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Contracts I

Stone
Laura Catherine Mason

REMEDIES
A. Contract Remedies in General
*Monetary Remedies and Equitable Remedies (sp. Performance, injunctions)
1. Purpose of Remedies
a. Expectation Interest- attempting to put the injured party in as good a position as it
would have been in had the K been performed. It gives the injured party the benefit of the
bargain. Based on actual value of K on performance and the circumstances at time of
performance (market changes can diminish).
*Material Breach- Results in no recovery for breaching party
*Substantial Performance- only partly done, allow cure
*Full Complete Satisfactory Performance (is this expected), something less than
satisfactory can be full performance
b. Reliance Interest- Injured party may by reliance on K have incurred expenses in
preparation for performance. Court attempts to put injured party in position they would
have been in had K not been made.
1) Essential Reliance- Prep for performance under K
2) Incidental Reliance- Prep for collateral transactions that a party
plans to carry out when K is performed
c. Restitution- for the prevention of unjust enrichment. Party in breach in position they
would have been had K not been made.
Breach

Expectation Reliance Restitution


Goal: Put P in the Goal: Return P to Goal: Restore value of benefit
Position as if K had status quo ante conferred on D
Been performed

Remedies based on K Remedy based off the K-


Theory of unjust enrichment
2. Types of Remedies
a. Specific- intended to give the injured party the very performance that was promised
b. Substitutional- intended to give the injured party something in substitution for the
promised performance ($).
3. Economic Aspects
a. Efficiency Breach
B. Enforcement by Specific Performance and Injunction
C. Enforcement by Award of Damages
CALCULATING DAMAGES

I. Expectancy Interest
A. Restatement §347— Injured party has right a damages based on his expectation interest as
measured by a) loss in value of other party’s performance caused by its failure/deficiency plus b)
any other loss, including incidental or consequential loss caused by breach less c) any cost or other
loss that he had avoided by not having to perform
1. Expectation measured= The value of what was promised -- value of what was delivered.
2. Formula: Loss (K price) + incidentals or consequentials – gains from K breach (costs
avoided by P as a result of breach)

B. Hawkins v. McGee—
Facts- Surgeon is consulted about a skin graft surgery on D’s hand. He says that there will
be 4 days in the hospital and a few days down. He also is quoted as guaranteeing a 100%
perfect or good hand. The D is suing for breach of warranty of operation’s success.
D Contends- This cannot be a reasonable assumption of a contractual relation.
P Contends- The doctor solicited this operation to test his otherwise little skill in skin
grafting, evidence that they took the doctor’s words at face value. He is seeking damages.
Procedure- Jury finds for P, D appeals on excessive damages.
Holding- The damages were excessive. All above $500 are removed. New Trial.
Reasoning- The instruction to the jury to award damages for pain and suffering and for ill
effects of the operation was in error. Recovery should be based on what the P would have
received had the contract been fulfilled (i.e. the value of the promised good hand and the
value of the hand he has right now).

C. Limits on Expectation Recovery-


1. Foreseeability- what is reasonably contemplated by the parties at K
a) general damages- obvious, without special knowledge of circumstances
b) special damages- probable loss, when D has reason to know special circ
2. Mitigation- duty not to worsen the loss
3. Causation- only the damages caused by the breach
4. Reasonable Certainty- show that the breach resulted in monetary loss and have evi
5. Unfair forfeiture- damages must not unfairly harm the D and provide windfall to P

II. Reliance Interest- a P may not be able to prove expectation damages, reliance is aimed to refund
expenses wasted of equivalent losses by the P in reliance, restoring her to the place she would have
been had there been no K
Essential- directly based on the K and essential to fulfilling the party’s contractual commitment
Incidental- incurred as a consequence of and incidentally to the K, for the purpose of enjoying or
taking advantage of the expected K
A. Restatement § 349-- The injured party may choose to ignore the element of profit and recover
as damages his expenditures in reliance (including expenditures made in preparation for
performance or in performance, less any loss that the party in breach can prove with reasonable
certainty the injured party would have suffered had the K been performed). He can do this if he
cannot prove his profit with reasonable certainty.

B. Security Stove case- D had knowledge of special circumstances, damages even though did not
foresee the specifics.
FACTS- P manufactured a special furnace with an oil and gas burner that it wanted to ship
to an exhibit (no sale) in Atlantic City. The furnace had to be shipped express and the D
contracted to do this on time. The special time constraints were made known in writing and
acknowledged. There were 21 packages in all. The P reached exhibit and the most imp part
was missing. The part never made it on time. P seeks damages for expenses of the trip and
shipping from D.
CONTENTIONS- D contends that P can only recover for lost profits, of which there is no
evi. The other costs are not caused by the breach they were incurred before K.
PROCEDURE- Case tried before judge and awarded P $1000. D appealed
ISSUE- Whether the P can recover reliance damages in the form of the trip expenditures.
HOLDING- Reliance damages can be recovered, judgment affirmed
REASONING- Ordinarily P could only recover lost profits, however, the D was made
aware of the special circumstances before the K was made. Because of this K, the P made
expenditures that he otherwise would not have made. The P relied on the K with D. There
were no profits contemplated at the exhibit and no way to recover that.

C. Anglia TV v. Reed— Expenses are granted prior to the breach. D knew or should have known
that director would be hired. That is contemplated ex ante (§351).

D. Dempsey Case— Expenses are not granted prior to the breach. There is no contemplation. It’s
too speculative. Should D have contemplated expenses? Prior expenses are incorporated into the
contract by reference. Want to be able to argue that breach is or is not the proximate cause of the
loss and use the ex ante. See Lost Profits Seller
How can you prove expected profits? Often speculative.

E. Sullivan v. O’Conner – Restitution damages § 370. Patient suffered physical pain and
suffering beyond what is expected in surgery. Reliance interest will adequately compensate. Pain
and suffering is generally only awarded in personal service K.

G. Freund v. Wash. Sq. Press – Sp. Performance is unusual because parties are in conflict.
Expectancy interest is limited to value of foreseeable benefit. His loss profits and royalties are
speculative. The nominal damages are awarded for the recognized breach.
FACTS- P entered into K with D to have his manuscript published. K provided for $2,000
advance upon receiving manuscript, which was paid. The terms also included royalties and
return of copyright (in the event of termination). D merged with another company and
refused to publish work. There was no termination notice as provided for by K.
CONTENTIONS- P sues for delay in promotion, loss of royalties and cost of publication
somewhere else. Seeks specific performance
PROCEDURE- Trial court denies promotion recovery, royalties recovery, but grants
$10,000 for cost of publication. Appellate Court upholds, appealed again.
ISSUE- Whether the P is entitled to cost of publication damages for breach
HOLDING- Inaccurate measure of relief, decision reversed and modified.
RULE- UCC § 1-106
REASONING- Damages are made to put P in as good as a position as he would have been
if the K had been performed. To award P cost of publication would enrich him at the D’s
expense. These damages were not foreseeable by D. There is no recovery for royalties
because that number is purely speculative. This K does not allow any special damages to
be recovered. There is an incentive for Ps to mitigate their damages.

H. Ferrell- P agreed to lease building for cosmetology school, lessor reneges and P sues for lost
profits for 9 months spent looking for another location. P did establish a track record of profits
because it had been in business 9 months at the time of the trial. However, would different
locations translate to the same profits?
III. Restitution- restores to the P the value of a benefit unjustly conferred on D by disaffirming the K
and suing for the recovery of benefits received. Measure by market value or net gain
A. Bollenback v. Continental Cas. Co.-P wants rescission instead of correction to recover
Restitution ($2166) not Expectancy ($107). Not a mistake of fact, but an intentional
repudiation. § 373 (return of all premiums) and 374 (return of all benefits conferred less
benefit received).
FACTS- P is a policyholder under D. He paid premiums from 1954- 1963, when he
suffered a back injury. He sought to recover for bills and received no answer. After the 3rd
letter, he received a letter saying that his policy expired in 59. P wrote again asking for
verification and received no answer. P filed claim electing to rescind the K because of
repudiation and requesting all premiums paid to D.
CONTENTIONS- D contends P not entitled to rescission (mistake), and measure of
damages is incorrect
PROCEDURE- Trial without jury found for P, D assigns error in judgment.
ISSUE- Whether the P is entitled to rescind and recover all premiums
HOLDING- The P is entitled to rescind and can only recover payments after 59
(remanded).
REASONING- This action goes under equity. The breach is substantial enough to justify
P’s rescission. Although mistake of fact might have been a defense to this, the D was given
a chance to investigate and correct itself before action was brought. D was willfully
neglected to ascertain its mistake. The return of all premiums is not proper measure.
Theoretically he would have been covered for an accident that occurred between 54
(beginning) and 59 (D’s proposed termination). Those premiums (the coverage they
afforded) are benefits the P received from K. He can receive the rest for wrongful
termination.

