards expenditures b/c it assumes ¡Ç would have broken even.

(2) Certainty required ¨C explains why ¡Ç cannot usually recover for lost opportunities

(a) And ¡Ç cannot recover expenditures unless they can be proven with reasonable certainty (usually not a problem)

(3) Strict application of certainty rule undermines goals ¨C strict application would preclude recovery unless ¡Ç could show she would not have suffered even greater losses had D performed.

(a) Most important reliance interest application ¨C when ¡Ç cannot establish lost profits with reasonable certainty; i.e., ¡Ç cannot prove she would have at least broken even.

(i) ¡Ç may then have difficulty proving she would not have incurred serious losses had D performed.

(B) Strict application seems unjust b/c D¡¯s breach caused the uncertainty.

(i) Breach creates need for damages and undermines their ascertainability that would prevent their recovery

4. Summary of allocation of burden of proof

a) ¡Ç ¨C must prove expenses and profits w/ reasonable certainty. Profits more difficult to prove, so usually only recovers expenses

B) D ¨C must prove ¡Ç¡¯s losses. If cannot prove w/ reasonable certainty, court will not reduce recovery of expenses.

c) Zero profit is assumed! If either party wants a different recovery, they must prove it with reasonable certainty.

III. REMEDIES AGREED UPON BY PARTIES

A. Agreements excluding consequential damages

1. Sellers frequently seek to exclude liability of consequential damages.

2. Generally enforceable ¨C price of product will reflect the risk.

3. Unless unconscionable ¨C UCC makes two express provisions re: unconscionable limitations

a) Personal injuries ¨C any clause excluding consequential damages for personal injuries is prima facie unconscionable.

B) Commercial loss ¨C NOT prima facie unconscionable.

c) Exam note ¨C unconscionability is the only K defense that is likely to help ¡Ç combat limitations on remedies. I.e., ¡Ç wants to enforce the K (to get damages), but wants to avoid application of clause excluding consequential damages

B. Agreements specifying an exclusive remedy

1. Generally enforceable

a) Repair or replace ¨C provides that only recourse available to buyer is repair or replacement at seller¡¯s expense. Thus, excludes option to cover and charge seller for difference in price.

B) Refund ¨C refund if not satisfied w/ performance. But cannot claim damages.

2. Optional v. Exclusive remedies

a) Rule: remedial provision in a K is optional unless the contract explicitly specifies that the remedy is exclusive. Otherwise, ¡Ç may seek either the specified remedy or any other remedy allowed by law.

(1) Same rule usually applies to liquidated damages. (see infra)

3. Remedy that fails its purpose

a) If an exclusive remedy fails of its principal purpose, ¡Ç may resort to other remedies allowed by law despite the clause limiting recourse to those remedies.

(1) When a limitation destroys relief from the breach, courts will not deprive ¡Ç access to alternative remedies.

B) Mere undercompensation does NOT equate with failure of its principal purpose.

(1) All limitations will prevent recourse to some options that the law would have allowed.

c) When a limited remedy cannot be implemented it is worthless.

(1) Ex: clause limiting relief to repair or replacement becomes worthless when item cannot be repaired or replaced.

d) Multiple limitations

(1) Some Ks provide multiple limitations ¨C e.g., limit remedy exclusively to obligation to repair or replace AND explicitly disclaim any liability for consequential damages

(a) When 1st remedy fails of its essential purpose, ¡Ç obtains the right to sue for damages ... but the 2nd limitation (excluding cons. damages) may be enforceable.

C. Liquidated Damages and Penalties

1. Rule: courts enforce liquidated damages clauses but refuse to enforce penalties.

2. Liquidated damages must be reasonable regarding either a) the anticipated loss or B) the actual loss ¡_ and the uncertainty of the loss (uncertainty is one factor of a general reasonableness test)

a) Anticipated loss ¨C agreement on an amount that is reasonable at K formation is valid.

(1) Courts sometimes stretch to deny recovery when the liquidated amount greatly exceeds the actual loss, no matter how reasonable it originally seemed.

B) Actual loss ¨C turns on reasonableness of result, not intent of parties

(1) Thus, could have intended clause to be penalty, but if it turns out to be accurate, it is valid.

c) Uncertainty of loss ¨C greater the difficulty of ascertaining damages, the more likely the liquidated damages clause will be held reasonable.

(1) Thus, where actual loss is easy to calculate, the liquidated damages clause needs to be pretty close

(a) But where damages are harder to calculate, the court is likely to allow more leeway for a damage estimate that misses the mark

(2) However, some courts treat uncertainty as a threshold requirement ¨C if actual damages are easy to prove, the liquidated damages clause will be unenforceable.

d) Once liquidated damages are found to be reasonable, the employee no longer has the duty to mitigate damages under the avoidable consequences doctrine

(1) Therefore, reasonable liquidated damages should not be reduced because of ¡Ç¡¯s action/lack of action

3. What happens when anticipated losses are large, but actual losses are small? The results would look like a penalty

a) How to be tolerated:

(1) Bargaining provided opportunity to prevent getting into a bad deal

(2) D gets benefit of an undercompensatory clause (where ¡Ç gets less than actual losses), so shouldn¡¯t D bear risk of overcompensatory clause?

(3) If point is to reduce cost of proving damages, we must allow ¡Ç to rely on anticipated losses

B) However, some courts allow recovery of the actual damages or the liquidated amount ¨C whichever is smaller.

(1) Not a good rule - ¡Ç must bear risk of undercompensation w/o prospect that liquidated damages amount would be generous.

4. Parties can include losses court wouldn¡¯t have included in calculations

a) E.g., can include distress in a liquidated damage clause, as long as the clause specifically shows an intent to include distress

(1) Without express provision re: distress, courts should not read in distress as a way to save an overcompensatory liquidation clause

5. Some courts evaluate reasonableness re: a hypothetical breach

a) If unreasonable in that instance, then the clause is held to be a penalty and is unenforceable.

6. Posner ¨C penalty clauses prevent some efficient breaches ¨C proposes that the law allow parties to make any agreement they want, including one for penalties.

7. A formula clause would likely be enforced before a flat fee.

a) It corresponds to the degree of breach and is thus more reasonable

B) Reduces amount of risk involved in placing clause into K

D. Bonuses

1. A way to contract around the penalty rule: provide a bonus, not a penalty.

a) E.g. ¨C bonus for early performance rather than a penalty for later performance.

B) Technically, it¡¯s not liquidated damages, and it¡¯s not a penalty as it doesn¡¯t deprive a party of anything promised in the K.

2. No reasonableness limit applies.

E. Arbitration

1. Parties can agree to arbitration when they enter into the K or can agree to submit dispute to arbitration after the breach (after breach, however, only one party usually wants to go to arbitration)

a) How to fight arbitration once it¡¯s agreed upon

(1) File suit instead of submitting to arbitration

(2) Ask a court to set aside an arbitration award after it has been made

2. Filing suit instead of submitting to arbitration

a) Courts will usually stay proceedings pending the outcome of arbitration ¨C if the other party requests a stay.

B) D can waive arbitration clause by simply defending in court rather than requesting arbitration

c) Court must ascertain that the current dispute is w/in the scope of the arbitration clause before staying proceedings.

3. Review after arbitration

a) Caveat: arbitrators do not have official power to enforce their judgments ¡_ thus, arbitration awards still come to court for approval

B) Grounds for setting aside the decision of an arbitrator:

(1) No valid arbitration clause ¨C if invalid, no need to decide whether to enforce the arbitration award

(2) If the arbitrator exceeded his authority (dispute is outside the scope of the arbitration clause)

(a) But, party who litigates before an arbitrator may unintentionally waive the limitation by failing to object when that issue was considered.

(3) Serious misconduct ¨C fraud, bribery, corruption ¨C but must have proof of taint

(4) Complete irrationality ¨C if the decision falls outside the realm of any reasonable result

(a) But remember that arbitrators need not apply the law as a court would ¨C so result doesn¡¯t need to be in accord with the law.

(5) Against public policy ¨C general ... bounds not well defined.

4. Arbitration and punitive damages

a) Some courts allow punitive damages (arbitrators don¡¯t need to follow substantive law) ¡_ some courts rule against penalties (public policy is against punishing breach of K)

(1) Punitive damages forbidden (esp. in NY state courts)

(a) Questions that arise:

(i) But only for private wrongs? Can arbitrators award punitive damages for public wrongs?

(ii) Could arbitrator award punitive damages when K allows for it?

(iii) Same court previously affirmed arbitration award of treble liquidated damages (a clear penalty)

(2) Punitive damages allowed (esp. in fed. courts)

(a) Usually deal with public wrongs

(B) When parties agree that arbitrator may award punitive damages, courts may enforce such an award

(i) Implied consent may occur with one party asks for punitive damages in arbitration and the other party fails to object to that request

© Many cases where punitive damages are allowed also involve torts, so simple breach of K may not be enough

IV. SPECIFIC PERFORMANCE (Equitable Relief)

A. Rule: specific performance is an injunction ordering a party to perform as promised under the K.

1. Like expectation interest, it seeks to place ¡Ç in the position she would have been in had D performed ¨C but by forcing D to perform, not trying to calculate the equivalent in money damages.

2. Penalty of not obeying injunction is contempt of court.

a) This is a serious use of state¡¯s power to enforce a K, so judges prefer to award damages.

B. Irreparable Injury Rule (When to use equitable relief?)

1. Rule: courts will deny injunctive relief if the remedy at law (usually damages) is adequate.

a) When inadequate? (when to grant spec. perf.?) ¨C If thing promised is unique ¨C OR ¨C When damages are not as complete, as practical, and as efficient.

(1) When not as complete? ¨C when damages cannot be determined/paid

(2) When not as practical? ¨C when specific performance would be much easier

(3) When not as efficient? ¨C when its wasted court time or wasted ¡Ç¡¯s time trying to cover.

B) Uniqueness ¨C most courts will grant specific performance if the promised performance is unique.

(1) Land generally held to be unique ¨C thus, specific performance is common in Ks involving land.

(2) If sentimental value is attached to the item, it is usually held to be unique

(a) Art, family heirlooms

c) Shortage of goods ¨C if money damages would not allow ¡Ç to buy the same performance elsewhere due to scarcity, specific performance is proper.

(1) Might fall under practical ¨C see above

d) OR ¨C If ¡Ç has a good reason that specific performance will be better, it will usually be granted.

