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Chapter 1: A Roadmap for Contract Law

Lucy v. Zehmer Objective theory of contract is used to determine if an enforceable contract had been formed; that one of the
parties subjectively did not intent to form the agreement does not matter
FACTS: P and D were in a bar and P agreed to sell his farm to D through written agreement; D says that it was a serious transaction; P
says that it was done in jest or as a way to cajole D; the written agreement was made on the back of a service check and both parties
had been drinking
 Was an enforceable contract formed?
 Yes, an enforceable contract was formed by the parties
 In order to determine if a contract is formed, we use the “objective theory of contract” and rely on outward manifestation (i.e., the
words and actions of a person), not their subjective, possible, secret, and actual intent
 Law versus equity
o P is seeking specific performance for the sale of the farm, which is done under equity
 Note that in most cases an injunction is just a prelude to forced negotiation since it is a property rule that can be
sold for a price that is acceptable to the owner
o Court of equity allows for the possibility of looking into the wider circumstances surrounding the case to see if there is an
overall fair result because equity is the “King’s conscience”
 Remedy in breach of contract is almost always damages
o Usually breach of contract claims outside of the sale of land or where the goods are in some way unique are not given
specific performance
o Contract law prefers damages
 Because it is easier to administer and oversee in that the court does not need to follow up with the parties
 Because all of the reasons discussed under the economic theory of efficient breach of contract
 But an injunction is given for real estate since each parcel of land is deemed to be so that unique that
mere damages would not be adequate
 Equity may consider the fairness of the deal
o If $50,000 was actually a terrible instead of a good price, there may not have been an equitable enforcement, since the
court of equity can consider fairness, but P could still get damages
o What determines fairness?
 Does each party have the same information?
 Does each party have equal bargaining power?
 In principle or in fact?
 But we also want to reward P for the creative idea that he came up with
 i.e., Buying the land from farmers and selling the timber to make a profit
 He should not have to disclose all of the information about how he is going to re-sell land later for profit
 Knowledge is different than bargaining power
o And note that if a deal is so unfair as to be unconscionable, the court in equity may not enforce the contract at all, let
alone grant specific performance
 Definition of contract
o R2d 1: “A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of
which the law somehow recognizes as a duty”
 Objective theory of contract formation
o R2d 2: “A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a
promisee in understanding that a commitment has been made”
o What courts care about is the outward manifestation of assent (objective) not the actual assent of the parties (subjective)
 In one sense, “the actual mental assent of the parties is not a prerequisite for the formation of a contract”
 Rather, we determine if a contract is formed based on the objective perception of the situation
 “Agreement or mutual consent is of course needed, but the law imputes to a person an intention corresponding
to the reasonable meaning of his words and acts”
 So a party cannot just say that you were bluffing and were not serious when it seems like you were
 Learned Hand on the objective theory of contract:
 “A contract has, strictly speaking, nothing to do with the personal or individual intent of the parties. A
contract is an obligation attached by the mere force of law to certain acts of the parties, usually words,
which ordinarily accompany and represent a known intent. If, however, it were proved by twenty
bishops that either party when he used the words intended something else than the usual meaning
which the law imposes on them, he would still be held, unless there were some mutual mistake or
something of that sort.”
o e.g., Objective theory of contract in Lucy v. Zehmer
 D says that his intent was not to form an actual contract, the intent was to make P admit that he did not have the
money necessary to buy the land and therefore embarrass P
 But Court says that from an objective standpoint, it seemed like D’s intent was to form the contract
 But note that the court (as do many courts) gets mixed up in pointing to the activities that P did showing
that P thought that a contract had actually been formed
o Really, the court should consider whether a reasonable person would have thought that a
contract was formed, not if P subjectively thought that a contract was formed
 Since Lucy was (arguably) not being reasonable, giving the drinking at the bar and
the nature of the transaction, it is arguable that a contract was not formed under the
objective theory of contract
 This is essentially D’s argument
o A bar on Christmas eve where everyone has been drinking is not
the sort of place where large land sales are made, this is just not
the right setting and it was not reasonable for P (or the court) to
think that a contract was formed under the objective theory of
 Benefits of objective theory of contract
o Contract can be formed between an electronic agent and person
 Do not need two real people
o Easier to determine if contract is formed
 Do not need to spend resources on determining mental state of the parties like you must in criminal law
o BUT problem is with form contracts
 It may not be appropriate to continue to presume that the parties meant what they signed or what the objective
theory of contract would assume that they agreed to
 Problem 1-1 (Pepsi case)
o Court says that when viewed objectively, it was clearly a joke and not a serious offer to form a contract; it does not matter
if P thought that it was real (or if D thought that it was not, for that matter); it is the objective viewpoint that matters
 Bluff or dare versus a joke
o A bluff or dare is more serious and more dangerous since it has the appearance of objective seriousness
o A joke is somewhat safer since an objective viewer might more clearly see that there is no manifested intent to contract
o When someone appears to be making a serious promise, the intent to contract is presumed unless the more general
social context of the promise suggests otherwise
 e.g., I will agree to go for drinks if you agree to go for drinks after someone just invited you while at dinner
 Contract/no contract dichotomy
 Expectation interest?
 Reliance interest?
 Restitution interest?
o All that is needed to form a contract is the expectation interest
 Once this has occurred the unilateral power to withdraw from the arrangement is gone
 e.g., D tries to repudiate contract after its formation by saying that it was “only beer and liquor talking”
o But at this point it is too late; the contract has become binding merely on expectation interest
o Bright line rule makes things clear and lets people know that they should think seriously about the contract beforehand,
and on their own time, instead of the courts
o Once you cross the line of contract/no contract, you cannot go back without the consent of the other party
 e.g., Giving of $5 in order to create restitution interest is actually superfluous since the contract is binding on
expectation interest alone
 We call this “earnest money”
o But if the $5 is accepted, then restitution interest comes into play and it adds to the “moral
argument” that a contract was formed
 Although it does not matter legally, we think at least that the contract is “more
binding” than it otherwise would have been
 e.g., That P secured financing from his brother and hiring an attorney, etc. is reliance interest, but again it is not
needed to make the contract enforceable, because it is enforceable on the expectation interest alone
 Legal capacity (or lack thereof) and effect on contract formation
o Law intervenes for classes of people that are incapable of legal action
o General rule is that a contract is voidable if made by someone without the legal capacity to conclude a contract (R2d 12)
 Persons affected by guardianship (R2d 13)
 Persons who for some reason are under the guardianship of another (because mentally ill, etc.) cannot
incur contractual duties
 Persons under 18 “infants” (R2d 14)
 Can only make a voidable contract
o Can disavow the contract at any point and for any reason until they turn 18 (in most states)
 Why parents have to sign things on behalf of the child
 This is for the protection of children
 Mental Illness (R2d 15)
 Contract is voidable if person “is unable to understand in a reasonable manner the nature and
consequences of the transaction” or is “unable to act in a reasonable manner in relation to the
transaction and the other party has reason to know of his condition”
 Intoxication (R2d 16)
 Contract is voidable because of drunkenness or other intoxication, but it must be very high level of
o Person must be “unable to comprehend the nature and consequences of the instrument
o Rule is “where there is some understanding of the transaction despite intoxication, avoidance
of the contract depends on showing that the other party induced the drunkenness or that the
consideration was inadequate or that the transaction departed from the normal pattern of
similar transactions; if the particular transaction in its result is one which a reasonably
competent person might have made, it cannot be avoided even though entirely executory”
 Note that the “fair price” given for the farm was one reason that the court in Lucy v.
Zehmer found that a contract had been formed and D was not too drunk to form the
 If the price had been for $10,000, the court may have found that the contract
was voidable
 Different forms of contractual interest
o Expectation interest
 Expectation interest is secured from the time immediately after the formation of the contract where neither party
has changed his position based on the contract
 Sufficient in and of itself to be binding
 Makes the contract/no contract dichotomy extremely stark
 Parties have very little legal protection before the contract is formed and lots of legal protection
immediately after it is formed
o But note how the modern trend has diminished this line somewhat
 It is the interest that that party has on seeing the contract fully performed
 Why we enforce contracts from expectation interest alone
 There is a reliance interest in the expectation interest, which is different from the reliance interest in the
sense that a party has relied on the contract (or a promise in the case of promissory estoppel), because
the entire reason that we enforce expectation promises is so that people can rely on contracts and the
promises that they contain in making their plans, and setting their business opportunities, etc.
 And it is very difficult to prove this sort of reliance, since it is so interwoven into the idea of forming the
contract in the first place, so we assume that parties do in fact rely in this sense and therefore do not
require proof of this reliance (since much of the time it would be proof of inaction anyway)
o Reliance interest
 Reliance interest is secured when at least one party has expended time, money, and other resources based on
the contract
 e.g., P in Lucy v. Zehmer spent money on a title search and took the time to get financing
 Although expectation interest alone is enough to enforce a contract, with reliance interest the moral support for
enforcing the contract becomes stronger
 Reliance interest will also factor into damages, since they will add reliance damages for the expenditures made
in reliance on the contract
o Restitution interest
 Restitution interest is secured when one party profits at the other’s expense
 e.g., P in Lucy v. Zehmer gave $5 to D
 Like reliance interest, restitution interest is not needed to make a contract enforceable and is therefore
superfluous in terms of making contract enforceable, but it adds to the moral argument for enforcing the contract
 It also can add evidentiary support to the party trying to show that a contract was in fact made absent other
 Note also that a party may get restitution if there was in fact an unenforceable contract, to the extent that one
party was unjustly enriched by the other
 Appellate court should not probably have re-found the facts found by the trial court
o From a procedural perspective, it is somewhat problematic that the appellate court re-found the facts and made its own
determination of the situation after the fact finding trial court had already adjudicated the situation
 Compliance with the Statute of Frauds
o In Lucy v. Zehmer, P needed the contract to be in writing since it was a sale of an “interest in land” and this is covered by
the SOF
o Without this writing, the contract would not have been enforceable
 Must only be signed by the person against whom enforcement is sought
 This is why only D needed to sign, and not P, since P knew that D would not try to enforce the contract
against P
 Restatements of Contracts
o First restatement introduced in 1932
 Very clear and dogmatic about the common law rules of contract
o Second restatement in introduced in 1981
 More relaxed due to the influence of the UCC

NIPSCO v. Carbon County Coal The possibility in the change in the price of the coal was an element of the bargain, and P
cannot invoke force majeure, impracticability, or frustration to get out of the agreement; P took a bet that the price would rise
and lost, and now it must deal with it; this is why he have long term contracts, to ensure stability, but they can become
difficult when the underlying circumstances change
FACTS: P agreed to a long term contract to buy a certain amount of coal at a fixed price; the price could be changed through an
escalator clause, but it could only go up, not down; the price of coal dropped and it became uneconomical to continue to purchase the
coal at the price of the contract, especially since P could not pass on cost to rate-payers because the public utility commission refused
to allow for a rate hike; P stopped accepting the coal or paying for it
 Could P invoke force majeure, impracticability, or frustration to end the contract? Is the remedy damages or an injunction?
 The public service commission’s refusal to allow a rate hike was not force majeure and does not merit any other judicial imposed
condition (impracticability); damages are appropriate, not an injunction
 P assumed the risk of a drop in price and the inability to pass on the cost, and it must live with the consequences; if we did not
hold P to its agreement, the long term stability of making a contract is undermined; damages are appropriate because otherwise
the injunction would just be sold anyway (and at a higher price probably, since P would pay even more to get out of the contract
since it would still be a better deal for it) so it is a means of exploitation; the workers were not third party beneficiaries to the
contract, so that they will no longer have their jobs makes no difference, they were only incidental beneficiaries
 The law will not help the stupid and gullible especially if they are commercial actors with counsel, etc.
o In the law of contract, we have a sense that the law will not always step into protect the stupid and gullible people
o And we certainly don’t feel bad for not helping stupid gullible corporations with counsel who are assumed to be
sophisticated actors
 Long term contracts have merits and problems
o Problem with long term contracts is that the presumptions on which they are based may change dramatically and the
parties could get screwed
 NIPSCO took the risk that the market would fall, and they lost
 Note that this contract was made in the context of the 1970’s oil embargo and associated economic turmoil
o Long term contracts are good because the set the framework for a long term deal and allow parties to rely on them to
make other transactions and grow their business without fear of uncertainty
o Long term contracts are bad because the longer the contract the more likely that an event will occur that was not
considered by the drafters and will make the contract difficult to continue, and then the parties will be lead to litigation, and
the court may need to permit one party to get out of the contract, but then this undermines the stability offered by long
term contracts in the first place
 What to do when the assumptions change dramatically?
o What do we do when the assumptions on which the contract was made radically depart from what they initially were?
 Sometimes the parties will have thought about such an occurrence and include it in a force majeure clause
o Will the courts bail out the parties when a black swan comes along?
o If the parties did not allocate the risk of the change in the basic assumption on which the contract was made, one route to
take is to determine which party is the better insurer, and probably make that party liable
 This is essentially what the court does when it uses the doctrine of impracticability and frustration
 Force majeure
o Specifically enumerated events that allow one or both of the parties to back out of the contract
 e.g., War, political upheaval, natural disasters, other “Acts of God”
o NIPSCO argues
 Contract entitles it to withdraw because of government intervention as defined in the contract as force majeure
 It claims that the public service commission prevents utilization of the coal, but this is not what the
public service commission said—it only said that you cannot utilize the coal and raise the rates; so it
just made it expensive for the company
 It would be different if the public service commission said that they could no longer burn coal at all
 Impossibility/Impracticability/Frustration
o Impossibility
 Old common law term, now impracticability is used because the event does not need to be physically impossible
to invoke the doctrine
 When judges interpolate terms into a contract that deal with super remote contingencies that the parties could
not have expected and are therefore NOT included in the force majeure clause, so it is sort of like the judicially
imposed force majeure
 Terms that the parties would have agreed on explicitly if they had the time and foresight to deal with every
possible remote contingency
 The decision as to which party should be allowed to not perform his portion of the contract should be based on
which party is better able to bear the risk
 Which party can better prevent non-performance or insure against it if non-preventable, either the
promisor of promisee as regards each component of the deal
o Impracticability
 Modern term for the old doctrine of impossibility
 UCC 2-615
 Incorporates principle of impossibility as “impracticable” and deals ONLY WITH THE SELLER,
 “Delay in delivery or non-delivery in whole or in part by a seller who [takes certain action] is not a
breach of his duty under the contract for a sale if performance as agreed has been made impracticable
by the occurrence of an contingency the non-occurrence of which was a basic assumption on which the
contract was made”
 R2d 261
 Language similar to UCC but deals with both buyer and seller
 “Where, after a contract is made, a party’s performance is made impracticable WITHOUT HIS FAULT
by the occurrence of an event the non-occurrence of which was a basic assumption on which the
contract was made, his duty to render that performance is discharged, unless the language or the
circumstances indicate the contrary”
o Frustration
 R2d 265
 Language is almost identical to that of impracticability
 “After a contract is made, a party’s principle purpose in making the contract is substantially frustrated
without his fault by the occurrence of an event, the non-occurrence of which was a basic assumption on
which the contract was made”
 Usually this is where it does not make sense for the buyer to perform his part of the agreement
o e.g., Henry v. Krell, where the person did not have to pay to rent the apartment when King’s
coronation was postponed because he was sick, since the apartment was worthless to him for
that day at that point
 No easy escape hatch
o Posner says that you cannot just use force majeure or impossibility/impracticability or frustration as an escape hatch
when the risk was taken into account as a pricing mechanism, because otherwise the utility of long term contracts would
be undermined
 So a huge amount of weight is put on the draftsmanship
 BUT it is always hard to know if the risk is taken into account or not, IS IT ALL INSIDE, even if it is only
 Specific performance or damages?
o Carbon County wanted specific performance, not damages, and it argues that this would be better for the miners, since
they would be able to continue to work
o But there is a preference for damages in contract law
 Because the court does not need to oversee administration
 Because here it is an efficient breach and it would be inefficient to have Carbon County to continue to make coal
at the price that it costs them to mine, this would be an inefficient allocation of resources
 Contracts do not take social effect into account (incidental third party beneficiaries)
o Should we take into account the contract’s effect on the world?
 e.g., Loss of the jobs for the mine workers?
o We do not usually take the social context into consideration
 There is no such thing as an “incidental (or unintended) third party beneficiary doctrine”
o And, practically speaking, if an injunction were given, it would likely be sold for a higher price anyway, and this would
therefore not help the workers
 Since it is a property right that Carbon County would eventually sell when the price was good enough
o And to keep mining coal inefficiently would only force costs up for Indiana consumers who would then be sending money
to Wyoming, and this is arguably just as “unjust” as the miners losing their jobs
 UCC provision on damages
o NIPSCO’s termination may or may not have been a complete breach
o Trial court held that it was a complete breach and damages were thus awarded through UCC 2-708
 When determining damages due to the seller from the buyer, the court should use UCC 2-708
 (1) “Market differential” rule
o Damages are the difference in the market price at the time of place of tender and the unpaid
contract price together with incidental damages, but if this not sufficient;
 (2) “Difference measure” rule
o Damages are the profit that the seller would have made had the buyer fully performed,
including reasonable overhead and incidental damages
o Trial court used (2) because it is impossible to know the market price of coal for the duration of the contract
 Uniform Commercial Code (“UCC”)
o Exists in all states except for Louisiana
o Covers the “sale of goods”
o Different provisions for merchants as compared to non-merchants in some instances
o Note that the R2d borrows a lot from the UCC
 United Nations Convention on Contracts for the International Sale of Goods (“CISG”)
o Usually covers non-consumer transactions between parties that are based in different signatory states
o Hybrid of common law and civil law
 Fault does not matter
o Unlike in tort law, fault does not matter in adjudicating a breach of contract
o Rather, SL is the governing theme of contracts
 There are some exceptions, however, such as for professionals, who are usually held contractually liable only for
negligence unless they promise very specific results that then do not occur
o But note that fault does come into play on the margin
 e.g., Peevyhouse and determining damages, or Jacob & Youngs and determining adequate performance and

Why People Make Contracts and Other Basic Points

 Contract law is relatively new on the scene
o Some reasons why there was not contract law before 1600
 Life was more immediate
 Life was more local
 Persons had less independence to take free actions
 e.g., Persons were bound as serfs, etc.
o Social norms used to enforce agreements, but now since we are isolated and globalized and how no collective social
norms that bind us, we need to create them though contract law
 Main benefits of contract
o (1) Secures the future for the parties in light of economic or social uncertainty
 Allows parties to create their own reliance interest through contract
o (2) Allows for planning and allocation of resources
 This leads to more sophisticated options for wealth creation
o (3) Allows for risk allocation
 Transfers risks to those who are better able to bear them and insure against them and therefore prevents the
derailing of economic enterprise because of an unlikely event
o (4) More efficiency is gained when risks and burdens can be allocated to the party that is best able to bear them
o (5) Limits state intervention
 By contracting, parties can create their own law free from the intervention of the state’s default rules, which may
not serve their purposes very well
 Contract issues are always interrelated
o Contracts issues and doctrines are all interrelated
o There are lots of “balls in the air at once” and it is often difficult to assign them to different categories
o Not as easy to classify everything doctrinally
 Contract law under attack from tort law and regulations?
o As increased regulation has curtailed the freedom of contract, in some respects, contract law is being absorbed by tort-
based remedies statutory regulations and remedies
 Some ways that the freedom of contract has been under attack from tort law and regulations
 Increased use of reliance to enforce contracts
 Increased use of punitive damages for breaches of contract that “rise to the level of tort”
 Increased use of tortious interference with contracts
 Increased occasions where a third party makes a tort claim, as well as a contract claim, when he is
harmed by the breach of a contract between two other parties
 Increased emphasis on the role of good faith in contract performance
 Increased use of unconscionability
 Increased use of public policy
 Implied warranties
 Consumer legislation
 Statutory caps

Chapter 2: The Bargain Theory of Contract

 A contract is an “enforceable promise” NOT an “agreement”
 In the common law, a contract is NOT thought about as an agreement
 Rather, it is thought about as an ENFORCEABLE PROMISE
o Examples of where the difference matters
 e.g., A cash sale would be an enforceable contract in Europe because there is a present agreement, but not in
Anglo-American law because there is no future promise
 Since is a situation where both parties have just performed and there is no promise on either side
 e.g., An offer to reward is an enforceable contract in Anglo-American law because there is a future promise, but
not in Europe since there is no present agreement
 It is important to enforce promises because it is the means through which we can extend credit
o We enforce promises because it is the means through which we can extent credit, and this permits for exchanges
between persons that cannot be immediately completed, allowing for stability and performance of larger and more time
intensive tasks where necessarily one side will give credit to the other
 e.g., Either the builder will build on credit or the owner will pay on credit of the builder building
o Owed versus owned
 And note that this is different from credit alone supporting the right to the return of the thing extended
 e.g., If the owner pays the builder but the builder does not build, the primitive (and more tort like) idea
was that the builder would be unjustly enriched with the owner’s money and that the owner could sue to
get back the money that he owned, rather than that idea that the owner could get the money because it
was what he was owed
 So in a sense restitution is the proto-version of contract, that still has residual coverage
 What promises should we enforce?
o In the common law, we being with the premise that no promise are legally enforceable and then carve out areas where
promises are enforceable
o In general, we only enforce promises that we think are serious, and the test that we use in most instances for seriousness
is consideration
 What are the criteria for enforceability of a contract?
o Form
 Has been used in the past
 e.g., Contract under seal, which is still accepted in MA
 e.g., Dougherty v. Salt
o Aunt tried to make the promise enforceable through using formal language and a seal
 But it was NOT enforceable since it was just a promise to give money, and there was
no consideration
 It was just a “gift promise”
 UCC 2-203 abolishes the promise enforceable because of under seal
o Consideration
 This is the basic criterion that we use today
 Bargain theory of contract
o There must be consideration in order to form a contract
o If there is no consideration than it is just a naked promise and it is not enforceable
 But there are exceptions for reliance and restitution
 Consideration is of intermittent significance; it is usually easy to spot, but it will often show up as an
issue at awkward or inconvenient times
o Definition of Consideration (R2d 71)
 (1) “To constitute consideration, a performance or return promise must be bargained for”
 (2) “A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise
and is given by the promisee in exchange for that promise”
 (3) “The performance may consist of
 (a) An act other than a promise
 (b) A forbearance
 (c) The creation, modification, or destruction of a legal relation”
o So the basic organization of a contract today (with exception for reliance and restitution)
 Contract  (is an) enforceable promise  (which requires) consideration  (which comes from a) bargain or
A. Consideration
Hamer v. Sidway Consideration is a subjective concept; the court is not going to use the doctrine of consideration to make
sure that the contract was fair; what the courts are looking for is an exchange, and if that is present, the contract is
FACTS: D promised P that he would give him money if he did not drink or smoke; P adhered to the prohibition without ever making an
agreement with D; D then refused to pay arguing that there was no consideration paid by P
 What constitutes consideration? What is a unilateral contract?
 Restraint of P’s right to drink and smoke constituted the consideration; it is not necessary that the consideration actually be harmful
to one party or benefit the other party; it is only necessary that there was an “exchange”
 This was a unilateral contract, since the consideration offered by P was not the promise to do something in the future, but actual
 The court is not going to step in and determine if the consideration was equal or not; the parties are free to bargain and exchange;
and with respect to the unilateral agreement, P acted on it, thus manifesting is entrance into the contract by his performance
 Consideration is subjective not objective and is present as long as there is a bargain
o Executor for the uncle’s estate argues that there was no consideration because the promisor (the uncle) received no
benefit and because the promisee (the nephew) was actually benefited and not harmed (there was no detriment) since he
was made more healthy and upstanding
o BUT R2d 79 does away with the idea that consideration must actually benefit the promisor or bring detriment to the
 “If the requirement of consideration is met, there is no additional requirement of (a) a gain, benefit, or advantage
to the promisor, or a loss, disadvantage, or detriment to the promisee, or (b) equivalence in the values
exchanged, or (c) mutuality of obligation”
 Court will not make a value judgment as regards the worth of the consideration or the fairness of the of the deal
 Old rule was that there had to be a detriment to the promisee or a benefit to the promisor
o Hamer v. Sidway does away with this by saying that the uncle benefited in a “legal sense”
o Consideration is a hoop that must be passed through in order to form a contract
o But consideration is NOT a vehicle for judging the fairness or merit of the transaction
 e.g., Even in the case where the convict was listening to the radio while they in jail, there was consideration
o SO, the crucial element of a bargain constituting consideration is an actual exchange, not what was exchanged or what
the objective value of the exchange was
 Problem 2-1 (magazine advertisement case)
o Opening the envelope should count as consideration, since that is what the purported contract consisted of, and the court
is not going to use consideration as a policing tool for fairness
o So even opening the envelope can count as consideration
 Unilateral contracts (as compared to bilateral contracts)
o Unilateral contract
 Promise given by promisor in exchange for a future act or performance made by the promisee
 e.g., “I will give a reward to anyone who returns my cat”
o Bilateral contract
 Promise given by the promisor in exchange for another promise given by the promisee (who is then also a
promisor with respect to the other party who is then also a promisee)
 e.g., “I will pay you $100 if you agree to deliver my bike to me next Tuesday”
o In Hamer v. Sidway, the essence of the bargain was the continuing and future conduct, not some sort of promise on the
part of the nephew
 So it was a unilateral contract
o The person performing the unilateral contract cannot breach before performance since he has made no promise
 e.g., If the consideration was in fact a promise, the nephew could be liable for a breach, but since it was conduct
based, the consideration is not the promise but the conduct or performance itself
 Moving consideration
o Note that consideration may move from someone other than the promisee or come from someone other than the promisor
 e.g., A will pay B’s bank in consideration for B’s promise to pay A’s bank
 Gratuitous promises
o These are not enforceable under contract theory since there is no consideration
 If there is reliance, then maybe, as in the case Ricketts v. Scothorn
 Exchange of consideration must be an actual exchange
o In the below situations, there was no exchange
 (1) Promisor did not seek to induce the action taken by the promisee because
 (a) The promisee had already taken the action at the time the promise was made
o e.g., Past or moral consideration
 (b) The promisee took the action at the same time as or after the promise was made, but the promisor
had not sought to induce that action when making the promise
o Unsolicited action
 (2) The promisor did seek to induce the action taken by the promisee, but the action that the promisee took was
not taken in response to the promise
 e.g., When the promisee takes the action desired by the promisor but without knowledge of the
promisor’s promise, e.g., “cross offers” where neither side is aware of the other’s offer and there is
therefore no contract
 What we are looking for, remember, is a bargain
 A promise that is the inducement for a promise (or performance) in exchange and a reciprocal promise
(or performance if a promise is what is used by the other party) that is an inducement for the other’s

Lake Land Employment Group of Akron v. Columber For a non-compete agreement, consideration is seen as the continuing
employment and the forbearance from firing; no “new” consideration is needed
FACTS: P got D to sign a non-compete agreement without offering him any additional compensation or benefits at the time of signing
 Was there consideration in this contract therefore making it valid?
 The “forbearance” of the employer in not discharging the employee is the consideration (the continued contract of employment
must be viewed as completely fluid in order to support this theory)
 The court reasons that the parties are free to re-negotiate the deal at any time and this is what they did here, since this is an at will
employment situation
 Dissent says that this is just semantics; at the end of the day the employer has received more from the employee and the
employee has received nothing in return, so there was no consideration
 At will employment
o At will employment means that either party can end the employment at any time without showing cause
 Standard employment situation in the US
o The only reason that a new obligation can be imposed on the employee is because he is at will and can be discharged at
any time, so what the employer is doing technically is reaching a new agreement with the employee, and in consideration
is forbearing from firing that employee
 New consideration needed for a non-compete agreement?
o Difficulty with non-compete agreement is that there was no “new” consideration, even though the contract was fluid in a
sense and therefore always beginning anew each day
 There is the idea that the employee is more valuable after signing the agreement so the company will want to
keep them on longer
 But you can only measure if they actually keep him retroactively
o BUT at will employment can change and evolve since it is driven by the market, even though it is unfair to the employee
 Unequal bargaining power, but this is where the issue should be dealt with, not in consideration
o Majority shows how consideration can be manipulated quite a bit to find the answer that you are looking for
 Forbearance as consideration (R2d 74)
o Forbearance from making a legal claim is a recognized form of consideration
o Even the abandonment of invalid claims is recognized as consideration, as long as the party making such abandonment
“believes that the claim or the defense may be fairly determined to be valid” and the resolution of the matter either way is
 So you are bargaining for the certainty that the claim will not be brought
 Two forbearance as consideration problems
o Problem 2-2 (employee who agrees not to sue after injury case)
 Employee could not have sued anyway, since the injury was covered under worker’s compensation
o Bastardy suit (presumed father agrees to pay if the mother forbears initiating a bastardy suit)
 He was not the father anyway
o Both the woman and the employee won their suits
 This tells us that as long as the consideration is sincere, the courts will not judge its value
 The forbearance of brining even an invalid claim is consideration, as long as it is doubtful in some abstract sense
and the claim is not brought in bad faith

Petroleum Refractionating Corp. v. Kendrick Oil Co. The contract in this case was not an illusory contract because P gave up
the legal right to continue to make that kind of oil and sell it to someone else; so it was a conditional contract in that as long
as P made that kind of oil, he had to sell it to D under the contract and this this is adequate consideration
FACTS: P was in a contract to sell oil to D; the contract allowed for P to stop selling the amount of oil specified in the contract to D at
any point if it decided to stop making that type of oil; D then stopped buying oil and said that the contract was unenforceable for want of
 Was there consideration on the part of P to form a contract?
 There was consideration because P gave up the legal right that it had to continue to make that kind of oil and not sell it to D, and
this is enough consideration; that is, P could not continue to make that kind of oil and not sell it to D
 The requirement of mutuality of obligation is met here because there is adequate consideration
 Illusory promise (R2d 77 comment a)
o “Words of promise which by their terms make performance entirely optional with the promisor do not constitute a promise”
and there is therefore no consideration
o If there is a unilateral out for the promisor then there is really no binding promise
 e.g., Arthur and Betty have a contract but Betty can cancel at any time
 Betty’s promise is an illusory promise so there is no consideration so Arthur can also cancel at any time
because there is no contract at all
o It does not matter that Betty has no actual intention to back out of the deal
o Why Petroleum Refractionating Corp. v. Kendrick Oil Co. DID have a binding contract
 Court upholds the contract because P cannot “just cancel” the contract; it has to discontinue manufacturing that
type of oil as well
 P cannot cancel the contract and continue to manufacture that type of oil and sell to someone else
 So there is consideration
 Conditional contracts
o As in Petroleum Refractionating Corp. v. Kendrick Oil Co., if it is a “conditional out” not a “pure out” there is consideration
and the contract is enforceable
o As long as there is “enough pain in the condition” it is not an illusory promise
o Depending on market conditions, this sometimes has the effect of giving the party with much greater bargaining
advantage almost a “pure out” since the condition can be almost certain to occur/not occur, depending
 Making an illusory promise enforceable
o A court can sometimes construe an illusory promise as enforceable by finding a condition
o It is usually one that is outside of the promisor’s power, and when it is within the promisor’s power, the court will require
good faith in attempting to meet the condition, as in the case of securing financing for a real estate deal
 An illusory promise can be an offer
o e.g., A seller offers to sell all of something that a buyer can buyer but there is no exchange/consideration from the buyer,
so no enforceable promise, but then if the buyer says I’ll buy this, then he has accepted what amounted to an offer
 Doctrine of mutuality
o An extinct requirement of consideration when the courts used to make sure that the bargain was fair
o No longer needed
 Output and requirements contracts
 Output contract
 Buyer will buy everything that producer outputs
 Requirements contract
 Producer will provide everything that buyer requires
o Exclusivity is the consideration, it is limiting yourself in the market
o UCC 2-306(1) takes for granted the enforceability of output or requirements contracts
 “Such actual output or requirements as may occur in good faith”
 “No quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any
normal or otherwise comparable prior output or requirements may be tendered or demanded”
 So note this example if there is an assignment and then new, huge demand, which is not permissible
o Shows how courts have given way to commercial exigencies
 Problem 2-3 (“exclusive dealing contracts”)
o The promise to allow someone to be the exclusive dealer of a product is supported in consideration from the promisee by
an implied promise to use “reasonable or best efforts” to market the product (UCC 2-306(2))

Harrington v. Taylor There was moral or past consideration in this case; but this is not enough to support an enforceable
contract according to black letter law
FACTS: D promised P that he would pay her for the loss of her hand, which she lost while saving his life
 Was there enough consideration on the part of D to form a contract?
 There was not adequate bargain for consideration between P and D
 The law requires bargaining and consideration in order to form an enforceable contract; it cannot be retroactive or based on a
moral obligation
 Moral consideration and past consideration is NOT generally consideration
o Even in the really compelling circumstances, the law does not allow permit “moral consideration” or “past consideration”
 Moral consideration
 Promisor acts from a strong sense of duty toward the promisee
 Past consideration
 Promisor is seeking to recompense the promisee from a benefit previously conferred
o Harrington v. Taylor (could point to both moral and past consideration) maintains the valid principle of law even if harsh
o Exception is Webb v. McGowin, where the court did find moral consideration
 Court imagines that the falling block is suspended in the air and the parties are able to make a bargain that they
(apparently) would have made before the block falls
o R2d 86 says that “moral consideration” contracts should be allowable when
 The benefit was received directly by the promisor from the promisee
 Necessary to prevent injustice
 May be limited if the value is disproportionate to the benefit received
 Not binding if the promisee conferred the benefit as a gift or for other reasons the promisor has not
been unjustly enriched
o SO in this sense it is almost a restitution based contract remedy
 BUT this is NOT widely accepted among courts
o The broad normative question here is whether consideration is under inclusive as a test of what should be an enforceable
promise; at seems like in these cases that it is
o Some exceptions to the rule that moral and past consideration does not make a promise enforceable
 Promises that renew obligations that would be enforceable but for a “legal technicality”
 e.g., A debtor promises to pay a debt that he does not have to pay because the SOL
 e.g., A person reaffirms the promise he made as a minor after reaching the age of majority
 e.g., A debtor that went through bankruptcy and then promises to re-pay a creditor
o There may be instances where he would want to do this, e.g., to keep a car for work
 Promises given in R2d 90(2)
 e.g., Promises to a charitable organization
 e.g., Property settlements just prior to marriage
 These are promises that are enforceable even if reliance has not been shown
Hamilton Bancshares, Inc. v. Leroy There must be actual consideration to form a contract; it is not permissible to just recite
that there has been consideration, since this is nominal consideration and is not enough; but per the R2K, nominal
consideration is okay for an options contract
FACTS: D entered into options contracts with P for $1 of consideration, which was never actually given; P then reneged on the options
 Is the recitation of consideration sufficient to form a contract?
 Paying $1 for this option is sufficient, but it must actually be transacted; it is NOT enough to simply say that there has been
 The law requires bargaining and consideration in order to form an enforceable contract
 Option versus offer?
o Option (R2d 25)
 “A promise which meets the requirements for the formation of a contract and limits the promisor’s power to
revoke the offer”
 A contract has formed and the offeror cannot repudiate until the expiry of the period in the contract, and
the offeree must pay consideration for this right
o Options are used to secure financing for real estate, risk mitigation, buying real estate when
putting to together a large development
o Note that options contracts are SPECIFICALLY ENFORCED against the offeror, so a breach
will lead to an injunction, not money damages
 Because it would be hard to measure damages adequately
o Also, per R2d 37 most courts hold that an option contract remains open for its period even if
the party with the option rejects the option or issues a counter-offer at some point in the option
o Offer (R2d 24)
 “An offer is the manifestation of willingness to enter a bargain, so made as to justify another person in
understanding that his assent to that bargain is invited and will conclude it”
 The offeror can take away the offer at any time before the offeree accepts the offer
 Holding open the offeror’s offer
o Note the idea of balancing the common law’s strong position in favor of the offeror and his ability to revoke at any time in
order to prohibit the offeree from speculation on the offeror’s offer with the idea of wanting to allow the offeree some time
to consider the offer without offeror pulling it away at any arbitrary time
 Other binding offers
o “Firm offer” (UCC 2-205)
 In certain circumstances, an offer that gives explicit assurance that it will be held open and is in signed writing by
a merchant (consumers cannot make) to buy or sell goods cannot be revoked for a “reasonable time” and at
most three months despite the absence of consideration
o “Irrevocable offer” in CISG
 Following European law, offers are not revocable if “it indicates whether by stating for a fixed time for acceptance
or otherwise, that it is irrevocable”
 Nominal consideration in OPTIONS contracts
o Court does NOT accept that mere words alone can constitute consideration sufficient to form the option contract
 e.g., “For good and valuable consideration”
 e.g., “For $1” but nothing is ever paid
o BUT R2d 871(a) recognizes mere formality as sufficient to bind an OPTIONS contract
 Consideration is present when the offeror “recites a purported consideration for the making of an offer”
 BUT most courts do not seem to follow this
o HOWEVER, if the $1 would have been actually, it probably would have made a difference
 So long as the amount is actually paid, the court will usually uphold the contract
o In Hamilton Banc Shares, Inc. v. Leroy, in order to take the phrase “other valuable consideration” and make it meaningful
the parties would have needed to show that the earnest money was “organically connected” to this statement
 Otherwise the statement is empty
 Nominal consideration will not support the making of a contract
o It is true that something that most of the world would not value could be worth a lot more to individual people, and the
court will not vet the contract on the basis of fairness of consideration
 This leads people to try to use “nominal consideration” in order to make the gift or promise enforceable
 But this is “masking the gift by cloaking it in consideration”
o If court thinks this is happening it will call you out and find that the transaction is not binding
o So you should not use just money as the form of consideration because it is so obvious, you
should put it in terms of something that has sentimental value that the court cannot judge so
easily and objectively
o So bargain a $500K farm for grandma’s sweater and not for $1 or for a book worth $1
o Courts don’t like nominal consideration, because they see it as a “pseudo bargain” and they only want to enforce
bargains, not gifts, and the use of consideration is their way of doing this
 Once it gets labeled as “nominal consideration,” it is generally not enforceable
 Courts do NOT care about equality, BUT they do want the presence of a REAL Bargain
o R1st accepts nominal consideration and pseudo bargains
 If A sells B $5K worth of property for $1, there is consideration
o R2d does NOT accept nominal consideration or pseudo bargains
 If A exchanges B $5K worth of property for a book worth $1, there is NOT consideration
 Note that the R2d is inconsistent in permitting mere recitation of consideration in options contracts, but not
permitting nominal consideration in other contracts
 What the R2d is trying to do probably is to achieve the benefit of a firm offer by going through the tool of
 Problem 2-4 (Price for car that is open for one week)
o We classify this as an offer, meaning that it can be withdrawn
o But Frier thinks it should be a form of option contract or firm offer
o Both parties want this because the buyer can rely on it and the seller seems more serious
o Could we say that the potential buyer’s consideration is the resources invested in the search?
 Consideration for options contracts on the demise?
o In order to realize the benefit of firm offers (and because court’s are not as concerned about speculation), it is likely that
the idea that consideration is needed for an options contract will soon disappear
o R2d has already done this through the recognition of nominal consideration
o UCC has already done this through the use of a firm offer
o We just now need judicial inertia to catch up
 Trust as consideration argument?
o In Hamilton Bancshares, Inc. v. Leroy, D argues that the money was held in trust, and could not use it so they received no
benefit/consideration from the earnest money
o But the court rejects this because there was not a trust because the money was not in escrow, if they had put the money
in escrow, it might have been different.

