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Fall 2015 Barnhizer

CONTRACTS
Chapter 2. Enforceability of Promises: The Nature of Legal Duty
A. The Nature of Promise—A Commitment
 Definition of Contract: a promise or a set of promises for the breach of which the law gives a
remedy, or the performance of which the law in some way recognizes a duty. (R2K 1)
 Definition of Promise: A manifestation of intention to act or refrain from acting in a specified
way, so made as to justify a promise in understanding that a commitment has been made.
(R2K 2)
 King (bailor) v. Trustees of Boston University (bailee); Supreme Judicial Court of Massachusetts
1995
o Issue: Was there an enforceable contract?
o Rule: Defined charitable subscription as "an oral or written promise to do certain
acts or to give real or personal property for a charity or for a charitable purpose".
Within the jurisdiction of Massachusetts, "party must establish that there was a
promise and that the promise was supported by consideration or reliance".
 Definition of Agreement; Bargain: An agreement is a manifestation of mutual assent on the
part of two or more persons. A bargain is an agreement to exchange promises or to exchange
a promise for performance or to exchange performances. (R2K 3)

B. Understanding Contractual Intent: The Objective Theory of K


 According to 'objective theory of contracts', a maker's legal intent is determined not from the
promisor's actual or subjective intent but from objective manifestations of the promisor's
intent (The promisee’s discernable reasonable understanding of the maker’s words or
conduct).
 Requires courts to examine the promisee's discernable reasonable understanding of the
maker's words or conduct; their understanding must be reasonable in order to be preferred
over the promisor's actual intent, suggesting that it is objectively determined.
 Lucy (promisee) v. Zehmer (purported promisor)
o Facts: K negotiations over a K when both parties were drinking and the promisor
was joking.
o Issue: Is there an enforceable contract?
o Rule: “We must look to the outward expression of a person as manifesting his
intention rather than to his secret and unexpressed intention. ‘The law imputes to a
person an intention corresponding to the reasonable meaning of his words and
acts.’”
o Holding: Yes, Lucy is entitled to specific performance of the contract sued on.
o Reasoning: Zehmer’s subjective intent was irrelevant because his words and conduct
led Lucy to believe that he wanted to contract to sell his farm.
C. Enforcing Promises: Legal Theories of Obligation
 Obligation by Reason of an Agreement Supported by Consideration
o Consideration makes promises enforceable only when they are made within the
context of a bargained-for exchange of legal detriments. (R2K 71) (b) the
consideration induces the making of the promise and the promise induces the
furnishing of the consideration. Both elements must be pres ent or there is no
bargain.
o Three bases for determining the enforceability of a k: consideration, promis sory
estoppel, and restitution. K = Promise + _(CPR)_
 Consideration-made in the context of a bargained for exchange of legal
detriments
 Promissory Estoppel-the promisee reasonably relied on the promise despite the
absence of consideration.
 Restitution-May be ordered by the Ct. to avoid unjust enrichment in cases
where on party to a transaction confers a benefit upon the other party for
which the recipient should pay.
o A donative promise to make a gift in the future—promisors lack the ability to make
enforceable gift promises (generally unenforceable) and actual delivery of the gift
(generally enforceable).
 The Donor-Promise Principle
i. Preserves distinction between enforceable promises and unenforceable
promises to make a gift. Unenforceable gratuitous promises, not
supported by consideration, are referred to as the donor -gift or
donative-promise principle.
ii. Doughtery (promisee) v. Salt (executor of aunt ’s estate, promisor)
1. Issue: Is there an enforceable contract?
2. Rule: Contract = promise + consideration; consideration makes promises
enforceable only when they are made in the context of a bargained-for
exchange of legal detriments.
3. Holding: Aunt Tillie’s promissory note for $3000 to her nephew was not
enforceable because it lacked consideration. It did not invite assent to a
bargain.
4. Reasoning: Nothing was sought or given in return for Aunt Tillie’s promise.
 The Peppercorn Principle and the Equivalency Theory
i. The consideration doctrine only requires that the promisor seek or
bargain with the promisee for the return consideration in exchange for
the promise (blind to fairness of consideration). Court uses the
consideration doctrine to enforce the promise, not to police
imbalances in the value of items in the exchange itself. Peppercorn -A
gift can be converted into a contract.
ii. Hamer v. Sidway
1. Issue: Did the Uncle’s promise to his nephew to refrain from drinking,
smoking, and gambling until he was 21 for $5000 plus interest amount to an
enforceable contract?
2. Rule: Unless the promisor was benefited, the contract is without
consideration.
3. Holding: Yes, there was an enforceable contract and the Uncle’s estate must
pay.
4. Reasoning: The uncle benefited from the fact that his nephew was not
drinking, smoking, or gambling. The nephew gave up his legal freedom as an
inducement for the promise therefore there was an exchange of legal
detriments.
iii. Batsakis v. Demotsis
1. Issue: Was there an enforceable contract even though the agreement was
not fair? (Plaintiff loaned defendant $25 in exchange for her written promise
to pay $2,000)
2. Rule: Peppercorn Principle
3. Holding: Yes, the contract is enforceable.
4. Reasoning: Mere inadequacy of consideration will not void a contract.
 The Past Consideration Doctrine
i. A trailing promise, like a gratuitous promise, is not enforceable, even if
motivated by understandable gratitude. Trailing promises fail to
provide consideration (b/c promisee’s promise or performance was not
sought as it has already passed) and fail to satisfy the promissory
estoppel requirements (b/c promisee’s detrimental reliance was not
induced by the promisor’s promise; the promise occurs after the ac t is
performed)
ii. Hayes (promisee) v. Plantations Steel Company (purported promisor)
1. Issue: Whether Hayes supplied the required consideration that would make
the promise binding? If there was no consideration, was his alleged reliance
sufficiently induced by the promise to estop the company from denying its
obligation to him?
2. Rule: Valid consideration must be bargained for and must induce the return
act or promise. The purported consideration must not have been delivered
before a promise is executed.
3. Holding: No, there was not adequate consideration nor was his reliance
induced by the promise.
4. Reasoning: Hayes announced his intent to require well in advance of any
promise, and therefore the intention to retire was arrived at without regard
to any promise by Plantations.
 Gratuitous Conditional Promises
i. The basis for the distinction between an enforceable conditional
promise and an unenforceable gratuitous absolute promise (the
promisor made a donative promise and did not seek anything in
return).
1. Standard: Whether a reasonable person would understand that the promisor
objectively intended performance of the condition to be a gift or
consideration for a return promise or performance.
2. Court determines whether, by attaching the condition to the promise, the
maker of the promise seeks performance of the condition or rather intends
the condition as a mere necessary attachment to the enjoyment of the
otherwise gift (gratuitous promise).
3. Only the objective intent of a reasonable person standing in the positon of
the recipient.
ii. Kirksey (promisee) v. Kirksey (promisor)
1. Issue: Whether or not the maker of the promise bargained for the terms of
the condition?
2. Rule: Whether a reasonable person would understand that the promisor
objectively intended performance of the condition to be a gift or
consideration for a return promise or performance.
3. Holding: Kirksey, the promisor, did not bargain for the terms of the condition.
4. Reasoning: yes, she relied to her detriment to move her family to her brother
in law’s land. However, the traditional theory of consideration will not make
a gratuitous conditional promise enforceable.
o Obligation by Reason of Reliance: The Promissory Estoppel Doctrine
 Reliance damages designed to put the injured party in status equal to that prior
to entering the K (R2K 344b); makes a promise binding where the promise has
detrimentally relied on a promise that otherwise lacks consideration.
i. Ricketts (payer, grandpa) v. Scothorn (payee, granddaughter)
1. Issue: Whether the promissory note may be enforced when there was no
consideration?
2. Rule: Equitable Estoppel—when the payee changes their position to their
disadvantage in reliance on the promise, a right of action does arise.
3. Holding: Yes, under the doctrine of equitable estoppel the k.
4. Reasoning: Grandfather gave promissory note to granddaughter so that she
didn’t have to work anymore. Granddaughter quit her job, relying on the
promissory note for income. The promise from grandpa was to make a gift in
the future. Scothorn’s reasonable reliance on Ricketts’s promise of a demand
for $2k at 6% interest created a right in Scothorn to enforce the note and an
equivalent duty in Ricketts to pay interest and the principle.
 Hohfeld’s system distinguishes 4 related legal concepts and defines each in
terms of its jural opposite (no pair can go together) and jural correlative (each
pair must always exist together).
i. Jural Opposites (never together)
Right Privilege Power Immunity
No-Right Duty Disability Liability

ii. Jural Correlatives (always together)


Right Privilege Power Immunity
Duty No-right Liability Disability
iii. Promissory estoppel operates as a sword by which one who reasonably
relies upon another’s promise may bring a cause of action to enforce
that promise
iv. Wright (purported promisor-stepdad) v. Newman (purported promisee
mother)
1. Issue: Whether Wright can be liable for child support for Newman’s son
under the state’s K law?
2. Rule: p. 92/93
3. Holding: Newman is liable for child support.
4. Reasoning: There was no formal K, but Wright promised Newman and her
son support. The duty to support which Wright voluntarily assumed 10 years
ago remains enforceable under the contractual doctrine of promissory
estoppel.
 Contract and Family Law
i. Changes a lot of absolutes in K law because of the involvement of
emotions.
 Charitable Subscriptions
i. Promises to make a gift to a charity are not likely to be supported by
consideration.
ii. Unless the gift is of enormous size and importance, the charitable
organization cannot prove reliance on any specific promise –not
enforceable unless a charity can establish reliance.
iii. Allegheny College v. N’tl Chautaqua County Bank
1. Issue: Whether the enforcement of a charitable subscription can be squared
with the doctrine of consideration as qualified by the doctrine of promissory
estoppel?
2. Rule: Doctrine of promissory estoppel as substitute for consideration.
3. Holding: Yes.
4. Reasoning: The duty assumed by the school to perpetuate the name of the
founder of the memorial is sufficient in itself to give validity to the
subscription within the rules that define consideration for a promise of that
order. Charitable subscriptions are enforceable in the absence of
consideration if promissory estoppel applies.
 Commercial Promises
o Obligation by Reason of Unjust Enrichment
 Any person unjustly enriched at the expense of another must make restitution
to the other person.
 A person might confer a benefit upon another without the request of the other
party in 1. Gratuitous intermeddler transactions, 2. Emergency services, and 3.
Self-interested transactions.
i. Cotnam v. Wisdom
1. A doctor performed emergency services on a victim of a car accident and the
victim later died after the doctor tried to same him. And the doctor sued for
payment of his services. The Ct. awarded restitution for the doctor bc of the
value of the services rendered. However, most people would be deemed as
good Samaritans.
 There are 3 Categories that implicate the restitution:
i. Category 1 Non-contractual Restitution (no promise)
 A party uses this category of restitution to recover unjust enrichment of the
other party in the absence of a promise to return that benefit. It is a doctrine
in equity, not in k law.
ii. Category 2. Promissory Restitution (Promise But Trails Enrichment)
 Since the promise was made after the promisor received the
benefit, it neither sought the benefit (no consideration) nor
expected it on the form of reasonable reliance (no promissory) .
Consideration and promissory estoppel theory do not support
contractual recovery for promises made in connection with a
benefit already received.
iii. Contractual Restitution (K Defense or Breach)
 Since an actual K exists, restitution will often be available in these
cases, unlike the first two categories.
Like consideration and reliance, promissory restitution seeks to enforce the promise itself as
opposed to a restitution remedy designed to force the enriched pa rty to make restitution to
the plaintiff based on the value of unjust enrichment.
iv. Mills v. Wyman
1. Issue: Is the father’s promise, which was made after his son was cared fo
enforceable by law ?
2. Rule: It is only when the party making the promise gains something, or he to
whom it is made loses something, that the law gives the promise validity.
3. Holding: No, because there was no consideration for the promise.
4. Reasoning: In light of the health services that the son received, there was no
consideration for the father’s promise after the services were received to pay
for his son’s services. Moral obligation is not enough, and there must be a
preexisting obligation to form the basis of an effective promise. Father did
not request the health services and he had no obligation to support his adult
son.
v. Webb v. McGowin
1. Issue: Is the promise enforceable?
2. Rule: Where the promise preserves the property of the promisor, even
without request, it is sufficient consideration for the promisor’s agreement
to pay for the service, because of the material benefit received.
3. Holding: Yes.
4. Reasoning: Webb sustained serious injuries when he prevented a block from
falling on McGowin by jumping out with the falling block—rendered disabled
for life. McGowin agreed to care for Webb and pay him $15 every 2 weeks
for remainder of Webb’s life. However, McGowin died before Webb and
payments stopped. McGowin was benefited which was sufficient legal
consideration for the promisor to pay.
R2K 90 Promissory Estoppel: A promise which the promisor should reasonably expect to induce action or
forbearance on the part of the promise and which does induce such action or forbearance is binding if
injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be
limited as justice requires.
Chapter 3. Reaching Agreement Through the Process of Offer and Acceptance
A. Mutual Misunderstanding & Objectification
Consensus Ad Item—assent to the same terms and bargain

When parties attach different meanings to the same terms: 1. Ct. determines whose meaning
prevails; or 2. Determine that the parties failed to form an enforceable k—mutual
misunderstanding.

Case: Raffles v. Wichelhaus


 Facts: Peerless boats and bails of cotton
 Holding: no binding contract
 Reasoning: Mutual Misunderstanding R2K §20 Effect of Mutual Misunderstanding--The
parties manifesting assent attached materially different meanings of the Peerless Boats
(sailing at different times).
B. Theory of Offer and Acceptance

The UCC specifically abandons the offer and acceptance focus of the common law by stating
that a k for sale of goods may be made in any manner sufficient to show agreement including
conduct by both parties recognizing the existence of a k. UCC 2-204 and 2-206.

R2K 20—mutual assent does not exist (and therefore no k) where the parties attach materially
different meanings to their manifestations and neither party is at fault for failing to understand
the other party’s interpretation.

R2K 26—A manifestation of willingness to enter into a bargain is not an offer if the person to
whom it is addressed knows or has reason to know that the person making it does not intend to
conclude a bargain until he has made a further manifestation of intent.

R2K 24—An offer is the manifestation of willingness to enter into a bargain, so made as to
justify another person in understanding that his assent to that bargain is invited and will conclude
it.

R2K 22—An offer is the manifestation of willingness to enter into a bargain, so made as to
justify another person in understanding that his assent to that bargain is invited and will conclude
it.

OfferPromise + Consideration or ____ = Contract

1. The promissory Nature of an Offer


Case: Owen v. Tunison: Was there an offer capable of an acceptance?
 Facts: Plaintiff seeks to buy plot of land that was not for sale
 Reasoning: Defendant did not offer to sell to plaintiff §24 Offer: Manifestation of
willingness to enter into a bargain. Made as to justify another person in understanding
his assent to that bargain is invited and will concluded
Lefkowitz v. Great Minneapolis Surplus Store
 Did the ads constitute an offer?
 Facts: Lefkowitz published an ad to sell fur coats “Sat. 9am sharp, 3 brand new fur coats,
worth to $100. First come, first served $1 each.” A man came in to buy one, but was
denied bc he wasn’t a woman.
 Holding: Ct. ruled that bc plaintiff fulfilled all terms of the as and the as was specific and
left nothing open for negotiation, a k had been formed.

The legal relationship btwn A and B is one of privilege/no right. With the making of an offer, A
has created a power of acceptance in B and A is under a correlative liability to B to enter into a K
if B exercises his power of acceptance. At the same time, A retains a power of acceptance in B,
and A is under a correlative liability to B to enter a k if B exercises his power of acceptance. At
the same time, A retains a power to revoke the offer at any time before acceptance, while B
suffers a correlative a loss of power to accept. B’s acceptance of A’s offer erases the
power/liability relationship and replaces it with a right/duty relationship. B has a right under the
terms of the k and A has a duty to comply with the k terms. Fulfillment of the k terms erases the
right/duty relationship and creates a new privilege/no right relationship. B has the privilege and
A has no right against B for exercising the privilege.

2. The Condition of Acceptance


The existence of an offer creates a power of acceptance in the offeree. That power may be
exercised by acceptance provided that the offer has not been terminated prior to acceptance.

A condition of acceptance is a condition attached to the promise by the maker of the promise that
renders the promise enforceable iff acceptance occurs in the manner invited by the offer.