C. Limitations on Injunctions (when to deny spec. perf.)

1. General rule ¨C if remedy at law is adequate, spec. perf. will be denied

2. Undue hardship ¨C when harm to D greatly exceeds the benefit to ¡Ç, a court may deny an injunction.

3. Excessive judicial supervision ¨C when burden of enforcement exceeds the benefits an injunction has over the damage remedy.

a) Courts may need to resolve disputes about what the K or injunction requires ¨C court may then deny injunction.

(1) Puts undue burden on court

4. Compelling individuals to perform personal services (employment Ks)

a) If court ordered person to work for someone, it would be a throw-back to slavery

B) Problem of supervision ¨C how will court know if employee is working at maximum effort or if they are slacking off?

c) Strained relationship between employer and employee would create a tense situation

d) Modern exception - specific performance against employers

(1) Now, courts can force employers to accept workers they otherwise wouldn¡¯t have accepted or keep a worker they otherwise would have fired

(a) E.g., statutes such as anti-discrimination laws

e) Exam note ¨C personal service v. service

(1) Not all services are personal ¨C employment Ks are ¡_ construction Ks are not

(2) Promises by companies are not personal service

(a) Therefore, ordering a construction company to finish a project is not against public policy

D. Enforcing Negative Covenants

1. A promise to work for one employer implicitly includes a promise not to work for another at the time you are working for this employer.

2. The promise not to work for another employer can be specifically enforced.

a) I.e., employees cannot be forced to work for someone, but can be forbidden to work for any other.

3. Rule: injunctive relief will be granted to restrain violation by an employee of a negative covenant in a personal service K if the employee is a person of exceptional and unique knowledge, skill, and ability in performing the service called for in the K

a) Unique does not mean one-of-a-kind, only that it would be difficult to locate someone as good.

B) Negative covenant clause doesn¡¯t need to be expressly stated in the K as long as the substance of the K implies the negative clause.

4. Enforcement beyond the K term

a) Some promises not to work extend after the employment ends in order to protect trade secrets.

(1) Courts are reluctant to limit employment after the contract period w/o an express clause in the K.

5. Public policy implications of enforcing negative covenants

a) No person compelled to work for another

B) The performance need not be supervised for quality

c) A broad injunction may prevent a person from earning a living

(1) Courts need to tailor their injunctions narrowly.

V. RESTITUTION

A. Seeks to place D in the position she would have occupied had the K not been made

B. When is restitution used?

1. When no enforceable K exists, but ¡Ç has performed services that benefit D

a) Unjust enrichment exists if D has received a benefit which she cannot in fairness keep w/o compensating ¡Ç - creates a ¡°quasi-contract¡±

(1) Must be a benefit to D

(a) If no benefit, then no cause of action for restitution

(2) Some benefits are fair to keep ¨C e.g., gifts, acts by volunteers

(a) If ¡Ç could have bargained but didn¡¯t, likely a volunteer

(B) Gift

(i) Requires donative intent on part of donor;

(ii) Delivery; and

(iii) Acceptance

2. Restitution for breach of an enforceable K

a) How measured? One of two ways:

(1) If ¡Ç¡¯s performance increased D¡¯s wealth, D must refund the amt. of the increase in wealth

(a) If partial performance, assume the project will be completed. I.e., a half-finished building is a benefit since D will hire someone to complete the rest

(2) If ¡Ç¡¯s performance saved D the need to hire another to provide that performance, D must pay the amt. another party would have charged to provide that performance at the time ¡Ç performed

(a) Note: not the K price, but what others would have charged

(B) Note: measured at the time of performance, not the time of K formation

B) If D breached an enforceable K: (restitution to the nonbreaching party)

(1) ¡Ç may elect the larger of the two measures of restitution

(2) Restitution may exceed the amt. recoverable under expectation

(a) Usually why ¡Ç might opt for restitution over expectation ¡_ to avoid any losses the would have suffered

(3) If ¡Ç has fully performed and D¡¯s only remaining duty is to pay, ¡Ç cannot recover in restitution but may sue for the price owed

c) If ¡Ç breached an enforceable K: (restitution to the breaching party)

(1) The court usually awards the smaller of the two measure of restitution

(2) Restitution may not exceed a pro rata share of the K price

(a) If ¡Ç only works 75% of K before breaching, can only recover 75% of K price

(3) Restitution is available only if the value of ¡Ç¡¯s performance exceeds the amt. of damages to which the nonbreaching D is entitled

(a) I.e., breaching ¡Ç may owe the other party damages caused by the breach

VI. CONSIDERATION

A. To be enforceable, a promise must be supported by consideration.

B. To constitute consideration, a performance or return promise must be bargained for:

1. Bargained for = if something is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise

a) SOUGHT, IN EXCHANGE; GIVEN, IN EXCHANGE

B) Promisor is typically D ¨C the breaching party

2. Gift promises are not enforceable until delivery is made; but exchanges are enforceable from the time the promise is made

a) Conditional gifts are not bargained for

(1) E.g., ¡°if you go around the corner to the store, I¡¯ll let you buy a coat on my credit.¡±

(a) Promisor is specifying how the promisee will receive the gift. The promisor didn¡¯t seek the man¡¯s going around the corner in exchange for giving the man the coat.

(2) Unless the promisor¡¯s words seek the future occurrence and the promisee causes the condition to occur ¨C then there¡¯s consideration

C. Exceptions ¨C where K is enforceable w/o consideration

1. Moral Obligation

a) Involve acts of generosity that prevent bargaining in advance ¡_ and afterwards, the recipient promises to compensate for the generosity

B) Promisee must establish 4 things:

(1) The existence of a promise;

(2) That the promisor received a benefit;

(a) Promisor must personally receive the benefit

(B) Like unjust enrichment, ask if there really was a benefit

(3) That the promisee provided that benefit;

(a) Promisee must personally provide the benefit

(4) That failure to enforce the promise would produce injustice

c) Defenses to moral obligation: (I made the promise after the generous act, but now I don¡¯t want to pay)

(1) Gift

(a) When the promisee (person who did the generous act) intended a gift; or

(B) When the promisee bestowed the benefit w/o request even though bargaining was possible (officious intermeddlers)

(2) Disproportionality

(a) When the promisor makes a promise that is disproportionate to the benefit received, the courts may limit the promise to the value the promisor actually received

2. Past Consideration

a) When there was an enforceable K (w/ consideration), and some action cuts off liability (bankruptcy, stat. of limitations) ¡_

B) Then the promisor comes forth and renews the promise, even though he doesn¡¯t have to ¡_

c) The new promise waives the defense that cut off liability

(1) The new promise is thus enforceable, even if it¡¯s different than the old promise

3. Reliance

a) When someone relies on a promise even though they didn¡¯t give anything in exchange

B) General circumstances in which courts will enforce promises based on promisee¡¯s reliance:

(1) A promise;

(2) The promisor reasonably should have expected the promisee to rely on the promise;

(3) The promisee did rely on the promise (in a way the promisor reasonably should have expected); and

(4) Injustice can be avoided only be enforcing the promise

c) When reliance is proven, it establishes promissory estoppel

(1) The court will then not consider the arg. that the promise is unenforceable b/c of lack of consideration. I.e., they are estopped from denying the existence of consideration

d) On test:

(1) Start by arguing that reliance did occur

(2) Then argue that reliance was reasonably foreseeable (not that reliance was reasonable ¡_ just that promisor should reasonably foresee the reliance)

VII. Improper Promises

A. Incapacity

1. If a party lacks the capacity to enter a contract, any agreement she makes is voidable. (only voidable at the request of the incapacitated)

a) 4 basic sources of incapacity:

(1) Infancy

(2) Mental illness or defect

(3) Intoxication

(4) Guardianship

2. Infancy

a) Persons under the age of 18 lack the capacity to enter contracts

(1) Exceptions:

(a) In some states, marriage removes the incapacity, regardless of age

(B) In some states, contracts to obtain the necessities of life are enforceable despite infancy

B) How to protect the parties unaware of another¡¯s infancy?

(1) A minor who misrepresents her age may be estopped to raise it as her defense

(2) Limitations on restitution

(a) Specific restitution ¨C when an infant asserts the defense, the other party is entitled to recover the item given in exchange for the infant¡¯s promise

(i) Property may not be in same condition, though

(a) In some states, the infant¡¯s recovery of amounts paid is reduced to account for the value of her use of the property

(i) Pay fair rental value for time used if property in good condition

(ii) Pay depreciation value of property if property has depreciated

(B) Restitution in money is generally unavailable

(i) An infant who cannot return the specific thing received often need not return anything to the other party

(a) No need to return fair value of services received

3. Mental Illness or Defect

a) Two types of incapacity, both of which must stem from a mental illness or defect, i.e. mental illness is what caused you not to understand the K

(1) Cognitive incapacity ¨C if person is ¡°unable to understand the nature and consequences of the transaction¡±

(a) Thus, party¡¯s assent is not evidence that she valued what she received more than what she gave up

(2) Volitional incapacity ¨C exists if 1) a person is ¡°unable to act in a reasonable manner in relation to the transaction,¡± AND 2) ¡°the other party has reason to know of his condition.¡±

(a) What is meant by ¡°condition¡±? Mental illness itself or the inability to act in a reasonable manner?

(B) Person may seem to understand what the transaction entails, but the disorder prevents her from exercising a free choice

(i) Party¡¯s assent may or may not reflect the value she attaches to the items exchanged

B) How to protect the parties unaware of another¡¯s mental illness?

(1) Reason to know requirement ¨C means Ks will be enforced if the other person had no reason to know.