B. § 370 Rescission available when: Conferred benefit on D, breach by D is total, P returns


anything recovered from D
C. § 371 Measure of restitution interest - as justice requires by either
(a) Benefit Rendered: The reasonable value of the benefit received (if he had gotten services
elsewhere)
(b) Benefit Received: Increase in value of party’s property
D. § 373 paid when other party is in breach
1. Any benefit conferred on other party by part performance or reliance.
2. No payment if all duties are performed besides due payment
E. §374 – Restitution in favor of party in breach
1. Breaching party entitled to restitution for any benefit conferred by part performance in
excess of the loss that he has caused by his own breach.
2. If parties agree to terms limiting the damages, a party agrees to have their performance
retained in case of breach, that party is not entitled to restitution if the value of the
performance as liquid damages is reasonable in light of the anticipated or actual loss and
difficulties of proof of loss.
F. §376 – a party is entitled to restitution of any benefit conferred if K is breached on fraud or
duress.

G. The Perfect Tender Rule- calls for perfect performance, allows the buyer to reject the goods
that do not conform to the K in any manner (§ 2-601).
1. Sellers remedies 2-703-10 SEE DAMAGES
2. Buyer’s remedies 2-711-17
3. Incentives- Holds promisor and promisee to terms of K and causes parties to read and
honor K
4. Exceptions to the Rule-
a) the parties otherwise agree
b) rejection of the goods under an installment K may occur only if there is a
substantial impairment of value
c) the failure of the seller to make a reasonable K with a carrier of the failure of the
seller to notify the buyer, promptly, of shipment gives the buyer the right to reject
only if material delay or loss ensues
d) If the buyer has accepted the goods, he no longer has the right to reject
e) A bad faith rejection by the buyer in relation to an immaterial defect may
preclude his right of rejection
f) Though the buyer has the right to reject for any defect in general, if K time
remains, the seller has the right to cure

C. Point of Acceptance Rules


1. U.C.C. 2-606 –What constitutes acceptance of goods? Possession intent to keep
a. After reasonable opportunity to inspect the goods signifies to S that the goods
are conforming or that B will take or retain them in spite of their nonconformity
b. Fails to make an effective rejection 2-602(1), but such acceptance does not
occur until B has had a reasonable opportunity to inspect them
c. Except as otherwise provided in 2-608(4), does any act inconsistent with S’s
ownership if the act is ratified by S
d. Acceptance of a part of any commercial unit is acceptance of the entire unit.
2. U.C.C. 2-601(Buyer’s Rights on Improper Delivery/ Before Acceptance) – Perfect
tender is watered down under 2-508 (Cure by Seller) which allows seller to correct non
conformity in goods during K time of performance.
3. U.C.C. 2-608(1) (Buyer’s Rights on Improper Delivery/ After Acceptance)— After
acceptance of goods buyer can reject only if non-conforming performance substantially
impairs the value of the goods. See E
4. Ramirez v. Autosport – P accepted the goods, D had a reasonable amount of time to
cure the goods. Buyer can only reject goods if non-conforming performance substantially
impairs the value of the goods.

D. When can B sue for breach?


1. If Buyer accepts
a. 2-606, 2-608. Can revoke only if goods are substantially impaired
2. Buyer’s remedies for Seller’s breach of goods
a. B may cancel and recover for down payment of price paid (restitution damages)
b. B may cover and have damages too [2-711(1)(a) using 2-712 cover provision]
3. Total breach by Seller
a. 2-713: Mkt. Price – K price + Inc./Cons. Damages
b. Equity would enforce specific performance but remedy at law (money) is
preferred.
c. When will buyer seek equitable performance?
1. Exchange of unique property (ex. Hand tooled machine parts or other
specialty good
2. Use 2-716 (Specific Performance) prefaced by 2-711(2)(b) (B’s
remedies).
4. What do people do to get around perfect tender? 2-719—Contractual Modification or
Limitation of Remedy

E. Substantial Impairment (2-608) -- Durfee v. Rod Baxter Imports, Inc.- can’t repair the Saab, it
substantially interferes with purpose or operation. Substantial impairment-Does the effect interfere
with the use of the product? Why no substantial impairment? a series of minor defects is not
serious enough to interfere with the use. Taken individually it’s minor, but if you add them up it
becomes major. D had a replacement-repair clause in warranty. Buyer seeks revocation of
acceptance of goods, return of money and other expenses (restitution). Not good for courts to
interfere with explicit language of contracts. Dealer couldn’t repair car after several attempts; car
could not be used as much (deprived owner of benefit of bargain) so 2-719(2) would apply. Wants
incidental/ consequential 2-715, but has to prove them

G. Michigan Cen. R.R. v. State- 371(b) benefits received, implied K, under Indiana Public Policy
the highest price paid is bid price for the coal not market price (incentive to add a risk premium to
bid price when dealing with gov.)

IV. Cost of Performance


A. Restatement § 348(2)(b)—if the breach results in defective or unfinished construction and loss
cannot be proved with substantial certainty, he may recover on the reasonable cost of completing
performance or of remedying defects if cost isn’t clearly disproportionate to probable loss in
value. The general rule for figuring damages.
1. Damages are determined objectively, except must be what RP in her position would
have expected to have come form the deal given all circumstances.
2. Figure right to expect and what actually got
V. Diminution in Value
A. Restatement § 348(2)(a)- If a breach results in defective or unfinished construction and the loss
in value to the injured party is not proved with sufficient certainty, he may recover damages based
on the diminution in the market price of the property caused by the breach.
1. Used to figure damages when using the Cost of Performance rule would result in P being
a better position than he was if K was completed. MC>MB.

B. Peevyhouse- The $29,000 job will only increase prop. value by $300 (is the marginal benefit
worth the marginal cost or is this economic waste?). The court acts as a mitigator by finding the
diminution of value not cost of performance (increases MB). This is substantial performance and
the part left undone is incidental. The court ruled for D. Expectation interest in this case would not
equal cost of performance because cost of doing work was grossly disproportionate to the value of
the land, so correct remedy would be DIMINUTION OF VALUE (348 2a);
1. Majority view—economic waste; don’t want to spend $30,000 for $300 property; cost
exceeds benefits; restoration was incidental, primary purpose was mining;
2. Minority view—person’s word is his bond; land could have other values to farmer; court
doesn’t want to get involved with that
3. Pareto Optimal- everyone is better off, Pareto Superior- some are better off, none are
worse off, Pareto Inferior- some are worse off.

C. Hints: Diminution is common, i.e. car wreck cost to restore would be $20,000 but value the
day before wreck would be $15,000 so $5,000 would be economic waste; Why didn’t ask for
specific performance? Because someone made a promise and didn’t fulfill it; Apply the Coase
Theorem: If you keep the transaction costs low; encourage private transactions instead of
government regulation, you will move resources to their highest value and use.; Try to put yourself
in the shoes of owning both the farm and the coal company. What would make the most economic
sense?

VI. Efficient Breach


A. Definition-- An intentional breach of contract and payment of damages by a party who would
incur greater economic loss by performing under the contract. If the D’s cost to perform the K
would exceed te benefit that performance would give both parties, the D may save enough money
by breaching to pay expectancy damages to the P and still come out ahead. It compensates the P
and increases the D’s wealth

VII. Mitigation (breach of services here, goods covered under U.C.C.)


A. Restatement § 350- P has to use reasonable effort/ due diligence to find comparable
performance

B. Rockingham Co. v. Luten Bridge Co- This is executory K (one in which performance has not
been completed). Completing the bridge was eco. Waste, if they had stopped, Luten could recover
expected profit under 347.
FACTS- On Jan. 7, 1924, the County awarded a contract to the P for the construction of a
bridge. On March 3rd, the county passed a resolution to notify the P that any further work
on the bridge was done at their own risk, they wanted out of the contract and would not
pay. A copy of this was sent to P. Only $1900 had been completed so far. Then, an
individual board member insisted the bridge should be built and work continued. The
board renounced his actions and refused to pay.
PROCEDURE- The trial court excluded evidence as to notification and awarded pl full
amount of bridge. County appealed.
ISSUE- The measure of the pl’s recovery.
HOLDING- The decision is reversed. Remand for new trial.
REASONING- The def was in the wrong to breach the contract and should owe damages
for work completed thus far. However the pl had a duty not to increase the damages after
the breach of contract.

C. Hussey v. Holloway- D attempts mitigation by offering other job (substantial performance).


Court rules it as a material breach and P is not obligated to take substantial performance unless it
is comparable to original promise. P exercised due diligence to find comparable performance.
There is no recovery for loss that could have been avoided.
FACTS- D agreed to employ P as hat designer. The D breached this K, but offered P a job
with less pay ($18 down to $15 per week) in the same general capacity (hat maker). P
contest that second offer was not in good faith. P cannot find another job. Judge instructs
the jury that if the P received the same benefits from another job there or a comparable job
somewhere else, P cannot recover. The P was obligated to take the $15 job.
PROCEDURE- P alleged exception to the judge’s instructions
ISSUE- The trial court judge refused to give several rulings and left out certain testimony
HOLDING- The trial court was correct in its instructions, exceptions overruled.
REASONING- The P was not obligated to accept modified agreement. The instructions
protected the P’s rights

VIII. Lost Profits Seller


A. Mitigation and lost profits
1. Olds v. Mapes-Reeves Construction Co- D wrongfully terminated K for marble. P
looked for mitigation and made K2 with building owner for more money. Trial court
found: Old K ($3000) – New K ($1050) = $1943. P argues for: Old K (3000) – Cost of
completion of Old K ($717) = $2283. The appeal overruled trial court because calculating
the new K price allowed a windfall for D. The D is not entitled to profit off the P’s new
independent K.