Fisher v. Jackson Consideration cannot be activity incidental to the formation of a contract; it must be something separate
FACTS: P thought that he had been given a lifetime position with a firm for which his leaving of his old employment was consideration;
when he was fired, he sued
 Was P’s leaving of his old position enough consideration to form a contract for life employment?
 P did not give adequate consideration to form an employment contract for life; his leaving of his old position was merely incidental
to his being able to accept a standard, at will employment contract
 There was no consideration so there was no contract for life employment
 Consideration cannot be incidental to acceptance of the contract
o Employee would only have a claim for something more than at will employment if there was some “additional
consideration” on his part to make a contract
 P argues that leaving his old job and the reduction in pay was the additional consideration
 Court says that this was just the incidental condition to accepting the offer to being this new employment at will
 P may have a better argument is D knew that he had taken a reduction in pay and they tried to woo him away
and took him away from a competitor, etc.
 Comparison of Hamer v. Sidway with the promise to treat one for lunch if they show up at the restaurant
o If you can draw a distinction, it is that the one if a true forbearance, and the other is just incidental to the acceptance
o This is a blurry line, but there is a real difference between performance as consideration and performance as incidental to
receiving a gift or forming a separate contract
o SO recognize the difference between a unilateral contract, where that the offeror wants and is willing to bargain for is the
performance which is consideration, versus the case where the offeror just wants to give a gift, or offer you a new
contract, and the performance is incidental and he does not care about it (e.g., In Fisher, the new employer did not care
that the employee leave his job, or you do not care if the homeless person cross the street)
 Problem 2-5 (tenured professor who changes jobs)
o This case is much more compelling, because the professor gave up something very specific that the other university knew
about and tried to bargain for, and they were not indifferent to this as the employer in Fisher v. Jackson was (in that the
employer there did not seem aware of the fact that he was leaving another job, or at least this was not in the record)
 Five distinct contract formation issues thus far observed:
 (1) Offer:
 No legal obligation to keep it open and can be revoked at any time because it is not supported by
 But there is an exception for “firm offers” under the UCC
 (2) Option:
 This is in fact a contract in its own right even though it looks forward to another contract in the future; it
is binding because it is supported by consideration, which can be nominal under the R2d
o Note that the consideration can be part of the larger contract
 e.g., Lease agreement with an option to renew included within the larger agreement
 (3) Unilateral Contract:
 An offer is accepted by action alone; not favored in the legal system; it remains an offer until the act that
constitutes acceptance
 (4) Conditional Contract:
 This is a contract that is entered into subject to a condition in the contract
o e.g., Purchase a condo if a certain mayor is elected
o e.g., Purchase a house on condition that a person could obtain financing and inspection by the
o e.g., Sell oil on the condition that we continue to make the type of oil
 In some cases a good faith effort to meet the condition is seen as the consideration, if it otherwise not
 (5) Conditional Offer:
 Can look like a unilateral contract but it is really just an offer; showing up is not consideration to make it
a binding contract—it is just a condition for acceptance of an offer, because it is not as if the person
making the conditional gift is actually wanting to induce the other person to come to the restaurant, it is
just incidental to receiving the UNENFORCEABLE promise the person just made
o e.g., Telling a homeless man that you will buy him a coat if he comes across the street
o e.g., Telling someone that you will buy them lunch if they come to the restaurant
o It is difficult to draw a bright line in some of these situations
 If there is an element of “real bargain” it may be an enforceable contract, but it depends on the court and all of
the facts informing the situation

B. Reliance
 Consideration is sometimes under-inclusive in determining what promises should be enforced
o What to do with the contracts that should be enforced but cannot be because there is no consideration?
 Two options:
 In the UK: expand the doctrine of consideration
 In the US: reliance (promissory estoppel)
o FRIER does NOT like the expression promissory estoppel; he prefers “reliance”
 R139(2) is a good generalizable checklist for thinking about reliance
o Though it deals specifically with reliance in the context of the SOF
o “In determining if justice can be avoided only by the enforcement of a promise, the following circumstances are
 (a) The availability and adequacy of other remedies, particularly cancellation and restitution
 (b) The definite and substantial character of the action or forbearance in relation to the remedy sought
 (c) The extent to which the action or forbearance corroborates evidence of the making and terms of the promise,
or the making and terms are otherwise established by clear and convincing evidence
 (d) The reasonableness of the action or forbearance
 (e) The extent to which the action or forbearance was foreseeable by the promisor

Ricketts v. Scothorn P reasonably relied on the promise of another to her detriment; so although there was no consideration,
the promisor must perform his part of the bargain because of the promisee’s reliance
FACTS: D’s grandfather offered her money for life and told her that she did not need to work anymore; D then quit her job
 Can D enforce a contract to pay the money against her grandfather?
 There was no consideration, so a contract cannot be formed by that route; however, the court will enforce the contract through the
doctrine of promissory estoppel (i.e., “reliance”), since D quit her job (put herself in a worse off situation) on the basis of the
promise made by her grandfather, and she was justified in relying on this promise
 The promise is enforced on equitable grounds
 No consideration here because there was no bargain/exchange
o Grandfather just came in and offered the money without requiring any sort of action, and the granddaughter did not
promise any action in return
 Introduction of reliance as a basis for enforcement
o Even though the court used the wrong term, the court’s intuition was right
o The ruling by the court in this Rickets v. Scothorn changes contract law because the contract is enforced based on
reliance and not on consideration
o The facts of the case are very different from equitable estoppel because there was no misrepresentation of fact, which is
why the court came to the right holding but used the wrong language/basis for the holding
 Difference between equitable estoppel and promissory estoppel
o Equitable estoppel
 The court in this case references “equitable estoppel” or “estoppel in Pais”
 e.g., Man has a shed with expired fire insurance but he does not renew because he is told that policy is
not expired, when his shed then burns down, the company must reimburse him
 e.g., Man says that he purchased and received two automobiles and that he would pay the balance of
the purchased price; when the loans for the automobiles are sold, the man stops paying because he
never received the automobiles, but he must pay because he said in the previous document that he had
received the automobiles
 A nice definition of equitable estoppel: “an application of the fundamental, equitable, and moral rule that a man
may not be permitted to deny the truthfulness of an assurance which he has given to another for the purpose of
having it acted upon by the latter, and which the latter has in fact acted upon”
 Equitable estoppel is a shield only
 It prevents parties from asserting what would otherwise be an unequivocal right or an effective defense
on the basis of the past statements that they previously made to the contrary
o But what happened in this case? Was it really equitable estoppel?
 No, it was not really equitable estoppel because there was no misrepresentation of facts (note that the
misrepresentation of facts must be inadvertent otherwise it would be (potentially) fraud)
 e.g., In the fire insurance case, it was done knowingly, but was an accident
o Promissory estoppel (Reliance)
 Key difference between equitable and promissory estoppel is that equitable estoppel is the misrepresentation of
a present fact and promissory estoppel is the assertion of a promise in the future to do something
 Difference is that the promise is NOT a fact
o But there is the similarity of the person being misled to act their detriment either case
 Promissory estoppel is a shield and a sword
 The party so asserting can force the other party to take action
o e.g., To pay the promisee or to follow through on the promise even though unsupported by
 Promissory estoppel in contract law
o Definition in R1st 90:
 “A promise which the promisor should reasonably expect to induce action or forbearance of a definite and
substantial character on the part of the promisee, and which does induce such action or forbearance, is binding if
injustice can be avoided only be enforcement of the promise”
o R2d 90 is slightly different from R1st 90
 The reliance does not need to be “definite and substantial”
 Courts can consider “reliance not only by the promisee but also by 3rd parties where appropriate”
 The “remedy for breach may be limited as justice requires”
o R2d actively invites the courts to limit the application of promissory estoppel as regards the level of damages
 It wants only reliance damages to be applied, not full expectation damages
 So the granddaughter would not get full performance/expectation damages
 Or at least it is up for the court to decide depending on the facts/justice of the case, and/or which is
harder to measure reliance or expectation damages
 But R2d reduces the amount of reliance that is required, so it is easier to make a claim because you no longer
need “substantial and definite”
 Shows the intrusion of reliance (more tort like in character) into contract law
 And it allows the claims to be made by third parties
 Overall desire is to encourage the use of reliance but to lower the remunerative portion
o BUT judges still tend to stick with R1st articulation of reliance in that they usually require definite and substantial reliance
but also still provide full expectation damages if such reliance is found, and not just reliance damages
 Basic elements of reliance/promissory estoppel
o (1) There must have been a promise by the promisor
 Courts usually want a “clear and definite” promise
o (2) Promisor must have reason to expect reliance on the promise by the promisee (or a third person under the R2d)
 Not necessary that promisor sought, only that he should have reasonable expected, such reliance
o (3) Promise must have induced such reliance
 Must be actually induced, not coincidental, and promisor is not bound until reliance actually occurs
o (4) Circumstances are such that injustice can only be avoided by enforcing the promise
 If P is no worse off because of his reliance, then there is no basis for damages; you could still bring suit, but
damages would be zero, depending on if expectation damages were used
 Law is hesitant to grant relief under reliance
o Law is very begrudging to grant relief on the basis of reliance
o Law does not want parties to take the nominal action just so that they can claim reliance as the basis for enforcement (but
note that under the R2d this would lead to very small reliance damages anyway, and in any case a court would be
reticent to use the doctrine of reliance if the reliance was small since it is an equitable remedy with a lot of discretion to
use only if justice requires)
 So courts have lots of rules about what is required for reliance based enforcement
 The requirements in both R1st and R2nd enumerate these:
o Promisor must reasonably anticipate action (not seek to induce, just reasonable expect)
o Promisee must justifiably rely on the promise (cannot be ridiculous)
o There must be a relationship between the JUSTFIED reliance and the promise
 Some sort of nexus
 e.g., So it makes sense that the granddaughter quit her job (since that is
what the grandfather suggested or hinted at), but there would not
necessarily be a nexus if someone promised a general money gift spend it
all on a boat or new house
o There must be an injustice if not enforced
o Courts will always look to consideration before reliance as the primary reason to enforce a contract
 Critiques of reliance as a method of enforcement
o Holmes: “It would cut up the doctrine of consideration by the roots if a promise could make a gratuitous promise
enforceable by subsequently acting in reliance on it”
o Reliance seems like another way that contract law is being swallowed up by tort law
 Since reliance damages (as opposed to expectation damages) are more like tort damages and the theory of
action is more like tort in that the idea is harm to another as opposed to a loss of the benefit of the bargain
 Problem 2-6 (employee retires with promise of pension)
o It was a bad idea to stop the payments, since there was a pretty clear instance of reliance here
 Charitable promises
o Charitable promises can be binding absent consideration or even absent reliance
 R2d 90(2) makes this charitable rule
 BUT most courts do not accept this, and would require actual reliance in order to bind the promisor

Cohen v. Cowels Media Co. Reliance can form the basis of a contract, and often it can lead to full expectation damages, not
just reliance damages
FACTS: P disclosed information to D on the promise that his identity would be kept confidential; D then disclosed P’s identity and P
was fired as a result (note that there is a strong case to be made here that there was a contract supported by consideration)
 Can this contract be enforced through promissory estoppel?
 Court oddly finds no “traditional contract” even though the presence of bargaining and consideration to seem to be present (FRIER
thinks that there is a contract based on consideration)
 Court holds that promissory estoppel can work as an enforcement mechanism: (1) the promise must be clear and definite (2) the
promisor must have intended to induce reliance, or reasonably expect such reliance, and such reliance must have occurred to the
promisee’s detriment (3) the promise must be enforced in order to prevent an injustice
 Based on fitting the facts to the rules of promissory estoppel/reliance, the court finds a contract
 Try consideration first and then reliance
o In contracts claims, attorneys trying to show the presence of a contract will always first try to show that there was a
contract based on consideration and then they will try to show that there was a contract based on reliance (and the courts
will do the same in their analysis)
o In the first round of this case, the MN Supreme Court found no basis for consideration
o The reliance issue was paused while SCOTUS ruled on whether or not there was a 1st Amendment issue
 SCOTUS says that there was not 1st Amendment issue
 But why no consideration?
 The MN court’s argument is not very good
 Anonymity should be the bargain for the information, so there should be consideration.
 (my idea) Court uses a subjective view of bargaining (they say that this is not what parties familiar with
journalistic and not legal transactions expect)
 BUT we should be objective standard
 Although against the R2d, full damages are often granted for enforcement based on reliance
o Note that the jury instruction in Cohen is the standard breach of contract instruction, and the rule is that the harmed party
is placed into the position that they would have been in if the contract had not been breached
o So the court enforces full damages even though the breach was made on the basis of a reliance contract and not a
consideration based contract (this follows from R1st’s approach to damages based on reliance)
o Perhaps the invitation in the R2d for lower damages in reliance cases is to encourage people to bargain and use the
traditional consideration route, instead of coming to rely on full damages based on the reliance route
 Expectation damages versus reliance damages
o Note difference
 Expectation damages:
 Harmed party is put into the position that they would have been in if the contract had been fully
 Reliance damages:
 What you actually lose or lost as a result of the breached contract
 More like tort damages

Midwest Energy, Inc. v. Orion Food Systems, Inc. Reliance is possible in this case but the reliance damages are low because
the expenditures made in the reliance can be used in another context
FACTS: P wanted to add D’s franchise to her business; after being told by a representative from D that “we can go forward with the
franchise” she expanded her building and prepared to accept the franchise
 Can this contract be enforced through promissory estoppel/reliance?
 The fact pattern is strong enough such that promissory estoppel/reliance is at least possible
 Through her action, which was arguably reasonable given the signals that the representative of D gave to her, P relied on the
promises of D to her detriment
 Dissent says that reliance was unreasonable and there was no harm caused of any real value, and since reliance should only be
used in exceptional circumstances, it should not be applied here
 No contract because of the SOF
o See how the SOF destroys the traditional contract based on consideration argument
o So the court uses reliance instead, which cannot be defeated by the SOF defense in most jurisdictions, including this one,
as well as under the R2d 139
 Passive versus active reliance
o Negative reliance is hard to prove because it is very amorphous
 e.g. That P did not pursue other options for a franchise is different than that the granddaughter quit her job in
Rickets v. Scothorn
o What would P have done otherwise?
 We don’t know…evidentiary problem…
 Market could have them elsewhere, etc.
 Low reliance damages
o Note that the damages are just reliance damages and they are very low because P could re-use the space
o If the court found that a contract was formed, P might have got lost profits (expectation damages), but it did not because
there was no actual contract, so only reliance damages (though note that some courts will award expectation damages
even on the basis of reliance only)
 Was it reasonable or justified reliance?
o Dissent says that reliance was not reasonable partially because the parties were business actors and all of the written
materials saying that they should not move forward unless there was a signature
 The clear disclaimer in the contract is meant to protect D from eager salesman like that in this case
 Will the law help stupid people who rely unreasonably since they are so gullible?
o Like Red Owl case, the person who relied was stupid and the reliance was not reasonable (arguably), so should the law
step into help them, or just let them suffer?
 No promissory estoppel for sophisticated legal actors?
o Although not a formal rule, most courts will not grant reliance damages to promisee’s who should have known that the
promise of the promisor was not enforceable absent consideration
o Some courts require, though it is not black letter law, that the promisee be justified in believing that the promise would be
legally enforceable, and not just a moral commitment
 So it is hard to argue that reliance by a sophisticated actor who knows the law was in any sense “justified”
 Arguably, P in Midwest Energy, Inc. v. Orion Food Systems, Inc. was such a person
o Helps protect against parties using reliance as a pure substitute for consideration when trying to achieve enforceability
 Problem 2-7 (GM and Ypsilanti tax abatements)
o Reliance if anything is the tax abatements
o But this is not a legally enforceable reliance based promise on the part of GM
 All of the promises are hedged with general qualifiers
 e.g., “If there are favorable market conditions”
 So it was not clear enough to support reliance

C. The Restitution Interest

 Restitution (dual definition)
o (1) Cause of action
 e.g., “P sued in restitution”
 A cause of action in restitution is often made in cases that are similar to contract but are not covered for some
reasons, for example, if the parties had no contract-like exchange
o (2) Measure of damages
 e.g., “Court granted restitution damages”
 Restitution damages in contract law are given to P and are based on the benefit that his act conferred on D
 Act to supplement or mitigate contract law damages (whether expectation or reliance) that may not
otherwise exist
 Puts the promisor into the position that he would have been in had the promise not been made
 Contrast to reliance which puts the promisee into the position that he would have been in had the
promise not been made
 Restitution interest and efficient breach of contract
o If there is a case calling for an efficient breach, where the breaching party gives the non-breaching party his expectation
interest and still can make a profit, if the breaching party also must give some restitution interest, this must be calculated
into his decision whether or not the breach is efficient
o But note that the rule is not that you have to disgorge entirely, since this would prevent efficient breaches from ever
happening, it is only that you have to pay restitution interest where applicable, and this must be taken into account

Bailey v. West P cannot get restitution damages under a contract implied in fact since the context does not support this or a
contract implied in law because D did not benefit from P’s work to help the horse
FACTS: P took on a horse that was purchased and then rejected by D; P tried to get restitution for boarding the horse after it was
dropped off at his house and he accepted it and cared for it
 Can P get contract damages based on either a “contract implied in fact” or restitution damages based on a “contract implied in
law/quasi contract”?
 No, P cannot get damages under either theory; P cannot get contractual damages under a “contract implied in fact” since the
limited (really, lack of) interaction between P and D does not suggest a contract implied in the facts; P cannot get restitution under
a quasi-contract because the facts show that the taking in of the horse was not a benefit that D appreciated and it would not be
inequitable to not grant restitution (it is unlike the idea of a doctor aiding an unconscious person in the street)
 Rules governing restitution-based remedies
 Contract implied in fact versus a quasi-contract
o Contract implied in fact
 Contract implied in fact is a totally normal contract implied by social conditions and context
 No different from any other contract, it is just implied as opposed to express
 Often non-verbal
 e.g., Dropping of your clothes at the dry cleaners without saying anything
o Quasi-contract (“implied in law”) (“unjust enrichment”)
 Quasi contract is a contract implied in law (also known as unjustified enrichment); it is not a contract at all; the
law creates it for parties who may or may not want it
 e.g., Doctor who aids the unconscious victim of an accident and then later expects to be paid, the
person must then re-pay even if they are a Jehovah’s Witness and did not want the treatment
 So, e.g., If the horse had been dumped at P’s door and he cared for it while attempting to find the
owner, this may be a contract implied in law, but these were not the circumstances of the case
 Requirements for the formation of a “quasi-contract” are very complex and intricate even though the court can
distill them into a few simple rules
 Officious intermeddler versus the doctor
o Note the idea of a “volunteer” or an “officious intermeddler”
 e.g., Neighbor who paints your house when you are on vacation and it helps increase the house value
 BUT you do not need to compensate your neighbor since he is an officious intermeddler
o How is this different from the doctor treating an unconscious patient?
 Per Posner and law and economics, the parties in the doctor case would have certainly bargained to reach this
agreement, but they could not because the transaction costs were so high, so we require restitution damages for
the doctor’s action
 So the law implies a contract between them, since they would have reached it without the high transaction costs
 But the social values of parties may change the assumptions, so we should be careful about assuming
what agreements the parties would have made but for the high transaction costs
o This is a limit to Posner’s assumption that the parties would contract
 e.g., Jehovah’s witness that did not want treatment
 In any case, the general rule is that a professional that performs a service in his professional capacity for
someone clearly in need, is not an officious intermeddler
 Note also that a gratuitous gift cannot be a claim for restitution
 e.g., I am giving you this watch, and then you come back a day later and demand restitution
 e.g., Someone playing music in the Subway and you listen to it and enjoy it
 This would in effect be forced sales and not voluntary transactions

Chapter 3: Negotiation and Formation of a Contract

A. Introduction: The Role of the Courts
 Court’s classic contract formation template
o In classical contract theory, courts have a template and they want parties to conform to it
 Conformance to the objective theory of contract formation
 What the courts want is for the ritual to be played out
 But it often is not followed
 Because parties don’t think anything will ever go wrong
 They simply forget to do the paperwork
 Classic contract formation ritual
 (1) Offeror makes an offer
 (2) Offeree can accept or make a counter-offer
 (3, 4, 5, etc.) If acceptance, there is a contract; if counter-offer, the original offeror is now the offeree
and can accept or make another counter offer until a contract is formed or the parties give up
 Doctrine antiquated today?
o Classical doctrine of offer and acceptance largely developed in the 19th century for the purpose of forming a contract by
letter, so much of it is quickly becoming irrelevant and obsolete

Sun Printing and Publishing Association v. Remington Paper & Power Co. Courts must limit the extent to which they are
going to step in and help parties figure out what they agreed to as opposed to letting them learn their lesson from improperly
made contracts; a mere agreement to agree is not enforceable
FACTS: P and D made an agreement in which P would purchase paper from D and they would agree on the price and the duration of
that price later on, but that in any case, the price later on could not exceed a certain amount based on a competitors market price; D
then backed out of the contract and refused to sell paper to P at any price
 Is it permissible to let D back out or must it sell paper to P?
 D can back out because the parties just made an “agreement to agree” and not an agreement to sell at any specific price for any
specific amount of time (i.e., they did not have a contract)
 Parties must be explicit and formal about creating a contract and the court is not going to step in and force them to bargain fairly;
since they did not include two essential terms (the price and the duration of that price—if they had included at least price, and
arguably they did since there was a certain ceiling based on the competitor’s price, it might have been seen as an options contract,
but since there is no time element, it is insufficient), there was no enforceable contract, and D is permitted to get out of its
obligations through this loophole
 D should have to sell at the competitor’s price and should not get out of the deal just by making use of the loophole; the court
should force the parties to bargain fairly in the way that they both clearly contemplated in the beginning; since it was clear that they
meant to form a contract, we should hold them to it
 Cardozo says that the court will not bail the parties out
o What happened is D could get a better deal and used this defect/loophole to get out of the contract
 Difference in judicial approach between Cardozo and dissent
 Cardozo agrees that the contract is defective with respect to time and says that the court is not going to
bail them out
o Cardozo wants the parties to do a better job drafting and he won’t bail them out
o “He will not revise when the courts are only supposed to construe”
 Dissent argues for a “rule of reason” where the judge substitutes a reasonable view of the contract for
what the black letter text actually says
o FRIER says that the dissents menu of options fortifies Cardozo’s notion that we don’t want to
deal with all of the loosey-goosey of trying to understand what the parties wanted
 Difference between majority and the dissent is how much of a stickler you are going to be on the parties
 Is it better to be a stickler, but only if people actually respond to the rules/incentives
o e.g., FRIER’s example the strict bus policy: people will adjust their behavior to conform to the system and the system will
be more efficient overall and the courts will not have to deal with as many problems if we are a stickler about the rules
 Cardozo admits this in his statement after the decision
 “Court subordinated the equity of a particular situation to the overmastering need of certainty of
transactions in commercial life”
o But this all assumes that people will actually respond to these incentives
 But will business actually change?
 Maybe once it gets burned or someone is made an example of, but maybe not?
o And business people don’t like lawyers or understand the law, so there might not be any response
 So the learned efficiency of the court’s decisions is diminished
o And we need to balance future reliance and/or expectation change with the equity concerns of any given situation
 But you can’t have your cake and eat it too
 Vicious (over) drafting cycle?
o (my idea) Cardozo’s logic may lead to a certain vicious drafting cycle where people will be driven to draft even more
specific contracts, which will create even more loopholes, so the contracts will become even more specific, etc., etc.

B. Offer and Acceptance

Ford Motor Credit Co. v. Russell Advertisements are not generally considered legal offers; rather, they are just seen as
puffery meant to induce invitations to bargain
FACTS: P advertised a car at a certain amount with a certain percent of financing; D bought the car but ultimately agreed to higher
financing because she had bad credit
 Was P’s advertisement an offer that they then broke?
 No, it was not an offer, it was only an invitation to bargain
 Advertisements to the general public, even with specific terms, are not legal offers, unless they can be fulfilled by the unilateral
action of the offeree (i.e., the consumer)
 Definition of an offer (R2d 24)
o “The manifestation of wiliness 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”
o Note that it is very similar to a promise in Rd 2(1): “A manifestation of intention to act or refrain from acting in a specified
way, so made as to justify a promisee in understanding that a commitment has been made”
 So in a sense an offer is a promise to conclude the bargain if acceptance is made before the offer is revoked
o Note that like the formation of a contract in general, the presence of an offer is considered objectively, not subjectively
 Classic offer and acceptance template
o Woman in the case actually was the person who made the offer as per the template of offer and acceptance
o Legally, when you take an item from Kroger to pay, you are making an offer that Kroger then accepts
 This is different than how we think about such things naturally in life
o But what about rain checks?
 Store feels obligated to honor the deal even though they are not legally obligated because they did not actually
make an offer that you accepted; rather, you made them an offer that they can accept or reject
o e.g., Store has a switchblade in the window with a price next to it; but this was not actually an offer so it was legal under
English law banning the sale of switchblades
 Advertisements and quotations are not offers (R2d 26)
o “A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addresses 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”
o So when the word “quote” is used or the pronouncement is clearly an advertisement, it is not an offer such that the person
making the pronouncement would be bound by someone saying “I accept”
 There are good reasons to not treat advertisements as offers
o We want people to be able to advertise and market their products and exchange information, without fear of binding
themselves to honor hundreds or thousands of offers that they made
o We don’t want consumers to storm the doors of every shop with a good add, since there is no way that the proprietor
could meet all of these “acceptances”
 The rabbit stole case
o e.g., Lefkowitz rabbit case is different because the advertisement said “Rabbit stole for $1, was originally $100, first come
first served” and this seems a lot more like a unilateral contract, so the court ruled that it was an offer, not just an
o There is also not the problem of the offeror not being able to perform in tons of contracts with tons of acceptances,
 The same logic is true for lost property, since it is inherently limited to one future performance
o Note that there was also some judicial consumer protection activity going on in that case
o Generally, the more specific the terms of the advertisement, or the extent to which there are words of commitment, the
close it comes to being an offer
 Bids are offers
o In an auction, the bidders are making offers that the auctioneer can then chose to accept or reject
o But if the bid is “no reserve” then putting the items out may be seen as an offer
 Duty to read
o The court is unsympathetic because D signed a contract no matter what was advertised
 But is this realistic when dealing with adhesion contracts and the ignorant consumer?
 Problem 3-1 (medical school application brochure case)
o Was this an advertisement or an offer?
 This is probably an advertisement and not an offer because per R26 the consumer had reason to know that the
person making the advertisement does not mean it as such
 And it would be impossible for the alleged offeror to honor the contract if everyone accepted

Davis v. Satrom When an offeree responds to an offer with new terms, it is a counter offer, and not an acceptance, under the
common law’s mirror image acceptance rule; this process can go back and forth until the parties reach an agreement
FACTS: P was trying to buy real property from D; the parties went back and forth, with each changing the terms of the agreement; the
last standing counter-offer was made by D to P and it included the condition that D’s attorney would need to approve any final
agreement; P claims to have accepted this agreement, but D disagrees
 Was a contract formed?
 Even if a contract was formed, and it very well might have been (even though there is the contention that D revoked his last
standing counter-offer before P accepted), that contract was subject to approval by D’s attorney, and D’s attorney did not approve
of the agreement for a good faith reason (bad tax liabilities), so if anything a conditional contract was formed, and the condition
was not met, so the court will not enforce the agreement
 The template for offer and counter offer in the formation of a contract
 The back and forth of the offer and acceptance template
o (1) First document is the “letter of intent,” which was an offer by P and we don’t care that it is called a “letter of intent,”
since the parties do not know what they call something; it is an offer, legally
o (2) Second document is the returned letter with a change of terms sent by D; this is a counter offer and it ends P’s initial
 In theory you can only one offer on the table at a time, so the effect of each counter offer is to eliminate the
existence of the previous offer; a counter offer is the rejection of the offer
o (3) P’s new unsigned “commercial purchase agreement” is a another counter offer
 Note that the court may conclude a contract was made by number 2 and 3 in P and D’s exchange, if the terms
were the same even if the medium or document was different
o (4) D’s returned “commercial purchase agreement with altered terms is yet another counter-offer
 Could P have accepted this final counter offer during the ten day interval?
 Yes—the lesson is to only keep your offer on the table when you are prepared to honor it at any point
 Since until an offer is revoked or lapses, it is open to being accepted
o Note that the fact that a person says “I accept” and adds new terms means that they do not accept, it is a new offer,
though of course 2-207 changes this
 Termination of offer by the offeree and otherwise (R2d 36)
o (1) When the offeree rejects the offer (R2d 38)
o (2) When the offeree makes a counter offer (R2d 39)
o (3) At time specified in the contract (R2d 41)
o (4) At the end of a reasonable time (varies significantly depending on context) (R2d 41)
o (5) If the offeror revokes the offer (R2d 42)
o (6) If either the offeror or the offeree dies or becomes incapacitated (R2d 48)
o (7) If the terms in the offer include a condition for acceptance and the condition fails to occur
 Conditional that attorney approve
o Suppose that P accepts during the ten day period; the offer it would still be subject to the condition that the attorney
approve the contract
 Court wants this to be a good faith rejection/evaluation, not just an escape hatch for getting out of a contract at
last minute
 Otherwise this would be a masked illusory offer
o This is a very grey area, but this sort of conditional offer widely occurs, as in contractor
approval of the conditions of the house before sale, etc.
o There is a requirement of good faith since it is a discretionary performance of the contract

Merced County Sheriff’s Employees’ Ass’n v. County of Merced This is a case of misunderstanding, but the contract is
enforceable since D had reason to know of the meaning attached to the contract by P, whereas P did not have reason to know
of the meaning attached by D
FACTS: There was a renegotiation of the wage agreement between the P1 (policemen) and P2 (firefighters); P1 thought that the
payment would escalate as per a certain schedule, but D thought it would escalate as per a different schedule, but also knew that P1
thought that it would escalate per the schedule understood by P1; P2 and D both had different meanings attached to the schedule and
neither knew that the other had this different meaning; there was general confusion about how to interpret the contract
 Was a contract formed and if so how should it be construed?
 Per R2d 20 contract did exist between D and P1 because D had reason to know that P1 interpreted the contract a certain way and
not in accordance with how D was interpreting it, but P1 did NOT have reason to know that D was interpreting it in a certain way
and not in a way that it was interpreting it
 Per R2d 20 a contract did not exist between D and P2 because each party had material differences in their understanding of what
they were agreeing to such that there was no meeting of the minds, this is because if there is a mutual misunderstanding
 The rules of contract formation
 Misunderstanding can make a contract unenforceable
o R2d 20(1) says: “There is no manifestation of mutual assent to exchange if the parties attach materially different
meanings to their manifestations and (a) neither party knows or has reason to know the meaning attached by the other; or
(b) each party know or each party has reason to know the meaning attached by the other (FRIER is uncertain about when
(b) would actually happen in real life)
o BUT R2d 20(2) says: “The manifestations of the parties are operative in accordance with the meaning attached to them
by one of the parties if (a) that party does not know of any different meaning attached by the other, and the other knows
the meaning attached by the first party; or (b) that party has no reason to know of any other meaning attached by the
other, and the other has reason to know of the meaning attached by the first party
o Note that the meanings do not need to be exactly the same for there to be an adequate understanding; of course
connotations will be different, etc., but there must be a general agreement on the essential terms (comment b to R2d 20)
 In its strongest iteration, requirement of meeting of the minds conflicts with the objective theory of contract
o Note that R2d 20 and the idea of needing a “meeting of the minds” conflicts a little with the objective theory of contract
o There is a very grey line (a fork!) between total misunderstanding (e.g., Peerless, where there is no contract) and mere
ambiguity and uncertainty (e.g., Where there is a contract, and the court must interpret it)
 e.g., In the “what is chicken” case, the judge opted to say that there was a contract and attempt to interpret it
instead of saying that there was a complete misunderstanding and no contract was present at all; he later
admitted that finding that no contract was present at all based on a complete failure of the meeting of the minds
(“like ships that pass in the night”) may have been a better route
 Objective theory of contract and mutual secret meaning
o If under an objective interpretation the contract would mean something, but both parties subjectively thought that it meant
something else, the court (Judge Hand notwithstanding) would be very reticent to apply the objective meaning, since this
would contravene the agreed-upon intent of both parties
 The Peerless ship case
o Merced County is different from Peerless because D knew what P thought the contract meant
o In Peerless, both parties were thinking of a different ship entirely, so although from an objective standpoint it seemed as if
there was an agreement, there was no “meeting of the minds” and therefore no contract at all
o SO a complete misunderstanding is an exception to the objective theory of contract
 Problem 3-2 (professor who leaves the college knowing its interpretation of re-instatement)
o No, per R2d 20, he cannot win, because he knew their understanding of the terms and that it was different than his
 Does actual/subjective agreement even matter?
o Some courts that are more conservative will say that the actual agreement of the parties is extremely attenuated concept
and the question is all about the template and the objective theory of contract
 So that all that is needed is a bare minimum of the true meeting of the minds
o But some other more liberal courts are more willing to use parol evidence and other tools to try to ascertain the parties
actual intent, even if it diverges from what the objective theory would indicate

Ardente v. Horan Common law mirror image rules says that an acceptance with new terms is in fact a counter offer that then
can be accepted or counter-offered by the other party
FACTS: D offered to sell his house to P; P said that he accepted the offer but then included new terms in a separate sheet with his
signed acceptance
 Was the offer to contract accepted?
 No the offer was not accepted; rather, P presented a counter offer and did not accept the offer through the mirror image rule
 The idea that P could have given “absolute acceptance” and only included another collateral matter is dismissed, this was a
qualified acceptance, which is nothing more than a counter offer and no acceptance at all
 The rules of contract formation require that an offer be accepted through the mirage image rule
 The “quibbling” or “equivocal” acceptance (R2d 57)
o “Offerors are not bound by acceptance in equivocal terms, unless he reasonably understands it as an acceptance”
 So D is not bound by “the quibbling acceptance” of P
 If you try to accept and offer and sweeten the pot and overstep the boundaries too far you may just end
up instigating a counter offer instead of accepting
 “Mirror image rule” (R2d 59)
o “A reply to an offer which purports to accept it but is conditional on the offeror’s assent to the terms additional to or
different from those offered is not an acceptance but is a counteroffer”
 Parties are “caught in the template” of contract formation and must abide by it
o So, e.g., since P’s message is another counter offer, then the hypothetical response from D saying “yes we have a deal
but no furniture” is just another counter offer
 Must conform to the mirror image rule
 But there is some level of variance that the court will permit, this is a big grey area and a fork
 Absolute acceptance with a request for gratuitous benefit (Rd 61)
o It is possible to fully accept an offer and also request extra terms, as long as you make it clear that you are accepting the
offer in any case: “Frequently an offeree, while making a positive acceptance of an offer, also makes a request or
suggestion that some addition or modification is made. So long as it is clear that the meaning of the acceptance is
positively and unequivocally to accept the offer, whether such request is granted or not, a contract is formed”
o “An acceptance which requests a change or addition to the terms of the offer is not invalid unless the acceptance is made
to depend on the assent to the new terms”
 e.g., “I accept your offer for 100 tons of steel at the price of $300 a ton, and I hope that you can deliver it in
installments of 25 tons per week if you are able”
 Two common issues with negotiation
o FRIER’s rule: don’t be a piggy when negotiating a contract, and don’t do these two things
 (1) Tendency to want to get things that you don’t bargain for
 e.g., P wants to include the furniture in the transaction without losing the opportunity to purchase the
house, trying to take advantage of the process by inserting terms at the end of the deal
 (2) Desire to have the other side bound when you are not
 But this goes against the idea of mutuality of obligation
 Problem 3-3 (Professor who signs under protest)
o His addition of under protest was probably not a “counter offer” and was acceptance, so I think that he would have a basis
for suing the school, who then denied his purported counter offer

Contracts Concluded by Exchange of Letters

 Offeror is master of the offer (Rd 30(1))
o The offeror can stipulate any rule about how the offer must be accepted and the acceptance will not be binding if it does
not conform to these rules
 e.g., “This offer must be accepted by email,” and someone calls
 This is not valid acceptance
o BUT, most offers do not specific how acceptance can be made, so any reasonable form of acceptance is usually valid
 UCC 2-206(1): “Unless otherwise unambiguously indicated by the language or circumstances (a) and offer to
make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the
 R2d 30 follows the UCC on this point
 Some older common law rules were very formal, e.g., if you get a mail offer, you need to respond by
mail even if offer does not stipulate, since you must use the same form of media
 “Mailbox rule” (still the rule at common law) (R2d 63)
o A “mailed” (what does this mean today?) acceptance becomes effective when acceptance passes out of the control of the
offeree (i.e., goes into the mailbox, or the offeree hits “send” from his email)
 BUT all other contract formation communications are effective at the time of the receipt (revocation, offer, etc.)
o Note that you can vary from the default mailbox rule if you are the offeror and stipulate
 Since the offeror is the master of the offer
o Two exceptions
 Options contracts are formed only when the acceptance is received by the offeror (R2d 63(b))
 Under the CISG, international sales of goods follow the civil law rule that acceptance occurs only at receipt
 Difficult problems with mailbox rule
o Overtaking rejection: By letter, A offers to sell B a drill press for $5,000. B mails A a letter of acceptance, but then, before
A receives the letter, B telephones to reject the offer. Is the rejection effective? [No, there is a contract] What if, relying on
the rejection, A sells to a third party before receiving B’s acceptance? [The rejection might then be effective but only on
the basis of promissory estoppel, or equitable estoppel to the extent that the rejection was construed as a fact]
o Overtaking acceptance: By letter, A offers to sell B a race horse for $3,000. B mails A a letter of rejection, but then, before
A receives the letter, B mails a letter of acceptance. Is B’s acceptance effective? [Yes, under the traditional rule, but
because of the change in R2d 40 it is not necessarily] Does it matter than A receives the rejection before the acceptance?
Whether A relies on the rejection?
 Note that R2d 40 changes this rule with respect to overtaking acceptance, and the new rule is whatever
communication arrives first governs the transaction, since it would unfair to have A rely on the rejection that he
receives before the acceptance, even if B accepted before A received the rejection
 But note then that B has in effect a negative option contract (since binding once put in mail as rejection
but he could alter and accept by telephone if market improves)
o Overtaking revocation: Corporation A sends corporation B a letter offering to sell an airplane for $10,000,000. A short time
later, A mails a revocation of the offer; but before B receives A’s revocation, it mails an acceptance. Is the acceptance
effective? [I think so, since the mailbox rule applies to acceptance, but not revocations]
 Silence generally cannot constitute assent (R2d 69)
 Offer cannot be framed such that silence can be a manifestation of assent
 Offer cannot be framed such that the contract is binding unless the offeree expressly rejects the offer
o BUT there are cases where there is a duty to respond and silence can be seen as acceptance (this would be an implied in
fact contract)
 (1) “Where 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”
 (2) “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 or inactive intends to accept the offer”
 (3) “Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if
he does not intent to accept”
 Incidental action cannot be acceptance
o Sometimes offerors try to make incidental action acceptance of an offer, e.g., opening a website is accepting the terms of
privacy on the site, BUT this is not legal; the website must make you press another button explicitly accepting the terms
o Accepting an offer cannot be merely incidental to activity represented by the contract
 Problem 3-4 (JJ White and the research assistance the Target online shopping)
o (1) I think that JJ White acceptance would be effective, since the overtaking revocation was not received by JJ White
before he accepted
o (2) This is a hard problem because the computer interface is both advertisement and bargain making center
 Target is probably okay in canceling the deal assuming that they did not take the money yet, since legally all
they did was refuse to accept the consumer’s offer; it is the same as you putting an incorrectly labeled good on
the checkout counter and them saying we can’t sell for this price
 What is target ran out of car seats, must they still honor it?
 Would it change if the confirmation email said that it was “accepted”
 Probably it would then be binding
o Lots of strain put on the old rules
 Does it matter that no human being is involved in the sale?
 The law is pretty okay with this these days
o What about soft drink bottle cap case where they give too many winning caps/letters. What do you do?
 End it immediately and try to revoke the offer if able to, legally

Mid-South Packers, Inc. v. Shoney’s, Inc. A firm offer must be held out for a reasonable amount of time, with three months as
the UCC standard, but then the terms of the offer can be changed, or the offer can be revoked
FACTS: P and D met and P presented a proposal to sell meat to D at a certain price, and said that they could raise the price after a 45
day notice; D did not respond in any specific way; D then began to purchase meat at the price given in the proposal; later, P raised
prices and D paid for meat at the new price, but kept it as a separate line item, which they eventually deducted from their final payment
 What is the legal effect of the proposal document that P presented to D? Was it a requirements contract? Was it a firm offer that P
was obligated to keep open for at least three months?
 There was no requirements contract because D did not agree to buy exclusively from P and this is the necessary consideration to
form a requirements contract
 At most, the proposal document constituted a “firm offer” that was irrevocable for at most three months (if it was not this, then it
was just a price quote and could be changed at any time); so after a certain date (three months per the UCC or 45 days per the
given terms of the offer), the price increase was okay, and from this point on D paid that price and cannot expect to get the
difference back between than price and the initial lower price given, if at all, through the firm offer; so each subsequent purchase
order after that time was a separate and new contract for the higher price
 D clearly manifested acceptance of the new contract at the new price and induced performance for a relatively long period of time,
and it cannot then retroactively claim that it did not have a contract at that price
 Termination of offer after a reasonable time (“lapse”)
o Usually the power to accept an offer is terminated as per R2d 36 (when the offeree terminates the power of acceptance or
offer is otherwise terminated or per some offeror action)
o R2d 41: “Power to accept is terminated at the time specified in the offer, or, if no time is specified, at the end of a
reasonable time”
 This time will depend on the market and context, e.g., land versus stocks or commodities
o And per R2d 42 and 43, other direct or indirect communication or action by the offeror that indicates that it is no longer
willing to keep the offer open also can terminate the offer
o The power of termination in the offeror exists because, unlike an options contract (R2d 25 and 87), the offer is not
supported by consideration, so it can be withdrawn at any time
 This is part of the contract/no contract dichotomy
 BUT, there are exceptions to the ability of the offeror to revoke and to the contract/no contract dichotomy
o Firm offers (UCC 2-205)
 A merchant who makes an offer in signed writing and says that it will be held open for a certain period is bound
to honor the offer for that period of time or for a reasonable time if no period is given by the merchant, but in any
case not longer than 3 months
o Firm offers (CISG)
 An offer cannot be revoked if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is
 Note that there is no outer limit and the offer does not need to be signed
o Rolling contracts
 Contracts that become “more complete” when one party receives the terms and does not reject them, as in Hill v.
o Relational contract
 Contracts that seem to develop based on the actions of their parties such as course of performance
 The protest rule and its purpose
o Did P’s protest per UCC 1-308(a)?
 No, P did not protest appropriately because they led D to believe that they were accepting the new price,
marking off the price in the ledger did not count as protest
 UCC really wants parties to be forthright in their dealing and protest
o The protest rule is to provide a tool for parties who are in a contract where they need the completion/materials, etc. now
but they object to the strategic behavior of the other party; they can keep the relationship alive to get what they need and
deal with the problems as soon as they have the opportunity
 Relational contract
o The contract in this case is informally called a “relational contract” because it is a contract where parties adapt it over an
extended period of time, and let day to day decisions run the relationship
 But this can create problems legally when the parties get angry with each other
 Why offerors also like firm offers
o Binding nature of a firm offer is actually better for the offeror too because it demonstrates a seriousness to the offeree
who then may be more motivated to bargain
o But the problem with firm offers and other offers that are still open offers and not yet revoked is that the offeree has the
ability to speculate on the offer and the market and can wait to see if it is a good deal before accepting, and this seems to
take advantage of the offeror

Contracts Accepted by the Offeree’s Performance

 Unilateral contracts (term is not used in R2d) (R2d 30)
o Offer is accepted not by a promise of future act, but actual performance itself
 e.g., Hamer v. Sidway, where the bargain was to refrain from drinking and smoking, not a promise to refrain from
drinking or smoking
o Cannot be breached by the offeree such that damages are awarded to the offeror
 Unilateral contracts and part performance (R2d 45)
o When an offer clearly envisages a unilateral contract “an option contract is created when the offeree tenders or begins the
invited performance or tenders a beginning of it” because the beginning of performance furnishes the consideration for
the option contract (note that this is a change from the old common law rule that would have allowed the offeror to revoke
at any time even before performance was complete, as in the Brooklyn Bridge example)
o So the option then lies with the offeree who can chose to continue to perform or not, but the offer is not enforceable until
full performance is completed
o So, e.g., the uncle in Hamer v. Sidway cannot revoke the offer 2 months before the nephew’s 21 st birthday after the
nephew had been performing for 2 years
o BUT only actual performance creates the option contract, not preparation for performance
 e.g., Assembling all materials to travel to the north pole for a reward is not performance until you have actually
set out on the trip
o And the option contract rule does not apply if the offer itself makes clear that the right to revoke is reserved
 Bilateral or unilateral contract?
o In the past, courts tried hard to distinguish whether an offer was inviting acceptance by a return promise (bilateral) or
action (unilateral)
 Today, most courts do not care as much
o UCC 2-206(1): An offer can be accepted “in any manner and by any medium reasonable to the circumstances”
 So a firm can respond to an offer for a part by either responding with a promise to send the part, or by simply
sending the part
 But if accepted by performance, under the UCC, seasonable notice must be given
o R2d 30, 32: If the means of acceptance is not stated, “an offeree can accept an offer by either promising to perform or
performing, as the offeree choose”
o R2d 60: When the offer is ambiguous as to the means of acceptance, not only is the beginning or tender of performance
“an acceptance by performance” but this acceptance “operates as a promise to render complete performance”
 SO, if an offer invites accepts by performance only, the offeree who starts performance has the option to not
 BUT, if any offer ambiguously invites performance through either a promise to perform or actual performance,
and the offeree accepts by actual performance, he is bound to continue performance to completion, since the
beginning of his performance is seen as his promise to continue

Double AA Builders, LTD. v. Grand State Const., L.L.C. An offer can be accepted by reliance when the offeree relies on the
offer to his detriment, at least in the construction bidding context; in this sense the reliance forms the consideration that
accepts the offer and makes the promise binding
FACTS: P made an offer to work as a subcontractor to D; D then won a bid to build a project based on the price that P quoted in its
offer to work as a sub (though D did not at the time tell P that it had made its bid based on P’s price, though P should have known this
was possible); P’s offer said that it was good for 30 days and D informed P that it had won the bid within the 30 days; P said that it
could no longer do the project
 Is this a binding offer based on promissory estoppel?
 Yes, promissory estoppel is appropriate here because the offeree relied on the offer of the offeror (and his promise to keep the bid
open for 30 days) to his detriment and the offeror should have known that this was a possibility
 It would be inequitable to allow the sub to remove himself from the obligation after the general contractor committed to the build
the project based on that information
 Justice Traynor, Drennan v. Star Paving Co., and inclusion of promissory estoppel in the construction industry
o Brought promissory estoppel (R1st 90) into construction bids, so promissory estoppel became a form of “offer estoppel”
 Because the general makes a bid based on a justified reliance on the subs bids
 And the sub expects and wants the general to use its bid, that is why he submitted it
 So the bid contains an “implied subsidiary promise not to revoke the bid”
o BUT it is not binding on the general to use the subs bids
 This leads to “bid shopping” and “bid chopping” by the general, which is why subs hate Drennan decision
o Why don’t subs and generals enter into a conditional contract that if general wins using subs bids, then they have to use
the sub?
 FRIER doesn’t know, it is just not the industry practice
o However, if the general begins to “bid shop” or “bid chop” then the sub no longer has to honor its bid
o Additionally, in CA and some other jurisdictions, for public contracts, the rule is that you must use the subs bid that you
included in your bid if you are the general
o R2d 87(2) canonizes Drennan, making an offer that is justifiably relied on before acceptance an option contract, but it is
almost never used since it extends the reach of the Drennan logic beyond the construction industry, and courts do not
want to do this, so courts just stick to the R1st 90 framework
o What is the difference between the Drennan analysis and promissory estoppel?
 Difference is “promissory estoppel” versus “offer estoppel” of sorts
 So difference is between an offer and a promise
 But “justified reliance” is present in each case
o Note, however, that promissory estoppel does not replace the whole contract, as it usually does
 RATHER, the promissory (or rather, offer) estoppel/reliance is seen as the consideration for an implied promise
to keep the bid open for a reasonable amount of time, that is, it forms an option contract
 Judge Hand’s approach, as a comparison to Traynor
o In James Baird Co. v. Gimbel Bros., a case similar to the Drennan decision, Judge Hand did not require the sub to
perform under his offer based on the general’s reliance
 Judge Hand said: “the contractors had a ready escape from their difficulty by insisting on a contract before they
used the figures; and in commercial transactions it does not in the end promote to seek strained interpretations
in aid of those who do not protect themselves”
o Demonstrates the distinction between the judicial philosophy of the two judges:
 Do we put the onus no parties to look out for themselves, or require parties to follow through on their non-legal
representations inducements (enforce reliance interest even when it is not legally enforceable)
 Sort of a question about when we bring the legal system to bear on issues when parties have not
directly invoked it
 Crazy practices of the construction industry and potential solutions
o In the construction industry, there are general contractors and there are subcontractors, and all of the bids come in at the
last possible minute, creating quite a lot of confusion and chaos
o With bid chopping and bid shopping, there is a lot of strategic behavior by both the generals and subs that is informed by
the perverse incentives involved with making a bid
o Three ways to deal with the situation
 (1) Treat subcontractor’s bid as an offer that can be revoked at any time before the general’s promise of
acceptance, even if the general has relied on it in forming its bid to the owner
 But this can screw generals
 (2) Treat subcontractor’s bid as an offer than cannot be revoked until the general contract has had a reasonable
time to promise acceptance following award of the contract from the owner, so treat it as an option contract
 But this can lead to bid chopping and shopping
 This is Drennan’s approach, where there is offer estoppel
 (3) Treat the subcontractor’s bid as an offer that is accepted by the general when it uses that offer to form its bid
and win the contract (so the use of the bid is an implied promise to accept subject to the implied condition that
the general win the award)
 This seems like a happy median, but bargaining power in favor of the general contractor probably
prevents it
 Distinguishing sale of goods versus services
o Subcontractor Double AA Builders, Inc. argued that under UCC that the offer is not enforceable because it was a contract
for goods in excess of $500, requiring per the UCC SOF that the contract be signed (it was not since it was just faxed);
o But the court held that this was a sale of services, and the UCC does not govern services, so the UCC Statute of Frauds
does not apply
o And the common law statute of frauds does not covers sales above a certain amount, apparently
o And the performance of the roof is different than the case of the chip supplier selling chips, since that is more like a good
o When determining if something is a good or a service you must ask, what is its “predominant purpose”?
 e.g., Is eating at a restaurant a good or a service?
 Probably depends on the nature of a restaurant—is it a full service fancy restaurant, or a cafeteria?