(a) Helps protect those who entered into a K with a mentally ill party without knowing

(2) Detrimental reliance

(a) Partial performance or other changes in circumstances may prejudice the other party so greatly that avoidance of the K would be unjust

(i) In that case, the K would not be able to be disaffirmed by the mentally ill party

(3) But, courts will allow the mentally ill to disaffirm an unfair contract even after the party has performed

4. Intoxication

a) K is voidable if the intoxication caused a person to be:

(1) Cognitive incapacity ¨C unable to understand in a reasonable manner the nature and consequences of the K; or

(2) Volitional incapacity ¨C unable to act in a reasonable manner in relation to the K

(3) AND if the other party has reason to know of the incapacity, i.e., that the intoxication has left the person unable to understand the transaction or unable to act reasonably

B) Protection for parties unaware of another¡¯s intoxication

(1) Most stems from the ¡°reason to know¡± requirement

(2) Intoxicated person must disaffirm K promptly after becoming sober

B. Duress

1. Involves 3 elements:

a) An improper threat; that

B) Induces a party¡¯s assent to the agreement; under the circumstances where

c) She had no reasonable alternative but to assent

2. Elements in detail:

a) Improper threat:

(1) The threat need not be stated expressly ¨C it can be implicit

(2) Focus on whether the threat was improper, not the mere existence of a threat

(3) The following threats are always improper:

(a) A threat to commit a crime or a tort

(B) A threat that itself would be a crime or a tort if the threatener obtained property as a result, e.g., blackmail

© A threat of criminal prosecution

(d) A threat to use of civil process in bad faith

(i) I.e., threat to commence a civil suit

(e) A threat to breach an obligation of good faith under a K

(i) Usually arises when one party seeks to modify a K

(ii) Note: some threatened breaches are proper ¨C new circumstances may justify renegotiation, or there may be a chance for efficient breach

(a) But, improper when the threat is made w/o any legitimate basis for seeking modification

(4) The following threats are improper if the resulting contract is not on fair terms:

(a) The act threatened would harm the other party without significant benefit to the threatener

(B) The effectiveness of the threat is enhanced by prior unfair dealing by the threatener

(i) If the threatener caused the weakness that increases susceptibility to a threat

© The threatened act is a use of power for illegitimate ends

(i) A catch-all provision

(d) Application difficulties:

(i) ¡°Fair terms¡± are often unascertainable ¨C no standard exists

(i) Many terms used are standardless, as well:

(a) E.g., ¡°illegitimate ends¡±, ¡°prior unfair dealings¡±

B) Inducement:

(1) Only applies if the threat induced the assent ¡_ not if the party would have assented anyway.

(2) If the threat ¡°substantially contributed to the manifestation of assent,¡± the threat induced the assent

(a) The burden is on the threatener to show the party would have assented regardless of the threat

c) No Reasonable Alternatives:

(1) If the party has reasonable alternatives to succumbing to the threat, courts may reject efforts to disaffirm

(2) Ask: is there a way you could have said no and avoided the harm of the threat?

2. Threats by 3rd parties:

a) Threats by 3rd parties will make the K voidable ¡_

(1) Unless the other party to the K relies materially on the agreement in good faith and w/o reason to know of the duress

B) A person who makes a threat at the request of a party to the K may be an agent of that party ¡_ not a 3rd party

c) If the party has reason to know, reliance is unreasonable

B. Undue Influence

1. Rule: if assent was induced by undue influence, the K is voidable

2. Extends the rules re: duress to cover situations where the threats are unintended or too subtle to identify.

a) Inducement

(1) Same as in relation to duress ¨C ¡°substantially contributed to the manifestation of assent.¡±

B) Undue influence

(1) Unfair persuasion, PLUS either domination or relationship of trust.

(a) Unfair persuasion: need to ID forces that made it harder for a person to recognize the merits of the deal being offered ¨C one example may not be sufficient

(i) A few examples:

(a) When assent occurs in an unusual place or time, and the party who selected the place/time did so to lower resistance

(B) When one party insists on immediate or rushed assent ¡_

(B) Domination: when a person is under the domination of the party exercising the persuasion, they have less ability to resist unfair persuasion

(i) How define domination?

(a) Dependency/necessity: when one party depends so heavily on another that she feels she cannot refuse the other¡¯s offer. Refusal would cause the party to rescind that support

(B) Overbearing presence: when one party possesses power that the other cannot resist. E.g., physical intimidating presence in one¡¯s home

© Relationship: results from a relationship of authority between the parties. E.g., employer-employee relationship

© Relationship of trust: a relationship that justified a party in believe the other would not act inconsistently with the persuaded party¡¯s welfare ¨C usually family ties

(i) Nonfamilial relationships: can arise w/o family ties. E.g., doctor, pastor, close friendship ¨C this relationship may lead the party to believe that the other would not act inconsistently with her welfare.

3. Undue influence by 3rd party will make the K voidable unless the uninfluenced party to the K relies materially on the agreement in good faith and w/o reason to know of the undue influence

C. Misrepresentation

1. 4 elements to prove:

a) A misrepresentation was made;

B) The misrepresentation was either fraudulent or material;

c) The misrepresentation induced the party¡¯s manifestation of assent; and

d) The party was justified in relying on the misrepresentation.

2. Elements in detail:

a) Misrepresentation ¨C ¡°an assertion not in accord with the facts¡±

(1) Assertion need not be express - silence can be an assertion (see infra)

(2) Assertions are not limited to statements of fact ¨C includes promises, opinions, and statements of law

B) A misrepresentation is material if:

(1) The assertion would substantially contribute to a reasonable person¡¯s decision to assent to the transaction; or

(2) The speaker knows the assertion would substantially contribute to the other party¡¯s decision to assent to the transaction.

c) A misrepresentation is fraudulent if:

(1) The party intends the assertion to induce another party to assent to the transaction; AND one of three conditions applies:

(a) Believed false - the speakers knows or believes the assertion is inaccurate; or

(B) Exaggerated confidence - the speaker implies she has confidence in the accuracy of the assertion when she does not have such confidence; or

© Baseless opinions - the speaker implies she has a basis for the assertion when she does not have such a basis.

(2) Most statements made in negotiations fail to withstand the first part of the test ¨C that the assertions had the intent to induce the other party to enter the deal

d) Inducement:

(1) A misrepresentation induces a party¡¯s assent if it substantially contributes to his decision to assent to that particular deal

(a) Depends on the particular party ¨C not a reasonable person

e) Justified reliance:

(1) Reliance is justified if the speaker implies she has a factual basis for an opinion

(2) When is reliance unjustified?

(a) If one already knows the truth;

(B) If one could discover the truth so easily that failure to do so would constitute bad faith; or

© If the assertion is a pure opinion (that does not imply the speaker has facts to support the opinion)

(i) Exceptions to reliance on pure opinion: (reliance is justified)

(a) There is a relationship of trust btwn. the parties;

(B) The deceived party reasonably believes the speaker has special expertise; or

© The deceived party is particularly susceptible to deception

3. Concealment v. Nondisclosure

a) Concealment: active attempts to prevent the other party from discovering the true state of affairs ¨C usually is misrepresentation

B) Nondisclosure: when a party doesn¡¯t volunteer correct information w/o an inquiry from the other party.

(1) When will this silence be considered an assertion?

(a) If a party knows that a prior assertion would mislead the other party unless she makes additional disclosures;

(B) If a party knows that disclosure will correct a mistake about the character or essential terms of a K;

© If a relationship of trust and confidence entitles a person to know the fact; or

(d) If a party knows that disclosure would correct a mistake of basic assumption, and nondisclosure would breach an obligation of good faith and fair dealing.

(i) Basic assumption ¨C must be a mistake re: a fundamental part of the transaction

(ii) Known mistake ¨C deceiver must know about the mistake

(iii) Good faith ¨C remember no duty of good faith exists in negotiations.

(a) Disclosure required by good faith will vary with the type of K ¨C cf. used car salesman v. medical appliances

D. Mutual Mistake

1. K is voidable for mutual mistake if both parties were mistaken (about the same thing) and:

a) The mistake involved facts at the time the K was formed;

B) The mistake concerned a basic assumption upon which the agreement was made;

c) The mistake materially affected the agreed exchange; and

d) The adversely affected party did not bear the risk of the mistake.

2. Elements in detail:

a) Mistake at formation

(1) Must be a present mistake ¨C one discovered after the K was made

(2) Mistaken prediction about future events does not fall w/in the scope of the rule

B) Basic assumption

(1) Mistake must go to the heart of the deal ¨C usually affecting the subject matter of the transaction

(2) Rule of thumb: if you cannot tell who values the thing actually sold more, the mistake p

Poop Man Bob · December 17, 2002

1) Commerce Clause

a) Pre-1937

(1) SC insisted on a direct and logical relationship between the intrastate activity being regulated and interstate commerce

ii) Other notes:

(1) Stream of commerce theory allowed – not after 1937

(2) Distinction between production and commerce – not after 1937

(a) Post-1937, the effect is what matters, not when the activity occurs in relation to interstate commerce

B) Post-1937

i) SC recognized 3 theories upon which a commerce-based regulation could be premised:

(1) “substantial economic effect” theory

(2) “cumulative effect” theory

(a) which was a means of arriving at the “substantial effect” (#1)

(3) “commerce-prohibiting” protective technique

c) US v. Morrison (2000) – 5-4 opinion

(1) Improper for Congress to aggregate the effects of all crimes against women throughout the nation to find an effect on interstate commerce sufficient to support regulation of such crimes

d) US v. Lopez (1995) – 5-4 opinion

i) Majority – current test – does the legislation:

(1) Regulate the use of the channels of interstate commerce,

(a) Highways, waterways, air traffic – even if channel in question is completely instate

(2) Regulate and protect instrumentalities (modes or vehicles) of or persons/things in interstate commerce, or

(a) Refers to people, machines, and other “things” used in carrying out commerce – even if item in question is used completely instate

(3) Regulate activities substantially affecting interstate commerce?