B. Lost Profits on a new business


1. Usually not awarded, but sometimes when P would recover no expectancy b/c he has
lost no economic benefit, may try to gain some potential lost profits.
2. Owner must show some facts
a. Projection of profits
b. Based on both similar business in the area and his profits since opening.
3. Argue: Merely projections, different neighborhoods – what is to say that P would have
done any better in the original building, also his subsequent profits could be based on
seasonal sales that will misrepresent his figures.
4. How do you calculate profits if it’s a new business? Bring in expert testimony. Look at
comparable businesses. It will be resolved as a fact question for the jury. Can you contract
around to avoid the problem? If you fear that lost profits would be too speculative,
stipulate what the profits would be. (liquidated damages clause).

IX. Lost Volume Seller (of goods)


* If a seller of goods or services has the capacity to supply the full demand for those goods or
services, a breach by one buyer is not substituted for by a subsequent sale of the goods or services
to another customer who would have bought those in any event. The breach has caused a loss in
the volume of the P’s sales and can only be compensated for by an award of lost profits.
A. Covered under the UCC 2-706, 2-708(1) and 2-708(2)
1. 2-706(1) = K price – resale + Inc. damages
a. Permits aggrieved seller to choose resale or continued manufacture
b. Resale must be reasonable and in good faith
c. $500 - $300 + $50 = damages
2. 2-708(1) = K price – market price of goods + Incidental damages – costs avoided
a. Mkt value must be determined at the time and place the parties would have
entered substitute performance.
3. 2-708(2) is proper remedy when 708(1) would not compensate seller adequately (make
whole)
a. Remedy is for lost profits from breach of K
b. Profits – salvage resale = damages
c. Three-Part Test:
1) Did seller have capacity to make sale to both buyers?
2) Would it be profitable for seller to make both sales?
3) Show that innocent party would have made the sale absent the K1
breach? (look at past record of sales, market, high v. low statistical
probability—fact question for the jury)
* Unique Goods- must take into account alternatives and consider the off set of any resale
value. Revised 2-708 does not use this wording, but it allows profit and “junk sale” values.

B. R.E. Davis Chemical Corp. v. Diasonics, Inc- UCC 2-708(1) v. 2-708(2), Expectancy Interest
as lost volume seller.
FACTS- Davis (D) and Diasonics (P, seller) contracted sale of medical equipment. Davis
paid $300,000 as down payment. Davis breached the contract and refused to take
equipment or pay. Davis sues for down payment (less $500). Diasonics counterclaimed for
offset as “lost volume seller” under UCC. The P did end up selling the equipment to
another company.
PROCEDURE- Court entered summary judgment for Davis and awarded down payment
less 500 and plus interest. Diasonics appealed.
ISSUE- Can Diasonics claim damages as a “lost volume seller”?
HOLDING- Reverse summary judgment for Davis, remand calculate damages for
Diasonics (pending certain conditions)
REASONING- There was no previous rule regarding this situation in the state. The court
looked to other states to formulate ruling as well as the Code. The conditions are that
Diasonics must prove that it had the capacity to produce breached unit in addition to the
resale and that it would be possible to profit from both sales. In addition, Diasonics must
show that it could have made the 2nd sell even without the breach.
X. Quantity Discounts
A. These are not lost profits and cannot be recovered as incidental damages by S as provided
under 2-708(2) and 2-710 (P can recover on incidentals like charges, commissions and expenses,
NOT benefits)

B. Nobs Chemical, USA, Inc. v. Koppers Co., Inc-


FACTS- Koppers contracted to buy 1000 metric tons of cumene from Nobs. Koppers
breached K. P arranged to buy cumene for $400 per ton and $45 for transportation, totaling
$445,000. Contract price was $540,000. Court ruled for P to recover lost profits (540,000-
445,000) of $95,000. Court ruled P could not recover for extra $25 per ton it had to pay
because of reduction in total order size.
CONTENTIONS- P contends they should recover the difference between contract price
(540,000) and the market price (220,400- 264,480) provided for in subsection (1). This
method would adequately compensate, so it should control not subsection (2). Also, they
should be compensated for the extra cost per ton to their diminished order.
PROCEDURE- Tried without jury. Pl appeal measure of damages, Def cross-appeals for
incorrect method of damage calc
ISSUE- 1) Whether the District Court was correct in applying lost profits method to
measure damages to pl’s loss. 2) Whether it was error of Dist. Ct to refuse to award pl
additional $75,000 which they were required to pay when they lost their quantity discount
HOLDING- 1) District Court was correct in applying lost profits method 2) Court was
correct in deny $75,000 additional damages. AFFIRMED
REASONING- 1) UCC applies subsection 2 (lost profits) to sellers who never acquire
contracted goods. As such, they cannot have action for purchase price or resale. 2) UCC
does not provide for recovery of consequential damages by a seller. This cost is not
reasonably incurred because it was not an expense necessary to performance of the K. it
was extra benefits seller did not receive from supplier.

XI. Cover (Mitigation of K for Goods)


A. Buyer Remedies
1. 2-713 allows for Buyer to recover: Cost of Cover - K price (plus consequential and
incidental damages) = damages (less expenses saved in consequence of the seller’s
breach)

B. Cover on part of the Buyer consists of buying substitute goods to replace those repudiated or
not delivered or delivered damaged by the seller.
1. UCC 2-712: permits buyer to cover and gives damages due for covering to buyer if
costs of cover are reasonable.
2. UCC 2-715 (2)(a): in figuring consequential damages, however, includes only losses
which could not reasonably been avoided (Bars recovery of damages that could be
reasonably avoided).
4. Buyer remedies 2-711 – 2-717
5. 2-711 allows cover or damages for non-delivery
C. Appropriate Cover- whether at the time and place the buyer acted in good faith and in a
reasonable manner, and it is immaterial that hindsight may later prove that the method of cover
used was not the cheapest or most effective; goods must be commercially reasonable substitute;
the buyer is protected from market price slump and can recover actual loss; done in reasonable
time

D. Durawood Treating Co. v. Century Forest Industries- tries internal cover


FACTS- Dura-Wood entered contract to supply third party, Smith Co, with cross ties. Def,
Century Forest, agreed to supply pl with ties for said contract. Def breached K.
Subsequently pl reviewed other price quotes and determined self-production would be least
expensive means of keeping Smith K.
CONTENTIONS- 1) Pl- valid method of cover, def- subbing from itself is not valid in
covering 2) Pl could have made more profits if they weren’t using their own factory
PROCEDURE- District Court awarded pl $100,000 for breached K. On appeal,
jurisdiction of diverse citizenship
ISSUE- 1) PL’s cover for breached K 2) Pl’s potential profits award 3) P’s lost profits
award on Smith K1
HOLDING- 1) Cover is valid, affirmed 2) Potential profits should not be recovered 3)
Lost profit award allowed double recovery, reversed.
REASONING- 1) When breached K, buyer may cover by making in good faith and w/o
unreasonable delay any reasonable purchase of goods to substitute for those due from
seller. Internal production can satisfy three parts of cover 2) “Potential profits” that could
have been made by pl if they had not used their facilities for substitutes is not covered as
consequential damages. That situation was preventable by a different form of cover. 3)
Awarding recovery for amount of profit per tie Pl would have received form Smith if def
had fulfilled K is double recovery. The actual damage award considered difference
between cost of cover and K price.

E. Cover on part of seller is a de facto duty to mitigate when goods are wrongfully rejected or
repudiated before performance.
1. Particularly those goods which are perishable
2. Seller remedies under 2-703 – 710
3. 2-704 provides for decision of continued manuf. or scrap of materials in the event of a
breaching buyer, subject to good faith business judgment.
4. 2-709 requires attempt at resale b-4 claiming price of goods from buyer.

XII. Warranties
A. Types of Warranties
1. Express Warranties (§2-313)- an explicit promise by seller that requires a show of
reliance by buyer. It is made by a description or a sample/model. “Puffing” about a
product does not amount to an express warranty if the buyers know it is the seller’s
opinions.
a) Must show reliance as the basis of the purchase or bargain under state law.
b) The seller has the burden of information because they are in the better position
of low information costs
2. Implied Warranties (§2-314)- a warranty that goods will be suitable for intended
purposes. There is no reliance required. It is implied by the seller being a merchant with
respect to goods of that kind. This is always given unless there is a disclaimer.
3. Warranty of fitness for a particular purpose 2-315
a. B must know of special purpose and rely on S’s skill and judgment.