Case: International Filter v. Conroe Gin


 Facts: Intl Filter, offerer is suing Conroe Gin for breach of k. What is sufficient to
evidence on acceptance of an offer?
 Holding: The offer became a k once approved by Chicago Exec.
 Rule: A condition of acceptance is a condition attached to the promise by the maker of
the promise that renders the promise enforceable iff acceptance occurs in the manner
invited by this offer.
 Reasoning: R2K§50 Acceptance of Offer: Acceptance of an offer is a manifestation of
assent to the terms thereof made by the offeree in a manner invited or required by the
offer. Acceptance must exactly mirror the terms of the offer. Any other difference
indicates a counter offer

3. Mailbox Rule: R2K§63 Time when acceptance takes effect & 64 Acceptance by telephone
and Teletype
 Acceptance is effective upon deposit in the mail by the offeree (may occur w/o
knowledge of the offeror)
o Nonapplicable to option k which are only effective upon receipt
 1. Offeree is bound by a mailed acceptance just as much as the offeror
 2. An offeree may mail a rejection first before changing her mind and attempting to
overtake the rejection w/an acceptance. A mailed rejection is effective only upon receipt
and consequently does not terminate the offeree’s power of acceptance until it is actually
received by the offeror
 3. While an offer creates a power acceptance in the offeree and a power of revocation in
the offeror, a revocation-like a rejection-is effective only upon receipt by the offeree

4. Acceptance by Silence R2K 69


 Where an offeree fails to reply to an offer, his silence and inaction operate as an
acceptance only when:
o An offeree takes the benefit of offered services with reasonable opportunity to
reject them and reason to know that they were offered with the expectation of
compensation.
o Where the offeror has stated or given the offeree reason to understand that
assent may be manifested by silence or inaction, and the offeree in remaining
silent and inactive intends to accept the offer.
o Where bc of previous dealings or otherwise, it is reasonable that the offeree
should notify the offeror if he does not intend to accept.
Case: Day v. Cayton
 Facts: Wall builder builds wall without permission of other adjacent property owner
 Holding: Held for builder because acceptance by silence
 Reasoning: Cayton watched builder do the work and remained silent while Day erected
the wall and expected payment
 Rule: If a party voluntarily accepts and avails himself of valuable services rendered for
his benefit, when he has the option whether to accept or reject them, even if there is no
distinct proof that they were rendered by his authority or request, a promise to pay for
them may be inferred.

5.K of Adhesion = Form K


Probs: The adhering party to a k has little choice as to its terms. Some terms are specifically
assented to (realistic enforcement) whereas boilerplate provisions are seldom read (making
enforcement more problematic on assent grounds).

Carnival Cruise Lines v. Shute


Facts: Shutes buy a ticket for cruise, try to sue in Washington, however, the ticket had a clause
that stated jurisdiction was only proper in Florida. Shutes maintain that they did not agree to the
forum clause about jurisdiction.
Holding: The Ct. enforces the forum clause bc the cruise has a special interest in keeping jrx
issues in a particular state, it’s more time and money efficient for both parties to litigate in FL,
and the Shutes’ rights have not been violated by the clause.

Termination of the Power of Acceptance


 Considers the termination of the offeree’s power of acceptance
 R2K 36 the power acceptance may terminate before exercise in any of following ways:
o Rejection or counter offer by the offeree, or
o Lapse of time, or
o Revocation by the offeror, or
o Death or incapacity of the offeror or offeree

1.Termination by Offeror Revocation


 R2K 36 the power of acceptance terminates when the offeror revokes that power prior to
its exercise by the offeree.
 Consideration theory of obligation does not exist to enforce a promise of irrevocability
unless and until the offeror receives supporting consideration
 Under the will theory, there has been no subjective or objective meeting of the minds
until mutual assent is expressed through the acceptance mechanism

Case: Dickinson v. Dodds


 Facts: Dodds sent a memo to Dickinson, the offeree stating that he would sell his land to
him and that he needed to accept until 3days later. Dickinson was later informed that
Dodds made an offer to Allan for the same land and Dickinson’s agent approached Dodds
with an offer of acceptance and Dodds declined saying that it was too late.
 Holding: There was no binding k for the sale of Dodd’s property to Dickinson. There
does not need to be an express retraction of the offer. Dickinson knew before he accepted
that Dodds changed his mind.
 Rule: Until both parties agree verbally or in writing, no agreement is made and the
substance is only an offer.

Option K R2K 25—An option is an enforceable k to keep an offer open. Thus, a promise to hold
an offer open for a period of time, if supported by a consideration, is enforceable as an option k.
The promise is not revocable for the option period, and if the power of acceptance (option
exercise) is not exercised prior to the termination of the stated period, the consideration is
forfeited to the offeror as compensation for keeping the k subject matter off the market for that
period.

UCC 2-205 an offer is irrevocable only if the offer: is made by a merchant, is included in a
writing signed by the merchant, and makes an assurance it will be held open.

2.Termination by Offeree Rejection or Counteroffer


 To be effective acceptance must be unconditional and on the precise terms of the offer—
Must be the mirror image of the offer and must not vary the terms of the offer in any
manner. R2K 38 and 36
 R2K 39 Counteroffers make a substitute proposal in the form of a new offer that confers
a new power of acceptance on the original offeror/counterofferree.
 “Battle of the Forms”--Where commercial parties often deal with each other through
purchase orders and order confirmation forms, each expressing common price and
quanitity terms but with many other additional or different terms
 R2K 37 Neither counteroffer, rejection, death, nor incapacity of the offeror terminates the
poer of acceptance under an option k.
 UCC 2-207Last Shot Rule: Common law permits the parties to trade competing forms,
treating each new form as a new counteroffer to the last form. The first party to begin
performance is deemed as a consequence of the objective theory of k, to have accepted
the terms of the last counteroffer—typically the terms contained on the last-transmitted
form before acceptance.

Step-Saver v. Wyse Technology

3. Termination by Death or Incapacity


 Common law determines that the death or incapacity of the offeree terminates that
person’s power of acceptance.

C. Effect of Pre-Acceptance Reliance


 Pre-contract reliance typically occurs in 3 contexts: 1. Unilateral k; 2. Bilateral k; and
3. Reliance on Precontract Negotiations
o Unilateral K—Acceptance only occurs when the performance is completed,
not at anytime before it. The offeror may choose to waste the offeree’s partial
performance of the acts require for acceptance by revoking the offer before
the offer can complete the acts.
o Bilateral K—involve promises on both sides of the transaction, rather than
only a promise and performance. Ex. General contractors show pre-
acceptance reliance when they rely on a bid from a subcontractor in
preparation for their own bid for the general contract.
o Pre-contract Negotiations—a party detrimentally relies on non-contractual
promises or representations by the other party to the transaction; negotiations
do not form a k until the parties manifest the necessary intent to form a k.

1. Unilateral K
Petterson (offeree) v. Pattberg (offeror)
o Issue: Whether at the time Pattberg refused the offer of payment, he had assumed any
binding obligation, even though subject to condition.
o Holding: Court held that due to the fact that the provisions of the contract were unilateral,
defendant was rightfully able to withdraw the offer before decedent's act was completed.
As a result, plaintiff was required to pay the loan without interest forbearance.
o Reasoning: Pattberg promised a payment plan on a mortgage for Petterson, but Pattberg
sold the mortgage before Petterson paid. Petterson came to Pattberg’s door stating that
he’d come to pay off the mortgage. Before a tender of the money had been made, Pattberg
informed Petterson that he could not perform his offered promise because he was no
longer his creditor.

Tender—an offer of performance, whereas a tender of performance is more specifically defined


as a demonstration of readiness, willingness, and ability to perform as requested.

2. Bilateral K
o An offer to enter into a bilateral k can be immediately accepted simply by
communicating acceptance; an offer is revocable at anytime before the offeree’s
acceptance.
Common law applies to services; UCC applies to transactions involving the sale of goods.

James Baird v. Gimbel Bros. (offeree, gen. contractor v. offeror, subcontractor)


Defendant merchant sent contractors who were likely to bid on a construction job an offer to
supply material needed for the job at set prices. Defendant did not realize that he was mistaken
about the total quantity of the material needed for the job. Plaintiff contractor received
defendant's offer and bid on the construction job that same day, basing its bid on the prices
quoted by defendant. Later that same day, defendant telegraphed a withdrawal of the offer to
contractors, having learned of his mistake. Plaintiff formally accepted defendant's offer several
days after receiving the telegraph and the written confirmation of withdrawal. Defendant refused
to recognize a contract, and plaintiff sued for breach of contract. The trial court directed a verdict
for defendant. The court affirmed, holding that because the offer was withdrawn before it was
accepted, the acceptance was too late.

Drennan (offeree, gen.contractor) v. Star Paving Co. (offeror, subcontractor)


Plaintiff was a licensed general contractor preparing a bid for a school district. Defendant
subcontractor was the lowest bidder for the paving work. Plaintiff used defendant's bid in
computing his own bid for a school project. The day after receiving defendant's bid, plaintiff
stopped by defendant 's office, whereupon plaintiff was informed that defendant's bid was a
mistake. Defendant refused to do the paving work at the price originally given plaintiff. Plaintiff
sued defendant to recover damages caused by defendant's refusal to perform the work according
to its bid. On appeal, the court affirmed the award of damages to plaintiff, since the loss resulting
from any mistake fell upon the party who caused it. Plaintiff had no reason to believe that
defendant's bid was in error and plaintiff was entitled to rely upon it.

Berryman (landowner) v. Kmoch (optionee)


The parties entered into a contract under which the landowner granted the individual an option to
purchase his land at an agreed price for a period of 120 days. The consideration for the contract
was $ 10.00, which the individual did not pay. The landowner asked to be released from the
option and without the individual's agreement sold the land to a third party during the 120-day
option period. After the land was sold, the individual sought to exercise the option within the
option period. The landowner then commenced his declaratory judgment action. On appeal, the
court affirmed. The court held that because the individual failed to pay the consideration under
the contract, the contract became a mere offer to sell that could have been withdrawn at any time.
The court also rejected the individual's claim of promissory estoppel. The court held that the
individual's efforts and expense to find investors to purchase the land did not constitute acts that
could have reasonably been expected as a result of extending the option promise. The court held
that the individual's power of acceptance was terminated when he learned that the land had been
sold to the third party.

3. Pre-Offer Acceptance on Negotiations


o Since the parties are negotiating, there is no mutual assent. However, one party
may expect the negotiations to continue in good faith , but absent such an
express agreement, k law generrally does not favor contractual liability based on
negotiations.
Pop’s Cones v. Resorts Intl.
The trial court granted defendant casino's motion for summary judgment in plaintiff shop's claim
of promissory estoppel. Plaintiff appealed and the court reversed the grant of summary judgment
because plaintiff relied to its detriment on the promises of defendant that plaintiff would be
permitted to relocate its operation to defendant's location. The court found that plaintiff was not
claiming breach of contract, but that plaintiff sought damages that resulted from its reasonable
reliance on defendant's promises. Plaintiff suffered the loss of its prior location and its ability to
earn profits during the summer season, out-of-pocket expenses including attorney fees, and
expenses in finding an alternate location. Affording plaintiff all favorable inferences, its
equitable claim raised a jury question, and defendant's motion for summary judgment should not
have been granted.

Both implied and express agreements to negotiate, the parties do not wish to make a binding
agreement with open terms.

4. Pre-Contractual Agreements
o R2k 27 Permits Cts. To enforce the parties’ agreement and treat the lack of a
final written memorial as a breach of one of the terms.

Texaco v. Pennzoil
o Defendant oil company brought 90 points of error in its appeal of a judgment
entered against it for tortious interference with a contract. The court denied all
but one point of error. The court held that the jury assessment of 3 billion dollars
was excessive in that it went beyond the amount needed to punish and deter
future conduct. Plaintiff oil company was directed to file a remittitur of 2 billion
dollars. Failure to file the remittitur would lead to reversal and remand of the
judgment. On the remaining points of error the court held that the evidence
supported the jury finding that a binding agreement existed between plaintiff
and a third oil company for the purchase of the third company. Defendant knew
of the agreement prior to its own purchase offer and tortiously induced a breach
of that agreement. The jury charge correctly stated the law and explanatory
instructions were proper to enable the jury to render a verdict. A retired judge
was properly appointed to complete the trial when the original judge fell ill and
defendant was not denied a fair trial. Defendant received due process in the
handling of its motion for new trial. Further, there was no jury misconduct.

1. Contracting in the Information Era


 Internet lowers search, information, and menu costs; information age commercial
practices offer increased opportunities for both customization and standardization of
contract terms.

Chapter 4. The Scope of Contractual Obligations


 Identifying the Terms of a Written Agreement: The Parol Evidence Rule
 Parol Evidence Rule: precludes (prevents) proof of terms to add to or vary the terms
of subsequent written contract where the writing was intended as the final and
complete expression of the agreement R2K 213 and UCC 2-202
o An embodiment of the larger contractual notion allowing parties to mutually
'discharge' prior obligations
o Permits the judge to exclude certain types of evidence from the jury to
determine its truth; bars any proof of the fact itself regardless of quality of
evidence
 Integration Test and Collateral Agreement Rule
o Integration Test and Collateral Agreement Rule
 When one of the parties asserts that the later writing
discharged(cancelled) the earlier oral or written terms, the parol
evidence rule is activated to resolve the matter.
 A judge decided the question of fact: Did the parties intend the later
written agreement to become their final, integrated expression or did
they intend the prior oral or written agreements to become part of
their total agreement?
i. Case: Thompson--seller v. Libbey--buyer
o Facts: Plaintiff owner of the logs to be sold to the buyer according to a
written agreement. Action brought for the money by owner and buyer
pleaded a warranty of the quality of the logs alleged to have been made at
the time of the sale and breach of it, offered on the trial oral testimony to
prove warranty which was admitted over the objection of plaintiff that is was
incompetent to prove a verbal warranty, the contract of sale being in writing.
o Issue: Is parol evidence admissible to prove a warranty for this written
contract?
o Rule: If it imports on its face to be a complete expression of the whole
agreement--contains language as imports a complete legal obligation--it is to
be presumed that the parties here introduced into it every material item and
term; and parol evidence cannot be admitted to add another term to the
agreement, although the writing contains nothing on the particular one to
which parol evidence is directed.
o Reasoning: There is nothing on the face of the contract that suggests that the
contract is incomplete as it appears to be a complete sale and purchase od
the logs by both parties.
o Notes: To be admitted as a collateral agreement, a distinctness test required
that the earlier parol agreement relate to a distinct subject matter. If the Ct.
determines that it is a complete integration, the analysis ends. If not, the
court admits the parol evidence to supplement or explain the writing.
R2K Section 209(1) Integrated Agreements
 The parol evidence rule does not bar evidence of prior negotiations to add terms to
supplement a partially integrated writing provided the additional terms do not vary
any terms expressed in the writing
 If the writing is totally integrated then the parol evidence rule bars evidence even of
consistent additional terms
 The integration test searches for the discharging intent of the parties
 Where one of these contemporaneous agreements is oral and the other is in writing,
and the writing is silent as to the oral agreement, the parol evidence rule may bar
enforcement of the otherwise valid oral agreement
 Cts. Added additional tests for integration and the collateral agreement rule. The firs
for distinctness is normally determined by reference to whether the two agreements
share common consideration. R2K Section 216(2)(a)
 Natural Omission Test seeks to understand the objective discharging intent of the
parties, the judge decides whether these two parties objectively expressed
discharging intent in the later writing.
 Evidence includes: 1)facial completeness of the writing itself, 2) a comparison of the
terms of the two alleged agreements, 3)the circumstances surrounding the making
of the two alleged agreements, and 4) oral and written extrinsic evidence of prior or
contemporaneous negotiations regarding what the parties intended R2K 216(2)(b)
ii. Case: Mitchill--buyer v. Lath--owner
 Facts: Mitchill argues that her promise to purchase the farm was expressly
subject to the seller's prior or contemporaneous oral promise to remove an
unsightly icehouse across the road. Mitchill relied on Lath's promise to
remove the icehouse and entered into a written contract and bought the
property. The owners never removed the icehouse and had no intention to
do so.
 Issue: Whether or not the oral agreement between the Laths and Mitchill
may be enforced in a court of law?
 Rule: 1. The agreement must in form be collateral, 2. The agreement must
not contradict express or implied provisions of the written contract, 3. The
agreement must not be so clearly connected with the principal transaction as
to be part and parcel of it.
 Holding: The judgment of the Appellate Ct. and that the Special Term should
be reversed and the complaint dismissed, with costs in all courts.
 Reasoning: The respondent does not satisfy the 3rd and maybe not the 2nd
requirement. Because the icehouse being present would not lead to the
belief that a separate agreement existed with regard to it. The icehouse is
collateral but it is so closely related to the subject dealt with in the written
agreement so closely that we hold it may not be proved.

Four Corners Rule and the Collateral Agreement Rule


When the writing appears on its face to be a complete expression of the whole agreement, the
Ct. should presume that the parties introduced into it every material item, parol evidence
cannot be admitted to add another term to the agreement.