C. Negotiation and Closure

 Complex contract negotiation
o In complex business negotiation today, it is hard to know when the parties have actually formed an agreement
 Because the classic framework of offer and acceptance is not pertinent to the way that complex business deals
are accomplished
o Is the final written version the actual contract, or just a written memorialization of a pre-existing contract?
o What about letters of intent and various intermediate contractual steps?
o What about contracts with multiple terms, some of which are less important than others; which terms need to be decided
before the legally binding contract is actually formed?

Situation Management Systems, Inc. v. Malouf, Inc. In complex deals, the parties may have very different conceptions about
when an agreement has actually been reached
FACTS: P made a somewhat ambiguous oral promise to D that they would sign a five year deal; based on this promise D bought
another company; P then refused to sign the five year deal as per the terms that the parties had originally used
 Did the parties actually reach a contract, even though nothing was finalized and signed?
 Yes, there was enough information here supporting a jury verdict that the parties had come to an oral agreement; so it is
appropriate for D to sue for breach of this contract
 The objective theory of contract views the parties as have come to an agreement on all material terms (this is probably influenced
in part on D’s acquisition of the company, as perhaps constituting beginning of performance of the contract)
 Why the court found a contract
o In complex deals, parties may have very different conceptions about where the deal is and what has been decided
o The court finds a contract based on the other terms and the conversations between the owners
 Could reliance have been present here?
 Yes, probably, since one party bought a company, but the court decides the contract based on
traditional contract theory grounds
o P was still looking toward a written agreement and thought that only that would be binding, but the executive assurances
undermines this notion, and the court ultimately found that those assurances were enough even without the writing to
constitute a contract
o From D’s perspective, it is already carrying out the contract by the purchase of the other company
 This is a fairly decisive point in the court’s analysis
o It is important that this is seen to be an actual contract and not just a promissory estoppel claim, since with promissory
estoppel (reliance), you would only get reliance damages, but with a contract, you get expectation damages
 What did SMS do wrong?
o Should have been more clear about what they were and were not doing and agreeing to
 But their personal relationship and desire not to be “overtly legal” probably undermined this
 What should LMA have done?
o Get it in writing! Why would you purchase another company based on an oral agreement only, even with a close friend!
 Arm’s length agreement
o Note the idea of an arm’s length dealing, as separate and independent entities with no personal relationship
 Does the court here make an exception to this idea because of the close personal relationship between the
owners of the respective companies?
 Not the sort of contract you make orally
o This case notwithstanding, courts will usually be suspicious of enforcing an oral contract for something like a purchase of
a company, since this is not something that people usually do based only on an oral agreement
o This is similar to the argument made by Zehmer in Lucy v. Zehmer, but there is was more contextual
 i.e., Selling expensive land is not something that you do on a whim while drinking in a bar on Christmas Eve
 Effect of planned future written agreement? (R2d 27)
o “Manifestations of assent that are in themselves sufficient to conclude a contract will not be prevented from so operating
by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof; but the
circumstances may show that the agreements are preliminary negotiations (only)”
 See also comment c to this section, which includes different questions courts may ask when determining if a
future written contract was what the parties were contemplating, versus just a memorialization
 Extent to which express agreement has been reached on all of the terms to be included
 Whether the contract is the type to usually be put into writing
 Whether it needs a formal writing for its full expression
 Whether it has few or many details
 Whether the amount involved is large or small
 Whether it is a common or unusual contract
 Whether a standard form of contract is widely used in similar transactions
 Whether either party takes any action in preparation for performance during the negotiations
 Some parties may avoid clarity intentionally
o Because they think that they can have their cake and eat it too
 i.e., They won’t technically be bound by they can get the other party to act

Arnold Palmer Golf Co. v. Fuqua Industries, Inc. 6th Circuit uses a more comprehensive approach to see if the parties reached
an agreement by looking at the context, etc.
FACTS: P and D were negotiating an agreement of merger; they created an MOU that said the parties have “reached a general
agreement” and they specified many terms; it also said that a final agreement would be reached by the parties’ lawyers, which would
include the incorporation of other terms; D then backed out of the deal and P sued for breach of contract
 Did the parties actually reach a contract, even though the agreement was not in the final version?
 It is possible that the parties reached a final agreement; there is at least enough evidence tending to show this that the breach of
contract claim should not have been dismissed on summary judgment
 If we look at the public statement and the terms of the MOU as well as all of the other contextual and circumstantial evidence, a
reasonable person could determine that the parties had reached an agreement; this is a very fact intensive process

Empro Manufacturing Co., Inc. v. Ball-Co Manufacturing, Inc. 7th Circuit uses a more four corners approach to see if the
parties reached an agreement; since it said that they did not on paper, they had not formed a contract
FACTS: P and D were negotiating an agreement of purchase; P included in all of the documents including a general letter of intent
clauses saying that the deal was not final, etc.; D backed out of the negotiations and P sued for breach of contract
 Did the parties actually reach a contract, even though the agreement was not in the final version?
 No; there was no agreement; all of the statements in the letter of intent saying that this was not final must be taken on their face to
mean just that; so either party could back out at any point
 Many agreements today are made in stages, and until the final stage is reached, the agreement is not binding; this determination
should be made on the basis of what the words in the documents say, not circumstantial evidence, etc.
 Arnold Palmer (VI Circuit) as compared to Empro (VII Circuit)
o Can we reconcile these cases?
 Each has a memo/letter of intent
 Each has some ability for final approval (the “subject to” language or the “board approval” language)
o Does it make a difference that the memo of intent in Arnold Palmer was actually negotiated whereas the letter of intent
was only drafted by one party?
 Yes, probably
o Also, Fuqua purchased a company, so this could be performance (and therefore reliance)
o Ultimately, we want to determine if the final agreement was a mere memorialization or the actual agreement itself
o BUT really the difference is in judicial attitude and approach
 VI Circuit is wondering about intent and uses “circumstantial evidence” and approaches the situation from a
more subjective framework with a wider factual scope
 VII Circuit is more concerned with the terms in the “four corners” of the document and is more objective and
does not care about the wider circumstantial evidence of the situation
o So, if you are aware the you are in the 6th or 7th Circuit, you should take this sort of judicial attitude into account when
bargaining with another party and trying to help your client
 e.g., Letter of intent says that there is “no further commitment”; in the VII Circuit this would probably end the
discussion no matter what the wider situation suggested, whereas the VI Circuit may take the wider situation into
o VI Circuit has a “softer heart” for equity than the conservative Easterbrook
o VII Circuit and Easterbrook is more like Cardozo or Hand in that he wants the parties to write things down and be clear
about what they are doing, he is not going to make the contract for them, even if it seems inequitable to one party in the
 The long term rule governing expectations that is established is better for all

Copeland v. Baskin Robbins U.S.A. An agreement to negotiate in good faith is enforceable; an agreement to agree is not
enforceable; courts will sometimes help the parties that have agreed in principle but not in the specifics fill out their terms,
but they will not complete the entire contract for them
FACTS: P and D made an “agreement to negotiate” an agreement in which P would purchase D’s ice cream factory
 Is there such a thing as an agreement to negotiate? Is this different from an agreement to agree (which is unenforceable)?
 Yes, it is permissible for the parties to make an agreement to negotiate in good faith, and this is what the parties did here
 An agreement to negotiate in good faith does not require that the parties come to an agreement, only that they make a good faith
effort to do so; this is valuable since both parties invest so many resources in negotiation, you want to know that the other party is
proceeding in good faith; for a breach of this contract, you can only get reliance damages, not expectation damages
 When D broke off the negotiations, what the options for P?
o (1) Proceed with the contract but without the co-packing provision
 But this is economically a bad decision
o (2) Attempt to sue D for breach of a co-packing contract, even though it was not totally agreed to (as in Arnold Palmer)
 But the evidence for this is a little slim, since it would be hard to show that there was a complete contract in
place since there were so many unknown terms
o (3) Argue that there was a contract to negotiate the remaining terms in good faith
 Though not necessary to succeed, just to make a good faith effort
 This is what P did
 More than an agreement to agree
o If this was just an agreement to agree, as in the Sun Paper case, it would not be enforceable, since agreements to agree
are NOT enforceable
 But we want to try to make a sharp distinction and call it a contract to negotiate, which then comes with a good
faith duty, since it is performance of the contract
o How is different than Racine?
 Arguably, here there was actually a contract supported by consideration to negotiate, so there was a contractual
duty to perform the negotiation in good faith, not just a general background duty, which is non-existent in Anglo-
American law
 Court will not just create the whole contract, but almost in some instances…
o Note that even with the more aggressive stance of modern courts in reading in and filling out missing terms of contract
and thus finding an enforceable contract, the proto contract in this case is missing too many essential terms for the court
to complete it
 i.e., Today courts would be more willing than in Sun Printing’s day to fill out an “agreement to agree” for the
parties, as in the case of Kenai v. Ferguson, the gas station lease case, where the court inserted the market rate
for the lease into the contract since the parties could not agree even though they had agreed to agree
 In fact, UCC 2-305 explicitly sanctions this, especially as regards price
 PROVIDED that there is a manifestation of intent to form a contract under UCC 2-305(1)(b)
 But note that the longer the contract duration and the more difficult the construction on the court, the less likely
the court will be to do this
 So the court finds a contract to negotiate and because of the duty to perform an existing contract in good faith, it
means that the parties must negotiate in good faith and cannot just pull out on a whim
o What Copeland allows is the parties to voluntarily enter into a contract that would enforce such a duty
 But note that the facts supporting the contract to negotiate (thus in good faith) are a little shaky and it is also hard
to distinguish them in some ways from Racine
 What do the parties expect should their agreement to agree fail?
o It is often unclear if the parties expected at the time of making the agreement to agree that if they should not agree the
court would imply terms, or the contract would just end
 And the parties may have conflicting views on this in the actual dispute
o It is also possible to sever the indefinite part or not agreed upon part if the contract would still be workable without it
 Labor agreements have a duty to negotiate in good faith by statute
o Because society has more of an interest in seeing this reach agreement to avoid labor strife than in the case of other
o Also there is probably more bargaining power disparities
 UCC and open term contracts (2-204(3))
o “Even though one or more terms are left open, a contract for sale of goods does not fail for indefiniteness if the parties
have intended to make a contract and these is a reasonably certain bases for giving an appropriate remedy”
 This implies an analysis of the parties’ intent by the court
o UCC is a little looser than the common law on the court’s ability to fill in terms
 R2d 33 requires that the “terms of the contract be reasonably certain”
 UCC and open price contracts (2-305)
o “The parties if they so intend can conclude a contract for sale even if the price is not yet settled. I such a case the price is
the reasonable price at the time of delivery”
o If one party has the power to do this under the contract it must do so in “good faith”
o The court may fix the price and other essential terms of the contract
 So Sun Printing would have come out differently under the UCC
o But 2-305(4) provides that “where, however, the parties intend not to be bound unless the price be fixed or agreed and it
is not fixed or agreed, there is no contract”
 Why use indefinite contracts?
o Too much time to specify all terms for a routine transaction
o Parties reluctance to raise difficult issues for fear that the deal may then fall through
o Simply impossible to deal with every remote contingency that could arise
 Indefinite contract is different from a failure to agree
o Mere silence about a minor term in the contract is different from discussion and the inability to agree on the term
o First situation is an indefinite and potentially enforceable contract and the second situation is no contract at all
 Indefinite contracts and restitution and reliance
o If an agreement is too indefinite to be enforced under contract law leading to expectation damages, the court may still of
course award reliance or restitution damages, provided that they are appropriate
 What the courts are really doing, perhaps
o JJ White sees the court’s finding of a contract to negotiate in good faith as just a way for the court’s to develop a creeping
duty of good faith in pre-contract negotiation
 Generally, there are four ways that pre-contractual liability have developed, and the contract/no contract
dichotomy has been accordingly undermined
 (1) Unjust enrichment resulting from the negotiations
o This would lead to restitution interest
o e.g., Architect who prepared plans during negotiation and the other party used the plans with
another architect
 (2) Misrepresentation made during the negotiations
o This would be like the public contracting cases and seems to be based somewhat in tort
 (3) Specific promise made during the negotiations
o This seems like a reliance based remedy
o e.g., Red owl or the case of the gas station
 (4) An agreement to negotiate in good faith
o e.g., Baskin Robbins
 Problem 3-6 (Bethlehem steel)
o Should the court fill out the terms for the parties?
o Is there evidence that this was contemplated, or was it rather that the deal would fall through in no agreement
o See how in these types of cases one party often wants the court to provide terms and the other party wants to get out of
the contract altogether

D. Good Faith in Contract Formation

 Good faith requirement in performance of a contract
o UCC has a requirement of “good faith” in the “performance and execution” of a contract (UCC 1-304)
 This was controversial when introduced because the parties were scared that they would be found to not be in
good faith just on the subjective interpretation of the court, and that courts could expand their license to impose
duties on parties
 BUT it is only in the performance, NOT in formation or negotiation
 Same rule echoed in R2d 205
 “Every contract imposes on each party a duty of good faith and fair dealing in its performance and
o Purpose is to prevent the contracting party from engaging in conduct that while not technically transgressing the express
terms of the contract frustrates the other party's right’s or benefits to the contract
o But the courts have generally not been very apt to use the idea unless paired with another basis for finding a party to be
in breach
 “Culpa in contrahendo”
o “Fault in the making of a contract” (i.e., The negotiation and contract formation)
 You get reliance damages (based on the cost of engaging in the bargaining process) if your partner does not
negotiate in good faith
 BUT this is not in Anglo American law, only European law
 In common law, there needs to be gross misconduct that looks more like a tort claim before there will be
damages for bad faith negotiation
 Should liability build gradually, or come all at once when the contract is formed?
o Often the same people who think that the contracts should be concluded formally and be in writing, etc. think that there
should be no duty to negotiate in good faith, while those who would enforce agreements not following the formal
requirements of contract formation for purposes of equity, tend to see the duty of good faith in negotiation as a good thing
 Ultimately, should the parties have to look out for themselves, or should the courts require fair play and
supervise everything?
 Will we allow contractual liability to arise gradually as the parties near an agreement, or only bring contract law to
bear once a contract has been formed per the contract/no contract dichotomy?

Racine v. Laramie, Ltd., Inc. v. Department of Parks and Recreation There is no duty to negotiate in good faith in Anglo-
American law; good faith is limited to performance of a contract
FACTS: P was in a forty year contract as a concessionaire; P wanted to amend the contract; D began to negotiate the amendment and
then stopped (arguably) arbitrarily and in bad faith
 Is there an implied duty or warranty to negotiate in good faith?
 No, there is no implied warranty to negotiate in good faith in Anglo-American law; all that is required is that the parties to an
existing contract perform the terms of that contract in good faith
 P’s claims are based on promissory estoppel and similar cases where there was a letter of intent that had a provision that the
parties continue to negotiate in good faith and nothing like this was present here; the general rule is that there is only a
requirement to negotiate in good faith in special circumstances (i.e., If the parties have agreed to do so, with promissory estoppel,
or the discretionary powers doctrine)
 There is no duty to negotiate in good faith
o D did have reasons for denying the expansion, P just thought that they were too abrupt in pulling out
o But these reasons don’t even matter since there is no duty to negotiate in good faith; D could just pull out whenever for
any reasons, or not bargain at all (note that this may not be reasonable, since they did already have an existing contract
that they were performing and arguably they had to act in good faith in its execution)
o Should the investments in the negotiation by P change the outcome?
 No, but what if D was egging them on? Then maybe it could be, but still P should have got something in writing
 e.g., Frier’s brother and the bid to clean the UMich hospital where there was no real intention to
evaluate the bid, should this lack of good faith lead to reliance damages for the cost of the bid?
o No, it should not, the brother needs to look out for himself (unless unjust enrichment or there
was a contract to negotiate in good faith) (note what Frier’s brother did—say that he will do bid
in exchange for a written confirmation of the evaluation of the bid, since this would be
consideration forming a contract, which would then require good faith in the performance of
their discretion about whether to accept or deny the bid), i.e., he looked out for himself
o The general rule is that as a bidder you are required to protect yourself, if you don’t win the bid or it falls through, absent
some other agreement, the incidental costs are your loss (as Easterbrook said, in Empro)
 Common law’s aleatory view of negotiations
 Both parties bear the risk of losing the time, resources, expenses, and lost opportunities they used in
negotiation if the other party backs out at any time before finalization, and the offeror can do this at any
time since there is no duty to negotiate in good faith
o One problem with finding a duty to negotiate in good faith is that it would be hard to determine when a party was just
making a sound business decision and when it was acting in bad faith, and this would be difficult for the parties

New England Insulation Co. v. General Dynamics Corp. In public contracting, bids will be reviewed in good faith, and this was
carried over to the private market in this case, but this is the minority position
FACTS: P submitted a bid to work on a project for D; P was told that the bids would be kept secret and would be assessed after all of
the bids had come in; D was, however, planning to go with another subcontractor all along and had no intention of reviewing P’s bid,
and further, they shared it with a competitor
 What did D do that was wrong?
 D (may have, this is just an appeal from a granted motion to dismiss) represented to P that it would give a good faith review of P’s
submission when it in fact had no intent to do so, and P incurred costs to submit the bid, and this is not fair/done in bad faith
 The court takes the requirement in public contracting that bids submitted receive a good faith review and translates it to the private
sector—this rule is based on something like promissory estoppel, since P and others incur costs when they submit a bid; further, D
promised not to divulge the bid to others, and it did this
 Reliance damages for requesting a costly bid in bad faith
o Because of D’s bad faith negotiation, P gets reliance damages (this is a fringe case that most other jurisdictions would not
 P does not get expectation damages because it may have not won the bid anyway
o Court borrows the idea that the submission of a bid brings with it the implied contract to conduct the bid process honestly
and in good faith from public contracting (from the Heyer decision and the Federal Court of Claims)
o Note that the promise of confidentiality adds a promissory estoppel hook that makes the court’s decision a little more
o BUT, really
 Confidentiality breaches are one thing
 An implied contract to conduct bid process fairly is another thing
 Courts are generally okay with enforcing the first, but not the second
 Difference between the US and Europe
o e.g., French deal example, where the party was negotiating with another party on the side and had no intention of coming
to agreement with the first party
 This is sufficient for reliance damages in Europe
o But we have a different attitude in the USA and will not be forgiving or help parties that get burned
 They have the tools to deal with it themselves through ancillary contracts
 Tort remedies
o If the bad faith reaches a certain level, there are tort remedies
o Tort of fraudulent misrepresentation
 Parties bear the loss of the expenditures in deal making if the deal falls through
o As Easterbrook said in Empro, there are not reliance damages for the expenditures incidental to negotiating a deal
o Why is this good idea?
 Very difficult to determine at what point the obligation would arise
 Could have a chilling effect on negotiations
 Could have acceleration effect increasing pressure on parties to come to a hasty conclusion
 Each party can do a better job at managing his own expenditures in coming to the deal, and the other should not
have to act as his insurer
o JJ White agrees with this line of logic, FRIER is a little skeptical
 Problem 3-7 (landlord installs new wiring for the party who then decides not to enter a lease case)
o I think that you should be unforgiving, parties can protect themselves, we are not going to bail them out
 Note that all of the European attorneys thought that the party should get redress through expenditure damages,
showing the difference in attitude
 Note that the parties ability to bargain in these situations is dependent on macro market forces
 e.g., Lots of vacant space versus little vacant space
o We do NOT want parties to run up reliance costs and then pass them on to the bargaining partner, they should build them
into their actions/decisions/risks themselves
 Note that the market can also impose informal sanctions on bad faith actors, like when people don’t want to do
business with someone who acts in bad faith
 We don’t need the law to do this, someone’s own reputation will punish them

E. Problems with Standard Form Contracts

 Form contracts
o These have become completely ubiquitous and have substantially altered contract law
o Comprised of tons of “boilerplate” that is usually highly favorable to one party
o Usually the party dominating the transaction tries to get this language into the agreement through boilerplate, which is to
say without really negotiating over it
 Battle of the forms
o How do we deal with this reality?
 Continue to fight to work with classical contract theory?
 Use 2-207 approach?
 Use rolling contracts approach?
 Use reasonable expectations approach?
 Why we have form contracts
o Reduce transaction costs for the party
 Because it is not necessary to re-negotiate every time
 Because risk is manageable since it is more knowable
o Ultimately makes products and services cheaper for the consumer
 Assuming that the savings are at least partially passed on and the market is competitive, etc.
 Some problems with form contracts
o Parties can structure the contract so as to protect themselves from specific risks of which they but not the other party may
be aware
 Though choice of law provisions
 Through the waiver of certain warranties, etc.
o Inequities in bargaining power can be accentuated
 But note that form contracts do not create bargaining power, they are merely evidence that it exists
 And by adding so many regulations, e.g., by putting rent controls on the market, etc., the legislature has
reduced the ability of the consumer to bargain, since they, e.g., cannot negotiate for an increased rental
in exchange for not having an exculpatory clause
o (my idea) most bargaining takes place at the regulatory level and not between individuals, so it
is really FTC (for consumers) bargaining against Chamber of Commerce (for Google) and not
the consumer against the company, though the FTC as bargaining party is a much stronger
argument, since Google represents itself most often
o But does this make the situation work since consumers rely on the regulatory agency, or even
a consumer group filled with citizens to look out for them
 Some standard boilerplate (usually exists to take away the default rules provided by the UCC):
 Limitation of warranties
 Limitation of legal remedies
 Forum selection
 Choice of law
 Attorneys’ fees
 Limitation on right to modify a contract
 Limitation on principles of interpretation
 Limitation on assignment and delegation of contract
 Arbitration clause
 Integration/Merger Clause
o Dominant party wants to put itself into a favorable position with the lawsuit, but does not want to tell the other party about
what this actually means for the contract
o But often even the party that wants the terms has not thought about what they actually mean in light of the current
contract and deal and this makes it very difficult when litigation arises to know what the parties agreed to since so much is
not relevant or contradictory, etc.
 e.g., Agent that used the “buy” contract and not the “sell” contract on accident
 UCC in general retains the traditional terms of contract law
 UCC 1-103: Unless UCC overrides, all other laws apply
 UCC 2-204: The agreement of the parties is still at the center of a contract
 UCC 2-206: Offer and acceptance is still present
o HOWEVER, in light of the development of form contracts and business practices in general, the UCC has tried to deal
with the battle of the forms through 2-207
 Understanding 2-207 (developed to deal with contract formation but in practice deals with contract interpretation)
 (1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an
acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made
conditional on assent to the additional or different terms.
 (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the
contract unless:
 (a) the offer expressly limits acceptance to the terms of the offer;
 (b) they materially alter it; or
 (c) notification of objection to them has been given or is given within a reasonable time after notice of them is received.
 (3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings
of the parties do not establish a contract. In such case the terms of the contract consist of those terms on which the writings of the parties
agree, together with any supplementary terms incorporated under any other provisions of this Act.
o Goal is to prevent a situation in which a boilerplate contract on an acceptance form, simply by virtue of being the “last
shot,” becomes the contract governing the transaction
o Although designed to aid in contract formation (i.e., to deal with cases like Ardente v. Horan), 2-207 is used in most cases
to deal with situations in which both parties agree that a contract has been formed since they have been performing for
some time without a problem, but they do not agree on what the terms of the contract are since each parties form has
radically different terms
 And they do not look at the term until a dispute arise
o More often than not, the application of 2-207 gives more of a strategic advantage to buyer in most cases and away from
the seller, who was usually better off under common law last shot, since his form was the last to be exchanged
o How to interpret 2-207
 Section (1): Does away with the mirror image rule and thus deals with formation
 The first step in applying 2-207 is to determine if the exchange of documents did in fact result in a
contract (THIS IS AN IMPORTANT THRESHOLD MATTER FOR FRIER), and only if the court finds
that one has been sufficiently established, will it move to (2) (or it can also move to (2) based on
performance as in (3))
 Section (2): Assumes that a contract has been formed as per (1), or per (3), and determines which of the
offeree’s proposals will be included in the contract
 Additional terms only proposals that will almost never be accepted if the offeror if the buyer is a
consumer and the seller is a merchant
 Additional terms become part unless (a), (b), (c) if the offeror is a merchant
 Different terms addressed under either
o Knock out rule
 But this ruins the idea that offeror is master of offer
o Different terms are not included
 But this looks like the first shot rule
 Section (3) was added later and is meant to deal with the “real cases” the times when the parties have been
performing and then an issue arises and the contracts they have are radically different
 Terms that agree are included, and the UCC provides all gap fillers
 Problem 3-8 (battle of the forms)
o (1) Yes, Buzz’s terms apply and become part of the contract
o (2) No, an essential term of the contract is in contradiction, so this would be a counteroffer
o (3) This would be a counteroffer at common law and if the parties just begin to perform, then the last shot doctrine would
govern and all of Sally’s terms would control; under 2-207, Sally’s terms would arguable fall into the last clause of (1)
since the offeree made agreement expressly conditional on the assent to the additional terms, and in this case it would be
a counter offer accepted by Buzz; or they may just be additional terms that are incorporated as between merchants
unless they are material (and they probably are, in which case they would not) or Buzz rejects them in 10 days, or if
Buzz’s offer had been expressly limited to the terms; we could then proceed with knockout rule to the extent that it is

Gardner Zemke Co. Dunham Bush, Inc. When using 2-207, when appropriate, we can use the knock out rule to get rid of
different terms and replace these with UCC default terms in order to form the agreement
FACTS: Offeror (P) ordered a part from offeree (D) using an order form with a basic warranty provision for the part; offeree responded
with the part and a reply receipt that contained numerous disclaimers of all warranties; the part then broke
 How to we construe the terms of this contract using 2-207?
 This is a contract that is construed using 2-207, so offeree’s response with new terms is not a counter offer per the common law
mirror image rule, rather it is an acceptance with proposals for “additional” and “different” terms
 Further, because the offeree did not make it clear to the offeror that he would not proceed without the incorporation of his terms
(including those on the bill of sale and saying that inaction means assent is not enough), his new terms do not trump the former
terms under the last clause of 2-207(1) (which would then not make it an acceptance, but rather a counteroffer), so we need to
determine how to incorporate them into the contract
 Further, since the terms were different from the original warranty terms given by the offeror, we will use the “knock rule” and say
that everything in conflict cancels is counterpart out, and the rest of the gaps will be filled in by the UCC default terms
 UCC 2-207
 Departure from common law last shot doctrine
o Under common law, often the offeree (seller) would have had the last shot, so its terms would govern
 Why does the court say that the capital letters from offeree requiring assent by offeror to the new terms are not enough?
o If separately written in or discussed, maybe/probably they would be and it would be a different matter (the last clause of 2-
207(1) would apply and it would be a counteroffer), but because it is boilerplate it is understood that it is not an emphatic
deal breaker, and the offeree was not conditioning acceptance on assent to the terms
o If offeree really cares about these new boilerplate terms, he need to make it more clear than just adding boilerplate and
should not proceed with the transaction without making sure that the terms have been included in the contract
 Applying 2-207 to this case
o We can’t just ignore the terms of offeree’s boiler plate, but how do we determine if they will make it into the contract?
 Are they “different” or “additional” terms?
 Additional terms (explicitly covered by 2-207(2))
o If offeror is consumer, additional terms cannot be included unless there is express assent
(which there will never be)
o If offeror is a merchant, additional terms from the offeree become part of the contract unless
(a) offeror’s offer is expressly limited to the terms of the offer or (b) the additional terms
represent a material alteration (c) notification of objection to the additional terms is given
before or just after the additional terms are introduced
 The biggest dispute: what is a material alteration?
 The comments to 2-207 flesh this out a little bit, but it is a matter of judgment
for the court
o “Result in surprise or hardship if incorporated without the express
awareness of the other party”
o Something like an arbitration clause is probably in between what is
definitely material and what is definitely not material
o If it is worth fighting for, it is probably material
 Different terms (not covered, whether by intention or accident in 2-207)
o Courts take different approaches as to what to do with these terms
 (1) “Different” is not to be distinguished with “additional” and the 2-207(2) analysis
should be used
 (2) “Different” terms is to be distinguished from additional terms and any different
terms are simply discluded from the contract
 (3) “Different” or conflicting terms get “knocked out” and the default UCC rules and
warranties govern the transaction
o Knockout rule
 Conflicting rules get knocked out and the default rules of the UCC govern
 These are generally more favorable to the buyer
 Knock out rule is the least worst solution in these instances
 Alternative no. (2) is that the offeree’s different term does not get included at all (but
this would be a “first shot rule”) and suffers from a similar level of arbitrariness as the
last shot rule and is the minority view
 But it does keep the offeror as master of the offer, and if the offeree does not
like it, he can go elsewhere
 Knock out rule reflects the underlying belief that UCC terms are better for parties (but
this impinges arguably on the freedom of contract) and creates a situation where the
parties come to rely on the courts to construe their contracts
 (my idea) why do we do this, we should let them learn the hard way!
 Would expectations change if we enforced the last shot doctrine?
 Net effect of 2-207
 Acceptance of offer by offeree can alter the terms of the offer though the knock out rule and other
applications of 2-207
o This goes against the idea that the offeror is master of the offer
 Court’s finding in Gardner Zehmke
o The terms were “different” because the first purchase order had a warranty provision
o However, if the contract had been formed over the phone, then the documents exchanged would have probably been
seen as “additional” and the analysis given under 2-207(2) would be needed (i.e., they are additional terms that would be
incorporated as between merchants, unless they materially alter, offeror expressly limits offer, or the offeror objects
 What if no contract formed by the documents themselves?
o If both Gardner Zehmke and Dunham Bush has said per 2-207(2)(a) that acceptance will only occur if their own terms are
expressly assented to by the other party, but then the transaction ensues anyway, then the court would use 2-207(3), and
probably find that contract is largely governed by the UCC default rules, since there would likely be little agreement in
terms, so they would all cancel out under the knock out rule
 CISG largely preserves the common law mirror image rule

Step-Saver Data Systems, Inc. v. Wyse Technology When terms represent a material alteration to a pre-existing contract,
those terms are not included in the contract per UCC 2-207(2)
FACTS: Offeror (P) ordered and continued to order software license from offeree (D); offeror ordered over the phone; on the box top of
the product, there was a set of terms claiming to the be the final contract, and these were very favorable to offeree; the terms took
effect when offeror opened the box
 How to we construe the terms of this contract using 2-207?
 The actual telephone order and not the opening of the box was the contract, so the terms on the box were at best an acceptance
or a confirmation
 The terms were not therefore a counter-offer under either common law (since it doesn’t apply, since this is governed by the UCC,
even though this software and that is debatable) or the rules of 2-207, since the contract already exists
 The terms included a material alteration to the previously established contract, so they are not included per 2-207(2)
 UCC 2-207
 Confirmation versus acceptance
o Because the oral contract already exists, according to the judge, D’s “confirmation” is not an acceptance with different or
additional terms as in Gardener Zehmke; rather, it is the introduction of new terms that materially alter the transaction, so
as per 2-207(2), they are not included in the agreement
 Difference between Step Saver and Gardner Zehmke
o No contract in Gardener Zehmke until acceptance with terms
o Contract already exists in Step Saver since there was an oral contract
 Opening the box is problematic as a method of acceptance of the new, additional terms
o Is this the right decision?
 Maybe not
 Because they are commercial parties
o They should have sophistication to deal with this type of issue
 Because of the repetition
o This was their “course of dealing”
o But Step Saver did object…
 If there is a pre-existing oral agreement, and a confirmation is sent, the terms it contains are necessarily additional
 When did the contract come into being?
o It is unclear when the contract came into force
o Undermines the contract/no contract dichotomy
o UCC is not too worried about this
 2-204(2): “An agreement sufficient to constitute a contract for sale may be found even though the moment of its
making is undermined”
o Leads into the idea of a “rolling contract”
 Problems with the sale of software
o Potential legal frameworks
 Very anti-consumer, most states and courts have rejected it
 ALI’s Principles of the Law of Software Contracts
 Fairly new and has never been used by any court
o Should software be a “good” under the UCC?
 e.g., Architectural design on a disk; design is flawed but the disk is fine
 Design is not a good, it is information
 But, e.g., Lots of computer software on a car is part of a total good
 These are the two extremes, but there is a lot in between
o In any case, both parties stipulate that this is a transaction involving the sale of goods in Step-Saver, so the UCC applies
 Problem 3-9 (mIcrodot and software program)
o All of (1), (2), and (3) factual scenarios would constitute a contract under 2-207, with (3) especially constituting a contract
under 2-207
 Note on Carnival Cruise v. Shute
 Supreme Court had earlier held that the terms of a boilerplate agreement accepted by a company from another
company were binding even though it was through a non-negotiated adhesion contract
 Similar case arose in Carnival Cruise and IX Circuit said that they were not binding because it was a consumer,
not a company with legal counsel, etc.
 But Supreme Court overruled the IX and said that they were binding even on a consumer
o Two important implications
 (1) Consumers cannot get out of agreements just because they entered the contract through a non-negotiated
adhesion contract
 (2) At least some contracts will be upheld even though their full terms are not known by the consumer until after
the essential agreement (e.g., to pay for a cruise) is agreed upon, which in some respects resembles the last
shot rule…
 But this seems to contradict 2-207(2) if we assume the contract was already formed and this is a
material alteration, and it is not between merchants anyway
o The consumer is like Step-Saver
 But then there is the idea of a “rolling contract” and I think this is how the situation must be explained

Hill v. Gateway 2000, Inc. Rolling contracts have come to define consumer contracts; in a sense, such contracts are not made
complete until the final terms are reached; in some ways, they undermine 2-207 and revert back to the last shot rule…, in
some other ways, they can also be seen as unilateral contracts that are accepted by the conduct of the consumer (not
returning the goods, and this sort of makes sense since they have the option to return, so it is not binding on them, until the
end of the period, but the seller cannot renege, like the Brooklyn Bridge
FACTS: Offeror (P) ordered a computer that came with shrink-wrap terms requiring arbitration; offeree (D) stated that offeror assented
to the terms by not returning the computer within 30 days; offeror did not return the computer and then tried litigation
 Are these post-purchase terms effectively incorporated into the contract?
 Yes, the terms are a part of the contract; it does not matter that offeror did not read them (because there is a duty to read); offeree
can stipulate the form of acceptance, and that is what happened here; the revelation of full terms often happens after the product is
purchased and paid for (since this is most efficient) and this is perfectly acceptable, since the purchaser can return the product if
he disagrees with the terms; Easterbrook holds that a contract is not formed until finally at the end when the consumer accepts by
not returning the product; he also says that 2-207 is not applicable when there is a form from only one party (the argument would
be that this is a material alteration of the contract), though he is not widely followed in this view of the analysis, though his general
conclusion is generally accepted due to the necessities of the marketplace
 The efficiencies of rolling contracts
 Easterbrook changing the law
o Holding is based both on Pro CD and Carnival Cruise
 Holding is that the arbitration clause is enforceable
o How do the terms become part of the contract?
 How can you reconcile this with Step Saver
 It is pretty hard/impossible
o It is the sale of goods, so 2-207 should apply
 But Easterbrook ignores 2-207 and says that it is only for when two forms are used, not one (even though by its
own terms it should be)
 Easterbrook is just flat wrong on this point, and this is widely accepted by people on both sides of the
wider debate
o BUT really, Easterbrook seems to think contract is not formed until end of 30 days, or it is not completely formed
 In some ways it must be admitted that 2-204(3) permits this by acknowledging “open contracts”
 But can this really be true, given that all of the parts of the contract have been performed except warranties, in
that the computer has been paid for and shipped, etc.
 It has to be for the analysis to withstand 2-207(2); really, what we are saying is that there was really
only one agreement all alone and the “additional terms” were part of it from the beginning, or at least
contemplated in some way
o i.e., Easterbrook says that consumer knew that there would be more “shrink-wrap terms,” so it
is okay…
 Rolling contracts
o We still use classic principles of agreement, but should we in light of the “battle of the forms”?
 Easterbrook and others seem to accept the presence of “rolling contracts”
 There is a contract after the, e.g., phone call order, but it is not fully formed with all of the terms until
after 30 days, or until the consumer receives the product and has a chance to reject terms, etc.
o This is a complete aberration from the contract/no contract dichotomy
 Note that the rolling contract is hard to distinguish from the conditional contract in that the final
agreement is conditional on the terms to come later
 In any case, the convenience presented by rolling contracts clearly seems to be what consumers want
 They don’t want to have to listen to terms on the phone, or fill out an agreement and then receive the
product, they just want to order the product
 Why have rolling contracts developed?
o Market forces
 Rolling contracts make prices cheaper for consumers overall
 Consumers as a class are better off, but maybe not the individual consumer how gets burned
 Consumers prefer a cheap product or service with horrible contract terms as compared to a more expensive
product or service with better terms in the contract
 What’s Easterbrook’s reason for thinking that the consumer won’t get exploited in this situation?
o What protections are there for the consumer?
 Right of return within a reasonable period
 Terms cannot be too onerous or the courts will find them unconscionable and therefore unenforceable
 Executive agency regulation
 e.g., Dodd Frank Act, FTC, etc.
 Non-governmental consumer protection organizations
o But ultimately the market forces are where the protection lies, according to Easterbrook, at least
 This is what the market has created, so we just let it be
 If consumers desire otherwise, their demands will alter the market appropriately
 Despite the good or bad of rolling contracts, they are generally accepted today
o This is largely due to the fact that it is difficult to think of an alternative that would be acceptable and still allow for quick
and easy consumer transactions
 Contract terms as part of the product (Douglas Baird)
o There is the idea that the warranties and contract more generally are just part of the product that you are buying, and like
some electronic items, the consumer does not know everything about how it works, and this is something that he should
just build into his decision making process, and this is simply a necessity for the mass markets that we have today
 Peggy Radin’s response
o By contracting, you can waive certain default background rights
 Legislative
 Constitutional
 Common law
o You can get rid of remedies to which you are entitled
 This is a “democratic and normative degradation”
 The “Chicago philosophy” is more concerned with the market as a whole, not the individual consumer
o So we should have tort remedies for bad (defective) boilerplate
 But then there is the question about whether or not the terms would actually be
defective under either the consumer expectations or risk utility test
 So the FTC and other should regulate more heavily, since neither classic
contract law (or tort law, perhaps) is not the best way to regulate this
 Additionally, firms don’t actually pass on savings they get from using boilerplate
o Since the market is not completely competitive and there is not perfect information
 And some rights cannot be sold because of due process concerns about unalienable rights
 “Click-wrap” contracts are usually okay, but “browse-wrap” contracts are not
o And the advent of internet sales reduces the importance of rolling contracts, since now the consumer can at least
theoretically look at all of the terms and agree before he actually purchases the product
 Problem 3-10 (consumer renegotiates termite protection case)
o Court held that this was a counter offer to the contract, which was accepted

C & J Fertilizer, Inc. v. Allied Mutual Insurance Co. Reasonable explanations test is another way to deal with the battle of the
forms; the courts will not enforce a contract that goes against the reasonable expectations of the contracting parties; this
approach is not widely followed today except for perhaps in the insurance context
FACTS: P purchased an insurance policy that required that clear evidence of a break-in that left physical marks be present before the
insurance company would compensate for a loss incurred through a burglary; P was aware of this provision but did not closely read the
policy and argued that it was unreasonable since what he signed up for was an insurance policy for burglary
 How do we use the reasonable expectations doctrine?
 Court holds that the policy should be construed to benefit P; court uses the reasonable expectations test, and then expands it by
saying that the exclusion in the policy was not in line with the reasonable expectations of P as to what he was getting through the
insurance policy; the problem with this is that P did not read the policy, and if he did, he would have clearly had seen the carve out,
and more likely than not, would have been fine with it; so this is a broad expansion of the reasonable expectations test (which if
anything applies to terms that are unreasonable and about with the party is unaware or could not have been aware and to which
the party would have not reasonably agreed)
 The liberal judicial attitude of the 1960-70s
 Use of the reasonable expectations doctrine
o What makes this case different from Gateway or some other cases in the battle of the forms is that the specific language
was there from the beginning and P knew about it
o But the court though that the definition of burglary was misleading
 Because it doesn’t fit into the reasonable expectations
o If the purchaser had been clearly pointed to the exclusion, the case might have been different
 But it seems as if the salesperson was a little unclear, since he is both an agent and salesperson
o So do we have sympathy for him?
 Maybe, but what if he has been paying less throughout the year?
 Then maybe not, he decided to take the risk and he lost
o BUT the insurance company does need to make it more clear, especially given the nature of the door of the purchaser
and how it was susceptible to burglary by this method
 The complexity of insurance contracts is why they are heavily regulated
o (my idea) especially since this person is not a consumer, they should put the onus on the parties to bargain themselves
instead of bringing it to the courts
 This would save money both in administering the courts and for the insurance company who would not have to
defend the suit, and this would make taxes and insurance premiums cheaper for everyone
o The problem with this case (which was marginalized three years later) is that the court ignores the duty to read and
makes it seem like someone would be in a better position if he doesn’t read, since the court will rush in to defend him
 Reasonable expectations generally confined to insurance policies
o The reasonable expectations test as a way of dealing with form contracts is largely confined to the insurance industry,
due to the complexity of the policies
 But perhaps it will spread as a broader (and in some way tort-like, since it is based on a standard of
reasonableness) response to the problem of form contracts
 But some empirical evidence shows that it is even on the wane in insurance contexts
 Due probably to a more conservative shift in the judiciary in the last 30 years
o Additionally, it is the policy of courts to interpret insurance policies as against the drafter
 This will almost always be the insurance company
 R2d 211 on form contracts and reasonable expectations
o A party is generally bound by form contracts
o But per section (3) “if the other party has reason to believe that the party manifesting such assent would not do so if he
knew that the writing contained a particular term, the term if not part of the agreement”
 BUT FRIER says not to use this because it is impossible to apply
 Problem 3-11 (signing arbitration agreement while distressed before abortion)
o I think agreement will be enforceable since it is not an unreasonable expectation (unless there was duress…)

F. The Statute of Frauds

 Statute of Frauds
 R2d 110
 UCC 2-201 (sale of goods over $500)
o Contemporary list is basically from 1677 English Statute
o Two types of contracts are included
 (1) Contracts that are thought to be generally more important
 Most important in the list today
o (1)(d) “a contract for the sale of an interest in land”
o (1)(e) “a contract that is not to be performed within one year from the making thereof”
 Two reference points are the time of the making of the contract and the time when
performance is to be completed
 So an employment agreement for 10 months to begin immediately is not
within the SOF but an employment agreement for 10 months to begin in
three months is within the SOF
o (2)(a) “a contract for the sale of goods for the price of $500 or more” (from the UCC)
 (2) Contracts that are potentially dangerous to promisors if made on a whim and without proper determination,
and that can be made on an almost unilateral basis
 e.g., Suretyship, as in when one spouse saying that they will answer for the debts of their spouse
o Appellate judges hate SOF, so they create lots of exceptions and constrain the rule pretty tightly
o BUT trial judges like it since it clears the docket really easy, so they don’t have qualms about upholding and applying it
 What is the purpose of the SOF?
o UCC cases treat the purpose as pretty minimal—only to prove that a contract in fact exists, so it is basically evidentiary
 The presence of all of the terms is not as important
o Non-UCC, common law case, seem to want more than just proof of existence
o Other purposes include providing caution (as in suretyship) and allowing many cases to be decided very easily, it is hard
to know how much more litigation there would be if we did not have the SOF
 No Statute of Frauds in the CISG
o There is no requirement that a contract be in writing for it to be enforceable under the CISG

C.R. Klewin, Inc. v. Flagship Properties, Inc. Appellate courts want to limit the statute of frauds; so the one year requirement
is strictly read to mean that the SOF only applies to contracts that by their own terms cannot be performed in one year
FACTS: P agreed to be the general contractor to a large development project led by D that would take many years to complete; there
was clear evidence of an oral agreement since there was a video tape record; the parties never wrote down the agreement for the full
project; D tried to pull out after several months
 Does the SOF govern this agreement?
 No, the SOF it does not govern this agreement since courts want to construe it as strictly as possible, so it only applies to a
contract that by its own terms will not be fully performed within one year; so although it was clear that this contract would take more
than a year to be performed, this was never acknowledged in the oral contract, so it must be upheld and the SOF cannot be used
a defense against a breach of contract claim, as it is, for the purpose of the SOF, a perpetual contract, and therefore not under the
scope of the SOF (as under modern constructions)
 The SOF, especially the one year rule, has no apparent value for modern life, so court try to limit it
 The contracts to be performed in more than a year stipulation
o Here, the contracts to be performed in longer than a year rule requires that BY ITS OWN TERMS a contract must take
longer than a year to perform, it is not enough for it to be an indefinite contract that will realistically take longer than a year
 SOF analysis under common law
o (1) Is the contract within the scope of the SOF?
o (2) If yes to no. 1, then is the SOF satisfied?
 The harder question is no. 2
 What satisfies the SOF?
 R2d 131
 A contract satisfies the SOF when:
 Signed by person against whom it is enforced
o (a) “Reasonably identifies subject matter”
o (b) “Sufficient to indicate that a contract with respect thereto has been made between the
parties or offered by the signer to other party”
o (c) “States with reasonably certainty the essential terms of the unperformed promises in the
 So you need to prove both the existence of a contract and the basic content/essential terms
 Electronic signature?
o SOF has been amended, both by the states and by congress, to permit electronic signatures in, e.g., emails, to count as a
“signed writing”
o BUT, there are still some limits, e.g., for wills
 Problem 3-12 (various SOF problems)
o Answer to all of the questions is “no,” the SOF cannot be raised as a defense
 FRIER says that it is hard to distinguish these, they are all crazy
 Writing to satisfy the SOF does not need to be contemporaneous with the promise
o e.g., Written letter confirming the promise to the ne[hew in Hamer v. Sidway was not, and this was okay