B. Overstreet v. Norden- P must show reliance as a basis of purchase/bargain (state law). The
seller has the burden of information because they have lower information costs, it is an expert
because this product is novel and unique.
FACTS- Dr. Overstreet, vet and horse breeder, files complaint against Norden for breach
of expressed and implied warranty. P read the material on the D’s drug that prevents equine
rhinopneumonitis. Based on that info, he inoculates his horses. Six of them get the disease
anyway and abort their foals (disease side effect). P seeks losses for aborted foals.
CONTENTIONS- D- must show reliance on express and implied warranties. Damages
are limited to cost of the vaccine.
PROCEDURE- judgment for the pl, damages of $40,500. Def motions for a JNWV or
new trial in alternative- denied, appeals
ISSUE- Jury instructions were erroneous concerning specific breached warranty and
damages measure.
HOLDING- Jury instructions were erroneous, reverse and remand
REASONING- P’s reliance on the warranty does not have to be proven, however, there is
insufficient evi to maintain that D breached its implied warranty. An expert like P may rely
on express warranty when the product is new or unique. The P must show reliance on the
express warranty as the basis of the bargain, which he did not. Recovery should not be
limited by the Alternative Product Rule in this case. The loss of the foals is covered under
the UCC and should be accounted for.
CONCURR- They disagree that the damages should be calculated that way and suggest
that the Alternative Product Rule be applied to the pl. If he searched and there was no other
sub for the drug, then the alt would have resulted in abortions too. Therefore the def is not
liable for the loss of foals.

XIII. Foreseeability
A. Foreseeability acts as a limit on expectancy damages. A party in breach is not liable for
damages (for partial or total breach) that the party did not at the time of contracting have reason to
foresee as a probable result of the breach. Only the loss must be foreseeable and only by the party
in breach. The things that are reasonable to foresee not actually foreseen. Restatement 351
1. §351(1)- Damages are not recoverable for loss that the party in breach did not have
reason to foresee as a probable result of the breach when the K was made.
2. § 351(2)- Loss may be foreseeable as a probable result of a breach because it follows
from the breach (a) in the ordinary course of events, or (b) as a result of the special
circumstances beyond the ordinary course of events, that the party in breach had reason
to know.
a. General Damages- those arising naturally from breach, foreseeable by a
reasonable person (D can be unaware of them and still be liable)
b. Special Damages- result from special circumstances, that party had reason to
know (D assumes risk). This encourages P to plan and disclose information.
3. § 351(3)- A court may limit damages for foreseeable loss by excluding recovery for
loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it
concludes that in the circumstances justice so requires in order to avoid
disproportionate compensation
4. U.C.C. 2-715 (inclusion of incidental/consequential damages)

B. Hadley v. Baxendale- The deliverer did not know about the mill’s stopped performance, thus
they could not reasonably foresee the consequences and damages are limited. Landmark case-
establishes and clarifies law for later.
FACTS- The pl had a milling business that was stopped by the crank shaft breaking. P
enlisted D to transport broken shaft to manufacturer for a new one. D says the shaft will be
delivered next day from pick up- P emphasized hurry. Delivery was delayed because of
neglect and P is suing for lost profits from the mill being down extra time.
CONTENTIONS- D had duty as carrier
PROCEDURE- jury awarded P £25 in damages
ISSUE- Whether D can be held liable for special damages for breach when it had no
knowledge of the circumstances calling for breach.
HOLDING- New trial
REASONING- There is no reason for saying that the parties entered into a special K to
assume consequences of non-delivery. The D did not know the full extent of the
consequences of the break of K
* Two rules- the injured party may recover damages for loss that will fairly and reasonably arise
naturally from the breach, the other losses that can be recovered are consequential damages but
only when foreseen at the time of K. (general and special)

C. Nirvana Fallacy- the market is imperfect and it has costs. A loss does not always mean
recovery. Government regulations can be contracted around.

D. Tacit Agreement- implied agreement to be liable for special damages. The damages must be
foreseeable, or only general damages can be recovered.

E. Morrow v. Hot Springs Bank-


FACTS- PL owned coin collection valued at $32,155.17, which he kept under 11 locks in
his home. He inquired numerous times about safety deposit boxes and there were none in
the city. The bank, D, had moved locations and was adding safety deposit boxes. P paid for
3 boxes stipulating need by Sept 1. Employee promised to notify him and failed to do so.
His coins were stolen 4 days after the boxes became available.
CONTENTIONS- D breached K when failed to notify P as promised
PROCEDURE- Summary judgment in favor of bank, appealed
ISSUE- Whether the bank can be liable for consequential damages that it did agree to
assume at the time of K
HOLDING- summary judgment affirmed
RULE- “Tacit Agreement Test” for recovery for consequential damages, P must prove D at
least tacitly agreed to assume responsibility for risk.
REASONING- There is a breach of K, but there is no liability for special damages. There
is no proof that the D agreed to assume the risk of insuring the coin collection when it
contracted to provide boxes for P. The P was in the position to K for the coins.

F. Kerr S.S. Co.— If special damages known to RCA and contemplated that it’s within terms of
contract, then it would be in line with Morrow decision; could also get negligence damages leads
to tort. K1 is not a tort (duty is defined as contract).

TYPES of DAMAGES

I. Types of Damages
A. Incidental damages- those reasonably incurred by the P after the breach in attempting to deal
with the breach (like cost incurred in procuring substitute performance and mitigation)
C. Compensatory Damages- puts the non-breaching party where she would have been had the
promise been performed
1. Expectation Damages- P’s standard measure of damages will be based on an expectation
measure (like sufficient for party to buy a substitute performance)
a) Reliance Damages- puts the P in the position she would have been in had the K
never been formed
b) Consequential Damages-
c) Punitive Damages- generally not awarded in commercial K cases
d) Nominal Damages- token damages where a breach is shown but no actual loss is
proven
e) Liquidated Damages- agreed by both parties at the time of the K

B. Contract for the Sale of Goods


1. Remedies of the Seller- when the buyer wrongfully rejects or revokes acceptance of
goods, fails to make a payment due on or before delivery, or repudiates, the seller may:
a) Withhold delivery of goods
b) Stop delivery by the carrier,
c) Resell the goods and recover the difference,
d) Cancel the K,
e) Recover the price (if the goods have been accepted or the conforming goods
were lost or damaged within a reasonable time after the risk of loss passed to the
buyer OR the goods have been identified to the K and the seller is unable to resell)
f) Recover ordinary K damages
2. Remedies of the Buyers- if the seller fails to deliver or repudiates or the buyer rightfully
rejects or revokes acceptance with respect the goods:
a) Cancel
b) “Cover”
c) Recover foods ID to the K if the buyer has paid a part or all of the price
d) Recover the goods contracted for if the buyer is unable to cover AND the goods
were either in existence when the K was made or were later ID in the K
e) Obtain specific performance if appropriate
f) Recover damages for non-delivery
3. Anticipatory Repudiation by Seller- the buyer may await the seller’s performance for a
commercially reasonable time
4. Remedy of Buyer Who keeps nonconforming goods- the buyer may recover the
difference between the value of the goods would have had if they had been as warranted
and the actual value of the goods (UCC § 2-714(2))

C. Employment Contacts
1. Breach by Employer- irrespective of when the breach occurs the standard measure of
damages if the full K price
2. Breach by Employee-
a) Intentional Breach- employer is entitled to a standard measure according to what
it costs to replace the employee
b) Unintentional Breach- standard measure is same for intentional breach,
employee may have a right to quasi-contractual recovery for work done to date

D. Duty to Mitigate Damages- She must refrain from piling up losses after she receives notice of
the breach, must not incur further expenditures, make reasonable efforts to cut down losses, party
can recover the expenses of mitigation
1. Employment K- employee must use reasonable care in finding other employment

E. Special Damages
1. Restatement §353 (Emotional Disturbance)— recovery for emotional disturbance
that serious emotional disturbance was a particularly likely result
2. Restatement §355 (Punitive Damages)— punitive damages are not recoverable for a
breach of K unless the conduct constituting the breach is also a tort for which punitive
damages are recoverable
a) This is defined by Stone as “contort” and described as judicial tyranny and
shrinking of the pie in a world of scarce resources.
b) Punitives may be recovered for emotional disturbance only in K which had “the
foreseeable purpose of providing peace of mind” at the heart of the K. See Haynes
v. Dodd
Ainsworth ($6 mill. man)- Restatement 205 requires good faith. Insurance offers settlement
because the MC of litigation would be more expensive. Punitive damages belong to tort law, but
court allows recovery for oppression (relies on state statute, court defines oppression, no terms are
clearly defined). § 353 does not cover obstinacy. This makes the law ambiguous. Does it violate §
351(3) of avoidance of disproportionate compensation.
FACTS- During an angiogram there was an accident that caused P’s husband to suffer a
stroke. He went into a come for 7 days and sustained permanent damages. P attempted to
collect benefits from their insurance company. The company denied the claim 5 times
despite overwhelming evi and medical records that proved no pre-existing condition or
other factors. There was no investigation made by the company. D offered a “compromise”
of $1,940 instead of her covered $9,600, which P refused. P sued seeking compensatory
and punitive damages.
CONTENTIONS- Policy says that it covers any conceivable accident. P contents it was
an accident, D contends it was a disease
PROCEDURE- Jury awarded $200,000 compensatory and $5,939,500 in punitive. Motion
for Judgment NWV- District Court eliminated punitive damages.
ISSUE- Whether punitive damages should stand in this case
HOLDING- District Court’s ruling reversed, reinstated jury’s verdict
RULE- Jury may award punitive damages where the D has been guilty of fraud, malice or
oppression (a conscious disregard for the rights of others which constitutes an act of
subjecting P to cruel and unjust hardships).
REASONING- The P produced substantial evi that the D consciously and deliberately
ignored. The policy covered “any conceivable accident.” The relationship between insured
and insurer is a special confidence and any ambiguity will be construed against the insurer.
Punitive Damages- for oppression, consider the financial position of D, the culpability
and blameworthiness (mitigating circumstances), vulnerability and injury suffered by the
offended party, offensiveness of the punished conduct, and the means judged necessary to
deter future misconduct.

