Contracts Quiz 2nd Semester 1995

4. Identify as precisely as you can the apparent tension between the reliance principle and the operation of a waiver. How does UCC §2-209(5) deal with this problem?

Any time that parties are allowed to unilaterally alter the consideration, there is necessarily tension with the reliance principle. The troublesome characteristic of a waiver is that it can be unilaterally retracted. If retraction were allowed at any time, even after the other party has reasonably relied upon the continuation of the waiver, then the reliance principle would have no regulatory bite. In order to protect the reliance of the parties, UCC § 2-209(5) requires that in order to retract a waiver, a party must give actual notice of the retraction and that the retraction will not be valid to the extent that it has been reasonably relied upon the other party. Note the similarity in operation of the reliance principle here as compared with revocation of an offer.

5. How can payment of “less” than the contracted for debt be squared with the consideration doctrine?

The consideration doctrine requires that the parties bear the risks that were distributed to them upon contract formation. Thus, when the “debtor” tenders “less” or a different performance, he necessarily shifts risks toward the “creditor”. This can only be squared with the consideration doctrine if we recognize that consideration is not static, and allow the consideration to evolve. Modification, waiver and open price terms are all examples of an evolving consideration.

6. When two contracting parties have made an express contract in which they differ on the meaning of a critical term (remember the “chicken” case), normally the party who has been most reasonable in their construction of the language is rewarded as a matter of regulatory policy by having their meaning used by the court. How should the conflict be handled in the case where both parties have been equally reasonable?

Assume that the language in dispute goes to the heart of the consideration. When two parties have been equally reasonable in their conflicting interpretation of the language, then the consideration is broken. Under an objective view of the contract, neither party can be said to have redistributed their risks because they have not even been properly identified. Thus, the court must set aside the consideration, either in whole or in part, and get directly at balancing any protectable reliance or restitutionary interests between the parties.

7. Sometimes a court chooses to set aside the consideration, discharge parties from any further obligation to perform, and get directly at the reliance and restitutionary interests of the parties. What dilemma, measured at the bottom line, does this choice introduce?

When the court discharges the parties, it is stating that the expectation interest is not worthy of protection. This means that it is not going to put the parties in as good a position as they would have been if the performance had been completed. When awarding reliance or restitution damages, the court is attempting to put the parties in the same position that they were in pre-contractually. However, the risks that the parties were exposed to pre-contractually have changed in the meantime. The amount of stability in the market minimizes the disturbance of risk that is brought about by discharge, but does not eliminate it. Thus, in a changing market, an increment of reliance on the contract’s existence itself is created post-contractually. This is to say that the parties have lost something in the process even if they are reimbursed for their expenditures because contract law can not turn back the hands of time. The parties are given back the resources they had pre-contractually, but they are now faced with deploying those resources in a different market. This is a serious dilemma in the law of contracts because its regulatory power is diminished to the extent that it can not provide perfect protection for the parties’ interests.

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