(a) Doesn’t matter whether the particular instance of the activity affects interstate commerce, as long as the instance is part of a general class of activities that, collectively, substantially affect interstate commerce (Wickard)

(4) Also keep in mind:

(a) Regulation must be of an economic activity

(B) Congressional findings help to show the link between the regulation and how it affects interstate commerce

ii) Dissent

(1) Advocates a “rational basis” test

(a) A test whereby a court will uphold congressional action if it bears a reasonable and rational relationship to the attainment of an appropriate government end – should defer to Congress

e) Reno v. Condon (2000) – Congress allowed to regulate states as commercial actors (as market participants)

f) 10th Amendment Limits

i) Printz v. US (1997) – federal government may not compel the states to enact or administer a federal regulatory program, even if the acts are east-to-do and involve no discretion

ii) NY v. US (1992) – Congress may not violate state sovereignty by requiring a state through force of law to enact certain legislation

(1) Limits power of Congress to commandeer legislative processes of the states

g) If what’s being regulated is an activity the regulation of which has traditionally been the domain of the states, and as to which the states have expertise, SC is less likely to find that Congress is acting w/in its commerce power

i) Thus, education, family law, and general criminal law are areas where SC is likely to be more suspicious

h) Defn. of “regulate” – to prescribe the rules by which commerce is to be governed

2) Spending Power

a) Current test –

(1) Limits on spending:

(a) spending must be in pursuit of “general welfare” – defer to Congress to decide whether or not in pursuit

(B) must condition funds unambiguously

(d) other constitutional provisions may bar use of the conditional grant of federal funds

(e) Congress may use conditional spending power to achieve results indirectly, even in areas it cannot regulate directly

(2) Treaties may not violate any distinct Constitutional prohibitions or guarantees

(a) Reid v. Covert – put to rest concerns re: treaties being used as basis for domestic action affecting individual rights beyond the limits governing other national powers

3) Foreign Affairs

a) Congress has power to make treaties and are supreme law of the land

i) Even if subject area not otherwise w/in Congress’s control, it will be held as a “necessary and proper means” of executing the treaty if it falls w/in the scope of a valid treaty

ii) Treaties may not violate any distinct constitutional prohibitions or guarantees

iii) President can make treaties, but must be ratified by 2/3 Senate

B) Congress can declare war, but President is Commander-in-Chief

i) Original interpretation - President can repel sudden attack, but cannot initiate war w/o an act of Congress

(1) But haven’t modern times changed what a “sudden attack” is?

c) Executive agreements and executive orders – see notes

4) Political Questions

a) Subject matter Court believes inappropriate for judicial review because resolution should be left to politically accountable offices

i) Only one factor needs to be present to make the issue non-justiciable:

(1) Textually demonstrable constitutional commitment to coordinate political branch

(2) Lack of judicially discoverable and manageable standards

(3) Impossibility of deciding without initial non-judicial policy determination

(4) Cannot resolve without expressing lack of respect for another branch

(5) Unusual need for unquestioning adherence to prior political decision

(6) Potentiality for embarrassment from multifarious pronouncements

ii) Based on Guarantee Clause (guarantee of republican form of government)

5) Executive and Legislative Powers

a) Executive

i) Numerous implied powers derived from Art. 2 Sec. 1 – “The executive power shall be vested in a president”

(1) If S.C. concludes that a presidential action is w/in the “executive” sphere, action will not be unconst. merely b/c it doesn’t fall w/in any constitutionally enumerated power

(2) One limitation S.C. has always relied on – President may not make laws

(a) Youngstown Sheet & Tube Co. v. Sawyer (1952) - Look to see if President’s actions are a usurpation of legislative power

(i) Concurrence – President’s powers aren’t fixed – they fluctuate depending on their disjunction or conjunction w/ those of Congress – 3 categories where President’s power may lie

1. President acts pursuant to express or implied authorization of Cong. – authority at maximum

2. President acts in absence of Cong. grant or denial of authority – “zone of twilight” where Pres. and Cong. Have concurrent authority

3. President acts in contradiction to express or implied will of Cong. – power at “lowest ebb”

(3) Dames & Moore v. Regan (1981) – the President has the power to suspend pending claims against foreign governments where such action is necessary to the resolution of a major foreign policy dispute and where Congress has acquiesced.

(4) Clinton v. NY (1998) - Line item veto unconstitutional b/c violates Presentment Clause

(a) Solution – multiple bills for each item of spending

B) Legislative

i) INS v. Chada (1983) - Legislative veto held unconstitutional b/c it violated the 1) Presentment Clause (every bill must be presented to the Pres. for his signature) and the 2)bicameral requirement (that both houses pass a bill for it to be law)

ii) Removal:

(1) Bowsher v. Synar (1986) – It is a violation of separation of powers for Congress to impose executive functions on an officer over whom Congress has the power of removal

(a) Congress may not reserve the right to remove an executive officer for cause, at least where cause is fairly broad

(B) Congress can still remove by impeachment

(2) Morrison v. Olson (1988) - Congress may limit President’s right to remove a purely executive officer, as long as the removal restrictions are not “of such a nature that they impede the President’s ability to perform his constitutional duty.”

6) Executive Privileges and Immunities

a) US v. Nixon – President is not above the law – does not have absolute immunity

B) Nixon v. Fitzgerald – President is absolutely immune from civil damages liability for his official acts

c) Clinton v. Jones – doctrine of sep. of powers does not require federal courts to stay all private actions against the President until he leaves office

7) Section 5 Powers

a) City of Boerne v. Flores - Congress’ power under §5 of the 14th extends only to enforcing provisions of that Amendment and does not give it the power to determine what constitutes a constitutional violation

8) Privileges and Immunities

a) Slaughter-House Cases – SC held the 14th’s Privileges and Immunities Clause merely forbade state infringement of the rights of national citizenship – not the rights of state citizenship

i) All fundamental rights were left up to the states – not the federal government

9) Substantive Due Process

a) Incorporation

i) The extent to which the due process clause incorporates the specific guarantees of the BofR into itself and applies these guarantees to the states

(1) Currently – only provisions of the first 8 amendments that have not been incorporated – 2nd, 3rd, 7th, and 5th in part (requirement of grand jury indictment in criminal matters)

(a) Aka “selective incorporation”

B) Economic liberties

i) If a law infringes on economic liberty, all that is needed to uphold the law is a showing of minimum rationality

(1) Williamson v. Lee Optical – rational basis scrutiny can be very, very low

ii) Thus, the Court gives deference to state legislatures and their economic regulations

c) Two current approaches to Substantive Due Process – how to determine if a right is “fundamental” and qualifies for heightened judicial protection

i) Rehnquist’s approach – “tradition and history” standard (how Bowers occurred)

(1) Look to see if the action is “deeply rooted in this Nation’s history and tradition” – from the Moore case

ii) Souter’s approach – liberty interest (how Roe occurred)

(1) Look to see if those liberties are “implicit in the concept of ordered liberty” such that “neither liberty nor justice would exist if [they] were sacrificed” – from the Palko case

(a) Constitution there to protect liberty and rights – can extrapolate from the text and apply Constitution to modern times

(B) A somewhat natural law approach

iii) CAVEAT – if the interest is fundamental, then it triggers strict scrutiny – the state must have a compelling interest – and usually can’t meet the burden

(1) If the right not fundamental, then all that’s needed is mere rationality

(2) Look at how general the right being discussed is

(a) Personal autonomy v. right to engage in sodomy

d) Possible rights that stem from due process

i) Autonomy – to be free from undue governmental interference in general

ii) Personhood – to be free from govt. interference with your body

iii) Ability to control one’s own health

(1) Right to die cases –

(a) Cruzan v. Director, MO Dept. of Health – due process protects the right to refuse unwanted lifesaving medical treatment

(B) Washington v. Glucksburg – SC held law prohibiting assisted suicide does not violate 14th

iv) Right of privacy – protects intimate aspects of personal life from govt. intrusion

Poop Man Bob · December 17, 2002

CIVIL PROCEDURE OUTLINE

P. Hansen ¨C Fall 2002

I. General - Civil Procedure

A. Civil = not criminal

B. Outline of a civil action

1. Pleadings

a) ¡Ç files complaint

B) ¦¤ files answer (can file counterclaims)

2. Motions to dismiss claim(s) (if possible counterclaims)

a) Failure to state a claim

B) Lack of pers. jurisdiction

c) Improper venue

d) Lack of sub. matter jurisdiction

e) Failure to join a necessary party

f) Improper service or process

3. Discovery

a) Interrogatories

B) Requests for prod. of docs

c) Oral depo.

d) Fed. discovery rules require automatic disclosure of certain info re: case

4. Motions for summary judgment

5. Trial

6. Appeal

II. Due Process and Prejudgment Seizure

A. Case Law Regarding Prejudgment Seizure

1. Fuentes v. Shevin (stove)

a) Fuentes defaults on stove, so Firestone seizes it. Firestone only has to issue bond and have form checked by court clerk. No prior notice or preseizure hearing required.

B) Court holds statute invalid.

i) Due Process clause was violated ¨C prohibits any deprivation of property w/o prior notice and an opportunity to be heard.

¡¤ Due Process clause there to minimize substantive errors and prevent arbitrary encroachment

ii) Due Process applicable regardless of substantive interest in property (Fuentes should be protected even though stove was still Firestone¡¯s ¡_ she had an interest in the stove through her payments)

iii) Exceptions where outright seizure w/o prior hearing is allowed (extraordinary circumstances):

¡¤ If there is an important governmental or public interest at stake; and

¡¤ If there is a special need for prompt action; and

¡¤ If state has kept strict control over its monopoly of legit. force; and if the person initiating seizure has been govt. official responsible for determining, under the standards of a narrowly drawn statute, that it was necessary and justified in this particular instance.

2. Mitchell v. W.T. Grant Co

a) Similar facts to Fuentes, but creditor seizes under Louisiana statute requiring both documentary proof of claim by creditor and judicial authorization; it also gave Mitchell an immediate hearing.

B) Different than Fuentes, and held constitutional, b/c:

i) Dealt with a narrow issue ¨C specifically about ownership; more fact-based

ii) Judicial determination required ¨C not a clerk¡¯s

iii) Verified affidavit required ¨C sworn statement containing specific facts and personal knowledge

iv) Prompt post-seizure hearing

v) Allegation of exigent circumstances

3. North Georgia Finishing v. Di-Chem

a) Court rules several states seizure statutes are invalid, because:

(1) They allowed a clerk (not a judge) to issue the writ

(2) There was no provision for a prompt postseizure hearing

(3) There was no bond requirement

(4) No need for an affidavit of extraordinary circumstances (lessor only had to allege the lessee might hide or transfer the property ¨C there was no personal knowledge required to make the allegations)

B) Note that Di-Chem and the two previous cases add to a requirement that there must be either a hearing or ¡°another safeguard.¡± See below for the current rule.

2. Connecticut v. Doehr (or, a rule at last)

a) Doehr gets sued and gets his house attached before commencement of the suit under a Connecticut statute. Statute requires a plaintiff to get judicial approval and an affidavit that there is ¡°probable cause¡± that ¡Ç will prevail.