Migerobe, Inc. v. Certina USA, Inc. UCC SOF is more forgiving than the common law SOF; it requires proof of the existence of
a contract and the quantity of the goods, which can come from several different memoranda
FACTS: P agreed to buy watches from D; there was no single document memorializing the agreement; D tried to pull out of the
contract and P sued for breach of contract
 Does the SOF govern this agreement?
 Yes, the SOF does govern this agreement; the contract involved the sale of goods for an amount over $500, so it governs; further,
the scattered memoranda of the agreement can constitute writing for the statute of frauds; it is not necessary that everything be
contained in one document
 The evidentiary purpose of the statute of frauds is satisfied
 It is permissible to satisfy the SOF with different but linked documents
o R2d 132: “The memoranda may consist of several writings if one of the writings is signed and the writings in the
circumstances clearly indicate that they relate to the same transaction”
 UCC does not require as much as common law SOF
o All that is needed is:
 Existence of contract
 Quantity
o Do NOT need price, single document, or all essential terms
 e.g., in Migerobe, what the court found:
 (1) Signed memo from Wolfe to Oliver, this indicates the existence of a sale, largely because it is in the
past tense
 (2) Unsigned memo to inventory control with the sales code, which provides the link to the third
 (3) Unsigned order form, and importantly, this has the quantity, which is needed to satisfy the UCC
statute of frauds
 Statute to promote fraud?
o Because appellate judges see the SOF as a means to promote fraud since parties can back out of otherwise valid
contracts just because they are not in writing, they constrain it as much as possible
o People otherwise use it as an “escape hatch” where the other party is bound but they are not
 e.g., Lucy v. Zehmer, one party is bound but the other is not (since only Zehmer signed)
 Zehmer is bound but Lucy is not since it is the signed writing of the party to be charged
o Statute seems under inclusive since valid oral contracts are not enforceable
 Satisfying the SOF is not the same as proving existence of an enforceable contract
o Could say that there is an oral contract, but no SOF, so not enforceable, but that does NOT mean that there is no contract
at all
o Could say that SOF satisfied, but no contract (because on party was intoxicated, etc.)
 If a party does not plead the SOF defense at trial, they cannot bring it up on appeal
o Because appellate judges dislike it

ConAgra, Inc. v. Nierenberg SOF under the UCC is satisfied between merchants when per 2-201(2) party sends confirmation
of the agreement and the recipient does not object in writing within ten days
FACTS: D spoke to P on the phone and (depending on who you ask) agreed to sell grain to P or talked to P about selling a certain
quantity of grain at a certain price; P wrote down the agreement on a confirmation slip and signed it, which was then not sent to D until
ten days later; D never signed the confirmation slip and claimed there was never a contract and even if there was, it is not enforceable
under the SOF (since this was a sale of over $500 of goods)
 Does the SOF govern this agreement?
 Yes, the SOF governs this agreement under the revised UCC statute of frauds (2-201)
 First, there is not sufficient evidence to make an exception to the requirement of writing under 2-201(3)(b) since D never claimed
that a contract existed in court or in any definitive manner, despite the badgering that he got from opposing counsel
 However, since the lower court classified D as a merchant, which was actually erroneous and should have been objected to, 2-
201(2) applies, which allows for an oral agreement to be enforceable if a party sends a confirmation of the contract binding the
sender and the receiver does not object in writing within 10 days, and this did not happen here since D did not object and in fact
tried to be deceitful; the court further finds that ten days was a reasonable time in light of the circumstances for P to send the
 The UCC statute of frauds provisions
 Substitute performance
o When they did not get the grain from the farmer, Conagra purchased a “substitute performance” and can sued for the
difference caused by the breach
o This is what is entitled to do under UCC 2-712
 Satisfaction of UCC SOF even without a written record (2-201(3)(a)(b)(c))
o (a) If goods are custom made for the buyer and the seller has already begun to make or procure them
o (b) If the party against whom enforcement is sought admits that a contract has been made in court
o (c) If payment has been made and accepted for the goods
 UCC SOF satisfied by written confirmation not objected to (2-201(2))
o SOF is satisfied if, “between merchants” within a “reasonable time” a writing confirmation of the contract and sufficient
against the sender is received and the party receiving it has reason to know its contents, and such party does not within
10 days object to the its contents
 Here, farmer did not respond at all, and because he did not object it binds him
 But note that this is only “between merchants” under 2-201(2) which is why it matters that farmers are
o Farmers are merchants in most states
 During the 10 days, since the confirmation is binding against Conagra, the farmer could enforce it against
Conagra, but Conagra could not enforce it against him, but after the 10 days it is enforceable against either party
o Why does the UCC have this rule?
 Business people should answer their mail
 Gives salience to the presence of a contract, at least as understood by one party since it puts the other party on
o What would have happened if he had objected?
 Contract would just fall apart
o What is a reasonable time to send the confirmation?
 Note that there is an issue of what is a “reasonable time” to send the confirmation: what is this? Trade practice?
Hotness of markets?
 What is a “merchant”?
o “A person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill
peculiar to the practices or goods involved in the transaction or to whom such knowledge or skills may be attributed”
 Purpose of UCC SOF
o 2 issues that UCC SOF is trying address
 (1) Someone just making up an oral agreement
 (2) Someone denying the existence of a valid oral contract
o UCC is much more interested in preventing (1) and not allowing (2) to occur, so real oral contracts, even if not perfect as
per the common law SOF, are still enforceable under the UCC SOF
 Since there are many ways to satisfy the UCC SOF

Lige Dickson Co. v. Union Oil Co. of California Minority view is that promissory estoppel cannot overcome a SOF defense;
majority view is that it can
FACTS: D made an oral promise to P that it would continue to sell asphalt to P for a certain price, and based on this promise, P
accepted certain contracts to pave roads with the fixed price of asphalt included; D then raised their price due to cost pressures of the
oil embargo in the early 1970s
 Does the SOF govern this agreement? Is there an exception for reliance?
 Yes, it does, and reliance or promissory estoppel is not an exception to the statute of frauds; this oral agreement is not enforceable
since it was for a sale of good over $500 and the only exceptions for strict application of the SOF are those found in the UCC code
itself in 2-201 (1) and (2), notwithstanding Judge Traynor’s decision, promissory estoppel, under R2d 139 is not an exception and
this court does not accept it into its law
 The legislature in enacting the UCC wanted the only exceptions to the statute of frauds to be those that are within the UCC, and
this does include R2d 139, otherwise the unifying principle of the UCC will be undermined
 Promissory estoppel cannot overcome a SOF defense (but this is a MINORITY view)
o By the wording of UCC 2-201, exceptions to UCC SOF are limited to those given within 2-201, versus the general
exceptions to the UCC, which include lots of principles of law and equity, including promissory estoppel (1-103(b)),
especially since 1-103(b) starts with “unless displaced”
 Should estoppel be a basis for escaping the SOF?
o I don’t think so, because I think the parties should get things in writing!
 Like Learned Hand’s logic in the department store case
 Parties should have a rule that they do not proceed unless in writing
 Majority rule is reliance can overcome SOF (R2d 139)
o Justice Traynor was the person who originally initiated this change
 (my idea) But is it even “justified” to rely without something being in writing when a lawyer (or sophisticated
business actor) should know that it is unenforceable?
 Maybe for consumer, but not for a sophisticated corporation
 Don’t we undermine the SOF and reliance on it by bringing promissory estoppel?
o Lots of actors rely on the SOF to know what is enforceable
 This is just like the property law case that created an equitable covenant
o But this favors a party with better information/legal counsel, which may be unfair
 Should there be a distinction between consumers and business and justified reliance without
compliance with the SOF?
 How do courts reconcile majority rule with clear language of 2-201?
o Courts are able to come to this conclusion by saying that 1-103 “swamps” 2-201 to say that reliance can overcome SOF,
but this is really stretching things given the introductory language in both sections

Chapter 4: The Contents of the Contract

 What provides the content of a contract?
o Words of the agreement are of course the starting point
 But additional content is also derived from other sources
 (1) Gap fillers
o Terms supplied by law to fill the gaps that have been left in a contract
o e.g., UCC implied warranties
o e.g., Course of performance, course of dealing, trade usage
 (2) Oral or written terms that were part of the negotiation but never made it into the final agreement
o Side agreements and other information that would be probably covered by the PER
 (3) Oral or written terms that come after the contract is signed
o Modifications, relational contract

A. The Parol Evidence Rule

 Parol Evidence Rule (“PER”)
o The question is: when you are doing negotiations, how to do take all parts of the contract and distill it to written text can
includes all parts of the main and side agreements?
 The PER is supposed to function to allow parties to commit their final agreement to writing without fear that
outside evidence will be brought in to lead the court to think that the parties agreed to something else
 So its purpose is more to affirm the primacy of the final agreement than mere evidentiary
o PER:
 Definition:
 From Baker v. Bailey: “In the absence of fraud, duress, or mutual mistake, all extrinsic evidence must
be excluded if the parties have reduced their agreement to an integrated writing”
 Pros of the PER:
 All of the clutter surrounding the negotiation can be stripped away and the parties can rely on the final,
signed agreement as the sole item governing the performance of their contract
 Ideas and terms that were thought about and rejected in the course of negotiation will not be thought by
one party to have entered into the agreement
 Cons of the PER:
 Parties need to be very careful that all sub-agreements that they desire to be part of the overall
agreement are included in the written contract otherwise they will be unenforceable
o This can work an injustice to the less sophisticated party
o Different from the criminal law rule
o There is no “e” and it is not a rule of evidence but a rule of contract
o It is a substantive law of contract and not a rule of evidence
 PER is loved by trial judges hated by appellate judges
o Like the SOF, trial judges love the PER because it is an easy docket clearer and appellate judges hate it because it often
leads to what seem like unfair results
 Recent development of the PER
o PER has in some respects become more important in recent decades because of the advent of form contracts, which
almost always include an integration clause
o PER is a manifestation of the contract/no contract dichotomy since it will exclude all other parts of the contract formation
process once the final contract is reached
 But as with other manifestations of the contract/no contract dichotomy, the strictness of the dichotomy as
regards the PER has been diminished in recent years by the UCC and judicial approach more generally

Baker v. Bailey Strict application of the PER

FACTS: P bought land from D’s children with an agreement granting water rights to D; the agreement said that the water rights were
personal to D and would not be included with the property rights of the new owner if D ever sold the property; the agreement also had a
merger clause; it was understood by both parties that the reason the water rights would not transfer was that P was concerned that
“hippies” or someone else objectionable would move in, but that as long as the new owner was reasonable, the water rights could
transfer; without the water rights, the value of land was massively discounted
 Will the PER block introduction of the implicit understanding of the parties with respect to the agreement?
 Yes, the PER applies, especially since there is a merger clause, so P has the right to refuse to allow the water rights to transfer,
even to a reasonable new owner of the property
 This is a strict application of the PER
 Traditional process for applying the PER
o (1) Was the document intended by the parties as the final version of the agreement?
 The question is: is it INTEGRATED!
 When using the traditional four corners approach, the court determines if it is integrated by looking at
the terms within the four corners of the document to determine if it seems integrated
o A merger clause helps a lot with this but it is not totally dispositive
 R2nd 209 steps this back a little bit (in line with Traynor’s approach) because it says: “Where the
parties reduce an agreement to a writing which in view of its completeness and specificity reasonably
appears to be a complete agreement, it is taken to be an integrated agreement, unless it is established
by other evidence that the writing did not constitute a final expression”
o This is in line with Traynor’s idea that the wider context of the transaction should be consulted,
along with the written document, to determine if there was in fact integration
o (2) If it is the final agreement; that is, if it is integrated, the PER applies and all other evidence about what the contract
means is disqualified
 Analysis in Baker
o The contract is integrated in the court’s view because:
 It seems complete
 There is a merger clause
 It is signed
o This is the classic four corners approach
o So the PER blocks all other evidence from coming in
 “Naturally included” argument
o The court’s argument in Baker is that this provision is one that would “naturally be present” in the written agreement
 Problem 4-1 (ice house removal case)
o Criticized only because of the arbitrariness of the “natural” provision in the analysis, but otherwise a good example of the
strict application of the PER
 PER supports commercial stability?
o Baker court justifies the harsh result by saying that “commercial stability requires it”
 But these are just people
 But we uphold for both people and business since it is hard to distinguish at some point
o But courts do probably apply the PER more aggressively for businesses
 PER important because of the use of the jury in the US?
o PER is used in the US but not in many other common law countries, and this may be in part because of the use of the jury
in the US and a corresponding desire to want to protect the parties from the jury’s arbitrary use of other evidence
 Integrated? Completely (final and exclusive agreement) or partially (final agreement)?
o If it is determined that the agreement is integrated, the court must then determine if it is partially or completely integrated
 R2d 210
 An agreement can be completely or only partially integrated, and this is a question for the court to
decide before the court moves to interpret the contract or apply the PER
 R2d 213
 Partially integrated agreement discharges prior agreements to the extent that they are inconsistent with
the terms of included in the partially integrated agreement
 Completely integrated agreement discharges prior agreements to the extent that they are within the
scope of the completely integrated agreement
 Often it is clear if the agreement is integrated by looking at the face of the agreement itself, but other
relevant evidence can be used to make this determination
 (Comment c)
 Additional terms can be added to a partially integrated document but not to a completely integrated
document, but inconsistent terms cannot be added to either a partially or completely integrated
o So if it is partially integrated the question is whether the additional terms are consistent and
supplement or contradict and therefore excluded
 Exceptions to the PER (R2d 214(d)-(e)
o Parol evidence can come in
 To show illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause
 To show grounds for granting or denying rescission, reformation, specific performance, or other remedy
 To show that the contract was a conditional contract
 To clarify the meaning of an otherwise ambiguous contract

Masterson v. Sine Traynor says that the preliminary question of whether or not a contract is integrated cannot be answered
without first looking at “parol evidence” and the context of the circumstances; the document itself is the leading indication of
the intent of the parties, but it is not everything
FACTS: P sold land to D (his sister and brother-in-law) with an option to buy back the land at some point; P then was bankrupt and the
trustee appointed by the court for his creditors tried to exercise P’s option
 Will the PER block introduction of evidence suggesting that the option was meant to allow the residence to stay in the family
meaning that it would not be transferable to the trustee?
 No, according to Justice Traynor, the PER will not exclude this information; there is no merger clause in the written agreement, and
it is natural to expect that such a collateral agreement (that the option was only for family members) would be included here, so it
is not something that “certainly would have been included in a written agreement” so the parole evidence can be introduced
 Justice Traynor says that the PER should only be used when there is the possibility that a jury would be misled or when the parole
evidence is completely contradictory to the written contract, and that is not the case here
 Dissent says that this is a flat rejection of the PER and this allows parole evidence to come in from a very interested witness and
this is exactly why it exists; he also says that it will undermine the certainty of real estate transactions and can be used to defraud
people, chiefly creditors, in this case; he says that it is appropriate to use in order to interpret ambiguous terms of a contract (as
was properly done by the trial court), but it cannot be used in the manner permitted by Traynor
 PER does not block using extrinsic evidence to determine meaning of a patently ambiguous term
o So it is okay of course to use extrinsic evidence to know the patently ambiguous term “same consideration as heretofore”
as used in the agreement in Masterson
 BUT the court goes much further here and considers whether the agreement included the agreement that the
option was not assignable to those not in the family
 Traditional PER would say evidence of this sort is not admissible since the language is not ambiguous on this
 Traynor’s attack on four corners doctrine
o Traynor attacks the initial four corners doctrine, saying that the judge cannot really decide if the document is integrated
before taking into consideration all of the evidence
 Then he can make a decision about whether the writing is integrated or not
 So the allegation of the side agreement in Masterson means that the instrument is not fully integrated
 BUT is the question to see if it is wholly integrated or just integrated, but only partially
o The instrument may help determine if the document is an integrated document, but it is necessary to look at the other
evidence too
 So the document loses some primacy in the contract
o But how big is the change, really?
 (my idea) Judges implicitly do take into account at least some extrinsic evidence when evaluating if a contract is
integrated, they just don’t use all of the rhetoric of Traynor
 Policy for Traynor
o Helping the economic “underdog” who relies on the oral agreement
 (my idea) But which consumer underdog actually thinks that oral agreements are enforceable anyway!?!?
o Says that the traditional policy reasons for the PER are not applicable here
 Costs of Traynor’s approach
o Traynor never considers transaction costs
 This arguably undermines the security of document based transactions in land
 More litigation because more uncertainty
 Hard for the parties to bargain conclusively
 Traynor’s view adopted by R2d 214(a)
o “Agreements or negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to
establish (a) that the writing is or is not an integrated agreement”
o This is precisely Traynor’s argument
 The judge should first consider parol evidence to see if the document is integrated before deciding if it is in fact
integrated; using the four corners approach alone is insufficient
 Merger clause
o A merger clause is strong evidence of integration, but it is not dispositive (R2d 209)
o If an agreement lacks essential terms making it impossible to perform without reference to another document, the merger
clause will not dictate that the agreement is actually integrated
o Note that some courts finds that merger clauses in boilerplate are unenforceable since they are unconscionable or not
actually “agreed to” by the consumer
 Oral condition
o If there is an oral condition on the enforceability of the entire agreement, it is not blocked by the PER
o e.g., Husband had the oral condition that his wife approve of the car purchase and this was admitted as evidence that the
entire agreement was not enforceable absent her approval

The UCC Parole Evidence Rule

 UCC PER (2-202)
o (1) If integrated?
 Presumably something more like Traynor’s test for determining whether it is integrated would be used
o (2) Parol evidence may not be introduced to “contradict” document terms
o (3) But the document terms may be “explained or supplemented”
 (a) “Course of dealing, trade usage, or course of performance”
 The above are always admissible, even if the documents is intended to be the final and exclusive
(completely integrated) agreement, though preference is given to the express terms
 (b) Evidence of “additional consistent terms unless the court finds the writing to have been intended to be the
complete and exclusive statement of the terms of the agreement”
 So unlike the evidence in (a) these terms are only included if the judge finds that the written instrument
although a “final expression” (partially integrated) was not the “complete and exclusive statement”
(completely integrated)
o An integration clause would usually prove that the written instrument was the “complete and
exclusive statement”
 If the court finds that the writing is not the “complete and exclusive statement” it will include additional
terms only if they are “consistent” with the rest of the agreement
o Consistent has been interpreted variously
 “Inconsistent” has been interpreted to mean that the additional term must “contradict
or negate a written term”
 “Inconsistent” has been interpreted to mean the “absence of reasonable harmony
between the additional term and the terms of the written instrument”
o Completely integrated is not to be presumed (202, Comment 1)
 “Code rejects any assumption that because a writing has been worked out which is final on some matters it
necessarily means that all matters have been agreed upon
 i.e., The UCC rejects the assumption that an integrated document is a completely integrated document
o “Certainly included” rule (2-202, Comment 3)
 If the court finds that the parties negotiating would have “certainly included” the term that one party seeks to
introduce, the court should bar the inclusion of that term under the PER
 What would have been “certainly included” will depend on who the parties are and who is representing
o e.g., Consumers selling a car to one another
o e.g., Large corporations represented by NY lawyers

Thompson v. Estate of Coffield When there is evidence of mutual mistake supporting contract reformation, there is an
exception to the PER
FACTS: P bought land from D; the conveyance contained certain reservations including one for mineral rights as provided for in certain
leases that were to be recorded, but they never were; based on a strict application of the PER, the trial court refused to bring in
testimony supporting a reformation of the deed to include the leases
 Is there an exception to the PER in the case of contract reformation?
 Yes, here based on the statements made by the parties in probate court it is clear that the leases were supposed to be included in
the deed, so reformation is appropriate (or at least is should be considered)
 There is an exception to the PER in the case of mutual mistake or fraud that then requires contract reformation, and there is at
least enough evidence here to consider this
 Reformation
o An exception to the PER
 (1) Instrument representing an antecedent agreement that should be reformed
 (2) Mutual mistake or misrepresentation
 (3) Proof of these elements by clear and convincing evidence
o Contract is re-written be the judge to fit the parties original intent
 Based on mutual mistake (R2d 155), OR
 Must be a mistake by both parties, not just one party
 Based on misrepresentation (R2d 166)
 One party induced assent by the other party through misrepresentation
o In either case, the standard for showing proving that the contract should be reformed is clear and convincing evidence
o Reformation is an equitable remedy, so it is within the court’s discretion to withhold it even if it is applicable for reasons of
 e.g., Third party relied on the agreement as it is in good faith

B. Interpreting the Terms of the Contract

 Contract Interpretation
 Unlike PER debates, which concern terms that are NOT IN the written agreement, the question of interpretation
concerns the meaning of terms that are actually IN the written agreement
 Most contract cases involved the interpretation of a document—it is a big problem!
o Why contracts are open to varied interpretation
 Language has inherent ambiguity
 Parties cannot put every remote contingency in the contract
 Since the transaction costs of doing so would be so high
o Objective or subjective meaning?
 Learned Hand’s objective approach
 “The whole House of Bishops” could say that the party meant something else and it would not matter if
that is not what the plain meaning of the words in the written contract objectively seem to say
o The Learned Hand rule in its extreme is absurd
 But aren’t all rules in their extreme absurd?
o Courts will rarely if ever impose a meaning on a contract that neither party actually wants
 The objective approach or plain meaning approach is still the default method for interpreting a contract,
but the trend is to be more in tune with other ways of determining what the parties subjective meant
 Various rules of interpretation
o Some are used more or less depending on the context, etc.
 What do recitals say?
 What is the general purpose of the agreement?
 Expressio Unius
 Where a term is in a list, you assume that it is “of the same kind”
 Assumption that every term has meaning and is not redundant
 Interpretation should be done as to the whole agreement
 Words use repeatedly have the same use throughout
 Specific provision controls a general one since it is more likely to be the dickered intent of the parties
 Written terms over printed terms
 Dickered terms over boilerplate
 Contra proferentem
 Public interest
 Evidence of prior negotiations
 Trade usage
 Course of performance
 Course of dealing

Random House, Inc. v. Rosetta Books, LLC Court uses the objective or plain meaning approach and finds no ambiguity
FACTS: P was the owner of a copyright license to print several works in “book form”; D obtained licenses to distribute the books on e-
 How do we interpret the contract here? Does “book form” include e-readers?
 No, “book form” does not include e-readers; based on the argument that all terms in a contract have a purpose (they are not
superfluous) and on (to some extent, though not as pure extrinsic evidence) trade usage, along with the plain dictionary definition,
“book form” means a printed and bound material, not something like a digital e-reader
 The judge uses the four corners of the contract and attempts to interpret the meaning of what is written there and does not look
back forty years to what the parties meant by “book form” when they signed the agreement
 The “objective approach” or “plain meaning” approach to contract interpretation
o NY’s framework for interpretation is in some ways similar to the PER (though with respect to the terms in the agreement);
the judge looks not intent, but intent as “objectively” expressed in the written language of the contract
 Judge sticks pretty much to the words on the page and does not draw in evidence of the contemporary contract
formation 40 years ago
 Judges analysis, as an example of the objective approach
 (1) Decide if there is ambiguity? (decided by the judge)
o (a) Look at the document holistically to see if it is integrated (“four corners”)
o (b) And if the meaning is plain and there is no ambiguity (in the eyes of the judge), do NOT go
to step (2)
 (2) Present parol evidence to the jury and let them decide the meaning of the document
 Note that courts are tempted to find “no ambiguity” so that the question does not go to the jury
 And normally (Traynor and his following, though this is the modern trend, being the exception) judge
makes this decision based on the document alone (the “four corners”) without looking at the other
circumstantial evidence
o Danger of “objective approach”
 The danger in this method of course is that the judge will impose his meaning on the text even if this is not what
the parties intended, or if they did not intend anything at all
 That is, it is actually hard to be objective because you come to the bench with your biases, etc.
o Benefit of the “objective approach”
 Parties can rely on the written contract to govern their relationship and this protects reliance interest
 Parties will be more scrupulous about forming the written agreement and this will lead to better drafting and
prevent problems from arising and litigation from ensuing
 When is a contract ambiguous
o Per the court in Random House: “contract language is ambiguous if it is capable of more than one meaning when viewed
objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and is
cognizant of the customs, practices, usages, and terminology as generally understood in a particular trade or business”
 This is a narrow interpretive set of lenses
 It is hard to actually meet this threshold in practice
 Why did Random House not modify contract when technology changed?
o Should Random House have “roused sleeping dogs” before this became an issue to try to expand the definition?
o Random House could have been proactive about re-negotiating with authors, but they decided to take the risk that
everything would just go okay if they didn’t bring it up as the technology was changing
 Strategic ambiguity
o Note that parties might chose to be strategically ambiguous if they think that it will assist them down the line
 It’s tough to draft a contract that will not be made obsolete somehow in 40 years
o There are known unknowns
o And there are unknown unknowns
 “Expressio unius” rule
o Judge in Random House uses expression unius rule
 Since Random House enumerated certain forms of media, it excluded or bracketed the other issues forms of
 “New use” technology problem
o Whether licensees may exploit new media channels to distribute the works for which they have received a license when
those channels are developed after they have received the license

W.W.W. Associates, Inc. v. Giancontieri Clear and unambiguous language will be enforced according to its clear meaning;
extrinsic evidence should only be introduced if the four corners approach admits ambiguity; when it does not, there is no
need to move beyond the document
FACTS: P planned to buy land from D; the contract that they used contained a clause that allowed either party to unilaterally withdraw
from the agreement if litigation concerning the land (but not related to their dispute) was on-going as of a certain date; the main reason
(per P’s testimony) for this term was the litigation and P’s fear that it could not get financing because of it; the document also contained
a merger clause
 How do we interpret the contract here? Do we use extrinsic evidence?
 No, since the document unambiguously grants either party the right to back out of the agreement, this will be enforced; it does not
matter that the clause was inserted for the purpose of allowing P to back out
 Upholding the plain and unambiguous terms of contracts agreed to by parties preserves reliance on the written contract as the
basis for a business transaction, and there is no reason to bring in extrinsic evidence if not necessary to understand the words in
the four corners of the document

 Unambiguous language will be enforced

o When the contract’s terms are clear and unambiguous there is no need to look outside of the written document
o This protects reliance interest and leads to commercial stability
 Grammar matters
o Note that putting a comma in the wrong place may have the effect of qualifying a wholly different clause and therefore
change the meaning of the sentence entirely
 Partially standardized and partially bargained terms
o When interpreting a contract, the court should attempt to reconcile bargained terms and standard/form contract terms
(R2d 2-202(5))
o If the terms are impossible to reconcile, the bargained terms are given supremacy over the standard/form contract terms
(R2d 2-203(d))
 Some general principles of construction
 (1) Entire contract should be read as a whole and every part interpreted with reference to the whole, so as to
give effect to its true purpose
 (2) Contract itself must be read in light of the circumstances in which it was made and that it is necessary to
consider the situation of the parties at the time, the necessities for which they naturally provided, the advantages
each probably sought to secure, and the relation of the properties and rights in regard to which they negotiated
 (3) Where a public interested is affected, an interpretation that favors the public is preferred
 (4) Specific provisions ordinarily will be regarded as qualifying the meaning of broad general words in relation to
a particular subject
 (5) Unless contrary to the plain meaning of the contract, an interpretation given by the parties themselves will be
 (6) An interpretation that gives a reasonable, lawful, and effective meaning to all of the terms is preferred as
compared to an interpretation that leaves a part unreasonable, unlawful, or of no effect (R2d 203(a))
o But note that many of these principles can come into conflict with each other

Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co. Traynor says that the test of admissibility of extrinsic
evidence is to explain the meaning of a written instrument is NOT whether it appears to the court to be plain and
unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the
FACTS: D was working on P’s plant; the contract governing their agreement provided that D would obtain insurance to cover any
damage to P’s property; there was evidence indicating, however, that the purpose of the insurance was to coverage damage for injury
to the property of third parties only and not P’s property directly; the trial court interpreted the contract on its face and held that the
contract provided coverage to P’s property
 How do we interpret the contract here? Do we use extrinsic evidence?
 Yes, we must use all of the evidence that may be relevant to interpreting the contract; we must know the context of words to know
what they mean; if the “offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably
susceptible” that evidence should at least as a preliminary matter be considered
 The goal of the court is to enforce the intended agreement of the parties, not just the judge’s interpretation of magic words; we
cannot use the parol evidence rule to add to or take away from the words of a written contract but as a threshold matter we must
consider extrinsic evidence to determine what the words in the contract in fact mean
 Is language is inherently ambiguous?
o Note Traynor’s view about the inherent inability of language to express meaning, at least by itself
o “Words don’t have absolute and constant referents”
 Judges must consider total evidence of circumstances to understand what language means
 But if Traynor’s inherent ambiguity becomes too broad, it becomes really hard to draft a contract that
you can believe will be reasonably enforceable
 What actually is unambiguous for Traynor?
o How much (if at all) can a California judge just say “it’s not ambiguous” without looking at the wider context anymore?
 Probably in very limited cases
 Narrow or wide reading of Traynor’s opinion?
o You could read Traynor’s opinion narrowly to say that the judge should consider trade usage
 And then it would not be that different from what the judge in Random House said, or what the UCC requires
o But it seems like Traynor’s scope is wider than this, and this is how the opinion has historically been read
 Traynor’s key point
o The judge is supposed to listen to evidence outside of the document BEFORE determining if the language of the
document is ambiguous
o Traynor wants judges to be open to assertions by the parties regarding the meanings of a contract that are
“REASONABLY SUSPECTIBLE” to being supported by the language in the instrument
 If something is completely improbable, the judge should not countenance it
 i.e., Quote from the later California Supreme Court saying the Pacific Gas holds that “parol evidence is
admissible to demonstrate ambiguity despite facial clarity” is probably an overstatement of what Traynor meant,
since the language of the written instrument must be “reasonable susceptible” to the meaning supported by the
extrinsic evidence
 But note that there is the idea that sometimes an agreement that is unambiguous will be made to be
ambiguous through the introduction of extrinsic evidence, and sometimes this is necessary in order to
determine the meaning of the agreement
o e.g., “Ship Peerless must take cotton from Bombay to London” is not ambiguous unless the
extrinsic evidence that there are two ships is introduced
o So maybe the introduction of extrinsic evidence to create ambiguity is needed sometimes
o BUT then, this really is just a case of mistake/misunderstanding, which generally is not
prevented from introduction by the PER or other rules of interpretation anyway
o How novel is Traynor’s idea?
 (my idea) how much of what Traynor wants already happens?
 Of course judges take circumstances into account when interpreting, but why must we bring the parties
and their self-interested assertions into the debate?
 BUT, his scope is probably wider, in that he seems to suggest that a judge should actually listen to
other evidence, and not merely take account of the circumstances and the type of transaction
 R2d 212 Comment b as a rule for contract interpretation
o “It is sometimes said that extrinsic evidence cannot change the plain meaning of a writing, but meaning can almost never
be plain except in a context; any determination of meaning and ambiguity should be made in light of the relevant evidence
of the situation and relations of the parties, the subject matter of the transactions, preliminary negotiations and statements
made therein, usages of trade and the course of dealing between the parties; but after the transaction has been shown in
all of its length and breadth, the words of an integrated agreement remain the most importance evidence of intention”
 This comment seems to accept Traynor’s view
 Stock transaction done in code
o If there is a written agreement that says “sell”; but an oral agreement that “sell” means “buy” the oral agreement will be
o This reverses the R1st and shows how the subjective approach is encroaching on the objective approach
 Traynor’s overconfidence
o Traynor is probably overconfident in the ability of the judge to interpret the real intent or meaning of the parties
 Judicial economy?
o Do judges have time to consider extrinsic evidence before looking at the written instrument?
o One reason for the objective approach is that it allows for a degree of certainty between the parties, but another important
reason is that it allows the judge to settle disputes more quickly and less expensively
 Judge Kozinski’s counterpoint
o Now the door is always open to undermining a written contract even if the agreement was fully negotiated by fully
competent counsel so there are now great new transaction costs because of increased litigation
o Also, there is the problem that parties may draft ambiguously so that they can bring up there assertions later if they are
“reasonably susceptible” to the alignment with the language of the contract, especially if a party thinks that they will be in
a better litigating position down the road
 Which is better, the “old” or “new” approach?
o Old approach
 Judge fixes the relations of the parties without the aid of a jury and measure of security is provided to written
 The written agreement has primacy
o New approach
 Jury (or fact finder) fixes relations of the parties through the use of all evidence surrounding the contract’s
formation and the security of the written agreement is undermined
 The written agreement has no unique or compelling force
 Posner says that parties may prefer the “old approach”
o Parties prefer the inflexibility of the old approach, even if they lose sometimes, as compared to the expense and
uncertainty of having a jury decide the meaning of a contract
 Parties cannot block extrinsic evidence contractually
o It is against public policy to include a clause in the contract that says extrinsic evidence may not be considered when
interpreting the contract
 This is something that the court gets to decide
 More efficient to not get allow for some ambiguity?
o (my question) is it more efficient to have a less than perfect agreement 100% of the time and not waste the resources on
having the lawyers argue about every possible remote contingency when negotiating the contract and just accept that
there will be bad litigation about 2% of the time
 This may be better and more efficient overall

ConFold Pacific, Inc. v. Polaris Industries, Inc. There is a rule that contracts should be interpreted against the drafter;
contractual interpretation disputes only go to the jury if there is ambiguity requiring credibility determinations or equally
reasonable inferences
FACTS: P worked on a consulting project for D; it drafted an NDA to cover the presentation of the consulting analysis and quite clearly
that only; later, it submitted a design for a container for D without expanding or writing a new NDA; D then gave this information to
another company
 How do we interpret the contract here? Do we use extrinsic evidence?
 The NDA only covers the consulting analysis and not the design specifications
 P wrote the terms of the agreement and using the rule that the terms must be interpreted against the drafter, we find that they
decided not to include the design specification in the ambit of the NDA; whether or not using extrinsic evidence for the
interpretation was necessary (it probably wasn’t), but it only supports the case that the NDA did not include the design
 If there is tension between the words of the contract and the extrinsic evidence, then it should go to a jury or the trier of fact to
determine the mosaic of meaning, but that is not the case here
 Contract interpretation a question of law or fact? (R2d 212(2))
o A trier of fact must decide if the determination of the meaning of the contract depends on the credibility of extrinsic
evidence or the choice between equally reasonable inferences drawn from extrinsic evidence
o Otherwise, the meaning of a contract is a question of law
 Additionally, per Comment e, even if the agreement is not integrated and determining the meaning depends on
extrinsic evidence, it is still a question of law if there is “no reasonable way to interpret it except for one party”
o So very few cases actually get to a jury; the judge filter works pretty well
 This is good for the party arguing the “obvious interpretation” but not so good for the party arguing the less than
obvious interpretation
 Contra proferentem
o The principle of interpretation that states that a contract should be interpreted against the drafter since he was in the best
position to more clearly spell out his rights and obligations
 Interpreting insurance contracts
o Rule of contra proferentem has been applied aggressively since the insurer is usually the drafter
o General rule of thumb is that if the meaning is ambiguous, the insured is covered
 But there has been some stepping back on this trend in recent years
 If the meaning is plain, the exclusion will be enforced

Nanakuli Paving & Rock Co. v. Shell Oil Co., Inc. Per UCC 2-102, course of performance, course of dealing, and trade usage
can be incorporated into a contract, leading in some cases to a “relational contract”
FACTS: P bought asphalt from D; there was a widespread trade usage of not raising the price of asphalt for deals that asphalt pavers
had already contracted, since they could not raise the price on the customer; D also had engaged in this practice, making it a course of
performance, twice before with P; D then raised its prices on D for deals for which P had already contracted; the written contract that P
and D had did not mention this rule at all
 How do we interpret the contract using the UCC and its course of performance and trade usage rules?
 When interpreting the contract, we need to import commonly accepted trade usage as a being part of the agreement (UCC 2-202);
the trade usage of granting price protection was so widespread in Hawaii (where the deal was made) that it will be included with
the agreement (arguably this contradicts, not supplements or explains the express terms, but…); additionally, the course of the
performance of the parties suggested that price protection was part of the agreement; note also the court finds the express terms
of the agreement to be consistent with the total agreement per the trade usage and course of performance additions, though this is
a stretch, at least in how they describe the relationship
 Additionally, raising the price without advance notice is arguably not performing the contract in good faith, which is a separate and
secondary reason for the breach of contract claim
 Court applies the more context and commercially realistic terms of the UCC
 When the price is fixed by one party, it must be in good faith (UCC 2-305)
o But Shell is acting in good faith here, it is just that the embargo has raised prices so much
 So it is not that Shell is price gauging
 Who should bear the loss when the price goes up and the contract is fixed for the final customer?
o Shell?
 Maybe they are in a better position to predict the price, so they should bear the loss?
o Nanakuli?
 Nanakuli has two arguments
 (1) Price protection is built into the contract through trade usage and course of performance
 (2) Good faith requires price protection even if it is not in the contract since it is a “commercially reasonable”
 Note that this argument was also given in Baker v. Bailey, where the court denied it
o Argument (1)
 UCC 1-303(e) (applies to all contracts, since not in 2000s, not just the sale of goods)
 When interpreting a contract, there is a hierarchy of tools
 Note it is not required that there be an ambiguity in the express terms in order to make use of these
o (1) Express terms
o (2) Course of performance
o (3) Course of dealing
o (4) Trade usage
 UCC 2-202 says that (2), (3), and (4) can “supplement and explain” express terms even if the contract is a
complete and final statement (completely integrated), so they can effectively change the contract
 That is, they are in fact more than just interpretive tools
 Course of performance
 In the past, Shell price protected
o But these were for small increases in the cost of oil; and now it is a huge increase
 So it is putting a strain on the policy
o What Shell should have done is said that when it was price protecting this was a “one time
waiver” so that the course of performance does not end up changing the terms of the contract
 Because through 2-202 the “contract can shift away from the document” and Shell or
a person in its position will want to prevent this
 But often the party in Shell’s position does not and it gets out of hand
o Note that one time would not be enough, but Shell does it two times, and the court here at
least says that it is enough
 Course of dealing
 How the parties interpreted the terms in a prior contract
o But this is not dealt with by the court in this case
 Trade usage
 The court opts for a wide definition of trade usage
o It is “paving” so not just asphalt suppliers but aggregate suppliers too
o Shell of course does not want this because it is easy for the aggregate suppliers to price
protect, since their prices have not been increasing that much, so they have been
 Trade usage can “supplement and explain” but not “contradict”
o What does it take to “contradict”?
 For the court here, the rule is “as long as the trade usage does not swallow the terms
entirely” or “completely negate” the terms
 This is the total negation test
o White and Summers say that this is too high a threshold for
allowing trade usage to come into the agreement
 Most other courts would require a higher level of harmony,
e.g., Columbia Nitrogen Corp, where the idea that fertilizer
prices are just projections subject to adjustment
 What does it mean to be consistent or not contradict?
o This is a big fork!
o Argument 2
 Shell should price protect because it has a good faith obligation
 Majority accepts this argument too
 Judge Kennedy rejects this argument as an independent reason (i.e., It would not be sufficient if the
trade usage and course of performance were absent)
 Difficulty with trade usage
o Note that trade usage is harder to spot than Llewellyn thought it would be
 e.g., Ostensibly Shell needs to be aware of what Chevron or even Honolulu aggregate suppliers are doing with
their price protection to see what trade usage is
 Since a party is presumed to know the trade usage of the industry in which it is working
 Aim of the UCC
o Framework of the UCC is to give effect to the intent of the parties even if it is slightly inconsistent with the terms in the
document, but it cannot be at the total expense of the document
 So the drafting requirements are a little looser than under a traditional analysis
o This undermines the contract/no contract dichotomy
 Drifting away from the written agreement (relational contract)
o Note that in long term contracts parties often make accommodations for each other and in so doing drift away from the
terms of the contract in the document and undermine the document as representative of the contract
 So if you are going to be nice, and grant an exception, make sure that you make clear that it is a “one time
waiver” only!
 Parties may not want trade usage incorporated into their agreement, but what can they do?
o If trade usage is always incorporated, the parties might have a difficult time negotiating and prescribing the terms of their
agreement such that they can freely contract in the way that they want to
 They will thus have little ability to predict the outcomes of their disputes when litigation ensues

MCC-Marble Ceramic Center, Inc. v. Germanica Nuova D’Agostina, S.p.A. CISG is more open to trying to ascertain the
subjective intent of the parties by looking at the wider circumstances and context
FACTS: P and D made an oral agreement for P to purchase marble from D; there was clear evidence that both parties subjectively
understood that the oral agreement and not the terms of the purchase agreement would govern the contract; the CISG governs the
exchange because it occurred between a US and Italian company
 How do we interpret the contract using the CISG?
 Because both parties were aware that P did not intend to be bound by the terms in the written contract, Section 8(1) of the CISG
governs and the court was inquire into the subjective intent of the parties, not just the objective manifestation as presented on the
contract itself; it is permissible to use parol evidence for this purpose, in keeping in line with the spirit of the GISC
 Court applies the more context and commercially realistic terms of the UCC
 CISG permits parol evidence
o Since this was an international transaction governed by the CISG, the PER is not applicable
 Why does the US still have the PER?
o Perhaps because we still have jury trials and juries are more susceptible to being unduly swayed by parol evidence
 Asbestos insurance policy interpretation exercise
 Note that the “reasonable expectations” rule against insurers would help the insured in this case, in addition to the other
arguments he can make
 Perhaps the insured should update the policy to make it more clear since he is in a better position to know about the needed
o But one the insured knows about the problem, they are going to be very resistant to change the policy without a huge
change in the cost/premiums unfavorable to the insurer

C. Implied Terms and the Implied Covenant of Good Faith

 Implied or default terms
o Because the parties cannot think of everything that must be included into the agreement, or forget to include important
terms in the agreement, the court have a list of implied terms (“gap fillers”) that will be read into the agreement as default
 Neutral default terms
 Parties can often negotiate around these fairly easily
o e.g., 2-207 and the battle of the forms
 Policy based default terms
 Often difficult to negotiate around these
o e.g., 2-312 implied warranty of good title, which is very difficult to waive
 Implied obligation of good faith in contract performance
o Originated in case law
o Adopted by the UCC in 1-304
o Adopted into common law by R2d 205

Haines v. City of New York Court implies a reasonable period to a contract that otherwise lacks a duration; per R2d 204 “a
term which is reasonable in the circumstances is implied by the court, even though one party or the other may not wish for
the term to be present”
FACTS: P and D reached an agreement in 1926 that D would provide for the filtration of the sewage need of P both now and as per
the future growth needs to P; over the years P grew a lot and D continued to provide the services; eventually, D said that it could not
expand the coverage anymore since it had got out of hand; it seems as if in general the parties had not contemplated the idea that
there would ever be prohibitions on the discharge of raw sewage
 The parties forgot to include a durational term to their contract or a limit on its scope; does this mean that it is perpetual and
unlimited, or that either party can break it at any time?
 This is not a perpetual contract; and it is also not permissible for either party to exit the contract at will; rather, the court implies a
duration of a “reasonable period” on the contract based on what it surmises to be the parties’ intent
 The court says that the reasonable period is as long as D requires clean water; and since the enacting of environmental protection
 laws were not contemplated when the contract was made, these cannot change the contract; D does not, however, need to
continue to expand the scope of the coverage
 Court can imply terms into the agreement (R2d 204)
o When, e.g., an agreement has no duration or scope, the courts will imply a reasonable duration and scope
 Frustration of purpose argument?
o Could you make a “frustration of purpose” argument if you are NYC, since the thing for which they bargained for (clean
water) is no longer at play?
 This would maybe be like Krell v. Henry
 BUT the problem here is that the small towns have already fully performed their end of the bargain
o They had their streets dug up, etc. so it is hard to go back now
 Intentionally putting of the problem?
o Maybe the lawyers for NYC just intentionally put off the problem to let the court deal with it down the road, as is being
done now
 Judge forcing parties to bargain
o Is the judge trying to allow both parties to bargain and reach a settlement by giving both parties some chips to put on the
table? And the court does this by filling in the gaps of the contract
 Gap filler should be efficient
o When filling in the gaps, Posner says the judge should pick the “most efficient rule”
o In this case, allowing the parties to negotiate is probably the most efficient but often it is very difficult to determine what
the most efficient rule is
 Problem 4-2 (Surplus of insurance premiums)
o There are arguments either way in this case