Seaman’s – trial court awards punitives for “tortuous breach of implied covenant.” There is no
reasonable test for bad faith. Calif. Courts struggle under this and Cal. Sup. Ct. eventually holds
that tort remedies are not available for breach of covenant.
Club Med. – “Fraud” is supposed to be hard to prove. This case doesn’t really meet the test; it is
“almost fraud.” Test: 1) specific intent to defraud 2) knowledge of representations and falsity 3) P
suffered damages 4) P relied on offers. This is an outlier case and an unusual award. There are no
punitive damages for warranty breach. Was there foreseeability at the time of K of emotional
disturbance suffered under § 353, 355?
* Limiting Punitives—Becker article

3. Restatement §352 (Speculative Loss)- damages are not recoverable for loss beyond an
amount that the evi permits to be established with reasonable certainty
a) Exceptions to Not Awarding Special Damages—Piece of mind contract
Lamm v. Shingleton
b) Contracts to buy insurance—Are they piece of mind contracts? insuring against
financial risk, if so they’re commercial, but it’s a fine line (Ainsworth)

III. Specific Performance


A. Remedy in Equity
1. Restatement §359—Adequacy of Damages
2. Three main kinds of relief for remedy in equity
a. Specific Performance- ordering the promisor to render the promised
performance
b. Injunctions- like negative sp. performance, direct a party to refrain from doing
a specified act.
c. Mandamus – an order by the court to an official ordering a specific action
3. Remedy at law (dollar amount) is favored because it allows the parties to find substitute
goods with the money and it is fairly easy to evaluate damages that way.
4. Remedy in equity is favored when
a. Uniqueness (i.e. land)
b. One shot personal K (i.e. portrait painting)
c. Monetary damages are difficult or uncertain to set as a value, or impossible to
get sub goods
5. Remedy in equity only used when remedy at law not available, inadequate
a. Laclede Gas Co. v. Amoco Oil Co- K for oil over number of years, hard to find
replacement for oil K, remedy at law is inadequate and it is hard to know the real
value of this K. established a 3 part test for suing remedy in equity:
1. Part (service) is not readily obtainable elsewhere
2. Part or service is available only at considerable expense, trouble or loss
3. It cannot be estimated in advance
*Not unless the K is in definite terms, a substantial part or the performance has been
rendered, not if disproportionate burden to perform, not in personal service, not if unfair or
against public policy
6. Unlikely because it forces parties that probably have animosity to work together, high
monitoring costs

B. Extent of Specific Performance- Not usually to employment K.


1. Cooperation is not likely.
2. 13th amendment forced slavery issue.
3. Monitoring costs.
4. ABC v. Wolf- hard to enforce in employment K, but can ask for injunction to stop him
from working at a competitor, the K had a non-competition clause
a) Non-Compete Clauses reasonability:
1> Is the restraint supplementary to the interests of a legal, valid K? protect
market share
2> Is the restraint reasonable as to time?
3> Is the restraint reasonable as to space? 75 miles may be ok but SE may
not

IV. Liquidated damages- stipulated in the K in case of breach, avoids Foreseeability issues that
might come up. The courts will not enforce penalties (2-718)
A. Ball Park Rule- 1) are damages difficult to predict or assess, incapable of estimation at moment
you enter K 2) is the liquidated damages amount a reasonable estimate of likely actual damages

B. Must be reasonable in light of anticipated (ex ante) or actual (ex post) harm §356
1. Common Law uses and approach to ex ante and ex post
C. C&H Sugar v. Sun Ship- P made two separate K for two parts of a ship for their sugar shipping
business. Although they needed both parts of the ship to function, the two manufactures cannot
depend in the other’s later performance. Damages by later performance were difficult to determine
at the time of K. Although P’s actual damages were much less than the liquidated damages, they
only have to be in proportion to anticipated damages. It was a good business K that the parties
bargained for.

V. Penalty Clauses
A. Definition--clauses included in a K that will reward the breached upon party more than they
would have earned by full performance in the event of a breach. (§ 356) this could deter efficient
breaches and does not est. a rule for entering K
B. Lake River v. Carborundum- ct. believes this clause is a shotgun clause, windfall, over-
compensation, P gets the actual damages (unpaid K – cost saved)

C. Kearney v. Master - P K w/ D to sell P some equip. to make some parts. P claims that equip is
bad and caused P to lose profits and sales. P sues to recover all losses (with consequentials). K
had a limitation on liquidated damages (repair, replace, return $ clause) which excluded
consequentials. P contends that the clause rendered K to fail its essential purpose (2-719), court
disagreed and held for D. D had repaired machine on numerous occasions and P had never
attempted to take advantage of replacement clause. The clause was a risk-shifting device, so it was
not failing its essential purpose. The parties make up for this risk in the K price.

D. Mahoney v. Tingley— Seller of house required buyers put earnest money down on house.
Buyers backed out and seller had to sell for less than original price. Seller sues for lost profits of
house sell, court holds that if seller incorporates an earnest money agreement in K as liquidated
damages clause then they cannot avoid that agreement and the $200 in earnest money is what they
get. It doesn’t make a difference if the clause is bad for the seller and not the buyer.
E. Britton v. Turner- (Employment K) quitting breach- can’t recover under express K. P renders
part performance of labor under K and quits. Courts allow recovery under quantum merit (implied
K)- the breaching part is awarded the value of services rendered if the value was received and
accepted by the other party. Party would be paid for work dine less costs incurred in transactions
and search for cover. The D could reject completely the whole of P’s performance. But in service
K only money will suffice.

Forming a Contract

I. Types:
A. Express- formed by language, oral or written
B. Implied (in Fact)- formed by manifestations of assent other than oral or written
C. Quasi-Contract (in law)- not contracts, constructed by courts to avoid unjust enrichment by
permitting the P to bring an action in restitution to recover the amount of the benefit conferred on
the D
1. Quantum Merit- 1) Offer of services, 2) recipient stands by & permits, 3) services are
rendered to recipient, not anyone else
Cotnam v. Wisdom- (371(a) Restitution= benefits rendered) Doctor provides emergency
med. aid, court finds implied in law K because benefits are received, it was logical to want
services, it prevents unjust enrichment
Michigan Cen. R.R. v. State- (371(b) Restitution= benefits received) there was a mistaken
delivery of coal to the government that was 2x the price of the coal that was ordered under
the K (lowest bidder deal). The recipient used the coal and the courts found an implied K.
The damages should be the benefits received (market value of the coal). The courts apply
the “as justice requires” clause § 371 (see Restitution) because the Indiana statute on bids
says that the state can’t legally pay more than the bid price. Makes an incentive to add a
risk premium when dealing with the government.
2. Equitable remedies available- the usual measure of relief is the benefit received by the
D, but courts also allow recovery measured by the detriment suffered by the P (if the
benefits are difficult to measure, or the result would be unfair).
a) Where there is no K involved, the courts must find: the P has conferred a benefit
on the D by rendering services or expending properties, the P had a reasonable
expectation of being compensated, the benefits were conferred at the express or
implied request of the D (P was not a volunteer), and the D will be unjustly
enriched by retaining the benefits without compensating the P
3. Damages awarded can be any of the three, but usually restitution or reliance
a) Restitution where P has conferred some benefit on D in their relationship
b) Reliance where P has relied on the performance of D and has suffered some form
of legal detriment to that effect.

*O+A+C= K

II. Consideration- price for enforceability in the courts


A. Legally enforceable contracts contain a bargained for change in legal positions between the
parties= valuable consideration.