B) Court finds statute invalid because:

(1) No prior notice

(2) Time between seizure and hearing could be (and often was) lengthy

(3) Affidavit isn¡¯t worth much (most plaintiffs believe they will prevail, whether their case is strong or not)

c) Court further argues that to be constitutional, a statute should:

(1) Give timely notice to the defendant of impending seizure

(2) Grant a prompt post-seizure hearing

(3) Four of nine justices argue for a bond requirement

d) More importantly, the court uses the Mathews test (a decision normally applied to government seizures; now the court applies it to seizures between private parties)

B. The Mathews Test (cited in Doehr)

1. The Mathews test is a balancing test.

a) COSTS v. BENEFITS

(1) Costs

(i) Risks of Error

(a) The greater the chances of an erroneous interference with D¡¯s property rights, the harder it will be for a given statute to withstand due process scrutiny.

(B) Examples things reducing Risk of Error:

(i) A factual affidavit that does not rely on mere assertions

(ii) Judicial authorization for seizure

(iii) A narrow issue calling for seizure

(ii) D¡¯s Interest

(a) The significance of the property seized affects the validity of seizure; i.e., taking a record player is less significant than a stove, and therefore it is easier to find D¡¯s interest not harmed by such a seizure.

(B) Examples of things reducing Defendant¡¯s Interest

(i) A prompt hearing operates to help D¡¯s interest

(ii) Similarly, a bond helps to insure D¡¯s interest by guaranteeing recourse for wrongful deprivation

(2) Benefits

(a) ¡Ç¡¯s interest

(i) If the party seeking seizure has no reason to fear that the property may be secreted, then his interest is not all that compelling.

(ii) Examples of Plaintiff¡¯s Interest:

(a) Special Need for Prompt Action

(B) Pre-existing Property Interest

(B) Public interest

(i) Is there any dire need to have this item replevined without a trial beforehand? (extraordinary circumstances)

C. Clues to an unconstitutional statute (these make it more likely that a statute will violate due process rights)

1. Plaintiff doesn¡¯t post a bond (increased chance of harm to D)

2. Deprivation before hearing (note, however, that even a preseizure hearing can fail due process scrutiny)

a) The following make such a deprivation more likely to pass muster:

(1) extraordinary circumstances

(2) a verified affidavit authorized by a judge

(3) damages for wrongful seizure (i.e., posting a bond)

(4) immediate post-seizure hearing

3. Authorization by a clerk rather than a judge (increased risk of error)

4. Affidavits based on conclusory statements (increased risk of error)

D. Note there are no hard-and-fast rules about determining a statute¡¯s validity; approach problems by first applying the Mathews test

II. The Complaint

A. Specificity (Rule 8(a))

1. Rule 8(a) ¨C a complaint need only have:

a) Statement of jurisdiction

B) Short & plain statement of the claim and why the pleader is entitled to relief

c) A demand for judgment of some kind

2. ¡°Notice Pleading¡±

a) A complaint need not allege any specific wrong; rather it must merely notify the opposing party of the nature of the claim against it

B) Rule 12(e) allows for a motion for a more definite statement, but it is generally used only to decipher unintelligible motions, or those that are so vague that the defense could not reasonably be required to frame a responsive pleading, not used to receive more detail

B. Consistency and Honesty in Pleadings (Rule 11)

1. Pleading in the Alternative

a) Pleadings are different than testimony

(1) Pleadings ¨C encompass all possibilities that may come out in trial ¡_ everything the jury might find (given the facts of the case)

B) Alternative pleadings ¨C where the pleader alleges two or more alternative claims that may not be consistent with one another

(1) Alternative pleadings are permitted even if they are inconsistent with each other subject to Rule 11

c) Why allowed?

(1) Judicial economy ¨C prevents multiplicity of suits

(2) Prevent injustice ¨C both defendants could blame each other in a separate proceeding and both walk away scot-free

d) If pleader (¡Ç) has knowledge of true facts, alternative pleading not allowed

2. Rule 11, Honesty, and Sanctions

a) Rule 11 requires general honesty in all pleadings, including:

(1) The pleading is not for an improper purpose (e.g., delay)

(2) The pleading is warranted by existing law or a nonfrivolous argument to extend or reverse existing law (must state so)

(3) The pleadings¡¯ allegations and factual contentions have ¡°evidentiary support¡± or are likely to have such support upon further discovery

(a) If no evidentiary support, must state ¡°on information and belief, ¡_¡±

(4) Rule 11 requires the party to make a reasonable inquiry into the factual allegations before filing the pleading

B) Sanctions are not mandatory; plus, the sanctions should be the minimum that will adequately deter the bad behavior

c) The ¡°Safe Harbor¡± Provision ¨C an attorney has 21 days to withdraw an offending pleading after opposing counsel files a Rule 11 motion to avoid sanctions.

C. Legal Sufficiency of Plaintiff¡¯s Claim (Rule 12(B)(6))

1. Rule 12(B)(6) permits a defendant to move for dismissal for ¡°failure to state a claim upon which relief can be granted¡±

2. This motion is evaluated on the face of the complaint, not the evidence.

a) The court must accept the facts in the complaint; it evaluates the legal theory to see if a claim can be granted (or the frivolousness of an argument to extend the law)

3. If the motion to dismiss is granted, ¡Ç has two options:

a) He can amend his complaint without prejudice, or

B) He can appeal. If he does so, he takes a serious risk: more often than not, a court will not permit an amendment after an unsuccessful appeal.

4. Pre-answer motion to dismiss ¨C pluses and minuses

a) Positives

(1) No need to file answer

(2) Gives D more time

B) Negatives

(1) ¡Ç can amend complaint

(a) The complaint would not have been amended had D not filed the 12(B)(6) motion

(i) And the more time that passes the less likely ¡Ç will be able to amend

(2) If another least-favored defense is out there and D fails to raise it in the pre-answer motion, it is lost forever

D. Heightened Requirements for Specificity (Rule 9(B))

1. Rule 9(B) ¨C In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.

a) Note this is an exception to the 8(a) notice pleading standard

2. In cases of fraud, there must be enough facts in the complaint to raise a ¡°strong inference¡± of fraud ¨C that is, the specific acts or omissions upon which the claim rests.

III. Defendant¡¯s Response

A. Pre-Answer Motions (PAMs)

1. A defendant has 20 days after service of summons to file PAMs (either before or concurrently with his answer), or the answer itself.

a) If PAM is granted the suit is dismissed (except for 12(e) motion for a more definite statement; then an answer must be filed within 10 days of the amended complaint being filed)

B) If PAM is denied, then D has 10 additional days to file the answer

2. Disfavored Defenses ¨C these can only be brought in a PAM or in the answer; if they are not, then they are waived. They are (all are Rule 12(B)):

a) 2 ¨C Court lacks personal jurisdiction

B) 3 ¨C Court is the improper location (improper venue) for the suit

c) 4 ¨C Insufficient process (adequacy of summons itself)

d) 5 ¨C Insufficient service of process (manner of service)

3. Favored Defenses ¨C these can be brought at any time up until the end of trial. They are (all are Rule 12(B)):

a) 6 ¨C Failure to state a claim (note this is the only non-procedural defense in Rule 12(B))

B) 7 ¨C Failure to join a necessary party under Rule 19

4. Most Favored Defense ¨C this can be brought at any time, even on appeal, whether it was an issue at trial or not. It is (Rule 12(B)):

a) 1 ¨C Court lacks subject matter jurisdiction

B. Setting Aside a Default Judgment

2. Three factors determine ¡®good cause¡¯

a) Will the tardy judgment cause prejudice to ¡Ç? (Has ¡Ç¡¯s ability to prepare been harmed by D¡¯s inaction?)

B) Does D have a ¡®meritorious defense?¡¯ (anything not completely insane)

c) Did culpable conduct on D¡¯s part lead to the default?

(1) an intent to thwart the proceedings or a reckless disregard for the proceedings (not just incompetency)

(a) Note here the courts will try not to penalize the client for picking a lousy attorney.

3. Courts generally favor hearing a case on its merits.

C. Admissions and Denials in the Answer (Rule 8(B))

1. Rule 8(B) ¨C A party shall affirm or deny and state defenses to each of the claims in the complaint

a) If admits, held as true for purposes of litigation whether or not it is accurate in fact.

B) Failure to deny constitutes an admission (8(d))

c) An answer claiming lack of knowledge to affirm or deny is a denial

(1) Unless D ¡®obviously had the knowledge or information,¡¯ in which case it constitutes an admission.

d) Denials can also be ineffective. A defendant must be careful to specifically deny and affirm where a portion of the complaint contains a mix of averments that are true/false.

2. Sometimes a denial is called a ¡°negative defense¡±

3. See also Amendments to Pleadings, infra.

1. A defendant must plead anything constituting an ¡°affirmative defense¡± in his answer.

a) Ex.: res judicata, contributory negligence, assumption of risk, failure of consideration, etc.

2. A plaintiff does not have to anticipate a defendant¡¯s defenses in his complaint.

3. D waives any defense it has not pleaded

4. D usually has burden of proving the defense it asserts ¨C usually by a preponderance of evidence (51%)

E. Compulsory and Permissive Counterclaims (Rule 13(a))

1. Defined

a) Compulsory Counterclaims are those that ¡°arise out of the same action or occurrence¡± and does not require the presence of third parties over which the court has no jurisdiction

B) Permissive Counterclaims are those that are not so related ¨C D may assert claims in an independent action

2. Four Tests for Compulsoriness

a) Are there the same facts/law in the claim and counterclaim? (rarely used)

B) Would res judicata prevent hearing the counterclaim as a separate suit?

c) Is there the same evidence in the claim and counterclaim? (¡°same evidence¡± standard)

d) Is there a logical relation between claim and counterclaim?

(1) How much evidence do two claims need to share? The courts are unclear.

3. A compulsory counterclaim must be brought if it is ever to be heard (Rule 13(a): a pleading shall state as a counterclaim¡_). Otherwise, it is barred.

4. A permissive counterclaim can be brought at D¡¯s option (Rule 13(a): a pleading may state as a counterclaim¡_)

a) Permissive counterclaims often run afoul of subject matter jurisdiction problems when the primary claim is federal and the counterclaim is state, since there is no supplemental/ancillary/pendant jurisdiction.

5. Cross-claims (one D against another D) need NOT be brought in original suit; i.e., they are permissive.

a) For a cross-claim to be brought, it must:

(1) Arise out of the same transactions or occurrence that is the subject matter of the orig. action or a counterclaim therein

(2) OR related to any property that is the subject matter of the orig. action

IV. Amendments to Pleadings (Rule 15)

A. A pleading can be amended once before a response is filed or, if the pleading is one to which no responsive pleading is permitted and the action has not been placed upon the trial calendar, the party may so amend it at any time within 20 days after it is served

B. After a response has been filed, a party may amend the party's pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires.