Centronics Corp. v. Genicom Corp. There is an implied covenant of good faith in the performance of a contract but only in
certain areas, including where one party has an amount of discretion under the contract; but that is not present in this case
FACTS: P and D reached an agreement that had part of the purchased funds go into escrow subject to final adjustment once an arbiter
reached a decision on what the proper final balance of the sale would be based on accounting of the assets of the company; the
contract implied that the escrow amount would be released at this time; P wants some of the undisputed funds from the escrow so that
it can put them to productive use; D refused
 Is there a duty of good faith in contract performance under common law such that D must release the undisputed funds from
 There is a good faith requirement at common law, but it does not here require that D release the funds, since this is not in the
discretion of D anyway, as discretion is understood under the god faith analysis
 There are three places where good faith arises under the state law (1) in contract formation (2) in employment contracts and (3)
discretion in contract performance; as to (3), the topic of the case here is where a party with the discretion to deprive the other
party of a substantial portion of the agreement’s value must act in good faith with his discretion; there are two ways of approaching
this: (a) such party cannot act contrary to common standard of decency and reasonableness based on the common purpose and
justified expectations of each party (i.e., you can’t act with bad faith) or (b) when a party tries to recapture without payment of the
performance costs the unstated economic opportunities bargained away by the deal
 Under either of the above tests, the court here adopts the first one, D did not act in bad faith; further, it is arguable that it did not
even have the wide discretion contemplated in form (3) to do so
 Good faith in contract performance?
o The concept of “good faith” is often invoked by judges, but when you winnow the concept down, it is clear that there is not
much substance to the concept in our law
 In the Centronics decision, Justice Breyer gives the other areas of good faith in the law (of New Hampshire)
 The first two are “stray” uses of the good faith concept but the third is a little more substantive
 (1) Contract formation:
 But really this is just the tort of misrepresentation, so it does not really mean much
 And we have learned that there is no general duty of good faith in contract formation
 (2) Employment relationship:
 But really this was just unlawful discrimination since it was sexual discrimination
 (3) Discretion in performance of a contract:
 This is an “imperfect category” but the part that concerns Centronics
o One party having discretion arises in two ways
 (1) Intentionally because the parties cannot precisely fix every term beforehand
 (2) Unintentionally due to lack of clarity in the terms of the agreement
 BUT Centronics does not actually have discretion anyway
o But what if Centronics has more discretion
o Then the good faith question may be more of a serious matter, because they could drag their
feet and slow up the deal
 But good faith is still a weak norm/rule even with this added discretion
 This could be bad faith or just breach of contract for not responding in a
reasonable time
o The legal community has been generally cautious about expanding the doctrine of good faith in contract performance and
 What is good faith?
 Traditional (Summer’s) approach
 Good faith is “not bad faith” in that it excludes behavior that is inconsistent with common
understandings of decency, fairness, and reasonableness
 Burton’s approach
 Bad faith is a promisor’s discretionary action subjectively intended to recapture economic opportunities
forgone or bargained away at the time of contract
 Just sort of a fancier explanation of the same concept
 UCC’s approach (UCC 1-304)
 (1) Honesty in fact
 (2) Observance of commercially reasonable standards of fair dealing
 Restatement approach (R2d 205)
 “Faithfulness to an agreed common purpose and consistency with the justified expectations of the other
party; it excludes a variety of types of conduct thought to constitute “bad faith” and in violation of
common standards of decency”
 Does good faith ever serve as an independent basis for a contractual obligation?
o Not usually, unless you run to the tort threshold
 Final comment of UCC 1-304 is that the good faith standard does NOT extend beyond the terms of the deal
 But where you draw the line?
o This is the key good faith debate today
 Should market handle policing bad faith?
o If you have bad faith, people won’t want to play with you at the playground
 Dry cleaners example
o With the new strip mall plot that also has dry cleaners—is this bad faith?
 According to the R2d it is (see R2d 205, Illustration 2)
 Because you are not in breach but are depriving the other party of the substantial values of the agreement
 Business Darwinism
o Ultimately, the question is where the court will step in and curtail the business Darwinism
 Good and bad faith in commissions versus omissions
o There is the idea of bad faith commissions versus bad faith omissions
 Perhaps there is a higher duty for not engaging in bad faith commissions than bad faith omissions
 i.e., Similar to the higher duty of care for affirmative actions versus the lack of duty to rescue

Shell Oil Co. v. HRN, Inc. There is a safe harbor defense, which is the “market price” applied in a non-discriminatory way, to a
claim or bad faith based on an open price contract under the UCC, so the “honesty in fact” is in some respects subordinated
to “commercially reasonable”
FACTS: P was in an agreement to sell gas to D; it was an open price fixed by P; this sort of agreement is covered by 2-305 of the UCC
and requires “good faith”; D argues that P was not acting in good faith because it was P’s subjective intent to drive D out of business;
yet D’s price was within the market standard and did not discriminate among different Ds
 Does the requirement of good faith in an “open price term” contract require subjective and objective good faith?
 Yes, there must be subjective and objective good faith, technically; but the rebuttable presumption (or “safe harbor”) of comment 3
that if the price is (1) generally the market price and (2) non-discriminatory, then good faith has been met
 The idea that the court should attempt to determine if a party had subjective bad faith would lead to great uncertainty and lots of
jury determination-based litigation and this goes against the goal of the UCC; so claims of bad faith must have some basis in
commercial (objective) reality, they cannot be purely allegations about subjective intent; and in any case, good faith only requires a
“reasonable price” not a “fair market price”
 Safe Harbor defense to lack of good faith claim
o An open price fixed by the seller must be made in good faith (UCC 2-305(2))
 What good faith requires (per the UCC):
 (1) Honesty in fact
o Subjective component
 (2) Reasonable commercial standards
o Objective component
o But comment 3 gives a “safe harbor” based on conformation to the “market price”
 This is a shield to protect a seller from a lack of good faith claim
 But the franchisees say that there must be subjective good faith too
o Assume Shell intentionally is trying to force the leases out of business, can it?
 This is a smart business decision for them
o Does Shell’s subjective intent matter?
 (my idea) It should not matter, it is a competitive market and we can’t make Shell
subsidize inefficiency at the expense of its bottom line
o What if Shell is being malicious?
 (my idea) even this should be okay as long as it is competitive (and not, e.g.,
o But why should motive even matter?
 See, e.g., Keeble v. Hickeringill
 Malicious is okay as long as it is not anti-competitive
o BUT this is a little difference, because we are dealing with parties that have contracted out of
the default rules of the law, and contracts do require good faith in performance
 And it does seem like parties that have a contractual relationship should have a high
duty toward each other than what the law requires as the tort/property baseline
o But if the safe harbor protection is so strong, are we basically reading honesty in fact out of the provision entirely?
 Maybe we are…
 Problem 4-3 (Bakery truck case)
o 2-306(1) Good faith is required in a requirements contract
 Posner found a breach of the duty of good faith here!! Wow!
 Some judges are more aggressive about enforcing good faith
 European-esque judges who are more willing to step in
o There would be a difference between the bakery closing down and not taking any trucks (good faith) and the bakery
thinking that it is no longer a good deal and trying to back out (bad faith); it seems like the bakery was doing the later here

Hillesland v. Federal Land Bank Ass’n of Grand Forks There is generally no duty of good faith in the employment relationship,
meaning that employees are at will and can be fired at any time even without cause; the only protection for the employee
comes from statutory or tort limitations
FACTS: P was fired after engaging in questionable employment activity; he was the longtime employee and CEO of the company that
fired him; he argued that it was bad faith to fire him and there should be an implied duty of good faith in employment agreements, which
allow one to be fired only for cause
 Is there an implied duty of good faith in employment agreements?
 No, there is no implied duty of good faith in employment agreements; so an employee can be fired at will for no reason at all; the
only exception is if the termination is against public policy
 If the court implied a requirement of good faith in the performance of at will employment, it would be a judicial incursion on the
employment contract and lead to bad faith claims and harm business; this is especially the case because good faith is so
notoriously hard to define
 Good faith in the employment relationship?
o This can make it difficult to fire someone without cause
o But most jurisdictions do not have an implied duty of good faith meaning that “at will” employees can be fired at any time
with or without cause
 The US is the only industrialized country to largely maintain at will employment
 Problem 4-4 (Woman fired for blocking employer’s sexual advances)
o Good faith is invoked here but really the issue is just plain sexual discrimination which is illegal under civil rights statutes
 Problem 4-5 (GE unaware of their option to buy back at a low price)
o This is a tricky case
o It might be wise to inform GE in order to keep your relationship
 Judge held that the other party was required to let GE know of its option
 Because there was such a long time between the contract and the event
o But it does open Pandora’s box

D. Express and Implied Warranties

 Express warranties
o Oral or written promises or affirmations of fact made by one party to the other during the formation of the contract
o Enter the final bargain as warranties if there is reason to believe that the one party would not have entered the bargain
without the warranty
 They were NOT “puffery”
o e.g., Hawkins v. McGee, where the doctor promised the boy that he would make his hand 100% new and this lead the
boy and his parents to undergo the operation
 Implied warranties
o Three major implied warranties from the UCC
 Good title
 “The title conveyed shall be good” (2-312(1)(a))
 Can be waived, but very difficult to do so and still make the sale since the seller must make it clear to
the buyer that he does not have good title
 Merchantability
 “The goods shall be merchantable” (2-314(1))
 Can be waived if conspicuous when in writing and includes the word “merchantable”
 Fitness for a particular purpose
 “The goods shall be fit for a particular purpose” (2-315)
 Can be waived if conspicuous and in writing
o All three of these implied warranties can be waived or avoided as long as specific procedures are followed

Carpenter v. Chrysler Corp. A seller’s statement can become an enforceable express warranty when it becomes part of the
basis for the bargain
FACTS: P went to D’s car dealership to buy a car; the salesman there told him that the actual car in front of him was a “good car” a
“new car” a “reliable car” and the “car for his needs” of which P had earlier informed the salesman; the car actually had had previous
problems, was not new, and continued to have problems
 Did the salesman create an express warranty when making his statements?
 Yes, the salesman did create an express warranty because they were sufficiently specific and induced P into making his decision
 The court found an express warranty here although it is hard to see how this wasn’t just puffery; but based on the context of the
case, an express warranty was found
 How Chrysler messed up
o First, it was actually probably the lie about the battery and the failure to mention the recall that lead to liability against
o If it was only the statements of the salesman, it seems doubtful that it would be enough to find a breach of express
o What Chrysler should have done is included an integration clause in the final sales contract disclaiming all warranties
made by the salesman
 This is where the teeth of the PER would really come into effect
 But they did not do this, to their loss
 And it might have been difficult for them to do it under 2-316 comment 1, which says that express warranties
may not be able to be disclaimed after they have been made; the purpose of this rule being that the UCC “seeks
to protect a buyer from unexpected and un-bargained for language of disclaimer by denying effect to such
language when inconsistent with language of express warranty”
 UCC express warranties
o “An 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 creates an express warranty that the goods shall confirm to the affirmation or promise” (UCC 2-
o Note that 3-313 does NOT require reliance in the legal sense (comment 3)
o Note that a seller does not have to use the words “warranty” or “guarantee” to create a warranty, nor does he need to
intent to create a warranty at the time
 Puffery
o Statements made in the course of advertising that cannot be treated as an express warranty
 e.g., Beer advertisement case, where P said that buying the beer did not transport him to a tropical island with
beautiful women
 Who remembers what?
o Note that it is often the case that the buyer remembers much more about the alleged warranties than the seller and it is
often difficult for the seller to testify as to what he said and did not say
 e.g., Salesman that says lots of different things to lots of different customers
o This can lead to evidentiary problems at trial
 Warranties by description
o Express warranties used to be specific affirmations of fact or promises, but they can now include descriptions of the good
at any point during the formation of the contract, as long as they form part of the basis for the bargain, significantly
broadening the scope of what might be construed as an express warranty (2-313(1)(b))

Vlases v. Montgomery Ward & Co. A warranty is means SL for the seller in the sense that it does not matter if the seller is not
at fault in how the goods came to be defective
FACTS: P bought 2,000 day old chicks from D; the chicks were found to be infected with a deadly disease when they arrived at P’s
farm; it is impossible for anyone to know if the chicks had the disease until it manifests itself and there is no cure for the disease
 Did seller breach the implied warranty of merchantability and the implied warranty that the goods were fit for a particular purpose?
 Yes, the seller breached these implied warranties and it does not matter that the seller was not at fault with respect to the chicks
having the disease
 The implied warranties can only be removed by express waiver, not by a showing of no fault; in this respect, they seem to put strict
liability on the seller to conform to the warranty
 Implied warranty of merchantability (UCC 2-314)
o “Unless excluded under 2-316, a warranty that the goods shall be merchantable is implied in a contract for their sale if a
seller is a merchant with respect to goods of that kind”
o “Merchantable” means suitable under the description given
o Most manufactures disclaim the implied warranty of merchantability
 Implied warranty of fitness for a particular purpose (UCC 2-315)
o “Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required
and the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is, unless excluded or
modified under 2-316, an implied warranty that the good shall be suitable for such purpose”
o 2-315 is a kind of fall back to 2-314
o There must be proof that a merchant understood that there was a particular purpose for the product
o So the hard cases are those where someone has a bizarre and unusual response to the product
 Merchantability versus fitness for a particular purpose
o Merchantability (3-314) centers around the market and the ordinary conception of the product
o Fitness for a particular purpose (3-315) operates in tandem with 3-314 because it covers the market in general, but it also
covers the specific needs of a given consumer (e.g., Carpenter v. Chrysler Corp., where the salesman knew of the
buyer’s particular needs, in addition to the standard use of the product)
 Why imply a warranty?
o Protects the buyer because he can buy in confidence
o Protects the marketplace because people can transact in the marketplace in confidence
 Strict liability of the implied warranties
o In Vlasses, neither party is at fault so someone has to bear the loss, so maybe it makes sense to put it on the seller since
he can spread the cost more easily
 Disclaiming the implied warranties (UCC 2-316)
o Merchantability
 “To exclude or modify the implied warranty of merchantability or any part of it the language must mention
merchantability and in the case of writing must be conspicuous”
o Fitness for a particular purpose
 “To exclude or modify any implied warranty of fitness, the exclusion must be by a writing and conspicuous”
o So you can disclaim orally a warranty for merchantability but NOT fitness for a particular purpose
o But language such as “as is” or “with all faults” is sufficient to disclaim all implied warranties”
 Limiting the remedies (UCC 2-718 and 2-719)
o General remedies for a buyer who has taken possession are:
 (1) Rejection
 (2) Revocation of acceptance
 (3) Suit for damages
 (4) (If successful rejection or revocation) a right to the return of the purchase price
o It is permissible to limit a remedy, including saying that the only remedy is to repair or replace (UCC 2-719(1))
o But if the limited remedy fails its essential purpose, all UCC remedies come back into play (2-719(2))
 e.g., If the defect cannot or has not been repaired or replaced
 Note that the limit on remedies need NOT be conspicuous, and so in some ways this is a much stronger tool for
the manufacturer, since you can keep the warranties but limit them drastically
o Consequential damages can be limited as long as it is unconscionable, and this also does not need to be conspicuous;
but note that it is prima facie unconscionable when it prevents consequential damages arising out of the harm to a
person, but not commercial harm (2-719(3))
 Are there some products that by their nature fail the implied warranties?
o e.g., Cigarettes and butter maybe fail the implied warranties because they cause of cancer and heart disease
 So can we say that they are not fit for a particular purpose or merchantable?
o Should dangerous products be excluded from the market?
 This is patronizing
o (my idea) No, because the products still are merchantable and fit for the purpose for which the person bought the product,
which is to give pleasure or taste; the attendant dangers or side effects do not matter
 This could maybe be tort, but not warranty
 Tort versus contract
o Tort claim under strict products liability would not have worked in Vlasses, because the loss was only to the product itself
(the chicks), and not another person or property on account of the defective product
o Generally strict products liability in tort has been the dominant protection for consumers in cases of personal injury
o But warranty has been the dominant protection for economic losses, since torts will not provide coverage as easily for
economic harm
o Note that you can sue in warranty for both economic or personal/property injury, but you can only sue in tort for
personal/property injury, not economic loss (generally)

Massy-Ferguson, Inc. v. Utley A waiver of the implied warranties must be conspicuous otherwise it does not count
FACTS: D bought a piece of farm machinery from a dealer who financed the purchase; the dealer then promptly assigned the loan to
the manufacturer, who was intimately involved in the selling of the machinery; D then defaulted and the manufacturer brought suit; the
sales contract had a waiver of implied warranties in small print on the back side of the contract; the contract also had terms saying that
the buyer covenanted not to sue the assignee of the loan on the basis of breach of warranty
 Did the seller sufficiently give notice of the waiver of implied warranties? Can D sue the assignee manufacture on breach of
 No, the waiver of the implied warranties was not conspicuous so they were not adequately waived and hence they apply; and the
rule that a buyer cannot sue the assignee of a loan used to purchase the product based on breach of warranty only applies where
the lender takes the assignment for value and in good faith, not when they are for all intents and purposes functioning as the seller,
which was the case here
 Court wants to support the purposes of the implied warranties of the UCC and the desire to allow lenders to lend without fear of
breach of warranty claims made as a defense for a default in payment, since a lender has no control of the quality or fitness of the
 Assignment scheme in the case
o Why make an assignment?
 The retailer can get the payment now and the manufacturer can assume the debt obligation in the long term
 Protection of assignees from breach of warranty claims
o The goal is to protect banks who would like to extend financing, so as to encourage financing
 But it does not apply here because the retailer is acting for the manufacturer, so there is really no “genuine”
 Not conspicuous disclaimer
o The disclaimer was not conspicuous enough to disclaim under 2-316(2)
o Things like type size, color, font, capital letters, something incorporated by reference, etc. matter when making this
o This problem has been exacerbated by the internet transactions where you have to scroll down the page to read the
whole disclaimer
 This may or may not be conspicuous, but it seems like it is less conspicuous than getting the whole printed
disclaimer in your hand
o Definition of conspicuous
 1-201(10) Conspicuous means: “so written, displayed, or presented that a reasonable person against which it is
to operate ought to have noticed it”
 But ultimately whether or not something is conspicuous is a “decision for the court”
 Manufacturers like to make their own warranties
o Manufacturers like to create their own warranties instead of being bound by the warranties of the UCC that would
otherwise be implied, since the UCC warranties are generally fairly buyer-friendly
o Karl Llewellyn thought that manufacturers would like the UCC warranties, but he was wrong
 Is the market for warranties actually competitive?
o In some cases the market for warranties is competitive (e.g., cars), and in some cases it is not (e.g., it is just boilerplate in
a small electronics device sales)
o This will affect the extent to which the warranties are something over which someone can bargain

Gilbert v. Monaco Coach Corp. MMWA is an example of consumer legislation that is supplementing basic contract law; it is
federal and thus preempts the UCC; it provides, inter alia, that when there is any limited written warranty you cannot then
disclaim the UCC implied warranties
FACTS: P bought an RV that was manufactured by D but sold by another party; the RV had several problems that made it unusable by
P; the RV had a limited warranty that provided for repair or replacement of any part or portion of the RV manufactured or supplied by D;
the warranty also limited the remedy to repair or replacement of parts and excluded consequential damages
 What remedies are afforded to P?
 Under the Magnuson-Moss Warranty Act (MMWA), the requirements providing that a seller cannot waive an implied warranty
under certain conditions are only for full warranties, and the warranty here was a limited warranty, and was conspicuously labeled
as such, so there was no violation of the substantive provisions of the MMWA
 D has breached its express warranty to repair and replace parts that it manufactured; P has pointed to problems with the RV and
although it cannot identity the exact source, this is not required, since the aim of the MMWA is to protect consumers, it can hardly
be expected that the consumer should have to point to the exact technical cause of the defect in a complex piece of machinery
 D did not breach the implied warranty of merchantability and fitness for a particular purpose because these claims must be, per the
MMWA, governed under state law and the state law here requires that such claims are only applicable where there is privity of
contract, and there is no privity here because P sued the manufacturer, not the seller
 P cannot revoke the contract and get a full refund because this remedy is only available for full warranties, and the warranty here
is limited; alternatively, the remedy may also be available if there was privity of contract, but there is not privity of contract
 P may be entitled to consequential and other damages because it is possible that the warranty that P does have has failed its
essential purposes because D has not repaired the RV such that it is operational, and this would mean that all of the UCC implied
warranties come back into play
 The Court applies the MMWA to the various questions of the case
 No privity of contract
o Since P is suing Monaco without a contract between them, P is not in privity of contract with D, and because of this, there
options are considerably limited
 Magnuson-Moss Warranty Act
o MMWA (federal law) partially alters the UCC (state law)
o Deliberately designed to help consumers
o If you give a written warranty it must be either “full” or “limited”
o MMWA says that you may NOT disclaim the UCC implied warranty of merchantability or fitness for a particular purpose
per UCC 2-316 if you have any written warranty, and almost all sellers of new goods do have some written warranty, so
this means that the UCC implied warranties get automatically folded in
 This is to protect consumers from written warranties that seem good but really are not; so if the seller gives any
warranty upon which the consumer makes his decision, the consumer will at least get the UCC implied
warranties, at least for as long as the limited warranty given by the seller lasts
 This is helpful for the consumer since otherwise the seller could offer seemingly good but technically complex
and meaningless warranties in order to compete while waiving the (better for buyer) UCC implied warranties on
the back in boilerplate, but with the MMWA the seller cannot
 But in the XPEL Contract example, they are waived anyway
o This is because consumers and even some lawyers do not know that you cannot waive them,
so this waiver has no legal effect except as a trick
o MMWA does allow you to limit remedies, and XCEL does this, limiting the remedy to the value of the product
o There has been lots of pro-consumer legislation laid on top of the common law and the UCC and the WWMA is an
example of this
 Market acting in spite of legal rules?
o Note that in practice the customer can often get more than the contract permits him because he can just say “I’m the
customer and I am always right” since the firm will want to keep his business and not get bad reviews, etc.
 We may have certain legal rules, but the market in reality actually governs the transaction

E. Modifications
 Preexisting duty rule (R2d 73)
o Old common law rule is that “performance of a legal duty owed to a promisor which is neither doubtful nor the subject of
honest dispute is not consideration”
 e.g., The brewery case, where the architect demanded more money and the brewery gave it to him
 Court said: “When a party merely does what he has already obligated himself to do, he cannot demand
additional compensation therefor, and although by taking advantages of any necessities of his
adversary, he obtains a promise for more, the law will not regard it”
 So the court used the doctrine of consideration to filter out the improperly modified agreement
 e.g., Reducing rent from $700 to $650, but no consideration
 Modification is not enforceable under the traditional pre-existing duty rule
 e.g., Police officer tries to obtain a reward for catching the bank robber
 Classic example of what the pre-existing duty rule seeks to prevent; the police officer had a pre-existing
duty to capture the robber anyway
o The duty here is imposed by law, not contract
 Some courts say that a pre-existing duty to a third party cannot be the consideration for a contract, but
other courts, and R2d, says that it can be consideration, per R2d 73 comment d, since there is less
likelihood of coercion
o The purpose of the rule is to prevent the “hold up game” and generally to limit the ability of the parties to engage in
strategic behavior
 But the rule causes problems when the parties start to want to modify the contract voluntarily
 So it seems like it used to be used as a forma/doctrinal way for judges to police an agreement, but since good
faith and the presence of tort play a larger role, the pre-existing duty rule is not as important
o Today the preexisting duty rule is generally suspect
 Permissible modification
o R2d 89
 A contract may be modified notwithstanding the pre-existing duty rule when the modification is voluntary for both
parties and (1) the promise modifying the original contract was made before the contract was fully performed on
either side (2) the underlying circumstances which prompted the modification were unanticipated by the parties
(3) the modification is fair and equitable
o UCC 2-209
 “An agreement modifying a contract within this article needs no consideration to be binding”
 But it must of course be made in good faith
 This kills the pre-existing duty rule

Angel v. Murray This was a voluntary and (ostensibly) non-coercive modification of the contract, so it is enforceable; this
case is a demonstration of the marginality of the pre-existing duty rule today
FACTS: P entered into an agreement with D for D to collect all of the city’s trash at a fixed price; during the time of the agreement the
city expanded rapidly and D could no longer afford to collect the trash without going out of business; D then asked P if P would pay him
more due to the great increase in the size of the city; D voluntarily agreed to the increase in pay
 Is it permissible for the contract to be modified such that D is paid more for a pre-existing duty?
 Yes, the pre-existing duty rule, which states that a pre-existing duty cannot serve as consideration for the performance of a
contract, is not applicable here because the rule is generally suspect and meant only to prevent strategic behavior parties, which
did not occur here
 Rather, the application of a good faith and voluntary modification, as articulated in UCC 2-209 (though this is not applicable since it
is for the sale of goods) and R2d 89 is more appropriate
 Per R2d 89, a contract may be modified notwithstanding the pre-existing duty rule when the modification is voluntary for both
parties and (1) the promise modifying the original contract was made before the contract was fully performed on either side (2) the
underlying circumstances which prompted the modification were unanticipated by the parties (3) the modification is fair and
 Cronyism?
o Note that the P citizen Angel sees the $10K as cronyism since the city is giving extra money to D
 Is this the risk that the garbage collector took?
o Didn’t Maher take the risk that the city would grow?
o Isn’t this what Posner said that the municipality did by signing a similar long term contract in the NIBSO case?
o Yes, maybe; so the city does not need to modify the agreement, but they have agreed to, which is why the citizen thinks
that there is cronyism going on
 Maher as compared to Alaska Packer’s
o The fishermen extorted payment in bad faith
 And there was no extra work for the fisherman
o But there is extra work in this case since there is more garbage to collect, and the situation is not
 When is there extortion?
o Although the brewery case and Alaska Packer’s case are examples of more immediate extortion, extortion can also be
more subtle, and it is difficult to distinguish these in some ways from Maher
 e.g., Maher’s inability to complete the job may be a threat just like extortion, since the city may not be able to find
another collector and the garbage would pile up and citizens would be unhappy, etc.
o Basically, where you cross the line into extortion is an open ended question
 But still Maher should not orally threaten to breach, since this would take away any semblance of voluntariness
 Is extortion okay? A contract is either performance or damages…
o Note that you could just argue that extortion is fine since when someone signs a contract they know that they are either
getting performance or damages and they be fine with either option theoretically, so when you extort and threaten to
breach, you are really just allowing the contract holder to get damages, but if they really prefer performance, then they
can pay more
o The person who is being extorted can also just call the other party’s bluff
 When is the modification made under duress and therefore voidable?
o “If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no
reasonable alternative, the contract is voidable by the victim” (R2d 175(1))
 So what is an improper threat?
 Obviously, physical violence, but what else?
 Note that a “threat by a party to a contract not to perform his contractual duty is not by itself an improper threat”
but it is if “it is a breach of the duty of good faith and fair dealing imposed by the contract”
 Law does not want to prevent an efficient breach from occurring, but it also wants parties to act in good
o UCC approach (2-209 comment 2)
 The test of good faith may in some cases require an objectively demonstrable reason for seeking modification,
but such matters as a market shift which makes performance come to involve a loss may provide such a reason
even though there is no unforeseen difficulty as would make out a legal excuse from performance under 2-615
and 2-616
 So the zone is higher than just a bad deal but lower than impracticability
 So, e.g., although it is not for a sale of goods, the excavation that encounters rock case is not an improper threat
and the modification to increase the price 9x is enforceable since there was an “objectively demonstrable
reason” for making the modification, and it was not made in bad faith
 Requirement of protest
o Note that a party that feels coerced into making a modification must protest or object such that the coercing party is on
notice that they are not making the change voluntarily in order for the court to review for coercion or duress
 Problem 4-6(1) (running back contract re-negotiation)
o Make sure the modification is clearly voluntary
 You could take the old sweatshirt approach, where you add something new, so there is new consideration
 Add an additional year
 Just try to cancel the contract and write a new one (each party’s surrender of rights would be consideration for
the other’s surrender)
 Problem 4-6(2) (changing location of window for walk in freezer)
o Damages are probably appropriate for the buyer because per R2d 89 she “materially changed here position in reliance on
the promise” when she bought the walk in freezer
 Jury Instructions (Boeing v. Aircraft Gear)
o Note the long and complex jury instructions and how it is unlikely that the jury would be able to understand and process
everything that happened in coming to their decision

Brookside Farms v. Mama Rizzo’s, Inc. The UCC allows for exceptions to the SOF, in the form of reliance and payments for
goods received, and these were met here, so the modification is enforceable even though it was an oral modification
governed by the SOF, which therefore otherwise would not be enforceable
FACTS: D agreed to buy from P basil under a requirements contract set at a certain price; because D needed the stems removed from
the basil, the contract was modified and the price was increased; at various points thereafter, the price was increased; D’s VP said that
he would note the changes in writing in the contract since the contract provided that it could only be amended in writing; the contract
was also governed by the UCC SOF
 Was the modification to the contract done appropriately?
 Yes, the contract was appropriately modified under both reliance and statutory exceptions to the SOF
 (1) The reliance exception is that a modification to the SOF counts if done orally if one party tells the other that he will reduce it to
writing and the other party relies on this promise (2) the statutory exception to the SOF is the actual performance after the fact,
which clearly indicates the presence of a contract, therefore satisfying the purpose of the SOF; additionally, it does not matter that
the parties contract specified no modifications except those made in writing, since this “private SOF” is governed by the same
exceptions to the UCC’s SOF
 Long term contract and business partner is struggling
o Note that Mama Rizzo’s is struggling
o One of the hardest issues to deal with in contract relationships is when your long term partner is struggling and you want
to keep the contract but also to protect yourself
 Private SOF
o The contract has a section prohibiting modification not in writing
 This is an attempt to prevent the drift away from the written document as “relational contracts” tend to do, as
happened in, e.g., Nanakuli by course of performance
 UCC allows per 2-208(1) that “any course of performance accepted or acquiesced in without objection
shall be relevant to determining the meaning of the agreement”
 UCC allows per 2-202(a) that “the terms of an integrated agreement may be explained or supplemented
by course of performance”
 But the parties end up drifting and getting sloppy in their relational contract anyway
 Exceptions to the SOF in Mamma Rizzo’s
o Reliance (from R1st 178 comment f)
 “A misrepresentation that there has been satisfaction of the SOF if substantial action is taken in reliance on the
 So reliance is found because the Mamma Rizzo’s manager said that he would make the change to the
stems provision in writing to comply with the contract and Brookside believed and relied on this promise
o Court assumes that this same promise was implied for subsequent price changes
 But this may not be such a fair assumption
o Goods that have been accepted UCC 2-201(3)(c)
 “A contract that does not satisfy the SOF but is valid in other respects is enforceable with respect to goods for
which payment has been made and accepted or which have been received and accepted”
 So for all of the basil already accepted, the SOF is satisfied
 UCC 2-209 “Modification, Rescission, and Waiver”
o UCC in general wants it to be easier for the parties to modify their contracts
 Comment 1 to 2-209: “This section seeks to protect and make effective all necessary and desirable modifications
of sales contracts without regard to the technicalities which at present hamper such adjustments”
o Waiver under 2-209(4) and (5)
 Per (4) an attempt to modify that does not otherwise comply with 2-209 can operate as a waiver, which, per (5),
the party who waived can retract provided he gives the other party reasonable notice that strict performance will
now be enforced and the other party has not relied to its detriment on the waiver such that it would be unjust to
return to the original (strict) enforcement
 Modification: e.g., If your rent payment is due on the first of the month, but you do not get paid until the
first Friday of the month and you modify the lease, then the landlord is bound to accept this modification
and would need
 your permission to return to the old payment terms
 Waiver: e.g., If your rent payment is due on the first of the month, but you do not get paid until the first
Friday of the month, and you just do not pay until then and the landlord cashes the check, it can be a
waiver, but the landlord can return to the original terms and require that you pay when it is due per the
lease as long as he gives you reasonable notice
 Mamma Rizzo’s proving too much?
o Mamma Rizzo’s wants to say that none of the modifications are enforceable since they were not in compliance with the
“private SOF” of the agreement
 Judge says (hypothetically) okay Mamma Rizzo’s, we can revoke everything, but then we are back to where we
started from and you still have to purchase 91,000 pounds of de-stemmed basil leaves
 Strong parol evidence of modification can override written modification requirement
o Common law
 Even if a contract requires that any modification be made in writing, if there is strong and clear evidence that an
oral modification was made, it will alter the contract
 So there is no contract that is completely immune from oral modification
 But note that if the modification is paired with reliance the case is stronger than if not
 “A contract that requires modifications to be in writing can only be modified in writing, but a party asserting such
a provision may be precluded from doing so if the other party relied on his conduct to the contrary”

Asmus v. Pacific Bell Employer can remove a benefit that it unilaterally conferred provided the benefit was there for a
reasonable time and the employer gives reasonable notice of the removal
FACTS: D employed P; D modified the at will employment contract and made P an employee that could only be fired for cause; D then
modified the employment contract again by reverting P to the at will situation; but D gave P reasonable notice of the modification and it
occurred after the indefinite employment contract had run for a reasonable time
 Was the modification to the contract done appropriately?
 Yes, the contract was appropriately modified
 Court treats the changes to the employment contract as unilateral in that all the employees did was perform as an employee (in
return for a promise of benefits), not promise to perform; the court says that changes to a unilateral contract (at least in the
employment context) can be modified provided that they had run for a reasonable time and reasonable notice is given before
modification; the court explicitly rejects that they can be modified immediately as well as the assertion that the contracts should be
treated as bilateral and therefore that assent and mutual consideration would be required to terminate
 How do you get rid of a benefit once in place?
o Once an employee has accepted a benefit as part of a scheme, how do you retract?
o Court offers three approaches
 Approach (1)
 Allow termination without notice at any time before completion of the contract
o So the employees do have a contractual right to the benefit they were given
o This would be like telling someone after they were half way across the Brooklyn Bridge in a
unilateral contract that you will no longer going to pay them
 Approach (2)
 Impose bilateral concepts on the agreement and say that the employer cannot remove the benefit with
mutual consent and additional consideration
 Approach (3)
 Unilateral approach where the employer can terminate the benefit if the benefit lasted for a reasonable
time (since it had no fixed duration to begin with, but if there were it would be different), the employer
gives reasonable notice, and the modification does not interfere with the employees’ vested rights
o Court choses Approach (3)
 The court says that the employee excepts the new benefit system simply by continuing to work, or in continuing
to crawl across the Brooklyn Bridge
 But note that Pacific Bell had offered additional consideration just in case the court employed a more bilateral
approach to the problem instead of the unilateral approach that they took
o Are these unilateral options contracts?
 R2d 45: “Where an offer invites an offeree to accept by rendering performance and does not invite a promissory
acceptance, an option contract is created when the offeree begins performance”
 e.g., the U of M professor furlough problem; University realized that it is safest to just grandfather in the
plan since it was too risky legally to retract it since people may say that they came to the University
because of it
 e.g., Brooklyn Bridge crawl
 Isn’t the AT&T, or the University of Michigan, or the person who had you crawl across the Golden Gate Bridge
bound by the option contract you now have?
 BUT the Brooklyn Bridge Crawl and the Tenure Plan are different from Pacific Bell because the
promisee was receiving the benefit of the promise as he went along, as opposed to it coming all only at
the end
 BUT Brooklyn Bridge Crawl and Tenure Plan have end points, so it may be harder to modify these as
per the option status, but since AT&T was given unilaterally and is indefinite, it is easier to make the
case for modification, since otherwise, it would be very difficult to change
o Though note the Tenure Plan is in some ways similar, since AT&T could just grandfather in the
employees who had received the benefit
o Note that in general a long term and indefinite relational contract like employment is really difficult to analyze under
traditional contract law
 But was there even a contract in the first place?
o Rule is that consideration must induce a promise (or performance) in exchange for something; so there must be a bargain
o In this case, it is not clear that the promise to not fire induced a return promise or performance from the
employee/promisees, since they were doing and going to do this anyway
 e.g., Imagine that they did not know about this offer but kept working, it would be like a case where someone
offers a reward to return a lost good, but someone returns it without knowledge of the reward; this would not be a
unilateral contract since there was no mutual inducement
 Problem 4-8 (Berkeley law professors)
o It might be harder to fire the professors as compared to normal employees because of the tenure, especially since it was
a reason for which they came (as opposed to, as in the case of Asmus v. AT&T, something that was bestowed on them
while they were already there, and something for which they were given benefit as they went along, but still hard to
distinguish—the Brooklyn Bridge Crawl is easier to distinguish since reward comes only at the end)

Wong v. Paisner Accord and satisfaction can be used to alter the terms of the amount due under an agreement when the
amount is unliquidated only
FACTS: P and D made a contract in which P would perform services for D and P would be paid (in P’s view) by the hour and (in D’s
view) according to a fixed fee; D sent P a check for the full amount under the fixed fee view of the contract saying that the bill was paid
in full; P then crossed out that the fee was paid in full and deposited the check; P then sued for the remainder which he thought he was
 Was the bill paid subject to accord and satisfaction?
 Yes, the bill was paid according to accord and satisfaction (or at least the jury could so find) (but note that in some respects this
seems more like substitute performance, although the doctrines are very similar)
 The doctrine of accord and satisfaction allows a party to offer an accord to satisfy the amount due and if the other party accepts,
the first party had a time to satisfy it by actual payment of the accord, which is what happened here (note that this arguably was
“substitute performance,” which is similar by slightly different from accord and satisfaction)
 Accord and satisfaction R2d 281(1)
o An agreement (accord) in which an obligee promises to accept a stated performance (satisfaction) of the obligor’s existing
 Agreement on part payment
o e.g., Wong v. Paisner
 Check represents an offer to comprise on the disputed debt
 Cashing the check (even with crossing out payment in full) constitutes acceptance of the offer
 So there is both accord and satisfaction
o If the obligor does not fulfill his requirement under the accord within the time period specified, the old debt is re-instated
 Accord and satisfaction under the UCC (1-308(b))
o UCC accepts accord and satisfaction as a method to discharge a debt in full through agreed-upon partial payment
 Substitute performance R2d 278(1)
o If an obligee accepts in satisfaction of the obligor’s duty a performance offered by the obligor that differs from what is due,
the duty is discharged”
 e.g., Debtor owes $1000 but offers a machine instead and the creditor accepts, then the debt is discharged
 Liquidated v. un-liquidated damages; must be a good faith dispute for accord and satisfaction/substitute performance
o Accord and satisfaction is only for un-liquidated debts (debts for which the amount is in dispute)
o So, e.g., If you are leasing you apartment and the landlord agrees to reduce the rent by $50 when you him to do so, the
landlord can later sure to recover the $50 per month since it was a liquidated debt in that it was not in dispute
 Potential argument you could use in this case is try to say the amount was in dispute because the premises were
not habitable, but this probably won’t work
 Potential argument is to try a promissory estoppel by saying that you continued to attend law school in reliance
on the extra $50, but this probably won’t work
 But you could say that the rent is $650 and an old sweatshirt and then there is new consideration for a new
contract and you will not have to deal with the accord and satisfaction failure problem
 This is like the running back example where you make him sign autographs
 Status of preexisting duty rule
o Pre-existing duty rule is generally abolished
o But there restraints of good faith and no duress or coercion, which was the largely the original aim of the pre-existing duty
rule anyway
 Overreaching debtor
o Some debtors are not the poor and weak consumers, but tortfeasors, insurance companies, and employers
o So it is important that a modification to the debt not be made flippantly in an oral statement so that due evidence and
caution is given to the modification

Chapter 5: Legal Regulation and Contracts

 Judicial regulation of contracts
o Judges regulate contracts through many different tools
o Three main tools are, from least aggressive to most aggressive:
 Mistake
o Must be a mistake of fact, not a mistaken prediction or hope
o Usually must be a mutual mistake
o If the risk of the mistake was intentionally allocated to one party by the contract, that party
cannot claim mistake as a reason for not enforcing the contract
 Difference between mistake and misunderstanding
o Misunderstanding: R2d 20
 When the offeror means one thing and the offeree understands another, or vice versa
 Each believe something different and the law finds that there was no agreement
 e.g., Peerless, where they are each thinking of different ships
 e.g., Merced County police officer agreement
o Mistake: R2d 153
 Each party thinks something about a fact underlying the agreement that is in fact
 e.g., Sherwood, where they each think the cow is sterile
o But note that it is difficult to distinguish the doctrines
 e.g., the Restatement cites Peerless for both doctrines
 Illegality
 Contracts that “are against public policy” as defined by statute (e.g., Prostitution agreement) or the
judge (e.g., Non-competition agreement that works a restraint on trade)
 Unconscionability UCC 2-302
 An old doctrine from equity, but implemented by Llewellyn as an alternative to the “covert remedies”
that the courts were using for cases that they saw as unconscionable, since the covert remedies were
not reliable (e.g., stretching consideration in order to deal with an unconscionable situation could lead
later judges to use that stretched view of consideration in normal cases, and this is undesirable)
 So doctrine of unconscionability was to allow judges to be open and clear about what they were doing
o Important that it is a matter of law for the judge and not for the jury

A. Misrepresentation and Mistake of Fact

 Burden on contracting parties to determine validity of facts
o General rule is that the parties and not the courts should have the burden of ferreting out the truth when coming to an
 e.g., Wood v. Boyton, where woman sold stone worth $700 for $1 since she did not know it was an uncut
 Court did not allow the sale to be undone, since the seller could have investigated the true value of the stone
 Mistake doctrine
o Definition of mistake: “belief not in accord with the facts” (R2d 151)
o Mutual mistake: both parties enter the contract with the mistaken belief (R2d 152)
o Unilateral mistake: one party enters the contract with the mistake belief (R2d 153)
o A mistake can only make the contract voidable if it “goes to a basic assumption on which the contract was made and had
a material effect on the agreed to exchange in performances” (R2d 152 and 153)
o If the party adversely affected bore the risk of the mistake, then the contract will not be voidable (R2d 154)
 Misrepresentation
o Misrepresentation is an “induced mistake” and can also be a tort
Weintraub v. Krobatsch Misrepresentation “induced mistake” can be the basis for not enforcing a contract
FACTS: P sold a house to D in “its present condition”; there was evidence showing that P knew that the house was infested with
termites but did not tell P; but also did not deny that the house was infested with termites; she merely left the lights on whenever D
came over to see the house, so that the termites would stay in the walls; after finding out about the termites, D attempt to rescind the
 Is rescission appropriate here?
 Yes, rescission appropriate here since P had a duty to disclose
 Unlike the older doctrine, the strict rule of caveat emptor is not appropriate given modern notions of justice; rather, fraudulent
misrepresentation can include silence since there is a duty to disclose a material fact bearing on the transaction
 Tort of misrepresentation (“induced mistake”)
o “Liability for commercial harm caused by the plaintiff’s justifiable reliance upon material misrepresentation of fact that
leads to contracts, transfers of property or other bargains”
 Misrepresentation requires
 (1) Intentional misrepresentation
 (2) Of fact or opinion (as distinct from a promise)
 (3) That is material
 (4) Intended to induce
 (5) Does induce reasonable reliance by the plaintiff
 (6) Proximately causing pecuniary harm to the plaintiff
o Misrepresentation is a tort, but P wanted the contractual remedy of rescission, not damages, and might not have been
able to prove that is was intentional since D did not say anything definite at any point
 But the consumer-friendly NJ court says that this misrepresentation was a fair basis for rescission
 Misrepresentation overcomes “present condition sale”
o Misrepresentation seems to override the “present condition” waiver language in the contract of sale
 But what is misrepresentation and when do you have a duty to disclose?
o Is silence misrepresentation when:
 Haunted house?
 Someone was murdered in the house?
 A sexual offender lives next door?
 Selling a company that is experiencing latent financial problems?
 Caveat emptor (“buyer beware”)
o Was a more potent doctrine during the 19th Century days of freedom of contract
o But still has some force in the common law
o If a party has the tools available to investigate the product he is buying but does not and therefore misses a defect, the
court may not bail him out
 e.g., Case where the buyer did not check to see if there was a second mortgage on the property he bought when
it would have been easy for him to do so