B. Elements of Consideration
1. Bargained-for-Exchange: requires that the promise induce the detriment and the
detriment induce the promise, there should be a benefit to the promisor. Courts are
concerned with the legitimacy of transaction (esp. where the promise appears to be unfair
or taking advantage of the other party) § 71
a) Detriment is the relinquishing of a legal right. (an immediate act, forbearance,
partial or complete abandonment of an intangible right) It could be a promise to
forbear.
b) Benefit to the Promisor- shows that he got what he bargained for, economic
benefit to the promisor is not required
c) Gift- if either of the parties intend to make a gift, he was not bargaining for
consideration
1. Act of Forbearance by promisee must be of benefit to Promisor- If the
promisor’s motive was to induce the detriment, it will be treated as
consideration, if the motive was no more than to state a condition of a
promise to make a gift, there is no consideration.
Hamer v. Sidway- uncle promises money in return for nephew refraining
from things he had a legal right to do.
Kirksey v. Kirksey- after convincing his widowed sister-in-law to abandon
her property and move to his place, the D kicked her out. Court rules gift
because no consideration. It was not bargained-for
2. Economic benefit is not required. It could be something intangible like
peace of mind.
3. Applies to promises yet to be enforced
a) In donative promises, where the party unconditionally undertakes
to make a future gift and asks for and receives nothing in return,
there is no consideration
b) In a commercial exchange, the promise has clearly purchased for
an economically equivalent price which def has consideration

2. Adequacy of Consideration- (71 and 84)As long as a legal detriment has been suffered
in exchange for the promise the court usually will not inquire into its value in relation to
the promise, unless it is a court of equity. There does not have to be an equivalence in the
number of promises or performances provided by each party.
Batsakis v. Demotsis (Greek lady case)- P promised to pay $2000 American dollars later
for the equivalent of $35 in Greek money now. This is the cost of being poor. The courts
refused to determine the value of things given up for consideration.
a) Exceptions: the courts will inquire about adequacy when (1) there is a disparity
in exchange resulting from oppressive or underhanded bargaining or justifiable
mistake (like fraud or duress) and (2) the consideration is obviously nominal.
1> Token Consideration- where the consideration is only token, or
something entirely devoid of value, it will usually not be legally sufficient
2> Sham Consideration- when parties recite consideration of $1 or another
insignificant sum. Usually the recited sum has not been paid and was never
intended to be paid. Find no consideration
3> Possibility of Value- where there is possibility of value in the bargained
for act, adequacy of consideration will be found even though the value
never comes in existence
Seyferth v. Groves (Options to buy K are ok)– Farmer K w/ landowner to sell
passage through his property for RR. RR is to give farmer $1 and pay later for land
$40/acre. Farmer refuses acceptance of $1 and cites that K is invalid b/c of
inadequacy by way of no Consideration. Court holds that consideration was recited
in K so that is enough to hold the K valid. Option K.

b) Some courts take consideration at face value and find an implied promise to
provide the stated act or forbearance at some time in the future, or by estopping to
promisor from denying receipt of recited consideration.

3. Preexisting Legal Duty- traditionally the promise to perform of the performance of an


existing legal duty will not be sufficient consideration. However, any new increase in the
party’s detriment would be sufficient to constitute consideration. This is to prevent coerced
modifications.
a) Exceptions-
1. New or Different Consideration Promised- if the promisee has given
something in addition to what she already owes in return for the promise
she now seeks to enforce, or has in someway agreed to vary her preexisting
duty, such as by accelerating performance, there is consideration (doesn’t
matter how slight)
a) Modification- if the parties agree to modify their contract,
consideration is usually found to exist where the obligations of both
parties are varied. However, a modification solely for the benefit of
one of the parties is unenforceable (except under the UCC when
modification is sought in good faith). Must have clear evi
2. Honest Dispute as to Duty- if the scope of the legal duty owed is the
subject of honest dispute, then a modifying agreement relating to it will
ordinarily be given effect
3. Unforeseen circumstance- mere unforeseen difficult in performing is not
a substitute for consideration. But where the unforeseen difficulty rises to
the level of impracticability, such that the duty of performance would be
discharged
Blaskeslee v. Bd. Of Water Commissioners- K to build a dam, unforeseen
difficulty of WWI. Parties agree to new K2 for more money. Court affirmed
b/c parties did not know of difficulties at the time of K and there was an
effort to renegotiate. Ct allows even though it is new price for same work
(pre-existing duty). Extreme circumstances:
a) Contractor has to have a legit reason to seek adjustment of K
b) other side must vol. agree to K2 out of fairness
c) party is not trying to take advantage of other side
4. UCC § 2-209(1): states that an agreement modifying a contract subject to
the UCC needs no consideration to be binding. ONLY when both parties are
acting in good faith
5. Existing Debts- generally, payment of a smaller sum than due will not be
sufficient consideration for a promise by the creditor to discharge the debt.
Neither a legal detriment nor a benefit would be present. (if the
consideration is in any was new or different then sufficient consideration
may be found)

4. Mutual and Illusory Promises- consideration must exist on both sides of the K, both
must be bound (mutually obligatory). If one party is bound and not the other, the promise
is illusory—consideration fails. Mutuality can be found in these situations:
a) Requirements and Output Contracts- Requirements K (promise to buy all that I
will require) and Output K (promise to sell all that I manufacture) are enforceable.
Consideration exists, as the promisor is suffering a legal detriment; he has parted
with the legal right to buy or sell the goods he may need from another source
1. No unreasonably disproportionate quantities- compared with any stated
estimate or in the absence of any states estimate, to any normal or otherwise
comparable prior output or requirements
2. No previously established business- sometimes refused to enforce
agreements where the promisor did not have an established business
because there is no basis for estimating quantity, too speculative. The UCC
avoids this by a good faith agreement
3. Quantity is limited by an implied obligation of good faith or
reasonableness and by an implied obligation of exclusive dealing.
Discretion to If absolute No commitment= illusory
Order only what
Is required If subject to Commitment = not
Limitation illusory
Promise to pay for goods -good faith
Ordered and supplied -reasonableness
BUYER SELLER -exclusive dealing

Promise to supply all


Goods ordered No Discretion—absolute commitment

b) Conditional Promises- these are enforceable, no matter how remote the


contingency, unless the “condition is entirely within the promisor’s control”
1. Promise conditioned on satisfaction- a promise to buy if satisfied with
goods is not illusory since one cannot reject them unless dissatisfied. The
courts assume that the party would use his rights in good faith UCC § 1-304
c) Right to Cancel or Withdraw- at times an unqualified right is illusory, the
consideration is valid if in any way restricted (like right to cancel upon 60 days
notice). The UCC § 2-309(3) implies a requirement of reasonable notice even if it
is not specified in the K
d) Best efforts Implied- courts may find an implied promise furnishing mutuality in
appropriate circumstances- implied efforts to use best efforts UCC § 2-306(2). This
provision recognizes exclusive dealing and imposes a good faith and reasonable
expectations test on the party who determines the quantity. The quantity tendered
must not be disproportionate to any estimate, or if no estimate is given than the
comparable K
e) Options Contacts- enforceable because one has purchased time to decide, are not
objectionable on mutuality grounds
Great Northern Ry. v. Witham- Needs and req. K for D to supply P with all the iron P may
order from time to time. When it comes time for D to perform, D says no. P sues and D
claims that P never suffered any legal detriment b/c they were never under any obligation
to buy anything. This case wouldn’t be a valid K but for the court finding a needs and req.
The RR will have some needs and there is consideration.
Linder v. Mid Continental Gas- P owned a service station and had a K to lease said station
to D w/ D having a right to terminate w/ ten days notice. D terminated its sublease to P’s
husband (a separate K) after P2 started buying gas from a competing company. P
terminated her lease w/ D b/c D terminated sublease w/ the husband. D sued to recover
possession of the station. P claimed that D gave no consideration by the option to
terminate. Held: The ten days notice required by K was enough consideration to satisfy
mutuality of K, not necessarily the time but the payments that would have to be paid on the
lease during said time.
Scott v. Moragues Lumber- (conditional promises, condition precedent) if D buys shio,
then he will charter it to P. It is a condition precedent not an option because the condition is
a trigger for the K. D claims no mutuality b/c his promise was based on the purchase of the
ship, D does not have to buy so he is not bound. The consideration is found in that the K
can be valid if it depends on condition that is the will or wish of the D.
a) If you satisfy the condition, and the parties have bargained for the next or
second part, would there be consideration? If yes then there is mutuality
Loudenback- P agrees to buy “all the rick they need” from D for a specified time. They do
not buy any for 3 years b/c of market flux. Then P attempts to buy and D refuses. D claims
that P originally breached by buying crushed rock from another supplier. Court says that all
needs should be filed by D rock company so P was in breach. Could argue that rock and
crushed rock are 2 different needs (should have defined rock)
Empire Gas-(needs and requirement, best efforts) K for D to buy exclusively from P, set at
3,000 units more or less. D decides not to buy any (no needs) and therefore no
requirements from P. D argues that no quantity is disproportionate to terms and the buyer
is not bound by the terms so it is illusory. Court holds that D must make a good faith effort
to meet their K absent any showing of good business judgment for their decision not the
buy the units. There is not evi of good faith