Masterson v. Sine
The Sines received a conveyance to purchase land from the Mastersons. Masterson went
bankrupt and Sine went to exercise the option and so fid the Mastersons trustee in bankruptcy.
Sines attempted to introduce parol evidence to prove that at the time of conveyance, the
parties intended for the land to be kept in the family and the option to repurchase was
personal to the grantors. If imposed, the trustee would have no right to exercise the option.
Writing alone is not sufficient to tell what the true intent of the parties were. The option clause
did not explicitly state that it is a complete agreement and the deed is silent on assignability.

 Effect of a Merger or Integration Clause


 UCC Section 2-202(b) allows consistent terms to supplement the writing, provided a
court determines the writing is only partially integrated and not completely integrated.
Effect of a Merger or Integration Clause
 Where the parties share a common interest in making certain their written agreement is
completely integrated and therefore, cannot be supplemented by prior or
contemporaneous extrinsic terms, it may be wise to include a merger clause in the
agreement stating just such a mutual intent. "Merger" attaches from the view that the
effect of the clause is to merge prior negotiations into the final integrated writing.
 Expressly states that there are no other terms express or implied and the entire
agreements of the parties is limited to the terms expressed in the document
Case: Lee--seller v. Joseph E. Seagram & Sons. Inc. –buyer
 Facts: Appeal by defendant. Plaintiffs dad (now deceased ) and his sons. Lee offered to
sell Capitol City to Seagram but conditioned the offer on Seagram's agreement to
relocated the Lees in a new liquor distributorship of their own in a different city. An
officer for Seagram began negotiations for the sale and it was soon complete. However
the promise for relocation was never written. Lees claim a breach of oral agreement
 Issue: Whether the policy for avoiding fraudulent claims through the application of the
parol evidence rule mandates reversal of the Trial Ct.'s judgment on the ground that the
jury should not have been permitted to hear the evidence?
 Rule: If the written contract was not a complete integration, then the parol evidence
rule has no application.
 Reasoning: 1. It was expectable that the agreement would not necessarily be integrated
into an instrument for the sale of the corporate assets. 2. It is significant that there was
a close relationship of confidence and friendship between the Lees and the Seagrams. 3.
The transactions may not have been integrated in the minds of the Seagram agents
when the contract was drafted. 4. The written agreement does not contain the
customary integration clause, even though a good part of it is boilerplate (standardized
provision).

 Parol Evidence Rule & Valid K Requirement


Case: Danaan Realty Corp. v. Harris
 Facts: Cause of action-induced to enter into a contract of sale of lease of a building held
by defendants because of an oral representation falsely made by defendants as to the
operating expense of the building and as to the profits to be derived from the
investment. Plaintiff is seeking damages for fraud.
 Issue: Whether the plaintiff can possibly establish from the facts alleged in the
complaint (with the contract) reliance on the misrepresentations?
 Rule: If the facts represented are not matters peculiarly within the party's knowledge,
and the other party has the means available to him of knowing by the exercise of
ordinary intelligence, the truth, or the real quality of the subject of the representation,
he must make use of those means, or he will not be heard to complain that he was
induced to enter into the transaction by misrepresentation.
 Reasoning: If the plaintiff has made a bad bargain then he cannot avoid it in this
manner. Purchaser seems to have fully read and understood the contract and the
provisions which state that purchaser was able to examine the premises on his own.
 Notes:Dissent: There are many other cases with very similar facts in which the court
decided differently. There have been contracts with very similar provisions of which the
plaintiff was not prevented from bringing in an action of fraud even though it said
"understood and agreed" on the contract. Plaintiff needs to be protected for good faith
not the other way around.

B. Interpreting the Terms of the Agreement

 A term is vague if it has an unclear contextual meaning (a range of meanings on both


sides of a core objective meaning) and ambiguous if it is subject to a double meaning
(not with a range, but two separate meanings)
 R2K 201 Meaning of a K
o If one of the parties actually knew that the other party attached a different
meaning to the term, and the innocent party did not know of the difference, the
Ct. should adopt the meaning understood by the innocent party.
o Where a special meaning is shared by both parties, it will become the legal
meaning
 UCC 202

1. Case: Pacific Gas and Electric Co. v. GW Thomas Drayage & Rigging Co.
 Facts: Defendant appeals from judgment for plaintiff in an action for damages
for injury to property under an indemnity (protection against loss) clause of
contracts. Defendant entered into a contract with plaintiff to supply the labor
and equipment for refurnishing the plaintiff's steam turbine. Defendant agreed
to perform the work at its own risk and indemnify plaintiff against all losses.
Liability insurance for injury was also not less than $50k for defendant. During
work the cover fell and damaged the rotor of the turbine. Plaintiff brought action
for $25,144.51 the amount spent on repairs.
 PH: Trial Court dismissed count of negligence and ruled indemnity clause
covered injury to all property regardless of ownership. Ct. determined that the
contract had a plain meaning therefore the court refused to admit extrinsic
evidence that would contradict the interpretation.
 Issue: Was the evidence admissible?
 Rule: If the ct. decided after considering the evidence that the language of a
contract is "fairly susceptible of either one of the two interpretations contended
for …" extrinsic evidence relevant to prove either of such meanings is admissible.
 Reasoning: Evidence was relevant to the issue and should have been admitted.
Since the clause was reasonably susceptible to that meaning, the offered
evidence was also admissible to prove that the clause had that meaning and did
not cover injuries to plaintiff's property.
 Notes: Defendants maintain that the indemnity clause the parties meant to
cover injury to property of third parties only not the plaintiff's property.

 Traynor 2step—The judge will consider extrinsic evidence to determine whether the
term is reasonably susceptible to more than one meaning. If so, evidence is admitted so
that the fact finder can determine which meaning controls—the process of
interpretation.
 Parol Evidence incorporates the presumption that:
 To the extent that the parties execute a writing that is intended to be a final
expression of their agreement, no parol evidence may be admitted to
supplement, explain, or contradict the terms of the writing.
 But, to the extent that the writing is not a final and complete expression of
agreement, consistent but not contradictory parol evidence may be admitted to
supplement or explain those parts of it that have not been finally expressed.
 Parol Evidence Defined:
 Arising before the k: Any evidence of prior oral or written agreements not
integrated in to the written k before its execution.
 Arising at the time of k: Any evidence of oral agreements not integrated into the
written k.
 Traditional historical formulation “4 corners rule”—if the meaning of the agreements
was clear, complete, integrated, and unambiguous as determined by judge reviewing
the text of the writing (within the 4 corners of the document), no parol evidence of
ambiguity or non-integration could be admitted.
 Before such an oral agreement as the present is received to vary the written k, at least 3
conditions must exist:
 The agreement must in form be a collateral one;
 It must not contradict provisions of the written k;
 It must be one that parties would not ordinarily expect, or, must not be so
clearly connected with the principal transaction as to be part and parcel of it.
 Integration
 A written k may be partially or completely integrated
 Whether an agreement is partially integrated determines whether and to what
extent the parol evidence rule is applied.
 A “extrinsic,” (parol), is one method for the parties to indicate that they intend
the writing to be a final integration of their agreement and to bar parol evidence.
 The absence of a merger clause is often evidence that the parties did not view
the writing as a final integration of the agreement.
2. Case: Frigaliment Importing Co. (buyer) v. BNS Intl Sales Corp (seller)
 Facts: Plaintiff says chicken is a young chicken, suitable for boiling and frying.
Defendant says chicken means any bird of that genus that meets contract
specifications on weight and quality. Two Contracts in suit. After initial shipment
concerning first contract to Swiss corporation, they found that the young
chickens were what they’d consider fowl or stewing chicken. Swiss corporation
had a problem with that and stopped the second shipment in transport in
Europe the next day. Agents for the two companies negotiated the deal for
chicken and buyer stresses that the agents purposely used the English word
chicken instead of the German words which have other specific meanings and
that the seller should’ve noticed that. However, there is testimony from the
seller that the buyer used both the English word chicken and the German word
which can mean two different kinds of chicken.
 PH: The action is for breach of the warranty that goods sold shall correspond to
their description. The plaintiff has the burden of proof.
 Issue: What is the definition of chicken given the circumstances?
 Rule: Since the term chicken is ambiguous, judge will look to the contract for
interpretation and then to the surrounding circumstances.
 Holding: Plaintiff has not sustained its burden of persuasion that the contract
used chicken in the narrower sense. Judgment entered dismissing the complaint
with costs.
 Reasoning: Seller had good faith in delivering the chickens that they thought the
buyer meant and seller’s definition of chicken aligned with the Department of
Agriculture, the variances within the industry, and the fact that the buyer could
never get the broiler kind of chicken at that price.
 Notes: R2K 201(2) The process of interpretation searches for a reasonable
meaning attached by each party; construction attaches legal consequences to
the interpretative process. Court Reasoning
1. 1. Express Terms of K (Dictionary Def.)
2. Course of Performance –These parties interpreted this k after
formation
3. Course of Negotiations—These parties this K before formation
4. Course of Dealing—These parties previous k before formation
5. Trade Usage

C. Supplementing the Agreement with Implied Terms


 Common Law Implications
 The process of construction—begins after interpretation
 R2K 204 When the parties to a bargain sufficiently defined to be a k have not agreed with
respect to a term which is essential to a determination of their rights and duties, a term
which is reasonable in the circumstances is supplied by the Ct.
i. Case: Wood (promise,duty) v. Lucy, Lady Duff Gordon(promisor, no
right)
 Facts: The promisor is a fashion designer who hired the promisee to help
promote her business. According to the contract—promisor was to have the
exclusive right under her approval to place her indorsements on other designs
and to sell her designs and market them to others. Furthermore, the promisor
would receive half of all the profits and revenues derived from any contracts he
made. The Promisee’s right was to last one year and after that from year to year
unless terminated by notice of 90 days. Promisor placed her indorsements on
fabrics and clothing without the promisee’s knowledge and withheld the profits.
There was no explicit clause that said he would perform his duties.
 Issue: Is there an implied promise for reasonable efforts to place the promisor’s
indorsements and market her designs?
 Rule: There is a contract if a promise is lacking and the whole writing may be
instinct with an obligation imperfectly expressed.
 Holding: Yes, there is an implied promise. Judgment of the appellate court
reversed and the order of the special term affirmed with costs in the appellate
division and in this court.
 Reasoning: Promisor offered an exclusive privilege and he accepted. The
acceptance of the exclusive agency was an assumption of its duties. Unless he
gave his efforts, she would have no business according to the contract. Promisee
also had duties to account for all the transactions and the profits made.

 Cts. Turn to implied-in-law terms in two situations: 1. To fill in gaps in the parties’ k and
2. The common law and UCC both impose mandatory default terms, even where the
parties attempt to k explicitly on a particular issue.

i. Case: City of Yonkers (promisee) v. Otis Elevator Co. (promisor)


 Facts: Otis Elevator company was a big employer in the city of Yonkers and had
benefited from the city for many years. Due to changes in technology the
company could no longer afford its Yonkers facility so it shutdown. The City of
Yonkers is seeking damages from Otis and its parent company for breach of
contract. There was no express commitment in any agreements between
Yonkers and Otis to to continue production at the Yonkers facility.
 Issue: Whether a material issue of fact exists and whether the law was applied
directly?
 Rule: Court must determine 1. Terms the parties intended 2. Terms that the
parties would have intended had they thought about it 3. Terms that are fair
 Holding: No material issue of fact exists and the judgment of the district court
affirmed.
 Reasoning: Otis continuing presence was a goal not a commitment. Both the
President and VP of Otis stated that had they known that within the letter of
intent it stated that Otis needed to stay open in Yonkers for more than 10years
from the time of the letter. Otis closed because it was having economic trouble,
not fair to penalize them for shutting down.

 Caveat Emptor & Warranties


i. Warranty Liability
 Caveat Emptor—let the buyer beware; the buyer implicitly agreed to bear all risks of
poor quality, bad workmanship, or other defects in the property being sold.
 Shifted risks from the seller to the buyer at the moment of the sale
 Only if the seller committed fraud in making the sale could the buyer recover for
patent or latent defects.
 Buyer has full inspection before purchase.
 Warranty Liability UCC 2-314 and UCC 2-315
 To exclude or modify the warranty of merchantability, the language of the
exclusion or modification need not be written, but must specifically mention
merchantability.
 An express warranty as to the quality of goods was enforceable as a promise and
was never truly subject to the caveat emptor doctrine.
 Implied Warranty:
i. The major question in determining the existence of an implied warranty
is the reliance by the buyer on the skill and judgment of the seller. The
buyer had experience with sailboats at the time of the purchase and
precise specifications in regard to the type of boat he wanted.
 Express Warranty:
i. 1)Affirmation of fact, promise or description: statements made by the
seller in the course of negotiation are presumptively affirmations of fact.
The statements made by a retailer in a brochure can create express
warranties. The statements in the brochure are specific and unequivocal
and nothing indicates that the vessel is experimental in nature.
ii. 2) Basis of the bargain test: No particular reliance need be shown to
weave seller’s affirmations into the fabric of the contract. The buyer
doesn’t need to show that he would not have entered into the
agreement absent the warranty or that it was a dominant factor in
inducing the agreement. An inspection by the buyer of goods does not
necessarily discharge the seller from an express warranty if the defect
was not actually discovered and waived.

1. Case: Keith (buyer) v. Buchanan (seller)


 Facts: Sailboat was described by the seller as a seaworthy vessel. Buyer said he
relied n the representations in the sales brochures in regard to the purchase.
Buyer had a friend check out the boat and who affirmed it was sea worthy. Buyer
bought the bought. After buyer bought the boat he sued for breach of express
warranty and breach of implied warranty.
 Issue: Did the seller’s statement constitute an express warranty?
 Rule: In order for there to be an express warranty: 1. The court must determine
whether the seller’s statement constitutes an affirmation of fact or promise or
description of goods under Cali UCC. 2. Assuming the court finds the language
used susceptible to creation of a warranty, it must determine whether the
statement was a part of a bargain. 3. Court must determine whether the
warranty was breached.
 Holding: Affirmed all other aspects of the trial court’s judgment but reverse in
regard to its finding that no express warranty was created and remand for
further proceedings consistent with this opinion.
 Reasoning: Cal. Unif. Com. Code § 2313, provides that express warranties are
created by (1) any affirmation of fact or promise made by the seller to the buyer
which relates to the goods and becomes part of the basis of the bargain, and (2)
any description of the goods which is made part of the basis of the bargain.
Formal words such as “warranty” or “guarantee” are not required to make a
warranty, but the seller’s affirmation of the value of the goods or an expression
of opinion or commendation of the goods does not create an express warranty.
 Notes: Buyer wasn’t able to test the boat in the water. The seller’s statement
induced the buyer to buy the boat therefore there was a bargain (an exchange of
legal detriments)

Warranty Disclaimers
Sellers exercise advance contractual control over ultimate liability for potential later breaches of
warranties in two important but essentially distinct fashions.
 The seller can attempt to eliminate the warranty promise itself in the contract of
sale, the subject of this section.
 Sellers can also use the contract of sale to limit the extent of liability arising from
a warranty not effectively eliminated in the contract.
 Warranty disclaimers are mostly a matter of state law and the common law and
UCC usually control.
UCC Warranties
 UCC warranty disclaimer provisions are arranged according to the type of warranty.
 Disclaimers for express warranties UCC 2-316(1)
 Disclaimers for implied warranties of merchantability and fitness for a particular
purpose UCC 2-316(2)
 Express and implied warranties created by the UCC may be eliminated subject only to
express limitations stated on such contractual disclaimers.
 Problems to consider:
 What result obtains when an express warranty is made verbally (parol evidence
rule?) or in the sale contract, but the contract also disclaims any express
warranty (issue of internal documentary inconsistency). UCC 2-316
 Where the seller makes an express warranty, but does not properly disclaim the
implied warranties of merchantability and fitness for a particular purpose. UCC
2-317
 Where the express warranty and implied warranties cannot be read consistently and
cumulatively, the court must determine which warranty prevails. UCC 2-317 establishes
a 3-tier approach to the problem:
 P.370
 The implied warranty of fitness for a particular purpose is not disclaimed by an
inconsistent express warranty. In these cases, the warranty that usually survives is the
one that is more explicit under the assumption that that warranty more properly
reflects the objective reliance of the buyer. UCC 2-317.
Implied Warranties
 Contractual disclaimer of the implied warranties of merchantability and fitness for a
particular purpose is permissible but must follow one of two alternative pathways under
UCC 2-316(2)-(3).
 Contract simply states that the goods are sold ‘as is,’ ‘with all faults,’ or similar
language that makes plain to a consumer that there are no implied warranties.
UCC 2-316(3)(a)
 In order to exclude or modify the implied warranty of merchantability, the
language of the disclaimer must mention the term ‘merchantability’ and in the
case of a written disclaimer, must be conspicuous.
 A disclaimer of the warranty of fitness must be conspicuous and can only be
disclaimed in a written document.
 UCC 2-316 (3)(b)
Express Warranties
 When the disclaimer and the warranty are inconsistent, the express warranty prevails
over the disclaimer. UCC 2-316(1)
 Important exception
 The invalid disclaimer is subject to the parol evidence rule UCC 2-202.
 If an express oral warranty precedes or is contemporaneous with the execution a
written sales contract that contains a disclaimer of all warranties express or
implied, admissibility of evidence to prove the making of the express warranty
will depend upon the operation of the parol evidence rule. If the sales contract is
completely integrated, the evidence will not be admitted.
 Unless some exception exists, such as admitting the evidence of the oral warranty to
prove fraud on the part of the seller, the parol evidence rule will grant greater dignity to
the written disclaimer than the oral warranty. UCC 1-103(b)