1. A party cannot amend if doing so would cause prejudice (harm) to the other side.

a) Prejudice is hard to show and usually only arises is statute of limitations cases.

2. A party also cannot amend to undercut Rule 12 (h) by adding an unfavored defense.

C. ¡°Relating Back¡± Amendments to the time of original filing

1. Relates back ¨C is deemed filed on the same date as the original pleading ¨C thus preventing statute of limitations from barring the claim

a) It is permitted by statute

B) It arises out of the same conduct, transaction, or occurrence as the original pleading (general rule)

c) It changes the party against whom a claim is asserted, meets (B) above, and the new party knew or should have known the action would have been brought against him but for the mistake in the original complaint, AND the added party will not be prejudiced in maintaining a defense

3. Summary of possible defendants ¨C will relation back be allowed after the statute of limitations has run?

a) Additional Defendant ¨C no; cannot add a new defendant ¨C unless the new D is an entity related to the original D, ¡Ç has a strong interest in obtaining relief, and the new D will not suffer prejudice

B) Misnamed Defendant ¨C yes; ¡Ç can fix the error regarding the name (mistake requirement)

c) Unnamed Defendants ¨C no; if ¡Ç new the names of some of the Ds but not others, recent cases do not allow ¡Ç to add the unnamed D after the statute of limitations has run

4. When does the new D need to receive notice?

a) D must have been on notice within the period provided by Rule 4(m) ¨C 120 days after the filing of the complaint.

(1) What if complaint is filed 1 year before the s/l expires, and the proper D is notified 6 months later.

(a) Then an amendment is attempted after the s/l expires. Is it allowed?

(i) Courts are split.

(a) Some say ¨C sorry, new D not notified w/in 120 days of original complaint.

(B) Others allow it ¨C not the intention of the rule.

V. Discovery (Rule 26)

A. Disclosures Required

1. Initial Disclosures (must be given w/in first 100 days without waiting for a discovery request) ¨C 2 weeks after the discovery conference

a) Names & addresses of individuals likely to have discoverable information

B) Copies or descriptions of relevant documents

c) Computation of damages and basis of that computation

d) Copies of any insurance agreements under which an insurer might be liable

2. Disclosure of Expert Testimony

a) 90 days before trial - must include qualifications, opinions to be expressed, and basis for those opinions ¨C only of the testifying experts, though.

(1) Disclosure of non-testifying experts¡¯ identity or opinions only required upon a showing of exceptional circumstances

3. Pretrial Disclosures

a) At least 30 days before trial a party must disclose witnesses expected to be called or who will be called if the need arises.

B. Discovery limited by privilege

1. All claims of privilege must be made expressly and must include a description of whatever is not produced or disclosed (privilege log)

a) Attorney-client, priest-penitent, doctor-patient, husband-wife

B) 5th amendment right not to self-incriminate

c) Attorney¡¯s work product

(1) Documents and tangible things a) prepared by or for a party or B) in anticipation of litigation or for trial

(2) Are discoverable only if the other side:

(a) Has ¡°substantial need¡± and

(B) Cannot obtain the ¡°substantial equivalent¡± without ¡°undue hardship¡±

d) Government secrets

C. Parties must obtain a court order or written stipulation:

1. To take more than 10 depositions

2. To server more than 25 written interrogatories

3. For physical/mental examination of a party

a) Requires a showing of ¡°good cause¡± and

B) That the party¡¯s mental or physical condition is in the controversy

1. The court may enter an order

a) To protect a party or person from ¡°annoyance, embarrassment, oppression, or undue burden or expense¡± ¡_

B) If the movant certifies that it has conferred with the other parties and tried to resolve the dispute without court action

E. Mechanisms used in discovery

1. Oral depositions (expensive; most important)

2. Deposition upon written questions

3. Interrogatories (inexpensive)

4. Request for the production of documents (2nd most important)

5. Court-ordered mental or physical exam (for ¡°good cause¡±)

6. Requests for admission

F. Certification of disclosures, requests and responses (Rule 26(g))

1. To the best of [the signer¡¯s] knowledge, information and belief,

2. Formed after a reasonable inquiry,

3. Each mandatory disclosure is complete and correct,

4. Each discovery request or response is:

a) Warranted by existing law or a good faith argument for new law

B) Not interposed for any improper purpose

c) Not unreasonable or unduly burdensome or expensive

G. Generally, the scope of discovery extends to anything not beyond the scope of the litigation that is not privileged

H. Rule 37 Motion to Compel Disclosure ¨C permits sanctions against offending party

1. May be obtained if the movant:

a) Is entitled to the discovery and

B) Certifies that it has, in good faith, conferred or attempted to confer with the other side

2. The losing side must be the other side¡¯s expenses related to the motion

3. Sanctions

a) Matters may be deemed established

B) Support or opposition of claim/defense may be prohibited

c) Pleadings or parts of pleadings may be stricken

d) Action may be dismissed, or default judgment entered

e) Noncompliance may be treated as contempt of court

I. Additional Sanctions

1. Sanctions for improper requests, responses, and disclosures: (Rule 26(g))

a) The court shall impose an appropriate sanction

(1) On either the attorney or the party it represents

(2) For a Rule 26 violation that is not ¡°substantially justified¡±

(3) Including payment of reasonable expenses incurred (and reasonable attorney¡¯s fees) because of the violation

2. Party who fails to make a mandatory disclosure, or fails to correct a prior written response:

a) May not use undisclosed info., unless nondisclosure was substantially justified or harmless

3. Party who fails to make an admission:

a) Must pay the reasonable expenses incurred to prove the matter, including reasonable attorney¡¯s fees

J. The effects of broad discovery include more information at trial, and (more importantly) a more likely chance of settlement.

VI. Summary Judgment

A. For a successful summary judgment motion, the moving party must show the absence of any issue of material facts

1. Contrast to motion for dismissal: SJ focuses on the facts, while motion to dismiss merely focuses on the complaint.

2. SJ is not meant to try the facts, but only to determine if there are genuinely contested issues of material facts

B. Burden of production

1. Defined ¨C a party¡¯s duty to introduce enough evidence on an issue to have the issue decided by the fact-finder, rather than decided against the party in summary judgment

2. If D issues the summary judgment:

a) ¡Ç must meet his burden of production; i.e., must respond w/ sufficient evidence that a reasonable fact-finder could find in his favor

3. If ¡Ç issues the summary judgment:

a) P has to shift the burden of production; i.e., by providing sufficient evidence that a reasonable fact-finder would have to find for ¡Ç because it would be unreasonable to do otherwise

B) In other words, he must foreclose the possibility of an issue

4. The Celotex standard

a) Rehnquist¡¯s approach - moving party must merely point out the absence of evidence supporting the respondent¡¯s case.

B) Any evidence pointed out as insufficient or inadmissible must also not leave open any question of the potential for a triable issue

(1) ¡°Any question¡± is pretty subjective.

C. Strategic Implications of a Summary Judgment Motion

1. Forces the nonmoving party to do a ¡°dress rehearsal¡± for trial on paper.

a) This forces the nonmoving party to either step up discovery or drop the case altogether.

B) It may or may not increase costs of litigation ¨C while it certainly forces more costs into a shorter time span, the discovery costs would probably happen anyway in the course of normal litigation.

2. It also gives the moving party a ¡°sneak preview¡± of at least some elements of the nonmoving party¡¯s case

3. Helps educate the judge re: facts of the case

D. Other general notes on summary judgment

1. The judge is supposed to look at the evidence in the light most favorable to the nonmoving party, and ask if a reasonable juror could find for the nonmoving party in such a light.

2. ¡Ç may move for summary judgment any time after 20 days from start of the action or any time after the opposing party files a summary judgment motion. D can move for summary judgment at any time.

VII. Personal Jurisdiction (1st ring)

A. Methods of exercising personal jurisdiction

1. Minimum Contacts

a) A state may exercise jurisdiction over a defendant if D has ¡°minimum contacts¡± within that state.

(1) Note this analysis only applies for cases where the court must have specific jurisdiction.

(2) The alternative is general jurisdiction. A court has jurisdiction over a defendant for:

(a) individuals ¨C defendant is domiciled in-state

(B) corporations ¨C primary state of business and state of incorporation.

B) Steps In Minimum Contact Analysis

(1) Has D purposefully availed himself of the court¡¯s jurisdiction?

(a) Does he have ¡®systematic and continuous¡¯ activity in the state?

(i) As in Int¡¯l Shoe, where D had employees operating regularly in the state.

(B) Does the cause arise from a contact with the state? (Does D gain the benefits of the forum state¡¯s services?)

(i) A retail sale outside the state that happens to end up in-state is not purposeful availment (as in Volkswagen)

(i) A magazine publisher is subject to libel anywhere the magazine is sold since it could reasonably anticipate suits there.

(a) Hansen instead thinks this type of situation should be read narrowly, focusing on the targeted nature of the publication (Was the story directed at the forum state? Will its effects be primarily felt there?)

(ii) Injecting goods into the stream of commerce may meet this requirement (e.g., selling or advertising in the forum state; possibly if defendant has reason to believe goods will end up in a specific state)

(a) O¡¯Connor ¨C D¡¯s placing product in the stream of commerce is not enough to establish jurisdiction.

(i) Minimum contacts must be established by an action of D purposefully directed towards the forum state

(d) Hansen suggests distinguishing cases which involve contracts and cases involving retail sales. Note the test is easy for contracts and more difficult for retail sales (ones that took place out of state and ending up in forum state)

(2) Would the exercise of jurisdiction comport with fair play and substantial justice? (also known as ¡°reasonableness¡±)

(a) Is personal jurisdiction reasonable? Must look at:

(a) D¡¯s contacts with state:

(i) Continuous and systematic?

(ii) Large volume?

(iii) Benefit to D?

(iv) Are contacts related to the claim?

(v) What is the state interest in regulating D¡¯s activites?

(B) Estimate of inconvenience:

(i) How great is the burden on D?

(ii) How convenient is the forum for ¡Ç?