Lenawee County Board of Health v. Messerly Mutual mistake can make a contract unenforceable unless the risk of that
mistake was clearly assigned to one of the parties
FACTS: Buyer bought a property that had a latent septic problem that made the property uninhabitable of which neither the seller of
the buyer were aware; the value of the property dropped to zero or below a few days after the buyer bought it; the buyer bought it for a
rental property revenue stream; the contract for sale said that the property was “accepted in its present condition” or “as is” by the
 Was there a mutual mistake such that the contract should be rescinded?
 There was a mutual mistake of fact since the value was thought to be about $25,000 but it was really $0
 The court abandons the distinction between mistakes affecting the “essence” of the consideration (as in the case of Sherwood and
the cow) and those only affecting the “value” of the consideration (as in the case of the apartment complex where not as many
apartments could be built) because the distinction is really hard to draw in many cases
 The court adopts the R2d 152 approach for mutual mistake which says that where (1) a mistake of both parties was made at the
time the contract was made (2) as to a basic assumption on which the contract was made (3) and which has a material effect on
the agreed exchange of performances, the contract may be avoidable as long as the risk of mistake was not clearly assigned to
one party; in this case, though, because of the warranty disclaimer language, the risk of mistake was assigned to the buyer, so in a
case where neither party is at fault, the buyer will lose
 Land Contract
o Was used in this case instead of a mortgage because there is very high interest rate and a mortgage might be classified
as usury
o It is a seller financed sale of land
 Sherwood v. Walker
o One party or the other will benefit enormously
o Case is different from Peerless case because each party is thinking of the same cow
 It is just that the substance has just changed so much (so it is mistake and not misunderstanding)
o How do we distinguish this from Wood v. Boyton?
 Sold and delivered v. sold and not delivered
 Possible to know v. impossible to know
 “Misrepresentation” through silence of buyer?
o What about the idea of “misrepresentation” of buyer, since he knows something is much more valuable
 e.g., Lucy, where the buyer knew that the land was more valuable for selling timber
 e.g., Buyer knows that there is oil under the land
 e.g., If the buyer in Sherwood suspect the cow was not barren
o We do want to reward these people for having expert knowledge about the true value of something
 Mistake more prevalent in land transactions
o Note that mistake often comes up in land transactions as opposed to sale of goods, since the land transaction is a one off
event and therefore easier to rescind whereas the sale of goods usually involves some performance that has already (at
least largely) happened by the time the mistake has been found, so it is hard to back out
 Mutual mistake under the Restatement (R2d 152)
 (1) “Basic assumption” on which contract was made
 (2) “Materially affects” agreed exchange of performance
 (3) “Present at the time the contract was made”
o This allows the court a lot of freedom to decide something on a case by case basis
o But R2d 154 “Party bears risk of mistake if the risk is allocated to him by the terms of the agreement”
 So if the buyer in Sherwood has had a hunch that he cow was not barren, then he should get to keep it, since
the seller took the risk that it was (or he paid slightly more and took the risk that it was not), but it seems as if he
did not in this case
o Note that it is actually hard to determine in practice which party took the risk
 The key question is who ultimately should bear the risk?
 (my idea) It seems like it would be best to set the rule that it is always on one party and then that party
knows that it is his risk and he can insure against it and or build it into the price
o Would it make sense to always put on the seller, since if it is more valuable than expected the
seller still gets the benefit he expected and the buyer gets more and if it is less valuable then
expected the buyer can return and the seller and return to his buyer, etc.
 Think about this in outline!
 Erroneous prediction is not a mistake
o e.g., NIBSCO thought oil price would rise but it did not (though the doctrine of mistake did not come up in that case)
 Problem 5-1 (valuable coin that is later shown to be a fake)
o Buyer was allowed to rescind on the basis of mutual mistake
o Note that idea of knowledge (since both were merchants) and the implied warranty of merchantability (since this would be
a violation of that) come into play in this case

Monarch Marking System Co. v. Reed’s Photo Mart, Inc. Courts are reticent to not enforce contracts on the basis of unilateral
mistake only; it will only happen if the contract is unconscionable or the other person had reason to know of the mistake
FACTS: D mistakenly ordered four million instead of four thousand labels; when the labels arrived, D refused to pay and claimed
mistake as the basis for rescinding the contract
 Is rescission appropriate here?
 No, rescission is not appropriate here, since P cannot be (or D will not but it) put back in the status quo
 Mutual mistake can only (possibly) be the basis for rescission if the contract is still executory, once the party that did not make the
mistake has acted to its detriment, the contract cannot be rescinded; the only thing that the party that did not make the mistake is
permitted to lose is the benefit of the bargain
 Unilateral mistake (R2d 153)
o Getting out of a unilateral mistake is much more difficult than a mutual mistake
 R153 has exceptions:
 (a) Unconscionability
 (b) When the other party should have known it was a mistake
o e.g., It is really important that the jury finds that Monarch should not have known that this was
a mistake (R2d 153 uses the language of “reason to know” so “should have known” is the
standard), because if it had then the contract may have been voidable
 But it does seem quite certain that Monarch should have known it was a mistake,
 But it is very rare when this will be found
 Trade usage rears its head
o Note that the question/problem of trade usage is also implicated since the court says that the buyer is required to know
that “MM” meant one million in the printing industry
 Someone will have to lose
o Someone will have to lose in this case since Monarch expended a lot of money to make the unique labels
 So they could maybe make a reliance argument
 Unilateral mistakes often arise in construction bids

B. Public Policy and Illegality

 Void as against public policy (R2d 178(1))
o “A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is
unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the
enforcement of such terms”
 What makes a contract illegal?
o Sometimes illegality is based explicitly on statute
o Sometimes it is based on judicial interpretation
 When courts do invoke “public policy” but without connection to a specific statute as the basis for unenforceable
contract, they do not do so rashly, since it is a vague area and clear judicial intervention
 Since otherwise there are no guideposts to follow and the judge has great power to determine for
himself what is sound public policy and this can vary greatly from judge to judge
 Freedom of contract is not an absolute right
o Freedom of contract is only a secondary constitutional right, not a primary one
 Traditional areas of judicial prohibition on contracting as against public policy
o Restraints on free trade
 Direct cartel is obviously a restraint on trade (but is also probably criminal)
 Non-compete agreement with onerous terms
o Contracts covering marriage, family life, and sex
 Though this is changing quickly based on evolving social attitudes with respect to these issues

Clouse v. Myers Contracts that try to get around the law are illegal and thus unenforceable
FACTS: P paid money to D and entered into a partnership agreement to run a bar with D that was called an employment agreement so
that P could continue to operate the bar under D’s liquor license instead of applying for a new license; the police found out about this
and revoked the license, thus stopping the operation of the bar; under the contract, P should have received his money back
 Will the court enforce the contract’s requirement of return of money?
 No, the court will not enforce the return of the money because it was an illegal contract
 The contract was an illegal contract because it was made in order to subvert the law, so the court will not enforce it; both parties
have unclean hands; note also that P’s claim against D for fraud is not met anyway since there is a very high standard for fraud
that is not met here
 Unclean hands
o P came to court with unclean hands because he was trying to evade liquor license requirements
 Why liquor license is not divisible
o Purpose of the non-divisible liquor license is being able to keep tabs on who is distributing liquor so that the state
government can make sure that the mob or other criminal organization does not get control of the bars, etc. by becoming
a silent partner with other citizens
 Fraudem Legis
o Note that the statue in Clouse does not itself prohibit the contract, so the issue is In Fraudem Legis
o The issue is trying to get around the law
 e.g., It is illegal to operate a prostitution house, so the court will say that it is just as illegal to lease a property to
a prostitution house
o So the illegality in this case is not statutory per se
o The court is instead looking to what the parties are really trying to do by way of the contract
 The court is extending the statute to make it more effective as per a situation that the legislature could not have
specifically apprehended
 No restitution when contract is against public policy (R2d 197)
o “Except with some exceptions, a party has no claim in restitution for performance that he has rendered under or in return
for a promise that is unenforceable on grounds of public policy unless denial of restitution would cause disproportionate
 e.g., In Clouse P cannot get his $7500 back because the black letter law is that the court will not disturb the
existing positions since all parties have unclean hands, subject to the “disproportionate forfeiture qualification,”
 which is not met here since it is only $7500
 Although it is unclear as to just where the disproportionate forfeiture line resides
o Keep the court pure
 R2d 197 can be defended by the notion of wanting to keep the court pure from the corruption posed by enforcing
illegal contracts, or granting restitution, even if the maintenance of the status quo is unfair to one of the illegal
 e.g., When you bust a gambling ring, should the state return the money to the gamblers, or should it
escheat to the state?
 Problem 5-2 (illegal activity and non-compete agreement)
o The non-compete clause was not related to the illegal activity, so it was held to be enforceable
 So there must be some relation between the illegal activity and the remedy sought/issue at play in order for the
court to decline to uphold the contract on the basis of illegality

Hopper v. All Pet Animal Clinic, Inc. If a non-compete agreement is too broad it will be held to be illegal as an unlawful
restraint on trade
FACTS: P signed a non-compete agreement with her employer; she then breached the agreement; the non-compete said that she
could not be a veterinarian for three years in the town and in the practice of small animals
 Is the non-compete agreement enforceable?
 Yes, it is enforceable, except that the duration is too long
 The three year term should be reduced to one year since that is all the time that is needed (per the trade usage of local
veterinarians) for the employer to hire a new person and for that new person to demonstrate to the clients that they are a suitable
replacement; the geographic and substantive provisions are fair; the court upholds the rest of the agreement through the principle
of narrowing to keep enforceable instead of striking the whole thing down; the court also discusses the “Rule of Reason” and the
competing interests of free trade but protection of employers served by the use of non-competes
 Note that the court denies damages for lost profits to D, even those can be accepted usually, because his claims are speculative
 Why no preliminary injunction?
o Note that strategic litigation mistake of not requesting a preliminary injunction and only the one year permanent injunction
which had expired by the time the litigation was complete and was therefore never observed
 New consideration to sign non-compete
o Note that the employer gave new consideration to the employee when she signed the non-compete in order to secure the
enforceability of the non-compete because the WY Supreme Court had not yet ruled on whether or not such agreements
were enforceable without some new consideration
o This approach is generally supported as good public policy, since the employee is usually unable to bargain about
whether or not to sign the non-compete since he might otherwise lose his job
 Policy behind non-compete agreements
o Pros
 Non-competes help employers who share trade secrets, client information, business skills, etc. with employees
without fear that the employee will take the information to a competitor right away
 So they allow for information sharing and workforce development
o Cons
 But the problem is that they limit the employee’s ability to work and that can deprive the community of the
employee’s socially valuable skills and it is generally a restraint on trade, which common law judges have always
sought to prevent as a matter of judicial policy setting, much before the advent of statutes preventing this
 e.g., When the radiologist was the only one in town, his skills were too valuable, so the non-compete
was unenforceable
 e.g., If there was only one other vet in town, the non-compete may be unenforceable since otherwise
the other vet would have a monopoly
 Rule of reason
o Rule for determining if the non-compete is enforceable
o Class articulation
 “Whether the restraint is such only as to afford a fair protection to the interests of the party in favor of whom it is
given, and not so large so as to interfere with the interests of the public”
o R2d 188(1)
 “An ancillary non-competition agreement is unreasonable in restraint of trade if (a) the restrain is greater than is
needed to protect the promisee’s legitimate interests (b) the promisee’s need is outweighed by the hardship to
the promisor and the likely injury to the public”
 No basis for three year term
o Note that the employer should have come up with more specific facts as to why three years was the right amount of time
as opposed to just picking a general number
o They need to give the court some actual reason
 e.g., Vet board recommendation or the practice of other area businesses
 Options for when the non-compete is illegal in its current manifestation
o (1) Make entire agreement unenforceable
 Court would just strike down the entire agreement
o (2) Blue pencil rule
 Go through illegal agreement and making it legal by striking out, but not adding
 Not a “modification” but a “snipping out” only
 Some non-compete contracts were written for this
o e.g., Not compete in NW Ann Arbor, Ann Arbor, Washtenaw County, SE Michigan, USA, etc.
 But the blue pencil approach is generally not used by the courts today
o (3) Enforce narrower term
 Do not alter the basic idea, just narrow it
 BUT maybe the court should not narrow since the parties will start to broad and high with their terms
knowing that the worst case scenario is that the court will narrow it to acceptable limits
o But if they knew that the court would possibly just strike the whole thing down, then they may
be more reasonable to start off with
o So choosing the option of just making the whole thing unenforceable will probably lead to
fewer lawsuits going forward
 This is the R2d’s chosen route
A.Z. v. B.Z. Courts are reticent about enforcing contracts that require persons to engage in sexual or familial relationships
FACTS: P and D were husband and wife and had used in vitro fertilization in order to become pregnant; when they got divorced,
several of the embryos were still at the clinic; the husband and wife had previously signed a contract saying that “upon their separation”
the embryos would go to the wife for implantation; the husband usually signed the form in blank and the wife filled out the information
 Is the agreement enforceable?
 No, it is not enforceable
 The form signed by the husband and wife was meant to aid the clinic not to govern a potential dispute between then subsequent to
a divorce; it has no duration; the form says “separated” which is different from divorce; the wife filled out the information after the
husband signed it in many cases, so it may not represent “true intent” (but this seems to move too far away from objective theory
of contract); the agreement does not provide any other terms for custody or support payments, etc.
 Additionally, the court would not enforce the contract on public policy grounds anyway, since what the wife is trying to do is force
the ex-husband to become a father against his will, and it is against public policy to enforce contract compelling persons to enter
familial relationships, based on both judicial decisions and the statutes of the legislature
 Formalist approach and public policy approach
o (1) Formalist approach
 Court discusses how the consent forms are not enforceable because of how they were signed, what their
purpose was, that other kids were subsequently born, because the father never really contemplated this
possibility after divorce, the difference between separation and divorce, etc.
 Seems like the court is developing a set of higher standards because of the subject matter of the
contract, since many of these issues would not upset the court much if this contract governed some
other issue
o (2) Public Policy
 Court looks to the legislature (adoption agreement and marriage agreement rule) and its own decisions to
develop the broad rule that it will not enforce contract that compel one to enter into a familial relationship
 What the court is trying to do is to show that this is a special case, and all of the formal reasons given in
part one would not by themselves be enough outside of this unique context, so it is really part two that
is driving the decision
 Court will not enforce contracts compelling individuals to enter familial relationships
o Massachusetts’s court’s rule is not adhered to in many other states
 e.g., Contract in the A.Z. v. B.Z. case would be upheld
 Problem 5-3 (Same sex impregnation and one couple leaves)
o Massachusetts court sticks to its rule and says that Betty cannot be forced to pay support
 Problem 5-4 (Girlfriend stops birth control in order to get pregnant with boyfriend)
o How to you reconcile this issue with the “cannot be forced into a familial relationship holding of AZ v. BZ?
o Is the policy in MA too broad?
o Maybe we do want to force people in some circumstances, what about the interest of the child?
 In most states they would say that it does not matter that the woman has agreed to take birth control since the
interest of the child trumps, but in MA with their precedent it would be harder
 No one wants to make the difficult decisions
o The broader problem is that the legislature does not want to deal with these highly contentious issues since they need to
get reelected, etc.,
o So they end up falling to the courts, who have to decide the cases because they are not prospective or abstract problems
but actually happening

C. Unconscionability
 Unconscionability
o Major direct method the courts use to not enforce contracts
o New rule introduced in UCC 2-302
 But it had been around for a long time from the Chancellor in equity
 Though it was usually a gate-keeping doctrine for invocation of the Chancellor’s power, not a tool that the
Chancellor would use independently
o UCC 2-302:
 (1) “If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at
the time it was made [so not how it ends up afterward] the court may refuse to enforce the contract, or it may
enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any
unconscionable clause as to avoid any unconscionable result”
 (2) “When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the
parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and
effect to aid the court in making that determination”
 Comment 1:
o Purpose is to “make it possible for the courts to police explicitly against contracts and clauses
they find to be unconscionable (as opposed to the “covert remedies”)
o “Basic test is whether, in light of the general commercial background and the commercial
needs of the particular trade or case, the clauses involved are so one-sided as to be
unconscionable under the circumstances existing at the time the contract was made”
o “The principle is one of prevention of oppression and unfair surprise” and “not of disturbance of
allocations of risk because of superior bargaining power”
o R2d 208:
 “If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the
contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the
application of any unconscionable term as to avoid any unconscionable result”
 Broad sword of unconscionability
o These are very wide powers given to the courts by the UCC as statute
o And this makes lots of judges uncomfortable since they need to decide based on “justice”
o So they have cut the idea down and given it a framework
 Libertarian objection to unconscionability
o Principles of freedom of contract permit for un-enforcement in only two instances
 (1) Defect in the process of contract formation
 e.g., Fraud, duress, etc.
 (2) Incompetency or incapacity on the part of the person against whom the contract is enforced
 e.g., Youth, mental impairment, etc.
 So when the doctrine of unconscionability is used in its substantive dimension, it undercuts the freedom of
contract and does more harm than good
 Since it is a judicial evaluation about what the parties have chosen for themselves to do, and as long as
it is not illegal, they should be able to do it
o BUT a potential response is that the courts think that there was procedural unconscionability in these case, where one
party was somehow manipulated by the other party in coming to agree to the contract, and the “substantive” prong is
merely indirect evidence that it actually happened
 BUT this is still substituting the court’s judgment for what a rational party would agree to
 e.g., It was not entirely irrational for Mrs. Williams to make the agreement she did given her status
 Unconscionability usually not applied as regards the price
o Since the price should not come as a surprise to the consumer or whomever entered the agreement
o It is often negotiable, and it would be hard to uphold the contract after changing the price

Williams v. Walker-Thomas Furniture Procedural and substantive unconscionability can make a contract unenforceable;
demonstrates how unconscionability can be used in a patronizing fashion
FACTS: P bought a piece of furniture from D; the purchase was purchased pursuant to a “cross collateral” installment contract which
said that as long as P had an unpaid balance on any previous piece of furniture the payments for the new piece would go to each
piece, pro rata, which had the effect of keeping title to all pieces in D until P fully paid the bill; P then defaulted and D seized all her
furniture purchased in the last 4 years
 Is the agreement unenforceable because it is unconscionable?
 Yes, the contract is unconscionable
 The courts have a common law power to degree contracts unenforceable due to unconscionability, and that the legislature had just
passed the UCC (though not applicable to contracts at the bar, which per 2-302 requires that contracts be conscionable), there is
approval for such judicial action
 Unconscionability occurs when there is (a) an absence of meaningful choice on the part of one of the parties and (procedural
unconscionability) (b) contract terms which are unreasonably favorable to the other party (substantive unconscionability) and both
are present here because P was uneducated and the terms of the contract were boilerplate and the actual contract is very onerous
for someone like P who has seven kids and lives on welfare checks
 Historical background of Williams
o Central doctrinal unconscionability case
o Only reason that the case made it to the DC circuit was the this was the period of giving lots of legal aid to the poor
because it was the Great Society
o Judge Skelly was a very activist judge
 Walker-Thomas Furniture’s strategy
o Note that the pro rata strategy of D created a saw tooth debt pattern that never made it to zero
 This is called a “dragnet clause”
o So when P defaulted all of the goods were returned to D since D had title to the good until they were completely paid off
o In terrorem strategy
 Real strategy is not to get the furniture back since used furniture is not that valuable but rather to hold P in terror
so that she will keep up on her payments since all of the furniture would otherwise be taken away
 It is a psychological affect more than the value of the furniture
 In a sense this is similar to the (illegal) penalty form of liquidated damages
o But the purpose was to allow poor buyers to buy since they had bad credit and there was no other way that Walker
Thomas could sell the furniture to people like Mrs. Williams without going out of business
 Unconscionability framework
o This is a “sword that has been given to the courts” by statute, but it is hard to know when it is right to use it
o So they have established a two part analysis, and both procedural and substantive unconscionability must be present
(with the exception that it seems intuitive that a court would in fact hold a contract unconscionable if the substance was so
terrible even if the process of bargaining was fair)
 (1) Procedural unconscionability
 “Absence of a meaningful choice for one party”
o Defect in the bargaining process itself
o Procedural unconscionability is present when there is no real bargain
 e.g., An asymmetry in bargaining power, such as in education or knowledge or the
need of the service
 An adhesion contract is good evidence of procedural unconscionability but it is not
always dispositive (especially when regulated as in the case of utilities)
o But if substantive unconscionability does not come from procedural unconscionability, then
there is no unconscionability
 (2) Substantive unconscionability
 “Terms are unreasonably favorable to the other party”
o Manifestations of the defect in the bargaining process
o This framework helps courts know when you to use the sword of unconscionability
 Paternalistic court
o Note that the court in this case is very paternalistic in its judgments
o Court’s holding essentially means that the poor like Mrs. Williams can no longer buy furniture like this, since they cannot
afford to pay up front and have bad credit
 Consider “general commercial background”?
o UCC says that the terms are “to be considered in light of the general commercial background and commercial needs of
the particular trade or case”
o And in Williams the background was an inner city business trying to provide products to the poor through the only way
possible, right?
 Consumer legislation takes over
o Many of the early unconscionability cases were taken over by consumer legislation and consumer lobbies that are now
pretty powerful (e.g, Uniform Consumer Credit Code)
 So the number of unconscionability cases has dwindled
Batfilm Productions, Inc. v. Warner Bros., Inc. Courts will not usually invoke unconscionability for parties that are capable of
protecting themselves
FACTS: P sold the rights to Batman movies to D; the terms of the sale provided that P would get 13% of the “net profits”; but net profits
is a Hollywood term of art that is very complex and essentially is designed to ensure that “net profits” are never realized such that the
profit participants will never get there share; P was a former general counsel of MGM so he was presumably aware of this process
 Is the agreement unenforceable because it is unconscionable?
 No, the contract is not unconscionable
 Although the contract certainly seems unfair, it is not unconscionable since the bargaining party was not at a disadvantage and
had ample education to know what “net profits” meant and how the contract would actually function; the courts cannot step in and
re-write a contract for every party that feels like they got treated unfairly
 Unconscionability largely for consumers?
 e.g., Mrs. Williams in Walker Thomas Furniture (at least in the view of the Court) was unable to protect herself
since she was poor and uneducated, etc.
 e.g., Former general counsel in Batfilm was able to protect himself since he had lots of knowledge of these
contract and how they work, etc.
o So question of what is unconscionable will depend greatly on position of the parties in relation to the commercial setting
o There is usually a presumption of conscionability between two sophisticated business actors with counsel
 But some exceptions, as in, e.g., Scissor-tail, where the agreement to arbitrate but with an arbiter from one of
the parties where there was not a “minimum level of integrity” but these cases are rare
o So this is why unconscionability has receded as consumer legislation has become more widespread
 Hollywood and net profits
o This system is used by Hollywood in order to make it very difficult for any profit participant to actually receive a payment
from the movie
o They are contrary to GAAP, which espouses the “accrual method of accounting” for money earned and expenses incurred

Ferguson v. Countywide Credit Industries, Inc. Employment agreement to arbitrate is unconscionable since it is procedurally
and substantively unconscionable
FACTS: P signed an arbitration agreement when she obtained a job with her employer; the arbitration agreement was presented to her
as an adhesion contract and contained a number of provisions that tilted the balance of the arbitration in the employer’s favor
 Is the agreement to arbitrate unenforceable because it is unconscionable?
 Yes, the arbitration agreement is unconscionable
 The FAA provides that arbitration agreements are binding on federal courts except for the reasons for which a court may refuse to
enforce a contract; therefore unconscionability can be the basis for refusing to enforce an arbitration agreement; unconscionability
requires procedural and substantive unconscionability; procedural unconscionability is present where there is oppression and
surprise and California courts have found the oppression constituting procedural unconscionability wherever there is an adhesion
contract for employment; substantive unconscionability means that the agreement “shocks the conscience of the court” and this is
present here because the agreement covered the types of claims that an employee would bring but excluded the types of claims
that the employer would bring; the fees were to be paid in large part by the employee; the discovery provisions favored the
employer by limiting the topics about which the employers representative could be deposed; finally, because the agreement is so
systematically flawed and one sided, it cannot be saved by severing certain portions and the whole thing is thus unenforceable
 Growth of arbitration after FAA, and judicial resistance to this growth
o Federal Arbitration Act (FAA) was passed in 1925 in order to promote arbitration in international business transactions
between commercial actors with equal bargaining power who wanted quick and cheap resolution to their business
decisions so that they could move on with their transaction
o In the 60s and 70s SCOTUS expands the FAA to cover many more areas of transactions, since SCOTUS wanted to
encourage arbitration as way of de-clogging the over-burdened courts
o Now arbitration is mandatory in almost all consumer agreements, and it can sometimes be abused
 This is something that a lot of state and lower federal courts do not like
 In response, CA and many other states began to reinterpret unconscionability where arbitration has been used
to harm the consumer (in the court’s view)
 This has made arbitration more expensive and cumbersome and this had the effect of making
arbitration less appealing since not as easy and efficient, etc.
 Judicial controls on arbitration agreements in employment contracts
o FAA permits for arbitration to be unenforceable “on the grounds as exist at law or in equity for the revocation of any
o Courts have used the judicial tool of unconscionability to invalidate many agreements to arbitrate, such as in employment
 e.g., Armendariz v. Foundation Health Psychcare Services, Inc., where the California Supreme Court decided
that mandatory arbitration agreements in employment contracts were in principle acceptable
 But the agreement in this case was unenforceable since it was so one sided
 e.g., Circuit City Stores v. Adams, where SCOTUS agreed that mandatory arbitration agreements in employment
contracts were in principle acceptable under the FAA
 But the agreement in this case (on remand to the 9th Circuit, importantly) was unenforceable since it
was so one-sided
 e.g., Ferguson v. Countrywide
 Arbitration abuse?
o Arbitration has had a huge effect on contract law because it has become much more widespread
 But it has also been potentially abused
 e.g., National Arbitration Forum criminality
 So the area in which unconscionability has grown in importance the most over the last few decades has been in
relation to mandatory arbitration agreements
 Is substantive unconscionability all that matters?
o Procedural unconscionability analysis in Countrywide is a little different from that of Williams since the court does not look
at P’s characteristics, education, etc.
o Rather, procedural unconscionability is present merely because it was an adhesion contract in the context of an
employment contract
 So the question of procedural unconscionability becomes somewhat of a perfunctory analysis without much
context as to the actual transaction, at least in California, or at least the procedural analysis is made at more of a
class level, as opposed to with respect to the individual
 Because the substantive unconscionability is extreme on the “sliding scale” analysis
 Critique
 But note that when the court treats procedural unconscionability as totally perfunctory and base the
decision almost only on substantive unconscionability, the court is becoming much more of a “fair
o This is what Epstein’s idea about the role of freedom of contract is concerned about
 But many other states still maintain a certain threshold for true procedural unconscionability, so
California is not representative of the country
 Lack of mutuality the reason for substantive unconscionability?
o In Countrywide decision:
 Employee must arbitrate claims for discrimination and workers compensation, etc.
 Employer can litigate claims for breach of confidentiality and non-competition agreements, etc.
o But does lack of mutuality itself make it unconscionable?
 Beyond mere unconscionability to overt judicial regulation
o Note that the judicial controls governing mandatory arbitration agreements have led to those seeking to compel arbitration
(usually the stronger party in the bargain) to follow a rough list of guidelines, which vary by jurisdiction; in California, at
least, the party compelling arbitration must:
 Provide for a neutral selection of arbiters
 Not unduly limit the time frame in which claims may be brought
 Allow for more than minimal discovery
 Require a written award
 Not limit relief that would otherwise be available in court
 Not require employees to may either unreasonable or any costs as a condition to access the arbitration forum
 Not require the employee to waive class arbitration or un-waivable statutory rights
 Select arbitrators in a manner such that the employee is not unfairly disadvantaged
o All of these “regulations” take away from some of the fast, quick, and easy characteristics that arbitration used to contain
o Should the courts be doing this?
o Maybe not, but Congress has not stepped in to amend the FAA…
 Severability?
o Some courts will try to sever the unconscionable terms form the arbitration agreement
o Some courts will just hold that the whole agreement is unenforceable
 Arbitration not appropriate for civil rights cases?
o Maybe we want a public trial in the discrimination case, in an effort to sort of shame the company as opposed for them to
be able to hide their actions behind the confidentiality of arbitration
 Arbiters have the full range of remedies available to a court
o But these can be limited by contract, just like normal
 Federal preemption through the FAA?
o Because of all of the new judicial controls developed under the doctrine of unconscionability on arbitration (especially in
cases between an organization and a consumer or employee, and especially in California and the Ninth Circuit and
similarly liberal courts), there was a question of whether judges were applying “the grounds as exist at law or in equity for
the revocation of any contract” selectively and undermining the letter and spirit of the FAA
 It was thought that judges had developed an arbitration specific version of unconscionability
 Judges found arbitration unconscionable at twice the rate of non-arbitration agreements
 But the FAA preempts such judicial controls over arbitration
o Judge Easterbrook: “no state governed under the FAA may employ a higher or novel standard not applied to the other
clauses in the contract”
o SCOTUS agreed with this reasoning and decided in AT&T v. Concepcion that the FAA does in fact prevent special
judicial regulation of arbitration

AT&T Mobility LLC v. Concepcion (SCOTUS 2011) State courts cannot discriminate, in intent or effect, against arbitration
through the use of unconscionability; the purpose of the FAA is thwarted when this happens and SCOTUS will not permit it
FACTS: P signed an agreement requiring arbitration for disputes and prohibiting the arbitration from taking place where P was the
member of a purported class; that is, it forbade class arbitration; the district court and court of appeals found that the arbitration
agreement was unconscionable under California law because it generally prevents class action arbitration, which Discover Bank
(California Supreme Court case) says is unconscionable
 Is this unconscionable? Is California’s rule about collective arbitration waivers being unconscionable preempted by the FAA?
 No, the agreement to arbitrate is not unconscionable because the state’s unconscionability doctrine is preempted by the FAA
 Although the Discover Bank rule comes out of the general California legal policy of invalidating waivers of class actions (so in
litigation too) in consumer contracts, it has been applied in a fashion that harms arbitration (because it makes it more difficult and
cumbersome, as all class base dispute resolution becomes) and is therefore at odds with the FAA; requiring the availability of
class-wide arbitration conflicts with the objectives of the FAA, namely, the efficiency, informality, decreased risk of costs to
defendants; requiring Ds to accept class wide arbitration takes away any incentive for a lawyer to assist with a small arbitration
award on an individual basis, and thus these will never be brought; so the purpose of the FAA is undermined and California’s
Discover Bank rule is therefore preempted
 Justice Thomas says that the saving clause in the FAA points to fraud, duress, and the like (the reasons for saying that a contract
was not lawfully made); the Discover Bank rule does not concern the making of contracts, but rather their effect; but since the FAA
only says that agreements to arbitrate will be unenforceable because of pathologies in the making, it is inconsistent with the FAA
and therefore unenforceable
 Because the Discover Bank rule is not a blanket limit on class action waivers (only when they are unconscionable) and because it
applies to litigation and arbitration, it should be seen to be within the savings clause of the FAA and therefore not preempted; there
is nothing fundamental about arbitration being between only two parties; and to the extent that the FAA wanted easy resolution
between parties with equal bargaining power, class arbitration does this because it gives more power to the consumer class;
generally, the FAA allows the states to define unconscionability (as a basis for not enforcing a contract) as it sees fit, and to step in
and trample California’s right to do this is not in line with the principles of federalism
 Discover bank decision
o California Supreme Court combined two sections of the CA civil code:
 1670.5 – unconscionability
 1668 – Illegality to limit liability in certain contexts
o California generally bans the waiver of class action law suit rights
 Discover Bank extended this to class action arbitration when:
 (1) In a contract of adhesion
 (2) Predictably small amounts
 (3) Allege a scheme to cheat the consumer
 California Supreme Court is the real target of SCOTUS
o 9th Circuit is sort of the proxy for the California Supreme Court
 Most legal systems do not have class actions
o They are unique to American law, largely because of the cost of litigation
 Exception in the FAA, and Scalia’s reading
o Section 2 of the FAA: Arbitration agreements are enforceable “save upon such grounds as exist at law or in equity for the
revocation of any contract”
 But how large is the exception?
 California was banning the waiver of class action arbitration? Is this okay under the FAA?
o No, it preempts this, says Scalia
 Scalia says that although something may be nominally the same in its application to
litigation and arbitration (e.g., you must use the federal rules of evidence), the effect
on arbitration could be much different than on litigation; there could be only minor
burdens on litigation but large burdens on arbitration
 So he sees this as sort of an indirect singling out of arbitration, even if the “no class
action waiver” is nominally the same, since it cuts against the “essence” of arbitration,
since class action arbitration fundamentally alters its essence, whereas class action
litigation does not fundamentally alter litigation
 Scalia presumes a real agreement between the consumer and the company (note
that he cites Gateway approvingly, showing that the extent to which someone sees a
real agreement in the boilerplate agreements to arbitrate is in part the underlying
 How does Scalia deal with the question of whether a claim will never be brought if
there is no class action?
 He says that there “may be desirable” reasons to allow class wide
arbitration, but even so the FAA preempts and that is the law; this may be an
invitation to Congress to step in and change things if it wants to
o Is Justice Scalia saying that California is distorting unconscionability in a way that is singling
out arbitration, or that no matter what they are doing, and no matter if it is right or wrong, it
makes no difference so long as the effect is to undermine the purpose of the FAA?
 I think it is the latter
 Part of the problem with this is that the FAA was enacted before class action arbitration was developed
 Primary use of arbitration is changing
o Arbitration used to be a tool used by equally situated business actors
o Now it is primarily used between consumers and retailers or other sellers
 Showing that it is not juries that companies fear so much as massive class action litigation or arbitration, which
can ruin the company if it gets too big
 No deterrence without class actions?
o Note the potential loss of deterrence without class actions
o Maybe companies will act inefficiently or exploit if there is no class action deterrence; but there is still of course the class
action litigation threat
 Thomas dissent, more concerned about procedure
o More concerned with the making/formation of a contract
o So he says that it is permissible for the contract to be unenforceable under unconscionability since the doctrine of
unconscionability it has a procedural element
 But he is not okay with the contract being unenforceable under illegality since it does not have a
procedural/making of contract element, and is more of an external public policy argument and not a defect in the
o So if the claim against enforcement was based on the unconscionability alone since it has a procedural context, it is
unclear if he would have joined the majority; but because the illegality aspect was added, and because the procedural
component is taken as almost a given anyway, he joined the majority and held that it was not in line with the FAA since it
was not focused on a defect in formation
o Discover Bank mashed illegality and unconscionability together, and this may have been a strategic blunder given
Thomas’ decision to join majority based on the non-procedural (illegality) nature of the claim
 What is the scope of AT&T?
o Is it the beginning of SCOTUS trying to curb the use of judicial unconscionability more broadly?
o Or is it a narrower holding on class action arbitration?
 Lots of other questions going forward
o What if a state adds a procedural device to arbitration in that state?
o What is the “true nature” of arbitration that SCOTUS is going to protect?
o Does AT&T extend to public rights such as the California Private Attorney General Act?
 Or will SCOTUS say that it is preempted by the FAA?
 Regulation of arbitration
o Lots of consumer protection organizations are beginning to become involved in the regulation of arbitration agreements
between consumers/employees and employers
o Dodd Frank Act allows the Consumer Financial Protection Agency to conduct studies and if it deems it has sufficient
evidence to prohibit mandatory arbitration agreements between consumers and lenders as well as in other contexts

Chapter 6: Remedies
 Overview of forms of damages
o Expectation damages
 The norm in contract law, where you put the non-breaching party into the position they would have been in were
the contract to have been preformed
 And it is the circumstances at the time that performance would have occurred, so if the market collapse
between when the promise was made and when performance would have occurred, this will affect
expectation interest
 Unlike tort law, expectation damages do not bring P to where he was; rather, they bring P to where he was
promised to be
 Monetary damages is the way that this is done in almost all cases
 Formulas for expectation damages (note that it is actual worth, not the worth to a reasonable person, though
actual worth is sometimes hard to show, if idiosyncratic, etc., which is why the market is often used)
 Farnsworth
o Damage = loss in value + other loss – cost avoided – loss avoided
 Loss in value: difference in value between what the injured party would have received
under the contract and what they did receive
 Other loss: injured party’s costs arising from the breach, such as costs previously
incurred in justified reliance on the contract, or costs associated with arranging
substitute performance
 Costs avoided: what the injured party does not have to pay out as a result of the
 Loss avoided: any savings that the injured party may make after the breach
(mitigation of damages, I think)
 Usually expectation damages are measured with reference to the market price
o UCC 2-713 for seller’s non-delivery or repudiation
 Damage = difference between the market price at the time when the buyer learned of
the breach and the contract price together with any incidental or consequential
damages, but less expenses saved as a result of the breach by seller
o UCC 2-708 for buyer’s non-acceptance or repudiation
 (1) Damage = difference between market price at the time and place of delivery and
the unpaid contract price together with any incidental damages, but less expenses
saved as a result of breach by buyer
 (2) If (1) is inadequate, the measure is the reasonable profits that the seller would
have made
 (2) is used often in the case of a lost volume seller, or where the seller has
made something uniquely for the buyer that no one else really wants or for
which there is no substantial market
 Three general limitations on expectation damages
o Non-breaching party must usually mitigate, unless a lost volume seller
o Non-breaching party may only recover for a foreseeable loss, not what is unforeseeable at the
time the contract is made
o Expectation damages are not award beyond the amount at which they can be proved with
reasonable certainty
 Rule of thumb test
o How much would performance of the contract increase or decrease the plaintiff’s wealth?
o Reliance damages
 Return the non-breaching party his outlay in performing the contract
o Restitution damages
 The part of P’s outlay that actually benefited the breaching party
 Direct versus consequential damages
o Direct damages
 Basic difference between what you were promised and what you received (foreseeable in the ordinary course of
 e.g., Car was supposed to have working brakes and it did not
o Consequential damages
 Damages that arise as a consequence of the breach (not foreseeable in the ordinary course of things)
 e.g., Car with bad brakes does not stop so you drive through your garage door
 Duty to mitigate
o Non-breaching party has a duty to mitigate its losses once the contract has been breached
 Specific performance (R2d 359)
o Damages are generally the remedy, NOT specific performance
o In contract law, per R2d 359, specific performance will not be ordered if damages would adequate to protect the
expectation interest of the injured party”
o Usually specific performance is only used where the goods in question are unique and most often this involves a real
property transaction
 Strict liability
o Contract damages are usually strict liability and there is no concern for fault (with some exceptions)
o This can work both ways in that it is nice for the party since he can intentionally breach when it is an efficient breach
situation and bad for the party when it is not his fault and he would rather not breach

A. Expectation Damages
 Expectation damages and the problems that can arise
o Often easy to calculate
 e.g., Contract is to sell oil for $12 million and when the buyer breaches the market is now $10 million for the oil
 The expectation damages are $2 million
o But sometimes it is hard to prove how the contract would have increased (or decreased) the non-breaching party’s wealth
 e.g., Freund
o And sometimes performance would decrease the non-breaching party’s wealth, but damages should still be given
 e.g., Contract to paint the house yellow was for $10K and would reduce the value of the house by $2K, and
substitute performance costs $12K
 In this case, the damages are for $2K even though the plaintiff’s wealth is in fact improved by the
o And how does the law account for intangibles?
 e.g., Employment contract is breached and the employee must take a different job at a lower price but in a field
that he enjoys much more and is much happier in?
 Expectation damages and the efficient breach of contract
o Breach of contract is not a tort or civil wrong
 The central objective behind contract damages is compensatory not punitive
 So per R2d 355 punitive damages are “not recoverable for a breach of contract unless conduct
constituting the breach is also a tort for which such damages are also recoverable”
 So the law permits and seems to even encourage efficient breaches of contract
 This is because of the efficient breach theory
o Not a legal doctrine but an academic explanation
 e.g., In the Hunt for the Red October case, the breach on the part of the paperback publisher was
efficient since it could (or so it believed) make more money while still paying the hardback press for its
 e.g., In the case where seller is making widgets and selling them to A; seller then finds out that B needs
the widgets to seller breaches his contract and sells his widgets to B for a higher price; with the extra
money he makes, he can pay the damages that are owed to A on account of his breach and still make
a profit on the breach
 This is a Pareto Superior
o An reallocation of resources where at least one party is better off and no party is worse off
 And if this is true, society is better off, and when you aggregate each individual
Pareto superior, society is way better off
 If the law required specific performance in circumstances otherwise supporting an efficient breach, it
would be inefficient for society since it would require a party to do something that would cost more to
him than it would benefit the other party
o But note the three issues that arise when thinking about an efficient breach
 (1) Theory of efficient breach assumes that the breaching party is able to calculate with reasonable accuracy the
profit that would come from a breach
 But this is often hard because the potential breaching party does not have all the information he needs
and the legal rules determining what the costs of the breach are vary enormously depending on context
o e.g., Will there be consequential damages?
 (2) Theory of efficient breach assumes that the non-breaching party will be fully compensated, otherwise there is
not a Pareto Superior
 But this is not often the case since monetary damages are not representative of subjective loss and
there are transaction and other costs, such as lawyers’ fees, for which the non-breaching party will not
be compensated
 (3) Theory allows the breaching party to gain all of the profit from the breach
 (4) And what about ruining the relationship between the parties for future business transactions?
 This is probably a form of transaction costs
 (5) And what about undermining aggregate societal reliance interest in the stability of contracts?