1. Case: Consolidated Data Terminals (distributor) v. Applied


Digital Data Systems Inc. (manufacturer)
 Facts: ADDS and CDT entered in a written agreement in which
ADDS promised to accept CDT purchase orders for computer
terminals and CDT would promote the use of the terminals from
ADDS. CDT also promised to refrain from selling any terminals
that would be in competition with ADDS terminals. Contract
details: P2 “the contract was subject to cancellation by either
party at any time upon 90day notice. P22 contained a merger
clause stating that no agreements between the parties existed
outside of the written agreement, and NY law would govern the
agreement.” CDT ordered the Regent 100s terminals which ADDS
maintained as inherently reliable and its most advanced terminal
that would operate at 19,200 baud (1920 characters per second).
After receiving the terminals, CDT realized that there were huge
design errors. ADDS responded by performing on its warranty
obligations (special team of engineers and a return service for
customers). After a year, most of the terminals were functional,
however, they never performed at 19,200 baud. CDT stopped
selling the Regent 100s and other ADDS products.
 Issue: Whether the express warranty of ADDS prevails over the
general warranty disclaimer with CDT?
 Rule: Where a contract includes both specific warranty language
and a general disclaimer of warranty liability, the former prevails
over the latter where the two cannot be reasonably reconciled.
 Holding: Court affirmed the district court’s conclusion that ADDS
was liable to CDT for compensatory damages based on breach of
contractual warranty. The express statements warranting that the
Regent’s 100s would perform at a 19,200 baud rate prevail over
the general warranty disclaimer, and properly formed the basis
for CDT’s breach of warranty.
 Reasoning:
 Notes: The purposes of allowing the warranty to prevail over the
disclaimer, assuming a warranty exists, is to protect a buyer from
‘unexpected and unbargained’ language of an inconsistent
disclaimer.

 Insurance K
 1. The insurer drafts standard form contracts which are presented to the consumer on a
take it or leave it basis without opportunity for negotiation. This makes the insurance
contract an example of an adhesion contract Def.--A standard form contract drafted by
one party (usually a business with stronger bargaining power) and signed by the weaker
party (usually a consumer in need of goods or services), who must adhere to the
contract and therefore does not have the power to negotiate or modify the terms of the
contract.
 2. Contra proferentem construes any ambiguity against the drafter (i.e. the insurance
company) as described in R2K 206.
 3. Even in the absence of ambiguity, R2K 201(2)(b) provides that an insured’s meaning
wil control over the insurance company meaning where 1) the insured had no reason to
know of the insurance company’s meaning; and 2) the insurance company did have
reason to know of the insured’s reasonable objective understanding.
 Case: Atwater Creamery Co. v. Western Natl Mutual Ins. Co.
 Facts: Creamery was insured up to $20,000 by Western against burglary under
an “evidence of enforceable entry” requirement. Someone broke into the
Atwater soil center and Atwater filed a claim with Western under the burglary
policy. However, Western denied coverage because there were no visible marks
to the exterior/interior at the point of entrance. Police determined that it wasn’t
an inside job. Strehlow who is the owner of Western’s agent testified that he
mentioned the evidence of enforceable entry requirement to Poe the soil center
plant manager. Atwater says they don’t remember that conversation and no one
read the policy in its entirety at the soil center (Poe stated he couldn’t
understand it).
 PH: Atwater sued Western to cover the damages from the burglary along with
other business fees related to the business. Atwater sought declaratory
judgment against insurer, seeking coverage for losses sustained during a burglary
of the creamery’s storage building.
 Issue: 1. Whether the conformity clause in the policy operates to substitute the
statutory definition of the crime of the burglary for the definition of burglary in
the policy. (Do the definitions of conflict?) 2. Whether the reasonable
expectations of the insured as to coverage govern to defeat the literal language
of the policy.
 Rule: The reasonable Expectations doctrine provided the standard for the court.
–the reasonable expectations of the insured.
 Holding: Affirmed the directed verdict for the insurance co. but reverse as to the
policy coverage.
 Reasoning: The statutory def. of burglary imposes criminal sanctions on those
whose acts fall within its purview. The policy def. is to limit the risk the insurer is
willing to cover. Therefore, the conformity clause does not substitute statutory
provisions for policy provisions only where is regulates insurance (disagree with
insurer). They also looked at the purpose of the requirement and said that it’s to
protect insurance companies from fraud by way of inside jobs and to encourage
insured to reasonably secure the premises. Application of policy—Poe could
have reasonably thought that it meant there must be clear evidence of burglary
not of forced entry. Atwater reasonably expected that its insurance would cover
the burglary.

 The Implied Obligation of Good Faith

UCC good faith 1-302

 Case: Locke v. Warner Bros.


 Holding: The court reversed the decision that granted summary judgment in
favor of respondent entertainment studio, holding triable issues of fact were
present with respect to appellant director's claims of breach of contract and
fraud. The court ruled that the evidence presented inferred respondent
breached the agreement by refusing to consider appellant's proposals in good
faith, and the issue of fraudulent intent was one for the trier of fact.
 Reasoning: Appellant director brought action against respondent entertainment
studio for tortious wrongful discharge in violation of the public policy against sex
discrimination, breach of contract, and fraud. Summary judgment was granted in
favor of respondent, and appellant sought review. In reversing the decision, the
court held that a triable issue existed as to whether respondent breached its
contract with appellant by failing to evaluate appellant's proposals on their merits.
If respondent acted in bad faith by categorically rejecting appellant's work and
refusing to work with her, irrespective of the merits of her proposals, such
conduct was not beyond the reach of the law. The implied covenant of good faith
and fair dealing obligated respondent to exercise its discretion honestly and in
good faith. Testimony indicated that respondent expressed an absolute
unwillingness to work with appellant, it could have reasonably been inferred that
respondent never intended to give appellant's proposals a good faith evaluation.
Respondent's payment of the guaranteed compensation under the agreement did
not establish that respondent fulfilled its contractual obligation.
 Course of Dealing, Usage, & Course of Performance
 Case: Swanson (lessor) v. BECO Const. Co. Inc. (lessee)
 Holding: The supreme court modified the judgment by reducing it to $ 13,058.65
and affirmed the judgment as modified. The lessor was awarded costs, including
a reasonable attorney fees, on appeal.
 Reasoning: The lessor billed the lessee $ 13,200 for the use of his Bobcat. The
lessee refused to pay and the lessor filed an action seeking to recover the sum of $
13,200 in unpaid rent, damages for failure to return the Bobcat in the condition
required by the lease, and prejudgment interest. The current appeal was from a
grant of summary judgment in favor of the lessor, holding that an equipment lease
agreement was not ambiguous and that an alleged usage of trade was not
applicable. The supreme court reduced the judgment to $13,058.65 and affirmed it
as modified. The lessee did not contend that the term "working day" was a term of
art within the construction industry. In fact, the lessee did not present any relevant
evidence as to an alternative definition of the term. When the term "working day"
was given its ordinary meaning, the lease agreement was not ambiguous and the
lessor was entitled to rent for every day of the lease term except Sundays and
holidays. The district court's calculation of the amount due was $300 too much
because there were only 43 working days during the term of the lease.
 Employment K
When employment contracts do not state a specific duration, what are the legitimate expectations
of the employer and the employee with regard to the duration of the employment?
 American jurisprudence has followed the ‘employment at will’ doctrine that generally
provides that an employee may be discharged without cause and at any time; an
employee may also resign without giving any reason and at any time.
 Courts have grafted exceptions to the default rule that an employment contract is at-
will:
 Parties may opt out by providing for a definite term of employment.
 Parties may rebut the at-will presumption by providing that the employee may
be terminated only for ‘cause’.
 A savvy employee may argue under expressio unius exclusio alterius est, that by
listing terminable offenses, the handbook impliedly promised not to terminate
an employee for offenses or conduct not contained in the list.
 Employers may anticipate the savvy employees by inserting a disclaimer in the
employee handbook.
 The employee may rebut the presumption by a showing that the employee provided
‘additional consideration’ over and above what the contract required. i.e. performing
substantial additional duties or incurring substantial hardship on behalf of the employer,
or detrimental reliance on some promise of the employer for a definite term of
employment.
 Promissory estoppel remains the most common employee allegation to
overcome the presumption of at-will employment.
 Strength of the at-will presumption often outweighs such estoppel
considerations. “You will be here until you retire.”
 The presumption may be defeated where the termination would violate public policy.
 Discharged at-will employees often claim that the termination was in bad faith
 Good faith is not an independent duty, but rather attaches to other obligations
created by the contractual relationship between the parties or by statute.

Chapter 5. When an Enforceable Promise Becomes Due: Breach of Promise & Non-
Satisfaction of Conditions
 Anticipatory Repudiation
 Classic Def. of a contract breach contemplates nonperformance of a duty when
that duty is due. R2K 235(2)
 Anticipatory Repudiation: Declaring an intent not to perform before
performance is due.
i. Discharges the injure party’s duty to perform and creates an immediate
claim for total breach and damages at the time of repudiation.R2K 253
ii. It is interesting to create a right in the injured party to sue immediately
for damages for total breach at the time of repudiation.
iii. Usually requires a clear and unequivocal declaration of anticipatory
repudiation.
iv. “I’m not sure if I’ll be able to do it” is equivocal and may create sufficient
uncertainty in the other party to justify suspending a performance until
that uncertainty is resolved, but do not give the injured party a right to
sue immediately for breach.
v. If a reasonable person in the injured party’s position would objectively
consider such a statement to be a repudiation (regardless of the good
faith of the obligor), that statement will constitute an anticipatory
repudiation.
b. Case: Truman L. Flatt & Sons Co. v. Schupf
 Facts: Flatt filed a complaint seeking specific performance of a real estate contract
with defendants as trustee under a trust. Defendants agreed to sell the plaintiff a
plot of land and the contract stated that it would be closed on June 30, 1993 or upon
approval of the relief requested from the zoning code of the city, whichever occurs
first. The contract was contingent upon the buyer obtaining within 120 days
amendment or relief of the zoning code of the city to permit construction and
operation of an asphalt plant. If the city denies the request then the contract is
voidable at buyer’s option and if buyer voids the contract buyer will receive a refund
of the money paid. Buyer’s attorney: sent a letter to the seller’s attorney indicating
that they would have a zero chance of success of obtaining the re-zoning request
and have decided to withdraw the request for re-zoning. Still interested in the
property and would like to offer $142,500.00 for the property which represents the
zoning classification for zoning a different category. Check with your clients and see
if that’s an acceptable revision. Seller’s Attorney: Be advised that that sellers are not
interested in selling the property for $142,500 and do not accept the offer. Plaintiff:
Clients elected to proceed with purchase pursuant to the contract. Give me a call for
the closing date. Buyer’s attorney sent two more letters to clarify the status of the
contract and by July, seller responded that the contract was void because of the
offer to contract at less than the asking price and plaintiff failed to waive the
contract.
 Issue: Whether the trial court erred in declaring defendant was entitled to judgment
as a matter of law based on the facts? (because 1. Buyer did not repudiate the
contract, and 2. Even if it did repudiate the contract, it timely retracted that
repudiation.)
 Rule: R2K 250
 Holding: Reversed and remanded.
 Reasoning: The may 21 letter did not constitute a clear implied threat of non-
performance. Illinois law requires requires a repudiation to be manifested clearly
and unequivocally.

 Conditional Promises
a. Express Conditions
i. Express conditions provide the parties with tools to provide that one or
both parties need not perform contract promises unless a specified event
occurs.
b. Example p. 438 In cases of doubt, language and circumstances are interpreted to
not create a condition in order to reduce the obligee’s risk of forfeiture, at least
if the event is within the control of the obligee, languages and circumstances are
interpreted to create a promise by the obligee that the event will occur, rather
than to the condition the obligor’s duty to perform.
i. Case: Oppenheimer & Co. Inc. v. Oppenheim, Appel, Dixon & Co.
c. Facts: A written agreement between the two partise regarding a sublease
provided that there would be no sublease between the parties ‘unless and until’
plaintiff delivered to defendant the prime landlord’s written consent to certain
tenant work on or before a specific deadline. Obligor and obligee entered a
sublease agreement. The agreement provided that there would be no sublease
until the obligee delivered to the obligor the prime landlord's written consent to
perform certain tenant work. The obligee provided timely oral notice, but not
the written notice that was required by the terms of the lease agreement. When
the obligor failed to perform according to the lease terms, the obligee filed a
complaint for breach of contract and alleged that it had substantially performed
its part of the bargain. The trial court held in favor of the obligee.
d. Issue: Whether the doctrine of substantial performance applies to the facts of
the case.
e. Holding: The court found that substantial performance had no application to the
dispute.
f. Reasoning: The parties' letter of agreement unambiguously established an
express condition precedent rather than a promise. The sophisticated parties
dealt at arm's length and there was no reason to relieve the consequences of
their bargain. The court further held that the issue of whether there had been
substantial performance was not for the jury but the judges of the law.

g. Ordering of Preferences

(1) Constructive Conditions for Simultaneous Exchanges


 Where performances can be exchanged simultaneously, they are due simultaneously.
R2K 234(1).
 In a simultaneous performance exchange, each party’s duty to perform is subject to an
‘implied condition’ that the other party actually performs or offers to perform “tender”.
R2K 238
 Most consumer transactions in goods are simultaneous transactions because the goods
are available for immediate purchase.
(2) Constructive Condition for Nonsimultaneous Exchanges
 Where the performances cannot be exchanged simultaneously because one party’s
performance takes time, the performance requiring time is due first. R2K 234 (2).
 In a non-simultaneous exchange, the party’s performance due second is subject to an
“implied condition” that the first party’s performance will not be materially defective.
R2K 237.
o The first party must substantially perform before the other party’s performance is
due. i.e. getting a house painted and paying for it (service and construction
contracts).
o Protects the second party from having to pay for an uncured materially defective
performance.
 Where a party renders a materially defective performance, the defective performance
does not discharge the other party’s duty to perform. Rather, the duty is suspended. R2K
225(1).
o Provides opportunity to cure for party whose performance was materially
defective. R2K 242
o When cure is no longer legally permissible, the suspended duty is discharged
because the implied condition did not occur. R2K 225(2).
 While substantial breach performance is not perfect performance and thus constitutes a
breach of contract entitling the other party to damages, the other party receiving
substantial performance must still perform as if there is no condition of perfect
performance.

i. Case: El Dorado Hotel Properties (seller) v. Mortensen (buyer)


 Facts: The note and deed of trust arose out of the sale of the El Dorado Country Club
property by the Seller to the Buyers for $2.2 million. Buyers made one payment prior to
the amount of $400k due on March 1. The agreement also included release of portions
of the property which stated “Upon payment of $400k plus interest payment due March
1, the trustors shall be entitled to have released… (p.453)” (a) “Trustors shall have
submitted to the Beneficiary a plat of the subject property showing the location of the
original release and the location…this plat shall be approved by Beneficiary to be
consonant with the requirements set forth in this paragraph…” The Buyers failed to
secure the money to make the March 1 payment deadline until late February. Buyers
contacted the Sellers in late February and secured an agreement that there would be no
default if the payment due on March 1 was made by noon on March 5. Default/Standard
Acceleration Provision: “should default be made in payment of any installments, the
whole sum of the principal and interest shall become due at the option of the holder.”
On March 3, Buyers told Sellers that they would be delivering the release plat
deed/deed of release, but Sellers told them that they would not review them because
there wasn’t enough time until payment was made. On March 4, Seller told buyer that if
they did not make the March 5 payment then he would file foreclosure action. Buyer
responded on March 4 that they planned to make the March 5 payment. On March 5,
Buyers presented a payment to Sellers but they refused the payment and filed the
foreclosure complaint.
 Issue: Whether the Trial Court erred in holding that the release provision did not
contemplate simultaneous performance by the parties.
 Rule: R2K 234 (b) “Where a time is fixed for the performance of one of the parties
(payment of $400K by March 1) and no time is fixed for the other (approval and delivery
of release) simultaneous performance is possible and will be required unless the
language or the circumstances indicate the contrary.”
 Reasoning: Trial court erred in its application of the rule and that “upon payment”
meant after payment. There are many meanings for the word upon that don’t mean
after. The language of the agreement nor the circumstances object to the simultaneous
performance of both parties since the payment and release could be exchanged
simultaneously if the release was provided in a sufficient amount of time.