5. “Past” or “Moral” Consideration- generally is not sufficient consideration, the parties


did not bargain for it. Although the detriment may have induced the promise, it was not
itself induced by the promise.
a) Exceptions-
1. Debt barred by a technical defense- if a past obligation would be
enforceable except for a technical defense ( statute of limitations) the courts
will enforce a new promise if it is in writing or has been partially performed
2. Promise to pay for past requested act- if acts been previously performed
by the promisee at the promisor’s request, it will be enforceable.
3. Terms of new promise binding- most courts will enforce the new promise
according to its terms, rather than the terms of any prior understanding

C. Substitutes for Consideration- certain substitutes for consideration can make an agreement at
least partially binding.
1. Promissory Estoppel (reliance)- used to refuse to allow D to deny that K exists. § 90- a
promise is enforceable to the extent necessary to prevent injustice if:
(i) The promisor should reasonably expect to induce action or forbearance
(ii) And such action or forbearance is in fact induced
(iii) Used as justice requires
There must be a promise and a detrimental reliance on the promise. It was primarily used
to validate gratuitous promises but is also used in commercial promises (promises made
with noncompliance with a legal formality, promise made during negotiations for an
abortive K, defect or omission in the K).
Elements:
A Promise +
The Promisor’s conduct and intent A reasonable expectation by the
promisor that it will induce reliance
The promisee’s reaction Promise does induce action or
forbearance (although §90 does not
say so, the reliance must be justified)

The Consequence: Detriment Injustice can be avoided only by


enforcement

Limits on Relief Remedy may be limited as justice


requires (the nature and extent of the
promisee’s reliance is relevant here)

Devecmon v. Shaw- Uncle says he will pay for nephew’s trip to Europe. He dies, and
estate refuses to pay b/c no consideration (no benefit to uncle). Court finds consideration in
nephew being induced to rely on the promise to his detriment.
Feinberg v. Pfeiffer- company awarded pension because of past services and wants her to
continue to work. Company later stops payment. Court finds that even though she was old,
she relied on the promise by giving up future jobs (forbearance). However she was an
employee at will and had no legal right to future job.

2. Promises in Writing
3. Promises to Pay legal obligations barred by law- Usually this new promise must be
in writing, or there must have been some part performance. The new promise is
enforceable only according to its terms, not the original obligation
4. Reaffirmation of voidable promise- if the incapacitated person affirms the K upon
attaining capacity, his promise at that time will be binding
5. Promises under Seal- common law

D. Duress and Coercion to gain consideration invalidates a K (175)


Post v. Jones (U.S. 1856). 196—A ship was grounded and three other ships came. The
ship had oil the others needed, so they decided to do an auction for the oil. Price ended up
as $1 per barrel. Owners of the grounded ship brought suit against the others later for
salvage (saved property). Auction was held to be invalid because the ship was in a helpless
situation where there was no market, money, or competition. Courts say not bargained for
instead of corecion or duress.
Mitchell v. C.C. Sanitation Co.- P was struck by a negligent driver causing injuries to him.
P signed a release not to sue the company of the driver. The release was the product of
negotiation between an appointee of P’s company and an insurance agent of D. P brought
action for damages later. P claims not bargained for, coerced and under duress. He is trying
to use his job rights as a threat, but as an employee at will he had none. You can threaten
what you have a legal right to do (except for criminal purposes like extortion).

E. Implied Promises and Best Efforts- sometimes a court will substitute an implied promise for
one that seems illusory on its face thereby satisfying the mutuality of consideration. (See
EMPIRE)
Wood v. Lucy, Lady Duff-Gordon- P had K with D for exclusive rights to approve designs
are spilt profits. She places her name on things without consulting him or sharing profits. D
claims no mutual consideration to give up her rights b/c P had no detriment (no express
promise for any obligation) so it was illusory. Court finds implied promise of best efforts
(like good faith) by the P to market D’s brand. Was it efficient?
a) YES- because finding implied promise makes parties enter into K to produce
not to sit around
b) NO- incentive for bad contracting, what are best efforts?
Bloor v. Falstaff Brewing- P had K to sell their brewery to D. K terms required “best
efforts” to sell the beer for 6 years and liquidated damages if D discontinued beer. Sales
went down, the marketing budget went down. P sues for breach of best efforts. Courts used
judicial descretion to determine remedy- comparing to other comparable brands. Court
finds that D did not use best efforts to promote the beer, but doesn’t entitle P to liquidated
damages.
a) K around: set amount to sell, royalties from all beer sales, series of K renewable
at every interval and adjusting to market price

F. Mutuality and Employment at will K- generally, employment K of indefinite duration is


considered terminable at-will, so employers/employees can terminate at any time w/o legal action.
1. State/federal statutes prohibit employer from discharging employee for certain for: race,
age, gender, handicap, union membership
2. Collective bargaining limits employers’ ability to fire
a) Provisions not to fire w/out just cause or for specific offenses
3. Courts have played an active role in limiting at-will doctrine.
a) Public policy
1> for refusal to violate the law
2> for whistleblowing
3> for insisting on a right granted by statute
4> distinguish b/t public policy concerns and private, individual grievances
Belline v. K-Mart – P was a manager at K-mart, he blew the whistle on his manager and was fired.
His only K was an employment at will K. Court held that it was not proper to have fired P, citing
public policy concerns of protection of whistle blowers. Dissent finds that ignoring employ at will
K is inefficient and P could have done things differently and saved his job.
b) Contract Analysis (Really an Estoppel Analysis)
1> Express terms—written statements in the employee handbook
2> Implied terms—faithful service, commendations, promotions over years
then sudden termination
a. Probationary hiring—employee that survives probation period has
been implied promise of job security
c) Implied covenant of good faith and fair dealing (2-203) (2-302) (§ 208)
1> construction—to prevent employer from exercising right to fire in such a
way as to deprive an employee of promised benefits
2> rarely used to prevent employer from firing w/out cause
d) Liability imposed on ground of tort opens the door to punies and emotional
damages
e) Model Termination of Employment Act—if an employee has worked w/ the
same employer for one year, can’t be fired without good cause
1> employee misconduct
2> poor job performance (assistant manager had poor job performance as
snitch and high cost bearer)
f) Courts find mutuality of C in that employee has held job and employer has paid
him

III. Defenses to Enforcement


A. Statute of Frauds- certain agreements, by statute, must be evidenced by a writing signed by
the parties sought to be bound. Otherwise the court will not enforce the K. Writing is a best evi
rule. It reduces information costs. K are either within the statute of frauds or not within the
statute.
1. Agreements Covered (must be in writing). Within the statute, and subject to it.
a) Executor of Admin promises personally to pay estate debts (out of his own
funds) must be in writing
b) Promises to pay debt of another- must be a collateral promise to another’s
promise to pay and not a primary (or original) promise to pay and the main purpose
of the promise must not be pecuniary interest of the promisor
1> Give him the goods and if he does not pay, I will= a collateral promise.
However, give him the goods and I will pay is a primary promise
c) Promises in Consideration of Marriage- this applies to promises that induce
marriage by offering something of value (other than a return promise to marry)
d) Interest in Land- this includes not only agreements for the sale of real property
or an interest therein, but other agreements pertaining to land. (§ 125-129)
1> Interest in land includes: sale of real property, leases for more than one
year, easements of more than one year, fixtures, minerals or structures if
they are to be severed by the buyer and mortgages
e) Performance not within one year- a promise that by its terms cannot be
performed within a year is subject to the statute of frauds (§ 130)
1> Date runs from the date of the agreement (not performance)
2> If there is possibility of completion within one year, it is not within this
provision
3> If both parties are allowed to termination within a year, the majority
opinion is that non-performance is not performance within one year, so it is
still within frauds (minority says it was outside)
4> Lifetime contracts- promise that is measured by a lifetime is not within
the statute because a person can die at any time
f) Sale of Goods Priced $5000 or more- not enforceable unless evidenced by a
writing signed by the party to be charged. (UCC §2-201(1)). Goods= all things that
are movable at the time of ID to the K of sale
1> Code permits enforceable oral K for the sale of goods of $5000 or more
when: the goods are to be specially manufactured for the buyer (and are not
suitable for sale to others) and the manufacturer has made a substantial
beginning on their manufacturing or commitments for procurement before
repudiation is received
2> Oral K for goods is enforced where there is a written confirmation
between merchants (2-201(2))
3>Admissions in pleading or court
4> UCC expressly makes a “no oral modification” clause enforceable.
2. Requirements- any writing will suffice as long as it contains every essential term of the
oral or implied agreements (ID the party sought to be charges, Id the K’s subject matter,
terms and conditions, recital of consideration, signature of the party to be charged).
3. M- marriage
Y- year or more
L- land
E- executor
G- goods over $5000
S- Suretyship made with the creditor
4. Part Performance takes a K outside the statute of frauds.
5. Equitable estoppel can help enforce the K when P relied in D’s misrepresentation to not
put K in writing.