(i) Greater concern for foreign D¡¯s ¨C courts don¡¯t want to mess with foreign relations

c) 3 items needed for PJ:

(1) Minimum contacts

(2) Action was purposefully directed at forum state

(3) Personal jurisdiction must be reasonable

2. Long-arm statutes

a) Does a state statute give that state jurisdiction? If yes¡_

(1) Is the statute constitutional?

(a) Use minimum contacts test ¡_ would personal jurisdiction be reasonable?

3. Personal Service In-State

a) This is the traditional rule - a state can exercise jurisdiction over anyone within its borders.

(1) Note this power also typically applies to people domiciled in a state regardless of if they are present in the state at the time of service.

B) Personal jurisdiction via in-state personal service was most recently upheld in Burnham v. Superior Court

4. In-State Service to an Implied Agent

a) If a state heavily regulates an activity for the protection of its citizens, it can appoint an agent for service for an out-of-state defendant.

(1) The key is exclusion: can the forum state exclude people from doing this activity?

B) Ex.: States regulate automobiles to protect the safety of its citizens; the state can name an in-state official as an implied agent of out-of-state drivers for service of process should someone wish to sue them for an auto accident.

5. Consent to Service ¨C Forum Selection Clauses

a) A person can consent to a state¡¯s personal jurisdiction

(1) The biggest problems in this area arise when the consent is via a small clause in a contract, for instance on the back of a cruise ticket

B) Requirements for consent:

(1) Notice ¨C even if it¡¯s teeny-weeny writing on the back of a ticket

(2) ¡°Fundamental Fairness¡± ¨C i.e., no bad faith (forum locale is meant to discourage lawsuits); no requirement for a remote, alien jurisdiction; disputes that are ¡°essentially local¡± should be kept in the locality.

VIII. Subject Matter Jurisdiction (2nd ring)

A. Remember, this is the most favored defense and can be brought up at any time, even appeal, and even if it has not been mentioned before.

1. Federal courts are courts of limited jurisdiction. State courts are courts of general jurisdiction

2. The burden rests on ¡Ç to prove the court has subject matter jurisdiction.

3. A court can dismiss on lack of subject matter jurisdiction even if one of the parties does not challenge it

4. Remember, the Supreme Court has jurisdiction on any claim that is appealed to it as the ¡°court of last resort,¡± regardless of if a federal court could have heard the case at the trial level.

B. Levels of analysis for federal claims

1. Constitutional ¨C What claims does the constitution say can be heard in federal court? (Article III, Sec. 1)

a) Congress can establish federal courts (except, of course, the Supreme Court)

2. Statutory ¨C What claims does Congress say can be heard in federal court?

a) Citizens of different states (diversity suits) ¡ì 1332

B) Federal Questions (after 1875) ¡ì 1331

3. Judicial ¨C What claims does the judiciary say can be heard in federal court?

a) Interpretations of constitutional & statutory rules (see infra)

B) A federal court will not hear domestic relation or probate cases

C. To sue in federal court, you need either DIVERSITY or a FEDERAL QUESTION.

D. Diversity Jurisdiction

1. Two requirements:

a) Diversity: the parties must be from different states, or one party is from the U.S. and another is from a foreign country

(1) Citizenship is determined by domicile (not mere residence) Mas v. Perry

(a) A change of domicile requires:

(i) Taking up residence in the new domicile, and

(ii) Intending to remain there (note how subjective this rule is!)

(2) For corporations, a ¡°dual¡± citizenship exists:

(a) The state of incorporation, and

(B) Their principal place of business (headquarters)

(3) A resident alien is a ¡®citizen¡¯ of his state of domicile

(4) There must be complete diversity between the parties

(a) All ¡Çs must be from a different state than all Ds.

B) Amount in controversy: must exceed $75,000

(1) The amount in question is determined by the damages sought in the complaint (not the actual award) ¨C as long as the amount claimed is done so in good faith

(2) Cannot add together the claims of different parties to get the minimum amount

(a) But, each ¡Ç can add all of their individual claim together

(3) If ¡Ç seeks injunctive relief, courts put value on those services to see if it meets the amt. in controversy requirement

E. Federal Question Jurisdiction

1. Generally, a federal claim exists if ¡Ç alleges a right or interest that is substantially founded on federal law.

a) The Well-Pleaded Complaint Rule ¨C a federal claim must be part of a ¡°well-pleaded complaint¡± ¨C this is the rule that decides most jurisdiction issues

(1) Courts will only look at what has to be in the complaint ¡_ not any extraneous information

(2) The court examines the complaint to see if the federal issue must be present for the claim to be complete.

(3) Federal jurisdiction cannot be based on anticipated or actual defenses ¨C must be part of the original cause of action

B) Franchise Tax Board Rule ¨C if a ¡°substantial¡± federal issue is a ¡°necessary¡± element of a state claim, then there is federal jurisdiction

(1) Merrell Rule ¨C if there is no federal remedy (for a private cause of action), then the federal issue, is not ¡°substantial¡±

(a) Therefore, would fail the Franchise rule.

2. When is there a federal cause of action?

a) If a federal law creates a private cause of action

(1) Congress does not create a private cause of action for every federal regulation because to do so would overrun the courts. However, sometimes courts will imply a federal cause of action even though it does not exist by the statute.

B) If a state law claim includes a federal claim that could be brought under an existing private federal cause of action

(1) Note the doctrine of preemption. If a federal law ¡°so occupies¡± a given field, a federal court should hear the issue (e.g., labor relations suits)

c) If there is a very important constitutional question at issue

F. Removal

1. If a plaintiff could have sued in federal court, but instead chose state court, a defendant can remove the proceedings to federal court by filing within 30 days of the filing of the complaint. At this time, the state action ¡®freezes.¡¯

a) The exception is a diversity of citizenship suit where D is a citizen of the state where the claim is brought ¨C D cannot remove to federal court

2. The action is removed to the ¡°district and division¡± of the state court where it was originally filed

a) Venue rules do not apply to removed actions

(1) So the case is removed to the appropriate federal court, even if the action couldn¡¯t have originally been brought there.

3. A plaintiff can file a motion to remand to get the claim back into state court.

G. State v. Federal Court: Strategic Considerations

1. Why choose federal court?

a) Federal Procedures may be faster

B) Jury is drawn from a larger area

c) Intimidation ¨C may know federal system better than other attorneys

d) Judges appointed for life are not beholden to political issues

2. Why choose state court?

a) Cozier proceedings

B) Narrower jury pool

c) You may just prefer a state judge

IX. Other Considerations in Choosing the Forum

A. Venue (3rd ring)

1. Summary ¨C in most cases, the D must be sued in a fed. district where they reside or where important events relevant to the claim took place.

a) Venue deals with insuring that the forum has some logical bearing on either the claims or the parties.

2. 28 USC ¡ì1391: Venue ¨C a case must be brought in (sec. a & b are essentially the same except the third part, and are thus presented together):

a) The judicial district where any defendant resides, if they all reside in the same state.

(1) Note an alien can be sued in any district (sec. d)

B) The judicial district where a substantial part of the events/omissions giving rise to the claim (or a substantial part of the property which is the subject of the action is situated)

(1) Note for this to apply, the incident must occur in this country (there are no federal districts abroad!)

c) Any judicial district in which: (fallback provisions ¨C only apply if there is no district, anywhere in the US, which would be a proper venue under the first two subsections above)

(1) Defendants are subject to personal jurisdiction (solely diversity cases) (sec. a)

(2) Any defendant may be found if there is no other district available. (cases that are not based on diversity alone) (sec. B)

3. Venue may be waived by D if D fails to raise her objection in her answer (it is a disfavored defense)

a) Venue may be agreed to beforehand ¨C see Forum Selection Clauses, supra

4. Transfer of Venue ¨C 28 USC ¡ì1404(a)

a) Provides federal courts with discretionary power to transfer a case to another federal district ¡°for the convenience of parties and witnesses, and in the interest of justice¡±

B) Is transfer appropriate? Consider:

(1) Location of evidence

(2) Private interests of the parties (the location of their residences)

(3) Whether a judgment can be enforced in that forum

(4) Interest in allowing local decision of local cases

c) Choice of law when case is transferred:

(1) Transferee court (where case is being transferred) must apply the choice-of-law rules of the state from which the claim was transferred

d) Compare with Removal

(1) Transfer ¨C changes ¡Ç¡¯s geographical choice

(2) Removal ¨C changes ¡Ç¡¯s choice of state court in favor of federal court w/in the same geographical area

B. Manner of Service

1. When must a court give personal notice and when can it do so by publication, appointing someone to handle unknown parties¡¯ interest?

a) Personal service ¨C sufficient in any context

B) Service by mail ¨C sufficient for known parties (i.e., names and addresses are known) Federal Rules only ¨C see below

c) Service by publication ¨C sufficient for unknown parties (i.e., names and addresses cannot be reasonably ascertained)

(1) Note the balancing test for notice by publication ¨C You must use the method of service that is most reasonable. The court balances efficiency against fairness.

2. Federal Rule 4 ¨C permitted methods of service

a) Personal service

(1) For a corporation, serve an officer or managing agent.

B) Leave service at place of abode or with a person of reasonable ability

c) Via mail with a request to waive personal service

(1) Note incentive for defendant to waive personal service ¨C doing so buys him time to answer (60 days instead of 20)

(a) If D doesn¡¯t waive right to personal service, D has to pay the costs of being personally served

C. Forum Non Conveniens

1. Refers to the discretionary power of a court to decline jurisdiction if a more convenient (or just) forum is available elsewhere.

2. The trial court is given broad discretion to decide whether to hear or dismiss on forum non conveniens grounds. (FNC is not considered a constitutional issue).

3. Testing for FNC: the short version. Court should dismiss based on if the forum:

a) Is unfair to D out of proportion to plaintiff¡¯s convenience, or

B) Causes significant legal or administrative problems.

4. Testing for FNC: the big balancing test. Court considers:

a) The location of witnesses and evidence

B) The amount of prejudice to D

(1) Counterbalanced by plaintiff¡¯s convenience

(a) Plaintiff¡¯s right to choose forum is given great weight.