a. Constructive Conditions
i. Case: Jacob & Youngs v. Kent
 Facts: Plaintiff built a home for defendant and sues to recover ~$3k remaining in unpaid
balance. Specifications “All wrought iron pipe must be well galvanized, lap welded pipe
of the grade known as standard pipe of Reading manufacture.” Pipe was not all from
reading and plaintiff was advised to redo the piping, however, that task would require that
the plaintiff demolish that entire structure so the plaintiff did not redo the piping and
asked for certificate of the final payment. The defendants refused to pay and this suit
followed.
 PH: Evidence that the piping was of the same quality as the Reading manufactured
piping was excluded and a verdict was directed for the defendant. Appellate Division
reversed and granted a new trial.
 Issue: Whether the literal words of the contract are sufficient for the fulfillment of the
contract?
 Rule: The measure of the allowance is not the cost of the replacement, which would be
great, but the difference in value, which would be either nominal or nothing.
 Holding: Order affirmed and judgment absolute directed in favor of the plaintiff upon the
stipulation, with costs in all courts.
 Reasoning: The Court must weigh the purpose to be served, the desire to be gratified, the
excuse for deviation from the letter, the cruelty of enforced adherence in order to tell
whether literal fulfillment is to be implied by law as a condition.

a. Excuse, Waiver, and Other Relief from Effect of Conditions


 Excuse of the nonoccurrence of the condition causes the correlative duty to become
due.
Doctrine of Good Faith
 R2K 245 The parties must exercise good faith and fair dealing:
o To refrain from preventing or hindering the occurrence of the condition (doctrine
of prevention).
o To take affirmative steps to cause its occurrence, at least when the occurrence is
within the party’s control.
Doctrine of Waiver
 The party who benefits from the nonoccurrence of the condition may waive the effect of
the condition in most cases.
 R2K 93 Contractual waiver of conditions at common law do not require that the waiving
party actually know their legal rights, only that they have a mere reason to know.
 R2K 84(1)(a) A waiver of an express condition is not effective if the condition was a
material part of the exchange and the promisee was under no duty that it occur.
 Normally waiver occurs when a party makes an express or implied promise to perform
despite the nonsatisfaction of an express or constructive condition.
o If the waiver promise was given in exchange for negotiated consideration then the
promise is permanently enforceable.
o A waiver can be retracted with reasonable notice given before the time for the
condition to occur has expired.
 Most often the promise to waive is not express, but implied from the
waiving party’s acceptance of performance despite the nonsatisfaction of
the condition. R2K 247
Doctrine of Excuse to Avoid Forfeiture
 Courts may excuse conditions that would cause an unconscionable forfeiture at the time
of the occurrence of the condition not at the time the contract is formed. R2K 229
 Forfeiture “a denial of compensation that results when the obligee loses his right to the
agreed exchange after he has relied substantially, as by preparation or performance, on
the expectation of the exchange.”
 Disproportionality is applied by balancing the obligee’s described forfeiture with the
importance of the condition to the other party. R2K 229.
o The condition excuse by reason of disproportionate forfeiture can only occur
where the condition was not a material part of the exchange.
o Forfeiture excuses are inextricably tied to equitable balancing of the reasonable
expectations of the parties.

i. Case: Holiday Inns of America Inc. v. Knight


 Facts: Buyers appeal from a judgment for owners in an action seeking a declaration that
an option contract was still effective. The option contract was for the purchase of
property in an initial payment of $100k and four additional payments of $10k to be
made on July 1 of each year after 1964 unless the option was exercised or cancelled
before the next payment became due. Cancellation provision “It is mutually understood
that failure to make payment on or before the prescribed date will automatically cancel
this option without further notice.” The agreement also included instructions to the
optionees to deposit the payments in an escrow account with the Security Title
Insurance Company for optioners to terminate the account upon a missed payment.
1964 and 1965 payments were made and the optionees made major commercial
developments around the property increasing the value of the property. Optionees
mailed a check dated June 30th to optioners who received it on July 2nd 1966 and
returned it stating that the contract had been cancelled on July 8 th. On July 8th the
optionees sent another check and again it was refused. On July 15 optionees deposited
a check for $10k in the escrow account but the check was refused. Optionees maintain
that the payment was timely upon mailing the check.
 Issue: Whether the right to exercise the option in the future was forefeited by a failure
to pay the consideration for that right precisely on time?
 Rule: Conditions may be excused where the enforcement would cause an
unconscionable forfeiture at the time of the occurrence of the condition.
 Holding: Judgment reversed and the trial court directed to enter summary judgment for
optionees in accord with the views herein expressed.
 Reasoning: Optionees are seeking to secure relief from the provision making time of the
essence in tendering the annual payments and are not seeking to extend the period
during which the option can be exercised. Did the optionees bring themselves within
section 3275 and would there be loss in the nature of a forfeiture suffered by the
optionees if the option contract were terminated?
 The parties agreed to bind themselves to a 5year agreement with the price payable in
installments not an independent contract that was renewable at the end of every year.
The contract installments were partially for an option to buy the land during that year
and partially for a renewal of the option for another year up to 5years total. It is the
right of the optionees to renew the contract that would be forfeited by requiring
payments strictly on time. Optionees have lost more than the benefit of their bargain
since they have paid a substantial part of $30k for the right to exercise the option during
the last 2 years. Optionees have acted in good faith and have been willing and able to
perform on the contract. Optioners have not suffered any injury due to the contract
termination and none of their reasonable expectations have been defeated and will
receive the full benefit of the bargain

Chapter 6. K Unenforceable by Operation of Law


This chapter addresses situations in which the state will refuse to lend its enforcement powers to
private agreements and contracts by operation of law, or because of a defect in contract
formation, even where the parties have apparently satisfied all of the requirements for formation
(i.e. mutual assent) and enforceability (consideration).

 Illegal K or K that contravene public policy (k is void)


 K required to be evidenced by a written memorandum pursuant to the statute of frauds (k
is unenforceable)
 K is so grossly one-sided and unfair as to shock the conscience of the Ct. (K is uneforceable)
 K executed through fraud, duress, or undue influence (k is voidable)
 K executed where one or both parties are mistaken (k is voidable)
 K where a party’s executory obligations have become impracticable or a party’s principle
purpose has been frustrated because of supervening events after execution (executory
obligations are discharged and k is unenforceable with respect to nonperformance of those
obligations)

A. The Distinction Between Void and Voidable Contracts


 Void Contracts—cannot be enforced at either party’s election.
o Contracts that violate public policy, unconscionable contracts,
 Voidable Contracts—contracts that the promisee may choose to enforce or avoid at the
promisee’s election.
o Contracts induced by fraudulent representation, by infants, etc.
 Void ab initio—void from the beginning.

B. The Public Policy Doctrine


 Generally, contracts that contravene public policy are void.
R2K 178 a promise or agreement is unenforceable on the grounds of public policy in
situations:
a. Where the legislature has directly declared certain agreements or promises illegal;
b. Or where the judicial precedent has recognized the existence of public policy
against enforcement of such promises.
 A party who enters an illegal contract through gullibility, dependence on the other party’s
expertise, or lack of sophistication regarding the legal requirements of the transaction
may be entitled to recovery even though the underlying contract is illegal or contrary to
public policy.

Illegal K R2K 178


Anheuser-Busch Brewing Ass’n (seller, plaintiff) v. Mason (buyer, defendant)
Facts: This action was brought to recover a balance claimed to be due by the seller for and on
account of bottled beer sold to the buyer. Seller knew that buyer was running a brothel and
would be paid for the beer it dispensed with the money from the prostitution.
PH: The case was dismissed by the trial court upon admission that the buyer knew about the
brothel and how the beer may or may not be involved.
Issue: Whether the seller and buyer had an illegal contract for which the seller cannot recover?
Rule: Mere knowledge by a vendor of the unlawful intent of a vendee will not bar a recovery
upon a contract of sale, yet, if, in any way, the former aids the latter in his unlawful design to
violate a law, such participation will prevent him from maintaining an action to recover.
Holding: Reversal of the order of dismissal.
Reasoning: The illegality of the brothel is only collateral to the sale of beer. When a contract is
illegal or immoral it is void, it is also true that a contract is not void just because there is
something immoral or illegal in its surroundings or connections. A contract cannot be declared
void simply because it tends to promote illegal or immoral purposes. Aside from the seller’s
knowledge of the buyer’s business, there is no connection showing that the seller violated the
law. Buyer did not meet the burden of proof showing that if the contract was enforced, it would
violate public policy, or endangers the public.
Notes:
 The graduated relief structure (as opposed to the all or nothing void contract
approach) places the risk of nonenforcement of a contract for illegality on the
cheapest risk avoider. A court should permit some recovery by a plaintiff seeking
to enforce an otherwise illegal contract where the plaintiff was:
o In a significantly weaker bargaining position
o Was not a repeat player with respect to the subject matter of the contract
o Lacked knowledge of the illegality
o Did not participate significantly in the wrongdoing
o Or other contexts in which it would be more beneficial to societal welfare
to permit the plaintiff to enforce the contract, or to obtain rescission and
restitution.

K in Contravention of Public Policy

1. Contracts in Contravention of Public Policy


 The public policy doctrine appears to contravene directly principles of freedom of
contract and private autonomy.
o Risks: judicial bias, ambiguity, and paternalism.
 The value of the illegal contracts or public policy doctrine lies in the quality of the
statutes and public policies it seeks to promote.
 The source of judicially created public policies itself challenges principles
essential to the rule of law.

Hewitt v. Hewitt (split between a girlfriend and boyfriend who have been living as a
married couple)
Facts: V. Hewitt has been living with R. Hewitt for 15 years and has 3 children with him,
unmarried but in a family-like relationship. She alleges 1. R. Hewitt promised her that they
would live their lives together and she is therefore entitled to half of his property, 2. The conduct
of the parties evinced an implied contract, 3. R. Hewitt fraudulently assured her that she was his
wife, and 4. She has relied to her detriment on his promises and devoted her entire life to him.
PH: Trial Court found that neither a ceremonial nor a common law marriage existed and directed
V. Hewitt to specify the division of property that she was seeking. The Ct. dismissed the
complaint because Illinois law and public policy require such claims to be based on valid
marriages. Appellate Ct. reversed stating her COA based on an express oral contract because
they presented themselves as a married couple.
Issue: Whether V. Hewitt may recover “an equal share of profits and properties accumulated by
the parties” from R. Hewitt for the 15 years she lived with him.
Rule: Illinois Marriage and Dissolution Act.
Holding: V. Hewitt’s claims are unenforceable because they contravene the public policy,
implicit of the Illinois Marriage and Dissolution of Marriage Act, disfavoring the grant of
mutually enforceable property rights to knowingly unmarried cohabitants. The judgment of the
appellate Ct. is reversed and the judgment of the circuit court is affirmed. Is it appropriate for the
court to grant a legal status to a private arrangement substituting for the institution of marriage
sanctioned by the State? Property rights for unmarried couples would undermine the Illinois
Marriage and Dissolution of Marriage Act, making co-habitation more attractive than marriage.
Reasoning: The issue cannot be addressed solely based on contract law and it also cannot be
solely based on equity and fairness as there are large public policy implications for these
decisions. What will be the impact of this decision on society and the institution of marriage?
Societal norms are moving away from the traditional notions of marriage and family. This
situation would constitute a common law marriage but those were invalid as of 1905. Any
changes should be made through the legislature not the court.
Notes:

Covenants Not to Compete in Employment Contracts


 Covenant Not to Compete—should the employee terminate the employment or be
terminated, the employee will not go to work for a competitor of the employer
engaged in the same or similar business, within a proscribed geographic area, for a
limited period of time following the termination.
o Threaten the ability of employees to change employers
 Some employers appear to be personally purposefully delaying presenting
noncompete agreements until the employee’s bargaining power is at its weakest, like
on their first day of work “cubewrap contracts”

C. Unconscionability—K Void for Unfairness


 The doctrine of unconscionability—when the courts refuse to enforce part or all of a
purported agreement that is so unfair, inequitable, one-sided, or unjust that it ‘shocks
the conscience’.
1. History & Purpose of the Doctrine of Unconscionability
 Courts would manipulate other doctrines in place of the unconscionability doctrine to
rule for the outcome that they favored given unfair contracts
 UCC 2-302 permits courts to regulate the unconscionability of a contract or term
without making up their own rules (deceit).

Williams (buyer, appellant) v. Walker-Thomas Furniture Co. (seller, appellee)


Facts: Within the purchase agreement of any items from Walker-Thomas Furniture, it stated th
price of the purchased furniture, the monthly rent payment, and a provision that title would
remain with the furniture co. until the total of all the monthly payments made equaled the stated
value of the item at which time the purchaser could make title. In the event of default, the store
could repossess the item and all items previously purchased could also be repossessed and each
new purchase became subject to a security interest. Williams bought a stereo for $514. 95 and
defaulted on the payments to Walker Thomas Furniture. The Company thus sought to repossess
all of Williams’ items that had been purchased since 1957. The store knew of Williams’ financial
position, that she would never be able to afford the payments on the stereo and sold it to her
anyway.
PH: District court ruled in favor of the Company and Ct. of Appeals affirmed.
Issue: Are all or at least some of the contracts set forth by Walker-Thomas Furniture Co.
unconscionable—nonenforceable?
Rule: Where the element of unconscionability is present at the time the contract is made, the
contract should not be enforced.
Holding: Case is remanded to the trial court for further proceedings on whether the contract is
unconscionable.
Reasoning:
The application of unconscionability requires that there is an absence of a meaningful choice on
the part of one of the parties of the contract which are unreasonably favorable to the other party.
The choice part can only be determined in light of all circumstances. Were the terms hidden, did
all parties understand the contract given their education levels. Court applied a reasonability test
based on the terms of the contract considered in light of the circumstances existing when the
contract was made.
Notes:
The court doesn’t hold that that the add-on security clause was unconscionable, but rather
remands for further findings as to whether the company’s clause was unconscionable

Dissent: Appellant was aware that she couldn’t afford the purchase and such situations should be
mitigated by public policy.

2. Elements of Unconscionability
 Supporters argue that the doctrine has provided needed flexibility to the Court to
regulate bargains based on duress, fraud, etc. without being deceitful.
 Critics focus on:
o The lack of judicial discretion that it allows
o Inability of the doctrine to remedy later incrementally unfair behavior by
the offending party
o Likelihood that the doctrine might help out the party in front of the court
in the short term but likely to injure the class to which the party belongs in
the long term

D. The Statute of Frauds—K Unenforceable for Want of a Signed Writing


Elements of Unconscionability
 A bargain may be unconscionable because of flaws in the bargaining process such as
fraud, duress, hard bargaining tactics, and use of adhesive standard form contracts or
burying important terms in fine print and legalese
 The terms of the contract themselves may be oppressive or unfairly surprising
Unconscionability and Arbitration
 Courts routinely use unconscionability doctrine to police arbitration clauses in
consumer, employment, franchise, and similar contracts.
The Statute of Frauds—Contracts Unenforceable for Want of a Signed Writing
 Statute of Frauds— identifies specific contexts in which an otherwise valid oral contract
must be evidenced by written memorial of the transaction and signed by the party
against whom enforcement of the contract is sought.
 Section 2-201 applies the statute of frauds’ requirement of a written memorial signed
by the party to be charged to all transactions for the sale of goods for a price of $500+
o Writing only needs to evidence that the party to be charged assented to a
transaction between the parties for a specific quantity of goods. The writing does
not need to include any material terms other than the quantity of goods sold.
 Statute of Frauds contains several saving clauses that permit enforcement of a contract
even if it would otherwise fail under the general rule.
o 2-201(2) creates a merchant’s exception which deems satisfaction in some cases
where a merchant sends a written confirmation of the transaction that would
satisfy the Statute as against the sender.
o 2-201(3) provides three exceptions to the general rule of nonenforceability of
oral contracts:
 The seller begins production of goods specially manufactured for the
buyer that are unsuitable for sale to others (specially manufactured
goods exception).
 The party to be charged admits the existence of the contract in court (the
judicial admission exception).
 Acceptance of Payment (in whole or in part) by the seller or acceptance
of delivery (in whole or in part) by the buyer (the partial performance
exception)
 Three-part analysis:
o Is the contract within the the statute of frauds?
o If the contract is within the statute of frauds, is it evidenced by a written
memorial and signed by the party to be charged?
o If a contract within the scope of the statute of frauds is not evidenced by a
writing or signed by the party to be charged, is compliance with the statute
excused?
1. Is the K within the Statute of Frauds
 UCC identifies 6 transaction types
o K by an executor or administrator to pay damages out of his own estate.
o K to act as a surety for the debts or defaults of another person.
o K made in consideration of marriage.
o K for the sale of an interest in real property.
o K not to be performed within one year of the making thereof.
o K for the sale of goods at a price of $500+
 If a K is one of these 6 transaction types, then it must be evidenced by writing and
signed by the party against whom enforcement is sought or the K is unenforceable
unless the writing requirement is otherwise excused.