IV. Discharging the K


A. Novation- occurs where a new contract substitutes a new party to receive benefits and assume
duties that had originally belonged to one of the original parties under the terms of the old K. A
novation will serve to discharge the old K.
1. Elements
a) A previous valid K
b) An agreement among all parties, including the new party to the new K
c) The immediate extinguishment of contractual duties as between the original
contracting parties
d) A valid and enforceable new K

B. Accord & Satisfaction-


1. Accord- an accord is an agreement in which one party to an existing K agrees to accept,
in lieu of the performance that she is supposed to receive from the other party to the
existing K, some other, different performance
a) Requirement of Consideration- in general, an accord must be supported by
consideration. Where the consideration is lesser than the old K, then it will be
sufficient if the new consideration is of a different type or if the claim is to be paid
to a 3rd party
b) Partial Payment of Original debt- sometimes the offer of a smaller amount than
the amount due under and existing obligation in satisfaction. Usually this will only
suffice as accord and satisfaction if there is a “bona fide dispute” as to the claim or
there is otherwise some alteration in the debtor’s consideration
c) Effect of Accord- if taken alone, it will not discharge the prior K, it merely
suspends the right to enforce it
2. Satisfaction- the performance of the accord agreement. Its effect is to discharge not only
the original K but the accord K as well.
3. Checks Tendered as “Payment in Full”- if a monetary claim is uncertain or is subject
to a bona fide dispute, an accord and satisfaction may be accomplished by a good faith
tender and acceptance of a check when that check conspicuously states that the check is
tendered in full satisfaction of the debt
C. Accounted Stated

V. Interpreting the Contract


A. Parole Evidence Rule- in K a writing generally prevails over any oral evidence. (§ 2-209) this
is a rule of substantive K law. If is designed to carry out the apparent intention of the parties and to
facilitate judicial interpretation by having a single clean source of proof (the writing) on the terms
of the bargain. Where the parties to a K express their agreement in a writing with the intent that it
embody the full and final expression of their bargain (integration), any other expressions- written
or oral- made prior to the writing, as well as any oral expressions contemporaneous with the
writing, are in admissible to vary the terms of the writing.
1. Integration- the writing must be an integration of all agreements between the parties
a) Intended as a final expression- the more complete the agreement appears to be in
its face, the more likely it is that it was intended as an integration
b) A Complete or Partial integration- If the integration is complete, it may not be
contradicted or supplemented by parole evidence. If it is only partial, it cannot be
contradicted, but it may be supplemented by proving up consistent additional terms.
If the agreement contains a merger clause reciting that the agreement is complete
on its face, it strengthens the presumption that all negotiations were merged in the
written document. If the writing is unintegrated (no terms are fully and clearly
expressed) then parole evi may be admitted to supplement or explain the writing,
but it may not contradict
c) WILLISTON TEST: would parties situated as were these parties to this K
naturally and normally include the extrinsic matter in the writing? If such
reasonable parties would have included the matter in writing, evi of the extrinsic
matter will not be admitted. On the other hand, if the judge determines as a matter
of fact that normal parties would not have included the extrinsic matter in the
writing, evi of the mater may be introduced.
d) 4 Corners test: if the writing interpreted as a whole in accordance with the plain
meaning of the land used, appeared to be a full, final, clear and unambiguous
expression of the agreement, it is deemed integrated.
2. Extrinsic Evidence outside the scope of the rule- the rule prohibits the admissibility of
extrinsic evi that seeks to vary, contradict, or add to an integration, but other forms of
extrinsic evi that do not bring about this result will be admitted.
a) Attacking Validity- (K in its entirety) the party acknowledges that the writing
reflects the agreement but asserts that the argument never came into being because
of formation defects (fraud, duress, mistake, illegality), conditions precedent
(where the K would not become effective until a condition occurred, all evi of the
understanding may be offered and received)
b) Interpretation- if there is uncertainty or ambiguity in the agreement’s terms or a
dispute as to the meaning of the terms. It can explain terms, but not alter
c) Evidence of true consideration
d) Reformation- where the party alleges facts entitling him to reformation of the
agreement, the rule is inapplicable because the P is asserting that the terms do not
in fact constitute an agreement. He must show that there was an antecedent valid
agreement that is incorrectly reflected in the writing (mistake). The evi must be
clear and convincing. There was a subsequent modification. There is a clear oral
contract supported by consideration or a substitution of the first.
3. Collateral Agreements- even the finding of a completely integrated agreement doesn’t
preclude a showing of a collateral agreement (an entirely separate and distinct agreement
b/n the same parties). in certain cases, courts have suggested that extrinsic evi is admissible
to show agreements b/n the parties that are “collateral” to the transaction otherwise
evidenced by an apparently integrated writing. If an agreement is “collateral” it obviously
must be an agreement that parties situated as the parties to this K would naturally and
normally not include in the apparently integrated writing.
4. 3 Requirements before oral agreement will be allowed:
a) agreement must be collateral
b) 2nd agreement must not contadict express or implied provisions of the written K
c) must be one where the parties would not normally be expected to embody
the wanted terms in the K writing
5. Conditions Precedent

VI. Unconscionability (K 44) §208- unclear test, can invalidate, weakness in bargaining position.
An unconscionable K must have: 1) lack of adequate opportunity for dealer to review K 2) inability to
understand the provisions of K 3) lack of opportunity to seek a lawyer’s advice. If these things are there,
there is probably coercion.
A. Termination of Dealerships/ Franchiser
1. Look at 2-309(3)—Terminator must give reasonable notice and no bad faith 1-203, §205
a) Argue Yes—Dealer is at mercy of manufacturer
b) Argue No—Parties are obligated to perform at least something
2. Attempts by dealers to invoke unconscionability in order to prevent termination of their
dealerships have generally been rebuffed.
Smith v. Price’s Creameries—court held that P was educated and that no evidence was
given to show lack of opportunity to review the fine print of the K
3. Some courts infer in the absence of any express provision in the agreement that the
dealership was intended to last long enough to give dealer an opportunity to “recoup his
investment” in the business.
Schultz v. Onan Corp.—terminated dealer may recover his unrecouped expenditures,
but he may not recover damages for the lost value of his business or for lost future profits
4. A number of states now restrict a franchisor’s right to terminate ongoing dealership
arrangements.
a) Ex. Wisconsin Fair Dealership Law—prevents franchisor from canceling, failing
to renew, or substantially changing the competitive circumstances of a dealership
agreement w/out good cause
5. Federal level you have the Automobile Dealers’ Day in Court Act
a) Argue Yes—2-306
b) Argue No—Best effort is the problem not the solution, proof is a subjective area,
termination is always for a good cause
c) Gives dealers cause of action for damages by reason of the failure of the
manufacturer to act in good faith in terminating, canceling, or not renewing the
franchise with said dealer
d) Good faith is an issue
1> Must show coercion or intimidation
e) Petroleum Marketing Practices Act of 1978
1> protection extended to franchised distributors and retailers of gas
2> prohibits termination or failure to renew for any grounds other than
those set out in the statute

VII. Liquidated & Unliquidated Damages


A. Liquidated Debt – debt that is mature, due and no dispute exists as to its amount. In damages
for a breach, damages become liquidates once the breach has occurs and the damages can be
calculated by arithmetical means.
1. Only unliquidated debts can be modified.
2. The seller may take an offer to settle debt and that acceptance will be enforced only in
the case of liquidated debt.
3. A check sent for a liquidated claim, even if marked “full payment”, will not be
enforceable as a settlement for debt.
4. Ex. Paying rent on an apartment.
B. Unliquidated debt – debt that is unsure, i.e. amount is in dispute
1. If all claims are set in concrete and debt is sure then no modification may take place.
2. Fisheries case (Payment in Full Case)–a fish packing company made an agreement to
buy excess fish from a fishery. When the amount went well above the estimated agreement
the packer attempted to decrease price by giving fishery a check for a lesser amount.
When Fishery accepted this modified amount the debt was cleared. Why, b/c debt was
unliquidated, i.e. it was not explicitly spelled out in the K. Also an intro to accord and
satisfaction.
3.Restatement §73 and §74(1)(a)—where is consideration element Can debtor always mark
payment in full and have satisfaction, no only if an unliquidated claim (Rule on 305); 2-
306(1)—estimates were disproportionate

C. Only way that a payment for a liquidated debt can be enforced is if Buyer can show that the old
K was mutually discharged and K2 was substituted
1. This is a hard burden to meet
2. Clear and convincing evidence of discharge and new K required.
D. Change of tenor in agreement
1. If A owes B $500 by Dec. 15. B agrees to accept $300 as full payment if A agrees to pay
before Nov. 15.
2. That is a promise supported by consideration b/c of time value of money detriment.
3. Same as change in duties as above.
E. Analyzing a liquidation problem
1. Ask first if K1 is liquidated debt—one presently due for which there is no legitimate
dispute (All terms are agreed upon); How do you find new consideration? (Illustration on
289); key in this area is if a creditor is merely releasing a clear claim, there is no
consideration, debtor looks for consideration