Freund v. Washington Square Press It is difficult to calculate damages in some cases; damages are not measured by the gain
that the breaching party enjoyed as a result of his breach; where expectation damages are not proved with reasonable
certainty, they are not granted
FACTS: P signed an agreement with a publisher where he would write a book and then send it to them and they would pay him $2K
and then they would publish the book and he would get 10% of the profits as royalties; the trial court awarded P the amount it would
cost to publish the book himself, which they found to be $10K
 What amount of damages should be awarded?
 The award of $10K was inappropriate since it was based on the cost of D to publish and not the expectation of P for a completion
of the bargain
 P in this case got restitution since the rights to the book were returned to him (which is what D got from P in the initial bargain); P
did not plead reliance damages so he is not entitled to them; P’s expectation damages were not specific enough, so he is not
entitled to them; generally, the goal of contract law is to put the party in the position that they would have been in had the contract
been performed; since P did not give enough facts to show his expectation damages, the court gives him nothing; awarding him
the cost of D’s performance is not appropriate
 Good faith required where discretion is given in performance of the contract
o Because this is an area of discretion in the contract, which requires good faith on the part of the press, which means that
they could only terminate if they found the work unsatisfactory or for some business emergency, but not simply because
of a routine business decision to stop printing hardcovers
 Nominal damages
o Vindicate the rightfulness of the party’s claim, but provide no real compensation
 Why no specific performance?
o Not usually given in contracts suits per R2d 359(1) “specific performance will not be ordered if damages would be
adequate to protect the expectation interest of the injured party”
o But they are given per UCC 2-716 “where the goods are unique or under other proper circumstances”
o Note that there are good reasons for this
 Court does not want the hassle of having to follow up and oversee actual performance
 Often the injunction will just be sold under bi-lateral monopoly conditions, which can be unfair to the party
ordered to perform
 It would prevent the efficient breach of contract
 What damages are due to the non-breaching party in Freund?
o Restitution interest
 These have been satisfied since the rights to the book (which is what enriched the publisher) were returned to
the author
o Incidental expenses?
 Cost of finding another publisher…should these be included?
 They seem to be ignored
o Waste of time?
 P could have argued that he was harmed because another author published the work and then dried up the
market, so all of his intellectual energy was wasted
 But the court does not consider this
o Cost of performance as damages?
 This would probably be acceptable if it were a vanity press and all P wanted was his book, and then he had to
get it printed elsewhere instead
 This would be like the construction contract, where what the plaintiff wants is actual performance
o Reliance damages
 But his writing seems to not be dependent on the contract, since he did it before
 And he does not argue for this at trial
o Expectation damages/Lost royalties
 Very difficult to calculate these with reasonable certainty, so the court does not grant them
 P should have done a better job, though
o Disgorgement
 Just take away the money from D that it made be breaching
 But this is rarely done and is hard to calculate in this case, and it would prevent parties from making an
efficient breach of contract
o So generally we are having trouble putting P into the position that he would have had had performance occurred
 There are some cases where the remedies that the law provides do not seem well-suited to meets the needs of
any particular case and its nuances
 No expectation damages if they are too speculative
o R2d 352: “Damages are not recoverable for loss beyond an amount that the evidence permits to be established with
reasonable certainty”
 But this rule is loosely enforced, as in the case of the Red October
 Generally, the certainty requirement is relaxed if the breach is willful
 Because the “breaching party who has wrongfully broken a contract should not be permitted to reap
advantage from his own wrong by insisting on proof by which reason of his breach is unobtainable”
 New business problem with expectation damages
o e.g., New coffee shop is about to open, but the landlord defaults on the lease
 How much did the coffee shop suffer?
 Would their profits have been high?
 Maybe they would have lost money?
 Did they forgo other opportunities?
Note that that law is very reticent to give damages for such negative reliance since it is so
difficult to prove with any definiteness
 Because we do not know with reasonable certainty, we cannot grant expectation damages
 All we can grant is reliance damages and restitution if applicable
 Damages are not based on the profit made by the breaching party as a result of his breach
o Otherwise, there would be no efficient breach of contract
 Problem 6-1 (Contractor defaults in building the house case)
o (1) Wrong
o (2) Wrong
o (3) This is a decent argument, if it is within the market price, including the 40K restitution interest for the contractor
 But because the owner needs to go onto the spot market it is likely that he will have to pay more in most cases

Peevyhouse v. Garland Coal Company Diminution in value test is chosen over the cost of performance test when the cost of
performance would be disproportionate to the diminution of value
FACTS: P signed an agreement with D to allow D to mine coal on his property; one term in the agreement required that D fill in the
holes when he was done; D finished mining and did not fill in the holes; it would have cost $29,000 to fill on the holes and the
diminution to the property without filling in the holes was only $300; D agreed it breached and the jury assessed damages of $5,000
 What amount of damages should be awarded?
 The diminution in value test should be used here since the cost of performance test is not appropriate since it would involve
unreasonable economic waste
 Generally, the non-breaching party is entitled to the cost of performance (on the market) unless the amount is disproportionate to
the good to be obtained/loss to the breaching party; that is, unless it is grossly disproportionate to the relative economic benefit; it
is important that the filling in of holes was incidental to the contract and not the main point of the contract (if this were not the case,
specific performance, and therefore the cost of performance may be in store, since we want to respect the idiosyncratic desires of
a specific plaintiff)
 Dissent says that this is a willful and “bad faith” breach and that D was fully aware of the cost of performance when he made the
bargain and this was therefore included in the bargain; in the performance of the contract, D got what he bargained for and now he
is denying P what he bargained for, and the court should not permit this; it should therefore issue an injunction compelling
performance (which P would almost certainly sell to D for any amount less than $29,000)
 Jury’s compromise verdict
o Jury award represented a compromise verdict that was actually pretty intelligent
 Since it balances the $25K and the $300
 Why does the jury give $5K?
 Reflects the jury’s estimation of the subjective value to the famer (sentimental value, etc.)
 Punitive measure of sorts
o Although note that punitive damages are not permitted in contract law unless the breach of
contract also amounts to a tort that qualifies for punitive damages
 Eastern steamship case
o e.g., US seized the ship at the beginning of WWII with the promise to restore it after the war; the cost to restore it is $4m;
the value after restoration would be $2m
o How do we put the party into as good of a position as they would have been were the contract to have been performed?
 Principal purpose of the contract can effect whether cost of performance or loss of value is the measure
o e.g., Owners has a house and he wants to put up a statute in the front lawn that costs $25K but if he goes through with
the project, it will reduce the value of the house by about $10K; contractor building the statute defaults and he gets a new
contract, can the contractor say that he saved you money?
 NO, since this is clearly something with real subjective value to you
o So how do you distinguish from Peevyhouse?
 The leveling, since it was a side/incidental component of the contract, does not have the same central personal
value, or so it seems
 So if Peevyhouse had a separate contract for $25K to level and this was breached, we would award
o So to do a better job, the Peevyhouses should have a separate agreement or at least make it
clear that “separate value” is being attached to the reclamation, as opposed to it being
incidental to the commercial mining contract
 What if they hired another party to reclaim and then sued for substitute performance?
o This would be a clear indication that this is actually valuable to the Peevyhouses and then they
probably would have been granted the $25K damages, since they would have undertaken a
form of cover on the market, analogous to the UCC provision 2-712
 Remember that we do not want to punish Garland for the breach, just put the Peevyhouses into the
situation in which they would have been
 Breach on a construction project
o R2nd 348(2) Where a breach “results in defective or unfinished construction and the loss in value to the injured party is
not proved with sufficient certainty, damages can be either (a) the diminution of market price caused by the breach or (b)
the reasonable cost in completing performance if that cost is not clearly disproportionate to the probable loss in value to
the non-breaching party”
 e.g., Peevyhouses were awarded (a) because (b) was disproportionate and it is too hard or not believable that
filling in the holes had clear subjective value
 e.g., Jacob & Youngs v. Kent is an example where (a) is appropriate (even though there P was acting for specific
 Was there an efficient breach in Peevyhouse?
o It depends on what the actual value of performance was to the Peevyhouses
 If the Peevyhouses valued it at $25,000, it was not an efficient breach, since they were made $24,700 worse off
and this would therefore not be a Paredo Superior
 But it is also not inefficient, since it was not economic “waste” like the widgets in Posner’s example that
no one wants, because Garland was made $24,700 better
 Rather, it is a wealth transfer
 If the Peevyhouses valued it at $300, it was an efficient breach, since they were compensated at exactly their
value and Garland saved $24,700
 This is a Paredo superior
 If the Peevyhouses valued it at $300 and the jury awards them $25,000, then it is not an inefficient breach, just
another wealth transfer from Garland to Peevyhouse
 Why not use specific performance in the Peevyhouse case?
o Especially since it is real property
o Then P can sell the injunction at the amounts the parties agree to
 But then there is the bilateral monopoly problem, etc.
o And the idea that filling in the holes was incidental is hurts the Peevyhouses’ argument
 Problem 6-2 (New Orleans and its fire crew that was not working properly)
o City got nothing
o They did not suffer any loss or injury, so they get no damages
o This has to be solved going into performance
 e.g., An insurance company grants a bond that guarantees performance

New Valley Corp. v. United States (1) That P could not have himself performed does not undermine his claim for damages
when he was still injured because he could have sold his contract to another
FACTS: P signed a contract with NASA to have it deliver its satellite into space; NASA breached the contract when it decided that it
would no longer send satellites into space; during this same time P ran out of money and filed for bankruptcy so it could not have
performed at the launch date even if NASA had not breached
 What amount of damages should be awarded?
 The test for damages is the amount that performance was worth to P as measured by how much more a third party would have
paid for the contract if NASA had not breached
 R2d 254 says that a “party’s duty to pay damages for a total breach by repudiation is discharged if it appears after the breach that
there would have been a total failure by the injured party to perform his return promise”; but what this section really means is that
the complaining party actually suffered an injury and the breach was the cause; because P could have sold its contract for a good
deal of money except for NASA’s breach, this is the amount of damages that P is entitled to, and it does not matter that P himself
could not have performed

New Valley Corp. v. United States (2) Direct damages are based on the value of performance itself and are present in this case
since the contract itself had value and could have been sold
FACTS: P signed a contract with NASA to have it deliver its satellite into space; NASA breached the contract when it decided that it
would no longer send satellites into space; during this same time P ran out of money and filed for bankruptcy so it could not have
performed at the launch date even if NASA had not breached; the contract prohibited consequential damages and allowed for only
direct damages
 Are the damages at issue direct damages or consequential damages?
 The damages at issue here are direct damages and not consequential damages
 Direct damages are based on the value of performance itself; consequential damages are based on the value of some
consequence that the performance may produce; here, the value of launch contract in the sale to the third party was the direct
damage that NASA caused to P
 Distinction between direct (general) damages and consequential (special) damages
o Direct damages
 Value of performance itself
 What is foreseeable in the ordinary course of things
o Consequential damages
 Value of some consequence that the performance may produce
 What is not foreseeable in the ordinary course of things
 UCC 2-719(3)
 Consequential damages can be limited unless it would be unconscionable to do so
o And it is presumed unconscionable when they are limited in relation to bodily injury
 They are almost always excluded in real life
o The line between direct and consequential damages can be difficult to draw sometimes
 e.g., Jet aircraft is delivered but its cabin is defective and there is litigation, during which the jet is not used, and
also during which the warranties expire on the engines, so they must be re-purchased—is the cost of re-
purchasing the warranty direct or consequential damages?
 Perhaps direct because
o Because it was more within the parties’ control?
o Because it was clearly more within the bargain?
o It was foreseeable per Hadley v. Baxendale
 Hard to measure damages when there is not a strong market
o Because there is not much of a market, in order to find the damage measure, the court looks to the value of the
hypothetical sale
 Difference between contract and tort damages
o e.g., Hawkins v. McGee and the child’s hand
 Value as it was promised
 Value as it was
 Value as it is
o In a medical malpractice tort claim, the doctor would only be required to return the patient to where his hand was
o In a breach of contract claim, the doctor would need to bring the patient to the place where he would have been had there
been full performance

Krafsur v. UOP Lost volume seller is not required to mitigate damages and is therefore entitled to his reasonable profits
FACTS: P signed a licensing contract for software to manage its refinery with D; P then filed for bankruptcy and the licensing
agreement was transferred to its successor; the new agreement with the successor and D was more valuable than the original
 Does D deserve damages for the amount remaining on the contract or for the amount after considering that D did mitigate its
 D does not deserve damages for the amount left on the contract because he is not a “lost volume seller”
 The court uses two tests to determine if D is a lost volume seller (if he is, then his mitigated damages don’t count and he should
get full damages to be compensated)
o First test:
 (1) Seller must demonstrate that it could have made a second sale
 (2) Would the seller have made the second sale to the ultimate purchaser even without the breach?
 (a) Did the breach provide the opportunity to make the second sale?
 (b) Determine the second buyer’s particular needs to determine whether he would have bought even
with the breach?
 (c) What is the characteristic of the goods in question, and the more specialized the goods, the more
likely that this was merely a replacement sale
o Second test:
 (1) Did seller possess capacity to make the additional sale?
 (2) Would it have been profitable for the seller to make the additional sale?
 (3) Would the seller probably have made the additional sale even with the breach?
 Because the seller was selling a site specific program and it ultimately sold it to a company that took over the refinery and would
not have existed but for the breach, the lost volume problem is not applicable here, so D did in fact mitigate its damages, and since
it made a profit, it gets nothing
 Court distinguishes from the Wired Music case, which had a product for which a second sale could have and would have been
made to the second purchaser even without the breach, and which was therefore in fact a lost volume case
 Lost volume seller and mitigation of damages
o e.g., Rembrandt painting sale
 Buyer Museum A breaches
 But buyer Museum B buys
 Seller suffers no loss and has completed mitigated his damages
 And seller is not a lost volume seller since there is only Rembrandt piece and he would not have sold it but for
the breach by the first buyer
o e.g., Neri v. Retail Marine
 Buyer A breaches
 But buyer B buys
 Different because the seller had lots of boats and his lost volume is real
 His supply is unlimited
 So the damages for lost volume seller are found under 2-708(2) (“lost profits”), which also includes incidental
 So he can recover his lost profits except for the $500 per 2-718(2) since the UCC does not allow for a
forfeiture of payments already made before the breach except for in the small amounts needed to
provide for a security (either $500 or 20% of the contract price, whichever is smaller)
o e.g., Wired Music
 Also a lost volume case
 Different from Neri because the marginal cost of producing more music is zero for Wired Music, but something
for Neri, and this may differ based on what boat it is in the assembly line process
 At some point, does 2-708(2) swallow up 2-708(1)?
 Two prong test for finding the lost volume seller
o (1) Could have (objective)
o (2) Would have (subjective
o So the lost volume seller is not applicable in this Kafsur because although they could have they would not have sold but
for the bankruptcy
 Sellers damages under 2-708(2) (for lost volume sellers and sellers of goods made uniquely for buyer)
o The “overhead” in this case is variable overhead NOT fixed overhead
o It looks like “due credit for payments of proceeds of resale” would undermine the purpose of (2) that touches on the lost
volume seller, and this is true, but there are two purposes for 2-708(2)
 First, to deal with the lost volume seller
 Second, to deal with the seller who has made a unique item for the buyer for which there is no market, but which
he can still sell for scrap or in a secondary market for something, and this is the “due credit for payments or
proceeds of resale”
 So “due credits for payments or proceeds of resale apply to the second category where you can get
some, but not much, value for the resale
o Note that this re-sale must be commercially reasonable, so e.g., burning a nice pool table (the
reuse wood be firewood) was not
 Marginal cost
o Note that lost volume sellers may have no bounds on the ability to produce their product, but there may be bounds (or
variations) on whether they can do so at a profit
o And generally, suppliers/sellers generally aim to operate their businesses at an optimal volume
 So even though the supplier could have made the second contract even if there had been no breach, he would
not have because it was not worth it to him, because there would be no marginal profit or a small marginal profit,
 e.g., Steel mill case where the marginal cost to produce the steel for the seller hits the market price ($11 per ton)
after 100,000 tons, so if he has a contract to produce 100,000 tons for $12 per ton that is breached, he can then
sell for $11 per ton, and recover under 2-708(1) the difference between the contract and market price, but this
should be the extent of his damages, since he would not produce more steel anyway, since he cannot do so at a
 e.g., If there are ten contracts to produce ten items and the marginal cost of product rises hitting the market price
just after item number ten, and the second contract is broken, the seller should get the lost profits under contract
ten and not contract two, since the his marginal profit loss is the profit margin he would have made making the
tenth contract, which will be smaller than the second contract
 Problem 6-3 (Seller where the marginal cost of product changes)
o (1) The proper measure should be $30K since that was the seller’s marginal profit on the sale
o (2) This argument will not work, since the seller would still have made a marginal profit of $30K on that specific sale, and
it does not change his overhead costs, which are fixed, if it were variable, that might be a different situation
 Problem 6-4 (PVC pipe case)
o Tough case

KGM Harvesting Company v. Fresh Network When a seller breaches, a buyer can either seek cover and sue the buyer for the
difference between the contract price and the (reasonable) cover price (2-712) and if the buyer cannot or chooses not to
cover, the measure of damages is the difference between the contract price and the market price at the time that the buyer
was made aware of the breach (2-713)
FACTS: D had a contract to purchase lettuce from P at a fixed amount and price; when the market price for lettuce went up, P refused
to sell; D had a series of cost plus contracts with its clients, so it covered on the open market and bought lettuce and sold to its clients;
its clients took and passed on the costs of the more expensive lettuce eventually all the way to the consumer; D then sued for the
contract cover differential under 2-712; P argued that it was not entitled to this amount since its actual damages were much less since
it could pass on most of its costs; D separately argued that it was entitled to interest beginning at an early time than the court gave
even though it had a minor computation error in notifying P what the damages were
 What is the measure of damages? And when does the interest begin?
 D is entitled to the contract cover differential in damages and it does not matter that this leads to a windfall to him
 D is entitled to interest from the earlier date since the minor discrepancy in damages
 The benefit of D’s bargain was to have a stable and reliable price of lettuce; by giving him his full damage award we put him into
the position that he would have been had the contract been performed; D has no obligation to share his windfall with his
downstream clients
 The requirement for interest in damages is that (a) D actually know the amount of damages owed P or (b) D could have computed
that amount from reasonably available information, and this threshold was met, so the minor error does not push back when
interest started accruing
 UCC 2-712
o “After a breach, a buyer can cover by making in good faith and without any reasonable delay any reasonable purchase of
or contract to purchase good in substitution for those due from the seller” “The buyer may recover from the seller as
damages the difference between the cost of cover and the contract price together with any incidental or consequential
damages, but less expenses saved in consequence of the seller’s breach”
o A buyer can “cover” but it must be under a commercially reasonable standard
 This is easy with lettuce since it is pretty much the same everywhere and does not change over time
 But it is harder when the market is more dynamic
 e.g., Computers, since they are all a little different and the technology advances quickly
o But it is a pretty flexible standard
 e.g., One person even made their own machine as cover and this was accepted
o Note that it is okay if in “hindsight the method of cover used was not the cheapest or most effective” since all that is
required is commercial reasonableness
o And what do we do in this case where the buyer is able to pass on his costs of cover, can he still sue for the difference
between the contract price and the cover price, therefore reaping a windfall?
 The court allows it in this case
o Note that the cost of difference in contract price and cover price is based on the time that the buyer learned of the breach,
so the buyer can, if he wants to take the risk decide to ride the market a bit, and get either a windfall if it falling fast (and
he can cover for cheap but he still gets the difference based on market at time of breach) or lose a lot if it is rising (where
cover is expensive but he still gets damages based on time he learned of breach)
o If the buyer chooses to cover, he cannot then sue for damages under 2-713 contract market differential (since in some
cases he would have an incentive to do so if he covered for a good price and if the market price has risen such that he
could make a profit this way)
 UCC 2-713
o “The measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the
time when the buyer learned of the breach and the contract price together with incidental or consequential damages, but
less expenses saved in consequence of the seller’s breach”
o Should we allow for damages in the case where the actual losses are very small because the buyer did not even go
through with the contract?
 e.g., Allied canners, where the difference between the contract price and the market price was $150K but where
the buyer did not even go through with the final sale so his actual damages were only $4,500
o The court in KGM approves of the award of damages constituting a windfall (much more than actual damages) since it
“encourages a more efficient market and discourages breaches”
 But what is the basis for this idea?
 What is the argument for letting the non-breaching party get a huge windfall?
o White and Summer say that 2-713 is a breach inhibitor to discourage breaches that are speculative in nature
 But is deterring breaches an end of remedies law?
 Should it matter to us how the losses fall?
 Economic justification for middleman cases with 2-712 and 2-713 windfalls
o (1) Court is respecting privity and the allocation of risk between the parties
o (2) Court is encouraging an efficient market by deterring sellers from backing out of contracts, since this discourages
contracting on reliance thereon
o (3) If the courts were to construe the contract as a put option where the seller has the option, but not the requirement to
sell to a middleman with a cost plus contract, that seller would not last long since no one would work with him
 Interest matters
o Note that interest can often be a huge part of the final damage award
 Interest begins to accrue before the time of judgment on liquidated amounts
 Interest begins to accrue at the time of judgment on unliquidated amounts
 UCC 1-305
o UCC 1-305 says that “remedies liberally construed”
 But only to put in as good as a position as they would have been in, not to generate a windfall
 In order to prevent a windfall, KGM says that “actual loss” should be the standard
o But the court rejects this in KGM
 Problem 6-5 (Oil resale case)
o Probably the damages should be based on the higher amount since the damage measure is the difference between the
contract price and the market price at the “time and place for tender”
 UCC 2-703 is a list of seller’s remedies
o There is a series of remedies but none of them are given priority
o Basic problem is that the UCC remedies interact with each other awkwardly and it is unclear what the systems goals are
o Problem is the rules are unknown (so the parties do not know how to act) and the courts disagree on what they should be
 Who breaches when?
o Note that usually the seller breaches when the market is rising fast (since he can sell elsewhere for higher) and the buyer
breaches when the market is falling fast (since he can buy elsewhere for lower)

Fertico Belgium v. Phosphate Chemicals Export Ass’n, Inc. A buyer-seller is entitled to receive his cover cost per 2-712 even
though he was able to then sell the late-delivered goods for a profit; the breach by delay (as opposed to non-delivery) and the
fact that the buyer was also a seller make this a difficult case
FACTS: P ordered fertilizer from D; D then breached in the timing of delivery so P sought cover and sold the fertilizer; it then sought
damages under 2-712 for the cost of procuring cover; but it then received the original fertilizer and sold that to another buyer for a
profit; it then sued for the cost of covering from the breach
 Is the payment of damages for the cost of cover appropriate?
 Yes, it is appropriate because it is a strict application of 2-712; P should get cover because he could made the second sale without
the breach
 P would have made the second sale were it not for D’s breach, so he should be put at a disadvantage for completing both sales
 Dissent says that what the majority has done is apply the lost volume seller analysis to a case of a buyer who then later sells, but it
should not exist here because the good that the buyer can buy are not unlimited and are dependent on the market price
 After cover, can you still accept goods?
o If you take advantage of cover, can you still accept the goods based on whether or not the market was favorable or
unfavorable for your ability to sell them too?
o In Fertico, the buyer had no other option
 This is a tough question
 Would Fertico have made the second sale?
o Whether or not Fertico would have made the second sale (majority assumes that it would have and dissent assumes that
it would not have) determines the outcome of the case
o When a buyer is a re-seller whose supply is exceeded by its demand, he may have a viable lost volume claim, just as with
the case of a lost volume seller when a buyer reneges
 Effect of post breach events on damage recoveries
o The general rule is that a court should not take account of post breach events when determining damages, since a
contract is a bet and the parties should be compensated per the knowledge that was known at the time of the bet
o But this is not consistently followed and courts are generally all over the place in considering post breach events when
determining damages
 Problem 6-6 (Oil tanker lease and the Gulf War)
o White would say that the damages should be limited to actual damages
o Generally, the 2-700s damages clauses are problematic and the courts use 1-305 to skirt around them sometimes; that is,
usually to lower them when otherwise the damages would seem to benefit the non-breaching party more than he would
have been benefited had the contract been fully performed
 Problem 6-7 (same as 6-6 but with option to extend)

Hadley v. Baxendale Damages must be limited to what was reasonably supposed to be in the contemplation of the (court says
both, but really it is just the breaching party) parties at the time that they made the contract as the probable result of the
breach of it; if special circumstances were known to the parties when they made the contract, damages resulting therefrom
are included, but if the special circumstances were not known, you cannot get damages resulting therefrom
FACTS: P ran a mill that had a shaft that broke and needed repair; the shaft was brought to D who was to transport it to the foundry for
repair; D delayed in bringing it to the foundry and the mill was unable to operate for a period of time; D did not (allegedly) know that the
mill was not able to operate without this shaft; P sued for consequential damages based on his lost profits for being unable to operate
the mill
 What is the measure of damages?
 When there is a breach of contract the non-breaching party is entitled to “damages that may be fairly and reasonably considered
either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably
be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the
breach of it. Now if the special circumstances under which the contract was actually made were communicated by the plaintiffs to
the defendants and thus known to both parties, the damages resulting from the breach of such contract, which they would
reasonably contemplate, would be amount of injury which would ordinarily follow from a breach of contract under these special
circumstances so known and communicated.
 Because the railroad did not know of the special circumstances of the case (i.e., that the mill was unable to run without this part),
the mill owners may not get lost profits since these would not naturally arise from such a breach
 Judge’s adoption of French position
o Parties initially approach the question from the perspective of tort, so they are concerned about remoteness and
proximate cause
o But Baron Parke suggests that the French standard should be the measure of damages—based on what was
contemplated and foreseeable, so this then leads to the factual question of whether or not there was notice of the fact that
the mill could not run without this shaft (and this is where there is the crucial inconsistency between the reporter and what
the court found)
 Note that the complete French standard also allows consequential damages when there is fault in the breach as
long as they are proximate, so the court adopts the first half of the standard, but not the second
 e.g., FedEx delivery and you lose job because it was delayed, should you get consequential damages?
o Probably not, since it was not in the contemplation of the parties, since you do not interact with
FedEx when sending a package
 What does it mean for the issue to be “in contemplation of the parties”?
o Holmes says that it must “enter the bargain” and that mere notice alone is not enough
 That is the risk of failure to preform leading to consequential damages must actually be assigned to the eventual
breaching party beforehand
o But this view is usually rejected and seen as requiring too much
 Majority rule
 Rule one from Hadley
o “Everyone, as a reasonable person, is taken to know the ordinary course of things and
consequently what loss is liable to result from breach of contract in that ordinary course”
 Rule two from Hadley
o “There may have been added in the particular case knowledge which the party actually
possess of special circumstances outside the ordinary course of things of such a kind that a
breach of those special circumstances would be liable to cause more loss”
 e.g., Victoria laundry operation where the boiler delivery was delayed
 Laundry lost customers
 Laundry lost contract with government for dying cloth
o Would a supplier of the boiler know that such a delay would cause a loss of costumers,
maybe, what about the loss of the government contract, maybe not
o So rule one of Hadley is met as regards the customers but not the government contract
o And rule two of Hadley would not be met as regards the government contract unless the
laundry specifically told the boiler supplier about the government contract
o R2d 351 Unforeseeability and related limitations on damages
 (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 contract was made
 (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 special circumstances, beyond the ordinary course of events, that
the party in breach had reason to know
 (3) Court may limit the damages of a foreseeable loss if justice so requires in order to avoid disproportionate
compensation (e.g., the case of the star who had a failed plastic surgery)
 This rule essentially restates the rule in Hadley v. Baxendale, with (2) (a) representing rule one in Hadley and
(2)(b) representing rule two in Hadley
o UCC 2-715(2)
 Essentially restates the common law rule from the R2d
 But note that it does permit consequential damages for the seller
 What makes something “foreseeable”?
o (1) The question is only what is foreseeable at the time of the making of the contract, so subsequent events are not
o (2) All that needs to be foreseeable is the loss that resulted from the breach, not the particular manner of breach of
manner of loss
o (3) Despite what the Baron says in Hadely, only the breaching party needs to have foreseen, not both parties
o (4) It is what is objectively foreseeable, so what one ought to have seen
o (5) It need only be foreseeable that the loss is probable as a result of the breach, not that it is certain to happen
 When do consequential damages cases usually arise?
o Another question is the ability or the inability of the injured party to avoid or mitigate the loss were it to happen
 So note that problems of consequential damages and foreseeability usually arise in the case where the seller
breaches to the buyer and the buyer is for some reason unable to cover on the market and the breach therefore
impedes collateral transactions that were in some way dependent on the breached contract
 Consequential damages and efficient breach of contract
o (my idea) how do consequential damages affect efficient breach of contract?
 If the other party can cover easily, probably not that big of a deal, but if it is uncertain or they cannot, it may have
a big effect on deciding whether or not the breaching party will actually be able to work an efficient breach
 Economics of Hadley
o Resolution assumes that certain risks are borne by each party as the normal form of the transaction; if other risks are to
be transferred, they must be considered explicitly during the negotiation; it can be assumed, if the negotiation operates as
the rule anticipates, that the party undertaking to bear such atypical risks will charge an appropriate insurance premium
and exercise appropriate extraordinary care in performance of the transaction
o So it allocated the burden of taking efforts to avoid the realization of the risk
o By setting the default rule in favor of the uninformed party, the courts induce the informed party to reveal information (i.e.
Give salience to the issue), and consequently, an efficient contract results
 Civil law and common law
o Civil law contract breach damages are usually more extensive and are only limited by proximate cause
o Perhaps this is one reason why breaches are less common at civil law, and it makes sense given the civil law’s desire to
be tougher about the enforcement of contracts
 Problem 6-8 (manufacturer of a shaft did a bad job and the mill had to shut down)
o Manufacturer has a better notion of the consequences than the shipper in Hadley, probably
 So the results were more foreseeable and might therefore be included in the damages

Herrera v. Union No. 39 School Dist. As long as certain results are in the contemplation of the parties, damages for the
realization of those events may be appropriate, though this is not usually the case for cases of wrongful discharge
FACTS: P was unlawfully discharged but was paid for the duration of this contract term
 What is the measure of damages?
 P should still get nominal damages to vindicate his claim
 Although consequential damages are usually not appropriate for cases of wrongful discharge, this is only because the loss of
professional opportunities or damage to professional reputation is not usually in the contemplation of the parties when they made
the contract; but if it is, then consequential damages could be appropriate
 Iteration of the Hadely v. Baxendale rule
 Usually difficult to identify the future loss in breach of employment contracts
o It is difficult to identify the future losses
o The employer did not give the reason for why they fired him (probably this was to avoid the possibility of consequential
damages, if it could be shown that this would lead to them…)
o This case is in the casebook because it shows that damages are restricted to those that are reasonable and provable and
foreseeable at the time of the contract’s formation
 Usually no emotional distress damages in contract (R2d 353)
o Emotional distress is not a basis for damages unless it is particularly likely to result from the breach of contract
 e.g., Case where the casket broke and the corpse fell out
o Note that most other instances will not lead to emotional distress damages
 e.g., Even if you are wrongfully discharged from your employment and this leads you to be distressed you
cannot usually get emotional distress damages
o Unless it rises to the level of tort

Simeone v. First Bank National Ass’n If there is no market to determine the market price, it indicates a scarcity and then the
market can be based on an expert’s valuation, or specific performance can be granted since the goods are probably unique
FACTS: P was in an agreement to purchase a unique classic car and the seller repudiated; the car was then sold to another party who
then sold it on the market at a great profit
 What is the measure of damages?
 Since there is no strong market for this kind of car, the measure for damages can be based on the difference between the contract
price and an expert’s valuation of the market price (and the market is classic cars, not re-possessed items from the bank) per
comment 3 of UCC 2-713
 Consequential damages are recoverable since the bank had reason to know that P was going to re-sell the car and his lost profits
in re-selling are thus included
 It is unreasonable to claim that P should have mitigated his damages since this would have required that he spend an enormous
amount, and mitigation does not require expenditures that are impractical or disproportionate to the loss to be avoided
 Damages rules provided for under the UCC

B. Mitigation
 Mitigation of damages
o General rule is that when one party breaks a contract the other may not take action that would increase the damage; in
many cases, the non-breaching party may have an affirmative obligation to mitigate its damages by seeking substitute
o Per R2d 350: (1) Except for as stated in (2) damages are not recoverable for loss that the injured party could have
avoided without undue risk, burden, or humiliation (2) The injured party is not precluded from recovery by the rule stated
in (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss
 e.g., Case where the purchaser breached the contract but the obstinately contractor continued to work anyway
and then sued for damages
 Here, the contractor did not mitigate his damages; instead, he increased them
 There is no duty to mitigate, actually
o You do not have to mitigate damages, but you can lose a lot in your damage award as a P if you do not and the case is
one in which you have a duty to mitigate
 Problems with finding when there is a duty to mitigate
o When should there be a duty to mitigate?
 (my idea) if something is more commodity like or indistinguishable for other options/goods
 When it is easy to effectively seek an alternative
o Can we accommodate personal preference?
 e.g., Shirley MacLaine movie breach and the refusal to do the second movie
o What is an adequate substitute?
o Does it matter if the opportunity is from the same company
 e.g., Shirley says that they betrayed her
o It is hard to define when there is a duty to mitigate in the case of fairly unique services or opportunities as opposed to
commodity like goods
 e.g., Fourth grade teacher was moved to sixth grade and had to commute farther
 No duty to mitigate under 2-708 (seller’s remedies for buyers breach) and 2-713 (buyer’s remedies for seller’s breach)
o BUT only because those formulas ASSUME the mitigation of damages

In re WorldCom, Inc. Lost volume sellers do not have a duty to mitigate damages because it is logically impossible for them
to do so
FACTS: Jordan was in a contract to work as a celebrity spokesperson; there were two years left on the contract when the company
filed for bankruptcy; Jordan did not seek alternative spokesperson positions
 What is the measure of damages? Did Jordan mitigate?
 Jordan was not a lost volume seller because although he could have sold more of his brand (although his reserve was not infinite
as is sometimes invoked by the courts, it was requisite for this purpose), he would not have sold more because he did not have the
subjective intent to further market his brand given his change of business decisions
 In the alternative, since Jordan was not a lost volume seller and had the duty to mitigate, he did not make reasonable efforts by
taking affirmative steps; rather, since he had changed business course, he did nothing; and the dilution of his brand or harm to his
reputation are not sufficient reasons in this case for avoiding his duty to mitigate; his alternative decision to start an NBA franchise
was not an effort to mitigate but rather a completely independent decision, so it does not therefore count; so the court will need to
determine what amount Jordan could have mitigated by in order to assess damages
 Damages rules and the duty to mitigate
 Could you disclaim the duty to mitigate?
o Frier thinks so but is unsure
 Lost volume seller
o When the seller’s supply exceeds demand
o Yes to a licensing company or Michael Jordan
o No to a company selling cars in 1948
 Lost volume sellers have not duty to mitigate damages
o Lost volume sellers do not have a duty to mitigate, but MJ is not a lost volume seller, so he did have a duty to mitigate
 Wrongfully discharged employees have a duty to mitigate damages
o This often seems unfair, since they then have to take another job that is offered to them even if it is not as uniquely good
as the one they lost, as long as it is within reason
 UCC 2-709 suit for price
o Once a buyer has accepted, the seller can sue for the price and does not need to mitigate the damages
 Problem 6-9 (rejection of accepted goods)
o Will the return agreement work?
 Seller does NOT have a duty to mitigate once the buyer accepts
 Acceptance changes the situation
 It allows for the UCC 2-709 “Action for price”
o Siemens is probably a lost volume seller in this case anyway
 Efficient breach revisited
o Criticism of efficient breach theory
 Contracts should be covered by property rules
 If there is efficient breach of contract, why should there not be efficient theft of goods?
o But the response to this is that there is a difference between a property rule and a liability rule
 If a right is protected by a property rule, then the breaching party must pay the costs
of breaching as well as other punitive damages
 If a right is protected by a liability rule, then the breaching party must pay the costs of
breaching but nothing more
o Our society has decided that contracts are only protected by liability rules not property rules
 Breaching contracts is immoral
 The moral wrong of breaching a contract (a promise) is not fully covered by monetary damages
 Undermines reliance
 Because a party cannot totally depend on the performance, because it will not occur if it is “efficient” to
not perform
 Transaction costs
 Litigation after the breach, loss of the bargaining partner, needing to be more careful next time you
contract, buying insurance all represent transaction costs resulting from the breach
 Assessment costs
 Often difficult to measure the expectation interest, it is time and resource intensive (going to court) and
often not accurate anyway, since it is hard to know subjective value
 Different forms of transaction costs and their effect on efficient breach
o A has contract to sell to B, but C values the goods more than B, so it would be efficient to breach and sell to C, assuming
that A can pay expectation damages to B and still come out ahead
o But why not still sell to B and then have B sell to C, where A takes a brokerage fee?
 Because there are search costs!
o Or why not negotiate out of the deal with B and then sell to C?
 Because there are transaction costs!
o So it is easier to just breach
 But note that there are transaction costs associated with this as well!
o In any case, in all three circumstances, the goods end up in the hands of the person who values them the most, it is just a
question how quickly and efficiently they get there!
 Problem 6-10 (Vase sale)
o This is an example of a potential efficient breach, assuming the transaction costs do not get out of control
 Problem 6-11 (Player moves from baseball to football)
o Maybe this was efficient, but is hard to know because we do not have objective criteria

C. Reliance Interest
 Reliance damages (R2d 349)
o “As an alternative to the measure of damages stated in 347, the injured party has a right to damages based on his
reliance interest, 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 contract been
o Usually used when neither profits nor losses can be calculated with reasonable certainty

Wartzman v. Hightower Productions, Inc. Because neither negative nor positive expectation damages can be proven, the non-
breaching party is entitled to reliance damages
FACTS: D contracted with P to help him incorporate himself; P messed it up and for this reason D could not raise the funds necessary
to accomplish his flagpole sitting competition; D had expended lots of money in order to further this goal
 What is the measure of damages? Are reliance damages appropriate?
 Yes, reliance damages are appropriate here
 Because it is impossible to calculate expectation damages, reliance damages are appropriate for the costs expended by P in
preparation and performance; D has the burden and can try to prove that expectation damages would have been negative and by
this reason reduce his reliance damage judgment but he is unable to do so here
 Usual hierarchy of damages sought
o Usually expectation damages are worth the most, reliance damages are next, and restitution damages are the least
 But this can change when the expectation was for a losing enterprise, but reliance or restitution damages have
been expended
 But note that reliance damages are capped by foreseeable expectation damages (to the extent that
they are negative) but restitution damages are not
 New business problem
o e.g., Security Stove case
o Because it is uncertain if the expectation damages would be successful, reliance damages are given instead
 Reliance damages are in some respects like tort damages
o Because they put the party back in the position that they were before the events began
 Reliance damages are different from the reliance interest
o Note that there is a difference between reliance damages and reliance interest; often when the courts enforce a contract
based on the reliance interest (promissory estoppel), full contractual (expectation) damages are awarded, even though
the R2d aims to discourage this in some instances, saying that “damages may be limited as justice requires”
 Problem 6-12 (New café landlord breaches)
o Ultimately awarded $0 because there time was not given value since it was not proved that they gave up other
opportunities (the fact that they had concrete expenditures may have gotten lost in the record)
o Court will not require exact numbers but you do need to have at least some proof to show that you are entitled to

D. Restitution Damages
 Restitution damages
o Goal is to restore to a party the benefit that it conferred on the other party
o Remember that restitution usually involves a situation where there is no actual contract, but the contract finds a “quasi-
contract” or a contract implied in law

Fisher v. First Chicago Capital Markets, Inc. Restitution damages may be available as an alternative to expectation and
reliance damages when those are unavailable
FACTS: P contracted with D to perform certain services over a number of years; the agreement was made in writing and then modified
subsequently orally; P continued to perform based on this modification
 What is the measure of damages? Are restitution damages appropriate?
 Yes, restitution damages are appropriate here
 The SOF defense blocks both the contract based expectation damages and the reliance arguments (this state law is one of the
few states that treats the SOF as a defense to reliance); but it is possible for P to get restitution for the fair value of his services
(which is one prong of restitution, the other would be the amount by which D was unjustly enriched, and the court usually choose
the amount more favorable to the non-breaching party)
 Per R2d 139 the SOF is not a defense to a contract enforced through reliance
o But the state law in this jurisdiction does not follow this rule and is in the minority position
 Method for determining restitution interest
o This is often a complex process
o R2d 371
 “If a sum of money is awarded to protect a party’s restitution interest, it may as justice requires be measured by
 (a) the reasonable value to the other party of what he received in terms of what it would have cost him
to obtain it from a person in the claimant’s position, or
 (b) the extent to which the other party’s property has been increased in value or his other interests
 Generally, the courts pick the choice of measure that is more generous to the party who did not breach the
obligation or contract
o e.g., A agrees to repair B’s roof for $3K; A does part of the work at a cost of $2K, increasing the value of B’s house by
$1.2K; the market price to have a similar carpenter to do the work is $1.8K; A’s restitution interest is equal to the benefit
that he has conferred on B; if A breaches, he will be awarded 1.2K in restitution and if B breaches he will be awarded
$1.8K in restitution

United States for the Use of Palmer Construction, Inc. v. Cal State Electric, Inc. A breaching party may seek restitution but
only if the non-breaching party’s substitute performance did not require it to pay more than it initially bargained for
FACTS: P breached his contract with D; at the time of the breach, P had provided a value of 204K to D but been paid only 114K; after
the breach D needed to expend 126K to complete the work that P had contracted to do, so it ended up spending 6K more than it had
initially bargained for under the contract; but the trial judge awarded restitution damages of 80K to P
 What is the measure of damages? Are restitution damages appropriate?
 No, restitution damages are not appropriate here
 Although it is true that a breaching party may receive restitution damages if the breach leaves the non-breaching party unjustly
enriched, it is impermissible to award these damages if they have the effect of making the non-breaching party pay more than he
would have otherwise and so lose the benefit of his bargain
 Cannot get restitution damages if it would force non-breaching party to pay more than contract price
 Contract is often an important reference point for restitution
o Although we are dealing with a restitution action, the original contract still has some governance in terms of reference
point over the dispute
o Note that this was also the case in the TVA case
 Unlike reliance, at least before the completion of performance, there is no expectation cap on restitution damages
o If the victim of the breach has spent more than the contract on performance he can get restitution even if they are more
than the expectation damages
o But once performance is complete, all that is available is expectation damages
 e.g., Lawyer who agreed to do the divorce for $600 and then spent $25,000 on it and the client breached before
the case was over (although this was a tricky one since the jury had gone to the jury room but not yet returned)
o But note that some scholars, e.g., Frier, think that it should not be this way
 Problem 6-13 (School construction case)
o Typically for construction contracts the measure of damages is the reliance + anticipated profits, but if the profit goes
negative should negative expectation damages be factored in to restitution damages?
 The answer is yes for reliance damages, but the R2d does not say for restitution
 Problem 6-14 (Power utility case)
o ?

E. Specific Performance
 Specific performance (R2d 359)
o Specific performance will not be ordered if damages would be adequate to protect the expectation interests of the party
o Generally, specific performance will only be given if the good are unique or represent some special subjective value
 e.g., Real estate
 e.g., Widow who contracted to buy the playing cards of her deceased husband
o UCC 2-716(1) Specific performance may be degreed when the goods are unique or in other proper circumstances
 UCC wants specific performance to be used more often; but judges have not been using it much outside of the
“unique” context
 Factors for considering specific performance
o Favor
 Damages inadequate
 Damages uncertain
 Goods are unique
o Disfavor
 Availability of substitute
 Performance indefinite or unclear, so hard to direct action
 Return performance is not secure
 Supervision of enforcement difficult
 Not the best decision given the court’s equitable discretion

Almetals, Inc. v. Wickeder Westfalenstahl, GmbH Specific performance may be granted as an equitable remedy when
damages would be inadequate to protect the non-breaching party
FACTS: D and P were in a contract that had 60 day payment terms; D breached the contract to change the payment terms to cash on
delivery; the facts showed that this would cause P to go out of business and lead to layoffs since P could not get the product that D
made anywhere else in the world
 What is the appropriate remedy?
 Injunctive relief is appropriate here
 Because this is a unique product that cannot be gotten anywhere else and because the cost of breach would be that P goes out of
business and therefore could not sure for damages and because the public interest if benefited and D is not harmed in anyway,
injunctive relief is appropriate here to force D’s compliance with the terms for the duration of the contract
 Economics of specific performance
o Benefits
 (1) Shifts the burden of determining the costs of the defendant’s conduct form the courts to the parties
 Substitutes costly forensic fact finding with private negotiation
 (2) Costs are more accurately determined by the free market and the parties bargaining than by the courts
o Costs
 (1) Court must oversee performance
 (2) Bilateral monopoly and associated transaction costs are created, and the costs may be so high that
negotiation does not even happen
 Should specific performance be given more often?
o Yes
 It is the best remedy since it neither under or over compensates the non-breaching party
 It would prevent strategic behavior since the non-breaching party cannot argue that something was worth more
to him that it actually is in order to get more damages
 Three reasons why the parties should be able to elect specific performance
 (1) Most damages are under-compensatory
o Because of un-enumerated incidental costs, opportunity costs, frustration, severance of the
relationship, etc., so specific performance should be granted
 (2) Because promisees have economic incentives to sue for damages when they are likely to be fully
compensatory, when they would rather have specific performance it means that it make sense
o Because monitoring costs for specific performance of a party that would rather breach will be
high, so when a party requests specific performance it must mean that damages are truly
 (3) Promisees possess better information than courts do about the adequacy of damages and the
monitoring costs associated with specific performance
o No
 If someone values something more, it makes sense to allow that person to have it instead of giving it to someone
who values it less through specific performance
 The law should not impede what the market will bear
 Note how this is such an economic understanding of contracts, you are only getting an agreement to
the extent that it remains a good transaction for the other party and breaking it is no big deal, and in fact
encouraged in order to align the transaction with the market
 Specific performance may bear no relation to the cost of performance for the promisor and the harm suffered by
the promisee for failure to perform
 Peevyhouse and specific performance
o What would have been the outcome in Peevyhouse had there been specific performance?
 Peevyhouses would have probably settled eventually for a price somewhere less than $25K, assuming that they
actually did not value filling in the holes that much
 Civil law is more apt to grant specific performance
o But for purposes of convenience, many business actors prefer damages since they can move on more easily from the
bad contract
 Negative Injunctions
o Court will not force you to perform personal services, otherwise it would be something approximately involuntary servitude
 Problem 6-15 (Opera star’s performance contract)
o Court will not force you to play for the team that you broke the contract with, but they will prevent you from playing for a
different team
 Since you are a unique player
o Negative injunctions often occur in the sports context

F. Liquidated Damages
 Liquidated damages
o Liquidated damages clauses seek to bind the court’s damage award
 R2d 356(1) “Damages for either party may be liquidated in the agreement but only in an amount that is
reasonable in light of the anticipated OR actual loss caused by the breach and the difficulties of proof of loss; a
term fixing an unreasonably large amount is unenforceable on the grounds of public policy
 UCC 2-718 “Damages for breach by either party may be liquidated in the agreement but only at an amount that
is reasonable in the light of the anticipated OR actual harm caused by the breach, the difficulties of the proof of
loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy; cannot amount to a
 Three general rules (from Farnsworth)
 (1) Old common law rule was that the amount must be reasonable in light of anticipated loss
o But the UCC, and then the R2d, allows reasonable in light of the anticipated or actual loss, so
this allows clauses that would be unenforceable in light of the anticipated loss if they are
reasonable in light of the actual loss; it should not be a basis for striking down provision that
was reasonable in light of the anticipated loss but not reasonable in light of the actual loss)
 (2) Damages to be anticipated from the breach must be uncertain or difficult to calculate
 (3) Must be an intent from the parties to liquidate the damages

NPS, LLC v. Minihane Liquidated damages are permissible here because the anticipated loss was uncertain and the amount
was reasonable in that it did not arise to the level of a penalty
FACTS: D entered into an agreement that had a liquidated damages clause and D then failed to make payments and he was required
to pay the balance of the lease under the liquidated damages provision
 Is the liquidated damages clause enforceable?
 Yes, the clause is enforceable and further the non-breaching party does not need to mitigate its damages because that goes
against the underlying purpose of establishing liquidated damages
 The court finds that the potential actual damages at the time of making the contract were hard to ascertain and the liquidated
damages provided for under the contract were not unreasonable such that they amount to a penalty, therefore the liquidated
damage provision is enforceable
 Acceleration clause as a form of liquidated damages
o Acceleration clauses usually fall under the category of liquidated damages
o Often acceleration clauses can border on being a penalty
 Should we allow liquidated damages even when there are no actual damages?
o e.g., Private contractor to build a road and there is liquidated damages of an amount per day that it is late but the road
was to have a bridge built by another contractor that also was delayed; so the road was not useable at all since the bridge
was not complete, so the actual damages were zero—should be allow liquidated damages in this case?
 “In light of anticipated OR actual damages”
o Note that a court will probably not enforce a liquidated damages clause that was reasonable in light of anticipated
damages but is grossly disproportionate in light of actual damages, though by the terms of the UCC or the R2d, they
could and should
 e.g., Bridge case above
 How wide is the freedom of contract?
o How wide do we allow the parties to contract outside of the background law—is this good, fair, and efficient?
 There is no duty to mitigate when there is an enforceable liquidated damages clause
 When should we have liquidated damages?
o Should you have liquidated damages when the damages are estimable?
 No, probably not
o Liquidated damages are better used when there is a real personal value that is over and above market value
 This is the main and intended use of liquidated damages
 e.g., Sentimental object or unique experience
o But the law does not like when liquidated damages are used as a penalty in cases where actual damages are easy to
 But why can’t this be an element of the contract?
 Presumably the penalty for non-performance is built into the final price, one party is merely paying for
the added assurance and is willing to pay a premium for it
o Where a penalty is seen as being part of the consideration that formed the contract, the courts
will scrutinize it strictly
 This is one of the only times that courts will scrutinize consideration
 But maybe we do not like penalties since they do not allow for efficient breach
 Ultimately, should we hold people to their contracts or allow them to change their minds?
o Does this undermine reliance in the system since people can then breach so easily?
o This is what the Europeans are to
 Is the law going to be patronizing or allow the freedom of contract?
 “Alternate performance”
o A party can perform its bargain by doing either option
o Sometimes hard to distinguish form a liquidated damages
o And note that the difference matters since a party cannot just pay the penalty of the liquidated damages clause and then
get out of the its principal contractual obligation, though it can of course perform an alternate performance contract under
either alternative
 Problem 6-16 (Alternate performance or liquidated damages?)
o (1) Ok and this happens all the time
o (2) Probably would actually be okay but would be vetted by the court to see if reasonable or a penalty
o (3) Economically, this is the same as two, but legally it is different since it is a bonus and not a (potential) penalty
o (4) This is a take or pay contract and is hard to characterize
o Note that the difference between 2 and 3 is just an issue of draftsmanship
 Limitation of remedies
o UCC allows for the limitation of remedies per 2-719
o Limitations of remedies do not need to be conspicuous like the disclaimer of warranties covered under 2-316
o But they do need to be exclusive in order to be effective
 e.g., In order to limit remedies, one needs to say that the buyer’s only remedy is repair or replacement, otherwise
the buyer can chose between this remedy and other remedies
 e.g., Repair or damages, and he will often want damages, and that is not what the seller wants to give
the buyer
o But if the limited remedies fail their essential purpose, all of the other remedies from the UCC can come back into play
o 2-719 also allows for the limit on consequential damages, though when they are limited in relation to bodily injury, they
can be unconscionable
 Summary of remedy rules at common law versus in civil law
Damages Specific performance Penalties
Common law Normal, but limited to what is Rare, except for unique/real property Not permissible in principle
Civil law Normal, unlimited except by proximate Normal remedy Permitted as long as not grossly
cause when there is any fault in breach disproportionate