Coan (appellant, offeree) v. Orsinger (respondant, offeror)


**K not to be performed within one year of the making thereof, then it must be evidenced
by writing.**
Facts: Coan planned to be the resident manager at an apartment complex for $75.00/wk + rent
free apt. for the duration of the K. which was run by Orsinger called Tyler Gardens. Agreement
was to continue “until Coan completed his law degree as a student duly matriculated in
Georgetown Univ. Law. or discontinued his studies” Agreement was orally confirmed and Coan
assumed duties as manager on October 12, 1956. On November 17, 1956 Coan got letter
terminating the K and the termination was confirmed orally by Orsinger on Dec. 1, 1956.
Orsinger denies entering into a K but admitted there was an oral K with an agent from Tyler
Gardens. Orsinger denied that the K was for a definite period of time and that it was at-will of
either party. Tyler Gardens admitted it had a K with Coan but denied that it was for a definite
period of time, instead it was at-will. Respondents used the statute of frauds as a defense.
PH: Orsinger used the statute of frauds as their defense. Summary judgment was granted for
Orsinger and Coan appealed.
Issue: Is the oral contract enforceable?
Rule: If the contingency which fulfills and completes the terms of the K happens or could
possibly happen within a year, the K is not within the statute. If the contingency prevents or
discharges the parties from performing their obligations under the K within a year, then the K is
within the statute. **precise language in book**
Holding: Yes, the oral contract which was supposed to last for 3 yrs was within the statute of
frauds and was therefore, unenforceable.
Reasoning: Annulment Provision--Statute of Frauds would be non-applicable if Coan couldn’t
continue his studies due to lack of scholarship. However, this provision does not affect the
performance of the K and would only make the K null and void and the Statute of Frauds would
still apply. There was an oral K “for personal services” for longer than a year but subject to
annulment which might happen within a year. This provision solidifies that performance within a
year is impossible and thus, the k is within the statute of frauds. Furthermore, because Coan
started law school in the Fall 1956 and would not finish until 1959, performing the terms of the
K within a year would be impossible.
Notes: Coan maintained that the Statute of Frauds did not apply because the K could be
performed within a year.
Dissent:
 Coan and Orsinger knew each other and Orsinger offered Coan the job when he learned
that Coan needed to take of his family financially while he went to law school. Prior to
the offer, Coan had a job lined up as a real estate salesman after coming back from the
Army. Furthermore, he offered a job to Coan’s wife for $95 which were all tax
deductible to Orsingers company.
 There was no prior notification of termination and Coan forwent his other job offer and
moved to Tyler Gardens and paid 2months rent in advance.
 The K could have been performed in 2 ways:
o Orsinger could have continued to employ Coan throughout the 3 years of law
school, the wife could have continued to work, etc.
 There’s a difference between a discharge from liability because of a refusal to perform
and the possibly complete and timely performance of the second.
 The parties agreed upon an alternative clause which admitted of performance within
the year, hence the K was not within the statute.

2. Satisfying the Writing Requirement

 Don’t confuse parol evidence rule and the written memorialization required from the
statute of frauds.
 Parol Evidence—defines the scope of the terms that a court may consider as
compromising the parties’ agreement.
o Issue facing the Court is not enforceability of the parties’ agreement, but
whether the written memorial represents a complete and unambiguous
statement of the parties’ bargain.
 If a K id within the Statute of Frauds, the court’s analysis must shift to the sufficiency of
the written memorialization of that K, not its meaning.
o Memo may be, but doesn’t need to be a fully integrated and written K.
o Focuses on whether the writing evidences that the parties actually did make an
enforceable oral agreement.
 A writing that will satisfy the statute may differ in both content and form from the
written agreement typically at issue in a parol evidence rule situation:
o The memo may be made contemporaneously with the parties’ oral agreement,
following that agreement or before the agreement.
o The memo need only show the assent of one party to the K, in the form of a
signature by the party to be charged.
o The memo may comprise multiple writings, prepared at different times.
o The memo may be prepared by its maker for purely internal purposes, and it
doesn’t need to be transmitted to the other party to the transaction.
o The memo must have existed at some point in time, but a later loss or
destruction of the memo will not prevent it from satisfying the statute of frauds.
Article 2 of the UCC and the common law have different requirements for satisfying a k.
 Common Law K, the memo must identify the parties to the, the subject matter of the k,
and the essential terms of the k.
o Most difficult is that the applicable writing or memo state ‘with reasonable
certainty’ the ‘essential terms’ of the k.
o Essential terms are those necessary to enable a court to calculate the expectancy
remedy of a non-breaching party.
 UCC 2-201—a memo must
o 1. Be sufficient to indicate that a k for sale has been made between the parties
and signed by the party against whom enforcement is sought…
o 2. Indicate the quantity of the goods sold.
 In both cases the memo MUST BE SIGNED by the party AGAINST whom enforcement is
sought “the party to be charged”
 The signature requirement may be satisfied by any mark that may be reasonably
understood by the other party to the K as indicating the signer’s intent to authenticate
the written document and to adopt or assent to that document.
o Question is always whether the symbol was executed or adopted by the party
with present intention to authenticate the writing UCC 1-201 (39).

Crabtree (offeree) v. Elizabeth Arden (offerer)


Facts: Crabtree sought a sales manager position with Elizabeth Arden Sales Corporation and
requested a 3 year k at $25k/year to President Arden. Arden offered a 2 year k, on an annual
salary of $20k for first 6 mo, $25k for 2nd 6 months, and $30k for 2nd year plus expenses of
$5k/year for each of those years. Crabtree replied interesting and a written memo was sent from
Arden’s secretary to Crabtree with those specifications. Crabtree called the corporation accepting
the invitation to join the Arden organization and Arden replied a welcome. On his first day of
work he was issued a payroll change card that was initialed by Mr. Johns with the
aforementioned specifications regarding Crabtree’s negotiated salary. After 6mo, Crabtree
received the raise from $20k to $25k but the raise to $30k never happened. He brought it to the
attention of Mr. Johns but Arden refused the salary increase. Crabtree left the job and
commenced action for breach of k.
PH: Arden denied the existence of a 2year employment agreement, and if there was one,
enforcement was barred by the statute of frauds. Crabtree was awarded damages.
Issue: Since the k relied upon was not to be performed within a year, was a memo of its terms,
subscribed by Arden, to satisfy the statute of frauds, Personal Property Law?
Rule: At least one writing, the one establishing a contractual relationship between the parties,
must bear the signature of the parties to be charged, while the unsigned document on its face
refer to the same transaction as that set forth in the one that was signed.
Holding: Judgment affirmed.
Reasoning: Each of the two payroll cars the initialed by Arden management constitutes a memo
under the statute as they were signed with intent to authenticate the info contained therein and
that such info does evidence the terms of the k. Must consider the length of the k, may be
supplied by reference to the earlier unsigned office memo and if so, whether its notation “2 years
to make good” sufficiently designates a period of employment. Though the Statute of Frauds
allows for separate writings to represent a single agreement, in this case some writings have been
signed and others haven’t. The signed and unsigned writings should be read together, provided
that they clearly refer to the same subject matter or transaction in order to determine the terms of
the k. The payroll cards referred to “salary increase per contractual arrangements with miss
arden.” Not likely that the memo was fraudulent which contains all essential terms except the
length of employment but the memo refers to ‘2 years to make good’ which can only refer to the
k term.
Notes:

3. Excusing Compliance Failure


 US Courts can restrict the scope of application and operation of the Statute of Frauds by
adopting narrow interpretations of its provisions and creating numerous exceptions that
soften its effects and impacts when the parties fail to satisfy its requirements.
o If the k is unenforceable, the parties may still proceed on non-contractual or quasi-
contractual theories of enforceability and recovery like restitution.
o Principles of promissory estoppel, equitable estoppel, and part performance may
provide a basis for enforcing the k terms by barring the breaching party from raising
the Statute of Frauds as a defense.

McIntosh (plaintiff, employee) v. Murphy (defendant, employer)


Facts: Alleged breach of one year oral employment K.
Employer of a car dealership while in California, interviewed the employee twice for
management positions in Hawaii. The employee extended his interest to the employer and the
employee told the employer that he would come to Hawaii and employer said that the assistant
sales manager position was open. Though surprised by the change in title, employee confirmed
that he’d be going to Hawaii. Employee changed and moved his whole life and belongings to
work for the dealership. Employee worked at the dealership for 2.5 mo before he was
terminated because he was ‘unable to close deals with prospective customers and could not
train the salesmen.’
PH: Trial Ct. Ruled that the oral k was not within the statute of frauds “oral employment k, that
is not to be performed within one year from the making thereof to be in writing.” Because the
employer bargained for acceptance by the actual commencement of performance by
employee, so that he was not bound by a k until he came to his first day of work. Assuming that
the k was for a year’s employment, it was performable within a year exactly to the day and no
writing was required to make it enforceable. However, if agreement was made final over the
phone, then it was still not within the statute of frauds. **judge wanted to avoid unjust
enforcement of the statute. Jury found for employee. Employer appeals.
Issue: 1. Whether the employee can maintain an action on the alleged oral employment k in
light of the prohibition of the Statute of Frauds making unenforceable an oral k that is not to be
performed within one year.
Rule:
p.552
Holding: Judgment affirmed on the ground that the employee’s reliance was such that injustice
could only be avoided by enforcement of the k.
Reasoning: There is no question that the action of employee moving from California to Hawaii
was foreseeable by the employee.
Notes
1. Time of Acceptance of the Employment Agreement

II. Enforcement by Virtue of Action in Reliance on the Oral K

Merchant’s Exception:

 Among merchants, the transmission of a written confirmation of the oral k, which is in a


form binding on the sender, becomes binding on the receiver if not objected to within 10
days of receipt.
 An oral agreement must have been reached in fact prior to the sending of such a
confirmation for that confirmation to become binding on the receiver.

Harvest Rice v. Fritz and Mertice Lehman Elevator and Dryer Inc.
The buyer argued that the circuit court erred in finding that the buyer report did not constitute a
writing in confirmation of a contract because it lacked emblematic contractual language. The
company contended that the buyer's report lacked clear, confirmatory language referencing a
previous oral agreement with the buyer. The appellate court found that the prior negotiations via
cell phone between the buyer's employee and the company's employee constituted an agreement
and that the buyer report faxed on April 1 was a confirmatory writing contemplated by the
merchants' exception of Ark. Code Ann. § 4-2-201. The buyer report was sufficient to indicate
the consummation of a contract, not mere negotiations. The buyer report on its face appeared to
evince a prior oral agreement between the two parties. It satisfied the merchants' exception as a
writing in confirmation of the contract, pursuant to § 4-2-201(2), for purposes of removing the
alleged contract from the Statute of Frauds.

Chapter 7. K Unenforceable by Election: Regulating the Agreement Process


a. Voidable Contracts: enforceable unless a party with the power avoidance elects to
exercise that power.
i. §7 Voidable contract: one where one or more parties have the power, by a
manifestation of election to do so, to avoid the legal relations created by the
contract, or by ratification of the contract to extinguish the power of avoidance.
1. Innocent party has option to:
a. avoid; or
i. avoidance may be exercised by one or both parties
ii. before or after performance by either or both
b. Enforce and seek damages
2. Contract may be a criminal act
3. Fraud in inducement of contract
b. Preclusion by Affirmation or Election of Remedies: Preclusion by affirmation of
voidable contract: election of a remedy on the contract may constitute an affirmation of a
voidable contract. That same affirmation may denote the preclusion of inconsistent
remedies relating to a contract that is not voidable.
i. Preclusion by affirmation of a voidable contract
1. Not sure what goes here
c. Lack of Legal Capacity of One of the Parties
i. Contracts with minors
1. Halbman v. Lemke (p. 579)
a. Facts: Minor purchases a car and wrecks it sends to shop, incurs
b. Holding: The court held that plaintiff had the absolute right to
disaffirm the contract and, as a condition of that right, he was
only required to return as much of the consideration as, at the
time of disaffirmance, remained in his possession.
c. Rule: a minor who disaffirms a contract for the purchase of an
item which is not a necessity may recover his purchase price
without liability for use, depreciation, damages, or other
diminution in value.
i. Necessities are food, shelter, clothing (any other
minimum you need to survive)
ii. Mental Capacity: A person incurs only voidable contractual duties by entering
into a transaction if by reason of mental illness or defect if:
1. He is unable to understand in a reasonable manner the nature and
consequences of the transaction, or;
2. He is unable to act in a reasonable manner in relation to the transaction
and the other party has reason to know of his condition
a. Otelere v. Teachers’ Retirement Board (P. 588)
i. Facts: Teacher seeks to change her insurance policy to
the maximum benefits. She died two months later and
upon payment of the benefits the insurance company fell
in. They sought money back because Ms. Otelere’s
contract was avoidable because of her mental illness
ii. Holding: because incapacity to contract or exercise
contractual rights could exist despite the intellectual or
cognitive ability to understand, and the other party knew
or was put on notice as to the contractor's mental illness.
iii. Reasoning: §15 Contracts made by the mentally ill:
1. Voidable if
a. Unable to understand in a reasonable
manner the nature of the contract
b. Unable to act in a reasonable manner in
relation to contract and other party
knows of the condition
2. When a contract is made and the other party
knows of the condition
a. Power terminates
b. Unless performance substantial in whole
or part so avoidance would be unjust
iii. Contracts Affected by a Relationship of Trust and Confidence: (p. 601)
1. A persons non disclosure of a known fact is equivalent to an affirmative
assertion that the fact does not exist when the other person is entitled to
know the fact.
d. Abuse of the Bargaining Process by one of the parties
i. Most common categories of bargaining abuse by one of the parties at the
formation of the contract are deception and coercion.
ii. Intentional and Negligent Misrepresentation:
1. Fraud in the inducement creates a voidable contract in which the
defrauded or injured party has a power to avoid the contract and obtain
rescission and restitution for any consideration transferred to the
fraudulent party.
a. Hill v. Jones (p. 608)
i. Facts: Couple goes to purchase a home. They ask the
owners several times if there was any termite damage.
Owners lie and say no even though there were known
termites in the home.
ii. Holding: the seller had a duty to disclose to the buyer
termite damage known to the seller, but not to the buyer,
if it materially affected the property's value,
iii. Reasoning: Duty to disclose
1. If one party knows that the other is mistaken as
to a basic assumption, he is expected to disclose
the fact that would correct the mistake
2. A seller of real or personal property is ordinarily
expected to disclose a known latent defect of
quality or title that is of such a character as
would probably prevent the buyer from buying
at the contract price.
iv. Concealment §160: action intended or known to be
likely to prevent another from learning a fact is
equivalent to an assertion that the fact does not exist
v. Non-Disclosure Equivalent to Assertion: §161
vi. Fraud Misrepresentation: §162 Fraud or material
intentional deception
2. Enhance-IT, LLC v. American Access Technologies, Inc. (p. 620)
a. Facts: Plaintiff filed suit, alleging that defendant shipped it
defective goods.
b. Holding: Fraud in stating they had
c. Reasoning:
iii. Duress
1. Behavior that overcomes the “free will” of of a party to contract; induce
by an improper threat
2. Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline Service Co. (p.
628)
a. Facts: The contractor hired the transporter to move construction
materials by sea. Numerous problems impeded performance of
the contract, and the contractor terminated the contract. The
parties settled for a portion of the invoice. The transporter argued
that the settlement should be avoided on the grounds of
economic duress.
b. Holding: The transporter made a sufficient factual showing to
withstand the motion for summary judgment as to each of the
elements of economic duress by showing that it was the victim
of a wrongful threat, and the threat deprived it of its unfettered
will.
c. Reasoning: Parties properly demonstrated the elements of
economic duress
i. Must demonstrate Economic Duress by:
1. showing they are a victim of a wrongful or
unlawful threat or act. And;
2. Such act or threat must be one which deprives
the victim of his unfettered will.
iv. Undue Influence: (1) Unfair persuasion of a subservient party under the
domination of another person; or (2) unfair persuasion of a person by another
using a relationship of trust and confidence to deceive the other party
1. Odorizzi v. Bloomfield School District (p. 641)
a. Facts: Elementary school teacher arrested on criminal charges of
homosexual activity. While in an extremely vulnerable state, the
school suggested he resign. He signed resignation papers but
later regretted doing so and tried to get his job back. The district
said no. Man files suit
b. Holding: Use of undue influence to cause the party to resign
from his job.
c. Reasoning: Representative of the school board achieved his
resignation through over persuasion
e. Failure of the Bargaining Process
i. Mutual Mistake
1. Sherwood: a cattle importer sold to Sherwood a cow. The cow was
supposedly barren so it was sold at a cheap price. Later the seller said the
contract should be avoidable because of mutual mistake as to the worth
of the cow. The court held that because the mistake was for the substance
and not the worth, the contract was avoidable.
a. Error of fact concerning a basic assumption underlying the
contract by both parties;
b. Mistake has an adverse material effect on the parties’ exchange
or performances
c. The contract does not allocate the risk of mistake to party.
2. Lenawee County Board of Health v. Messerly (p. 659)
a. Facts: A landowner constructed an apartment building on his
property and installed a septic system without a permit and in
violation of the health code. The landowner conveyed title to the
property to the sellers. Pursuant to a land sale contract, the
buyers purchased the property from the sellers. The county
health board then obtained a permanent injunction prohibiting
human habitation of the property due to the defective sewage
system. The buyers initiated an action against the sellers to
rescind the land sale contract on the basis of mutual mistake and
failure of consideration.
b. Holding: Both parties were blameless because neither the sellers
nor the buyers knew of the defective septic system. The court
was faced with two equally innocent parties and concluded that
the risk should be allocated to the buyers.
c. Reason: The parties' land sale contract also contained an "as is"
provision allocating the risk to the buyers. Thus, risk allocated to
buyer to examine the land thoroughly. Mutual mistake as to the
income producing nature of the property.
ii. Unilateral Mistake §153: If the mistaken party can prove the other party had
reason to know of the mistake, the contract is voidable even if it is not an
unconscionable mistake.
1. Cummings v. Dursenbury (p. 672)
a. Facts: Plaintiffs purchase house that was supposedly “year
round.” House actually only a three season house, which sellers
should have known.
b. Holding: Held for the plaintiffs
c. Reasoning: Unilateral Mistake Doctrine
i. The mistake related to a material feature of the contract.
1. House purchased for year round use without any
insulation to withstand severe winters
2. Buyers exercised reasonable care in ascertaining
the suitability of the home for winter living