(B) However, if ¡Ç is foreign, it is not given great weight.

c) What law would apply

(1) If the alternative is a foreign country that offers no remedy, then the court will probably not dismiss;

(2) However, if the foreign country offers any remedy, regardless of how small, the court is more likely to dismiss. Piper Aircraft v. Reyno

d) Local (or state, or federal [for foreigners]) interest, if any

e) Burden on the court (i.e., having to apply foreign law)

D. Fraudulent Inducement

1. Invalidates service when ¡Ç lures D into the forum w/ falsehoods in order to serve

2. Doctrine applied (service invalid) when D comes into jurisdiction to negotiate w/ ¡Ç, and ¡Ç has subsequent change of heart, doesn¡¯t tell D, and serves D before negotiations

a) But courts have upheld serving D after negotiations have broken down

X. State vs. Federal Law (The Erie Problem)

A. Overview

1. The Rules of Decision Act of 1789 (28 U.S.C.A. ¡ì 1652) requires the federal courts hearing state claims to use the ¡°laws of the states¡± in deciding the claim. The question was, what exactly was meant by ¡°laws?¡±

2. The Old Rule: Swift v. Tyson only permitted federal courts to interpret state statutes, not common law.

3. This was overturned by Erie v. Long Island R.R.. Under Erie, the federal courts were allowed to apply state common law in state claims. Why?

a) Constitution ¨C court says in Erie that there is no ¡°general¡± federal common law (i.e., common law that does not relate to a federal issue) because the Constitution does not give them the power to decide ¡°general¡± issues, and thus the federal courts must apply state law.

(1) The court does not specify a Constitutional provision, but it is most likely relying on the 10th amendment ¨C powers not reserved for the federal government are given to the states.

B. Problems with Erie

1. What is substantive and what is procedural?

a) The Rules of Decision Act requires the federal courts to apply state substantive law

B) The Rules Enabling Act for the FRCP require the federal courts to apply federal procedural law

c) Thus, the problem is when is a rule substantive and when is it procedural?

(1) A final answer: FRCP are presumed to be procedural.

2. Fed. courts have to determine for themselves what state common law would say if there is no ruling that that particular issue ¨C they essentially have to guess

XI. The Size of the Litigation

A. Res Judicata and Collateral Estoppel

1. Res Judicata (a.k.a ¡°claim preclusion¡±) ¨C A final valid judgment on the merits precludes relitigation of the same claim between the parties.

a) Valid

(1) If the court had PJ over D

B) On the merits

(1) Includes 12(B)(6) dismissal, summary judgment, and judge/jury decisions

(a) This means the case cannot be dismissed for a procedural reason (e.g., for lack of jurisdiction) for res judicata to apply

c) Same claim

(1) This means the claim must arise from the same ¡°transaction or occurrence¡±

d) Between the parties

(1) Third parties to the transaction or occurrence are not barred

(2) Remember compulsory counterclaims ¨C these cannot be brought in a new action

e) Other notes on res judicata

(1) Res judicata combines the doctrines of merger and bar.

(a) Merger means a victory in court causes the claim to merge into the judgment so it cannot be brought again

(B) Bar means a loss in court bars relitigating the claim.

(2) Res judicata bars relitigating in every state (full faith & credit)

2. Collateral Estoppel (a.k.a. ¡°issue preclusion¡±) ¨C a party cannot relitigate issues previously actually litigated and necessarily decided.

a) Actually litigated

(1) Default judgment does not count ¨C there must have been actual litigation

B) Necessarily decided

(1) The specific issue must have been actually decided (a problem if the judgment does not include a decision on each issue)

c) Who is barred? ¨C Only parties to the prior suit

(1) Collateral Estoppel can only be used against an original party. (that is, the ¡°victim¡± must be an original party)

(a) For an old party to use it against a new party would deny the new party the chance to be heard on the issue (i.e., due process considerations)

(B) This is not a problem for a new party using it against an old party, as the old party has already had a chance to be heard on the issue.

d) Mutuality ¨C Same parties as in the prior suit (thus, nonmutuality means a new party is involved)

3. Res Judicata and Collateral Estoppel compared

a) Res judicata applies to the entire claim while collateral estoppel only applies to a given issue

B) Res judicata applies whether or not there has been litigation, while collateral estoppel only applies to issues actually litigated

c) Res judicata applies only to the original parties, while collateral estoppel may apply to new parties

B. Permissive Joinder

1. Permissive Joinder of Claims (Rule 18(a))

a) A party can join as many claims has he has against another party

B) Note, however, that this is only a pleading rule ¨C the judge may sever unrelated claims for separate trials if needed at a later time (Rule 42(B))

2. Permissive Joinder of Parties (Rule 20)

a) To join a party (who is not required), you must establish that your claim against the party to be joined:

(1) arises from the same transaction or occurrence of the initial claim (must be reasonably related); and

(2) involves a common question of law or fact.

B) Example

(1) Kedra ¨C Court permits joinder of police officers by family suing for harassment. The harassment took place over a period of time, so court says joinder is justified; reserves the right to sever at a later time.

c) The Balancing Test for Permissive Joinder: The court balances:

(1) The efficiency of hearing the case in one action and the similarities involved vs.

(2) The differences involved and any possible prejudice.

d) Note that again this rule is for pleadings and the court can sever at a later time pursuant to Rule 42.

C. Misjoinder of Parties (Rule 21)

1. Misjoinder of parties is not grounds for dismissal of an action

2. Parties may be dropped or added by order of the court at any stage of the action

3. Any claim against a party may be severed and proceeded w/ separately

D. Devices for Adding Parties

1. Impleader (Rule 14) (a.k.a. 3rd party practice)

a) A procedure that permits D to bring into the lawsuit a 3rd person who is or may be liable to D for all or part of ¡Ç¡¯s claim against him

(1) Limited to situations where D has right to indemnity ¨C LOOK HERE FIRST

(a) AND, the state¡¯s substantive law must allow indemnification ¨C not all states do!

(2) Note the liability must be to the defendant ¨C the defendant cannot implead saying the 3rd party is liable to ¡Ç. If X is battered and sues Y, but it was actually Z (Y¡¯s twin brother), Y cannot implead Z ¨C that is, he cannot suggest a new target for X

(3) Therefore, the 3rd party¡¯s actual liability is in large part based on the success of ¡Ç¡¯s action ¨C if plaintiff loses, the 3rd party is obviously not liable to D for damages that were not assessed

(4) There must be a causal connection between ¡Ç¡¯s claim against D and D¡¯s claim against the 3rd party

B) Citizenship for diversity of an impleaded 3rd party is irrelevant, as supplemental jurisdiction takes care of it; venue is also ignored

c) Court has discretion to deny the impleader or to sever the suits into two proceedings (anyone can challenge impleader); factors weighed include:

(1) Pro-Impleader

(a) Efficiency of hearing all related claims in one proceeding

(B) Avoiding repeated suits and inconsistent judgments

(2) Anti-Impleader

(a) Undue delay

(B) Unnecessary complexity for the lawsuit

d) ¡Ç can assert any claims against an impleaded 3rd party arising from the same transaction or occurrence that is the subject of plaintiff¡¯s suit against D

(1) Along the same lines, the 3rd party can assert any claims against ¡Ç arising out of the same transaction or occurrence as ¡Ç¡¯s original complaint against the original D

(2) 3rd party can also assert a 3rd party complaint against any person not a party ¡_ who may be liable to it for all or part of the claim against it

e) If a counterclaim is brought against a plaintiff, he may implead according to the same rules (since in such a case, ¡Ç becomes a ¡°defendant¡±)

2. Counterclaims and Cross-Claims (Rule 13)

a) Compulsory Counterclaims (13(a))

(1) A defendant must state any counterclaims arising from the same transaction or occurrence

(2) This is ¡°rule-mandated res judicata¡± ¨C if a person does not assert a compulsory counterclaim, he is forever barred from bringing it in a later action

B) Permissive Counterclaims (13(B))

(1) A defendant may bring any counterclaims he wishes that do not arise from the same transaction or occurrence (he is not barred from later action if he does not)

(2) Like the 18(a) joinder rule, the court may sever these claims at a later time for a separate trial

c) Cross-Claims (13(g))

(1) A cross-claim is a claim asserted between co-parties, e.g., defendant #1 cross-claims against defendant #2

(2) Cross-claims are limited to any claim arising out of the same transaction or occurrence that is the subject matter of either the original action or of a counterclaim

(a) Keep in mind that if D1 has a counterclaim against D2 arising from the same transaction/occurrence as the cross-claim, it is compulsory, i.e., must be brought

d) Both counterclaims and cross-claims may be used to add parties subject to Rule 20 (If a party can assert a counterclaim or cross-claim, he can add parties to that claim, subject to joinder rules)

3. Intervention (Rule 24)

a) Intervention allows a party to enter a lawsuit of his own accord, e.g., without either ¡Ç or D bringing him in

B) Types of Intervention

(1) Of Right (24(a))

(a) A party has the right to join a suit if he meets the following criteria:

(i) Interest test ¨C The party must have a ¡°significantly protectable interest¡± (see infra)

(a) Look at the practical impact of the decision

(B) Inefficiency of bringing a separate suit

(ii) Impairment test ¨C That interest must be impaired as a practical matter (This rule is interpreted more flexibly than Rule 19; even if res judicata doesn¡¯t apply, impairment based on persuasive authority will be adequate)

(iii) No Adequate Representation test ¨C This is a minimal burden ¨C you only have to show you may be inadequately represented, e.g., a minimal conflict of interest exists

(2) Permissive (24(B))

(a) The court will let a party intervene if there is a common question of law or fact at issue or if a fed. statute confers a conditional right to intervene; court has broad discretion to allow or deny permissive intervention

(i) The court is supposed to take into consideration any undue delay or prejudice to the original parties

4. Class Actions (Rule 23

~KRYLON2~ · December 17, 2002

dude what the fuck

Poop Man Bob · December 17, 2002

Originally posted by ~KRYLON2~
dude what the fuck

'Tis what I need to know.

dr.testical · August 22, 2003

worst shit ever

Poop Man Bob · August 22, 2003

Wow. I've already forgotten everything I was supposed to have learned that semester.

Why did you bump this?

$360 · August 22, 2003

wow, i just read ALL of that..

sike.

BigOatser · August 22, 2003

Originally posted by Poop Man Bob
Why did you bump this?

why did you post this?

August 22, 2003

whoa...

August 22, 2003

mang. if thats something im soon to come across in college i think im just not going to bother to go back...

Poop Man Bob · August 23, 2003

Originally posted by BigOatser
why did you post this?

Boredom, my friend. Boredom.

caL · August 23, 2003

im scared of all the words:eek:

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