 Different perceptions about what contract remedies should achieve

o Europeans put more weight on the completion of the contract
 Civil law would say that the overall situation is more efficient when people can place a higher reliance on the
contract almost always being performed
 This this aggregate efficiency makes up for individual instances of inefficient performance
o Common law courts did not take as seriously the ethical component of the promise of the contract
 Efficient breach of contract was the academic idea that was developed to explain why the common law allowed
for easy breaches of contract

Chapter 7: Conditions and Self-Help Remedies During Performance

 Condition (R2d 224)
o “An event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under the
contract becomes due”
o Often rights or self-help remedies arise for one party, who is the beneficiary of that condition, when that condition does
not occur
 Some self-help remedies
 Suspension of performance
 Cancellation of contract
 Rejection of goods
 Revocation of acceptance of goods
 Promise or a condition?
o Conditions are NOT promises
 So if a party does not fulfill a condition placed on him, the other party can NOT sue for breach, UNLESS that
condition was also a promise
o e.g., “Buyer promises to give written notice of any claim within 30 days of the manifestation of the cause of the claim”
 This sounds like a promise, and because it is, and if the seller is injured for a lack of notice, the seller can
counterclaim for a breach of promise, any damages from which would be deducted for the claim that the buyer
had against the seller under the warranty
o e.g., “It is a condition of the seller’s obligation to pay on its warranty that the buyer give written notice of any claim within
thirty days of the manifestation of the cause of the claim”
 This sounds like a condition, and if the buyer fails to meet it, he forfeits his right to sue the seller, but the seller
cannot have any claim against the buyer, since the buyer only failed to meet a condition, not a promise
 Independent promises in the old common law
o It used to be that each parties promise to perform under the contract was independent of the other party’s performance
o So if one party failed the other party had to continue and then sue for damages
 Dependent promises in the new common law
o Judges then implied the condition that any major (“material”) failure by one party to perform under the contract was a
condition that allowed the other party to suspend performance, and if the other party’s failure was serious enough, to
cancel his performance altogether
o R2d 237
 “Except as stated in R2d 240, it is a condition of each party’s remaining duties to render performances to be
exchanged under an exchange of promises that there be no uncured material failure by the other party to render
any such performance at an earlier time”
 Two forms of conditions
o Express conditions
 Explicitly put into the contract
o Implied conditions
 Courts add these conditions because they are seen as the presumed intention of the parties, even though they
are not in the contract
 Most conditions are conditions precedent

A. Express Conditions
 Express conditions
o Performance of one party is expressly conditioned on the occurrence of an event not certain to occur
 e.g., Dove v. Rose Acre Farm, Inc., where substantial performance on the part of the law student was
inadequate because the condition expressly noted that performance in the form of payment would come only if
the law student worked for the full period, and there was no disproportionate forfeiture, since the law student was
being paid normal wages anyway and the payment was a bonus

Merrit Hill Vineyards, Inc. v. Windy Heights Vineyard, Inc. One party’s failure to meet an express condition relieves the other
party from performing his duties under the contract, but it cannot lead to a breach of contract, unless that condition was also
a promise
FACTS: P entered into an agreement to buy D’s vineyard on the condition that D show up at closing with proof of title insurance; if D
did not show up, the contract provided that the security deposit would be returned
 Is this a conditional contract?
 Yes, this is a conditional contract
 P does not need to go through with the purchase and his security deposit must be returned because the condition precedent to the
contract was not met; additionally, P cannot get consequential damages, since no contract was actually formed, since there was
no independent promise to perform the condition that would support such damages
 Difference between a condition and a promise
o Violation of a condition simply stops the transaction, whereas violation of a promise would be a breach that could lead to
damages or other remedy
 (my idea) Are conditions better than promises because of less litigation/transaction costs?
 But one problem with pure conditions is that it gives the person the option of negating the deal by not
meeting the condition
o So should there be a promise to meet the condition?
 The party who does not have the discretion to meet or not meet the condition would
like such a promise
 Because otherwise it would be impossible to rely on the contract, and this
would undermine reliance interest
 But there is a duty to execute a contract in good faith, so you would maybe have a
duty to try to meet the condition, but this is only if there is a promise, because
otherwise there would not be a contract to support the duty of good faith in
 If there is a pure condition then there is no requirement of good faith since
there is not promise and not contract
o Condition and promise often based on the whole context of the deal
 e.g., I will perform a ferry service if I can get a boat and a promise to try to do so
o Court will not save Merritt Hill and read in a promise

Howard v. Federal Crop Insurance Corp. This provision in the contract was a promise, not a condition; this means that P may
have to pay damages for the breach of his promise but he does not forfeit his insurance
FACTS: P was in a contract with D to insure his crops; the contract provided that P could not plow under his crops before the examiner
inspected crops about which a claim was made; the contract was unclear as to whether or not this provision was a condition or a
promise on the part of P
 Is this a conditional contract?
 No, this was a promise, not a condition
 Because this is a promise and not a condition, there is no forfeiture, and this is a goal of the law (because it abhors a forfeiture);
this clause is construed as a promise and not a condition before preference is given to promises if the language is unclear; so P
does not forfeit his claim, though damages may be assessed against him since there was a breach of his promise in the contract
 Law prefers a promise to a condition because it minimizes the risk of forfeiture (R2d 227)
o “In resolving doubts as to whether an event is made a condition of an obligor’s duty, and as to the nature of such event,
an interpretation is preferred that will reduce the obligee’s risk of forfeiture, unless the event is within the obligee’s control
or the circumstances indicate the he assumed the risk”
 Note that the event/condition was in fact in the obligor’s control in Howard
o Comment b says that the purpose of this preference is that “the non-occurrence of a condition of an obligor’s duty may
cause the obligee to lose his right to the agreed exchange after he has relied substantially on the expectation of that
exchange, as by preparation or performance”
 But note the policy is as to whether there was a risk of forfeiture as of the time that the contract was made, and
is not meant to consider whether a forfeiture in fact occurred
 Court may excuse the non-occurrence of a condition if it would otherwise cause a disproportionate forfeiture (R2d 229)
o This is an escape hatch for a condition that has the effect of being very onerous
o If a condition is frivolous or ridiculous, etc. the court may not enforce it when it leads to a forfeiture
o e.g., Jacob & Youngs v. Kent
o e.g., If Dove would not have been paid at all for the ten weeks instead of just not getting a bonus
o e.g., If in Howard it was a condition and he had to forfeit the family’s farm
o e.g., If an insured cannot get his medical reimbursement for brain surgery because he did not make the proper notification
 Waiver of a condition (R2d 84)
o It is permissible for the person having the right afforded by the condition to waive it
o It is necessary that the person against whom waiver is claimed have intended to waive the right afforded by the condition
o Any waiver other than by express agreement must be unequivocal and may not be simply inferred from the circumstances
o A waiver of a condition does not need to be put in writing even if the contract containing the condition is under the SOF
o Condition that has been waived can be reinstated as long as there is reasonable notice, provided that the person in
whose favor the condition has been waived has not relied to his detriment on the waiver of the condition
 e.g., Rent payment change with the landlord
o Waivers are permitted “unless (a) the occurrence of the condition was a material part of the agreed exchange for the
performance of the duty and the promisee was under no duty that it occur, or (b) uncertainty regarding the occurrence of
the condition was an element of risk assumed by the promisor”
 Problem 7-1 (wrongful discharge litigation)
o Did company waive by responding?
 Although this is a colorable argument, he actually lost in the case

Morin Building Products Co. v. Baystone Construction, Inc. When the obligor’s satisfaction is a condition for payment, a
reasonable person standard for determining satisfaction should be used except in cases where the performance has
subjective, aesthetic, or other personal value
FACTS: P entered into an agreement to put up siding for a factory; the contract was conditional in that D had to accept the quality of
the siding before payment was to be made; there was evidence that the siding was a slightly different color but also evidence that the
siding could not be made to match perfectly
 Is this a conditional contract?
 Yes, this is a conditional contract but the standard used is, per R2d 228, whether a reasonable person would be satisfied with
performance, not whether the obligee is actually satisfied
 The facts surrounding the formation of the contract in this case suggest that the reasonable person satisfaction was the standard
adopted by the parties in this case; for items that have a more aesthetic purpose, actual satisfaction can be employed and
rejection can be made even if unreasonable, as long as it is in good faith; but this was not the intent of the parties in this case
(given the form contract and that the structure was a factory and a form of sheet metal that cannot be made to match perfectly was
 Condition of approval objective or subjective?
o Objective (for most performances)
 Reasonableness limitation
 Court says that rejection can only be made if it is reasonable
o Subjective (for aesthetic judgments)
 Good faith limitation
 Nothing can be done if the obligor/approver rejects performance, since it is a completely conditional contract,
subject to the good faith limitation
 e.g., In an artistic commission, you can withhold unreasonably, but not in bad faith, as in e.g., the
obligor does not even look at the picture, since there is discretion in performance and this is an area
where the law requires good faith
 Striking at the freedom of contract?
o Note that Posner is concerned that he is rejecting the form contract and this goes against his default conservative rule of
freedom of contract
o He is unhappy about departing from the plain language interpretation especially since it is two equal commercial entities,
since the language of this contract did seem to suggestive a pretty explicit right of the obligor to reject at his will and for
any aesthetic reason he had

B. Implied or Constructive Conditions

 Implied conditions
o Lots of these cases revolved around the extension of credit in the transaction
 The question is when the law will impose conditions on the party that in effect require one party to extend credit
to the other party
o Common law courts have been implying conditions for a long time
 The implied condition of order of performance (R2d 234)
o (1) “Where all or part of the performances to be exchanged under an exchange of promises can be rendered
simultaneously, they are to that extent due simultaneously, unless the language or circumstances indicate the contrary”
 e.g., A cash sale when the goods are given over the counter at the same time that the cash is given over the
o (2) “Where the performance of only one party under such an exchange requires a period of time, his performance is due
at an earlier time than that of the other party, unless language and circumstances indicate the contrary
 e.g., Stewart v. Newbury, where a construction contract without the provisions of installment payments, requires
that as a condition for payment the contractor completely finish the building
 When is a breach big enough to warrant suspension of the other party’s performance?
o If the breach is small, it does not rise to the level of allowing the other party to suspend his performance; that is, breaching
the mutual condition of continued performance, though damages could be gotten for this small breach
o If the breach is large enough, it is a material breach, and would allow the other party to suspend their performance, as in
a partial breach, or cancel the contract altogether, as in a total breach

K & G Construction Co. v. Harris A material breach may be either a partial breach or a total breach, and if it is a partial breach,
then the breaching party is given time to cure and the other party is entitled to suspend performance; if cure is not made, the
partial breach will mature into a total breach
FACTS: P was a contractor who hired subcontractor D; D had to perform his services in a workmanlike manner; but D caused damage
to P with his bulldozer but refused to repair it; because of this P withheld payment of the installment contract to D; D then continued to
work for a month until he was not paid again, and then he stopped working
 Was this a breach permitting suspension of performance?
 Yes, D breached the contract by not performing in a workmanlike manner; P considered this a partial breach and allowed D to
continue to work but withheld payment (in so doing, suspending his performance); when D then stopped working it was a total
 The general rule of contract today is that covenants are mutually dependent if the intent of the parties suggest that they are, and
the intent almost always is that they are, and this allows an injured party to be free to not perform once the other party has
breached, and this is what happened in this case
 Material breach (R2d 241)
o Factors relevant to determining if there was a material breach
 (a) “Extent to which the injured party will be deprived of the benefit which he reasonably expected
 (b) Extent to which the injured party can be adequately compensated for the part of that benefit of which he was
 (c) Extent to which the party failing to perform or to offer to perform would suffer a forfeiture
 (d) Likelihood that the party failing to perform or to offer to perform will cure his failure, taking into account all of
the circumstances, including any reasonable assurances
 (e) Extent to which the behavior of the party failing to perform or to offer to perform comports with the standards
of good faith and fair dealing”
o e.g., Destroying wall is not performance in a workmanlike manner, which was a condition of the contract, and there was
therefore a material breach
 So the other party can either wait and sue or withhold progress payments
 Partial breach or total breach? (R2d 236)
o Partial breach
 (1) “A claim for damages for total breach is one for damages based on all of the injured party’s remaining rights
to performance”
o Total breach
 (2) “A claim for damages for partial breach is one for damages based on only part of the injured party’s
remaining rights to performance”
o Some rules for determining when a partial breach can be treated as a total breach
 Per R2d 242 Comment a: “A party’s uncured failure to perform or offer to perform note only has the effect of
suspending the other party’s duties, but when it is too late for the performance or the offer to perform to occur,
the failure also has the effect of discharging those duties; ordinarily, there is some period of time between
suspension and discharge, and during the period a party may cure his failure, but when timely performance is so
essential, any delay can result in an immediate discharge, and no period of time is given for cure”
 Uncertainty about whether a breach is material
o Court says that it was a material breach, but if it was not a material breach then they would have been the breaching party
 This is a dangerous situation since both parties are operating in the dark about what actually happened, to know
if it was actually a material breach
 So using self-help pressure remedy can be dangerous if you get it wrong
o Note that if K &G had totally ended right away and treated the material breach as a total breach and not a partial breach,
that may have been problematic since although material, time was not of the essence, so the other party should have
been given a period of time to cure
 Self-help measures
o Suspension of performance (often in the form of suspension of payment) is the main way through which the non-
breaching party pressures the breaching party to cure the breach
 Keep working while in breach?
o Why did the subcontractor keep working?
 Maybe because he was unsure about how the insurance claim would sort out
o What was the consequence?
 The sub gave free work for one month and they do not have a claim in restitution since the damages were higher
than the value conferred in restitution since the non-breaching party had to pay more on the spot market
 Note that this is often the case in these instances, since the spot market will cost more, so there is no
restitution even though the breaching party conferred much more benefit, with respect to the value for
his services outside of the spot market, than he got paid for
 Why giving time to cure is good
o It would be wasteful to through the party in breach off the project if otherwise things are going well and the breach can be
cured cheaply and effectively by the party in breach
o This is better than finding a new contractor, etc.

Taylor v. Johnston
FACTS: P and D formed an agreement to have D’s horse sire foals for P’s horses; D then sold the horse and moved it to another state
and said that the reservation for having the horses sired was cancelled; but P said that he would still like the performance, so D allowed
it to happen and arranged for the occurrence to take place in the other state, to which P’s horses were moved; after a series of
schedule mishaps, P breached by seeking alternate performance
 Was this an anticipatory repudiation of the contract?
 There was an initial anticipatory repudiation by D, but this was retracted when P treated it as not a breach and D showed intent to
perform and the parties found a way to move forward with the contract before the term of performance ended; there was never an
express repudiation by D; although D was not super helpful in facilitating performance, there was nothing suggesting his implied
repudiation, so P was not permitted to claim D’s anticipatory breach and end the contract, since D never put the contract out of his
power to perform
 Doctrine of anticipatory repudiation
 Anticipatory repudiation (R2d 250)
o Express
 (a) “Statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself
give the obligee a claim for damages for total breach under R2d 243
o Implied
 (b) “A voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a
 When you put performance out of your power
 Anticipatory breach can be withdrawn, depending (R2d 256)
o If injured party is made aware of the retraction of the anticipatory breach before he has relied to his detriment on the
reality of the breach, or notified the other party that he considers the breach to be final, the breach is nullified and the
contract is put back into place
 Economics of anticipatory repudiation
o Treating an anticipatory repudiation as a total breach makes sense because it allows the non-breaching party to mitigate
his damages, instead of waiting around for the performance to come, even though the other party has said that it will not
 e.g., Case of De La Tour, whose courier was able to seek opportunities elsewhere once informed of the
anticipatory breach
 Is implied anticipatory breach objective or subjective?
o e.g., In Johnston v. Taylor, was all of the run around in the horse farm enough to constitute implied anticipatory
 No, because the promisor still had the power to perform the contract within the period prescribed
 But note here that the issue is that a horse must be bred early in the season otherwise it is not as
valuable since it will have to race with horses much older than it and the judge does not seem to
understand this
 Does this then mean that they was anticipatory repudiation?
o Perhaps the other party could ask for a guaranty under UCC 2-609, if the UCC governs
 Damages for anticipatory repudiation
o When buyer repudiates (UCC 2-708)
 Damages are assessed according to the difference between the market price at the TIME and PLACE for
DELIVERY and unpaid contract price, but NOTE THE POTENTIAL CHANGE, at the expiration of a commercial
reasonable time, so the seller cannot just sit around either, so IT IS STILL THE SAME, because of cases like the
Halloween pumpkin example
o When seller repudiates (UCC 2-713)
 Damages are assessed according to the difference between the market price at the TIME the buyer LEARNED
of the breach
 e.g., Case of a rising grain market and the seller repudiates two months before performance is due
since he can get a better offer elsewhere; what can the buyer do? He can cover within a reasonable
period and then sue under 2-172 or he can sue for breach at the market price differential under 2-713,
but he cannot just wait out for the market to go even higher and then sue for higher damages at the
time of performance
 So basically his damage award will be pegged at the time of the repudiation
o But then there is the question of whether it was actually a repudiation and what would be a
reasonable time to cover/ascertain the damage award
 Buyer can choose to, or not to, cover

Kunian v. Development Corp. of America When a party has reasonable grounds to doubt the other party’s performance, he
can ask for adequate assurance using UCC 2-609 and if such assurance is not forthcoming, he can treat the other party as
having repudiated the contract
FACTS: P and D were in a contract that provided for delivery in lots and payment in lots; when D failed to make payment after one
installment, P refused to deliver the next installment under its right to suspend performance; per 2-612 this could be a breach by D if it
is seen per 2-612 as a breach of the whole contract, but when P requested past payment and future performance, he reinstated the
contract again per 2-612; P also demanded per 2-609 adequate assurances that D would continue to pay since he had breached
earlier promises and purchased goods from another seller; D did not provide these assurances (since he did not put the funds in
escrow as P required)
 Was this a breach?
 Yes, because D failed to provide adequate assurances to P which P was justified in seeking (there were “reasonable grounds”), P
is permitted to treat this as repudiation of the contract per UCC 2-609
 UCC 2-612 and UCC 2-609
 Installment contracts and the question of breach (UCC 2-612)
o Exception to perfect tender rule since each lot must only consist of substantial performance
o If the non-conformity or default of any one installment substantially impairs the value of the whole contract, there is a
breach of the whole
o But the contract is reinstated if the injured party requests future lots, accepts the non-conforming lot, or brings an action
only with respect to the non-conforming lot
 Adequate assurance (R2d 251)
 (1) Where reasonable grounds arise to believe that the obligor will commit a breach by non-performance that
would of itself give the oblige a claim for damages for total breach, the obligee may demand adequate assurance
of due performance and may, if reasonable, suspend any performance for which he has not already received the
agreed exchange until he receives such insurance
 (2) The obligee may treat as a repudiation the obligor’s failure to provide within a reasonable time such
assurances of due performance as is adequate in the circumstances of the case”
o This has the effect of implying a condition that one party not cause the other party to doubt the completion of the contract
through his words or actions
 Adequate assurance (UCC 2-609)
o (1) “A contract for sale imposes an obligation on each party that the other’s expectation of receiving due performance will
not be impaired/ When reasonable grounds for insecurity arise with respect to the performance of either party the other
may IN WRITING demand adequate assurance of due performance and until he receives such assurance may if
commercially reasonable suspend any performance for which he has not already received the agreed return
o (4) If adequate assurance is not received within 30 days, the other party has repudiated the contract
 What is a reasonable grounds for seeking adequate assurance under 2-609?
o Just a rumor?
o Getting the run around?
o SEC filing?
 Danger of 2-609 letter
o When you send a 2-609 letter and suspend performance you need to be careful, because if you ask for too much you run
the risk of over-demanding, and is you suspend performance, you risk that you are yourself breaching the contract, but if
you ask for too little, you may get a vague response that does nothing to assuage your fears
 7-1 (Pecan growers)
o Perhaps this is adequate
 7-2 (Implied morals clause)
o Should the court imply this clause in OJ Simpson’s agreement?

Jacob & Youngs, Inc. v. Kent Unless the parties are completely explicit (“material part of the agreed exchange”), the court will
imply a condition met by substantial performance when there would otherwise be a disproportionate loss, especially when
the substantial performance is not willful but due to inadvertence
FACTS: P was the contractor for D’s house; the house was made complete but the wrong type of pipe was used (although it was
exactly the same as the type requested); D demanded that the pipe be replaced, but to do this would mean that the entire expensive
house would have to be torn down
 What is the remedy for this breach?
 Because the contract did not make it explicitly clear, we assume the reasonable intention of the parties, which means substantial
performance and not performance to the letter in the most absolute sense; although this does not given the party to substitute his
judgments for what the other party specifically requested, it means that de minims errors, especially when paired with a high cost
to fix, are not going to imposed as condition to the performance of payment; usually the measure of damages is the cost of repair
or replacement, but where it is disproportionate, as is the case here, it is only the loss of value, which is essentially nothing
 Unless the intentions of the parties are completely clear showing the contrary, the rule that gives a remedy in cases of substantial
performance with compensation for defects of trivial or inappreciable importance, is an instrument of justice; this is especially true
when the discrepancy is due to inadvertence and not to willful behavior
 Dissent agrees in principle with majority’s analysis, but he thinks the breach in this case was due to substantial negligence and not
minor inadvertence
 Cardozo’s analysis
o Parties can contract for an express condition but this is not what happened in this case per Cardozo
 But note that if you look at the actual terms of the contract, they seem pretty clear on this point
o Cardozo says that the court will not imply a condition from the specifications, when it would be so costly and not entail any
actual damages
 Dissent does not treat the specifications as an express condition either
 Rather, the question turns more on an inadvertent versus a willful breach
o All and all it seems to be more of a tort-like analysis, with willfulness, etc. playing an important role
 Substantial performance and the court’s grant of an excuse (R2d 229)
o “To the extent that the nonperformance of a condition would cause disproportionate forfeiture, a court may excuse the
non-occurrence of that condition unless its occurrence was a material part of the agreed exchange”
 But then how do we make allowance for individual tastes?
 You must make this very clear in the contract
 You make it a material part of the agreed exchange
 Express conditions and substantial performance under R2d 229 example 1
o Re-hash of Jacob & Young’s, but the clear express condition is accepted
 Yet substantial performance is still okay because it is not a material part of the agreement and would otherwise
lead to a large forfeiture
 So even if there were an express condition, Cardozo could reach the result under R2d 229
 But note that the contractor cannot just willfully substitute something that he thinks is “just as good”
o So there must be a good faith spin on the issue, that is a breaching party who unscrupulously
forces changes on a customer will not be saved by the substantial performance rule
 Cardozo consistent?
o Is this possible to reconcile with Cardozo’s Sun Printing opinion as regards the PER and the interpretation of Reading
Pipe and what that meant
 Jacob & Young’s as compared to Peevyhouse
o Note that the difference between Jacob & Young’s and Peevyhouse is that P was asking for specific performance, which
would have been inefficient, since the cost to remedy was way disproportionate to the loss of value, and this would have
been social waste; but if only damages are requested, or if an injunction is given and then sold, it is not social waste since
the inefficient work will not be done, it is just a wealth transfer, that may or may not be justified (and the wealth transfer
may be better all things considered, since it will cover any genuine but subjective loss in value that is not reflected in the
market price)
 Also note that this is why the jury award that will fix a median amount, as happened in Peevyhouse, is a nice
solution, even if it is not logical under either damage measure
 Note also that in these situations (Jacob & Youngs, Peevyhouse, and Wunder Co. (Minnesota case) the effect of
willfulness versus inadvertence is used by the court to help tip the scale on how the damage measure should be
 e.g., Cardozo saw as inadvertence and since the lost value was zero the damages were zero, whereas
the dissent said that it was willful so full damage should be awarded
 Another consideration to take into account on the margin is the presence of evidence of special value, whether it
is a material part of the agreed exchange
 e.g., if Peevyhouse had specifically wanted the land to be graded and made this clear)
 7-4 (Discolored roof case)
o Is there an implied condition that the roof be the same color?
o Probably, yes, this is different from pipes because it has aesthetic properties and is not hidden behind walls

Wilson v. Scampoli UCC rules for the sale of goods from a seller to a buyer; buyer has right to reject if not perfect tender, but
then must give the seller the opportunity to cure
FACTS: P ordered a TV set that was delivered but that had a red hue; P rejected the set immediately
 Can the buyer reject the goods?
 Yes, because D has failed to render perfect performance (per UCC 2-601) and P rejected upon delivery (instead of accepting an
then revoking), P has the right to reject the non-conforming delivery; however, P must at least give D a reasonable amount of time
to investigate the problem and cure the problem by repair if it is not great inconvenience to the buyer
 UCC goods-based remedies
 Matrix for UCC sale of goods
o (1) Inspection:
 There is no “duty to inspect” but the UCC assumes that a buyer will expect the goods that it receives almost as
soon as they arrive
o (2) Accept or reject
 Reject:
 If under 2-601 the goods “fail in any respect” to satisfy the “perfect tender” rule they buyer may reject
them upon delivery
o Note that installment contracts are not governed by the perfect tender rule, and substantial
performance for any one installment is sufficient
 So there is no idea of “substantial performance”
 The rejection does not need to be “reasonable”
o e.g., Scratch on the back of a TV that will never be seen is sufficient to reject
 The right to reject is for a reasonable time after arrival, but it is usually fairly short, though once a court
allowed a rejection to occur after six months, since it took that long to install the good, etc., to it will vary
based on context
 Note P in Wilson v. Scampoli had the right under 2-602(2)(b) to keep the rejected good as a security
interest since she had already paid in full
 Note that if a buyer uses a good that he has rejected it nullifies the rejection and constitutes acceptance
since it would have been “inconsistent with rejection” under 2-602(1)(c)
 If a buyer rejects under 2-602 through 2-604, it must particularize its reason for its rejection under 2-605
 Then, under 2-508 the seller has the right to cure the reason for the rejection
 This has two purposes
o Mitigates the strategic advantage of the buyer who can reject if the goods are not perfect
o Prevents the situation where the buyer wants to reject based on the smallest stitching error in
a dress because he has found the dress somewhere else for a cheaper price
o Accept:
 If under 2-607(1) the buyer accepts the goods, then he is obligated to pay for them and the seller can take
advantage of the action for price under 2-709
 But a revocation can be made under 2-608, but only on the basis of a failure of substantial performance, so the
perfect tender rule is gone
 And there is no right to cure for the seller in this case
 This is probably because the substantial performance threshold is already more forgiving
 Under 2-608(1)(a) if the seller is unable to cure under 2-508 in order to make the goods perfect, but the goods
do substantially perform, then the buyer has to keep the goods but can sue for expectation damages based on
the loss due to the defect
 Under 2-608(b) if the buyer waits a while or does not discover the problem until he has accepted and it is too late
to reject
 Problem 7-5 (Flour bag case)
o Shouldn’t the seller be given time to cure, yes maybe, but the buyer can still reject the goods and force the seller to take
all the bags back with him to cure the defect, and there is generally no problem with bad faith here since although the
UCC introduces the concept of bad faith, it has been weakly applied outside of certain areas (e.g., discretion in
performance of the contract), though it is likely that a good could and would find a breach of the duty to act in good faith

C. Impossibility, Impracticability, and Frustration

 Why all contingencies are not always accounted for
o A central purpose of contracts is to allocate risk
o But not all risks can be accounted for in the contract
 Because parties forget about something
 Because it would be a waste to try to consider every possible contingency
 Because things change
 Because people die
 Impossibility
o Old common law term, now impracticability is used because the event does not need to be physically impossible to invoke
the doctrine
o When judges interpolate terms into a contract that deal with super remote contingencies that the parties could not have
expected and are therefore not included in the force majeure clause
o Terms that the parties would have agreed on explicitly if they had the time and foresight to deal with every possible
remote contingency
o The decision as to which party should be allowed to not perform his portion of the contract should be based on which
party is better able to bear the risk
 Which party can better prevent non-performance or insure against it if non-preventable, either the promisor of
promisee as regards each component of the deal
 Impracticability
o Modern term for the old doctrine of impossibility
o Impracticable is more than impractical
o UCC 2-615
 Incorporates principle of impossibility as “impracticable” and deals only with the seller
 “Delay in delivery or non-delivery in whole or in part by a seller who [takes certain action] is not a breach of his
duty under the contract for a sale if performance as agreed has been made impracticable by the occurrence of
an contingency the non-occurrence of which was a basic assumption on which the contract was made”
o R2d 261
 Language similar to UCC but deals with both buyer and seller
 “Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence
of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to
render that performance is discharged, unless the language or the circumstances indicate the contrary”
 Frustration
o UCC ?!?!
 Oddly, the UCC does not have a provision for frustration, or for a doctrine of impracticability that would permit
the buyer to get out of the contract
 It is unknown if this was intentional or an accident
 So in principle the buyer cannot invoke this doctrine under the UCC, though common law still would allow it
under, mot usually, frustration of purpose
o R2d 265
 Language is almost identical to that of impracticability
 “After a contract is made, a party’s principle purpose in making the contract is substantially frustrated without his
fault by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract
was made”
 Usually this is where it does not make sense for the buyer to perform his part of the agreement
 e.g., Henry v. Krell, where the person did not have to pay to rent the apartment when the King’s
coronation was postponed because he was sick, since the apartment was worthless to him for that day
at that point
 Where do you draw the line?
o Issue is that when you imply these conditions into the contract it is hard to know when to draw the line
o What is something that rises to the level that is appropriate to imply since the parties surely would have thought about it
o There is the issue that if you call off the contract through these conditions it may harm those that relied on it
 e.g., If someone renovates an apartment for the coronation and spends a lot of money doing so
o In this case you must ask who is the better insurer and assign them with the risk, even though it is retroactive
 Impracticability/Frustration as compared to mistake
o Note the idea that impracticability and frustration arise with supervening event and mistake arises with an event or
condition unknown at the time of the contract’s formation
 e.g., Grading area of land where grader and the owner assumed that it was just gravel but it was solid bedrock
 Maybe you could make a mistake argument
 Alcoa example
o Fairly decent argument because of all of the evidence about how they set the price index, etc. so it is sort of an unusual
 The question is: are all of the contingencies “in” the pricing mechanism, does the contract take account of
everything when it was made, or will the court add conditions?
o Note that we consider only the contract/controversy and not the wider context, e.g., Alcoa’s financial strength, etc., at
least in the normal case
o Academic reaction to Alcoa was very negative

Karl Wendt Farm Equipment Co. v. International Harvester, Inc. A stable market is not a “basic assumption on which the
contract was made” that would support the court’s intrusion due to impracticability; this is just a losing contract, and that is
not enough
FACTS: P was a franchisee with whom D breached the contract not according to the terms of the agreement in the face of D’s needing
to leave the industry and sell all of its assets due to a collapse in the farm equipment market
 Is this a case of impracticability or frustration of purpose?
 No, the events here do not rise to the level of impracticability or frustration of purpose
 Economic unprofitableness is not enough to warrant judicial intervention in the contract; a bad economy is not an event the non-
occurrence of which was a basic assumption of the contract; additionally, both rules require that the party seeking relief be not at
fault, and arguably D was at fault here
 Problem 7-6 (Suez Canal closes)
o I think that people should buy insurance for these sorts of things, there is political upheaval insurance
o It is more efficient and stable to insure for this on the private market then to rely on the judge as your insurance, since you
do not know how he is going to rule, and because of this certainty attention and capital can be focused elsewhere
 Implied condition of impracticability only where there is economic waste?
o Note my idea of there should only be impracticability or frustration where there is economic waste but not where it is
merely a wealth transfer, since the one reduces overall efficiency, and the other does not
 Long term contracts, good or bad?
o Length of the long term contract will depend in part on what the parties expectations are about when the court is going to
step in and help them when the black swan comes along and the assumptions change
o Long term contracts probably have a value that falls off sharply after a certain point, because once you get several
decades removed, it is impossible to know if the assumptions will change or not, so it is good for the court to impose the
condition of impracticability in such cases, but we do not want the parties to rely on this overtly, since it creates a moral
 10, 50, 500 year floods?
o Impracticability should be used for the 500 year floods, not the 100 year floods, for that people should get insurance
 When should impracticability and frustration be invoked?
o Note that idea that the promisor’s promise to pay damages if he breaches is a form of insurance, but like any insurance is
excludes certain events, and impracticability or frustration represent those events
o Usually the superior risk bearer should bear the risk, but for events that are large, unforeseen, and uncontrollable by the
parties, it is probably best that the risk be shared by both parties, through the use of these doctrines

Dills v. Town of Enfield Where one party has been assigned the risk of the failure of the basis assumption, that party must
bear it and the court will not impose an implied condition of impracticability or frustration of purpose
FACTS: P was in a development agreement with D; the terms of the agreement recognized that the developer may not be able to
obtain financing; they thus said that if P did not obtain financing after the completion of detailed construction plans, he could receive
back his deposit; but if he did not submit construction plans, D got to keep the deposit; therefore the idea that P would have trouble
obtaining financing was contemplated by the parties and allocated in the terms of the agreement
 Is this a case of impracticability or frustration of purpose?
 Although this could be impracticability (maybe) it cannot be because the risk of the inability to get financing was specifically
allocated to P by the agreement
 The whole premise of impracticability and frustration of purpose is that the law will imply a condition into the agreement because
the parties presumably would have done so had they thought about the occurrence of a remote event; but where this risk is
allocated in the agreement prospectively, then judicial intrusion has no place
 What happens when the court uses impracticability or frustration?
o Restitution governs, and any benefit conferred must be returned (R2d 272(1))
o Per the R2d, reliance damages should also be permitted, at least as an off-set to restitution, but most American courts do
NOT grant this (R2d 272(2))
 So, e.g., in Krell v. Henry the down payment would be returned, even if part of it were used to renovate the
apartment for the viewing
 Do gap filling policies just raise costs?
o Some economists think that impracticability and frustration and similar judicial conditions just raise costs because they
lead to uncertainty and create new risks, making the situation worse

Chapter 8: Third-Party Rights and Responsibilities

A. Third-Party Beneficiaries
 Privity of contract
o Basic requirement for a person to sue another in contract is that there be privity of contract
 Third party beneficiaries (R2d 302)
o Intended
 Do have legal rights on the contract between third parties
 “Unless otherwise agreed between the promisor and the promisee, a beneficiary of a promise is an intended
beneficiary if recognition of a right to performance is the beneficiary is appropriate to effectuate the intention of
the parties and either
 (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the
beneficiary, or
o A “creditor beneficiary”
 (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the
promised performance”
o A “donee beneficiary”
o Incidental
 Do NOT have legal rights on the contract between third parties

Lawrence v. Fox It is clear in this case that the promise was made for the explicit benefit of P, who is therefore a third party
(creditor) intended beneficiary, who can thus sue under the contract
FACTS: Party A gave money to D for D to give to P the following day, the consideration being the money from A to D and the D’s
promise to A to pay the money to P; P then sued D for not delivering the money
 Is P an intended third party beneficiary such that he can sue D?
 Yes, P has standing to sue as a third party beneficiary (a “creditor beneficiary”) (if he had not been A’s creditor and A had only
meant to bestow a gift, he would have been a “donee beneficiary”)
 The contract was made for the benefit of P and P can therefore sue as a third party beneficiary, it is okay that there is not privity of
contract (and it is not necessary that the money be given in trust to D with P as the beneficiary of the trust, though if this would
have been the case, then there would be no debate)
 Dissent says that there must be privity for P to have rights as against D
 Demise of the importance of privity
o Rules for privity became more liberal due in part to the objective theory’s rise in the 20th Century over the more subjective
theory of the 19th Century
 Irrevocable right in third party beneficiary?
o Per R2d 311(1), it is possible to make the right of the third party beneficiary irrevocable if they wish
o But per R2d 311(2), the promisor and the promisee retain the power to discharge or modify the agreement without the
third party beneficiary’s consent, unless per R2d 311(3) the intended beneficiary has (1) justifiably relied, (2) brings suit,
or (3) promises to accept the benefit
o So this means that unless otherwise provided for the right of the third party beneficiary is contingent, not vested
 Beneficiary subject to any infirmity in the promise or other reason why contract would be unenforceable (R2d 309(1)(2))
o “A promise creates no duty to a beneficiary unless a contract is formed between the promisor and the promisee; and if a
contract is voidable or unenforceable at the time of its formation the right of any beneficiary is subject to the infirmity”
o “Right of beneficiary is discharged when the contract is unenforceable due as against public policy, because it is
unconscionable, impracticable, etc.”
 Overlapping duties to beneficiary and promisee (R2d 305)
o “(1) A promise in a contract creates a duty in the promisor to the promisee to perform the promise even though he also
has a similar to duty to an intended beneficiary”
o (2) Whole or partial satisfaction of the promisor’s duty to the beneficiary satisfies to that extent the promisor’s duty to the
o So, e.g., IF in Lawrence v. Fox, performance was in the alternative, payment to one satisfies payment to another
 Without novation, promisee is still liable (R2d 310)
o “Where an intended beneficiary has an enforceable claim against the promisee, he can obtain judgment or judgments
against either the promisee or the promisor or both based on their respective duties to him. Satisfaction in whole or in part
of either of these duties, or a judgment thereon, satisfies to the extent the other duty or judgment, subject to the
promisee’s right of subrogation (against the promisor)”
 Intended beneficiary does not need to be identified, just identifiable
o e.g., H gives money to F to pay L’s heir
o This is fine it is not necessary that the beneficiary be identified at the time of the transaction only that he be identifiable at
the time that the performance must occur
o This is essentially how life insurance works
 A third party beneficiary does not need to be express, it can be implied
o e.g., NYC sewage treatment contract
 Problem 8-1 (Exercycle franchisee boundaries)
o Franchisee won in showing that he was an intended third party beneficiary
o This shows how flexible the rules are today
 Problem 8-2 (Moch water pump case)
o Privity of contract is maintained in areas where there could be huge liability, so usually the public is not considered to be a
third party beneficiary of every government contract
o e.g., Martinez v. Socoma Companies, Inc., but Cf. Shell v. Schmitt and Barksdale Air Force Base case, but the difference
is that in that case it was very clear who the beneficiaries were, otherwise no third party rights are created

Martinez v. Socoma Companies, Inc. Unless explicitly identified, members of the general public are not considered to be third
party beneficiaries with legal rights under a contract between the government and a third party, since otherwise liability will
just be too wide
FACTS: A class of Ps sued as third party beneficiaries to a contract between the government and several corporations; the contract
was between the government and the corporations and the purpose was to promote development and job creation in the inner city
 Is P an intended third party beneficiary such that he can sue D?
 No, P is not a third party beneficiary with standing; P is a member of the public that would have been benefited but he was only an
incidental beneficiary and it does not matter that he was not benefited more than others
 P claims to be a done third party beneficiary, but this is only the case where the third party was to be the recipient of the gift or the
intent of the parties made clear that a third party would have rights as against the promisor, but this is not the case here; P is a
member of the general public and the intended beneficiary was the public as a collective, we simply cannot allow all members of
the public to sue as third party beneficiaries of government contracts (this is in the R2d somewhere)
 Dissent says that Ps were clearly the third party beneficiaries
 Problem 8-3 (HP warranty to the end user with a retailer in between)
o Does the warranty extend to the end user? It depends
o HP does not have a contract with the end users, so privity of contract may block, unless they are perhaps third party
 Third party beneficiaries of warranties (UCC 2-318)
o Gives state legislatures three alternatives
 The alternatives vary in how they provide for rights to person who do not have direct privity of contract
 Legal or natural person
 Persons in household or any person
 Injury to person or any injury
o But note that HP wants people to come to it when there is a problem, they want to create a relationship, but the judge
may or may not allow this, depending

B. The Assignment of Rights and Delegation of Responsibilities

 Assignment and delegation (THEY ARE DIFFERENT)
o Assignment
 Assign the rights (of the promisee) under the contract
o Delegation
 Delegate the duties (of the promisor) under the contract

Contemporary Mission, Inc. v. Famous Music Corp. There is a difference between delegation and assignment and when you
delegate, unless there is a novation, the promisor is still liable to the promisee if the delegatee does not perform
FACTS: P developed music and was in contract one with D to market and develop the music and this contract was not assignable;
there was another contract that involved other duties of D and this contract was assignable; D assigned both contracts
 Was it okay for D to assign both contracts?
 It was not permissible for D to assign and delegate contract one since that went against the express terms of the agreement; it was
okay for D to delegate its duties under contract two, but just barely, because arguably this was performance that was sufficiently
personal (oblige has a substantial interest in having the original obligor perform or control the acts promised) such that the
delegation is unfair to P; but after the delegation of duties D is still responsible to make sure that its delagee performs, and in this
sense he is a surety of sorts
 Rules of contract assignment and delegation
 Parties can limit the right to delegate the duties and assign the rights under a contract (R2d 317, 318, 322)
 It is easier to assign than to delegate
o R2d 322
 “Unless the circumstances indicate the contrary, a contract term prohibiting assignment of “the contract” bars
only the delegation to an assignee of the performance by the assignor of the duty or the condition”
o UCC 2-210(4)
 “An assignment of “the contract” or “all of my rights under the contract” or an assignment in similar general terms
is an assignment of rights and unless the language or circumstances indicate the contrary, it also a delegation of
 When delegation is not permissible
o When it is not prohibited by the terms of the contract, delegation is okay unless “the promisee has a substantial interest in
having its original promisor perform or control the acts required by the contract” (R2d 318(2); UCC 2-210(1)
 Without novation, assignor is still liable
o R2d 318(3)
 “Unless the oblige agrees otherwise, neither delegation of performance nor a contract to assume the duty with
the obligor by the person delegated discharges any duty or liability of the delegating obligor”
 But where the oblige agrees to accept performance by the delegated person, the contract is novated,
and the original obligor is discharged from liability
o UCC 2-210(1)
 “No delegation of performance relieves the party delegating of any duty to perform or any liability for breach”
 e.g., Manufacturer delegates the production of an item to another, if the item is then defective, can the buyer sue the
o Yes, the buyer could since there was no novation, but the buyer could not sue the person to whom it was delegated since
there was no privity, but couldn’t he sue as a third party beneficiary?
 Unless there was tort liability, which does not need privity, of course—note that this is another way that tort is
taking over contract, and note that if the pass through provision of the revised UCC article 2 were passed then
that would have allowed contract to catch up with tort a little bit
 Once duties delegated, promisee or delegator can enforce against the delegatee
o UCC 2-210(4) “Acceptance by the assignee constitutes a promise by him to perform those duties. The promise is
enforceable by either the assignor or the other party to the original contract”
 Assignment of rights cannot unfair to the original promisor/promisee (UCC 2-210(2))
o “Unless otherwise agreed all rights of either the seller or the buyer can be assigned except where the assignment would
materially change the duty of the other party, or increase materially the burden of risk imposed on him by the contract, or
impair materially his chance of obtaining return performance”
 e.g., Where there is a requirements contract and the assignment of rights under the contract would materially
alter the promisors obligation (as in an assignment of a requirements contract for hamburger patties from Charlie
Macs to Burger King)
 Adequate assurances when there is a delegation of duties (UCC 2-210(5))
o “The other party may treat any assignment which delegates performance as creating reasonable grounds for insecurity
and may without prejudice to his rights against the assignor demand assurances from the assignee under Section 2-609”
 Sally Beauty case
o This is a case where the delegation would be okay except that the promisee has a substantial interest in having the
original promisor perform the contract, as opposed to the person to whom the duties would be delegated, since otherwise
one of its competitors would be marketing its products, so the delegation is not appropriate
o Posner says that the market could handle this, but it probably depends on how similar the goods were