Chapter 8. K Unenforceable by Later Events: Discharge of Future Duties Absent a Breach


a. Historical Development of the Impossibility Doctrine
b. Modern Impossibility, Impracticability, & Frustration
iii. Impossibility (objective): The duty of a promisor was discharged when after
formation of the contract, a duty became impossible by reason of a supervening
event not reasonably anticipated and occurring without the fault of the party
1. A thing is rendered impossible when it is not practicable
iv. Impracticability (Subjective): Impracticability doctrine as a defense requires an
extreme and unreasonable expense and difficulty that cannot be surmounted by
reasonable efforts
1. Performance may be impracticable because extreme and unreasonable
difficulty, expense, injury, or loss to one of the parties will be involved
a. A thing is impracticable when it can only be be done at an
excessive and unreasonable cost.
v. Frustration of Purpose: situations in which performance of the contract remains
feasible but the purpose for which one or both parties entered the contract has
been defeated
1. The purpose that is frustrated must have been a principal purpose of that
the party in making the contract.
2. The frustration must be substantial. It is not enough that the transaction
become less profitable for the affected party or even that he will sustain a
loss.
3. The non-ocurrence of the frustrating event must have been a basic
assumption on which the contract was made
vi. Modern impracticability and Frustration at Risk: §261 (Supervening
impracticability).
1. A party bears the risk of a supervening event unless the non occurrence
of the event was a “basic assumption of the contract”
2. If the supervening event was reasonably foreseeable, the promisor will
forfeit the excuse where the agreement itself does not allocate the risk of
foreseeable event to the other party.
vii. Transatlantic Financing Corp. v. United States (p. 698)
1. Facts: Plaintiff contracted with defendant to deliver a cargo of wheat
from Texas to Iran via the Suez Canal. When the Suez was closed, the
contract became impossible to perform. Plaintiff argued that when it
delivered the cargo by going around the Cape of Good Hope, it conferred
a benefit upon defendant for which it should have been paid in quantum
meruit.
2. Holding: The court held that plaintiff was entitled to only the contract
price for transporting the cargo.
3. Reason: performance of the contract was not rendered legally impossible
by the canal's closure. Instead, plaintiff attempted to take its profit on the
contract and then force defendant to absorb the cost of the additional
voyage. When impracticability without fault occurs, the law seeks an
equitable solution.
a. For it to have been rendered impossible:
i. A contingency (something unexpected) must have
occurred
ii. Occurrence of the contingency must have been rendered
performance commercially impracticable
viii. Mel Frank Tool & Supply, Inc. v. Di-Chem Co. (p. 706)
1. Facts: The lessee, a chemical distributor, leased premises from the
lessor. Those premises were vacated after the city enacted an ordinance,
which prohibited the storage of hazardous materials.
2. Holding: On appeal, the court held that the ordinance did not excuse the
lessee's breach.
3. Reason: When a party's principal purpose in making the contract was
substantially frustrated by the occurrence of an event that was beyond the
control or expectation of the parties, its duty to render performance was
discharged. However, the frustrating event had to nullify a basic
assumption upon which the contract was made and had to be so severe
that it could not be regarded as within the risks assumed under the
contract. Thus, so long as there was a serviceable use for the property, a
party's performance was expected even though the remaining uses were
less lucrative.
c. Discharge of Duty by Assent or Modification: at some point in their relationship, the
parties to a contract may mutually agree to discharge their respective duties under the
contract (mechanisms in which parties may alter or rearrange their contractual
relationship: Rescission, Executory bilateral accords (accord and satisfaction) and
substituted contracts) (p. 718)
ix. Doctrinal Development
1. Preexisting Legal Duty Rule
a. Angel v. Murray (p. 723)
i. Facts: Plaintiffs, citizens, filed a civil action seeking
repayment of additional fees paid to defendant refuse
collector by defendant city budget director under a
contract. Defendant refuse collector was awarded a
contract with the city. He requested additional payments
to cover unexpected increases in refuse. Plaintiffs
alleged the payments violated the city charter and were
made without consideration.
ii. Holding: The court found for plaintiffs holding that the
city charter did not intend to limit the city's ability to
amend an existing contract.
iii. Reason: The court abandoned the preexisting duty rule,
and found that the city voluntarily agreed to give
defendant refuse collector the requested fees and amend
the contract. The modification was made during a time
when the contract was not fully performed, and evidence
was presented that the volume of refuse had
unexpectedly risen substantially. Therefore, the decision
to pay the additional fees was fair and equitable.
2. Agreed Resolution of Disputes – Accord & Satisfaction
a. Clark v. Elza (p. 734)
x. Effect of Writing Restricting Oral Modification
1. Cloud Corp v. Hasbro, Inc. (p. 748)
NOM Clause—the supplier could not deviate from a purchase order without Hasbro’s written consent.
[No Oral Modification]
Hasbro made the aquariums and cloud corp. manufactured the packets they needed. Hasbro tells cloud
that the supply of laponite packets is running out and to use a new formula that reduces amount of
laponite in packet. Cloud (supplier) doesn’t know that demand is falling, but thinks that the business will
increase. Every purchase order from Hasbro has a NOM Clause. Cloud Corp. believed that the last 2
purchase orders were modified bc they had regular conversation with an agent from Hasbro after they
changed the packets. Ct. held the NOM clause was ineffective bc emails sent by agent has her signature
and the modification can operate as a waiver UCC 2-209.

Statute of Frauds Sale of Goods Applies when:


Michigan—price is more than $1000
General Rule--$500+

Chapter 9. Remedies of Breach of K


A. Election of Breach of K Remedies
3 Forms of Monetary Damage Recovery
 The restitution interest—simplest compensation method; requires the party against
whom restitution is sought to disgorge the value of any benefits received from the other
party. Ex. P.759
 The reliance interest—compensates the nonbreaching party for expenditures made in
performing or preparing to perform that party’s obligations under the k. As opposed to
restitution damages, which examine the benefits received by the breaching party,
reliance damages focus on the injuries suffered by the nonbreaching party in
detrimentally relying upon the enforceability of the k.
 The expectancy damages (interest)—Attempts to compensate the nonbreaching party
for the benefits lost by reason of non-performance of the k. Attempts to give the
nonbreaching party the value of full performance of the k and place the nonbreaching
party in the position she would have been in if the k had been fully performed as
promised.

 Alternative equitable injunctive relief remedies, including specific performance (Ct.


order to perform) and injunctions (Ct. order compelling not to breach).

B. Election to Seek Rescission and Restitution Damages Off the K


a. Contract
 Generally, the k operates as a practical upper limit on damages recovery, except where
the breaching party commits an uncured material breach before the injured party has
fully performed and the injured party seeks restitution off the k.
 The injured party will argue the value of its services exceeds the k price, and having
committed serious breach, the breaching party is not in a position to reject a restitution
damage recovery. R2K 373, R2K 349

b. Case: US v. Algernon Blair Inc.


 Facts: Coastal Steel brought this action on behalf of the US under the Miller Act against
Algernon. Blair had a k to build a naval hospital w. the US. Blair also contracted with
Coastal to perform certain steel erection and supplying equipment in conjunction with
Blair’s k with the US. Coastal began its work, but Blair refused to pay after 28% of
Coastal’s work was complete. Coastal terminated the k. Coastal brought suit to recover
labor and equipment.
 PH: Dist.Ct. found that Blair’s k with Coastal obligated them to pay for the use of the
equipment which justified Coastal’s termination of the k. Ct. also found that under the k,
the amount due to Coastal, minus what had already been paid totaled $37,000 and that
Coastal would’ve lost more than $37,000 if performance was completed. Ct. held that
any amount due Coastal must be reduced by any loss it would have incurred by
complete performance of the k, the Ct. denied recovery to Coastal.
 Issue: May a subcontractor, who justifiably ceases working under a k because of the
prime contractor’s breach, recover in quantum meruit the value of labor and equipment
already furnished pursuant to the k irrespective of whether he would have been entitled
to recover in a suit on the k?
 Rule: Quantum meruit recovery is the reasonable value of the performance and
recovery is undiminished by any loss which would have been incurred by complete
performance. The standard for measuring the reasonable value of the services rendered
is the amount for which such services could have been purchased from one in the
plaintiff’s position at the time and place the services were rendered.
 Holding: Coastal is entitled to recover quantum meruit; judgment reversed and
remanded with instructions.
 Reasoning: The Ct. hasn’t determined the reasonable value of Coastal’s labor and
equipment. When that amount has been determined, judgment will be entered for
Coastal, minus payments already made under the k. Where a buyer makes a deposit on
a purchase k, but is unable to complete the purchase: the injured seller is entitled to
damages, but if the deposit exceeds those damages, the breaching purchaser is entitled
to a return of the excess and may bring a suit to enforce this right.

C. Election to Seek Damages on the K


a. The Expectancy Interest
 Expectancy Interest = Loss in Value + Other Losses – Cost Avoided – Losses Avoided
= [value promised-value received] + OL + CA+ LA
 Material Breach—measure of damages is the cost of completion
 Substantial Performance—Diminution in value is the measure of damages
 Willful Breach—Not in good faith, look @ intent of the damage
i. Case: Hawkins v. McGee
Facts: In preparation for hand surgery to remove scar tissue, the plaintiff and his father
went to the defendant’s office and when the father asked how long his son would be in
the hospital, the defendant replied 3-4 days but not over 4 and he’d be able to go back
to work in a few days. This statement was not considered a contract by the doctor to
the father, only expressions of opinion. However, the doctor also said that he would
“guarantee to make the hand 100% perfect.” Plaintiff asserts that this was a warranty by
the doctor. Doctor argues that no reasonable person would understand his statement to
be a warranty.
PH: Ct. found that damages were excessive in suit and made an order that the verdict be
set aside, unless the plaintiff elected to remit all in excess of $500. The plaintiff refused
to remit, the verdict was set aside as excessive and against the weight of evidence and
the plaintiff excepted.
Issue: Whether the words could possibly have the meaning imputed to them by the
party who founds his case upon a certain interpretation.
Rule: True measure of the plaintiff’s damages is the difference between the value to
him of a perfect hand and the value of his hand in its present condition, including any
incidental consequences fairly within the contemplation of the parties when they made
their k. Damages not thus limited are not to be given.
Holding: New Trial.
Reasoning: There is evidence that the doctor solicited the father for the opportunity to
perform the surgery and during cross-examination, it was found that the doctor sought
an opportunity to experiment on skin grafting in which he had little experience. If jury
accepted this info, then it could be reasonably inferred that the doctor induced consent
to perform surgery with the intention of making his hand 100%. Question submitted to
jury to determine if the statement created a k. The jury was improperly instructed that
plaintiff's damages included both pain and suffering and the ill effects of the operation.
The instructed measure of damages was improper because the correct measure of
plaintiff's damages was the difference between the value of a perfect hand and value of
his hand in its post-operation condition. The pain resulting from the operation was a
legal detriment suffered by plaintiff in consideration for the contract.

ii. Case: American Std. v. Schectman


Facts: American made a k to convey buildings and equipment to Schectman, a
demolition and excavating contractor in return for $275,000 and his promise to remove
the equipment, demolish the structures and grade the property as specified. Schectman
failed to complete grading and to take down some foundations and other structures one
foot below the grade line as promised.
PH: American recovered a judgment on a jury verdict of $90,000 against Schectman.
Issue: Whether the Ct. should have charged the jury, as defendant Schectman
requested, that the difference in value of plaintiffs’ property with and without the
promised performance was the measure of the damage is the main point in his appeal.
Rule: The general rule for breach of a construction k is that the injured party may
recover those damages which are the direct, natural and immediate consequence of the
breach and which can reasonably be said to have been in the contemplation of the
parties when the k was made. When there has been substantial performance of the k in
good faith but defects exist, the correction of which would result in economic waste,
Cts. Have measured the damages as the difference btwn the value of the property as
constructed and the value if performance had been properly completed.
Holding: The request was properly denied and the cost of completion—not the
difference in value—was the proper measure. Finding no other basis for reversal, we
affirm.
Reasoning: Schectman argued that American suffered no loss in value of the property
because of the breach bc they sold the property for $183,000 only $3,000 less than mkt
value. And by charging the jury with cost of completion at $110,000, not diminution in
value of the property as measure for damages, American gained way more than they
should have at their expense. The diminution in value rule generally applies when
defects in construction are impossible to fix or can’t be fixed without a substantial
tearing down of the structure. The breach of k is not excused because it didn’t
add/subtract value from the property. The damage should be measured by the cost of
completion bc removal of the structures that Schetman didn’t remove would cost
$90,000 and they did not even attempt to do so in good faith. Therefore, the proof
regarding the value of the plaintiff’s property was properly rejected.

b. The Reliance Interest Alternative


 Expectancy Damages—promisee is put in the position as if the k was fully
performed; recognizes the loss of profits and out of pocket expenses
 Reliance Damages—Putting injured party put back in a position had the k
been performed (direct and indirect expenses)
 Restitution Damages—(vomit back) Putting the promisor in a position
had the k never been made
 Direct Reliance Damages—always forseeable v. Indirect Damages—
incidental damages
i. Case: Walser v. Toyota Motor Sales
Facts: The dealership owners had entered into a purchase agreement and paid earnest
money for land after the car manufacturer verbally informed them that they had been
approved to sell its cars. A couple days later, the dealership owners were told that a
mistake had been made and that they were not approved.
PH: The court affirmed the dealership owners' damages award, limited to their out-of-
pocket expenses. The court affirmed summary judgment in favor of the car
manufacturer on the dealership owners' claim under the Minnesota Motor Vehicle Sale
and Distribution Regulations.
Issue: Whether the district court erred by instructing the jury that the damages on their
promissory estoppel claim were limited to out-of-pocket expenses and erred in granting
summary judgment on their claim under the Minnesota Motor Vehicle Sale and
Distribution Regulations, Minn. Stat. § 80E.06(1).
Holding: The court affirmed the damages award, holding that the district court did not
abuse its discretion in limiting the award because the manufacturer presented evidence
that the dealership was far from a certainty and that the owners would have great
difficulty in meeting the capitalization requirements.
Reasoning: The court concluded that summary judgment was proper because the
dealership owners failed to establish that they had a written agreement or contract
which was a necessary element of the breach of the state statute.
c. Limitations on the Expectancy and Reliance Interests
 Forseeability Limitation—If damages are not forseeable, then they are
not recoverable; profits are generally recoverable
 Certainty Limitation—profits are not foreseeable
 Avoidability—mitigation with reasonable effort
i. Forseeability Limitation
1. Case: Hadley v. Baxendale
Facts: Defendants promised to deliver a broken mill shaft on the 2nd day after receiving
it, but failed to do so for 7 days. Plaintiffs couldn’t provide mill to their customers and
had to buy the flour on the market and pay its workers and plaintiffs claim damages for
300 pounds.
PH: Defendants paid 25 but the jury found for 50 for the plaintiff. Defendant appeals for
a new trial and new jury instructions.
Issue: Whether the jury was correctly instructed to consider loss of profits in estimating
the damages for the plaintiff?
Rule: Where two parties have made a k and one of them has broken it, the damages the
non-breaching party should receive should reasonably /naturally flow from the breach
itself. However, if there were special circumstances and the breaching party knew about
the special circumstances, then the damages from the breach would be the amount of
injury which they would reasonably contemplate so known and contemplated.
Holding: The judge should have instructed the jury, based on the facts, they should not
take the loss of profits into consideration at all in estimating the damages. Therefore,
there should be a new trial.
Reasoning: The only information shared btwn the parties is that the broken mill shaft
needed to be repaired and that they were millers. Plaintiffs never specified whether
that was the only mill shaft that they or whether the mill shaft needed more repairs
than they thought. Therefore, the lost profits cannot reasonably be considered a
consequence of the breach of k. For the loss would not have flowed naturally from the
breach of k and the circumstances were not special which could have made the situation
reasonable if the defendants had known the significance of this mill shaft.
 UCC Hadley I Damages—presumptive, direct damages, arise naturally from K
 UCC Hadley II Damages—Indirect damages, to avoid this there needs to be a
written disclaimer

2. Case: Florafax Intl. v. GTE Mkt Resources


Facts: Florafax was a flower company that contracted with GTE to handle some of its
telecommunications. Florafax also contracted with Bellerose which was a worldwide
flower marketer. In their k there was a clause that the companies could terminate the k
upon 60days written notice. Florafax contracted with Bellerose two weeks before GTE.
GTE was contracted to handle the phone calls by provided telemarketers to Florafax
because of all of the business that Bellerose would bring in. The Florafax/GTE k specified
that termination could happen after a 2year period based upon application of a
price/fee renegotiation clause. There were some issues with GTE’s performance and the
biggest issues happened during both valentines day and mothers day when GTE failed to
increase the number of available telemarketers so that it could accommodate the busy
season. There was evidence that GTE purposefully failed to provide enough service and
that GTE didn’t want to k with Florafax anymore. As a result, Bellerose terminated its k
with Florafax based on Bellerose’s testimony. Florafax also had to setup its own calling
center and incurred additional costs. As a result, FLorafax sought damages for the cost
of GTE’s performance that GTE did not perform and its lost profits from its k with
Bellerose.
PH: The court vacated the appellate court's decision to the extent that it disturbed the
jury's verdict and the trial court's judgment as to the award of lost profits for the floral
wire service. The court affirmed that part of the judgment awarding lost profits based
on the jury's verdict.
Issue: 1. Whether a party suing for breach of k may recover lost profits arising from a
collateral k? 2. If Florafax can recover for its lost profits with Bellerose, should it be
capped by 60days?
Rule: p.824 Where there are special circumstances in the k, damages which result in
consequence of the special circumstances are recoverable iff the special circumstances
were communicated to or known by both parties to the k at the time they entered the k.
Holding: Yes, there were special circumstances known by GTE of the third party k. No, it
shouldn’t be capped by 60 days.
Reasoning: GTE knew it wouldn’t profit from its k with Florafax, but entered into the k
anyway. Also, both GTE and Florafax provided expert witnesses to present on Florafax’s
economic projections—profit. They had differing bases. (p.822). Florafax expert
calculated Bellerose loss at $1,921,028.00 extended out to 3yrs, yet GTE estimated
$505,731.00. Also loss of profits at $294,044.00 What was in comtemplation btwn the
parties at the time of the k, is a jury question. 60 day notice period was not a part of
GTE’s k only Bellerose/Florafax.

ii. Mitigation Limitation


1. Case: Rockingham County v. Luten Bridge
 Any damages they could have recovered after the breach could not be
recovered bc the Bridge Co. received notice that they should not continue
building the bridge after the County breached K, but they continued to finish
building the bridge anyway.
2. Case: Parker v. 20th Century Fox
 Fox decided not to produce a film that Parker was supposed to star in (a
feminist film in which she had a lot of power in the directing). However, the
alternative movie they offered her at the same pay rate was not substantially
similar. Therefore, Parker had a right not to mitigate damages.
iii. Certainty Limitation
1. Case: A-S Development v. WR Grace Land Corp.
Facts: A-S Development entered a k with Grace Land to sell some of its property,
including Channel Club Tower (CCT). There was an issue with CCT’s electrical power
supply and, so the parties elected to remove the sale of CCT from the original k and to
attach it to a supplemental agreement, which detailed how CCT would be transferred.
More specifically, the sales price for CCT was to be the book value of CCT as of the close
of business on the day prior to closing. A.S. advised Grace that the book value was
~$9.7million. Grace Land refused to close sale for the title of CCT, so A.S continued to
sell the individual apts units to retail buyers. A.S’s cash receipts from the sales =
$13.8million. A.S provided expert testimony on 3 different theories on how to calculate
damages for Grace Land’s refusal which included 3factors: k price of 9.7million, monthly
receipts for sale of units- cash disbursements for completion, and marketing of the
project. Theories: Method1. The involuntary loan theory; Method2. Alternative Capital
Receipts; Method3.Alternative Sales Price. GraceLand didn’t provide alternative
calculations.
Issue: Action for specific performances of a real estate transfer.
Rule: If receipts>disbursements in a month, the cash flow was positive. If
disbursements>receipts in a month, the cash flow was negative.
Gen Rule for Damages for breach of k for the purchase or sale of real property—
damages= k price-mkt value at the time of the breach.
Holding: Though results are imprecise, yes, because Grace Land wrongfully rejected the
CCT title, and A.S’s actions do not preclude its recovery in equity.
Reasoning: Ct. best liked the involuntary loan theory. Mkt price> k price. A.S would have
suffered $3k or nothing at all. Led to 2nd issue--Whether an award of damages in a k can
be given in reliance on the time value of money when A.S has received the full k price as
the result of its efforts to mitigate damages.

D. Equitable Alternatives When Monetary Damages Are Inadequate


a. Inadequate Monetary Remedy
i. Case: Sedmak v. Charlie’s Chevrolet
Facts: Specific performance claim. Sedmaks alleged to have entered a k to purchase a
Corvette for 15k. Sedmaks had initial convo with Kells, a sales manager for Charlie’s
about the corvette. Kells said if they had one, then they could buy it. Ms. Sedmak made
$500 tender on the car as a deposit to Kells and got a receipt. Kells said the car was on
order and would definitely be theirs. Sedmaks called to make custom changes to the car
while it was being manufactured. Kells relayed those changes to the manufacturer and
told them a k would be mailed to them, but it was never mailed. Sedmaks approach
Kells about the sale of another Corvette and Kells asked for Sedmaks permission to keep
initial Corvette in the showroom once it got there for an Indy race and Sedmak agreed.
Kells notified Sedmaks that the corvette arrived, but that they could not buy it, only put
in a bid for it. Sedmaks filed suit for specific performance.
PH: Trial Ct. ruled in favor of Sedmaks and that they had an oral k. Found the k was
excepted from the statute of frauds and ordered Charlie’s to make delivery of the car
available.
Issue: 1. Whether the existence of an oral k is supported by credible evidence. 2. If an
oral k exists, whether it is unenforceable bc of statute of frauds, and 3. Whether specific
performance is an improper remedy bc Sedmaks did not show their legal remedies were
adequate.
Rule: The Ct. may decree specific performance as a buyer’s remedy for sale of goods
where the goods are unique or in other proper circumstances.
Holding: Yes, case was a proper circumstance for ordering specific performance.
Judgment affirmed.
Reasoning: Failure to further specify the car price from 15K does not make the k void or
voidable. Oral k was removed from the statute of frauds by partial payment made by
the Sedmaks. The car was a limited edition and could not be bought just anywhere.
b. Personal Service K
i. Case: Lumley v. Wagner
Facts: Lumley (P) contracted with Wagner (D) for her to sing at Lumley’s theater for three
months. Under the contract, Wagner promised not to perform at other theaters while under the
contract without written consent. The defendant subsequently arranged to sing at Gye’s theater
for more money.Lumley sued and sought an injunction preventing Wagner from performing at
other theaters. The trial court granted injunctive relief for the plaintiff and Wagner appealed.
Issue: Can injunctive relief be used to enforce a promise not to render personal services?
Holding and Rule: Yes. Injunctive relief can be used to enforce a promise not to render personal
services.
The court cannot compel specific performance to render personal services, but it can grant the
remedy of injunctive relief to prevent a party from performing personal services. The court can
compel the defendant to abstain from those acts she promised not to commit under the contract.
Disposition: Relief granted.
Notes: This case is an example of the use of injunctive relief to enforce a negative covenant in a
contract.
E. Remedies Specified or Modified by K
1.Parties may attempt to specify ex ante the measure and method of calculation of damages that a
Ct. shall apply in the event of a breach.
2.Instead of specifying a particular measure of damages, the parties may also attempt to modify
or exclude damages for certain types of injury, such as consequential damages or damages for
personal injury.
a. Remedies Specified by K
R2K 356 Liquidated damages clauses are enforceable, provided the amount is 1. Reasonable in
light of the anticipated or actual loss caused by the breach; and 2.the damages are difficult to
prove or ascertain.
UCC 2-718 The parties may liquidate damages but only at an amount that is reasonable in light
of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the
inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.
The reasonableness std. is satisfied if the parties’ estimate at the time of contracting is reasonable
but does not approximate the actual loss or If the liquidated damages clause approximates the
actual loss even though it does not reflect other losses that might have been anticipated.

i. Case: SP Terrace v. Meritage Homes of Texas


The court held that the seller failed to raise a fact issue on its affirmative defenses of
modification and interference by the purchaser, but raised fact issues whether the purchaser
waived performance of the substantial completion deadline and whether the purchaser caused
delay that extended the time for performance. The parties never signed a written agreement to
extend the deadline beyond December 31. The extension of time modification was a material
term-as such, it was unenforceable because it was never reduced to writing. The seller's
counterclaim stated a claim for affirmative relief, but the seller failed to prove on the record
presented that the earnest money provision of the contract was unenforceable as a matter of law.
The liquidated damages provision was enforceable as a limitation of remedy absent any evidence
or argument that it was unenforceable on that basis. Once the purchaser exercised its option to
terminate due to the seller's failure to meet the substantial completion deadline, the purchaser
was relieved of further contractual obligations, including the requirement of providing notice and
a 30-day opportunity to cure any failure to comply with the deadline.
b. Remedies Modified by K
General Rule: parties may agree by k to act with respect to one another in a manner that would
be tortious in the absence of such a k. Likewise, the parties may also k to limit their liability to
one another for negligence in the course of their contractual relationship.
i. Case: Schrier v. Beltway Alarm Co.
Alarm Co. didn’t call the police for 14mins after Schrier hit the panic button at his liquor store
when he was robbed. Schirer was injured in the robbery.
Damages: Hadley I—loss of k $287.00 direct damages; Hadley II—store damages + injury
(consequential/indirect damages)
Holding: only recover the loss of k.
Difference btwn liquidated damages and exculpatory clause
Liquidated damages--per occurrence pay this amount if we breach the k. Set at the time of
contracting for certain circumstances of breach.
Exculpatory clause—we are not liable in the event of a breach and if we are, we are only liable
for contract amount.
F. UCC Buyer and Seller Remedies
2-703 and 2-711 attempts to put individual in position has k been fully performed.
Sellers’ Damages: 2-706; 2-708; 2-709; 2-710
Buyers’ damages: 2-711; 2-712; 2-713; 2-714; 2-715; 2-716
a. Buyer’s Remedies
i. Delivery of Non-Conforming Goods—The “Perfect Tender Rule” v.
Damages for Loss in Value
Specific Performance—is equitable only when there is no other recovery available at law
ii. Buyer Monetary Damages for Seller Breach
1. Case: Dangerfield v. Markel
The parties entered into a contract for the purchase of potatoes. The buyer filed an action for
breach of contract, alleging that the farmer had failed to deliver potatoes during certain contract
periods and that the market price had increased substantially over the contract price during that
time. The farmer counterclaimed, alleging the buyer failed to provide for delivery of the potatoes
and failed to make timely payment for the ones delivered. The buyer filed a motion to strike the
part of the counterclaim for consequential damages, and his motion was granted. The trial court
entered judgment in favor of the buyer. The farmer appealed the grant of the motion, and the
buyer argued that the order was not appealable. The court vacated the order and remanded,
holding that the motion to strike was the remedy for eliminating redundant, immaterial, or
impertinent matter in the pleading. The motion was used for objecting to an insufficient defense
and was not designed as a method of dismissing all or part of a counterclaim, so the motion to
strike was erroneously utilized as a basis for eliminating substantive portions of the farmer's
counterclaim.
iii. Seller’s Remedies—UCC 2-708 and the “Lost Volume Seller” Rule

Neri (buyer) v. Retail Marine Corp. (seller) ---lost volume seller rule
Facts: Neri contracted to purchase a $12,500 boat from Retail Marine, however after Retail
Marine got the boat, Neri repudiated the k. Retail Marine incurred some additional incidental
expenses like storage costs, but later sold the boat to another buyer for $12,500.
PH:
Issue: What are Retail Marine’s damages?
Rule: Under Lost Volume Seller Rule 2-708(2)—Seller must show that it had a sufficient supply
of goods that it could have additionally performed the second sales k and that it would have
successfully solicited the ultimate purchaser, even if the original buyer had not breached the k.
Holding: Lost Volume Seller Rule applies, and Retail Marine was awarded its lost profits on the
Neri sale.
Reasoning: At Common Law—Retail Marine successfully mitigated damages by reselling the
boat at the k price, did not lose any profits, and only incurred some incidental damages.
Under UCC 2-706—k price minus proceeds of resale, Retail Marine would have recovered at
most its incidental expenses involved in arranging the resale.
According to the Lost Volume Seller Rule, a Retail Marine had an abundant supply of that kind
of boat and if Neri performed, Retail Marine would have made profits from two boat sales
instead of just the profits from the second sale.

Seller must show they are a volume seller functionally unlimited supply of goods. Lost volume
seller must show they would’ve made additional sale in addition to that of the repudiating buyer.
1. Case: R.E. Davis Chemical Corp. v. Diasonics, Inc.
Facts: Diasonics sells and manufactures medical equipment and Davis is a purchaser of
medical equipment. Davis contracted with Diasonics to purchase some medical
equipment and paid a deposit of $300,000. Before the k, Davis contracted with two
Dobbin and Valvassori to build a medical facility that would used the equipment from
Diasonics. The doctors breach their k with Davis and then, Davis breached its k with
Diasonics. Davis refused to pay the remaining balance or to take the delivery of the
equipment. Then Diasonics sold the same equipment to a 3rd party for the same price it
charged Davis.
PH: Davis sued Diasonics for its $300,000 deposit under UCC 2-718(2). Diasonics
counterclaimed that it was entitled to offset that amount under the lost volume seller
rule 2-718(3). They also claimed that the doctors tortiously interfered w.its k with Davis
bc they knew that if they breached their k, then Davis would breach their k with them.
Issue: Whether Diasonics’ damages should be measured under 2-706 or 2-708(2).
Rule: Lost Volume Seller Rule applies—changed def: whether the seller could have
produced the breached units in addition to its actual volume, but also whether it would
have been profitable for the seller to produce both units.
Holding: Dismissal of 3rd party complaint affirmed and reversed and remanded Davis’s
grant for summary judgment.
Reasoning: The Illinois Courts would follow the cases in other states bc such an issue
has never been ruled on in Illinois therefore the lost volume seller rule can be used to
recover its lost profit. Diasonics has a choice for recovery and is free to reject the
damage formula in 2-706 and 2-708. The claim of tortious interference did not meet the
elements.

Third Party Beneficiaries


 Intended ones get to enforce the K; can enforce fiduciary duties often are
made; if not a 3rd party then they can’t enforce k.